Q3 2020 IntriCon Corp Earnings Call
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I'd now like to hand, the conference over to your first speaker today Investor Relations Ms. Li Salvos. Thank you. Please go ahead.
Thank you operator before we begin I would like to preface our remarks with the customary Safe Harbor statement. Today's conference call contains certain forward looking statements. These statements are based on the current estimates and assumptions of Intricons management and are.
Due to uncertainty in challenge and changes in circumstances.
Given these uncertainties you should not place undue reliance on these forward looking statements actual results may vary materially from the expectations contained in today's call for a list and description of the risks and uncertainties associated with our business. Please refer to the risk factor section of our most recent annual and quarterly reports on form 10-K and form 10-K.
Perspectively with the FCC.
I would now like to introduce Intricons CEO, Scott long ball to review the company's third quarter performance and financial results.
Conclusion of his remarks, we'll open the call for your questions Scott.
Thank you Lee.
Good afternoon, and thank you for joining us we hope you're all remain safe and healthy.
I'm excited to assume the new rule is intricons CEO and inspired by the commitment and leadership of my colleagues each day.
As we look ahead, we have a significant opportunity to leverage our core strengths into diversified hi girls medical market.
In preparation for the last two years, we have taken steps to strengthen our balance sheet.
Bolster our leadership team with extensive sector specific experience XP.
Expand our core competencies geared to serve new medical markets.
Sharpen our focus and discipline on core competencies and business development.
Through this work I'm confident.
We will we are well positioned to capitalize on current and emerging opportunities in high growth medically markets to be a leading joint development manufacturing partner for miniature micro Metro medical devices.
On the call today I'd like to start by covering some of the highlights of our third quarter performance, including an update on progress in each of our key medical markets you are targeting and thoughts on the remainder of 2020 and beyond.
As we are still in progress of hiring a new CFO I will also discuss additional color around our financial results reported earlier today.
Well that no we are making good progress towards identifying the right candidate to feel that way.
With the goal of having somebody on board before year end.
At the conclusion of my prepared remarks, well open up the call for your questions.
Starting with our third quarter performance yeah.
The Intercon team continued to deliver against the priorities we established at the outset of this year and I'm proud of our accomplishments in the quarter.
Total revenues increased approximately 2% year over year to 27.4 million sequentially revenues grew 16%.
Exceeding our expectations as we entered the quarter.
Encouragingly. Despite the continued impact of cold at night team on a global health care sector, we experienced signs of growth across all aspects of our business for the first half of the year.
This included increased engagement with Medtronics diabetes group.
The positive impact of our acquisition of animal medical services.
An increasing access to Audiologists supporting our hearing health business.
And while not your reflected in our top line, we were able to ship more resources.
Into business development to support longer term growth initiatives.
While we are still operating in a modified work environment with all federal and local recommended safety protocols in place to ensure the health and safety bar employees, an uninterrupted supply chain to our customers.
We expect to continue to do so through at least the remainder of the year.
In spite of these adjustments our teams come together to drive results.
Our manufacturing operations continued to meet customer demand despite various supply chain challenges.
We have also started to implement innovative ways to work through plugs and access challenges to showcase our capabilities to prospective customers.
Such as the addition of virtual facility tours, which will be widely available on our website set to launch in the summer.
Importantly, the continued emphasis on cost control coupled with significant restructuring actions taken over the first half of the year enabled us to post approximately 650000 a profit this quarter.
With a line of sight to continued greater bottomline stability in our core business.
I'd like to take the next few minutes to dive into some detail on our progress in several of the key medical markets, where we are currently focused.
Starting with the diabetes market sales to Medtronics diabetes group, representing 53% of total revenue during the third quarter.
As anticipated we saw quarter over quarter improvement because new patient starts increased largely attributed to the health care systems, beginning to reopen in select regions worldwide.
More specifically the rebound was driven by sales of the continuous glucose transmitter we produce for Medtronic integrated insulin pump systems.
In September Medtronic announced that the approval for the many beds 770, GE insulin pump system with smartphone connectivity.
This is the latest system that expands the benefits of hybrid cloud acute therapy to younger children living with type one diabetes and makes it easier to access and share real time, CGM and pump data.
The system will enable caregivers and care partners to see user data remotely on their smartphones with proactive Enap notices sent me decreased levels rather range.
The data can also be shared automatically with clinicians and educators to help facilitate a more effective telehealth visits and product trainings.
We're excited to be supporting such innovative technology that will better align for type one diabetics.
Our relationship with Medtronics diabetes group remains as strong as ever and as we look towards the end of the year and into 2021. We are confident that we are well prepared to continue to meet volume demands and support the anticipated global.
Global product launches and upgrades.
Next turning to the surgical navigation and interventional market. This is a segment, we're especially excited about as we see tremendous growth opportunity.
For both opportunities to leverage existing capabilities and micro miniature electronics precision molded.
Medical coil technologies as well as the new market opportunity opening up following a recent acquisition of Ellman medical services sporting events.
The integration of BMS is progressing smoothly with the contribution of 2.8 million to our revenues in the third quarter.
We anticipate continued low double digit growth through the remainder of 2020 with accretion to net income.
As we highlighted on prior calls the acquisition of Vms enables us to immediately diversify our revenue base, including its largest customer medtronic cardiac and vascular group for which are currently serves as the sole manufacturer for Medtronics chocolate Ptca balloon catheter.
Chocolate the key product the medtronics appropriate vascular catheter portfolio.
This design and clinically proven to reduce.
Trauma by providing balloon inflation that is predictable controlled in uniform.
Medtronic recently received regulatory approval in Japan for chocolate P.T.A., expanding its addressable market.
We anticipate seeing the benefits of the approval in the coming months.
Going forward, we are confident that we can leverage yes, that's a strong reputation with medtronics cardiovascular group.
With Intricons financial stability to secure other business opportunities within Medtronic.
Lastly, our medical coil business continued to deliver strong results during the third quarter.
Up over 30% over the prior year period driven.
Driven from ongoing customer demand, serving the interventional pulmonology and electro physiology markets.
Turning to the hearing health market. We also saw upside as I noted earlier from increased access to Audiologist.
In addition, as we await updates on pending LTC legislation.
We continue to make progress in our discussions with a number of potential partners that are actively pursuing and customer health care initiatives, specifically solutions for hearing health care market, including retailers Rangers pharmacies.
As previously disclosed earlier this year, we elected to postpone our self fitting software clinical trial until such time, we can ensure the health and safety of the trial participants.
We have been working on safety measures to adapt our clinical protocol to be called it's safe.
Now there are a number of moving parts, we maintain our goal of completing the trial by mid 2021.
As we enter the final quarter of 2020, I believe Intricon has weathered the worst of the storm.
Several encouraging milestones on the horizon, including strengthening order patterns across your medical business.
Particularly with our largest customer in the diabetes segment and our medical equipment business.
Furthermore, as I noted last quarter, we have adjusted our cost structure to provide greater business stability in today's uncertain business environment.
Looking forward we.
We are working to enhance our organizational design to better shape. The way we structure and operate our business is our structure evolves. It will sharpen our investment discipline and increase the speed at which we operate.
I am confident that this will bust enable once you're kind to successfully focus our resources on strategic market opportunities that are key to long term growth.
Turning to our financial results for the 2023rd quarter as I noted earlier net revenue was 27.4 million versus 26.9 in the comparable prior year period.
By core business segment revenues in our medical business for the quarter were 20.7 million an eight.
8.1% increase year over year and represented 75% of total revenue, which was relatively consistent with the third quarter prior year.
Again, this increase was largely driven by our medical coils business and a $2.8 million revenue contribution from Emerald Medical services, which the company acquired in May 2020.
And our hearing health business segment total revenue for the third quarter was 5.5 million.
Down 13.6% over the prior year third quarter.
Once again this decrease was largely due to no revenue from high health innovations.
And the reduction in advertising as part of the hearing help express restructuring efforts.
However, as I noted earlier, we did see some upside in the second due in part to renewed access to Audiologist and solid orders from our indirect and consumer customers.
More specifically within the hearing health segment indirect end consumer revenue was 1.8 million.
Correct. The end consumer revenue through our hearing help express business is 1 million and our legacy OEM revenue was 2.8 million.
Third quarter gross margins were 26.3% compared to 25.2% from the prior year comparable period.
The higher margin was primarily due to cost reduction initiatives and higher volumes.
Operating expenses for the third quarter were $6.7 million compared to $7.2 million in the prior year period.
The decline in expenses was largely due to the Swift and substantial response to the pandemic and its impact on our business, partially offset by the inclusion of Dms.
The company also incurred a charge of approximately 250000 related to an earnout provision, yes purchase agreement specifically the chain, Japan regulatory approval of Medtronics chocolate P.T.A. catheters that I noted earlier.
Encouragingly, we have been able to position the company back to a level of profitability without disrupting progress on strategic initiatives.
We posted a net income attributable to shareholders of $644000 or seven cents per diluted share versus a net loss attributable to shareholders of 290000 were three cents per diluted share for the 2018 this quarter.
Lastly, our combined cash and investment balance at September Thirtyth 2020 is approximately 30.9 million up slightly from June Thirtyth 2020.
Which brings us to the guidance.
There is still much uncertainty as we enter the last few months of the year.
However, we believe our business has stabilized to agree we were confident that our fourth quarter revenues worldwide with our third quarter revenue.
Confidence stems from stabilizing business trends momentum with Medtronic.
Yes, delivering results as expected.
In short we are cautiously optimistic as we handled the final quarter of the year, but we want to reiterate.
But the COVID-19 pandemic poses a risk of uncertainties to our operating results.
As we look out further to next year, our focus will be on expanding existing relationships with top tier medical Oems.
Leveraging core competencies to diversify our customer base and medical markets.
Positioning to capitalize on the changing regulation and the hearing health market.
And enhancing organizational design to more effectively scale to drive continuous innovation.
With that I'd now like to open up the call for any questions operator.
Yeah.
As a reminder to ask that question you will need to press star one on your telephone do enjoy your question based upon a hatched.
Your first question comes from the line of John Baugh from Stifel. Your line is now open.
Great Hey, Scott good afternoon.
One thing to just call out.
Maybe start hire reps year over year lower opex.
Maybe we can start there is a foldable lower opex is sustainable going forward and then just to be clear that $250000 now was that in the opex number for the quarter was that somewhere else below a lot.
So no it was in the Opex number for the quarter, John and the operating expenses.
You will see that under the other operating expenses line on the press release.
And then in terms of any of your broader question and lowering the optics.
Obviously, we made the decision as we thought about repositioning our hearing health asset sales.
Taking a bit more in sort of a growth engine, but really to support our product development pulling back significantly on the sales and marketing advertising expenses and that's a trend that you're going to see continued going forward.
That said as we begin to to make inroads in some of these end markets. We will probably look to increase our sales and marketing get more feet on the street to more aggressively drive drive penetration.
Into those desired markets, so I do think that.
Again, it will be lower than what we've historically been running.
But I do think over time, you'll start to see more investments go in sales and marketing to support selective growth in those deals and medical markets. Okay got it and maybe one or two more from me you spend some time throughout the call alluding to some of the business.
Business development opportunities and putting some resources and investments behind it if possible can you be a little bit more specific as to when those may materialize or take hold or those lower terminate your or could we see some incremental opportunities come into the personnel in 2020.
A great question I think it's a combination I do think you'll start to see some of the fruits of that labor that we've been working on over the last 18 months materializing in 2021, we're gonna continues I mentioned, though to put more resources into into driving into more opportunities with our law.
Longer term in nature. So I think you have a combination John.
Of the cold opportunities that we're working on a boat that will come through in 2020, and then others that will support longer term growth in 2022 and beyond.
Got it and last one for me on the hearing health side. It sounded like maybe I'm mistaken, but you haven't started the trial you want to ensure the safety of the of the participants. So I guess that's sort of question. One is a trial that started what would you need to start the trial Scott you think in order to complete it by call it that mid year timeframe that.
You alluded to and then just like a bolt on to that line of questioning what's going on at a higher level with the industry.
Regards to hearing health in other words has everything just come to a standstill as everyone awaits. The regulations are there still progress being made in the background what some of the potential branding partners, maybe if you could just talk to.
At a higher level, what is or is not occurring down that rob. Thanks for your time.
Yeah. Thanks, Ryan I'll take the last question first and then a follow up on the timing of our clinical so clearly there's there's what the pandemic can the push out in the FDA.
Draft guidance there.
There are there is still activity going on I would say, it's not quite as robust as where we were when the law was passed back in 2017, but there are still a lot of activities that are happening and we are still working with potential branded partners potential retail partners and that will be a focus as we round out 2020 and.
Enter into to 2021, and I am confident that we will be able to secure a branded partner has the draft legislation.
It comes to life.
In terms of where we're at with our clinical trial.
This week, we had to put safety first we had worked with the FDA that outlined what our clinical trial is going to look like prior to the the pandemic.
Taking a step back we've we've adjusted we've tried to adapt to what we see as a more coal did say protocol for a clinical trial will be engaging the FDA you over the coming months.
With our anticipation to start sometime in the first quarter, depending on the feedback we get from Colombia, FDA. So those activities are still moving but.
But again, obviously with what's going on with the pandemic and the delay in.
The draft guidance it slowed things down slightly.
Perfect. Thanks for the color.
Your next question comes from the line of Kyle Bowzer from call to your Securities. Your line is now open.
Great. Thanks, Good evening, thanks for the update.
Maybe just CMS.
Correct me if I if I heard this wrong do you say sales were $2.8 million in the quarter and then second how should we think about this I mean.
Seems like a pretty nice opportunity here should we see this stepping up sequentially and now that we've unlocked Japan I'm just trying to think about how we should model this going forward.
Yes, Great question look this is when we did the acquisition. This is one of the reasons, we were excited about moving into the space not.
Not only will be acquiring a business with a very skilled senior team one that had a very great relationship with Medtronic. We felt like this product line had great opportunity and so we were very excited for the approval in the Japan market.
We think that we'll start to see some of that benefit come through potentially late this year, but most likely.
Kyle it won't really begin to materialize until the beginning of 2021.
So as we enter into the the last quarter.
I would look at revenues coming out of that business to be relatively consistent with what we saw in the third quarter, but we do anticipate a step up as we enter into 2021, Q1, and Q2 to support that launch.
Got it and it was 2.8 million in Q3.
Correct got it and now that you're in Medtronics vascular division through that acquisition, obviously have a very strong relationship in the <unk> diabetes Division I'm, just kind of curious as you look at new opportunities to expand your offerings through new partnerships.
Have you prioritized kind of partnering and deferring division at Medtronic or are you looking more at outside opportunities at this point is it a mixture of just kind of curious.
How the activities have been going there.
Yeah, Great question and really it's a combination of both.
It's really largely working we come in and add value.
We know there's other places within Medtronic, but our core competencies can be leveraged and we could add value obviously with the relationship that we have built with the diabetes group now coupled with the strong reputation that Emerald has within the cardiovascular group just puts us in a stronger position to go pursue other opportunities.
Whether it's within those two groups or now getting the type of references and recommendations to other groups within Medtronic. So those will be ones that clearly we will continue to pursue and be very opportunistic.
But there is also opportunity outside of Medtronic and there's a lot of inroads that had been made.
Not necessarily all showing up on the top line in 2020, so I'm very confident with the work that we've done setting the table and 2019 and here throughout 2020 that we have great opportunity outside of Medtronic that we'll be able to leverage our technology into certain areas.
As noted in the past such as interventional Pulmonologists and Electrophysiologist.
And so that will be again, another high priority for us as we enter into 2021.
Got it I appreciate that and then just lastly, we saw a very successful year go IPO can.
Can you talk about how if at all this this impacts intercon seems like a year ago.
Okay, now kind of step on the gas a bit here, which should help ensure kind I would think but just love to get your thoughts. Thanks.
Yes, maybe I'll just I'll take that in all even stepping back more broadly I think this just reinforces what we always thought which is this over the counter drugs to consumer space holds great potential and I think you see that reflected in the valuation that animal has today and whats or excuse me that you.
A year ago has today and the capital that they were able to raise their their IPO.
It's a little bit on the timing again is a little bit hard to get our handle on just with whats going on with the FDA, but longer term. There is a lot of potential there and that's why we're excited we're excited to be able.
Just to to be unable to work with those those partners that can really drive volume and Thats, where our focus is.
Obviously, we have a longstanding relationship with Hugo we supplied them their DSP and we're excited to continue to work with them as they look to drive their business and what we think can be a very large market.
Okay, Great Scott Thanks for all the updates that for me.
Thanks have a great that.
Two.
Your next question comes from the line of Andrew Dsilva from B. Riley Securities. Your line is now open.
Hi, good afternoon, Thanks for taking my questions and sorry, if you hit on any of these topics that was bouncing between calls, but Oh, sorry, just a couple of quick bookkeeping questions.
If you could just let me know what that depreciation and amortization.
Based comp cash flow from operations in Capex for the quarter that'd be useful.
And then.
While you're pulling that can you maybe just talk around your partnership at your go I believe previously you were their sole source kind of internals components internal components provider.
Is that still the case.
Or has that relationship evolved in any capacity.
I'll go through the housekeeping items, and then I'll jump on the bigger the question depreciation amortization for the quarter was.
1.258 million.
Stock based compensation was 332000.
Cash flow from operations was $1.6 million for the quarter.
And Capex was 610000.
Great. Thank you.
And now in terms of the the relationship with your goes I mentioned, it's a long term relationship that we've had with them and we supply them the DSP chips that powers their device.
So nothing has changed with that relationship and again were looking forward to supporting the growth that they're anticipating as we look to drive into this fast market.
Okay perfect.
And just a last quick question relates to Medtronic.
Can you hear me.
Discuss the cadence or how you're.
Using the new diabetes launches and how they're trending and has there been any progress on CMS reimbursement for them or with the painting the non adjunctive designation.
Designation I did see CMS.
CMS had a proposed rule and it looks like it would expand coverage.
And payment for CGM, they'll classify think all CGM.
Versus just a therapy pgms to durable medical equipment. So I was just curious if you could.
Do you have any color on those to Medtronic topic.
Sure maybe I'll start with the last one I know there has been some progress on the non objective I don't know currently where that stands. So I don't want to speculate I guess I would defer to Medtronic, but I know that was something that was they were pursuing and felt like progress has been made in.
In terms of the the integrated pump systems look I'm excited about what medtronics, bringing to the table in the southern suddenly GE system with smartphone connectivity solves a lot of the consumer wants that they weren't currently getting that maybe they were getting from some of the competitor.
Devices, So I think you'll start to see some of that market share.
At a robust overtime begin to to to slow and as we look at their future generation products specifically.
The seven Avi I think thats shirts to check a lot of boxes in terms of customer delight, whether it's the improved algorithms with alarms, whether it's the auto correction boards or compatibility with with the new sensor, which really enables.
Fewer fingerprints only having one calibration at the beginning of you. So I'm very excited about what Medtronic has has laid out for their roadmap and Entercom is thrilled to continue to support what we think is really innovative technology, that's going to better the lives of many types.
One diabetics.
All right great. Thank you very much congrats on the snap back and.
Good luck closing that 2020.
Great. Thank you and have a good day.
I don't see any question at this time I will turn it over to our CEO Scott liable for closing remarks.
Excellent. Thank you and thank you everybody for joining us on the call today, we look forward to updating the group in our year end results and in the meantime, everybody. Please say safe and healthy. Thank you have a great night.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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