IntriCon Corporation (IIN) 2020 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the IntriCon Corp.'s Third Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference over to your first speaker today, Investor Relations, Ms. Leigh Salvo. 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 IntriCon's management and are subject to uncertainty 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 Factors section of our most recent Annual and Quarterly Reports on Form 10-K and Form 10-Q, respectively, with the SEC. With that, I would now like to introduce IntriCon's CEO, Scott Longval, to review the company's third quarter performance and financial results. At the conclusion of his remarks, we'll open the call for your questions. Scott?

Thank you, Leigh. Good afternoon, and thank you for joining us. We hope you're all remaining safe and healthy. I'm excited to assume the new role as IntriCon's 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 in the diversified high-growth medical markets.

In preparation, over the last 2 years, we have taken the steps to strengthen our balance sheet, bolster our leadership team, with extensive sector-specific experience, expand our core competencies geared to serve new medical markets, and sharpen our focus and discipline on core competencies and business development. Through this work, I'm confident we are well positioned to capitalize on current and emerging opportunities in high-growth medical markets to be a leading joint development manufacturer partner for miniature and micro miniature 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 we 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. On that note, we are making good progress towards identifying the right candidate to fill that role, with the goal of having somebody on board before year-end. At the conclusion of my prepared remarks, I'll open up the call for your questions.

Starting with our third quarter performance. The IntriCon 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. And sequentially, revenues grew 16%, exceeding our expectations as we entered the quarter. Encouragingly, despite the continued impact of COVID-19 on the global health care sector, we experienced signs of growth across all aspects of our business over the first half of the year. This included increased engagement with Medtronic's Diabetes Group, the positive impact of our acquisition of Emerald Medical Services, and increasing access to audiologists supporting our hearing health business. And while not yet 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 of our employees and 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 team has come together to drive results. Our manufacturing operations have continued to meet customer demand despite various supply chain challenges. We have also started to implement innovative ways to work through present access challenges to showcase our capabilities to prospective customers, such as the addition of virtual facility tours, which will be widely available on our new website set to launch in December. 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 $650,000 in profit this quarter, with a line of sight to continued greater bottom line 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 Medtronic's Diabetes Group represented 53% of total revenue during the third quarter. As anticipated, we saw quarter-over-quarter improvement as 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's integrated insulin pump systems.

In September, Medtronic announced FDA approval for the MiniMed 770-G insulin pump system with smartphone connectivity. This is the latest system that expands the benefits of hybrid closed-loop therapy to younger children living with type-1 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 in-app notices sent when glucose levels are out of range. The data can also be shared automatically with clinicians and educators to help facilitate more effective telehealth visits and product trainings. We are excited to be supporting such innovative technology that will better the lives of type-1 diabetics. Our relationship with Medtronic's 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 their anticipated 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 from both opportunities to leverage existing capabilities in microminiature electronics, precision molding, and medical coil technologies, as well as the new market opportunity opening up following our recent acquisition of Emerald Medical Services, or EMS. The integration of EMS 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 for the year.

As we highlighted on prior calls, the acquisition of EMS enables us to immediately diversify our revenue base, including its largest customer, Medtronic Cardiac and Vascular Group, for which it currently serves as the sole manufacturer for Medtronic's Chocolate PTA balloon catheter. Chocolate, the key product in Medtronic's peripheral vascular catheter portfolio, is designed and clinically proven to reduce trauma by providing balloon inflation that is predictable, controlled, and uniform. Medtronic recently received regulatory approval in Japan for Chocolate PTA, 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 EMS' strong reputation with Medtronic's Cardiac and Vascular Group with IntriCon's 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 38% over the prior year period, driven from ongoing customer demand serving the interventional pulmonology and electrophysiology markets.

Turning to the hearing health market. We also saw upside, as I noted earlier, from increased access to audiologists. In addition, as we await updates on pending OTC legislation, we continue to make progress in our discussions with a number of potential partners that are actively pursuing end customer health care initiatives, and specifically, solutions for hearing health care market, including retailers, branders, and 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 COVID-safe. While 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, with several encouraging milestones on the horizon, including strengthening order patterns across our medical business, particularly with our largest customer in the diabetes segment and our medical coil 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 are working to enhance our organizational design to better shape the way we structure and operate our business. As our structure evolves, it will sharpen our investment discipline and increase the speed at which we operate. I am confident that this will best enable IntriCon to successfully focus our resources on strategic market opportunities that are key to long-term growth.

Turning to our financial results. For the 2020 third quarter, as I noted earlier, net revenue was $27.4 million versus $26.9 million in the comparable prior year period. By core business segment, revenues in our medical business for the quarter were $20.7 million, an 8.1% increase year-over-year and represented 75% of total revenue, which was relatively consistent with the third quarter of 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.

In 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 a reduction in advertising as part of the Hearing Health Express restructuring efforts. However, as I noted earlier, we did see some upside in the segment due in part to renewed access to audiologists and solid orders from our indirect and consumer customers. More specifically, within the hearing health segment, indirect to end consumer revenue was $1.8 million, direct to end consumer revenue through our Hearing Health Express business was $1 million, and our legacy OEM revenue was $2.8 million.

Third quarter gross margins were 26.3% compared to 25.2% in 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 EMS.

The company also incurred a charge of approximately $250,000 related to an earn-out provision in the EMS purchase agreement, specifically the Japan regulatory approval of Medtronic's Chocolate PTA 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 $644,000 or $0.07 per diluted share versus a net loss attributable to shareholders of $290,000 or $0.03 per diluted share for the 2019 third quarter. Lastly, our combined cash and investment balance at September 30, 2020, was approximately $30.9 million, up slightly from June 30, 2020. Which brings us to guidance. There is still much uncertainty as we enter the last few months of the year. However, we believe our business has stabilized to a degree where we're confident that our fourth quarter revenues will align with our third quarter revenue. Our confidence stems from stabilizing business trends, momentum with Medtronic, and EMS delivering results as expected. In short, we're cautiously optimistic as we handle the final quarter of the year, but we want to reiterate that 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 in medical markets, positioning to capitalize on the changing regulation in the hearing health market, and enhancing our organizational design to more effectively scale and drive continuous innovation. With that, I'd now like to open up the call for any questions. Operator?

(Operator Instructions) Your first question comes from the line of Jon Block from Stifel.

One thing to just call out -- maybe to start, higher revs year-over-year, lower OpEx. Maybe if we can start there, is the thought that the lower OpEx is sustainable going forward? And then just to be clear, that $250,000 earn-out, was that in the OpEx number for the quarter or was that somewhere else below the line?

So that was in the OpEx number for the quarter, Jon, in the operating expenses. You'll see that under the other operating expenses line on the press release. And then in terms of your broader question on lowering the OpEx, obviously, we made the decision as we thought about repositioning our hearing health asset, thinking a bit more instead of a growth engine, but really to support our product development, pulling back significantly on the sales and marketing advertising expense. And that's a trend that you're going to see continuing going forward.

That said, as we begin to make inroads in some of these end markets, we'll probably look to increase our sales and marketing, get more feet on the street to more aggressively 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 selected growth in those end medical markets.

Okay. Got it, and maybe 1 or 2 more for me. You spent some time throughout the call alluding to some of the 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? Are those longer-term in nature, or could we see some incremental opportunities come into the P&L in 2021?

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 materialize in 2021. We're going to continue, as I mentioned, though, to put more resources into driving into more opportunities that are longer-term in nature. So I think you have a combination, Jon, of opportunities that we're working on, both 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 participants. So I guess that's sort of question one, as the trial not started, what would you need to start the trial, Scott, do you think in order to complete it by, call it, that mid-year time frame 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 in 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 with 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 road.

I'll take the last question first and then follow up on the timing of our clinical. So clearly, there's -- with the pandemic and the pushout in the FDA draft guidance, there's still activity going on. I would say it's not quite as robust as where we were when the law was just passed back in 2017, but there are still a lot of activities that are happening. And we are still working with potential branding partners, potential retail partners. And that will be a focus as we round out 2020 and enter into 2021. And I am confident that we will be able to secure a branding partner as the draft legislation comes to light.

In terms of where we're at with our clinical trial, obviously, we had to put safety first. We had worked with the FDA to outline what our clinical trial was going to look like prior to the pandemic. We've taken a step back. We've adjusted, we've tried to adapt to what we see as a more COVID-safe protocol for our clinical. We'll be engaging the FDA here over the coming months with our anticipation to start sometime in the first quarter, depending on the feedback we get from the FDA. So those activities are still moving. But again, obviously, with what's going on with the pandemic and the delay in the draft guidance, it slowed things down slightly.

Your next question comes from the line of Kyle Bauser from Collier Securities.

Maybe just EMS -- correct me if I heard this wrong, did you say sales were $2.8 million in the quarter? And second, how should we think about this? I mean, it seems like a pretty nice opportunity here. Should we see this stepping up sequentially now that we've unlocked Japan? 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 this space. Not only were we 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 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 Medtronic's vascular division through that acquisition, obviously, have a very strong relationship in the 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 in a different division at Medtronic, or are you looking more at outside opportunities at this point? Is it mixture? Just kind of curious how the activities have been going there.

Yes. Great question. And really, it's a combination of both. It's really largely, where can we come in and add value? We know there's other places within Medtronic that our core competencies could be leveraged and we could add value. Obviously, with the relationship that we've built with the diabetes group, now coupled with the strong reputation that Emerald has within the cardiovascular group that just puts us in a stronger position to go pursue other opportunities. Whether it's within those 2 groups, or now getting the type of references and recommendations to other groups within Medtronic. So those will be ones that clearly we'll continue to pursue and be very opportunistic.

But there's also opportunity outside of Medtronic. And there's a lot of inroads that have been made, not necessarily all showing up on the top line in 2020. But I'm very confident with the work that we've done, setting the table in 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 that we've noted in the past, such as interventional pulmonology and electrophysiology. 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 ERGO IPO. Can you talk about how, if at all, this impacts IntriCon? Seems like ERGO can now, kind of, step on the gas a bit here, which should help IntriCon, I would think, but just I'd love to get your thoughts.

Yes. And maybe I'll just -- I'll take that, and I'll even step it back more broadly. I think this just reinforces what we always thought, which is this over-the-counter direct-to-consumer space holds great potential. And I think you see that reflected in the valuation that Emerald has today and what -- or excuse me, that ERGO has today, and the capital that they were able to raise out of their IPO.

A little bit on the timing, again, it's a little bit hard to get our handle on just what's 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 to be the enabler to work with those partners that can really drive volume, and that's where our focus is. Obviously, we have a long-standing relationship with ERGO. We supply them with their DSP. And we're excited to continue to work with them as they look to drive their business in what we think can be a very large market.

Your next question comes from the line of Andrew D'Silva from B. Riley Securities.

And sorry if you hit on any of these topics, I was bouncing between calls, but I'll start with just a couple of quick bookkeeping questions. If you could just let me know what the depreciation and amortization, stock-based comp, cash flow from operations and CapEx was for the quarter, that would be useful. And then while you're pulling that, can you maybe just talk around your partnership with ERGO? I believe previously, you were their sole source kind of internal components provider. Is that still the case, or has that relationship evolved in any capacity?

I'll go through the housekeeping items, Andy, and then I'll jump on the ERGO question. Depreciation and amortization for the quarter was $1,258,000. Stock-based compensation was $332,000. Cash flow from operations was $1.6 million for the quarter. And CapEx was $610,000.

And now in terms of the relationship with ERGO, I mentioned, it's a long-term relationship that we've had with them. And we supply them the DSP chip that powers their device. So nothing has changed with that relationship. And again, we're looking forward to supporting the growth that they're anticipating as they look to drive into this vast market?

Okay. Perfect. And my last quick question relates to Medtronic. Can you maybe discuss the cadence or how you're viewing the new diabetes launches and how they're trending? And has there been any progress on CMS reimbursement for them with obtaining the non-adjunctive designation? I did see CMS had a proposed rule, and it looks like it would expand coverage and payment for CGM, and classify, I think all CGMs versus just therapeutic CGMs as durable medical equipment. So I was just curious if you could give any color on those 2 Medtronic topics.

Sure. Maybe I'll start with the last one. I know there has been some progress on the non-adjunctive. 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 had been made. In terms of the integrated pump systems, look, I'm excited about what Medtronic is bringing to the table. I think the 770-G 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 that had eroded over time begin to slow. And as we look at their future generation products, specifically the 780, I think that starts to check a lot of boxes in terms of customer delights, whether it's the improved algorithms with alarms, whether it's the auto correction bolus, or compatibility with the Zeus Sensor, which really enables fewer finger pricks, only having one calibration at the beginning of use. So, I'm very excited about what Medtronic has laid out for their road map, and IntriCon is thrilled to continue to support what we think is really innovative technology that's going to better the lives of many type-1 diabetics.

I don't see any question at this time. I will turn it over to our CEO, Scott Longval, for closing remarks.

Excellent. Thank you. And thank you, everybody, for joining us on the call today. We look forward to updating the group on our year-end results. And in the meantime, everybody, please stay safe and healthy. Thank you, and have a great night.