Sonic Innovations, Inc. Q3 2008 Earnings Call Transcript

Sonic Innovations, Inc. (SNCI)

Q3 2008 Earnings Call Transcript

October 28, 2008, 5:00 pm ET

Executives

Mike Halloran – VP and CFO

Sam Westover – Chairman and CEO

Analysts

Joshua Zable – Natixis

Sam Bergman – Bayberry Capital Management

Gary Siperstein – Eliot Rose

William Jones [ph] – Smith Barney

Presentation

Operator

Good day ladies and gentlemen and welcome to the third quarter 2008 Sonic Innovations earnings call. My name is Melody and I’ll be your coordinator today.

(Operator instructions) I will now turn the call over to Mr. Mike Halloran, Vice President and CFO. Please proceed.

Mike Halloran

Thank you Melody. Good afternoon and welcome to the Sonic Innovations third quarter 2008 conference call.

Before moving into our review of the third quarter and our thoughts on the future, I would like to remind everyone that during the course of this conference call we will offer projections and other forward-looking statements regarding future events and future financial performance of Sonic Innovations. I wish to caution you that these statements are just predictions and that actual events or results may differ materially and adversely.

I’ll refer you to the documents we file from time to time with the Securities and Exchange Commission and specifically the section entitled factors that may affect future performance included in part 1, item 1A, of our annual report on Form 10-K for the year ended December 31, 2007. And in part 2, item 1A, of our 2008 quarterly reports on Form 10-Q which identifies important factors that could cause our actual results to differ materially and adversely from those contained in our projections and forward-looking statements. With that Safe Harbor statement, let me turn the call over to our CEO, Sam Westover.

Sam Westover

Thank you Mike. Good afternoon and welcome to our earnings call.

Sonic Innovations’ strength in the market place is being demonstrated by record sales and good growth in a challenging market. Our strength is the result of our strong product foundation and superior customer service. Our products have the best sound processing, leading noise reduction, and excellent feedback cancellation. They’re small and easy to use.

Sonic was the first company to report a softening of the hearing instrument market in North America. We reported this to you on February 5. We immediately began a plan to prepare for a global slowdown. As a result of our early preparations and implementation, we’ve continued to show revenue growth and record revenues and a reduction in our cost structure. We implanted five responses to the threat of a global recession. First, we restructured our European operations. We’ve outsourced our Danish sales and administration. We’ve closed our UK office. We’ve discontinued our unprofitable domiciliary business in the Netherlands. We’ve sold a few old retail stores that did not fit into our long-term strategy.

In total, we’ve reduced our SG&A in this restructuring more than $8 million annually. Second, we’ve reduced our head count by 16% excluding vertically integrated operations. Third, we’ve launched the line of products that are responsive to increased consumer price sensitivity. Fourth, we’ve reduced the pace of acquisition in de novo stores, and fifth we reinstituted hedging of inter-company balances for foreign exchange risks to mitigate the impact of the strengthening US dollar.

We’ve launched six new products this year and we’re launching one more new product next week. Our product line is fresh. More than 80% of our wholesale sales are from products that are less than two years old. Our vertically integrated business grew during the third quarter 24.5% in revenue, significantly above the market, more than 67% of our revenues from our vertically integrated businesses. Our strategy is working. The elimination of non-strategic activities is largely finished. We will have eliminated 55 employees. These actions improve our profitability going forward and facilitate our ability to focus on our strategic operations. There will be about $700,000 of additional restructuring charges in the fourth quarter which should wrap up the transition. We’re showing strong growth outside North America where hearing instruments are subsidized by national health programs. North America continues to be soft.

I’m very proud of the progress that we’ve made in the first three quarters of 2008 compared to the same period in 2007 after adjusting for restructured activities and discontinued operations. Adjusted revenues increased 12%. Income from continuing operations for the three and nine months ended September 30, 2008 excluding restructuring charges are essentially unchanged from the same periods in 2007. Gross margin improved from 62.8% to 63.5%.

We’re continuing to make a few acquisitions. We’ve acquired $6.8 million in 2008, an increase of $1 million since our last call. There has been no change in our pricing discipline. We are evaluating acquisitions opportunistically with an ion capital availability which allows us to focus on restructuring and eliminates raising capital as a requirement in the current environment.

In the first quarter, we launched the new product called Ion 400. Ion 400, the newest member of the ion family of products has hands-free automatic features to the markets smallest micro-BTE. In addition, Ion 400 provides excellent moisture resistance. In laboratory testing, Ion 400 outperformed all competitive products tested when subjected to extreme moisture and humidity conditions. Ion 400 also offers voice alerts, automatic and adaptive directionality, and a robust adaptive feedback management system.

In April, we launched another product called the Velocity mini-BTE. The new Velocity mini-BTE is the smallest fully-featured BTE on the market. The mini-BTE extends the premium features found in Velocity into a foreign factor that offers both open air and standard fittings, a powerful fitting range and extendable functionality such as Bluetooth and direct audio input support.

In August, we began shipping three new products in the Velocity family; Velocity 4, Velocity 12, and Velocity 24. This family of products offers a range of prices and features. Velocity 4 is targeted at the current economy where some customers are looking for lower price alternatives. Velocity 24 is our newest high-end product and Velocity 12 is an advanced product. The Velocity series provide solutions designed to meet each patient’s individual lifestyle, budget, and hearing needs. Every Velocity product features sonic sound digital processing that provides exceptionally natural sound. Velocity’s noise reduction goes beyond simply providing a comfortable listening experience and actually improves speech understanding and noise. All Velocity products offer directional technologies to improve hearing in noisy situations. Velocity 24 and Velocity 12 have the additional automatic and adaptive directional options that provide hands-free operation in a wide variety listening environments.

We recently launched a Sonic Blue, our Bluetooth streamer that provides seamless integration of our hearing solutions with modern communication devices like mobile phones and MP3 players. For some, hearing on the telephone can be a challenge, but with Sonic Blue the audio is delivered directly through the patient’s hearing instruments to both ears providing greater audibility than ever before.

Next week, we’ll be releasing one more product for a total of seven products this year. This new product called Velocity 6 completes the offering in the Velocity family of products. Velocity 6 is an ideal midlevel product providing many of the excellent features found in the Velocity family like Sonic Sound and Dustin [ph] industry noise reduction, and directionality at a very attractive price claim. We also have products in developmental plan for release in the spring.

To summarize, in the short run we’ve positioned the company to respond to the threat of a global recession. We’ve grown revenue, increased gross profit, and reduced SG&A expenses. We will continue to improve our cost structure to address the changing economy. Our long-term strategy is working. Vertical integration continues to produce impressive returns growing 36.6% in revenue and 23.7% in operating profits on a year-to-date basis. Our service levels are the best in the business and we continue to produce great products with new features and benefits. After Mike goes through the details of the financials, we’ll open the call for questions. Mike?

Mike Halloran

Thank you Sam.

In the third quarter, we essentially completed our restructuring program. As you probably recall, we’re eliminating unprofitable businesses and customers and reducing head count by more than 50 positions, primarily in Europe. The operating loss is associated with the locations subject to this restructuring were $0.8 million in Q1 2008, $1.2 million in Q2 2008, and only $0.2 million in Q3 2008. We said last quarter in these operations, we would lose $0.2 million and that’s what we did.

Unfortunately, much of the success of these restructuring initiatives were offset by the decline in North America wholesale business. What are we doing about North America to improve operating income? Well one, we’ve hired Paul Wennerholm as President and Chief Operating Officer. His sole focus in the near term is improving the North America wholesale division. Two, we’re implementing price increases and operational changes that take effect in mid November. Three, we launched three new products in late Q3 2008 including two new products that fit into a mid and low price category that meet a growing need in our product lineup, particularly given the struggling North America economy. We also have one more lower to your price product to be launched in Q4 as Sam indicated. These products are competitively featured at each of the key price points particularly the lower price points something that the company was not focused on in the past. Four, we have identified cost reductions in marketing expenditures in our retail operations. And finally, we’re cutting costs corporate wide in an effort to produce the sales level necessary to break even.

The restructuring cost for Q4 will be about $0.2 million for extra cost associated with the lease in the Netherlands and also we’re expecting additional $0.5 million of other costs for a total of $0.7 million in Q4. The volatility in the market place and foreign currency presents challenges in forecasting Q4 results. The impact on Q3 sale as a result of the strengthening of the US dollar was roughly $1.0 million when compared to Q2 2008. The US dollar today compared with the Euro and Australian dollar as of June 30 has strengthened by approximately 25% and 50% respectively. In order to offset these issues, the company continues to reduce cost where possible.

The strengthening of the dollar and the softening of the global economy continue to weigh on our profitability. I would expect Q4 2008 to look similar to Q3 2008 except lower sales and lower expenses and no benefit for reversal of a deferred tax evaluation allowance in our Australian operation. The following discussion is based on continuing operations. Two divisions that were part of our restructuring plan are reflected as discontinued operations because one was sold and the other was essentially closed. I will now go through more detail.

Net sales in the third quarter 2008 were $31.3 million up 4.3% on third quarter 2007 sales of $30.0 million. Year-to-date sales increased to 12% over 2007. Operations where we are vertically integrated as Sam indicated earlier did well with sales growth of 24.5% and 36.6% for the three and nine months ended September 30, 2008 respectively over the corresponding period in the previous year. This demonstrates the company’s vertical integration strategy is growing sales at a high rate. By segment, North America third quarter sales of $11.9 million decreased to $0.7 million or 5.4%. The US economy continues to put downward pressure on our business and therefore as we previously discussed we are taking steps to improve profitability in this division.

European sales of $11.7 million increased 8.9% over 2007 third quarter sales of $10.8 million. We expect local currency sales to increase nicely in Q4 because September 2008 orders in our largest European retail operation grew 20% over September 2007 orders and September orders roll into Q4 sales. The rest of the world sales of $7.7 million in the third quarter 2008 were up $1.0 million or 15.2% from 2007 sales of $6.7 million. Year-to-date sales have increased 27.7%. We opened retail locations in 2007 and 2008 which are driving our sales.

Gross margin of 64.3% for the third quarter 2008 was up 1.4% from last year’s third quarter margin of 62.9%, and on year-to-date basis gross margin improved from 62.8% to 63.5%. The increase is due to a stronger mix of retail sales to wholesale sales and as you called retail sales carry a higher margin than wholesale sales, and the impact of foreign currency offset by lower average selling prices in wholesale. I expect gross margin in Q4 2008 to be approximately 63%.

Selling, general and administrative expense in the third quarter of 2008 up $18.0 million was up $1.7 million from last year’s third quarter level. SG&A expenses increased as a result of investing in those operations where we are vertically integrated.

For the restructuring cost in 2008 will be approximately $4.4 million for existing activities and an additional $0.5 million to coming Q4 2008. Total cash payments associated with the restructuring program will be $2.4 million and non-cash is $2.5 million. On the expense in the third quarter 2008 was $2.0 million down $0.1 million from $2.1 million in third quarter 2007. We expect research and development expenses to be $2.0 million to $2.2 million per quarter going forward. Operating loss was $0.1 million for the third quarter 2008 and $0.9 million year to date compared with $0.4 million gain in Q3 2007 and a year-to-date gain of $1.0 million.

Two things drove this change. First, the 2008 restructuring and intangible write offs of $0.2 million for the third quarter and $1.6 million year-to-date, and second the softening in North America wholesale sales primarily resulting from the downturn in the US economy.

Other income was at loss of %0.1 million in Q3 2008 and year-to-date is an income of $0.1 million. We expect other income loss to be a loss of approximately $0.1 million in Q4 2008. We had an income tax benefit of $0.9 million in the third quarter 2008 and $0.3 million year-to-date. The benefit was due to a $1.2 million reversal of our reserve against our deferred tax assets in our Australian operation. I would expect our income tax provision to be roughly $0.3 million in Q4 2008 because the foreign locations generating the income tax provision are profitable and we use a transfer pricing method based on the net sales. Our net operating loss carry forward to approximately $23.6 million in the US and $18.4 million in the balance of the world.

Excluding restructuring charges, our income from continuing operations is approximately the same result as in 2007 for the third quarter and year-to-date. Going forward growth – growing North America sales and reducing cost will be the key in improving financial performance both of which have management potential. Basically, the average shares outstanding for the third quarter were 27.5 million in 2008 versus 26.7 million in 2007.

Turning to the balance sheet, we’re committed to reducing inventory by $2 million between June 30th and December 31, 2008. We met that commitment in Q3 with the reduction of $2.1 million. We do not expect much improvement over the September 30 inventory balance. We continue to focus on collecting balances due and improving our processes in accounts receivable. Operating cash flow this quarter was $0.6 million. As of September 30, 2008 cash and marketable securities totaled $13.6 million and we have an available line of credit of $6.0 million. Melody at this time we’d be happy to take questions.

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from the line of Joshua Zable with Natixis, go ahead.

Joshua Zable – Natixis

Hey guys, thank you very much for taking my call here. Kudos on the cost restructuring here and executing, you know, it’s tough out there but for what it’s worth we appreciate it. Just a couple of questions here. The market – you guys have been pretty upfront from the get-go about the market softening up. Clearly, we’re seeing that in the numbers and there’s a limit to what we can do. We’re also getting to the point where we are starting to anniversary some of that softness. Can you just talk about – I mean I don’t think anyone really predicted the mess that’s out there right now even if we did present some softening. Can you talk about maybe if your expectations have changed towards the level of softening the market if you can, and I know it’s hard to gauge of what inning we’re in, are we in the seventh inning of the softening or are we like in the third inning here, and just when do we see the uptake weather be because the (inaudible) or just because we‘ve hit a point where we are at the bottom and regardless we should see a little growth?

Sam Westover

Well, you’re right. I don’t think anyone anticipated that the stock market and the credit markets would be behaving this way at this point so we were seeing some softening slope. I wouldn’t say recessionary but slow – slowing of growth in the US economy as far back as December and we reported that in February. And the reason that we think that the hearing aid market softens is based on consumer confidence. When people are insecure and they’ve seen their portfolios adversely impacted, they tend to defer elective healthcare purchases and the hearing aids in that category. So as long as we see continuing stream of news reports in the newspapers and on television that the economy is uncertain, consumer confidence tends to be lower and people defer their purchases. But because it is healthcare you can’t defer it forever. People still need to hear even in of that economy. The purchases will happen it’s just not as robust as we would have seen a year or two ago. So when will consumer confidence start to turn around? I’m afraid I don’t know the answer to that one. We’re hoping sooner rather than later but it’s based on, in large part, on some of the macro events that are driving the overall economy and that’s above my day grade.

Joshua Zable – Natixis

Fair enough, fair enough. So I guess on the fourth quarter and then looking forward a little bit, Mikey talked about think about the fourth quarter as similar profitability with lower sales so just the way to think about is just lower sales with lower costs coming through on similar profitability or did I miss hearing that?

Mike Halloran

No, that is correct particularly with the foreign currency. I think if you look at it from a local currency perspective I think particularly our Europe operation and our Australia operation continue to grow but with the foreign currency of the Euro just from June 30 until today is down 25% and the Australian dollar is 50%. That will have a pretty dramatic effect both on sales and operating expenses.

Joshua Zable – Natixis

Okay. So on a volume basis, just to be clear – on a volume basis overseas you guys are growing pretty nicely, you’re getting hit on currency in the US though you’re seeing volumes go down basically?

Mike Halloran

That’s correct.

Joshua Zable – Natixis

Okay. And then again going forward, should we think about a model of consistently the US – I guess it’s hard to say but I’m just trying to figure out how bad do you think it’s going to get? Because obviously you’re at a point here where the stock is priced almost to what the company is going out of business here so I’m just trying to gauge if we’re at the bottom or if we should set the bar lower just so we can figure out where we are in this cycle? Any idea on how we should think on the North America sales?

Mike Halloran

Well I think that North America will continue to be soft for some time, for months to come. Hopefully not a year but I think in the next few months we should expect that. But along your comment of devaluation of the company, obviously when the stock is at a $1 it’s easier to do the math, right? We have 27 million shares outstanding. A $30 million valuation for this company doesn’t really make any sense. We just look at EBITDA we’re running a $1.25 million positive on EBITDA so that’s not a going concern issue. If you look at our top line where in the $125 million range, you would expect a one-time valuation is a bargain I would think and when you’re at 25% of that it’s fairly absurd. And if you look at the devaluation – or the value of individual components of our company, the breakup value of the company is significantly higher than our current market cap. So we think that the valuation is being driven – well it’s not being driven by valuation. I think there – our exigencies that are demanding redemptions and the funds that are – that have invested in us and we do things that there’s an understandable flights equality for capital in general and those economic drivers I think are being more significant than evaluation of the company. We can’t – we can’t figure out how to do evaluation that only generates a $30 million market cap.

Joshua Zable – Natixis

Well your guess is good as mine here but –let me just address that question I guess a little bit more pointedly here. From a cash perspective you talked about $30 million cash but it is line of 6. Can you just talk about cash flow because I know, again the stock is being priced like it’s going out of business and clearly either you and I think so? Can you just maybe give us a little bit color about cash flow and maybe improving cash flow as we go forward giving these cost cutting because I know obviously that’s cost you some cash, so when we look to next year because that means concentrating on your cash value?

Sam Westover

Joshua let me take that. When I look at our cash flow in the fourth quarter and 2009, so let’s say it got to $13.6 million and that’s all available cash. We freed up $5 million in the restricted previously. So that’s all available and we have $6 million so we have about $20 million. If I look at our debt, our debt is $9 million today. And in addition to that, we generate about $7 million of non-cash charges in our income statement annually. So if the company just breaks even in 2009 we should – and we hold receivable and payables in equilibrium, we should have generated $7 million of cash and we typically have about $2.5 million to $3 million in capital expenditures. So just our cash generation alone should be about $4 million and we have $8 million of debt of which we have left $4.5 million current. So just – if I said just break even from operations, come up with the $4.5 million pay down our debt, we end with the same cash balance.

Joshua Zable – Natixis

Great. And then one final question, I know that Paul is there with you. I guess Paul you are stepping in from a different perspective here. It’s a tough market so you’ve got a tough job but on the other hand you have a good company with good products. The way –

The key to North America growth I imagined over the short term will be some market share gain [ph]. Can you just talk about – if possible in the short time that you’ve been there how you feel positioned relative to your competition in North America?

Sam Westover

I’m sorry for the confusion. We haven’t invited Paul to participate on the call. Maybe we’ll do that next time but I think I know where – what he is seeing and it’s still a little bit tough out there because our independent retailers are selling fewer hearing aids than they’re accustomed to and they only buy when they need to replenish their inventory or satisfy their customers. So that means that the manufacturers are all competing with each other as we always have, and I don’t think we’re doing better or worse than anybody else. I think everybody is experiencing the same thing when as we talk to the larger retailers they’re having the same type of experience that we are in North America.

Joshua Zable – Natixis

Great guys. Well thanks for taking my call and keep up the good work.

Mike Halloran and Sam Westover

Thanks Josh.

Operator

Our next question comes from the line of Sam Bergman with Bayberry. Go ahead.

Sam Bergman – Bayberry Capital Management

Hello Sam.

Operator

(Operator instructions) Our next question comes from the line of Gary Siperstein with Eliot Rose. Go ahead.

Gary Siperstein – Eliot Rose

Hey guys.

Mike Halloran

Hi Gary.

Gary Siperstein – Eliot Rose

A solid quarter and good progress. Thanks for all the hard work.

Mike Halloran

Thank you Gary.

Gary Siperstein – Eliot Rose

Sam could you give us – just following up on the back end of the last quarter’s questions in terms of valuation and you talked about strenuous or exogenous events knocking the stock down and separate from what the company is really worth. With all that in mind, with the $30 million roughly market cap and basically $13 million in cash, does it make sense at all? My understanding is Australia alone could be worth as much as $30 million or $40 million. Does it make sense to liquidate part of the business to answer the question about the balance sheet and then use that cash to invest domestically for an ultimate turn around?

Sam Westover

When things happen like this where all the rules go out the window, it gives you an opportunity for reflection and contemplation of lots of different scenarios. And I can assure you that we’ve had discussions that consider a wide range of various scenarios that would maximize shareholder value. So I think it will be hard to come up with one that we haven’t considered but what we’re trying not to do is to react – over react for a temporary situation because it is alarming when you see that the stock do what it’s done but we haven’t worked this hard for the last 10 years to sell at the bottom the first time something negative happens.

So that’s – I think it’s just a clear indication that there is definitely a net underneath our activities here so it’s hard to imagine how we got to this point. It is even harder to imagine how it could be lower than this point. So we’ll look at that but we don’t want to do things that are foolish just because it’s expedient in the short run. We need to take a little bit longer view of what the opportunity is and protect our shareholders to the best that we can and we’re not the only ones who have seen the downturn in the stock price. If you look at all our competitors, they’ve all seen dramatic reductions. It’s not just us obviously every company in the world is going through this to some extent. But everybody is feeling it and we have your best interest at heart. I’ve got a significant equity position at least from my point of view. I’m not here for the paycheck. I’m here just like you for the stock price and I’m very interested in seeing that improve as soon as possible.

Gary Siperstein – Eliot Rose

That’s fair Sam. I guess just to followup. Clearly, I wouldn’t want you to do anything out of short-term events and the stock price but I’m asking I guess from more of a tactical or strategic point of view if one could get $30 million or $25 million or $40 million, whatever the number is for Australia, you really could take advantage of acquisitions domestically, you could buy a lot of your stock back in, one time sales which you referred to earlier is almost a $5 bill and that’s for sale now. I mean if there’s ever an economic recovery out there, maybe sales go to $6 per share. So between buying the stock back in and making acquisitions domestically or other parts of the world, I guess I’m just asking if it makes sense strategically and I guess the fact that you haven’t done it yet is you feel keeping it together makes more sense right now?

Sam Westover

Well for that particular one it does because our Australian operation is vertically integrated and that’s really the future that we’re moving towards so to sell one vertically – to sell a very successful, well-run vertically integrated company to build a new one somewhere else is transactionally [ph] disruptive at least and probably doesn’t benefit the company in the short run and maybe even long run if it doesn’t improve the situation.

But we have –we did exactly what you were proposing when we looked at our European operations. We looked at non-vertically integrated activities and we said, “You know, this really doesn’t make sense.” So we sold some of those and closed others and we’re using those funds to reinvest in that going forward company which is vertically integrated and growing very nicely. So the company is in transition. It’s going to look a lot different when we come out of this. We’re like – all the companies that go through this experience successfully will come out the other side much stronger competitors than when we went in.

Gary Siperstein – Eliot Rose

Sam, last question and thank you for your time. Would you give us, if you can a little color on where you’d like to be? Where could this company be in two or three years, or three or four years? Or if you can give me some sense of what part of sales could get to the bottom line looking into recovery in two or three years or three or four years coupled with all the things you guys are doing on the expense side and the new product side etc.

Sam Westover

Sure. Well when we’re finished with this we’ll be showing 20% – and Mike if you can jump in and stop if I’m over exuberant – but 20% plus on the bottom line and we don’t see any reason why we can’t continue to grow the top line. If we can grow the top line in this environment which we’re doing then there’s no reason why we can’t see acceleration of that as things become a little bit easier. And already we’ve got solid EBITDA where the cash is not an issue. Our balance sheet is strong and we are temporizing our acquisition phase just for security reasons. We want everyone to feel very, very confident that there is not a cash issue out in front of us and we’ll look at those opportunities opportunistically.

Mike Halloran

Sam, a couple of things too about your question regarding our assets and our valuation, really for me there is two takeaways. One, that some of the parts is clearly worth significantly more than the whole. And then the second piece is – and obviously we don’t believe this would happen but if we ever need it to monetize any of our assets we don’t think we would have a problem doing that. So I guess to me those are the two key takeaway points to your earlier question. Some of the parts are clearly higher and also we would have no difficulty monetizing assets if we needed to.

Gary Siperstein – Eliot Rose

Okay, thank you guys.

Sam Westover

And just a final comment, we’re a lot more optimistic than this conversation is done. So I understand that because the stock is being valued as though – while the company is in distress, it doesn’t mean that we are. We’re much more optimistic than the stock price would indicate.

Operator

Our next question comes from the line of Joshua Zable. Go ahead.

Joshua Zable – Natixis

Hey guys. Thanks for taking my followup here. Just a quick run, I know you guys touched on this but obviously you guys were very successful in Australia, and I know we talked about the strategy and you talked about the strategy in the US, and obviously given the hiccups in the market here makes it a lot more difficult to go ahead and execute simply because you want to be conservative on the cash front of things. And I guess, with the comments you made earlier, Mike specifically about the cash flow, being cash flow positive, and obviously business even what appears to be doomsday scenario, you guys feel like cash flow positive and still doing okay. Can you just talk about will these – will your acquisition strategy and your vertical integration strategy continue? Is it absolutely on hold? Because you did a great job in Australia, you’ve obviously made good progress here in the US to the extent that you can. And just trying to help us understand if – are we just at a standstill there because of cash? Or are you guys, as you’ve said you talked about from an internal point of you being optimistic. You do have this cash. You’re confident cash that is coming so obviously you are going to be opportunistic in discipline but that strategy is not dead?

Sam Westover

No. It’s definitely not dead. I think the better way to look at it would be to say in the US things are at a low so we’re still optimistic about this strategy. We still feel very good about it. The operations that we’ve acquired we think have significant upside going forward but there’s not a lot of wind out here for our sails. So to take our capital now and invest it in a flat economy or even a shrinking economy doesn’t seem particularly prudent. I think we’d rather keep our powder [ph] dry and at the right time and for the right situation we’ll take advantage of that. But I think it’s prudent for us to pull back a little bit particularly in the US market place.

Joshua Zable – Natixis

Great. Thanks very much guys.

Operator

Our next question comes from the line of Sam Bergman with Bayberry Capital Management. Go ahead.

Sam Bergman – Bayberry Capital Management

Good afternoon Sam and Mike. How are you?

Mike Halloran

Good thank you.

Sam Bergman – Bayberry Capital Management

You did a good job on restructuring and I think there’s a lot of promise to Sonic Innovation and I’m sure you’ll carry that forward. Couple of questions, the new product lines that have come out this year, are you able to attack competition in the United States wholesale business with that array of new products or take away some market share or not?

Sam Westover

That’s a good question. The interesting thing about the wholesale hearing market in the US is that it has two fundamental aspects to it. One of them is product which you mentioned. But the one that is equally important is a solid sales execution and marketing and we’ve done quite a bit of market research with independent hearing care professionals and we asked them that question that you’re asking. Who makes the best hearing aid? Who has the best technology? Do you know that ours is the best? We think it is. And what they typically say is once you have achieved a certain level of confidence in your product and technology, then in their view it switches over to the relationship with the sales rep and service issues and things like that. So we feel very strongly about our product that it provides the best patient benefit and best noise reduction and it really does benefit patients we think in a superior fashion, but when you’re out there in the market place that’s about the only feature. So I would say that, “Yes our products are able to take market share.” We sign up new customers all the time and they started using Sonic products. But it is equally important to have a good sales representation and good customer service in order to maintain those relationships and we do well on those two. So we’re always looking very hard to make sure that our products are competitive and leading edge and for the categories in which we compete which is 95% of the hearing aid market, we think our products are very competitive and they’re more than enough for our sales people to be successful at attracting new business.

Sam Bergman – Bayberry Capital Management

So you see some of this new business coming your way from the products that you just released or not?

Sam Westover

Yes definitely. Absolutely. We’re very enthusiastic about the Velocity 6 that’s coming up next week. It’s just perfectly priced with the right features for this particular economic circumstance. Our sales people are very much looking forward to that and that will be hitting the streets here in the next week.

Sam Bergman – Bayberry Capital Management

The other question I wanted to ask you is in regard to the stock price knowing that it’s 25% of sales. Since you have been buying retail stores somewhat of a whole pan. Does it make sense to devote $2 million or $3 million to buy back stock? And the second part of the question is should we expect to see insiders buying the stock after the window opens two or three days from now?

Sam Westover

I think all of those things are possibilities. It’s not – I don’t think I’m allowed to answer your question directly but I certainly understand your thinking and can’t disagree with it. We always have a board meeting within a week after a call such as this and we’ll be having such a board meeting here very soon and I’m sure topics like that will be discussed.

Sam Bergman – Bayberry Capital Management

Because it just seems to me with a lot of promise for the future in this company at a $1.20 a share, it’s almost a no brainer for the board to buy back stock and I’m hoping they listen to this call and work on it pretty quickly.

Sam Westover

Okay, I will pass those comments along.

Sam Bergman – Bayberry Capital Management

Thank you very much and good luck to the upcoming quarters. Thank you again.

Sam Westover

Okay thank you.

Operator

Our next question comes from the line of William Jones [ph] with Smith Barney. Go ahead.

William Jones – Smith Barney

Hi guys. I agree with that least having the board seriously consider looking at the stock buyback but could you just briefly comment on where we are applying with the VA to get our line in with them?

Sam Westover

Sure. The VA has indicated that they’ll be sending an RFP out for the industry to bid on and so far they haven’t send it out, so we’ve got our team here that’s all prepared to receive that and we’ll see what they’re looking for and respond accordingly but nothing yet. It’s a little bit later than we expected. I think six months ago, we thought it was going to be September, three months ago we thought it would be October, so it’s not here yet. Maybe they’re doing something else in Washington right now. I don’t know.

William Jones – Smith Barney

Thank you.

Operator

Please standby. We have question from Joshua Zable.

Joshua Zable – Natixis

Hey guys sorry this is my last one I promise. Just with – I just thought the tax credit has been floating out there, a tax credit idea for hearing aid. It looks like there’s going to be a significant change in government here probably for the democrats we’re obviously looking at healthcare as an area of focus. Any ideas and I know it’s obviously difficult to predict the future as far as what’s going to happen in politics but what are we going to do even when they tell us. But any ramblings or thoughts about the tax credit coming through, maybe if the democrats come in or anything, or any insights that you guys have at all?

Sam Westover

Sure and I don’t want any of my comments to sound politically motivated. But it’s very hard to determine how this is all going to work because it looks like there’s a willingness to spend on things that would help ordinary Americans so some more government spending maybe a potential – maybe a possibility in a democratic administration and that would vote well for the hearing tax credit. But on the other hand, it’s just unfathomable that anybody would want to spend in this economic environment.

Joshua Zable – Natixis

Okay.

Sam Westover

Maybe I’m wrong. Maybe others will see that differently. So we’ve got an active activity going on with congress, signing people up for this tax credit, and we’ll see when the dust settles whether or not they’re serious about some of this increased spending on healthcare and other things that they’ve been talking about and if they are we’re positioned. We’ve got the people we’ve been talking to about this for years that I think would very much like to vote yes on it and really we’re the only country in the developed world that doesn’t offer a significant hearing aid benefit to its citizens. It seems like the United States of America is the only country that hasn’t realized that being able to hear really does provide benefit and economic benefit. People that can hear can work and people that work pay taxes so the government gets the money back that they would pay on hearing aids in the first place. It’s a no-cost activity and it benefits the population. Why not do that? But so far we haven’t been able to get that message through. Perhaps in the new administration they’ll here that.

Joshua Zable – Natixis

Great. Thank you very much guys. That’s my last one.

Sam Westover

Thank you Joshua.

Operator

I’d like to turn the call back over to Mr. Westover for any closing remarks. Please proceed.

Sam Westover

Thank you Melody. Well I’d like to thank you all for your continued interest in Sonic Innovations. These have been interesting times these last few weeks and months but Sonic is demonstrating consistent and substantial revenue growth. Our cost cutting efforts have positioned us for future earnings performance. Our strategy is to expand distribution for these great products through outstanding quality and superior customer service. So we look forward to updating you on our further progress in February. I wish you all a good day.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. That does conclude the presentation. You may now disconnect. Have a wonderful day.

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