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Hooper Holmes Inc. (NYSEMKT:HH)

Q4 2013 Results Earnings Conference Call

March 26, 2014 8:30 AM ET

Executives

Andrew Berger - S.M. Berger, IR

Henry Dubois - President and CEO

Tom Collins - Chief Financial Officer

Analysts

Brooks O'Neil - Dougherty & Company

Matt Reiner - Adirondack

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Hooper Holmes 2013 Fourth Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session with instructions provided at that time. (Operator Instructions)

At this time, I would now like to turn the conference over to Andrew Berger of S.M. Berger. Please go ahead.

Andrew Berger

Thanks, [Louis] (ph). On behalf of the management of Hooper Holmes, we are extremely pleased that you have taken the time to participate in our conference call and thank you for joining us to discuss the company's 2013 and fourth quarter financial results and business outlook.

Before I introduce management, I would like to remind everyone that certain statements made during the course of this conference call, especially those that state management's intentions, hopes, beliefs, expectations or predictions for the future, are forward-looking statements. It is important to remember that the company's actual results could differ materially from those projected in such forward-looking statements.

Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in the company's annual report on Form 10-K, copies of which maybe obtained by contacting either the company or the SEC.

By now, you should have received a copy of the news release, which was issued earlier this morning and is available on our website. You should also have received a copy of the slides accompanying managements’ presentation this morning, which is also available on the Events section of the website at investor.hooperholmes.com/events.csm or in an 8-K that was filed this morning with the SEC.

Participating in the call today are Henry Dubois, Hooper Holmes' President and Chief Executive Officer; and Tom Collins, Chief Financial Officer.

At this time, I will turn the call over to Henry. Henry?

Henry Dubois

Thanks, Andy. Good morning, everyone, and thanks for joining us. For this quarter, we will change the format of our call by referring to the slide presentation. As Andy mentioned, it is available on our website.

2013 was a transformational year for Hooper Holmes. We sold the Portamedic business unit and [started the year] (ph) in Basking Ridge, New Jersey, done our transition to Olathe, Kansas and turn the folks of the company to our growing Health & Wellness business.

As you can see on Slide #3, this morning, we are introducing the new Hooper Holmes as we call it internally the new Hooper. On today’s call, we will focus mostly on the future, on where we are going and covering three things.

Our Health & Wellness business and leading capabilities, dynamics of our markets and where we have already accomplished to take advantage of growth opportunities and our high-level strategy to deepen our customer partnership and grow rapidly.

Before we turn our attention to the future, we announced our 2013 financial results this morning and I’d like to turn the call over to Tom to review the numbers. Tom?

Tom Collins

Thanks, Henry. As Henry mentioned, there is a lot of change in 2013. We sold the Portamedic business unit, strengthening our working capital position. We began to move out of our Basking Ridge headquarter, which will allow us to reduce our cost structure and the transition to a linear management team and corporate structure in Olathe is well underway. Once we file the 10-K, our operations will be based on Olathe.

As a result of these major organization changes, financial results from 2013 may not easily compare to our future in 2014 and beyond. As per our press release, for the full year 2013, the company’s consolidated revenues were $49.2 million, representing a 3.5% decline from $51 million in 2012.

The company recorded a net loss of $11.3 million or $0.16 per share in 2013, compared to $17.6 million or $0.25 per share loss in 2012. The net loss for 2013 includes approximately $0.8 million of restructuring charges and a net loss from discontinued operations of approximately $1 million. The net loss for 2012 included $0.6 million of restructuring charges and the net loss of $10.5 million to discontinued operations.

In terms of our balance sheet, our year end cash balance was $4 million with no debt and working capital of $8.6 million. I will discuss more details on operating income and some other financial themes momentarily.

In the fourth quarter of 2013, consolidated revenues totaled $15 million, representing a 1% decline from $15.2 million in the fourth quarter 2012, essentially flat between the two periods.

The company recorded a net loss of $2 million or $0.03 per share for the fourth quarter of 2013, compared to a net loss of $6.7 million or $0.10 per share for the fourth quarter of 2012.

As you see on slide four, the revenue story for 2013 has two primary themes. The first is that our Health & Wellness business revenue totaled $23.1 million for the full year 2013, an increase of approximately 8%, compared to $21.3 million in revenue for 2012.

As previously discussed with you, this occurred principally from lower volumes from one customer, but we understand, made changes in their business systems which reduce demand. We see that orders from this customer are rebounding in 2014. Growth across all other Health & Wellness customers during the same period increased approximately 35%.

2013 also saw a year-over-year decline in both our Heritage Labs and Hooper Holmes Services lines of business. This decrease is primarily attributable to decline in demands for services associated with the life insurance markets.

We are exploring all options to mitigate the effects of the decline in our life insurance businesses and are evaluating these initiatives with our investment banking advisors. I’ll also want to point out a few key financial themes for 2013, you can see on the lower right.

The company recorded an operating loss from continuing operations in 2013 of $9.8 million compared to a $7 million loss in 2012. This increased operating loss was driven by margin pressure in our life insurance business segment, increases in restructuring charges and selling, general and administrative costs associated with the sale of Portamedic and our transition to Olathe.

Additionally, Health & Wellness gross margins were affected by higher material and examiner’s travel costs in 2013. For 2014, we expect to improve margins by continuing to expand our health professional network, increasing supply efficiency and driving productivity increases through expansion and scale of our operating platform.

As we have said, our legacy cost structure and SG&A were set up for much different business. Given the size and scope of our transition out of Portamedic and out of Basking Ridge into Olathe, our SG&A cost will not be easily comparable throughout the year.

As previously mentioned, our net loss improved for both the full year and fourth quarter 2013 when compared to 2012. This was driven by the sale of Portamedic and a solid fourth quarter in our Health & Wellness business, which because of seasonality in October, November, which is historically the largest volumes of the year.

2013 also ended with a solid working capital position and no debt on the balance sheet. Our three-year loan and security agreement with Keltic Financial Partners remains in effect to provide flexible financial support if needed.

I’ll now turn the call back to Henry.

Henry Dubois

Thanks Tom. 2013 fourth quarter marked a transition for Hooper Holmes that will continue through Q1 2014. In the past, Hooper had been focused on the declining competitive market for life insurance applications. That legacy continues to affect lab testing and services development. And as Tom mentioned, we are exploring all opportunities to address those impact.

We consider Health & Wellness to be our core business and growth engine. This morning I’ll briefly describe our business and then discuss the growth opportunities we see in our strategy for new Hooper.

As you can see on Slide 5, we are a health information company. We have a network of local health professionals in cities and towns across the United States. We mobilize that network between thousands of people every day from employee Wellness program.

Last year, we performed 420,000 Wellness screenings. We served more than 65 health management companies and through them more than 2,500 employers. We also achieved a participant satisfaction rate of approximately 99%, a key measure of service quality.

Slide 6 suggests delivering coverage, consistency and compliance across the country in a complicated business. There are three keys to understanding our business. First is people. Our network of health professionals include nurses, phlebotomists and doctors. We have the skills and talent needed to collect personal health informations accurately and professionally.

The second is process. We train health professionals in our screening process for the screenings we performed in Honolulu are the same as the ones we performed in Hartford.

And the third is technology. We have secured proprietary technology platforms that delivers fast, accurate data to our customers typically within 48 hours of the screening event. In fact, we believe speed and accuracy in data reporting is one of our competitive advantages.

The map in the lower right shows the scale and scope of our operations. We present the complete range of capabilities needed to conduct biometric screenings anywhere in the country. And to this point, we conducted screenings in every state last year as well as the districts of Columbia, Puerto Rico and Guam. Each of the blue dots on the map represents the location of screening events performed in 2013. We are now poised to make the most of our health enrollment strengths.

As you can see on Slide 7, in the past, the company has been focused on turning around its life insurance paramed business. Those characteristics are described on the left under legacy. This turnaround consumed years of management potential and the company’s capital. The sale of Portamedic in the third quarter of 2013 now permits us to focus on health enrollment. It also -- it also marks the end of a higher cost structure.

We now have a new leaner management team in place in Olathe. We have flat new organizations and increased the breadth and responsibility of our business leaders. Our job now is to leverage our new team for growth in healthcare services and to build shareholder value.

We will outgrowth by expanding our capabilities in areas such as data capture and delivery. We are excited about the opportunities that Health & Wellness market presents for 2014 and beyond.

Turning to Slide 8, we are focused on growing our employer wellness business. Wellness programs offer today usually focused on exercise, smoking cessations and weight loss. Participants who enroll with one of these programs typically need a biometric streaming such as those performed by Hooper.

We collect the basic measurement and test results of baseline employee populations. Importance of the wellness programs because more than 75% of the cost healthcare in United States can be treated to chronic conditions that hurt employee productivity and performance.

A Howard study shows that employees realize almost $2 to $3 in savings from every $1 dollar spent on employee enrollments. Today, large employees lead a utilization of wellness programs. Small employers can’t match large employers, can’t scale on their own. But small companies can bring together and through education achieve similar advantage.

We believe we have a role in helping small and medium size platforms -- we believe we have a role in helping and medium sized employers to gain access to affordable economic wellness programs. And while more employers are offering wellness programs, the market for biometric screening and wellness processing is still almost deficit.

Slide 9 illustrates the total market for biometric screenings that is not nearly fully penetrated. Beginning from largest to smallest, the red area on the slide represents substantial market for the total U.S. workforce. The dark blue area represents at about a half of U.S. employees are offering wellness programs. The light blue area represents employers that today are offering wellness programs with biometric screenings. And the small blue circle on the left represents Hooper.

We are a market leader but the market is soft and penetrated. There is no dominant player. The adoption rates for biometric screenings are still growing. But the drive for measurable results, more corporate wellness programs are likely to use biometric screenings.

We also have the advantage of good relationships with 65 health management companies as customers. These companies are leaders in employer wellness programs and many are growing rapidly. However, these companies typically do not have biometric screening capabilities and rely on us to sell their services on their behalf.

As one of the largest providers with the national footprint and as we continue to demonstrate the value and reliability of our services, we expect them to continue to choose Hooper to serve their clients. We understand our business, workforce and priorities. Our health professionals play a critical role in collecting health information and reporting results for participants. Our people, obviously, are the wellness program participants.

At a very high level, Slide 10 shows two areas, which we believe represent product and service development opportunities for Hooper. Leveraging this time we spent with participants is a primary area of focus. The most important moment in employee wellness is when participants engage in data collection and information sharing. It is an engageable moment, when people have a unique chance to take control of their health.

Hooper plays a key role in this process. In 2013, we delivered [quoting] (ph) to participants about 30% of the time. We believe we have untapped opportunities to provide greater support through our wellness assessment. Expanding the range of our [quoting] (ph) services should be attractive to our customers and their clients.

We also have additional opportunities in data gathering and reporting. For example, many wellness companies still reply on paper to gather and process participant information. We believe we can help our customers improve the efficiency of their processes through faster data entries, paperless reporting and improve analytical capabilities. We have begun to develop action plans in these area but we are still in early stages.

We have most to do. As Slide 11 indicates, we are pleased with the process we have seen from the first quarter of 2014. We are on track with our budget for the year, which we have indicated as a Health & Wellness growth oriented and cash flow positive budgets.

We are pleased with the directions of screening volumes in the first quarter, which are tracking towards expected goals. Our strategic plan is focused on expanding operational efficiencies in our core business, improving technology in data collections and expanding opportunities to new products, services and technologies.

Our move to Olathe is on track, our team is doing things in new ways such as outsourcing certain operations and support functions for best-in-class performance rather than building costly internal capabilities.

We've build the solid plans for 2014 and we're tracking our progress. Right now, we are focused on building an internal track record for delivering against our plans. We believe results for the first quarter 2014 and beyond will set the baseline for our performance going forward and so far we are pleased with this performance.

While we have more to accomplish, we are confident about the direction we are heading. The slide 12 makes clear, our goal is to be cash flow positive for the full year and to deliver Health & Wellness growth.

Our near-term strategy is built around providing customers with the highest service quality, continue to developed our health professional network and partner with our customers to diversify our service offerings and profitably grow revenue.

Turning to slide 13, we are focusing on our quality and our partnership, which will be the foundation for our growth. Before we take your questions, I'd like to make a brief statements regarding guidance.

Due to the evolution of our business over past 12 months and the transition to a new operating model, we are not yet able to provide specific financial guidance at this time. However, to give you a measure of our confidence, what I can say is that a year ago in the first quarter of 2013 we performed 93,000 screening. This year in Q1, we are on track to perform 125,000 screening or roughly a 33% increase.

With that, I'll be happy to take your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from the line of Brooks O'Neil of Dougherty & Company. Please go ahead.

Brooks O'Neil - Dougherty & Company

Good morning, Henry. I have a number of questions. I was just curious could you elaborate a little bit on sort of what was going on with your large Health & Wellness customer and what seems to be changing as it might impact your '14 results with them?

Henry Dubois

Good morning, Brooks. Thanks. I’ll be happy to elaborate a little bit. The large customer, they had changed some of their operating systems as they related to their ongoing customers and as they implemented that in 2013 it had an impact on a number of screenings that they perform. They’ve -- continue-- they're going through that process and it's now working and actually we have seen orders that to put them back on track where they were in 2014.

Brooks O'Neil - Dougherty & Company

Great. Could you just speak it all about the level of investment you think might be required to help continue to transformation of the company?

Henry Dubois

Yeah.

Brooks O'Neil - Dougherty & Company

What some there is might be that you planned to invest capital in this year?

Henry Dubois

Sure. I would be happy to elaborate a little bit Brooks. To start with, we’ve got -- for the most part the investment is more in transitioning ourselves out in Olathe, so there is more kind of closing things down here in Basking Ridge and transferring all operations. We have pretty much done that actually by the end of the first quarter, so we're in good shape there. Additional small capital expenditures might be on the data side, but we are not a capital intensive company.

Brooks O'Neil - Dougherty & Company

Okay. Could you just talk a little bit about, obviously you have scope to what I might call legacy businesses, although strikes me that given your move to Kansas, the lab business probably is central of to the Health & Wellness opportunity. But can you talk a little bit about how you see sort of the future with the non-core businesses outside of Health & Wellness?

Henry Dubois

Sure. Brooks, we're looking at those businesses right now and evaluating them to figure out what is the best opportunity for the company. We are looking at how do we either acre them around or what we do with that and that's pretty much all I can say at the moment.

Brooks O'Neil - Dougherty & Company

Sure. Okay. Just two more quick one. One, you mentioned some of the expanded opportunities you see in Health & Wellness. I'm just curious how you evaluate, whether you will ultimately compete with your 65 Health & Wellness customers and whether you see opportunities to do things that they're not doing today?

Henry Dubois

Well, obviously, we need to make sure that we don't compete directly with customers that we have good partnership and relationship with. And we want to look at how we can expand our offerings to them and through them. I mean, if you look at Slide 9, where we talk about the significant market potential, just getting into the overall size of the screening market gives us substantial growth.

Then as we’re talking about kind of the engageable moment as we’re calling internally the eyeball time between the screener and the participants, that’s a good time for us to be able to say is there more additional quoting that we can provide, additional service that we can provide at that time. So it’s creating more value so that we and our partners, we can now, can grow together.

Brooks O'Neil - Dougherty & Company

That’s good. And then just one last one, I don’t think you mentioned specific opportunities going direct to some of the larger health insurance companies in the United States. Obviously, historically, you did a good job with the life insurance customers. Where do you see any opportunity to go direct and work with some of the large health insurers in today’s marketplace?

Henry Dubois

We work some with the health insurers now and in their respect as we go into kind of a smaller mid-term market that maybe more way to find aggregators that can help us. So, whether it is either the directly through and to the medical insurance companies or as through brokers, those are things that we’re flooring and actually pursuing.

Brooks O'Neil - Dougherty & Company

Great. Thank you very much.

Operator

(Operator Instructions) Your next question will comes from the line of Matt Reiner of Adirondack. Please go ahead.

Matt Reiner - Adirondack

Hi guys.

Henry Dubois

Hey Matt, how are you doing?

Matt Reiner - Adirondack

Good. Can you -- the facility that you have left for sale in Basking Ridge. Could you give us a ballpark on what the range is that you might expect to get out of that?

Henry Dubois

Facility, sure it’s a 53,000 square foot facility on 8.3 acres sitting here in Basking Ridge, New Jersey, right off of I-287, actively listed. If any one’s interested, we start to get [Gary Baldwin & Brothers] (ph). We’ve got it listed for around $4 million. We don’t know the real estate market here. All we know that, we’re actively pursuing opportunities that are with it.

Matt Reiner - Adirondack

Okay. And also I hadn’t got a chance to look at your press release as I’ve been driving this morning. Did you mention how many screenings you did in the fourth quarter?

Henry Dubois

For the full year, we did roughly 440,000 screenings. Fourth quarter, it’s done by 250,000 if I recall at the end of the third quarter. So that will be about 170,000 roughly for the fourth quarter. I’m sorry. 120 -- about 160,000 on the fourth quarter.

Matt Reiner - Adirondack

They are 160,000, okay?

Henry Dubois

Correct.

Matt Reiner - Adirondack

And is there some seasonality to the screenings, as far as how they trend during the year?

Henry Dubois

Yeah. There is seasonality. The fourth quarter density, the largest volume screening, particularly in the month of October and November.

Matt Reiner - Adirondack

And then, what would be the weakest quarter?

Henry Dubois

Usually the summer time, Q3 sort of tends to be our lowest volume quarter.

Matt Reiner - Adirondack

Okay. All right, Great. Thanks.

Operator

(Operator Instructions) And as there are no further questions at this time, I will now turn it back to management just for any closing.

Henry Dubois

Great. Well, thank you all for joining us this morning. We look forward to continue to report our progress in the months ahead. We’re now signing off from here in Basking Ridge. And we will see with you next time from Olathe, Kansas. Have a good day.

Operator

And thank you. Ladies and gentlemen, this does conclude the conference call for today. Again, we thank you for your participation and you may now disconnect your lines.

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