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Hooper Holmes, Inc. (NYSEMKT:HH)

Q1 2014 Conference Call

May 14, 2014 8:30 AM ET

Executives

Andrew M. Berger – SM Berger & Co., Inc., Investor Relations

Henry E. Dubois – President, Chief Executive Officer & Director

Tom Collins – Chief Financial Officer & Senior Vice President

Analysts

Gary Ribe – MACRO Consulting Group

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Hooper Holmes 2014 First Quarter Financial Results Conference Call on the May 14, 2014. Throughout today's base presentation all participants will be in a listen-only mode. After the presentation there will be an opportunity to ask question. (Operator Instructions)

I will now hand the conference over to Andrew Berger of S.M. Berger & Company. Please go ahead, sir.

Andrew M. Berger

Thanks. 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 first 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 website.

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 E. Dubois

Thanks, Andy. Good morning, everyone, and thanks for joining us as we speak with you from here Olathe, Kansas the new location of our headquarters. We are using a slide presentation again this morning and as Andy mentioned, it is now on our website. To remind you we began to transform Hooper Holmes a year ago. The purpose is to move a little from the mature slightly declining life insurance market to focus slowly – I am sorry to focus solely on a growing and vibrant market that Health & Wellness market.

Though last spoke to you just seven weeks ago when we reported our 2013 financial results as you can see on Slide 3 in that short-time since been we have made more progress in our transformation. When we spoke on March 26, I said our success would be shaped by three things, quality, partnerships and growth. Today, I’m pleased to report progress in all three areas. This morning we will look at all three of them starting with our strategic alliance with CRL on Slide 4.

Our strategic alliance with CRL will bring Hooper three things, capabilities, clarity and capital. The new capabilities currently in the form of CRL state-of-the-art lab testing services. CRL completes over 100 million lab tests each year, which gives them significant scale. Those capabilities will now be available to our wellness customers. Going forward, clarity comes and Hooper sole focus on Health & Wellness. When this agreement closes our companies involvement in life insurance lend.

And capital comes in the form of $3.7 million as CRL acquires our Lab and Services business. Those businesses, compliments CRLs leadership in the life insurance sector. We also believe this alliance will deliver important value to our Health & Wellness customers. The alliance with Hooper in CRL in the top-tier of companies providing wellness screenings and advanced lab testing.

And this strategic alliance should allow Hooper in CRL to cross sell and be first to market with new solutions and services. We believe CRLs lab tests, plus the Hooper Health Professional network had the potential to meet more sophisticated customer needs, but announcing the CRL alliance is not our only recent accomplishment.

Turning to Slide 5, you can also see that we rounded that our management team, and would get closer to the finish line of our transition to Olathe. On April 29, we announced that Tracy Mackey and Dave Rexroat had joined our team. Tracy is our new General Council and Corporate Secretary. She is an expert in corporate law, governance, mergers and acquisitions and business strategy. Dave is our new Senior Vice President of Health & Wellness products and operations. He has a long background in healthcare services, related technology and health insurance.

Tracy and Dave will help us capitalize on healthcare trends and help us create a nimble growth oriented entrepreneurial culture. At the end of March we also completed moving our finance and administrative functions to Olathe. That was a major milestone. We outsourced our data center and other administrative function such as benefits and payroll and strengthened our IT capabilities. And we have signed an agreement subject to customary real estate provision to sell our New Jersey property for $3.05 million that transaction is expected to close by July 11.

Now, let me turn over to Tom to review the results we announced this morning.

Tom Collins

Thanks Henry and good morning everyone. As you can see on Slide 6 consolidated revenues for the first quarter 2014 were $12.6 million representing an increase of approximately 2% from the prior year of $12.4 million. An increase in Health & Wellness revenue of $1.9 million, or 38% was partially offset by decrease in Heritage Labs and Hooper Holmes Services of $0.6 million and $1.1 million respectively. Gross profit decreased by $0.6 million during the first quarter of 2014, primarily due to lower profits for Heritage Labs of $0.4 million and Hooper Holmes Services of $0.2 million.

Selling, general and administrative expense for the first quarter of 2014 decreased $0.2 million to $5 million compared to the prior-year period. The decrease is due to efficiencies achieved from consolidating operations Olathe, Kansas. Included in the SG&A number of $5 million was $1.1 million of one-time transition costs, that were incurred in connection with winding down legacy operations in New Jersey.

Our consolidated operating loss for the first quarter of 2014 was $2.5 million, compared to a consolidated operating loss for the first quarter of 2013 $2 million. The increase is due to lower gross profit, primarily from Heritage Labs and Hooper Holmes Services and from the previously mentioned $1.1 million transition costs.

Our consolidated net loss for the first quarter of 2014 was $2.7 million or $0.04 per share as compared to a net loss of $2.6 million or $0.04 per share for the first quarter of 2013. In terms of our balance sheet, our cash balance of March 31, 2014 was $2.7 million, with no debt outstanding and working capital of $6.7 million.

Turning to Slide 7, Health & Wellness revenue for the first quarter of 2014 were $7.1 million, an increase of $1.9 million, or 38% from the prior year period reflecting higher volumes from existing customers as well as new customer contracts. In the first quarter of 2014, Health & Wellness performed 125,000 health screening compared to 93,000 health screenings in the prior year period, an increase of 34%.

Operating income from Health & Wellness was $0.5 million in the first quarter, compared to an operating loss of $0.02 million in the prior year period. Health & Wellness gross margins decreased in the first quarter 2014 to 22%, as compared to 31% in the prior-year period.

A portion of the margin decrease corresponds to investments made to improve our distribution of revenues by bringing new large employers onto our screening platform in the first quarter. These investments reflect some screening events with higher per unit costs as well as increases in the cost of materials and higher per unit labor and travel costs for field specialist and examiner.

We expect to improve Health & Wellness gross margin, by continuing to expand our health professional network increasing supply efficiency and achieving productivity increases by optimizing our operating platform. Historically our Health & Wellness gross margins have ranged from 25% to 35%. We expect to end 2014 at a gross margin run rate at the upper half of that scale.

The 2014 first quarter saw a year-over-year decline in both Heritage Lab and Hooper Holmes Services, which will ultimately be treated as discontinued operations when we close our strategic alliance with CRL. Heritage Labs revenues in the first quarter of 2014 were $2.5 million a decrease of $0.6 million or 19.8% compared to the prior year period. Hooper Holmes Services revenues for the first quarter of 2014 were $3 million a decrease of 26.5% from the prior year period. These declines reflect a continued decrease in demand for our life insurance services.

Looking ahead when we close our strategic alliance with CRL we expect to have approximately 125 employees, a decrease of 60% from our headcount as of March 31, 2014, reflecting the reduction of headcount associated with the Lab and Services business. We anticipate closing the transaction in late Q2 or early Q3 and expect to head 2015 as the growth forward SG&A run rate of our Health & Wellness focused business.

And now, I’ll turn the call back to Henry.

Henry E. Dubois

Thanks Tom. When our strategic alliance with CRL is complete we’ll be purely a Health & Wellness company. We serve a large market and have lots of room to grow. As we have discussed with you on the past, the graphic at the top of Slide 8 shows that the total market for biometric screening is not nearly fully penetrated.

At the top of slide reading from largest to smallest the red area represents potential market of the total U.S. Workforce. The dark blue area represents that about have of those employers offer wellness programs. The light blue area represents employers that offer wellness programs with biometric screenings. And the small blue circle on the left represents Hooper. We are a market leader, but there is no dominant player. And the adoption rate for biometric screening it still growing.

To succeed we are concentrating are thing things growth, new offerings, and improved gross margins. In the short-term we believe growth on a year-over-year basis will come from gaining market share by winning new customers through our channel partners and expanding the range of services we provide. We will also be making investments in our sales and marketing capabilities to help generate this growth.

With an expanded range of lab testing capabilities from CRL we will work closely with our wellness channel partners to develop new services to meet their needs. Over time, we made pursue new channel opportunity including health plans and [indiscernible] consultants that could use Hooper’s services.

You can expect us to continue to refine our offerings to broaden our revenue base. For example, we believe we can help our customers improve their data capture and reporting processes by eliminating paper.

You can expect us to continue to refine our operating models, improve our efficiency and reduce cost. As Tom said, our historical gross margins have ranged from 25% to 35%. Our goal is to end 2014 at a gross margin run rate at the upper half of that scale. Finally, you can expect us to deliver growth on a year-over-year basis as we continue to grow our business.

Turning to Slide 9, our work now is to build upon what we started. The 38% revenue growth we've delivered year-over-year in the first quarter is a positive start for the year. We are excited about that for two reasons, first because two large organizations decided to adopt wellness programs we believe that shows the demand for wellness and for the services we provide. Second, screenings can become an annual event typically around the same time each year.

With our management team complete, we expect to conclude our strategic alliance with CRL late next month or early in the third quarter. In terms of what's next, you can expect us to strengthen our sales team and continue to improve our service deliver model. We continue to work closely with our channel partners to attract new employers and we’ll – refine and expand our service offerings.

The new Hooper has a cleaned balance sheet with not debt, access to capital an additional capital to come from the CRL transaction and the sale of our New Jersey property. We believe we have the right team, the right partners, the right customer relationships and the right assets. We are continuing to focus on long-term strategy and delivering shareholder value.

And now I would be happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from Gary Ribe from MACRO Consulting. Please state your question.

Gary Ribe – MACRO Consulting Group

Hi, guys thanks for taking my question. I guess – I just – may be I missed the first four, or five minutes or may be you clarify it. I know in one of your presentations you had guided to operating expenses SG&A half of what it was in 2012 or being over 50% of the SG&A.

I just wanted to clarify that was ex the Portamedic overhead and everything else and that is number that I was looking at was a little north of $20 million, from where to cut from, is that I don’t know if you spoke to that or not, but is that still a goal and am I thinking about that correctly and am I looking at the right number on which the kind of be thinking about that that?

Henry E. Dubois

Thanks Gary. This is Henry I’ll pass that question to Tom to address it first.

Tom Collins

Sure, Thanks Gary for the question. The 50% reduction that was mentioned was on the historical SG&A of about $40 million. As we continued to so that was with Portamedic that was a company that was built frankly for different structures, so we’re continuing to evolve and work toward building in SG&A structure that centers around our Health & Wellness focused business.

Gary Ribe – MACRO Consulting Group

Okay and I may have missed this, I don’t know if you gave any guidance on that to think about that going forward from here. Now that with the New Jersey sales and everything else before we moved out there. How do you think that there is this scale as you pick up revenue going forward?

Henry E. Dubois

Well Gary, as you know we are a company that’s been in transformation, we’re moving towards just an Health & Wellness focused company with the sale of the lab and service businesses to CRL, we’re continuing to right size the operations, continuing to right size of the SG&A portion.

Yes, with the sale of the building in New Jersey, we’ll be in a position to reduce the cost associated with maintaining that even though we’re not operating from there any more, but we still have the maintenance costs associated with that. so all of that will help us drive to a lower SG&A number, we have not provided guidance from that, but we do believe that we will continue to be reducing that from the number that Tom has shared.

Gary Ribe – MACRO Consulting Group

Okay, okay, great I appreciate that. I think that’s it, I’ll jump of I appreciate you taking my questions.

Henry E. Dubois

Thank you, Gary.

Tom Collins

Thanks, Gary.

Operator

(Operator Instructions) There appears to no further questions at this moment. Please continue with any further points, you wish to raise.

Henry E. Dubois

Okay, thank you very much. And thank you all for being on the call. We look forward to seeing you at the Shareholder meeting in June here in Olathe, Kansas. And speaking with you in August, when we report our second quarter results. Again thank you for joining the call.

Operator

This concludes today’s conference. Thank you for participating. You may now disconnect.

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