IntriCon's (IIN) CEO Mark Gorder on Q2 2016 Results - Earnings Call Transcript

| About: IntriCon Corporation (IIN)

Call End:

IntriCon Corporation (NASDAQ:IIN)

Q2 2016 Results Earnings Conference Call

August 02, 2016, 05:00 PM ET

Executives

Scott Longval - CFO

Mark Gorder - CEO

Analysts

Scott Billeadeau - Walrus Partners

Dick Ryan - Dougherty

Operator

Good day and welcome to the IntriCon Second Quarter 2016 Results Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Scott Longval, Chief Financial Officer. Please go ahead.

Scott Longval

Thank you, operator. Joining me on today’s call is Mark Gorder, Intricon’s CEO. 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. Important factors that could cause such differences include, among others, those set forth under the headings Risk Factors and Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 10-K filing for the year ended December 31, 2015.

With that, I'd to introduce Mark for a strategic look at IntriCon’s second quarter.

Mark Gorder

Thank you, Scott and thank you everyone for joining us today. I would like to begin by reviewing key highlights and results for the second quarter. And after that, Scott will cover the financials in more detail and then we'll take your questions.

By this time, most of you have had a chance to review our second quarter press release. For the quarter, net sales of $17 million were consistent with the prior-year period, and the company's value hearing health initiatives delivered year-over-year growth. Results were inline with our June 30, 2016 pre-release and reflect a timing shift in orders from our largest medical customer.

Looking at our three businesses, sales and hearing health grew 7% over the prior year period, primarily due to contributions from PC Werth. During the quarter, we experienced gains in value hearing aids, personal sound amplifier products and assisted listening devices.

These were partially offset by anticipated decreases in conventional channel sales. For some time we have been focused on opportunities in value hearing health versus the conventional channel. Shortly I will comment further on these efforts.

Our Medical business sales decreased 4% in the 2016 second quarter, compared to the year ago period, primarily driven by our largest customer, Medtronic. Sales to Medtronic were lower as they manage the transition of their pending FDA approval and launch for the MiniMed 630G system. Despite this timing issue, long-term we believe we are well positioned for growth with Medtronic. In addition to the MiniMed 630G, we are also designed into the MiniMed 670G system which was recently submitted to the FDA for pre-market approval.

Looking at our professional audio communications business, sales declined 5% from the prior-year period. We anticipate the revenue for the second half of the year in this business to be flat with the prior-year comparable period. In addition, we are working on several notable opportunities that management believes will provide modest revenue growth in 2017.

I'll now briefly touch on other key initiatives, most notably in value hearing health. Over the past 12 months, several institutions, including the US Food and Drug Administration, the President's Council of Advisors on Science and Technology and most recently, the National Academies of Sciences, Engineering and Medicines, have recognized that untreated hearing loss in the United States is depressing [ph] national problem.

High device costs and inadequate innovation in distribution channels are creating significant barriers to access for most Americans. Each institution, individually has released statements indicating their support for improving hearing health access and affordability for consumers, thereby improving market penetration.

As a company, we are aligned with the FDA, PCAST and NASEM efforts to overcome barriers to device access and spur development and innovation in cost-effective technology.

All of these pivotal events point to a groundswell for fundamental change. They highlight the need for an outcomes-based hearing healthcare model in which the best value-added devices and software technology are combined with varying levels of practitioner intervention to provide the most efficient, lowest cost solution to consumers across the country.

One recent initiative to improve affordability in the US market was equipping independent audiologist with the best value-added devices at the best price, by establishing earVenture, a joint venture with the Academy of Doctors of Audiology or the ADA.

While earVenture has not yet generated significant revenue, it is an important strategic element in IntriCon's approach. Over 450 ADA members have now registered to join the earVenture program. earVenture is focused on sales and marketing efforts to convert those members into consistent customers, as well as solicit non-registered ADA members to join.

In the United Kingdom, our integration plan for PC Werth is proceeding on schedule. We completed the relocation and other corporate alignment efforts during the quarter. Over the last several months we have delivered initial devices to targeted National Health Service clinics and received positive feedback. We're directing sales and marketing efforts at additional clinics during the second half of the year.

While the ADA and NHS leadership have embraced our offering, which is a groundbreaking first step in order to drive meaningful growth in both of these markets, we must focus our efforts on educating practitioner and marketing directly to them.

To support our strategy commitment and targeted focus on value hearing health, in mid-May we raised $3.7 million in net proceeds through a public stock offering. This is an important step in advancing our future plans, by providing additional financial flexibility to aggressively explore initiatives to expand our offerings into alternative distribution channels that require less practitioner intervention. These models have demonstrated the ability to scale more quickly and efforts into traditional channels.

Another key aspect of their raise was to add targeted shareholders in an effort to bolster the depth of our shareholder base, aligned with our value hearing heath strategy. As we move forward, it is important that we have trusted partners.

Lastly, while our second quarter results were short of our expectations, we view the lower revenue levels as temporary and we have already taken measured actions to reduce operating expenses.

These reductions which will not impact the company's ability to execute strategic initiatives should result in approximately 600,000 in annual savings, the majority of which we'll start to see in the 2016 fourth quarter.

Now, I'd like to turn the call back over to Scott.

Scott Longval

Thank you, Mark. I’ll begin reviewing our second quarter financial results in more detail. For the 2016 second quarter, the company reported net sales of $17 million, compared to $17.1 million in the prior year period.

IntriCon posted net loss attributed to IntriCon shareholders of $1,490,000 million or $0.23 per diluted share versus net income attributable to IntriCon shareholders of $506,000, or $0.08 per diluted share, for the 2015 second quarter.

Gross profit margins were 22.8% compared to 26.8% in the prior-year second quarter. The decrease was primarily due to a less favorable sales mix and slightly increased overhead expense.

Operating expenses for the second-quarter were $5 million, compared to $3.9 million in the prior-year second quarter. The increase was largely due to the inclusion of PC Werth, which we acquired in November 2015, and higher research and development investments.

Specifically in 2016 we're committed to enhancing our DSP wireless connectivity and self-fitting software technologies that will provide for increased access to inefficiencies in the values hearing health distribution channel in medical biotelemetry markets.

Turning to other financial metrics. Just Mark previously mentioned in May we raised $3.7 in proceeds from a public stock offering and in April we amended our credit facilities with a private bank, improving our liquidity and financial flexibility.

Our debt of $9.6 million increased sequentially from the 11 - decreases sequentially from $11.5 million, primarily due to the pay down with the funds we received from the public offering, partially offset by PCW alignment efforts, new distribution channel investments and inventory build for the launch of several key value hearing health and medical programs.

Our total cash cycle days at the end of the second quarter was 85. This is an increase from 65 days at the end of the comparable prior year period.

In terms of guidance, based on the information currently available, we anticipate third quarter net sales to be consistent with the 2016 second quarter levels. With a notably smaller net loss, additionally, we anticipate fourth quarter net sales at levels that will achieve profitability.

Now, I’d like to turn the call back over to the operator so we can take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll go ahead and take our first question from Scott Billeadeau with Walrus Partners. Your line is open.

Scott Billeadeau

Thanks for taking the call. Hi, guys. Could you give us a little sense of – given the quarter and the Medtronic delay, what kind of visibility do you have from them if any, you know, at this time for that part of that business?

Mark Gorder

Hi. Scott. This is Mark. We stay in obviously constant touch with Medtronic. We just had our VP of Marketing and Sales was out there last week. They continue to remain optimistic, that they will get the approval shortly. They will not obviously say a date, but the domineer [ph] out there that we experienced and the behind the scenes kinds of activities that we're starting to see would indicate that they anticipate approval shortly.

Scott Billeadeau

Great. And then, second thing, on the you know, developing, the markets with PC Werth and with earVentures, maybe kind of walk through what we should see for OpEx related to that, I mean, is there something coming up that you can then incrementally spend or will you at some point have a higher level of spendings to support that in the near term or is that longer term?

Mark Gorder

I think with, starting maybe with PC Werth, we made some substantial investments in repositioning the business moving it. There were some real occasion costs, some other costs in terms of acquiring the business and putting it in a proper position.

I think at this point that we don’t anticipate significant increases in operating expense for the operation over there. Some of the focus is going to be on marketing and sales and to some degree those costs are already in place. We may have to get one or two more sales people over there. But its not – looking at the big picture that’s not a huge increase in operating cost.

So I think the – in general we expect it to stay pretty steady and then the focus is on driving hearing aid sales into the clinics, which basically means getting the sales force out to call on all the potential clinics in the UK.

I can give you a little update on what we're doing there. Its quite and extensive structure to have in the UK for the National Health Service for hearing aid delivery. There are about 230 I guess, we would say major departments or larger operations and then each one of those can have multiple clinics.

So there is about 450 actual audiology clinics, some of them are small, some of them are larger. We visited approximately 50 of these sites and we've had hearing aid demos, 25 of those have products on trial and we're doing a number of focus groups starting soon in early fall to try to push our brand and our name within the community there.

So we're making good progress. There is long way to go. But we've got the business stabilized. We've got the infrastructure in place and we're starting to drive marketing and sales efforts into the clinics.

Scott Billeadeau

Okay. And just maybe one follow up, I know, you've said you've had some devices over there, they are testing. What is the procedure there, do you – do they test and if they kind of a – a one big okay, you are good to go or is it clinic-by-clinic or maybe give us a little feel for when do you get to go ahead to actually sell?

Mark Gorder

Its actually two level process. The first process you have to get devices approved by the National System, and that goes, you get on the contract and it goes on their website and on their product list. And then you are okay to buy, you are not on that list, you can't purchase a device or you can't sell a device.

So we got two products on the list back last fall approximately and we have another one that we're trying to get on this fall to that, its called the ASP group which does the testing for the National Health Service as a whole.

And then we have to get out as I said in call on these 230 departments and 450 clinics, the 450 one at a time to try to get people to try your product. So there is two level approach, first you have to get on the framework and then you have to go out and do the pick and shovel [ph] work to get sales.

Scott Billeadeau

Okay. Great. Well, thanks. I'll get back in queue.

Mark Gorder

Thank you, Scott.

Operator

[Operator Instructions] We'll go ahead and take our next question from Dick Ryan with Dougherty. Your line is open.

Dick Ryan

Thank you. As a follow up Mark, how many sales people do you have in the UK now and I think you said may need to add one more or and what's the experience level of the sales group?

Mark Gorder

We've got four now and Delain Wright who is our VP of Business Development, he is a gentlemen that spent 8 years in the UK running a hearing aid company for Siemens over there. And he is the one that’s managing, putting in the sales force.

So he is from time to time, he is looking at what the appropriate requirements are. He is added some new people since he is taken over there. We have four total, we may add one more and then I think five he feels sufficient to cover the country.

Dick Ryan

And do you have sense of when you might start getting flow of orders, whether it’s a trickle [ph] or something more meaningful from the IHS?

Mark Gorder

[Audio Ends Abruptly]

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