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Hooper Holmes, Inc. (NYSEMKT:HH)

Q4 2007 Earnings Call

March 14, 2008 11:00 am ET

Executives

Jennifer Williams – FD

Roy H. Bubbs – Interim President and Chief Executive Officer

Michael Shea – Senior Vice President, Chief Financial Officer and Treasurer

Analysts

Mitra Ramgopal – Sidoti & Co.

Brian Riley – Wachovia

Nelson Obis – Winfield Capital

[Pat Reiner – Adirondack]

Walter Schenker – Titan Capital

Val Thomas – Merrill Lynch

Operator

(Operator Instructions) I would now like to turn the meeting over to Miss Jennifer Williams with SD.

Jennifer Williams

Welcome to the Hooper Holmes fourth quarter and year-end 2007 conference call. If anyone has not received a copy of the release issued this morning, please call FD at (212) 850-5600, and a copy will be sent to you immediately.

Before management begins their formal remarks, I would like to remind you the extent of company statements or comments represent forward-looking statements. I refer you to the risk factors and other cautionary factors in this morning’s press release, as well as the company’s most recent SEC filing.

In addition, the call is being recorded on behalf of Hooper Holmes and is copyrighted material. It could not be re-recorded or re-broadcast without the company’s expressed permission. As you know, your participation implies consent to our taping. Once management has concluded their formal remarks, we will open the call for questions.

With that said, for management are Roy Bubbs, Interim President and Chief Executive Officer, and Michael Shea, Chief Financial Officer.

Roy H .Bubbs

I have some opening remarks and afterwards, Mike and I will be glad to take any of your questions.

When we spoke ten days ago, I told you that I was focused on sales and sales management and Portamedic, and I talked about the importance of possible revenue. I also spoke about driving a professional business mentality throughout Hooper Holmes, an attitude focused on profitable growth.

The results we announced this morning reinforce the importance of focusing on profitability and growth. Mike will review the numbers in a moment but before he does, I want to call your attention to several points.

First is Portamedic units, which declined 13% in the fourth quarter of 2007. That is the same rate of decline we saw in the third quarter. This is not satisfactory and it is one reason why one of the first thing I did on the job was to bring Portamedic’s top sales and operational leaders together for a two-day working session.

About 60% of our business is locally ordered and of that about half is ordered by our local agents. We need more field sales people on the street with the right tools and training to win new business. Right now, we are filling ten open positions and we have developed new materials that we need to use to get more sales.

The other half of local business is ordered by brokers. We need to do a better job selling our end-to-end process. If we can get brokers from applications to commissions faster than anyone else, we will win their business. The second point is pricing. We raised our prices by 6% on average per exam, starting on January 1, 2008. This increase applies to 30-40% of our customers who do not have contracts. We introduced our price increases in 2007 and we are hopeful our ’08 pricing will hold after years of price decline.

The third point is gross margin. We significantly improved gross margins in the fourth quarter to 24.9%, an increase of about 210 basis points. The major component of this margin improvement comes from pricing increases, cost reductions related to consolidating various office locations, and eliminating costly equipment leases.

And the last point I’d like to underscore is managing costs. In the fourth quarter of ’07, SG&A declined to $15 million compared to $16.9 million in the fourth quarter of ’06. A good deal of reduction is due to implementing strategic initiatives that were identified in ’06 to reduce headcount and operating expenses.

Looking at our other businesses, progress continues in Health & Wellness, which was launched a little over a year ago. The fourth quarter is a strong quarter from a seasonality perspective. In the fourth quarter, this business delivered $2.5 million of revenue and a total of $5 million for the full year of ’07. We now have 15 Health & Wellness customers including several newly won in the fourth quarter such as, Health Promotions Network and Health Promotions Management, Inc.

Heritage Labs still report quarter revenues that were 16% above fourth quarter ’06. However, the loss of one major customer will reduce Heritage Lab’s revenues on an annualized basis by about $4 million, beginning at the end of the first quarter of ’08. In response, we are adding to the Heritage Lab sales team to bring in new customers.

Underwriting Solutions has done a good job bringing in new revenues from new customers and diversifying our customer base. As you remember, one major customer of this business contributed 80% of the revenue back in 2006. That customer contributes less than 40% of revenues today.

And now, I’d like to turn it over to Mike Shea to review the numbers.

Michael Shea

For the fourth quarter of 2007, our consolidated revenues decreased 5% to $58.3 million compared to $61.3 million in 2006. We had a loss of continuing operations of $2.3 million or $0.03 per share, compared to a loss of $36.7 million, or $0.54 cents per share, in 2006.

Our fourth quarter 2007 loss from continuing operations includes restructuring and other charges of $1.8 million while the fourth quarter loss for 2006 included restructuring and other charges of $2 million and an impairment charge of $33.1 million related to goodwill and intangibles.

In regard to discontinued operations as previously announced, we concluded the sale of our former UK subsidiary, Medicals Direct, during the fourth quarter. This transaction resulted in a gain of approximately $9.2 million.

As for revenues in the fourth quarter, our Portamedic revenues decreased approximately 5% to $36.1 million, compared to $37.9 million in the fourth quarter of 2006. This decrease is the result of a reduction in paramedical exams of approximately 13%, partially offset by a higher average revenue per exam of 7%.

Infolink reported revenues of $7 million, a decrease of 8% compared to $7.6 million in the fourth quarter of 2006. Heritage Labs revenues increased to $5 million in the fourth quarter of 2007, up approximately 16% in comparison to 2006, partially attributable to increased lab testing for wellness customers.

Underwriting Solutions revenues decreased 25% to $3.3 million, primarily due to the loss in volume from one major customer, partially offset by revenue from new clients. Our Claims Evaluation Division reported revenues of $6.9 million, a decline of 4% compared to $7.2 million reported in the fourth quarter of 2006. The decrease was primarily the result of continued declines in independent medical exams ordered by our customers.

As Roy mentioned earlier, our consolidated gross margin for the fourth quarter of 2007 was 24.9%, a significant improvement from 22.8% in the prior year. For our Health Information Division, gross margin increased to 24.6% versus 22.4% in the fourth quarter of 2006. Gross margin for our Claims Evaluation Division increased to 27.6% from 26.2% in 2006.

As for selling, general and administrative expenses, SG&A on a consolidated basis totaled $15 million dollars in the fourth quarter of 2007, a decrease of approximately $1.8 million, or 11% for the prior year period. Regarding our balance sheet, working capital at December 31, 2007, was approximately $22.1 million, including $10.6 million in cash and cash equivalents and no debt outstanding.

Accounts receivables totaled $29.7 million with day sales outstanding of 46 days. Regarding cash flows, cash provided by operations approximated $3.3 million in the fourth quarter of 2007, primarily resulting for a significant decline in our accounts receivables, partially offset by our operating loss for the quarter. In addition, capital expenditures for the quarter were approximately $1.4 million.

And with that, I turn the call back to Roy.

Roy H. Bubbs

What I see in these results change my opinion that there is a great deal of business that can be won by Hooper Holmes and all our businesses. Therefore, we will continue to focus on profitable and top line revenue. In the days ahead we will continue to strengthen our sales force and we will repress two areas that have a significant impact on our bottom line, on profitable commitments with some customers in the “no app, no pay” problem.

We’ve already begun a pilot’s chargeback people who ordered our services from the brokers and agents but we can’t find the insurance companies that finally receive the application, and we are going back to some of our customers to get the appropriate pricing and margins we need to deliver service profitably.

Before we get to your questions, I’d like to refer to the subject of exploring strategic alternatives which was mentioned when my appointment was announced on February 6. The Board’s intention is to improve Hooper Holmes’ evaluation to all stakeholders. To that end, all options will be considered including the investments, acquisitions, and disposing of certain businesses. We have reviewed but not selected an investment advisor. We will keep the market updated in due course.

I’d like to remind you that we are not in a position today to give guidance other than to reiterate our February 20 announcement that we do not expect to be a profitable year this year. I’d like to underscore that we are very dedicated to improving this business.

We made progress last year on the cost side, but we are committed to improving our profitable revenue in getting market share in Portamedic. At the same time, we look to leverage our strength and to grow our other businesses rapidly.

We thank you for your patience and support and now I’d be glad to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Mitra Ramgopal – Sidoti & Co.

Mitra Ramgopal – Sidoti & Co.

Starting with the revenues, we did see some sequential improvements in looking out to ‘08. I know you mentioned about eliminating non-profitable revenue. I don’t know if it’s possible to give us a sense of what we probably saw in fourth quarter that could be gone going forward.

Michael Shea

No, Mitra. We’re not going to be that specific. We’re analyzing all of our revenues as Roy talked about today and on the previews call, but at this point no, we’re not in position to comment what impact that would have on 2008.

Mitra Ramgopal – Sidoti & Co.

I think you mentioned you just implemented some price increases in January 1 and this is coming off of, I guess, some increases that you saw in the fourth quarter. It seems like you certainly have some leeway on that front.

Michael Shea

So far, you’re right. We did have success with that in 2007, our price increases. We put them up again January 1, and right now the push back has been minimal so we’re confident.

Mitra Ramgopal – Sidoti & Co.

I know Wellness and Disease, you said it was seasonally strong but how were we if you had to sort of strip that out from the line items you reported where should we take that out of because I know some of it is also in Heritage?

Michael Shea

That’s right. What you should do for the $2.5 million of Health & Wellness in Q4 about 65% of that is Portamedic revenue and report in that line, approximately 35% is in the Heritage numbers.

Mitra Ramgopal – Sidoti & Co.

Again without reading too much into the fourth quarter, I think you said that it was just seasonally strong as opposed to just the addition of new clients, etc.

Michael Shea

It was both. We certainly did have new clients in the quarter for Health & Wellness so we’re very pleased with that but absolutely it is the strongest quarter from a seasonality perspective.

Mitra Ramgopal – Sidoti & Co.

Looking at SG&A that came down significantly, I know you’ve talked about revamping the sales force, making some additions, etc. Should we expect a spike on that line or is that a pretty reasonable run rate to look forward to?

Michael Shea

Yes, I would not call it a spike. I think that’s a pretty reasonable run rate. You’re right. These investments we’re going to make, we’re going to try and make sell funding, so it’s basically diverting existed budgeted dollars as opposed to adding. But we have cut a lot so I would not expect and Roy talked about this in our previews call, not expect a huge or any type of decrease at this point in that SG&A line.

Mitra Ramgopal – Sidoti & Co.

You had some charges in this quarter as we look at to ‘08 and beyond. Is it fair to assume that the charges are pretty much behind us now and the restructuring?

Michael Shea

Well, I think I’ve said that before so I’m not going to reiterate that. I mean we have had these special charges. We will have some special charges in Q1 certainly related to our CEO termination so I do see special charges on the horizon, at least in Q1. So I can’t say that we will not be having those going forward.

Mitra Ramgopal – Sidoti & Co.

It seems like your cash flow positive in the quarter.

Michael Shea

Yes, we were $3.3 million but I do need to point out that that was due to a significant decrease. We did a great job on our receivables this quarter, offset partially by the reduced operating loss, so it was cash flow positive for the quarter but for the year cash flow from continuing operations was about a negative $0.6 million. You’ll see details in that when we issue our 10-K on Monday.

Operator

Our next question comes from Brian Riley - Wachovia.

Brian Riley - Wachovia

I was just wondering if we have the cash flow number excluding bouncy changes for the quarter.

Michael Shea

Yes, for the quarter EBITDA for Q4 was a negative $1.1 million.

Brian Riley - Wachovia

We’re having some luck in the pricing area. I was just wondering how we are perceived relative to our competition with our pricing structure currently.

Roy H. Bubbs

It appears that when we increase our price, our competitors follow right behind us.

Operator

Our next question comes from Nelson Obis – Winfield Capital.

Nelson Obis – Winfield Capital

With the change in leadership here, are there any nuances or changes in focus or strategy that we should expect to be implemented? From the outside, given all the information we got to hear, the resignation of Mr. Calver seems like an extraordinary over-reach for the kinds of things that we’ve so far discussed, usually are dealt with by replacing a marketing person, not a CEO.

So I’ve got to think that there’s been some rethinking. I just want to see if you could help us at all with the big picture here because it doesn’t quite add up. Where are you going with the company that might be a little bit different other than blocking and tackling a little better in the Portamedic unit?

Roy H. Bubbs

Strategically, I think the company’s focus are other businesses besides Portamedic, who seems to have the right people, the right focus, right sales plans and are implementing quite well. Our focus, as I said earlier, is on top line revenue growth and that is not strategic as they are very tactical at this moment.

The company’s focused very much on the tactical side of what needs to be done over the next X amount of months to get the revenue to a position where we no longer talk about red. We talk about black. So, that is the bigger picture as there is, that we’re all about right now focused on tactically being good at our implementation and concerning to get profitable revenues primarily on the Portamedic side.

Nelson Obis – Winfield Capital

When you look at the company, basically, it’s an unprofitable business model which is being made less profitable by some industry changes. One thing that the former CEO was fond of articulating was that he looked at the Portamedic as a massive distribution system. It was being under-utilized and that there were opportunities cast one’s mind out.

That was all what I call high concept but it was kind of intriguing because you do have this distribution center that’s legendary in the industry. Do you still think that those opportunities are there and that the distribution system can be used in a more productive manner and you’re ultimately after spending some time here is kindly the goal of that distribution system or are you looking in a different direction?

Roy H. Bubbs

I believe we have a great asset and that’s in our distribution system. I believe we can leverage that and we currently do get synergy from it, and I expect we will continue to get synergy from it.

Operator

Your next question comes from [Pat Reiner – Adirondack].

[Pat Reiner – Adirondack]

Can you give a little more colors as to when you think, I understand you’re in a situation here and you’re trying to get your arms around it but as far as like providing some sort of range of expectations. In your last call, you indicated that you weren’t ready to provide any kind of guidance yet and now you’re reiterating that. I’m not looking for exact specifics.

I understand you’re still trying to get around but even a little more general information as to directionally where. Like to say you won’t be profitable is one thing but is it one of those things that you’re going to exit the year as still not being profitable? Do you have any intention of at least hitting breakeven at some point during the year, or is it just too early for you to figure that part out yet?

Roy H. Bubbs

I think the most appropriate answer to the marketplace is it is too early. We feel what we’re focused on are the right things to not only improve our sales and bringing in new customers, new agents, whether they be through existing channels that we spent a lot of years in, but also the ever increasing brokerage channel.

We also believe that our pricing is not outrageous. It’s in line with our clause and we believe our clients will work with us in understanding the cost of delivering the business and what are appropriate charges that we should be getting.

Lastly, it’s pretty simple that if somebody orders something and we can’t find the company they placed with, that they’ll either help us find that company or pay for it themselves. So those are just fundamental things that I believe will have a significant impact on our bottom line. It’s just how fast will that rubber and that traction will take hold on the road and how fast we can get it done.

Putting that all together, along with the other businesses seem to be performing quite well, I feel very strong that we’re going to make progress this year.

[Pat Reiner – Adirondack]

What about from a cash burn perspective, I know now you have $10 million in cash or you did as of December 31. How much credit lines in to that one, do you think you have the money to get through ’08, given that you’re not going to be profitable in ’08?

Michael Shea

Yes, the answer to that is absolutely yes. You’re right. With our cash on hand, we have complete availability under our credit facility and certainly, if you look at the negative EBITDA for the fourth quarter, you can kind of get a picture as to how much cash we’re going through each quarter. So certainly based on all that, we do believe we have sufficient funds available per operations until we do turn cash flow positive.

[Pat Reiner – Adirondack]

We talked about Heritage Labs, the large customer that you’re losing could you give us some more color on why that customer’s leaving?

Michael Shea

We had disclosed this previously in our filings. Let me point out, the customer did not express any dissatisfaction with Heritage, as far as, terms of our quality, our service, but they did believe that a competitor lab could better address some of their research and analytical needs. So they had no issues with Heritage in any way but they just felt a competitor could better address some of their issues as a customer.

[Pat Reiner – Adirondack]

Is the lab business profitable in its own right even with that lost customer, even with that being gone.

Michael Shea

Yes.

Operator

Our next question comes from Walter Schenker - Titan Capital.

Walter Schenker – Titan Capital

The company still expects the Wellness business to be roughly double what it was last year. That’s part of a projection or you won’t say that.

Michael Shea

Yes, we’ve not gone that specific, Walter, but what we have said is we expect $40 to $50 million in two to three years.

Roy H. Bubbs

We can’t give you anything specific on ‘08 related to help from Wellness.

Walter Schenker – Titan Capital

But you still believe $40 to $50 million in two to three years, you make it three years is a reasonable target? Which would mean that $4 million and that number it requires some pretty big gains somewhere in between?

Michael Shea

Yes, it would be a significant growth.

Walter Schenker

What I don’t understand, what was so unusual, I realize there’s some seasonal patterns in Wellness. But Wellness is going to go up pretty dramatically overall for the year whatever that percentage may be, in the fourth quarter where you only lost $0.03, you have a new price increase in effect this year that would cause the sequential business to be significant.

Is there anything that should likely cause sequentially the business to be significantly worse than it was in the fourth quarter, given the cost things you’ve done and the price increase you put in place?

Michael Shea

Well, that’s pretty close to asking a guidance question. Let me just remind you on the pricing that’s how the unit only affects our non-contracted Portamedic customers. And I do want to remind you we saw a 13% unit decline in Q4, and that is Portamedic. Portamedic is 60% of our business. You tell me what the unit decline’s going to be in Q1 and I could have a better answer.

Walter Schenker – Titan Capital

Less than that, how’s that?

Michael Shea

I’ll let you do the math.

Walter Schenker – Titan Capital

I realize we’ve had this discussion. You will be rolling price increases to the people on the contract, assuming the pricing holds for those who are not on the contract over the course of the year. And it is the goal, although not the forecast of the company, to reduce the declines in Portamedic and try and stabilize unit volume?

Roy H. Bubbs

Yes, it is.

Walter Schenker

Therefore, assuming you achieve that, the unit declines of Portamedic will be declining during the course of the year.

Michael Shea

That’s certainly our goal.

Walter Schenker – Titan Capital

If Wellness will be up sharply for the year, pricing will be up partially, but up more as the year goes by we’ll be up at Portamedic. And if we are successful, my assumption in reducing the rate of decline at Portamedic, or possibly even stabilizing it, then as we go through the year the financial performance versus the fourth quarter should be improving.

Michael Shea

Reminding all those assumptions you put out there Walter actually occurs as you’ve said, yes, that’s correct.

Operator

Our next question comes from Val Thomas - Merrill Lynch.

Val Thomas - Merrill Lynch

Looking at pricing increases, do you think that your current operational performance is going to support price increases in the market you serve?

Roy H. Bubbs

Yes.

Val Thomas - Merrill Lynch

Roy represented on the previous call that the four major competitors that Hooper competes against some of them are rowing in the same financial canoe that Hooper is. For the ones that aren’t rowing in the same canoe with you, what are they doing to gain market share in this market versus what Hooper’s doing and what can you learn from them?

Roy H. Bubbs

Really, there are three major competitors in this space and there’s no hard-core data that can tell us who’s doing what so a lot of it is Street information back and forth. It is our understanding that maybe two of our competitors are losing market share along with us and one is gaining it.

What our best take on the gaining is that that particular customer picked up a rather significant account last year that helped increased their volume significantly and probably still had a little bit better head growth in total, but nothing probably outstanding over and above what they’ve got with some new accounts. So right now, it’s a little bit of moving deck chairs around on the Titanic.

That’s why, I’ll go back to saying there’s more business out there that we can go get than what we currently have and that’s why I believe still, it’s basically one-on-one sales, going out there and telling our story which is a compelling story, I believe, to bring back or to get new people to take a look at Hooper Holmes.

Val Thomas - Merrill Lynch

Well, if operations performance forces pricing increases, why didn’t we see more aggressive pricing increases in prior periods.

Roy H. Bubbs

I think over the last year, year and a half, there’s been significant progress made on that. I think that once again, in my remark of ten days ago, I said we have a handful of customers that we need to have a better conversation with regarding our pricing and I think all those things together should have a good improvement on our balance sheet.

Val Thomas - Merrill Lynch

My take is that if units are decreasing at a rate higher than, it might be applications, I don’t know where. It seems a stretch to say that operations would support pricing increases. How do you explain the delta between the decline and the unit declination versus the MIB declination, which is Hooper running off units faster than the MIB is declining?

Roy H. Bubbs

I wish that was an easy question to answer because we all look at MIB but we really don’t know what that really constitutes. MIB constitutes the whole marketplace which not all of it is involved in exams, etc. and so is it a good indicator or not the only indicator we have out there, admittedly?

But going back to the core part of your question is fundamentally, we’re not bringing in new customers, new agents, to generate new activity. To be more specific, this company is growing around our top-of-career-captain type of agent over the last fifteen years.

The industry’s gone where the career agent owns the 60-65% of the marketplace and now owns something in the 35-40% of the marketplace, and we have to do a much better job on that brokerage side which is the area that’s been growing, or taking market share away from the career side.

So we have to do significantly better job at penetrating this marketplace that we know but are not involved in enough yet or aggressively involved in enough yet. So, that’s a little bit of what’s happening in the marketplace and where Hooper Holmes has to put its attention and focus.

Operator

Our next question comes from Brian Riley - Wachovia.

Brian Riley - Wachovia

I was just wondering the SG&A numbers are about 25% of the revenue line, which is improved over last year a little bit, and I was wondering how much more there is to go in trimming that line item?

Michael Shea

Brian, you’re right, we did see significant improvement over the last year’s fourth quarter and the full year, year-over-year, was a significant decline. We also talked about it a little earlier, we’re always looking where we can find additional cost to cut. But a lot of those major cut initiatives are behind us and are built into this Q4 number, so at this point, we may be able to trim some more from that but I would use that current $15 million as a run rate at this time.

Brian Riley - Wachovia

On the business that we are doing where we’re not being paid, or the contracts get lost out there, can you sort of give us an idea as to how much that is as a percentage of our business?

Michael Shea

I can’t give specifics on the numbers, Brian, but I do want to point out that it is a significant bottom line increase because we have already paid the examiners. All the cost related to those billings are already recognized in the P&L’s, so what we do recover will be a direct drop to the bottom line. So, we can’t get specific but I can tell you it’s significant.

Roy H. Bubbs

Thank you again for all of you joining us today. We look forward to keeping you up to-date in our progress in the weeks ahead. Have a great weekend.

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