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Edited Transcript of IIN earnings conference call or presentation 24-Feb-20 10:00pm GMT

·28 mins read

Q4 2019 IntriCon Corp Earnings Call ARDEN HILLS Mar 4, 2020 (Thomson StreetEvents) -- Edited Transcript of IntriCon Corp earnings conference call or presentation Monday, February 24, 2020 at 10:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * J. Scott Longval IntriCon Corporation - Executive VP, CFO, COO, Treasurer & Secretary * Mark S. Gorder IntriCon Corporation - CEO, President & Director ================================================================================ Conference Call Participants ================================================================================ * Andrew Jacob D'Silva B. Riley FBR, Inc., Research Division - Senior Analyst * Jonathan David Block Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst * Leigh J. Salvo Gilmartin Group LLC - MD ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good day, ladies and gentlemen, and welcome to the IntriCon Corp.'s Fourth Quarter 2019 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Leigh Salvo of Investor Relations. Please go ahead, ma'am. -------------------------------------------------------------------------------- Leigh J. Salvo, Gilmartin Group LLC - MD [2] -------------------------------------------------------------------------------- Thank you, Laurie. 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. For a list and description of the risks and uncertainties associated with our business, please refer to the Risk Factors section of our most recent annual and quarterly reports on Form 10-K and Form 10-Q, respectively, with the Securities and Exchange Commission. With that, I would now like to introduce IntriCon's CEO, Mark Gorder, for a review of the company's fourth quarter and full year performance. Scott Longval, the company's COO and CFO, will then cover the financial results in more detail. And at that point, we'll open the call for your questions. -------------------------------------------------------------------------------- Mark S. Gorder, IntriCon Corporation - CEO, President & Director [3] -------------------------------------------------------------------------------- Thank you, Leigh, and thank you, everyone, for joining us today. In 2019, our team committed to several priorities that included meeting the volume demands of our key customers and partners, pursuing new business opportunities and partnerships that could best leverage our core competencies to accelerate growth and, importantly, diversify our revenue base. We made meaningful progress throughout the year, including many strategic decisions and material adjustments to our operations that ultimately has enabled IntriCon to enter 2020 inspired with a strong dedication and sharp focus on what we do best, delivering complex micro miniature devices that require specialized design expertise and high production volumes. I'm especially encouraged by an expanding pipeline of near-term growth opportunities we see emerging. And accordingly, we are taking the necessary steps today to ensure we are optimally organized to act quickly and prudently. We remain steadfast in our commitment to be a leading joint development manufacturing partner for miniature medical devices, including microminiature products, microelectronics, micromechanical assemblies and complete assemblies that enable affordable and accessible health care and improve the quality of life for those we serve. Our platform technology currently addresses several high-growth medical markets, including diabetes, drug delivery, surgical navigation and hearing health. With regards to diabetes, Medtronic is our largest single customer, represented 60% of our total revenue in 2019. Undoubtedly, we were affected throughout the year by the timing of their ongoing global commercial product launch of the 670G and the competitive pressures domestically that they have highlighted in recent commentary. Coming off 2 years of robust Medtronic's diabetes growth of 50% and 58% in 2017 and 2018, respectively, growth slowed notably in 2019 to 5% due to the aforementioned reasons. We are encouraged by the recent launch of the 670G in select European countries, sales of which have partially offset declines in the domestic market, and we remain well positioned to meet significantly greater Medtronic diabetes volume well into the future. However, due to the ongoing headwinds that impacted their diabetes business in 2019, as outlined in their recent commentary, we are applying a more tempered outlook for this business in 2020. That said, as a top supplier and integral part of Medtronic's mission to deliver superior products in diabetes management, we continue to see tremendous value and long-term growth potential with this important customer in our Medical business. As I noted, a top priority in 2019 was the pursuit of business development opportunities that leverage our core competencies and diversify our revenue base. We believe it's critical that we focus our efforts on driving toward a more predictable revenue model with sustained growth potential and corresponding operating leverage. Said simply, our strategy must evolve in order to most efficiently create long-term value for our shareholders. In order to accomplish this, last year, we began to actively seek new opportunities and partnerships that could best diversify our medical customer base and expand our addressable markets. Our needle assembly competency has provided significant opportunities within the drug delivery market. Through our long-standing relationships with key customers, such as Smiths Medical, our drug delivery business increased in the mid-teens in 2019 and now represents 6% of our total 2019 business. We are currently pursuing other needle assembly opportunities, which could be additive in 2020. As we've highlighted on previous calls, surgical navigation is an area where we see meaningful near-term upside, and more specifically, the areas of interventional pulmonology and electrophysiology. I'm delighted to announce that we have identified several opportunities that could quickly leverage our microminiature electronics, precision molding and medical coil technologies into markets that have high-growth rates and steep technology curves. We have taken the important next step to add additional engineering capacity to support our growth in medical coil and catheter assemblies to meet the demands of current customers and to support the development of future customers. We expect this year to continue to build out this infrastructure with sales and marketing support, reallocating resources and optimizing efficiencies in our existing business. While we are making meaningful progress, it is premature to talk more specifically about these opportunities. We look forward to providing updates when appropriate. Our third priority in 2019 was to seek partnerships with best-in-class entrants in the emerging over-the-counter hearing aid market. Throughout the year, we made great progress identifying and aligning IntriCon with potential high-profile partners that value our ability to deliver superior hearing aids, self-fitting software and customer care to the U.S. market. I'm encouraged by the progress we've continued to make in our discussions with several commercial entities that are actively pursuing end customer health care initiatives, and specifically solutions for the hearing health market, including retailers, branding partners and pharmacies. While this landscape and the associated time line is still taking shape, we are confidently moving forward in identifying a path that we believe best positions us to benefit from the pending change in hearing health care regulation, which opens the hearing aid market to over-the-counter sales. Despite no recent updates on the draft guidance of the pending OTC hearing aid regulation, given the high cost of hearing aids today, we remain excited by the tremendous potential this change could have for hearing-impaired consumers. In order to concentrate on opportunities that ensure we most effectively leverage our resources, we have made the decision to pivot our Direct-to-End-Consumer initiatives through Hearing Help Express entirely towards supporting product development and as a testing platform in order to best capture the near-term benefits we see through an Indirect-to-End-Consumer approach. As a result of this repositioning, advertising and marketing spend related to Hearing Help Express will decrease significantly beginning in the second quarter of 2020. Furthermore, while the pivot will result in lower revenue for 2020, it allows us to de-risk our business and increase profitability. We acknowledge that considerable investment was made towards launching a direct to end consumer approach to the hearing health care market. And while we are no longer pursuing this channel today, we have gained invaluable insight into consumer preferences, strengths and weaknesses of solutions available today and where the best opportunity lies for gaining immediate consumer traction. This insight enabled us to emerge as stronger candidate to those entities seeking the partner to best pursue this market. It also provides us with a very attractive platform for new entrants into this market that are seeking a partner that can bring tele-audiology customer care service and support to the table. In the Direct-to-End-Consumer channel, more specifically -- in the Direct-to-End-Consumer channel, revenue declined during the fourth quarter as we began to reduce investments in advertising and marketing in Hearing Help Express. As I noted earlier, we are repositioning this business to support product development. While lower-- while revenue was lower, accordingly, so were losses associated with this business. As anticipated, we experienced a meaningful revenue decline in the second half of the year as a result of High Health Innovation's decision to shift towards a more traditional brick-and-mortar approach to hearing health care that no longer align with our partnership strategy and approach to reaching the end consumer. In the fourth quarter, we made final shipments to High Health Innovations. And subsequently, we have reallocated our resources and efforts to enhance our consumer-centric ecosystem of care and target other opportunities with the potential for better long-term results. Along those lines, in anticipation of the OTC hearing aid regulation, we are working with several potential branding partners that could utilize our hearing aid technology, self-fitting software technology and customer care expertise. We believe these relationships will take on different forms as several delivery models will be tested once the final regulation is in place. Additionally, we have also initiated our clinical trial process for our self-fitting software, which we intend to have complete in conjunction with the final OTC regulations. In summary, we believe our long-term success in the hearing health care market will largely be driven by our Indirect-to-End-Consumer channel. As such, we are reprioritizing our investments to more clearly focus on securing high-profile partners that value our ability to deliver an ecosystem of care platform, which includes superior hearing aids, self-fitting software and customer care to the U.S. market. As we look forward to 2020, we see a continuation of work done in 2019 towards diversifying and building a sustainable pipeline of growth opportunities. The next phase includes 4 key priorities for the year: first, continue to meet the volume demands of Medtronic's diabetes business; second, accelerate the diversification of our non-diabetes revenue by leveraging our already established core technology platforms; third, continue to pursue and secure partnerships that can utilize our hearing aid technology, self-fitting software technology and customer care expertise; and finally, implement an organizational structure that best aligns with our focus on driving a sustainable pipeline of growth opportunities. Now I'd like to turn the call over to Scott to discuss our financials and guidance in more detail. -------------------------------------------------------------------------------- J. Scott Longval, IntriCon Corporation - Executive VP, CFO, COO, Treasurer & Secretary [4] -------------------------------------------------------------------------------- Thank you, Mark. Turning to our financial results. For the 2019 fourth quarter, we reported net revenue of $27.7 million, a decrease of 8.8% over the prior year period. The decrease was primarily due to the significant decline in revenue to High Health Innovations in our legacy hearing health OEM business, partially offset by growth in our non-diabetes Medical business. By core business segment, revenues in our Medical business for the quarter were $21.3 million, a 5.7% increase year-over-year and represented 76.9% of total revenue. This growth was largely due to strong medical coil sales, which grew 82% from the prior year. In our Hearing Health business segment, total revenue for the fourth quarter was $4.9 million, down 41.3% over the prior year quarter. Once again, this decrease was largely due to minimal revenue from High Health Innovations as they shifted towards a more traditional brick-and-mortar approach to hearing health that no longer align with our partnership strategy to reaching the end consumer, as Mark noted in his earlier comments. We believe this transition is largely complete and do not anticipate any additional revenue from this customer in 2020. Within Hearing Health segment, Indirect-to-End-Consumer revenue was $1.5 million, Direct-to-End-Consumer revenue through our Hearing Help Express business was $1.2 million and legacy OEM revenue was $2.1 million. Fourth quarter gross margins were 26.9%, down from 29.9% in the prior year fourth quarter. Gross margins were constrained primarily due to excess capacity related to recent manufacturing expansion to meet the anticipated higher volume requirements of our existing and future customers. Operating expenses for the fourth quarter were $6.7 million compared to $7.7 million in the prior year period. The decrease stemmed from a substantial reduction in advertising and administrative expense in Hearing Help Express. We posted a profit attributable to shareholders of $768,000 or $0.08 per diluted share versus net income attributable to shareholders of $868,000 or $0.09 per diluted share for the 2018 fourth quarter. For the full year ended December 31, 2019, IntriCon reported revenue of $113.5 million, relatively flat with 2018. Gross margins were 27.3%, down from 31.9% in 2018. Again, the decrease in margin was primarily due to excess capacity related to the recent manufacturing expansion. Operating expenses were $33 million compared to $27.9 million in the prior year period. The increase stemmed from a onetime noncash impairment charge of $3.8 million and an increase in administrative expenses. Net loss attributable to shareholders was $3.8 million or $0.43 per diluted share versus $5.5 million or $0.64 per diluted share in 2018. Turning to our guidance. We expect full year 2020 revenue to a range of $110 million to $114 million. While we do not anticipate providing regular quarter guidance, we did want to offer some direction on our expectation for the first quarter revenue in the range of $23.5 million to $24.5 million. Full year 2020 gross margin is expected to range between 26% and 27%. In general, we anticipate linear revenue growth and gross margin improvement throughout 2020. However, this could be impacted by commercial product launch timing from our largest customer. More specifically, we anticipate a more tempered diabetes business in 2020 due to the ongoing domestic pressures that Mark commented on earlier. In our Hearing Health business, we do not anticipate any financial upside in 2020 as a result of the pending OTC hearing aid regulation. Longer term, I believe we are well positioned for continued growth from our core businesses. In addition to our revenue growth opportunities, we anticipate that over time we will be able to leverage our current manufacturing infrastructure and expand gross margins into the mid-30% range. Now I'd like to turn the call back over to the operator so Mark and I can take questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) We have a question from the line of Jon Block from Stifel. -------------------------------------------------------------------------------- Jonathan David Block, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [2] -------------------------------------------------------------------------------- I'll try to keep it to maybe 3 and then follow up offline. But the first one, Mark and/or Scott, is on the DTC hearing business. Can you give a little bit more color to the pivot and strategy that you laid out? I'm just also trying to tie it back from a revenue perspective. In other words, are you taking orders from only existing customers but not new customers? What does that mean if we think about revenues specific to DTC hearing in 2020, which was sort of run rating south of a $5 million business exiting 2019? -------------------------------------------------------------------------------- Mark S. Gorder, IntriCon Corporation - CEO, President & Director [3] -------------------------------------------------------------------------------- Jon, the way I would characterize that is we're trying not -- we're trying to control the direct-to-consumer marketing spend and reduce that to a test platform. There's still ongoing revenue from the existing database, which could be efficiently managed, but we're trying to make sure that we are not spending to try to become a direct-to-consumer channel because we think our best bet is to partner with these emerging retail branding partners that we're working with. Does that answer your question? -------------------------------------------------------------------------------- J. Scott Longval, IntriCon Corporation - Executive VP, CFO, COO, Treasurer & Secretary [4] -------------------------------------------------------------------------------- Jon, maybe I'll interject as it relates to 2020 in terms of revenue expectations. Clearly, we believe, based on the repositioning of this business, that the top line revenue will be notably lower than where we finished 2019. -------------------------------------------------------------------------------- Jonathan David Block, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [5] -------------------------------------------------------------------------------- Okay. So that's a good segue to my second question, Scott. So I know you probably don't want to get too specific on the top line. But if I look at your $110 million to $114 million for the year, call it, $112 million at the midpoint, let me throw out a couple of numbers and maybe if you can respond. If Medical were $85 million to $87 million; Hearing $18 million to $20 million; and Professional Audio, $6 million, I mean, is that the right ZIP Code to be in, where that Hearing business is actually sort of south -- possibly south of a $20 million business due to some of the recent data points that we got this particular quarter? -------------------------------------------------------------------------------- J. Scott Longval, IntriCon Corporation - Executive VP, CFO, COO, Treasurer & Secretary [6] -------------------------------------------------------------------------------- Exactly. All those ranges seem right in line with kind of our expectations. And again, we tried to lay out what was impacting our thought process in terms of 2020, and I think we captured that in terms of the numbers you just alluded to. -------------------------------------------------------------------------------- Jonathan David Block, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [7] -------------------------------------------------------------------------------- Okay. So last one for me is going to be a little bit maybe more higher level or strategic. Mark, I'm guessing with the pivoting strategy in DTC hearing, you don't do that, I would think, unless maybe you've got some increased conviction on how this market evolves and the demand of potential partners knocking on your door, wanting to do something with you guys from a strategic standpoint. So maybe if you can talk to that. What was -- what have you seen occur over the past 6 to 9 months, which says, "Hey, you know what, let's shutter this DTC thing and use this platform to really go after the IDTEC." Maybe if you can just give us a feel on the demand out there for your services as a key supplier and partner. -------------------------------------------------------------------------------- Mark S. Gorder, IntriCon Corporation - CEO, President & Director [8] -------------------------------------------------------------------------------- Good question, Jon. I think the -- what we've seen is we're talking to a number of these different potential channel partners. All of them -- I wouldn't say all of them, but most of them do not have expertise in hearing health. And they are looking for a partner that can deliver hearing care devices, in other words, this ecosystem of care. So they value some of the things that we learned by developing our expertise at HHE in addition to the things that IntriCon brings to the table. And we think that although it's not for certain exactly which partners will emerge and how that -- those channels will unfold, we do believe that they will value our assets that we have developed, looking forward to delivering this ecosystem of care. And we think we've learned that much to feel that we're pretty convicted in that direction. -------------------------------------------------------------------------------- Operator [9] -------------------------------------------------------------------------------- Your next question comes from the line of Andrew D'Silva from B. Riley FBR. -------------------------------------------------------------------------------- Andrew Jacob D'Silva, B. Riley FBR, Inc., Research Division - Senior Analyst [10] -------------------------------------------------------------------------------- Just to start off, could you please just let me know what depreciation, amortization, cash flow from operations and CapEx was for the quarter? And then while you're pulling that info, taking all the guidance -- or taking into account the non-adjunctive aspect of the 670G and then maybe the transmitter reorders with existing customers, the re-ups, typically 4 years for the pump, but 2 years for the transmitters, just curious on what's going on or going into the CGM guidance. -------------------------------------------------------------------------------- J. Scott Longval, IntriCon Corporation - Executive VP, CFO, COO, Treasurer & Secretary [11] -------------------------------------------------------------------------------- Thanks, Andy. This is Scott. Some of the housekeeping items first. Your depreciation, amortization number is $830,000 for the quarter. Stock-based comp was $369,000 for the quarter. CapEx was $806,000, and so the negative cash flow from operations of $545,000. In terms of your question in regards to our calculus in guidance for Medtronic in 2020, obviously, they've had some recent comments in terms of what's going on in the marketplace, the competitive pressures they're facing domestically and now just starting to kind of get the international rollout going. Clearly, as we look at 2019, that business did not meet our expectations. And so as we started thinking about 2020, we wanted to come in from a position of providing the guidance that we saw in front of us that we feel very confident in. And so some of the additive pieces that may impact this business in 2020, we did not account for as we thought about our full year guidance and, more specifically, speaking to the non-adjunctive CGM and then getting approval on that because we don't know exactly how that will be impacting our business and the timing that, that approval will come. -------------------------------------------------------------------------------- Andrew Jacob D'Silva, B. Riley FBR, Inc., Research Division - Senior Analyst [12] -------------------------------------------------------------------------------- Got it. Okay. And looking at their print, while -- as far as Medtronic Diabetes goes, it's essentially flat year-over-year. But when you kind of break it down a little further, they did show teens growth on the CGM side of the business. Like how are you looking at the CGM growth that they're putting out even on a fairly flat top line when you're looking at your guidance? Are you basing it more on just the overall top line the Medtronic's showing? Or are you actually delving into some of the CGM aspects as well? -------------------------------------------------------------------------------- J. Scott Longval, IntriCon Corporation - Executive VP, CFO, COO, Treasurer & Secretary [13] -------------------------------------------------------------------------------- Well, there's -- that's a great question, Andy. And there's some puts and takes there clearly because one of the faster-growing parts of their diabetes business is related to the CGM in the disposable part of that business. So obviously, we would anticipate that to grow a little bit greater than their top line total. Again, though, as we look into -- look forward into 2020, and without them providing definitive guidance on what they view their next year to be, we wanted to, again, take an approach where we felt very comfortable with the number that was out there. And then obviously, as Medtronic has talked about the attention to getting that business back on track, getting their sensor platform back on track, we believe that throughout the year, there is potential upside, but again, things that we did not want to model into our range for the initial guidance that we're giving. -------------------------------------------------------------------------------- Andrew Jacob D'Silva, B. Riley FBR, Inc., Research Division - Senior Analyst [14] -------------------------------------------------------------------------------- Okay. And are you -- is there any sort of impact that -- just generally doesn't appear to be CGM related or anything, but just from the coronavirus, is there any sort of impact that you've accounted for in there? -------------------------------------------------------------------------------- J. Scott Longval, IntriCon Corporation - Executive VP, CFO, COO, Treasurer & Secretary [15] -------------------------------------------------------------------------------- Well, clearly, that was something that they highlighted on their call and the impact of that. And for me to start trying to guess what the coronavirus impact could have on Medtronic's business, I think, would be a little bit irresponsible. So again... -------------------------------------------------------------------------------- Andrew Jacob D'Silva, B. Riley FBR, Inc., Research Division - Senior Analyst [16] -------------------------------------------------------------------------------- I mean, overall, just on your overall business, did you have -- did you account for any sort of coronavirus impact, total IntriCon sales? -------------------------------------------------------------------------------- J. Scott Longval, IntriCon Corporation - Executive VP, CFO, COO, Treasurer & Secretary [17] -------------------------------------------------------------------------------- Well, again, because most of our revenue is domestic in terms of our business, we put very little impact of what the coronavirus could be from our top line. Now that being said, as you know, we have Asian operations, specifically in Singapore and Indonesia, and we have taken extensive measures to make sure that we are doing everything we can within our control to ensure there's no disruption in our manufacturing ability in those facilities. -------------------------------------------------------------------------------- Andrew Jacob D'Silva, B. Riley FBR, Inc., Research Division - Senior Analyst [18] -------------------------------------------------------------------------------- Okay. Okay, fair enough. And just a couple of quick ones that relate to the hearing health side of the business. Just (inaudible) the FDA's guidance, obviously, you've noted that, that's going to be a moving target for you and not to have any robust expectations as it relates to change in cadence in your Hearing Health business in the interim. But they've already codified their self-fitting asset last year. And as you look at the Indirect-to-End-Consumer part of the business, can you help me understand like what are some of the gives and takes? Or what's really holding it up? Is it just interpreting what the language means as far as perceived? When we're looking at a perceived milder and moderate hearing loss, are there other key items that we should be really thinking about when the draft guide and eventual final rules come out? -------------------------------------------------------------------------------- Mark S. Gorder, IntriCon Corporation - CEO, President & Director [19] -------------------------------------------------------------------------------- Well, I think, Andy, the one thing we do know, there's a fixed time line on this. The legislation requires that the FDA act by August of 2020. So even though the delay and guidance has been longer than we anticipated, they're still up against a fixed deadline. And we -- I hate to speculate on what I've heard about when it's going to come up because I said last time, I thought it would come out based on some correspondence we got from the FDA themselves that it was going to be in late November, early December, and that didn't happen. And -- but they're up against the fixed time line, so they're going to have to get something done here relatively soon in order for them to make their own deadlines. -------------------------------------------------------------------------------- Andrew Jacob D'Silva, B. Riley FBR, Inc., Research Division - Senior Analyst [20] -------------------------------------------------------------------------------- Right. But as far as what's kind of stopping further partnering opportunities as you're waiting for the guidance to come out, are we -- are you really looking at just particular aspects that are in limbo right now? And if you could elaborate what they might be. And one of the questions that was asked, perceived versus -- perceived falls into the mild or moderate category or whatever might be holding things up. I'm just curious what it... -------------------------------------------------------------------------------- Mark S. Gorder, IntriCon Corporation - CEO, President & Director [21] -------------------------------------------------------------------------------- I don't think, Andy, that they're going to move off of that requirement for mild to moderate. They've already given some indication of their thinking when they approve the Bose de novo back in October of last year. And that pretty specifically lays out some criteria for the output power and so forth of a device that would go into that category. So I don't think they will back off on that. I think it's more procedural things that are holding it up. But at IntriCon, we are moving ahead as though it's going to be enacted in the August-September time frame. And we're making our investments in our clinical trial, in our ecosystem of care to be prepared. So the one -- the only thing we can control is make sure that our ecosystem of care platform is ready to go in 2020 and be aligned in discussions with as many branding partners as we can to assure that we're in one of the channels that's going to start to make some -- to get some traction. -------------------------------------------------------------------------------- Andrew Jacob D'Silva, B. Riley FBR, Inc., Research Division - Senior Analyst [22] -------------------------------------------------------------------------------- Okay. Last question from a sales and marketing standpoint. When we look back before you acquired Hearing Help Express, your sales and marketing was about 1/3 of where it was, maybe a little bit more than 1/3 of where it was now. What should we expect? It looks that you're kind of moving away from the DTC. Should you kind of go back [mostly in line to] where you were a few years back? -------------------------------------------------------------------------------- J. Scott Longval, IntriCon Corporation - Executive VP, CFO, COO, Treasurer & Secretary [23] -------------------------------------------------------------------------------- Andy, this is Scott. Thanks for the question. There's a couple of pieces. Clearly, as we think about pivoting that business, dropping our advertising and selling expense would be a notable decline from where we've been. We are, though, as Mark mentioned in his comments, looking to add resources on the sales and marketing side to support some of the growth opportunities we're seeing on the medical side of our business. But that being said, we will see a decline on the sales and marketing side back down to sub-$10 million on the sales and marketing expense for 2020. -------------------------------------------------------------------------------- Operator [24] -------------------------------------------------------------------------------- And we have a follow-up question from Jon Block from Stifel. -------------------------------------------------------------------------------- Jonathan David Block, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [25] -------------------------------------------------------------------------------- I'm going to keep it to one quick follow-up. But here's a question that I think I'm going to get quite frequently. So Scott, I think I certainly expected the guidance to be back-end weighted. But if we take $24 million for 1Q revenue and trying to get to the midpoint of the annual, it implies you've got sort of $29 million, so let's just take $29 million for the balance of the year, I believe. Yet you're saying the guidance is conservative because it doesn't reflect a pickup for Medtronic on 780 or it doesn't reflect anything coming in, in the back part of the year from hearing. So then why the step-up? Or what drives the step-up? So in light of, with all due respect, missing your guidance a couple of times in 2019, you got to get the Street comfortable that this truly is a conservative guide. So can you be as specific as possible as what is driving the $24 million 1Q up to an average of $29 million, if it doesn't reflect those incrementals on each side of that business? -------------------------------------------------------------------------------- J. Scott Longval, IntriCon Corporation - Executive VP, CFO, COO, Treasurer & Secretary [26] -------------------------------------------------------------------------------- Sure. Thanks, Jon, for the question. I think there's a couple of factors that are impacting that linear approach. And both really on the Medical side of the ledger, with the guidance that we're giving in the first quarter, there are certain inventory levels that are being managed by our largest customer, Medtronic. And understanding what the order flow looks like for the first half of the year, we see a significant step-up from where we are in the first quarter to the second quarter. And that's pretty much baked into our discussions and understanding of the trajectory of the business and overall ties to some of the preliminary comments that Medtronic has made publicly. The other pieces to that, Jon, are some of these other medical initiatives that we've been working on for quite some time. We've seen, again, kind of that continuous growth in our non-Diabetes Medical business. And we continue to see and anticipate that business to grow in a linear fashion throughout 2020. -------------------------------------------------------------------------------- Operator [27] -------------------------------------------------------------------------------- We have no further questions at this time. I will now turn the call over to Mark Gorder for his closing remarks. . -------------------------------------------------------------------------------- Mark S. Gorder, IntriCon Corporation - CEO, President & Director [28] -------------------------------------------------------------------------------- Want to thank all of our investors for joining the call today, and we look forward to updating you as we continue to make progress going forward. Thank you very much for joining our call. -------------------------------------------------------------------------------- Operator [29] -------------------------------------------------------------------------------- Ladies and gentlemen, this concludes today's conference call. Thank you for your participation, and have a wonderful day. You may all disconnect.