IntriCon Corporation (IIN) 2010 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the IntriCon third-quarter 2010 earnings call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions). This conference is being recorded today, Thursday, October 28, 2010.

And at this time, I would now like to turn the conference over to Scott Longval, Chief Financial Officer. Please go ahead.

Thank you, operator. Joining me on today's call is Mark Gorder, IntriCon's CEO.

Before we begin, I'd 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, 2009.

With that, I would now like to introduce Mark for a strategic look at IntriCon's third quarter.

Thank you, Scott, and thank you, everyone for joining us today. I would like to begin by reviewing our 2010 third-quarter results and key highlights for the Company. Next, I will discuss our strategy and growth plan, and after that, Scott will cover the financials in more detail, and then we'll open up the call for your questions.

By this time, most of you had a chance to review our third-quarter press release. We are pleased with our performance, delivering measurable year-over-year revenue, and earnings progress. Sales were up 14% over the prior year, and we reported $0.04 per share on earnings versus a loss of $0.14 in the prior year.

We are also investing significantly in our business including several key research and development initiatives that we believe strengthen our platforms for future growth.

For the third quarter, we recorded double-digit growth in all three core markets. As a percent of revenue, our medical business contributed 44%, hearing health and professional audio communications contributing 33% and 23%, respectively.

Medical continues to post strong revenues, rising 11% from the prior year. Once again, medical gains were the result of continued sales of wireless glucose monitors and the addition of sales from our proprietary cardiac diagnostic monitoring devices, or CDMs. Currently, CDM sales consist of digital Holter monitors designed for continuous electrocardiograph or ECG data recording.

Hearing health sales rose 20% from the 2009 third quarter. Driving this increase was a rebound in the hearing health market. We believe more significant future growth will stem from the introduction and acceptance of new products early 2011.

Professional audio communications rose 15% from the prior year, primarily through organic growth and sales of headset devices to the installed sound market and communication devices to securities agencies. Fueling this business is increasing marketplace demand for smaller and more durable devices that perform well in noisy or hazardous environments.

I'll now touch briefly on highlights from our respective businesses. We have considerable information to share on new products. In the medical arena, we continue to make progress with our new Centauri CDM device. Centauri is a next-generation wireless outpatient monitoring device that uses a proven automatic arrhythmia detection algorithm. We anticipate submitting Centauri for FDA approval in the upcoming weeks.

Turning to the hearing health, earlier this year we unveiled our hybrid Overtus DSP amplifier. Overtus is designed to optimize open-in-the-canal fittings, utilizing advanced adaptive feedback canceller; and incorporate an acoustic switch that eliminates the need for a bulky mechanical switch, allowing for further miniaturization. This amplifier has two patent-pending technologies which allow our customers to produce their open in-the-ear devices.

Overtus will enter production in the near future and sales are expected to have a modest impact on fourth-quarter results. We have taken the Overtus technology and developed our own complete hearing device, the all-new, patent-pending APT Open ITC. The APT, introduced at the European Hearing Aid Acousticians event earlier this month, is powered by the Overtus and includes our Reliant CLEAR adaptive feedback canceller and the AcousTAP acoustic push button.

In addition, the APT utilizes the patent-pending Concha Lock System technology which allows for the suspension of an open in-the-ear device in the ear canal. These features create a stable, effective amplification, occlusion-free comfort, and easy integration into existing fitting systems.

Our OEM customers now have the option of using Overtus in their own devices, or purchasing our complete APT device.

We are in the process of finalizing development of our PhysioLink wireless technology, which will be incorporated into our products in the medical, hearing health and professional audio communications markets. PhysioLink enables audio and data streaming to ear-worn and body-worn applications over distances of up to five meters.

Our situational listening device, or SLD, product line leverages PhysioLink. SLDs help hearing-impaired people in noisy environments and allow them to listen to television, music, and direct broadcast by wireless connection. They also supplement conventional hearing aids that don't handle noisy situations well. We anticipate production in the SLD platform in early 2011.

Before turning the call over, I'd like to reiterate that while we are pleased with our results to date, we continue to drive the future growth opportunities.

Now, Scott will offer an in-depth look at our financial performance. Scott?

I would like to echo Mark in saying that we are encouraged by our third-quarter performance. For the third quarter, the Company reported net sales of $14.7 million, an increase of 14% from net sales of $12.9 million for the prior-year period. Each of our three core markets -- medical, hearing health, and professional communications -- contributed to the growth with all three markets reporting double-digit growth.

Net income for the 2010 third quarter was $243,000, or $0.04 per diluted share, versus a net loss of $736,000, or $0.14 per diluted share for the prior-year period. Included in the 2009 results were Datrix-related acquisition costs and bank refinancing charges of $532,000, or $0.10 per diluted share.

Gross profit in the 2010 third quarter was 25.9%, up significantly from 20.3% in the year-ago period. The primary drivers of the increase were higher sales volumes, increased proprietary technology in our products, which generate higher margins; and the impact of various margin enhancement programs. While we continue to implement gross profit improvement initiatives, including production transfers to low-cost manufacturing facilities and the ongoing rollout of lean manufacturing programs.

For the 2010 nine-month period, IntriCon reported net sales of $44.2 million and net income of $530,000, or $0.10 per diluted share. This was up from 2009 net sales of $37.5 million and a net loss of $2.3 million, or $0.43 per diluted share. Included in the 2009 nine-month results were Datrix-related acquisition costs and bank financing charges of $546,000, or $0.10 per diluted share.

As we previously discussed, we've began relocation of our Singapore operation in the third quarter as required by the Singapore government. This includes construction of a new clean room to house future transfers of Class II and Class III medical devices, helping to meet the rising pressures from medical customers to reduce costs. The bulk of these costs will be capitalized and expensed over the term of the new lease. The new facility will be up and running during our fourth quarter.

While we're seeing customers continue to reengage in all of our markets on new programs, persisting economic sluggishness has caused many patients to delay discretionary medical procedures, and hospitals and doctors to cut back on purchases of legacy med-tech products. During the course of the year, several large medical customers experienced temporary fluctuations in demand. As some customers have ordered above their immediate needs, we anticipate certain medical orders to slow in the fourth quarter; however, we believe these deferrals to be temporary.

That said, we are encouraged by our year-to-date performance. We have posted double-digit growth in each of our three core markets year-to-date. Our focus remains on the long term. We are accelerating the development of proprietary core technology. The benefit of this is exemplified in the increasing number of new products based on patent-pending proprietary technology, such as the Overtus and APT; and to all of our markets that we believe will drive future revenue growth.

Turning to other financial metrics, IntriCon generated $1.3 million of positive operating cash flow during the third quarter. IntriCon's total cash cycle days at September 30, 2010 were 85 days, up from 75 days at the end of fiscal 2009. Cash cycle days are comprised of days sales outstanding, which were 48 days; plus inventory outstanding, which was 74 days at the end of the third quarter, less days based payable which stood at 38 days.

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

Thank you, Sir. We will now begin the question-and-answer session. (Operator Instructions). Sheldon Chester, RBC Wealth Management.

Yes, good quarter. Could you please discuss what type of margins you expect with your new products? And also what type of margins you expect to end the year up this year as well as next year?

Hi, Sheldon. This is Mark. I'll answer the first one. I'll have Scott answer the second.

Most of the new products that we are putting out we expect to have gross margins in the 45% to 50% range, the ones that are based on all our proprietary patented technology.

And Scott, do you want to --?

Sure. It is generally not our practice, Sheldon, to comment in detail on forward-looking periods, but what I will say is our margin at 25% or 25.9% this quarter was significantly up from where it was last quarter. We definitely feel like we are making some progress in the margins and I think that is attributed to primarily the volume increases, but also us accelerating some of our proprietary development in these technologies, getting them incorporated into our products. So longer-term, we definitely intend to drive margins to much higher levels than where they are at today.

Okay. Can you also comment on what areas of your business that you expect to see slower in the fourth quarter?

I would say that the focus on the fourth quarter and where we alluded to some of the orders being a little bit less than what we've experienced in the first part of the year, that was more focused on the medical side of our business. If you've looked at our medical business over the last three years, we've shown eight consecutive quarters of medical revenue growth.

What we are experiencing now is a little bit of a pullback. I envision and the rest of the management team here believes that this is just a short-term downturn; and long-term, we will be in a very good position with our current medical customers; and then with additional medical customers, we anticipate bringing on board through new products such as the Centauri.

We could probably also -- this is Mark again, Sheldon. I have engaged with all of our key medical accounts over the past few weeks and they are all very positive about achieving growth next year. So that kind of supports Scott's statement that whatever fluctuations we're seeing are temporary.

Okay. Thank you very much.

Sam Bergman, Bayberry Asset Management.

Hi, good afternoon, Mark and Scott, how are you? (multiple speakers)

Good. A couple of questions. Is there any way to breakout the 40% of the medical business and tell us what the CDM part of it was?

We don't break it down to any further level of granularity at this point. One of the things that we're very conscious of is not divulging too much information on our medical customers since there is such a large concentration of our medical customers. At this point, we are not breaking that revenue down to that level.

Okay. So if you look at the product that you're expected to come out with, the Centauri, in the next couple of months or get approval and then have it come out to your customers and then the next upgrade after that, is there a sales force that is going to be devoted to those particular product lines or not?

Yes, Sam. We have already partially implemented a sales force dedicated to that, and we expect to add to it during the course of the next 12 months. So there is a totally dedicated marketing and sales staff focused on cardiac diagnostic monitoring.

So should we expect the G&A to go up because of that or are you able to get some costs taken out in other areas of the Company?

It will go up marginally but we have added -- a great deal of that cost is already reflected in the current quarter's expenses.

Okay. So how many people do you think you will add in the next six months?

We have two people that are dedicated to it at this point and we expect to add a third person during the early part of 2011.

In the press release, you mentioned about there are several key research and development initiatives. Besides what was written in the script, I assume, those items were not mentioned. Can you talk about those?

Yes. In addition to the ones we mentioned, there's also a next-generation cardiac diagnostic monitoring device called the Hammer, and that utilizes our miniaturization skills. It also uses our PhysioLink radio technology and some of our DSP technology. And it will be a downsized state-of-the-art cardiac diagnostic monitoring device that will actually perform all three functions -- a Holter monitor, event recorder, and mobile cardiac outpatient telemetry, all in one device. It will be waterproof and miniaturized. So there are some significant marketing advantages in this device over what is currently in the market.

So in other words, you can swim with it?

You can take a shower with it.

Okay.

I do not know about the swimming. We haven't tested that.

So in terms of that product, going back to the first product that you are going to go for FDA approval in the next couple of weeks, can you tell me on the Centauri, what is expected in terms of -- if it has been shown to any OEMs and what is the feedback on that?

The Centauri is directed at kind of the emerging MCOT market in the cardiac diagnostic monitoring. That is the one that has the most promise. There have been some changes in the reimbursement that have slowed down the rate of acceptance of MCOT, but in the long run it is the must efficacious diagnostic device. So it will continue to gain market share.

So having said that we expect that in the medical field, you really have a long ramp-up cycle for products. So once we get FDA approval -- none of the customers will put much work into it until we get FDA approval, and then we will take it out to various beta sites that we've already gotten commitments from and have them try the device and start utilizing it in their product lines.

Now the thing to remember, they utilize our product in conjunction with their own software. So they have to make changes to their infrastructure and software to incorporate our device into it. So it is going to take most of 2011 to ramp this thing up and get it into volume usage by our customers because of the amount of investment they have to make.

Right. Can you also discuss the audio communications -- what particular government agencies are you selling those products to and what kind of growth is there in those products for those agencies going forward?

In our professional communications products there are two areas that we sell into that would fall into that category. One is military and overt applications, and the other is covert. In the covert applications, we can say nothing about who we are selling to and what we are doing other than that market in this environment with the increased spending on homeland security and defense is obviously a growing market, and there is a lot of interest in digital signal processing and low-power wireless technology and body-worn devices in covert operations.

On the overt side of the military, we continue to see progress there too, selling to the US government, the Singapore government, and various police, fire, and other defense groups.

Out of the three markets that you are in, which market do you believe will show the most growth in 2011?

I think it will be very balanced. We are excited about the hearing health market because of the Overtus and the APT technology we talked about. We think that market is for open-ear, in-the-ear devices is quite promising, and we expect that to do very well. And we have several other new hearing aid products that we didn't talk about that are also focused on hearing health. So we expect to see a continued rebound and good growth in the hearing health market next year.

On the professional communications side, I think with the PhysioLink and some of the work we've done in working with some of our government customers, we think there will be reasonably good growth there as well.

And on the medical side, we not only have solid OEM customers that have told us to expect to continue to grow next year, but we have another year under our belt in the cardiac diagnostic monitoring market. We have booked a couple of new accounts which we expect to see some growth out of it in 2011 plus the introduction of these new devices.

We're quite excited that next year should show good year-over-year performance over this year.

The glucose monitoring device, when does the upgrade in that particular product come out and will that cannibalize any of the existing sales of the product out now?

On glucose sensor transmitters, that is totally a cooperation with our OEM customer, and those timelines are totally dictated by them.

I see. So there's been no mentioning at this point on what the timeline is?

We think that there is going to be progress made in 2011, but we do not know the exact timing.

Besides the products that you mentioned and you received, I guess design wins that you have coming out with these products, there's been a lot more money spent on R&D in the last year, are there any other new design wins? I heard design wins take 12 months to 18 months to get to the marketplace eventually. Are there anything else out there that you can talk about that holds promise?

I guess in the hearing aid market, we have gotten several design wins already on the new Overtus and APT technology.

On the hearing aid market, we sell to everyone there and we sell something to everyone already. So we're not gaining new customers there, what we're gaining is new platforms within that customer that we've won a design into, if that makes sense.

It does. Now last question, in terms of the lean manufacturing programs, how much over the next 12 months can that particular processed program be used to increase margins and how do you think margins -- how much do you expect the margins to increase over a 12-month period if you're using that program successfully?

[Tim], this is Scott. I will take that question. We have been working on our lean manufacturing programs now for some time. We've attacked different areas. It's been very successful, and we will continue to implement lean manufacturing principles going forward. I would say the bulk of the value has already been reflected into the margins to date. We have done a very good job and you get to a point where the cost outweighs the benefit.

Where I believe that we're going to get more traction on the margin is driving these new products. You mentioned that we've put a great deal of investment over the last three or four years -- in the last one or two years into some of our proprietary technologies. Some of the things that we are going to do with those technologies and get them into the marketplace are going to drive the margins that Mark were speaking of in the 40% to 45% range. So at a very high-level, I think you'll see more margin improvement driven from volume and from the initial proprietary content.

If you had to say your proprietary product in the system now versus what you expect in 2011, should we say those products are in the 10% to 20% range now growing to the 30% to 40% range or less than that?

It's different by each market.

Right.

I would say in our medical market, we probably had the lowest amount of proprietary concept. The products that Mark mentioned earlier, the Centauri and the Hammer in the cardiac markets are our proprietary technologies, and those are the products that we believe are going to drive the margins in our medical business.

So today, we are -- probably 20% of our medical revenue is driven by our own proprietary technology. We anticipate to push that north of 50%. Within the hearing health market, we probably have the most proprietary content but I would say that that proprietary content level is even going to increase as we made a conscious effort to develop more IntriCon technology, and not take on as much custom work.

And lastly, within our professional communications, once again, the PhysioLink core technology is going to be driving a lot of our platforms that we are going to sell into the different customer markets that Mark talked about. So I think you are absolutely right that the shift that we have from today, from 12 months from now to 24 months from now, you are going to see more IntriCon technology in every product that we sell across the board.

Okay. Thank you very much.

Alvin Hoffman, private investor.

All right. The PhysioLink enables audio and data streaming to ear-worn devices. Do the ear-worn devices have to match this to PhysioLink or could people who already have hearing aids use it?

Alvin, no, the PhysioLink operates on a proprietary 2.4 gigahertz protocol. It is in the ISM band. You would need both receiver and transmitter in the device that is sending the signal and the device that is receiving it. So we would have to manage the interface between the earpiece and any accessory that was transmitting an audio signal to it.

So this is not anything that the large market that is already there could take advantage of?

That is correct. Because this technology is new and it has to be incorporated into both the ear-level device as well as the transmitter that is sending the signal to it.

All right. The new Centauri CDM device, how much will this sell for per each?

We are guesstimating a range of between $500 and $700 per unit.

For an improved model? We're talking about the improved model, the one that would be waterproof?

Yes.

$500 to $700.

Yes, with the mobile cardiac capability. Without the mobile cardiac capability, it would be probably in a range of $400-$500.

That's what's being sold in the market now?

Yes. This will be a downsized version.

That is great. Thank you.

Thank you. (Operator Instructions). And at this time, I'm showing no further questions in queue. I'd like to turn the call back over to Mr. Gorder, the CEO for closing remarks.

Thank you. Once again, thanks all of you for taking time out of your day to join our call. We would like to conclude by saying that across the board we are focusing our resources and capital on our strengths making body-worn devices smaller and better. We are doing so by continuing to invest in new initiatives that we believe will fuel long-term growth. This strategy centers on the idea of enhancing the mobility and effectiveness of miniature body-worn devices and creating entirely new technology-driven products.

Thanks again for your interest in IntriCon and for joining our call.

Ladies and gentlemen, this does conclude our conference for today. If you would like to listen to a replay of today's conference, please dial 800-406-7325 or 303-590-3030 and enter the access code 437-5930. AT&T would like to thank you for your participation and you may now disconnect.

(Operator Instructions).