IntriCon Corporation (IIN) 2010 Q4 法說會逐字稿

Good day ladies and gentlemen. Thank you for standing by. Welcome to the IntriCon fourth-quarter 2010 earnings conference call.

During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions). This conference is being recorded today, Thursday, February 17, 2011.

I would now like to turn the conference over to the CFO, Mr. Scott Longval.

Thank you operator. Joining me on today's call is Mark Gorder, IntriCon 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 operation in our 10-K filing for the year ended December 31, 2009.

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

Thank you Scott, and thank you, everyone, for joining us today.

I would like to begin by reviewing our 2010 fourth-quarter results and key highlights for the Company. Next, I will discuss our strategy and growth plan. After that, Scott will cover the financials in more detail and then we'll open up the call for questions.

As you've seen from our press release, we continued to make strides both financially and strategically in the fourth quarter. For the year, we drove top and bottom-line improvements while positioning the Company for long-term growth. What's more, this progress comes even as we increased investments in research and development by 34% over the prior year.

Across the board, we are focusing our resources and capital on our strengths, making body-worn devices smaller, better connected, and more mobile. We are doing so by leveraging our proprietary core technologies across multiple product platforms and accelerating the development of new core technologies and products. We believe our continued prudent investments in these initiatives will fuel long-term growth.

While we are currently channeling our expertise into three main markets, our core technologies offer potential benefits to many other industries. It's our ultimate goal to reach a broader marketplace.

For the fourth quarter, we saw double-digit revenue growth in both Hearing Health and Professional Audio Communications. As anticipated, Medical was down from the year-earlier fourth quarter. During 2010, several large medical customers experienced temporary fluctuations in demand and entered the fourth quarter with inventory levels above their immediate needs.

The good news is that we continue to maintain strong relationships with our Medical OEM customers. In addition, we believe that the fourth-quarter pause in medical orders was temporary and anticipate more normalized order patterns in the first half of 2011.

Looking at our three markets as a percentage of total revenue, in the fourth quarter, Medical contributed 36% with Hearing Health and Professional Audio Communications contributing 40% and 24% respectively. We are encouraged by the rebound in our Professional Audio Communications and Hearing Health markets. Sales in those markets increased more than 25% and 18% respectively over the prior-year fourth quarter. The Professional Audio Communications gain was primarily due to higher sales of headset devices to existing customers and communication devices to government agencies. These customers continue to demand smaller and more durable products that perform well in noisy or hazardous environments.

Driving the Hearing Health increase was the continued overall rebound in the hearing aid market, coupled with pent-up demand. We also believe that the introduction and acceptance of recently released products will lead to significant future growth.

I'll now touch briefly on core technology advances and product development highlights. We are in the process of finalizing development of our PhysioLink wireless technology. PhysioLink offers capabilities which will be incorporated into products across all of our markets, including Medical and Professional Audio Communication. PhysioLink enables audio and data streaming to ear-worn and body-worn applications over distances of up to 5 meters. The first product platform to incorporate the PhysioLink will be Sirona, the Company's second-generation wireless cardiac diagnostic monitoring device.

Future products within our Professional Audio Communications market which will incorporate PhysioLink technology include our situational listening device, or SLD. Our SLDs leverage PhysioLink technology to help hearing impaired people in noisy environments, allowing them to listen to television, music and direct broadcast by wireless connection. SLDs supplement conventional hearing aids that don't handle noisy situations well. The Company anticipates conducting market trials of its SLD platform in the second half of 2011.

On the Hearing Health front, we reached recently launched our all new patent pending APT open in the canal hearing aid based on the Overtus DSP amplifier previewed at the European Hearing Aid Acousticians conference in October 2010. APT is now available to OEM customers worldwide. A more in-depth overview of APT and Overtus is available on our press release of February 1, 2011.

As a company, we are committed to developing hearing aid products that bring proprietary enhancements to the marketplace. Research has shown that there are considerable negative social, psychological, cognitive, and health effects associated with untreated hearing loss. The Overtus DSP amplifier offers an effective means to address this condition. It delivers the latest advances in hearing aid signal processing technology.

In the Medical arena, IntriCon continues to make progress on the Centauri CDM device. The Company anticipates FDA approval in the second half of 2011 with the product available for sale in late 2011. This will be an exciting addition to our product portfolio.

I'd like to emphasize that while we are pleased with our results for the fourth quarter and the year, we're looking to the future. In 2011, we plan to build on the initiatives that drove success in 2010, developing our core technologies across multiple product platforms and launching new devices. As a business, we are focused on increasing revenue, improving margins, and growing our bottom line. We will do so by raising the percentage of proprietary IntriCon technology we incorporate in our products, driving higher sales volumes, and increasing our low-cost manufacturing footprint.

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

Thank you Mark. I want to reiterate that we are encouraged by our 2010 financial improvement. The Company reported net sales of $14.5 million in the 2010 fourth quarter, a 2% increase from net sales to $14.2 million for the prior-year period. Our net loss in the 2010 fourth quarter was $169,000, $0.03 per diluted share, a marked improvement from a net loss of $1.6 million, or $0.29 per diluted share, for the year-ago period. Included in the prior-year results was a loss from discontinued operations of $1.7 million or $0.32 per diluted share.

Gross margins in the 2010 fourth quarter were 24.1%, down slightly from 25.2% in the year-ago period. The decline primarily related to sales mix. We continue to implement gross profit improvement initiatives, including production transferred to lower-cost manufacturing facilities and the ongoing rollout of new manufacturing programs.

Operating expenses for the fourth quarter were slightly lower than the previous 2010 quarters and flat compared to the 2009 fourth quarter. For the year, we reported net sales of $58.7 million and net income of $361,000, or $0.07 per diluted share. This was up from 2009 net sales of $51.7 million and a net loss of $3.9 million, or $0.73 per diluted share. Included in the 2009 results were Datrix-related acquisition costs and bank financing charges of $561,000, or $0.10 per diluted share.

2010 net income from continuing operations was $665,000, or $0.12 per diluted share, compared to a 2009 loss from continuing operations of $1.8 million, or $0.34 per diluted share.

Our Medical business represented 42% of total revenue 2010 with Hearing Health and Professional Audio Communications contributing 36% and 22% respectively. This compares to 2009 levels of 44%, 36% and 20% for Medical, Hearing Health, Professional Audio Communications respectively.

Gross margins for 2010 were 25.6%, up nicely from 21.4% in 2009. Gains were driven by higher sales volumes, increased proprietary technology and products which generate higher margins, and the impact of profit enhancement programs I mentioned a moment ago.

Operating expenses for the year were $13.4 million, up $1.7 million over the prior year. The main drivers of the increase were the greater investments in research and development and the full-year effect of Datrix operating expenses. The majority of the $1.1 million increase in R&D, which equals approximately $0.21 per diluted share, was to fund the acceleration of proprietary core technologies and product platforms to support our future growth initiatives. As a percentage of revenue, research and development grew from 6.5% in 2009 to 7.6% in 2010.

The Company has completed the previously discussed relocation of our Singapore operation 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. The bulk of these costs were capitalized and will be expensed over the term of the new lease. The additional capacity and capabilities of this new facility will help our customers meet the rising pressures to lower production costs.

The Company reduced total debt from $9.6 million at the end of fiscal 2009 to $8.6 million at the end of 2010. In addition to paying down debt, the Company has made significant investments in infrastructure, including nearly $600,000 to relocate the Singapore operation.

Turning to other financial metrics, IntriCon generated approximately $1.6 million of positive operating cash flow during the fourth quarter. IntriCon's total cash cycle days at December 31, 2010 was 81 versus 75 days at the end of fiscal 2009. Cash cycle days are comprised of days sales outstanding, which was 48 days, plus inventory outstanding, which stood at 68 days, less payable outstanding, which stood at 35 days.

I'd now like to turn the call back to the operator so we can take your questions.

(Operator Instructions). Sam Bergman, Bayberry Asset Management.

Good afternoon Mark and Scott. How are you Mark? Everything going pretty well?

Yes it is. (multiple speakers) is working great.

I'm glad you're back up and running. A couple of questions. Proprietary technology that you're trying to put into new products or -- and maybe perhaps in the existing product that are out there, what percentage of products combined right now have your new proprietary technology?

That's a good question. I think all of the new releases have proprietary technology. The percentage of legacy products is still quite high, but all of the new releases have proprietary technology. I would guess, probably in the last year, maybe about 20% of our revenue was new product releases. The proprietary technology is a little higher than that because we have some hearing aid DSP amplifiers that have a lot of patented adaptive feedback cancellers in them, so probably the percentage of legacy products is maybe about 30% that have proprietary technology.

If I looked at our three markets, Hearing Health, Professional Audio and Medical, Hearing Health has the highest percentage of proprietary technology in both legacy and new releases. It's probably in the 70% range. In Professional Communications, all of our microphones are proprietary to IntriCon, but there is no, as yet no digital signal processing or low-power wireless has been incorporated into the Professional Communications segment.

In Medical, all of the new releases that are coming in the cardiac diagnostic monitoring, the first of those releases will occur in 2011. So basically none of the legacy products have that. It will be all the new releases. So in Medical, it is a very low percentage because a lot of our Medical businesses is still proprietary work that we do for specific large OEMs. Does that answer the question?

Pretty much. Now, the PhysioLink technology, is that a licensed product? Do you have to pay royalties on that, or not?

The fact that -- we pay royalties on a very small proportion of our proprietary technology. 90% of it is our own internally developed technology.

Okay. On the Medical division, how many customers are involved in that Medical division are OEMs right now? What's the largest -- without names of course, what's the largest customer, percentage-wise, of sales?

Scott, do you want to take that one?

Yes. If I look at the total customer base, we have approximately 20 Medical customers. Obviously, we have one Medical customer that makes up a significant portion of our revenue, approximately 20%.

So are we saying that all 20 customers had excess inventory, or are we saying just the largest customer had excess inventory in the channel?

If we look at our customer make up (technical difficulty) our top two customers were ones that had some of the inventory issues that we had talked about in the previous release.

I think I could add to that. What we heard feedback from most of our Medical customers as well as in the trade in general is that many doctors, physicians, and hospitals were holding on to products longer, or they were taking a longer time to replace disposables. The net result was that I think most of our Medical customers experienced some kind of an adjustment in 2010.

Now, would you expect, from your largest customers in the Medical area, is there any concern that their technology will become outdated, and even though they are out with a new upgraded product line, some other competitor will take away the technology and have it to their advantage as a new and upcoming technology, versus some of the customers that you have that are going pretty good in terms of Medical sales?

I would say definitely not. The large OEMs that we are dealing with are leaders in their field. They are not only market share leaders, but they are technology leaders. The products that we are codeveloping with them are state-of-the-art recently-released products.

Now, would it make more sense -- I know you're spending a lot more in R&D right now. Would it make more sense to concentrate on two areas instead of three areas to get some products out faster, or getting the design wins and then ramping up for product? Because it just seems like the concentration is very narrow at this point, and there's not enough OEM customers to grow that top line the way it should be growing. What are your thoughts on that?

Well, the best explanation I could give there is that, if you look at the Visio technology that we are developing, the base technology there will support product platforms in all three of our (technical difficulty). That was probably a 3, 3.5 year development effort just to develop the core technology. The first launch of that technology will occur late in 2011 with the Sirona cardiac diagnostic monitoring device. So, that's how long it takes from the inception to the completion of the core technology, and then incorporating that into a product. But you'll see very rapid introduction of product platforms based on PhysioLink over the course of 2011 and 2012 in all three of our businesses.

Do you think that will make a difference in terms of going from slow growth to moderate to stronger growth?

We had, prior to the recession, or the Great Recession as it's called, we had pretty really good results between 2004 and 2007. I think we had about a 25% revenue growth compound annual growth rate during that three-year period. Although we can't say specifically how we expect to do in the next three years or the three years starting with fiscal 2010, we expect to have good solid growth because we've got enough core technologies now to drive that kind of growth.

So you're saying the technologies you have today and the product lineup that you have today and coming out in the next 12 months is far greater than what you had in 2004, 2007 timeframe?

Far greater.

Far greater.

(multiple speakers) better position today than we were in 2004 going into that growth spurt.

So going forward in 2011, what should we expect the SG&A line to look like and the R&D? Are we ramping up tremendously a lot in 2011 too as we did in 2010, or will that spend diminish?

I think the growth in absolute dollars won't be as great in 2011 as it was in '10. It will be a flatter growth in GS&A and R&D. There will still be some growth in R&D, but the GS&A line will not increase significantly, except for a couple of investments we're going to make in improving our marketing efforts.

Just two other quick questions and I'll let somebody else get on. The APT product that was in the, I guess in the show in Europe and just released, that product, does that currently have OEM customers that are buying the product, or -- I know you had tremendous interest in the product. It sounds like whatever I read on it seems like it's a terrific addition to your line of hearing products and it should do well. Are there current OEM companies that are actually ordering it?

Let me answer that question in two parts. The APT is based on our Overtus DSP amplifier. The Overtus DSP amplifier has two patented features in it. One of them is our Reliant CLEAR adapted feedback canceller, which is an excellent feedback canceller that was tailored for use in open -- in the ear hearing aids.

The second feature is called the AcousTAP. It's an acoustic switch that doesn't require a mechanical switch, so it allows for the manufacture of much smaller hearing aids. The Overtus amplifier has been in the field now since October. We have multiple customers throughout our global customer base who are already using Overtus in their own proprietary in the ear and deep canal type fittings. They're using both the Reliant CLEAR and the AcousTAP features and are having very good results. We've got very good feedback from the market.

The APT is just recently released. We have only shipped about less than 1000 pieces. It's too early in the cycle of that product to give you any feedback on it. Obviously, as a management team, we feel that it should be successful, but we need to wait and see what kind of feedback we get in the next three months. I'm certain, by the next quarterly release, we will have better input that we can give you.

What is the ASP for the APT?

ASP for the APT is about between $150 and $200 depending on volume. The ASP for the Overtus is about $50. That's the amplifier, just the amplifier.

The last question is regarding something I read in the 10-Q prior quarter. Is there any liabilities remaining for the [CLAS] company that you had one time, or any of -- can you talk about the asbestos lawsuits that are going on with IntriCon, and if any liabilities are out there for shareholders to worry about?

Scott, do you want to take that one?

Yes, I will. The legacy (technical difficulty) that's going on with the asbestos deals with (technical difficulty) as we had disclosed in each of our 10-Qs and 10-Ks, IntriCon is still responsible to defend those cases. That being said, we have over $140 million worth of insurance to cover those claims. To date, we have spent right around $6 million. So we feel that we are adequately covered with any exposure when it comes to asbestos.

Okay. Is that part of the [CLAS] liability? Is that what that is?

Correct. It was retained when we sold the assets of one of the [Cealus] divisions.

Okay. Thank you very much.

(Operator Instructions). Sam Bergman, Bayberry Asset Management.

I guess, if nobody else is going on, I'll hit you with one more. Tibbetts division that's up in Maine, I know that seems to be doing quite well for you guys. For the government portion of the business, what percentage is government sales?

The government sales is about 4% of total revenue.

So it's very little.

It is. As we've discussed before, our strategy in growing that business (technical difficulty) shy away with some of the legacy business, which is doing kind of one-off products, and looking to get our proprietary technology into those future product lines. A good example of that would be the PhysioLink wireless. As we look at offering different products in that area, this could be a technology that we could definitely leverage.

I think --

I'd say that's going to be our growth strategy on that side of the business.

I think we can report there that we have a couple of design wins with the government for both the PhysioLink and some of our DSP technology.

In the Medical arena, is there any design wins that you have worked on and you expect to close soon, or already closed in the last quarter of 2010? Where is the development happening in the Medical area right now?

Well, on the Medical area, I guess we are hoping for recovery for our large OEMs going forward. We anticipate that certainly by the second half of the year that should be back up running on a more normal basis. In the cardiac diagnostic space is where all our development effort is going, and we have a number of submittals to the FDA that are going to occur in 2011. Although they won't generate much revenue in 2011, those submittals and approvals will generate, we think, some good revenue growth in 2012. So most of the R&D work in Medical has been going into the cardiac diagnostic space with two product platforms there, the Centauri and Sirona that we are planning on releasing. So those won't achieve any design wins until late in the year.

We do have some other things going on with legacy cardiac diagnostic monitors. It's a little early to report on that, but if you ask that same question in April (technical difficulty) I can give you a better update.

So on the cardiac diagnostic product line, although it's taken longer than expected to get these products approved or in front of the FDA, have you lost any time to competitors or the marketplace at this point?

Not at all (technical difficulty). If you talk to all the medical companies right now, they are all experiencing difficulties with the FDA submissions. The FDA has changed their stance on 510(k) submittals, and it's become much more unpredictable and problematic to get these through. So we are hearing the same from not only our customers but from our competitors.

So is it possible that the two products you're talking about would not be a 2011 event and it would be a 2012 event were it approved, or do you feel pretty comfortable about 2011?

We tried to build in some uncertainty into that prediction of 2011, so I feel pretty comfortable that we will have those on the market by the end of the year.

If you look at those products versus the Hearing Health products like that APT and the Overtus, which one would you consider giving the Company more growth in revenue percentage-wise?

I think we expect Hearing Health -- those Hearing Health products to do well. I think we expect roughly even growth from all three of our businesses.

Okay. Thank you again.

There are no further questions at this time.

Once again, we appreciate you taking time out of your day to join the call. I'd like to conclude by saying that we made significant progress during the year in developing our core technologies across multiple product platforms, launching new devices and continuing to run an efficient organization. We look forward to building on this in 2011. Thank you all again. Have a great day.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. If you'd like to listen to a replay of today's conference you can dial 1-800-406-7325. For international participants, you can dial 1-303-590-3030 and enter the access code 4407088#. This replay will be available until February 24, 2011. Once again thank you for your participation. You may now disconnect.