IntriCon Corporation (IIN) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, thank you for standing by. Welcome to the IntriCon fourth-quarter 2011 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 23, 2012. I would now like to turn the conference over to Mr. Scott Longval, CFO. Please go ahead, sir.

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 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 on 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 with the year ended December 31, 2010. 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 2011 fourth-quarter results, key highlights for the Company and, lastly, our focus for 2012. 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 have had a chance to review our fourth-quarter press release. Looking at our business as a whole, economic softness is leveling off and we're starting to deliver sequential financial improvement. Medical revenues posted double-digit gains over the prior year fourth quarter and we're beginning to see the top-line impact of our hi HealthInnovations work.

These trends, combined with the fact that we continue to invest in pipeline building core technologies, position us well for the future. We're helping companies reduce their costs by shifting the point of care from more expensive settings, like hospitals and clinics, to less expensive ones such as the home or Internet. And we are meeting the growing demand for small and lightweight advanced body worn medical devices that connect patients and caregivers in nontraditional ways.

Fourth-quarter medical sales increased 14.3% over the prior year benefiting from rising sales to Medtronic and other key medical customers. These trends have driven four consecutive quarters of sequential growth.

In addition, our two wireless cardiac diagnostic monitoring devices, Centauri and Sirona, are now both FDA 510(k) approved. We're working to incorporate these devices into the customized software packages of future customers. We believe these two devices, which provide remote wireless ambulatory monitoring, will generate further gains later in 2012.

Hearing health revenue declined 6.8% from the prior year fourth quarter. This was primarily due to overall hearing health industry softness partially offset by initial revenues from hi HealthInnovations. Our work with hi HealthInnovations started to slowly ramp up in the fourth quarter. We expect this ramp to continue in the 2012 first quarter.

Moreover, we have a technically advanced product line with our innovative digital signal processing circuits such as our nanoDSP, Overtus DSP Amplifier and complete systems such as our APT and Lumen. We anticipate these lines contributing to future growth in the traditional hearing health business as this market rebounds as well.

Professional audio communication sales were down 10% from the prior year fourth quarter, primarily due to softness in various international niche markets. I'll now briefly touch on key 2011 highlights for the Company.

In September 2011, IntriCon entered into an agreement to become the supplier of hearing aids to hi HealthInnovations, a UnitedHealth Group company. Hi HealthInnovations has launched a suite of high-tech, lower cost hearing devices for the estimated 36 million Americans with hearing loss. Hi HealthInnovations will offer consumers technically advanced hearing aids, including those based on IntriCon's new APT open in the canal ITC hearing aid platform.

Related to this business, during the fourth-quarter IntriCon began initial product shipments, supported and assisted hi HealthInnovations in establishing the necessary infrastructure to create their innovative distribution system and increased development efforts to ensure timely introductions of new hi HealthInnovations hearing aids.

As previously disclosed, as a company we devoted a considerable amount of time, resource and capital during 2011 to securing the agreement in preparing for the program's launch. In July 2011 the Company established a new manufacturing facility in Batam, Indonesia to further reduce our manufacturing costs. Currently we occupy 15,000 square feet which we will use to manufacture select labor-intensive assemblies in various product lines.

It's imperative that we have low cost manufacturing options to drive continued margin improvement. This new facility gives us that, as well as the ability to pursue the potential high-volume manufacturing opportunities that we're seeing right now in the marketplace.

We've begun to transfer select sub assemblies to our Batam, Indonesia facility which is currently in the ramp up phase. We will continue to transfer other projects as appropriate and we anticipate a favorable impact on margins beginning in mid-2012.

Now let's look at our priorities for 2012. For the past five years we've been intently focused on developing the core technologies in building the global manufacturing footprint that will allow us to secure market changing relationships with leaders in the healthcare industry such as our Medtronic and hi HealthInnovations programs. As the point of care continues to move away from traditional settings our products help to meet a growing need.

In addition to working successfully with our existing partners in 2012, we are continuing to develop new core technologies while enhancing existing ones -- securing additional market changing relationships with leaders in the healthcare industry; expanding and driving efficiencies at our international manufacturing facilities; and returning the Company to profitability.

We fully expect to report a year of improved performance and growth when we hold our 2012 earnings call with you a year from now. Now I'd like to turn the call over to Scott.

Thank you, Mark. I'll begin by reviewing our fourth-quarter financial results in more detail. For the 2011 fourth-quarter the Company reported net sales of $14.5 million, the same level as the prior year period. IntriCon reported a net loss in the 2011 fourth quarter of $352,000 or $0.06 per diluted share compared to a net loss of $169,000 or $0.03 per diluted share for the prior year fourth quarter.

Gross profits in the 2011 fourth quarter were 23.1% versus 24.1% in the prior year period, mainly due to costs related to the establishing our Indonesian facility and ramp-up associated with the hi HealthInnovations program. The decrease in gross profits was partially offset by the impact of various ongoing profit enhancement programs.

Operating expenses for the fourth quarter were slightly higher than the prior year comparable period. Sales and marketing and general admin expenses were relatively flat compared to a year ago. However, research and development increased over the prior year period primarily to support product offerings under the hi HealthInnovations program.

For the 2011 year IntriCon reported net sales of $56.1 million and a net loss of $1.4 million or $0.25 per diluted share. This compares with 2010 net sales of $58.7 million and net income of $361,000 or $0.07 per diluted share. As a percent of total revenue, our medical and hearing health businesses contributed 41% and 37% respectively. Professional audio communications was 22% of the 2011 revenue; this was relatively consistent with 2010 levels.

Gross profits for the 2011 full year were 22.6%, down from 25.6% in the prior year period, chiefly due to volume and to the factors I just noted above in the fourth-quarter gross profit discussion. We anticipate margin improvement as overall volumes increase and as newer products with our proprietary technology gain traction in the marketplace.

In addition, we continue to implement gross profit improvement initiatives including production transferred to lower cost manufacturing facilities and the ongoing rollout of lean manufacturing programs.

Operating expenses for the year were $13.9 million, up $439,000 over the prior year. The main driver of the increase was higher investment in research and development which grew from 7.6% of sales in 2010 to 8.7% of sales in 2011. We remain focused on developing pipeline building proprietary core technologies and product platforms to support future growth initiatives.

In addition, significant investment dollars were allocated to development efforts to ensure timely introduction of new products for hi HealthInnovations.

Turning to other financial matters, IntriCon was breakeven from an operating cash flow standpoint for the 2011 year. Our total cash cycle days at December 31, 2011 were 81 days, flat with the comparable 2010 period. Cash cycle days are comprised of days sales outstanding which totaled 50 days, plus days sales of inventory which totaled 95 days, less days payable outstanding which stood at 64 days at the end of the year.

Debt increased from $8.6 million at the end of fiscal 2010 to $11.1 million at the end of 2011. During 2011 the Company made significant investments in global manufacturing infrastructure, core technology development and to secure and prepare for the hi HealthInnovations program launch.

2011 was a year of an investment for IntriCon and we fully expect to begin to see positive outcomes of those investments as the 2012 year progresses and beyond. Now I'd like to turn the call back over to the operator so we can take your questions.

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

I've got a couple questions. First of all, on the Sirona and the Centauri, you said that there was software that's being added for OEM customers. Have any of those products been sold up to now? Are they in your revenue?

No, they're not. The revenue we anticipated from those was relatively low in the early phases of our cardiac diagnostic revenue at this point ranges about -- around 3% of sales. And we're anticipating growth in that number, but it will not be material relative to some of the other programs that we have ongoing.

We are expecting good growth out of Sirona and Centauri. We do have to get the software to interface with our product before the customers can buy it, so that's an additional -- we anticipated this, but that's additional work that we have to perform in order to make the sale.

So the customers have specific requirements that we have to meet in order to interface with their software. It's not an overly difficult thing to do, but it is somewhat time-consuming. But we do anticipate revenue probably in the second half of this year. But it will not be material relative to the other things that are going on.

So compare that to the other things that are going on that you feel will be material. Are we talking about HealthInnovations being the number one driver at this point?

HealthInnovations would be probably the number one driver, growth in our medical sales with customers like Medtronic and Smiths will be an additional driver. We've seen that the medical market has bounced back and I believe we've had a few consecutive quarters of continuous growth now in that medical business since it bottomed out in late 2010 and most of 2011. So those would be the key drivers.

Now HealthInnovations, that started up what -- in the month of November?

We made some minor shipments in the fourth quarter.

The program, Sam -- this is Scott. The program started earlier in 2011 clearly getting the infrastructure in place and doing the research and development work for operations group. That started earlier in the year and the costs were incurred earlier in the year.

And when we talk about it starting up, there's a significant amount of infrastructure that hi HealthInnovations has to put in place in order to roll this program out on a national basis. And so they have -- I don't know -- obviously we're not privy to all the details of their rollout, but we are supporting them with a number of initiatives to create viable methods of getting hearing aids out to the general public.

So (multiple speakers). Go ahead I'm sorry.

And that entails their over the Internet testing and fitting methods. They anticipate sometime in this year to provide some testing capability to personal physicians. So there are a number of ways that they anticipate being able to serve the hearing impaired and we're assisting them in putting in all the infrastructure they need in order to deliver hearing aids to those various locations.

So you sold, in the fourth quarter, a very small amount. Can't you give us units sold?

We can't get into specifics, Sam, just due to customer confidentiality. What I can say, it was pretty minimal as a portion of our total revenue (inaudible).

I'm just wondering -- in terms of your total revenue, I'm just wondering -- you're putting a lot of -- or you have spent a lot of money for the infrastructure and you're putting a lot behind this product and the alliance. How successful do you really think it's going to be?

Well, this distribution system we think is a disruptive way of serving the -- approximately 80% of hearing impaired do not use hearing aids today. So depending on which number you use -- I received a new number that's even higher. There was a recent study done that now says there are 48 million Americans that are hearing impaired and we're serving roughly 20% of those.

The growth in the aging population, the increased incidence of hearing loss within that population and the potential increased penetration of the market due to this disruptive channel forecasts some rather sizable numbers if you kind of connect the dots.

We think people knowledgeable in the field can kind of us sit down and plot out those numbers and come up with some pretty interesting statistics as to what hi HealthInnovations can do. We can't forecast that, but we think the opportunity is very exciting and it's very disruptive.

And a major resistance point to growth in the market is the cost of the devices. And we think that the cost of high tech custom program hearing aids can be prohibitively high for many individuals. We think that by levering the scale that UnitedHealth Group has in bypassing supply-chain intermediaries, they can streamline the process and pass the savings to the consumer.

Do you think it's possible that's why your hearing revenue was down this quarter, perhaps your customers, your OEM customers are not happy with the setup?

I don't think that has any impact at this point. The industry itself has been flat for the last two or three years.

Should we assume that in the future you'll be able to [give us] units after quarter is over or not?

No, we will not be providing any information about United's performance. We'll be folding that into our overall hearing health revenue numbers.

What's the average unit cost of the product?

That's confidential between us and United.

But we can easily find that out from customers that have United.

You're talking United's sale --?

United's sale price?

Yes. Not United's sale price, but the price to the customer. When the customer goes on the Internet and he's subscribing to the health plan, what does he pay?

Well, it depends. It depends on what kind of insurance coverage they have with United. There are some United plans that provide full coverage; there are some -- there's a Medicaid rider that provides partial coverage with a co-pay. They also have where you can -- if you're not a member you can buy them at preset prices, which are I think listed on their Internet website. So there are many different ways that they're providing access.

Do you know, Mark, how many people or how many subscribers have that on their policy?

I do not at this time. I do not, Sam. But I think it would be fair to say that their intent is to make it widely available. They serve roughly 70 million Americans. And I think their intent obviously is to make it widely available.

Going to the medical area that you were talking about increases sequentially quarter to quarter, and you mentioned Medtronic and Smith. Are you working with any other large companies on design wins for medical products or are those two mostly the high percentages of your revenue?

Well, we have a stated intent to increase our customer base and find more Fortune 1000 medical customers that need these body worn devices. We think that with the emphasis on shifting the point of care from the more expensive to the less expensive venues, that almost every major medical company is going to have to play in that space.

And we feel that by increasing our effort in marketing and sales we can identify additional accounts like United and Medtronic that would be interested in forming a partnership with us to develop body worn monitoring devices or diagnostic devices similar to what we've done with Medtronic and UnitedHealthcare and others.

So in other words, I mean, if you look at sales and marketing you're basically saying that that area will go up over a 12-month period; am I right to comment that way?

That's correct. We would like to expand that effort and get more feet on the ground and more effort into market development. And we think there's tremendous potential with these other Fortune 1000 medical companies that we have not yet penetrated.

And where should we expect R&D to be this year?

It will be slightly higher than it was in 2011 as a percent of sales, so maybe it was running what, 8.7% this year (multiple speakers) call it, Scott?

Something like that.

Yes. This year R&D was about 8.6%, 8.7% of revenue and we would anticipate it being up maybe 0.5%.

Okay. And my last question is, last year, perhaps the fourth-quarter conference call and maybe the first-quarter conference call, there was a press release where, again, you talked about returning the Company to profitability because you had spent four or five years of R&D and the fruits of that work was going to come to fruition. What's different this time around?

You weren't able to do it last year and I think you had -- you didn't have a very good year last year compared to the majority of US companies in your I would say revenue range. So what's going to make this year different?

You got the body worn products, you're not going to see much revenue from that it seems like all year, maybe in the fourth quarter, but that's an unknown. You do have a couple of new medical or medical lines for Medtronic that are added to what they used to give you. So maybe that's going to bring a little bit more revenue. Professional is down and probably will stay down. So where are you getting the hope that this is going to happen?

Well, all three of our businesses we expect to generate some good growth this year. You mentioned professional audio was down last year; we've also already booked a couple of sizable contracts for professional audio devices with the US government and with the Singapore military. So we already know that we'll have some topside growth for professional audio.

And as we mentioned on the medical side, that over the last three or four quarters that business has been rebounding. We expect it to continue to go in that direction. So that will produce good growth. And the best opportunity we've ever had is probably the UnitedHealthcare and that's ramping up.

So I would say that's what different than last year. Last year we had -- we still were somewhat affected by the recession in our medical business and a lot of medical customers had the same issue -- that I'm in contact with. They all were seeing sluggish growth. I know Medtronic did and others did.

Okay, let's hope. Thank you very much.

You're welcome, Sam.

(Operator Instructions). [Ben Cohen].

I've been a long-time investor in IIN and its predecessor, and I just want to answer some of Sam's questions, if I may. To begin with, I am slightly hearing impaired and also a member of UnitedHealth and I recently acquired the hearing aids through them. My total cost for two hearing aids was less than $1,000.

Having purchased hearing aids from retail vendors I can tell you the cost was between $5,000 and $6,000. So there is a substantial difference that should accrue not only to the subscribers of UnitedHealth but also to IIN.

I just want to ask just two or three questions. To begin with, as a member of UnitedHealth I noticed there was only one advertisement that I received in the mail with regard to the program of hi Innovations. Since that time, which was back I believe in December, there's been very little coming from them to the subscribers. And I don't know how much influence or pressure you can put on them, but I certainly believe that if a little bit more advertising was done by them or notification to their subscribers you probably would get a lot more orders.

Also I'd like to question are we limited -- we -- excuse me. Is the Company limited in terms of only dealing with UnitedHealth or can you go out and (inaudible) have the same kind of contract arrangements with other health organizations?

Both good questions, Ben. I can't obviously speak for United, but I know that they at some point will probably heavily increase their advertising efforts and their outreach to get to more United customers because, as you said, this benefit to the consumer is tremendous. And nothing like this has ever been done before to provide this kind of hearing care at a very competitive price.

Relative to the exclusivity, we have signed an exclusive agreement with United subject to a couple of conditions, one of which is we cannot sell our devices to another health insurer. So we're limited there to working with them. But we feel that as the largest insurer of the United States that we've picked the right partner. And every day that I work with them and their very talented group I feel more convinced of that.

Okay. The only other question I had is looking at your balance sheet, what was the reason for the big jump in the inventory of over $3.5 million compared to the prior year?

Good question. As Mark mentioned, we're preparing for a number of programs that we think are going to add some nice top-line revenue for us in the first half of 2012, a big chunk of that is related to the United program -- the hi HealthInnovations program, excuse me, and also with some uptick in some of our Medtronic business. So those are the two big drivers of the increase in inventories.

Is it premature to ask what does this quarter look like?

It's our historical practice not to give any sort of forward-looking guidance.

Okay, I think that's all the questions I have.

Thank you, Ben. Good questions.

You're welcome.

Thank you. And there are no further questions in the queue at this time. I would now like to turn the call back over to Mr. Gorder for closing remarks.

Thank you, operator. Once again, we appreciate you taking time out of your day to join the call. I would like to reiterate that 2011 was a year of significant investment in core technology development, global manufacturing infrastructure and specific program initiatives.

We believe we have set the stage for sustained growth in 2012 and beyond. We fully expect to see the benefits of our initiatives in the near- and long-term. We look forward to updating you on our progress in the future and thanks again for joining our call today.

Ladies and gentlemen, this concludes the IntriCon fourth-quarter 2011 earnings conference call. If you'd like to listen to a replay of today's conference please dial 1-800-406-7325 or 303-590-3030 with the access code of 451-6102. AT&T would like to thank you for your participation. You may now disconnect.