IntriCon Corporation

Good day and thank you for standing by. And welcome to the Intricon Corporation third quarter 2021 earnings conference call. At this time, all participants are in listen-only mode. After this presentation, there will be a question and answer session. To ask a question during that session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to turn the call over to your speaker, Lee Salvo. Please go ahead.

Thank you, Operator. 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 Intracons 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 factor section of our most recent annual and quarterly report on Form 10-K and Form 10-Q, respectively, with the SEC. With that, I would now like to turn the call over to Intercon's CEO, Scott Longball, for a review of the company's third quarter performance.

Thank you, Lee. Good afternoon. We appreciate everyone joining us today. On the call with me is Anna Lee Lutkins. the company's current treasurer and director of finance, who has stepped into the role of interim chief financial officer effective October 29, 2021. I worked along the side of Anna Lee for nearly 12 years and have the utmost confidence in her ability to guide our finance department as we conduct a search for a permanent CFO. Turning to our third quarter results, Intercon delivered a near-record revenue quarter with total revenues increasing approximately 14% year over year. We also saw meaningful progress towards several very exciting catalysts on the horizon that we are tracking for accelerated growth across multiple market opportunities. While we continue to experience the impact of pandemic-related labor shortages and supply chain constraints on our manufacturing business, We have continued to be successful in navigating these challenges to identify and implement options in order to meet the increasing demands of our customers and plans for accelerated growth in the coming year. As a reminder, our components and assemblies are integrated into advanced micro technology in a number of device platforms for global customers in the diabetes, surgical navigation, interventional catheter, and hearing health markets. I'd like to take the next few minutes to cover the recent highlights and updates of our business in each of those markets, and then I'll turn the call over to Anna Lee to cover our financials in more detail. Starting with the diabetes market, Sales to Medtronic's diabetes group represented 58% of our total revenue in the third quarter, with 24% growth over the third quarter of 2020 and 18% sequentially, primarily attributable to the continued launch success of the Medtronic MiniMed 780G in certain international markets and the Medtronic MiniMed 770G in the U.S. These launches have contributed to our strong results over the past several quarters, and we have the same expectation for the forthcoming Medtronic product launches, including contribution from the approval and launch of Medtronic's Guardian 4 sensors. We are especially encouraged by Medtronic's recent announcement that the one-year real-world clinical data on over 3,000 pediatric and adolescent patients achieved time and range results that well surpassed clinical consensus guidelines for the glycemic control using its MiniMed 780G system with the Guardian Sensor 3. Not only does this open up potential additional market opportunity for the system, that further validates its benefits for patients of all ages. We are proud to be their partner of choice in delivering advanced products like this to the global market. Turning to our surgical navigation and interventional catheter business, we further expanded our business with existing customers, as well as progressed on several new opportunities that we're confident will provide additional future growth. More specifically, Surgical navigation, which includes our medical coil product line, continued to build off the strength of the second quarter as we ramped up production capacity to meet customer demand ahead of a planned commercial launch. Medical coil revenue in the third quarter was $2 million, up 31% year-over-year and 18% sequentially from the second quarter of 2021. Interventional catheters, developed and manufactured through our Emerald Medical Services business, experienced a lighter third quarter following a strong first half due in part to the COVID-related flare-up in Japan around the time of the Olympics, which partially limited operations. This portion of our business also experienced some supply chain-related constraints, but we are actively pursuing alternatives that will best enable us to continue to meet customer demand and timelines. Revenue from EMS in the third quarter totaled $3.4 million, a 22% year-over-year improvement, and an 18% decline over Q2 2021. We expect the continued international adoption of interventional catheters manufactured by EMS and further expansion opportunity with products pending FDA submission will lead to meaningful upside in 2022. In summary, we believe there is a significant potential for growth in these markets where our collaborative enterprise capabilities of complex catheters and microcoils are well-suited to drive innovation and differentiation. Turning to hearing health, in the third quarter, revenues declined approximately 14% to the prior year, largely due to timing of orders as year-to-date revenues in this market were up 21%. Supply chain impacts also contributed to the decline year over year, but we expect to recoup this revenue over the next few quarters. Last month, the FDA published the highly anticipated proposal to establish a new regulatory category for over-the-counter hearing aids. Intercon has been a major supporter to open this market as we believe it offers much needed broader public access to hearing aids at a significantly lower cost for the estimated 30 million Americans suffering from age-related hearing loss. Under the proposal, Americans 18 years or older with perceived mild to moderate hearing loss would have access to less expensive and significantly more accessible hearing aid alternatives, where previously they would be required to get a prescription from an audiologist, in addition to several visits for fitting, adjustments, and maintenance. There is a widespread bipartisan support for the proposal, and we are very optimistic for its approval. A longstanding priority for Intracon has been identifying securing partnerships with other participants in the market that can benefit from our hardware, firmware, software, and back-end support. we have never been better positioned to partner with a wide range of participants in this emerging market. As part of our preparation to support the OTC market, earlier this year, we commenced a clinical trial for our proprietary self-fitting software, and in September received notice that a summative usability validation had been completed, which allows a clinical trial of the software to progress. With this milestone, we remain on track to complete ahead of the anticipated FDA final ruling, enabling us to further advance our positioning in the ecosystem of care to support customer experience and success with OTC hearing aids. Our pilot program with Hurex continues to expand and has been met with widespread excitement. As the market moves towards an anticipated OTC option, encouragingly, We are seeing increased demand from Hurex for our hardware, firmware, and software technology. In parallel, we are driving opportunities with additional partners that see the value of our ecosystem of care as they enter the space. We have tremendous confidence in the potential of this new market, and we have done a great deal of work to position Intricon as the joint development and manufacturer of choice. As we enter the final quarter of the year, I believe we are better positioned than ever within the markets we serve. Customer demand remains high across all of our core markets. Our existing partnerships are secure, and we have a significant number of catalysts emerging that I'm confident will drive our growth in 2022 and beyond. In the short term, we do anticipate that the fractured supply chain and labor shortages which created inefficiencies that impacted our margins in the third quarter, will persist at least through the remainder of the year and may continue to constrain margin expansion in the short term as we enter 2022. That said, we are taking steps to minimize these challenges, including dual sourcing, increasing inventory levels, and customer price increases. We also believe over time we will reach greater direct labor efficiencies as newer employees are trained and gain line experience. In summary, I'm confident that these challenges to our supply chain and staffing are transitory. We are taking immediate action to mitigate the impact, and over time, as the macro environment stabilizes, we can achieve even greater operational efficiency, resulting in margin improvement. Importantly, continued high-level execution and consistent growth throughout an undoubtedly challenging time perfectly exemplifies the resilience of our business and the team we have assembled. With that, I'll now turn it over to Annaleigh. Annaleigh?