Dynatronics Corp (DYNT) 2008 Q2 法說會逐字稿

This is Kelvyn Cullimore. (OPERATOR INSTRUCTIONS).

Thank you. We'll go ahead and begin our call today. This is the Dynatronics Corporation second-quarter call for fiscal year 2008 for financial results for the period ending December 31st, 2007.

Before we begin, as a reminder, during the course of this conference call, management may make forward-looking statements regarding future events or the future financial performance of the Company. Those statements involve risks and uncertainties that could cause actual results to differ perhaps materially from the results projected in such forward-looking statements. We caution you that any such statements should be considered in conjunction with the disclosures, including specific risk factors and financial data contained in the Company's most recent filings with the SEC, including its most recent annual report on Form 10-K/SB.

Follow my comments, we will open it up for some questions and answers and go to there. Again, it sounds like we've still got some people on the line who haven't muted their phone. (OPERATOR INSTRUCTIONS). Thank you very much.

As we reported in the press release that was sent out today, we are pleased to have generated a strong 100% increase in revenues for the second quarter over the same quarter of the year before. This was ahead of our first-quarter revenue growth of 91%. Of course, the majority of this increase came as a result of the addition of our acquisitions of dealers that occurred on June 30 and July 2 of this year. That was a strategic move that was implemented and has proven to be very helpful.

I'm sorry. (OPERATOR INSTRUCTIONS).

In addition to the dealers that were acquired since that time, we have also been able to add several new direct sales reps in other territories around the country. And that has added on our ability to generate our sales.

Sales for the quarter ended December 31 were a record $8.9 million, just barely short of the $9 million mark compared to $4.4 million last year. Sales for the six months were $16.8 million compared to $8.6 million. The increase is important not just because of the increase of the second quarter over the same quarter last year, but also because we increased sales by $1 million in the second quarter over the first quarter, which was a promising outcome.

The gross profit for the Company and for the quarter increased by about 105% to $3.3 million as a result of the increased sales with margins hitting almost 38% compared to about 36.8% the prior year, and gross margin for the six-month period was about $6.3 million compared to $3.1 million.

What's significant about that particular factor is that those percentages also include factors that relate to inventory that was acquired from the dealers that they had previously acquired from us. That meant that our cost basis for a period of time in some of that inventory was higher than it will be going forward. And if those excess margins or excess costs were eliminated, our six-month average margin was around 40%. So we are confident going forward depending on product mix, that we should be in the 39 to 41% range on gross profit margin.

Of course, the selling, general and administrative expenses for the quarter increased significantly over the prior year, again, because of the new business model that we have adopted. We had about $4.3 million in increased expenses for the six-month period as well. Substantially all of the increase in SG&A expenses for the period were related to the recent acquisitions, and they break down into basically three categories. $2.2 million was higher selling expenses, primarily related to the new direct sales force, commissions and such; also, $1.2 million in higher labor and operating costs to support the higher sales volume; and about $1 million in higher general and administrative expenses associated with the acquired companies.

During the quarter, the transition items and other costs related to that, that we consider to be transitory in nature or possible to be eliminated as we complete our consolidation, there was about $203,000 in this reporting quarter that was related to personnel costs, such as overtime, severance, temporary personnel and other personnel costs.

With the assimilation of the six acquisitions now getting closer to completion, the management team has worked to identify additional cost savings. It's taken a while to get our arms around the new operation and to understand all of that particular intricacies of that operation, but we now believe that there's probably about $1.3 million in annualized costs that can be eliminated and those annual costs will be -- those eliminations will begin over the coming months, and we believe these reduction in expenses won't negatively affect operations and sales, but just reflect what we can do to better assimilate the companies and operate more efficiently.

R&D during the quarter remained comparable to last year, 363 compared to 346. And for the year, for the six months ended, we were at $700,000 compared to $800,000 -- $824,000 the prior year. We will be introducing a new synergy combination unit next month; it's scheduled for release around March 21. This is the first time we have revised this particular product line since about 1998, and we are very excited about the outcome. It is sure to boost sales of this particular line, a very high margin Aesthetic Product.

The AMS unit is the vacuum massage device that reduces cellulite and the MDA device is a microdermabrasion that takes care of fine lines and wrinkles through a microdermabrasion process on the face. And so we are very excited about the introduction of those new products next month, and as a result, we will probably see a little bit of an increase in R&D expenditures during this third quarter simply because of the unique costs that are incurred just prior to release of the new product.

Bottom line for the quarter, there was about a net loss of about $338,000 compared to last year, about a $43,000 loss. Net loss for the six months has been about $1,050,000 compared to 220 -- $218,000 the prior year.

As projected, we were able to cut our losses in half from the first quarter to the second quarter. That reflects some of the synergisms that are being obtained in the acquisition and assimilation of the dealers that were acquired. We believe that will continue on into the third quarter, and we will see additional synergies that are achieved, but the full assimilation probably won't be reflected until the fourth quarter, when we expect to return to profitability. We are pleased that the assimilation of the six companies has gone as well as it has. It's been a very challenging time for us. We have now virtually consolidated all the operations into three warehouses, down from what was previously eight, and this will help to streamline operations and help to save costs.

We have continued to expand not only our direct sales rep line, but we have added several new dealers in areas where the dealers are very strong and very capable of representing the line. And that is something that has occurred just in January and February, where we have added three new significant dealers that should give us significant boost to our sales efforts in regions of the country where we do not have a direct sales force.

And as we have stated before, we continue to look for ways to effectively increase our coverage of the country sales, either through the direct sales force or through dealers who have good coverage in those areas.

One thing that has occurred as a result of the acquisitions is we have seen accounts receivable increase. They've increased about $2.9 million since June 30. Some of that was expected as a result of the increased sales. Some of it is a result of some billing paradigms that we implemented early on that we are going to be discontinuing that delayed collection on some large orders until the order was totally completed. We have learned some things in the last six months about how to go about properly handling those billing practices and believe that we have that under control.

However, as of the end of December, there was probably $1 million in accounts receivable outstanding that were passed through as a result of those billing practices, and those are all being resolved during this third quarter.

We do not feel that there is any significant increase in or need for increase in our bad debt allowance. It was simply a billing practice that put us in a little bit of a hole. We are confident that our strategic plans to continue growing the Company are going to be effective. We do have some challenges in reducing overhead and some labor expense, but we have a plan in place to make some significant strides over the next six months in that area, as well as some exciting plans with the new introduction of AMS and MDA and the plans for our new catalog, which we anticipate will be out in the next three to four months, which will give us a significant boost in our sales and marketing effort.

So that kind of sums it up. I guess in summary, we've made the progress we had hoped to make from first quarter to second quarter by reducing the losses and working on the synergies of the acquisitions. We anticipate that continuing during the third quarter with a return to profitability anticipated in the fourth quarter. And so we, with sales continuing strong as they have, and margins improving, we are very confident about the future.

So with that, I would be happy to take any specific questions that people may have. (OPERATOR INSTRUCTIONS). And please if you need to go away from your phone, don't put us on hold. Some people have music on hold and that gives us all that background music.

Okay, I'll start. This is Jeff calling from Argentina, Bob's second-favorite country. A question. When I compare first quarter to second quarter and first quarter had a $1.1 million loss before acquisition costs before taxes. This quarter had a $0.5 million loss. Excuse me, let me back up. What I'm trying to say is when I compare quarter to quarter, excluding acquisition costs, first quarter was about a breakeven. A $1.1 million loss before tax and you are saying there's $1.1 million acquisition costs. This quarter, despite the fact that there is higher sales, your onetime costs or your acquisition costs were about $0.3 million, but your loss before tax was about 0.5. So excluding acquisitions costs, actually you lost about $200,000 more before tax quarter to quarter despite the higher sales. Can you comment on what's driving that?

Some of that is just the anticipation of what some of those assimilated costs will be going forward when I mention that we have identified the 1.2, $1.3 million cost reduction plan. We recognize that the biggest part of that in this quarter was the margins. If you look at margins, this quarter we only had about $114,000 in margin adjustments whereas last quarter, we had almost $400,000, about 330,000, $340,000 in margin adjustments. And so that -- those margin adjustments alone are the biggest factor.

And so in the first quarter, we had higher adjusted margins than we had in the second quarter, and that was primarily a result of product mix. And so we saw a lot of our increase in sales was in the area of products that we have lower margins on instead of the higher margins. So that whole thing is a margin adjustment that should split back next quarter as we bring those margins back up.

Okay. And what do you think about continuing to grow sales sequentially like you've done going forward? Do you think that's feasible to pass $9 million in the third quarter and continue to grow sequentially or we're going to level out at this level?

We do think that there will be an opportunity to grow. I don't know that we will see that growth in the third quarter. I think it's going to require -- because we only have the new AMS and MDA unit out for a few weeks of the quarter. And we will see some diminishment in sales of those products in anticipation of the new products coming out. And so we won't see the big bump from that till fourth quarter.

The new catalog will also provide a significant bump to sales, but that won't be till fourth quarter either. And so I don't anticipate a significant increase in the top line in the third quarter ending in March. We are anticipating an increase in the fourth quarter.

Okay. Thanks.

This is Jeremy calling from Ottawa. You talk about $1.3 million in potential cost reductions. And it relates primarily to your acquisitions last year, which occurred a good many months ago if I'm not mistaken.

Correct.

Eight months ago. You're not a large organization. I would like you to explain why it is taking so long for you to have identified these cost savings and do we go about the process of implementing on that.

Well, when you say that we are not a large company, I guess that's a relative term. We have doubled in size in the last six months; and the number of transactions in the business model has changed dramatically during that period of time. We have transformed from being a manufacturer with a few hundred distributors as customers, to being a manufacturer and a distributor with several thousand customers. And so the transaction volume has been significant and the type of business that we are running has changed dramatically. It has taken us a long time to rationalize that, to understand it and to be able to identify what we absolutely have to do and what we don't have to do.

So I guess if there's a criticism that it was that our goal was number one, not to lose a single customer during the transition. And so we probably went heavy on expenses than we needed to in order to make sure those customers were protected as opposed to trying to trim it sooner than we needed to.

So it was just a strategic decision to make sure that we had a good, solid base of understanding and policies and procedures in place so we could move forward.

Now, of the $1.3 million that we're talking about, not all of that is related to the transition, to the assimilation of the companies. There are other costs that we feel can be trimmed that need to be trimmed under our new paradigm that we feel had to be reevaluated that may relate back to pre merger days.

So we feel like overall, while it may have taken longer than some would have liked, we felt like that approach was necessary to make sure that we preserved the top line because in the end, without the sales, it didn't matter what our costs were because we needed those sales and margin to support the long-term operations.

Yes, but when you were doing your due diligence for the acquisitions, you must have made some plans, given you had the opportunity during that period of time to formulate a plan, that presumably could have resulted in an earlier elimination of these costs.

Yes, although our plan didn't call for that early of an elimination, our plan was a six-month plan. We are probably three months behind where we had hoped to be. But according to our plan, this is -- we're not terribly disappointed with where we are at. We feel that the plan to -- part of our original plan was a greater consolidation effort than we have subsequently done. We changed our plan midstream because we realized there were some critical components that would have been -- would have negatively affected operations had we executed every aspect of our original plan. I don't think that's unusual.

I think as you get in, you do your best on your due diligence and then when you get into the actual operations, you learn quite a bit. And we felt like we had to be flexible to that and change the paradigm that we're operating under, keep a warehouse in California, make sure that we were able to support our customer base and then look at how we could then move forward to achieve some of the rationalized costs.

Okay. One final question on a different vein. With regards to your normal course of stock acquisition, what have you actually done in that regard?

On the stock buyback?

Yes, that's right; with regards to the quarters that have been already reported on. And now that we're in Q3, have you done anything in Q3 in that regard as well?

We have an ongoing stock buyback program in place that is limited by SEC rules. We do what we can on a daily basis. The Board, as you are aware, authorized another $250,000 to that fund. And it is being applied almost on a daily basis, as the market permits.

Can you quantify what you have done so far year-to-date?

Year-to-date on the new 250,000, how much of that have we spent --

New and old. Just the total shares purchased.

Well, we've spent about $575,000 total in the program. And average acquisition price has probably been around $1.15 or $1.20. So probably around 0.5 million shares over the last two years.

Okay. What portion of that would be in the current fiscal year?

The portion in the current fiscal year, it's probably only been around 100,000, so probably 100,000 shares.

Okay.

At the most.

Thank you. Good luck.

(OPERATOR INSTRUCTIONS). Anyone else?

We appreciate getting the calls from Argentina and north of the border. If we have any U.S. citizens that would like to ask questions, we're happy to take those as well. We have more international shareholders it sounds like than we have international sales at the moment. That's another area we would like to work on.

I'm a U.S. citizen just living in Argentina, so I qualify for both.

Okay, great. Great. Well we appreciate it. We appreciate your following us. Any other questions?

Well, we appreciate your being on the call today. We are excited about our direction and we feel like moving forward there will be some exciting things to report on our next call and hope that you will hang in there with us. We are appreciative of your support. Thanks for being on the call today.