Dynatronics Corp (DYNT) 2009 Q2 法說會逐字稿

This is Kelvyn Cullimore. We are ready to begin the conference call for Dynatronics' report for the second quarter. Let me begin with a statement. The purpose of today's conference call is to discuss financial results for the quarter ended December 31, 2008.

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-KSB.

Today, I will update you on Dynatronics' results for the quarter ended December 31, 2008. When I am done with my presentation, will be happy to open the call to questions.

All right. Our report today is certainly a better report than we have had in the recent past. We have been able to make great progress towards the assimilation of the Company operations and are pleased to report the Company's return to profitability in the quarter ended December 31. That is a fairly significant accomplishment given the economic headwinds that we have been facing.

Specifically for the quarter, as you've probably all seen from the report, the pretax profit for the quarter was about $90,000 and that compared to a pretax loss last year for the same quarter of over $500,000. That is about a $611,000 improvement. The numbers for the net amount after-tax shows a profit of about $55,000 compared to a net loss last year of about $339,000.

More striking perhaps is the six-month performance. For the six months ended December 31, we have generated about a $1.5 million improvement on the pretax line compared to the first half of last fiscal year. The pretax loss for the six-month period was reduced to about $100,000 compared to the same period last year of about $1.630 million. On a net basis, the loss last year was $1.050 million compared to a net loss this year of only $84,000, which is about $0.01 a share.

So the sales -- obviously, sales and gross profits for the quarter and six months, as you can see from the numbers that were sent out, were basically even with the prior year periods. So the return to profitability has been based on our initiatives to reduce SG&A expenses and R&D expenses, which initiatives took place primarily in March and July of last year.

So we have been able to get the Company back to an operating equilibrium that shows profitability and given the current economic headwinds we are facing, we have engaged a consulting firm, Vici Capital Partners, to help us create a leaner, more profitable organization.

Part of that stems from our transformation from being solely a manufacturer to being a distributor of many additional products besides the ones that we manufacture and converting over from not just selling through dealers, but having direct salespeople in the field. We are approaching over 40 direct salespeople now in the field, covering up to about 30 states that we cover directly and the rest we still cover through our dealer networks.

The savings that have been generated have come primarily in the labor and operating costs for the quarter if you just compare the differences. About $326,000 was in labor and operating costs, $110,000 was in general and admin costs. A lot of that being legal fees and then we did reduce our selling expenses by about $75,000.

We have seen some great results from the introduction of our new catalog that went out just at the end of the last quarter and we have seen a sustained increase in catalog-related sales. We attribute that to the great effort of our salesforce, as well as having the new tools in their hands, primarily being the 500-page catalog.

We are pleased that we have that. Some have asked whether the acquisition of all of our dealers was strategically important. I believe the current environment is proving that that is the case. When you are facing difficult economies, typically you see declines in capital equipment sales and therefore, now that we have expanded our offering to a much broader line of products through our catalog, it makes us a little more recession-resistant and gives us a little broader base to work from. We also feel that the direct salesforce is coalescing very well and representing Dynatronics and getting our name out there and our products better known.

So we are very pleased with that progress and are expecting to see that continue. We have several programs in place moving forward where we are even working with dealers on special marketing promotions, a DynaClub promotion. DynaClub is a marketing concept we use with our direct reps, as well as our dealers, to expand sales of catalog-related products.

The Vici Capital effort is expected to help us not only reduce costs, but improved operational ways of improving margins. We are very excited about the work that is taking place there. Vici has come in and has been very cooperative and helped us identify significant items that we think could generate as much as $1 million in efficiencies over the coming year as we begin to implement those at the end of this quarter and the first of next quarter. So we feel very fortunate to have them working with us.

Some of you may know from past press releases that the head of Vici Capital is Mark Crockett. Mr. Crockett had joined our Board last year. In the course of his service on the Board, realized that they could help us more in operations and so he resigned from the Board and is fulfilling this consulting role. As a result of that change, in order to be compliant with NASDAQ requirements for having a majority of independent directors, Kelvyn Cullimore Sr., the Chairman Emeritus of the Company, also resigned from the Board so that we could maintain three independent directors and two officers on the Board and meet that requirement.

Relative to the stock itself, as you may be aware from past press releases, the Company did receive a delisting notice from NASDAQ. NASDAQ is now in a second extension of enforcing those rules. Right now, that does not become effective for us until the end of June and depending on how the economy continues, we believe NASDAQ may consider an even further extension of that based on their past history. So at the current point in time, our listing is still secure on NASDAQ and we do have some additional time, at least through the end of June, if not longer, to reclaim that -- meeting the listing requirements.

We also have renewed our line of credit with our bank and that line of credit has been extended to next October. They have worked with us very well. We are very pleased with our relationship with our bank.

So looking forward, we do know that, as every body recognizes, the economic headwinds are significant. We anticipate continued weakness in the sale of our capital equipment products, which is why we are focusing a lot of effort on the sales of our catalog-related items -- supplies and soft goods and things of that nature -- to try and help make up that difference.

We are continuing to expand our sales network. We anticipate, because of the reduction in capital sales, we will probably see some softening in margins in the next two quarters as capital equipment sales may be replaced somewhat by catalog equipment sales that are a little bit lower margin. Nevertheless, we are continuing to work on keeping those numbers as strong as possible and trimming the Company operation to match the sales and margin being generated.

We are continuing to work on some new products as well. We don't anticipate the release of a significant new product in the current quarter, but we are working on some new products -- one that could be released in the next couple of months and some that will be released at the first of the next fiscal year. And so the R&D effort continues and our focus on innovative products remains strong. So with that information, that is kind of the overview. I will entertain questions from those who are on the line.

Hello, this is Jeff from Buenos Aires, Argentina. How are you doing?

Great, Jeff. Kelvyn Sr. is going to be headed your way shortly.

Oh, okay. On a missionary purpose?

He is actually -- he is on a humanitarian trip for a week, but he is also going to be meeting with a dealer that we have down there.

Okay, very good. Well, congratulations on a profitable quarter. It is always nice to have, to be in the black. Can you be a little more specific on your projections for the current quarter as far as -- I mean you are halfway through it. Do you think you can maintain profitability this quarter?

We are targeting a breakeven for the quarter. We feel that, right now, it is very difficult to forecast even much more than a month. January was weak. We saw some weak capital equipment sales in January, but January has always been a weak month. So the question becomes how much rebound do we see in February and March? And so really we are -- the first half of the third quarter is always our weakest. The second half is our best part of the quarter. So right now, our forecast, our target is to break even for the third quarter.

Okay. All right. And are you comfortable in your balance sheet? I notice your line of credit has come up about $400,000 since the end of the fiscal year and I know inventories are up some. Cash is about the same. But are you comfortable with where you are in your balance sheet that you're not being overextended?

Well, the biggest problem with our balance sheet right now is the cycle of our inventories. We have certain items that we bring in from overseas. It just so happened that we brought in multiple containers all right in this period of time. That has pushed up our inventory levels. In addition, the increased sales in the second quarter, particularly of distributed items, required that we bump up our inventory levels to support that. And so we are watching the inventory very carefully because, based on our line of credit, we don't get as much borrowing base out of our inventory as we do our receivables and so we're watching that carefully.

We did see about a $700,000 increase in inventories from the end of June to the end of December and we don't -- if you look at our cycle, we are peaking right now and you will see us -- if you follow -- we are following the same cycle we did last year, which is inventories ran up and peaked right around the December/January timeframe and then they ran downhill to June, which is when they hit a low point. So we're following that same cycle so what we should see from now till the end of June is a continual decline in that inventory, thus an improvement in our cash position.

Okay, very good. And you are comfortable with your R&D expenses? I know you ratcheted those down lately. I mean that has helped you get to profitability. But I mean are you developing new products at the same pace you were or is that a bit more slowly because you've cut that back somewhat?

No, because we -- what we did is we stretched out the development process a little bit on some of the new products. One of the new products we're going to bring out is one that we have outsourced as opposed to doing it in-house. That one is the one that may come out in the next couple of months. The ones that are being introduced in the early part of the next fiscal year are ones that we have been working on since last July and working at a perhaps a more deliberate pace as opposed to an accelerated pace just to make sure that we keep profitability in line with where we need to be. So yes, we have reduced R&D expenses. The effect of that is probably to extend by a quarter or so the introduction of the new productline.

Okay. One last question. These perhaps $1 million efficiencies with the help of Vici Capital, do you think this is going to take place gradually, like, okay, maybe next quarter or first quarter of next fiscal year, we will see a little bit and just kind of ramp up or are we going to see $1 million hit at one time spread out over four quarters? What do you think about those?

I think it will ramp up pretty quickly. It is going to be one of those things where the changes will be implemented in our structuring and these are not major initiatives. What it is is we have gone through and tweaked virtually every process and said how do we do this more efficiently? How do we do this better? How do we increase our margins and revenues and what kinds of programs can you implement? Sometimes it is as simple as charging a fee for something our competitors are charging a fee on that we aren't charging a fee on. It may be a way of accelerating your receivables. It may be a re-financing of a particular facility that would yield lower interest rate or interest expense. It is a cumulative thing, but as they are all implemented, I think you will see the biggest benefit of that in the fourth quarter and first quarter of next year.

Okay. Very good. Well, good luck on the rest of the quarter. Thank you.

Well, along with everyone else, we are praying for the economy to rebound here.

All right, thanks.

You bet. Hey, Jeff, how is the recession affecting things in your hemisphere?

Things have definitely slowed down. The economy was running on full steam and inflation was running at 25%, 30%, so that has slowed down and with commodity prices going down, they rely upon exports a lot here -- beef and soybeans and so things have slowed down here. But Argentina is much more resilient as far as these kinds of things because they have been through so many cycles. They had 25% unemployment in '02 when they had their last crash.

I guess we ought to count our blessings, huh?

Yes, I mean this is no -- what they see now is this is just another cycle, happens every five years. So things are fine here. What part of the country is your father going to?

Buenos Aires.

Okay. So he's going to come here in the city. Okay. All right. Well, very good. Thanks again.

You bet, Jeff. Thank you. Other questions? Well, if there are no other questions, we will take that as a good sign that the news is good and people are pleased with the report. If you do have other questions that you would like to have specific answers to, we would be happy to entertain those directly. Feel free to call either myself or our Investor Relations Manager, Bob Cardon. We will be able to address those questions. So last call, any other questions that anyone would like to ask? All right. Thank you all for joining us today.