Dynatronics Corp (DYNT) 2010 Q1 法說會逐字稿

(Operator Instructions).

We would like to welcome everybody to the Dynatronic's conference call for the fiscal quarter ending September 30th. We are trying a new --

(Operator Instructions).

I am sorry for that brief delay. We are starting with a new conferencing service. We had complaints on our previous calls about the quality, and so we are switching to a new service. Hopefully it will be better this time. We will be muting all lines while I am doing my report. At the end of that, we will unmute the lines and ask people to individually mute their lines for the call.

(Operator Instructions).

We would like to welcome everybody to Dynatronics Corporation's first quarter fiscal year 2010 financial results conference call. The purpose of today's conference call is to discuss financial results for the quarter ended September 30, 2009. 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 date contained in the Company's most recent filings with the SEC, including its most recent annual report on Form 10-K.

Today I'm going to update you on Dynatronics results for the quarter ended September 30, 2009. Following my presentation, we will unmute all the lines and open the call up for questions and answers. Seems like we just spoke, since we just did our conference call about 45 days ago for our fiscal year-end. And so we're pleased to have you back joining us. We have some good news to report today, that we hope you will be pleased with. As reported in our press release that went out today, the first quarter operating results showed significant improvement over the same quarter last year. We actually generated about a 3.6% increase in top line revenue for the current quarter. While that is not an order of magnitude that we would like to see, given the current economic recession here in the United States and literally globally, we are very pleased to see an increase during that period over the last quarter. Sales of medical supplies and soft goods portion of our business increased as a percentage to 53% -- 53.4% for the quarter, compared to last year during the same quarter, it was 47.1%.

That shift was not unexpected primarily because we are seeing a continued soft market for the higher margin capital equipment -- that we are pleased to see that we are gaining market share even in a declining market on the supplies and catalog products. Despite the fact that we've seen a shift in margin, or shift in product sales to the lower margin supplies and catalog products, our margins for this quarter were actually very similar to last year's level. What decrease there was in gross margin as a percentage of sales in this quarter as compared to last year was fully attributable to the product mix in this quarter that favored the lower margin catalog products and supplies.

We do believe however, if history repeats itself, that every time we go through a recessionary period, what we see is a build up of demand for the capital equipment products. So we are hopeful as the general economic pressures are relieved over the coming year, that we will see higher sales of those kinds of capital equipment, both the aesthetic devices and the higher margin therapy devices. And try and fill, what we believe will be a pent-up demand as the economy starts to improve and credit markets start to improve. In the meantime, we will continue to pursue the sales of catalog and supplies to help fill any lost sales of capital equipment.

Our selling and general and administrative expenses for the current quarter did decrease by $264,000, and we also had a small reduction in R&D expenses. These cost cutting measures were attributable to the implementation about six months or more ago of some austerity measures associated with the [Vichy] contract that we implemented, the consulting group helped us to identify ways to improve efficiencies and reduce costs. And that is being more fully reflected in this quarter, compared to the same quarter last year Our pretax profit line improved by about $332,000 to $142,000 compared to the loss last year of almost $200,000. And net profit for the year was $68,000, which rounds up to about $0.01 a share, compared to a net loss of almost $144,000 in last year's first fiscal quarter.

It's good news to be starting off the new fiscal year with a profit. Typically the first quarter of our fiscal year is always a slow quarter. In fact, going back over our history, it was not uncommon for the first quarter to be a loss or break-even quarter, even prior to recessionary times. So we are pleased even in these difficult economic times to be showing a profit for the first quarter. Over the last two years as everyone is well aware, we've implemented some important strategies to expand our distribution. We could see changes taking place in our markets, and we took some aggressive steps to improve our position and protect our distribution channels. Those relate specifically to the acquisition of certain dealers two years ago. And subsequent to that, the addition of other direct sales reps to protect our distribution channels, as well as seeking relationships with other strong dealers within our network. We also implemented the aggressive cost-cutting measures that have been previously mentioned. And we're seeing some good improvement from all of those efforts combined. None of us anticipated the recessionary pressures that have materialized over the last year.

But the changes that were put in motion two years ago have positioned us well to weather that storm. And while those challenges from the general economic conditions certainly have had an impact on us, and have slowed our progress or made our progress a little more difficult than normal, we believe that as the economy begins to improve that we'll be in an even better position to take care of the strategies we've implemented. Some of those initiatives we've undertaken to drive sales, include the establishment of some new preferred vendor agreements. We announced not too long ago, the signing of an agreement with Western Rehabilitation Health Networks, which is a group of 114 clinics that could generate as much as additional $1 million dollars of sales annually. And we are poised to announce several other preferred vendor agreements very soon, that we believe will also help to drive sales. In addition, as previously mentioned, we've expanded our direct sales force the last couple of months by 25%. We've added some very experienced new sales reps because of consolidations that were taking place in our industry.

As we reported last month, one of our competitors was acquired by another competitor. And that freed up some personnel that we have taken advantage of hiring. And it has helped to fill some areas where we were weak in parts of the southeast. And we feel that it's going to bear some fruit for us in very short order, because these are experienced sales representatives with established relationships. We are also going to be launching our new eCommerce website this next month, giving birth to that particular initiative has not been painless. It has taken longer than anticipated, which most people probably understand. We still expect to launch that before the end of the calendar year. And this new system we expect will allow our sales representatives to be much more effective, by giving them easier access to quotes and to information. And it will also reduce our transactional costs, as we begin to migrate customers from the current method of calling in orders, to actually placing orders over the eCommerce side.

We did introduce last June, our new V-force unit. Of course, it is a capital piece of equipment, and demand for capital equipment is certainly muted. And -- but we do continue to sell that product from month-to-month, and it has added strength to our capital product lines and our profit margins. We still have other products in the R&D pipeline which were scheduled for introduction over the course of the next 12 months. And as I mentioned in our last conference call, we did talk about some of the changes taking place in our industry. One of our largest competitors, Chattanooga Group which is a subsidiary of DJO Incorporated, is making some significant changes of their own. They've closed down their main facility, or are in the process of closing down their main facility in Chattanooga, and transferring those functions to other plants that they own. We believe that is going to create some temporary opportunities for us, that we hope to be able to take advantage of. In addition, DJO sold off their catalog division, their Empi Catalog division to Patterson Medical, also known as Sammons Preston. And that change has opened up a lot of new accounts as well, that we are pursuing.

In addition, we're continuing to pursue opportunities with group purchasing organizations. These are large affiliations of hospitals, and chains of facilities that do their purchasing through a singular contract. We have never had access to those particular kinds of accounts in the past, primarily because we didn't offer a broad enough product line. And we now, being one of only two companies left in our industry, that has a broad product line along with a direct sales force, we believe positions us well to compete for some of that business. Now, those are large contracts that only come up every so often. We are bidding on one of them at the present time -- should know more information on that in the next 90 days. And we are working on an additional one for next spring. There are primarily six big GPO's that we work with, and they all come up about every three years. So it's important to be on the cycle, so that our bids can be properly submitted.

So with the efforts to pursue a new sales reps, new dealers, new customers, national accounts, GPOs, we have a very aggressive strategy laid out for increasing our sales, which we believe will also increase our bottom line. Primarily because we have also got the initiatives such as eCommerce to reduce our transactional costs. And we have been so aggressive in proving our efficiencies over the last year. So we believe we're well positioned to continue the current trend of profitability and enhance it. We're pleased that we're reporting our fourth consecutive quarter of profitability, since even given the current economic conditions.

Many people have asked what is happening with our stock, with our listing on NASDAQ. As you know, the delisting notice was sent to us. And we did file an -- for a hearing with NASDAQ to appeal that decision. They have granted us that hearing. We will be meeting with them on the 19th of November. We will know within 30 days if they're willing to grant us the 180-day extension that we are seeking. We have confidence that it will be granted. The pattern with NASDAQ has been to grant those requests, so long as the plan being presented seems reasonable. And we believe we do have that reasonable plan, and believe that if we can get that 180-day extension, we can preserve our listing on NASDAQ.

The future of the Company we believe is strong. We're confident about the strategies we have developed, and are putting into effect. And I believe that the coming quarters will bear that out. So that's the basic report at this time. I am -- I will unmute everyone's lines. In the process of that we would ask, that you mute your individual line. If you would press star 6, that will mute your line. And if you would like to ask questions, you should press pound 6 to unmute the line. We sometimes get background noise from people who are on the call, and out of respect for everybody who is on the call, we ask you mute your line by pressing star 6. And then if you would like to ask a question, you can unmute it by pressing pound 6.

(Operator Instructions).

We are open to take questions at this time. If you are having trouble -- I'm not hearing anyone. You need to press pound 6, if you muted your line. Questions from anybody on the call for me? If anybody is asking a question, I cannot hear you. You may have muted your line by pressing star 6. In order for me to hear you, you also need to press pound 6 to unmute your line.

Can you hear me?

I can hear you now.

Okay. This is Bob Jensen with Jensen Capital Management.

Hi, Bob.

I'm just curious, you guys -- (inaudible) Hello?

I'm here.

Okay. You guys are going to have your eCommerce up and running, I guess within a month?

That is certainly our expectation.

I'm wondering what the cost of that is. I'm getting a bunch of echo feedback here, that is making this a little difficult. I'm wondering what the cost of the eCommerce site is? And basically I would imagine some of those costs were incurred in your first quarter. Are there going to be additional costs for that coming in the second quarter?

We have been very fortunate in identifying a source to assist us with the establishing our eCommerce. The company that we bought our software system from, our basic accounting and enterprise software from, had a package for a -- for an eCommerce site. And so we are expecting that the eCommerce site will be less than $100,000 or certainly less than $130,000 to fully implement. Now --

Now have some of those costs been incurred already? Or are they coming in Q2.

No, those get capitalized and amortized. So those will be amortized over the three years after the website goes live.

Yes. Okay. Okay. Do you anticipate, you guys must have hired , what, roughly 10 new sales reps?

That's about correct. Yeah.

Do you anticipate that will be accretive to earnings from the get-go? Or is there a lag and do you expect the lag in having -- (inaudible).

We expect there will be a lag. That is a good question, Bob. We think that the second quarter, the quarter ending in December, will probably be a little slower in ramping up. But by third quarter we believe we'll start to see the more direct benefits, certainly by Q4 should see the full benefit.

Yes, okay. You guys -- just one other question here. You guys -- you guys are bringing in the first quarter you brought 8/10 of 1% to the bottom line, 8/10 of 1% of sales to the bottom line. When you guys get the benefits of all of the cost-cutting and everything, the full impact of all of that, basically when the company is running well, do you guys have a target as to what you would like to see as a percentage of revenues that you bring to the bottom line?

Let me give you--

What is the potential there?

Yes, let me give you an example, for instance, in this quarter just ended, on September 30th, we, of course, the consulting services we received from the [Vichy] group were not free. And so there was $100,000 expensed in this quarter of the services that they provided.

Okay.

That's not an ongoing expense. And there was $125,000 expense in Q4 for their services. So -- and there will be another $50,000 expense in the current quarter, and that will be the conclusion of that. And so the -- the long-term, our goal, is to be above 5% of sales on our -- on our profit margins.

So how long do you think to get there?

Well, if I had a crystal ball and could tell you what the national economy was going to do, I would be better able to answer that. That's the big unknown right now. If we were in the kind of economic conditions we were in two years ago, I would think that we should be able to get there within a year. But unfortunately not knowing what's going to happen with -- with health care reform issues help us? Will they hurt us? Will the economy bounce back sooner or later? Those are all of the issues, that I think are giving me pause.

Okay. One more question and I'm done. Do you guys expect further cost-cutting savings as we go into this new year?

Well--

Or is it pretty much behind you?

No, no, I think what you will see is the full realization of all of our cost-cutting moves, probably won't be realized until probably next spring. And the reason for that is, because some of the cost-cutting is centered around our eCommerce. Once we get the eCommerce launched we believe that there will be opportunities for some greater savings. And so those savings have not been realized, and won't be, until that site is launched, and we'll see those savings realized in Q3 and Q4.

Can you quantify the potential savings we could possibly see?

We are certainly hoping that those savings will be in the realm of $300,000 to $500,000 annually.

Okay.

That will be more difficult to ferret out, simply because if we achieve our sales growth along that same path, that will be masked a little bit, because what it will -- what it will be reflected at, is lower increases in SG&A in association with those type of sales.

Okay. Thank you.

All right . Anybody else have questions today? Somebody has got some background noise there. If you're not going to ask questions, can we ask you to please press pound 6 to mute your line. Anybody else have questions today? If you're trying to ask me a question, and I'm not hearing you, your line may be muted. Press pound 6. Well, Bob, sounds like you were the only one with questions today. We appreciate them. They were very good ones.

Great.

If anybody has follow-up questions that they would like to ask, feel free to call us directly, and we'll be happy to answer it. And we appreciate you being on the call today. One last request. Anybody have any last questions? I suppose when the news is better, the questions aren't as great. So thank you, very much, for being on the call, and we will have another call in 90 days. Thank you.

This call is no longer being recorded.