Dynatronics Corp (DYNT) 2010 Q2 法說會逐字稿

We would like to welcome everybody to our call today. This is Kelvyn Cullimore, President and CEO of Dynatronics Corporation. The call today is to discuss the results of our fiscal year, the second quarter of our 2010 fiscal year. That's the quarter ending December 31, 2009.

Before we begin, as a reminder, during the course of this conference call we 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 from the results projected in such forward-looking statements. We caution you 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 10K. To that I'll update you on the Dynatronics results for the quarter ended December 31, 2009. After that we'll entertain questions. (Operator Instructions).

Thank you. We are pleased today to begin with the announcement that we received on Friday, a letter from NASDAQ indicating that we had cured the listing deficiency that we were under. Many of you are aware that for the past year or so, NASDAQ had been postponing enforcement of the dollar minimum bid rule, the SEC required that they begin doing that. As a result we received a letter indicating that due to our stock price trading below a $1 that we were, that we had a deficiency that had to be cured by April or we would face delisting.

Over the course of the last couple of weeks our stock did trade up over $1 for the required period of time and on Friday NASDAQ did issue us the formal indication that the deficiency as the dollar minimum bid had been cured and that the threat of delisting had been lifted. A press release will be going out later this week formally announcing the curing of that deficiency. Obviously we're quite pleased with that to be able to maintain our NASDAQ listing. We of course remain subject to those same rules and hope that the operating results we'll announced to and in future quarters will continue to sustain the stock at a level sufficient to maintain that, or to avoid that deficiency in the future.

Today, we're going to talk about some very positive operating results from the second fiscal quarter that ended December 31. Our net profit for the quarter tripled over last year. We jumped from a $54,000 profit last year to $188,000 profit this year. I believe that makes the fifth consecutive profitable quarter that we have had since we implemented the mergers some time back and reported some very large losses in fiscal 2008. The net profit for the six months also jumped from a loss of about $84,000 to a profit of $257,000. All indications that we are on the right path in implementing the strategies necessary to return the Company to stronger profitability. Sales for the six months were about even with last year with the first quarter of this fiscal year being a little bit higher than the prior year and this recently completed quarter just a little bit lower.

Generally speaking, sales have been able to be maintained during this period of time. We're somewhat pleased with that, given the economic realities that we are facing and many companies facing declining sales in this economic environment. We're pleased that we've been able to at least maintain sales during that difficult period of time; however we're looking forward to factors that we have implemented increasing sales in the coming quarters. Contributing factors to our profitability of this last quarter are as follows. We had a shift in sales mix that resulted in slightly higher margins.

Margins increased from 38% to 39%. What we saw was about a 10% increase in the sales of our manufactured capital products which have a much better margin on them. At the same time, we saw about an 8% decrease in the lower margin distributed products that we sell. We believe that the 10% increase in manufactured items could be attributable to a slightly improving economy but more likely, it is the result of new sales to national accounts we've been announcing of late. Those national accounts, many of them have already begun switching some of their capital purchase requirements to us, and we're not yet completely converted to them buying their supplies all from us. That is still in the works, so we believe it's not so much an improving economy as it is the fact that we have many new national accounts that have begun purchasing capital equipment from us.

This last quarter was the first quarter in the last six where we actually saw an increase in capital equipment sales quarter-over-quarter. Capital equipment is typically the first thing that becomes a casualty of a recessionary period and so to have that increase this quarter over last quarter as I said is a very positive sign, and is what is contributing to the higher margins that we are seeing. Of course, one of the biggest factors in achieving the profitability was the reduction in our SG&A expense. A little over a year ago, we began a specific project with the help of a consulting group to aggressively reduce costs and restructure some of our business.

In the quarter just ended, we were able to reduce expenses by about $127,000 and through the six months we've reduced expenses by about $400,000. In the second quarter, we did incur some additional expenses, about $75,000 related to costs of bringing on new sales personnel. There were some guaranteed Commissions in their start up period that were incurred. We believe that's an investment that will pay off as the salespeople begin to catch up to the Commissions that they are being awarded. We also had about $150,000 during the six-month period and earned Commissions to the consultants that helped us in the restructuring effort. That has been an important contribution to a long term savings plan that we have instituted but we did incur about $150,000 in Commissions related to that particular project. Those Commissions have now been fully paid and we will not see that continuing on in future quarters.

The R & D expenses were down slightly, $60,000 for the quarter and $100,000 over the six months. That's more a reflection of timing of R & D expenses as opposed to less of the focus on R & D. We are committed to new products that we are working on, many that are scheduled to be introduced in the coming 12 months. Of course the interest expense that the Company has been incurring has reduced as we have been successful in reducing our line of credit. A year ago our line our credit was about $6.2 million, and we reduced that as of the end of December to about $4.3 million and as of last week, we were down below $4 million on an outstanding balance on the line of credit.

All of that has contributed to about $20,000 a quarter in lower interest expenses, but more importantly has significantly improved available cash for operations. That reduction in the line of credit has been achieved not only through profitable operations but by better management of accounts receivable and inventory levels. The coming quarter is always one of our most challenging. The quarter ending in March typically is our worst quarter of operations during a fiscal year. Last year we reported an operational loss of about $250,000 for the quarter.

That was offset last year by a one-time gain of $470,000 that was related to the elimination of certain retirement benefits for myself and Larry Beardall, who is Executive Vice President of the Company. We believe that next quarter we will significantly improve on the operating results from last year, changing from a $250,000 operating loss to a modest profit for the quarter. Again it's typically our worst quarter of the year, but we have reason to believe that we've turned things around fairly significantly and with some of the improvements in sales and with national accounts, we believe that we'll see a significant improvement over last year.

For the rest of the year a couple of things that are pending that we think will impact our performance in a positive way, we've announced over the last couple of months the addition of several national accounts and preferred vendor agreements. While we have seen some benefit from those in the quarter ending in December, we believe that the majority of benefit from those has yet to be realized. Many of those preferred vendor agreements are still being worked out. The details of then as we go out and market to the various clinics, there are literally thousands of clinics associated with these agreements and getting them all online is going to take some extra effort, but we believe as they do start to come on line that will significantly help.

Also as I mentioned we did have some expense from start up costs related to new salespeople that we brought on last quarter. We believe that those reps are now starting to pay off. We'll see them catching up to the Commissions that are now being paid. We have over 50 direct reps that are out in the field representing the Company and we believe that those reps efforts will also help to strengthen sales and profits in the coming quarter. And quarters beyond.

We've also mentioned our eCommerce initiative, as happens with any significant initiative like that, it has taken longer and costs a little more to launch than we had anticipated but we remain extremely optimistic about the benefits of doing that, the reduction in our operating expenses will be significant as we move more business to an eCommerce solution. Our expectations for launching that eCommerce remain high for this quarter. We are hopeful that that will be accomplished, however we are committed to making sure that the technology is working properly before it is implemented.

We continue to pursue other national accounts and group purchasing organizations. We have mentioned in the past our pursuit of group purchasing organizations. These are, there are six large ones in the country that serve thousands of hospitals. They are unique to the hospital environment. We have not in the past been able to compete in that arena because of a lack of breadth of product but since the mergers that occurred a couple of years ago, we have been in a position to do so. We are working and have been in a position to do so. We are working on trying to obtain some of that business.

We're learning a lot in that process. We were unsuccessful in our first two attempts. We have a couple more this year that are available to us and we are more confident that we'll see some positive results from those efforts in the next 12 months. And we continue to focus on the sale of capital equipment, including our V-Force product.

Capital equipment remains the heart and soul of what we do. It is the area where we are the most profitable and we are confident that we have the best products. That combined with actions by some of our competitors of late that have made their products less available has opened opportunities for us that we plan to take advantage of in the next year. We believe we have the best capital equipment available to the fiscal marketplace and we'll make that a focal point of our efforts in the coming 12 months.

Overall, we're pleased that the strategic plans we implemented a couple years ago are now starting to bear fruit. It's put us in a position to be competitive on a much broader basis, to have better control of our distribution channels, and to put us in a position to take advantage of unique opportunities that have occurred within our marketplace. It was off to a rough start on those strategic plans. Those who have followed us for the last few years know that 2008 was a very very difficult year for us as we implemented those plans but we've survived that and now have reported five consecutive profitable quarters, and I believe that we are on track to continue that trend and to improve on it as we move forward. With that explanation, I'll remove the mute from the lines and if there are people who have questions, I'd be happy to entertain those questions at this time.

I'll be happy to take any questions at this time. (Operator Instructions). Any questions for me at this time?

Yes, I have one. Can you hear me?

I can hear you just fine.

Okay, this is Sally Wallick with Epic Financial, and I'm new to your Company so maybe you'll bear with me a little bit, but you mentioned several different kinds of accounts, national accounts, preferred vendor arrangements and group purchasing organizations. Can you just talk a little bit about the differences and importance of each of those different or maybe in fact maybe they overlap and if so, maybe you could help me with that too.

Yes, there is some overlapping. Let me try and clarify that for you. Let me start with GPOs. GPOs are group purchasing organizations that represent chains of hospitals. The hospital market has not been a market that we have ever had significant involvement with.

It has been primarily in the past the domain of one of our Chief competitors. They represent a different segment of the market than the national account, so when we talk about a GPO, we're talking primarily about chains of hospitals who do their purchasing through one of the group purchasing organizations. Many of those group purchasing organizations represent the same hospitals, in other words a hospital may belong to two or even three group purchasing organizations and so the fact that we were not successful in our first two does not mean that we can't gain access to many of them through another GPO.

National accounts, we refer to national accounts chains of primarily physical therapy clinics. Physical therapy clinics many years ago began to ban together into bigger regional and national chains and there are several of them, there's several hundred actually either regional or national groups that are affiliated and so we have begun to pursue those more aggressively and often when we talk about a preferred vendor arrangement, those are associated primarily with associations which are independent clinics that have banded together as an association versus a national account which may have centralized purchasing. So when we talk about a national account they typically have centralized purchasing, they may be a chain of clinics s of anywhere from 50 clinics up to 500 clinics, or even more.

The associations are typically two associations we've announced recently, PPP, and Well Works, each have over a thousand clinics associated with their operations, so when we talk about being a preferred vendor, they have identified us as their vendor of choice for the products that we are offering and so we now go out and market that to their affiliates and we have negotiated special pricing for their affiliates whereas with a national account, we negotiate a direct price and then there's more of a specific requirement where they do centralized purchasing of that.

Okay, and where do you think the greatest opportunity is for you over the next say two to three years?

Definitely the opportunities lie in the national accounts and GPO business. That's why we have shifted our focus there. There are still many, there's still thousands of individual independent clinics and we still service the athletic training market which is large institutions, universities, athletic teams, professional franchises and things of that nature but the biggest growth for us we believe will be in the national account and GPO arena.

Okay, great, and then one last question and I'll let someone else step in. You mentioned expanding the salesforce in the first half and the expenses related to that in the second quarter. Can you give us an idea of the size of the salesforce now versus say a year ago or the end of the last fiscal year, and also where does that go from here? Do you expect to continue to expand?

Yes. When we did the merger with the six dealers two and a half years ago, we brought on about 30 direct sales representatives at that point in time. We began adding other sales reps since that time and we are now at 51 direct sales reps, so we've come close to doubling the number of direct sales reps in the field since the merger two and a half years ago. That's significant but it also represents a significant in what is happening within our market. Right now, in years past, there were a lot of smaller manufacturers working through a dealer network and that's how most products got distributed in this market. That has now crumbled and it is translating or transitioning into direct sales organizations. We and one of our competitors now are the only ones who have a national coverage of direct sales representatives on the street and it gives us a distinct advantage because we believe those who have migrated to our camp are those who are the best capital equipment salesmen and understand the needs of the clinics best.

Okay, great. Thank you so much.

You're welcome. Other questions? I know we've got lots of people on the call. (Operator Instructions).

Any other questions today for me? I'm not hearing any other questions. I guess I'll make one last call, if there are any other questions for me. If not, certainly we would be happy to entertain any calls directly to myself or Bob Cardon, and would be happy to address those questions as they may arise. Last call for any other questions on today's call? Okay, if not, I guess when there's good news there's fewer questions.

We appreciate very much the support that we have been receiving. We recognize that while our efforts to turn the Company more profitable are critical and nothing would happen without the support of our shareholders which we have felt keenly in the past few weeks. We do appreciate that. Our goal is to provide basis for that support on an ongoing plan. We believe that we'll be able to do that and that the coming year will be even better, especially as the economy hopefully begins to unthaw just a little bit and demand returns to more normal levels.

We're confident that if we can accomplish what we have in this kind of an economic environment as the economy begins to improve that will only enhance the efforts that have been put in place, so we respect the support of our shareholders, we appreciate it, and thank you for being on the call today. Again if you have any other questions feel free to call us and we'll be sending out a Press Release this week announcing the curing of the listing deficiency from news dak. Thank you for being on the call.