Dynatronics Corp (DYNT) 2010 Q3 法說會逐字稿

This is Kelvyn Cullimore, President and CEO of Dynatronics Corporation. We'd like to welcome you to our third quarter conference call today. (Operator Instructions). Let me begin with our formal statement. The purpose of today's conference call is to discuss financial results for the quarter ended March 31st, 2010. Before he 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. Today I plan to update you on Dynatronics' results for the quarter ended March 31st, 2010. Following my presentation, we'll open the call up for questions and answers.

So let me begin with some highlights and little discussion about the future of the Company. And then I'll be happy to take any questions that you might have. The third quarter of our fiscal year ended March 31st continued a string of consecutive profitable quarters.

This is the operator. How may I assist you?

Would you please isolate any background noise from any of the lines and force the mute on their line?

Yes, sir.

Sorry about that, folks. Let me get back to my call here. This quarter continues a quarter of -- this continues a string of six consecutive profitable quarters. Last time the Company was able to string together six consecutive profitable quarters was more than five years ago. We're very pleased that we are back into a profitable track and we'll talk a little bit about that today. That profitable track has been done notwithstanding the recessionary pressures that the general economy, both in the United States and literally worldwide, has been experiencing.

The highlights that I'd like to talk about, if you look at the performance of the Company over the last few quarters, you can see that we have been very diligent in focusing on reducing expenses. Over the last year, we've been able to cut more than $1 million in expenses, which has helped to make the contributions to the bottom line that we have achieved. During that time, sales have remained fairly flat, which in I suppose a recessionary period is an accomplishment in and of itself. But the third quarter represented a breakout for us. The quarter achieved about an 8% increase in sales quarter-over-quarter. That's the first indication, especially during the recessionary period, of an increase in the top line and we attribute that to a couple of factors. Number one, as we had announced over the last few months, we've signed on several new sales representatives in parts of the country. It's taken a while for that to ramp up but we are starting to see some fruits from those efforts. Equally, we are seeing an improvement in national account generation. We announced several national accounts that we were working with over the last few months, some that had named us as preferred vendors. We are starting to see some fruits from those contracts and those preferred vendor agreements as well. We believe there will be more to come on those, some of them have been a little slow in ramping up as we are working with the individual clinics to convert them over and so we are hoping to see a steady increase as a result of that in the future. But the 8% increase in sales was a very welcome breakout for us after several quarters of very flat sales in the past.

Our margins have been able to improve slightly during that same period of time, which is also a positive indicator. Sometimes you're able to generate top line improvement but that requires significant discounting or or kinds of sales at lower margin levels. The fact that we've been able to maintain our margins and improve them even slightly during this period of time is a positive indicator that we're achieving sales without having to go out and significantly discount or go to pricing levels that would affect those margins. And that's especially good, given the economic recession that we are facing. Probably the most important point to clarify for this particular quarter as you compare it to last quarter, first blush it appears that our profitability for this quarter, pretax profitability was about $50,000 lower than the third quarter last year.

And while that is true, it's important to understand that the elements that make up that differential. The key element of that differential was during the quarter last year the Company took a one-time expense reversal associated with the elimination of a retirement benefit for myself and Larry Beardall, another officer of the Company. Eliminating that retirement benefit resulted in a recognition of an expense reversal of $472,000. Absent that particular kind of an adjustment from operations, the Company would have shown about a $300,000 loss. Comparing those two for the quarter, this year and last year, that operationally a $0.5 million swing in operations for Dynatronics, comparing this quarter to same period last year. The reversal of that retirement expense was certainly a factor that helped us be profitable in that particular quarter and was part of the austerity program that the Company implemented in order to return the Company to profitability and we were certainly pleased to achieve that goal. But when you are looking and doing the comparisons between the two quarters, it's important to keep in mind that that quarter last year benefited from that one-time expense reversal. And so overall for the nine month period with that particular -- keeping that one-time adjustment in mind, it results in about a $1 million swing for the nine month period this year over last year. So we are pleased that operationally we've been able to make that kind of progress and feel that the -- although the net profit appears to be slightly lower this year than last year, last year had that one-time benefit of $472,000 that needs to be taken into account when doing the analysis.

The other thing that is probably worth mentioning is that we did file for a tax refund under the revised carry back rules and were able to achieve a $0.5 million tax refund, carrying back some of our losses to one more year prior and a year that we were fairly profitable and able to capture some of that tax money and use that to help reduce our line of credit and further capitalize the Company. So we feel that the progress of the Company has been consistent over the last several quarters, especially this year over last year, achieving some of the marks and goals that we were setting and feel that that trend is going to continue. There are some future focuses that we think will help us achieve that. Number one, we continue to focus our sales efforts on bigger sales objectives. National accounts, regional accounts, group purchasing organizations, those types of targets are the primary reason that we are seeing some of the growth that we are and believe that that would continue. We are also doing some work to add in tools for our sales force and for our customers that we believe will give us additional impetus and that includes an eCommerce solution that we've been talking about now for almost a year and is going into beta testing this week and should be ready to launch very soon. That eCommerce site will make it easier to do business with Dynatronics and will reduce our costs of transactions quite significantly. And we have programs in place to encourage customers to move their business over to that methodology.

We continue to focus also on new products. We've got several new products on the drawing board that are scheduled for the next year. Those new products we believe will give us added impetus for sales and profitability as we move forward. Continuing to look also at new sales representatives and dealers that can help us to further solidify our coverage both domestically and internationally. So with those kinds of focuses, we believe that we are positioned to continue the string of profitability and to now that we have direction increase our velocity in that regard and try and further improve the profitability of the Company in the coming year. That gives a brief overview of the performance for the three months and nine months and I will unmute the lines here and invite questions from anyone who would like to ask them at this time.

(Operator Instructions). Are there any questions for us today? I'm not hearing any. I'm hoping that we didn't have a general mute on the lines. We're going to check with the operator and make sure. If you're trying to ask a question and not getting through, hold on just a second. Are there any other -- are there any questions? I'm a little nervous because I'm not hearing any and I'm afraid that we may have a problem with our service here and having muted the lines. It appears we may have a problem with the lines. I know people can hear me but we're getting an indication that questions aren't able to be asked quickly here. So let us -- bear with us just a second while we try and get that corrected. In the meantime, if you would like to ask a question while we're trying to get this done, please write them down and if you have another line that you can go to, feel free to call me on my cell phone at 801-580-4523. I will repeat the question and try and answer it for you at that time. I'm hearing some background noise.

Yes, what were the net sales and the profit for the quarter?

Thank you. Maybe that means they got the phone fixed there. Net sales for the quarter were $8,235,000. That compared to last year's sales of $7,600,000. That brought our total sales year-to-date up to $25 million, compared to $24,350,000, compared to last year. Net profit for the quarter was $96,000, compared to last year net profit was $141,000. Of course, given the benefit that that quarter had of the $472,000 expense reversal, and year-to-date the nine months was $353,000, compared to $57,000 last year. So it's a significant increase for the nine month period, even given the benefit that the nine month period had last year. Any other questions?

What are some of the new things that you're looking to bring to market this year? Can you tell anything about that?

We are working on some new modalities that are part of the high profit margin segment of products that we manufacture and distribute in the electro therapy, ultrasound and traction device range. And so they are in that particular category. I'd prefer not to go into any more detail than that, but that's the arena that we're looking at.

How is the V force doing? Is that catching on and gaining any traction? Haven't heard much about that lately.

Yes, the V force has experienced very steady sales since its introduction. Certainly has not been a barn-burner, but it has been steady. We sell anywhere from five to 12 units a month and it continues to have a niche, primarily in two areas that we have been able to focus on. One is in the athletic training market, it seems to be a very significant interest there, and then in the geriatric treatment. It's also been very -- a very popular product in that area. So those are the two areas where we have found the most interest. General physical therapy, it has not been quite as popular. It's been those who focus on sports medicine and on geriatric populations. Any other questions?

Yes. Can you hear me?

I can. Were you having trouble getting through?

Not really.

Okay. Good. Thank you.

I'd like you to talk about the future and about what would we expect, would it be with April and May, a continuation of the 8% or do you have any greater growth expected?

We don't expect significantly more growth than the rate that we're seeing right now, unless we are successful in bringing on some fairly large clients. But even then, as we do that, we recognize that there is a ramp-up period for that. We think that the sales growth will be a slow build over the next year. And especially as recessionary pressures start to abate. We don't expect to see a sudden elimination of recessionary pressures. We think it's going to be gradual as most people have commented. But as that occurs, we think there will be a benefit to especially the capital equipment side. We've seen a fairly steady pace on the supplies and consumables. But on the capital equipment side, that's where the recessionary pressures are felt the greatest and we're starting to see that start to alleviate. We had several quarters where we saw -- I mean several months now where we've seen capital sales improve year-over-year, whereas prior to the end of calendar 2009, we were essentially seeing month over month declines in capital equipment sales. And so in this calendar year, that has turned around and so these -- the third quarter benefited from that. We're expecting to see some benefit from that in the fourth quarter.

Okay. Thank you. Congratulations.

Thank you. Any other questions?

Yes, I've got a question.

Thank you.

You guys' sales are reasonable. I mean, they're not setting the world on fire but they're not bad. Why can't you guys bring profits to the bottom line?

Well, our big --

better than what you are? Is there room to cut costs significantly from here? I mean, I thought you guys would have significant cost cutting when you had a consulting firm come in and do a study and basically I thought I've just expected more earnings out of you guys and I'm really disappointed that not -- quarter after quarter, not much comes to the bottom line.

Well, we're hoping to improve that. What we are seeing is --

How are you going to improve it?

Primarily through growing the top line. The expense line, and implementing things like our eCommerce solution, that was part of the goal with the consultants, that was one of the things that came out of that. We have reduced expenses by over $1 million as I mentioned earlier. A lot of the profitability we're seeing comes from that. And trying to improve the top line is really where the significant growth will come, because we've cut to a point now where I feel that we've got a core operation that can sustain higher levels of sales and that will bring more profitability to the bottom line. So it's all a matter of sales growth and we certainly have the potential to accomplish that. Probably have never been in a position where we had more potential for sales growth than we do right now. And that primarily stems from the acquisitions we did almost three years ago and building up that organization. Granted, it has been a much slower build and a more costly build than we anticipated. So your disappointment is understandable. But I believe that that -- what you have seen, if you look at the trend from where we have been to where we are now, we're hoping that if the economy cooperates just a little, and we're able to achieve some of our sales and marketing objectives, that we'll see a continued upward trend on that bottom line. Because --

Excuse me. Shouldn't you have some sort of plan for if the economy doesn't improve. Everybody can sit back and say, if the economy improves, if the economy improves. What if it doesn't? Do you have a way that you're going to whack out some costs so that you bring some increased profitability?

Yes, this is not -- our plan is not dependent on the economy improving. Everything we've done has been on the assumption that it will remain where it's at right now. So we believe that we will be able to achieve a significant improvement on the top line, just like we have in the third quarter. We'll see some of the benefits of the efforts we've been putting in, starting to come to fruition. It's slower than what we had hoped it would be but we believe that it will happen. If you look for instance at the operations for the third quarter, as I mentioned, if you exclude the one-time item from last year, there was $0.5 million improvement in this year over last year and $1 million in the nine month period. And a lot of that has to do with the cost cutting that we have already achieved. So I believe with the eCommerce solution, that will enable us to cut some additional costs. I believe we'll be able to move forward with a more aggressive model, a more efficient model for processing sales. I wish I could tell you that it's going to turn around immediately, that you'll see big numbers drop into the bottom line starting next quarter. But I think it will take a few more quarters to really get our feet under us and continue to move forward.

What is a reasonable expectation of percent of revenues for you guys to bring to the bottom line, provided you get your Company running like you would like to have it running or basically at an optimal level? Is it -- do you think it's possible for you guys to bring 2% to the bottom line? 5% to the bottom line? 7%?

If I didn't believe we could get to a 5% or better, then I wouldn't be doing my job. I think we have proven in the past that we can do that and I believe we'll be able to do that in the future.

Okay. Over what kind of time period?

Well, I wish I had that crystal ball. [ LAUGHTER ]

Well, I mean, hey, any business, it's basically a matter of adjusting expenses to the revenues you got coming in the door. And to make it operate profitably.

It's also a matter of building for -- we're not targeting a status quo. If we were just trying to say we don't expect it will ever get better than it is now, then I would be very disappointed. We have -- we really have high hopes and expectations it will get better and so we're building up in certain areas so that we can push those sales. If you just sit back and say it's going to be exactly what it is now and just cut your expenses and try and make it profitable and hunker down, then I think you missed too many opportunities. I think we will -- we have been very aggressive in cutting costs but there comes a point where if you cut it beyond a certain amount, you're not able to support the effort to go out and recruit new sales.

Don't get me wrong. I applaud you guys for the progress that you're showing. I just think you're going to have to do better in order to get your stock price to do anything significant.

That you and I both agree on. Our goal is to get out of this period of being at $1 a share and constantly battling with whether you're going to stay listed or not and push it up so that we're comfortably above the $2 mark and we recognize what kind of profitability as to be achieved to do that and that is certainly within our business plan to accomplish in the next fiscal year.

Okay. Thank you.

Appreciate the questions. They were good ones. Any other questions?

This is Jeff, in Argentina. I called in late so I apologize if the question is a duplication.

No problem, Jeff. Feel free to call back if you have any other specific questions. Go ahead.

Just following up on the last call, can you provide any more color on fiscal 2011 in terms of profitability expectations and your business plan? I'm sure you have something but I don't know if you can share a little more detail than what you just did.

It would be difficult to do that without divulging strategies that I think are proprietary. I have to be honest with you on that. Not all of our competitors are public companies. They don't share all those strategies so we certainly wouldn't want to undermine those efforts. We have both an aggressive plan and a not so aggressive plan. One that says if we hit certain marks then we should see significant improvement in top line and bottom line. If not, we've got to figure out how to bring that many to the bottom line and plan for the future. So I'm not in a position to give you much more detail than that but we're hoping that the progress we've seen, if you plot it out where we've been and where we're heading, we're hoping to maintain the slope of that line.

Okay. What about Q4, you're halfway through Q4, can you comment on sales trends there, if you haven't already?

What we find, just -- our pattern of sales within the Company shows that on a quarterly basis, the first quarter is -- I mean the first month of a quarter is usually slow and the third month of a quarter is usually very large. And we just seem to be in a pattern like that and not able to identify specifically why that always is, other than just sales patterns that have developed over time. But April came in pretty much where we expected it to be.

Okay.

And so we're hoping that if the trend continues, that we'll see that come June and hopefully be able to show an improvement over last year as we have the last six quarters.

Okay. Okay. One last question. R&D expenses, they continue to decline. Can you comment on that?

Yes. There's no way to bring out a brand-new products next year without see an increase in R&D expenditures. So we fully expect that there will be an increase on that line in fiscal 2011.

Okay. So you think this has bottomed out pretty much.

There's no question.

Okay.

Yes.

All right. Well, very good. Thank you.

You bet, Jeff. Thank you. Any other questions today? Again, we apologize for the problems with the phones. We hope that you were able to hear the full call and that you weren't too frustrated in trying to get in to ask any questions. We'll try and improve on that for our next call. And if you have anything further, feel free to call in and speak to us. We'll be happy to answer any further questions that you might have. Thank you for participating in the call today.