Dynatronics Corp (DYNT) 2010 Q4 法說會逐字稿

This is Kelvyn Cullimore, President and CEO of Dynatronics. Would like to welcome those of you who are on our conference call today, reporting the results of the fourth fiscal quarter and fiscal year-end ending June 30, 2010.

The purpose of the call today is to discuss the financial results for that period. Before we begin, as a reminder, during the course of the 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 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'll update you on Dynatronics' results for the fourth quarter and the year ended June 30. And then following my presentation, we'll open it up for questions and entertain as many as there may be. You should have in front of you or should have received the press release that was sent out today announcing the earnings for the quarter and for the fiscal year.

I'd like to start off first by addressing a few points from the fourth quarter and then we'll talk about the year in general.

As the numbers show for the fourth quarter, sales were fairly even with last year as was gross profit. The main differentials in the reporting quarter compared to last year had to do with our SG&A expenses, which were down over $100,000. That was offset somewhat by increased R&D expenses, but also supplemented by significantly improved interest expenses during the period that reflects lower interest rates and lower lines of credit, which I'll talk about -- line of credit balances that I'll talk about in a minute.

There was also probably some questions regarding the income tax provisions as shown. If you look at the net income before income taxes, you'll see that we increased from an operational perspective from about a $27,000 pretax profit to $87,000 pretax profit. It's, on a percentage basis, almost a triple and yet on a real basis, it's only about a $60,000 increase. We'll take every increase we can get.

The income tax provision, as noted, shows that last year, we had an income tax benefit even though we showed a profit. And so the differential in the net income does not look as great because of that factor. Two things led to that. Last year, we had to true-up our tax accruals, which had been over accrued during the past year or two years, and that resulted in a credit for that period.

The other thing that has happened is that during the current year, there was a decision to reclassify certain taxes that are paid to states that assess a tax that is not income-driven. Those are more business taxes; they're business activity taxes -- different ways that states are finding to tax corporations and businesses within their jurisdiction. And so we have moved those taxes up to operating expenses as opposed to an income tax, which is a more accurate reflection.

So the reclassification of those, along with the true-up last year, resulted in the differential on the tax line. So the more important number, perhaps, is the income before -- or before income taxes, which reflects the operational perspective.

Those are the highlights from the fourth quarter. We're pleased that that represents the seventh consecutive quarter that we have reported a profit. That is a stream that we have not achieved since the early part of the century. So we were pleased with the trend that is being developed there. Of course, we expect to improve the amount of profits that we hope to be generating in the future. And more importantly, the fact that we've been able to generate those profits during a very challenging economic time is also a good indicator of the progress we're making.

If you look at the year-ended results, the bottom-line on the year-end is that we're reporting about a 310% improvement on net profits over last year. The main components that contributed to that was about a 2% increase in sales. That helped to push margins up by about $0.25 million. We did see, during the course of the year, a resurgence in interest and capital equipment, which is a good thing. That is helping us to maintain sales of higher margin products.

In a down economy, we fully expect to see a soft demand for capital equipment and that was certainly the case in 2009; but we did see a return of demand towards the end of our fiscal 2010 year, which was certainly pleasing.

We have been able to reduce our SG&A expenses by a significant amount and the R&D expenses were also down over 2009. You'll note that on R&D expenses, even though they were down for the year, they were up in the fourth quarter. That is a reflection of an intentional plan on our part. We are working on some new products that will be introduced in the coming fiscal year. And so we do expect R&D expenses to ramp up more over the course of the next year, as reflected in the fourth quarter.

Also, the other expenses show a significant reduction. A lot of that has to do primarily with the reduction in the interest expense the Company is paying. Over the course of the last year and over the course of the fiscal year, we were able to reduce our borrowings on our line of credit by almost $2 million. That adds to a reduction from the peak borrowings that we achieved about 18 months ago, were down about $3.5 million from that point.

That reduced line of credit, of course, generates lower interest. In addition, we were able to renegotiate a mortgage that we had on one of our facilities and reduce our interest rate from approximately 9.1% to about 5.6%. So, those two factors have contributed significantly to reducing expenses as well. And we expect those reduction in expenses to continue.

So, as a result, we were able to report about a $0.03 share earnings for the year compared to $0.01 last year. And, of course, compared to the year before that was a significant loss. So the trajectory of the Company is on the right course; we just need to increase the velocity.

Probably an important factor to disclose is, even though our sales were only up about 2%, not only was that accomplished in a difficult economy, as you examine the metrics of that increase, what we see is in areas of the country where sales have declined because of more severe economic impact, areas like California or Michigan where the economy has been hit harder than in other parts of the country, unemployment is higher, we've seen declines in sales in those areas.

Over the last few years, those declines have been as much as 10%. And so we've been able to overcome not only the declines in those areas by -- but also by adding increased sales in other territories, adding new customers, et cetera.

As we have reported in press releases that we have sent out, the increase in sales is coming through some contracts we have with national accounts, where we've become a preferred provider. We've also increased the number of direct sales reps to 53 that are now selling in 40 states. And all of those things are combining to help drive the sales engine.

It would also be important to remind those on the call that last year, the net income before taxes of about $140,000 for the year, was achieved with a boost that occurred in the third quarter of that year, where in a retirement benefit for key executives of the Company was terminated and it generated about a $450,000 one-time gain. If that gain were taken away, that reduction expense were taken away, the loss would have been closer to a $300,000 loss for the year.

What that illustrates is, operationally, we improved by about $1 million over last year. And that's a significant accomplishment in the current environment, attributable to the increase in sales that I just talked about, and also the reduced expenses that we've been able to achieve.

One of the things that we are excited about and looking forward is we have launched, as of July, our first e-commerce solution and it has been extremely well-received. We believe, over time, that e-commerce solution will not only enable higher sales, but certainly enable us to service those sales at a much lower cost.

The goals that we set for our e-commerce conversion have been significantly exceeded. We had hoped in the first three months of operating that e-commerce site that we'd convert approximately 10% of our orders; we're now converting almost 25% of orders over to our e-commerce solution. And so that is an encouraging sign, probably an indication that we should have done this sooner. But we're certainly pleased to have that up and running, and certainly is a great tool for our sales reps and for our customers.

We continue to pursue opportunities with large national accounts. We have, in the past, never been a player in the group purchasing organization market. That has been the domain of others. But now that Dynatronics is one of only two companies in our industry that have a direct sales force on the ground, we are a much better competitor for that business. We weren't successful in our first couple of attempts, but those taught us a lot, and we are now working on two others that we hope will bear fruit. And we hope to have some announcements on those positively in the next 90 days.

We also, as I mentioned, are pursuing R&D. We know that R&D expenses will ramp up somewhat in the next year. We expect those increased costs to be offset by higher sales and better margins. But we do plan to introduce some significant new products towards the end of the next fiscal year. They've been in production now for well over a year, and it is anticipated that they'll be able to be released coming up in the next -- by the end of the next fiscal year.

So, generally, although the numbers we would like to -- we would like them to be larger than they are, and certainly, our goal is to increase the amount of profitability of the Company through driving higher sales. The accomplishments of the past year have been significant in the face of the difficult economy -- to grow sales by 2% overall; overcoming 10% losses in some territories and increasing by double digits in others; reducing our expenses; improving our cash position significantly; reducing our line of credit from where it was at its peak of well over $6 million to well under $3 million, creates not only headroom for operating capital but reduces our interest expense for the Company.

All of these things show that we are headed in the right direction. And as we are successful with some of our current plans of introducing new products; securing new national accounts; increasing our direct sales force; working with our dealers who are financially strong; and working towards improving our bottom-line, we believe that the next fiscal year will continue to show the trajectory that we have been on. And, hopefully, be able to result in higher profitability, thus justifying a higher stock price.

The final thing I would address before I take questions is we recognize that we -- or acknowledge that we have received another deficiency notice from NASDAQ relating to our failure to meet the minimum bid requirement of $1.00. We have until December -- late December to cure that deficiency. That is cured by the stock being -- trading at a minimum bid of $1.00 for 10 consecutive days approximately. If we don't achieve it by then, we will file an appeal, which should give us an additional six months or so to come up with a plan to correct that deficiency and maintain the listing on NASDAQ.

So with that, I will be happy to take questions that you may have, whether it's regarding the financial performance of the Company, any of our future plans, or if it has to do with the current NASDAQ deficiency situation, we'll be happy to address any of those.

If you would, we'll open the lines now and take your questions.

We can hear some background from some folks. If you've got TV on or radio or something on, we'd appreciate if you'd turn it down out of courtesy to the others on the call. Thank you.

Questions today? I know when the news is good, sometimes the questions aren't as -- or as great, but I'm sure some of you have a few things you'd like to ask, so please feel free.

Is there any consideration by the Board of possibly selling the Company or putting the Company up to maybe place it with a larger company? Because when you look at the history, it just seems like not really making tremendous progress. I mean, when you talk about 300% gains and everything, it's relatively meager when you really look at the dollar amounts. And the Company today is not where it was back in fiscal years ending 2003, 2004. And I recognize that the economy has a lot to do with that, but it would just seem to me that maybe Dynatronics would be best served -- the shareholders would be best served if the Company was placed with a larger entity.

Certainly, that is a strategy that others have considered. The current trajectory that we are on might argue in favor of a little more time before pursuing a strategy like that. I'm not aware that the Board is currently looking at that kind of strategy, because I think there are some things on the horizon that, if we achieve them, there may be interest created in a larger company looking at us. I think those are all strategic questions that are circumstantial that require a pretty good evaluation.

I think that the track that we are on right now -- I acknowledge your comment; you're absolutely right. The -- you always put your best foot forward. A 310% increase sounds better than just saying that we improved operations by $1 million. And we need to improve operations by $2 million or $3 million to get the stock price up and make it a better return to our shareholders.

So that's our goal. Whether the Board would consider entertaining a strategy such as you recommended, I'm not in a position to say. Obviously, anybody that makes overtures to us, the Board has an obligation to the shareholders to consider any kind of an overture, should they be made. And my experience says that the best time to get those is when you are performing well.

And, although, as you point out, our current performance, while certainly better than losing money, is still pedestrian, if the economy were to turn around a little bit and we're able to do well with some of the plans we have for this fiscal year, I think we would be able to get a better return for our shareholders, in a strategy like you talk about, a year from now or so than perhaps at the current time.

And could you elaborate a little more? Because I think the only way the Company will grow and not be in a stagnant position, as it has been, is with new products. Now can you elaborate a little about the type of new products you're trying to develop?

We'll have some announcements on one of the new products that we're going to be introducing in the next 60 days. It is a unique product that we think has some real potential, because it is a product that is a software-related product, not a hardware product.

So our costs -- there's nothing to inventory. And the sales, the selling point price is a recurring revenue stream for those who purchase the product. And so we feel that it has some real potential, but I'm just -- I'm probably two or three weeks away from being able to express that in more specific terms.

But we are confident that that product will do -- a very important -- will provide a very important tool for our sales representatives to go in and help clinics, because right now clinics are looking for ways to enhance their revenue. This tool will help them do that. And the amount that they pay per month for this service that we will be selling is very reasonable. And the profit -- or the profit multiples can be very significant. But we're still in the testing phase of this and the release probably isn't until November or December. And as that comes onboard, the potential for that is fairly significant.

It is a little bit of a departure in the fact that it is not a treatment device for the clinic, but what it does is it gives our sales reps an opportunities to help their clients improve their revenue. And that is something in this kind of an economy that would be, we believe, will be very attractive.

We're borrowing the concept from another discipline. And that discipline has been very successful with this same type of product. And so it has been modeled once with success and we believe that it can be successful in the disciplines that we service.

That's one thing. Towards the end of the fiscal year, we will be introducing some new products that are along the lines of the same types of products that we have done in the past -- electrotherapy, ultrasound, et cetera.

Oh, just one other thing. I noticed where Palomar announced that they're launching a home use laser by the spring of 2011. Is there products that Dynatronics can launch that would go directly to end consumers?

There -- we have not dabbled much in that side of the market. We have focused on the clinical side of the market. The requirements and regulatory issues are different when you go direct to consumer. It doesn't mean that we couldn't look at it, but just being perfectly honest, it has not been a focus for us. We have been focused primarily on clinical customers.

Okay. Thank you.

Other questions today? Those were good ones. Thank you. Last call.

Are there any analysts currently following the Company or providing public relations information to stimulate interest in the stock?

At the present time, we've got a few retail newsletters who follow us. As far as traditional market-makers or analysts that would follow us, our stock has never been -- our market cap has never been sufficiently large to warrant that kind of following. So we will get interest from small funds or newsletters from time to time, but at the present time, no, the answer is there are no significant analysts that are following us that I am aware of.

Okay, there are several market-makers that do trade your stock, however?

There are. I mean, we've been around for 20, 25 years and -- as a public company. And I think many of those market-makers have a real comfort level with our stability and they know that we are a pretty good bet. And so we'll see them come in and out of the stock, based on that familiarity. But the problem is we don't have the market cap that warrants assigning an analyst or having any kind of institutional type investors who come into our stock.

Okay, thank you. It sounds like you're on the right track.

Well, we're on the right track, but we've got to increase the velocity, as the previous caller mentioned -- previous questioner mentioned. We are -- if you look at the trajectory, it's certainly on a positive track, given the economy, but we have to increase that -- the magnitude of that increase to get the kind of return to our shareholders that we all expect. And being one of the largest shareholders of the Company, nobody is more motivated than current management to try and make that happen.

Okay. Thank you.

You bet. Any other questions?

Just one other question. With regard to sales overseas, what has been happening in that area?

That has always been an area of weakness for us. Overseas sales have never amounted to more than 10% of our sales. And currently, they're down in the 3% or 4%, maybe as high as 5% range.

The biggest challenge we have on international sales is, many of those markets, particularly in our discipline, have competition that have distribution lines tied up. So we continue to look for distribution lines because we have never had the financial model that warranted placing direct salespeople in those markets.

And so we have been dependent upon finding independent distributors who already service the market that we would be in. And we've had very little success in Europe, in particular. We do have success in South America, Central America, South Africa, and some Asian countries. And that's where the heart of our international sales tend to be.

We have not, other than England itself, I'm not aware of a significant sale to any European country in the last couple of years. So that is an area that we continue to look for an opportunity to improve, but are somewhat at the mercy of the distribution channels that exist there.

Thanks.

Any other questions?

I have a question. Why don't you post your -- or put your conference call on the Dynatronics website?

We do put it on the website. Following this call, it will be posted on the website.

It will be?

Yes.

Thank you.

The recording is -- we always do that. If you go to our website, you'll see that it has changed since we introduced our e-commerce solution. And so, when you go to the Dynatronics.com website, that's one of the first -- you're presented with our e-commerce tool. But what we don't do is we don't do a webcast of the call. But the recording will be posted on the website under the Investors section of the website following the call. And should -- the past ones should be on there as well.

So if you're having trouble finding it on the website or making it work, we'd really appreciate some feedback, because we assume that it works. But if you can't find it or it's not working, please call Bob Cardon, who's in charge of our Investor Relations for the Company.

Okay. Thank you very much.

You bet. I'm being told, for those who are interested, that it's under the Press Release section of the Investor section. So you have to go there to find the broadcast, so.

Any other questions today? Let me just say that we sincerely appreciate each of you taking your time to be on this call. As a small public company, we recognize that it is shareholders such as you, or those who are interested such as you, who help sustain our stock. And we sincerely appreciate your interest and welcome your calls or questions at any time. Feel free to call me or Bob Cardon, who oversees the Investor Relations for the Company.

Thank you very much for being on the call today, for your interest in the Company, and we reaffirm our commitment to trying to accelerate the progress that we have shown over the last couple of years and trying to get it up to a level where it is significant for all of our shareholders. So thanks for being on the call today.