Dynatronics Corp (DYNT) 2012 Q2 法說會逐字稿

Hello, this is Kelvyn Cullimore, Chief Executive Officer of Dynatronics Corporation. Want to wish everybody a happy Valentine's Day and appreciate you joining us on our conference call reporting the results of the quarter ended December 31, 2011 and the six month period ended December 31, 2011. Let me begin by reading the Safe Harbor statement. The purpose of the call, as I mentioned, is to review the financial results for the quarter ended December 31, 2011.

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-K.

Today, I'll update you on the Dynatronics' results for the second quarter, December 31, 2011. Following my comments, we've will open it up for questions and answers and the operator will give instructions on how to make those questions and we will do our best to give you our answers to them.

For the quarter, as reported in our press release, sales maintained the same pace as they did in the first quarter of this fiscal year, increasing at a rate of about 1% over the prior year. Gross profit margin also, for the quarter, increased at about 1.5%, increasing from 38.7% to 38.8% of sales. The increased sales and gross margin contributed to $43,000 more in gross profit for the quarter compared to the prior year.

That $43,000 additional gross profit, however, was offset by about $52,000 more in SG&A expense. The higher sales expense was the primary factor and that was related to additional personnel hired to pursue the GPO business, and higher sales commissions in the quarter due to direct retail sales comprising a higher percentage of overall sales than they did last year.

We also had increased depreciation and amortization due to capital investment to support e-commerce initiatives and strengthen the Company's IT infrastructure. The increased expenses were related to the e-commerce and IT-related costs, as well as increased sales expenses.

During the quarter, we were able to reduce our interest expense through better negotiated rates on our debt, as well as increase our income from finance charges assessed to customers. This resulted in a about a $24,000 improvement overall compared to last quarter. However, much of the increase in finance charge is about $14,000 was assessed that were assessed to customers represented one-time settlements during the quarter that aren't expected to repeat.

With the additional gross margin being more than offset by increased expenses and increased savings from interest expense and higher revenue from increased finance charges, net profit before taxes normally would have come in slightly better than last year. However, we are in the final stages of some significant new product development that resulted in R&D expenses increasing $56,000 during the quarter over the same quarter last year. I will discuss some of the R&D impacts more a little later.

The net profit before taxes for the quarter ending December 31 was $72,000, compared to $113,000 last year or a difference of about $41,000. The increased R&D expense more than accounted for this differential. Had R&D expenses been more normalized, pre-tax profits would have reached closer to $130,000 for the quarter. With the expected tax accruals, net profits for the quarter are reported at about $46,000, compared to $68,000 last year, leaving us just short of rounding to a full $0.01 per share.

For the six month period, keep in mind our first quarter was a difficult quarter, and so combining the two resulted in the six months being poorer performing than the prior year. Sales did continue throughout the six months at about the 1% pace improvement over last year, increasing to $16.272 million, or an increase of about $154,000, through the six-month period.

Most of this increase is a reflection of higher retail sales by our sales reps, which results also in slightly better margins, but also slightly higher sales commissions. Gross profit margin for the six months ended December 31 increased to 38.2%, compared to 38% for the same period last year, yielding about $94,000 more in gross profit for the six month period.

Reduction in interest expense and improvement in interest income improved performance by $40,000 during the six-month period. When you add that improvement to the improved gross profit, we generated about $134,000 in improvements in operations from those factors. However, those improvements were offset by the following factors. About $246,000 of increased SG&A expense, of which only $52,000 was reported in the second quarter and $194,000 was from the first quarter.

During that first quarter, as you recall, we had about $103,000 of increased sales expenses and the balance of it was increased labor and benefit expenses that were somewhat anomalous in that first quarter. R&D expense for the six months was up $63,000. $56,000 of that $63,000 increase was booked into the second quarter.

These two factors combined for overall increased expenses of $309,000, offset by the $134,000 in improvements I just mentioned for a differential during the six-month period of about $175,000. That $175,000 differential explains the difference between the $34,000 loss we are reporting through six months this year and the $143,000 profit achieved the year before. The increased experience during the quarter in the September 30, 2011 accounted for the majority of that difference and performance improved significantly during the second quarter. And, of course, R&D expenses for the six months accounted for the $63,000 of the differential.

We're somewhat pleased that the second quarter improved dramatically over the first quarter. Performance exclusive of R&D expenses, as measured by income before taxes, improved by about 15%. While we're certainly not satisfied with that increase, we believe it is indicative that we are moving in the right direction, we just need to improve the pace at which we are moving.

Let me talk a little bit about some of our strategic initiatives that we've got going on. The increased R&D expenses that we have experienced for the last couple of years have been related to new products that we will be introducing. To put it in prospective, R&D expenditures in fiscal year 2010 were about $915,000. In 2011, they jumped to $1.384 million and for the first six months of fiscal year 2012 they have been on an annualized pace of $1.415 million.

The current pace of R&D expenditures are $0.5 million higher than what we experienced in fiscal year 2010. We do expect the pace of R&D expenditures to continue somewhat through Q3 when we begin introducing some of the new products. That's the quarter that we're currently in that ends in March, and then begin to return to more normalized levels beginning in Q4. In fiscal year 2013, that begins in July of 2012, we expect R&D expenditures to be down approximately $400,000 from the current pace to around $1 million per year.

Calendar 2012 will see more new products introduced by Dynatronics than any other single year in our history. Most will be introduced in the first six months of the year. The first will be the Dynatron Quad 7. The Quad 7 is a combination device that delivers compression, heat and cold therapy, and electrical stimulation.

It competes with the popular device on the market that does cold and compression only and uses ice as the method for achieving the cooling process. In addition to the cold and compression that the competitive unit provides, we add the features of heat therapy and combination electro therapy.

More importantly, our unit will eliminate the mess of using ice to achieve temperature. We believe this unit will be an exciting new innovation in the market that should give our sales a boost as the unit is competitively priced with the competition and offering significantly better features and operating methods.

Following the Quad 7 will be the introduction of the Solaris Plus family of products. The Solaris Plus family of products will replace our existing Solaris line. It updates many features, as well as the aesthetics, makes the products much more user friendly, incorporates a mobile cart for easy use in the clinic, and takes virtually all of our technology and intellectual property developed over the last 20 years and consolidates it into a new family of devices. We expect that we'll significantly rekindle interest in these core products and give a boost to sales.

By late summer, or mid summer, we is expect to introduce a product called the Dynatron 1 which is a simple but exciting new ultrasound device developed in partnership with an overseas manufacturer. It incorporates some exciting new features and is well-priced and we believe will add some additional enthusiasm to the market.

The new product development that we have been working on for the last couple of years, the investment we've been making is on the verge of starting to bear fruit, with many of these new products being introduced over the next four to six months.

The GPO business, which we have been working on now for a couple of years, we continue to pursue the opportunities we have under the limited contracts that we have been awarded. As we have disclosed in our press release and our public filings, it is a much slower process than we anticipated. As a result, we've not experienced the sales growth that we had hoped.

Yet sales continue to increase. To put it in prospective, our GPO -- sales to GPO related accounts is up about 42% since last March, through the end of the reporting period, which is about a $700,000 annual pace for increase. That puts us around $1.7 million sales pace to the GPO accounts. We continue to score avenues for increasing our business with the GPOs.

We have people specifically assigned to work on that and as we have talked about in the past, we have been working with two new GPOs, two of the five large GPOs in the country, to secure contracts with them. One of them, one of the largest in the country, we've been working with since last September and the original information we received was that they would be making a decision on awarding a contract in December or January.

We're disappointed to be informed in January that they have postponed awarding a contract until June or July. We aren't sure why the delay is being implemented because all of the documentation has been submitted. We've responded to all the questions, but there appears to be some internal reasons why they're postponing a decision on the contracts, and so we're disappointed. Looks like we'll be waiting another five or six months to know what their decision is.

Likewise, the other GPO we're working with had been working with us on a new solicitation for bids that they had indicated they would be requesting by the end of January. When we did not receive that solicitation we contacted them and talked to them the first of February, and we're told that, again, due to some internal workings, they postponed the solicitation of bids to summer of 2012.

These postponements are certainly disappointing to us because we have been working hard for the last six months on lining up the potential for these contracts, but the work is now done and we just have to wait them out. In the meantime, we will continue to work on the existing contracts that we have and try to enhance the GPO business that is in front of us.

In addition, we continue to focus -- in addition to the GPOs, a sister effort is working with national accounts. The national accounts continue to be a focal point and seem to have a little more profitability in them than the GPO business, a little easier to navigate and certainly easier to access. We continue to work with new regional and national accounts as consolidation in our industry continues to gain momentum.

Some have asked whether we have abandoned our effort with the STREAM product, which, as you may recall, is a software as a service that we market. We are the exclusive marketer of that for the developer of that product to the physical therapy marketplace. We have not abandoned it, but have refined our model and are trying to fit it into a specific category by working with large national accounts to implement the program as a test program and, therefore, launching it into many more of their clinics.

That is our main focus with STREAM and we're working with two or three large national accounts with that now and should, over the next four months, have a much better feel as to their interest in implementing the program. That program, if implemented, certainly is beneficial to Dynatronics because we have no cost of maintaining that program. We simply receive a monthly commission related to the payments.

In addition, we've seen an increase in interest in international sales. The international sales have shown a slight increase over the last couple of quarters and for the first time in a long time, we are in negotiations with some distribution in Europe. That is a market we have never been successful in tapping and for the first time, we have a legitimate distributor that we believe has the potential of selling at least our manufactured capital products into that marketplace.

That will not be a quick type of an event and they are waiting for our new products to be introduced, as that seems to be creating the most interest on their part. We anticipate knowing more about that by the first part of fiscal year 2013.

During the last quarter, also, we received a notice from NASDAQ that there were -- our bid price had dropped below $1, therefore, we were deficient in meeting their listing requirements. We received that notice on about November 9. That means we have approximately one year from that date to cure the deficiency by our stock trading above $1 for ten days. We believe that will be achievable given the numerous positive things that we have on our horizon and are not terribly concerned about curing that deficiency.

In summary, right now the performance for the second quarter, again, exclusive of the R&D impact, was an improvement over last year by about 15%, certainly a big improvement over the first quarter. We are moving in the right direction in that regard. The new products that we have ready to be launched in the next four to six months are quite exciting and we believe will give a significant boost to our sales force and to our customers, generating significant new interest.

The reduction in R&D that is anticipated to begin manifesting itself significantly in the quarter ending in June should add to our bottom line for a 12-month period to the tune of about $400,000. The GPO business is still increasing, although not at the pace we would like. We still have the two other GPOs on the horizon. We'll be working with in the next six months to hopefully gain access to their customers, and continue to focus on national account business and increasing international sales.

While Q3, the current quarter that we're in ending in March, will probably still be dampened somewhat by R&D expense and continuing economic factors, we believe Q4, beginning in April, May and June of this year, will begin to show the benefits of the improved sales and lower expenses and think that fiscal year 2013, starting in July, will return us to significant profitability. With that information, that's the report I wanted to give on the call. I'll ask the operator now to open up the line for questions and we'll be happy to respond to any questions that you might have.

(Operator Instructions). Mary St. Mary.

You talked a fair amount about what your hopes are for new contracts, but can you tell me what the ramp up has been of your existing contracts?

Yes, I mentioned -- as I had mentioned in past calls, right now the contracts that we have are with Amerinet. We have a contract for capital equipment with Amerinet and we have contracts with some smaller GPOs on top of that are for capital equipment and supplies. As you measure that, most of those came online beginning in March of last year. The improvements have been basically a 10% improvement with Amerinet customers and about a 231% improvement with Premier customers. As I mentioned, that is an increase of around 42% and it's on annual pace of about $700,000 through of increased sales as a result of these contracts. It continues to build and so our total sales previously to these same types of customers have been about $1 million and we're running -- it was about $1.7 million last year and we're running about $700,000 better than that this year. And our hope, of course, is that continues to ramp up, but that's not a flat number.

(Operator Instructions). Bob Fairmont.

I would like to know, on a net income basis, what you project the benefit from the research reduction to be? On a per share base basis as well.

We're projecting that to be about $400,000 pre-tax and our tax rate runs around 38%, and so you would be looking at around $250,000, which is about a $0.02 share improvement.

I might mention, while we're waiting for anyone else to ask questions, we did participate in an investor conference in New York in January put on by Sidoti Research. It was a very interesting conference. We felt very good about the response that we received and the interest in the stock. We do know, for what it's worth, when our stock ran up last spring some of that was due to one or two investors who bought significant positions in the stock. We became aware when we were preparing our filings that one of those, who had acquired over 1 million shares of our stock, had sold out of that position in the last six months, which explains why perhaps there had been some pressure on the stock. The recent increase in the stock is hopefully not only related to that particular entity having sold their position and that pressure being gone, but also the expectation of what is coming with the new products and such, and we've explained all of that at these investor conferences as well.

Joseph Levee.

A question about your selling G&A. I know for the last few years, fiscal 2008 to 2010, it kept coming down and then it reached a low point last year when it was just under 32% of sales. For the first six months this year it's bounced back up to 33.1% of sales, which is better than 1% increase over last year, despite the fact that sales have been increasing. Is that going to come down in the future? That seems to be more of a stubborn obstacle than the R&D expenses, which are up around 0.5% over last year.

You're right. There is a challenge with that. We did make some investments in our sales efforts to try and address some of the GPO business and that is partly what is reflected there. The other part though is that we are seeing a shift to sales being more from our retail sales from our direct sales force. As you know, we sell product, both through a dealer network, which we sell wholesale, and we also sell products through our direct sales force on a retail basis. The retail sales generate more margin but they also generate more sales expense because of commissions associated with that.

What we have seen in that period is the majority of the increase in our selling expense is related to two factors. One is the ramp up with the GPOs and national accounts where we have more people out on the road trying to generate the sales. Number two, a shift to higher sales of our retail sales, which generates more sales commission and so those are the two main factors. I'm not seeing significant increases, for instance, in trade show expense or advertising or things of that nature. Those seem to be pretty well under control. The factors that are fluctuating are the sales commissions and the sales efforts with the national accounts and GPOs.

Because overall you're gross profit percentage has been really consistent for the last 2.5 years. It's like 33.3%. The range -- I'm sorry 38.2% to 38.4%. There's no big fluctuation there.

You would hope that we would see higher margins to offset some of those increased sales commissions and that is what we are working on.

I think you're going along in the right direction if you can close some of those other deals and with the new products, I think it should be exciting.

We're sure hoping. We're pushing every button we can.

I'm showing no further questions at this time.

Okay, well if there are no further questions we'll give you one more chance to weigh in, but as usual we invite calls to ask any questions you may have. Bob Cardon, our Director of Investor Relations, or myself would be happy to address your questions if you have some after the call. In the meantime, we wish you a very happy Valentine's Day and look forward to speaking to you again when we have the results of our third quarter around the first part of May. If there are no other questions. Operator, you see any other questions at this time?

I'm showing no other questions.

Okay, if not then we'll terminate the call for today. Thank you all for joining us.

And ladies and gentlemen, this will end the conference call. We thank you for your participation and ask you to please disconnect your line.