Dynatronics Corp (DYNT) 2021 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Dynatronics Fourth Quarter Fiscal Year 2021 Earnings Call. It is now my pleasure to turn the floor over to your host, Skyler Black, the company's Principal Accounting Officer. Skyler, the floor is yours.

Thank you, operator. Before we begin, let me remind you that during the course of this call, we will make forward-looking statements regarding our current expectations, plans, projections and financial performance relating to our business. These forward-looking statements reflect our view as of today only, and they involve risks and uncertainties that could cause actual results to differ materially from those discussed today. Important factors that could cause actual results to differ materially from those projected or implied by our forward-looking statements today are included in our most recent 10-K and other reports filed with the SEC, and include uncertainties and risks related to the impact of COVID-19 pandemic on the business results. We caution you not to place undue reliance on forward-looking statements we make this morning. We undertake no obligation to update or revise forward-looking statements.

We have included a slide deck as part of our presentation, which is available on the webcast if you have registered for it. If you have not, you can find it easily on our investor page at dynatronics.com. It's directly in the middle of our Investor Relations homepage.

Thank you, Skyler. Good morning, and thank you for participating in today's call. I'm John Krier, President and Chief Executive Officer of Dynatronics. And with me today are our Principal Accounting Officer, Skyler Black; and our Chief Financial Officer, Norm Roegner. On today's call, we will cover the highlights and achievements of the fourth quarter and full fiscal year 2021 and the recent progress of our execution on the transformational projects announced in April 2021. Norm will provide commentary on the financials, and then we will have the operator open the phone lines for questions.

First, I want to again thank our employees, partners, customers and all stakeholders for their hard work and perseverance during the COVID-19 continuing disruptions. Health and safety for our team and partners remain top of mind, and we work hard to preserve our business and protect our people here at Dynatronics. We are committed to responding responsibly to the challenges of the global pandemic.

We issued a press release this morning announcing the financial results of our fourth quarter and fiscal year 2021 ended June 30, 2021. We have been executing on an ongoing business transformation, while simultaneously dealing with a global pandemic that has impacted our business significantly. We have continued to experience a general increase of procedure and practice visit volumes at the facilities we serve, but we are closely monitoring for any potential disruption from the recent uptick in COVID-19 reported case volumes.

Skyler has reviewed the forward-looking statements on Slide 2 of the presentation. So let's go straight to Slide 3. You can see Norm's, Skyler's and my background on this slide. It provides some color as to our collective resources and the experience that we have brought to the company.

I've been CEO of the company since July 2020. Before joining Dynatronics, I was involved in the management of orthopedics and bracing companies for nearly 17 years. I started to get to know the Dynatronics team several years ago while working for Breg, a significant Dynatronics customer. At Breg and predecessor companies, I helped to execute 13 successful acquisitions, growing Breg revenue significantly by building a compelling and sustainable business model. We had industry-leading organic growth, and we had an unwavering commitment to customer experience with the mantra to make it remarkably easy for our customers to choose us. Our team at Dynatronics has the same focus in mind and our industry fundamentals are very similar to Breg.

Norm Roegner has been CFO of the company since November 2020. He brings over 20 years of executive financial and operational leadership to the company and was most recently Vice President of Finance for Phillips-Medisize, a Molex company backed by Koch Industries. Norm has brought operating discipline and planning talent to Dynatronics and led the team that develop the product optimization plan that we announced in April and substantially completed on schedule in June 2021.

Skyler is our Principal Accounting Officer and has provided his valuable expertise to the company since 2018, which helps him guide our historical perspective in this transformation.

Turning to Slide 4. While each of these bullets is very important to our sustainable growth platform, the first 4 items represent our focus in the first half of fiscal year '22 due to near-term opportunities in our markets. We have substantially completed the product portfolio optimization initiatives as planned. The completion of these important initiatives on schedule has allowed the management team and the entire Dynatronics organization to focus exclusively on becoming better partners for our customers.

I'm proud of our results and the great work of our team, not just in the fourth quarter, but over the past several quarters. These efforts have enabled Dynatronics to emerge into fiscal year '22 in a position of strength. Before I cover the specifics of our fourth quarter fiscal year '21, I want to provide context to the strategy driving the momentum we are generating.

Goal number one is to deliver commercial success. To allow us to accomplish this goal, the strategy is to: one, streamline rehabilitation sales exclusively to existing and new dealers, thereby eliminating perceived competition with customers from our historic direct sales efforts; and two, focus sales and marketing resources on products manufactured by Dynatronics. If we can accomplish these strategies, we will drive sales growth and better partner with our customers.

Goal number two is to expand margins and cash flow. As a company, we are going to focus on higher-margin, differentiated products that we manufacture. We expect that over time, these changes will deliver higher annual net sales, gross margin, operating income and cash flow from operations that enables sustainable long-term growth.

Goal number three is to strengthen the balance sheet via sustainable cash flow from operations, which can support additional investment in product development and/or M&A in target markets.

Goal number four is to build a consistent cadence of new product introductions across both of our growth markets: rehabilitation and bracing and support. By focusing our energy and resources on the products we manufacture, we are fostering an environment of consistent product portfolio innovation and product life cycle management. We have made targeted investments to build our leadership team and define our culture of accountability, allowing us to focus on our customers and execute on our near- and long-term growth strategies.

Looking to Slide 5, accomplishments and optimization plan results. Rather than go through this slide point by point, I'll discuss the continued feedback I'm hearing from our customers and dealers as we've discussed our new focus with them. Customers and dealers continue to tell us that this is a welcome change. By eliminating perceived conflict with our dealers and adding account managers dedicated to our most strategic call points, we have the opportunity to build our industry-leading brands and generate new sales. Early results continue to exceed our base-case expectations through the implementation of our growth strategy. We continue to add leadership talent with proven success both commercially and in business transformations in medical device markets.

In addition, we have continued to strengthen our balance sheet and are taking the necessary actions for a path to organic revenue growth. Q4 was another key milestone for our balance sheet with the closing of the sale of our Tennessee facility and PPP loan forgiveness by the SBA. We ended the quarter with cash on hand of approximately $6.1 million and 0 drawn on our asset-based line of credit. Our capital is adequate at this time to support our existing operations.

We eliminated over 1,600 SKUs of low-margin, third-party distributed products. These products were low or no growth, carried low or unacceptable margins and were not our own manufactured products. The rationalized products were at the lowest end of our margin profile. By eliminating these sales, it stands to reason our margins will migrate upwards over time.

Management focus on our brands will lead to additional support to our customers and product innovation opportunities so that we can provide excellent experiences consistently to our customers. As an example, our new Hausmann 3D PROTEAM Builder, which is a configurable product application with customization features directly on our website, has been very well received. Customers can add their logos, choose colors and further customize their configurations of our product offerings. Flexibility by listening and working with our customers is consistent with our mantra to make it easy for customers to choose us. We debuted this technology at the recent College Athletic Trainers Society meeting with excellent feedback from the largest dealers in the country.

Moving to Slide 6. The positive, meaningful customer and dealer demand for our new strategy both in Q4 fiscal year '21 and quarter-to-date in Q1 fiscal year '22 has provided us with the confidence to initiate net sales guidance for fiscal year '22. As a reminder, product sales in each quarter in fiscal year '22 will represent products we plan to continue to offer as the optimization initiatives announced on April 22, 2021, were substantially completed in fiscal year '21.

Net sales are on pace to achieve approximately $11.5 million to $12.0 million for Q1 fiscal year '22, which exceeds the $9.25 million quarterly continued product net sales baseline set in April 2021 and the $9.8 million continued product net sales achieved in Q4 fiscal year '21. We expect, assuming no significant adverse effect on procedure volume from the recent surge in COVID-19 activity, net sales in fiscal year '22 to be in the range of $40 million to $45 million.

We believe gross margins will migrate upwards over time from our recent results. The midpoint of this sales guidance represents 15% growth relative to the $37 million annual continued product net sales baseline set in April 2021. We expect the distribution of sales across the quarters to align with historical trends, which have tended to be a little higher in the first and fourth quarters, and lower in the second and third quarters. We will be monitoring and adjusting to any new seasonality that may emerge from ordering patterns in the rehabilitation market from transitioning exclusively to a dealer-based business model.

Excluding exit activities, gross margin would have been 28.0% of net sales in fiscal year '21. We are not providing gross margin guidance on the conference call today since we are still in the first quarter of our new gross margin profile. As a reminder, our optimization plan targets higher gross margin in fiscal year '22 relative to fiscal year '21, an improvement over time from recent years.

Absent significant impacts of the recent and continuing surge of COVID-19, we anticipate selling, general and administrative expenses of 30% to 35% of net sales in Q1 fiscal year '22. Operating leverage should continue as we grow sales. Absent significant impacts of the continuing surge of COVID-19 recent outbreaks, the company continues to plan and execute on delivering higher operating income and cash flow provided by operations in fiscal year '22 relative to fiscal year '21, excluding the notable other income events discussed in Q4. Other income in Q1 of fiscal year '22 is expected to include an approximate $0.6 million benefit from the employee retention credit.

We believe there continues to be opportunity to improve all of our financial metrics. This guidance is based on our current operations and is subject to the risk factors and other forward-looking statements and uncertainties contained in this presentation and in our filings with the SEC.

On to Slide 7. The markets that we serve are large, growing and fragmented. Dynatronics is building a scalable platform to grow its customer and revenue base and generate sustainable cash flow so that we create value for our shareholders. The industry research continues to indicate that the rehabilitation and bracing and support markets exhibit attractive growth profiles. Opportunities exist across Dynatronics primary brands to expand market share within existing customers as well as add product offerings within the segments in which we compete. As we are all likely experiencing or reading about the statistics of facility activity, orthopedic procedures and other peripheral activities like team sports that create demand for our products are volatile based on COVID-19 activity throughout the country.

Building on the foundation of the markets we serve, let's move to Slide 8. Our M&A strategy is detailed here to give you an idea of what we will be looking for. We continue to have conversations regarding possible acquisitions, innovation partnerships and other business ventures, and have the balance sheet and leadership team to execute on any that meet our well-defined criteria. This newly built leadership team, including Norm and me, have successfully acquired and integrated numerous target companies. Again, most recently, while at Breg and a predecessor company, we completed 13 successful acquisitions that enabled the commercial platform to be successful. I will now turn the call over to Norm.

Thanks, John. Please turn to Slide 9, which contains our quarterly financial highlights. The full income statement and management discussion and analysis can be found in the 10-K, and I will summarize them here.

Net sales were $12.2 million for the quarter ended June 30, 2021, compared to $8.1 million in last year's quarter. The full year-over-year increase is primarily due to an increase in overall procedures and activity compared to the prior year which was heavily impacted by the early fall out of the COVID-19 shutdowns. For the full fiscal year ended June 30, 2021, net sales were $47.8 million compared to $53.4 million in the prior fiscal year. The year-over-year decrease is primarily due to the continued impact of COVID-19 including reduced demand for our products, reduced capacity and operating hours, supply chain disruptions and extended handling times.

Gross profit for the 3 months ended June 30, 2021, increased $0.9 million to $2.3 million or 19.1% of net sales compared to $1.4 million or 17.4% of net sales in the same quarter of the prior year. The year-over-year increase in high -- gross margin and gross profit was primarily driven by increased sales partially offset by notable changes to cost of goods related to exit activities for discontinued products in the fourth quarter. Gross profit for the full fiscal year ended June 30, 2021, was $12.9 million or 27% of net sales compared to $15.1 million or 28.3% of net sales in the fourth quarter of fiscal year 2020. The year-over-year decrease in gross profit and gross margin was primarily attributable to lower sales and COVID-19 impact, which reduced gross profit and notable charges to cost of sales associated with exit activities for discontinued products. Excluding the $0.5 million of costs associated with exit activities included in cost of sales, gross profit for the quarter ended June 30, 2021, was $2.8 million or 23.1% of sales.

Selling, general and administrative expense were $4.6 million for the 3 months ended June 30, 2021, an increase of $0.9 million or $3.6 million in last year's period due primarily to an increase in headcount-related to revenue recovery and expenses incurred related to exit activities. For the full fiscal year, SG&A was down $1.5 million compared to the prior year due primarily to lower commission expenses and decreased sales costs on lower sales. Excluding the $0.5 million of costs associated with exit activities included in SG&A, SG&A for the quarter ended June 30, 2021, was $4.1 million.

Other income totaled $5.1 million for the 3 months ended June 30, 2021, an increase of $5.2 million from other expense of $0.1 million in last year's period. For the full fiscal year, other income was $5.8 million, an increase of $6.2 million from the prior fiscal year expense of $0.4 million. The increase in other income is due primarily to PPP loan forgiveness, a big gain on the sale from our former Tennessee manufacturing facility and the employee retention credit.

Net income was $2.9 million for the 3 months ended June 30, 2021, compared to a loss of $2.3 million in last year's same quarter. Net income was $2 million for the full fiscal year ended June 30, 2021, compared to a net loss of $3.4 million in the prior fiscal year.

We expect our outstanding shares to increase in the range of 200,000 per quarter, depending on our share price. As of September 23, 2021, the number of common shares outstanding was approximately 17.6 million.

The balance sheet is in a strong position with a net cash position at $6.1 million on June 30, 2021, which represents our highest cash position in recent years. We have 0 balance on our line of credit and a borrowing base of approximately $5.2 million as of September 2021.

Let's go to Slide 10. It is important to highlight the notable additions to other income included in the quarter ended June 30, 2021. They include PPP loan forgiveness by the SBA, benefit from the employee retention credit and a gain on the sale of our Tennessee facility. Excluding these 3 items, net loss would have been $2.3 million for the 3 months ended June 30, 2021, and $3.2 million for the full fiscal year ended June 30, 2021.

The optimization initiatives announced on April 22, 2021, were substantially completed by June 30, 2021, as planned. Therefore, we expect net sales for fiscal year 2022 to represent products remaining in our portfolio as of July 1, 2021. In April of 2021, we predicted approximately $1.2 million of exit-related expenses to support the optimization initiatives, of which $0.4 million was expected in cash expenditures. The final expenditures were actually less than anticipated with approximately $1 million in total exit expenses, of which $0.2 million is expected in cash. The split of expenses was approximately 50-50 between cost of sales and SG&A.

Before I turn the call back over to John, I will note the company continues to expect volatility due to the continuing challenges from COVID-19, including higher delivery and shipment costs, supply chain disruptions, extended handling times and delays or disruptions in procedure volume. Dynatronics also expect some continued volatility from the company's business optimization. This concludes our summary of the operating results. I will now turn the call back to John.

Thank you, Norm. Slide 11 shows the investment highlights for Dynatronics. Each statement is reflective of a set of actions designed to deliver results. Our clear focus is on driving organic revenue growth and cash flow from operations. We are well capitalized with approximately $6.1 million of cash on the balance sheet at the end of June and no debt.

Strategically, we have clarified our position in the market with our well-established brands and a leadership team focused on the future. We anticipate good progress in all of these key strategic areas in our fiscal year 2022. We are excited to be moving Dynatronics in a direction that will both reward our shareholders and provide a consistently differentiated experience to our customers. I will now turn it over for questions.

(Operator Instructions) We'll take our first question from Jeffrey Cohen with Ladenburg Thalmann.

So I guess I'll start with Norm. The other items, is that $0.9 million employee retention credit federal or state?

It is a federal charge.

Okay. And then along with that, the $0.8 million on the gain of a sale, so there was some mortgage on that because the sale price was higher than the $0.8 million?

No, there was no mortgage on that. We had fully paid that off.

Got it. Okay. And then it sounds like your stabilization is mostly complete. And could you talk about -- from this baseline level you're referring to, it looks like another $2.5 million on a quarterly basis on the top line upside. Is that coming from any place in particular, internal developments? Or less products or more products or are some products driving?

Yes, Jeff, I would say it's really being driven by 2 things. The first is the reaction to the clarification of our strategy has been strong and the account manager support of our dealers is showing the early results, and that's what we're feeling. Plus just we operate in these 2 markets that are growing on their mid-single digits on their own. And so that is the clarification in the revenue driver so far.

Okay. Got it. And any internal developments of sorts that you'd like to call out as far as areas of focus or what we may expect product-wise?

Yes. We're in the early stages of this consistent cadence of product innovation. The 2 tables we launched in January was a good start. We added the 3D PROTEAM configurator here in July, and we continue to have opportunities across our portfolio. So that is a cadence that we're looking to in the future quarters to be able to continually release.

Okay. Got it. And it looks like the readout is single-digit growth of $40 million to $45 million range for '22. That's above what you're calling out as a baseline. Is that right?

That's the way to look at it. We're looking at Q1 with the 15% over the baseline. Q1 usually represents one of our highest quarters based on our historical seasonality trends. So that's a great start to the year. When we came into the fiscal year, we booked $9.8 million of our -- what we believe is our continued portfolio in Q4. If we do achieve the market growth of the mid-single digits, that's about $10.3 million a quarter, that would land us in the midpoint of our range for the year at about $42.5 million. That's how we arrive at that guidance.

Yes. Okay. And Norm, you're stating on the share count approximately 800,000 share increase on an annual basis from the baseline you're at currently?

Yes. At the stock price right now, yes.

(Operator Instructions) We'll take our next question from Scott Henry with ROTH Capital.

Just a couple of questions. First, for clarification, I know you're not giving gross margin guidance, but if I interpreted it correctly, the implication is that it should be higher than 28% in fiscal year 2022. Did I interpret that correctly?

Yes. I would say you interpreted that correctly, Scott. I mean we did a lot of work on the optimization project and we expect the margins to migrate upwards. But...

Okay. That's helpful. I just wanted to make sure that was the baseline, that 28% that you were using. Next question, just when you think with SG&A 30% to 35% for 2022, would you expect to start seeing that decline post-2022 as you get a little more leverage into the new model? Is that what you would expect?

Scott, this is John. I think the way we're looking at that in the Q1 is that guidance is for Q1 of our fiscal year. And then we are planning to scale and have operating leverage over time as we evolve our revenue model. So I would use that range for Q1 and then we'll continue to work on it from there.

Okay. Great. And then from kind of a big picture revenue outlook, how should we think about -- there's a lot of noise in fiscal '21 and probably some noise in fiscal 2022. But when we think about the categories, orthopedic or physical therapy, how should we think about the organic growth in each of those categories?

I'll share with you the way that we look at it internally, Scott. We're fortunate to participate in these 2 markets that have natural tailwinds that grow in the mid-single digits. So as we're able to simply execute routinely and take advantage of those tailwinds, growing in the mid-single digits is the right answer. Then as we continue to execute our strategy, we can then take share, which is what allows us to grow at a rate that's faster than 5%. And those are the 2 points that we talk about internally and we work on to deliver growth in excess of what the market is naturally providing.

Okay. All right. That's helpful. And then with COVID and cost input inflation and supply chain interruptions, are you finding that you have any pricing power to perhaps up price to offset some of those input costs?

I think the way we're looking at it, Scott, is we -- certainly, where we can and it's appropriate, we will have to pass on the price like most organizations do. We also have a number of conversations about how to better partner with our customers where we can have them participating in more of our brands or more of our product portfolio, which helps us offset some of those price increases through share and through simplification with those customers. But price is definitely something we have to pursue to manage the supply chain disruptions.

Okay. Great. And I guess just the final question. Any comments that you would have on the current M&A environment and the ability to perhaps acquire new revenue streams? You've given all that's going on. How would you categorize that environment? Is it favorable or unfavorable or typical, I guess?

The way that we categorize it for us, Scott, is that it's very important to -- as a part of our strategy going forward, we need to drive organic revenue growth. We need to drive acquisitive growth. One nice part is that as we've been building this team, the ability to execute these exit initiatives in Q4 on schedule on time, we went from a standing start in mid-April to having it complete by January 30, was a good early demonstration of this leadership team's ability to execute. So as the right M&A opportunity comes along, we need to be able to take advantage of it and use this team to execute. So still very active in that space, and we look forward to continuing to grow in that way.

We'll take our next question from Anthony Vendetti with Maxim Group.

Just a follow-up on just -- yes, just a follow-up on a couple of points. On the acquisition front, just to piggyback up the last question there, the type of acquisitions that you're looking to make or the ones that are in the pipeline would be more bolt-on as opposed to transformational, correct?

That's correct in the early stages. I mean at this point, with where the balance sheet is and the ability for us to have the best leverage overall for the business, being at the lower end of our acquisition profile would be the near-term opportunity.

Okay. Great. And then on the gross margin side, the cadence that we should look at for fiscal year '22, as you said, migrate upward, but it should be incremental every quarter? Or is there any particular reason why it wouldn't move up throughout fiscal year '22?

So Anthony, it's a good question. It's tough for us to answer that right now. We're still trying to obviously navigate this COVID environment, are seeing some impacts from the supply chain disruptions from COVID. So it's difficult to say that it's going to migrate up. We're going to continue to expect that to happen over time. But right now, we're not giving any guidance or any forward-looking thoughts on that.

Okay. So that kind of brings me to the last question on COVID. So the reason -- the biggest input or variable that could have an impact on the gross margin in '22 would be continued supply chain disruption, right? Whether it's -- we hear about all the container ships that are off the coast of California that haven't been able to get in. So any type of supply chain disruption would be the main reason or variable that would potentially put a little pressure on the gross margin, right?

I think that's a fair way to describe that. And that's what we're focused on from a margin perspective primarily right now.

Okay. But from what I understand from my channel checks, in terms of the customer side, the physical therapy offices, the hospitals that do physical therapy, they have all figured out how to provide these services in a COVID environment, whether it's the original strand or the Delta variant or any other variant that comes along. They're up and running, and it's just a matter of how to work around it, but your customers are all up and running for the most part. Is that correct?

Anthony, this is John. That is generally correct for the most part. Of recent though with the activity, there has been other delays or deferrals of procedures, not nearly at the level we saw last year, but there have been more than we saw, say, at the beginning of our first quarter or at the end of our fourth quarter. So it is something we all have to continue to monitor closely. Your point is also correct though that as practitioners, they've really been aggressive in making sure that they can work around to the best extent possible, the disruptions.

And that is all the time that we have for questions today. Mr. Krier, do you have any closing comments you'd like to finish with?

Yes. Thank you, operator. Thank you all for your interest in Dynatronics. If you have any further questions, please direct them to Skyler Black or Jeff Christensen. Their contact information is in this presentation and in our press releases. Have a great day.

This does conclude today's teleconference. We thank you again for your participation. You may disconnect your lines at this time, and have a great day.