Dynatronics Corp (DYNT) 2021 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Dynatronics Second Quarter Financial Year 2021 Earnings Call. (Operator Instructions) It is now my pleasure to turn the floor over to your host, Skyler Black. Sir, 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.

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, who has been a leader here within our finance group since January 2018; and our Chief Financial Officer, Norm Roegner, who joined the company in November and was introduced on our last earnings conference call.

We issued a press release this morning announcing the financial results of our second quarter ended December 31, 2020, for fiscal year 2021. And on today's call, I have some prepared remarks to provide an update on our achievements in the quarter and overall positioning. And then I will turn it over to Norm for the financial report.

At the conclusion, we will have the operator open the phone lines for questions.

First, I would like to thank our employees, partners, customers and all stakeholders for their continued hard work and perseverance through the trying time of COVID-19. Health and safety for our team and partners remain top of mind, and we continue to do our best 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 have included a slide deck as part of our presentation, which is available on the webcast if you have registered for it. And if you have not, you can find it on our investor page at dynatronics.com.

Skyler reviewed the forward-looking statement, so let's go to Slide 3. I'd like to introduce myself and the executive team at Dynatronics to provide some color as to our collective resources and experience that we have brought to the company and our excitement at the significant changes underway. I've been CEO of the company since July 2020. Prior to joining Dynatronics, I was involved in the management of orthopedics-embracing 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.

Breg is owned by Water Street Healthcare Partners, which is a private equity firm with an extensive track record of success in building great health care companies. At Breg and predecessor companies, I helped execute 13 successful acquisitions, growing Breg revenues 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 that same focus in mind, and our industry fundamentals are very similar to Breg's.

Norm Roegner, who joined us 3 months ago, brings over 20 years of executive financial and operational leadership to Dynatronics. Most recently, Norm was Vice President of Finance for the medical pharma solutions division of Phillips-Medisize, a Molex company. During his extensive work at multiple Molex companies, Norm led financial execution across the commercial organization, supply chain and manufacturing operations.

It's well-known within the industry that Koch Industries, the parent company of Molex, has a culture that recognizes operating discipline. So welcome, Norm. We will hear from Norm in just a few minutes.

Moving to Slide 4, the markets that we are serving are large, growing and fragmented. There is an opportunity here for Dynatronics to build a scalable business, grow its customer and revenue base, generate sustainable cash flow so that we create value for our shareholders. The industry research indicates that the rehabilitation and bracing and support markets continue to exhibit an attractive growth profile.

As you can see on the slide, with both of these markets expected to grow in excess of 5% per year towards an estimated $6 billion in annual sales in 2025, from under $5 billion today. Drivers of this growth include aging population, higher levels of obesity and an increased focus on wellness, all of which are accelerating demand for rehabilitation support systems.

Also importantly, physicians and clinics continue to move towards a more conservative treatment style for injuries, and the proliferation of physical therapy facilities nationwide has been evident for the past decade, at least. It seems fair to expect that people are going to always want to live healthier and longer lives. Thus, there should be demand for our products, and we'll get to a market snapshot shortly.

Please turn to Slide 5. At the top of the slide, you can see initiatives important to our success in moving Dynatronics to a market valuation that reflects execution of our strategy and financial model. We have begun and will continue to take actions to accomplish these financial objectives for Dynatronics. It's important to acknowledge that the COVID pandemic continues to present serious business challenges, including disruption to our customers and the supply chain, which will continue to result in choppiness for the next several months.

I want to remind investors that historically, there has been some seasonality to our business in which our sales are often a little higher in the first quarter and the fourth quarter, and sales are a little lower in the second and third quarters.

Looking forward, we are planning for third quarter sales and gross margin to be in line with the quarter ended December 2020 due to the COVID environment we are operating in.

Similarly, we are planning for cash flow from operations to be negative in the third quarter due to seasonality, the negative impact from COVID and planned inventory increases as we adjust for the disruptions in the global supply chain.

We are targeting our return to positive cash flow from operations in the fourth quarter. Our team is accelerating our business optimization and product portfolio rationalization. I'm confident that our experienced transformation team is focused on the right strategies in growth markets to build a competitive and sustainable business and financial model with higher sales, margins and free cash flow.

Please turn to Slide 6 for the results we achieved in the second quarter. At a high level, before getting into the quarterly comparisons and what we achieved in the quarter, our team is committed to improving operating leverage and generating cash, continuing on our path to up-level the leadership team and maintaining the strongest balance sheet possible from which to grow our business.

The financial highlights include an operating cash flow for the quarter of $1.5 million which represents an increase of 34% compared to the prior quarter Q1 2021. We reported net sales of approximately $12 million, which was within 1% of what we had in the prior quarter. And from a transformation perspective, the fact that we were able to stabilize revenues in the COVID-19 environment was significant, considering the challenges described a moment ago.

On the expense side, we realized a 7% reduction in SG&A relative to the prior quarter, benefiting from matching staffing, facilities, inventory and procurement to customer demand, including reviewing our customer accounts and order activities.

We ended the quarter with 0 borrowings on the line of credit. And overall, we had net cash of $3.5 million, with a borrowing base of approximately $5.4 million on the $11 million asset-based line of credit.

I'd like to now turn the call over to Norm to go through the financial details that include a more traditional rundown of sales, gross margins, operating expenses and the bottom line.

Thanks, John. Please turn to Slide 7, which contains our quarterly financial highlights. The full income statement and management discussion and analysis can be found in the 10-Q, and I will summarize them here.

Net sales decreased $3.2 million or 21.2% to $12 million for the quarter ended December 31, 2020, compared to net sales of $15.2 million for the quarter ended December 31, 2019.

Net sales decreased $7.5 million or 23.7% and to $24.1 million for the 6 months ended December 31, 2020, compared to net sales of $31.6 million for the 6 months ended December 31, 2019.

The year-over-year decrease is primarily due to COVID-19 precautions and associated changes in elective procedures, which reduced demand for our products. We continue to have no significant customer concentration, and none of our customers accounted for more than 10% of sales in the quarter.

Gross profit for the quarter ended December 31, 2020, decreased $1.2 million or about 27.1% to $3.3 million or 27.9% of net sales. By comparison, gross profit for the quarter ended December 31, 2019, was $4.6 million or 30.2% of net sales. Gross profit for the 6 months ended December 31, 2020, decreased $2.5 million or about 25.6% to $7.2 million or 30.1% of net sales. By comparison, gross profit for the 6 months ended December 31, 2019, was $9.7 million or 30.8% of net sales.

The year-over-year decrease in gross profit and gross margin percentage was primarily attributable to lower sales and COVID impacts, which reduced gross profit, and changes in the mix of sales in our major product categories.

Selling, general and administrative expenses decreased $0.7 million or 14.7% and to $3.9 million for the quarter ended December 31, 2020, compared to $4.6 million for the quarter ended December 31, 2019. Selling expenses decreased $0.5 million compared to the prior year period, due primarily to lower commission expense on lower sales and decreased sales management salaries.

General and administrative expenses decreased $0.2 million compared to the prior year period, driven primarily by a decrease in payroll and benefit costs as a result of headcount reductions.

Selling, general and administrative expenses decreased $1.4 million or 14.2% to $8.2 million for the 6 months ended December 31, 2020, compared to $9.5 million for the 6 months ended December 31, 2019. Key reductions were attributable to the same factors as in the quarterly factors I just mentioned.

Getting to the bottom line, net loss was $0.7 million for the quarter ended December 31, 2020, compared to $0.1 million for the quarter ended December 31, 2019. Net loss was $1.1 million for the 6 months ended December 31, 2020, compared to $39,000 for the 6 months ended December 31, 2019. The higher net loss was attributable to a decrease in gross profit, partially offset by a decrease in SG&A and a decrease in interest expense as a result of lower average borrowings on our line of credit.

As John mentioned, the balance sheet is in better shape than it's been in 3 years with a net cash position. In our 10-Q, you'll see a Paycheck Protection Program, or PPP, loan of approximately $3.5 million on the balance sheet.

Based on our review of the loan forgiveness rules, we believe this amount will be forgiven in full, and thus, we are not including it in our net debt calculation. That net cash position was $3.5 million as of December 31, 2020.

Also worth mentioning is that as of February 1, I am pleased to say, we regained compliance with the NASDAQ minimum bid requirement of $1 per share. So if you didn't see it, we did file an 8-K on February 1, and we are in full compliance with the NASDAQ listing requirements.

This concludes our summary of operating results. I will now turn the call back to John.

Thank you, Norm. Turning to Slide 8, you will see a list of actions we've taken that we believe show we're on the right track to stability and then to growth. We broke these activities down into a few groups, as you can see on the slide, and I'll highlight a few of the actions.

New leadership hires, outside of stabilizing our revenue base and the safety of our employees, this has been a major focus area. Implementing partners and leadership cultural change, focusing our employee actions to overall organic revenue growth and consistent profitability. The Tennessee facility is now fully exited, listed for sale and being marketed through a broker.

Intalere Group Purchasing Organization, or Intalere GPO agreement, is extended for an additional 3 years. This builds on our 20-plus year relationship with Intalere, and we share this contract with the 3 industry leaders in bracing and supports, DJO, Breg and Ossur. Two new products recently announced, both Hausmann tables, reflecting opportunities for organic growth and margin expansion.

Turning to Slide 9, M&A strategy. Our M&A strategy is detailed here to give you an idea of what we will be looking for. We continue to have conversations with potential merger partners and to explore product opportunities that may exist. As we have strengthened our leadership team's execution capabilities and our balance sheet, we are positioned to be opportunistic as acquisitions may present.

Let's turn to Slide 10. Dynatronics is undergoing optimization, starting with an aggressive, experienced management team, seeking to build a competitive and sustainable business model. I'm confident that we have the strategy to grow revenues and the commitment to reenergize the customer experiences we deliver. At the same time, we are continuing to pare our cost structure to meet the market demands at attractive gross margins. Our employees are culturally aligned to see all of these metrics improve substantially, given some time. Dynatronics has well-respected brands which stand the test of time and a relevant product portfolio serving growth markets.

We are developing a culture focused on optimizing resources and applying disciplined financial models to investment decisions. We have generated cash flow from operations, and we have no debt other than the PPP loans. And our management incentive compensation is linked to revenue and EBITDA growth.

It takes commitment, talent and focus to build a great business. And as you'll see on Slide 11, we've accumulated some outstanding senior-level talent here, many coming to us within in-industry experience. We continue to benefit from our continuing association with Brian Baker, with whom I have worked closely before. Brian has C-suite experience at great companies like Integra and SeaSpine.

Our most recently announced hire was R.J. Smith, who is heading up our customer experience team. I have also worked with R.J. before. I knew R.J. is an excellent sales and marketing leader, and he was the recipient of numerous accolades in his nearly 10 years at Breg, including being named Breg Cultural Champion of the Year, which was an award given to outstanding contributors to achieving Breg's key results of organic revenue growth and EBITDA expansion. R.J.'s focus on results and collaborating with the other members of the leadership team make him the kind of leader we want at Dynatronics.

Our employees across all of our locations will continue to assess and adapt to the changing market conditions related to COVID-19 and react accordingly. We have demonstrated this ability over the past 3 quarters, resulting in a stabilization of our business, despite the significant disruptions to our end-user customers.

While we remain committed to taking steps to build from here throughout calendar 2021 and into fiscal year 2022, I want to maintain a cautious outlook. We are managing change, and we've got the added layer of COVID disruptions that are still out there, affecting our customers and the supply chain.

And given the ongoing disruption, it would be reasonable to expect some choppiness as we drive the company forward into a growth model. As a result, we will continue our recent practice of not providing forward-looking guidance. We appreciate and thank our investor base and employees for their ongoing support and commitment to Dynatronics.

I will now turn it over to the operator for questions.

(Operator Instructions) And the first question is coming in from Jeffrey Cohen.

So we've done some work on this end, and we're just trying to get your sense, generally speaking, on COVID's impact and COVID's effect on the markets which you serve, more specifically, rehab and prehab and PT, and what that looks like. It sounds like and feels like it's bottomed out. Are you seeing any signs of growth over the past 2 or 3 months?

What's your take on the disruptions out there? And where stabilization has occurred or will occur?

Yes. Thanks, Jeff. I would look at it like this, we're looking at the patient volumes largely stabilizing. I think you see that in our revenues in Q2 compared to Q1. One of the areas that's interesting for us is given the breadth of the markets we serve, the impact of that stabilization is a little bit different. So what's happening in athletic training, in schools, may be different than what's happening with physical therapy facilities, both private and the acute IDN locations versus ambulatory surgery centers. But I think largely, we would look at it as those volumes have stabilized, but there was certainly choppiness in Q2 with the spike of COVID activity, and we're looking forward to Q3.

Okay. Got it. And some commentary on the margin front. It feels like you continue to do some work there. Has that bottomed out for you? Have you discontinued lines that are unproductive and added on other products and lines which are more productive on driving that higher?

So Jeffrey, in terms of the margins, I mean you saw, obviously, margins dropped a bit from the sequential period, so from Q1, and that was really driven by favorable product mix that we saw in Q1 that didn't bleed into Q2.

So going forward, we think that the margins, at this point, for Q3 should be in line with the second quarter results. And in terms of products, I mean we're always looking for opportunities to improve the margins and new products as part of that. The releases with our Hausmann tables coming in, we'll see some improvement there. But generally, we're looking for Q3 to be in line with Q2 at this point.

Yes. Okay. Got it. And then lastly, could you talk about the M&A front? I know that John addressed some on the slides and what you're aspirationally looking for. But does it seem like out there that there's more activity going on? Or less activity? Or you continue to be as busy as you have been on that front?

Thanks, Jeff. I -- we do continue to be as busy as we have in the past, actively having conversations with merger partners, especially those that are complementary in the categories that we participate in. So we'll continue to do that. The nice part is, where we've landed the balance sheet with our cash position and the asset-based line of credit being available to us, that continues to be an opportunity for us. So we'll have that be an active part of our strategy ongoing and continuing.

Okay. Got it. And then lastly for me, I know you give nothing on forward-looking, but any commentary thus far on how the year has gone? It seems like from your revenues being relatively stable in the last 2 quarters, we should anticipate that, that's a good level to think about as conditions are not changing much either direction.

That's right, Jeff. We're planning for similar activity as what we had in Q2. The challenge that's out there is the choppiness and COVID impacts that come up and down with the different markets that we serve. But that is what we're building the business around and planning around.

And the next question is coming from Scott Henry.

Just a couple of questions that may just expand on a few of the prior questions. I guess for starters, gross margins, it was probably a couple of years ago. But at one point, the corporate goal was noted as about 40%. The question is, longer term, not just looking at this fiscal year, but as business comes back on speed, do you think those higher levels are still attainable? Or should we be thinking that the long-term number may be lower? Maybe 35% would be the long-term target?

John, I don't know if you want to jump in on this one at this point. But what I would say, and in general, we're looking at a history for Dynatronics, and they have been able to achieve that mid-30s for a margin perspective, and we're aiming to get back to that.

I think we have some work to do, obviously, to get there. We're looking at a lot of different options. And doing a lot on different fronts. One on new product releases, obviously, we're looking there. We've got some work to do in our operating structure to improve our margins. And of course, we're looking at it from a commercials perspective in terms of rationalizing products that just aren't in line with our overall margin perspective and expectations.

So there's a lot of work. I don't know if we've really set a long-term target, but knowing that Dynatronics historically has gotten into the mid-30s, I think that's a fair goal for us to get back to.

Scott, I'll build on what Norm said as well that industry participants in various categories have been able to achieve margins higher than ours. And so there's a reason that we need to be able to improve our operations and our business model to do that as well.

Okay. Great. That's helpful. And there -- in the press release, it was mentioned there were 2 new products in January. What sort of magnitude of revenue do you expect to be able to get from new product launches, not just those, but throughout the year? It seems like you're starting to kind of bring out a newer product cycle.

The question is, how impactful can that be on the bottom line? Or on the top line, I should say.

Absolutely. And I think those 2 products are a nice sign of us moving forward. Sarah Mealman joined us as our Director of Product Marketing towards the end of our fiscal year Q1, and this is a nice indication of that work starting to pay off.

I would add 2 things to this. Those 2 tables are interesting in 2 fronts. While they're not going to materially -- they're not material to revenue, they are both additive. The first one being our Hausmann treatment table, was a combination of 2 products from our former Tennessee facility and our New Jersey facility and the ability to bring it into one with the features of both, so we could then have an opportunity to expand our gross margin.

Similarly, the second table we released, the stand-in table was a product that we had traditionally sourced from another provider and sold in the marketplace, we were able to bring that design in-house, produce it in our New Jersey facility, grow revenues with it and expand our gross margin. So that is a sign of some of the work that we're looking for, and we do believe product launches and releases will be an important part of our future.

Okay. And I guess the final question, just when I think about that revenue growth coming through. Now we recognize it's not going to happen in fiscal third quarter and probably not fourth quarter as well. Would you expect 2022 fiscal year to be the time when we do see this revenue growth coming through, Assuming, obviously, COVID has kind of tailed at that point? And as well should the SG&A, should that stay down at these levels kind of pending that revenue growth uptick?

From a -- I guess I'll start with the SG&A part and -- at this point, we've scaled the operating cost and our SG&A to the level we're at. And we're planning to maintain it for the near-term until we see a change in that top line number. So we feel pretty comfortable where we're at. I think it will -- our plan is to hold it there for the near term.

In terms of when do we start to see the growth in the top line, I think we're aiming to start looking to see more growth in the second -- well, starting in 2022. But probably as we go through the year, we should see some momentum with our revenue. But we've got to get through this quarter, and it's -- and this year at this point and see where the final numbers land.

Okay. Great. And I guess just a final question, when should I expect to see the 10-Q filing? Should that be today?

Yes, Scott, that will be just later this morning.

And the next question is coming from Anthony Vendetti.

Maxim Group. Just a question on -- just -- most of the questions have been answered, but obviously, COVID has had an impact on the business. It sounds like things are stabilizing, which is great to hear. Has COVID impacted the product mix to some extent? And if so, in what way? And then glad to hear about the new Hausmann tables. Obviously, combining those into one provides gross margin opportunity. Can we just talk a little bit about other initiatives in the product pipeline that could do something similar? And if you can't get too specific, how many of those initiatives are in the pipeline at this point?

Absolutely. I think, Anthony, if we look at the overall product mix, given the categories we serve, certainly, our orthopedic bracing and supports has had a stronger mix compared to the rehabilitation equipment, if you look at it quarter-over-quarter. So that -- if you looked at that overall for the company, you're seeing that play out.

On the individual product pipeline or category opportunities, you're right, without being too specific, we have opportunities in each of our categories. I think the Hausmann tables shows an opportunity in the treatment equipment area. We've got opportunities in our orthopedic bracing and supports line that we have and in our therapeutic modality.

So the nice -- as we've added in individuals and our product marketing team and started to lean into this area, we'll now be able to build a cadence and a pipeline going forward that we can selectively release and look to use that to build our revenues.

Okay. And just on the COVID impact, has that had much impact in terms of the product mix? Or not really?

It has not for us. Our product mix of being the modalities and the capital equipment with Hausmann, that has stayed consistent. We've not participated in any meaningful way on the supply side of it other than our traditional supply business that supports our modalities or our treatment equipment.

And there were no other questions in queue at this time.

Thank you, Paul, and thank you for all the questions and for your interest in Dynatronics. If you have any further questions, please direct them to Skyler Black or Peter Seltzberg. Their contact information is in this presentation and on the press release issued earlier this morning.

Operator, you may end the call.

Thank you. Ladies and.

gentlemen, this does conclude today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.