Dynatronics Corporation (DYNT) on Q2 2021 Results - Earnings Call Transcript
Operator: Good morning, ladies and gentlemen, and welcome to the Dynatronics Second Quarter Financial Year 2021 Earnings Call. At this time, all participants have been placed on listen-only mode and the floor will be open for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Skyler Black. Sir, the floor is yours.
Skyler Black: 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.
John Krier: 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'll turn it over to Norm for the financial report. At the conclusion, we’ll have the operator open the phone lines for questions. First, I'd 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're 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 statements. 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 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. Breg is owned by Water Street Healthcare Partners, which is a private equity firm with an extensive track record of success in building great healthcare companies. At Breg and predecessor companies, I helped execute 13 successful acquisitions, growing Breg revenues significantly by building a compelling and sustainable business model.
Norm Roegner: Thanks, John. Please turn to Slide 7, which contains our quarterly financial highlights. The full income statement, and Management Discussion & 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% to $24.1 million for the six-months ended December 31, 2020, compared to net sales of $31.6 million for the six-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 six 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 six 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% 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 six months ended December 31, 2020, compared to $9.5 million for the six months ended December 31, 2019. These 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 six months ended December 31, 2020, compared to $39,000 for the six 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.
John Krier: Thank you, Norm. Turning to Slide 8, you’ll see a list of actions we've taken that we believe show we're on the right track to stability and then to grow. We broke these activities down into a few groups, as you can see on this 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 three years. This builds on our 20-plus year relationship with Intalere and we share this contract with the three industry leaders in bracing and support: 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 teams' execution capabilities, and our balance sheet, we're 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're continuing to pair 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.
Operator: Thank you. Ladies and gentlemen, the floor is now open for questions. . And the first question is coming in from Jeffrey Cohen. Jeffrey, your line is live. Please announce your affiliation and pose your question.
Jeffrey Cohen: Well, hi, John, Norm and Skyler, how are you?
John Krier: Good morning, Jeff. Great to hear your voice.
Jeffrey Cohen: So you've done some work on this 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, 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 two or three months? And what's your take on disruptions out there, where stabilization has occurred or will occur?
John Krier: 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.
Jeffrey Cohen: 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 add it on other products and lines which are more productive and driving that higher?
Norm Roegner: So, Jeffrey, good morning. How are you doing today? Thanks for the call. 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 a 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, and we're always looking for opportunities to improve the margins and new products as part of that, and 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.
Jeffrey Cohen: Okay, got it. And then lastly, could you talk about the M&A front, I know that John addressed some of the slides and where you're aspirationally looking for, but does it seem like out there that there's more activity going on and less activity or you continue to be as busy as you have on that front?
John Krier: Thanks, Jeff. 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 base 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.
Jeffrey Cohen: 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 the last two quarters, we should anticipate that that's a good level to think about as conditions are not changing much either direction?
John Krier: 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.
Jeffrey Cohen: Perfect, okay, that's it for me. Thanks for taking the questions.
John Krier: Thanks, Jeff.
Operator: Thank you. And the next question is coming from Scott Henry. Scott, your line is live. Please announce your affiliation and pose your question.
Scott Henry: Thank you. Good morning. Just a couple of questions that may just expand on a few of the prior questions. I guess, I'll start with gross margin, it was probably a couple years ago, but at one point, that 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, maybe lower, maybe 35% would be the long-term target? Thank you.
Norm Roegner: John, I don't know if you want to jump in on this one at this point. But what I would say 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, and we're looking at a lot of different options and doing a lot of different fronts. One on new product releases, obviously, we're looking there, we've got some work to do on our operations -- operating structure to improve our margins. And of course, we're looking at it from a commercial 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 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 Henry: Okay. Fair enough.
John Krier: 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.
Scott Henry: Okay, great, that's helpful. And there in the press release, it was mentioned there were two 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?
John Krier: Absolutely. And I think those two products are 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 two things to this. Those two tables are interesting in two fronts. While they're not going to materially, they're not material to revenue, they're both additive. The first one being our Hausmann treatment table was a combination of two 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.
Scott Henry: Okay. And I guess, a final question, I just want to -- I think about that that revenue growth coming through, 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 is 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?
Norm Roegner: From a -- I guess I'll start with the SG&A part. And at this point we've scaled, I think the operating costs 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 mostly our plan is to hold it there for the near-term. In terms of when do we start to see the growth in 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 this year at this point, and see where the final numbers land.
Scott Henry: Okay, great. And I guess just a final quick question, when should I expect to see the 10-Q filing, should that be today?
John Krier: Yes, Scott, that will be just later this morning.
Scott Henry: Okay, great. Thank you for taking the question.
Operator: Thank you. And the next question is coming from Anthony Vendetti. Anthony, your line is live. Please announce your affiliation and pose your question.
Anthony Vendetti: Thanks. Maxim Group. How you doing?
John Krier: Anthony thanks for joining in.
Anthony Vendetti: Hey, good. How are you doing? Hey Norm, hey John, hey Skyler. Just most of the questions 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 the -- 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? Thank you.
John Krier: Absolutely. I think, Anthony, if we look at the overall product mix, given the categories we serve, certainly our orthopedic bracing and support 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 in support line that we have, and in our therapeutic modality. So the nice, as we've added in individuals in our product marketing team and started to lean into this area, we'll now be able to build a cadence in a pipeline going forward that we can selectively release and look to use that to build our revenues.
Anthony Vendetti: Okay. And just on the COVID impact, has that had much impact in terms of the product mix, or not really?
John Krier: 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.
Operator: Thank you. And there were no other questions in the queue at this time.
John Krier: 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.
Operator: Thank you. Ladies and gentlemen, this does conclude today's conference call. You may disconnect your phone lines at this time. Have a wonderful day. Thank you for your participation.
