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Edited Transcript of DYNT earnings conference call or presentation 14-May-19 12:30pm GMT

Q3 2019 Dynatronics Corp Earnings Call

COTTONWOOD HEIGHTS May 20, 2019 (Thomson StreetEvents) -- Edited Transcript of Dynatronics Corp earnings conference call or presentation Tuesday, May 14, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christopher Richard Von Jako

Dynatronics Corporation - CEO & Director

* David A. Wirthlin

Dynatronics Corporation - CFO & Secretary

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Conference Call Participants

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* Anthony V. Vendetti

Maxim Group LLC, Research Division - Executive MD of Research & Senior Healthcare Analyst

* Jeffrey Scott Cohen

Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to your Dynatronics Third Quarter 2019 Earnings Conference Call. (Operator Instructions) At this time, it is my pleasure to turn the floor over to Mr. Christian Jako, Chief Executive Officer. Sir, the floor is yours.

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Christopher Richard Von Jako, Dynatronics Corporation - CEO & Director [2]

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Good morning and welcome to the Dynatronics investor call. I'm Chris Von Jako, Chief Executive Officer and with me on the line is David Wirthlin, our Chief Financial Officer. We issued a press release this morning announcing the financial results of our third fiscal quarter and 9 months ended March 31, 2019. Later this morning, we will file 10-Q for the quarter. Today, I'll provide brief commentary on our third quarter, and then I will turn it over to David to provide a detailed analysis of our financial performance. I will follow this up by providing update of our fiscal 2019 financial guidance. At the conclusion of our commentary, we will have the operator open the phone lines for questions.

Before we begin let me remind you that during the course of this call we will be making 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 our 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. I 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.

Our sales for the third quarter of fiscal 2019 are in line with the guidance provided last quarter. We continued to focus on building our restorative products platform for long-term success. We are focused on first driving operating cash flow and profitability. And second, scaling the business for growth, both organically and through acquisition.

Actions that we have taken to drive profitability have increased our operating cash flow despite the recent decline in revenue. We will continue to take actions to eliminate unproductive activities, reduce overhead burden and generate synergies within the business. We believe these changes are positioning us well for better performance in the long term.

To scale the business, we continue to implement operational best practices. We have driven process improvements in our Utah and Tennessee sites and have recently started that same process at our New Jersey site. For example, in Utah and Tennessee, we restructured the site leadership, reduced overhead and empowered the team to drive productivity improvements within the business. Some of the improvements we have made include the product specialization we have previously discussed, an improved standard costing system and a new process for demonstration evaluation of inventory. All of this has enabled us to get more work done with fewer resources. We believe these efforts are positioning us well for the future.

Before I turn the time over to David, I want to reemphasize the unique opportunity we have to become the recognized standards in restorative solutions. As we continue to build the platform, we will be able to leverage our reputation for strong brands that are differentiated for their quality, on-time delivery and excellent customer service. Going forward, we plan to leverage these strengths across all of our sites more consistently and aggressively. This will help reduce cost and position us to drive growth across the business.

David will now provide a financial report.

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David A. Wirthlin, Dynatronics Corporation - CFO & Secretary [3]

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Thanks, Chris. I will now provide a financial report on the quarter and 9 months ended March 31, 2019. Dynatronics closed the acquisition of Bird & Cronin in the beginning of our second quarter of fiscal year 2018, therefore, Bird & Cronin's operating results are included in the full 9 months ended March 31, 2019 but are included in only 6 of the 9 months in the same period of the prior year.

Net sales for the quarter ended March 31, 2019 decreased $2 million or 12.5% to $14.6 million compared to $16.6 million in the same quarter of the prior year. The decrease was primarily due to $1.7 million reduction in sales of physical therapy and rehabilitation products due to product rationalization initiatives implemented at the first of the fiscal year, transitions in our sales force and lower sales primarily in our targeted direct selling effort.

Net sales for the 9 months ended March 31, 2019 decreased $456,000 or 1% to $47.1 million compared to $47.5 million in the same period of the prior year. The change in sales included a $5.8 million increase attributable to the addition of Bird & Cronin offset primarily by a $5.9 million decrease in sales of physical therapy and rehabilitation products for the first 9 months of the fiscal year driven by product rationalization initiatives implemented at the 1st of the fiscal year, transitions in our sales force and lower sales primarily in our targeted direct settling effort.

Gross profit for the quarter ended March 31, 2019 decreased $887,000 or 16.8% to $4.4 million representing 30.3% of sales compared to $5.3 million or 31.8% of sales in the same quarter of the prior year. Lower sales was the primary cause of the decrease reducing gross profit by approximately $631,000. The decrease in gross margin percentage to 30.3% from 31.8% contributed about $255,000 to the reduction in gross profit and was due primarily to reduced sales in our direct versus dealer channel, which had the effect of lowering the average selling price in our physical therapy and rehabilitation products.

Gross profit for the 9 months ended March 31, 2019 decreased $769,000 or 5% to $14.6 million representing 31.1% of sales compared to $15.4 million or 32.4% of sales in the same period of the prior year. The decrease in gross profit included an increase of $1.8 million attributable to the acquisition of Bird & Cronin offset by approximately $2 million due to lower sales and $650,000 due to lower gross margin percentage. The decrease in gross margin percentage to 31.1% from 32.4% was due primarily to a decrease in sales through our direct channel.

Selling, general and administrative expenses, which includes research and development for the quarter ended March 31, 2019 decreased approximately $1.7 million or 25.4% to $4.8 million compared to $6.5 million in the same quarter of the prior year. The decrease included lower selling expenses of $460,000 consisting of lower fixed sales management salaries and lower commissions. Additional decreases included $785,000 in lower severance expenses and $228,000 in lower research and development expenses.

Selling, general and administrative expenses for the 9 months ended March 31, 2019 decreased approximately $1.1 million or 6.8% to $15.1 million compared to $16.2 million in the same period of the prior year. The addition of Bird & Cronin contributed $1.7 million in additional SG&A expenses, which was offset by a $1.2 million decrease in selling expenses due to lower fixed sales management salaries and reduced commissions, reduced severance of $658,000, reduced acquisition expenses of $277,000 and reduced research and development expenses of $1 million.

Net loss for the quarter ended March 31, 2019 was approximately $563,000 compared to a net loss of $1.3 million in the same quarter of the prior year. Depreciation, amortization and other noncash expenses were $380,000 in the quarter. Net loss for the 9 months ended March 31, 2019 was approximately $689,000 compared to a net loss of $1.1 million in the same period of the prior year. Depreciation, amortization and other noncash expenses, including a $237,000 income tax provisions were $1.2 million in the period offset by a noncash gain of $375,000 related to evaluation adjustment of acquisition related contingent consideration.

Net loss attributable to common stockholders was $718,000 for the quarter ended March 31, 2019 compared to a loss of $1.5 million for the same quarter of the prior year. Net loss attributable to common stockholders was $1.3 million for the 9 months ended March 31, 2019 compared to a loss of $2.8 million for the same period the prior year. The $1.5 million improvement in net loss is attributable to common stockholders and due to a $1 million reduction of deemed dividends, $97,000 decrease in preferred stock dividends and $376,000 improvements in net loss.

As of March 31, 2019, we had cash balances of approximately $414,000. We have an $11 million asset base line of credit pursuant to which we had borrowed $4.8 million as of March 31, 2019. Our line of credit balance is currently averaging approximately $5.8 million leaving available borrowings of about $1.5 million based on our current borrowing base.

In the 9 months ended March 31, 2019, net cash provided by operating activities was $1.6 million. This is the result of our cost reduction efforts as well as proactive management of working capital. We paid $913,000 in acquisition holdback payments and $304,000 in debt and capital lease obligations.

As of March 31, 2019, the remaining deferred acquisition payments totaled $967,000 of which we paid $467,000 subsequent to March 31, 2019 leaving one final payment of $500,000 due to be paid in August.

This concludes our summary of operating results. Chris will make a few final remarks before we open for questions.

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Christopher Richard Von Jako, Dynatronics Corporation - CEO & Director [4]

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Thank you, David. Moving onto our guidance. We are narrowing our full year expected consolidated sales in fiscal 2019 to approximately $61.5 million to $62.5 million. While we will be providing our 2020 guidance after we report fiscal 2019, we recommend analyst model flat revenue growth year-over-year between fiscal 2019 and 2020. We intend to continue the process of focusing on operating cash flow and profitability, which may lead to further pruning of the product line. However, we remain optimistic about growth in certain product lines.

Consistent with last quarter, we expect our consolidated operations to generate positive cash flow from operations in fiscal 2019. We expect gross margin to be in the 31% range and SG&A to be about 32% of sales for the current fiscal year, including approximately $1.7 million or 2.7% of sales in noncash charges. Our team has demonstrated the ability to quickly adjust our expenses in response to the revenue reductions we had experienced.

The number of common shares outstanding as of March 31, 2019 was approximately 8.2 million. We expect our outstanding shares to be increased by approximately 110,000 per quarter at the current stock price. Again, this guidance is based on our current operations and does not include the impact of any potential acquisitions. I continue to spend time meeting with our sales professionals, vendors and customers. I attended the American Academy of Orthopedic Surgeons in Las Vegas in March. This was very successful meeting for featuring our orthopedic brands and gave us great exposure in the industry. I was pleased to be with a number of vendors, distribution partners and customers during the conference. I also attended the National Distribution & Contracting Exhibition in Nashville and The Independent Medical Co-op 2019 National Convention and trade show in Orlando during April. We showcased all of our 3 marquee brands at these events, and we continue to build our brand in the marketplace. We also continued to proactively share our story and build relationships with the investor community. We conducted meetings during the JP Morgan healthcare conference in San Francisco in January. We presented at 3 investor conferences during the quarter, including the Canaccord Musculoskeletal Conference, the 31st Annual ROTH Conference and the 29th Annual Oppenheimer Healthcare Conference. We continue to gain great exposure to the investor community through these efforts.

We are also pleased that the Maxim Group initiated equity research coverage in April. During the quarter, we presented to our Board of Directors an updated 5-year strategic plan, including our defined values, mission and vision. We are committed to our combined company mission. We deliver restorative products to accelerate optimal health. As I approach the end of my first year as CEO, I continue to be reminded of what sets us apart from the competition. Our market differentiators include our strong brands, Dynatronics, Hausmann and Bird & Cronin, our high-quality, U.S.-made restorative products, consistent on-time delivery and excellent customer service.

In the coming quarters, we plan to thoughtfully drive greater synergies across all of our sites more consistently and aggressively. We plan to accomplish this in part by streamlining the divisional structure that we maintain post our 2 acquisitions. We will also aggressively seek out revenue synergies so as to drive topline growth across the business. This process has only just begun with completion of our strategic plans, and we plan to discuss this further as we make progress through the calendar 2019. We appreciate and thank our investor base and employees for their ongoing support as we progress through this transitional period. We continue our commitment to partnering with our customers by providing restorative products to accelerate optimal health.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Anthony Vendetti with Maxim Group.

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Anthony V. Vendetti, Maxim Group LLC, Research Division - Executive MD of Research & Senior Healthcare Analyst [2]

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Chris, I was just wondering if you could talk a little bit about the pruning process on the products. I thought that was largely done. Have you discovered more products that don't make sense as part of your portfolio going forward?

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Christopher Richard Von Jako, Dynatronics Corporation - CEO & Director [3]

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Thanks for the question. So we continue looking at product rationalization in general. But I think at least in the legacy business, we're pretty good there as far as all the pruning that we've done there. But we continue to look at it in the business in general across the brands.

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Anthony V. Vendetti, Maxim Group LLC, Research Division - Executive MD of Research & Senior Healthcare Analyst [4]

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Okay. And then just in terms of distribution, I know you have a lot -- dealer network and so forth. Is the goal to go direct sometimes where it makes sense? Or is the dealer network and the third-party distributors essential in certain areas?

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Christopher Richard Von Jako, Dynatronics Corporation - CEO & Director [5]

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Well, for sure, the dealer network is more important, and we have a small targeted direct sales force. And over the last year, we've been looking at that direct sales force, and we've made some changes there, especially in some underperforming areas, and in certain cases, we've moved from a direct to a dealer network.

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Anthony V. Vendetti, Maxim Group LLC, Research Division - Executive MD of Research & Senior Healthcare Analyst [6]

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Okay. Any other opportunities you think to cut cost? You said, SG&A expect to stay at around 32%, R&D seems relatively light. Is there anything else that you're doing to cut costs at this point?

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Christopher Richard Von Jako, Dynatronics Corporation - CEO & Director [7]

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Well, as you know, the company was created from 3 family-run companies, and we're always looking for opportunities to make the organization more efficient. I mentioned in my opening remarks, the Utah and Tennessee facilities, we restructured site leadership, reduced overhead and empowered the team to drive productivity improvements. Other opportunities include combining the selling activities and moving products to centers of excellence. I'll give you an example on that, Anthony. So during the quarter, we've moved certain manufacturing activities from our Tennessee to our Minnesota site, which will improve efficiency by approximately $150,000. So we're always looking at these things and looking at creating more efficient streamline structure.

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Anthony V. Vendetti, Maxim Group LLC, Research Division - Executive MD of Research & Senior Healthcare Analyst [8]

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Okay. I guess lastly on innovation. R&D did tick up even though it's not a significant expense. Is there anything that -- and when you looked at the entire portfolio and went down the product line, is there anything that you said, well, this is something we need to have right now? Or is there anything obvious at this point?

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Christopher Richard Von Jako, Dynatronics Corporation - CEO & Director [9]

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Well, I think as far as the R&D is, we have deemphasized it specifically at physical therapy and rehabilitation line. We move more to a outsourcing model. And this has allowed us to be more effective while still being able to take advantage of the innovation in the market. So we look at future distribution agreements as well as contracting R&D efforts, but we're always looking at new products, so we always have companies that are coming to us to utilize our channel through distribution. And then on a soft goods side, we're constantly evaluating product improvements, and they may be small improvements, but they -- we believe they add up over time.

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Operator [10]

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(Operator Instructions) We have a question from Jeffrey Cohen with Ladenburg.

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Jeffrey Scott Cohen, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research [11]

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So you talked about guidance before $61.5 million to $62.5 million, and you made some commentary about 2020. Did you say that -- can you refresh me, please?

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Christopher Richard Von Jako, Dynatronics Corporation - CEO & Director [12]

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Yes. So basically what we said is, we'll give an updated guidance after we give our fourth quarter results. But based on our initial forecasting, we're expecting revenue to be flat year-over-year.

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Jeffrey Scott Cohen, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research [13]

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Okay. So essentially $62 million on the top line and tends to drop at the bottom line, right?

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Christopher Richard Von Jako, Dynatronics Corporation - CEO & Director [14]

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Right.

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Jeffrey Scott Cohen, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research [15]

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Top line G&A, bottom line margins up to what, 32%, 33%? Could you talk about where you could go to in 5 quarters on the margin side?

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David A. Wirthlin, Dynatronics Corporation - CFO & Secretary [16]

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Look we expect gross margin for the rest of the fiscal year -- for fiscal '19 to be 31%. We are looking always as there are ways to improve that, we're not giving any full guidance on that at this point.

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Jeffrey Scott Cohen, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research [17]

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Okay. But based on flat growth and 2 more percent on margin that gets you positive from a cash standpoint?

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David A. Wirthlin, Dynatronics Corporation - CFO & Secretary [18]

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Yes.

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Christopher Richard Von Jako, Dynatronics Corporation - CEO & Director [19]

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Did you hear that, Jeff? David said, yes.

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Operator [20]

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(Operator Instructions) And there appears to be no further questions in the queue. I'll turn the floor back over to management, no further questions.

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Christopher Richard Von Jako, Dynatronics Corporation - CEO & Director [21]

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All right. Thank you for your questions and your interest in Dynatronics. If you have any further questions, please direct them to our Investor Relations contact Jim Ogilvie. Operator, you may end the call.

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Operator [22]

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Thank you. This concludes today's teleconference. We thank you for your participation. You may disconnect, and have a wonderful day.

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Christopher Richard Von Jako, Dynatronics Corporation - CEO & Director [23]

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Thank you.

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David A. Wirthlin, Dynatronics Corporation - CFO & Secretary [24]

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Thank you.