Q4 2021 Dynatronics Corp Earnings Call
[music].
Good morning, ladies and gentlemen, and welcome to the Dynatron X fourth quarter fiscal year 2021 earnings call. It is now my pleasure to turn the floor over to your host Skyler Black the Companys 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.
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, including 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 this 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 <unk> Dot Com, it's directly in the middle of our Investor Relations homepage.
Thank you Skyler and good morning, and thank you for participating in today's call I'm, John career, President and Chief Executive Officer of Diana Tronox and with me today are our principal accounting officer, Skyler Black and our Chief Financial Officer Norm Ragnar 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 normal provide commentary on the financials and then we will have the operator open the phone lines for questions first I wanted to again, thank our employees partners customers and Allstate.
Holders 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 <unk>, 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 30th 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 two of the presentation. So let's go straight to slide three.
You can see norms skyler 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 <unk> I was involved in the management of orthopedics embracing companies for nearly 17 years I started.
To get to know the Dynatron X teams several years ago, while working for brag, a significant dynatron X customer.
Outbreak and predecessor companies I helped execute 13th successful acquisitions growing break revenue significantly by building, a compelling and sustainable business model we.
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 <unk> has the same focus in mind in our industry fundamentals are very similar to break.
Norm Ragnar 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 Philips <unk>, a mole X company backed by Koch industries.
Norm has brought operating discipline and planning talent to Dynatron X and led the team that developed the product optimization plan that we announced in April and substantially completed on schedule in June 2021.
Skyler as 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 four while each of these bullets is very important to our sustainable growth platform. The first four items represent our focus in the first half of fiscal year 'twenty two due to near term opportunities in our markets.
We have substantially completed the product portfolio optimization initiatives as plant.
The completion of these important initiatives on schedule has allowed the management team and the entire dynatron ex 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.
These efforts have enabled <unk> to emerge into fiscal year 'twenty two in a position of strength.
Before I cover the specifics of our fourth quarter fiscal year 'twenty, one 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 exclusive lead to existing and new dealers, thereby eliminating perceived competition with customers from our historic direct sales efforts and to focus sales and marketing resources on products.
Manufactured by Dynatron X.
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 our balance sheet via sustainable cash flow from operations, which can support additional investment in product development and or M&A in target markets Golar.
Goal number four is to build a consistent cadence of new product introductions across both of our growth markets rehabilitation and bracing and supports by focusing our energy and resources on the products. We manufacture we are fostering an environment of consistent product portfolio innovation and product.
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 five accomplishments and optimization plan results.
Rather than go through the 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.
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 $7.0 million and zero drawn on our asset based line of credit or capital is adequate at this time to support our existing opera.
<unk>.
We eliminated over 60, and 100 Skus of low margin third party distributed products. These products were low or no growth carried low or unacceptable margins and we're 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 housing and three D protein builder, which is a configurable product application with customization features directly on our website has been very well received.
<unk> 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.
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 six the positive meaningful customer and dealer demand for our new strategy. Both in Q4 fiscal year 'twenty, one and quarter to date in Q1 fiscal year 'twenty. Two has provided us with the confidence to initiate net sales guidance for fiscal year 'twenty two.
As a reminder, product sales in each quarter in fiscal year 'twenty two will represent products. We plan to continue to offer as the optimization initiatives announced on April 22021 were substantially completed in fiscal year 'twenty one.
Net sales are on pace to achieve approximately $16.0 million to 12.0 million for Q1 fiscal year 'twenty two.
Which exceeds the 9.25 million quarterly continued product net sales baseline set in April 2021.
And the $17.0 million continued product net sales achieved in Q4 fiscal year 'twenty one.
We expect assuming no significant adverse effect on procedure volume from the recent surge in COVID-19 activity net sales in fiscal year 'twenty two 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 <unk>.
<unk> to a dealer based business model.
Excluding exited activities gross margin would've been 28.0% of net sales in fiscal year 'twenty one we.
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 'twenty, two relative to fiscal year 'twenty, one and improvement over time from recent years absence 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 'twenty two 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 'twenty two relative to fiscal year 'twenty one.
Excluding the notable other income events discussed in Q4 other income in Q1 of fiscal year 'twenty. Two is expected to include an approximate 0.6 million benefit from the employer 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 seven the markets that we serve are large growing and fragmented dynatron X 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 dynatron ex primary brands to expand market share within existing customers as well as add product offerings within this segment in which we compete as.
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 eight.
Our M&A strategy as 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 normally have successfully acquired and integrated numerous target companies.
Again, most recently, while at Bragg, 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 nine which contains our quarterly financial highlights.
All income statement and management's discussion and analysis can be found in the 10-K.
And I will summarize them here.
Net sales were $14.0 million for the quarter ended June 30 of 2021.
Compared to $9.0 million in last year's quarter.
The full year.
Year over year increase was 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 32021, net sales were $55.0 million.
Compared to $57.0 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 reduce capacity and operating hours supply chain disruptions and extended 1 billion times.
Gross profit for the three months ended June 32021.
Increase in Europe, <unk> 9 million to $5.0 million or 19, 1% of net sales.
Compared to $5.0 million or 17, 4% of net sales in the same quarter of the prior year.
The year over year increase in high <unk>.
Our 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 32021 was $21.0 million or 27% of net sales.
There are $16.0 billion 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.
Notable charges to cost of sales associated with exit activities for discontinued products.
Excluding the zero point $5 million of costs associated with exit activities included in cost of sales.
Gross profit for the quarter ended June 32021 was $10.0 million or 23, 1% of sales.
Selling general and administrative expense were $10.0 million for the three months ended June 32021, an increase of 0.9 million or $9.0 million in last year's period.
Due primarily to an increase in head count related to revenue recovery.
Expenses incurred related to exit activities.
For the full fiscal year, SG&A was down $6.0 million compared to the prior year due primarily to lower commission expenses and decreased sales cost on lower sales.
Excluding the zero point $5 million of costs associated with exit activities included in SG&A.
G&A for the quarter ended June 32021 was $5.0 million.
Other income totaled $6.0 million for the three months ended June 32021.
An increase of $7.0 million from other expense of 0.1 million in last year's period.
For the full fiscal year. Other income was $13.0 million, an increase of $8.0 million from the prior fiscal year expense or zero point $4 million.
The increase in other income is due primarily the PPP loan forgiveness.
The sale from our former Tennessee manufacturing facility.
And the employee retention credit.
Net income was $11.0 million for the three months ended June 32021.
We're doing work of $5.0 million in last year's same quarter.
Net income was $2 million for the whole fiscal year ended June 32021.
Compared to a net loss of $7.0 million in the prior fiscal year, we expect our outstanding shares to increase in the range of 200000 per quarter, depending on our share price.
As of September 23, 2021, the number of common shares outstanding was approximately $23.0 million.
Our balance sheet remains strong position with a net cash position at $7.0 million.
June 32021, which represents our highest cash position in recent years.
We have zero balance on our line of credit and a borrowing base of approximately $7.0 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 32021.
They include PPP loan forgiveness by the SBA.
From the employee retention credit.
And a gain on the sale of our Tennessee facilities.
Excluding these three items net loss would have been $5.0 million for the three months ended June 32021.
And $5.0 million for the full fiscal year ended June 32021.
The optimization initiatives announced on April 22021 were substantially completed by June 32021.
As planned.
Therefore, we expect net sales for fiscal year 2022 to represents products remaining in our portfolio as of July one.
2021.
In April 2021, we predict that approximately $3.0 million of exit related expenses to support the optimization initiatives of which.
It's zero point $4 million was expected and cash expenditures.
The final expenditures were actually less than anticipated with approximately $1 billion in total exit expenses.
Of which zero point $2 million as 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.
You'll note the company continues to expect volatility due to the continuing challenges from COVID-19.
Including higher delivery and shipping costs.
Ply chain disruptions.
Extended handling times and delays or disruptions in procedure volume.
<unk> also expect some continued volatility from the company's business optimization.
Thank you Don.
11 shows the investment highlights for Donna Tronox. 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 $7.0 million of cash on the balance sheet at the end of June and know that strategically.
Strategically we have clarified our position in the market with our well established brands and our leadership team focused on the future we.
We anticipate good progress in all of these key strategic areas and our fiscal year 2022.
We are excited to be moving dynatron X 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.
Thank you that's all.
<unk> is now open for questions. If you do have a question. Please press star one on your telephone keypad at this time, if you're using a speaker phone. We asked it won't posing your question you pick up your handset to provide the best sound quality again, ladies and gentlemen, if you do have a question or comment. Please press star one on your telephone keypad at this.
Time.
We will take our first question from Jeffrey Cohen with Ladenburg Thalmann. Please go ahead.
Uh Huh, John Norman Scrubber, how are you.
Good morning, gentlemen.
Nice to see Europe.
Restaurant in person, so I guess I'll start with norm.
The other items is that 0.9.
Employee retention credit federal or state.
It is a federal charge or a credit manager.
Okay, and then along with that at that 0.8 on the gain of the sale. So there were some mortgage on that because the share price was higher than the 0.8.
There was no mortgage on that we had to fully pay that off.
Got it Okay and then.
It sounds like your stabilization is mostly complete.
Could you talk about from this baseline level, you're referring to it looks like another.
Two and a half million or on a quarterly basis on the topline up side is that coming from any place in particular in terminal developments or less.
Less products or more products or some products driving.
Yeah, Jeff I would say, it's really being driven by two things. The first is the reaction to the clarification of our strategy has been strong and the account manager support of our dealers are is showing the early results and that's what we're feeling plus.
We operate in these two markets that are growing on their mid single digits on their own and so that is the clarification on the revenue drivers so far.
Okay got it and any internal developments are shorts that you'd like to call out as far as areas of focus are.
What we may expect a product launch.
Yes, we're in the early stages of this consistent cadence of product innovation. The two tables, we launched in January was a good start we added the three D protein configure ader here in July and we continue to have opportunities across our portfolio. So that that is the cadence that we're looking to in the future quarters should be able to continually release.
Okay got it and it looks like the a good readout is a single digit growth of 40% to 45 range for 'twenty two that's above.
What you're calling out as a baseline.
All 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 $17.0 million of our what we believe is our continued portfolio in Q4, if we do achieve the market growth of the mid single digit.
That's about $10 three a quarter that would land us in the midpoint of our range for the year at about 42, five that's how we arrive at that guidance.
Okay, and Nuomi are stating on the share count.
Approximately 800000 share increase on an annual basis from the baseline Europe currently.
Yeah.
Chris right now yes.
Okay.
I think that those are for us thanks for taking the questions.
Thanks, Jeff.
As a reminder, ladies and gentlemen, if you do have a question or comment you May press star one on your telephone keypad at this time again Thats star one to join the queue.
We'll take our next question from Scott Henry with Roth Capital. Please go ahead.
Thank you and good morning, just a couple questions first for clarification, I know, you're not giving gross margin guidance, but if.
If I interpreted correctly the implication is that it should be higher than 28% in fiscal year 2022.
Did I interpret that correctly.
Yeah, Yeah, I would say you interpret that correctly Scott I mean, we did a lot of work on the optimization project, we expect the margins to migrate upwards.
But.
Okay. That's helpful. I just wanted to make sure that was the baseline that 2008 that you were using.
Next question just.
When you think SG&A, 30% to 35% for 2022.
Would you expect.
To start seeing that decline post 2022.
You get a little more leverage into the new model is that what you would expect.
Scott This is Joe I mean, I think that we like.
The way, we're looking at that.
In 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 will continue to work on it from there.
Okay.
Great and then.
I'm kind of a big picture revenue outlook.
How should we think about it is there's a lot of noise in fiscal 'twenty, one and probably some noise in fiscal 2022 but when we think about the.
The categories orthopedic or physical therapy, how should we think about the organic growth in each of those categories.
And I'll share with you the way that we look at it internally Scott we're fortunate to participate in these two markets that have natural tailwind that grow in the mid single digits. So as we're able to simply execute routinely and take advantage of those tail wins 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 two points that we talk about internally and we work on to deliver growth in excess of what the market is naturally providing.
Okay Alright. Thank you that's helpful.
And then.
Yeah.
Covid and cost input inflation and.
Supply chain interruptions.
Are you finding that you have any 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 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.
All 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 a final question any comments that you would have on the current M&A.
The M&A environment, and the ability to perhaps acquire new revenue streams that you've given.
All that's going on.
How would you categorize that in environment is favorable or unfavorable it or typical I guess.
The way, we categorize it for US Scott is that it's very important to us.
Part of our strategy going forward, we need to drive organic rather than to grow with we need to try and drive acquisitive growth. One nice part is that as we've been building this team.
Ability to execute these exit initiatives in Q4 on schedule on time, we went from a standing start in mid April to having a complete by January 30th was a good early demonstration of this leadership team's ability to execute so it's 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 for.
Two continuing to grow in that way.
Okay, great. Thank you for taking the questions.
Thanks Scott.
Got it.
Well take our next question from Anthony Vendetti with Maxim Group. Please go ahead.
Thanks, Good morning.
Just a follow up on <unk>.
Yeah, just to follow up on a couple of points.
On the acquisition front.
Piggyback off the last question there.
The type of acquisitions that youre looking to make or the ones that are in the pipeline would be more.
On as opposed to transformational correct.
That's correct in the early stages I mean at this point with the 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 and then on the gross margin side.
The cadence that we should look at for fiscal year 'twenty two as you said migrate upwards.
It should be incremental every quarter or is there any any particular reason why it wouldn't.
Move up.
Throughout fiscal year 'twenty two.
Okay.
Sorry.
Anthony.
Good question its tough for us to answer that right now we're still trying to obviously navigate this COVID-19 environment.
Fee income impacts of it.
My chain disruptions from Covid. So it's difficult to say that'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.
Forward looking thoughts on that.
Okay. So so so that kind of brings me to the last question on Covid. So the reason.
The biggest input are variable that could have an impact on the gross margin and 22 would be continued supply chain disruption right, whether it's Europe.
Hear about all the container ships that are off the coast of California that havent been be able to get in so any type of supply chain disruption would be the mean.
Reason or variable that would potentially put a little pressure on the gross margin.
I think thats, a fair way to describe that and that's what we're focused on from a margin perspective, primarily right now.
Okay.
From what I understand from my from my channel checks in terms of the customer side.
The physical therapy offices to hospitals that do physical therapy.
They have all figured out how to.
How to provide these services in a COVID-19 environment.
Whether it's.
Original strand.
The Delta Varian or any other benefit that comes along.
They're up and running and and it's just it's just a matter of how to work around it but your customers are are all up and running for the for the most part is that correct.
Andrew This is John that as that is generally correct, but 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.
Really been aggressive in making sure that they can work around to the best extent possible the disruptions.
Okay great.
Alright, I think thats, that's everything thanks, so much I'll hop back in the queue.
Thanks Anthony.
Thanks Anthony.
And that is all the time that we have for questions today, Mr. Kurt do you have any closing comments you'd like to finish with.
Yes. Thank you operator thank.
Thank you all for your interest in <unk>. If you have any further questions. Please direct them to skyler black or Jeff Christiansen their contact information is in this presentation and in our press releases and 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.