Q1 2022 Dynatronics Corp Earnings Call
Okay.
Good morning, ladies and gentlemen, and welcome to the diner Tronox first quarter fiscal year 2022 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.
Forward looking statements regarding our current expectations.
Plans.
Projections and financial performance relating to our business.
These forward looking statements reflect our views as of today only and <unk>.
They involve risks and uncertainties that could cause actual results to differ materially from those discussed today.
Factors that could cause actual results to differ materially from those projected or implied by our forward looking statements are included in our most recent 10-K.
And other reports filed with the SEC.
And they include uncertainties and risks related to the impact of the COVID-19 pandemic on our 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.
During our prepared remarks, we will be referring to slides that are available for viewing and the webcast and posted in the Investor Relations section of <unk> Dot com.
I'll now turn the call over to John Fischer, Our President and Chief Executive Officer.
Thanks Skyler good.
Good morning, everyone and thanks for joining <unk> call today.
Before I begin our call on this veterans day. It is our privilege to say thank you to all of America's veterans to let them know, we appreciate them for their service and honor them for their sacrifices.
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 first quarter fiscal year 2022, norm will provide commentary on the financials and then we will have the operator open the phone lines for questions.
Please turn to slide three.
You can see norms skyler and my background on this slide it provide 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 team several years ago, while working for break a significant dynatron X customer.
At brag and predecessor companies I helped execute 13th successful acquisitions growing break revenue significantly by building, a compelling and sustainable business model.
We had industry, leading organic growth and we had an unwavering commitment to customer experience with a mantra to make it remarkably easy for our customers to choose us.
Our team of Dynatron X has that same focus in mind and 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>.
<unk> company backed by Koch industries.
Norm led the team that implemented the product optimization initiatives that we announced in April and substantially completed on schedule. In June 2021, norm has brought financial and operating discipline and planning talent Dynatron ex skyler.
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.
Let's turn to slide four.
We have been executing an ongoing business transformation.
To date, we have implemented a new exclusively dealer sales model in our rehabilitation market and shifted our product sales mix to faster growth higher margin products that we manufacture.
<unk> and dealer reaction to dynatron ex transformation strategy, along with favorable tailwind in the markets. We compete in are driving sales that outpace our expectations.
That provided the company with the confidence to initiate sales guidance in September.
Our transformation remains the top priority, we are executing at a high level and have operating levers to achieve our goals, including improvement in gross margin operating income and cash flow from operations in fiscal year 'twenty two relative to fiscal year 'twenty one.
Absent significant impacts of the continuing sort of COVID-19 cases.
This year over year planned improvement excludes the notable other income events discussed in Q4 fiscal year 'twenty one.
Each of the four initiatives on slides five and six are very important to our sustainable growth platform.
Looking at slide five new leadership hires were a major focus area, we implemented partners and leadership culture of accountability and focused our employee actions to overall organic revenue growth and consistent profitability.
This newly built leadership team substantially completed in June 2021, as planned the business optimization and product portfolio rationalization plan announced on April 22021.
This achievement was another milestone for our team.
We ended the quarter with cash on hand of approximately $5 5 million no debt and zero drawn on our line of credit with a borrowing base of approximately $5 2 million.
Our capital is adequate at this time to support our existing operations.
We will continue to strengthen the balance sheet via sustainable cash flow from operations, which can support additional investment in product development and accretive M&A in target markets.
Looking to slide six over the course of a 10 week period, we went from a standing start to substantially completing by June 30th the business optimization and product portfolio rationalization plan announced on April 22nd.
We eliminated over 1600 Skus of low margin third party distributed products, an approximate 11 million annual net sales reduction.
These products were low or no growth carried lower unacceptable margins and we're not our own manufactured products.
The rationalize 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.
A key reason, we moved away from the distributed products our largest dealers asked if we were their customer competitor or supplier in some cases it was all three.
You're seeing the positive early results with the Q1 fiscal year 'twenty two reported net sales and annual guidance, we released.
We are getting benefits of market volume increases and a favorable reaction to our strategy.
Management focus is on our brands, leading to additional support to our customers and product innovation opportunities. So that we can provide consistent excellent experiences to our customers.
Moving to the dealer channel in our rehabilitation market is a strategic move to simplify our business.
Drink than our revenue platform and generate cash.
In the six months following the announcement I and my team have been able to discuss this change with our dealer partners and the response continues to be overwhelmingly positive.
Moving to slide seven we intend to provide guidance on metrics that we are confident with while managing the choppy nature of this business transformation and the impacts of COVID-19, we.
We expect net sales in fiscal year 'twenty two to be in the range of 40 million to 45 million assuming no significant adverse effect on procedure volume from the recent surge in COVID-19 cases.
The midpoint of this sales guidance represents 15% growth rate relative to the $37 million annual continued product net sales baseline set in April 2021.
We developed our annual sales guidance range for fiscal year 'twenty two by taking the Q4 fiscal year 'twenty one revenue from continued products of $9 8 million.
Adding market growth of approximately 5% is $10.3 million per quarter.
Three quarters of $10 3 million plus at our $12 3 million revenue in Q1 fiscal year 'twenty, two result, and performance slightly above the midpoint of our annual sales guidance in fiscal year 'twenty two.
Customer and dealer reaction to dynatron ex transformation strategy continues to be overwhelmingly positive demonstrating our new business model strength and providing us momentum building upon the favorable tailwind in the markets. We compete however.
However, it is early in our fiscal year, 'twenty, two and with significant volatility due to continuing challenges from COVID-19, we believe it is prudent to maintain our guidance for annual sales in fiscal year 'twenty two.
The company expects the distribution of net sales across the quarters in fiscal year 'twenty two to align with historical trends, which have tended to be a little higher in the first and fourth quarters highest in our first quarter and lower in the second and third quarters. There may be some variability in this pattern as the company adjust to ordering patterns and it's real.
<unk> market given the transition to an exclusive dealer based sales model.
As a reminder, product sales in each quarter in fiscal year 'twenty two will represent products. We plan to continue to offer following the optimization initiatives announced on April 22nd.
Looking at slide eight this is the details of our guidance.
We are very focused on the top line, but we also plan to drive margins over time, our target is to achieve 40% gross margins over the longer term, which would be comparable to what we believe our peers are cheap.
Our competitors D. J O before they were acquired by Colfax and Oser when you break out their bracing segment maintained margins for bracing and supports of approximately 50% and for rehabilitation of roughly 30%. Our gross margin was 29, 8% in Q1 fiscal year 'twenty to an inquiry.
<unk> from 27.1% in fiscal year, 'twenty, one, including the exit activities associated with the discontinuation of third party distributed products.
Gross margin in Q1 fiscal year 'twenty, two with somewhat muted by the impact of COVID-19, and supply chain challenges, including extraordinarily high freight costs and increased cost for raw material, specifically freight costs and raw material costs increased 170000, and 195000, respectively in Q1 fiscal.
Year 'twenty two than the same quarter last year, which is a 3% increase in cost of sales in the first quarter of fiscal year 2022.
Excluding the additional freight and raw material impacts our gross margin was higher in the first quarter versus prior year.
More generally the company and its customers expect to experience continued supply chain and other challenges due to COVID-19, including rising raw material costs higher delivery and shipment costs supply chain disruptions and extended handling times similar to those reported by many companies. We are taking multiple actions to help offset.
These inflationary pressures, including price increases where appropriate exploring alternative sourcing relationships and improving factory yields.
We're going to do what it takes to keep serving demand for our customers.
We have a very steady eye on the long term to build a scalable platform to grow our customer and revenue base deliver margin expansion and strong cash flow from operations. So that we can create value for shareholders.
We have not yet provided gross margin guidance for fiscal year 'twenty. Two we just finished our first full quarter in this new model and we need additional experience to feel comfortable discussing where margins might trend in fiscal year 'twenty to this.
This reality, along with disruptive COVID-19 headwinds and escalated supply chain costs makes us cautious in this area that said, we do see opportunities to expand our gross margins by better capacity utilization. For example, we are operating only one shift in our plants and gross margin leverage maybe.
We achieved by using a second shift.
We also are actively working on other process efficiencies to streamline our operations.
We anticipate selling general and administrative expenses of 30% to 35% of net sales in fiscal year 'twenty two.
Our first quarter SG&A tends to be the highest for the year due to financial audit and other timing related events.
In addition, we expect operating leverage as we grow sales.
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 nine the markets that we serve are large growing and highly fragmented.
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 with existing customers as well as add product offerings within the segments in which we compete.
As we're 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 and staffing shortages being reported throughout the country.
Our markets generate 5% to 6% organic growth per year, if we take market share our growth can be higher than that.
We have ramped up our cadence of product introductions, we released two products and a configurable product application in the first seven months of calendar year 2021, we are routinely talking to customers and have new products in the pipeline.
Building on the foundation in the markets, we serve let's move to slide 10.
Our M&A strategy as detailed here to give you an idea of what we will be looking for we continue to have conversations and pursue 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.
Our focus criteria include greater than 40% gross margin and cash flow contribution within the first year. Our focus is on our current markets. Our near term targets are at the lower end of the $5 million to $30 million revenue range. We believe we can make a smaller acquisition with our balance sheet and not use equity than them.
And straight post acquisition success.
We believe our share price is undervalued and want to unlock some of that value.
I will now turn the call over to norm.
Thanks, John.
Please turn to slide 11.
Contains our quarterly financial and business highlights.
As a reminder.
Full income statement and management's discussion and analysis can be found in the 10-Q I.
I will summarize some of the key financials here.
Net sales were $12 3 million for the first quarter of the fiscal year.
That compares to $12 1 million in the same quarter of the prior fiscal year.
We continue to see an increase in overall procedures and activity compared to the prior year.
Which was impacted by the COVID-19, shutdowns and other related disruptions.
Gross profit for the first quarter of fiscal year, 2022 was $3 7 million or 29, 8% of net sales.
Compared to $3 9 million or 32.2% of net sales in the same quarter of the prior year.
As John mentioned earlier, we are seeing inflation on raw materials and significantly higher freight cost in the quarter.
Which are the drivers of the year over year decrease in gross profit and gross margin for the quarter.
Selling general and administrative expense was.
$4 1 million for the first quarter of fiscal year 2022.
Compared to $4 2 million in the same quarter of the prior year.
The decrease was due primarily to lower direct selling expenses and the benefit of the employee retention credit partially offset by higher marketing investments.
Other income totaled 0.9 million for the first quarter.
An increase of 0.9 million from other expense of 0.0 3 million in last year's period.
Net income for the first quarter of this fiscal year with zero point $5 million.
That compares to a net loss of zero point $4 million in the first quarter of fiscal year 2021.
We expect our outstanding shares to increase in the range of 180000 per quarter, depending on our share price.
As of November eight 2021, the number of common shares outstanding was approximately $17 7 million.
The balance sheet is in a strong position with a net cash balance of $5 5 million on September 32021.
We are investing in inventory as a result of the higher sales in Q1 of fiscal year, 'twenty, two and supply chain volatility COO.
And longer lead times.
The organization made a strategic decision to place additional orders on key raw materials and other supplies early in the spring of 2021.
That inventory is beginning to make its way into the facilities and will be consumed over the coming quarters.
We have a zero balance on our line of credit and a borrowing base of approximately $5 2 million as of September 30th 2021.
Cash used in operating activities was 0.6 5 million for the three months ended September 32021, due to the company's working capital investment.
On the expected double digit growth.
You're spending on inventory to serve customer demand growth.
And additional safety stock to help offset continued expected supply chain disruptions.
We target cash flow from operations to be positive in fiscal year 'twenty two relative to fiscal year 'twenty one.
Absent significant impact of the recent or future searches of COVID-19 outbreaks.
We announced in October that we terminated our agreement with Millstone medical outsourcing for order fulfillment effective on January 2nd 2022.
<unk> order fulfillment will be shifted to our distribution center in Minnesota for most of its brand to drive margin expansion.
Consistent customer experience and scale our fulfillment for growth.
Before I turn the call back over to John I will note, we continue to navigate a volatile landscape due to the continuing challenges from COVID-19.
<unk> higher raw material prices delivery and shipment costs supply chain disruptions extended handling times and delays or disruptions in procedure volume at.
At the same time like Itraxx also expect some continued volatility from the company's business transformation.
This concludes our summary of the financial and operating results I will now turn the call back to John.
Thank you Don looking to slide 12, we believe the current share price undervalues, our balance sheet strength and position to drive. This business forward. For example, the enterprise value to sales is well below the medical products peer group average, we have a clear line of sight to profitable growth and our strategy.
Going forward has clarity we have been executing an ongoing business transformation and consistently performing each quarter to demonstrate we achieve our goals.
We are actively sharing our story with the investment community as we move forward in our markets.
We hope to meet with you at upcoming Investor events, we will participate in the virtual Q4 Investor Summit Conference on November 16th 2017.
Information about this event is available on the Investor Relations section of Dynatron X Dot com.
Slide 13 are the investment highlights for Dynatron X. Each statement is reflective of a set of actions designed to deliver results.
Our clear focus is on driving organic revenue growth profitability and cash flow from operations, we are well capitalized with approximately $5 5 million of cash on the balance sheet at the end of September 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 anticipate good progress in all of these key strategic areas in our fiscal year 2022.
We're excited to be moving Dynatron X in the direction that we're both reward our shareholders and provide a consistently differentiated experience to our customers.
I will now turn it over for questions.
Thank you.
Ladies and gentlemen, the floor is now open for questions.
You have any questions or comments. Please press star one on your phone at this time.
If you wish to withdraw from the question queue. Please press star two.
We do ask that if you are listening via speakerphone. Please pick up your handset for optimum sound quality. Once again, if you have any questions or comments. Please press star one on your phone now please hold a moment, while we poll for questions.
And our first question today is coming from Jeffrey Cohen at Ladenburg Thalmann. Your line is <unk> you may begin.
Hi, This is actually destiny on for Jeff. This morning, how are you doing.
Good morning Destiny great.
And glad to hear well congratulations on a nice quarter and.
Considering you know really restructured and streamlined the business I was hoping we could maybe start at a high level can you remind us of the Tam currently now that you've restructured your business.
Yeah, absolutely I mean, we compete in two markets right Destiny, we compete in the rehabilitation market and we compete in the bracing and supports market, we really focus largely on the U S market. When we think of those two markets that we compete in it's roughly $4 9 billion overall in the categories that we're active in.
Okay got it thank you and chatting with these dealers and getting feedback I'm wondering if they're noting.
Gaps in their portfolio that your innovation your current in house development or sale or if that's something you'd prefer to do or are looking to do inorganically.
We absolutely are having those conversations with our customers and dealers to understand what they're seeing in the marketplace and how we can evolve our product portfolio to match them. That's both innovating inside the platforms that we currently have but they're also giving us feedback about other brands or other technologies that we should be considering in our acquisition pipelines are there.
They are absolutely are source of where our products will be not only now but going forward.
Okay got it. Thank you maybe I'll just switch over to some of the financials for inspection second excuse me you noted some favorable tailwind could you talk a bit more about those in terms of revenue and do you believe you'll see those moving into calendar year 2022.
Generally speaking in the markets we compete in so both rehabilitation embracing and supports enjoy mid single digit organic growth on their own in the range of 5% to 6%. So we naturally get the benefit of that from the the favorable dynamics that play out or folks wanting to live healthier lives and what have.
Then we have the ability that that's not going to stop anytime soon but we have done the ability to generate even higher growth than that if we take market share.
Okay got it got it and then in terms of SG&A, we should expect it to be higher in Q1, I think that's pretty standard for most companies, but I also and you also noted the termination of the notes don't agreement as well as second shifting shifting your facilities I'm wondering how in that SG&A does that take into account additional FTE then.
Could you just remind us where were the FTE count is currently.
Absolutely so roughly speaking that that termination of that Millstone agreement will happen at the end of this calendar year. So roughly December 31 of 2021 that activity was shifted over into our Minnesota operation overall, our head count is approximately 175, which is similar to where it was at the end of June.
Okay got it and then how soon might you engage that second shift is there a particular driver that would.
I encourage you to flip that switch if you will.
Where I would put that destiny is in the different tactics that we're looking at to drive gross margin improvement. We are focused on that over time to not only improve our operations, but to get to the level that our peers are at a competition wise a second shift is one potential possibility in that vein not committing to any specific time.
[noise] frame on that but it is it's an indication of one of the various levers that exist for us to expand our margin.
Okay got it I believe that does it for me I'll jump back in queue. Thank you.
Your destiny.
Thank you. Our next question today is coming from Anthony Vendetti at Maxim Group. Your line is live you may begin.
Hi, This is actually Jeremy comment on the line for Anthony how are you guys doing.
Good morning, Jeremy.
Good morning, Okay. So just a couple of questions related to gross margins and the inflationary environment that we're in so you mentioned on the call that you are passing on some higher cost the price increases to customers is that across all your brands. All your products are you picking which products you think it will.
Have the best elasticity to take a price increase.
Jeremy Let me jump in on this pricing related question in normal can also comment over time on the overall gross margin.
This is a very sensitive topic for all customers and for anybody that's operating in the environment, our preferred path with our customers is to talk with them about loyalty and how they can increase our overall wallet share with us to then mute some of those price increases that we would otherwise have to pass on to them relative to where we pass on those prices, we absolutely have to look.
Inside of our portfolio and understand where is it appropriate what exact products are driving the increases where do we where do we have that opportunity. It's a very sensitive conversation that we always have to have and so we're very targeted but to be clear. Our first priority with our customers is to drive loyalty and have them increase their share with us to offset those increases.
Okay understood.
I mean, I assume that you know you.
Properties.
The increases are here to stay I don't usually inflation it doesn't go bad.
Inflation is not a good thing because it but so I guess, it's just a matter of how youre going to work around the inflation going forward then moving to the supply chain I know you mentioned that in the past you increased your inventory for pretty surprised when you said you're going to start dipping into that shouldn't you see aside from increased cost you see anything else about the apply chain disruption.
You know, having a meaningful effect on your business in any unfortunately, not such a positive way.
Or are you prepared for that in the future.
So Jeremy I'll I'll take that down and you know from the COO.
Corporate side and the supply chain disruptions I mean, I think we've done a great job.
Dealing with it from an inventory perspective, this quarter, making some investments obviously, the the cost side, it's hard to predict.
And I think if you look at different economic measures and there's a good chance that we may see inflation continue to rise.
But that said, we also do see some areas, where it's declining at that I think that there's an upgrade rolled back some of those costs and things like wood and some of the petroleum based products. So I don't know if it's going to be here for forever I do think there's a chance that rolled back but for now we're looking at there's going to be here for at least the probably the next fiscal year and that's how we're approaching it.
And then there's that and you don't think it's not going to do you have no it's not going to affect your business any light on that.
Parents to handle any sort of disruption you have enough supply on hand, do you have enough.
Waste alternative means to get the supply that you need for your products. So.
We feel pretty yeah, we've made a sizable investment this quarter in the inventory. So I think we're comfortable that.
We've got a lot of the products, we need and we have a line of sight to anything that.
And the water and in the supply chain do.
You never know with some of the disruptions, we've seen imports and the rails, if something's going to pop out and change out but right now I think we're comfortable that we've got the inventory to move forward and satisfy our customer demand.
Okay that Jeremy this is John I might add.
Just said there around that's one of the reasons that we're cautious around our future quarters and our overall net sales guidance of 40 million to $45 million. Despite what was a really strong Q1 for us is those potential disruptions from COVID-19 in future periods that we just simply can't account for as of yet.
Right no I understand but it seems like you do have enough in the continent at least in the medium to short in the short to medium term to handle any sort of increased demand for their products or any other disruptions. That's good and then just last one question I know you mentioned that you know.
You're seeing procedure volume increase and practice visits go up is that trend has continued into this until the current your current fiscal quarter as you talk to your customers and you see any I mean, I know we had a delta referred to in the last couple of months that that doesn't seem to impact your business do you see.
Any future impact due to COVID-19, even if there's a resurgence or anything at this point your facilities and have adopted so adapted to the new norm so to say.
There are mixed signals in the market at this point when you look at the period of July to September and you look at some of the largest physical therapy change you saw patient visits per day being reported as very strong simultaneously you had folks reporting their financial results for that same period discussing that they were planning for slowdowns in the October November December.
<unk> timeframe not only from the Delta variant of COVID-19, but from staffing shortages. So we're seeing mixed signals in the marketplace. We're constantly talking to our customers about this and it's just going to be something that we're gonna be have to be watching and we're gonna be cautious on and Thats why you see our guidance staying where it is as well.
Okay I understand thank you very much for taking the questions and I'll hop back in queue.
Thank you Jeremy.
Okay.
Thank you.
I will now turn the floor back over to John Fischer for any closing remarks.
Thank you Kate and thank you 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 release have a great day and operator, you may end the call.
Thank you ladies and gentlemen, this does conclude todays event you may disconnect at this time and have a wonderful day, we thank you for your participation.