Dynatronics Corporation Q3 2023 Earnings Call
Speaker 2: Thank you for standing by. This is the conference operator.
Speaker 2: Welcome to the Dynatronics third quarter results for fiscal 2023 conference call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. To join the question queue, you may press star then 1 on your telephone keypad.
Speaker 2: Should you need assistance during the conference call, you may signal an operator by pressing star and zero.
Speaker 2: I would now like to turn the conference over to John Crear, President and CEO of Dynatronics. Please go ahead.
Speaker 3: Thank you, operator. Good morning everyone and welcome to Dynatronics third quarter earnings call. Before we begin, I will call your attention to our safe harbor statement found on slide two. I remind you that the discussions during this conference call will include forward-looking statements.
Speaker 3: Factors that could cause actual results to differ materially are discussed in the company's most recent filings with the SEC.
Speaker 3: We caution you, not to place undue reliance on forward-looking statements, we may make this morning. We undertake no obligation to update or revise forward-looking statements.
Speaker 3: During our prepared remarks, we will be referring to slides that are available for viewing in the webcast and posted on our Investor Center page at dinatronics.com.
Speaker 3: On today's call, we will cover the highlights and achievements of the third quarter of fiscal year 2023, as well as provide commentary on the financials, and then we will have the operator open the phone lines for questions from our analysts.
Speaker 3: I want to begin by highlighting three external market events which have impacted us this quarter. First, competitive acquisitions by one of our rehabilitation customers. Second, a reduction of specific skews from an OEM bracing customer. And finally, general market choppy-n-us have caused us to re-examine our assumptions for the back half of fiscal year 2023. Net sales are expected to be $7.5 million to $8.5 million for Q4 of fiscal year 2023 and $39.5 million to $40.5 million.
Speaker 3: for the full fiscal year. As I have stated earlier, and despite any external events, we remain firmly focused on gross margin improvement.
Speaker 3: In Q3, despite lower revenue, the InaTronics deliver the gross margin of 23.9% versus 22.4% in the prior year. Finally, we have made significant cost structure changes and reductions in response to the lower anticipated revenue. Using the baseline run rate of cost through March 2023, we have made approximately 1.5 million to 2 million of cost reductions to selling general and administrative expenses to be realized.
Speaker 3: in fiscal year 2024.
Speaker 3: Moving to slide 4, as a reminder, the full income statement and management, discussion, and analysis, and be found in the 10Q. I will summarize some of the key financials here.
Speaker 3: Net sales were $9.2 million for the third quarter of fiscal year 23 compared to net sales of $10.3 million in the prior year period. Gross profit for the quarter was $2.2 million. Or as I noted earlier, 23.9% of net sales.
Speaker 3: compared to $2.3 million or 22.4% of net sales in the same period the prior year.
Speaker 3: The increase in gross profit as a percentage of net sales was driven by the continued combination of net price realization and better overall product mix.
Speaker 3: Selling, General, and Administrative Expenses decreased 0.3 million or 8.1 percent to 3.4 million for the quarter-ended March 31, 2023, compared to 3.7 million for the quarter-ended March 31, 2022. Reductions and salaries and benefits were the primary drivers of the decrease. Net loss for Q3 fiscal year 23 was 1.2 million compared to a net loss of 1.5 million in the same period of fiscal year 2022.
Speaker 3: We'll increase approximately 120,000 per quarter, depending on our share price.
Speaker 3: The approximately 120,000 shares per quarter is based on a share price of a dollar forty per share The net cash balance was approximately 0.7 million on March 31, 2023 The same is on June 30, 2022
Speaker 3: We reduced our inventory balance by approximately 2.4 million from our June 2022 levels to 9.7 million. We will continue to strategically optimize our inventory while preparing for new product introductions and seasonal demands in our upcoming quarters. Gas generated by operating activities was 0.4 million for the first nine months of our fiscal year 2023, which compares the cash used by operating activities of 3.3 million in the same nine months of the prior year.
Speaker 3: This concludes our summary of the financial and operating results.
Speaker 3: Turning to slide 5, as stated earlier, most margin expansion remains a key focus.
Speaker 3: gross margin increased to 23.9% in Q3. A 1.5% point increase from the prior year gross margin of 22.4%. So, coincidentally, the decreasing gross margin of 4.2% points from Q2 reflects the customer disruption previously discussed, coupled with macroeconomic supply chain challenges.
Speaker 3: We are continuing to execute against our 6-point Gross Margin Plan.
Speaker 3: Number one, price rationalization. Number two, rationalized product. Three, new product introductions. Four, manufacturing efficiencies. Five, revenue scale, and six, mergers and acquisitions.
Speaker 3: Slide 6 provides the fiscal year 23 guidance details.
Speaker 3: I discussed our net sales guidance range for fiscal year 23, a 39.5 million to 40.5 million. Effectively, we have reset the baseline net sales performance to approximately 9.25 million per quarter and align the performance to our historical seasonality trends.
Speaker 3: Historical seasonality trends tend to be highest in the first and fourth quarters of our fiscal year.
Speaker 3: The company is continuing its recent trend of not providing forward looking gross margin guidance due to the choppy nature of the business transformation and the impact of the noted external events.
Speaker 3: We anticipate selling, general and administrative expenses of 35% to 40% of net sales in Q4 of fiscal year 23. As we move through the upcoming quarters, we expect to continually leverage and improve our scale on this S-GNA cost-base and return to our targeted range of 30%
Speaker 3: to 35% of net sales in fiscal year 24.
Speaker 3: 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.
Speaker 3: 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. Turning to slide 7.
Speaker 3: Refreshing our product portfolio is a key part of our growth plan. The Dynatronics team has reached approximately 6% of revenue coming from products released in the past three years and has been able to maintain this level for four consecutive quarters. Flight 8 shows the investment highlights for Dynatronics.
Speaker 3: The markets we serve, rehabilitation and bracing have opportunities for dynatronics to expand its product profiles.
Speaker 3: We target improvement in gross margin in the coming quarters, despite the revenue disruption, and overall macroeconomic environment. We have approximately 0.7 million of cash, and 9.7 million of inventory on the balance sheet at the end of March, with no debt.
Speaker 3: Dynamitronics has not borrowed against its asset base of inventory or accounts receivable since July 2020, representing 11 consecutive quarters of no debt.
Speaker 3: Dynatronics is focused on ensuring financial flexibility by evaluating additional working capital reductions, a possible asset-based line of credit, and potentially using our ATM facility as appropriate.
Speaker 3: We will continue to share our progress and update as we move through our fiscal year 2023.
Speaker 2: I will now turn it over for questions. Thank you. We will now begin the question and answer session. To join the question, you may press star then one on your telephone keypad. You will hear a tonic acknowledging your request.
Speaker 2: If you are using a speaker phone, please pick up your handset before pressing any keys. To withdraw your question, please press star then two. We'll pause for a moment as colors join the queue. Our first question comes from Brook, Zoneel of Lake Street Capital Market. Please go ahead.
Speaker 4: Good morning, Jen. I'm hoping perhaps you could give us just a little bit more color on the specific
Speaker 4: I don't need to know the name of the customer, but I'm just curious, the nature of what happened to disrupt your business with these customers.
Speaker 3: Not a problem. Good morning, Brooks. When we look at the revenue and the disruption that we face, it's really a tale of two stories. We did have an acquisition of biocustomer of ours, of one of our competitors in our rehabilitation space. And so that's our houseman brands, that's our Dimetronics brands of therapeutic modalities. If you look at it quarter over quarter, our bracing product category was roughly flat. And that's despite being impacted by some of our...
Speaker 5: as well to be disruptive.
Speaker 3: Okay, and that just helped me with the bracing. Did they just, customer just eliminate some line items? That's correct. These are, customers that have looked historically ordered certain products from us that we also sell under our burden code and brand and they made the decision to eliminate and streamline those through their portfolio. Okay, and then second question is.
Speaker 4: Any of that as well as sort of the general macro uncertainty?
Speaker 3: change your assessment of your ability to sell down the inventory you're holding? It does not change that assessment. The good part about our inventory, because we built it up over the last year going from six and a half to twelve million and now down to nine point seven, it's very fresh inventory. It's inventory that can continue to be sold through our customer base. If anything, it might provide us an opportunity to potentially reduce it more over time, but it's still our inventory, our manufactured products.
Speaker 4: very healthy and does not impact our ability to sell through it. Great. And then one last question. I'm just curious as you think about new product activity, are there any specific highlights you'd offer that it might give us some encouragement about?
Speaker 4: You know, the future and your opportunity to grow your business.
Speaker 3: Yeah, the good part about what we've done with nine new product releases since the early part of 2021 and all of those products are doing well in the marketplace. They're very much accepted. Our brands are still healthy and strong with where we compete. So that opportunity still exists to refresh the product portfolio.
Speaker 3: introduced new products like we did with the MAMMENT collection and that's really you know what we've seen up to this year is our growth and the rehabilitation side of our business was driven by our new products and that's where we had leaned into all of our investment and with the decline quarter of record and revenue when you have an acquisition in that space. We've said before we also need to expand that product introductions into the bracing segment which will continue to refresh that portfolio as well. So we're certainly still excited about that.
Speaker 6: Yes. A couple questions. So on slide five you talked about a facility build plan. Could you elaborate on that please?
Speaker 3: Yeah, so we take a look at, you know, from a manufacturing efficiency perspective, you know, we're continuing to ensure that...
Speaker 3: We get our facilities right size for the revenue that's coming through them. That's going to allow us to improve our manufacturing efficiencies and it's one element of our gross margin plan.
Speaker 6: Okay, got it. And can you talk a little bit about is this a follow on to the business transformation?
Speaker 6: As you from last year or as you say, 2023 business transformation.
Speaker 3: I would look at it as a resetting in more of a 2023 business transformation. Back in 2021, what we said was we want to focus on our own manufactured products. So we eliminated our third party distributed products that were the lower end of our margin profile. And then as we continued up to this point, that has continued to be our pace. So that part of the strategy is not changing. However,
Given the fact that one of our customers is now vertically integrating a greater, that's going to impact our revenue going forward. So we have to plan for that and that's where we're resetting it. So it's a bit of a continuation of what we did in April 21, but resetting the revenue expectation because of those competitive acquisitions. Okay, got it. One more on the product side. Can you talk a little bit about... But...
the difference between the Solaris platform and the 25 series, the 925 series.
Yeah, the biggest strength about the Solaris platform, which is our most sought after product, is the ability to have our accessories. That's our thermostim products. It's our light therapy products. Very well received in the athletic training room and the physical training centers out there. Those are not available in our 25 series models. Our 25 series models tend to be our entry, if you will.
into our combination units, but our Solaris is what our customers really demand out there. There are highest running products and it's based on those accessories.
And the ASP differential is a LARIS 2X or 3X, the price of the two carosures.
It is not a two or three X that sort of pricing elasticity doesn't exist in our market, but it does command of a premium ASP compared to the baseline series. Okay, got it. And so he comes with the ability to purchase more than one handset.
handpiece. It does. It does. Accessor does.
Okay, perfect. That does it for us. Thanks for taking the questions.
Okay, perfect. That does it for us next. We're taking the questions. Thank you Jeff.
Our next question comes from Scott Henry of Roth Capital. Please go ahead. Thank you.
Thank you, and good morning. I just want to follow up on a few of Brooks questions just a little more detail. So the first issue was one of your customers was acquired by a competitor which vertically integrated in. What percent of sales was that customer of your total sales?
Yeah, we did not disclose the yeah, the approximate is it's just it's significant customers the way that I would term in Scott So it's going to have an impact on our revenue and something that we're going to have to plan for going forward
By significant would you say greater than 5%?
I wouldn't say a number specifically, but I would say that it's less than 10% and it's going to be in the single digits.
Okay, all right. Thank you. That's helpful. And then another customer reduced the number of SKUs on the bracing.
That's helpful. And then another customer reduced the number of SKUs on the bracing. You know what?
Would you put that as about the same magnitude of impact as the first issue?
quantitative metrics around each of these events.
Yeah, I would say that it's going to be less impactful than the first issue, which was one of our customers acquiring a competitor overall in that part of the segment. We've been rationalizing our product and our price, which has had an impact in that business year over year. And so it will be less than the first issue, but it will still impact us going into our customer failure.
just if you could give it to them within your sector or overall economically just how do we think about that that term?
Yeah, I would let me put a little more context to it. You know, if we were coming into this fiscal year, we talked about our markets, you know, our customer base, our products, handing the grow at the 2, 3, 4% year over year base. When you look at the materials we talked about today on our investment highlights on PJ, we talk about that our customers, our products, our markets, we're competing in our more in line of being flat, sort of 0 to 1%.
when we look at some of the competitive information that's out there with public reports of folks like Novis and others in our segments, you know, we look at their Q4 of the calendar year going into Q1, you're seeing numbers like 0%, 1%, 2% overall growth. Now, that, and when I refer to choppiness, but at the same time, we also see
some elements of procedure volume still being in the mid single digits or patient therapy visits showing up in the mid single digits. So the choppiness I'm referring to is that there's no one consistent trend where those patient visits are showing up in demand for products, whether they be ours or our competitors at the same level. And that's what we're experiencing.
in our business is trying to understand when is the volume going to show up in our products and when will that choppyness smooth out? So if I'm interpreting that correctly and maybe I may, I'm not, are you saying that the pie is growing slower than originally expected? That is our expectation in our market. That's what we are.
is we should grow at the market rate on its own and then if we're taking share, we'll be able to grow above that. And we've been able to do that for every quarter up to this one, which was impacted by this competitive acquisition and this specific customer issue. So that's what we expect going forward. We're going to have to now take some additional share if we're going to beat the market. If the market's growing at 0 to 1 percent,
If we want to grow, we're going to have to take some share. But for right now, I would say that there's no material change in our share, but we believe that the market pie is sort of flat if you will at this point. Okay. Great. And then, you know, the final question.
which may have some follow-ups to it.
The big picture here, 40 million in revenues, pretty good amount of revenues. The question is...
Can I or do you believe you're at scale to be a cash flow positive company at 40 million in revenues or does that number need to be higher? Or can you make adjustments because you would think you could be profitable with that.
that size, depending on pricing, depending on how competitive you are as far as gross margins. You know, I guess the question stems into what's the master plan to turn cash flow positive and what's the timing on that?
We believe we have to make the reductions in the business or the changes in the business necessary to be cash flow positive at this revenue level. That's what running a good business looks like to us. We took significant steps in the fourth quarter to do that by reducing our SGNA on the range of 1.5 to 2 million.
that will appear in FY24. We still need to expand our gross margin. So we are going to operate the company in a manner that will put us on a path to being cashful positive. I'm not able to give you an exact timeline on that, Scott. I think having that appear in FY24 is certainly a target for us.
However, we need to make sure that just day-to-day we're executing on that. Okay. So when we look at the, you know, I mean the positive is you're not losing a lot of money, which is preferred.
When we look at EBITDA in 2024, the size of the loss, how should we think about it relative to the current losses? It looks like they're all generally around a million right now. Maybe a little higher.
maybe a little lower. Do you think those losses will, you know, at least maintain those levels or might they jump a little bit during this transition? Our expectation as we move into the new fiscal year, even at this reset revenue level of call it $37 million annualized.
will be that we will reduce the EBIDA loss or we're targeting to reduce the EBIDA loss in the new fiscal year. If you look at it up to this point, you know, call it, you know, 2 million or so of an EBIDA loss for the year by making the SGA reductions that we have made and that we're targeting, we should be able to reduce that.
There's still uncertainty out there in terms of the choppiness that I mentioned the market the flattening of the market But it is our plan to reduce that going into the new year
Okay, great. You know, I'm just going to ask one follow-up just out of curiosity because it's such a buzzword nowadays. Do you think you can utilize AI in your business in any ways to reduce costs? There may be ways that are out there that are appropriate for our business.
But for us, with the products that we have and the products that we compete in, the scale that we have, the number of customer transactions that we have, the single best opportunity for us is just to continue to manufacture quality products, stay lean, run a very clean business for our customers, is likely the most successful path for us.
Okay, and does that entail being more of a brand in less of a commodity to some extent? I mean, is that how you think about maybe more differentiated higher margin products?
We need to just continue to be very relevant in our customers minds with our brands our brands that you know
roughly 50, 60 years old, very well respected in the markets that we compete in. We're known for quality, we're known for quality for cost. We're going to continue to just deliver those on time, deliver them with qualities. And our customers have said, if you just do that, do the basics, we're going to reward you. Absent these unique events or external events of saying acquisition by one of our customers. Business Proof corners.
Okay, great. Thank you for taking the questions. Thank you Scott. This concludes the question and answer session. I would like to turn the conference back over to Mr. Career for any closing remarks.
Thank you, operator, and thank you all for your interest in Dynatronics. If you have any further questions, please direct them to IRADynatronics.com. Have a great day.
This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.
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