Dynatronics Corporation (NASDAQ:DYNT) Q2 2023 Earnings Call Transcript February 9, 2023

Operator: Welcome to Dynatronics' Second Quarter Fiscal Year 2023 Earnings Call. My name is Jenny and I will be your operator for today's call. As a reminder this conference call is being recorded for replay purposes. Following today's presentation, there will be a question-and-answer session with analysts. At this time, all participants are in a listen-only mode. It is now my pleasure to turn the floor over to your host Mr. John Krier, the company's President, Chief Executive Officer and Chief Financial Officer. John the floor is yours.

John Krier: Thank you operator. Good morning, everyone and welcome to Dynatronics' second quarter earnings call. Before we begin, I will call your attention to our safe harbor statement. I remind you that the discussions during this conference call will include forward-looking statements. Factors that could cause actual results to differ materially are discussed in the company's most recent filings with the SEC. 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. 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 dynatronics.com.

On today's call, we will cover the highlights and achievements of the second 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. Slide 3 highlight a few of our recent accomplishments as we continue our journey to exceed market revenue growth rates and establish a sustainable business that generates consistent profitability. Three key takeaways for our second quarter. I will begin at the highest level to briefly speak to the macroeconomic environment we are seeing. We, like our competitors and other industries, continue to face inflationary pressures, supply chain challenges and inconsistent utilization, all of which work to somewhat dampen our quarterly results.

We are happy to report, however, that despite these headwinds, we continued to stabilize and improve our gross margin profile. Our Q2 gross margin was 28.1% or an increase of 8.4% from the prior fiscal year. Though the macroeconomic headwinds prevented us from achieving quarter-over-quarter margin expansion. We expect raw material availability, inflationary pressures and freight volatility to improve throughout calendar 2023 and remain confident in the business outlook and in our differentiated strategy. And we'll maintain our net sales guidance of $45 million to $48 million for fiscal year 2023. And finally, our commercial execution delivered the 7th consecutive quarter of organic revenue growth above the baseline we set in April 2021 and at/or above market growth rates.

We are executing with a clean balance sheet, managing our inventory balances to appropriate levels, all while handling the increased demand for our products amidst the backdrop of new product innovations. Moving to slide 4. As a reminder, the full income statement and management discussion and analysis can be found in the 10-Q. I will summarize some of the key financials here. Net sales were $10.9 million for the second quarter of fiscal year 2023. That compares to net sales of $10.5 million in the prior year period, representing an organic growth rate of 3.3%. Gross profit for the quarter was $3.1 million or as I noted earlier, 28.1% of net sales compared to $2.1 million or 19.8% of net sales in the same period the prior year. The increase in gross profit as a percentage of net sales was driven by a combination of net price realization and better overall product mix.

While we have seen a slowing of cost increases during Q2 of fiscal year 2023 in both freight and raw materials specifically inbound freight, we remain cautious and have modeled cost pressures to continue for the remainder of calendar 2023. Selling, general and administrative expenses increased $0.4 million or 10.9% to $3.9 million for the quarter ended December 31, 2022 compared to $3.5 million for the quarter ended December 31, 2021. Investments in marketing and marketing programs were the primary drivers of the increase. Net loss for Q2 fiscal year 2023 was $0.8 million. That compares to a net loss of $1.4 million in the same period of fiscal year 2022. Separately, the company completed its reverse stock split on February 1, 2023. And additional details will be provided later in today's presentation.

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Outstanding shares will increase approximately 75,000 per quarter depending on our share price. The approximately 75,000 shares per quarter is based on a reverse stock split adjusted share price of $2.25 per share. The net cash balance was approximately $0.7 million on December 31, 2022. The same as on June 30, 2022. We reduced our inventory balance to $10.7 million with a reduction of approximately $1.4 million from the balance on June 30, 2022. We will continue to strategically optimize our inventory, while preparing for new product introductions and seasonal growth in our fiscal fourth quarter. Cash generated by operating activities was $0.3 million for the first six months of our fiscal year 2023, which compares to cash used by operating activities of $2.4 million in the same six months of the prior year.

This concludes our summary of the financial and operating results. Turning to slide 5. We will continue to provide guidance on metrics that we are confident with. And we are affirming our expectation that net sales in fiscal year 2023 be in the range of $45 million to $48 million. The midpoint of this sales guidance represents a 5% organic growth rate relative to the $44.3 million annual net sales in fiscal year 2022. The company expects the distribution of net sales in fiscal year 2023 across the quarters to align with historical trends. Highest in the first quarter, lower in the second and third quarters with higher growth again in the fourth quarter. Our second quarter continued this historical seasonal trend. Moving to slide 6. As we have stated in earlier calls, gross margin expansion remains a key focus.

Gross margin increased to 28.1% in Q2 an 8.4% increase from the prior-year gross margin of 19.8%. Sequentially, the decrease in gross margin of 2.1% from Q1 reflects seasonality coupled with macroeconomic supply chain challenges. As a company, we are executing on a six-point gross margin plan. Number one, price rationalization, an example is our tiered pricing strategy which rewards customer loyalty. This strategy is being tested with recent competitive acquisitions in our rehabilitation market. However, our dealer network has remained strongly aligned to our strategy. We remain committed to rewarding those dealers who demonstrate loyalty to our brands. And we remain 100% a dealer-centric organization in our rehabilitation product categories.

Number two, rationalized product. In addition to the major shift in April 2021, we routinely execute on streamlining our product offering. Internally, we simply say, we must grow over the disruption. This is routine product lifecycle maintenance. Our disciplined execution in this area is a key to longer-term margin expansion. Number three new product introductions. In the past quarter, we exceeded one million in Mammoth table sales orders after less than a year on the market. The remaining three opportunities in our six-point plan are number four manufacturing efficiencies; number five, revenue scale; and number six, mergers and acquisitions. We continue to explore all options to drive these three additional elements of our plan. My team and I are committed to execute our strategy and move us from the current approximate 30% year-to-date gross margin performance to our future potential based on the six-point plan.

Slide 7 reaffirms Dynatronics' fiscal year 2023 guidance details. Net Sales are expected to be in the range of $45 million to $48 million. The midpoint of this range $46.5 million represent 5% organic revenue growth. Given the persistent inflationary pressure, macroeconomic impacts and supply chain challenges, we are deferring providing gross margin guidance. We do expect fiscal year 2023 to continue the expansion towards our longer-term target of 40%. Year-to-date, we have improved gross margin by 4.1%. We anticipate selling, general and administrative expenses of 30% to 35% of net sales in the fiscal year 2023. As we gain revenue scale, we expect to continually leverage our SG&A cost base. Year-to-date, selling, general and administrative expenses are 34.8% of net sales.

And we expect this to slightly improve and fall firmly within the range we anticipate. We understand what it takes to build a scalable platform to grow our customer and sales base to be a much larger company in our markets, drive margin expansion and consistently deliver strong cash flow from operations to create value for shareholders. We will continue to focus on further improving all our financial metrics. This guidance is based on our current operations and it's 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 9. The Dynatronics differentiated growth platform targets initiatives in each of these strategic priorities. Momentum has been building on our gross margin expansion and as we move into Q3 and Q4 of our fiscal 2023.

While we acknowledge the year-over-year improvement, we are not satisfied with our progress. New, targeted and innovative product releases are the third pillar of our gross margin improvement plan. And we plan to continue to improve our performance in this area. Let's move to Slide 9. Healthy med tech companies, depending on industry or subspecialty, routinely drive 15% to 20% of revenue from products released in the past three years. The best companies often raise this bar to 30%-plus of net sales. The Dynatronics team has now reached approximately 6% of revenue coming from products released in the past three years. And this was launched from a standing start at the end of calendar 2020. I'm incredibly proud of our marketing, engineering, supply chain and operations teams for helping initiate this growth culture.

And there's more to come. Please turn to Slide 10 on winning market share. We strive to be an organization that consistently demonstrates execution to its plan. Not just words but solid execution to simple principles. We win market share through number one, superior commercial execution. Make the dealers' and customers' lives as easy as possible and make it simpler to do business with us. And two, favorable mix shift to product innovations. We remain focused on driving improvement in our dealer and end-customer experience, offering volume-tiered pricing that rewards customer loyalty and delivering product innovations that give dealers reasons to continue moving their end-customers to Dynatronics. Dynatronics' management team is focused on methodical execution and continually seeking a strong, differentiated understanding of the commercial landscape in the product categories we compete in.

Before I close with the investment highlights of Dynatronics, I want to share additional details of the recently completed reverse stock split as shown on Slide 11. As background, our shareholders authorized the Board of Directors to affect this split to ensure Nasdaq compliance with the $1 minimum bid requirement. The reverse stock split was effective at 5 p.m. Eastern Time on Wednesday February 1, 2023. The 1-for-5 split was authorized and approved at the annual shareholder meeting on November 17, 2022. Key reverse stock split execution points. Outstanding common shares were reduced from approximately 19.6 million shares to approximately 3.9 million shares. Preferred shares remain unchanged. However, the conversion feature was reduced in the same 1-for-5 ratio from 335,1000 shares to 670,200 shares.

Additional comparative details are available in the appendix of today's presentation. Slide 12 shows the investment highlights for Dynatronics. The markets we serve rehabilitation and bracing have stable growth profiles. Our sales and share growth have been driven by customer and dealer reaction to our business transformation. Sales have exceeded the market or our baseline expectation for seven consecutive quarters now. We target improvement in gross margin in fiscal year 2023 despite the macroeconomic environment. We have approximately $0.7 million of cash and $10.7 million of inventory on the balance sheet at the end of December with no debt. Dynatronics has not borrowed against its asset base of inventory or accounts receivable since July 2020 representing 10 consecutive quarters of no debt.

We are demonstrating progress against each of our strategic goals with more to come. The investment community is actively listening to our story and we will continue to share our progress and update as we move through our fiscal year 2023. I will now turn it over for questions.

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