Dynatronics Corporation

Good morning, ladies and gentlemen, and welcome to the Dynatronic second quarter fiscal year 2022 earnings call. It is now my pleasure to turn the floor over to your host, Skylar Black, the company's principal accounting officer. Skylar, 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, financial performance relating to our business. These forward-looking statements reflect our view as of today only and they involve risks and uncertainties that could cause 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 are included in our most recent NK and other reports filed with the SEC and 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 in the webcast and posted in the investor relations section of Dynatronics.com. I will now turn the call over to John Krier our president and chief executive officer.

Thanks, Skylar. Good morning, everyone, and thanks for joining Dynatronic's call today. On today's call, we will cover the recent highlights and achievements. 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. With me today are our principal accounting officer, Skylar Black, and our chief financial officer, Norm Regner. You can see Norm's, Skyler's, 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. Slide four highlights just a few of our more recent accomplishments, all of which drive the company's revenue growth to exceed the market and our baseline revenue expectation for the third consecutive quarter. Our accelerating transformation continues even with greater than expected disruption from COVID-19. Let me begin with three headline points. First and foremost, we have a clear line of sight to profitable growth and have a well-defined strategy in place to execute against. We have been executing an ongoing business transformation and consistently performing each quarter to achieve our goals. Second, we are confident in our outlook. We maintain our fiscal year 22 net sales guidance. And third, our markets generate 5% to 6% organic growth per year. We plan to take market share and therefore grow faster than the 5% to 6% organic growth our collective markets generate. Moving to slide five, we will continue 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 expect net sales in fiscal year 22 to be in the range of 40 million to 45 million, assuming similar procedure volume despite the recent surge in COVID-19 cases. The midpoint of this sales guidance represents a 15% growth rate relative to the 37 million annual continued product net sales baseline set in April 2021. Customer and dealer reaction to Dynatronic's transformation strategy continues to be overwhelmingly positive, demonstrating our new business model strength and providing us momentum, building upon the favorable tailwinds in the markets we compete. However, 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 22. The company expects the distribution of net sales across the quarters to align with historical trends. Highest in the first quarter, lower in the second and third quarters, with a bounce back in the fourth quarter. This pattern matched our expectations for Q2, consistent with our prior guidance. However, there may be some variability in this pattern. as the company adjusts to ordering patterns in its rehabilitation market, given the transition to an exclusively dealer-based sales model. Slide six provides the guidance details. We are 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 achieve and reflects our long-term target. Our competitors, DJO, before they were acquired by Colfax, and Oser, when you break out their bracing segment, maintain margins for bracing and supports of approximately 50% and for rehabilitation of roughly 30%. Our gross margin was 19.8% in Q2. It was 27.0% in fiscal year 21, including the exit activities associated with the discontinuation of third-party distributed products. Gross margin in Q2 was muted by the impact of COVID-19 and supply chain challenges, including extraordinarily high freight, raw materials, and labor costs. Specifically, gross margin would have been 29.9% or 10 points higher without the COVID impacts in the second quarter. Excluding the additional freight, raw material, and labor cost impacts, our gross margin was higher in the second quarter and first half versus the prior year. More generally, the company and its customers expect to experience 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 alternate sourcing relationships, and improving factory yields. We're going to do what it takes to keep serving demand from our customers. We have a 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 to create value for shareholders. We have not yet provided gross margin guidance for fiscal year 22. We just finished our first half year results, in this new model, continue to face significant cost pressure headwinds due to COVID-19 supply chain disruption, and we need additional experience to feel comfortable discussing where margins might trend in fiscal year 22. That said, we do see opportunities to expand our gross margins over time by better capacity utilization. We 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 22. Q2 was a good example of the team managing SG&A appropriately in the face of mounting input cost pressures. As we gain revenue scale, we expect to continually leverage and improve our scale on this SG&A cost base. 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. Turning to slide seven, each of these bullets is important to our sustainable growth platform. I'm proud of our results and the great work of our team over the past several quarters. I want to provide context to the strategy driving the momentum we generate. Goal number one is to expand margins and cash flow over time. As a company, we 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 enable sustainable, long-term growth. Drivers of future margin growth include dynamic price tiers, according to the loyalty share from the dealer and customer. The advantage there is to position the company to make the dealer's and customer's life as easy as possible and make it easier to do business with us. Pricing that factors in relationship metrics, such as full company loyalty share, in addition to product-based pricing, allows us to be much more competitive. Goal number two is to strengthen the balance sheet via sustainable cash flow from operations. which can support additional investment in product development and or M&A in target markets. The recent cost pressure has made this very difficult to achieve. However, we remain focused on what we can control as an organization. Goal number three 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 lifecycle management. Moving to slide eight, the three takeaways about our recent new products are one, ramped up cadence and expanded pipeline of product innovations. Two, in January 2022, under the umbrella of return to mobility, we launched an exclusive suite of products. And additionally, three new metal tables. And three, dealer and customer feedback drove the product releases. This expansion is additive to our dealer strategy by driving greater loyalty through our dynamic pricing approach. The more products within our product portfolio we offer to our dealers and customers, they are rewarded for buying more from us in our dynamic price tiers. I want to provide the highlights of each of these. Metal tables are a new product category for us. We launched our first company-manufactured metal tilt table in January, filling a void in our product offering since late 2020. We are the only provider in the market that dealers and clinicians can get all four products in one place. Our four distinct products in the rehabilitation care pathway are a tilt table, stand-in table, parallel bars, and training stairs. We anticipate several new metal table product launches in the first half of fiscal year 23 to broaden our metal tables platform, thereby expanding our presence of metal tables in the rehabilitation market. We are currently a leading company in laminate or wood tables in the rehabilitation market, and this expansion is a natural next step. We anticipate that our expanded pipeline of new product innovations will lift our growth annually. Looking at slide nine, Brian Baker rejoined Dynatronics full time as Chief Operating Officer in January 2022. He served as Chief Operating Officer from May 2019 until his promotion to Chief Executive Officer in August 2019. Brian held that position until July 2020 when he resigned due to health issues relating to COVID-19. Thankfully, he has fully recovered from the COVID-19 virus. Following his resignation as Chief Executive Officer, Brian continued as a member of the Dynatronics Board of Directors and a consultant to the company. He has continued to deliver significant accomplishments to drive growth and profitability during his tenure as a leader and then later as a consultant to Dynatronics. New leadership hires have been a major focus area. We implemented culture partners, leadership culture of accountability, and focused our employee actions on overall organic revenue growth and consistent profitability. On slide 10, the markets that we serve are large, growing, and highly fragmented. The industry research continues to indicate that the rehabilitation, embracing, and supports markets exhibit attractive growth profiles. Opportunities exist across Dynatronic's primary brands to expand market share within existing customers, as well as additional product offerings within the segments in which we compete. As we are all likely experiencing or reading about, The statistics of facility activity, orthopedic procedures, or other peripheral activities like team sports that create demand for our products are volatile based on COVID-19 activity and staffing shortages reported throughout the country. Building on the foundation and the markets we serve, let's move to slide 11. Our M&A strategy is 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. We have the 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 to 30 million revenue range. We believe we can make a smaller acquisition than demonstrate post-acquisition success. We believe our share price is undervalued, and we want to unlock some of that value. I will now turn the call over to Norm.