Sharps Compliance Corp.
Q1 2019 Earnings Call Transcript

Published: 24 Oct 2018

[Operator:]

Greetings and welcome to Sharps Compliance First Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Jennifer Belodeau. Thank you. You may begin.

[Jennifer Belodeau:]

Good morning, and welcome to the Sharps Compliance First Quarter Fiscal 2019 Earnings Call. On the call today, we have David P. Tusa, the company's President and Chief Executive Officer; and Diana P. Diaz, Vice President and Chief Financial Officer. David will review the company's business performance operation and growth strategies, while Diana will review the financials. Immediately following their formal remarks, we will take questions from our call participants. As you're aware, we may make some forward-looking statements during the formal presentation and in the question-and-answer portion of this teleconference. These statements apply to future events, which are subject to risks and uncertainties, as well as other factors that could cause actual results to differ materially from where we are today. These factors are outlined in our press release, as well as in documents filed by the company with the Securities and Exchange Commission. These can be found at our website or at sec.gov. With that, let me turn the call over to David to begin. Go ahead, David.

[David Tusa:]

Thanks, Jenny. Good morning, everyone and welcome to our first quarter fiscal year 2019 earnings conference call. We're pleased to start the fiscal year 2019 with a strong first quarter, including revenue of $10.3 million. This represents an increase of 6.3% over the same prior year quarter. The increase was driven by a $500,000 increase in our flu shot related orders and a $500,000 increase in orders for the companies on unused medication management solutions. These increases were partially offset by lower billings in the pharmaceutical manufacturer market due to timing of inventory builds. Gross margins increased from 31.3% to 32.6% for the first quarter. SG&A increased from $2.7 million to $3 million, as we continue to invest in sales and marketing. The company reported operating income of about $100,000 for the first quarter consistent with the operating income of the first quarter of the prior year. We recorded net income of about $100,000 or breakeven per basic and diluted share in the first quarter of fiscal year 2019, which is flat over the prior year first quarter. For the first quarter of fiscal year 2019 our mail back solutions represented 55% of customer billing. Our route-based pick-up was 21% of customer billings and unused medication 16%. While we benefited from the flu shot and immunization related orders this quarter, there is variability and seasonality in that part of the business. So while the retail market is very important to our business, we focused on growing our newer revenue streams, including route base pick and unused medication solutions both of which typically contributed more predictable recurring revenue stream. During the first quarter we added Florida to our route based pick up footprint. And with this we now directly service 24 states or 55% of the population. Of course, we already directly serve all 50 states with our mail back and unused medication management solutions which have returned via common carrier. Furthermore, we're seeing intensified demand for our unused medication solutions, as communities, states, retailers health care providers and others work to address the growing epidemic of prescription drug abuse and accidental and poisoning. In fact, President Trump this morning signed a bill creating expanding and reauthorizing federal programs addressing different aspects of the opioid epidemic, including prevention, treatment and recovery. Last week we announced our support to the DEA's national drug takeback day, scheduled to take place on October 27. As part of that announcement, we noted our company milestone of having properly processed and treated over £2.7 million of unused medications since 2009 through the use of our MedSafe and TakeAway Medication Recovery System envelopes. The company has sold more than 3.4 million of its TakeAway Medication Recovery System envelopes. We deployed 2800 MedSafe units and have processed over 20,500 MedSafe liners. In August we announced a statewide federal federally funded contract for the purchase of MedSafe and liner's for the State of Montana. And as we expected the contract began rolling out in the September 2018 quarter and contributed 320,000 in revenues for the first quarter of 2019. We're pleased to support statewide efforts to fight the opioid epidemic by providing a convenient method for residences to properly dispose of unused medications, including controlled substances. We look forward to working with and assisting other states. Through our leadership position in the ultimate user unused medication management, we're committing to increasing our role in assisting the efforts to fight the national opioid crisis. And under the new DEA rules, the MedSafe is used in areas such as retail and hospital pharmacies, long-term care, drug treatment facilities, as well as licensed law enforcement, currently about half of our MedSafe are deployed in the retail pharmacy environment and it will say that the opioid crisis has really changed the way that we interact with and work with these industries, as well as state and federal government. As many of you are aware, over the past few years we've strategically broadened our portfolio of solutions. We've grown from primarily a mail back company to our position now to a leading comprehensive provider of medical and pharmaceutical waste management services, and most recently recycling a single use medical devices. We've seen continued interest in the health care setting for our TakeAway Recycle System, which is designed to facilitate the true recycling, not reprocessing a single use devices and this would include tubes, masks, or endoscopes, forceps, scopes, airway management devices and the like. Our TakeAway Recycle System provides a solution that keeps the customers complying with disposal regulations, help them - help to avoid fines, also support sustainability, while keeping used devices from returning to the health care setting. We're working with a number of single use device manufacturers who say their customers were actively looking for a recycled solution, in light of increased infections in hospitals and surgery centers and for improved single-use device efficacy. The market for recycling of single use devices is still developing, but we believe that it has the potential to ultimately become a material revenue stream for us. As we move through fiscal year 2019, we believe we're well positioned to leverage four primary revenue streams to drive growth. This includes our traditional medical waste mail back, our route-based pick up, our unused medication management solutions and the new single use device recycling system. The management team is very focused and excited about the prospects for the company for fiscal year 2019 and beyond. And with that, I'll turn it over to Diana to cover the financials in a bit more detail.

[Diana Diaz:]

Thank you, David. First quarter of fiscal 2019 revenue increased 6.3% to $10.3 million, as compared to $9.7 million in the first quarter of last year, with the increase primarily related to a $500,000 increase in pre-sales [ph] orders and a $500,000 increase in orders related to our unused medication solutions during the quarter. These increases were partially offset by lower billings in our pharma manufacture business due to the timing of inventory build. Our route-based pick up revenue for the first quarter of fiscal year 2019 of $2.8 million is not only 21% higher than the prior quarter, it's also more than double the average quarterly revenue generated from our acquired businesses based on their pre-acquisition revenue run rate. With the revenue growth, gross margin improved to 33% for the first quarter, as compared to 31% gross margin in the first quarter of last year. SG&A expense increased to $3 million or 29% of revenue for the first quarter of fiscal 2019 compared to SG&A of $2.7 million or 28% of revenue in the same prior quarter, due to increased investments in sales and marketing. With our focus on profitability, we continue to closely manage our controllable SG&A cost. It's an ongoing balance - balancing act that we believe that continued investment in sales and marketing makes sense for the long-term growth of revenue. We reported operating income of about $100,000 in the first quarter of 2019 consistent with operating income in last year's first quarter. We recorded net income of a $100.00 or breakeven earnings per basic and diluted share this quarter consistent with the first quarter of fiscal 2018 and we recorded EBITDA of $500,000 in the first quarter of fiscal '19, again consistent with EBITDA on the same period of last year. Looking at the key comparisons, for the first quarter of fiscal 2019 the company achieved both revenue and customer billings of $10.3 million. Professional market billings increased 19% to $3.7 million, retail billings increased 61% to $2.3 million and included flu and immunization related orders of $1.2 million and billings of about 700,000 for unused medication solutions. Flu and immunization related billings for last year were right at $$700.000. Government buildings increased 8% to $600,000 with half of the billings coming from MedSafe related orders and our pharmaceutical manufacturer billings decreased 47% to $800,000, primarily due to timing of inventory build. A few more comments about the retail flu business. On a trailing 12 month basis ending September 30, 2018, flu and immunization related orders of $4.5 were about $500,000 higher than the prior amounts of $4 million. Also, for the upcoming December 2018 quarter, we have already received orders of 1 million, which is more than half of the orders received last year in the December 2017 quarter, which totaled up to $1.7 million. Our balance sheet remained solid with $5.1 million of cash at September 30th, 2018 and working capital of $10.9 million. Based on customer billing for the month of September 2018, a $4.3 million are day sales outstanding or DSL is 47 days. And as David mentioned, we are excited about the prospects for fiscal 2019 as we focus on those four major revenue streams. We have the people and the infrastructure in place to drive growth in all these markets and we're ready to meet the challenges ahead. And with that, I'll turn the call back over to David.

[David Tusa:]

Great. Thanks, Diana. I think we're ready for the Q&A. So let's open it up.

[Operator:]

Great. Thank you. [Operator Instructions] Our first question is from Matt Hewitt from Craig-Hallum. Please go ahead.

[Charlie Eidson:]

Hi. This is Charlie Eidson on for Matt. Congrats on the Q1 on execution and thanks for taking my questions.

[David Tusa:]

You bet. How are you doing?

[Charlie Eidson:]

Good. Related the unused medication offering, can you provide some color on the sales pipeline. Are you having - you know, have you been able to increase penetration with existing customers and are you seeing the size of the deal increase as the offerings gains additional traction?

[David Tusa:]

That's a great question. As I mentioned earlier in the - in the opening, what's going on in the country with this opioid crisis, is really - it's really changing how we interact with customers and it's really changing how this market is being addressed. So yes, the pipeline continues to grow. The opportunities that were proposed to go on are larger and we're pleased. I think what we're really excited is that we see ourselves as the leader in this unused medication market. Customers respect us. We have a significant amount of history in properly managing the unused medications, including controlled substances. So we're excited about that market opportunity and think that they will continue to show growth.

[Charlie Eidson:]

Certainly, that makes sense. I wanted to ask about a revenue line that isn't talked about much, the third party treatment revenue line item. It looks like it was up over 100% in FY '18 - finishing around $900,000 in revenue and then Q1 came in a little lower than I would have expected around $100,000. How should we be thinking about this revenue bucket for the rest of '19? Is that something you're focused on as a growth area?

[David Tusa:]

Well, you know, the third party treatment there's some level that's consistent, but then the majority of it is really episodic. And I think what you're talking about the prior year was related to Hurricane Harvey business, that we had. So we had a lump sum of business in that particular quarter. So we do look for opportunities. I will tell you this for us to be able to allocate our time and capital and effort to, it needs to be something sizable and quite profitable. So we do run across opportunities here and here.

[Charlie Eidson:]

Okay. That's helpful. And then one more you know, SG&A was up a little bit, as you mentioned you mentioned you were investing in sales and marketing. Is this something - is this kind of the run rate we should expect over the rest of the year? Or you know, I guess any help trying to figure out how to model that would be helpful?

[Diana Diaz:]

I think we've said before that it's going to be in that range. This is probably at the top end of the range, but somewhere $3 million, you know $2.9 million, $3.1 million of SG&A is about what we would expect going forward.

[Charlie Eidson:]

Okay. Great. Thanks for taking my questions.

[Operator:]

Our next question is from John Sturges from Oppenheimer and Company. Please go ahead.

[John Sturges:]

Thank you for taking my question. Some interesting things, just curious about, it looks like most of this was organic growth and I'm just curious as to - I know there is been early discussions some M&A. My question is so in parts. How did you enter Florida, was that purely organic or did you pick up a route carrier and the other one, that would be curious about is with the revenues increases at this point, how much of that drops - can drop to the to the bottom line?

[David Tusa:]

Okay. Two very good questions. First of all, all the growth that's reflected is organic. We've moved into Florida organically. We did not we did not acquire a company. So we did that organic. The best way to look at the modeling going forward is because I think this quarter on the gross margin is pretty clean. I think the best way to do that is to model out incremental revenue probably about the 45% level that would - that would drop as gross profit line item and then of course, Diana mentioned about 3 million a quarter in SG&A.\

[John Sturges:]

Got that. I have to tell you that you've had quite nice organic growth, do you anticipate continuing that in the next say couple of years. But I can imagine you would grow as fast as there. The other question is the Hurricane impact, was there one right through your - the middle of part of your service area?

[David Tusa:]

We - first follow on the Hurricane side. We planned very, very well for this, what we did is we make sure that all the customers were serviced well in advance prior to the Hurricane. And then within a week after our Hurricane hit, we were back on the rise, so we didn't have any disruption related to the Hurricane in Florida. As far as the growth rate you know, we still think we're very low penetrated in a number of key markets and we still have opportunity, we think to grow significantly. If you look at unused medication and how well we've grown, we're still very, very low penetrated in that market and it continues to - it continues to develop, the pipeline is strong. On the route-based business, we've been growing that consistently at about the 20 plus - 20 to 20 plus percent, here it is 21% for this quarter, but we think that there's a real opportunity on the route based to continue to grow at that level and maybe even higher with some additional sales and marketing. So unused medications could - should continue to be strong on our traditional mail back, on our traditional mail back business. We continue to see opportunities in all the markets that we chase. We were we were cautiously optimistic, but pleased with the increase related to the flu business. We don't want to be known as the company that only rides mail backs for the flu business. But we were pleased to see that grow. So we're excited. And we think that we continue to have opportunities for significant organic growth.

[John Sturges:]

It seems to me you could even accelerated, say a little M&A going on. I'm just curious what are the opportunities for picking up possibly other route based businesses that maybe you know within your coverage space?

[David Tusa:]

We did. We look at tuck-in opportunities. We look at that for expansion opportunities and well we look selectively. We do have a pipeline of opportunities and we continue to stay in contact with the market. We're pretty selective and has to meet certain requirements for us. We're not going to just go do a deal to go do a deal. Plus it will be nice to have a little more currency in the stock and hopefully with continued solid performance and we'll have a little more currency in the stock and be able to look at - look at additional opportunities.

[John Sturges:]

Well, congratulations. Very nice execution.

[David Tusa:]

Thank you.

[Operator:]

Our next question is from Kevin Steinke from Barrington Research. Please go ahead.

[Kevin Steinke:]

Good morning. Just wanted to follow up on the discussion about Florida. So could you just give us a little bit more of a sense of the type of investments you needed to make to expand in Florida. Maybe in terms of trucks or you know, office space, sales team, just trying to get a sense you know, of the investment and then why the decision to go into Florida and you know, how you're going to attack that market going forward from a sales perspective?

[David Tusa:]

Sure. First of all, with respect to Florida you know, unused medications or mail back business that we've always been in Florida, this is just a route based pick up. Given the reason why we did it is, we have a lot of business in Florida, You know, the majority of our business is where we have a customer that may have 200 locations across the country and that could be a significant portion of than that they're actually in Florida. So we've been subcontracting it out for years and it got to the point where when we looked at it hard that we could - what we put out there, heavy trucks with three, trucks which are you know, $1200 a month lease and three drivers, a very, very small office. It's maybe a few thousand dollars a month. It's a small office and then we're able to do is a service at ourselves and its - we recognize a higher profitability and we're able to service the customer direct instead of using a subcontractor. And that's important in our in our business that customers like to see that we're doing more and more of this route based pick up where we directly service.

[Kevin Steinke:]

Okay. That very helpful. That makes a lot of sense. So just wanted to touch on the pharmaceutical manufacturer channel for a minute. You mentioned the timing of inventory builds impacting the quarter. You had talked last quarter about a new customer potentially ramping up in the September quarter. Did that kind of roll out as planned and you know was the quarter more impacted by just builds from existing customers?

[Diana Diaz:]

We did have a program that started in this quarter and that's reflected in the revenue there. And you know just compared to the first quarter of last year the inventory build were at a lower level. Different programs that sort of thing.

[Kevin Steinke:]

Sure. Okay. I mean, we - you know presumably those will be built in future quarters, it just was a kind of a timing issue. Okay. And you know also the flu - the flu shot business was good. I mean, is that just again something that we should think about in terms of some timing benefited you or is there any change or increase in order flow relative to history, just trying to get a sense of you know, maybe if this is pulled forward from future quarters or how we should think about that?

[David Tusa:]

No, it was just increased orders. I think that there's been much more media coverage of flu shots. And I think that's really helped people to get out and get their flu shots and what's really encouraging and Diana mentioned it in her opening, was that in the December quarter we actually have in our budget the same as what we generated last year which was a million seven. So what are we 24 days into the first month of the quarter. We already have a $1 in orders in hand within expectation of 1.7. So that's strong as well. So it just appears that there's more people going out getting flu shots and I think the media is doing a good job of encourage everyone to do that.

[Kevin Steinke:]

Okay. That's good to hear. Can you give us an update on what's going on in that home healthcare market? I know that can be impacted by timing from quarter-to-quarter. Is there a meaningful pipeline of sales there or you know, what's your level of sales effort in that particular home health care market?

[David Tusa:]

Healthcare is an interesting market and it's a very, very fragmented market. And we address home healthcare primarily through distributors. We have a couple of key distributors that we sell through, which is lot more efficient to go through them, where the healthcare agencies maybe ordering other items directly from them. We've always said that that is probably our initiative, our lowest growth markets and what do we do last year, like 4%, 5% increase over-year-year in home health care market and that's kind of consistent with what's happened with our expectations, not a lot of growth there. And it just makes more sense, Kevin, what was the opportunities that we have in front of us in a much, much higher growth markets that we allocate more of ourselves marketing resources to those initiatives. And it shows in the in the numbers when you look at the retail that when you look at professional and you look at some of the other markets and we're just allocating more resources to markets. But we think that we can drive more growth and grow quarter.

[Kevin Steinke:]

Okay. Yeah, makes sense. Just lastly I wanted to ask about the takeaway recycle system you had talked last quarter about one program that you had landed with a customer. I mean, is that - how is that rolling out or ramping up. I mean, is that something that I think should benefit to December quarter as you had mentioned previously?

[David Tusa:]

Right, right. We'll see about 200,000 in revenue in the in the December quarter related to one of the customers that we're working with. We're also working with a couple of others as well. So we're excited, you know I've always said that what we do is we listen to the customers and we listen to their pain points and we listen to what they're what they're trying to accomplish and we design solutions accordingly. And this is a great example. The take away recycle system is when the industry came to us and asked us for a recycle solution for the single use devices that would otherwise be reprocessed and what we processed is basically cleaning them and then sending them back into health care. They could be use three or four times in the healthcare setting and I think the market is looking or the industry is looking for more of a true recycle solutions or doesn't go back into healthcare, but the device itself is recycled in a way that supports the sustainability initiatives.

[Kevin Steinke:]

Okay. Thank you for taking the questions.

[David Tusa:]

You bet.

[Operator:]

[Operator Instructions] Our next question is from Brian Butler from Stifel. Please go ahead.

[Brian Butler:]

Good morning. Thank you for taking my question. Just on the retail business, can you give us some incremental more color on the MedSafe that were kind of put out this quarter versus maybe last quarter and a year ago period?

[David Tusa:]

Here's the best way to look at the MedSafe and I'm going to talk about all the markets. We've got about 2800 out there right now. A year ago it was 1400 and a year before that it was about 700. So what they're doing is they're doubling every year in the deployment of the MedSafe's and roughly half of the MedSafe's we have out there are in the retail market, region pharmacy line.

[Brian Butler:]

Okay. And I heard you guys correctly, I think you said that unused medication was about $700 million in the third quarter for revenues and what was the year ago period?

[Diana Diaz:]

It was $700m000 and, a year ago it was - it was about. I'm sorry, $300,000 a year ago.

[Brian Butler:]

Okay. 300. And…

[Diana Diaz:]

In the retail market.

[Brian Butler:]

Okay. And when you think about you know kind of anniversary and some of the larger you know gains that you saw from unused medication in 2018, I mean is the kind of $1 million or $1.1 million, I guess a flu related retail you know a sustainable pace. I mean is that - am I thinking about this right away that you know non- flu retail is running somewhere on that forward $4.3 million annually?

[David Tusa:]

I'm sorry, one more time Brian.

[Brian Butler:]

I'm just trying to understand, like how much you know, you're going to be facing some tougher growth comps in the second half or in the remainder of '19, especially on unused medication. I'm just trying to understand the non-flu related kind of pace of revenues. I mean, right now you're running about 1.1, so call it $4 million on an annual. I mean. Is there more upside to that from where we are on - from unused medication or is that kind of the right baseline to use?

[David Tusa:]

I think the best way to look at that unused medication is, it was a solid quarter for the unused medication. We had Montana in there, right.. It was about 300,000 and we think that we have the opportunity we think fiscal year '19 we're going to have the opportunity to add more med safes in the retail - in the retail market that will drive that increase from 2800, hopefully you know, much higher than that. And then at the same time, we're generating the recurring revenue from all the MedSafe that are out there that we're selling replacement liners. So that's what's driving that growth and that's what we think given the opportunity. So you're going to say we hope we expect to see significant increases from the sell, the upfront sale of MedSafe, as well as from the liners that we saw sold previously that we're going to get to continue recurring revenue.

[Brian Butler:]

Okay. And then segment wise, looking at the pharmaceuticals, I mean ,you touched on this a little bit. Obviously quarter-to-quarter there's a lot of variability, but even on a trailing 12 month basis I mean, the segment is down. I mean, you're still around maybe just under $4 million annually on a on a trailing 12. And based on your current support programs that you have out there and the new one that you started is this kind of the baseline. I mean, does the low level of kind of that annual pace. I mean, I'll accept the fact that there's a lot of volatility, but you know, if we went back two years ago, I think you guys were closer to $6 million in annualized revenues and now you're our around 4, so I'm just trying to understand what really is kind of the base revenue?

[David Tusa:]

I think you're right, I think it's about $4 billion to $4.5 billion as the base revenue for the pharmaceutical manufacturers market and that will increase as we close more deals.

[Brian Butler:]

What is the pipeline look like for pharmaceuticals at this point and the remainder of the '19?

[David Tusa:]

We've got a strong pipeline with existing customers that are launching new drugs, as well as we have a few deals we're chasing with new customers. So the pipeline does look good and we think that will hopefully see some of those deals and what the margin in June quarter and also margin in June quarter for either new deals with existing customers or just new deals with new customers.

[Brian Butler:]

Okay. And then also on the incremental margin, I think I heard at the end that you talked about it being about 45% kind of flow through, down to the gross margin line, is that slightly less than where we were before, and is that because you're just spending more on just having some higher costs with rolling out some of the newer revenue drivers?

[David Tusa:]

We've always said it's like 45% to 50% incremental gross margin and when I side using the 45% as is the route based business is closer to the 40% to 45% incremental margin. And while the MedSafe type or the unused medication business can be you know, 45%, 50%, maybe even higher. So I'm just trying to be conservative as with the mix of the product, the different solution offerings. I think conservatively you could say incremental revenue of 45% of the gross profit line item.

[Brian Butler:]

Okay. And then just two housekeeping ones. Do you have a number for CapEx in the quarter and cash from operations?

[Diana Diaz:]

Cash from operations is going to be around 400, 500,000. And we had about 250,000 of CapEx.

[Brian Butler:]

Anything unusual in there or is that just kind of the regular kind of maintenance?

[Diana Diaz:]

Just regular capital maintenance, yeah.

[Brian Butler:]

Okay, great. Thank you very much for taking the questions.

[David Tusa:]

All right. Thanks, Brian.

[Operator:]

Thank you. This concludes the question-and-answer session. I would like to turn the floor back over to management for any closing comments.

[David Tusa:]

Great, thank you. Thank you for everyone participating. We look forward to talking next quarter.

[Operator:]

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.