Sharps Compliance Corp.
Q2 2019 Earnings Call Transcript

Published: 23 Jan 2019

[Operator:]

Good day ladies and gentlemen and welcome to your Sharps Compliance Second Quarter 2019 Earnings Call. All lines have been placed on a listen-only mode and the floor will be open for questions and comments following the presentation. [Operator Instructions] At this time, it is my pleasure to turn the floor over to your host, John Nesbett. Sir, the floor is yours.

[John Nesbett:]

Good morning, and welcome to the Sharps Compliance second quarter fiscal 2019 earnings call. On the call today, we have David Tusa, the Company's President and Chief Executive Officer; and Diana Diaz, Vice President and Chief Financial Officer. David will review the Company's business performance, operations and growth strategies, and 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 session 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 earnings 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. So, with that, let me turn the call over to David to begin the review and discussion. Go ahead, David.

[David Tusa:]

Thanks, John, and good morning, everyone. Welcome to our second quarter fiscal year 2019 earnings conference call. Revenue in the second quarter of fiscal year 2019 increased 11% to $12.4 million. This compares to revenue of $11.1 million in the same prior year quarter. The growth was driven primarily by about $1.5 million in increased flu shot-related orders that are reflected in our retail market billings. This was partially offset by lower billings for Pharma Manufacturers due to timing of inventory builds. The Company reported operating income of $800,000 in the second quarter of fiscal year 2019, a significant improvement compared to operating income of $100,000 in the second quarter of 2018. EBITDA was $1.2 million for the second quarter, compared to about $500,000 in the prior year quarter. Sharps record net income of $800,000 or $0.05 per share in the second quarter as compared to $200,000 or $0.01 per basic share in the second quarter of the prior year. We believe our strong second quarter result reflects our success promoting the value of our three primary solution offerings. One, the traditional medical waste mailbacks; two, the route-based medical waste pick-up services; and three, our unused medication management solutions. During the second quarter, we achieved growth in all of these solution offerings, further strengthening our leadership position as a comprehensive solutions provider to healthcare and retail markets. Additionally, our new single-use device recycling system contributed $200,000 of revenue in the second quarter and is reflected in our billings by solution as Mailbacks and in the professional market. In order to minimize the impact of seasonal or unpredictable revenue in our business, we made a strategic decision to add a route-based pick-up as well as unused medication line of solutions to our service offerings over the last few years. Our route-based pick-up offering now operates in 24 states, reaching approximately 55% of the U.S. population. Furthermore, demand for our unused medication solutions including the MedSafe and TakeAway Medication Recovery System Envelopes, continues to intensify as communities, retailers and healthcare providers work to address the growing epidemic of prescription drug abuse and accidental poisonings occurring across the United States. Specifically related to the MedSafe, we have installed now about 3,000 of our MedSafe collection with subsequent units, we processed over 24,500 MedSafe liners. Now, the 3,000 compares to 1,600 collection receptacles a year ago and about 800 units two years ago. Through our leadership position, we are committed to increasing the role our solutions play in assisting the effort to fight the national opioid crisis by making proper disposal of used medications including controlled substances available in a convenient and cost-effective manner. We're excited to start the fiscal year off with two solid quarters of growth, continued strategic positioning of the Company as a comprehensive solutions provider. We continue to differentiate our offerings by providing high quality and responsive customer service, web-based regulatory and training tools, customized recording and reasonable contract terms and pricing. We believe we're evolving as a leader in the United States for ultimate user unused medication management solutions through our two offerings, the MedSafe and the TakeAway Medication Recovery System Envelopes. Likewise, we believe our TakeAway Recycle System for the proper recycling of single use devices could represent a significant opportunity. And we're focused on continuing the momentum we've seen from this new offering. As we move through the balance of fiscal year 2019, we believe we're well-positioned to continue to improve our leadership position. We look forward to leveraging opportunities to add new customers, track additional revenue growth and improve profitability. And with that, I'll turn it over to Diana.

[Diana Diaz:]

Thank you, David. As mentioned by David, second quarter fiscal 2019 revenue increased 11.5% to $12.4 million as compared to $11.1 million in the second quarter of last year with the increase primarily related to a $1.5 million increase of flu shot-related orders. This increase was partially offset by lower billings in our Pharma Manufacturer business due to the timing of inventory builds. Our route-based pick-up revenue for the second quarter of fiscal 2019 of $2.1 million is not only 14% higher than the prior year 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 this overall revenue growth, gross margin improved to 32% for the second quarter as compared to 28% gross margin in the second quarter of last year. SG&A expense increased to $3 million or 24% of revenue for the second quarter of fiscal 2019, compared to SG&A of $2.8 million or 25% of revenue in the same prior year quarter. We had some increased investments in sales and marketing that drove that increase in the dollars. With our focus on profitability, we continue to closely manage our controllable SG&A costs. It’s an ongoing balancing act as we believe the continued investment in sales and marketing is necessary for long-term revenue growth. Company reported operating income of $800,000 in the second quarter of 2019, an improvement over operating income in the second quarter of last year of a $100,000. Sharps reported net income of $800,000 or $0.05 per basic and diluted share this quarter, which is higher than last year’s second quarter of $200,000 or $0.01 a share. The company recorded EBITDA of $1.2 million in the second quarter of this fiscal year, which is higher than EBITDA last year of $500,000. Looking at the key comparisons for the second quarter of fiscal 2019, we achieved revenue and customer billings of $12.4 million and $12.5 million, respectively. Professional market billings increased 14% to $3.8 million. Retail billings increased 61% to $4.2 million and included flu and immunization-related orders of $3.2 million. Flu and immunization-related billings for the prior year quarter were $1.7 million. Government billings increased 32% to $500,000, Pharmaceutical Manufacturer billings decreased 43% to $800,000 primarily due to the timing of inventory builds. For the second quarter of fiscal 2019, our mailback solutions represented 65% of customer billings and increased 20% over the prior year. For the same period, the route-based pick-up was 17% of customer billings and grew 14% over the prior year. And finally, our unused medication solution was 11% of customer billings and grew 3% over the prior year. Our inside and online sales channel, which primarily targets the professional and government markets, achieved a 20% increase in billings in the second quarter of fiscal 2019 compared to the prior year. A few more comments about the retail flu business. On a trailing 12-month basis ended December 31, 2018, flu and immunization-related orders of $6.1 million were $1.5 million higher than the prior amount of $4.6 million. This increase was driven by more adults receiving of flu shot in 2018 versus 2017 as well as more flu shots administered in the retail clinic sector in 2018, which per the CDC is now over 32%. Looking at the key comparisons for the first six months of fiscal 2019, revenue increased 9% to $22.7 million and customer billings increased 9% to $22.8 million. Professional market billings increased 16% to $7.5 million. Retail billings increased 61% to $6.4 million. Pharmaceutical Manufacturer billings decreased 45% to $1.7 million due to the timing of inventory builds. Home health care billings were essentially flat at $4.1 million. Assisted living billings increased slightly to $1.3 million and government billings increased 18% to $1.1 million. With respect to the Pharma Manufacturer market billings, we believe the fiscal 2019 billings will be relatively flat when compared to the fiscal 2018 pharma billings of $4.4 million. While we do have new pharma programs launching in fiscal 2019, the impact is offset by significant inventory builds for a larger pharma programs in the first half of fiscal 2018, which did not reoccur in fiscal 2019 due to their significant size. For the first six months of fiscal 2019, our mailback solutions represented 60% of customer billings and increase 11% over the prior year. For the same period, our route-based pick-up was 18% of customer billings and grew 17% over the prior year. And our unused medications was 13% of customer billings and grew 20% over the prior year. And for the year-to-date period, the inside and online sales channel achieved a 27% increase in billings in the first half of fiscal ‘19, compared to the prior year. Our first 2019 year-to-date gross margin was 32.4%, which was an improvement over the first six months of last year of 29.6%. SG&A increased 8% to $6 million in the first half of fiscal 2019 and net income for the first half of fiscal 2019 was $849,000 or $0.05 a share compared to net income is $231,000, or $0.01 per share in the first six months of 2018. Our balance sheet remains solid with $6.4 million of cash at December 31, 2018 and working capital was $11.8 million at the end of the quarter. As David mentioned, we're excited about the prospects for fiscal 2019 as we remain focused on our key revenue streams and continue to invest in sales and marketing as needed to grow the business. And with that, I'll turn the call back over to David.

[David Tusa:]

Thank you, Diana. Operator, we're ready to open it up for the Q&A.

[Operator:]

Absolutely. Ladies and gentlemen, the floor is now open for questions. [Operator Instructions] And our first question comes from Peter Rabover from RCO Capital. Please state your question.

[Peter Rabover:]

Hey, guys. It’s actually [technical difficulty] but that’s fine. Congratulations on a nice quarter. So, I guess, just [technical difficulty] in December there was a new EPA rule signed about disposal of hazardous waste [technical difficulty] I guess with respect to medicine and et cetera, [technical difficulty] and I’m curious how you guys fit into that rule, and whether [technical difficulty] is able to [technical difficulty] hazardous waste and anything -- any color you can give us would be awesome?

[David Tusa:]

Okay. I think, I understood your question. You were cutting in and out. First of all, let me say this about unused medication. Vast majority of the unused medication that we process and we treat is what's called ultimate user. Ultimate user medications are consumer dispensed. It's medications that you may have in your medicine cabinet to go unused. And those fall under different rules. And we're studying these new EPA rules, but it looks that applies a lot to facilities that are using drugs internally for themselves. We're studying that, we're looking at that, we see if there may be an opportunity. But right now, everything we do is driven by rules outside of those EPA rules.

[Peter Rabover:]

Okay. Is your incinerator able to take, I guess what EPA now labeled, hazardous waste in terms of medicine?

[David Tusa:]

No. Hazardous waste is a different waste stream. Hazardous waste stream is different from medical waste, different from pharma waste, and hazardous waste is a different material. We do transport that. We use third parties for the destruction of it. So, if we have a customer, for instance, one of our largest customers, and we just added the haz waste offering to our medical waste offering, and the way that we do that is that it’s already existing customer, we can provide the transportation and we can facilitate the transportation and the ultimate destruction. But, we would have to use a third-party incinerator for hazardous waste.

[Peter Rabover:]

What would it take for your incinerator to be able [technical difficulty].

[David Tusa:]

You were cutting out, but I think you…

[Peter Rabover:]

Sorry. What would it take for your incinerator to be labeled as being able to take hazardous waste?

[David Tusa:]

It's just a totally different -- it's a totally different animal than what we process. You talk about hazardous waste incinerators that are huge, very, very, very difficult department, and it -- we're good with the medical waste and the pharma waste that we dispose off; on the haz waste, we can perform a great service or complementary service to our customers. But, we're going to third-party that. We're less than 5% penetrated in all of our markets with medical waste and pharma waste. And instead of devoting resources trying to look to expand capability into incineration, we're going to stay focused on what we do best and then we'll use third-parties. And we do have a two or three of them we work with for the incineration of the haz waste. We want to stay very, very focused on the markets that we serve best.

[Peter Rabover:]

Okay. Thank you for that color. [Technical difficulty] sounds very exciting. Could you give us some metrics, maybe how many liners per waste per installed? I guess, what kind of trends you're seeing there? And like, how many -- what's the ultimate market for the installed -- for these things to be installed do you think there is -- are?

[David Tusa:]

Well, right now, we’re upto about 3,000 collection receptacles that are out in the marketplace. And there is five industries that to the collection receptacles under the DEA rules can be used. Pharmacy retail -- in pharmacy, in hospital, long-term pharmacy and long-term care, drug treatment facilities and license law enforcement, and we service all of those markets. We have 3,000 out there. We’ve returned liners so far of about 24,500. And some of the markets, liner may return once a month; some of the markets, they may return once every two months. So, I’d say, on average, that a liner probably comes back somewhere between that, between one -- about one in every two months a liner will come back from an installed base of a collection receptacle. Your question about the opportunity, I think is a really good one. This is still new for the country. And there’s been a couple of GAO reports that are out there. But based on our study in the market and again we think we’re the leader in this market, we think that still it’s probably only 5% penetration rate in the market. So, we think that really this is just new and this is just beginning. We’re excited about unused medication, we’re excited to be the leader in that market, and we’re really excited because we think that this could ultimately be a very significant market. So, you could do the numbers. If the industry itself is 5% penetrated, then it’s a much larger opportunity than what we’ve seen in the numbers so far.

[Peter Rabover:]

[Technical difficulty] is it just about equal for the Company split?

[David Tusa:]

I am sorry. We can’t understand that question.

[Peter Rabover:]

[Technical difficulty].

[Diana Diaz:]

We can’t understand any of the words that you’re saying.

[David Tusa:]

It’s very gabbling.

[Peter Rabover:]

Is at all better?

[David Tusa:]

A little bit.

[Peter Rabover:]

Okay. My question [technical difficulty] pick-up, the liner, is it mail based or [technical difficulty].

[David Tusa:]

It’s what we call common carrier. It’s return via common carrier, like UPS. And that’s the model that we use. And we think that model is the most convenient because the customer is not waiting for a dedicated trucking driver to kind of pick up on a schedule the inner liner. With the use of a common carrier UPS, they can be pushed up same day that they are full and therefore the collection receptacle can stay operable and not have to be shut down. But that’s the model that we use and we see that’s the most efficient in the marketplace to transport the liners to our facility.

[Operator:]

Thank you. And our next question comes from Kevin Steinke from Barrington Research. Please state your question.

[Kevin Steinke:]

So, you talked about the TakeAway recycle system a little bit. You had about $200,000 of revenue related to that. So, can you talk a little bit more about the pipeline there? It seems like there continues to be some optimism around that newer offering, and maybe what you're seeing in the marketplace in terms of demand there?

[David Tusa:]

Sure. That's a great question. We continue to be cautiously optimistic. And if you remember, we've been working on this a couple of years. And the single use device industry came to us and the manufacturers of single use devices came to us and said that the traditional process of reprocessing of a device, which is cleaning it, autoclaving, and then sending it back into the healthcare system, it's something that they did not want to do or they wanted to do less. So, we've been working with four or five single use device manufacturers. And with the idea is that we work with them and that little bit of a customization on the system itself, and then they had sales people and they move it into the hospital or the surgery center. We have one deal so far that has been signed, which is guaranteed minimum purchases, the 200,000 that hit and the server was part of that. But, we have a few others that we're working on as well. So, through these device manufacturers, what we're doing is pilots in different hospital systems across the country. And it's a way to take these single use devices, put them in our system, our collection system, they come back to our plan. And it's not recycling in the sense that they're being cleaned and sent back to health care. It's a true recycling solution where they're brought back broken down by their individual components and then sent to the appropriate recycle streams. Stainless steel goes to stainless steel recycler; the battery goes to the battery recycler and so on and so forth. So, we've seen a lot of interest and we’re working with well-recognized names on the device manufacturers. So, I think that'll play out over the next probably calendar 2019 that we’ll have a better idea. But, we're excited about it. And what's driving the device manufacturers and driving health care is the concern over increased infection in the hospital setting. And while sustainability initiatives regarding the recycling of devices is very important to the health care setting, reducing -- potentially reducing infections in the hospital setting from device that may be reused is a concern as well. So, we continue to work on that. Hopefully, we'll have more news over calendar ‘19. But so far, we've been very, very pleased, say we probably have about, I don't know, 15 or 20 pilots. Between the different manufacturers we work with, we probably have about 15 to 20 different pilots with different hospital systems across the country right now.

[Kevin Steinke:]

So, the $200,000 of revenue generated in the quarter from the TakeAway recycle system, is that -- would you characterize that as still coming from a relationship that’s kind of in the pilot phase but could potentially be solidified or ramp up further?

[David Tusa:]

No. That was rolled out. That was rolled out of a pilot into a real program. And so, what we're doing is -- what we like about this is I have one customer, the device manufacturer, and they can provide it to whatever customers of their, hospital customers that they want of theirs, but my one customer is a device manufacturer, but that's going from a pilot to a roll-out of a program with guaranteed minimum purchases.

[Kevin Steinke:]

Okay. Okay, got it. Great. Okay. I just wanted to ask about the gross margin. If there is anything one-time in there? The revenue levels were obviously strong. I think you kind of target that low to maybe mid-30% gross margin. Is there potentially higher gross margins at these revenue levels in future quarters, just trying to see what they might have factored in the gross margin in the quarter?

[Diana Diaz:]

We did not have any unusual items this quarter; they came in as expected.

[David Tusa:]

Kevin, it’s just as we said before. We've invested over the last couple of years in some pretty significant infrastructure to the Company as far as the route-based business to support the plants, and we're excited that -- we continue to believe that we have that operating leverage at the gross margin level as well because of that investment. So, we increased revenue, should see improvement in both the gross and the operating margin level with higher revenue.

[Kevin Steinke:]

Okay, got it. Yes. Okay. That's helpful. And as you kind of look at the flu season here, I mean, the data is indicating that it's a pretty strong flu season, and you mentioned more shots being administered in the retail clinic setting. I mean, do you think that's a trend that could continue? I mean, it seems to me that there was a bit of a pause maybe in the retail clinic growth. But, from what you're hearing from customers, and I think you talked about last quarter them advertising more. I mean, do you think that market, maybe it'll be reignited a little bit or what's your view of that retail clinic market overall?

[David Tusa:]

We’ll look back at a second to talk about the flu markets. Over the last couple years, it's been weak; before this year, it’s been weak and it's been about $4.5 million in revenue a year, which has really been on the weaker side over the last couple of years. And a lot of that from what we understand is attributable to the cold weather hitting late in the northeast and people delaying flu shots or not getting flu shots. This year was different and this year was about $6 million in flu shot revenue versus what we have had in the past of about $4.5 million. So, the way I see it and Diana sees, that’s what she said. And there's more and more flu shots, not only it administered to adults, but in the retail setting now over 32% of shots being administered. I don’t remember if that was 15% or 20%. But, what I'm trying to say is, what we hope for -- and we can't make any guarantees, but the prior two flu seasons of $4.5 million a year were weak flu seasons. And we think that the $6 million, based upon what's going on now and what potentially could happen, could be more of a normalized flu season, assuming continued administration of them in the retail setting and adults getting their flu shots. So, love it or hate it, we have the flu business, and while it’s been weak, we're hopeful that something closer to the $6 million is something a bit more normalized than the $4 million -- $4.5 million than we had over the prior two years. That’s just our take on what we see. It’s not a prediction. And we have been wrong on this before but we were pleased to see a strong flu season and revenue is representative of that in this year.

[Kevin Steinke:]

Okay. That’s helpful commentary. I appreciate it. And I’ll jump back into queue. Thanks for taking my questions.

[Operator:]

Thank you. And our next question comes from Brian Butler from Stifel. Please state your question.

[Brian Butler:]

Good morning. Thank you for taking my questions.

[David Tusa:]

Good morning. How are you doing?

[Brian Butler:]

Good. Just so we can circle back to the unused medication, because I didn’t get a lot of answers on that first question. When you look at the growth in second quarter, this second quarter here is only 2.5% versus the first quarter it was almost 60%. Can you give a little color on how we should think about the volatility in this and how far we are from mature market? I mean, it sounds like it’s far from mature being only 5% penetration. But, how should we think about the growth of that penetration, as well as the volatility quarter-to-quarter? Is this going to be like flu business, or is this going to be settled into some kind of long-term steady growth?

[David Tusa:]

Well, again, let’s stand back and let’s look at the numbers on the unused medication. So, last year fiscal year 2018, we did about $5.9 million, call it $6 million in revenue related to unused medications in fiscal year 2018. Now, a significant portion of that $6 million was generated in March and June quarters of last year because our largest customer with unused medications, their rollout is -- affects primarily the March and the June quarters; they want to get them out in March and June quarters for the year. So, although we had only $3 million in the first six months of this fiscal year, which would lead you to believe, which is not true, but if you multiply times to 2, it’d look like it’s flat for the year. But what it doesn’t reflect is the rollout orders that we expect in the March and the June quarters. So, for instance, the rollout quarters for last year in 2018 were about a $1 million, that affected the March and June quarters of last year.

[Diana Diaz:]

Correct.

[David Tusa:]

And we think that has the opportunity to happen potentially this year. So, I think, you really have to look at it on more of a trailing 12 or you more have to look at it and say in June. But yes, we do expect growth over this $6 million last year, we expect growth within this fiscal year with unused medications, because the orders should be heavy in the March and the June quarters of this fiscal year.

[Brian Butler:]

Okay. So, that growth that we’ve seen this quarter will potentially be improving going forward. Again, it seems like the $6 million is -- if I heard you correctly last year included a $1 million of rollout and those rollouts are occurring again or not, they’re not going to occur again?

[David Tusa:]

The $6 million including the rollout, that’s only one customer, okay? So, it is going to roll out again, it’s going to roll out again this year. So, what I’m saying is that the $3 million we’ve generated so far doesn’t really impact orders from our larger customers that should be impacted, it should hit the March and the June quarters.

[Brian Butler:]

Okay. And then, on the flu related business. You talked about kind of 4% to 4.5% being the weak kind of annualized number for flu season. Is that a good bottom, I mean, is it possibly lower and how should we think about the second half here? I mean, historically, third quarter for you guys has been very low based on what you're seeing quarter-to-date. Is that still a true statement?

[David Tusa:]

Well, first of all, as I mentioned earlier, the 4.5 is what we've seen in the -- and what we saw as weak flu season, this was $6 million, no one knows for sure. But just to give you an idea, in the March quarter of last year, fiscal year ‘18, we did about $400,000 in flu orders, in the June quarter, we did about $1.3 million, and that was in fiscal year ‘18. So, those are the numbers for last year. I'm not going to estimate what they're going to be this year. But, I think that's probably, if I had to guess a little bit more of a baseline type of number for this year.

[Brian Butler:]

And then, in the patient support or the pharmaceutical with the patient support programs, what gives you confidence that you can get to the $4 million or $4.5 million kind of flat year-over-year in the second half of ‘19 here? I mean that's -- you're looking at almost $3 million of revenues that need to be made up. Do you have some programs that have already been discussed on ramping up or again, what gives you that confidence?

[David Tusa:]

Right. We have new programs that are coming, we have new members that are coming online and we have expansion of existing programs. Kevin, one of the things that causes that negative comparison in pharmaceuticals -- I'm sorry, Brian, in the Pharmaceutical Manufacturer is, in the December quarter of last year, that’d be the ‘18, the fiscal year ‘18 December quarter, we had a huge amount of inventory build stocking orders, which created a bit of a negative comparison and it was ordering quite a bit of inventory, which we’re burning off now. So, we're not going to receive in fiscal year ‘19 orders related to that customer. So, that delta we're making out with new programs that we're launching or expansion of existing program. But based on what we see right now, we should be overall relatively flat, that was $4.5 million from pharma for the last year.

[Brian Butler:]

Okay. And then, just on the cost side. Are there any outsized kind of inflationary costs that we need to be watching for that you guys are seeing now, such as like, maybe your third-party hazardous waste to what kind of trends you might be seeing there?

[David Tusa:]

I think, the ones that we’ll be bit concerned about is some of the labor costs, especially on the operations side, drivers, plant operators. Labor costs have been hit, and those have been a very large concern. The third-party haz cost, yes, it's gone up a little bit, but it's still a very, very tiny component of our total costs. When you look at our total cost, it really doesn't impact that. So, we pass price increases to our customers, we continue to look at price increases. But, the labor cost, we may bet hit a bit on that.

[Brian Butler:]

Okay. And then, just one last one. Can you give a little update on the acquisition pipeline and kind of what opportunities you think do you guys have for the second half of 2019?

[David Tusa:]

We continue to look at opportunities in different parts of the country. I'm not going to get specific parts of the country that we’re looking at. We do think that there's opportunity. A lot of it has to do with timing. A lot of us to do with timing of the opportunities. It would also be nice to have a little bit more currency in our stock, that would I think would be helpful as well. But we think that there are opportunities to grow. We look forward to the trend we can get back and make a few more acquisitions in key geographic areas that will expand our direct pick-up footprint.

[Brian Butler:]

Okay. And is it capital that's holding you back or is it really just finding the right deals?

[David Tusa:]

It’s probably both. We try to be prudent obviously with the capital deployment. And again, it's much more currency in the stock when it's at a higher price. The opportunities for the acquisitions are just really opportunistic. These are family -- typically family owned business. In a lot of cases, there has to be some sort of a triggering event for them too. So, we keep in contact with many of them but you do have to be opportunistic when it does arrive.

[Operator:]

[Operator Instructions] And our next question comes from John Sturges from Oppenheimer. Please state your question.

[John Sturges:]

Dave and Diana, thank you for taking my call. That was a nice year-over-year progression. So, obviously, we’re looking forward to more. I'm curious about the single use device. How big is the market? I'm just curious about the domain profile. Lot of questions, at what point do you think it's going to become a profitable business? Is there a way to benchmark that? The other thing is devices costs are falling. So, it becomes probably easier to dispose the devices and with greater demand for your service as opposed to recycling these things through sterilization in-house. So, I'm just trying to get a general feel for the size of the market, the range of the customer size, are they ambulatory, are these devices more like arthroscopic devices? Whatever color you can provide would be helpful.

[David Tusa:]

Sure. It's an interesting observation you made about the fact that devices are coming down in price. And it actually works in our favor because as device prices come down, opportunities to spend money on something like a recycling becomes a bit more possible. I mean, the devices that we work can be $25, or it could be a $1,500, much more complicated device. So, again, the industry reached out to us to help and solve the problem. We're working through that. We think that -- I mean, there's millions of these devices that are used in health care. But the ones you think about the ones that have metal plastics, maybe a battery, a bit more complicated devices that they see, that they weren't recycle. Again, we're pleased we've got one deal behind us; we're working on a few others. I think we'll see through calendar ‘19 if we really have something here. But the market, if it takes off and if it's all such a big market, I mean, it could be a market similar to what would be for medical waste or unused medication. So, we're cautiously optimistic and we're working with some very prominent names in the single use device industry and with quite prominent hospital systems as well. So, give us a couple or few more quarters to kind of see how it goes before we claim victory. But, so far, we’ve been quite encouraged.

[John Sturges:]

So, I am curious, you been brought in to a facility as part of the product offering is how I am understanding this from the device manufacturer. Is that correct?

[David Tusa:]

That’s correct.

[John Sturges:]

So, what you’re doing is really handling some of the after use liability that manufacturer may face, if the device isn’t -- and some of it’s simply bad PR, if it isn’t properly handled?

[David Tusa:]

Right. The other things is what we’re doing is we’re working with device manufacturers and we’re helping them with creating a differentiation for them versus maybe one of their competitors. But, yes, we’re also helping reduce the liability for the hospital by eliminating that device that may otherwise be autoclaved and go back into the healthcare system. So, there’s two or three different sales angles into it. And the other one is sustainability. If you look at lot of the hospitals systems, they are very big into their sustainability issues. And what we produce to our customers is a result of the recycling or certificates of recycling and show how many pounds of devices that were recycled and kept out of the healthcare system. So, three to four different sales angles that we use. But, we’re excited -- it could fit into what we do as well because it’s reverse logistics in healthcare, which what we do, whether it’s medical waste, whether it’s unused medication; in this case, it’s single use devices. It’s helping the customer by getting something out of their system and then properly recycling or disposing them.

[John Sturges:]

Now, are these part of either the route-based program or the mailback program, or do you have…

[David Tusa:]

This is UPS, this is all coming back UPS. And again that’s -- what we’ve seen is the most efficient way to get these systems transported and back to our facility. Again, waiting for a pick-up, when the container for the systems are full, the UPS drivers are everyday, and they pick them up and return to us.

[John Sturges:]

I am curious, I mean some of these devices, I am assuming carry a certain disease liability whereas at Sharps you can just -- I think you just incinerate those, but these are actually recycling, so require some handling on your part. I am just curious how you’re handling the risk on your side?

[David Tusa:]

Well, the medical waste as well as single use devices are autoclaved. That’s the industry standard for -- and they don’t go into the incineration. So, we do the same thing with the single use devices. We put them through the autoclave process to make sure that it’s fully decontaminated before being handled or otherwise sent to a recycling stream.

[John Sturges:]

Got it. And also curious, right now I assume you’re dealing with larger hospitals but there are quite a few ambulatory clinics, which might benefit where you also at the same time possibly just have a -- you’re picking up the Sharps business, doctors offices, et cetera. So, I am just curious, the overall size of the market, and do you have a…

[David Tusa:]

We’ve calculated it and we’ve looked at it. And again, it would be similar to the size of the market for the medical waste or for the unused medication. It’s a huge market opportunity. What’s exciting for us is we can be on a forefront of establishing a new standard in the healthcare setting to recycle single use devices. It’s kind of -- I mean, think about the single use devices we use multiple times within the healthcare setting. So, we’ll be making the single use device truly single use. And that's what we're excited about being part of that in healthcare setting.

[John Sturges:]

So, you're looking with the FDA at establishing standards, it sounds like, you might be doing some of that work?

[David Tusa:]

I'll just leave it, and we're working with the -- some of the major device manufacturers and working with them to get the systems out into the marketplace. And it’s so far so good.

[John Sturges:]

So, they're handling the liability of getting the standard set?

[David Tusa:]

I'll just leave it at that.

[John Sturges:]

Okay. Very good. I'll go back in the queue. Thank you.

[David Tusa:]

Okay. All right. Thanks, John.

[Operator:]

Excellent. Thank you. I will now turn the floor back over to management for closing remarks.

[David Tusa:]

Right. Thank you, Karen. We appreciate it. Thank you everyone for participating in our call today. We look forward to talking to you next quarter. Thanks. Have a great day.

[Operator:]

Thank you. Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time and have a great and safe day.