Sharps Compliance Corp.
Q3 2019 Earnings Call Transcript

Published: 24 Apr 2019

[Operator:]

Greetings and welcome to the Sharps Compliance Third Quarter 2019 Earnings Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jennifer Belodeau, Investor Relations. Thank you, you may begin.

[Jennifer Belodeau:]

Good morning, and welcome to the Sharps Compliance third 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, operations 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 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 out of the way, let me turn the call over to David to begin the review and discussions. Go ahead, David.

[David Tusa:]

Thanks, Jen, and good morning, everyone. Welcome to our third quarter fiscal year 2019 earnings call. The March quarter is historically our weakest quarter and this was no exception. While our internal expectations were about $10 million or higher in revenue and breakeven earnings, we fell short as a result of lower MedSafe sales and timing of orders in our home healthcare markets. Exacerbating the challenging quarter were higher than expected costs of sales including costs related to EPA required testing, adverse impact of the new revenue recognition standard and additionally our costs associated with the expansion of the route-based business in the Southeast portion of the country which were higher in variance of the revenue generated. So following a strong start to fiscal year 2019 characterized by two consecutive quarters of revenue growth and increased operating earnings as compared to the prior year our consolidated growth moderated in the third quarter with revenue essentially flat at $9.5 million. Our professional and pharmaceutical manufacture billings showed increases of 15% and 6% respectively, but the growth was offset by 12% decrease in Home Healthcare billings, slight decreases in Assisted Living and retail for the quarter. We saw a net loss of $1.1 million or $0.07 a share in the third quarter compared to a net loss of $800,000 or $0.05 per share in the third quarter of fiscal year 2018. While the March quarterly results are below our expectations and honestly they were disappointing we look at more annual periods to assess the business. So I will touch – we're working on ending the fiscal year which is a year ended June 30, and hope to be more in line with the estimates of $43.6 million annual revenue. Our goal is to make up the March shortfall which is about $600,000 with increased MedSafe sales, potentially higher flu shot related orders and driving additional growth in the professional market in the June quarter. Now as we move through fiscal year 2019 we remain focused on increasing the marketplace recognition of our three primary solution offerings. Our traditional medical waste mailback, [indiscernible] based pick-up, and unused medication management solutions. We saw 4% increase in mailbacks during the quarter and a 20% growth in our route-based business and the route-based business is now representing 24% of the total revenue of the company. We're pleased with the traction we're seeing in our route-based business as evidenced by the trailing 12-month revenue generated from the route-based business of about $0.5 million and this is more than double the revenue associated with the acquired revenue of about $3.9 million. As many of you know, a few years ago we made a decision to expand our route-based presence to compliment the mailback offering, address additional customers such as surgery centers and other medium quantity generators and establish a more predictable cons consolidated revenue stream. Our route-based solution is currently available in 24 states, the average capacity of reaching 55% of the population. And as of March 31, 2019 we serviced 12,200 customers directly with our route-based offering. This was in comparison to about 6500 locations that we acquired and it compares to 10,300 customer locations at March 31, 2018. We found the ability to choose the mailback or the route-based offering or a combination of the two service offerings as a competitive advantage in attracting our targeted small-to-medium quantity generator customers. Now on the unused medication, as the leader in the industry we've installed about 3,200 MedSafe collection units to date. We've processed over 28,500 inner liners which compares to about 13,000 liners a year ago, so we more than doubled the liners in a year. Our installed collection receptacles were 2200 a year ago and 900 two years ago. We've sold 3.6 million TakeAway envelopes since 2009 and since the DEA changed their rules in late 2014 we've sold 1.5 million of the TakeAway envelopes. So the market for profits flow through to the unused medications continues to grow. As communities, retailers, healthcare providers work to address the growing epidemic of prescription drug abuse and accidental poisonings occurring across the U.S. We have combined with education and treatment our solutions are playing an important part and a growing role in assisting the effort to fight the national opioid crisis by making the proper cost effective and continued disposal of controlled substances readily available to consumers across the country. While billings for unused medications were up sequentially 26% and they were up 9% year-to-date, billings in this segment of our business were down during the third quarter largely because of third quarter of 2018 the prior year quarter included a higher number of MedSafe units installed than the current quarter related to the launch of a major unused medication program with a large retail pharmacy. The rollout of this specific program is ongoing with a greater number of units to be installed in calendar 2019 than in 2018. But the installs in 2019 will be distributed over more of the calendar year. We are confident and continue the growth of the unused medications solutions and believe this line of business will increase and become a larger percentage of the total revenue. During the March quarter Linda Brock joined the Company as Vice President of Sales. Linda is managing and leading the field sales team, including business development, national account managers and territory managers with a focus on accelerating the closing of existing sales opportunities, meeting or exceeding sales budgets, while growing the sales pipeline. Linda is a seasoned sales leader with extensive experience in the healthcare and related services industry. So what will she focus on? She is focused on portfolio selling, all customers, our solutions, all offerings, all markets. New business focus, deploying dedicated resources, new business opportunities in markets where we showed we had success. Also existing our channel expansion we're going back and spending more time cross selling opportunities to the existing customer base, also increased usage of the mini sales portals we have including Salesforce. The last thing is she is going to focus more on bringing the regulatory compliance products involved in the sales opportunities earlier in the sales process. We've already found that to be successful and she will make that part of what she is doing going forward. So we welcome her to the team. We look forward to her contributions. Now let's look ahead to fiscal year 2020. We believe we're uniquely positioned for growth in 2020 with our full line of solution offerings, expanded infrastructure and participation in a market that we believe is vastly underserved. We continue to be pleased with the positive customer response for the company as an alternative provider focusing on customer service, online training tools, responsiveness, and reasonable contract terms. We look forward to more growth and success from our route-based offering and are proud of our leadership role in the cost-effective and convenient ultimate user medication disposal. Now before I turn the call over to Diana, who will address the financials in more detail, I just want to take a quick minute to remind everyone, this Saturday, April 27 is the DEA National Drug Take Back Day. It is a great opportunity to visit a collection site in your area to drop off unused or expired prescription drugs for proper treatment. We can all help prevent any opioid crisis or the opioid abuse by raiding your medicine cabinet of unused or expired medications including controlled substances and you could find a collection site near you by visiting the DEA's collection site locator. With that, I'll turn it over to Diana.

[Diana Diaz:]

Thank you, David. Third quarter fiscal 2019 revenue increased to $9.5 million as compared to $9.4 million in the third quarter of last year. Our route-based pickup revenue for the third quarter of fiscal year 2019of $2.3 million is up 20% compared to $1.9 million in the prior year quarter and contributed 24% of total revenue for the quarter. Gross margins decreased to 21.5% for the third quarter as compared to 24.4% gross margin in the third quarter of last year. Our gross margin performance was adversely impacted in the third quarter by higher than expected cost of sales, including costs associated with once every three-year EPA required test at the Company’s treatment facility in Texas which will not be required for another three years. Gross margin was also adversely impacted by about $100,000 or 100 basis points, as a result of the application of the new revenue recognition standard in the current quarter compared to the prior year quarter. Additionally, our costs associated with the expansion of our route-based business in the Southeast portion of the country were higher in advance of revenue generated. SG&A expense increased to $2.9 million or 31% of revenue for the third quarter of fiscal 2019, compared to SG&A of $2.8 million or 30% of revenue in the same prior year quarter related to our continued investment in sales and marketing. With our focus on profitability, we continue to closely manage our controllable SG&A costs. And it’s an ongoing balancing act as we believe that the continued investment in sales and marketing makes sense for us and for the long-term growth of revenue. The company reported an operating loss of $1.1 million in the third quarter of 2019 compared to an operating loss in the third quarter of fiscal 2018 of $700,000. Sharps reported a net loss of $1.1 million or a loss of $0.07 per basic and diluted share this quarter, compared to a net loss of $800,000 or a loss of $0.05 per basic and diluted share in the third quarter of last year. The company recorded and EBITDA loss of $600,000 in the third quarter of fiscal 2019 as compared to an EBITDA loss in the same period of last year of $300,000. Now let's look at the key billing comparisons for the third quarter of fiscal 2019. Professional market billings increased 15% to $378 million. Retail billings of $1.6 million were relatively flat when compared with the prior year. Home Healthcare billings decreased 12% to $1.6 million, primarily related to the timing of orders. Government billings increased 9% to $0.6 million and Pharmaceutical Manufacturer billings increased 6% to $1 million, primarily due to the timing of inventory bills for new and current patient support programs. For the third quarter of fiscal 2019, our mailback solutions represented 49% of customer billings and increased 4.5% over the prior year. For the same periods, our route-based pickup was 24% of customer billings and grew 20% over the prior year while our unused medications for 18% of customer billings and decreased 7% compared to the prior year period. The third quarter of fiscal 2018 included a higher number of MedSafe units installed than in the current quarter related to the ongoing launch of a major unused medication program. The rollout of this specific program is ongoing with a greater number of units to be installed in calendar 2019 than the last year, but the installs in this current year will be distributed over more of the calendar year. The inside and online sales channel, which primarily targets the professional and government markets achieved a 7% increase in billings in the third quarter compared to the prior year. Now we’ll look at the key comparisons for the first nine months of fiscal 2019 where revenue increased 6% to $32.1 million and customer billings increased 7% to $32.3 million. Professional market billings increased 16% to $11.2 million. Retail billings increased 42% to $8 million. The increase in retail billings for the first nine months of 2019 is primarily due to $2 million increase in flu shot related orders and a $400,000 increase in MedSafe billings. Pharmaceutical Manufacturer billings decreased 32% to $2.7 million due to the timing of inventory builds. Although there were new pharmaceutical manufacturer programs launched in fiscal 2019, the impact is offset by significant inventory builds for larger programs in the first half of fiscal 2018 which did not re-occur in fiscal 2019 due to their significant size. Home Health Care billings decreased 4% to $5.7 million, Assisted Living billings were consistent with the previous year period at $1.9 million and Government billings increased 15% to $1.7 million. For the first nine months of fiscal 2019, our mailback solutions represented 57% of customer billings and increased 9% over the prior year driven primarily by strong current fiscal year flu related orders. For the same periods, our route-based pickup was 20% of customer billings and grew 18% over the prior year, while our unused medications comprised 15% of customer billings and grew 9% over the prior year. The inside and online sales channel, which primarily targets the Professional and Government markets, achieved a 20% increase in billings for the first nine months of fiscal 2019 compared to last year. Fiscal 2019 year-to-date gross margin is 29.2%, an improvement over the first nine months of fiscal 2018 of 28%. SG&A expense increased 6.5% to $8.9 million in the first nine months of fiscal 2019. Net loss for the first nine months of fiscal 2019 improved to $276,000 or a loss of $0.02 per basic and diluted share compared to a net loss of $526,000 or a loss of $0.03 per basic and diluted share in the first nine months of last year. Our balance sheet remained solid with $5.2 million of cash at March 31, 2019 and working capital of $9.9 million. And with that, I’ll turn the call back over to David.

[David Tusa:]

Okay, operator I think we can go ahead and open up the line for questions.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from the line of John Munda [ph] with First Analysis. Please proceed with your question.

[Joseph Munda:]

Good morning, David and Diana, can you hear me okay?

[David Tusa:]

Yes we can, how are you doing Joe?

[Joseph Munda:]

Good. Real quick, David, I was wondering if you could comment a little bit on the pricing environment, particularly on the pickup service as well as the competitive landscape? If you could give us some commentary there are you seeing pricing stable in that environment? As well as Diana, in your comments you talked about the Southeast and some costs involved there that are higher than you guys had expected, is that related to ongoing operations, are you looking to, is it – are you expanding in the Southeastern wise and that's why those costs went up? Thanks.

[David Tusa:]

I’ll take the first one. We haven’t - seen the growth - significant change in the competitive landscape or the pricing. But Joe, keep in mind, on the medical waste side, our expertise is really more at the – a customer that may have 25 or 100, 200 facilities, we actually service all the way up to over a 1000 facilities. So we’re not focused on that one or two-person shop maybe a business or a doctor, we're looking for the larger opportunities and with those larger opportunities, those customers are more concerned about the online tools, the regulatory tools, the compliance tools, customer service working with a larger more established company, which we are. So we don't see a whole lot of change in products. We still see a lot of opportunity out there. You know, you’ve probably say this before, we really love the professional market. Our professional market makes up 800,000 professionals, a $600 million market and that's our - that's a sweet spot at where we’re trying to grow. And I think you saw that numbers suite, on the route-based, we had always looked for growth in that of 20% to 25% and that's where we are. Do you want to take the other question Diana, on the expansion?

[Diana Diaz:]

Sure. We expanded into Florida in the November, December timeframe and so as you compare this year to last year we were just expanding into that. We’ve got some additional costs. But as we growth that customer base down there that will moderate.

[David Tusa:]

And Joe, we’ve also invested more resources throughout the Southeast and as we service more and more customers in the Southeast in addition to Florida, it's a great market for us and I think you see what the number of locations now have increased that we’re having success in the Southeast.

[Joseph Munda:]

Okay, thank you.

[Operator:]

Thank you. Our next question comes from the line of Brian Butler with Stifel. Please proceed with your question.

[Brian Butler:]

Good morning, can you guys hear me?

[David Tusa:]

Yes good morning, how are you doing?

[Brian Butler:]

Very good. Thanks for taking my questions. Just on starting out I guess, when you look at the growth for fiscal 2020 when positioned for growth, can you give us some color maybe on where you are thinking bracket wise? I mean, in the past we’ve looked at double-digit growth, we’re kind of now mid-single-digit growth, may be last, I mean is upper single-digit or double-digit still achievable and where does that come from?

[David Tusa:]

Sure, I think you are – we agree that the growth is high as a double-digit is very achievable. I think you're going to continue to see strength in growth with the professional market, the route-based business. I think what you are also going to see fiscal year 2020 I think we’re going to see increases in the MedSafe, the unused medication offerings that will help achieve the kind of growth numbers that you spoke of. One example is, new DEA rules were written for long-term care, assist living long-term care and as of yet they really haven’t adopted in a big sort of way, but there are some changes coming that I think are going to help that and then got to help that grow that market. We have a pretty significant presence on the medical waste side and we think we have an opportunity to expand or do more business with assisted-living on the MedSafe. So between the unused medications, route-based, and again I would like to talk about the flu, but there is some school of thought that we’re going to have another strong flu season, I can't guarantee that. But you put this altogether and I think you can get to high single digits or potentially double-digit.

[Brian Butler:]

Okay, actually talking about, unfortunately we’re going to have to talk about the flu I think, but on the retail side before we get to the flu when you think about the med safety sort of business, I mean clearly there was a headwind because there was a tough comp. And it looks like you said calendar year 2019 is going to be higher on MedSafe installations than 2018, but how is that translate I guess on your fiscal year. I mean, is it realistic to believe unless you get an expansion of this MedSafe program from where you are right now that there is upside or is that really going to be flat to down on unused medication for the MedSafe installs?

[David Tusa:]

Well, what Diana was referring to is the one national retail pharmacy that we serviced and what is it, it's last year they did it between…?

[Diana Diaz:]

Right, so in 2018 750 units were installed over a seven-month period from November 2017 through May 2018. For 2019 it’s going to be over 1000 units that will be installed over a 10-month period from February 2019 through November 2019. So we think that the June quarter will be fairly comparable to last year, maybe little bit higher.

[Brian Butler:]

So that’s through November of this year which we view essentially three quarters maybe a little less of MedSafe not potentially - that program ending, I mean is there another program in the wings or is it potential to be expanded or should I be thinking of that remaining half the year to three quarters falling back down to just replacement of the liners?

[David Tusa:]

Well, it’s a very successful program and we’re hopeful that we’ll continue. I can’t guarantee it, but I could just say that it's very – it has been very successful. It seems very effective and we’re pleased, they are pleased, hopefully that could expand. But to your point on the liners, we’re starting to see now the true razor, razor blade model on the collection receptacle and this is a beautiful model, but the collection receptacle out there and in the liner revenue is a recurring revenue associated with that. So we’re starting to see a significant increase in the liners returning because of the more and more collection receptacles that we have out there. I'd just say and what we have seen, we think it's going to continue to be a significant growth contributor to the consolidated revenue and again throughout calendar 2019 I think we also have the potential to see increased sales from the long-term care market as well.

[Brian Butler:]

Okay and on flu, just what are the flu revenues this quarter? I know it was very small, but just what was that number and when you think of the first, I guess month of this quarter for you guys, have you seen the ramp up in preorders or is it still going to be more weighted to the back of this quarter?

[Diana Diaz:]

The fourth, I'm sorry, the March quarter was just under 400,000. It was very consistent with last year’s March quarter on flu.

[David Tusa:]

Right and then the fourth quarter, the June quarter of last year was what $1.3 million.

[Diana Diaz:]

$1.3 million.

[David Tusa:]

$1.3 million last year and Brian we’re seeing some indications that it could potentially be stronger.

[Brian Butler:]

Okay and then let’s talk about the pharmaceuticals. I mean, this is a program that has been volatile it's always been volatile, but even on trailing 12-month basis. I mean, the revenues here over the last two years have been more or less cut in half. Based on the programs you have in the pipeline and in the programs that are currently running, how should we think about this on just the very bottom level of what this form of revenue basis can generate?

[David Tusa:]

Well, first of all, the comp was adversely impacted. What do we have, we have the significant one was December 2017?

[Diana Diaz:]

Correct.

[David Tusa:]

And that really adversely affected the comp. I guess the big orders knows probably a couple years worth of mailbacks that were purchased in that December 2017 quarter. I think for this year we’re probably looking at what 4, 4.5 for this fiscal year Brian, somewhere between that $4 million and $4.5 million. We do have and we are working on a number of programs going forward that we think will possibly impact 2020. And then we’ll start to see then more orders and that one customer that had the big orders in December of 2017. So hopefully 2020 will be a better year than 2019 with respect to the pharma manufacturer market.

[Brian Butler:]

So 4 to 4.5 this year that would mean you’re going to do almost $1 million to $1.5 million in the fourth quarter?

[David Tusa:]

Yes, did $1 million a little bit over in the March quarter.

[Diana Diaz:]

Correct.

[Brian Butler:]

Right I mean, okay then I guess, can we talk a little bit about just overall growth I mean besides the organic growth that you kind of outlined, is there any thoughts strategically on what could potentially get you guys bigger, faster obviously your deal pipeline? Can you talk about what's kind of that pipeline looks like and kind of what’s the potential there?

[David Tusa:]

That’s a great question. From a deal standpoint we think there is significant opportunity to grow the route-base business and increase our geographic coverage potentially through acquisitions and maybe tuck-in in the market where we exactly exist are serving currently. We’ve looked at it. We have prospects that are out there. The question is, is capital and we'd like to continue that growth and we look at it but from a capital standpoint that we’d like to have a little bit more currency in our stock to be able to pull the trigger on that. But it’s something that we are looking at and it is something that we think that could accelerate the growth of the company and combine the organic growth with some nice acquisition growth and start to build the company here with more scale.

[Brian Butler:]

So has that been the stock price has been the limiting factor on what's kind of held up acquisitions since if you go back I guess probably about a year, year and a half ago when you kind of entered the route-base business is that really been the holdup?

[David Tusa:]

Well, first of all, we wanted to make sure that we were going to execute successfully on the route-base business. We're going to be able to grow the business at the levels which we think we could grow to prove out the model which we've done and we’re now looking at potential ways to raise the capital to be able expand that effort. So right now yes, right now it's an issue of capital issue, take currency of the stock be able to continue that.

[Brian Butler:]

Okay great, thank you very much for taking my questions.

[David Tusa:]

Thanks.

[Operator:]

Thank you. Our next question comes from the line of Peter Rabover with Artko Capital. Please proceed with your question.

[Peter Rabover:]

Hey guys, could you talk maybe a little bit about your - the competitive side of your business maybe, I know it’s a delicate question, but what are you seeing out there and are you bullish, are you bearish and what can we think about it that way?

[David Tusa:]

Well, as I mentioned earlier in the medical waste side we from a competitive standpoint are not as concerned with what the smaller maybe the local or the regional players because we go after deals where it may have a national presence or it may cover 10 states. And that's really where we do well. And so from that standpoint, just the one competitor that we would have that's often much, much larger than us, that hasn’t changed in - on the medical waste side. On the unused medication, we have seen some competition from mostly the smaller players that are out there that have jumped into this business. And we occasionally see them, but right now that we’re pleased with our leadership position. And again the larger deals where there is significant collection receptacles, are there potential for significant liners, I think it's important from the customer standpoint that are dealing with a company that’s larger and one that has the disposal secured and can provide the customer service and the tracking that’s necessary on the unused medication programs.

[Peter Rabover:]

Okay thank you. On the MedSafe you kind of said your retail customer is 750 to a 1,000 this year and could you – there is only kind of two partners that I can think of and they both have red logos. What’s the potential for that customer, are we talking five figures of inflations and why haven't they done as much?

[David Tusa:]

Well, I’ll tell you what, we’ve worked with them for a couple years now on the collection receptacles. We’ve been pleased with the rollout. We’re hopeful that it will continue. And again, they are pleased and we’re pleased and we will just have to see. But I will tell you that it's a great working relationship and we think there's obviously an opportunity for the rollout to continue past 2019.

[Peter Rabover:]

Right, but I mean like at what point are they going to say hey, like this is working at 1,700 locations, let's do it at 5,000 locations more of that?

[David Tusa:]

Well, I don't think they would have put another thousand jobs in collection receptacles in 2019 as the 750 didn’t work in 2018. So again, everyone is pleased. We don't know for sure. No one knows for sure what's going to happen past 2019, but I could just tell you that the program is doing quite well. They are pleased and we’re pleased.

[Peter Rabover:]

Okay and then maybe a final question, could you give an update on where do you guys stand, with the California SB-12 law and how you guys are planning that, what are you thinking about that, et cetera, any color that will be great?

[David Tusa:]

No, that’s a great question. We're actually working with Calvary Recycle. We have been out and met with them a couple of times and we’re involved in the process. It still very, very, very early, but sometime probably by the end of the calendar year 2019 to have a better idea on what the program is going to look like and how it's going to rollout. What we're excited about is the ability to provide our medical waste mailbacks and to residences of our consumers and sub-injectors in California. And that's one of the intriguing parts about the bill, but we’re watching it. We’re working with them and probably at the end of 2019 we will see. But it definitely has the potential to be a significant opportunity.

[Peter Rabover:]

I mean, are there signposts that we should look for, anything that any sort of color that you can give us that would give us more confidence than you or the industry kind of getting in that business?

[David Tusa:]

We'll they are pretty good about publishing the different meetings and documents related to the program on their website. They do it on a regular basis. I think we're going to be back out with them in May. I think for some more meetings related to what the program is going to look at. But if you email me I am going to send you a link and you can look at it and see the progress on their website and it talks to about potentially what they are looking at.

[Peter Rabover:]

Okay, great. That's it from me for now. I appreciate your time.

[David Tusa:]

Okay great.

[Operator:]

Thank you. We have reached the end of our question-and-answer session. I would like to turn the call back over to Mr. Tusa for any closing remarks.

[David Tusa:]

Great, thank you. Thank you, operator. Thank you everyone for your participation in the call. We appreciate your support and we look forward to talking to you again soon. Thanks.

[Operator:]

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.