Sharps Compliance Corp.
Q1 2017 Earnings Call Transcript

Published: 26 Oct 2016

[Operator:]

Greetings and welcome to the Sharps Compliance's First Quarter and 2017 Earnings Conference Call. At this time, all participants are in listen-only mode. An interactive question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I'd now like to turn the conference over to your host, Mr. John Nesbett, of INS. Thank you, you may begin.

[John Nesbett:]

Good morning and thank you for calling in. Welcome to Sharps Compliance first quarter fiscal 2017 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 operations and growth strategies, and Diana will review the financials. Immediately following their formal remarks, we will take questions from the call participants. As you are 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 earnings release as well as in documents filed by the company with the Securities and Exchange Commission. These can be found on our Web site 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. Good morning everyone and welcome to our first quarter fiscal year 2017 earnings conference call. Let me first start with a high level review of the September quarter and then I’ll follow it with more details. The quarterly customer billing of 9.8 million and the GAAP revenues of 9.5 million were in line with our internal expectations. Additionally, SG&A exclusive of acquisition related expenses were also in line with our internal forecast. Now acquisition related expenses were about $200,000 higher than our expectations because of higher acquisition related regulatory cost associated with the states of New York and New Jersey, as well as third party accounting and valuation related services necessary for our SEC financial. So we estimated the acquisition expenses of 500,000 but they came in at 700,000. Now to gross margins. The gross margin was about 500 basis points lower than the prior year for the following reasons. About 150 basis point impact related to excess plant related cost to both our Texas and Pennsylvania facilities. We're running three shifts at our Texas facility, while the PA facility is expected to be operational later this week or early next week, so we're incurring pre-operational costs and incurred higher than expected costs at our Texas facility. Next we have a 200 basis point impact from the legacy Pharmaceutical Manufacturer program of about $375,000. This is the one program we have that's a split model where there's no margin upfront, the margin is earned on the backend. So that impacted the margin by about 200 basis points. Finally, we had about 100 basis point impact from the unexpected US PS price increase reported last quarter which is now mitigated, but it wasn't mitigated until October 10th of 2016. The normalized or the expected gross margin for the quarter was about 36%. Now more on the PA facility, we believe the PA facility will provide savings estimated at $400,000 for fiscal year 2017 and $800,000 for fiscal year 2018. The savings are in the form of lower medical waste treatment costs from our route-based businesses, lower processing cost associated with our mailback and lower outbound shipping costs from the distribution portion of the facility. So the drag on earnings over the past few quarters should be corrected with a realization of these cost savings. And additionally we're also performing a review of the cost structure across the company to see where we may be able to reduce expenses as we look to get the cost structure more in line with the level of margins we know we're capable of generating. Now some additional color on the billings by market. The professional and pharmaceutical manufacture market billings were very strong this quarter with increases of 65% and 44% respectively. The professional market benefited from the acquisition revenue as well as growth from inside sales. We're also very pleased with the research into the Pharmaceutical Manufacture markets billing as well as a level of current sales activity. We expect to launch four more patient support programs of new drug therapies over the next year, and once it rolls out these four programs are expected to generate annual revenue between about 700,000 and 1.2 million. As we said before we provide a unique solution to our Pharma Manufacturer customers that allows them to meet medical waste disposal regulations while at the same time developing a branding opportunity, gathering patient data that could improve medication adherence and compliance. The relationships we've established in this sector are very strong and we believe our comprehensive solution capabilities are competitive in themes [ph] where we present our offerings to Pharma Manufacturer customers. Now the retail market, the retail market levels were very strong as a result of solid flu shot and immunization related orders during the September quarter. Although we don’t have a feel for the December quarter flu shot orders, the June and September quarters were much stronger than last year, the December quarter orders will be driven by demand for flu shot during this period. Government billings were efficiently flat in the first quarter at about $500,000 and this included about $100,000 in orders from the VA Blanket Purchase Agreement and about $300,000 in revenue from our MedSafe program. As we discussed on earlier calls, the VA program is taking much longer than we expected to rollout, but we continue to work closely with them as they communicate the availability of benefits of the program to veterans. So with all of that said, customer billings were up 23% for the quarter, GAAP revenue was increased 21% to 9.5 million. Now a bit about the bigger picture, as a company, we are very focused on capturing additional market share in the small to medium quantity generator medical waste market. Through the offering of both our mailback solutions in our route-based pickup service, we believe the market opportunity is exceptional, and our modest stats [ph] we’re the second largest company that offers flows and mailback and route-based solutions with a largest generating, an estimated 700 million to 800 million annually in domestic sales in this market. We made a strategic decision a couple of years ago to supplement the mailback solutions with a route-based pickup offering to effectively service all customers in the small and medium quantity generator markets and be a true full service provide. So to that end we’ve completed three strategic acquisitions over the past 16 months and coupled with our Texas and Louisiana operations, we now service about 8,500 customer locations with a route-based pickup. This is proving to be an excellent complement to our mailback solution allowing us to offer the best and the most cost effective solutions to our customers. Our sales team is very well trained about the offerings and how to quickly determine which one or both is best for our new customer's business. Now from a discloser standpoint, for the first time we’re breaking out the billings by solution offering. In the first quarter the route-based pickup services contributed 1.5 million or 15% of total billing, while the mailback contributed 6.6 million or 67% of the billing. As we continue to expand our service offering in foot print with the flexibilities to offer that customers mailback, pickup or a combination of both, we are bullish about our ability to capture increasing market share in this small and medium quantity generator sector. Finally, I want to update you on the sales team. As we announced last month we are actively searching for a new leader of our field sales initiative. Our inside sales initiatives has and will be continue to be manage by Dennis Halligan, our VP of Marketing. His team is responsible for generating the leads and launching the campaigns that feed into inside sales. So as far as the field sale, we’re in the candidate identification and interview process. As of today, our sales team consist of three field sale personal, 21 inside sales personal and four sales and regulatory support personal. A total of 28 employees. It's the experienced team focused on being experts in all of our solution offerings, identifying and closing new opportunities and accelerating our closure rate. Our inside and online sales initiative continues to show success, generating almost 17% of our overall revenues for the quarter and over 1.6 million as we sell all of our solution offerings to customers via the phone or ecommerce driven Web site in multiple markets across the country. We believe the initiative has strengthened further now and we can offer the route-based service to many more states in the northeast. And by the way inside sales was impacting much more than just the professional market. For example in the 2016 quarter inside sales impacted the government market, the retail market as well as Assisted Living. With that I'll turn it over to Diana and she'll provide some more details on the financials.

[Diana Diaz:]

Thank you David. The first quarter 2017 revenue of $9.5 million was an increase of 21% as compared to $7.9 million in the first quarter of last year, and a sequential increase of 7% as compared to the fourth quarter of fiscal 2016. As David mentioned for the quarter we saw strong performance from our professional Pharmaceutical Manufacturer, retail and Assisted Living market with growth in the professional market partially driven by five businesses. Beginning in the first quarter 2017 we've expanded our financial reporting to include billings by solution. The company's mailback billings in the first quarter of 2017 increased 17% to $6.6 million as compared to $5.6 million in the first quarter of 2016 and represented 67% of total revenue, while base pickup revenues were $1.5 million in the first quarter of 2017 and represented 15% of total revenue and demonstrating a 306% increase as compared to first quarter of 2015. Gross margin was 31% in the first quarter of fiscal 2017 compared to a gross margin of 37% in the first quarter of fiscal 2016. As David mentioned earlier the gross margin was about 500 basis points lower than the prior year for the following reasons. About 150 basis point impact related to excess plant related cost at both our Texas and Pennsylvania facilities. A 200 basis point impact from a legacy pharmaceutical manufacture program order which is a split model, meaning no margin up front. And finally a 100 point impact from the unexpected US PS price increase reported last quarter which was not mitigated until October 10th of 2016. So when you take into effect those, the normalized and expected gross margin for the quarter was 36%. SG&A expense increased to $3.7 million for the quarter. SG&A for the first quarter of fiscal 2017 includes about $700,000 in acquisition related expenses associated with the completion of the city waste acquisition, about a 100,000 in ongoing costs associated with our acquired businesses, and higher sales and marketing costs focused on inside sales initiative. As David mentioned previously the $700,000 of costs associated with the completion of the city waste acquisition were higher than originally estimated by about $200,000 due to higher acquisition related regulatory costs associated with the states of New York and New Jersey as well as higher third party accounting and valuation related services necessary for SEC financial statement. The company reported an operating loss of $0.9 million in the first quarter compared to operating income of $0.2 million in the first quarter of fiscal 2016. Sharps reported net income of about $1 million or loss of $0.06 per diluted share this quarter compared with net income of $200,000 or $0.01 per basic and diluted share in the first quarter of fiscal 2016. Excluding the expenses related to the company's acquisition of Citiwaste on a non-GAAP basis, the company reported adjusted net loss of 0.2 million or $0.02 loss per basic and diluted share in the first quarter of fiscal 2017. Our balance sheet remains solid with 6.9 million of cash and cash equivalents at September 30th, 2016 and we saw cash and cash equivalents decline in the first quarter primarily due to the $4 million paid for the Citiwaste acquisition, payment of acquisition related cost and capital expenditures including those related to the new Pennsylvania treatment facility. And with that I’ll turn the call back to David.

[David Tusa:]

Thanks Diana. Just a couple of final comments, before we turn it over to the Q&A. Since July 2015, we carefully closed and integrated acquisitions that have enhanced our capability, strengthened our infrastructure and expanded our footprint in customer base. These capabilities combined with our unique and effective portfolio of solutions like our MedSafe, the TakeAway Envelope or even the TakeAway Recycle system had positioned us well for growth and increasing market share in our targeted small to medium quantity generator segment. We are working every day to continue to build the foundation to increase our company's size and presence in the market place and to drive sustained and growing profitability. Just a quick thank you to the employees, it's been a very, very busy quarter with the launching of a new plant -- 40,000 square foot plant up in Pennsylvania and I just want to recognize their contribution, it's a milestone event for us and I think everyone has been involved in it. And with that operator, let's open it up for questions.

[Operator:]

At this time we will be conducting a question-and-answer session. [Operator Instruction] Our first question comes from Matt Hewitt from Craig-Hallum. Please go ahead.

[Matt Hewitt:]

A few from me. First, the facility sounds it's going to up and running here within a week or two, how quickly will you be able to ramp up in that facility to capture some of the synergies you’ve discussed today and on last quarter's conference call?

[David Tusa:]

Well, with respect to the medical waste and distribution portion of it, we can ramp that up pretty quickly. The mailback takes a little bit longer because they just don’t come back right away from when we ship them to the customers, what do we have here Diana, we -- that 450,000 based on our estimates, we think about 100,000 of that in the December quarter.

[Diana Diaz:]

That’s correct.

[David Tusa:]

And then about 175 for each of the third and the fourth quarter. So we will be able to -- you’ll start to see the majority of the impact in the third quarter, but we will see some in the second quarter though.

[Matt Hewitt:]

Okay, so as we think about the gross margins, obviously there was a hit this quarter, and some of the acquisition, but the facility as you ramp it up, we should see that gross margin pop right back up to your -- that normalize range that you talked about?

[David Tusa:]

Right, the way we look at it is, is normalized margins something closer to 36% and then you know we're going to have the opportunity to increase that margin by 100 to 200 basis points with a savings from the launch near the plant.

[Matt Hewitt:]

Okay, and then I guess sticking with that East Coast facility, one of the advantages was going to be the multistate opportunities that you expected to come in once you had that facility up and running, do you have any of those types of opportunities in the pipeline today. How quickly do you anticipate being able to close some of those types of deals?

[David Tusa:]

We did we actually have our folks in the northeast now chasing multistate deals because we can service about 11 states in the northeast and we would hope to see those start to close as early as the December quarter.

[Matt Hewitt:]

Okay great, maybe two more and then I'll hop back in the queue. The retail customer that was lost, you know -- can you describe -- was that just a one-off situation, is that something we should be paying close attention to, any color relating to that would be helpful. Thank you.

[David Tusa:]

We didn't lose any retail customers.

[Diana Diaz:]

We just didn't have a flu season last year.

[Matt Hewitt:]

No I thought, maybe I misread that, I thought in the retails sector there was 300,000 --

[David Tusa:]

That was.

[Matt Hewitt:]

Launched by [multiple speakers], take away medication recovery systems [indiscernible] launched by a retail customer. I guess that was last year -- was that last year?

[David Tusa:]

That was an opening order last year, so you factor -- that wasn't a corresponding operating order this year, so that just offsets somewhat the increase in retail. Retail action the blip [ph] isn’t substantially higher than what's shown in retail.

[Matt Hewitt:]

Understood. Alright, my mistake, sorry about that, and then last one. Home Health, it’s been relatively flat for several quarters, I'm just curious if you could give an update on that market opportunity where do you see that one going and then I'll hop back in the queue. Thank you.

[David Tusa:]

Sure, we look at every year on a trailing 12 basis specially markets like home Healthcare which had about 4%.

[Diana Diaz:]

Yes.

[David Tusa:]

That’s up about 4%, we've always said that Home Healthcare market we think is somewhat of a mature market that we've always looked at as about 5% growth revenue business. So the trailing 12 for 4% is really not that far off what we -- our expectations.

[Matt Hewitt:]

Okay, great, thank you.

[Operator:]

Our next question comes from Brian Butler from Stifel, please go ahead.

[Brian Butler:]

Just on the 1.1 million of acquired revenues, was that all in the professional?

[David Tusa:]

No, no, that's broken out between -- do you have that broken down between the different --.

[Diana Diaz:]

In the quarter the growth was primarily in the professional market, that's most of what we see and the city waste customer base. But the other northeast has a mix of about 20% Assisted Living and a little bit in some of the other markets, but primarily Professional.

[Brian Butler:]

Okay, about 80% of the 1.1 million was in professional?

[Diana Diaz:]

I would say it’s probably more than that, because the bulk of it was city waste and that's all Professional.

[Brian Butler:]

I guess what I was trying to get at is, what was the organic professional growth if you were to talk out the city waste benefit?

[Diana Diaz:]

It is about 900,000 -- I'm sorry 900,000 was the acquired, the difference 200,000 was organic.

[Brian Butler:]

What’s that on a percentage basis, I didn’t have that real quick, but is that -- I mean it seems like that's probably just low single digit. It seems I guess, it seems a little light. I was thinking professional growth on an organic basis is probably going kind of upper single digits to double digit, is that just a focus on route-based in the short term? Was it acquisition or is there some slowing of growth in professional?

[Diana Diaz:]

The inside sales market as David mentioned earlier is split between professional and government. So a lot of the inside sales growth was between professional and government, and the majority of the increase in a professional market which relates the acquired business.

[Brian Butler:]

Okay. And then I guess then looking at -- on the gross margins, so I think you kind of talked about this in last question, kind of got into it, but there is about 1.2 million in total annual saving when you add up the '17 and the '18 early benefits from the new facility, correct?

[David Tusa:]

No, it's 400,000 in '17 and 800,000 in '18.

[Brian Butler:]

Right, that 1.2 total or is it 800,000 is just a -- you are getting an incremental 400,000 in '18, I am just trying to understand.

[David Tusa:]

An incremental 400,000.

[Brian Butler:]

The total saving is about 800,000?

[David Tusa:]

That’s right.

[Brian Butler:]

Okay, and then when you think about a normalize margin of kind of that 36%, that 800,000 is going to incremental to that, so you should be seeing that move up from 36% to whatever those savings equal over that’s ’18 [ph]?

[David Tusa:]

Right, where we’ll be looking at it is, we think we can improve the gross margins about 100 basis points to 200 basis points with the impact from facility and as the business grows as well there should be some more of the expansion opportunities with some revenue growth too.

[Brian Butler:]

And on that 100 or the 200 basis point from the Pharma customers that’s upfront, does that come back and what's the kind of the timeframe of that, do you see that incrementally benefit in the second half of '17 or is it drawn out further?

[Diana Diaz:]

It comes out over the next year as solutions come back for treatment. But it's a little bit of a spike impact on the gross margin in the year -- in the quarter when we have an inventory build. So if you look at the impact overall in the year, it's a much smaller impact over a 12 months period.

[David Tusa:]

Probably [indiscernible], I mean it will take six to nine to 12 months for those mailback to come back and that’s when we recognize the profitability.

[Brian Butler:]

Okay, so this should be a little bit a tailwind I guess is what I’m hearing from margin perspective on that?

[David Tusa:]

That’s correct.

[Brian Butler:]

And the Pharma last second quarter of '16, it was extremely strong revenues I think 2.8 million in billing, does that come in, I mean this time in second quarter going forward, or I mean is that a repeatable event or is that more thinking about normalized pharmaceutical kind of runs in a 1.5 million range?

[David Tusa:]

I don’t know if there is a normalize quarter for Pharmaceutical Manufactures. They order when the inventory builds or at the level with that makes the investment [ph] working with them right now and working with all of our Pharmaceutical Manufactures to secure the December orders. We don’t know yet what all is going to fall in, but it's typically a strong quarter. But we can’t guaranty it’s going to be at that same level for this December quarter.

[Brian Butler:]

Okay, and retail again, I guess the wild card continues to be the flu season in December or what the orders are going to be. Do you have a historical range of how much that sung? Let's call it from top to bottom, just to kind of put a bracket around what's a realistic headwind or tailwind from a strong flu season or a weak flu season?

[David Tusa:]

Last year flu, what did we do?

[Diana Diaz:]

In the December quarter of last year we did a 1.8 million of flu business.

[Brian Butler:]

And that was weak?

[Diana Diaz:]

That was weak and the year before that we did 2.4 million in the December quarter.

[Brian Butler:]

Okay, so, 600,000 swing is kind of, if you think about realistic -- I mean that's actually very helpful from a modeling perspective. And then SG&A, you know ex the costs for the acquisitions, is running about 3 million? Is that the right way to think about it quarterly? Is it 3 million a quarter or does that kind of ramp up as route-based business kind of grows?

[David Tusa:]

No, we think that [indiscernible] a net increase over the last year, about 100,000 of that was from the acquired business, so it's nearly 400,000 or so is throughout the company. So I think the 3 million is a good way to look at the SG&A.

[Brian Butler:]

Alright, and then last one on the government orders, you know running at about 400,000 a quarter, is that kind of the bottom level and then if a VA contract ever ramps, that's where the incremental comes from? Or is that feasible that it continues to decline from where it is.

[David Tusa:]

You know we’ve been awfully disappointed on the VA, particularly envelope VO [ph], we’d actually been pretty pleased with the MedSafe, the MedSafe quarters were about 300,000 in this past quarter, it's been pretty strong in the government sector on a MedSafe offering. So I think that probably makes sense to look at that as more of a normalized ordering pattern for the MedSafe and gives you know, we will hopefully and we can [indiscernible] but hopefully that the takeaway order envelopes will really increase as well.

[Brian Butler:]

Right, and just last, accountant one. Do you have a cash from ops and a CapEx number for the first quarter?

[Diana Diaz:]

Yes, we're working on our 10-Q right now, but it looks like cash used in operations will be around $800,000 you know primarily impacted by the acquisition costs and then the cash from investing includes about 800,000 of regular CapEx, since we're wrapping up the Pennsylvania treatment facility and of course the acquisition related cash outflows which were right at 7.1 million and we borrowed 3 million of debt.

[Brian Butler:]

Okay, great, thank you very much.

[Operator:]

[Operator Instructions] and our next question comes from Kevin Steinke from Barrington Research, please go ahead.

[Kevin Steinke:]

Just wanted to continue the discussion on gross margin a little bit more. So that 36.4% adjusted number excludes some operating expenses related to the Pennsylvania treatment facility although I would guess -- that wouldn't -- would that be the full run rate of operating expenses that you expect from the treatment facility in the quarter, or excluded or would the expenses related to that facility obviously ramp up in the next quarter as it actually begins operations.

[David Tusa:]

Well, the 150 basis points was -- on the operating was the excess, over what we expected from a -- at the plant standpoint, so what will happen then going forward is, some of that will go away because it was -- the Texas facility access repairs and maintenance on the PA standpoint that will be more than covered up savings. So the savings are net of the operating cost at the Pennsylvania facility.

[Kevin Steinke:]

Okay, so I guess in your last call you talked about the annual cost is the plant is about $1.5 million and then the 0.4 million of cost are just partially offsetting those added costs, at least in the short run. Is that the way to think about it? I mean obviously overtime you’d grow into those cost, but in the short run higher cost from the plant partially offset by cost savings, is that correct or I am thinking about this --?

[David Tusa:]

What the [indiscernible] you have to be looking is this capital cost associated with the plant. And the way we look at it is how quickly we can recover that with savings. So we’ve always talked about within a two to three time period recovery that capital expenditures was about 1.5 million.

[Kevin Steinke:]

Okay, got it, all right, yes that make sense, okay. So on the pharmaceutical manufacture side the three new orders those are all for existing customers in the first quarter correct?

[Diana Diaz:]

That’s correct.

[Kevin Steinke:]

Okay, so you are now talking about four new patient support program launches over the next 12 months, last quarter you talked about two over the next three quarters, so I guess you have added two more new opportunities into the pipeline?

[David Tusa:]

We have, it's been pretty -- it’s been really good over the last couple of quarters with the activity from the pharmaceutical manufacture side. And that’s a result of a couple of things. One, I mean we continue to market to that area and we’ve got one field sales person in particular that’s been very good at chasing and landing the new Pharma deals, but out there in the industry Pharma knows we’re the leader with the patient support programs and we continue to add to those. So we’re pleased with the level of activity that we currently have in the sales side and we think that’s going to continue to be a strong growth market for us.

[Kevin Steinke:]

Okay, great. So just a couple of housekeeping questions here on your enhanced breakout of billing by solution, you have the other category, can you just remind us what's in that, is that more product type sales or what's in that other bucket?

[Diana Diaz:]

It's kind of a lot of the old things that the company started with, so it’s got IV poles [ph], it's got asset return boxes, it's got some containers only rather than a mailback solution, so it's kind of -- it's not an area that we expect to grow significantly overtime. And I think you can see that -- the percent of revenues in the current quarter is much lower than it was last year and we’ll continue to see that decline as a percent of revenue. But the dollar amount will remain consistent.

[David Tusa:]

Yes, that’s right. That was related to the Home Healthcare business, where the company literally start 20 years ago selling IV poles and asked for return boxes in addition to the mailback. And -- so that’s really that legacy type business.

[Kevin Steinke:]

Okay, that’s helpful. And then on the tax expense, the last couple of quarters it's shown zero, I don’t -- usually there is maybe a small amount of tax or a small tax benefit, but it's been zero the last couple of quarters, I don’t know if there is anything to that or it's just kind of an anomaly?

[Diana Diaz:]

Well, I think we were less -- in the fourth quarter we were truing up for the year. We look at what we think our effective tax rate is for 2017 and what our -- it's really going to be our state tax expense and we think that's going to be about 7%. But with the loss we determined not to report a benefit in this quarter, but it would be about 7%.

[Kevin Steinke:]

Okay 7% tax rate for the full year?

[Diana Diaz:]

Yes.

[Kevin Steinke:]

Okay, okay great, well thanks for taking my questions.

[Operator:]

I'd now like to turn the floor back over to management for any closing comments.

[David Tusa:]

Thank you everyone for participating in the call and we look forward to talking with you next quarter, everyone have a great day.

[Operator:]

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