Sharps Compliance Corp.
Q2 2017 Earnings Call Transcript
Published:
- Operator:
- Welcome to the Sharps Compliance Corp. Second Quarter 2017 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. John Nesbett of IMS. Thank you, Mr. Nesbett. You may begin.
- John Nesbett:
- Good morning and thank you for calling in. 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 have a question and answer session with 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 at our website or at sec.gov. Okay. With that, let me turn the call over to David.
- David Tusa:
- [Technical Difficulty] capabilities. With the expansion of our route-based business to be better positioned to further penetrate what we believe to be an underserved medical waste market for small- and medium-sized generators in the US. The progress was a bit shrouded in our consolidated results by negative comparisons that we saw during the December quarter in three areas. First, the flu shot related season, while strong in June and in the September quarters, was weak in the December quarter and caused a negative comparison of about $700,000 in the retail market billings compared to the prior year. Second, the prior year December quarter included a takeaway envelope stocking order by a major retail pharmacy totaling $600,000. We didn't have such an order in the December 2016 quarter, causing another negative comparison in the retail market. And, third, we experienced delays in pharmaceutical manufacturer customer inventory builds causing a negative comparison of $1.1 million in that market. So we started the quarter behind by about $2.4 million when compared to the prior year. Now, we were able to offset a significant portion of this with strong growth in a professional and the government markets. For the six-month period ended December 31, 2016, we saw similar negative comparisons adversely affecting the retail and the pharmaceutical manufacturers market. Now, on a positive note, we completed the integration of the three acquired route-based businesses and launched the new treatment and distribution facility in Pennsylvania on November 1, 2016. These are major accomplishments and, again, position us very well for further growth as we penetrate what we believe to be a $1 billion domestic market in the medical waste management of small and medium quantity generators. So let's walk through some more details of the December quarter. Second-quarter customer revenues of $9.7 million was, for the most part, in line with our internal expectations, considering the weak flu shot orders for the quarter and the negative comparisons mentioned above. As most of you know, the result in the retail market can be impacted by factors outside of our control such as a mild winter. As has happened now for two straight years and additionally on top of that a timing of pharmaceutical manufacturing inventory order bills can be difficult to predict and skew quarter-over-quarter comparison. Now some additional color on the billings by market. The professional market billings were very strong this quarter, increasing 62% to $3 million. That equated to growth for the market of $1,156,000, and this consists of growth related to the acquired businesses at about $819,000 and organic growth of about $337,000. So the professional market billings generated from acquisition revenue, post-acquisition organic growth, and organic growth attributable to our inside sales initiative. We continue to focus on gaining customers from the small and medium quantity generator sector, which is largely comprised of physician offices, clinics, surgery centers, dentists, vets and other healthcare providers who we can meet their medical waste requirements and save money using either our Sharps Recovery mailbox system or the route-based services or a combination of both. Retail to pharmaceutical manufacturer billings decreased in the quarter by 46% and 44%, respectively. The retail billings are driven by flu shot demand, and in the December quarter, flu shot related orders were down significantly. We also saw a decline in orders from retail customers for the takeaway envelopes as prior year had stocking orders in the December quarter. Pharma billings were down in the second quarter, resulting in the timing of inventory builds. We do expect to receive inventory builds for the March quarter -- the March 2017 quarter. We continue to believe our relationships with pharma manufacturers are strong, and we are able to provide them with not only comprehensive medical waste management solutions, but also allow them to meet disposal regulations, at the same time developing a branding opportunity and generating patient data that could improve medication adherence and compliance. Now, the government side -- government billings increased 53% to $400,000 a year. This included about $100,000 in orders under the VA's blanket purchase agreement with about $200,000 in revenue from our MedSafe program. While we have been pleased with the MedSafe orders from the government, we continue to be disappointed in the very slow ramp-up rates of the TakeAway envelope orders from the VA. Now the gross margin for the quarter was about 300 basis points lower than our expectations because of the duplicative medical waste treatment costs. And the way to think about that is, while we had a fully operational treatment facility up in Pennsylvania for the December quarter, we underestimated the number of mail backs that would be -- continue to be treated by third parties. So we saw a significant number of mail backs going to third parties, which is much more expensive to treat obviously than our facility and our facility up and running, treating primarily the regulated medical waste for more route-based businesses. So we should see a significant reduction in the third-party costs in the March and the June quarters and returned back to normalized gross margins. Additionally, from a margin standpoint, the reduction in the pharma market related billings also adversely impact the margin, and this business is typically higher-margin business. So, looking at our ongoing strategies, we believe we have a tremendous opportunity to increase our market share in the small to medium quantity generator market, offering both a mail back and our expanded route-based services. Now, as you see in the supplemental schedule to the earnings release, our medical waste mail backs represent about 65% of our consolidated quarterly billings, while the route-based pickup business contributed about 17%. Unused medication solutions, such as the MedSafe and the TakeAway envelope, represent 8% of the second-quarter billings, while the remaining 10% is represented by other ancillary products. Of the $1.6 million in route-based business, about $1 million represents historical revenue from the acquired businesses at their run rates upon acquisition. We are pleased with the growth difficulty of the route-based offering and believe it will continue to grow as a percentage of the revenue of the Company. The sales team -- and whether it be inside or field -- they are very well trained to assist our customers in determining which service -- mail back, pickup or a combination of both as the best solution for their facility and saves them the most money. On the route-based side, we currently service about 9100 customers, and it is proving to be an excellent complement to our mail-backs solutions, allowing them to offer the best and the most effective cost-saving solutions. As of today, our sales team consists of three fields -- sales personnel -- 19 inside sales personnel, four sales, and regulatory support personnel -- for a total of 26. It is an experienced team, and all of our solutions and the ability to officially identify and close new opportunities which we believe will accelerate our closure rates. Our inside and online sales initiative continues to show success, generating about 16% of the overall revenue and at $1.4 million or an increase of 42% over the prior year. So, with that, let me turn it over to Diana who will cover the financials in a bit more detail.
- Diana Diaz:
- Thank you, David. Our second-quarter 2017 revenue of $9.7 million decreased 3% as compared to $10 million in the second quarter of last year. Sequentially, revenue grew 2% as compared to the first quarter of fiscal 2017. As David mentioned, in the quarter, we experienced significant negative comparisons in the retail and pharmaceutical manufacturing markets, but did experience strong growth from our professional and government markets of 62% and 53%, respectively, and we achieved 10% growth in assisted living billings. Gross margin was 30% in the second quarter of fiscal 2017 compared to gross margin of 33% and the second quarter of fiscal 2016. Gross margin for the second quarter of fiscal 2017 was adversely impacted by duplicative costs as we transitioned from third-party processing of medical waste in our Northeast region to internal processing at our new facility in Pennsylvania. We expect third-party processing costs to decrease significantly beginning in the March 2017 quarter. SG&A expense increased to $2.9 million for the quarter. SG&A increased over the prior year by about $300,000 for the second quarter of 2017 with approximately $100,000 of this increase attributable to ongoing expenses associated with acquired businesses. The remaining $200,000 increase is directly related to higher sales and marketing costs. On a sequential basis, compared to the September 2016 quarter, and when excluding the September 2016 quarter's $700,000 of acquisition costs, SG&A decreased by about $100,000. The Company reported an operating loss of $204,000 in the second quarter compared to operating income of $664,000 in the second quarter of fiscal 2016. Sharps reported a net loss of $227,000 or a loss of $0.01 per basic and diluted share this quarter, compared with net income of $615,000 or $0.04 per basic and diluted share in the second quarter of fiscal 2016. Looking at the key comparisons, for the first six months of fiscal 2017, revenue increased 8% to $19.2 million, and customer billings increased 3% to $19.1 million. As David mentioned, the year-over-year comparison was negatively impacted by several factors. In the prior year, we had TakeAway envelopes stocking orders by major retail pharmacies totaling about $1 million. We did not have such orders in the December 2016 year-to-date period. Also, we experienced delays in the pharmaceutical manufacturer customer inventory build, causing a negative comparison of about $1.7 million in that market. This put our year-to-date comparisons behind by about $2.7 million when compared to the prior year. Continuing on the year-to-date comparisons, professional market billings increased 63% to $5.8 million. Assisted living billings increased 12% to $1.2 million. Government billings increased 16% to $800,000. Pharmaceutical manufacturer billings decreased 15% to $3.2 million, due to the changes in the inventory build timing described previously. Home healthcare billings remained essentially flat at $3.9 million, and retail billings declined 23% to $3.7 million, primarily due to a decrease in billings for the TakeAway Medication Recovery System envelopes, which were launched by several retail customers in the prior year. Billings for the flu shot related business were relatively flat for the first six months of fiscal 2017 compared to the prior year. And, on a trailing 12-month basis, which tracks the flu shot season, flu shot related business in the retail market increased 9% in the current period compared to the prior year. Fiscal 2017 year-to-date gross margin was 30% as compared to gross margin of 35% in the first six months of fiscal 2016. For the year-to-date period, gross margin was adversely impacted by duplicative costs as we transition from third-party processing and medical waste in our Northeast region to internal processing at our new facility in Pennsylvania. We expect those third-party processing costs to decrease beginning in the March quarter, and such costs totaled about $500,000 in the December year-to-date period. Gross margin for the year-to-date period was also negatively impacted by USPS rate increase that was effective from the start of that period, July 1, 2016, through October 10, 2016. SG&A expense increased 27% to $6.6 million in the first half of fiscal 2017. SG&A for the first half of fiscal 2017 includes $700,000 of acquisition-related costs. Without these acquisition-related costs, SG&A increased 14% compared to the first half of fiscal 2016 as a result of the Company's ongoing investment in sales and marketing initiatives. Net loss for the first half of fiscal 2017 was $1.2 million or a loss of $0.08 per basic and diluted share compared to net income of $800,000 or $0.05 per basic and diluted share in the first six months of fiscal 2016. Excluding acquisition-related expenses of $700,000 on a non-GAAP basis, the Company reported an adjusted net loss of $500,000 or $0.03 loss per diluted share in the first half of 2017. Our balance sheet remains solid with $7.2 million of cash and cash equivalents at December 31, 2016. And, with that, I will turn the call back over to David.
- David Tusa:
- Thanks, Diana, and just a couple of comments before we turn it over to the Q&A. Let me just say that 2016 has been quite the transformative year for the Company. We completed the integration of three acquired route-based businesses. We launched a new treatment and distribution facility in Pennsylvania. And we believe these moves are very important to the Company for the following reasons. The addition of the route-based business allows us to be a comprehensive provider of medical waste management services to the small and medium quantity generator market across the country, offering both a mail back and a pickup. The addition of the route-based businesses provides predictable and recurring revenue in a $1 billion market where proper disposable of medical waste is required by law. The addition of the route-based businesses is an excellent complement to the mail back offering where we can customize the best solution for the customer while saving them the most money. The addition of a permanent treatment facility allows us to control the disposal of our medical waste for not only the route-based business, but also the cost effective and proper treatment of our mail backs. And, finally, we believe the addition of a permanent treatment facility builds significant asset value in the Company, in addition to opportunities to save on operating costs. And, with that, operator, we are ready to turn it over to Q&A.
- Operator:
- [Operator Instructions]. Our first question comes from the line of Matt Hewitt of Craig Hallum Capital Group. Please proceed with your question.
- Matt Hewitt:
- First one, obviously, it was a weak flu season so far, but recently it has started to spike per the CDC data. And I am wondering, is it too late for you to see a benefit from what could become a more normalized tail end of the flu season? I mean, is it too late for those flu shots to occur, historically, when you look back?
- David Tusa:
- The only thing I can really say is that we have received some orders in January related to flu, but I am just not going to predict, Matt. The last two flu seasons have really been disappointing because of the mild winter. So we will just have to wait and see how it rolls out in the March quarter.
- Matt Hewitt:
- Okay. Fair enough. And then, regarding the Pennsylvania facility, you mentioned that some of the mail-back items have not been going to your Northeast facility. I am wondering, one of the opportunities that you had laid out with that facility prior to its launch was for you to start processing third-party treatment items for other vendors. Have you started to see that, and what type of an opportunity does that present?
- David Tusa:
- Right. We have. We have been providing quotes to companies for the third-party processing of the medical waste. I didn't want to do it in the December quarter because that was our first quarter of operating, and we wanted to make sure that everything was operating appropriately, which it was. But, hopefully, we will start to see -- actually, we are going to see some of the third-party revenue coming in the March quarter. Now, regarding mail backs, when you switch the labels on our outgoing mail backs, the return labels to go to a different facility, it just doesn't happen right away. And we really underestimated the impact on that because the majority of the flu business that we had for 2016 went to third parties instead of our facility. I think we changed the labels on the outbound sometime in October.
- Diana Diaz:
- Yes.
- David Tusa:
- And we want to be conservative and make sure that facility was going to be totally up and running. So we had significant third-party costs to process those mail backs while we had a fully operational system. Now, you won't see that in the March and the June quarters. You will see a significant reduction in the third-party cost to process mail backs, and we will start to see some of the savings that we talked about.
- Matt Hewitt:
- And then, one last one for me. Maybe talk a little bit about the sales and pricing environment on the professional services side. Obviously, with your route-based offerings ramping, are you seeing any changes there either from a competitive standpoint or maybe given some of the other pressures that health systems and healthcare providers are seeing? Thank you.
- David Tusa:
- No, we haven't really seen any pricing pressures. I will say that when we purchased City Waste and integrated City Waste in our operations, because the Northeast is very densely populated. Up in the Northeast, the route base is typically the most cost effective solution because of the density. What we have seen that has been very, very encouraging is, now with that acquisition, we are able to significantly increase the reach. So, for instance, instead of focusing on opportunities just in New York and New Jersey, they have recently closed deals that are in -- that may cover five or six states in the Northeast, and they continue to work on opportunities in the Northeast. Whereas, before, we may have been -- at least they have New York and New Jersey. So we see a significant opportunity. And, by the way, it is an underserved market, we believe, in the Northeast. There is just not a lot of providers, and now that we can come in and we have won a couple good-sized deals, where we are able to directly service five or six states I think of a total of 11 states in the Northeast. So that is really encouraging, and that is actually one of the reasons why we thought it made a lot of sense to buy City Waste.
- Operator:
- Our next question comes from the line of Joe Munda of First Analysis. Please proceed with your question.
- Joe Munda:
- Well, first off, Diana, I was wondering if you could give us a sense of broad-based pickup. Can you break that out for us between professional and, I believe, assisted living, I believe, are the two core markets. Can you give us a sense of what the revenue split between those two segments looks like for route-based?
- Diana Diaz:
- Sure. Almost all of it is professional. There is a small slice of it that's probably less than $100,000 a quarter. That is assisted living. And as we add more locations, we will continue to track not, but for the current quarter, it was almost all professional.
- Joe Munda:
- Okay. And the growth in professional, organic versus acquired, can you give us a little bit more granularity there?
- David Tusa:
- Sure. Joe, we mentioned earlier, the way to look at that is that is an increase of $1,156,000 in the quarter. And if you look at that and look at the Company's historical run rates of the acquired companies, it is about $819,000 of that is from the acquired. The remaining $337,000 is organic. About 20%. And that 20% is split pretty much between the organic growth and the acquired businesses, as well as the organic growth in just the business that we sell out of the inside sales group.
- Joe Munda:
- Okay. And is that a good growth rate to assume going forward? 20%?
- David Tusa:
- You know, when we modeled out these acquisitions, we did model it out at about 20%. I think we have the opportunity to increase the route-based business by higher than 20%. And just like I mentioned earlier, and the last question, you have the folks that are in the Northeast, instead of chasing closing $2000 or $3000 a year deals, they are closing $20,000 and $50,000 a year deals. So we are hopeful that the increase in professional market on the organic side can be higher than 20%.
- Joe Munda:
- Okay. It's helpful. On the pharma side, you guys mentioned delays. Can you expand on this a little bit? Can you tell us, is it something on your end, or is it something on the customer end? Are we expecting a makeup in the third quarter? Can you kind of give us some sense of what is going on there?
- David Tusa:
- Sure. There were to two programs that ordered heavily in the prior year December quarter. So a couple of things were happening. One, there is some spillover, and some of it will hit in the March quarter. But some of it is that they ordered at levels assuming a certain patient count. And when they ordered significant orders in the last December quarter, they still have inventory. So whereas they had planned for that to last a year, it may last them 18 months. So we are dealing with that. You will see -- I think we already have in the back about $1 million in revenue for pharma, and that is just what we have right now. We are out there working to try and bring some more business in into that March quarter.
- Diana Diaz:
- That's correct.
- Joe Munda:
- Can you remind us how many pharma programs you guys are currently running?
- David Tusa:
- What we have, like, 14 programs?
- Diana Diaz:
- Yes.
- David Tusa:
- 14 programs of varying sizes that we have.
- Joe Munda:
- Okay. And, David, just my last question. On the VA, the government, I just want to get your thoughts. New administration focused on opioid abuse among veterans. Any thoughts there or any updates you can provide us? Have you had interactions with the VA since the changeover in administration? Thanks.
- David Tusa:
- We have and we talk with them on an ongoing basis, and they tout the success of the MedSafe program, which has been actually very successful. Actually, I think more than half of our MedSafes we have in the field are in the VA facilities. And we just really -- we really just don't have much on the envelope. They are pushing it, but I am not going to make any predictions. I would rather wait until it hits, but I really don't have a lot of news out of [indiscernible] that hasn't been pushed further. Hopefully, with the new administration, it may increase, but I sure can't guarantee it.
- Operator:
- Our next question comes from the line of Brian Butler of Stifel. Please proceed with your question.
- Brian Butler:
- Just circling back on the retail segment, even if you adjust out the flu and the one-time purchase of the mail backs last quarter, it still looks like organic growth there was negative. Can you give us some color just on what is happening market share wise, competition, and just new customer growth in the retail segment?
- David Tusa:
- Actually, if you look at the flu season, and, again, we like to talk about these on a trailing-12 basis. But, if you look at the flu on a trailing-12 basis, it was actually up 9%. $5.6 million in flu revenue versus $5.2 million. And it was flat for the six months, $2.7 million versus $2.6 million. So, overall, it was up just a bit with respect to just flu-related orders.
- Brian Butler:
- Right. Well, I guess even more so, if I look at the trailing 12 on the retail by itself, you are somewhere around $7.7 million on retail buildings versus $9.1 million in the first quarter and $8.5 million in the second quarter. So is there something else beyond flu that is shrinking this segment?
- David Tusa:
- No. It is just the negative comparison related to -- you know, last year we had significant stocking orders for that TakeAway envelope.
- Diana Diaz:
- Right. On a trailing 12 month, that was $1.2 million of envelopes.
- David Tusa:
- In the six months, it was about $950,000. So we stocked -- because that was a new envelope that could accept controls. So we pushed that, and we got significant stocking orders for the last year. We haven't got it this year. So $950,000 in stocking orders for the six months and about $1.2 million on the trailing 12.
- Brian Butler:
- Okay. But, even then, I mean, retail growth beyond flu volatility, we are talking low single digits here -- low, maybe mid-single digits.
- David Tusa:
- Right.
- Brian Butler:
- Okay. And then, on the pharmaceutical, are you guys still expecting four new programs? I know last quarter that you talked about the four new programs, adding like $700,000 to $1.2 million in annual revenues. And just with the delays you have seen in the first six months here, is that still the right way to think about that, and is that contribution now going to be much less?
- David Tusa:
- No. We still look at it as about $1 million in incremental revenue, but it is really difficult to predict when they are actually going to launch FDA approvals and other factors beyond our control that really determine the launch dates. But we still have active programs that we are working on launching.
- Brian Butler:
- So, I guess, just thinking about growth on a year-over-year basis for fiscal 2017, unless you're going to have 50% to 60% year-over-year growth in the second half, you are looking to be kind of flat on pharmaceutical, unless those programs show up timing wise. I'm just trying to understand going from a strong 2016 to a 2017, it looks like you might be flat. I would be surprised if you are down, but it looks flat is not out of the realm of possibility if volatility continues.
- David Tusa:
- Well, on a trailing 12, that pharmaceutical business was down about $770,000, and a significant portion of that is related to the delay in orders from the December quarter. December is usually a really big quarter for pharma and -- as they like to fill out their budgets. But once we get that in and you will have more of a comparison, about the same as it was for the prior year. But you are right. It is -- there is an opportunity there to -- on the pharmaceutical side, to see lower growth rates, if you look at it on a calendar year basis for 2017 versus for prior years.
- Brian Butler:
- And what about the pipeline beyond the $1 million? Is that -- can you give some color there? I'm just trying to, again, calibrate what kind of real growth you can see in pharmaceutical sales because it has been very strong historically.
- David Tusa:
- Well, we are working with pharma on -- actually on some new programs that are not part of what we just mentioned and that really work with them to help them capture data from some of these new devices -- these smart devices, the injection devices that capture much more patient data. They will be the typical syringe, and we are working with a couple of pharmaceutical manufacturers on programs such as that. So we are hopeful that sometime in 2017 we could launch some of those, but there is no guarantee. But we are in active discussions with two major pharmaceuticals right now on programs similar to what I just described.
- Brian Butler:
- Okay. That's helpful. And on the government business, so it seems like you're getting more traction with MedSafe than the mail backs. Can you give us some color on just kind of penetration-wise on MedSafe for where it stands in the VA? Because these are clearly not the kind of same of reuse as the mail backs. So just trying to understand what remaining market is out there in the VA for MedSafe?
- David Tusa:
- Well, why don't we ever talk about standing of the MedSafe?
- Diana Diaz:
- We have almost 800 MedSafes that are out in the US, and not all of those are in the MedSafe -- I mean, in the VA. There are some in the DOD and then the number in retail pharmacies and hospitals and assisted living communities. So there is a lot of opportunity in some of the other markets other than governments that we really haven't seen that growth yet.
- David Tusa:
- But we also sold the VA side side to look at those opportunities for the MedSafe in other facilities. It has been a really interesting market. The MedSafe or the change in the DEA rules was focused primarily on long-term care, and long-term care has been very slow to adopt the MedSafe. So the growth that we have really seen has been outside of long-term care. Hopefully, 2017 can be a year where we can see the adoption of the collection receptacle by long-term care, which is the industry that the new rules were designed to facilitate, then collecting at a much lower cost disposing of unused medication.
- Brian Butler:
- Okay. And one more here on revenues, at least. On the new facility, where you are taking third-party revenues, where it is that going to show up in the segment revenues?
- Diana Diaz:
- It will show up in environmental.
- Brian Butler:
- Environmental. Okay. Then, one or two on margins here. On the profitability side, you talked about the duplicative costs having an impact. How does that compare to your expectations of the new facilities savings of $400,000 in 2017 and $800,000 in 2018? Does that push those out or --?
- David Tusa:
- We had always seen those savings for 2017 in the March and in the June quarters, the majority of that in --. Now, we still think that there's significant opportunities for savings, and again, we will start to see that in the March and the June quarters. The other thing about costs that we have -- I don't think we mentioned -- we also had some significant costs we incurred on the distribution side of the facility as we spent significant dollars on transportation costs loading up that facility with that initial stocking order. But I think you will start to see more than normalized margins in the March and the June quarter as we fully ramp that facility up and we could start processing the thousands and thousands of mail backs that we ship out every day.
- Brian Butler:
- Those savings you guys talked about last quarter are still kind of -- are the targets that we should be looking at?
- David Tusa:
- That's right.
- Diana Diaz:
- Yes.
- Brian Butler:
- Okay. And then, last one on this, is on breakeven, when you think about where that comes out in the incremental margin you are seeing on new revenues, I mean that has been somewhat obscured by some of the growth in acquisitions. Because, clearly, revenues have gone up, but the operating leverage has not been there as earnings have come down. What kind of is the breakeven now, and what is that incremental contribution going forward, just post all this route-based activity?
- David Tusa:
- Well, first of all, the incremental margin on what we call the product level, the variable cost, is still running about 50%. Actually, when you look at the December quarter, it was 50%. It was a fixed cost component across the sales that increased significantly related to the duplicative cost on the plant. But, when you look at adding those back and looking at the more normalized margin, we should have been positive for the December quarter. So I still think that the breakeven should be -- should still be somewhere $8.5 million, $9 million depending upon the type of businesses coming in and operating costs and so on and so forth. Again, I think it will be good to -- let's see a nice normal quarter in the March and the June quarters where all of these anomalies are flushed out and we are processing all of the mail backs, and we are getting the benefits from our distribution side. We're going to save money on the distribution side as well, and then I think we will have a much better idea.
- Operator:
- [Operator Instructions]. The next question comes from the line of Kevin Steinke of Barrington Research. Please proceed with your question.
- Kevin Steinke:
- I just wanted to follow up on revenue from the route-based business. In the press release, you mentioned $1.6 million in revenue from route-based services and $1 million from the acquired businesses. So that implies $600,000 of organic revenue growth in the quarter. So is that a combination of, say, the route-based businesses you launched organically in Texas and Louisiana? And also, organic growth from -- I guess it would be primarily Alpha Bio Med because you acquired that over a year ago. Is that the way to think about -- okay.
- David Tusa:
- Yes, I think that is the way to look at it. I mean, it is $1.6 million in revenue, and that is the route-based businesses we acquired. That is what we have in Texas and Louisiana. We also have a subcontractor network that we sell services. But the way to look at that is $1.6 million. If you want to look at the contribution from the acquired businesses based upon their run rates, it was about $1 million of that $1.6 million. And if you want to look at what they are running at now, I think they are about $1.2 million, about a 20% increase over what they acquire. But the $1.6 million, you're right, includes the South and what we are doing there as well.
- Kevin Steinke:
- Okay. Perfect. That's helpful. So, as you go on out into the marketplace with the route-based offering and you are able to pitch that in combination with the mail back, given some of the pricing pressures we have heard about in the marketplace, I am wondering how much cost effectiveness is part of your sales pitch as you go out and compete for new business. I mean, obviously, you're also pitching quality and a good service, but are you using costs as a meaningful differentiator when you are competing for new business?
- David Tusa:
- Well, I will just tell you. I will give you an example. We just closed up in the Northeast some really nice-sized deals, about 63 locations. And I will tell you why or how we get those is three things. It is, one, is going to be reasonable contract terms. And the industry, over the years, has seen what I think would be unreasonable contract terms. So, reasonable contract terms. Two, yes, pricing -- reasonable pricing, which includes reasonable increases -- price increases -- annual price increases. We sell those out. And then, three, is the customer service side. We just closed a good-sized deal, and the customer service side was so important we did a demo for all of the healthcare facility professionals. We did an online demo of our SharpsTracer system, of our ComplianceTrac system, and we showed the commitment to customer service and supporting the customer after the sale. And all three of those are really what was needed to get the deals done. And I think that is what we've seen in most of the deals -- those three. I don't think it is just price. I think it is much more than just price.
- Kevin Steinke:
- Okay. That's very helpful. Appreciate that. And then, you talked about how you have completed the integration of the three route-based businesses you have acquired. Can you just talk a little bit more about what that means practically? I mean, have you combined routes of some of those acquired businesses? Have you rebranded them? Just gotten them on common systems? Just kind of wondering what that integration all entailed and what it means for the operation of the business going forward.
- David Tusa:
- Well, it is really all of those, but I will tell you. I will tell you this. Here is the way to think about it. When you have these acquired businesses that you have brought in, they no longer have to focus on the marketing side. We have a four-person marketing team, and the marketing team works to -- on the marketing initiatives in their areas. So that is more time that they can spend selling. The other reason being is the back office side. We pick overall the back office side, and yes, we have a common platform that we put them on as well. So the way I look at the integration is -- the success of the integration is, let's take things away from them that will detract from them selling. Let's give them the resources they need so we can drive more sales and let them focus on what they do best. From a branding standpoint, we look at the market, and we look at whether the name that they have is a name that is a well-recognized name in the market. As a matter of fact, in the Northeast, we still operate City Waste as City Waste. It is a very well recognized name. The Alpha and the Bio teams are really more of a Sharps Compliance. So, over a period of time, then we will look at that branding and make a decision. But we don't want to alienate any customers by changing a name that is well known in that area. So I have got to tell you, we planned the integration out. I thought we did a phenomenal job on the integration. By the way, at the same time we were integrating these companies, we were launching a new plant in the Northeast. And we got it all done. So we are pleased. We are pleased with the growth rates. And we think that the route-based side, again, it is a perfect complement to the mail back and the combination of those two, and we believe we are really the only one out there proactively offering both that mail back and a pickup to save them the most money.
- Kevin Steinke:
- Okay. Well, good to hear that went smoothly, and that was helpful commentary. A couple more questions here. SG&A run rate going forward, as Diana mentioned, ex-acquisition costs, SG&A was actually down about $100,000 sequentially. So I don't know if $2.9 million is a good run rate. I mean I think last quarter on the call you talked about maybe examining your cost structure a little bit. So wondering if there was any outcome from that and what we should expect going forward.
- David Tusa:
- Yes. No, but that was a result of our cost-saving initiative. I mean, we have over the last year, year and a half, we have added businesses and we have added people. So, with the completion of the plant, we paused for a bit, and we looked at the cost structure, and we did take cost out of the business. So I think you can look at that SG&A as $2.9 million or lower for the next couple of quarters.
- Kevin Steinke:
- And then, lastly, I noticed you just changed up the numbers in the presentation for inside online sales channel a bit. It went down a little bit historically. I don't know if you could just -- a little more insight into what the mix change was there.
- David Tusa:
- What we did is we had some of the business in the inside sales line item that wasn't being managed by inside sales. For instance, it may have been distributor relationships. So when we were drilling down and looking at evaluating the inside sales, we just wanted to make sure that the comparisons were provided. There is sales from distributors that inside sales doesn't matter and doesn't manage, and that is better suited up in the distributor line. But what you have on the inside and online sales for both periods is exactly the book of business that they currently manage.
- Operator:
- There are no further questions in the audio portion of the conference. I would now like to turn the conference back over to management for closing remarks.
- David Tusa:
- Again, thank you, everyone, for joining our call. We look forward to speaking to you next quarter.
- Operator:
- This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful rest of your day.
Other Sharps Compliance Corp. earnings call transcripts:
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- Q2 (2022) SMED earnings call transcript
- Q1 (2022) SMED earnings call transcript
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- Q1 (2020) SMED earnings call transcript