Sharps Compliance Corp.
Q3 2017 Earnings Call Transcript

Published: 26 Apr 2017

[Operator:]

Greetings and welcome to the Sharps Compliance Inc. Third Quarter and Fiscal 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host John Nesbett with IMS. Thank you Mr. Nesbett, you may begin.

[John Nesbett:]

Good morning and welcome to the Sharps Compliance third 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 performance, operations and growth strategies, while 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 this 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 in our website or at sec.gov. So with that let me turn the call over to David to begin the review and discussion. Go ahead David.

[David Tusa:]

Thanks John and good morning everyone and welcome to our third quarter fiscal year 2017 earnings call. While our third quarter revenue and SG&A were consistent with or better than internal forecast, gross margin fell a bit short of our expectations. We were looking at gross margins closer to about 29% which was improved gross profit by about $142,000. The shortfall was related on the gross margin was related to a couple of things, one, while we have recognized savings related to the processing of the mail back at our owned facilities, the volume is not yet at the level that we had expected. The other thing is we had some incremental operational costs at the Pennsylvania and Texas plants. So all in about $142,000 effect on the margin. Now regarding the quarterly revenue, the growth in the professional and the pharmaceutical manufacturing markets was very strong, increasing 49% and 35% respectively. Overall, company growth was hampered by the second quarter or by the second consecutive flu shot immunization season. Our retail flu business on a trailing 12 basis was about 5.7 million which is really only an increase of about 10% over a lower prior year base. The professional market continues to be positively impacted by the success of our inside sales team. E-commerce driven sales as well as a contribution from route-based businesses. The solid growth in pharmaceutical manufacturer market sales is related to several inventory builds in the quarter. Three of which were related to new patients support programs. Our unique solution for pharmaceutical manufacturers, as soon as the medical waste compliance requirements are met, also provides a branding opportunity for the pharmaceutical manufacturer and probably most importantly the capability to collect patient data which could lead to improved medication and adherence. Because of the vast experience we have with pharmaceutical manufacturers, our ability to customize patients for program and collect and report valuable data, we believe we're uniquely positioned as the leader in this market. Further, we’ve seen increased interest in the market for patients for our programs from manufactures of new and existing self injectable medication. We’re continuing to see strong demand for the MedSafe, which facilitates disposal of controlled and non-controlled unused or expiring medications. We believe we're providing them a valuable service to long-term care facility, retail and hospital pharmacy, hospice, drug treatment and the licensed law enforcement markets. The patent-pending solution addresses nationwide concerns over opioid abuse as well as environment responsibility. Since we launched the MedSafe in early 2015, we've generated 2.3 million in revenue, specifically related to the MedSafe collection receptacle and associated liners. Our route-based business contributed 19% of our third quarter billings, grew by over 160% driven by revenue growth from the nearly acquired or recently acquired Citiwaste operations. The route-based business contributes stable revenue in markets where proper disposable of medical waste is required by law. It complements our mail back offering and reduces the seasonal impact of the retail market billing. And as you know over the past 18 months or so, we've been systematically enhancing and complementing the mail back offering like expanding our route-based business. So we believe we can attract more of our target group which is a small to medium quantity generator when we offer them more service options. Our sales team is effectively working with effective customers to determine the best option. We’d add a mail back, a pick up or a combination of both. The collateral benefit of broadening these service offerings moderates the seasonality in the business. We believe the medical waste market for the small and medium quantity generators is under-served and represents a tremendous opportunity for the growth of the company. As we've discussed, our consolidated revenue is impacted by seasonality, at least a lumpiness in our results. The route-based operation appeal to customers who need to adhere to strict regulations, related to the disposal of medical waste and provide us with a more predictable recurring revenue stream. Our acquired businesses represented about a million of the 1.6 million in route-based business for the current quarter. Acquired business revenue for the prior-year quarter was $250,000 out of the 628,000 total route-based business. Regarding the professional market, of the 981,000 in increased billing, 722,000 was related to acquired businesses, while the remaining 259,000 is organic. So just a bit more about the March 2017 quarter, total revenues were 8.6 million, an increase of 29% compared to last year’s quarter. Government billings were essentially flat and about 400,000. This included 100,000 in orders related to the Veterans Administration Blanket Purchase Agreement and 200,000 in revenue for the MedSafe. While we have seen steady interest in orders for MedSafe from government agencies, the TakeAway envelope orders from the VA continues to ramp slowly. As you will see in the supplemental earnings schedules, our medical waste mail back represented 57% of our consolidated quarterly billings, while the route based business contributed about 20%. Unused medication management solutions such as the MedSafe and the TakeAway envelopes represented 10% of the third quarter billings while the remaining 13% are represented by other ancillary products. Now looking forward, our June quarter has historically been very strong because it typically including the opening orders related to the flu season, which are reflected in the retail market. The pharma market billings for the June quarter should also see positive impact from a couple of inventory builds as well as growth in existing and new programs. Additionally, we expect to see continued strength in the billings from the professional market, which is driven primarily by inside sales, e-commerce sales, the impact of field sales deals closing as well as route-based business. We have an experienced sales team including both inside and field sales with expertise in all of our solution offering. And all of our salespeople are trained to help our customers determine whether the mail back pick up or a combination of both is a better solution, in terms of both convenience and cost savings. So the sales team, we have four field sales personnel, 17 inside sales and four sales and regulatory support personnel for a total of 25 employees. Now with that Diana why don’t you cover the financials in a bit more detail please.

[Diana Diaz:]

Okay. Thank you. David. Third quarter 2017 revenue increased 29% to $8.6 million as compared to 6.7 million in the third quarter of last year. And in the quarter we saw growth across all segments. The gross margin improved to 27.4% in the third quarter of fiscal 2017 compared to gross margin of 25.5% in the third quarter of last year. As David mentioned, we were looking for gross margin of about 29% for the third quarter of this year. SG&A expense increased slightly to $2.8 million as compared to $2.7 million in the same period of 2016. SG&A increased over the prior year by about $81,000 for the third quarter of fiscal 2017 year due to incremental sales and marketing cost. Sequentially, SG&A is down 109,000 or 4% from the December 2016 quarter reflecting the impact of our cost savings initiatives. The company reported an operating loss of 638,000 in the third quarter of fiscal 2017 compared to an operating loss of $1.1 million in the third quarter of last year. Sharps reported a net loss of 668,000 for a loss of $0.04 per basic and diluted share this quarter compared with a net loss of $1 million or $0.07 per basic and diluted shares in the prior year third quarter. Looking at the key comparisons of the first nine months of fiscal 2017, revenue increased 14% to $27.8 million and customer billings increased10% to $27.5 million with increases across most all of our segments of our business, we'll go through a few of those now. Professional market billings increased 58% to $8.8 million. Assisted living billings increased 10% to $1.8 million. Government billings increased 10% to $1.2 million. Pharmaceutical manufacturer billings decreased 4% to $4.6 million due to delays and inventory bills. And home healthcare billings increased slightly to $5.8 million. Retail billings declined 18% to $4.5 million, primarily due to a decrease in billings for the TakeAway medication recovery system envelope which were launched by several retail customers in the prior year. Billing for the flu-shot related business were relatively flat for the first nine months of fiscal 2017 compared to the prior year. And on a trailing 12-month basis, flu-shot related business in the retail market increased 10% in the current period compared to the prior year. Fiscal 2017 year-to-date gross margin of 30% as compared to gross margin of 32% in the first nine months of fiscal 2016. SG&A expense increased 19% to $9.4 million in the first nine months of fiscal 2017. SG&A for the first nine months of this year includes about $700,000 of acquisition-related costs. Without these acquisition-related costs, SG&A increased 10% compared to the first nine months of last year as a result of our ongoing investment in sales and marketing initiatives. Net loss for the first nine months of fiscal 2017 was $1.9 million or $0.12 for basic and diluted share compared to a net loss as $200,000 or $0.01 per basic and diluted share in the first nine months of fiscal 2016. Excluding the acquisition-related expenses of about $700,000 on a non-GAAP basis, the company reported an adjusted net loss of $1.2 million or $0.07 per diluted share in the first nine months of 2017. Our balance sheet remained solid with $5.7 million of cash and cash equivalent at March 31, 2017 and working capital of $9.6 million. Additionally, at last month we announced a new $14 million credit facility with a commercial bank. The new facility is available for working capital and other general and corporate purposes up to $6 million and funding for acquisitions of up to $8 million. And as we look forward, we believe that the June 2017 quarter should be strong as David mentioned previously. We believe gross margins going forward should be in the 35% to 37% range considering revenue levels of $10 million to $11 million. Additionally, we expect SG&A for the June quarter to be $2.7 million to $2.8 million reflecting the continued impact of our cost savings initiatives. And with that I'll turn the call back over to David.

[David Tusa:]

Thanks Diana, just a couple of comments before we turn it over to Q&A. As we continue to enhance our portfolio of comprehensive medical and pharma waste management solutions we believe. We are well positioned to build on our customer base in the underserved small to medium [indiscernible] generator market. We plan to continue to expand the geographic reach of our route-based offerings which complements our convenient mail back solutions to meet the needs of existing customers and to win new business. And with that operator, let’s open it up for questions.

[Operator:]

[Operator Instructions] Our first question comes from the line of Matt Hewitt from Craig Hallum. Please proceed with your question.

[Matt Hewitt:]

First up, obviously nice progress on the East Coast and with the professional billings. Are you seeing any changes on the competitive front whether it be from pricing or maybe more aggressive marketing and advertising, any color there would be helpful.

[David Tusa:]

No, not really. We like the Northeast, we think it's a great market for us and we're only when you look at the professional market, the way I look at it, we're only 2% maybe on a good day 3% penetrated in that market and we like it. We continue to expand in that area, but we really haven't seen any changes in the competitive landscape.

[Matt Hewitt:]

Okay. Great. And then regarding gross margins, I think both of you touched on this briefly, but obviously a little bit below expectations here in Q3. It sounds like you're going to see a nice bounce back in Q4, how should we be thinking about that as we start to look out to next year? Will that I guess get to a more normalized level? Obviously, this year, you had the impact of the Citiwaste acquisition and ramping up that new facility, but I'm just trying to think of the general 32% to 35% kind of the range for maybe for next year?

[David Tusa:]

Well, this is the way, first of all, we’re looking at the design, I mentioned between that $10 million and $11 million revenue level, 35% to 37%. What I’d like to see is getting into the September and December quarters, what we're processing are mail back to ourselves that will really be the first quarter where the vast majority of what we're doing is processing the mail backs ourselves. That's where you see a lot of savings and that's where you see improvements in the gross margin. So I think that we have an opportunity to continuing to see the gross margins degrees. So it's cost efficiencies as well as continuing revenue because of the leverage.

[Matt Hewitt:]

Okay. Great. One more and then I’ll hop back in the queue. Thank you for the update on the headcount and sales. It sounds like there was a couple of movements there, added field sales rep, down a couple on the inside sales side, has that stabilized and where do you see that, do you look -- are you looking to add maybe one or two people over the next few quarters or how should be thinking about the headcount for that group? Thank you.

[David Tusa:]

Sure, Matt and that’s a great observation. We added our field sales person up in the northeast to supplement our sales efforts in the northeast and what we did on the inside sales is we reduced the headcount by a couple and what we did is we really focused on the others being much more efficient. So it's really more of an efficiency and we were able to grow significantly in inside sales with less people, so if we could do it with less people and save some dollars out of the SG&A, we're going to do it.

[Operator:]

Our next question comes from the line of Brian Butler with Stifel. Pleased proceed with your question.

[Brian Butler:]

I just wondered on the professional side, what was the organic growth if you took out the Citiwaste and the acquisition related volume or revenue?

[Diana Diaz:]

About 700,000 of the growth in the professional market was from the acquired business. So it lets 200, 250 that was organic. We had a slight negative comparison on some of our distributor activity in the professional market that was about 100,000 and the rest was growth from inside sales or field sales.

[Brian Butler:]

Okay. So that comes out like somewhere in the mid-teens I guess on the organic growth in professional. Is that the right way to think that going forward from here or is it still really opportunity wise better than that?

[David Tusa:]

It’s really I think opportunity was better. Let’s focus, let’s kind of break it out, let's focus on the acquired businesses that we track their success based up on the growth over their historical revenue levels and they're up about 25% on the route based business, which is what we're quite excited about. I mean that's what our goals are to have that organic revenue growing at higher levels, more consistent with that. And again, we think we have the opportunity to do that.

[Brian Butler:]

Okay. All right. That's on the professional. And then on retail, I just wanted to touch, I mean it sounds like you're expecting the strong quarterly improvement on the preorders for next flu season to occur. If flu season remains weak, what's the right way to think about growth in that business? And if we have a flu season like we've seen over the last two years, is this really retail growing at 2%, 3% or is there really some more opportunity for growth there?

[David Tusa:]

Well, here's the way we look at it. First of all, for the June quarter, we typically receive about $2.5 million of opening orders for the flu business and we probably have about half of that already received so far. So that's the way we look at that and I’m not guaranteeing it’s going to happen, but that's historically what we do. And then you usually have a nice follow on in September and then December, who knows because it’s based on folks going out and getting their [indiscernible]. We’ve been disappointed over the last couple of years, I think, would you say Diana, the flu business alone was up 10%.

[Diana Diaz:]

Right. On a trailing 12-months, it’s going to compare season to season.

[David Tusa:]

Right. So, I’m not going to guess Brian other than the fact that off a low base, we increased 10% in the flu business this year over the last or lets’ get those opening orders and hopefully start to or have a good June quarter and then we’ll just have to monitor from there.

[Brian Butler:]

Okay. Maybe I can ask in a different way. If you exclude the flu business, what was growth in retail kind of on a year-over-year or on a trailing 12-month basis?

[Diana Diaz:]

So, if you exclude the flu, then you have some negative comparisons depending on what quarters you look at from the launch of the envelopes in some of the retail pharmacies last year. So, the rest of the businesses is pretty flat with a slight growth.

[David Tusa:]

Yeah. That retail market is really driven by that flu related. There are some year around immunizations that really for the most part is going to be driven by flu.

[Brian Butler:]

Okay. So I guess another way to look at it is, you’re really not seeing expanding, a big impact from expanding people or people getting flu shots, more people getting flu shots in a retail setting, right, I mean that seems to be a less of the factor in driving that growth than it had been in the past and really now you’re just.

[David Tusa:]

Yeah. That’s exactly right. What we've seen over the last few years is not only more flu shots, for more flu shots administered in the retail setting and the data that we’ve seen, that's starting to kind of stabilize and as far as percentage that are administered in a retail setting, so which you really have now is just the demand for the flu shots and it’s going out and getting flu shots.

[Brian Butler:]

Okay. And then on the pharmaceutical, I think you mentioned that our trailing 12 that pharmaceutical was down a little bit year-over-year, I think it was something like 5 million, 5.5 million on a trailing 12 versus kind of that little bit over 6 million if we went back to the third quarter of ’16. With the pipeline you have with new patient support programs, what's the right way to think about this going forward? Does this get back to a 6 million plus kind of annualized revenues or is that still you're kind of having some of these customer rebuilds not occur again?

[David Tusa:]

I think it's a good way to look at it, getting it back to the $6 million level. And the other thing is we’ve really been encouraged, there’s been a lot of interest lately, and you’ve heard when I went through the script and I talked about, this quarter with three new programs that were contributing to revenue that the activity, the sales activity in the former patients thought programs is quite high right now, so we're pleased with that. So I think that we have an opportunity to get back to that 6 million and if we're fortunate enough to lay in some additional yields and maybe even more to that.

[Brian Butler:]

Okay. And then MedSafe, you had talked about the -- can you give a little update I guess just on what the installed base is and how to think about the recurring revenues associated with kind of that installed base?

[David Tusa:]

It’s close to, I think it’s 700 or 800 of MedSafe units that we have out in the field. The way you measure it, the way I measure it is because [Technical Difficulty] and the return liners now I think are over 6000. So that’s the way that we measure the success of that. We've had a lot of interest. What we want to do is get more and more MedSafe out there and what we want to do is increase the numbers of the liners. So what do we do? A couple of hundred thousand dollars of MedSafe for the quarter. 400,000 for the quarter. So hopefully, we'll be able to see that increasing going forward as we not only get more MedSafe out in the field, but more importantly, add more and more of those return liners turn back. So we're pleased with that and we think that we have the opportunity to grow that.

[Brian Butler:]

All right. So that 400,000, is that all liners or is that?

[Diana Diaz:]

It’s a combination.

[Brian Butler:]

What would you say? Is liners -- is it 80-20 or is it something different?

[David Tusa:]

Yeah. Usually majority of it is the return liners, they're coming back like once a month and naturally providing the recurring revenue. It's difficult because on the collection receptacles, we have a lease and a sale model. So it just depends what's hot for that particular quarter, whether it's -- although we’ve seen the sale, the sales model be a bit more popular lately. So we’ll take either one of them.

[Brian Butler:]

Okay. And then lastly on kind of the acquisition you talked about kind of like your capacity, give a little bit more color on the pipeline and kind of opportunity wise, are you looking geographic or is it really more tuck-in, just some color there would be great?

[David Tusa:]

We're looking just it’s geographic and what we're looking at is trying to facilitate that geographic expansion, so we can cover a larger percentage of the population. And our customers like that, our customers like us directly servicing as much as we as can. So we'll probably have a better update next quarter on where we are with that, but we're working on it, we're looking at it and think that the geographic expansion makes sense.

[Operator:]

[Operator Instructions] Our next question comes from the line of Kevin Steinke from Barrington Research. Please proceed with your question.

[Kevin Steinke:]

Good morning. So you talked about the three new patient support program rollouts and pharmaceutical manufacturer segment during the quarter. So with those rollouts, could you just give us an update as you have in the past on the number of deals that are in the pipeline and potential revenue associated with any potential new deals as you have in the past?

[David Tusa:]

Kevin with the three new programs that we launched and that we built for the prior quarter, was directly related to what we had talked previously about new programs that we were landing. We probably got three that are in the pipeline right now that we're working on currently that has potential to improve the revenue going forward. Overall, we have, it’s 15 programs with 10 different manufacturers, which is great and which we want to continue to build on.

[Kevin Steinke:]

Okay. That's helpful. And you had mentioned that you’re looking for a pretty good June quarter in pharmaceutical as well. Can you just clarify, is that just a continuation of the rollout of those new programs or is it existing builds or what do you expect for the June quarter in pharma?

[David Tusa:]

The June quarter is going to be a couple of existing programs, we have inventory builds scheduled for the quarter. So we think this past quarter, the March quarter was strong for the pharma and then we’d like to see another strong quarter for the June quarter as well.

[Kevin Steinke:]

Okay. That's helpful. And then you've talked about the year-over-year headwind in retail, given the takeaway orders that you've had passed, are there any indications of replenishment orders coming from those customers or the potential to roll out takeaway to other customers in retail or how are you thinking about that part of the business as we move forward?

[David Tusa:]

The reorder, they're difficult to predict you know. We work to fill those every day, but as far as the large retail pharmacies, we're probably good right now with what we have, meaning, we’re having in place and then we're waiting on reorders. Again, I don't know when they're going to come in, but I don't think you're going to see, we'll probably see it’s more like regional chains or smaller chains that may want to launch the -- that they want to launch the program.

[Kevin Steinke:]

Okay. And you talked about you're happy with the demand you're seeing for MedSafe. You're doing some of that in the government market, but you also mentioned last quarter you had hope to begin penetrating the long-term care market a little bit more with that offering. Are you seeing a pick-up in demand from long term care or is that still kind of moving a little more slowly?

[David Tusa:]

No. We’re seeing demand in long-term care. The other area we receive demand is in pharmacies and hospitals and there's been a pretty significant demand, because it's either, they can be used in a pharmacy in a hospital or a pharmacy in a retail setting. So probably the hospital setting, the pharmacy in the hospital setting and setting a long term care that we’ve seen some renewed interest there.

[Kevin Steinke:]

All right. That’s good to hear. And then the environmental billings were up nicely on a sequential basis. And last quarter, you had talked about the potential for providing waste treatment for outside parties. So I don't know if there was any of that going on in the quarter or what the outlook for that initiative is going forward?

[David Tusa:]

Kevin, those were in Texas. We are looking at -- now starting look at Pennsylvania, so a potential third party opportunities and have held off, doing that for now to make sure that we were up there and have some time behind those operating efficiently, making sure all procedures and protocols are in places. So we're looking more towards or now towards third party treatment activity out of the northeast and we may have some as early as the June quarter.

[Kevin Steinke:]

Okay. Good. And then lastly just to clarify, the 10 million to 11 million of revenue, 35% to 37% gross margin. That was specific to the June quarter that those numbers apply to or is it just kind of what we should think of.

[David Tusa:]

That's June. That’s what we think that our gross margin will be applicable to the June quarter for those levels of revenue.

[Operator:]

There are no further questions in queue. I’d like to hand the call back over to management for closing comments.

[David Tusa:]

Thank you and thank you everyone for participating in the call. We appreciate and we’ll look forward to talking to everyone next quarter.

[Operator:]

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