Sharps Compliance Corp.
Q4 2017 Earnings Call Transcript

Published: 10 Aug 2017

[Operator:]

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

[John Nesbett:]

Good morning and welcome to the Sharps Compliance fourth quarter and 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 Q&A portion of this conference. 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 Web site or at sec.gov. So with that, I'll now 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 fourth quarter fiscal year 2017 earnings conference call. We ended the fiscal year 2017 with a strong quarter reflecting revenue of $10.4 million, an increase of 17% over the prior year. An EPS of $0.04 per share, we also saw growth in the fourth quarter customer billings in all market except retail. The strong fourth quarter performance topped the fiscal year of strategic initiatives and expansion into the route-based business and so there is a launching of a new treatment facility and distribution warehouse in Pennsylvania. Although our first three fiscal year 2017 quarters were adversely impacted by acquisition-related expenses, Texas plant related cost. We're now seeing the positive results of the strategic moves as demonstrated by our solid fourth quarter growth and profitability. Additionally, the route-based pick up service greatly enhances our offerings. Thereby creating what we believe to be a comprehensive provider of healthcare waste management services to the small and medium quantity generator. Finally, our infrastructure has increased significantly, thereby facilitating future growth in the business. So, we are different company, much different than we were even a year ago. One area of our business that has been challenging for us for the last couple of years and throughout fiscal year 2017 is the retail market. During the first nine months of 2017, retail market billings were negatively impacted by lower overall flu immunization related orders. And in the fourth quarter an addition to a disappointing flu-related business, we also lost one of our larger immunizing retail pharmacy customers. And we plan ourselves on long-term relationships which we have developed through our capabilities and also our adaptability in working with our customers to ensure we're providing the most cost effective and efficient solicitous for the business. We very rarely lose business, so parting ways with the customer like this is not taken lightly. However, it's important to note that the margins on their business was lower than average, it's also important to note that we remain a dominant player in the retail, pharmacy, immunization market with about 70% market share. We believe, we provide the best solution in this market, with the best customer service and have redoubled our efforts to ensure we exceed our customer expectation. Now, if we look at the other markets, we saw a significant growth in our professional and pharmaceutical manufacturer markets, which increased 57% to 50% respectively. Our professional market continues to be positively impacted by the success of our inside and field sales teams, e-commerce driven sales and the addition of the route-based offering. The solid growth in pharmaceutical manufacturer market sales is related to several inventory builds in the quarter for our patient support programs. We have a unique solution for pharma companies that not only ensures medical waste compliance requirements are met, but also provides a branding opportunity and the capability to collect patient data, which could lead to improved medication adherence. We have long standing relationships with major pharmaceutical manufacturers and a leadership position in this market, larger due to our ability to customize patient support programs and collect and report valuable data. Additionally, we have seen increased interest in the market for patient support programs, the manufacturers have new and existing stock injection medications. We continue to see strong demand for MedSafe offering. MedSafe facilitates disposal of controlled and non-controlled unused and expired alternative use of medications. We believe we are providing the valuable service to our long-term care, customers, retail and hospital pharmacies, hospice, drug treatment and licensed law enforcement markets. It's a patent-pending solution addressing nationwide concerns over opioid abuse and environment responsibility. Since the launch of MedSafe in early 2015, we've generated about $3 million in revenue, specifically related to the MedSafe collection receptacle and associated liners. We believe this for year 2018 will be another year growth for MedSafe sales. Our route-based business, they contributed 16% of the fourth quarter billings, and grew by over 180% in the fourth quarter driven by revenue from our Citiwaste operations which was acquired in July of 2017. The route-based business contributes stable and more predictable revenue in markets where the proper disposable of medical waste is required by law. It also complements our mail back offering and it reduces the seasonal impact of retail market billings. As you know over the past couple of years, we have been systematically enhancing and complementing the mail back offering by expanding into the route-based business. Strategically, we can attract more of our target group of small to medium quantity generators when we can offer them flexibility in the choice of their solutions, whether it'd be a mail back, route-based pick up or a combination thereof. Our sales team is focused on working with perspective customers to make sure, we're providing the best and most effective option for their operations. Our acquired businesses represented approximately $1 million of the $1.7 million in route-based business revenue for the quarter. Of the $1.1 million fourth quarter growth in the route-based businesses, about $700,000 was attributable to acquisition, the difference being generated from organic growth. Regarding the professional market of the $1.2 million in increased billings, 722,000 was related to acquired businesses, while the remaining $420,000 of growth is organic. As we look forward to fiscal year 2018, we continue to believe there is a tremendous opportunity for us to capture more of the underserved small to medium quantity generator healthcare business in all of our key markets. Overall, we're very pleased with the progress made during fiscal year 2017 with our growth of strategic growth initiatives and we are energized by the opportunities we are seeing related to our ability to provide a more comprehensive offering of both mail back and route-based solutions across a broader geographic footprint. Now with that, and I'll turn it over to Diana, who will cover a bit more on the financials.

[Diana Diaz:]

Thank you, David. Fourth quarter 2017 revenue increased 17% to $10.4 million as compared to $8.9 million in the fourth quarter of last year, with gross margin of 35% as compared to 36% in the fourth quarter of 2016. SG&A expense decreased by $2.8 million or 27% of sales as compared to $2.9 million or 33% of sales in the same period of 2016. This reflects the impact of cost savings initiatives that we launched in early 2017. The company reported operating income of $595,000 in the fourth quarter compared to operating income of $214,000 in the fourth quarter of fiscal 2016. Sharps reported net income of $569,000 or $0.04 per basic and diluted share this quarter compared with net income of $220,000 or $0.01 per basic and diluted share in the fourth quarter of last year. The company achieved EBITDA of $980,000 in the fourth quarter of fiscal 2017 as compared to EBITDA of $429,000 in the same period of fiscal 2016. Looking at some key comparisons for the full year of fiscal 2017, revenue increased 14% to $38.2 million and customer billings increased 11% to $38.1 million. Professional market billings increased 58% to $12 million; home healthcare billings increased 7% to $7.9 million. Pharmaceutical manufacturer billings increased 4% to $6 million; assisted living billings increased 11% to $2.4 million. Government billings increased 9% to $1.7 million and retail billings declined 20% to $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, as well as an overall decline of 15% in billings for flu-shot related business in fiscal 2017 compared to the prior year. Fiscal 2017 gross margin was 31% as compared to gross margin of 33% in fiscal 2016. SG&A expense increased 13% to $12.2 million in fiscal 2017 and it included $700,000 of acquisition-related cost associated with the completion of the acquisition of Citiwaste. Without these acquisition-related costs, SG&A increased 7% compared to fiscal 2016 as a result of our ongoing investment in sales and marketing initiatives. Net loss in fiscal 2017 was $1.3 million or an $0.08 loss per basic and diluted share compared to breakeven net income or $0.0 per basic and diluted share in 2016. Excluding the $700,000 in acquisition-related expenses on a non-GAAP basis, the company reported an adjusted net loss of $591,000 or $0.04 loss per diluted share in 2017. Our balance sheet remains solid with $4.7 million of cash and cash equivalents at June 30, 2017 and working capital of $10.5 million. Going forward, we expect SG&A for the September quarter to be $2.8 million to $2.9 million depending on investments in sales and marketing 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 the Q&A. We believe our strategic initiatives are critical to the positioning of the company, as a comprehensive service provider, the capability of providing medical, pharmaceutical and hazardous waste solutions across the country. We continue to explore opportunities to expand our geographic reach and infrastructure so we can better serve our existing and perspective customer base. And with that, operator let's go ahead and open it up for questions.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from the line of Matt Hewitt from Craig-Hallum. Please go ahead.

[Matt Hewitt:]

Good morning and thank you for taking the questions.

[David Tusa:]

Hey Matt, good morning.

[Matt Hewitt:]

Couple of questions, obviously disappointing to lose a large retail customer, if we could get a little bit of color was that a competitive displacement, are they bringing maybe that service in-house, any color there would be helpful?

[David Tusa:]

Matt, for competitive reasons, I'm not going to get into a lot of the details. We focus on providing great customer service. We have strong relationships, we very rarely lose business, we still have 70% make share in that immunizing retail pharmacy that's it. So, we're going to, we're going to leave it at that. We were disappointed, but we think we do a great job in servicing that market.

[Matt Hewitt:]

Okay. And then, I guess looking out at the next year, are there some things that you could do aside from growing the various segments, there is some things you could do maybe to pick up some share or are there other opportunities to maybe offset that loss?

[David Tusa:]

Are you talking about just to the retail, in the retail market?

[Matt Hewitt:]

Yes. Within retail.

[David Tusa:]

We have -- again we have a significant market share in that retail pharmacy market. The growth in that business if there is just more flu-shots being administered in the retail setting or just more flu-shots being at administered. It's been a disappointing market for the last few years, because of the delay in the winter and the cold weather, where we are focused in that retail market is a number of other solution offerings like the MedSafe, which has been a great offering for fiscal year 2017.

[Matt Hewitt:]

Okay. Maybe one more from me and then I'll hop back in the queue. The pharma segment is doing well maybe if you could give us an update on the pipeline there and some of the opportunities that you see over the coming quarters and in the years?

[David Tusa:]

Sure. We like the pipeline. The pipeline has been growing. We've seen some interest -- increased interest recently and we're chasing two or three larger deals, these were a little bit longer than other sales cycle. But, we've got a number that we're been working on. I will tell you the ones that we're working on that really focus more on -- that focus more on the launching of new drugs which is what we like. And we launched our patient support program with the launch of the drug, we like that a lot because, if we become part of the treatment regimen.

[Matt Hewitt:]

That's great. Thank you.

[Operator:]

Thank you. Our next question comes from the line of Joe Munda from First Analysis. Please go ahead.

[Joe Munda:]

Good morning, David and Diana. Congrats on the quarter. Can you hear me okay?

[Diana Diaz:]

Yes.

[David Tusa:]

Yes, we can hear you.

[Joe Munda:]

David, first off, professional, I wanted to talk how many states can you reach now and I guess, you talked on expansion possibilities, any comments there would be great?

[David Tusa:]

Sure. First of all, obviously, with the mail back, we can address all of 50 states, with the route-based pick up, we can directly service 23 states it makes up about [indiscernible] about 48% of the population in those 23 states. And in the remaining we've got a pretty strong sub-contractor network that allows us to facilitate the disposal if it's outside of our service area. But that's been really the key, I think it's some of the growth that we've seen in the fourth quarter and I think that's going to be a key for some the growth we'll see in fiscal year 2018 and that now we can directly service from the route-based side a pretty significant portion of the population.

[Joe Munda:]

Any thoughts on, I mean, I know you're just digesting the acquisition of Citiwaste and the other one. But any thoughts of pushing, even further Westward with further acquisitions?

[David Tusa:]

We continue to look at acquisitions and we've got a pretty robust acquisition pipeline and we are looking at other areas and you're really going to be opportunistic in these areas in finding the right candidate and finding them at the time in which it's good for them to sell. But, I will tell you this, with the integration of the acquisitions and launching of systems, we've launched new route-based systems that we believe integration will be relatively smooth moving forward as we look to potentially acquire other operations.

[Joe Munda:]

Okay. And then, I guess in relation to the type of customer you are garnering, I know, one of the main focus is was to move upstream get larger volume sort of customers. Can you give us some; I guess some color on what you're seeing as far as customer concentration is concerned in the professional market?

[David Tusa:]

Sure. I think what we've seen a change over the last year, is in that professional market where we are seeing whether its deal close or deals in the pipeline, we're seeing much larger deals we're seeing multi-state deals. And, we look at, we may close deals of a $100,000, $150,000 that may encompass six or seven states in the professional market. We've got some that we're chasing that are even larger. So, what I like about the professional market now is while inside sales was looking more at the smaller customers that are field sales for the use of both the mail back and the pick up are going after and the shorter close deals that are much larger covering many more states.

[Joe Munda:]

Okay. And then I guess in relation to that, can you give us updated number on field sales and inside sales perhaps?

[David Tusa:]

What do we have its inside sales is at 16, 16 and I think field sales is 5.

[Diana Diaz:]

Yes. That's correct.

[David Tusa:]

And then we got some regulatory support people…

[Diana Diaz:]

Correct. The total is 25.

[Joe Munda:]

Okay. And then, thank you, I appreciate that. And then, Diana my last question going forward, lot of moving pieces just seems to be the first like real clean quarter that we are seeing out of Sharps. I guess how should we think about the cadence of gross margin going forward, now that everything has sort of been digested from these acquisitions opening the plant, the expansion, the enhancement. How should we think about gross margin, if this 35% level something that we can model off of going forward?

[Diana Diaz:]

Yes. We look that and we think with revenue levels of $10 million to $11 million, we're looking at gross margin in the range of 34% to 36%. So, right about where we ended up this quarter, is kind of in the middle of that range.

[Joe Munda:]

Okay. Thank you. I'll hop back in the queue.

[Operator:]

Thank you. Our next question comes from the line of Brian Butler from Stifel. Please go ahead.

[Brian Butler:]

Good morning. Thanks for taking my questions.

[David Tusa:]

Good morning.

[Brian Butler:]

Just on the lost customer, can you give a little color on what the size that would be impact-wise in 2018?

[David Tusa:]

We know that last year the customer -- last year fourth quarter.

[Diana Diaz:]

Last year fourth quarter was $700,000 in revenue, last year was $1.2 million and then we did have $350,000 in revenue from this customer, mostly in the first quarter of this year.

[David Tusa:]

So $350,000 for fiscal year 2017, so that's what that will be behind -- for this fiscal year 2018, $300,000.

[Diana Diaz:]

Yes.

[Brian Butler:]

So, the contribution, I'm sorry, in 2018 you said it's going to be $300,000 versus $1.2 million in 2017?

[Diana Diaz:]

No. Fiscal year 2016 had $1.2 million, this past fiscal year 2017 that we just closed had $350,000.

[Brian Butler:]

Okay. So, this customer who is out of -- for most of 2017, fiscal 2017?

[Diana Diaz:]

Correct. Our flu season is big in September, December and March, I'm sorry in June, but nothing in March.

[Brian Butler:]

So fiscal 2018 that the headwind is really only $350,000.

[Diana Diaz:]

Exactly.

[Brian Butler:]

Okay. That's helpful. And when you think about the flu business, I mean two years now it's been very weak just because the seasons have been weak. I mean when you think about this looking at fiscal 2018, you can't forecast where the flu season goes, but unless it gets materially worse from where we are which is already a low -- from a growth perspective it doesn't seem like there is a lot of risk here and that unless another lost customer something, it seems like bit -- I call it fiscal 2016, fiscal 2017 were kind of trough periods for flu business, is that a fair statement?

[David Tusa:]

I think so. I mean we didn't actually quite surprised over the last couple of years, how it's been weak? I think it's right Diana, I mean 2017 over 2016 without the impact of a loss customer pretty much flat.

[Diana Diaz:]

It was flat.

[David Tusa:]

It was flat, I think you are probably right, unless there is a significant increase or decrease in the number of flu-shots that administered in that retail setting.

[Brian Butler:]

Okay. And then on the MedSafe and the strength that you've seen there, does that that's all in the retail segment, the MedSafe?

[Diana Diaz:]

No. It's heavy in the government market. We're also seeing some increase in the assisted living and retail pharmacy and we're starting to see a lot in the professional markets.

[Brian Butler:]

Okay. And can you just update everyone just kind of on the opportunities, I think you talked about it being about $3 million in revs was that once you started it or was that in fiscal 2017?

[David Tusa:]

Yes. That was since we started it. If you take a step back, those rules changed, the rules changed in 2014, it named four pathway for industries where the solution offering could be used, long-term care, retail and hospital pharmacies, hospice drug treatment and licensed law enforcement. So, a lot of the business that we've seen has been hospital pharmacies and some retail we're starting to see long-term care jumping on Board and that something some of the surge we saw in the fourth quarter. And I think that's where we're going to see a positive impact in fiscal year 2018, as the long-term care industry looks to raise the solution as well. But, they've been a slow adopter.

[Brian Butler:]

Okay. And then on the acquired revenues, do you have a number for fiscal 2017 what the contribution was just from the revenue level?

[Diana Diaz:]

It was the contribution to growth?

[Brian Butler:]

Just, yes. How much acquired revenues were in fiscal 2017?

[Diana Diaz:]

So, the acquired revenue for the one that we acquired in July this past year was about just over $700,000 a quarter.

[Brian Butler:]

Okay, so 3 million bucks.

[Diana Diaz:]

Yes.

[Brian Butler:]

Okay. So it was pretty, so fiscal 2017 had about $3 million, so organic growth then for the remaining business was somewhere around what 5%, 6% is about right?

[Diana Diaz:]

Yes.

[Brian Butler:]

Okay. And then thinking about growth, I mean there is not much roll over that deal, the acquisition was last July, so when you think about 2018 assuming no additional acquisitions in fiscal 2018. How should we be thinking about organic growth is that just mid-single digit?

[David Tusa:]

I think, you talking about on the route-based business, you're talking about the professional market?

[Brian Butler:]

Well listen, if you take $3 million out of, your revenues then your organic total was about 5.5%?

[Diana Diaz:]

Right, so we had a couple of things that we had to overcome from in the current year we had $1 million of retail envelope stocking orders in 2016 that, was a reduction that we had to overcome and then we had the $900,000 in reduction from the lost customer. So, when you adjust that out, you did a higher growth rate on the organic business.

[David Tusa:]

We're looking for something higher than just mid-single percentage of increase Brian.

[Brian Butler:]

Okay, and when you think about, I guess with the asset additions you have with the new processes and facility, how big, I guess what amount of business can you do on the current platform, I mean is it double where we are now before you start out that new facilities or is there really more growth CapEx that's going to have to be spent in order to get to that, I guess better than mid level organic growth?

[David Tusa:]

So here is a way to think about it, with that plant especially up in Pennsylvania, we're - we have one out of play we're running it roughly one shift and its has a border place for the addition of the second auto claim. So, if you really think about it from that term we're using roughly 1/6th of the capability the capacity. We did that on purpose, when we put that in place we wanted to put something in place and facilitate a much, much larger company. So, only one shift right now technically you could do three shift with auto claims, so you can see that as a percentage of the capacity.

[Brian Butler:]

Okay, and then just one, last one, you talked about SG&A being somewhere about $2.8 million, $2.9 million in first quarter of fiscal 2018, is that a good quarterly pace to think about going forward or is that going to tick up through the year as you continue to look to add more sales growth?

[David Tusa:]

Yes, we look to add more sales growth, I think what you could see in that is probably 5% to 7% increase 2018 over 2017 and that increase will be focused on sales of marketing.

[Brian Butler:]

Great, thank you very much.

[David Tusa:]

You bet.

[Operator:]

Thank you. [Operator Instructions]. Our next question comes from the line of Kevin Steinke from Barrington. Please go ahead.

[Kevin Steinke:]

Good morning. I wanted to follow-up on the discussion of the waste treatment facility in Pennsylvania. Are you now seeing the level of cost savings from that facility that you hope you would generate in terms of waste processing and treatment, shipping, et cetera or is there kind of more to go to get to the savings run rate you are targeting?

[David Tusa:]

I think there is more to go, when you look at the plan, and you look at the operations of that, we are working on more and more efficiencies in the operations, it just was starting to running was November, December of last year. I think we're looking forward is we're starting to now perform some third-party treatment which will help reduce the net cost as, the net cost as well. So, we hope to the use of efficiencies and bringing in some third-party, you'll see some additional savings over the next couple of few quarters.

[Kevin Steinke:]

Okay, and I noticed that well environmental had a pretty good quarter was that, was it mostly Texas again or?

[Diana Diaz:]

That was in Texas.

[Kevin Steinke:]

Okay, good. Home healthcare has been market we've typically thought of is kind of flattish market although now the last two years you put some good growth of 7% to 8%. Is there anything new or going on in that market or is that still something we should think about as more mature and slower growing, what's going on in that space?

[David Tusa:]

That's good Kevin, question Kevin. And we've been very pleased with that as well there have been some changes, we've got a really good relationship with a couple of large distributors in home healthcare, you know home healthcare is very, very fragmented. And we've been signing one of our field sales personnel to work very closely with the distributors and it's been very successful is not that we're working with distributor own some larger deals right now in the home healthcare. So, we've been pleased and we just found another way to further penetrate that that very, very fragmented market.

[Kevin Steinke:]

Okay. That's good to hear. So, does the sales effort on that market continue to ramp up going forward?

[David Tusa:]

I think so. We continue to see success there -- continue to see growth there and it would, we're pleased with the growth rates over the last couple of years, but I don't think, maybe the 7% to as much as 10% is unreasonable for 2018.

[Kevin Steinke:]

Okay, okay. And when you are in the discussion of MedSafe, its - you didn't list it in the earnings release, I don't think, but I think Diana mentioned also some signs of success in the professional market for MedSafe. So just wondering, how much you can address there opportunity in terms of getting MedSafe in the professional if there is kind of a cross sale you can do when you're pitching your route-based and your mail back solution all in kind of wrapping that up in the whole offering?

[David Tusa:]

Diana go ahead.

[Diana Diaz:]

It's really opportunities in hospitals that have a retail, have a pharmacy associated with them, and that's where we put that business. We will have a lot of hospital RMW business since we're focused on the small quantity, but that's where we put it, because it makes sense.

[David Tusa:]

Our inside sales team has just done a tremendous job of billing after this market where we traditionally we're not serviced medical waste from the hospital. We are doing quite well with the MedSafe in the hospital pharmacies. And we're seeing more and more of that, because that's one of the five areas that the new DEA rules address to allow the collection of the unused medications including controlled substances. So, we've been very, very pleased with that growth.

[Kevin Steinke:]

Okay, So it's not something really that you're traditional, professional customer would probably use that maybe in terms of, maybe the volumes are large enough for?

[David Tusa:]

Right, no right is not, but we had to, we have so many markets and we thought, so that we put it in the professional market, but that's not a doctor doing it.

[Kevin Steinke:]

Okay, okay. Make sense, all right thanks a lot for taking the questions.

[David Tusa:]

You bet.

[Operator:]

Thank you. Ladies and gentlemen that's all the time we have for Q&A today. I would now like to turn the floor back over to management for closing comments.

[David Tusa:]

Thank you. We appreciate everyone's participation in the call. Thank you for support. We look forward to the next quarterly earnings call. Everyone have a great day. Thank you.

[Operator:]

Thank you, ladies and gentlemen, this does conclude our teleconference for today. You may now disconnect your line at this time. Thank you for your participation. And have a wonderful day.