Sharps Compliance Corp.
Q1 2018 Earnings Call Transcript

Published: 25 Oct 2017

[Operator:]

Greetings and welcome to the Sharps Compliance Inc. First Quarter 2018 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. I would now like to turn the conference over to Mr. John Nesbett of IMS. Mr. Nesbett, please begin.

[John Nesbett:]

Good morning and welcome to the Sharps Compliance first quarter fiscal 2018 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, Diana will review the financials. Immediately following their formal remarks, we will have a question-and-answer session. As you are aware, we make some forward-looking statements during this formal presentation and in the question and answer portion of this teleconference. These statements apply to the 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 SEC. These can be found at our website 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 first quarter fiscal year 2018 earnings call. Our first quarter revenue increased by 10%, when excluding the retail market which experienced a decline of 32%. We saw growth in quarterly billings and 10% in the professional market, 23% in the government market, 7% in the home healthcare market. We also saw an increase of over 5x in the environmental billing. Regarding the Billings by solution offering, we generated growth of 20% route based pick up business and a 48% increase in unused medication billing. The mail back related billings were down 16% as a result of lower retail market billing. So the first quarter net income was just shy of a penny, at $75000 versus a loss of almost 1 million in the prior year. We’ll let Diana in a bit just get into more of the detail of the numbers, but I want to focus for a few minutes on where we’ve been and more importantly where we’re going. Fiscal year 2017 was a year of transformation of the company as we moved into the route based business, integrated acquisitions and launched a new 40,000 square foot treatment facility and distribution warehouse in Pennsylvania. Through the first three quarters of fiscal year 2017, we were virtually impacted by incremental costs and expenses associated with the transformation. It was a bit painful, but definitely necessary as we have now positioned the company for future growth. As a full service provider, we compete for larger deals in additional markets and geographic area. So we're a much different company now and see the transformation as a stepping stone to building a much larger company. Additionally, we’ve seen the financial benefits of all of these changes in the June 2017 quarter results as well as our recent quarter ended September 30. So going forward, we’re quite optimistic on the remaining fiscal year 2018 and beyond, with not only more growth in our key markets with our key offerings, but also revenue growth from the unused medication solutions. We saw a 48% increase in unused medication solution offering sales in the first quarter and we believe we have the opportunity for even more growth in fiscal year ’18 with both the MedSafe and the Takeaway Meditation Recovery System envelope. You can’t read a newspaper, a news website or watch TV without seeing daily coverage of the opioid abuse crisis in our country. Finally, we're seeing the country focus on addressing solutions to the problem versus more talk about the problem and we think we had foresight when we launched our MedSafe program in 2015, and of course our takeaway envelope has been around since 2009. And as we announced yesterday, we’ve surpassed the 2 million pound mark for trimming unused medication. We believe we are a leader of providing ultimate user medication disposal systems at a time when the country is looking for a solutions. So regarding our markets, the market for unused medication, we estimate to be about $1 billion market and the similar size for the medical waste management in the small and medium quantity generator market across the country. So what that is important to know that we service the entire country with our mail back and our unused medication solutions. We also service 23 states or about 48% of the population with our routed based pick up offering. With this, we believe we're uniquely positioned to further penetrate these markets with our proven offerings, expanded infrastructure, great customer service, reasonable contract terms and of course our dedicated employees. So with that, I’ll turn it over to Diana and she can cover the financials in a bit more detail.

[Diana Diaz:]

Thank you, David. Our first quarter fiscal 2018 revenue was essentially flat at $9.7 million as compared to $9.5 million in the first quarter of last year, with gross margin of 31%, also consistent with the gross margin for the first quarter of last year. SG&A expense significantly decreased to $2.7 million or 28% of sales as compared to $3.7 million or 39% of sales in the same period of 2017. The first quarter of last year included about $700,000 of one-time expenses related to our acquisition of Citiwaste. Without these costs, SG&A in the first quarter of last year was $3 million. The decrease in adjusted SG&A of about $300,000 reflects the impact of cost savings initiatives that we launched in the second quarter of fiscal 2017. The Company reported operating income of $0.1 million in the first quarter compared to an operating loss of $0.9 million in the first quarter of fiscal 2017. The first quarter of last year included the $700,000 of one-time expenses related to the Citiwaste acquisition. We reported net income of $0.1 million, or breakeven earnings per basic and diluted share this quarter, compared with a net loss of $1 million or a loss $0.06 per basic and diluted share, in the first quarter of last year. The company achieved EBITDA of $491,000 in the first quarter of this year as compared to an EBITDA loss of $602,000 in the same period of last year. Looking at the key comparisons for the first quarter of fiscal 2018, the company achieved revenue of $9.7 million and customer billings of $9.8 million. Professional market billings increased 10% to $3.1 million. Home healthcare billings increased 7% to $2 million. Pharmaceutical manufacturer billings decreased 14% to $1.5 million due to the timing of inventory build. Assisted living billing increased 2% to $0.6 million. Government billings increased 23% to $0.6 million and retail billings declined 32% to $1.4 million, reflecting a decline in billings for flu-shot related orders and the loss of one retail pharmacy customer. Our balance sheet remains solid with $5.2 million of cash and cash equivalents at September 30, 2017 and working capital right at $10.8 million. And with that, I'll turn the call back over to David.

[David Tusa:]

Thanks, Diana. Let’s go ahead and open it up for questions please.

[Operator:]

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

[Matt Hewitt:]

Good morning. Thank you for taking our questions. First question, regarding the nice uptick in the environmental business, is that growth sustainable or was there something onetime in nature there?

[David Tusa:]

There was some one-time, some sustainable growth. You’ll probably see a couple of hundred thousand in the December quarter, so probably a couple of hundred thousand of it was one time.

[Matt Hewitt:]

And then regarding the retail segment, obviously last quarter you announced that you had lost a large customer. I'm wondering if you could provide what the retail segment looks like on an apples to apples basis. So if we look at the Q1 here, if you were to back out that one customer from the year-ago period what does the growth or decline look like for that segment ex that customer a yea go.

[Diana Diaz:]

So just by the quarter?

[Matt Hewitt:]

Yeah for Q1 here.

[Diana Diaz:]

For the quarter that one customer accounted for just under $300,000 last year.

[Matt Hewitt:]

And then one last from me, DSO ticked up a little bit here in the first quarter is that just a timing issue or will you be able to whirl that away next quarter, how should be thinking about DSOs. Thank you.

[Diana Diaz:]

I think, it's really related to sales that came in, in the last month of the quarter. And so on a one month revenue, the DSO was about 53 days. So you can see that maybe a little higher than last quarter but not a lot.

[Operator:]

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

[Brian Butler:]

Just the first one on the retail, just to touch back, how much was flu business in the first quarter ’18 versus ‘17.

[Diana Diaz:]

The first quarter flu business was $721,000 this year in the quarter versus $1.5 last year in the first quarter.

[Brian Butler:]

And when you think about that is that just a much weaker season this time around because we already were at a weak season last year or is there just a timing issue on that and have you seen that reverse in the last quarter to date in the second quarter.

[David Tusa:]

I think it’s a little bit both, its weakness plus the timing of the orders. The way we look at this reach of market or the flu related market is roughly a baseline of about $6.5 million a year, unless there's a really tough flu season and the demand for our product goes up. It can also be volatile like for instance December. The December quarter will probably have a $1 million in flu-related orders versus the what was it 730 in this last quarter. So probably 6.5 of a baseline, Brian, unless we see an uptick with colder weather and more flu shots being administered.

[Brian Butler:]

And then on the pharmaceutical side, obviously it’s volatile quarter to quarter but even on LTM basis, it's down 8%. Can you give us some color kind of how we should think about growth, not necessarily next quarter, but over the next 12 months, is that still a high-single digit grower or is it really more unknown.

[David Tusa:]

Well, it is volatile, you're right, it's very volatile because of the timing of bills and whether they built for six months or a year and it's difficult, it's very difficult to predict. Going forward we're optimistic where we're looking at the potential to launch new deals with pharmaceutical manufacturers. We've seen quite a demand. So I think that we have the opportunity for fiscal year ’18 to show some level of growth over what we would have done in ‘17.

[Brian Butler:]

Because growth in ’17 was 4.5% so something better than that.

[David Tusa:]

Yeah I think I don't think it's unrealistic to see something maybe closer to 10%, with new deals being launched. The other thing is a lot of that has to do with patient counts for these particular drugs. The patient count goes up, they use more mail backs; it goes down, they use less mail backs. But we would expect to see something better than 4%.

[Brian Butler:]

Professional, 10% growth there, it looked like you had good route based increases in revenues, but it looks like it might have come at the expense of mail back. Can you just give some color on if the route base collection is cannibalizing that mail back or is there something else that causes that decline.

[David Tusa:]

It's definitely not cannibalizing the mail back business, I’d tell you what we saw with the professional market. Strength in the route based business which is freight, what we saw also this past quarter is our inside sales group were fielding a lot of calls for unused medication. And you see that the unused medication numbers are up quite a bit with 48%. So those unused medication dollars fall into retail, government, assisted living, so they fall into some of the markets other than professional. So there's no cannibalization, it's really just the inquiries were very happy with unused medication in the September quarter.

[Brian Butler:]

So are you comfortable with 10% growth in professional or is that really something that should be much higher. I mean historically it's grown much faster.

[David Tusa:]

It has. No, I’m not comfortable with 10% and I think that it should grow at a rate higher than 10%. I think we have the opportunities out there to do that. And I think that throughout ’18 I think you'll see growth better than 10%.

[Brian Butler:]

And then last one just on cost, the SG&A at the new level, it seems like you guys made good progress on the cost savings, is this the right pace, this 2.7 million a quarter or does it tick up a little bit through the remainder of the year?

[David Tusa:]

It's going to tick up a little bit, probably 100,000 or 200,000 a quarter, I think Diana?

[Diana Diaz:]

That’s right.

[David Tusa:]

So 100,000 or 200,000 more per quarter and that’s going to be just focused on sales and marketing, sales and marketing, sales and marketing. So we're working hard to control our cost, keep SG&A high but at the same time spending on sales and marketing.

[Brian Butler:]

So maybe 3 million a quarter is kind of the right pace to look at for the remainder of the year?

[Diana Diaz:]

I think more about 2.8 or 2.9 million.

[Operator:]

[Operator Instructions] Our next question comes from the line of Joe Munda of First Analysis. Please proceed with your question..

[Joe Munda:]

So I guess piggybacking off of Brian's question a little bit here, any competitive dynamics you're seeing in the marketplace, you've been talking about the expectation for growth in professional over 10%. Assisted living is a little bit lower than expected as well and these were two key areas I think that the pickup service was supposed to focus on as far as growth was concerned. So I’m just curious is there any competitive dynamics you’re seeing in the marketplace that is stunting the growth on your end, are you still able to offer the similar savings or similar value prop that some of your competitors are offering, some commentary there would be greatly appreciated. Thank you.

[David Tusa:]

Sure now that's a great question, Joe. And yes, the route-based business is focused primarily on the professional market. We really haven’t seen any change in the dynamic in the marketplace. We see it as the same guest, the growth in assisted living and professional market should be higher. I think it will be higher as we go through ’18, but no real changes out there and we're still able to provide the type of savings to the prospects that we have in the past.

[Joe Munda:]

And then maybe I missed this, I hopped on the call a late, contribution from acquisitions as far as revenues concern this quarter. Is there any way you can split that out for us and give us some sense of what their contribution were or what their revenues were from Alpha Bio/Med and I'm sorry, I'm blanking on the other one, but the contributions there.

[David Tusa:]

Citiwaste.

[Joe Munda:]

Yeah, I'm sorry. Citiwaste. Yeah.

[David Tusa:]

It’s the majority of that, it’s the majority of revenue in that route-based…

[Diana Diaz:]

Joe, they were in our operations last year from July 1. So there is no acquired revenue, it’s all organic growth from the time that we brought that business on.

[Joe Munda:]

I understand, but you were using a third-party provider prior to that acquisition - those acquisitions, correct, I mean or a route-based pick up.

[David Tusa:]

We were but that’s a relatively small number. The vast majority of what you see in the route-based pick up numbers or the growth in those numbers are attributable to those acquisitions.

[Operator:]

There are no further questions at this time over the audio portion of the conference. I would now like to turn the conference back over to management for closing remarks.

[David Tusa:]

Thank you everyone for your continuous support, we look forward to speaking with you next quarter. Everyone have a great day. Thank you.

[Operator:]

This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time, have a wonderful rest of your day.