Sharps Compliance Corp.
Q2 2014 Earnings Call Transcript

Published: 28 Jan 2014

[Operator:]

Greetings. And welcome to the Sharps Compliance Second Quarter Fiscal Year 2014 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 turn conference over to your host, Ms. Jennifer Belodeau, Investor Relations for Sharps Compliance. Thank you. You may begin.

[Jennifer Belodeau:]

Thank you. Good morning. And welcome to our conference call to discuss Sharps Compliance financial results for the second quarter of fiscal 2014. On the call today we have David Tusa, Sharps’ President and CEO; and Diana Diaz, Sharps’ Vice President and Chief Financial Officer. David will review the company’s business operations and growth strategies, and Diana will review the financials. Immediately following our formal remarks, we will take questions from our call participants. If you are listening via webcast, please note that you have the ability to submit questions through the Internet. As you’re 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. With that out of the way, let me turn the call over to David to begin the review and discussion. David?

[David Tusa:]

Good morning. And welcome everyone to our second quarter earnings conference call. Our second quarter represents another solid quarter of growth for the company with revenue of $7.6 million, an increase of 34% over the last year second quarter and a 22% increase compared to the first quarter of fiscal year 2014. Our revenue growth was driven by increase billing across all of our key market. I’ll get into the market specifics in just a moment. We are pleased again have achieved profitability with net income of $120,000 or penny a share. But I -- as I often said to many of you we are much more focused on revenue growth versus share, riding a penny or two of earnings. The way we build, sustain long-term value and high margin profitability is to drive revenue growth superior. So here is what makes me really excited about the second quarter. First, the revenue growth in every single market which was much higher than the segment growth rate which means we continue to increase market penetration and growing our market share. The incremental revenue was at our higher margin supporting the operating leverage business model. Our sales organization is performing and performing well and the long-term trends such as a shift in healthcare delivery to alternate healthcare -- healthcare science, cost pressures for healthcare related facilities, increase regulation and healthcare reform are all still very much in our favor. So now let’s breakout the performance for our key markets, Professional market, the billings grew $360,000 or 38% in the second quarter contributing $1.3 million or approximately 18% of consolidated revenues. The Professional market refers primarily to customer such as dentist, veterinarians and physicians. This growth has largely result of our insight and online sales channel, which drove 23% increase in billings to $49 million in the second quarter. We also continue to see the positive impact in this market from our joint marketing alliance where we offer both the mailback, as well as out based pickup service where appropriate. Now there is many variables -- the variables in many of our markets that make short-term visibility and short-term performance difficult to predict. However, our Professional market has achieved consistent quarterly sales growth for trailing 12-month billings 32% higher than the prior year. Our success in the professional market is tied to our targeted sales initiatives with our ability to offer customize medical waste solutions to our customers. Now, our biggest challenge in corresponding focus in the professional market is increasing awareness of our mailback solutions so that the perspective customer base understand -- understand it as more economic and efficient alternative to their traditional, costly inefficient pickup service in the small quantity generator sector. Going to the retail market, our billings grew by 28% to $1.8 million compared to the prior-year quarter. And this contributed about 25% of the consolidated revenue. The retail market refers primarily to retail pharmacies and clinics to utilize our solutions to collect transported processed medical waste which in this case is primarily used syringes. We’ve seen growth in the segment during the past two quarters related to a strong flu season driving increased demand for shots as well as the continued shift of administration of shots through the retail segment. As most of you know, our retail flu business is seasonal. So we’ll most likely not see this level of revenue growth in the third quarter but deal with the longer term win. Sales of this market were up 27% on a trailing 12-month basis compared to the prior year trailing 12-month. So while the third quarter billings for the market may slow a bit, the longer term trends are very positive. With the changing phase of healthcare and consumer seeking alternatives to the traditional setting, retail pharmacies are steadily increasing the scope of the services that they provide. With our 75 plus percent share of this market, we are in excellent position to see continued long-term growth in this business. Okay, Pharmaceutical Manufacturer, the billings in this market were very strong this quarter, showing a 60% increase to $1.5 million or approximately 20% of the consolidated revenue. Our pharmaceutical manufacturing market encompasses customize bringing in a mailback solutions we provide to patients of large global pharmaceutical manufacturers. We’re very excited about the progress we’re making in this market and believed its poise for continued long-term growth. As many of you are aware, our pharma business seems to be lumpier and difficult to predict in our other market sectors. Much of the growth in the December quarter came from resupply orders from several existing pharmaceutical manufactured customers. We don’t expect to maintain a level of buildings in the third quarter as we now draw down on the existing vendor-managed inventory. But we believe we will see more resupply orders in the June, September and December quarters of 2014. We also seek growth with existing patient support programs as pharma recognizes the value in our customized solutions which help them to improve patient interaction, build brand royalty and create opportunities for increased medication adherence. And finally, we’re in the later stages of opportunities with new drug and device Patient Support Programs which we believe could positively impact our calendar year 2014 and ‘15 revenues. The Home Health Care market increased 15% to $1.8 million which represented 25% of our consolidated revenues. Our Assisted Living market billings grew 10%, about $400,000 or 6% of consolidated revenue. As health care migrates from traditional settings to the home, we believe there is a great opportunity to provide our solutions to alternate health care sides such as Assisted Living and Home Health Care. We remain in a very strong position to benefit from several trends including the shift away from traditional health care settings to alternative sides. We’re developing a new regulation and ordinances around a proper disposal of unused medications and of course the aging U.S. population. We also remain very focused on providing more innovative solutions and are growing our sales force to ensure that we are introducing our solutions to the right audiences in order to maximize our presence in these growing addressable market. Finally, we believe the effectiveness of our solutions coupled with our excellent customer service and our proactive regulatory support are key components of the success of our sales process. And with that I will turn it over to Diana, who will provide more details on the financials. Diana?

[Diana Diaz:]

Thank you, David. Our second quarter results, reflects another strong quarter for the company. Gross margin was 35% in the second quarter as compared to 30% in the prior year second quarter. The quarter’s margin improvement demonstrates leverage we have in the business on higher sales volumes. SG&A expenses in the fiscal 2014 second quarter increased to $2.45 million or 32% of sales as compared to $2 million or 35% of sales in the second quarter of 2013. The reduced SG&A as a percentage of sales is a result of higher sales and operating leverage. On a dollar basis, SG&A for the second quarter of fiscal 2014 was negatively impacted by legal expense of almost $200,000 associated with our claim to the CDC related to the termination of a government contract, severance costs of about $100,000 for a former officer of the company and increased sales and marketing spending. The company generated operating income of $120,000 in the second quarter of fiscal 2014, compared with an operating loss of approximately $430,000 in the same prior year period. Earnings before interest, taxes, depreciation, and amortization, or EBITDA was $402,000 for the second quarter of fiscal 2014, compared with an EBITDA loss of $154,000 in the same period of the prior fiscal year. As David mentioned, net income was $120,000 or $0.01 per basic and diluted share, compared with a net loss of $428,000 or a $0.03 loss per share for the prior year period. Our balance sheet remains solid with $15.3 million in cash and cash equivalents as of December 31, 2013 with no debt. Our strong balance sheet gives us flexibility as we build a larger company. As we’ve previously disclosed, Sharps had an authorized stock repurchase program in place for up to $3 million extending through 2014. During the December quarter, the company repurchased 117,441 at an average price of $4.73 per share. This brings the total shares repurchased under the program to 161,801 shares at a cost of $681,000. And with that I will turn it back over to David.

[David Tusa:]

Thanks, Diana. We are making significant progress in fiscal year 2014 as reflected with two solid quarters. As one of only two national providers of medical waste and unused medication management solutions, we believe our solutions offer the best option for the growing market of alternate healthcare sites. We remain focus on educating our addressable market about their economies, efficiencies and availability of our comprehensive, customizable solutions. It’s been a busy quarter and as such I would like to thank all of our employees for their contribution to our growth, and their efforts towards building our company that is capitalizing on the changing dynamics of the healthcare industry. And with that operator, let’s turn it over for questions.

[Operator:]

Thank you. (Operator Instructions) Our first question comes from the line of Ryan Daniels with William Blair. Please proceed with your question.

[Nick Hiler:]

Hi. This is Nick Hiler in for Ryan Daniels. Thank you for taking my questions. I guess, first on gross margin. At least on a sequential basis, it declined even though revenue grew from the first quarter. I was just wondering if you could highlight what drove that.

[Diana Diaz:]

Sure. I would be glad to answer that. We did have a decrease in gross margin from 37% in the first quarter to 35% in the second quarter. And it was really due to a combination of higher costs of treatment facility kind of mix of business. Our fixed costs generally run at about $1.1 million a quarter and our products costs range from 48% to 50% of revenue and this quarter, the product cost was really on the high end of that range so.

[Nick Hiler:]

Okay. Great. Thanks. That’s all I had.

[Operator:]

Thank you. Our next question comes from the line of Brian Butler with Wunderlich Securities. Please proceed with your question.

[Brian Butler:]

Hello. Thanks for taking my question.

[David Tusa:]

Good morning, Brian.

[Brian Butler:]

Good morning. Lets start on the Pharma, can you just give a little update on where you think the pipeline stands, kind of talk about the number of perspective deals that are out there and kind of talk about what you see going forward because last time I remember that you still had a -- I think it was like four attractive opportunities there?

[David Tusa:]

Yeah, that’s right. We have a number of opportunities about four that are in the later stage of award and should we -- hopefully, we awarded in contract those opportunities and they will possibly impact ‘14 and ’15, then will grow lot sometime into calendar year 2014. So we feel pretty good about those again, those on the later stage. But we are also dealing with our existing customers as we are introducing more solutions and more customized solutions with existing customers as well that could grow the business. So we are excited about pharmaceutical manufacturer market. We are doing many things for them and I think that’s going to strategically play a key role going forward.

[Brian Butler:]

Okay. And on the pharma, when you think of the reorders that you had this quarter and than what that kind of -- can you quantify the amount of reorders because when you look at the third quarter, does it go back to first quarter levels where you are like around 600,000 for pharma, or has the base level actually increased a little bit?

[David Tusa:]

Well, as I mentioned, it’s a really lovely business. We built it bulk and received bulk orders then we draw down on. So while the March quarter maybe light and we will see the build up of those re-supply orders throughout the remaining calendar year. So, again, it’s hard to actually predict when this will hit in the quarter. But what we do, Diana, on a trailing 12 on pharma?

[Diana Diaz:]

On the trailing 12 for pharma, we increased 14%.

[Brian Butler:]

And what are we for the trailing 12 for the billings for pharma?

[Diana Diaz:]

That was some…

[David Tusa:]

No, no, the dollars.

[Diana Diaz:]

The dollars, $2.6 million.

[David Tusa:]

Yeah. So, $2.6 million, so you are right, roughly $600,000 or $700,000 I think is the baseline. But we have the opportunity to increase that. But again it’s not going to always firmly drop in or smoothly drop in a quarter. But from a lot of perspective, we think we are going to see that number grow on a trailing 12 basis.

[Brian Butler:]

Those opportunities that are in the later stage, is that a second half of 2014 for you, or is that possibly pushed out further?

[David Tusa:]

Probably launched those programs, should we land those or probably the second half of calendar year 2014.

[Brian Butler:]

Okay. And then on the Home Health, you guys have been showing really good growth in that. Is that growth sustainable kind of in the second half of 2014, and is that being driven by the Daniel partnership or is that coming from somewhere else?

[David Tusa:]

No, that’s only a backup business. Again, whether we are on the trailing 12, really we have to look at it, because there is some lumpiness seen in Home Healthcare because there is a lot of it that runs through distributors. So, what we are on a trailing?

[Diana Diaz:]

On a trailing 12 months, we are at 7.5% increase.

[David Tusa:]

Yeah. So 7.5% -- 7 plus percent, that business should be growing at about 10% and we think we have opportunities maybe to increase even more. But I think it would be safe to say about 10%.

[Brian Butler:]

Okay. And then talking about the Daniels partnership is, can you give a little bit of an update or at least possibly quantify, what do you think that that is in the second quarter and what do you think it might be going forward still?

[David Tusa:]

Well, we worked with the folks at Daniels and as you know we are able to offer the pickup service customized with a mailback solutions. And I think right now we are working with them and through that alliance, we are probably generating $600,000 or $700,000 a year. We have a number of opportunities out there that we are chasing and we think that where the Daniels alliance could help us, but instead of trying to predict and provide numbers, I really just like to show it in the P&L what it is Brain.

[Brian Butler:]

No. I understand. But still, I guess, the point is, the pipeline is far from exhausted, there are still huge amount of opportunity there?

[David Tusa:]

Oh! Absolutely.

[Brian Butler:]

Okay. And then a couple bookkeeping one, on the SG&A that you identified about $300,000 the legal and severance? So is it right way to think about that going forward, is that $2.5 million for a quarterly SG&A kind of comes back down to $2.2 to $2.3?

[David Tusa:]

Right. Yeah. That’s a way to look at it.

[Brian Butler:]

Okay. And then on the D&A, on the P&L, you have the D&A like $1.3 million but in your EBITDA breakdown it’s something like 28 -- I am sorry, it’s 200,000 -- $280,000, there is a difference about $165 and I was just curious where that D&A kind of goes through on the P&L.

[Diana Diaz:]

There is a portion of the depreciation and amortization that can cost to sales that’s related to depreciation at our treatment facility in our warehouse.

[Brian Butler:]

Okay. That’s fine. That’s where about. And did you have, what was your CapEx spending for the quarter?

[David Tusa:]

We are at about a $1 million a year maintenance CapEx.

[Diana Diaz:]

And our quarterly level was quite in that range.

[Brian Butler:]

And it’s right around $250,000.

[David Tusa:]

Correct.

[Brian Butler:]

Great. Well, congratulations on a very good quarter. Thank you.

[David Tusa:]

Thanks Brain.

[Operator:]

Thank you. Our next question comes from the line of Joe Munda with Sidoti & Company. Please proceed with your question.

[Joe Munda:]

Good afternoon, sorry, good morning, David and Diana. Thanks for the questions.

[David Tusa:]

Good morning.

[Joe Munda:]

David or Diana, just a quick question with that, I am following up on the last caller’s question the CDC expense, are you expecting a claim from them or you file the claim with them, are you expecting to be paid on that, can you give us a little bit of clarity there?

[David Tusa:]

Sure. We file the claim…

[Diana Diaz:]

(Inaudible) after termination.

[David Tusa:]

Yeah. After the termination of the contract in 2012, we file the claim with the CDC, just in our opinion let’s say into five-year requirements contract. And the claim is about a $1.7 million or $1.8 million and where it looks like that its actually going to go to trial in the third week of February, next month. So, yes, we made a claim of roughly a $1.7 million and believe that opposition is that we need to be repay for the obligations that we had to try to make good on because we established our five-year requirements for the contract.

[Joe Munda:]

Okay. And so, I know, the last caller had talked about SG&A, are we to assume that that litigation expense is going to be prevalent or it still exiting, until I guess for the near-term here?

[David Tusa:]

No. We -- it was heavy in the December quarter because we have depositions and discovery, it was a very quarter for the claim, we probably have some in the March quarter but that will be overly the -- the winter loss.

[Joe Munda:]

Okay. And David, in regards to your comments, you talked about sales force and growing that force, can you give us some sense of where you guys stand with the number of direct threat and where you would like to be by the end of the year?

[David Tusa:]

We have on a field sales five, I think we are about six reps that we already have, I would love to be eight or nine here over the next quarter or two decades. We’re quite busy, our markets are quite active and we’re garnering some pretty significant audiences. So I’d love to get that to eight or nine. On the inside sales side, I think we’re up to like eight or nine folks there and I probably see that increasing over the next couple of quarters by about four or five.

[Joe Munda:]

Okay. And then I know you touched on Daniels here. Now the pipeline of opportunity with Daniels, where is that, what businesses really do you see that enhancing would be…

[David Tusa:]

Well, let me just say -- that’s right Joe. It affects many of our market. You know, for competitive reasons I don’t want to talk about any particular market. But there is many markets that we have on our radar that are our core markets. I think we believe that could benefit from the larger deals where we integrate the pick up in the mailback.

[Joe Munda:]

Okay. And then I guess my final question, you touched on the regulatory environment as being a driver for growth for the company. Can you give us some sense or some clarity on what you’re seeing and what is -- and why you really think that?

[David Tusa:]

Well, there is a lot of activity on the regulatory side surrounding proper disposable of unused medications. And there are some new rules that are going to come out from the DDA in March that will facilitate unused medications disposal, consumer dispense and will also include controls. All the business that we’ve done up till now has excluded controlled substances. So that’s going to change, it’s going -- I think its going to change the business significantly. And I believe we’re well positioned to take advantage of that with our solutions that we have been able to hopefully increase that -- the business from that product line.

[Joe Munda:]

Okay. Thank you.

[David Tusa:]

Thanks.

[Operator:]

Thank you. (Operator Instructions) Our next question comes from the line of Ron Legrow with Athena Fund. Please proceed with your question.

[Ron Legrow:]

Congratulation on the strong quarter.

[David Tusa:]

Thank you.

[Ron Legrow:]

Now that we’ve had such a good result for the past two quarters. Now it would be a good time to be getting out to the street and getting more creative in our stock. Are you committed to doing that?

[David Tusa:]

Absolutely, we are working on pretty active February and March, for getting out on the road and talking to folks. I’ve been out recently as well but I think February and March will be heavy on the IR side.

[Ron Legrow:]

Good. Obviously can we still think stocks are being undervalued given that you’ve been buying back more stocks during the last quarter?

[David Tusa:]

Well, it’s an important part of our job to make sure that we have a strong IR initiative.

[Ron Legrow:]

All right. Thank you.

[Operator:]

Ladies and gentlemen, that’s all the time we have for questions today. I’d like to turn the floor back over to management for closing comments.

[David Tusa:]

Thank you and thank you again everyone for dialing in. We believe our mailback solutions for medical waste and unused medication management, for the most economical and convenient solutions, for the changing healthcare industry, again in the small quantity generator sector. Our entire organization is very energized about the opportunity before us. We thank you for your support and we look forward to speaking to you next quarter.

[Operator:]

Thank you. This does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.