Sharps Compliance's (SMED) CEO David Tusa on Q4 2016 Results - Earnings Call Transcript

| About: SHARPS COMPLIANCE (SMED)
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Sharps Compliance Corp. (NASDAQ:SMED) Q4 2016 Earnings Conference Call August 10, 2016 11:00 AM ET

Executives

John Nesbett - IR, IMS

David Tusa - President & CEO

Diana Diaz - VP & CFO

Brandon Beaver - SVP, Sales

Analysts

Matt Hewitt - Craig-Hallum

Joe Munda - First Analysis

Brian Butler - Stifel

Kevin Steinke - Barrington Research

Shawn Boyd - Next Mark Capital

Craig Hoagland - Anderson Hoagland & Co.

Operator

Greetings and welcome to the Sharps Compliance Corp. Fourth Quarter and 2016 Year-End Earnings Conference Call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. And as a reminder, this conference is being recorded.

I'd now like to turn the conference over to your host, Mr. John Nesbett, Investor Relations for Sharps Compliance. Thank you, Mr. Nesbett, you now have the floor.

John Nesbett

Good morning and welcome to Sharps Compliance fourth quarter and fiscal year-end 2016 earnings call. On the call today, we have David Tusa, the company's President and Chief Executive Officer; Diana Diaz, Vice President and Chief Financial Officer; and Brandon Beaver, Senior VP of Sales.

David will review the company's business operations and growth strategies, and Diana will review the financials, Brandon will discuss the company's sales initiatives and related activities. Immediately following their formal remarks, we will take questions from the call participants. If you are listening via webcast, please note that you have the ability to submit questions through the Internet.

As you are aware, we may make 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 on our website or at sec.gov.

Okay, so with that, I will now turn the call over to David to begin the review and discussion. Go ahead, David?

David Tusa

Thanks, John. Good morning everyone and welcome to our fourth quarter fiscal year 2016 earnings conference call.

Let me start the call by saying that fiscal year 2016 has been a very active and productive year for the company, in closing several strategic acquisitions and developments which have significantly grown our service offerings, customer base, capabilities, and geographic reach to strength our infrastructure supporting future growth.

So first a few comments about the June quarter results. We generated $9.2 million in customer billings for the quarter which was positively impacted by the growth in professional, retail, assisted living, and home healthcare markets totaling $841,000. Now, $250,000 of the $841,000 of growth was from acquired businesses. This quarterly growth in customer billings was offset by decreases in the pharmaceutical manufacturer and government markets totaling $865,000. The pharmaceutical manufacturer billings were driven by lumpy inventory build orders. So while the quarterly billings were down the full fiscal year customer billings for pharmaceutical manufacturer market were up 18%.

And while the prior year government and market billings for the customer included about $500,000 in TakeAway envelope orders from the VA, the current quarter reflected about $100,000 and that's a result of slow rollout of the VA TakeAway envelope program.

Now for the fiscal year 2016, we generated a 9% increase in customer billings and this was below our internal expectations primarily due to an extremely weak 2015 flu season and a slower than expected rollout of the VA TakeAway envelope program. Now that $750,000 of the $2.8 million increase in fiscal year 2016 customer billings were from acquired business.

Now on to strategic initiatives that position the company for future growth. During fiscal year 2016, we deployed about $11 million in capital resources to complete the acquisition of three well run route-based pick-up services based in the Northeast. We are very prudent with the deployment of our capital, but strongly believe this acquisition program is important to our strategic initiatives, accelerating growth, and most importantly, providing a much needed service to our perspective customer base.

So with just three acquisitions, the launching of a treatment facility in Northeastern Pennsylvania and servicing Texas and Louisiana from our East Texas treatment facility, our route-based businesses cover 13 states encompassing about 100 million people or 31% of the population. So in less than a year we now service about 8,100 customer locations with a route-based pick-up. The route-based pick-up business is an excellent complement to our mailbox solution and allows us to offer the best and most effective solutions to our customers.

Our sales team is very well trained on both offerings and how to quickly determine which one or both are best for the new customers business. The revenue from the route-based pick-up service was over $525,000 in the June quarter and is expected to contribute about $1.3 million in revenue in the September 2016 quarter.

So in an effort to show progress and better understand our company going forward, we're going to begin to report customer billings by the solution offerings. So route-based business, mailback business, unused medications and I think it will help everyone understand how the company is changing for the additional offerings.

In addition to completing strategic acquisitions the launch of the new solutions like the MedSafe it's a new TakeAway Medication Recovery Envelope, the TakeAway Recycle System all play an important role in the growth as well. So as you heard me say many times, our strategy encompasses driving organic growth, launching new solution offerings, and closing strategic acquisitions. So what is all this means development and the accomplishments of last year, well we transformed the company from a provider of medical waste mailback into a company that now provides comprehensive medical pharma, hazardous, and hazardous waste solutions to many healthcare related growth markets.

For example, if your professional market customer, we can provide you with either a medical waste mailback or route-based pick-up to facilitate the cost effective collection in treatment of medical waste. Also we can provide your facility with important and web-based OSHA and Bloodborne Pathogen chain. We can also sell you a DEA approved mailback facilitating effective spot disposal of control substances. If you're going to office, we can send you a mailback that addresses a proper disposal of your amalgam plates.

Our long-term care customers, we can provide mailback or route-based pick-up. We can also provide a MedSafe and TakeAway Medication Recovery Envelopes which facilitate the cost effective disposal of patients who first time use medications including controlled substances.

We also have in-house expertise to help long-term care with our hazardous waste programs. Now, the retail sector we provide a medical waste mailback supporting immunization program in the retail clinic operations. We also provide a TakeAway Medication Recovery system envelope to resell to customers. We also offer the MedSafe in the retail clinic sector which provides customers with safe and proper disposal of unused medication again including controlled substances while increasing the traffic in the store.

Finally, we can provide a mailback biohazard spill kit to protect employees in the retail setting in event of an incident.

Surgery centers, surgery centers we can provide a route-based collection business treat the medical waste. We can also provide the surgery center with a Ship-back solution to facilitate the recycling; a single-used device as used in surgery.

And of course in the pharmaceutical manufacturer side, we provide the disposal for the patients for RA patients or MS patients the pharmaceutical manufacturers but also valuable patient data, raining opportunities, improved medication adherence when your mailback is formed as a patient support project.

So in addition to all of the examples that I mentioned of the different offerings that we have in the different sectors, now with the route-based pick-up service, we're also able to service what we call medium quantity generators that will be nursing homes or dialysis centers or urgent care or labs or may be universities. Because of the volumes of waste generated at the medium quantity generator, we cannot always do this effectively with a mailback. But we can now provide a full complement of offerings including our route-based pick-up to a new customer base that we weren't able to address before.

So as you can see we transformed the company into a comprehensive provider serving a small to medium quantity generators across the country. And we believe rolling one or two companies in the country they can perhaps provide all of these offerings on a nation-wide base to the small and medium quantity generators in the healthcare and related sector.

Just two last items and I will turn it over to Brandon to address sales. We recently received a permit in the launch of the treatment facility in Northeast Pennsylvania is a significant event. It's also a strategic expansion for the company. It strengthens the infrastructure and the ability to effectively serve the growing customer base while saving the company money on medical waste processing and distribution of our mailback.

And finally I want to talk about inside and online sales initiative. You know, I remember not too long ago when it was just an idea, we hired a few inside sales reps in over a week and we developed a shopping cart. And with that I'm pleased to say that it's working, it's working well. The inside and online sales channel generates almost 20% of the overall revenue and it exceeded $6 million in revenue for fiscal year 2016. The initiative also showed an increase of 34% in the fourth quarter as we sell all of our solution offerings to customers, across the country, on the phone, and via our ecommerce website. We believe the initiative strengthen even further now that we can offer the route-based businesses, the route-based services to more states in the Northeast.

And by the way inside sales is impacting more than just a professional market. For example, in the June quarter, inside sales impacted not only professional but also government, retail, and the assisted living markets and we were pleased to see that.

As our sales team is up to 20 reps, we are looking to hire more we'll continue to invest in the initiatives by hiring more reps and launching many more marketing programs necessary to create awareness and drive sales. Sales generated by the inside sales and by the ecommerce section of the website are among the highest margin in the company and we're going to continue to focus on this important sales channel.

And with that, I will turn the call over to Brandon. Brandon?

Brandon Beaver

Thank you, David. We had some tough sales comparisons in the quarter particularly in the pharmaceutical manufacturer and government markets. We did however deliver significant growth in the professional sector and solid growth in the retail and assisted living sectors.

Pharmaceutical manufacturer billings were down compared to the previous year which included several inventory builds for patient support programs. Our relationships in this market remains strong as ever as our customers recognize that in addition to offering a disposal solution for patients in the home setting, our solution gives them an opportunity for branding and data collection around patient behavior and medication adherence.

Order patterns can vary from quarter-to-quarter due to program timing but we're encouraged by the opportunities we're seeing for pharma, including programs for new self-injectables, new drug indications, and higher patient counts.

We currently have 11 total patient support programs which generated in excess of $5.7 million over the past 12 months, an increase of 18% over the prior years. We believe we have an opportunity to grow the existing programs by about $0.5 million to $1 million over the next 12 to 18 months. We expect to launch couple of new programs over the next nine months to generate again roughly $500,000 to $1 million in customer billings once fully rolled out.

Professional market made up of small and medium quantity generators such as physicians, dentists, surgery centers, clinics, veterinarians, and other healthcare related providers increased by 33% in the June quarter. This sector represents a recurring revenue model, and once we illustrate the cost savings and ease of use in our solutions, we increase our opportunity to capture these customers. We offer reasonable pricing as well as contract terms and of course excellent customer service.

During the quarter, our retail business showed encouraging growth. As you will remember the mild winter and weak flu season had a negative impact on our retail business in the first and second quarters of fiscal 2016. To give you a comparison, during the flu season from 2011 to 2014, Sharps saw an annual growth in its retail flu business between 24% and 36%. The mild 2015 flu season which took place during our fiscal year 2015 actually drove a 13% decrease in our retail flu business. I'm glad to report that our fourth quarter retail billings increased by 7.5% as compared to last year primarily due to a 22% increase in flu shot orders in advance to the upcoming flu season over the same period last year.

We are cautiously optimistic about the current flu season but we really won't know how the season will go into the September and December quarters, when we traditionally receive our follow-on orders from the retail clinics.

Assisted living billing showed a continued strength in fourth quarter with 14% growth which is a result of dedicating our resources and closing new customer deals, converting untapped opportunities and also reflects the appeal of our new route-based pick-up service which is well suited for the market. Our sales team is trained to work with customers to determine how best to meet their operational needs and generate cost savings using our mailback or the route-based pick-up service.

Now let me just say for a second here on the pick-up business, it's a reoccurring predictable revenue stream unlike some of our other products and services. We offer this service to provide some balance for our overall book of business.

Getting back to the sales team, they also focus on leveraging the strength and versatility of our offering to drive more sales. With our recent acquisitions, our solutions portfolio and our geographical reach have been significantly strengthened. As we close these acquisitions, our sales and marketing team immediately begin to target the new coverage areas.

Additionally, we introduced new technology to the acquired companies and we move all back office operations to corporate. With an active acquisition candidate identification program ongoing, we continue to look for tuck-in or geographic expansion opportunities. As of today, our sales team consists of four field sales personnel, 20 inside sales personnel, and six sales regulatory and logistical support personnel for a total team of 30 employees. It's an experienced team focused on these experts in all of our solution offerings, identifying and closing new opportunities and accelerating our closure rate.

David I will turn it back to you.

David Tusa

Thanks, Brandon, and Diana, will cover the financial section.

Diana Diaz

Thank you, David. Fourth quarter 2016 revenue of $8.9 million was essentially flat as compared to $9 million in the fourth quarter of last year. As David and Brandon mentioned, for the quarter we saw strong performance from our professional, retail, and assisted living markets, partially driven by acquired businesses which was offset by lower revenue from our pharmaceutical manufacturer and government markets.

Gross margin was 36% in the fourth quarter of fiscal 2016 compared to gross margin of 42% in the fourth quarter of fiscal 2015. Gross margin for the fourth quarter of fiscal 2016 was negatively impacted by increased infrastructure cost including rents on the new Pennsylvania treatment facility and higher return transportation cost associated with the USPS rate increase that was effective February 1, 2016. We worked out a rate concession with the USPS which should be effective in September of 2016 but this hit us pretty hard with this rate increase in the June quarter.

Selling, general and administrative expense increased to $2.9 million for the quarter. SG&A for the fourth quarter of fiscal 2016 included about $100,000 of additional cost related to our audit of internal controls for fiscal year 2016 which was not required in fiscal year 2015. Acquisition related costs and higher sales and marketing costs focused on our inside sales initiatives.

The company reported operating income of $200,000 in the fourth quarter compared to operating income of $1.4 million in the fourth quarter of last year. Sharps reported net income of about $200,000 or $0.01 per basic and diluted share this quarter compared with net income of $1.3 million or $0.08 per basic and diluted share in the fourth quarter of last year.

Looking at the highlights for the fiscal year ended June 30, 2016, revenue increased 8% to $33.4 million and customer billings increased 9% to $34.3 million. About $750,000 of the $2.8 million increase in customer billings was from acquired businesses.

As David mentioned, this year-over-year growth was lower than our internal expectations primarily due to the extremely weak 2015 flu season and the slower than expected rollout of the VA TakeAway Envelope program. The mild 2015 flu season which took place during our fiscal year 2016 actually drove a 13% decrease in our Retail flu business and a $2 million shortfall in expected revenue.

For the year, the professional market billings increased 22% to $7.6 million. Pharmaceutical manufacturer billings grew 18% to $5.7 million primarily due to inventory builds for patient support programs. Home Health Care billings increased 9% to $7.4 million. Assisted Living billings increased 17% to $2.2 million, and Retail billings increased slightly to $8.8 million as compared to $8.7 million in fiscal 2015. Retail sales were negatively impacted by the mild flu season, but positively impacted by the watch of the TakeAway Medication Recovery System envelopes by certain retail customers when compared with the prior year. Government billings decreased to 12% from $1.5 million in fiscal year 2016 with a slower than expected rollout under the VA TakeAway Envelope program.

Gross margin for the fiscal year 2016 was 33% compared to 36% in the prior fiscal year. Gross margin for 2016 was negatively impacted by increased infrastructure cost, including rent on the new Pennsylvania treatment facility and higher return transportation costs associated with the USPS rate increase that was effective February 1, 2016.

SG&A expense increased 14% to $10.8 million for the year, which included about $200,000 of cost associated with our acquisition program. Without these acquisition related cost SG&A increased to 12% compared to fiscal 2015 due to about $200,000 of additional costs related to our audit of internal control for fiscal year 2016 that was not required in fiscal 2015 and expenses related to our ongoing investment in sales and marketing initiatives.

The company reported EBITDA of $800,000 in fiscal 2016 as compared to EBITDA of $2.1 million in fiscal 2015. Net income for 2016 was $13,000 or $0.00 per basic and diluted share compared to net income of one $1.2 million or $0.08 per basic and $0.07 per diluted share in the prior fiscal year.

Regarding the upcoming September 2016 quarter, the income statement will include acquisition related expenses of about $500,000 associated with the closing of the Citiwaste acquisition.

Our balance sheet remains solid with $12.4 million of cash and cash equivalents at June 30, 2016 and no debt. The company's current cash position today is approximately $7.8 million with a decrease from June 30, 2016, primarily due to a $4 million cash spend in July 2016 associated with the Citiwaste acquisition. We also issued 456,760 shares of common stock for the company and borrowed $3 million under the acquisition portion of our credit agreement as part of the deal. Our current remaining availability into the credit agreement is $6 million.

At June 30, 2016, working capital, stockholders equity, and total assets were $17.2 million, $23.8 million, and $30.1 million, respectively.

Inventory of $3.9 million at June 30, 2016, is higher than the balance at June 30, 2015, of $2.7 million. The increase in inventory is a direct reflection of growth in the business as well as preparation for government envelope orders.

And with that, I'll turn the call back to David.

David Tusa

Thanks, Diana. And just a couple of comments before we turn it over to Q&A. I really don't want the stock that's we had a weak flu season and the fact that the VA rollout, the TakeAway Envelope deal. I would look at that to overshadow the accomplishments for the year. We closed three acquisitions, three solid acquisitions, ones that Brandon had mentioned, are going to bring in recurring revenue, more predictable recurring revenue in a regulated market. We closed them, we integrated them, and that business is running very well.

The other thing is the plan. We talked about plan receiving the final and launching the new plan up in Northern Pennsylvania, Northeastern Pennsylvania, that's -- it's no easy feet. We applied for that. The application was filed in November, December of last year; we received a permit in July. So for a medical waste treatment facility in the Northeast has been permitted within what's that seven, eight months is very, very quick. So we got a great team of folks, we did it, we got it, John, and I think it should also show you that we're good at what we do and we've got a very dedicated group of employees.

So with that, let's go ahead and turn it over to Q&A.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions].

And our first question comes from the line of Mr. Matt Hewitt from Craig-Hallum. Please proceed with your question.

Matt Hewitt

Good morning and thank you for the update.

David Tusa

Good morning.

Matt Hewitt

A few questions for me. First and foremost, on the Citiwaste acquisition, is there any seasonality to that business or how should we be thinking about the $3 million of revenues as we look out over the next year?

David Tusa

Matt, that's a great question. No there really isn't any seasonality. When you look at their business, it's all focused on the regulated market in the healthcare sector. For example, these are some of the types of customers in Citiwaste, we'll have, it could be surgery centers, urgent care, large physician practices, imagining, education, colleges, general homes, plastic surgery, so they're focused on areas where that should lend itself to recurring revenue.

Matt Hewitt

Okay, great. Thank you. And the government I think everyone would agree has been a little bit disappointing out of the gates on the VA side. What do you think it's going to take for that business to start to ramp closer to expectations as we get into this upcoming year?

David Tusa

Matt, we're frustrated, we're obviously frustrated. There was lot of time and effort put into the program the launching of the program and it's slow. I'm coming -- I really -- I really -- we continue to work with the VA, we're trying to push and help and support, but at this point I'm not going to guess on what it's going to take. We're going to continue to work with them. And hopefully, they're going to come through. It's a very valuable program as well. It's providing the TakeAway Envelope to our veterans. I think everyone reads the news every day that talks about the epidemic in this country with opioids and other abuse. And we think it's a critical program and we're going to work with them. And hopefully, we can get that thing going. But at this point, it's really difficult to say.

Matt Hewitt

Okay. And then one last one then, I'll hop back in the queue. Flumist, no longer being supported by the government, I'm curious as you look out over the next year especially, with the flu season, how much have you built in for that shift that's expected back to the needles of the Jabs versus Flumist into your internal estimates and expectations and what are your early reads on the flu season? Thank you.

David Tusa

Well, first of all on Flumist, I think it's only like 3% or 4% of the total --

Diana Diaz

That's correct.

David Tusa

Of the total flu business. So, well, we were obviously pleased to see that. I don't think it's going to have a significant impact. We were able to secure some solid orders for the June quarter for the flu business, as we load up the channel for the retailers. Everything we're hearing right now from either the customers or if you look at the CDC information, everything right now shows that it's probably going to be a flat flu season that's what -- that's what we're hearing so far. But we'll have to see it's -- the flu business is event driven, whether it's a cold winter or mild winter or some sort of an event in the country that will encourage folks to go out and get their flu shots. So like we said before, we really won't know until probably closer to September, we should receive orders in the September quarter which we already have some. And then in the December quarter should have some as well. But those two quarters, the September and December quarter will be driven by the demand and how many folks rather getting their flu shot.

Operator

And our next question comes from the line of Mr. Joe Munda from First Analysis. Please proceed with your questions.

Joe Munda

Good morning, David, Diana, and Brandon thanks for taking the questions. First off David I would like to talk a little bit about the treatment facility, what that does for you on the revenue side as well as on the cost side in particular gross margin, a little bit more color there would be great as well as Diana if my follow-up to that, the impact of U.S. postal service on gross margin in the quarter and for the year. Thank you.

David Tusa

Great, thanks Joe. The treatment facility is important for many reasons. We're going to -- it's hopefully going to launch in probably October. We do have the permits. There was a little bit of a delay in getting the equipment, the autoclave equipment but we should be operational in October. But there is three or four areas where we say one is just the route-based business between, you know between Citiwaste and the prior two acquisitions that we made we generated from the start about three million pounds of medical waste will be treating. And I think it's pretty easy, it's pretty safe to say that we think we will save about $150,000 a year just on the processing of the existing medical waste from the businesses that we purchased. So that's one fit.

The mailback side should be significant saving there. Once you get in about six to nine months, when mailbacks start making its way towards a facility that we will probably be processing a million pounds of mailbacks and we think the savings there about -- will be about $300,000 a year. So there is another $300,000.

And then lastly the use of this facility as a distribution center is really important, that's going to save out there in transportation cost of our mailback to our customers. And we think we are pretty conservative in saying that that should be at least $100,000 a year in savings. So between those three that's 550 plus thousand dollars which by the away is recovering about a third of the cost of the new facility, we think it would be about a $1.5 million in total once we get it launched.

So that's important from a savings standpoint. The other thing it does, Joe, is it allows us to facilitate the growth of the route-based businesses, we know we have the capacity which by the way will probably from day one we will be able to handle all of this with just one shift at the treatment facilities, so we will have plenty of capacity. It will also allow us the opportunity for processing ways for third-parties which could be incremental revenue, which there is lot of haulers across the country that use third-party. So we're pretty excited about it from a cost savings standpoint, really more than anything it helps us control our destiny. It becomes a very important part of the infrastructure of the company, another permitted treatment facility in addition to our East Texas and what was the last question?

Diana Diaz

He had a question about what the impacts as -- the postal rate increases. So for the quarter it had about $100,000 impact on our cost related to that higher rate from USPS that was effective February 1. And for the year because it started in the March quarter the year's impact was about $200,000. And as we mentioned we have recently negotiated a concession to this rate increase that we expect to be effective in September of 2016.

David Tusa

And Joe it was a surprise. The post office is over the last few years have been doing a great job of keeping the cost under control with little or no, no increases. And it was the surprise that they got thrown at us. So we immediately moved into working with them in negotiating and it took a little while but hopefully it will be effective in September. What we've done is we've negotiated about a 70% reduction of that increase. So hopefully we'll associate a hundred thousand dollar impact will only be -- that will be $30,000.

Joe Munda

Okay. As far as Citiwaste is concerned, I mean are there plans for I mean you have this new treatment facility coming online. You have this expanded coverage area, any plans to expand the fleet that you currently have within the Citiwaste, buy more trucks; hire more people, any thoughts there. And then one follow-up on related pharma as far as those programs are concerned was there anything that happened in the quarter that kind of brought the numbers down, it just seems like that it was tracking pretty nicely over $1 million here and then $900,000 in the quarter? Thanks.

David Tusa

I will handle, I talk about Citiwaste she can grab the pharma side. But on the Citiwaste, we added to the fleet and hired more people on day one. We're really excited about that area that New York, New Jersey, and of course Connecticut, Rhode Island, other areas up in the Northeast. And as part of going through the diligence and completing the acquisition we started buying more trucks and hire our new people. That's a beautiful part about that business, because as they layered more business, now because the infrastructure we have in place, which you do is you just hired more -- I'm sorry hire more drivers and you add more trucks.

So we think it's a very scalable business and right there I think they're 12, I think they're 12, I think we will probably have about across in both businesses 22 or 23 trucks. But up in the Northeast is just a matter of just adding the additional trucks. We're also excited about New Jersey. New Jersey is an area that we think is one that's very underserved and one where we think that we could significantly grow with that Citiwaste acquisition. But we're again very scalable and we're looking forward to more drivers and more trucks. Brandon you want to talk about this?

Joe Munda

Real quick, why is New Jersey unreserved?

David Tusa

A trip to New Jersey, New Jersey is a tough area to operate, it's tough to get a permit, it's really tough to get a permit, and if you don't have a permit in that, there you can't more so for instance you can't subcontract out if to the New Jersey area, whoever name is on that contract actually has to service the customer. And there's just not much there. There's not close, it is tough to get a permit and we tried for a year to get a permit just before the Citiwaste acquisition to get a permit and of course the Citiwaste acquisition gave us that permit.

But it's tough. It takes time. And there's just not really a lot of haulers up there that are permitted in the state of New Jersey. And New Jersey obviously very, very highly populated area. So we're pleased and we're hopefully going to see more and more up in New Jersey area.

Brandon Beaver

So Joe, I'll touch on the final question you had and you're exactly right, and you're looking Q4 2016 over Q4 of 2015 we only had about $0.5 million drop. But overall for the year we had a strong billing at 80% growth of $5.7 million. There was really nothing other than just some timing of some bills. We'll see -- you should see a couple of bills here in the September and December quarters that will kind of bring back some of our what will kind of normalization of our billings for the quarter for pharma. But really nothing has lagged as far as any programs dropping off, anything like that is just as a matter of timing on these bills similar to you kind of start getting into some of the retail business it gets a little lumpy.

Joe Munda

Yes, let me get this straight, you said the existing programs can add $500 to $1 million. And then the new programs can also add $500 to $1 million, correct?

Brandon Beaver

That's correct. We've got a couple of new programs coming on board over the next 12 months or so. And once they're fully rolled out and obviously some of these states as the new drug enters the market it does take a little bit of time to ramp up. So what we look to see is $0.5 million to $1 million in both of those areas, correct.

Operator

And our next question comes from the line of Mr. Brian Butler from Stifel. Please proceed with your question.

Brian Butler

Just first one kind of thinking on organic growth. I mean if you take out acquisitions for your fiscal '16, you're probably somewhere around 5.5% if you would adjust for the $2 million of the flu impact I guess that puts you kind of a little over 10%, I'll call it 10% to 12%?

David Tusa

Right.

Brian Butler

What's the right way to think about organic growth on the footprint you have right now for 2017? I mean, is it in that 10% to 15% range or really can it get back to that 15% to 20% range?

David Tusa

It's you really have to look at -- of course you've to get back into that 15% to 20% range, which really you have to look at it by market. I mean one of the reasons why we're expanding not on the obvious reasons in the route-based business projection, predictability, and stability to the revenue base. But, Brian, you get this flu business which is still what $6 million of our business and if that's flat then that's a secondary portion of the business that won't show growth.

Now, we're very excited about the growth opportunities that we have in like professional market, the assisted living market and these new markets will be entering into these medium quantity generators. But just as you see, just for the recent quarter that the professional market and some other markets are growing at very healthy rate. So it's tough to generalize without analyzing each of the markets. But we think that with the addition of the route-based business that we have a great opportunity to be able to grow the revenue base much higher than the 9% that we generated for this past year.

Brian Butler

Okay. And then on Citiwaste, you said you added people and trucks to the fleet. Can you give a little color on this, how much was that; was it a 10% increase? Did trucks go from 10% to 15%, just looking for the size?

David Tusa

Oh, the trucks I think were at 11% and I think we're like 12% or 13% right now. We replaced also a couple of the ones that were older that weren't going out on longer routes. We hired a couple of more people, couple of more people, one is a driver. We're also in the middle of hiring some sale support out there as well. These small private companies, they like to run lean and we need more support. We got a phenomenal sale person out there in New York and he needs help. And of course, now he has a marketing team and of course we have the entire sales team supporting as well. But I think the best way to look at it is over the next few quarters I'd love to say that we brought in a few more trucks and then we hired some more drivers. So that's our plan going forward. And hopefully, we'll be doing the next quarter or two we will be talking about much larger infrastructure.

Brian Butler

Okay. Great. And I got couple questions on cost. On the United States Post Office the new rate you negotiated in 2017, in fiscal 2017 year; is that still up from where you were on average of 2016 or is that down? I'm just trying to understand if that's a drag in fiscal 2017.

David Tusa

No, that's -- what that's going to do is say for instance, that $100,000 or so that we had in --

Diana Diaz

In the quarter.

David Tusa

Incremental cost in the quarter, we have negotiated down about 70% of that. So about -- then the increase will be roughly $30,000 and that would carry forward into 2017. The $30,000 increase but not a $100,000 increase.

Brian Butler

Okay. So still a slide drag on the gross margin side, but not nearly the same as what you saw in fourth quarter?

David Tusa

Right.

Brian Butler

And on the SG&A side, it was up about 13% in 2016. How should we think about SG&A 2016 to 2017, if you're growing organically in that 10% to 15% range? Is it going to mere that or is there as you ramp up sales and other things to support the route-based, did that grow faster?

Diana Diaz

When we look at next year we think the quarterly SG&A is going to be about $2.9 million. And we've looked at what we have during the fourth quarter of 2016, the higher soft cost are going to be spread over the whole year rather than forced into two quarters, so that's going to come down a bit. We have some acquisition related cost in the fourth quarter and we're assuming none of those other than the $500,000 that we've talked about for the Citiwaste deal. And we've assumed that we'll have about $120,000 of SG&A for Citiwaste for their sales activities as well. So when you put all those together, our estimate for the September quarter is about $2.9 million per quarter.

Brian Butler

And did that -- I'm sorry did that -- did you say that included the $500,000 on acquisition cost?

Diana Diaz

Does not include the $500,000 for acquisition related cost.

Brian Butler

Does not. Okay. And then based on the current footprint now with the route-based in Citiwaste in there, do you think about the flow through from incremental revenue? What does that now look like? Is that still 45% to 50% for that incremental dollar revenue on operating leverage or has that come down?

David Tusa

Well, on the route-based side you can look at that gross margin on the route-based side it's about 40% on the gross margin side, about 25% on the operating margin side. Our other businesses, close to the 45% to 50% on the incremental gross margin. So you can bring those together to see what the incremental impact is on revenue.

Brian Butler

Okay. So and just on the route-based side, just clear those. Okay. So 40% gross margin is what you're saying.

Diana Diaz

Yes.

David Tusa

I think it was 40% -- I think it was the March and June quarters, like 41% gross margin on Citiwaste side.

Diana Diaz

That's correct.

Brian Butler

Okay.

David Tusa

And that doesn't mean hopefully we're going to get some of these cost savings here are related to the new plan. We'll get synergies from the systems being on the same system platform, but just at the current run rate they're about 41% gross margin.

Brian Butler

Okay. And then just one last question. On the professional segment, on the customer there, are you seeing any kind of pricing pressure or if you could give color on the pricing environment in that market?

David Tusa

Well, I mean we love that market because we -- what we're doing there is just trying to make them aware of the alternatives to their existing provider. And we can pretty easily -- and Brandon, we see it every day. We can pretty easily save from 30% to 40% from what they are paying their existing providers itself generated 50% margin over it.

Brandon Beaver

You know Brian, that's our largest opportunistic market. It certainly gives us I would say the vast majority of our opportunities that inside sale chases probably in the 90% range is the professional market. And a very large chunk of the time we are -- as David just mentioned, significantly lower from a pricing standpoint just because the way that the market has had a handful leaders out there over the years. So we were definitely chipping away at it.

David Tusa

The other thing -- one other thing, again, we mentioned it earlier, the dropping side in the addition of Citiwaste is really going to help us get into some additional areas that we really haven't been in for a big way, surgery centers, urgent care. And you just take a facility that generate more than just a small quantity generator. We're excited about those opportunities and be able to move in there. We know from what we've seen that we can say those facilities running as well from what they're paying and we're excited about those additional opportunities.

Operator

And our next question comes from the line of Kevin Steinke from Barrington Research. Please proceed with your question.

Kevin Steinke

Good morning everyone. On the Citiwaste acquisition in the press release announcing that deal you noted that their customer base is pretty diversified across variety healthcare professionals, as well as assisted living long-term care provider. So I don't know if you have a more definitive percentage breakdown may be of their customer or revenue mix in terms of the various markets you serve?

David Tusa

I think, Kevin, the majority of their business, yes, it's going to be in that professional office. Again, physician practices, I mean I'm just looking at the other side here physicians, pediatrics, pathology, imaging, and then as well into the surgery centers and urgent care, which are more professional market as well. They do have some long-term care business, but I would say that's a smaller percentage of the total, I would say that the vast majority of it would be in the professional market.

Diana Diaz

All right. The long-term therapies for Citiwaste have smaller percentage, but it wasn't in the first two acquisitions we looked at.

David Tusa

Right.

Kevin Steinke

Okay. I was just asking because from a modeling perspective I guess that that's going to boost the professional segment growth as we move through our fiscal 2017 more significantly?

David Tusa

Right, and again, that's where our inside sales initiative probably more than half of what they sell into that professional market as well. So between what the route-based businesses are doing and what our team here is doing plus the larger field sales opportunity we close that are going to be affecting the professional market as well.

Kevin Steinke

Okay, great. And so I -- you have now done three acquisitions in the Northeast, built a treatment facility, so did you feel like you are going to still continue to pursue acquisitions in the Northeast?

David Tusa

Yes that what we're looking at now is obviously absorbing what we have and by the way the integration has gone very well and the businesses are doing well either at or above our expectations. And what we're looking at right now is primarily tuck-ins up in that Northeast now that we have trucks, drivers and seems to be online treatment facility will be great if we're able to look at tuck-ins where we can go in there and buy the business and just basically just suck the routes up into our existing infrastructure. Those are a very profitable and ones it will be very efficient. So we have a list and we are contacting, and we're talking to folks every day, so that's what I would say we're focused on right now.

Kevin Steinke

Okay. It makes sense and you mentioned in the prepared comments that you're going to be breaking out route-based revenue in other service areas going forward, so is that going to be more a formal thing, you're doing your earnings releases or SEC filings or does the commentary on your conference calls?

David Tusa

Right, what we're going to do is if you look how we release our financials now, we have a supplemental schedule of customer billing channel which is direct distributors and inside online sales, we're continuing to do that. We are going to have the billings by market and then what we're going to do is we're going to add one more and that one is going to be the customer billings by the solution offerings, whether it's the mailback, whether it's unused medication solution or whether it's route-based pick-up. And then you know the company is changing and I think it's important that we're able to communicate to you and others and you can look and also measure our success in growing the different types of solution offerings.

Kevin Steinke

All right. That will be helpful. And then just lastly any update on progress with one of your newest product offerings the TakeAway Recycle System?

David Tusa

Yes. Well let me tell what's going on now is we're working with a major device single-use device manufacturer and what we've been doing over the last few months is piloting it with some of their customers and it's new for the industry, so we're working with them and probably and hopefully that the pilots will move into longer-term contracts.

We have been pleased so far and really it's the manufacturer single-use device that's pushing into their customers through their sales reps. So hopefully over the next couple of quarters, we will be able to give more color on that but it's definitely being used out in the market in the healthcare sector which primarily hospitals and surgery centers.

Operator

Now next question comes from the line of Joe Munda from First Analysis. Please proceed with your question.

Joe Munda

Yes thank you. So quick follow-up, David on MedSafe, here in Illinois Walgreens is growing out kiosks really similar to what you guys are doing with MedSafe. Any thoughts there I mean I don't -- I can't piece it together how exactly they're doing it but they are rolling them out at a number of Walgreens locations nationwide. Any thoughts competitively how they're able to I guess be in compliance with the DEA regulations because I'm a little confused by all this.

David Tusa

Well first of all let's talk about what we're doing around MedSafe. We've made progress even since the last quarter, we have been going from 500 to 600 now in MedSafe that we have in the liners that we're processing now is like 2,700.

Diana Diaz

That's correct.

David Tusa

2,700, so it's working and we like our model is again a common carrier, use of a common carrier. So with MedSafe when it's full the nice return via UPS gives back to our facility. We don't know a lot about the Walgreens program. The only thing we do know that it's not a common carrier model, it’s more of what we believe a pick-up model, which we think, it is our opinion when it comes to unused medication in that retail sector we think it's much more convenient and much more cost effective to use a common carrier model because the only return to big box with the unused medication in it once its full versus being on a pick-up. We don't know a lot but we do know that it appears that it's a pick-up versus a common carrier model. And the pick-up is a bit more complicated as well when we look at it from the DEA rule standpoint.

Joe Munda

I mean are you guys observing Walgreens here and may be saying look you turnaround and you go to other customers potentially that your retail customers and try to pitch them on the MedSafe is that an opportunity as to looking at.

David Tusa

Sure. I mean it ever since we have launched it whether it's long-term care, whether it's retail, drug treatment, pharmacies and hospitals and we've been pitching it and actually the common carrier approach has been one if they launch a program is one that they like because again its more convenient. I will say this. We have of the 600 we have done with government sector side as well. What we've got?

Diana Diaz

We're 45% in government.

David Tusa

45% of the 600 is in the government, the VA hospitals, the DOJ; I got to tell you the private sector side has been all the slower to adopt it because the cost who is going to pay for it. And so but we're starting to see more traction we did sell more MedSafe this past quarter. But from what we see right now, the Walgreens is really the only one where we have seen anything other than a common carrier type of approach. So we like where we are, we like our offering, the customers like it, we'll see going forward and the acceptability of it and but we're selling it every day.

Operator

Our next question comes from the line of Shawn Boyd from Next Mark Capital. Please proceed with your question.

Shawn Boyd

Thanks for taking the questions, can you guys hear me okay?

David Tusa

Yes.

Diana Diaz

Yes.

Shawn Boyd

Just a couple real quick on pharma if I heard you right, you guys highlighted the ability to grow the business by basically $1million to $2 million from a combination of the existing and new customers is that off the FY'16 revenue level at $5.7 million.

David Tusa

Yes.

Shawn Boyd

Okay. And we think that's a -- I'm sorry 12 to 18 month timeframe.

David Tusa

Some of that will come in, earlier than later you got your 12 month run rate on our current programs we expect a $0.5 million to $1 million growth. The new programs will take some launch time and that’s I would say you're looking more to the 12 to 18 months fully implemented.

Shawn Boyd

Got it, okay thank you. And on government, certainly get the frustrations and its already here that’s not ramping yet. I guess I just want to recalibrate and understand what do you guys think that the core level, well let's get the numbers right we did $400,000 in the quarter and how much of that was from the new contract only about $100,000.

David Tusa

That's correct, Diana, that's what we're talking.

Diana Diaz

Yes, that's correct.

Shawn Boyd

So that 300, that seems a little low but is $300,000 a quarter kind of think quarter level of government orders assuming that nothing from that additional contract, what’s that base level I need to just think about?

David Tusa

The government business whether it's we provide our mailbox at government clinics. We sell the MedSafe so that's what that the $300,000 that $300,000 is.

Diana Diaz

Right, and then I mean the MedSafe has been growing and the government market so there some opportunity for growth there and that's kind of the opportunity.

David Tusa

Well, the $300,000 is what it is per quarter now and hopefully we can grow that but again we frustrated and we'd like to see growth from that TakeAway Envelope program that we have the contract for. But the government is unpredictable and that sector is tough to predict. We would -- to be answer would been even pretty pleased with the $300,000 or so in quarter revenue we generated through the MedSafe and mailbox other government customers.

Shawn Boyd

Right. And that's where I'm going. I'm just to say is that consistent so annualized at $1.2 million a year is this business now $1 million to $1.5 million kind of levels that we can then assume that anything that comes on from the contract is incremental to that or is still --

David Tusa

I think you're right in what you're saying.

Shawn Boyd

Okay. And then last thing David on Citiwaste the -- that business if I understood it was $3 million a year in trailing revenues, you're already increasing the fleet size and I guess the drivers and so you're growing that business a bit right off the bat. What kind of growth can we expect on that going forward, what is that business do this year you can --?

David Tusa

Well, I can just tell you what it's done historically. I mean historically it's been growing 30% to 40% a year. I'm not saying we're going to do 30% to 40% going forward, but we think it has the opportunity to grow significantly. Give us a couple of few quarters to go out there and sell more with not only the Citiwaste folks but our inside sales team and we will be better be able to tell you late they've done a great job of growing in the marketplace they're in a great sector and the market opportunity for them is significant.

Operator

And our next question comes from the line Craig Hoagland from Anderson Hoagland & Co. Please proceed.

Craig Hoagland

Hi, I was hoping to just circle back to the gross margin conversation. If your rout-base business generate 40% or slightly higher percent gross margins and the rest of the businesses are in the 45% to 50% range. Then corporate gross margins would be somewhere in the low to mid 40s. But they're obviously below that, and I was just hoping if you could help us understand if they ever get there or are they investing ahead of growth that's going to keep margins lower than that or sort of what's the long-term trajectory?

Diana Diaz

I think our model is still consistent and includes a level of fixed cost each quarter, which last quarter we’ve had is $1.2 million a quarter. We still think that's the right number and then our product cost range from 49% to 51% of revenue. So that's where we get the idea that the incremental revenue comes in about 50%. So when you blend those together that's where you come up with a margin that is depending on the level of revenues somewhere in the high 30s and low 40s and so that's how we look at it, that's how our forecasts are put together and when you look at the pick-up business, it's coming in at 40% margin, so we think it matches up well with the rest of our business.

David Tusa

Right and as you mentioned the 40% -- the 45% or the 50% that's the incremental product level revenue that does not take into account our -- yes, for the fixed cost -- the cost of the facility whether its East Texas or whether it's now Pennsylvania so there is cost associated with what that and that is in a cost of sales that we, that's below the product level cost.

Craig Hoagland

Okay and for the route-based the 40% numbers are now I guess to that 49% or 51% product cost so --

Diana Diaz

I think it's the combined; it's the merge, the combined margin.

Craig Hoagland

For route-based, okay so that include the facilities.

David Tusa

Well that includes, yes because what they had is they would have like disposal cost that they would have to pay a third-party.

Diana Diaz

Variable.

David Tusa

Right, so that's going to that will change a bit and hopefully that margin is going to increase when we're processing the medical waste ourselves.

Craig Hoagland

Okay, so if we had enough volume we get above that 40% level?

David Tusa

Right.

Craig Hoagland

We need to amortize the $1.2 million per quarter.

David Tusa

Right, which is right we just need more revenue, we need more sales to better cover that fixed level of cost to the cost to goods sold.

Operator

There are no further questions at this time. I'll turn the call back over to management for any closing remarks.

David Tusa

Great, thank you all for participating in our conference call. We look forward to talking with you next quarter.

Operator

Ladies and gentlemen this does conclude our teleconference for today. We thank you for your time and participation and you may disconnect your lines at this time. Have a wonderful rest of the day.

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