Q1 2024 Nephros Inc Earnings Call
Good afternoon, and welcome to the <unk>, Inc. First quarter 2024 financial results Conference call.
All participants will be in listen only mode should you need assistance. Please signal like conference specialist by pressing Star then zero on your Touchtone telephone.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to Kieran Smith Investor Relations.
Kieran Smith: Please go ahead.
Kieran Smith: Thank you good afternoon, everyone. Thank you all for participating in net proceeds first quarter 2024 conference call.
Kieran Smith: Before we begin I would like to caution that comments made during this conference call by management will contain forward looking statements regarding the operations and future results of metros.
Kieran Smith: Encourage you to review the net proceeds filings with the Securities and Exchange Commission, including without limitation. The Companys forms 10-K, and 10-Q, which identify specific factors that may cause actual results or events to differ materially from those described in the forward looking statements.
Kieran Smith: Factors that may affect the company's results include but are not limited to the impact of COVID-19 pandemic across its ability to successfully timely and cost effectively market sell its products and service offerings the rate of adoption of its products and services.
Kieran Smith: SaaS of its commercialization efforts and the effects of existing and new regulatory requirements on <unk> business and other economic and competitive factors.
The content of this conference call contains time sensitive information that is accurate only as of the date of the last call today May 19 2024.
Kieran Smith: The company undertakes no obligation to revise or update any statements to reflect events or circumstances. After the date of this conference call, except as required by law.
Kieran Smith: I would now like to turn the call over to necrosis, President and Chief Executive Officer, Robert Banks. Robert Please go ahead.
Robert Banks: Thank you Carrie.
Robert Banks: Good afternoon, everyone.
Robert Banks: Thank you for joining us to discuss the 2024 first quarter results, which were reported today.
Robert Banks: It has been an exciting start to the year I want to start by thanking the deckers team for a job well done as our programmatic business.
Robert Banks: Percent over the same quarter last year, despite the 5% drop in top line revenue.
Kieran Smith: This topline decrease is attributed to a record nonrecurring emergency order that was reported in Q1 of last year and unusually low amount of emergency business in this past quarter.
Kieran Smith: So collectively all of these factors was a modest 8% overall growth over the prior quarter.
Kieran Smith: Given the unpredictable nature of E. R orders, we remain focused on operational prudent and disciplined deployment of capital.
Kieran Smith: These actions positively complement the growth of recurring sales and further support our steady advancement towards solid financial performance.
Kieran Smith: With an established foundation, our programmatic business and customer loyalty, we are investing in the development of new capabilities to extend our competitive advantages addressing water quality and safety challenges.
Kieran Smith: One example is the creation of an online filter tracker, which enhances the customer experience of managing their necrose filters.
Kieran Smith: <unk> two offers automated replacement reminders and documentation that installation and then deploy.
Kieran Smith: And these features are just the beginning as <unk> continues to explore ways of generating value in the digital space.
Kieran Smith: Net proceeds also exploring how to best support customers in need of nano and micro plastics and M. P's as we seek to expand our featured abilities within our medical filtration lives.
Kieran Smith: Our ability to retain micro organisms with the smallest of course size on the market and uniquely positions us to address and that piece, particularly nano plastics.
Kieran Smith: Looking ahead, the future growth of macros will depend upon the continuous enhancement of sales strategies, the leverage of changing regulatory guidance.
Kieran Smith: And the exploration of new products.
Kieran Smith: Accordingly, our sales team is actively supporting our national partners and nurture their success through increased training expansion with existing accounts and conversion of emergency response to programmatic business.
Kieran Smith: Additionally, we have been participating in a record number of trade shows and regional industry events generating significant brand awareness and visibility to our product capabilities.
Kieran Smith: Netflix just presence also affords countless opportunities to educate key influencers and decision makers on the most salient regulatory changes and recommended solutions.
Kieran Smith: The stakeholder connections cultivated in these environments informed customer frameworks and often lead to future sales.
Kieran Smith: The last area I'd like to highlight before turning the floor over to Judy is the need for solutions that mitigate human exposure to nano and micro plastics and MPS.
Kieran Smith: I read a new article almost equally regarding the multiple health concerns related to N M P's, which are significant.
Kieran Smith: The ability of M p's to penetrate biological barriers and leach toxic chemicals can lead to cellular toxicity.
Kieran Smith: Formation and damaged DNA.
Kieran Smith: Our hollow fiber technology, which offers the smallest pore size on the market enables us to provide filtration that you're effectively retained an M piece.
Kieran Smith: I will now pass the mic over to our CFO Judy.
Kieran Smith: Yes.
Judy: Thanks Robert.
Judy: I'll now provide a closer look at net present financial performance in the first quarter we've.
Judy: We reported first quarter net revenue of $3 $5 million, a 5% decrease over the corresponding period in 2023.
Judy: The decrease was primarily driven by decreased revenue from emergency response orders, which are unusually large in the first quarter 2023 and not repeated in the comparable 'twenty 'twenty four period. However, the decrease in emergency response, or this was partially offset by increased revenue from programmatic or recurring fail.
Judy: Which were 12% more than the same period in 2023.
Judy: Gross margins in the quarter was 62% compared with 57% and 2023, an increase of five percentage points year over year.
Judy: The increase in gross margins was driven by reductions in shipping expenses and more favorable terms with our largest supplier.
Judy: Research and development expenses were 200000 for the first quarter 'twenty 'twenty, four and 2023 respectively.
Judy: Sales general and administrative expenses were $2 1 million for both the first quarters of 'twenty 'twenty, four and 2023 respectively.
Judy: Net loss for the quarter was $169000.
Judy: There to $306000 in the same period last year.
Judy: Adjusted EBITDA in the quarter with negative $95000 compared with positive 147000 during the same period in 2023.
Judy: Net cash used in operating activities was $672000 in the quarter compared to net cash provided by operating activities of $276000 in the same quarter last year.
Judy: The use of cash primarily reflects.
Judy: The operating loss came in at 2023 annual bonuses, which always hit in the first quarter and an investment in inventory to support future growth.
Judy: Our cash balance on March 31st 2024 was $3 $6 million compared to $4 3 million as of December 31st 2023, we continue to remain debt free.
Judy: Please refer to today's press release for more details about the calculation of adjusted EBITDA and its reconciliation to GAAP net income or loss.
Judy: Information about our results will be found in our filings on Form 10-K, which should be filed later today.
Judy: I will now turn the call back to Robert for some closing remarks, Robert Please go ahead.
Robert Banks: Thank you again for joining me and for your investment in this great organization that is so uniquely positioned to solve the toughest problems associated with water consumption.
Robert Banks: Additional thanks to each of our <unk> employees, our partners and our customers without which we would not be where we are today.
Robert Banks: I'd like to close by reiterating our enthusiasm for our future growth prospects as we continue to build on the momentum we have been experiencing.
Speaker Change: This concludes our formal presentation remarks, we will now take questions from the audience operator, please open the call for questions.
Speaker Change: We will now begin the question and answer session.
Speaker Change: To ask a question you May press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys.
Speaker Change: At any time your question has been addressed and you would like to withdraw your question. Please.
Speaker Change: Please press Star then two.
Speaker Change: Again it is star then one to ask a question.
Speaker Change: At this time, we will pause momentarily to assemble our roster.
Speaker Change: The first question comes from.
Speaker Change: Tomas Mcgovern with Maxim Group. Please go ahead.
Tomas Mcgovern: Hey, guys congrats on the quarter. So yeah, so let's start off with looking at the growth in recurring revenue I'm just curious how much of this growth in the programmatic sales is reflective of expansion within those key partners that you've discussed in the last couple of calls versus acquiring new clients.
Speaker Change: Okay.
Speaker Change: Thank you for that question Thomas.
Speaker Change: It looks it's about a good mix of new customers and growth in existing customers, we've been adding a record number of new sites. This past quarter and that's felt really good so that herb nomadic business continues to expand.
Thomas: The strategy, we've been quite effectiveness spin this land and expand approach we would go in and we would acquire business and one part of the facility and then as we get comfortable and know who all the players are we expand to other parts. So that strategy has been pretty effective in two of the regions, whereas regions, where we haven't typically had a lot of sales.
Speaker Change: Exposure are enjoying a lot of growth in new customers, where we're just getting to build those relationships and trust as we.
Speaker Change: Look work with local partners and direct what.
Speaker Change: What we have noticed is the existing business has not always been maintained and growing.
Speaker Change: At the rate we expect however, the new digital tool that I, just mentioned will take a look and track if they've got 10 units that we're treating did we'll change that filter 10 times in the prescribed period and what we're finding probably.
Speaker Change: 40%, 25% of the time, depending what region were in Theyre, not changing them when required or requested.
Speaker Change: It's not because it's done on purpose, but also don't forget that the filters installed theres been no problems and just missing their pms more preventative maintenance activities.
Speaker Change: So our goal our task is to make sure that we're not leaving anything on the business. We've already won so that we keep that recurring programmatic business going while also adding new customers and expanding into places, where we haven't been able to add our filters in the past.
Speaker Change: So the exact split between.
Speaker Change: And new business versus new customers difficult to track that based on some of the deficiencies and maintaining the programmatic business as we mentioned, but we're going to get a lot easier than doing that when we add these digital tools that I just discussed a moment ago.
Speaker Change: Hope that answers that question and look for more to come on that.
Speaker Change: That business in the future.
Speaker Change: It absolutely no that's very helpful. So.
Speaker Change: So just kind of on the online filter tracker. Just curious you know when you guys exactly launched that and have you guys already started to see that reflect and people kind of ordering these filters on time versus you've mentioned several times since we've been covering that but yeah. You know a lot of times, whether it's because they're just.
Speaker Change: So again it doesn't sound like it's intentional it's just they have a lot on their plate there focusing on their business it might not be ordering these as promptly as they should be so it. So have you already started to see the kind of shift have you seen that start to pay off or is it too early to tell.
Speaker Change: Too early to tell we are just in the beta phase we are signing up a few customers, making sure we work out the Kinks and what we're finding is there's another feature we'd like to add well it'd be good if you could do this so we're we're probably need to say, it's done and move on at one point, but it's it's proven so exciting and different capabilities.
Speaker Change: Things that we'd like to do to enhance the functionality. So it's really early in those phases, we've been talking about it internally for a few months and we're just happy that it's finally ready to start launching rolling out to customers and we're starting to get those results now, but that's still in early phases.
Speaker Change: Got you I appreciate that and then my final question is on the N. M. P that you discussed in your prepared remarks. So are you guys currently servicing any customers for the express purpose of filtering some micro plastics or is it something that you have had seen maybe.
Speaker Change: Industry demand for it and you guys are kind of responding to it and looking to kind of enter that space more aggressively does it seem to be a pressing issue.
Speaker Change: Yeah. This is been something that has come up fairly recently.
Speaker Change: And I read an article that said the average person consume a little bit of a credit card or <unk>.
Speaker Change: Six every week and I just started to think about what can we do about that being a filtration company there aren't regulations, stating what the acceptable limits are in certain areas and there's not really a driver other than people wanting to do the right thing when it comes to the damage that it can potentially data humans. All of this is still being evaluated still under research.
Speaker Change: Theres just a lot of gaps in understanding what it does long term effects of human health, how it disrupts development and people in adults. So we are trying to get ahead of that.
Speaker Change: By taking a look at our technology because it just uses size exclusion, we have a whole of a certain size anything bigger than that whole doesn't pass through.
Speaker Change: So without any.
Speaker Change: Scientific thought there, we can easily removed and EM piece, because they are larger critical size.
Speaker Change: But they are smaller than the average pull through on the market and so they do pass right through so.
Speaker Change: Because we have that smallest core size in the market, where but that's still to the company to address these at M. P's and that got me really excited as a new opportunity that we need to explore so we first have to figure out what are the holding capacity how long will that last where we recommend it for building that that information up and we'll get to the point, where we can launch this.
Speaker Change: As a solution that people can consider.
Speaker Change: And lots of different markets.
Speaker Change: But if you think about the health care and hospitality market. There is the joint Commission, there's CMS Theres Ashray. There's all these regulating bodies that tell them, what's good what's bad and good suggestions.
Speaker Change: Not that same guidance can you talk about schools and government facilities. So it's a different cell that's a different it's a push versus the pool, so long and we're ready to provide the products. Once we get all of that with details worked out. So it's very exciting for us. It's you really hear more and more about it as things go along and I'm, hoping that it represents a significant opportunity for us.
Speaker Change: Chris.
Speaker Change: Yeah.
Speaker Change: Awesome I appreciate you guys, taking the time to answer my questions and I'll hop back in the queue.
Speaker Change: Okay. Thank you.
Speaker Change: The next question comes from Mike because tightest with private Investor. Please go ahead.
Mike: Good afternoon, and congratulations on the quarter guys. Great job. My question is naturals husbands on the hospitals and health centers of course can you also just mentioned on <unk>.
Mike: Schools municipalities, but Theres also senior living centers and more that you've started selling to even even.
Mike: Even before the the nano plastics possibility do you see this trend of increasing your Tam continuing.
Speaker Change: Well, Mike It's a great question and good to hear from you.
Speaker Change: That's what has been selling to those entities and part of it comes from where we were born getting our beginnings in the dialysis space and taking that technology and expanding it into patient care facilities, what you'll see when we start looking at the Tam or other places schools and capacities senior centers Correctional facilities government buildings is there.
Speaker Change: You don't always have the same drivers that youre going to find in those health care facilities.
Speaker Change: As mentioned a few of the regulating bodies like the joint Commission, an entre that Paulo and become greeting adhere to when we did deal with those patient care facilities. There's not the same driver core school believe it or not saying that you must provide this type of quality of water.
Speaker Change: But we do see that yields the articles and documentation of warehouse patients or students or inmates or whomever have been injured and lawsuits happen. So we can get called in and can solve some of those problems. So I do see this continuing I look forward to it being less of a push it more of a pool, that's what I was answering that I missed.
Speaker Change: His question, but.
Speaker Change: But in the meantime, it's all about my team and the never seen educating those who are.
Speaker Change: Dealing with ramifications when they do have those different contaminants and microorganisms impacting because our infection control products are really are providing a great solution for those places, but otherwise without significant problems, so expanding that Tam and fast is really good.
Speaker Change: And we see this continuing it won't be a source of driving new business in the future.
Speaker Change: Thank you for that question.
Speaker Change: Sounds great. Thank you and one more question if I could could you elaborate on that.
Speaker Change: OEM agreements that you have.
Speaker Change: Crude narrow filter stylus or otherwise.
Speaker Change: Sure sure I can I can speak to that I will have to be a little bit general Wanna mention names just out of respect a lot of the Oems are competitors with others, but.
Speaker Change: When youre dealing with dialysis and <unk>.
Speaker Change: People are using our devices their FDA cleared class II.
Speaker Change: They become something that is worked into the clearance that device will obtain so often we have to working in parallel for months. If not years ahead of the launch of a particular product.
Speaker Change: So that the solution when introduced are released it becomes something that is.
Speaker Change: But you have to use a specific configuration in order to maintain that.
Speaker Change: The use case and the clearances that that device has achieved so we have.
Speaker Change: A fair amount of OEM agreements, that's a pretty significant part of our business and we're always looking for ways to improve how we're performing and delivering value so that those Oems choose us.
Speaker Change: For the next product revisions and also for the new product launches.
Speaker Change: They may have requirements that are filters cannot perform today, maybe its the size restraint or a capacity constraint. So we're able to take.
Speaker Change: Taken redesign, especially based on our smaller size accommodate some of those needs. So it would be we'd become a really favorable partner from the Oems perspective.
Speaker Change: So those agreements are nurtured and treated extremely with high regard in importance in priority in our organization and we have some great people on the team who are experts in what they do whether it be dialysis or working in hospitals enable to meet the needs of some of those Oems.
Speaker Change: Thank you for that and Britain with your question.
Speaker Change: Thank you I was going to ask the third question on the exciting nano plastics opportunity, but you actually covered that already so so thank you very much and again congratulations.
Speaker Change: Thanks, Mike.
Speaker Change: Again, if you have a question. Please press Star then one.
Speaker Change: The next question comes from Encore Sagar private Investor. Please go ahead.
Speaker Change: Yeah.
Encore Sagar: Mr. <unk>. Your line is open did.
Encore Sagar: Did you have a question or perhaps your phone is muted hey, good afternoon.
Encore Sagar: Sorry about that hey, good afternoon, Robert and Judy. Thank you for taking my questions a good quarter.
Encore Sagar: With growth on the programmatic revenue.
Speaker Change: Robert You you you.
Speaker Change: Laid out a couple of I think good initiatives on the recurring revenue part the filter.
Speaker Change: Thank you renegotiated the contracts with distributors to nowhere the filters are placed.
Speaker Change: And now this online tracker filter.
Speaker Change: Where the customers would know when the filter needs to replace.
Speaker Change: If you can share any insights any early insights that you have seen on how the screen even help two.
Speaker Change: Accelerate the programmatic revenue further.
Speaker Change: And then what we have seen now that'd be great.
Speaker Change: Sure sure.
Speaker Change: That's great insight and we started looking at this a couple of months ago and what we're noticing is the team's working really hard and it's closing a lot of new business.
Speaker Change: And we're not losing customers active customer sites stay pretty high but yet we werent seeing that recurring revenue our baseline that's where we were starting from quarter. After quarter, you seemed lowered lower so that the numbers didn't add up we started digging into accounts and particularly me out where we sold filters.
Speaker Change: And they've got a certain number of machines and we're expecting a certain amount of turnover. It just wasn't achieving.
Speaker Change: Achieving that turnover well it turns out nursing homes for example, don't have big budgets and they could choose to leave them on for years before they change it out instead of three months or six months and that's not good sometimes it's just neglecting and not having the staff to go find it and change it more often than not it's just forgotten about and not the.
Speaker Change: Priority when they've got short staffs and budgets going other places so by having a reminder to be able to tell them that hey, this was installed a certain time period to go it is driving that change or should drive that change that's the theory.
Speaker Change: And we have an offline tool where you can look at a spreadsheet and say okay. It was 46 six or.
Speaker Change: Six months ago, but often the response was well we didn't install it yet or we installed a month. After we bought it so it wasn't real clear, but being able to scan that that QR code on that filter once it's put in place gives us the exact timing.
Speaker Change: Installed.
Speaker Change: So that we got that gap and get more accurately and automatically tell what and when and where things are supposed to be installed so.
Speaker Change: So that we don't get the 75% or so that we're not replacing them when they're supposed to be and that's on the optimistic side.
Speaker Change: So the I'm very optimistic that we will get the growth in programmatic business.
Speaker Change: That's reflective of the new sales that were achieving on a daily basis.
Speaker Change: That's exactly your question, but that is that's that's.
Speaker Change: That's great.
Speaker Change: I agree I think it's easier to.
Speaker Change: Sell through the fivefold, there's an existing.
Speaker Change: Installations that you have been to just find a sell new five brand.
Speaker Change: Brand new devices from scratch.
Speaker Change: That's great good to see that and I think in the in the presentation that you had.
Speaker Change: Go on fresh the planet Microcap Conference I think you laid out a few initiatives for growth.
Speaker Change: And I think there there there is there is a bunch of them micro plastics you mentioned.
Speaker Change: New devices.
Speaker Change: And then there was commercial there could be even.
Speaker Change: Some foreign distributors, if I could have you probably.
Speaker Change: Summarizing go through at least the tweet hop can you should as you think.
Speaker Change: You're working on.
Speaker Change: Currently and that could help for this year's top line that'll be great.
Speaker Change: Okay no problem.
Speaker Change: That last phrase that you put in there for this year as topline made the difference thats going to stay with a gross misuse change really tough in the short term or long term. However, the short term or this year impact I expect this digital tool to really be a driver and it's not because it's going to bring in new customers, but for the reasons, we talked about earlier.
Speaker Change: Of it not letting us forget about filters that we've already won we did the hard work we delight the customer we got the units installed why not get the filter changed out every six months and by the way. It's the only FDA cleared for six months beyond that we're not guaranteeing performance. Although it doesn't just turn off at six months one day.
Speaker Change: I do think that this digital tool getting that in the hands.
Speaker Change: All of that.
Speaker Change: Hospital officials, those who have skin in the game when something doesn't go as planned or expected to drive that programmatic change out on a recurring basis.
Speaker Change: Next I think that this cross selling where we are maybe we're in there taking care of the ice machine. While we also have sterile processing products and that's a big part of the hospital.
Speaker Change: Hospitals standard filters, as well or bubble or is water fountains showers sinks inline filters theres just so many different applications.
Speaker Change: Typically you just bought into a facility for one application. So that's.
Speaker Change: The cross selling more land and expand strategy is going to be probably the second bigger driver and then nurturing our partners and distributors. So it's getting out to these events speaking at conferences I will be at APEC in a month or two we've got the ashy conference coming up in California.
Speaker Change: These are big National events, where you get all the infection control people you get the members of the conferences that are responsible parties at these facilities for maintaining infection control.
Speaker Change: Protocol water management programs.
Speaker Change: Those are the people, where we're gonna have to educate on the new guidelines that come out.
Speaker Change: The new technologies available and mitigation strategies against pathogens and other things that impact the infection control space.
Speaker Change: If you ask what the top three are that we will have the impact this year I pick those three.
Speaker Change: But as you noted there are others too that were discussed during the plant microcap.
Speaker Change: Uh huh.
Speaker Change: Yes.
Speaker Change: One last one regarding the gross margin.
Speaker Change: There was a nice gross margin improvement do you.
Speaker Change: Back to continue from that you know shipping Oh, you know gross margin side that you're that you captured do you expect that to continue for the restaurants a year.
Speaker Change: Yes, I'm going to let them Judy to handle that question I'd I have my own thoughts.
Judy: She's been digging into it pretty deep.
Judy: How do you view it.
Judy: Yeah, I'm, sorry could you repeat the question again for some reason it didn't come.
Judy: From a gross margin standpoint, Judy I think the gross margin was higher I think about 62% compares with loss of last year's quarter. So do you expect that to continue for the throughout you expect to keep that gross margin or the shipping will fluctuate and Oh, yeah, Okay and thank you for repeating that it was.
Judy: If that didn't come here, because we were very pleased with Martin our shipping expenses, we've been managing very carefully they were unusually high during the commentary that we've been working very hard and managing.
Judy: Air versus sea shipments and working through that so we feel right now without sort of an economic increase overall in shipping expenses. They felt pretty good about that the negotiations and the better terms with our supplier that's something that continues.
Judy: Ultimately our gross margin was affected by a mix.
Judy: <unk> put in larger customers may have a different discount here, but we feel pretty good about maintaining relatively strong margins like this we'll see quarter to quarter there'd be some fluctuations, but I don't think this is just such an anomaly.
Judy: Okay.
Judy: The next question comes from Nick Farwell with Arbor Group. Please go ahead.
Nick Farwell: Judy My follow up in the last Gentleman's question.
Nick Farwell: You indicated that gross margins might be sustainable for a couple of factors one of them is better terms from your supplier.
Nick Farwell: Is that in part are reflected in any way did currency have an impact either to your income statement or balance sheet.
Speaker Change: Thank you for the question no currency has just a modest.
Speaker Change: Negligible effect, when we renewed our contract with our largest supplier. We did do a good job at negotiating terms that were more favorable in the longer term supply. They know our volumes are growing so that really relates to the actual pricing of the raw I've just finished products that we buy.
Speaker Change: And I'm curious given the base business grew 12% to what degree.
Speaker Change: Does that in your mind reflect a softer economy or perhaps just a.
Speaker Change: Short term perturbation.
Speaker Change: It seemed to Brett.
Speaker Change: Versus past history seemed a little more modest than a normal.
Speaker Change: Year to year growth or sequential growth.
Speaker Change: See how seasonality in the base business not including the emergency response.
Speaker Change: Yeah, Hi, Judy I'll take that question, if you don't mind.
Judy: Hi, Nick I was hurting is going.
Nick Farwell: It's a.
Nick Farwell: Robert I appreciate it.
Robert Banks: No worries, it's a really good question and something I've been keenly aware and focused on over the past few weeks, if not months coming up to the close of the quarter and Ive got probably three different attribution to guide that my first response is if you look at the number of hospital beds as vindication of the perform.
Judy: So if the health care, our patient care market that number is not growing it's pretty stagnant if not lower.
Judy: And that in case the number of.
Judy: Support services, whether it be ice machine showerheads and spouses isn't isn't growing accordingly, so from that aspect. The market's flat. If you look at health care industry overall, it's only growing at two 3% tops.
Judy: So again, another indicator and if you look at just gross domestic product other things. So when we hit a number like 12%.
Judy: Modest, yes, still far outpacing the growth of the industry itself.
Judy: So I think the we're kind of a victim of our own success, because we set up.
Judy: The expectations of huge growth numbers, which we do expect to continue to grow in double digits.
Judy: Just.
Judy: Personal expectations, not anything where we're committing to our guiding but the growth of 12%, although modest not something to be ashamed of.
Judy: Another thing I would add is the winter months, the colder months tend to be seasonally lower and sales.
Judy: There has not been a lot of season.
Judy: Seasonality quite evident before somewhat masked by that emergency response, but when I strip away the numbers and look just at that programmatic and core business I do see a seasonality.
Judy: Kicking quite clearly.
Judy: On top of that so.
Judy: Those are a couple of three things I would say in response to the 12% number.
Judy: It's it's nothing to be disappointed about from my perspective as far as the reflection of how well we're closing business. We are taking market share from our competitors and we're not losing or bleeding customers on the back end so.
Judy: I'm pretty happy from that perspective, and imports are still delivering those types of numbers going forward.
Speaker Change: Yeah, I'm curious Robert what is the mix between direct and.
Robert Banks: Your distribution your various distributors and has that shift have any impact on the on the higher end of the range of gross gross profit margins.
Robert Banks: When we look at our partners distributors.
Robert Banks: We have far fewer than we did this time, one year ago, and that's very very intentional and deliberate those who are still with us are much more aligned with how we do business. The value story that we sell they've got the relationships in places, we would not otherwise have a chance to touching.
Robert Banks: When you look at the small number of sales people that we have and the.
Robert Banks: Thousands of targets out there there's no chance of us touching them. All so the distribution partners are essential on the trick is making sure. They understand the value that <unk> provides when it goes to solving problems for a different customer base.
Robert Banks: Facilities, so the they're able to go in and sell at.
Robert Banks: So the products and it's not a discussion about price.
Robert Banks: How fast can you get it when you take care of everything from installation and maintenance perspective, so they're commanding premiums over the alternatives when we sell direct.
Robert Banks: Often we are offering some type of discount or.
Robert Banks: And from a customer perspective, there isn't a lot of difference from a margin perspective, it's slight but I.
Robert Banks: It's part than volume of sales far outweighs the gross margin dollar positively outweighs the what.
Robert Banks: What we give up and having a partner barrick delivering the goods as well. So it's a it's a good question, we always keep an eye on that mix Theres been no significant change one way or the other.
Robert Banks: Two two.
Robert Banks: Say that that's what's.
Robert Banks: Impacting that gross margin, it's more of the idle that Judy mentioned earlier.
Robert Banks: So really I think I hear you, saying that at the operating line the sale through direct quote unquote.
Robert Banks: Versus direct is roughly the same.
Robert Banks: Gross margin may be different but the allocation of SG&A is perhaps if you did it in some fashion or could do it would be somewhat lower given the volume of a direct order.
Robert Banks: Hum.
Robert Banks: Okay.
Speaker Change: I'm not sure I would say the same.
Robert Banks: But it's not significantly different how is that for us.
Robert Banks: Entering.
Speaker Change: [laughter] that's good enough.
Robert Banks: And then last question I am curious as head count changed dramatically over the last year.
Robert Banks: Oh good question genetically know however, we have been adding resources as the sales grow to support the additional resources.
Robert Banks: We've noticed that there is a certain capacity that person in the region can handle and once they reach that saturation point, we've got to add more heads to be able to cover more and still provide that personal touch with direct and guidance training for the partners. So we've added in the areas of sales and continue to.
Robert Banks: Selectively add but we're being extremely prudent about where we deploy heads and what costs. We incur because we think one of the bigger strength that we have and we remember the history quite well, but we came from.
Robert Banks: That we have to maintain.
Robert Banks: What level of performance that we are deploying the capital in the most efficient use so that we return that value for our shareholders.
Robert Banks: And then my last question briefly you've moved into a new facility and consolidated to what degree is that and it's been reflected in the better gross margins in particular, but perhaps the ability to generate a positive sustainable positive cash flow.
Speaker Change: Oh, that's a very good point the new.
Robert Banks: The new facility.
Robert Banks: Expansion to where we were at their main headquarters allowed us to cease use of a couple of other sites some off site storage another facility and the further relocation.
Robert Banks: So it's a bigger place and it's much closer so that the amount of effort transiting back and forth. When it does occur is much much less the media costs.
Robert Banks: So that does result in some savings.
Speaker Change: I don't know if I quantify that.
Robert Banks: Just getting everything settled in getting that operation up and running and getting the inventories at the right levels.
Robert Banks: So I think that may be reflected in Q1, maybe more so in the future a future.
Robert Banks: Future quarters, I don't know Judy if you had anything to add to that or might be able to quantify any of it I don't know that we've done that exercise to just show what that impact has been worse.
Judy: No I think you handled it well I don't think youre going to see a dramatic change in our cost but.
Judy: It will help.
Speaker Change: Okay. Thank you I appreciate it Judy Robert Thank you.
Speaker Change: Thank you.
Speaker Change: The next question is a follow up from Thomas Mcgovern with Maxim Group. Please go ahead.
Thomas Mcgovern: Hey, guys. So I thought I'd follow up an accident last two questions are well suited for my outstanding questions. So firstly on the head count increases that you guys did over the past year, you've kind of answered half. My question, saying that you guys are going to continue to selectively add heads where it is needed but you know given given what you discussed in terms of short term.
Speaker Change: Catalyst you know between the digital tracking tool the cross selling opportunity in the event.
Speaker Change: Each of these seems to me as though you'll need boots on the ground to do that.
Speaker Change: From where I stand it looked like they could be you know fairly segmented in terms of.
Speaker Change: Skills or expertise do you guys anticipate any need well first of all you know do you expect a similar based based on the demand you're seeing in the market are you expecting to.
Speaker Change: Pretty similar in terms of head count total number of head count and similar to 2023 more or less and then second question is have you guys looked at or considered adding maybe specialized salespeople are whether its to target. These N N pes or to you know really get to know the digital tool and bring people and bring your sites onboard with that or is it more just you know.
Speaker Change: Based on territory with general salespeople to go out and kind of where multiple has to get you guys to where you need to be.
Speaker Change: So Thomas Thanks for that follow up question I do have to wonder are you sitting in my staff meetings.
Thomas Mcgovern: Very good thoughts insights and all things that we're thinking about.
Thomas Mcgovern: I love the <unk>.
Speaker Change: The thought that you just said I mean, it's really just what the words in my mouth.
Speaker Change: When it comes to the absence I'll I'll start there first that does require some specialized expertise we don't have that in house. So we're working with a partner that actually already has this software and technology developed launched and has been running at in other spaces and we're just adopting it and changed it to fit ours. That's how we were able to go until they move out.
Speaker Change: Minimal viable product in such a short period of time and now enhancing it to match what we went.
Speaker Change: Literally only spent a few months on this and if you've ever been in the software development World starting from scratch can take a year or so so that's a we took advantage of existing tool and just repurpose it for our needs.
Speaker Change: Save time cost and also we didn't have to bring expertise in house.
Speaker Change: When it comes to N M P's in other future looking technologies we.
Speaker Change: We did just add an engineer we're looking to add another one.
Speaker Change: And we are selectively looking for people with certain skill sets.
Speaker Change: To help handle some of these future growth areas and all of what we're doing this is going to put into our budget baked into our profitability goals, making sure that the sales support some of that growth and.
Speaker Change: You can deploy capital that I mentioned, where it makes sense and I'm using an ROI type decision for everything that we're doing if I add this hedge spend this money will I get that return over what period of time and does it make more sense to spend here than it does on this other project. So that's been very helpful as far as making sure that we felt.
Speaker Change: Well about where we are spending and where it makes sense to lean forward and take a risk for bringing on an asset you might return greater growth faster, we're going ahead and doing it.
Speaker Change: Hope that answers your question.
Speaker Change: Thanks for that one that's good insight and insightful question.
Speaker Change: Alright I appreciate it doesn't answer my question and then the final question I had for you guys is on that warehouse right. So.
Speaker Change: Maybe it doesn't make a huge impact in any one particular quarter, you're hoping to see some margin accretion over the long run as a result, two questions. On that is are you guys still using any third party warehouses across the country, maybe just to make sure that your distribution points are at or near several sites, particularly as you guys continue to expand and the second question.
Speaker Change: As with your in house warehouses as a newly developed warehouse, how how long do you expect.
Speaker Change: The the capacity the warehouses, you think will be able to service.
Speaker Change: Your inventory storage requirements for at least the foreseeable future or do you anticipate a need to bring on a third.
Speaker Change: Third party warehouses or possibly expand.
Speaker Change: The warehouse.
Speaker Change: Appreciate it.
Speaker Change: Sure I can address that so the first question as far as I know, we don't have additional storage sites or other and apparent.
Speaker Change: Facilities throughout the country really that was the goal to get rid of all of those extra expenses.
Speaker Change: To address the point, you mentioned were being closer to our customer we are a key supplier. We do have partners now that are in the stocking.
Speaker Change: Mentality.
Speaker Change: Stocking position, so that we have been able to lean on them, even if it's not account that they actively service to be able to get something out the door, but we still maintain 24 hour or less type of response with emergency orders shipping out same day.
Speaker Change: The team will wont hesitate to drive in seven eight o'clock at night on the weekend and get something shipped out driving it personally to a shipping carrier so.
Speaker Change: Having a closer facility to service the west coast or something that effect may be.
Speaker Change: There may be some benefit there, but it's going to be hard to beat the speed with which we turnaround things today.
Speaker Change: So that's the first part of your question the second part about needing to expand again.
Speaker Change: Have certain milestones built into once you get to this point, we're going to need to add that.
Speaker Change: <unk> facility and the particular space, where we are now.
Speaker Change: I'm only utilized in about 50% of what I'm going to have available.
Speaker Change: The short term so at that point.
Speaker Change: With that space becomes available our sales should require rescue that additional space and we will take advantage of it. So it was a very deliberately planned.
Speaker Change: Very convenient and an excellent real estate agent that we've been working with them, making sure that we've got our needs met and we're planning out for three to five years and make sure that everything matches up very well.
Speaker Change: Great I appreciate you guys, taking the time to answer all my questions. Congrats again on the quarter.
Speaker Change: Thank you.
Speaker Change: The next question comes from Ralph while with our well investment management. Please go ahead.
Ralph: I Rob at night.
Ralph: Nice presentation today.
Ralph: I was wondering.
Ralph: In the past.
Ralph: They talked about customer retention.
Ralph: And I was wondering what's the percentage of the customers have been retained.
Ralph: Versus new customers and.
Ralph: Have you seen any any price pressures.
Ralph: In the end.
Ralph: What you're selling.
Ralph: And are there any.
Ralph: A major new accounts that you've taken on board that you.
Ralph: Close to taking on.
Ralph: Okay and then.
Speaker Change: I have another question.
Ralph: Okay.
Speaker Change: Oh, okay.
Speaker Change: So I'll start with the retention question.
Speaker Change: So we the retention rates.
Speaker Change: That's correct, let me go back a little bit, but start with the active customer sites.
Speaker Change: We take the number of active customer sites and you come up with a net sales net new customers and that's a function of what we've lost versus what we can't gain and we have put a rolling retention rate and quarter over quarter, we hover right around the same rate or quarterly retention rates are right around the mid nineties.
Speaker Change: To.
Speaker Change: 90, 294% so.
Speaker Change: That's been very very good very high it tells us that our customers are.
Speaker Change: We're satisfying them and despite our higher than the competitive competitive price, we're still retaining them because frankly, it's just a different product with the the way that we perform.
Speaker Change: Now the.
Speaker Change: From a price perspective, we do get pressure.
Speaker Change: We do have a product that is a premium product there is a significant amount of quality assurance and checks and.
Speaker Change: Just a lot that goes into a medical device versus the standard off the shelf filter.
Speaker Change: But when customers realize that what they were spending on.
Speaker Change: How frequently they were changing the previous filter how to recover from Alicia outbreak that they no longer have to.
Speaker Change: The price of our filter just becomes a moot.
Speaker Change: Quint.
Speaker Change: So from that perspective.
Speaker Change: Pressure, yes, however, in our premium product position I think it's it's well justified and our customers seem to agree. So yeah, we'll continue to leverage the performance and making sure that.
Speaker Change: We're providing more value then we're charging and we're not leaving too much value on the table when it comes to how we price and just as far as gaining customers and keeping customers.
Speaker Change: Hum nuts that.
Speaker Change: Cover your questions there.
Speaker Change: Missed one or two points, but let me know if I didn't.
Speaker Change: Okay.
Speaker Change: You've been there I'm not sure, but it's probably closer to a year now and.
Speaker Change: You saw a.
Speaker Change: Significant opportunity.
Speaker Change: At NEP grows then you you know the water business quite well from your past.
Speaker Change: And you've done well.
Speaker Change: Other companies in the past.
Speaker Change: What would you say.
Speaker Change: Now that you've been there for a while what is.
Speaker Change: Come faster and better.
Speaker Change: Then what you might have expected and.
Speaker Change: What do you feel are your major.
Speaker Change: Challenges.
Speaker Change: Going ahead.
Speaker Change: You may not have thought where its major when you joined.
Speaker Change: Okay.
Speaker Change: Let's see I'll start with what's gone better.
Speaker Change: <unk>.
Speaker Change: The fact that this team will jump through hoops run through a walk to get to filter out the door to a customer and meet the demand is just incredible I've never experienced that in a company where the people that work here. They take it personal every customer need every desire to have something installed it.
Speaker Change: In the world to them.
Speaker Change: And it shows and when we have the sales team out willing to sacrifice on birthdays and weekends and kids events to go make sure they take care of the customer.
Speaker Change: That's how we win these customers that stay with us for life.
Speaker Change: And that's I didn't see that in previous places institutions, who I worked at.
Speaker Change: At least not to that extent.
Speaker Change: And also know that this team will pivot and change when something isn't working or when there is a certain need that is not a standard off the shelf, we're jumping through hoops to try to figure it out.
Speaker Change: And we'll put our heads together and theres, such smart people that have way more talent and experience in this industry than I do working here, it's just a matter of giving everybody a chance to help solve the problem and it works really well. So those have been my really pleasant surprises takeaways either responses have you.
Speaker Change: To reflect on the first year from a.
Speaker Change: What was the second part how did you phrase it it was things that we would want differently.
Speaker Change: What has it been more challenging to you and and and how.
Speaker Change: How are you working those things got it got it so the more challenging thing has been if you have a customer who has a problem and.
Speaker Change: They don't have the regulatory body, telling you need to fix that problem. The sheer complacency, sometimes to not want to address the problem it and only do what their required has been somewhat startling.
Speaker Change: And frankly, it's I've had customers, saying I'm not going to spend any money unless I'm told to I just don't have the budget don't have the people.
Speaker Change: I got other problems in the facility.
Speaker Change: So these are typically life or death situations when people getting sick.
Speaker Change: So.
Speaker Change: <unk> addressed that.
Speaker Change: So I got some feedback on the line.
Speaker Change: We've been addressing that through education, just making sure we're sharing exactly how yes. It may be more upfront costs, but it's saving you more in maintenance.
Speaker Change: Let's filter changes less response cost dollars.
Speaker Change: So it's been working it with just the slow Bryan and Dan combat when it comes to sharing that message with the.
Speaker Change: The parties that.
Speaker Change: We are making those decisions so so yeah.
Speaker Change: Yeah, good questions insightful questions.
Speaker Change: And it's.
Speaker Change: And a nice nice year so far.
Speaker Change: Robert I suspect that there besides I mean, you're a major area is about the hospital business nursing homes and.
Speaker Change: Dialysis area and I would assume that there are other areas that could use.
Speaker Change: In an important way, perhaps very pure water and I'm just wondering.
Speaker Change: You know.
Speaker Change: Whether you have the capability at this point to go after some of those areas and if you do how you would go about that and how how do you see the revenue mix.
Speaker Change: Perhaps changing over the next two to three years.
Speaker Change: The major reliance on hospitals and nursing homes and.
Speaker Change: And dialysis.
Speaker Change: Are there any significant thoughts that you might have in that area and of course, you mentioned nano plastics before.
Speaker Change: Yeah, that's what I was going to revert back to that.
Speaker Change: The example of an area where we have.
Speaker Change: Pivoted into are starting to look at different areas.
Speaker Change: Hospital, our patient care.
Speaker Change: Wins of infection control or to make sure I used that word patient care and infection control as opposed to a hospital because theres clinics, there's senior living facilities Theres Correctional facilities lots of places that house people and take care of people.
Speaker Change: Those are all our target markets and it makes sense because there's regulation driving it now if we can get that same regulation guidelines from school boards or from government agencies recommending certain water quality standards and government buildings those are going to be the areas that we pivoted to fastest.
Speaker Change: Other than that it's us, creating a market or.
Speaker Change: A push versus pull and that hence the nano plastics.
Speaker Change: Something that we eat through size exclusion can already solved and resolved so its not inventing a new wheel, it's not creating something new muscle. It's deploying what we already have in a different application.
Speaker Change: So those are the areas that we're going to see impacting growing fastest.
Speaker Change: Other places, but I am getting inquiries here and there for applications.
Speaker Change: I won't mention too many of them here, but.
Speaker Change: When it comes to gel processing, that's an area that also has already suited for our technology. So we're going to.
Speaker Change: Dive into sterile process and how we meet the needs of.
Speaker Change: Places that have instruments that need to be cleaned after coming in contact with them.
Speaker Change: Patients up whatever nature. So all good growth areas I do see those becoming a significant part in the future and Paul.
Speaker Change: And parties that are coming to you for this capability.
Speaker Change: I've had two type of those two of those types of requests in the past month.
Speaker Change: I won't say, who or which ones but.
Speaker Change: There's areas that we hadn't typically.
Speaker Change: Dealt within the past outside that patient care realm. So that's exciting.
Speaker Change: Mhm, Yeah that does sound good, especially if they are coming to you.
Speaker Change: Yep.
Speaker Change: Okay. Thank you I. Thank you.
Speaker Change: Okay.
Speaker Change: Okay. This concludes our question and answer session and then <unk>, Inc. First quarter 2024 financial results Conference call. Thank you for attending today's presentation you may now disconnect.
Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Yes.
Speaker Change: [music].