Sharps Compliance Corp.
Q2 2022 Earnings Call Transcript

Published: 26 Jan 2022

[Operator:]

Good day, ladies and gentlemen and welcome to the Sharps Compliance Second Quarter Earnings Call. At this time, all participants have been placed on a listen-only mode and we will open up the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Jen Belodeau with IMS Investor Relations. Ma'am, the floor is yours.

[Jennifer Belodeau:]

Thank you. Good morning and welcome to the Sharps Compliance second quarter fiscal 2022 earnings call. On the call today we have David P. Tusa, the company's President and Chief Executive Officer; and Diana P. Diaz, Executive Vice President and Chief Financial Officer. David will review the company's business performance, operations and outlook, while Diana will review the financials. Immediately following their formal remarks, we will take questions from our call participants. As you're aware, we may make some forward-looking statements during the formal presentation and in the question-and-answer portion of this teleconference. These statements apply to future events, which are subject to risks and uncertainties, as well as other factors that could cause actual results to differ materially from where we are today. These factors are outlined in our earnings release, as well as in documents filed by the company with the Securities and Exchange Commission. These can be found at our website or at sec.gov. So, with that, let me turn the call over to David to begin the review and discussion. Go ahead, David.

[David Tusa:]

All right. Thanks Jen and good morning to everyone and thank you for participating in our second quarter earnings call. I am going to first cover a few highlights of the quarter. as you see the second quarter revenue of $18.9 million increased 11% over the prior year and 36% sequentially. Our route-based locations, which we really believe is the best way to measure the success of our route-based offering. Those locations increase 17% from about 14,900 to 17,400. Professional market billings grew 15% year-over-year, consistent with the increase in the route-based customer locations. Our unused medication revenue for the quarter increased 9%. And while this was driven by was a 25% increase in the inner liner sold, it was actually 31% increase in inner liner sold for the year-to-date -- fiscal year-to-date period. And I think this really illustrates the success in the recurring revenue model from the MedSafe offering. We saw a bounce back in the sequential quarterly immunization related mailback billings increased by $2.8 million. And this is reflective of the continuation of the COVID-19 vaccine and booster shots administered in the retail pharmacy level. Our Long Term Care market billings for the quarter and year-to-date were down, and they were down because of the headwinds. And as we talked about last quarter, the September and the December quarters of last year were heavy, significant volumes in COVID related waste. That was being generated by our Long Term Care customers. We also had very high lab related business as well. But when you take out the roughly 400,000 headwind in the September quarter, 800,000 headwind in the year-to-date period then the route-based business overall increased by about 15%. We closed on the Affordable Waste acquisition in October, and we're presently working on more acquisition opportunities. You may have seen the recent PharMerica partnership announced. Let me just speak to that, just to make sure everyone one understands the importance of that. We really pride ourselves in our ability to solve complex problems for customers. I think we're really good at that and pressing problem facing the Long Term Care industry has been the proper cost effective and compliant management of unused medications, including controls substances and hazardous waste. So, the DEA rules were changed back in 2014, or the DEA adopted the Secure and Responsible Drug Disposal Act. And that was the beginning of the MedSafe. We designed the MedSafe based upon the DEA adopting that rule. Well, those rules were primarily designed for Long Term Care and also retail pharmacy. And I think we've done a great job in retail pharmacy with the MedSafe and I believe becoming a leader. So, now it's time for Long Term Care and the Long Term Care market to be able to adopt the MedSafe and the MedSafe it's been slow to adopt. So, we need a catalyst. We need a catalyst to really start to drive the MedSafe offering in Long Term Care. And we believe the part with PharMerica could be that catalyst. It could help increase the adoption of the MedSafe and could raise awareness of the MedSafe and how we can make them compliant. We can save them money and we can provide a very, very convenient solutions for the Long Term Care business. So, we're excited about that. And again, we look at that overall as a potential, as a catalyst to move MetSafe sales in Long Term Care. So, let's look forward. We are quite energized to continue capitalizing on the opportunities we see. We're growing our leadership position in all the markets and in all the solutions we offer. We continue to focus on organic growth of the route-based business, and hopefully we'll have the opportunity to compliment that organic growth with acquisition growth. The acquisition pipeline remains quite vibrant. And again, we believe we have an opportunity or the opportunity to close more acquisitions. In immunizations, we've seen the ongoing emergence of the new variance -- can't watch news without hearing about the variance -- causing the COVID-19 related business landscape to remain quite fluid. But as we move through the any fiscal year 2022, we think the immunization related orders will be driven by timing and volume of the continued rollout of the COVID-19 shots and boosters. As a point of reference, we only have about 40% of fully vaccinated Americans that have received the booster. You heard -- everyone heard the news yesterday, the Omicron variant and how there is being a vaccine that's being specifically designed for that variant could be available to March of 2022. This morning we were talking about how the CDC is recommended a fourth shot for immunocompromised. So, we think we'll continue to see more immunization related orders, because of all this. Diane will speak to here in just a bit about the orders that we received or the revenue we received in the December quarter. So, we think we're extremely well-positioned to continue to take advantage of the opportunities. And it's really important to know from all of our standpoint that we're highly confident that we have the infrastructure in place as well to be able to support the current and the perspective customers and all the growth opportunities in front of us. So, with that, I'll turn it over to Diana and she can address more about the financials.

[Diana Diaz:]

Thank you, David. We reported revenue of $18.9 million, an increase of $1.9 million or 11%. Customer billings were $17 million in the second quarter of fiscal 2022, which is a decrease of $1.5 million or 8%. Billings for the second quarter are lower than the second quarter of last year due to the timing of inventory bills in our Pharmaceutical Manufacture segment and the timing of distributor orders in the home healthcare markets. Professional market billings increased 15% to $5.2 million in the second quarter of fiscal 2022 as compared to $4.5 million in the second quarter of last year, consistent with the increase in route-based customer locations that David described earlier. Retail market billings grew 4% to $6.4 million in the second quarter of fiscal 2022 as compared to $6.1 million in the same prior period. Within that retail market immunization related order orders were down slightly at $4.6 million in the second quarter of fiscal 2022 compared to $4.8 million in the prior year. Pharmaceutical Manufacture market billings decreased by $1.2 million to $1.9 million in the second quarter of fiscal 2022 as compared to $3.1 million in the same prior year period. The timing of inventory bills for patient support programs drove more than half of the $1.7 million decrease in mailback solution billings. Long Term Care billings decreased by $300,000 to $800,000 in the second quarter of fiscal 2022 compared to $1.1 million in the prior year period. And this was related primarily to heightened volumes of COVID-19 related waste management in the prior year, most of which adversely impacted the route-based business customer billings. Our billings for unused medications grew 9% to $1.9 million in the second quarter of fiscal 2022 as compared to $1.7 million in the same prior year period, as a result of a 25% increase in the number of MedSafe liners sold. Related to our MedSafe business, we installed 106 MedSafe during the second quarter. This was lower than our forecast going into the quarter, but consistent with the number installed in the prior quarter of 137 units. For the December, 2021 quarter, our installs of 106 units were lower than our forecast of 400 units, as we saw and continue you to see concerns in retail pharmacy related to additional MedSafe installs when their business is so focused on COVID-19 Omicron testing and vaccination activity. On a year-to-date basis, we have installed 504 units, down slightly from the prior year-to-date installs of 552 units. For calendar year 2021, we installed 817 units, which is down from the installs in the calendar year 2020 of 1,330 units due to COVID related activity required of retail pharmacies who chose to delay additional MedSafe installations at this time. We believe calendar year 2022 MedSafe installs will be driven more by Long Term Care than retail pharmacy. Related to utilization of existing installed MedSafe, MedSafe liners processed in the second quarter of 8,200 was up 23% over the prior year, indicating more traffic in retail pharmacies. Consistent with the trends and liners processed, MedSafe liners sold in the second quarter of 9,000 units was up 25% over the prior year. A total liners return since the program inception were 100,679 and MedSafe units installs were at 6,627 at December 31, 2021. Moving through the financials. The gross margin for the second quarter improved to 35% compared to gross margin of 33% in the second quarter of fiscal 2021. SG&A increased by about $600,000 or 17% to $4.4 million in the second quarter of 2022 compared to the same prior year quarter. The increase in SG&A is related primarily to about $200,000 in acquisition related costs. a $200,000 increase in the accrual of management incentive comp and continued investment in sales and marketing. We reported operating income of $2 million in the second quarter of 2022 compared to operating income of $1.7 million in the second quarter of last year. We recorded net income of $1.4 million or $0.07 per basic and diluted share this quarter compared to net income of $1.2 million or $0.07 per basic and diluted share in the second quarter of last year. We reported improved EBITDA of $2.6 million in the second quarter of 2022 compared to EBITDA of $2.2 million in the second quarter of last year. Now a few points about year-to-date results. We reported revenue of $32.8 million in the first half of fiscal 2022, an increase of 9% compared to revenue of $30.2 million in the first half of last year. Customer billings decreased 7% to $29.7 million for the first half of fiscal 2022. Gross margin was essentially flat at 30.6% for the first half of fiscal 2022 as compared to 30.7% in the first half of last year. But it was negatively impacted by about $800,000 of increased the fixed cost component of cost of sales. SG&A expense increased 14% to $8.6 million in the first half of fiscal 2022 compared to $7.5 million in the first half of fiscal 2021. This increase is related to the $200,000 of acquisition related costs, a $500,000 increase in the accrual of management incentive comp and the company's continued investments in sales and marketing. We recorded operating income of $1 million in the first half of fiscal 2022 as compared to operating income of $1.3 million in the first half of last year. Net income for the first half of fiscal 2022 was $600,000 or $0.03 per basic and diluted share compared to net income of $900,000 or $0.06 per basic and diluted share for the first half of last year. EBITDA was $2.2 million in the first half of fiscal 2022, consistent with EBITDA in the first half of fiscal 2021. Our balance sheet remains very strong, with $36 million of cash as of December 31, 2021, which compares to $41.2 million at the end of September, 2021 and $27.8 million at the end of June, 2021. We have working capital of $42.8 million at December 31, 2021 that compares to $7.9 million of working capital at the end of June, 2021. Our strong balance sheet provides us with the opportunity to execute on our broader acquisition strategy as we continue to work our active pipeline of opportunities. Looking forward to the March, 2022 quarter, we typically have seasonally low immunization related billings of revenue. For example, in the March, 2020 quarter, which was pre-COVID vaccine, we sold about $700,000 in immunization mailbacks. To-date, in the March, 2022 quarter, we immunization orders of over $1.8 million, so a seasonally low quarter is not expected in light of COVID related immunizations. Looking forward to the route-based business in the March, 2022 quarter, we expect to see about a 15% or more increase over the prior year March, 2021 quarter, if higher COVID related activity of about $300,000 in Long Term Care and labs in the prior year is excluded. And with that, I'll turn the call back over to David.

[David Tusa:]

Thanks Diana. Operator, let's go ahead and open it up for the Q&A.

[Operator:]

Certainly. Ladies and gentlemen, the floor is now open for questions. Your first question for today is coming from Gerry Sweeney. Please announce your affiliation, then pose your question.

[Gerry Sweeney:]

Hey, David, Diana, Ralph Capital, as you guys know. Thanks for taking my call.

[David Tusa:]

You bet.

[Gerry Sweeney:]

Wanted to talk a little bit about route-based business, the 17% growth in customer base. Can you give a little bit more detail on this growth? I think you've made some -- or not acquisitions, I apologize -- some investments internally with some internal sales and external sales. And just curious if this is broad based growth and where this is coming from. And is there an opportunity continue to invest and sort of drive this business from a --?

[David Tusa:]

Sure. It's broad base growth in all of our markets and the small and medium quantity generator market, everything to vet chain, the surgery center, it's across a board and we have invested. We've invested more and more in our sales team. And that's what we're pushing sales of all solution offerings in those markets, but we've been pleased with what we've seen on the route-based as well.

[Gerry Sweeney:]

Obviously, Long Term Care has been a headwind as they got used to dealing with COVID and reduced their PPE use and disposal. Has COVID shifted any other like growth in terms of outsourced, or the -- outside of hospital type of services? And is there any impact on that positively or negatively on the markets?

[David Tusa:]

No. The only thing I would say is we know we had the headwinds in the Long Term Care from the prior year period, and that's really it. I don't -- I mean, we're kind of continuing to work through obviously on the vaccine, the immunization side, and on the Long Term Care then, it's normalized. Although, I will say this, the Long Term Care, the lab side seems to be a bit stronger here in January. So, maybe what this latest variant there appears to be more volume coming out of Long Term Care and labs. And again what we've seen just for the month of January.

[Gerry Sweeney:]

Got it. And then switching gears a little bit to unused meds, made the comment that you're going to see more growth probably from the Long Term Care market over the retail pharmacy market. Obviously, retail pharmacies are dealing with COVID and there's a big focus there. But is there anything fundamentally shifting on that market in terms of rollout or opportunities for the --?

[David Tusa:]

Well, I think like you saw in Diana's numbers, I think we had originally inspection like maybe 400 MedSafe, and it was like 100, a little bit over 100 that we installed for the December quarter, so retail pharmacies are very, very, very focused on testing, on immunization, on boosters and all of the above. And that's where the resources are being focused right now. So, it's quite likely, and again, we look at it from a calendar year basis on the installs on the MedSafe, that as long as what's going on now continues, then they're probably going to be light on the installs on the retail pharmacy. Now, the way we look at it is we think the calendar year 2022 could be the year for Long Term Care. So what we're hoping for is that potential strengthen the Long Term Care on the MedSafe will make or more than make for any potential shortfall on the retail pharmacy.

[Gerry Sweeney:]

Got it. Okay. I don't want to ask too many questions. I know there's other people lined, so I'll jump back in queue. Thank you.

[David Tusa:]

All right. Thanks Gerry.

[Operator:]

Your next question is coming from Rob Brown. Please announce your affiliation, then pose your question.

[Rob Brown:]

Hi, good morning, David, Diana. I am with Lake Street Capital Markets. My question is really just though with Gerry. Is it -- with -- when COVID normalizes, would you expect that the unused medicine activity would pick up in the retail pharmacy or would you expect them to sort of reevaluate it, or how do you expect that long term?

[David Tusa:]

No. I think, it'll pick back up and go back to more normalized levels. It's just -- I don't think any of us know when we're going to get back to normal. I don't know if you've been in a retail pharmacy lately, but they're quite busy. But they expect, and we expect after we get through this, that they should be back to more normalized levels.

[Rob Brown:]

Okay. Great. And then, just in terms of the inventory build you're seeing at the customers. I think you talked about pretty strong immunization orders in the quarter. What's your sense on the inventory bill at customers and how sort of the activity is play out for the -- kind of the seasonality for calendar 2022?

[David Tusa:]

So that's a good question. I think I mentioned last call, I thought just based upon the limited knowledge that we had, that they may have had $5 million -- you're talking about excess mailback inventory.

[Rob Brown:]

Yeah. Correct. Correct.

[David Tusa:]

So, we know that that's been burned off that five, maybe down to two, but they continue to order and there's still some inventory levels that are out there. I don't think they're overly excessive. In fact, as you saw from Diana's numbers, we received quite a few orders in the -- end of December quarter. So, I tell you what's changed is there's no more flu, the mailback can be use -- it's fungible, whether it's for flu or any kind of immunization, COVID or shingles or whatever. So, I think that what we're going to see is for the foreseeable future, the orders driven by whatever vaccines or shots or whatever they're administering, I will say what do like, I like a lot is the fact that they appear to be -- the orders more predictable and smooth over the quarters. For example, I'd rather have three quarters of $5 million each versus $15 million the first. So, I think we'll see that. And we saw the evidence of that. What did we bill in the immunization orders, four plus -- $4 million-plus for the quarter.

[Diana Diaz:]

$4 million-plus for the quarter.

[David Tusa:]

Yeah. So -- and then Diana mentioned as well. So far in January, we already have $1.8 million in revenues for immunization. So, I think things are going to be again, much more smooth and predictable versus the significant vary spikes that we've seen in orders and inventory levels. That's -- I hope that answer your questions, but that out the best we can do.

[Rob Brown:]

Yeah. Thank you. That's very helpful. I'll turn it over. Thank you.

[Operator:]

Your next question is coming from Michael Hoffman. Please announce your affiliation, then pose your question.

[Michael Hoffman:]

David, Diana, Stifel. Thanks. Following up on vaccines, pre-COVID kind of $9 million a year pace, bounced around a little bit maybe, but kind of call it $9 million. COVID, obviously throws it all over the place. $5 million of build up inventory. You kind of walk that out of a baseline and then add in what do you think you a combination of sustained flu and then new COVID. So, are we landing on a $10 million, $11 million number this year at this point? Or do you think it ticks up a little towards $12 million, $13 million in the fiscal year?

[David Tusa:]

So, I'm sorry. So you're talking about the immunization billings?

[Michael Hoffman:]

Just the vaccine piece of that, which is historically flu was like $9-ish million a year.

[David Tusa:]

Right. So …

[Diana Diaz:]

So year-to-date, we're already at $6.4 million through December.

[David Tusa:]

So, we're at $6.4 million. If we're at $6.4 million, if you use -- and this is just a guess -- but if you use maybe December as a guide, the December quarter was 4 million plus,

[Diana Diaz:]

$4.6 million.

[David Tusa:]

$4.6 million-plus a six. So, I think pretty conservatively, you could get comfortable with 10 million plus now. If there's more vaccines administered and it's really going to be adoption by Americans and maybe it could be a bit higher, but I don't -- your low end -- I don't think it's unreasonable.

[Michael Hoffman:]

And $10 million to $12 million is probably the right range. And then next year I get back that inventory build. And what have you, and now I'm having conversation it looks more like $14 million to $15 million.

[David Tusa:]

I think that's reasonable.

[Michael Hoffman:]

Okay. What's the route-based headwind in 4Q, fiscal 4Q?

[David Tusa:]

It's zero. In 4Q, it's about 300 -- it's about $300,000 in the March quarter.

[Michael Hoffman:]

Okay. So, by 4Q we ought to see real $15 million as opposed to adjusted $15 million organic growth.

[David Tusa:]

Right. And hopefully even -- hopefully, the potential will be higher, but yes.

[Michael Hoffman:]

Okay. And then on the MedSafe wherever the sources, do you still think in the calendar year, you're going to be at 1,200, 1,300, regardless of the source?

[David Tusa:]

Maybe. It's tough to predict. We know that we'll probably be short on the Long Term Care -- I mean, on the retail pharmacy side, which we've always targeted, like 1000, 1200 units. It's really going to be a factor of how quickly the Long Term Care will adopt the MedSafe. We're optimistic that we can make up that shortfall the 1000 to 1200 with Long Term Care, can't make any guarantees, but that's what the goal is. And -- but the adoption by Long Term Care is going to be a key driver into making that number.

[Michael Hoffman:]

All right. Great. Thank you very much.

[David Tusa:]

All right. Thank Michael.

[Operator:]

Your next question is coming from Kevin Steinke. Please announce your affiliation, then pose your question.

[Kevin Steinke:]

Hi. Kevin Steinke, Barrington Research. I just wanted to ask more about the PharMerica partnership, and just the mechanics of how that's going to work. It looks like you're an approved vendor for the roughly 2,500 facilities that they serve. So, should we kind of think of this essentially as a hunting license where you still -- you have to go out to the facilities and get them signed up one by one, or what's kind of -- how quickly do you think this can be adopted and just any more details on how you see the partnership ramping up or working?

[David Tusa:]

So, let me talk a little bit big picture first, we kind of stand back. There's a difference in the operations of a MedSafe and a Long Term Care facility than in a retail pharmacy. In a retail pharmacy, we have a contract with the retail pharmacy and we sell the retail pharmacy. In Long Term Care, since the pharmacy is really usually a third-party to the Long Term Care facility, and it's a three-party agreement. So in a sense, the long -- the pharmacy to Long Term Care has to be part of and really run program. They have to be a DEA authorized collector. So, they have to be in the middle of it as well. And that was one of the things that had kind of slowed down the adoption. It's more complex than launching it. So PharMerica is on board and they are pitching this to their communities. We're helping with the training. The PharMerica employees have been great to work with and helping with getting them up to speed and training. But they're the ones that are pitching it to the communities and we're there to help in any way possible. So, I think really they're taking the lead because they see the significant advantage being able to offer this to their Long Term Care communities.

[Kevin Steinke:]

All right. Yeah. So, I mean, that -- so it sounds like they're obviously on board given the partnership and dedicating some meaningful resources to it.

[David Tusa:]

Right.

[Kevin Steinke:]

Okay. Right. And so, your comments about potentially Long Term Care -- potentially making up the shortfall, and MedSafe installations on the retail pharmacy side, a lot of that could potentially be driven -- that makeup be driven by the PharMerica relationship. Is that how you're thinking about it?

[David Tusa:]

Well, I don't -- I mean, the PharMerica partnership is great. We look forward to it. They're great people to work with. I look at this more of a catalyst to move all of Long Term Care. So, it -- when all of Long Term Care sees the ease of use and how it saves the money and it makes them compliance, I think that we have the opportunity to increase sales throughout all of our Long Term Care customers. Again, I think PharMerica is a catalyst and I think it'll be very, very helpful. But I think it'll really bring awareness to the Long Term Care communities of the significant advantage to using the MedSafe versus what they're currently doing.

[Kevin Steinke:]

Right. And are you working on other potential partnerships like this with Long Term Care pharmacies? I mean, is that kind of the avenue you're taking to really attack and penetrate this market more significant?

[David Tusa:]

Right. Exactly. Because you have to have the pharmacy -- the pharmacy to serve Long Term Care, they had to be integral part of the process, the operation and the sale, and yes, we're talking with others.

[Kevin Steinke:]

Okay. And the pipeline is good there, or …

[David Tusa:]

Sure. Yeah. They're all quite aware of the MedSafe.

[Kevin Steinke:]

Okay. Great. Well, thanks for taking my questions.

[David Tusa:]

You bet. Thanks, Kevin.

[Operator:]

I would now like to on the floor back over to David for any closing comments.

[David Tusa:]

Thank you, operator. Thank you everyone for participating in our call. We appreciate the support and we look forward to talking next quarter. Thank you.

[Operator:]

Thank you. Ladies and gentlemen, this does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.