Sharps Compliance Corp.
Q3 2021 Earnings Call Transcript

Published: 28 Apr 2021

[Operator:]

Greetings and welcome to the Sharps Compliance 3Q 2021 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note this conference is being recorded. I’ll now turn the conference over to your host, Jennifer Belodeau. Ms. Belodeau, you may begin.

[Jennifer Belodeau:]

Thank you. Good morning, and welcome to the Sharps Compliance third quarter fiscal 2021 earnings call. On the call today, we have David P Tusa, the company's President and Chief Executive Officer; and Diana 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.

[David Tusa:]

Thanks, Jennie. Good morning, everyone. And thank you for participating in this morning's call. I'm looking at the list of the attendees. And many of me, and how much I like talking about the business and the outlook. And it's just the opportunity that we have in front of us. So that's what I'm going to do, I'm going to talk about the business instead of any kind of scripted presentation. So everyone's seen the March numbers, they're very, very impressive. We're very proud of the numbers and the performance. But I truly believe that's what's more important than the numbers is the fact that I just believe we're just getting started, as we grow this company to a much, much larger organization. Of course, we knew the immunization revenue for the third quarter was going to be very, very strong. But I want everyone to make sure they understand that I don't think we're anywhere near won and done. And again, I think we're just getting started with generating significant revenue growth. So it's really quite the contrary. And again, I believe we've got tremendous opportunity in front of us. So let me tell you how I look at the at the immunization business, whether it's COVID-19, or flow. It's opposite; we're also playing a key part in the rollout of the COVID-19 vaccines, which is fantastic. We're proud to do it. And of course, we love the revenue associated with that. But the way I look at it is we're working right now on the rollout of the adult vaccine. And you've seen the news; you see that we only have about 29% of Americans that are fully immunized. So we've got a ways to go, obviously, but here's how I see it rolling out. So we have the vaccine for adults which are going on right now. I think it'll be followed by vaccines for adolescence, I think it could happen in the summer, the move we followed with seasonal flu shots, then I think that there's an opportunity for vaccine for children. And then as everyone hears us, the vaccine or the booster shots for the vaccine to address efficacy, and the potential variant. So that's a lot of activity. And that's a lot of things that are going on and we're playing a key role of it in and why I mentioned the children's and the adolescent vaccine is what the experts are saying if we have any chance of achieving herd immunity, it's going to be the children, it's going to be the adolescence; they're going to have to be immunized if we have any chance of achieving this 70% to 85% rate of immunization.

[Diana Diaz:]

Thank you, David. Sharpe achieved record revenue of $27.5 billion and record customer billings of $31 million in the third quarter of fiscal 2021. These are increases of $17.1 million or 164% and $20.7 million or 200%, respectively. The increase in customer billings for the third quarter was driven by an increase in immunization related billings of $19.5 million reflected in the retail market and an increase in our route-based business of about $1 million. The increase in third quarter revenue of $17.1 million was driven by immunization related business of $16.1 million which is net of deferred revenue of almost $4 million and the $1 million increase in the route-based business.

[David Tusa:]

Great. Thanks Diana. Operator, let's go ahead and open it up for the Q&A, after which I'll make a few closing remarks.

[Operator:]

Our first question is from Gerry Sweeney with ROTH Capital.

[GerrySweeney:]

Good morning, David. Diana. David, you talked about COVID vaccines 30% adult population. They're about at least with one shot. We have boosters, we have variants. We have adolescence, or they kick in and I suspect adult population and adolescence they're going to be sort of different participation rates. But what do you think are the potential value of all this wrapped up and even flu into next year? Is there a way you could maybe help us bracket this write a benchmark and how does this also not just really over the next 12-18 months this is going to be a process. Thanks.

[DavidTusa:]

No, that's actually a very good question. I'll tell you a little bit, I'll back into, so for planning purposes, we need to know what the demands are going to be on the business. And we've done many, many calculations between COVID-19, Covid for adults, you hear on the news that I think as many as 74% of the adults will receive the two shots, adolescents and children, and we've made some assumptions, they maybe even as much as half of the of these, the children and adolescents will get the vaccine flu. We run out flu this year. And by the way, flu is probably going to be worse this year. But the experts are saying that community levels are down. And in the flu may not just be the typical 7 - 8 million, and we think it potentially can be even 10 million and higher. And it boosters, even if you make an assumption on boosters, even that of the 250 million adults, even if maybe a third or a half, get a booster shot, that's significant number of mailback. So just with COVID-19 we think that there could be as much as a million mailbacks for the next say, 9-12 months, maybe 15 months, and a million mailbacks on the COVID-19. It can be another, could be 300,000, and on the flu could be another 300,000 on the booster. So that gives you is about as many as 1.6 million in mailbacks, and when you do the math, that equates it as much as $60 million in revenue. And I'm not saying we're going to generate $60 million in revenue, but I think that could be the kind of the addressable market that we would have on the vaccine. So we generated so far about $20 million in immunization business. So there are opportunities for over the next 9-12, maybe 15 months to generate significantly more revenue related to the immunization business. And even if it's $50 million that's another $30 million over and above where we are right now. We also want to say is those mailbacks numbers are really important and making sure and we do, and we have plans, we will meet the requirements, we will have the 1.6 million available over that time period, to be able to service that market. And I hope that was a long way of answering your question.

[GerrySweeney:]

Yes. And maybe take it a step further. I was trying to do a little math as actually you were answering that with those numbers. That's COVID beginning to end we'll say, like, the first wave of vaccines, right? Then we get into '22 and '23, there's a tail to this business, right? You're going to boosters again, and variances that are and different participation rates there. Have you tried to do any of the maths on that as to what that tail could be? I mean, literally, right now, I was looking at something like 15 million. But that's really rough back of the envelope.

[DavidTusa:]

Right. I, the way I look at it is, so in the future years, let's say you have one visitor versus the two shots you received this year, on the children's vaccine, by the way, when the children's ultimately get the vaccines, they'll have to just like the adolescence, flu will continue to be strong. And I think there'll be boosters for the foreseeable future. So I think you can pretty conservatively say maybe 30%, maybe 30%, maybe a third of it could continue in the future, maybe even as much as half. It just depends upon the vaccines. It depends on what other kind of variants may come about, or what other kind of Coronavirus as we may see in the future. So I think we're comfortable with maybe say as much as at least a third of that continuing in '22 and thereafter.

[GerrySweeney:]

Got you. And then shifting gears, obviously route-based great business, and great growth drivers longer term. As you look out to the next year, what do I mean, there's opportunity, probably for organic and inorganic investment. On the organic side, it's a lot of marketing sales, and you're set to carve out some of the numbers, I think on the inside sales and it's up a $1 million a year, year-over-year et cetera. What's your sort of view on your investment over the next year on from both aspects for that organic and inorganic?

[DavidTusa:]

Well, I'll just tell you that because of what we're experiencing on the immunization side and because our desire to significantly grow that route-based business, we're in the process of hiring roughly another 10 salespeople and we're going to invest heavily in the sales and marketing and we'll go from roughly 20 to as many as 30 people on the sales side, which is really important, because we think it's our moment. I think something that's really helps. When we move into an area organically, we did this successfully in the Midwest. And we're doing it right now in what we call the Southwest, the four states in the southwest. That brings a lot of revenue opportunities, because those are areas we wouldn't go after directly because we don't provide direct service. Those are areas where we have previously subcontracted and we may include in larger opportunities, so we're performing direct service. And we're marketing heavily into all of the areas all 37 states that we are providing direct service. So I think that'll give us a bump, as well in the revenue growth from a route-based business, more salespeople, more marketing, and more direct service in a greater geographic area.

[Operator:]

Our next question comes from Rob Brown with Lake Street Capital Markets.

[RobBrown:]

Good morning, David and Diana. Congrats on a very nice quarter. Just wanted to dive a little bit more into the COVID vaccine activity. What I guess what are you seeing in terms of the planning for the fall and sort of filling the channel? And I guess, what's your inventory at this point? And how are you sort of prepared at this point?

[DavidTusa:]

So again, as I mentioned before, I think that we could sell as many as 1.6 million or of our mailbacks even over this calendar year, we sold roughly about 0.5 million in the March quarter. And we are right now, I'll tell you how, hold on, I got this. We're right now, our weekly production of the Sharps containers that are at the critical part of the mailback are about 50,000 a week. So we're manufacturing about 50,000 a week that we have ongoing, we will go on throughout the year to be able to meet those needs of this upcoming COVID business.

[RobBrown:]

Okay, great. And I know you added capacity, significant capacity for processing the returns, where are you at in terms of capacity utilization in your facility?

[DavidTusa:]

We still have significant capacity; we did add at the additional autoclave in Pennsylvania, the larger autoclave that we installed in the Texas facility, we tripled the capacity. And we're doing fine, we have plenty of additional capacity, we are using more of it, but not substantially more because when you triple the capacity that gives you a lot of room to grow. I think what's also important is the improvement of the efficiency. In Pennsylvania, we have two, so use the same crew to run two other places you were using runs one. And it makes for a more efficient operation as well. But I don't see any problem with having the capacity to treat all of the medical waste, whether it'd be the mailback or whether it be the route-based business. But I will tell you that because of the facilities we have, and the permits that we have, it wouldn't be too terribly hard to be able to add additional autoclave if we needed additional capacity. But I think we're fine for a while.

[RobBrown:]

Okay, great. And then on the route-based business, I think you talked about even 40% growth is something you thought you could do better than but what's sort of your view on the route-based growth I guess, organic growth at this point? And are you seeing that at scale benefit as you've gotten your footprint in place? Are you seeing the scale benefit, accelerating the growth there?

[DavidTusa:]

We are. And we saw that when we went into the Midwest, about a year ago, we went into the Midwest and we're seeing that's a big part of the contribution of the growth that we've seen. And we expect to see significant growth as well from the southwest, plus other regions that we directly service. I'll just say that 40% is great, but we're not happy with it and we think, yes, the opportunity to generate a higher much higher organic growth rate.

[Operator:]

Our next question is from Amit Dayal of H.C. Wainwright.

[Amit Dayal:]

Thank you. Good morning, guys. With respect to the strengthened operating margins is this basically coming from better capacity utilization and if revenues stay elevated at these levels. Should we expect, these levels of margins to continue coming through?

[DavidTusa:]

So a couple of things, and then Diana is going to share some time with you and give you some different gross margins at different revenue levels. There's -- we have a significant line item in cost of sales that's fixed. So really, it's a variable cost that drove that margin expansion only. But Diana can share with you the different gross margins at different revenue levels. We think we see going forward.

[DianaDiaz:]

Sure, we, if we ignore the impact of the revenue recognition that benefited our current quarter, we expect gross margins to be at these levels at a $20 million revenue level for the quarter, we would expect gross margin of 37% at a $25 million quarterly revenue level, we would expect gross margin at 40%. And at a $30 million quarterly revenue level, we would expect gross margin of about 42%.

[Amit Dayal:]

And on the operating margin side, I mean, your operating costs should remain relatively stable, given that you have enough capacity in place right now.

[DianaDiaz:]

Correct.

[DavidTusa:]

Right, you should see, yes, you should see a flow through of a significant portion of that additional gross profit to the operating income line item.

[Amit Dayal:]

In terms of the revenue mix longer term, David, between immunization and route-based and unused medication, is there a target you're shooting for? Could you give us a sense of where you might see or where the business might be in a few years from now relative to contribution from these three segments?

[DavidTusa:]

Well I want it all. I want all of them to grow and grow significantly, and I think the mix will be depending upon which sectors grew. The mailbacks, also the mailbacks sector is heavily influenced with immunizations is going to be strong for quite a while and the route-based business will continue to grow at a healthy rates, and again, we think the unused medication will come back online in a bigger sort of way in the September quarter. So I'll take significant growth from all three of them. And a few years down the road, we'll see where we are, but there's no target other than that top line and growing that top line significantly.

[Amit Dayal:]

And just looking forward to sort of the June quarter '21 should we expect sequential growth relative to the third quarter given that there are still some levels of vaccinations that need to be completed, et cetera?

[DavidTusa:]

I don't like talking about quarters. I know you want to talk about them. That's why I was talking about the opportunity more from a 9 to 12 month standpoint. We have a huge opportunity in front of us, how it all falls into the quarter. I don't know yet. I will say that April was strong. April was a busy month. And it was quite strong. So instead of talking about individual quarters, I really look, really more for the 9-12 to 15 months. And see significant opportunity; how it falls between those quarters, we'll just have to see.

[Amit Dayal:]

Would this be stronger than March, if you will?

[DavidTusa:]

Well, anything's possible. But we'll have to see. I'm not going to say it is. I'm not going to say it isn't. But I think we're going to see continued strength as a company with consolidated revenue over the next 9 - 12 months.

[Amit Dayal:]

And just last one in terms of, so your market share gains, do you think you are making progress on that front? Especially with the growth you're seeing on the route-based side and improvements on the immunization front as well. Compared to this time last year, do you feel you have a stronger market share?

[DavidTusa:]

Well, on the immunization side of the business, we have about roughly about 70% of the retail pharmacies, and that was the same as what it was last year. And that's the same as what it is this year. Now we do think that we're improving market share in the other markets like the route-based business and when we grow, that's just taking more market share. And so that's where you'll probably see more market share growth, but 70% is where we are on the retail pharmacy.

[Operator:]

Our next question is from Kevin Steinke with Barrington Research.

[KevinSteinke:]

Hey, good morning. So following up again on the route-based business obviously around 40% is a healthy growth rate, but you think you can grow it even faster? What do you see is the catalyst to potentially growing that business faster? Is it just more sales efforts? Or geographic expansion or kind of what gets that business growing faster do you think?

[DavidTusa:]

Right. Well, it's really all of the above. It's more salesforce personnel, more marketing. And it's a geographic expansion. Every time we, if we expand geographically in an area that we service directly, it's an area that we will go after directly versus against subcontracting. So every time we do that, we have the opportunity to grow that business. The other one is just closing larger deals as well. And as we close larger and larger deals, the vast majority of our larger opportunities and prospects focus on the route-based business. So it's really all three of those added out that that we believe will lead to higher growth rates.

[KevinSteinke:]

Okay, got it. And you've talked about here potentially seeing growth rebounding and unused medications in the September quarter. Can you maybe just talk a little bit more about what's in the pipeline there that's giving you some confidence that you're going to start seeing a rebound?

[DianaDiaz:]

Sure, Kevin, we've talked earlier about one of our large retail pharmacy customers had adjusted their installation plan to address COVID related response, and they expect to get back with their installs starting in the summer. We're also seeing increases in liners processed in the current quarter, which those liner boost process were up 13% over last year, and 15% higher than the December quarter. So those are good facts. We think we installed about 140 MedSafe, during this quarter, the third quarter. And we expect to see the number of installs increase in the September and the December quarters by about 300 units in each quarter. And that would have an incremental revenue impact of about $400,000 to $500,000 a quarter due to that higher installation activity.

[KevinSteinke:]

Okay, that's some great detail. I appreciate that. And then just lastly, here you've talked about you are invest more in the salesforce, and how should we think about it kind of SG&A run rate going forward? Is this kind of $4 million plus? Or what you would expect going forward? Or what -- how are you thinking about that line?

[DianaDiaz:]

Yes, we talked about there being an increase of 9 %to 12% year-over-year, and I think we're still there. We may be the increases in the headcount may bump it up a little bit. But we're kind of on target with we're where we expect it to be.

[DavidTusa:]

But, Kevin, as we see bringing in more salespeople in the game working to bring 10, I think we have five in so far of additional salespeople as we see that works and start accelerating sales, and we will hire more, and if we're getting the results from that, but I think this roughly 10% to 12% target is probably good for now. If we did anything, it would be directly related to the fact that we were confident it was going to, exponentially increase the revenue growth rate.

[DianaDiaz:]

Exactly.

[Operator:]

Our final question is from Brian Butler with Stifel.

[BrianButler:]

Good morning. Thanks for taking my questions. I'm sorry; I might have just missed this on the MedSafe on the liners. But what was the installs for the quarter and in the --

[DianaDiaz:]

The number of MedSafe installed during the quarter was 141. And the liners processed in the quarter were 7,700.

[BrianButler:]

7,700. Can you just kind of remind us just think about what the size of the MedSafe market is kind of on a larger go forward basis? I mean, I know what we would install they're going to ramp back up. But where are we in the size, in the progress of this market and kind of what's installed now and how big it could be?

[DavidTusa:]

Right. One of the ways to look at that is if you look at just the number of retail pharmacies and the number says long-term care facilities, and those are two primary targets, there's at least 100,000 facilities between those two. And what do we have in MedSafe deployed right now, the 6,000, about 6,000. So if you think about it from that standpoint, you're roughly 6% penetrated in a quite a large market. So we have a lot of runway, I will say this about long term care. Long term care is where the DAA rules were originally focused on. And long term care has been a little bit slower to adopt, and of course, COVID slowed down the long-term care facilities from adopting it as well. Now, we've seen more opportunities coming our way. And we're actually getting some help from our new director, Pat Mulloy, who came on board, who has tremendous contact and experiences in the long term care, we're working with him, to help us identify opportunities, and to help us to refine our approach to try to drive more MedSafe sales and long term care, by the way, long term cares, looking for cost savings, that'd be regulated medical waste, or the whole unused medication side of the house. So we think from a timing standpoint, it could be good as we re approach all of these long term care business and try to accelerate the growth on the MedSafe sales.

[BrianButler:]

Okay, that's helpful. And then when we think about margins, you gave -- that the detail you gave on the gross margin was very helpful. And if I were to kind of do the math on that, it looks like the incremental gross margin on new revenue is over 50% and comes out like 52% I think on the math that you gave. Is that sustainable? Is that the right way to look at as revenues grow, that 50 plus percent is the incremental margin at this point going forward?

[DavidTusa:]

Yes, I've always said 45% to 50%, depending upon the mix of the business. It was -- this was a good quarter from a revenue mix standpoint. And it'll be somewhere between 45% and 50%, maybe closer to 50% than 45%, it depends on the mix, but I think the 50% is probably a good measure.

[BrianButler:]

Okay, and what do you think, kind of the size is overall, just the current infrastructure that you have, I know, you expanded out obviously, to deal with COVID, what kind of revenue can be sort supported kind of on the current infrastructure before you have to make more investments.

[DavidTusa:]

So on the -- we're using roughly a third of the capacity on the treatment side, on the route-based business; there really isn't any limitations there because you just add trucks and drivers to the existing infrastructure. As far as a mailback business, we can easily as you saw in this last quarter, and with some of the projections that we talked about earlier, we can easily crank out two plus million of these a year, we don't really have any restrictions. Actually, I meant to mention earlier, while we're -- had the capacity right now to do about 45,000 or 50,000, a week, here in the June, July timeframe, we'll be up to about 60,000 to 65,000, a week on the mailback side. So I see us being able to grow a company much, much, much larger. Now, if we did have to make investments it's adding an additional autoclave, which, by the way, is about $400,000 installed, the trucks and the drivers are an operating expense because we lease the trucks, and as far as the manufacturing of the mailbacks, we have contract manufacturers that use our molds to make the Sharps containers, and we have many of them across the country. We could add more. So we have plenty of, that's one of the things we have assured our customers at the beginning of this COVID and because in some parts of the medical waste industry, there was a real shortage in Sharps containers and we reassured them, we have as many as you need, because we make them ourselves and we're able to deliver so I think it's much, much larger before there's really any significant capital expenditure that they would have to make, Brian.

[BrianButler:]

Okay, that's helpful. And I'm going to switch back to the vaccine talk and the mailbacks I guess; just want to be clear you talked about 1.6 million is kind of the calendar year case. And we did about 500, little over 500,000 in the first quarter. And when you think about that remaining cost just over a $1 million that's the next kind of 9 to 12 months. Is that including -- that's including the flu, the flu demand as well, correct?

[DavidTusa:]

Right. That's correct. Because the mailback is fungible, it can be used for COVID-19. It can be used for flu, it can be used for shingles shots, and it can be used for anything.

[BrianButler:]

Right, there's no way to kind of pick out which flu is and which is vaccine.

[DavidTusa:]

No. Right now, especially right now with what's going on with COVID is just mailbacks. And that's what we're working on with the customers. And, again, we can make a lot more of them. And we plan to keep building, I will tell you this, we're not going to stop, we're going to keep building and facilitate. We expect to be growth throughout the calendar year, Brian, but we are not going to stop. We have an additional warehouse that up in Pennsylvania. And my goal is to have par levels for the mailbox, well over 400,000 meaning inventory levels that will not go below at least 400,000. And I think this past year was -- would support that without a doubt. But again, if we needed another warehouse is just warehouse and we leased the warehouses. So it's not a capital expenditure. It's just some additional operating expenditure that's the beautiful part about this business. And expanding it as we are in is just not a lot of significant CapEx that we would.

[BrianButler:]

Okay and I know you don't like talking about the quarters, but I'm going to try again, just kind of think about. Is this, I mean, you realize we have to think about the model and how this plays out. But I'm guessing from a planning perspective, you have a similar dilemma and trying to figure out how to be prepared for delivering these. Is there any or do you think there's any seasonality around the vaccine? Jeez, I mean, I guess, what kind of volatility could we see? I mean I can just take that one point the remaining 1 million or 1.1 million, and kind of evened it out over whatever period. But is there some volatility that we should expect or may expect?

[DavidTusa:]

I think you just watch like we do, you just watch, and you're going to see when that adolescent vaccine is going to become available, I think it's going to be pretty soon. And that's the 12 to 16 year olds. And those kinds of events are very, very important, as you hear more and more talk about flu and how important it is get your flu shot, and that'll drive. And there's more and more talk about the boosters. There's a potential for the boosters in the fall as well. So I think what you have to look at is you have to look at the rollout of the different vaccines I watch every day, the percentage of the population there's 230 million roughly of immunizations that we have, it's about 90, it's about 93 million people, they have received two shots, that's 186 million injections, and about another 45 have had one, have had one shot. So that's 45 million. Yes, that's a 231. So these are the kind of numbers that we watch. And I think that everybody should be able to watch as we, see these numbers, if it slows down, the business could slow down, if it picks up then our business with them would pick up and that 1.6 million is an estimate that we made for planning purposes, Brian, and the kind of assumptions that we made were again, 74% of the adults, maybe 50% of the kids, we think that about 60% to 65% of these immunizations, all the ones I described will be administered in the retail setting. I took that into account. And then we have about 70% of that market. And that's account as well. One of the thing about flu, I got to tell you this retail, the retail pharmacy is proven to be just a phenomenal spot to be able to get immunization. They are efficient and they run very, very, very well. I think you could get a pickup in the flu in the retail pharmacy market because guess where they went and got their COVID-19 shot, they got it at the retail pharmacy. So I think it's going to bode really well for the retail pharmacy side which again is a big part of our business. But it rolls out like a roll out it falls out like it falls out. That's why I like to look at it over the 9 to 12 months standpoint.

[BrianButler:]

Okay and then one last, just quick one for me. We saw the sale of Curtis Bay out there. Have we seen any change in the competitive market for you guys with kind of that changing the hands or anything else?

[DavidTusa:]

No, no change. There's really been no change in from a Curtis Bay or really in the industry standpoint.

[Operator:]

Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session. I will now turn the call over to David Tusa for closing remarks.

[David Tusa:]

Thank you, operator. Thank you everyone for participating in our call today. We look forward to follow up. We look forward to the next quarter. And it's also we think a real opportunity to thank all of our employees, still more business.

[Diana Diaz:]

And asset.

[David Tusa:]

So anyway, thank you everyone for participating. Thanks to all the employees. We look forward to talking to you all so.

[Operator:]

This concludes today's conference. And you may disconnect your lines at this time. Thank you for your participation. And have a great day.