Sharps Compliance Corp.
Q3 2020 Earnings Call Transcript

Published: 29 Apr 2020

[Operator:]

Greetings, and welcome to the Sharps Compliance Third Quarter 2020 Earnings Call [Operator Instructions]. As a reminder, this conference is being recorded.I would now like to turn the conference over to your host, Mr. John Nesbett of IMS Investor Relations. Thank you. You may begin.

[John Nesbett:]

Good morning. And welcome to the Sharps Compliance third quarter fiscal 2020 earnings call. On the call today we have David Tusa, Company's President and Chief Executive Officer and Diana Diaz, Vice President and Chief Financial Officer. David will review the company's business performance, operations and growth strategies, while Diana will review the financials. Immediately following their formal remarks, we will take questions from call participants.As you're aware, we 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 Web site 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:]

Thanks, John. Good morning. And welcome everyone to our third quarter fiscal year 2020 earnings conference call. As we reported our third quarter results, our country and the entire world are coping with the devastating health and economic impacts of COVID-19. The Sharps Compliance were taking every precaution to ensure the safety of our employees, while at the same time remaining active as a leading national provider of comprehensive medical waste solutions, bringing uninterrupted essential service to our customers in the healthcare industry.In support of this, we increased our route-based drivers, plant and operations personnel by 10% in advance of the COVID-19 pandemic to make sure that our operations and servicing of our customers would not be adversely affected by potential absence of employees due to COVID-19. We also temporarily increased the pay for our front line operations personnel and drivers during the pandemic. And these are investments in the business that we believe make sense as we strengthen what we believe to be already excellent relationships with our customers and solidify our place as a comprehensive service provider to our customers across the nation on an uninterrupted basis.We'll get into the March quarter financials in just a bit. But first let me say that although we're not pleased with $0.10 loss for the quarter, we do not believe the loss is representative of the long term prospects of the company. We're remain bullish on the short and long term prospects of the business. We believe we're well positioned now better than ever for significant growth.So what are we doing in advance of the expected growth in the business and where do we believe the growth will be generated? As announced on March 25th, the company is focusing on expanding its infrastructure to support what it believes to be a strong 2020 flu and immunization season, as well as medical waste disposal related to potential COVID-19 vaccine, which may become available for administration in the United States.Additionally, the company sees other potential increased medical waste volumes related to COVID-19, such as the long-term care market where personal protective equipment or PPE in many facilities is being disposed of as medical waste and not as trash, which has been the historical practice. Finally, in an equal or greater importance, our route based footprint now extends to 32 states for about 70% of the population. This significantly increases our pipeline of larger, small and medium quantity generator new sales opportunities, which we believe could be positive, could positively impact many of our core markets. The pipeline is very active and we believe we could see revenue from new deal closures as early as July of 2020.So to support the growth and the growth opportunities, we're significantly increasing our production and inventory of medical waste mailbacks to ensure we remain well positioned to meet the expected increase in demand related to the 2020 flu season and the potential COVID-19 vaccine. We expanded our route-based truck fleet and drivers necessary to facilitate potential increase in volumes from its expanded 32 state route-based footprint and related larger prospect opportunities. We're increasing our medical waste processing capacity from 10 million to 27 million pounds per year. We're adding a larger autoclave in the Texas facility and we're adding a second autoclave in the Pennsylvania facility. We're also securing a larger warehouse and distribution facility in Pennsylvania to store and distribute larger volumes of medical waste mailbacks.So regarding the quarter, March is typically our slowest revenue quarter as a result of seasonality and customer ordering patterns. As part of this, we achieved growth in revenue with increased customer billings in our retail, professional and assisted living markets. And substantial growth in two of the key solutions, unused medication and the route-based business.We expected higher gross margins for the March 2020 quarter, but the cost of goods sold for the quarter was adversely impacted by the proactive 10% increase in route-based drivers, plant and operations personnel and by the temporary pay increase for front line workers we implemented to ensure uninterrupted service during the pandemic. Additionally, we incurred operating costs related to the expansion of route-based business into the Midwest ahead of anticipated revenue, all these items increased cost of sales about $200,000 or 200 basis points. Regarding SG&A, we incurred about 200,000 more than our internal expectations. And as a result, increased professional fees, computer systems related costs to support sales and marketing efforts.So again, while our March quarter revenue was close to our internal expectations at the mid to high 10 million range, the cost of goods sold in SG&A were higher than what was expected for the reasons discussed, resulting in a greater loss than the $0.04 to $0.05 that we expected. Again, we don't believe the quarter changes our outlook for the business, which continues to be very bright.So let's look forward. We believe we have improved visibility, revenue visibility, because all the items I just mentioned and included the following. We anticipate revenue should be favorably impacted by what experts believe should be a strong flu immunization season, potentially followed by COVID-19 immunization effort, coupled with potential growth from our core markets, including long-term care, home healthcare and professional markets.Additionally, the expansion of our route-based footprints in 32 states or 70% of the population significantly increases the pipeline of new prospect opportunities. We remain bullish and are confident that our leadership position as a comprehensive provider of medical pharmaceutical and hazardous waste to small and medium quantity generators, will provide significant opportunities for the growth of the business for the balance of 2020 and beyond.With that, I'll turn the call over to Diana to cover the financial section of release in a bit more detail. And then afterwards, I'll make a few closing comments before we open up for questions.

[Diana Diaz:]

Thank you, David. Third quarter fiscal 2020 revenue increased 10% to $10.4 million as compared to $9.5 million in the third quarter of last year. Our route-based pickup billings for the third quarter of fiscal 2020 of $2.6 million are up 16% compared to $2.3 million in the prior year quarter and contributed 25% of total billings for the quarter. Our unused medication billings of $2.1 million are up 24% compared to $1.7 million in the prior year quarter and contributed 20% of total billings for the quarter. Our mailback billing of $4.6 million contributed 45% of total billings for the quarter.Gross margin for the third quarter remained consistent at 21% as compared to gross margin in the third quarter of last year. As David mentioned, we expected higher gross margins for the March 2020 quarter, but the cost of goods sold for the quarter were adversely impacted by the proactive 10% increase in route-based drivers, plant and operations personnel in advance of the COVID 19 pandemic, as well as a temporary increase in pay for our front line operations personnel and drivers during the pandemic. Additionally, we incurred operations costs related to the expansion of our route based business into the Midwest ahead of the anticipated revenue. All of these efforts increased cost of goods sold for the quarter by about $200,000 or 200 basis points.SG&A expense increased 24% to $3.6 million or 35% of revenue for the third quarter of fiscal 2020 compared to SG&A of $2.9 million or 31% of revenue in the same prior year quarter. Regarding SG&A, we incurred about $200,000 more than our internal expectations as a result of increased professional fees, computer and system related costs, to support our sales and marketing efforts.The company reported an operating loss of $1.6 million in the third quarter of 2020 compared to an operating loss of $1.1 million in the third quarter of last year. Sharps recorded a net loss of $1.6 million or a loss of $0.10 per basic and diluted share this quarter compared to a net loss of $1.1 million or a loss of $0.07 per basic and diluted share in the third quarter of last year. We recorded an EBITDA loss of $1.2 million in this current quarter as compared to an EBITDA loss of $600,000 in the same period of last year.Now let's look at the key comparisons for the first nine months of fiscal 2020. Revenue increased 20% to $38.6 million and customer billings increased 22% to $39.5 million. Retail billings increased 33% to $10.7 million due primarily to an increase in billings for unused medication solutions, including MedSafe and Takeaway Recovery System Envelopes, as well as flu shot related orders.Home healthcare billings grew 32% to $7.6 million. Pharmaceutical manufacturer billings increased 52% to $4.1 million related to the timing of inventory builds for several customers. Professional market billings increased 11% to $12.3 million. Net income for the first nine months of 2020 fiscal was $100,000 or $0.01 per basic and diluted share compared to a net loss of $300,000 or a loss of $0.02 per basic and diluted share in the first nine months of last year.Our balance sheet remain solid with $4.9 million of cash at the end of the quarter and working capital of $9.7 million. Additionally, last week we announced that we received $2.2 million into the Paycheck Protection Program or PPP established as part of the Coronavirus Aid Relief and Economic Security Act or CARES Act. And with that, I'll turn the call back over to David.

[David Tusa:]

Great thanks, Diana. There's no doubt that this is an unprecedented time for our country and our company. We remain focused on driving sustainable recurring revenue as we grow our market presence as a comprehensive provider of convenient and cost effective medical, pharmaceutical and hazardous waste solutions. With our expanded route-based capabilities, upgraded treatment facilities and enhanced capacity, we believe we're well prepared to provide our essential services and solutions to support the healthcare industry during what we anticipate will be very busy 2020 and 2021.And before we turn the call over to Q&A, I just want to thank all of our employees for all the efforts to support our growth in the last few quarters and particularly during the last month or two as we have met all of the challenges, operating a company during a pandemic and providing uninterrupted service to our customers. We have a very dedicated employee base during the challenging times. We look forward to the growth opportunities ahead as we continue to build what we believe to be a much larger company. I'd like to thank everyone for joining the call. We appreciate the support and we hope everyone stays healthy and safe. And with that operator we can open it up to Q&A.

[Operator:]

Thank you. At this time, we’ll be conducting a question-and-answer session [Operator Instructions]. Our first question comes from line of Gerry Sweeney with Roth Capital Partners.

[Gerry Sweeney:]

I wanted to start out on the mailback and discuss maybe some baseline revenue and opportunities. I think in the past, I know these numbers are slightly dated, but these from the CDC about 45% of U. S. adults got flu shots in the past and 32% of that was in the retail setting. And I believe in some of our conversations that kind of equates about to an $8 million baseline revenue for Sharps. So I wanted to see is that an accurate baseline? And then two, talking to your partners that use the mailback, are you're getting any kind of indication on order patterns, et cetera?

[David Tusa:]

Sure, let me take that one, that's correct. And here's what we're doing let me just tell you what we're doing. Based upon input from customers, just everything that we're reading about the flu and COVID-19, we build about roughly and sell about 200,000 mailbacks a year for a flu season. Think of it more in a calendar year basis, which is obviously June, September and December being the strong. And so roughly 200,000, maybe 220,000 mailback.So what we're doing for the seasonal flow, we're building about 50% increase. So roughly 300 plus thousand mailbacks with what we're building and we're going to have those available for June by June 30th. We start shipping in the May timeframe for the opening orders on flu. So we're going to build instead of 220,000 closer to 300,000 or more. And then what we do is we have plans as well for the continuation of the build for the potential COVID-19 vaccine season, which no one really knows exactly when or how many.But we're going to be prepared and we'll reassess at June and the June, July timeframe as we start to get through the seasonal flu. But we're prepared to build as many as 600 plus thousand mailbacks for the calendar year. So we're going to be, so we can be ready to make sure that we can satisfy all the needs from our customers. And yes, they do use the mailback in the retail, clinics, grocery stores, immunizing program. So you can see that roughly 8 million that has the potential, I can't guarantee it. But the potential to be as much as 25% to 50% higher depending upon the actual number of flu shots and then some sort of follow on for COVID-19.And I think I've read everything available every publication, and I've read everything from COVID-19 vaccine from being in the fall of this year to the March quarter, to the summer of next year, no one knows exactly, but we're going to be prepared. And I will say this and it's no secret that everyone is trying to move as quick as they can to make this COVID-19 vaccine available, because that's what solves the problem. So there's a lot of herculean efforts going on to try to accelerate that process and make it available. And we will absolutely positively be ready for that season.

[Gerry Sweeney:]

And maybe switching gears, well staying on COVID actually. This whole situation is evolving, I think even the world has changed a lot compared to beginning of March, mid-March end of March, et cetera. How do you see this impacting your revenue? And I know you touched upon it in your opening remarks a little bit. Obviously, long-term care is going to see a positive but you also probably dental and elective care areas probably down at least in the short-term and then you also have unused medication. How is this going to develop? We're going to see an opening up of some of the states I think, it's happening now, maybe dental comes back, elective care comes back. Do people use more PPE? Do other less procedures, just any visibility or thoughts on that matter? And then even wrapping in unused meds, I think that probably maybe a little bit slower initially, because of just everything that's happening in the LTC market but a lot there, but just curious.

[Diana Diaz:]

So, as you can imagine, we're watching every piece of data that we can find about how this is impacting our business. And we have seen temporary closures of about a thousand dental dermatology and physician practices and that equates to about 90,000 in lost monthly revenue. But offsetting that is increased volumes of medical waste generated in some of our long-term care customers that are utilizing our systems and services to contain and dispose of PPE, the protective equipment utilized in their facilities. And we're also starting to see some of those thousand locations that had temporary closures start to reopen. So that's something we're watching every day.

[David Tusa:]

So all in all, we think we've been very, very fortunate in that. Yes, there are some temporary closures dermatology dentists, but the volume is coming out on long-term care are quite high. And so really one, at least right now, one is offsetting, is offsetting the other.

[Gerry Sweeney:]

To practices change in terms of long term care? I mean, I've got some friends that are dentists and you know they're talking about more PPE between procedures, maybe less procedures during the day, but it almost sounded as though at least in the near term, whether it’d be a year or two years, there could be more medical waste coming out of some of these smaller providers as well.

[David Tusa:]

It could. But right now, at least for the moment and it's been focused on primarily on long-term care but it could in the future, we haven't seen it yet, but it could. And I think as these facilities and again, we're starting to see that dental start to reopen, it very well could. But we don't know yet.

[Gerry Sweeney:]

And then one quick one, route based you expanded in the Midwest. How much of a drag was this on the margin profile? Or I know you start with some partners and then as you get a little bit more size, you start moving in with your own equipment. But was this at all a drag on margins in the quarter as well?

[David Tusa:]

Yes, it was about 90,000 for the launch kind of duplicative launch costs and costs related to the launch. It should be substantially less in the June quarter.

[Operator:]

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

[Kevin Steinke:]

I wanted to follow up on your preparation for potential COVID vaccine a bit here. You mentioned you're doing a lot of your own internal research. I believe you also commented at recent conference that you're hearing from your customers that this could early 2021 could be the potential timing of a COVID vaccine. And I'm sure they don't have completely clear insight either. But you know, I just wanted to maybe illuminate the point that your customers are actually telling you this and that that's why it makes sense to build this inventory in anticipation of supporting your customers?

[David Tusa:]

That's correct, they told us a number of things. One, this is going to be, in their opinion, a very strong seasonal flu season. That's why we're building as much as 50% more mailbacks this year, the next. And yes, they have told us that we need to be prepared early 2021 for the ultimate COVID-19 vaccine. So what we're doing is we have a plan right now to build through the end of this calendar year, which would include COVID-19. but when we get to the June, July timeframe, we'll kind of re reassess and see exactly where the vaccine is. But yes , it's coming from the customers as well as our research.

[Kevin Steinke:]

And then on your route based expansion, you talked about how that's simple geographic expansion obviously increases your potential targets for new business, but it sounds like it's just not, now you have more targets because of your geographic expansion but you're actually seeing a real pickup in the pipeline or a very active pipeline. So can you just maybe talk about that the activity in that pipeline? And you mentioned maybe new business as early as July. So maybe anymore color on that would be helpful?

[David Tusa:]

So here's how the business works. So when you're talking about larger opportunities, you’re talking about larger opportunities that could be anything from 100,000 a year in contract valued up to 2 million in contract value. These are customers with locations of a few hundred to as much as 1,000 are more. So in going after these opportunities, what's really important that we found in the industry is being able with your route-based business to directly service the vast majority of the locations.And I can think of a few of them that we're working on one in particular, but because we've added the Midwest that the coverage and how much we can service other of their locations, it's closer now to 80% to 90%. When you can directly service 80% to 90% and limit the amount that you subcontract, it makes for a much, much stronger offering with the customer, as well as it helps you from profitability standpoint since your margin on the subcontracted portion is less. So they act as a pipeline, is quite active with opportunities, primarily in the professional market in long-term care.And we're excited about it and we just want to make sure with all the talk of COVID and flu, we don't miss the big picture. The big picture is we've worked really hard to put this infrastructure in place and the footprint in place for the route-based business and we hope to see the benefits of that with closing larger and larger deals here in the second half of calendar 2020.

[Kevin Steinke:]

So you mentioned temporary pay increase for some of your front line workers. Have you thought about maybe how long that is, or is that become permanent at some point? Just any thoughts around that.

[David Tusa:]

We think it's, we'll assess again at June. But I think you'll definitely have that, it's about 100,000 or 115,000 is what the impact is and you'll definitely have it for the June quarter, and we'll reassess after the June quarter.

[Kevin Steinke:]

So the SG&A, you said was about 200,000 higher than your anticipated some professional fees and computer system costs. Do we start to see some of those costs come out in the next quarter or two, or is this maybe a higher run rate going forward?

[Diana Diaz:]

So we had talked about the fact that certainly this year, our SG&A costs are at a higher level than last year. And looking into the fourth quarter, we think that and for the year that we expect SG&A for the fiscal 2020 to increase 17% to 18% over last year's full fiscal year, because of the investments that we've made. So some of it continues on, maybe there's some lumpy professional service fees and such, but we're at a level to support the growth in the company.

[Kevin Steinke:]

And then lastly for me, this is a number I think you've given in the past. But if you can use disclose it, just the number of MedSafe units installed for you currently?

[Diana Diaz:]

We are currently at 4,700 MedSafe units installed.

[Operator:]

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

[Brian Butler:]

Just a quick follow up on the MedSafe, the 4,700 units. Could you also provide the number of liners processed to-date?

[Diana Diaz:]

I don't have the number of processed to-date but I've got the number of processed in the quarter, which was about 6,800, which was up compared to last quarter, which was 5,700 liners processed.

[Brian Butler:]

And then just piggy backing Kevin's question on the SG&A, just to understand this. When you talk about it being a 70% and 80% in ‘20 and kind of at the level to support the growth. So thinking beyond that we should be estimating it to get back more into kind of a normal, I would say, closer to about 5% range for growth or is this really going to be tied more?

[Diana Diaz:]

Yes, I think we would say that next year would be somewhere between 5% to 10% increase in SG&A and we may be able to narrow that as we get closer to the end of June.

[Brian Butler:]

On the increase can you take -- I guess an incremental margins. How do we think about incremental margins with the COVID and the increased flu? I mean, are these going to be coming in at higher margins? Historically, the flu has been pretty high margin, I think business for you. So is this $0.50 kind of on a gross margin for every dollar that you increase or is it less narrow?

[David Tusa:]

I think it's consistent with what we've always said is that incremental margins about 45% to 50%, and I think that's what this incremental revenue should come in as well.

[Brian Butler:]

And then on professional, professional growth seems slow in the quarter at 6.2. Is that really COVID related or are there some other timing issues related to the mailbacks? I mean, it looks like the route-based wasn't that impacted, but it look like mailbacks and professional seems to have bit of a headwind?

[David Tusa:]

Yes, I think when you look at both on them. When you look at both of the mailback and the route-based, they were both impacted these roughly thousand locations, 90,000 a month, we did some impact. But it's both, it’s both the mailback in the route-based. Again, the good news is that the long-term care side of it should really help minimize or hopefully offset that.

[Brian Butler:]

And then on pharmaceutical, pharmaceutical I think was somewhat a little bit below what you're looking for but more or less in line just under 1 million for the quarter. Has that been impacted by COVID? I mean, should be in the sense that I'm sure people are still, patient support programs are still ongoing. But has the pace of new ones are possible reorders been impacted by COVID or slowed?

[David Tusa:]

No, we haven't seen any impact on patient support programs.

[Brian Butler:]

And then last one. Do you have the flu revenue for the third quarter? I know it's always really low but just…

[Diana Diaz:]

Yes, it was actually up a little bit. It was right under $700,000 for the quarter.

[Brian Butler:]

That’s up a lot.

[Diana Diaz:]

That was $400,000 last year…

[David Tusa:]

So it’s up about $300,000 over the last year.

[Operator:]

Thank you. Our next question comes from line of Michael Hoffman with Stifel. Please proceed with your question.

[Michael Hoffman:]

So thank you for taking two different ones. This being in different locations means we're not as coordinated. I have curious question with regards to the incremental costs, on the OpEx side. So I think I got a point of clarity that 90,000 is non-recurring, because that's the one time Mid West build out. So start with sort of a 100 to 120. What do you need to see now to extend that?

[David Tusa:]

You know, we're just going to look at everything that you and others are looking at, as well as the country starts to open and as the impacts from COVID 19 start to less. And we know that we will continue to do what we're doing through the end of June and we'll just see. We’ll just make sure that we do the right thing. I will tell you this as well. What we're hoping for, Michael, as well as we've added these, the drivers and the plant workers to make sure that we can have uninterrupted service that what we hope that could happen as the business starts or business continues to increase and we have land more and more deals, especially some of these larger route based deals that the increased personnel can just fold into servicing the increased customers and the increased revenue, that's we're hopeful that would happen.

[Michael Hoffman:]

And then I understand sort of bits and pieces of the data about a thousand customers got impacted by the great shutdown. You have about 13,000, so it's a little less than 10%. It's kind of around eight is the way to think about that what was impacted?

[David Tusa:]

Well, there's mailback customers in there as well, 13,000 its just route based. There were some mailback customers in there as well. So if you think about it, I think we're going to have roughly 40 plus thousand customer locations when you include the mailback.

[Michael Hoffman:]

And then, so that leaves me to second one. I'm assuming the MedSafe liner activity was softer in the second half of March coming into April, because of the great shutdown. And then that activity hopefully recovers as we get back into a restart.

[Diana Diaz:]

There were a couple of things that were impacting the unused medications. We did have a fewer MedSafe units that were installed in the quarter, at 238 compared to the December quarter where we installed 365 so that was down a little bit. And we also, in the December quarter, we had about 150,000 of MedSafe revenue associated with a state program that was launched in the State of Missouri. And there was no similar launch in the March quarter, so that impacted the quarter-to-quarter comparison but we have, the Missouri program is picked up again in April. So, I think we'll see more activity but there may have been a little bit of a pause there.Also, one other thing. Our large retail pharmacy customer had about the same number of units installed in the March quarter that they did in December, but it has paused two months of their calendar year 2020 roll out, the months of April and May. And that's going to have about a 300,000 impact that shifts billings from the June quarter to the September quarter. So it didn't impact March, but will impact June.

[Michael Hoffman:]

And then just to follow through the line of thinking on, if you had 100,000 mailbacks to your plan and 40% of the population gets a flu vaccination. Is the market telling you they think 60% of the population is going to get a flu vaccination and that's sort of a flow through to your model?

[David Tusa:]

Here's what they're saying. They manufacture and I think they administer about 160 million vaccines, roughly half the population of 328 million. So they don't believe it's going to be 160 million vaccines, but it's probably not going to be the full 328 million. So it's going to be somewhere in between there. And just based on input from them and some of the research, we think there could be 25% to 50% higher number of flu immunizations that will be administered, maybe even more.What we're doing just to be careful is we're going to build about 300,000, which is roughly you're right roughly about 100,000 more than we did last year. We're going to have those inventory ready to go by June. The reason why we're doing that, Michael, is because if there's an -- people get their flu shots earlier, or if it's not June, September, December, maybe it's heading in September, you have to have the mailbacks in inventory, shipping and making sure they can get to the source. I don't think anybody really knows but it's going to be somewhere between that 160 million and 328 million vaccines.

[Michael Hoffman:]

And there's nothing about aging out of the mailback itself. So, if the public doesn't in fact accelerate greatly and you're carrying more you can carry those over into the next season?

[David Tusa:]

Sure. Yes, absolutely.

[Operator:]

Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Tusa for any final comments.

[David Tusa:]

Thank you, operator. We appreciate everyone participating in the call. And again, stay safe and we'll talk soon. Thank you.

[Operator:]

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.