Q4 2021 Agiliti Inc Earnings Call
Good afternoon, and welcome to agility agility as fourth quarter and full year 2021 earnings conference call.
Today's call is being recorded and we have allocated one hour for prepared remarks and Q&A.
At this time I'd like to turn the conference over to Kate Kaiser Senior Vice President of corporate Communications, and Investor Relations and agility.
You may begin.
Thanks, Molly and Hello, everyone. Thank you for joining us on today's call as we provide an overview of agility results.
Ending December 31st 2021.
Before I begin I'll remind you that during today's call, we'll be making statements that are forward looking and consequently are subject to risks and uncertainties.
Certain factors may affect us in the future and could cause actual results to differ materially from those expressed in these forward looking statements.
Risk factors are detailed in our press release and our most recent SEC filings, which can be found in the investors section of our corporate website at agility health dotcom.
Well also be referring to certain measures that are not calculated and presented in accordance with generally accepted accounting principles during the call.
You can find a reconciliation of those measures to the most directly comparable GAAP measures and a description of why we use these measures in our press release.
To download a copy of the presentation that we'll use to facilitate today's discussion.
Visit our website at agility helped dotcom.
The investors section at the top of the screen.
And then events and presentations finally select a presentation titled ability Q4, and full year 2021 earnings sites with.
With that I'll turn the call over to our CEO Tom on it.
Thanks, Kate and good afternoon.
Thank you for taking the time to join US as we review our results from the fourth quarter of 2021.
And reflect on our performance for the full year.
Joining me today is our CFO Jim Mccarrick.
And our president some burning.
These are commercial operations.
Our results for 2021 finished ahead of our expectations and our previously increased guidance for the year.
And agility crossed the 1 billion dollar annual revenue milestone.
Today, we'll walk through the factors that drove our performance throughout 2021.
For perspective on current trends in the business.
And share our initial outlook for the year ahead.
Jim will provide details on our results and our 2022 guidance later in the call.
With a few insights into our overall performance and direction.
First we continued to deliver on our commercial goals as reflected in our results for both the quarter and the full year.
With the rapid rise of the spread of the COVID-19, Delta and I'll, let Ron variance late in the year.
We saw increased customer demand all of our medical device rental fleet, which favorably impacted our equipment solutions results.
Within equipment solutions, we also recognized the financial contribution from our recent size wise acquisition.
We continued to see solid performance across the rest of our business as well.
But critical engineering performance in the quarter. It was largely driven by new customer contracts and our ongoing work supporting the strategic national stockpile.
Revenue from onsite managed services held steady year over year.
On March 1st Agility filed an 8-K announcing a new one year agreement with HHS to continue our important work managing maintaining and deploying the federal government's emergency medical device stockpile.
Campaigning will provide additional details in his prepared remarks.
With our focus now squarely on 2022 and beyond.
Offer a brief recap on our strategy and the overall direction of the company.
We have established agility is a key part of our national health care delivery infrastructure.
Starting at a local level.
We help hospitals health systems, and other provider organizations efficiently manage their medical device needs.
Ensuring the availability of patient ready medical equipments whenever and wherever needed include.
Including rights to the patient's bedside.
Medical devices, we managed mobilized and maintain on behalf of our customers are paired with clinical expertise and technology enabled service capabilities.
Helping to drive down cost and improve patient care outcomes for our customers.
With more than 150, local medical device repair and logistics centers.
Our teams quite literally live and work in the same neighborhood as the customers we serve.
We've previously shared that agility is unique operations infrastructure.
Decided 100 mile radius of more than 90% of all staff beds in the country.
This provides us a meaningful structural advantage and how we access our customers and identify new opportunities as.
As well as a cost advantage and how we serve them.
At a national level.
Agility delivers integrated medical device repair and logistics solutions targeted at improving device readiness and availability and delivered at scale.
Our national operations footprint uniquely enables us to serve many of the nations largest and most sophisticated health care systems.
Provides rapid coast to coast support during times of peak or emergent need.
Throughout our long history of agility has provided the supplemental medical device capacity.
So health systems across the country.
To meet the patient surge during each flu season.
You supported our health systems regional response to fires floods and other natural and manmade disasters are mobilizing teams in medical equipment on short notice to wherever needed.
Over the last six years, we've been supporting device management maintenance and appointment needs on behalf of city state and federal government Emergency response teams.
Our work on behalf of these government agencies has been an important part of the National Medical response throughout this period impacted by COVID-19.
Agility is even become the partner of choice for many medical device manufacturers.
Surveying is an extension of their own field repair capabilities.
To solve large scale challenges, including nationwide medical device recalls.
On top of our established history of consistent organic growth.
<unk> has demonstrated a record of successful tuck in M&A.
Our stated approach to evaluating opportunities as to overlap and extend.
Meaning.
We look to build on our existing capabilities to drive additional profitable volume through our national service infrastructure.
To grow our market size and share.
While always staying close to what we do best.
In 2021 we completed two acquisitions that clearly illustrate this approach.
First was north field medical nationwide provider of surgical equipment repair and maintenance services, which we closed last March.
Building on the 'twenty 'twenty acquisition of mobile instruments.
We combined the second and third largest independent service providers too.
To expand our capabilities and surgical instrument repair.
And to complete our nationwide service footprint.
More recently, we acquired size wise in a transaction that closed on October 1st.
Well manufacturer and distributor of standards, especially bed frames therapeutic support surfaces and patient mobility equipments.
Size wise, clearly illustrates our overlap and extends bottle.
And beyond the direct and near term synergies, we're excited about the future opportunities that the size wise acquisition opens up for agility.
Obesity is a national challenge.
Across the continuum of care these patients require specialized medical equipment and handling protocols.
And they were at significantly higher risk for medical complications associated with prolonged bed rest.
Despite the need is patient population and the conditions that took care for them.
We remain woefully underserved.
Looking forward we see.
See a compelling opportunity to build on the size Wise Foundation.
And deliver new targeted solutions.
With a local clinical and operational support for which agility is known.
More broadly.
Agility maintains an active pipeline of M&A opportunities.
And the financial flexibility to pursue them.
We will continue to seek targets that can drive profitable volume through our national operations infrastructure.
Extend the value that we provide for our customers.
It enhanced our competitiveness.
The final point I'll make today regarding our strategy.
Is it wrong to extraordinary resilience and predictability that we built into our business model.
As you look across our business you can observe our connection to every phase of our customers medical device lifecycle.
As well as the balance of our business between the medical and the procedural sides of hospitals operations.
Financially.
This service for us as a natural internal hedge.
Meaning.
Garza said macro trends facing our health system as a whole.
Our specific situations or challenges affecting an individual customer.
Some part of parts of our solution set are always in demand.
I previously described the durable nature of the agility business model.
Which has been evidenced in our stable financial performance.
Started well before COVID-19 .
And throughout the highs and lows of the pandemic and now as we support our customers' transition back to normal operations.
Reflected in our results.
Is the resilience of our model and the essential nature of our work.
We're proud of the performance of our teams and have the important roles that agility is long performed in support of our National health care delivery system.
Looking forward.
We're even more enthusiastic about our strong business momentum and the opportunities ahead of us.
Let me now turn the call to Tom banning for his perspective on our performance.
Thanks, Tom I'll begin with some additional color on our commercial performance.
Then share a few reflections on recent macro trends and their impact on our business.
First we continue to see heightened customer demand for our rental equipment during the fourth quarter driven by both the Delta and Omar Khan variance of the COVID-19 virus, our Peerless National network medical device servicing logistics capabilities ensured that we remain responsive to the needs of our customers as they navigate the effects of the pandemic.
Now seeing a return to normal non COVID-19 device utilization levels as we approach the end of Q1 'twenty two we likewise expect to see a return to normal surgical case volumes across the country, which will favorably offset some of the impact from normalization of equipment demand.
More broadly while the persistence of COVID-19, and experience and an ongoing impact on customer mind share. Our teams continued to enjoyed access as we supported their short term needs today are increasingly engaging with our customers on their longer term strategic initiatives.
The topic of our new Federal government agreement for emergency medical device stockpile management on February 28 of this year agility entered into a new one year agreement with the U S Department of health and Human services, six assistant Secretary preparedness and response for the comprehensive maintenance and management services.
<unk> for medical or later equivalent.
Contract consolidates several prior agreements and it's comprised of an initial six month lease term and a six month option term on March one 2022, the agility publicly release details of this award.
In summary determined this new agreement for up to 12 months.
As intended to provide sufficient time for HHS to run a competitive multiyear contract award process, while minimizing the risk of interruption to the critical services that agility provides in support of our nation's ongoing COVID-19 response agility of course fully intends to compete for the future contract Award.
As we've shared on previous calls we operate under strict Nondisclosure agreement with HHS regarding the details of this contract and the work that we performed at their direction.
Information, we can discuss today is limited to what the federal government discloses publicly and what we provided today in our prepared remarks.
To take a moment to touch on the general subjects of labor availability wage inflation and supply chain risk. We continue to closely monitor these important inputs to our business and we followed a broader discussion happening across all industries as we shared last quarter. We are not seeing a significant impact from these macro issue.
Use.
Regarding labor availability, we tend to view this subject across three broad categories are we attracting high quality candidates to top of the funnel are we able to land the right candidates. Once we've engaged them in the recruitment process and finally can we retain good talent once they've joined agility with.
With that context in mind, what we're seeing today as we're currently tracking somewhat fewer candidates at the top of our funnel and our time to fill positions has ticked up slightly.
<unk> also seen increased wage pressure in certain local markets and that complicates our ability to successfully land candidates once we've engaged them in the process.
As a result today, we're seeing our own positions approaching 12% of total positions within the company while positions normally hover in the high single digits based on historic turnover levels at our in our high growth rate to date, we've not been able to manage through these additional open roles without meaningful customer.
Act or excess overtime, we continue to monitor our teams and our customers closely to ensure we can continue our work on trying to minimize the risk of employee burnout.
Our overall employee retention rates have held relatively steady over the last three years, we credit this to a culture that prioritizes the needs of our team members, including throughout Covid, when we extended new targeted benefits to ensure our teams financial and personal well being.
Bigger picture jewelry prides itself on mission driven work, we offer the opportunity to build a rewarding career doing work that makes a difference in the lives of patients and that supports our nation's health care system.
Further we ensure our team members have the opportunity to share in the success of the company through our cash and stock based incentive programs and more recently the introduction of an employee stock purchase plan.
Overall, we believe agility remains competitively position the generally difficult labor environment.
In terms of supply chain risks our outlook is somewhat similar the jewelry generally operates under longer term supply agreements with relatively fixed pricing or.
Our centralized purchasing and supply chain management processes ensures efficient acquisition management, a critical repair parts for the devices that we service for our own fleet and for those devices that we manage for our customers.
With the recent addition of manufacturing capabilities through our acquisition of size wise.
We are maintaining adequate safety stock to support the business through potential short term disruptions.
Okay.
I'll conclude with an update of the integration of our recent acquisitions.
First we have completed the integration of Northfield medical today, we go to market as a single surgical equipment repair team, we serve our customers with a differentiated service offering supported by our integrated technology platform and a common operating infrastructure.
We're also now well underway with our integration of size wise, we've aligned our commercial selling team and our operations leadership, which is our highest integration priority.
Combined team is collaborating in the field to bring our newly expanded solution directly to customers.
We're now taking steps to combine our financial and operating systems as well as our corporate functions and we're just beginning to merge our facilities vehicle fleet equipment inventory and operations personnel are projects that will span roughly the next two years.
With that let me turn things over to Jim to review our financial performance.
Thank you Tom.
I'll start with an overview of our Q4 and full year 2021 financials, and then end with some comments on our 2022 financial guidance.
For the fourth quarter total company revenue totaled $290 million.
Representing a 36% increase over the prior year.
Adjusted EBITDA totaled $85 million, an 18% increase over the prior year.
We estimate that size wise contributed approximately $40 million in revenue and $10 million and adjusted EBITDA for the quarter.
Which includes an estimated $2 million to $3 million of revenue contribution from Covid driven demand.
Adjusted EBITDA margins were 29% in Q4.
Down 440 basis points from last year.
Adjusted EBITDA margins versus the prior year were impacted by the acquisition of size wise as well as the acquisition of Northfield medical.
You will recall that agility generally enjoys a very strong margin profile. So.
So the companies we have acquired all start with lower pre synergy adjusted EBITDA margins.
Our strong operating performance drove an adjusted earnings per share of <unk> 25 cents up 25% or five cents a share over Q4 of last year.
This growth was a direct result of our strong overall business performance.
Partially offset by an increase of 32 million weighted average fully diluted shares outstanding associated with our April 2021.
Oh.
For the full year total company revenue totaled 1.84 billion, representing a 34% increase over the prior year.
Adjusted EBITDA totaled $331 million.
Representing a 41% increase over the prior year.
Adjusted EBITDA margins were 32% for 2021.
Up 150 basis points from last year.
Margins were favorably impacted by overall volume growth.
Most notably from record utilization or medical device fleet and services performed under our HHS contract.
Organic growth from new customers and Covid, driven medical device rental utilization.
Also significant drivers.
Our strong operating performance drove an adjusted earnings per share of <unk> 99 cents up 48 cents and nearly double last year's result.
Taking a closer look at the fourth quarter across our service lines.
We delivered strong revenue growth across both equipment solutions and clinical engineering and.
And a slight decline in onsite managed services revenue.
Equipment solutions revenue totaled $120 million up 54% year over year.
Our October 1st acquisition of size wise contributed approximately $40 million in revenue in Q4.
In addition, COVID-19 .
Covid demand continued in Q4, and while difficult to quantify we estimate had a net favorable impact of between 12 and $15 million versus pre COVID-19 levels.
In the prior year period, we also experienced a favorable impact from COVID-19 of approximately $11 million to $15 million.
Moving to clinical engineering Q4 revenue was $96 million.
Representing year over year growth of 57% for the quarter.
A significant driver of this performance was higher than anticipated revenue from work performed under HHS agreement.
In addition, we reported the revenue contribution from North field medical within our clinical engineering solution during the quarter.
Finally, our onsite managed services revenue totaled $74 million.
Representing a year over year decline of 1% for the quarter.
As we have previously described for nearly two years customers have been focused on the near term challenges related to COVID-19 .
And agility as equipment solutions service line has directly benefited.
As we emerge from this COVID-19 dominated period, where once again engage with their customers on longer term more strategic initiatives.
We are already seeing an increase in new onsite managed opportunities moving through our sales funnel.
Continuing down the P&L gross margin for Q4 totaled $121 million, an increase of $34 million or 40% year over year.
Our gross margin rate was 42%.
More than 100 basis points better than the prior year.
This improvement in margin rate was driven by record levels of utilization of our medical device fleet.
And by general volume growth across our solutions.
As all lines of business leverage a common operations infrastructure volume has a favorable impact on our margins.
SG&A costs for Q4 totaled $95 million, an increase of $26 million or 37%.
SG&A expenses as a percentage of revenue increased by approximately 30 basis points over the prior year.
The increase was primarily due to SG&A costs from our 2021 acquisitions net of achieved synergies.
Moving to the balance sheet.
We closed Q4 with net debt of 1.18 billion, which includes 1.19 billion in debt last $74 million of cash on hand on our balance sheet.
Our cash flow from operations for the year was over $210 million draw.
Driven by strong operating results and lower interest costs, resulting from the Paydown of our second lien debt facility as part of our IPO.
Strong cash flow generation and adjusted EBITDA growth resulted in a reduction versus the prior year of our reported leverage ratio to three four times at the end of the quarter.
As we stated in our Q3 earnings call. We had estimated that the size wise acquisition would result in an increase in our leverage ratio.
By approximately half a turn.
Which is consistent with our actual results.
A reminder, that over the longer term, we expect to maintain our leverage in the low to mid three times range.
As we anticipate using our strong balance sheet and cash flow generation to fund opportunistic M&A.
Jody maintains a position of significant liquidity with 316 million available as of December 2021.
This includes our $250 million revolving credit facility as well as cash on hand.
On October one 2021 with the closing of the size wise acquisition.
We successfully raised $150 million add on term loan with terms and pricing consistent with the most cost efficient portion of our term loan debt.
As we turn towards 2022.
I'll spend a minute on plan near term incremental capital investment.
We are guiding full year capex in the range of $80 million to $90 million or approximately 7% to 8% of revenue.
This is one to two percentage points higher than our normal level of annual investment to support our operations and it infrastructure as.
As well as the maintenance of growth requirements of our business.
There are several drivers for the increased spend in 2022.
First we were unable to invest at the targeted level of maintenance Capex for our equipment fleet last year.
Some device manufacturers experienced supply chain challenges and or quality related ship holds.
This is simply a timing delay it had no impact on our operations and we finished 2021 below our targeted spend level.
Next we are modestly increasing our investment to accelerate the ongoing build out of our internal systems infrastructure.
These investments are focused on improving customer experience and upgrading capabilities to support the rapidly expanding scale of our business.
Finally, with the acquisition of size wise, we are making several focused investments to modernize and expand our manufacturing infrastructure to align with our near term growth projections.
Turning now to the rest of our 2022 financial outlook.
As a reminder, we provide guidance for key performance metrics and a full year basis.
I'll start with a quantitative summary, and share our significant assumptions.
We currently expect to deliver 2022 revenue in the range of 1.16 to 1.19 billion.
Representing top line growth of 12% 15%.
We anticipate adjusted EBITDA in the range of 305 million to $315 million of.
A decline of approximately 5% to 8% compared to the prior year.
And as just stated our net cash capex guidance.
Flex our expected investment in the range of $80 million to $90 million.
Finally, we are adding adjusted earnings per share to our full year guidance metrics as we approach the one year anniversary of our IPO and our capital structure has stabilized.
For 2022, we expect adjusted earnings per share in the range of 89 to 94 cents per share.
From a qualitative perspective and as we have shared in each of our earnings calls throughout much of 2020 to our financial results, we will comp against that $30 million to $40 million in high margin Covid driven revenue tailwind from 2021.
While we saw some COVID-19 driven demand early in Q1 of this year, our 2022 plan assumes a return to pre COVID-19 equipment utilization levels for the balance of the year.
Additionally, and as Tom described earlier, our new HHS contract consolidates several prior agreements and it's narrowed scope reflects the ongoing management and maintenance of the device stockpile.
Without the incremental activities associated with its initial standup or deployment.
While the financial details of the contract remain confidential.
Implicit in our guidance is that agility will see an approximate $40 million to $50 million in revenue reduction in 2022.
That difference will be accounted for within both clinical engineering and onsite managed services.
Though the majority of the impact is expected within onsite managed services.
Consistent with our ordinary course of business, we expect to continue signing and implementing new contracts for our solution throughout the year.
As customers turn the attention back to their long term strategic and financial initiatives, where our solutions play an important role.
Net of the Covid impact and a re scoped HHS contract and adjusting for the annualized impact of acquisitions made in 2021.
Our guidance implies organic revenue growth in the mid to high single digit range consistent with our historical pre COVID-19 growth rate.
Finally, our implied full year adjusted EBITDA margins, which can be calculated from our 2022 guidance are expected to be in the range of 26% to 27%.
Primary drivers that will impact margins for the balance of the year include the normalization of rental device utilization back to pre COVID-19 levels.
Our internal assumptions on the new HHS contract.
And the impact of our acquisitions in Northfield medical and size wise.
Both of which start with lower pre synergy EBITDA margins when compared to agility historical average.
I'll now turn the call over to our operator to provide instructions for Q&A.
Thank you and at this time, we will be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.
You May press Star two if you would like to remove your question from the queue.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. We also ask that everyone limit themselves to only one question and one follow up question.
One moment, please while we poll for questions.
Our first question comes from the line of Matthew Borsch with BMO capital markets. Please proceed with your question.
Yeah.
Yes.
A little bit more about.
The change in your experience with labor availability and wage inflation.
Remember, what he said on the third quarter.
You know what you were saying was knowing.
It was modest really accelerating is there anything you can say about regional variation or.
You know what you know about.
Winter the theater way might be coming from anything like that.
Hey, Matthew it's Tom Ben and thank you for the question it's.
As we said in our prepared remarks.
We usually run in about the high single digit range in terms of.
Our vacancy rate within the within the company, where we're now hitting the low double digit rates and we are certainly are amping up our recruiting efforts to be able to make sure that we get the right people in the right roles. We've had to make some modifications in certain markets to our incentive structures in.
Order to make sure it was attractive to get people in those particular markets, but generally speaking as we shared in our in our remarks and of course, what we talked about last quarter, it's not having a material impact on the business.
Are you just in terms of where the trend it is been going for what <unk> seen over the last two months.
2020, so what youre getting at.
It has gotten better or worse.
Recently, I'm, just trying to figure out.
Trains running right now yeah. It's a good good question. So retention has remained relatively steady but with our growth. We have vacancies that we're trying to fill in I would say, it's been a little slower to fill the positions as we stated than it has been in the past, but the retention rates again remain relatively steady which is encouraging.
We have the right models in place our team members feel fulfilled in what they do and that the incentive structures are aligned with what their desires are so we're doing well in.
In terms of retaining but recruiting certainly in certain markets, it's a little more difficult than it has been.
Okay. Thank you.
And our next question comes from the line of Kevin Fischbeck with Bank of America. Please proceed with your question.
Great. Thanks.
I appreciate the comment about breaking out the organic revenue growth because it is kind of hard to tell.
Well you.
You know what.
What's underpinning everything given the deals and Covid and everything but maybe it makes sense to if you can give us a little additional color by segment. As you think about you know what's going to be growing maybe above that mid to high single digit range and what might be calling below that how much kind of a.
Are you assuming kind of a return to normal.
Core volumes or is there a pent up demand anywhere in the assumptions.
Yep.
Thanks, Kevin.
Don't break out the details with in revenue.
Just sharing a couple of things that I had shared in the prepared remarks.
First from a Covid perspective, we do expect that we're going to get back to a pre COVID-19 level here very quickly and recall that what I shared was that the 2021 impact for us overall was $30 million to $40 million.
So that would be a good.
Reference point as you think in 2021% to 2022 within equipment solutions.
Thing I called out which.
Is an important one is in Q4 the estimate for the size wise revenue for the acquisition was about $40 million for the quarter. So that also will impact equipment solutions in 2022.
So those are a couple of pieces to keep in mind the <unk>.
Other piece to keep in mind Kevin.
I pointed it out is within HHS that contract that we just renewed we estimate that the impact there is between 40 and $50 million of lower revenue.
And that primarily will impact on site it will impact both clinical engineering and onsite, but primarily on site.
So that hopefully gives you a little bit more color did you think about 2022 within each solution.
Okay.
Yes.
As we think about the Capex shifts that you guys were discussing it sounds like some of that was because of equipment delays and things like that are those things.
Fully resolved now or is this still having an impact and you expect it to be resolved by year end and if it if there are future delays would that potentially have an impact on your ability to serve clients.
So this is Tom.
Maybe you can hit that one.
Yeah. So.
Are they fully resolved.
No.
Medical device manufacturers are both seeing still some impact to the supply chains and there are still recalls that impact availability of equipment in terms of its impact to our business. So.
Zero risk.
We think about the says you have maintenance capex in our fleet, while we maintain at least.
The level, where we're continuously refreshing the equipment that we own so at delay simply means the average age of our equipment base H slightly over the course of the year, but no impact to our ability to meet the requirements of our customers and we just make it up when we can to ensure that we're refreshing R. R.
Fleet appropriately.
Alright, great. Thanks.
Our next question comes from the line of Frank Vanilla with Jefferies. Please proceed with your question.
Hey, guys congrats on a strong quarter here I guess too.
Two for me on the contract on the on the lower $40 million to $50 million low revenues in the quarter. Just wondering if you could maybe unpack that provide a little clarity clarity. There is that a is there some assumption there that there is sort of a six months.
Contract that it could end up six months or you know or it goes all the way. The tahltan 12 months, there is sort of a midpoint and what what is that that options.
That second six month option period.
Clarity sake.
Sure. This is how many kindergarten.
Take that for you. So if you take a look at what has happened.
Brent contract extension and by the way will be some two and a half years into <unk>.
One year contract initial contract, but let me give some color to what Scott.
There has been.
There has been a medical device stockpile for a very long time, we've been part of that medical device stockpile actually are managing it.
The half dozen or so years that I and this team has been here.
As part of Covid in our use cases, the pandemic it was significantly expanded and directly awarded to us.
You've seen us share over the last six months with a series of these one and two month extensions.
And then now a one year direct award that consists of a six month base period, a six month option period.
What's gone on and they describe it in the contract award.
The first initial extensions I think it was.
I hope that Covid could wane.
The time and the ability.
<unk> to run a competitive process without risk to the vital services that we provide with delta and Democrat and an uncertain paths with regard to COVID-19 .
The strategy that they outlined was a new one year.
Directing awarded contracts to agility to give them time to.
Okay.
Hey.
July process when they feel that that the world has stabilized that COVID-19 has not really.
<unk> seen it to the background. So they can run a full government procurement process without risk to the services that we're providing.
So it's structured as an initial six months with that with a six month option term and wood.
Generally expect that sometime between the first six months and the end of that option terms that I'll go ahead and run this a competitive process.
As we have stated continuously.
We have consolidated all of the predecessor.
Parts of the stockpile under our management over the last six years, we have additionally, consolidated other previously unrelated stockpiles under our management, we continue to feel very good about our position on this.
Whenever the government is finally in a position to be able to run a new longer term contract award.
Great. Thank you for that and then just just sort of taking a longer term view there. It is it prudent to assume I guess given the the variable portion there that this sort of steps down or or contribution wanes overtime to 'twenty three 'twenty four et cetera.
Oh I'm sorry.
$40 million to $50 million reflects.
That's what we have been.
Generally pointing to which we've spoken about the contract.
What is the ongoing maintenance storage management.
The stockpile.
Imagine in this first year when we got the award there was a substantial increase in the number of devices that needed to be managed.
Being made by a wide variety of manufacturers.
Provide us protection.
Taking on this greatly expanded uncertain stockpile.
It was structured in a way to support all these standup activities ensuring these devices are ready and then whatever deployment activities might occur over the course of that year.
So it was a very it was a larger contract.
The current contract.
It was back to that stockpile management and maintenance without assumptions of future.
She said appointments so it's that normalized level supporting a $15 million that we guided to here of reduced revenue is really that normalized level of revenue.
To see in our.
Future five year renewal options, reflecting managements.
Management of the stockpile again not the deployment.
That's the standup.
Great. Thank you I appreciate it.
And our next question comes from the line of Jason Cazorla with Citi. Please proceed with your question.
Hi, great. Thanks, Thanks for the questions I just wanted to quickly turn back to the labor supply commentary you noted, 12% open positions currently versus high single digits, historically and while that isn't a significant difference could you maybe expand on if this labor supply dynamics are impacting your go to market strategy for <unk>.
New revenue opportunities in the near term I guess just considerations around impacts for Gulfport as opposed to the ability to service current contracts, which you said you haven't really noticed the impact yet just any color there would be great. Thanks.
Yeah, Thanks, Jason Tom betting again, so we don't see the macro trends right now inhibiting growth and I think it speaks to the strength of our model and our ability to retain talent. We obviously have been proactive in making sure we recruit and retain.
At an accelerated level, but also some of the acquisitions that we've done it created some really nice synergies that have allowed us to be able to meet the customer demands.
Without having to fill these positions so we've grown 20% year over year and the pressure of filling.
Filling these positions and the head count really hasnt impacted our customers and in part because of the fact that.
We've been able to manage the talent balance that talent that we have both through the acquisitions and then in the existing resources that we had well and so right now again no impact on our delivery to our customers and our ability to meet the growth targets that we set for ourselves.
Got it great. Thanks, and then maybe just as a follow up I Wonder you called out short term Covid spoke yes, there's an impact for onsite managed services I think this is the first time to calling this argument all specifically I could be off here, but I was just hoping you could delve deeper around your comments on the sales funnel, there and how you're seeing the opportunity for that segment develop a mid <unk>.
Dynamic thanks.
Thank you Jason so on the equipment solution side, which is our augmentation of both equipment and labor resource for clinical engineering that was obviously in the highest demand during the critical periods for our customers as they were trying to meet the needs of their patients in various markets of course it was dramatic.
And so the strategic conversations around for instance, coming in and managing their equipment either across their facilities or across their ideas were postponed because their near term needs on the transactional basis outweighed their demand to try to really manage the equipment across.
Their enterprise so it was much more tactical and strategic and now that we're seeing the.
The amount of hospitalizations begin to drop.
We're seeing our customers re engaging on these onsite conversations which catch much more strategic and and that's why we're seeing the growth on the onsite side and as we mentioned earlier.
A return of some of the equipment, that's been deployed and distributed for some time because of.
The fact that the hospitalizations are beginning the trial so that pivot.
To more strategic conversations around full management of their equipment across their enterprise is starting to become more relevant.
Then it has been over the last year year and a half.
Because of the Covid demands.
Just just an additional point.
I'd share with you.
You said that it wasn't clear if we had.
Okay.
Indicated.
Yeah.
We're on site with land for the year, what I'll remind you is that when we guide only to fall.
Your revenue, that's our individual solutions, but what we've pointed out consistent.
Is.
Some portion of our business no matter, what's going on is always in there.
I bolted balanced across lifecycle needs of our customers.
When it comes to the devices as well as a balanced across both the medical and procedural sides of the house.
In this case, specifically I liken it to the example of that.
But when the house is on fire.
Somebody's looking for somebody to hand them, a hold or a bucket of water not pulp redesigning the kitchen.
In the same way when their houses were on fire during the course of Covid, our customers were looking for help.
Servicing the devices the teams and the equipment necessary to meet their needs.
The fires out.
Once again thinking about how do I know you said that you might help how do I.
<unk>.
Remodel the kitchen, that's just shift back to their longer term initiatives.
Stations with them shifting.
Again back to our focus on what.
What we do in our asset programs.
Got it thanks for all the color.
Our next question comes from the line of Matt <unk> with Keybanc. Please proceed with your question.
Good afternoon, and congratulations on a nice Oh I'm sorry.
Got it.
Just a quick one what percentage of your business is now tied to like weaker recovery in procedural volumes I mean now that the fires out seems it seems as if that's going to be the area of the hospital.
Call me back a little bit faster I, just wanted to better understand how levered you are to that.
Okay.
So we are somewhat levered the procedural side in two places.
To put the solutions, we have a business that provides.
And technicians to support the surgical cases as.
As well as the specialist for repair business.
Now that we can acquire both star skills as well as.
Mobile instruments business. So we are.
Well its procedure volumes when we've spoken in the past about OLED impact.
I've always described it as a net.
And Pat.
So the excess of demand.
Some types of equipments on the medical side.
All.
The reduction in surgical case volumes that impacted especially the business I've just described.
So we would expect these things are.
So lower utilization of things like pumps, and Vance and beds and monitoring.
Hey.
Corresponding pick up.
For things like our surgical laser business and our surgical instrument repair business.
Okay excellent.
And then just on revenue synergies.
You made a couple of really great acquisitions.
When you think about the acquisitions, you've made you've made them during a very a very difficult time for the hospitals you know as you kind of look to increase your share of wallet and grow market share.
Is it there is there since you've had those conversations with those customers and we're now at a point in 'twenty, two where do you feel comfortable with that they could start deploying those.
So, yes and yes.
Now what.
One acquisition again, just speak to that a balance across the medical and the placebo.
Sizable acquisition.
Clearly benefits on the medical side and as we've described a been a beneficiary.
Some excess COVID-19 demand.
Northfield and mobile instruments, both in the surgical instrument repair side have been.
Somewhat impacted by a reduction in surgical case volumes.
We've continued to sign business throughout this period and we do expect as surgical case volumes return.
To be a beneficiary of that both increase in case volumes as well as you're continuing to side sign that new business.
Yeah, we shared when combined the number two number three.
Our service organization to those acquisitions and surgical instrument repair, we're very excited about what our competitive position looks like.
With that we do expect that to be an important driver of growth for us in the future.
Thank you very much.
And our next question comes from Amit <unk> with Goldman Sachs. Please proceed with your question.
Thanks, This is Phil on for Amit.
A couple of clarifications, if I could the first one.
I appreciate the $40 million to $50 million.
One comment on the HHS contract I'm wondering if you can characterize whether or not.
Reduction in scope.
That's expected on a go forward occurred prior to this kind of full on renewal over the course of the last few months when the contracts were just being pulled forward or if this is a new phenomenon that the scope will be reduced moving forward.
The prior extensions, we're an extension of an existing array.
General one year direct contracts that were awarded.
And this new contract that we've just announced.
Is where we expect to see this revenue reduction impacts our 'twenty 'twenty.
It is much as we have been consistently guiding in terms of our expectation on what the scope of a longer term agreement would be as well again, what what comes out.
Causes the 40% to $40 million to $50 million reduction is reduced scope.
As I stood up.
And with respect to further deploy need to further deploy this equipment support our pandemic response. So those line items effectively come out and result in about a $40 million to $50 million.
Duction in scope and revenue for us, but that's for the new contract that was just announced.
Okay, that's very clear thank you.
And then secondarily on the year over year, Covid impact, but I saw the 30% to 40.
And obviously 12 to 15 comment on the quarter.
I also heard the getting back to a normal environment for equipment solutions. During the course of 2022, but it's fair to think about some level of impact occurring in <unk> persisting for a moment kron correct as the 12 to 15 experienced in <unk>, a reasonable starting point for the impact expected within 'twenty two guidance.
Primarily within the one quarter.
Yeah, I mean, I wouldn't think about it that way as I shared in my script.
We saw it early in the first quarter, but what we've assumed in for the balance of the plan is that it's not going to be material.
So we'll be back to a pre COVID-19 level.
Candidly starting.
And in the middle of it.
Q1.
So that so that is the range that you suggested it would be much higher than what we would expect to see in the quarter, we would expect a non material impact in Q1.
Okay. Thanks very much.
And we have reached the end of the question and answer session I'll now turn the call back over to CEO , Tom Leonard for closing remarks.
Thank you and thank you again, everyone for joining our call today I'll say, it's absolutely a privilege to get to share the great work of our teams.
They are doing to support our nation's health care system.
We're excited about our momentum as we enter 2022.
Look forward to sharing our continued progress with you with.
With that we'll conclude today's call.
And this concludes today's conference call.
And you may disconnect your lines at this time, thank you for your participation.
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