Agiliti Inc. Q1 2023 Earnings Call
Welcome to <unk> 2023.
Today's call is being recorded.
Located one out of four people prepared remarks.
The box and Q&A.
At this time I'd like to turn the conference over to Kate.
<unk> Senior Vice President.
Communication English relations.
Thank you you may begin.
Thank you operator, and Hello, everyone.
You for joining us on today's call is we provide an overview of a <unk> for the quarter ending March 31st 2023.
Before we begin I'll remind you that during today's call will be making statements that are forward looking and consequently are subject to risks and uncertainties.
Certain factors may affect us in the future and can cause actual results to differ materially from those expressed in a forward looking statements.
Specific risk factors are detailed in our press release and in our most recent SEC filings, which can be found in the investors section of our corporate website at agility health Dot com.
We will also be referring to certain measures that are not calculated and presented in accordance with generally accepted accounting principles. During this call you can find the 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 will use to facilitate today's discussion. Please visit our website at agility health Dot com.
The investors section at the top of the screen and then events and presentations finally select a presentation entitled Agility Q1, 2023 running slides.
Now turn the call over to our CEO company.
Good afternoon, and thanks for making time to join US today is review our results from the first quarter of 2023.
Call with me as our C F O Jim Kirk and we're coming to you from Las Vegas, where tomorrow agility, where participate in the annual Bank of America Health Care Conference. We look forward to this opportunity to meet face to face with many of our shareholders and with those who have expressed ongoing interest and agility.
Turning now to our results are financial results for the first quarter were in line with our expectations.
<unk> being just one quarter in and with three quarters of work still ahead of US we're reaffirming our full year guidance for 2023.
Jim will review our queue on results in more detail and provide additional color on our performance in a few minutes I'll first offer some brief observations on our progress.
Julia entered 2023, well positioned to execute our growth strategy and our results in the first quarter reflect our positive momentum as we've described.
Ribbed on prior calls were taking a balanced view on a year as we laugh laugh both the favorable contributions from COVID-19 in the prior year and the impact of the timing and revised scope of the H H S contract renewal as.
As we turned towards the second half of this year, we expect the underlying organic growth engine of the business to come more clearly into focus driven by our consistent new business momentum and steady customer demand for our connected solutions.
As we've shared our relationships with many of our customers has evolved from meeting their immediate transactional leads to more strategic partnerships and with the support of our GPO partners, we're seeing our customers purchasing commitments elevated from individual facilities to system wide commitments the.
The steady rate of hospital consolidation has further elevated advance for more system wide partnerships and for the past several years agility has been at the forefront of these discussions with our customers.
Accordingly, and as we shared where now shining more seven and eight figure annual value contracts than ever before in our country and our company's 80, plus your history.
[noise] umpire calls we've mentioned that these larger deals requires somewhat longer and more complex implementations as we embed ourselves deeply into our customers operations to unlock value in their medical device value chain.
This results in a longer ramp to profitability with implementation cost frontloaded in the process as.
As we've shared we expect that this dynamic will yield some near term lumpiness in our financial results.
Ran into the back half of the year, we expect these multiyear contracts once again support a more visible and predictable financial outlook consistent with our long history as a company.
In preparation for today's call I found myself, reflecting on the state of the health care industry from this time last year to now and in particular on the evolution of agility is important role and responsibility and supporting our broad network of customers across the nation.
While our collective outlook has certainly improved postpay endemic many of the challenges facing our health care system remain unchanged the burdens of capital constraints labor and supply chain shortages and broad based inflationary cost pressures.
The continued uncertainty surrounding the financial and operational environment is causing healthcare executives to seek partnerships with vendors, who can help to meaningfully reduce costs, while enabling better patient care and outcomes Jodie is uniquely positioned to help them accomplish both.
We believe agility stands alone when it comes to the manufacturing management maintenance and mobilization of medical devices.
Our goal for our customers as simple to ensure conditions have around the clock access to the patient ready medical devices. They need delivered to the point of care with the confidence that they are maintained to the highest industry standards.
Sure a few examples of these capabilities inaction and quantify the benefits to our customers.
On the labor front are unique ability to supplemental hospitals biomed team with agility technicians can compensate for our customers short term staffing shortages, minimizing employee burnout and reducing or eliminating overtime expense.
But helping our customers returned to her own devices back into circulation more quickly. We can also help reduce or eliminate other operational impact caused by a lack of equipment availability in excess rental expense.
Similarly, improving medical device utilization and reducing the cost of device ownership is another area, where agility makes a difference.
Even prior to the pandemic health systems generally owned too much capital medical equipment.
As we know many health system subsequently acquired even more equipment during the pandemic, which has had a near term negative impact on our equipment rental volumes as we previously stated.
That said many of these health systems now bear the financial and operational strain of expenses and increasingly idle assets that still require ongoing preventative maintenance and repair.
Jody supplemental clinical engineering, offering and our onsite management programs can address this challenge, helping customers free up both the capital and related operating expenses, resulting from having made long-term capital investments to meet the short term demands of Covid.
On top of the broad benefits of our product and service offerings were also implementing solutions that help improve the customer experience and ease the process of doing business with agility.
One such example is our recent order intake integration with each of the major EMR vendors, which speeds and simplifies customer ordering by enabling them to execute an order within their existing EMR workflow.
Among customers, who have implemented EMR ordering where now fulfilling 60% to 80% of customer requests via that channel.
As we continue to onboard a higher portion of larger customer contracts more system wide nature, we will continue to optimize our systems with features that enable us to embed ourselves more deeply within our customers value chain.
Staying true to our name our ability to rapidly evolve and bring meaningful and measurable solutions that improved care delivery is underscored our growth throughout our history as a company and this work remains critical today as we help our customers navigate the ongoing challenges of this post pandemic era and simultaneously.
Easily plan for the future.
As we progress in 2023, our teams remain focused on the disciplined execution of our strategy and on fostering strong and collaborative partnerships with our customers.
Looking forward, we even more enthusiastic about momentum in our business and the opportunities ahead of us.
I'll now pass the call them gym for detail on our first quarter results.
Thank you Tom.
I'll start with an overview of our Q1 2023 financials.
And later offer some comments on our outlook for the year.
For the first quarter total company revenue was 300 million referees.
Representing a 2% increase over the prior year.
Excluding the favorable impact from Covid in the prior year, which was estimated at $5 million to $7 million and primarily impacted our equipment solutions business.
Revenue increased approximately 4% in Q1 year over year.
Adjusted EBITDA totaled $72 million.
A 19% decline compared to Q1 last year and.
Adjusted EBITDA margin as totaled 24%.
Adjusted EBITDA margins compared to the prior year were affected by the revised scope of the new HHS contract renewal as well as a lower mix a medical device rental placements in the quarter.
In addition, adjusted EBITDA margins were negatively impacted by the onboarding over larger customer contracts.
Which tend to have lower upfront profitability with more front loaded costs during the implementation phase as Tom mentioned.
Adjusted earnings per share of 2000, and a quarter compares to 29 and the year ago period.
By both a declining adjusted net income and an increasingly effective interest rate on our deck.
Which amounted to approximately three cents a share for the quarter.
Taking a closer look at the first quarter across each of our service lines.
Oh equipment solutions revenue totaled $121 million.
1% year over year.
The decline was primarily attributable to lower customer utilization of our peak need rental equipment fleet in the quarter.
Excluding the prior year excess COVID-19 benefit equipment solutions was up approximately 4%.
Moving to clinical engineering.
Q1 revenue was $113 million, representing a year over year increase of 10% for the quarter.
New customer organic growth was the primary driver for the increase versus the prior year cause we continue to advance her solutions, including within our surgical equipment repair portions of the business.
Finally, onsite managed services revenue totaled 66 million rappers.
Representing a year over year decline of 6% for the quarter.
This is primarily driven by the renewal pricing and scope of our HHS agreement.
Which was reset to a longer term pricing model for managing and maintaining the stockpile devices.
Continuing down the piano.
Gross margin dollars for Q1 totaled $109 million a.
A decline of 12% year over year.
Our gross margin rate was 36.5% compared to 42% in the prior year period.
The decline in margin rate was primarily due to a lower mix of peak need rental placements post COVID-19.
As well as the factors related to the HHS agreement as previously described.
SG&A cost for Q1 totaled $89 million.
An increase of $3 million a year over year.
The increase was primarily due to costs associated with our queue for 2022 acquisitions.
And costs with our CEO transition.
Moving to the balance sheet.
We closed Q1 with net debt of 1.09 billion.
Our cash flow from operations for the first quarter was $55 million.
Ah reported leverage ratio at the end of Q1 approximated three nine turns.
Excluding the impact of the late Q4 2022 acquisitions.
Tammy associated purchase price paid for the businesses are leverage ratio would have approximated three seven turns as of March 2023.
Looking forward, we will remain diligent in determining the optimal use of our cash generation.
Agility maintains a position of solid liquidity with $222 million available and is comprised of $14 million of cash on hand and.
208 million available under our revolving credit facility as of March 2023.
In addition in April 2023, we expanded our revolving credit agreement by $50 million and extended the term to Q2 2028.
On a pro forma basis or total availability at the end of Q1 totaled $272 million.
Further in early May we completed a modification an extension of our term loan which transitioned are key underlying benchmark rate from LIBOR to sopher and extended the maturity date to Q2 2030.
A reminder, on the terms of our debt given the macro view, our near term interest rates.
Of R 1.09 billion in that we maintain an interest rate swap agreement on $500 million.
Which is swap floating right terms for fixed rate terms.
This provides a partial hedged for any anticipated market rate increases in the short term.
And it will expire June 1st 2023.
Anticipating this exploration and Q2.
In April 2023, we entered into a new interest rate swap agreement on $500 million of our debt within our effective date of July 1st 2023.
This new swap is the effect of fixing our sofa base rate at 4.07% and the agreement is a two year duration.
Turning now to our 2000 twenty-three outlook.
We are reaffirming our full year financial guidance.
Specifically, we expect to deliver 2023 revenue in the range of 116 to one not one 9 billion.
Representing top line growth.
4% to 6%.
We anticipate adjusted EBITDA in the range of $295 million to $305 million.
Our net cash Capex guidance reflects expected reinvestment into our business in the range of $85 million to $95 million.
Finally, we continue to expect adjusted earnings per share in the range of 65 to 70 cents per share.
A reminder, that we estimate the negative impact of higher interest expense to be in the range of 15 cents per share to 20 per share.
From a qualitative perspective and as we have shared in each of our earnings calls in 2023, our financial results will be copping against the favorable.
$5 million to $7 million impact of Covid in Q1 of 2022.
In addition, as we are shared and our prior earnings calls as a cue to last year, we saw lower than expected utilization of our equipment rental fleet.
Leveling out below 2019 pre pandemic levels.
R 2000 twenty-three guidance assumes placements were remain at this new baseline level.
And that we will continue to benefit from normal seasonality throughout the year.
Finally, our guidance implies a waiting a revenue growth towards the second half of the year as we continue to onboard new business.
I will now turn the call over to our operator to provide instructions for our Q&A.
Mhm.
Thank you Sir.
Ladies and gentlemen at this time, we will be conducting a Christian that authorization.
If you would like to ask a question could you. Please start in the one on your telephone keypad.
Confirmation code will indicate your line this is Christian Q.
You may please start in too if you would like to remove the accretion from the cute.
Full participants using speaking of equipment it might be necessary to go ahead and see it before placing the sakes.
Greece that you limit yourself to one question and one follow up.
One moment, please while we both Christians.
A prescription from your mission Keybanc capital markets. Please go ahead.
Hi, Good afternoon. Thank you for taking my questions and congratulations com on on a good first quarter.
Thank you.
I think you guys mentioned that the first quarter came and is expected I think are.
It was a little bit better than kind of street expectations.
Did you know better hospital activity.
Procedural volumes at hospital translate to better demand for you guys.
Yeah, ma'am. Thank you for the question.
What's really benefited US was some of these larger deals had begun to implement in Q1 that we spoke about frequently so I wouldn't suggest that it was really driven by the.
The positivity of admissions within the health systems, but rather our ability to start to get some of these larger deals to translate into revenue.
And when you talk about the the Frontloaded lumpiness of these contracts.
Assuming you'll always have contracts et cetera, Onboarding are these just specifically larger than what you had previously and then from here on out. These are the type of contract TB expecting so you'd be expecting it.
It wouldn't necessarily necessarily be like.
I got a one or two quarter Lumpiness something you kind of see more regularly going forward and is it just the change and kind of like the contracts with the size at this time.
Yeah, if you're you're exactly right Mad it's Ah when you compare and contrast, while we're onboarding now versus history the.
The size and scale has gone up.
And that's what the key driver is four four that Matthew.
Okay. Thanks <unk>.
Got it thanks for the questions.
Thank you.
The next question is from Jason persona off City. Please go ahead.
Great. Thanks. Good afternoon. Thanks for taking my questions wanted to go I wanted to ask about margins in the corner you know coming in at 24% with just a decent lift in margin progression throughout the rest of the year to hit the midpoint of guidance can you just walk us through how you saw margins developing a quarter of the factors that help drive Margaret between progression outside about doing a ramp up in.
These new large contracts will be helpful. Thanks.
Yeah, No problem, Jason Thanks for the question.
As I mentioned in the script there was a few drivers for the EBITDA margins in Q1 relative to the prior year now that were lapping COVID-19. We're on the other side of that but that did have an impact in Q1 SEC.
Second piece that had an impact was the renewal of the HHS agreement.
And then the third piece was just the onboarding of some of these larger contracts.
You are right to assume that the maps assumes that in the back half of the year the EBITDA margins do improve.
And then again that's back to one of the key elements for US as we've shared is the back half top line revenue growth right growth is our friend.
We have this shared infrastructure.
Or were able to put through this shared infrastructure. The better we are from a growth perspective, not only top or bottom line as well.
That helps you Jason.
Got it that's that's helpful. Maybe just a follow up I guess, the the strength in clinical engineering sit out in the quarter revenue up almost 11% new customer <unk>. This is related to the the these new contracts coming on and generated from that in our otherwise you know as we think about.
The rest of the year right should be considered momentum that business low double digit revenue growth and once he was a ferret bogey you have to think about the rest of the year are you know are the nuances, we should be aware of things.
Yeah.
Good good question as we've talked about previously you know for clinical engineering. It does represent a greater share of market share of wallet opportunity for us.
The answer to that question is yes. Some of these larger deals did onboard and the quarter, although we don't provide guidance on the quarters.
Can use history as the guide to.
To think about it for the full year Jason.
Okay. Thanks.
Thank you very much.
The next question comes from Kevin <unk> from Upa's. Please.
Thanks, Thanks for taking my question first question.
Just trying to understand how hospitals or or maybe acting differently now feels like the worst is behind him utilization maybe is getting better are you seeing any change in that kind of demand or the kind of ordering like are they asking for different types of products different types of services now than they were a year ago and how does that in.
<unk> if it if anything has changed.
Yeah. Thanks, Kevin further question and the answer is yes, as we shared in previous earnings calls up until about this time last year. Our customers were very transactionally focused trying to meet the near term needs of the constituencies in their patient populations.
Really only been in the last year that we've started to elevate the conversations with the customers, but what's changed is we're seeing customers, making decisions system wide not in all circumstances, but in many circumstances, where historically, it's been at a facility level and it's because they realize now the importance of medical <unk>.
<unk> management across our enterprise so the conversations have shifted from transactional two strategic and they've shifted from individual facility, making too. He has an idea in or system, we need to consider a decision that we can make across our enterprise and because of the very unique infrastructure that we have.
We can support them either regionally or nationally and we're really the only vendor that can do it depending on the services that they are looking for.
Mmk that's super helpful.
<unk> as we think about Onboarding, all the new business and I know a lot of your serve a little bit second half, there's gonna be a some momentum should we expect that to carry forward meaning.
I Wanna say, it's easy comps or whatever but it sounds like there's a potential for accelerated growth at this plays out and normalize. It does that is that a fairly to think about it without asking for guidance per se.
Yeah the the.
What I would share with you is just what we've shared in terms of this year right and if you think about first half second half.
We share the second half will be stronger from a year over year perspective.
When you do the math on first half in second half you can kind of conclude in terms of where the second half is going as I've indicated in the script are full year guidance was 4% to 6% growth for the full year.
See what we did in terms of Q1, okay.
Fair enough. Thank you.
You got it thanks for the question.
Thank you. The next question is from <unk> <unk>. Please go ahead.
[noise]. Good afternoon. This is more roadway and for Brian I had a question about the contract renewals when I get some clarity on your expectations for renewal for the remainder of the year and a follow up if I could get maybe an estimate on the amount of contracts.
Are set to expire.
Okay.
Okay.
Yeah I appreciate that question, we don't go into the that in terms of the level of granularity by customer I think the the one thing and maybe T V can.
Shed some light on this if he so chooses is just thinking about it in terms of more of the bigger picture GPO arrangements.
Which we feel very comfortable and in terms of where we sit.
And to my knowledge and CBE correct me, if I'm wrong, but there is no major GPO contracts upbringing rule no. That's correct. In fact, we've added a new service lines 200 G. P. O agreement, so we're pretty solid on the renewable front and pretty confident.
And it's it's considered already in our guidance for 2023.
Renewals are solid.
Great and.
Noted that there is an expansion and leverage ratio and I'm curious to know how you're thinking about a potential M&A.
Forward through this year essentially into 2024.
Yeah look with the higher interest expense.
More broadly, we're certainly being very intentional about reviewing each and every deal I will tell you that the intention in the back half of the year or M&A is more smaller tuck ins and to use our excess cash.
To pay down debt.
That is our goal for the balance of the year until.
Until we see things improved from a macro perspective.
We're still maintaining a very solid pipeline of opportunities, but I think Jim summarized it well, we're being very thoughtful and those tuck ins that make good strategic sense for us.
Okay. Thank you very much.
You got it thanks for the questions.
Thank you.
The next question is from <unk> of.
Please go ahead.
Hi, Thanks for taking the question Tom maybe just for you to start.
Just in your prepared remarks, you talked about kind of being more of the <unk>. Your customers <unk> can you go on to a little bit more detail. There, maybe where you are from a customer perspective, how much is left to go just give us any sense of what that could mean for for the business looking for maybe from an acceleration standpoint.
It'd be great to hear if you could maybe give us some kind of color on what you see from maybe even like same hospital growth for for kind of those those customers that are that you're a <unk> yeah.
Yeah. Thank you for the question I'll go in reverse order on that too early to tell them [laughter]. We were really excited about those customers, where we have integrated with her EMR and as I mentioned in my prepared remarks, once integrated we're getting 60% to 80% of the orders coming directly through that integration.
Too early to tell how meaningfully that's going to and pick us impact us longterm financially, but I can tell you to our customer lens. They are extraordinarily happy with our ability to be able to provide that solution in their clinicians workflow and that's very critical because too often they were having to leave workflow for our competitors.
Our circumstance they don't need to do so so.
Too early to tell in terms of the long term financial impacts, but it very well received from our customers as evidenced by the amount of utilization were getting when we implement.
Got it. Thank you and just a quick question more for for gym here, but I I think he made a couple of small acquisitions last quarter or are they close but can you talk about what the revenue contribution was for those those couple of deals.
Maybe just provide us what segments they were and thank you for taking the questions.
Yeah no worries.
They were immaterial overall from a financial perspective, as we shared in the last quarter. We didn't disclose it you should think about those truly in terms of small numbers in terms of where it impacted us.
Principally impacts us within equipment solutions and.
And Ah.
Smith and tiny bit within clinical engineering, but again drew both of those were immaterial and in totality.
Thank you.
Got it drew thanks.
That is true.
Thank you very much.
The next question is from Kevin Fish break off Bank of America. Please go ahead.
Hi, this is actually going to be able to carry on for Kevin. Thanks for taking my question I think they said that non COVID-19 equipped equipment solutions Avenue.
4% in the corner can you talk about what drove out.
Yeah sure I appreciate the question.
One of the really nice things within equipment solutions is it nicely balanced between peak need rental and other what we call a capital enabled rental solutions or if you think about in terms of surgical rental primarily around urology as well as spare.
Shelty pads.
Both of which require either a technician or a clinician to help onboard with the customer and we're seeing nice momentum with respect to those couple of areas of the business I hope that helps.
Mmm. Thank you.
You got it.
Thank you very much.
<unk> I have no further questions in the queue.
Well. Thank you all for joining us today, and we look forward to sharing our continued progress on our next call will close the call here operator. Thank you.
Thank you very much.
Ladies and gentlemen.
You may not disconnect your lines and thank you for your participation.
Mmm.
[music].
<unk>.