Q2 2023 Agiliti Inc Earnings Call
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Good afternoon, and welcome to the second quarter 20 twenty-three earnings conference call.
Today's call is being recorded and we have allocated one hour for prepared remarks and too many.
At this time I did like to turn the conference over to match My Cape Senior Vice President of Finance and Investor Relations at agility.
Thank you and you may begin.
Thank you operator, and Hello, everyone. Thank you for joining us on today's call is we provide an overview of a deal with these results for the second quarter ending June 30th 2023.
Before we begin I'll remind you that dream today's call, we 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 could cause actual results to differ materially from those expressed in these 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 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 all used to facilitate today's discussion. Please visit our website at agility health dotcom.
Like the investors section at the top of the screen and then events and presentation.
Finally, select the presentation titled Agility, you 220, twenty-three, earning slides.
I will now turn the call over to our CEO Tom Bang.
Good afternoon, and thank you for joining us today as we review our results from the second quarter of 2023 on the call with me today is our senior Vice President of Finance Investor Relations, Matt Mccabe, and our Chief Financial Officer, Jim pick Eric Jim will review, our queue to results in more detail and provide additional color on our performance and outlook.
And the second quarter revenue increase consistent with our forecast over prior year. However, we did not see a corresponding increase in the EBITDA contributions that we expected due to shift in our solutions mix.
There are two main factors driving this shift first is discussed in recent quarters, we've seen a lower mix of peak need rental or piano replacements post COVID-19, which is wait on our EBITDA margins SEC.
Secondly, the volume of large deals require somewhat longer and more complex implementations, which result in a longer ramped of profitability due to the higher upfront servicing costs.
The combination of these new larger contracts and a contraction in our PNR business wait on our profitability in the second quarter. We expect this trend to continue into impactful your results Jim will discuss our guidance in more detail.
To provide some additional background, we highlighted last year that we were experiencing a rebaselining of the utilization of our rental fleet primarily in the areas of infusion pumps ventilators in patient monitoring devices. We experienced continued slowing in R. P. In our business during the second quarter of.
2023, due to reduce demand that resulted from the significant medical equipment purchases made by our customers over the past few years.
Is there a mix of balls, we're very encouraged by the benefits, we expect to receive as our customer relationships mature into strategic partnerships, resulting in longer and more mutually beneficial agreements.
Over the longterm this mix shift will help to create a more valuable business with a more predictable revenue and EBITDA stream.
In the near term, we expect to deliver solid revenue growth for the year in line with our forecast.
As we look towards the second half of 2023 and beyond our teams remain focused on identifying and prioritizing the strategic opportunities across health systems, and securing enterprise wide commitments to grow our opportunities set.
Now I will discuss three key trends that we're seeing in our business that showcase agility strengths and opportunities for growth.
First I'm proud to report that we continue to make good progress expanding our engagements with both new and existing customers.
As our customers increasingly recognize our value this translates into new opportunities for agility or <unk>.
Sales teams are highly focused on growing our business and driving market share as we differentiate through the breadth and quality of our offerings and our unique ability to service large clients and provide I D and wide solutions with our technology enabled capabilities.
At the ground level Vagility stands alone when it comes to the manufacturing management maintenance and mobilization of medical devices, we provide patient ready medical devices deliver where needed when needed and maintains the highest industry standard on a platform that scaled to serve the entire healthcare.
Continuum.
Acknowledging the value we provide to our customers. We were pleased to have been awarded the health Trust performance groups clinical supplier of the year Award in July The award is a testament to our impact in addressing some of the key financial clinical and operational constraints facing today's health care system. This award is meaningful.
It's based on driving value and measurable outcomes for health care providers, while empowering clinicians and health care workers to confront challenging circumstances every day.
The second topic I'll discuss is converting new business into revenue.
This has been and will continue to be a critical component of our growth strategy going forward and I'm proud of the solid top line performance, we delivered in the second quarter. Thanks to our team's efforts to work with our customers and help them realize the full value of the solutions. They've purchased this conversion is especially important as we continue to secure more significant and.
Strategic relationships with our customers.
One notable area of recent growth for our business is in the ambulatory surgery center market over the last few months, we have one contracts with two of the largest AFC franchises for services, including clinical engineering surgical equipment repair and surgical laser rental in these cases, we have received corporate level support to can.
<unk> their sites from a myriad of local vendors to agility very pleased with our continued progress in this growing market and we're excited to increase our footprint, while continuing to provide meaningful support that improves patient outcomes.
The third trend is ongoing optimization of our business structure by retaining and leveraging talent and identifying areas. We can increase efficiencies to further strengthen our platform.
The jewelry offers unique opportunities for career growth advanced training his path to higher compensation and passed to management, which attracts exceptional industry talent.
Offered from within a rapidly growing company with a nationwide reach it's a combination of benefits opportunities and mission driven work that a health system just simply can't match.
As a result, our employee retention has remained steady and many job categories over the last several years, but it's at record levels and some of our customer facing roles.
Has been particularly important as we've onboard it acquired businesses and we endeavor to leverage the skills of our talented teams to continue our growth momentum.
We're also increasing efficiency by continuing to expand the implementation of solutions that help to improve the customer experience and streamline the process of doing business with agility as.
As discussed in our last call a recent order intake integration with each of the major E. M. R. Vendors has simplified the ordering process, while increasing the accuracy of the customers ordering by nibbling them to execute an order directly within their existing EMR workflow amongst.
Amongst customers, who have implemented the ear more ordering where now fulfilling 60% to 80% of their requests via this channel and I've seen an approximate 20 per cent increase in order velocity due to the simplification and efficacy of ordering within current work flow.
Before I wrap my prepared remarks, I'd like to highlight a few examples that how agility is helping health systems address complex challenges by leveraging our broad and unique nationwide footprint.
First Vagility recently secured a single source supplier gaming with one of the largest group purchasing organizations for onsite managed services. This is a new category for this G. P O and a revalidate <unk> of our value in this area. It also secure as our ability to make progress scoring our overall onsite managed.
Services platform as we progress through the second half of this year and into 2024.
In addition, we recently secured a large program with a device manufacturer to provide targeted remediation efforts for their equipment fleet.
With this agreement will be providing clinical engineering services to bring their equipment back to required specifications.
Finally, we continue to make progress with the government cause we were just awarded another multi million dollar agreement with the veterans administration.
These are just a few illustrations of the progress, we're making growing our business across both new and existing customers.
As we move into the second half of the year. Our teams remain focused on the disciplined execution of our strategy. We understand the challenges health care facilities face. We continue to work hard to foster strong collaborative partnerships to create long term value. Our goal is to help our customers realise measurable savings through improved operating performance.
Mormons, which ultimately results in better patient care.
Now pass the colander gym for details on our financials.
Thank you Tom.
I'll start with an overview of our queue to 20 twenty-three financials.
And later offer some comments on our outlook for the year.
For the second quarter total company revenue was 291 million, representing a 6% increase over the prior year.
Adjusted EBITDA totaled 66 million.
A 6% decrease compared to Q2 last year and adjusted EBITDA margins totaled 23 per cent.
Adjusted EBITDA margins were affected by the revised scope, the new H H S contract renewal as well as a lower number of peak need rental placements.
In addition, <unk>.
Justin EBITDA margins were negatively impacted by the onboarding of larger customer contracts, which have tended to have lower upfront profitability with higher service costs.
Adjusted earnings per share of 14 cents in the quarter compares to 19 cents in the prior year.
Driven by a decline in adjusted net income and an increase in the effective interest rate on our deck.
Which amounted to approximately four cents per share for the quarter.
Taking a closer look at the second quarter across each of our service lines.
Equipment solutions revenue totaled 114 million.
Up seven per cent you over a year.
The increase was primarily attributable to Onboarding new business.
Partially offset by lower customer utilization of our peak need rental equipment fleet and a quarter versus the prior year.
Recall that we had previously estimated that our peak need rental placements would trend more closely with 20 twenty-two beginning in the second quarter of this year.
This has not occurred as our customers were slower to return our own the equipment throughout 2022.
As time noted customers also invested in a higher quantity of their own equipment.
Moving to clinical engineering.
You too revenue with 112 million.
Representing a year over year increase of 7% for the quarter.
New customer growth was the primary driver of the increase versus the prior year cause we continue to advance our solutions, including within our surgical equipment repair portions of the business.
Finally, onsite managed services revenue totaled $65 million <unk>.
Representing a year over year increase of 4% for the quarter.
This is primarily driven by organic growth in our onsite managed solutions, where our employee show up each day to more efficiently utilized customer own medical equipment.
Continuing down the P&L.
Gross margin dollars for Q2 total 99 million.
An increase of one per cent your over a year.
Gross margin right with 34%.
Compared to 36% in the prior year.
The declining margin rate was primarily due to a lower mix a peek need rental placements.
Higher cost to onboard new business.
And the factors related to the H H S agreement terms as previously described.
S T and a cause for Q2 totaled $81 million a.
A decrease of 1 million year over a year.
Moving to the balance sheet we.
We closed Q too with net debt of 1.09 billion.
Our cash flow from operations for the first half of the year was 82 million.
A leverage ratio at the end of Q2 on a pro forma basis after adjusting for the impact of the late Q4 2022 acquisitions was.
It was approximately 3.85 turns.
Looking forward we.
We will remain diligent in determining the optimal uses of our cash generation.
Jody maintained a solid liquidity position as of June 2023, with 282 million available.
Comprised of 9 million of cash on hand, and 273 million available under a revolving credit facility.
As a reminder, in April 20th twenty-three, we expanded our revolving credit agreement by $50 million and extended the term Q2 2028.
Further in early May we completed a modification an extension of our term loan.
Which transitioned are key underlying benchmark rate from LIBOR too so for an extended a maturity acute 220 30.
Finally.
R 1.09 billion in debt.
We maintain an interest rate swap agreement on 500 million.
Which swap floating right terms for fixed rate terms.
Anticipating the expiration of this swap on June 1st 2023.
In April 20th twenty-three, we entered into a new interest rate swap agreement on 500 million of our debt effective July 1st 2023.
This new swap has the effect of fixing our silver base rate at 4.07%.
And the agreement is a two year duration.
Turning out toward 20th twenty-three outlook.
We are reaffirming our full year revenue guidance in the range of 1.16 to 1.19 billion.
In addition, as.
As we shared in our prior earnings calls.
Beginning in Q2 of last year, we had modeled a rebaselining of the utilization of our peak need rental equipment fleet.
Or 20 twenty-three initial guidance assume placements of our peak need rental fleet will remain at this level.
After the completion of a 20th twenty-three flu season, we've experienced placements below the prior year period.
We estimate this trend to have an additional $20 million to $30 million of revenue impact for 2023.
Recall that this revenue has a high flow through the prophets.
In addition, we continue to onboard larger new contracts some of which have lower initial profits.
Accordingly, we are taking a more conservative view on the balance of the year for our earnings.
This decline will also be reflected in our adjusted EBITDA margins.
Which we expect to remain at lower relative levels as a result, the more muted profitability from the current mix.
Specifically, we now expect adjusted EBITDA between 260 million and 270 million for the full year 2023.
As our mix evolves and we start to see the benefits from the larger contracts materialize.
<unk> peak need rental stabilizing at more normalized post COVID-19 levels.
We expect our longer term margins will stabilize.
But will likely remain below our historical levels.
As Tom mentioned offsetting this margin impact will be a solid and more predictable stream of revenue, which gives us confidence in our longer term performance.
Continuing with our 20th twenty-three guidance.
We know expected just it earnings per share in the range of 54 to 59 cents per share.
A reminder, that we estimate the negative impact of higher interest expense to be in the range of 16 cents per share the 19 cents per share.
We have improved our cash capex guidance and expect a reinvestment into our business and $80 million.
Note that this reflects a reduction in our year over year Capex for equipment fleet space.
Specifically related to our peak need rental investments.
Offset partially by investments being made for information technology <unk>.
Including the development of software to support projects to improve our infrastructure and customer experience.
That wraps up our prepared remarks, and now I'll turn the call over to our operator to provide instructions for Q&A.
Thank you.
Ladies and gentlemen, leaving and I'll be conducting a question and answer session.
If you would like to ask a question please best stock and one on your telephone keypad.
A confirmation filling will indicate your line isn't the question Q U.
You may have pets star and two if you would like to remove your question from the queue.
But participants using speaker equipment, it may be necessary to pick up your handset before pressing the stocky.
Ladies and gentlemen, we will wait for a moment, while we pulled full questions.
Our first question comes from the line of Matthew Mission with Keybanc capital markets. Please go ahead.
Thank you and and good afternoon, I, just first on the revenue guidance, which which you kept intact. It did it it seems as if there is a revenue impact from the lower utilization of of the rental equipment.
Are you off setting that that impact with with additional revenue somewhere else or are you kind of pointing to the low to the low end of the revenue ranch and and while keeping it.
Slow down driven by the supplemental equipment placements coming down by 20 to 30 million.
We also discussed in the script then big can share the progress that we're making with respect to the other areas of our business, both with new and existing customers. So you're right I'm Mad as we've talked about previously we had a number of new deals brought in we were convert.
He knows new deals and we're starting to realize the benefit of the conversion of those deals and that's why you're seeing the offset.
So when you think about the incremental change is it incrementally positive on the revenue you're expecting them to be receiving from these contracts that that's offsetting it or is that is that in line with your expectation of like going into the year and we should be lowering.
Our our revenue number towards the lower end to reflect these changes.
Yeah, Matt, we're progressing well with the onboarding of the newer business.
That's what we would share mad with respect to that portion.
Of the overall revenue guide.
Hope that helps.
Okay and then just lastly on the on on the EBITDAR would you would you mind walking us down it from your exist. Your your previous EBITDA arrange to to the currently about our range. The 35 million dollar change how much of that was.
Is is distinctly due to the rental utilization and how much of it is due to the slower onboarding or the swell of ramp and profitability for for the contracts and jumped.
Back in the queue after that.
Yep, No worries Mad first and foremost, it's due to the lower equipment placements.
H from a revenue perspective again, it was 20 to 30 million, which has very high flow through top line. The bottom line. So that is by far and away the biggest driver further reduction.
The rest is we shared in the script is principally based upon onboarding, the new business, it's coming in at lower initial margins.
But the the first piece there that.
That being the equipment placements being down is.
The most.
Salient point there of the reduction.
Okay. Thank you.
Thank you.
Our next question comes from the line of Jason The third law, but city. Please go ahead.
Yeah, great. Thanks, Good afternoon, I just wanted to follow up on the lower equipment rental baseline I guess, what's changed since you Lord that baseline back in the second quarter of 22, as a customer behavior or anything along those lines. I guess, you know does that change the longer term kind of growth outlook for that business with just the lower baseline you're gonna <unk>.
No more naturally off of or is it just you know differences are thinking about that that business in the entirety of just any help there would be would be great Sir.
Yeah. Thanks, Jason so on our PNR business the equipment rental service, it's designed to meet supplemental equipment needs of the customers and it always tends to ebb and flow of census in customer buying practices. We expect in time for that supplemental rental demand to resume but in the near term.
We've taken a conservative outlook on the assumptions and they're all considered in our 2023 gardens.
Okay got it your English in Jackson.
Yeah, I guess it just it sounds like it's just swelling or anything but do you expect this is gonna be like a true baseline for the business going forward you'd think he'd grow up the star there's no material kind of Rebasing, that's still needs to be done our pockets of caution that you would think that that's out there at this point.
That's right. We believe we have taken a conservative approach here for the outlook that we've got it too in 2023 at Jason.
Okay got it thanks, and then maybe just doing a follow up you know I wanted to go back time to your commentary around improved visibility kind of going for it I guess you know after the three basic I guess I'll just gives you the confidence there you know.
In your invisibility that highly reoccurring revenue business.
Kind of moving forward I guess, if any other or just cometary around the visibility of the business going forward the margin profile vans and can you just anything along those lines would be great.
Yeah, Thanks, Jason as as we mentioned in a previous earnings call. <unk>. This was gonna be a tale of two years. The first half of the year being a little cloudy from both COVID-19 as well as the flu season, the second half of the year as we talked about we would have a more.
Or visible view on the revenue side and it talked about to be a mid single digit grower on the top line, we're already starting to realize that with the conversion of this business that was brought in that was in the queue and is now converting and we're seeing a lot of other new business coming in that gives us very.
Good confidence that the top line will grow consistent with the expectations that we set and consistent with current guidance and we also believe on the EBITDA side that this is the right conservative view on what the full year looks like based on the conversion of that new revenue coming in.
Okay got it thanks for all the color.
Thank you.
Our next question comes from the line of Brien Tankful it but.
But Japanese please go ahead.
Hey, good afternoon, guys. What is the follow up just to the questions around margin. So.
Should we just be thinking about this as a margin reset ordinary salaries that cause it sounds like at.
At least the the way I'm hearing it is that.
Basically yeah. This is your expectations.
For the foreseeable future, but then as I think about especially wrapping up piano again and then you.
Like getting some of these contracts wrapped up you shouldn't the margins start picking up stay within the next six months or so.
Yeah. So I'll hit on the short term peace T V can hit on the longer term view, but it is true that in the short term. It is implied in the twenties twenty-three guidance.
That the full ear guidance it took them bitcoin or the range. It's in the 22 22, and a half ish range. So that would be fair to say that it's in that same.
Ah range is where we sit today as we turned that page into 20th 24, some of the things that I would just Wanna make sure that we.
We understand is that when we think about EBIT margin rapes overall.
Our biggest opportunity for advancement is volume gross cause we're able to leverage our shared infrastructure, which includes our S. G. N a is.
Is it as it relates to your question specifically around supplemental rental demand longer term I would just say this that as Tom B and we have shared in the script. We believe that this is a conservative view with respect to the balance of this year cause we turn into 2024 obvious.
Scully of things revert back to more of a historical level that does represent a tailwind for us moving forward.
Anything else Yeah, we just say two that we've seen nice growth in other modalities within equipment solutions, particularly those areas, where we can wrap differentiated services around a piece of equipment and a good example of that is on the specialty birds and the opportunity for us to assist our customers as they need that.
Asian for either a specialty frames and surfaces or med surge beds. So while indeed, we are taken in conservative view and at some point, we do expect the supplemental rental demand specifically around infusion pumps ventilators and monitors that I mentioned in the script to rebound we are seeing nice growth in the us.
[noise] modalities, they just don't contribute as much EBITDA out of the gate.
Got it and then it was my second question you you've touched on the surgery centers that are like new opportunities there how it should be thinking about you a number one the runway in that business. It sounds like you're very early obviously, but also what kind of margin profile should we be thinking about it you K Mart trashy in that space.
Yeah, just as a reminder, where I mentioned in the script, we earned our commitments with the largest franchises at a corporate level, but it's still demands us going at two a facility level and getting them along with the support of the corporate level converted both on the areas of clinical engineering that's the.
Repair and maintenance of devices as well as the ability for us to provide rental augmentation for <unk> and the lake. So we see that business, particularly around clinical engineering being pretty consistent with the other parts of our business rentals, a little bit different because reimbursements different.
In the AFC marketplace, but the biggest opportunity we have there is around surgical equipment repair as well as overall device repair on the clinical engineering side.
Gotcha, no hunting license basically what you got right now.
Exactly that but that's new to us Ah we hadn't gotten those in the past the decisions were made locally and now we're getting corporate commitment similar to what we're seeing on the idea inside where you've got the the the corporate office is wanting to get the benefits of the value that agility can provide.
Alright awesome. Thank you.
Thank you Brian .
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Ladies and gentlemen, a reminder, if you wish to ask a question. Please press star and one.
Our next question comes from the line of Matthew and the shot with Keybanc capital markets. Please go ahead.
Alright. Thank you just a quick couple of follow ups you guys have done really well with size wise Oh for the last thing I'm almost.
Almost like you're in a half since you've you've owned it we have heard from some of the surgical equipment providers that bariatric surgeries are have have taken a little bit of a step back to the G. L. P ones as part of the rental utilization a little bit of a step back and expectations around.
Size wise and and the bariatric pets.
No it's not Matt. Thank you for the question the Ah demand for our specialty frames and surfaces hasn't waned as remain very consistent and size wise, it's been a great catalyst to allow us to solve that problem for our customers.
Okay, and then I think you you mentioned Ah Ah remediation with a with a with a large medical device manufacturer I think a lot of us can figure out who that is it as they do come back from the absence over over like the last couple of years do you do you feel as if.
You have a good handle on you know your customers and how much you know pumped demand that they that they needed from their rental fleet and sat customer what was was out and you know whatever that excess demand was for you guys, we could potentially be offset by the by helping in this remediation.
I don't think there's going to be much of a shift in demand through the remediation. These are to bring our devices up to.
Per specifications I really can't go into too much more detail on that because we're under NDA on this but we don't see that impacting any of the guidance that we have for twenty-three.
Thank you.
Thank you.
Ladies and gentlemen, if you wish to ask a question Please press star and one.
As there are no further questions I would now have the confidence Silva to Tom blending fall closing comments.
[noise]. Thank you operator, and thank you all for joining us today, and we look forward to sharing our continued progress next call. So we'll close the call. It here. Thank you.
The confidence of Agility, Inc. Has now concluded. Thank you for your participation you may now disconnect your lines.
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