Q3 2023 Agiliti Inc Earnings Call
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Good afternoon, and welcome to the Trinity sits quota changes during Q3 earnings conference call.
Today's call is being recorded and we've allocated one hour for prepared remarks and Q&A.
At this time I'd like to turn the conference as a cheesecake Kaiser Senior Vice President of corporate Communications and Investor Relations at agility.
You may begin.
Thank you and Hello, everyone.
We appreciate you joining us on today's call as we provide an overview of agility results for the quarter ending September 32023.
Before we begin I'll remind you that during todays call well be making statements that are forward looking and consequently are subject to risks and uncertainties certain.
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 investor section of our corporate website at agility helped dotcom.
We will also be referring to certain measures that are not calculated and presented in accordance with generally accepted accounting principles during the call you.
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 download a copy of the presentation that will be used to facilitate today's discussion. Please visit our website at agility health Dot com select the investors section at the top of the screen and then events and presentations.
Please select the presentation titled Agility, Q3, 2023 earnings slides.
A final note before we begin our prepared remarks.
On October 2nd 20, twenty-three agility announced that Tom Leonard with rejoined the company as its Chief Executive Officer effective immediately Mr.
Mister Leonard previously served as CEO of agility beginning in April of 2015 until announcing his retirement in January of this year.
I will now turn the call over to our CEO Tom Leonard.
Thank you Kate and good afternoon, it's.
It's great to be back into Germany.
I'd like to begin today with some brief reflection, but would be joining the company.
And our path forward.
What was the first few weeks my focus has been on reconnecting with our teams across the company.
And doing a deep dive into our solutions and operating systems.
Taking a clear understanding of our performance obstacles and opportunities.
What gives me confidence as I reenter the business is it we don't need to look outside for near term growth opportunities.
No part of our business faces a structural hurdle it impacts its long term potential.
In other words.
Jody has far more room to execute and has been apparent in recent quarters.
The key to unlocking our potential.
Again with the rebalancing of mix.
We've already begun to refocus and retrain, our selling teams once again delivered healthy balanced business mix for the company.
For agility.
It is not simply the relative proportion of the individual solutions we sell.
That's an important point that bears repeating.
You're already a healthy mix of business.
It's not just about the relative proportion of our individual solutions.
It also includes balancing larger multi year customer contract wins with a steady flow of more transactional high contribution margin business, including rental and supplemental clinical engineering.
It means regaining the discipline of building local market density to ensure we best utilize our existing local market capabilities, a key driver to improving our overall margin profile.
It's about refocusing on share of wallet capture opportunities within our existing customers.
Our combined solutions to drive meaningful synergies for customers and we benefit from the efficiencies of sure James.
Tools and infrastructure.
And it includes targeting our selling efforts in local markets, where we have preexisting capabilities.
Reduce our growing short term reliance on margin staffing third party service partners.
Importantly, these actions are not meant to represent the comprehensive list.
Rather they are among the many levers the company has long used to deliver a best in class margin profile.
It had been missed is the company over indexed on generating top line growth.
Also key to achieving both near and longer term growth goals will be unlocking the potential of our entire business.
In recent quarters.
Management's discussion with investors because revolved around a post COVID-19 re baseline for our peak day rental solution as.
As well as the financial impact of delays and upfront implementation cost.
The company on boarded more and larger contracts than ever before in its history.
This remains an accurate description of the variance in reported results from analysts expectations.
Prior periods.
But various expectations is that the same as unrealized potential.
Let me illustrate that point with a couple of examples.
Beginning within our equipment solution service line.
Did you need rental has emerged as a significant driver in a julie's financial performance over the prior three years.
First as the company benefited from outsized demand for medical equipment during the pandemic.
And again as we move toward a lower utilization baseline post COVID-19.
As a result of our customer customers excess medical device purchases during that period.
But keep in mind.
These rental represents just 6% of total company revenue this year.
So while there will always be critical for us to continuously refill the bucket.
With this type of transactional high contribution margin volume.
For the financial impact of PNR on our overall results should be more muted at this current level.
Today as it was prior to the pandemic.
The more strategic offerings within our equipment solution service line.
And more important to our longer term growth plans.
<unk>, our specialty beds and clinical circumstance solution or S. Yes.
As well as our surgical services offering.
And she gets includes product manufacturing capabilities and clinically differentiated support surfaces acquired through the size wise acquisition in 2021.
This solution has been a consistent growth driver and presents a long runway for margin improvement as well as opportunities for future strategic investment.
Shortly after our acquisition two years ago.
To invest in R&D systems infrastructure and manufacturing automation.
Starting in 2024 will begin to see clear benefit as a result of those investments.
An example.
We currently make in support more than 100 variations of therapeutic support surfaces, and a variety of sizes materials and levels of performance capability.
We will soon launch a streamlined best in class range of therapeutic support surfaces under the agility brands.
It will simplify the decision process for our customers.
To provide agility line of sights to gross margin improvements as we simplify our supply chain and achieve benefits from our increased manufacturing scale.
We're excited about our first significant new product family launch with.
And our solution, we see as key to our long term gross Roe goals.
Our surgical services offering.
It was primarily focused on urology procedures.
Our agility and mobilize the surgical lasers.
Certified laser technicians provide access to a range of modalities in a pay per case model.
We enjoy the number one competitive position by revenue in this segment and have access to a broad range of technologies, including several on an exclusive basis for our strong manufacturer relationships.
Having completed the integration of the contracts teams and modalities that came with the late 2022 acquisition of electronics.
Well positions with growth and margin expansion initiatives as we prepare to enter a new year.
Staying on the topic of unlocking the potential of our entire business I'll share just one more example, this time from our clinical engineering service line.
You'll recall that we acquired mobile instruments in early 2020.
In North field medical in 2021.
These acquisitions of the prior numbers, two and three players by revenue and surgical equipment repair once did you already into a fast growing segments of the market.
As an independent service provider, we offer our customers a strong financial value proposition.
A one vendor solution for their repair needs.
Along with the cockpit is working with the business and as I said 30 to 45 certified and backed by a full medical device quality management system.
So mobile instrument Northfield were acquired during the pandemic.
When surgical peaceful I use around the country were below normal levels. So we took the opportunity at that time to focus on integrating our operations and harmonizing our commercial strategies.
Today, we hold a strong competitive position, we enjoy positive momentum in the market.
Executing on our roadmap for growth.
And accelerating margin expansion.
In summary as.
As we rebalance our selling mix.
Focus on better execution across all of our solutions, we believe our core financial engine will once again deliver highly profitable and predictable growth.
Our ability to execute on these and other opportunities within our portfolio remains well within our control.
As I conclude my prepared remarks today I want to acknowledge the recent analyst and Investor feedback we've received.
We appreciate the importance of bandwidth rebuilding the trust and confidence of the market.
We believe the recent performance of our equity significantly undervalues, the strength of our financial engine, our competitive position in the markets we serve.
And the sustainable advantages of our unique operating model.
We understand the overhangs that currently way on our valuation.
And we're committed to working through that.
A return to agility to lead this company as a deeply believe in our team.
And the critical role of agility plays in our National medical device infrastructure.
And in our ability to rebuild a bright future for this company.
While delivering strong returns for our shareholders.
So as we complete and prepared to report on the full year instead.
Instead of expectations for 2024.
We're committed to providing the right level of transparency and color on the business.
In your view of our progress.
For now I'll pass the call to Jim provide detail on our Q3 results before returning to take your questions.
Thank you Tom.
I'll start with an overview of our Q3 2023 financials and later offer some comments on our outlook for the year.
For the third quarter total company revenue was $292 million.
Representing an 8% increase over the prior year.
Adjusted EBITDA totaled $62 million.
A 7% decline compared to Q3 last year.
And adjusted EBITDA margins totaled 21%.
Adjusted EBITDA margins were affected by the revised scope of the new HHS contract renewal.
As well as a lower number of peak need rental placements.
In addition, <unk>.
Adjusted EBITDA margins were negatively impacted by mix within equipment solutions with lower peak need rental revenue.
Partly offset by strong revenue growth for both FCS and surgical services.
Including the contribution from the prior year acquisition.
Adjusted earnings per share of nine cents in the quarter compares to 19 cents in the prior year drew.
Driven by a decline in adjusted net income.
The impact of the increase in the effective interest rate on our debt amounted to approximately five cents per share in the quarter.
Taking a closer look at the third quarter across each of our service lines.
Equipment solutions revenue totaled $113 million.
10% year over year.
The increase was primarily attributable to onboarding, new surgical rental business, primarily driven by the December 2022 acquisition.
As well as new customer growth within SCS.
Growth within equipment solutions was partially offset by lower peak need rental revenue in the quarter versus the prior year.
Moving to clinical engineering.
Q3 revenue was $115 million.
Presenting a year over year increase of 11% for the quarter.
New customer growth was the primary driver of the increase versus the prior year.
We continue to win and onboard new business <unk>.
Including within our surgical equipment repair service fine.
Finally, onsite managed services revenue totaled $64 million.
Representing a year over year decrease of 1% for the quarter.
Continuing down the P&L.
Gross margin dollars for Q3 totaled $97 million.
A decrease of 5% year over year.
Our gross margin rate was 33%.
<unk> to 37% in the prior year.
The decline in margin rate was primarily due to a lower mix of peak need rental placements.
The onboarding of new large customers within our clinical engineering solution.
Handle lower renewal pricing of the HHS agreement.
We will anniversary the HHS renewal pricing in Q1 of 2024.
SG&A costs for Q3 totaled $87 million.
An increase of 1.3 million year over year.
The increase was primarily due to severance costs related to a reduction in staffing in the quarter.
As well as costs associated with the CEO transition.
These costs were partially offset by favorable incentive expense associated with our lower projected management incentive payout.
Moving to the balance sheet.
We closed Q3 with net debt of 1.15 billion.
Our cash flow from operations for the first nine months of the year was 148 million.
Our leverage ratio at the end of Q3 was approximately 3.87 times.
As we proceed through this year and into 2024, our capital allocation strategy will focus primarily on reducing our debt.
And continuing ordinary course reinvestment in our business to support our operations and growth initiatives.
In the short term we.
We are internally focused on improving our business mix and margins.
And we have paused on actively pursuing M&A opportunities.
Although we continue to maintain a healthy pipeline.
Additionally.
We do not anticipate further share buybacks under our current authorization in the foreseeable future.
We continue to target maintaining our longer term leverage ratio in the low to mid three X range.
Agility maintained a solid liquidity position as of September 2023.
With 323 million available.
Apprised of $30 million of cash on hand.
$293 million available under our revolving credit facility.
As a reminder, in April 2023, we expanded our revolving credit agreement by $50 million and extended the term to Q2 of 2028.
Further in early May we completed a modification and extension of our term loan.
Which transitioned our key underlying benchmark rate from Wyborcza sulfur and extended the maturity to Q2 2030.
Finally.
Of our 1.15 billion in debt.
We maintain an interest rate swap agreement on 500 million.
With swaps floating rate terms for fixed rate terms.
This swap has the effect of fixing our sofa base rate at 4.07%.
And the agreement expires at the end of Q2 2025.
Turning now to our outlook for the remainder of 2023.
We are reaffirming our full year guidance for each of our metrics.
Specifically revenue in the range of 1.16 to 1.19 billion.
Adjusted EBITDA in the range of $260 million to $270 million.
And adjusted earnings per share of 50, 754 cents per share $2 59 per share.
And finally, our capital expenditures at $80 million.
That concludes our prepared remarks.
And I'll now turn the call over to our operator to provide instructions for Q&A.
Thank you.
We will now be conducting a question and answer session.
You can call in to ask a question. Please press Star then one on your telephone keypad.
A confirmation tone will indicate your line is seeing the question queue.
You May press Star and then two if we've got to move to a question from the queue.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the sakes.
The first question we have.
Jason Cazorla of Citi. Please go ahead.
Oh, great. Thanks, I know more on 'twenty 'twenty four is coming next quarter, but I was hoping if you could give us a sense of the major swing factors had with Intel ones to consider for next year.
And if at a high level, there's potential for margin expansion and 24, just outside of any major upswing in PNR demand and then you know if there's any reason why we shouldn't leverage the longer term targets you have out there for the three businesses just as proxy to think about revenue growth for next year at this point. Thanks.
So I'll start.
No not at all.
All of them.
But we are both eager to jump in.
So let me start and say our ability to expand our margins is not simply a function of peak need rental performance.
It's actually about driving the right mix as I described in my prepared remarks across our business. We really think the most important driver being our focus on building local market density ensuring those areas in and around our local.
Our local infrastructure of teams with medical devices.
Our vehicle fleet.
Driving business near in and around those local facilities. It's when we leverage that as a core part of our service delivery that that business generates it's best incremental margin on that next dollar of revenue.
And Jim do you want to touch on mix.
Yeah, I think you hit it.
Jason we haven't provided the guidance yet on 2024.
Ask you to look at though is just the trend for 'twenty two 'twenty three as we.
Completed in Q3 and use that as a starting point for 2024, but more to come there Jason as we rounded round the bend.
Okay got it and maybe just a follow up on that point around the transactional I guess as we think about the growth levers there they see us in a surgical services outside of the P&L, how should we think about the EBITDA flow through of those solutions against the PNR just trying to think of the magnitude.
As your focus there and then it sounds like the shift is a top priority, but just curious what the lead times look like for the implementation of the shifts you know if we should think about this as like a day, one turnaround or if it will take a few quarters to come.
More of a material mix shift just trying to get a sense of timing around those two things.
Yeah, Thanks for that.
So the first one with regards to your individual solutions and their contribution margin as the next dollar of revenue that we onboard.
It is less about is it peak need rental or is it supplemental clinical engineering, it's really a lot more for this business and the margin profile around that.
The place that we source the operating capabilities to deliver against that next dollar of revenue. So what do we think about that bit more simplified.
I can sell the same piece of business for example, our supplemental clinical engineering, who may go in and help a customer who has fallen behind and he has a couple of dozen infusion pumps that they haven't been able to get parts for example.
If that is the customer who is down the street from one of my local a local service centers, we may be able to do that work, but you are transporting that that equipment in our existing vehicles to an existing facility with our existing fulltime employees that have already been bought and paid for by other parts of our <unk>.
Yes.
That would flow through at very high contribution margin.
Conversely, if that same game need was done in a place that's not a place where I have local market capabilities or where you don't have capacity and I have flex overtime or if I have to put somebody in an airplane to go to that facility.
And that can actually not very profitable lessen our corporate average contribution.
To service that revenue.
What's key is not necessarily exactly which solutions and which proportion we sell them.
It's really about how we drive our business in ways that we can maximize that leverage of.
Of these local markets capabilities that we enjoy.
And in terms of that sort of the speed of the turnaround or that change.
So I'd have you think about it.
Yeah sure so much getting of course as we had have you at this point.
I think about it like a ship crossing the ocean.
It's steering compass is just your 1% off a couple of degrees.
Yes, and the first day or so.
It might not be noticeable maybe a few hundred yards off course, but by the time you reach the other side of the Ocean you might Miss your intended port by a couple of hundred miles.
While our business is a perpetuity it doesn't have a destination that same thing is true.
By getting a little bit off.
And a number of these areas, but always off to the wrong side.
We've gotten off course, and you can see that clearly in our margin profile hitting back on course.
It's about making small forest adjustments and a variety of places within our business is not big changes, it's not blowing up anything that we do today, we don't need the entirely new sales force, we don't need anything that we don't already have within our portfolio. It's about the small adjustments some of which we've already started to make that will increasingly.
<unk> seen in our financial results. So it doesn't happen in a day or a week, but it will happen consistently I would say give us a few quarters to starts to see some of the impact of a point you to some of the impact as it as it happens right.
Leading indicators will give you a report cards as we proceed but you should expect a slow but steady progression back in the right direction, which will be most clearly seen over time in the gross margin rate in this business.
Great. Thank you very much.
The next question, we have from Brian <unk> of <unk>.
Jeffrey Please go ahead.
Hi, everyone. This is nor roadway in for Brian.
Now that you're back at the helm I guess I just wanted to first get a high level overview of what your strategic priorities are moving.
Moving forward as we go into Q4.
And then into 2024.
So thank you for the a D a.
Wide open question Oh.
What I'm really excited about spending my time doing right now is getting back deep into the heart of the business.
And working with the teams to understand exactly where we are which things are going well and what adjustments we need to make to make this business that at.
Extraordinary financial engine.
You should be able to set your watch to.
It's something that gives me great Joy and it's one of the things I'm. Most excited about is like returns to the business.
This is an amazing business. It is under achieving I think by a wide degree when its true potential is.
We're getting there.
<unk> again is the biggest near term priority that app.
Longer term what makes agility unique is this isn't a bad on a on a single technology, it's not a bet on a short term trend.
What we enjoy what powers this.
Financial engine is a local market infrastructure.
Of of teams and capabilities when it comes to managing maintaining repairing mobilizing medical devices.
The longer term opportunity for this business is to continue to drive.
<unk> volume not just of the solutions that we enjoy today, but the others that we might build or acquire it.
And our business really is test.
Untapped potential in terms of the future for it so near term, it's getting back to a healthy margin profile longer term, it's really around driving growth organically and inorganically.
By driving meaningful volume to our local market infrastructure, where we can do it more profitably and without peer.
Better than anyone.
Great and then for Jim.
Yes.
Curious to know some of your capital allocation priorities, you noted that paused M&A and aren't doing any share buybacks, but given that half of the overall debt of the company is at a variable rate how are you thinking about paying down the debt versus investing in the business.
Yeah look I think we'll be very thoughtful about it obviously, we know our cost of debt has gone up.
So I think we'll be pretty well balanced with both paying down debt as well as reinvesting in our business for.
For all the reasons that Tom pointed out in his script.
That that's the way to think about it.
Thank you for the question.
Ladies and gentlemen, just a reminder, if you would like to ask a question Youre welcome to press Star and then one.
The next question we have is from Kevin Fischbeck of Bank of America. Please go ahead.
Hey, this is gonna be along for Kevin and thanks for taking the question you know recently hospitals have been talking about cost pressure from labor and professional fees is that having an impact on your conversations with clients on where they can save money elsewhere or is it preventing them from having conversations with you at all cause there.
Shocked by it.
Hi.
What we have long prided ourselves on as the company is being on the right side of health care, what what that means for US is we have the opportunity every time, we go into one of our customers' facilities.
Take on some of the work that they tried to do for themselves and do it in a fundamentally different way yeah. We don't have a badge flip model, we retrieved their employees for our outsourced employees, which really runs the risk of just adding cost for them.
Rather we can help them when it comes to the medical devices that they own.
Free up the excess capital tied up in owning too many medical devices and the cost base any cost that come with supporting those devices, we can reduce their reliance on rental by driving the utilization of the equipment that they own we can reduce their costs of repairing and maintaining their medical does.
<unk>.
We focus our solutions on delivering a hard dollar financial return for our customers.
Precisely when they're in this place when they feel that financial pressure I think that that our conversations are most powerful with our customers.
Great. Thank you.
There are no further questions at this time.
Like to turn the floor back over to come the nickel closing comments.
So first I want to thank everyone for the opportunity to speak with you today.
Six weeks now are back in the business I'm very excited to have the.
The opportunity to be here.
It truly is a business with a bright future.
And our near term challenges are both obvious and I think very manageable.
We're going to look forward to providing an update on our progress as we complete 2023.
We share our goals as we turn the corner into a new year.
And with that I'll go ahead includes conclude todays call.
This concludes today's conference. Thank you for joining US you may now disconnect your lines.
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