Agiliti Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 7, 2023

There are 6 speakers on the call.

Operator

Good afternoon, and welcome to Agility's Third Quarter 2023 Earnings Conference Call. Today's call is being recorded, and we have allocated 1 hour for prepared remarks and Q and A. At this time, I'd like to turn the conference over to Kate Kiser, Senior Vice President of Corporate Communications and Investor Relations at Agility. Thank you. You may begin.

Speaker 1

Thank you, and hello, everyone. We appreciate you joining us on today's call as we provide an overview of Agility's results for the quarter ending September 30, 2023. Before we 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. 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 agilityhealth.com.

Speaker 1

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 will use to facilitate today's discussion, please visit our website at agilityhealth.com, Select the Investors section at the top of the screen and then Events and Presentations. Finally, select the presentation titled Agility Q3 2023 Earnings Slides. A final note before we begin our prepared remarks.

Speaker 1

On October 2, 2023, Agility announced that Tom Leonard would rejoin the company as its Chief Executive Officer effective immediately. Mr. Leonard previously served as CEO of Agiliti 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.

Speaker 2

Thank you, Kate, and good afternoon. It's great to be back at Agility. I'd like to begin today with some brief reflections of rejoining the company and our path forward. Over the 1st 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, Seeking a clear understanding of our performance, obstacles and opportunities. What gives me confidence as I reenter the business Is that we don't need to look outside for near term growth opportunities and no part of our business faces a structural hurdle that impacts its long term potential.

Speaker 2

In other words, Agility has far more room to execute and has been apparent in recent quarters. The key to unlocking our potential begins with a rebalancing of mix. We've already begun to refocus and retrain our selling teams to once again deliver a healthy balanced business mix for the company. For Agility, mix is not simply the relative proportion of the individual solutions we sell. That's an important point that bears repeating.

Speaker 2

For Agility, a healthy mix of business is not just about the relative proportion for 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 is about refocusing on share of wallet capture opportunities within our existing customers That our combined solutions drive meaningful synergies for customers and we benefit from the efficiencies of shared teams, Tools and infrastructure, and it includes targeting our selling efforts in local markets where we have pre existing capabilities Importantly, these actions are not meant to represent a comprehensive list. Rather, they're among the many levers the company has long used to deliver a best in class margin profile. But that

Operator

had been missed if the

Speaker 2

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, much of management's discussion with investors has revolved around a post COVID rebaseline for our peak deed rental solution, as well as the financial impact of delays and upfront implementation costs as the company onboarded more and larger contracts than ever before in its history. This remains an accurate description of the variance in reported results from Ensign's expectations in those prior periods. But Verint's expectations is not the same as unrealized potential.

Speaker 2

Let me illustrate that point with a couple of examples. Beginning within our equipment solutions service line, Peakneed Rental has emerged as a significant driver in Agility's financial performance over the prior 3 years. First, as the company benefited from outsized demand for medical equipment during the pandemic. And again, as we moved toward a lower utilization baseline post COVID, as a result of our customers' excess medical device purchases during that period. But keep in mind, Indeed rental represents just 6% of total company revenue this year.

Speaker 2

So while it will always be critical for us to continuously refill the bucket With this type of transactional high contribution margin volume, Board Financial Impact of P and R on our overall results Today, as it was prior to the pandemic, The more strategic offerings within our equipment solutions service line and more importance to our longer term growth plans Include our Specialty Beds and Clinical Circuses Solution or SES as well as our Surgical Services offering. SES includes product manufacturing capabilities and clinically differentiated support services acquired through the SizeWise 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 2 years ago, we began to invest in R and D, systems infrastructure Manufacturing automation. Starting in 2024, we'll begin to see clear benefits as a result of those investments.

Speaker 2

One example, We currently make and support more than 100 variations of therapeutic support services in a variety of sizes, materials and levels of performance capability. We will soon launch a streamlined best in class range of therapeutic support services under the Agility brand It will simplify the decision process for our customers and provide Agility line of sight to gross margin improvements as we simplify our supply chain and achieved benefits from our increased manufacturing scale. We're excited about our first significant new product family launch within a solution we see Our surgical services offering is primarily focused on urology procedures, Rigility mobilizes surgical lasers and 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 through our strong manufacturer relationships. Having completed the integration of the contracts, teams and modalities It came with the late 2022 acquisition of Healthtronics.

Speaker 2

We're well positioned with gross 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 and Northfield Medical in 2021. These acquisitions of the prior numbers 2 and 3 players by revenue in surgical equipment repair Launched Agility into a fast growing segment of the market. As an independent service provider, we offer our customers a strong financial value proposition, A one vendor solution for the repair needs, along with the confidence of working with a business that is ISO 1345 certified and backed by a full medical device quality management system.

Speaker 2

Both Mobile Instruments and Northfield required during the pandemic when surgical case volumes 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 and are executing on our roadmap for growth and accelerating margin expansion. In summary, as we rebalance our selling mix and focus on better execution across all of our solutions, We believe our core financial engine will once again deliver highly profitable and predictable growth.

Speaker 2

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 management 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 weigh on our valuation and we're committed to working through them.

Speaker 2

I return to Agility to lead this company because I deeply believe in our team We're delivering strong returns for our shareholders. So as we complete and prepare to report on the full year As an expectation for 2024, we're committed to providing the right level of transparency and color on the business to strengthen your view of our progress. For now, I'll pass the call to Jim to provide detail on our Q3 results before returning to take your questions.

Speaker 3

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 Q3, total company revenue was 292,000,000 Representing an 8% increase over the prior year. Adjusted EBITDA totaled 62,000,000 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 knee rental placements.

Speaker 3

In addition, 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 SCS and Surgical Services, including the contribution of the prior year acquisition. Adjusted earnings per share of $0.09 in the quarter Compares to $0.19 in the prior year, driven by a decline in adjusted net income. The impact of the increase in the effective interest rate on our debt amounted to approximately $0.05 per share in the quarter. Taking a closer look at the 3rd quarter across each of our service lines. Equipment Solutions revenue totaled 113,000,000 up 10% year over year.

Speaker 3

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 SES. 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 $115,000,000 representing a year over year increase of 11% for the quarter. New customer growth was the primary driver of the increase versus the prior year as we continue to win and onboard new business, including within our surgical equipment repair service line.

Speaker 3

Finally, On-site managed services revenue totaled $64,000,000 representing a year over year decrease of 1% for the quarter. Continuing down the P and L. Gross margin dollars for Q3 totaled $97,000,000 a decrease of 5% year over year. Our gross margin rate was 33% compared 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 and the lower renewal pricing of the HHS Agreement.

Speaker 3

We will anniversary the HHS renewal pricing in Q1 of 2024. SG and A costs for Q3 totaled $87,000,000 an increase of $1,300,000 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 a lower projected management incentive payout. Moving to the balance sheet.

Speaker 3

We closed Q3 with net debt of 1,050,000,000 Our cash flow from operations for the 1st 9 months of the year was 148,000,000 And 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 are internally focused on improving our business mix and margins, And we have paused on actively pursuing M and 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-3x range. Agility maintained a solid liquidity position as of September 2023 With $323,000,000 available, comprised of $30,000,000 of cash on hand and $293,000,000 available under our revolving credit facility.

Speaker 3

As a reminder, In April 2023, we expanded our revolving credit agreement by $50,000,000 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 LIBOR to SOFR and extended the maturity to Q2 2,030. Finally, of our $1,050,000,000 in debt, we maintain an interest rate swap agreement on $500,000,000 which swaps floating rate terms for fixed rate terms. This swap has the effect of fixing our sulfur base rate at 4.07 percent and the agreement expires at the end of Q2 2025. Turning now to our outlook for the remainder of 2023.

Speaker 3

We are reaffirming our full year guidance for each of our metrics. Specifically, revenue in the range of $1,160,000,000 to 1,190,000,000 Adjusted EBITDA in the range of $260,000,000 to $270,000,000 and adjusted earnings per share $0.54 per share to $0.59 per share and finally, our capital expenditures at $80,000,000 That concludes our prepared remarks, and I'll now turn the call over to our operator to provide instructions for Q and A.

Operator

Thank you. We will now be conducting a question and answer The first question we have is from Jason Casola of Citi. Please go ahead.

Speaker 4

Great. Thanks. I know more on 2024 is coming next quarter, but I was hoping if you could give us For margin expansion in 2024 just outside of any major upswing in P and R demand. And then if there's any reason why we Shouldn't leverage the longer term targets you have out there for the 3 businesses just as proxies to think about revenue growth for next year at this point? Thanks.

Speaker 2

So I'll start.

Speaker 3

No, Ed, Tiela, I'll follow.

Speaker 2

We're both eager to jump in. So let me start and say, our ability to expand our margins is not simply a function of Peakneed Rental Performance. It's actually about driving the right mix as I described in my prepared remarks across our business with really the most important driver being a focus on building Local market density, ensuring those areas in and around our local infrastructure of teams of medical devices of 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 business generates its best incremental margin On that next dollar of revenue. Jim, do you want to touch on mix?

Speaker 3

Yes. I think you hit it to a tee. Jason, we haven't provided the Guidance hit on 2024. What I'd ask you to look at though is just a trend for 2023 As we completed Q3 and use that as a starting point for 2024, but more to come there, Jason, as we round

Speaker 4

Okay, got it. And maybe just a follow-up on that plan around the transactional, I guess as we think about the growth levers there, the SCS and the surgical services outside of the P and R, how should we think about the EBITDA flow through of those solutions against the P and R? Just Trying to think of the magnitude as you focus there. And then it sounds like the shift is a top priority, but Curious what the lead times look like for the implementation of the shift. If we should think about this as like a day 1 turnaround or if it would take a few quarters to kind of See more of a material mix shift, just trying to get a sense of timing around this too.

Speaker 4

Thanks.

Speaker 2

Thanks for that. So the first with regard to 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 the place that we source The operating capabilities to deliver against that next dollar of revenue. So what do we mean about that? A bit more simplified.

Speaker 2

I can sell the same Piece of business, for example, supplemental clinical engineering, we may go in and help a customer who's fallen behind and he has a couple of dozen infusion pumps That they haven't been able to get parts for, as an example. If that's a customer who's down the street from one of my Local service centers, we may be able to do that work, transporting that equipment in our existing vehicles To an existing facility with existing full time employees that have already been bought and paid for by other parts of our business, That would flow through at very high contribution margin. Conversely, if that Aim need was done in a place that's not a place where I have local market capabilities or where I don't have capacity and I have flex Over time, or if I have to put somebody in an airplane to go to that facility, that could be actually not very profitable, less than our corporate average Your contribution to Service Debt revenue. So what's key is not necessarily exactly which solutions and in which proportion we sell them. It's really about how we drive our business in ways that we can maximize that leverage of these local markets capabilities that we enjoy.

Speaker 2

And in terms of the sort of the speed of the turnaround or the Change. Here's how you think about it. In terms of us getting off course as we had at this point, I think about it like a ship crossing the ocean. If its steering compass is just 1% off, a couple of degrees off In the 1st day or so, might not be noticeable, maybe a few 100 yards off force. But by the time you reach the other side of the ocean, You might miss your intended port by a couple of 100 miles.

Speaker 2

And while a business is a perpetuity, it doesn't have a destination, the same thing is true. By being a little bit off in a number of these areas, they're always off for the wrong side. We've gotten Off course and you can see that clearly in our margin profile. Getting back on course is about making Small course adjustments in a variety of places within our business. It's not big changes.

Speaker 2

It's not blowing up anything that we do today. We We don't need an 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 It will increasingly be seen in our financial results. So it doesn't happen in a day or a week, But it will happen consistently.

Speaker 2

I would say give us a few quarters to start to see some of the impact. We'll point you To some of the impact as it happens, as a leading indicator, we'll give you a report card 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 of this business.

Speaker 4

Great. Thank you very much.

Operator

The next question we have is from Brian Tanquilut of Jefferies. Please go ahead.

Speaker 5

Hi, everyone. This is Nour Roble in for Brian. Tom, now that you're back at the helm, I guess I just want to first get a high level Full review of what your strategic priorities are moving forward as we go into Q4 and into 2024?

Speaker 2

So thank you for the wide open question. 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 Extraordinary financial engine that you used to 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 as I've returned to the business. This is an amazing business. It is underachieving, I think, by a wide degree what its True potential is. So getting there quickly again is the biggest near term priority that I have.

Speaker 2

Longer term, what makes Agility unique is this isn't a bet 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 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 profitable volume, not just of the solutions that we enjoy today, but that others That we might build or acquire in a business really has untapped Potential in terms of the future for it. So near term, it's getting back to a healthy margin profile.

Speaker 2

Longer term, it's really about driving growth organically and inorganically by driving meaningful volume through our local market infrastructure, where we can do it more profitably and without peer, better than anyone.

Speaker 5

Great. And then for Jim, I guess I'm curious to know some of your capital allocation priorities. You noted that You paused M and 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?

Speaker 3

Yes. 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 all the reasons that Tom pointed out in his script, That's the way to think about it. Thank you for the question.

Operator

The next question we have is from Kevin Fischbeck of Bank of America. Please go ahead.

Speaker 1

Hey, this is Nabil on for Kevin. Thanks for taking the question. Recently hospitals have been talking about cost pressure from labor and professional fees. Is that having an impact on your conversations with clients on

Speaker 2

Hi. What we have long prided ourselves on as a company is being on the right side of healthcare. What that means for us We have the opportunity every time we go into one of our customers' facilities to take on some of the work that they try to do for themselves and do it in a fundamentally different way. We don't have a badge flip model where we trade their employees for our Outsourced employees, which really runs the risk of just adding costs for them. Rather, we can help them when it comes to the medical devices they own, Free up the excess capital tied up in owning too many medical devices and the costs the spending costs that come with supporting those devices, We can reduce their reliance on rental by driving the utilization of the equipment that they own.

Speaker 2

We can reduce their costs of repairing and maintaining their medical devices. Because we focus our solutions on delivering a hard dollar financial return For our customers, it's precisely when they're in this place when they feel that financial pressure. I think that our conversations are most powerful with our customers.

Speaker 1

Great. Thank you.

Operator

There are no further questions at this time. I would like to turn the floor back over to Tom Leonard for closing comments.

Speaker 2

So first, I want to thank Everyone for the opportunity to speak with you today. I'm 6 weeks now. I'm back in the business. I'm very excited To have the opportunity to be here. This truly is a business with a bright future And our near term challenges are both obvious and I think very manageable.

Speaker 2

So we're going to look forward to providing an update on our progress As we complete 2023 and as we share our goals as we turn the corner into a new year. And with that, I'll go ahead and conclude today's call.

Operator

This concludes today's conference. Thank you for joining us. You may now disconnect your lines.

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Agiliti Q3 2023
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