Agiliti, Inc. (AGTI) Q1 2023 Earnings Call Transcript
Good afternoon, and welcome to Agiliti’s First Quarter 2023 Earnings Call. Today’s call is being recorded, and we have allocated 1 hour for prepared remarks and Q&A.
At this time, I’d like to turn the conference over to Kate Kaiser, Senior Vice President of Corporate Communications and Investor Relations at Agiliti.
Thank you. You may begin. Thank you, operator, and hello, everyone. Thank you for joining us on today’s call as we provide an overview of Agiliti’s results for the quarter ending March 31, 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 agilitihealth.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’ll use to facilitate today’s discussion, please visit our website at agilitihealth.com, select the Investors section at the top of the screen and then Events and Presentations. Finally, selected presentation titled Agiliti Q1 2023 Earnings Slides.
I’ll now turn the call over to our CEO, Tom Boehning.
Good afternoon, and thanks for making time to join us today as we review our results from the first quarter of 2023. On the call with me is our CFO, Jim Pekarek, and we’re coming to you from Las Vegas where tomorrow, Agiliti will participate in the Annual Bank of America Healthcare 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 in Agiliti.
Turning now to our results. Our financial results for the first quarter were in line with our expectations. Being just 1 quarter in and with 3 quarters of work still ahead of us, we’re reaffirming our full year guidance for 2023. And Jim will review our Q1 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.
Agiliti entered 2023 well positioned to execute our growth strategy and our results in the first quarter reflect our positive momentum. As we’ve described on prior calls, we’re taking a balanced view on the year as we lap both the favorable contributions from COVID-19 in the prior year and the impact of the timing and revised scope of the HHS contract renewal. As we turn 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 needs to more strategic partnerships. And with the support of our GPO partners, we’re seeing our customers’ purchasing commitments elevate from individual facilities to system-wide commitments. The steady rate of hospital consolidation has further elevated the demand for more system-wide partnerships. And for the past several years, Agiliti has been at the forefront of these discussions with our customers.
Accordingly, and as we’ve shared, we’re now signing more 7- and 8-figure annual value contracts than ever before in our company’s 80-plus year history. On prior calls, we’ve mentioned that these larger deals require 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 costs front-loaded in the process. As we’ve shared, we expect that this dynamic will yield some near-term lumpiness in our financial results. As we enter the back half of the year, we expect these multiyear contracts will 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 have 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 Agiliti’s important role and responsibility in supporting our broad network of customers across the nation. While our collective outlook has certainly improved post pandemic, 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 health care executives to seek partnerships with vendors who can help to meaningfully reduce costs while enabling better patient care and outcomes. Agiliti is uniquely positioned to help them accomplish both.
We believe Agiliti stands alone when it comes to the manufacturing, management maintenance and mobilization of medical devices. Our goal for our customers is simple to ensure clinicians have round-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. Let me share a few examples of these capabilities in action and quantify the benefits to our customers. On the labor front, our unique ability to supplement a hospital’s biomed team with Agiliti technicians can compensate for our customers’ short-term staffing shortages, minimizing employee burnout and reducing or eliminating overtime expense.
By helping our customers return their own devices back into circulation more quickly, we can also help reduce or eliminate other operational impacts caused by a lack of equipment availability and excess rental expense. Similarly, improving medical device utilization and reducing the cost of device ownership is another area where Agiliti makes a difference. Even prior to the pandemic, health systems generally owned too much capital medical equipment. Yet as we know, many health systems 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.
Agiliti’s supplemental clinical engineering offering and our on-site 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, we’re also implementing solutions that help improve the customer experience and ease the process of doing business with Agiliti. 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 our EMR ordering, we’re 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 in 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 improve care delivery has 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 planned 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’re even more enthusiastic about the momentum in our business and the opportunities ahead of us.
I’ll now pass the call to Jim 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, 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 margins 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 of medical device rental placements in the quarter.
In addition, adjusted EBITDA margins were negatively impacted by the onboarding of 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 $0.20 in the quarter compares to $0.29 in the year ago period, driven by both a decline in adjusted net income and an increase in the effective interest rate on our debt, which amounted to approximately $0.03 a share for the quarter.
Taking a closer look at the first quarter across each of our service lines. Equipment Solutions revenue totaled $121 million, down 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 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 as we continue to advance our solutions, including within our surgical equipment repair portions of the business. Finally, on-site managed services revenue totaled $66 million, representing a year-over-year decline of 6% for the quarter.
This was 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 P&L. Gross margin dollars for Q1 totaled $109 million, 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 as well as the factors related to the HHS agreement as previously described.
SG&A costs for Q1 totaled $89 million, an increase of $3 million year-over-year. The increase was primarily due to costs associated with our Q4 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. Our reported leverage ratio at the end of Q1 approximated 3.9 turns. Excluding the impact of the late Q4 2022 acquisitions and the associated purchase price paid for the businesses, our leverage ratio would have approximated 3.7 turns as of March 2023.
Looking forward, we will remain diligent in determining the optimal uses of our cash generation. Agiliti 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, our total availability at the end of Q1 totaled $272 million. 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 date to Q2 of 2030. A reminder on the terms of our debt given the macro view on near-term interest rates. Of our $1.09 billion in debt, we maintain an interest rate swap agreement on $500 million, which is swap floating rate terms for fixed rate terms. This provides a partial hedge for any anticipated market rate increases in the short term and will expire June 1, 2023. We Anticipating this expiration in Q2 in April 2023, we entered into a new interest rate swap agreement on $500 million of our debt with an effective date of July 1, 2023. This new swap is the effect of fixing our SOFR-based rate at 4.07% and the agreement has a 2-year duration.
Turning now to our 2023 outlook. We are reaffirming our full year financial guidance. Specifically, we expect to deliver 2023 revenue in the range of $1.16 billion to $1.19 billion, representing top line growth of 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 $0.65 to $0.70 per share. A reminder that we estimate the negative impact of higher interest expense to be in the range of $0.15 per share to $0.20 per share. From a qualitative perspective, and as we have shared in each of our earnings calls, in 2023, our financial results will be comping against the favorable $5 million to $7 million impact of COVID in Q1 of 2022. In addition, as we have shared in our prior earnings calls, as of Q2 last year, we saw lower-than-expected utilization of our equipment rental fleet leveling out below 2019 pre-pandemic levels.
Our 2023 guidance assumes placements will remain at this new baseline level and that we will continue to benefit from normal seasonality throughout the year. Finally, our guidance implies a weighting of revenue growth towards the second half of the year as we continue to onboard new business.
I’ll now turn the call over to our operator, to provide instructions for our Q&A.
Thank you, sir. Ladies and gentlemen, at this time, we will be conducting a question-and-answer session. [Operator Instructions] We request that you limit us off to one question please call for questions. Our first question is from Matthew Mishan of KeyBanc Capital Markets.
I think you guys mentioned that the first quarter came in as expected. I think our — it was a little bit better than kind of Street expectations. Did better hospital activity and the procedural volumes at hospital translate to better demand for you guys?
Yes, Matt, 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 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 front-loaded lumpiness of these contracts, I’m assuming you’ll always have contracts that are onboarding, — are these just specifically larger than what you had previously? And then from here on out, these are the type of contracts you expect you’d be expecting. So it wouldn’t necessarily be like a 1 or 2 quarter lumpiness is something you kind of see more regularly going forward? And is it just a change in kind of like the contracts of this size and this time?
Yes. You’re exactly right, Matt. It’s — when you compare and contrast what we’re onboarding now versus history, the size and scale has gone up. And that’s what the key driver is for that, Matthew.
The next question is from Jason Cassorla of Citi.
I wanted to ask about margins in the quarter coming in at 24%. It was 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 develop in the quarter? The factors that helped drive mortgage progression outside of the ramp up in these new large contracts would be helpful.
Yes. 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 we’re lapping COVID, we’re on the other side of that, but that did have an impact in Q1. The second piece that had an impact was the renewal of the HHS agreement. And then the third piece is just the onboarding of some of these larger contracts. You’re right to assume that the math assumes that in the back half of the year, the EBITDA margins do improve. And 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, the more we’re able to put through this shared infrastructure, the better we are from a growth perspective, not only top and bottom line as well. Hope that helps you, Jason.
And maybe just a follow-up, I guess, the strength in clinical engineering stood out in the quarter, revenue up almost 11%. New customer growth. This is related to these new contracts coming on and generating revenue from that? And or otherwise, as we think about the rest of the year, right, should we consider the momentum in that business, low double-digit revenue growth in 1Q is a fair bogey as you think about the rest of the year? Or are there nuances we should be aware of?
Yes. Good question. As we’ve talked about previously, for clinical engineering, it does represent a greater share of market and share of wallet opportunity for us. The answer to the question is yes. Some of these larger deals did onboard in the quarter, although we don’t provide guidance on the quarters, you can use history as the guide to think about it for the full year, Jason.
The next question comes from Kevin Caliendo from UBS.
First question, just trying to understand how hospitals are maybe acting differently now. It feels like the worst is behind them. Utilization maybe is getting better. Are you seeing any change in the 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 impact you if anything has changed?
Yes. Thanks, Kevin, for the 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. It’s really only been in the last year that we 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 device management across their enterprise. So the conversations have shifted from transactional to strategic and they’ve shifted from individual facility making to, hey, as an IDN or a 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’re looking for.
As we think about onboarding all the new business, and I know a lot of your sort of a little bit second half, there’s going to be some momentum. Should we expect that to carry forward, meaning I don’t want to say easy comps or whatever, but it sounds like there’s a potential for accelerated growth if this plays out and normalizes. Is that a fair way to think about it without asking for guidance, per se.
Yes. 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 shared that second half will be stronger from a year-over-year perspective. When you do the math on first half and second half, you can kind of conclude in terms of where the second half is going. As I’ve indicated in the script, our full year guidance was 4% to 6% growth for the full year, and you see what we did in terms of Q1.
The next question is from Brian Tanquilut of Jefferies.
This is [Indiscernible] in for Brian. I had a question about contract renewals. I just want to get some clarity on your expectations for renewals for the remainder of the year? And a follow-up, I could give maybe an estimate on the amount of contracts that are set to expire.
Yes, I appreciate the question. We don’t go into the — that in terms of the level of granularity by customer. I think the one thing, and maybe TB can shed some light on this, if he chooses is just thinking about it in terms of more of the bigger picture GPO arrangements which we feel very comfortable in terms of where we sit. And to my knowledge, in TB, correct me if I’m wrong, but there is no major GPO contracts up for renewal.
No, that’s correct. In fact, we’ve added new service lines to our GPO agreements. So we’re pretty solid on the renewal front and pretty confident that — and it’s considered already in our guidance for 2023 that the renewals are solid.
And you noted that there is an expansion and leverage ratio, and I’m curious to know how you’re thinking about potential M&A going forward through this year and potentially into 2024?
Yes. 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 where 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 we see things improve 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 in those tuck-ins that make good strategic sense for us.
The next question is from Drew Ranieri of Morgan Stanley.
Tom, maybe just for you to start. Just in your prepared remarks, you talked about kind of being more embedded in your customers’ EMRs. Can you go into 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 the business looking forward, maybe from an acceleration standpoint, — and 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 kind of those customers that are — that you’re embedded in the EMR with?
Yes. Thank you for the question. I’ll go in reverse order on that. Too early to tell. We’re really excited about those customers where we have integrated with our 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 impact us long term financially, but I can tell you through our customer lens, they’re 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. And in our circumstance, they don’t need to do so. So again, 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 we’re getting when we implement.
And just a quick question more for Jim here. But I think you made a couple of small acquisitions last quarter or they closed, but can you talk about what the revenue contribution was for those couple of deals? And maybe just remind us what segments they were in.
Yes. 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, it principally impacts us within equipment solutions and a smidge, a tiny bit within clinical engineering. But again, Drew, both of those were immaterial in totality.
The next question is from Kevin Fischbeck of Bank of America. This is actually Navia [Indiscernible] on for Kevin.
I think you said that noncoded Equipment Solutions revenues were up 4% in the quarter. Can you talk about what drove that?
Yes, sure. I appreciate the question. One of the really nice things within Equipment Solutions is it’s nicely balanced between peak need rental and other what we call capital-enabled rental solutions, which think about in terms of surgical rental, primarily around urology as well as specialty beds 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.
Ladies and gentlemen, we 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. We’ll close the call here, operator. Thank you.
Thank you very much, sir. Ladies and gentlemen, you may now disconnect your lines, and thank you for your participation.