Agiliti, Inc.

Good afternoon and welcome to Agility's first quarter 2021 earnings conference call. Today's call is being recorded and we have a located one hour for prepared remarks and Q&A. At this time, I would like to turn this conference over to Kate Kaiser, Vice President of Corporate Communication and Investor Relations at Agility. Thank you. You may begin.

Thank you, Laura, and good afternoon, everyone. Thank you for joining us on today's call as we provide an overview of Agility's results for the quarter ending March 31st, 2021. Before we begin, I'd like to 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 our most recent SEC filings. which can be found in the investor section of our corporate website at agilityhealth.com. We'll 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 nearest comparable gap measures and a description of why we use these measures in our press release and in the slide presentation we will use to facilitate today's discussions. If you'd like to download a copy of the presentation, 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 Q1 2021 Earnings Slides. Finally, and important to note, on April 22nd, 2021, Agility's registration statement on Form S-1 related to our initial public offering was declared effective by the SEC. And on April 23rd, 2021, our common stock began trading on the New York Stock Exchange under the symbol AGTI. The IPO closed on April 27th, 2021. The condensed consolidated financial statements as of March 31st, 2021, which we will review today, do not reflect the impact of our IPO. With that, I'll turn the call over to CEO Tom Leonard for his remarks on our first quarter.

Thanks, Kate, and good afternoon. Thank you for taking the time to join us as we review our results from the first quarter of 2021. As a newly public company, we're excited to continue sharing the agility story and the important work that we do is a vital part of our nation's healthcare infrastructure. I'd like to start today by taking a moment to recognize our extraordinary team. Throughout our more than 80 year history, we've been driven by a belief that every interaction has the power to change a life. That has never been more true than over the past year as COVID-19 affected our communities, our healthcare system, and each of us personally. From the very beginning of the pandemic, our teams worked side by side with clinicians in hospitals and health systems across the country, ensuring access to the patient-ready medical devices they needed to care for their patients. It's an honor to serve alongside more than 4,400 passionate, dedicated professionals doing work that truly makes a difference. Joining me on today's call is our Chief Financial Officer, Jim Pekarek, our President, Tom Benning, who leads our commercial operations, and Kate Kaiser, our Head of Corporate Communications and Investor Relations. Following the recent close of our IPO on April 27th, I'd like to begin today's call with a brief overview of our business, outlining the fundamentals of what we do and why we believe Agility's well-positioned to sustain our consistent above-market growth for years to come. To sum up Agility in a single phrase, we're the leading experts in the management, maintenance, and mobilization of regulated reusable medical devices. We ensure healthcare providers have the medical equipment they need delivered right to the patient's bedside and always with the confidence it's maintained to the highest industry standard. Today, we serve more than 7,000 US-based customers with one or more of our solutions, delivering an essential end-to-end service and all built on a peerless set of capabilities. We organize the work that we do for our customers into three distinct service lines. The first is equipment solutions. More commonly referred to as medical device rental, we provide access to medical devices to our customers to meet peak census needs or provide access to a high cost, low utilization device, which wouldn't otherwise make sense for our customers to own. Agility enjoys by far the largest medical device fleet in the country, owning more than a quarter million capital medical devices and related accessories. We generally focus on device categories, but we can wrap a differentiated service model around access to the device. For example, surgical lasers. We also provide a laser technician to support the surgeon in the use of the device during the procedure. Next is clinical engineering. This is our business in medical device repair and maintenance. It's our fastest growing business. It's in the largest market segment that we participate in. We repair and maintain virtually all of the medical equipment you'd expect to find at a hospital. We perform this work both at our customers' facilities as well as in our local service network. Finally, there's our onsite managed services solution. Our teams here work in hospital facilities, working shoulder to shoulder with clinicians, managing our customers' medical devices. With our onsite solution, clinicians never have to hunt for the devices that they need to care for their patients. We ensure those devices are patient ready and delivered right to the patient's bedside. We operate this service through a dedicated onsite team to perform these duties, and a proprietary software platform, which we integrate into our customers' hospital information systems and use to manage our team's workflow and optimize our customers' medical device utilization. What makes Agility stand apart is how we bring these three service lines together. Our three service lines seamlessly connect to form a comprehensive end-to-end solution that's based around our customers' workflow. and it's designed to bridge the gaps that results in waste and inefficiency. As seen through the eyes of our customers, Agility will manage and mobilize a provider's own medical equipment on site within their facilities. But then we process, repair, and maintain these devices, doing that work both on premise as well as offsite in our local service centers, a model which is unique to Agility. Finally, We closed the loop to deliver the lowest total cost of accessing the devices they need by providing supplemental device rental to support their peak needs or to provide access to specialized or low utilization devices. This service framework delivers a hard dollar financial return and clinical benefits. We improve equipment availability and on-patient device utilization. We reduce or eliminate unnecessary medical device rental, and we lower the cost of maintaining health systems-owned devices. Importantly, we also free up the capital and the operating expense that's too often tied up in the ownership of excess equipment. The benefits we deliver are both measurable and meaningful to our customers. Agility is the only company with the scale and the breadth of capabilities to optimize medical equipment utilization in this end-to-end process, whether it's across departments within an individual facility or scaling up to serve the largest delivery networks in the country. Now, in a moment, I'm going to invite Tom Benning to share some color on what we're seeing in the market and among our customers. But first, let me share my perspective on a few recent milestones. On March 19th, we closed our acquisition of Northfield Medical, a nationwide provider of surgical equipment repair and maintenance services. Integration of this business is already underway. We're excited to add Northfield's robust repair capabilities as a logical extension of our rapidly growing clinical engineering business. This merger also illustrates our general approach to M&A, which is to overlap and extend. This means that we look to build on our existing capabilities and to drive additional profitable volume to our at-scale national service infrastructure while always staying close to what we know and do best. While Agility's growth has been primarily organic, this team has completed a handful of small complementary acquisitions. Looking ahead, we'll continue to evaluate opportunistic tuck-in M&A to augment our strong organic growth profile. Second, as we described earlier, Agility completed an initial public offering of its common stock on the New York Stock Exchange on April 23rd. This represents an important milestone for this 82-year-old company, acknowledging both the business we built and the meaningful growth opportunity ahead of us. Following the close of our IPO, we directed proceeds to retire certain outstanding debt-related fees and expenses under the company's credit facilities. As Jim will review later on in the call, our pro forma leverage ratio is now 3.3 times, in line with the expectations we shared ahead of our IPO. Turning to our first quarter financials, I'm pleased to note that all results met the high end of the preliminary range we disclosed in our S-1 filing. Total revenue for the quarter was $235 million, representing a 31% increase from Q1 of 2020. Q1 adjusted EBITDA was $86 million, a 77% increase compared to Q1 of last year. And our adjusted earnings per share for the first quarter was $0.30, compared to an adjusted EPS of $0.05 for the prior year period. Jim will share additional detail on our Q1 financial performance, as well as our 2021 full-year financial outlook. For now, let me turn the call to our President, Tom Banning, to offer his perspective on our performance and the trends we're seeing in the market.

Tom Banning Thanks, Tom, and hello, everyone. It's my pleasure to be joining you here today. So, as we near the halfway mark on 2021, I can't help but reflect on this time last year, when COVID-19 was first impacting our communities. We've been proud to support our healthcare system through this time of unparalleled crisis and our highly visible role during this period is increase the awareness of the unique and essential nature of what we do. COVID-19 drove a net financial tailwind for us. In the short term, we saw higher utilization of our service teams and our rental device fleet. longer term we're benefiting from the expansion of medical device stockpile management opportunities at the federal state and local levels as well as a heightened awareness amongst our customers of the need to better manage their critical medical device assets durability of our business model is clearly visible in our performance during this challenging period and it's important to highlight as agility first transitioned to support our customers at the beginning of the pandemic And now as we move back toward normalized operations, you can observe our connection to every phase of our customer's medical device life cycle, as well as the balance of our business between the medical and procedural sides of a hospital's operations. Financially, this serves as a natural internal hedge, meaning regardless of the macro trends facing our healthcare system as a whole or specific situations or challenges affecting an individual customer, some part or parts of our end-to-end solution are always in demand. Our stable financial performance, evidence in our pre-COVID results, and then again as we pivoted to meet the extraordinary demands on our health system over the last year, and now as we support our customers transition back to normal operations, demonstrates the resilience of our business model. To offer a sense of our current commercial focus, Let me now share a few recent trends we're observing amongst our customers. First, we're seeing a clear focus on ramping procedure volumes and improving overall financial health. As background, a year ago as COVID first took hold, we saw a significant drop in elective surgical procedures with the case volume at that time falling to 30 to 40% of normal rates for some specialties. Volumes had mostly recovered by the fall of 2020, but sporadic COVID hotspots caused providers across the country to delay or cancel procedures, with the data we saw reflecting roughly 85 to 90 percent of aggregate normal case volumes. Now, as providers push to drive elective case volumes back to normal levels, we expect a favorable impact on the procedure-focused parts of our business. Second, we're now seeing hospitals and health systems in a position to take a longer-term outlook on planned investments and strategic initiatives. Our conversations with customers have moved past the short-term urgent needs and returned to discussing opportunities to drive operating efficiencies and reduce unnecessary costs. Examples include leveraging our onsite management solutions, to optimize across their enterprise and free up capital and operating expenses linked to excess medical device ownership. Similarly, there is ongoing interest in outsourcing non-core operations like clinical engineering to companies like Agility, where we can meaningfully reduce the cost of repair and maintenance on a hospital's own devices by leveraging our local services teams. Of note, our timely recent addition of Northfield Medical's surgical instrument repair capabilities further expands our capabilities in this category and provides us additional value we can deliver to our customers. Important to note that Agility's primary commercial focus is serving hospitals and health systems. However, the unique nature of our nationwide footprint local market service, and med device logistics capability have made us the partner of choice for many medical device manufacturers as an extension of their organic capabilities. Increasingly, government agents have also turned to Agility to support large-scale localized medical device readiness needs, including emergency medical device stockpile management and deployment. For the last six years, we have positioned our capabilities to establish Agility as a de facto partner for the management and local deployment of government owned medical device stockpiles. As previously disclosed, Agility entered into a new contract on July 21st of 2020 with the Department of Health and Human Services to manage the federal government's expanded emergency medical device stockpile. This one year initial contract awarded under the CARES Act as part of the expanded acquisition authority in response to COVID-19 represented an expansion of the federal government's medical device stockpile. As visible in the federal register and in our publicly disclosed statements, Agility had already consolidated oversight of the pre-existing emergency ventilator stockpiles prior to this expansion under the CARES Act. Based on our successful history serving the federal government, state and local agencies, as well as our domestic military healthcare infrastructure, we believe Agility is uniquely capable of supporting the needs of these agencies going forward. Please understand that we operate under a strict non-disclosure agreement with the Department of Health and Human Services regarding the details of this contract. As such, the information we can share today is limited to what we have provided here in our prepared remarks. Now I'll turn things over to Jim to provide detail on our Q1 financial performance.

Thanks, Tom. I'll start with an overview of our Q1 2021 financials at a high level, then provide some comments on our new capital structure, and finally share our 2021 financial outlook. For the first quarter, total company revenue totaled $235 million, representing a 31% increase over the prior year. adjusted EBITDA total of $86 million, representing a 77 percent increase over the same period of 2020, and adjusted EBITDA margin expansion of 900 basis points. That level of strong operating performance drove an adjusted earnings per share of 30 cents per share, up 25 cents from Q1 of 2020. Taking a closer look at our revenue for the first quarter of 2021, recall that we operate our business from a single shared infrastructure that supports each of our solutions. And accordingly, we report our financial results as one segment. Within that single segment, we report our revenue by solution line for equipment solutions, clinical engineering, and onsite managed services, respectively. We delivered strong Q1 performance across all three of our service lines, benefiting in part by the impact of COVID-19 on the demand for our equipment rental services. Equipment solutions revenue totaled $82 million, representing growth at 21% for the quarter. we estimate that the favorable impact from COVID overall was $10 to $12 million occurring primarily within equipment solutions and reflecting increased demand for our device rental services. Looking ahead, we expect that in Q2 of this year, we will have left the initial surge of COVID-driven demand that occurred last year. Currently, our rental fleet utilization is trending below this same time last year and is gradually returning to normalized utilization levels. This trend aligns with our financial plan for 2021 and is fully considered within the full year guidance we have provided for total company revenue. Moving to clinical engineering. Q1 revenue was $75 million. representing year-over-year growth of 14% for the quarter. Note that the recently completed acquisition of Northfield Medical on March 19 is accounted for within clinical engineering. Northfield Medical contributed approximately $4 million in revenue for the first quarter. Finally, our onsite managed services revenue totaled $78 million. representing year-over-year growth of 73% for the quarter. A significant portion of the growth in Q1 came from our expanded contract with the federal government for medical device stockpile management, which was originally awarded in the third quarter of 2020. Moving to our balance sheet and our new capital structure, we have reduced our leverage by 90 basis points from 4.2 times as of December 31st, 2020, to 3.3 times on a pro forma basis as of March 2021, after giving effect for the acquisition of Northfield, as well as the use of proceeds from our recently completed IPO. Net proceeds of approximately $390 million from the all primary shares IPO were used to repay outstanding borrowings, primarily our second lien term loan debt, which was our highest cost debt. Estimated annual cash interest savings from our new capital structure will exceed $20 million. Included in the pro forma leverage calculation of 3.3 times is approximately $18 million in adjusted EBITDA that was generated by Northfield Medical in 2020. Looking forward, we expect to maintain our longer-term leverage in the low to mid three times range. We also anticipate using our strong balance sheet and cash flow generation to fund opportunistic tuck-in M&A aligned with our strategy to augment our organic growth profile and drive additional profitable volume through our at-scale operating infrastructure. Agility maintains significant liquidity with more than $324 million available on a pro forma basis as of March 2021. This includes our newly expanded $250 million revolving credit facility, as well as cash on hand. the maturity date on the expanded credit facility was extended to align more closely with our remaining term loan. Since completing the IPO and reducing our outstanding debt, we are pleased to share that the corporate rating was recently increased from B to B plus with a positive outlook from S&P and from B1 to B2 with a stable outlook from Moody's. Over time, We expect this should further reduce our cost to access the capital markets as required to augment our growth with targeted M&A. Finally, I'll provide some additional color on our 2021 financial outlook. As a reminder, going forward, we will provide guidance for key performance metrics on a full year basis. I'll start with a quantitative summary and share our significant assumptions. For the full year 2021, we expect total company revenue in the range of $950 to $975 million, representing growth of 23% to 26%. We are targeting adjusted EBITDA in the range of $275 million to $285 million. representing growth of approximately 17 to 22%, and we expect to invest net cash CapEx in the range of $65 to $70 million. CapEx as a percentage of revenue, a relevant measure of the decreasing capital intensity of our business, is expected to be in the range of 6 to 7%. From a qualitative standpoint, our assumptions are as follows. We expect a return to normalized pre-pandemic utilization levels for our rental fleet by the end of Q2. Recall, we shared that the net favorable impact of COVID on 2020 revenue was estimated to be between $30 and $40 million. This impact occurred primarily within equipment solutions, and over the period, from Q2 to Q4 of 2020. In Q1 of 2021, we estimate that the net favorable COVID impact on revenue is between $10 and $12 million. Reflecting on the balance of the year, we are planning under the assumption that COVID will continue to abate within the United States. Accordingly, we expect generally lower utilization of our rental device fleet partially offset by new account growth as well as favorability in surgical rentals within our equipment solution service line between Q2 of this year and Q1 of next year. We also expect to ramp new contracts for our clinical engineering and on-site managed solutions throughout the year as customers turn their attention back to their longer-term goals. These assumptions are embodied within our full-year guidance. Our 2021 financial guidance also includes the assumption that we will successfully renew the agreement with the Department of Health and Human Services. As a reminder, we operate under a strict NDA with HHS and are not permitted to disclose details of this or other contracts beyond the publicly available details on the Federal Register. Although final determinations with respect to the renewal and the size of any future contract are not yet determined, we expect the size of the future contract will be appropriate for the anticipated level of services required to manage and maintain the stockpile post-pandemic. Finally, Our implied EBITDA margins, which can be calculated from our 2021 guidance, range from 28 to 30%. This margin range generally reflects a return to our pre-COVID margin profile compared to our reported Q1 adjusted EBITDA margin of over 36%. Primary drivers that contribute to the return to pre-COVID margins include the assumed normalization of rental device demand by the end of Q2, our internal assumptions on an expected renewal of our stockpile management contract with HHS, and the impact of our recently completed acquisition of Northfield Medical, which had lower initial EBITDA margins compared to our historical average. Before we open the call to your questions, I want to echo Tom in sharing our gratitude to our team members for continuing to fulfill a critical role in healthcare. I've never been more proud to be part of team agility. I'll now turn the call over to the operator to provide instructions for our Q&A.

At this time, we'll be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation screen will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary for you to pick up your handset before pressing the star key. Please limit yourself to one question and one follow-up, and feel free to jump back in the queue afterwards. A moment while we pull for questions. Our first question comes from the line of Matthew Borch with BMO Capital Markets. You may proceed with your question.

Matthew Borch Thank you and congratulations on the quarter results and on your IPO as well. Let me ask if I could about your dialogue to the hospital. I know you referred to this during the call and noticed that clinical engineering came in more ahead, I think, than other areas. I don't know if that reflected. Recognizing, of course, Northfield was in that number. But is this unfolding faster or slower than you would expect in terms of the conversations you're having with hospitals? And is there anything about the post-pandemic environment or approaching post-pandemic environment that is making them more receptive to the value proposition you're laying out to them.

So first, thank you for the question, Matt, and good to connect again. As you pointed out, we did have strength across all three of our service lines in Q1. and as you point out as well within clinical engineering. I think the post-pandemic period is playing out very much as we anticipated. Implicit within our guidance has been our expectation that by the time we got to Q2 and certainly by the end of Q2, we'd see normalized utilization of our rental device fleet, and the ramping of discussions with our customers on longer term initiatives, including around clinical engineering. So I think that's playing out more or less as we anticipated. I will say there's a small portion of the federal government contract that relates to the supports and maintenance of the devices that we deployed from the stockpile in the field. And with those things that are clinical engineering focused, we also account for within clinical engineering. So that is a small part of the performance in Q1 as well.

Can you just, if I can ask one other question, can you give us, I guess the trickiest area here is on the federal government contract, and I heard everything you said. And maybe, is that correct? partly why you're not giving guidance on the individual categories, or is that not something you're going to do going forward?

So on a go-forward basis, we're going to provide guidance on whole company revenue, not guidance by individual solutions.

Okay. Okay, thank you.

Our next question comes from the line of Matthew Michon with KeyBank. You may proceed with your question.

Matthew Michon with KeyBank. Great. Good afternoon, and thank you for taking the questions. Also, congratulations on the IPO. So, Tom, it looks like you guys came in at the high end of where you were expecting your 1Q ranges, but I think the midpoints of your revenue ranges are down a little bit from where the deal model was. Kenneth, can you walk through maybe some of the moving pieces about what's changed into 2Q, 3Q, versus what you thought a couple months ago?

Yeah, Matt, what I would share is, in general, nothing's changed. We very much, what we've shared previously within the model is consistent with what's transpired in the business and what we're reflecting within our guidance more broadly, Matt.

Okay, excellent. And then just your initial thoughts on Northfield and mobile repair coming together, how you're thinking about integration of those two businesses and the kind of overlapping footprints.

So one of the things we particularly liked about Northfield, and again, his background, Northfield brought us capabilities in surgical instrument repair. It was a great complement to a smaller business that we acquired a year before called Mobile Instrument, Northfield being the number two player by size in the surgical instrument repair space, and Mobile Instrument being At the time, the number three player by size in that surgical instrument repair segment, number one, of course, being Steris. So we brought these two businesses together, mostly with the close of the Northfield acquisition that closed at the end of March. We really were excited about Northfield's contract positions with GPOs, the momentum that they have in the marketplace, some of their extraordinary references, including with some very significant academic medical centers. And there's actually very little overlap between the two companies, mobile that we'd acquired again the year before and Northfield, but very little overlap in terms of existing customer base. as well as the deals that were in each business's respective funnels. So the work that we have going on today to integrate these two businesses is proceeding actually very smoothly with so little actual overlap commercially. It's not been disruptive at all on the back end as we've looked to integrate And first and foremost, that integration has started with our commercial teams, making sure that we're driving that alignment in the field, eliminating or reducing any chance for conflicts with our customers and their customer communication, particularly with new deals. And then over time, we'll work to integrate the back end. We like to think about our integration to follow from the Hippocratic Oath. When we think about integration, particularly on the back end, we like to say first do no harm. Let's make sure we do it thoughtfully, carefully, and not risk breaking anything. This acquisition, like all that we've done, really focused on accelerating top-line growth, on expanding the available market. So that gives us the opportunity to be thoughtful in how we integrate the back end.

Thank you very much.

Our next question comes from the line of Amit Hassan with Goldman Sachs. You may proceed with your question.

Hi, this is Phil on for Amit. Can you guys hear me okay? We got you. Awesome. Yeah, maybe I can follow on to Matt's question on the Northvale side and ask for maybe some quantitative around that. I'm interested if you can provide sort of any financial synergy targets that you guys have in mind in relation to the integration efforts and then also what the contribution from Northfield has contemplated in this year's financial guidance so that we can try to work down towards organic numbers.

Yeah, Phil, where I'll start you is, so we don't break out that level of detail, but a couple of reference points for you. We've disclosed that Northfield delivered $111 million of top line revenue in 2020 and approximately $18 million of EBITDA. That's how to think about that portion of the business coming into 2021. Regarding why we don't separate organic versus inorganic, consider that last year we acquired the number three ISO in mobile instrument and then added Northfield, the number two in the space. So it would be impractical to parse the two because we're in the process of integrating both as well as with the overall business more broadly. Obviously, we're going to use that integration to share our one overall infrastructure. So given that, we don't guide the subparts of our individual solution lines, but keep in mind that Northfield is included within the CES portion, the clinical engineering portion of our revenue in March and then going forward.

All right, thanks. That's helpful. Maybe another one to help with a little bit of an apples-to-apples comparison. I heard the commentary around 2Q unwinding the rental benefit from COVID. It sounds like if we just put some rough numbers on it that that implies roughly a $15 million to $25 million headwind versus the three-quarters of impact. from COVID from 2Q20 to 4Q20. Is that just kind of ballpark, the right way to be thinking about the net headwind that's coming in 2021 within your financial guidance?

So let me just restate what I shared previously, Phil, which was that in 2020, we estimated the impact was between 30 and 40 million of top line revenue from COVID. And that primarily occurred between Q2 and Q4 of 2020. And then we've shared that in Q1, the impact was 10 to $12 million. So you're thinking about it in the right range with the framework that I just shared overall in my script still.

All right. Thanks for the questions. We appreciate it.

Yep. Happy to help.

Our next question comes from the line of Kevin Fishbeck with Bank of America. You may proceed with your question.

Great. Thanks. I guess you mentioned that if things are returning to normal, the hospital clients are in better financial health and better able to kind of focus on doing agreements with you guys. Can you talk a little bit about where we are in that process? How should we think about that? Is Q2 still a quarter of discussions and we should expect it to be more in the back half of the year? Or is this something that we should expect to start to see into the numbers? And which which parts of the business, I mean, I guess it's going to be clinical insurance right now on site, but which one maybe more than the other is more levered to that?

So, Kevin, good to speak again. Thank you for the question. I would say that there are expectations of this, again, ramping down of the COVID impact going into Q2 is fully implicit within our full-year guidance. specific to the point of which or how each of the solutions impacted. The primary net tailwind has been within equipment solutions. And within equipment solutions, we usually describe it as a net tailwind, is that we think about this balance in our business between the medical and the procedural side of a hospital or health system. And so what we saw, what produced the net tailwind for us, and primarily within equipment solutions, is those areas more focused on the medical, like the rental of ventilators and infusion pumps into a degree specialty beds and surfaces. We saw a strong tailwind, high demand offsets to a degree. by decreased demand on our surgical laser portion of our business, which also falls within Equivalent Solutions. As we get to this point of the year, as Tom Benning reflected, that their customers' conversations are changing. Both are taking longer-term cues now, again, because they don't have to worry about the challenges right in front of their face. And while they're focusing on improving their financial health, which means returning to a normalized level of procedures, we'll see that both within our surgical laser rental, that that will pick up and comp very well versus last year when procedures were off, but on NETS, right, that fall off on the medical side and equipment solutions, the pickup on the surgical side, that still produces a NETS headwind for us for these next four quarters within equipment solutions. What we expect to see as well then within clinical engineering and within our onsite managed is the conversations that we've been having with customers once they've been able to look up from the challenge right in front of them. Those conversations are turning into opportunities which will turn into contracts and we're very comfortable based on the deal flow we're seeing today that in that mix of very strong tailwinds for us in equipment solutions as well as within clinical engineering, but a good line of sight to the full year and to the guidance that we've provided for our full-year revenue and full-year EBITDA.

Okay, that's helpful. In the slide deck, you mentioned that you guys continue to look at smaller kind of opportunistic M&A to augment the growth. Any commentary on the deal environment today and how you guys think about leveraging your capacity to do a deal after closing your deal just a couple of months ago?

Thank you. So when we think about capacity, there's both financial capacity and management capacity to successfully after you've acquired it to successfully integrate it and deliver results for our shareholders. We're deep in the work today on Northfield, and we hope to be in a position, if we can find the right opportunities, to do more M&A, whether it's in this year or beginning of next year. Our focus, our approach is opportunistic. So we're not chasing opportunities. We don't need to chase deals. We do maintain a healthy funnel of interesting opportunities. We're very mindful of valuations. But when we find the right opportunity, if we've got the available management capacity, it is our view that we're going to, over the longer term, maintain our leverage ratio in the low to mid threes. but occasionally tap into that available capacity for M&A, opportunistic M&A, with the goal of after acquiring something through synergies and through growth and our performance, once you can drive down to that longer-term general goal of low-to-mid threes on our leverage.

All right, great. Thanks.

As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. Our next question comes from the line of Ralph Giacobi with Citi. You may proceed with your question.

Thanks. Good afternoon. I guess I was wondering if there was anything to call out on the type of hospitals you see accelerating discussions? Is it? or more rural or urban? Is it larger systems versus smaller systems? You know, is it those that are more challenged in the financial position versus those on more sound footing? You know, just anything qualitatively there in terms of who's accelerating the discussions at this point.

Yeah, I'll say simply most, if not all, hospitals have financial challenges in some form. primarily through the loss of ability to do procedures at normalized rates. Nearly every customer that we speak to, and it's large for-profits whose names you know, small San Juan Community Hospitals, academic medical centers, really all of them are focused on a return to health. If I were to, a way to think about it would be when your house is on fire, It's not time to think about upgrading your kitchen, even if upgrading your kitchen will make your home more valuable. When you're house is on fire, you want to put the fire out across the market, market by market, facility by facility, without regard for public, not-for-profit, community, large. For the last year, our customers were focused on the challenges at hand, and they tapped into us to help us solve their most urgent challenges, getting access to the devices that they need to care for their patients. And as each of them are, in turn, based on what's going on in their local markets, able to lift their heads up, now they're ready to think about what should their future look like. And we're having those discussions really across our customer base, and our customer base, we have more than 7,000 facilities we serve across the country, really are a cross-section organization. of healthcare, the healthcare marketplace in the US.

Okay, all right, fair enough. And then just, I guess to follow up, lots of headlines around inflation out there. Are you seeing anything at this point, maybe specific to supplies and or labor to sort of pull out? Thanks.

Great question, thank you. So today we're not seeing any impact either with labor market tightness or in supplies, particularly with regard to parts. Sorry, on the parts side, we generally have longer-term arrangements with our suppliers, so I think we feel pretty comfortable in our position there. With regard to the labor market, I'd say a couple of things. First, our standard contract does include inflation adjustment provisions. So there is an offset that we generally have. I also say, and this is important, that we're obviously not immune from labor shortages or those related cost pressures. But it's important to say that for our most important roles, it really is for us a specialized and narrow healthcare-only market where we're effectively competing with hospitals for the same types of talent, for example, biomedical technicians who repair and maintain devices. And we believe, and I think our history has shown, we simply have more to offer those folks than our customers do. Further to the point, One of the things that we see is when our customers are experiencing these same challenges and risks of whether it's the risk of labor market inflation or just simply an inability to get the talent that they need to do this work, it actually adds to their interest in outsourcing these areas like clinical engineering to companies like Agility. So we're not seeing the impact today in our business. I think we're in a good position when it comes to recruiting and retaining the high-quality talent in this narrow market. And it generally serves as a tailwind for us when we think about the propensity for a customer to outsource versus doing this work for themselves.

Okay. Very helpful. Thank you.

Our next question comes from the line of Anthony Patron with Jefferies. You may proceed with your question.

Thanks, and congratulations as well on the IPO and the strong quarter. Maybe, Tom, a more sort of macro question coming out of pandemic, just sort of your views on where hospitals are, you know, their heads are at just as it relates to preparedness out of the pandemic. Do you think there's more of an extended tailwind here in the event that they want to be, you know, sort of more prepared just from a capacity standpoint? And so, Do you think there's this sort of accelerated discussions on more outsourcing of equipment and potentially bulking up rental and maybe even on-site services? And so how do you think that's trending, and what do you think that does to share of wallet at existing sites going forward? And then I'll have one quick follow-up.

Yeah, Don, I really appreciate that question. It's important one for us. I think there is a great longer-term, not quantifiable care wins that we get based on the pain that our customers experience as they went through the pandemic. In the conversations that we have, this need to be ready, this need to never find themselves unable to deliver the kind of care that they expect to as part of their mission to their patients is something that's driving a lot of soul searching and a lot of activity on their part. And I'll say a an important part of our business, the onsite management business, where we will maintain, manage, mobilize hospitals-owned equipment, and not just the hospitals, but mobilize it across the health system where that equipment is most needed, and then again, augment with our rental. That was historically for us something that we had to educate our customers on, the inefficiencies that they have, the waste that they have, the excess equipment that they have while they're still renting. What COVID has done and their inability to manage for themselves this environment such that they had access to the equipment that they needed, they had visibility to it, could mobilize what they had first and then be wise about how they chose the rent. That used to be an education sale for us. Now we're getting pulled into the C-suite to help customers understand how do I keep this from happening to me again? How can I be ready not just to more efficiently manage these assets, but to make sure I never find myself unable to provide the care that my patients expect and demand of us? So I think it's a longer-term, very positive tailwind for us. It's certainly impacting where we're able to engage with our customers and giving us access to the C-suite at a level that we've never had before.

A quick follow-up, maybe for Jim, would just be a little bit on margin progression, adjusted EBITDA margins. Surprise to the upside in the quarter. There's some volume rolling off of COVID next quarter. So just the spread between the 36% and the guide for the year and, you know, just how we should be thinking about the lumpiness or lack thereof of adjusted margins. Thanks again.

Yep, happy to help there. In my prepared remarks, just to restate the elements of why our EBITDA margins in Q1 of 2021 are going to normalize and come back to pre-COVID levels, it's really three drivers. First being cycling through of COVID. As we've shared previously, the revenue impact from COVID also had a very high flow-through rate While we don't describe what that impact is, it certainly did exist. So that's point number one. Number two is the assumptions that we're making with the renewal of the government contract. And finally, a key piece to keep in mind is the acquisition of Northfield did have lower EBITDA margins. which will take us a bit of time to integrate and execute and get back more in line with the overall trends in terms of our EBITDA margins. That's the way I would think about it.

Helpful. Thanks again.

Yep. Happy to help.

Ladies and gentlemen, we have reached the end of today's question and answer session. I would like to turn this call back over to Mr. Tom Leonard for closing remarks.

Thank you, Operator, and I want to thank everyone for your time and for your questions today. I'd like to close by sharing that we like to describe Agility as a company on the right side of healthcare. And what that means is that whether we're in times of financial strain or at times of relative prosperity, this need and the part of our customers to drive cost savings, operating efficiency, and patient safety, these needs are fundamentally essential. We have demonstrated we're a critical part of our national health care infrastructure, and I think as the events of 2020 now clearly highlight, the services that we provide are always necessary and in high demand. We look forward to updating you on our progress, and we do want to thank you all for your interest and agility. With that, I'll go ahead and close today's call. Thank you.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Enjoy the rest of your evening.