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spk09: Good afternoon and welcome to Agility's third quarter 2023 earnings conference call. Today's call is being recorded and we have allocated one 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 Agility. Thank you. You may begin.
spk02: 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 30th, 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 FCC filing, which can be found in the investor section of our corporate website at agilityhealth.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 GAP measures and a description of why we use these measures in our press release. 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 a presentation titled Agility Q3 2023 Earnings Slide. A final note before we begin our prepared remarks. On October 2nd, 2023, Agility announced that Tom Leonard would rejoin the company as its Chief Executive Officer, effective immediately. Mr. Leonard previously served as CEO of Agility, beginning in April of 2015, until announcing his retirement in January of this year. I will now turn the call over to our CEO, Tom Leonard.
spk06: Thank you, Kate, and good afternoon. It's great to be back at Agility. I'd like to begin today with some brief reflections on rejoining the company and our path forward. Over the first few weeks, my focus has been on reconnecting with our teams across the company and doing a deep dive into our solutions and operating systems. 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. In other words, agility has far more room to execute than 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. For agility, a healthy mix of business is not just about the relative proportion of our individual solutions. It also includes balancing larger multi-year customer contract wins with a steady flow of more transactional high contribution margin business, including rental and supplemental clinical engineering. It means regaining the discipline of building local market density to ensure we best utilize our existing local market capabilities, a key driver to improving our overall margin profile. It's about refocusing on share of wallet capture opportunities within our existing customers, 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 to reduce our growing short-term reliance on margin-sapping third-party service partners. 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 have been missed is the company over indexed on generating top line growth. Also key to achieving both near and longer term growth goals will be unlocking the potential of our entire business. In recent quarters, Much of management's discussion with investors has revolved around a post-COVID rebaseline for our peak-need 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 management's expectations in those prior periods. But variance to expectations is not the same as unrealized potential. Let me illustrate that point with a couple of examples, beginning within our equipment solution service line. Peak need rental had emerged as a significant driver in Agility's financial performance over the prior three years. First, as the company benefited from outsized demand for medical equipment during the pandemic. And again, as we moved toward a lower utilization baseline post-COVID. as a result of our customer's excess medical device purchases during that period. But keep in mind, deep need rental represents just 6% of total company revenue this year. 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&R on our overall results should be more muted at this current level. Today, as it was prior to the pandemic, the more strategic offerings within our equipment solution service line and more importance to our longer-term growth plans include our specialty beds and clinical services 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 improvements, as well as opportunities for future strategic investment. Shortly after our acquisition two years ago, we began to invest in R&D, systems infrastructure, and manufacturing automation. Starting in 2024, we'll begin to see clear benefit as a result of those investments. 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 that will simplify the decision process for our customers and provide Agility line of sights to gross margin improvements as we simplify our supply chain and achieve benefits from our increased manufacturing scale. We're excited about our first significant new product family launch within a solution we see is key to our long-term growth goals. Our surgical services offering is primarily focused on urology procedures, where agility mobilizes surgical lasers and certified laser technicians provide access to a range of modalities and 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 that came with the late 2022 acquisition of Healthtronics, we're well positioned with growth and margin expansion initiatives as we prepare to enter a new year. Staying on the topic of unlocking the potential of our entire business, I'll share just one more example, this time from our clinical engineering service line. You'll recall that we acquired mobile instruments in early 2020 and Northfield Medical in 2021. These acquisitions of the prior numbers two and three 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 their 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. Both mobile instrument and Northfield were acquired 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 predictable growth. Our ability to execute on these and other opportunities within our portfolio remains well within our control. As I conclude my prepared remarks today, I want to acknowledge the recent analysts 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. I return to Agility to lead this company because I deeply believe in our team and the critical role Agility plays in our national medical device infrastructure, and in our ability to rebuild a bright future for this company while delivering strong returns for our shareholders. So as we complete and prepare to report on the full year and set expectations 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.
spk03: Thank you, Tom. I'll start with an overview of our Q3 2023 financials and later offer some comments on our outlook for the year. For the third quarter, total company revenue was $292 million, representing an 8% increase over the prior year. Adjusted EBITDA totaled $62 million, a 7% decline compared to Q3 last year, and adjusted EBITDA margins totaled 21%. Adjusted EBITDA margins were affected by the revised scope of the new HHS contract renewal, as well as a lower number of peak need rental placements. In addition, 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 SES 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 third quarter across each of our service lines. Equipment solutions revenue totaled $113 million, up 10% year over year. The increase was primarily attributable to onboarding new surgical rental business, primarily driven by the December 2022 acquisition, as well as new customer growth within 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 million, 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. Finally, onsite managed services revenue totaled $64 million, representing a year-over-year decrease of 1% for the quarter. Continuing down the P&L, gross margin dollars for Q3 totaled $97 million, a decrease of 5% year-over-year. Our gross margin rate was 33 percent compared to 37 percent 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. We will anniversary the HHS renewal pricing in Q1 of 2024. SG&A costs for Q3 totaled $87 million, an increase of $1.3 million year over year. The increase was primarily due to severance costs related to a reduction in staffing in the quarter, as well as costs associated with the CEO transition. These costs were partially offset by favorable incentive expense associated with a lower projected management incentive payout. Moving to the balance sheet, we closed Q3 with net debt of $1.05 billion. Our cash flow from operations for the first nine months of the year was $148 million, 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&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 million available, comprised of 30 million of cash on hand and 293 million available under our revolving credit facility. As a reminder, in April 2023, we expanded our revolving credit agreement by 50 million and extended the term to Q2 of 2028. Further, in early May, We completed a modification and extension of our term loan, which transitioned our key underlying benchmark rate from LIBOR to SOFR and extended the maturity to Q2 2030. Finally, of our $1.05 billion in debt, we maintain an interest rate swap agreement on $500 million, which swaps floating rate terms for fixed rate terms. This swap has the effect of fixing our SOFR base rate at 4.07%, and the agreement expires at the end of Q2 2025. Turning now to our outlook for the remainder of 2023, we are reaffirming our full year guidance for each of our metrics. Specifically, revenue in the range of 1.16 to 1.19 billion, adjusted EBITDA in the range of $260 to $270 million, and adjusted earnings per share of $0.54 per share to $0.59 per share, and finally, our capital expenditures at $80 million. That concludes our prepared remarks, and I'll now turn the call over to our operator to provide instructions for Q&A.
spk07: Thank you. We will now be conducting a question and answer session.
spk09: If you would like to ask a question, please press star and then one on a telephone keypad. A confirmation turn will indicate your lives in the question queue. You may press star and then two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. The first question we have is from Jason Casorla of Citi. Please go ahead.
spk05: Great. Thanks. I know more on 2024 is coming next quarter, but was hoping if you give us a sense of the major swing factors, headwinds and tailwinds to consider for next year, and if at a high level there's potential for margin expansion in 2024 just outside of any major upswing in P&R demand, and then you know, if there's any reason why we shouldn't leverage the longer term targets you have out there for the three businesses, just as proxies to think about revenue growth for next year at this point.
spk08: Thanks. So I'll start. Go ahead, T.L. I'll follow.
spk06: 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 peak need 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, of driving business near, in, and around those local facilities. It's when we leverage that as a core part of our service delivery that that business generates its best incremental margin on that next dollar of revenue. Jimmy, do you want to touch on this?
spk03: Yeah, I think you hit it to a T. Jason, we haven't provided the guidance yet on 2024. What I'd ask you to look at, though, is just our 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 the bend.
spk05: Okay. Got it. And maybe just to follow up on that point around the transactional. I guess as we think about the growth levers there, the SCS and the surgical services outside of the PNR, how should we think about the EBITDA flow through of those solutions against the PNR? Just trying to think of the magnitude as you focus there. And then it sounds like the shift is a top priority, but just curious what the lead times look like for the implementation of the shift. If we should think about this as like a day one 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 those two things.
spk06: 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 I mean about that? More simplified. I can sell the same piece of business, for example, supplemental clinical engineering, where we may go in and help a customer who's fallen behind and has a couple of dozen infusion pumps that they haven't been able to get parts for, you know, as an example. If that's a customer who's down the street from one of my local by 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 same need was done in a place that's not a place where I have local market capabilities, or 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 can actually not very profitable, less than our corporate average contribution to service that 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. And in terms of the speed of the turnaround or the change, here's how I'd have you think about it. In terms of us getting off course as we have 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 first day or so might not be noticeable, maybe a few hundred yards off course. But by the time you reach the other side of the ocean, you might miss your intended port by a couple of hundred miles. 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, but always off to 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. It's not blowing up anything that we do today. We don't need the entirely new Salesforce. We don't need anything that we don't already have within our portfolio. It's about the small adjustments, some of which we've already started to make that will increasingly be seen in our financial results. So it doesn't happen in a day or a week, but it will happen 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 rights direction, which will be most clearly seen over time in the gross margin rate of this business.
spk08: Great. Thank you very much.
spk07: The next question we have is from Brian Tanquily of Jefferies. Please go ahead.
spk04: Hi, everyone. This is Noor Roble in for Brian. Tom, now that you're back at the helm, I guess I just want to first get a high-level overview of what your strategic priorities are moving forward as we go into Q4 and into 2024.
spk06: So thank you for the wide-open questions. 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 and it's one of the things I'm most excited about as I return 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. 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 the others that we might builds 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. Longer term, it's really about driving growth organically and inorganically by driving meaningful volume to our local market infrastructure where we can do it more profitably and without peer better than anyone.
spk04: Great. And then for Jim, I guess I'm curious to know some of your capital allocation priorities. You noted that you paused M&A and aren't doing any share buybacks. But given that half of the overall debt of the company is at a variable rate, how are you thinking about paying down the debt versus investing in the business?
spk03: Yeah, look, I think we'll be very thoughtful about it. Obviously, we know our cost of debt has gone up. So I think we'll be pretty well balanced with both paying down debt as well as reinvesting in our business for all the reasons that Tom pointed out in his script. That's the way to think about it.
spk08: Thank you for the question.
spk07: Ladies and gentlemen, just a reminder, if you would like to ask a question, you're welcome to press star and then one.
spk09: The next question we have is from Kevin Fishbeck of Bank of America. Please go ahead.
spk01: Hey, this is Nabila for Kevin. Thanks for taking the question. You know, recently hospitals have been talking about cost pressure from labor and professional fees. Is that having an impact on your conversations with clients, on where they can save money elsewhere, or is it preventing them from having conversations with you at all because they're distracted by it? Thanks.
spk06: What we have long prided ourselves on as a company is being on the right side of healthcare. What that means for us is we have the opportunity, every time we go into one of our customers' facilities, take on some of the work that they 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 cost the attending costs that come with supporting those devices, we can reduce their reliance on rental by driving the utilization of the equipment that they own. We can reduce their costs of repairing and maintaining their medical 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.
spk08: Great. Thank you.
spk07: There are no further questions at this time. I would like to turn the floor back over to Tom Leonard for closing comments.
spk06: So first I want to thank everyone for the opportunity to speak with you today. I'm six weeks now 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. So we're going to look forward to providing an update on our progress as we complete 2023. 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.
spk07: This concludes today's conference. Thank you for joining us. You may now disconnect your lines.
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