Thank you everyone for joining us this afternoon. I'm Drew Ranieri, one of the medical device analysts here, and it's my pleasure to have the Agiliti management team with us today, CEO, Tom Boehning, and CFO, Jim Pekarek. Before we get started, just a quick disclosure. Please see the Morgan Stanley Research Disclosure websites for important disclosures, disclaimers. If you have any questions, please reach out to your sales rep. But with that, let's kind of get into the discussion.
I first thought it might be helpful, Tom, if you might kind of give us kind of the 10,000-foot level view of the company today, and maybe some quick background on the company and markets you compete, and then we can kind of dig into some of the other questions.
Well, thanks, Drew. Thanks for having us. We appreciate it. So Agiliti is a very exciting business in many ways. We're the leader in the manufacturing, management, mobilization, and maintenance of medical devices for hospitals. It's a mouthful, but bottom line is, we have the ability to support our customers' needs, primarily for movable medical equipment. These are devices that support patient care that are also transportable, and that can be supported either from our local service centers or directly within the facilities. There's a long history of this business of being a great services entity, 84 years, to be exact.
And as a result of that, this business has continued to evolve, and then post-COVID, has evolved differently than pre-COVID, where pre-COVID, we had a business that was highly transactional and happening locally, and post-COVID, the customers have asked us to look at solving their problems across their enterprise, instead of necessarily being isolated within an individual facility or individual region. And we're able to do that because we have an infrastructure that's unrivaled.
We have 6,000 team members, most of whom are in the field as either operators or account managers. We have 1,500 vehicles, and we have 300,000 medical devices, all of which supports the customer's needs to ensure they can provide the best possible patient care locally, and doing that through 150 service centers that are all within 100 mi of every major acute care hospital in the country. So it's a very unique business and very, dynamic in terms of meeting the local and immediate needs of the customers that we have.
Great. Yeah, thanks for the color there. And, maybe just given that you do touch so many customers-
Mm-hmm.
And hospitals, just talk about the backdrop a little bit more broadly. And it seems like we're spending less time talking about staffing shortages and the inflationary environment, at least from a hospital perspective. But when you are engaging your customers today, maybe what are their concerns over the next few months and even heading into 2024? And to parlay on that, like, what are you seeing from the customer perspective? Like, where the most interest is in from your portfolio, your offerings?
Yeah, I think I'll go in reverse order on that, if that's okay. So, we often talk about the fact that, while a $1.12 billion business, the opportunities for us, just within our existing customers who are outsourcing today, is about 80%. We have about 20% share of wallet today, but that doesn't even take into consideration those customers that are insourcing as well. So if you build on the opportunities beyond just those that outsource and include those that insource by creating share versus simply taking share, the opportunities for us are extraordinary within our existing customer base.
So almost everyone uses us in some capacity, whether it's just providing rental augmentation during peak needs, or whether they use our resource tools to be able to provide clinical engineering support during periods of time that they need to catch up with their preventive maintenance work or the repair work for their specific devices. That often happens transactionally and locally. And then we can build on that to provide, at a modality level, rental across their enterprise. So for instance, we could do surgical laser rental across their enterprise. We could provide bed rental across their enterprise. We could provide clinical engineering across their enterprise. So the opportunities for us in those markets continue to grow and is evidenced by what we shared during the last earnings release.
Two of the largest ASC franchises have reached out to us and asked us to help create new ways in which they can sole source things such as equipment repair, surgical equipment, device repair, as well as rental augmentation for their particular, ASCs, because historically, those decisions have been made locally. So when you think about demand that we see, demand remains extremely high for patient handling. Those are, bed frames and services. Demand remains very high on surgical, the procedural part of our business, surgical equipment repair, and surgical laser rental that we do, and we always see demand on clinical engineering. So if you take all those together and then layer onto it, the on-site managed services, our ability to mobilize all the devices across an enterprise, we have, we got a lot of runway.
Maybe to dig in too, about the insourcing, outsourcing aspect, you know, what has been kind of the traditional barrier or limitation in kind of even further penetrating the outsourcing side, and then even more recently on, like, the insourcing side?
Yeah, a lot of it is awareness. Too often, we were in areas of the hospital where they knew us transactionally. They knew we were there to support them on a rental basis. They knew we were there to support them on a supplemental clinical engineering basis. But having them understand the value we can provide across their enterprise, either at a facility level or at an IDN level, that's really where we've made a lot of investments over the last three or four years. Having teams that are focused on socializing the full capabilities, versus just worrying about certain areas that we've already penetrated. So now that we have all these other modalities that we can provide to customers, we go out, we socialize them to our capabilities. Everything we do has a hard dollar ROI associated with it.
We provide them those ROI stories, and then we implement. And of course, we have very robust testimonial bases that we're able to draw on in certain markets, that advantages us a lot. So I wouldn't. I think it's really all about our execution on socializing to our capabilities than it is the customers resisting. There are certain markets where people have historically insourced, and convincing them to outsource is always a challenge. But we've made great progress in those areas as well. But with only 20% wallet share for those who actually do insource, or excuse me, outsource today, then suffice it to say, we've got a lot of opportunity for us for organic growth.
Maybe kind of a selfish question, being in med tech, but again, you do touch many, many hospital customers. But as you are kind of thinking about 2Q into 3Q or even the back half, I mean, you have a lot of unique insights on... How are you kind of thinking about or how are your, or what are you seeing in terms of hospital utilization? Anything to kind of call out from a customer perspective into the third quarter? I think we're all trying to see where, where things are heading in the back half.
Yeah, so are we. We do see. I should say it's more anecdotal than... We normally would see our transactional business grow commensurate with the admissions. And I think what we're seeing when people are presenting, often they're lower acuity, so they're presenting, and then they're not being admitted. So a lot of patients remaining in observation. Don't know if that trend will shift. Our business, the Peak Need Rental component of our business, has some seasonality associated with it, primarily tied to the flu season, roughly the February, or excuse me, the November through March, April timeframe. So we expect that. We'll see some of that, but the higher admissions hasn't really had that meaningful-
Mm-hmm.
- of an impact on us yet. Now, our business is very well balanced between the medical side and the procedural side of our business. Medical being rental, clinical engineering, et cetera, et cetera. Procedural, primarily around surgical, where people will rent our surgical lasers, or we'll do surgical equipment repair, all tied to the actual number of procedures, and we've seen that steadily increase post-COVID on the procedural side of our business, and we suspect that will remain.
Okay. Maybe let's change gears and maybe look at the growth algorithm of the business. Looking ahead, I mean, you were talking about hospital demand in the market and then also adding services to your existing hospitals. You have three sub-businesses-
Yes
Right now, but how are you thinking about all those scaling up into the overall growth algorithm for the company? And any comments on really what you're thinking about the longer-term growth for Agiliti?
Jim?
I think when you think about the longer-term growth horizon, even though we haven't provided guidance for 2024, think about revenue in the mid-single-digit range is a decent place to be. We don't break out the guide as it relates to Equipment Solutions versus CE and Onsite, but I would take it back to more of a historical perspective. Keep in mind, Equipment Solutions traditionally was low to mid-single-digit growth. The Clinical Engineering growth was in a double-digit growth. Again, the reason for that is the share of wallet opportunity is greatest within Clinical Engineering. Onsite has been traditionally in the mid to high-single-digit in terms of the growth rates overall.
Maybe Tom or Jim, but I mean, you're talking about your transactional revenue becoming or converting more into contractual over time. You're just talking about some of the prior growth rates. Does anything change in terms of just this conversion, or are these kind of like the baseline assumptions that we should at least be thinking about as the transactional shifts to contractual?
I think it's a decent proxy going forward, Drew, to use as a framework for going forward, longer term.
Okay. Tom, you were talking about the ASC opportunity-
Yeah
- a couple of providers reaching out to you, but it seems like it's... You're again, touching many hospitals, but it seems-
Yeah
It's kind of early days, at least in the ASC opportunity for the company. So how are you kind of viewing that today? And maybe this is for Jim, but actually, does that accelerate the opportunity given your growth with some of the new construction that's happening and more of the procedural shift to the ASC?
Yeah, and to be clear, these are contracts with the two largest franchises. They want us to provide clinical engineering, surgical equipment repair, and surgical laser rental for all their sites. The challenge is the ASCs haven't historically mandated these happening at the individual ASC sites. So they're going arm in arm with us, site by site, to get them to convert. So it's going to take some time to do it, but this is a market that historically has been very fractured. And so to see them operate more like an IDN and have the franchise actually insist on higher quality, in some cases at a lower cost, is unusual. So we're starting to earn that business. We've got a team of people actually working directly with these franchises to get these sites converted, and it's nothing but complementary to what we do today.
It allows us to leverage that very unique infrastructure we just talked about, that local presence, to be able to flex in clinical engineering resource, provide the lasers as needed, or do the repairs on the surgical equipment. That is so exciting for us because it's a natural extension of what we already do today.
Okay. And with it being a natural extension, is there any, like, change in kind of the business model, or do you have to have a specialized sales force or even service force to kind of not come back, but to really go after the ASC opportunity?
No, that's the beauty of it. The only difference is the ASC reimbursement model is a little bit different. So on the surgical laser rental, it's a little bit of a different financial model, but the primary opportunities for us out of the gate is really around Clinical Engineering and Surgical Equipment Repair, and that's where we're doubling down. So no change at all to our business model and leveraging that local infrastructure to do it.
Got it. One of the bigger topic debates happening, at least on the med tech side right now, is the impact on bariatric procedures from some of the GLP-1s. And you did acquire Sizewise-
We did.
Almost two years ago now.
Yeah, a little over two years.
But maybe just, you were asked this question on the recent call, but just wanted to circle back here. Has any kind of anything changed in your view? Are you expecting any impact on your bariatric businesses, whether it's bed rentals or anything procedure exposed?
Yeah, and one thing to note, on our patient handling business, it's the devices that are unique to bariatrics are limited. So when you think of our patient bed rental, patient handling, our unique surfaces that help with clinical outcomes, they're not geared uniquely for bariatrics. Bariatrics is a complement to what we do. It's not exclusively what we do. So even if there is a long-term impact from it, it shouldn't have a material impact on us, certainly not in the near term, and in the longer term, we'll have plenty of time to pivot. But the investments that we're making are specifically around surfaces and frames that help with outcomes. And so irrespective of whether they're bariatric or there's other concerns that the provider has specifically around those patients, we're not unique to bariatrics in that regard.
So I would say we are not heavily exposed there.
Okay. So really, no impact. One of the other items I wanted to hit on today was really your infusion pump fleet.
Mm-hmm.
I mean, I think you mentioned before that you have right around 10%, maybe 7%-10%-
Yeah.
Ownership of the large volume pumps in the U.S., so pretty sizable installed base there. But with a major pump kind of returning to market, as we speak, how are you kind of thinking about hospitals purchasing to replace prior generations, or even really your own fleet with some of the new pump offerings?
Yeah, I mean, I'll share with you my observations from our customers, unique to the new pumps, and Jimmy, maybe you can talk about our own fleet. But this is going to be a slow conversion. This doesn't happen rapidly. So if people do decide to migrate to the newer infusion pumps, it won't be wholesale, and it won't be immediate. These transitions take plenty of time to be able to administered. I can tell you, our, our customers, if they have not already, earmarked or spent the capital, are going to be cautious about spending, a bunch of capital, do a wholesale change in their fleets. Well, we're just not seeing it.
In fact, that capital retrenchment is advantaging us because they're asking us to help come in and create more longevity with the devices they have or help them be able to prevent making more device acquisitions by managing their fleet more efficiently. So we don't see, and it's not being telegraphed, any wholesale shift in customers picking up and essentially just buying a whole new fleet of devices overnight and being able to administer those. But you want to speak about our fleet, Jimmy?
Well, with our fleet, obviously, the biggest portion of our fleet is BD with infusion pumps, and they have an obligation to remediate, and we're working with them to do that, as they are with the providers as well. We see that occurring over time, and, they have to do that, not at our expense, but their expense.
They've been good partners. There may be even an opportunity for us to assist them in the remediations beyond our fleet.
Mm-hmm.
Maybe an opportunity for us.
Got you. And when would you have kind of clarity on that opportunity for remediation?
Difficult to tell.
Okay.
But it's not uncommon for Agiliti to provide support of OEMs when they do remediations. So we announced in the last earnings release, we had just earned another new agreement with one of the OEMs to help them with a remediation, and that's not an uncommon because we're local. Short of them either flying people in or creating a depot to be able to take on whatever those devices are and do those remediations, we're a much better alternative in many cases. And all of the major manufacturers have used us in some capacity over the last many years, so we have very good partnerships with them.
M aybe to follow up on the slow conversion, kind of comments. I mean, when you're seeing, when you're talking to your customers, I mean, is the slow conversion, is it more just on the capital side? They're just not willing to prioritize infusion pump of kind of like a wholesale fleet change, or is there still, like, staffing that's kind of inhibiting, like, a education effort for their nursing staff?
Oh, it's both. It's both. And where we see the latter is when a customer shifts and uses us, for instance, for frames and surface rental augmentation. So perhaps they were on a Hillrom platform, and they've decided to move to one of our platforms for rental, and then we have to in-service all of the clinicians to do it, takes time. So the rollout will be limited, A, by capital and B, by staffing and resources. The latter and the former both can advantage us as well.
Got you. Maybe even more of a forward-looking question, but Baxter, too, will be eventually coming out with a new pump. But would you kind of expect these similar dynamics for, for them as you're seeing?
Same thing, yes.
Maybe just to shift gears, to even it up for a moment. But in looking back, maybe this is more for Jim, but looking back at the second quarter, revenue was there. I mean, it came in in line or slightly better, but EBITDA kind of fell short of expectations. Guidance for EBITDA was cut by about 10%. So maybe let's kind of take apart those couple factors that you've kind of called out. Jim, maybe with the lower mix of Peak Need Rental post-COVID, just talk to us more about the utilization rebaselining factor, what you're seeing, and do you have line of sight to improvement on this trend as we head into the back half or even into 2024?
Yeah, I would say, Drew, where we sit today is it's stable. You know, as I pointed out in the script, we have not assumed any return to more of a pre-COVID level. We have not assumed that at all. We've just assumed for the balance of the year that it remains stable. Our selling teams and operators are working with the providers to make sure that we understand what's occurring with the providers. So overall, what I would tell you again is as we complete the year and move into the next year, we're assuming things will be stable. Now, obviously, over the longer term, there should be some regression to the mean, because over the longer term, the providers do use the equipment, they do lose them.
There's repairs that are necessary, and we're the ones that augment those needs, but we're not planning for that in terms of the guide for this year.
I understand that the utilization isn't back to pre-COVID levels, pre-pandemic levels. What gets a hospital customer back there?
Well, just as a point of, of clarity, we're talking about Equipment Solutions, which think of it as our rental business. A subset of that rental business is where we have the challenge. That's the infusion pumps and the ventilators, because there was a fair number of those acquired during COVID. Why? Because there was money granted to the hospitals to be able to make those acquisitions. In some cases, we found that they've recently unboxed equipment that they still hadn't unboxed yet. So it's really Peak Need Rental within Equipment Solutions, where we've seen the headwind, and it's unique to those two modalities. When you think about Equipment Solutions in totality, we also have our patient handling, that's our beds business, that is doing really well, and we have surgical lasers, surgical laser rental, which is doing very well.
So it's really a small portion of Equipment Solutions, unfortunately, with a very high flow-through for EBITDA that has created the headwind. The question is when it's going to recover. As Jim stated, there will be, at some point, a reversion to the mean. We're not banking on that, because there's still those pumps and those vents that people have to cycle through. And, whether they're lost or broken, there's other opportunities that can be created for us, specifically around Clinical Engineering, as these devices need to be PM, because if they're not, they're not patient-ready. So there are opportunities there, but, we certainly are not forecasting that part of the business recovering, at least throughout 2023.
Got it. Maybe a couple follow-ups there. You mentioned earlier, or at least talked about the go-forward revenue run rate being like mid-single digits. Does that assume that you do return back to pre these levels of utilization or not?
No, that would be additive if it did. We believe it's stabilized, so we have a good barometer as to where the peak need rental is. For those of you who have been following our business, it was difficult to understand during peak need. So from November through about the April, May timeframe, the devices hadn't been returned, so we weren't certain just exactly what the new rebaselining should be. And then in the June, July timeframe, it became apparent what the new baseline is. But as Jim said, it has stabilized, and we're confident where we are, and we're confident that our forecast is aligned with where we're going to deliver from the top and the bottom line. And at some point, that will start to recover, but we're not banking on any recovery there.
So the mid-single-digit growing assumes that it stays deflated on the Peak Need Rental side.
Got it. Have you sized the Peak Need Rental exposure?
When you say exposure-
Or just the size of the business, or how we should think about that?
We haven't publicly disclosed it, but I would, you know, directionally guide that within Equipment Solutions, that would be in the 15%-20% of that Equipment Solutions' total revenue number.
I say peak need is 15%-20% of-
Of Equipment Solutions.
Of Equipment Solutions. Not the business. That's right.
Gotcha. Okay. All right, and maybe the second factor for the EBITDA impact, EBITDA impact was kind of this transformation from transactional to contract implementation. So kind of where are you in the process? You have 7,000+ customers, but is this still like early innings for switching over these contracts, mid innings? Just how can we kind of think about this? Whoever wants to-
We laugh, we laugh about this one on the webcast. We believe by the end of the year, we'll be caught up. So in other words, the ones that we knew needed to get converted and have been, and realizing full revenue and what we expected the margin, the other profile to be, and then, of course, we bring new ones in. But we think it will stabilize by the end of the year and become much more predictable for us moving forward, because we've gotten... As, as that portion of our business has grown, and we've shared in previous earnings calls, we've done more seven and eight-figure deals in the last 18-24 months than we've done in the last 84 years. And that's a really good sign that our customers look at us as strategic partners, many, many learnings in that process.
We've caught up with that. We think by the end of the year, we're gonna be very predictable in terms of the new business we're bringing in and the other business that is converted, and in the margin profile that we would have expected historically for those lines of business.
Got you. And with the contracts that you have implemented, you're not starting off in, like, negative territory?
No.
It's just dilutive.
They're all profitable, but they're, you know, we over-service in the first year-
Mm-hmm.
And then we get caught up. So after the first year, year and a half, it meets the profit profile. But these are stickier agreements. These are three to five-year agreements that the customers and ourselves are committed to, and it's a great opportunity for us to add more higher-margin solutions to whatever that customer is committed to across the facility or the enterprise.
Got you. And as we think about 2024, I mean, is there a number to kind of throw out in terms of what would be coming up for, for contractual renewal for next year, or a backlog that we can kind of think about?
No.
For everybody on the webcast. Okay.
Sorry, we can't.
Understandable. It's been a while since you've done an acquisition.
Mm-hmm.
Sizewise was... actually, you had a couple, I think, at year-end that were-
We had a couple, yeah.
Small.
Yeah.
But I think Sizewise, you talked about before about it being a $15 million synergy opportunity, by year two, or maybe three, if I'm misremembering this. But kind of where are you in that integration process and synergy process? Is that still on the table? And then just generally, how are you kind of viewing M&A, looking ahead?
Going in reverse order, from an M&A perspective, we always keep a robust pipeline of opportunities. I think if, if there are anything that closes this year, it'll probably be a tuck-in or two that we'll do, but the prioritization for the business is to pay down debt. And, as we announced, we're also doing some stock buyback. So that's one and two, and then, complementary, accretive, tuck-in acquisitions would be our third priority. Do you wanna speak to Sizewise?
We're right on track with Sizewise. We did disclose the synergy math, and it's very much in line with what we expected, Drew.
Gotcha. Gotcha. We kind of touched on the longer-term growth rate that you're kind of thinking about, at least for the company. Maybe just to hit a couple minutes that we have left here on the margin side, but you—the company was a beneficiary through the pandemic on some of the peak need. I think pre-pandemic, you might have been in the 27% adjusted EBITDA margin territory.
Mm-hmm.
2023 is not shaping up to be that way. But how are you thinking about the pathway back to your pre-pandemic margins? And maybe just talk about some of the opportunities that you see to get back there, and when, if you wanna, if be so kind.
Well, I would bring you back a little bit when you do that compared to the pre-COVID time. That was before we did a few acquisitions. We acquired Northfield, we acquired Mobile in the surgical equipment repair space, and then obviously, we acquired Sizewise. Those were the three large acquisitions that we did. In terms of EBITDA margin, you saw, based upon what we had disclosed in terms of the size of top line and bottom line, especially for the surgical equipment repair side, that they came in at lower EBITDA margins. So what does that mean?
We kind of look and you compare those numbers back in 2018, 2019, in terms of EBITDA margins versus today, I would say directionally, about half of that decline was due to the M&A that I just described, the remainder of which was due to what we just talked about with respect to peak need rental being the big driver, post-COVID versus pre-COVID. Those are the two big drivers for the EBITDA margin decline from pre-COVID to where we sit today. So what, what I would tell you is in terms of going forward, even though obviously we haven't guided to 2024, what I would share with you is that the focus should be on where our EBITDA margin is coming out of our guide for 2023, which directionally is in that 22-22.5% range.
And we can at least think about margin expansion into 2024, or should we-
I would think about it in terms of stable-
Okay.
At this point.
Okay. And is there anything structurally inhibiting you from increasing, like, the 50% from the prior M&A deals that you've done, or getting that margin back up?
I think time is one thing. Obviously, continuing to integrate is one of the key elements. The other piece to keep in mind, though, Drew, is that some of the businesses that we've acquired, like on the surgical equipment repair side, from an EBITDA margin perspective, they come in at lower margins, as we disclosed, than our broader business.
Okay. That's fair. Sorry, we ran a little bit over, but, Tom, Jim, I really appreciate you guys being here today. Thanks so much.
Thank you. Pleasure is ours.
Happy, happy to help, Drew.