Good afternoon, and welcome to Agiliti's second 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 would like to turn the conference over to Matt McCabe, Senior Vice President of Finance and Investor Relations at Agiliti. Thank you, and you may begin.
Thank you, operator, and hello, everyone. Thank you for joining us on today's call as we provide an overview of Agiliti's results for the second quarter ending June 30th, 2023. Before we begin, I'll remind you that during today's call, we will be making statements that are forward-looking and consequently are subject to risks and uncertainties. Certain factors may affect us in the future and could cause actual results to differ materially from those expressed in these forward-looking statements. Specific risk factors are detailed in our press release and in our most recent SEC filings, which can be found in the Investor section of our corporate website at agilitihealth.com. We will also be referring to certain measures that are not calculated and presented in accordance with generally accepted accounting principles during this call.
You can find a reconciliation of those measures to the most directly comparable GAAP measures and a description of why we use these measures in our press release. To download a copy of the presentation that we will use to facilitate today's discussion, please visit our website at agilitihealth.com. Select the Investor section at the top of the screen and then Events and Presentations. Finally, select the presentation titled Agiliti Q2 2023 Earnings Slides. I'll now turn the call over to our CEO, Tom Boehning.
Good afternoon, and thank you for joining us today as we review our results from the second quarter of 2023. On the call with me today is our Senior Vice President of Finance and Investor Relations, Matt McCabe, and our Chief Financial Officer, Jim Pekarek. Jim will review our Q2 results in more detail and provide additional color on our performance and outlook. In the second quarter, revenue increased consistent with our forecast over prior-year. However, we did not see a corresponding increase in the EBITDA contributions that we expected due to shift in our solutions mix. There are two main factors driving this shift. First, as discussed in recent quarters, we've seen a lower mix of peak need rental or PNR placements post-COVID, which has weighed on our EBITDA margins.
Secondly, the volume of large deals requires somewhat longer and more complex implementations, which result in a longer ramp to profitability due to the higher upfront servicing costs. The combination of these new larger contracts and a contraction in our PNR business weigh on our profitability in the second quarter. We expect this trend to continue and to impact full-year results. Jim will discuss our guidance in more detail. To provide some additional background, we highlighted last year that we were experiencing a rebaselining of the utilization of our rental fleet, primarily in the areas of infusion pumps, ventilators, and patient monitoring devices. We experienced continued slowing in our PNR business during the second quarter of 2023 due to reduced demand that resulted from the significant medical equipment purchases made by our customers over the past few years.
As our mix evolves, we're very encouraged by the benefits we expect to receive as our customer relationships mature into strategic partnerships, resulting in longer and more mutually beneficial agreements. Over the long term, this mix shift will help to create a more valuable business with a more predictable revenue and EBITDA stream. In the near term, we expect to deliver solid revenue growth for the year in line with our forecast. As we look towards the second half of 2023 and beyond, our teams remain focused on identifying and prioritizing these strategic opportunities across health systems and securing enterprise-wide commitments to grow our opportunity set. Now I'll discuss three key trends that we're seeing in our business that showcase Agiliti's strengths and opportunities for growth. First, I'm proud to report that we continue to make good progress expanding our engagements with both new and existing customers.
As our customers increasingly recognize our value, this translates into new opportunities for Agiliti. Our sales teams are highly focused on growing our business and driving market share as we differentiate through the breadth and quality of our offerings and our unique ability to service large clients and provide IDN-wide solutions with our technology-enabled capabilities. At the ground level, Agiliti stands alone when it comes to the manufacturing, management, maintenance, and mobilization of medical devices. We provide patient-ready medical devices, deliver where needed, when needed, and maintains the highest industry standard on a platform that's scaled to serve the entire healthcare continuum. Acknowledging the value we provide to our customers, we were pleased to have been awarded the HealthTrust Performance Group's Clinical Supplier of the Year Award in July.
The award is a testament to our impact in addressing some of the key financial, clinical, and operational constraints facing today's healthcare system. This award is meaningful as it's based on driving value and measurable outcomes for healthcare providers while empowering clinicians and healthcare workers to confront challenging circumstances every day. The second topic I'll discuss is converting new business into revenue... This has been and will continue to be a critical component of our growth strategy going forward, and I'm proud of the solid top-line performance we delivered in the second quarter, thanks to our team's efforts to work with our customers and help them realize the full value of the solutions they've purchased. This conversion is especially important as we continue to secure more significant and strategic relationships with our customers. One notable area of recent growth for our business is in the ambulatory surgery center market.
Over the last few months, we have won contracts with two of the largest ASC franchises for services including clinical engineering, surgical equipment repair, and surgical laser rental. In these cases, we have received corporate-level support to convert their sites from a myriad of local vendors to Agiliti. We're very pleased with our continued progress in this growing market, and we're excited to increase our footprint while continuing to provide meaningful support that improves patient outcomes. The third trend is ongoing optimization of our business structure by retaining and leveraging talent and identifying areas we can increase efficiencies to further strengthen our platform. Agiliti offers unique opportunities for career growth, advanced training as path to higher compensation, and paths to management, which attracts exceptional industry talent.
Offered from within a rapidly growing company with a nationwide reach, it's a combination of benefits, opportunities, and mission-driven work that a health system just simply can't match. As a result, our employee retention has remained steady in many job categories over the last several years, but it's at record levels in some of our customer-facing roles. This has been particularly important as we've onboarded acquired businesses, and we endeavor to leverage the skills of our talented teams to continue our growth momentum. We're also increasing efficiency by continuing to expand the implementation of solutions that help to improve the customer experience and streamline the process of doing business with Agiliti.
As discussed on our last call, our recent order intake integration with each of the major EMR vendors has simplified the ordering process while increasing the accuracy of the customers' ordering by enabling them to execute an order directly within their existing EMR workflow. Amongst customers who have implemented the EMR ordering, we're now fulfilling 60%-80% of their requests via this channel and have seen an approximate 20% increase in order velocity due to the simplification and efficacy of ordering within current workflow. Before I wrap my prepared remarks, I'd like to highlight a few examples as to how Agiliti is helping health systems address complex challenges by leveraging our broad and unique nationwide footprint. First, Agiliti recently secured a single-source supplier agreement with one of the largest group purchasing organizations for onsite managed services.
This is a new category for this GPO and a revalidation of our value in this area. It also secures our ability to make progress growing our overall onsite managed services platform as we progress through the second half of this year and into 2024. In addition, we recently secured a large program with a device manufacturer to provide targeted remediation efforts for their equipment fleet. With this agreement, we'll be providing clinical engineering services to bring their equipment back to required specifications. Finally, we continue to make progress with the government as we were just awarded another multimillion-dollar agreement with the Veterans Administration. These are just a few illustrations of the progress we're making, growing our business across both new and existing customers. As we move into the second half of the year, our teams remain focused on the disciplined execution of our strategy.
We understand the challenges healthcare facilities face, and we continue to work hard to foster strong collaborative partnerships to create long-term value. Our goal is to help our customers realize measurable savings through improved operating performance, which ultimately results in better patient care. I'll now pass the call on to Jim for details on our financials.
Thank you, Tom. I'll start with an overview of our Q2 2023 financials and later offer some comments on our outlook for the year. For the second quarter, total company revenue was $291 million, representing a 6% increase over the prior-year. Adjusted EBITDA totaled $66 million, a 6% decrease compared to Q2 last year, and Adjusted EBITDA margins totaled 23%. 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 the onboarding of larger customer contracts, which have tended to have lower upfront profitability with higher service costs.
Adjusted earnings per share of $0.14 in the quarter compares to $0.19 in the prior-year, driven by a decline in adjusted net income and an increase in the effective interest rate on our debt, which amounted to approximately $0.04 per share for the quarter. Taking a closer look at the second quarter across each of our service lines. Equipment Solutions revenue totaled $114 million, up 7% year-over-year. The increase was primarily attributable to onboarding new business. Partially offset by lower customer utilization of our Peak Need Rental equipment fleet in the quarter versus the prior-year. Recall that we had previously estimated that our Peak Need Rental placements would trend more closely with 2022, beginning in the second quarter of this year. This has not occurred as our customers were slower to return our owned equipment throughout 2022.
As Tom noted, customers also invested in a higher quantity of their own equipment. Moving to clinical engineering. Q2 revenue was $112 million, representing a year-over-year increase of 7% for the quarter. New customer growth was the primary driver of the increase versus the prior-year, as we continue to advance our solutions, including within our surgical equipment repair portions of the business. Finally, onsite managed services revenue totaled $65 million, representing a year-over-year increase of 4% for the quarter. This is primarily driven by organic growth in our onsite managed solutions, where our employees show up each day to more efficiently utilize customer-owned medical equipment. Continuing down the P&L, gross margin dollars for Q2 totaled $99 million, an increase of 1% year-over-year. Our gross margin rate was 34%, compared to 36% in the prior-year.
The decline in margin rate was primarily due to a lower mix of peak need rental placements, higher costs to onboard new business, and the factors related to the HHS agreement terms, as previously described. SG&A costs for Q2 totaled $81 million, a decrease of $1 million year-over-year. Moving to the balance sheet. We closed Q2 with net debt of $1.09 billion. Our cash flow from operations for the first half of the year was $82 million. Our leverage ratio at the end of Q2 on a pro forma basis, after adjusting for the impact of the late Q4 2022 acquisitions, was approximately 3.85 turns. Looking forward, we will remain diligent in determining the optimal uses of our cash generation.
Agiliti maintained a solid liquidity position as of June 2023, with $282 million available, comprised of $9 million of cash on hand and $273 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 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 $1.09 billion in debt, we maintain an interest rate swap agreement on $500 million, which swap floating rate terms for fixed rate terms.
Anticipating the expiration of this swap on June 1st, 2023, in April 2023, we entered into a new interest rate swap agreement on $500 million of our debt, effective July 1st, 2023. This new swap has the effect of fixing our SOFR base rate at 4.07%, and the agreement has a two-year duration. Turning now to our 2023 outlook. We are reaffirming our full-year revenue guidance in the range of $1.16 billion-$1.19 billion. In addition, as we shared in our prior earnings calls, beginning in Q2 of last year, we had modeled a rebaselining of the utilization of our peak need rental equipment fleet. Our 2023 initial guidance assumed placements of our peak need rental fleet will re-remain at this level.
After the completion of the 2023 flu season, we have experienced placements below the prior-year period. We estimate this trend to have an additional $20 million-$30 million of revenue impact for 2023. Recall that this revenue has a high flow-through to profits. In addition, we continue to onboard larger new contracts, some of which have lower initial profits. Accordingly, we are taking a more conservative view on the balance of the year for our earnings. This decline will also be reflected in our adjusted EBITDA margins, which we expect to remain at lower relative levels as a result of the more muted profitability from the current mix. Specifically, we now expect adjusted EBITDA between $260 million and $270 million for the full-year 2023....
as our mix evolves and we start to see the benefits from the larger contracts materialize and peak need rental stabilizing at more normalized post-COVID levels, we expect our longer-term margins will stabilize but will likely remain below our historical levels. As Tom mentioned, offsetting this margin impact will be a solid and more predictable stream of revenue, which gives us confidence in our longer-term performance. Continuing with our 2023 guidance, we now expect adjusted earnings per share in the range of $0.54-$0.59 per share. A reminder that we estimate the negative impact of higher interest expense to be in the range of $0.16-$0.19 per share. We have improved our cash CapEx guidance and expect reinvestment into our business at $80 million.
Note that this reflects a reduction in our year-over-year CapEx for our equipment fleet, specifically related to our peak need rental investments, offset partially by investments being made for information technology, including the development of software to support projects to improve our infrastructure and customer experience. That wraps up our prepared remarks, and now I'll turn the call over to our operator to provide instructions for Q&A.
Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. If you would like to ask a question, please press star and one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star and 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 key. Ladies and gentlemen, we will wait for a moment while we poll for questions. Our first question comes from the line of Matthew Mishan with KeyBanc Capital Markets. Please go ahead.
Thank you, and good afternoon. Just first on the revenue guidance, which, which you kept intact, it seems as if there is a revenue impact from the lower utilization of the rental equipment. Are you offsetting that, that impact with, with additional revenue somewhere else? Are you kind of pointing to the low, to the low end of the revenue range, and, and while keeping it? Hello.
Down, driven by the supplemental equipment placements coming down by $20 million-$30 million. We also discuss in the script, and Tom B. can share the progress that we're making with respect to the other areas of our business, both with new and existing customers. You're right, Matt.
Yeah, Matt, as we have talked about previously, we had a number of new deals brought in. We were converting those new deals, and we're starting to realize the benefit of the conversion of those deals, and that's why you're seeing the offset.
When you think about the incremental change, is it incrementally positive on the revenue you're expecting to be receiving from these contracts that, that's offsetting it? Or is that, is that in line with your expectation of going into the year, and we should be lowering our revenue number towards the lower end to reflect these changes?
Yeah, Matt. We're progressing well with the onboarding of the new business. That's what we would share, Matt, with respect to that portion of the overall revenue guide. Hope that helps.
Okay. Just lastly, on the EBITDA, would you mind walking us down, if from your previous EBITDA range to the current EBITDA range, the $35 million change, how much of that was distinctly due to the rental utilization? How much of it is due to the slower onboarding or the slower ramp in profitability for the contracts? I'll jump back in the queue after that.
Yep. No worries, Matt. First and foremost, it's due to the lower equipment placements, which, from a revenue perspective, again, was $20 million-$30 million, which has very high flow through top line to bottom line. That is by far and away the biggest driver for the reduction. The rest, as we shared in the script, is principally based upon onboarding the new business that's coming in at lower initial margins. The, the first piece there, that being the equipment placements being down, is the most salient point there of the reduction.
Okay. Thank you.
Thank you. Our next question comes from the line of Jason Cassorla with Citi. Please go ahead.
Yeah, great. Thanks. good afternoon. I just wanted to follow up on the lower equipment rental baseline. I guess what's changed since you lowered that baseline back in, second quarter of 2022? Is it customer behavior, or anything along those lines? I guess, you know, does that change the longer-term kind of growth outlook for that business? Is it just a lower baseline you're going to grow more naturally off of, or is it just, you know, differences or, or thinking about that, that business in its entirety? Just any help there would be, would be great to start.
Yeah. Thanks, Jason. On our PNR business, the equipment rental service, it's designed to meet supplemental equipment needs of the customers, and it always tends to ebb and flow with census and customer buying practices. We expect in time for that supplemental rental demand to resume, but in the near term, we've taken a conservative outlook on the assumptions, and they're all considered in our 2023 guidance.
Okay.
Did that get your question, Jason?
Yeah, I know. Just I guess just it, it sounds like it's just slowing, if anything. You expect this is to be like a true baseline for the business going forward? You think you'd grow off this, or there's no material kind of rebasing that still needs to be done, or pockets of caution that you would think that, that's out there at this point?
That's right. We believe we've taken a conservative approach here for the outlook that we've guided to in 2023, Jason.
Okay. Got it. Thanks. Then maybe just as a follow-up, you know, I wanted to go back, Tom, to your commentary around improved visibility kind of going forward. I guess, you know, after this rebase, I guess what just gives you the confidence there, you know, to in your visibility of the highly reoccurring revenue business kind of moving forward? I, I guess just any other just commentary around the visibility of the business going forward, the margin profile of the entity, just anything along those lines would be great.
Yeah. Thanks, Jason. As, as we mentioned in the previous earnings call, this was going to be a tale of two years. The first half of the year being a little cloudy from both COVID as well as the flu season. The second half of the year, as we talked about, we would have a more visible view on the revenue side and had talked about to be a mid-single-digit grower on the top line. We're already starting to realize that with the conversion of this business that was brought in, that was in the queue and is now converting. We're seeing a lot of other new business coming in that gives us very good confidence that the top line will grow consistent with the expectations that we set and consistent with current guidance.
We also believe on the EBITDA side, that this is the right conservative view on what the full-year looks like, based on the conversion of that new revenue coming in.
Okay. Got it. Thanks for all the color.
Thank you. Our next question comes from the line of Brian Tanquilut with Jefferies. Please go ahead.
Hey, good afternoon, guys. I have some follow-up just to the questions around margins. Should we just be thinking about this as a margin reset or an earnings power reset? Because it sounds like, yeah, at least the, the way I'm hearing it, is that, basically, you know, this is your expectation for the foreseeable future. Then, as I think about potentially ramping up PNR again and then, you know, like, getting some of these contracts ramped up, shouldn't the margins start ticking up, say, within the next six months or so?
Yeah. I'll hit on the short-term piece. TB can hit on the longer-term view. It is true that in the short term, as implied in the 2023 guidance, that the full-year guidance, it took the midpoint of the range. It's in the 22- 22.5-ish range. That would be fair to say that it's in that same range is where we sit today. We turn the page into 2024, some of the things that I would just want to make sure that we understand is that when we think about EBITDA margin rates overall, our biggest opportunity for advancement is volume growth because we're able to leverage our shared infrastructure, which includes our SG&A.
As it relates to your question specifically around supplemental rental demand longer term, I would just say this, that as Tom B. and we have shared in the script, we believe that this is a conservative view with respect to the balance of this year as we turn into 2024. Obviously, if things revert back to more of a historical level, that does represent a tailwind for us moving forward. Tom, anything else?
Yeah. I would just say, too, that we've seen nice growth in other modalities within equipment solutions, particularly those areas where we can wrap differentiated services around a piece of equipment. And a good example of that is on the specialty beds, and the opportunity for us to assist our customers as they need bed augmentation for either specialty frames and surfaces or med-surg beds. So while indeed we are taking a conservative view, and at some point, we do expect the supplemental rental demand, specifically around infusion pumps, ventilators, and monitors that I mentioned in the script, to rebound, we are seeing nice growth in the other modalities. They just don't contribute as much EBITDA out of the gate.
Got it. Then I guess my second question, you touched on the surgery centers that are, you know, kind of like new opportunities there. How should we be thinking about-
You know, number one, the runway in that business, it sounds like you're very early, obviously, but also, what kind of margin profile should we be thinking about as you gain more traction in that space?
Yeah, just as a reminder, where I mentioned the script, we earned commitments with the largest franchises at a corporate level, but it still demands us going at to a facility level and getting them, along with the support of the corporate level, converted both on the areas of clinical engineering, that's the repair and maintenance of devices, as well as the ability for us to provide rental augmentation for endoscopes and the like. We see that business, particularly around clinical engineering, being pretty consistent with the other parts of our business. Rental's a little bit different because reimbursement's different in the ASC marketplace, but the biggest opportunity we have there is around surgical equipment repair, as well as overall device repair on the clinical engineering side.
Gotcha. hunting license basically, is what you got right now?
Exactly that, but that's new to us. We hadn't gotten those in the past. The decisions were made locally, now we're getting corporate commitment, similar to what we're seeing on the IDN side, where you've got the, you know, the, the corporate offices wanting to get the benefits of the value that Agiliti can provide.
All right. Awesome. Thank you.
Thank you, Brian.
Thank you. Ladies and gentlemen, a reminder, if you wish to ask a question, please press star and one. Our next question comes from the line of Matthew Mishan with KeyBanc Capital Markets. Please go ahead.
Hey, thank you. Just a quick couple of follow-ups. You guys have done really well with Sizewise over the last, I guess, almost like year and a half since you've owned it. We have heard from some of the surgical equipment providers that bariatric surgeries have taken a little bit of a step back due to the GLP-1s. Is part of the rental utilization a little bit of a step back in expectations around Sizewise and the bariatric beds?
No, it's not, Matt. Thank you for the question. The demand for our specialty frames and surfaces hasn't waned. It has remained very consistent. Sizewise has been a great catalyst to allow us to solve that problem for our customers.
Okay. I think you, you mentioned a remediation with a, with a, with a large medical device manufacturer. I think a lot of us-
Mm-hmm
... can figure out kinda, kinda who that is. As they do come back from the absence over, over, like, the last couple of years, do you, do you feel as if you have a good handle on, you know, your customers and how much, you know, pump demand that they, that they needed from their rental fleet as that customer was out? You know, whatever that excess demand was for you guys, we could potentially be offset by the, by helping in this remediation.
I don't think there's gonna be much of a shift in demand through the remediation. These are to bring devices up to proper specifications. I really can't go into too much more detail on that because we're under NDA on this, but we don't see that impacting any of the guidance that we have for 2023.
Thank you.
Thank you. Ladies and gentlemen, if you wish to ask a question, please press star and one. As there are no further questions, I would now hand the conference over to Tom Boehning for closing comments.
Thank you, operator, and thank you all for joining us today, and we look forward to sharing our continued progress on our next call. We'll close the call here. Thank you.
The conference of Agiliti, Inc. has now concluded. Thank you for your participation. You may now disconnect your lines.