Agiliti Inc. (AGTI) CEO Tom Leonard On Q3 2021 Results - Earnings Call Transcript

Nov. 09, 2021 8:31 PM ETAgiliti, Inc. (AGTI)
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Agiliti Inc. (NYSE:AGTI) Q3 2021 Earnings Conference Call November 9, 2021 5:00 PM ET

Company Participants

Kate Kaiser - IR

Tom Leonard - CEO

Tom Boehning - President

Jim Pekarek - CFO

Conference Call Participants

Amit Hazan - Goldman Sachs

Matthew Borsch - BMO

Ralph Giacobbe - Citi

Kevin Fischbeck - Bank of America

Matthew Mishan - KeyBanc

John Ransom - Raymond James

Anthony Petrone - Jefferies

Disclaimer*: This transcript is designed to be used alongside the freely available audio recording on this page. Timestamps within the transcript are designed to help you navigate the audio should the corresponding text be unclear. The machine-assisted output provided is partly edited and is designed as a guide.

Kate Kaiser

00:04 [Call Starts Abruptly] select the presentation titled Agiliti Q3 twenty twenty one earnings slides.

00:09 With that, I'll turn the call over to our CEO, Tom Leonard.

Tom Leonard

00:14 Thanks, Kate and good afternoon. Thanks for taking the time to join us as we review our results from the third quarter of twenty twenty one. Joining me today to discuss our performance is our CFO, Jim Pekarek; and our President, Tom Boehning, who leads our commercial operations.

00:32 Our results finished ahead of our expectations for Q3 after having previously increased our guidance in the full year twenty twenty one. Today, we'll walk through the factors that drove our performance in the third quarter, and provide color on our updated guidance for the full year.

00:50 Starting with the highlights. Total revenue for the quarter was two hundred and sixty two million dollars, representing a thirty five percent increase from Q3 twenty twenty. Adjusted EBITDA was eighty two million dollars, a forty six percent increase compared to Q3 of last year. And our adjusted earnings per share for the third quarter was zero point two three dollars compared to an adjusted EPS of zero point thirteen dollars for the prior year period representing an increase of seventy six percent.

01:22 In line with our performance and adjusting for the October first, close of the Sizewise acquisition, we have raised our guidance for full year twenty twenty one to reflect expected revenue in the range of one point zero one billion dollars to one point zero two billion dollars and adjusted EBITDA in the range of three hundred million dollars to three hundred and ten million dollars. Jim is going to provide more detail on our financial outlook and the principal drivers behind our Q3 results later on in the call.

01:54 Let's start today with a few insights into our overall performance and our direction. First, we once again delivered our commercial goals for the quarter. I previously described the stable and highly predictable nature of the Agiliti business, which is clearly evident in our consistent performance including our most recent results. Results also reflect the increased customer demand for our medical device rental equipment during August and September, as providers continue to combat the impact of COVID-19 and its variants across the country. This late demand exceeded our initial expectations for the quarter.

02:39 Additionally, we are working at the direction of the federal government's under national stockpile management contracts, we recognized higher than anticipated time and materials based revenue in Q3. We previously expected a portion of this revenue to occur in Q4 of this year. So this reflects an acceleration in timing and our prior expectations. I’ll note that this difference in timing does not increase our view on the total financial contribution in this contract for the balance of the year.

03:10 Coming on the topic of our government stockpile agreement for a moment, we offer a brief update on our contract status. Agiliti continues to operate under a series of short-term extensions to our existing contracts, while we await the Federal Government reissue of an RFP for a contract renewal. We have no visibility into the timing of either the RFP or contract award. Until such time, the new contract is awarded. We expect that HHS will continue to ensure the continuity of our support for the maintenance, storage and deployments of these critical resources by use of short-term extensions.

03:52 I'll remind you that our financial guidance for twenty twenty one continues to include the assumption that Agiliti is successful in securing a renewal of this government contract. As we shared on previous calls, we operate under strict non-disclosure agreement with HHS regarding the details of this contract and work to perform at their direction. As such, the information we can discuss today is limited to what the federal government disclose publicly and we will be providing here in our prepared remarks.

04:23 I'd like to spend some time today on another recent highlight, our acquisition of Sizewise. On September fourteenth, we announced that Agiliti had finalized an agreement to acquire Sizewise, a manufacturer and distributor of standard and specialty bed frames, therapeutic support surfaces and patient mobility equipment. In our announcements, we noted that during the twelve months ended June thirty, twenty twenty one, the Sizewise business generated revenue of one hundred and fifty five million dollars and adjusted EBITDA of thirty million dollars, which was inclusive of an estimated benefit from COVID-19 and approximately five million dollars in adjusted EBITDA.

05:07 Acquisition was finalized on October one and we will account for Sizewise future revenue contribution within our Equipment Solutions Service lines. We're early in our integration of Sizewise. However, we see a clear path to achieving meaningful cost synergies as we integrate, targeting five million dollars in year one EBITDA and going to fifteen million dollars by year three.

05:32 The first and foremost, this acquisition is about long-term profitable growth. Sizewise builds and Agiliti's unique at scale infrastructure as we optimize our combined operations network including facilities, vehicles, staff, products and our business operating systems, we will further improve our local market presence and our customer reach.

06:02 Sizewise strengthens Agiliti's capabilities of supply chain, permitting greater input of R&D, manufacturing and logistics from vital product category and enabling us to manufacture a differentiated product portfolio for our exclusive benefit.

06:20 Sizewise expands Agiliti's value proposition with their exceptional market reputation and deep expertise to better address the clinical needs of bariatric patients and there is a risk of skin, fall injury and is aligned with Agiliti's is proven end-to-end service model, providing best-in-class, high utilization medical equipment delivered within a comprehensive service framework.

06:48 To provide some broad market context on this compelling opportunity, in twenty twenty it was estimated there were nine point two million hospital stays, in which obesity was a principal or secondary diagnosis accounting for approximately a quarter of all hospital stays. Primary diagnosis was associated with bariatric surgical procedures and a secondary diagnosis was associated the complicating medical conditions with the most common being orthopedic, cardiorespiratory, skin or wound related or behavioral health conditions. An estimated two million or twenty two percent of those discharges were for severely obese patients for treatment and patient handling.

07:40 In the U.S., severely obese patients account for approximately thirty percent of all staff injuries related to patient handling. In sixteen point five percent of all U.S. healthcare expenditures are spent to treat obesity and obesity-related diseases representing approximately one hundred and sixty eight billion dollars in annual cost to our health care system. Once these patients are discharged specialized bariatric and patient handling equipment is almost always needed for their continued care.

08:14 The Sizewise acquisition mergers well with Agiliti's primary value proposition, ensuring providers have access to the critical medical equipment they require, deliver to the point of care and augmented by our differentiated services, and always with the confidence that they're maintained high standard in the industry. We're excited about the opportunity in front of us and plan to share more in the coming quarters as we begin to execute this combined company.

08:44 With that, I turn the call over to Tom Boehning for his perspective on our performance in Q3.

Tom Boehning

08:51 Thanks, Tom. I'll begin with some additional color on our commercial performance and then share a few reflections on some recent macro trends and their effect on our business. First, we continue to see heightened customer demand for our Rental equipment during the third quarter. Changes in COVID related demand are obviously difficult to predict. But our peerless national network of medical device service and logistics capabilities ensures that we remain responsive to the needs of our customers as they navigate the effects of the pandemic.

09:23 While supporting our customers' near-term needs, we continued to engage with them on longer term strategic initiatives and investments. Our ability to continue negotiating and signing longer term agreements throughout this period at short term disruption is evident in our consistent positive results and also provides us excellent forward visibility for the next several quarters.

09:47 I'd like to take a moment to touch on subjects of labor availability, wage inflation and supply chain interruptions. We continue to closely monitor these important inputs to our business as we follow the broader discussion happening across all industries. To-date, we seem to be less impacted than most when it comes to these macro issues, facing nearly all companies today. But that doesn't mean we're not managing through localized challenges across parts of our business.

10:15 Regarding labor availability, we tend to be the subject across three broad categories: Are we attracting high quality candidates to the top of the funnel? Are we able to land the right candidates once we’ve engaged them in the recruiting process; and finally, can we retain good talent once they've joined Agiliti. With that context in mind, what we're seeing today is that we're currently attracting somewhat fewer candidates at the top of our funnel and this is a long gating our time to fill positions.

10:44 We're also seeing wage pressures in some local markets and that can challenge our ability to land candidates once we’ve engaged them in the process. Our overall employment retention rates, however has stayed pretty steady. In fact, our turnover rates are flat to slightly down over the past three years. We credit this to a culture that prioritizes in each of our team members, including throughout COVID when we extended new targeted benefits to ensure our team’s financial and personal well-being.

11:16 And while our position vacancies are currently taking slightly longer to fill, we have successfully grown our headcount by more than twenty percent year-over-year with most of those roles supporting our field-based customer facing operations and contributing to our above market growth. To remain proactive in the battle to attract and retain talent, we recently completed a comprehensive weight and position study to measure our competitiveness across all job categories, levels of seniority and local labor markets. We have and will continue to proactively tune our compensation models as appropriate.

11:50 Bigger picture, Agiliti prides itself on our mission driven work. We offer the opportunity to build a rewarding career and doing work that makes a difference in the lives of patients and that supports our nation's healthcare system. Further, we ensure our team members have the opportunity to share in the success of the company through our financial incentive programs and more recently the introduction of employee stock purchase plan letting them participate in the growth in the success of the company. It's for all these reasons that we believe Agiliti remains competitively positioned in a generally difficult labor environment.

12:26 In terms of supply chain pressures, our outlook is somewhat similar. Agiliti generally operates under a longer term supply agreements with relatively fixed pricing. Our centralized purchasing and supply chain management processes ensures efficient acquisition and management of critical repair parts for the devices that we service, both for our own fleet and for the devices that we manage for our customers. Further with the recent addition of manufacturing capabilities through our acquisition of Sizewise, we are building adequate safety stock to support the business through potential short term disruptions.

13:03 I'll conclude with an update on the integration of our recent acquisitions. First, the integration of Northfield Medical remains on track and nearly complete, following our acquisition of the business in March of this year. Our teams have worked to seamlessly combine our operations and build out our offering in surgical equipment repair services.

13:25 Immediately following the close of the transaction, we aligned our customer facing sales and ops teams and we've been collaborating on commercial opportunities. Today, we go to market as a single surgical equipment repair team with a differentiated service offering carried by a dedicated sales force backed up by our consolidated technology platforms and supported by a common back-office infrastructure.

13:49 As we approach the final phases of our Northfield integration, we've also began the initial phase of our integration plan for Sizewise. Our integration philosophy has always been first, do no harm, meaning that we take time upfront to learn, and we worked jointly toward a combination that elevates the best of both companies. We plan to utilize the remainder of twenty twenty one to assess talent and perform our integration blueprinting. We plan to begin executing our formal integration plans in early twenty twenty two.

14:23 With that let me turn things over to Jim to offer more detail on the financial performance in Q3.

Jim Pekarek

14:29 Thank you, Tom. I'll start with an overview of our Q3 twenty twenty one financials and then offer some reflections on the balance of the year. For the third quarter, total company revenue totaled two hundred and sixty two million dollars, representing a thirty five percent increase over the prior year.

14:53 Adjusted EBITDA totaled eighty two million dollars, representing a forty six percent increase over Q3 of twenty twenty. This performance resulted in adjusted EBITDA margins of thirty one percent for Q3 of twenty twenty one, up two hundred basis points from last year. Our strong operating performance drove an adjusted earnings per share of zero point two three dollars, up from zero point thirteen dollars in Q3 of last year.

15:27 Taking a closer look at our revenue for the third quarter across our service lines. We delivered strong revenue growth across both Clinical Engineering and Onsite Managed Services and a slight improvement in Equipment Solutions revenue. Equipment solutions revenue totaled seventy eight million dollars, up one percent year-over-year.

15:51 We had previously estimated that in Q3 of last year, the favorable impact from COVID was in the range of eleven million dollars to fifteen million dollars, primarily occurring within Equipment Solution. On our last earnings call, we shared our expectation that we will return to pre-COVID demand levels in Q3. However, this year's late Q3 surge in COVID-related hospitalizations resulted in a net favorable revenue impact that we estimate between seven million dollars and ten million dollars. Additionally, during the quarter we recorded five million dollars in revenue related to a larger than normal liquidation of equipment from within our medical device fleet.

16:44 Moving to Clinical Engineering. Q3 revenue was one hundred twelve million dollars, representing year-over-year growth of seventy eight percent for the quarter. The growth in the quarter came from signing and onboarding new business over the last year. And as you heard earlier from Tom, we also delivered higher than expected revenue from work performed during the quarter under the direction of the federal government under our stockpile management agreement. In addition we reported revenue contributions from Northfield Medical within our Clinical Engineering solution during the quarter.

17:27 Finally, our Onsite Managed services revenue totaled seventy three million dollars, representing year-over-year growth of thirty two percent for the quarter. A majority of the growth in Q3 came from our expanded contract with the federal government for Medical Device Stockpile Management Services.

17:47 Gross margin for Q3 totaled one hundred three million dollars, an increase of twenty nine million dollars or thirty nine percent year-over-year. Our gross margin rate was thirty nine percent, up over one hundred basis points from the year ago period. This improvement in margin rate was driven primarily by strong total revenue growth across all three solutions. As all lines of business leverage a common operations infrastructure, volume growth generally has a favorable impact on our margins.

18:25 SG&A costs for Q3 totaled seventy five million dollars, an increase of three million dollars or four point six percent. The increase was primarily due to cost increases for the Northfield acquisition, offset by the decrease in the remeasurement of the tax receivable agreement of nine point four million dollars in twenty twenty.

18:50 SG&A expenses as a percentage of revenue declined by over eight hundred basis points, partially due to the decline in the expense related to the remeasurement of the tax receivable agreement with also due to continued overall leverage of our fixed cost infrastructure.

19:09 Adjusted EBITDA for Q3 totaled eighty two million dollars, representing an increase of twenty six million dollars versus the prior year. Our year-over-year revenue growth and improved gross margins in the quarter combined to deliver adjusted EBITDA margins of thirty one percent.

19:31 In the appendix to our slide deck, we provide a reconciliation of GAAP EBITDA to adjusted EBITDA, consistent with our past reporting. Finally, our adjusted earnings per share for Q3 totaled zero point twenty three dollars per share, an increase of zero point ten dollars per share from the prior year and representing seventy six percent year-over-year growth. This growth was a direct result of our strong overall business performance partially offset by the increase in the weighted average fully diluted shares of approximately thirty five million shares associated with the shares issued during our April twenty twenty one IPO.

20:19 Moving to the balance sheet and our new capital structure. We closed Q3 with net debt of nine hundred and twenty one million dollars, which includes one point zero four billion dollars in debt, less one hundred and twenty four million dollars of cash on hand on our balance sheet.

20:39 Our cash flow from operations for the first nine months of the year with over one hundred and thirty million dollars, driven by strong operating results and lower interest costs resulting from the pay down of our second-lien debt facility as part of the IPO. Strong cash flow generation and adjusted EBITDA growth resulted in a reduction of our leverage ratio to two point nine times at the end of Q3.

21:11 Looking forward, with the recently announced Sizewise acquisition, our pro forma leverage will increase by approximately half a turn. A reminder that over the longer term, we expect to target our leverage in the low to mid three times range as we use our strong balance sheet and cash flow generation to fund opportunistic M&A.

21:36 Agiliti maintains a position of significant liquidity with three hundred and sixty six million dollars available as of September twenty twenty one. This includes our two hundred and fifty million dollars of revolving credit facility as well as cash on hand. Since completing the IPO and reducing our outstanding debt, we shared that our corporate rating increased from B to B+ with a positive outlook from S&P and from B2 to B1 with a stable outlook from Moody's.

22:10 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. In this regard, on October one, twenty twenty one, with the closing of the Sizewise acquisition, we successfully raised one hundred fifty million dollars add-on term loan with terms and pricing consistent with our most cost efficient portion of our term loan debt.

22:42 Our pro forma liquidity after giving effect to the Sizewise acquisition and the recent debt raise includes an undrawn two hundred and fifty million dollars of revolving credit facility as well as over forty million dollars of cash on hand.

22:59 Finally, I'll provide some additional color on our twenty twenty one financial outlook. As a reminder, we provide guidance for key performance metrics on a full year basis. I'll start with the quantitative summary and share significant assumptions. Based on current performance and fully considering the financial impact of the Sizewise acquisition, we are raising our guidance for the full year twenty twenty one. Specifically, we are increasing our revenue guidance to a range of one point zero one billion dollars to one point zero two billion dollars, representing full year revenue growth of thirty one percent to thirty two percent. We are also raising our adjusted EBITDA guidance to a new range of three hundred million dollars to three hundred and ten million dollars, representing full year growth of approximately twenty eight percent to thirty one percent.

24:01 Finally, we are slightly increasing our net cash CapEx guidance from the previous range of sixty five million dollars to seventy million dollars to a revised range of sixty seven million dollars to seventy two million dollars. CapEx as a percentage of revenue is expected to remain in the range of six percent to seven percent.

24:23 Reflecting on the balance of the year, we are planning under the assumption that COVID-19 continues into Q4 before starting to taper. This should favorably impact the utilization of our medical device fleet for the balance of the year. Recall that last year that favorable net COVID impact on our financial results was approximately thirty million dollars to forty million dollars for full year twenty twenty revenue, occurring primarily between Q2 and Q4.

24:57 The favorable net COVID impact on our financial results has been approximately nineteen million dollars and twenty four million dollars for the first nine months of twenty twenty one. The strong growth implied by your full year guidance takes into consideration that the comps will become more challenging for the next several quarters, until we have fully lapped the COVID tailwind.

25:24 Additionally, and as Tom noted earlier, we recognized higher than anticipated time and materials based revenue related to our medical device stockpile management contract with the federal government during Q3. We had previously expected a portion of this revenue to occur in Q4 of this year, so this reflects acceleration in timing from our prior expectations. This does not increase our view and the total financial contribution from this agreement for the balance of the year.

26:06 Continuing with our assumptions regarding the stockpile management contract, for twenty twenty one financial guidance includes the assumption that we will successfully renew the agreement with the Department of Health and Human Services. We also expect to continue signing and implementing new contracts for solutions throughout the year in the ordinary course of our business as customers continue to turn their attention back to the strategic and financial initiatives where solutions play an important role.

26:43 These assumptions are embodied within our full year guidance, as is evident in our consistent and positive twenty twenty and twenty twenty one financial performance, changes in the outlook with respect to COVID-19 may slightly alter our mix of revenue for the balance of the year. But we would not expect it to significantly impact our consolidated results from our expectations for the balance of the year.

27:16 Finally, our implied full year EBITDA margins which can be calculated from our revised twenty twenty one guidance are expected to be in the range of twenty eight percent to thirty eight percent. This guidance reflects our expectation that the business will return to our pre-COVID margin profile.

27:40 Primary drivers that will impact margins for the balance of the year include the normalization of rental device volume as we exit twenty twenty one. Our internal assumptions on a renewal of the HHS contract and the impact of our recently completed acquisitions of Northfield Medical and Sizewise, both of which have lower initial EBITDA margins when compared to Agiliti's historical average.

28:12 I will end my prepared remarks today with a final comment and the recently completed Sizewise transaction. For the next two quarters, we will plan to provide additional financial context for the revenue and adjusted EBITDA contribution coming from the acquired Sizewise business. By the end of Q2 of next year, we expect that we will have sufficiently progressed with our integration such that it will not be practical to identify the Sizewise specific contribution through our overall financial performance.

28:51 Similar to our experience with the Northfield acquisition, Agiliti's rental business in operations infrastructure benefit from significant overlap with the acquired Sizewise business. As we integrate all aspects of the product portfolio, operations infrastructure and related back office capabilities, we expect that the financial contribution associated with legacy Sizewise will quickly become indiscernible.

29:24 With that, I'll now turn the call over to our operator to provide instructions for Q&A.

Question-and-Answer Session


29:33 We will now begin the Q&A session. [Operator Instructions] The first question comes from Amit Hazan with Goldman Sachs. Please go ahead.

Amit Hazan

30:07 Thank you and good afternoon. I wanted to start with the guidance question. So Sizewise, it looks like you just kind of -- if we kind of look at the revenues that you gave for their LTM, could contribute to about forty million dollars or so this year, which looks like it's about the size of your increase in guidance. Just give us some clarifications around that, maybe you're thinking about the synergies or something like that, but clearly that business in 3Q benefited even without some of the call-outs from 3Q to 4Q on the government side. So just help us out to understand contribution of the Sizewise as it relates to the increased guidance and just overall confidence in the business as it relates to the increased guidance?

Jim Pekarek

30:52 Yeah. No worries. Thanks for the question, Amit. What I would tell you in terms of the way to think about our updated guidance for the year, think about it in three elements. One is, we continue to on board new business, as I've said and that helped in Q3 and it's certainly reflected in our updated guidance for the full year.

31:16 Secondly, with respect to your specific question with Sizewise, as we've disclosed that business historically has been about one hundred fifty five million dollars in revenue, and we've disclosed that there's been about thirty million dollars of adjusted EBITDA. Keep in mind that within that thirty million dollars was approximately five million dollars of COVID benefit. So that's the second element of the reason for increase.

31:48 And then the last one is COVID. Recall that when we had our previous guidance, we had estimated that we would return to a pre COVID level in H2. What we saw happen was that did occur in July, but then as we move into August with Delta began to ramp up. And as we disclosed with respect to our Q3 benefit from COVID, we estimated that benefit from a topline perspective in the range of seven million dollars to ten dollars million. Those are the three elements to think about in terms of the raise in the guidance, Amit.

Amit Hazan

32:30 Okay. And just taking forward a little bit, where we're tasked with modeling twenty twenty two despite uncertainties around COVID or the government contract be. So I'm wondering what kind of help you can give us in terms of just puts and takes to think about for both sales and margins next year and how you're thinking about modeling internally and what you can help us with the kind of just get our numbers as estimate is accurate as possible with the information we have?

Jim Pekarek

33:05 Yeah, Amit. We'll provide the specifics, when we update our guidance for next year, but what I would say is that the elements that I shared just now around the rationale for our increase in guidance are really the three key elements to keep in mind as you update your modeling for twenty twenty one and twenty twenty two. I don't know, if you guys have perspective, you want to share there in that.

Tom Leonard

33:40 Yeah. I guess the thing I would add to amplify what you said Jim is obviously part of the pre-IPO process we spend some time you and outline our initial views and the key drivers for our initial views on what next year would look like see that remains intact, plus the annualization of the two acquisitions we did in this year. Northfield, which was completed late Q1 and on October one, I think those are the right building blocks what we've shared previously to get you in the right place to start.

Amit Hazan

34:22 And just one last one for me, just high level. Obviously, we're kind of monitoring, what's going on with customers of yours in terms of just labor shortages on their side. I wonder, if you could just give us a sense of how that impacts your business positive or negative in the different divisions? Thanks so much.

Tom Boehning

34:44 Yeah, Tom. I can take that one. As said in our prepared remarks, we've actually grown our headcount twenty percent year-over-year and that's been in line with the steady growth of the business. However, we are keeping a close eye on what is happening in specific markets. So we're being proactive and prepared to pivot as needed if market conditions change or new challenges emerge. So as it stands right now, we don't see any of these macro trends inhibiting our growth.

Tom Leonard

35:24 And just to follow up with little bit more on that, since how it impacts our business, Tom just that we don't see at this point impacting the costs in our business. But in terms of the opportunity as we look forward, we previously shared that we early operate for our highest talent pool of resources in the company. We operate in a closed market place for that talent within healthcare.

35:53 And many of those folks like our medical technicians, which work for hospital or work for a company like Agiliti, if you look for hospital, they honestly work in the basements and there are cost center -- there are cost to the hospital. If you work at Agiliti here at the point end of the spear, what we do, you have that key benefits from our investments in training via the ability for staying not just with your bonuses as we do well, the share and equity ownership. So in that battle for talent, we tend to be pretty well positioned.

36:28 What does that mean in terms of our business opportunity? Well, that's just one more pressure on customers and we're already dealing with the management names the devices, which is a non-core, non-clinical department of their business. Just one more pressure I think that lends to the answer to outsource that business to someone like Agiliti, you can do better with higher quality and at a lower overall cost and they can do for themselves. So cost-wise, it's been neutral so far and be able to manage it in terms of opportunity wise, I think it gives just more reason for our customers to outsource to some.

Amit Hazan

37:13 Thanks so much.


37:17 Okay. [Operator Instructions] The next question comes from Matthew Borsch with BMO. Please go ahead.

Matthew Borsch

37:35 [Technical Difficulty] since that you're pointing to a range of twenty eight percent to thirty percent for the full year, did I understand you correctly, because I calculate that numbers come out to like twenty nine point five percent and thirty point five percent. I'm wondering if I'm just making some obvious error.

Jim Pekarek

38:03 No, Matt. The range is twenty eight percent to thirty percent. No obvious there. Sure, I can take it offline with you, just to make sure we're online.

Matthew Borsch

38:15 Okay. Let me just, if I could ask [Technical Difficulty] second question here. Should we think about clinical engineering and Onsite Services as segments that would have done even better, absent the COVID impact in 3Q. I'm just curious how you would characterize that?

Jim Pekarek

38:37 Yeah. No, I wouldn't characterize it that way. One thing that might be helpful for you though in terms of just understanding the clinical engineering revenue for the quarter and I pointed this out in the script, but just to embellish on it a little bit. The growth is really due to a few factors, obviously in the on-boarding of new business and then the acquisition that we made of Northfield Medical. We don't disclose the impact in Northfield Medical for this quarter, but what I will tell you is what we disclosed for Q3 of twenty twenty is that Northfield Medical was around twenty nine million dollars of revenue. So if you took last year's Clinical Engineering revenue and added twenty nine million dollars that would be a good way to do the comp of Q3 of last year to Q3 of this year. So hopefully that helps a bit, Matt.

Matthew Borsch

39:38 It does. Thank you.


39:43 The next question is from Ralph Giacobbe with Citi. Please go ahead.

Ralph Giacobbe

39:49 Great. Thanks. Is there any changes to the financials in the economics of the government contract under these short term extensions? And for 3Q, just wanted to clarify, it was more or was revenue driven by incrementally the variable component of the contract, given the Delta surges, is that what you meant by sort of the pull-through just wanted to kind of clarify that? Thanks.

Jim Pekarek

40:18 Ralph, on the first question, what I would say is that the math has been factored in when we think about our full year guidance with respect to government. So I wouldn't say that there is a change there with respect to our thinking. And again, as I pointed out in my script, we've assumed that we're going to be successful in on-boarding that renewal of that contract.

40:48 In the second part of your question, I want make sure I understood it right, could you ask that again Ralph?

Ralph Giacobbe

40:54 Sure. I'm just wondering if there was a revenue contribution, I guess from the variable component? So there are fixed component, variable component to the government contract. So is the variable component sort of trigger because of the Delta surge or am I misunderstanding because you also had sort of the commentary around benefits from the expanded contract. So I guess I'm just a little unclear on -- on some of those comments?

Jim Pekarek

41:19 Yeah. No worries. There was certainly some work with respect to the government's request for us to do some work, given what was going on with respect to Delta for sure. And just to clarify that work that T&M work showed up within the clinical engineering revenue for the third quarter that's where we talked about the movement from previously we had anticipated that work being done in Q4 and it moved up to Q3. So, yes, you're thinking about it right from the perspective of request that the government made based upon what was going on with Delta.

Ralph Giacobbe

42:02 Okay. Got it. That's helpful. And then just lastly, I was hoping you can give just an update on conversations with hospitals at this point, coming out of the pandemic, if there is greater appetite to expand relationships. I think in your prepared remarks, you did talk about sort of long-term strategic conversations or something like a longer-term contract. I was hoping you could flush that out, give some context around that as well? Thanks.

Tom Boehning

42:31 Yeah, Ralph. So it's Tom, we are seeing the customers we engage at a different level around things that they want to do with us that perhaps had been paused during the period of COVID. We're excited by that and what COVID has done is raise awareness to what Tom had mentioned earlier that what they're doing with their medical equipment is often not strategic, but during the pandemic, they realized the strategic importance of it and the differentiated value that we can provide as a result of the unique outsourcing services that we can provide to them. And so we have seen an uptick over the course of certainly the last quarter, where customers are wanting to reengage where they may have caused some of the broader conversations of various things that we could do together and we're looking forward to continuing to see that to grow and opportunities of consequence begin to come through as we emerge from the pandemic.

Ralph Giacobbe

43:41 Okay. That's helpful. Thank you.


43:44 The next question is from Kevin Fischbeck with Bank of America. Please go ahead.

Kevin Fischbeck

43:50 Great. Thanks. I wanted to try and get a better sense of how you felt the core business actually performs here in Q3, because obviously the guidance raise was -- the beat versus consensus was nice. But I guess when you think about the COVID contribution and then the shifting from Q4 to Q3 and the government contract, it's not very clear to me how much of that kind of outperformance is actually in that core business versus some of these that are kind of timing unexpected issues?

Jim Pekarek

44:27 Yeah, I don't know if you want to get on it, but I would just say from my lens, our view in terms of the core businesses, it continue to perform consistent with what the guidance is that we've shared previously.

Tom Boehning

44:45 Yeah. I mean Jim, I guess, the way I would characterize it as I said the math was entirely consistent, absolutely on the guide on a full year basis. We have a sense for what consensus looks like and I'd say effectively if you walk the BEATS plus a quarter of a Sizewise, less effectively but timing differential as we brought some Q4 into Q3 of the government's position under that contract as we shared. It gets you very directly to what that revised expectation with the quite of the full year. And in terms of where do that BEAT come from as we described, it came from day-to-day operations of our business and to a degree from the work that we do, from the federal government again including the timing related portion of that.

Kevin Fischbeck

45:44 Okay. I guess maybe expand to the guidance raise for the year and I’m just trying think about the core versus. So I think it sounds like the government contract for the year didn't change, but you've got Sizewise, which is call it eight million dollars, a quarter to thirty million dollars number. And then you said COVID was seven million dollars to eleven million dollars in Q3 with some additional contribution in Q4. I don't think you really had much COVID in the back half of your guidance. So it kind of feels to me like a lot of the guidance raise was COVID and Sizewise, is that fair to the quarters is largely in line or is the core business are performing more than that would imply?

Jim Pekarek

46:27 Yeah. There is the three elements is what I would tell you. The one is the piece with respect to Sizewise that you hit on, it's now being reflected in Q4. With respect to COVID, like we said in the script, its seven million dollars to ten million dollars is the math with respect to the revenue in Q3. And then the other piece would be the continuation of onboarding new business. So they are element of each and like I said at the outset of your question, I feel like that our core business is doing exactly what we've expected it to do from our prior guidance that we provided.

Kevin Fischbeck

47:14 Okay. Actually, I just have one quick question. Sizewise seasonality anything to think of there sort it look like Equipment Solution seasonality or is there anything that we currently look that into next year?

Jim Pekarek

47:25 Yeah. I mean the one thing I would point out and have pointed out is when you think about the COVID benefit for them. We've estimated that that's about five million dollars of a favorable impact in terms of adjusted EBITDA number that we had shared of thirty million dollars. If you think about them like you think about us with respect to Q4, we expect COVID to come into Q4 and then to over the course of the quarter come down and more in a pre-COVID level you should think about that is well, consistently with Sizewise. Nothing much else as you go into Q1, it's somewhat similar to our business in that typically in a pre-COVID world, you have the benefits of the flu, but I would tell you that that's more on the fringes that -- that's not the sizable impact.

Kevin Fischbeck

48:28 Perfect. Thanks.


48:30 The next question is from Matthew Mishan with KeyBanc. Please go ahead.

Matthew Mishan

48:33 Hey. Thank you and good afternoon, guys. Is there any way you guys could quantify your estimated to the fourth quarter for Sizewise? You're going to end up quantifying what the actual rule is over the next couple of quarters. I think it will just be helpful for the folks to understand the estimate for Sizewise implied in the fourth quarter?

Jim Pekarek

49:02 Yeah. I'm happy to help with that Matt. What I would do is I would use the historical number that we provided one hundred fifty five million dollars is a base. And then you can just divide that number by four. it's a decent proxy is the way I would think about it in terms of the EBITDA you could do the same, but I would provide a little bit further discount and given a five million dollars COVID benefit, we previously outlined within the thirty million dollars.

Matthew Mishan

49:34 Okay. I think that makes total sense and thank you for giving that color. And the last question would be around the labor inflations. You were talking about, it sounds like you've been able to retain your employees, but you are having a more difficult time attracting the right candidate? I think you're not alone in that. And I think we’ve heard that from mostly everybody. How do you think about your ability to attract the right candidate and your ability to kind of support growth into next year, especially with some of the onboarding that you're doing with the business?

Tom Leonard

50:15 Yeah. Thanks.

Matthew Mishan

50:17 Yeah. Go ahead, Tom.

Tom Leonard

50:20 I think we're in a good place. Tom Boehning mentioned in the script and I'll kind of reiterate here. We managed to grow our headcount some twenty percent this year in alignment with our growth. So while the -- we had fewer folks piling in at the top of the funnel and we normally would see or expect that as an issue being able to meet our needs, need to the business. As we look forward next year, remember as well -- as we come together with Sizewise, there is a synergy opportunity in there and some of those headcount needs will likely be met. We have folks that are currently employed by either Agiliti or Sizewise providing further we'll leave for cushion for us in making sure that we have the talent on board that we need in the places that we need them as we execute our next year. And I will note, we have not changed our outlook at all for next year based on anything which with regardless to either actually personnel cost for any of the supply chain related issues. We feel like we've got them at this point, pretty well in hand.

Matthew Mishan

51:35 Thank you very much.


51:38 The next question is from John Ransom with Raymond James. Please go ahead.

John Ransom

51:43 Hi. Good evening. Just to kind of telescope back for a minute and talk of here customers and thinking about the landscape post COVID. What do you think has changed versus not changed and how do you see yourself adjusting to the market now versus say to your [Technical Difficulty]?

Tom Leonard

52:13 Tom, do you want to...

Tom Boehning

52:12 Yeah, my pleasure. So thank you for the question. If we see opportunities has continued to grow for us with expansion into surgical equipment repair over the course over the last twenty months and then the additional opportunities on the bariatric space with the acquisition of Sizewise. So access for us has continued to grow, not just simply because of the strategic importance of what we provide to customers, but the breadth of offerings that we have has allowed us to continue to raise the opportunities that we have with the right audiences within our customers and because of that we're, as mentioned in the prepared remarks is, we are having more strategic conversations than we've had certainly over the little last twenty months. So it's been exciting to add those product lines and give us an opportunity to pull them all together into more complete offerings and really provide a much more impactful suite of cost savings and value lift as well as improving clinical outcomes as a result of the ads of those products and businesses.

John Ransom

53:34 And then if I could just...

Tom Leonard

53:34 Yeah. And then if I could just follow on to that…

John Ransom

53:37 Sure.

Tom Leonard

53:39 If I could briefly follow on to that. Yeah. One thing that we talked about is that Agiliti [Technical Difficulty] i.e. that we provide to customers by being fairly unique, that's often meant there is an education component associated with our sale, having to highlights for customers their inefficiencies, their waste. I would say that one of the things that has absolutely changed as a result of COVID is while customers may have tolerated that inefficiency before that waste before. They clearly seen when they couldn't get access to the critical medical equipment they needed to provide care for their patients. They clearly saw that this has to be a higher priority than it was before. So rather than pushing our way and educating our way into the C-suite we find ourselves getting pulled out more into the C-suite with the question being posed to us, how can you help us -- not just eliminate the waste, but better mobilize this equipment. So we have what we need, when we need it patient ready. And I'd say the nature of the conversations we're having with customers has really evolved throughout this period of COVID in a unique way should be able to serve the nation's healthcare system.

John Ransom

54:53 Thank you for that. And as a follow-on I mean you've clearly done a couple of acquisitions that help the story. How many BD people that you have like scouring landscape for deals, like you've done versus say few years ago and do you see more opportunities to add capabilities and are you getting more inbound as you've gotten public and got more visible?

Tom Leonard

55:21 So I see in terms of -- it can't be strategic, if it just shows you that the door step in the form of a book. The BD process starts with me, it starts with our business team and what do we need to do to continue to expand our solution to differentiate, it’s to offer more value to customers. Who's out there than that might be additive to our story and none of these things fall into our lap and I see in the case of Sizewise for example, we were in discussions with them for the better part of three years, getting to know them, assessing the fit, making sure they would be the right company for us.

56:01 In a similar vein, a new CEO and I followed the Northfield team for better part of the last five plus maybe six years, so it isn't about a BD team getting books and processing on it. It's about this executive team having a strategy for the business, looking for things that will continue to augment the value that we have, building those relationships vetting them and building a funnel because we'll easily look at more than twenty opportunities before we bring one, as far along as it gets visible or gets closed. And we do have a good healthy funnel as we sit here today. And again, that's part of my job to help ensure that that remains the case.

John Ransom

56:43 I feel kind of bad for somebody trying to us help [indiscernible] them. That sounds tough. All right, that was [indiscernible]. I'll go back in the queue. Thank you.


56:56 The next question is from Anthony Petrone with Jefferies. Please go ahead.

Anthony Petrone

56:58 Hi, and good afternoon. A couple of -- one question on contracting and then a follow-up on labor to a question asked earlier in the call. On the longer-term Department of Health contract, just wondering with the expectation there should be? Is it something that slips into twenty twenty two and if so, just what do you think even with Delta sort of ongoing here that the Department of Health would sort of put that decision making process for a longer-term contract on hold here for a bit?

57:39 And then on labor shortages, we're hearing hospitals themselves again having pressure as staffing is shifting, nurse practitioners in particular and physicians' assistants are leaving the industry. And so when you think of that pressure on hospitals from a staffing level, it kind of strikes us that actually provides a greater opportunity to outsource a number of initiatives internally at the hospital as an offset to higher cost pressures that they may be facing next year. So we actually think that actually staffing shortages could spark more conversations at the C-suite for Agiliti between hospitals? Thanks.

Tom Leonard

58:22 So thanks for that. We'll have to make this our last question because we are at the one-hour mark. In terms of the first question regarding the Federal government contract, I wish the delays of the government could be fully known to me and if they would address their contract strategy with us, but they don't. So we standby awaiting an RFP and our formal contracts award and in the meantime, we'll continue to keep these critical resources and a deployable state of readiness under the short-term contracts if they continue to extend to us.

58:57 With regard to the second point you made about staffing difficulties for our customers for hospitals, it absolutely does lend itself to greater interest, so this is need to outsource. And we do expect that to be modest tailwind to the business that we do, which is doing this work, when it comes to medical devices better and at lower cost, the higher quality, our customers can do for themselves. And with that we are at full time. So we'll go ahead and bring today's earnings call to a close. Thank you everyone for your interest in Agiliti.


59:41 This concludes question-and-answer session and also the conference. Thank you for attending today's presentation. You may now disconnect.

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