Agiliti, Inc. (AGTI) CEO Tom Leonard on Q1 2022 Results - Earnings Call Transcript

May 14, 2022 11:33 PM ETAgiliti, Inc. (AGTI)
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Agiliti, Inc. (NYSE:AGTI) Q1 2022 Earnings Conference Call May 10, 2022 5:00 PM ET

Company Participants

Kate Kaiser - Senior Vice President, Corporate Communications and Investor Relations

Tom Leonard - Chief Executive Officer

Jim Pekarek - Chief Financial Officer

Tom Boehning - President

Conference Call Participants

Matthew Borsch - BMO Capital Markets

Joanna Gajuk - Bank of America

Jason Cassorla - Citi

Matthew Mishan - KeyBanc

Zach Weiner - Jefferies

Amit Hazan - Goldman Sachs

Operator

Good afternoon, ladies and gentlemen and welcome to Agiliti’s First Quarter of 2022 Earnings Conference Call. Today’s call is being recorded and we have allocated 1 hour for prepared remarks and Q&A. At this time, I’d like to turn the conference over to Kate Kaiser, Senior Vice President of Corporate Communications and Investor Relations at Agiliti. Thank you. You may begin.

Kate Kaiser

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 quarter ending March 31, 2022. Before we begin, I will 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 our most recent SEC filings, which can be found in the Investors 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’ll use to facilitate today’s discussion please visit our website at agilitihealth.com, select the Investors section at the table of the screen and then Events and Presentations. Finally, selected presentation titled Agiliti Q1 2022 earnings slides.

With that, I will turn the call over to our CEO, Tom Leonard.

Tom Leonard

Thanks, Kate and good afternoon. Thank you for time to join us as we review our results from the first quarter of 2022. Joining me today is our CFO, Jim Pekarek; and our President, Tom Boehning, who leads our commercial operations.

We are pleased with our performance in Q1, and our financial results met our expectations. We remain on track for the balance of the year and with three quarters of work still ahead of us we are reaffirming our full year financial guidance. Jim will review our Q1 results and provide additional color on our performance in a few minutes. I’d like to start today with some brief observations on the broader trends impacting our customers.

By now, we are all well aware of the challenges facing our healthcare system, the rapidly increasing burdens of capital constraints, widespread labor and supply shortages and broad-based inflationary cost pressures. Importantly, at the intersection of those challenges, Agiliti is able to deliver a broad set of compelling value propositions. When it comes to the manufacturing management, maintenance and mobilization of medical devices, we believe Agiliti stands alone. Our goal for our customers is simple to ensure clinicians have access to the patient-ready medical devices they need, delivered to the point of care with the confidence they are maintained to the highest industry standard.

Let me share a few examples of these capabilities in action and quantify the benefits to our customers. Our unique ability to supplement a hospital’s biomed team with Agiliti technicians deployed from our local service centers as one simple example can compensate for our customers’ short-term staffing shortages, minimizing their employee burnout, and eliminating overtime expense. And by helping our customers return their own devices back to service more quickly, we reduce or eliminate other operational impacts caused by lack of availability and excess rental expense.

Similarly, improving medical device utilization and reducing total medical device operating costs is another area where Agiliti is making a difference. Even prior to the pandemic, health systems generally owned too much capital medical equipment. We have previously shared research showing health systems across the country experienced average on patients’ daily utilization below 42% across device categories like monitoring equipment and infusion pumps and ventilators. Yet many health systems subsequently acquired even more equipment to meet the rapid surge in patient census early on in the COVID-19 pandemic. Today, many of these health systems labor under the financial and operational impact of expenses and increasingly idle assets that still require ongoing preventative maintenance and repair.

Agiliti’s onsite management programs are helping customers free up the capital and the related excess operating expense, which resulted from making long-term capital investments to meet the short-term demands of COVID. At Agiliti, we pride ourselves in being on the right side of healthcare, meaning we specialize in making the delivery of care safer and more efficient, ensuring regulatory compliance for our customers and giving clinicians peace of mind, knowing that the devices we serve are maintains to the highest industry standard. As our customers struggle with rapidly rising labor and other input costs, Agiliti is able to deliver an average of a 15% to 25% lower operating cost to our customers in the areas we manage while still maintaining our own best-in-class margin profile.

As we’ve shared in prior calls, our unique local market service infrastructure, consisting of medical device-focused maintenance, repair and logistics capabilities extend all the way to the patient’s bedside, all supports an operating model without peer. We believe Agiliti is unique as a company with the scale and breadth of capabilities to deliver these benefits across our nation’s healthcare system, supporting providers ranging from individual healthcare facilities up to the largest health systems in the country, helping medical device manufacturers as an extension of their own repair and remediation capabilities. And increasingly, supporting states and federal government agencies to manage maintain and deploy their emergency medical device stockpiles.

The essential nature of our work was clearly evident throughout the period defined by COVID-19, and it’s equally relevant today as we support our customers through this challenging period. We recently lapped the 1-year anniversary of Agiliti’s initial public offering. Reflecting briefly from last year to now, I’m excited to have this opportunity to continue to share our story. Looking forward, we’re even more enthusiastic about our strong business momentum and the opportunities ahead of us as a company.

I now turn the call to Tom Boehning to offer his perspective on our performance.

Tom Boehning

Well, thanks, Tom, and hello everyone. I will build on Tom’s remarks today with a few brief updates on our commercial progress and some additional context on evolving macro trends and in relation to our business and our customers. In early Q1, as expected, we saw the return to lower non-COVID levels of device utilization by our customers. Likewise, we’ve seen a recovery toward normalized surgical case volumes across much of the country. We’ve previously discussed the balance of our business across both the medical and procedural sides of our customers’ operations.

The ramping of case volumes is favorably offsetting some of the financial impact from normalization of equipment demand. These areas have shown an inverse correlation throughout the last 2 years as provider organizations routinely canceled or deferred surgical cases to tackle the surge in COVID patients as each wave of COVID moved across the country.

The normalization of demand continues to play out very much as expected in our financial performance. We’ve also seen a clear shift in our customers’ mind share, focus from short-term COVID-driven needs to an increasing focus on longer-term strategic initiatives, emphasizing cost control and quality of patient outcomes. The shift is only accelerating due to the significant economic forces now facing our customers, which Tom highlighted earlier. We’ve described the impact of these external economic forces on our customers’ operations.

Now I’d like to take a moment to touch on general subjects of labor availability, wage inflation and supply chain risk and their impact on agility. Much as we shared last quarter, we are not seeing a significant impact from these macro issues. Starting with labor availability, helpful to start with an understanding of our labor market, Agiliti competes for our critical skilled labor categories from within a relatively closed pool of healthcare-focused talent. Biomedical technicians as one example are skilled professionals that earn a certificate from an accredited education institution before they’re qualified to repair medical devices. As there are numerous high-paying jobs within healthcare for biomeds is a relatively closed market for talent.

While most of these jobs and employees today are working in hospitals and health systems, we enjoy a significant advantage in hiring and retaining these professionals. At Agiliti, these are high visibility revenue-driving frontline roles. Our techs earned competitive salaries plus they share in the success of the company through our generous incentive plans as well as various equity ownership plans.

Additionally, we offer opportunities for continued career growth, advancing training as a path to higher compensation and path to management. Offered from within a rapidly growing company with a nationwide reach, it’s a combination of benefits and opportunities that a health system simply can’t match. So while we have experienced some minor impacts from trends around wage inflation and labor availability, it has been absorbed today to the flexibility of our operating model, employee retention that has remained relatively steady over the last 3 years and overtime levels that are nearly unchanged.

Bigger picture, Agiliti prides itself on mission-driven work. We offer the opportunity to build a rewarding career doing work that makes a difference in the lives of patients and that supports our nation’s healthcare system. As further evidence, we recently completed our annual employee engagement survey. With nearly 80% of our employees responding, we achieved an overall engagement score of 72. This places us within 5 points of the extraordinary company benchmark, representing the top quartile of all companies and across all industries.

Turning briefly to supply chain risks, our outlook remains unchanged from prior quarters. Agiliti generally operates under longer term supply agreements with relatively fixed pricing. Our centralized purchasing and supply chain management processes ensure 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 believe that we are maintaining adequate safety stock that supports the business through potential short-term disruptions. Further, as we primarily self-manufacture for our own rental fleet, any potential financial impact from short-term supply chain interruptions would likely be immaterial.

A few final points on M&A and our recent acquisitions, we noted last quarter that we are substantially complete with the integration of our Northfield acquisition. I am pleased to report that we’re making great progress with our integration of Sizewise as well. As I have shared, we have already aligned our commercial selling team and our operations leadership, which was our highest integration priority.

Our combined team is successfully collaborating in the field to bring our newly expanded solution directly to customers, and we are realizing the benefits of that in our results. We are now taking steps to combine our financial and operating systems as well as our corporate functions. And we are just beginning to merge our facilities, vehicle fleet, equipment inventory and operations personnel, a project that will span roughly the next 2 years. More broadly and reiterating that we’ve – what we shared previously, Agiliti maintains an active pipeline of M&A opportunities and the financial flexibility to pursue them. We continue to see targets that can drive profitable volume through our at-scale nationwide infrastructure, extend the value we provide for our customers and enhance our competitiveness.

With that, let me turn things over to Jim to review our financial performance.

Jim Pekarek

Thank you, Tom. I’ll start with an overview of our Q1 financials and then offer some comments on our outlook for the year. For the first quarter, total company revenue totaled $294 million, representing a 25% increase over the prior year. Adjusted EBITDA totaled $89 million, a 3% increase compared to Q1 last year. Adjusted EBITDA margins totaled 30% for Q1 of 2022. Adjusted EBITDA margins versus the prior year were impacted by the acquisition of Sizewise as well as the acquisition of Northfield Medical. You will recall that Agiliti generally enjoys a very strong margin profile. So the companies we have acquired all start with lower pre-synergy adjusted EBITDA margins.

In addition, adjusted EBITDA margins were impacted by the renewal of the HHS contract as well as lower medical device rental utilization as we saw a return to pre-COVID placements in the quarter. Our strong operating performance drove net income of $20 million, up over 100% compared to Q1 of last year. Adjusted earnings per share of $0.29 compares to $0.30 in the year ago period, with strong earnings growth, offset by the increase of 33 million weighted average fully diluted shares outstanding associated with our April 2021 IPO to 139 million shares in Q1.

Taking a closer look at the first quarter across each of our service lines, we delivered strong revenue growth across both Equipment Solutions and Clinical Engineering and an expected decline in onsite managed services revenue as we had previewed when we provided our annual guidance in March. Equipment Solutions revenue totaled $122 million, up 48% year-over-year. Our October 1 acquisition of Sizewise contributed approximately $43 million in revenue in Q1. In addition, COVID demand continued in the first part of Q1. While challenging to quantify, we estimate had a net favorable impact of between $5 million and $7 million versus pre-COVID levels. A reminder that in the prior year period, we had experienced a favorable impact from COVID of approximately $10 million to $12 million.

Moving to Clinical Engineering, Q1 revenue was $103 million, representing year-over-year growth of 37% for the quarter. Revenue derived from our HHS contract was lower year-over-year, reflecting the previously described reset from active deployment and in-market support of the stockpiled devices to the longer-term pricing levels associated with the ongoing maintenance of the stockpile. In Q1, the revenue contribution from Northfield Medical, an acquisition, which closed in March of last year, was the primary driver of year-over-year favorability. Finally, our onsite managed services revenue totaled $70 million, representing a year-over-year decline of 10% for the quarter. This is primarily driven by the renewal pricing and revised scope of our HHS agreement.

Reflecting on our onsite services for nearly 2 years, customers have been focused on near-term challenges related to COVID, which primarily benefited our Equipment Solutions service line. As we emerge from this COVID-dominated period, we are once again engaged with our customers on their longer term more strategic cost and quality initiatives. We continue to see new onsite managed opportunities moving through our sales funnel.

Continuing down the P&L, gross margin for Q1 totaled $124 million, an increase of $22 million or 22% year-over-year. Our gross margin rate was 42%, down 110 basis points from the prior year. The decline in margin rate was driven primarily by the acquisition of Northfield in the prior year. In addition, lower medical device placements from a return to pre-COVID levels also had an impact. SG&A costs for Q1 totaled $86 million, an increase of $17 million or 24%. The increase was primarily due to SG&A costs from our 2021 acquisitions, net of achieved synergies. SG&A expenses as a percentage of revenue totaled 29%, which was consistent with the prior year results.

Moving to the balance sheet, we closed Q1 with net debt of $1.07 billion, which includes $1.12 billion in debt, less $52 million of cash on hand on our balance sheet. Our cash flow from operations for the quarter was over $67 million, 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. In addition, our cash flow from operations less cash flow from investing activities totaled over $50 million, which represents a conversion of 2.5x our net income in the quarter. Strong cash flow generation and adjusted EBITDA growth resulted in a reported leverage ratio of 3.2x in Q1. In addition, in the quarter, we utilized our cash on hand to pay down over $70 million in debt obligations.

Looking forward, we will remain diligent in determining the optimal uses for our strong cash generation. This principal reduction is expected to reduce our cash interest payments by more than $3 million annually. We continue to target leverage in the low- to mid-3x range as we expect to use our strong balance sheet and cash flow generation to fund opportunistic M&A over time.

Agiliti maintains a position of significant liquidity with $294 million available as of March 2022. This includes our $250 million revolving credit facility as well as cash on hand. Finally, a reminder on the terms of our debt given the macro view on likely near-term interest rate increases. In total, of our $1.07 billion of debt, we maintain an interest rate swap agreement on $500 million of our debt, which has swapped floating rate terms for fixed rate terms. This provides a partial hedge for any anticipated market rate increases.

Turning now to our 2022 outlook, we are reaffirming our full year financial guidance. Specifically, we expect to deliver 2022 revenue in the range of $1.16 billion to $1.19 billion, representing top line growth of 12% to 15%. We anticipate adjusted EBITDA in the range of $305 million to $315 million. Our net cash CapEx guidance reflects expected reinvestment into our business in the range of $80 million to $90 million. CapEx should normally be in the range of 6% to 7% of revenue each year, but is planned slightly higher in 2022.

As discussed last quarter, the increase is due to three specific investments, targeted incremental investment in our IT infrastructure, an increase in manufacturing investment tied to our Sizewise acquisition, to ensure we are fully prepared to meet our longer term growth goals and timing of some targeted 2021 equipment fleet purchases shifted to this year when a device manufacturer was unable to supply in 2021. Finally, we continue to expect adjusted earnings per share in the range of $0.89 to $0.94 per share. From a qualitative perspective, and as we have shared in our prior earnings calls, throughout much of 2022, our financial results will comp against the $30 million to $40 million in high-margin COVID-driven revenue tailwinds from 2021. While we saw some COVID-driven demand very early in Q1 of this year, our 2022 plan assumes a return to pre-COVID equipment utilization levels for the balance of the year.

Additionally, as we have previously shared, our new HHS contract consolidate several prior agreements, and its narrowed scope reflects the ongoing management and maintenance of the device stockpile without the incremental activities associated with its initial standup for deployment. While the financial details of the contract remain confidential, implicit in our guidance is that Agiliti will see an approximate $40 million to $50 million revenue reduction in 2022. That difference is accounted for within both clinical engineering and onsite managed services. So the majority of the impact is expected within onsite.

Consistent with our ordinary course of business, we expect to continue signing and implementing new contracts for our solutions throughout the year as customers turn attention back to their long-term strategic and financial initiatives where our solutions play an important role. Net of the COVID impact and the rescoped HHS contract and adjusting for the annualized impact of acquisitions made in 2021, our guidance continues to imply organic revenue growth in the mid to high single-digit range, consistent with our historical pre-COVID growth rate.

Our implied full year adjusted EBITDA margins, which can be calculated from our 2022 guidance are expected to be in the range of 26% to 27%. Primary drivers that will impact margins for the balance of the year include the normalization of rental device utilization back to pre-COVID levels. Our internal assumptions on the new HHS contract and the impact of our acquisitions of Northfield Medical and Sizewise both of which start with lower pre-synergy EBITDA margins when compared to Agiliti’s historical average.

Finally, our business does experience some seasonality with the first and fourth quarters generally representing our strongest quarters based on the historical timing of the annual flu season. We expect a similar trend in seasonality this year with a return to pre-COVID demand and the recently signed HHS renewal, which occurred in late Q1. At going time, we are pleased with our first quarter results, and remain confident in our outlook for the year.

I’ll now turn the call over to our operator, to provide instructions for Q&A.

Question-and-Answer Session

Operator

Thank you very much, sir. [Operator Instructions] The first question comes from Matthew Borsch of BMO Capital Markets.

Matthew Borsch

Yes. Thank you. So just to be clear, are you still saying that the impact in the first quarter from COVID was net neutral? I mean, I think that was your earlier view, although we hadn’t been through the full quarter. I’m just curious if that had changed.

Jim Pekarek

No, Matt. The Q1 impact was $5 million to $7 million. It was actually right in line with what we had expected as we planned for the full year.

Matthew Borsch

Okay. And then that’s it for the full year.

Jim Pekarek

Yes, that’s right.

Matthew Borsch

Okay. And just a question on on-site managed services, you’re expecting that to pick up as things normalize. I’m just curious, the 10% decline, I think I’m sorry if I got the wrong figure there, but I think it was a 10% decline in revenue year-over-year. That suggested you didn’t see that yet in the first quarter or correct me if I’ve got that wrong?

Jim Pekarek

In terms of the math, you have the math right, Matt. Keep in mind, what I shared in my prepared remarks, was that for the full year, what we expect in terms of the impact from the HHS renewal was about a $40 million to $50 million reduction from the prior year. And specifically, I said that the majority of that would be within on-site. And so as I shared, I think in the prior script in March, I had shared that I expect is that, that will impact negatively the on-site piece. So it’s hard to see that goodness from the new customer growth.

Tom Leonard

Matt, just more broadly, if you were to reflect on our historical performance that ‘15 to ‘19 period, which is all organic not impacted by M&A, not impacted by COVID, not impacted by the government business. You’d see that it was – on-site was very consistently a high single-digit grower. And that’s a good assumption to use when you think about – how to think about that business, how to model that business. There is nothing fundamentally different and probably as much or more demand today as ever with that solution.

Matthew Borsch

Fantastic. Thank you.

Jim Pekarek

You got it, Matt. Thanks for the question.

Operator

The next question comes from Kevin Fischbeck of Bank of America.

Joanna Gajuk

Good afternoon. Actually, this is Joanna Gajuk filling in for Kevin today. So thanks for taking the question. So first, I guess, a question on the – on your guidance. And I guess more so in the first quarter. So it sounds like the COVID-related revenue contribution was as expected, the $5 million to $7 million you estimate, but how was the quarter overall versus your internal expectations? Because I mean you might – you kept your full year guidance kind of implies the quarter was in line, but versus the consensus estimate, obviously, EBITDA came in much better. So I don’t know whether if we were just modeling it incorrectly in terms of seasonality. So yes, I guess the question is how did Q1 came in versus your internal expectations?

Jim Pekarek

Yes. Good question. It was very much in line with our internal expectations. I called it out in the script as it relates to seasonality, seasonality definitely does play a part. So when you think about the quarters yes, you have to keep that in mind. And then there is some just normal timing that occurs from quarter-to-quarter. So that was the biggest piece in terms of the modeling piece – is making sure that the seasonality and some of the timing things that we’ve talked about in prior quarters are factored in. But as bottom line very much in line with what we had internally planned for.

Joanna Gajuk

Thank you. If I may, on the discussion around labor, you mentioned that, but also I’m curious, any color on the rising fuel costs. How big of a I guess, part of your P&L is really the fuel cost? And what are you assuming in your guidance essentially? Thank you.

Jim Pekarek

Yes. Good question. So we may mention it in our 10-K, and I think we also did again this quarter in the quarter. But just on the quick math, we said that a 10% increase to our prior year’s costs would be about $600,000 to $700,000 ish of increased costs. So overall, not a big factor is the long and short of it.

Joanna Gajuk

And what are you assuming in the guidance, there is some inflation year-over-year, presumably.

Tom Leonard

We don’t break out every assumption that we make, we are comfortable that we have it covered.

Joanna Gajuk

Okay, great. Thanks so much. That’s all I really have. Thanks.

Jim Pekarek

Yes. You got it.

Operator

Thank you. The next question comes from Jason Cassorla of Citi.

Jason Cassorla

Great. Thanks for the questions. I wanted to go to your conversations you’re having with hospitals just in terms of the continued shift towards longer-term strategic initiatives, maybe can you just delve a little bit deeper into those conversations and perhaps if hospitals are approaching their relationship with you differently at this point with maybe different demand for your services, just given the backdrop? Just any color on those conversations and how they are developing would be very helpful.

Tom Boehning

Yes. Thank you for the question. The answer is yes. Our hospital customers are seeing a different demand for our services. And while we of course have been socializing to our full capabilities finding that they are outreaching to us because they are learning about our full breadth of offerings and wanting to see if we can help them with medical equipment management, not only within individual facilities, but perhaps across their entire IDN. And in doing so, as Tom mentioned in his remarks, we’re able to identify material savings. It could range anywhere between 10% and 20%, 25%. And so that is really compelling to the customers that we speak to is creating great opportunities for us, and it’s becoming pretty viral in certain markets where we’re seeing more and more customers enthusiastic about what our capabilities are.

Jason Cassorla

Got it, thanks. That’s helpful color. And then maybe just towards your commentary around the longer term supply agreements with generally fixed pricing, I guess, are – as you’re renewing contracts with hospitals to submit this backdrop, are you seeing pressure from customers for price concessions at this point? Maybe just for your customers that you already have that you’re already providing services for. And they just would like a little bit better pricing on that? Or how would you frame that? Thanks.

Tom Leonard

Yes. I just want to kind of separate that comment related to our supply agreements. So we need, for example, spare parts from manufacturers, and we generally source those on longer-term supply agreements with relative to fixed pricing. But reflecting on customers and our discussions with them, no, we’re not seeing pressure to change reduced pricing, but is important to understand the value proposition that we have for our customers. So we’re not a body shop. We don’t badge flip and try to sell back the same bodies to the hospitals they could have hired for themselves. As I described in one of the examples I gave, when we take over an environment for a hospital, we’re typically saving them 15% to 25% of over what they were able to do that work for themselves while still as we shared, delivering a best-in-class margin profile for the company. So – when we go in and work with our customers, we’re reducing their operating costs, 15% to 25%. The alternative is to take this on themselves and have their costs go up. So just – it’s the nature of our business model, that’s not really a discussion that we end up having. Can you adjust down your pricing? We’re already significantly lower costs than what they could do for themselves. And frankly, what others with body shop badge flipping models could possibly do for them as well.

Jason Cassorla

Got it. So just to clarify, for the customers you’re already saving 15% to 25%, you’re not seeing them come back to you incrementally at this point suggesting price concessions. I just want to make sure right.

Tom Leonard

Exactly. That’s – it’s not even the nature of the kind of conversation we have with customers, because consider what the alternative is, it would be to do it themselves, which would be to hire the bodies, employ a direct model and have their costs go up 15% to 25% or more in that rising cost environment that they experience. We have more conversations with our customers than we’ve ever had before because of our unique model, everything that we do, reduces the operating costs for our customers. Otherwise, we wouldn’t be in that business model. So that runs completely counter to that type of the business model and contract relationships that we enjoy with our customers.

Jason Cassorla

Got it. Okay, thank you. Thanks for the time.

Operator

Thank you. The next question comes from Matthew Mishan of KeyBanc.

Matthew Mishan

Hey, good afternoon, guys. Thanks for taking the questions. Sorry for the broader one here, but I just wanted to get your sense of the hospital capital spending environment and how you think it’s progressing through 2022, you get the sense that hospitals may be a little bit more incrementally cautious around hospital capital spending? And how do you think that may kind of help for benefit Agiliti?

Tom Leonard

Yes. Thanks for the question, Matt, good to hear from you. We don’t see all of hospital capital spending. We do see a good bit of a hospital capital spending on medical equipment. And if I can paint with a broad brush, here’s what I’d say, hospitals have already owned too much equipment. It’s already been a value proposition for us to help them free up the excess capital tied up in owning excess equipment and the operating expense associated with that. What we saw during the pandemic was they tended to buy more to meet that short-term need. So I think hospitals are generally flush at this point with capital medical equipment and many of our conversations as we go in with our on-site programs are Okay. Now I’m stuck because I’ve overbought I’ve got too much. Can you help us? Can you help us run what we have more efficiently? Can you help us get rid of this excess? Can you help us make this all less expensive to take some of these costs out of our healthcare system? So with that is our view of where we see it, I would imagine that hospitals are typically find themselves fairly flush with medical equipment because generally, the conversations we have is them reaching out to us saying that we’re in this position can you help us?

Matthew Mishan

Thank you for that. And then you mentioned a couple of times that the mix is driving or some mix of Northfield and Sizewise is a headwind between year-over-year margins. Just – in the previous acquisitions you guys have made, how long did it take to realize the synergies and get them up to where Agiliti’s average margin sits?

Tom Leonard

So these are the first two of and real scale that we’ve done so we can’t benchmark. I think one of the points we made in the prepared remarks is we’ve integrated with Sizewise, as an example, our commercial selling teams, but the work to take their physical footprint their vehicle fleets, their equipment fleet merge it with ours, rationalize what isn’t needed out of it, making sure we have the right people, the right equipment, the right facilities in the right markets it’s going to be a couple of year journey. So I think that’s a good way to think about it. I think we will be making incremental progress over the first couple of years until that work is done. What we guided to when we did in example of the Sizewise acquisition was that we would deliver $5 million in cost synergies in year 1, growing to $15 million by year 3. And we are very comfortable with that initial guidance that we shared at the time of the acquisition.

Matthew Mishan

Alright. Thank you.

Operator

Thank you. The next question comes from Zach Weiner of Jefferies.

Zach Weiner

Hey, everyone. Thanks for taking the question. We did a survey on hospital CEOs and CFOs looking at labor pricing. Just curious if you could give some color on that? We’re hearing that labor pricing is high and will continue to be high for the next several quarters. Just curious how that will impact the broader business here? Thanks.

Tom Leonard

Yes. So it’s a tailwind for us. We agree that labor pricing is up on an apples-to-apples basis. We are very fortunate, and I say uniquely fortunate in that our operating model isn’t directly dependent on that apples-to-apples comparison. Let me explain. In one of our largest labor groups, we’re seeing for a biomed of Level 3. That cost to hire is about 6% for that exact same level of experience, exact same role about 6% higher year-over-year based on something – some work we did analysis we did a couple of months ago. But we don’t see that flow through to our P&L, why not? Because our operating model isn’t just about hiring your Biomed Level 3s, if I need to hire, I mean take it a Level 1. I may use these lower-level technicians, cost me about half as much what we call the medical equipment technicians. We do some semi complex repair work under the supervision of a biomed. We have several thousand lower-level technicians, our customer support techs, our hospital support techs cost me even less and these medical equipment technicians. We have this blended – we have a blended resourcing model that we deploy from our local service centers that are down the street from our customers that means whether one individual physician type might cost me 6% higher per year. The way this all bleeds through ultimately in my P&L is we’re seeing no meaningful, no real impact of that as it blends out into the P&L for the year, perhaps not as elegantly stated, as the model works, but we’re not feeling the impact of wage inflation in our P&L today because of the flexibility of our operating model.

Zach Weiner

No, that’s helpful. And then I guess further to that, are you seeing any tailwind in terms of new contracts or extension of current contracts due to the current labor environment?

Tom Leonard

The value that we provide to our customers is even greater today because it’s hard for them to source these resources and when it is just a direct hire for those skill sets without the kind of scale that we have to the ability to apply the kind of mixed labor model that we can employ. Our customers are seeing their costs go up at that rate of 6%, 7% per year. It’s only in our – in the operating model where we can blend these labor rates across that scale that we have deployed locally that we don’t see it or experience it like our customers do. So the value proposition that we have is increased for our customers. And yes, that’s driving a lot of activity in the field.

Zach Weiner

Thanks for taking my questions.

Operator

Thank you. The next question comes from Amit Hazan of Goldman Sachs.

Amit Hazan

Good afternoon folks. Just a couple for me here. One is just on the government contract side, I think in your prepared remarks, you mentioned state and local governments, too. And I don’t know maybe that’s always in your prepared remarks, and I’ve missed it, but I’m just curious if there is anything to that if you’re having any progress with stockpiling contracts at state and local level that you’ll be able to call out or just talk to it qualitatively?

Tom Leonard

Yes, right. So nothing that we periodically threshold, and we have had that in our remarks for a while since we’ve been a public company. I think what should stand out hopefully in folks’ minds is, I’m not aware of any other company that actually supports stockpiles at any level. And over the course of the 7 years I’ve been with the business, we’ve been taking on these types of arrangements. Some cities have stockpiles. We’re generally the one that’s called on to manage those. A number of states have stockpiles as well. We’re generally the company called upon to manage, deploy and support those. And then we’ve taken on a number of stockpiles for the federal government as well. So while there is always been an ordinate amount of focus on the HHS contract, the fact is our unique capabilities have always made us the best and perhaps the singular choice for managing these types of stockpiles and it’s something we’ve been doing, again, for the better part of my 7 years here.

Amit Hazan

Yes. And just a follow-up on the guidance kind of seasonality piece, you called out 1Q, 4Q. That’s appreciated. Maybe just to ask you specifically on 2Q in terms of just color on anything that you would want us to consider from a seasonality perspective in trying to model the divisions and flow through to margins? Obviously, we heard you on the COVID piece, but anything else that you’d call out would be super helpful for modeling? Thanks folks.

Jim Pekarek

Yes. Look, I’d say a couple of things just to keep in mind. But historically, when you look at each of our service lines, Equipment Solutions is the area that typically sees the most variation, Q1 and Q2, the strongest. So that’s a point. And then further, knowing that, as I described in the guidance, what we’ve assumed for the balance of the year is that we’ve returned to a pre-COVID level, and we had some COVID that $5 million to $7 million. So that’s a point with respect to Equipment Solutions. All I would tell you is, and we talked about this a little bit before, too, I mean, which is that within Clinical Engineering, it’s a bit lumpy quarter-to-quarter based upon some of the T&M work that’s performed, that would be the one other area where in Q1, we did a fair amount of T&M work and there is some lumpiness there between Q1 and the balance of the year. That – those would be the 2 pieces that I would point you to.

Tom Leonard

And that T&M work is really driven by the HHS contract, it’s not normally a lumpy...

Jim Pekarek

Very good color, TL. That’s right. It was related to the HHS agreement. Is that helpful for you?

Amit Hazan

Yes. That’s helpful. Thanks, very much.

Jim Pekarek

You got it.

Operator

Thank you. Ladies and gentlemen, we have reached the end of our Q&A session. This concludes today’s teleconference. You may now disconnect your lines at this time. Thank you for your participation. Thank you.

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