Premier, Inc. (NASDAQ:PINC) Q2 2023 Earnings Call Transcript

Premier, Inc. (NASDAQ:PINC) Q2 2023 Earnings Call Transcript February 7, 2023

Operator: Good morning and welcome to Premier’s Fiscal 2023 Second Quarter Earnings Conference Call. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Angie McCabe, Vice President, Investor Relations. Please, go ahead.

Angie McCabe: Thank you. Welcome to Premier’s fiscal 2023 second quarter conference call. Our speakers this morning are Mike Alkire, Premier’s President and CEO; and Craig McKasson, our Chief Administrative and Financial Officer. Before we get started, I want to remind everyone that our earnings release and the supplemental slides accompanying this conference call are available in the Investors section of our website at investors.premierinc.com. Management’s remarks today contain certain forward-looking statements, and actual results could differ materially from those discussed today. These forward-looking statements speak as of today, and we undertake no obligation to update them. Factors that might affect future results are discussed in our filings with the SEC, including our most recent Form 10-K and our Form 10-Q for the quarter, which we expect to file soon.

We encourage you to review these detailed safe harbor and risk factor disclosures. Also, where appropriate, we will refer to adjusted or other non-GAAP financial measures, such as free cash flow to evaluate our business. Reconciliations of non-GAAP financial measures to GAAP financial measures are included in our earnings release, in the appendix of the supplemental slides accompanying this presentation and in our earnings Form 8-K, which we expect to furnish to the SEC soon. I will now turn the call over to Mike Alkire. Mike?

Mike Alkire: Thanks, Angie. Good morning, everyone, and thank you for joining us. A short time ago we reported our second quarter results, which I am pleased to share, were largely in line with our expectations. We also announced that we are implementing a targeted cost savings plan and revising our fiscal 2023 segment revenue and adjusted earnings per share guidance. First, I’m incredibly proud of our team for continuing to execute the four pillars of our growth strategy. Strong revenue growth in our Performance Services segment was driven by the execution of enterprise license agreements this quarter and growth in our consulting services and certain of our adjacent markets businesses. Importantly, we believe growth in enterprise license agreements demonstrates our strong partnerships with our members.

These multiyear agreements expand the use of our technology and consulting services platform to help members deliver higher quality more cost-effective care to their patients. Even in challenging time for health systems, our members and other customers continue to see our offerings as long-term solutions for their needs. We are also making progress in strengthening our existing capabilities and expanding into adjacent markets. In the second quarter, we acquired TRPN assets for Contigo Health, our direct-to-employer business. These new assets, which we have rebranded as ConfigureNet, include our new out-of-network wrap currently offers access to more than 900,000 providers across 4.1 million US locations. We believe this offering will positively impact employer and provider-sponsored health plans bottom lines, as well as health plan members out-of-pocket costs when they access out-of-network health care services.

Performance in our Supply Chain Services segment reflect quarter-over-quarter growth in net administrative fee revenue, primarily due to growth in the non-acute or, as we call it, the Continuum of Care group purchasing business. Also, as we anticipated, direct sourcing products revenue grew sequentially from the first quarter of fiscal 2023, primarily driven by expansion of our product portfolio in a more normalized demand and pricing environment. While our second quarter performance generally reflects continued execution of our multiyear growth strategy, we, as well as our members and other customers, are operating in a challenging and uncertain macro environment. Inflation, rising interest rates, labor challenges and ongoing supply chain constraints continue to affect our members and other customers.

For example, within our Performance Services segment, Remitra, our e-invoicing and payables platform, is experiencing the same market dynamics impacting other financial technology companies. While these headwinds are driving slower-than-expected adoption of Remitra, we believe this environment further magnifies the need for invoice and payment automation and dependable supply chain financing for health care providers and suppliers in the long-term. We are in the process of realigning our Remitra business and cost structure for operational efficiencies in the near-term to include hosting accelerated solution design sessions with suppliers and providers to further strengthen our go-forward strategy. We remain confident regarding Remitra’s potential as an important growth engine for Premier.

As we announced this morning we proactively implemented targeted but meaningful cost savings measures. This includes the reduction of non-labor expense as well as elimination of certain open staffing positions and a modest reduction in our workforce. Let me be very clear, we are deeply committed to our mission to improve the health of communities. We do not take decisions that affect our employees lightly. These were difficult decisions to make, but they were also necessary to align our cost structure with the current environment, while providing flexibility to support our members and other customers in improving the delivery and cost of care. Looking ahead, we remain focused on executing our multi-lever growth strategy in reinforcing our competitive position.

We will continue to appropriately and proactively invest in opportunities that optimize our business, for sustainable long-term growth, while maintaining financial discipline and flexibility. Importantly, we believe we are well positioned for longer-term success through the combination of our deep member relationships and our comprehensive and scalable technology and services platform, powered by comprehensive health care data to deliver meaningful solutions to our members in the market. I will now turn the call over to Craig McKasson, for a more detailed discussion of our second quarter operational and financial performance, our cost savings plan and revised fiscal 2023 financial guidance. Craig?

Craig McKasson: Thanks Mike. For the second quarter of 2023 and as compared with the same period a year ago, our results were generally in line with our expectations with total net revenue of $359.6 million, a decrease of 5%. Supply Chain Services segment revenue of $235.5 million, a decrease of 13% and Performance Services segment revenue of $124.1 million an increase of 15%. In our Supply Chain Services segment, net administrative fees revenue increased 3% over the prior year period, primarily driven by growth in the non-acute group purchasing business. Our acute GPO business, continued to be affected by a lower level of overall utilization of our members’ health care services in the quarter which in-turn impacts the supplies they purchase.

Within our acute and non-acute GPO portfolio, the food category produced another quarter of strong growth due to volume growth and the impact of inflation which was partially offset by the continued normalization of demand and pricing across some categories including Pharmacy and Personal Protective Equipment or PPE relative to the prior year period. Also, demand and pricing for these categories have continued to decline from the high-levels earlier in the pandemic. As we have communicated on past earnings calls, we continue to tightly manage price increases on behalf of our health care provider members. Although, inflationary price increases have impacted certain contracts across the portfolio, particularly products reliant on petroleum and labor for their production.

These increases have been mitigated by price decreases in other areas including Pharmacy and PPE. Notably, through our disciplined negotiations, we implemented new pharmacy portfolio pricing this fiscal year which is yielding lower pricing for certain products compared with the prior year period. As a result, we did not experience a material impact from inflation on our overall business in the quarter. As we expected, products revenue declined from the second quarter of last year which included higher prices and incremental purchases of PPE and other high-demand supplies related to the pandemic. The decline from the prior year was primarily due to two factors; one, the state of the pandemic compared with the previous year; and two, excess market supply and member inventory levels of certain products including PPE, which contributed to lower demand and pricing.

We continue to see ongoing demand for other products and are expanding our product portfolio and driving increased member adoption to mitigate these market conditions. In our Performance Services segment, revenue increased 15% compared with last year’s second quarter. This was primarily due to the timing of revenue associated with enterprise license agreements executed in the current year quarter compared with the prior year quarter as well as growth in our consulting and certain of our adjacent markets businesses including contributions from our acquisition of TRPN key assets in October 2022. As Mike indicated, Remitra, which is still in its early stages, is not ramping up at the pace we originally anticipated and we are revising our fiscal 2023 expectations for this business.

We are reducing headcount and associated costs in this business to better align with our current performance expectations and are in the process of adjusting our operational plan for Remitra moving forward. We remain confident in the longer-term prospects for this business and the need that these capabilities address for our members and suppliers. With respect to our adjacent markets businesses on a combined basis, we currently expect revenue to grow 30% to 40% this fiscal year over fiscal 2022 including the benefit from the contribution of our TRPN asset acquisition. Turning to profitability, GAAP net income was $64.4 million for the quarter. Adjusted EBITDA decreased slightly compared with the prior year period to $140.5 million, primarily due to two factors; first, Supply Chain Services adjusted EBITDA decreased compared with the second quarter of fiscal 2022.

Profitability of our direct sourcing business improved sequentially from the fiscal 2023 first quarter, but declined from the prior year quarter as we expected due to the decrease in products revenue driven by lower demand and pricing for PPE and higher logistics costs in the current year period. Logistics costs have begun to normalize and we expect to see that benefit margins in the second half of this fiscal year. Growth in net administrative fees revenue mitigated some of the decline in direct sourcing profitability. A quarter-over-quarter increase in Performance Services adjusted EBITDA, partially offset the decline in Supply Chain Services adjusted EBITDA. This was primarily due to an increase in Performance Services revenue, which was partially offset by higher selling, general, and administrative expenses, driven by additional headcount to support growth in certain of our adjacent markets businesses.

Compared with the year ago quarter, adjusted net income decreased 5% and adjusted earnings per share decreased slightly to $0.72, primarily as a result of the same items that impacted adjusted EBITDA as well as the increase in the effective tax rate in the current year. These items were partially offset by the impact of the completion of our fiscal 2022 stock repurchase program on the current year period shares outstanding. From a liquidity and balance sheet perspective, cash flow from operations for the six months ended December 31, 2022 of $196.7 million was flat compared with the prior year. Free cash flow for the second quarter was $109.6 million compared with $107.1 million for the same period a year ago. The increase was primarily due to lower purchases of property and equipment compared with the prior year period due to the timing of purchases.

For fiscal 2023, we continue to expect free cash flow of approximately 45% to 55% of adjusted EBITDA. Cash and cash equivalents totaled $94.6 million as of December 31, 2022 compared with $86.1 million as of June 30, 2022. We ended the quarter with an outstanding balance of $300 million on our five-year $1 billion revolving credit facility, which was renewed through December, 2027 during the second quarter. We subsequently repaid $30 million in January. With respect to capital deployment, we continue to take a considered and balanced approach especially, given rising interest rates. We remain committed to investing in organic growth, targeting acquisitions to strengthen or complement our existing capabilities, and differentiate our offerings in the marketplace, and returning capital to stockholders through our quarterly dividend and periodic share repurchases.

We have historically executed share repurchase programs, on an annual basis. And while we do not currently have one in place, we will continue to assess whether and when that would be an appropriate use of capital. During the first six months of fiscal 2023, we paid quarterly cash dividends to stockholders totaling $50.2 million. Recently our Board of Directors declared a dividend of $0.21 per share, payable on March 15 2023 to stockholders of record as of March 1. Turning now to our cost savings plan. This initiative is designed to position the business to weather the near-term challenges, many of our providers and supplier partners are facing. Through this plan, we are lowering our expenses including non-labor costs, eliminating more than 70 open positions and reducing our workforce by approximately 100 employees or nearly 4% of our total workforce.

These actions are expected to produce pre-tax cost savings of approximately $18 million to $20 million in fiscal 2023, and $35 million to $40 million on an annual run rate basis. We expect pre-tax cash restructuring charges of approximately $8 million, primarily related to our workforce reduction, which is expected to be substantially completed in February 2023 and expensed in the third quarter of fiscal 2023. Now turning to our revised fiscal 2023 outlook and guidance. Based on our performance in the first half of this fiscal year, our current visibility into the macro environment and our expectations for the remainder of the year, we are making the following updates to our fiscal 2023 guidance ranges. We are lowering Supply Chain Services net revenue, to a range of $930 million to $980 million.

This is comprised of the following components: GPO net administrative fees revenue of $600 million to $620 million, as utilization has not yet universally returned to the level we originally anticipated, and members continue to destock excess inventory built up as a result of the pandemic. Direct sourcing products revenue of $285 million to $315 million, reflecting excess supply in the market and member inventory levels as I mentioned earlier, and a slower ramp in new domestic manufacturing capabilities than we initially planned due to manufacturing factory delays. As we previously communicated, we are collaborating with many of our members to stand up domestic manufacturing of certain PPE products, as part of our efforts to create a more resilient health care supply chain.

We are raising Performance Services net revenue to a range of $450 million to $470 million, reflecting our performance in the second quarter and expected contributions from ConfigureNet partially offset by lower revenue contributions from Remitra, than we originally expected. Our guidance for total net revenue remains unchanged for fiscal 2023. Our guidance range for adjusted EBITDA also remains unchanged at $510 million to $530 million, and incorporates certain onetime restructuring expenses, associated with our cost savings plan. As we look to the remainder of this fiscal year, we remain optimistic and are taking proactive steps to position the business to weather current macro headwinds. But given the uncertainty in the environment, and how it might evolve, there could be some additional pressure on profitability.

Lastly, we are lowering our adjusted earnings per share guidance, to a range of $2.53 to $2.65, reflecting the following items: Higher depreciation expense than we originally contemplated in our initial guidance, primarily as a result of certain fiscal 2023 planned depreciation not being calculated correctly within our forecast system. This issue has been corrected. Higher interest expense due to rising interest rates and increased utilization of the company’s revolving credit facility to fund its acquisition of TRPN assets. These items are expected to be partially offset by a tax benefit as we now expect our effective tax rate to be at the low end of our 26% to 27% guidance range. From a cadence perspective, we currently expect the following for the remainder of this fiscal year.

In our GPO business, we expect net administrative fees revenue to be relatively flat in the third quarter compared with the prior year quarter reflecting the current healthcare utilization environment and ongoing decrease in levels of member excess inventory. In our direct sourcing products business, in the third quarter we anticipate a sequential increase from the second quarter in revenue. However, we expect revenue to be lower in the third quarter compared with the prior year period, which benefited from the impact of increased demand and pricing due to the pandemic. In our Performance Services business, we expect third quarter revenue to decline sequentially from the second quarter due to the timing of certain enterprise license engagements, but we generally expect this segment to produce strong year-over-year growth in the third quarter.

From a profitability perspective, for the third quarter of fiscal 2023, we expect adjusted EBITDA to grow in the low to mid-single-digit range over the prior year period. As I mentioned earlier, our third quarter results will reflect certain restructuring expenses related to our cost savings plan. So we expect adjusted EBITDA to increase sequentially from the third to fourth quarter of this fiscal year. In closing, while we had to implement difficult actions that impacted some of our teammates to help ensure our cost structure is more aligned with the current economic cycle, our business is resilient and we remain well positioned in the market. We generate significant stable cash flows and our financial position remains strong. As we look ahead, we are focused on executing our strategy to deliver long-term growth and value creation for our stockholders and other stakeholders.

Thank you for your time today. We’ll now open the call up for questions.

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Q&A Session

Operator: We will now begin the question-and-answer session The first question comes from Eric Percher with Nephron Research. Please go ahead.

Eric Percher: Thank you, Mike and Craig. Maybe to start with where you were ending and specifically the commentary around additional pressure on profitability is possible. Can you give us some view of what risks you have contemplated in second half guidance and where those additional pressures might come from?

Craig McKasson: Sure, Eric. This is Craig. I’ll be happy to take that. I think as we’ve talked about clearly utilization of the healthcare systems is a key area that we’re going to have to see how that continues to recover. I will tell you €“ you €“ certainly it’s regional in nature. Some health systems are seeing rebounds but a lot of health systems and other providers continue to not see utilization coming back at the pace that we would have anticipated. So to the extent that it doesn’t rebound at the levels we’ve contemplated, that would be a headwind. If we see a more robust recovery to utilization as we head into 2023 that would be a tailwind to kind of help us perform better. The other issue is around this destocking of inventory that has been taking place.

We do think that has been normalizing down and getting back to where people’s purchasing patterns are going to start to be more normalized. But to the extent that that were to vary one way or the other that would be a headwind or a tailwind. Clearly, macroeconomic issues around where the overall economy goes, certainly can have implications one way or the other. We have factored in sort of where we believe best case to be on those three factors, with what we see moving forward and in the discussions with our healthcare providers. But to the extent that those move that would have an implication. And then, as we’ve historically talked about in Performance Services, again, very proud of the results we achieved in the second quarter with the enterprise license agreements.

Those do have variability at times are difficult to predict, but we have a good pipeline and feel good about the ability to do that in the second half of the year but that could be a headwind or a tailwind depending on whether and when those agreements come through in the last six months of the year.

Eric Percher: And items like destocking. I know last quarter we talked a lot about that. Does it — it feels like visibility into these items is just impaired in 2023, because of the comparisons, or do you feel like you have better or worse visibility now versus where you were three or six months ago?

Mike Alkire: Eric, this is Mike. So, just to give you a bit of a backdrop on this. So, if you looked at pre-pandemic, many of the healthcare providers, sort of maintain this just-in-time inventory level for PPE and other supplies. And then, obviously, post the pandemic, all of our members and others build up these pretty significant strategic stockpiles 30, 60, 90 days, in some cases even 120 days. So then, if you kind of look at where we are right now and given the macro environment, many of our providers are taking a closer look at these inventory levels and trying to sort of optimize or figure out what is the right size for carrying inventory levels going forward. So, just in general to answer your question very specifically, we expect sort of the short-term trend of this balance that our health systems are trying to go — trying to understand to occur over the next couple of quarters. And then we believe it will turn back into a much more normalized environment.

Eric Percher: Thank you.

Operator: The next question comes from Michael Cherny with Bank of America. Please go ahead.

Michael Cherny: Good morning, and thanks for taking the question. Maybe just first one, if I can. Relative to the change in Performance Services guidance, is there any way to bifurcate out the reduction in Remitra near-term outlook versus what was the contribution from the new TRPN assets in terms of the core versus non-core organic growth in that segment?

Craig McKasson: Sure, Michael. This is Craig. Thanks for the question. We don’t typically get into breaking out individual components. But as I did talk about on the call, our adjacent markets businesses, which again as a reminder, include our Contigo Health business, the Remitra business but then also our clinical decision support and Applied Sciences or Life Sciences business. With the inclusion of ConfigureNet now that, as I said in my prepared remarks, we’ll grow 30% to 40% year-over-year. We had originally expected that to grow 30% to 40% prior to the acquisition of ConfigureNet. If we were to remove ConfigureNet from that, we would still be growing just a couple of points below the low end of that range. So, outside of Remitra, the other three aspects of our business both Contigo Health organically and with ConfigureNet now Applied Sciences and clinical decision support are, all growing at levels that would get us to the range that we originally discussed.

It is just Remitra that which has not seen the uptake and in particular due to the rollout of Remitra’s CFO, which was the supply chain financing aspect of that business that with the rising interest rates and the cost of capital, we’re not seeing the uptake on. So really, we’re seeing not more flat or not a lot of growth in the Remitra aspect, which is being made up by the Performance in the other parts of our adjacent markets business and then the contributions from ConfigureNet.

Mike Alkire: And then Michael, I do have to add from a Remitra standpoint, while we are seeing some sort of these short-term headwinds, I will tell you, I still believe in this incredible need in the market for our health systems to automate their invoicing and payment systems. We actually conducted an accelerated solution design event, which for us is sort of this strategy creation of that with a number of really critical suppliers, very, very significant suppliers. And I’ll tell you to a person all of them said that we need to have a technology like this in the industry. So we’re still incredibly bullish on the program going forward. Going forward, we’re also going to create an accelerated solutions design event for the members to really, really drive out what that value opportunity is for them as well.

So we’ve defined it, what the value props are for the suppliers. And again, we’re going to have an accelerated solution design event for our members over the next couple of weeks to really define that value prop for the members as well.