Premier, Inc. (NASDAQ:PINC) Q2 2024 Earnings Call Transcript

Premier, Inc. (NASDAQ:PINC) Q2 2024 Earnings Call Transcript February 6, 2024

Premier, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, and welcome to Premier’s Fiscal 2024 Second Quarter Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Ben Krasinski, Senior Director of Investor Relations. Please go ahead.

Ben Krasinski: Thank you, and welcome to Premier’s fiscal 2024 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 presentation accompanying this call are available in the Investors section of our website at investors.premierinc.com. Please be advised that management’s remarks today contain certain forward-looking statements, such as statements regarding our strategies, plans, prospects, expectations, future performance, 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, during this presentation, we will refer to adjusted and other non-GAAP financial measures, including free cash flow, to evaluate our business. Information on why we use these measures, in addition to GAAP financial measures and reconciliations of these measures to our GAAP financial measures are included in our earnings release and in the appendix of the supplemental presentation accompanying this call. Information on our non-GAAP financial measures will also be included in our Form 10-Q for the quarter and our earnings Form 8-K, both of which we expect to furnish to the SEC soon.

I will now turn the call over to Mike Alkire.

Michael Alkire: Good morning, everyone, and thank you for joining us today. We are excited to share several updates with you, including that our Board of Directors has concluded its review of strategic alternatives and approved a new $1 billion share repurchase authorization. Over the past several months, together with our Board, we have thoroughly identified, reviewed, and explored options to maximize value for Premier’s stockholders. You may recall that as part of this process, we divested our non-healthcare GPO operations in July 2023. This transaction unlocked substantial value for stockholders and enhanced the Company’s focus on our differentiated healthcare businesses. The Board subsequently considered opportunities for deploying capital resources, including the proceeds from this divestiture.

To accelerate returns to stockholders, with this in mind, we will implement a $400 million accelerated share repurchase transaction as part of the new share repurchase authorization. We are exiting the strategic alternatives review process with a clear picture of our future strategic vision. That includes a disciplined focus on our key strategies that differentiate us in the market. When we think about our capabilities that are key to our mission and vision, what we know is this. Premier is an essential enabler of high-quality, cost-effective healthcare. Our provider-led, technology-enabled strategies deliver unique enterprise solutions for better provider performance and a smarter healthcare supply chain. We continue to see technology and artificial intelligence as key enablers to our vision and capabilities that set us apart from the competition.

This includes the expansion of the use cases beyond providers and into life sciences, medical device, and payer adjacent markets. Moreover, as the healthcare industry continues to grapple with challenges, including labor shortages, supply chain disruption, and an aging population, Premier is an essential partner now more than ever. We remain committed to a disciplined approach to execution that we expect to deliver value for our stockholders, members, and other customers. Consistent with this, management and the Board looked at ways to enhance our focus on our differentiated data, technology, and widescale network to best serve our members and other customers. As a result, in consultation with management, the Board authorized Premier to seek partners for certain other assets.

We believe these are meaningful businesses that will thrive with the right partners, creating more value for the customers they serve, while also affording Premier the opportunity to narrow our operational focus. Assets under consideration include, first, Contigo Health, our direct-to-employer business. While we expect the provider-sponsored health plan and employer markets to continue to progress, we believe an outside partner will allow for continued advancement of the business through a broader capability set and increased scale. Second, S2S Global, our direct sourcing business, which was a strategic investment to augment our GPO offering and provide additional optionality for commodity purchases for our member healthcare providers. We believe a committed partner with alignment to our membership could provide the resources necessary to further broaden and scale this business and continue to support our commitment to supply chain resiliency initiatives while removing the operational and working capital requirements for Premier.

We are excited about the future as we execute on the strategies that set us apart in the market, including streamlining all aspects of the supply chain and leveraging our unique data, technologies, and AI capabilities to support provider performance, improvement, and growth in adjacent markets. Before I turn it over to Craig, I want to express our appreciation for our stockholders’, customers’, and employees’ patience as we diligently explore strategic alternatives. I’m excited about our recently announced 10-year GPO agreement with Tufts Medicine that expands our relationship to include co-management of their people, processes, and technologies to drive efficiencies and contain costs. I’m also incredibly proud that Premier was recently recognized by Newsweek as one of America’s greatest workplaces for diversity.

True to our mission to improve the health of communities, we are dedicated to creating a diverse and inclusive workforce and are so thrilled to be recognized nationally for our efforts. I will now turn the call over to our Chief Administrative and Financial Officer, Craig McKasson, for a detailed review of our results and our financial guidance for the remainder of the fiscal year.

Craig McKasson: Thanks, Mike. I first want to echo your sentiment about our excitement to exit the strategic alternatives review process in a position of strength, with an eye towards executing with discipline on our core healthcare businesses. Let me first share our fiscal year 2024 second quarter results. While total net revenue declined from the prior year period, we did meet our expectations for profitability as a result of ongoing discipline in actively managing our business in our Supply Chain Services segment, and as expected, net administrative fees revenue was impacted by an increase in the aggregate blended member fee share to the mid-50% level. This impact was partially offset by continued growth in member purchasing.

In our direct sourcing business, we continue to experience the impact of excess market supply in members’ and other customers’ inventory levels, which has contributed to lower demand and pricing in the current year period, resulting in a decline in products revenue. Before moving on, I wanted to provide some operational updates on our strategies to create more resiliency in the healthcare supply chain. As part of our initiatives to bring more manufacturing on and near shore, our domestic gown manufacturing partner began producing products in Tennessee earlier this year. In addition, we expect to launch our Domestic Glove Program in the second half of fiscal 2024. Lastly, we added five additional vital medications to our Drug Shortage Resiliency Program, which now offers members access to over 150 drugs in short supply.

In our Performance Services segment, revenue was impacted by a decrease in contributions from enterprise license agreements compared to the prior year period. However, we remain enthusiastic about market opportunities that validate the need for our solutions. For example, we continue to drive growth in our consulting services business as healthcare providers are leveraging Premier to drive clinical and margin improvement. We also continue to make progress in our adjacent markets businesses which grew over 29% in aggregate. Notably, in our applied sciences business, we recently announced our partnership with TFS HealthScience, where Premier’s AI will help accelerate research through innovative ways to integrate real-world evidence into clinical trials.

In addition, we are seeing market validation that our technology-enabled margin improvement solutions continue to save providers considerable time and money. Recently, Henry Ford Health reported that Premier’s digital invoicing and payables platform has eliminated the need for manual handling of nearly 100,000 paper invoices over a six-month period. Turning to profitability. GAAP net income was $52.9 million for the quarter. Total adjusted EBITDA was impacted by the following factors. First, Performance Services adjusted EBITDA decreased mainly due to lower revenue and incremental headcount to support growth in our consulting services and adjacent markets businesses. And second, Supply Chain Services adjusted EBITDA declined mainly due to a decrease in revenue and an increase in expenses in support of our GPO and supply chain co-management businesses.

This decrease was partially offset by a higher profit margin in our direct sourcing business due to lower logistics and products costs compared to the prior year period. Adjusted net income and adjusted earnings per share each declined, primarily driven by the same factors that impacted adjusted EBITDA. The decreases were partially offset by higher interest income. From a liquidity and balance sheet perspective, cash flow from operations for the first six months of fiscal 2024 of $35.4 million decreased from $196.7 million in the prior year period. The change was primarily due to $138.5 million in tax payments in the current year period from the sale of our non-healthcare GPO operations. Cash was impacted to a lesser extent by lower net revenue and was partially offset by a reduction in inventory purchases and lower fiscal 2023 performance-related compensation payments during the fiscal first quarter compared to the fiscal 2022 payments in the prior year period.

Free cash flow for the first six months of fiscal 2024, an outflow of $63.3 million, decreased from an inflow of $109.6 million in the prior year period, primarily due to the same factors that impacted cash flow from operations, including the aforementioned $138.5 million in tax payments, as well as an increase in capitalized software purchases related to the advancement of our supply chain technology automation. Looking forward and excluding the impact of tax payments related to the sale of our non-healthcare GPO operations, we expect fiscal 2024 free cash flow to approximate 45% to 55% of adjusted EBITDA for the full year. Cash and cash equivalents totaled $371.1 million as of December 31, 2023, compared with $89.8 million as of June 30, 2023.

The increase was driven by the sale of our non-healthcare GPO operations, net of the previously mentioned tax payments. As of December 31st, we have received a total of $629.8 million in proceeds and we now expect the final purchase price to be up to $740 million as we continue to work through member consents and the true-up period that ends in February. As we stated last quarter, we used a portion of these net proceeds to pay down our five-year $1 billion revolving credit facility and continue to have no outstanding balance as of the end of the second quarter. With respect to capital deployment, we will remain disciplined and focused on taking a balanced approach. As Mike mentioned, to accelerate returns to stockholders, our Board has approved a new $1 billion share repurchase authorization through June 30, 2025, including the implementation of a $400 million accelerated share repurchase transaction.

This will augment our quarterly cash dividend which totaled $51.1 million during the first six months of fiscal 2024. In addition, our Board recently declared a dividend of $0.21 per share payable on March 15th, 2024, to stockholders of record as of March 1st. We will also continue to evaluate opportunities to invest in organic growth and potential acquisitions to strengthen, enhance, or complement our existing capabilities and differentiate our offerings in the marketplace. Turning to our outlook for the remainder of the year. As a result of the conclusion of our strategic alternatives review process, we are now providing formal fiscal 2024 guidance. Our guidance incorporates certain key assumptions related to the market and our business, and it does not incorporate the impact of any future share repurchases following the $400 million accelerated share repurchase transaction or any significant acquisitions or divestitures that we may undertake.

With these key assumptions in mind, our specific fiscal 2024 full year guidance ranges are as follows. Supply Chain Services segment revenue of $840 million to $880 million, comprised of net administrative fees revenue of $588 million to $603 million, direct sourcing products revenue of $207 million to $222 million, and software license, other services, and support revenue of $45 million to $55 million. Performance Services segment net revenue of $425 million to $445 million. Together, these produce total net revenue of $1.265 billion to $1.325 billion. We expect adjusted EBITDA to be in the range of $405 million to $425 million, and adjusted earnings per share to be in the range of $2.06 to $2.18, which includes an estimated $0.09 to $0.10 impact from the $400 million accelerated share repurchase transaction.

Our guidance is also based on the following assumptions and expectations. In our GPO business, we continue to anticipate aggregate blended member fee share will be in the mid-50% range for fiscal 2024 on a full year basis, and we expect continued growth in member purchasing driven by further penetration of existing member spend. In addition, we are assuming that patient utilization remains generally stable with flat to low single-digit growth. But to the extent that utilization or member participation in our GPO are higher or lower than we expect, these could represent potential headwinds or tailwinds to our expectations. In our direct sourcing products business, we believe we have finally reached the lower end of our more normalized quarterly run rate for this business.

As a result, we expect flat to nominal sequential improvement in products revenue on a quarterly basis as pricing and demand continue to normalize and we realize incremental contributions from the ongoing ramp of our domestic gown and glove initiatives in the second half of fiscal 2024. In our Performance Services business, we anticipate revenue growth of approximately 20% in our adjacent markets comprised of our life sciences, clinical decision support, Remitra, and Contigo Health businesses. With respect to Contigo Health, revenue contributions represented around 40% of our aggregate adjacent markets revenue in fiscal 2023. Due to a combination of slower growth this year and higher growth in certain of our other adjacent markets businesses, we expect Contigo Health revenue will represent approximately one-third of our aggregate adjacent markets in fiscal 2024.

Consistent with prior years, due to the timing and magnitude of enterprise license agreements and certain consulting arrangements, there may be periodic variability in the recognition of the revenue and profitability associated with these engagements between quarters. In closing, we remain committed to and confident in the disciplined execution of our strategy and the value-creation opportunities ahead. We are encouraged by recent projects and customer engagements and are excited to continue to share our strategy and value proposition with new and existing customers. We continue to operate with a strong financial foundation supported by significant cash flow and a flexible balance sheet, which provides us the ability to continue to return capital to stockholders while also investing in future growth.

We appreciate your time today and we’ll now open the call for questions.

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Q&A Session

Operator: We will now begin the question-and-answer session. [Operator Instructions] At this time, we will pause momentarily to assemble the roster. Our first question comes from Stephanie Davis of Barclays. Please go ahead.

Stephanie Davis: Hey, guys. Thanks for taking my question and congrats on finally ending the strategic review. So, I have one on the review process and one on the core business. Starting with review, Mike, what made the direct sourcing business in Contigo really stand-out to you with the two assets that made the most sense to monetize? And I’m going to assume you’ve explored some of these sale venues during your strategic review process, do you have any broad-stroke thoughts on timeline for these processes or kind of how this will play out?

Michael Alkire: Yes. So, thanks for the question, Stephanie. The Board considered obviously a broad range of potential options and strategic alternatives and, while we can’t get really into any specifics of the processes of the Board’s deliberations, just rest assured that we conducted a very thorough review to determine the best path forward for the Company, for Premier’s stockholders, and our other stakeholders. So, starting with that, I think that as the process went on, it just became apparent there was bit of interest in the S2S and the — and our Contigo Health assets and it made a lot of sense for us to be public that, with the right partners, we really believe that those assets can grow in partnership with Premier and its membership.

And that was really the driver, was to make sure that as we were thinking about the future of this organization, that we had a couple of those areas that were not necessarily core to our capabilities, that we really wanted to find strong partnerships to continue the growth of those assets.

Craig McKasson: Yes. This is Craig, Stephanie. The only thing I would add is that, as we look at the — as we looked at those two businesses and we think about the scale, the resources, and the expertise that other partners can bring to actually take those to the next level, we have a strong belief both of those businesses have a bright future. But with a partner to help take them to the next level, they stood out versus our differentiated core businesses that already have scale within our institution.

Stephanie Davis: Understood. And Craig, that I have you, let me ask you more about the core business. You cut your assumptions pretty heavily for Performance Services, but if I scrub out last year’s tough comp, it actually doesn’t look like Performance Services had a bad first half at all. So, why change the outlook so much? And how much of that is reflective of the current environment or maybe the ongoing strategic review process making it tough to sell versus broader market fit or conservatism?

Craig McKasson: Yes. It’s a good question, Stephanie. Thank you. And first of all, I would agree that when you take out last year’s tough comp, we do feel good about the first half that we had in Performance Services, particularly with certain aspects of our business. As we look forward and the full year guidance that we put out, as I indicated in my prepared remarks, we are not seeing the growth in Contigo Health that we had anticipated when we started the year. And I had provided some preliminary directional perspective. And so that’s certainly been a haircut. And I talked about sort of it shrinking relative to the rest of our adjacent markets businesses in my prepared remarks. Secondarily, I would say with what’s happening in the market, I do think it has been somewhat influenced, but not totally, by our strategic alternative review process.

I think the prospects for enterprise licenses in our Performance Services segment, we’ve tapered some of those expectations from what we were thinking we would see earlier in the year. We still feel good about the pipeline, but we are seeing those continuing to take a long time to get over the finish line in certain cases. And so we have factored that into the full year guidance that we established. And as you know, given the profitability of those license agreements, that does flow through to the adjusted EBITDA line as well.

Stephanie Davis: Right. Super helpful. Congrats on being done, guys.

Michael Alkire: Thank you.

Craig McKasson: Thank you, Stephanie.

Operator: The next question comes from Richard Close of Canaccord Genuity. Please go ahead.

Richard Close: Yes. Thanks for the question. Craig, I was wondering if you could talk a little bit about just the quarterly cadence, how we should think about the third and fourth quarters, maybe from the Supply Chain and Performance Services, if there is any nuances we should be aware of.

Craig McKasson: Sure. Thank you for the question. I think if you think about our Supply Chain Services business, I would expect a slight — we would anticipate a slight step-up from a sequential standpoint in the third quarter at this point, and then kind of relatively flat across the third and the fourth quarters. As I mentioned, we do expect some, not tremendous, but slight step-up in the direct sourcing business, given that we had sort of hit the bottom rung. And I know that I’ve said that in the past, but we truly do believe we’ve hit sort of the low end of the watermark for direct sourcing. So, I’d expect a slight step-up sequentially and then sort of flat across the third and fourth quarters as we move forward. Relative to our Performance Services business, I think broadly, thinking about where we came in in the second quarter, sort of repeating itself as we continue through the back half of the year is the best way to think about that.

We do have some gap closure plans that we’re hoping will help Q4 to step-up slightly. But overall, I would think sort of the Q2 level is sort of where we would anticipate the rest of the year playing out.

Richard Close: Okay. And as a follow-up just on Contigo, are the — was it the TRPN assets that you bought, I guess, a year and a half ago, or not sure of the timing, that’s going as well potentially with the divestiture?

Craig McKasson: Yes. It would be the entire Contigo Health business which would be the TPA business, the COE business that we provide, and the RAP network components tied to TRPN. That’s correct.

Richard Close: And then with the revenue information that you gave for Contigo, was the revenue associated with the TRPN assets fully in — I don’t remember, was that fully in the 2023 fiscal numbers?

Craig McKasson: No. The asset was acquired in the October timeframe of fiscal 2023, so it would have been about eight-plus months in ’23 and then a full year in fiscal 2024.

Richard Close: Okay. Thank you.

Michael Alkire: Thank you.

Operator: The next question comes from Kevin Caliendo of UBS. Please go ahead.

Kevin Caliendo: Thanks. Thanks for taking my question. When we think about Contigo and S2S and how this actually works on a functional level, is there any sort of revenue dis-synergies from not fully owning these businesses? Meaning, is there any other parts of your business that could be affected by not having these companies as part of your offering? I don’t know if there’s bundling or any other kind of revenue synergies. That’s the first question. And then the second question is more on the ASR and the repo and how do you expect to finance. I mean, you have $371 million of cash now, you are expecting free cash flow, but I can’t imagine that you want to drain all of your cash for an ASR. So, just, if you can just take us through sort of how to think about financing the ASR and the repo going forward.

Craig McKasson: Sure. This is Craig. Thanks for the questions, Kevin. First of all, with respect to revenue dis-synergies, would not expect material dis-synergies as a result of these businesses and looking for potential partnerships. I think the only thing. I wouldn’t expect this, but I would highlight is that with our S2S business, it is a contracted GPO supplier, so we do receive GPO administrative fees on S2S purchases. We would certainly anticipate that to continue even if there were another provider that had a controlling or a full ownership of that business. However, I’d be remiss not to say if they chose not to do a GPO contract, then yes, that would be a place, but I can’t envision that actually occurring. Relative to Contigo Health, there really aren’t any direct dis-synergies that would apply at all for that business.

So, that’s the first question. The second question relative to the ASR, our expectations and anticipation is that we will use cash to finance the $400 million accelerated share repurchase. There is some potential given the timing of the funding, that we may have a very short-term bridge of utilizing our credit facility just to do the initial funding when that launches here in a couple of days. But we would expect to pay that down pretty promptly. And then as we look forward, moving forward into the remainder of the authorization, obviously, subject to market conditions and other criteria, when we make the assessment whether to do that, then we would factor in free cash flow that we have at that point to the extent that we had done any transactions that generated cash flow relative to Contigo Health, S2S, and then to the extent that it made sense from a capital allocation standpoint, we could utilize our credit facility for additional repurchases in fiscal 2025 as well.

Kevin Caliendo: Fantastic, guys. Thank you so much.

Operator: The next question comes from Allen Lutz of Bank of America. Please go ahead.

Allen Lutz: Good morning and thanks for taking the question. Craig, you mentioned that maybe some of the softness in Contigo was driven by the strategic review. Do you think that the strategic review impacted any other parts of the business? And — do you think the closing of the review could drive any improvement outside of Contigo? And then separately, you mentioned free cash conversion, 45% to 55%, but also said that S2S was pretty working capital intensive. How should we think about what the conversion rate would look like on free cash flow, excluding S2S and Contigo? Thanks.