Premier, Inc. (NASDAQ:PINC) Q4 2023 Earnings Call Transcript

Premier, Inc. (NASDAQ:PINC) Q4 2023 Earnings Call Transcript August 22, 2023

Operator: Good morning, and welcome to Premier’s Fiscal Fourth Quarter and Full-Year Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Ben Krasinski, Senior Director, Investor Relations. Please go ahead.

Ben Krasinski: Thank you, and welcome to Premier’s fiscal 2023 fourth quarter and full-year 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. Please be advised that 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 Form 10-K, 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.

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Mike Alkire: Thank you, Ben. Good morning, everyone, and thank you for joining us today. Today, we will highlight our progress in our fourth quarter and fiscal year 2023 and update you on our ongoing evaluation of strategic alternatives to unlock value for our stockholders. First, I am pleased to share that our team achieved total net revenue of $1.3 billion, adjusted EBITDA of $499.8 million and $264.4 million in free cash flow that equated to 53% of adjusted EBITDA this fiscal year. These results reflect the agility and dedication of our people in an incredibly fluid health care environment. As a team, we are confident in our ability to effectively manage costs and grow Premier through the continued execution of our strategies to deliver technology enabled better, smarter health care.

We are pleased with the continued strength of our member network this year with a 98% GPO retention rate and the 94% technology or SaaS institutional renewal rate both evidence of the trusted long-term relationship we have with our members. Further, an overwhelming 99% of our C-suite members surveyed in recent months believe they are better positioned for the future with Premier by their side. We are moving forward with intention on our recent announcement that the Board and management team are evaluating potential strategic alternatives to unlock value for our stakeholders. The recent sale of our non-health care GPO operations to OMNIA Partners for approximately $800 million in cash, demonstrates the underlying value of one of many premier businesses that when leveraged can create significant value that can be reinvested in high-return solutions or to return value to stockholders.

With the assistance of our outside advisers, our Board and management team continue to evaluate other potential actions to unlock value for our stakeholders. For us, technology enabling health care isn’t just a nice to have, and Premier continues to lead the market in AI-enabled health care technology solutions. I’m incredibly proud of the progress we have made this year and we are laser-focused on making transformative strides in the future. We are ensuring on-time payments for suppliers and unlocking working capital for providers through AI-enabling the entire purchasing to payments process with Remitra. It isn’t a matter of if, but when the next pandemic may arise. So we have technology enabled the predictability of supply chain shortages with 90% accuracy.

We are doubling down on investments in domestic and nearshore manufacturing to ensure resiliency. For years, we have been AI-enabling smarter decisions in the workflow of hundreds of thousands of clinicians and are now expanding that offering to help them realize millions of dollars of value through accurate coding and documentation. We are also completely disrupting and automating the timely and manual prior authorization process. Lastly, our comprehensive network and vast data set are now being used to upstream in the innovation process to optimize the lengthy clinical trials process. I’m incredibly pleased that in Q4, our applied sciences business signed an end-to-end clinical trial with one of the top 10 largest pharmaceutical companies in the world.

Before I turn it over to Craig, I want to pause and recognize the premier team for their tireless work this year, both in terms of their disciplined execution and their compassionate connection to our purpose. Premier employees are the boots on the ground for many of our members, health care providers, who serve as the heartbeat of their communities. This is especially true during natural and human-made disasters, including wildfires and hurricanes. These individuals make themselves available 24/7 to ensure our members have the resources to respond to and serve their communities. Passion for performance and innovation are two of our core values that I’ve seen demonstrated this year more than ever before. The Premier team recognizes that with change comes great opportunity that makes me incredibly proud and excited for the future of our company.

I will now turn the call over to Craig McKasson for a discussion of our operational and financial performance.

Craig McKasson: Thanks, Mike. For the fourth quarter of 2023 and as compared with the same period a year ago, our results were total net revenue of $340.4 million, which was flat compared to the prior year. Supply Chain Services segment revenue of $228.1 million, a decrease of 2% and Performance Services segment revenue of $112.3 million, an increase of 4%. In our Supply Chain Services segment, net administrative fees revenue increased 3% from the year ago quarter, driven by growth in both our acute and non-acute or continuum of care through purchasing programs. This was primarily due to recovery of member volumes and further penetration of existing member spend. These increases were partially impacted by the following factors.

First, the continued normalization of demand and pricing across certain categories, including pharmacy, staffing and personal protective equipment or PPE. Second, continued regional variation in patient utilization trends affecting member purchasing. And third, an increase in aggregate blended member fee share due to current market dynamics, including the impact from the consolidation of certain number of health systems. Within both our acute and continuum of care GPO portfolios, the food category produced another consecutive quarter of strong growth, primarily driven by increases in volume and the impact of inflation, which was partially offset by the continued normalization of demand and pricing across the other categories previously mentioned.

As we look forward, we believe that we still have a significant opportunity to continue to expand and penetrate our members spend as we continue to broaden our GPO contract portfolio with new suppliers and product categories, drive adoption of our high compliance purchasing programs, including SURPASS and AscenDrive, further expand into the largely untapped purchased services category of spend leveraging technology and analytics through our conductive business and modernize the health care supply chain by leveraging technology and AI enablement from purchasing to payments. In our direct sourcing business, products revenue declined from the year ago quarter, due to continued excess market supply and members and other customers’ inventory levels, which contributed to lower demand and pricing in the current year period.

We believe member inventory levels are returning to more normalized levels, although some members continue to work through excess supply of certain products, which may persist for the next few quarters. Through the ongoing management of this business, we were able to reduce our inventory significantly during fiscal 2023, down from the heightened levels associated with helping our members and other customers, secure PPE and other critical items during the COVID-19 pandemic. In addition, our logistics costs have generally returned to more normalized pre-pandemic levels. On the domestic manufacturing front, we are beginning to see some initial uptake in our isolation gown initiative, and we are planning to launch our exam glove initiative in the second quarter of fiscal 2024.

In our Performance Services segment, revenue increased 4%, compared with last year’s fourth quarter, primarily due to growth in our consulting services and our adjacent markets businesses, including clinical decision support, and Contigo Health. Compared to the prior year, fiscal 2023 Performance Services revenue of $436.2 million grew 9% year-over-year, including 22% growth in our combined adjacent markets businesses to more than $100 million in revenue. Within our adjacent markets businesses, applied sciences had another strong year with over 20% revenue growth reflecting the differentiation of our research-ready data set and unique ability to link health systems to industry to help expedite innovation. As we look forward, we remain excited about the future growth potential for this business.

Our Contigo Health business also exhibited strong top line growth and expansion in fiscal 2023, creating a stable foundation for future growth. Despite this progress, the ramp, particularly in profitability, is lagging our original expectations as we continue to scale and stand up the program, resulting in a goodwill impairment of $54.4 million. To be clear, we remain very excited about Contigo Health and its long-term growth prospects. In the years and months ahead, we will continue to expand our center of excellence programs with large employers and provide transparent out-of-network claims pricing management with more than 900,000 contracts across 4.1 million locations. We believe this will allow us to deliver growth in each functional area, while also providing comprehensive employee benefit management to health system [Indiscernible] and other employers, all while leveraging our existing TPA capabilities.

Turning to profitability. GAAP net income was $18.9 million for the quarter. Adjusted EBITDA increased 8% from the prior year period, due to an increase in Supply Chain Services adjusted EBITDA, which was mainly due to growth in net administrative fees revenue and the benefit of lower logistics costs in our direct sourcing business, compared to the prior year period. The increase in Supply Chain Services adjusted EBITDA was partially offset by a quarter-over-quarter decline in Performance Services adjusted EBITDA. This was mainly due to higher expenses as we continue to invest in growth and scalability, primarily in our adjacent markets businesses. Compared with the year ago quarter, adjusted net income and adjusted earnings per share each increased 11%, primarily as a result of the same items that impacted adjusted EBITDA.

From a liquidity and balance sheet perspective, cash flow from operations for full-year fiscal 2023 of $444.5 million was flat, compared with the prior year. This was primarily impacted by increased net cash within our direct sourcing business, as we lowered inventory in the current fiscal year and a dividend from a minority investment. These items were offset by higher revenue share paid to members. Free cash flow for fiscal 2023 was $264.4 million or approximately 53% of adjusted EBITDA, compared with $260.8 million for the same period a year ago. The increase was primarily due to a decrease in purchases of property and equipment as we continue to carefully manage overall capital expenditures. From an income tax perspective, our effective tax rate for fiscal 2023 was 26%, which was in the 26% to 27% range we anticipated.

From a cash tax rate perspective, we continue to benefit from our August 2020 restructuring and our fiscal 2022 second quarter subsidiary reorganization. As a result and consistent with our expectations, the cash tax rate for fiscal 2023 is estimated to be between 1% to 2%. In fiscal 2024, we expect our cash tax rate to be in the range of 1% to 5% excluding the onetime impact of cash tax paid on proceeds from the sale of our non-health care GPO operations, which will be subject to a 25% tax rate. We anticipate our effective tax rate to be in a range of 26% to 28% in fiscal 2024. Cash and cash equivalents totaled $89.8 million as of June 30, 2023, compared with $86.1 million as of June 30, 2022. We ended the quarter with an outstanding balance of $215 million on our five-year $1 billion revolving credit facility, of which the full outstanding balance was repaid in July and August from the approximately $538 million in cash received upon the close of the sale of our non-health care GPO operations.

We will continue to collect cash from the remaining escrow of $151 million, and we expect additional cash proceeds upon completion of a true-up in accordance with the purchase agreement later this fiscal year. With respect to the remaining cash proceeds, we currently plan to maintain this cash on our balance sheet, while we complete our evaluation of strategic alternatives. However, we plan to evaluate the highest return opportunities for eventual use of the proceeds, including reinvestment in the business, acquisitions that enhance the value of the business and returning capital to stockholders via share repurchase. During fiscal 2023, we paid quarterly cash dividends to stockholders totaling $100.2 million. Recently, our Board of Directors declared a dividend of $0.21 per share payable on September 15, 2023, to stockholders of record as of September 1.

As previously announced, given our Board and the management team’s ongoing evaluation of potential strategic alternatives, we are not providing our fiscal 2024 outlook or other formal guidance at this time. Nevertheless, I would like to provide some high-level perspectives on the overall business and discuss how persistent trends we are seeing in the market will likely impact our business in fiscal 2024. In our Performance Services segment, we continue to focus on our health care provider performance improvement capabilities, while also expanding our presence in adjacent markets with life science companies, suppliers, employers and payers. In fiscal 2024, we expect over 20% growth in our adjacent markets businesses, which will contribute to the mid- to high-single-digit revenue growth we anticipate in our Performance Services segment.

As I mentioned earlier, our Group purchasing business continues to be impacted by market dynamics, including the overall state of the macro environment and the significant cost pressure it is placed on many of our health care provider members, the current and future impact from consolidation of member health systems and an always competitive market to retain and win new business. Overall, we expect our GPO business will continue to experience growth and gross administrative fees with the acute side of the business growing in the low to mid-single-digit range and the continuum of care side growing in the high-single-digit range prior to any impact related to changes in member fee share. However, given the previously mentioned market dynamics, we would expect there to be an increase in member fee share during fiscal 2024, resulting in the aggregate fee share across all members in our GPO increasing from the current low 50% range to the mid to high 50% range.

Turning to our direct sourcing business. Given the ongoing impact of excess market supply and certain member excess inventory levels, we expect nominal growth in products revenue in fiscal 2024. As previously discussed, we implemented a cost savings plan and had lower performance incentive achievement in fiscal 2023 to help achieve our profitability expectations. While some of the cost savings will continue to benefit us in fiscal 2024, we do plan to invest resources in some of our higher growth areas to position the overall business for long-term sustainable growth and value creation. Finally, with respect to fiscal 2024 expectations, we have determined that we will no longer include equity earnings from our minority investments in our adjusted EBITDA.

This change results from the previously disclosed change in our minority investment in FFF Enterprises last quarter. As a result, we expect an additional headwind to adjusted EBITDA in fiscal 2024, given the elimination of equity earnings that were included during fiscal 2023. As a reminder, this change will not have an impact on cash flow. Consistent with fiscal 2023, we expect to generate free cash flow of 45% to 55% of adjusted EBITDA in fiscal 2024. Before I conclude, I also wanted to take the opportunity to reiterate Mike’s appreciation of our team for their hard work and ongoing commitment as we continue to serve our vital role as a trusted and embedded partner for our health care provider members and other customers. Our employees are our greatest asset, and we will continue to focus on cultivating a high-performing culture and driving employee engagement as we position our business for 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] The first question is from Eric Percher of Nephron Research. Please go ahead.

Eric Percher: Thank you. Maybe to start with the macro, could you give us a perspective on some of the regional volume variability you’ve spoken to and whether you’ve seen changes and catch up in some of the geography or anything that looks like progress?

Mike Alkire: Yes. Thanks, Eric. This is Mike. So while we’ve seen some improvement in utilization overall, as you just said, it does continue to vary by geography with many of our providers not seeing a full return to the sort of the pre-pandemic level. We do have some data that, I guess, is probably a quarter or so old that showed some low-single-digit increases for our acute volumes over the prior year period. And then from a non­acute standpoint, mid-single-digit increases over the prior year period. So we are seeing just — we are seeing the growth come back. But again, it’s incredibly regional, places in Florida, Texas are doing obviously much better than places than the rest belt. And so we’ll continue to track that.

Eric Percher: And as we think about the guidance or not guidance, but the directional commentary you’ve given today, how much of the decision not to have formal guidance is what’s going on in the marketplace, difficulty predicting the market versus the limitations on not knowing where the strategic effort will land you?

Craig McKasson: Yes, Eric, this is Craig. It’s really the latter. So as we think about the strategic alternatives and potential changes in the complexion of the business, we are just continuing to evaluate and assess how that could impact our potential expectations. So I wanted to provide perspective, but without issuing guidance, one of the examples I would highlight is when we did announce our divestiture of the non-health care GPO operations initially thinking there would be a pretty significant change in the way that our financial statements would look. And then subsequently, because of the uniqueness of that transaction, it’s not having that impact. So we really just really in discussions with the Board and the management team wanted to get through this about alternatives review and then plan to come out with more formalized guidance post that exercise.

Eric Percher: And last one here, just triangulating all the commentary, Craig, on cash flow. Can you tie together a few of these items relative to free cash flow this year, understanding the net working capital improvement may not recur in the EBIT time or EBITDA guidance to the percentage of EBITDA you expect expansion or contraction?

Craig McKasson: Yes. I think broadly, what I would say when you think about the commentary I provided around ‘24 expectations based on our current construction, I would say that there could likely be contraction in overall free cash flow. But again, it will continue to be in that 45% to 55% of adjusted EBITDA conversion rate.

Eric Percher: Thank you.

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

Richard Close: Yes, thanks for the questions. Craig, I was just — can you talk a little bit more about the member fee share and the increases there? And then maybe the timing of renewals from back in the restructuring previously several years ago. Just walk us through all that.

Craig McKasson: Sure. So I think as I talked about in my prepared remarks, I mean, it does continue to be a competitive environment. Health care providers are under tremendous pressure when we did the restructuring back in 2020, the majority of our members entered into five, six, seven year contracts that did not have termination for convenience or out clauses, those remain intact. We did have, as we previously disclosed, a subset of members that either didn’t agree to the restructuring at that point in time or some that actually did maintain the ability to go to market or do renegotiations at points in time. So as we’ve done those, we have seen some pressure on fee share. In some limited circumstances, we have seen members that actually subject to a fixed firm contract have been willing to entertain a renewal process.

And so that has had pressure on fee share at some points in time. And so we’ll continue to evaluate. And then we’re also being opportunistic when it makes sense in terms of talking about longer-term extensions with members as we think about all-in relationships, bundling in Performance Services capabilities with the GPO and things of that nature as we move forward. So all of those characteristics are what are causing our ‘24 fee share to likely increase from the current low-50s up to the mid- to high 50% range that I disclosed.

Richard Close: Okay. That’s helpful. And then with respect to the applied sciences, maybe a little bit more detail on the clinical trial win that you highlighted and really the opportunity for growth in that adjacent market would be helpful.

Mike Alkire: Yes. This is Mike. So let me just give a broader sort of perspective of what we’ve been doing in the clinical trial space. So I think you’re well aware, we have significant amounts of data. And obviously, in partnership with our health systems, we’re able to offer sort of this real-world evidence, kind of, capability to life science organizations, as well as medical devices. I think a couple of very, very unique things about our offering. First, we’re able to sort of flip the funnel, if you think about it in terms of identifying patients for trials, where we’re using our AI capability and looking at the unstructured data. And we can look at inclusion and exclusion criteria before we actually select the site and the physician investigators.

So that sort of is a reverse of what actually happens today where many times a site picked and then a physician investigators pick, so we can sort of flip that funnel. So I think that life science and medical devices that is something very, very interesting. As far as some interesting things we’ve been up to in the market, we have been doing some things from a Phase IV study standpoint, where we’re creating synthetic control arm. So what that allows is it allows for us not to have the whole placebo kind of comparators. And so when you’re able to do that using data and those kinds of things, it becomes a lot more efficient and obviously, incredibly accurate given that we have the data that we have. So we’re really excited about those two disruptive opportunities in the real-world evidence space for these trials.

Richard Close: Okay, thank you.

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