Q2 2020 Earnings Call
Ladies and gentlemen, thank you for standing by and walking through the Premier fiscal year, 2022nd quarter results in conference call.
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I'd like to hand, the call over to Jim story. Please go ahead.
Thank you Michelle and welcome everyone to Premier's fiscal 2022nd quarter Conference call. Our speakers today are Susan Ward, Chief Executive Officer, Mike out Guy or President and Craig Mckasson Chief administrative in financial Officer, Susan Mike and Craig will review the quarter's results.
Right and operations update and discuss ongoing strategies for the year before we get started I want to remind everyone that copies of our earnings release and the supplemental slides accompanying this conference call are available in the Investor Relations section of our web site at investors Dot premiering dot com.
Management's remarks today contains 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 FCC, including our form 10-Q for the fiscal second quarter, which we expect to file system. We encourage you to review these detailed safe Harbor and risk factor disclosures. Please also note that financial results presented today reflect continuing ops.
Ration was following the completion of our sale and exit of the specialty pharmacy business on June 7th 2019, also where appropriate we will refer to non-GAAP financial measures to evaluate our business.
Reconciliations of non-GAAP financial measures to GAAP financial measures are included in our earnings release it in the appendix of the supplemental slides accompanying this presentation and in our earnings release form 8-K, which we expect to furnished to the FCC soon.
Now, let me turn the call over to Susan Devor.
Thanks, Jim and welcome everyone to our call.
We have a lot to share with you. This morning, so let's get started.
Overall, our fiscal second quarter financial results exceeded managements expectations, driven by the ongoing steady growth of our core supply chain services business.
This solid performance largely offset the continued softness in performance services segment revenues, which as we discussed on our last call was anticipated.
Based on the first half performance and our outlook for the remainder of the fiscal year, including the impact of the acquisitions. We are revising segment revenue guidance to reflect our expectations that increased year over year growth in supply chain services, well more than offset ongoing challenges in performance services.
As a result, we also are increasing the guidance range for consolidated net revenue while reaffirming the current guidance ranges for non-GAAP adjusted EBITDA and adjusted fully distributed earnings per share.
Before we review our strategic initiatives and our performance in detail I want to reiterate what I said last quarter about our business.
Premier delivers a unique integrated total value proposition for each of our members, enabling them to achieve a consistent and compelling total return on their investment.
The importance of this cannot be overstated as it helps us both win new business and retain existing members.
In a highly competitive marketplace and it has historically produced consistent steady and profitable growth for premier.
Against this backdrop I'm very pleased about our comprehensive partnership with common Spirit Health announced just last week and our agreement to acquire the security group purchasing and Nextera consulting businesses from the Greater New York Hospital Association, which we announced this morning.
These are huge wins that when coupled with the successes we've achieved with other significant health system mergers, including Aurora advocate health and valid health.
Further demonstrate the value and differentiation of our integrated sourcing technology and service capabilities.
These wins among others over the past few years validate premieres ability to drive cost synergies went to large health systems are merging.
Common spirit was created about a year ago from the merger of Catholic health initiatives and dignity health.
It operates 137 hospitals and more than 700 care sites across 21 state.
And generated a combined $29 billion in revenues in fiscal 2019.
Our new partnership will focus on operational and clinical alignment and improvement opportunities.
Mike will provide more perspective on the opportunities, we see with common spirit and just a few minutes.
Turning to our agreement to acquire the security and Nextera businesses I know our future relationship with the Greater New York Hospital Association has been a major question on the mines of our investors. So let me spend a few moments on that.
Okay already operates a large regional GE PEO business with members comprising more than 300 hospitals and 2700 health related facilities in the New York Tristate area.
Next era operates a hospital supply chain consulting and co management business that we believe is highly complimentary to our own consulting capabilities.
In acquiring these businesses Premier well received 100% of the revenue generated by next Sarah and 100% of the gross administrative fees generated biosecurity.
This includes more than 82% of security member growth administrative fees revenue that has already been extended through December 2024.
With five year contract containing no early termination provision.
And we believe that we will renew the remaining contracts when the time comps as most of these long term obscurity members are very familiar with premier and have been accessing our TPL contracts through a security.
We believe this is a very positive outcome considering that greater New York is both a large regional aggregator of health systems and our biggest customer.
This acquisition secures the long term revenue streams from security members.
And provides us with the opportunity to collaborate more closely with individual members and deliver significant added value through our technology and services.
Further we believe this transaction underscores the confidence that the Greater New York Hospital Association and Nextera and security members have in premieres highly differentiated total value approach, which is driven by our industry, leading G.P.O. analytics and consulting capabilities.
The financial impact of the acquisitions has been factored into our revised fiscal 2020 guidance.
Greg will discuss the acquisition and its financial impact in more detail when he reviews the financials.
Turning back to our business is more broadly in supply chain services, we remain focused on achieving steady growth by continuing to deliver a comprehensive value proposition and compelling return on our members investment in the relationship.
The components of this value proposition continue to include total cost savings contract pricing analytics dedicated resources.
Distribution DRA payments and fee share.
Looking at performance services.
And you to operate in a challenging market environment, where we believe health care providers spend has been restrained by ongoing political and regulatory uncertainty.
We think this is likely to continue through at least the presidential election.
That said and as Mike will discuss shortly we remain hard at work enhancing the value proposition of our core health care provider solutions.
Through the ongoing evolution and integration of our products services and capabilities.
At the same time, we're pivoting to new opportunities in adjacent markets, where we can leverage our unique combination of deep member relationships integrated analytics and other wraparound services.
So to sum up we continue to take a balanced approach by remaining focused on evolving and strengthening the value proposition of our core businesses, while making strategic investments in new areas.
As we've said since our IPO, we will continue to pursue opportunities to create sustainable long term value for all stockholders now let me turn the call over to Mike Alkar, Our President who will walk you through some of the initiatives that we're pursuing.
Thank you Susan Thanks, everyone for joining our call today as discussing our operational performance I'll review, the strategic and operational progress, we're making a.
Drill down on some specific ongoing and new initiatives.
However, before we get started I'd like to provide some perspective on recent market developments impacting the global health care supply chain for personal protective apparel.
As you know health systems around the world are in the early stages of dealing with the rapidly spreading grow virus.
Well here in the U.S. were also managing through a large product recall impacting surgical accounts drapes and other items.
Premieres focused on working with our suppliers of members to ensure consistent supply, particularly in times of crisis.
For both our direct sourcing and supply chain contracting capabilities, we sourced product for multiple suppliers and manufacturers around the world.
Build inventory and maintain a consistent supply of high quality products.
While we can't predict the future we're doing everything in our power to ensure save consistent and continuous flow of products to our nation's healthcare providers.
Now, let's turn to review of our operations for the fiscal second quarter.
It's in the supply chain services segment, we continue to achieves steady growth through ongoing initiatives that include are expanding high compliance purchasing programs.
Our focused on leveraging new opportunities in the area of purchased services are continuing expansion of the provide gx drug shortage program and our ongoing work to integrate technology capabilities into our supply chain strategies.
Lets drill down for a moment on purchase services.
As part of our longer term focus we are building out a technology enabled and and supply chain strategy.
A key component of which is our ability to help health systems better manage the challenging area of purchase services.
Where are those routine clinical and non clinical services, often provided locally or regionally by third parties.
Research shows that on average purchase services account for up to 30% of a typical us hospitals non labor expense.
To address this opportunity we are continuing to leverage our recent acquisition of Med Pricer, which provides technology solutions that enable hospitals and other health care providers to analyze benchmark and source purchased services contracts.
While still early on I'm happy to report this business is progressing nicely and we look forward to driving even more value for our members and growth for premier as we continue to harness this critical area of purchase services spent.
Looking at performance services, we're excited about the ongoing development of our clinical decision support technology, which we acquired with stance on health just over a year ago.
This platform provides the ability to deliver clinical decision support analytics within the electronic health record workflow.
Utilizing machine learning and artificial intelligence.
It is proving to be a critical component and a number of our initiatives, including our automated prior authorization solution as well as our initiative to develop a next generation platform to further helped facilitate the delivery of high quality standardize care at a reduced costs.
This platform continues to generate strong member interest and it's been one of our fastest growing businesses within performance services.
One catalyst for creating a tailwind for clinical decision support platform is the payment regulations, requiring all health care providers to consult a CMS approved clinical decision support system by January Onest 2021 for advanced imaging procedures or forfeit Medicare reimbursement.
We're also integrating its capabilities and to continue go health, our direct to employer high value care network initiatives.
In that regard I am thrilled to announce the Contigo health has just initiated a pilot program with a major national employer to develop a clinical program designed to improve care for its employees with a focus on advancing maternal health.
This is part of this new pilot program Contigo Health is working with US Fortune 25 company on a series of initiatives to help provide providers eliminate unwarranted variation and maternal care that has proven to lead to higher costs lower quality outcomes.
In fact, just last month Premier released the study showing that complications.
And common chronic condition.
Lengthened mothers hospital stays and increased hospitals childbirth costs by 20% or more.
Contigo Health is also in the planning stages with a second major employer for another pilot program and continues to target signing up a third large employer during this current fiscal year.
Turning briefly to our drug shortage initiative.
We have now partnered with 25 manufacturers and our reliably supplying nearly 150 shortage drugs by the National drug code.
In 2019 alone our provide gx program added new drugs to our portfolio.
We're currently working with the pipeline a 50 additional shortage drugs that are absolutely vital to patient care.
Looking at the future I want to take a few minutes to further discuss the opportunities. We see ahead with the acuity nextera and common spirit.
We are indeed very excited about our agreement to acquire Securities TPL business. This provides us with the opportunity to continue and expand our long term relationships with our members acquired through acuity.
These relationships can now be more tightly integrated with premier and we look forward to driving incremental value for these healthcare providers and for premier by delivering our broader suite of technology analytics and wraparound services directly to these members.
Turning to that Sarah as a standalone business with unique hospital consulting and management capabilities and a loyal customer base xcerra brings compelling and complimentary offerings to premieres portfolio.
We expect next Cerus hospital supply chain co management services to help us accelerate premiers and technology enabled supply chain strategy.
We further expect to expand access business outside of the New York Tri State area to provide technology enabled value analysis capabilities supply chain business intelligence, and consolidated and virtual buying functions to a broader array of customers.
Looking at common spirit health this new partnership what's happened to premieres comprehensive offerings as Catholic health initiatives previously used premieres performance improvements services and technologies.
And dignity health access Premier supply chain services common spirit the merged entity will be fully converting to premieres group purchasing organization and we will leverage premiers analytics and are focused team of experts to strengthen and accelerate the execution of a clinically integrated supply.
Okay.
In closing we remain focused on further developing our technology enables supply chain and enterprise analytics and performance improvements strategies, we believe our continuous focus on enhancing our core capabilities, while developing while developing new ones positions premier well now and into the future. Thank.
Thank you for your time today, let me turn the call over to Craig Mckasson, our chief administrative and financial Officer.
Thanks, Mike now, let's walk through the second quarter financial results in more detail from a GAAP standpoint, consolidated second quarter net revenue of 319.6 million increased 4% from 307.6 million a year ago supply chain services segment revenue of 200.
32.6 million increased 9% from 212.7 million.
Net administrative fees revenue of 172.1 million increased 4% from 165.7 million, primarily resulting from ongoing contract penetration driven partly by our high compliance portfolio programs and the addition of new contract categories and suppliers across both.
Both our acute care and alternate site businesses.
Products revenue of 58 million increased 31% from 44.2 million last year, driven primarily by continued growth in member demand for our Premier pro commodity product categories increased us foods product sales and aggregated purchases.
Turning to the performance services segment as anticipated second quarter revenue of 87 million decreased 8% from $94.9 million a year earlier as we previously discussed factors impacting performance services segment revenue included reduced revenue from our hospital improvement enough.
Patient network contract with CMS and fewer consulting engagements relative to last year when multiple engagements were underway in conjunction with the earlier recruitment of several academic medical centers.
Additionally, the applied science as business experienced Lear lower year over year revenue largely related to the timing of certain contracts.
This was partially offset by certain new license and SaaS technology contracts in the quarter as well as growth in our clinical decision support technology business.
Looking at profitability GAAP net income was 91.6 million for the quarter compared to 105.8 million last year.
This is primarily due to the remeasurement of deferred tax balances related to a change in north Carolina's state income tax law, resulting in a reduction of future income tax benefits.
After a GAAP required noncash negative adjustment of $480.2 million to reflect the increase in the redemption value of limited partners class B common unit ownership based on the increase in our stock price during the second quarter, we reported a GAAP.
GAAP net loss of $6.88 per share.
Consolidated non-GAAP adjusted EBITDA of 148.4 million for the quarter increased 4% from 142.9 million from a year ago.
From a segment perspective supply chain services non-GAAP adjusted EBITDA of 148 million compared with 135 million last year, the 10% year over year increase was primarily driven by growth in net administrative fees and products revenue.
In performance services non-GAAP adjusted EBITDA of 30 million decreased 19% from 37.1 million a year earlier.
The decline was primarily driven by that same factors impacting revenue that I just discussed as well as by expenses associated with ongoing investment in our clinical decision support technology and Contigo help our direct to employer high value care network.
Second quarter non-GAAP adjusted fully distributed net income of 90.8 million increased 2% from 89.2 million a year ago and non-GAAP adjusted fully distributed earnings per share increased 10% to 74 cents from 67 cents.
As part of our commitment to deliver long term stockholder value, we repurchased a total of approximately 3.5 million shares during the fiscal second quarter for $112.8 million at an average price of $31.80 per share.
For the first six months of fiscal 2020, we've repurchased a total of approximately 4.6 million shares for $148.6 million.
From a liquidity and balance sheet perspective cash flow from operations for the six month period was 217 million compared with 210.2 million for the same period last year. The increase in cash flow from operations was primarily driven by higher net administrative fees and product revenue.
And an increase in working capital, primarily driven by increased cash collections on contract assets.
These were primarily offset by decrease performance services revenue and increased selling general and administrative expenses.
The increase in SGN expenses is primarily due to higher acquisition and disposition related expenses and expenses associated with certain strategic initiatives and acquisitions.
Non-GAAP free cash flow for the six month period was 127.9 million or approximately 44% of non-GAAP adjusted EBITDA, compared with 114.7 million or 41% a year earlier.
The growth is primarily due to the same factors driving growth in cash flow from operations as well as a decrease in purchases of property and equipment and decreased distributions to limited partners due to their change in ownership.
The cadence of six month free cash flow results is consistent with historical performance and we continue to expect that non-GAAP free cash flow will approximate 55% to 65% of non-GAAP adjusted EBITDA for the full fiscal year.
Our cash and cash equivalents totaled 111.6 million at December 31, 2019, compared with 141.1 million at June 32019.
We ended the quarter with an outstanding balance of $50 million on our five year 1 billion dollar revolving credit facility, which we have subsequently repaid.
Before turning to guidance, let me provide a quick financial overview of our agreement to acquire the acuity and Nextera businesses from the Greater New York Hospital Association.
As Susan noted in acquiring these businesses, we will receive all of the next era revenue and all of the gross administrative fees generated by acuity.
Regarding the GPO, we will share administrative fees directly with securities underlying members in accordance with those members contracts at an aggregate contracted administrative fee share that is consistent with the mid 30% range of our overall aggregate administrative fee share.
In addition, as disclosed in the press release acuity is providing one time rebate payments to certain of its members that from an accounting perspective premieres required to treat as prepaid administrative fee share.
And amortize over the life of the contracts on our financial statements.
When considering this noncash amortization the effective administrative fees share expense to acuity members under the acquired contracts averages in the low 50% range.
We are acquiring these businesses for total consideration of approximately $291.5 million any potential contingent payment of up to $30 million due to the sellers in fiscal 2025 based on the achievement of certain member renewal objectives.
The anticipated impact of the transaction, including initial synergies is reflected in our revised fiscal 2020 guidance.
So turning to guidance based upon performance through the first six months of the fiscal year, our current outlook and assumptions for the remainder of the year and the anticipated financial impact of the acquisitions of security Index. Sarah we are updating fiscal full year guidance as follows.
We are increasing supply chain services segment revenue to a range of $895 million to $930 million, indicating anticipated year over year growth of 5% to 9%.
This outlook assumes stronger than previously anticipated growth in net administrative fees and products revenue, which we now project at 2% to 6% and 11% to 15% respectively.
Revenue is not expected to be materially impacted by the security in Nextera acquisitions.
We are decreasing performance services segment revenue to a range of 340 to 354 million, indicating an anticipated year over year decline of 2% to 6%.
This is primarily due to slower than planned growth in our technology and consulting businesses and the slower than originally expected ramp up of our Contigo health initiatives.
However, due to the anticipated growth and supply chain services. The guidance range for consolidated revenue is being increased to 1.235 to 1.284 billion, indicating year over year consolidated net revenue growth of 1% to 5%.
We are reaffirming guidance for non-GAAP adjusted EBITDA at a range of 566 to 589 million, indicating continued expectations for 1% to 5% year over year growth.
This incorporates the expected negative adjusted EBITDA impact of $11 million to $13 million for the fiscal year due to the expenses associated with security and Nextera business acquisition.
Senses are primarily related to the noncash amortization of the one time rebate payments by a security to its members as I just discussed and to the overall additional infrastructure costs associated with the acquired businesses.
Similarly, we are reaffirming non-GAAP adjusted fully distributed earnings per share at a range of $2.76 to $2.89, indicating growth of 4% to 9%.
This includes the expected negative impact of five to eight cents for the fiscal year related to these same acquisition related expenses.
Finally, I'd like to provide a brief update on our ongoing quarterly exchange process on January 30, Onest approximately 4.9 million class B units were exchanged on a one for one basis for shares of class a common stock.
Our next quarterly exchange occurs on April Thirtyth.
Thank you for your time now, let me turn the call back over to Susan.
Thanks, Craig a few closing thoughts before opening the call to questions first premier outperformed management's expectations in the quarter led by our group purchasing and direct sourcing businesses.
Second we believe our partnership with common spirit is a momentous business when it reinforces our position as the market leader and further validates our comprehensive integrated approach to delivering compelling value for merging health systems in a consolidating marketplace.
And lastly, our transaction with the Greater New York Hospital Association retains significant existing revenue stream that securities group purchasing members drive to Premier.
Secures five year contract extensions with no early termination provision.
Ads nextera as supply chain management, and consulting assets, which we believe will help accelerate our end to end enterprise supply chain strategy.
And reinforces our long term strategic relationship with a purity members.
Thanks, So much for your time today operator, please open the line for questions.
As a reminder to ask a question you will need to press star one on your telephone.
Your question press the pound key.
Please standby why we've compiled documenting roster.
Our first question comes from Lisa Gill of JP Morgan Your line is open.
I'm wondering if any on for Lisa Hi.
Maybe you could speak a little bit more to what drove the reduced expectations in the performance services segment in the back half should we still be thinking about margins in the in the mid Thirtys, there and when should we start to think about the timing of contigo halls benefiting the model.
Sure. This is Craig. Thanks for the question first we are still expecting EBITDA margins to be in the mid Thirtys as we continue to diligently manage the expenses associated with the reduced expectations on revenue growth.
But the lower expectations really are a function as I discussed of lower than anticipated technology, and primarily consulting related business that we had hoped would manifest in the back half of the year, but is just not coming along at the pace that we'd expected and then we have had a little bit slower ramp up to our contiguous contigo.
Health initiative, given the timing and the timeline that it's taking to ramp up some of the large employers here. Although we are extremely excited about the major employer that we have launched this first pilot program with and from a standpoint of when we really see that taking off in the future. We currently expect it will continue to see growth as we move into 20.
21, but as we've talked about on previous calls it's more likely into the 2022 timeline when we really start to see that contribute meaningfully.
Great. Thanks, and then maybe one more just on utilization you've spoken recently about improve utilization trends, how should we be thinking about that going forward and what's baked into your guidance.
Yes. Thanks. This is Craig again, so from a utilization standpoint, we did talk at the JP Morgan Conference a couple of weeks ago about the fact that in our analysis. The the second quarter indicated a second consistent quarter with some positive utilization trends, we had been experiencing declining or flat inpatient.
Utilization for a number of quarters and for the last two quarters, we've actually seen that flipped to a slightly positive utilization environment with Inc.
Increases in outpatient ambulatory utilization as well.
We at this point still are not at a point that we would call that a sustainable trend. So we're continuing to monitor that we're also being mindful of some of the supply related considerations in the marketplace.
Surrounding certain product recalls and the.
From a virus implications on what that could potentially have in the future. So continuing to be mindful of what utilization trends might be moving forward.
Great. Thanks very much.
Our next question comes from Ryan Daniels the Flume Blair. Your line is open.
Yes. Good morning, Thanks for taking the questions a quick one on the M&A transaction. Susan you said in your prepared comments that you've got five year renewals I think with 85% of the business can you go into a little bit more detail again, I didn't quite catch what that was.
So you know as as you know.
Clarity and the Greater New York Hospital businesses cover a large member base.
And so what we did was target those largest big member.
Secure contracts a lot of other health systems, there have been using.
The security contracts for years and years their contracts around different waterfalls, and so we wanted to get that bolus of 82% locked down and then we'll just read new and or our take on the extensions of the other contracts as they come up.
Although Europe is likely to 100% of the revenue and all the all the business of both the GPO and the consulting business right understood and then the 82% is at 82% of the clients or the revenue that they've been generating you've got bigger clients, yes, the Rev and 82% of the revenue right and more than 18%.
To be clear.
Okay and then in the follow up on the performance services I mean, obviously continues to underperform, a little bit and it sounds like you anticipate that continuing profits. If we look at the adjusted EBITDAR off I think year to date 20, 526% is there any contemplation of.
Further restructuring or cost cutting to drive profitability. There do you think the revenue growth will kick in a little bit more and help with that in the back half of your such that that's not required. Thanks, Hey, Ryan This is Mike alkire. So.
We've actually been kind of going down that path of doing the restructuring we've we've.
We've been focused on Rightsizing parts of the advisory services business that obviously, you know to be need to be more streamlined the more efficient to drive what we think is the appropriate growth in the market, we've been bringing on additional capabilities from a commercial standpoint.
New leadership.
Different people that can actually help us with driving large scale clinical transformation deals.
So we've been pretty much making those transformational changes for the better part of the last two or three months.
Okay I can hear thank you.
Our next question comes from Donald Hooker of Keybanc. Your line is open.
Okay, great. Good morning, so very interested this common spirit deal obviously the numbers there are really big so just trying to get a sense as to what's sort of incremental and what's not at this.
And when I think about their supply chain spend where you already servicing I guess, the dignity half part of that.
The other part completely new.
Would that be upside you commented that it was not material to fiscal 2000, but it could be a needle mover in fiscal <unk> 21.
Yes. So we're really excited first Don about common spirit, we think it is indicative of our ability and consolidating health care market really when the big Big mergers. We did have the supply chain business on the dignity side, we had no supply chain business on the Chr side. So we are up.
Wiring that we are getting the GPO business on the C.H.I. side. We also had several technologies embedded at CHF health systems and corporate.
And we are adding to that supply chain analytics of for the entire system and so in addition to that we have a big savings target as you might imagine.
We will have a number of resources on the ground dedicated to making the centralization supply chain in partnership with their leadership.
Deliver the desired saving so there are a lot of components of the relationship as there always are and it will take some time to ramp up.
The GPO conversion and the install of the new six or seven technologies.
And so we're very excited about it but yes, it is incremental new business and a couple of different ways.
Okay Super.
I guess, you probably won't answer this spin off I'll take a shot and ask anyhow, but I mean are the when I don't think about the economics of the GPS you tend to sort of target a 30% share back and I realize that can vary but is that kind of how one might think about your relationship with common scared the CHF side of the incremental GPS.
Affinity there.
Well you know we don't typically disclose individual contract details for any single member. This was a competitive bid process and we went at at the same way we've gone it the other big merger deals, which is the total value proposition and I will tell you the largest number on the page was the savings target.
There was a significant level of investment in the resources on the ground. There was significant acquisition on their part of the technologies.
And administrative fees share was a part of the total value proposition.
So we feel like in a competitive bid process, our our differentiation came through in all the different levers that we can bring to that.
That total value creation for them.
Okay, well congrats on that and then maybe one last one and I'll jump back in Q.
In terms of GPO compliance, which is obviously an important driver can you update us on.
The surpass and ascend programs in terms of member participation and maybe just qualify weather or those real drivers here or is it something beyond that.
This is Mike I'll, let Craig talk to you have about the real drivers for the numbers, but just a quick update unsurpassed. We've got 11 core members now representing about $8.4 billion, an annual supply chain spend in surpassed.
And then in ascend we have more than 1000 hospitals that represent about $21 billion in annual spend and just as a quick reminder, we actually didnt open up the core membership opportunity to join surpass.
Up until last quarter. So obviously, we're in discussions with additional members to gauge their interest in joining that high compliant program.
Yes. This is Craig the only color I would add is that as I indicated in my prepared remarks, the vast majority of our growth in supply chain is coming from penetration across our membership.
And that includes kind of continued uptake as we talked about last quarter in the surpassed and ascend high compliance portfolios worked we are seeing.
Good growth and adoption into those programs and so it's helping.
Drive some of our growth, but we're seeing it even across the balance of the membership and somewhat underpinned by the utilization improvements that I talked about earlier.
Thank you.
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Our next question comes from Steve Valiquette of Barclays. Your line is open.
Hi, This is Jonathan young on for Steve just in relation to the acquisitions.
What was the impetus to acquiring the assets from GE and my hand.
How does this impact your relationship kind of moving forward because I see in the press release that.
Jim why won't be limited partner and premiere on November 2nd So just won't give color on that.
Yes so.
Greater New York is different from our other member owners and that there are regional aggregator essentially there at GPL and so we have had you know.
Decades of relationships with both the association and there and their members. It was cleared up both of us that.
We are both Gpos and therefore, there would be synergies associated with with acquiring nm, bringing the two together.
We also were very interested in the next Sarah consulting capabilities. There are lots of ft East there with particular expertise in supply chain consulting and supply chain co management and so pretty early on in the discussions we thought that combining our.
Our capabilities our people our technology getting some of the synergies out of duplicative areas.
Made bringing those two businesses together as an acquisition make the most sense and so we went through the process got got the fairness opinions and things that we needed to do with our board and our own committees and we both just agreed this was the best way to continue the law.
Long standing relationship that we had had with those members.
Okay great.
Okay.
Just in relation to the performance services I guess in relation to slows down does is it still.
Related to political uncertainty on what what these future healthcare market will look like and I guess.
To some extent.
Why.
Why double down with Nextera, essentially with given kind of the uncertainty in the performance server side. Yes. So this is Mike So let me take a first pass the so.
Yes, the political uncertainty it just it just causes a lot of questions for health care systems in terms of.
The investments that they are thinking about their thinking about making in terms of where is the direction.
You know that the federal government is moving towards.
And what are those capabilities that they need to continue to build out so that uncertainty.
You know sort of plays in their decision, making process as far as next service concern Nexteras, primarily focused in the supply chain area and so.
As you're well aware our performance services for the most part is focused and clinical standardization.
And driving clinical transformation, whereas next era is primarily focused in the supply chain part of the business, which is all about driving.
Standardization of products and the best use of products and those kinds of things so a little bit different.
Capability in terms of what mix there is bringing to the table and nextera from our perspective is a very natural wrap around to the GPO with security. So a lot of their relationships today, our co management relationships for the whole supply chain and that that was very concise.
Distant with our ongoing supply chain enterprise strategy.
Understood Thats helpful. Thank you. Thank you.
Our next question comes from Richard close of Canaccord Genuity. Your line is open.
Great.
Thanks for the questions just to hit on the performance services and the political uncertainty monikers who's the maybe.
And your perspectives here in the conversations you're having with customers is it something that they're just waiting to see what the results of the election or is there anything to do with maybe the Supreme Court ruling.
You see a.
He thoughts in terms of what these customers.
Need to see.
Maybe the election or you see a ruling that.
Turning to position, where okay, they're ready to go uncomfortable to pull the trigger a new agreements with you guys. Yes. So a couple of things that that we see.
Richard one is.
They are maintaining the technologies.
In information services than the performance services technologies that we have so we still have high retention rates in the technology. So we believe that they think eventually the quality safety clinical analytics and being paid based on those things in global kinds of models.
We think they believed that thats coming on so those retention rates are high we think the population health and new models and the consulting that goes with that.
Is such that Theres, just not as much urgency today and it really will depend on how we get through the election, how fast they start to announce new programs, new bundles, new value based payment program, they're talking about Medicaid block.
Grants.
And I think right now theres a lot of political turmoil it seems continuing in the in the federal government.
And the fee per service World is still you know sort of 85% of their revenue streams and so they just don't have the momentum that we think they will have now we believe in a in a new election, whether it's.
Whether its trump or a Democrat.
We believe that Trump will have a second term and therefore not be worried about programs that he he wants to and initiate and so we think it could get back on track with the Trump administration. We also think if it were a Democrat they would want to try to pick back up ASEAN and drive that forward. So.
We're being cautious about how fast we think that momentum is going to change.
But we do think that the ultimate answer here is going to be payment models tied to quality safety outcomes and total cost.
Part of our pivot Contigo health and part of our pivot to using our stance and technology for prior authorization capabilities and part of our pivot to apply sciences is to create additional markets. So were not as dependent on that momentum in performance services.
That we've had in the past.
But it will take itself a year or two to workout and we've continued to be consistent about that.
Okay and my follow up is on the applied Sciences, Craig maybe can you go over what generated the year over year decline there or what was the specifics you cited.
Yes, what I indicated was really sort of the timing of when contracts hit so on a year over year basis, we saw a slower lesser amount of contracts in the current fiscal second quarter than we had a year ago. We still are are focused on is that Susan indicated pivoting our business to enhance and have more opportunities in life Sciences as weve.
Move forward.
Perfect. Thank you.
Our next question comes from Kevin Caliendo.
Your line is open.
Great. Thanks for the question. This is Adam noble in for Kevin just wanted to confirm for both security as well and et cetera, do they have any customers outside of return New York Association in your current book of business or are they completely surfacing existing clients within the.
Within your overall your customer base.
It's primarily within our current customer base.
Gotcha and for Nick service, specifically, I mean could you talk about the product and service overlap between what you already doing that so are there any additional capabilities that they but they do that you think you could expand to your broader customer base or is it more simply SPE use.
Offering some of the same services that you already yeah, do but servicing.
From clients, Yes, I think there are two primary areas that they offer.
At a higher level that what we offer one is clinical value analysis. So they do a great job leveraging our data working with their organizations to standardize value analysis across those healthcare systems that they work with so thats number one and then number two is the co management of the supply chain. So they built out some very very strong.
Measures and and so.
Services to help their healthcare systems from a co management standpoint in the supply chain area, and we think actually than New York market is it is a tougher market than most and so the need for cost savings and supply chain.
Management and co management, it really will supplement our bill does that enterprise end to end supply chain strategy. So we do view it as complimentary to what we have not duplicative to what we have.
Gotcha, and if I could just thinking one more question.
On the product revenue growth from a quarter could you give a little bit more color into what specific product categories.
Drove the growth from a quarter and.
How sustainable do you think this level of growth is as we cycle into the back half beer as well as the 2021.
Yes. This is Craig so from a products revenue standpoint, just ongoing continued really strong growth across our core commodity products in our premier Pro product line, primarily gloves personal protective attire.
Candidly incontinence products all of those actually showing very strong growth.
We do have a relationship with US foods, who is a distributor of all of our food products for our health care systems, and they actually leverage our.
Direct sourcing capabilities to distribute primarily gloves into their facilities across the United States and so very strong growth during the quarter and then as we have talked about we also do what are called aggregated purchases or bulk buys where we take advantage of I'll say spot opportunities in the market to take title to product that we can then.
Sell it to us substantial discount to members based on kind of excess demand in the marketplace et cetera, and so we had strong growth from that in the second quarter as well, so really the business sort of performing very well across all of its capabilities from a topline standpoint.
Gotcha, Thanks for the questions.
Our next question comes from Jason Plagman of Jefferies. Your line is open.
Good morning. Thanks for the question first one going back to performance services can you provide anymore color on kind of the trajectory that you're expecting for for revenue growth in second half homage should be expect quarter over quarter growth.
In Q3 in Q4 from the Q2 level or just kind of the directories should we should be thinking about that second half would be helpful.
I think as you think through the cadence of the year. So we had a lower first quarter, obviously, a step up in the second quarter. We did have the benefit and a good strong second quarter given some.
As I indicated in my comments good sales on the technology side, it's really been the consulting side that didnt sort of meet our expectations that are broader level I think as we look into the back half the year would expect a slight step up in Q3.
Over where we came in in the second quarter and then I think Q3 in Q4 at this point would kind of be at a consistent run rate basis for the balance of the year.
And that'll get us into the updated guidance range that we provide.
Okay. That's helpful and then.
Switching gears a limit on supply chain segment.
As you grow that co management portion of that business does that.
Have any positive or negative impact on the margin profile for the supply chain segment.
Well our view of the co management business that it is that it's going to include additional contract penetration of the GPL potentially additional use of the direct sourcing businesses and consulting payment for consulting services that are people driven and so we have a couple of different kinds of margin businesses.
All of which we think get better with a with the co management arrangement. It's just.
A mix shift that that might occur somewhat but our our anticipation is that that revenue doesn't replace GPO administrative were a revenue at actually enhances it.
Great. Thanks for the questions.
Our next question comes from to lender Singh of Credit Suisse. Your line is open.
Hi, Thanks, a lot just wanted to get a little bit more color around guidance on supply chain services segment still a pretty wide range of 35 million dollar with a lower than not and effecting much growth into second half can you help us understand puts and takes there is all a function of the expectations around utilization trends.
Sure. This is Craig so relative to the guidance as I indicated earlier response, we are still.
Aware of and and monitoring the potential impacts of the product recalls that happened in the marketplace around gowns and the implications of that could have on utilization around elective procedures et cetera.
And then the the potential impact of the krona virus and while we're optimistic that the market will get their arms around that and prevent that from further expanding we certainly want to be careful and mindful that those could have implications on our health care providers ability to deliver care, which downstream impacts utilization and the use of supplies by us.
So we're just being a little bit careful on that side to make sure that we manage that.
Utilization overall, we're sort of assuming we're on this kind of cuts the long standing trend we've had.
The other thing I would say from utilization standpoint that we always and I Wouldnt say, we have enough data yet to emphatically.
To conclude this but as you think about the rise and the increase in high deductible health plans. There does tend to be at times higher utilization in calendar fourth quarter at the end of a calendar year. Once people have met their deductibles those all reset when you move into a new calendar year and so that can also.
Packed on utilization so there's a lot of factors that are sort of.
Out there that could impact where the back half of the year from a supply chain services standpoint.
Could come in and so Weve purposely left the range, where it is to contemplate those potential downsides on the upside to the extent that we do continue to see positive utilization those recalls and the krona virus or managed appropriately. We think that provides a path to actually continue the strong first half that we had and potentially perform on the higher end.
Okay, and then with respect to Contigo held out understanding was that the majority of benefit was not going to be until fiscal 2001. So just wanted to better understand the comments that on slowdown bump up that business impacting those segment outlook is it more investments so as it related.
Revenue you give us some expectations revenue as well, yes, if there was an expectation of some additional revenue in fiscal 20, as we were rolling that out we had anticipated a faster ramp up in calendar 2020, the Dol say the back half of our fiscal year with these pilot programs those pilot programs have taken a little bit longer to get.
Off the ground than we originally contemplated as we've worked through the discussions with benefit.
Decision makers in those large employers that we're working with and so there is a lower contribution from a revenue perspective than we originally.
Expected in fiscal 20 to your point, the more significant increases and growth in that business. We do still anticipate to begin in fiscal 2001, and then candidly into fiscal 2022, but the guidance was impacted as a result of a slower ramp up in revenues, we are continuing to make investments on a core.
Hi side to stand up that we're very excited about getting this first very significant national employer signed up and very close to a second one as Mike indicated.
So things are trending in a very positive wages, taking a little bit longer to get off the ground than originally expected.
Alright, Thanks, a lot.
Our next question comes from Michael Polarcus Baird. Your line is open.
Hey, good morning, Thanks for taking the questions stepping in for Air cooled. This morning question on purity I understand that had some of their own contracts on a direct basis not everything flowed through the premier portfolio. So can you help us understand as part of this transaction.
On a run rate basis, what sort of incremental.
Gross and or net fee revenue is going to be generated from the security purchase.
Sure. This is Craig so our historical relationship with Greater New York actually did provide that we actually shared fees on all of the contracts, whether they were premier contracts or part of their regional portfolio. There with some very minor carve outs in some some very specific excluded categories, but broadly and generally.
Speaking all of the revenue came in and collectively so there was aligned incentives. So I wouldn't I wouldn't suggest that there is a material change as a result to the acquisition because we were already getting credit for the vast majority of our share of those regional contract fees in the past okay helpful.
Similar question on the on the next therapies.
It sounds like a consulting business that you can leverage to enable your core supply chain business. The way, it's written about in the press release suggest that.
Nick Sarah at least based fee revenue is going to be.
Incorporated into the supply chain reporting segment is that correct.
That.
Okay and can you frame that the magnitude of that business today before any synergies that you and.
Aspire to extract.
I mean, we're not specifically disclosing the levels of revenue, but I would tell you that that on an annual run rate basis that business was in the $20 million to $25 million range.
Okay. Thank you very much.
Our next question comes from Sean Wieland Piper Sandler Your line is open.
Hi, Thanks, So just a follow up on that.
I'm just confused on the revenue contribution relative to your guidance and these acquisitions and are you are you not disclosing that or.
Is there no revenue impact.
For fiscal 2020, the revenue impact of the acquisitions as I indicated is not material at all because we are picking up revenue from the next Sarah component of the acquisition, but we do have the noncash amortization of the one time rebate payment that curative.
He is making to its members that we have to take a portion of our consideration and actually.
Allocate that to prepaid contract administrative fee share and then amortize that so that amortization, which reduces net revenue is actually offsetting the contributions that we're picking up from the next Sarah business.
So maybe putting strategic reasonings aside what from a financial perspective, what's the rationale for doing the acquisition.
You know our airborne unanimously agreed that that securing those revenue streams removing termination.
Convenience provisions.
Locking in that huge.
Customer base.
Gaining the next Sarah capabilities, and the synergies associated with consolidating what our GP OWS.
Now all made sense from a from a strategic and financial perspective.
Okay. Thanks, very much thank you.
Our next question comes from Andrew Cooper of Raymond James Your line is open.
Hey, everybody thanks for that question.
Lots been covered so I'll keep it kind of high level here, but just as we think about it thinking one of the answers to an earlier question the comment on per fan in services and going for those larger clinical transformation type deals and I.
I think back to the control tower sort of commentary we've heard before why is now the right time, when we think that there's a little bit of a pause on on all this uncertainty to go for these bigger sorts of deals as opposed to potentially.
Being willing to take some smaller deals and go after it kind of piecemeal or at least until strategically there may be more willingness to go. After this is has any of that started to come to fruition and sort of how do you think about that are evolving relative to the uncertainty. We've seen yes. So this is Mike. So I would just say in one word cost I think that way.
And we're trying to win healthcare system or trying to drive clinical standardizations really about getting waste out of the system and reducing overall costs. So that no matter what happens with the federal government you know as healthcare continues to evolve as these large employers are expecting.
Differentiated value from our healthcare standpoint for their employees.
They want it done you know with in a very very high quality, but efficient ways, but I think the simple answer to your question is we're really focused on and leveraging that controlled.
This overall cost and reduce variation, we do have small medium size and large engagements in performance services in consulting and we'd long term believe that being up point solution.
Both then is is not the right long term answer the right long term answer is to bring all that technology big scale clinical and cost transformation and that'll be the differentiation, because we'll have embedded technology and resources to drive us sustainable.
Clinical and cost performance. So we do both today, but clearly our vision is the differentiation of being able to add our technology to consulting which most other consulting companies do not have an ability to do.
So it's an investment, we're making and we're continuing to make that investment and and.
Building for the future.
Okay. That's very helpful context, thanks I'll.
I'll stop there and chat on a follow up if anything thanks.
Thank you.
At this time like to turn the call back over to Susan Devor for any closing remarks.
So thanks, everybody for your time and questions today. Our next quarterly update is currently scheduled for May fit. Thanks, so much.
Ladies and gentlemen. This concludes today's conference call. You may now disconnect everyone have a great day.
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