Q4 2020 Premier Inc Earnings Call
After the speakers presentation they'll be a question and answer session.
The question during the session you need to press Star then one on your telephone please be advised the today's conference maybe recorded if you acquire any further assistance. Please press Star then zero.
I would not like they have a comp so what's your favorite today.
Okay, Vice President of Investor Relations. Please go ahead.
Thank you Sarah.
Turning to premieres fiscal 2024th quarter Conference call. Our speakers. This morning, our Susan Debord, Chief Executive Officer, Mike Alkire, President and Craig Mckasson, Chief administrative and financial Officer before we get started I want to remind everyone that copies of our earnings release and the supplemental slides accompanying.
Conference call are available in the Investor Relations section of our web site at Investor stopped Premier Inc. Dot com.
Management's remarks today contain certain forward looking statements and actual results could differ materially from those discussed today.
Forward looking statements speak as of today, and we undertake no obligation to update.
Factors that might affect future results are discussed in our filings with the FCC, including our form 10-K for the fiscal year, which we expect to files to.
We encourage you to review detailed safe Harbor risk factor disclosures. Please also note that financial results presented today reflect continuing operationally following the completion of our sale an exit of the specialty pharmacy business on June 7th 2019.
So where appropriate we will refer to adjusted or non-GAAP financial measures 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.
In our earnings form 8-K, which we expect furnished to the FCC Stan.
I'll now turn the call over to Susan divorce Susan.
Thanks, Andy Good morning, everyone and thank you for joining US today. This morning will review the highlights from our fiscal 2024th quarter and full year performance discuss how premieres responding to the cobot 19 pandemic.
And discuss why we believe we're well positioned to execute our strategy.
Liver value to our stakeholders.
Looking back on fiscal 2020, I'm very pleased with all that we achieved as we continued to evolve our supply chain and enterprise analytics platforms.
We expanded our group purchasing and supply chain programs to respond to the immediate needs of our health care providers during cobot 19 and to continue our progress against our longer term growth strategy.
We invested alongside our members to promote domestic manufacturing capacity for personal protective equipment.
We continue to invest organically in our performance improvement technology and services.
And to expand our reach in adjacent markets.
And we completed three acquisitions during the year.
We also provided shareholder return through the repurchase of 150 million of class a common stock under our stock repurchase program.
And we embarked on and recently completed our corporate restructuring and separately entered into amended and extended long term group purchasing agreements with over 96% of our members.
The level of this overwhelming support by our members demonstrates the strength of our long standing relationships and the value we provide especially in the current environment.
Our fourth quarter and full year financial results were consistent with our expectations and reflect solid execution across our businesses.
Compared with fiscal 2019, we finished the year with 7% growth in net revenues.
A decrease in GAAP net income and increased adjusted EBITDA and earnings per share on both a gap and adjusted basis as a political.
As we had anticipated in its Greg will discuss in more detail in his remarks, our business was affected by the cobot 19 pandemic in the fourth quarter.
And we do expect continued pressure from the pandemic on our business, but it's difficult to predict exactly how much and for what duration of time.
Using our data and technology, we are continuously monitoring healthcare utilization patterns current cobot 19 hotspot potential cobot 19, resurgence by geography, and the phase reopening of state schools and businesses.
There are many variables at play here that make accurate and reliable forecasting extremely difficult in this unprecedented environment.
As a result, it currently is not possible for us to accurately predict what the full impact will be on our business. This fiscal year and therefore, we are not establishing fiscal 2021 guidance at this time.
Greg will address this in more detail in his remarks.
Importantly, though as communicated two weeks ago, beginning in fiscal 2022, we expect to target a multiyear compound annual growth rate in the mid to high single digits for consolidated net revenue adjusted EBITDA and adjusted EPS.
While we expect the pandemic to affect our business in fiscal 2021. It has presented an opportunity for us to further demonstrate our differentiated value and strategic alignment with our member health care providers.
Our G.P.O. contract direct sourcing capabilities forward by programs generic drug shortage program and other non traditional partnerships, we were able to address our participating members historical demand levels and a significant portion of the increased demand for many product cat.
Degrees critical to the operations of our member health systems and providers.
We have played a key leadership role in helping health care providers manage through this challenging environment mitigate the impact of a current and future cobot 19, resurgence and begin taking steps to create a more resilient health care system and supply chain in the future.
As discussed on our third quarter earnings call, we're continuing to partner with I remember health care providers.
To help them, one build confidence to fully resume elective been delayed health care procedures, while at the same time, continuing to predict and care for patients diagnosed with cobot 19.
To prepare for the upcoming normal flu season, as well as potential additional corona virus surges in their communities.
Three discover opportunities for efficiency in both care delivery and infrastructure costs and for improved their market position and financial performance.
The cobot 19 pandemic impact on the U.S. health care system over the past several months further validates.
And reinforces our belief in our technology enabled and and supply chain and enterprise analytics and performance improvement strategies.
In addition to driving automation insights and improvements for providers. We're also continuing to expand reach.
Leveraging our unique capabilities to connect providers to payers employer and life sciences companies to improve clinical outcome and reduce costs.
With our strong market position and significant alignment with our members following their 99% level support for our corporate restructuring.
We believe we are well positioned to further penetrate the supply chain and enterprise analytics market execute on our strategy and deliver value to all our stakeholders over the longer term.
Through the strategic actions, we announced two weeks ago, we believe we simplified our structure in order to provide more stability predictability and transparency of our business.
We have unique and deeply embedded relationships with our members that through recently amended and extended GPL agreements with the vast majority of them demonstrate our members long term commitment to and alignment with our strategy.
We also generate strong and consistent operating cash flow and have a flexible balance sheet that we believe will support our balanced approach to capital deployment, including the payment of a quarterly cash dividends.
As we've said many times before premieres mission is to improve the health of our communities, which are facing complex suicidal challenges today.
In order to improve and transform health care within the diverse communities across our country and to support the success of our members. We need continued diversity of thought cross cultural representation and engagement within our own workforce.
We have been and remain committed to continuing to support a diverse and inclusive culture.
To achieve this we have a well established diversity inclusion and belonging program at Premier.
In fiscal 2020, we further enhanced this program through the implementation of additional initiatives, including additional comprehensive diversity and inclusion training formation of and support for several more employee resource groups and expansion of our open engagement forums.
Before I turn the call over to Mike I want to thank all of our employees and our member health systems and their frontline workers for their continued commitment to and focus on treating patients suffering from the effects of cobot 19 safely resuming elected been delayed procedures and services and innovate.
Moving to more effectively use technology to predict surveil and treat resurgence and disease, while creating a more resilient health care supply chain for the longer term.
Now I'll turn the call over to Mike Alkire, our president.
Thank you Susan I'll start with a few of our operational achievements for fiscal two took 2020.
First we grew our member base during the year through new and expanded relationships with common spirit health.
Virginia Mason Health system, Boston Children's Hospital.
I'd be see you help among others.
We now have an alliance of more than 4100 hospitals and health systems as well as approximately 200000 other providers and organizations.
Sockets, we increased the purchasing ball, you're running for or do you feel contract to more than $67 billion.
Sure.
Administering the value we bring to our long standing member owners that have an average tenure of approximately 21 years, we achieved very high retention rates again in fiscal 2020.
With a 99% retention rate for our group purchasing business at a 95% so institutional renewal rate.
And poor or annual member satisfaction survey showed that our members actually do not you premiers of vendor.
Nearly 90%, indicating that they view us as the strategic partner or an extension of their own organization. In addition, we achieved net promoter score of more than 70%, which is on par with some of the most recognizable high performing companies and the fortune 25.
We believe these accomplishments underscore the strength of our relationships with our members.
I'll now discuss the critical role premieres played to help our health care partners managed through the unprecedented and evolving environment caused by the code that making pandemic.
Although product shortages appear to be less severe than they were in the spring medical surgical supply chain remain strain due to further disease spreads.
The resumption of what could procedures and stockpiling of supplies.
We continue to work diligently on addressing these areas of concern.
Primarily through expanding our products and services portfolio by expediting the contract.
Process for critically needed cobot 19 related products with the addition of 75, new cobot contracts toward Yukio portfolio and bedding over 1100 could central brokers and suppliers.
Identify new had previously untapped onshore near shore in offshore sources of supplies.
Our direct sourcing business.
Greetings exchange that enables health care providers to trade and redistribute excess personal protective equipment among themselves to better address areas that need.
Well, one boasting a domestic manufacturing with our members such as our investment in procedure Maritech, a domestic personal protective equipment manufacturer.
And finally, developing clinical surveillance and supply chain technology, that's kind of anticipate surge has been cobot 19 predict future demand for squad.
With respect to the pharmacy supply chain and the pervasive nature drug shortages.
This is an area of potential risks that needs continuous monitoring.
We continue to address these areas of concern in the following ways.
Monitoring the week, we fill rates for more than 250 drugs necessary for coping 19 specific care and complications as well as for emergency an elective procedures.
Providing access to more than 160 drugs that are on the drug shortage list.
Distributing restaurants and vaccine through our minority owned especially distributor.
Uh huh.
Securing dedicated sources of supply, including safety thought wrote Premier Pro Rx private label program.
And provide gx drug shortage program and through multi source contract.
And finally through continued focus on enabling greater domestic manufacturing of pharmaceuticals.
We will continue to advance our supply chain business beyond traditional GPL services, and then to fully integrated supply chain.
Service partner with the capabilities to co manager a member supply chain outcomes by providing technology and services that spanned the full continuum of their supply purchasing cycle from upfront and ecommerce purchasing platform to a backend invoicing and payment processing capability.
As a trusted partner, we believe we will be able to continue to grow our business as we provide an even more compelling value proposition for a member health care providers through significant cost savings as well as insights that operating efficiencies.
We continue to make progress advancing our enterprise analytics and performance improvement strategy by further enhancing capabilities for health care providers of diversifying to also address new markets.
Contigo Health business is one example of this.
Integration of our recent acquisition of helped design plus a care management third party administrator of the core of nationally recognized centers of excellence program.
This is progressing well.
Through this combination we're continuing to further advance or direct to employer high value care initiative that is focused on improving and standardizing care.
Reducing costs and generating revenue for health system participants.
Contigo Health now offers care management specializing in the development and administration of customer myself benefit solution.
Warm for employer clients and health system partners.
Demonstrating the value we provide the employer through our enhanced can people health strategy, Walmart along or a longtime customer of the centers of excellence program made the strategic decision to extend the relationship I partner with can you help provide high quality value based care for their associates and their associates.
Samples.
We will continue to focus on supporting their employees health food cardiac joints fine and Barry after programs.
We continue to partner with Lowe's, which was the first centers of excellence customer for Contigo Hello.
Hello, This line plus acquisitions to support their associates held through a variety of innovative centers of excellence program.
We also recently engaged self insured schools of California, or Oh, I see a 250000 member organizations to provide their employees.
So who are oncology centers of excellence program.
Before turning the call over to Craig I want to reiterate Susan's comments regarding the importance of diversity and driving our and our members success.
In addition to our diversity and inclusion blogging programs for our our employees.
For the 20 years ago, we established a real bus supplier diversity program.
Reverse suppliers help our members approve the quality of life in the community they serve and create jobs.
Sure our members commitment to helping minority women and better Uno businesses as well as small business enterprise.
Pete ROE and fraud.
Finally, I also want to take or employees and members for all their hard work to help our communities as they navigate the cobot 19 pandemic.
Greatly appreciate the commitment and the meaningful difference, but they have made.
I will now turn the call over Craig Mckasson, our chief administrative and financial Officer.
Thanks, Mike I'll begin today with a brief discussion of our fiscal 2024th quarter results provide some additional thoughts and expectations around the financial impact of our recently announced restructuring and closed with some general thoughts related to our outlook for this year and how cobot 19 might impact.
Our businesses in the near term.
Overall, we successfully finished fiscal 2020, achieving the financial performance, we anticipated and communicated on our last earnings call by exceeding our revenue guidance range and nearly achieving our profitability guidance ranges. Despite the significant impact of the cobot 19 pandemic on our business.
For the fourth fiscal quarter of 2020 consolidated net revenue of 342.8 million increased 8% from a year ago.
Supply chain services segment revenue of 258.4 million increased 14% compared with the prior year quarter.
Net administrative fees revenue decreased 11% quarter over quarter, primarily due to a decline in member purchasing volumes as a result of the cobot 19 pandemic that caused an interruption of elective procedures lower overall utilization.
And the slowdown of alternate site spending and non healthcare related supply chain bargains.
Products revenue increased 88% from the 2019 fiscal fourth quarter, driven by our ongoing efforts to secure personal protective equipment and other high demand supplies for our members as a result of the cobot 19 pandemic.
Turning to performance services revenue of 84.3 million in the fourth quarter decreased 5% from a year ago and was primarily driven by a decreasing consulting engagements and technology pulled purchases as a result of health care providers focusing on issues related to the Coca 19 Pam.
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The decrease was also driven by the planned discontinuation of our former CMS government contract as part of the overall hospital innovation improvement network program that ended on March 31 2020.
Looking at profitability net income was 55.4 million for the quarter compared with 70.2 million last year.
After a GAAP required non cash negative adjustment of 48.4 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 fourth quarter net loss attributable to stockholders was 31 cents per share.
Consolidated adjusted EBITDA of 119.5 million in the fourth quarter decreased 15% from a year ago.
Supply chain services, adjusted EBITDA of 123.2 million decreased 13% quarter over quarter, primarily driven by a decline in net administrative fees revenue as a result of the pandemic as well as incremental expenses associated with our fiscal 2020 acquisitions of med.
Pricer and the assets of security and Nextera.
These declines were partially offset by revenue growth in the products business an increase in earnings related to our minority interest in FFF and a decrease in travel and meeting expenses as a result of the pandemic.
In our performance services segment, adjusted EBITDA of 26.3 million decreased 7% from the prior year quarter, primarily due to lower revenue and continued investments in our Contigo health network.
This was partially offset by a decrease in expenses associated with the aforementioned CMS government contract and a decrease in travel in meeting expenses as a result of the pandemic.
Adjusted fully distributed net income of 71.4 million decreased 17% from year ago, and adjusted fully distributed earnings per share decreased 14% to 58 cents with the decline is attributable to the pandemic.
From a liquidity and balance sheet perspective cash flow from operations for fiscal 2020 was 339.9 million compared with 511.9 million for fiscal 2019.
The decrease was primarily due to the following factors.
First the addition of the prepaid contract administrative fee share of 93.8 million for one time rebates paid by a curiosity to certain of its members has agreed to buy a curiosity prior to entering into the purchase agreement with Premier.
Which was excluded from the purchase price of the security and make Sarah asset acquisition.
Second and related to the pandemic the deployment of approximately $90 million to fund prepayments in the procurement of critically needed personal protective equipment for members and third acquisition related expenses and decrease performance services revenue.
Free cash flow for fiscal 2020 was 266.5 million or approximately 47% of adjusted EBITDA compared with 342.8 million or 61% for fiscal 2019.
The decrease was primarily driven by the same factors that affected cash flow from operations and was partially offset by lower tax distribution payments to limited partners due to a change in ownership.
Our fiscal 2020 full year free cash flow was also impacted due to the effect of the pandemic on our fourth quarter net administrative fees revenue.
And the results of the timing of cash inflows and outflows, resulting from our strategic decision to use operating cash flow to procure necessary PE products in direct sourcing to address our members increased need for these products.
As a result of a kogan related surge in member demand cash flow was affected by the timing when payments were made to purchase products and the subsequent routine cash collection on product sales.
Cash and cash equivalents totaled 99.3 million at June 32020, compared with 141.1 million at June 32019.
We ended the quarter with an outstanding balance of $75 million on our five year 1 billion dollar revolving credit facility and we have subsequently repaid 25 million of that amount.
Following the recent announcement of our corporate restructuring and separately amended and extended GPL agreements I would like to provide some additional clarity around the anticipated cash flow impact of these actions over the next several years.
From an operating perspective as we previously communicated we expect a 100 million to 110 million dollar reduction to net administrative fees revenue in fiscal year 2021, as a result of the amended GPL agreements.
This will be the sole item from our strategic actions to impact our income from operations in fiscal 2021.
We'll also be a corresponding impact to cash flow from operations.
The termination of the tax receivable agreement or TRP, which requires the aggregate payment of approximately 474 billion. We'll continue to be reflected in the financing activities section of our cash flow statement.
As a reminder, we expect to pay less than $11 million this quarter with the balance to be paid in 18 equal quarterly installments, beginning in the quarter ending March 31 2021.
Next the benefit from the recent exchange of class B common units in shares into shares of class a common stock.
Which when combined with all historical exchanges is expected to result in a cumulative 780 million to $830 million in future cash tax savings.
This is expected to be realized and positively impact cash flow from operations by 50 million to 60 million per year over the next 15 years.
The other benefit other restructure related to 100% of operating income now being attributable to premiering is that we expect a positive impact to cash flow from operations.
20 million to 35 million in fiscal 2021 and could have a similar impact over the next several years, depending on the impact of other tax factors.
We will also benefit from simplified income tax reporting that is expected to result in a one time deferred tax benefit of 100 million to $120 million.
This will impact our effective for GAAP tax rate in fiscal 2021, but from a cash impact perspective, the cash tax savings will be spread over a 15 year period and are already included in the 50 to 60 million dollar estimate that I just provided.
To further simplify and aggregate cash impact of all premieres future tax benefits, we expect that our cash tax rate will generally be in the range of 7% to 13% over the next several years.
And we expect to continue to use a tax rate of approximately 26% for purposes of calculating adjusted earnings per share consistent with prior periods.
Finally, I would like to take a moment to share thoughts around capital allocation, given our strong cash flow and flexible balance sheet. We believe we have the ability to continue investing in our business through both organic reinvestment as well as disciplined acquisitions and investments that support our strategic goals.
While also returning capital to our stockholders.
Two weeks ago, we announced that our board of directors recently initiated and declared a quarterly cash dividend up 19 cents per share.
While future dividends will be subject to market conditions and approval by the board our general expectation is to nominally grow the dividend in conjunction with expected business growth in future years.
As Susan discussed earlier, given the uncertainty related to covert 19, we're currently unable to accurately estimate the impact of the pandemic on our performance in fiscal 2021.
Therefore, we are not establishing fiscal 2021 guidance at this time.
We will continue to assess our ability to do so as we move forward throughout the year.
That said I'd like to provide some directional commentary on how we currently expect our business may progress in the short term.
Our GPO net administrative fees revenue, which generates significant EBITDA will continue to be pressured by lower overall healthcare utilization.
The deferral of certain elective procedures and a slowdown in purchasing in non healthcare related areas.
Our performance services technology, and consulting businesses will continue to experience some delayed decision, making related to new engagements and potential delays in timing of completion for existing engagements.
And finally, we will continue to take a balanced approach between diligently managing our expenses in the current environment. While also ensuring that we have the appropriate resources in place to position the company for future growth in a post coded environment.
We will continue to manage through dependent make environment as effectively as we can and as we have indicated we expect to target a multiyear compound annual growth rate in the mid to high single digits for consolidated net revenue adjusted EBITDA and adjusted EPS beginning in fiscal 2022.
Thank you for your time today now, let me turn the call back over to Susan.
Thanks, Craig and we appreciate your participation on the call today, because we're all in different locations. Please address your questions to either Mike Craig or me and we will address them. Accordingly, operator, you may open the call for questions.
Thank you as a reminder to ask a question really need to press Star then one on your telephone to withdraw your question. Please press the pound King.
Our first question comes on the line of Eric Harsher, what's enough on research. Your line is now open.
Thank you I'll start with a question for Mike you talked about meeting historical levels, but not elevated levels of demand for pp can you help us understand from the dynamics with procurement right. Now have you seen your procurement costs go up how much of that are you able to pass along.
To customers that president.
Yeah, So let me just to.
Your question at the highest levels. So what we saw all is obviously very significant surges and the demand so.
Starting with a surgical masks, we saw surges of 305th almost 350% isolation gowns, almost 500% and 95 respirators a 2700%. So there was this obviously and continues to be this incredible.
Demand on the on the supply chain.
And so when that a balanced occurs when you have you know the significant amount of demand versus the amount of supply obviously not only you know the cost of the finished goods goes up but all the goods that you know the raw materials that go into that continue to go up so we it depends by the category, but we've seen a significant cost increases.
Crossed the you know all for the most part all the <unk> categories.
Some of them are beginning to come back down you know just a you know the as the as the demand continues to sort of you know slow down then you'll see prices continue to come down but for the most part.
You know we are when we go and we procure product. We are you know offering that back out to the membership at the prices you know we go try to get the best prices, we can get but obviously, we factored that into how we price products you know to the membership.
Okay. That's helpful and are you, reaching kind of get healthy rates on the majority of those products. When it comes say, giving the hospitals what they need today are we still looking at a gap to meeting demand.
Yeah. So you know I think things are stabilizing there are still categories that you know obviously, we're still struggling we're still getting you know needs around isolation Gal.
You know you're still hearing a issues associated with pipes the dynamics and.
So things that are going to be needed as we're thinking about the vaccine. So we're continuing to build out resiliency and and additional strategies to support bringing those those products online as well.
And it being the ended the fiscal year. They can I ask is there any update on how much of the total business is in non healthcare areas.
Craig sure because.
Yes. This is this is Craig sorry, Mike I'm, sorry, our non health care business represented represents about 5% of our GPO. If you think about areas like colleges and universities other hospitality venues and things of that nature.
But it's about 5% of our of our GPO business today.
Thanks for that Craig.
Thank you.
Thank you. Our next question comes on the line of Ryan Daniels and with William Blair. Your line is not open.
Yeah, Hi, good morning. This is a Jared house in her Ryan Thanks for the questions I'm just actually Craig maybe maybe this is for you I wanted to talk about that's why 22 growth profile of kind of mid to high single digit range. I guess could you talk about maybe just the specific drivers at this point I give you the visibility or.
Comfortability and kind of getting back to that in a more normalized environment. How should we sort of think about that maybe in terms of the split of growth with new customers versus existing customers and are there any investments needed to be made this year to support the acceleration that grows back in a kind of the post pandemic world.
Sure. Thanks appreciate the question so relative to the anticipated kind of longer term growth rates as we look at the some quite chain service inside of our business a once the pandemic subsides. We believe that we will return to the low to mid single digit growth and our group purchasing business.
The majority of that growth consistent with past history will come from our existing membership base and driving additional penetration and the expansion into newer categories in areas of growth such as purchase services, a physician preference areas continued expansion and alternate.
Site.
Facilities et cetera, and so that's sort of the way that won't get after the group purchasing component supply chain services, we always factor in some new business growth, but we've typically talked about 90 plus percent of our growth and the GTL coming from the very large footprint that we already have in place today was 4100 hospice.
Paulson health systems and over 200000 other providers the direct sourcing business. We've obviously seen the outsized growth in the tail end of fiscal 2020 with sort of $50 million of incremental revenue from these forward buys for.
Michael a products, we see that sort of continuing for the first half of fiscal 2021, but once we returned to more normalized levels, we would expect to get back to sort a low double digit growth in direct sourcing as we continue to.
Procure some additional product categories and expand our penetration and use across our membership for direct sourcing. So the combination of those will yield the the mid to high single digit growth on the supply chain services side of our business and then for performance services you know in fiscal 2020.
We did see declines in consulting but continued to have good solid technologies business growth.
With mid single digit growth in that part of the business in fiscal 2020, and so as we look to fiscal 2022, we think that we have reset of the consulting business with its wrap around implementation services tied to the technology business and so we think we'll get back to mid to high single digit growth that will.
Come from expanding our analytics capabilities and sweet.
Both with providers, but then as we've talked about strategically looking at Patterson and new markets, such as working with payers providers employers and providers and life science companies and terms that your question relative to investments, we will continue to make ongoing incremental.
Our investments in our strategic expansion in fiscal 2021, I'm not huge dollar amounts kind of in that five to 10 million dollar range that we've been doing the past couple of years took further our contigo health initiative and our technology enabled supply chain services initiatives above and beyond sort of ongoing run rates.
Okay, great. Yeah. That's a that's helpful color I'll leave it there not back into queue. Thanks.
Thank you. Our next question comes on the line of Jay Leno dressing with credit Suisse. Your line is not open.
Hi, Thanks, everyone.
He must provide a little bit more color on your program that will invest in domestic manufacturing capabilities, how much additional capacity, even though the speech I might it take investment add any color there would be helpful and Douglas planting implementing lipper problems of explodes seem that opportunities for the critical products like ventilators columns testing kits.
Yes, so Mike.
Well the detail.
Yeah. So yeah, just as we think about domestic manufacturing just there's just at the highest level.
Obviously, we want to focus on those areas that are health care providers are going to need you know and future events like a you know a pandemic or a natural natural disaster. So obviously, we made the investment and prestigious Maritech up and it adds millions of units of product or so.
So we're really happy with you know the investment in prestigious Maritech to bring that domestic manufacturing online.
We are going to be continuing to look in other areas of P. P. P. P E for additional domestic manufacturing so think of products like isolation gallons, we think there's a huge opportunity to automate that entire manufacturing process.
And bring those you know those prices long term.
Close to what what you know the prices are for products that come you know either from southeast Asia or other near Shore Places. We're also considering.
You know areas than pharmaceuticals, you know, we have the provide rx pumps or provide gx program.
Which are obviously, where we make investments in domestic manufacturers.
Drugs that are in short supply I can definitely see US you know making additional.
Investments and domestic manufacturers for.
Both the finished goods for pharmaceuticals, as well as the <unk>. So those would be other areas we're thinking about.
And Jay let rod just to add our philosophy here is that if we can make minority investments, meaning not expand you know significant levels of of our capital and we can invest alongside our members which is what we did with prestige America check and then concur.
Currently we can get long term commitments.
For buying the product.
At competitive prices.
That's the philosophy, so we may have.
Some of these in the most critical categories trying to limit the capital out play and maximize the level of long term commitment and have the members.
Right there alongside us so so that's the philosophy.
Okay, and then a quick follow up.
A question head.
Any update you can shed on the health can design plus pitch TB equation, you announced last quarter or any of that east, Texas, what expedience there to flag.
So Susan I'll start your more the welcome to jump and so yeah. We have had some obviously and I mentioned them and my talking points. We've had some nice a reason you know resigning by lows and and Walmart. So we're real happy with you know what's happening there.
You know we were continued to expand into different services.
To support you know the entire can meet Contigo Health initiative, which obviously is our focus to help our health care providers work more closely with employers.
Okay. Thanks.
Thank you.
Thank you. Our next question comes on the line of Donald Hooker with Keybanc. Your line is now open.
Oh, great good morning, everyone.
Had a question on these are due to her question on the products revenue obviously it was up.
So year over year in the June quarter, how can you quantify how much of that maybe was the personal protective equipment and is there anything unusual about the character of that revenue.
As we think going forward in terms of the margins I know the products revenue margin as lower obviously, the MACI fuel margin.
I just was curious if there is any margin implications. We the character that revenue line might have changed significantly in the June quarter.
Sure and Don This is Craig I'll be happy to address that side as I mentioned in my previous response, we had about $50 million little over $50 million of revenue associated with procurement of the critical PE supplies in the fourth quarter above and beyond kind of what our normal experience.
Base would be as we looked at fiscal 2021 again uncertain given the pandemic and how long this will persist but at this time, we're thinking that that that's sort of excess demand as people are building stockpiles and continuing to treat patients et cetera.
It's likely to potentially go on for the first couple of quarters.
So for the Frac from the front half of fiscal 2021.
Relative to the characterization the rest of the revenue. It is similar in margin to our direct sourcing business being low single digit kind of margin.
We were a little bit pressured on margins in the early stages of the pandemic. When there was more of a crisis in terms of getting product over to the United States. So we incurred some additional expense back.
In the tail end of third quarter, and I'd say in the early stages of the fourth quarter with sort of getting product on planes and getting it over here or whatever it took to get it into the states. We've now returned as much more time to normal distribution channels and so we're sort of back to kind of low single digit margins on that business consistent over.
For all with our direct sourcing portfolio overall.
Okay Super Thank you and then from them.
I guess you mentioned there about stockpiling used to be clear any sort of as we think kind of longer term.
Do you suspect there or any changes in terms of how health systems think about inventories and you know it's I guess in the past books have been pretty.
Oriented toward just in time kind of Inventorying, but as we go forward what does your senses. The has in terms of just general strategies buyer members.
Regarding inventory levels over time is there any kind of sustained genes that could come out of all this.
We do we do think there is a sustained change we have providers, who who believe they now need their own 30, or 60 or 90 day stockpiles than I think you know what we've been experiencing is folks building identifying those critical to operations.
<unk> category, we've helped them do that and then identifying the levels of inventory that they need longer term I think they aren't as confident in relying certainly on state or federal.
Stockpiles and so they have moved to their mindsets from just in time to the need for you know two weeks three weeks four weeks supply many of them got down to you know days of supplies and don't ever want to be in that position again, and so I think one once you get through its can.
System with what Craig said.
Building those stockpiles and then it'll be a more normal replenishment of those stockpiles. So we think that's happening and happening maybe more in the first half of the year than the second half of the year, but but definitely there's a shift in mind and mindset.
Thank you.
Thank you. Our next question comes from the line of David Larsen with Baird. Your line is now open.
Hi, congratulations on working through the Pan dimension assisting all your hospital clients Tom through that very challenging time, you guys. Obviously played a key role now so.
Well done and congratulations [laughter] can you, maybe just talk a little bit about the pressure on the supply chain EBITDA margin that we saw and you know what's sort of margin should we expect sort of going forward through fiscal 2001 fiscal 22.
And then did I hear you correctly, there's there's $110 million drag on revenue from GE PEO re contracting efforts going is that all going to be in fiscal 21, and it does that all going to flow through to supply chain EBITDA margin. Thanks.
Sure. This is Craig Mckasson I'll be happy to handle that so with respect to the pressure from the pandemic on our fourth quarter supply chain services revenue and EBITDA margin from the G.P.O.. We did see an approximately 20 million dollar kind of negative impact from that.
Pandemic as a result of the shutdown in the economy and the slow down in elective procedures etcetera. So we saw very significant declines in our food portfolio in our surgical services portfolio and also pretty significant declines in our pharmacy portfolio as a result of the and.
Pack that the pandemic and so that that sort of magnitude impacted our EBITDA margins at our EBITDA in the fourth quarter, we were able to mitigate and offset some of that with the.
A savings we found through its kind of diligently managing.
Resources in hiring the the slowdown and the elimination of traveling meetings in the fourth quarter and we also had very strong performance from our other.
The investment in our specialty distributor FFF, but but.
Not that significant drag on EBITDA as a result come back.
Relative I'll come back to the third.
The I'll come back last I apologize to the comment about ongoing margins because I do want to address as we talked about two weeks ago as part of our corporate restructuring. Yes. There is a 100 to 110 million dollar impact on supply chain services net revenue and adjusted EBITDA in fiscal 2021.
As a result upbeat.
Separately entered into amended and extended GPO agreements.
So we will see that come down by that level in fiscal 2021, and then well beyond the path to the mid to high single digit multiyear compound annual growth rates that we've talked about when we think about the margins in the business for supply chain on a prospective basis, we've historically been in the low to mid 60% adjusts.
Good margin adjusted EBITDA margin range, we would anticipate that will be more in the.
50% range on a prospective basis as a result.
The corporate restructuring and once we've sort of reset and bypassed the the covert pandemic implications.
Thanks very much.
[noise]. Thank you. Our next question comes from the line of Stephens adequate with Barclays. Your line is open.
Great. Thanks, good morning, everyone.
So yeah, just in regards to the elimination of the dual class structure and the new agreements, where the majority of the a member owners were now on class a common stock take US I was curious whether there is still will be some rules in place that will restrict and are governed the ability of the member owners to sell shares or is that going to be more open ended now going.
Forward.
Sure. This is Craig there aren't restrictions on the stock. So it is freely tradable are indications based on discussions as we historically talked about many of our large health <unk> health care systems have an Indian desire and have indicated that they want to continue to have a significant.
Strategic interest and ownership in the business, but they are freely tradable in the past they were freely tradable as you know it was just as they became sorta eligible over the seven your timeline and they went through the exchange process, but at this point those are our shares that they have the ability to transact to say seats.
Okay.
And then yeah. This is a question that probably won't have to be answer for another five to seven years thankfully, but.
Some investors have asked about asked us about the notion that the reset GPO admin fee share from call. It mid 30% arranged in our around 50%.
But that's still perceived by some investors to be somewhat below current market rates less that's a missed characterization.
Some investors are still thinking about my premier still have to go through another albeit smaller GPO b share reset with member owners and another five to seven years I know, it's not quite the simplest greater market racism. Other nuances there may be just to address that question since investors that we kind of bring that up to us. Thanks.
Yeah, I can start and then Craig you can you can fill in some of the some of the other details.
From our perspective.
The value proposition to the health system, and we said this from from the day, we went public almost seven years ago, it's about contract pricing, it's about access to the product it's about savings, it's about technology and analytics.
If you recall back at the IPO time, we had our 30% fee share and then we also had a tax distribution that generated kind of 15% to 16% additional effective fee share. So they were in that mid to high a 40% range tax reform took a significant portion of that away and then the.
Restructuring essentially took the rest of that away and so our view of this is that it's the total value proposition.
Seven years, we've been you know kind of bet that combined.
You know mid 40.
Admin fee share and that we needed to replaced that as we did the restructuring and on a going forward basis.
Total value proposition and five more years, we will have been it essentially 12 13 14 years.
At the administrative fee share economics that we have because we believe all those other.
Components of value are the big numbers I mean, the fee share is a you know in average 2% fee share on the volume purchase and their share of it.
Savings that we're trying to generate our 3%, 5%, 10%, 15% you know depending on the product category and so we believe long term that owning that end to end supply chain and going after all of that span and driving significant savings that the VAT.
You proposition.
And so we haven't changed our view of that.
Okay I appreciate the extra color. Thanks Yep. Thanks.
Thank you. Our next question comes on the line of Sandy Draper with two of Securities. Your line open.
Thank you very much a lot of my questions have been asked and answered. So maybe one quick one for Craig and then a follow up probably for Mike or maybe Susan just want to make sure Craig I. Appreciate the clarification on the 100 110 million of revenue impact in fiscal 2021, just wanted to make sure in the fourth quarter.
The lower admin fees, there was no contractual impact there that was purely on.
The coven impact just want to make sure I'm accurate on that.
That's correct the new GPL contracts are effective July one so fourth quarter, the $20 million drag I talked about was fully due to the coated 19 pandemic and we would expect obviously while procedures elective procedures have started to resume non healthcare is continuing to be impacted alternate sites continuing to be in.
In fact, it so we do see.
Pressure in the.
In fiscal 2021, as we move forward irrespective of the contract amendments as well.
Got it Okay. That's helpful and then for me, Mike or or or maybe Susan.
It's obviously a little bit too early to say, how our potential new customers are reacting to the to the new structure of the business and how you would be contracting that had been fees that maybe rep looking backwards.
How important was the structure that potential to be an owner of the business to bringing on new G.P.O. customers and if it was a really important pitch in terms of getting those customers. How do you. You know is there offset or what do you. What do you sell obviously, you're selling as you pointed out season, the value et cetera.
But is there anything you need to talk around that I'm, just curious as to how big of a selling point that was previously and does that change things going forward. Thank you.
Yes, Thank you and and you know for all of the newly recruited health systems over the last several years they have not come in as as owners.
And so the return on investment that they're looking for is all about saving technology resources, the value proposition and when you've got retention levels of 99%. It. It's all about that value proposition, so I wouldn't say that ownership.
Derive that retention level or the recruiting success that we've had I think the the services the contract portfolio the savings the value proposition drive all that having said that I think for our existing owners.
That that ownership group does provide a lot of strategic insight. It provides a lot of innovation ideas.
And I do think that strategic alignment and the way our.
Our owners do you.
It is consistent with what Mike talked about in his.
Brett around.
Their view of us not at the vendor, but as a strategic partner or actually an extension of themselves.
Just to clarify the newly recruited customers that that we mentioned.
I do not typically come in as owners and that's not the value proposition.
That I think they're buying.
Hey, soon but I am just your top Sandy just a couple of other things you know its intercepting.
You know all part of this value proposition that Susan is describing.
Also includes you know initiatives like the investment in procedure Maritech right. So.
I think this this you know our differentiation is you know not only about it and fully focused on driving costs down but.
We are being very innovative in terms of diversify the supply chain, bringing more domestic manufacturers back into the U.S. that obviously helps the communities that these health care systems, you know provide care for so I also think that that's a big differentiator in a significant part of the of the.
Oh, you proposition that Susan just commented about.
Mike can Susan thanks, so much that's really helpful. Appreciate that.
Thank you.
Thank you on next question comes from the line of John Ransom with Raymond James Your line is now open.
Hey, good morning, just.
A little bit of a question on current patterns of utilization Yeah. Medtronic is out this morning.
Talking about a you know high single digit decline and electives, what would you say that you're seeing right now in terms of utilization.
And this is there any discernible trend that you've seen kind of from beginning of July too late August.
Yeah, you know that's what's so hard about this right, which is it varies by geography, and so you've got hot spots you've got spots that are you noticing a lower growth in cobot term.
Cobot trends and so the challenges it varies a lot by geography, when we survey our members and when we look at utilization data.
In the July and August timeframe, we have we have started to see members talking about being you know 80% to 95% back too.
They're they're elective and utilization rates they are continuing to see some challenges with people you know in ambulatory settings and alternate site settings.
He our settings, but I think that all of them believed they are currently ramping back up to full utilization levels, but they're not there yet.
Back and forth uncertainty in additional surges I think many of them are planning for.
Assumption of all of their procedure volumes plus the normal flu season, plus additional surges of of co bid that is causing them to make sure. They have the PE supplies that they're going to need but it's it's variable right now and that's what makes it so hard to.
To predict the full effect for the year.
But that's kind of because if you look at from Greg.
Or make sure I mean, Susan do you think it's a at this point I mean, there's three dynamics right. So there is supply and if you just look at inpatient beds supply the cobot surge as a month behind US I mean current hospitalizations and like Texas, Florida, Arizona for Cobot are down 50%. So there would appear to be a capacity issue from.
An inpatient standpoint do you think at this point, it's just still shortages of P.P. and supply or do you think it's a patient demand, particularly Medicare folks just afraid to.
Come out.
Yeah, well down what do you think the manufacturers.
I do not think it's the inadequacy of supply most of our health systems with our help through our direct sourcing company and our additional supplier contracts have been building up so that they feel good about the supplies. They have as Mike said, there they have some worries syringes another thing.
Thing, but I don't think that they are not seeing patients because they don't have supplies I think it's just a patient nervousness, it's a patient confidence issue.
And.
I think they're engaging in a lot of marketing and other activities to make sure patients know that their environments are safe to come into and what they tell us is that one people actually come in and experience it and see the level of.
Safety precautions in place then they're completely comfortable but it's just getting and in that getting them back in that door. The first time and we think that's that's causing some of the ramp up.
To be a little bit slower than just fully opening backup and everybody coming back at the historical levels, but it's nice if that's right.
If I could add one other anecdote are too so I will tell you just as recently as within the last week or two.
Susan and Craig and I were both all on calls with executives of large health systems that are quite frankly were even with the down the decline of the virus. They were still protecting you know I see you beds right. So you know there their job is to ensure they've got the you know the access for.
Patients that needed so I.
I I don't think that there was a little bit of you know.
Concern about you know research you know a resurgence and those kinds of things. So <unk> point right I think they're beginning to you know be much more open and you know you know get those elected tried to get those elective procedures back in as soon as possible.
Okay and then just.
Just my other question and.
I I'm not trying to the sounds like a meaner and tougher question that I really [laughter] libraries that if if if I look at a your re cut deal I guess I'm struggling to see a the shareholder side of this a little bit because.
What what's your client Scott was much lower fees and tradable shares. What you got was just an extended term. So the only plug factor to me as maybe your fee structure and this the feedback from the channel maybe your fee structure as a bit above market and just had to bring it to market and this was the deal you could cut while bringing your fee structure back to market, but it.
Other than the tax savings in the longer term it just looks a little unbalanced from a shareholder perspective. So is there is there something else that we're missing and this is because because he you've really got to deals pretty large deals and they both kinda resulted in the same thing where you got some intangible benefits for in exchange for pretty pretty sharply lower fees. So are we at the end of the cycle.
And what are we missing on the other side of this negotiation that may not be a parents as public a analysts.
Yes, So I think you know from our perspective, we're focused on the strategy execution for the long term and having the appropriate dose and simpler structure in order to execute that we think theres been a lot of concern in uncertainty you know kind of overhang relative to our structure and relative to.
Two.
Those longer term member contract relationships. So what we decided to do let's be very proactive about it not wait for those number rather a contract renewals and to have that continuing overhang, we sat down with all of those member owners went through invalidated the strategy got the long term commitment to that we.
Did get tighter contracts with.
Generally know termination for convenience provisions, which which we had any earlier contracts. We also got a 567 year waterfall, we got more predictability of those revenue streams.
We got longer term agreements, we got a simplified structure with the tax benefits, we got rid of the T.R.A. liability, we implemented that dividend and so we think.
A lot of those things are good for all shareholders.
And so on balance that's how we viewed it got that all lined up restructuring done got us.
Muesli, 99%, 96% contracts.
You know significant support for the long term relationship and now that that is all done we can completely and fully focused on future operating performance implementing this strategic initiatives and taking significant.
Uncertainty kind of out of the equation longer term. So so that was our view of and we thought and we continue to think that that's good for all stockholders.
And then it's actually only.
Yeah. The only last thing I would just had quickly on there, which I think is known but we did have a special committee of independent directors that engage their own financial and legal advisors to kind of evaluate the merits of the restructuring and the separate.
Arrangement to amend and extend the GPL agreements and.
But overall that was in the best interest of all shareholders long term.
Great. Thanks, so much.
Thank you.
Thank you I last question comes on the line of Richard close with Canaccord Genuity. Your line is now open.
Great. Thanks for squeezing me in here.
Two part question first.
Was there anything materialize during co bid on the performance services side, where you're seeing.
No significant interest that could drive heightened demand once we exit depend diabetic a pandemic, maybe a specific product or service area to highlight and then the second part for Mike would maybe beyond the pipeline of Contigo has co bid changed.
Pipeline at all and what does it look like.
Yeah. So I'll start and then Mike you can provide a more insights on contigo in performance services you know as we said we're targeting in 2022.
For for that businesses as well mid to high single digit growth I think the areas Richard that continue to experience I'm. Good growth are all the cost management type technologies, So our labor productivity, our ERP our physician operator.
Actions improvement kinds of technologies are also our clinical decision support we have been building and did build during the pandemic technologies to predict and surveil Cove at 19.
Symptoms and also to predict.
Supply demand required for a surge is not only in co bid, but the technology could be for other.
Diseases, So we see.
Several of those technologies as having the growth opportunities that that get us back to that sort of mid to high single digit growth rate and then the wrap around consulting consulting was challenging I'm certainly during a co bid.
But we think that getting back to a more normal level.
Together with the areas of technology that we see growth than.
As what gets us comfortable with that that roadmap for the future growth trends, Mike If you want to add some details on cut on contigo.
Yeah. So just if I could just at a couple of comments on Susan So I just want to she made the comment about this this you know our ability now to truly look.
You know what's happening at the point of care with the symptoms.
And be able to predict whether or not you know patient potentially you know are going to need hospitalization and those kinds of things. So those lessons learned that machine learning coating that occurred as we were sort of building out that application to understand cobot surveillance. You know there are new use cases for that right. So picked up a high cost pace.
You know at the point of care and those kinds of things. So we're really excited that we sort of hard wired and created the right pipes.
That can be used an additional use cases with that technology.
Just to refining point at Susan's comment around the wraparound services as our health care system start to get back to normal operations, they're going to need to figure out ways. The do it much more profitable. So we've got an offering that you know basically helping our health care systems get back to help and the end the and the technology and the services actually help them do that.
As far as Contigo Health pipeline, you know looks you know continues to look strong we're really keeping an eye obviously.
You know what's happening in the various markets with the resurgence and those kinds of things and can these procedures get done and the impact on elective procedures, but.
So far we believe we're going to still be on track to achieve our budgets for the year and again, we're really excited about you know some of the recent wins, we had with both Walmart and with wells.
Okay. Thank you.
Thank you.
Thanks Richard.
Thank you. This concludes today's question and answer session I would now like to kind of all back to Susan divorced for closing remarks.
Thanks, everyone for joining today, we look forward to continuing to talk with you in the coming weeks and months.
So much.
Ladies and gentlemen. This concludes today's conference call. Thank you for your participation you may now disconnect everyone have a great though.
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