Q1 2021 Premier Inc Earnings Call
Good afternoon, ladies and gentlemen, welcome to the Premier Inc. fiscal 2021 conference call. At this time, all participants are in a listen only mode.
Later, we will conduct a question and answer session and instructions will follow at that time, if anyone should require assistance. During the conference. Please press star zero on your Touchtone telephone.
I would now like to turn the conference over to your host Ms., Angie Mackay, Vice President of Investor Relations.
Thank you Christian welcome to Premier's fiscal 2021 first quarter conference call. Our speakers. This afternoon, our seasoned devor premieres, Chief Executive Officer, Mike Alkire, President and Craig Mckasson, our chief administrative and financial Officer before we get started I want to remind everyone that cause.
Many of our earnings release and the supplemental slides accompanying this conference call are available in the Investor Relations section of our website at investors Dot Premier Inc. Dot com.
Management's remarks today contain certain forward looking statements and actual results could differ materially from those discussed today. These forward looking statements speak as of today and we undertake no obligation to update them.
Factors that might affect future results are discussed in our filings with the SEC, including our form 10-Q for the fiscal first quarter, which we expect to file soon we encourage you to review these detailed safe harbor and risk factor disclosures.
Please also note that financial results presented today reflect continuing operations. Following the completion of our sale and exit of the specialty pharmacy business on June seven 2019.
Also where appropriate we will refer to adjusted or non-GAAP financial measures to evaluate our business.
Patients of non-GAAP financial measures to GAAP financial measures are included in our earnings release in the appendix of the supplemental slides accompanying this presentation and in our earnings form 8-K, which we expect to furnished to the FCC soon I will now turn the call over to Susan Devor Susan.
Thanks, Andy Good afternoon, everyone and thank you for joining US today. This afternoon, we'll review our fiscal 2021 first quarter results share our perspective on the potential impact of the presidential election on Premier.
And discuss the reasons, we believe were well positioned to execute our strategy provides superior products and services to our members and deliver value to our stockholders.
We're pleased with our first quarter results, which we believe reflects solid execution and the differentiated value that we deliver to our members.
We're delivering these results in a very challenging environment and we continue to play a key role in helping our health care providers navigate the ongoing Cove at 19 pandemic.
Compared with the prior year period, we produced 15% growth in consolidated net revenue.
14% growth in our supply chain services segment net revenue.
And 18% growth in our performance services segment net revenue.
As we expected and previously communicated when we discussed our restructuring and separate amendment and extension of our member owner GPO agreements adjusted EBITDA and adjusted earnings per share declined year over year.
The ongoing impact of the Cove in 19 pandemic is also impacting our year over year profitability.
Craig will provide more details on these topics in his remarks.
We experienced sequential improvement compared with the fiscal 2024th quarter related to the impact of the COVID-19 pandemic on our business but.
But expect some ongoing pressure given the pandemics continuing effect on various parts of the country and our economy.
Given current surge patterns and the uncertainty surrounding the approval distribution and adoption of an effective vaccine it remains difficult for us to predict by exactly how much and for what duration of time, we will continue to be affected.
As a result, it's not possible for us to accurately forecast the full financial impact on our business for the remainder of this fiscal year and as such we are not providing fiscal 2021 guidance at this time.
We will continue to diligently monitor health care utilization patterns current cobot, 19, hot spots and trends resurgence by geography.
Vaccine approval distribution and adoption implications consumer behavior, and the continuing phase reopening or as the case may be renewed closures of businesses and other organizations in various states.
Most importantly, we will also continue to take a leadership role, helping our members navigate this challenging environment assisting them in monitoring and preparing for current and future Cove at 19 resurgence in helping create a more resilient healthcare supply chain in the future.
As we've communicated over the past several months the pandemics impact on our health care provider members has further validated and reinforced our belief in our technology enabled end to end supply chain and enterprise analytics and performance improvement strategies.
Moreover, we believe premier is well positioned irrespective of the outcome of the election.
Regardless of politics, many of the underlying problems of cost quality and safety will remain across healthcare in some respects. These problems have intensified as a result of the financial impact of the COVID-19 pandemic on health care providers.
And both parties will need to contend with the challenges facing the Medicare Trust fund and state budget pressures, resulting primarily from increasing health care spending and relief subsidies.
Employers will also continue to seek solutions for healthcare spending which is growing faster than the cost of other employer paid benefits.
This will fuel the movement to risk based payment models for providers and a focus on the efficient delivery of patient centric services.
Finally, both parties are equally focused on preventing a repeat of the recent supply chain challenges that resulted from an overdependence on critical products coming from a few countries.
Healthcare providers have learned from the pandemic that we need diversified sources for critical products, including expansion of domestic manufacturing capabilities.
An area in which we have been at the forefront.
Pursuing a robust strategy in partnership with our member health systems.
We expect this issue will be prioritized by the next Congress and administration no matter the outcome of Tomorrow's election, which we believe will benefit the investments that we've made.
So we're off to a solid start in fiscal 2021 and focused on executing our strategy to achieve our near and longer term goals.
As we've said previously beginning in fiscal 2022 and subject to the COVID-19 pandemic, we expect to target a multi year compound annual growth rate in the mid to high single digits. We.
We believe the work we've been doing and will continue to do positions us well for the long term now.
Now I will turn the call over to Mike Alkire, our president.
Thank you Susan.
This afternoon Im going to focus on the progress we are making in executing our technology enables end to end supply chain and enterprise analytics and performance improvement strategies as we further position premier for long term sustainable growth.
And our supply chain services segment, we currently capture approximately $67 billion of our existing member spends.
Our longer term goal is to continue to expand the portion of member spend recapture.
Solidifying our position as the leading provider of healthcare supply chain technology and services that will enable us to manage alongside our member health systems total supply chain outcomes.
We are making progress by executing in the following areas.
First.
We are expanding our portfolio and deepening member engagement by expanding our GPL portfolio coverage into categories put strict particularly in areas, including purchase services and clinical in physician preference products continuing to expand our high compliance purchasing programs.
And Colin boasting with our members in additional onshore and nearshore manufacturing to create more resiliency in the healthcare supply chain.
Our co investment and prestigious Maritech is one example of how we are creating more resiliency in the healthcare supply chain and I'm pleased to share that is making good progress.
Prestigious now fully ramped up with our committed members and they have been supplying 100% of our participating members committed spend for the last several months.
We are also actively pursuing other opportunities to co invest in additional critical product categories to advance this school.
Which we believe exemplifies as well as strengthen the deep and long term relationships, we maintain with our member health care providers.
Second.
We continue to focus on technology, enabling all aspects of the healthcare supply chain.
Through our E Commerce front end platform stock.
And our planned technology expansion into E invoicing and payables to provide an automated seamless paperless procurement invoice and payment experience then.
In addition, we are developing and enhancing artificial intelligence enabled clinical analytics that will be integrated into the clinical workflow to help providers conduct value analysis and determine the effectiveness of products and therapies and appropriate resource utilization.
And third co owning or co managing member supply chain outcomes to drive further efficiencies and savings.
Turning to our performance services segment, we believe there's a real need and opportunity for AI, driven technology data and insights with wraparound implementation services to improve quality and reduce total costs.
In addition, we continue to help healthcare providers transition to risk based payment models.
We are also expanding our capabilities to more fully address and coordinate care improvement and standardization in the employer payer and life Sciences markets.
Specifically, we are focused on advancing this business in the following ways.
First improving health care provider member performance utilization, our integrated clinical operational and financial analytics workflow technology and technology enable advisory services, all of which work together to improve quality reduce cost in the health care system in.
Advanced transitions to new payment models.
Our recently announced to your partnership with US Department of Health and Human services office of women's health demonstrates the differentiated technology data analytics capabilities and wraparound advisory services, we provide.
Congress is focusing on the growing national maternal health crisis as women in the US are dying, we're experiencing lifelong complications as a result of their pregnancy at an increasing rate.
Importantly studies find that the vast majority of these deaths and harm are preventable.
In response, the office of women's health provided a sole source contract to premier because of our unique and proven data.
Measurement analytics and performance improvement capabilities.
The goal of this initiative is to conduct data analysis to understand the key drivers of health in equities.
Implement and analyze performance improvement measures that impact outcomes.
Scale identified solutions to at least 200 hospitals across the nation that are treating the most vulnerable populations.
We look forward to partnering with HHS to provide a science based approach that is driven by reliable timely data.
We are also we are excited and honored to bring the expertise capabilities and solutions necessary to help America. The safest place in the world to have a baby.
Second we are further expanding use cases of our data and technology platform, along with our machine learning and natural language processing capabilities to better connect stride providers and life Sciences companies with data backed research leading to real world evidence and advancements inpatient discovery for clinical trials.
For example, we are working to utilize electronic health records or each ours to create a drug trial network leveraging our existing research collaborative with life science companies.
Third we are further expanding contigo health, our direct to employer platform through.
Through expansion of the centers of excellence programs to include additional providers prior authorization capabilities as well as high value networks growth and wraparound network expansion.
With these initiatives and strategies underway. We believe we are well positioned to make further progress in advancing our strategy to achieve our longer term goals.
I will now turn the call over to Craig Mckasson, our chief administrative and financial Officer.
Thanks, Mike I'll begin today with a brief discussion of our fiscal 2021 first quarter results and close with some general thoughts related to our outlook for the remainder of this year and how COVID-19 may continue to impact our businesses in the near term.
For the first quarter of 2021 consolidated net revenue of $346.9 million increased 15% from a year ago supply chain services segment revenue of $253.7 million increased 14% compared with the prior year quarter and per.
Foreman services segment revenue of $93.2 million increased 18% compared with the prior year quarter.
In supply chain services net administrative fees revenue decreased compared with prior year, primarily due to three factors first our amended and extended GPO agreements, which were effective July one 2020.
As we expected the implementation of these agreements reduce net administrative fees revenue by approximately $25 million in the first quarter compared with the year ago first quarter.
Second an estimated decline of approximately $13 million related to a decrease in member purchasing volume in certain categories. As a result of the COVID-19, pandemic, which continued to negatively impact overall health care utilization, including elected procedures and the slowed.
Down the spending in non healthcare related areas and third.
5 million dollar negative impact, resulting from the GAAP required non cash amortization of prepaid contract administrative fees as a result of our prior year acquisition of security Index Sarah.
Products revenue increased 140% from the 2020 fiscal first quarter, driven by $59 million in incremental revenue related to our ongoing efforts to secure PE and other critically needed high demand supplies for our members as a result of that.
COVID-19 pandemic.
In the performance services segment revenue growth was primarily driven by new technology agreements, including approximately $14 million from SaaS based and license agreements and approximately $5 million in incremental revenue from our fiscal fourth quarter 2020 acquisition of health design.
And plus.
With respect to profitability net income was $180.7 million for the quarter compared with $70.9 million last year. This.
The significant increase in net income is a result of the ability to record a deferred tax benefit in the amount of $134 million, which is comprised of a benefit of $118 million attributable to the restructure as previously disclosed and an additional.
$16 million as a result of a release of valuation allowance on deferred tax assets attributable to utilization of net operating losses.
After a GAAP required noncash negative adjustment of $26.7 million to reflect the increase in the redemption value of former limited partners class B common unit ownership net income attributable to stockholders was $1.42 per share.
The adjustment in the first quarter is for the period from July one 2020 through July 31, 2020, as a result of the board of directors being comprised of a majority of independent directors on July 30 Onest.
As a result premier will no longer be required to make this adjustment in the future.
Consolidated adjusted EBITDA of $110.7 million in the first quarter decreased 21% from a year ago, we expected this quarter over quarter decline as a result of the impacts of the amended GPL agreements. The COVID-19 pandemic and the accordion next and Sarah.
Acquisition on net administrative fees revenue.
Supply chain services, adjusted EBITDA of $102.6 million decreased 32% quarter over quarter, primarily driven by the decline in net administrative fees revenue.
In performance services segment, adjusted EBITDA of $37.1 million increased 82% from the prior year quarter, primarily due to revenue growth as well as a decline in ESG in expenses, primarily related to decreased travel and meeting expenses as a result of the COVID-19 pandemic.
Adjusted net income of 70.2 million decreased 18% from a year ago and adjusted earnings per share decreased 16% to 57 cents.
Our effective tax rate of 24%, which we now expect for the remainder of fiscal 2021 was slightly lower than initially anticipated as a result of the release of a valuation allowance on deferred tax assets associated with current year utilization of historical net operating losses.
From a liquidity and balance sheet perspective cash.
Cash flow from operations for the first quarter was $30.8 million compared with $96.1 million for the prior year.
The decrease was primarily driven by lower net administrative fees revenue.
As well as an increase in working capital that was primarily the result of approximately $66 million in inventory purchases for aggregated purchasing of ERP to help our members manage through the pandemic.
Free cash flow for the first quarter was negative $28.4 million compared with $43.5 million for the same period a year ago.
Historically free cash flow is lowest in the first quarter given that our fiscal year ends in June and payment of certain expenses, including annual incentives occur in the first quarter.
The decrease in free cash flow was primarily driven by the same factors that affected cash flow from operations, including the impact of the GPO amendments and the COVID-19 pandemic on net administrative fee revenue.
And the timing of funding of pp inventory as well as from tax receivable agreement payments made to the former limited partners of Premier LP.
On October 22nd 2020 Premiers Board of directors declared a quarterly cash dividend of 19 cents per share payable on December 15th 2020 to stockholders of record as of December one 2020.
Cash and cash equivalents totaled $120.4 million at September 32020, compared with $99.3 million at June 32020.
Our five year $1 billion revolving credit facility had an outstanding balance of $150 million as of September 32020, and we have subsequently repaid 50 million of that balance in October.
As Susan discussed earlier, given the uncertainty related to the COVID-19 pandemic. We're currently unable to accurately estimate the impact of the pandemic on our performance for the remainder of fiscal 2021. Therefore.
Therefore, we are not providing fiscal 2021 annual guidance at this time.
We will continue to assess our ability to do so as we move forward throughout the year.
However, I would like to provide some directional commentary on how we currently expect our business to progress in the short term.
Broadly we expect that one.
While the negative impact of the COVID-19, pandemic lessened compared to the fourth quarter of fiscal 2020, we continue to expect that our GPO net administrative fees revenue, which generates significant EBITDA will continue to be pressured by lower overall health care utilization.
Potential deferral of certain elective procedures and the continued slowdown in purchasing in non health care related areas as a result of the ongoing COVID-19 pandemic.
Second our direct sourcing products revenue, which generates lower margins than our GPO as a result of taking title to the product will continue to benefit from our ongoing efforts to secure critically needed pp and other supplies in high demand for our members.
Based on our current visibility, we expect a meaningful sequential increase of approximately $40 million in our direct sourcing business revenue in the second quarter of fiscal 2021.
After which it could likely depending on the pandemic step back down in the third and fourth quarters of this fiscal year.
Three while we generally expect our performance services technology and consulting businesses may experience, some delayed decision, making related to new engagements and potential delays in timing of completion for existing engagements as a result of the pandemic, we experienced sequential improvement.
During the first quarter and have a more optimistic view regarding revenue growth for performance services in fiscal 2021 than we did a quarter ago.
Fourth with respect to profitability as a result of increasing product costs and the low margin indirect sourcing we do not expect significant incremental benefit to our full year fiscal 2021, adjusted EBITDA and adjusted earnings per share performance as a result.
Most of the significant incremental revenue performance in direct sourcing.
As always we will continue to take a balanced approach between diligently managing 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 co bid environment. Please.
Finally, as Susan highlighted our longer term growth targets subject to the impact of the ongoing COVID-19 pandemic are to deliver a multi year compound annual growth rate in the mid to high single digits for consolidated net revenue adjusted EBITDA and adjusted earnings per share beginning in fiscal two.
2022.
Thank you for your time today now, let me turn the call back over to Susan.
Thanks, Craig we appreciate everyone's participation in our call today and because we are 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.
Ladies and gentlemen, if you have a question at this time. Please press Star then the number one on your Touchtone telephone if your.
Question has been answered all your wish to remove yourself from the queue. Please press the pound key.
Your first question is from Eric Percher from Micron research.
Thank you all for the commentary.
A question for Craig I think you directional commentary glanced off cash flow they didn't address it directly.
Let me maybe ask as you look towards potentially another 40 million elevated in Q2. It is your expectation that most of this working capital Allomap reverses by the year end and as we look to full year cash flow.
Should we be thinking more about fiscal year 19, as the comparable versus some of the onetime items last year.
Sure Eric that's a great question.
Would expect subject to the pandemic as I indicated in my directional commentary that if we see a step back down in the back half of the year as some of that stockpiling and excess demand normalizes that yes, we would see free cash flow stabilize and improve in the back half of the year relative to your commentary should we look to fiscal nine.
Team the only thing that I would remind you is as a result of the amended and extended GPO agreements. We do expect free cash flow as a conversion of adjusted EBITDA to be at a lower percentage more likely in the 40% range on a go forward basis as opposed to where it would have been in fiscal 19 prior to the.
Looking at the amended and extended GPL agreements that we put in place.
Thank you for that and and I guess, the other part of that last year. There was some pp any element as well as the.
Acquisition related rebate.
In fiscal 20, that's correct, we had about $50 million of incremental purchasing of pp in the fourth quarter.
Fiscal 2000, and then that was about $59 million here in the first quarter I indicated we're expecting another incremental 40 million on top of that in the second quarter, and then again subject to.
How the winter months turn out here from a pandemics perspective will dictate whether that we continue to see elevated levels or see that returned back down.
To more normalized historical type levels over time.
Perfect. Thank you.
Thank you. The next question is from Lisa Gill from JP Morgan.
Thanks, very much good afternoon, Mike you mentioned that the women's health initiative with a test.
Is there a way that you can size that for us and was that meaningful to the growth in the quarter for performance services.
Yes, So let me just talk very broadly and then I'll, let Craig answer the financial question. So it's.
It's a contract that we just won so we're not obviously seeing any of the revenue and the reason. It's so important to US is obviously it provides an opportunity for us to bring all of our capabilities from a data technology and services standpoint.
The HHS to really help them get after improving women's health and what that Craig you can answer the question around financial the.
The financial question.
Sure. Thanks leases. So the contract itself is approximately an 8 million dollar government contract over a two year period. So.
Meaningful, but while not overly significant I think it is incredibly important to highlight the social impact that premier can have with our data and analytics on pressing needs that are affecting the health care population across the country as well.
Yes.
If we think about performance services and the strong performance in the quarter. Obviously, that's contracted contribute to that can you. Maybe just talk about is is there a specific area I know and Mike's comments. He also talked about risk bearing entities or is there anything that you would call out and I know, you're not giving guidance going forward, but are these things that.
I anticipate that we'll see as we move through the next several quarters on the performance services side I know, it's much more difficult to call things, especially on the supply chain side I'm, just curious around what you're seeing around trends on the performance surfaces.
So three bags I think drove first quarter growth first of all we had cerebral and enterprise data analytics license deals. So obviously that had strong financial impact we had strong growth across our SaaS technology business, including.
Clinical decision support technology, so thats that stance and wrap around with our quality and safety systems. So that had some really nice growth and then we had incremental revenue contributions from our health design plus acquisition Lisa.
Okay. That's helpful. Thanks.
The next question is from Donald Hooker from Keybanc.
Hi.
Yeah in the GPR business, you called out sort of non health care areas as a percent of the stand that you have there can you can you remind me what that farmers.
Sure. This is craig done or what how to handle that.
Yes, So one thing I think is.
Yep I understand so our non health care component of our group purchasing organization is about 5% of our total GPS So what thats primarily comprised of his things such as colleges and universities K through 12 schools.
Yes.
As far and other types of organizations like that.
Hospitality chains things of that nature, where we actually take the portfolio that we have available to our health care providers that makes sense also in those non health care type environment. So what we did see was a.
With the shutdown in the economy last quarter, a substantial to the tune of almost 70% decline.
In that business and while that's come back maybe a little bit that continues to be very very below historical levels. Given that the economy has not fully opened up and a lot of those areas and you continue to have schools and colleges and universities in a virtual environment and things of that nature.
Okay. That's helpful. And then maybe a follow up to Craig or Susan or whoever.
You guys seem more optimistic on the performance services space I know you had some good data out okay pick a month ago around there.
Population health management collaborative it seemed like you were working with a number of ratios and we're getting good results as they seem to do every year with you guys.
As those programs are heating up again is there is that a driver for you guys is that particular area.
One of the kind of maybe hear hear about that effort that collaborative and maybe.
Maybe a little more detail on the optimism prevent present segment.
Yes, thanks, Don So we have had great success with our ATM and bundled payment collaborative then those member health systems have performed better than the national averages in both and so what I would say, it's a consistent level of of participation in those programs.
Depending on whether the speed of the movement towards value based programs picks back up after an election that that's not really been factored in at.
At this point most of our growth as as Mike and Craig said in performance services.
Really been driven by the technology side of the house and as you will recall, we we did do some pivots to employer direct to employer provider relationships through Contigo health and also in applied Sciences, and we're seeing good growth in applied sciences, as well and so I would say population health continues to.
The a good business for us, but but more of a steady business and not not really where the growth came from in the first quarter.
Okay.
Thank you very much.
The next question is from Joel Anderson from Credit Suisse.
Hi, Good evening, everyone. This is actually Jermaine brown filling in for Solyndra.
So Susan maybe this is for you.
Strong results within the products business, just trying to better understand the sustainability of that into run rate going forward. So if.
If you can can you provide some color on maybe the hospitalization rates that you seem to know the general state of the supply chain, particularly given the potential research in some cases as we head into the winter season.
Yeah, I can tell you what what we know from our working with our members and what we see in some of the data and then Craig and Mike can give you some additional commentary potentially on the impact to direct sourcing.
Yeah, the inpatient volumes generally.
And it varies by geography, but generally they are back to the sort of 90% plus range on an end date inpatient basis, that's been more gradual.
But that but they're about at the 90, 95% range.
We're also seeing for some of our healthcare systems, an increase in severity of the patients that are in the hospital.
Outpatient any our visits are coming back a little bit more slowly they're more like in the 80% range and then the non acute and.
And non health care side.
Craig referred to is slower yet more like the 50 to 70, 75% range again it varies by geography, and I think you know our role in this is to get commitments for from our members for the supplies that they think they're going to need use our direct sourcing vehicle to help them make.
Sure they have the supplies that they need and at the same time you now have all the stuff they need as they come back.
In terms of their inpatient and outpatient volumes I think the uncertainty is you know if we end up having health systems have to slow down or stop elective procedures are going or if the economies or geography.
Shut down more significantly.
Obviously, thats going to affect our both our group purchasing.
Business as well as our direct sourcing business. So Craig I'll turn it to you for any financial comments and Mike anything you want to add.
Yeah, the only additional.
Color that I would provide and I think I addressed this in the remarks I've already had but from a products revenue standpoint, which is our direct sourcing business. We have seen dramatic uptick in PE needs, we've talked about that incremental $59 million in the first quarter, we expect that to step up even further with an incremental approximately four.
80 million above that in the second quarter. The question in terms of further demand beyond that really is dependent upon the pandemic. What we have been seeing is people building up stockpiles of their products and inventory. So that they are not in the same situation that they were in.
Back in the spring.
But to the extent that things were to go negative we could see more sustained.
Overperformance in the direct sourcing part of our business, but as I indicated in my remarks based on current visibility, we would anticipate that that it would be likely to step back down in Q3 and Q4.
Hey, Craig just a couple of additional factor. So I think you all know we regularly survey our members around.
Where they think they have some potential exposure as it relates to Pete PE and we just did this survey last week.
Are those that responded 40% shared that they had a shortage of gloves.
28% said they had shortages in the in 95 areas.
12% said testing swabs and 10% so accounts so what that means to us is we're going to be looking at creative ways through.
To do either forward buys or create other mechanisms to assure that our healthcare systems have the appropriate PPD the care for their patients.
Got it and then one more what they were performing services business very strong margins on how sustainable is that and you.
You know, it's not what are the offsets for the remainder of the year assuming that.
Hello.
Travel expenses zones.
Expenses associated with with meeting in person.
Not materialize.
Sure. This is Craig I'll be happy to address that so what we've generally talked about in our performance services segment is that we.
Generate adjusted EBITDA margins in the mid 30% range typically it was a little bit lower than that in.
Fiscal 20, but we would expect that we will be back in fiscal 21 to sort of that mid thirtys range to your point it was slightly higher in the first quarter and part of that was attributable to the strong technology services component of our growth contributed to the revenue growth in the first quarter, that's obviously going to be at a bit higher margin because.
That doesnt have the labor dependent nature that the advisory services piece has but we do anticipate seeing improved performance and growth in advisory services through the balance of the fiscal year as well. So we would anticipate that mid 30% adjusted EBITDA margin that we've traditionally generated in that business over the full year.
Perfect. Thank you.
[music].
The next question is from Jonathan Yong from Barclays.
Hi, Thanks, just turning back to on the product side again.
I'm just curious on your comment about numbers may be stockpiling I guess, one is that is that is that the case that they are stockpiling and.
I, just holding inventory into how many weeks of inventory due to have at this juncture versus where they were.
Call it in the second quarter.
Susan I can take a first crack at this so it depends on the health system. So many of our health systems hub guidance of trying to get 90 days of inventory depending on what the PE category is.
So they're thinking those are there kind of sort of sort of.
Stockpiles that they need to attain it was literally on with the executive Vice President Chief operating officer of a very large system in Florida today, they want to try to get to 120 days stockpile. He thinks it's going to take them six to nine months to get to that level of stockpile. So I think all that underpins sort of.
Reagan Susan's comments around how we think about the revenue growth associated with products in the next couple of quarters.
Okay.
Yeah, and the only thing I would add is I think generally our health systems think that that could continue for for several more months as we try to get a vaccine out and get everybody vaccinated and different states have different requirements on the healthcare systems to build stockpile, so they're complying with their state requirements.
So anticipating.
No.
Another six months or more of this and want to make sure they have the supplies that they need.
Okay, great and just going back to some of the comments on the shortage on the cloud side, we heard another peer of yours. Today also mentioned that loans are are now kind of in shortage.
I guess it seems like that that you are seeing seeing that issue as well as it as it's been a bit more.
Prominent more recently and how long do you kind of see this persisting. Thanks.
Yes, so the gold markets itself has been slowly building over the last number of months in terms of demand.
So its for the most part if you think about other countries that historically.
I would not have been high Utilizers gloves theyre now in the market to be.
By product, we we know that in the non acute settings, even domestically here.
There is a lot more glove utilization than there was prior to the pandemic. So the.
The way we describe it is that this demand has been building over time.
We've obviously been part of it and we've seen it.
And then we know what's happening from a supply side. There are a certain number of factories that produce those those clubs. There are additional factors that are coming on line.
Over the course of the next couple of quarters, but obviously, we think in the in the short mid term theres going to be a lot of price pressure given that demand as it is exceeding supply.
Great. Thank you.
The next question is from Ryan Daniels from William Blair.
Yes, thanks for taking the questions and all the color thus far Mike I have one for you in discussing some of the strategic.
Growth drivers in the supply chain business, you mentioned co owning or co managing supply chain outcomes to drive further savings can you comment a little bit more detail about what that actually means for the organization to co owner co manage the supply chains that if there is any risk or performance based fees that are included with that thanks.
Thank you I appreciate the question so couple of things what it means to US is that we are bringing all of our technology our.
Our services and our group purchasing function.
That account and really only into supply chain outcome.
And so what that means is obviously, we've been really working on building out the ecommerce platform or the upfront ordering platform to help our health care systems extend pricing into the non acute settings extend their catalog the non Peter acute setting so building out that technology. We then obviously.
We acquired.
Pricer of last year and that was really a focus on getting after purchase services. So.
Creating benchmarks and TPL contracts in the purchase services arena.
And then obviously, you're bringing additional technology and analytics to get after.
Physician and clinical preference item. So the whole goal really is high were bringing our technology and our capabilities to get after all the skin.
I spoke a little bit about the invoicing and and and payables.
We believe we've got a pretty neat neat solution on invoicing that we're just beginning to sort of roll out and that really brings all the invoicing in the one to one centralized area across these very very complex large IDN than its really an efficiency play to help them more efficiently manner.
It's all invoices, it's also an opportunity to.
Managed cash more effectively given that they obviously have the invoicing and payables in one centralized function. So it's the services it's the technology in.
And its wraparound capabilities.
That outcome in some cases, we will.
You know you know.
Go at risk with.
It creates.
Create some performance risk.
Risks deals with some of our healthcare systems.
No two.
Yeah to ensure that we're obviously driving the most amount of results possible.
Oh, Yeah, and Mike. This is Craig the only thing I would add to that Ryan as I think generally where we've steered it's always subject to change but is more of a performance based type engagement, where its were sharing in the savings as opposed to pure risk of guaranteeing a certain outcome and then were at risk for anything above or below or below that but but that could change over time, but.
I think that the intention is much more around.
Sharing in the savings that are achieved as opposed to being truly at risk.
Thank you Craig.
Great makes sense and then one follow up just on Contigo health.
Can you talk a little bit more about the pipeline for that employer interest in the centers of excellence and any other data points there around wrapping in more providers or more capabilities to the high value network that you're.
You are really pushing out there it seems like an interesting time for employers to be looking at something like this to engage their their workforces. Thanks, yeah.
Yes, so solid pipeline of additional employers that were in conversations with it.
Initially where the focus is really to expand those centers of excellence.
So working with those employers and and.
Building out.
Centers of excellence capabilities to support those employee bases of.
The team is been conversations, though as well with various healthcare delivery systems in terms of building out the high value networking and the requirements of participating that from a.
Clinical quality standpoint, and the like so strong pipeline and more to come as the strategy continues to evolve.
And Mike just one add Ryan we actually think the work we're doing in the maternal initiative is also a blueprint for care delivery.
In the employer setting for those employees and best practices and managing complications and.
Hi costs, because with complications and morbidity comes 20% higher costs. So we actually think we can leverage the data technology insights and learnings through contigo.
From all of our maternal activities.
And so I could add one more thing.
Ryan.
One other attribute of contigo that where we're continuing to evolve is all around prior authorization.
So at the point of care, ensuring that the employers are approving the procedures and the the therapies that employees are are obviously going to need.
And so our clinical data a lot of our.
Capabilities from a from a quality.
And our.
Clinical analytics capabilities.
Really are sort of again that that underpinning if you will of prior authorization and that seems to be getting a lot of interest on behalf of the employers.
Okay perfect I appreciate all the color. Thank you.
The next question is from John Ransom from Raymond James.
Hi, I just wanted to ask a question about the long term guidance.
Just given the pace of.
Stance and your core business could you help us bridge the.
Gap between that and your revenue EBITDA and EPS targets.
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Sure. This is Craig I'll be happy to talk about our plan to achieve the mid to high single digit growth longer term beginning in 2022, so on the supply chain side of our business. It's comprised of our GPO as you're aware clearly during the pandemic and with the reset of the amended and extended agreements were not achieving our normal low to mid.
Single digit growth in fiscal 2021, but in beginning in fiscal 2022, we do anticipate if the pandemic has subsided that we will be back to that low to mid single digit growth. The way that we anticipate achieving that is continuing to expand our GPL portfolio.
Further into new categories, we've talked about and Mike mentioned, the $67 billion of spend we're capturing today and we think there is substantially more spend across other categories of spend that are not currently being.
Captured through our GTL and so we plan to do that through a lot of the technology enhancements that Mike talked about further.
Participation in adoption and usage of our high compliance purchasing programs, which had been growing but with the cost pressures that health care systems will face, we think there's more opportunity there the co investing that we're doing in onshore and nearshore manufacturing and being able to pull that through GPL agreements and Gerard.
Business will help drive business growth there as well and then as Mike talked about are with some of our health care providers the ability to co owning co manage it actually have an individual or team that is in there managing the supply chain allows us also to identify and capture more supply chain spend through.
Through the GPL and then we'll have our direct sourcing business as well, which we expect once we get beyond this outsized demand we're experiencing during the pandemic would return back down to sort of the low single digits, 10% type growth that it was experiencing prior to this time period and that will come through further penetration and adoption.
Across the membership and selectively expanding the portfolio into appropriate categories, where it makes sense, so thats, how well get to the mid to high single digit on the supply chain side on the performance services side mid to high single digit growth is anticipated through continuing to leverage our integrated clinical operations.
Financial analytics.
The clinical decision support expansion into the electronic health.
Record and workflow to provide opportunities is really growing significantly and we think that thats going to continue to be a big growth.
Platform and then we've talked quite a bit about our ability to extend.
In those sweet spots that are addressing provider needs, but also in partnership with life Sciences, and employers and payers through prior authorization, our high value network, our direct to employer network that Mike just talked about those areas all provide growth trajectory that will get us to the mid high single digits in that.
Part and when we achieve that type of revenue growth in those businesses, where the margin profiles that we have that will yield the mid to high single digit performance in adjusted EBITDA and adjusted earnings per share.
Great Great and just a couple of follow ups.
On the sourcing side.
If we look out two or three years, while the overall there being any significant movement and onshoring some of the supplies or perhaps made overseas or is that just.
Is that really just not going to happen for a variety of reasons and then the second question just going back to your long term guide why isn't there.
Some operating leverage as ends of the EPS and operating income grow faster than the top line I mean, it seems like they're all kind of projected growth. So right, but you would think of your business there might be some.
Increasing levels of growth as you kind of move down the line.
So let me answer okay quite correct, yes.
Yes, Mike Let me just set the the operating leverage comment real quick and then I'll turn it over to you in terms of domestic manufacturing. So so John I think that the the big driver is the.
Low to mid single digit growth of the GPO, which is most significantly the high Mark highest EBITDA margin business and so it does make it when you look at the overall mix of the business.
More challenging to get to operating leverage we obviously will have from an EPS standpoint, the potential we will see in the future of other shareholder return vehicle side, albeit share repurchases or otherwise that could get us a higher growth rate there, but when you look at the overall mix of the business.
We anticipate that we will continue as I mentioned earlier to have EBITDA margins in the performance services segment in that mid 30% range. We will continue to have advisory wraparound implementation services to augment and leverage the technology and so the combination of the higher margins, where we could get some leverage and technology will be.
Offset somewhat by all of the implementation services that drive the value and ensure the high retention and renewal rates that we get there.
And then there is not a lot of additional operating leverage given the nature of a GPL model.
And so thats why they are comparable for the most part.
And then just from I'll just be brief but from a domestic standpoint.
I do believe longer term.
Those manufacturing products those products that are highly automated to manufacture I guess is a better way to say that.
We do believe there's a high probability that there that they would be produced either domestically or near shore.
Obviously, you're well aware, we made the investment in and then 95 and other face mask producer here in Texas we've.
We've got a couple of other projects that are focused on additional PPD. We also believe that our our country is incredibly exposed as it comes to as it as it relates to generic drugs and.
The active pharmaceutical ingredients of the raw materials that go into the active pharmaceutical ingredients as well as the Excipients that go into the finished goods.
So given that most of those are highly automated processes. We believe the U.S. could potentially compete long term and it just is it just a matter of.
Are we going to have the right level of capital investment and the right levels of partnerships to to actually make those decisions and bring both bring that.
Production back onshore.
Yeah, and the only thing I would add that.
Our our intention is to make minority investments alongside of our member health systems have our member health systems and vast then bring commitment levels with it so that were advanced buying what we know they have committed to purchase so.
It's not a not a terribly capital intensive strategy for premier, but it makes it a highly retentive relationship and it also.
Helps us lessen the dependence on foreign countries for a lot of this PT.
Thank you.
The next question is from evidenced children from BTIG.
Hi, Thank you for taking my question. This one is for Craig.
Product direct sourcing gross margins.
Talked on it throughout the call, but they were less than 2% this quarter and I believe historically that gross margin have been running in the high single digits.
Can you talk a little bit about.
Some of the challenges on sourcing right now what you're seeing because I believe.
The comment from last quarter was after some early pandemic.
No challenges and an incremental cost to get product over we had kind of maybe figured out.
The spread a little bit there.
And I know you had said the margin the revenue there is not really going to drop through for the rest of the year, but maybe help us figure out where between the one Q margin and your historical margin you guys might might trend in the coming quarters. Thank you yeah. So Evan it's a great question. So so I think that the main reason you saw some of that deterioration why we did see.
Some stabilization and other components MPP, albeit such as masks et cetera, where we did see some compression was in the glove market as Mike talked about the ramping demand and gloves. We did see product costs go up significantly for gloves, we actually did implement a price increase along with a lot of other.
Manufacturers in the first quarter, but it wasn't effective at the beginning of the first quarter. So that really did put some pressure on gross margins.
We would anticipate and expect that will.
That margin should improve as we go into the remainder of the fiscal year now that that.
The price increases to ensure that we're covering our costs more appropriately and getting an appropriate margin without any price gouging, which we are now doing is in place for our direct sourcing business, Mike I don't know if there's any other color you wouldn't.
You had a thank you Craig.
Okay. Thank you and my second question and I Hope this isn't a dumb one but the product I'm sorry, the performance services business.
Obviously, I think by my model, the best organic growth and maybe three years there.
Even if I take out AHGP.
But but the commentary was mostly around tech upside and I.
I was always under the impression that a lot of there was a lot less variability in tech and we were primarily thinking about SaaS based components on Premierconnect, but is there is there some more onetime type licensing revenue coming through there that maybe is.
But the pattern to little bit different in that business than him historically used to.
Let me a good question so on.
Sorry, Mike go ahead.
You go.
Evan we have seen and we've talked about this over the past probably I don't know 12 or 18 months.
With our enterprise data analytics someone's when some of our members are actually engaging for all of our solutions. They are now purchasing licenses to get access to that.
And that is different revenue recognition than our historical kind of individuals SaaS based products and so we continued on both we saw growth in both in the first quarter, but we did have as I mentioned some license agreements where there is accelerated revenue recognition under the license approach and that's we've been talking about that for the.
Last few quarters, and so there's a little more lumpiness than true kind of standard SAP space annuity revenue recognition when when we do sell those enterprise data analytics licenses, what Craig I do want to highlight those enterprise data analytics licenses.
Nice part about them from an operational standpoint is we're in the all facets of the healthcare systems.
Analytics and so we like these enterprise wide capabilities because it it really does sort of show all the capabilities of of.
Premier to integrate all these disparate data sets and leverage our stance and capabilities to write those keen insights into the work flow. So we do like these enterprise wide deals as it creates a.
Quite a bit of stickiness for us long term.
Thanks, Steve.
Okay.
The next question is from Stephanie Davis from SVB doing.
Got in the quarter and thank you for taking my question.
He then you you hinted this in an earlier question, but if you look at your performance services segment. It feels like you start to move away from the value based solution and a little bit more into utilization in supply and Buckler management tools.
With that in mind, how do you guys given any thought to potential divestitures SMB assets from your prior peak strategy just given some of the valuations with theme for the small healthtech assets.
Thanks, Stephanie I'm, sorry, I Didnt mean to imply that we are moving away from that I guess was basically articulating that the growth curve in the quarter was smart technology, SaaS and license as as Mike and Craig has talked about and then we've described moving towards adjacent my.
Markets through Contigo, the direct to employer and through applied Sciences Life Sciences had nice growth. There. We continue to believe that the market will move to value based.
Payment models.
We wanted to have diversified revenue streams and growth drivers across multiple areas.
We think it's entirely possible with either.
Republican or Democrat Democratic.
Administration that that the movement to alternative payment models will accelerate and so when there's no. There's no stepping back from that it's really the combination of data technology services.
To help providers move in that direction as well, so I didnt mean to imply that if if I did.
Because we think that's very much a part of the future as well.
Okay understood and I guess in the flip side of that question. Then are there any tech assets that you are looking to add as your strategy does evolve the day.
Well I do think that our capital deployment in the performance services area will continue to be around analytics capabilities claims analytics ambulatory analytics analytics in the population health space as well as direct to employer or life sciences kinds of capabilities.
Prior authorization, which Mike talked about so we have our sort of targeted areas for both organic and inorganic investment in performance services. Then you know Stephanie we continue to have this view that if you link quality and operational financial supply chain cost data element.
You can really help providers improve you can help them assume risk in these new models and you also can take those insights to sweet spot with employers and or payers to end or life Sciences company to work on some common problems so that that's base.
60 strategy, how do we take that infrastructure weve built and all the data and insights we have and use them for a couple of different purposes.
Okay. That's helpful. Thank you guys.
Thank you.
The next question is from Richard close from Canaccord Genuity.
We could close your line is open.
Yeah, congratulations on a good start to the year I'll keep it quick here you talked about the advisory services revenue.
I mean growing throughout the year or is there any specific area on advisory services that you see increased demand coming in the future quarters of this fiscal year. It's.
It's primarily all centers around performance improvement and that really relates to helping our healthcare systems get back to normalcy.
As they are dealing with cobot. So it's it's for the most part all performance improvement.
Well, okay. Thank you and that cost management space and clinical variation states. They all have big cost imperatives because of many of the challenges of cobot, So cost management space and kind of large scale performance improvement to Mike's point.
Okay. Thanks.
Your last question is from Michael Cherny from Bank of America.
Hi, This is Allen in for Mike I guess for Cregger, Mike with a potential stockpiling of PPD can you dig a little deeper on the pricing trends and then is there any scenario where pricing.
Could materially move the needle one way or the other.
Yes, Craig I'll, just take a makeover.
A couple of macro comments that you can get into some detail if you'd like.
So what we're experiencing right now and gloves, obviously is that you know China.
Basically double the cost of gloves, I don't know now six weeks ago.
So obviously and that shift you know sort of exacerbated that that market and the price of closer or continue to go up so.
I would just tell you. The reason for that again is that there was a pretty significant demand supply imbalance and.
There are countries and organisations taking advantage of that.
Is there are there other categories that we have a sense, it's too to Susan's point, it's too early to tell because we we we don't know enough obviously about the virus, but we're keeping an eye.
On things that are going to be supporting vaccine distribution, so think of cold storage and those kinds of things, we're keeping an eye on hype bittermyx needles, and alcohol swabs and those kinds of things, but you know for the most part I.
I would say those are the areas that we have there might be a potential increase in prices.
Susan Craig I'm not sure if you have anything else that.
This is Craig I think the only color I would add and Susan really touched on this earlier as you know our our perspective is as opposed to just going out and trying to procure product from any source and not really having kind of a perspective on cost and therefore, the price of the healthcare systems. The key for US is really working with our members to aggregate.
Commitment in demand so that we can actually manage the amount of product that we need to to procure on their behalf and that helps us in terms of keeping costs down and then as I mentioned earlier, our intent is in no way to ever try and pass excess margin.
You know at the expense of our health care providers and folks that are trying to deliver care across this country. So we'll make margin on our business but.
Not at the extent of raising pricing. So I think what you'll see from US is if theres elevated product costs will have higher prices for a period of time I think as Mike talked about we'll see how that plays out but overtime, we think that'll come back down to normalized levels. It's just going to take some time given the outsized demand that's happened over the past few quarters.
Thank you.
Ladies and gentlemen that concludes our conference call for today. Thank you for your participation and have a wonderful day you may all disconnect.
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