Q2 2023 Premier Inc Earnings Call
Good morning, and welcome to Premier's fiscal 2023 second quarter earnings Conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing Star then zero on your telephone keypad.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to Angie Mccabe Vice President.
Investor Relations. Please go ahead.
Thank you welcome to Premier's fiscal 2023 second quarter Conference call. Our speakers. This morning are Mike Alkire, Premier's, President and CEO and Greg May Catherine our chief administrative and financial officer before we get started I want to remind everyone that our earnings release and the supplemental slides accompanying this conference call.
<unk> are available in the investors section of our website at investors stopped 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 most recent Form 10-K, and our Form 10-Q for the quarter, which we expect to file soon we encourage you to review these detailed safe Harbor and risk factor disclosures also where appropriate we will refer to adjusted or other non-GAAP financial measure.
Such as free cash flow to evaluate our business reconciliations of non-GAAP financial measures to GAAP financial measures are included in our earnings release and the appendix of the supplemental slides accompanying this presentation and in our earnings form 8-K, which we expect to furnish to the SEC I will now turn the call.
Over to Mike <unk>, Mike, Thanks, Angie and good morning, everyone and thank you for joining us for a short time ago, We reported our second quarter results, which I am pleased to share were largely in line with our expectations.
We also announced that we are implementing a targeted cost savings plan and revising our fiscal 2023 segment revenue and adjusted earnings per share guidance.
First I'm incredibly proud of our team for continuing to execute the four pillars of our growth strategy.
Strong revenue growth in our performance services segment was driven by the execution of enterprise license agreements this quarter and growth in our consulting services and certain of our adjacent market businesses.
Importantly, we believe growth in enterprise license agreements demonstrates our strong partnerships with our members.
These multiyear agreements to expand the use of our technology and consulting services platform to help members deliver higher quality more cost effective care to their patients.
Even in a challenging time for health systems are members and other customers continue to see our offerings as long term solutions for their needs.
We're also making progress on strengthening our existing capabilities and expanding into adjacent markets in the second quarter, we acquired TRP and assets for <unk> health, our direct to employer business.
These new assets, which we have re branded as configured that include our new out of network wrap that currently offers access to more than 900000 providers across four 1 million U S locations.
We believe this offering will positively impact employer and provider sponsored health plans bottom lines as well as health plan members out of pocket costs when they access out of network health care services.
Performance in our supply chain services segment reflect quarter over fourth quarter growth in net administrative fee revenue, primarily due to growth in the non acute or as we call. It the continuum of care group purchasing business.
Also as we anticipated direct sourcing products revenue grew sequentially from the first quarter of fiscal 2023.
Primarily driven by expansion of our product portfolio, and a more normalized demand and pricing environment.
While our second quarter performance generally reflects continued execution of our multiyear growth strategy, we as well as our members and other customers are operating in a challenging and uncertain macro environment.
Inflation rising interest rates labor challenges and ongoing supply chain constraints continued to affect our members and other customers.
For example, within our performance services segment re Metro R. E N voicing and payables platform is experiencing the same market dynamics impacting other financial technology companies.
While these headwinds are driving slower than expected adoption of room metrics. We believe this environment further magnifies the need for invoice and payment automation and dependable supply chain financing for health care providers and suppliers in the long term.
We are in the process of realigning, our re metro business and cost structure for operational efficiencies in the near term. So include hosting accelerated solution designed sessions with suppliers.
And providers to further strengthen our go forward strategy.
We remain confident regarding <unk> potential as an important growth engine for premier.
As we announced this morning, we proactively implemented targeted but meaningful cost savings measures.
This includes the reduction of non labor expense as well as elimination of certain open staffing positions and a modest reduction in our workforce.
Let me be very clear, we are deeply committed to our mission to improve the health of communities, we do not take decisions that affect our employees lately.
These were difficult decisions to make but they were also necessary to align our cost structure with the current environment, while providing flexibility to support our members and other customers and improving the delivery and cost of care.
Looking ahead, we remain focused on executing our multi lever growth strategy and reinforcing our competitive position, we will continue to appropriately and proactively invest in opportunities that optimize our business for sustainable long term growth, while maintaining financial discipline and flexibility.
Importantly, we believe we are well positioned for longer term success through the combination of our deep member relationships and our comprehensive and scalable technology and services platform powered by comprehensive health care data to deliver meaningful solutions to our members in the market.
I will now turn the call over to Craig Mckesson for a more detailed discussion of our second quarter operational and financial performance, our cost savings plan and revised fiscal 2023 financial guidance great.
Thanks, Mike for the second quarter of 2023, and as compared with the same period a year ago. Our results were generally in line with our expectations with total net revenue of $359 6 million a decrease of 5% supply chain services segment revenue of $235 five.
A decrease of 13% and performance services segment revenue of $124 1 million an increase of 15%.
In our supply chain services segment net administrative fees revenue increased 3% over the prior year period, primarily driven by growth in the non acute group purchasing business, our acute GPO business continued to be affected by a lower level of overall utilization of our members' health care services in the quarter.
<unk>, which in turn impacts the supplies they purchase.
Within our acute and non acute GPO portfolio. The food category produced another quarter of strong growth due to volume growth and the impact of inflation, which was partially offset by the continued normalization of demand and pricing across some categories, including pharmacy and person.
LOL protective equipment or PPE relative to the prior year period.
Also demand and pricing for these categories have continued to decline from the high levels earlier in the pandemic.
As we have communicated on past earnings calls, we continue to tightly manage price increases on behalf of our health care provider members.
Although inflationary price increases have impacted certain contracts across the portfolio, particularly products reliant on petroleum and labor for their production.
These increases have been mitigated by price decreases in other areas, including pharmacy M. P. P.
Notably through our disciplined negotiations, we implemented new pharmacy portfolio pricing this fiscal year, which is yielding lower pricing for certain products compared with the prior year period.
As a result, we did not experience a material impact from inflation on our overall business in the quarter.
As we expected products revenue declined from the second quarter of last year, which included higher prices and incremental purchases of PPE and other high demand supply it's related to the pandemic the decline from the prior year was primarily due to two factors one the state of the pandemic.
Paired with the previous year and two excess market supply.
And remember inventory levels of certain products, including PPE, which contributed to lower demand and pricing.
We continue to see ongoing demand for other products and are expanding our product portfolio and driving increased member adoption to mitigate these market conditions.
In our performance services segment revenue increased 15% compared with last year's second quarter. This was primarily due to the timing of revenue associated with enterprise license agreements executed in the current year quarter compared with the prior year quarter as well as growth in our consulting.
And certain of our adjacent market businesses, including contributions from our acquisition of TRP and key assets in October 2022.
As Mike indicated remit truck, which is still in its early stages is not ramping up at the pace. We originally anticipated and we are revising our fiscal 2023 expectations for this business we.
We are reducing head count and associated costs in this business to better align with our current performance expectations and are in the process of adjusting our operational plan for <unk> moving forward.
We remain confident in the longer term prospects for this business and the need that these capabilities address for our members and suppliers.
With respect to our adjacent market businesses on a combined basis. We currently expect revenue to grow 30% to 40% this fiscal year over fiscal 2022, including the benefit from the contribution of our TRP and asset acquisition.
Turning to profitability.
GAAP net income was $64 4 million for the quarter.
Adjusted EBITDA decreased slightly compared with the prior year period to $145 million, primarily due to two factors.
First supply chain services, adjusted EBITDA decreased compared with the second quarter of fiscal 2022.
Profitability of our direct sourcing business improved sequentially from the fiscal 2023 first quarter, but declined from the prior year quarter as we expected due to the decrease in product revenue driven by lower demand and pricing for PPE and higher logistics costs in the current year period.
Logistics costs have begun to normalize and we expect to see that benefit margins in the second half of this fiscal year.
Growth in net administrative fees revenue mitigated some of the decline indirect sourcing profitability.
Our quarter over quarter increase in performance services adjusted EBITDA, partially offset the decline in supply chain services adjusted EBITDA.
This was primarily due to an increase in performance services revenue, which was partially offset by higher selling general and administrative expenses driven by additional head count to support growth in certain of our adjacent market businesses.
Compared with the year ago quarter, adjusted net income decreased 5% and adjusted earnings per share decreased slightly to 72.
Primarily as a result of the same items that impacted adjusted EBITDA as well as the increase in the effective tax rate in the current year.
These items were partially offset by the impact of the completion of our fiscal 2022 stock repurchase program on the current year period shares outstanding.
From a liquidity and balance sheet perspective cash flow from operations for the six months ended December 31, 2022 of $196 7 million was flat compared with the prior year.
Free cash flow for the second quarter was $109 6 million compared with $107 1 million for the same period a year ago. The increase was primarily due to lower purchases of property and equipment compared with the prior year period due to the timing of purchases.
For fiscal 2023, we continue to expect free cash flow of approximately 45% to 55% of adjusted EBITDA.
Cash and cash equivalents totaled $94 6 million as of December 31, 2022, compared with $86 1 million as of June 32022, we ended the quarter with an outstanding balance of $300 million on our five year $1 billion revolving credit facility, which was renewed.
Through December 2027 during the second quarter, we subsequently repaid $30 million in January .
With respect to capital deployment, we continue to take a considered and balanced approach, especially given rising interest rates, we remain committed to investing in organic growth targeting acquisitions to strengthen or complement our existing capabilities and differentiate our offerings in the marketplace.
And returning capital to stockholders through our quarterly dividend and periodic share repurchases we.
We have historically executed share repurchase programs on an annual basis and why we do not currently have one in place we will continue to assess whether and when that would be inappropriate use of capital.
During the first six months of fiscal 2023, we paid quarterly cash dividends to stockholders totaling $50 2 million.
Recently, our board of directors declared a dividend of 21 cents per share payable on March 15, 2023 to stockholders of record as of March 1st.
Turning now to our cost savings plan. This initiative is designed to position the business to weather the near term challenges many of our providers and supplier partners are facing.
Through this plan, we are lowering our expenses, including non labor costs, eliminating more than 70 open positions and reducing our workforce by approximately 100 employees or nearly 4% of our total workforce.
These actions are expected to produce pretax cost savings of approximately $18 million to $20 million in fiscal 2023.
And $35 million to $40 million on an annual run rate basis, we.
We expect pre tax cash restructuring charges of approximately 8 million primarily related to our workforce reduction which is expected to be substantially completed in February 2023, and expensed in the third quarter of fiscal 2023.
Now turning to our revised fiscal 2023 outlook and guidance.
Based on our performance in the first half of this fiscal year, our current visibility into the macro environment and our expectations for the remainder of the year, we are making the following updates to our fiscal 2023 guidance ranges.
We are lowering supply chain services net revenue to a range of $930 million to $980 million.
This is comprised of the following components.
GPO net administrative fees revenue of $600 million to $620 million as utilization has not yet you know the universally returned to the level. We originally anticipated and members continue to destock excess inventory built up as a result of the pandemic.
Direct sourcing products revenue of $285 million to $315 million, reflecting excess supply in the market and remember inventory levels as I mentioned earlier.
And a slower ramp in new domestic manufacturing capabilities than we initially planned due to manufacturing factory delays as.
As we've previously communicated we are collaborating with many of our members to stand up domestic manufacturing of certain PPE products as part of our efforts to create a more resilient health care supply chain.
We are raising performance services' net revenue to a range of $450 million to $470 million, reflecting our performance in the second quarter and expected contributions from configure net partially offset by lower revenue contributions from her mitra than we originally expected.
Our guidance for total net revenue remains unchanged for fiscal 2023.
Our guidance range for adjusted EBITDA also remains unchanged at $510 million to $530 million and incorporates certain onetime restructuring expenses associated with our cost savings plan.
As we look to the remainder of this fiscal year, we remain optimistic and are taking proactive steps to position the business to weather current macro headwinds, but given the uncertainty in the environment and how it might evolve there could be some additional pressure on profitability.
Lastly, we are lowering our adjusted earnings per share guidance to a range of $2 53.
To $2 65.
Reflecting the following items.
Higher depreciation expense than we originally contemplated in our initial guidance primarily as a result of certain fiscal 2023 planned depreciation not being calculated correctly within our forecast system.
This issue has been corrected.
Higher interest expense due to rising interest rates and increased utilization of the company's revolving credit facility to fund its acquisition of TRP and assets.
These items are expected to be partially offset by a tax benefit as we now expect our effective tax rate to be at the low end of our 26% to 27% guidance range.
From a cadence perspective, we currently expect the following for the remainder of this fiscal year.
In our GPO business we.
We expect net administrative fees revenue to be relatively flat in the third quarter compared with the prior year quarter, reflecting the current health care utilization environment and ongoing decrease in levels of member excess inventory.
In our direct sourcing products business in the third quarter, we anticipate a sequential increase from the second quarter and revenue. However, we expect revenue to be lower in the third quarter compared with the prior year period, which benefited from the impact of increased demand in pricing due to the pandemic.
In our performance services business, we expect third quarter revenue to decline sequentially from the second quarter due to the timing of certain enterprise license engagements, but we generally expect this segment to produce strong year over year growth in the third quarter.
From a profitability perspective for the third quarter of fiscal 2023, we expect adjusted EBITDA to grow in the low to mid single digit range over the prior year period as I mentioned earlier, our third quarter results will reflect certain restructuring expenses related to our cost savings plan. So we expect adjusted EBITDA to increase.
<unk> sequentially from the third to fourth quarter of this fiscal year.
In closing.
While we had to implement difficult actions that impacted some of our teammates to help ensure our cost structure is more aligned with the current economic cycle. Our business is resilient and we remain well positioned in the market.
We generate significant stable cash flows and our financial position remains strong.
As we look ahead, we are focused on executing our strategy to deliver long term growth and value creation for our stockholders and other stakeholders.
Thank you for your time today, we'll now open the call up for questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
If you were using a speakerphone please pick up your handset before pressing the keys.
But any time your question has been addressed and you would like to withdraw. Your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
The first question comes from Eric Percher with Nephron Research. Please go ahead.
Thank you, Mike and Craig.
Maybe ill start.
There you are were ending and specifically the commentary around additional pressure on profitability as possible can you give us some view of.
What risks you have contemplated in second half guidance and where those additional pressures might come from.
Sure Eric This is Craig I'll be happy to take that.
I think as we've talked about clearly utilization of the health care systems is a key area that run out to see how that continues to recover I will tell you you certainly it's regional in nature. Some health systems are seeing rebalanced, but a lot of health systems and other providers continue to not see utilization coming back at the pace that we would have any.
Dissipated so to the.
That it doesn't rebound at the levels, we've contemplated that would be a headwind if we see a more robust recovery to utilization as we head into 2023 that.
That would be a tailwind to kind of help us perform better.
The other issue is around this destocking of inventory that has been taking place. We do think that has been normalizing down and getting back to where people are purchasing patterns are going to start to be more normalized but to the extent that that were to vary one way or the other that would be a headwind or a tailwind.
Clearly macroeconomic issues around where the overall economy goes.
You can have implications one way or the other we have factored in sort of where we believe best case to be on those three factors.
With what we see moving forward and in the discussions with our health care providers.
But to the extent that those move that would have an implication and then as we've historically talked about in performance services again very proud of the results. We achieved in the second quarter with the enterprise license agreements those do have variability at times are difficult to predict but we have a good pipeline and feel good about the ability to do.
That in the second half of the year, but that could be a headwind or a tailwind depending on weather and when those agreements come through in the last six months of the year.
Items like Destocking I know last quarter, we talked a lot about that.
It feels like there's visibility into these items just impaired in 2023 because of the comparisons.
Do you feel like you have better or worst visibility now versus where you were three or six months ago.
So Eric this is Mike. So you know just to give you a bit of a backdrop on this so if you looked at pre pandemic. Many of the health care providers sort of maintain this just in time inventory level for PPE and other supplies and then obviously post the pandemic or.
All of our members and and others build up these pretty significant strategic stockpiles are 30, 60 90 days in some cases.
Even a 120 days so.
And then if you kind of look at where we are right now and given the macro environment.
Many of our providers are taking a closer look at these inventory levels.
So trying to sort of optimize or figure out what is the right size for carrying inventory levels going forward.
So you know just in general to answer your question very specifically, we expect a sort of a short term trend of this balance that our health systems are trying to go.
Trying to understand to occur over the next couple of quarters.
And then we believe it'll turn back into a much more normalized environment.
Thank you.
The next question comes from Michael Cherny with Bank of America.
Please go ahead.
Good morning, and thanks for taking the question maybe.
Maybe.
Just first one if I can relative to the change in performance services guidance is there any way to bifurcate out the reduction or be truck near term outlook versus what was the contribution from.
The new tier P N assets in terms of the core versus non core organic growth in that segment.
Sure. Michael This is Craig. Thanks for the question, we don't typically get into breaking out individual components, but as I did talk about on the call our adjacent market businesses, which again as a reminder include our <unk> health business. The <unk> business, but then also our clinical decision support and a light and applied Sciences.
Our life Sciences business.
With the inclusion of a configure net now that as I said in my prepared remarks will grow 30% to 40% year over year. We had originally expected that to grow 30% to 40% prior to the acquisition of configure net if we were to remove configure net from that we would still be growing just a couple of points below the low end of that range.
So outside of <unk> Mitra the other three aspects of our business. Both continue go health organically and with configure net now applied Sciences and clinical decision support are all growing at levels that would get us to the range that we originally discussed it is just for metro which has not seen the uptake and in particular due to the rollout.
Of Ramirez, CFO , which was the supply chain financing aspect of that business that with the rising interest rates and the cost of capital we're not seeing the uptake on so really we're seeing not more.
More flat or not a lot of growth in the remitter aspect, which is being made up by the performance in the other parts of our adjacent markets business and then the contributions from configured and then Michael I do have to add from a pre metro standpoint, while we are seeing some sort of these short term headwinds I will tell you I still believe in.
This incredible need in the market for our health systems to automate their invoicing and payment systems.
We actually conducted an accelerated solution design about which for us is sort of this.
Strategy creation event with a number of really critical suppliers very very significant suppliers, but I will tell you to a person all of them said that we need to have a technology like this in the industry.
So we're still incredibly bullish.
On the on the program going forward going forward. We're also going to create a an accelerated solutions design a bit for the members to really really drive out what that value opportunity is for them as well. So we've defined it what the value props are for the suppliers and again, we're going to have an <unk>.
Accelerated solution design event for our members over the next couple of weeks to really define that value prop for the members as well.
Got it and thinking about the net administrative fees I don't think it's overly shocking to see that the continuum of care utilization is performing better than acute care, given where we've seen.
Your customers' reports other various different health care participants as you think about the strategic evolution of that part of the business.
Is there any pivots, you need to do or changes investments pull back to you to make within the core G. P. O to service what appears to be for all intents and purposes, a long term transition towards more and more care happening outside the traditional four walls of the hospital.
Sure. Thanks for the question Michael So first of all we are actually realigning resources, obviously to that non acute area.
So before I give you a bit more detail on that let me just say the core capability of the GPO actually services acute and non acute so we have one capability that services. Both and then we have additional value that we create in the non acute space.
Leveraging technology and other things to get after things like purchase services and some of the smaller expense items. So very specific to your question.
The investments that we're going to continue to make to get after that non acute space, primarily revolve around technology. So technology to help these non acute facilities to ordering.
Technology that helps them understand what's happening with their purchase services spend.
And those kinds of things. So we have been realigning given that the growth is in that non acute and youre going to see us continue to make investments in those areas Yeah and Michael This is Craig the only quick thing I would add to that is as part of that technology evolution that Mike's describing obviously the nature of the non acute customer base.
As more disparate and so are focusing through technology on ensuring roster attachments are correct price activations are happening onto the contract portfolio.
That part of the business is a little easier in a more centralized acute function and so we do have efforts and initiatives to do that and then I would remind you that the non acute GPO in and of itself has grown over the past four to five years from about 30% of our GPO portfolio up to 40%. So it is definitely a bigger area.
You have growth in an area of focus as we continue to move forward and one other comment I should've made I'm not sure that tied it back to re Metro. This is why we Mitra is so important right because in these non acute areas, it's going to be really critical that we understand what's happening from an invoice all invoices.
And <unk> will be that solution for that non acute market.
Understood. Thanks, so much thank you.
The next question comes from Stephanie Davis with SBB Securities. Please go ahead.
Hey, guys. Thank you for taking my question.
There's a lot of moving pieces in the quarter. So I was hoping we could look through the timing of license sales over the past two quarters and from a services business.
The normalization.
And the supply chain side and kind of talk to some of the underlying growth in your new initiatives and what's been better or worse than expected.
Sure I'll start and then Mike can add some color so relative to performance services extremely pleased with the second quarter performance and what we saw from enterprise license agreement execution standpoint.
As you'll recall last quarter, we had indicated that we'd had a license or two that had not come in that we'd originally anticipated and then we had actually said that one of those had come in sort of post quarter close when we announced our earnings.
This demonstrates that that in fact did occur and then we had strong performance through the remainder of the quarter.
Actually hitting highest levels of enterprise license that we've had in terms of performance for the quarter.
So very pleased with that as we look at the other parts of our business our clinical decision support very successful in the quarter <unk> continuing to do what it needs to do ahead of plan for the quarter and on a year to date basis. The life Sciences business growing extremely well in terms of the work that we're doing with life Sciences.
Organizations to move them forward again, where we didn't see performance, where we expected is room metra and so that was below the expectations and the reasons for our commentary about revising that plan.
That's sort of.
And the last piece of performance services. We also had a very strong quarter in our advisory services business.
We're continuing to see.
Growth above and at expectations for managed services, where we're actually helping health care systems provide service oversight of their it applications and other other things from an advisory standpoint, and we're also seeing good performance in our collaborative still so that's performance services on the supply chain side of the <unk>.
Business the normalization.
As we talked about in the call. We continue to expect to see direct sourcing in particular come down this fiscal year, but begin to grow sequentially. We saw that in this quarter. We will continue to see that sequentially through the balance of the fiscal year, but we won't see year over year growth until we get to the fourth quarter, because we did have higher.
Demand and pricing in the prior year compared to what we're experiencing in the current year and then relative to the GPO part of the business.
It really is part and parcel tied to utilization in the excess inventory levels that we've seen as we as Mike discussed we do think that inventory is getting back down toward normalized levels, but there may be a little bit of a tail on that still that could impact sort of the.
The level of growth that we see in the back half of the year slightly.
They underperformed in San Francisco, and it's not just beneficial timing.
Paul over from last quarter, but actually better enterprise sales.
How do we reconcile the weaker hospital macro versus that kind of a re prioritization how about these projects.
Yeah. So.
I think you were asking some of the smaller health systems, It's interesting Stephanie I think.
What youre going to see going.
Going forward is that the smaller health systems are going to need the same levels of technology and efficiencies as the big ones right if not more.
So we have been creating and designing technology enterprise license surfaces.
To really reduce the number of point solutions that all of these health systems are dealing with and you know pretty much have one sort of overarching enterprise.
Analytics strategy. So we believe obviously it will.
Create the most amount of value.
For those health systems, regardless of their larger small and then of course Stephen.
Stephanie where I think we are pretty we believe we have a pretty significant differentiation is having that wrap around services capability to really drive performance improvement.
Okay very helpful. Thanks, guys.
The next question comes from Steven Valiquette with Barclays. Please go ahead.
Stephen you might be muted.
Mr. Valiquette your line is open.
Okay, we'll move along then to the next questioner.
The next questioner is Jessica <unk> with Piper Sandler.
Please go ahead.
Hi, good morning, Thanks for taking the question.
I was hoping just when you talk about utilization related pressure on acute care purchasing can you just help us understand maybe what categories of spend you're seeing pressure in is it mostly manifesting in consumables or are you seeing a capital purchasing delays as well and then if it is in fact capital related do you just have any of those.
Sure Hi, Barry.
Yeah, Thanks, Jeff Let me take a.
A quick stab at this so.
Overall utilization if you know and this is going back to the end of our first quarter.
We have like a 90 day lag on some of this information, but we.
We saw a decrease in the acute spend by about two 4% and then we saw an increase.
In that quarter of three 1% so that decrease not increase I'm sorry acute was decreased to four and then non acute was increased or has that decreased $3. One okay. So so.
Both of those.
Areas highlights the fact that obviously.
That are the core basic buying of the health system. So think med surge and those kinds of things are still under a lot of pressure, where we're seeing increases obviously as the food is coming back a lot quicker than.
And then had originally been.
The food is coming back a lot quicker or the food is coming back at a better rate.
Post pandemic.
So the only thing I would add to that just because I think and again I'm going to say what I repeat what I said earlier in terms of it does vary. So you will hear some health care organizations that are seeing strong utilization. It does depend on the markets that they're in but broadly overall the entire footprint, we're not seeing overall utilization come back at the levels that we thought it would.
Is in some part elective procedures not being there. Some of this is actually dependent on labor. We continue to hear from our health care providers that they are challenged in terms of getting full staffing back to where they needed it to be to be able to provide everything that they need and want to provide.
And relative to your question on capital I don't know that we have a conclusive kind of response, sometimes capital because of the timing lag, but broadly I would say that we have seen some pause in capital equipment purchases or from a GPO standpoint for us that would actually have if they're delaying or have already delay.
The administrative fees would be in the future because we get paid at the point in time when that capital equipment is put into service in the health care institution.
Yes that makes sense and then just my quick. Thank you I appreciate that and then my quick follow up would be on.
Can you just remind us what percent of performance services revenue or what product, we should think about it recurring or reoccurring revenue versus license. Thank.
Thanks again for the question yes.
So across our entire ports Port performance services segment revenue about 80 plus percent is non license based type revenue.
Great. Thank you.
The next question comes from Richard close with.
Canaccord Genuity. Please go ahead.
Yeah. Thanks for the thanks for the questions. Craig I was wondering if you could just walk us through.
The depreciation expense and what we should be thinking about that and what what the change was and then.
Just on the interest expense that you called out and the higher rates.
I guess I'm, a little surprised that you were surprised on that.
From the original guidance, so just walk us through those two points if you could.
Thank you for the question Richard So relative to depreciation as I indicated in my comments. We Unfortunately had an issue with our forecasting system that was not calculating planned depreciation on future assets at such point in time that they would be placed into service in the system. So as you know we developed internally developed.
Software, we have a roadmap of when those will be placed into service and so as we got into this fiscal year and particularly in the second quarter, we realized depreciation was coming in higher than we had thought and anticipated in our planning model and identified this system issue and our forecast system and so we've rectified that we now have.
A reconciliation processes and things in place to make sure that does not occur anymore, but that did result in depreciation in our actuals being higher than we had initially contemplated and believed at the time that we established guidance back in August .
That's really the primary issue associated with depreciation.
Minor related element accelerating a little bit of depreciation as we had a couple of smaller assets that we accelerated the useful lives onto given sort of.
The use of those in the marketplace, which is just giving us more depreciation than we'd originally planned as well. So those two items are really what drove the increase in depreciation expense versus what was contemplated certainly disappointed we had a system issue didn't didn't discovered at the time, but we have rectified that and put processes in place to make sure that does not occur.
Again in the future relative to the interest expense as a reminder, when we established guidance back in August we did not have the TRP in acquisition closed. So we didn't have the level of capital on the credit facility that we do now.
At the time of our first quarter call in November we were still in the process of renewing our credit facility and didn't want to get premature in terms of updating and understanding where that was ultimately going to come out and at that time, not having identified the depreciation.
The challenge that we're now facing the interest expense actually would've kept us within our initially planned guidance range, but the combination of those actually did create the requirement for us to have to adjust guidance and so that's the reason for the two line items in the adjustment to our adjusted earnings per share guidance.
Okay. Thank you.
The next question comes from Eric Coldwell with Baird.
Please go ahead.
Thanks, very much I have perhaps three just clarifications housekeeping stuff.
First Craig.
In your early prepared or.
Discussion on the Q&A you were talking about headwinds in tailwind.
As you look out through the year at the end of that you said something to the extent of we have factored in the best case.
It would seem to me you would want to factor in the Middle case and guide yes.
Was that a wording issue I apologize, Eric if I didn't say it correctly I meant to say our best estimation not best case, So yes, we.
We certainly did not factor in a best case into our expectations, we factored into our <unk>.
First evaluation based on the macro environment conditions, and what we're hearing from our health care systems today Yep.
I assume that was the case, but wanted to make sure it was clear.
And then another clarification or just a reiteration perhaps.
Thank you said, if you exclude the new acquisition TRP and configure net.
That adjacent markets growth within performance services would have only been a couple of points below the lower end of the original 30% to 40% growth range did I hear that correctly that that is correct. Okay. So.
I know the theme of perimeter is important but the magnitude of the impact therefore, not not huge in dollar terms.
And.
Then the last one.
The pre tax restructuring charges.
Coming in three Q was part of your discussion of <unk> profitability, the inclusion of those charges and non-GAAP numbers.
I E will you know is this going to be.
Taken out in gap or is this going to those charges going to actually the $8 million going to impact EBITDA in the third quarter on a.
Consensus basis, yes. Thank you for asking we are absorbing the $8 million restructuring charge in our adjusted EBITDA performance, we will not be adding that back. So that's why we were indicating that that's going to impact third quarter profitability.
It's not an add back to adjusted EBITDA Okay.
That's it for me thank you.
The next question.
Question comes from Jack Wallace with Guggenheim. Please go ahead.
Yes, thanks for taking my questions.
You've got one on room Mitra.
Just so I'm clear it seems like some of these slower pick up.
And that business was related to.
Part of the value prop.
Related to the.
Lansing portion of D. A.
The business and.
So I'm just stepping back and thinking all right you've got a product or service that will help reduce.
Cost reduce friction in the payments reduced some of the labor burden it seems like it's a.
A very great product market fit in today's macro site.
So I guess my question is are there other yeah.
Points of friction that maybe.
Causing a slower rollout of the product whether it's information implementation timelines any kind of upfront payments are something that would cause the customer base. The pause on a decision. There you know if they were not where it should not go through with the.
The financing option. Thank you yeah. So this is Mike so virtually all of the.
Concern or the lack of performance was the CFO of that cash flow optimizer.
And as Craig said, it's primarily.
Really well it's related to a couple of things one interest obviously in the market, but also just the market in general.
But secondly, what I'll continue to say is.
The back side of this the invoicing part of this is something thats, absolutely going to be needed.
And the health care systems.
It actually helps them centralized invoicing.
Continue to say as health care moves from the acute to the non acute.
It's going to be really important that they centralize all this invoicing across all of these disparate.
Areas, where they're providing care and this solution will actually do that.
So it obviously will help reduce labor costs in terms of managing invoices, but just as importantly provide them insights as to what's being invoiced in those facilities. So.
Like I said earlier, we're incredibly still positive on this.
This opportunity and as I said, we had a.
Number of our suppliers together a couple of weeks ago, and there was a lot of excitement there.
I imagine when we get the providers together, we will see the same level of excitement.
Got you that's helpful and then on the GPO.
Yes, two questions here one do you think your your.
Feeling the impact of some of the reimbursement issues.
Play providers in the back half of the calendar year, and maybe even into the first quarter. Just the payers are delaying some payments and if there's a related to that do you feel like there's potentially even lower levels of inventory supplies.
Yeah.
Particularly in the inpatient.
Your customers just as a yes.
Cfos, they're managing cash flow.
So with the <unk>.
What side of that being is there or do you feel like there is a potential for a snapback.
Faster glide path out of this.
<unk>.
Hum.
I hope that you have in the third quarter guidance. Thank you yeah, so as far as payers slow paying no thats not typically that's not something that will have the level of impact in terms of our business.
And that are for the most part, especially as it relates to the GPO, it's pretty much driven by utilization rates.
As it relates to <unk>.
Your other question.
<unk>.
I think as I said from an inventory standpoint, they'll continue to bleed this inventory out.
At some point, obviously in the next quarter or two youre going to start to see more of an uptick but.
But I think that the Cfos, who are really trying to find that optimized level of inventory to ensure that they have enough product, but obviously, they don't have a high level of expense carrying that product.
Got you that's helpful. Thank you so much thank you Chuck.
And our last question will come from Kevin Caliendo with UBS.
Please go ahead.
Thanks, and thanks for sneaking me in.
I guess to follow up on that if you think about the issues in the supply chain have you delineated at all between the impact from lower utilization versus the impact from inventory reductions and our manufacturing.
Hughes.
Yes.
First of all.
It's tough for us to delineate in that.
The pressures that our health system feel in terms of utilizing inventory is all based upon exploration right. So they're going to try to.
Use that product rightfully, so they're going to try to use that product obviously before it expires. So we know there is a ton of that in the market is as as.
As you would expect having said that on utilization in general is so geographic we have a number of our health systems that actually are starting to see volumes come back to normal. So volumes that obviously are that are important to especially to create.
Growth in the in the GPO admin fees of those elective procedures and so we are starting to see growth in certain markets.
Of where thats actually occurring.
But we're not seeing it in other markets. So it's really hard for us to delineate.
Given that there's so much difference between just utilization patterns, it's really hard for us to delineate.
The difference between whats happening from a utilization standpoint, and what's happening from an inventory management standpoint, and the only the only other point I would highlight Kevin with the focus of today's conversation and the question is really focused on the member inventory levels, but as we also articulated there is and does continue to be excess supply in the market. There was so much <unk>.
<unk> done to try and anticipate and prepare for where they thought.
Demand might be needed because of the shortages. We were seeing an example, I would give you is the state of New York had bought so much inventory that they actually continue to give away some inventory to healthcare providers in New York versus New York providers, having to buy it and so that excess supply issue is also sort of pushing.
Through the channel.
Which needs to and we think it's going to get there over the next quarter or so as we've talked about but thats another dynamic and so when you have all three of those it's hard to kind of prescriptive.
Prescript ably say X is attributable to this why is attributable to that Zee is attributable to that.
And presumably that excess supply, mostly PP&E or is it other stuff as well <unk>, yes, yes.
So are you seeing anything with.
Your customers are they moving down are they doing more private label being more on formulary are they doing any narrow sourcing anything like that.
Yeah as you would expect so our committed programs have continued to grow.
Our surpass program has.
It's I don't know.
We're seeing it.
Probably about an eight or eight or 9% growth in folks that are interested in surpass and then similar levels of people that have <unk>.
Taken advantage of our assigned drive programs. So those committed programs are picking up just as you would expect given the financial pressures that these health systems are are undertaking in all of them would tell you they'd much rather figure out ways to standardized product as opposed to reduce labor.
You talked about.
About pricing discipline and your openness to your suppliers to look to pass through price can you talk about where you mentioned certain raw material prices and our labor cost can you talk about where you're allowing higher prices into your formulary versus maybe where some of your customer.
I might also be allowing certain products to go through with the higher prices like what you accept as a higher price. Some of your hospitals have the option to also buy and are you seeing any differences there.
In terms of what they're what they're willing to what they're willing to pay up for.
Yes.
No no no. Good question. So just as a quick reminder, as you think about anything any any decision from a sourcing standpoint that happens here, it's primarily happening in one of our sourcing committees, which is made up.
Entirely of our health care system executive so.
When we get a price increase.
Or somebody that wants to do a price increase that goes by that committee.
That committee makes the decision as to whether or not theyre going to agree to that and there is a number of factors that they weigh.
In terms of determining whether or not to allow that.
This increase on the obviously profitability at the suppliers is important.
The second is how healthy is the market if they don't allow for a price increase and that supplier does not provide that product or are we going to create a monopoly or duopoly or whatever so they put all of those sort of ideas.
<unk>.
Their decision process.
And then that really determines whether they take a price increase but for the most part any increase that.
We take is based upon our member input. So I don't there's not a difference as to whether or not premier. It takes one versus the members because we are very very aligned in those areas.
That's actually really helpful. If I can get one last one in.
We've all seen and read how shipping costs and some of the big Big <unk>.
Inflationary pressures that were hurting.
Supply chain in 2020 in 2020, one those have meaningfully down I'm. Just wondering as you see that or are you changing or is it creating more opportunity to source for yourself more effectively is that something that's happening now or is that something that might happen in the future and how would that impact the business for you.
So it is but we're always it's a great question, but we always have an eye towards.
Another event like this so obviously, we wanted to take advantage of interest and any synergies that are happening from a logistics standpoint, and make sure that that value gets obviously driven into the contracts and then our health systems are paying less for products, having said that we want to make sure that we are building a more resilient.
At the end of the supply chain.
So that if there is ever a huge logistical challenge in the future we have the ability to pull a lever that has more near shore onshore capabilities. So we are going to continue to build out that resilient model. So even though today, we're seeing the logistical costs come down we want to make sure we have.
The REIT optionality in the event that cost significantly go up in the future.
This concludes our question and answer session and Premier's fiscal 2023 second quarter earnings Conference call. Thank you for attending today's presentation. You may now disconnect.
Yeah.
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