Q1 2024 Premier Inc Earnings Call
Good morning, and welcome to Premier's fiscal 'twenty 'twenty four first quarter conference.
Conference call all participants will be in listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions. That's a question you May press Star then one on your Touchtone phone to withdraw from the question queue. Please press Star then two please.
Please note. This event is being recorded I would now like to turn the call over to Ben Krasinski Senior director of Investor Relations. Please go ahead. Thank you and welcome to Premier's fiscal 'twenty 'twenty four first quarter conference call. Our speakers. This morning are Mike Al Khair, Premier's, President and CEO.
Craig Mcafee, our chief administrative and financial Officer.
Before we get started I want to remind everyone that our earnings release and the supplemental presentation accompanying this call are available in the investors section of our website at.
Investors Dot Premier Inc. Dot com.
Please be advised that managements remarks today contain certain forward looking statements such as statements regarding our strategy plans prospects expectations and future performance and.
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 S. E T, 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.
<unk> in our earnings release and in the appendix of the supplemental presentation accompanying this call.
Information on our non-GAAP financial measures will also be included in our Form 10-Q for the quarter and our earnings form 8-K, both of which we expect to furnish to the SEC Dan I.
I will now turn the call over to Mike <unk>.
Good morning, and thank you for joining US we are pleased to be with you today to discuss our fiscal 'twenty 'twenty four first quarter results.
And provide an update on progress in advancing our strategy to technology enabled better.
Barter health care.
Our first quarter results reflect disciplined execution and actively managing our business as.
As a result, we performed better than anticipated in terms of profitability.
At the same time, we were slightly below our expectations for consolidated and segment net revenue, which Craig will discuss later.
First let me address our ongoing strategic review process, our board and management team continue to work with outside advisers to evaluate potential actions.
As part of this assessment, we previously announced the sale of our non health care G. P O operations for approximately $800 million in cash.
Subject to certain post closing purchase price adjustments.
Unlocked value for our shareholders.
As we continue to be thoughtful and diligent in our evaluation of additional opportunities I wanted to emphasize that we do have a sense of urgency and reaching a conclusion to our process.
We remain very focused on ensuring this process is not a distraction for our employees and their ability to continue executing our strategies and delivering value to our members and other customers.
I'm incredibly proud of our team's agility and adaptability, which have become defining characteristics of our culture and company.
Premier our strength is our people they are core to the success and growth of our business. We are incredibly honored to recently be named one of the best companies to work for in 'twenty, two 'twenty, three and 'twenty 'twenty four by U S News and World report.
Our people and the resilience of our business reinforce our role as a trusted partner for our members and other customers.
It also gives us confidence in our long term positioning and ability to enable providers to safely reduce costs and improve outcomes through our technology enabled performance improvement platform.
Our members continue to grapple with financial recovery and normal normalization in part due to continued workforce challenges and shortages, we believe our role to help them plan for the future as.
Has never been more important menu.
Many providers are expressing increased interest in our shared services and co management models.
These models can help alleviate workforce pressures and reduce overall costs within their systems.
That's pressure to reduce costs and improve quality continues many health care providers turn to premier to help with market differentiation.
Which is why we were pleased to recently release together with Fortune magazine, the 100 top hospitals and 15 top health systems of 2023.
Made possible by our acquisition of this established credible program. These reports are serving as an entry point to have strategic discussions with new health systems about their performance and how premier technology and services can help drive performance improvement.
Premier believes that artificial intelligence the machine learning have a unique and important role to play in health care.
We are excited to be at the forefront of this movement given our years of experience in this space.
With our robust data assets and ability to co develop AI solutions alongside our members. The end users that these technologies, we are differentiated from others in the market.
We are committed to identifying additional innovation catalyst to enable use cases to incubate grow and scale.
Premier believes that AI can transform health care and spur innovation.
To drive successful implementation of our future I'm excited about our recent leadership promotions those being Leigh Anderson to the Chief operating officer role Andy.
Andy Brillo to the Chief commercial officer role.
And Bruce Ratcliff, our senior Vice President of supply chain services.
These promotions position our team to move forward with our one premier growth mindset.
This includes continuing to execute with precision on our strategies and continued innovation around the capabilities that our members and other customers will need to be successful in the future.
In summary, we remain focused on executing our strategy by partnering with our members and other customers to deliver innovative scalable solutions.
We will continue to help them navigate the challenges of the current environment in the short term.
Position that to provide lower cost higher quality health care over the long term.
We believe our trusted relationships with members and other customers are a key component and the foundation of our business and position us for continued growth and long term value creation for our stakeholders.
Thank you and I will now turn the call over to Craig for a discussion of our operational and financial performance.
Thanks, Mike for the first quarter of fiscal 2024, and as compared with the prior year period. Our results were total net revenue of $318 8 million an increase of 2%.
Performance services segment revenue of $108 million, an increase of 15% and supply chain services segment revenue of $210 8 million a decrease of 4%.
In our performance services segment revenue increased 15% compared with the prior year period, primarily due to the following factors.
And continued growth in certain of our adjacent market businesses on a combined basis, our adjacent market businesses, including revenue contributions from our T. R. P. N asset acquisition in October of fiscal 2023 grew over 29% in the fiscal first quarter compared to the prior year period.
We remain excited about these emerging businesses and continue to leverage artificial intelligence, including natural language processing machine learning and EMR embedded clinical decision support for several use cases to include one.
Putting in clinical documentation capabilities to help streamline coding workflow for providers, which typically translates a higher quality care and reduce costs.
Two the continued evolution of our automated prior authorization capabilities, which we believe is a meaningful opportunity to address an unmet market need.
And three working with our life Sciences partners to use AI to more easily identify patients as candidates for clinical trials.
And our supply chain services segment net administrative fees revenue decreased 1% from the prior year period, driven by a decline in the non acute or continuum of care group purchasing program due to lower than anticipated remember purchasing in certain categories, which was partially offset by a slight in.
Kris and year over year acute care purchasing.
As we anticipated and previously discussed during prior quarters. The overall group purchasing business was impacted by an increase in aggregate blended administrative fee share to the mid 50% level in the first quarter.
In our direct sourcing business, we continue to experience the impact of excess market supply and members and other customers inventory levels, which contributed to lower demand and pricing in the current year period, resulting in a 14% decline in products revenue. We continue to believe it may take a couple of additional.
<unk> quarters until pricing and demand fully normalized.
Turning to profitability GAAP net income was $42 4 million for the quarter.
Adjusted EBITDA increased 5% from the prior year period due to the following factors.
First an increase in performance services adjusted EBITDA, mainly due to the increase in revenue, partially offset by higher cost of sales for related revenues as.
As well as an increase in expenses, primarily due to investments in certain of our adjacent markets businesses.
And second an increase in supply chain services, adjusted EBITDA, which was mainly due to a higher profit margin and our direct sourcing business compared to the prior year period.
By lower logistics and product costs, partially offset by an increase in expenses in support of our GPO and supply chain co management businesses.
Compared with the prior year period, adjusted net income and adjusted earnings per share each increased 15% driven by adjusted EBITDA.
An increase in interest income as well as a decrease in depreciation and amortization expense, partially offset by the expected increase in our non-GAAP estimated effective income tax rate from 26% to 27%.
[laughter].
From a liquidity and balance sheet perspective.
Cash flow from operations for the first quarter of $81 9 million in.
Increased from $74 8 million in the prior year period, driven by an increase in cash receipts as a result of higher revenue and collections in the current period.
And a decrease in fiscal 2023 performance related compensation payments made during the first quarter compared to the amounts paid in the prior year period.
These increases in current your operating cash flow were partially offset by a one time dividend received from our minority investment in the prior year period.
Free cash flow for the first quarter of $35 9 million increased from $31 5 million in the prior year period, primarily due to the same factors that impacted cash flow from operations, partially offset by an increase in purchases of property and equipment.
As a reminder, free cash flow is typically lowest in the first quarter since our fiscal year ends in June and payment of certain expenses, including annual performance related compensation occurs in the first quarter.
Yeah.
Cash and cash equivalents totaled $453 3 million as of September 32023, compared with $89 8 million as of June 32023 the.
The increase in cash and cash equivalents was primarily due to proceeds from the previously announced sale of the company's non health care GPO operations we.
We used a portion of these proceeds to pay down our five year $1 billion revolving credit facility and we ended the quarter with no outstanding balance.
With respect to the remaining cash proceeds we currently plan to maintain this cash on our balance sheet, while we complete our evaluation of strategic alternatives. However, we continue to evaluate the highest return opportunities for eventual use of the proceeds which may include reinvestment in the business.
And or the return of capital to stockholders via share repurchase.
During the first quarter, we paid quarterly cash dividends to stockholders totaling $25 8 million.
Recently, our board of directors declared a dividend of 21 cents per share payable on December 15, 2023 to stockholders of record as of December 1st.
As discussed last quarter, given our board and the management team's ongoing evaluation of potential strategic alternatives, we are not providing our formal fiscal 2020 for guidance at this time.
That said I did want to reinforce some directional commentary for the remainder of this year.
In our GPO business given market dynamics, we continue to expect an increase in the aggregate blended fee share in our G. P O. The mid to high 50% range. We anticipate this may result in a mid single digit decrease in net administrative fees revenue in fiscal 2024.
In our direct sourcing business, given the ongoing impact of excess market supply and certain member excess inventory levels. We now expect growth in products revenue to be relatively flat in fiscal 2024.
In our performance services segment, we continue to expect over 20% revenue growth in our adjacent markets businesses collectively which will contribute to overall segment revenue growth of mid to high single digits for the full year.
As a reminder, in the second quarter of fiscal 2023, we had a very strong quarter for enterprise license agreements, depending on the timing of deals this year compared to the prior year period, it could impact year over year revenue and profitability growth comparisons in our fiscal second quarter.
From a profitability perspective, I would like to remind you of a few considerations that we expect to impact our results this fiscal year.
One the impact of the anticipated decline in net administrative fees revenue.
Two we implemented a cost savings plan and had lower performance incentive achievement in fiscal 2020 three.
While a portion of the cost savings continue to benefit us in fiscal 2024, we are investing in certain of our higher growth areas to position. The overall business for a long term sustainable growth and value creation in.
In addition, we currently expect performance based achievement to return to more normalized levels.
Three we are no longer including equity earnings from our minority investments and our non-GAAP profitability measures.
Considering these factors we would generally expect our consolidated adjusted EBITDA margin to be in the low 30% range in fiscal 2024.
In summary, we continue to execute on our strategy generates significant free cash flow and maintain a flexible balance sheet with significant cash on hand, and no balance on our credit facility.
Looking forward, we believe our business has a strong foundation and we will continue to evaluate high return opportunities to further support long term sustainable growth and return of value to our stockholders. We appreciate your time today and we'll now open up the call for questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
At this time, we'll pause momentarily to assemble our roster.
Our first question comes from Eric Percher from Nephron Research. Please go ahead.
Thank you.
Let me start with the direct sourcing commentary Craig Hi, can you tell us if this represents.
A material change in your outlook for the year and particularly the comment around pricing levels are you seeing pricing in the market today that is below what you would consider a reasonable margin and what is your thought on achieving stability there.
Sure. Thanks for the question I wouldn't say, it's a material shift in the outlook I think when we talked last quarter I said, we expected sort of nominal growth in and now we're seeing is relatively flat. So I don't think it's a significant change in our expectations for the business I just think the level.
Supply in the marketplace given excess capacity that was manufactured and then the continuing bleed out of certain members inventory levels is taking a little bit longer than we originally contemplated and anticipated would occur relative to pricing. What I would say is that we have seen pricing continue to normalize.
Come down I would say overall generally pricing, particularly I'll say for gloves, which is one of the major categories.
Back now at normalized pre pandemic levels, but in certain cases, there is excess supply where they are that there is an opportunity for people to try and move product that even discounted pricing.
So sort of pre pandemic level levels, although that's getting through the channel relatively quickly.
And is there any change in the nuance relative to stock at existing customers kind of working its way through versus stock available on the market.
Good clarifying question, what I would say is relative to stock. It members we are.
Really are beginning to see ordering patterns return to more historical levels. The only exception I would say is in the case of certain members gallons continue to be something that they had really procured excess amounts of gallons.
But broadly I would say.
Dynamic now would be more around certain excess capacity in the market primarily around clubs.
Alright, thank you.
The next question comes from Jessica <unk> from Piper Sandler. Please go ahead.
Hi, guys. Thanks for taking my question I wanted to quickly follow up on Eric's question can you just clarify how some of the direct sourcing products are purchased or how much visibility you all have into kind of a the nexstar upcoming calendar years purchasing patterns is it like a six month buying cycle do you have 12 months of the visit.
Just interested in any color you can give on purchasing and the direct sourcing business.
Direct sourcing its you know our focus had been initially around PPE.
Especially during Covid. So it was you know.
Quite a bit of a focus on our resiliency play just making sure that the health care systems had access.
The various product lines.
We have.
You are probably a quarter or two and to what the inventories look like what's hard for us to judge is really the utilization of those inventories you know depending on you know the utilization of the health care systems and such so.
You know our focus really is just continuing to build out capabilities to understand those demand signals are.
Continuing to build out capabilities to support the members.
Where you know we think that there's a lack of resiliency.
Got it and then just as a follow up I wanted to ask about that net admin fee revenue in <unk> and then just expectations for the year can you just parse out kind of trends in the acute purchasing versus non acute versus non health care.
Color would be helpful. And then finally, just any thoughts on how you all are planning to use the proceeds from the sale of the the non acute non health care GPO business. Thanks, Scott.
Sure Jessica this is Craig so relative to the GPO as I indicated in the first quarter, we saw a slight increase in acute care purchasing we did see growth in non acute but below sort of the expectation level of where we normally would have expected in terms of gross administrative fees, we saw a little bit less utilization.
In the non acute.
Our continuum of care, a part of the business around food being down year over year as inflation begins to normalize a bit there. We also saw a little bit lighter flowing through the distribution.
Channel than we would've originally.
Expected, we think that will recover as we move through the rest of the year.
In terms of how the GPO breaks out I'd say no no change around the non health care part of the business that is continuing to move kind of according to how we would have expected and then relative to planned use of the proceeds from the.
Sale of our non health care GPO operations, we do have that cash on our balance sheet, we will need to make a tax payment associated with those cash proceeds in the second quarter, so that will be one.
Aspect of the cash that we will need to be utilized about 144 $45 million something of that nature based on the proceeds we have today the remaining amount beyond that as I said in my commentary we.
We will continue to evaluate certainly be giving thought and consideration to the us and plan to return capital via share repurchase once our strategic alternative review is complete.
Or reinvestment in the business.
Awesome. Thank you.
Again as a reminder, if you have a question. Please press Star then one.
And our next question comes from Allen Lutz from Bank of America. Please go ahead.
Good morning, and thank you for taking the questions. Craig you talked about the consulting business driving a really strong growth within the performance services book of business I'm curious what are some of the major areas Youre, helping health systems drive margin improvement and then has that evolved at all from during Covid.
Covid.
Sure Alan Thanks.
I'll kick it off and then I can tell already that Mike would like to jump in and add some color here so relative to our consulting business, it's really around margin improvement given the financial pressures that the health care systems are facing so it's around improving clinical performance, but also just non labor expense reduction, but Mike I can tell you you'd like to jump in yeah.
I think Craig had Ed I think margin improvement I think theres a couple of.
Sort of prongs that come off of that first as Craig said, the non labor stoppage. So you know we're going to we're working with our health care systems on.
Looking at appropriate utilization using our data and our technology.
To rationalize buying as it relates to specific DRG.
And then again using our data technology and benchmarking around labor or health care systems are coming off a very very high utilization of temporary staff.
To get through Covid, and so we're helping them sort of right size from a labor standpoint, what their operations needs to look like on a go forward basis.
And then finally.
We are continuing to build out co management capability.
And those relate to a couple of different areas one in supply chain.
Where we.
Obviously are providing a number of services to help really.
It really drive down the overall supply chain costs through co management.
And then also as it relates to technology.
We're we're involved in a number of opportunities our performance improvement initiatives to look at ways to create scale and managing applications and other technologies.
And this is Craig one last piece of color to add Mike mentioned this in his prepared remarks, but I would also say our recent publication of the 100 top hospitals in 15 top health systems has provided an opportunity for outreach and discussion about where there may be performance improvement opportunities for those institutions. So we're seeing an uptick around some.
Of that outreach as well.
Great. Thank you.
This concludes our question and answer session in Premier's fiscal 'twenty 'twenty four fiscal quarter conference call.
Thank you for attending today's presentation you may now disconnect.
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