Premier, Inc. (NASDAQ:PINC) Q2 2024 Earnings Call Transcript
Premier, Inc. (NASDAQ:PINC) Q2 2024 Earnings Call Transcript February 6, 2024
Premier, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, and welcome to Premier's Fiscal 2024 Second Quarter Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Ben Krasinski, Senior Director of Investor Relations. Please go ahead.
Ben Krasinski: Thank you, and welcome to Premier's fiscal 2024 second quarter conference call. Our speakers this morning are Mike Alkire, Premier's President and CEO; and Craig McKasson, 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.premierinc.com. Please be advised that management's remarks today contain certain forward-looking statements, such as statements regarding our strategies, plans, prospects, expectations, future performance, 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, during this presentation, we will refer to adjusted and other non-GAAP financial measures, including free cash flow, to evaluate our business. Information on why we use these measures, in addition to GAAP financial measures and reconciliations of these measures to our GAAP financial measures are included 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 soon.
I will now turn the call over to Mike Alkire.
Michael Alkire: Good morning, everyone, and thank you for joining us today. We are excited to share several updates with you, including that our Board of Directors has concluded its review of strategic alternatives and approved a new $1 billion share repurchase authorization. Over the past several months, together with our Board, we have thoroughly identified, reviewed, and explored options to maximize value for Premier's stockholders. You may recall that as part of this process, we divested our non-healthcare GPO operations in July 2023. This transaction unlocked substantial value for stockholders and enhanced the Company's focus on our differentiated healthcare businesses. The Board subsequently considered opportunities for deploying capital resources, including the proceeds from this divestiture.
To accelerate returns to stockholders, with this in mind, we will implement a $400 million accelerated share repurchase transaction as part of the new share repurchase authorization. We are exiting the strategic alternatives review process with a clear picture of our future strategic vision. That includes a disciplined focus on our key strategies that differentiate us in the market. When we think about our capabilities that are key to our mission and vision, what we know is this. Premier is an essential enabler of high-quality, cost-effective healthcare. Our provider-led, technology-enabled strategies deliver unique enterprise solutions for better provider performance and a smarter healthcare supply chain. We continue to see technology and artificial intelligence as key enablers to our vision and capabilities that set us apart from the competition.
This includes the expansion of the use cases beyond providers and into life sciences, medical device, and payer adjacent markets. Moreover, as the healthcare industry continues to grapple with challenges, including labor shortages, supply chain disruption, and an aging population, Premier is an essential partner now more than ever. We remain committed to a disciplined approach to execution that we expect to deliver value for our stockholders, members, and other customers. Consistent with this, management and the Board looked at ways to enhance our focus on our differentiated data, technology, and widescale network to best serve our members and other customers. As a result, in consultation with management, the Board authorized Premier to seek partners for certain other assets.
We believe these are meaningful businesses that will thrive with the right partners, creating more value for the customers they serve, while also affording Premier the opportunity to narrow our operational focus. Assets under consideration include, first, Contigo Health, our direct-to-employer business. While we expect the provider-sponsored health plan and employer markets to continue to progress, we believe an outside partner will allow for continued advancement of the business through a broader capability set and increased scale. Second, S2S Global, our direct sourcing business, which was a strategic investment to augment our GPO offering and provide additional optionality for commodity purchases for our member healthcare providers. We believe a committed partner with alignment to our membership could provide the resources necessary to further broaden and scale this business and continue to support our commitment to supply chain resiliency initiatives while removing the operational and working capital requirements for Premier.
We are excited about the future as we execute on the strategies that set us apart in the market, including streamlining all aspects of the supply chain and leveraging our unique data, technologies, and AI capabilities to support provider performance, improvement, and growth in adjacent markets. Before I turn it over to Craig, I want to express our appreciation for our stockholders', customers', and employees' patience as we diligently explore strategic alternatives. I'm excited about our recently announced 10-year GPO agreement with Tufts Medicine that expands our relationship to include co-management of their people, processes, and technologies to drive efficiencies and contain costs. I'm also incredibly proud that Premier was recently recognized by Newsweek as one of America's greatest workplaces for diversity.
True to our mission to improve the health of communities, we are dedicated to creating a diverse and inclusive workforce and are so thrilled to be recognized nationally for our efforts. I will now turn the call over to our Chief Administrative and Financial Officer, Craig McKasson, for a detailed review of our results and our financial guidance for the remainder of the fiscal year.
Craig McKasson: Thanks, Mike. I first want to echo your sentiment about our excitement to exit the strategic alternatives review process in a position of strength, with an eye towards executing with discipline on our core healthcare businesses. Let me first share our fiscal year 2024 second quarter results. While total net revenue declined from the prior year period, we did meet our expectations for profitability as a result of ongoing discipline in actively managing our business in our Supply Chain Services segment, and as expected, net administrative fees revenue was impacted by an increase in the aggregate blended member fee share to the mid-50% level. This impact was partially offset by continued growth in member purchasing.
In our direct sourcing business, we continue to experience the impact of excess market supply in members' and other customers' inventory levels, which has contributed to lower demand and pricing in the current year period, resulting in a decline in products revenue. Before moving on, I wanted to provide some operational updates on our strategies to create more resiliency in the healthcare supply chain. As part of our initiatives to bring more manufacturing on and near shore, our domestic gown manufacturing partner began producing products in Tennessee earlier this year. In addition, we expect to launch our Domestic Glove Program in the second half of fiscal 2024. Lastly, we added five additional vital medications to our Drug Shortage Resiliency Program, which now offers members access to over 150 drugs in short supply.
In our Performance Services segment, revenue was impacted by a decrease in contributions from enterprise license agreements compared to the prior year period. However, we remain enthusiastic about market opportunities that validate the need for our solutions. For example, we continue to drive growth in our consulting services business as healthcare providers are leveraging Premier to drive clinical and margin improvement. We also continue to make progress in our adjacent markets businesses which grew over 29% in aggregate. Notably, in our applied sciences business, we recently announced our partnership with TFS HealthScience, where Premier's AI will help accelerate research through innovative ways to integrate real-world evidence into clinical trials.
In addition, we are seeing market validation that our technology-enabled margin improvement solutions continue to save providers considerable time and money. Recently, Henry Ford Health reported that Premier's digital invoicing and payables platform has eliminated the need for manual handling of nearly 100,000 paper invoices over a six-month period. Turning to profitability. GAAP net income was $52.9 million for the quarter. Total adjusted EBITDA was impacted by the following factors. First, Performance Services adjusted EBITDA decreased mainly due to lower revenue and incremental headcount to support growth in our consulting services and adjacent markets businesses. And second, Supply Chain Services adjusted EBITDA declined mainly due to a decrease in revenue and an increase in expenses in support of our GPO and supply chain co-management businesses.
This decrease was partially offset by a higher profit margin in our direct sourcing business due to lower logistics and products costs compared to the prior year period. Adjusted net income and adjusted earnings per share each declined, primarily driven by the same factors that impacted adjusted EBITDA. The decreases were partially offset by higher interest income. From a liquidity and balance sheet perspective, cash flow from operations for the first six months of fiscal 2024 of $35.4 million decreased from $196.7 million in the prior year period. The change was primarily due to $138.5 million in tax payments in the current year period from the sale of our non-healthcare GPO operations. Cash was impacted to a lesser extent by lower net revenue and was partially offset by a reduction in inventory purchases and lower fiscal 2023 performance-related compensation payments during the fiscal first quarter compared to the fiscal 2022 payments in the prior year period.
Free cash flow for the first six months of fiscal 2024, an outflow of $63.3 million, decreased from an inflow of $109.6 million in the prior year period, primarily due to the same factors that impacted cash flow from operations, including the aforementioned $138.5 million in tax payments, as well as an increase in capitalized software purchases related to the advancement of our supply chain technology automation. Looking forward and excluding the impact of tax payments related to the sale of our non-healthcare GPO operations, we expect fiscal 2024 free cash flow to approximate 45% to 55% of adjusted EBITDA for the full year. Cash and cash equivalents totaled $371.1 million as of December 31, 2023, compared with $89.8 million as of June 30, 2023.
The increase was driven by the sale of our non-healthcare GPO operations, net of the previously mentioned tax payments. As of December 31st, we have received a total of $629.8 million in proceeds and we now expect the final purchase price to be up to $740 million as we continue to work through member consents and the true-up period that ends in February. As we stated last quarter, we used a portion of these net proceeds to pay down our five-year $1 billion revolving credit facility and continue to have no outstanding balance as of the end of the second quarter. With respect to capital deployment, we will remain disciplined and focused on taking a balanced approach. As Mike mentioned, to accelerate returns to stockholders, our Board has approved a new $1 billion share repurchase authorization through June 30, 2025, including the implementation of a $400 million accelerated share repurchase transaction.
This will augment our quarterly cash dividend which totaled $51.1 million during the first six months of fiscal 2024. In addition, our Board recently declared a dividend of $0.21 per share payable on March 15th, 2024, to stockholders of record as of March 1st. We will also continue to evaluate opportunities to invest in organic growth and potential acquisitions to strengthen, enhance, or complement our existing capabilities and differentiate our offerings in the marketplace. Turning to our outlook for the remainder of the year. As a result of the conclusion of our strategic alternatives review process, we are now providing formal fiscal 2024 guidance. Our guidance incorporates certain key assumptions related to the market and our business, and it does not incorporate the impact of any future share repurchases following the $400 million accelerated share repurchase transaction or any significant acquisitions or divestitures that we may undertake.
With these key assumptions in mind, our specific fiscal 2024 full year guidance ranges are as follows. Supply Chain Services segment revenue of $840 million to $880 million, comprised of net administrative fees revenue of $588 million to $603 million, direct sourcing products revenue of $207 million to $222 million, and software license, other services, and support revenue of $45 million to $55 million. Performance Services segment net revenue of $425 million to $445 million. Together, these produce total net revenue of $1.265 billion to $1.325 billion. We expect adjusted EBITDA to be in the range of $405 million to $425 million, and adjusted earnings per share to be in the range of $2.06 to $2.18, which includes an estimated $0.09 to $0.10 impact from the $400 million accelerated share repurchase transaction.
Our guidance is also based on the following assumptions and expectations. In our GPO business, we continue to anticipate aggregate blended member fee share will be in the mid-50% range for fiscal 2024 on a full year basis, and we expect continued growth in member purchasing driven by further penetration of existing member spend. In addition, we are assuming that patient utilization remains generally stable with flat to low single-digit growth. But to the extent that utilization or member participation in our GPO are higher or lower than we expect, these could represent potential headwinds or tailwinds to our expectations. In our direct sourcing products business, we believe we have finally reached the lower end of our more normalized quarterly run rate for this business.
As a result, we expect flat to nominal sequential improvement in products revenue on a quarterly basis as pricing and demand continue to normalize and we realize incremental contributions from the ongoing ramp of our domestic gown and glove initiatives in the second half of fiscal 2024. In our Performance Services business, we anticipate revenue growth of approximately 20% in our adjacent markets comprised of our life sciences, clinical decision support, Remitra, and Contigo Health businesses. With respect to Contigo Health, revenue contributions represented around 40% of our aggregate adjacent markets revenue in fiscal 2023. Due to a combination of slower growth this year and higher growth in certain of our other adjacent markets businesses, we expect Contigo Health revenue will represent approximately one-third of our aggregate adjacent markets in fiscal 2024.
Consistent with prior years, due to the timing and magnitude of enterprise license agreements and certain consulting arrangements, there may be periodic variability in the recognition of the revenue and profitability associated with these engagements between quarters. In closing, we remain committed to and confident in the disciplined execution of our strategy and the value-creation opportunities ahead. We are encouraged by recent projects and customer engagements and are excited to continue to share our strategy and value proposition with new and existing customers. We continue to operate with a strong financial foundation supported by significant cash flow and a flexible balance sheet, which provides us the ability to continue to return capital to stockholders while also investing in future growth.
We appreciate your time today and we'll now open the call for questions.
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