Premier, Inc.

Good morning and welcome to Premier's fiscal 2023 third 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 today's 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 third quarter conference call. Our speakers this morning are Mike Alkire, Premier's President and CEO, and Craig McCaffin, 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 are available in the Investors section of our website at investors.premier.com. Please be advised that 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 measures, 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 in the appendix of the supplemental slides accompanying this presentation and in our earnings form 8K, which we expect to furnish to the SEC soon. I will now turn the call over to Mike Alkire. Mike?

Thank you, Angie. Good morning, everyone, and thank you for joining us today. Early this morning, we reported fiscal 2023 third quarter results and provided an update to our fiscal 2023 guidance. Our third quarter results and revised full-year guidance largely reflect three factors. One, our progress in advancing our longer-term strategy. Two, an ongoing impact from macroeconomic headwinds. And three, healthcare market dynamics. Today, I'll share some highlights from the third quarter, and then Craig will provide details on our financial and operational results and revised fiscal 2023 guidance. As a purpose-driven healthcare company, we remain steadfast in supporting our member healthcare providers and other customers as they continue to navigate the current environment, largely characterized by labor challenges, supply chain disruptions, inflation, and rising interest rates. We also continue to focus on advancing our longer-term strategy and reinforcing our competitive position in the market. Our business is built on a solid foundation And we believe we are uniquely positioned in the market through, one, our ability to identify and predict innovation catalysts using our vast data set. Two, our ability to deliver solutions to those catalysts and the market with AI-enabled technology, services, and programs. And three, our ability to scale by leveraging the power of the Premier Alliance. In the third quarter, our performance services segment produced 9% quarter-over-quarter revenue growth. Within this segment, our AI-enabled technology and services platform is driving efficiency and scale for our healthcare provider members and other customers. Top-line growth in this segment reflects our progress in further diversifying our revenue mix and expanding into new customer bases by leveraging our unique combination of member relationships, integrated analytics, and other wraparound services to further penetrate markets that are adjacent to our core healthcare provider business. Through our adjacent markets businesses, we are also partnering with life sciences, payers, self-insured employer customers, and other healthcare product and service suppliers to deliver high-quality, more effective healthcare. Collectively, our adjacent markets businesses produce strong quarter-over-quarter growth and remain on track to grow 30% to 40% this fiscal year. Contigo Health, our direct-to-provider and direct-to-employer health plan benefits platform, which includes our provider network, centers of excellence, and third-party administrator, and provider-sponsored health plan solutions, is making solid progress integrating our recently acquired provider network assets. We recently formally launched ConfigureNet, our out-of-network wrap offering built from these acquired contracts with more than 900,000 providers, across 4.1 million locations. While it's still early, ConfigureNet is beginning to gain traction in the market, and I'm pleased to report that we have signed several new ConfigureNet customers over the past several months. Contigo Health's customer base and pipeline of opportunities include provider-sponsored health plans and Fortune 50 and other large self-insured employers. We believe this business is well-positioned to expand into self-funded employer health plans across the U.S., by offering a differentiated solution that better manages healthcare costs for employers and their health plan members. Turning now to our supply chain services business. In the third quarter, our group purchasing organization business performed in line with our expectations, with our non-acute or continuum of care GPO producing mid-single-digit growth. Our direct sourcing business continues to be impacted by excess market supply and high member inventory levels, which contribute to lower demand and pricing. We, along with our healthcare provider and supplier partners, continue to focus on building a more resilient supply chain. As part of our ongoing effort to geographically diversify sources of production across a broader set of products, we recently announced a joint venture and a subsequent grand opening of a new domestic manufacturing facility to manufacturing and countenance products in Virginia. We expect this and other partnerships to contribute more sustainable and secure production of vital domestically produced healthcare products. We believe this will help drive less dependence on unpredictable markets and strengthen Premier's overall value proposition by further supporting our members, including the more than 4,400 US hospitals, and health systems and over 250,000 providers and other organizations. Before I turn the call over to Craig, and as we wrap up fiscal 2023, I want to acknowledge the continued dedication and efforts of our employees in advancing Premier's strategy and focusing on our mission to improve the health of our communities. In summary, we remain focused on executing our longer-term strategy by partnering with our members, and other customers to deliver innovative, scalable solutions that we believe help solve some of healthcare's biggest challenges and create value for our stakeholders. We will continue to help providers and other customers navigate current macroeconomic headwinds and other market dynamics through novel, technology-enabled solutions designed to lower costs and improve healthcare and the quality of life for patients. Now I'll turn the call over to Craig for more detailed discussion of our third quarter results and revised fiscal 2023 financial guidance. Thanks, Mike. For the third quarter of 2023, and as compared with the same period a year ago, our results were total net revenue of $322.2 million, a decrease of 7%, supply chain services segment revenue of $216.7 million, a decrease of 14%, and performance services segment revenue of $105.6 million, an increase of 9%. In our supply chain services segment, net administrative fees revenue was flat compared with the year-ago quarter, driven by mid-single-digit growth in our non-acute or continuum of care group purchasing business, where we continue to focus on technology enablement to create greater efficiencies for our members, while also channeling incremental member spend through our GPO portfolio. The growth in our continuum of care GPO business was offset primarily by the following factors within our acute GPO business. First, the continued normalization of demand and pricing across certain categories, including pharmacy, diagnostics, staffing, and personal protective equipment, or PPE. Second, continued regional variation in patient utilization trends affecting member purchasing. And third, a slight increase in aggregate blended member fee share due to current market dynamics, including the impact from consolidation of certain member health systems. Within both our acute and continuum of care GPO portfolios, the food category produced another consecutive quarter of strong growth. primarily driven by increases in volume and the impact of inflation, which was partially offset by the continued normalization of demand and pricing across the other categories previously mentioned. Direct sourcing products revenue declined from the third quarter of fiscal 2022, which included the effect of higher prices and incremental purchases of PPE and other high demand supplies as a result of the COVID-19 pandemic. This business continues to be impacted by excess market supply and member inventory levels of certain products which resulted in lower demand and pricing. We continue to see ongoing demand for other products such as topical skin adhesives and IV safety catheters and are expanding our product portfolio and driving increased member adoption to mitigate current market conditions. In our performance services segment, revenue increased 9% compared with last year's third quarter, primarily due to growth in our consulting services and certain of our adjacent markets businesses, including contributions from Contigo Health's acquisition of TRPN assets in October 2022. As Mike stated earlier, we continue to expect revenue from our adjacent markets businesses to grow 30% to 40%, on a combined basis in fiscal 2023 compared with fiscal 2022. Turning to profitability, gap net income was $48.6 million for the quarter. Adjusted EBITDA increased 5% from the prior year period and primarily reflects two factors. First, an increase in supply chain services adjusted EBITDA. which was mainly due to lower performance-related compensation expense, lower logistics costs in our direct sourcing business, and higher equity earnings related to certain of our minority investments in domestic manufacturing. These items were partially offset by restructuring expenses from our previously announced cost savings plan that was implemented in the quarter. The increase in supply chain services adjusted EBITDA was partially offset by a quarter over quarter decline in performance services adjusted EBITDA, which was mainly due to higher headcount related expenses in some of our growing adjacent markets businesses compared with the prior year period, as well as restructuring expenses associated with the cost savings plan. These items were partially offset by profitability associated with revenue growth in our Pink AI and Contigo Health businesses, as well as lower performance-related compensation expense. Compared with the year-ago quarter, adjusted net income and adjusted earnings per share each increased 2%, primarily as a result of the same items that impacted adjusted EBITDA, partially offset by an increase in the effective tax rate in fiscal 2023 compared with fiscal 2022. From a liquidity and balance sheet perspective, cash flow from operations for the nine months ended March 31, 2023 of 331.2 million decreased compared with the prior year period, primarily due to one, a decrease in cash receipts from members and other customers compared with the prior year period, in which there was higher direct sourcing products revenue as a result of the impact from the COVID-19 pandemic, and two, an increase in revenue share paid to members in the current year period. These items were partially offset by a decrease in inventory purchases compared with the year-ago period, as well as lower operating expenses driven by the company's cost savings plan implemented in the third quarter of fiscal 2023. In addition, net operating cash flows increased due to higher cash receipts, primarily due to dividends from one of our minority investments. Free cash flow for the nine months year to date in fiscal 2023 was $199.5 million, compared with $201.9 million for the same period a year ago. The decrease was primarily due to the same factors that impacted cash flow from operations, partially offset by lower purchases of property and equipment, namely our internally developed software and purchased hardware, compared with the prior year period due to the timing of projects and purchases. For fiscal 2023, we continue to expect free cash flow of approximately 45% to 55% of adjusted EBITDA. Cash and cash equivalents totaled $91.5 million as of March 31, 2023, compared with $86.1 million as of June 30, 2022. We ended the quarter with an outstanding balance of $235 million on our five-year, $1 billion revolving credit facility, of which $60 million was repaid in April. During the first nine months of fiscal 2023, We paid quarterly cash dividends to stockholders, totaling $75.2 million. Recently, our Board of Directors declared a dividend of $0.21 per share payable on June 15, 2023 to stockholders of record as of June 1. Now turning to our revised fiscal 2023 outlook and guidance. Based on our performance in the first nine months of this fiscal year, our current visibility into the macro environment and market dynamics, and our expectations for the remainder of the fiscal 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 895 to 925 million. This decrease is due to our revised outlook for our direct sourcing products business, of $250 to $265 million, reflecting the ongoing impact of excess market supply and member inventory levels and lower revenues than we previously anticipated due to delays in new domestic manufacturing capabilities for isolation gowns and exam gloves. Consistent with the guidance we provided last quarter, we continue to expect GPO net administrative fees revenue of $600 to $620 million. We are lowering performance services net revenue to a range of $440 to $460 million. While the overall business continues to have a strong pipeline of opportunities, we are seeing to some degree some softening in demand and delayed decision making for some of our more comprehensive enterprise license and consulting services engagement. largely due to the current macro environment. While we believe there is a continued need for these innovative solutions in the longer term, we think it is prudent to take a more cautious view in the nearer term. As a result of the changes to segment level revenue guidance, we now expect total net revenue to be in a range of 1.34 to 1.39 billion in fiscal 2023. We are revising our adjusted EBITDA guidance to a range of 490 to 510 million, and adjusted earnings per share to a range of $2.43 to $2.55. This is primarily due to the changes to our revenue guidance, as well as the result of Premier entering into an amended agreement with FFF Enterprises, where we received a preference on any future liquidation of that business. As a result of this new liquidation preference, our 49% ownership interest is now considered preferred equity rather than common stock interest, resulting in a change in the accounting methodology where we will no longer recognize our proportionate share of quarterly equity earnings, which we had historically included in adjusted EBITDA and adjusted earnings per share. This change is expected to result in an approximate 2 to 4 cent per share impact on our fiscal 2023 earnings per share. Importantly, it will not have an impact on cash flow. While we're disappointed that we're bringing down our fiscal 2023 guidance, especially since we implemented the cost savings plan in the third quarter to help mitigate some of the macro-related headwinds impacting our business, We remain focused on executing our long-term strategy to create value for our stakeholders. Our business is stable and resilient, built on a solid foundation with significant cash flow generation and a strong, flexible balance sheet. And importantly, supported by highly engaged employees dedicated to our mission to improve the health of communities. We appreciate your time today. and will now open the call to questions.