Premier, Inc. (PINC) Earnings Call Transcript & Summary

Good afternoon, and welcome to Premier, Inc.'s Business and Financial Update Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] At this time, I will now turn the call over to Angie McCabe, Premier's Vice President of Investor Relations. Please go ahead.

Thank you, Jimmy, and good afternoon. Before we get started, I want to remind everyone that copies of our press release, 8-K filing with the SEC and the supplemental presentation accompanying this conference call are available in the Investor Relations section of our website at investors.premierinc.com. Management's remarks today contain certain forward-looking statements, and actual results could differ materially from those discussed today. These forward-looking statements speak as of today, and we undertake no obligation to update them. Factors that might affect future results are discussed in our filings with the SEC, including our Form 8-K filing we made today. We encourage you to review these detailed safe harbor and risk factor disclosures. On the call today are Susan DeVore, Premier's Chief Executive Officer; Mike Alkire, President; and Craig McKasson, Chief Administrative and Financial Officer. Susan and Craig will provide remarks regarding this afternoon's announcement, and we will then open the call to questions. I will now turn the call over to Susan.

Thank you, Angie, and hello, everyone. Today, I'll discuss this afternoon's announcement regarding the strategic actions we've taken that we believe strengthen and best position our company for the long term. I'll then turn the call over to Craig to provide more details on the financial impact and benefits of these actions, and then Mike and Craig and I will take questions. Over the past couple of years, we've continued to evolve our company so that as we move forward, we can advance our strategy to provide differentiated value to health care providers through technology-enabled end-to-end supply chain and enterprise analytics and performance improvement solutions. We intend to achieve this in part by reinforcing our role as an essential partner with a critical and stable infrastructure that enables our members to provide high-quality and cost-effective health care in their communities and by becoming more deeply embedded in our members' supply chain and enterprise analytics functions. Importantly, the impact of the global COVID-19 pandemic on the U.S. health care system over the past several months further validates, reinforces and accelerates, quite frankly, our belief in our strategy. We believe the strategic actions that we're undertaking simplify our structure, strengthen the strategic alignment with our member owners and provide us stability, support and capital to continue advancing the evolution of our business to drive long-term growth and deliver value to our stakeholders. These actions include the following: First, we eliminated our dual-class ownership structure; second, we terminated our tax receivable agreement, or TRA, with our member owners; third, and separate from the equity simplification and termination of the TRA, we now have amended group purchasing agreements with the vast majority of our member owners; and finally, demonstrating our commitment to returning capital to our stockholders, our Board of Directors initiated and declared a quarterly cash dividend. I'm thrilled that our member owners overwhelmingly supported these actions. As a percent of our member owner gross administrative fees, more than 99% agreed to the corporate restructuring and termination of the TRA, and 96% separately agreed to amend and extend our GPO agreements. This demonstrates the strength of the long-standing relationships we have with them and the value we bring to them, particularly in the current environment. As a result of the amended GPO agreements, we do expect a $100 million to $110 million reduction in net administrative fees revenue and adjusted EBITDA in fiscal year 2021. Importantly, the restructuring will also create significant tax benefits going forward, which Craig will discuss in more detail in his remarks. As we continue to focus on executing our strategy, these actions will enable us to target a multiyear compound annual growth rate in the mid- to high single digits for consolidated net revenue, adjusted EBITDA and adjusted earnings per share beginning in fiscal 2022. I'll now turn the call over to Craig to walk you through the specifics of each of our actions and the financial implications now and into the future. Craig?

Thanks, Susan. I'll begin with a discussion of our restructuring. We eliminated our dual-class ownership structure through an exchange under which our member owners converted their Class B units and corresponding Class B common stock for shares of Class A common stock on a one-for-one basis. Members representing more than 99% of member owner gross administrative fees agreed to this equity restructuring. This is a meaningful step in the simplification of our company because coupled with our recent transition to having a majority independent Board, it completes the shift away from our prior controlled company status, addresses the complexities of our ownership structure and financial reporting and generates expected future cash tax savings. Specifically, the exchange of the Class B units and corresponding Class B common stock into shares of Class A common stock, results in our recording tax amortizable goodwill in the amount of $1.2 billion to $1.4 billion, which, subject to future tax rates and other conditions, is expected to result in $300 million to $350 million in future cash tax savings. Including our historical quarterly Class B unit exchanges, we have now recorded a total of $3.1 billion to $3.3 billion in tax amortizable goodwill, which is expected to result in $780 million to $830 million in future cash tax savings. Second, and also as a result of the exchange, 100% of our operating income will now be attributable to the parent corporation, Premier, Inc. Therefore, we will no longer make quarterly tax distribution payments to the former limited partners as incurred previously under the dual-class ownership structure. Since we have the ability to realize incremental benefit from our existing deferred tax assets, we expect cash taxes to be $20 million to $35 million lower in fiscal 2021 compared with fiscal 2020. And subject to fluctuations in income, the geographic mix of our revenues and any changes in tax law, we anticipate that we will continue benefiting from lower cash taxes in future years. And finally, we also benefit from simplified income tax reporting that resulted in a remeasurement of deferred tax assets and the write-off of certain deferred tax liabilities. We expect this to result in a onetime deferred tax benefit of $100 million to $120 million, which we currently expect will result in a negative effective tax rate in fiscal 2021. In addition, we are terminating the TRA we have with our member owners. As a result of this, we are required to accelerate the discounted value of payments due to member owners and will make early termination payments totaling approximately $474 million. Of that amount, we expect to pay less than $11 million in our first quarter of fiscal 2021, and the remaining $463 million will be paid in 18 equal quarterly installments beginning in the quarter ended March 31, 2021, and ending in the quarter ended June 30, 2025. We expect that the termination of the TRA will enhance our balance sheet flexibility in the long term as it determines the final amount and accelerates the paydown of a significant current and future liability. We are very pleased that, separately, we now have amended and extended group purchasing agreements with the vast majority of our member owners, which in totality represents 96% of our total member owner gross administrative fees revenue for the 12 months ended June 30, 2020. Generally, the agreements have durations of 5, 6 or 7 years with elimination of the termination for convenience clauses contained in the prior agreements, helping to enhance the visibility and stability of our net administrative fees revenue. Notably, the varied lengths of these agreements creates more of a waterfall for future contract renewals. The amendments also address potential risk and uncertainty associated with member owner group purchasing agreement renewals. Consistent with our prior commentary and expectations that our administrative fee share was likely to increase over time, the aggregate fee share across all members that participate in our group purchasing programs will be in the high 40% to low 50% range moving forward compared with the mid-30% range for the 12 months ended June 30, 2020. We believe the revised feature arrangements in the amended agreements provide an attractive value proposition for Premier's member owners based on the total return of the relationship that Premier provides while preserving longer-term economics for Premier. We also believe Premier is differentiated and will continue to be successful in the marketplace based on the total value we provide our members. This includes cost savings, contract pricing, product access, analytics capabilities, dedicated resources as well as feature. As a result of the terms of the amended and extended agreements, we expect a reduction of approximately $100 million to $110 million in fiscal 2021 net administrative fees revenue and adjusted EBITDA and a $0.60 to $0.66 impact to adjusted earnings per share compared to our expectations prior to amending the agreements. Beginning in fiscal 2022, we expect that our net administrative fees revenue will resume its historical low to mid-single-digit growth as part of our targeted multiyear mid- to high single-digit compound annual growth rate in consolidated net revenue, adjusted EBITDA and adjusted earnings per share. Next, as we've consistently said, returning capital to stockholders is a significant component of our balanced and disciplined capital allocation approach that enables us to maintain ample liquidity, make investments in the business to drive growth, strengthen our capabilities so that we can provide new and enhanced services to our members and deliver value to all our stakeholders. With our consistent strong cash flow and solid balance sheet, we benefit from financial flexibility and the ability to continue investing in our business while also returning capital to our stockholders. With this in mind, our Board of Directors initiated and declared a quarterly cash dividend of $0.19 per share or $0.76 on an annualized basis. The first cash dividend is payable on September 15, 2020, to stockholders of record as of September 1, 2020. This milestone underscores the Board and management team's confidence in our ability to continue executing on our strategic priorities and in the strength, stability and long-term prospects for our company. Finally, I would like to provide some additional color related to how these strategic actions simplify our financial reporting. In addition to eliminating our former dual-class ownership structure, on July 31, 2020, Premier was in compliance with NASDAQ rules, requiring us to have a majority of independent directors on our Board. As a result, we will no longer be required to adjust the redeemable limited partners' capital to the redemption amount, which was historically based on the change in Premier's Class A common share price at the end of each reporting period. The actions also simplify our financial reporting by consolidating our tax structure as well as eliminating the former limited partners tax distribution and the previously booked noncontrolling interest, which resulted from the limited partners Class B common share ownership. I'll now turn the call back over to Susan.

Thanks so much, Craig. So as we look ahead, we're excited about the actions we announced this afternoon and what they mean for achieving our goals and for the future of Premier. We remain focused on executing our strategy to further differentiate and enhance our total value proposition through our technology-enabled end-to-end supply chain as well as our enterprise analytics and performance improvement initiatives to help our members drive improved health outcomes and reduce costs. We're confident that the changes we announced today support the long-term sustainability and growth of our business and Premier's continued efforts to deliver superior service, performance and value to our stakeholders. With that, Mike, Craig and I will now open the call up for questions. Operator?

[Operator Instructions] Our first question comes from Lisa Gill with JPMorgan.

Susan, I'm just wondering around the time line of the elimination of the dual-class structure. It was roughly, if I remember correctly, 7 years ago that you went public and everything was aligned to 7 years. So I just want to understand, was this something that Premier's Board made a decision? Or were the member hospitals anxious in some way to monetize what they've seen in Premier, would be my first question? And then just secondly, I just really want to understand the structure of the new relationships on the GPO side because I know that you've been talking about your renewals being very positive over the last several years, and just wondering how this lines up. I understand what Craig was talking about, that the waterfall is going to be a little bit better than what we've seen historically. But just want to understand maybe the 4% that didn't decide to move forward and how do we think about that. Just any color that you can help me to understand both of those pieces.

Okay. Thanks, Lisa. A couple of questions in there. The first one, the Board and management absolutely initiated this effort, and this was all in advancement of the execution of the strategy long term with an appropriate and simpler structure to do it with. So what we were hoping to accomplish and we believe we've accomplished is, one, we were able to proactively address those member relationships and the relationships with the member owners and do it ahead of the November exchange and do it ahead of the future contract renewal process. Two, we were able, in all of those meetings that Mike and Craig and I and others had, talk about our strategy evolution, the investments we were going to make, the kinds of capabilities we were building to serve them and drive even greater value to their health system. So we were able to talk about the alignment and the co-innovation and co-investment that we want to have with our health care systems. Third, to your question about the contracts, the GPO contracts are longer-term agreements, 5, 6 and 7 years. We were able to eliminate generally the termination for convenience provisions. We were able to implement liquidating damages clauses. And so our view is that those contracts are tighter. They're longer. We renewed them early, and we have a more normal waterfall on a going-forward basis. We were also able to simplify the structure, optimize the tax benefits, take care of that future TRA liability. And with all of that kind of behind us with the restructuring, we now have, in our view, more stability, more predictability of future operating performance and complete focus on implementing all the elements of our strategy. So the few -- and 96%, we thought, was amazing. Some of our member owners have governance requirements or they were in the middle of strategic activities. They're still with us and we plan to have them stay with us, and they're still with us under their current contracts. So I don't know if I answered all your questions. I don't think this was about members wanting to move their stock to Class A all at one time. I think we will continue to have a significant number of member owners who maintain equity in Premier.

Our next question comes from Steve Halper with Cantor Fitzgerald.

Just a follow-up question on the exchange. Is there any lockup provision around the Class A shares that the member hospitals are going to be receiving?

Sure. This is Craig.

Craig, do you want to answer?

Yes. Thanks, Susan. I'll be happy to handle that. We will be filing a registration statement so there should not be a lockup on those shares, although I would highlight, as Susan indicated, that we would expect that a large number of our health systems will continue to hold and maintain equity in Premier.

And just one follow-up on the incremental $300 million to $350 million in future tax savings that you identified. What is the time frame that we should be thinking about there?

Yes. That is associated with the step-up of tax amortizable goodwill, which the IRS currently allows over a 15-year life. So it will be over a long time period that we'll take that tax deduction.

Right. And then the aggregate amount that you've already realized that's under the same time line, except it just started earlier. Is that the right way to think about it?

That's correct.

Our next question comes from Eric Coldwell with Baird.

I just wanted to clarify on Steve's question. You mentioned the 350 -- the $300 million to $350 million in future cash tax savings. In the slides and the press release, you mentioned, including historical exchanges, that it's expected to result in a total of $780 million to $830 million. I just want to make sure I understand. Which is the net savings over the next 15 years? Is that the $300 million to $350 million or the $780 million to $830 million?

Yes. Sorry, Eric. This is Craig. So to clarify, the total amount of tax amortizable goodwill over the next 15 years or so, because some started a few years ago, as Steven asked, will result in cash savings in total of $700 million to $830 million. The $300 million to $350 million that we talked about today is the benefit from the exchange that is happening solely as part of this restructuring. So that's included in the $780 million. It's not that you net them down. The total benefit will be $780 million to $830 million over time.

Got it. Got it. The -- and then just as a quick follow-on. The onetime deferred tax benefit of $100 million to $120 million, that's in addition to the $300 million to $350 million that's new?