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

Well, I'm A.J. Rice, the health care service analyst from Credit Suisse, and very pleased to have up next in the office here, Premier. Mike Alkire, is the President and CEO; and then Craig McKasson is Chief Administrative Officer and -- Chief Administrative and Financial Officer. It's great to have you guys. Thanks for participating in the conference here.

I wonder if maybe we could just start off, I'll ask you. It's been quite the year. What -- if you look back on Premier's experience, we're 11 months in now almost. What have been some of the wins for the company year-to-date? And what have been some of the challenges?

Yes, I can start, Craig, and then please add in. So we've had a lot of great wins over the course of the last year. Starting with our clinical decision support capability, we're really happy with the progression of that and how it's supporting our prior authorization offering. And for those of you not aware, it's really an opportunity to use 2021 kind of technology, natural language processing and machine learning, AI really to automate the whole prior auth function. We think it's very, very unique in health care, and we're really happy with the way that that's being utilized in the market. We're also happy with what's happening in our life sciences practice. We started to do quite a bit of work around patient identification using Epic and Cerner, using our clinical decision support capability. Actually we're recognized along with AstraZeneca and Clinithink looking at idiopathic nodules as pre-diagnosis for lung cancer. So really excited about what was happening in that area. Also happy with, obviously, the acquisition that we just made with our TRPN offering, which really gives our Contigo Health offering about 900,000 contracts which they can do a whole plethora of things with to include building out wrap capability for networks and helping health care systems get into creating health plans and those kinds of things. So we're really excited about that. On the supply chain side, I'll tell you, we've got a significant backlog of our health systems that are interested in our committed programs, our SURPASS and our ASCEND program. So we're really excited about that as well. So I'd say all of that are very, very strong tailwinds for us as we go into the second half of the year.

Yes. Thanks, Mike. Sorry, I didn't mean to cut you. I think the only couple of things I would add. I think we're really proud of the resiliency efforts in the supply chain side of our business as well and actually getting our members to co-invest with us to ensure that there's not single-threaded access to product in the future and that we're not as dependent on certain aspects of the globe in terms of making sure that we have what we need to take care of people. So that's another success I would highlight on the supply chain side. Challenges, you asked about, what I would just say is for health care providers this has been a really tough year. When you think about the supply chain pressures they faced and then the labor challenges that they've had as well, they need us more than ever. But it is a tough environment.

And so strategic significance of each for the company, just to level set everyone.

Sure. So Craig, I'll start again. So at a very high level, Premier has always been focused on helping our health systems drive higher levels of performance. So that's both from a financial standpoint as well as a clinical standpoint, making sure that they're driving the best possible outcomes for their patients. We have 2 segments in the business. The one is -- the first is our supply chain segment. We have a whole focus in supply chain on aggregating the spend of our health care systems and driving better pricing. We also have a capability where we actually directly source products, so contract manufacturing products. And as part of that, as Craig was just describing, we have a number of initiatives around resiliency. So one of the things that COVID taught us that we had an overdependence on some very specific categories of drugs on China. And our focus over the last number of years is to truly diversify out of China into other Southeast Asian countries as well as the opportunity to produce products domestically. So that's the supply chain part of the business. And then the focus there also is really to bring technology to enable the entire function to help it to be easier for our health systems to leverage our programs from a technology standpoint to get enhanced value of all the things that we do to help them bring down their supply costs. Then on the Performance Services side, our business is really all about clinical decision support and analytics with a wraparound advisory services capability. So one of the things that's very unique to Premier is that we have a some very, very unique large datasets to include areas of quality, safety, labor and supply chain. And our focus really is to integrate those datasets and understand the insights around improvements. And then to the degree that it makes sense we want to write those improvements under the Epic, Cerner and Athena into the workflow. So that's the focus from a performance improvement standpoint. And then along the way, we created a few adjacencies. We have a Contigo Health offering, which is all about helping our health care systems go direct to employers for their health care needs. We have an offering called Remitra, which is all about e-invoicing and e-payables to really help streamline the invoicing and payment process. And then as I said earlier, we have a clinical decision support capability to help our health systems as it relates to prior authorization, things like how to document HCC scores appropriately and those kinds of things. So everything we do really is around helping our healthcare systems and then the adjacent markets strive higher levels of productivity.

I think a couple of points to color to get it kind of your scale and growth aspect part of your question. On the supply chain side of the business, the GPO by design, is a low to mid-single-digit growth business in aggregate. Our whole reason for being is to keep and combat inflation and keep prices down. So it's not to have high growth from that. The growth from the GPO really comes from further penetrating additional spend and getting it on contract. Mike mentioned health care systems, but I would highlight as particularly for people that are new to the story, we serve all health care providers. So our GPO is about 60% hospital, about 40% ambulatory footprint. So whether it's tied to a health system, as Mike articulated, or individual non-acute practices.. And what we see in our GPO is very low -- kind of low single-digit growth in the acute care footprint. Utilization is moving from the 4 walls of the hospital to other sites of the care. And then we see much higher growth in the non-acute care footprint. High-margin business in terms of the GPO. Direct sourcing is a low single-digit EBITDA margin business growing at -- in a non-COVID world, we can talk about some of the normalization as we go through our discussion here. But typically, would be more of a high single, low double-digit type growth business. And then on the Performance Services side, the provider business, Mike talked about around margin improvement, performance improvement, is more of a mid-single-digit type growth business typically. And then we've specifically articulated the adjacent markets that Mike highlighted, have been growing in excess of 30% or target to grow 30% to 40% this year and that was an $80 million business -- set of businesses last fiscal year.

One thing, a number of players broadly in your space have had to deal with this, obviously, PPE, protective equipment, big surge in the COVID dynamics and now it has been winding down and its impact on your reported results. I'm sure you're looking forward to the quarter where you don't have to talk about that anymore. But what -- where are we at? Are we close to normalization in your mind or is there still some room to go?

Yes. So what I would say is we believe we've hit the bottom. So our first quarter '23 results we think are the low watermark. It's been a function of 2 dynamics. I want to make sure people understand both. Normalization of pricing, which had been elevated. We do think prices have really normalized and stabilized back to more typical levels as well as demand. And so the only thing that's left to kind of work itself through the channel, we saw this in the first quarter, and I think there will be a little bit of this still in the second quarter is a lot of health care providers had really built up stockpiles to make sure that they weren't caught short. And so they've been working down some of those stockpiles. And so we think that that's resolving itself here. And as we move into the back half of our fiscal year, we'll be back into kind of normal high single, low double digit type growth coming from the PPE part of our direct sourcing business.

Interesting. Is that -- historically, have they really run almost just in time type of thing with those -- that and other products and now they are running higher levels of inventory or are they playing more games with inventory? What do you see happening there?

So couple of things. So we've created a couple of strategies to ensure that we have a bit more resiliency in the way that they can access the product. So us along with 16 of our health systems invested in an organization that produces face masks. And as part of that investment, we actually asked them to stockpile product for us. So it actually works incredibly well in that. They produce product, put it into a stockpile, we utilize the oldest product first and then we keep that whole thing fresh. But we've been doing that -- strategies like that in masks, we've been doing strategies like that in gowns, and beginning to sort of think that strategy through in gloves. But I'll tell you historically it was the distributors held the lion's share of the inventory and the health systems didn't have much inventory. But since COVID we've been building out some resilient practices to help them.

And I know you talked about -- you have to obviously make an assumption around utilization in the Supply Chain Services business. How much does variance in utilization mean to you? And I don't know what your assumption looks like relative to what we're seeing with the hospitals. Is that enough variation that's meaningful in the impact to you or not really?

Well, let me just start, and then I'll have Craig add in. I will tell you, utilization is very regional. So we're seeing some of our health systems kind of getting close to -- back to pre-COVID levels and back to normal for those elective procedures and some of those things. But we have a significant portion of them that are quite back yet. And so, obviously, depending on what the procedures are, it could have an impact on our -- the utilization of our products and those kinds of things. So, I think it remains to be seen the way that we sort of describe it is. We're kind of going through some of the short-term variation, but long-term given that you've the Baby Boomers entering into the health stream for health care needs. We do foresee obviously utilization obviously picking back up.

Yes. What I would say, generally, A.J. is, when we think about establishing our guidance range, the midpoint of our guidance is really targeted toward our assumption around flat to slightly declining acute care utilization and then growing utilization in the non-acute space. What we've typically seen is as those have ebbed and flowed, it pushes us within the range of guidance that we've established. It's not meaningfully moving the number unless you have something, obviously, dramatic like pandemic, where utilization just dropped through the floor. But on the margin, when things are moving around, it's what would cause us to be in the lower end or the upper end of margins trajectory.

Okay. And obviously, a hot topic this year has been around inflation. Maybe walk people through a little bit how that impacts your business? And are you seeing over the course of the year, at least it stabilize? And as you think ahead while you're in the fiscal year, but in your guidance, if you assumed it worsening in fiscal '23 versus '22?

Yes. So generally speaking, inflation has not been a big driver or a detractor from our performance. Our, again, whole reason for existence is to combat inflation, make sure that we're doing that. Having said that, obviously, we're in unprecedented times in terms of what you're seeing with inflation. The way to think about our GPO portfolio, which is the biggest -- has the biggest implications associated with obviously inflation around products. Majority of our portfolio, which is our med-surg and related products typically have fixed pricing for 3-year contract terms, and then there's a waterfall of those contracts coming up. We do have situations where suppliers come to us at times like this, requesting temporary price increases due to the impacts of inflation on their margins. We actually have an entire kind of formalized process with our supply chain executives around evaluating those. To date, we've had around 300 requests for temporary price increases -- the committee that evaluates that has awarded about 50% of those so far. It has not materially affected. It's obviously a slight tailwind to the extent that you do see prices go up. But our business is all designed around looking for other contracts and ability to mitigate that. Our pharmacy and our food programs, which represent about probably 35% of our GPO portfolio actually have provisions that allow for fluctuating prices based on inflation and deflation. So those aren't actually being impacted by that.

So is food inflation then a positive for you?

Food inflation is a tailwind at a time like this. It would be a headwind when obviously inflation comes down. Food has typically been about 5% to 10% of our GPO, so it's not that it's going to meaningfully move the number. And I called out on the remarks on our last earnings call, the fact that we had a tailwind from food, but we actually had -- we saw deflation in pharmacy. So those sort of mitigate one another.

I got you. How big is pharmacy in the mix?

Pharmacy is about 1/4 of our GPO portfolio.

Okay. I think you've talked about some logistics costs. Maybe I we want to spend a little bit more time and what you're seeing there. There does seem to be some indication that some of the logistics is getting better now, but I don't know if you're yet seeing that or not.

Yes, I just think a couple of things. First of all, as labor cost continues to rise, you're going to see an impact on logistics. And then also little bit of the, sort of, the outcome of the war in Ukraine, you're starting to see some pressure on cost of petroleum, diesel fuel, those kinds of things. And obviously, those -- if those things -- the price of those go up, obviously, it's going to increase the price of the products being delivered to our health systems.

Yes. The other thing we specifically saw and discussed on our earnings call is the impact of overseas freight, which was very elevated, kind of 3, 4, 5, 6 months ago. That has -- is what we've begun to see normalize and coming down over the past couple of months, but that's going to impact our margins, kind of Q3, Q4 once we work through the inventory.

So there's a little bit of a lag before that -- you realize that. Okay. How much is broadly defined logistics costs in your total cost structure in that business? Have you talked about that?

Yes, I'd have to follow up in terms of specific component of that. We don't get into that level of granularity here.

Is the fact that health systems, as you've acknowledged, are under pressure, has that created any dynamics in terms of their willingness to go out for RFP. I sense that there's a lot of transition in RFPs. But -- or does that create opportunities for you to maybe find a new system that has historically not worked with you? Is that changing any of the dynamics there in the competitive landscape?

Couple of things. First of all, if I could just talk about our business first. One of the things that we've really challenged the teams around is we've got to get our offerings to a place where they're cash flow neutral for the health system. So before they make an investment, they've got to actually see some level of improvement on cash flow as well as shorter-term recognition of return. And that's going to be really important. So to the degree we're doing work, let's make sure that the health systems are seeing those returns in those quarters. So we've been really picking up the pace on really narrowing our capability to really meet their needs in the short term. But obviously, along the way, we've got to be driving improvements that are long lasting and that are long-term oriented. As it relates to new customers, yes, I think it gives us the opportunity to have conversations that we've not had before and that we do have offerings that are different than our competitors in the market. And again, the same practice of creating short-term returns, both cash flow and from an EBITDA or a margin perspective are really important. Because right now, health systems don't have the wherewithal to make investments that aren't going to actually prove out in the short term. So GPO conversions are typically longer term, so to the degree that we're having conversations, winning that kind of business, we've got to make sure that at the point of transition, we're driving that kind of value to get that level of return.

On the -- maybe pivoting over to the Performance Services business, which has obviously got some of the growth engines you were talking about earlier. There's investment to be made in some of these newer businesses, and that's stepping up and that may be coloring some of what we've seen in the margin there. Is there any way to bifurcate out sort of the long standing businesses in Performance Services and what the margin trend is there versus some of the discretionary investments you're making to try to support growth going forward?

Yes. I think the way to think about the business is the adjacent markets businesses, in particular, Remitra has been an investment business to date. It's obviously a brand-new growth business entering a new platform with anticipation of turning into a margin generating business in the back half of the fiscal year. Contigo Health, similar in terms of being an investment to get it off the ground. And so those low -- low-to-no margin to date, but with an expectation to begin delivering margins, not necessarily out of the gate at the levels of the more mature technology business. Our more mature business historically has had a mid-30s kind of margin. What you're seeing and what you saw last year is we're investing in some of these growth businesses, and I think it's the way to think about the overall segment for fiscal 2023 is probably more at the 30% -- in the 30% range right now. We did it at our last Investor Day in November '21, talk about longer term getting back to 34% to 36% margins in that business. So it's that mix in combination that will deliver that type of performance.

Yes. And you're saying some of that you might actually even see at the end of the fiscal year. So it's a pretty rapid ramp up. Is that the right way to think about it or?