Premier, Inc. (PINC) Earnings Call Transcript

Good morning, everyone. This is Eric Coldwell. I'm Baird's Healthcare Supply Chain and Pharma Services Analyst. It is our pleasure today to have Premier with us. And speaking will be Susan DeVore, CEO; Craig McKasson, CAO and CFO; and also Angie McCabe and Ben Krasinski will be with us in IR. Before we get into the Q&A in the fireside chat, I just want to give Susan a minute to make some introductory comments. And with that, Susan, I'll hand it over to you.

Thanks so much, Eric, and welcome, everybody. Ben, if you'll just advance the screens to the first one. Premier is a health care improvement company. We work with over 4,100 hospitals and 200,000 other providers in the health care ecosystem. As you can see here from the map, we have a huge national footprint. We have data, clinical, financial, operational data on over 45% of the patients in the country. We have $67 billion of supply chain spend that flows through our group purchasing organization. And we have a very unique strategic alignment with our members. We have over 90% of our members who would actually say they view us as a strategic partner or an extension of themselves. They don't view us as a member. Many of our members have been with us for over 20 years. We have very high retention rates, as you can see on the slide, and renewal rates for our SaaS-based informatics products. We're all about co-innovating how to improve cost and quality and outcomes in health care providers. So if you go to the next page, Ben. A little bit of a delay here. When we think about the emerging health care trends and how we're positioned with those trends, clearly, all of our health care providers even before COVID, but certainly since COVID are focused on cost management. They have millions and millions of dollars of financial imperatives, and we're helping them to achieve that every year. They also increasingly, and especially in a post-COVID world are very worried about access to product and need more transparency into the supply chain, and we are helping them streamline and take out the fragmentation in supply chain. Clearly, pharmaceutical market and creating healthier markets is a focus for us as well. And on the Performance Services side of the business, our predictive analytics, our retrospective, predictive, artificial intelligence, AI-enabled analytics really help health care systems drive their operating and clinical performance improvement. We have more recently taken those data assets we have and started extending them to employers, payers, life sciences and other markets. And as the market continues to evolve to value-based care, we have not only the ability to serve the provider market, but also these other markets. Ben, if you'll advance to the next slide. We reported 2 segments, and we have an integrated technology platform across the two. In Supply Chain Services, we have a group purchasing organization. We also have a direct sourcing company, where we contract manufacture product for health care systems, that has been immensely important in the COVID pandemic. You can see there that the supply chain side of the business is 73% of our fiscal '20 consolidated revenue and 84% of pre-corporate segment adjusted EBITDA. On Performance Services side of the business, we have SaaS-based technology and license-based technology products. We have wraparound consulting services and we also have what we call performance improvement collaboratives, which bring together hundreds of health systems working on common problems, 27% of consolidated net revenue and 16% of pre-corporate segment adjusted EBITDA. Our data assets. Ben, if you go to the next slide, are immense. We have 100 billion data points. Our data goes back over 17 years. It goes forward in real time and near real time. We have supply chain data, cost data, quality data, safety data, pharmacy data and data around all of these new payment models like accountable care organizations and bundled payment. And we have a customer base that has always included providers and their health plans. But increasingly, it's including more employers, payers, pharma companies and device manufacturers as they use our data to really drive their own performance improvement in clinical outcomes. If you go to the next slide, we have an integrated data platform. One of the things that's very important to our business is that we're able to be vendor agnostic and payer agnostic. Meaning we take data from every source, system and every payer, we bring it into the platform, we connect the cost data, the quality data, the safety data, the outcomes data. And it gives us a really differentiating -- differentiated set of tools and then we wrap our consulting services around it to drive the improvement. If you go to the next slide, our strategy going forward is really to extend end-to-end supply chain capabilities, meaning we have a group purchasing organization. We have a direct sourcing company. We have several analytic products -- supply chain analytic products, some of which we've built organically, some of which we've acquired over the years. And our goal is to be deeply embedded in the supply chain organizations of our health care systems and have end-to-end capabilities so that we can help them manage their total supply chain outcomes. Similar concept on Performance Services, where we have all of our technologies embedded. We have people embedded. We have wraparound services embedded and the idea is to take all of that data and analytics and help drive the performance improvement from the inside. We would describe this as sort of the Intel inside or the Premier inside. And again, our goal here is to be able to actually co-own, co-manage their clinical outcomes as well as their total cost outcomes. If you go to the last slide, in this next slide. From a supply chain perspective, we think it's a big addressable market. We have $67 billion of spend today running through the GPO. We think there's $200 billion out there, if you take all components of the supply chain spend just for our existing members. And so our goal is to continue to drive penetration of more and more of that supply chain spend. If you go to the next slide. In fiscal '20, we accomplished a lot of things. We were very involved in the response of providers to the global pandemic. We continue to invest in our supply chain resiliency programs. We invested actually alongside of our members in a domestic manufacturer to shore up their access to PPE, we completed 3 acquisitions. We repurchased stock, and we completed a major corporate restructuring, which we announced a few weeks ago, and we're able to amend and extend GPO agreements with the vast majority of our health system member owners. On the last slide, Ben, I'd just say, from a value proposition, what's compelling about Premier is we have a strategy, both on the supply chain side and Performance Services side, which contemplates end-to-end capability, meaning we are that strategic partner, extension of the health care organization that can actually take supply chain and performance end-to-end with analytics, wraparound services, collaboratives and all kinds of data. We have really unique long-term relationships with our members. And it's a strategic alignment that has existed for many, many years. Strong cash flow, flexible balance sheet, a disciplined approach to acquisitions. We are targeting multiyear compound annual growth rates in the mid- to high single-digit range for consolidated net revenue, adjusted EBITDA and adjusted EPS. And we think we're very well positioned to further penetrate supply chain and the performance improvement analytics marketplace. So Eric, I'll stop there, and we'll just do the fireside chat.

Great, Susan, thank you very much. Obviously, you had a lot of big news here recently with your reorganization, no shortage of topics. I think just kicking us off a lot of folks are interested in the decision and the process. I won't ask you to rehash all of the details, but how did you come to this decision? And was it proactive? Was there maybe a little bit of shareholder pressure, debate on the Board about this? I'm just curious what the real setup, the backdrop of this was.

Yes. So we've been public for 7 years now. We did have a complex structure. We knew it. It was sort of the only way we could take 150-plus partner owners into a public company. So we did that intentionally. But as we got closer to the end of that 7-year vesting period, we wanted to be proactive. We wanted to position the company structurally for the long-term execution of the strategy. And so we proactively -- management proactively took the idea to the Board to discuss. We proactively took the ideas to the member owners. Craig and I and Mike and others met with all 150-plus of the member owners. We talked about strategic alignment. We wanted to get tighter termination provisions. We wanted a waterfall that was 5, 6, 7-year waterfall. We wanted to be ahead of the renewals that would be happening over the next couple of years. We wanted to remove that TRA liability. We wanted to optimize tax benefits. We did form a special committee of the Board. We had financial advisers, legal advisers. And at the end of the day, we felt like all of us in agreement that this was the right structure that would allow us to take some of the complexity out of the dual-class structure and those things and be 100% focused on strategy execution going forward.

So that's great. Thank you. One of the topics, and this is probably the most uncomfortable asks because I'm sure you can't give me the full answer. But the first thing I heard from a number of investors after the news hit was, "Hey, this is great because it sets Premier up to do whatever they want. They could if the public markets aren't working, they could LBO, they could sell themselves." That would have been more difficult under the prior ownership structure. I'll go out on a limb and ask, is any of the thought process here about that independence and flexibility that you'll have in the future? Or was this really more about managing the business as a stand-alone public company and giving you the best option to do that going forward?

Yes. So this was about long-term strategy execution and the best structure to support that long-term strategy execution. Obviously, we have a very strong balance sheet cash flow. We have great assets on both sides of the business. Management is always interested in creative ideas and ways to create shareholder value. But our goal here is execution of the long-term strategy.

Okay. Great. You chose -- for fiscal '21, you chose not to give guidance because of the uncertain environment. And obviously, there's a lot of other change with the reorg as well. Did you get some frameworks? And first, I'll start with the admin fees in supply chain services. Clearly, you're expecting lower than normal health care utilization and volumes over the x number of months or quarters. I think it's very TBD for all of us. That would include deferrals of elective procedures, et cetera. If current utilization nationally -- and most data sources would put it somewhere around 85% or 90% of normal here exiting in August or early September. If we stayed in or around that zone, give or take a handful of points, would that be an unreasonable proxy for modeling admin fees for the next year, of course, net of any contract resets with the reorg, would that be the reasonable proxy? Or are there other factors in play, like share gains, pricing, customer stocking up, other nuances that maybe are unusual this year that would say, no, you really can't take national utilization and make that the correlate for modeling admin fees?

There are 3 or 4 components. Craig, so why don't you walk through the 3 or 4 components?

Craig, you look like you're jumping to get in here. So I want to hear from you.

Yes. Sorry about that. So clearly, as you indicated, we didn't establish guidance. And the issue is uncertainty around the duration of how long it lasts. What I would say is that typically, our admin fee performance does correlate with utilization trends. So I wouldn't say it would be an unreasonable assumption to do that. But there are other factors. As we talked about in the past, the majority of our growth in the GPO is focused around driving additional penetration and usage of our contracts, expanding the portfolio we did as part of COVID, put in a supplemental contract sourcing program, where we added more contracts to the portfolio and things of that nature. So our strategy and focus is to make sure we're expanding and driving growth as much as possible within the context of the environment we're operating in. But I wouldn't say that your assumption is unrealistic in terms of thinking about the correlation with utilization trends.

You also obviously have a product division. Susan mentioned the contract manufacturing. You've been really active in generics. You've been active in PPE, you've been active in areas where customers often see shortages of supply. You showed exceptional growth here in the most recent quarter as would be expected, specifically on the PPE. But it does sound like, Craig, when you gave some of those assumptions for fiscal '21 that after the next couple of quarters, more in the back half of fiscal '21, that you had great expectations for product revenue growth. You did talk about long-term growth similar to what you forecasted in the past. I sensed a lot of investor uncertainty coming off of the call. Some people thought that it takes the current run rate and then just slow the growth to double digits. Other people thought maybe you meant, go back to the pre COVID run rate and then grow from there. I was hoping you could clarify for people who might have been uncertain after the last call.

Sure. Appreciate the question. So I think the way to think about our direct sourcing business is, if you look at its history, it's been kind of a high single, low double-digit growth business. In fiscal '19, it did about 100 -- just under $190 million of revenue. We were guiding pre-COVID to 11% to 15% growth in the fiscal year. So that's that low double-digit type growth we were talking about. We then talked about the incremental demand and benefit that we got in the very tail end of the third quarter and the fourth quarter, and I talked about sort of a $50 million sort of step-up, and then I indicated that while we aren't certain, again, because of the lack of certainty around the duration of the pandemic, at this point, we believe that, that sort of incremental or excess demand could continue through the first half of the year. So if I were modeling, I would think about -- I was doing around $190 million in fiscal '19, growing at 11%, 12%, 13% in a normalized environment, what would that look like in fiscal '21, if I didn't have these spikes in the first half of the year. And then I would layer those incremental spikes on top of that. So to answer the question, we would expect a step-down in the back half of the year once you don't have these isolated step-ups.

That's helpful. Performance Services, you mentioned prospects for elongated decision cycles continuing, also some delayed timing on existing engagements. Tech revenue was actually really solid in fiscal '20. I think that was a nice highlight for you. But you also said that with the uncertainty of the pandemic new sales flow, which I think is reasonable for us to have expected. I also know in the past, you've talked about election cycles have been... [Technical Difficulty]

I think Eric's frozen on mic, but I think he was going to ask about...

At times decision -- absent the guidance, I'm hoping for some level setting.

Yes. I think Eric is asking about...

Can you guys...

Yes. I think I got it, Eric. I think he's asking about election cycles and the impact on our business of election cycles. For the last 2 or 3 years, as you know, we have been pivoting our business for less impact, if you will, of the political environment because it's been quite challenging for the last few years. And so our investments with Contigo Health with employers and life sciences to extend our capabilities there, we have done well in terms of our technology services with providers and with others. And our view sort of now is that, that march to value-based care is going to continue, but we're not going to have our business be in any way dependent on whether it's a Republican-led or a Democratic-led administration. We're really focused on health care systems, performance improvement, their ability to transition to any of these models because the cost problem, the quality problem, the safety problem, none of those problems have changed. And in fact, the financial challenge is going to be even greater in a post-COVID world. So we're structuring the business and executing the strategy irrespective of what we think the election cycle will do.