PINC - NASDAQ

Good morning, and welcome to the Premier Inc. Fiscal 2023 First Quarter Results and 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 Angie McCabe, Vice President of Investor Relations. Please go ahead.

Thank you. Welcome to Premier's fiscal 2023 first 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 slides accompanying this conference call are available on the Investors 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 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 8-K, which we expect to furnish to the SEC soon. I will now turn the call over to Mike Alkire. Mike?

Thanks, Angie. Good morning, everyone and thank you for joining us today. This morning, we reported our first quarter results, which were consistent with our expectations and we are reaffirming our fiscal 2023 guidance, which we introduced at our August earnings call. Our performance reflects continued execution of our strategy to provide value to our members and other customers through our innovative technology-enabled solutions that we expect will result in sustainable, long-term growth and create value for our stakeholders. Through our data and insights that can influence virtually every decision of health care, we are demonstrating our value as a trusted partner in helping our members navigate an evolving and challenging environment. This morning, I'll share some highlights from the quarter and the progress we are making towards achieving our long-term growth objectives. Craig will review our financial result and fiscal 2023 outlook in more detail. In our PINC AI clinical decision support business, we continue to enhance our prior authorization and analytics solutions, among others to improve the patient, provider and payer experience. We are expanding our utilization management or UM, capabilities beyond the way, UM has currently delivered. We expect to soon begin scaling a new full service UM offering that enables providers and payers to leverage medical evidence and partner directly to help ensure the patients receive the most appropriate treatment. This solution will leverage our technology to transform the prior authorization process into one that guides clinicians to the most appropriate evidence-based options for their patients. This clinical decision support technology is embedded into the electronic medical record workflow of the clinician, thereby making it more efficient and less burdensome to the patient, provider and payer. Our goal is simple, to accelerate the time it takes for patients to be connected to appropriate therapies and to improve health outcomes. We have also made investments to improve some of our core capabilities, including our clinical surveillance technologies for infection prevention, quality analytics products and enterprise resource planning technology, among others. These solutions are now being introduced to better serve the growing non-acute market. We are also further expanding our partnerships with pharmaceutical, medical device and diagnostic companies that leverage PINC AI data and research capabilities for real-world evidence to advance the development and commercialization of clinical innovations. On our fiscal 2022 third quarter earnings call, we highlighted the work that PINC AI Applied Sciences is doing to identify patients with idiopathic pulmonary nodules or IPNs. We are proud that PINC AI Applied Sciences, along with our partners, Astra

Thanks, Mike. This morning, I will walk through our fiscal 2023 first quarter results and discuss our outlook for the remainder of the fiscal year, which remains unchanged from when we introduced it on our earnings call in August. Turning to the first quarter of 2023 and as compared with fiscal 2022's first quarter, results were consistent with our expectations with total net revenue of $313.9 million, a decrease of 14%. Supply Chain Services segment revenue of $219.7 million, a decrease of 21% and Performance Services segment revenue of $94.2 million, an increase of 7%. In our Supply Chain Services segment, net administrative fees revenue was essentially flat compared with the year ago quarter, primarily driven by continued growth in our non-acute GPO business as well as further penetration of existing member spend in the acute business, partially offset by the impact of members that did not amend or renew their GPO agreements in August 2020 as discussed on previous earnings calls. Within our GPO portfolio, the food category experienced strong growth, which was partially offset by price reductions in our pharmacy category as well as the continued normalization across a few categories, including pharmacy, that experienced stronger purchasing related to increased demand due to the COVID-19 pandemic in the prior year period. With respect to price inflation, and as we have communicated on recent earnings calls, we continue to manage price increases for supplies and services on behalf of our health care provider members. Although, inflationary price increases have had an impact on some contracts across the portfolio, they have not had a significant impact on our business to date. As we expected, products revenue declined from the prior year quarter due to the continued normalization of demand and pricing for personal protective equipment or PPE, and other supplies as a result of the progression of the COVID-19 pandemic. This was partially offset by ongoing demand for products as we continue to expand our product portfolio to include more clinical products, such as safety catheters and drive increased member adoption. In our Performance Services segment, revenue increased 7% compared with last year’s first quarter, this was primarily due to continued growth in our adjacent markets and consulting businesses and partially offset by the timing of revenue associated with enterprise analytics license agreements in the current year compared to the prior year. In addition, our adjacent markets businesses grew 40% over the prior year quarter, driven primarily by growth in PINC AI, Applied Sciences, Contigo Health and Remitra. We remain on track to achieve our fiscal 2023 target of 30% to 40% year-over-year growth in our adjacent markets businesses, which delivered over $80 million of revenue last fiscal year. With respect to profitability, GAAP net income was $43 million for the quarter. Adjusted EBITDA of $109.4 million in the first quarter decreased 10%, as we expected, from the same quarter a year ago, primarily due to two factors. First, Supply Chain Services adjusted EBITDA of $121.2 million decreased quarter-over-quarter. This was mainly due to our direct sourcing business, which experienced a decline in profitability, as we expected, given a decrease in products revenue, driven by lower demand and pricing for PPE as well as higher logistics costs that impacted margins. Second, Performance Services segment adjusted EBITDA of $19.4 million decreased from the prior year quarter, primarily due to the timing of revenue related to enterprise license agreements as well as higher selling, general and administrative expense, mainly related to additional head count to support anticipated growth in our adjacent markets businesses, particularly Contigo Health and Remitra. Compared with the year ago quarter, adjusted net income decreased 21% to $62.5 million and adjusted earnings per share decreased 19% to $0.52. Adjusted net income and adjusted earnings per share reflect income tax expense at an effective rate of 26% and 21% for the first quarters of fiscal 2023 and 2022, respectively. The lower effective tax rate in the first quarter of fiscal 2022 was primarily the result of the estimated impact of a valuation allowance release due to a subsidiary reorganization that was expected to and ultimately did occur in the second quarter of fiscal 2022. We continue to expect our effective tax rate to be at a more normalized level of 26% to 27% for fiscal 2023. From a liquidity and balance sheet perspective, cash flow from operations for the three months ended September 30, 2022, was $74.8 million compared with $55.2 million for the prior year. The increase was mainly due to increased cash flows from the continued growth in our Performance Services business as well as higher cash receipts from a dividend associated with one of our minority investments, and that was partially offset by a decrease in cash received as a result of lower revenue in our direct sourcing business as demand for pandemic-related supplies continues to normalize. Free cash flow for the first quarter of fiscal 2023 was $31.5 million compared with $10.3 million for the same period a year ago. The increase was primarily due to the same factors that affected cash flow from operations as well as a decrease in purchases of property and equipment. As a reminder, free cash flow is typically lowest in the first quarter since our fiscal year ends in June and payment of certain expenses, including annual employee incentive compensation, occurs in the first quarter. For fiscal 2023, we continue to expect free cash flow of approximately 45% to 55% of adjusted EBITDA. Cash and cash equivalents totaled $176.6 million as of September 30, 2022, compared with $86.1 million as of June 30, 2022. We ended the quarter with an outstanding balance of $250 million on our five-year $1 billion revolving credit facility and subsequently utilized an additional $125 million to fund our acquisition of TRPN assets, bringing our outstanding balance to $375 million as of the end of October. With respect to capital deployment, in a rising interest rate environment, we will remain disciplined and focused on taking a balanced approach through investments in organic growth and targeting acquisitions to strengthen, enhance or complement our existing capabilities and differentiate our offerings in the marketplace as well as the return of capital to stockholders through our quarterly dividend. We continue to look at opportunities that we believe will generate long-term stockholder value and are also focused on successfully integrating previously announced acquisitions. As Mike discussed earlier, we closed our acquisition of key assets of TRPN to advance Contigo Health’s growth strategy and paid for the assets through a combination of cash on hand and utilizing our credit facility. We are focused on integrating the acquisition into our business in fiscal 2023 and positioning it in the marketplace. As we communicated when we announced the transaction, we expected to generate $0.01 to $0.02 of accretion in fiscal 2023. We also anticipate that the transaction will result in $40 million to $60 million in incremental annual net revenue and will contribute 40% to 50% in adjusted EBITDA margin once it is fully scaled in the next three to five years. During the first quarter of fiscal 2023, we paid quarterly cash dividends to stockholders totaling $25.2 million. Recently, our Board of Directors declared a dividend of $0.21 per share payable on December 15, 2022 to stockholders of record as of December 1. Based on our first quarter performance and our outlook for the remainder of this year, we are reaffirming our initial guidance that we introduced on our fiscal 2022 fourth quarter earnings call in August. Specifically, we continue to expect total net revenue to be in the range of $1.38 billion to $1.45 billion, adjusted EBITDA to be in the range of $510 million to $530 million and adjusted EPS to be in the range of $2.63 to $2.75. From a cadence perspective, and as a reminder of the expectations we provided last quarter, in our GPO business, we are now generally beyond the previously mentioned impact of the members that did not amend or renew their GPO agreements in August 2020, and we expect this business to begin growing on a sequential basis in the second quarter of this fiscal year. In our Direct Sourcing Products business, we are beyond the impact that the COVID-19 pandemic had on this business and expect it to grow on a sequential basis beginning next quarter. However, we still expect revenue to be lower in the second quarter of this fiscal year compared with the prior year period, which benefited from the impact of increased demand and pricing related to the pandemic. In our Performance Services business, we expect revenue to increase sequentially from the first quarter throughout the remainder of the year, although 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 during any given fiscal year. From a profitability perspective, we expect earnings in the first half of fiscal 2023 to be affected by three factors. First, the first half of fiscal 2022 benefited from higher demand and pricing associated with pandemic-driven purchases of PPE and other supplies in our direct sourcing business. Second, the aforementioned impact on our GPO business in the first quarter of fiscal 2023 related to the members that did not amend or renew GPO agreements in August 2020. And third, we are making incremental investments across the business to drive our anticipated growth, particularly in our adjacent markets businesses and to recruit and retain talent in what continues to be a challenging labor market. These factors are expected to result in an approximate mid-single-digit year-over-year decline in adjusted EBITDA in the first half of fiscal 2023. Importantly, we expect this trend to reverse in the second half of this fiscal year as we continue to grow the business. In summary, we continue to execute and deliver value to our members and other customers in a challenging market environment. We remain focused on executing our strategy, and we believe we are on track to deliver on our fiscal 2023 commitments and to achieve our long-term growth objectives. Thank you for your time this morning. We’ll now open the call up for question.

[Operator Instructions] And our first question will come from Stephanie Davis of SVB Securities. Please go ahead.

Thank you for taking my questions. I wanted to start a little bit on the guidance you had in light of the Contigo acquisition close. Can you walk us through how much of this was already baked into the outlook? How should we think of the acquisition’s contributions as still getting you within the range or maybe to a different area of the range post close?

Sure. Thanks, Stephanie. So when we originally established guidance back in August, we had not factored in the TRPN assets, although it’s not going to be a complete full year. As we talked about when we announced the transaction, it will be accretive $0.01 to $0.02 in fiscal 2023. It’s early in the year, so we are not adjusting our full year guidance as a result of that incremental contribution. But obviously, it is a benefit to the overall guidance range.

Understood. So as opposed to the normal derisk with the beat in the first quarter, so you get a derisk from the acquisition close. One follow-up on when I think about the license sales miss in the first quarter, that surprised me as you’re already on a lower base for license sales in 1Q of last year. So can we take a step back, should we think about that as a benefit to timing in 2Q revenues? Or is there a way to give us broader color on kind of the demand environment for the first half license sales in 2023 versus 2022?

Yes. Relative to enterprise licenses, as we’ve talked about, it’s hard to predict exactly when they will close. I’ll let Mike provide some more perspective on the macro environment and demand. But what I can say is that we had – we did have enterprise license agreements that did occur in the first quarter, but there was another one that we expected to happen before the end of the quarter that did not close. I can say we have had one close since quarter end at this point, but that is the timing implication that we regularly discuss can cross across quarters depending on when they hit.

And then in terms of just the broader market and the demand on the enterprise licenses, it’s – Stephanie, so these health systems are under a lot of pressure. And so we’re trying to configure these enterprise licenses in a way that actually drives not only, obviously, long-term value, but also helps them from a short-term. And so it’s really just getting that message out there that there is the ability to potentially reduce cost, but longer-term, have longer-term agreements and be able to expand our capabilities into these accounts. So the demand is still there, and it’s just a matter of us making sure that we’re in the market with the appropriate messages.

Understood. Very helpful, guys. Thank you.

Thank you.

The next question comes from Eric Percher of Nephron Research. Please go ahead.

Thank you. I want to follow up on the comments around capital deployment, and I’m interested to hear if you’re seeing that there’s more activity in the market and maybe some entities that are looking for – or reaching the end of funding. Have you seen much acceleration? And it feels like TPRN hits a lot of different metrics in terms of being both accretive and extending the business and helping current customers. Are those just very hard to find? Or do you think we can see an uptick in M&A this year?

Yes. So more broadly, obviously, Eric, we are looking at in the market this year for assets that might be priced more reasonably than they have been in the past. We are going to continue to look in areas that extend our current capabilities, which truly are tech enabling the supply chain, helping our health systems really focus on appropriate buying and really channeling them into a capability that helps them leverage our committed programs and the ways truly to reduce cost. So in the Supply Chain area, we’ve got to continue to look for those opportunities. In the Performance Services area, it’s all of those adjacent businesses that Craig talked about. And our focus has been, just like with TRPN, how do we create or buy – look at these platforms that can help us not only support our health care systems today, but also build a longer-term platform that can help them as they’re sort of navigating a really, really difficult environment. And what TRPN is going to allow them to do is, for many of our health systems that either have partnerships or that have health plans, it’s going to allow them to extend services into their market. So we will continue to look for more reasonably priced assets but with an eye towards assets that really are a platform.

Yes. The only thing I would add to that, Eric, is we will continue to have our balanced approach. Obviously, we are in a rising interest rate environment. So we’ve got to be thoughtful when we are going through our capital plan analysis in terms of strategic fit, financial fit and execution/cultural alignment of the assets that they’re going to strategically differentiate us, but we’re going to deliver the financial returns we expect. So we continue to have an active pipeline. We continue to look, but we’ll be balanced in terms of how we think about accomplishing that.

And Craig, that higher interest rate obviously impacts your consideration of return when it comes to share repurchase. But looking at how you’ve financed this in the cash balance, do you still look at share repurchase as a possibility over the course of the year?

It’s something we’ll continue to assess in terms of best use of capital, yes.

Thank you.

Thank you.

The next question comes from Kevin Caliendo of UBS. Please go ahead.

Hi. Thanks for taking my call. A question I have is trying to understand if there’s any change in purchasing patterns happening at the hospital. I think in some of the checks we’ve done, we’ve heard companies are maybe not buying or replenishing inventories as much as they had in the past on supplies and other things. I’m just wondering if you’re seeing that in any way, shape or form? Are there any categories, if it’s PPE or anything else? And how pricing in the supply chain might be impacting behavior in any way, shape or form?

Yes. No, certainly. So a couple of different thoughts on that, Kevin. First, in supply chain, it is an environment right now that is continuing to evolve. So if you remember, our health care systems, a number of them made pretty significant investments in stockpiles and wanted to ensure that, as the virus progressed, they had enough products. So I do think that a number of those health systems are utilizing those stockpiles, which does obviously put a pressure on the demand for some of that PPE. I will also tell you that from a utilization standpoint in just terms of consumers utilizing the health care system, the – through our June quarter, the acute decreased, the acute utilization decreased by 2.7%. That’s obviously also putting pressure on all supplies. Obviously, that would have been utilized in those procedures. That’s a Supply Chain standpoint. On the Performance Services side, I will tell you, we have to continue to drive a message that we can not only create capability that creates long-term return and value for these health systems, but also short-term. And we’ve got some really, really unique solutions that we can offer our health care system customers that can help them in the short-term, meet some of their issues or meet some of their needs in terms of bringing down their overall cost, not only from an operating standpoint, but also from a corporate standpoint, that corporate overlay that many of our health systems are trying to figure out how to be more efficient with.

Yes. And the only thing I would add to that, Kevin, is that our expectations, particularly in our direct sourcing business, did contemplate that our members had procured PPE kind of buildups that they were going to be bleeding down, which is why we’re continuing to see that normalization. Now we do think the first quarter is the low watermark, so we will start to see sequential growth in the direct sourcing business moving forward. Although, as I said in my remarks, there will still be a decline in the second quarter because of the level of purchasing that was still occurring last year at this time. But that was factored into our expectations in terms of some of that slowdown due to what they had built up over time.

That’s helpful. If I can ask a quick follow-up. Is – are you also seeing people or customers going more full on formulary? I know it’s kind of what you’re saying, but it would feel like...

Yes.

In a way to save money, that’s actually a positive incremental for you as well, right?

Without a doubt. So – and that is obviously one of our primary objectives is to get people onto these committed programs, aka, formulary. But yes, we are seeing a lot more interest in those committed models as health care systems are feeling this pressure and some cases of utilization not picking quite back up at the pace they expected.

Great. Thank you so much. That’s helpful.

Thank you.

The next question comes from Eric Coldwell of Baird. Please go ahead.

Thank you very much. I’m going to throw a lot of numbers at you, but I’m following up on Stephanie’s original question around Performance Services and the acquisition. So you did $401 million in fiscal 2022 Performance Services revenue. TRPN is doing $40 million to $60 million, and the segment guidance this year is $430 million to $450 million. So it does look on face like organic Performance Services revenue is implied to be down about $10 million year-over-year if we hold this guidance as up-to-date or accurate. And if TRPN wasn’t included in that original guidance and adjacent markets are organically growing 30% to 40%, doesn’t that imply that the non-adjacent markets that made up about 80% of the segment’s revenue last year are actually down about $40 million? I’m just – I’m a bit confused about this Performance Services revenue guidance for the year.

Yes. Thanks, Eric. I appreciate the question. Again, it’s early in the year. And given that we’re only going to have partial year contribution from TRPN, at this point, we elected not to change the overall guidance given it will have a nominal contribution. I will say to your point that we are seeing and have communicated on previous calls, the rapid growth that we’re seeing in those adjacent markets part of our Performance Services business, which are offsetting slower growth, I wouldn't say it's negative growth, but I can understand, based on the range of guidance why that's how the numbers would appear. We will continue to assess our performance as the year goes on and revisit our revenue guidance on a go-forward basis.

And one, we are – obviously, we just closed on that transaction. So we've got to go through a process of integrating this asset over the next few weeks. So we'll be in a lot better place to do exactly what Craig suggested.

If I could just get one quick follow-up. Are there any revenue – is there a revenue discounting going on with that TRPN guidance? Or is there anything to consider in terms of the mechanics of how that revenue comes in, that might not be immediately visible to us on the Street?

Yes, it's a great question, Eric. I would say – I wouldn't necessarily call it discounting. But what I will say is that in Contigo Health's original business plan, there was an expectation they would be building out some network capabilities and there was revenue and contribution that was contemplated in their original model, which was in our guidance. We subsequently closed TRPN, which is going to give us contributions for network capabilities. So we had to basically net out the benefits we were expecting to get from a different approach than having the TRPN asset in our business mix for fiscal 2023.

Okay, that’s very helpful. Thanks guys.

Thank you.

The next question comes from Richard Close of Canaccord Genuity. Please go ahead.

Yes, thanks for the question. Just to follow up on that last question and discussion. It wasn't clear to me, is the $40 million to $60 million for the acquired business, is that the run rate now or when you expect it to be scaled and integrated.

Yes. Thank you, Richard. No, if you go back and read the release announcing the acquisition, the $40 million to $60 million is when that has been built out over the next three to five years, not the current run rate at all.

Okay. That's helpful. I just want to go back to the utilization management, Mike. Can you talk about that offering and like the go-to-market and the revenue model associated with that? Who are the customers? Just more details there would be helpful.

Certainly. So obviously, we're in early stages. But you heard us talk about in the past this whole focus on technology enabling prior authorization. So this is just another step in building out that category or that offering. And as you know, prior authorization has been a very, very cumbersome and manual process. And so our focus really is to technology enable that and we are in a very unique spot to use natural language processing, machine learning to automate that capability. Now we've been working with a couple of different organizations over the last year, 18 months to build out that capability. So we feel really comfortable where we are. Our goal really obviously is the leverages to help our health systems improve quality and reduce cost. So obviously, one of the areas of focus is obviously working with our health systems and providers. And then the other area, obviously, is working directly with payers. So we do have some very specific capabilities, especially around high cost imaging and in those areas, where we can help payers actually become more efficient as many of them are using manual labor and other capabilities to read charts and to look at lab values and all of those kinds of things. And we have technology enabled that using the various protocols to automate that entire function. So we're really excited about it. But to answer your question two, areas that – two markets we're focused on both the payer and the provider market.

And Richard, just a little additional color. So on the provider side, that would be typically a SaaS subscription to our clinical decision support capability. So that would be the revenue model on the provider side. On the payer side, it is a contractual relationship with a payer to provide that back office automation and AI-enabled capability to eliminate their manual labor.

Okay, thank you.

Thank you.

The next question comes from Jessica Tassan of Piper Sandler. Please go ahead.

Hi, thank you so much for taking the question. I'm hoping you can maybe talk a little bit about who the addressable market is for this out-of-network wrap products from TRPN Direct Pay. Just interested to know, are you guys selling that to be sort of a supplement to whatever the employer's ASO plan might be? Or just how is that sold, who is the end customer and then how large is the market and sort of how quickly do you estimate it's growing?

Yes. So let me just hit the highest level of the strategy stuff first. So we found this asset. We're incredibly excited about this asset. And so Jess, as you think about our health care systems, they are – they need to continue to look at ways to provide more services for their patients. Obviously, many of them have what we characterize as provider-sponsored health plans. And those health plans, for the most part, are providing services to those communities as well as their own staff, right. So many of them are self-insured. So what this wrapper does is if you're a patient or if you're an employee or if you're a customer of that health plan and you have to have services outside of that provider footprint, typically, you have to go – these health plans have to contract with somebody else to provide that kind of capability. And what we have done with this asset is provide this now capability of a wrapper so that when those either customers or those employees go outside that provider's footprint, we can actually service them through the contracts that we have bought this acquisition. So, we think it's incredibly exciting. We also think, obviously, that not only can we provide this wrapper capability but now as health systems are looking to sort of expand into the payer side of the market, we have that TPA capability that you're well aware of, that really supports our Centers of Excellence program. And now with this wrapper, we have the ability to provide health plan capabilities – virtual health plan capabilities, so that if a provider wants to stand that kind of capability up, we have those assets. So we're really excited about both of those activities in both of those options.

Yes. And this is Craig. We do think there's a potential third business case, which could be to have employers or providers carve out their out-of-network reps. So as opposed to having it bundled into their overall offering. ConfigureNet, which we've said is going to be the brand name of this capability in the future, could be carved out and actually be a separate capability that could be provided as well.

Got it. That's helpful. And I just have one quick follow-up. I think you mentioned that there were some pricing headwinds related to COVID in 1Q of last year. And I just wanted to clarify that those were not related to the direct sourcing business, those were outside of it. And then if that's the case, can you just kind of clarify what exactly those headwinds that you lapped in 1Q were, how big? And do they persist through 2Q or the back half? Thanks.

Yes. I think – I mean, again, going back to last year, the year-over-year impact, there's really two headwinds that were affecting us from pricing standpoint. So indirect sourcing, yes, we had higher pricing of commodity products a year ago. Prices have continued to come down. So that is a headwind in terms of the margins that we're seeing in our direct sourcing business. We also have the freight expense implications from a couple of months ago that are impacting margins in that business. So those are the headwinds to the direct sourcing business. And then I also talked about in my commentary, the GPO headwinds because we had the last quarter, a year ago, of the folks that had not amended and restated their GPO agreements, so they had lower pricing in their GPO participation agreements a year ago. Those have now stepped up, which created a year-over-year headwind in the GPO business.

Thanks Jess.

The next question comes from Jack Wallace of Guggenheim. Please go ahead.

Thanks for taking my question. I just want to talk about the GPO business. Looks like there's a fairly steep ramp just given the guidance in the first year number. Can you help us just think through the sequential layering on of net admin fees expected throughout the year and just the impact of the macros, the volumes impact and that cadence?

Yes. I mean, as I just mentioned, we do expect from a GPO perspective, that Q1 was the low watermark for the reasons I've talked about, Jack. And then we would expect sequential increases throughout the remainder of the fiscal year. So stepping up in Q2, a slight step up in Q3 and then a step up again in Q4 to get us within the range of performance that we've talked about for the year. That is and will continue to be stronger performance in the non-acute GPO side of the business, which is about 40% of the business now and lower growth in the acute care business as we are continuing to not contemplate and expect significant ramp-ups in the utilization within the acute four walls of the hospital.

Got you. That's helpful. And then I just want to go back to comments made on the last call about the front half of the year having about a mid-single-digit EBITDA decline year-over-year. We're a little bit higher than that this quarter. Just wondering how much of that was the impact of the license sale that slipped into the second quarter and if there are any other puts or takes in there?

Yes. The more significant impact affecting first quarter was the GPO headwinds that I've discussed in terms of the impact that had and then the direct sourcing margin impact from the normalization of purchasing. I think if you look at the gross margins in the direct sourcing business, you're going to see a significant step down because of the decreased level of revenue and the freight expense implications that we've talked about that are affecting us in the first half of this fiscal year. We do think that's – we're seeing ocean freight come down and things of that nature, which we think will benefit us from a margin standpoint in the back half of the year. But those two headwinds are really impacting us. Within Performance Services, yes, the lower EBITDA margin contribution we had in the quarter did get affected by the timing of the enterprise license agreements.

Got you. Thank you. That’s it from me.

Thank you.