ICON plc

Good day, and thank you for joining us on this call covering the quarter ended March 31st, 2022. Also on the call today, we have our CEO, Dr. Steve Cutler, and our CFO, Mr. Brendan Brennan. I would like to note that this call is webcast and that there are slides available to download on our website to accompany today's call. Certain statements in today's call will be forward-looking statements. These statements are based on management's current expectations and information currently available including current economic and industry conditions. Actual results may differ materially from those stated or implied by forward-looking statements due to risks and uncertainties associated with the company's business, and listeners are cautioned that forward-looking statements are not guarantees of future performance. Forward-looking statements are only as of the date they are made, and we do not undertake any obligation to update publicly any forward-looking statement, either as a result of new information, future events, or otherwise. More information about the risks and uncertainties relating to these forward-looking statements may be found in SEC reports filed by the company, including the Form 20F filed on March 1, 2022. This presentation includes selected non-GAAP financial measures, which Steve and Brendan will be referencing in their prepared remarks. For a presentation of the most directly comparable GAAP financial measures, please refer to the release section titled Condensed Consolidated Statements of Operations. While non-GAAP financial measures are not superior to or a substitute for the comparable GAAP measures, we believe certain non-GAAP information is more useful to investors for historical comparison purposes. Included in the press release and the earnings slides, you will note a reconciliation of non-GAAP measures. Adjusted EBITDA excludes stock compensation expense, restructuring costs, foreign currency gains and losses, amortization and transaction-related costs and their respective tax benefits. We will be limiting the call today to one hour and would therefore ask participants to keep their questions to one each with an opportunity to ask one related follow-up question. I would now like to hand over the call to our CFO, Mr. Brendan Brennan.

Thank you, Kate. In quarter one, Icon achieved gross business wins of $2.78 billion and recorded $357 million worth cancellations. Consequently, net awards in the quarter were $2.43 billion, resulting in a net book to bill of 1.28 times. With the addition of the new awards in quarter one, our backlog grew to a record $19.6 billion, representing an increase of 2.7% on quarter four of 2021, or an increase of 9.8% year-over-year on a combined company basis. Our backlog burn was 10% in the quarter, consistent with quarter four. Revenue in quarter one was $1,902,000,000. This represented a year-on-year increase of 121.6% or 125% on a constant currency basis. On a combined company basis, revenue increased 6% to 6.1% or 7.8% on a constant currency basis from the comparable period last year. The revenue impact From year-over-year changes in foreign currency exchange rates resulted in a headwind of approximately $30 million in quarter one. Our top 25 customer concentration increased slightly from quarter four, as our top customer represented 8.9% of revenue, and our top five customers represented 28.6% of revenue. Our top 10 represented 43.8%, while our top 25 represented 62.8%. Adjusted gross margin for the quarter was 27.8%, compared to 28.1% in quarter four. Gross margin was negatively impacted in the quarter by the slowdown in Russia and Ukraine, as well as supply challenges in our laboratory services business. Adjusted EBITDA was $340.6 million for the quarter, or 17.9% of revenue. In the comparable period last year, adjusted EBITDA was $285.9 million, on a combined company basis, or 16% of revenue, representing an impressive year-on-year increase of 19%. Adjusted operating income for quarter one was $314 million, a margin of 16.5%. The adjusted net interest expense was $38.5 million for quarter one. The reduced interest expense was attributable to the 25 basis points decrease in the rate on our term loan B facility, which took effect at the end of Q4, when our leverage ratio declined below four times adjusted EBITDA. This resulted in a $0.06 benefit to earnings per share over Q4. We do not expect this level of expense to continue in subsequent quarters as we anticipate a rising interest rate environment over the course of this year. The adjusted effective tax rate was 17% for the quarter. However, we continue to expect the full year 2022 adjusted effective tax rate to be approximately 16.5%. Adjusted net income attributable to the group for the quarter was $228 million, a margin of 12%, equating to diluted earnings per share of $2.76, an increase of 27% year over year. In the first quarter, the company recorded $12.1 million of transaction and integration-related costs, U.S. GAAP income from operations amounted to $170.3 million, or 9% of revenue during quarter one. U.S. GAAP net income attributable to the group in quarter one was $112 million, or $1.36 per diluted share, compared to $1.82 per share for the equivalent period last year. Net accounts. Receivable was $745 million at 31 March 2022. This compares with a net accounts receivable balance of $642 million at 31 December 2021. Cash collection efforts continue to be strong with DSO of 35 days in the quarter, down from the 49 days on a comparable basis from March 31st to 2021, and up from 31 days on a comparable basis at December 31, 2021. The sequential increase in DSO is a consequence of ongoing finance integration activities and alignment of billing processes. As this work is completed, we will look to maintain and decrease our DSO. Cash generated from operating activities in the quarter was $227 million. At March 31, 2022, the company had a cash balance of $560.8 million and a debt of $5,142,000,000. leaving a net debt position of $4,581,000,000. This compared to net debt of $4,682,000,000 at December 31, 2021, and net cash of $595.6 million at March 31, 2021. Capital expenditure during the quarter was $19.6 million. We ended the quarter with a performer net debt to trading 12-month adjusted EBITDA ratio of 3.3 times. The priority for capital deployment remains on debt pay down in the near term. And as such, in quarter one, we made a payment of $300 million on our term loan B facility. Given our continued strong cash flow generation, we reiterate our target of exiting 2022 below three times adjusted EBITDA. As announced in our last call, our Board of Directors authorized a share repurchase program of up to $100 million. I'm pleased to report we were successful in deploying the full authorization of $100 million within quarter one, resulting in the purchase of 421,000 shares at an average price of $237.76. With all of that said, I'd now like to hand over the call to Steve.

Thank you, Brendan, and good day, everyone. Icon had a strong start to the year in quarter one, reflecting continued operational strength and business momentum, despite macroeconomic headwinds impacting our business. Throughout the year, ICON employees continued to exhibit their ongoing resilience and dedication to delivering customers' programs as effects from the pandemic continued with the emergence of new COVID variants and the war in Ukraine presented a new set of challenges. Ensuring the safety of our employees in the region is our first and foremost priority. We have been able to provide support to many Ukrainian families and employees that have crossed the border to neighboring regions and assisted in relocation to other ICON offices where circumstances allow. We are working closely with our customers to ensure studies continue and patient safety is maintained to the full extent possible, deploying remote technologies for monitoring and assisting dislocated patients in finding new trial sites. Patient recruitment activity in the region has been halted and no new studies or sites are being started at this time in Russia or the Ukraine. Earlier this month, I was in our office in Poland, which has been at the forefront of helping to provide the on-the-ground support to many of our employees leaving Ukraine. I'm incredibly proud of the extraordinary efforts exhibited by our employees in Poland and nearby countries. Our staff in the region not only have gone above and beyond for their colleagues, but for our customers, sites and patients as well, ensuring trial continuity and mitigating risk to the best of our abilities. They are an excellent representation of the ICON culture and we are grateful for their dedication and tireless efforts. In the quarter, the financial impact from the war in Ukraine was approximately $5 million. we anticipate a continued impact in subsequent quarters, up to an estimated 1% of revenue for the full year, assuming no further change in our ability to operate in the region for the foreseeable future. Despite challenges from the war in Ukraine and emergence of additional COVID variants, the broader environment for clinical development remains strong. Total RFP volume was solid in quarter one, increasing by low double digits on a year-over-year basis. While the biotech funding market declined further in the quarter, we have seen pharma R&D spend continue to grow, and we have not witnessed the slowdown in RFP activity in the small and mid-sized biopharma segment, which was consistent with the strong levels we saw in quarter four 2021. Additionally, I would note that we haven't seen an uptick in the level of cancellations or project delays in this segment of our business. have continued to see private and venture capital funding supporting companies with strong science and novel therapies in areas such as oncology rare disease infectious diseases and neurology in the last few years icon has worked with over a thousand emerging biopharma companies and our consultative partnership model strongly appeals to this customer segment we are confident with Icon's ability to continue winning market share across the biotech and small pharma segment, giving our leading expertise and purpose-built biotech unit, consisting of 8,000 dedicated employees. Our backlog exposure to capital market-dependent companies remains low, and our strong position across all other key market segments should ensure our business wins remain robust in the foreseeable future. Our business development performance was excellent in the quarter, resulting in another record quarter of net business wins of $2.43 billion, representing a net book-to-bill of 1.28 for the quarter and 1.27 on a trailing 12-month basis. Backlog grew 10% year-over-year to $19.6 billion on a combined company basis, an increase of 2.7% sequentially from quarter four, 2021. Sales performance was particularly strong in our large farming unit, but was broad-based across all business units, reflecting continued demand for our innovative and integrated solutions. Strategic discussions across several key partnerships are continuing to advance, presenting opportunities for growth and expansion across our business segments. Our clinically focused but diversified business mix and customer-centric offerings has played a key role in winning new customers and renewing existing partnerships as customers seek flexible development models along with a broad set of services and expertise. One of our key success factors in building and maintaining strong customer partnerships is our commitment to collaboration and operational excellence. In the quarter, we held our first Partner of Choice meeting as new icons. bringing together several of our partners in the strategic solutions segment of our business to share insights and ways to further innovate in this area. ICON is leading the way with its approach to customer engagement, and events like this clearly demonstrate our commitment to our focus on creating enduring customer partnerships. Financial performance was strong in the first quarter, resulting in combined company revenue of 6%, or 8% on a constant currency basis year over year. These results exceeded our initial expectations, given difficult comparisons on a year over year basis from high pass-through revenue related to COVID studies and further headwinds due to foreign currency fluctuations and the war in Ukraine, which will continue to challenge us in quarter two. Despite these macro headwinds, operational performance was impressive, with adjusted EBITDA growth of 19% year-over-year on a combined company basis in quarter one, as SG&A cost management was particularly strong due to achievement of initial cost synergies. I was also very pleased with our adjusted earnings per share of $2.76, which grew 27% from quarter one, 2021. At a high level, our overall customer mix has stayed consistent and well-balanced in quarter one, with approximately 50% of total revenue in large biopharma and approximately 45% of total revenue in mid and small biopharma. Within the small biopharma segment, companies that have less than $100 million in annual R&D spend again represented a mid-teens percentage of our overall revenue and backlog, Given our cash collection efforts in the quarter, we were able to make a $300 million payment on our term loan B facility, further reducing our leverage to 3.3 times adjusted EBITDA at the end of the quarter, down from 3.4 times at the end of quarter four. We believe we are on track to hit our aspirational target of exiting 2022 with a leverage ratio of approximately 2.5 times adjusted EBITDA. Our integration progress continued throughout quarter one as we passed the one year mark since we announced the transformative union with PRA Health Sciences that now completed nine months operating as a combined organization. Our focus on enabling a unified employee experience has continued to advance. bringing more of our staff together physically through facility integrations, of which we have now completed 50 across the globe. Even more importantly, our efforts to connect the organisation through the implementation of common platforms and enterprise-wide technology systems are reaching critical milestones. A few of our first system implementations, including our human capital management system, will go live this quarter, and we are advancing deployment of several other tier one enterprise wide systems, which will come online in the next few months. Our successful integration efforts to date have enabled continued progress on our synergy targets. And as we reaffirmed in March at our analyst day, we expect to realize approximately 50% of our cost synergy target or $75 million in 2022. From a revenue synergy perspective, our cross-sell activity was again strong in quarter one, with approximately $30 million in new awards, consistent with the activity in the fourth quarter of 2021. Cross-sell awards in the first quarter were led by Laboratory Services, Early Phase, and IRT, sir. Turning to COVID-related trends, there were several notable factors impacting our business in quarter one. Revenue related to COVID studies was consistent with quarter four, representing a mid-single-digit percentage of overall revenues. Backlog related to COVID programs was approximately 5% total ending backlog, as we were successful in winning new business for additional vaccine work related to booster studies in the quarter. These additional study wins are evidence that COVID-related work will be part of our business for some time, and is an excellent testament to ICON's leadership in vaccine development and strong trial execution in this area. With the new awards won in quarter one, we expect that COVID-related revenues will represent approximately 5% of our total revenue for the full year 2022. From a site access perspective, we saw continued resilience from sites and staff throughout the quarter, despite the emergence of additional COVID variants and a lockdown in China causing restricted access to sites that had previously reopened. This dynamic, coupled with site access impacts from the war in Ukraine, caused a slight increase in the number of sites restricted in some capacity, now totaling approximately 17%. While we have seen volatility in levels of site access across different regions, either due to COVID or more recently from the war in Ukraine, Our teams are now able to pivot faster and more seamlessly by deploying remote-based solutions, lessening trial impacts that would have been more substantial two years ago. We have seen continued adoption across customer segments of decentralized trial components, particularly hybrid models of development. While we have noted that fully decentralized trials are few in number currently, we were pleased to have started a recruitment on a full phase two decentralized clinical trial study in women's health in quarter one. This study is a great example of the power of our broad set of integrated services, where the trial is being executed utilizing multiple decentralized components. Digital patient recruitment services, our AcelaCare site network, and concierge services center with the study managed by a decentralized clinical trials operational team. We remain focused on our commitment to further invest in key technologies, tools, and platforms that will improve efficiency and delivery in our industry. OneSearch, our innovative site selection tool, is continuing to deliver insights to our customers on optimal site selection, reducing site startup times, decreasing the number of non-recruiting sites, and improving overall patient recruitment rates. During the quarter, we invested further in the tool with interface updates to enable better user experience and data enhancements to add valuable data sources, as well as backend mapping. We continue to look for opportunities to integrate broader sources of data, not only to OneSearch, but across our entire set of solutions. Our focus is on increasing our access to, not necessarily ownership of, unique data sources, as well as evaluating partnerships and other opportunities that advance our healthcare intelligence strategy by further enhancing our analytics capability, producing more targeted results and outcomes for our customers. Another area of strong focus for our organization is in automation. Through the additional capacity provided by robotic process automation, we have continued to enable our new capabilities and offerings for customers, where the outputs of clinical trials can be delivered in a more timely way and at a higher level of consistency and quality. A great example is in the completion of our eTMS, which has been one of the strongest areas for RPA productivity in 2022 so far. with over 2,800 FTE business days saved in quarter one. In addition, we continue to leverage advancements in technology, enabling us to employ remote monitoring across a range of workflows in our clinical trials. We are unifying our sites towards a single way of working, enabling remote review of ECGs and lab reports and combining patient recruitment and scheduling into an overall integrated capability. As clinical development continues to evolve and biopharma customers increasingly look to their partners to provide innovative solutions, we see an excellent opportunity to lead the market with our focus on healthcare intelligence. We believe our investments in talent, technologies, data and analytics are leading to improvements in long-held industry challenges, patient recruitment, site identification and study start-ups, just to name a few. we remain excited by the opportunity to create a new paradigm for bringing clinical research to patients and the enhanced outcomes it will deliver for all of our stakeholders. With a strong performance in the first quarter and continued positive customer demand environment, we are reiterating our 2022 financial guidance revenue in the range of $7.77 to $8.05 billion and adjusted earnings per share in the range of $11.55 to $11.95. As indicated at our Analyst Day in March, we expect an adjusted EBITDA margin of approximately 18% in the full year 2022. Finally, earlier this month, I was honoured to accept the award of Ireland's Company of the Year at the 2021 Business and Finance Awards on behalf of ICON. This award recognises companies based on their market position, operational and financial achievements, and is a tribute to the dedication and engagement of our 39,000 employees around the world. Before moving to our Q&A session, I'd like to take an opportunity to recognise our employees for their commitment and efforts in quarter one. We look forward to the continued success of our organisation throughout the year as we remain focused on delivery for customers, sites, and patients around the world. Operator, we're now ready for questions.