ICON plc

Good day, and thank you for joining us on this call covering the quarter ended June 30th, 2023. 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 20-F filed on February 24, 2023. 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 press 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, adjusted net income, and adjusted diluted earnings per share exclude stock compensation expense, restructuring costs, foreign currency gains and losses, amortization and transaction-related and integration-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 for a brief follow-up. I would now like to hand the call over to our CEO, Dr. Steve Cutler.

Thank you, Kate, and good day, everyone. ICON delivered good results in quarter two at our focus on quality, operational excellence, and innovative solutions continued to drive success in our project delivery for customers. The industry demand environment has been solid with positive trends across all customer segments. Overall RFP activity continued the sequential improvement we experienced in quarter one, and we saw a notable pickup in RFP activity within the biotech segment toward the end of quarter two. while we are encouraged by the uptick in overall opportunities, the behaviour we have previously noted of cautiousness regarding spending as well as delayed decision-making on awards is still present within this segment. Within the mid and large biopharma segments, we continue to see a resilient environment with another quarter of strength in functional service and hybrid opportunities. We are cautiously optimistic we will see an improving trend in bookings through the second half of this year. And while it's early in the third quarter, we have seen RFP activity continue its positive trajectory in July. We continue to see a high level of engagement with customers that are seeking a partner that can provide flexible and customized solutions for their specific clinical development needs. As customer pipelines, development plans and management priorities evolve, their outsourcing partner requirements change as well. Our differentiated position as the most scalable and comprehensive provider of clinical development solutions strongly positions us with existing and new customer opportunities and partnerships, regardless of their preferred development model. To that end, I'm very pleased to announce we were successful in securing an expansion of an existing strategic partnership with a top 20 pharma customer in quarter two. We have increased the scope and scale of services under our partnership, which now includes multiple elements of our offering in full service and functional solutions, as well as a number of periclinical services. This strategic customer recognized the value of easily accessing a variety of scaled clinical development services and technologies that were unavailable at our competitors. We see this scenario being replicated at other top 50 biopharma companies going forward, and we remain in active dialogue with several large companies contemplating this type of model. Similar to this partnership, we have begun to see a number of large pharma customers move towards a more blended or hybrid model of clinical development. This incorporates elements of both traditional full service and functional outsourcing as customers seek a solution which drives efficiency for their entire portfolio, which often includes augmenting their existing infrastructure alongside outsourcing support. As a market leader and a skilled provider of these services, Icon is uniquely positioned to partner with customers in driving more efficient delivery of services and better outcomes to achieve their specific goals. Our stated vision is to be the world's leading healthcare intelligence organisation, and to this end, we recognise the importance of being at the forefront of technology adoption, specifically with potential application of artificial intelligence and machine learning in clinical development. We are investing in our technology infrastructure in order to accommodate the significant volume growth in trial data appropriately scaling to enable seamless data collection and management. We are focused on developing and advancing our market-leading tools that utilize elements of AI and machine learning alongside our clinical expertise. In quarter two, we released our latest AI-enabled capability called Iconex, which enables study teams to more quickly and easily identify potential investigators based on connections in active physician networks and published content. This is particularly important in complex therapeutic areas such as rare disease, and will support our efforts in improving site selection, a long-held industry challenge. ICON has also continued to make considerable advancements with robotic process automation, and we are on course to double our progress from last year in 2023 with the expectation of processing 2 million hours of activity through automation, focused in areas such as data mastering, systems integrations, and document handling. In addition, we recently released the latest version of the Icon digital platform, our end-to-end solution to enable patient-centric, decentralized clinical trials. This new release includes updates to important features such as ECOA and direct data capture while also integrating with several other ICON solutions such as Firecrest Portal for site training and communications as well as the MAPI Research Trust, our market leading clinical outcomes assessment library and other validated instruments. We are also making notable progress in other initiatives at ICON. We released our 2022 ESG report, providing updates on our commitment to conducting business sustainably and the further advancement of our ESG program, ICON Cares. We've made great progress toward the achievement of a number of our targets, most notably in our goal to achieve gender parity at senior levels by 2025. We have also submitted our commitment letter to the Science-Based Targets Initiative the first step in submitting targets for validation. Separately, we were delighted to be added to the Russell 3000 Index at the end of June, following its annual reconstitution process. It is a great milestone for ICON since becoming a publicly traded company in 1998, presenting an opportunity to further expand our shareholder base. Turning to our financial performance in the quarter, ICON delivered solid results with a 4.4% revenue growth over quarter two, 2022, our first quarter in excess of $2 billion in revenue. Direct fee revenue growth was in the high single digits year over year on a constant currency basis, and net bookings grew 4% over quarter two, 2022, resulting in a net book to bill of 1.2. Of note, Similarly to direct revenue, our direct fee net bookings grew in the high single digits on a year-over-year basis. We delivered another quarter of impressive margin performance with gross margin expansion of 120 basis points on a year-over-year basis and 17% adjusted EBITDA growth on quarter two 2022. Strong direct fee revenue growth and continued focus on cost management across the company were key factors in our margin expansion in quarter two. Our capital deployment strategy remains unchanged, with our priorities focused on further reduction of our floating rate debt, as well as potential tuck-in acquisition opportunities that are strategically aligned with our portfolios. Depending on progress in these two areas, we will also be opportunistic on share buybacks as we get to the end of 2023 and into 2024. We've made great progress in achieving our net leverage ratio target of 2.5 times adjusted EBITDA as we closed out quarter two. And this is now at a level to position us to return to an investment grade rating. This will enable us to return to the debt market in the short term to restructure part of our current debt, thereby allowing us to reduce our interest payments for 2024. With the positive results we have delivered so far in the first half of this year, we are narrowing our financial guidance for the full year 2023. We now expect revenue to be in the range of $8.07 billion to $8.21 billion, an increase of 4.3 to 6.1% over the prior year. Additionally, we expect adjusted earnings per share to be in the range of $12.63 to $12.91, representing an increase of 7.5% to 9.9% over the full year 2022. This increases the midpoint of our adjusted earnings per share by 4 cents to $12.77. This guidance includes progress on our tax rate and assumes adjusted EBITDA margin expansion of approximately 150 basis points on a year-on-year basis. Finally, I want to highlight an important milestone we recognised earlier this month, which was the two-year anniversary of our union with PRA Health Sciences. We have delivered on all of the targets we set at the announcement of our combination. surpassing initial timelines on the achievement of cost synergies and our target net leverage ratio. We also performed at or above our key financial targets for the full year 2022 through continuing to deliver for our customers and patients. We are grateful to and proud of all of our employees for their valuable efforts and commitment to driving our success through this transformational period for our company. We look forward to ICON's continued progress and market leadership as we continue to build the world's leading healthcare intelligence organization. I'll now turn the call over to Brendan for additional comments on our financial results. Brendan.

Thanks, Steve. In quarter two, Icon achieved gross business wins of $2.86 billion and recorded $441 million worth of cancellations. This resulted in a net of awards in the quarter of $2.42 billion, a net book-to-bill of 1.2 times. With the addition of the new awards in quarter two, our backlog grew to a record $21.7 billion, representing an increase of 2.2% on quarter one of 2023, or an increase of 8.5% year over year. Our backlog burn was 9.5% in the quarter, slightly down from quarter one levels as we had anticipated. Revenue in quarter two was $2.2 billion. This represents a year-on-year increase of 4.4% or 4.3%, on a constant currency organic basis. Overall customer concentration in our top 25 customers decreased from quarter one at 2023. Our top customer represented 8.6% of total revenue in quarter two. Our top five customers represented 26.2% of revenue. Our top 10 represented 40.3%, while our top 25 represented 61.1%. Gross margin for the quarter, was 29.6% compared to 29.8% in Quarter 1, 2023. Gross margin increased 120 basis points over a gross margin of 28.4% in Quarter 2, 2022. Total SG&A expense was $182.9 million in Quarter 2, or 9.1% of revenue. In the comparable period last year, total SG&A expense was $194.5 million, or 10% of revenue. Adjusted EBITDA was $414.2 million for the quarter, or 20.5% of revenue. In the comparable period last year, adjusted EBITDA was $354.3 million, or 18.3% of revenue, representing a year-on-year increase of 16.9%. Sequentially, adjusted EBITDA margin improved 30 basis points over quarter one, margin of 20.2%. Adjusted operating income for quarter two was $383.8 million, a margin of 19%. This was an increase of 16.8% over adjusted operating income of $328.6 million, a margin of 17% in quarter two of 2022. The net interest expense was $80.9 million for quarter two. We now expect the full year interest expense to total approximately $310 million in 2023. reflecting the change in market expectations for further rate increases in the second half of 2023. The effective tax rate was 15.2% for the quarter. We now expect the full year 2023 adjusted effective tax rate to be approximately 15.5%, down from our full year 2022 effective tax rate of 16.5%. Adjusted net income attributable to the group for the quarter was $256.9 million, a margin of 12.7%. equating to adjusted earnings per share of $3.11, an increase of 8.7% year-over-year. In the second quarter, the company recorded $12.7 million of transaction and integration-related costs. U.S. GAAP income from operations amounted to $209.5 million, or 10.4% of revenue during quarter two. U.S. GAAP net income attributed to the group in quarter two was $115.6 million, or $1.40, dilute per diluted share compared to $1.41 per share for the equivalent prior year period. Net accounts receivable was $1,171,000,000 at the 30th of June, 2023. This compares with a net accounts receivable balance of $1,197,000,000 at the end of quarter one, 2023. DSO was 52 days at June 30th, 2023, an increase from 41 days of June 30th, 2022, and a decrease of two days from March 31st, 2023. Cash from operating activities in the quarter was $204 million. Free cash flow increased 18% over the second quarter of 2022, and we expect further improvement in cash conversion in the second half of this year, as quarter two is typically our lowest quarter due to the timing of bonus payments. We expect this to result in free cash flow of circa $1 billion for the full year 2023. We are pleased with the initial progress made on DSO in the quarter and will remain focused on billing levels and cash collection activities to ensure we continue to improve as we progress through this year. At June 30, 2023, the company had a cash balance of $270 million and debt of $4,312,000,000, leaving a net debt position of just over $4 billion. This compared to net debt of $4.21 billion at March 31, 2023, and net debt of $4.43 billion at June 30, 2022. Capital expenditure during the quarter was $32.1 million. From a capital deployment perspective, we made a payment of $150 million on our term loan B facility in quarter two, and ended the quarter with a leverage ratio of 2.5 times net debt to adjusted EBITDA. We expect to continue our payments on our Term Loan B facility over the course of 2023, totaling approximately $800 million to $1 billion for the full year. As Steve mentioned, given we met our initial target leverage ratio of 2.5 times adjusted EBITDA, we will be actively pursuing options to restructure our long-term debt. Given the current floating rate level on our Term Loan B facility, we see a very good opportunity secure a more favorable position in 2024, assuming an investment grade of ratings occur this year. Alongside revising our financial guidance for the full year, we have updated key assumptions, which are now an effective tax rate of 15.5%, free cash flow target of circa $1 billion, capex spend of $150 million, and interest expense of circa $310 million, all for the full year 2023. Before we move to Q&A, we want to extend our thanks to the entire ICON team for their many contributions to our performance this quarter. Operator, we are now ready for questions.