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.

Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, press star 11 again. Please stand by while we prepare your first question.

first question comes from sandy draper at guggenheim partners sandy your line is open please go ahead uh thanks so much and good morning um i guess the the first question is steve on your comment on uh or maybe it's brendan on the potential bookings improving the back half a year trying to think are you thinking about on a on a year-over-year growth basis on a gross bookings and we'll see where cancellations sort of shake out or net bookings just any more color on how you see that, and is that primarily driven by the biotech area? Thanks.

Yeah, Sandy, thanks for the question. We see, well, I'll answer your last question first. The opportunities that we're seeing in the business are not just in the biotech. They're really fairly broad-based across the business. So really, I think we reported last quarter an increase in RFP on a sequential basis. That's continued in the second quarter. And as I said, early in July, we're seeing further opportunities. So we're certainly cautiously optimistic of a strong business development performance in the back end of the year, right across the various segments. And in terms of whether it be gross net, new, all of the above is what I would say. Ultimately, net new business is what drives our revenues. We haven't seen, while cancellations have been perhaps slightly elevated above historical levels, we don't see them in any way to be abnormal. And so we don't see cancellations being a major issue. So really we see the potential, as I say, cautiously optimistic for an improved business development performance in the back end of the year based on what we're seeing in terms of opportunities across the business.

Great. That's really helpful. And then just a quick follow-up or unrelated follow-up for Brendan on the free cash flow. Down a tiny bit to a billion, but still would expect that or requires a pretty good improvement to back out the year. Is that just driven by continued DSOs coming down? And do you have a new DSO target for the end of the year? Thanks.

Hey, Zannie. How are you? Yeah, we need to continue to focus on our cash conversion, absolutely, and of course, a big part of that will be DSO management. We've said over the last couple of quarters that we wanted to see that coming down by at least a couple of days. We've said in the longer term, we'd like to be in the mid-40s, and certainly that's where I'd like to be coming to as we get to the back end of the year. So that's certainly the target I've given the guys. We think that's a good and close to optimal level of DSO for Icon, given the structure of our company, but also our customers. So that's very much the focus as we get into the back half of the year. I think it's also important to say we'll be looking carefully at the other elements of our balance sheet in terms of our own DPO focus and making sure that that lines up with DSOs and the credit market that we're in, the environment that we're in. So we'll be keeping an eye on all elements of the balance sheet. But yes, the DSOs is by far the biggest piece of that, and we'll be targeting mid-40s.

Great. Thanks, Brendan. Thank you. Please stand by for your next question. Your next question comes from Justin Bowers at Deutsche Bank. Justin, your line is open. Please go ahead.

Hi, good morning, everyone. Just on the improving demand environment, is that across all customer segments? And I guess the question would be, what are some of the, what do you think the changes are in 2Q from 1Q and maybe even the end of the year last year? And then Are you seeing any changes in conversion rate as well, or is that more of what you anticipate sort of in the back half of the year as well?

Yeah, Justin, it's Steve. I think as I said in the previous answer, the demand increase, the RFP opportunities are really across the segments of the business. Our large pharma group, in our biotech group, and in the more lab services peri-clinical early phase as well. So it's, from that point of view, consistent, functional as well. So I'm pleased with the way that that's, as I say, broad-based. In terms of conversion, I don't know that we see any significant change in conversion. A lot of the work is still in the oncology space, which, as you all know, burns a little slower. There are some large opportunities out there in sort of this post-COVID next-generation work, and so it'll depend upon what happens in terms of our success rate in winning those. That may have some impact on burn rate if, in fact, we're successful there. So that all remains to be seen. But I think the main point is it's broad-based, it's across the group, and we're cautiously optimistic that we can make some improvements there. on our business development wins in the back half of the year, which will set us up well realistically for 2024 and beyond.

Good to hear. And if I may, on the expansion of the existing strategic partnership, when would you expect that to start to show up? And then any updates on your top customer in that partnership?

In terms of the expansion of the existing one, that's going to take a little bit of time to flow through. There are various constraints that this partner has in terms of what their portfolio is. And so we don't expect any dramatic immediate uptick on a revenue basis there. But I think broadly speaking, for the longer term, medium to longer term, we certainly see some opportunities to build and to drive forward the revenues from that partner, but certainly nothing for 2023. In terms of our top customer, we continue to work well with them and we continue to service them well. There is some adjustments in the way that they're putting their development models together and moving perhaps more to a more functional hybrid sort of basis, but that's typical of a number of customers in the large pharma space at the moment. We're seeing that somewhat of a trend across the industry there, but it's something that we feel we're well positioned to be able to accommodate, given that we are the number one provider on the functional space, and we obviously have a very strong full service group. And typically these customers put in place hybrid solutions, where part of their portfolio is functional, but there's also a part of their portfolio that stays in a full service and some becomes more hybrid. So, you know, we feel we're well positioned to be able to accommodate whatever development model that our largest or any other customer for that matter wants us to work with.

Appreciate it. I'll jump back in queue.

Thank you. Please stand by for your next question. Your next question comes from Luke Sergut at BioPlease. Luke, your line is open. Please go ahead.

Great. Thanks for the question, guys. So I kind of wanted to dig into the customer classes here that you guys report on. So the top 11 through 25 have really been picking up here the last three quarters now, I guess. Can you talk a little bit about what's going on there? I would assume that I'm probably wrong in thinking that these are smaller biotech and it might just be that they're underserved by you guys and you guys are winning wallet share. So talk about the growth that you're seeing there, especially in the in light of the overall industry demand structure.

Let me have a go at that one, Luke, and then I think Brendan might want to dig in. Don't assume that the 1125 are all large or small. There's a fair mix of different customers, and some customers jump in there for a period of time and then come out. I don't know that there's anything in particular going on with that group of customers. We believe we serve our large customers effectively. I think the opportunity we're having as we're going forward is looking at the more mid-sized customers, those who are interested obviously in the functional but perhaps don't have their own internal development resources to be able to do that and so they go full service. But they're also thinking about a more hybrid model. And so I think we are focusing our attention and our focus more effectively in that mid-sized market. And that may be some of what we're seeing in terms of how they're growing.

I was just going to add to that, Luke. Obviously, it's a great sign to see expansion in the next cohort outside your top 10. And again, I think it speaks to the strength of the portfolio of businesses that we have. that we're growing, not just in the top 10, but growing outside of that top 10 and broadening the customer base, generally speaking. So I think it's a positive piece, and I think it speaks really well to the combination of the organizations over the last two years, to Steve's point in the opening remarks, and how we're really managing now to do a much better job at making sure that right across our portfolio, we're selling as much service as we can into all our customers.

Great. And then I guess the follow up kind of adds on to that. So as you guys are thinking about the industry growth as it is now and talking about seeing green shoots and funding, how do you guys, what are the conversations you're hearing from your larger customers on the large pharma side, unlocking those programs and really trying to getting a path back to that high single digit growth?

You know, the conversations we have are really around how they're spending their money effectively and efficiently and how we can help them get their drugs to market. So as I say, when I get asked this question a lot, Luke, even when R&D budgets are going up or they're spending more, we clearly have an opportunity. But even when they're not, and even going down or staying flat, we have an opportunity. In fact, sometimes it's more of an opportunity for Organizations like ours when budgets are flat because the pharma companies look at how they're spending and try to optimize their spend. So it varies really depending upon the customer. As I said, this was some of the larger pharma. There's a trend perhaps more towards a hybrid full service functional model at the moment. But, of course, in the biotech, they're highly in the full service. And those midsize ones in the middle are really looking at how best to optimize those development dollars. So it really depends upon the company. It depends upon the management that's in the company at the particular time and the size and the shape of their portfolio. There's really no one-size-fits-all on that, I'm afraid.

Okay, great.

Please stand by for your next question. Your next question comes from Jack Meehan at Nefron Research. Jack, your line is open. Please go ahead.

Thank you. Good morning. Steve, I was curious to get your thoughts as you speak with your pharma customers. I'm just curious, has the Inflation Reduction Act come up as a consideration, and how do you think that could impact trial activity as we go into 2024?

Yeah, thanks, Jack. Not specifically, I would say. The IRA obviously is out there, and the implications of the IRA really are some years down the track. So while I suspect they're thinking about it and talking about it internally and looking at how they're spending their development dollars and organising their portfolio, we haven't had any specific conversations around the IRA. And again, I'll say it, as I said before, I think the IRA... offers us an opportunity going forward. Because there is potentially some implications for the drugs they develop and the money they spend. And so they'll be looking, I think, carefully at how they do that. And perhaps some of the models that we're seeing come forward are maybe a reaction to what they see coming down the track, coming several years down the track with the IRA. That may or may not. But we haven't had any sort of specific conversations with them about that.

Great. OK. And then one question for Brendan on just backlog burn expectations. You know, I think previously you were talking about 9.5% for the year. That would kind of call for a stabilization in the back half. Is that still your view? And just as you look at your backlog, how do you think this kind of trend is going beyond this year? Thank you.

Hey, Jack. I suppose, you know, we call it 9.5. That's a full year number. That means, obviously, we started the year at 9.6. We're at 9.5 in the current quarter. So it's not going to move a huge amount from that. But, you know, I think there's, you know, it'll be 9.5 or thereabouts as we get into the second half of the year. So that is our full year number. It's a struggle. You know, we've talked about this in the past. Conversion is not easy. Steve made the point on an answer earlier on that, you know, we still see a lot of oncology in the marketplace. And, obviously, those trials, they can be, you know, four to six years in duration. So, you know, mathematically, that's a lot lower than... 9.5% a quarter. Against that, we have the mix of our businesses, some are faster revenue burn. And so we're always looking at how do we optimize that? How do we be as efficient as we can in delivery of our projects for our customers? How do we make sure we're starting them up quickly and getting on with the trials and getting them enrolled? So it's a constant battle. As we get into next year, we'll give you the insights as we get to that point, I think. I mean, I think it's fair to say that this has been a declining trend over time in the industry. But we're always battling as hard as we can to keep it as flat as possible, and we'll certainly continue to try to do that as we get into 2024. But we'll give you a better granularity on that as we think and talk to 2024 later in the year.

Appreciate it. Thanks. Please stand by for the next question. Your next question comes from Dan Leonard at Credit Suisse. Dan, your line is open. Please go ahead.

Thank you. I'm curious, with the biotech funding environment seeming to be improving a bit, could you share any thoughts on timing, whether you'd expect any lag between improved funding and your business opportunity, or whether you think you could see a change in real time?

Sure. I think as we see the green shoots of biotech funding seeming to appear, and as I say in in the RFP opportunities. I think this is going to take a little bit of time to play out. As I said, I think we'd like to think for the second half of this year that those opportunities will lead us to a strong business development performance, which should play then, I think, into revenues as we get into 2024. I think that's all I can give you on timing at this stage. Some of these opportunities, as I think I indicated, are around more sort of next generation vaccines that may burn a little faster and help us. But others are, you know, typically biotech is highly focused in the oncology space as well. So that will tend to be pushed down the track a little bit. So, you know, I wouldn't expect, as I say, with the opportunities we're seeing to see much impact on this year. But I do think it gives us optimism for 2024.

Appreciate that. And just to clean up question, Brendan, can you remind us how much of your backlog is COVID at this point and what the COVID associated revenue was in the quarter?

Yeah, it's low singles at the moment. You know, it's a couple of percent in terms of the backlog. I mean, the overall year is probably still in that 3% range, 3 to 4% for the full year on our COVID revenue at this point.

and then just to jump in that's where it was for this quarter as well around three and a half percent of revenue which is down from quarter one as expected perfect thank you please stand by for your next question the next question comes from Patrick Donnelly at City Patrick your line is open please go ahead

Great. Thanks, guys. Steve, maybe just kind of putting a lot of your comments together on the potential improvements of bookings, RFPs. You sound pretty optimistic about the potential biotech improvement. There was a lot of attention turning to 24. I know it's a little early, but there seems to be some debate if you guys are more of a mid-single-digit grower next year. I guess in the current environment and what you're seeing, do you see a path to that being more kind of getting back to that high single-digit framework next year? Brendan touched a little bit on the conversions.

as well you know what do you see as the key variables and how do you kind of look at that eye level yeah patrick uh you know i don't think we're quite ready to uh to talk too much about 2024 at this point as as you've outlined you're quite right we you know we see uh optimism a reason for cautious optimism with the with the rfp flow the sequential rfp flow uh coming in and that's obviously uh needs to be converted into into business wins in the next uh You know, it's a couple of quarters, and if we do well in that space and we continue our, I think, very good win rates, if we can apply those to the opportunities that we're seeing, I think we'll be in good shape for 2024. But I'm not ready to put a number on 2024 at this point. We feel optimistic, certainly about our medium and certainly long-term growth, but medium-term growth, and that does include 2024. But as Brendan said, we'll get back to you on that. on that as we get towards the end of the year.

Okay. Understood.

And then... Sorry, Patrick. We just lost you. If you could just try to repeat that second part.

Apologies. Patrick got disconnected. In the meantime, should we take the next question from David Windley at Jefferies? David, your line is open. Please go ahead.

Hi. Thank you. You've made really solid progress, seem to be well on your way to the 150 basis points of margin improvement this year. That has, as I think you and we expect, been more geared toward G&A leverage, but you have made some progress on gross margin as well. I guess I'm wondering, Steve, what your longer-term aspirations are relative to margin and the opportunities to get there, essentially, is there still some room on gross margin to make some progress, or should we think about that largely being scaled on SG&A? Thanks.

Yeah, Dave, I think we made about 120 bps improvement on gross margin year-on-year from the quarter. So I think that's a reasonable progress on a gross margin basis. And as you know, we've also made some progress on our SG&A. You know, I think it'll depend a little bit on the mix of work that we get. Certainly some therapeutic areas, some parts of our business obviously have a slightly different margin profile, so it'll depend upon that. I think we see still some optimism in terms of our ability to move our gross margin forward modestly, you know, given the various options we have with respect to, I talked about it, robotics, AI, machine learning and how that can help us in the direct sort of fee, direct cost of labour area. But I'd say probably most of our margin gain over the next few years will be around STNO. We continue to, I think, have one of the best global business services groups in the industry. And so, you know, continuing to leverage that and to leverage their expertise. And we have opportunity, I think, in terms of where we're locating those people, as I say, the processes, around what they do, our abilities with machine learning. So it's really on both, but I'd say probably the majority of progress will be made in the SG&A sort of level.

And do you hazard a numerical target? Like if you're at better than 25 and a half for this year on EBITDA, are you thinking several percentage points more to be had over multiple years?

I think we're talking about 20.5, Dave, not 25 and a half. Don't give me a heart attack.

Right, sorry, I meant 20 and a half is what I meant to say if I didn't say that.

Thank you. I'll just get back off the floor if you don't mind. You know, we've made really good progress in that space, and I'm delighted with, you know, we've done it both in gross and in the SGA level. We see we'll make some – that's the number that we think we'll get to. We can make some further progress on that as we get towards the end of the year, and then we'll look at it for next year. I'm not going to put a target on that at the moment. We continue to challenge ourselves in that front, as our former CEO said, every ceiling becomes a floor. I'll get that right. And so we continue to challenge ourselves on that front, but I don't think I'm ready to put out any particular target on that at the moment.

Fair enough. Appreciate the answers. Thank you.

Please stand by for your next question. The next question comes from Elizabeth Anderson at Evercore ISI. Elizabeth, your line is open. Please go ahead.

Hey, guys. Thanks for the question. Maybe just a pivot of what Winley was just asking. How do you think about the long-term? If pharma is moving toward more of a hybrid, functional, full-service mix, how do you think about that vis-a-vis the longer-term margin opportunity? Are there particular offsets that you guys can have at that mix shift? Are there other opportunities that present themselves there? Thank you.

Yeah, I think there's certainly some, those businesses around the functional and even hybrid do present us with some different margin challenges, Elizabeth, going forward. We have some significant plans in place to make sure that we have our people in the right places, right locations, and using the right technology in order to mitigate those sorts of challenges. So while there are always going to be some challenges, whether you're working full service business or functional business or hybrid business on a margin front, customers are always expecting us to do things faster, better, cheaper on a long term. But we believe the organization's well positioned to be able to do that, and we're taking steps even as we speak, to continue that progress as we go forward into the future. Do you want to add anything?

No, I think that's it. You know, it's something that we constantly keep under review. You know, as we look at our mix of business, you know, we're always challenging ourselves. It's what Steve said earlier on. How do we maintain our gross margin profile in the right levels? And that's something that we do as just part of our organization and part of the investment strategy, indeed, that we have to make sure that we're We're thinking about technology and the efficiency of our trials to both deliver the best customer results, but also make sure that we're maintaining margin profiles.

Got it. Thank you. That's helpful. And then in regards to sort of hitting... We lost Elizabeth.

We lost Elizabeth now, I think. Elizabeth?

Yeah, apologies. We lost Elizabeth there, too. Next question. And Elizabeth, if you're still listening, please do press star 1 again. to join the queue and Patrick as well. Star 11 will put you back in that queue. In the meantime, the next question is from Max Smock at William Blair. Max, your line is open. Please go ahead.

Hi, good morning. Thanks for taking our questions. Sticking on the customer theme, we talked about your top customer and some smaller customers, but it looks like revenue from customers two through five was down year over year and more than 10% sequential here in the second quarter. Just wondering if there's anything to call out that would explain the lack of growth from these customers in particular in the second quarter.

Max, Brendan here. I don't think there's anything too dramatic to call out, Max. It really depends on each individual customer and where they are with their projects. For example, we often have cases where you could have a retro change order pickup on a particular customer that could accelerate in the revenues in two to five and it'll make the other customer segments look slightly different. So I don't think there's any kind of extraordinary math there. And it's not, as we've said in the past, it's not an absolute consistent number. While our top five doesn't tend to change that much, you do have people coming in and people moving out. And again, that can be specific to the customer. It can be specific to where they are in their development profile. One of the big things that we see that shifts even our large customers up and down is just where they are on their development pipeline. oftentimes we'll see big chunks of work come in from folks. They'll burn through that. They'll reset. It could be a period of time you don't see that much, and then they come back again. So there is that flux that is just natural to the clinical research business. Yeah, understood. That's super helpful. Thanks, Brendan.

Maybe another quick one here for me, just on cancellations. Again, kind of nitpicking a little bit, but 2.1% slightly above, I think, the 2.0% target you've laid out. In the past, is there any detail you can provide around what accounted for the slightly elevated cancellations in terms of customer size, therapeutic modality, or indication? And then relatedly, how much bad debt expense did you take here in the second quarter?

I'll leave the bad debt one to you, Brendan. But in terms of the cancellations, Max, no, they were fairly across the board. as a broad-based, if you like, or consistent across the various segments of our business. There's no particular therapeutic area or customer segment where we saw any more cancellations. I mean, really, on a historical level, the cancellations were pretty much as previously. They really weren't up sequentially or on the year. So it's really nothing to see there as far as we're concerned from a cancellation basis. Do you want to take the bad debt?

Yeah, sure, Max. As you guys know, we took a chunk in the first quarter. We felt in the second quarter that we were more than adequately provided on bad debt provision. We don't consistently over time do it every single quarter. So we kind of look at it on a quarter-by-quarter basis. We didn't feel the need to increase that provision in the current quarter. Got it.

Thank you again for taking our questions.

Please stand by for your next question. The next question comes from Casey Woodring at JP Morgan. Casey, your line is open. Please go ahead.

Hi, great. Thanks for taking my questions. So Steve, based on your comments, it sounds like 4Q is the bottom in terms of SMID RFPs given the sequential upticks here in 1Q and now in 2Q and so far through July. But You know, order growth was flat sequentially in 2Q. So can you maybe just talk about the customer conversations you've had recently that gives you some confidence that this deliberate decision-making that you called out during the prepareds will improve in the back half of this year? And then maybe just, you know, thoughts on where bookings growth can be in the back half. And is a book-to-bill acceleration maybe closer to the middle of that 1-2 to 1-3 guidance range goal? You know, is that realistic in the back half?

Yeah, in terms of customer conversations and converting RFPs to awards, yeah, they've been relatively flat sort of sequentially. But these do take, I mean, typically RFPs, there's a lag here in terms of winning the work and often take three months, many, and sometimes longer, and then implementing the work. As I said, we're optimistic that we can improve our business development performance in the second half of the year, but really it won't be much impact on revenue until we get into 2024. And our customer conversations have been sort of along those lines. There's certainly some opportunity out there. We talked about, mentioned some green shoots in terms of the biotech funding. The RFP opportunities are sequentially up. across the board, not just in biotech, but in large and mid-sized pharma as well, and indeed in our peri-clinical labs, early phase, and functional. So, you know, as I say, I'm cautiously optimistic, and I think those two words are important. We believe we've got some good opportunities now to prosecute and to bring in, in terms of wins in the next... Six months or so, next couple of quarters, I think that can get us into the middle of that range, the 1.2 to 1.3. That would be our expectation, but we have to deliver on that, and we have to win that work, and then we have to convert it into revenue. And so there's work for us to do, but we're certainly primed up, and we certainly have the raw material and the opportunity to do it, Casey.

Got it. That's helpful. And then just one last one for me for the model. Brendan, any changes to your FX assumptions? I think last quarter you were embedding, you know, 50 basis point tailwind from FX on the top line. Just has that changed at all?

I mean, we're still, I mean, we keep it under review for the current year. We'll look at it. You know, there's probably, yeah, it's around half a percent still. So, you know, that's still there. We'll keep it under review. As we know, the FX movements go up as well as down, so we'll keep it under review as we go through the course of the year, but I think the current guidance reflects all of our thinking on both FX and other elements at the moment.

Got it. Thank you.

Thank you. Please stand by for the penultimate question in the queue. Just a reminder, if you do wish to ask a question, please press star 1 1 on your keypad to join the queue. The next question comes from Derek De Bruyne at Bank of America. Derek, your line is open. Please go ahead.

Hi, great. Thank you for taking my question. I won't push on the EBITDA margins. The RFP has already been asked. So those are my ones. But so I'll ask the obvious. You know, look, you've delivered nicely. You've got good cash flow generation. It's improving. How should we think about capital deployment? I mean, are there M&A opportunities, particularly on the technology side that you're looking at? What about share buybacks? Just a little bit more color on how should we sort of think about use of the cash?

Yeah, Derek, as you know, we've done a nice job in moving our debt down and getting back to investment grade, and I think the first thing we'll do is take an opportunity to potentially restructure part of that debt, as I mentioned. In terms of capital deployment going forward as we get to the end of the year and into next year, we're certainly already surveying the market from an M&A point of view. It'll be back to more our typical traditional tuck-in, string of pearls type approach. That's what we've done in the past and we'll continue to look at that. There are still areas of our business that I'd like to see us build and scale up in and those are the areas I think we've talked about, real world evidence, labs, imaging, those sorts of parts of our business where we believe we can by bringing them together and scaling up, we can really get ourselves a significant advantage, a unique advantage. In terms of buybacks, they are probably the third priority, but notwithstanding that, we will be opportunistic in how we look at that. Clearly, the M&A market still remains actually a little frothy in terms of valuations for the companies, and we're not the sort of company that's going to overpay on a on an acquisition. So we'll value and we'll look at the opportunities. We'll look at what value they bring to our business. We'll look at how much we have to pay for them and what sort of opportunities and synergies we can drive in as we acquire them. And if that makes sense, we'll do that. That would be the priority. But if they're not and we have our capital accumulating, we'll certainly look at potentially buying back our stock. But that, as I say, would be on a more opportunistic basis.

Got it. And then just one follow-up. I mean, Obviously, the China biotech has been weak. A lot of concerns coming out of that and certainly impacting some of the other companies that we cover the China situation. Can you just remind us on some of your activities in that market in that region? And, you know, is that been a headwind opportunity? Just can talk about that, I think, in particular. Thank you.

Yeah, I mean, China's not a huge part of our business. You know, we have about 1,500 employees out there, roughly, what is it, 3% or so, 3.5% of our business. We haven't seen any particular problem lately. You know, they've now obviously opened up post-COVID, so we see sites are now available to us more effectively. And, you know, with the COVID wave really sort of dissipating now, it's kind of almost back to business as usual in China. Unfortunately, that's not the case in Russia or Ukraine yet. But China's, you know, sort of back to where we'd like it to be. It's contributing. We have a significant presence out there in terms of number of people. We have a functional business out there. We have a full-service business out there. And increasingly, we're seeing, you know, customer opportunities out there as well. So, you know, I'd say China's pretty much back to almost pre-COVID levels now. Great.

Thank you very much.

Thank you. Please stand by for your last question in the queue currently. And that question comes from John Sowerbier at UBS. John, your line is open. Please go ahead.

Hi. Thanks for taking my question here, Deanne. Just one. Do you have any additional color around trial starts and how those are tracking and, you know, there have been some press reports on shortage on certain ecology drugs out there that might be impacting trial starts. Just any color you can provide there. Thanks.

John, I don't think we see any particular dramatic change in trial starts. We've seen a little data around the industry around perhaps, you know, phase three is going, fewer phase three trial starts, but that hasn't, that we haven't appeared That hasn't appeared in terms of what we've seen from customers in terms of clearly from what we've said in terms of RFPs and opportunities. So I don't really have much to contribute on that front. We see the market still being plenty of opportunities, still plenty of great innovation happening and still plenty of new drugs, not just drugs, but cell and gene therapy being an important part of that sort of portfolio coming through and we have some expertise in that space. No, nothing there that we would call out as anything but normal.

Great. Thanks for taking the question.

Thanks, John. I don't know if Elizabeth or Patrick wanted to jump back in. We didn't cut them off, we promise. So I was wondering if they wanted to jump back in, but otherwise I think we're almost done then, operators.

Yes, they haven't joined the queue again, so I'm assuming they don't wish to. But again, Patrick and Elizabeth, if you do want to ask a question, star 11 on your keypad. Thank you. I think we can assume their questions were answered, perhaps, by following questioners. Back to you, Stephen, for final remarks.

Okay, well, thank you, Operator, and thank you all for listening into our call today and your interest in ICON. We look forward to providing further updates as we progress through the second half of 2023. So thank you all and have a good day.