ICON plc

Good day and thank you for joining us on this call covering the quarter ended June 30th, 2024. Also on the call today, we have our CEO, Dr. Steve Cutler, our CFO, Brendan Brennan, and Senior Vice President of Corporate and Commercial Finance, Emer Lyons. 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 23, 2024. 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 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 in the interest of time. I would now like to hand over the call to our CEO, Dr. Steve Cutler.

Thank you, Kate, and good day, everyone. Icon's results in quarter two continued our positive year-to-date trajectory of growth marked by solid financial performance and further success in securing new business across our segments. Net business wins and backlog grew by 7% and 10% respectively year-over-year as our leading scaled offering continues to resonate with our customers, uniquely positioning Icon to meet increasing demand for innovative, and flexible solutions in clinical development. We remain encouraged by the leading indicators in our market that support a solid demand environment, including continued growth in RFP flow and the overall consistent level of opportunities we are seeing across our customer segments. While biotech funding levels attenuated slightly in quarter two from a robust start in quarter one, we see this market continuing to stabilize and have seen a modest uptick in RFPs on a trailing 12-month and sequential basis within this segment. Importantly, customer sentiment appears to be improving and we remain optimistic around the contribution to mid-term growth this important customer segment represents. In the large pharma segment, we see continued opportunity to win and expand our support of the many customers seeking novel solutions. While macro challenges and budget uncertainties remain a factor at the forefront in their overall spending decisions, we have seen continued prioritization around the development of late stage clinical pipeline assets to advance drugs to market. We believe this provides a certain degree of stabilization to the demand patterns in this area of the market that have largely been steady through more volatile macroeconomic periods in recent years. Our offering in large pharma is particularly well placed to serve customers seeking flexible blended solutions encompassing both full service and functional elements of delivery with our proven agility and scalability in both service areas. One of the key strategic initiatives we laid out at our investor day in May was extending our leadership in the large pharma market through our blended solutions offering. and our differentiated ability to customize a model for customers. This increasingly important approach was critical to our success in securing another new strategic partnership with a rapidly growing top 30 pharma company for full service solutions in quarter two. We were selected for this partnership due to our ability to partner with this customer in creating a tailored operational solution that was optimized to fit their evolving needs. Our deep understanding of various outsourcing models and the ability to pivot between them was a key differentiating point for ICON, as well as our portfolio of integrated peri-clinical services that will create value in areas such as site and patient solutions and laboratory services. This reinforces our recent success in building partnerships outside of our top-tier customers, creating a well-diversified and balanced portfolio that is not overly concentrated to a particular customer or therapeutic area. Specifically, in the first half of this year, we were able to grow revenue outside our top five customers by over 8%, illustrating the success we are having in executing our portfolio and developing our top tier customers of the future. As we continue to grow and scale our company, we remain focused on leveraging the unique blend of experience and capability we have in not only winning, but executing and expanding large-scale strategic partnerships that create strong value for both our customers and ICOM. While our perspective on this year's demand environment has remained consistent, we did receive an update late in the quarter pertaining specifically to next-generation COVID vaccine trials that will cause an impact to our full-year revenue in 2024 due to the delayed start of these studies. There were two primary but separate issues that affected the start of these trials. One was a delay in sponsors receiving regulatory guidance that was required before commencing trial enrolment pertaining to new variant specifications, and the second was investigational product related issues that caused a delay in enrolment. We are working closely with our development partners to ensure efficient and timely execution of these high priority studies that continue to be of critical importance to our customers and the safety and health of our communities. To be clear, these studies have not been cancelled and our expectation is that these trials will enrol the majority of patients in 2025 with startup-related activities having already commenced in some instances. With these anticipated changes, we now expect our COVID-related revenue to be approximately 1.5% to 2% of total revenue for the full year in 2024, representing a year-over-year headwind of approximately 200 basis points to total revenue. While we're disappointed by these unanticipated one-off project delays, these do happen in our industry, and they are limited to one specific area within our business. We remain confident in the strength and delivery of our underlying service offering, as well as the benefits of a diversified mix of customers and therapeutic areas that constitute our entire portfolio. Our business performance excluding COVID has been very solid, with revenue growing 8% year-to-date, over the first half of 2023 and is helping to offset some of the negative headwind we are now expecting from both foreign exchange and the COVID-specific study delays. To that end, given the excellent margin delivery year-to-date through strong project execution and cost control across the business, as well as further leverage of our global business services model, we are increasing our full-year adjusted EBITDA margin expectation to 21.7%. at the midpoint of our range, an increase of 80 basis points on a year-over-year basis. This outperformance, coupled with expected savings on full-year interest expense, is supporting the increase of our full-year adjusted earnings per share guidance, which we now expect to be in the range of $15 to $15.20, an increase of 17.3% to 18.8% over the full year 2023. With the consistent trends in our broader demand environment, our expectation on book-to-bill remain in the range of 1.2 to 1.3 times on a quarterly basis, maintaining our previous target range. Turning to financial performance in quarter two, net bookings grew 7% on a year-over-year basis, resulting in a book-to-bill of 1.2 times in the quarter and sustaining our trailing 12-month book-to-bill ratio of 1.24 times. We again saw a strong performance in our large pharma business, particularly in full service solutions, as well as for operational delivery services in data sciences, which notably secured a new sole provider award in the quarter. Total revenue increased 5.3% on a constant currency year-over-year basis in the quarter. Gross margin of 29.9% increased 30 basis points over quarter two 2023, and total SG&A expense decreased 40 basis points on a year-over-year basis to 8.7% of total revenue, driving another quarter of strong adjusted EBITDA growth of 9% over Q2 2023. This resulted in an adjusted EBITDA margin of 21.2% in the quarter, up 70 basis points year-on-year. With strong margin delivery through our P&L, in addition to the benefits of our debt refinancing, we saw excellent year-over-year growth in adjusted earnings per share of approximately 21%. Following the successful repricing of our existing term loan B facility earlier this year, we continued our strategy of further refinancing our variable debt in quarter two. We completed our inaugural SEC bond offering total $2 billion in early May, which was met with very strong investor interest and initial order book of circa $15 billion. The proceeds of this offering were allocated to the repayment of our fixed-term loan B debt, resulting in a current capital structure which has approximately 72% of our debt subject to fixed rates. As we noted at our investor day in May, this now provides us visibility to a reduction of approximately $110 million in interest expense over 2023, resulting in expected total full year interest expense in the range of $200 to $210 million for 2024. Importantly, this was a great milestone for our company in completing our first investment grade bond offering. and providing increased balance sheet flexibility as we look to continue to optimally deploy capital on a go-forward basis. As we have previously stated, we remain focused on M&A as the priority use of capital in the near term, with a focus on strategic assets that continue to differentiate our clinical offering and drive value for our customers. However, as communicated previously, we have authorization from our board of directors for a share repurchase program of up to $500 million to be deployed opportunistically on an ongoing basis if the appropriate assets cannot be secured at the right price. We are updating our full year 2024 guidance range to account for the delayed COVID-related projects as well as foreign exchange headwinds due to the strengthening US dollar since our quarter one report. We now expect revenue to be in the range of $8.45 billion to $8.55 billion, an increase of 4.1% to 5.3% over full year 2023. As I noted earlier, we are increasing our full year adjusted earnings per share guidance to a range of $15 to $15.20, an increase of 17.3% to 18.8% on a year-over-year basis, reflecting our strong margin delivery and continued cost management. Before I close out my prepared remarks, I want to provide a brief update on our CFO transition. We continue to make good progress on our search for a new CFO, and we now have a small number of very strong candidates remaining in the process. We expect to make a more detailed announcement regarding this transition later in the current quarter. Finally, I want to extend my sincere thanks to all of our colleagues at ICON for their many efforts in the quarter and the first half of this year in supporting our customers and helping to accelerate their development programs to bring new therapies to patients around the world. Brendan, I'll now hand it over to you to review our financial performance in more detail.

Thanks, Steve. In quarter two, ICON achieved gross business wins of $3.07 billion, an increase of 7.4% on a year-over-year basis. In addition, we recorded 493 million worth of cancellations, resulting in net awards in the quarter of 2.58 billion, and then booked a bill of 1.22 times. With the addition of the new awards in quarter two, our backlog grew to a record 23.8 billion, representing an increase of 2% on quarter one of 2024, or an increase of 9.9% year over year. Our backlog burn was 9.1% in the quarter slightly down from quarter one levels. Revenue in quarter two was $2.120 billion. This represented a year-on-year increase of 4.9% or 5.3% on a constant currency basis. Overall customer concentration in our top 25 customers decreased from quarter one, 2024. Our top five customers represented 24.7% of revenue in quarter two. Our top 10 represented 39.3%. while our top 25 represented 60.9%. Gross margin for the quarter was 29.9% consistent with quarter one 2024 as expected. Gross margin increased 30 basis points over gross margin of 29.6% in quarter two 2023. Total SG&A expense was $183.5 million in quarter two or 8.7% of revenue. This was in line with the prior quarter on total percent of revenue basis. In the comparable period last year, total SG&A expense was $182.9 million, or 9.1% of revenue. Adjusted EBITDA was $450.4 million for the quarter, or 21.2% of revenue. In the comparable period last year, adjusted EBITDA was $414.2 million, or 20.5% of revenue, representing a very solid year-on-year increase of 8.7%, and expansion of 70 basis points in margin. Adjusted operating income for the quarter two was $417.3 million, a margin of 19.7%. This was an increase of 8.7%, adjusted operating income of $383.8 million, a margin of 19% in quarter two of 2023. Net interest expense was $42.9 million for quarter two. We're continuing to fix the full year interest expense to total approximately $210 million in 2024 with a roughly even split in total remaining interest expense for the remaining two quarters of the year. The effective tax rate was 16.5% for the quarter. We continue to expect the full year 2024 adjusted effective tax rate to be approximately 16.5%. Adjusted net income attributable to the group For the quarter, it was $312.6 million, a margin of 14.7%, equating to adjusted earnings per share of $3.75, an increase of 20.6% year over year. In the second quarter, the company recorded $6.8 million of transaction integration-related costs and $45.8 million of restructuring costs. U.S. GAAP income from operations meant it's $229.9 million, or 10.8% of revenue during quarter two. U.S. GAAP net income in Quarter 2 was $146.9 million, or $1.76 per diluted share, compared to $1.40 per share for the equivalent prior year period, an increase of 25.7%. Net accounts receivable was $1.198 billion at 30 June 2024. This compares with the net accounts receivable balance of $1.146 billion at the end of Quarter 1, 2024. DSO was 51 days of June 30, 2024, a decrease of one day from quarter two, 2023, and an increase of two days from March 31, 2024. Cash from operating activities in the quarter was $218.6 million, and free cash flow was $182.4 million in the quarter, an increase of 6% on a year-over-year basis. We continue to see customers seeking more competitive contracted credit terms as well as a desire to hold on to cash longer given the higher interest rate environment we're currently in. This dynamic is primarily focused in our large pharma customer group, which has been growing faster at ICON and is thus driving greater impact on our overall DSO profile. At June 30, 2024, cash totaled $506.6 million and debt totaled $3.4 billion, leaving a net debt position of $2.9 billion. This compared to net debt of 3.1 billion at March 31st, 2024, and net debt of 4 billion at June 30th, 2023. Capital expenditure during the quarter was $36.3 million. From a capital deployment perspective, 2 billion of cash from the successful investment-grade bond was used to repay 2 billion and 14 million of our terminal B facility. Additionally, our revolving credit facility was undrawn at the end of quarter two. From a capital deployment perspective, Steve indicated our priorities for capital to be centred on M&A, where we can acquire assets that further strengthen our portfolio of services and value proposition for customers. Our pipeline of opportunities is healthy, yet we remain disciplined in our approach to evaluating acquisitions that will meet our criteria from a strategic and financial perspective. We also continue to consider opportunistic share repurchase given our strong balance sheet position. Our key assumptions behind the full year guidance remain in place. An effective tax rate of 16.5%, free cash flow target of circa $1.1 billion, capex spend in the range of 150 to 200 million, and interest expense in the range of 200 to 210 million. All for the full year 2024. Finally, I would like to also thank our ICON employees for their dedicated efforts in quarter two. Operator, we are now ready for questions.