ICON plc

Good day, and thank you for joining us on this call covering the quarter ended September 30th, 2024. Also on the call today, we have our CEO, Dr. Steve Cutler, our outgoing CFO, Brendan Brennan, our incoming CFO, Nigel Clerken, 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 the call over to our CEO, Dr. Steve Cutler.

Thank you, Kate. Before I begin my remarks on the quarter, I wanted to briefly welcome and introduce our incoming CFO, Nigel Clerken, who is joining us on the call today. Nigel is an accomplished executive with excellent experience across both biopharma and pharma services organisations in a public and private setting. We are thrilled to have him join our executive team at ICON. In addition, I want to extend my sincere thanks to Brendan, as this will be his last call with us, concluding a highly successful career at ICON. Thank you, Brendan, for your partnership and many contributions. Moving to the results for the quarter, Simply put, ICON's results for the third quarter were not in line with expectations we had previously anticipated. As in any period we forecast, we have a number of risks and opportunities that are identified across our business that generally counterbalance as we progress through and close out the quarter. In this most recent quarter, the identified risks materialized to a greater extent than expected and Despite our efforts, the identified opportunities did not offset this impact, resulting in a greater deviation from forecasted results than we would typically see. This was due to three main reasons. First, we are seeing a small number of top customers who are experiencing continued cost pressures and are implementing actions to manage their development spend more tightly. Within our biotech business, slower decision making and capital allocation led to award delays and slow trial starts. And finally, we had a large number of project delays and cancellations late in the quarter within our fast burn vaccine area that materially impacted revenue. To provide more detail on each of these challenges, the first was attributable to lower than anticipated revenue contribution from two of our largest customers, that are undergoing development model transitions, which we have been supporting them with since the start of the year. As we have previously highlighted, we are seeing an increasing emergence of hybrid development models amongst our large pharma customer base, which has uniquely positioned ICON to win a disproportionate share of these large partnership opportunities. Heightened focus on portfolio prioritizations leading to tighter development spend emerged through the quarter, delaying the expected ramp up of new work that was forecast to begin in their new models. What this has resulted in is studies closing out in their previous model without the counterbalancing revenue from new studies as expected. While this creates pressure from a revenue perspective in the near term, which we have reflected in our full year revenue guidance, we do believe this is an isolated impact that will be increasingly offset by growth outside of these two accounts as we move forward, and is underpinned by the revenue growth we've seen outside of these customers, which we expect to be in the mid-single digits on a year-over-year basis for full 2020-24. The second issue was slower than expected activity in our biotech segment, both from a business development perspective, which impacted our total level of new awards, as well as in operational prioritization decisions, which resulted in negative study modifications and delays in study startup that occurred in the quarter. While we continue to see a positive level of overall opportunity flow in this segment, customers continue to operate with caution in terms of the overall use of their capital. This is impacting the speed of decision-making on both award of new work and how quickly customers are starting new trial activities. We saw several decisions on large award opportunities delay into quarter four as customers required additional time to review final scope specifications before making award decisions, which are anticipated to take place this quarter. Lastly, we saw an outside level of vaccine-related cancellations in quarter three, totaling approximately 20% of overall cancellations which combined with slower COVID activity is also contributing to the lower than expected revenue in the second half of this year as these programs are fast burning in nature and were expected to start in the quarter. While we are dissatisfied with the performance this quarter and the reduction in guidance for the year, the factors contributing to the results are well understood by our team and we are taking decisive action to manage them appropriately. We will deliver on one of our strengths, which is expertly managing costs. This includes aligning our resources in the right locations globally to best support our customers and their critical projects as we continue to act as a strategic partner and deliver on our commitments for not just the short term, but their long term needs. We have already implemented plans to improve processes and reduce overall costs across the organization. and we expect to see some benefits of these actions in quarter four and more fully as we move into 2025. This includes accelerating actions we already undertake as an organization with 40,000 plus employees, assessing spans and layers across our organization to determine optimal levels of oversight and utilization to drive efficiencies. Finally, we continue to increase our adoption of automation and the use of technology across our business to leverage our scale and centre of excellence model. We remain confident in the underlying health of our business, the progress we are making in building critical partnerships and our continued ability to deliver for our customers. In our large pharma business, we have been successful in renewing all strategic partnerships this year And I'm very pleased to announce the award of another top 10 strategic partnership, which was finalized in quarter three. ICON was selected for the breadth and depth of our capabilities, including our therapeutic experience and expertise, as well as our innovative approach in addressing challenges across the development continuum. The addition of this new competitive win brings our new strategic partnership count within the top 30 pharma to three in the past 12 months. clearly showing our momentum in gaining market share in this important space. These relationships are already delivering increased opportunity flow to our pipeline and new awards to our business. We are seeing a notable increase in therapeutic areas such as cardio and metabolic diseases, with new award growth increasing over 50% on a trailing 12-month basis, which is helping to offset the drop-off in vaccines. In quarter three, we had solid growth in our total backlog of 9.4% on a year-over-year basis, with strength in new awards from laboratory and early phase services. However, there was an increase in total cancellations in the quarter driven by an outsized number of vaccine programs relative to our normal expectations. Relative to when we started this year, we saw more meaningful transitions in our business than anticipated, with a significant level of COVID-related work moving out of this calendar year. Two of our large customers undergoing more significant development model shifts with resulting cost pressures and the biotech market that is taking longer to recover and remains cautious. Despite these circumstances, we have still managed the business to drive revenue growth of 5.6% excluding COVID-related revenue and adjusted earnings per share growth of 13.5% both on a year-to-date basis. We remain encouraged that opportunities across the totality of our business continue to track positively given the contribution from new strategic partnerships as well as increased opportunity flow from biotech, which we believe is still supportive of holding at least a 1.2 times net book-to-bill ratio on a trailing 12-month basis. Fundamentally, our view has not changed in our mid- to long-term outlook for our industry and the opportunity for Icon. We continue to deliver for our customers across all segments of our business and will appropriately manage our business as we transition through what is a more challenging environment in the near term for specific customers and as a result for Icon. As we look forward to 2025, We are not yet issuing specific guidance for the full year, but plan to do so as we normally do in January when we present at the JP Morgan Conference. At a high level, provided the opportunity levels continue through the balance of the year, we would anticipate continuing to target a book to bill of 1.2 to 1.3 times on a trailing 12 month basis. We would note that we are seeing an uptick in pass-throughs as a more meaningful component of total trial costs, even in non-vaccine areas of the portfolio, which is expected to start to reflect in our overall revenue mix next year. While there are certain large pharma customers in our portfolio that remain challenged in their spending outlooks for next year, our initial view on growth outside of these specific customers is positive and indicative of our overall development spend growth. While recovery in the biotech segment has been slower than we anticipated relative to the start of this year, large opportunities have been increasingly moving into the pipeline. And our performance this quarter, from a business development perspective, will be an important determining factor to growth in this segment for Icon next year. In totality, we would anticipate revenue growth in the low to mid single digit range for the full year. which takes into account the expected headwinds, which we expect will have a greater impact in the first half of the year. We continue to be extremely well positioned to take market share and grow in new and existing accounts, as evidenced by the recent strategic partnership wins we have accumulated since our union with PRA. The potential for these new partnerships to offset the aforementioned headwinds is very real. as we move into 2025, and this, in addition to the growth of our strategic customers, gives us confidence that ICON will emerge from this transition period even better positioned and diversified across our customer base. We remain committed to our capital deployment strategy, which is focused on executing M&A in the areas of the portfolio we would like to strategically expand our capability and presence principally in our ancillary businesses such as laboratory services, site and patient solutions, as well as select geographic areas such as Asia Pacific. We have opportunities in our pipeline that we are actively engaged on that could be executed in the short term. In addition, we have stated we would opportunistically evaluate deploying capital towards share repurchase, which we did late in quarter three, totaling $100 million worth of stock repurchased. We have recently secured authorization for a further $250 million for share repurchases, which gives us a total of $650 million now available for further repurchases. We anticipate remaining active in opportunistic share repurchases through the balance of this year and beyond. Before I hand over to Brendan, I want to extend my thanks, as always, to our hardworking and dedicated employees across the globe that are committed to driving our mission and supporting our customers in accelerating their development programs. Brendan.

Thanks, Steve. In quarter three, Icon achieved gross business wins of $2,832,000,000, a decrease of 7.3% on a year-over-year basis. In addition, we recorded $504,000,000 worth of cancellations, resulting in net awards in the quarter of $2,328,000,000 and then booked a bill of 1.15 times. With the addition of the new awards in quarter three, our backlog grew to a record $24.3 billion, representing an increase of 2.1% on quarter three of 2024, or an increase of 9.4% year over year. Our backlog burn was 8.5% in the quarter, down from quarter two levels. Revenue in quarter three was $2.03 billion. This represents a year-on-year decrease of 1.2% or 1% on a constant currency basis. Overall customer concentration in our top 25 customers increased from quarter two, 2024. Our top five customers represented 24.8% of revenue in quarter three. Our top 10 represented 40.6%, while our top 25 represented 62.9%. Gross margin for the quarter was 29.5%, a decrease of 40 basis points on quarter two, 2024. Gross margin decreased 30 basis points over a gross margin of 29.8% in quarter three of 2023. Total SG&A expense was $180.4 million in quarter three, or 8.9% of revenue. This is an increase of 20 basis points on the prior quarter of 8.7% of revenue, In the comparable period last year, total SG&A expense was $180.1 million, or 8.8% of revenue. Adjusted EBITDA was $418.8 million for the quarter, or 20.6% of revenue. In the comparable period last year, adjusted EBITDA was $432.5 million, or 21% of revenue, representing a year-on-year decrease of 3.2%, a contraction of 40 basis points in margins. Adjusted operating income for quarter three was $383.8 million, a margin of 18.9%. This was a decrease of 4.3% on adjusted operating income of $401.1 million, a margin of 19.5% in the quarter three of 2023. Net interest expense was $49.4 million for the quarter. We continue to expect a full year interest expense to total approximately $200 to $210 million in 2024. The effective tax rate was 16.5% per quarter, and we continue to expect the full year 2024 adjusted effective tax rate to be approximately 16.5%. Adjusted net income for the quarter was $279.2 million, a margin of 13.8%, equating to adjusted earnings per share of $3.35, an increase of 1.5% year over year. In the third quarter, the company recorded $7.9 million of transaction and integration-related costs, U.S. GAAP income from operations amended to $285.4 million or 14.1% of revenue during Q3. U.S. GAAP net income in Q3 was $197.1 million or $2.36 per diluted share, compared to $1.97 per share for the equivalent prior year period, an increase of 19.8%. Net accounts receivable was $1,172,000,000 at the 30th of September 2024. This compares with a net accounts receivable balance of $1,198,000,000 at the end of Q2 2024. DSO was 52 days at September 30th, 2024, an increase of three days from Q3 2023, and an increase of one day from June 30th, 2024. cash from operating activities in the quarter was $402.7 million, and free cash flow was $359.4 million in the quarter, an increase of 15% on a year-over-year basis. We saw a nice improvement in cash collections in quarter three despite the ongoing dynamics present, but our customers, particularly large farmer organizations, looking to hold on to cash longer and seeking competitive credit terms. Despite this dynamic, we remain on track to achieve our original full year guidance of free cash flow of circa $1.1 billion. At September 30th, 2024, cash totaled $695.5 million and debt totaled $3.4 billion, leaving a net debt position of $2.7 billion. This compared to net debt of $2.9 billion at June 30th, 2024, and net debt of $3.7 billion at September 30th, 2023. Capital expenditure during the quarter was $43.3 million. We ended the quarter with a leverage ratio of 1.6 times net debt to adjusted EBITDA. Our key assumptions behind the full year guidance are largely unchanged, an effective tax rate of 16.5%, free cash flow target of circa $1.1 billion, cap expense of circa $150 million, and interest expense in the range of $200 to $210 million, all for the full year 2024. With all of that said, we'll now open it up for questions.