Syneos Health, Inc.

Good morning and welcome to the Cineos Health third quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions will be given at that time. I would like to hand the conference over to Ronnie Spate, Senior Vice President of Investor Relations. Please go ahead, sir.

Good morning, everyone. With me on the call today are Michelle Keefe, our CEO, Jason Meggs, our CFO, and Michael Brooks, our COO. In addition to the press release, a slide presentation corresponding to our prepared remarks is available on our website at investor.cineoshealth.com. Remarks that we make about future expectations, growth, trends, anticipated financial results, and our expectations regarding the macroeconomic environment the COVID-19 pandemic, and the war in Ukraine constitute forward-looking statements for purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995, and we disclaim any obligation to update them. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors. These factors are discussed in the risk factors section of our Form 10-K for the year ended December 31st 2021, and our other SEC filings. During this call, we will discuss certain non-GAAP financial measures which exclude the effects of events and transactions we consider to be outside of our core operations. These non-GAAP measures should be considered a supplement to, and not a replacement for, measures prepared in the courts with GAAP. For a reconciliation of non-GAAP financial measures with the most directly comparable GAAP measures, please refer to the appendix of our presentation. I would now like to turn the call over to Michelle Keefe. Michelle?

Thanks, Ronnie. Good morning, everyone, and thank you for joining us today. I am disappointed to share that Cineos Health experienced more significant headwinds in net awards, revenue, and margins than anticipated during the third quarter, producing results that were well below our expectations and, frankly, unacceptable. I'm going to briefly cover our third quarter results and discuss our demand drivers, after which I'll walk you through the four areas where we are focused in order to address performance and improve visibility while continuing to invest for long-term growth. Total company year-over-year revenue contracted by 0.9% for the third quarter compared to the prior year. In clinical solutions, revenue declined 3.5%, primarily related to reimbursable expenses and the impact of foreign exchange. Excluding reimbursable expenses and on a constant currency basis, clinical solutions revenue grew 6.9%, driven primarily by growth in our large pharma business, partially offset by backlog conversion delays and lower revenue from COVID-related projects. Our clinical growth was below our expectations, primarily due to the impact of lower net awards and delays in backlog conversion, along with customer delays in our FSP business. In our commercial solutions business, revenue growth remained strong at 8% compared to 2021. Commercial growth was primarily driven by deployment solutions, including the contribution from our Cineos One portfolio and higher reimbursable expenses. Our commercial business continues to perform well, and we have enhanced our digital capabilities beyond our kinetic offering with the addition of digital learning solutions and advanced technology for patient hub services. Now I'd like to take a deeper look at demand drivers and what we are seeing in terms of awards and performance for each of our customer segments. As a reminder, our strategic business plan for driving growth in clinical solutions is focused on each of our customer segments, driving further large form of penetration, investing to grow the pre-revenue biotech segment, and finally bolstering our strong position in the small to midsize biotech segment. our existing clinical large pharma preferred provider relationships remain strong, and we are pleased with our continued progress on several new opportunities. Although we continue to see slower near-term awards with our existing preferred provider relationships, we anticipate incremental new awards over the course of 2023. Next, demand in our pre-revenue biotech customer segment is consistent with our expectations. with slowing RFP flow largely driven by the impact of the macroeconomic environment. Our core issues with clinical net new business and revenue growth are primarily with small to midsize biotech customers, where we historically maintained a leading position. While demand from these customers has been impacted by the macroeconomic factors, we now believe that these headwinds are more specific to Cineos Health. We believe that as we have grown in recent years, our clinical operating model had begun to lose its traditional strengths of agility and leadership engagement that was critical to these post-revenue SMID customers, which began to negatively impact our opportunities for repeat business. In addition, we saw delays in award decisions from SMID customers at a higher volume in September than we experienced in June, and experienced an unexpected decline in our overall clinical SMID win rate during Q3. As I will discuss in more detail shortly, we are focused on accelerating clinical reimagined and enhancing our business development activities to increase our share of new business opportunities, including repeat business. Our clinical net awards for the quarter were impacted by these dynamics, which contributed to an unfavorable book-to-bill compared to our updated outlook provided in September. Clinical solutions book-to-bill ratio was .3 times for the third quarter, excluding reimbursable expenses, resulting in a 0.98 times TTM book to bill. The commercial demand environment remains healthy, with particular strength in our larger farmer customer segment, as we leverage Kinetic and our new digital capabilities to drive new opportunities for growth. We have seen some normalization of RFP flow from SMID customers attributable to the macroeconomic environment. The commercial team had a solid quarter of net awards, reflecting our normal seasonality with a book-to-bill ratio of 0.8 times for the quarter and a 1.07 times on a TTM basis, excluding reimbursable expenses. Over the last few months, I've spent a great deal of time with our customers to gain a full understanding of what is important to them and how we are performing against their expectations. Ultimately, I expect us to be the premier biopharma solutions provider, leveraging our unique product development model and the insights it generates to accelerate success for our customers. However, we are disappointed by our current financial performance and are aggressively attacking four focus areas to reach this goal. Clinical reimagined, strategic business development, improving visibility, and increasing efficiency. First, our Smith customers are clear that they want Cineos Health to continue to deliver therapeutic insights, but with enhanced agility and high touch leadership engagement. Clinical Reimagined was launched in Q1 2022 and is working to reduce the complexity of our full service operating model, streamline our organization and processes, enhance our customer engagement, and infuse innovation and insights throughout our clinical operations. We believe the result would be an efficient and effective delivery model supported by our technology enhancements designed to build momentum with our projects and customers leading to improved backlog conversion and net awards, including repeat business. The upgrades in talent and investments we previously outlined are already addressing these issues. But to put it plainly, it has been more extensive and taken longer than we expected. Most importantly, we have already deployed our new operating model across a number of customers, and we are receiving overwhelmingly positive feedback. Second, We have had a number of leadership and organizational changes within strategic business development over the last 18 months. As a result, we did not evolve our business development capabilities to fully leverage our integrated solutions or effectively engage our customers within the current competitive environment. We now have the right senior leadership in place and they are driving more proactive, productive customer engagement. We are strengthening our approach with cross-functional regional teams working to ensure we utilize our full capabilities to design the best delivery strategy for each customer opportunity enabled by technology and shared insights. Combined with our more efficient and effective delivery model, we expect these enhancements to improve our win rates and repeat business opportunities across our customer portfolio. We are seeing early signs of success with these initiatives and expect awards from Post Revenue Smith customers to begin a gradual recovery during Q4. Third, we must improve visibility into our business and are taking a number of steps to improve our business development, operational and financial systems and processes. We believe these changes, coupled with the impact of clinical reimagined and our investments in strategic business development, will enhance operational insight and lead to improved visibility and performance. Fourth and finally, Long-term margin expansion continues to be a critical component of our value creation plan. We've undertaken a full review of our organization to ensure we have the appropriate size and scope for our current business and will continue to drive longer-term margin expansion. Additionally, through our Forward Bound programs, we are focused on continuing to streamline the structure of our operations and processes. As a bold new step in this transformation journey, I am pleased to announce Project Velocity, which will further catalyze our Forward Down efforts. We have selected two world-class partners to help us accelerate innovation and quality throughout the enterprise and across multiple phases to drive further long-term margin expansion. Jason will provide more detail on this exciting new project. We are intensely focused on executing these activities and investments with accountability from senior leadership. While we do not expect to see significant improvements in our performance overnight, we will share the key trends that demonstrate our progress in this transformation. We remain confident in our strategy and the breadth of our capabilities and are laser-focused on managing our near-term headwinds while we work to improve performance and best position Cineo's health for long-term success. While we must improve our near-term performance against our business plan and financial targets, Our industry, strategy, and balance sheet remains strong, and our future remains bright. I will close with some additional color on my broader vision for Cineos Health following Jason's discussion of our Q3 results and updated guidance. Jason?