ICON Public Limited Company (NASDAQ:ICLR) Q1 2024 Earnings Call Transcript

ICON Public Limited Company (NASDAQ:ICLR) Q1 2024 Earnings Call Transcript April 25, 2024

ICON Public Limited Company isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Hello, and welcome to the ICON plc Q1 2024 Results Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand over to Kate Haven, VP of Investor Relations. Please go ahead.

Kate Haven: Thank you. Good day, and thank you for joining us on this call covering the quarter ended March 31, 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 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 excludes stock compensation expense, restructuring costs, foreign currency gains and losses, amortization and transaction related and integration related costs, and the 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.

Steve Cutler: Thank you, Kate, and good day, everyone. ICON's performance in quarter one marked a strong start to the year, combining solid financial results, an impressive uptick in business awards, and excellent adjusted earnings growth. Net business wins were a record in the quarter, exceeding $2.65 billion, as our comprehensive scaled offering continues to fuel our leadership position in clinical development. The market trends we saw early in quarter one continued throughout the balance of the quarter, characterized by stabilizing demand within the biotech customer base, as well as a continuation of the robust demand we have consistently seen from large pharma customers. Underlying demand drivers are incrementally more positive through quarter one, with biotech funding increasing over 50% on a year-over-year basis in quarter one, according to BioCentury.

And large pharma R&D spend figures indicating low single-digit growth for the full year, in line with previous expectations. Proposal volumes are at healthy levels, with overall RFP volume increasing low double digits on a trailing 12-month basis. In quarter one, net bookings grew 10% on a year-over-year basis, resulting in a book-to-bill of 1.25 -- 1.27 times in the quarter and increasing our trailing 12-month book-to-bill ratio to 1.24. We had a robust business development performance across all operational segments, with notable strength in our large pharma full service solutions segment as well as in our laboratory business. While it's early in quarter two, to date we have seen a continuation of these trends across customer segments and we remain positive on the outlook for the full year.

We expect book-to-bill to be in the range of 1.2 times to 1.3 times on a quarterly basis, maintaining our previous target range and expectation for an average book-to-bill of 1.25 times for the full year 2024. One of our important strategic initiatives as we came into 2024 was the focused rebranding of our dedicated biotech solutions business, ICON Biotech. We saw an opportunity to enhance our market position within the biotech segment with customers that historically associated ICON with a large pharma focus. ICON Biotech is the world's largest dedicated biotech CRO with approximately 8,000 staff that are exclusively committed to that segment and understand the unique needs of the biotech customers we support. We are committed to optimally serving this key customer group and believe we can best do so through our current dedicated structure.

Following the rebrand activity in quarter four last year, I am pleased to report that we are already seeing positive momentum in terms of customer receptivity and an increased win rate in this segment. In addition to our focused efforts within the biotech segment, we continue to drive forward our leadership in large pharma. Growing strategic partnerships is a critical element to this strategy, which not only includes the execution of new strategic partnerships, but renewing and expanding existing customer relationships. In quarter one, we were successful in renewing a longstanding Top 20 pharma partnership, primarily utilizing full service solutions. The renewal reinforces our strong delivery history of execution for this important customer and our collective team's collaboration to drive efficiency across their development portfolio.

Another important factor in ICON's ability to secure and grow our customer partnerships is through the development of innovative solutions across our portfolio. We are excited about the future potential of our comprehensive and cost effective offering in clinical trial tokenization. This end-to-end approach follows patients longitudinally through their healthcare journey beyond their participation in a clinical trial. The surge in drug development in areas like diabetes and obesity has increased the need to collect and analyze long term follow-up safety, efficacy and health expenditure data. We are anticipating greater market, regulatory and reimbursement requirements in the future, hence the need to deliver broader, more comprehensive insights that ultimately drive increased value for our customers.

Turning to our financial performance in quarter one, our team delivered another period of strong results across a number of measures. Total revenue increased 6% on a year-over-year basis. Gross margin of 29.9%, increased 10 basis points over quarter one 2023, and total SG&A expense decreased 90 basis points on a year-over-year basis to 8.7% of total revenue, driving a very strong adjusted EBITDA growth of 11.3% over quarter one 2023. This resulted in an adjusted EBITDA margin of 21.2% in the quarter, up 100 basis points year-on-year. Given the performance on adjusted EBITDA growth and the continued paydown of our Term Loan B debt, we saw excellent year-over-year growth in adjusted earnings per share of 20%. The execution of our capital deployment strategy continued as planned in the first quarter.

We closed the previously announced acquisition of HumanFirst in January, a leader in the field of digital health technology selection. This important capability is strategically aligned with our approach to providing an enhanced integrated offering. The combination of our leading clinical outcome assessment capabilities and digital health technology selection offers the ability for customers to optimize clinical trial design and enhance data collection quality. As we previously noted, our capital deployment priority remains M&A, and we continue to actively evaluate assets that will strategically and operationally enhance the current areas of our service portfolio. After positive rating changes from S&P and Moody's in the back half of 2023, moving ICON back to investment grade status, we began the execution of the planned refinancing of our variable rate debt in quarter one.

This included a successful repricing of our existing Term Loan B in the quarter, reducing our interest rate by 25 basis points as well as the removal of our credit adjustment spread. In parallel, we improved the terms of our revolver facility and we are working closely with our banking partners to progress refinancing of our debt. This will allow us to better utilize our balance sheet and provide more certainty on our annual interest expense. We continue to expect our full year interest expense will be in the range of $200 million to $230 million this year. We are updating our full year 2024 guidance range to account for our financial performance in quarter one and the positive market environment we've seen so far this year. We expect revenue to be in the range of $8.48 billion to $8.72 billion, an increase of 4.4% to 7.4% over full year 2023.

Additionally, we expect adjusted earnings per share to be in the range of $14.65 to $15.15, an increase of 14.5% to 18.5% on a year-over-year basis. The new ranges maintain the midpoint of our previous guidance range, reflecting an outlook that is consistent in terms of overall market activity and our performance year to date. Before I hand it over to Brendan for further detail on our financial performance, I want to provide a brief update on our previously announced CFO transition. As we indicated earlier this month, Brendan has decided to depart ICON after a long and very successful tenure in our finance organization at the company and importantly as our CFO for the past 12 years. While we're sorry to see Brendan go, we understand his desire to take on a new challenge in his career, moving to a different industry and we are very grateful for his significant contributions to our organization over the past 18 years.

As previously noted, we have commenced a process with a large global recruitment firm to identify our next Chief Financial Officer, which includes both external and internal candidates for the role. We plan to provide additional updates on this process and the transition period as we progress. In the meantime, Brendan is firmly in his role as a CFO and we have not made any changes to our broader finance organization as a result of this announcement. Finally, we are looking forward to our upcoming Investor Day, which will take place on May the 30th in New York City. The leadership team of ICON will be present at this important event and further details will be made available on our website in the coming week. In closing, I want to thank all of our colleagues at ICON for their dedicated efforts in quarter one in continuing to support our mission in bringing new therapies to patients around the world.

Brendan, I'll now turn it over to you.

Brendan Brennan: Thanks, Steve. I appreciate the kind words and want to reiterate my commitment to ensuring a smooth transition with plans to work closely with Steve and our broader management team to accomplish this. Turning to our financial results in quarter one. In quarter one, ICON achieved gross business wins of $3.11 billion and recorded $460 million worth of cancellations. This resulted in a solid level of net awards in the quarter of $2.65 billion and a net book-to-bill of 1.27. With the addition of the new awards in quarter one, our backlog grew to a record $23.4 billion, representing an increase of 2.5% on quarter four of 2023, or an increase of 10.1% year-over-year. Our backlog burn was 9.2% in the quarter, slightly down from the quarter four levels, and we anticipate similar levels through the remainder of the year.

Revenue in quarter one was $2,090 million. This represents a year-on-year increase of 5.7% or 5.4% on a constant currency basis. Overall, customer concentration in our top 25 customers decreased from quarter four 2023. Our top five customers represented 26% of revenue in quarter one. Our top 10 represented 41.4%, while our top 25 represented 62%. Gross margin for the quarter was 29.9% compared to 30.4% in quarter four 2023. Gross margin increased 10 basis points of a gross margin of 29.8% in quarter one 2023. Total SG&A expense was $181.7 million in quarter one, or 8.7% of revenue. This was in line with the prior quarter on total percent of revenue. In the comparable period last year, total SG&A expense was $189.6 million, or 9.6% of revenue.

Adjusted EBITDA was $444 million for the quarter, or 21.2% of revenue. In the comparable period last year, adjusted EBITDA was $399.1 million, or 20.2% of revenue, representing a very strong year-on-year increase of 11.3% and expansion of 100 basis points in margin. Adjusted operating income for quarter one was $411.4 million, a margin of 19.7%. This was an increase of 11.6%. Adjusted operating income of $368.7 million, a margin of 18.6% in quarter one of 2023. Net interest expense was $65.8 million for quarter one. We continue to expect the full year interest expense to total approximately $200 million to $230 million in 2024. 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 was $288.5 million, a margin of 13.8%, equating to adjusted earnings per share of $3.47, an increase of 19.7% year-over-year. In the first quarter, the company recorded $7 million of transaction and integration related costs. US GAAP income from operations amounted to $285.5 million, or 13.7% of revenue during quarter one. US GAAP net income in quarter one was $187.4 million, or $2.25 per diluted share, compared to $1.41 per share for the equivalent prior year period, an increase of 60%. Net accounts receivable was $1,146 million at the 31st of March 2024. This compares with a net accounts receivable balance of $1,088 million at the end of quarter four 2023. DSO was 49 days at March 31, 2023, a decrease of five days from quarter one 2023.

Cash from operating activities in the quarter was $327.1 million and free cash flow was $300 million in the quarter, an increase of 102% on a year-over-year basis. While DSO increased sequentially, we continued to target mid-40s in terms of DSO on a full year basis, albeit we can have fluctuations on the timing of payments that can influence total DSO in any particular quarter. On March 31, 2024, cash totaled $398 million and net debt totaled $3.5 billion, leaving a net debt position of $3.1 billion. This compared to net debt of $3.4 billion at December 31, 2023, and net debt of $4.2 billion at March 31, 2023. Capital expenditure during the quarter was $27.2 million. From a capital deployment perspective, we made a payment of $275 million on Term Loan B facility in quarter one and ended the quarter with a leverage ratio of 1.8 times net debt to adjusted EBITDA.

Given the successful repricing of our Term Loan B and our intention to refinance our existing debt, we do not anticipate making discretionary payments in quarter two at this time. After successfully deleveraging over the past few years, as well as our return to investment grade rated company, we feel we are well positioned from a balance sheet perspective to deploy more capital opportunistically for M&A, as well as potential share repurchase. Our preferred use of capital remains M&A, and we have a number of opportunities in the pipeline that we are currently engaged on, which would add scale and capability to fast growing strategic areas of our portfolio. 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 million to $200 million, and interest expense in the range of $200 million to $230 million, all for the full year 2024.

Finally, I would also like to sincerely thank our ICON employees around the world for their hard work and dedication in delivering our strong performance in quarter one. Operator, we are now ready for questions.

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