Q4 2019 Earnings Call

Okay.

Good day, ladies and gentlemen, I welcome to the Nitrates third quarter earnings Conference call.

At this time, all participants are in listen only mode.

Well, we will conduct a question and answer session and instructions will follow with their time.

If anyone should report operate assistance. Please press Star then zero on you touched on telephone.

As a reminder, this call may be recorded.

Now I'd like to introduce your host for today's conference call cabin Brady met case executive director of Finance, Sir you may begin.

Good morning, and thank you for joining med paces fourth quarter 2019 earnings conference call.

Also on the call today is our president and CEO August Trundle in our CFO and COO of laboratory operations Jesse Geiger before we begin I would like to remind you that our remarks and responses to your questions. During this teleconference may include forward looking statements within the meaning of the private security litigation.

Reform Act of 1995.

These statements involve inherent assumptions with known and unknown risks and other important factors that could cause actual results to differ materially from our current expectations.

Excluding the impact of the changes to the revenue recognition standards.

These factors are discussed in the risk factor section of our form 10-K, and other filings with the FCC.

Please note that we assume no obligation to update forward looking statements in the future even if that's the much change.

Accordingly, you should not rely on any of today's forward looking statements as representing our view as of any date after today.

During this call we will also be referring to certain non-GAAP financial measures.

These non-GAAP measures are not superior to or a replacement for the comparable GAAP measures, but we believe these measures help investors gain a more complete understanding your results.

A reconciliation of such non-GAAP financial measures to the most directly comparable GAAP measures is available on the earnings press release and earnings call presentation slides provided in connection with today's call.

Slides are available on the Investor Relations section of our web site at Investor documentation Dot com.

With that I would now like to turn the call ever to August Trundle.

Good day.

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<unk> based performed well in 2019 and ended on a strong note.

Full year revenue, New business awards, and ending backlog were each up over 20%.

Despite heavy investments in organic growth globally in 2019, we executed with what we believe is the industry, leading EBITDA margin among clinicals heroes and generated free cash flow over 120% of EBITDA.

I would like to point out that our reported EBITDA is not inflated by adding back recurring at real operating costs, such as stock based compensation.

Program costs to improve operating efficiency.

Restructuring costs severance payments or integration costs.

On our Q1 2019 earnings call I mentioned to that our six so six basis net business awards were somewhat misleading that quarter and had bookings appeared to increase on a sequential basis and you had net service based awards essentially six so five basis net bookings were sequentially down.

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The opposite happened in Q4.

New business awards entering backlog in Q4 2019 at 281.1 million were sequentially down in total but on a service. We're essentially six so five basis net new business awards were actually up 10% sequentially over Q3.

Our Q4 book to Bill ratio on a six so five basis was the highest level achieved on the year.

Our bookings were very strong in Q4, and right, where we wanted them to drive 2020 revenue growth.

We entered 2019 strong and exited even stronger I will now turn the call ever to Jesse.

[laughter].

Thank you August and good morning, everyone.

Net new business awards entering backlog in the fourth quarter increased 21.6% from the prior year to 281.1 million.

Resulting in a 1.22 net book to Bill.

For the full year 2019, net new business Awards were 1.1 billion an increase of 21.7%.

Ending backlog as of December 31st was 1.3 billion, an increase of 21.3% from the prior year.

Revenue was 229.9 million in the fourth quarter of 2019, which represents year over year growth of 19.7% on a reported basis and 19.5% on a constant currency organic basis.

Full year 2019 revenue was 861 million.

Which represents a 22.2% increase from 2018 or 22.4% on a constant currency organic basis.

EBITDA of 41.1 million increased 1.2% compare.

Prior year period.

For the full year 2019, GAAP net income was 100.4 million compared to 73.2 million in 2018.

Adjusted net income of 32.2 million in the fourth quarter increased 14.5% compared to 28.1 million in the prior year.

Full year 2019, adjusted net income of 113.3 million increased 18.7 per cent compared to 95.5 million in 2018.

Adjusted net income growth was primarily driven by revenue growth lower interest expense and effective tax rate, partially offset by higher employee related cost in reimbursed out of pocket expenses.

GAAP net income per diluted share for the quarter was 78 cents compared to 61 cents in the prior year period.

For the full year 2019, GAAP net income per diluted share was $2.67 compared to GAAP net income per diluted share of $1.97 cents in 2018.

Fourth quarter 2019, adjusted net income per diluted share of 85 cents grew 11.8% versus fourth quarter 2018, adjusted net income per diluted share of 76 cents.

For the full year 2019, adjusted net income per diluted share was $3.02 compared to $2.59 per diluted share in 2018.

Regarding customer concentration our top five and top 10 customers represent roughly 19% and 29% respectively of our total 2019 revenue.

In the fourth quarter, we generated 56.9 million and cash flow from operating activities and our net day sales outstanding decreased compared to the third quarter from negative 12.5 days to negative 14.7 days.

We ended the quarter with 131.9 million of cash.

And in February 2020, our board of directors authorized share repurchase program of up to $100 million.

Moving now to our newly established 2020 guidance.

Wow.

1.05 billion for the full year Twentytwenty.

Representing growth of 13.2% to 16.7% over 2019 total revenue of 861 million.

Our Twentytwenty EBITDA is expected in the range of 170 to 178 million.

Representing growth of 13.6% to 19% compared to EBITDA of 149.6 million in 2019.

We anticipate our twentytwenty effective tax rate to be in the range of 19% to 21%.

We have assumed 38.1 million fully diluted shares for Twentytwenty and there are no stock repurchases in our guidance.

We forecast 2020, GAAP net income in the range of 123.4.

To 127.4 million and GAAP earnings per diluted share in the range of $3.24 to $3.34.

With that I will turn the call back over to the operator, so we can take your questions.

Thank you.

Ladies and gentlemen to ask a question you would need to press Star then one on your telephone.

[music] withdraw your question Okay.

Again, that's all I want to ask a question.

Please standby we've compiled acuity roster.

Of larger or smaller than last year. Thanks.

Thanks, John I guess, the only item I'd point out it's just the.

A head count growth. We grew we grew head count around 20% each of the past two years.

We're very comfortable with the current level of staff to support existing in near term upcoming projects. So as our our 20 to 20 projections unit revenue projections are lower than the past couple of years.

Experience and we've effectively caught up on the hiring.

We are continuing to invest in people to sustained long term growth, but at a lower rate than in 2019. So this will lift some margin and tend to offset.

The additional office lease cost this year.

Okay, and just to clarify are you assuming that the head count grows in sync with revenue or perhaps a little bit slower.

Yeah, generally and think perhaps a little bit slower, but it will depend on how the year progresses.

And the lease cost for the building comes on just as a reminder, second quarter.

At about a 2 million dollar clip per quarter. So first quarter does not have that incurred incremental costs Q2, Q3 in Q4 about $2 million a quarter.

Great. Thank you.

Thank you.

Our next question comes from Atlanta, David.

No.

Hi, Thank you good morning.

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His has there been any change in the composition of your backlog in including average duration of backlog I'm I'm kind of getting that whether or not you expect your conversion rate to stay relatively stable or or change.

Yeah, I don't know, there's going be a big banks, we did have it but we've had stuttering cancellations probably at an elevated level several times in the last well three of the last five quarters.

So that that kind of throws a curve ball in there, but I would not expect a meaningful change and our conversion rate I don't think it's going to be.

Going up or particularly going down.

Much but it could trail down slightly yes, I think about 18% Dave is a good good working assumption.

Okay, great and that segways into my second question nicely, which is which is around.

Quarterly cadence, if you care to give us any.

Any specifics you mentioned the cancellations fourth quarter, but also in some other quarters were those studies that were in flight or not yet contributing revenue when should we think about those impacting no near term quarters in terms of.

The level of growth relative to the full year.

Yeah, I don't think it'll have that big of an impact on the near term quarters if anything it.

It's a headwind a couple of quarters out.

So we're kind of sticking to the to the annual guidance here, we're not we're not giving any quarterly.

Commentary as you know, we can be a bit irregular quarter to quarter.

But the cancellations in the fourth quarter could create a little bit of a headwind in the second half of this year.

But if the business environment remains strong we may not feel much of the impact there.

So that's that's I guess, the only thing I'll comment on phasing of of revenue and then on the cost side.

We have though the.

Campus cost kicking up in Q2 that we do not have in Q1, yes, we say our hedge we've had to hedge a little bit on the revenue growth because of.

The cancellations and I think the environment remains relatively consistent and I think that we would achieve a third consecutive year of growth topline growth over 20%. This year for wasn't for cancellations pick elevated.

But that's kind of the new normal then we'll just have to grow through.

Gotcha and then last question the your slide six with.

The four bar charts and focusing on EBITDA.

It it stands out to me at least that in 2018 margin kind of steadily grew through the year in 2019 the quarter to quarter.

Change sequential change in margin was fairly dramatic and more choppy.

Would you expect 2020 to be smoother or will it.

I have some of the same factors that influence swing 19.

It should be pretty smooth it should be pretty smoothing, you're the one wildcard is just the out of pocket expenses in kind of how those play out quarter to quarter does can be a little bit a little bit choppy.

Okay, Alright, that's all for me. Thank you thanks, Dave.

Thank you.

Next question comes from Atlanta area.

Your line is.

Great. Thanks, when you're thinking about capital deployment here I understand you historically been focused on largely organic growth efforts, but how are you evaluating potential opportunities out there from an M&A standpoint are there any there's anything interesting you are expanding into other areas are expanding in central lab I'm just curious what your.

There on that front thanks.

Yes, thanks, Aaron yet, we're still focused on organic growth.

We do look at what's out there, but theres theres nothing.

That's in the market the were interested in that we aren't already doing organically.

Whether thats growing across the geographies that we're in.

Or.

Adding expanding our laboratory capabilities et cetera.

We're doing all of everything we want to do organically and especially it's just a distraction we've got plenty of growth opportunities organically and it's just a distraction to go after acquisitions.

Okay. Good it's good to hear and then also heading into 2020, there are some kind of anomalies going on it's an election cycle. We also have corona virus. I mean have you thought about sort of oriented defeated any sort of fluctuation baby and decision, making that you've historically seen around your core biotech customer be heading into an election cycle and then also.

Corona virus is there anything embedded in your expectations can you remind us of how you're thinking about your overall exposure there. Thanks.

Yes, we havent seen we haven't seen any real slowdown in funding or any sort of pull back in the biotech funding environment. So the market continues to be strong.

At the moment.

How that plays out towards the end of the year you know is still a wildcard, but we're we're keeping a close eye on.

Funding of of active programs and the funding.

Health of new opportunities and right now we're seeing no signs currently have anything.

Retracting.

As far as the virus is concerned it has impacted our operations in Asia.

Particularly mainland China and Hong Kong.

We've been able to maintain sufficient operating capacity to serve our clients' needs. We continue to monitor the situation.

If it stays contained we will.

We do not anticipate a meaningful financial impact and we believe any negative economic impact is covered within our current guidance range.

Well, we'll keep an eye on it yeah I mean, it changes by the day, we woke up and Sunday, we had.

Italy.

Our main office in Italy, as in Milan, and the offices now shut people working from home lot of monitoring visits canceled.

Lisa.

A bigger market than China, Although we have laboratory operations as well as clinical in both Beijing and Shanghai.

Which has been frustrating. So there is theres lot of moving parts, we believed that it will not be material.

But you know things things change by the day, so it's really kind of hard to hard to predict anything we do not have any particular specific hedge in the in the guidance based upon.

Cross device effects, because we do think it will be.

Non material in the end, but it is up.

You know a difficulty obviously.

Okay. Thank you that's helpful.

Thank you.

Our next question comes from the line of Sandy Draper with Suntrust. Your line is open.

Thanks, very much a lot of my questions have been asked so maybe just on the share repurchase I. Appreciate Jesse said, it's not in the guidance, but August in the past you have typically said your view or share repurchases to be very opportunistic when you feel like there was a dislocation not sort of the steady cadence.

With this new authorization is there any change in your philosophy about how you think about share buybacks. Thanks.

Yes. This is Jesse setting no change in our philosophy.

We will continue to be more opportunistic then systematic from quarter to quarter. The authorization is there just so that we can take advantage of opportunities as they as they present.

Sandy are you there.

Thank you.

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Oh, yes, sorry, I was on me, but I appreciate.

My only question Thanks, Jessica great. Thanks, Andy.

Thank you.

A reminder, ladies and gentlemen that star one to ask the question.

Our next question comes from the line of Donald Hooker with Keybanc. Your line is open.

Great Good morning.

See you guys are working through a pretty material expansion in Cincinnati as you've mentioned a number of times.

Can you update us in terms of your location.

Facility capacity elsewhere, I think you have some facilities in Texas and.

Overseas as well can you update us more broadly on your facility capacity given your rapid growth.

Okay.

In the U.S., we do have operations, we do have sort of offices and in Dallas, Denver and blame Minneapolis.

Relatively small compared to the Cincinnati operation.

Globally, we have offices around the world.

No I didn't.

Numerous account and just from a capacity utilization standpoint, there's there's varying degrees of of excess capacity in each of those offices, depending on on the growth rates in that jurisdiction and just where we are and where every year, where outgrowing some number of offices and where either expanding into current location.

Taking on another floor or we're moving to added a new location to expand and that's happening regularly around the world and kind of in the run rate. The only reason we've called out so much attention to the Cincinnati expansion is it is such a large bolus of of.

Incremental capacity that we're doing here all at once at our campus as opposed to the regular cadence of of office expansions that happened around the globe for us.

Super Thanks for that and then maybe on slide seven you give your pie charts of your customer concentrations and whatnot and there was a little bit of a lift in the large pharma.

Bucket from 7% to 10% if im reading this correctly and you alluded to a acquisition of one of your clients.

I guess would we think in your guidance, there's a maybe.

I presume, maybe a hiccup in terms of one of your clients being acquired or.

That what is the nature of that specifically and how does that play in do you financially.

Yes, there is no no hiccup or or.

Soft spot to overcome as a result of that transaction, we had a small biotech customer that was acquired.

By large pharma in 2019, it's about 4% of our revenue with that customer for the year.

And we've reclassified that as you noted on on slide seven we do have a strong relationship with the acquired a company and we're continuing to perform work on the active studies, which extend into the next few years.

Okay Super.

I guess, that's all from me. Thank you.

Thanks, Don.

Thank you.

Im showing no further questions at this time I would now like an awful Apple Kevin Brady for closing remarks.

Thank you for joining us on todays call and for your interest in met those we look forward to speaking with you again on our first quarter 2020 earnings call.

Ladies and gentlemen. This concludes today's conference. Thank you for your participation you may now disconnect everyone have a wonderful day.

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