Q4 2021 Medpace Holdings Inc Earnings Call

February 15, 2022

Good day, ladies and gentlemen, and welcome to the <unk> fourth quarter and full year 2021 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 follow at that time.

If anyone should require operator assistance. Please press Star then zero on your Touchtone telephone.

As a reminder, this call maybe recorded.

I would now like to introduce your host for today's conference call.

<unk>, it's Matt <unk> director of Investor Relations you may begin.

Good morning, and thank you for joining med paces fourth quarter and full year 2021 earnings Conference call also on the call today is our CEO August Troendle, our president Jesse Geiger and our CFO , Kevin Brady 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 Securities Litigation Reform Act of 1095. These statements involve inherent assumptions with known and unknown risks and uncertainties as well as other important factors that could cause actual results to differ materially from our current expectations. These factors, including the ongoing impact of Covid.

19 on our business are discussed in our Form 10-K , and other filings with the SEC.

Please note that we assume no obligation to update forward looking statements. Even if estimates change accordingly, you should not rely on any of today's forward looking statements.

Representing our views 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 of results a reconciliation of such non-GAAP financial measures to the most directly comparable GAAP measures.

Is available in our earnings press release and earnings call presentation slides provided in connection with today's call. The slides are available in the Investor Relations section of our website at Investor Dot <unk> Dot com.

With that I would now like to turn the call over to August Troendle.

Good day.

<unk> had a good year in 2021 and is anticipating another good year in 2022.

Our current 2022 guidance is essentially unchanged from our earlier guidance provided.

Last October .

Two issues that we are monitoring closely in 2022, our biotech funding and wage inflation.

Biotech funding is down over the past year.

However, we have not experienced an increase in project delays or other concerning signs related to clients' financial strengths.

RFP dollar volume was down approximately 10% in the second half of 2021 compared to the first half.

And was down over 24% in January 2022, compared to January 2021.

Despite this weakening in RFP flow, we believe believe the business environment is sufficient to maintain strong growth trajectory.

Note that backlog awards can leg rfps by several quarters and that our current awards reflect the strong competitive win rates over the past few quarters.

Wage inflation has accelerated in the past six to nine months and will be a headwind to margin.

As a reminder, our bill rates are set at time of project.

Annual wage inflation assumptions are generally included in each project that is good but these assumptions are usually on the low side of actual wage inflation and will trail actual inflation.

By even more in the current environment.

We believe that our guidance adequately addresses the anticipated margin headwinds.

Jesse will now make some remarks on our performance and then Kevin will review the quarter.

And guidance in more detail.

Thank you Augusta and good.

Good morning, everyone.

Revenue for the fourth quarter of 2021 was $308 6 million.

Which represents a year over year increase of 18, 8%.

Full year 2021 revenue was 104 2 billion.

A 23, 4% increase over 2020.

Net new business awards entering backlog in the fourth quarter increased 27, 9% from the prior year to $458 7 million.

<unk> and a 149 net book to Bill.

For the full year 2021, net new business Awards were $1 6 billion, an increase of 37, 1%.

Ending backlog as of December 31 was approximately $2 billion.

An increase of 29, 5% from the prior year.

Overall, our COVID-19 related work for 2021 represented only two 2% of revenue and less than 1% of backlog.

We projected approximately 1.04 billion of backlog will convert to revenue in the next 12 months.

Backlog conversion in the fourth quarter was 16, 7% of beginning backlog.

Further we were able to grow head count 24, 3% from the prior year, and a challenging and competitive labor environment and.

An employee retention and continued robust hiring for future business will remain top priorities in 2022.

With that I will turn the call over to Kevin to review financial performance in more detail and discuss our 2022 guidance.

Thank you Jessie and good morning to everyone listening in.

As Jesse mentioned revenue was $308 6 million in the fourth quarter of 2021.

This represented a year over year increase of 18, 8% on a reported basis.

In 19, 2% on a constant currency organic basis.

Full year 2021 revenue was $1 $104 2 billion, which represents a 23, 4% increase from 2020 or 22, 9% on a constant currency organic basis.

EBITDA of $61 4 million increased 2% compared to $60 2 million in the fourth quarter of 2020.

Full year 2021, EBITDA increased 18, 8% to $223 1 million compared to $187 8 million in 2020.

On a constant currency basis fourth quarter and full year EBITDA decreased one 1%.

An increased 19, 3%, respectively compared to the prior year.

EBITDA margin for the fourth quarter was 19, 9% compared to 23, 2% in the prior year period.

For the full year 2021, EBITDA margin was 19, 5% compared to 23% in 2020.

EBITDA margin declined from the prior year, reflecting higher reimbursed out of pocket expenses and increased employee related costs.

In the fourth quarter of 2021, net income was $50 million compared to net income of $50 9 million in the prior year period.

For the full year 2021, net income was $181 8 million compared to $145 4 million in 2020.

Net income growth over the prior year was primarily driven by higher EBITDA as well as a lower effective tax rate.

Net income per diluted share for the quarter was $1 32.

Compared to $1.35 in the prior year period.

For the full year 2021, net income per diluted share was $4 81.

Compared to net income per diluted share of $3 84.

2020.

Regarding customer concentration our top five and top 10 customers represent roughly 17% and 24% respectively of our 2021 revenue.

In the fourth quarter, we generated $79 million in free cash flow from operating activities and our net days sales outstanding was negative 47 two days.

We did not repurchase any shares during the fourth quarter.

And we had $195 million remaining under our share repurchase authorization at the end of the quarter.

Our board of our board of Directors also approved an increase of $300 million to our current share repurchase program.

We ended the fourth quarter with $461 million of cash.

No outstanding debt and $50 million of Undrawn capacity on our revolving line of credit.

Moving now to our guidance for 2022.

As August mentioned, we are Reconfirming, our 2022 guidance shared in our third quarter earnings release.

We are forecasting total revenue in the range of $1 4 billion to $1 $4 6 billion for the full year 2022.

Representing growth of 22, 6% to 27, 8% over 2021 total revenue of $1 $1 2 billion.

Our 2022 EBITDA is expected in the range of $262 million to $278 million.

Representing growth of 17, 4% to 24, 6%.

Compared to EBITDA of $223 1 million in 2021.

We anticipate our 2022 effective tax rate to be in the range of 13, 5% to 14, 5%.

And there are no additional share repurchases assumed in our guidance.

We forecast 2022 net income in the range of $204 million to $216 million.

And earnings per diluted share in the range of $5 35.

To $5 67.

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

Thank you.

Ladies and gentlemen, as a reminder to ask a question you will need to press Star then one on your telephone.

Withdraw your question press the pound key again.

Again, Thats star one to ask a question please.

Please standby, while we compile the Q&A roster.

Our first question comes from the line of John Kreger with William Blair. Your line is open.

Hey, thanks very much.

August you mentioned.

RFP decline in January I think you said, 25% just curious are you seeing any other signs of client hesitancy, such as lengthening decision cycles or slower trial startups or anything like that.

No, we really haven't seen any other.

Theres always.

It's difficult to.

Pick a metric like that.

Measured over a short period of time, but.

I don't really think there has been assigned to us.

Real lack.

Lack of funding or more difficulty.

Look in our client base Thats always an issue getting funding and it always does take some time and there is frequently delays.

So.

It's difficult.

To develop a useful metric and.

Anecdotal evidence does not raise commodity level this concern.

Great. That's helpful. Thanks totally different question, we've been hearing.

More commentary out of the FDA and CMS lately that there is they want more patient diversity in clinical trials I'm curious if you are cognizant of that does that seem like a notable change and does it have any implications on how youre going to approach. This.

<unk>.

Yes, no. It is an important factor in.

Site selection and.

Trying to get at.

A diverse and representative samples.

Patients in trials.

Every important issue.

Generally that is discussed with the clients very early.

<unk>.

Ideas on what sort of breakout would like generally its not something thats stratified or.

It greatly inhibits recruitment, but it is a consideration geographically.

<unk>.

Around the world and within the United States.

We fixed rates.

Great. Thanks, and one last quick one you mentioned wages as the other concern are you changing your tactics about.

How youre going to get in front of this for example, where you're recruiting or maybe the level of experience that you are going after.

No I think it's bill.

Businesses as usual.

Our wage levels are.

<unk>.

Particularly at the entry level quite a bit.

But I think our recruitment strategies remain intact.

Okay. Thank you.

Thanks sure. Thank you.

As a reminder, ladies and gentlemen, Thats 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, everyone.

I just wanted to maybe hear a little bit more on the on the inflation topic.

You probably saw the producer price index up this morning, it looks like up 10% year over year. I mean, these are some big big inflation numbers.

I know in the.

On the margin of our contracts changing like if you do a three to five year contract I know you said in the past.

I mean is there or are you trying to push through those prices.

Industry trying to push that through can you just elaborate on that a bit more because I think that's an important topic.

Okay. So I think your questions Matt.

Yes.

How pricing changes.

Are you changing the structure of contracts. So yes, so in the past no yes.

Yes.

I think so.

Quick answer to that is no we have the same structure to our contracts.

The wage.

Rates that are used in building the contract are fixed at time of bid.

We do put.

Wage inflation assumptions into the contracts and in fact.

Not changed.

<unk> go forward.

Escalation rates.

But you have to realize that.

There is a quite a bit of a lag between when we set pricing and when we do the contract.

Said pricing at bid it can be a year or two before it gets started and it can run for three five years.

So there are many years out and.

A significant change in the inflation.

We will affect your contracts under works for quite a long time and you incrementally address that for.

For new contracts, but thats kind of bumping or starting point in new contracts to wage inflation. If we think we're in a cycle of really rapidly accelerating inflation over the longer term, we would have to increase fee.

Wage inflator during the contract or go to a more variable cost structure, which is something we could do but we have not done yet.

Yes, my sense I mean, correct me if I'm wrong, you guys have fairly good pricing power in the past. So I guess, what I'm hearing from you is youre not doing anything radically changing in terms of escalators in your contracts, but you might do so in the future and you you might you feel like you probably could be able to do that in the future is that fair.

Yes, I think Thats fair and I think we can change our pricing for go forward bids which is of course the peak.

The dynamic youre negotiating with the client.

But it's difficult.

To address existing contracts behalf.

Fixed.

Reimbursement rate.

Got you and maybe my follow up question would be similar on the.

Inflationary topic, you guys are holding a lot of cash on your balance sheet, which is good obviously, you've done super well generating cash flow can you just maybe elaborate on your thoughts pulling that cash maybe just update us on any changes in thinking around kind of what the right balance sheet for med paces overtime.

Yes, Dan this is Kevin just in relation to our capital allocation strategy.

We're going to be consistent with where we've been for a while now.

And that will continue to invest in the organic growth of the business, whether it's infrastructure or people or.

What have you.

Number two pillar for us the primary pillars outside of that is going to continue to be.

Opportunistic share repurchases and you probably saw that.

We were granted.

Increase in our authorization of about $300 million from the board.

Okay. Thank you.

Thank you.

I'm showing no further questions in the queue I would now like to turn the call back over to Lon for closing remark.

Thank you for joining us on today's call and for your interest in Med pace. We look forward to speaking with you again on our first quarter 2022 earnings call.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.

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Good day, ladies and gentlemen, and welcome to the Mad pace fourth quarter and full year 2021 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 follow at that time.

If anyone should require operator assistance. Please press Star then zero on your Touchtone telephone.

As a reminder, this call maybe recorded.

I'd now like to introduce your host for today's conference call Lawn Mowers Merit pay for the wrap up of Investor Relations you may begin.

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 Securities Litigation Reform Act of 1995. These statements involve inherent assumptions with known and unknown risks and uncertainties as well as other important factors that could cause actual real.

Adult to differ materially from our current expectations. These factors, including the ongoing impact of COVID-19 on our business are discussed in our Form 10-K , and other filings with the SEC.

Please note that we assume no obligation to update forward looking statements. Even if estimates change accordingly, you should not rely on any of today's forward looking statements.

Representing our views as of any date after today.

With that I would now like to turn the call over to August Troendle.

Good day.

<unk> had a good year in 2021 and is anticipating another good year in 2022.

Our current 2022 guidance is essentially unchanged from our early guidance provided last October .

Two issues that we are monitoring closely on 2022, our biotech funding and wage inflation.

Biotech funding is down over the past year.

However, we have not experienced an increase in project delays or other concerning signs related to clients' financial strange.

RFP dollar volume was down approximately 10% in the second half of 2021 compared to the first half.

And was down over 25% in January 2022, compared to January 2021.

Despite this weakening in RFP flow, we believe the business environment is sufficient to maintain our strong growth trajectory.

Note that backlog awards can lag rfps by several quarters and that our current awards reflect our strong competitive win rates over the past few quarters.

Yes.

Wage inflation has accelerated in the past six to nine months and will be a headwind to margin.

As a reminder, our bill rates are set at time of project debt.

Annual wage inflation assumptions are generally included in each project that has been but these assumptions are usually on the low side of actual wage inflation and will trail actual inflation.

By even more in the current environment.

We believe that our guidance adequately addresses the anticipated margin headwinds.

Jesse will now make some remarks on our performance and then Kevin will review the quarter.

And guidance in more detail.

Thank you Augusta.

And good morning, everyone.

Revenue for the fourth quarter of 2021 with $308 6 million.

Which represents a year over year increase of 18, 8%.

Full year 2021 revenue was $1 142 billion.

A 23, 4% increase over 2020.

Net new business awards entering backlog in the fourth quarter increased 27, 9% from the prior year to $458 7 million <unk>.

Resulting in a 149 net book to Bill.

For the full year 2021, net new business Awards were $1 6 billion, an increase of 37, 1% and ending backlog as of December 31 was approximately $2 billion.

An increase of 29, 5% from the prior year.

Overall, our COVID-19 related work for 2021 represented only two 2% of revenue and less than 1% of backlog.

We projected approximately 1.04 billion of backlog will convert to revenue in the next 12 months.

Backlog conversion in the fourth quarter was 16, 7% of beginning backlog.

Further we were able to grow head count 24, 3% from the prior year and a challenging and competitive labor environment.

An employee retention and continued robust hiring for future business will remain top priorities in 2022.

With that I will turn the call over to Kevin to review financial performance in more detail and discuss our 2022 guidance.

Thank you Jessie and good morning to everyone listening in.

As Jesse mentioned revenue was $308 6 million in the fourth quarter of 2021.

This represented a year over year increase of 18, 8% on a reported basis.

In 19, 2% on a constant currency organic basis.

Full year 2021 revenue was $1 $104 2 billion.

Which represents a 23, 4% increase from 2020 or 22, 9% on a constant currency organic basis.

EBITDA of $61 $4 million increased 2% compared to $60 2 million in the fourth quarter of 2020.