Q3 2024 ICON PLC Earnings Call
Yeah.
Speaker Change: Good day, and thank you for standing by and welcome to the Icon Plc Q3 earnings conference call and webcast. This time all participants are in listen only mode.
Speaker Change: So the speaker's presentation, there will be a question and answer session to ask a question. During this session. Please press star one and one on your telephone you. We then had an automated message advising you had just raised.
Speaker Change: Your question. Please press star one and one again. Please note that you can only ask one question pop out to start participant to give everyone. The chance to ask a question.
Speaker Change: And please also note that today's conference is being recorded I would now like to the conference over to Kate Haven. Please go ahead.
Kate Haven: Good day and thank you for joining us on this call covering the quarter ended September 32024 also on the call today, we have our CEO Dr. Steve Cutler, our outgoing CFO Brendan Brennan, our incoming CFO, Nigel Clerkin and senior Vice President of corporate and commercial finance you rely on.
Kate Haven: I'd like to note that this call is webcast and that there are slides available to download on our website to accompany today's call.
Kate Haven: 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.
Kate Haven: You are cautioned that forward looking statements are not guarantees of future performance.
Kate Haven: 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 statements 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 our SEC reports filed by the company, including this form 20-F.
Kate Haven: On February 23 2024.
Kate Haven: This presentation includes selected non-GAAP financial measures, which Stephen Brendan will be referencing in their prepared remarks for our presentation of the most directly comparable GAAP financial measures. Please refer to the press release section titled condensed consolidated statements of operations.
Kate Haven: 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.
Kate Haven: Included in the GAAP in the press release and the earnings slides, you'll 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 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.
Speaker Change: I'd now like to hand, the call over to our CEO, Dr. Steve Cutler.
Speaker Change: Thank you.
Speaker Change: Before I begin my remarks on the quarter I wanted to briefly welcome and introduce our incoming CFO Nigel Clerkin.
Joining us on the call today.
Speaker Change: Nigel is an accomplished executive with excellent experience across both Biopharma and pharma services organizations public and private sitting we are thrilled to have enjoying our executive team at icon.
Speaker Change: In addition, I want to extend my sincere thanks to Brendan as this will be his last call with us, including a highly successful career at icon. Thank you Brendan via partnership and many contributions.
Speaker Change: Moving to the results for the quarter simply put our <unk> results for the third quarter were not in line with expectations. We had previously anticipated.
Speaker Change: As in any period, we forecast we have.
Speaker Change: A number of risks and opportunities that are identified across our business that generally counterbalance as we progressed through and close out the quarter.
Speaker Change: And this most recent quarter you identified risks materialize 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 customers who are experiencing continued cost pressures and are implementing actions to manage the development spend more tightly.
Speaker Change: Second.
Speaker Change: Within our biotech business slower decision, making and capital allocation led to award delays and slow trial stopped.
Speaker Change: And finally, we had a large number of project delays and cancellations late in the quarter within our five vaccine area that materially impacted revenue.
Speaker Change: To provide more detail 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.
Speaker Change: As we have previously highlighted we are seeing an increasing emergence of hybrid development models amongst our large pharma customer base, which is uniquely positioned icon to win a disproportionate share of these large partnership opportunities.
Speaker Change: Heightened focus on portfolio prioritization, leading to tighter development spend emerged through the quarter delay in the expected ramp up of new work that was forecast to begin in the new models.
Speaker Change: This has resulted in is studies closing out in the previous model without the counterbalancing revenue from new studies as expected.
Speaker Change: 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.
Speaker Change: Which we expect to be in the mid single digits on a year over year basis for full 2020 'twenty four.
Speaker Change: 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 operational prioritization decisions, which resulted in negative study modifications and delays in study startup that occurred in the quarter.
Speaker Change: While we continue to see a positive level of an overall opportunity flow in this segment customers continue to operate with caution in terms of the overall use of that capital.
Speaker Change: This is impacting the speed of decision, making on both awarded new work and how quickly customers are starting new trial activity.
Speaker Change: We saw several decisions on large award opportunities delay into quarter four as customers required additional time to review final scope specifications before Mikey award decisions, which are anticipated to take place this quarter.
Speaker Change: Lastly, we saw an outsized level of vaccine related cancellations in quarter, three totaling approximately 20% of overall cancellations, which combined with slower COVID-19 activity is also contributing to the lower than expected revenue in the second half of this year as these programs are fast burning and <unk>.
Speaker Change: And we're expected to start in the quarter.
Speaker Change: 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.
Speaker Change: And we are taking decisive action to manage them appropriately.
Speaker Change: 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 the critical projects as we continue to act as a strategic partner and deliver on our commitments, but not just the short term.
Speaker Change: But their long term needs.
Speaker Change: 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.
Speaker Change: This includes accelerating actions, we already undertake as an organization with 40000, plus employees assessing spans and layers across our organization to determine optimal levels of oversight and utilization to drive efficiencies.
Speaker Change: Finally, we continue to increase our adoption of automation and the use of technology across our business to leverage our scale and center of excellence model.
Speaker Change: 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.
Speaker Change: That large pharma business, we have been successful in reviewing all strategic partnerships this year.
Speaker Change: And I'm very pleased to announce the award of another top 10 strategic partnership which was finalized in quarter three.
Speaker Change: Art gun was selected for the breadth and depth of our capabilities, including a therapeutic experience and expertise as well as our innovative approach in addressing challenges across the development continue.
Speaker Change: The addition of this new competitive win brings a new strategic partnership count within the top 30 pharma two three in the past 12 months.
Speaker Change: Clearly showing momentum in gaining market share in this important space.
Speaker Change: These relationships are already delivering increased opportunity flowed through our pipeline and new awards to our business.
Speaker Change: A notable increase in therapeutic areas, such as carrier 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.
Speaker Change: In quarter, three we had solid growth in our total backlog of nine 4% on a year over year basis.
Speaker Change: Strength in New Awards 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.
Speaker Change: Relative to when we started this year, we saw more meaningful transitions in our business than anticipated with a significant level of COVID-19 related work moving out of this calendar year two of our large customers undergo a more significant development modal shifts with resulting cost pressures and the biotech market that is taking.
Speaker Change: Longer to recover and remains cautious.
Speaker Change: Despite these circumstances, we are still manage the business to drive revenue growth of five 6%, excluding COVID-19 related revenue and adjusted earnings per share growth of 13, 5% both on a year to date basis.
Speaker Change: 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 one two times net book to bill ratio on a try.
Speaker Change: 12 month basis.
Speaker Change: Fundamentally our view has not changed in our mid to long term outlook for our industry and the opportunity for <unk>.
Speaker Change: We continue to deliver for our customers across all segments of our business and we will appropriately manage our business.
Speaker Change: As we transitioned through what is a more challenging environment in the near term for specific customers and as a result for icon.
Speaker Change: 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.
Speaker Change: 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 one two to one three times on a trailing 12 month basis.
Speaker Change: We would note that we are seeing an uptick in pass throughs as a more meaningful component of total trial cost even in non vaccine areas of the portfolio, which is expected to start to reflect in our overall revenue mix next year.
Speaker Change: While there are certain large pharma customers in our portfolio that remained 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.
Speaker Change: While recovery in the biotech segment has been slower than we anticipated.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: 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 position and diversified across our customer base.
Speaker Change: <unk>.
Speaker Change: 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.
Speaker Change: Hillary businesses, such as laboratory services site and patient solutions as well as select geographic areas such as Asia Pacific.
Speaker Change: We have opportunities in our pipeline that we are actively engaged on that could be executed in the short term.
Speaker Change: We have stated we will opportunistically evaluate deploying capital towards share repurchase, which we did light in quarter, three totally $100 million worth of stock repurchase.
Speaker Change: 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.
Speaker Change: We anticipate remaining active and opportunistic share repurchases through the balance of this year and beyond.
Speaker Change: Before I hand, it over to Brandon 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 and accelerating their development programs.
Speaker Change: Brendan.
Brendan Brennan: Thanks, Steve and quarter, three oncology gross business wins of $2.832 billion.
Brendan Brennan: Decrease of seven 3% on a year over year basis, and Additionally, we reported $504 million worth of cancellations, resulting in net awards in the quarter of $2 billion $328 million in.
Brendan Brennan: And that book to Bill of 115 times.
Brendan Brennan: With the addition of the New awards in quarter, three our backlog grew to a record $24 3 billion, representing an increase of two 1% quarter. Two of 2000 quarter. Three reflects 24, an increase of nine 4% year over year.
Brendan Brennan: Our backlog burn.
Brendan Brennan: 5% in the quarter down from quarter two levels.
Brendan Brennan: Revenue in quarter three was two months.
Brendan Brennan: This represents a year on year decrease of one 2% or 1% on a constant currency basis.
Brendan Brennan: Overall customer concentration in our top 25 customers increased from quarter two.
Brendan Brennan: Turning to slide four our top five customers represented 24, 8% of revenue in quarter three our top 10 represented 46% as part of our top 25 represented 62, 9%.
Brendan Brennan: Gross margin for the quarter was 29, 5% a decrease of 40 basis points on a quarter to four.
Brendan Brennan: Gross margin decreased 30 basis points over gross margin of 29, 8%.
Brendan Brennan: Great.
Speaker Change: That's right.
Speaker Change: <unk> expense was $184 million, a quarter or eight 9% of revenue.
Speaker Change: This is an increase of 20 basis points from the prior quarter of eight 7% revenue.
Speaker Change: In the comparable period last year total SG&A expense was $180 1 million or eight 8% of revenue.
Speaker Change: Adjusted EBITDA was $418 8 million for the quarter or 26% of revenue.
Speaker Change: In the comparable period last year, adjusted EBITDA was $442 5 million or 21% of revenue representing a year on year decrease of three 2%.
Contraction of 40 basis points in margin.
Speaker Change: Adjusted operating income for quarter, three was $393 8 million a margin of 18, 9%.
Speaker Change: This was a decrease of four 3% on adjusted operating income of $401 1 million a margin of 19, 5%.
Speaker Change: So your 2023.
Speaker Change: Net interest expense was $49 4 million for the quarter.
Speaker Change: We continue to expect full year interest expense to total approximately 210.
Speaker Change: <unk> million dollars.
Speaker Change: The effective tax rate was 16, 5% in the quarter and we continue to expect the full year 2024, adjusted effective tax rate to be approximately 16, 5%.
Speaker Change: Adjusted net income for the quarter was $279 2 million a.
Speaker Change: Imagine a 13, 8% equating to adjusted earnings per share of $3 35 et cetera.
Speaker Change: It's a one 5% year over year.
Speaker Change: In the third quarter company recorded $7 9 million of transaction and integration related costs U S. GAAP income from operations amounted to $285 4 million or 14, 1% of revenue during quarter three.
Speaker Change: U S. GAAP net income in quarter, three was $197 1 million or $2.26 per diluted share.
Speaker Change: Third $2 97.
Speaker Change: <unk> per share for the equivalent prior year period, an increase of 19, 8%.
Speaker Change: Net accounts receivable was $1 billion $172 million targeted at the September 2024. This compares with a net accounts receivable balance of $1.198 billion at the end of the quarter to four.
Speaker Change: DSO was 52 days at September 30 of 2024, an increase of three days from quarter three three and an increase of one day from June Turkey is try to touch Paul.
Speaker Change: Cash from operating activities in the quarter was $402 7 million of free cash flow was $359 $4 million in the quarter, an increase of 15% although year over year basis.
Speaker Change: We saw a nice improvement in cash collections in quarter three despite the ongoing dynamic presence.
Speaker Change: Presence of our customers, particularly large pharma organizations looking to hold onto cash longer are 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.
Speaker Change: At September <unk>, 2024, cash totaled $695 $5 million in desktop.
Speaker Change: <unk>.
Speaker Change: Leaving a net debt position of $2 7 billion.
Speaker Change: This compared to net debt of $2 9 billion at June <unk>, 2024, and net debt of $3 7 billion at September 30 of 2023.
Speaker Change: Capital expenditure during the quarter was $43 3 million.
Speaker Change: We ended the quarter with a leverage ratio of one six times net debt to adjusted EBITDA.
Speaker Change: Our key assumptions behind our full year guidance are largely unchanged and effective tax rate of 16, 5% free cash flow target of circa $1 1 billion Capex.
Speaker Change: Capex spend of circa $150 million noninterest expense in the range of 210.
Speaker Change: Million.
All for the full year 2024.
Speaker Change: But all of that said, we'll now open it up for questions operator.
Speaker Change: Thank you.
Speaker Change: Listen I'll ask a question. Please press star one and one on your telephone and wait for your name to be announced until we've until your question. Please press star one and one again once again its all one and one on your telephone and wait for your name to be announced.
Speaker Change: If you could I'll kindly ask one question to give everyone. The chance to ask a question. Thank you.
Speaker Change: We are now going to proceed with our first question.
Speaker Change: And the question is come from the line of Elizabeth Anderson from Evercore. Please ask your question. Your line is opened.
Elizabeth Anderson: Hi, guys. Thanks, so much a question welcome Nigel.
Elizabeth Anderson: Can you maybe provide us with a little bit more.
Elizabeth Anderson: Color on sort of your confidence around pharma 2025 budgets in terms of here.
Elizabeth Anderson: Top customers are they are you feeling.
Elizabeth Anderson: Feel like you have good visibility at this point that they are all sort of set their spending and cut levels that you see for those of them who are reducing spending in certain areas. Do you feel like you have a good grasp on that I, just want to kind of understand that a little bit further as we think about sort of that sort of fourth quarter and then into 2025. Thank you.
Speaker Change: Sure Elizabeth.
Speaker Change: So I think overall, we see the large pharma market in totality.
Speaker Change: To be growing at a reasonable rate low Linda has been the sort of low to mid single digits. Obviously, we're more exposed in.
Speaker Change: In a couple of cases to a couple of large customers.
Speaker Change: It's somewhat of a different story, we do believe I think as we get into 2025 that will see the bottom.
Speaker Change: All of that.
Speaker Change: The slowdown with those particular customers that we have and we will start to move upwards.
Speaker Change: Probably more towards the back end of 2025. So we do have some visibility certainly in terms of one of them. We think we have some clear visibility, but probably at the bottom as we head towards the end of this year. The other it's a little less clear to be very honest, but we do think we're approaching that point and by the middle of next year, we will be sort of moving on the on the up.
Slope away from some of the declines we've seen with those particular customers. So overall I think we see the large pharma market is.
Speaker Change: Net positive as I say, the 3% to 4%, 3% to 5% and so we believe we can benefit from that particularly with the strategic partnerships that we've been successful in winning over the last.
Speaker Change: A couple of years really.
Speaker Change: And so all overall, we see it as a medium to long term positive, but we've got some a transition period to work through over the next two to three quarters.
Speaker Change: We are now going to proceed with our next question.
Speaker Change: The question has come from the line of Michael Cherny from Leerink Partners. Please ask your question.
Michael Cherny: Hi, good morning, and thanks for taking the question.
Michael Cherny: If I can follow along a similar trend to Elizabeth's question, but.
Michael Cherny: Two biotech demand youre not the only company that's signaling any type of concerns or worries about the state of decision, making the biotech market.
Michael Cherny: As you think through the various different constituencies that you work with across biotech was there anything that you can glean about.
Michael Cherny: Pockets of strength and weakness versus the D C.
Michael Cherny: He'd versus status of where these companies from a venture funding perspective.
Speaker Change: Similar to the pharma question, where does that comfort factor lie about the pacing of biotech recovery given that obviously market wide, it's been a bit slower than we'd all would have anticipated.
Michael Cherny: Okay.
Speaker Change: Yes, Mark that's probably we're probably a little less certain in terms of budget, we've been calling the end of the biotech challenge for.
Speaker Change: Several quarters now and clearly as we've seen in this quarter, we were not there yet we see the same data you do in terms of their funding they had a good start to the year that it would slow in the middle of the year and then September seemed to be positive and we are getting the same sort of vibes from our customers in terms of their applications they seem to be able to raise capital.
Speaker Change: Particularly for good signs, but allocating and they have been they have delayed decisions that have delayed awards.
Speaker Change: <unk> projects and there has been some uptick in the cancellation side of things. So I don't think were ready to quite call. The end of the challenges in the biotech segment just yet.
Speaker Change: We do believe I think long term.
Speaker Change: It will be positive and we will we will move back to a very solid position and I think there's certainly data that would support that.
Speaker Change: But I think the next again the next two to three quarters. It remains somewhat uncertain, we do see as I say.
Speaker Change: Some optimism in the segment in terms of the Rfps numbers, we're seeing through the solid is certainly solid enough there's plenty of opportunity in our.
Speaker Change: Pipeline, but it's nailing that opportunity, Dan and converting even those awards into projects that start in the burn revenue at the at the right.
Speaker Change: To the extent that we expect is is where the challenges lie and I think we're not quite at the bottom of that yet so I'm, sorry, if I'm not able to give you a definitive answer on that but we continue to find that one probably the most challenging aspect of that business.
Speaker Change: We are now going to proceed with our next question.
Speaker Change: Our question comes from the line of you got from Barclays. Please ask your question.
Speaker Change: Alright, great. Thanks, guys.
Speaker Change: I guess as you.
Speaker Change: Think about the recovery here and then into 'twenty, five and the market kind of being that low single digit growth and you guys typically growing at the high end of that is that does that still safe assumption here as we think about 25 and then.
Speaker Change: As you also think about the margin implications here the flexibility of your model and that model one slash hybrid.
Speaker Change: Is that you can provide allows a lot of flexibility to scale up and down resources pretty quickly. So given this is late in the year understand what hits in <unk>, but how do you rightsize those and how we think about that margin progression as the business starts to ramp back up.
Speaker Change: Yes look as I think we said pretty clearly on the call we're not going to provide.
Speaker Change: Any sort of guidance for next year, we're looking hard at the business.
Speaker Change: Certainly over the next three or four months and we will provide that guidance in January as we as we normally do having said that we do believe we can grow next year, it's probably going to be more in the low to mid single digits at this point.
Speaker Change: That's kind of our certainly our expectation and we don't make any projections on margins at this point you know out of the mix of our business is changing with the.
Speaker Change: The vaccine studies coming through and some uptick in the in the functional work being being counteracted and offset by some progress on the full service, particularly with these new strategic partners that are coming in on a full service basis. So there's puts and pulls from a margin point of view in both on both what we do.
Speaker Change: As I said, we do expect revenue growth.
Speaker Change: That's what we'll be working for.
Speaker Change: But at the moment, we're not going to be too specific about that we will be as we say as we get to JP Morgan in January.
Speaker Change: We are now going to proceed with our next question.
Speaker Change: Okay.
Speaker Change: Our question comes from the line of Justin Bowers from Deutsche Bank. Please ask your question.
Speaker Change: Okay.
Justin Bowers: Hi, good afternoon, and just pivoting back to large pharma a two part question on the development model changes in the replenishment cycle, how much visibility do you have into this dynamic persisting.
Justin Bowers: Or is this a step change in that funnel and then is the messaging there that.
Justin Bowers: These two customers will will sort of be a headwind into 2025.
Justin Bowers: And then the rest of that customer cohort the top 20, which would then grow.
Speaker Change: To answer your second question.
Speaker Change: First Justin I think that's a reasonable way to characterize it we certainly see growth outside of our top two I think that the extent of around 6%.
Speaker Change: We're happy to see that and Thats all.
Speaker Change: <unk> in many cases by more full service work better margin work and so we think there's a nice offset.
Speaker Change: On that front in terms of the the more functional is that a permanent.
Speaker Change: Things are never permanent these things tend to wax and wane, depending on who is in charge of the company and what the.
Speaker Change: The operating model <unk> is.
Speaker Change: We have some opportunity I think to to work in both models effectively in both models, we've talked about our hybrid model and our ability because we are the largest functional provider to provide hybrid functional and full service.
Speaker Change: <unk> of any sort of development program will portfolio. So we well we do believe we're very well positioned no matter, which way the market goes.
Speaker Change: To be able to prosecute enter into when that when that work.
Speaker Change: But as I say at the moment, we're seeing that push towards a more functional approach persisting at least in several of our top customers, but it is being offset to some extent by some movement towards full service in other parts of the business and of course, our biotech customers are all full service so as always.
There's puts and calls and theirs.
Speaker Change: <unk>.
Speaker Change: Tailwind and headwinds on this thing I think generally we feel the market overall will progressed nicely. If we can prosecute and execute our projects as we believe we can.
Speaker Change: We believe we can get some modest margin uptick, but that all remains to be seen and as I said, we're not going to be specific about 2025, well beyond just at this point.
Speaker Change: Okay.
Speaker Change: We're now going to proceed with our next question.
Speaker Change: Our question comes from the line of Heinz from Mizuho. Please ask your question.
Speaker Change: And we're certainly prepared to utilize our balance sheet to prosecute the share buyback.
Speaker Change: Options and we also are very much in the market on the M&A side of things, where we can bring in.
Speaker Change: Components of the business to supplement what we already have and to improve the performance of what we already have that's certainly the push on the M&A side of things. So we do believe we've got the tools in the toolkit. We do believe we've got the balance sheet and we do believe we've got the people and the strategy to achieve the goals that we sit at it.
Speaker Change: We're now going to proceed with our next question.
Speaker Change: Our question comes from the line of Patrick Donnelly from Citi. Please ask your question.
Patrick Donnelly: Hey, guys. Thank you for taking the questions.
Patrick Donnelly: Wanted to follow up on it with Luke's question I'm from the margin stuff.
Patrick Donnelly: Talk a little bit about some cost actions can you frame up what you guys are going to do on the cost side.
Patrick Donnelly: The magnitude if possible and I would say it would be helpful.
Patrick Donnelly: Just trying to figure out you know when you look at the second half here Youre, implying EBITDA margin somewhere above 20%. We've got a fair number to think about next year and just the cost out piece would sort of help us contextualize that thank you guys.
Speaker Change: Yes, Patrick in terms of cost I think I think it has been noted we've acted fairly quickly too.
Speaker Change: To realign our cost base with the work that we have in the backlog and the work that's proceeding in tobacco.
Speaker Change: Absolute priority for us is to make sure that our customers have the resources they need.
Speaker Change: To get there.
Speaker Change: Critical projects done that is that that is priority absolute number one and we were very focused on doing on doing it having said that we do recognize that an adjustment on the cost base is important.
Speaker Change: We're pulling a number of levers whether it be spans of control whether it be looking at where we have.
Speaker Change: Excess people in certain areas.
Looking very hard at doing that and taking decisive actions.
Speaker Change: I'll leave it at that I do believe it'll have some impact on quarter four not a huge impact, but really that that impact will be.
Speaker Change: As we get into 2025 and I do believe we have some other areas, we can look at as well.
Speaker Change: It's not just a one off where you're going to continue to look at what.
Speaker Change: What we need to do on our cost base and we do it well and it's something I think.
Speaker Change: I guess my question is twofold.
Speaker Change: One is that.
Speaker Change: Is is how much of the wallet do these partnerships avail, you of and you know maybe that's mixed in different categories or whatever but I'm just interested in.
Speaker Change: And what cases are you kind of pan out.
Speaker Change: The client and in what cases might you only being one therapeutic area or only in one service or something like that.
Speaker Change: And then with that footprint and that opportunity to interact with those clients at that higher level.
Speaker Change: And to the point that you made about development model changes.
Speaker Change: How much of this is.
Speaker Change: Kind of major adjustment by big pharma to the.
Speaker Change: Outlook that they have loss of exclusivity cycle, a new pricing dynamic in the U S.
Speaker Change: And really reevaluating returns on invested R&D.
Speaker Change: And re pivot re positioning or or.
Speaker Change: Pivoting pipeline and the bottom line on this part of the question really is.
Speaker Change: Is it just these two or are we only kind of midway through a lot of big pharma clients doing these times these types of things. Thanks.
Speaker Change: Right Okay.
Speaker Change: Let me start with your first one.
Speaker Change: In terms of the sort.
Speaker Change: The share of wallet, what we do with these strategic it really does vary.
Speaker Change: I would say in most cases, we are.
Speaker Change: <unk> selected us.
Speaker Change: Either one of one one to one of three full but it's usually in the sort of up up to three one or two cases, we're the sole provider, but that's not that doesn't happen very often more cases, it's more one of three and we do get access to their entire outsourcing portfolio.
Speaker Change: And so we have the opportunity to bid and we bid usually against the other one will be out of the tube and.
Speaker Change: Okay.
Speaker Change: And so we take it in those terms in terms of customers responding to some of the regulatory challenges that they face inevitably.
Speaker Change: I talk about those and they work through some move in a more functional basis and some are moving in a more full service spices and summit because the pipelines are so full of their requirement to develop drugs is so so critical because they are growing so fast that.
Speaker Change: They are attending.
Speaker Change: And that tends to be in a more full service basis.
Speaker Change: It's a long way of telling you that.
Speaker Change: It's not particularly correlated with any.
Speaker Change: Particular regulatory or external factor.
Speaker Change: Multitude of things and each customer each farmer.
Speaker Change: Their own set of circumstances and pick their models based on those I.
Speaker Change: I think I'd just add quickly Dave that it has presented us with a lot of opportunity I think I think it's fair to say over last 18 months, we've probably seen more activity. That's been caused by buying some of these concerns from a macro perspective, whether it be IRI or some of the other issues that have come up in Cogs.
Speaker Change: Large pharma to take a hard look at how their development organizations are structured and where where they need to get to over time, obviously, the the outlooks are going to be different on a customer by customer basis, but that gives us an opportunity to go in and really fight for.
Speaker Change: Or continue to.
Speaker Change: Two.
Speaker Change: To defend our position in existing partnerships and have an opportunity to to win new ones and obviously, we've been successful winning three new large partnerships in the last 12 months and that's critical in terms of our growth outlook for the future. So so it's not necessarily a negative in terms of.
Speaker Change: These these customers looking at.
Speaker Change: Looking harder around their development spend and opportunities.
Speaker Change: We're not going to proceed with our next question.
Speaker Change: Okay.
Speaker Change: Our question comes from the line of Matt Smoke from William Blair. Please ask your question.
Speaker Change: Risks materialize into a greater extent and some of the opportunities not offsetting.
Matt Smoke: I'm just trying to think about the revised guide for.
Matt Smoke: 24, and your comments about a low single digit mid single digit for 2025.
Matt Smoke: Maybe putting it this way are you more worried about the risks being more protracted and I'm thinking about the two pharma that you talked about the re prioritization there or do you feel are less confident in some of the opportunities offsetting which which of those two components that you adjust more when revisiting the guide.
Matt Smoke: That's it.
Speaker Change: That's a good question Michael.
Speaker Change: In our business there are always risks and there are always opportunities and as I said in my prepared remarks.
Speaker Change: This quarter for the first time in probably 55 or 60 quarters.
Speaker Change: The company.
Speaker Change: There really was a very substantial difference in what played out the risks well outweighed the the opportunities I think going forward, we will reformulate and re look at what those risks and opportunities are and be able to be.
Speaker Change: A little bit more accurate if that's the right word in terms of in terms of how we think the world is going to go and how it's going to come in quarter. Three as you. All know is it's probably the most challenging quarter in the year given that August is very quiet customers or Hawaii thoughts or why it's sometimes difficult to get the information you're looking for.
Speaker Change: And then everyone comes back in September.
Speaker Change: Down to a number of key decisions as to whether you make your book to bill number or not and so it is a challenging quarter and when things done.
Speaker Change: And they don't go as we'd expect.
Speaker Change: The very short term impact plays out as it has for us.
Speaker Change: In this quarter I don't see going forward that way that we're going to have this sort of quarter in fact.
Speaker Change: We don't get it. So these are sort of quarter on a regular basis.
We've got a pretty good track record as I said over the last 50 or 60 quarters.
Speaker Change: Specific customers or at least we could name specific customers.
Speaker Change: <unk>.
Speaker Change: But I think it's.
Speaker Change: We believe that.
Speaker Change: The issues that we have with these customers.
Speaker Change: Delighted to them, it's not that they are the only ones moving in the direction. It out with a change in the development model of moving towards a more functional approach. It is the issue for US of course is that they are very significant customers for us and they are both going in.
Speaker Change: In the same direction that are at a similar rate of knots.
Speaker Change: And so that's the specific issue that we have and to be a bit more specific.
Speaker Change: As they change their model, we anticipate we certainly anticipated a decline in revenues from a certain part of their business in terms of the.
Speaker Change: Full service work. We also expected was a much more significant uptick in the functional business and Thats really where the.
Speaker Change: What hasnt happened so much and so the different sort of differential if you like has become much more expensive and much more expanded than we had anticipated at.
Speaker Change: At the beginning of the year and even as we went midway through the year. So that differential of what they are we don't I would awards versus what they have been awarded and Thats really because they haven't been doing that work because of the budget cuts I think they've been cutting back on their pipeline.
Speaker Change: So it is very specific we do believe it is somewhat is totally isolated to these so it's not that others aren't moving units are doing similar things, but theyre, certainly not having the sort of impact that.
Speaker Change: They have on our on our portfolio on our level of works.
Speaker Change: Actually to clarify that in terms of the.
Speaker Change: Some other customers or other companies in related industries.
Speaker Change: Sure.
Speaker Change: They have commentary on the large pharma models.
Speaker Change: I can't comment specifically on their businesses or what they do we don't see this as a.
Speaker Change: Part of this is the market we live in now we've seen.
Speaker Change: A lot of and obviously this is predominantly driven by the large pharma customers as well.
Speaker Change: In relation to their new contracting procedures over the last 12 months, we have seen them pushing out the milestones again trying to have fewer milestones and contracts.
Speaker Change: And sometimes they necessarily on our new Workstyle has definitely has impacted us from a from an absolute perspective in terms of that unbilled level I think you'll see from the cash receipts in the quarter. Obviously, we're still in good Nick and still targeting to make the free cash flow target for the year.
Speaker Change: Absolutely, it's a matter of.
Speaker Change: Focus.
Speaker Change: At the.
Speaker Change: The organization as we go forward I think one of the other compounding factors as we have seen less upfront.
Speaker Change: Elements of pass through payments.
Speaker Change: They're looking at balance sheets of our size you don't get that many people that are kind of voluntary.
Speaker Change: This piece in terms of listen we manage our debtor book appropriately over time I think that is fair I think we have done a decent job of that some of the large customers have.
Speaker Change: Payment methodologies that immediately puts you into looking at things like and customer programs effectively that has.
Speaker Change: Some elements of.
Speaker Change: Cost to them that is fair.
But thats just the way they are operating at this level now and we've seen that from a couple of our large customers. So to that extent, we operate with them in those models and albeit it's not widespread across the book of business.
Speaker Change: And I think then on the second.
Speaker Change: I would tell you that we did Mike.
Speaker Change: Relatively modest sized acquisition.
Speaker Change: Lighting to an organization in eastern Europe to supplement our eastern European capabilities.
Speaker Change: Within the next two to three quarters will be we'll be moving well through it yes.
Speaker Change: That quickly actually in the early phase you know more in the phase one spaces, it's actually been quite good in terms of overall activity, particularly on the award front, we called that out obviously in addition to labs.
Speaker Change: And nice performer for us in the quarter, so actually we're not seeing that even on the early end.
Speaker Change: Early stages of our business.
Speaker Change: Good point.
Speaker Change: We're not going to proceed with our next question.
So question is come from the line of Charles <unk> from TD Cowen. Please ask a question.
Speaker Change: Hi, yes. Thanks for squeezing me in just Steve you mentioned earlier about capital deployment.
Speaker Change: Youre looking at a bunch of opportunities in the short term can you give us a little bit more sense would these be more material than the ones that the one that you just talked about in eastern Europe maybe.
Speaker Change: And I guess the follow up to that has anything to do.
I suggest that you couldnt do both M&A and buy back shares given where your Leverages currently.
Speaker Change: I'll answer your second question first.
Speaker Change: No. We believe we can do both we believe our balance sheet as cash collections have been excellent. This quarter. So we believe we're in a strong position from a balance sheet point of view to be able to deploy either a M and I and the orange share buyback will be opportunities certainly on the on the share buyback side of things.
Speaker Change: The size of the of the M&A opportunities we're contemplating.
Speaker Change: They're not huge there are transformational they are similar size to the one I described.
Speaker Change: Previously, we are looking to supplement and to improve our current operations so whether it be in the lab space, whether it be in the patients.
Speaker Change: Space.
Speaker Change: Potentially in the <unk> real world those sorts of areas are the areas that we think we can we can we can Mike.
Speaker Change: A sensible acquisition that can actually improve our overall performance. So it's more than just what we bring in from a revenue and EBITDA point of view its what it can what we can see logistically get from a revenue and obviously from a cost but from a revenue and a performance point of view. If we can if we can prosecute our projects better for our customers.
Speaker Change: We are able to burn revenue OLED all that good stuff you will know about that so so those are the sorts of areas. We're looking at areas, where we can really.
Speaker Change: Turbo charge, if you lock out clinical operations, particularly in the phase phase II phase III area and burn that would get that work done for our customers more effectively and more efficiently. So those are the those are the areas we look at.
Speaker Change: Right.
Speaker Change: Yeah.
Speaker Change: In the interest of time, we will end the question and answer session.
Speaker Change: And I would like to hand back to Steve Cutler for closing remarks. Thank you.
Speaker Change: [music].
Speaker Change: Good day and thank you for joining us on this call covering the quarter ended September 32024 also on the call today, we have our CEO Dr. Steve Cutler, our outgoing CFO Brendan Brennan, our incoming CFO, Nigel Clerkin and senior Vice President of corporate and commercial finance reliant I would like to note that this call as well.
Speaker Change: Cast and that there are slides available to download on our website to accompany today's call.
Speaker Change: 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 Companys business and <unk>.
Speaker Change: Centers are caution that forward looking statements are not guarantees of future performance forward.
Speaker Change: 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 statements 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 our SEC reports filed by the company, including the form 20-F.
Speaker Change: Filed on February 23, 2024.
Speaker Change: This presentation includes selected non-GAAP financial measures, which Steve and Brendan will be referencing in their prepared remarks for our presentation of the most directly comparable GAAP financial measures. Please refer to the press release section titled condensed consolidated statements of operations.
Speaker Change: 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.
Speaker Change: Included in the GAAP 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 their respective tax benefits.
Speaker Change: 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.
Speaker Change: I would now like to hand, the call over to our CEO Dr. Steve Cutler.
Speaker Change: Okay.
Speaker Change: I'll begin my remarks, when the quarter I wanted to briefly welcome and introduce our incoming CFO Nigel Clerkin, who is joining us on the call today.
Speaker Change: <unk> is an accomplished executive with excellent experience across both Biopharma and pharma services organizations public and private sitting we are thrilled to have enjoying our executive team at icon.
Speaker Change: In addition, I want to extend my sincere thanks to Brendan as this will be his last call with us, including a highly successful career at all thank you Brendan via partnership and many contributions.
Speaker Change: Moving to the results for the quarter simply put our <unk> results for the third quarter were not in line with the expectations. We had previously anticipated.
Speaker Change: As in any period, we forecast we have a number of risks and opportunities that are identified across our business, but generally counterbalance as we progressed through and close out the quarter.
Speaker Change: And this most recent quarter the identified risks materialize 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.
Speaker Change: This was due to three main reasons.
Speaker Change: We are seeing a small number of customers who are experiencing continued cost pressures and are implementing actions to manage the development spend more tightly.
Speaker Change: Second within our biotech business slower decision, making and capital allocation led to award delays and slow trial stopped.
Speaker Change: And finally, we had a large number of project delays and cancellations late in the quarter within our five vaccine area that materially impacted revenue.
Speaker Change: To provide more detail 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.
Speaker Change: As we have previously highlighted we.
Speaker Change: We're seeing an increasing emergence of hybrid development models amongst our large pharma customer base, which is uniquely positioned icon to win a disproportionate share of these large partnership opportunities.
Speaker Change: Heightened focus on portfolio prioritization, leading to tighter development spend emerged through the quarter delaying the expected ramp up of new work that was forecast to begin in the new models.
Speaker Change: This has resulted in is studies closing out in the previous model without the counterbalancing revenue from new studies as expected.
Speaker Change: 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.
Speaker Change: Which we expect to be in the mid single digits on a year over year basis for full 2020 'twenty four.
Speaker Change: 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 operational prioritization decisions, which resulted in negative study modifications and delays in study startup that occurred in the quarter.
Speaker Change: While we continue to see a positive level of an overall opportunity flow in this segment customers continue to operate with caution in terms of the overall use of that capital.
Speaker Change: This is impacting the speed of decision, making on both award of New work and how quickly customers are starting new trial activity.
Speaker Change: We saw several decisions on large award opportunities delay into quarter four as customers required additional time to review final scope specifications before Mikey award decisions, which are anticipated to take place this quarter.
Speaker Change: Lastly, we saw an outsized level of vaccine related cancellations in quarter, three totaling approximately 20% of overall cancellations, which combined with slower COVID-19 activity is also contributing to the lower than expected revenue in the second half of this year as these programs are fast burning in.
Speaker Change: And we're expected to start in the quarter.
Speaker Change: While we have.