ICON PLC (ICLR) 2003 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the ICON plc second quarter fiscal year 2003 results conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question and answer session. If you have a question, please press the one, followed by the four.

As a reminder, this call is being recorded Tuesday, January 7th, 2003.

I will now turn the call over to Mr. Sean Leech, Chief Financial Officer. Please go ahead, sir.

Thank you. Good day, ladies and gentlemen, and thank you for joining us on our second quarter fiscal 2003 conference call covering the results for the quarter ended 13th of November 2002. On the call today we have Dr. John Climax, our Chairman, and COO, Peter Gray.

Before I hand the call over to John, I would like to make the customary cautionary statement in relation to forward-looking statements. Certain statements in these opening remarks constitute forward-looking statements concerning the company's operations, performance, financial conditions, and prospects. Because such statements involve known and unknown risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements. Given these uncertainties, investors and prospective investors are cautioned not to place undue reliance on forward-looking statements.

With that said, I would like to hand the call over to John.

Thank you, Sean. Good day, ladies and gentlemen, and a very happy new year to you all. Thank you for joining our conference call covering the results for the quarter ended 30th November 2002.

Net revenue in the quarter was $53.5 million, an increase of 42% over the same period last year. Of this, net revenues in the U.S. were up 48% on the comparable quarter, while Europe and the rest of the world grew by 29% (ph) over the same period. Excluding the impact of our most recent acquisition, net revenue growth was 32%.

Year to date, net revenue was $100.4 million, which represented a 36% increase over the comparable period. Of this, net revenues in the U.S. were up 41% and Europe and the rest of the world were up 25%. Excluding acquisition, the year-to-date net revenue growth was 31%.

Direct costs were 28.7 million for the quarter, representing 53.6% of net revenue compared to 54.4% in the comparable period. SG&A, including D&A, costs were 34.6% of net revenues for the quarter compared to 33.9% in the same quarter last year.

Year to date, direct costs were $54.1 million, which represented 53.9% of net revenue compared to 53.4% of the first six months of fiscal 2002. SG&A, including D&A, costs were 34.6% of net revenue for the six months ending 30th November 2002 compared to 35.1% for the same period last year.

Operating income for the quarter grew by 43% over the same quarter last year, from $4.4 million to $6.3 million. Year to date, operating income grew by 35% over the same period last year, from $8.5 million to $11.5 million. Operating margins were 11.8% compared with 11.7% for the same quarter last year, and up from 11.1% in the previous quarter. As expected, operating performance in our lab business was well below plan, with no operating income contribution generated in the quarter. As you will recall, this softness was due to our higher than normal of cancellation in the first quarter.

Net new business awards in the lab (ph) for the quarter were ahead of plan, and as a result, its backlog and full costs (ph) indicate, as we expected, a good recovery in the quarters ahead. Against this, our core clinical development business continued its progress, and operating margin exceeded 13% in the quarter.

Taxation was 30.6% of pretax income for the quarter, in line with the revised guidance we gave through our last conference call following the acquisition of BPA (ph) and MCS (ph). The increase in our effective tax rate is due to the conversion of our surplus cash through these acquisitions into operating businesses, which unlike our investment income are subject to U.S. taxation.

As a result, net income for the quarter was $4.4 million, or 36 cents per share, compared to $3.5 million, or 28 cents per share last year, while net income for the year to date was $8.4 million or 69 cents per share compared to $6.8 million or 56 cents per share for the comparable period last year. Capital expenditure in the quarter was $4 million, and payments made for acquisitions, $15.7 million in the quarter. Our investment in days sales outstanding, commonly referred to as DSOs, were 59 days compared to 63 days at the end of the previous quarter and 67 days at 31st May 2002.

As a result of these factors, net cash at 30th November 2002, was $27.5 million compared to $38.9 million at the end of the last quarter and $43.1 million at the end of fiscal 2002. Net new business awards in the quarter were $67 million compared to $54 million last quarter and $34 million for the comparable period, an increase of 97%. Cancellation was $5 million, or 7% for the quarter. Year to date, net new business awards were $121 million, an increase of 51% over the comparable period, with cancellations at 17 million or 12%.

As a percentage of our opening backlog, cancellations were approximately 2% in the quarter. The portion of our backlog to be earned in the next four quarters is approximately $184 million, up 53% on the same quarter last year. This represents approximately 80% of our current market forecast and is at the higher end of the range of forward revenue cover we like to see. We therefore believe that we are in a very good position to exceed the current revenue forecasts for the next 12 months.

We're delighted with the results for the quarter, and in particular, with the strong organic revenue growth and the increase in our operating margins. In addition, during the quarter, we've completed the acquisition of BPA and MCS and made significant progress in integrating them into ICON. As you will recall, we estimated that these acquisitions would be mutual to our earnings in the current quarter and would be increasingly accretive in future quarters. As the integration progresses, our confidence in these estimates continues to solidify. With the continued strength of our industry, strong backlog, and our strong margin performance, we are looking to the remainder of fiscal 2003 and beyond with confidence.

That concludes our opening remarks, and I would like now to open the call up to questions.

Thank you. Ladies and gentlemen, if you would like to register a question, please press the one, followed by the four on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the one, followed by the three. If you are using a speakerphone, please lift your handset before entering your request.

The first question will come from the line of Peter Foley (ph) with Marion Fokers (ph). Go ahead.

Good afternoon, gentlemen. I wonder, can you give the breakdown of revenue and operating profits across the three various business units that you have and maybe talk about the utilization rates as well, and also, given the strong revenue growth, whether -- you know, whether the growth is outstripping your current resources in staff numbers.

Sure. I will take that one, Peter, or the first part anyway. In terms of the margins, as John indicated in his opening remarks, our operating margin in the lab was basically no contributions. So effectively, their margin was zero percent in the quarter. This would (inaudible) extend our core clinical development groups, which performed strongly in the quarter and delivered a margin of over 13.4% in the current quarter, thus giving us the overall 11.8%.

In terms of utilization, as we indicated on our last conference call, Europe recovered well and recorded utilization just under 85% for the quarter, and the U.S. was slightly above 86. Thus, we averaged in and around the 86% mark overall for the group. I'm sorry. I forgot the last part to your question.

Just wondering, going forward, what the revenue growth and just wondering, are you actively recruiting at the moment to handle the additional new business wins that you are winning.

Peter, I will take that. Of course we're recruiting actively. In order to grow the revenues at this pace, we pretty much have to increase the head count at a comfortable pace. From a management perspective, also, we are constantly expanding our structure and adding to our structure, growing as we have now done for six quarters in a row at over 30%, ain't easy, and the way in which we manage it is ensuring that we have efficient management structure and a solid enough management structure in place to support us, and that means that we're constantly adding to that structure.

I'm just wondering how the staff pace (ph) and business performed in this quarter. Did it go to plan, or are you generally happy with the acquisition?

Well, we're only two months into it, Peter, so it will be absolutely premature to make any comment on that, other than it has not done anything that we didn't expect it to do at this stage.

Thank you.

The next question will come from the line of Ian Hunter (ph) with Good Buddy Stockbrokers (ph). Go ahead.

Good afternoon. As you said, a very good margin recovery, up to 11.8%, and you're saying that the lab constituted nothing. Can we be look at improving margins over the next two quarters, and can you give us guidance on that? Again, you have good net new business wins with a lower level of cancellations. Is this a sustainable level at $67 million, or will we be seeing some fluctuations through the next two quarters?

Again, Peter Gray. Margins -- obviously, if the lab recovers, as we expect it will, we could see some further upside on margins. We have been indicating and expressing confidence that we can achieve overall margins of 12% and perhaps even a little in excess of 12%. So if the lab does recover, as we expect, yes, I think 12% is certainly achievable in the next couple of quarters, and perhaps a little even more than that.

In terms of business wins, 67, obviously, is a good step forward from previous levels, but the revenues growing as fast as they are, we obviously need to continue to increase the level of business wins, so we will be confident that business wins will continue to be strong. I think it's inevitable in the real world that there will be some fluctuations, but we certainly see a variable market at the moment, and therefore would not have any fears in that regard.

Okay, thank you.

Next question comes from the line of David Marshall (ph) with NCD Stockbrokers (ph). Go ahead.

Good afternoon, gentlemen. Just on the strength of the numbers you reported today, and John Climax has inferenced that, you know, your conference (ph) you will exceed the market expectations for net revenues, and is there any new guidance for net revenues and earnings for fiscal '03? And just maybe if could you update the margin expectations for the year, as well? You're coming in toward the top of the range already.

I'll answer the question in summary, I suppose, David. Yeah, I think it's likely we will be -- the general estimates that are out there, in general, most people have us at 1.43, 1.44 for the year. I think ultimately we're probably looking at EPS for the year as a whole of somewhere in the region of 1.48 and 1.49, and if you back margins into that, we are expecting some improvement of the margin over that period, probably (inaudible) in line of what you had before, our Q1 results, David.

Okay. Excellent. And just if I can follow up, just to ask you about, you know, your working capital requirements, you must be under a lot of pressure at this stage, giving the pace of the growth and the revenue side, and I noticed again the total revenue line is continuing to grow at a very fast pace. And, you know, will the DSOs be sustainable at this good metric you produced this quarter?

Yes. I think what we've guided is that we will be in the 60 to 65 range. We were pleased to see it below the 59. We've obviously been working hard on the basis that it came down from (inaudible) three quarters ago. It's a continuous focus of ours are and will it continue to be so. We will see fluctuations in it again. Our contract is a fixed-point contract business with specific milestones based on metrics, operational metrics, and these can be quite tough on the basis that it could take you an additional week to recruit the final patient to say here's the 100-patient milestone type of milestones that we have.

So I would expect some level of fluctuation. But I think you will see and probably agree that the underlying trend in our DSOs has been positive not just for this quarter but over the last three to four quarters, and I think that trend will continue and it will continue to be our focus. We do not have any great motivation to act as a banker, so working capital is always an important issue for us, and as we grow, and with the large level of growth that we have, our preference is obviously to keep working those numbers down.

I think we've seen a good progress. We will continue to push. I don't see us heading back to higher levels than we're currently at.

Absolutely, I concur. It's very impressive the way you managed it so well. Well done.

The next question comes from the line of John Kreiger (ph) with William Blair.

Thank you very much. Another question about margins. If you look back over the last few years (ph), what level of operating margin has your lab been able to sustain when it's running smoothly with a good level of business activity?

John, I suppose we haven't owned it for long enough to say that we had a period where we've had sustained margins. When we acquired it, it was a business in distress. Had been making (ph) losses, had been brought to break even when we bought it, and during last year, it got to margins in excess of 15% for two or three quarters.

One.

One quarter. But 13 margins (ph) in excess of 10% during a number of quarters. Our firm belief and confidence is that the lab is capable of making margins in excess of 15% on a consistent and sustainable basis. But we are in an exercise of building that business, we're investing in it, and there will be those fluctuations from time to time as we go through that progress. We are confident that 15% at least is a sustainable level.

Great. Thanks. And have you said how long it will take to you get back at least close to a more normalized profit margin with the lab?

I suppose we're being cautious. One doesn't -- we're not pleased, clearly, with the performance the last couple of quarters. But we would expect that in two, outside three quarters to get back to accessible levels of margin.

Great, and then an unrelated question. Can you talk a bit more about what's driving the great new business at present? How much of that, for example, came from your recent acquisitions?

Very little of it came from our recent acquisitions. I think the positive with recent acquisitions is they had a strong backlog as we acquired them, and given the size of those businesses, they won't have a very high win rate in a given month or couple of months which we've owned them. So the business wins that you're looking at are essentially business wins within our core business, not materially contributed to by the acquisitions.

Where is it coming from? I think the answer is it's coming from a very, very broad spectrum of customers and clients from -- ranging from big pharma to biotech to specialty companies. I think one of the features of the wins in the quarter were how broadly based they were. Remind me, Sean, I think there were 30-plus projects involved in the wins.

Correct.

A couple of large ones and quite a number of interesting, small Phase II type programs, et cetera. So it's broadly based, John.

As you look at that mix of business coming in, would your expectations be that your concentration statistics would change at all over the next year?

We've been predicting this for a long time, so I would be cautious, but yes, I think that would be a reasonable inference. The analysis of our backlog shows that 33 different companies make up 90% of the backlog, 33 different clients make up 90% of the backlog. That's been broadening over the last couple of quarters very significantly. As you know, for a long time, we've been reporting that 50%, 50% to 60% of our revenues come from our top five clients. That metric of 33% clients making up 90% of the backlog, I think, is an indicator that we believe that the top five metric is going to decline and continue to decline over the next year or so.

Great. One last question. What was that number for this quarter, Peter? The top five percentage of business from the top five clients?

53%, John.

Thanks very much.

The next question comes from the line of Jack Guardman (ph) with Davie Stockbrokers (ph). Please go ahead.

Thanks very much. Just two questions, please, just to follow-up on John's (inaudible) regards concentration. Just wondering whether you might be able to give us more flavor in regard to project concentration in the quarter we have just seen. And secondly, while acknowledging, obviously, that it's premature to make any definitive judgments on NCS, just wondering if you can give us just a flavor so far from a business development perspective, i.e., how is the business being marketed? Is it being marketed with ICON as a prominent add-on to that pitch?

And I suppose secondary to that, you did mention before that you were toying with the idea of bringing NMCS to Europe. Is there demand in the first instance, and have you thought any further on it?

Okay. First part to your question was concentration in the quarter in terms of projects.

Yeah.

John, do you want to take that?

Yeah. There isn't a project concentration. Let me give you an example. Let's look at the top three clients. We had 61 projects with our top three clients.

Okay.

And that covers a total of 29 drugs.

Okay.

And only seven of them gave us revenues of more than a million a quarter.

Only seven projects or seven drugs?

Seven projects.

Seven projects, okay.

That gives us revenues of more than a million a quarter.

Okay.

And what you also have to understand is, out of the 61 projects we are doing, 38 projects covering 19 drugs are in the Phase IIIB, Phase 4 arena.

Okay.

So there isn't a real drug of project concentration in the mix.

Okay, okay. That's great. Thanks, John.

Second part of your question related to MCS.

In particular, Peter, from kind of the business development perspective, and obviously the potential angle to include ICON as a part of the pitch, and also whether you're looking at Europe.

Yeah. I think what we have - what we felt all along in acquiring MCS was we need to be careful with this because we don't want to cannibalize our own market and offer people the opportunity of using temporary staff and staffing it themselves rather than using the full service. So we are not marketing MCS side by side with ICON. As I think we said on our last conference call, MCS addresses a market that has existed a long time that ICON has been asked to service, but our business model does not suit servicing the type of business that MCS services, and that's where we saw the opportunity with it. It serves an outsourcing market, albeit a different one to ours, and we thought there was virtue enough in being in that.

And if you also remember, we see some potential for managing our staff utilization a little bit more tightly as a result of the flexibility it may give us. But the core answer to your question is, we are not marketing them side by side because you want to make sure we don't confuse clients as regard to what the strategy should be and what our strategy is.

That goes, obviously, for core chemical (ph) pitches as well.

Absolutely.

Okay.

In terms of Europe, it's too early for us to be working on bringing the MCS concept to Europe, and it is in our plans that we will eventually do that. But as we said, we want to bed it in and get comfortable with how it's working and how we sell it before we tackle the European market.

Okay, and have you just -- on the European side, Peter, have you seen the kind of anecdotal demand that you would have experienced prior to what you experienced in the U.S. prior to acquiring MCS?

Absolutely, we have. In fact, we have in the past looked at a couple of companies that provide exactly the same type of service that MCS does and, for various reasons, decided not to pursue them as an acquisition opportunity (inaudible) real (ph) market in Europe as well.

The next question comes from the line of Robert Kyle (ph) from UBS Warburg.

Thank you. Just a quick question. One more on the lab. I'm sorry if I missed this. Is there anything beside the cancellations that's driving the margin problems, and is there anything incremental, any sort of business process that you can change to improve margins or plan to change to improve margins?

The first -- to the first part of your question, Rob, no, it's purely related to some fairly large cancellations -- a couple of large projects that got cancelled, and again, we talked about this in the last conference call. There was nothing sinister in those cancellations. It was project -- product-related issues that caused the cancellations. Nothing to do with us.

In terms of changes we can make to the business to improve margin, it's all about volume. We have an efficient business. The way in which the lab has been structured, I think, is relatively optimal. Once volumes come back, the margins will come back with it, and therefore, as we said earlier, business wins in the quarter just ended were ahead of plan. Forecasts for the lab are for improvement this quarter, and we expect that that improvement will continue beyond (inaudible) this quarter.

Great. Thanks, Peter.

The next question comes from the line of Steve Unger (ph) with Bear Stearns.

Good morning. Just to follow-up on the question on the lab. Did you give us a breakdown of the revenues for the lab in the quarter?

Yeah. The lab did revenues of just over 6 million for the quarter, Steve.

So then, in terms of costs for the lab, you essentially lowered costs then in the quarter.

No. The head count is consistent, Steve. Obviously, it has direct costs associated with the actual production of kits (ph), for example, and also for the purposes of processing.

Okay.

There is that flexed element of cost within the last cost save (ph) -- publicly (ph) as your the volume goes down, as does that cost. But in terms of if you like the volume-driven costs, i.e., the people, and I take that with the pinch of salt, our head count stays consistent with the previous quarter.

Is that the plan then for the remainder of the year to keep the head count pretty much flat in the lab?

Peter here. Yes, we will flex head count in line with business volume, Steve. But as I said to Rob's question earlier, it's a volume issue essentially at the present time, so for the next couple of quarters, I expect we won't see much head count growth. We will make sure that we're pushing more volumes with the existing infrastructure.

We had a lot of questions on the lab here, and I understand why. I think it's important to put the lab in perspective. It's up for some cancellations. It's not that large a business, and there therefore cancellations can have a disproportionate impact on its performance. We are very confident at the lab. We've signed a new lease for the lab in New York in the last couple of months where they're going to move into a facility twice the size of their current facility. We are in the process of planning the opening of a lab facility in Singapore. We're investing in this business because we believe in it and because we know it will perform well for us. And therefore, one quarter where it's been a little bit disappointing, I don't think should become an overemphasized point in all of our discussions.

Okay, understood. In looking at the backlog, did you give us the amount that was added to the beginning backlog from the acquisitions, or how much the acquisitions brought to backlog?

I think the number was 8 million.

In terms of absolute dollar value across the backlog brought, it was a little over 12 million.

Over 12 million.

That's the absolute dollar backlog, not to be confused with our 12-month backlog.

Okay. That's fine. And then, in looking at the labor markets, both in Europe and in the United States, have you seen or could you give us an overview of the labor markets right now for clinical research staff in both markets?

Yeah. In the U.S. -- again, if you asked me this question a year and a half ago or a year ago, we would have said it was extremely tight and we were concerned about it. We have grown our business, you know, at the headline numbers that we gave in John's opening comments, we have grown the business in the United States in the high 30s on an organic basis in the quarter just ended, we've been growing the U.S. business very strongly over the last year, year and a half, and we have been able to get the people in order to support that.

So it is a tight labor market. There is competition for people, but they are available when you go out there, rattle, shake the trees, you can find the people. Again, as you know, part of our strategy as a company is to hire young graduates and put them through comprehensive training, and that's been part of how we serviced the growth in the company over the last 12 months.

If the U.S. market continues to be tight, I think there's strong demand; clearly our results and our competitors are showing that there is strong demand for outsourcing, which means there's strong demand for people with experience in this area.

In Europe the market is, as you would expect, a little more -- a little freer. That doesn't mean that people with experience are falling out of the trees, but it does mean that there isn't quite the same degree of competition to get experienced people in Europe as there is in the United States. At the same time, ICON also has the strategy in Europe of bringing in people and training them ourselves. We found that an effective strategy over the years and we continue to pursue that.

Okay, and two last quick questions. One is, could you comment on the operating cash flow and free cash flow in the quarter, and then maybe just give us a brief update on progress in adding Phase I capabilities to the company?

I will take the cash flow question, Steve. In terms of cash flow generated by operations, it was 7.5 million in the current quarter and that leaves us running at about 9.5 million for the year to date, and as I read it right, you take the cap ex off that, too. The cap ex for the quarter was 4 and 7.1 year to date. In terms of Phase 1 ...

In terms of Phase 1, as you know, we just made the acquisition of -- recently made the acquisition of Barten Bolonski (ph) and MCS. We're looking at a number of opportunities in the early phase arena, clinical pharmacology being a very important asset (ph), particularly the early-phase arena with pharmacology being an important aspect, and we hope that something will happen in the near future.

Okay. Fair enough. Thanks.

Thanks, Steve.

I'm showing no additional questions. Please continue.

Well, ladies and gentlemen, our second quarter has been another record one for ICON, with strong organic growth, a significant margin increase in our core business, excellent business wins and flows, and all of these point to a confident outlook for the company going forward.

Thank you all for joining in with us today. Goodbye.

Ladies and gentlemen, that does conclude your conference call for today. We thank you for your participation and ask that you disconnect your line.