ICON PLC (ICLR) 2004 Q4 法說會逐字稿

Good day ladies and gentlemen and welcome to the ICON PLC quarter four and full year fiscal 2004 earnings conference call. My name is Bill and I will be your coordinator for today. [OPERATOR INSTRUCTIONS] I now turn the presentation over to your host for today's call Mr. Sean Leech, Chief Financial Officer. Please proceed, sir.

Thank you, Bill. Good day, ladies and gentlemen, and thank you for joining us on our fourth quarter fiscal 2004 conference call covering the results for the quarter and year-end May 31, 2004. Also on the call today we have Dr. John Climax, our Chairman, and our CEO Mr. Peter Gray.

Before I hand the call over to John, I would just like to make the cautionary statements in relation to forward-looking statements.

Certain statements in these opening remarks constitute forward-looking statements concerning the companies operation, performance financial condition 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 undo reliance on such forward-looking statements. The company undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of new information future events or otherwise. And with the formalities out of the way, I'd like to hand the call over to John. John.

Thank you, Sean. Good day, ladies and gentlemen. Thank you for joining our conference call covering the results for our fourth quarter ended May 31st, 2004. Net revenue in the quarter was $77.9 million, an increase of 18% over the same period last year.

Of this, net revenues in the US increased by 4% on the comparable quarter, while Europe and the rest of the world increased by 49% over the same period. Excluding the impact of acquisitions, our overall net revenue growth was 13%. Full year, net revenue was $296.9 million, which represented a 32% increase over the comparable period. Of this, net revenues in the U.S. were up 17% and Europe and the rest of the world were up 67%. Excluding acquisitions the net revenue growth was 21% for the year.

Turning now to other costs. Direct costs were $42.3 million for the quarter, representing 54.2% of net revenue, compared to 52.8% in the comparable period. SG&A and D&A costs were 33.4% of net revenues for the quarter, compared to 36.2% last year.

Full year, direct costs were a $162.6 million, which represented 54.7% of net revenue compared to 54.2% for the last year. SG&A and D&A costs were 33.7% of net revenue for the year, compared to 34.8% last year. As a result of our operating income for the quarter grew by 33% over the same quarter last year from $7.2 million to $9.6 million. Full year, our operating income grew by 38% over the last year from $24.9 million to $34.4 million.

Our operating margin was 12.4% for the quarter, compared to 11% in the same period last year. Full year, operating margin was 11.6% compared to 11% last year. Our clinical business performed very well in the quarter and grew its operating margins to 14.3% from 12.4% in the comparable period. As anticipated our laboratory business following its move to new facilities made a loss of $0.5 million in the quarter, on revenues of $7.4 million.

We expect that it will return to profitability over the coming quarters. Taxation was 25.8% of pretax income for the quarter, compared to 26.5% for the comparable period last year. The full year effective tax rate was 25.8%, compared to 27.7% for fiscal 2003. As a result, net income for the quarter was $7.2 million, or $0.51 per share, compared to $5.3 million or $0.43 per share last year.

For the full year, net income was $25.7 million or $1.88 per share compared to $18.3 million or $1.50 per share last year. Turning now to our balance sheet. Cash generated from operations was $12.8 million in the quarter, while capital expenditure was only $3.4 million. Year to date, cash generated from operations was $43.6 million, while capital expenditure was $13.1 million.

Our DSOs were 60 days at the end of the quarter, compared to 57 days at the end of last quarter, and 64 days at the end of fiscal 2003. As a result of these factors, net cash at May 31st, 2004 was $78.8 million. In the quarter, we were awarded new business of $99 million, offset by cancellations of $8 million, resulting in net rewards or awards of $91 million.

In summary, 2004 has been another excellent year for ICON. Organic revenues grew by 21%. Earnings per share increased by 25%. Operating margins expanded by over half a percent. We generated strong cash flow, and ended the year with a total backlog of $464 million compared to $352 million at the end of last year, an increase of 32%. In addition, we added significantly to our advisory services to the acquisition of Globalmax, we gained some significant new clients and succeeded in converting a number of existing relationships to preferred provider status.

The recent acquisition of 70% of Beacon Bioscience gives us a foothold in the developing centralized imaging market and we are enthusiastic about the opportunity it presents. Overall, we are very pleased with the performance of the business and its positioning going forward. I would now like to hand this call over to Peter Gray, who will comment specifically on the outlook for the year and our view of the market. Peter.

Thank you, John. The initial (inaudible) for this call had quite different comments prepared to those (inaudible). That's because in recent weeks, we've suffered delays on two significant projects, the combined value of which is approximately $25 million. These delay are due to FDA dialogue with the respective clients, and I should add that the major contract, which has attracted much attention from investors over the last year is not one of these.

At the timing of any resumption of these studies is uncertain, we have removed them completely from our backlog and the forecast. As a result, we currently have backlog to be earned in the next 12 months of 238 million, excluding any Beacon Bioscience backlog and this represents approximately 66% of current forecasts. Just to clarify on this, we expect 238 million of our total backlog to be earned in the next 12 months and as John mentioned a moment ago, our total backlog is $464 million.

You will recall that we had unsatisfactory net business wins of 67 million in the second quarter of fiscal 2004, which ended in November 2003, and we needed to regain momentum. Our net wins of 91 million in each of quarter three and four achieved this.

However, these recent delays have been a setback, and will lead us to expect that our total revenues in the current quarter will only increase moderately quarter-on-quarter, while revenues in quarter two, which ends in November will show a small sequential decline. Thereafter sequential revenue growth should resume. As a result, we expect overall revenues in fiscal 2005 as was disclosed in our press release to grow by 10%, and we anticipate earnings per share will be in the range of $2 to $2.10. If I turn now to what's going on in the marketplace and our view of the market, RFP flow as we've said on previous calls in Europe has been very robust throughout fiscal 2004 and indeed through calendar 2004 to date.

In the U.S., after a slightly soft quarter, three, which ended in February, in which volumes and values were down year-on-year, and I think I gave those figures on the conference call last time out. At quarter four which ended on May 31st, we bounded strongly and RFP volumes were up 66% while values were up 36%. Looking forward, we believe that the robustness of the marketplace.

Our success in of being selected as a preferred provider by several large pharma companies. Some of which are new clients, will give us considerable scope to grow as these relationships develop and in addition, the biotech and special (inaudible) continues to be very active and we continue to capitalize on this.

We, therefore, believe that our long-term expectation of annual revenue and earnings growth of approximately 20% per annum remains valid and our growth should get back on track as the fiscal year ending May 2005 progresses. That concludes our remarks, and we'd now like to open the call open to questions.

Thank you very much, sir. [OPERATOR INSTRUCTIONS]. Our first question comes from Jack Gorman of Davy Stockbrokers. Please proceed.

Thank you. I just have two questions. Firstly, Peter, just in relation to the two projects, just wondering if you can give us a flavor, first of all, as regards whether there was any link between the project as regards therapeutic areas, types of clients, whatever the case maybe, or whether there were just totally discrete events and kind of unlucky from your own perspective.

And I just wanted to tally 10% revenue growth with the reduction from consensus earnings, just working your 66% there would give me consensus earnings of about 360 or maybe a little bit more. Just wondered, is the 25 million the only adjustment that we need to make to revenues?

And secondly, and just as a follow on, I was just wondering what your own views as regards to mail six figures are. I know a good bit, at this stage plus just if you have any preliminary thoughts as regards that the consensus figures that are out there at the moment on that year?

Okay. I'll think take the first one, and Sean maybe will take the other two. In relation to the two projects, there is no linkage, Jack. The clients are different, the therapeutic areas are different, the drums are different. It is I wont say an extraordinary coincidence, but it was quite a coincidence that two projects in the same week were stopped by different clients arising out of dialogue they had with the FDA, but there's no connection between them that we can identify that it appears to be pure coincidence. The other two questions were in relation to the revision in guidance, I think, the revenue growth and male six.

Let me give you some color on the guidance, Jack. I suppose in terms of if you take the mid range of where we would expect to come out, we would be looking at revenues, revised guidance for revenues for fiscal 05' as a whole of approximately 327 million. How would we expect that to grow roughly between 79 and 80 million in quarter one, with EPS in quarter one of 51 to $0.52? In quarter two, we would expect, as we've indicated a sequential decline in revenue and we would expect that to be in the range of between 76 million and $78 million of revenue in that quarter. With EPS in the quarter between 40 and $0.42.

Rolling on, then we expect our sequential revenue growth to return and we have indicated and we would expect revenue, Jack, in Q3 or between 80 and 83 million with EPS in between the 50 to $0.54 range, and in terms of Q4, then we would expect revenues in excess of $85 million and EPS of between 58 and 62. If you take just to reset the knowledge base, I suppose. If you take thus revised estimates of revenue against the 238 and forward 12 months revenue, you can see that that's a very healthy percentage and well above our normal guidance in terms of comforts.

Yes.

The 238 obviously does not include Beacon and Beacon was probably a novelty some quite a handful amount of 12-month revenue into that as well. And therefore we think 327 is prudent, but I think appropriately prudent. We think that is a number that is very achievable.

Okay. Sean, just to confirm, is the change in revenue guidance, I'm not sure what the consensus is on revenues, but would that be more than the 25 more is it around the 25 million relating of into the two projects?

I don't quite know where you are going with that, Jack fairly.

I just want to tally the loss of the content, the revenue impact from the loss of the project in the current fiscal year with the reduction and relative to the consensus at the moment, and I think the consensus working back off your 66% would have been something in the region of about 360 million?

Correct.

360, and you have a 327, which is 33 million. I'm just wondering, should there be a relationship in the 33 million reduction and the 25 million that you have seen in terms that you've seen in the two projects.

I think we've taken some slowdown, Jack, and I know we've taken account of the cancellations and we've taken a prudent approach. So, to be honest we looked at what we thought was achievable Jack as opposed to back hand consensus numbers.

Great. So, this is base case and you're being conservative from your own perspective.

Yes, and the thing you have to bear in mind, Jack, is if we continue of the trajectory fan, we continue hiring, and therefore, our capacity to take on more work in later quarters would be greater, so you have a knock on it by slowing down the hiring, which is what we've done, this time. You basically reset your capacity, and that has a knock on effect at a later stage.

Yes, perfect. And then just on May 06' then?

I think as indicated we fully expect to get back on track in the latter parts of fiscal 05'. I think we would return to our normal transmission, as we would contemplate it, Jack, with 20% revenue growth on top of bottom line. I think our anticipation is to finish '05 with strong margin performance, so I think top and bottom line should perform in the 20% ranges.

Okay. That's brilliant. Thanks a lot.

Thank you very much sir. Ladies and gentlemen your next question comes from John Kreger of William Blair. Please proceed.

Thanks. Sean and Peter, just following on that, your longer term 20% growth goal, I think in the quarter you just reported, you said ex-acquisitions, your revenue growth was about 13%. Can you help us understand the difference? Is that all coming from a softer U.S. market or is there something else behind that?

It's all coming from the softer U.S. market, John. Again, as I said in my comments, quarter two where we had disappointing wins of 67 million, we've been rebuilding from that, and the states were the major disappointment in that second quarter, and states got back to the U.S. specifically got back to 0.95 book-to-bill ratio in the third quarter and got to a 1.4 book-to-bill ratio in the fourth quarter so we're building back its momentum, but unfortunately these delays for calculations have undone that. But with those couple of weakish quarters in the states that led the revenue growth ex-acquisitions to be a little bit softer in Q4.

And then do you have a perspective on why we would be seeing such a divergence between the U.S. and European environments at this point?

I could go back to a lot of history here, John, I'm not sure it is particularly productive, but I think if you recall, the reason why we had the disappointing wins in quarter two was because we had some uncertainty about our capacity arising from major projects we had won in quarter one, and that can constrained us from actually winning all of the business that was available to us in the second quarter and we have unfortunately felt the consequence of that since. The general business environment is pretty good, as I said in my comments, in the quarter ended May 31, in the U.S. our key volumes are off 66% and values up 36%, and in Europe and in the same period, I think the percentages are pretty similar. So the market in both -- on both sides of the Atlantic is pretty robust, and therefore don't see any reason why we will not be able to get ourselves back on track. We took a while to recover from that blip in quarter two, and as I said, these cancellations have just come at the wrong time for us.

Okay. One last question, unrelated. You're lab, central lab, what is the related timings or when you expect that to break-even again?

Well, we expect that this would break-even and may be such a little profit in the quarter we're now in. We're now revising that to at the earliest, next quarter, but more likely the third quarter, and partly because there revenues haven't accelerated as rapidly as we had projected, they are accelerating, but not as rapidly as projected, and partly because unfortunately, one of the two cancellations included a not insignificant lab component, and that's gone. And so near term revenue in the lab will be impacted by that as well. The lab is on the right trajectory it's just a little slower than we had been predicting.

Okay. Thanks.

Hello.

Thank you very much, sir. Ladies and gentlemen your next question comes from Dave Windley of Jeffries & Company. Please proceed.

Hi. Good afternoon, gentlemen. Could you comment, please, Peter, on not only the kind of volume and dollar value of contract flow but how has the pricing discipline in the marketplace and in your request for proposal.

Sure, Dave. Yes. You know pricing discipline basically there is nothing new to comment on. As I think I've said our novelty in the past, as I think I have said in the past we're not seeing and haven't been seeing any unreasonable pricing activity and we're continuing not to see that. I think I've explained in a couple of public presentations of late it's preferred provider initiative does clearly in selecting -- in selecting CROs, there is a focus on some sort of price break in return for being a preferred provider, but there are compensation benefits in becoming a preferred provider in terms of volume, in terms of reduced cost of acquiring business and so on, and we believe those even themselves out. So nothing has changed in the pricing environment. We think the environment, is, as I said, pretty good.

And as I do the quick math on your Q1 and Q2 numbers, Sean, it looks as if the sequential revenue dip falls, if not completely, close to completely through to the bottom line. Is that the correct way to look at that and conversely, is my question was going to be do you have any or not have any cost flexibility where you can turn off the cost and make it a little bit more than that in the near term?

No. I think you're reading it correctly, Dave. I think we've lost incremental revenue. That will fall directly to the bottom line. You have to take in context, that we are still hiring in Europe, for example. We're obviously not hiring in the U.S. and we are controlling the costs, but I think what you're alluding to is the cost for production which I don't think this is appropriate.

I think yes, this is the one-quarter blip I mean and if you look at the revised guidance, you can see that the impact is actually overall just in Q2 and Q3. So I think your interpretation is absolutely right. And the sequential decline in revenue is going to fall to the bottom line in quarter two.

And if I can just add a bit of color to that, Dave. And you know, well the decline, first of all is coming in our clinical business. As we have often said and we will continue to say in an environment where we think the market is growing, it would not be in our interest to let people go. We think that our backlog will refill relatively quickly, and therefore, we retain the cost of those people, even if we haven't got revenues for them for a short period of time. And that's why the full effect falls to the bottom line.

Okay. And then one last question on the delayed contracts. The -- just to try to understand, the issues that have these contracts pushed back are regulatory in nature and are the source of on -- or the subject of ongoing discussions between the sponsor and the regulatory agency; is that correct, and anything you can add to that would be helpful.

That is correct. They are regulatory in nature and there are ongoing discussions between FDA and the clients, although the reason obviously why the project has been stopped is those discussions are relatively fundamental to the plan of the client, and the client is reevaluating what they need to do in order to satisfy FDA.

Okay. Thank you.

Thank you very much, sir. Ladies and gentlemen, your next question comes from David Marshall of NCB Stockbrokers. Please proceed.

Hi. Thanks, guys. And just maybe if I could get a flavor for, I suppose, where these projects would have ranked in terms of you know your top couple of projects. Presumably they were some of the biggest ones, and you know moving forward, what would be your largest single project exposure, and may be just also off to get a flavor for thing -- you know how many people will it be that are kind of idle in Q2 that were committed to this project, and may be just follow up earlier on as well, in terms of preferred provider relationships, Peter, you've mentioned that you're doing well on that front. You know off the top, I suppose, 15 to 20 clients, at this stage would be on the majority of those preferred provider lists?

Okay. First question was where do these projects rank. Both were in start up stage, so in terms of actual revenues they generated for us up unto now, David, they wouldn't have been significant. One was awarded to us in the quarter ended February, the other was awarded to us in the quarter ended May, and so therefore both of this say were in the early stages, and they wouldn't have been among the largest. There are other -- there is one, now notorious one, obviously which is significantly larger, but there are many projects that would exceed $10 million in value, and -- that we are running currently, and it would not be I think I've answered this question on previous calls, it would not be unusual for us to win a project or two in any given quarter valued in excess of $10 million.

So I wouldn't see them as an exceptionally large, although they are more obviously on the higher end of the spectrum given that our average is somewhere between 3 and $5 million. And the second part of your question, I'm trying to remember what it was, in relation to you, but I think you're alluding to the recovery levels and the utilization levels David, would that be correct?

Yes indeed and I am just trying to get a feel for how many people are actually kind of -- people were committed in Q2 who are now kind of idling?

I would guess the number of people, I haven't got the figures exactly to hand date, but it was somewhere between 40 and -- 40 and 50 or 40 and 60 people.

Okay. And then in terms of preferred provider relationships, maybe the top 10 to 15 companies.

I'm looking at the list here in front of me and I think we certainly have -- we certainly have over 10 of the top 20 counted as having preferred providers and not all of the top 20 have officially gone upgraded to preferred provider, so we're feeling pretty comfortable with where we are.

And in terms of uplift, you're continuing to add.

Yes.

Gain-gain relationships?

Yes, it seems to as I've said in some of the presentations on a previous call, there's been a flurry of activity in terms of collecting preferred provider, CROs over the last year, and that flurry of activity was particularly acute around the November to February time period. It's eased off somewhat. There isn't as much activity in this regard, but there are still one or two companies going through the process, and there may be one or two others who are getting ready to go through the process.

Okay. Thanks.

Thank you very much, sir. Ladies and gentlemen, your next question comes from Steve Unger of Bear Stearns. Please proceed.

Hi. Good morning. Just a quick question. The 25 million, that's annual revenue; right?

That's not correct, Steve. No. That's the total -- the total combined value of two projects.

Okay. How much is that for just the next 12 months?

It's approximately 13 to 15.

13 to 15. Okay. And then in terms of hiring, you guys are going to maintain your head count? That's correct? That's the plan anyway.

That is the plan, yes.

Okay. So the cost basis should stay relatively flat.

Yes.

Okay. And then how does the phase 1 unit perform this quarter?

Performed very well. As you're probably seeing an another phase 1 units, it's seeing good activity and performed very, very soundly in the quarter, Steve.

Okay. And just circling back to this adjustment then to the revenues. If you're pulling out 13 to 15 million for the year associated with these two project delays, does that mean, I mean, that we were all way too high and that for our 05' numbers, I think a lot of us were looking for 20% organic revenue growth, and if I'm pulling out 13 to 15, I think I'm coming up with around 10 without these delays. Is that correct?

No. I think as Peter said earlier, Steve, unfortunately when you encounter a sequential decline, you lose growth momentum year-on-year, so I think we were perfectly comfortable enough, if we actually look at our Level of 12-month backlog coverage coming in before the delay. Our coverage would have been 70%, again, consensus. We would consider that, as you know, a comfortable position, not perfectly comfortable, but comfortable enough that we would have achieved market estimate. I don't think the market had anything wrong. I think these delays have had an impact that slowed our momentum down and it's going to take us a couple quarters to regain that momentum.

Okay, okay. Thank you.

I understand the question you're asking, Steve, and as I tried to explain earlier, when we freeze hiring, it means that capacity that we would have had in future quarters we now don't hire, and therefore, our ability to meet the revenue projections in later quarters is more challenging, you know, in the process of reselling, we certainly don't want to set new targets that are that where we would be in danger of not meeting and, therefore, I think we've tried to be reasonably conservative here.

Okay. Okay. I understand. Thank you.

Thank you very much, sir. Ladies and gentlemen, your next question comes from Ian Hunter of Goodbody Stockbrokers. Please proceed.

Good afternoon, gentlemen. I was just going to ask a couple housekeeping questions as most seem to have gone through. The first one is, I wonder if you can give us a break down of the profile of the 91 million in business wins that you recorded this quarter, just a little bit of small contract several large ones, or the usual contract size as indicated earlier and also perhaps will you give us a flavor for the client concentration, an idea of the other percentage of business generated by your top five clients and where you're seeing this split now between the farmer and the Biotech sectors.

I'll take the second question first, Ian. In terms of client concentration, we've managed that pretty well. We only have one client that is in excess of 10%. If I take the top five clients that we have, the total concentration runs to about 40%, and it was 51% last year. If I take the top 10, it was 68% last year, and this time around it's 58%. Again, you should take that into context, because you are of the top five clients, you're talking about 98 projects, 52 different drugs, and only about two of those studies generate more than 2 million a quarter.

All right. And your question on relation to farm and Biotech 42% of our revenues now come from the non-top 20-pharma companies. And if I look at Biotech companies alone, 30% of our revenues come from them, and this time last year, Q4 last year, it was 19%. So we've improved our positions with the Biotech company.

And back to the first part of your question, the profile of the 91 million. There were a couple projects in excess of 30. One project in excess of 10 million in the quarter and there were a couple of projects in excess of 5 or 6 million in the quarter, and then the rest were pretty normal distribution of normal sized projects, Ian.

Yes, Okay. Is this a trend you're seeing, they can lose the average size of project is going to trend up only maybe because the costs are getting greater?

That's been the trend for several years. It used to be 1 to 2 million, it's now to 3 to 5 million is the average value of our contract.

Yes. Okay.

That does continue to trend upwards.

Okay. Thanks very much.

Thank you very much, sir. Ladies and gentlemen your next question comes from Christopher McFadden of Goldman Sachs. Please proceed.

Thank you, everyone and good morning. A couple questions, if I might. Firstly, you talked about the ability and the willingness to reduce costs relative to staff, and I think that makes sense in terms of investing in your business. I'm wondering, though, in the interim are there non-staff costs that might be able to be trimmed in near term to help to cushion some of the lost revenue here. Second question would be to Peter or to John. Obviously there is a certain concentration of customer and a certain cancellation risk that is inherent to the late stage Sera (ph) market and business model. Having said that, in retrospect, any execution dynamics or any decisions or strategies relative to this situation that, you know, with the perfect view of hindsight, you might have done differently, just trying to think through how you and the management team are thinking about this situation, I guess, you know, what lessons might be learned.

On the cost side, Chris, I suppose it goes without saying that trimming other costs, non-payroll costs is something we do on a quarter-by-quarter basis as we sharpen up our forecasts and in the circumstances went our way, clearly we'll do that again. So I think it's -- it would be negligent of us if we did not do that and of course we will be doing that.

And in terms of concentration and any wonderful insights we have with the benefit of hindsight, I think the honest answer is no. We could go back and talk about the large project that we won a year ago and that the disruption that created for us. But you know, that is a year ago and we've had ample opportunities in spend since then to reload our backlog. We didn't reload it sufficiently.

We go after projects and obviously large projects are very attractive so we go after large projects. I don't think we should change that. I think we've been a little unlucky here, but to be honest, we've been lucky in the past at times when we have had cancellations and we've worked our way through those even when they were significant.

On this occasion, we've had a cancellation and we've probably found ourselves in the wrong place at the wrong time with those two delayed cancellations, and it has left us exposed. It's part of the inherent risk on this business and we've tried over the years to constantly remind people of the reality of risk in the business and I wish I wasn't preaching it today but I am preaching it today because we have indeed encountered that inherent risk.

Overall, the remedy for this is strength in our backlog, and our backlog a year ago was running at in excess of 75% coverage of the next 12 months' revenues. We dipped down below 70% for the first time in a long, long time three quarters ago. We got back to 70% one quarter ago, and we were at 70% again, as Sean said, until these delays came along. We're now back down to 60%. It's not as sufficiently, what this tells us is this is not a sufficiently strong level of backlog to be secure when the slings and arrows of outrageous fortune hit us. And we will work very hard over the coming quarters to reload the backlog and get it back into the 75% level and make sure we maintain it there.

Fair enough Peter and then a final question would be you exit this quarter with a very strong balance sheet position both in terms of cash and just overall liquidity. Given the float on the shares, are there certainly some limitations in terms of share repurchase that probably would factor into your decision making, but having said that, are there ways that the balance sheet strength can both kind of help your question and also I guess provide some comfort or some solids for shareholders who are involved in the shares today.

I think if we were in a sustained, depressed position in terms of our stock price, we would of course look at the potential of doing a stock buyback, and I don't believe we're in a sustained business dip here. We believe we're going to get back to the strong levels of growth we've enjoyed in the past. We have the cash in our balance sheet because we see that there will be opportunities for us going forward to make bold on acquisitions and to strengthen our business, both commercially and strategically. We want to be able to capitalize on that.

So I think it would be a knee jerk reaction on management's behalf if we were to run out and say we're immediately going to do something like a share buyback in an environment where we believe the market is strong, the opportunities for growth are good, and the opportunities to strengthen our business with strategic acquisitions continue to be there for us. But as I said, Chris, if our belief in that respect proves to be overly optimistic and we found ourselves in a year's time where we haven't been achieving some of the goals that we have set ourselves, then of course I think we would re-look at that.

Very good. Thank you.

Thank you very much sir. [OPERATOR INSTRUCTIONS]. Your next question comes from Peter Frawley of Merrion Stockbrokers. Please proceed.

Good afternoon gentlemen. Can I just clarify what your expectation is for new business wins in quarter one? Is it in the range of 60 to 70 million, i.e., the 90 million less the 25? And then what are the possibilities of actually winning back these two contracts? Are they dead in the water or is it just a small change to the trial design, and when roughly would you know when that was going to take place and then finally, I'm just wondering whether ICON gave any advice to their consulting division on the actual protocol design or anything along those lines?

Good question, Peter. On the first one, the wins we'd expect in the current quarter will be not -- the net wins will be we would expect down somewhat because of the impact, of the significant impact of these delays, cancellations, and yes, we would expect gross wins to be in excess of 90 million, and therefore, when we take the cancellation number off, we're going to be down somewhere in the mid 60's to mid 70's range, unless -- you know, we're still five weeks away from the end of the quarter. Much can happen in that timeframe, unless something wonderful happens to us, I think that would probably be the kind of range the wins will come in at.

And do we expect to win back these projects? I'd be very hopeful that as the dialogue between our sponsors and the FDA progresses, that we will have an opportunity to continue to work with those sponsors on the products concerned.

Timing it out, we just can't predict, and it does appear to us in both cases that these are going to be a significant delay or there will be a complete redesign and a new project will emerge, and how the client chooses to treat that in terms of coming straight back to ICON or going back on out to a competitive situation remains to be seen, and that's entirely in the client's hands. Final question, did we give any advice on the protocol for either of these? I thank God and say no.

Okay. And I will just ask you two a quick tidy of questions. Just on the cash flow generation and the fall in better days and also the margins in the quarter, is there anything in particular driving that's unusual in Q4.

I only wish to relate to say that our DSL has improved in the quarter. It actually declined slightly, Peter, and therefore it went from 57 to 60, not a significant decline obviously, and within our range of acceptability. Nothing specific in terms of the net cash provided by operations. Capex is probably slightly lower than expected on an ongoing basis but not much. In terms of your margin question, no, I don't think there's anything exceptional, other than I think you know, our consulting business generally have a slightly better quarter in our Q2 and Q4, that probably helped us in our Phase I, had a good quarter as well, as did our clinical business. I don't think there is anything exceptional really on the margin.

Okay. Great, thanks.

Thank you very much sir. Ladies and gentlemen your next question comes from Mary Lisanti of AH Lisanti Capital. Please proceed.

Can you hear me?

Yes.

Okay. How much of this was due to the timing? Because you mentioned when you started out that up until a few weeks ago, you know, you thought everything was fine, and how much of it is just the awkwardness of this coming as you're releasing a quarter do you think in terms of creating a bump in your backlog?

I think there are number of different ways of answering that Mary and we are announcing today, we are releasing today our year-end numbers. We waited until our orders were complete. So we are a month later than we would be for other quarters in announcing these numbers and had we been on a normal quarterly cycle we would have had our announcement out and we would not have had any revision to guidance looking forward.

And so the timing of this has been unfortunate in one sense, maybe fortunate for investors in another sense in that we are giving very up-to-date news. This has only happened within the last 14-16 days, I think, and therefore we are giving very up-to-date news.

Our quarter one numbers are, we are confident and are reasonable secure, so we are giving forward-looking view of quarter two, which begins on the 1st of September and ends at the end of November. But the reason why we feel it's important to do so, it is not only because we are doing an announcement, it is also because with only five weeks to go to the end of the quarter. The ability to recover from this in the next five to eight weeks is limited because sales cycles are considerably longer than that, and therefore it would be foolhardy for us to believe that we could turn this around in that timeframe. I just said a few moments ago, I would be delighted and I would be the first to celebrate if indeed something came good for us in the next number of weeks. I don't think that's a realistic possibility, so what we're doing here is we're giving guidance based on the best information we have available and based on normal win/lose patterns.

But there is nothing in the business that has changed that would lead you to believe that over a period of months that you couldn't replace that backlog and you know, perhaps a little bit more. There's nothing in the tone of business, there's nothing in the strength of business, there's nothing in the way the FDA is approaching the Biotech companies that's different?

No, absolutely not. We are confident in the state of the market and the tone of the market, and we believe given time we will be able to rebuild our backlog.

Okay. Thank you.

Thank you very much. Ladies and gentlemen your next question comes from John Kreger from William Blair. Please proceed.

My question was answered. I was also going to ask for the real driver of the sequential improvement in margins given that it sounds like the lab did not improve much. I think Sean you suggested that consulting and clinical is the driver. If there's anything else I'd love to hear that.

No and I have to be fair John part of color as we've indicated in the past, our core business can do between 12% and 14% margins. We actually go back to last quarter our core margins had fallen from the previous quarter, which was about 14.2. So what you've seen through the year, you've seen core margins I think in Q1 is 14%, Q2 is 14.2. It is down last quarter, 13.3. And therefore all we're really seeing this quarter is the recurrence of their performance that we were seeing earlier on in the year.

Thanks.

Thank you very much, sir. [OPERATOR INSTRUCTIONS] Our next question comes from Dave Windley of Jeffries and company. Please proceed.

Couple follow-ups. Sean, given what appears to be a what will be in the next quarter or so a fairly significant shift in mixed profitability between Europe and the U.S., will your tax rate change dramatically from what it was in the fourth quarter?

Should as always, Dave. Yes, I'd expect a tax raise of approximately 24% in Q1. That would dip down to approximately 20, 21% in Q2, as the shift, relatively we will pay less tax in the European side than we do in the U.S. And we will shift back then towards 24% in the back end of the year, in line with the previous guidance.

Okay. And then I apologize. I know somebody asked to state one question, but your phase 1 had a strong fourth quarter, and that was driven by general phase 1 activity. I assume that you don't see a whole lot of QT cardiac safety testing in your phase 1 clinic. Is that fair.

Well do get QT work as well, yes.

Okay. And so all the variety of factors driving phase 1, you're seeing in your clinic?

Yes, we are. I think it's valid to point out that indeed the European, there's been a lot of talk about European clinical directive, and its impact on where phase 1 work is going, and I know our competitors who have units in the U.S. has been reporting very strong levels of business, some of which they've attributed to the introduction of European clinical directives. What we're seeing is we have seen some pull in business development strength in our favor, when unit nothing that we're particularly concerned about, but undoubtedly, some of our competitors are creating lots of noise about the impact of the EU, PTD, and it had some effect, as clients wait and see what impact that will have in Europe, but I think we are getting over us, I don't think it's going to have a significant impact going forward, but as I said it has had a little pause, it has shown a little pause in our business development activity in phase 1, but nothing that we're concerned about.

Great. And Peter one last question. Clearly, the impact that you're having to look at most clearly today is a specific one related to contracts. I'm wondering if through -- as you look through the business and look at some of the acquired businesses that you have bolted on in clinical, could you give a little bit of a rundown of which ones of those are say exceeding expectations and which ones might be trailing expectations, if any, and I think important plan key Globalmax, etc?

Without going into too much detail, well some of them had actually been integrated fully, and we don't have visibility.

Okay.

And the only one that would be a little disappointed with, and that's not tracking in line with plans was the MCS business, which is the contract staffing business. All of the other acquisitions have performed extremely well, and if we mention the important plan keys specifically which has been integrated into our clinical business, that has brought a value to what it brought new clients to us, it also brought some very experienced people to us, which has been very valuable. So we're very pleased with how that acquisition has tracked for us. Globalmax has shown a consulting business a very good quarter, and Medeval had a very good quarter. So generally our acquisitions are tracking very well.

And on the contract staffing, you had mentioned some loss of business due to kind of the CRO head-to-head competitiveness, that being that there were some CRO clients in that company's business, but you were seeing that ramp back up. Is that still true or has that hit somewhat of a pause?

I'm trying to recall what fairy tail they were telling you at that stage.

I thought that they did some business for quintile?

Yes, yes and that is correct, and that business did go away and we haven't recovered that business as you would expect. Generally, we have not seen a business not because of that particular event, although obviously that wasn't helpful. But generally our business just hasn't shown the growth that we would have expected it to show but we're making some progress.

Okay. Thank you.

Thank you very much, sir. Ladies and gentlemen, that concludes the question and answer session for today's call. I'd like to turn the conference back over to Dr. Climax for his closing remarks please proceed.

Well, since there are no more questions, I would like to leave the call with a general comment that 2004 has been a very successful year for us. The organic growth has been strong, margins have improved we've managed our working capital very well, and we have made some good strategic acquisitions during the year, all of which positioned ICON nicely for fiscal 2005. While year-on-year growth will initially be more modest than in recent times, we expect that it will accelerate as the year progresses. With that said, thank you very much.

Thank you very much, ladies and gentlemen, for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good day.