ICON PLC (ICLR) 2014 Q4 法說會逐字稿

Good day, and welcome to the ICON full-year and Q4 2014 results conference call.

Today's conference is being recorded.

At this time, I would like to turn the conference over to Simon Holmes. Please go ahead.

Good day, ladies and gentlemen.

Thank you for joining us on the call covering the quarter and full year ended December 31, 2014. Also on the call today, we have our CEO, Mr. Ciaran Murray; our CFO, Mr. Brendan Brennan; and our COO, Dr. Steve Cutler. I would just like to note that this call is webcast, and there are slides available to download on our website to accompany today's call.

Some of the statements in today's call will be forward-looking statements. 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 are cautioned that forward-looking statements are not guarantees of future performance. The Company's filings with the Securities and Exchange Commission discuss the risks and uncertainties associate with the Company's business.

This presentation includes selected non-GAAP financial measures. For a presentation of the most directly comparable GAAP financial measures, please refer to the press release statement headed consolidated income statements unaudited US GAAP. 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. We will be limiting the call to one hour today, and therefore ask participants to keep their questions to one each with an opportunity to ask one related follow-up question.

I would now like to hand over the call to our CFO, Mr. Brendan Brennan.

Thank you, Simon.

Net revenue in quarter four 2014 was $390 million. This represents year-on-year growth of 13%. On a constant dollar organic basis, year-on-year revenue growth was 9%.

For the full year 2014, net revenues were $1.503 billion, up 12.5% compared to 2013. On a constant dollar organic basis full-year revenue growth was 8%. For the full year 2014, our top client represented 31% of revenues, compared to 26% for the full year 2013. Our top five clients represented 53%, the same as last year. Our top 10 represented 64%, again, the same as last year, while our top 25 clients represented 79%, compared to 78% last year. We achieved [forter] headcount leverage in the quarter and ended the year with approximately 10,600 staff.

The gross margin expansion that we have consistently driven over the past number of years continued in the quarter. Group gross margin for the quarter was 41.1%, which compared to 40.7% in quarter three, 37.7% in the comparable quarter last year. For the full year 2014, group gross margin was 39.9%, up 320 bps from the 36.7% in the full year 2013.

SG&A is reported with 21.9% of revenue. This compared to 21.8% last quarter and 23% in the comparable period last year. For the full year 2014, SG&A reduced to 22.4% of revenue, compared to 23.5% for the full year 2013.

Operating income for the quarter, excluding restructuring charges, was $60.4 million, an operating margin of 15.5%. This compares to 15.3% last quarter and 11.2% in the comparable quarter last year. For the full year 2014, operating margins were at 14%, compared to 9.7% for the full year 2013.

The net interest income (sic - see press release "expense") for the quarter was $204,000, and the effective tax rate was 11%. Net income for the quarter, excluding restructuring charges, was $54 million, a margin of 13.8%, equating to earnings per share of $0.87. This compares to earnings per share of $0.79 in quarter three and $0.53 in the comparable quarter last. EPS in the quarter benefited by $0.07 due to the 11% tax rate and the lower share count that resulted from the $140 million share buyback program that was completed during the quarter.

On a full-year basis earnings per share were $2.87, a 62% increase over last year. DSOs in the quarter were 40 days, which compared to 38 days in quarter three and 32 days in the comparable quarter last year. At the end of December 2014, we had net cash of $216 million, compared to $249 million at the end of September 2014.

And will all that said, I would like to hand you over to Ciaran.

Thank you, Brandon. Good morning, everyone.

I'm happy to report that 2014 was another year of progress for ICON. We booked $1.8 billion worth of new business, grew our backlog by 16% to $3.6 billion, and grew our revenues by 12.5% to over $1.5 billion.

By continuing to improve our operational performance and expanding our margins, we increased earnings per share by 62% to $2.87 during the year. All of this created value for our investors.

I'm encouraged that we added a number of new accounts to our client roster in the second half of 2014 and increased presence in the mid-market and biotech sectors, as they look to harness the development expertise and global capabilities of larger CROs. This will help drive future growth and provide better balance to our Business.

A key element of this success was our continuing strategic focus on promoting operational excellence and quality and bringing innovative solutions to our customers. These solutions have been enabled by our market-leading, ICONIK, Firecrest and ADDPLAN technologies, all of which received strong market recognition during 2014.

Based on our ICONIK technology, ICON was the only CRO to receive Informatica's Innovation Award for solutions that improve decision-making in healthcare. TransCelerate members recognized that are Firecrest GCP module reflects their best practices for training, while Firecrest also won a global award for the quality of its multi-media content. During 2014 Pfizer, Rush joined our ADDPLAN consortium, where they will work with existing members, Novartis, Janssen, and Eli Lilly to develop adaptive design methodologies that improve decision-making in exploratory studies.

We are integrating these differentiated solutions into a next-generation informatics hub that will harness clinical and real-world data from both existing and new sources. To support the development of this informatics hub and to drive future innovation and drug development, we recently announced the creation of our Global Innovation Center based in Ireland. The center will foster the development of new technologies and clinical trial processes to enable faster access and better insights from the increasingly large volumes of data being collected during drug development. All of ICONs innovation is ultimately focused on improving our customers return on investment and R&D and delivering better outcomes for patients around the world.

An increasingly important trend impacting this return on investment is the need to demonstrate product value for regulators and payers. Our Commercialization and Outcomes Group addresses this need, and in 2014, they recorded strong growth as their market-leading offerings gained real traction.

We are excited that we have signed the acquisition of MediMedia Pharma Solutions that will further improve our offering in this high-growth area by adding scientific communication services. We will also create cross-selling opportunities for our clinical services as their client base does not overlap significantly with ICON's.

In 2014, we also saw our Central Lab perform well and record gross margins at target group level, and we also saw our early-phase business stabilize and return to modest profitability following the restructuring of 2013. We continued to invest in our capabilities in 2014, increasing our scientific and medical expertise by launching ICON Consulting Services, and with the acquisition of Aptiv, we gained market-leading adaptive trial capabilities and expanded our presence in Japan with Niphix.

So as we look forward into 2015, we believe the key drivers of market growth will continue. R&D spend will continue to increase modestly, driven in part by a new breed of cancer therapies based on biologics and the growth of specialty drugs targeting niche indications. More of this spend will be outsourced as customers seek to variablize overheads and look for innovative technology and solutions to increase the productivity of drug development.

Market share will continue to shift towards global CROs that have the footprint and breadth of capabilities to run large and increasingly complex global trials. We are well positioned to capitalize in this growth. Alongside our global scale and full-service portfolio, we have outstanding therapeutic, medical, and scientific expertise. Our expertise, operational excellence, and differentiated technology solutions have enabled us to develop industry-leading partnerships.

So as we move forward into 2015, we have a strong platform on which to build, and we're guiding further growth. We expect revenue to grow to a range of $1.61 billion to $1.675 billion, an increase of between 7% to 11%, which in constant currency is an increase of 6% to 10%. We expect earnings per share to grow by 20% to 25%, to a range of $3.45 to $3 60.

Before moving to the Q&A I would like to thank the entire ICON Team around the world whose hard work and commitment have contributed to another successful year for ICON. Thank you, everyone, and we're now ready for questions.

(Operator Instructions)

Jeff Bailin, Credit Suisse.

Thanks for the questions. Maybe just to start with one for Brendan: Not to get too greedy here on the margins, but looking at 4Q margins of 15.5%, you are already in the upper end of the range that you provided as a new target of 14% to 16%. With that in mind, is there anything we should think about that was maybe one-time in the back half of 2014 on the margins that will moderate, or how we should think about the ongoing margin opportunity in 2015 and beyond?

Thanks. It's Brendan here, obviously. Just to -- in the quarter, certainly, there wasn't -- we wouldn't call out any particularly one-time. As you'll recall in the previous quarter, in the SG&A, we had a revaluation gain of about 100 bps. Obviously, with the dollar still being strong in fourth quarter, we saw some benefit from that again, probably to the tune of about 70 bps this time around.

Also during the quarter, we had an offsetting onerous lease charge that was included in SG&A, which pretty much offset that, in its entirety. So, the SG&A number that you saw in the fourth quarter was pretty much a good run-rate number. From that perspective, it's just continuing good gross margin story and SG&A leverage that's got us to the 15.5% in the quarter.

I think -- sorry, Jeff. I think what we're really saying: If you look at our guidance, we're implying that our margin will continue to grow this year, probably average out at just over 16% in our guidance. It exits the year somewhere around 16.3% margin. In the medium term, we've reset our margin target to the new range of 15% to 17%.

Got it. That's very helpful. I appreciate that color.

And just a quick follow-up: Is there anything that you can give us around MediMedia -- the multiple you paid, or the revenue or margin profile for that acquired business?

Hi, Jeff. It's Brendan here again. In terms of the revenue contribution that we look at in 2015, we are estimating in the range of $45 million to $50 million for the [stub] period. So, it should be -- as Ciaran was saying, it should be closing imminently. You can do the math on what the full-year impact is. In EPS terms, probably a contribution of about $0.10.

Great, thanks for the questions.

Douglas Tsao, Barclays.

Can you hear me?

Yes. Go ahead.

We've obviously seen you continue to add these tuck-in acquisitions in terms of technology-based deals. Is that where you're thinking and focusing right now in terms of your M&A strategy, versus thinking about consolidation of smaller players in the core clinical services segment of the Business?

Yes, Doug. We've always pursued a policy, really, of tuck-in M&A, which adds skills and capabilities to our Organization, ahead of more standard consolidation plays. And MediMedia is another situation where we bring to the table things that we don't have before.

We like that strategy. It's what we continue to do. We think it broadens our service offering, and makes us a better partner for our customers. It allows us to drive more growth through our organic business.

It was a consolidation of more core services. It doesn't really bring us a lot of additional or differentiated capability. And it is an option there for -- maybe if you were looking at synergies or that kind of thing, but it also brings integration of systems, and overlapping things like that, that just aren't as clean and value-added as our capability-based tuck-in strategy.

Okay. Great. And then, just thinking about the business wins, just curious about the distribution of those across your customer base, in particular in the fourth quarter, versus your one large client. Have you seen an improved mix in terms of non-Pfizer business, or are you still seeing that same relative contribution from Pfizer versus ex-Pfizer business?

No, we've seen an improvement in the mix. I think we've been pretty open saying, during the course of the last couple of years, the Pfizer account would ramp up to a certain level. You can see from the numbers in Q4 when you back out the math that it's stabilizing.

Obviously, the large transitions at the start are on board, so the level business wins are stabilizing at a very healthy rate, and we're very happy with it. But if I were to look back on last year, our business outside of our largest account, improved by about 30% -- the business wins; whereas the wins from our largest account are stabilizing and leveling off. We are very happy to see that mix improve.

Okay. Great. Thank you very much.

Tim Evans, Wells Fargo.

Brendan, I believe you said constant-dollar organic growth of 9% in the quarter. I believe we've also established that there was a $4-million FX headwind in the quarter. If we back into the contribution from Aptiv, I'm looking at something like $18 million. That would be meaningfully lower than what I would have anticipated from Aptiv contribution. I just wanted to see if everything is going okay with that, or if there's something we need to be watching?

No, Tim. This is Ciaran here. Everything is going well with the Aptiv acquisition. It's integrated well.

The key areas that we were focused on around the adaptive technology, in Japan in particular, are proceeding to plan. We finished the heavy lifting of the integration work, albeit that this is a sophisticated technology and will grow in time. There is nothing I would point to that would cause any concern with how that's going.

Steve, do you -- you're closer to this.

We're happy with it. We're starting to see a lot of traction from customers, particularly around the adaptive side of things. It's not something that happens overnight, but it's certainly something that we're getting a lot of interest from customers in. And also in the Japanese operation -- we feel we're moving that forward as well. We are very comfortable with the way things are moving.

Okay. Do you still expect that to be $100-million-plus business here going forward, annualized?

I think one of the things -- it's so well integrated into our overall business that it was hard to -- when we looked at that as part of the Organization, we certainly didn't model it separately. It's all baked into that revenue guidance that we put out there.

Okay. If I may sneak one more in: Can you quantify the foreign exchange impact on your earnings that is baked into your 2015 guidance?

Actually, for the guidance numbers, about 200 bps on the revenue side of headwind from FX impact. On the EPS line, it's pretty much the same, as we've talked about before. We see it as not having a huge impact that changes the margin; but in EPS terms, it doesn't move the (inaudible) significantly.

Okay. Thank you.

Dave Windley, Jefferies.

Your book to bill -- you touched on it a little bit in terms of seeing nice wins away from Pfizer. Your book to bill has been extraordinarily stable for quite a long period of time, when I look at the chart in the slides. Would you attribute that to still a fairly healthy contribution of quarter-to-quarter RFP-driven non-strategic business? Or why do you think you've been able to report right around that 1.2 for such a long period of time?

I would suppose that if you look at the profile of our Business, we've a good deal of visibility with our strategic accounts. Our top five accounts account for half of our Business. So, we work with those guys in advance, and planning [stops] the work. So, we're able to see how things are going. The rest of our Business has just been healthy flow of RFPs and tactical work, and our win rates have stayed steady.

But I think if you look at it, you will see there is more variation in the gross wins line. And then, what we're seeing is just there's been -- I think this quarter was the highest gross wins possibly we've ever recorded. But we picked up a couple of cancellations that are more at the historic norm rather than the relatively low cancellations we've seen over the last three or four quarters.

I would just say we have a fairly stable business portfolio. We just have a high level of predictability. We plan on that basis.

Okay. Thank you for that. And then, I wanted to ask my follow-up on margin, and particularly trying to understand, maybe underneath the covers a little bit, what some of the more significant levers are that are helping you to not only improve margin up to this point, but raise your expectations again?

Are you seeing efficiencies that are coming more from, say, supportive costs, be it your central service offices for back office support and things like that, or are you actually seeing -- obviously, gross margin is improving as well. I'm wondering if you're starting to see real in-study efficiencies from selective source data verification, adaptive trial designs, whatever it might be, that are, say, more in-study efficiencies from changes in the way we're really doing clinical trials?

I think you have really pointed to all of the factors there, and it answers it. It's a little bit of everything.

The first thing that I would draw attention to: We built a very efficient -- invested heavily in the global business services model, and over the last few years, and we started the heavy lifting in that, really, back in 2011. And over time, once the model is there, we are very efficient at managing costs as we grow, so we continue to get leverage. That will continue to be a driver as we go forward.

At the gross margin line, it is a combination of management and productivity, the key metrics that we look at; and the technology, the in-trial technology, and improving start-up and recruitment, and deploying new technologies and new processes.

Steve, maybe you have a comment?

Yes, I think there's certainly, on the clinical trial area, Dave, we've put a lot of effort into our ICONIK platform, the Firecrest platform, and we are seeing some benefits of that. The risk-based [monitor], which you alluded to, is becoming more accepted within this industry, and we see we're able to offer our customers a better price, but also not sacrifice, or even improve, our margins on that work. So, it's a -- dare I say it -- a win-win for both of us.

And then, around start-up as well, we see that's an important area. We are investing in that area, and getting some efficiencies there.

I think the other point is around -- right where we've got large portfolios of work with several customers, we're really able to generate some efficiencies around the management of those portfolios of work. That's playing through to, certainly on the gross margin line as well.

Great. I appreciate the color.

(Operator Instructions)

John Kreger, William Blair & Company.

This is Matt in for John today. Looking at your sides, I see that the burn rates have tapered off a little bit over the last four quarters. Can you guys just talk a little bit about what's driving that, and where it might trend in 2015?

Yes, we can. It's really just a function of the fact that we've got more large studies at longer duration have come into the backlog over the last year or so. And those studies, take [longer]. The burn rate comes down, but they last a lot longer, so it gives you further visibility into the future. There's really nothing to it beyond that.

Looking forward, we'd probably expect the burn rate to continue to decline modestly, or level off at around that 10.9%, 11% mark, but you can never be entirely sure. There are a lot of moving parts there. There's 500 ongoing projects being done every day that go at varying paces. We don't see a significant difference in it, but certainly it's the long studies that have taken it down from where it was, say, this time last year.

If I could ask a follow-up? With the Covance-LabCorp deal closing, what do you guys see in the marketplace there? Does that provide you guys any opportunities going forward, do you think, within Central Lab?

It's Steve. I think there are some opportunities for us in the lab space. I think we're seeing, again, some interest from customers in our labs, and I think a number of the other CROs have indicated the same. So, we see some opportunity.

Having said that, we have to go out there and make the most of those. Nothing is a given, and we respect all of our competitors in the lab space. We believe there is opportunity, but there's also work to do there. We are optimistic in terms of what those opportunities will bring us.

Great, thank you.

Donald Hooker, KeyBanc.

One quick mundane question: When you think about your earnings-per-share outlook for 2015, what is your tax rate assumption there? I don't know if you recalled -- if you guys mentioned why the tax rate was a little bit lower in the fourth quarter. And how should we think about that flowing through into next year's?

It's Brendan here. For our guidance, we're expecting it still to be in that 16% effective tax rate for 2015. We've done well with our tax rate over the years, and it's come down to obviously that level. In the fourth quarter, basically we saw some of our provisions roll off just as a matter of timing. After a certain period of time, they just roll off, and you get a bit of a bump, and that often happens in quarter four rather than the earlier quarters of the year. That's what happened in [that specific] quarter; but as an outlook for 2015, the rate is still at 16%.

Great. One other question -- a follow-up -- somebody touched on it earlier, but I wanted to see if I could get you to discuss it a bit more. Regarding the use of your technologies, adaptive clinical trials and risk-based monitoring -- I know it's probably impossible to do this, but could you maybe attempt to gauge the penetration rate or something of those technologies? Can we think about what percent of trials are using these technologies, if that's possible?

The short answer probably is that it's not really possible to give a credible or meaningful hard metric in that, but I'm sure Steve would have some anecdotal reflection. (laughter)

Yes. I'm not going to put a number on it, but we are seeing significant interest in it. We don't have any expectations that this is going to ramp up over six months; it's taking some time. Some customers are very interested and are very active. Others are much more conservative, and still want to maintain some of the old procedures. We are able to accommodate both.

We are encouraging our customers to move to the more patient-centric, risk-based approach. We believe there's benefits to them, in terms of the quality of their trial, in terms of the operational management of their trial, ultimately in terms of the pricing they're paying and the value they're getting. However, we work with a relatively conservative industry, and so we have a lot of these discussions.

It's moving. It's certainly moving faster than the electronic data capture did in -- 20 years ago. I think we'll certainly see a lot faster progress in terms of patient-centric monitoring than we have electronic data capture, but it probably won't move as fast as we'd like or as fast as a lot of people expect. So, I'd say it's probably a five-year process by which we'll move most of our trials to this approach.

The bottom line is: Some trials just aren't appropriate for it. They don't suit it very well. So, there is work for us to do in that area as well.

Is there any catalyst that might happen to drive -- accelerate that adoption? I think there was a TransCelerate paper from earlier. Is there any other thing that might accelerate that on the horizon?

I think the catalyst is customers need to do more with less. The R&D budgets being capped and challenged, and I think that is the catalyst. Many of our customers understand that, and are moving that way. Others are less inclined to move in that way. But I think that's the catalyst: the requirement to get more value for their money.

Thank you.

Robert Jones.

It's Adam Noble calling in for Bob. Just to go back to the 200-plus-basis-point margin expansion for 2015 -- any sense you could give us around the breakdown of that between gross margin and SG&A?

I might just need to clarify: That was the 15% to 17% was the medium- to longer-term target for our margin. What is that in relation to our guidance? Our guidance would imply margins that are averaging about 16%, and exiting about 16.2% or 16.3%.

We've seen the pattern over [the] years where it's about half and half -- half of our margin expansion has come from gross margin, and half from SG&A. And we'd expect as we move from our exit margin of 15.5% in Q4 2014 to the new levels over the year, it will continue to be half and half. We are forecasting the 700-bps increase in margin in 2015, with that 15% to 17% range being the longer-term target.

Okay. That makes a lot of sense. And you bought back quite a bit of stock the past two quarters. Anything you could share around share repurchase assumptions in your 2015 guidance? Should we think of share repurchases as being a more consistent part of the capital allocation strategy going forward?

Yes, I think you can consider that it will be more consistent part of our strategy. What we said, I think last year, was that it would be our intention to -- as part of our deployment of capital -- to be anti-dilutive in our share purchases. We'd always be a little bit opportunistic. Some of our strategy will depend on when we're throwing off cash, how much we have in investment opportunity; and where we don't have investment opportunities, we're more than happy to do buybacks.

I think we said we'll pretty much pursue a policy of buying back enough shares every year to make sure there's no dilution to the shareholders and the share count through the options that we issue to staff. So, there's actual guidance. I think we just haven't assumed any buybacks in the numbers that we've quoted, to the extent when and if we go to the market, that will be upside to that.

But there's an opportunistic element to it. The timing will depend on what we're doing on our M&A strategy and things like that. So, we felt that given it would be a relatively modest level and that we issue about 1 million shares a year, it won't move the numbers significantly, so we just left it out of the guidance.

Makes sense. Thanks a lot.

Tycho Peterson, JPMorgan.

It's (inaudible) on for Tycho. Congrats on the quarter.

Just one quick question on Aptiv: Can you comment a little bit on the medical device component of that, and how you are planning to capitalize on that opportunity going forward?

Sure. It's Steve Cutler here. Yes, we have a very strong medical device group that's really come to us from Aptiv. ICON did have a medical device expertise and resources, but we've been able to combine that with a very strong group, the Aptiv team, and we've established that within our commercialization group as a separate SBU entity, and we're pushing forward with building that business.

We think there's opportunity in that area. We think the outsourcing market is relatively undeveloped, and has great potential for moving forward. The dollars aren't as large, but we believe the device space is probably where the [drug] pharmaceutical space was 20 years ago. So, we are putting an active push on moving that forward; and we're seeing -- initially, we're seeing some good traction there. We've won some good work. We have some good, strong people who are experts in the industry, and we feel we're in a good place there.

Great. And then, in terms of the guidance for the top line, should we think of sequential growth quarter over quarter on the top line, as well as being the trend in 2015? Or is there any seasonality or anything else in terms of trial wind-downs that we need to be aware of?

I think what we will see in 2015 is that we'll be stronger in the back half of the year due to the customers that we've added to the roster in the back half of 2014. It takes time to get these things up to speed. So, we would expect a pattern of starting the year with modest growth on Q4, but then accelerating through the course of the year.

Great. Thanks, guys.

Todd Van Fleet.

Ciaran, just want to get your assessment as to where things stand industrywide on the whole strategic partnerships concept and movement. Things have seemed pretty quiet for a period of time, and just wanted to get your thoughts on whether or not you think it's going to stay quiet or whether there could be more activity over the course of maybe the next 12 months?

I think probably you'd say the larger transactions and deals have been done over the last few years, and the top CROs have got their strategic partners and their arrangements made. What we are seeing are similar models being talked about in different market sectors. I think I mentioned in my comments that we've seen good traction and good wins in mid-sized, and especially pharma and biotech, as we're taking the learning -- the advantages that's there from some of those strategic models into a different place. But I wouldn't expect any massive activity such as we saw probably a couple of years ago.

Thanks.

As there are no further questions in the phone queue at this time, I would like to hand the call back over to Ciaran Murray for any additional or closing remarks.

Okay, thank you. I would like to reiterate that we're pleased with the progress that ICON has made in 2014, and we are looking forward to building on this progress during 2015, as we seek to become the CRO partner of choice in drug development for our customers in the industry. Thank you, everyone.

Thank you. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.