ICON PLC (ICLR) 2015 Q2 法說會逐字稿

Good day, and welcome to the ICON quarter two earnings call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Simon Holmes. Please go ahead, sir.

Thank you. Good day, ladies and gentlemen. Thank you for joining us on this call covering the quarter ended June 30, 2015. 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.

Certain 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, investors are cautioned most forward-looking statements are not guarantees of future performance. The Company's filings with the Securities and Exchange Commission discuss the risks and uncertainties associated with the Company's business.

This presentation includes selected non-GAAP financial measures. For our presentation's 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'll be limiting the call today to one hour, and would ask the participants to keep the 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 two was $389 million, up 3.4% from the same quarter last year and 0.1% on last quarter. Year-on-year constant-dollar revenue growth was 9%, constant-dollar organic growth, including the impact of MNPS and active in the quarter, was 4%.

For the quarter, our top clients represented 30% of revenue, compared to 34% last quarter. Our top 5 clients represented 51%, compared to 52% last quarter. Our top 10 represented 65%, compared to 64% last quarter, while our top 25 clients represented 78%, compared to 77% last quarter. We ended the quarter with approximately 11,300 (inaudible).

We continue to see gross margin expansion driven by efficient resource management across our project teams and good cost management. For quarter two, group gross margins increased to 42.1%, compared to 41.3% in quarter one, and 39.6% in the comparable quarter last year. We have delivered further support cost efficiencies in the quarter and, as a result, SG&A reduced to 20.9% of revenue from 21.2% last quarter, which excludes a one-off FX revaluation gain, and 23.3% in the comparable period last year. This represents a significant progress towards our goal of 20% SG&A levels.

Operating income for the quarter was $68.1 million, an operating margin of 17.5%, compared to 16.4% last quarter, again excluding the one-off revaluation gain, and 12.8% in the comparable quarter last year. The net interest expense for the quarter was $10,000, and the effective tax rate was 14%. For the full year of 2015 we expect our effective tax rate to remain at 14% and believe we can sustain this rate on an annual basis going forward.

Net income for the quarter was $58.6 million, a margin of 15.1% equating to earnings per share of $0.95. This compares to $0.90 last quarter and $0.64 in the comparable quarter last year, or an increase of 48%. DSOs in the quarter reduced to 45 days from 47 days in quarter one. And, as I mentioned on our last call, we anticipate that our DSOs will remain around these levels for the remainder of the year. During the quarter, we generated $28.1 million of cash from operating activity, had capital expenditure of $13.4 million, and bought back $58 million of shares. As a result, the Company's net cash at the end of June 2015 amounted to $132 million, compared to $172 million at the end of March 2015.

With all that said, I'd now like to hand over to Ciaran.

Okay. Thank you, Brendan. Good morning, everyone. quarter two was a good quarter, despite our backlog conversion being a little bit lower than expected. We booked a record level of new awards, growing our backlog by 8% over last year, and the concentration of our largest client reduced to 30%, from 34% last quarter. Our operating margin expanded to 17.5%, and we beat earnings, reporting $0.95 of EPS. So, we raised our full-year earnings guidance by 8% to a range of $3.90 to $4.00. Continuing our policy as defined capital to best drive long-term shareholder return, we are expanding our share repurchase program by up to $400 million. I will talk a little bit about each of these things and have a look at the quarter in a little bit more detail.

We continue to see healthy levels of activity in the market. Overall, biopharma R&D spending is growing in the low- to mid-single-digit range, and this has been driven by significant increases to biotech funding and the adoption of more partnership-type models by midsized biopharma companies. We've also seen above market growth in the [stage 4] and post approval market. All of this will provide a platform for future growth opportunities.

In quarter two, we posted gross new business awards of $571 million and net new business awards of $486 million. This is a [nice] book to bill of 1.25. It is also the highest level of quarterly bookings ever recorded by ICON. And, as a result of this, our backlog increased by 8% over last year, to $3.7 billion.

The development of new relationships is an important part of our strategy to grow revenue and to reduce customer concentration. Encouragingly, a high proportion of this quarter's business wins were delivered from the new customer relationships developed over the past three quarters. Around 50% of our year-to-date awards have come from outside our traditional large pharma customer base, and our trailing 12-month net book to bill from midsize and biotech customers is 1.3 times. Over time, this will serve to further reduce our customer concentration.

Revenue in the quarter was $389 million, which is an increase of 4% over last year in constant-dollar organic growth terms, but a little bit less than our expectation at the start of 2015. And this results from slower conversion of our backlog this year compared to past years. Backlog conversion in quarter two was 10.7%, compared to 11.5% this time last year. The backlog is converting more slowly than expected due to a higher proportion of larger, more therapeutically compact trials in that backlog and the fact that projects tend to be awarded earlier under a partnership model than they were in the past. These awards will start to convert to revenue in the second half of the year.

Our investments in people, process, and technology over the past number of years continue to yield results and in quarter two we've seen further expansion in gross margin and reduction in SG&A costs. This has resulted in an operating margin of 17.5%, another Company record, and it drove the earnings of $0.95.

Over the past few years we've redesigned the structure of our service areas to better meet our customer needs and to better leverage our global support infrastructure. I'm happy with the progress we continue to make and, in quarter two, all service areas performed in line with expectations.

We are pleased with continuing integration of the Aptiv acquisition, the core CRO business is fully integrated into our clinical research services, and we have delivered the cost synergies expected. We continue to integrate the adaptive trial technology into our informatics platform, and we are receiving very positive feedback from customers. The addition of the Niphix business that we acquired Aptiv has given us a very competitive offering in Japan, and we've seen sustained improvements in our business there, and posted record Japanese business in the quarter. We also added MediMedia Pharma Solutions to our commercialization group last quarter. This brought us additional capabilities to help demonstrate evidence of product value, [repairs and regulated], and it expands to customer relationships into functions such as medical affairs and marketing. The business has integrated well into ICON, and it's enhanced our position as a market leader in the [stage 4] and post-approval segment.

One of the most important drivers of our growth and success over the past 25 years has been our string of pearls strategy of acquiring capabilities that enhance our service offering and help customers improve the efficiency and the quality of their development efforts. We will continue to deploy capital in the pursuit of capability-enhancing acquisitions. With a strong cash flow and balance sheet we believe we can execute that strategy and continue our recent policy of increasing shareholder value through the use of shared buyback programs. Since 2014, we have repurchased just under $200 million of shares. And we have put approvals in place that allow us to extend this program to repurchase up to a further $400 million of shares. We expect that the buyback will be executed over the next two to three quarters. The impact on the current year's earnings will be modest, around $0.03. However, we estimate that the program will have an accretive annual impact to $0.35 to $0.40. This will be funded from cash and bank debt.

Looking out at the remainder of 2015, we expect our strong margin performance to continue and, as a result, we are raising our full-year earnings guidance by 8%, from a range of $3.60 to $3.70, to a range of $3.90 to $4.00. This represents an increase of 36% to 39% compared to 2014 earnings. As a result of our lower revenue conversion, we expect our 2015 revenue to be in the range of $1.57 billion to $1.6 billion, compared with our previous range of $1.6 billion to $1.65 billion. This represents a constant-dollar organic growth increase of 3% to 5% compared to 2014.

Before moving on to the Q&A, I would like to thank the entire ICON team for their hard work and commitment during the quarter. Thank you, everyone, and we are now ready for questions.

Thank you sir.

(Operator Instructions)

We will take our first question today from Stephen Valiquette of UBS. Please go ahead.

Hi Steve? Hello?

Steve Valiquette please go ahead, your line is open. Please make sure that the mute function is depressed.

Maybe we'll take the next question?

We will move on from our next question of David Windley. Please go ahead Mr. Windley, your line is open. Mr. Windley please make sure that your mute button is not pressed on your phone.

Can you check if the questions are working correctly?

Yes just one moment. Mr. Windley, your line is open. Can you hear us?

Do we want to move down and try the next question?

Okay, just one moment. Mr. Tim Evans, Wells Fargo Securities.

Thank you, am I the lucky one to get through here?

Boy, Tim, am I glad to hear you. Never been so happy to hear your voice.

Maybe I missed this. Can you break out the FX impact on revenue for us?

I sure can, Tim. We started off with that at the beginning of our call.

But in case, for those who have missed it, we said we were 3.4% up year-over-year on an absolute basis. We said we were 9% up in constant-dollar terms. And then in constant-dollar organic terms when you exclude the year-on-year impact of MMPS and Octave we were 4% up year-over-year.

Okay. Got it that is very helpful. Can you cause FX benefits on your margins as well (technical difficulties)?

Actually in terms of just to clarify again, Tim, last quarter we did see an 80 bp uplift in our margin as a result of the evaluation gain. Due to relatively favorable levels of euro dollar in the current quarter we didn't have an re-evaluation gain coming into the numbers, so it was negligible basically, so it did not have an impact. Is that what you are specifically speaking to, Tim?

No. I'm speaking more on the difference (inaudible).

You are breaking up a little bit there Tim, can you repeat that?

(Inaudible) on I guess what you would call the translational basis, what would've been the impact to the margin?

Okay.

Yes, Tim, if you look at the dollar to euro rate, so that 1.35 we saw last year, now we are in an environment obviously it's $1.10 to the euro. We would estimate that that full-year impact is probably about 100 bps on our margins. So that's our best estimate for full-year impact.

Okay. My last question is, what does your earnings guidance for the year contemplate for use of that new share repurchase authorization?

That contemplates about $0.02 to $0.03, up $0.03 I think I said in my commentary. It's going to take, we will start the authorization when the period-- when the shares open up again in the market. It is probably going to take two quarters to three quarters, because as you know we are restricted to buying about 15% of the day's trading based on the average of the last six months, so it's not as if we can go ahead and buy it all at once.

We see that we probably will be buying over the next two to three quarters. This year's impact will be modest, as we said those $0.03, with a full-year impact will be around $0.35 to $0.40.

Great. Thank you.

Thank you Tim.

Dave Windley of Jefferies.

My apologies for the miss before. I was wondering if you could talk to, or maybe elaborate on some comments you made in your prepared remarks about the studies that you have been gratified to win from new strategic relationships? And the ramp up of those studies, and the visibility that you have to them really hitting in the second half of the year?

Yes, it's good to talk to you, I was getting a bit worried there. (laughter)

They offed me in the last 30 minutes.

Were doing the call from New York today so we are not in our usual environment, so I starting to get jumpy.

Yes, I mean if you go back to--we've been working hard on the kind of concentration that is been building up under our other sources business over the past 12 months to 18 months and we started to see that really pay dividends toward the back end of last year. Think if I look back toward the end of Q3 through Q4, and in the first half of this year, we've probably added around 10 significant new customers to our bench which is very gratifying, and validates a lot of the things that we do, so we are particularly happy about that.

What we've seen is that, I think I said in my remarks, about 50 or maybe a little bit more 50% of our business is coming from outside of our traditional customer base. So what we have seen with money going into bio tech funding, and some of the complex therapeutic areas in the market, that these studies are just a bit harder to do.

So we've a combination of two things. You are working with new customers, who we did forecast at the start of the year around start up assumption, takes a little while to get things up and running and put models in place and get the details sorted out. Simultaneously some of these are difficult enough in therapeutic areas. So it can take longer.

Once we get the partnership or the relationship sorted out, it goes into backlog, and then it is taking a little bit longer to get protocols finalize and complicated studies, to get regulatory approvals, and to get (sites a bit), so that the studies are staying a little bit longer in the startup period than we might have expected when we did our forecast toward the back end of last year. But the visibility is good. I mean, they are all real studies. They are all starting up.

It's just a question that you find once you get over the initial obstacles, things start to gain momentum, and they start to flow through into revenue and we are seeing some of that start. Maybe ask Steve, you are closer to this (inaudible).

I think that's all true. I think the other thing is they tend to be awarded in terms of assets or progress, which we think is very positive because we can start to plan the efficiencies around those programs. But of course those programs take some time to rollout and some times there is sequential work to be done. So there's definitely other component, I suppose, which probably slows the backlog.

Thanks for that, I appreciate that. Are there capabilities, or maybe even human resource expertise that you need to add to the stable to better address some of the growing complexities? It seems like this is probably a trend in the industry that is here to stay. I wonder if there's a new capability, or perhaps a target acquisition that you need to add to your stable that will break down some of those bottlenecks?

We certainly look at that on a constant basis around how we start up studies, how we recruit patients into trials. There's a lot of effort in our organization going into those sorts of areas, we are making I think some significant progress in that area. So it's a combination, I would say, of capability and technology.

We are able to deploy those in a way that that combination sort of allows us to accelerate. But there's only so much we can do if we are depending upon a protocol coming through, or a development program coming through. So there's a limited amount.

Once we get the green light we go hard. But in many cases, and this is what we are seeing, we have to wait for the green light, we have to wait for the regulators to approve the trials, we have to wait for the protocols to come through, and so all of those things to happen. To some extent we are constrained within that environment. We are certainly looking very hard at what we can do to accelerate the key cost of these trials and of running these trials.

Great and one.

I was just going to add there, it was over the last 12 months or 18 months, in terms of our in-house capability and brains trust, we have added a fairly significant number of senior positions around things like patient recruitment, and things like specific therapeutic areas things that are starting to gain traction in the markets now.

Okay. My last one was, you commented on how much share repurchase is added to your guidance. I wondered if you could comment, if you have not already, what margin assumption you are making in guidance for the back half of the year to get to your new numbers?

We have not commented on that, Dave. We will exit the year, our guidance, we'll exit the year at a margin of around 18%.

Okay. Thank you.

Thank you. Eric Coldwell of Baird.

Thank you very much, and very good job on the margin performance. I guess first off on the SG&A goal of 20%. I'm curious what your timing is to get there. And I assume that is a durable rate once you get there.

Hello Eric, yes we think that is something that as we grow the organization that we can stick 20% in the longer term. Generally we see actions that are going to help. Obviously the margin regression Ciaran just mentioned, we expect to be around 18% leaving the year. So, an element of that will come out through SG&A as we go through the course of the year.

And as we look out I suppose we will probably take the guidance. But you know we are at 21% at the moment, 20.9%, and we see a good chunk of our SG&A helping the margin on the back quarter. So really, we are in the territory of 50 or 60 bps after this year.

We were at 29% when we started, and we've come down to just under 21%. So it's not too far off if that's what you're asking. We can only expect to hit that target sometime in the course of next year.

You've done a great job there, there's absolutely no doubt. I guess what I'm really struggling with is, ICON is in new uncharted territory compared to your history. And when I look at the history of the space in total, on a similar sort of GAAP reporting methodology, current accounting adjustments overtime et cetera, et cetera.

Really, the peaks we have seen in the group have been, at least in the public [zeroes] with a relative similar mix, the peaks been in the kind of best cases ever, low 20% area. And I'm just curious, do you, with this current margin target of I think 15% to 17%, which I believe is still your formal guidance. You are now saying maybe 18% at the end of the year. At the end of the day just how much more is left?

And do you see some vision of perhaps moving to levels that the industry really has not been out before? Do you think you can get into the low to mid 20%s and stay there on this GAAP reporting basis? Because you've done a great job and I guess I'm just struggling with how much more is really left. I don't want to doubt you, you've shown margin improvement every quarter since 3Q 2011, so it's hard to fight the tape on this but at the same time it seems a little bit almost too good to be true.

As you know, we have always been very cautious in how we have characterized our margin targets from that period. I think I remember first call back in, it would've been a Q3 earnings call in 2000 as you remember, we had just had a bad quarter where we broke even with a small GAAP loss. I think I remember setting our margin target at 68% or something and people looked at me and thought how are we going to get there in t he short term?

I think what has changed over that time, a couple of things. When you look compared to the past, and what gives the opportunity to move forward and then, as they say, every ceiling becomes a floor. I think if you look at our margin improvement over that time, about half of, I'll use rough numbers from SG&A, and about half of it from gross margin. And so if we just focused particularly on the SG&A component, because there's a lot of new stuff, a lot of opportunities in SG&A that we did not have five years ago or 10 years ago, at different points in the past cycle.

When I go back 10 years when I joined ICON as CFO, we effectively--what has changed since then. We run about six different business units, each loaded up with their own support structure and SG&A. And over time we've managed to come up with an extremely efficient global business model which supports our tax administration, it supports our everyday SG&A.

And the advantage there, if you look at the technology that we use and we use fairly sophisticated ERT platforms, they are very scalable, they are very common in the marketplace, when it comes to hiring and training staff, they are all very familiar with them. And we have consolidated everything they are into one unit. It runs off technology platforms, instead of having staff scattered throughout the world with the bulk of the staff are concentrated in a few locations around the world, principally in Ireland and India and a chunk in the US.

If you look at the mix of staff overtime compared to 10 years ago, you have many more of our support function. Because of the advantage of technology and communication, and video, we have a lot more staff in regions where the cost of running these things isn't so much, and over time we've been able to constantly change and improve that mix. We still think they're certainly opportunities to do that as we go forward in the future.

I don't see any reason why when we get to our 20% target we stop. We have better procurement practices than we had as a small company. About 18 months ago we set up our first formal procurement office, and that has made huge efficiency difference in how we do things.

So the point I make is, yes, we all look back on the past and see there were cycles, there were limits. But I think we have different tools at our disposal, certainly on the SG&A which will help continue to drive efficiencies. I think on the growth margin side, we constantly seek to improve what we do, again through deploying technology and new opportunities. And the IT space which just didn't exist 5 or 10 years ago.

So, I'd be optimistic. We won't see the same rate of improvement where our margins have gone up so significantly in a short period of time. But we continue to see cost efficiencies that will help drive margins. And we continue if we grow the top line, and grow the Company to see modest leverage efficiencies too, that's the way we are looking at it as we go forward.

Okay, great. That's a very thorough response. I'll leave it at that and, again, congrats on the great margin performance.

Thank you. Steve Valiquette of UBS.

Okay. Thank you. I'm not sure what happened at the beginning I was talking but nothing was happening. So I apologize for whatever happened there.

My question was actually kind of similar to the last one with maybe a bit more of optimism. My question was just going to be, I think now you have that industry leading EBIT margin, the simple question was should we still generally assume EBIT margin expansion over the next couple of years? We are recognizing there are a lot of moving parts, but should we make that general assumption?

There are couple of other late-stage CRO's that went on hiring sprees in the first half of 2015. And just to kind of confirm, do you think everything is appropriately allocated from a staffing within Icon, the way the things stand right now? Thank you.

Yes. I think when we look forward to longer-term margins, we will certainly be targeting. We lacked it this year at about 18% margins and we will be targeting 18% to 19%. We'll go into more detail when we get around to doing guidance -- formal guidance.

At this stage our stated ambition for next year is to start the year at about 18% (finishes) at about 19% down from some of the things I spoke about there. Benefits that we can see coming through an SG&A and then of course some growth margin which is a little bit more complex, and of course has other things in it. So we are generally optimistic.

But on the hiring markets maybe I'll hand that over to Steve.

Yes, I think we look at this very carefully and we have a very strong group in the resource planning area that analyzes our backlog, and analyzes the new wins on a case-by-case basis in great detail. They are a good, strong group. We have invested in that area to make sure that we don't get ahead of the curve, but we don't get behind it as well. And our people worked very hard and have done a great job in terms of improving efficiency and productivity.

That combination, I think, has allowed us to really get very close to the requirements from a resource planning point of view. I don't anticipate any change there. I think we continue to do that and continue to do it well.

Okay, that extra color is helpful. Thank you.

Don Atuker of KeyBanc.

Great, can you hear me?

Yes.

Great. Just to be clear, I was taking notes. Your last comment was you are looking for 2016 operating margins to grow from 18% to 19%, 2016?

That's correct.

Okay.

Were saying we would finish this year around 18% and obviously start in 2016 at 18% as a floor and we would be seeking to move that up to 19% from there.

Okay and then I thought I picked up on some confusion on the forward-looking comments with guidance and whatnot. The timing of the share repurchases, because $400 million is a big number. And I think initially was going to all happen in the second half. And I think someone mentioned it would be a little bit next year as well.

So my question, when I think about forward-looking performance for ICON, can you talk about the timing of the share repurchases? And also, why is the tax rate stabilizing now at 14%? Did something change that makes that tax rate lower?

Okay. I'll address the guidance and then Brendan can talk about some of the changes that have brought the tax rate lower.

It's not that there's any confusion. But what I was trying to say was that we will start the buyback now in the second half of the year, and we will see only modest benefit in 2015 from this buyback, around $0.03. But the buyback will continue over the next number of quarters, that being Q3, Q4 most likely into Q1 in 2016.

And we estimate the full-year impact of the buyback at about $0.35 to $0.40, that would be 12 months impact. Obviously it depends on how much of it slips in 2016. And that will determine the number exactly, but I think we would assume a high percentage of the buyback will be done by the end of the year.

But it won't be complete, and really it's just around the practicalities of the certain restraints-restrictions upon us and how any shares we can buyback. And we are restricted to buy no more than 15% base trade in investing on a 6 month average, so it's going to take a little bit of time to buyback 6 million shares. And then on the tax, Brendan?

Don, as you know we kind of came into the year saying we were at 16% for the effective tax rate. Our GAAP tax rate for the past 2 years has actually been 15%.

The big driver I suppose and what's giving us comfort that we can move to 14% rate and that we can sustain that as we look at the years, is actually the margin improvement that has come through in the organization over the space of the last 12 months.

Our global business, pricing model we have in place to ensure the efficiency of our tax model basically means that as our margin performance grows more of that margin comes through into Ireland, which obviously is our home territory where we sign a lot of our contracts, and consequently where we pay a lot of our taxes, which is at the 12% rate. And it's the blending of that proportionately that growing over time can decrease the overall rates and that's why we se now that we feel comfortable that 14% is a good rate to think about as we look forward.

Great, if I can squeeze one last one in. Everyone is focused on the margins.

So, when I think about situations where you guys within your project portfolio, where you were able to most aggressively drive your Informatics Solutions, remote monitoring or patient-centered monitoring or whatever you call it and things like that. Are there ways to think about kind of the pockets of projects where you have higher margin so you can kind of think of kind of a target, if you could really drive better use of Informatics?

I think there are opportunities within that. We certainly are investing our money in our iconic solution, developing better algorithms to make sure that we are more efficient for our customers. It's all about getting faster, better, and cheaper. We understand that, we are driving those technologies through Iconic.

And there are certain projects that lend themselves better to a risk-based monitoring type. It will allow us to eventually give our customers better pricing, but also maintain or even improve our margins. So it's challenging but a good place for us to be in that sort of space.

Okay. Thank you.

Thank you. John Kreger of William Blair.

Hi, good morning everyone. It's actually Robbie Fatta, in for John, thank you for taking the questions. Just to follow-up on that last one on the space monitoring. Do you have an updated statistic that maybe tells us what percentage of new trials are initiated with some sort of respice monitoring associated with them?

I do not have that number at offhand. But, it tends to be the larger studies, and it tends to be with certain customers. So I don't want to speculate on a percentage in terms of numbers. It is a significant number, but certainly not the majority of studies. But it is a number, it's a percentage that is increasing as we go forward.

We are certainly seeing benefits not just in terms of the efficiency and the cost of doing those trials. But we actually started the season better off in terms of the quality of the information, and in the quality of management, and reporting, and actions that we can take on those trials. So we are able to identify areas of concerns and challenges earlier than we normally get to do in a traditional respite and our customers are being able to see that.

We are increasingly being able to quantify what our technology is able to bring to a trial, in terms of reduced protocol violators, in terms of reduced queries. And as we quantify that we get our customers to buy into that and to be much more amenable to applying these sorts of approaches to their new trials. It's a slow but a constant process and we are seeing some good progress. It is certainly not the majority of trials in (inaudible).

I think it's fair to say that way we tend to see new technology and view solutions adopted in the industry. It's a conservative industry, and rightly because of what we do. And in adoption of these things tends to start slowly and then gather momentum and pick up. So we've seen in the gathering momentum phase. I'm sure it will continue to do that.

Great, thanks for that. And one last one. I may have missed this before, so I apologize if I did.

But as we think about the backlog conversion rates and how it slowed over the last few quarters, I may have missed any comments about forward-looking conversion and if you expect that to stabilize as these new partnerships are starting to ramp up? Or if you think it will continue to slide for the next several quarters? Thank you.

No. You did not miss that, Robbie.

Looking forward, we would expect our conversion to stabilize. It should be around the same in Q3, maybe even pick up a little bit in Q4 as we see some of these new wins and new relationships start to kick in. But if you look back, I think we were 11.5% this time last year. I think we've seen a lot of the adjustment from where we are in the backlogs, so we are expecting it to flat line from here.

Excellent, thank you very much.

Thank you. Robert Jones of Goldman Sachs.

Thank you for the questions. I guess just on the biotech funding, I think both public and private funding is fairly well documented. It's been very strong and that ties in with your comments in the prepared remarks.

I guess there is some debate on where those dollars actually are in the pipeline today. Ciaran, I'm just curious, are you actually seeing those dollars showing up in the results in the form of phase II and phase III trials today? Or do you feel like we are still early days on the bolus of the biotech funding flowing through the late stage clinical trial part of development?

No. We are seeing those dollars in our awards in the quarter in phase II and phase III projects. We have had a good couple of quarters, and winning new customers, and they tend to be from midsize and biotech companies. I think more than 50% of our business this year, it's from that, the midsize and biotech sector, and that's those funding dollars that are coming through.

Based on what you are seeing from these clients specifically, does it feel like there's a pretty long runway on the ramp from that customer segment?

I'm not sure what you mean by long runway on the ramp from the customer segment?

It just seems like if we look at the biotech funding the last few years, every quarter it's actually setting new highs, both in the public and private funding markets. So the question I think people are trying to figure out is if the strong bookings in part is coming from these clients, where are we as far as that funding showing up in development?

Are we early days? Are we kind of middle innings, late innings? Just trying to get a sense of how much more we should expect from new business when it's coming specifically from the funding ramp we've seen.

Yes, it's interesting because, again, we are sort of in new territory here. I think it's fair to say that what we are seeing is much more commitment from the providers to sign on to back bio tech companies to take compounds right through development. Where, perhaps in the past, they took them to an earlier milestone and then we saw acquisitions of their licensing deals, things like that.

So early enough I would think, and it is gathering momentum, as the funding goes in, and as the success of these things start to come through. We are seeing a really good time in terms of drug approval and things on the market. And then looking at our pipeline, there's still plenty of stuff out there, so we are expecting it to continue.

I agree. I think it also reflects a confidence in the CRO industry because the bio techs now have an increasing vehicle to take their compounds through a vehicle they can be confident on, we will get their drugs to market. And we are also seeing other areas of the funding from other areas and more sort of newco type arrangements as well.

So, I mean, the money is coming into the industry in different ways now. It's not all coming in through large Pharma. I think it's an interesting dynamic the way (inaudible). I think the whole CRO industry, and we obviously are a big part of that, is benefiting from it and will benefit from it, because we are delivering well.

That's helpful. I guess just the second question would be around the conversion rate. Ciaran, I know you just talked about this but I'm still a little bit confused on why the conversion rate would be permanently lower than where you guys were, say, a year ago. It sounds like what is driving it lower, if I'm hearing you correctly, is the fact that some of these new relationships are still kind of early days in the pipelines from these relationships aren't at a run rate yet.

I know you also mentioned that the trial complexity is also leading to slower conversion. So I'm just trying to get my head around, if it's really just the ramp in new customers, wouldn't we at some point get back to historical conversion rates? Or is it really this dynamic of more complex trials that is driving this dynamic more permanently.

You kind of answered it for me. It's the complex tribal trials that are driving it to more permanent lower rates, combined with the fact that generally setting aside that new customers will come up to speed, and they'll set the rates. But that is not the principal driver here.

The principal driver is nearly 40% of your backlog medicine, complex oncology, as we go forward in the medical research and medicine trials are becoming more complex and will continue. Kind of all the easy cures have been found. So if you look at the mix in our backlog compared to years ago it's just more complicated stuff and it takes longer to get it through. So that is really what is driving it.

So, if you look at our conversion rate compared to the market allotted, it's by now means unusually low. And it is probably one of the higher ones. And that really just comes down to how you look at your backlog and book your awards, and just the mix that you have at a point in time.

But I think it is fair to say that there has been a trend over the last five years. It's probably come down from 14% every year, and that is just reflecting more complicated medical research, and trials taking longer.

Got it, that makes a lot of sense. Thank you.

Todd Van Fleet of First Analysis.

Hello guys, nice job on the quarter by the way. I've heard what you said about the margin expectations for this year, and next.

But as I think about the possibility of seeing some revenue growth acceleration over the course of the next 12 months. How do you think about the operating margin leverage within the business for the cost structure that is in place today. I.e. If (inaudible)and growth accelerates, would you expect to see the margin profile for the business accelerate or improve incrementally, I guess more quickly as well, that's the first question.

The second question is around sensitivity of interest rates, I'm sorry Forex rates, but I'll reserve that.

Okay. If you look at the past, Todd you see that over the last four years we have been able to post fairly decent revenue growth rates while improving our margins.

So I think you know at the scale and the maturity level that the businesses are, and the way we structured our kind of overhead functions and the technology that we have around for the resource planning and hiring. We used to outsource hiring a number of years ago and at one point we had the critical mass where we have our own recruitment center of excellence, with over 50 people they hire permanently and does a very good job, does it cheaper, does it faster, and we get better quality. So we are in a different place in the world than where we were, say, a number of years ago.

So as we look forward to growth -- growth, at modest rates, and what we always described as modest is anything else other way up to 10%, sort of 12% is pretty much--we are set up to do that without any unnatural impact on the viability of sustainable long-term margins. I mean you may conceivably get a quarter where you certainly have to hire a bunch of people, or something really spiked up, a side anomaly, but that would iron itself out after quarter.

So I don't see any significant change or impact to the cost structure or the margin structure from accelerated growth. Unless growth goes back to the old days of 25% and stuff like that. And I think that's when we used to point back and say- at those growth levels it could make the margin a bit lumpy. But on a steady trajectory now it is much better managed.

That is helpful. Then on the Forex front, I think you had said about 100 basis points impact on margin year-over-year. And I think the euro has declined about 20% from last year.

So I know you guys have run the sensitivity analysis internally. But I'm wondering if you can tell us, is that the way we should think about the business and the impact of Forex sensitivity of the margin profile to Forex that is maybe a 50 basis point impact for every 10% move the euro has against the dollar either way?

I think that's probably correct, I think that's what we were thinking about when we did the comparative analysis from 2014 into 2015, and that's where we came up with the hundred bps. So, given the only thing that that -- obviously, Todd, as you know is the overall proportion of revenue that we are doing in dollars versus euro, and that can change depending on the mix of business. Other than that I think your math should be broadly correct.

Thank you guys.

Thank you Todd.

Thank you. Douglas Tsao of Barclays.

Hello, good morning guys. So just in terms of the customer concentration. Obviously we saw, by my math, sort of a sequential decline from the Pfizer business.

Just curious, less of a point there, but if we think about the ex- Pfizer business, it was pretty solid on a sort of sequential basis, probably a little less growth on a year-on-year basis. Should we think about that quarter-on-quarter trend as the most indicative of how that sort of X-Pfizer business is trending right now in terms of backlog conversion, and bookings, et cetera?

Yes, we should. Thing quarter-on-quarter is the important number there, Doug.

What we've seen in the first half of the year is a lot more business coming from (inaudible) and from midsize and biotech. So we've a trailing book to bill of 1.3-- 12 month trailing book to bill of 1.3x. Aside that kind of large cohort of customers we have.

So we are going to city that business grow faster as we go forward. The maturing of the big Pfizer kind of was expected, and that was in line with our forecast. I think what is happened is the new business that we've worn over the last two or three quarters is stuff that is starting up a little bit more slowly and that's what is going to counteract the decrease, and some of the large account stuff.

Okay, great thank you very much.

Thanks a lot.

Thank you.

Okay. Sorry

That will conclude today's question-and-answer session. I would like to hand the call back over to you, Mr. Murray, for any additional or closing remarks.

Okay thanks. I was jumping the gun there.

Okay, thank you very much everyone. We got off to a rocky start there, we were relieved to hear your questions. So thanks again, and we are really looking forward to building on what we think was a solid quarter in quarter 2. And I'm sure the rest of the year we will continue to drive our position as the CRO partner of choice in growth development. Thank you very much.

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