Syneos Health Inc (SYNH) 2014 Q4 法說會逐字稿

Good day, ladies and gentlemen and welcome to the INC Research Fourth Quarter and Full Year 2014 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions will be given at that time.

I'd like to hand the conference over to Ronnie Speight, Vice President of Investor Relations. Please go ahead, sir.

Good morning, everyone. The purpose of this call is to review the financial results for INC Research's fourth quarter and full year 2014. With me on the call today is Jamie Macdonald, our Chief Executive Officer and Greg Rush, our Chief Financial Officer.

In addition to the Press Release, a slide presentation corresponding to our prepared remarks is available on our website at www.investor.incresearch.com by accessing presentations within the events section.

As a reminder an archive version of this webcast will be available for replay on our website after one o'clock today. As outlined in our Press Release, there will also be a telephone replay of this conference call available for the next seven days.

Remarks that we make about future expectations, plans and prospects for the company constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors. These factors are discussed in the risk factors section of both the company's final IPO prospectus as filed with the Securities and Exchange Commission on November 6, 2014 and in our Form 10-K filed earlier this morning as well as our other SEC filings from time to time.

In addition, any forward-looking statements represent our views as of today and should not be relied upon as representing our views as of any subsequent date. While we might update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so.

During this call, we will discuss certain non-GAAP financial measures which exclude the effect of events we consider to be outside of our core operations. These measures should be considered a supplement to and not a replacement for measures prepared in accordance with GAAP.

We believe that providing investors these measures helps investors gain a more complete understanding of our financial results and is consistent with how management views our financial results. For a reconciliation of the non-GAAP financial measures with the most directly comparable GAAP measures, please refer to slides 15 through 26 in the supplemental material posted on our website.

As we will be limiting today's call to one hour, we request that participants limit questions to one each with an opportunity to ask one follow-up question. I will now like to turn the call over to Jamie Macdonald. Jamie?

Thank you, Ronnie. Good morning and thank you for joining our fourth quarter and full year 2014 earnings call. 2014 has been a great year for INC Research. We produced significant growth in our business by delivering high quality service to our customers.

We continue to strengthen our position in the market as a leading global CRO through our therapeutic alignment and keen focus on clinical development services. We started the year with some very ambitious goals, but thanks to the expertise and energy of our global teams and the support of our customers, we were successful on a number of fronts.

I would like to recap our progress including a few key metrics highlighted on slide 3 of the presentation before Greg provides you with more details on our financial performance. First, we targeted double-digit revenue growth driven by operational execution that creates robust backlog conversion coupled with strong book-to-bill performance.

I am pleased to report we grew our net service revenues by approximately 23% during both the fourth quarter and the full year 2014. We continue to gain momentum in our business development activities growing net new business awards by double digits to $316.3 million for the fourth quarter and $949.8 million for the full year 2014.

Our resulting book-to-bill ratio was 1.5 for the fourth quarter and 1.2 for the full year in line with our long-term targets. Due to the nature of our business and awards, we continue to believe that this metric is more meaningful when viewed over the longer term and in conjunction with backlog coverage.

Our backlog remains strong at $1.6 billion as of December 31, 2014 up nearly 7% for the year. The growth for the full year in both our net awards and backlog was achieved despite a large cancellation in the second quarter which impacted net new business awards for 2014 by $85 million and year-over-year backlog growth by $132 million.

Second, during the first half of 2014, we completed our acquisition and integration of MEK Consulting which we believe represents a key strategic expansion of our global footprint in Greece, Turkey, and the Middle East and North Africa or MENA Region.

We continue to expand our diversified and loyal customer base of over 300 clients winning awards with 58 new customers while 92% of our new business awards were from repeat customers. This highlights our success in delivering high quality work for our clients allowing us to continue expanding existing relationships.

As an example of the importance of new customer wins, we executed a major alliance agreement with a large European pharma company in 2013 with limited initial awards and have grown that relationship into one of our top five customers in our backlog at the end of 2014.

We also continue to have a very diverse customer base. Specifically our top five customers accounted for only 37% of our revenue in 2014 with three of these customers repeating as top five customers from 2013.

Our therapeutic focus continues to resonate with both existing and new customers particularly in areas where clinical trials are highly complex such as CNS, Oncology and other complex diseases. Our net service revenue for these complex areas collectively grew by 26% in 2014.

In addition, these areas represented approximately 73% of our backlog as of December 31, 2014. We believe this demonstrates the effectiveness of our therapeutically focused project teams which extend down to the CRA level coupled with the therapeutic expertise of our business leaders.

Based on industry data, these complex areas represent over 55% of the Phase III drugs under development which we believe positions INC Research well for continued growth. Operationally, we continue to deliver high quality customer service through our proprietary Trusted Process whereby we standardize trial methodologies increasing the predictability of our delivery and reducing operational risk for our customers.

As part of our operating philosophy, we have developed industry-leading relationships with principle investigators and clinical research sites as evidenced by our ranking as the top CRO in the 2013 CenterWatch Global Investigative Site Relationship Survey.

In addition, we continue to strength our relationships with investigative sites through amongst other initiatives our collaboration with the Society of Clinical Research sites where we are a global impact partner, their highest level of membership.

During 2014, we expanded our total employee base from approximately 4,900 staff at the beginning of the year to 5,600 staff at the end of the year to support our global delivery for our customers, while continuing to reduce our employee turnover rate. We have continued to broaden our capabilities globally by expanding our presence in important markets like Japan.

On behalf of the board and the executive team, I'd like to take a moment to thank the 5,600 employees at INC Research who have consistently delivered best-in-class service for our customers enabling a successful 2014.

We ended the last part of 2014 with the completion of our initial public offering and the refinancing of our debt. We believe our new capital structure gives us significant flexibility to execute our ongoing growth strategies and to take advantage of diverse market opportunities.

From an overall market perspective, we continue to be encouraged by the underlying trends driving growth in our addressable market. Recent market studies continue to estimate that the market for CRO services for Phase II to Phase IV clinical development is expected to grow in the high single digits over the next three to five years.

We believe this growth will be particularly strong amongst the top CROs and we remain optimistic about our ability to grow our business at above market rates. Going into 2015 we remain focused on the delivery of both our operating and financial results. As we recently announced, we have evolved our organizational structure to continue strengthening our therapeutic focus and delivery of high quality services to enable future growth.

As part of this evolution, Dr. Michael Gibertini has been promoted to President Clinical Development with the responsibility for leading our global therapeutic teams. And Alistair Macdonald has been promoted to President and Chief Operating Officer with the responsibility for leading our global operations and alliance development efforts.

We look forward to the positive impact of their expanded leadership roles. Let me now turn it over to Greg Rush for more detailed comments on our financials. Greg?

Thank you, Jamie and good morning everyone. I'd like to start by making some additional comments regarding our financial performance highlighting some of the key metrics on page three which will present you with a more detailed margin view on page four.

Please note that we are presenting our key metrics on an adjusted or non-GAAP basis which excludes the impact of items which we believe are not representative of our core operations. Please note that in addition to the amounts excluded from our operating results in our Form S1, we have excluded foreign currency gains and losses recorded in other income principally associated with gains on intercompany balances along with an estimated $9 million of revenue from unusual change order activity recorded during the second and third quarters of 2014.

For clarity, we have included detailed historical quarterly and annual reconciliations as these adjusted metrics and the appendix of our slide deck showing irrelevant adjustments to their GAAP equivalence. As Jamie highlighted on the year-over-year basis, we grew our net new business awards by 11% during the fourth quarter to $316.3 million and by 17% for the full year to $949.8 million.

This resulted in a book-to-bill ratio for the fourth quarter of 1.5 and 1.2 for the full year. Even though we have a very strong book-to-bill for this quarter, book-to-bill is best viewed on the long term as it is not necessarily a good indicator for short term revenue growth.

For your reference on page 11 of the Appendix we have include our historical book-to-bill ratio on both a quarterly and trailing 12-month basis for the last two years. Our strong backlog coverage at the end of 2013 growth and net awards and long-term book-to-bill ratio of 1.2 translated into the growth of 22.6% in our net service revenue to $213.7 million in the fourth quarter 2014 from $174.4 million for the fourth quarter of 2013.

For the full year 2014, adjusted net service revenue grew by 22.7% or $148.3 million from $652.4 million for 2013 to $800.7 million for 2014. This growth excludes the impact of an estimated $9 million of unusual change order activity occurring in the second and third quarters of 2014 which we do not believe is representative of normalized operations.

Our revenue growth during the fourth quarter and full year 2014 faced a headwind from the strengthening US dollar which negatively impacted our revenue growth by $4.7 million for the fourth quarter and $2.2 million for the full year. Our year-over-year revenue growth was primarily driven by continued strong awards over the last 18 months along with a lower cancellation rate.

The growth in our fourth quarter revenue is particularly strong in the CNS, Oncology and other complex therapeutic areas as well as growth in revenue from a strategic FSP relationship. Turning to page five, I'd like to highlight the diversity of our revenue.

During 2014 and 2013, 43% of our revenue is from small to mid-size biopharmaceutical companies and 57% from large biopharmaceutical companies. As Jamie pointed out, we have a very diverse customer base with our top five customers comprising only 37% of our revenue from 2014, up slightly from 34% in 2013.

I'd also like to point out that two of the top five customers in 2014 were not in the top five in 2013. With the composition of our top five customers continually changing and 92% of our net new business awards coming from repeat customers, we continue to demonstrate our ability to grow relationships with our existing customers through high quality delivery and therapeutic focus.

On page six, we have provided historical trending of our adjusted gross margin, adjusted income from operations and adjusted SG&A expense. As this slide indicates, we have improved our margins throughout these periods, effectively managed pricing and expenses, and executed on delivery for our customers while holding SG&A expenses flat as a percentage of revenue.

Turning to the cost side of our P&L, direct costs increased from $111.4 million for the fourth quarter of 2013 to $133.3 million for the fourth quarter of 2014 and gross margin expanded from 36.1% to 37.6%. For the full year, direct cost increased from $431.2 million in 2013 to $512.8 million in 2014 with margin expanding from 33.9% to 36%.

As we discussed on our road show, we expect to continue to generating modest improvements in our cost structure over the long term driven by further efficiencies gained from better leveraging our facilities and information technology infrastructure.

Further, due to the fixed nature of many of our costs in the short term, we expect our gross margin to vary from quarter to quarter. SG&A expenses were somewhat elevated during 2014 increasing from $33.1 million or 19% of net service revenue in the fourth quarter of 2013 to $40 million or 18.7% of net service revenue in the fourth quarter of 2014.

SG&A expenses are typically higher during the fourth quarter of each year as we incur expenses associated with several sales and marketing related activities that are seasonal in nature and vary from quarter to quarter.

During the fourth quarter of 2014, we also saw an increase in incentive compensation associated with our performance exceeding previous expectations and incurred $1.5 million in costs associated with our implementation and testing of Sox controls in other public company-related costs.

For the full year, SG&A expense increased from $115.7 million in 2013 to $142.7 million in 2014 while remaining relatively flat as a percentage of net service revenue at 17.7% and 17.8% in 2013 and 2014 respectively.

Although we expect to continuing gaining leverage in our SG&A costs such that these costs grow at a rate lower than revenues over the longer term, our ability to gain efficiencies during 2015 will be partially offset by approximately $3 million to $5 million of incremental new costs associated with being a public company.

Our strong revenue growth, operational execution and our ability to leverage our SG&A infrastructure resulted in adjusted income from operation increasing 43.7% and $24.6 million for the fourth quarter 2013 to $35.3 million for the current quarter with the associated margin increasing from 14.1% to 16.5%.

Adjusted income from operations grew by 43.2% for the full year from $86.3 million in 2013 to $123.7 million for the current year; the related margin percentage improving from 13.2% in 2013 to 15.4% in 2014. Similarly, adjusted EBITDA grew by 35.2% for the quarter to $40.3 million for the fourth quarter 2014 and by 37.7% to $145.3 million for the full year 2014.

Adjusted EBITDA margins improved to 18.9% for the fourth quarter of 2014 and 18.1% for the full year 2014. Adjusted net income increased to $15.2 million for the fourth quarter of 2014 from $5.3 million for the fourth quarter of 2013.

Adjusted net income for the full year 2014 increased to $44.6 million from $16.3 million in 2013. Adjusted earnings per share was $0.26 for the fourth quarter of 2014 compared to $0.10 for the fourth quarter 2013. For the full year of 2014, we earned $0.83 per share compared to $0.31 per share for 2013.

Fully diluted weighted average shares outstanding used in calculating adjusted net income per share were 53.9 million and 58.8 million for the full year and three-month ended December 31, 2014 respectively. Included in our diluted share count for the full year and fourth quarter of 2014 were .6 million and 1.3 million shares respectively related to the dilution from stock options. At December 31, 2014, the outstanding share count was $61.2 million.

The overall impact of foreign exchange on our adjusted net income was a benefit of $1.4 million for the fourth quarter as the reduction in our total cost more than offset the negative impact to revenue. Similarly, to the full year 2014, the overall net impact to adjusted net income was a benefit of $2.3 million.

Page 7 provides some key metrics demonstrating our improving cash flows and leverage position. Our cash flow from operation was $131.4 million for 2014 as compared to $37.3 million for 2013. The increase is driven by our growth and revenue and margin improvements highlighted previously coupled with a disciplined approach to managing our working capital.

We ended the fourth quarter of 2014 with $126.5 million in unrestricted cash, up from $29.5 million from the end of 2013. In conjunction with our IPO, we refinanced our existing debt replacing our credit facility and redeeming our $300 million 11.5% senior notes with a combination of proceeds from our IPO and our new $425 million term loan as well as cash from our balance sheet.

In addition to reducing our net leverage ratio to approximately 2.1X as of December 31, 2014, we expect our new capital structure to result in a reduction of our annual interest expense by approximately $30 million. We will continue to look for ways to optimize our capital structure and to maximize available investment opportunities.

We expect to continue generating free cash flow and as discussed on our road show, we plan to use excess operating cash to pay down debt unless we find more compelling alternatives to efficiently generate returns for our shareholders.

On page 7, we provide our net DSO. As you can see, we continue to report overall strong performance in our customer portfolio with our net DSO of .3 which includes the impact of some customer deposits and other prepayments.

While we are pleased with this performance, over time we expect that our DSO will return to more normalized levels in the low teens. On page 13 and 14 of the Appendix, we have provided charts of both our overall DSO as well as DSO associated only with our net service revenue i.e., excluding reimbursable out-of-pocket expenses.

To provide a more in depth view of our backlog, page 8 includes a roll forward of our backlog for the last four quarters in addition to summarizing other key metrics we believe are important to understanding our expectations for future growth.

On the roll forward of our backlog, I will like to point out the net impact of foreign exchange which was a reduction of $44.5 million during 2014. The pie chart on the right on page 8 illustrates the concentration of our backlog, with 73% in the areas of CNS, oncology and other complex diseases.

We believe these represent the areas where we excel due to both our therapeutic expertise and the rigor of our Trusted Process. We also believe that these areas include some of the largest and fastest growth therapeutic areas in the broader market.

With regard to a leading indicator of future revenue growth, we believe one of the most important indicators is backlog coverage which is presented in the bar chart in the bottom left quadrant of page 8.

Backlog coverage represents the portion of the ensuing fiscal year's revenue that is in our backlog based on our current project level forecasts. While I will provide more detailed guidance on several financial metrics in a moment, as you can see on this chart, our coverage ratio remains strong with 89.4% of our expected 2015 revenue included in our backlog as of December 31, 2014.

This is based upon the midpoint of our guidance range. This compared to backlog coverage of 82.8% and 85.1% for 2013 and 2012 as of the beginning of each of their respective years. Lastly, in the bottom right of page 8, we provide a backlog burn rate. We believe our strong operational execution coupled with our conservative and disciplined approach to recording awards and backlog drives our industry leading quarterly burn rate which was ranging between 12% and 14% in recent quarters and was 14.2% for the fourth quarter of 2014.

On page 9, we are providing our guidance for key metrics for the full year 2015. This guidance takes into account a number of factors including current and foreign currency exchange rates and our expected tax rates. We expect our net service revenue to be between $870 million and $900 million representing a growth rate of 8.7% to 12.4%.

This takes into account a foreign currency headwind estimated at over $32 million, a negative impact of approximately 400 basis points. Accordingly, our constant currency growth rate is expected to be between 12.5% and 16%. We are forecasting adjusted EBITDA to range from $159 million to $169 million growing at 9.4% to 16.3%.

In addition, we expected our adjusted net income to range from $75 million to $82 million growing at 68% to 83.7%. This results in adjusted earnings per share of $1.19 to $1.29. Lastly, we expect to earn $1.00 to $1.17 per share on a GAAP basis. Included in our GAAP earnings per share guidance is an estimated $0.04 per share impact from stock based compensation.

Given our projected mix of revenue and expenses by currency, foreign currency headwind on revenue that I mentioned earlier is not expected to have a significant impact on our earnings for the year. While we are not providing quarterly guidance, based on our current phasing of our backlog for 2014 and the continued strengthening of the US dollar, we expected revenue in the first quarter to be flat to a slight decline sequentially from the fourth quarter in 2014.

Despite the foreign currency headwind, we do expect our first quarter net service revenue to grow between 12% and 15% on a year-over-year basis. This completes our prepared remarks and we'd be happy to answer any questions.

Thank you. (Operator instructions). Our first question is from Robert Jones of Goldman Sachs, you may begin.

Thanks for the questions and nice start to your public life. Really strong bookings in the quarter you know. Anything you guys would call out as far as the source of the bookings strength either from a client or therapeutic category perspective and I guess along those lines you know in the quarter was there any major client renewals that you would call out?

Hi Bob, it's Jamie. No, I think it was a pretty solid quarter all around. I think we've seen fairly good proposal volume earlier in the year and it was really conversion of some of those opportunities.

Nothing particularly unique. I think we had one customer that total awards in the quarter were over $50 million but it was across a diverse group of studies with different compounds and no major renewals in the fourth quarter. I think the one you're probably alluding to is probably sometime going to be quarter two we think.

Got it and then I guess, Greg just looking at your guidance, it seems like you can kind of get towards the midpoint of both EBITDA and EPS with about 50 to 60 basis point of margin expansion. Could you maybe just talk about the sources of that leverage and are there opportunities that you see at the further leverage of the business relative your initial 2015 guidance?

Yes, basically a lot of that will be coming from our facilities we talked about, on the road show. We should be able to leverage that. In addition, obviously with our expanding global presence and higher revenue base even in the therapeutic areas you have a layer of management overhead that we're able to leverage so that that coupled with our SG&A leverage -- the SG&A is facing a little bit of a headwind in 2015.

My guess is that we'll basically hold SG&A constant relative to where we were in 2014 for the full year. That will vary quarter by quarter just based on the revenue base but we feel good about where we're starting and obviously some upside in 2015 if we can deliver.

Got it. Thanks so much.

Thank you. Our next question is from Jeff Balen of Credit Suisse. You may begin.

Morning and thanks for the questions. Greg, it looks as though the backlog coverage for 2015 is higher than what the company experienced over the last two years. Is this just a company taking a somewhat conservative initial view towards 2015 revenues or is there anything FX related or Astellas related that might be impacting that?

I do think on the surface though appearing to be conservative, I'll point out a couple of things. We think it's overall a balance guidance. Our guidance is based on FX rates as of yesterday. If you look where FX has moved since December 31, we've lost about $15 million of revenue in our guidance so obviously that backlog coverage is strong but we're going to lose $15 million just from December 31.

We take that into consideration. The sales relationship negotiation is going great but at the same time, we wanted to just set a balance of whether there's risk for that. On the upside, our cancellation rate was really good amongst in our backlog in 2014 and we obviously could have some upside to this forecast if the cancellation rate repeats in 2015 what we did in 2014.

We model actually a slightly higher cancellation rate just to be conservative.

Got it. Thanks for all that color. And a question for Jamie, given the strong bookings performance by yourselves and some of the peers as well as maybe some changes in the competitive landscape with a few IPOs, a CRO being acquired by a clinical lab, I'm just curious if you're seeing anything shifting or changing in the pricing environment; if there's anything worth calling out across client groups there?

No, I think pricing is being reasonably consistent. I think as we talked about on the road show, I think there is pretty good discipline amongst the larger CROs. I think they have a pretty good perspective.

I think some of the smaller CROs are a little bit more maybe aggressive and opportunistic on individual opportunities just to make sure they're filling up their backlog. But generally, across this sort of larger CRO competitive set, it does seem to be fairly well disciplined.

I think you've seen that in the margin expansion across all the CROs as well. I think if pricing was suffering, you'd probably see that sort of pop up in either immediate margin or in their guidance for 2015.

Great, thanks for the questions.

Thank you. Our next question is from John Kreger of William Blair, you may begin.

Hi, thanks very much. Greg, could you give us a sense of what the FX impact was on the bottom line in the quarter and perhaps how it impacted your 2015 guidance?

Yes and for the quarter we got a $1.4 million benefit from FX mainly from the pound. We have a very low revenue base in 2014 and a very large expense base so the net impact on our operations was 1.4 for the quarter. For the full year, it was 2.3 so obviously the bulk of that benefit came through in the fourth quarter.

One think I will tell you for 2015, we talked about the headwind of you know $30-plus million in the revenue line, when we were modeling FX at the expense line, we have actually had been increasing our level of pound denominated revenue so that benefit that you could possibly see is shrinking.

So for the most part, we modeled it at break even on 2015 guidance and our scenario at the bottom end of our range where FX actually hurts us depending on the mix of the revenue and top end of the guidance can help us by a penny but you know our midpoint is assuming to break even.

Great, that's very helpful, thank you. The concentration stats that you gave us was helpful. If you look at your backlog 12 months from now, do you think those concentration stats will change much?

With regard to the CNS, oncology, is that what you're referring to; those concentrations?

No, I'm more referring to your top two and top five client coverage or --

Got it. Yes, I don't see a significant change amongst the top two. I will tell you that our top five in our backlog today is different than our top five customers in revenue in '14 and again, that's more of a story about the pipeline that the individual customer has and you know our diverse customer base.

Each customer we have the ability to in a particular have a very strong year from that customer and when their pipeline builds up and we get that pipeline awarded to us, it results in a little bit of a changeover in our top five and I do expect we'll probably have a slightly different mix of top five revenue customers in 2015 than we did even in 2014.

Very helpful, thanks; one last one. Given the strong bookings in the fourth quarter, what sort of hiring are you assuming in 2015 and should we assume the trend is about the same as your topline guidance?

I would tell you that one of the opportunities that we landed in the fourth quarter has the potential to be a much bigger relationship than even the awards in Q4. Watching that one carefully and if that one continues to evolve, we may do some ramp up in hiring in the first half to be able to meet their backlog.

Yes, I think hiring rates will be obviously less than revenue growth rates. We need that to get the margin expansion. I think we've got a fairly successful recruitment process and given the line of sight we have on backlog, we do expect some hiring. Maybe a little ahead of the curve just to make sure we've got staff onboarded and properly assimilated before placing them on project work.

But that's just the natural management of headcount relative to the backlog in revenue.

That's great, thanks very much.

Thank you. Our next question is from Eric Coldwell of Robert W. Baird. You may begin.

Thanks, actually John hit on a couple of my questions so I'll be brief. First one is regarding the -- well we already know about this of course but the larger cancellation earlier in 2014 with the impact on net awards and backlog growth. At one point we were under the impression that perhaps that client could come back with a refresh study around that compound or additional work.

I'm curious if you view that compound as completely gone at this point or if you think there's a chance that that molecule could come back into service activity. And then my second question is and I apologize if I missed this in the slide deck. I was hoping we could just get an update on your currency mix by revenue and also your total operating expenses outside of US dollars? Thanks so much.

Eric, it's Jamie. I'll take the first part of the question. Yes, that customer remains an important customer. It was actually a study specific cancellation so that compound itself is still active. It was a particular risk in a separate patient population that caused that initial cancellation in quarter two.

Other work continues with that study. In the second half of the year we won another large program from that same customer in a different therapeutic area so that's progressing as well and I'm actually going around to see the customer tomorrow so we'll be talking about some other opportunities as well.

So that relationship's good. In terms of whether that study comes back, it's possible but they would need some flexibility from a regulatory standpoint to de-risk the likelihood of an early termination on that study so that discussion we believe is still ongoing with the agency.

I'll probably get a little bit of a refresh on that tomorrow.

Got it; that's helpful.

Eric, on your currency question, about 70%, a little over of our use denominated in the dollar, the pound is just under 5% but I expect that to almost double in 2015. The euro is about 20% and I expect that to decline slightly in 2015 and then other currencies make up the difference and they're all under 5% collectively and individually probably under 1% each.

And total - Greg, that's very helpful. Total OPEX that's not denominated in US dollars.

About 58, 60% of our OPEX has been US dollars and then the next highest is the pound which is over 10% and then the euro is about 10% too.

And then I think we have the interest expenses in dollars as well so that sort of bridges between the OPEX percentages and I think like the natural hedge of the revenue line.

Yes, perfect; OK. Guys, most of my questions have already been touched on but thanks very much. That was a good update.

Thank you, Eric.

Thank you. Our next question is from Tim Evans of Wells Fargo Securities. You may begin.

Hi, thank you. Can you just remind us what has caused your backlog burn rate to rise? You had a nice little chart of that; the trend there in the slide deck and just remind us what has created that trend and then it does look like your guidance assumes the backlog burn rate steps down a little bit in 2015 and then what's causing that as well?

I'll maybe take the backlog burn rate and this is more from an operational standpoint. Greg might give you more of a financial perspective. We also had a pretty solid new business back in 2013 and one of those studies are now well through the startup phase so that we have country level approvals and sites initiated so we're into if you like the main component of the study which is patient enrollment, monitoring managing data.

And that just leads to more efficient conversion of that backlog. I think anytime you have a lot of studies in startup that can just slow down your burn rate because you're only in the initial components of that study so we feel fairly good about the burn rate.

It may move within the sort of band that you see on slide 8 of the slide deck but any more than that sort of 11% to 14% range is probably fairly efficient, healthy conversion. If it starts to drop off, it probably to us, it probably suggests that we're really not getting studies up quite as quickly as we had hoped or forecast.

Also just from a pure financial [perspective] that we talked about on the road show, we do think we have a very conservative mindset as to what goes into the backlog in the first place so that probably helps keep our backlog burn rate higher than maybe some of our competitors.

In addition, you know just pure mathematics. Some of it's just timing. I mean the Astellas relationship was originally awarded back in 2012 I believe and it's well up and running, et cetera so you're burning that backlog and you're not putting anything new in from a new awards perspective so you have constant pulling down of the backlog and obviously this will be a refresh in 2015 as now we renew that relationship in whatever form it takes and timing.

Thank you guys.

Thanks, Tim.

(Operator instructions). Our next question is from Donald Hooker of KeyBanc. You may begin.

Good morning. Yes, just maybe a bigger picture question on the margins. Obviously we're very impressive. When you look out over the next few years, do you have a particular vision as to how high margins could be say in three to five years structurally for a late stage CRO?

Yes, I will take it two parts. One, you know the fourth quarter did have -- margins were a little higher than what we were forecasting in 2015. We did get because of the FX. We got almost a point on the gross margin; about a half point I think to be exact and so that did help us in the fourth quarter.

And we're very proud of the margins. If you look at what we've done each year, we've increased our EBITDA margin. We more think of it as the operating level versus just SG&A or as direct costs that can vary quarter by quarter.

Long term EBITDA margins we are targeting 20% and we believe with our cost structure and our need to gain market share and leveraging SG&A, we can get there over the long term.

OK, and maybe I was going to ask sort of a vanilla question because most of the other questions that I was thinking of were asked but maybe did you all mention anything about your sort of your outlook on M&A in terms of sort of what types of assets you might be looking at or how you're thinking about bolting on new capabilities over time?

Yes, we like to focus on clinical development. I think we're getting benefit from that both operationally and actually in the market. I think customers appreciate that the whole organization is focused on clinical trials and maybe not some of the adjacent services space.

Yes, the possibility of some tuck-ins, I think that's definitely a possibility. We have very good geographic coverage at this point in time but there still may be assets out there that are more of a clinical operations asset that would be in good augmentation to our existing footprint.

So potentially Asia, I think is something that we will continue to look at and possibility to augment our Eastern Europe and Middle East capabilities. Whether we do that through M&A or organically, obviously that'll be a decision we get to as we go through that evaluation.

I mean in 2014 we made the MEK acquisition which helped us with Greece, Turkey, Lebanon, Egypt, but we couldn't find a necessarily good asset in Japan for our needs so we built up that operation organically and that's been pretty successful.

We have two offices in Japan now and just taken additional space in Tokyo to grow that team.

It seems like you're less interested in informatics and technologies, is that fair?

Not less interested. I think it's an important part of the business but there are a lot of other providers out there who have to use the term, "big data assets" and we have some very good relationships and some good partnerships with the likes of Medi Data and Oracle and SAS and CiteLine and Drug Dev and others.

And I don't think there are proprietary assets that we could acquire and own outright that will be sustainable over the long term and therefore we're better finding partners whose assets are fit for purpose relative to our needs.

Thank you.

Thank you. I'm showing no further questions at this time. I will like to turn the conference back over to Jamie Macdonald for closing remarks.

Thank you and thank you ladies and gentlemen for your attendance today and for your interest and investment in our company. We look forward to reporting back to you on our next call with further progress made during the first quarter of 2015. Have a great day.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day.