Medpace - Earnings Call - Q4 2020

Transcript

Speaker 0

Good day, ladies and gentlemen, and welcome to the Medpace Fourth Quarter and Full Year twenty twenty Earnings Conference 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 followed at that time. As a reminder, this call may be recorded. I would now like to introduce the host for today's conference, Kevin Brady, Medpace's Executive Director of Finance.

You may begin.

Speaker 1

Good morning, and thank you for joining Medpace's fourth quarter twenty twenty earnings conference call. Also on the call today is our President and CEO, August Trundle and our CFO and COO of Laboratory Operations, Jesse Geiger. Before we begin, I would like to remind you that our remarks and responses to your questions during this conference teleconference may include forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve inherent assumptions with known and unknown risks and uncertainties as well as other important factors that could cause actual results to differ materially from our current expectations. These factors, including the ongoing impact of COVID-nineteen on our business, are discussed in our Form 10 ks and other filings with the SEC.

Please note that we assume no obligation to update forward looking statements even if estimates change. Accordingly, you should not rely on any of today's forward looking statements as representing our views as of any date after today. During this call, we will also be referring to certain non GAAP financial measures. These non GAAP measures are not superior to or a replacement for the comparable GAAP measures, but we believe these measures help investors gain a more complete understanding of results. A reconciliation of such non GAAP financial measures to the most directly comparable GAAP measures is available in the earnings press release and earnings call presentation slides provided in connection with today's call.

The slides are available in the Investor Relations section of our website at investor.medpace.com. With that, I would now like to turn the call over to Jesse Geiger to discuss our financial results and 2021 guidance.

Speaker 2

Thank you, Kevin. Good morning, everyone. Our net new business awards entering backlog in the fourth quarter increased 27.6% from the prior year to $358,600,000 resulting in a 1.38 net book to bill. For the full year 2020, net new business awards were $1,200,000,000 an increase of 7.4%, and ending backlog as of December 31 was $1,500,000,000 an increase of 20.1% from the prior year. Revenue was $259,700,000 in the 2020.

This represents a year over year increase of 13% on a reported basis and 12.2% on a constant currency organic basis. Full year 2020 revenue was $925,900,000 which represents a 7.5% increase from 2019 or 7.3% on a constant currency organic basis. EBITDA of $60,200,000 increased 46.3 compared to $41,100,000 in the 2019. Full year 2020 EBITDA increased 25.5% to $187,800,000 compared to $149,600,000 in 2019. On a constant currency basis, fourth quarter and full year EBITDA increased 46.424.6% respectively compared to the prior year.

EBITDA margin for the fourth quarter was 23.2% compared to 17.9% in the prior year period. For the full year 2020 EBITDA margin was 20.3% compared to 17.4% in 2019. The higher margin was primarily attributable to lower reimbursed out of pocket expenses and employee related expenses as a percentage of revenue. In the fourth quarter twenty twenty, net income was $50,900,000 compared to net income of $29,800,000 in the prior year period. For the full year 2020, net income was $145,400,000 compared to 100,400,000 in 2019.

Net income growth was primarily driven by higher EBITDA as well as lower amortization, effective tax rate and interest expense. Net income per diluted share for the quarter was $1.35 compared to $0.78 in the prior year period. For the full year 2020, net income per diluted share was $3.84 compared to net income per diluted share of $2.67 in 2019. Regarding customer concentration, our top five and top 10 customers represented roughly 1725%, respectively, of our 2020 revenue. In the fourth quarter, we generated $105,500,000 in cash flow from operating activities.

And our net day sales outstanding decreased compared to the third quarter from negative twenty seven point four days to negative thirty three point six days. During the quarter, we repurchased approximately 411,000 shares at an average price of $115.42 for a total of $47,400,000 And we have $102,600,000 remaining under our current share repurchase authorization. We ended the fourth quarter with $277,800,000 of cash, no outstanding debt and $50,000,000 of undrawn capacity on our revolving line of credit. Moving now to our guidance for 2021. We are now forecasting total revenue in the range of $1,075,000,000 to $1,175,000,000 for the full year 2021, representing growth of 16.1% to 26.9% over 2020 total revenue of 925,900,000.0 Our 2021 EBITDA is expected in the range of $2.00 $5,000,000 to $225,000,000 representing growth of 9.2% to 19.8% compared to EBITDA of 187,800,000 in 2020.

Speaker 3

We anticipate our 2020 effective tax rate to be in

Speaker 2

the range of 15% to 16%. We have assumed 37,800,000.0 fully diluted shares for 2021, and there are no share repurchases in our guidance. We forecast 2021 net income in the range of 154,500,000.0 to $170,500,000 and earnings per diluted share in the range of $4.08 to $4.5 With that, I will turn the call back over to the operator so we can take your questions.

Speaker 0

Thank you. And your first question is from the line of Dave Windley of Jefferies.

Speaker 4

Hi, good morning. Thanks for taking my questions. I wanted to understand

Speaker 3

a

Speaker 4

little bit better your expectations, Jesse, around kind of backlog conversion? I know in the slide deck you give the percentage of the or the portion of your backlog that you expect to convert over the next twelve months. But also looking at your conversion rate as it has recovered from the COVID impact in 2Q of 'twenty, how are you thinking about backlog conversion? And maybe just help us a little bit with the cadence of revenue as it progresses through 'twenty one?

Speaker 5

Go ahead, Jason.

Speaker 2

Yes. Thanks, Dave. As it relates to revenue cadence, we are anticipating revenue to increase as we move through the year. So do expect revenue to be potentially slightly back end weighted, second half versus first half of the year. But as you know, quarter to quarter, a number of different things can cause some volatility in the quarter to quarter revenue.

So that's always a factor there. On the burn rate, it did tick up in the fourth quarter. You know, the average for 2020 was in the '17 I think 17.3%. So how that burn rate continues through the next full quarter really depends on the strength of the business environment. But I think kind of a 16% to 18% range is a reasonable expectation.

Speaker 4

So am I right to interpret that from what you just said that the burn rate comes down a little bit sequentially in the first quarter or maybe more than a little bit if 16% is the lower end of your range. I mean that's a couple of percentage points lower. Does it drop kind of within that range in the first quarter or the first half and then scale back up over the course of the year? Is that how you're thinking about that?

Speaker 2

Not necessarily. I mean, think it could be up or down in any sequentially, any quarter to quarter as we go through these next couple of quarters. It really depends on the size of the awards, obviously, to the revenue sequence. But yes, I think I would not expect it to necessarily stay at or above Q4 levels necessarily.

Speaker 4

Okay. And then a follow-up on the cost side. August, I hear your voice in there. Wasn't sure if you're on the call or not. But you've talked in the past about 20% top line growth being kind of the upper bound of a comfortable level for Medpace, obviously now guiding higher than that.

Wondering if there's anything we should know in there about relative pass through versus direct service fee. But I'm thinking more in terms of your staffing levels and ability to meet that level of growth. I noted that your headcount growth in 2020 was about 3%, so slower than your revenue growth for 2020. So maybe you could talk about where you currently stand as it relates to the billable headcount to get those projects done.

Speaker 5

Yeah. I I I think yeah. Hi, Dave. I I think we're in pretty good shape. You know, we went into 2020 with considerable excess amount of staff because we're expecting growth.

We're actually hoping for growth in above 20% in 2020. That didn't happen, so we didn't need all that staff. And so we in fact, we probably didn't need to hire anybody in in 2020. We we really didn't despite the ramp in in revenues later in the year. So, you know, we are we always are hiring ahead.

And, you know, I think we now are you know, as you saw in the fourth quarter, we are now starting to add headcount, but we were kinda using slack capacity till then. You're right. The revenue growth will be a little bit skewed potentially towards, you know, pass throughs as investigative site payments increase, ramp a little bit faster than direct costs during the year. That is part of it. Not all of it is revenue that requires scaled people.

But we will be scaling along with revenue through this year now in anticipation of continued strong growth into the future. And remember, I did say, you know, kind of a a 20% is a is a is a good target, and it's difficult to grow a lot, you know, more than that on a on a multiple year basis. Of course, any given year, you know, we've we've built up quite a bit of slack capacity going into it, and it's a matter of, keeping up with that over time. So I think we're in good shape now. We'll see how things pan out towards 2022.

But we do anticipate we'll be hiring pretty much in line with revenue,

Speaker 2

at

Speaker 5

least direct revenue gain of growth over this year.

Speaker 4

Got it. Thank you.

Speaker 0

Thank you. Your next question is from the line of Donald Hooker of KeyBanc.

Speaker 3

Great. Good morning. Thank you for taking my questions. You guys recently announced a collaboration partnership with, I guess, a consulting firm called Green Leaf Health, I believe, a week or two ago. And I I just would love to hear kind of maybe you you you press release that.

I just wanted to hear maybe kind of what that regulatory affairs consulting firm gives to Medpace that you didn't already have and why you chose to partner there instead of build it yourself as traditionally as the Medpace way?

Speaker 5

Yeah. Hi. That that's really a a a a partnership because of the unique staff that they have there. They have a number of ex FDA, relatively recent ex FDA senior individuals that bring a very strong important view into regulations and how they're evolving. I think as we scale our regulatory group, have I think we're never going to hire those of individuals.

You know, I think that And they are located in the Washington, you know, DC area near the, you know, where FDA is located. And so I think they offer unique capabilities that we don't generally You know, we don't do consulting. You know, we don't do, you know, regulatory consulting by itself. We do have, you know, good regulatory individuals for, you know, trial execution and and, developing protocols, etcetera. But generally, evolving trends at FDA, you're gonna want individuals who have recent experience there and real insight.

And that that's a opportunity for us to, you know, tap in tap into that. And as I said, we don't generally do consulting per se as a, you know, as a standalone. We don't do. So, you know, we we the partnership is, you know, we can bring them clients that can benefit from their expertise and they can help us be, you know, top of our game in terms of, you know, knowing expectations in evolving fields, you know, of regulatory affairs. So it's, I think, a really good opportunity for us and a strong partnership, and I think we'll have real benefits on both sides.

Speaker 3

Sure. If you don't mind, maybe just as a follow-up to your comments there, you referenced sort of evolving trends in the regulatory area. There are a lot of evolving trends in the regulatory area, obviously. But are there particular examples or case studies where just to maybe talk or ties it a little bit better for us, kind of what they're gonna what what they're gonna give? I assume this is gonna help help you guys grow over time.

Yeah. There particular case go ahead. Sorry.

Speaker 5

Sure. Sure. No. It's it's across a a whole spectrum. But I, you know, I think a kind of a a little bit of a focus for us was, you know, sort of the the the changes towards

Speaker 2

limiting,

Speaker 5

you know, patient access, limited patient access and, you know, virtualization of trials and, you know, new technologies and their acceptability as endpoints for, you know, for trials and how that's viewed. So I think it's kind of played off of some of the changes that have been pushed, accelerated by the pandemic but are evolving trends in the industry overall. So that was kind of, you know, one of the starting places. But, you know, they have expertise across, you know, really a, you know, breadth of, you know, regulatory affairs.

Speaker 3

Sure. Maybe I'll just ask one other follow-up and I'll let other people jump on. The I don't think you commented. I just maybe get some clarity around free cash flow going into next year and kind of what a good CapEx and number should be so we can get to kind of our free cash flow. I don't think you mentioned that.

Know you guys had done some build outs in the headquarters and I was just thinking if we could get some thoughts around working capital and free cash flow working capital and CapEx to get to sort of some directionality around free cash flow next year would be helpful. Thanks.

Speaker 2

Yes. Thanks, Don. Let's see. So for CapEx, we're anticipating around $44,000,000 of capital expenditures in 2021. And then DSOs have continued to be favorable for us.

And so from a free cash flow conversion standpoint, we had pretty high conversion in the fourth quarter. It was 162% of EBITDA. For the full year, it was lower. It was 121%. As we think about going into 2021, we certainly like when the environment gives us that kind of cash flow conversion.

But as we think about our internal modeling, we do tend to model something less than that. But it would not be out of question to have, 100%, or, you know, high 90s percent, EBITDA to free cash flow conversion.

Speaker 3

Wow, that's great. Thanks so much. Be well.

Speaker 2

Thanks, Dustin.

Speaker 0

Your next question is from the line of Wright with Credit Suisse.

Speaker 6

Hi thanks. I just wanted an update on how underlying fundamentals are trending now whether it's RFP flow or site accessibility or study startups. Are things generally normalizing? What are you seeing kind of across the market as it stands today and kind of what you're anticipating as things potentially normalize hopefully over the course of this year? Thanks.

Speaker 5

Sure, Ann. Hi. I think from a site perspective and kind of operational challenges of the pandemic, I don't think anything's changed materially since September. So, you know, I I think q four and into into q one, things are are pretty consistent in terms of access, our use of remote monitoring, and and, you know, all the tools we put in place, you know, back early on in the pandemic. Things have not have not opened up.

I I don't see even a trend, towards improvement, in the past, four or five months. So, you know, I I so I do think that, you know, still is ahead of us. I I, you know, I certainly think we will get back to a, you know, somewhat closer to normal and, you know, later in the year, hopefully by a bad mid year. You know, I I think some of the tools we've put in place will, you know, potentially continue indefinitely. But I I do think we're still faced with the same challenges we had back in September and and dealing with them as well as we did.

I I think that, you know, what has changed is, I think, more and more, you know, companies moving forward despite the challenges and the the friction there. But, you know, we've worked effectively around those challenges. And I and I think programs are generally progressing pretty well. So I think a lot more clients are moving forward. So, hey, and I ask you question, you know, how is RFP flow and and all the rest of it?

I think that's I I think that is doing well. I I I think, you know, again, I don't think there's been changes in the last five months. I think it's been strong, you know, through the fourth quarter and, you know, continuing. We continue to see quite a bit of opportunities and programs moving forward.

Speaker 6

Okay, great. And then following up on hybrid virtual decentralized trials, how do you think about your competitive positioning there? And do you think that you do need to make stepped up investments around that arena at this point? I mean, you've clearly adapted well in this sort of environment, but, I'm curious in it, you know, how things are shifting in a post COVID world. Do you need to step up investments around that around that arena?

Thanks.

Speaker 5

Yeah. I I I don't think they'd be material investments from our, you know, financial perspective. But I, you know, I think we always are investing in technologies, you know, wearables, technologies for remote, you know, data review, etcetera. So, you know, kinda hybrid trials we we we we do. And I think we we are competitive.

I think we will continue to invest in the area as it evolves and as as we have in the past. I think virtual trials and and, you know, truly sightless trials and and, you know, things like that. I you know, I I I don't see that as a a a meaningful part of the marketplace in the, you know, in the in the in the foreseeable future for, you know, for where we operate. So I I, you know, I I we're not really investing significantly, there.

Speaker 6

Okay, great. Thank you so much.

Speaker 0

And your next question is from the line of Sandy Draper of Truist Security.

Speaker 7

Thanks very much. And I don't think this is a repeat question. I got on a little bit late and so I apologize for that. But maybe a follow-up to that last question August about when not really looking at when we get back to whatever the new normal is. But whenever that is, what do you expect to go back to normal and to change?

Obviously, you guys and a lot of the industry is adapting pretty darn well. But what do you think I guess both from the operational side goes changes? And then maybe Jesse from the financial perspective what changes? I mean maybe one obvious answer is people get back to travel and on planes and so your expenses have a lift. But just trying to think about when we do start to see the account the everything opening back up, what changes back?

Because you've made a lot of adaptations both from an operational and financial perspective. Thanks.

Speaker 5

Sure. Thanks, Andy. Yeah. I I think, you know, we we are still seeing more virtual access to sites than we would prefer, and I think that is most efficient in the in the, you know, the currently designed trials. And, know, so we we are still having limitations on, you know, direct site access that does cause some inefficiencies.

We are managing around it, but I would not But, know, there there is, you know, somewhat of a a backlog in some cases of, you know, review of some things that has to be done on-site. And, you know, so I do think that there will be a kind of

Speaker 4

a burst

Speaker 5

in, you know, travel needs, you know, two sites, etcetera. I think that's one thing. I think, you know, as we get back to normal, there will be more general travel in the business as you say, you know, some of our internal costs of, you know, collaboration among groups and teams within the company. And also, you know, visit to clients, I I think will happen again. I I think that, you know, I I I think the pandemic has provided an opportunity to see the the value of, collaboration electronically through other means.

And that's been better integrated into our routine team interaction with clients. And I think that will continue. So I think the level will not be, you know, I don't think things are gonna snap back to the way they were. I think we will continue to work, I think a bit more efficiently on that side. But, you know, certainly, you know, a number of those costs will come back and, you know, people will get traveling again, is big, you know, change I see.

And of course, look, think with that is gonna come, you know, better patient access to sites and hopefully in many therapeutic areas an increase in the recruitment rate, etcetera, which is also gonna drive additional needs to be on-site.

Speaker 7

Great, thanks so much, August.

Speaker 0

Thank you. And that does conclude the Q and A session. I'll turn the call back over to Kevin Brady for any closing remarks.

Speaker 1

Thank you for joining us on today's call and for your interest in Medpace. We look forward to speaking with you again in the first quarter twenty twenty one earnings call. Thanks and have a good day.

Speaker 0

Thank you. That does conclude today's conference call. You may now disconnect.