Good day, everyone, and welcome to the Medpace Second Quarter Earnings Conference Call. This call may be recorded. I would now like to introduce your host for today's conference call, Kevin Brady, Medpace's Executive Director of Finance. You may begin.

Good morning, and thank you for joining Medpace's Second Quarter 2020 Earnings Conference Call. Also on the call today is: our President and CEO, August Troendle; 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 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-19 on our business, are discussed in our Form 10-K 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 August Troendle.

Good day. I have a few comments to put our financial numbers in context. Q2 revenue was reduced by 15% to 20% below plan as a result of the pandemic disruptions. We believe future quarters will see a lesser impact and expect to get back on a more normalized growth path in 2021. Compared to pre-March 11 run rates, lab sample volumes continue to be depressed by approximately 20%. Physical monitoring visits are improving but remain about 20% to 30% below levels prior to March. Our second half margin is projected to be significantly above that of the recent past, driven to a large extent by an anticipated reduction in the expected rate of growth below the original plan. Heavy investment in hiring and training in advance to permit rapid organic growth has depressed our margin significantly over the past few years. Those growth costs will be significantly reduced in the second half of 2020. Starting in Q4 this year and continuing into 2021, we expect to ramp up hiring activity, which should bring 2021 margin back down as revenue accelerates. Although Q2 net new business awards recognized as backlog were down 9% compared to Q2 of 2019, this is a misleading measure of demand in the current environment. Many trials are on hold, awaiting a more stable healthcare environment prior to moving forward. Unlike our peers, we do not recognize an award even when under contract until the study starts recruiting patients. The demand environment is stronger than implied by our reported new business awards. COVID-19 studies represented 11% of new business awards in Q2 and 22% of total award notifications. The majority of these awards represent treatment studies. Jesse will now review our second quarter financial results.

Thank you, August, and good morning, everyone. Net new business awards entering backlog in the second quarter decreased 9% from the prior year to $254.1 million, resulting in a 1.24 net book-to-bill. Ending backlog as of June 30 was $1.3 billion, an increase of 14.6% from the prior year. Revenue of $205 million in the second quarter of 2020 represents a year-over-year decrease of 4.3% on a reported basis and 4.1% on a constant currency organic basis. EBITDA of $35 million decreased 12.9% compared to $40.2 million in the second quarter of 2019. On a constant currency basis, second quarter EBITDA decreased 15% compared to the prior year. EBITDA margin for the second quarter was 17.1% compared to 18.8% in the prior year period. The decrease was primarily attributable to higher employee-related costs, including severance, partially offset by lower reimbursed out-of-pocket expenses on lower revenue. In the second quarter of 2020, GAAP net income was $24.1 million compared to GAAP net income of $27.5 million in the prior year period. The net income decline was primarily driven by lower revenue and higher employee-related costs, including severance, partially offset by lower reimbursed out-of-pocket expenses and interest expense. GAAP net income per diluted share for the quarter was $0.64 compared to $0.73 in the prior year period. Regarding customer concentration, our top 5 and top 10 customers represent roughly 18% and 27%, respectively, of our total revenue for the first half of the year. In the second quarter, we generated $44.3 million in cash flow from operating activities, and our net days sales outstanding decreased compared to the first quarter from negative 21 days to negative 30.2 days. During the quarter, we repurchased approximately 110,000 shares at an average price of $68.65 for a total of $7.6 million, and we have $49.2 million remaining under our current share repurchase authorization. We ended the second quarter with $160.9 million of cash, no outstanding debt, and $50 million of undrawn capacity on our revolving line of credit. Moving now to our updated guidance for 2020. We now forecast total revenue in the range of $880 million to $920 million for the full year 2020, representing growth of 2.2% to 6.9% over 2019 total revenue of $861 million. Our 2020 EBITDA is expected in the range of $180 million to $190 million, representing growth of 20.3% to 27% compared to EBITDA of $149.6 million in 2019. We anticipate our 2020 effective tax rate to now be in the range of 15% to 16%. We have assumed 37.6 million fully diluted shares for 2020, and there are no additional stock repurchases in our guidance. We forecast 2020 GAAP net income in the range of $136 million to $144 million and GAAP earnings per diluted share in the range of $3.62 to $3.83.

Your first question comes from the line of Dave Windley from Jefferies.

I guess the question I wanted to get at that, August, you touched on is around the second half implied margin. Could you perhaps give us a few different perspectives on that? One, the drop that we saw in Q1 to Q2 on pass-through costs. Is that reflective of what we should expect in the second half? And then maybe more strategically, in terms of shutting off hiring in the short term, I guess, can you just give us a little bit more color on the magnitude of that? And what will be the triggers for you to turn that back on?

Sure. Regarding your question about margin, pass-through should speed up in the second half, which may slightly negatively affect our margin. Without pass-throughs, our margin would be significantly higher, nearing 605 basis points. While this will act as a drag on the margin, it should also influence revenue positively, as pass-throughs are expected to return to some degree, although they will still be notably lower than in previous years and the first quarter. This will continue to have an impact. As for hiring, the main factor affecting our hiring is our forecasts on when business will resume. We have several projects that are currently on hold, waiting for the right timing. I believe these will start to progress, and the specific timing will dictate when we begin ramping up hiring. Currently, we have enough staff for the trials we expect to resume. We are proceeding cautiously but plan to start hiring in the second half of the year.

Okay. To clarify, if I consider the reimbursed out-of-pocket expenses to estimate a rough EBITDA number, are we anticipating an EBITDA margin of around 30 percent in the second half? I'm trying to understand the scale of the reimbursements involved.

Yes. I can't apply it to a 605. What I meant was that if you exclude all the pass-throughs, you end up close to that figure, although there are many unexpected factors involved. It's not straightforward. Jesse, could you provide some insight on this?

Yes. Let me jump in on this one. So Dave, pass-through cost, August mentioned, will accelerate but still be depressed. We had out-of-pocket cost as a percent of revenue around 30% in the second quarter, anticipate that to go up a little bit, but not much. So I think 30%, 31% might be a good assumption for out-of-pocket cost. We have an EBITDA margin for the full year and are at the midpoint of our guidance of around 20.6% and then filling in some of the other holes there. SG&A, in the first half was about 10.6%, expect that to be flat to maybe a little bit down in the second half, so call it, 10% for the full year. And then the balance would be direct cost of around for the year on the guide, midpoint, probably 39% or so, if that all adds up.

Our next question comes from the line of John Kreger from William Blair.

August, you mentioned demand trends were better than what your new business trends would imply. Could you just give us a little bit more about that? What sort of proposal volumes were you seeing either on a unit or a dollar basis in the quarter?

Again, I don't go off of just a dollar number for RFP flow, it was relatively consistent, but I think the more important thing is things that sponsors have lined up and committed to go forward. That's not a number we report. I did report the discrepancy between kind of new awards from COVID studies being twice what actually wound up getting into backlog because they had not started yet. And that's just a matter of timing and COVID studies are actually moving along rather rapidly. So the lag there is much less. But in general, we don't break out kind of the new authorizations as opposed to our backlog awards. But it certainly, in this environment, there's much more that is held up of the non-COVID studies, particularly moving forward at this time.

Great. And that was my second question. If you just think about some of the operational constraints that you're having to get these studies up and running. Can you just expand on that? And from your view, are you thinking about sort of a gradual return towards normalcy in the third quarter? Or are you thinking that the sort of on hold mode is going to persist for a while as we watch infections go up across the country?

Yes. Operational issues are not a significant concern at this time. While there may be specific centers that are affected, overall, that's not the main issue. The focus is more on how quickly recruitment can take place and the associated risks, which is causing some anxiety among clients, and I'm uncertain about those factors. It's not purely an operational matter or a situation where we can't initiate studies right now; the key concern is recruitment at sites and patient availability. We are observing positive trends, and I believe many of these studies will progress this year. Clients are committed to advancing the projects, and although things are currently in a holding pattern, I think most will proceed later in the year.

Okay. And then one last one. In terms of your hiring plans, I think you were up about 5% in the end of the second quarter. Should we assume more of a flattish number in terms of staff in the second half?

No, we do anticipate expanding staff in the second half. As I mentioned, it will pick up pace in the third quarter, continuing into the fourth quarter and next year. So we're hiring now, though not as quickly as we plan to later.

Your next question comes from the line of Sandy Draper from SunTrust.

Maybe first, just a couple of quick housekeeping ones. Jesse, I think you mentioned or maybe, August, you mentioned there was severance in the quarter. Can you just break out how much the severance charge was?

Yes. That was $2.3 million in Q2.

Okay. Great. As I review the expenses, especially considering the $2.3 million, I believe you mentioned the costs associated with the new headquarters. Does that take effect next quarter? I'm trying to determine a normalized cost figure. You provided some details, but I want to clarify how much costs have decreased when I exclude severance while accounting for the new headquarters expenses. I'm trying to understand the various factors that have kept the SG&A line so low.

Yes, Sandy. The building, we did incur some additional rent cost on the new building in the second quarter, it will be about a $2 million quarterly clip in each of Q3 and Q4. But in Q2, it was like $1.3 million because we were coming in mid-quarter.

Okay. Great. That's really helpful. And then maybe the last question for August. I know in general, you guys talk about that you operate in a different part of the market than a lot of the other publicly traded CROS. But I'm just curious in this environment where there's a lot of business, but a lot of concerns. Are you finding customers reacting more positively to you guys because you have a focus on the small players and they're going to be important to you? Or is it basically the customers looking for anybody who could do their work. And so is there any change in the competitive environment or at least how customers are reacting to your model versus, say, the larger publicly traded peers?

Yes. I don't think this environment has led to any differences in the dynamic. We do think we have a strong position in the market, but I don't think that has changed relative to this environment.

Your next question comes from the line of Dave Windley from Jefferies.

If the queue is short, I'll jump back in. You mentioned in August the comments about hiring and that you wouldn't expect those to have an impact on margin next year. Considering your overall public experience, your margins have been one of the less predictable areas for us. How do you view sustainability, with a 500 basis point to 400 basis point difference between the first half and the second half? Is the right number somewhere in between? What should we anticipate for a sustainable EBITDA margin?

The sustainability of our EBITDA margin will largely depend on our growth rate. Unlike some competitors who are experiencing margin pressures while growing at 6% annually and hiring in anticipation of business opportunities, our growth rate of over 20% organically is significantly benefiting our margin. This year, several factors are at play. For instance, reduced pass-through costs are slightly boosting our margin, but it's challenging to differentiate all the influences. There's also a reduction in discretionary expenses, particularly in business travel, resulting in savings in areas where costs would typically occur. Consequently, we're seeing positive momentum for our margin from multiple factors, particularly our growth rate and proactive hiring. It's important to note that hiring isn't just about increasing headcount; we require a larger team to support rapid growth. However, a substantial portion of our new hires consists of junior staff who aren't yet fully productive as they are still in training. This means we are carrying a considerable number of personnel who are not fully contributing yet, which adds to our costs. While I can't provide an exact figure, this issue significantly affects our margin, particularly when we're rapidly expanding at a 20% annual growth rate, which incurs high training and onboarding expenses.

Got it. Regarding the backlog policy, we discussed it thoroughly. I understand that your approach is quite conservative. You mentioned the difference with the COVID trials. As we see it, the industry has conducted several trials, often led by larger pharmaceutical companies. This hasn't particularly affected you, but it has affected the progress of studies that were already in progress. I'm curious to know if this has impacted you. If there were studies that had commenced and would have been included in your backlog under your policy but are now paused by the client, would you remove those from your backlog? How do you address that?

No. Once it's in backlog, we generally do not remove it unless there is a true cancellation. A pause in the study might slow the progress and could extend the duration beyond our normal backlog limits, but we typically would not take it out of backlog simply because of a pause. However, we did have a few studies that were paused. I believe this was less common than with large pharmaceutical companies, as I heard several of them mention that they were pausing a significant part of their portfolios at once. We had a relatively small number of studies that were active and recruiting before being put on hold, but there were a few. In our previous slides, we provided a breakdown of different studies in various phases, including those that were ongoing but had their recruitment significantly impacted. Some of these studies were indeed put on hold for recruitment for a period.

My last question is about the conference we had about 6 or 7 weeks ago, where you mentioned experiencing cancellations related to COVID in the first quarter and more since then. You also noted a few cancellations after the first quarter. Since you report net bookings, it's difficult for me to see the gross numbers and cancellations, but it seems that either those cancellations weren't significant or they were outweighed by incoming demand. Could you discuss the stability of the backlog or the internal churn in the backlog related to studies? This is somewhat related to my previous question.

Cancellations did increase somewhat, and we experienced some related to COVID. I mentioned that we are now in the second quarter. In the past month, there haven't been any additional cancellations that I believe were due to COVID, so that seems to be behind us. While there was a slight rise in cancellations, it wasn't significantly unusual, and we didn't feel it was necessary to highlight that.

I am showing no further questions at this time. I would now like to turn the conference back to Mr. Brady.

Thank you for joining us on today's call and for your continued interest in Medpace. We look forward to speaking with you again on our third quarter 2020 earnings call. Thanks, and have a great day.

This concludes today's conference call. Thank you, and have a great day.