Good day, ladies and gentlemen, and welcome to the Medpace Second Quarter 2022 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 follow at that time. As a reminder, this call may be recorded. I would now like to introduce your host for today's conference call, Lauren Morris, Medpace Director of Investor Relations. You may begin.

Good morning, and thank you for joining Medpace's second quarter 2022 earnings conference call. Also on the call today is our CEO, August Troendle; our President, Jesse Geiger; and our CFO, Kevin Brady. 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 replacements 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, everyone. Our primary focus continues to be ensuring adequate liquidity and funding for our clients, which are mainly pre-commercial biotech companies. So far, we have experienced very few cancellations directly linked to financial difficulties. How this situation evolves will depend on the severity and duration of the ongoing funding slowdown. I want to provide a more detailed look at our business opportunities pipeline. This is important because the RFP values we see for the quarter may not fully represent the overall situation. It's a mixed picture. In our industry, new business opportunities typically progress through three significant stages. Let me outline these steps. Step one is the request for proposal, or RFP, which is issued by a company sponsoring a clinical trial, with several CROs responding with formal proposals. CROs generally do not disclose metrics, as numbers alone fail to capture the full picture. There are essential qualitative differences that make summary numbers largely meaningless, emphasizing that quality is more critical than quantity. Step two involves a winning CRO receiving an initial award notification. The need to create a term for this indicates that this metric is typically not shared by any CRO in reports. The emphasis here, again, is on quality, as there is considerable uncertainty at this stage regarding the value, timing, and scope of the award. However, this metric has the advantage of being less subject to manipulation, with timing controlled by the sponsor. Step three applies specific criteria that can lead to the award being recorded as a backlog booking, generally referred to as a new business award, which is used to calculate the book-to-bill ratio. This is usually reported by CROs but should not be confused with the initial award notification from step two. Prior to recognizing an award in backlog, CROs often require confirmation of client funding and contract execution and apply subjective criteria that might delay recognition, including concerns over potential cancellations. Now, looking at Medpace within these steps: for step one, our RFP flow was robust in Q2, increasing by 31% from Q1. However, it's important to note that rapid increases in RFP volume can occur in weak environments due to high scenario planning and fundraising activities by smaller biopharmaceutical firms. This suggests that some of our RFP growth may not solely reflect a strong business environment. Our assessment of RFP quality is influenced by expected timelines for program commencement and a clear path to startup, which has become less defined in the current climate. Quantitatively, the situation appears strong, but it's challenging to assess the funding slowdown's impact on business. In step two, initial award notifications, we saw a significant decline in Q2, down 45% year-on-year and 42% sequentially. However, July's initial award notifications showed considerable recovery and aligned more closely with the prior 12-month average, leading us to hope that the Q2 downturn is not long-lasting. Step three, focusing on new business awards recognized in backlog, remained strong with a book-to-bill ratio of 1.28 in Q2. However, it's important to understand this largely reflects prior quarters' initial award notifications that have reached contract execution and are at the first patient visit stage, thus meeting our backlog criteria. The business development cycle in our industry is lengthy; while COVID-related opportunities can move quickly, the average RFP process takes considerable time, often resulting in delays of several quarters between initial award notifications and backlog recognition. Consequently, Q2's downturn in initial award notifications may not reflect in backlog bookings until Q4. We do have some concerns, but many metrics, particularly RFP volume, appear reasonably good. Cancellations can arise at any stage following initial award notifications but are most impactful when a program is already in backlog and ongoing. As I mentioned earlier, cancellations in Q2 were modest and do not indicate a significant issue. I remain confident in our future success and in exceeding industry organic revenue growth over the long term, as evidenced by our stock purchases in Q1 and Q2. Now, I'll hand it over to Jesse and Kevin for a detailed update on our Q2 results. Jesse?

Thank you, August. Good morning, everyone. Revenue for the second quarter of 2022 was $351.2 million. This represents a year-over-year increase of 26.2%. Our net new business awards entering backlog in the second quarter increased 16.3% from the prior year to $450.6 million. This resulted in a 1.28 net book-to-bill. And ending backlog of June 30th was approximately $2.2 billion; an increase of 24.4% from the prior year. We projected that approximately $1.13 billion of backlog will convert to revenue in the next 12 months. And backlog conversion in the second quarter was 16.8% of beginning backlog. In 2022, we continued to make progress in hiring, adding 8% from the end of 2021 and 16.8% from the prior year. With that, I'll turn the call over to Kevin to review our financial performance in more detail and discuss our updated 2022 guidance. Kevin?

Thank you, Jesse, and good morning to everyone listening in. As Jesse mentioned, revenue was $351.2 million in the second quarter of 2022. This represented a year-over-year increase of 26.2% on a reported basis and 27.7% on a constant currency organic basis. EBITDA of $68.1 million increased 42% compared to $47.9 million in the second quarter of 2021. On a constant currency basis, second quarter EBITDA increased 35.3% compared to the prior year. EBITDA margin for the second quarter was 19.4% compared to 17.2% in the prior year period. The increased EBITDA margin was driven by net foreign exchange benefits behind the strong U.S. dollar and slower headcount growth in 2021. In the second quarter of 2022, net income of $49.4 million increased by 23.6% compared to net income of $39.9 million in the prior year period. Net income growth over the prior year was primarily driven by higher EBITDA offset by a higher effective tax rate. Net income per diluted share for the quarter was $1.46 compared to $1.60 in the prior year period. Share repurchases during the quarter benefited EPS by $0.04. Regarding customer concentration, our top five and top 10 customers represent roughly 17% and 25%, respectively, of our year-to-date revenue. In the second quarter, we generated $96.6 million in cash flow from operating activities, and our net days sales outstanding was negative 45.5 days. During the quarter, we repurchased approximately 2.7 million shares at an average price of $137.86, for a total of $374.6 million. During the second quarter, our Board of Directors approved increases of $110 million to our share repurchase program. As of the end of the quarter, we have no share repurchase authorization remaining. Year-to-date, we have repurchased 5.5 million shares, which represented 15.2% of our common stock outstanding at the end of 2021. Our net position at the end of the quarter was $207.1 million, composed of debt of $249.7 million and cash of $42.6 million. Our net leverage ratio is approximately 0.8 times last 12-months EBITDA. Moving now to our updated guidance for 2022, full-year 2022 total revenue is now expected in the range of $1.405 billion to $1.435 billion, representing growth of 23% to 25.6% over 2021 total revenue of $1.142 billion. Our 2022 EBITDA is now expected in the range of $268 million to $280 million, representing growth of 20.1% to 25.5% compared to EBITDA of $223.1 million in 2021. Based on foreign exchange rates, as of June 30, this revised guidance includes an additional foreign exchange headwind on revenue of approximately $4 million and a foreign exchange tailwind on EBITDA of approximately $3 million related to the strengthening of the U.S. dollar. This guidance assumes a full-year 2022 effective tax rate of 14.5% to 15.5%, and 33.8 million diluted weighted-average shares outstanding for 2022. There are no additional share repurchases in our guidance. We forecast 2022 net income in the range of $205 million to $215 million, which includes $4.3 million of interest expense on our outstanding debt. Earnings per diluted share are now expected to be in the range of $6.07 to $6.36. With that, I will turn the call back over to the operator so we can take your questions.

Thank you. Our first question comes from Dave Windley with Jefferies. Your line is open. Please go ahead.

Hi, thanks, good morning. I wanted to connect your current comments with what you mentioned last quarter. In the previous quarter, you referred to cancellations related to a pre-bookings category of awarded programs that had not yet moved to backlog. Using your terminology today, I'm understanding that those would have reached or surpassed the initial award notification stage. Now, you're indicating that this initial award notification is significantly down. Are these the same issues, or are your comments today adding new information to what you shared last quarter? How should we interpret these two descriptions in relation to bookings in the second half of 2022?

Thank you, Dave. I believe my comments are quite distinct. We noted that there have been some indications of canceled projects. You are correct that we fall into the category of awards that have been given to us. Therefore, after considering an initial award notification, those awards have not yet been reflected in the backlog, meaning there have been no cancellations in our backlog. When I referenced our quarterly numbers being lower, I was not discussing the backlog, which could have been impacted by previous cancellations. Instead, I was referring to the new flow of projects awarded to us. The new flow has significantly decreased, providing a real-time overview of our business development progress. If potential clients are delaying decisions or canceling projects before they are awarded, those instances wouldn’t count as cancellations for us since we never received the award, yet it indicates a weakness in our project pipeline. As I mentioned, this issue tends to have effects that manifest a few quarters later, impacting our bookings in the latter part of the year. However, there is a lag between initial award notifications and when they are reflected in the backlog, which influences revenue down the line.

All right, thank you for that. On the guidance for the remainder of the year, you obviously had a very nice Q2, some upsides on both revenue and EBITDA. When we take those in combination, considering the FX impact for the second half, you appear to be turning ever so slightly your revenue and EBITDA expectations on a constant currency basis. Is that a reflection of some of these issues that you're highlighting? Is it a reflection of clients maybe not starting projects as quickly as you had anticipated or perhaps not being able to hire quite as many people as you hoped? Or is it just kind of rounding error?

Hi, Dave, this is Kevin. On the margin side of the equation, you can see that, at the midpoint, we do still expect margins to decline a bit further in the second half, and that it's pretty consistent with what we said in the first quarter call, that we do see some inflationary costs still coming in, and we are continuing to hire. We have a lot of retention efforts in place to reduce some of the attrition that we've seen in previous quarters. We've some office expansion coming up that are offsetting some of that net tailwind that we're seeing on FX.

Okay, thank you very much. I'll yield. Thanks.

Thank you. And our next question is going to be from the line of Christine Rains with William Blair. Your line is open. Please go ahead.

Hi. Thank you for taking the question. My first one is that I appreciate you commenting on cancellation, but I’m curious if you have noticed a notable increase in project delays?

I wouldn't say that we've specifically observed a significant number of delays, although there are some. We've also noticed a slight weakening, with more clients seeking funding. It's difficult to quantify or provide a consistent metric for this. Anecdotally, we do see some instances, but I wouldn't say it's concerning at this time.

Great, thanks. And then just an update would be appreciated on staffing overall as it relates to turnover and hiring. Specifically, I noticed that the pace of headcount growth slowed from the mid-20s in the back-half of the year to 20% last quarter, and then 17% this quarter. So, just in general, are you moderating the hiring plans at all or do you expect an uptick as the year progresses? Thanks.

Yes, this is Jesse. We are moderating a bit due to the current business environment. I believe we are well-positioned for both our present circumstances and upcoming projects. As Kevin mentioned, we are still hiring, although at a slightly slower pace compared to last year and 2021. Additionally, turnover has decreased, so we are focusing on retention efforts. So far, that seems to have had a positive impact, and we hope it continues.

Great. That's all for me. Thank you.

Thank you. Our next question comes from the line of Sandy Draper with Guggenheim Partners. Your line is open. Please go ahead.

Thanks so much. Maybe just a couple of housekeeping items to start, probably for Kevin, one, can you remind me, Kevin, if I just do the simple math of taking ending backlog from last quarter, add the bookings and subtract revenue, the number doesn't quite fit. I'm assuming FX is the majority of that. It's not a huge difference, but just can you remind me why that simple math doesn't necessarily always line up?

Yes, you're right, Sandy, the biggest impact there is going to be just changes in FX, that don't allow you to do the basic math.

Okay, got it. For my second question, could you remind me about the structure of the debt? It's showing up on the balance sheet as all $250 million in the current portion. If there is a revolver, does that mean it needs to be paid off in the next 12 months? That doesn't seem correct.

Yes, Sandy, it's a one-year revolver, that the term is in March of 2023. Obviously, we've got the intent and ability to refinance that. But, yes, that's why it's classified as short-term.

Okay. So, what are your thoughts on refinancing and extending the debt versus paying it down to make it more manageable? How do you view the long-term comfort with the debt?

Yes, our current plan is to start paying off that debt facility. We generate significant free cash flow, so we will begin to reduce that debt. We also want to monitor the stock price and any developments in that area. There is potential for additional share purchases as well. However, our main focus is on paying down that facility. We are in talks with our banking partners to determine what refinancing options will be sensible in the upcoming quarters.

Okay, great. And can you remind me what the rate is on that facility? Is it floating or fixed, and what is it?

It's floating at plus 1%.

Okay, I understand. In the current environment, it makes sense to focus on paying down the debt. As for the final point you mentioned, the Board has not yet expanded its share repurchase program. I would assume this is because you've reached the limit on the current line and are in the process of reevaluating. This doesn't indicate a definite decision one way or the other; rather, it reflects your reassessment of the balance sheet and the stock's position. If you see an opportunity, you can pursue it, but for now, you're in the evaluation phase. Would you say that's an accurate summary of your situation?

That's exactly right, Sandy. We'll continue to evaluate facilities, and what the little bit longer-term nature of what we want to do looks like, and we'll determine what's in the best interest of the company in the coming quarter there; you're exactly right.

Okay, great, thanks. And then my last one just following up on the hiring question. Jesse, can you remind me, as you said, a little bit slower hiring this quarter but still at a pretty reasonable level. If the market really comes back how long would it take you to rebuild? And RFP pipeline, not a deal, but a resume. If things come back, what's the lag time before you can really try to step on the gas and start hiring aggressively? Obviously, slowing down is probably easier. But just trying to think about if you are on a more moderate pace right now when things come back at some point, how quickly can you start ramping hiring back up?

Yes, we are increasing our hiring rate fairly quickly, depending on the labor market and competition. However, it often takes several quarters, sometimes up to a year, for new hires to become fully trained and effectively utilized. This means there is a lead time involved. We're not planning any significant reductions in hiring, and we expect to continue hiring at a strong pace. Additionally, focusing on retention is crucial since it is generally more efficient to keep existing employees than to concentrate on bringing in new ones. Our strategy involves balancing retention efforts with monitoring the business environment to adjust our rate of new hires as needed.

Great. Those are my questions. Thanks so much.

Thank you. And our next question comes from Eric Coldwell with Baird. Your line is open. Please go ahead.

Eric?

Mr. Coldwell, your line might be on mute. Okay, we will go ahead and move to our next question. We do have a follow-up question from the line of Paul Knight with KeyBanc.

Notification stage decline of 45% year-over-year in the second quarter and then it recovered in July. Was that July recovery kind of back to what backlog growth has been meaning around mid-20s? And then, why do you think that decline happened? And then maybe there was a rally. Do you think they are reevaluating budgets? What's your thought on why maybe there was this drop and then recovery?

I’m not certain. I’m hopeful there was a pause and things are now progressing. There is considerable month-to-month volatility. The only reason I mention the previous quarter's decline is due to our heightened awareness of funding flows and the fact that RFPs don't accurately reflect the current environment; in fact, we have many RFPs, but I don't want to create the impression that they are all positive. There was a significant drop in initial awards in Q2, but they rebounded in July, though not to the extent that everything was delayed. The July figures align with the previous four quarters, suggesting a return to our baseline run rate, but it's still early in the month. I can’t say for certain that this is indicative of next quarter's performance, but we are hopeful.

And this volatility you're seeing, is it concentrated in that small biopharma group of customers that's 79% of our revenue year-to-date that we see?

Yes, that drives our numbers. We anticipate some volatility in initial awards regardless of the company size. Occasionally, a company may have a surge in work, leading to general volatility. However, I believe the current weakness we are observing is primarily caused by smaller biotech companies.

Okay. And then, my last question is do you see any therapeutic area that's weaker like cell therapy? That seems to be the most troublesome spot in the clinical trial market right now. But, what are your thoughts?

That's a small enough area for us. It's not going to drive any of the larger numbers. The slowdown I do not have a particular categorization of the therapeutic area or type of study. It's broad as far as I can see.

Okay, thanks.

Thank you. And our next question is a follow-up question from the line of Christine Rains with William Blair. Please go ahead.

Hi, thanks for taking the additional questions. I was just wondering if you can comment on the historical delays from initial awards to executed awards, sort of in other words, the progression from bucket 2 to bucket 3, and should we assume that awards are lower in Q3 as a result or more like Q4? And just kind of what you're assuming in guidance?

Yes. Some things happen more quickly while others can take longer, especially during challenging funding periods or tough market conditions. During COVID, we experienced a rapid transition from award to execution. Typically, this process averages a few quarters, although there is significant variability. I noted in my prepared remarks a slowdown in initial awards during Q2, which we generally observe in Q4 as part of an average timeframe.

Great. That's helpful. And for Q4, just to clarify, that's included in guidance right now? And then just as a follow-up question, your operating cost has been well below our expectations for the last two quarters. I am just curious what you are eliminating on that front. And then, that's all for me. Thank you.

I'll take the first part of that. We don't give guidance on bookings. And bookings Q4 that is things moving into backlog we have immaterial impact on this year's revenue. And so would not be part of guidance. They would potentially affect 2023 guidance when we get there. But it really wouldn't have any impact on this year's performance financially.

Yes. As I have commented before, we do expect the balance of this year for in some of our costs to increase as you think about there's still inflation out there in some discretionary type activities. We are starting to see travel come back a bit. Things like training come back a bit. We are continuing to hire albeit at maybe slower pace, but we are continuing to hire. We've got a lot of retention efforts in place. Again, we try to improve our attrition rate. And we got some expansions overseas that are going to be coming online in the second half. That's really what's driving some of those expected increases in cost in the second half.

Okay, thank you.

Thank you. And our next question comes from the line of Eric Coldwell with Baird. Your line is open.

Okay, thank you. We'll try this on a new phone. Can you hear me now?

Yes.

I was wondering if you could provide details on the hit rate for your RFPs, specifically the current level and how it compares to recent periods and your long-term averages.

Yes, that's a very good point, Eric. It could impact initial award notifications. That's an important aspect to consider. It's a good question regarding how much of this slowing is due to overall decision delays versus our success in those decisions. Our hit rate did decline slightly this quarter, but that wasn't the main cause of the reduction. It was more about the significant decrease in new award notifications, which resulted from fewer decisions made this quarter rather than a change in our win rate. There was a slight reduction in our win rate; we had a very high win rate in the last couple of quarters, and it has now come down closer to our long-term average.

Are you willing to share broadly what your average hit rate over time has been?

No, I don't think we provide them. I think we have provided that in the past and I don't see a need to here.

Okay. Second topic is you had a very sharp snapback in free cash flow this quarter. And I believe last quarter it was chalked up to some timing. You had obviously a very good quarter on cash flow which tends to be indicative of a healthier environment. And then, as a follow-on to that I would say bad debt is obviously a topic we would want to look at it. There is in fact of slowdown or financial distress in the client base. So, I was hoping you could talk a bit about what you are seeing on the bad debt side? Even leading indicators there? And any recent reviews of client creditworthiness that you might be willing to discuss.

Yes, Eric. This is Kevin. On the bad debt side specifically we haven't seen an increase in bad debt. If you look at the cash flow, there is very little, if any, bad debt expense that was incurred in the quarter. We continue to monitor client payments and expectations and funding very closely. And we have been able to hold that down at this point in time. What was the first part of your question, Eric?

Just the strength in the free cash flow which looked to be a bit of a timely recovery from last quarter.

Yes, and we saw a similar timing on the other side. So we had great collections in the fourth quarter which resulted in kind of a slowdown in the first quarter. And then things snapped back on some advanced billings and collections in the second quarter.

Got it. Last one from me and it's more thematic. I am not asking you to give '23 guidance. But in a scenario where the small biotech base does slow or really any channel slows. But, obviously biotech is the majority of your book, your hiring would slow. I suspect some of your investments would slow. You have tightened the reins a bit. In this hypothetical scenario where demand slows and therefore future revenue slows, what do you see happening with margins? Is it a scenario where you could actually have margin stability or expansion because your cost reduction and your hiring demands will come in so much? Or would there still potentially be some deleveraging across the organization on fixed costs? And perhaps activities you wouldn't be willing to see slow down because whatever the environment is perhaps it's just a short-lived nature. Just getting a sense on what your considerations are for future margin if in fact there is an eventual more notable slowdown due to lower bookings in the future?

Yes, historically speaking, our margin tends to increase in such an environment.

Right.

I expect that to continue. The extent to which it does depends on not just revenue declines but also opportunities and what we observe in the next few quarters. There is a noticeable slowdown, and we are experiencing fewer opportunities. In this environment, our margins are likely to increase, potentially significantly, as we reduce our hiring and acquisitions while trying to stay ahead of demand for staff. Therefore, I anticipate that our margins will improve.

Okay, good. Thank you very much. I'll let others jump in.

Thank you. And I'm showing no further questions, and I would like to turn the conference back over to Lauren Morris for any further remarks.

Thank you for joining us on today's call, and for your interest in Medpace. We look forward to speaking with you again on our third quarter 2022 earnings call.

This concludes today's conference. Thank you for participating. You may all disconnect. Everyone have a great day.