Good day, ladies and gentlemen, and welcome to the Medpace Second Quarter Earnings Conference Call. [Operator Instructions]. As a reminder, 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 approximately 20%. Physical monitoring visits are improving but remain about 20%-- about 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 original plan. Heavy investment in hiring and training in advance and 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 more stable health care 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. 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. With that, I will turn the call back over to the operator so we can take your questions ladies.

[Operator Instructions]. 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 1Q to 2Q 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. Okay. The first part of your question about margin -- I'm sorry.

Like I figured the reduction in pass-through is having an impact here.

Yes. I'm sorry, pass-through should accelerate in the second half also. So that would have a little bit of a negative effect on our margin. In that -- without pass-throughs, obviously, margin is much higher, close to kind of a 605 basis reporting. So that should be a little bit of a drag on margin itself, but push on revenue, getting us back up because pass-through should come back to some extent, but still meaningfully below prior years and first quarter. So that will still have an effect. And then in terms of hiring, what's gating or hiring, really just our projections on when things are going to move forward. We have a lot of business that is kind of on hold and waiting for the right time to move forward, and I think it will begin to move forward. And the exact timing of that is going to determine when we start pushing harder on hiring, but we have adequate buffer for staff currently for the -- for trials we anticipate moving forward. And we're just playing it cautiously, but we will begin hiring certainly in the second half year.

Okay. Maybe to triangulate on this and put a finer point. If I were to think about roughly, taking -- since you do report reimbursed out of pockets, if I were to think about using that to kind of back into a rough 605 number, are we talking about kind of a 30-ish percent EBITDA margin in the second half? If I think about that on the 605, I'm trying to get a sense for the magnitude of the reimburse.

Yes. I can't think of it on a 605. I was just saying that you pull out -- you strip out all the pass-throughs. In the end, you get close to there, although there are a lot of effects that are kind of unanticipated. It's not so easy. I don't know, Jesse, if you could comment on that.

Yes. Let me...

What kind of margin is stripping that out?

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. So operational issues is largely not a major factor right now. I mean, certainly, there could be specific centers, et cetera, that are impacted. But by and large, that's not the issue. It's one of how rapidly recruitment is going to happen and the risks of that being impacted that clients are kind of a little on edge with, and I'm certain about. So I don't think it's really just an operational, I couldn't get that study started right now, but I guess the ultimate issue is recruitment at sites and availability and -- to patients. We are seeing positive trends. I do believe that many of these studies will move forward this year. There -- I think clients are committed to moving the project forward, the kind of -- in a holding pattern right now, but I do think that most will move forward in -- 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 said, it will sort of accelerate into third quarter -- into fourth quarter and then into next year. So we're hiring, we're even hiring now, and we're just not as rapidly as we intend to later.

[Operator Instructions]. 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. And then just as I look at the expenses, just -- especially if I factor in that $2.3 million plus, I believe -- I think you brought on the expenses in the facility, the new headquarters? Or does that start next quarter, I'm just trying to think of what sort of a normalized -- you gave us some color, but I'm just trying to triangulate how much cost went down, if I strip out severance, but then add back in some cost level for the new headquarters? I'm just trying to understand sort of all the puts and takes that are allowing the SG&A line to stay 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 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 is looking for anybody who will -- 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 is change 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, August, the comments around hiring and that you wouldn't expect those to then have an impact on margin next year. How do you think -- I guess I'm thinking about kind of the totality of your public experience, your margins have been perhaps one of the less predictable lines for us. How do you think about sustainability, you're going to have a 500 basis point, 400 basis point delta between the first half and the second half, at least, is the right number somewhere in between? What should we think about for sustainable EBITDA margin?

Yes. Look, it's sustainably EBITDA margin is going to depend upon how rapidly we're growing. I mean, look, you have other peers talk about holding staff and hiring aggressively in advance of all this business development they've signed grown at 6% a year organically and saying that it's significantly affecting the margin. Growing at 20-plus percent organically has a tremendous effect on our margin. And I don't know how large that's going to be. But this year, there's a number of effects. I mean, on margin, you got the reduced pass-through costs that tend to prop up our margin a bit. It is hard to sort out all of the -- then there's a lot of discretionary cost that's kind of internal travel that isn't passed through, that's business travel, and of course, that's cut out in the current environment because we aren't doing a lot of business travel. So there are some savings on a number of our lines that normally would be there. And so there's a push to our margin for several reasons. A big one is that growth rate and hiring ahead. And it's not just hiring the bodies and having excess staff, which you do need, you need a much larger bench when you're growing very fast. But you have a lot of more junior staff that is not productive. They're in training. And you're carrying a lot of people that isn't just slack capacity. They may not be capacity at all, but just people in the process of being trained to be able to enter projects when they get adequate experience. So I don't have a good feel for that, but it is a rather sizable portion of our differential this year and is, in general, several points, I think, of margin when we're growing very rapidly, growing organically at 20% a year is very expensive in our -- in terms of driving a lot of resource costs around training and orientation.

Got it. And then in terms of backlog policy, we talked about that a fair amount. I know that yours is very conservative. You alluded to the COVID trial difference. And if our understanding is correct, that the industry has had a number of trials, and maybe these are bigger pharma companies that did this more often. And so not a particular impact on you, but kind of paused half the breaks on studies that were in flight. And I'm wondering how -- if that did impact you, if you had studies that had started such that they would have, under your policy been included in backlog and then the client is pausing that, would you cancel those out? How do you handle that?

No. Once it's in backlog, we do not generally take it out unless there's a true cancellation. If there's a pause in the study, it might slow the burndown. And it might even may push out some of the duration that's beyond our normal backlog gating factors, but we would not generally pull that out of backlog just because they have. But yes, we did have a number of studies that were paused. I suspect it was less than was large pharma because I did hear from -- we did hear a number of large pharma companies saying they're pausing a broad part of their portfolio at one time. And it was very -- it was a relatively small number of studies that we had that were up and running, recruiting and were put on hold for recruitment, but there were a few. And I think we gave in our slides previously, a breakout of different studies in different phases, including those that were ongoing, but recruitment materially affected, et cetera. Some of those studies were put on hold for recruitment for a period of time.

And then last question for me is, at our conference about 6 or 7 weeks ago, you talked about having seen COVID related cancellations in the first quarter and more since, and I think you said in a couple since the first quarter. Wouldn't -- I mean, you report net bookings. So it's -- I'm not able to really see the gross and cancels there, but it wouldn't appear that either those cancellations were very big or they were more than overwhelmed by the demand coming in. Maybe you could talk about the stability of the backlog or the kind of the internal churn in the backlog related to studies, kind of a related question, the last one, I guess.

Yes. So cancellations were up some. We did have some COVID-related cancellations. I did call out that we're into this quarter -- in this past quarter, second quarter. In the last month or so, there hasn't been any additional ones, I think, related to COVID. So I think that's kind of done. The tapered off, but we did -- it was an effect. It was a little bit more than usual, but nothing to call out. So we didn't discuss 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.