Executives: Ronnie Speight - Vice President, Investor Relations Alistair MacDonald - Chief Executive Officer Greg Rush - Chief Financial

Officer
Analysts: John Kreger - William Blair Eric Coldwell - Baird Dave Windley - Jefferies Sara Silverman - Wells Fargo Adam Noble - Goldman Sachs Tycho Peterson - JPMorgan Sandy Draper - SunTrust Michael Baker - Raymond James Donald Hooker -

KeyBanc
Operator: Good morning, ladies and gentlemen and welcome to the INC Research Second Quarter 2017 Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to Ronnie Speight, Vice President of Investor Relations. Please go ahead, sir.

Ronnie Speight: Good morning, everyone. The purpose of this call is to review the financial results for INC Research’s second quarter 2017.

With me on the call today are Alistair 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 investor.incresearch.com, within the Events and Presentations section. An archived version of this webcast will be available for replay on our website

after 1:00 p.m. today and there will also be a telephone replay available for the next 7 days. Remarks that we make about future expectations, plans and prospects for the company, including statements related to our backlog and pipeline, constitute forward-looking statements for the 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 our Form 10-K for the year ended December 31, 2016, our Form 10-Q for the quarter ended June 30, 2017, our definitive proxy materials filed in conjunction with our proposed merger with inVentiv Health, and our other SEC filings. 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 effects of events and transactions 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 non-GAAP measures helps them gain a more complete understanding of our financial results because management uses such measures for operating, budgeting and financial planning, decision-making and reporting. For a reconciliation of the non-GAAP financial measures with the most directly comparable GAAP measures, please refer to Slides 23 through 27 in our presentation. As we will be limiting today’s call to 1 hour, we request that participants limit questions to one each with an opportunity to ask one follow-up question. I would now like to turn the call over to Alistair MacDonald.

Alistair?

Alistair MacDonald: Thank you, Ronnie. Good morning and thank you for joining our second quarter 2017 earnings call. I am happy to be able to provide you with an update of our strong performance thus far in 2017, our confidence in our long-term strategy and the progress we have made towards completing our recently announced merger with inVentiv Health. We continue to build on our momentum from the first quarter, with another record quarter of gross and net awards. In the second quarter, net awards totaled $423.8 million, representing growth of 40% compared to $302.1 million during the second quarter of 2016 and a net book-to-bill ratio of 1.6 for the quarter, 1.5 year-to-date, and 1.4 on a trailing 12-month basis.

We continue to see strong demand for our service offering, particularly among small to midsized biopharmaceutical companies and we have a robust pipeline for the second half of 2017. Our momentum in the first half has continued into the third quarter with two contingent awards totaling $84 million from a large pharmaceutical company based in China, representing the largest aggregate award from China in the company’s history. Due to the size of these awards, our customer requires approval by their shareholders, but we fully expect this approval in the second half of 2017. These strong year-to-date awards continue to build a robust backlog for the fourth quarter of 2017 and the full year 2018. Accordingly, we are cautiously optimistic that we are on the path to returning the company to double-digit organic revenue growth in 2018.

We also believe the strength in our recent awards demonstrates our customers’ confidence in our strategy and our ability to continue executing on our growth initiatives as we work to complete our transaction with inVentiv Health and integrate the two companies. Importantly, our second quarter awards were broad-based across therapeutic areas, indications, award types and even individual customers with no customer representing more than 10% of gross awards. We have also continued to enhance our competitive position with larger biopharma customers by further strengthening our capabilities in areas such as functional service and our Real World and Late Phase business. Specifically, we have continued to add significant leadership depth and experience to our Real World and Late Phase business to drive our organizational support and focus on these services both in the proposal and execution phases. We have deployed fit for purpose technology and a collaborative approach of our consulting services.

Although it’s still a relatively small portion of our business, we are pleased with the success these investments are yielding with our 2017 awards in this space already nearly at the level of our awards for the full year 2016. We believe expanded capabilities in this area will enhance the value of our offerings, including, on a combined company basis with inVentiv. In addition, we are maintaining our strategic focus on creating strong site relationships and improving the sustainability of their participation in clinical research through our catalyst programs. We recently announced the launch of our Psychiatry Catalyst side network in response to the rapid growth and strong pipeline of psychiatric studies. Demonstrating the effectiveness of our strategy, we are also proud to have once again being ranked the top CRO to work with among the top 10 global CROs in the 2017 CenterWatch global investigative site relationship survey.

This marks the third consecutive survey in which we achieved this ranking and we are the only CRO to rank among the top three in the whole CenterWatch surveys over the past decade. Before turning over the call to Greg to provide more color on our second quarter results, I wanted to provide an update on the significant progress we have made towards closing the merger with inVentiv Health. Let me start by saying that as we continue our integration planning efforts, we have even greater enthusiasm about this compelling strategic combination, which will create a leading global biopharmaceutical solutions organization and the benefits that we are confident we will achieve for all stakeholders as a combined company. We are moving through the regulatory approval process on schedule. We have satisfied all regulatory approval requirements with the expiration of the waiting period under the Hart-Scott-Rodino Act as well as receiving the required affirmative approvals from other international jurisdictions.

We have also completed the SEC review process, filed our final definitive proxy materials and are holding our special shareholder meeting next week. Assuming the remaining closing conditions are met, we currently expect to close the transaction in August. We have also made significant progress in our integration planning and we will be in great shape to hit the ground running upon completion of the merger. I am proud to say that our respective teams have been working incredibly well together on our pre-closing integration planning. Our dedicated transition management office and our offsite consultants are managing the integration planning process.

We have already announced multiple layers of our combined leadership team and we have a strong communication strategy in place. We are leveraging the considerable integration experience of both organizations and the proven principles of the trusted process to ensure we remain focused on serving our customers while capitalizing on our growth opportunities. Let me now turn it over to Greg Rush for more comments on our financials. Greg?

Greg Rush: Thank you, Alistair and good morning everyone. As a reminder, we are discussing our results on an adjusted or non-GAAP basis as shown on Slides 4 and 5, have also included our key operating metrics on a GAAP basis on Slide 3.

Also, note that all of my references to percentage changes have been rounded. Our net service revenue for the second quarter was $258.1 million, slightly ahead of our expectations, although relatively flat compared to the second quarter of 2016. This was net of a foreign exchange headwind of $4.6 million resulting in a constant currency revenue growth of 2%. On a year-to-date basis, we grew our net service revenue by less than 1% from $507.8 million to $510.2 million. This was net of a foreign exchange headwind of $8.1 million also resulting in a constant currency growth rate of 2%.

For both the second quarter and year-to-date periods, net service revenue was relatively flat compared to 2016, primarily as a result of weak net new business awards in the fourth quarter 2016 and customer and regulatory delays of awarded projects, among other factors. Our direct costs increased to $159.1 million in the second quarter of 2017 compared to $157.9 million in the second quarter of 2016. This increase was primarily driven by $6.5 million increase in personnel and related cost and contract labor cost on a constant currency basis, which is partially offset by a $1.5 million decrease in an incentive compensation and the benefit of foreign exchange. It is important to note that we maintained staff at a higher level during the second quarter of 2017 and required to deliver the second quarter revenue and we’ll do so again during the third quarter. We have maintained these high levels of staff in anticipation of the impending start of the large amount of work that we have been awarded since late in the first quarter and to ensure appropriate combined staffing levels and mix following the closing of the inVentiv merger.

The carrying cost of this excess staff is estimated at approximately $3 million to $5 million in the second quarter. As a result of these factors, gross margin for the second quarter of 2017 declined to 38.4% compared to 39% for the same period in 2016, net of a foreign exchange benefit of approximately 20 basis points. For the first half of 2017, direct costs increased to $311.2 million from $307.9 million for 2016 with gross margin declining from 39.4% to 39% for the same reasons I discussed for the second quarter. Gross margin for the first half of 2017 also included a positive foreign exchange impact of 40 basis points. SG&A expenses decreased from $40.8 million in the second quarter 2016 to $39.3 million in the second quarter of 2017, declining from 15.8% to 15.2% of net service revenue.

On a year-to-date basis, SG&A expenses decreased from $82.7 million in 2016 to $81.1 million in 2017, with the related margin decreasing from 16.3% to 15.9%. The decrease was primarily due to lower incentive compensation and the benefit of foreign exchange, partially offset by an increase in personnel related cost. Our adjusted income from operations for the second quarter decreased from $55 million in 2016 to $53.7 million in 2017. While the associated margin declined from 21.3% to 20.8%. Year-to-date adjusted income from operations declined from $107.2 million in 2016 to $105.7 million in 2017 with the related margin declining from 21.1% to 20.7%.

The decrease was due to the decline in gross margins for the reasons discussed earlier. Adjusted EBITDA for the second quarter declined slightly from $60.1 million in 2016 to $59.8 million in 2017 with the associated margin remaining flat at 23.2%. This decrease was primarily due to the increased costs resulting from maintaining excess headcount, partially offset by lower incentive compensation expense. Foreign exchange had a negligible impact on adjusted EBITDA. For the first half of 2017, adjusted EBITDA increased to $117.9 million, compared to $117.1 million in 2016 with the associated margin remaining flat at 23.1%.

Adjusted net income increased to $35.1 million for the second quarter of 2017 from $34.3 million for the second quarter of 2016 and increased to $68.2 million from $66.8 million on a year-to-date basis. Adjusted diluted EPS grew by 5% from $0.61 in the second quarter of ‘16 to $0.64 in the second quarter of 2017, while also increasing from $1.19 to $1.24 on a year-to-date basis. Slide 8 provides key metrics related to our cash flow and leverage position. During the second quarter of 2017, our operations produced $22.7 million of cash as compared to $45 million in the second quarter of 2016. The decrease in operating cash flow from the second quarter was primarily driven by the increase in our DSO from 13.9 days as of March 31, 2017 to 17.7 days as of June 30, 2017, along with other changes in working capital.

Cash flow from operations for the first half of 2017 was $98.4 million an increase of $54 million compared to the first half of 2016. Due primarily to the increase in milestone billing requirements, we expect our DSO will continue to be volatile from quarter-to-quarter and may continue to elongate over time. We ended the second quarter with $169.7 million in unrestricted cash and total debt outstanding of $475 million. I would now like to provide a brief update on our pending merger with inVentiv and their operating results for the second quarter. On Slides 10 through 15, we have provided a summary of the progress we have made on the merger, as Alistair mentioned, as well as some key highlights of the preliminary second quarter results for inVentiv Health.

It’s important to note these results are preliminary and inVentiv management and our external auditors continue to review the results. These results fall within the range expected for the second quarter and keep inVentiv roughly on track to achieve the forecasted 2017 results included in our definitive proxy plus or minus a few percentage points. Turning to guidance, after much thought and consideration, we have decided not to provide updated guidance for 2017 at this time. Since our pending merger with inVentiv Health has not closed, we believe it is too early to provide combined guidance at this point and we will be in a better position to forecast inVentiv’s results after the merger closes. In addition, given that we expect the merger will close in the next few weeks, we do not believe it is prudent to provide standalone guidance for a number of reasons including, but not limited to, the following uncertainty regarding the precise timing of the closing; the impact of purchase accounting; uncertainty around our post-combination effective tax rates for the period from closing through December 31, 2017 as the jurisdictional mix of earnings vary month-to-month and determining whether to repatriate certain part of earnings as a result of the merger; our inability to estimate the cost of retaining excess staff; and lastly, uncertainty surrounding the timing and amount of transaction fees and restructuring cost as well as the anticipated benefits from those restructuring activities.

But all of that said, I will provide a brief update regarding how we are progressing against the forecasted amounts included in our definitive proxy. Based on our most recent estimates, we currently believe that both INC and inVentiv results are on track to achieve the approximate levels disclosed in our definitive proxy, despite facing headwinds from customer regulatory delays. However, I do want to point out that the delays have pushed 2017 revenue and associated earnings to be disproportionately weighted to the fourth quarter, with third quarter revenue being roughly flat compared to the second quarter. In addition, the delays and risk of additional delay have increased the risk of achieving the 2017 point estimate contained in our proxy. As for our longer term outlook, we remain bullish on the overall demand environment, as evidenced by our strong book-to-bill ratio, along with a combined company’s positioned to capitalize on revenue generating and cost saving opportunities.

Some of the factors impacting our increasingly positive longer term outlook include, but are not limited to, the following. We have a higher backlog coverage as of June 30, 2017, for a full year 2018 as compared to previous years, with backlog growing by 20% when compared to the backlog for the full year 2017 at the same point in 2016. While we are not ready to increase the INC portion of our 2018 revenue forecast included in the proxy, we are cautiously optimistic there maybe upside to our original estimates. Note that inVentiv Health has not completed its backlog coverage for 2018 and we expect to be in a better position to analyze their backlog coverage later this year after completing the merger. As outlined on Slide 11, we have successfully arranged committed financing to enhance the capital structure of the combined company, which should reduce our initial annual interest expense by about $8 million to $9 million compared to our previous estimates.

Bolstered by our progress on integration planning and response from our customers, we remain very confident in our estimates for cost synergies and earnings accretion and are increasingly excited about our incremental revenue opportunities. We currently expect to provide updated guidance for the combined company when we report our results for the third quarter 2017. Our updated guidance may differ materially from the amounts contained in the proxy as these amounts in the proxy are on a standalone basis for each company and therefore, do not include the direct and indirect impacts of the merger that I discussed earlier, among other factors. In closing, I would like to echo Alistair’s comments regarding our enthusiasm for both the strategic opportunity of our combination with inVentiv Health as well as the tremendous progress our teams are making towards closing the transaction. This completes our prepared remarks and we would be happy to answer any questions.

Operator?

Operator: Thank you. [Operator Instructions] Our first question comes from John Kreger with William Blair. You may begin.

John Kreger: Hi, thanks very much. A question for Alistair.

Alistair, if we think back to your fourth quarter earnings call, which I believe was in February, pretty dramatic improvement in your commentary and in the awards flow. Can you just give us your perspective on what you think might be driving it?

Alistair MacDonald: Yes, thanks, John. I think the demand environment has changed a little bit. We are not seeing the delays in customer decisions that we saw in the fourth quarter. So kind of the environment and the market we are in has changed a little bit, back to more the normal position than we saw in Q4, but I think also we made some changes internally.

Just the way that we collaborate, the way that we review inbound RFPs, the way that we respond to proposals, just the type of coordination between operations and business development really working to understand what the customer is trying to achieve while the industry is responding to the RFP making sure we get production out there around solutions. And I think the customers are really responding to that. We really kind of felt that focusing attention in the RFP process and I think some of the results you are seeing are as a result of that, particularly, I think as you guys would recognize in the period where we would expect to see some indecision around awarding, what clients need because of the merger. We just had massively positive responses from customers new and old where the combination that we are putting together with inVentiv is something that we are really, really interested in and that’s fantastic.

John Kreger: That’s great.

Thank you. And for my follow-up, can you just maybe talk a little bit to how inVentiv did in the second quarter to the extent you are able to comment on it? The customer delay comments you guys made towards the end of your prepared remarks it wasn’t clear if that was kind of specific to INC legacy or also related to inventive? Thanks.

Greg Rush: This is Greg. Go ahead, Alistair.

Alistair MacDonald: I was just going to say, I think the response has been a little bit different.

They have a different customer set. And they are in bigger longer term relationships. So, I think the response has been slow and steady. It’s not been a negative response by any means. And I think a lot of our customers from talking with Mike and some of the BD folks that have been face-to-face with customers.

They just see it as businesses as usual for inVentiv but with more horsepower on the way. So, again, not a negative, not as bigger response as I think we have seen. But I think that’s because we are bringing in new dimension to our customers, because we are bringing in potential commercialization for them in the future and more access to Real World evidence work. So I think when you look at what the merger brings to INC customers, it brings a new – it brings scale. It also brings new service offerings that people are interested in whereas for inVentiv it just brings scale and trusted process and things like that.

So, it’s not as much of a change for the customers that have been working with inVentiv. Sorry, Greg?

Greg Rush: John, I assume your question could be either related to awards, because we felt some delays in awards in the fourth quarter not so much in Q1 or Q2. So from an awards perspective, inventive is a little bit more lumpy than we are for

two reasons: one, 30% to 40% of their business on the CRO side is FSP. And under their booking policy, if they signed a 3-year FSP, they booked all 3 years and then they get 3 years without a renewal. So, you will have some lumpiness in the amount of the awards, you can have a big windfall one quarter and then next quarter you won’t have any awards there.

So, a little bit more lumpy than our business we are evaluating combined company’s policy on awards post combination. We are not ready to announce that yet. We are evaluating whether that’s a conservative enough policy. The second aspect is they have larger customers than ours and so they tend to get larger studies and so that can cause a little bit more volatility. From a revenue perspective, I would say it’s a little bit more acute at INC in the first half than at inVentiv, but both companies have seen delays.

Then I mentioned in our prepared remarks, we do see Q3 flattish in revenue for both companies, primarily because of those delays, but Q4 right now, based on our backlog is looking pretty strong. And 2018 as we mentioned, our backlog is up substantially compared to previous periods at 20%, which really bodes well for a strong growth. Again, that backlog is INC only we don’t have inVentiv’s yet. And obviously, we will be vetting that post combination and making sure that they conform to review of backlog policies and practices.

John Kreger: Very helpful.

Thank you.

Operator: Thank you. Our next question comes from Eric Coldwell with Baird. You may begin.

Eric Coldwell: Thanks.

A couple of things here. And I am not sure you are going to be able to answer all of them. But when you say you are cautiously optimistic on returning to double-digit growth in 2018, I wasn’t clear. Is that INC standalone or is that combined company?

Greg Rush: That is INC standalone. As you know, in the proxy we had the combined INC’s projections were double-digits and our bookings have done nothing, but support that.

We are more optimistic today than we were on May 10 on both INC’s standalone and the combined company’s numbers for 2018. We both are building good backlog for that in the CRO and new drug approvals are pretty strong so far this year, which is a precursor to the commercial. We got to get close that business in the second half of this year in the commercial business for sure, but at least the leading indicator is good for that business. So we are more optimistic today than we were in May given our first half results.

Eric Coldwell: Got it.

And then I think I heard you say that no client represented more than 6% of bookings this quarter. Is that correct?

Greg Rush: More than 10%.

Eric Coldwell: More than 10% okay. I am having some problems with the phone today. So, nobody more than 10%, one of the questions I have already received today a couple of times is with the strong 1.6 plus book-to-bill, are these – when you think about where the industry is sort of mixed in terms of reporting now with some going to more of a contracted basis and some more on a as awarded basis.

Can you add any color on that 1.6? How would that stack up if it were purely as contracted as opposed to as awarded? Is that something you have looked at and maybe you could share with us?

Greg Rush: We haven’t looked at that, Eric. As I have told you in the past, whenever a company provides guidance to you on what their numbers are going to be, they have to take into account four things if they are going to give you an accurate guidance forecast. They going to give you what their current backlog that’s been contracted is and how that slots into revenue. They are going to give you the backlog that has been awarded, but not contracted, because they have a forecast of when that is. And in this industry typically, things go to contract within 120 days, sometimes faster.

So if they are giving you a forecast on a February earnings call, their Q2 revenue has already got some awarded, but not contracted in that guidance. They have to do that. So we believe very much in transparency. So we want to give you as much information as we do. So that’s the second item.

The third item that they are using is their sales pipeline. You often asked what’s your win rate? How is your pipeline? Most companies don’t give you what their pipeline is because that could be a competitive issue with others to let people know what their pipeline is. But we sort of give you a not quantitative, but a qualitative idea of how our pipeline is, and so that’s the third element. And the fourth is most – all companies, in theory, could have been awarded business that under their bookings policy, whatever that maybe, they can’t put into backlog, for example, contingent awards. A great example of that, we talked on our earnings call about, in Q3, we received almost $100 million of awards from a Chinese company.

We have not booked that in the month of July because it’s contingent upon their Board of Directors approving, but absolutely when I – that work is supposed to start in the late third quarter, early fourth quarter. So when I am talking to you on this call about how I think my results for the fourth quarter are going to be, it also includes the anticipation of that work starting. So, those are the four things that we – that every CFO is going to take into consideration in giving guidance, giving you as much of that information to me I think is helpful, but that’s up to you to determine if you think that giving you that is helpful or not.

Eric Coldwell: Okay, thank you very much.

Operator: Thank you.

Our next question comes from Dave Windley with Jefferies. You may begin.

Dave Windley: Hi, good morning. Greg, you answered a little bit of that. I guess, my first question I will just combine a couple of things.

One is your commentary where you are talking about your confidence in the backlog for the fourth quarter and beyond 2018. And then the contingent awards not yet booked in July, but if they were to be booked, it sounds like they are supposed to start toward the end of the third quarter. So, I certainly noted that you skipped over the third quarter in your comments about your confidence about backlog and I wanted to explore why you did that? I think, again, maybe this contingent backlog is a factor and you did talk about the backend loading of the year, but if you could just kind of give us better sense of what’s going on in the third quarter and why you didn’t express that confidence about the backlog headed into the third quarter?

Greg Rush: It wasn’t intentional. In our prepared remarks, we tried to guide to what Q3 revenue is going to look like, because it’s basically flat with Q2. We are as confident in delivering that as we are in the Q4 numbers.

So, there is not a lack of confidence in Q3. It’s just that when we look at how our backlog is slotting, if you look at our awards, if you rewind to our February call, David and we talked about that through February – I think our call was around February 27, near the end of February. We had not at that point in time, still closed a lot of those awards that had delayed from the fourth quarter. So, we had a very strong month of March and so most of our bookings are in March. So think about it usually takes 4 months to go to contract, so you can’t take revenue until you go to contract, so that puts you into July for all of that work that was awarded in Q1 the earliest it could start, works not even.

So, when we first started, it’s sort of a slow bell curve moving out to a high point. So, we knew when we were looking at this year that it was going to be a much more weighted towards the fourth quarter revenue growth, same thing for Q2. Q2 was much more linear in awards. Quite honestly, it was not back end loaded. It was much more linear throughout the quarter.

But again, most of the work that was awarded in Q2 won’t start until the fourth quarter. So, that makes – that’s building the very strong growth profile for the fourth quarter relative to prior year and it leaves Q2 and Q3 as sort of our flattish quarters relative to the prior year and that – and we see a really robust growth in Q4 and beyond.

Dave Windley: Got it. So, if the Board of Directors of this Chinese client approves the awards, I presume is it approval of the funding – of the dollar – the allocation of the dollars for the studies is that what has to be approved?

Greg Rush: Yes. They have to approve engaging us.

So, it’s the whole approval of an agreement just like if we were entering into a lease they have to approve, our board of a certain amount would have to approve the entire lease, not just the funding. It’s just based on the dollar value they have to approve. And just to be clear on that, what we were trying to articulate that’s not lagging that tail is not lagging the dog on our forecast. That’s a small amount of revenue. The point we are trying to make on that is this is a very important study for CRO industry as a whole much less INC.

One, this drug has a reasonable possibility of being the first drug approved in the U.S. from a Chinese company. That will be a major accomplishment if we are part of that. Two, it’s a very large ophthalmology study for our CNS portfolio. It’s a novel compound.

And there could be follow-on studies and it’s the largest study in our history – we have talked a lot about Asia-Pacific out of China. That’s what we are trying to articulate. In addition, the fact that we got those awards in July, so not only we have a strong book-to-bill in Q2 of 1.6, the momentum what we have seen since March has continued into July and we have – those are all the things we are trying to point out that we weren’t trying to say hey, that’s the reason why we are going to have this robust growth in Q4. I mean, it’s going to be a rounding error in revenue in Q4 that study. That’s what we are trying to articulate.

Dave Windley: Got it. So you got to the much more important part. What I was trying to go to was if those studies did start as you anticipate would that be upside to the third quarter? It sounds like it’s a relatively small amount of revenue that you would recognize anyway, is that the right take?

Greg Rush: Yes, even for Q4, we weren’t trying to articulate that from a pure financial. There is so many qualitative points from that study and it really is about the momentum that we are seeing in our bookings.

Dave Windley: Yes, no doubt it’s very large.

So, thanks for your answers. Thanks.

Operator: Thank you. Our next question comes from Tim Evans with Wells Fargo. You may begin.

Sara Silverman: Hey, this is Sara Silverman on for Tim. I had a question on the China contract. I was wondering is that one of the larger deals that you guys talked about that you are working on earlier in the year and if you could talk about kind of the deciding factors that we met there? And then on Q2 awards, would you characterize that as kind of catch-up on the broad-based delays and then we would seem kind of a more return to more normalized bookings closer to the kind of 1.2x going forward?

Greg Rush: We don’t give guidance on bookings going forward. So we have always said bookings are volatile quarter-to-quarter. We had great bookings in Q1 also if you recall.

So I would say Q1 was more where we got the – if there was a catch up that we saw that. That study in July that we mentioned from China was one of the ones that had – we have been tracking since the fourth quarter, we didn’t necessarily expect it in the fourth quarter of last year, but we have been tracking that on for a while. We will end that study because we believe we are the strongest CNS company in the industry. We have a great experience there. We also believe as a sub point, ophthalmology is particularly one of our stronger areas.

So, we won that based on our experience and depth of therapeutic expertise. I think customer also appreciated our trusted process and ability to hit timelines. They were very concerned about timing of deliverance and they felt like we had the best track record of delivering what we said we are going to do when we say we are going to do it. So those two things, trusted process and therapeutics won that study.

Alistair MacDonald: I will just add to what Greg said there, I spent some time to discuss that around in China, and I think it’s very salient that we were able to show them exactly how this trial – their program will run, what the therapeutic insights were.

And as Greg mentioned, in the ophthalmology space, it’s key to know that therapeutic very closely. The sites we are going to take it through were key to having these kind of products as well as the qualifications to run it. So I spent a lot of time on the ground with the customer, we spent a lot of time walking them through how we are going to deliver it, what the trusted process means to them. They have spent quite a bit of time checking our references talking to other customers that we have worked with. And I think wrapping them up in both our therapeutic expertise, face-to-face contact going, as well as the Trusted Process and the fact that we brought them over the line.

Then, as Greg said, it’s very loud program very happy to have won it. And we look forward to start to deliver it in the next couple of quarters.

Sara Silverman: Great, thank you.

Operator: Thank you. Our next question comes from Robert Jones with Goldman Sachs.

You may begin.

Adam Noble: Hi, this is Adam Noble in for Bob. Thanks for the question. I just wanted to get to the customer concentration. I know you guys talked a lot about the strength in FSP and strength with some of those large pharma clients, but it does seem like the percent of revenue from SMID CAP Biopharma and client concentration overall has shifted a lot this year versus last year.

Anyway you could, I guess, square those two? And is that simply the SMID Biotech just really, really strong or anything else we should be thinking about?

Greg Rush: Alistair, you want to take the first part of that?

Alistair MacDonald: Yes. Unfortunately, I am on my cell phone today. So, I missed sort of the beginning, but I think the environment overall – but I think the question is general environment – biotech is it more broad than that? But I think our customers said we have always worked with it seems very energetic and very bullish in the market right now. So we got information from one of the analysts that told very recently about the level of biotech funding and how healthy it was and that kind of thing. So, I think we have seen and I think we have made comments and we have seen a lot of activity right across the platforms that we look at.

So across our details, across regions, across different customer types since we are fairly broad-based at the moment, FSP, I think we talked about in our – on the last earnings call about the FSP we had in that quarter. And I think we have more core service awards this quarter, but I think that’s just a timing thing overall. And the FSP ones might take a bit longer, a bit bigger, so it will come along a little bit less frequently and need to make it shortly, but I mean it’s pretty broad-based.

Greg Rush: Just one comment, I do think for INC in particular if you – one of the slides in the slide deck shows our awards and – by type and we have had over ‘16 and ‘17 we continue to be very robust in the small to mid and that’s where most of our awards are coming from right now. And one of the advantages of the inVentiv merger that gives us more exposure to the large pharma, so if you look at I think Slide 6 in the deck, you can see that steadily, our revenue has been shifting away from larger pharma to the small to mid and that’s mainly because of all the awards we have been getting in ‘16 and ‘17 coming primarily from the small to mid and we define that as below top 50 pharma.

Adam Noble: Got it. That’s really helpful. And just to ask one quick question on inventive, the revenue was down 7% year-over-year, anything you could share on the revenue growth for the two segments? Was that pretty similar for the two or did commercial or clinical decline more?

Greg Rush: I think clinical actually grew. I think if you look on Slide 13, the – our clinical net revenue growth grew by 5% and I don’t have the exact number on commercial, but I think it declined by double-digits when we were announced the merger we articulated that our forecast, our guidance expectations the numbers that were included in our proxy for inVentiv, they were all contemplated a low teen to mid teen decline for the commercial business in ‘17 compared to ‘16 and that was primarily due to

two things: one, they had a large cancellation at the end of ‘16 and secondly, they are coming off the year, which was – in which FDA approvals of new drugs had been cut in half, I think it went from something like 45 in 2015 to 22 I think is the number I have in my head for ‘16. And that really hurts their ability to grow revenue particularly on the selling solutions piece.

And so one of the things that we are optimistic about for 2018 is the fact that we are already above the approvals through June for the full year, so we are already – again on that same slide, we talk about – there is already 24 year-to-date approvals and that compares to 22 last year. So that’s a pretty strong growth. And a lot of people are predicting 40 to 50 approvals this year which if we get back to that level that should, in theory, give us an opportunity to return to strong growth in commercial in 2018.

Adam Noble: Great. Thanks for the questions.

Operator: Thank you. Our next question comes from Tycho Peterson with JPMorgan. You may begin.

Tycho Peterson: Hey, thanks. I will maybe just follow-up on that on inVentiv.

EBITDA margins did tick down a bit sequentially here. Can you maybe just touch on that? And are you guys still thinking about mid single-digit growth in EBITDA margins for that business for the year?

Greg Rush: EBITDA margins for inVentiv?

Tycho Peterson: Correct.

Greg Rush: They ticked up a little bit not substantially, but in the quarter, they went from 16.3 to 16.6 and then for the year-to-date, it went from 16 to 17.4, so they were up a little bit. And they also had excess staff, so one of the things that we decided to do, both of us for the same reasons, so inVentiv had originally planned when they came out of Q1 and we are looking at their backlog coverage in their forecast, they had some pockets of staff that were underutilized. And the original target date for the restructuring of the staff was at the end of May.

But given our announcement on May 10, they didn’t want – even though it wasn’t linked to our merger, they didn’t want their employee base to have an unconscious linking of our merger announcement with that layoff, so they pushed that layoff until the end of Q2. They carried those staff despite the fact that they didn’t have work. And then even as they exited Q2, both of us made the decision that as we look at our portfolio and backlogs, we should make sure that we have the right staffing mix and that we are going to wait and do a – after the merger to do a complete alignment of our staff and then if there is any excess staff at that point in time, take the staff out. So, that was our intention. That resulted in us having $3 million to $5 million of a negative impact on EBITDA just for the conscious decision of holding the staff.

They had the same thing that they did in Q2 and we will both do that in Q3, but by the end of Q3, we expect to have our staffing right-sized and that will result in favorable EBITDA margin expansion, obviously, by getting those staff out.

Tycho Peterson: Okay. And then just circling back on the revenue dynamics for inVentiv for the year, are you still expecting double-digit growth on the clinical side. Is that right?

Greg Rush: Did you say INC or inVentiv?

Tycho Peterson: inVentiv.

Greg Rush: inVentiv, we have never given guidance on the clinical side.

We may have it at the earnings call I think on the May 10 presentation we have talked about on a combined basis, INC and inVentiv together, would have double-digit growth. But we thought possibly in 2018 and INC was certainly looking at double-digit growth and we are even more bullish about our ability to hit the double-digit growth in clinical given our book-to-bills for the first half and we were – only said that in May. So, we didn’t give individual inVentiv guidance at either day.

Tycho Peterson: Okay. And then just lastly on backlog conversion, I guess, where do we – you think this kind of bottoms out? It was down a little bit again sequentially on the INC side.

So maybe just talk about where you think we bottom out there. And then similarly, can you just talk a bit about on backlog conversion for inVentiv?

Greg Rush: Yes. I don’t have the inVentiv backlog conversion number in front of me, so I will defer on that. Let we follow back up with you. INC backlog conversion is there is two things that are impacting backlog conversion for us this year.

It’s – and there is really three things. So, all the delays that we have had starting in the fourth quarter is causing a significant downtick in our backlog conversion. That’s the number one thing. The second is there has been a slight elongation of trials, the length of the trial that it’s supposed to run. So assuming no delay, we have seen the average duration of the trial pickup a little bit, because we have gotten a higher and higher percentage of oncology studies.

Oncology studies typically run a little longer. So those two factors are the biggest factors, but the third, which is actually a positive thing. When you have the record bookings that we have had in Q1 and Q2, your denominator and your backlog coverage goes up. And in theory, if you didn’t have the first two things, if you grow your backlog at a faster rate than your revenue, because you are having these record bookings, your backlog conversion is going to go down, which – in that instance is a good thing. And so back in 2013 and ‘14, our backlog conversion was going down, but it was going down slowly, because we were growing revenue at 19%, but yet we were growing bookings at 25%.

And so when you are growing your bookings at a faster rate than your revenue, you are going to hurt your backlog conversion and I don’t mind that particular phenomenon, but the first two, obviously, that hurts revenue. I think to your question as when does that bottom out, I am hoping that bottoms out in Q3. I mean, based on our current view of backlog burn and slotting, I would expect, again, particularly given that we have such a strong bookings quarter in Q2, that’s going to create a very big backlog ending balance. And given that our revenue is going to be flat, you can do the math. If you take the same revenue I did in Q2 and my ending backlog, I haven’t done the math, but I am guessing my backlog burn is going to decline again in Q3.

Tycho Peterson: Alright, thank you.

Operator: Thank you. Our next question comes from Sandy Draper with SunTrust. You may begin.

Sandy Draper: Thanks very much.

Most of my questions have been asked and answered in terms of specifics on the quarter. But maybe Greg or Alistair, bigger picture, you are now what 3 plus months since the merger, has been announced and obviously no disruption yet, a great quarter in terms of bookings, but any thoughts from customers or customer response in terms of the combined company? The customers have they had an a-ha moment or wow, this is going to be great, we can see more. Just love to get any anecdotal comments you can give us about the customer response. I know it’s not closed, but just see if they have given you some feedback? Thanks.

Greg Rush: Alistair, I will let you take that.

Alistair MacDonald: Yes. Thanks, Greg. Thanks, Sandy. Yes, I mean, we have had some great conversations with customers because obviously we can’t sell as a combined group kind of thing. But we’ve got a lot of our – a lot of the transition pieces of the merger was there.

We would have a lot of our small to midsized customers who would be more interested in staying with us going through Real World evidence and then going through the commercialization pieces. And I think the conversations that we have had have been very positive around that, plus they are very interested by it. They see the path that they can follow, but we have kind of made it easy for them to follow. And with a lot of their – I don’t know, I don’t know how to say it, but a lot of customers seemed very nervous about commercialization obviously. Ultimately, and I had a conversation yesterday with a customer about this and his comments were that – we are used to just kind of develop products and that was kind of the endpoint.

But now, obviously, with the pressure around pricing and reimbursement, it’s about what’s commercializable and the fact that we have this commercialization entity and that we can do everything or we will have it in the future and we can do everything and that we can help them plan for that future now rather in clinical, it seems really attractive. I mean, it seems obvious. But I don’t know, maybe just the fact that we put all the dots together for them. It just seems really that everybody is interested in it. People want to know how they are going to connect clinical to commercial and vice-versa.

And I think that’s a great sign, perfect for us for the future with that customer set. Now I think we will still see Big Pharma buying on an a-la-carte basis, they will buy from commercial or they will buy from clinical. Possibly it leads to a major – bottom line, it may take a while, but certainly that kind of theory had early days about small to mid companies having an option to commercialize themselves seems to be holding more so far in a very positive way.

Sandy Draper: Great. Thanks very much.

Operator: Thank you. Our next question comes from Michael Baker with Raymond James. You may begin.

Michael Baker: Thanks a lot. Just wanted to get a sense of as you – there is increased demand on the outcomes side of things.

Is there any sense as to how that margin profile shapes up relative to the development work?

Greg Rush: Yes, go ahead Alistair.

Alistair MacDonald: Let me add a comment and then you can comment on one other thing. I think, yes, a little bit, because right now we are building that group, so we are investing in that group. So when you look about business units numbers, they are a little bit lower than the more established groups in clinical, because we are investing in them. But I think the margins of the work that we are selling are pretty constant with the therapeutic business.

The Phase 1 through 3 therapeutic business, but there are also projects that are spread over a long time. So they are quite different structurally as well as the investments we have going on into those business units. Greg?

Greg Rush: I think you handled it. I have nothing to add on that.

Michael Baker: Thanks a lot.

Operator: Thank you. Our next question comes from Donald Hooker with KeyBanc. You may begin.

Donald Hooker: Great. Good morning.

Thank you for taking my question. Real quick one for me, because a lot of questions have been asked and answered. But in terms of the competitive dynamic, I know in the past quarter or two you have mentioned that you saw more sort of the larger CROs sort of successfully marketing down market into the small biotech sort of biopharma space whereas previously that sort of was, I guess, more for the smaller CROs. So for standalone INC, are you still seeing that or is that sort of competitive pressure eased off a bit or how can you describe that?

Greg Rush: I would correct what you said. We didn’t say that they successfully were going downstream, but we were seeing them.

So in the past, we would be in a bid with a small to mid biotech and we would typically see CROs number 4, 5, 6, 7 and then some that aren’t – you probably don’t follow that are smaller regional CROs. That was where most of our competition. In the last year, we have seen people the Quintiles, ICONs and Parexels of the world come downstream with limited success, but the fact that they are there and they are well run companies, I certainly can see them being more successful than they are initially. But we had not seen them in the past, and what we tried to highlight was that we were starting to see them more so than we did, say, a year ago. But I would characterize it as more limited success with some of those being more successful than others.

Donald Hooker: Okay, thank you. Thank you so much.

Operator: Thank you. I am showing no further questions at this time. I would like to turn the call back over to Alistair MacDonald for closing remarks.

Alistair MacDonald: Okay, thank you. Okay, thanks, everybody. Thanks for your time today and your continued interest and investment in our company. So, I wish you all a great day and thanks very much.

Operator: Ladies and gentlemen, this concludes today’s conference.

Thank you for your participation and have a wonderful day.