Good day and thank you for standing by. Welcome to the ICON Q4 and Full Year 2023 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I'd now like to hand the conference over to your first speaker today, Kate Haven. Please go ahead.

Good day. And thank you for joining us on this call covering the quarter and full year ended December 31, 2023. Also on the call today we have our CEO, Dr. Steve Cutler; and our CFO, Mr. Brendan Brennan. I would like to note that this call is webcast and that there are slides available to download on our website to accompany today's call. Certain statements in today's call will be forward-looking statements. These statements are based on management's current expectations and information currently available including current economic and industry conditions. Actual results may differ materially from those stated or implied by forward-looking statements due to risks and uncertainties associated with the company's business and listeners are cautioned that forward-looking statements are not guarantees of future performance. Forward-looking statements are only as of the date they are made and we do not undertake any obligation to update publicly any forward-looking statement either as a result of new information, future events or otherwise. More information about the risks and uncertainties relating to these forward-looking statements may be found in SEC reports filed by the company including the Form 20-S filed on February 24, 2023. This presentation includes selected non-GAAP financial measures which Steve and Brendan will be referencing in their prepared remarks. For a presentation of the most directly comparable GAAP financial measures, please refer to the press release section titled Condensed Consolidated Statements of Operations. While non-GAAP financial measures are not superior to or a substitute for the comparable GAAP measures, we believe certain non-GAAP information is more useful to investors for historical comparison purposes. Included in the press release and the earnings slides, you will note a reconciliation of non-GAAP measures. Adjusted EBITDA, adjusted net income and adjusted diluted earnings per share exclude stock compensation expense, restructuring costs, foreign currency gains and losses, amortization and transaction-related and integration-related costs, and their respective tax benefits. We will be limiting the call today to one hour and would therefore ask participants to keep their questions to one each with an opportunity for a brief follow-up. I would now like to hand the call over to our CEO, Dr. Steve Cutler.

Thank you, Kate, and good day, everyone. ICON delivered strong results in quarter four and for the full year 2023, as our team successfully navigated a dynamic environment impacted by several macroeconomic and geopolitical challenges. Through consistent operational delivery, increased scale and our comprehensive suite of solutions, we were successful in securing new partnerships and expanding existing relationships across our customer segments and with the world's top 20 pharma companies in particular. Overall, we continue to experience positive demand trends in our industry. In the fourth quarter, we did see some volatility in RFP activity across customer segments, as small biotech was somewhat muted toward the end of the year, with some companies continuing to be deliberate with their overall development spend decisions. With that said, we are encouraged by the improving sentiment among customers in quarter one, as well as underlying trends from a funding perspective that suggests a stabilizing market as we have entered 2024. Within the large pharma segment, we continue to see a strong level of opportunities, anchored by the strength of our new and existing strategic partnerships. In totality, across all segments, our overall trailing 12-month RFP activity increased in the high-single digits in quarter four, consistent with quarter three, and this appears to be continuing or even accelerating early in 2024. Given this backdrop, and in line with our previous comments, we expect book-to-bill to be in the range of 1.2 times to 1.3 times on a quarterly basis in 2024, with an overall target of 1.25 times for the full year 2024. In quarter four, net bookings increased 8% on a year-over-year basis, driving 10% growth in total backlog over quarter four 2022. We saw continued strength in demand across our large pharma segment for both full service and FSP solutions, as well…

Thanks Steve. In quarter four, ICON achieved gross business wins of $2.99 billion and recorded $461 million worth of cancellations. This resulted in a solid level of net awards in the quarter of $2.53 billion and a net book-to-bill of 1.22 times. Full year 2023 gross business wins were $11.77 billion and cancellations were $1.82 billion, resulting in the net business wins of $9.95 billion and also a net book-to-bill of 1.22 times. With the addition of the new awards in quarter four, our backlog grew to a record $22.8 billion, representing an increase of 2.4% on quarter three of 2023 or an increase of 10% year-over-year. Our backlog burn was 9.3% in the quarter, slightly down from quarter three levels. Revenue in quarter four was $2.66 billion. This represented a year-on-year increase of 5.3% or 4.1% on a constant currency basis. Full year revenue was $8.12 billion. This represented a year-on-year increase of 4.9% or 4.6% on a constant currency basis. Overall customer concentration in our top 25 customers increased from quarter three 2023, our top customer represented 9.5% of total revenue in quarter four, our top five customers represented 27.5%, our top 10 represented 43.8%, while our top 25 represented 66.8%. In the full year 2023, our top customer represented 8.9% of revenue, our top five customers represented 26.8% of revenue, our top 10 represented 41.4%, while our top 25 represented 62.9%. Gross margin for the quarter was 30.4%, compared to 29.8% in quarter three 2023. Gross margin increased 50 basis points over gross margin of 29.9% in quarter four 2022. Full year 2023 gross margin was 29.9% and we anticipate this to be a similar level for the full year 2024. Total SG&A expense was $180.2 million in quarter four or 8.7% of revenue. This is essentially…

Thank you. [Operator Instructions] Thank you. We'll now take our first question. Please stand by. First question is from a line of Justin Bowers from Deutsche Bank. Please go ahead.

Hi. Good morning, everyone. Can you just remind us what the net service fee revenue growth was in the quarter, and then more broadly, is there a rule of thumb or heuristic that we can use to help better understand sort of like what the topline headwind is from a shift to FSP? That's the first question.

I think that's two, actually, Justin, but on a direct fee basis, we're about 8% -- around about 8%. I think we did high-single digits, that's the number on a direct fee basis, so we feel good about that. We had slightly lower pass-throughs during the quarter, so that pushed us back overall to the five. In terms of topline impact of FSP, that's hard to -- it's really hard to quantify that at this stage. This is a very gradual approach. FSP is a relatively modest part of our business, although an important part of our business, and it contributes, at the bottom of the contribution level line, it's not too different, ultimately, to our full service work. So while it may have some modest impact on overall margins as it increases and we'll talk a bit about that as we go through the call and the trends on FSP, it's not as -- I think we talked about 200 or 300 – 200 bps to 300 bps as a number in terms of impact on a headwind basis over the longer term. But that's -- it really depends upon the customer and upon the particular contract.

Yeah. And of course, as we think about it, we talked about the fact that we saw that mix there last year, I think, we've started off this year with very strong indications that our full service organization is going to grow well in terms of business wins this year. So, and certainly, Justin, of course, it's included in our in our guidance as given and certainly the midpoint there would include the mixed shift, if you like, to the extent we see that during the course of it.

Appreciate it. That's what I wanted to, so I will jump back into.

Thank you. We'll now take our next question and this is from the line of Jailendra Singh from Truist Securities. Please go ahead.

Thank you, and good morning, everyone. So I wanted to follow-up on your macro commentary. It seems you are encouraged by data points and trends you've seen in Q1 thus far, but you're maintaining your outlook, which assumes slower CRO industry growth. So is it fair to say that you're not reflecting recent trends in your outlook, and if these trends continue, would you say that will be kind of upside your expectations for the year?

Yeah. I'd characterize it this way, Jailendra, and that -- I think as we said early in January on the RFP front, biotech was a little a little more muted, large pharma was strong. As we've gone into the first half of the first quarter of this year, we've probably seen the RFPs tick up and the environment sort of move up a notch. So, overall, in terms of RFPs in the first quarter, again, the first half of the first quarter. So we're not ready to declare victory and I'm not reporting the first quarter today, but we're seeing sort of mid-teens growth on the RFP opportunity. A lot of that through strength in large pharma. Some of the strategic partnerships we've talked about are bearing fruit in terms of opportunities. But we're also seeing a modest uptick around mid-single digits in the biotech space as well. So we talked about biotech stabilizing and improving, and that seems to be playing out in the first, as I say, the first very early part of this year. So we're encouraged by that. We're not quite ready to change guidance or to get further, to get too bullish on that at this point, but we're certainly very encouraged about the positive environment that we see in the first part of quarter one.

Okay. And then my quick follow-up on the gross margin. Looks like, of course, you expect that to be flat at 30% year-over-year. I just want to understand the puts and takes there. Are you seeing any pricing pressure from your clients, which might be impacting trends? Clearly shift to more FSP work is a headwind, but it's very gradual. Any offsetting factors you can highlight? Just give us more granular details about the gross margin trends this year.

Yeah. I'll take that one in terms of the margin progress and profile. Obviously, we were very happy with how we ended up the year. And yeah, we think that circa 30% is probably the right way to think about 2024. There are, of course, mixed shifts in the absolute levels of business. And to your point, they're quite gradual in terms of really having a significant margin profile impact. But we do a lot of work, as we've talked about in the past, in terms of making sure we're an efficient organization and that runs from making sure that all of our projects are highly utilized by our staff right down to the concepts of how we use our technology to continue automation and the use of robotics in our organization. And of course, that impacts not only on our gross margin, but on our SG&A as well. And so we look to continue that investment and Steve made reference to that in his prepared comments as we go through the course of 2023, I suppose, or 2024 I should say. All of that gives us confidence that, even with shifting dynamics in our mix of business between full service and FSP, we should be in a good place to be able to maintain that 30% gross margin, and as we talked about, that is our kind of more of our medium-term target as well. So we feel good about that and I think it's that diligence from a project management perspective and that use of technology that really gives us the comfort on that particular point.

Great. Thanks guys.

Thank you. We'll now take our next question and this is from the line of Luke Sergott from Barclays. Please go ahead.

Great. Thanks guys. Just to follow-up on that pricing. We hear about the competitive dynamics in the market. You always talk about the pharma industry always sharpening their pencils. But as you guys have shifted more towards large pharma, given the lack of biotech funding and RFPs out there, the large CROs are competing on fewer projects. So are you guys seeing fewer projects across large pharma and then how is that pricing environment among these projects, and is anybody kind of getting a little aggressive on the pricing dynamic?

Yeah. Thanks Luke. What we're certainly seeing more opportunities in large pharma. No question about that. The RFP dollars that are coming through are very solid and driving that, as I say, that early 2024, mid-teens increase in RFP on a trailing 12-month basis and we are seeing more opportunities as well. I think that's partly because of the number of strategic partnerships we have across the industry. I think it's partly because of the number of -- because of the fact that we are now a significantly scaled organization, we're a major player in the development space now and we're part of the conversation every time now, even if we're not a specifically a strategic partner with a large pharma, we get that opportunity. So we're seeing more, we're seeing more dollars. It’s price -- it's always a very competitive pricing environment. We have to sharpen our pencils. We have to be smart in the way we structure project teams and put projects together and we do that pretty well. So, I'd say the pricing environment hasn't changed dramatically. I would say that in our -- with our opportunities, because we are strategic with a number of these customers, our win rate tends to be higher in that part of the market as well. So we win a greater proportion of those dollars than we do in other parts of the market where we're competing with a number of different organizations and there are different perspectives on large versus small CROs, et cetera, et cetera. So, we certainly like that large pharma space. Of course, there's always some challenges on pricing, but we believe we're well positioned to be able to accommodate those.

Great. And then I guess the follow-up there is kind of on the same vein there. You guys put out the 1.25 book-to-bill guide. I don't remember you guys putting usually a hard target like that. So what's giving you the visibility? Is it something from the customer class, like, you said, like you can have a visibility in the biotech funding coming back or large pharma or some therapeutic index, just give us some type of idea of where you're getting that visibility?

Well, I'd say, first of all, it's a target rather than a guide. That is a fact…

Sorry, I didn't mean to put the words in your mouth.

Let's be clear, that's what we're shooting for. That's what we believe the market will support. So we're basing that on, the opportunities we're seeing coming in the door on the build that we have on a more strategic level with some of these midsize and large pharma customers. We're basing it on the stabilization and the improvement as we see in the biotech funding space and our opportunity to win business there. There's a number of things there. We feel we're in a good place to be able to benefit from those opportunities. We feel the companies moved along nicely. We've made a lot of progress with the integration, the union with PRA. That's much of that is behind us now. We feel very constructive about the long-medium and longer term future of the organization and the industry for that matter.

Great. Thanks.

Sorry. I'll just maybe just tack on quickly in terms of the 1.25 times, that's really the average target that we're thinking about for the full year. So that's not on -- every quarter is not going -- isn't necessarily to say it's 1.25 times on the mark, but it's still that the range between 1.2 times to 1.3 times for the full year, which of course averages 1.25 times.

Okay. Great. Thanks.

Thank you. We'll now take our next question and this is from the line of Eric Coldwell from Baird. Please go ahead.

Thank you. Good morning. I wanted to hit on staffing and resourcing. I'm curious with the mid-single-digit revenue growth this year, what kind of hiring needs you might have? How does that look on a gross and net-based, i.e., is turnover improving? Can you get more with less, if you will? And then I know you've done a couple of smaller deals here recently. What -- where do you think you end up the full year, including the M&A, in terms of headcount? Thanks very much.

Sure, Eric. So, overall, headcount-wise, we didn't really increase this year. We were able to get the growth through improvement in efficiency of, as I say, the 41,000 very dedicated employees that we have in the organization. Part of it was I talked about the hours on the automation, 2 million hours went in there. That certainly helped us and we're planning…

Right.

… more of that. So resourcing was solid. Retention's been very good. In fact, we've seen retention improve month-to-month, quarter-to-quarter, really, for the last couple of years now. So we're well above our retention levels pre-COVID now and we feel -- so the pressure in terms of resourcing is lower than it was. That's helping us from an SG&A point of view. We feel the workforce is engaged and enabled and really making it very positive. So we are -- I would say we're a more efficient organization than we were certainly two years ago and we continue on that push. As I said, the target was to move automation to closer to the 3.5 million hours, which represents a significant number of people if you convert that to hours. But that's the way we see our workforce growing, mainly through automation and process improvement than through actually adding headcount. Having said that, with the growth projection we have for this year, we will be inevitably adding people, but probably at a lower rate, and certainly, at a lower rate than we add revenue, so if you can work it in those sort of terms. We think we can continue with the efficiencies and with the improvement in the efficiencies, be it utilization, automation, all the rest of it. And as we get back and step back in the M&A market, clearly we'll be bringing on people as we acquire organizations and acquire companies, and we'll work that through and we'll work them into the organization, but that will be -- again, I think, we can say that we'll be increasing revenue at a greater rate than we'll be increasing headcount or the cost of headcount as we go forward.

That's great. If I could just throw in one follow-up here or a different question, the 1.2 times to 1.3 times book-to-bill range is consistent with what you've said in the past. I'm curious with this new publicly known contract with BARDA or opportunity with BARDA, do you have expectations in your annual book-to-bill related to that? I assume they're fairly modest, if so, but I'm just curious how much of that is, I hate to use the term legacy or core, because I think these are all core contracts, but non-BARDA work, how much of the net book-to-bill goal is more, I guess, traditional work versus this unique government opportunity and I'll wrap it up there. Thanks.

We see the occasional BARDA contract coming along, Eric, but there's nothing in Q4, and although, there may be some opportunities in the pipeline, we don't think they're going to materially have a major impact on our book-to-bills across the year. They may have some impact if they come in on a quarterly basis, but across the year, in terms of the aspiration, the target we have for new business awards, it'll be very modest or minor. So while they're important for our business, and obviously, they tend to be vaccine-related studies, and they give us an opportunity to earn revenue faster than some of the other projects we do and so from that point of view, particularly, they have some benefit for our organization. We don't think they're going to be particularly material on an annual basis and not necessarily going to drive that – that -- materially drive that book-to-bill number.

Thanks very much.

Thanks, Eric.

Thank you. We'll now take our next question and this is from the line of Patrick Donnelly from Citi. Please go ahead.

Hey, guys. Thanks for taking the questions. Steve, I wanted to pick up on the burn rate that you just mentioned there in terms of just what's in the pipeline, obviously, I know it varies between things like oncology. Obviously, you mentioned Sparta there. Can you just talk about how you're thinking about that burn conversion rate this year and where that trend line is going? And maybe Brendan, I'm sure you can chime in as well, but just curious on how you're thinking about that piece.

Yeah. Pat, I'll give you a bit of an opinion on that. Then Brendan can give you some more detail. I mean, we're at about the 9.3% this quarter. It's down a little -- it's down 20 bps from last quarter. It's probably not going up anytime soon, I would say, given the portfolio mix that we have as we've moved away from those vaccine trials at COVID. So we're possibly going to trend down 10 bps or so, that -- we're obviously working ways to avoid that, to speed up the current trials we've done, and we've had some success in doing that. But the trend is probably marginally flat or down, I'd say, in the in the sort of medium- – short- to medium-term. Brendan?

Yeah. No. I think that's exactly it. I don't know how to put that, it’s probably as we go through 2024, we probably think about more in that 9.2%, 9.3% range, and that's probably where we'll be. And to Steve's point, of course, there's opportunities that if we can get more of that vaccine working in the door, that might have a little bit of a -- help us with a little bit of a tailwind in the back half of the year, but at this stage, we're very much looking at the ranges that they've outlined.

Okay. That's helpful. And then maybe just following up on one of the earlier questions, Steve, I know you said, the RFPs, I think, it was mid-teens so far this quarter. I mean, it clearly sounds a little more constructive than you sounded at JPM in January. Can you just talk about, I guess, what you saw over the last month, month and a half to kind of, I guess, come out with a little more constructive tone there, and again, it sounds like that would shape up well in terms of just how to think about the book-to-bill for 1Q, I guess, being squarely in that 1.2 times, 1.3 times range. But just wanted to talk through what you're seeing over the past month and change there.

Yeah. Pat, I mean, I think, we have to be a little careful here. RFPs are a marker for new business wins, but they're not a perfect marker. We all know that. And so, but having said that, what we've seen, as I said, over the first seven weeks or eight weeks of the year is a nice uptick on a trailing -- particularly on a trailing 12-month and year-on-year comparison basis. As I said, mid-teens across the portfolio, but the majority of it is in the large pharma space. And that, to us, is good because, as I mentioned, we have a better win rate in that. So more dollars and more opportunities and a better win rate means we feel good about where the large pharma space is going. Having said that, we're also seeing a more modest, but certainly an uptick in our biotech opportunities and that's exciting for us as well, as we're really making a push on our biotech profile in the industry. We have 7,000 people focused on biotech and they actually do focus on biotech. It's not a smoke and mirrors thing with us. We have these people totally dedicated to this space. And so we're doing a bit more talking about that with our customers, and I think, that's starting to get some traction. And so, overall, we feel we've almost got past the nadir. Perhaps the nadir was the fourth quarter and we're starting to move. We've upped it a notch, I think, and it certainly feels to us like we're moving. The train's moved away from the station and we're starting to gain a bit of pace in that area. So, overall, as I say, I'm pretty constructive about it.

Understood. Thank you so much.

Thank you. We'll now take our next question. This is from the line of Jack Meehan from Nephron Research. Please go ahead.

Thank you. Good morning and good afternoon. I wanted to ask about some of the customer disclosures you provide. So just recently, you've had pretty good growth from your largest customer. I was wondering if there were any themes you would call out or therapeutic areas. Just how should we think about the durability of growth here?

Yeah. I think, as you can see from the numbers we reported, the largest customer did grow. That was specifically related to a couple of large projects that moved forward pretty quickly in the quarter and so I don't think we're necessarily seeing that as a sustained trend. Alternatively, the two to five dropped a little bit. Again, as it relates to one particular customer in there where the mix shift was changing a bit. So, these things change a little bit on a quarter-to-quarter basis, Jack. I wouldn't get too focused in on that as those are sort of long-term trends. We feel we're in a good place with our top 10, top 20 customers. They're all -- apart from one or two, they're growing and the ones that aren't growing it's more a mix shift change rather than anything else and even so we're seeing more of the business that they're wanting to go into, albeit it's at a different revenue flow. So, overall, we feel good. I've said it a number of times, we've made progress on the strategic front with a couple of customers and even others in the large pharma space where we haven't necessarily become a strategic partner with them and we're talking to them about some significant opportunities. Some of them are having some challenges, as we all know, and that has led to probably more strategic discussions around what we can do and how we can help them to get through some of the short- or medium-term pain that they have to endure. So, I know we often think about when customers are having a hard time sort of financially that they necessarily cut costs or cut spending. They can spend in different ways in my experience and sometimes that can be a significant benefit for us in terms of what they do versus when they're running and growing and their revenues are going up as well. So hard times produce opportunity for us and that's certainly proving the case in one or two areas on the significant large pharma space.

Great. And as one follow-up, what's the latest tone you're hearing around the IRA? I think there was a lot of, maybe concern or uncertainty around that last year. Do you feel like customers have a greater handle around how that's going to impact their R&D spend plan?

I haven't heard a lot that's changed since last year. I do think there's some genuine concern from customers around how their organizations are going to handle that. We have a meeting in a couple of weeks with some of our largest customers and that's a topic on the agenda to talk through with. We have some external people coming in, so I'll get a better handle for it then. But I don't think things have changed dramatically. I know that it's moved forward, they're negotiating the pricing. We haven't seen a -- we haven't seen -- I don't think that's been necessarily a reason for any budget challenges that they've had at this point. These are changes that are going to take some years to work in. And so, the short answer to your question, Jack, is not much changed, really. They remain, I think, concerned and somewhat challenged by it, but they're looking at different ways of developing drugs. We've talked about doing it in concurrent -- doing these developments concurrently rather than in series and that gives us an opportunity to expand the opportunity, to get them to market faster in multiple indications versus just waiting and doing it, as I say, sequentially. So again, sometimes these things and often these things, give us opportunity because we represent a possibility of doing things in a different way.

That was good. Thanks, Steve.

Thank you. We'll now take our next question and this is from the line of Elizabeth Anderson from Evercore ISI. Please go ahead.

Hi guys. Good morning and thanks for the question. I just wanted to follow-up on some of the demand questions that have been asked before. I think, obviously, one thing people continue to be worried about is, like, the overall, sort of pharma spending environment, whether it's IRA specifically related or something else. It's obviously nice that you have that new strategic partnership. That's nice to see. Can you talk about sort of the level of visibility on your strategic partnerships with large pharma and how kind of maybe they help you get a sense of sort of where their pipelines are going and help give people a little bit more confidence in the trajectory there? Thank you.

Yeah. I mean, I think, with our strategic partners, Elizabeth, we do get some visibility on their pipelines and that's one of the advantages of that partnership. We know what's coming down the pike. We know what therapeutic area we need to ramp up in and through our understandings and steering -- senior steering committee meetings, we're able to work out where we need to be as a partnership. I'm not hearing, again, at this stage, any further concerns on funding or on their R&D spend, if anything, based on the RFP opportunities we've got over the last couple of months and even last quarter, last year and second quarter and third quarter was strong as well, we're seeing more opportunity. So, I guess, I keep saying it, but as their budgets become perhaps a little bit more constrained or they watch where they're spending their dollars, they do appear to be coming more open to outsourcing and outsourcing even more than they're doing at the moment. So, as I say, I can't add much in terms of where the budgets are and whether it's an increase or decrease. We see -- we read the same data you do in terms of modest increases in R&D spending over the medium- to long-term, but it's how that money's allocated is really what's important to us. And if anything, I think we're seeing more opportunity in terms of the dollars that are outsourced and the opportunity to penetrate further that market.

Got it. That's super helpful. Thank you very much.

Good.

Thank you. We'll now move to the next question. Please stand by. This is from the line of David Windley from Jefferies. Please go ahead.

Hi. Hi. Good morning. Good afternoon. Thanks for taking my questions. I wanted to explore margin a little bit. First, just in talking about the FSP shift, you've highlighted that it is very gradual. I get that. I -- my sense is that, at least what I'm aware of is that, at the gross margin level, the margin difference between full service and FSP would be quite a bit wider. And then maybe at the EBITDA margin level, you get to that 200 basis points to 300 basis points of margin difference because the SG&A load on FSP is lower. You could correct me if I'm wrong there. So, I guess, I wanted to understand maybe if you could quantify from a percentage of revenue basis, how gradual is this shift to FSP such that you still think you can keep the gross margin at around 30%? I'll leave it there and come back with a follow-up.

I might take a crack at that one just to start off with. As you said, it is a gradual process. And as we think through the impact of this, and let's be honest as well, and before Christ, we said at the start of this year, actually, if anything, the scales probably tipped more towards the full service piece in terms of the opportunity that's out there. So I don’t think -- I'd start off by saying, we've seen trends in moving from full service to FSP in the past. I don't know if this is structurally any different from the trends we've seen in the past where some folks move in one direction, some folks move in the other direction. So that's probably the first important point to make. I think your commentary is not incorrect in terms of by the time you get to EBITDA, it's minimized and we've talked about the fact that in excess of 20% of our business is in that kind of FSP share of our revenue portfolio. I mean, we don't see it moving materially enough, I suppose, to really shift the gross margin piece. Certainly in terms of what we can do, as we've talked about, the efficiencies we drive through good utilization of our workforce through the use of automation in terms of balancing out any kind of makeshift that we have there. So I think we're a good organization. We've been doing FSP for a long time. I think we're efficient at how we deliver on our FSP contracts to the point that we can manage this and manage that growth. But I do think it's important to note that I don't think, I mean, I'm not even sure we'll see a material shift in terms of the percentage year-over-year from 2023 to 2024 in terms of the FSP, non-FSP business. So it is gradual and it will take time. And as I said, we've got other people going the opposite direction as well. We've got people moving away from FSP towards full service. So I'm obviously not giving you maybe the granularity it's like, but I do think we're very comfortable with, as we get through the course of this year, being able to maintain those gross margin profiles overall and being efficient as an organization and very accustomed to both models to be able to drop that margin improvement that we talked about, 50 bps to the EBITDA line.

Got it. Okay. And I did note that you said that the incremental partnership was full service. So that probably factors in. My follow-up question is around the automation. I mean, in so much as, notwithstanding your answer, this trend of multiyear trend toward FSP, offsetting that with automation seems particularly important and the improvement in your hours of automation seems pretty strategic and critical to your margin expansion strategy over the long-term. So I've kind of a two-parter here. One, could you give us a sense of the cost of an automation hour versus the cost of a labor hour? And two, in so much as you finished the fourth quarter of 2023 higher than you expected, and so the full year, you -- in air quotes, kind of pulled forward 20 basis points of margin expansion to 2023, to the full year of 2023, getting to 50 basis points is really more aggressive than or more aspirational than when you gave that guidance the first time and maybe give us the comfort that you still think that full 50 basis points is achievable? Thank you.

I'll start maybe, Dave, on -- I suppose the way we measure those hours that we're talking about, they're the equivalent hours that people would do. So if this was a job of work, we're talking about removing those hours from the organization. So when we talk about like the 2 million, we're talking about 2 million hours of kind of labor time removed from the organization. I don't know if I have above hour ratio for you that I can quickly give, unfortunately, but what we're talking about is a very substantial amount of hours of our average labor costs removed from the organization and not the target we think about in terms of how we measure that as an organization and also how we set a target. I mean, obviously, 2 million hours of people's labor time, even if you say, take a blended rate and look at our different geographies around the world and even if you said that this was occurring in lower cost geographies where you take the automation out, even if you made all those caveats, you're talking about very substantial savings as a result of this type of automation. And so we do think you're absolutely right, it is an important and strategic element of our gross margin development and something that we will be continuing to focus on over time. On the second bit, and then I'm sure Steve will want to chime in as well, but on the second piece, I think, as well enough, Dave, at this point to know that we generally don't talk about targets that we feel we can't hit. So we still do think the 50 bps is right, you're quite right, we ended up better than we thought we would and so that's a more ambitious target. As I've said earlier in the call, I think, it's more around kind of keeping that gross margin in that 30% ballpark and seeing continued leverage on our SG&A. And of course, you saw an absolute dollar decrease in 2022 to 2023 of $25 million on our SG&A. So we've got a great experience there and an amazing team that helps us deliver that leverage and it's that kind of leverage we're looking for, not quite that level of leverage, we don't need to absolute dollar drop as we go into 2024, but we certainly need to see the vast majority of the leverage on the 50 bps come from SG&A over the course of the year and I think we've got a good plan to achieve that. I don't know, Steve, if you want to add anything.

Oh! I think that's it, you said it all.

You're right. Thank you. I do know you to be very good at that. You're right.

Thank you, Dave.

Thank you. We'll now take our next question and this is from the line of Max Smock from William Blair. Please go ahead.

Hey. Good morning. Good afternoon. Thanks for taking our questions. Just a couple of quick ones for me here. So on direct fee versus pass-through revenue, I think it's been a couple of quarters now where pass-through revenue has been a pretty meaningful headwind on the topline. Just wondering if you can give us direct fee revenue growth in total for 2023 versus pass-throughs and then what you have embedded for each of these buckets in the topline guide for 2024. Now let's go ahead and ask my follow-up since it's related. How much of the margin improvement this year came from that mixed shift to direct fee revenue and then how are you thinking about the impact margins from this potential mixed shift in 2024? Thank you.

Max, I'll maybe give it a crack in terms of the 2022 over 2023 piece. Obviously, we've talked about direct fee being more on the high-single digits. And as you can see, well, you obviously can read what we did from a pass-through inclusive number for the full year. So, yes, there was a continued headwind from pass-throughs as we came through the course of 2023. That has been somewhat of the consequence of the kind of vaccine and then moving more towards our more traditional, let's call it, therapeutic mix of more oncology, more orphan-type therapies that have longer durations and so we've seen that as a headwind over the last couple of years. It's not peculiar to 2023. We do feel like we're coming, we're getting to the shorter yards on that. We talked about our -- the mix of that probably still being, to some extent a headwind as we go into 2024, but not to the same extent as we've seen in 2023 particularly. And we've also talked about, our expectation around our COVID, non-COVID mix is probably not dissimilar in the 3% to 4% range both in 2023 and in 2024. So, yeah, we would like to think it will step down a little bit in terms of a headwind as we go into 2024, but of course, we'll see how that plays out during the course of the year and we'll give you more granularity on that as we go through. The second part of the question. Sorry, I didn't scribble it down.

Mix shift.

We talked – yeah. Exactly. We'll give you -- I think, as we go through the course of the year, that mix shift will give you a bit more granularity.

Sounds good. Thank you.

Thank you. We'll now take our next question and this is from the line of Ann Hynes from Mizuho Securities. Please go ahead.

Hi. Good morning. I just want to focus on capital deployment. I know in your prepared remarks, you talked about M&A. Do you have unannounced M&A in your guidance, would be my first question. My second question would be maybe types of assets you're looking for that maybe you need to bulk up and then with the share repo, that’s not -- I know that's not in guidance and how do you balance M&A versus share repo for this year?

Okay. The answer to your question is no. And your first question, anyway, we don't have any M&A in our guidance. So just to be clear on that. In terms of…

New M&A, sorry, the new M&A, the previously announced M&A obviously is in there from Phillips and...

That's right. Yes. Yes. Yes.

Yeah.

That's in there. Yeah. Previously announced, yes, but there's nothing new in there. In terms of how we're looking at share buyback, we're at kind of a pivotal point with the organization. We've done, I think, a very good job in paying down our debt. We're 2 times adjusted EBITDA. Now that's a good place to be. And quite frankly, we want to be – we want to remain within kind of 1.5 times to 2.5 times. So as we – we have some potential -- we're still going to make another payment this quarter in terms of our debt. We'll be working hard to restructure that and get ourselves into a situation of certainty on what our interest payments will be and we've talked about the $100 million improvement or reduction in interest rates fees for 2024 versus 2023. And as we do that, we will remove -- particularly as we get towards the second half of this year, the M&A area is becoming much more important, and so we're actively looking at the moment, because these things take a little time, at a number of areas on the M&A front. We've talked about building our Accellacare site network and being stronger in that space. The labs represent an opportunity for us, whether it be in the specialty labs or the central lab. So, our lab is not within the top three at the moment. We'd like to be within the top three. And so we see some opportunity there. And then there are some other around sites and patients and services around concierge services, around even areas like devices. There are a number of areas we're looking at very hard for an M&A and that’s remain -- as we get and restructure our debt and move forward with that, the M&A becomes our priority for capital deployment. The share buyback is there, and we've -- as I say, received authorization from the Board to do that and we'll deploy that. We'll use that as and when we see fit opportunistically. And particularly if we don't find anything on the M&A front that we feel we can execute effectively and at a reasonable price. But at the moment, we feel there are some opportunities out there to buy organizations and capabilities that really fit with our organization, that fit with our capabilities and really allow us to prosecute clinical trials faster, better and more efficiently for customers and that remains the absolute priority.

Great. And just on your revenue guidance, there is a wide range and can you just go through what gets you to the low end and what gets you to the high end or the big variant factors?

Yeah. I'll take that, Ann. There is a wide range and we'll be narrowing that as we go through the course of the year, without doubt, and we may even think about that in quarter one or quarter two. I think we're still looking at a market, certainly, when we set the guidance, that will have some element of uncertainty in it and we were trying to really reflect that. There are obviously some opportunities. Steve made reference to the fact that there could be some additional vaccine work that could burn quickly through that and that might help us to get up into the higher end of the range, and likewise, there's always the risk of cancellations in this nature of the business. That's just the nature of the world, right? So as we get more certainty, certainly, we'll be narrowing that range as we get into the year. But certainly, I would always say to people when asked, midpoint is as good a place as any, right? So if you're trying to do your modeling, that's where I'd send you to.

Okay. Great. Thanks.

Thank you. And we'll now take our next question. This is from the line of Jack Wallace from Guggenheim Partners. Please go ahead.

Hey. Thanks for taking my question. I'll keep this brief. I was just wondering given the market dynamics and the pressures facing your customers, particularly the largest ones, if there's any incremental appetite utilizing risk-based monitoring and if we'll follow up to that if some of your investments in AI could be an accelerator for that? Thank you.

Okay. So, Jack, as I understand your question, is there any incremental appetite for risk-based monitoring based on some of their financial challenges? I mean, I wouldn't necessarily associate risk-based monitoring with financial challenges. I mean, risk-based monitoring is part of what we do on a normal basis now, where we focus our attention and our resources on sites or patients or areas of the data collection process that has the greatest risk and we use particularly offsite and our IT technology, some of our newest IT technology, to identify data that perhaps needs further scrutiny. And it is a more efficient way of doing it. So to that extent, we're spending our customers' dollars more effectively and more efficiently. But I think of it in those terms rather than as a cost reduction way of doing things. It's just a more effective way of deploying dollars around the clinical monitoring process is what I'd put it. Is that antiquated?

On the risk. Yeah. No. That does. I appreciate it. Thank you.

Yeah. Yeah.

Thank you. We'll now take the next question. This is from the line of Dan Leonard from UBS. Please go ahead.

Thank you. Just a couple of cleanups. First off on the COVID work, can you remind me what percentage of your backlog at this point is COVID and how you expect sales to trend in 2024?

Hey, Dan. They're well aligned in terms of the backlog and the percentage of revenue in that range of 3% to 4% for the full year.

Thank you. And the other cleanup, can you give an acquisition sales contribution figure in the quarter? If you did, I missed it, from the deals you've already announced and then how much is in that 2024 guide?

Oh! It's not huge. I mean, it's circa 10 in the quarter. It'll be in that ballpark for the quarter. It's not far off.

Thank you.

Thank you. We'll now take the next question. This is from the line of Derik De Bruin from Bank of America. Please go ahead.

Hey. Thanks for taking the question. This is Mike Ryskin on for Derik. Same thing, a couple minor cleanups. One is just, could you clarify exactly what the pricing assumption is for 2024? I know you talk about price qualitatively, but if you could quantify it. And then also on the interest expense, the $100 million year-over-year, all that makes sense and you talked about some of the payments coming over the course of the year, but just anything on pacing as we go through the year, just from modeling, when should we – when and how should we pace that through the year? Thanks.

On the pricing piece, Mike, it very much depends. There's no straight answer to that one. Of course, we have inflationary increases in most of our contracts and we have those negotiations with our customers at the start of the year. They obviously follow CPI Index in terms of inflationary pieces. So that's a conversation that happens every year. It's progressing around this time of the year again, but each new business will depend on the individual customer. And on the $100 million of, I mean, I would say, probably, more back-ended. We want to try to get all this sorted out in H1. So I would say, stepping down quarter-by-quarter, but probably more dramatically in the second half.

Thanks, guys.

Thank you. And we have one more question. This is from the line of Casey Woodring from JPMorgan. Please go ahead. Great.

Great. Hi. Thank you for squeezing me in. A lot's been asked, but I wanted to follow up on the strategic partnership questions. Just wondering how many of those types of partnerships you have now and is there a way to size this new opportunity that you called out this quarter and then the total opportunity of those partnerships in aggregate? And then also just what gives your full service offering a competitive advantage in winning those types of partnerships? Thanks.

Just a minor question at the end there, Casey. Is it competitive advantage of us over the industry? Let me start with the strategic partnership. We're not ready to sort of size it at that stage. We think of these things as being ultimately at least at the sort of $200 million in revenue annually. That's what our expectation is, as you become a strategic partner with a top 20, top 30 pharma company. I don't have a number for what the entire strategic partnerships give us, at least not on the top of my head. We are what we would call strategic with a significant majority of the top 20 pharma companies at the moment. I think we talked about when we got together with PRA 18 months ago or so, 20 months ago. I think we had 13 on. We've advanced that by several now. It's something like 16 or so. So we've made some significant progress. And importantly, there are a number of companies, while we haven't necessarily signed an MSA or become a strategic partner, we are talking to them and we are getting opportunities from them. Often this is a process that can take a year or two, not just to win the partnership or to be considered a strategic partner, but ultimately as the business ramps up with it. So these are things that aren't going to have an immediate impact on our revenues. But we are seeing certain opportunities. I am, to be quite honest, starting to drive those RFP improvements that I talked about. In terms of competitive advantage, we are a scale player now and our union with PRA, that is now 20 months ago has -- more like 30 months ago, in the middle of 2021, has made a major…

Thank you.

Okay. So I think, thank you, Operator. I think we're done with the questions. Appreciate the input and the questions from everyone. So thank you for joining the call today, your continued interest -- and for your continued interest in ICON. We're excited, certainly very excited for the opportunity ahead. We believe we're at a really pivotal point in our company's development now and I think that's been evidenced by some of the things we've, some of the comments we've made today around those strategic partnerships and the opportunities that we have going forward. So thank you for the questions and have a good day.

Thank you. This concludes the conference for today. Thank you for participating and you may now disconnect. Speakers please stand by.