Covance's CEO Discusses Q1 2012 Results - Earnings Call Transcript

Covance (CVD)

Q1 2012 Earnings Call

May 03, 2012 10:00 am ET

Executives

Paul Surdez -

William E. Klitgaard - Chief Financial Officer, Corporate Senior Vice President and Treasurer

Joseph L. Herring - Chairman and Chief Executive Officer

Analysts

Eric W. Coldwell - Robert W. Baird & Co. Incorporated, Research Division

David H. Windley - Jefferies & Company, Inc., Research Division

Robert P. Jones - Goldman Sachs Group Inc., Research Division

Tycho W. Peterson - JP Morgan Chase & Co, Research Division

Gregory T. Bolan - Sterne Agee & Leach Inc., Research Division

Ricky Goldwasser - Morgan Stanley, Research Division

John Kreger - William Blair & Company L.L.C., Research Division

Todd Van Fleet - First Analysis Securities Corporation, Research Division

Garen Sarafian - Citigroup Inc, Research Division

Stephen S. Unger - Lazard Capital Markets LLC, Research Division

Douglas D. Tsao - Barclays Capital, Research Division

Timothy C. Evans - Wells Fargo Securities, LLC, Research Division

Sean W. Wieland - Piper Jaffray Companies, Research Division

Presentation

Operator

Good day, everyone, and welcome to the Covance First Quarter 2012 Investor Earnings Conference Call. Today's call is being recorded. At this time, for opening remarks, I'd like to turn the call over to Vice President, Investor Relations, Mr. Paul Surdez. Please go ahead, sir.

Paul Surdez

Good morning, and thank you for joining us for Covance's first quarter 2012 earnings teleconference and webcast. Today, Joe Herring, Covance's Chairman and Chief Executive Officer; and Bill Klitgaard, Covance's Chief Financial Officer, will be presenting our first quarter financial results. Following our opening comments, we will host a Q&A session. In addition to the press release, 18 slides corresponding to the commentary you are about to hear are available on our website at www.covance.com.

Before we begin the commentary, I would like to remind you that statements made during today's conference call and webcast, which are not historical facts, might be considered forward-looking statements. Such statements may include comments regarding future financial results and are subject to a number of risks and uncertainties, certain of which are beyond Covance's control. Actual results could differ materially from such statements due to a variety of facts, including the ones outlined in our SEC filings. Certain of the 2011 financial measures we will discuss on this call are non-GAAP measures, which exclude the effects of events outside of our normal operations, such as items associated with our previous restructuring. We believe that providing these measures helps investors gain a more complete understanding of our results and is consistent with how management views our financial results. For a reconciliation of GAAP to pro forma results, please refer to supplemental schedules included in our press release issued last night.

Now I will turn it over to Bill for a review of our financial performance, which begins on Page 4 of the slide show.

William E. Klitgaard

Thank you, Paul. Good morning, everyone. All results in the first quarter of 2012 are presented on a GAAP basis, and in my comments, I'll be comparing those results to previously reported pro forma results from 2011. Net revenues for the first quarter were $531 million, that's an increase of 5.7% over the first quarter of last year. Growth was 5.9% on a constant dollar basis. Sequentially, a stronger U.S. dollar resulted in a slight $2.4 million FX headwind.

Operating income in the first quarter was $46.1 million, resulting in an operating margin of 8.7% of net revenue. This was down 220 basis points sequentially and 80 points year-on-year. EPS was $0.60 per share, which is flat year-on-year and down $0.13 from last quarter. The sequential decline in earnings per share was driven by weak performance in Early Development and to a lesser extent, increased spending on information technology, which were partially offset by the strong performance in Late-Stage.

The benefit of the share repurchase program added approximately $0.02 to EPS in the quarter. The effective tax rate for the quarter was 21.6%, and we expect a similar effect of tax rate as we look ahead to the rest of 2012.

Now please turn to Slide 5. In the first quarter, Early Development contributed 40% of net revenue, and Late-Stage contributed 60%. Also in the first quarter, 51% of our revenue came from the U.S., 15% from Switzerland, 12% from U.K., 8% from countries in Eurozone and the remaining 14% from the rest of the world.

Now please turn to Slide 6 to discuss the segment results. In Early Development in the first quarter, net revenue was $212 million, a 5.5% year-on-year reduction, as declines in revenue in both our North American and European tox services, as well as our Discovery Support Services more than offset year-on-year growth in other services.

Sequentially, revenue declined $22.8 million, driven primarily by a sharp decline in volumes from our Global Toxicology Discovery Support Services, as demand from a number of our large clients was well below expectations. Revenue in our Discovery Support Services were also impacted by seasonal buying patterns in our contractual minimum volume agreement. In Clinical Pharmacology, revenues while up year-on-year were down sequentially on a higher-than-expected level of study delays and cancellations.

Operating income for the first quarter was $11.3 million, which was down significantly on both the year-on-year and sequential basis. We had expected operating margins for the first quarter in the low double-digit range, and actual operating margins at 5.3% were well below that expectation and compares to 13.9% last quarter and 11.9% in the first quarter of 2011. The decline in profitability, both year-on-year and sequentially, was driven primarily by the lower revenue levels in global toxicology and Discovery Support Services where operating margin drops here on the downside was very high, as well as weakness in clinical pharmacology services.

Now turning to Late-Stage Development. Net revenue in the quarter was $319 million, which is up $21 million from the fourth quarter levels and up 14.9% -- 14.8% rather from first quarter of last year. Sequential and year-on-year revenue growth was driven by the very strong performance of our Phase II-IV clinical development services. I'd also highlight that our revenues in central laboratory services increased year-on-year and sequentially in both reported dollars, as well as on a constant currency basis. Late-Stage Development operating margin was $72.4 million or 22.7% of revenue, that's up 270 basis points sequentially and 250 basis points from a year ago.

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