Q3 2022 IQVIA Holdings Inc Earnings Call
Ladies and gentlemen, thank you for standing by at this time I would like to welcome everyone to.
<unk> third quarter 2022 earnings conference call all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
If you'd like to ask a question. During this time simply press star followed by the number one on your telephone keypad.
If you would like to withdraw your question Press Star followed by the number one again as a reminder, this call is being recorded thank you.
Now I'd like to turn the call over to Nick Childs Senior Vice President Investor Relations and Treasurer. Mr. Trials, you may begin your conference.
Thank you.
Good morning, everyone. Thank you for joining our third quarter 2022 earnings call with me today.
Ari boost feet, Chairman and Chief Executive Officer, Ron <unk>, Executive Vice President and Chief Financial Officer, Eric Sherbet, Executive Vice President and General Counsel, Mike speed up senior Vice President financial planning and analysis and and Gustavo per M Senior director of Investor Relations at <unk>.
Brian Stangl.
Today, we will be referencing a presentation that will be visible during this call for those of you on our webcast.
This presentation will also be available following this call and the events and presentations section of our IQ via Investor Relations website at IR Dot IQ via Dot com.
Before we begin I would like to caution listeners that certain information discussed by management. During this conference call will include forward looking statements.
Actual results could differ materially from those stated or implied by forward looking statements due to risks and uncertainties associated with the company's business, which are discussed in the company's filings with the Securities and Exchange Commission, including our annual report on Form 10-K and subsequent SEC.
Filings.
In addition, we will discuss certain non-GAAP financial measures on this call, which should be considered a supplement to and not a substitute for financial measures prepared in accordance with GAAP. A reconciliation of these non-GAAP measures to the comparable GAAP measures is included in the press release.
And conference call presentation.
I would now like to turn the call over to our chairman and CEO .
Ari.
Thank you Nick and good morning, everyone. Thank you for joining us today to discuss our third quarter results.
<unk> delivered another quarter of strong financial results despite.
Market concerns about slowing demand broader macroeconomic challenges and the various global geopolitical issues.
In fact.
Indicators of demand both from customers and in the market generally remain healthy.
Industry critical trials starts continue to trend ahead of last year.
Rising almost 7% year to date.
The pipeline of active early stage and late stage molecules are both up 8% from 2019 pre pandemic levels.
<unk> funding, which has been a lingering concern since the beginning of the year when one of our smaller competitors are raised alongs.
<unk> found the improved in fact in the quarter. According to Bayou World third quarter funding was $18 $7 billion the highest of any quarter. This year year to date funding is running at about a 60 billion dollar annual rate.
Which exceeds the average of the last five years pre COVID-19.
Our own RFP flow grew mid teens in Q3.
And RFP flow in both the large pharma and <unk> segments are up double digits on a year to date basis.
Our Q3 book to Bill was 139, excluding pass throughs and 127, including pass throughs, continuing our strong results from the first half of the year and as a result, as you saw our backlog grew five 4% versus prior year.
On a reported basis and nine 4%, excluding the impact from foreign exchange.
As you can tell we are not experiencing any signs of slowdown in demand.
It also helps that we are extremely diversified remember we serve over 10000 customers in more than 100 countries, including all top 25 large pharma clients across the spectrum of therapeutic areas now.
Why is demand remains very healthy as you know.
And as we have been saying throughout the year, we have been dealing with operational challenges caused by the global macro environment, including wage inflation.
High levels of attrition, obviously, the ongoing Russia, Ukraine disruptions.
Curing China log downs that are still going on.
And perhaps that's a newer development.
Some staff shortages at certain investigators sites as you know.
We have been able to overcome all these issues.
As reflected in our results for the first nine months of the year.
Although as we end the year, we are anticipating some minor delays in the timing of deliveries caused by decent macro disruptions and specifically by the bottlenecks that are created by staff shortages at certain sites.
And that are delaying the execution of our deliveries.
This is why we decided to tweak the guidance a little in the final stretch to the end of the year.
A note on our capital allocation strategy as a result of persistent high levels of inflation interest rates have been increasing sharply.
In response, we are adjusting our capital allocation strategy to include some debt pay down in addition to continuing the M&A and share repurchase opportunistically as in the past.
In summary, the underlying demand in the industry and in our businesses remains strong and we are managing through the headwinds caused by the factors I just discussed.
Now, let's review the third quarter in more detail revenue for the third quarter grew 5% on a reported basis and 10, 5% at constant currency.
The $22 million beat above the midpoint of our guidance range was driven by operational upside in both <unk> and R&D services.
Offset by continued foreign exchange headwinds.
Compared to last year, and excluding Covid related work from both periods. Our base businesses grew 14% at constant currency on an organic basis, notably on the same basis, the <unk> business was up 18%.
<unk> was up 12%.
Third quarter, adjusted EBITDA increased 11, 8%, reflecting our strong revenue growth and ongoing cost management discipline offsetting the headwinds of wage inflation that are persisting in our business third quarter adjusted diluted EPS of $2 48.
Yeah.
Grew 14, 3% driven by our adjusted EBITDA growth.
Can you provide some color on the business, starting with the commercial and technology side.
The exponential increase in industry data access and complexity has created tremendous new opportunities for insight and evidence generation.
We're making these data usable requires robust information management capabilities and as you know I'd say <unk>, yes, we've been building these capabilities for decades.
In the quarter the top 10 pharma clients selected <unk> human data science cloud to power large scale data analytics programs by centralizing and harmonizing data for 35 large countries across their primary care and specialty medicine portfolio.
We continue to advance digital marketing in healthcare, we are deploying a privacy first open ecosystem that delivers healthcare information in a timely and personalized manner to meet the fast changing needs of the health care consumer.
In the quarter Iqs, Yeah acquired last sold marketing, which developed an operating system. That's purpose built for health care marketers to coordinate and execute omnichannel digital campaigns from a single platform.
In addition, <unk> marketing solutions, which you will recall, we acquired about a year ago was recently selected by a top 10 pharma clients to bring to market their routine oncology and biological brands using digital insights to deliver personalized brand content to <unk>.
<unk> that are relevant to their practices and interest.
Demand for our commercial technology solutions remains strong this quarter. The top 20 pharma clients selected at UBS commercial technology ecosystem suites to transform its commercial operations into an AI enabled commercial model with.
Customer will deploy IQ <unk> orchestrated customer engagement suite, <unk> Master data management and orchestrated analytics in more than 30 countries driving the 20% efficiency gain in customer coverage and boosting the speed and precision of their older management process.
In the real World business IQ of yet continues to lead in innovative study designs that combine multiple ecu <unk> capabilities for example in.
In the quarter, we were awarded a multiyear portfolio of real World Studies in Psychiatry pharma midsized pharma company, we are combining faster data driven recruitment timelines with a comprehensive home health infrastructure to reduce the burden on both the patients and the sites.
Another example, we were awarded a significant contract with a major med Tech company to identify early markers for organ transplant rejection through a non interventional study that combines our metex real world and translational sciences capabilities.
Moving to Rds, our decentralized clinical trial DCT program has received independent compliance validation from EU General data protection regulation GDP are from trust arc, which is the leader in GDP or validation.
This is a big deal. This program is highly recognizing the industry as it requires two separate independent audits.
Key achievement for <unk> as it is the first time any DCT offering has received this European data privacy validation.
In addition.
We've now expanded our digital capabilities by launching the first self collection safety large panel for U S. Clinical trial participants in collaboration with Dr. <unk>, Inc. A leader in clinical grade blood collection solutions.
Participants in clinical trials can now provide a blood specimen for lab testing in the comfort of their own home without the need to visit an investigator site or how the healthcare professional visit them expanding our digital offerings and capabilities.
And of course as you've seen the overall R&D as business continues its strong momentum with services bookings in the quarter exceeding $2 billion for the first time ever.
This translated into a quarterly book to Bill ratio of 139, excluding pass throughs and including pass throughs. The business delivered over $2 5 billion of total net new business in the quarter with a book to be the ratio of 127.
Over the last 12 months, our contracted book to Bill ratio was 135, excluding pass throughs and $1 29, including pass throughs.
I will now turn it over to wrong for more details on our financial performance.
Okay. Thanks, Ari and good morning, everyone, let's start by reviewing revenue.
Third quarter revenue of $3 billion $562 million grew 5% on a reported basis and 10, 5% at constant currency.
In the quarter Covid related revenues were approximately $220 million down about $160 million versus the third quarter of 2021 and.
In our base business that is excluding all COVID-19 related work from both this year and last organic growth at constant currency was 14%.
Technology and analytics solutions revenue for the third quarter was $1 billion and $400 million up four 7% reported and 11, 6% at constant currency.
Excluding all COVID-19 related work organic growth at constant currency and tax was 12%.
R&D solutions third quarter revenue of $1 billion $979 million was up six 8% reported and 10, 7% at constant currency, excluding all COVID-19 related work organic growth at constant currency and R&D with 18% as already mentioned.
Finally contract sales <unk> medical solutions for CSN that third quarter revenue of $183 million declined 9% reported but grew 1% at constant currency and excluding all COVID-19 related work organic growth at constant currency and CSM, that's with 3%.
Year to date revenue was $10 $671 million grew four 2% on a reported basis and eight 1% at constant currency.
Covid related revenues were about $850 million year to date.
And our base business that is excluding all COVID-19 related work organic growth at constant currency was 14%.
Technology and analytics solutions revenue year to date was $4 billion and $247 million up five 2% reported and 10, 3% at constant currency, excluding all COVID-19 related work organic growth at constant currency in tech and analytics solutions with 11%.
R&D solutions year to date revenue of $5 billion $863 million was up four 5% at actual FX rates and seven 1% at constant currency.
But excluding all COVID-19 related work organic growth at constant currency and R&D was 19% year to date.
Finally contract sales in medical solutions, our CSM masks, a year to date revenue of $561 million declined four 6% reported and grew two 9% at constant currency, excluding all COVID-19 related work organic growth at constant currency and CSM mats was 5%.
Now, let's move down the P&L.
Adjusted EBITDA was $814 million for the third quarter, representing growth of 11, 8% while year to date, adjusted EBITDA was $2 billion and $426 million up 10, 6% year over year.
Third quarter GAAP net income was $283 million and GAAP diluted earnings per share was $1 49.
Year to date GAAP net income was $864 million or $4 52 of earnings per diluted share.
Adjusted net income was $470 million for the third quarter and adjusted diluted earnings per share grew 14, 3%.
To $2.48 and year to date, adjusted net income was $1.413 billion or $7 39 per share.
Now it's already reviewed R&D solutions delivered another outstanding quarter of bookings or backlog at September 30th stood at a record $25 8 billion, an increase of five 4% year over year on a reported basis and nine 4% adjusting for the impact of foreign exchange.
In fact, I might point out that without the impact of foreign exchange year over year backlog would be $900 million higher.
Next 12 months revenue from backlog increased to $7 1 billion growing two 8% year over year on a reported basis and six 7% adjusting for the impact of foreign exchange.
Yes.
Okay now reviewing the balance sheet as of September 30, cash and cash equivalents totaled $1 $274 million and gross debt was $12 $394 million, resulting in net debt of $11 billion and $120 million or net leverage ratio at the end of the quarter was three <unk>.
Four two times trailing 12 month adjusted EBITDA.
Third quarter cash flow from operations was $863 million in Capex was $165 million, resulting.
And our strong free cash flow result of $698 million for the quarter.
You saw in the quarter that we repurchased a $150 million of our shares which puts our year to date share repurchase at slightly above $1 1 billion and this leaves us with just under $1 4 billion of share repurchase authorization remaining under the current program.
As already discussed earlier, we're adjusting our cash deployment strategy in light of higher interest rates earlier. This month, we retired $510 million of variable rate U S. Dollar term loan scheduled to mature early in 2024 and this was in October . So you don't see it in our end of September balance sheet.
We will likely retire additional.
Term debt during 2023, while we continue to pursue acquisitions and repurchase shares.
As has been our practice since the merger.
Now, let's turn now to guidance.
For the full year 2022, we continue to expect revenue, excluding COVID-19 related work to grow organically at constant currency in the low to mid teens.
On a reported basis that strengthening of the U S. Dollar has caused over $500 million of full year headwind since our initial guidance last November and this $500 million includes a further impact since our second quarter earnings release.
In addition, as already mentioned global macro environment challenges, such as wage inflation investigators staff shortages slower than expected recovery of patient visits continue lockdowns in China, and that's still unresolved, Russia, Ukraine conflict are persisting.
And so far we've been able to offset all of these challenges and absorb them in our numbers, but we are forecasting a modest residual impact in pockets of our business during the balance in the year and we've reflected that in the updated guidance.
So for the full year, we now expect revenue to be between $14 $325 million and $14 billion and $425 million.
At the midpoint of our guidance. This represents an adjustment of about $100 million.
With roughly two thirds of this driven by foreign exchange impact and the rest by the global macro environment headwinds I just detailed.
Our updated guidance represents year over year growth of seven 4% to eight 2% at constant currency and three 2% to 4% on a reported basis and as a reminder, this equates to low to mid teens organic growth at constant currency, excluding COVID-19 related work.
Our projected revenue growth includes approximately 200 basis points of contribution from M&A.
We're also updating our guidance on adjusted EBITDA to reflect the revenue and cost headwinds mentioned, we're now expecting.
The guidance range to be between are we are now setting the guidance range to be between $3 billion $330 million and $3 billion $360 million, which represents year over year growth of 10, two to 11, 2%.
And lastly, we're raising the midpoint of our adjusted EBITDA EPS guidance by <unk> <unk> to reflect updated estimates of costs below the adjusted EBITDA line. We now expect adjusted diluted EPS to be between $10 10, and $10 20.
Which represents year over year growth of 11, 8% to 13%.
Moving to our fourth quarter guidance, we expect revenue to be between $3 billion.
$654 million $3.754 billion or growth of five 5% to eight 2% on a constant currency basis, and 0.5 to three 2% on a reported basis.
Excluding all Covid related work, we expect organic revenue growth at constant currency to be over 10% at the midpoint of our fourth year, our fourth quarter guidance.
Adjusted EBITDA is expected to be between $904 million and $934 million, that's up nine 2% to 12, 8% and finally adjusted diluted EPS is expected to be between $2 72 and.
And $2 at ADT growing $6 seven to 10, 6%.
Now all of our guidance assumes that foreign currency rates as of October 24 continue for the balance of the year.
So to summarize before we go to Q&A the underlying demand in the industry and our business remain very healthy we delivered strong operational P&L.
And free cash flow performance in the quarter revenue grew mid teens organically at constant currency, excluding COVID-19 related work. Our R&D business continues its strong momentum with services bookings in the quarter exceeding $2 billion for the first time ever.
Contracted backlog sits at a new record of $25 $8 billion up over 9%, excluding the impact of foreign exchange.
We repurchased nearly $150 million of our shares while reducing our net leverage ratio to approximately three four times trailing 12 month adjusted EBITDA.
And finally, we retired at the beginning of the fourth quarter $510 million of our variable term debt.
With that.
Let me hand, it over to the operator to start the Q&A session.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
Request that you. Please limit yourself to just one question so that others in the queue may participate as well, we'll pause for just a moment to compile the Q&A roster.
Your first question comes from the line of Dave Windley with Jefferies.
Hi, good morning, Thanks for taking my question.
I wanted to focus on kind.
Speed of throughput in Rds call it speed of studies.
And thinking about major buckets that that could fall both on the accelerator side and the decelerator side. So you talked about your DCT capabilities.
More remote activity that could.
Spur along throughput or recruitment of patients finding patients that are willing to participate in studies.
Maybe clients that post COVID-19 or are kind of pushing hard to catch up for things that were.
Push behind <unk>.
During Covid and then on the other side these things that you've highlighted around staff shortages at sites.
Things like that maybe therapeutic mix in your backlog might be lengthening thats something thats a trend in the industry. So just seems like relevant to how quickly you can convert your backlog into revenue are these factors and I wondered if you could kind of help us understand.
The tug of war, there and which ones winning.
Well good morning, Dave and thank you for the question and there are many elements of response in built in your question itself.
We know the industry and what's happening very well.
Look as a context.
As you all know in the field patient visits have not fully recovered to pre pandemic levels.
So that's point number one.
I think it was presented as an industry.
Conference recently I think it was on October 7th Society for clinical research sites summit.
This issue of.
Stop shortages that are affecting investor side operations was flag.
As a development industrywide.
No.
That if you will.
On the on the negative now.
Youre correct to point to DCT Xu obviously.
The less we require the.
Patients to actually visit decide better receipt as a counter to this issue now we don't see this issue is it.
As a total permanent or ongoing thing.
It happens to be.
Well, we have been dealing with and we've been talking about from the beginning of the year, which is very high levels of attrition people.
A lot of time going back to work.
We have halted time of recruiting the skill sets that we require.
For us the impact on.
Cost of labor that all of that has.
All of these factors in combination or as significant are the single most important operational challenges we have seen.
And as we've mentioned many times, we've been dealing with that and offsetting.
The impact of these issues with our productivity initiatives and cost reduction programs now we're not the only ones to experience. These specials, which is the sites also have stopped shortages.
As a result of the same factors.
And.
When.
They have to prioritize dealing with the incoming flow of patients versus dealing with clinical trials.
And so that's the development you mentioned also the complexity of studies.
As a new factors and I think this is also correct.
That is.
The mix not.
Not just in our backlog of things industry wide that happens to be the evolution of the market the mix of studies.
Makes it it makes the factors I just mentioned even more acute.
As you know recruitment of patients.
Is much more correlated the difficulty to recruit patients correlated with the complexity of the study.
Now this is an area, where we can shine because we've got our data analytics and our technology and we've proven many times that.
We are able to address complex studies and recruit patients better than we would have had otherwise so.
Which side is going to win it's hard to tell.
But look so far I mean through the year, we've been able to address all of those I mean, you've seen our numbers every quarter, we have been able.
To beat our own expectations, and that's because we've been able to address it.
So very diversified large scale company and we are able to address that we're not dependent on one single study.
How do we been a 10th of the size.
We would be.
Highly sensitive to a big study win or a big study loss were not.
We just tweaked to me it'll be the fourth quarter numbers just because.
We want to make sure we anticipate everything in the transparent and put this out.
For investors. Thank you for your question David.
Yes. Thank you.
Your next question comes from the line of Jon <unk> with UBS.
Hi, Thanks for taking my question.
I was wondering if you could talk a little bit more on the inflation and hiring trends and you also mentioned some attrition in the prepared remarks.
How do you see this playing out into next year I know youre not guiding on 2023, but you see some easing on the trends there and then on the other side I guess, how is pricing looking and are you able to offset any of these pricing these inflationary pressures on pricing.
Thank you John .
Very good question and that is exactly the operational equation that we are dealing with.
And again there is no news here, we've been talking about this throughout the year.
We've been saying this is the single most significant operational challenge we're dealing with.
These talent talent balance and the cost of the towns.
<unk> training, retaining and compensating the talent that we need to execute our studies.
The levels of attrition reached record highs.
Talking about almost 20% sometime in the first part of the year.
We have seen those levels of attrition come down and stabilize now there's still very high is now more in the.
16, 17% <unk> range.
And has stabilized there and we hope that they are going to continue to come down obviously, we put in place a very large number of measures to retain people in.
And those include.
Not only but they include.
The compensation.
With compensation adjustments, which again places.
Burden and more and create some inflation that we have to do it.
This is as I just mentioned before was same issue industrywide and improving at our partner sites, where we execute the studies, which is creating the bottlenecks that we talked about for estimated it could go as far as our operations.
We don't know how long these attrition issues and.
Employee turnover and headwinds we lost we are dealing with them I can tell you that many of the.
Cost cutting and productivity initiatives.
Programs that we were planning to launch in 'twenty, three we have decided to accelerate and we're starting many of them in this fourth quarter of 2022.
Anticipation of potentially continuation of some of these.
Employee turnover and wage inflation issues. So we are going to address that as far as our operations. Now you asked the balance of your question, which is how are we able to reflect that on pricing as you know.
On the <unk> side of the house it is a long cycle business. So.
The contracted backlog that towards contracted year or two years three years four years ago that female backlog sometimes.
That is.
At the system.
Cost assumptions, which was different than the ones we are facing.
There are in most contracts cost escalation provisions and clauses that enabled us to adjust the rates.
But I don't think anyone anticipated.
9%.
Inflation, so we're not fully able to.
Immediately you recall there is a delay if you will there is a lag between when we are suffering.
Suffering the cost headwind.
And when we can reflect that into our pricing.
It's a little less like dots in the shorter cycle businesses on the commercial side.
Also we have long term contracts, we have at least one year or two year contracts, we've got technology.
Licenses episodes in rates we've got.
Data contracts I'll touch on rates so.
It is more.
Likely that we are able to reflect price increases in analytics and consulting services, which are three six months one year.
Visibility type contracts and those were able to but again it's not.
The bulk of the business. So it will happen and we've got plans to do so but there is a lag.
Thank you John for your question.
Thank you.
Your next question comes from Sandy Draper with Guggenheim.
Thanks very much.
I guess <unk> be helpful to hear some commentary on the tax side.
And thinking about the three broad buckets, you look at Taz in terms of the demand drivers there are there.
What do you feel like is improving staying the same potentially weakening just thinking about some of the commentary of concerns out there around.
Whats happening with the sales force is that going to be.
The accelerating in terms of.
Cut does that stabilize thinking about overall marketing budgets, how people are looking at using data and marketing just it just would love some commentary about.
How you see what's going on in terms of pros and cons and puts and takes on the <unk> side as we head into next year.
Yes, well good morning, Sandy and thank you for.
For the question look we.
We are very pleased with the continued strong growth that we're seeing in cars.
You heard us both.
Ron and myself.
Report organic constant currency revenue growth, excluding <unk> from both views of 12%.
It's really really strong.
And you know that.
If you think about we think about the business in three buckets and the high growth.
Bucket <unk>.
<unk> real world and commercial take and they continue to be strong drivers of growth.
We continue to find innovative ways to utilize our real world evidence for clients as I described in my introductory remarks and.
And we continue to deploy more of our technology solutions you talk you talked about.
Digital marketing so it's true.
That sales forces sales reps.
But as a demographic in general are going down and so any thoughts of any businesses that are reliant on.
Physical interactions between sales reps and physicians.
Those businesses clearly have us down with long term trends.
So people who are dependent on CRM for example are going to experience headwinds.
Now as I have mentioned many times before.
We have been long ago.
At the.
Forefront of the transition to digital marketing interactions with Hcp's are now.
Rapidly evolving towards digital interactions.
And I mentioned in my introductory remarks, some examples we made.
Investments in this area, we bought DMD marketing last year, we bought last so.
This past quarter.
These are unique kind of an operating system that enables pharma clients to buy and decide where to place.
Promotional content.
This is where the industry is going we've made investments we bought technology and companies.
That we feel are unique and will enable us to.
Clay model, our our fair share of that market and we are here to support our clients in these transition.
So you're absolutely correct.
Overall.
The traditional mode of going to market.
<unk> is going away to slow trend downward, but it is downward but it is more than offset by growth in digital marketing.
And that's what we've been investing in and that's what's growing in our business.
Thank you okay, great that's really helpful. Thanks, Alright.
Your next question comes from the line of Shlomo Rosenbaum with Stifel.
Hi, Good morning, and thank you for taking my question. This one is actually for Ron.
Given the rise in interest rates and your focus on retiring more debt can you give us a little bit of color as to how we should be thinking of the blended interest.
Right that we should assume on that.
Are you targeting kind of a leverage ratio instead of the mid threes low threes like how should we be thinking about this just more of.
Ongoing basis.
Yes, thanks for the question Shlomo and it's very topical given the interest rate environment. These days and.
We haven't provided comprehensive P&L guidance for 2023 at this point.
But it's an important issue I'm going to give you a little bit of color around that in addition to what our strategies are to deal with it.
Let's start with the strategy you saw that we paid down debt in <unk>.
Fourth quarter term loan that was coming due $510 million in.
Early in 2024 and.
Comparatively expensive and we'll be looking to pay down some additional term loan debt that near term maturity as we go through next year, So you'll see us talking about that.
As far as.
Our average ratio.
That's been gradually trending downward with at three four as we exited Q3.
We'd expect that as we go through next year, we'll hit that or get close to any way that three target that we set for the end of 2025, I think we're going to get down to that level sooner rather than later and possibly by the end of next year.
But as far as interest expense goes.
Look we're not in the business of forecasting right. So.
Precisely forecasting interest expense dependent on what you think is going to happen with rates, but we can give you. Some help if we just look at where the market consensus for rates and kind of project outward from that we.
We think that in Q4 interest expense will be about.
$130 million give or take and you see thats a fairly substantial step up from where it had been.
Actually the run rate exiting.
The year at the very ended the quarter will be about $140 million per quarter, and if you extend that out.
It would be a math major to say it.
$560 million that is kind of an annual rate exiting the year and.
If there are further increases modest increases in rates as we go into the first quarter, which was what the market is projecting we'll say then.
And that number could go higher we also have a swap rolling off at the end of Q3.
You can see interest expense next year.
Higher than 560, maybe approaching $600 million, we'll say.
You have to keep in mind that this depends on a lot of things it depends on central rate actions our cash flow.
How we choose to use our cash flow next year and so forth, but this should get you in the ballpark anyway for your models I know some people have been struggling with that so I wanted to be a little bit more explicit.
Then we had been in the past when we said count on <unk> 16.
$1 million for each quarter point of interest in <unk> right, yes, So I mean.
That's good.
The item that we've been working on and as Ron mentioned, we've decided that it was time to retire some of the debt that matures in 2000 and for US. So we took out 510.
In just two weeks ago, a couple of weeks ago, and we probably going to retire.
What this was.
Maturing in 'twenty four we will.
The title of that in 'twenty three.
And so we will just begin addressing.
The issue of interest expense of course.
One year ish right from a comparison standpoint.
We likely will have a step up in interest expense in aggregate.
For us in 'twenty three versus 22.
But from then on hopefully you know rates are going to either stabilize or decrease if you look at the.
Forecasts by the individual governance of the fed, though you've got these charts with.
As we dug through presenting each governors.
Anticipation of rates and they are really all over them up.
For 2024, ranging from two 5% to 5% so.
Hopefully at some point the ratio would go down and then and then it becomes a.
A tailwind so to speak but certainly.
Going 2000 to 223 it'll be.
Headwinds.
But we have to address and we are planning to address and take other actions.
On other fronts to mitigate that impact.
Thank you.
Your next question comes from the line of Justin Bowers with Deutsche Bank.
Hi, Good morning, everyone I just wanted to follow up on the comments around labor and.
We're seeing.
Obviously some.
Some turnover.
Or some changes.
<unk> area and then.
Some of your clients as well so.
Wanted to get a sense of if the labor pressures that youre seeing are isolated.
And any specific pockets or geographies.
Some of the.
The turnover we are seeing.
And those other areas provide you an opportunity to either hire talent.
Kaz or.
Or just combat some of the inflation and then.
A follow up to that would be with some of the labor issues at the sites is there a way to provide us some goalposts on.
On what the backlog conversion would be.
Over the next 12 months in light of what Youre seeing at the site level.
Yes.
Yeah. Thank you very much for your question Luke.
Given the strength of the industry backdrop. These obviously competition for talent.
That's number one.
In addition to the overall context, both post COVID-19 the resignations and.
And and the inflation that.
Drives and additional components of wage.
Inflation now.
We are actively recruiting and hiring.
Thousands of people didn't have resolved are staggering the number of people we bring on board.
In order to meet the incremental demand and of course, we've had this attrition issue that I mentioned earlier, we have approximately 83000 employees.
We recouped, a let's say thousands and thousands of employees a year. So we do have the capabilities. We are focused on it now.
Which buckets, obviously its CRA is its.
<unk> people its project leadership.
Really frontline.
Execution.
Yields.
<unk>.
Skilled professionals and Thats, where the.
The issues are now because of that we've seen margin pressure from the labor cost increases.
But you've seen we've expanded our margins so really that's because of our productivity productivity initiatives. We do intend to continue this trend.
Just sitting here and watching the headwinds we are countering them and you know that we've done that throughout the year now we are.
We made a minus modest adjustments to reflect some.
Labor costs.
<unk> is that we are not able to offset entirely in the fourth quarter again very minor.
Just because there is a lot youll recruit.
Our scheme.
<unk> and expensive people it takes a little bit of time before they are actually deployed into few then productive.
And.
And sometimes you just don't have the time to catch up with the cost reduction programs to offset those increases in costs.
Yes.
With respect to the staff shortages of other sites, we don't manage those sites and hits.
It's hard to do the same thing there.
I do not at this point in time see that these trends are widespread or was that.
We are going to continue in such a way that all of a sudden.
The long term conversion.
Our backlog is compromised, we do not see that because those staff shortages have been.
Located in pockets, we are operating in.
A lot of sites and not all of them are experienced globally and it's mostly some sites mostly the sites that have been affected in the U S, where we see most of the pressure.
Frankly, some of the reasons, we've had to make the literally very modest residual adjustments, we made to our fourth quarter numbers.
Is a lot of this is due to the lab business not being able to not receiving the floor samples.
The sites.
On the timeline that they had been that they had expected them and the reasons for that is because there were less patient visits at the sites that were less efficient because of the sites because there was less task will handle the patients and so that's what's created the bottleneck.
And we know it's in specific.
Sites. So it's too early for me to say this is a widespread.
Permanent changing the industry yes.
The studies are more complex and that the results into slower conversion by definition.
But that was occurring even before COVID-19.
And it's not going to be a major.
<unk> down in Corona. So so far we can't we cannot say that this is a.
Going to continue we think that we'd be able to deal with it.
In the early parts of 2023.
Thanks, Larry I appreciate the question.
Your next question comes from Patrick Donnelly with Citi.
Great. Thank you guys for taking the questions.
Ron maybe one for you in similar vein there you talked about the interest expense, obviously jumping up with the variable next year I guess when you think about the different inputs are you touched on labor costs, there as well when you think about the ability to offset some of that down. The P&L can you just talk about against the margin structure for next year again, you have some of the inflationary pressures.
<unk> talked a little bit about pricing throughout the call but.
But I guess, how do you think about the P&L.
Defensiveness ability to insulate away from some of that interest expense jumping up on you guys. As you go into next year.
Look.
The interest expense is going to be pretty much what it is and it's going to be based upon rate increases and so forth and we'll do what we talked about in terms of.
Of that reduction.
And really what Youre looking for is what can we do up above.
The EBITDA line and above to offset some of the items below like interest rates below the line that we have less control over in the short term and we see our demand environment as we laid out today is fundamentally being very healthy.
Yes, we highlighted a few execution challenges due to macro factors, but we don't see them as being permanent and we see the outlook for next year without getting into guidance for 2023, obviously at this point, it's being fundamentally strong on an operating basis nothing has changed there.
We're going to try to continue to drive cost reduction to offset not just what <unk> already said.
The continued labor pressures, which hopefully will abate, but we cant count on that.
But also to help offset some of what we see below the line in interest expense and.
We will be coming out with guidance in the February timeframe and lay it all out for you then, yes, and again Thats absolutely you're absolutely correct. Patrick we are exactly working on these have mentioned earlier that we have planned you will recall when we gave our 'twenty by 'twenty five targets.
Which by the way are unchanged nothing <unk>.
In the slightest, making us deviate from the goals we've set.
For 2025 for our company.
At least.
With the exception perhaps of the leverage ratio, we were targeting to exit 25 leverage ratio of three and as Ron mentioned is likely will be a three well before that.
But other than that our goals are the same the road to those goals may be may not always necessarily be a straight line.
But the goals haven't changed now in support of these goals we had.
Over the next three years a series of.
Programs in.
Productivity initiatives.
Internally and we've decided in light of both the increased below the line headwinds for 2003, and a continued labor inflation, which we are assuming as a given.
We've decided to accelerate.
Programs, you were supposed to initiate in 'twenty three and we are initiating them in the fourth quarter of 2000 and so the answer to your question is absolutely yes.
And that's the plan.
Your next your final question comes from.
Elizabeth from Luke Fargo with Barclays.
Yes.
Hey, guys. Thanks for taking my question.
So Ron a quick one for you you guys had a big cash quarter can you talk about the drivers here.
You brought your conversion up to 85%, which is kind of where you guys were targeting I guess your long term range. So is this a good spot to think about the jump off.
I'm not sure what you mean by that jump off but for Tony sorry.
Well look I think in any given year.
We target, 80% to 90% of adjusted net income for cash flow, but cash flow is inherently volatile.
One year it may be a lot better one year it may be a little bit less and certainly from quarter to quarter, you see that to a much greater degree.
We had a not so great second quarter in a much better third quarter and the reason is pretty simple our collection timing of collections. Its just much better in the third quarter, then it and it was in the second quarter and.
Nothing has fundamentally changed in terms of our cash flow, we're going to continue driving towards maximizing cash flow trying.
Trying to minimize our days sales outstanding and.
And remain a strong cash generator.
Comment there is don't put too much weight on the quarter to quarter fluctuations because that's the nature of cash flow, it's not like earnings it's not accrual based it so it tends to be more volatile and more difficult to predict on a short term basis.
Alright, and then lastly here.
I'll leave the staffing shortages question for offline, but can you talk a little bit more about the color of the bookings.
Any change in the duration or the size of the average win that you guys are seeing any anything that would.
Per ton, an acceleration or deceleration in overall.
Quality and.
<unk>.
Absolutely nothing changed at all.
Okay. Overall RFP flow is 10% up year to date, 15% in Q3.
What we call the qualified pipeline, which means it has advanced its not early stage is not speculative.
As up 19% year over year.
<unk> in Q3.
Awards are.
I mentioned the number was in Q3 are.
22% up.
Second highest quarter ever.
Plus 10% sequential growth.
I mean, I don't know what else.
Im looking at every number possible on the demand side.
We are seeing no change it's widespread large former ABB, we've been saying these photos from the beginning of the year you guys are not believing us but the numbers are showing are.
And I guess, everyone else is coming through the story as well.
Oh man I appreciate it thanks, sorry.
Yeah.
Okay.
Alright.
Hum.
There are no further questions Mr.
Mr Trials, I will turn the call back over to you.
Okay. Thank you everyone for joining us today, we look forward to speaking to all of you again soon.
Team will be available rest of the day to take any follow up questions. You may have thanks, everyone.
This concludes today's conference call you may now disconnect.
Please wait the conference will begin shortly.
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