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spk14: The conference will begin shortly. To raise your hand during Q&A, you can dial star 1 1. good day and thank you for standing by welcome to the icon q3 2022 results conference call at this time all participants are in a listen-only mode after the speaker's presentation there will be a question and answer session to ask a question during the session you will need to press star 1 and 1 on your telephone you will then hear an automated message advising your hand is raised please be advised that today's conference is being recorded I would now like to hand the conference over to your speaker today, Kate Haven.
spk00: Please go ahead. Thank you. Good day, and thank you for joining us on this call covering the quarter ended September 30th, 2022. 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 March 1, 2022. 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 in the earnings slides, you will note a reconciliation of non-GAAP measures. Adjusted EBITDA excludes stock compensation expense, restructuring costs, foreign currency gains and losses, amortization, and transaction-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 to ask one related follow-up question. I would now like to hand the call over to our CFO, Mr. Brennan Brennan.
spk17: Thank you, Kate. In Quarter 3, ICON achieved gross business wins of $2,740,000,000 and a recorded $389,000,000 worth of cancellations. This resulted in net awards in the quarter of $2.35 billion, a net book-to-bill of 1.21 times. On a trading 12-month basis, our net book-to-bill was 1.24 times. With the addition of the new awards in Quarter 3, our backlog grew to a record of $20.2 billion, representing an increase of 1.3% on Q2 of 2022, or an increase of 9% year-over-year. Our backlog burn was 9.7% in the quarter, slightly below Q2. Revenue in Q3 was $1,942,000,000. This represented a year-on-year increase of 3.9% on adjusted revenue, or 7.4% on a constant currency organic basis. The revenue impact from year-on-year changes in foreign exchange results resulted in a headwind approximately of $67 million in quarter three. Our top 25 customers' concentration increased slightly from quarter two, as our top customer represented 8.6% of revenue, our top five customers represented 27.8% of revenue, our top 10 represented 41.7%, while our top 25 represented 62.6%. Adjusted gross margin for the quarter was 29.5% compared to 28.4% in quarter two. Gross margin strength was driven by continued direct fee revenue growth and improved resource utilization in quarter three. Total SG&A expense was $192.9 million in quarter three, or 9.9% of revenue. In the comparable period last year, total SG&A expense was $196.3 million, or 10.5% of revenue. we expect total SG&A expense to be at a similar absolute level in quarter four as we saw in quarter three. Adjusted EBITDA was $379.6 million for the quarter, or 19.5% of revenue. In the comparable period last year, adjusted EBITDA was $324.9 million, or 17.4% of revenue, representing a year-on-year increase of 16.9%. Adjusted operating income for Q3 was $352.7 million, a margin of 18.2%. The adjusted net interest expense was $57.2 million for Q3. As previously communicated, due to the increasing interest rate environment expected through the duration of this year, we are anticipating full-year interest expense to total approximately $210 million in 2022. This represents an increase of approximately $50 million from our initial assumptions for full-year interest expense when guidance was issued in January. The adjusted effective tax rate was 16% for the quarter. We continue to expect the full-year 2022 adjusted effective tax rate to be approximately 16.5%. Adjusted net income attributable to the group for the quarter was $247.2 million, a margin of 12.7%, equating to diluted earnings per share of $3, an increase of 17.5% year-over-year. In the third quarter, the company recorded $8 million of transaction and integration-related costs. U.S. GAAP income from operations amended to $243.7 million, or 12.5% of revenue during Q3. U.S. GAAP net income attributable to the group in Q3 was $160.2 million, or $1.94 per diluted share of compared to a loss of $1.17 per share for the equivalent period last year. Net accounts receivable was $934 million at 30 September 2022. This compares with a net accounts receivable balance of $875 million at 30 June 2022. Cash collection efforts continue to be strong with DSO 43 days in the quarter, up from 26 days on a comparable basis from September 30, 2021, and up from 41 days on a comparable basis at June 30, 2022. Cash generation from operating activities in the quarter was $214 million. At September 30, 2022, the company had a cash balance of $609.2 million and debt of $4,850,000,000, leaving a net debt position of $4,239,000,000. This compared to a net debt of $4,429,000,000 at June 30, 2022, and net debt of $4,918,000,000 at September 30th, 2021. Capital expenditure during the quarter was $37.3 million. We ended the quarter with a net debt to trading 12 months, adjusted EBITDA ratio 2.9 times. Our capital deployment priorities continued to be debt pay down, and as such, we made a payment of $200 million on our term loan B facility in the quarter, bringing our total repayments to $600 million year to date. We expect to make a similar-sized repayment in Q4, which will allow us to exit the year with a net debt to trailing 12-month adjusted EBITDA of approximately 2.7 times. This is in line with our previously communicated target of exiting the year with a leverage ratio below 3 times and well ahead of our initial expectations set in July of last year. With the rising interest rate environment, we have decided to hedge a portion of our floating interest rate exposure in Term Loan B facilities. While we will work to finalize our hedging strategy and resulting agreement by the end of this year, we anticipate this will effectively hedge a significant proportion of our floating interest rate exposure, providing more certainty around anticipated interest rate expense for the full year 2023, as market conditions continue to fluctuate. With all of that said, I'd now like to hand over the call to Steve.
spk10: Thanks, Brendan, and a good day to everyone. ICON delivered a very solid performance in the third quarter as our team continued to execute well across our operational segments amidst a challenging macroeconomic environment. The macroeconomic pressures that have been impacting our business for the majority of this year remain in focus as the war in Ukraine continues And to a lesser degree, the lingering effects of the pandemic, including rolling lockdowns and the zero COVID policy in China, have impacted our operations in these regions. Across the globe, we continue to prioritize the safety of our employees, while also maintaining trial continuity for our patients and customers. Our expectation for the full impact in 2022 revenue from these factors remains in the range of $60 to $80 million, as we have not seen any notable improvement in our ability to operate in the Ukraine and Russia in particular. In addition to the conflict in Europe and the COVID-related issues in China, the further strengthening of the US dollar and rising interest rate environment continue to impact our results in the third quarter and outlook for the full year 2022. Notwithstanding these issues, we remain encouraged by the positive underlying demand environment for clinical development services. Strength in demand has been led by mid and large biopharma companies, both in terms of RFP activity and in our business development performance in quarter three. As the broader funding environment in the biotech sector remains challenged, we are seeing a continuation of the trend we highlighted on previous earnings call, which is more deliberate spending from customers in the emerging biotech segments. This is translating to a lower average opportunity value in this segment, as biotech companies look to optimize study designs and are generally more cautious in their approach to clinical development as they conserve cash in an uncertain environment. While this dynamic has caused a slight headwind to new business wins in this segment, we have not seen disruption in terms of ongoing projects, delays, or an increase in cancellations at this time. bad debts also remain at historical low levels. Overall clinical development demand has continued to grow, as evidenced by trailing 12-month RFP growth in the high single digits, as increasingly complex clinical trials require the capabilities, footprint, and integrated solutions that only global CROs can deliver. ICON's unique partnership model brings the necessary expertise, technology, and insights to deliver patient-centric trials is resonating well, and we continue to find success in expanding existing customer partnerships. We've also made good progress initiating new large pharma discussions and partnerships, which was a key strategic rationale for our union with PRA Health Sciences. We believe the diversified portfolio of services across ICON positions us well with customers that have evolving needs and require flexibility in their approach to clinical development. Our strategic focus on all aspects of clinical development has enabled us to lead the market in providing unique solutions such as blended trial models where elements of full service and functional service provision are utilized and customized to deliver dedicated services and functions to biopharma customers. In addition to supporting our customers' new models of development, we remain steadfast in our commitment to innovation and continue to invest in opportunities where we see potential for significant near-term improvements in patient identification, recruitment, site performance, and investigator engagement. In quarter three, we successfully completed the pilot of our partnership with Veridyne, a company that is creating the largest EHR integrated site network in the industry. with 23,000 sites, 30,000 physicians, and access to over 40 million potential patients for trials. Through the partnership, we aim to lower the burden of participation for physicians while increasing the overall number of patients that have access to clinical research. We are encouraged by the results of the pilot and the opportunity to more rapidly and predictably connect patients and physicians with appropriate clinical trial opportunities. Additionally, our OneSearch platform, which uses proprietary algorithms and a variety of data sources to identify the best sites for a clinical trial, was recently recognized by a major trade publication as the leading industry tool in data analytics and business intelligence. OneSearch is helping to tangibly improve our site startup times and recruiting site metric, which drives improved speed and efficiency for our customers. Turning to our financial performance, I'm pleased with our results in the third quarter with strong backlog growth of 9% year over year and revenue growth of approximately 4% or 7.4% on a constant currency organic basis over the third quarter of 2021. Excluding COVID related work, revenue growth was over 14% year over year on the same basis. Operational performance was particularly strong in the quarter, with approximately 17% adjusted EBITDA growth year over year, resulting in a margin of 19.5%. Direct fee revenue growth and improved resource utilization alongside strong SG&A cost management helped drive our performance in the quarter, and we remain well on track to meet our target of 19% adjusted EBITDA margin for the full year 2022. This leaves us well on track to meet our medium-term goal of mid-teens growth in adjusted EBITDA through 2025. In addition, earnings per share grew strongly at 17.5% year-over-year in Q3. We continued our progress in reducing our floating rate debt exposure by making a $200 million payment on our Term Loan B facility in Q3. resulting in a 2.9 times net debt to adjusted EBITDA ratio at the end of the quarter. Furthermore, as Brendan mentioned, we are finalising a hedging strategy for the majority of our variable rate debt in order to provide greater certainty on our interest costs going forward. We expect to be able to announce the terms of this agreement by the end of this year. Only 15 months after completing the union with PRA Health Sciences, we have made excellent progress on the execution of cost synergies and integration of the organisation, which has allowed us to pay down our variable rate debt even faster than our initial expectations. As we approach our target of 2.5 times adjusted EBITDA, we anticipate our capital deployment focus will increasingly include potential share repurchase activity alongside M&A as we look to add capabilities and assets that further enhance our service offering. Given our financial performance in quarter three and the healthy underlying business environment, we are reaffirming our full year 2022 guidance of revenue in the range of $7.69 to $7.81 billion and earnings per share of $11.65 to $11.85. Additionally, as previously communicated, our full year EBITDA margin expectation of 19% remains unchanged. I've spoken in the past about our ambitious goal to be the recognised employer of choice in the industry and a highlight I was particularly proud of in the quarter was ICON's recognition as the 2022 Forbes World's Best Employers list as one of only two CROs. We believe this award, along with other industry recognition we have received, is a direct result of the investment and focus ICON has made on talent management, training programs, and overall career development for our employees. We continue to operate in a highly competitive industry for talent, and despite continued tightness in areas of the labour market, I'm pleased to report that we have seen steady improvements in employee retention each month as we have progressed through 2022. An additional highlight in quarter three was the release of our 2021 ESG report, featuring our environmental, social, and governance commitments. ICON performed our first ESG materiality assessment in 2022 and identified a number of priorities where we believe we can deliver the greatest positive impact for our stakeholders. We are deeply committed to our stated goals and objectives across a number of initiatives, including advancing public health, improving our employee experience, and minimizing our global environmental footprint. In light of broader macroeconomic challenges expected to continue to impact our business results, we wanted to provide initial thoughts on our outlook for 2023. Given the significant strengthening of the US dollar over the course of 2022, we anticipate a continuing revenue headwind in the first half of 2023, assuming foreign exchange rates continue at current levels. Backlog conversion is expected to be flat to slightly below Q3 levels due to a few notable factors. We are seeing a lengthening of overall study duration due to increasing trial complexity in full-service programs driven by growth in therapeutic areas like oncology and rare disease and a decline in vaccine-related work as a proportion of our overall backlog. Based on current dynamics in the demand environment, Our quarterly book-to-bill remains unchanged in the range of a 1.2 to 1.3 times target. We remain ambitious in our goal to drive 100 basis points of EBITDA margin expansion in 2023, as we continue to expect strong direct fee revenue growth along with solid cost management initiatives, including the realization of the full $150 million cost synergy target in 2023. Our longer-term growth aspiration of achieving $10 billion in revenue in 2025 remains unchanged. We plan to issue detailed financial guidance in accordance with our usual timing in January at the J.P. Morgan Healthcare Conference. This timing allows for the necessary inputs of our quarter four results, debt hedging strategy, and the latest macroeconomic outlook. in order to provide a specific guidance range for the year. Before we move to Q&A, I want to recognise and thank our employees across the globe for their continued efforts and significant contributions to our performance this quarter and in the years to come. So, operator, we are now ready for questions.
spk14: Thank you. As a reminder, to ask a question, you will need to press star 1 and 1 on your telephone and wait for your name to be announced. Please stand by while we compile the Q&A roster. Your first question comes from the line of Eric Caldwell from Baird. Please ask your question.
spk02: Thank you very much. I'm going to start with some comments made at a September conference about the labor inflation environment. I did hear today that turnover and staffing overall maybe improving month to month. But there were some comments about going into 23 expecting higher labor expense. And frankly, I thought that might pull back your EBITDA expansion goals, but it doesn't sound like it has. So anything you could share on that would be a good start. Thank you very much.
spk10: Sure. Thanks, Eric. Yeah, we do expect to see some inflation in labour rates given the inflationary environment. But the bottom line is we believe we can counter that with the various initiatives we have ongoing in the organisation to help us. We continue to reduce our SG&A costs. We have various operational initiatives that we believe we can put in place. So while we're not naive in expecting that there's going to be some pressure on labour rates, those sort of increases we believe can be more than offset by some of the initiatives we have going on in the organization.
spk02: If I could just have one more real quick. Thank you for some of these initial thoughts on 23. That's helpful. I think maybe the biggest, you know, when we're looking at variance across the street, probably the biggest variance we've been seeing across a number of our names is models for interest expense. I know there's some uncertainty with the hedging program you're setting up, but Is it possible to prompt you to maybe give a bit of a wide range on what you're thinking just to level set and get everybody in the same ballpark on interest expense outlook for next year?
spk17: Hi, Eric. It's Brendan here. I'll take that one. You know, one of the reasons I suppose we talked about giving guidance at JPM is because like everything else, the underlying LIBOR and SOFR rates are fluctuating quite dramatically at the moment as well. So it's a bit of a moving ball or moving goalpost, I should say, at this point. That said, we do expect to be in the high 200s for the full year interest rate. I would say probably I'd guide you more to the top end of that range. So that's our current expectation. But Please do take that as a draft, and we'll see how the market is playing out over the next couple of months. And obviously, we'll come back to you with something a little more specific than that when we get to January and our guidance at JPM. Great.
spk02: That's very helpful. Thanks, guys. Congrats on good results.
spk14: Thank you. We will take our next question. And the question comes from the line of Max Mock from William Blair. Please ask your question.
spk01: Hi, thanks for the question. Christine Rains on for Max Mock. Just a question on last quarter's call, you pointed out that ICON is interested in increasing its exposure to small biotech. I didn't hear you talk about it on this call, but I think that makes sense given what we see as excellent long-term growth prospects from this cohort. but it kind of took us by surprise given near-term funding risks. So I was hoping you could give some detail on this strategy, kind of like your timeline that you expect to pursue this in and your optimal small biotech target mix.
spk10: Okay. That's not our recollection, Christine. We're not looking to increase our exposure to small. I think it remains a very important part of our business at around half of it. But it's an area that, as we all know, has some funding challenges at the moment. And that's something we recognise. But we're not looking necessarily to increase it. In fact, what we've seen is our large farmer and mid-sized farmer discussions and business development has probably moved very significantly up in the last, probably the last 12 months, really, as we've come together. And certainly that trend has continued today. So, if anything, we'll be increasing our exposure in the large farmer market given the success we've had both in winning business in that segment and in some of these more strategic discussions that we continue to have in the large farmer space. So, I mean, biotechs and small emerging remain an important part of our business, as I've mentioned, but we're not looking necessarily to dramatically increase our exposure in that space.
spk01: Thanks. That makes sense. And just one follow-up for me. Just on the revenue front, last quarter you noted you're on track to meet your $100 million cross-sell target for the year. I didn't hear you mention that this time around. Is that still the goal?
spk10: That is very much still the goal. We remain on track for that. We've said that would be as we end 2024. So there's a longer-term lag, I suppose, on revenue synergies. The cost synergies, as I think I outlined, have come in faster than we expected. We're on track for $100 million this year and from a run rate of $150 million for next year. So we feel we're very pleased with how they've gone forward. Revenue synergies are working forward. We're selling and getting those awards, but they'll be a little bit slower to come through, and we're talking end of 24 on those.
spk01: Great. Thank you so much.
spk10: Okay.
spk14: Thank you. We will take our next question. Please stand by. And your question comes from the line of David Windley from Jefferies. Please ask your question.
spk05: Hi. Thank you for taking my question. I wanted to start with a backlog conversion as a general topic. Steve, in your prepared remarks, you talked about longer duration of trials and some factors on that front. We've also heard some commentary about labor challenges and attrition at sites and things like that so the the I guess the duration of studies in your backlog is probably a little more secular are there also some some shorter term issues that are affecting that duration and do you think those can be alleviated in the near term
spk10: Yeah, thanks, Dave. As I think we've outlined, the backlog conversion has dropped down a little bit, and we're anticipating flat, maybe slightly lower as we go to the end of the year. And it's really because of the return to a sort of normal cadence of longer-term trials. Oncology is becoming a larger proportion of our backlog. The COVID stuff is sort of moving away. those fast-burning vaccine studies. So it's more in relation to the shift in our backlog, if you like, and the make-up of the studies that we're doing. In terms of how we mitigate it, there's a number of factors ongoing, obviously, operationally, but the site one's an interesting one. We haven't seen the sort of disruption from a resource point of view at our Ocellicare sites, and we do believe there's an opportunity there to push more trials through our Ocellicare sites and to expand that. We have a good... Most of the people, in fact, all of the people in our Acellicare sites are dedicated to us and are dedicated on research. They don't have a pull to other sort of more standard clinical work. And so we see that's an advantage. And that's leading to continued improved performance in those sites, in those Acellicare sites. We're well above recruitment rates, 20%, 30%, 40% above our sort of more ad hoc sites. And so that's playing through nicely for us. We believe there's further opportunity there to push more trials and mitigate any pressure on the backlog burn.
spk05: Thank you for that. Very helpful. So then my second question is around your comments on RFP versus kind of reported numbers on bookings. It sounds like the RFP flows are still progressing at a pretty decent clip. You said high single digits. Bookings were down year over year by about a percent. And so I wondered if the bridge there is hit rate or decisions, awards just not being issued, you know, more RFPs not going to award, or what would be the delta between kind of high single digit RFP growth and slightly down bookings?
spk10: Actually, the bookings on a quarter-to-quarter day were pretty flat there, but it was slightly up rather than slightly down, about 1%. But, you know, these RFPs, I think I've always said this, are somewhat inexact. marker, if you like, for bookings. We do get RFPs that come through that are more costing exercises. Some of them are more ballpark figures, and then some come completely out of the blue. So as I say, it's not an idea. It's not an exact match for bookings. We're certainly seeing a lot of activity in the large pharma space on the RFP space. That's an area that's gone up. And on the biotech space, it's been a little more muted. But overall, the numbers are solid. As I say, high single digits on a trailing 12-month basis or so. I hesitate to get too focused in on RFPs. It's the business development. We've been flattish, and that reflects, as I say, some movement within the market on large pharma, midsize, and biotech, putting it all together. So it is what it is.
spk05: Thank you very much. Good luck with the rest of the year. Thank you. Thanks.
spk14: Thank you. We will take our next question. And the question comes from the line of Sandy Draper from Guggenheim Partners. Please ask your question.
spk03: Thanks. The first question on cash flow, good quarter, and I think in the slides you still have the target of $1 billion of free cash flow. Just wanted to see, Brendan, if that's still the target, and if so, that would imply a pretty nice step up and would assume that would really come from working capital. So just wanted to to get any comments on that.
spk17: Yeah, we put those targets, they were kind of implied in the original guidance, Sandy, so they shouldn't probably be read through as forecast elements. So they were kind of the objectives we set out at the beginning of the year. I think we'll improve, certainly, in cash flow in Q4. We had an excellent quarter of billing in Q3, so I do expect to see good cash flow generation on the back of that in Q4. We're probably not quite to the level that would get us to the billion-dollar mark in total. We'll certainly still aim for that. We're probably around, you know, we've been doing just over $200 million in free cash flow on a quarterly basis so far this year. I'd like to see a little bit more, but it probably won't close that gap in totality. So, you know, we're certainly 200-plus is certainly our expectation. I'd like to see that maybe push up maybe even to the 300 mark, but I don't think we'll quite close that gap, certainly.
spk03: Okay, that's really helpful. And then my unrelated follow-up. On the gross margin side, obviously, really good number. And I think you mentioned, or maybe it was Steve, about just the high mix of service revenue versus pass-throughs. I didn't know if that's really the bulk of it or if there's other stuff going on there. And in general, I mean, is it fair to think about, because I know there's a lot of folks on bookings, But I try to focus on quality of bookings and, you know, a big quarter that's heavily passed through doesn't mean a whole lot. But is it fair to say your bookings over the past three or four quarters have been more weighted towards service revenue versus pass-through? Because it's certainly showing up in the gross margin touches. Any thoughts around that sort of trend?
spk17: Yeah, I'll start off on that one, certainly, and maybe Steve might want to chime in. I think from, listen, we called out, you know, and Steve called out the numbers, you know, very good, solid, double-digit growth ex-COVID this year. And obviously COVID with its just quantum of pass-through that we saw in prior years, it was a drag factor on gross margin. We certainly, with the normalization of a mix of our backlog coming through the course of this year, see those kind of vaccine high pass-through business, you know, still continuing to wind down. And to your point, really good, solid direct fee revenue replacing that, which has a normal cadence of pass-through included in it. So you're probably in kind of, I suppose, historically taught about somewhere in the 25 to 30% of gross revenue being passed through on full service work. And I think you're coming back down to that. Obviously, that was much, much higher recently. with COVID work where it could have been actually the pass-through was often bigger than the actual, significantly bigger than direct fees. So yeah, I think we are seeing an element of that continuing. And as I said, that also adds to some of the points that we may talk about in terms of backlog conversion as well. So certainly it's a good story from a business wins perspective in terms of good mix of direct fee revenue helping gross margin.
spk10: Steve, did you want to add to that? No, I think that Sorry, Sandy. I think what Brendan said is right. We're certainly seeing a greater proportion of trials with a lower proportion of pass-throughs, if that makes sense. So if you look at our direct fee revenue growth, we are in a sort of high single digits, that sort of number. So it's playing through nicely and helping fuel as a tailwind for our gross margin going forward.
spk03: Got it. Thanks so much.
spk14: Thank you. We will take our next question. And the question is from Elizabeth Anderson from Evercore ISI. Please ask your question.
spk12: Hi. Good morning or good afternoon, guys. One of the things I was just wondering is sort of as you were talking about the demand environment in the third quarter, that was very helpful. As you think about sort of how the fourth quarter has been trending so far, Are you seeing any major changes in either sort of RFP flow in any of your customer segments or win rates or anything in that nature that would be worth calling out either on the positive side or the negative side?
spk10: Elizabeth, it's still pretty early in the fourth quarter. We're a month in. We track this on a week-to-week basis. We're not seeing any trends, either positive or negative, that I'd call out at this point.
spk12: Okay, that's very helpful. And then just in terms of the cost energy updates that you mentioned, I appreciate they said on realization of the total 150 for 2023, where do you sort of expect to be at this point by the end of the year?
spk10: Well, by the end of the year, we will be at a run rate that will give us the $150 million in 2023. We've got a little bit of work to do there in the last few months of the quarter to sort of get those initiatives in place, but we feel very confident that they'll be there and we'll have the $100 million in 2022. So, you know, we're well ahead of where we thought we were going to be with respect to our efficiencies, cost synergies, et cetera, et cetera. And that's helping us be pretty confident about our EBITDA and EPS growth going forward. A little bit back to Eric's question around labor inflation. There are some headwinds on labor inflation, but because we've driven so well and we've accelerated those cost synergies, we think we can move forward well overall from an EBITDA point of view. And some of that also impacts our gross margin.
spk12: Got it. That's super helpful. Thank you.
spk10: Good.
spk14: Thank you. We will take our next question. And the question is from Justin Bowers from Deutsche Bank. Please ask your question.
spk07: Hi. Good afternoon, everyone. Just continuing on the margin question, so the additional synergies are clearly a big piece of the puzzle, but can you help us think through the other the other levers that are going to help you drive that 100 basis point expansion for 2023.
spk10: Sure, Justin. I mean, there's a number of operational initiatives that we have in planning as we come together, as we continue to come together. This is a long-term process. We're being very considered and careful about how we integrate, not wanting to disrupt the customers projects. But having said that, there are some operational efficiencies around functions that we believe we can gain. We've got some opportunities around where we locate resource as we go forward really over the next couple of years. We have initiatives around our artificial intelligence and machine learning aspects that we're bringing in to do some of the more routine work. So there are a number of areas there that we believe over the port of probably more medium term that we can, we can drive. And we believe that's going to give us again over and above any headwinds, uh, some opportunities to expand our margin by the, by the a hundred bits that we think we can do next year.
spk07: And maybe just, just one more on the large pharma commentary. Um, you talked about the, the trailing 12 month growth and is, is there anything out there that you're seeing that might bend that? And then, um, you know, in terms of the increased momentum that you're seeing, that ICON's seeing, and large pharma biz dev, what do you think some of the key factors are there?
spk10: Is there anything out there that could bend that? You know, I guess there's always things that can bend this sort of thing, but, you know, we see it's not just one or two customers. We see a trend across a number of different organizations, a number of different large pharma and mid-sized pharma, for that matter, who want to engage with us. And so... Of course, there are things that could knock us off track. But at the moment, we're not seeing anything. And even with the challenges around the macro, it's probably driving more of it. I think they're seeing more of an opportunity for more importance around their outsourcing strategy and getting those strategies in place with good, competent partners. So I'm very confident that we'll continue that sort of progress. The business development side of things continues to be positive, particularly in that segment. Particularly in that segment. And so... You know, we're very optimistic about the way we're doing that, and I think the main reason for it is because we're an organisation of significant scale now. As I said, it was one of the key rationale for the union with PRA. PRA have brought huge expertise and competence to us. We're a very significant clinical development player now, and customers want to talk to us about what we can bring to them, whether it be in the FSP space, the full service space, our technology, our labs, icon decentralized platform you know we're spending and a lot of resource and effort in bringing that board we're seeing a lot of opportunities around those decentralized trials and they want to be they want to be part of that they want to have that discussion with us so it's a you know it's a we feel very constructive and positive about that those sorts of discussions thank you appreciate the questions thank you we would take our next question
spk14: And the question comes from Luke Sergot from Barclays. Please ask your question.
spk15: Great. Thanks, guys. Do you think, just some housecleaning stuff, can you give us an idea of what your growth ex-COVID was to see what that burn looks like?
spk17: Yeah, we can.
spk10: Sorry, I'm just trying to find that number here in the script. Mid-teens. I think we called out 14%, Luke, in the comments.
spk00: And that would have been constant currency.
spk10: On a constant currency basis, yeah. 14% was the number.
spk15: Awesome. Thanks. So just getting back here to thinking forward and past the COVID and everything. So You guys gave out a normalized, analyzed run rate for largest customer, and this was a while ago. I think it was at your Dublin Analyst Day, and that was around like 350, if I remember correctly. How should we think about this going forward, let's say, as you're approaching that path to your long-term guide?
spk10: Not quite clear on your question, Luke. Sorry. What's the question?
spk15: It's basically trying to figure out, because your largest customer right now is about $650 million, and just trying to figure out how quickly that burns off. And then where the offset is, it looks like the rest of your book continues to grow outside your top 25, taking massive step-ups here the last couple years. So just really trying to figure out those two moving parts going forward.
spk10: Yeah, I mean, again, back to one of the rationales for the union with PRA was to reduce our customer concentration. We've done that. No one's more than, I think, 10%. No, certainly no one's more than 10%. I think our largest is around about 8-ish percent backlog and revenue-wise. So we're pleased with the result of that union and what that's done to us. You know, we would see that probably continuing at about that rate. We have a good relationship with our largest customer, obviously. They feel confident in what we're doing. And so I don't know that that's going to dramatically fall. However, as you no doubt have seen, we are growing our business outside of the top 25. I think this quarter we had something like high single digits outside of the top 25, which sort of signals where we're going as an organization around expanding our customer base and working in the more midsize and smaller customer sort of group. You know, I'm not sure that I see dramatic changes going forward. Our top, you know, five, ten customers will continue to be a very significant part of our business, and they'll be really where a lot of our strategic partnerships are focused, of course. And so I would anticipate that that concentration there would continue at about that rate, maybe drop a little bit in the longer term as we expand, but overall, not dramatic differences.
spk15: Okay, thanks.
spk14: Thank you. We will take our next question. And the question is from the line of Patrick Donnelly from Citi. Please ask your question.
spk06: Taking the questions. Steve, helpful color on 23 to start there. I guess kind of diving into that a little bit more. I mean, you talked previously about the book to bill kind of being above 1.2. That would enable high single-digit growth in 23. you know, potential to kind of shift down towards mid-single if it goes below. I think we've been right at that number for two quarters now. You talked a little bit about the conversion, you know, being flat or slightly below 3Q with that lengthening and trial duration. I guess, where does that leave us thinking for next year? Are we sliding a little bit below the high single? I just want to get color there. And then maybe, Brendan, just how big is the FXN win? I know you talked about it's evident in the first half. No surprise there. But maybe if you could just quantify, that would be helpful.
spk10: Yeah, maybe I'll take the first part of your question, Patrick. We're talking about high singles on a constant currency basis, and that remains our target, our plan. I think we're going to look at all sorts of inputs, as I indicated, in the next two, three months to see where we're going to be from a guidance point of view. And we're not ready to provide really any sort of strong indication of guidance on this call. We aspire... to those high single digits. We're going to look at the various inputs, the burn rates, essentially the win rates and the composition of the wins, which is very important. You know, as we look at, we get into the sort of final few months of the year, you know, another couple of wins in the vaccine studies can have a material impact on these sorts of things. So we'll look at all of those things and come back to you in January with respect to where we're going to be on the guidance, but on a constant currency basis, we remain focused on moving towards what we said in the past.
spk17: Yeah, Patrick. Yeah, sure. On the FX piece, and I think this is color now from our year-to-date perspective. In Q2, of course, we adjusted our top line revenue guidance to take account of that. And at the time, we were saying it was in the range of 120 to 140 of an impact having on the top line at that point. We have seen that increase in Q3, but the most dramatic part of that certainly was in the first half of the year. So it's certainly just about north of 150 to the end of September. We'll keep a close eye to where FX rates are going. They're still wobbling a little bit. I think we've got a little more hanging on to parity, but certainly the euro has docked below parity on a number of occasions over the last couple of weeks. So that might still be a factor as we think about Q4, but to this point at the end of Q3, it's just north of 150.
spk06: And then for 23, Brendan, any initial kind of number as of FX rates today?
spk17: Yeah, it's an excellent question. You know, I think, you know, there is, as we look out and we think of average rates and constant currency from this year to next year, if we apply something like spot rates to next year versus this year, that could deliver about a 1% headwind in foreign exchange terms. To Steve's point, There's a lot of work to do between now and our guidance call at JPM. But that certainly is indicative of what we would expect if there was no change from where we're at at the moment.
spk06: Okay. And then just quickly on the balance sheet, capital deployment, encouraging to hear you guys paying down some debt, getting rid of some of that variable interest. You mentioned share repurchases as well, Steve, I think bolt on M&A. How do we think about the balance there kind of in the near term? I assume debt is still the priority, but maybe just talk through that piece. Thank you.
spk10: Yeah, Patrick, debt is still the priority. As I said, we anticipate paying another $200 million off our loan in the fourth quarter. But as you all know, M&A takes a little bit of time. And so we're certainly looking actively or starting to look actively in the market, because we believe around two and a half times adjusted EBITDA is about the right number for our balance sheet. We're not planning to go back to zero debt. So we want to use our balance sheet. We've got a strong business that's generating significant cash flow. And so as we get into next year, we'll be looking at, certainly M&A will be The next priority, if you like, once we've moved our leverage rate to where we want to be. But share buybacks remain an option as well, again, as we contemplate what we're going to do with our capital and we keep it at around the two and a half times. So that will be a little bit more opportunistic and it will depend upon what's available in the market and what sort of pricing we're seeing around some of the assets that we're looking to So there's a number of factors going in there, but we did want to signal that we are going to be actively in that space, probably certainly over the next 12 to 18 months. That's our plan.
spk13: Thank you. We will move to our next question.
spk14: The question comes from the line of Jack Meehan from Nefron Research. Please ask your question.
spk04: Thank you. Hello, everyone. I wanted to follow up on Patrick's initial question, just dig a little bit more into the backlog conversion dynamic. Is it possible to say today what portion of your mix is oncology and rare disease and just how much that's going to shift next year and maybe just conversely what the vaccine mix is changing?
spk10: I'll take the start of that one, Jack, and then Brendan might I mean, oncology in rare disease is a significant part of our background. It's about 40-ish percent of what we do, and it's probably going up rather than going down. If you look at oncology, CNS vaccines, that probably gets us to pretty close to 60 percent of our back. Now, vaccines, of course, burn quicker, and as those trials come in, they do give us a tailwind on burn. But oncology, I mean, almost every oncology trial is a rare disease trial these days because of the sort of patients we're looking for. And they do tend to be kind of large, long-term type studies. So they are a drag, if you like, on our burn, albeit their long-term work. But they do, as we increasingly, and they're, as I say, a very significant part of our backlog, they do put a little bit of a headwind on it. Brendan, do you want to add?
spk17: Yeah, no, I think the only thing, I mean, you're spot on, Steve, in terms of the proportionality there of both oncology and anti-infectives. So the one thing I would call out maybe is that the COVID, as a part of our backlog, is still in around that kind of mid-single digit level. And we expect, as we've talked about that, in terms of revenue contribution, moving down from probably mid-singles this year into probably into the lower singles next year. So that certainly is still a contributing factor in some of that conversion drop-off as well.
spk04: Got it. And then, just curious, is any of the moderation you're expecting in backlog conversion related to labor access? And also, can you just talk about regional dynamics, notably Europe and China, just how you feel about site access and the rate at which trial starts have been?
spk10: Yeah, we don't see labour access, at least our internal labour access, being a rate limiter for backlog conversion. We are seeing at some of our non-cellar care sites some impact there, particularly in the United States and, of course, with the lockdowns, et cetera, China, we've been fairly clear on that. So there is some impact in that space, but we're hoping and expecting... that we can, as I said, I think previously, we can drive some of our, more of our trials into our Acellicare network and expand that Acellicare network because we have dedicated resources in that network that aren't impacted by some of the other challenges that our more ad hoc sites have. So we think we can mitigate some of that site burn, if that makes sense, through our Acellicare site network and through supporting sites in addition to that, supporting some of the ad hoc sites, particularly key recruiting sites. So there's various things we're doing to help us, as I say, mitigate the risk on the site side of things. We don't see, you know, in terms of labour access, you know, it's a challenging market, you know, and all that sort of thing. I don't think that's got any significantly easier, but it hasn't got any worse either. And so we see access to labour and access to people who can do the work internally as being not a factor that's going to hurt us in the short to medium term.
spk14: Thank you. We will move to our next question. The question comes from Casey Woodring from JP Morgan. Please ask your question.
spk18: Hi, guys. Thanks for squeezing me in. Just piggybacking off of the cash flow question asked earlier, looks like unbilled revenue grew 62% year over year. So just curious as to what drove such a big jump in the quarter and if there are any read-throughs from that number. Thank you.
spk17: Thanks, Casey. I'll take that. We've been going through a process of harmonizing our process around revenue recognition over the course of the year. Certainly we did see some elements of that where we would have had a naturally a higher unbilled revenue balance in the ICON organization. And I think what you're seeing is that kind of returning to that point. We're seeing, you know, obviously when we brought in PRA at first, they had a lower position on that one. But I think what we're doing is correct. I do think, Will, we've had a, I mean, focusing on the future a little bit more so is that we've had a very, very solid quarter of good billing in Q3. I made reference to the fact that we had a couple of systems issues as we went through Q2. And we obviously are now all on one Oracle platform in Q3, which has been a huge, huge piece of work and will help us significantly in driving this balance as we go forward. So we're certainly looking at pushing that down as we go forward, but there will always be a normal level of unbilled balance there, you know, as we look at their makeup of ideas. So, you know, probably somewhere in the region of 35 to 40 days is, you know, not a bad area where we'd like to be in the longer term. So we certainly will be looking at pushing that balance down As I said, really good quarter of billing, and we'll see how it hopefully plays into the numbers in Q4.
spk14: Thank you. We will move to our next question. The question comes from the line of Dan Leonard from Credit Suisse. Please ask your question.
spk09: Thank you for taking the question. So I was wondering if you can give us the dollar amount of COVID-related trial revenue in the quarter. And then the progression, Brendan, can I clarify, you said low single-digit proportion of revenue in 2023, or was that a backlog comment in response to Jack?
spk17: Second question first, maybe. It was low single digits in terms of revenue in 2023 is our expectation at this point, coming off backlog of about 5% or mid-singles at the moment. I don't know if we have even a percentage in the quarter. Kate, do you have that number?
spk00: Yeah, it was mid-single digits in terms of revenue.
spk09: That works. Thank you.
spk14: Thank you. We will take our next question. The question comes from the line of Derek de Bruin from Bank of America. Please ask your question.
spk08: Hi, good morning. Can we... Can you talk a little bit about sort of like your cancellation rate expectations and sort of thinking about, you know, is 2% a good go-forward number to do that? And just anything unusual you're seeing with respect to cancellations now, you know, any pullback in people changing plans, just like that, just some general color on what you're seeing there and how to think about going forward. Thank you.
spk10: Yeah, I think the overall comment on that, Dan, is it's sort of more of the same. We haven't seen any significant changes in our cancellation, either the rate, the dollar number, you saw the 2% of opening backlog, gross-wise. We're fairly careful with what we put into the backlog in terms of who we contract with. And so there might be stuff that we don't put in that doesn't ever happen sort of thing. Overall, in terms of our smaller customers, as I said in my comments, we're seeing they're more deliberate in terms of what studies they're funding and in terms of what studies they're doing. That's logical, but we are seeing good science and good companies getting funding and getting an ability to move their projects forward, and whether it be in the private markets or in the public markets, for that matter, from follow-ons, they seem to be able to get the money they need. We're certainly not seeing in the clinical space an increase in the cancellation rate around these smaller, because that's where your question's directed. And so overall, it's, as I say, more of the same. Great. Thank you.
spk14: Thank you. And we will take our final question. The question comes from the line of John Sowerby from UBS. Please ask your question.
spk16: Hi, thanks for taking my question here at the end. You know, on the revenue synergies, you mentioned earlier on, you know, exiting on 2024 of those synergies, but if you're looking at the demand environment here and if things were to change, you know, is there an ability to partially maybe offset that and accelerate some of these revenue synergies as we look to next year?
spk10: I mean, John, we're always trying to accelerate our revenue synergies, but it really depends upon the... And we track this pretty carefully. These are not just studies we thought we might have won if we hadn't come together. They're very carefully tracked in terms of this is a service we're providing at one organisation, one legacy organisation or the other, that wouldn't have been provided if we'd remained two separate organisations. So we're tracking that, and the awards really are on track for that $100 million. and we, on an annual basis, and we expect those, as these things burn and take a little bit of time to come through, we expect those, you know, the revenue synergies to actually hit us as we exit 2024. So, you know, we're always trying to, of course, provide or accelerate them. But at the moment, the indication is that we're on track with what we said we're going to be doing, as opposed to the cost synergies where we're well ahead of what we said we'd do.
spk13: Thanks.
spk10: Okay. So thanks to everyone. We remain very confident about the business environment and what we're doing here at ICON to execute and to prosecute our customers' projects. So thank you, everyone, for joining the call today. We're pleased with our third quarter results, and we again extend our thanks to our dedicated workforce across ICON. As we continue to navigate the evolving landscape in clinical development and the broader environment, we remain focused on partnering to market faster for patients. Thank you very much, everyone.
spk14: This concludes today's conference call. Thank you for participating. You may now disconnect. The conference will begin shortly. To raise your hand during Q&A, you can dial star 11.
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