Earnings Call Transcript - IQV Q3 2022

Operator, Operator

Ladies and gentlemen, thank you for standing by. At this time, I would like to welcome everyone to the IQVIA 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. As a reminder, this call is being recorded. I’d now like to turn the call over to Nick Childs, Senior Vice President, Investor Relations and Treasurer. Mr. Childs, you may begin your conference.

Nick Childs, Senior Vice President, Investor Relations and Treasurer

Thank you. Good morning, everyone. Thank you for joining our third quarter 2022 earnings call. With me today are Ari Bousbib, Chairman and Chief Executive Officer; Ron Bruehlman, Executive Vice President and Chief Financial Officer; Eric Sherbet, Executive Vice President and General Counsel; Mike Fedock, Senior Vice President, Financial Planning and Analysis; and Gustavo Perrone, Senior Director, Investor Relations who has succeeded Brian. 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 in the Events and Presentations section of our IQVIA Investor Relations website. 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 Bousbib.

Ari Bousbib, Chairman and Chief Executive Officer

Thank you, Nick, and good morning, everyone. Thank you for joining us today to discuss our third quarter results. IQVIA delivered another quarter of strong financial results despite market concerns about slowing demand, broader macroeconomic challenges, and various global geopolitical issues. In fact, indicators of demand from both customers and in the market generally remain healthy. Industry clinical trial starts continue to trend ahead of last year, rising almost 7% year-to-date. The pipeline of active early-stage and late-stage molecules is both up 8% from 2019 pre-pandemic levels. EBP funding, which has been a lingering concern since the beginning of the year when one of our smaller competitors raised alarms. EBP funding improved in the quarter; according to Bio 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 annual rate, which exceeds the average of the last five years pre-COVID. Our own RFP flow grew mid-teens in Q3 and RFP flow in both the large pharma and EBP segments are up double digits on a year-to-date basis. Our Q3 book-to-bill was 1.39 excluding pass-throughs and 1.27 including pass-throughs, continuing our strong results from the first half of the year. As a result, our backlog grew 5.4% versus the prior year on a reported basis and 9.4% 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 10,000 customers in more than 100 countries, including all top 25 large pharma clients across the spectrum of therapeutic areas. While demand remains very healthy, we have been dealing with operational challenges caused by the global macro environment, including wage inflation, high levels of attrition, the ongoing Russia-Ukraine disruptions, reoccurring China lockdowns, and perhaps, more recently, some staff shortages at certain investigator sites. We have been able to overcome 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 delivery timing caused by these macro disruptions, specifically by bottlenecks created by staff shortages at certain sites 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. Due to persistent high levels of inflation, interest rates have been increasing sharply. In response, we're adjusting our capital allocation strategy to include some debt pay down in addition to M&A and share repurchases opportunistically, as we have in the past. In summary, the underlying demand in the industry and 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 TAS and R&DS 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, the R&DS business was up 18% and TAS 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 grew 14.3% driven by our adjusted EBITDA growth. Let me 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. Making this data usable requires robust information management capabilities, and as you know, at IQVIA, we've been building these capabilities for decades. Recently, the top 10 pharma clients selected IQVIA's human data science cloud to power large-scale data and 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're deploying a privacy-first open ecosystem that delivers healthcare information in a timely and personalized manner to meet the fast changing needs of the healthcare consumer. In the quarter, IQVIA acquired Lasso Marketing, which developed an operating system designed for healthcare marketers to coordinate and execute omnichannel digital campaigns from a single platform. Additionally, DMD Marketing Solutions, which we acquired about a year ago, was recently selected by a top 10 pharma client to bring to market three oncology and biological brands using digital insights to deliver personalized brand content to healthcare providers that are relevant to their practices and interests. Demand for our commercial technology solutions remains strong. This quarter, the top 20 pharma clients selected IQVIA's commercial technology ecosystem suite to transform its commercial operations into an AI-enabled commercial model. The customer will deploy IQVIA's orchestrated customer engagement suite, IQVIA's master data management, and orchestrated analytics in more than 30 countries, driving a 20% efficiency gain in customer coverage and boosting the speed and precision of their order management process. In the real-world business, IQVIA continues to lead in innovative study design that combines multiple IQVIA capabilities. For example, in the quarter, we were awarded a multiyear portfolio of real-world studies in psychiatry from a mid-sized 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. In another example, we were awarded a significant contract with a major med tech company to identify early markers for organ transplant rejection to a non-interventional study that combines our med tech, real-world, and translational sciences capabilities. Moving to RDS, our decentralized clinical trial program has received independent compliance validation from EU General Data Protection Regulation from Trust Arc, which is the leader in GDPR validation. This is a notable achievement. This program is highly recognized in the industry as it requires two separate independent audits. It is a key achievement for IQVIA as it is the first time any DCT offering has received this European data privacy validation. In addition, we've expanded our decentralized clinical trial capabilities by launching the first self-collection safety lab panel for U.S. clinical trial participants in collaboration with Tasso 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 home without the need to visit an investigator site or have a health care professional visit them, expanding our DCT offerings and capabilities. The overall R&DS 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 1.39 excluding pass-throughs. Including pass-throughs, the business delivered over $2.5 billion of total net new business in the quarter with a book-to-bill ratio of 1.27. Over the last 12 months, our contracted book-to-bill ratio was 1.35, excluding pass-throughs, and 1.29, including pass-throughs. I will now turn it over to Ron for more details on our financial performance.

Ron Bruehlman, Executive Vice President and Chief Financial Officer

Okay. Thanks, Ari, and good morning, everyone. Let's start by reviewing revenue. Third quarter revenue of $3.562 billion 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. In our base business, that is excluding all COVID-related work from both this year and last, organic growth at constant currency was 14%. Technology & Analytics Solutions revenue for the third quarter was $1.4 billion, up 4.7% reported and 11.6% at constant currency. Excluding all COVID-related work, organic growth at constant currency in TAS was 12%. R&D Solutions third quarter revenue of $1.979 billion was up 6.8% reported and 10.7% at constant currency. Excluding all COVID-related work, organic growth at constant currency in R&DS was 18%, as Ari mentioned. Finally, Contract Sales & Medical Solutions third quarter revenue of $183 million declined 9% reported but grew 1% at constant currency. And excluding all COVID-related work, organic growth at constant currency in CSMS was 3%. Year-to-date revenue was $1.671 billion, growing 4.2% on a reported basis and 8.1% at constant currency. COVID-related revenues were about $850 million year-to-date. In our base business, that is excluding all COVID-related work, organic growth at constant currency was 14%. Technology & Analytics Solutions revenue year-to-date was $4.247 billion, up 5.2% reported and 10.3% at constant currency. Excluding all COVID-related work, organic growth at constant currency in Tech & Analytics Solutions was 11%. R&D Solutions year-to-date revenue of $5.863 billion was up 4.5% at actual FX rates and 7.1% at constant currency. But excluding all COVID-related work, organic growth at constant currency in R&DS was 19% year-to-date. Finally, Contract Sales & Medical Solutions year-to-date revenue of $561 million declined 4.6% reported and grew 2.9% at constant currency. Excluding all COVID-related work, organic growth at constant currency in CSMS 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 $2,426 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, with year-to-date adjusted net income at $1,413 million or $7.39 per share. Now, as already reviewed, R&D Solutions delivered another outstanding quarter of bookings. Our backlog at September 30 stood at a record $25.8 billion, an increase of 5.4% year-over-year on a reported basis and 9.4% adjusting for the impact of foreign exchange. In fact, without the impact of foreign exchange, year-over-year backlog would be $900 million higher. Next 12-month revenue from backlog increased to $7.1 billion, growing 2.8% year-over-year on a reported basis and 6.7% adjusting for the impact of foreign exchange. 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 $11,120 million. Our net leverage ratio at the end of the quarter was 3.42 times trailing 12-month adjusted EBITDA. Third quarter cash flow from operations was $863 million, and CapEx was $165 million, resulting in a strong free cash flow of $698 million for the quarter. You saw in the quarter that we repurchased $150 million of our shares, which puts our year-to-date share repurchase slightly above $1.1 billion and leaves us with just under $1.4 billion of share repurchase authorization remaining under the current program. As was 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 US dollar term loans 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 continuing to pursue acquisitions and share repurchases, as has been our practice since the merger. Now let's turn to guidance. For the full year 2022, we continue to expect revenue excluding COVID-related work to grow organically at constant currency in the low-to-mid teens. On a reported basis, the strengthening of the US 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, global macro environment challenges such as wage inflation, investigator staff shortages, slower than expected recovery of patient visits, continued lockdowns in China, and the unresolved Russia-Ukraine conflict are persisting. So far, we've been able to offset all these challenges and absorb them in our numbers, but we're forecasting a modest residual impact in pockets of our business during the balance of the year and we reflected this in the updated values. For the full year, we expect revenue to be between $14,325 million and $14,425 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 impacts and the rest by the global macro environment headwinds. Our updated guidance represents year-over-year growth of 7.4% to 8.2% at constant currency and 3.2% to 4% on a reported basis. This equates to low-to-mid teens organic growth at constant currency excluding COVID-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 $3,330 million and $3,360 million, representing year-over-year growth of 10.2% to 11.2%. Lastly, we're raising the midpoint of our adjusted EBITDA EPS guidance by $0.05 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, representing year-over-year growth of 11.8% to 13%. Moving to our fourth quarter guidance, we expect revenue to be between $3,654 million and $3,754 million, or growth of 5.5% to 8.2% on a constant currency basis, and 0.5% to 3.2% 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 quarter guidance. Adjusted EBITDA is expected to be between $904 million and $934 million, up 9.2% to 12.8%. Finally, adjusted diluted EPS is expected to be between $2.72 and $2.82, growing 6.7% to 10.6%. All of our guidance assumes that foreign currency rates as of October 24 continue for the balance of the year. To summarize before we go to Q&A, the underlying demand in the industry and our business remains 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-related work. Our RDS 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 3.4 times trailing 12-month adjusted EBITDA, and we retired $510 million of our variable term debt at the beginning of the fourth quarter. With that, let me hand it over to the operator to start the Q&A session.

Operator, Operator

Your first question comes from the line of Dave Windley with Jefferies.

Dave Windley, Analyst

Hi, good morning. Thanks for taking my question. I wanted to focus on kind of speed of throughput in RDS. I'm calling it speed of studies and thinking about major buckets that could fall both on the accelerator side and the decelerator side. 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 are pushing hard to catch up for things that were pushed behind during COVID. 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. That's something that's a trend in the industry. It seems relevant to how quickly you can convert your backlog into revenue or these factors, and I wondered, Ari, if you could help us understand the tug of war there and which one's winning?

Ari Bousbib, Chairman and Chief Executive Officer

Well good morning, David. Thank you for the question, and there are many elements of response built into your question itself. You clearly know the industry and what's happening very well. Look, as context, patient visits have not fully recovered to pre-pandemic levels. So that's point number one. I think it was presented at an industry conference recently. I think it was on October 7 at the Society for Clinical Research Sites Summit; this issue of staff shortages that are affecting investigator side operations was flagged as a development industry-wide. That, if you will, is on the negative now. You're correct to point to DCT; obviously, the less we require the patient to actually visit the site, the better it is as a counter to this issue. Now we don't see this issue as a permanent or ongoing thing. It happens to be that what we have been dealing with since the beginning of the year are very high levels of attrition. People have a hard time going back to work. We have a harder time recruiting the skill sets that we require, plus the impact of labor costs from all of that. All these factors in combination are significant or the single most important operational challenge we have seen. 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. We're not the only ones to experience these staff shortages. The sites also have staff shortages as a result of the same factors. When they have to prioritize dealing with the incoming flow of patients versus dealing with clinical trials, that creates a challenge. You mentioned also the complexity of studies as a new factor, and I think this is also correct. There is a mix, not just in our backlog, but industry-wide that happens to be the evolution of the market, and the mix of studies makes the factors I just mentioned even more acute. As you know, the difficulty of recruiting patients is correlated with the complexity of the study. Now this is an area where we can shine because we've got our data analytics and technology, and we've proven many times that we are able to address complex studies and recruit patients better than we would have otherwise. So which side is winning? It's hard to tell, but look, so far, 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. We have a very diversified, large-scale company and we are able to adjust. We're not dependent on one single study. Had we been one-tenth of the size, we would be highly sensitive to a big study win or a big study loss. We're not. We just tweaked a little bit the fourth quarter numbers here just because we want to make sure we anticipate everything and be transparent with investors. Thank you for your question, Dave.

Operator, Operator

Your next question comes from the line of John Sourbeer with UBS.

John Sourbeer, Analyst

I was just wondering if you could talk a little bit more about inflation and hiring trends. You also mentioned some attrition in the prepared remarks. Just how do you see this playing out into next year? I know you're not guiding on 2023, but do you see some easing in the trends there? On the other side, I guess, how is pricing looking? Are you able to offset any of these inflationary pressures on pricing?

Ari Bousbib, Chairman and Chief Executive Officer

Thank you, John, and a very good question. That is exactly the operational equation that we are dealing with. And again, there's no news here. We've been talking about this throughout the year. We've said this is the single most significant operational challenge we're dealing with: talent, talent, talent. The cost of talent, recruiting, training, retaining, and compensating the talent we need to execute our studies. The levels of attrition reached record highs, almost 20% at times in the first part of the year. We have seen those levels of attrition come down and stabilize; they're now more in the 16%, 17% type of range. We hope that they will continue to come down. Obviously, we put in place a large number of measures to retain people, which include upward compensation adjustments, placing more burden and creating inflation that we have to deal with. This is an issue industry-wide, including at our partner sites where we execute the studies, which is creating the bottlenecks that we talked about. As far as our operations, we don't know how long these attrition issues and employee turnover will last. We are dealing with them. Many of the cost-cutting and productivity initiatives we were planning to launch in '23, we've decided to accelerate in the fourth quarter of 2022 in anticipation of the potential continuation of some of these employee turnover and wage inflation issues. So we will address that as far as our operations. Now, you asked about pricing. As you know, on the CRO side of the house, it's a long-cycle business. The contracted backlog that was created a year or two or three years ago cannot easily reflect current cost assumptions. There are, in most contracts, cost escalation provisions that allow for adjustments in rates. However, no one anticipated 8%, 9% inflation rates. So we're not fully able to immediately adjust for these cost pressures; there is a lag between when we feel the cost headwind and when we can reflect that in pricing adjustments. It's a little less of an issue in our shorter cycle businesses like on the commercial side. However, there too, we have long-term contracts where we need to account for previously agreed rates. We are more likely to reflect price increases in analytics, consulting, and services, which have shorter visibility contracts. It will happen, and we have plans to do so, but there is a lag. Thank you, John, for your question.

Operator, Operator

Your next question comes from Sandy Draper with Guggenheim.

Sandy Draper, Analyst

Thanks very much. I guess, Ari, it'd be helpful to hear some commentary on the TAS side, looking at the three broad buckets you look at TAS. In terms of demand drivers there, what do you feel like is improving, staying the same, or potentially weakening? Just thinking about the commentary or concerns around the sales force—whether that's going to be accelerating in terms of cuts or has stabilized—along with overall marketing budgets and how people are looking at using data and marketing. I'd love some commentary on the pros and cons and puts and takes on the TAS side as we head into next year.

Ari Bousbib, Chairman and Chief Executive Officer

Yes. Thank you for the question, Sandy. Look, we are very pleased with the continued strong growth that we see in TAS. You heard both Ron and myself report organic constant currency revenue growth, excluding COVID from both years, of 12%. That's really strong. The high-growth bucket includes real-world and commercial technology continues to be strong growth drivers. We are constantly finding innovative ways to utilize real-world evidence for clients, as I described in my introductory remarks, and we are deploying more of our technology solutions. It's true that sales forces, sales reps as a demographic are going down and any parts of any business that are reliant on physical interactions between sales reps and physicians face downward long-term trends. People who depend on CRM will experience headwinds. As I've mentioned many times before, we've been at the forefront of the transition to digital marketing. Interactions with HCPs are rapidly evolving toward digital interactions. I mentioned in my introductory remarks some examples; we made investments in this area. We bought DMD Marketing last year, we bought Lasso this past quarter. These are unique operating systems that enable pharma clients to decide where to place promotional content. This is where the industry is going. We've made investments; we bought technology and companies that we believe are unique and will enable us to claim our fair share of that market. We're here to support our clients in this transition. So, yes, the traditional mode of going to market is disappearing. It's a slow trend down, 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, Sandy.

Operator, Operator

Your next question comes from Shlomo Rosenbaum with Stifel.

Shlomo Rosenbaum, Analyst

This one is actually for Ron. Given the rise in interest rates and your focus on retiring more debt, can you give us some color on how we should think of the blended interest rate that we should assume on debt? Are you targeting a leverage ratio in the mid-3s, low-3s? How should we think about this on an ongoing basis?

Ron Bruehlman, Executive Vice President and Chief Financial Officer

Yes. Thanks for the question, Shlomo. It’s very topical given the interest rate environment these days. We haven't provided comprehensive P&L guidance for 2023 at this point, but it's an important enough issue that I want to give you some color about it in addition to what our strategies are to deal with it. Let's start with the strategies. You saw that we paid down debt in the fourth quarter with a term loan of $510 million that was maturing early in 2024, which was comparatively expensive, and we'll be seeking to pay down some additional term loan debt with near-term maturity as we go through next year. As far as our leverage ratio, that's been gradually trending downward. It was at 3.4 as we exited Q3. I expect that as we go through next year, we'll hit that or get close to that 3 target we set for the end of 2025. We might get down to that level sooner rather than later, possibly by the end of next year. Now as far as interest expense, we're not in the business of forecasting rates. The forecasting of interest expense depends on what you think is going to happen with rates, but we can give you some help. If we just look at the market consensus for rates and project outward from that, we think in Q4, interest expense will be about $130 million, give or take. You see it's a substantial step-up from where it has been. The run rate exiting the year at the very end of the quarter will be about $140 million per quarter. Extending that out, you don't have to be a math major to see it's about $560 million on an annual basis. If there are further modest increases in rates going into the first quarter, which is what the market is projecting this could increase. We also have a swap rolling off at the end of Q3, so you could see interest expense next year getting higher than $560 million, approaching $600 million. We’ll see. Please keep in mind that this depends on various factors—including central rate actions, our cash flow, and how we choose to use our cash flow next year—but this should give you a rough estimate for your models. I know some people have been struggling with that. I wanted to provide a bit more clarity than we had in the past when we’ve said count on about $16 million for each 0.25 points of interest.

Ari Bousbib, Chairman and Chief Executive Officer

Yes. That's been our approach. As Ron mentioned, we decided it was time to retire some of the debt that matures in '24. We took out $510 million a few weeks ago and we will likely retire that same debt maturing in '24. We will also need to address interest expenses since it’s a one-year issue. We will likely see a step-up in interest expense in aggregate for us in '23 compared to '22, but we expect rates to stabilize or decrease thereafter. The Fed's individual governors have projected rates to range from 2.5% to 5% for 2024. We hope at some point rates will decline and become a tailwind. But certainly for '23, this will be a headwind we have to address, and we are planning to take other actions to mitigate its impact.

Operator, Operator

Your next question comes from Justin Bowers with Deutsche Bank.

Justin Bowers, Analyst

I wanted to follow up on the comments regarding labor. We’re seeing turnover and changes in the Bay Area and among your clients as well. So, I wanted to know if the labor pressures you're facing are isolated in any specific pockets or geographies? And whether some of the turnover in those areas provides you an opportunity to either hire talent, notably in TAS or just combat some of the inflation? Additionally, can you provide some pulse on what the backlog conversion might be over the next 12 months in light of staff issues at the site level?

Ari Bousbib, Chairman and Chief Executive Officer

Yes. Thank you very much for your question. Given the strength of the industry backdrop, there's competition for TAS. That's number one, plus the overall context of post-COVID resignations and inflation driving an additional component of wage inflation. We are actively recruiting and hiring thousands of individuals to accommodate incremental demand, also dealing with attrition issues as I previously mentioned. We have approximately 83,000 employees and are recruiting thousands and thousands of employees each year, focusing on the right talents. Obviously, we’re observing challenges at the front-line execution and in field-skilled professionals. Because of that, we’re seeing margin pressure from labor cost increases, and yet you have seen expansion in our margins due to productivity initiatives. We intend to maintain this trend and will not sit idly by while facing headwinds; we will counter them, as you've seen throughout the year. We made a modest adjustment to reflect labor cost increases that we could not offset entirely in the fourth quarter, due to the inherent lag in recruiting highly skilled and expensive personnel. With staff shortages at other sites, we cannot manage those sites directly, and it's difficult to exert much influence there. As of now, I do not see these trends as widespread or likely to permanently compromise the long-term conversion of our backlog. Those staff shortages seem to be isolated to specific sites, mostly in the U.S. While complexity in studies has been increasing and results in slower conversions, it was an issue even prior to COVID, and we do not foresee it presenting major long-term problems. We believe our strategies will allow us to manage these challenges in early 2023.

Operator, Operator

Your next question comes from Patrick Donnelly with Citi.

Patrick Donnelly, Analyst

Great. Ron, maybe one for you in a similar vein there. You talked about the interest expense obviously jumping up with the variable next year. When you think about the different inputs, Ari, you touched on labor costs. As you evaluate the ability to offset some of that down the P&L, can you talk about the margin structure for next year, considering inflationary pressures? You talked about pricing throughout the call, but how do you anticipate the P&L's defensiveness and ability to insulate from interest expenses as we head into next year?

Ron Bruehlman, Executive Vice President and Chief Financial Officer

Look, the interest expense is going to be based on rate increases, and we will do what we can to manage above the EBITDA line to offset the items below the line, which we have less control over in the short term. Our demand environment is fundamentally very healthy overall. Yes, we highlighted a few execution challenges due to macro factors, but we don't see them as permanent. The outlook for next year is fundamentally strong on an operating basis. Nothing has changed there. We will continue driving cost reductions to offset not just the continued pressures from labor, which we hope will abate; but we'll also accommodate the impact from rising interest expenses. We’ll be coming out with guidance in February and will lay it all out for you then.

Ari Bousbib, Chairman and Chief Executive Officer

Yes. You're correct, Patrick. We are actively working on these issues. You’ll recall when we presented our 20 by '25 targets, those goals remain unchanged. With the exception perhaps of the leverage ratio targeted for 2025 at 3, which may happen sooner, likely by the end of next year. However, our growth goals have not altered. Though the path to reach them may not always be straightforward, our growth potential remains intact. In support of these goals, we've planned a series of productivity initiatives over the next three years, and we've decided to accelerate those plans and begin executing them in Q4 of 2022 due to the increased below-the-line headwinds we foresee in '23 and ongoing wage inflation. That’s our plan.

Operator, Operator

Your final question comes from Luke Sergott with Barclays.

Luke Sergott, Analyst

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. Is this a good spot to think about the jump off for '23?

Ron Bruehlman, Executive Vice President and Chief Financial Officer

I'm not sure what you mean by the jump off, but cash flow is inherently volatile. In any given year, we target 80% to 90% of adjusted net income for cash flow. But cash flow fluctuates significantly; one year can be much stronger and another weaker. Certainly, from quarter-to-quarter, you see greater variability. We had a not-so-great second quarter but a much better third quarter due to improved timing of collections in the third quarter. Nothing has fundamentally changed with our cash flow approach. We will keep pursuing maximizing cash flow and minimizing our days sales outstanding while remaining a strong cash generator. Just don’t put too much weight on the quarter-to-quarter fluctuations, as that volatility is the nature of cash flow compared to earnings which are accrual-based.

Luke Sergott, Analyst

All right. And then lastly here, I will leave the staffing shortage question for offline. But can you talk a bit more about the color of the bookings? Any change in the duration or the size of the average win you're observing? Anything that would signify an acceleration or deceleration in overall project quality and size?

Ari Bousbib, Chairman and Chief Executive Officer

Absolutely nothing has changed. Overall, RFP flow is up 10% year-to-date, 15% in Q3. What we call our qualified pipeline, which means it's advanced—not early stage or speculative—is up 19% year-over-year. Awards in Q3 are up 22%—the second highest quarter ever. Plus, we saw 10% sequential growth. I don’t know what else to tell you. I'm looking at every number possible. On the demand side, we see no change. It's widespread across large pharma and EBP. From the beginning of the year, we've been consistent with our narrative, and the numbers are demonstrating that.

Operator, Operator

And there are no further questions. Mr. Childs, I will turn the call back over to you.

Nick Childs, Senior Vice President, Investor Relations and Treasurer

Okay. Thank you, everyone, for joining us today. We look forward to speaking to all of you again soon. The team will be available for the rest of the day to take any follow-up questions you may have. Thanks, everyone.

Operator, Operator

This concludes today's conference call. You may now disconnect.