ICON Public Limited Company (ICLR) Earnings Call Transcript & Summary

All right. I guess we'll get started. Thanks, everyone, for joining us. I'm Patrick Donnelly, the tools diagnostics CROs analyst here at Citi. Happy to have Brendan Brennan, the CFO of ICON with us here to talk a little CROs. So Brendan, maybe you guys just reported last week, obviously, pretty good quarter, reiterated the guide you had given in January. But you want to maybe just talk through some quick highlights from 4Q into '23 and then we can kind of talk through some things.

Yes, we saw a solid quarter. It was a good end to the year. We were happy with our performance continue to see pretty solid organic growth, particularly on a constant currency basis. So that was continued to be good. But obviously, we were very happy with the margin performance, particularly in 4Q which was very, very solid. And a good jumping off point to think about as we go into '23 now. So we've seen a lot of expansion on EBITDA and we've seen good revenue growth. So we're kind of -- we're ticking all the boxes from what we've set out to do. Obviously, we're ahead of the curve in terms of integration costs and some of the synergies we talked about, which is very pleasing. But I think the biggest piece that's pleasing from my perspective as we leave last year is it's been a very, very solid period, particularly post the PRA acquisition in terms of where we sit in the marketplace now, how we're perceived by our largest customers and how that's really playing out in the marketplace at the moment. I think it's really paying us dividends and we're seeing a lot of traction in that large and mid-pharma space. So that's been the big positive takeaways.

That's a good starting point. Yes. Maybe we can talk bookings first. I mean you guys have set kind of that 1.2, maybe 1.21 over the last 3 quarters kind of write at that number. Maybe just talk about the backdrop SMID versus large, how you're seeing that? And then we can kind of dive into how you're thinking about it going forward?

Sure. Yes. No. I mean it's been -- as I think we've said throughout the large and mid pharma and biotech markets have been very, very solid in terms of their continuation of development spend. We think we've been doing well, particularly in that large pharma partner space. So that's been pleasing to see that continue. Biotech market has been challenged with funding environment, particularly being the major concern. There's still a lot of nervousness around what execs in that area, but when funding is going to get better and if funding is going to get better from where we're at now. 2022 wasn't -- I mean it wasn't a bad year, it was like the 2019 levels, albeit it wasn't at the high peaks of '21 and '22. And I suppose there's still a bit of a balancing act to do in terms of biotechs that are out there looking for funding versus the funding environment. And so that is having a drag factor -- something of a bit of a drag factor on those. But again, if we can continue to do and we still see on a quarterly basis, the ability to do 1.2 to 1.3, I think that's more than enough for us to do our guidance as we set out. And I'd like to see as we go through the course of this year a bit more traction, I suppose, in moving in the right direction from a funding environment perspective. I think that will take time, but I think it should come through and start to improve in the back half of the year.

Yes. So is that 1.2, 1.3 range the right way to think about '23 overall?

It certainly is. Yes, it certainly is. I mean as I said, I'd rather be at [ 1.25 ], and we'll be playing hard to get into that ballpark. -- but 1.2 is a fine book-to-bill as well. So there's nothing -- I'm not going into my coffee over that one. So it's a good position to be -- and we -- as I said, we'll continue to compete hard in the marketplace to try to get up into the midrange.

Yes. So maybe we can focus on the biotech piece a little bit. That's been talked about probably for over a year at this point. So I'm sure you're well versed. But you guys talked, I think, on the last call, the expectation and this probably lingers for another 6, 12 months, some of this slow purchasing kind of slow getting into trials. So I guess, what's the right way to frame it from past experience, been through a few cycles, obviously. So -- how do you think about what you're seeing now? And again, how long this could linger?

Yes. I mean, again, it is a peculiar one because in past cycles, we've seen a broader biotech environment impacts? Or you might have seen during -- after the financial crisis, of course, that was very broad across all industries. You're seeing quite a specific piece here at the moment, which is for those really small biotechs. And I think it is good to reflect in the fact that we're not even talking about really depressed levels. We're talking about 2019 levels. So we had this kind of sugar high for 2 years, in 2020 and '21 and a lot of companies got going and that was part of the pandemic effect on biotech development. We do need to find where the new normal is. And I think '22 was a learning experience for a lot of these biotechs who are relatively young in the marketplace and '23 will be an evolution of that. And I think what you're seeing is, and one of the things I emphasize is that good science gets really good funding. There is no shortage of funding in the biotech environment when there's good science behind it. I was talking to folks in the beginning of this year, and they had just easily hit their second funding round and gone to -- we're more than happy and we're oversubscribed. And again, they had a really good compound. It's going in the right direction. So I think there's an element of, yes, there is a biotech environment and then maybe too many biotech companies chasing after the same dollars or is the science is good equally in all those companies. I think that's the question. And I think we're starting to, I think, get through that as we get through the course of this year. There's probably more of -- probably more of a turgid period to go through, and that's why we talk about the second half of this year being probably better than the first half because we haven't -- I mean that really hasn't changed totally since back half of last year into where we are right now.

And just -- maybe just to refresh people, you've been pretty transparent about your exposure levels. Maybe just talk about large, mid, small biotech and pharma as you think about the portfolio?

Yes. I mean it's -- I mean our proportionality is, particularly after doing the deal, we were -- I think, directly outdoing the deal, we were kind of in that kind of 50-50 perspective, large top 20 pharmas, we're about 50% of the business. Everything else was about 50% of the business. That's still very much the case at the moment. So top 20 companies in the world are probably represent about 50% of our revenues. And so when we kind of parse out the remaining 50%, about 15% falls into what we call emerging biotechs. By our definition, I guess, there is no standard, -- so by our definition, $100 million R&D less is what we put into the emerging part of the market, by emerging biotech. For us, that represents about 15% of our backlog and our revenues on an annual basis. And then obviously, the remainder is everything from '21 down to that level. So it's a good mix of business. It obviously then it limits our exposure. We're pretty disciplined about the people we work with, and we're always looking for companies that have good science but have good funding and can get to the end of their trials and all those pieces as well. And we have very, very limited exposure in terms of bad debt risk and those pieces and we historically just haven't seen that. So I think there is certainly a good level of confidence in the customer set that we have.

Yes. And that 15%, is that pretty much isolated in terms of where you're seeing some of that pause and the rest of the market? Or is it.

I think that is fair. I think that is for -- yes, because what we've seen in the mid and large is continuing expansion of R&D, but it's -- and certainly continuing expansion of their relationships with the larger players in the CROs space. So yes, it's been generally positive in that, and I think the more challenge here has been about 15%.

Yes. So maybe touch on kind of the mid large pharma. Again, the trends there certainly seen healthy. Conversations seem like they are turn in the right way. So maybe just kind of talk about the health of that market, what you're seeing in terms of trial starts and expectations as we work away through '23 year?

Yes, it's pretty solid. There's no one -- I mean, I think from time to time, I get the questions about -- is this part of the market going to be more challenged now or is it result of the Inflation Reduction Act, other pieces like that. We certainly haven't seen or gotten any exposure to that being an impact to this point in any of those organizations. So they're very much moving ahead with their development and their compound development as was. And they are thinking about making sure that they're spending appropriately and building out their spend from an R&D perspective. Maybe 2 caveats to add to that or 2 -- 2, maybe pieces to unpack. The first thing that I think they are being more thoughtful about how they do their R&D process as they go forward. And I think that's something maybe that as CROs, we're being more involved in the conversation than we would have done in the past. I think in the past, we were seeing the service providers, and they would make a decision on how they would work their R&D platform, and then they bring you into the conversation of how you could plug into that. I do think there's an evolution of the conversation, and they're saying, here's the challenges that we have, how are you with a partner, how are we together going to get to make sure that our R&D is efficient and generating what we wanted to. So that definitely is an evolution in the type of relationships. And I think that, for me, puts a lot of store into how we're perceived by our markets and by our sponsors. The other piece is, I think it is fair to say that in 2021, R&D budgets you could spend over the limits and you probably wouldn't get you risk flat by the executive team. And I think most pharma companies, big farmers were spending more than they had originally budgeted. I think it is clear to people in 2023. Do your budget -- and I think executives have come in and said that to those guys. So that certainly has been a total different change. It hasn't been -- we're pulling back on a product development or we're pulling back on the time line of our development process and what we want to get out of it, but it has been a -- this year, you're going to do your numbers.

Yes. Okay. And you mentioned the IRA there. Are you hearing it come up with customers? What's the general tone in the market about that? I mean we've heard it come up on a few calls. Obviously, people are kind of suggesting -- it's just starting to pick its head out a little bit. So what are you hearing on that piece?

I mean it is relatively quiet on that yet. I do think it's informing some of the longer-term conversations that they're having about the evolution of their R&D models. But they're not right now thinking about how it impacts on '23 or '24. So I think it's more of -- they've been tasked to think about the evolution of their -- how they do R&D in their organization. Because I think a lot of them are thinking of that as being an impact more 25, '26 down the road, maybe in '27. So I think what they're doing now is really thinking about how do we, with our CRO partners make sure that we're ready for that when it comes. And that's how I would describe the kind of conversations that we're having at the moment, less about -- well, this year, I need to stop the budget or this year -- this is the impact this year. It's more about how do we get to that and still be productive and efficient in that time frame. So I think that's probably what I'm saying more. Certainly haven't had any conversations with folks where they're immediately worried about things and it's going to have an impact.

Okay. Fair. And then in terms of the customer exposure, you kind of talked about the top 20 being 50%, a tough one for you guys. I think it's 9-ish percent in the last quarter.

Yes, in Q4. Yes.

That's bounced around. I mean, years ago, it used to be a huge focus, I don't want to say a problem, but overhang, whatever you want to say. Is that the right way to think about 8%, 9% kind of going forward? What's the right way to frame that up?

Yes, certainly sort of sub 10. I do think probably 8, 9 probably the right way to think about it. If you look at our backlog concentrations, that's probably not unfair. We probably have a couple of customers who were not differentiated in #1, #2, #3 spots in terms of their overall scale in the organization. So it's always something you want to manage against. We have very large customer relationships. We're known as a really good partner to large pharma. So it's always going to be a bit of a thematic there. We're always going to have to give an eye to it. But I think we're big enough and diversify, I don't know in terms of the book of business, as I mentioned, 50% still outside that top 20 that we can manage that now under. So I mean, my big number is, I don't want to over 10. But I think that's something we can manage over time.

Okay. That's fair. And then maybe just in terms of the cancellation rates when you think about that book-to-bill, are you seeing any changes there? I mean, I know so far, it's been pretty consistent. It doesn't seem like you're seeing any big ones, but any updates kind of on that process?

No, no. Thematically, no. I think we -- again, most people are well vetted by the time they put their drugs into development now. You're not seeing too many cancellations. If you do, it's early on and it's usually before you're revenue generating. So -- but no, structurally, there haven't been anything that you worry about. I do remember a conversation -- having this conversation, I suppose it is my caveat. I remember somebody asking me about, wow, 5 years ago, are we entering a new era of cancellations being at a new norm of a low level and I said, well, you can never really tell the cancellations in the following quarter. We had our largest cancellation in the history of the company. So you can never really tell the cancellations.

And then maybe just the conversion rate, I know that's an area where it's kind of pushing down growth a little bit in '23 as you have some of these larger projects, you just talk through that dynamic what that shift looks like and any visibility into that normalizing on the other side?

Yes. Well, we talked about 9.5-ish that ballpark for 2023. I think that is the right way to look at it, and we were 9.7 in Q4. So we'll probably step down incrementally on a quarterly basis. That's how -- somebody was trying to do the math in the model, I think that's probably a good way to think about it. It is mix of business related, obviously. There's nothing underlying in the backlog that makes it worse, better or indifferent. So the normal course of the projects are moving at their normal pace. It's just the mix of the projects are going more towards that rare disease and oncology areas that have been traditionally very, very big. And we're seeing that kind of normality in terms of therapeutic mix come back in. So you're seeing backlog of oncology going in the direction of 40% again and that's pulling back through to revenue. And that obviously has an impact because a lot of oncology -- the vast majority are 4-plus years in duration. So we saw the kind of vaccine high. I think one of the things that was interesting, one of the things we looked at over the last couple of years was post integrating the organization, what have been the kind of ex-COVID, let's call it, conversion levels in the business to see if there's a passion or trend that's outside of that norm. And actually, truth be told -- when you exclude those trials, over the last couple of years, the conversion rate was actually in and around the mid-9s. So not substantially different from what we're seeing as we go into '23. As we've talked about, COVID being a smaller part of our business this year in low single digits. So not surprising then that you would see it normalize to a level where you're going to be comparative to the ex-COVID numbers that we were seeing in 1.5 years. So we continue to expect that as I go out of '23 into '24, given that historical trend and the mix of business, I'd like to see it stay at around that level.

Okay. That's fair. And then on the M&A side, PRA, at least -- can you talk about the revenue synergy part, we'll get to the cost synergy in a little bit. But just in terms of -- I know you've talked about being in the discussion a lot more given the scale now. Maybe talk a little bit about that if you're seeing more kind of wins coming your way as kind of combined larger entity?

Yes. I think -- just to maybe parse out for those in the room who aren't as familiar or listening in. When we talk about the revenue synergy, it was very much around the concept of not what we could win as a business as a bigger organization or how much more attractive we'd be as a larger organization. It was a much more simple idea of our existing customers because we now have a wider range of services, on ancillary services, can we sell to them that will get us circa $100 million of additional revenue. And we're moving in the right direction for that. And what does that mean? It means for us a small biotech that may be traditionally a PRA customer, they didn't have the option of having them do the lab -- central lab work or the imaging work or the translation services. They can get that all done there because we have all of those different service offerings in one shop. Likewise, play in a much more sophisticated and larger Phase I business than we had. We have some very large customers who need large Phase I counterparts, can we cross-sell that element? So I mean, there's certainly -- we've seen it on both sides of the -- parts of the organization being able to sell to the legacy customers from either side. It's making good progress. It's kind of in line with where we thought it would be. We said it would be something that we'd get to it about 2025 in terms of that $100 million. We certainly want enough business to get us there, but the normal course of revenue conversion is that it takes a couple of years for that to get up to that amount. So we continue to win on that basis. We'll continue to get to that synergy and then from a revenue perspective. So we look very much on track. I do think that then, to your point, there's the other part of synergy revenue, if you like, that we don't call out separately, which is the idea of we're one of the biggest CROs in the world now. That's a very impressive thing to bring into a pharma partner. It turns heads, it gets you opportunities that you wouldn't have seen before. As we've always said, we are #5 and #6, respectively, in the industry. We were aware of the fact that we weren't being invited to every table. And now I definitively know we learned because we pretty much are now. So there's definitely relationships. We've talked about one large pharma relationship that we've developed over the last 1.5 years, that would simply not have come about had we not done the merger. They said that was specifically. They said, we like you guys individually but this is never going to be -- we needed to feel -- to have that feeling of having a large counterpart that was significant enough for us to work with in this type of relationship. And they've been very clear that they want to be a top 5 customer of ours. So there's definitely been very significant benefits from that, particularly in that large and mid spheres.

Yes. No, that's helpful. And then maybe just moving to '23. Just in terms of the top line, we'll work our way down the P&L. But on the top line, maybe just talk through the guidance, the different inputs, you talked about the conversion rate, things like COVID or variables -- FX, we can maybe kind of get to. But maybe just talk about that guidance, how we should think about it working our way through '23 on the top line?

Yes. I do think we probably -- it still is -- we still have that kind of overhang on currency year-over-year on the comparators. Obviously, the dollar was strengthened significantly around summertime. So for the first half of the year, our toughest ForEx comp is probably in Q1. And so that's something that we're going to have to battle through a little bit this quarter. I mean I do see it sequentially, probably not massively different in terms of steps from how we went through the course of '22. So we want to see sequential improvement. There is some business that will probably help the second half of the year ramp a little harder. But at this point, it should be relatively equal steps as we go through the first couple of quarters, as I said, with maybe a bit more of a ramp in the second half. And certainly not out of line with the sequential steps up in revenue you saw in the back half of '23.

Okay. And just refresh us on COVID '22 to '23, where are we at this point? I assume no more new business coming in, but just.

Not much, very limited. Yes, very limited amounts.

Yes, on the [indiscernible]

Yes, it's probably -- it's a little -- still a little bit of a headwind, maybe it's 100 bps or so from that perspective. We've done well in that part of the world. And we had a lot of business at one stage in the past, that's significantly dropped down during '22, and it will drop down again as we go into '23. But it's not the slight headwind that it was coming from '21 to '22 or certainly from '20 to '21. So yes, it's probably around 100 bps in terms of the overall impact.

Okay. And then '23, obviously, you guys have out your longer-term growth rate, '23 is maybe a little on the lower end just because some of the conversion rate things, maybe a little bit of a COVID headwind. What's the right way to think about the long-term growth profile as business, particularly if you are, if you can get back to kind of the mid 1.2s, maybe 1.3 of bookings. How do you think about just that profile?

If you take a step back, '22 was a very solid year from a growth progress perspective on clients. As I said, on a constant currency basis, we were in around the 7% mark. Obviously, that has a significant impact on FX and you can't -- you have to deal with it when it comes along. Again, ex-COVID, we were probably more like mid-teens, and around 14% year-over-year, which is very significant. So I think the core business has been doing well and continues to do well. Certainly, this year is a little impacted again in the first half by foreign exchange, and we want to see it, obviously, the other pieces, as we talked about, the conversion piece. We do want to see -- I mean in order to get to our plan, we need to be back up into those 7s and -- in 7s and even 8s by the time we get to '24 and '25. I think the market that we see in front of us probably needs to stabilize a bit from the biotech funding that piece that we spoke about at the beginning of the meeting. But that should be doable. I mean, where does that put us in terms of the $10 billion ambition for 2025, probably leaves us a little short. So maybe there's going to have to be an M&A contribution to the tune of a couple of hundred million dollars. And that's how we kind of view things right now. So we certainly have a net goal of that ambition, albeit maybe originally, it was more of an organic story, and now it's going to have to have an element of M&A. We think, obviously, we're paying down debt well. We're making good progress. We're on that piece. We do want to get back into the M&A market, and we do feel like there's additional bolt-on type acquisitions or string apparels back to that phraseology, if we can that we can bring into the organization that can move the dot.

Yes. Maybe since you brought up M&A, we've certainly got some questions in the last week just based on some rumors of a larger asset that is apparently for sale. I guess how do you think about the size that you'd go after near term? And it sounds like more bolt-on, but yes, maybe just your thoughts.

Yes. No, it is. It is. I mean I think from a scale perspective, we're very convincing in the marketplace. We feel like we have the therapeutic and geographical depth now, and we're a real top player in the marketplace. So we don't feel there's a burning need to go after a significantly scaled organization. We are really happy with the integration process we have come through. I think it's been -- we've probably been the exception to the rule of CROs integrations to this point. And yes, I have no desire to put that back in the upside direction. So I think when we think about M&A now, it is very much around some of the ancillary pieces that we talked about, the labs, the -- our late phase business, our sell care business, which is our site business. So those are elements that we indeed continue to look at technology and the use of technology, particularly analytics. They are the elements that we want to continue to build on, there where we think we get the best value creation story and how we can drive the differentiation of the company as we go forward. Again, no desire to go after and our scale as I don't believe we need it.

Clear enough. Maybe on the deals you have done, obviously, PRA, the cost synergy story has been compelling forward the full year. Maybe just talk about what levers you pulled there your '23 again, kind of pulled that full '24 year forward? Is there more to go? What's the right way to think about some of the pieces there.

Yes, we've been happy with that, obviously. It's been predominantly in the story so far has been around SG&A and making sure we have a good well-leveraged cost base. That's been -- some of that's been office infrastructure and footprint. I think everybody has been looking at that, doesn't matter what industry you're in over the last couple of years, rightsizing for the future. And of course, some of it has been around the consolidation of our systems, but also making sure we have the right people in the right places. That's part of our cost mix. We've done a lot of work on that. As I said, we put the kind of system wide pieces in place and that's allowed us to get our SG&A down closer to 9% by the back end of '22, and that's where we expect it to stay as we go through '23. So really good progress on that front. Yes, we were able to do that faster than we anticipated. That represents the vast majority of the $150 million of synergies that we will be realizing as we go through the current year. And we've been very pleased with that. I do think we've talked about it as well, and you'll recall, Patrick, just back in our IR Day back in -- last year on 17th of March in Blue Bell. We had a plan of saying 21%, that was our EBITDA ambition. Obviously, we ended 2022 at 20.6%. So we're very, very clear on we're making good progress to that, and we want to see that certainly hit that target as we go through the course of this year. I think we certainly wouldn't put a cap on our ambition in terms of margin profile and [indiscernible]. I do think we need to work through this year. We're starting to integrate some of our core elements of our -- the noncustomer and site-facing elements of our operational business, open direct cost. That's the next step of the evolution. I don't think I'll be talking about synergies. I think this is just for me, it's more around good cost management and good delivery and efficient delivery for our customers as we go forward. But I think there's certainly more ambition to come in terms of our margin profile. And as I said, as we go through the course of this year, we get to that 21%. We'll be talking more about that later in the year.

So maybe in terms of -- maybe we can focus on the deal, and we can work our way kind of around the margin piece. In terms of that labor attrition rate, I know you're pretty happy with how that trended. What do you see in there? Wage inflation was a big focus last year? Maybe just kind of update on the metrics we see there.

Yes, it's been consistently. I mean, particularly the headcount turnover has been consistently getting better month by month. I mean, I think from the worst period, I think it was somewhat coincidental. It was post the merger, but around autumn time to 2021, we were all talking about, The Economist, how the great resignation as they're going to be front of the magazine. That was what was the team at ICON was going on. Pretty much every month sequentially since then our headcount turns have improved and that continues right into this year. That means a much more stable environment, much easier for us to grow from and helps with the unseen elements of the cost base because when you have much higher turnover rates, you're bringing in the new people at higher salaries. And so that really does inflate your salaries. And so while we had about 3% to 3.5% merit increases last year and it will probably be higher this year, probably more like 4% on average this year. The actual fact that we're actually now turning over heads at nearly same pace will offset that cost base to some make sense. So we feel it's manageable. It's still a pressure, but it is much more manageable. And I'd certainly rather be in a position where we're paying higher merit increases with much lower turnover in terms of the stability of the business at a much, much better place to be than where we were maybe 18 months ago. So I think it's positive progress we're making there. And I think that's certainly coming through in terms of customer delivery.

And then maybe kind of one of the offsets has been pricing a little bit of a lever you guys have been able to pull. Maybe talk about the pricing levels you kind of saw in '22, '23. How long does that take to work through the backlog? What's the way would you just think about that pricing lever for you?

Yes, there's an inflationary impacts that we can -- we can go back and have a conversation with our customers about and make sure that we're -- we are taking significant cost pressure that they help us with sharing that burden. It is probably the best way to put it. It's always a conversation. You never get exactly what you asked for, and then you wouldn't expect that. But it's been something that's been received, I would say, relatively well by our customer base as much as they can be in terms of sort of going in and ask for price rise. It takes time for it to -- takes time for it to move through the P&L account. But I mean, it is on -- some of it is on -- certainly on active studies where you're looking for inflationary increases on an annual basis. So there is an element of that. So it does take time to come through. I never really view that as a way, honestly, of ramping revenue. I just don't view it as that material even though -- so for me, it's always much more about margin protection and managing our cost base. And we don't go back to our customers thinking here's an opportunity to put prices up. We go back saying, listen, we want to retain staff. We want to have the right staff working on your studies. In order to do that, we need to pay good salaries. We need to pay good merit increases. And that's really what the conversation is about for us. So I never really sit down and go that's going to provide me with X amount of dollars in my revenue forecast for the coming year. It is much more around that margin protection.

And I guess holistically on the margin piece, I certainly have had some conversations where people say, all right, growth has slowed a little bit this coming year. Pulled synergies forward. You're pulling a lot of levers this year. What's going to be left if growth remains around these levels in '24. I mean it sounds like between SG&A and some other levers, you guys still feel confident there's plenty of room here, but maybe just talk through that please.

Yes. I think we've always been conservative when we set numbers. We generally don't tend to set numbers and miss them. That's always been our kind of resonates as a management team. We want to be able to be confident in the numbers we talk to you guys about. So I'm very confident in getting to that 21% as we go through the course of the year. But I'm also fairly certain that there are additional opportunities that we can get after that. I think that probably takes a bit of reflection, a bit of time to work out. I've always talked that when, again, when we sat and talked about how we would get to numbers for the 2025 plan. I think at the time, I said if we can get our gross margins to 29% or 30% and our SG&A to 8% or 9%, that will get us to the 21%. I think I suppose optimally, you could say in that scenario. Obviously, if you can get your gross margins to 30% and you get your SG&A to 8%, you get to a higher number, right? You get to 22%. So I think that would be the first probably protocol, we'll think about. And is that doable -- yes, in the context it should be. How long does it take us to get there? I think that's the piece we need to probably map out a bit more and have conversations with people about as we get to the back end of this year. But certainly, I wouldn't put a limit on the ambition at '21. And as I said, once we get to that number, we'll give you another idea of where we can go to.

Yes. Okay. And then cash flow was another kind of big focus coming out of 4Q. Maybe just talk through the moving pieces there. I know there are a few different metrics. DSOs certainly popped up as well. Maybe just on the cash flow, the moving piece is obviously the guidance that you guys gave for '23 is pretty healthy, but.

Yes. No, listen, we had -- I mean, it's pretty simple in our business. As I said, cash generation and cash flows, you have to -- it does move through your balance sheet. Sometimes it takes longer than you'd like, but the nature of it is you recognize revenue goes into unbilled revenue, get out of unbilled revenues at the invoice goes into build revenue, you get the cash in the door. We have -- given the mix of our customer base because as we said, we have a pretty substantial large element of our business about 50% and then we have midsized customers. Given that mix of customers, some of those folks have very extenuated long credit terms even when it's billed debt when it goes out the door. We would expect like an optimal DSO to be in the mid-40s range, 43% to 45%. Everything works, that's what I expect. Prior, I suppose maybe one of the things that people are kind of getting a bit angsty about this. And rightfully so, over the course of '22 is because it came out of the 20s and 30s when we came together. And of course, at that point, we were having -- we were coming off the back of vaccines, where you've got very significant pass-through payments upfront that artificially lowered the DSOs, plus we didn't really have the combination business fully formed at that point in terms of what those normal DSOs would be. So probably artificially low coming out of that. Obviously, we're 54 days at the end of Q4. Some things didn't work earlier in the year in terms of the level of billings that we were doing, and that particularly related to our billings and around Q2 of '22. It's a pretty simple cycle. If you build, get the cash in. We, unfortunately, we're in the middle of Oracle integrations and some of our headcount turnover issues around Q2. We didn't get to the billing target we wanted to. Guess what? In Q4, we collected nearly exactly what we built in Q2. So if you're not constantly getting those bills at the door, you're going to help us see that in your cash impact. We had record billings in Q3, and we went above that in Q4 and hit on a record in excess of $2 billion of billed transactions in Q4. So we feel that it's there start to be collected, and we'll go back to it in the first half of this year. I'm not particularly angsty about it. We also had an investigator payments issue. It's a bit of a bolus of work we needed to get through in Q4. That dropped cash conversion as well, aid into the cash balances. I think about $0.5 million of gross cash is around the right carrying amount for us on our balance sheet. And I'd like to see us make progress back towards that. We're obviously closer to $300 million in Q4. But I think -- we've done all the pieces we needed to do. We've got the bills out the door. We've got the cash collection cycle and moving in the right direction in the first half, we should see it coming in.

Yes. And I know the DSO focus has been something you've done before. I think a few years ago, DSOs were kind of a big focus first question on every call for a little bit there. You guys got them down. So I mean is there -- is this a similar kind of experience in terms of your visibility into getting this, I don't want to say fixed, but getting into that right level relatively quickly.

Yes. I mean what I would hesitate to say relatively quickly. I mean in order to get DSOs down, I mean every day for DSO close is about $20 million. So if you need [indiscernible] $20 million more in revenue to get your DSOs down every quarter. If I got it down a day or 2 a quarter, the next couple of quarters, that will be fine. We got out of the 50s and into the 40s, again, that would be fine. I don't expect to be traveling at a level of lower than mid-40s. And from a cash conversion cycle, kind of the damage is done a little bit when you came into '23 already. So even if we stayed flat, we'd have the right level of cash conversion compared to what we've forecasted to your point on the guidance of that $1 billion, $1.1 billion mark. So it's about, can we make incremental progress on this? I believe we can. But I don't think it's a flick to switch and we go back to [ 43 or 44 ].

Okay. That's fair. And maybe staying on kind of cash flow balance sheet. I think the leverage you guys broke below 3 in the last quarter, which is great to see. Maybe just thoughts on continue to pay down the debt. I know the fixed versus variable, you guys do some swaps and have more fixed. Maybe we start with the fixed variable piece and then just plans in terms of what leverage should look like over the next few quarters?

Yes. Obviously, we had -- we when we did the transaction, our mix of debt was heavily towards Term Loan B, which is a variable type of debt, which was great at the time. It was very low interest rates at the time. And we did a smaller fixed bond, which was -- remains great, but it was only for $500 million. So we had -- I mean we had a relatively high proportion of $6 billion of that. We only have $0.5 billion of that being fixed so we did have a relatively high proportion of variable debt. As you guys know, we did a capital swap on that, a mix of those 2 types of products. For the first couple of years, it's a higher proportion. On the Term Loan B and it represents about 50% of the term loan B, and it's capped. So which means kind of like an insurance policy if the rates go up, you don't have much of an upside exposure, but if the rates come down, you get some of the benefit. So you're not narrowing your window to the downside. You can take some of that benefit in the next couple of years. And then we move to a more traditional, just swap methodology as the rates actually the yield curve was come down over time. And I should say the interest curve comes down over time, and we get back to a more normal interest rate level on a lower amount following our normal pay down of debt in the next couple of years. So that's what we did. That brought us to about 60% fixed versus 40% variable. I think that's around the right level. We talked about a range of $280 million to $300 million on our interest charge this year. I think we'll see about circa $80 million in the first quarter, and it will step down as we continue to pay debt over the course of this year. So this Q1 is probably our toughest quarter of interest. As we get through the course of the year, yes, I mean, we could end up in the low 2s by the end of the year in terms of debt to EBITDA. I think we -- as I mentioned, we're ambitious about doing M&A. So we might go back into the market and have a look at numerous things. We'll have to look at the multiples that are available in the private space. They haven't got the news about multiples in the private space. So it's still pricy for us in that area. We'll obviously look at the interest costs and how we can raise. I want to get back to investment grade, very clear about that. Right from the get-go, we want to be an investment-grade issuer of debt. And so we'll have to look at the combination of those, the accretion of those M&A opportunities versus whether we should pay down more debt and whether that's a better deal effectively from an EPS perspective for shareholders. But we do want to get back into the M&A space. I'd like to see us get back to it. I don't think we need to be -- I wouldn't like to be over 2.5x in the long run. We might be, I would say, 1.5 to 2.5 is the way I think about the range of what's acceptable as we go forward.

Just 2 minutes left, so maybe a couple of quick ones. We get asked about NHPs just given the news a few weeks ago. I know you guys don't play in those. But just in terms of the second derivative impact, has it come up, what's the general thoughts? I mean, could this be disruptive to trials overall, you think it gets resolved relatively quickly -- your perspective?

And it's an interesting. I mean, it is an area of concern for the longer term. It certainly hasn't come up with our customers about what's present in their minds in terms of their development cycle. The longer the problem is there in that space, the more of an issue, it's going to be for us. But it does take a relatively long chunk of time. So it really depends on, I suppose, the other sources for -- is it nonhuman primates to NHPs? Is that right, I don't deal in this very much. So obviously, that is a concern. But it's more of a medium-term concern if it doesn't get resolved in terms of the sources of those animals. So we will see over time. Right now, it's not pressing in front of mind in terms of the folks we're dealing with.

And then maybe last one, just in terms of when you look at the guide, to your point, you guys have always layered in levels of conservatism. I guess when you look at the various factors, macro, P&L, whatever it may be, I mean where do you see and the most clear levers to upside. If certain things went right, you can kind of drive some nice upside to the guide?

Yes, we try to be -- I mean, we try to be balanced when we do our guidance. So -- and plus, I don't think we're putting out things that aren't ambitious. If we can -- if we can be creative around our interest rates, if we can do something on that, that has the most immediate effect in terms of our earnings growth. Our EBITDA growth is still relatively strong year-over-year. I'd like to see that continue. And there might be some margin upside. We've always done a very good job on cost control. On the revenue lines, I would say that the -- it's if we do in and around what we've said we've done from that perspective, I'll be happy enough at this point. I think there's enough upside and downside risk on that one that will probably even site itself out. So I think if there is good news coming on guidance, it's probably around more margin -- interest margin.

Understood. All right, Brendan, we'll leave it there.

Thank you.