Deslande v. Fortrea Holdings Inc. — Entry #65

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                  Exhibit J


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                                   Q3 2024 Fortrea Holdings Inc Earnings Call - Final


                        Q3 2024 Fortrea Holdings Inc Earnings Call - Final
                                            FD (Fair Disclosure) Wire
                                             November 8, 2024 Friday


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Length: 9987 words

Body


Corporate Participants
* Hima Inguva
Fortrea Holding Inc - Head of IR & Corporate Development
* Tom Pike
Fortrea Holdings Inc - Chief Executive Officer, President & Chairma
* Jill McConnell
Fortrea Holdings Inc - Chief Financial Officer
Conference Call Participants
* Eric Coldwell
Baird - Analyst
* Patrick Donnelly
Citi - Analyst
* Justin Bowers
Deutsche Bank - Analyst
* Luke Sergott
Barclays - Analyst
* David Windley
Jefferies - Analyst


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                                Q3 2024 Fortrea Holdings Inc Earnings Call - Final

* Elizabeth Anderson
Evercore - Analyst
* Max Smock
William Blair - Analyst
Presentation
OPERATOR: Ladies and gentlemen, thank you for standing by. Welcome to Fortrea's third-quarter 2024
earnings conference call. (Operator instructions) Please be advised that today's conference is being
recorded.
I would like now to turn the conference over to Hima Inguva, Head of Investor Relations and Corporate
Development. Please go ahead.
HIMA INGUVA, HEAD OF IR & CORPORATE DEVELOPMENT, FORTREA HOLDING INC: Good
morning. Thank you for joining Fortrea's third-quarter 2024 earnings conference call. I am Hima Inguva,
Head of Investor Relations and Corporate Development at Fortrea. On the call with me today are our
CEO, Tom Pike and CFO, Jim McConnell. The call is being webcasted, and the slides accompanying
today's presentation have been posted to the Investor Relations page of our website fortrea.com.
During this call, we'll make certain forward-looking statements within the meaning of Private Securities
Litigation Reform Act of 1995. These statements are subject to significant risks and uncertainties that
could cause actual results to differ materially from our current expectations.
We strongly encourage you to review these reports we filed with the SEC regarding these risks and
uncertainties. In particular, those that are described in the cautionary statement concerning forward-
looking statements and risk factors in our press release and presentation that we posted to the website.
Please note that any forward-looking statements represent our views as of today, November 8, 2024, and
that we assume no obligation to update the forward-looking statements even if estimates change. During
this call, we'll also be referring to certain non-GAAP financial measures. These non-GAAP measures are
not superior to or replacement for the comparable GAAP measures, but we believe these measures help
investors gain a complete understanding of results.
A reconciliation of such non-GAAP financial measures to the most directly comparable GAAP measures
is available in the earnings press release and earnings call presentation slides provided in connection with
today's call.
With that, I'd like to turn it over to our CEO, Tom Pike. Tom?
TOM PIKE, CHIEF EXECUTIVE OFFICER, PRESIDENT & CHAIRMA, FORTREA HOLDINGS
INC: Good morning, everyone. Welcome to the call. Let me start by saying that Fortrea had a solid
quarter of execution and progress on our strategic objectives. Our bookings landed well, and we delivered
on other key metrics as anticipated. Fortrea, as you probably know, the pure play CRO serving Phases 1
through 4.
We're a leading global provider of clinical pharmacology or Phase 1 development, functional service
provision, which we call FSP and full-service outsourcing. Fortrea is broad and deep in how we address
the market. We have preferred relationships with some large pharmaceutical firms and have broad
exposure to biotech.


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Our business overall is about 50, 50 between large pharma and biotechs. Our large pharma partners
appreciate that we have sufficient scale to conduct clinical services almost anywhere in the world. The
biotech customers value that were small enough to give our customers the personal attention they need to
drive agile solutions.
Both types of customers value our 30 years of experience and expertise. Since Fortrea spun out of our
parent, our customer and Net Promoter Scores have improved, especially recently. We're getting external
recognition too.
This quarter, PharmaTimes recognized a number of (inaudible) for the great work, including an in-house
CRA Global Project Manager and other roles. In addition, Fortrea has just been named a finalist in Fierce
Healthcare's excellence and data-driven DEI award for our DEI dashboard.
We're also a finalist in the CRO of the Year category in the annual script awards. Both awards will be
announced in early December. All that is pretty incredible, given we've only been independent for 16
months. Now here are some highlights for execution and progress during the quarter.
We achieved a book-to-bill of 1.23 for the quarter. We closed a number of important projects with larger
pharmaceutical customers, and we had success with biotechs. Our pipeline of opportunities for the next
two quarters is solid. Our exit from our foreign parent is nearly in sight with over 90% of the servers and
application systems migrated to our independent Fortrea environment.
Our EBITDA and revenue were in line with our expectations. And finally, we continue to uncover why
this business has underperformed financially and the people, process and technology required to fix that.
As usual, I'll provide some detail on some of these highlights and Joe will fill in with others. Last quarter,
I discussed a new large pharma relationship and some footholds, as we call them, of work in other larger
companies. This quarter, we made progress getting started with these customers, including responding to
some early requests for proposals.
For instance, one of the footholds resulted in an attractive full service engagement. This project is a
significant Phase 3 trial that Fortrea one based on our therapeutic expertise in the specific area and our
deep investigator relationships. Some other larger projects also came through as planned from long-time
larger customers.
Biotech companies also featured strongly in our full service wins in the third quarter across a number of
therapeutic areas. We have key biotech wins in oncology, diabetes, dermatology and autoimmune disease.
While we're known for our oncology expertise across our customer mix, we continue building a strong
position in other areas such as ophthalmology, where expertise in wet AMD and gene therapy skills are
seen as a strong differentiator.
Fortrea's real-world evidence consultants and scientists won several virtually designed observational
studies in the Asia Pac region for different pharma customers. Our consulting and science help us
differentiate. Our clinical pharmacology business continues to have strong bookings with attractive book-
to-bills, customers and indications.
As we've discussed in the past and with analysts, our lead executive for CPS saw some softness in biotech
around the time of the spin and has successfully transformed the mix to ensure a strong pipeline of
attractive opportunities.
That team has been particularly successful with larger pharmaceutical firms who are spending. Our CPS
business also continues to have a solid pipeline of qualified new business with biotech customers. For
instance, this quarter, we secured an important contract with a new biotech customer for a Phase 1 study


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supporting its Alzheimer's program. What was significant about this award is that we are initially not
selected for the program, but were able to unseat the incumbent CRO because of our solutions focus and
expertise in the area.
Our experience with complex programs in CPS helps us transition our strong relationships in Phase 1 into
Phase 1b and 2. As we discussed last time, we're making progress there with an increasing win rate. We
also continue to press ahead with some productivity and innovative technology projects. We have a nice
tool that's used by Fortrea and a couple of pharmaceutical firms for study oversight and optimization. We
showed our road map to customers and several prospects this quarter and generated a lot of excitement.
AI and ML is being added to try to improve predictability and utility to that tool. We're also looking at
some other interesting applications of technology made tools, AI tools in practical complex areas such as
protocols and amendments, SOPs, CRA copilot tool and continuous data cleaning.
Now let me address the questions I anticipate you will ask about our second half bookings. As we told
you, going into the third quarter, our pipeline was higher than the average of the prior three quarters with
a nice mix of large pharma and biotech.
Coming into the fourth quarter, the same metric held and the pipeline was greater than the average of the
prior three quarters. Consistent with our Q2 commentary, we continue to target a 1.2times book-to-bill for
the second half. We know that we need to execute through the quarter. Regarding revenue and adjusted
EBITDA in light of the backdrop of spin-related complexity, I'm pleased with our execution.
In addition to a strong quarter for new business, we delivered on expectations of revenues. We also
continued to expand our margin, delivering EBITDA as we expected. We know that we have continued
work to do, but we're making progress.
Let me hand over to Jill, then I'll wrap up with some comments about the remainder of the year. Jill?
JILL MCCONNELL, CHIEF FINANCIAL OFFICER, FORTREA HOLDINGS INC: Thank you, Tom,
and thank you to everyone for joining us today. As a reminder, all my remarks relate to continuing
operations of Fortrea following the divestiture of our enabling services businesses, unless I note
otherwise.
I'll start by saying that this quarter has delivered as we expected. Revenues of $674.9 million declined
5.4% year-on-year. The reduction versus the prior year was driven by lower service fee and pass through
revenues. Our service fee revenue continues to be impacted by a combination of factors, primarily lower
new business awards in the pre-spin period along with the mix of later stage and longer duration studies in
our portfolio.
The pass-through decline is driven by lower pass-throughs on the biomarker study we have previously
called out, which is continuing to normalize given its stage in the project life cycle. On a GAAP basis,
direct costs in the quarter decreased 6.6% year-over-year primarily due to lower personnel costs as well as
lower pass-through costs, partially offset by an increase in stock compensation and professional fees.
SG&A in the quarter was higher year-over-year by 27.6%, primarily due to an increase in professional
fees and incremental onetime costs incurred for exiting the TSA along with the yield costs related to the
receivable securitization program we initiated in the second quarter. The company reclassified $39 million
from direct costs to SG&A expense in the prior year comparison period primarily related to information
technology costs and certain non-clinic facility charges.
For the third quarter, you will see SG&A as a percent of revenue on a GAAP basis at 20.2%. However, if
you exclude the impact of approximately $27 million of onetime costs related to the continued separation


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                                Q3 2024 Fortrea Holdings Inc Earnings Call - Final

from our former parent and the incremental impact of a full quarter's worth of expense related to the yield
cost, underlying SG&A as a percent of revenue was consistent with the last two quarters.
Net interest expense for the quarter was $22.4 million, a decrease of $12.2 million versus the prior year.
Benefiting from the repayments we made on the Term Loan A and Term Loan B during the second
quarter. When looking at annualized interest expense using outstanding debt, securitization usage and
rates in effect during the third quarter 2024, annual total cash interest and securitization costs are
estimated to be approximately 18% lower compared to the annualized costs we were incurring at the start
of 2024.
Turning to our tax rate. The effective tax rate for continuing operations for the quarter was a benefit of
48.3%, reflecting an updated split of domestic versus foreign earnings relative to our latest forecast.
During the third quarter, we recognized a tax benefit of $17.3 million in continuing operations, primarily
due to this update and forecasted pretax loss, partially offset by a valuation allowance on our deferred tax
asset related to the carryforward of disallowed interest expense.
We continue to consider initiatives that we expect could improve our overall tax position over time. Our
book-to-bill for the quarter was 1.23 times and for this trailing 12 months is 1.15 times. Our backlog at
around $7.6 billion has grown 6.2% over the past 12 months. Adjusted EBITDA for the quarter of $64.2
million decreased 5.9% year-over-year compared to adjusted EBITDA of $68.2 million in the prior year
period.
Note that adjusted EBITDA increased 16.3% on a sequential basis, in line with our expectations. Adjusted
EBITDA margin for the third quarter was 9.5%, compared to 9.6% in the prior year period. Adjusted
EBITDA margin in the quarter was negatively impacted by the lower service fee revenues in the quarter,
along with higher SG&A costs post spin to support operations as a public company. These were partially
offset by the benefit from the restructuring program we initiated in the third quarter of 2023, which was
continued into 2024.
In the third quarter of 2024, adjusted net income of $20.7 million increased 3% compared to adjusted net
income of $20.1 million in the prior year period. Adjusted and net income for both basic and diluted share
for the current quarter and the prior year period was $0.23.
Turning to customer concentration. Our top 10 customers represented 51% of third quarter 2024 revenues.
One customer accounted for 15.1% of revenues. As I comment on cash flow, note these relate to Fortrea
in total as we have not segregated cash flows from discontinued operations. For the nine months ended
September 30, 2024, we reported $245.7 million in cash flow from operating activities compared to $150
million generated in the prior year.
Cash flow benefited from the sale of receivables under the securitization facility and an increase in
unearned revenue, partially offset by the decrease in net income. Free cash flow was $217 million
compared to $119.1 million in the first nine months of 2023. Net accounts receivable and unbilled
services for continuing operations were $689.1 million as of September 30, 2024, compared to $988.5
million as of December 31, 2023.
Days sales outstanding from continuing operations was 50 days as of September 30, 2024, 4 days lower
than June 30, 2024. The reduction versus the second quarter is primarily due to reductions in our unbilled
services balance if we continue to enhance our contracting terms and processes.
We continue to make changes to our contracting and order to cash processes to enable further
improvement to our DSO profile over time. We are fully compliant with the financial maintenance


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covenant of our credit agreement as of the end of the quarter. We ended the quarter with more than $0.5
billion of liquidity.
Our capital allocation priorities are unchanged, focusing in the near term on infrastructure investments for
timely exit of the transition services agreement with our former parent, targeting investments to drive
organic growth and improve productivity and then debt repayment.
Now, I will provide an update on our transformation program. We continue to make progress on our
journey towards improving the longer-term growth and profitability of Fortrea. Our competitive approach
to winning new business awards is a primary objective of our entire leadership team and we regularly
leverage their relationships and experiences to enhance our partnerships with our customers.
On operational execution, our first priority is delivering high-quality work for our customers. We continue
to execute on productivity improvements and actions that speed our time to study start-up and milestone
delivery.
At the same time, there are specific areas that we believe require measured investments to ensure revenue
growth and enhance operational effectiveness. For example, we are making select investments in our
commercial organization, certain operational areas and parts of SG&A.
We know that given our current margins, we need to deliver savings elsewhere to fund these investments.
We expect to exit the vast majority of the TSA services by year-end, with a limited number being exited
early in 2025 to ensure business continuity through 2024 year-end. We are continuing with targeted
programs to reduce costs, including programs intended to better align our resources with the needs of
specific projects while reducing pockets of lower productivity.
The improvement in overall adjusted EBITDA this quarter is attributable largely to these programs. We
are continuing with our plans to reduce SG&A costs across our supporting functions. We expect the
benefit from these to ramp up during 2025, as we believe that full independence from our former parent
will enable us to deliver these functions in more efficient ways versus how they were historically
delivered.
Regarding 2024 guidance, we have updated our revenue guidance range to $2.7 billion to $2.725 billion.
The reduction in the top end of the range is primarily driven by lower trends in pass-throughs, consistent
with what I discussed earlier.
Our adjusted EBITDA guidance range of $220 million to $240 million remains unchanged. There are a
number of moving parts that we are navigating and managing closely, such as the transition of key
internal IT systems and devices in and around the fourth quarter. These technology transitions do not
impact customer facing systems.
We expect to provide 2025 guidance in the first quarter of 2025. Building our backlog, along with efforts
to drive margin expansion, continue to be the primary focus of our leadership team. I'm not commenting
specifically on 2025 targets as they will be informed by the exact timing of exiting the TSA services from
our former parent, along with having more certainty on fourth quarter net new business awards and a
better sense of the pipeline of opportunities heading into 2025.
Before I conclude, I want to take a moment to acknowledge the significant progress our teams are making
towards fully exiting the transition services agreement, as well as to build the new infrastructure that will
enable us to operate more efficiently and effectively. As Tom mentioned, more than 90% of our IT
applications and servers have been transitioned and the teams leading our HCM and ERP implementations
are on track for their respective December and January go live date.


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It's easy to think, okay, what's next? But this demonstrates that our teams have the determination and
agility to execute difficult tasks under challenging circumstances. This effort, combined with the work
we've done to strengthen our capital position is laying the foundation for the long-term growth and
profitability of Fortrea.
There is still work to be done, but we are putting building blocks in place to create long-term value for all
of our stakeholders. With the solid foundation we have laid in the past year, attractive backlog of nearly
$7.6 billion and a talented global team of more than 15,500 professionals, we are committed to longer-
term growth and margin expansion.
Our commitment to execution, along with our focus on innovation and customer satisfaction, as shown by
our improving NPS scores, are unlocking new opportunities, enhancing our position in the market. We are
confident in our ability to improve margins and deliver significant value for our customers, employees and
shareholders over time.
Now I'll turn it back to Tom for the remainder of his remarks.
TOM PIKE: Thank you, Jill. In closing, let me provide a few thoughts about the remainder of the year.
Regarding the fourth quarter of 2024, as I mentioned, our pipeline of opportunities has grown and has
sufficient large pharma, which should be more predictable.
We're targeting a 1.2 book-to-bill in the second half. We have looked at qualified opportunities for Q1 and
feel it is solid at this point. Our customer systems, such as Veeva and Medidata, are already transitioning
in production in Fortrea's environment.
I'll be excited to see our new ERP system implemented this quarter. Next year, our hardworking teams
will turn their attention to making improvements for Fortrea. Moving to customers. I had a number of
senior level meetings with our larger pharma customers this quarter and got consistent reports of the
strong job our teams are doing.
While the environment is uncertain for some larger pharma organizations causing companies to increase
or decrease their spend in R&D, we're doing our best to help them through whatever they need to do. I've
also met with many biotech prospects and customers and the Fortrea teams are delivering their well as
well.
They're bullish on their therapeutic assets and know Fortrea can provide top quality data packages for
regulators. We provide multiple executive touch points to help them achieve their goals, often complex
goals with clinical research.
In Q3, we published our inaugural corporate social responsibility report, underscoring our commitment to
safety, environmental stewardship, fairness and ethical governance in everything that we do. In summary,
Fortrea had a solid quarter of execution progress, we're well positioned for growth and value creation in
the future.
I would like to recognize our Fortrea team around the world. It can be challenging to balance the
competing demands of working in a 30-year-old company with the needs and energy of a startup. Our
team is committed to customers and the important work of developing solutions that bring treatments to
patients sooner. I'm proud of what we've achieved so far and remain excited about what we can deliver in
the years ahead. Operator, can you please open the line up for questions? Thank you.
Questions and Answers
OPERATOR: Thank you. (Operator instructions)


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                                  Q3 2024 Fortrea Holdings Inc Earnings Call - Final

Eric Coldwell, Baird.
ERIC COLDWELL, ANALYST, BAIRD: Thanks very much. Good morning. Good job to pull in 3Q as
you did. I wanted to ask about clinpharm in particular. You have quite a few studies going in your various
units. They're not all diabetes and weight loss, but there are quite a few of them.
I'm curious if you could talk about what the nature of studies of, how that's transitioned this year? Is
clinpharm really getting a lift because of the GLP-1 type category or are you seeing strength in other
therapeutic categories as well? What's your overall read on how strong the overall Phase 1 market is?
TOM PIKE: Yes, I think I'd start by saying that One of the things we think about here at Fortrea is given
our size and given our breadth, we do have a different kind of exposure than the largest CROs to the
marketplace. And the exposure we have is to some attractive large pharmaceutical firms in Phase 1 in
particular as well as the biotech around the world.
And so the combination of those two, we've kind of replaced that business in terms of how we target
ourselves in the market. And we're really trying to target those organizations that are spending well.
Interestingly, Eric, it's, we do some work on GLP-1, but we also have broad exposure across the business.
As I mentioned, and actually, I had another point that I didn't add in an interesting autoimmune compound
that we have. in the UK that we're working on. We have a wide variety of things that we work through. So
it's actually less GLP-1 oriented, and it's more oriented across a wide array of sophisticated scientific
therapies.
ERIC COLDWELL: That's good to hear. And Tom, you mentioned the win rate was up, the Net Promoter
scores up. Are there any stats or metrics you could give us around those?
TOM PIKE: That specifics because then you'll ask me next time and (Laughter). But we basically have
win rates that are up since the spin year, our CPS win rates are quite good and in particular, as we were
talking about it. And, so I think, and the Net Promoter Scores have also taken returns for the better since
we spun. So we're pretty proud of those things as we move forward.
ERIC COLDWELL: Great. If I could squeeze one last one in with Jill, just a technical one. A lot of
moving pieces with the the TSA is the facility and the rates changing, just a lot moving on here with your
interest expense. You gave some metrics on the improvements year-over-year. I'm curious if you could
give us a sense on where you see sort of normalized interest expense quarterly. What's the exit rate on that
as we go into '25?
JILL MCCONNELL: Yes. I think what you saw this quarter, Eric, is pretty consistent because you
remember, Q2 was a little bit unusual in that we had, well, the debt paydown happened during the quarter,
but we also had the yield cost from the original debt that we were amortizing and we had to take a portion
of that as a write-off in the quarter, which impacted interest expense.
So what you saw this quarter is generally representative and it will depend on how rates move. And it also
would depend on what we might do if we need to be in and out of the revolver a bit in the quarter. But I
think somewhere in this range, plus or minus 10%, 15% is a decent approximation going forward.
Hopefully minus, but we'll see.
ERIC COLDWELL: Thanks very much, guys.
TOM PIKE: Sure. Thank you.
OPERATOR: Patrick Donnelly, Citi.


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PATRICK DONNELLY, ANALYST, CITI: Hey guys, thank you for taking the questions. Tom, maybe
just on the bookings environment, it's really nice to see the book-to-bill come in at the (inaudible) level. I
think the prior commentary was one, two in the back half with kind of a build right, with 3Q lower
building into a higher 4Q.
Can you just talk about, I guess, what changed that, what you saw in the quarter that was that much
better? And then it sounds like still one, two for the second half maybe just frame up for us what you've
seen so far this quarter would be helpful.
TOM PIKE: Yes. Thanks, Patrick. Good morning. We feel good about the back half. I think given what
the uncertainty we saw in Q1 and Q2, we've decided to stick with our prior commentary that we're looking
for a one. two average in the second half. But as I mentioned in the prepared remarks, we do have a nice
mix of large and biotech, which gives us a little bit more predictability in Q4.
But as you know, with Q4, given the holiday schedule that many large pharmaceutical firms have, you
really have to get a lot done given that holiday period we have there. But I think overall, we feel pretty
comfortable with Q4. And I'll also add that we've looked at Q1, and we feel pretty comfortable with Q1 as
well.
So as we look out, I'd stick with my prior remarks, but we feel pretty comfortable that if we execute, we
can deliver at 1.2 average.
PATRICK DONNELLY: Okay. That's helpful. And then, Jill, maybe just on the margin front. I know the
prior commentary was around kind of this 11% to 12% EBITDA margin for next year. Very much
contingent on the (inaudible) book-to-bill in the second half, which obviously we just kind of talk through,
you guys feel good about that. It would be helpful just at least at a high level to talk through the
confidence level in that EBITDA.
Again, I know it's the bookings were the big piece, at least one quarter through the second half looking
pretty good. So maybe just talk through the moving pieces and again, just the confidence level in the prior
EBITDA commentary.
JILL MCCONNELL: Sure, Patrick. We specifically are saying, we're going to not give 2025 guidance
right now. I think it's important, yes. We're very pleased, obviously, with the 1.23 that we achieved in the
third quarter, but we have to deliver in Q4 again, and it will depend very much on the mix and also what
we see going into the first quarter because you'll recall from earlier this year, we have had to change our
guidance based on the fact where we landed in the first half. So I think it's important for us also to
understand what that pipeline really looks like. It looks good at the moment, but the mix is also important.
And the timing of those TSA exits is really critical because they are essential. We believe we're on track
for year-end, but there's still a lot of work. And obviously, as I mentioned, two big systems getting ready
to go live, and those are absolutely essential for us in terms of moving into the next generation of SG&A
improvement.
So we would rather wait and have more clarity on what things look like rather than, say, something now
that they still have a lot of moving parts in it. So I'm going to refrain from answering that one directly, but
explain a little bit of eye of we're going to take the pause and give you that feedback or update in the first
quarter.
PATRICK DONNELLY: Understood. Okay. We'll stay tuned on that. Thanks.
OPERATOR: Justin Bowers, Deutsche Bank


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                                 Q3 2024 Fortrea Holdings Inc Earnings Call - Final

JUSTIN BOWERS, ANALYST, DEUTSCHE BANK: Hi, good morning, everyone. Tom, just one for
you. You've been in the industry just as long as anyone. And could you help characterize the environment,
especially with what we're seeing in large pharma now. And do you have a sense of maybe where we are
in terms of some of the restructurings and reprioritizations. Are we closer to the finish line here? Or is this
something that we think endures for the next year or two?
TOM PIKE: Hey, Justin, good morning. I guess a few things I'd say, we mentioned last time that we've
started to categorize the top 20, and they are so much of the spend of the industry into three groups. They
are those who are very successful and growing rapidly and frankly, spending rapidly on R&D. And you
even heard some of our competitors talk about it that it's spilling out into new full-service outsourcing
projects and opportunities for the industry.
And then we have two other groups that are kind of easily described. One is the really flat to declining
group and the other ones have slower growth or they're flat. And both of those other groups are doing
some level of restructuring. So a huge amount depends who you're exposed to.
If you're one of the largest CROs, you're probably exposed to most of that mix. So you have a fairly
complex puzzle. If you're somebody like us, we're exposed to some of it, and we're, we've been able to
manage it to date, I think, would be a way to say it. So, and I'd also, Justin, I saw your report associated
with the market growth and comments.
And I generally agree with what you said in there, I think. I think there are certain pharmaceutical firms
where R&D is accelerating and the general backdrop, it seems solid on the biotech front. We said that in
prior quarters. I think the recent September funding numbers, for instance, have indicated that as well. So
it seems solid, not spectacular, but solid. And so I think that firms can execute against this if their
commercial organizations manage well.
JUSTIN BOWERS: Got it. And then, maybe one for Jill. I appreciate the EBITDA bridge that you guys
provided in the deck. With respect to the bridge from 3Q to 4Q. You have two buckets, one for service fee
revenue growth and one for cost savings. Which one has the greatest variability? And what's the
interrelationship between the two, if any?
JILL MCCONNELL: Yes. Let me start, I think, the two buckets. When you look at the SG&A bucket,
well margin optimization, generally, I think, as you saw in this quarter, that was a big contributor really to
the improvement quarter-on-quarter. There's a piece of really related to variable comp and where we end
up landing for the year that's still on the table, and that kind of will drive how big we are in that range.
But the margin improvement that you saw this quarter, you'll probably also note, I called out 15,500
people. That's come down a little bit from where we were in the past quarter or two. And so it's a
combination of the work that we've been doing in a very thoughtful way to manage the business and set
ourselves up for future success, all while making sure that we prioritize our customers needs and think
about the needs of the projects.
On the revenue side, as I had mentioned at Q2, some of the step-up in the second half was going to be
related to a large suite of projects that we had won in the clinical pharmacology business as we've been
talking about earlier. And we did see that as we headed into Q3, and we're expecting that to continue into
Q4, although sometimes with the volunteers and things around the holidays, things can be a little bit
variable. So we wanted to just provide that little bit of range there because I do think there could be a little
bit of movement just depending on where we land.


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We feel good about it at the moment, but it will very much depend on how things play out over the next
couple of months. So those are some of the big drivers in terms of what's driving those two buckets in the
range that we provided.
JUSTIN BOWERS: Understood. Thank you so much.
JILL MCCONNELL: Sure.
OPERATOR: Luke Sergott, Barclays,
LUKE SERGOTT, ANALYST, BARCLAYS: Great. Thanks guys. I guess can we talk about some of the
pricing dynamics here? And for the recently one award that you guys have. The fear is that the feedback
has been like pricing has been extremely competitive. And so how much of this your wins are associated
with coming in as one of the lower-cost providers?
TOM PIKE: Yeah, good morning, Luke. Yes, as we said on prior calls, we recognize the situation that this
organization needs to improve its margins. And in general, our belief is that we can price at market and
based on our capabilities and experience, we can win projects. And so I know there's been some noise out
there about different organizations.
But in general, for us, we're trying to price that market because we don't believe our customers make a
decision based solely on price. They base it on, if you think about the strategy we have, how long the
duration is that we propose. The probability that we can deliver patients in the time frames that are
required for the study.
So they're looking at quite a number of things and our customers really aren't short sighted enough to
make choices on that. Now, I will say FSP continues to be competitive. You'll hear this everywhere.
There's less differentiation there. But again, the size of our business, at this moment in those most
competitive top pharma FSP clinical situations, we're, that's not a focus for us right now. So I think you'll
hear from people who are in that area, you'll hear an intense focus on price.
LUKE SERGOTT: Okay. And then just a follow-up here. I mean the, just talk about, you guys talked
about biotech strength and larger strategic strength that you guys saw that's driving the bookings. Can you
talk about like from a biotech perspective, is this mostly like from the recent or the public raises that
we've seen this year? Or is it mostly broad-based?
So just trying to figure out like the rest of the CROs have been really choppy and then you guys kind of
have really avoided a lot of the bookings and other issues that others have seen. So could you talk about
like how you're positioned in the market differently than the others that you guys aren't really seeing this
pressure exposure?
TOM PIKE: Yes. I think I acknowledge that with the biotechs and you saw this for us in quarters one and
two. There is some uncertainty around their decision-making process that is the nature of the beast over
there. And the question is really how well can the commercial organizations manage that. You heard us
talk last time, Luke, that we have put a lot of intense effort around our commercial organization trying to
understand those decision processes better, trying to, we actually created a new process for forecasting. So
we had a prior process. But in terms of forecasting book-to-bill, we added a new process after really late
in the second quarter, starting in the third quarter.
And so I think that's helping us manage those expectations and make sure we point our resources at the
most likely situations and really try to manage the decision process. One of the things you get with Fortrea
is you get the entire management team involved where we need to be involved with customers, not just in
the back offices administering the business.


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So we're trying to put not only the sales teams, but the operations team and the leadership, when necessary
and get them directly involved with customers. And frankly, I think that makes a difference. That being
said, again, what we've seen at our size, given our exposure is a solid biotech environment. We've been
saying this for several quarters, and it really is how does your commercial organization execute against
that, that can help you create some consistency there. Does that help, Luke on that?
LUKE SERGOTT: It does. Thank you.
TOM PIKE: Thanks.
OPERATOR: David Windley, Jefferies.
DAVID WINDLEY, ANALYST, JEFFERIES: Hi, thanks for taking my questions. Impressive progress in
the quarter. What we've heard in addition to what some of the other folks have asked already, One of the
key themes we've heard in the quarter has been cancellations.
So choppiness in the environment, difficulty to predict decision-making time lines, things like that, but
predominantly cancellations. Can you talk about what you are seeing or maybe not seeing from the
standpoint of clients changing their mind about intention to move forward on projects.
JILL MCCONNELL: Yes. Thanks, David. I can take that one. We've looked at this really closely because
we obviously hear what our peers are saying, and we have not seen any increase in cancellations. We had
called out the one. You remember that late in the first quarter, that kind of impacted the first quarter book-
to-bill, but we have not had any uptick.
We looked across the portfolio very carefully. We've seen it be kind of our normal rate obviously, it can
be situational from customer to customer. But fortunately, for us, this doesn't seem to be an issue.
TOM PIKE: Yes. Dave, I'd add just because sort of in full disclosure, and Jill and I have talked about it in
our clinical pharmacology business. There's almost what I'd call a churn where there are cancellations, but
it's usually just pulling back a project to restrategize how to deal with it, and then it's going to come back
later and so we've seen that.
And I think the industry talks about what happened with CRL and what's happening in the early
development stuff and whether it spills into clinical pharmacology. But for us, I'd almost call it a churn.
It's not really a cancellation rate. It's things moving in and out based on different strategies that customers
are taking. And so, but overall, Jill is absolutely right. When you look at our numbers overall, they're at
sort of historical norms.
DAVID WINDLEY: Got it. And Tom, while I have you, on this concept of qualified pipeline, I appreciate
you've talked about your comfort there. I think to Justin's question, you talked about kind of the triage of
top 20 and how you think about it. I'm going to assume, but I'm going to let you confirm that when you
think about what's in your qualified pipeline and what's moving forward that more of that, maybe not all
of it, but more of that leans toward these folks that are spending more, moving more, maybe less mired in
restructuring and things like that, maybe flesh out a little bit more of what gives you the comfort that you
expressed in the qualified pipeline that you're looking at internally?
TOM PIKE: Yes. I'd say interestingly, Dave, we do have a mix. So I'd love to say that our exposures
highly to that top segment. But we do have a mix. But given the exposure that we have, we, they are
moving ahead with projects. Everybody in the industry is moving ahead with projects, even the folks
who've talked about restructuring have important projects that they're driving.


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So right now, what we're involved in, how we're delivering, I got some excellent feedback this quarter
from some of our large pharma customers with some terms like that we are doing excellent work and
phrases like that. That are helping us. So we may not be as large, but what we are doing in larger pharma,
we're getting symacolades for.
DAVID WINDLEY: Got it. If I could sneak one more in. Jill, on the TSA exits, I appreciate that you said
that the timing is critical. I just want to make sure, I understand as you've kind of emphasized to me that
the TSA, the kind of removal of the check that you're writing to LabCorp for the TSA support services
they are providing.
That in and of itself is not what drives your margin expansion, but rather your ability to manage the
business on your own systems and identify areas to take SG&A cost out? Is that correct? Is my
understanding correct? Can you flesh that out a little bit?
JILL MCCONNELL: Yes. No, your understanding is correct, David. And I do think that's important. I
know we have talked about it before. So getting at this TSA access is really critical. Obviously, there's
additional costs associated there and the onetime costs. And you will see, I've shared this before, but for
everyone's benefit, the way those things are paid and build, you're going to see onetime costs through the
first quarter, just by the nature of how things go.
But we still believe that we're on track to exit the vast majority of it all by the end of this year, right
around the end of this year, certainly by the time we're coming out, talking about Q4 results with all of
you. And that is then really important. We'll go live on the new systems, and then that allows us to bring
in different processes, new structures and ways of working, be able to do more volume of transactions in a
more efficient and effective way.
So that is really critical. It's not an immediate switch that you exit a TSA and we get massively reduced
SG&A. There are some places, as we've talked about, particularly with our IT infrastructure, where
because of the work that we're doing with Cognizant. We've talked about that before, there will be some
improvements, but you'll see more of those come out over the course of next year, and we'll provide a lot
more detail about that journey when we give our guidance for 2025.
DAVID WINDLEY: Fantastic. Thanks for taking my questions and the extra one. Appreciate it
JILL MCCONNELL: Sure.
TOM PIKE: Thanks, Dave.
OPERATOR: Elizabeth Anderson, Evercore.
ELIZABETH ANDERSON, ANALYST, EVERCORE: Hi guys. Congrats on a nice quarter and thanks
for the question. Maybe just to start out, a shorter-term question on the cost side. Traditionally, you've
seen, or at least in the last two years, a nice step down in SG&A in the fourth quarter. Could you talk a
little bit (inaudible) why that happens in sort of your expectations? Obviously, it's in your embedded
guidance. So I just want to kind of (inaudible) understand what that is. And then I have a follow-up.
JILL MCCONNELL: Yes. Sure, Elizabeth. Thanks for the question. We typically do. And oftentimes,
over the course of the year, you're managing things, right, as you get, I mean, most folks would
understand that in an organization, you get to the end of the year, you tend to get a little bit tighter on
things. So you see some of that that comes through.
I do think for us, as I mentioned, one of the drivers there is around some variable comp and where the
year lands in terms of how that plays out. But I also highlight the changes we've been making over the


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course of this year, and I called out the change in headcount, that's not just operations. That's also parts of
SG&A as well, where we can do it a bit more thoughtfully.
So it's the cumulative impact of those as they've been happening over the course of the year. You get the
full quarter of benefit in the fourth quarter and then some of the other things that we mentioned. But that I
think there is a bit of a most organizations over the course of the year, you get closer to the end, you
tighten up a bit, and that you see that.
But that is generally what's driving the improvements as we go into the fourth quarter. Having said that, I
think as a percent of revenue, it's not going to be, it will be broadly in line with what we've seen over the
course of this year because we really do need to exit those TSAs in SG&A to start to be able to drive the
really different model.
ELIZABETH ANDERSON: Got it. That's very helpful. Thank you. And then I know earlier in the year,
you talked about some variability in terms of trial starts and sort of maybe sort of pivoting off of Dave's
question a little bit, just sort of like slower decision-making in biotech. But it seems like maybe what
you're saying and I just want to make sure we're understanding this correctly, is that you're not, you're
seeing that is perhaps like (inaudible) be even a little bit better. Is that a fair characterization?
TOM PIKE: Let me take that one, Elizabeth. Good morning. I think we would say we really tried to
manage that hard this quarter. So, we had two factors. We talked about this a little bit last and one is that
can you manage the biotech decision processes better. And our commercial team worked really hard to try
to do that, try to make sure we have the right interactions with executives, understood the processes, had
less stuff at the last minute.
So we worked hard on that. And then the other thing, frankly, is that we just had a little bit more large
pharma in the mix. And that does have predictability. So because they have a tendency to stay on
schedule. They don't make decisions. They don't have the board intervene or things that can happen with
biotechs.
So it's really the combo of those two in the second half that makes us feel better about our second half
numbers. But we're, I think as an industry, we all, as biotech continues to grow, as a proportion and
continues to be targeted by various CROs beside us, everyone has to get used to and get better at
managing those decision cycles.
ELIZABETH ANDERSON: Alright, thank you very much.
TOM PIKE: Thank you.
OPERATOR: Max Smock, William Blair.
MAX SMOCK, ANALYST, WILLIAM BLAIR: Hi, Tom. Hi, Jill. Thanks for taking our questions. I
wanted to follow up on some of your commentary on the pipeline here. I know you mentioned the
environment or the pipeline for the next two quarters is strong. But, just wondering if you think it's
healthy enough to support a 1.2 book-to-bill beyond the next couple of quarters here. I mean you had
those decisions in 2Q that got pushed out to 3Q on average the last couple of quarters, book-to-bill about
1.1, how much of the solid bookings this quarter do you think was the pushout of those opportunities from
2Q? Or do you really think the environment is healthy enough to kind of support that 1.2 book-to-bill
moving forward? Thank you.
TOM PIKE: Good morning, Max. We, as I said, we've got a process that we have initiated here where we
try to look out and we look at essentially what's in a stage where it's been awarded and not contracted,


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                                 Q3 2024 Fortrea Holdings Inc Earnings Call - Final

what still will be awarded and contracted. We look at the size, we look at the likelihood that there'll be
some kind of issue with the process.
And so we've done that in quite a bit of detail. And so when we look out over the next two quarters, we
feel comfortable that if we execute, we can be in that range of that targeted 1.2. Now it's, frankly, it's a
little difficult for us to look out that much further. This is such a funny industry. We do have things in the
pipeline for next year, but it's such a funny industry because so many things come in on short-term RFPs,
where there's a 10 day response time. For those who don't know the industry that well, it's , the good news
is there's so much volume of this and it's fairly well structured that it's consistent, you can manage around
it.
The bad news is you have these short cycle RFPs that you deal with all the time. And so I think we feel
comfortable saying the next two quarters are, have a solid pipeline. What Jill was referring to around
2025, think we'd like to get a little bit further in the quarter and frankly, because we'd be reporting during
the first quarter on Q4 results and providing guidance.
We'd like to get further along, finish out the year, understand these TSAs, understand where our systems
are at and then really talk about that full pipeline for next year. So I realize that's probably not what you
want to hear, Max, but I, what I can tell you is we have a very rigorous process. And what we see among
our large and small customers looks solid for the next two quarters.
MAX SMOCK: Yes, that was helpful, Tom. Thank you for that color. Also, I just wanted to follow up on
some of your commentary on small biotech. Tom, you mentioned there's still some uncertainty around
small biotech decision-making time lines. But just wanted to clarify whether you've actually seen those
decision-making time lines get better at all over the last few months?
And if so, what do you think were the drivers behind that improvement? I guess my question really is do
we need to see funding get better from here? Or do you think the funding environment is actually okay
now that we're past the election and just had another rate cut. Does that give the smaller innovators some
more confidence to go ahead and start spending again?
TOM PIKE: Yes. I think on the second part, I was thinking about in case we get near this question, Max.
And we're still kind of in battlefield fog from this election this week. But there is no question that in
general, biotech funding is correlated with lower rates. And if we have an SEC that's more comfortable
with mergers and acquisitions, you could see some tailwinds to the biotech sector.
What we, if you, my father-in-law used to talk about, assume the positive because it is a better way to live.
And so if we assume the positive, we did see some good things last time, like a guy like Scott Gottlieb put
in this FDA Commissioner and we did see Project Warp Speed, which I think we were all hoping would
give us the same kind of tailwinds for decision-making that you saw during the HIV crisis.
So, and we won't see the IRA expansion or we may not see the IRA expansion that was discussed. So I
think they're, right now, we're in Battlefield fog. It's very early, but if things continue to progress the way
they are, it's possible that we'll see more attractive biotech environment in the coming months here.
I actually don't think for Fortrea, it needs to be increased. I think, given our size and our exposure, if we
execute well as a commercial team, I think the solid funding we've seen, the numbers that have come out
in August, September are solid enough for us in the beginning of IPOs again. But for the industry overall,
certainly more funding is always better.
MAX SMOCK: Thanks again for. (multiple speakers) No, not at all. That was very helpful. Thank you
again for taking our questions.


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TOM PIKE: Thank you.
OPERATOR: Matt Sykes, Goldman Sachs.
UNIDENTIFIED PARTICIPANT: Good morning. Thanks for taking our question. This is Will Ortmayer
on for Matt. Just wanted to touch on the burn rate, given the higher conversion in the quarter and step up
that's implied for the fourth quarter, what are your expectations for backlog burn going into 2025?
JILL MCCONNELL: I thought you were going to talk about fourth quarter and you tried to sneak in one
on 2025 (inaudible), but I will say you did see a little bit of a step-up in the in the burn rate from Q2 to
Q3, we'd expect that to be consistent. I did talk at Q2 about the fact that some of the improvement we see
in the back half would be due to the improvement in the clinical pharmacology business, which has so far
come in generally as we expected, and it is a bit faster burning.
I don't think at this point, I can comment on 2025 burn rate, except to say that we are continuing to look at
ways to improve productivity and get projects started faster and focus on improving the time lines on
milestone delivery. So it's a focus for us. But I'm going to hold off on commenting on '25 burn until we
give '25 guidance.
UNIDENTIFIED PARTICIPANT: That's helpful. I had to try in 2025.
JILL MCCONNELL: I appreciate it. You did well there. That was clever, yes.
UNIDENTIFIED PARTICIPANT: I guess just one more from our side. When you think about the drivers
of the gross margin improvement, how should we be thinking about that between mix and cost
efficiencies as you grow that backlog? And are there any mix dynamics to call out that we should think
about moving forward?
JILL MCCONNELL: Yes. I do think we've been really clear from the beginning that prior to the spin, the
mix wasn't necessarily in the places. We really want to grow the full-service clinical business. We all
know that, that is the strongest from a margin delivery. And so we're still focused on that. We have really
seen great strength in clinpharm, as we talked about earlier.
And we still like the FSP business, although as Tom mentioned, it is getting more and more price
competitive. We still like it, though. It's very steady revenue, and we've learned to navigate that business
really well. So we welcome it all.
But I do think that mix is really important. And even within late stage clinical the therapeutic mix is.
You've heard, we've talked about, some of our peers have talked about the fact that the oncology programs
do tend burn a little bit slower as they get more and more specialized, some of them are longer because
you have longer-term follow-up requirements. So the mix is critical.
We want to be in all of it. We've talked about going into, we've got really strong therapeutic breadth, but
we've talked about areas we want to continue to focus on cardiovascular and neurology, some of these
things with the obesity drugs and we're making great inroads on all of those, but that mix really does
drive.
So I think that's also part of why we want to be really thoughtful as we go into '25 because in a quarter,
you can have a great book-to-bill. But if it's all long duration, slower burning studies, it's going to impact
your revenue rates for the next year. So we are looking at all of that. But the focus is clearly broad
balance, but we really do want to grow more of that late-stage clinical.
UNIDENTIFIED PARTICIPANT: That's helpful. Thanks, Jill.


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JILL MCCONNELL: Sure.
OPERATOR: Michael [Ryskyn], Bank of America.
UNIDENTIFIED PARTICIPANT: This is John Kim on for Michael. So you've talked about the SG&A
and the TSA exit seem to be on track. But without giving us the margin details if you think about the
investments and investments you still have to make the parts of the SG&A, that involves IT infrastructure,
but you also mentioned commercial organization today.
So I wonder what that entails. And earlier, you mentioned that SG&A as a percentage of revenues would
be consistent. But at least for the next two quarters, I'm wondering what the percentage would be for those
onetime costs is fairly high as a percentage of EBITDA.
JILL MCCONNELL: Okay. Sure. I think two things there. The, in terms of the investments, I did call that
out because it is really important to understand, as we've come out of the spin. One of the reasons you did
this was so that we could focus and have the right attention on the things we need to do to grow Fortrea.
And so the commercial investments are very much about, and we've talked about this previously, certain
therapeutic areas or locations in our sales organization, where we might feel like we're slightly
underrepresented and we want to have more opportunities to go after the great portfolio of work that's out
there and really focus on the pipeline. So that's the commercial investment we're talking about,
particularly in the biotech space.
I think the other areas, I mentioned operational investments in SG&A. Operationally, we've talked about
really wanting to focus on better resource management tools, which also help with our margin longer
term, even though there's a bit of an upfront investment. And SG&A is a very small amount. I'll just, I'll
say personally, within finance, there are a couple of technical expertise areas that we've had to invest in.
But generally, within SG&A, it's not so much significant systems or changes there. It might be around
how do you think about places where you can do work and making sure you invest in the best technology
to drive that work. So those are the types of investments we're making.
In onetime costs, we will see those, especially the spin related ones come down. We did expect Q2, it was
the highest. It's come down this quarter, probably step down a little bit again in Q4, and it should, it's not
going to completely go away in the first quarter because there are still some things that happen. But truly
as you get through the first half, those onetime spend related costs will disappear.
And we are on track, really and really pleased. I do, there's a lot of focus on this and it might not be as
obvious to the outside, but the effort to stand up in HCM, stand up in ERP, rebuild your entire
infrastructure. It's significant. So I do think the teams have done a phenomenal job and we feel really good
about where we are.
We have to get a few things over the line, and it's a lot of moving parts in the quarter. Thankfully, they're
all internal moving parts. So hopefully, it doesn't have any impact on our customers. But there's a lot to
navigate here, but we're excited about the fact that once we turn that corner, it really allows us to focus on
how we take Fortrea forward in the right way for our organization in '25 and beyond.
UNIDENTIFIED PARTICIPANT: Got you. And then sorry if I missed it, but in terms of the pharma
versus biotech mix, it's, I think Tom mentioned earlier that it's a 50, 50 split there and the large, it seems
like the awards are coming in evenly. But how is the RFP flow trending looking ahead, what's your
expectation there?
TOM PIKE: Good morning, John, I think it's consistent with the prior discussions here. It's solid. We
carefully choose our words and we continue to see opportunities that are adequate for us to be able to


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                                Q3 2024 Fortrea Holdings Inc Earnings Call - Final

grow. So we just have to sustain our win rate against those and deliver well and what we see as a solid
pipeline for the targets that we have.
So I think we're out of time, operator. I think, I'll just close out by saying that we had a solid quarter of
execution and progress. And we thank all of you for your time.
OPERATOR: This concludes today's conference call. Thank you for participating. You may now
disconnect.
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FOREIGN BANKS (58%); SIC6211 SECURITY BROKERS, DEALERS, & FLOTATION
COMPANIES (58%); SIC6282 INVESTMENT ADVICE (58%); NAICS522210 CREDIT CARD
ISSUING (58%); CONFERENCE CALLS (91%); INVESTOR RELATIONS (90%); ACCOUNTING
(89%); METADATA MANAGEMENT (73%); SECURITIES & OTHER INVESTMENTS (69%)


Load-Date: November 10, 2024


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