Deslande v. Fortrea Holdings Inc. — Entry #65

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                 Exhibit H


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                                   Q3 2023 Fortrea Holdings Inc Earnings Call - Final


                        Q3 2023 Fortrea Holdings Inc Earnings Call - Final
                                            FD (Fair Disclosure) Wire
                                           November 13, 2023 Monday


Copyright 2023 Electronic format, layout and metadata, copyright 2023 VIQ Media Transcript, Inc. ALL RIGHTS
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Length: 7181 words

Body


Corporate Participants
* Hima B. Inguva
Fortrea Holdings Inc. - Head of IR & Corporate Development
* Jill McConnell
Fortrea Holdings Inc. - CFO
* Thomas H. Pike
Fortrea Holdings Inc. - CEO, President & Chairman
Conference Call Participants
* Casey Rene Woodring
JPMorgan Chase & Co, Research Division - Research Analyst
* Derik De Bruin
BofA Securities, Research Division - MD of Equity Research
* Elizabeth Hammell Anderson
Evercore ISI Institutional Equities, Research Division - MD & Fundamental Research Analyst
* Luke England Sergott
Barclays Bank PLC, Research Division - Research Analyst
* Maxwell Andrew Smock
William Blair & Company L.L.C., Research Division - Research Analyst


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                               Q3 2023 Fortrea Holdings Inc Earnings Call - Final

* Patrick Bernard Donnelly
Citigroup Inc. Exchange Research - Research Analyst
Presentation
OPERATOR: Ladies and gentlemen, thank you for standing by. Welcome to Fortrea Third Quarter 2023
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 your speaker today, Hima Inguva, Head of Investor
Relations and Corporate Development. Please go ahead.
HIMA B. INGUVA, HEAD OF IR & CORPORATE DEVELOPMENT, FORTREA HOLDINGS INC.:
Good morning, and thank you for joining Fortrea's Third Quarter 2023 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 our CFO, Jill 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 the Private
Securities Litigation Reform Act of 1995. These statements are subject to significant risks and
uncertainties that could cause results to differ materially from our current expectations. We strongly
encourage you to review the reports we filed with the SEC regarding these results and uncertainties. In
particular, those that are described in the cautionary statements concerning forward-looking statements
and risk factors in our press release and presentation that we posted on the website.
Please note that any forward-looking statements represent our views as of today, November 13, 2023. 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 the call over to our CEO, Tom Pike. Tom?
THOMAS H. PIKE, CEO, PRESIDENT & CHAIRMAN, FORTREA HOLDINGS INC.: Thank you,
Hima. Hi, everyone. This is the second earnings call we have done as a public company and the first full
quarter where the new management team has been running the newly spun out company. On our last call,
we discussed how the year after the spin was announced, have been a challenge for Fortrea from a new
business quantity and mix standpoint. I also said that based on that sales mix and the cost structure we
inherited that we needed to get our financial health in order.
In the third quarter, we adjusted our cost structure for the near-term revenue situation. Every leader of
every organization took part. During our last earnings call, we told you that we would benchmark our cost
structure to understand more deeply how we compare to peers. We have done that, too.
We have a lot of work to do to change this company from a division of a division with strong clinical
skills and capabilities into competitive independent CRO that is the top choice for our customers and


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delivers results for our public investors. We need to invest in our future, while exiting arduous TSAs and
delivering a cost structure that is appropriate for a clinical services CRO.
This fall, while delivering for customers, we have been planning our course of action for 2024 and 2025.
For the next few minutes, I'm going to cover new business, our discussions with customers and some of
our commercial transformation. Then Jill will discuss the numbers as well as our efforts around
investments and operational and SG&A improvements. Finally, I will close with a few thoughts.
As we previously stated, we started the quarter strong in July, and I'm happy to announce that we ended
the quarter with a 1.24 book-to-bill and importantly, an attractive mix of work. As my leadership team and
I visited with large and small customers during the quarter, they are excited to hear the Fortrea's story and
open to our ideas about how to do clinical research more effectively. We are discussing our investments
and focus areas and receiving positive reactions.
I spent 2 weeks in Europe this quarter meeting with customers and our people. In the past 2 weeks, I've
met with 3 CEOs of top pharmaceutical firms all of whom want to hear more about what we're doing and
how we can work better together. We are at the table. Our strategy is to serve all of biotech and selective
larger pharma. Given our size, that is a lot of opportunity.
We've been doing work to transform our commercial and customer relationship capabilities to be more
effective. This means developing relationships, filling the opportunity funnel and winning business. It
requires select investments in people and systems. I believe the changes we are making will take fully a
year to implement to bring the consistency and business impact that we want.
In clinical research, sponsors do not change partners overnight. But we are seeing immediate progress.
Our pipeline for Q4 is adequate to deliver a solid book-to-bill for the quarter with a healthy mix of work,
assuming we execute. Building on our past strengths, along with the beginnings of our investments, to
create more distinctive differentiation, we have some interesting wins in the third quarter. Of course, these
are just a small sample of the over 3,000 clinical projects that this organization currently touches in some
way.
Our clinical pharmacology business continues to solidify its leadership standing. We recently announced
how a series of investments over the past few years has made a difference for customers as well as
volunteers in Phase I studies. Our clinical pharmacology expansions, which also included GMP pharmacy
capabilities and investments in technology are complete. These include, for instance, 100% digital bedside
capture systems.
The clinical pharmacology group secured some meaningful wins in cutting-edge early clinical
development studies and has a solid pipeline for the fourth quarter. A few examples include an orally
administered IL-17 antagonist for treatment of inflammatory and autoimmune diseases as well as an IL-4
antibody drug conjugate for the treatment of immune inflammatory disease. We were awarded several
studies of novel, next-generation molecules, including one that modulates a growth factor for the
treatment of ALS and another that is a tyrosine kinase inhibitor for cancer.
Turning to a few clinical services examples. We saw a large oncology award with one of our full-service
large pharma partners. Let me also highlight an award with a midsized European firm for one of their
newly acquired assets. Based on our level of executive engagement there, we are now entering into a
partnership discussion with them to help encompass their development goals for the next 7 to 10 years.
Outside of oncology, I would also like to call out 2 large Phase III fibrosis awards, which contributed over
$100 million with another one of our large pharma partner accounts. The most important part of what we
do is to delight our customers with delivery. Several oncology programs are achieving milestones faster


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than planned. For instance, we are meeting enrollment targets ahead of schedule in a complex solid tumor
study. We delivered an early database lock in a rare cancer study. Fortrea teams also celebrated with
customers when a promising oncology drug received an FDA approval letter and co-presented data with
customer at ESMO, a major conference that recently took place in Europe.
This quarter, we closed enrollment on a challenging rare disease study, 5 months ahead of schedule. We
delivered a last patient in, 7 months ahead of schedule in a Phase III pediatric metabolic study. Winning in
successful delivery in programs are the keys to growth for Fortrea, and we're prioritizing both. Winning
takes a great team, and we continue to foster and build our magnet talent.
Dr. Jim Bush, who leads our clinical pharmacology physician team was awarded an honorary fellowship
from the prestigious St. George's University of London. Our recently hired Chief Information Security
Officer, Jim Cameli, was just named a Top 100 Global CISO. We are adding a top CNS physician to our
ranks soon.
We've hired Dr. John Doyle, a consulting expert and alumnus of Pfizer to lead our consulting efforts and
help differentiate us. We just hired a recognized expert, artificial intelligence to lead our important efforts
in this space.
Now Jill, please tell us about the numbers, our investments and our plan to improve margins.
JILL MCCONNELL, CFO, FORTREA HOLDINGS INC.: Thank you, Tom, and thank you, everyone,
for joining us today. Our third quarter results are essentially in line with the guidance we provided to you
in August. As Tom mentioned, we had several significant wins in the quarter, which resulted in a book-to-
bill ratio of 1.24x revenue.
As we said in the second quarter call, we are rebuilding our trailing book-to-bill metrics from this quarter
onwards. Our backlog grew 2.2% sequentially, ending the quarter at $7.1 billion under the revised
backlog methodology that we announced with our second quarter results. We are laser-focused on
building on this positive momentum in the fourth quarter and beyond.
Our reported results continue to reflect previously disclosed headwinds as a result of the spin year, namely
the lower full-service clinical sales and cost of the inherited infrastructure. We are actively taking steps to
address both of those, which I will discuss later in my remarks.
Revenues were $776 million in the third quarter, representing a 1.8% increase versus the same period last
year. Clinical Services revenues of $712 million grew 2.1% year-on-year, driven by higher pass-through
revenues, partially offset by lower service fee revenues. The lower service fee revenues were due to
slower than historic ramp-up of a few longer-duration studies, along with the reduced quantity of new
business wins during the past spin year and, to a lesser extent, the remaining headwinds from the
previously disclosed FSP loss.
Enabling Services revenues of nearly $65 million were broadly flat year-on-year, driven by growth in our
Endpoint business and slightly higher pass-through revenue offset by lower call center activity. Revenues
for the 9 months ended September 30, 2023, were $2.33 billion, flat year-on-year. Note that currency was
not a material impact to our results in the third quarter.
Let me provide more detail on our cost base. Direct costs increased 8.8% year-on-year, primarily due to
higher pass-through costs, the addition of transition services agreement costs and personnel costs, partially
offset by the removal of former parent corporate allocations and carve-out adjustments Fortrea received
prior to the spin.


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SG&A was higher year-on-year by 11.6% due to an increase in personnel costs, the addition of transition
services agreement costs, onetime professional fees and credit loss provisions, partially offset by the
removal of former parent corporate allocations and carve-out adjustments Fortrea received prior to the
spin. Net interest expense for the quarter was $34.6 million. We continue to expect full-year interest
expense to total approximately $70 million in 2023, incorporating the change in market expectations for
interest rate fluctuations in the second half of the year.
The effective tax rate was 26.8% for the quarter. We expect the full-year 2023 adjusted effective tax rate
to be between 27% and 30%, which is in line with our previous guidance. Recognizing that there is
opportunity to bring our effective tax rate closer in line with peers, we are undertaking a review of our
structure to ensure it is optimal for our organization. We expect to provide more direction on the benefit
and timing of opportunities to optimize our tax structure, along with our 2024 guidance in the first quarter.
Adjusted EBITDA for the quarter of $70.5 million decreased 33% year-over-year compared to adjusted
EBITDA of $105.2 million in the prior year period. Year-to-date, adjusted EBITDA was $200.1 million,
which decreased 32.2% year-over-year compared to adjusted EBITDA of $295.3 million in the prior year-
to-date period. Adjusted EBITDA margin for the third quarter was 9.1% compared to 13.8% in the prior
year period. Adjusted EBITDA margin in the quarter was negatively impacted by the lower service fee
revenues and higher pass-through revenues along with the higher inherited cost base. Year-to-date,
adjusted EBITDA margin was 8.6% compared to 12.6% in the prior year period.
In the third quarter of 2023, adjusted net income of $21.3 million decreased 73.5% compared to adjusted
net income of $80.3 million in the prior year period. Adjusted net income for both basic and diluted share
for the quarter was $0.24 compared to $0.90 in the prior year period. Year-to-date, adjusted net income of
$107.9 million decreased 51.1% compared to adjusted net income of $220.6 million in the prior year-to-
date period.
Year-to-date, adjusted basic and diluted earnings per share was $1.22 and $1.21, respectively, compared
to $2.48 for both basic and diluted earnings per share in the prior year period.
Turning to customer concentration. Our top 10 customers represented nearly half of our year-to-date
revenue and one customer accounted for 10.2% of revenues. Next, I'll provide an update on cash and
liquidity.
Year-to-date, we generated $155 million in cash flow from operating activities compared to $59.2 million
during the same period last year. Year-to-date, free cash flow was $124.1 million compared to $23.2
million in the same period last year. Cash flows from operations benefited from improvement in unbilled
services and deferred revenue and lower cash used for accrued expenses, including lower incentive
payouts, partially offset by a decrease in net income.
Net accounts receivable and unbilled services were $1.05 billion as of September 30, 2023, compared to
$1.02 billion as of December 31, 2022. Days sales outstanding was 92 days as of September 30, 2023.
This is an increase of 6 days versus the second quarter. The increase is primarily timing related, including
the impact of working through the transition process for items that were previously intercompany
transactions and the remainder is due to us not using the receivables factoring facility in the third quarter.
Over the last 18 months, we have initiated several projects to improve our DSO profile. Because our
contracts provide services over extended periods, we experienced a lag in seeing those changes reflected
in our performance, but expect them to drive reduced DSO over time.
We ended the quarter with a net debt leverage ratio of 4.9x based on trailing 12-months adjusted
EBITDA. As noted previously, our near-term capital allocation priorities are: first, infrastructure


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investments for timely exit of the transition services agreement; second, targeted therapeutic and
technology investments to drive organic growth and net debt repayment. Our target for net debt leverage
ratio continues to be 2.5 to 3x over the medium term.
Moving now to our guidance for 2023. Our revenue guidance has slightly increased compared to what we
shared in August. However, the improvement is largely passed through revenue related. We expect full
year 2023 total revenue in the range of $3.08 billion to $3.13 billion compared to 2022 total revenue of
$3.1 billion. We reaffirm our previously provided full year 2023 adjusted EBITDA guidance range of
$255 million to $285 million. Our guidance assumes foreign exchange rates in effect as of September 30,
2023.
Now I will turn to our transformation efforts as it is important for us to share some of the actions we have
taken and will take to improve our performance over time. First, I will discuss some select organic
investments we must make, and then I'll provide more detail on our margin expansion program.
On investments, we are starting out as a solid competitor today, but we can and need to do more to grow
at or above market rates. We are investing in our relationships with an approach to investigator sites.
Partnering with them to help them deliver research more efficiently. We are investing and partnering in
our data and technology ecosystem in differentiated ways, oftentimes in partnership with recognized
leaders. We also need to make investments in geographic, operational and therapeutic area leadership.
These investments are both in people and in assets. They are also crucial to helping us win the types of
work that are most attractive as a CRO.
Now let me discuss margin expansion in several parts. First, new business mix; second, productivity tools;
and third, SG&A cost reduction.
First, we are laser-focused on selling a mix of work that brings higher value to our customers and
therefore, higher margins for Fortrea. The combination of increased volumes and better mix will improve
operating and overall margins over time.
Second, we will need to make further investments to optimize productivity. Given we recently completed
some investments in clinical pharmacology, we are looking to leverage those with higher occupancy and
throughput. We have good quality management systems in clinical services, but we need further
investment in certain productivity tools that will help us manage our global clinical services workforce of
around 17,000 people more effectively, particularly around Phase II and III studies. We will start these
investments in 2024, and some will continue into 2025.
Third, as previously discussed, we recognize the tremendous opportunity in front of us to reduce our
SG&A costs and bring EBITDA margins closer to peer levels, having been launched as a lift and shift
spin-off. In the third quarter, we embarked on our journey of margin improvement and business
transformation and have identified multiple levers to enhance margins over time. We now have readouts
on how we compare to our peers for each SG&A function as well as more detailed plans for the changes
we can make to improve our SG&A cost as a percent of revenue. The improvements will come in phases
over the next few years as some are heavily dependent upon exit of the TSA agreement.
Now let me give you a sense of timing for these initiatives. 2023 has been focused on setting the margin
improvement road map and taking actions to better leverage our global footprint. Initial actions were
taken towards the end of the third quarter to more appropriately align our cost structure to our existing
revenue profile. Due to the timing of those actions and lower attrition than we had been seeing
historically, there will be limited financial benefit in 2023.


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2024 will build on our growth initiatives and delivering consistent net new business awards to drive
revenue growth as well as exiting the transition services agreement with our former parent company and
beginning the SG&A improvement work. We need to exit the TSAs as soon as possible to avoid
incremental unplanned costs and to improve margins. This is a complex and expensive effort as systems,
infrastructure and processes in many areas remain heavily integrated. We are dependent on support from
our former parent to complete many of the exits. This is a top priority, and we have already exited 28 of
the TSAs. We have built detailed TSA exit plans with the goal of exiting the majority of the TSAs by the
end of 2024.
Throughout the business, we will work to align our SG&A costs with benchmarks. As we have
mentioned, much of this is focused on reducing high costs in IT, but also improving how we use
technology throughout the business. We will benefit from the more modern tools being deployed in our
industry now, along with AI and automation.
As an example, we can improve site selection leading to better patient recruitment by overlaying IT on our
data stack in collaboration with our technology partners. We will soon announce an important advance
alongside one of our key technology partners that illustrates the progress we are making. We are also
addressing costs through taking our delivery centers to the next level, along with better vendor and
facilities management, among other levers.
2025 and beyond will benefit from the reduced cost infrastructure, post the TSA exit along with increased
automation, more efficient resource utilization and moving our SG&A spend closer in line with peer
benchmarks. This transformation will also support our customer offering with productivity and
technology advances contributing to our ability to deliver projects faster and more efficiently.
Let me close with a few last remarks. As evidenced by our strong book-to-bill in the quarter, we are no
longer seeing or hearing concerns from customers about the potential for spin-off disruption. We are
delighted to be an independent organization, and we are excited about the energy and commitment of our
employees. We are confident that we can execute on our plan and capitalize on the unprecedented margin
expansion opportunity ahead of us.
With a proven management team, innovative clinical development solutions and an unwavering
commitment to deliver value to our customers, employees and shareholders. We are firmly on our journey
to establishing Fortrea as the top choice clinical research organization for pharmaceutical, biotech and
medical device companies.
Now I'll turn it back to Tom for the remainder of his remarks.
THOMAS H. PIKE: That's great, Jill. Thank you. We believe that we can be an organic grower based on
the core capabilities that exist here, augmented by select investments in people and assets. If we can exit
the majority of TSAs in 2024 and grow revenues through consistent delivery of industry standard book-to-
bills, at the end of the year, we believe we'll be able to get back to the margins we had in 2022. It will take
a tremendous effort, but we have the right team here to do it.
Our industry is changing and many of our competitors built their systems more than a decade ago, we
have the opportunity to move a generation ahead of them. While there's hard work in front of this team,
there is a real opportunity to improve clinical research and create value for our customers and investors.
I'm encouraged by the feedback from our Fortrea people around the world. We just feel that our first
engagement survey as Fortrea with a focus on culture. We don't have all the data in yet, but early signs are
that our people are highly engaged and excited about taking part in Fortrea. I also want to reemphasize
that I'm so pleased with the customer relationship discussions and opportunities we're being presented
with. We are talking about the future of clinical development in new and exciting ways.


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Last time, I told you that because I know so many CRO customers, investors and analysts, I feel a
personal commitment to make Fortrea successful as a business and as an investment. I still do.
In closing, I want to make a special call out to our employees who are working so hard to transform
Fortrea. In particular, I want to make a special call out to those in areas of the world with political unrest.
The courage, commitment and innovation you have shown has impressed us all, and you've done all that
without missing a beat in delivering for our customers and remaining dedicated to our patient-focused
mission.
On a personal note, my wife and I have had a grim reminder this quarter why we all worked so hard at
clinical research. We lost 2 of our dearest friends, one to ALS, one to esophageal cancer in the past few
weeks, there is essential clinical research work to be done.
Operator, let's open it up for questions.
Questions and Answers
OPERATOR: (Operator Instructions)
The first question comes from Luke Sergott with Barclays.
LUKE ENGLAND SERGOTT, RESEARCH ANALYST, BARCLAYS BANK PLC, RESEARCH
DIVISION: First one here, I guess, Tom, as you guys are looking -- you did this analysis on SG&A and
your peer margin level and you're looking to exit '24 closer to '22 levels. Can you just walk us through
kind of the buckets that you found on SG&A and maybe on the gross margin side, the TSAs, how those
contribute to that 400 basis points? Or how you guys got to those target levels?
THOMAS H. PIKE: Luke, good to hear from you. Let me -- let Jill start on that, and I may have a
comment when she finishes.
JILL MCCONNELL: Yes. Thanks, Luke. So as we've gone through, we have been able to see some
significant margin expansion opportunity with that SG&A benchmarking. Some of that will, however,
require a full exit from the TSAs for some of the groups, as you can imagine, particularly in IT and in
finance. So we will get benefit from some of the reductions and changes that we're making in SG&A.
But I would say in terms of getting to that exit rate at the end of 2024. It would be a combination of
SG&A savings along with benefit from revenue improvement towards the later part of last year, assuming
that we continue to deliver strong book-to-bills like we saw in the third quarter.
THOMAS H. PIKE: And I think, Luke, I'd add to that, that we used a really high-quality organization
who has understanding of the cost structures of CROs individually. So it's not some generalized industry
structure. And so -- clearly, the biggest area here is IT and IT infrastructure. And as Jill said, it's
interrelated with exiting the TSAs as we continue to be on the infrastructure of our former parent
company through 2024.
But we also have some short-term efforts around facilities, some difficult decisions to make there, some
other procurement opportunities. We're looking hard at our delivery center and trying to figure out how
we can optimize that based on what we've seen. So you'll see it emerging as through the year, but
primarily late in the year as we exit the TSAs.
LUKE ENGLAND SERGOTT: Okay. And then this kind of follows up on that. So you guys disclosed the
$30 million that was kind of layered on top of you guys. Do they take -- are they going to take that back?
And then as you guys are building out the infrastructure and the investments for the future growth and to


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get back to these levels? Is there going to be a period where there's like -- there's overlapping costs? I'm
just trying to figure out how that -- the shape of the improvements will look?
THOMAS H. PIKE: Jill, let me try to handle that. LabCorp is a well-managed company. So I don't think
they're going to take anything back. I think the reality is, as the business runner who -- as the guy who
runs this business, I was hoping that more of those numbers would be issues that would not be in our cost
structure. But the reality is the majority of them are.
And so what we've done is we doubled our efforts to make sure that our cost structure is aligned as we
described, we took these near-term actions where we could, recognizing we're actually selling a lot of
business. So you don't want to cut up your nose by face here. But we did take actions already, and then
we'll continue to take them through the year, just to make sure we get this cost structure aligned over time.
OPERATOR: The next question comes from Elizabeth Anderson with Evercore.
ELIZABETH HAMMELL ANDERSON, MD & FUNDAMENTAL RESEARCH ANALYST,
EVERCORE ISI INSTITUTIONAL EQUITIES, RESEARCH DIVISION: So maybe two things. One,
can you give a little bit more color on the overall demand environment? I know we've heard so much
about like pharma restructuring, and so just wanted to understand, obviously, you had very nicely
improved results in the quarter and just sort of trying to tease out what is the macro and what sort of
organic improvement?
And then secondarily, can you give, and about to that, sort of just like how you're seeing trends by maybe
pharma, biotech and any other sort of breakdowns you have with that just in terms of how you're seeing
those end market develop?
THOMAS H. PIKE: Yes. Thank you, Elizabeth. I think -- we continue to see this tremendous innovation
in the industry. I just spoke at a CNS Summit last week, and one of the things I spoke about is how you
take an area like Parkinson's and we now have 15 relatively new mechanisms of actions and therapies that
we didn't have years ago associated with dealing with Parkinson's. And so these are cell therapies, gene
therapies, traditional monoclonal antibodies, even some plasma therapies. So you look at the innovations
and they continue to be coming toward us rapidly, the velocity is only increasing.
On the other hand, there's no question there's some unusual pressures in the market with the Inflation
Reduction Act. And you're seeing some post-COVID-type reductions at certain firms. And so, in general,
the way I think the CROs are feeling about those is that most of the time when there are discontinuities
associated with those types of things, more work comes to CROs because there's pressure on internal
headcount, et cetera, but there's still this very attractive pipeline that needs to get done.
The IRA, in particular, might create more work for us because there's going to be an acceleration of
development of larger cohorts of patients. They're going to try to do indications that have larger cohorts
sooner and so that might create some acceleration for a period of time. Very difficult to predict. Biotech
funding, for us, it's solid. We read the same things that you do. But -- the net of all that, I'm going to go
back, Elizabeth, to what I often say is it seems to depend what you see.
So what we see here is among our larger pharma customers, we don't see a particular slowdown and
among our biotechs, we see an adequate flow of RFPs to give us an attractive mix of business. So based
on our size and what we see, who we interact with, how we're proactive, right now the environment seems
solid. But there's no question, to your point, we have this great time of innovation, but a number of events
taking place that cloud exactly what it looks like across the industry. But for us, what we see looks solid.
Does that help?


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OPERATOR: The next question comes from Patrick Donnelly with Citi.
PATRICK BERNARD DONNELLY, RESEARCH ANALYST, CITIGROUP INC. EXCHANGE
RESEARCH: Tom, maybe a follow-up on that kind of macro backdrop. I guess on the competitive side,
when you guys came out of LabCorp, you cited some disruption and customers not really wanting to deal
with that and kind of waiting you guys out a little bit. It sounds like that's improved. Can you just talk
about if you saw -- you cited a couple of large wins, were any of those competitive with some of the
bigger CRO players?
And then secondarily, just given that you commented on the pass-through impact on the revs, just
wondering if you could frame that piece up on bookings as well? I don't know, maybe 605, 606
equivalent, whatever it may be. Just trying to get a sense for that strong book-to-bill, just what the pass-
through impact was there as well. I appreciate it.
THOMAS H. PIKE: Yes. It's been interesting, Patrick, for us. When we met with you last time in this big
forum, we said we hoped that objections around the spin were behind us. And in fact, we really don't hear
them anymore. It's interesting. This quarter, as the quarter went on, we -- people accept us as an
independent company.
There -- a lot of the uncertainty is out. And so we're really not hearing that objection. Like any company,
we hear other objections, but we don't hear that objection. And so we're really excited about the way we're
being treated and the opportunities in the marketplace.
And so those large wins to your question there, they are competitive with the larger CROs. So the larger
CROs show up in most of our opportunities, I would say a very high percentage of our opportunities were
competing against the larger CROs. So I think they like the accessibility of management. They like some
of the innovation.
I have to tell you, our teams are preparing so well now. They're really thinking carefully about
differentiation. They're thinking about it in broad terms. They're trying to write better executive
summaries. It's actually been quite impressive to work with the teams here and see the evolution that's
taken place.
I'm going to leave Jill, with some of the pass-through specifics. But regarding pass-throughs, it definitely
appears to be an industry trend. You've seen it among our peers. It does seem to be somewhat related to
the inflation happening, associated with sites and then we had a little bit of a mix aspect that's hitting us
recently. Jill, do you want to add just a little bit more on that?
JILL MCCONNELL: Sure, Patrick. So I think in terms of the strength of the bookings, I think you were
implying, was 605 as strong as 606? And I can tell you that it was. We're very focused on making sure
that the service fee revenue is coming through and as we -- and the way that we're incentivizing our
commercial team is ensuring that as well. So what we're seeing is a combination of things, some of it is
the inflationary headwinds that Tom mentioned.
But we also, at this point in time, are just -- happen to have a few studies in our portfolio with heavy
biometrics and some other things that are driving that up. We expect that we'll see some of this increase
going into next year, just given the backdrop that Tom talked about with the inflationary costs, but we
happen to be in a particularly acute phase just based on a few studies right now that are high in biometrics.
OPERATOR: The next question comes from Casey Woodring with JPMorgan.
CASEY RENE WOODRING, RESEARCH ANALYST, JPMORGAN CHASE & CO, RESEARCH
DIVISION: So just following up on the margin cadence that you spoke about to get from this kind of low


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                                Q3 2023 Fortrea Holdings Inc Earnings Call - Final

9% number here in the back half of the year. So that, call it, 13% exiting next year. Can you maybe break
down that progression quantitatively between how much of that expansion will be from the TSA rollout
versus the cost-saving initiatives you called out here today and then top line drop-through?
And then just second, just a follow-up on the bookings numbers. You mentioned you had an attractive
mix of work. Can you just elaborate on that piece? What percent of bookings were full-service versus
FSP? And maybe any other details around that bookings composition that makes the mix attractive in your
view?
THOMAS H. PIKE: I'll do the second one first. I think what -- we were really pleased with this quarter in
terms of full service that it really was -- essentially, we exceeded the proportion of our regular revenues
associated with it. And I can't really tell you too much more than that, but we're really pleased with that
mix. And again, it's a real focus in -- it's very important for a CRO of our size and type of CRO we are to
really try to focus around what we're selling and the quality of what we're selling. So that it turns into
attractive work and attractive margins. So we are very, very focused on it. We can't give you too much
detail on the TSAs and SG&A. But Jill, do you want to take a shot at doing that for Casey?
JILL MCCONNELL: Yes. I think it's building on what I said earlier, Casey, is as we go through the
course of the year, you'll -- obviously, the actions that we're taking take a bit of time to manifest. And
we've got the readouts now. We're starting to do some of that. So you'll see that improving over the course
of the year. We've committed to being on an exit trajectory at the end of next year when we give our
guidance for '24, we'll be able to talk a bit more about exactly how the quarters look. But I think you
would expect to see that coming in, in the back end of next year in terms of getting to that level of
improvement because it will take amount of effort to work through all the different initiatives that we
have underway and to see them actually hit the bottom line.
OPERATOR: The next question comes from Max Smock with William Blair.
MAXWELL ANDREW SMOCK, RESEARCH ANALYST, WILLIAM BLAIR & COMPANY L.L.C.,
RESEARCH DIVISION: Maybe just a quick one here for me on your strategy. I think in the prepared
remarks, you mentioned you're targeting biotech being selective among large pharma. Just wanted to
confirm whether or not this is a change in strategy and how you think about the portion of large pharma
today that's addressable? And how do you think about your opportunity or your ability to compete across
the large pharma more broadly moving forward?
THOMAS H. PIKE: Yes, it's a good question. You picked up a nuance. I think we've actually nuanced our
strategy a little bit that clearly, biotech, for an organization of our size and composition represents a very
attractive opportunity. And so we definitely want to continue to focus there. And that's part of the nuance
that you smartly picked up.
And then with large pharma there probably are certain types of situations, certain types of FSP situations
or others that we may not be interested in. So I do think that there are certain elements of what large
pharma does that I would prefer we focus our resources on other aspects.
Again, it's always funny on these calls because it's somewhat like the timing of the SG&A and timing of
TSAs. We actually have the detailed plans, but we really don't want to get into them in too much detail
because we don't want to, in that case, set an expectation that too early here associated with 2024. We
don't want to give you guidance for 2024. And in the same way, we have to be a little cautious about our
strategy because these are open calls with our competitors.
But suffice to say, we really can serve large pharma very well. And with -- I think some of the strategies
that we're bringing to the table are quite unique about how to do flexible resourcing, how to really tuck


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                                 Q3 2023 Fortrea Holdings Inc Earnings Call - Final

into their strategies for clinical operations and for the product itself. But we're going to do it selectively,
so that we can really focus the right resources on it.
OPERATOR: The next question comes from Derik De Bruin with Bank of America.
DERIK DE BRUIN, MD OF EQUITY RESEARCH, BOFA SECURITIES, RESEARCH DIVISION:
Nice progress on the bookings. There's a pretty big spread in the consensus 2024 EBITDA estimates.
Some estimates are well above, some estimates are well below. I know it's too early to guide, but could
you expect adjusted EBITDA dollars to be up year-over-year versus 2023?
THOMAS H. PIKE: Gosh, we don't -- there's -- it seems like depending exactly how you look at the
numbers, it looks like there's maybe an outlier or two, and most others are actually pretty consolidated
towards the middle. I think at this time, Derik, we -- I'd rather not comment on that. Let's get into 2024
guidance. We -- I think this team has done an excellent job of refocusing the business. And at this point,
Jill has given some comments about 2024 and how we think it's going to roll out. But I'd rather not go
down a level of detail. I hope you don't mind. I just want to be a little cautious on that.
DERIK DE BRUIN: No, fair enough. It's just such a big spread. I just wanted to see if you had any
comment on it, but fair enough, I know it's early. Then switching tacks, how should we sort of think about
backlog conversion rates? I mean most of your peers are in the 9% to 10% range. Is that how we should
sort of think about this going forward for Fortrea?
JILL MCCONNELL: Yes. I think, Derik, that's consistent. We're seeing it settle down a little bit as we get
-- obviously, it's dependent on these new awards, the net new awards that we have coming in, rolling in
and starting to go through. So we expect to see that probably tick up ever so slightly as we get those into
the pipeline.
But as you know, it takes a couple of quarters from the time you win something to really meaningfully see
revenue from it. So we would expect over time -- because obviously, a total backlog conversion is relative
to the way that the methodology is done. But in terms of that, I think we would expect to see that more in
line with peers.
OPERATOR: I show no further questions at this time. I would now like to turn the call back to Tom Pike
for closing remarks.
THOMAS H. PIKE: Thank you. I'll just quickly close. I think we've tried to do what we said we would
do, and that is put our house in order, deliver the business, deliver the new business because it's very
important for us to demonstrate that we're effective in the marketplace. And then we're planning 2024 and
2025. So we appreciate your support, and look forward to seeing you next time. Thank you.
OPERATOR: This concludes today's conference call. Thank you for participating. You may now
disconnect.
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                               Q3 2023 Fortrea Holdings Inc Earnings Call - Final

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Classification
Language: ENGLISH


Publication-Type: Transcript


Transcript: 111323a15769863.763


Subject: COMPANY ACTIVITIES & MANAGEMENT (92%); EQUITY RESEARCH (91%);
BUSINESS NEWS (90%); COMPANY EARNINGS (90%); EQUITIES (90%); EXECUTIVES (90%);
HOLDING COMPANIES (90%); SECURITIES & OTHER INVESTMENTS (89%); TRANSCRIPTS
(78%); LITIGATION (50%)


Company: BARCLAYS PLC (84%); CITIGROUP INC (84%); JPMORGAN CHASE & CO (84%);
WILLIAM BLAIR & CO LLC (71%)


Ticker: BARC (LSE) (84%); 8710 (TSE) (84%); C (BMV) (84%); C (NYSE) (84%); JPM (LSE) (84%);
JPM (NYSE) (84%)


Industry: NAICS522110 COMMERCIAL BANKING (84%); SIC6029 COMMERCIAL BANKS, NEC
(84%); NAICS522210 CREDIT CARD ISSUING (84%); NAICS523150 INVESTMENT BANKING
AND SECURITIES INTERMEDIATION (84%); SIC6211 SECURITY BROKERS, DEALERS, &
FLOTATION COMPANIES (84%); NAICS523999 MISCELLANEOUS FINANCIAL INVESTMENT
ACTIVITIES (84%); NAICS551111 OFFICES OF BANK HOLDING COMPANIES (84%); SIC6022
STATE COMMERCIAL BANKS (84%); SIC6712 OFFICES OF BANK HOLDING COMPANIES
(84%); SIC6282 INVESTMENT ADVICE (71%); CONFERENCE CALLS (91%); EQUITY
RESEARCH (91%); EQUITIES (90%); INVESTOR RELATIONS (90%); ACCOUNTING (89%);
SECURITIES & OTHER INVESTMENTS (89%); METADATA MANAGEMENT (73%)


Load-Date: November 15, 2023


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                          Q3 2023 Fortrea Holdings Inc Earnings Call - Final


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