Fortrea Holdings Inc. Q3 FY2024 earnings call

Fortrea had a solid quarter of execution. They achieved a book-to-bill of 1.23. Closed important projects with larger pharmaceutical customers and had success with biotech clients. The pipeline of opportunities for the next two quarters was solid. Over 90% of servers and application systems had been migrated to the independent Fortrea environment. EBITDA and revenue were in line with expectations. The company uncovered issues to address financial underperformance related to people, process, and technology. Progress was made with large pharmaceutical customers, including winning a significant Phase 3 trial. Biotech companies had strong full-service wins across various therapeutic areas. The clinical pharmacology business had strong bookings. Made progress with productivity and innovative technology projects, showing a roadmap to customers and integrating AI and ML. Customer and net promoter scores improved, and received external recognition with being named finalists in awards.

Revenues for the third quarter of Fortrea were $674.9 million, a decline of 5.4% year-on-year. This decrease was driven by lower service fee and pass-through revenues. Service fee revenue was affected by fewer new business awards in the pre-spin period and the mix of later stage and longer duration studies. Pass-through revenue declined due to the normalization of a biomarker study. Direct costs decreased 6.6% year-over-year, primarily due to lower personnel and pass-through costs, partially offset by increases in stock compensation and professional fees. SG&A was higher by 27.6% year-over-year, mainly due to professional fees, one-time costs from exiting the Transition Services Agreement (TSA), and yield costs from the receivable securitization program. The book-to-bill for the quarter was 1.23x. The backlog stood at around $7.6 billion, which grew 6.2% over the past 12 months. Adjusted EBITDA for the quarter was $64.2 million, a decrease of 5.9% year-on-year but an increase of 16.3% sequentially. Adjusted net income was $20.7 million, up 3% year-on-year. The top 10 customers accounted for 51% of third quarter 2024 revenues, with one customer representing 15.1% of revenues.

Fortrea updated its 2024 revenue guidance to a range of $2.7 billion to $2.725 billion, with the top end reduced due to lower trends and pass-throughs. The adjusted EBITDA guidance range of $220 million to $240 million remained unchanged. Guidance for 2025 would be provided in the first quarter of 2025, focusing on building the backlog and margin expansion. The transition of key internal IT systems and devices in the fourth quarter was noted, with no impact on customer-facing systems.

Uncertainty regarding the timing and impact of TSA exits. Fluctuations in interest rates affecting interest expense. Uncertainty in biotech customer decision-making processes. Potential impact of the funding environment on biotech spending.

Q: Eric Coldwell asked about clinpharm studies and win rates.

A: Tom Pike responded that clinpharm has broad exposure across sophisticated scientific therapies, win rates have increased since the spin, and Net Promoter Scores have improved.

Q: Patrick Donnelly inquired about the bookings environment and margin confidence.

A: Tom Pike stated they feel comfortable with the back half, aiming for a 1.2 book-to-bill average, and Jill McConnell mentioned that 2025 guidance would not be provided yet due to uncertainties in mix and TSA exits.

Q: Justin Bowers asked about the EBITDA bridge and variability.

A: Jill McConnell explained that margin improvements were due to SG&A and cost savings, with variable compensation and project mix impacting variability.

Q: Luke Sergott asked about pricing dynamics and biotech strength.

A: Tom Pike said they price in the market based on capabilities, FSP is competitive but not a current focus, and biotech strength is due to the commercial team's efforts to manage decision processes.

Q: David Windley asked about TSA exits and margin expansion.

A: Jill McConnell clarified that TSA exits are critical but not the sole driver of margin expansion, with new systems and processes needed for long-term improvement.

Q: Elizabeth Anderson asked about TSA exits and biotech decision making.

A: Jill McConnell said TSA exits are critical, and Tom Pike mentioned that biotech decision making is being managed better with a mix of large pharma and improved commercial processes.

Q: Max Smock asked about the pipeline and biotech funding.

A: Tom Pike said they have a rigorous process for the next two quarters, and biotech funding is correlated with interest rates and the regulatory environment.

Q: Will Ortmayer asked about burn rate and mix dynamics.

A: Jill McConnell explained that burn rate is influenced by project mix, with a focus on late-stage clinical and therapeutic balance for margin delivery.