Fortrea Holdings Inc. Q4 FY2024 earnings call

• Strong book-to-bill: Fourth quarter book-to-bill 1.35, 1.2 average since spin, backlog at $7.7 billion.
• Commercial success: Strong new business in CPS, awards in full-service clinical work, biotech sector wins, and Asia Pacific sales. FSP had solid performance with a large customer safety platform launch.
• TSA exit: Successful exit of most TSAs, with Q1 continuing the trend, reducing payments to former parent. System transition included migrating devices, phones, applications, and launching ERP systems.
• NPS improvement: Comprehensive customer relationship feedback program led to significant NPS score improvements.
• Transformation plans: Focus on restarting revenue growth, increasing investment in biotech, SG&A cost reduction initiatives targeting $40-$50M in 2025 savings, and operations optimization for pre-spin and post-spin projects.

In the fourth quarter, revenues were $697 million, down 1.8% year on year. The lack of growth was due to lower late-stage clinical service revenue, partially offset by higher service fee revenues from the Phase I Clinical Pharmacology business. Full-year 2024 revenue was $2,696.4 million, down 5.1% from 2023. The Phase I Clinical Pharmacology unit performed well, but later-stage clinical business was impacted by lower new business awards in the pre-spin period and the mix of later-stage, longer-duration studies. FSP had solid sales but was affected by system transition efforts and holiday periods. The Phase I Clinical Pharmacology contributed positively, while later-stage clinical faced challenges with project lifecycle and new business start-up.

• 2025 revenue target: $2.45 billion to $2.55 billion, adjusted EBITDA $170 million to $200 million.
• Book-to-bill: Target 1.2 times average.
• SG&A savings: Target $40-$50M net savings in 2025 from cost reduction initiatives.
• 2026 modeling: Conservative assumptions with 1.15 times book-to-bill, planning 100 basis points SG&A cost reduction, expecting return to growth in first half of 2026.

• Pre-spin projects: Pre-spin projects have less revenue and profitability than expected for 2025, impacting financial performance.
• Macroeconomic concerns: Uncertainty around macroeconomic environment affecting clinical trial demand.
• Project lifecycle: Later-stage, longer-duration studies and slower-burning projects like oncology and biotech start-ups affect growth and margin expansion.
• Process improvements: Need for continued detailed process and system improvements to align with independent company size.

Q: Patrick Donnelly asked about the trajectory from 2025 to 2026, including identification of pre-spin project issues and confidence in new mix.

A: Tom Pike explained the need for detailed project-by-project analysis to identify pre-spin project issues, surprising slower start of new work, and emphasized dealing with pre-spin portfolio reality.

Q: Justin Bowers asked about cost structure and top-line assumptions.

A: Tom Pike and Jill McConnell discussed mix of large pharma and biotech, burn rate modeling, SG&A cost reduction targets of 80 basis points in 2025 and 100 basis points in 2026, and need for detailed resource alignment.

Q: David Windley inquired about backlog and project burn.

A: Tom Pike and Jill McConnell stated backlog is fine, projects tend to net write-ups and write-offs, and focus on accelerating new work.

Q: Elizabeth Anderson asked about current environment and pricing.

A: Tom Pike said pipeline is solid, cancellation rates not elevated, and industry pressing ahead with biotech and large pharma support.

Q: Luke Sergott asked about analysis catalyst and resource overlap.

A: Tom Pike explained catalyst was revenue shortfall signs, need for detailed project-by-project analysis, and resource optimization across geographies and projects.

Q: Eric Coldwell asked about 2026 margin expectations.

A: Jill McConnell said margin improvement expected in 2026 as new work with better margins accretes, and modeling is conservative but expects improvement.

Q: Max Smock asked about backlog adjustment and pre-spin projects.

A: Tom Pike clarified it's slower burn, not reduction in backlog, due to older projects extending and burning more slowly.

Q: Will Ortmayer asked about OpEx cadence and gross margin.

A: Jill McConnell said margin improvement over the year, with more detail in Q1 earnings as systems are reset and consolidated.

Q: Charles Rhyee asked about pre-spin vs post-spin processes and capacity utilization.

A: Tom Pike and Jill McConnell discussed detailed process changes, capacity management, and SG&A savings considering revenue decline.

Q: Michael Ryskin asked about pre-spin vs post-spin delineation.

A: Tom Pike explained significant process changes with detailed project reviews, approval processes, and hubbing strategies, showing clear difference in management detail.