Fortrea Holdings Inc. Q1 FY2025 earnings call

• Book-to-bill for the quarter was 1.02 times and trailing 12-month was 1.14 times. The pipeline remains solid with wins in various therapeutic areas, such as expanding a Phase 2/3 clinical development partnership and securing wins across multiple therapeutic areas with a large partner. - In the market environment, larger customers' opportunities and spend have remained fairly consistent; biotech sentiment is mixed with some cautiousness due to funding and regulatory factors. - Transformation efforts include focusing on quality, cost structure, operations improvement, and practical innovations. Actions to improve gross margins involve aligning resources, reducing direct costs, and increasing burn rate. SG&A is being transformed to improve service and reduce costs, with AI tools implemented to increase productivity. - Recognitions include cementing a partnership with the Society for Clinical Research Sites and being named a leader for pre- and post-pharmacovigilance operations by Everest Group.

Revenues for the first quarter were $651.3 million, down 1.6% year-on-year. The decline was driven by late-stage clinical service fee new business wins and a slowdown in backlog burn rate, partially offset by increases in service fee and pass-through revenues from the Phase 1 Clinical Pharmacology business. Full-Service Outsourcing comprises the majority of work, with recent successes like completing recruitment for a renal product seven weeks ahead of schedule and accelerating a large cancer study timeline. Clinical Pharmacology occupancy is high, and efforts are focused on optimizing pricing while delivering high quality. FSP has revised management and is looking to drive growth.

Reaffirming 2025 guidance: Targets revenues in the range of $2.45 billion to $2.55 billion and adjusted EBITDA in the range of $170 million to $200 million. Book-to-bill target is 1.2 times over time, but current market uncertainties make it difficult to estimate the remainder of the year's new business wins. Focus is on building the commercial engine to restart revenue growth.

• Market uncertainties including biotech funding slowdown, regulatory changes, and macroeconomic conditions. - Uncertainty in customer decision-making due to current market conditions. - Potential impact of economic and policy uncertainty on new business wins.

Q: David Windley asked about revenue cadence and margin improvement against flat revenue.

A: Jill McConnell responded that first quarter revenue strength was due to stronger pass-throughs in Clinical Pharmacology, but not expecting that to carry through, with service fees in line with forecasts and SG&A improvements phased in Q2 and Q3.

Q: Justin Bowers inquired about Clinical Pharmacology RFP volume and win rates.

A: Tom Pike said Clinical Pharmacology business remains strong, pipeline has returned, and they're working to turn pass-through work into revenue.

Q: Patrick Donnelly asked about bookings backdrop and competition.

A: Tom Pike noted biotech pipelines growing, large pharma opportunities solid, with biotech showing caution on funding and regulatory, and competition somewhat consistent with prior quarters.

Q: Eric Coldwell asked about SG&A expectations.

A: Jill McConnell said expecting marginal SG&A improvement in Q2, more dramatic in Q3 and Q4, targeting $70 million of growth savings in SG&A.

Q: Elizabeth Anderson asked about cash flow improvement and CEO search.

A: Jill McConnell said DSOs expected to come down to low to mid-40s by year end, and Peter Neupert mentioned CEO search is far along with optimistic timeline.

Q: Charles Rhyee asked about biotech funding and bad debt.

A: Tom Pike said biotech is delaying due to funding caution but pipeline sustaining, and Jill McConnell said no spike in bad debt yet.

Q: Luke Sergott asked about burn rate assumptions.

A: Jill McConnell said burn rate expected to be 8-8.5% for the year, with biotech starting more slowly but once running faster than large pharma peers.

Q: Matt Sykes asked about book-to-bill control.

A: Tom Pike said controlling controllables like early engagement and pipeline, with 1.2 times book-to-bill path but macro uncertainties affecting.

Q: Max Smock asked about margin trends.

A: Jill McConnell said gross margin will be choppy, with SG&A savings weighted to second half and $40-50 million net savings targeted.

Q: Michael Ryskin asked about SG&A cost savings timing.

A: Jill McConnell said $150 million gross cost reductions consistent with prior call, $70 million from SG&A and $80 million from operations, with $40-50 million net savings weighted to second half