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Presentation

Fortrea Holdings Inc. misses on earnings expectations. Reported EPS is $0.18 EPS, expectations were $0.36.

Operator: Ladies and gentlemen, thank you for standing by, and welcome to Fortrea Holdings Inc. Fourth Quarter 2024 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker’s presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. 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: Good morning, and thank you for joining Fortrea Holdings Inc.’s Fourth Quarter 2024 earnings conference call. I am Hima Inguva, Head of Investor Relations and Corporate Development at Fortrea Holdings Inc. On the call with me today are our CEO, Tom Pike, and 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 will 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 actual results to differ materially from our current expectations.

We strongly encourage you to review the reports we filed with the SEC regarding these risks and uncertainties, in particular, those that are described in the cautionary statement regarding 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, March 3, 2025, and that we assume no obligation to update the forward-looking statements even if estimates change. During this call, we will also be referring to certain non-GAAP financial measures. These non-GAAP measures are not a substitute for or replacement of the comparable GAAP measures, but we believe these measures help investors gain a more complete understanding of our results.

A reconciliation of such non-GAAP financial measures to the most 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 Pike: Thanks, Hima. Good morning, everyone, and welcome to the call. Today, we are pleased to share Fortrea Holdings Inc.’s fourth quarter results and look forward to what’s ahead in 2025. I’ll start with our commercial success. In the fourth quarter, we delivered a strong book-to-bill of 1.35, resulting in a 1.29 for the second half. Since our spin, our book-to-bill has averaged 1.2 times, which is what we had targeted. Our year-ending backlog has grown to $7.7 billion. We are pleased with the transformation of Fortrea Holdings Inc.’s sales capabilities over this past eight months. We delivered these sales with pricing discipline. Let me provide some color. We saw continued strong new business in our market-leading Phase I Clinical Pharmacology Services business, which we call CPS.

This included significant repeat awards from our largest CPS customer. In fact, the fourth quarter was our most successful quarter ever in CPS sales, where we’ve made major investments in our network of clinics, strengthening our offering and increasing capacity. Beyond CPS, our awards for full-service clinical work from large pharma were also strong, including global oncology studies and a sole source award in gastroenterology. We were also selected as the sole provider for drug safety services by a larger pharma customer with an innovative solution that has an integrated AI tool for literature searches and medical writing to support post-market surveillance. Our success in supporting the biotech sector with full-service solutions also continued apace in the fourth quarter.

We were very strong in biotech oncology wins again this quarter based on our expertise and strong study delivery. Beyond oncology, we won across a broad range of therapeutic areas, from a global Phase II infectious disease study to a sole source win in ophthalmology, an area in which we are building a strong reputation. I’d also like to call out a few other commercial highlights from the quarter. We had good sales in Asia Pacific as customers in this region recognized our capabilities to support them with global programs. For instance, this quarter, wins included a nice global Phase III oncology study and a significant medical device program. We are also pleased to have been selected for a global study led out of Asia Pac as part of a collaboration with a large pharma customer.

Also, our consulting organization is implementing multiple real-world evidence studies in Asia Pacific for a large US-based pharma firm looking to grow their business in the region. We delivered a solid performance in functional service provision, which we call FSP, in the fourth quarter as well. In addition to some solid sales in this part of the business, we helped a large customer complete the launch of a safety platform through a very large FSP effort that we will now continue to operate. This implementation was the culmination of almost 24 months of work integrating 11 complex systems and more than 80,000 product licenses, migrating about 3 million cases. Our safety and IT teams collaborated with the customer to deliver the platform ahead of schedule.

It’s a demonstration of Fortrea Holdings Inc.’s capabilities applied to a complex situation for a customer. Our consulting group continues to grow, developing real productivity solutions for the industry, and providing customers with science-based strategy from clinical development planning and regulatory strategy to real-world evidence solutions. For example, our team delivered qualitative and quantitative research studies to support FDA acceptance of clinical outcomes assessment endpoint measures and incorporated the novel measures into two sNDA filings with one approval so far for a biotech customer. Our improving clinical pharmacology and later-stage full-service outsourcing delivery is contributing to our strong book-to-bill, but it’s not the only place we’re seeing the improvements manifest.

One of the first things we established after the spin was a comprehensive customer relationship feedback program, including a net promoter score or NPS measurement system. I’m pleased to share that our NPS scores have significantly improved over the year. We believe that we’re creating a better customer experience working with Fortrea Holdings Inc. as well as understanding additional improvements that we can make. Another highlight worth noting from the fourth quarter is the successful exit of most of the transition service agreement or TSA with our former parent. That success has continued in Q1, and after this quarter, we expect payments to our former parent to be a fraction of what they were. Our team has delivered. It was no small feat, for example, to transition to the new Fortrea Holdings Inc.

digital environment. We migrated 17,000 devices, 8,000 mobile phones, 500 applications, finished building 1,600 servers, as well as the launch for HR ERP on December 16th and launch for our finance ERP platform on January 2nd. I want to commend both the Fortrea Holdings Inc. team and our effective teaming with technology partners to deliver these incredible results. Now, let me transition from customer successes. In both CROs I’ve run, I viewed the most important leading metric to be book-to-bill. Certainly proud that our average book-to-bill is 1.2 times since spin, and it bodes well for the future. However, let me discuss the big issue here. Our targeted revenue and adjusted EBITDA trajectories for 2025 are not in line with our prior expectations.

Let me remind you, this spin was lift and shift. We’ve been using the same management processes and systems that a division of a much larger company used, ideally waiting to update them until we convert them to our own environment. As we implemented our environment in connection with exiting the TSAs, we did a deeper analysis of full-service projects and other inputs to longer-term forecasts. Given this analysis, we have a better picture of the revenues, costs, margins, and timing on the full-service work for projects from the pre-spin period, and we understand that they represent a bigger slice of the pie in 2025. This analysis, which also took significant time to confirm, indicated that the pre-spin projects, many late in their lifecycle, have less revenue and less profitability than expected for 2025.

The strong book-to-bills since spin are creating work that’s sold and delivered at good margins. This post-spin work is not coming on fast enough to offset the pre-spin contract economics. This older versus newer mix issue will continue to negatively impact our financial performance during 2025 until revenue from our new business wins becomes a larger portion of the mix. We’re implementing new management systems and processes that are sized with details and granularity appropriate for an independent company of our size. They will enable us to align our resources to the work we need to do to complete trials more efficiently and profitably. Marcus Aurelius, the stoic and Roman emperor, championed the idea of something called Amor Fati, which means embrace your difficulties as part of your journey.

That is what we have to do here at Fortrea Holdings Inc. We keep moving forward. Now let me hand over to Jill McConnell.

Jill McConnell: Thank you, Tom. Thank you to everyone for joining us today. As a reminder, all my remarks relate to continuing operations following the divestiture of our enabling services businesses last year, unless I note otherwise. I want to acknowledge that this period with limited communication to the external investment community has been challenging. As we got later into the fourth quarter, we realized that we needed to do significantly more analysis along a number of dimensions before continuing to communicate. It was important that we had the full picture of 2024 results, including ensuring that TSA services exit, and strong book-to-bill were delivered and understanding where we might be falling short. We used this quiet period to interrogate our expectations for 2025 guidance and to ensure we had transformation programs underway so that we could provide the detail and transparency we are sharing today.

In my remarks, I will focus on the details of our 2024 results, our 2025 guidance, including the actions we have taken and will continue to take to reduce costs, and our outlook for the medium term. I will also discuss our transformation plans in detail so you understand how we plan to track our progress against them. As Tom shared, we had some very compelling successes in 2024. In addition to what he shared, recall that we sold two non-core businesses and paid down debt, reducing our annual interest expense. We also reduced our DSO 60% versus last year. I’m incredibly proud of our teams for the on-time launch of our stand-alone HR system and our finance ERP, and also for their efforts to enhance our internal control environment, which resulted in a successful remediation of the material weaknesses identified last spring.

Now I’ll cover the financial results. For the fourth quarter, revenues of $697 million declined 1.8% year on year. The lack of growth versus the prior year was driven by lower late-stage clinical service revenue, partially offset by higher service fee revenues from our Phase I Clinical Pharmacology business. Our Phase I Clinical Pharmacology unit has continued to perform well. Our later-stage clinical business is performing well for customers, as evidenced by their higher NPS ratings. However, service revenue declined based on a combination of factors, including lower new business awards in the pre-spin period, along with the mix of later in their lifecycle and longer duration studies in our backlog, including slower burning studies such as oncology, which have continued to be a significant part of our portfolio.

The fourth quarter was also negatively impacted by the effort associated with the system transition to exit the TSA services, along with a more pronounced impact of the holiday period compared to historical experience. Pass-throughs as a percentage of total service fee revenue have remained generally consistent year over year. Full-year 2024 revenue of $2,696.4 million was broadly in line with our guidance range, decreased 5.1% compared to revenue of $2,842.5 million for full-year 2023. On a GAAP basis, direct costs in the quarter decreased 3.8% year over year, primarily due to lower personnel costs as a result of restructuring actions. These savings were partially offset by an increase in professional fees and stock-based compensation, as well as targeted hiring where necessary to support specific needs.

SG&A in the quarter was higher year over year by 6.9%, primarily due to an increase in professional fees, and incremental one-time costs incurred for exiting the TSA services, along with the yield costs related to the receivable securitization program we initiated in the second quarter of last year. If you exclude the impact of one-time costs related to the spin, as well as the impact of the yield cost, underlying SG&A as a percent of revenue was broadly consistent with the previous two quarters. Net interest expense for the quarter was $21.9 million, a decrease of $12.6 million versus the prior year, primarily due to the $475 million in debt pay down across our term loan A and term loan B that were made in June 2024. When combined with our securitization program, interest and securitization costs for the fourth quarter were down approximately 22% compared to the fourth quarter of 2023.

Turning to our tax rate, the effective tax rate for continuing operations for the quarter was a benefit of 1.2%. The rate was negatively impacted by withholding taxes on our 2024 non-US earnings that we asserted are not permanently reinvested and an additional valuation allowance against our deferred tax asset. Our book-to-bill for the quarter was 1.35 times, and for the trailing twelve months was 1.16 times. Our backlog is at around $7.7 billion and has grown 4.2% over the past twelve months. Adjusted EBITDA for the quarter was $56 million compared to adjusted EBITDA of $58.9 million in the prior year period. Adjusted EBITDA for full-year 2024 was $202.5 million compared to adjusted EBITDA of $245.8 million for full-year 2023. Adjusted EBITDA margin for full-year 2024 was 7.5% compared to 8.6% for full-year 2023.

Adjusted EBITDA margin was negatively impacted by the lower late-stage clinical service fee revenues along with higher SG&A costs post-spin to support operations as a public company following the separation from our former parent. These were partially offset by the benefit from the restructuring program we initiated in the third quarter of 2023, which continued through 2024. Now we’ll move to net income and adjusted net income. In the fourth quarter of 2024, net loss was $73.9 million compared to a net loss of $48.6 million in the prior year period. Full-year 2024 net loss was $271.5 million compared to a net loss of $31.7 million for full-year 2023. In the fourth quarter of 2024, adjusted net income was $16.6 million compared to adjusted net income of $12.7 million in the prior year period.

Full-year 2024 adjusted net income was $30.1 million compared to adjusted net income of $111.9 million for full-year 2023. For the current quarter, adjusted basic earnings per share was $0.34 and adjusted diluted earnings per share was $0.33. Earnings to customer concentration, our top ten customers represented 53% of 2024 revenue. Our two largest customers accounted for 14.3% and 10.5% of revenues, respectively. As I comment on cash flow, note this relates to Fortrea Holdings Inc. in total as we have not segregated cash flows from discontinued operations. For the twelve months ended December 31, 2024, we reported $262.8 million in cash flow from operating activities compared to $168.4 million generated in the prior year. Cash flow for the full year benefited from the initial sale of receivables under the securitization facility in the second quarter and an increase in unearned revenue, as well as strong cash collections partially offset by the decrease in net income.

Free cash flow was $237.3 million compared to $128.1 million in 2023. Net accounts receivable and unbilled services for continuing operations were $659.5 million as of December 31, 2024, compared to $988.5 million as of December 31, 2023. Day sales outstanding from continuing operations was 40 days as of December 31, 2024, ten days lower than September 30, 2024, and considerably lower than the equivalent of roughly 100 days at 2023 year-end. The reduction versus the third quarter is due to our focus on billing and collection processes along with our efforts to enhance our contracting terms. We are compliant with the financial maintenance covenants of our credit agreement as of the end of the quarter. We ended the quarter with more than half a billion dollars of liquidity.

Although we expect to remain compliant with our debt covenants going forward, in order to provide more flexibility, we renegotiated our net debt leverage ratio to provide more certainty through the fourth quarter of 2026. The maximum leverage ratio was increased from 5.3 times to 6.0 times for the four quarters beginning with Q3 2025, stepping down in both the third and fourth quarters of 2026, and reverting to 5.3 times afterwards. With our TSA services exits largely behind us, we plan to focus our capital allocation priorities on targeted investments to drive organic growth and improve productivity along with debt repayment. Now turning to 2025 guidance. Using exchange rates in effect on December 31, 2024, we target our revenues to be in the range of $2.45 billion to $2.55 billion and our adjusted EBITDA to be in the range of $170 million to $200 million.

Note that due to the nature of where revenue is contracted versus our global employee footprint, using December 31, 2024 exchange rates provides a headwind to revenue and a tailwind to our cost base. The lower revenue targets year on year are driven by our project mix, which is burning more slowly due to the pre-spin awards moving through the later stages of their lifecycle and our therapeutic mix, with a significant portion of oncology which burns more slowly than other therapeutic areas. The post-spin portfolio is also impacted by slower start-up in biotech projects and the soft first-half bookings in 2024. The lower margin targets are driven by the inefficiencies in the pre-spin portfolio and the inherited SG&A costs that we are actively working to reduce.

Many of the pre-spin projects are extended in duration and are well into their lifecycle, as Tom described, both of which create headwinds to growth and margin expansion in 2025. Now I’ll discuss our robust transformation plans for 2025 and beyond. We believe the key to our transformation is restarting revenue growth, which is why we are laser-focused on continuing to build on the success of our commercial engine. To date, we’ve made good progress, delivering strong book-to-bills in the second half of both 2023 and 2024, and have delivered a solid 1.2 times average in the six quarters since the spin. We continue to see an attractive pipeline of opportunities in all phases of clinical work, both full-service and FSP, and we believe we are well-positioned to capitalize on this.

We plan to increase our investment in biotech in 2025. Overall, we have about a 50/50 split between large pharma and biotech customers, and we believe it is a competitive strength. For 2025, we continue to target achieving a 1.2 times average book-to-bill. Turning to our savings program, we’ve spoken previously about needing to bring our SG&A cost more in line with peers over time. Now that we are essentially exited from the TSA services with our former parent and are operating in our own enterprise system, we have initiated transformation programs to reduce personnel costs, consolidate IT applications and licensing expenses, and to further optimize our facilities footprint and our third-party vendor spend. We target year-on-year net savings of $40 to $50 million in 2025 from these initiatives.

This is included in our guidance, with the benefits increasing over the course of the year. And you should see a year-over-year reduction in total underlying SG&A spend. We expect these programs will extend into 2026 as we continue our efforts to bring our SG&A spend more in line with peers. Note that since the spin, and separate from the divestitures, we have reduced more than 1,400 positions across our operations and SG&A teams in an effort to better align our cost base with our revenue profile. That journey is continuing. And we took a charge of $21.3 million to our P&L in the fourth quarter to recognize the additional restructuring programs we’ve already kicked off for 2025. It is important to understand that since the spin, we have not had the impact of incentive compensation in our results due to our financial performance.

We are restarting these programs for 2025, so we anticipate these programs to be a headwind compared to prior years. Regarding our operations optimization, we’re looking at our projects as two categories: pre-spin awards and post-spin awards. With our pre-spin projects, we will continue to work on having an optimized level of resourcing and utilization and ensure we are compensated for the scope of work that we perform. Our goal is to see the pre-spin projects through to completion as efficiently as possible. At the present time, they are the vast majority of our later-stage full-service clinical revenue. We have included some operations restructuring in our 2025 guidance and will continue to seek opportunities for further optimization. Our post-spin projects are performing well, and we will continue to look for opportunities to accelerate delivery.

Post-spin projects only represent a small percentage of our full-service clinical revenue, less than we expected at this point. They will grow as a proportion of revenue over time, but we don’t expect them to become a majority of our later-stage full-service clinical revenue until the second half of 2026. In order for you to follow our progress, we intend to discuss each quarter how these post-spin projects are becoming a larger percentage of our later-stage full-service clinical revenue over time. Because our 2025 guidance is not in line with what we expected a few months ago, I’ll now share our current view of modeling for 2026. First, we prepared multiple years of project-by-project forecasts at a level more detailed than ever done previously.

We analyzed and adjusted other assumptions, including that the level of change orders and cancellation rates remain in line with our historic norm and current experience. For net new business assumptions, we used a more conservative 1.15 times for our modeling. We applied a burn rate assumption similar to what we have experienced since spin. We’re planning for another 100 basis points of reduction in SG&A costs in 2026. With these parameters, our modeling anticipates a return to growth in the first half of 2026. Before I conclude, I want to take a moment to recognize the incredible hard work by Fortrea Holdings Inc. employees to deliver strong book-to-bills and results for customers and to exit our TSA services and streamline our infrastructure.

We’ve shown this organization can accomplish difficult things. There is still work to be done, but we have put in place the building blocks to create long-term value for all our stakeholders. With the solid foundation we have laid in the past year, an attractive backlog of nearly $7.7 billion, and our talented global team, we are committed to delighting our customers and returning to growth and margin expansion. Now, I’ll turn it back to Tom for the remainder of his remarks.

Tom Pike: Thanks, Jill. Ultimately, our vision is to be the best choice CRO company that moves at the speed of science, listens intently to customers, and delivers with precision. While 2025 will continue to be a period of transition, the long-term trajectory is clear. We believe that we can master agility, scientific excellence, and customer-focused execution to define the next era of CROs. By embracing this mindset, we are positioning ourselves not just to compete but to lead. Now regarding shareholder value creation, I’m not satisfied with where things stand, and we’re reviewing additional opportunities for growth, cost reduction, and shareholder return. I’m still bullish on the CRO industry and Fortrea Holdings Inc.’s role in it.

The future of clinical research is being shaped through rapid advances in science and biology, evolving regulatory landscapes, and increasingly the transformative potential of AI. We believe the clinical research industry will grow, and CROs will be a key part of it. Here, as Jill said, our pipeline is solid, we’ve demonstrated we can sell. We can also deliver sophisticated solutions for customers and are supporting leading-edge science that promises significant advances for patients. For instance, we’re proud to be working with several biotechs who are developing silencing RNAs to treat a variety of cardiovascular diseases, including hyperlipidemia and thrombolytic disease. New drugs can be administered as little as once every six months, significantly reducing patient burden and improving compliance.

CAR T therapies are the most common pipeline technology for genetically modified cell therapies, and Fortrea Holdings Inc. is one of the very few CROs that has ever successfully brought a CAR T from first-in-human to market access. A new trend with CAR Ts is the treatment of autoimmune diseases, and Fortrea Holdings Inc. is there. The clinical research industry needs to evolve. Success will depend on our ability to be both agile and disciplined, more flexible in how we design and execute trials, upholding ethical and regulatory standards while running a good business. The intelligence revolution, or IR, is upon us. Technology, particularly AI, will revolutionize clinical research over time, but we believe the greatest impact will come from combining these innovations with deep operational, therapeutic, and regulatory expertise.

Our role is not simply to manage studies but to bring intelligence, productivity, flexibility, and problem-solving capabilities to every trial we conduct. Fortrea Holdings Inc. is pushing ahead in a focused way on AI. We examined 185 use cases last year. We have specific initiatives coming from that, such as to further enable our accelerate platform, as well as democratizing AI, which means cost-effectively rolling it out broadly to our people for productivity, and more. We believe we can transform Fortrea Holdings Inc. for this future. In the past year and a half, we demonstrated improvements in customer satisfaction and quality, all the while conducting an enormous transition as a spin-out. Over the coming months, you will see this energy directed toward transforming for the future.

I’ll close by recognizing the incredible efforts of our team at Fortrea Holdings Inc. We have tremendous therapeutic, regulatory, and operational experts across the globe. Their dedication and hard work have been instrumental in driving our success and positioning us for a bright future. Driven by our purpose of delivering solutions that bring life-changing treatments to patients faster, our team is ready to accelerate. Stay tuned. Now let’s turn to our operator to begin Q&A.

Operator: To ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. The first question will come from Patrick Donnelly with Citi. Your line is now open.

Patrick Donnelly: Hey, guys. Thanks for taking the question. Tom, maybe one for you just on kind of the trajectory here, 2025 into 2026. You know, it sounds like you’re citing kind of this pre-spin projects that were, you know, less revenue, less cost, less profitability, this old versus new mix issue, with a return to growth in 2026. I guess, can you just talk about, you know, the process to identify that? Why it took so long to kind of identify what was going on and, again, that that was gonna really weigh down 2025. Was this just getting contracts done before the spin and, you know, the financials got a little bit loose? And I guess on the back of that, just the confidence in the trajectory of the new mix, you know, picking things up as we work our way into 2026.

Tom Pike: Yeah. Thanks, Patrick. Yeah. As I said, you know, you try to use the existing process. You can’t change everything. You think about it, when you do a spin, you have some things you’re trying to proactively manage, like TSAs. You’re trying to, you know, in our case, we had to really redesign the commercial function and make it much more effective. So you have these proactive things. And then you have reactive things along the way. And what we determined here is that, really, the systems and processes associated with forecasting needed to get to a much more detailed level for us to have confidence in 2025. We had some signs of this. But you can imagine, to deliver this kind of guidance, we really had to do a lot of confirmation.

There was an initial pass at it. And then much more detailed analysis project by project, as Jill described in her remarks as well. And the result of that, which really took a couple of months to complete, is what you see here. Now, you know, nobody wants to bring this kind of news. As a shareholder myself, I don’t want to bring this kind of news. But we think we need to deal with the reality of this pre-spin portfolio and put it out there. I’d say the other thing, Patrick, that did surprise us in this analysis is that the newer work, the good work we’ve sold, which is being delivered at original deal economics as we call it, is starting more slowly than I would have expected. And we think some of that is our heavy mix of biotech that we have.

Whereas you’ve heard from us and some of our peers, there is a longer process for startup in many cases. And then in addition, you know, there is quite a bit of oncology, as you heard in my examples. We do a lot of excellent oncology work here, and it does burn a little slower. So all of that took a few months, frankly, to identify, analyze, confirm, go through the forecast, every element, change orders, you know, forecast, etcetera, to sort out because we didn’t want to bring this kind of news lightly. And we needed to make sure that we were confident in the underlying assumptions.

Patrick Donnelly: Then you mentioned, you know, there at the end, Tom, just the shareholder return opportunity. You know, stock below ten bucks this morning. I would love to just kind of pull the curtain back a little bit there. What you see is a reasonable path forward here, what are the focus points, and what can you guys do to unlock a little more value there?

Tom Pike: Yeah. A few things. You know, these bookings, I believe, led our industry in the third and fourth quarter. So the company is demonstrating that it does very good work for customers. And I tried to give you guys a sense of that. I know that’s a lot of detail for a call with our analysts and investors, but I would try to give you a sense that we do very good work and our work is improving and it’s well-received by customers. That’s the number one thing. What Jill was describing in her remarks too is we continue to really have a couple of very focused programs. One is growing the stuff that we can grow, like the clinical pharmacology business, continuing to grow that. Really looking hard at growing FSP this year. And continuing to focus on full-service outsourcing.

But at the same time, it is transforming our SG&A, and you heard that remark about the $40 to $50 million improvement that we’re looking for associated with it. And then, frankly, continuing to transform our operations in full service. With this more detailed information, we think we can align resourcing more effectively. You know, we’ve given you a sense through these numbers of what we believe is clear, but we’re gonna continue to work on optimizing how we deliver to make sure we’re delivering with quality, and meeting customer expectations or exceeding them, but also doing it cost-efficiently. So we’re gonna have those two programs very heavily. I should also mention that we also have one in the IT area. IT is very interesting because we know it’s transformative in AI.

But we also know that we have to deal with application rationalization and tech debt that we’ve got here from the prior decade. And so we have a very strong executive there who’s driving improvements in that area too.

Patrick Donnelly: And Patrick, anything else?

Tom Pike: Okay.

Patrick Donnelly: Alright. Thank you, Patrick.

Operator: And the next question comes from Justin Bowers with Deutsche Bank. Your line is open.

Justin Bowers: Hi. Good morning, everyone. Just trying to help understand the cost structure a little better, and then the top-line assumptions as well in the guide. So you talked about going into 2026 with a burn rate that’s consistent with historical patterns, but it looks like, you know, when the revenue step down, that implies something around an 8% burn rate, which would be, you know, over a hundred basis point contraction year over year. So is that sort of the right ballpark for how we should be thinking about 2025? And then just want to confirm that, you know, it sounded like earlier in 2024, you talked about a lot of the opportunities being with large pharma. And, Tom, you also just, you know, mentioned some of the focus on FSP as well. So really just want to understand sort of the execution there and the opportunities that you’re seeing in 2025, how that plays into the burn rate, and then I’ll come back with part two on the cost structure.

Tom Pike: Why don’t I start with that part? If you don’t mind, Justin? Well, in terms of the mix, we’re still about 50/50, and we like that mix. So we’ve been pretty successful with biotech. You guys might recall that we talked about how in the third quarter and fourth quarter, we had the more balanced exposure in terms of the bookings to those two areas, the large and then the biotechs. And we did deliver with that. As you look forward, we actually have a good pipeline now. And, you know, I think we’ve learned in this business not to try to overcommit at this point in the process, but it continues to be this nice mixture of large pharma and biotech. You can hear from the examples that we’re doing a lot of the most innovative work with biotechs.

I will say before Jill comments on the burn rate, that, you know, this is a very detailed analysis project by project. And many of these projects that we have are late in their lifecycle. And what that means, if you think about it with percentage complete accounting, and I hate to get into a detail here, but with percentage complete accounting, even if you lower the cost of execution, late in the trial, it’s still very difficult to improve the margins of that trial when most of the hours have been expended. And so what it’s got us in a situation of is working through almost an air pocket here, of things that are later in later stages, difficult to do much with, in many cases, don’t have the kind of profitability that we would like to see, and then we replace them with new work, but that new work has to come on calling.

And so that’s what you’re seeing in 2025. And, Jill, I don’t know if you’d comment on the burn rate here.

Jill McConnell: Yeah. I think, you know, we’ve tried, we’ve seen the burn rate. Our second half, you may recall from previous remarks, they said we did benefit some from clinical pharmacology business, which burns faster just based on the nature of those studies. Obviously, FSP comes in more quickly. But when we looked at this portfolio and really dug in, we did try to be, as you heard me say, we modeled a 1.15 even though we’ve done better than that on average since the spin. We wanted to be slightly more conservative. And, you know, we will be doing everything we can to try to see how we can improve those rates and be more efficient and optimize, as I mentioned, as Tom has talked about as well. But for now, that’s probably an appropriate way to model.

Justin Bowers: Okay. And maybe just I’ll be quick here on this one, but can you provide us with just sort of, like, ranges in terms of ratios for cost of services and SG&A in 2025?

Jill McConnell: So in 2025, we’re looking to take out 80 basis points as a percent of revenue based on the guidance that we provided. And then, as I said, we’re looking to take out another 100 basis points in 2026 as we go forward.

Justin Bowers: For SG&A?

Jill McConnell: For SG&A, yes.

Justin Bowers: Okay. Gross margin?

Tom Pike: You know, it’s clear to us, Justin, for gross margin, we need to continue to take action to, you know, you’re really seeing that as the overall EBITDA margin at this point, but it’s clear to us that we need to continue to be more cost-effective in that area and match resources to work in a very detailed way.

Justin Bowers: Okay. Thank you, Jill and Tom, and I’ll jump back in queue.

Operator: Thank you, Justin. And we do ask that everyone ask one question, and then please queue back up for a follow-up question to give everyone a chance to ask questions. And the next question will come from David Windley with Jefferies. Your line is now open.

David Windley: Hi. Good morning. Thanks for taking my questions. Appreciate the detail this morning. I wanted to kind of wrap a couple together that have already been asked, but around kind of thinking about burn rate, book-to-bill, and the level of backlog. So as Justin said, it does calculate to a burn rate that seems to drop about 100 basis points or maybe a little more, maybe 125. And hearing you describe that projects are kind of near the end of their lifecycle and not going to be as revenue in 2025 as maybe you’ve previously expected. I guess what I would expect to see from that is kind of a cleanout of backlog, maybe some dead backlog in there that’s not going to be productive or trials that were reduced in size and need to be down-scoped, and I don’t see that.

I mean, it looks like, you know, to get the burn rate to stay in approximately the right, you know, or not the right, but the same level that it was in 2024 would be about a billion-dollar, $900 million reduction in backlog. And so absent that, Tom, on your percent of completion comment, I would expect if that backlog still stays in, you would have positive true-ups at the end of trials that would actually help margin. So the punchline here is it seems like a missing link is either you’ve got projects at risk that you’re delivering on time on schedule that you could recognize favorably as they wrap up early, or you still have a big backlog cleanup that needs to happen. Which one is it, please? Thanks.

Tom Pike: Well, I’ll start. You may be able to tell that Jill’s a little under the weather today. So, you know, I’ll start and then you can add to this, Jill. Now with respect to the dead backlog, we actually went through analysis this quarter to try to look at stuff in the backlog, and there was really the backlog is substantially fine the way it is. I do think it’s possible that there are sometimes write-ups at the end of projects. But here, I think you, you know, you actually get both kinds from what I’ve seen here, Dave. You get some write-ups and some write-offs at the end, and they’re tending to net here in general. So it is a little different than in some places. So it’s a good detailed comment, but here, they’re tending to net.

And as they get long in life, you know, they tend to operate at lower margins. And then at the very end, they have a bump in activity associated with closing them out. And so we’ve done the best of our ability to try to estimate that for 2025. And this is what we see right now. In terms of backlog burn, yeah, I don’t, you know, as a public company, we can’t arbitrarily go and chop some of the backlog out to make those burn rates work. I think we just need to do our best to burn those off. They’re important projects for customers. And we need to finish them out. And then what we need to work on is really trying to accelerate the new work and, frankly, trying to accelerate the existing work during the course of this year because that’s good for everybody.

And so at this point, you know, the numbers are the numbers. You can hear we’ve worked on them for a long time. We’ve done more detail than ever before. And have programs in place to be effective. But this is our best judgment at this point. I do think there’s upside as we get into 2026 and you start seeing the new work come into the portfolio. And, you know, it should be a consideration. I’m sure we’ll talk about it in later calls. It should be a consideration around Fortrea Holdings Inc.

David Windley: I was pausing to see if Jill was gonna add it.

Jill McConnell: No. I mean, I think, you know, as we, as Tom said, we spent a huge amount of time trying to go through. We did go back and revalidate the backlog. We looked at our cancellation rates because a number of our peers have talked about those increasing. We have not seen that. They’ve stayed in line with our historic norms. So we believe the backlog as we’ve presented it is appropriate.

Tom Pike: Okay. Dave, I guess you could jump back in queue the way we’re doing this, but thank you for the question.

Operator: And our next question comes from Elizabeth Anderson with Evercore. Your line is open.

Elizabeth Anderson: Hi, guys. Thanks so much for the question. Can you talk about the current environment? I mean, there still remain some concerns about pricing in terms of demand. You have some, and then in terms of, like, also cancellations, you know, some of your peers have obviously called that out. So could you help us level set on that? I hear what you’re saying, obviously, about the change in forecast about sort of late-burning projects this would be applicable to, but it’d just be helpful to understand a little bit more in detail about where you’re seeing in the current environment in the first quarter.

Tom Pike: Thanks. Hey, Elizabeth. You know, it’s what I would say is substantially similar to what we’ve communicated in the last call, and that’s that we do have a good amount of opportunities both in large pharma and biotech. Our cancellation rates based on who we’re exposed to are not elevated. So I did see that in some of the others, but our cancellations are not elevated based on that. And the current environment, you know, I think the honest thing is we’re all a little nervous about the macros with everything going on, whether you’re shopping at Walmart or you’re thinking about your next clinical trial. But the industry seems to be pressing ahead. And right now, I think there’s a belief that biotech and yours will be supported, and so there’s a belief we’ll continue if we’ll continue to have, you know, opportunities there.

And then our large pharma partners, we chat about it as we’re preparing for this call, and we’re not seeing anything new associated with IRA. We’re not seeing any particular portfolio restructuring. So it seems like people are just pressing ahead. So, you know, our pipeline’s solid. It still takes, you know, every quarter, you know, in this business, as long as I’ve been doing it, you know, you never, it’s never over till it’s over, as Yogi would say. But our pipeline is solid as we look out to the future here. Thank you.

Operator: And our next question will come from Luke Sergott with Barclays. Your line is open.

Luke Sergott: Hey, guys. Thanks for the question. So I just want to talk about the analysis on the background. Like, what was the catalyst that tripped, you know, your controls that made you do the analysis and give us a sense of the timing on that? And then as you’re thinking about the mix shift into the from legacy to newer work, talk about kind of the resource overlap that you guys have because there’s, you know, there’ll be a concern if we’re taking an extra 80 bps of revenue out from SG&A this year, you know, and how that coincides with the new business that you’ve been winning, you know, that you might not have as much, you know, firepower to get those projects up and running as quickly as you could.

Tom Pike: Thanks for the question. You know, the catalyst was as we were preparing for the 2025 budgets, we started to see some signs that made us want to go deeper in terms of the analysis. And those kinds of signs were, you know, potential revenue shortfalls coming through in certain areas. And so, you know, when you see that kind of thing, you can’t take it at face value. And what we knew about the company was that, like many CROs, but not all of them, projects were estimated out into the future but not always in a detailed fashion. And we’ve talked in prior calls that there really are not the project management systems and resource management systems here that you see in some other companies. And so we knew this, and as we were looking, you know, last year, and then coming into this year, we really had to go deep.

And to your point about the old versus new and new work versus old, one of my biggest concerns is that we don’t want to turn around and actually slow down revenue because we don’t have the resources. We are a business that bills on an hour basis and on a head basis based on the work that people do. And so one of the things the team did, it was really a dual effort to try to make sure we had what we, you know, felt was a pretty accurate forecast, but also the operations team is working to really look out month by month, geography by geography, project by project, therapeutic area by therapeutic area, because to some degree, you need to know the sites that people actually operate at, and to try to optimize the resources so that, you know, if it’s a longer span of time, we might do a reduction, but if it’s a shorter span of time, we may have to hold the resource because it’s the better economic approach.

So I share that detail with you, Luke, because I just want to give you a sense that I have to credit our operations team, and under this adversity, they’re trying to get incredibly detailed about demand coming in, very much like a manufacturing environment where you look at inbound demand, and then also, how do they optimize that resource as there’s flow up and down at the sites that we have and then the geographies that we have. So I’m hopeful that we’re going to optimize it, but it is going to be something that we’re going to concentrate on every month, and actually, teams would be doing every day, but we’re going to look at every month to try to make sure we’re optimized. And if we can find more, we will. You might have heard my comment in there that I’m looking at further areas for revenue generation, cost reduction, and other shareholder value creation opportunities.

So it’s not over yet in terms of this. But we wanted to give you a sense as of today where we are on it.

Luke Sergott: Okay. Great. Thanks.

Tom Pike: Thank you, Luke.

Operator: And the next question will come from Eric Coldwell with Baird. Your line is open.

Eric Coldwell: Thanks very much. Can you hear me?

Tom Pike: Yes. Hey, Eric. How are you?

Eric Coldwell: Thank you. I’m sorry. Dialing in remotely today. I wanted to come back to the 2026 preliminary thoughts. Appreciate those detailed. Definitely picked up the 80 bps on SG&A this year and another 100 bps next year. I’m curious what you’re thinking. Sounds like you’re expecting to return to top-line growth in the first half and then maybe more in the second half with a better mix of projects in the second half of 2026. But what are you thinking on gross margin next year and overall EBITDA? This year, you’re targeting mid-sevens on EBITDA margin. The hundred bps would get me to the mid-eights if we held gross margin flat. But are you anticipating a better lift in gross margin on the revenue growth and the better mix in the second half? And so we shouldn’t just be thinking mid-eights on EBITDA margin in 2026.

Jill McConnell: So, Eric, I’ll try to take that. I mean, we are obviously have done a lot of that analysis. And I think, you know, we would be expecting more than the hundred basis points of margin improvement year on year, but felt like at this point, until we’ve been able to see how all these new processes we put in place are playing out, we would be better off, you know, waiting a couple more months and see how these forecasts are tracking compared to what we’ve provided. And then we can probably provide a little more clarity on what that future looks like. And we did try to be relatively conservative in our modeling, but, yes, you would expect also gross margin improvement in 2026 because we believe that even though you have to hold on to resource in certain areas, because you have to have it, it’s not all being fully utilized.

And so they’ll be able to absorb that growth as we’ve been hoping would come, but we’ll be able to absorb that growth without having to add a lot of significant additional resource in 2026.

Tom Pike: Eric, the other thing I’d add is that if you just think about the math, you know, roughly, as new work comes online, it’s performing very close to the deal economics of this industry. And so when you, and I think you guys, you know, do you, Eric, do you know this industry very well? You have a sense of what that is. So you can almost think of it as, you know, as it becomes a bigger part of the mix, the percentage of it, that mix, and that difference in margin will start accreting to the bottom line. So the plan here is as you see that new mix, you will see that at better margins, and that will lift it as it grows as a proportion. So you’re trying to get the model in your head, if you know what I mean, Eric, because as you see that, that allows what Jill is saying to go forward.

And I think, frankly, you guys can model it slightly different ways. It’s the 1.15 versus 1.2, but we’ve modeled it as 1.15 just to be a little conservative, and we feel like it’s good progression. Okay. Operator, we might move.

Operator: Our next question comes from Max Smock with William Blair. Your line is open.

Max Smock: Hi, Tom and Jill. Thanks for taking our questions. And, Jill, I hope you feel better soon here. Tom, I know you just discussed this in response to Dave’s question a minute ago, but I’m so sorry for a bit of a repeat question here, but, frankly, still just kind of struggling on our end to understand your backlog in the quarter in the context of your commentary around determining some of those pre-spin projects have less remaining revenue than you anticipated earlier in at the end of 2024. So just something, can you just walk through again why those findings wouldn’t lead to some adjustment to backlog in 4Q in the form of cancellations? I’m just trying to understand from a mechanic’s perspective why your findings are leading to a huge step down in burn rate instead of that big revision and backlog that Dave was discussing earlier. Thanks.

Tom Pike: Yeah. Max, it’s a good question because maybe I’ll clarify. It’s not so much less backlog. It’s actually slower burn, and that’s the difference in 2025. So these projects, we did some interesting analysis that showed that a lot of these older projects extend out as much as 40 to 50% longer than the projects we’re selling today. And so as you can imagine, when they’ve extended out over time, they’re burning more slowly. They have a lot of hours in them already. And every incremental hour is less as a percentage of the total. And that causes them to burn more slowly. So it’s less, it’s not so much that it’s a reduction in backlog, it’s just a lesser amount of it is gonna show up in 2025 than we expect. And so it’s a helpful clarification on your part.

And so that work is out there. It just is burning more slowly. And given it’s a bigger percentage of the mix, it also has some built-in inefficiencies, perhaps concessions on margin, other things, you know, over time, that we’re still carrying with us through these older projects.

Max Smock: Got it. Super helpful, Tom. Thank you for clarifying. I’m sorry if I misunderstood based on prior remarks.

Tom Pike: No. No. It’s important stuff right now. This obviously is a super important call. Thank you, Max.

Operator: Of course. And maybe just as a, and our next question comes from Matt Sykes with Goldman Sachs. Your line is open.

Will Ortmayer: Hey, guys. This is Will Ortmayer on for Matt Sykes. Thanks for squeezing me in here. The commentary around the 80 basis points of saving for the year is helpful, but just want to dig a little deeper on the expense side. How should we think about the OpEx cadence and, I guess, gross margin as well throughout 2025? A lot of moving pieces with the TSA roll-off, restructuring, shift to new business, and then some of the target investments. If you could just kind of parse out some of the puts and takes there and how we should think about phasing, that would be super helpful. Thank you.

Jill McConnell: Oh, well. So I think in terms you will see margins improve over the course of the year. It’s not you’re not gonna see the same, for example, step from one quarter one to quarter two that you saw last year. But you’ll see margin improve over the course of the year. However, we’re gonna provide more detail on that quarterly progression when we do our Q1 earnings. And the reason I say that is because, you know, we’ve come out of the TSAs. We have all the costs now. We’re resetting. You’re not gonna see much benefit from the SG&A reduction in the first quarter because we, you know, we’re standing up the new systems and we’re getting through year-end. We were remediating, you know, the material weaknesses I mentioned in my remarks.

And then in IT, you know, the work to consolidate applications takes a bit of time. So it will improve over the course of the year and the margins will improve, but we’ll provide more detail on that progression as we get our Q1 results.

Will Ortmayer: Got it. Thanks, Jill. Need more time on the new system.

Jill McConnell: As you can imagine, you know, doing that with everything right now, we need we want to see a couple months in the new system just to make sure everything is matching with the new process that we put in place.

Will Ortmayer: That makes sense. Thanks again.

Tom Pike: Alright. Operator, can we take operator, let’s take two more calls. We are at ten o’clock, and we want to let people go. And we’ll have some further calls with the analysts, but let’s take two more, and I apologize to folks. I know this is important, but we look forward to talking to you during the day.

Operator: So, alright. Go ahead, operator.

Operator: The next question comes from Charles Rhyee with Cowen. Your line is open.

Charles Rhyee: Yeah. Thanks for taking the question. Maybe just, and I apologize. I joined a little bit late, but can you talk a little bit about this idea of pre-spin versus post-spin projects? You know, were you looking at your backlog in this manner last year, or is this like, when did you start to really focus on the difference between the pre-spin projects versus the post-spin? And then secondly, following up on an earlier question around sort of the SG&A leverage this year and then into next year. How much, like, can you get us a sense on kind of what we’re running at in terms of capacity utilization, and sort of just a sense of how much excess capacity you’re kind of carrying currently to allow you to sort of, you know, recapture that in terms of margin as we go forward. Thanks.

Tom Pike: Yeah. Thank you, Charles. I’ll comment on a couple of things, and then I’ll give it to Jill. First, the pre versus post. We started to see trends. So what has happened over the past year and really not just the last few months now, is we’re trying to look deeply into the portfolio to try to understand what we could do about the profitability of some of these older projects. And as we look deeply into the portfolio, we start to see this pattern that we had relatively more percentage complete projects and relatively, and certainly the new ones. We wanted to make sure the new stuff that we won was operating at good economics, and we confirmed that. And then we started to look at the older stuff, and we noticed that there were a couple of categories that were distinct.

The much more mature ones that were more percent complete and then ones where we still have an opportunity to have an impact. So we started to look at that. And then, again, this analysis at higher levels caused us to actually take it down all the way to project by project. So, you know, it’s relatively recent to categorize it that way. But we certainly wanted to confirm that the new work that we won with our processes as an independent company was meeting its original economics because that’s totally under our control. I will just say on the capacity utilization, you know, that is closely managed, and we are trying to thread the needle of making sure that we have as limited capacity as we need to be able to deliver these projects with quality.

And, you know, that’s clearly part of what we’re trying to do. And on the prior question, you can hear how we’re gonna try to thread that needle delivering this more mature work that’s lower profitability and then also adding the new work to it, and the team is working at a much more detailed level. Jill, I don’t know if you’d add something on that.

Jill McConnell: Yeah. I think the only thing I would say is, you know, the 80 basis points that I mentioned is gonna be, you know, on a lower revenue base. Obviously, if revenue is flat, you’d be seeing a more substantial basis point reduction year on year. So that’s why we called out 80 basis points, but also kind of said $40 to $50 million of net savings because, you know, because of the revenue decline, unfortunately, you don’t see quite as much impact from it just a basis point perspective.

Tom Pike: Does that help, Charles? Okay. Let’s take one last operator.

Operator: Okay. And our next question will come from Michael Ryskin with Bank of America. Your line is open.

Michael Ryskin: Great. Thanks for squeezing me in. I appreciate it. Tom, I want to follow up on a point you’ve mentioned a couple of times in prepared remarks and Q&A, the sort of difference between pre-spin and post-spin in terms of the processes. I guess my question is, is it really that delineated? And what I’m getting at is, you know, yes, the management changed when you were spun out. But if you’re thinking about the employee base, that’s stayed largely the same. So the same people that were booking revenues and putting the bookings and putting the book together, that’s been more or less consistent. Yes, you’ve implemented new processes and you’ve gone through the TSA exits, etcetera. But that all took time. So I guess what I’m getting at is, is it really that clear where it’s, you know, the day before the spin, the day after the spin, or is there a risk that you look at some of your bookings from the second half of 2023 and they’re also a little bit lower quality than maybe some of the most recent ones from the last couple of quarters?

Tom Pike: I think it’s a fair question, but the reality is we have changed quite a lot. This business is managed at a much more detailed level. For instance, there are every project we now have regular calls where projects are reviewed at various levels of management. Sometimes even up to me and Jill associated with challenges that they face. All the projects in terms of approval of any kind of change, you know, in terms of scope, or any kind of change of additional hours without scope, all of that is now approved in some detail. And so if you look at the detailed processes that we put in place, it actually has changed quite a bit. And so what we want to just make sure is that those more detailed processes of management and, frankly, you know, not accepting variances as just something that has to happen.

Now that those detailed processes, we just need to make sure that on the new projects, we’re sustaining margin, and on the older projects, if we can capture additional compensation for additional scope, doing it. And then if we can use more effectively cost of resources, we’re doing it. And so there has been quite a bit of change here. I guess another example is we’ve taken work that’s used to have a higher cost resource. We started to put it into hubs. We have a very significant hubbing strategy. One of the things you’ll know about Fortrea Holdings Inc. is before I came here, they actually made some excellent investments in India and those to enter around other low-cost places in the world as well. And those elements are being used even more.

So I think, you know, we would say the focus and discipline we’ve had on this business has made a difference. It’s just difficult with the mature projects to actually impact them. But the newer ones, even if they’re pre-spin, but they’re earlier in their life, we can impact those. And the newest ones that we’ve sold, we want to make sure they’re delivered well. So Michael, I appreciate the question. Operator, we probably have to wrap from here. I just want to thank everybody for being with us. We’ve done a tremendous amount of work the last couple of months. And we think we have a firm foundation. We’re being well accepted by customers. These leading book-to-bills. And we’re gonna continue pressing ahead here for Fortrea Holdings Inc. Doing great things for our customers.

So thank you.

Operator: This concludes today’s conference call. Thank you for participating. You may now disconnect.