Operator: Ladies and gentlemen, thank you for standing by. And welcome to Fortrea First Quarter 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. [Operator Instructions] 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’s first quarter 2025 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 CFO, Jill McConnell. In addition, Peter Neupert is also joining us on the call. As mentioned in this morning’s press release, Peter has been our Lead Independent Director and will serve as our Interim CEO and Chairman of the Board. 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 Security Certification 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 concerning forward-looking statements and risk factors in our press release and presentations that we posted on the website. Please note that any forward-looking statements represent our views as of today, May 12, 2025, and that we assume no obligation to update the forward-looking statements even if estimates change. During this call, we’ll be referring to certain non-GAAP financial measures. These non-GAAP measures are not superior to or a replacement for the comparable GAAP measures, but we believe these measures have been best to gain a more complete understanding of results.

A reconsideration of such non-GAAP financial measures with the most directly comparable GAAP measures is available in the earnings press release and earnings call presentation slides provided in connection with this call. With that, I’d like to turn it over to our CEO, Tom Pike. Tom?

Tom Pike: Thank you. Good morning, everyone. Welcome to the call. Today, we have a number of important topics to discuss, focusing on our current business results and trajectory. Then towards the end of the call, we’ll address other announcements. Our revenues and adjusted EBITDA came in just about where we expected and we are reaffirming our guidance. Our book-to-bill was 1.02 times for the quarter and our trailing 12-month book-to-bill is 1.14 times. Let me start with our bookings, the general environment and our pipeline. Regarding the 1.02 times book-to-bill, we had a good pipeline and closed the anticipated large pharma opportunities, but saw delays to close some biotech awards and a little softness in Clinical Pharmacology in the quarter.

Each quarter, I’ve shared with you some interesting wins we’ve had to demonstrate that Fortrea wins important work. Today, I will highlight a few examples. We expanded a Phase 1, I am sorry, expanded a Phase 2/3 clinical development partnership with a large pharma customer into an observational development program, applying our real-world evidence expertise and experience. By engaging early and bringing a holistic approach, we’re delivering meaningful value to this customer and its type 1 diabetes portfolio. With another large partner, we secured wins across a range of therapeutic areas, including cancer and kidney disease, involving solutions from Phase 1 through late phase, as well as FSP. These wins were based on a longstanding relationship characterized by trust and transparency.

We also had some significant wins in the biotech space. We have an established partnership with a larger biotech. Last year, we delivered a smaller monotherapy trial, which led to a first quarter non-compete study to award and evaluate a multi-dose therapy. Biotech customers, in particular, appreciate that we’re large enough to deliver their studies around the world while being small enough to give them the executive attention that helps drive their programs with excellent delivery, timeline efficiencies and quality data for registration or acquisition. Turning to the market environment, please know that these remarks on the market were prepared before seeing the details of today’s announcement regarding the U.S. pursuing the most favored nation drug pricing.

As we’ve said in the past, the different CROs see different slices of the total clinical research spend depending on their size, customers they’re exposed to and the relationships they have. What we are seeing is that Fortrea ‘s larger customers have remained fairly consistent in terms of opportunities and spend since last year before the U.S. election. Certainly, they are speaking of the challenges ranging from patent cliffs to IRA to tariffs to regulatory agency changes, but overall, they’re pushing forward. As we’ve discussed, we are happy with how we’re targeting a roughly 50-50 blend of biotech and large pharma. Since the spin, we’re trending a bit more toward biotech. Regarding biotech sentiment, some report to us that regulatory meetings and input are timely.

Other biotechs are being more cautious, wanting FDA or other regulatory confirmation and support for proceeding, which is slowing down their decision-making. Some biotech customers are discussing a more challenging funding environment. Like you, we’ve seen reports of a biotech funding slowdown this calendar year, though there have been some nice recent acquisitions, which historically is positive. All that said, we do see our biotech opportunity pipeline growing. Some of that is due to the changes we’ve made to our commercial organizations and some due to brand building recognition for Fortrea with biotech. Before moving on, I do want to say that I’ve been working in life sciences for about 30 years, and pharmaceutical companies and executives are very resilient to administrative and policy changes.

The burden of disease is not going away and new and improved medications are critical. Further, innovation in both science and the process of drug development is progressing rapidly. Artificial intelligence is promising and has potential to rapidly accelerate our understanding of biology and our discovery of targets and therapies. AI, along with the increased use of real-world evidence, will improve the speed, cost and quality of clinical testing to prove therapies are safe and effective. I believe that well-run CROs will be part of the future. On an apples-to-apples basis, our employees and overhead costs are lower, our productivity is higher, and our ability to change is great. We now have 30 years of deep experience and are part of the reason why the biotech industry has been so innovative.

Let me go back to where I started this section. The public CROs can perform differently based on the slice of the market that they serve. Regarding our pipeline, I’m pleased to report that our overall pipeline of opportunities remains solid, higher than the average of the past three years and growing on a trailing 12-month basis. We believe our pipeline has the ability to produce attractive book-to-bills for the remainder of the year, keeping our average bookings pointing toward growth. Regarding the second quarter, it’s too early to tell exactly where we will land. April was solid, but we have more biotech exposure this quarter and these opportunities are more challenging to predict in terms of both win rate and timing. Our Clinical Pharmacology pipe is solid again.

There is currently a path to a 1.2 times book-to-bill, but there is greater uncertainty about the macroenvironment potentially impacting decision-making than at any time since we have spun. We are focused on putting a great value proposition in front of the customers, and in some cases, we do have our regulatory and strategy consultants helping customers think through how to best progress their products in this environment. On the commercial side, our transformation is continuing, and we perform well, but we still want to up our customer relationship game. We’re now starting to incorporate AI to increase the efficiency, quality, and consistency of our proposals, contracts and commercial workflows. This allows us to focus more on the value proposition and less on just dealing with basic qualifications.

We’ve added more sales capacity in biotech, a sales training academy and improved account planning for our larger customers. As I mentioned above, we’re reaffirming guidance for the year. I’m pleased with the results of the improvements we’ve made to our forecasting system since the end of last year. The first quarter was a quarter of solid execution. As we’ve discussed, we believe that 2025 is a transformation year. We want to win more business in a complex environment. We want to continue to deliver well and improve our customer relationships. At the same time, we know we need to improve gross margins, as well as reduce our SG&A costs. Let me discuss how our planned transformation addresses that. Now that we have substantially exited the TSAs, we’re focusing on quality, cost structure, operations improvement and practical innovations.

In our Clinical Pharmacology business, our occupancy is at high levels, so we’re focusing on optimizing pricing capacity while still delivering high quality. In FSP, we revised how we manage over the past year and are looking to drive growth. We’ve been working hard in our Full-Service Outsourcing business, which comprises the majority of our work. Here are a few examples of recent successes in Full-Service. We completed recruitment for a renal product seven weeks ahead of schedule and on budget for a large customer. We accelerated a large cancer study timeline by 12 months. In the first quarter, we delivered a first patient in for a sophisticated new CAR-T therapy. We know that we need to not only deliver well, but we need to improve our gross margins.

Here, as we’ve described to you, we have a combination of complex studies, some slower starting biotech projects among our more recent wins, and we are — and what we are now preferring to call longer duration and latent life cycle studies that are impacting the burn rate. We have several actions underway to improve gross margins. First, aligning our resources to the work, looking for ways to optimize across our therapeutic areas, sites and geographies to lower the cost of delivery in our global footprint. We have developed tools to assist us with this. Second, we’re also reducing our direct but more centralized cost of delivery. Finally, increasing burn rate should increase margins too. The first order of business is hitting milestones on time as well as getting paid for what we do.

We’re also trying to help biotechs get started faster. We’re trying approaches to speed things up, such as getting sites started faster, but studies cannot always enroll patients faster. We’re pushing and we’ll keep our focus here. Generally, this attention is better for our customers and our relationships with them. We have a great team and some long-tenured Fortrea executives and new leaders to drive change and improve gross margin. They will get it done. Regarding SG&A, we’re transforming our support functions to improve service, bring costs more directly in line with benchmarks. All of our SG&A organizations are now doing more with less. We can already see the benefit of having our own tailored ERP systems. For instance, last week, our Chief Administrative Officer was showing me the new, more actionable reports to get some attrition, spans, layers and costs of our employees.

We expect more improvements over time. We’re now optimizing our people around new processes. We’ll be implementing automation and AI tools as they become available from our system vendors. When we spun, Fortrea’s information technology costs were farthest above benchmarks. Ironically, with that spend, we did not inherit strong systems. From the beginning of 2024 to the end of 2025, if we hit our plan, we expect to reduce IT spend by about one-third on an ongoing run rate basis. That’s big. We’ve reduced IT costs, even though we’ve had to build many functions like cybersecurity from scratch. Coming off the intense TSA exit process, as well as the divestiture of our Enabling Services business, we are refocusing technology projects to make Fortrea better.

In the first quarter, we launched an enterprise-wide application rationalization program, which has already identified millions of dollars of savings over the next five years, a number we believe will grow as we complete the evaluation process. We are implementing new project management systems and developing better global resourcing capabilities. I just did a review of our new mobile tool to increase CRA productivity and quality overall, which will ultimately reduce our cost to serve customers. We’ve also been implementing a series of rapid releases to our own systems to manage studies more effectively. We continue to work with leaders like Viva and Medidata to take advantage of their latest innovations. For further optimization and productivity, after a series of pilots last year, we launched Copilot Chat through our Microsoft 365 license, making AI tools available to every employee who has Microsoft licenses.

Copilot is improving our productivity and has been rapidly adopted across Fortrea. We’re seeing more than 50% increases in usage week-by-week driven by a comprehensive change program. For employees in need of more advanced AI capabilities, Microsoft Copilot Enterprise is our primary solution. We piloted more than 200 use cases last year and demonstrated its power. We are rolling it out this year based on the highest priority use cases. Certain areas like protocol reviews, dealing with protocol deviations, site agreements, quality plans, medical writing, and report reviews are using AI and will standardize around AI assistance in the near future. As a regulated industry, given AI’s ability to make mistakes, we still need humans in the loop, but we believe our productivity will continue to improve.

We have a strong IT leadership team and excellent partnerships. In coming months, we hope to be able to demonstrate to analysts and investors some of the innovations we have under development or in production. Just a few more things before I hand off to Jill. We cemented a partnership with the Society for Clinical Research Sites, becoming a charter sponsor of the Collaborate Forward Working Group, which will explore and develop best practices to reduce administrative burdens across the clinical research ecosystem. We recently announced that Fortrea was named a leader for both pre- and post-pharmacovigilance operations by Everest Group in its annual Pharmacovigilance Operations PEAK Matrix Assessment for 2025. Third-party recognition is great to have and we’re also getting great feedback about our solutions and service experience directly from customers.

Overall, our customer Net Promoter Scores have continued to trend up, meeting our Q1 target, with team expertise and project management noted as areas of strength. I must call out our Clinical Pharmacology group when I talk about NPS. This team continues to earn exceptional scores. At Fortrea, we service customers well and are working hard in our transformation. We’re building a firm foundation for the future. Now let me pass to Jill for a more thorough discussion of our results and initiatives.

Jill McConnell: Thank you, Tom, and thank you to everyone for joining us today. As a reminder, all my remarks relate to continuing operations of Fortrea following the divestiture of our Enabling Services businesses last year, unless I note otherwise. In my prepared remarks, I’ll walk through the key drivers of our first quarter performance and provide an update on progress toward our 2025 guidance, along with the cost optimization initiatives underway. I’ll also take some time to discuss our broader transformation strategy and share some additional disclosures to enable you to better understand our current state and progression towards margin expansion. As Tom highlighted, we delivered a solid first quarter. Cancellations continue to be within our historical trends, although we noted some protraction in decision-making, particularly in the biotech segment and we are closely monitoring this trend.

For the first time since the spin, we delivered year-over-year growth in adjusted EBITDA and adjusted EPS, which is a positive step forward. We’ve exited all of the major TSA services from our former parent and are operating independently, which is evidenced by the year-over-year reduction in one-time spin-related costs and our initial progress toward right-sizing our post-spin cost structure. Now I’ll cover the financial results. For the first quarter, revenues of $651.3 million declined 1.6% year-on-year. The decline was driven by the varying late-stage clinical service fee new business wins both prior to the spin and in the first half of last year, along with some slowing in our backlog burn rate, primarily due to the mix of our current book of works, which contains certain projects that are more complex and longer in duration.

I’ll touch on that more later in my remarks. The reduction was partially offset by increases in service fee and pass-through revenues from our Phase 1 Clinical Pharmacology business. On a GAAP basis, direct costs in the quarter decreased 3.5% year-over-year, primarily due to lower headcount and personnel costs as a result of restructuring action. Direct personnel costs in absolute dollars were reduced more than double the amount of the service fee decline. Permanent headcount across all of Fortrea is down more than 8% over the last 12 months as we carefully balance the need to improve our cost base while continuing to deliver high-quality services to our customers. These savings were partially offset by an increase in pass-through costs, higher professional fees and stock-based compensation.

SG&A in the quarter was higher year-over-year by 1.4%, primarily due to an increase in personnel costs to support the establishment of our corporate functions as a standalone company, along with the yield costs related to the receivable securitization program. This increase was partially offset by the reduction in transition services agreement costs, which were substantially exited as of December 31, 2024. If you look at SG&A sequentially, excluding the impact of one-time costs and the securitization yield costs, SG&A in the first quarter is a little more than 3% lower than in the fourth quarter of 2024, and this includes absorbing variable compensation that we reintroduced in 2025. I’ll discuss more about our ongoing transformation efforts in SG&A later in my remarks.

Net interest expense for the quarter was $22.3 million, a decrease of $12 million versus the prior year, primarily due to the $475 million in debt paydown across our term loans made in June 2024. When combined with our securitization program, cash interest and securitization costs for the first quarter were down approximately 22% compared to the first quarter of 2024. Turning to our tax rate, the effective tax rate for continuing operations for the quarter was negative 2.7%. The rate was adversely impacted by an impairment of goodwill that has no tax benefit, an increase in our valuation allowance, the impact of BEAT, non-deductible compensation expenses, and withholding taxes for 2025 non-U.S. earnings that are not permanently reinvested. Our book-to-bill for the quarter was 1.02 times, and for the trailing 12 months, it was 1.14 times.

Our backlog is over $7.7 billion and has grown 4% over the past 12 months. Adjusted EBITDA for the quarter was $30.3 million, compared to adjusted EBITDA of $27.1 million in the prior year period. Adjusted EBITDA margin in the quarter was positively impacted by lower direct costs as a result of reduced headcount and the related personnel costs, partially offset by higher SG&A costs to support operations as a public company following the separation from our former parent. Moving to net income and adjusted net income. In the first quarter of 2025, net loss was $562.9 million, compared to net loss of $79.8 million in the prior year period, primarily due to a goodwill impairment charge recorded in the current quarter. The non-cash pre-tax goodwill impairment charge of $488.8 million related to our clinical development reporting unit.

The impairment was a result of uncertain global macroeconomic conditions and the decline in our share price, which led to our determination that the unit’s fair value had fallen below its carrying value. There is no impact to the carrying value of our Clinical Pharmacology reporting unit. In the first quarter of 2025, adjusted net income was $1.9 million, compared to adjusted net loss of $4.9 million in the prior year period. For the current quarter, adjusted basic and diluted earnings per share were $0.02. Turning to customer concentration, our top 10 customers represented 56% of first quarter 2025 revenues. Our largest customer accounted for 15.4% of revenues during the quarter ending March 31, 2025. As I comment on cash flows, note that all references to prior year cash flows are for the entirety of Fortrea, as we had not segregated cash flows from continuing and discontinued operations for the businesses sold in June 2024.

For the three months ended March 31, 2025, we reported negative operating cash flow of $124.2 million, compared to negative $25.6 million in the prior year. The main driver for the increased use of cash was our ERP conversion, as the cutover plan included a temporary pause and invoice generation during January 2025 to support system transition and data validation activities. As a result of this pause, we experienced an 11-day increase in day sales outstanding to 51 days and this was the key driver in the $70.5 million negative cash flow from accounts receivable and unbilled services. We expect that this DSO increase will begin to improve in the second quarter and over the remainder of the year. Free cash flow was negative $127.1 million, compared to negative $34.9 million in the first quarter of 2024.

Net accounts receivable and unbilled services for continuing operations were $729 million as of March 31, 2025, compared to $941 million as of March 31, 2024, with the primary decrease year-over-year driven by the sale of receivables under our securitization agreement partially offset by the previously described invoicing pause. Due to the use of cash during the first quarter, we ended the quarter with $89 million outstanding on the revolver, compared to $29 million outstanding at March 31, 2024. Following a net borrowing position at the end of the first quarter, we’re targeting operating cash flow to be positive across the balance of 2025, driven by improving DSO, increases in adjusted EBITDA, and lower cash outlays for restructuring and spin-related costs.

We continue to target operating cash flow for full year 2025 to be flat to slightly negative. We ended the quarter with more than $450 million of liquidity and with our projected EBITDA and available add-backs under the credit agreement, expect that we will continue to have ample access to our revolver throughout 2025. As a reminder, the maximum leverage ratio under our credit agreement includes add-backs beyond what we include in our adjusted EBITDA, such as pro forma benefits from in-flight cost savings initiatives, Fortrea’s public company costs and costs necessitated by the spin. The maximum net leverage ratio under the amended credit agreement ranges from 5.5 times to 6 times over the years 2025 and 2026 and reverts to 5.3 times as of the first quarter of 2027.

We are currently, and anticipate that we will remain, fully compliant with the financial maintenance ratios of the credit agreement in 2025. With our TA Services exits largely behind us, we plan to focus our capital allocation priorities on driving organic growth and improving productivity, along with debt repayment. Looking ahead in 2025, we are reaffirming our guidance for the year. Using exchange rates in effect on December 31, 2024, we continue to 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. We provided an additional slide in the first quarter earnings presentation on our investor relations website. This is intended to show how revenue is being adversely impacted by a slowing of our backlog burn rate versus the prior year.

Over the last couple of months, we have analyzed the data around our backlog and revenue across multiple vantage points, including age, therapeutic area, phase and customer size, among others. The analysis shows that the burn rate is being impacted by our project mix, which continues to be heavily weighted towards oncology, which in our experience can burn on average 20% more slowly than most other therapeutic areas due to the complexity of these studies. In addition, we have been seeing continued delays in the startup of biotech projects, although our analysis shows that once underway, these projects burn more quickly than large pharma studies. FSP revenue is anticipated to be a headwind in 2025, but as we shared previously, we are rekindling our efforts in FSP because we believe we can win attractive work that can benefit both our margins and our customers where appropriate.

In addition, given that our portfolio is still weighted more heavily to older projects, many of which are much longer in duration than our average project life cycle for newer projects, our burn rate is impacted as these move through the later, less intense stages of their life cycle. 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. Since the spin, we’ve made solid progress, delivering strong book-to-bills in the second halves of both 2023 and 2024, and have delivered a solid 1.18 times average in the seven quarters since the spin. Our book-to-bill in the first quarter was adversely impacted by some slowness in customer decision-making given the current market uncertainties, but we believe our pipeline remains solid to provide the foundation to win attractive Full-Service FSP and Clinical Pharmacology new business.

The pricing environment remains competitive but stable at this time and Fortrea aims to price that market. As previously shared, we are making targeted investments this year to expand our commercial coverage of biotech, as we believe it is important to thoughtfully invest in this space, recognizing that over time, biotech organizations will remain a compelling source of innovation and growth. We continue to target achieving a 1.2 times book-to-bill over time, but at this time, it is difficult to estimate how the remainder of the year will unfold around new business wins given the potential impacts of the current economic and policy uncertainty. As we’ve noted, we believe we have a solid pipeline, but timely decision-making and access to funding for emerging biotech customers, along with maintaining our win rate, will be key.

We have begun to see our efforts pay off to improve the efficiency of our project delivery, and we will continue to look for opportunities to improve our burn rate, including efforts to accelerate biotech startup and oncology project execution. We shared with you in March that the post-spin projects, which have a better financial profile, only represent a small percentage of our Clinical Full-Service Outsourcing fee revenue. They were roughly 16% of Clinical Full-Service Outsourcing fee revenue in the fourth quarter of 2024. This improved to roughly 24% in the first quarter of 2025. We believe they will grow as a proportion of revenue over time, but we don’t expect them to become the majority of our Clinical Full-Service Outsourcing fee revenue until the second half of 2026.

As we previously shared, our first quarter margins were adversely impacted by the lower revenue I described, compounded by our SG&A cost structure, which is currently higher than our peers. To address the higher SG&A cost, as well as better align our operational footprint to our current revenue profile, we are targeting gross cost reductions of $150 million in 2025, with an expected net benefit of $90 million to $100 million this year, as some of the cost reductions are being offset by the reintroduction of variable compensation. Through the first quarter, we have captured roughly $19 million in gross savings, with roughly one-third of that contributing to improvements in EBITDA. Now I’ll give an update on how we’re executing against those transformation plans for 2025 and beyond.

We have initiated transformation programs in each SG&A function and in the overall organization to reduce personnel costs, consolidate IT application and licensing expenditures, and to further optimize our facility’s footprint and our third-party vendor spend. Note that since the spin, and separate from the divestitures, we have reduced approximately 2,200 permanent positions or 13% across our teams in an effort to better align our cost base with our revenue profile. To-date, we have reduced our office footprint by over 200,000 square feet, reduced duplicative clinical subscriptions by approximately 40% and rationalized 15% of the applications we inherited. We expect these programs will extend into 2026 as we continue our efforts to bring our SG&A spend more in line with peers.

While we are reaffirming our 2025 guidance, we will hold off on discussing 2026 and beyond as the entire industry waits to see how some of the current economic uncertainty unfolds. In the meantime, we remain focused on winning attractive new clinical development business and note that the cost-saving initiatives we are targeting to reduce SG&A costs and the efficiencies we are driving to optimize our operations are supporting our goal to expand our margins. As we approach the second anniversary of our spin, I want to note the significant achievements and progress we’ve made to enable Fortrea to operate as an independent, agile organization. We’ve accomplished many things, in large part because of long days and heavy lifts from our teams, and I want to recognize them for this.

Our attention is now firmly focused on winning more new business, delivering for our customers, and thoughtfully right-sizing our organization. While we acknowledge our successes, we also acknowledge the challenges we’ve had along the way. We are diligently working on bringing the business back to a sustained path of growth. Building upon the solid groundwork laid since the spin, supported by our solid $7.7 billion backlog, and the expertise of our strong global team, we maintain our unwavering commitment to exceeding customer expectations and achieving a return to revenue growth and margin expansion. The foundational elements for creating long-term value for all our stakeholders have been established. Now, I’ll turn it back to Tom for the remainder of his remark.

Tom Pike: Thank you, Jill. For my closing remarks, I’d like to say a little more about the news we shared alongside of our earnings today as we announced that Peter Neupert is going to serve as Fortrea’s interim CEO after I step down. When I signed on in January of 2023, it was about a three-year assignment to lead the company through the spin and help it become a standalone company. I’m proud of the team and all that we have accomplished to navigate through the challenges before and since the spin and position the company for future success. However, the financial results and stock performance are not what any of us wanted. With Fortrea now operating as a fully independent company, the Board and I have agreed that this is the right time to move ahead with a transition as part of executive succession planning.

We believe the market opportunities for Fortrea are large and expanding despite the short-term issues. We believe the company is a strong player and our brand is well positioned in the market. We are delivering on our plans and getting stronger now that the spin is behind us. I’ve worked closely with Peter for two and a half years and I welcome him as interim CEO. Soon, the Board will complete its succession planning for the right CEO to lead the company for the next phase. The process is well advanced. Above all, I want to thank our 15,000 employees for their hard work during this demanding time transition and for their ongoing commitment to serving our customers. They have worked with tireless dedication and truly advanced our mission of bringing life-changing treatments to patients faster.

It has been my honor to run this company and to work with our customers, employees and shareholders in this important industry. I’m confident that Fortrea’s future is bright. Operator, can you please begin the Q&A session?

Operator: Thank you. [Operator Instructions] And the first question will come from David Windley with Jefferies. Your line is now open.

David Windley: Hi. Good morning and thanks for taking my questions. I’ll stick with the one and focus on revenue. The quarter’s revenue was quite a bit better than our estimate and consensus. Looking at guidance, I believe that the full year expectation was for something in the upper single-digit decline and I kind of think we were probably thinking that that would be in that range maybe in the first quarter. It was obviously quite a bit better than that. So my question is basically to understand the cadence of revenue a little bit better and your comments about burn rate and things like that. But it looks like essentially your guidance would assume that revenue is essentially flatted down for the rest of the year. I want to make sure I’m understanding that correctly, cadence-wise, et cetera? And then how you improve margin against that if revenue is not improving sequentially? Thank you.

Jill McConnell: Yeah. Dave, I’ll take that question. You’re right. The revenue strength in the first quarter was even service-through revenues came in in line with our expectations, pass-throughs came in higher than we expected, and we actually saw some increases in pass-throughs in our Clinical Pharmacology business. Those — as those spaces become more and more occupied, we’re having to leverage more third parties for that work and we’re working on ways to be able to better utilize the capacity that we have to try to minimize that. But that came in much stronger than we expected in the first quarter and we’ve just seen a little bit more strength as well in the regular clinical pass-through side. So we’re keeping a close eye on it.

We weren’t expect — we don’t expect that Clinical Pharmacology piece to carry through the remainder of the year, so that will impact a little bit the back half, at least for our current projections. We’re going to keep watching it closely. Obviously, if this trend continues through the second quarter, it might mean that there is a little bit of upside to revenue for the year, but it’s not appropriate for us to call that yet until we see a little bit more how that pass-through trend rate plays out. Service fees have generally been coming in line with where our forecasts have been projecting. They were, you know, a very small amount favorable in the first quarter. But that, in terms of margin expansion, I think you’ll see it expand across the quarters more slowly, not to the same pronounced way that you saw it from first quarter to second quarter last year.

We talked about this on the last call. But that’s because most of the savings initiatives, I talked about the 19 of growth and kind of a third that came through as net of that, that we were — we just started doing a majority of the notifications and programs in the first quarter. Some of them started late in Q4, but you’re not really seeing the full benefit of those. And with SG&A, it’s going to be a little bit more phased across the second and third quarter. So, you’ll see more of the revenue dropping through in the back half of the year as we start to see the benefit of those efficiency programs.

Operator: And our next question comes from Justin Bowers with DB. Your line is open.

Justin Bowers: Hi. Good morning, everyone. So, I just want to stick with Clinical Pharmacology. Can you talk about how the RFP volume looked for that in the quarter and how things are looking for the rest of the year? Any change in win rates? I think you talked about optimizing price there a little bit. Can you elaborate on that, please?

Tom Pike: Hey, Justin. It’s Tom. Yeah. The Clinical Pharmacology business remains strong for no obvious reason. The first quarter bookings were a little softer there, but that pipeline has returned. And you might recall from prior discussions that we made a deliberate effort over the last couple of years to try to move from more biotech focus to more large pharma focus. And frankly, the team has done it terrific. So, we do expect that to continue to be a shining star here in terms of both growth, pipeline, conversion and growth as we go through the year. And as Jill said, what we’re going to try to do, some of the work we actually have to take as pass-through because we have to give to third parties, just given the complexities of scheduling within clinics. And so, we’re going to do what we can to try to turn more of that into revenue. So, that business is very strong for us.

Operator: And our next question will come from Patrick Donnelly with Citi. Your line is open.

Patrick Donnelly: Hey, guys. Thanks for taking the question. Maybe a little bit of a follow-up on that? Just in terms of bookings backdrop, what are you guys seeing there? I mean, you have everything from biotech funding to pharma reprioritization, missing the drug pricing stuff this morning. I’m sure you’re still digesting. But what are you seeing in the backdrop? Is it getting more contenders? Do some of the bigger CROs are facing their own challenges? I’m curious if you’re seeing them encroach on more deals that you’re in the mix for. And then the pricing backdrop as well would be helpful to talk through and maybe get a little more competitive. I appreciate it.

Tom Pike: Yeah. Thank you, Patrick. It’s interesting for us, if you didn’t pick up the newspaper and read some of the reports of our competitors, it feels somewhat the same. So, our biotech pipelines continue to grow. Our large pharma partners, we’re continuing to see opportunities. We purposely use that word solid again, because we have a pipeline that should have the ability to hit our target bookings number. And — but as you said, what we are seeing practically on the ground, in particular in biotech in our set, is a larger number of discussions about wanting to make sure that the FDA really has approved their pathway, make sure that they get detailed, sometimes asking for another meeting. We do — we’re hearing a mixture of things.

Some people have meetings on time. Some people are needing further clarification that takes some extra time. And there definitely is a notable increased concern about funding. Right now, we’ve been able to offset that with better commercial activity. We — in the biotech side, we lead with science, the way we call it. And then we’ve done much more over the past year. We’ve tried to get our therapeutic experts, medical doctors, more involved with biotech sooner by targeting the key ones ourselves. In terms of competition, it’s somewhat like it was last quarter. I think we saw towards the second half of last year, the larger CROs starting to turn toward biotech. We actually saw Medpace a couple of times this quarter, which we haven’t seen too often, interestingly.

But I would say it’s competitive. And so far, pricing remains disciplined. So it is competitive, but there’s no notable lack of discipline around pricing.

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

Eric Coldwell: Hey. I was just hoping I could get a quick update on SG&A expectations from an absolute perspective for the year and maybe a margin perspective, and a better sense on what you’re thinking for the, you talked about some phasing issues in Q2 and Q3. That would be helpful to understand what you were thinking through there, Jill? Thanks so much.

Jill McConnell: Sure. Happy to discuss that. So we actually weren’t expecting much in terms of SG&A improvement in the quarter. So we were pleased to see a little bit of improvement given the timing and phasing of those initiatives. Because as we had shared, we had to really be fully exited from the TSAs to start many of the initiatives. So we’re expecting some marginal improvement in SG&A as a percent of revenue in the second quarter, but you’ll see it much more dramatically improve in Q3 and Q4. When we talked — when we came out with year-end, I think we said we were targeting about $70 million of growth savings. So of that $150 I mentioned, $70 is related to SG&A and we’re expecting about $40 million to $50 million of that to represent actual net-net reductions in SG&A over the course of the year.

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

Elizabeth Anderson: Hi, guys. Thanks so much for the question. I was wondering if you could talk a little bit about the cash flow improvement. You talked about DSOs getting — improving over the rest of the year. Maybe if you could give us a little bit more color on sort of that and the pacing of the impact you’re expecting there? And then also, just anything you can update us in terms of the expectations regarding the new CEO search and sort of any — if you have any timing expectations at this time? Thanks.

Jill McConnell: I’ll start with the cash flow progression, Elizabeth. So, as we mentioned, you’ll recall we were at 40 days at the end of the year last year and that was very strong for us. It even surprised us a little bit how well we did in collecting. That jumped up to 51 days at the end of the first quarter, but that was pretty much in line with our expectations because of the pause that we took in invoicing for much of the first month of the quarter. And given terms and just getting that restarted, it didn’t immediately go back to 100%. Obviously, on day one, it took a little while through the quarter to progress back. So we would expect to see those DSOs coming down. Over the course of the full year, we’re probably targeting to be kind of low to mid-40s by year end, but you should see that slowly come down over the course of the year.

And in terms of cash flow itself, we’re expecting the remaining quarters, Q2 will be a little bit more, I would say, neutral, but as we move through Q3 and Q4, we would expect those to be cash flow positive. And then for the full year, as we said, operating cash flow to be flat to slightly negative, just depending on how some things play out. T” And Peter Neupert’s on the line. Peter and I have worked closely together, as I said in my remarks. He’s an extremely capable executive. Peter, do you want to talk to the succession point?

Peter Neupert: Sure. I’ll give it a shot. It’s hard to predict when you’re going to land on the right individual to take the business forward. I’d say we’re far along and we’re very optimistic that we will have somebody in the seat in the not-too-distant future.

Operator: And our next question comes from Charles Rhyee with TD Cowen. Your line is open.

Charles Rhyee: Yeah. Thanks for taking the question. Tom, you had mentioned some questions around biotech funding. Just wanted to get a little bit more of your thoughts there in terms of whether you’re seeing even committed funding perhaps drying up and being a challenge for some of your biotech customers? And I guess then to Jill, as that relates to DSOs, anything to note in terms of assumptions for maybe bad debt within receivables? Has there been any sort of changes in terms with clients and sort of what’s confidence and sort of in your ability to collect on work that’s already been done? Thanks.

Tom Pike: Yeah. Thank you. Regarding the funding, I think where we’re primarily seeing it is a little bit more caution about trying to make sure that they’re confident that funding will be in place when they do their studies. So they’re talking to us that’s delaying some of their situations, a little bit harder to get money, a little bit harder to get meetings. And so for us, it’s been interesting. We haven’t seen cancellations. We actually haven’t seen people specifically say that they’re not doing something, but they have slowed down their decision-making and they’ve extended the timeframes around proposals as they’re just trying to ensure that they can get funding. So it’s been interesting so far, but it’s not been. But so far, our pipeline is sustaining to a level where we seem to have enough pipeline to be able to continue to grow as we described earlier.

Jill McConnell: Yeah. And I’ll just add, I’ll remind folks that with our methodology for taking bookings, we don’t take them unless they have adequate funding, not just to support the trial, but their operations based on run rate for the period of the trial. So we try not to expose ourselves there by taking it until we’re sure that they will be able to get through the duration of the trial. But in terms of bad debt, no, Charles, we have not seen any spike in terms of our credit provisions to-date. We are watching things very closely. As always, there are customers that we’re working with to try to navigate. I think some of that is because we’ve since it’s been gotten better at getting in front of it and trying to manage how we provide things to the customers and work with them. It doesn’t mean there are never any situations, but I don’t think we’ve seen anything unusual in terms of the run rate there. So thankfully, we’ll keep a close eye on it.

Operator: And the next question comes from Luke Sergott with Barclays. Your line is open.

Luke Sergott: Great. Thanks, guys. I just wanted to talk a little bit about the burn rate, what the assumptions are for the year. You had your AR kind of ticked down from 4Q, burn rate stepped down from 4Q as well? And then you talked a little bit about there about the difference between the biotech versus large pharma. Can you dig in there about why the biotech would be different, because I thought, I understand oncology is slower burning, but I assume that they’re also working a lot on oncology work as well? So just kind of double click on that one, if you would.

Jill McConnell: Sure. Luke, I think when we came in, when we talked about our results at the end of the year and talked about this year, we said we expected burn rate to be between 8 to 8.5 over the course of this year. And we saw that, come into the higher end of that range in the first quarter. The back end of the year, we’re still expecting 8 to 8.5. It will depend a bit on how these pass-throughs progress and how some of this kind of plays out and also continuing to work on the initiatives we’ve had. I think oncology, as we went and we just dug in on every which way you could look at the angles from our pipeline, and we just see across all the portfolio oncology, which for our late-stage Full-Service business is now approaching pretty much 50% of that portfolio, it does burn about 20% more slowly.

And we have seen that biotech start more slowly. And why that’s important is because as we’re kind of have been reinvigorating the pipeline and reinvigorating the backlog since the time of the spin, you have more of those biotech customers in there, and that’s causing a little bit of slowness to start up. The good news is, as I shared, once they get running, they tend to run a little bit faster than what we’ve seen with the large pharma peers. So over time, we’re optimistic that they’ll catch up and make up for that. But I think just given the phase of where we are with some of the newer work, we’re not quite there yet. Oncology, I know many of our peers have talked about this too, it just is — as these treatments become more and more specialized, the recruitment is a bit more challenging.

So they tend to start a little bit more slowly until you really get them up and running. They also tend to be longer in duration in many cases as they’re trying to follow up progression-free survival and other things for the period of time. Same thing with rare and gene therapy treatments. You see those long tails as well. So we definitely are experiencing some of that. Like everyone, we’re actively working to try to see what we can do to improve those burn rates. But I think for the remainder of the year, we’ll probably stay in that range.

Operator: And the next question will come from Matt Sykes with Goldman Sachs. Your line is open.

Matt Sykes: Hi. Good morning. Thanks for taking my question. Maybe just a high-level one, Tom, and maybe Jill, on the book-to-bill. Tom, you talked about a path to 1.2 times book-to-bill over the course of the year. I know there’s a lot of puts and takes in that. But I guess my question is, how much of that path is determined by things that you necessarily can’t control, whether it’s biotech funding, MFN, pharma sector tariffs, versus things that you actually can control in your business, like bookings and how competitive you are in the RFP process to getting those awards?

Tom Pike: Well, it’s interesting, Matt. You really hit on the key thing. I think in this kind of environment, controlling the controllables is the word of the day. So all of this discussion we’ve had about controlling our costs and really trying to get them in line with peers is really key to this. But on the booking side, it really is working hard on early engagement. It’s training our salespeople better. It’s trying to focus more on the value proposition, trying to make sure our pipeline is full. So what we’ve been trying to do is control the things that we can control. Regarding the 1.2 times, what I tried to describe is right now, as we sit here today, we do have a path. But the path for this quarter does have more biotech, certainly, than the last two quarters that need to close.

So just given the macros — given today’s news, given the macros, the uncertainty is real associated with it. And so we’re not going to give you a specific number. And in terms of for the year, right now, our pipeline is shaping up. If we just snap the chalk line today, it’s shaping up in a way that we could potentially deliver those types of bookings 1.2 times in the remainder of the year as well. So we’re not seeing concern about flow of pipeline. The second half, we do tend to see more large pharma. The way this business works, it does tend to be a little bit more predictable and we have a higher win rate because it’s off an allocation. And so we feel good at the moment. But I think all of us are going to have to digest the news, whether it’s regulatory news, whether it’s the most favored nation’s news, we’re going to have to digest that over the coming weeks.

Operator: And the next question will come from Max Smock with William Blair. Your line is open.

Max Smock: Good morning. Thanks for taking our questions. Let me just follow up on some of the margin questions that have already been asked. It seems like based on some of your previous comments about SG&A expectations for this year, I think the guide factors in about 100 basis points of gross margin in total for the year. First, is that the right way to think about it? And then can you walk through how you’re expecting gross margin to trend as we move through this year, and then what that means for where we should end up for adjustability with the margin exiting the year? Thanks.

Jill McConnell: Sure. I think in terms of gross margin. It’s going to be a little bit choppy over the course of the year. It’ll be improving from the benefit of the savings initiative. So as I mentioned, within operations, we have been looking to thoughtfully reduce our footprint and those actions have been overweighed. We’ve already been doing some of that, but you have the impact of variable compensation that we introduced right at the beginning of the year and then our annual merit cycle, which took effect at the beginning of April. And so we’re trying to kind of thoughtfully manage that and manage how we do that, as well as things like promotions around maintaining our talent and trying to minimize unwanted or attrition that we see — attrition that we would want to avoid with key talent.

So I think we’re navigating all of those things as we’ll see, as we talked about earlier in the call from a revenue perspective, we’re expecting it to be pretty flattish over the course of the year, potentially a little bit of softening in the second half if we see pass-throughs coming back to what we were expecting. But I think that’s the wild card, and we all know how margins can impact pass-throughs. I think from SG&A, as I shared earlier, Max, we’re targeting $40 million to $50 million of net savings, so we had a little over $420 million if you excluded things like stock-based compensation in 2024, and we’re expecting that to be around $375-ish million as we get into by the end of 2025. But it is more heavily weighted till the second half.

So we’re actively working on those plans and there’s still things that we need to be doing, but I think most of the teams have their plans in place, they’re just executing against them.

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

Michael Ryskin: Hey, Jill. Thanks. I’m actually going to follow up on just that last point. You’re talking about the $40 million to $50 million on SG&A and how ex-TSA would have been a little bit higher, but you also called out the $150 million of gross cost reductions versus $90 million to $100 million net.

Jill McConnell: Yeah.

Michael Ryskin: So just comparing those two numbers, can you walk through sort of like…

Jill McConnell: Sure.

Michael Ryskin: … what’s increments that you’re announcing today versus what you had talked about on the 4Q call and those new cost savings that you’re putting in? Walk us through the timing on that and just sort of line items, when it’s going to be realized, when we should see full benefits? Thanks.

Jill McConnell: All right. So just — I want to make sure I’m clear and I know it is confusing probably a little bit. So the $150 million is consistent with what we talked about on our Q4 call. $70 million of that gross is coming out of SG&A, $80 million gross is coming out of our operations organization. And then, the $90 million to $100 million we talked about, I’m saying $40 million to $50 million of that will come from SG&A and about $50 million coming out of operations. We are continuing to look and certainly as the course of the year plays out and in terms of bookings and being really thoughtful about how we manage, we’re continuing to look for other opportunities. As we know, even with taking out $40 million to $50 million net of SG&A this year, we’re still not going to be in line with peers on SG&A as a percent of revenue.

So there’s still work to be done. We’re not announcing anything new necessarily, but we’re continuing to just kind of tighten or sharpen the pencil, I guess, so to speak, and look for ways to continue to optimize. And certainly, if we decide that we’re going to do more, then that would be something we’ll talk about later in the year. But for now, we’re just progressing nicely against the plans that we laid out with our year-end announcement.

Operator: I would now like to turn the call back over to Tom for closing remarks.

Tom Pike: Okay. Thank you. I think I’d just like to say it’s been a real honor to run Fortrea and the future is bright. So thank you again. It’s been great to reconnect with analysts and others and look forward to seeing you out on the trail. Thank you.

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

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FORTREA HOLDINGS INC

Q1 2025

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