Q4 2023 Fortrea Holdings Inc Earnings Call - Q&A

Unknown Executive: Within a much larger parent and ended 2023 as a standalone company, demonstrating the ability to sell work at a level that we believe will achieve market growth rates, while at the same time, delivering on our commitments and improving our operations. We completed the spin-off from our parent company just before midnight on July 1st.

Larger parent and ended 2023 as a standalone company demonstrating the ability to sell work at a level that we believe will achieve market growth rates at the same time is delivering on our commitments and improving our operations. We completed the spend from our parent company just before midnight on July one this team.

Unknown Executive: This team completed the spin at an impressive speed, separating out a $3 billion enterprise while preparing it to go public in less than a year. As part of that process, we assembled a great leadership team, combining experienced leaders from the former parent company with bringing in seasoned industry executives. At the same time, we recruited an outstanding board of directors. During the SPIN process, our team established a roadmap for independent operations in a way that protected our customers' data and ensured ongoing projects.

The spin at an impressive speed separating out a $3 billion enterprise, while preparing to go public in less than a year as part of that process. We assembled a great leadership team combining experienced leaders from the parent and bringing in seasoned industry executives at the same time, we recruited.

Outstanding Board of directors.

During the spin process, our team established a roadmap for independent operations in a way that protects our customers data and assured ongoing projects I'm proud to say that we did not lose any customers and no customer projects were disrupted because of the spin related activities.

Unknown Executive: I'm proud to say that we did not lose any customers, and no customer projects were disrupted because of SPIN-related activities. We created and launched a new brand, Fortrea, and morphed our whole company from blue to green in a matter of just a few months. Since our debut as an independent company on July 1, the pace of our transformation has not slowed. This organization works hard, and it makes decisions at a fast pace. It's a testament to our team around the world that we continue to hit critical milestones.

We created and launched a new brand for Korea, and morphed, our whole company from Blue to Green and a matter of just a few months.

Since our debut as an independent company on July one the pace of our transformation has not slowed this organization works hard and it makes decisions at a fast pace. It's a testament to our team around the world that we continue to hit critical milestones.

Unknown Executive: Our commercial transformation is off to a great start, already delivering tangible results. We're pleased with our book-to-bill ratio for the fourth quarter of 1.3 times, bringing us to a book-to-bill of more than 1.27 times for our first six months as an independent organization. Given the lag between bookings and revenue, we expect the company to return to growth later this year. Looking specifically at the bookings in the fourth quarter, the awards span biotech, large pharma, and across our therapeutic areas. And it's an attractive mix.

Our commercial transformation <unk> is off to a great start already delivering tangible results. We're pleased with our book to Bill ratio for the fourth quarter of one three times, bringing us to a book to bill of more than 127 times for first six months as an independent organization.

The lag between bookings and revenue we expect the company to return to growth later this year.

Looking specifically at the bookings in the fourth quarter the awards spend biotech large pharma and across our therapeutic areas and it's an attractive mix. We continue to be strong in oncology and have also seen wins in other growing areas such as the <unk> one in phase one we have been successful selling solutions across all.

Unknown Executive: We continue to be strong in oncology and have also seen wins in other growing areas, such as GLP-1 and Phase 1. We've been successful selling solutions across all of our clinical businesses, phases 1 through 4, both full service and FSP. Our ability to deliver critical products and projects globally, forge strategic partnerships, and add value has positioned us as a key player in the industry. The fourth quarter momentum is carried through to this quarter.

All of our clinical businesses phase one through four both full service and FSP, our ability to deliver critical products.

Projects globally forged strategic partnerships and add value has positioned us as a key player in the industry.

The fourth quarter momentum has carried through to this quarter. We're looking at a solid pipeline for Q1, if we execute well.

Unknown Executive: We're looking at a solid pipeline for Q1 if we execute well. We've made strong progress in exiting the transition service agreements, which we call TSAs, with our former parent company. By the end of the year, we had exited about 40 percent of our TSAs, with a few more added this quarter so far. To help us with the TSAs, we selected two leading global information technology and services providers as strategic partners.

We've made strong progress in exiting the transition service agreements, which we call tsa's with our former parent company by the end of the year, we had exited about 40% of our TSA with a few more added this quarter so far.

To help us with the TSA, we selected two leading global information technology and services providers as strategic partners cognizant will consolidate our infrastructure hybrid cloud and application support we benefit from a deeply experienced partner, who can help us solidify our position and move to a best in class technology.

Unknown Executive: Cognizant will consolidate our infrastructure, hybrid cloud, and application support. We benefit from a deeply experienced partner who can help us solidify our position and move to a best-in-class technology, savvy global CRO. Accenture is both our managed security services partner and will help us transition to a new enterprise resource planning system.

Savi Global CRO.

Accenture is both our managed security services partner and will help us transition to a new enterprise resource planning system.

Unknown Executive: While we're exiting TSAs and building our infrastructure, we're also making selective investments in differentiation to drive our growth. We continue to make investments in our brand. We recently kicked off a new advertising campaign to raise awareness of our brand, as well as our impressive heritage of 30 years in drug development. We're raising our visibility at industry events. For instance, I'm going to be speaking at BIO in June.

While we are exiting TSA is in building our infrastructure, we're also making selective investments in differentiation to drive our growth.

We continue to make investments in our brand. We recently kicked off a new advertising campaign to raise awareness of our brand as well as our impressive heritage of 30 years in drug development, we are raising our visibility at industry events for instance, I'm going to be speaking at bio in June.

Unknown Executive: Another investment area is investigator site effectiveness. We established a site advisory board that currently represents over 440 sites across six countries and includes key pharma industry leaders. We're making progress on our technology and data strategies, which involve a complementary approach, partnering with industry leaders and developing our own intellectual property where we add value. Recently, Fortrea has been selectively using artificial intelligence and machine learning for years to improve our operational efficiency, from trip report review for CRAs to bed scheduling in our early development clinical research. We're pushing further now, hiring dedicated AI experts who, among other things, are establishing an AI ML innovation studio to support our customers and accelerate our investments going forward.

Another investment area is investigator site effectiveness, we establish a site advisory board that currently represents over 440 sites across six countries and includes key pharma industry leaders.

We're making progress on our technology and data strategies, which involve a complementary approach partnering with industry leaders and developing our own intellectual property, where we add value.

Recently announced.

Three vented vara and integrated patient and site centric solution that streamlines clinical trial experience.

<unk> has been selectively using artificial intelligence and machine learning for years to improve our operational efficiency from trip report review for CRH to bed scheduling in our early development clinical research units.

We're pushing further now hiring dedicated AI experts, who among other things are establishing AI ml innovation studio to support our customers and accelerate our investments going forward, we will soon be sharing more on this.

Unknown Executive: We'll soon be sharing more on that. In November, we announced a partnership with MediData where we're using MediData AI to improve access to and participation of diverse population groups in clinical studies. While this partnership addresses diversity as a critical requirement of today's research, it's not the only advance that we've made in this area. Our consulting team, for instance, has developed a comprehensive epidemiological plan template that leverages our expertise to support improvement in the development and delivery of diversity inclusion plans.

In November we announced the partnership with Medi data, where we're using many data AI to improve access to and participation of diverse population groups in clinical studies.

While this partnership addressed this diversity is a critical requirement of todays research it's not the only advance that we've made in this area are.

<unk> team for instance has developed a comprehensive epidemiological planned template that leverages, our expertise to support improvement in the development and delivery of diversity inclusion plans. This is becoming an area of expertise for <unk> thats in demand from large and small sponsors.

Unknown Executive: This is becoming an area of expertise for Fortrea that's in demand from large and small sponsors. Across Fortrea, we're executing our strategic plan and investing in differentiation with the discipline and focus that you would expect from this seasoned leadership team that we've assembled. The changes we've made are already delivering results, most visibly in terms of new business. Earlier today, we announced another step forward in our journey. Last fall, we did a strategic review, which pointed to the importance of focusing our investments and innovation on phase one to four clinical research services, including consulting, which deepens our real-world evidence capabilities and brings market access experience, which is helpful to drug development. Looking at our enabling services segment, while good businesses, they were less aligned with that needed focus.

Across for trio, we're executing our strategic plan and investing in differentiation with discipline and focus that you would expect from this seasoned leadership team that we've assembled the changes we've made are already delivering results most visibly in terms of new business.

Earlier today, we announced another step forward in our journey.

Last fall, we did a strategic review, which pointed to the importance of focusing our investments in innovation on phase one to four clinical research services, including consulting, which deepens, our real world evidence capabilities and brings market access experience, which is helpful to drug development looking.

Looking at our enabling services segment, while good businesses, they were less aligned with that needed focus.

Unknown Executive: Following that, I'm happy to report that we just signed a definitive agreement to divest our endpoint clinical and Fortrea patient access businesses to Arsenal Capital Partners, a private equity firm with market-leading companies in healthcare. This will help Fortrea management to focus on important phase one to four clinical services as we transform our company. It also helps improve our capital structure. As I commented in the press release this morning with Arsenal, I'm confident that Endpoint and Fortrea Patient Access will be able to strengthen their market position, nurture top-tier talent, and invest in new capabilities and resources while delivering solutions that improve patients' lives, which is a mission we all share. Before I pass to Jill for a review of our financial performance, I do want to describe a gap expense in the fourth quarter that was incurred in connection with our ongoing work with the customer, which has been the subject of prior disclosure. For background, in 2022, a third-party vendor, which is not associated with Fortrea, made a programming error that, when discovered, limited the usefulness of data from two arms of a forearm trial. As we noted in January, our independent expert reviewer determined this was not the fault of Fortrea or our process.

Following that I am happy to report that we just signed a definitive agreement.

To divest our endpoint clinical and portrait patient access businesses to Arsenal capital partners, a private equity firm with market leading companies in healthcare. This will help for trio management to focus on important phase one to four clinical services as we transform our company. It also helps improve our capital structure.

As I commented in the press release from this morning with Arsenal.

Im confident that endpoint for trip patient access will be able to strengthen their market position nurture top tier talent and invest in new capabilities and resources will delivering solutions that improve patients lives, which is emission we all share.

Before I pass to Joe for a review of our financial performance I do want to describe the GAAP expense in the fourth quarter that was incurred in connection with our ongoing work with the customer which has been the subject of prior disclosure.

For background in 2020 to a third party vendor, which is not associated with for Korea made a programming error that when discovered limited the usefulness of data from two arms of a four arm trial as.

As we noted in January our independent expert reviewer determined this was not default of <unk> or our processes.

Jill McConnell: However, we incurred significant incremental expenses associated with this rare third-party error. As part of working with the customer, we wrote off certain receivables, discounted some work, and provided other considerations as part of a multi-party solution to facilitate ongoing trials. This amount will be reflected in GAAP earnings, but not in adjusted EBITDA due to its unusual nature. Jill, I'll hand over to you now for more detail on the number.

We incurred significant incremental expenses associated with this rare third party air as part of working with the customer we wrote off certain receivables discounted some work and provided other considerations as part of a multi party solution to facilitate ongoing trials.

This amount will be reflected in GAAP earnings, but not in adjusted EBITDA due to its unusual nature.

Jill I'll hand over to you now for more detail on the numbers.

Jill McConnell: Thank you, Tom, and thank you to everyone for joining us today. We are pleased that for fiscal year 2023, we achieved or slightly exceeded the milestones we shared with you at the time of our spin, delivering the midpoint of our revenue guidance range, achieving two quarters in a row with a reported book to bill greater than 1.2 times revenue, and exiting roughly 40% of our TSA with our former parents. These achievements were driven by deliberate changes we introduced, for example, incentivizing our sales organization more effectively, fostering a customer mentality across the entire enterprise, and tightly managing our infrastructure activity and cost base. Turning to our full year 2023 results, Our backlog grew 3.6% sequentially, ending the quarter at $7.4 billion under the revised backlog methodology that we announced with our second quarter results.

Thank you Tom and thank you to everyone for joining us today.

We are pleased that for fiscal year 2023, we achieved or slightly exceeded the milestones we shared with you at the time of our spin.

Delivering the mid point of our revenue guidance range, achieving two quarters in a row with a record a book to bill greater than one two times revenue.

Roughly 40% of our TSA with our former parent.

These achievements were driven by deliberate changes we introduced for example, incentivizing our sales organization more effectively fostering a customer mentality across the entire enterprise and tightly managing our infrastructure activity and cost base.

Turning to our full year 2023 results are.

Our backlog grew three 6% sequentially ending the quarter at $7 4 billion.

Under the revised backlog methodology that we announced with our second quarter results.

Jill McConnell: The continued spin-your-wheel headwinds of lower full-service clinical sales, elevated infrastructure costs, and the transition services agreement weighed on our fourth quarter results. We are working to mitigate these headwinds, and we expect to be on track with a previously shared margin improvement target of exiting 2024 and entering 2025 at a run rate around 13% adjusted EBITDA. Revenues were $775.4 million in the fourth quarter, representing a 1.8% increase versus the same period last year. Clinical services revenues of $709.7 million grew 1.7% year on year, driven by higher pass-through revenues, partially offset by lower service fee revenues. The lower service fee revenues were due to a reduced quantity of new business wins during the spin year that ran from July 2022 through June 2023, along with a mixed shift of some studies moving to longer durations.

The continued spin your headwinds of lower full service clinical sales elevated infrastructure costs and the transition services agreement weighed on our fourth quarter results.

We're working to mitigate these headwinds and we expect to be on track with our previously shared margin improvement target of exiting 2024, and entering 2025 at a run rate around 13% adjusted EBITDA margin.

Revenues were $775 4 million in the fourth quarter, representing a one 8% increase versus the same period last year.

Clinical services revenues of $709 $7 million grew one 7% year on year, driven by higher pass through revenues, partially offset by lower service fee revenue.

The lower service fee revenues were due to the reduced quantity of new business wins during the spin year that ran from July 2022 through June 2023, along with a mix shift of some studies moving to longer duration.

Jill McConnell: Enabling services revenues of $65.7 million increased 2.8%, driven by solid growth in our endpoint platform and higher pass-through revenue, partially offset by lower call center volume in patient access. Note that currency had not a material impact on our results in the fourth quarter. Let me provide more detail on our cost base. Direct costs in the quarter increased 9.3% year-over-year, primarily due to higher pass-through, TSA, and personnel costs, partially offset by the benefit from the restructuring program that commenced in the third quarter and the removal of former parent corporate allocations and carve out adjustments received prior to the spin. SG&A in the quarter was higher year over year by 56.2 percent, due primarily to standalone operational and TSA costs. Net interest expense for the quarter was $34.5 million.

Enabling services revenues of $65 7 million.

Two 8% driven by solid growth in our endpoint platform and higher pass through revenue, partially offset by lower call center volume and patient access.

Note that currency was not a material impact to our results in the fourth quarter.

Let me provide more detail on our cost base.

Direct costs in the quarter increased nine 3% year over year, primarily due to higher pass through TSA and personnel costs.

We offset by the benefit from the restructuring program that commenced in the third quarter and the removal of former parent corporate allocations and carve out adjustments received prior to the spin.

SG&A in the quarter with higher year over year by 56, 2% due primarily to standalone operational and TSA cost.

Net interest expense for the quarter was $34 5 million.

Jill McConnell: In addition, as Tom mentioned, we incurred expenses in 2023 relating to a rare programming error made by a third-party vendor, which is not associated with Fortrea, who was providing services to one of our customers that impacted the customer's trial. As part of working with this customer, we agreed to make concessions and provide discounts and other considerations to the customer. We recorded $5.5 million for these costs in 2023. However, these costs are excluded from adjusted EBITDA and adjusted net income due to their unusual nature. Turning to our tax rate, we had $1.1 million in pre-tax book income on a full-year basis as a result of a large volume of one-time and spin-related expenses. Our full-year tax expense was $4.5 million and was driven by the non-deductibility of certain foreign tax expenses on low domestic earnings along with non-deductible executive compensation expense.

In addition, as Tom mentioned, we incurred expenses in 2023 relating to a rare programming error made by a third party vendor, which is not associated with <unk>, who was providing services to one of our customers that impacted the customers trial.

As part of working with this customer we agreed to make concessions and provide discounts and other consideration to the customer as part of a multi party affiliation we recorded $5 $5 million for these costs. In 2023. These costs are excluded from adjusted EBITDA and adjusted net income due to their unusual in nature.

Turning to our tax rate, we had $1 1 million pretax.

Book income on a full year basis as a result of a large volume of onetime and spin related expenses, our full year tax expense was $4 5 million and was driven.

Even by the non deductibility of certain foreign tax expenses on low domestic earnings along with nondeductible executive compensation expense.

Jill McConnell: This led to an effective tax rate for the full year ended December 31st, 2023 of 406.3%. It is important to recognize that because of the spin, there are essentially two six-month periods that are distinctly different. For the six-month period ended December 31st, 2023, the adjusted effective tax rate was 24.2%.

This led to an effective tax rate for the full year ended December 31, 2023 of 406, 3%.

It is important to recognize that because of the spin there are essentially two six month periods that are distinctly different.

For the six month period ended December 31, 2023, the adjusted effective tax rate was 24, 2%.

Jill McConnell: This is improved versus our prior forecast, primarily due to favorable R&D tax credits. We continue to work with our advisors on detailed plans to improve our effective tax rate over time. Adjusted EBITDA for the quarter of $67.2 million decreased 38.8% year-over-year compared to adjusted EBITDA of $109.8 million in the prior year period.

This is improved versus our prior forecast primarily due to favorable R&D tax credits.

We continue to work with our advisers on detailed plans to improve our effective tax rate over time.

Adjusted EBITDA for the quarter of $67 2 million decreased 38, 8% year over year compared to adjusted EBITDA of $109 8 million in the prior year period.

Jill McConnell: Full year 2023 adjusted EBITDA was $267.3 million, which decreased 34% year over year compared to adjusted EBITDA of $405.1 million for full year 2022. Adjusted EBITDA margin for the fourth quarter was 8.7% compared to 14.4% in the prior year period. Adjusted EBITDA margin in the quarter was negatively impacted by lower service fee revenues, portfolio mix, and longer duration studies.

Full year 2023, adjusted EBITDA with $267 3 million, which decreased 34% year over year compared to adjusted EBITDA of $405 1 million for full year 2022.

Adjusted EBITDA margin for the fourth quarter was eight 7% compared to 14, 4% in the prior year period.

Adjusted EBITDA margin in the quarter was negatively impacted by the lower service fee revenues portfolio mix and longer duration studies.

Jill McConnell: Higher pass-through revenues, the higher inherited cost base, and higher SG&A costs post spin to support stand-alone operations are partially offset by the benefit from the restructuring program we initiated in the third quarter. Full year 2023 adjusted EBITDA margin was 8.6% compared to 13.1% for full year 2022. In the fourth quarter of 2023, adjusted net income of $16.6 million decreased 79.7% compared to adjusted net income of $81.6 million in the prior year period. Adjusted net income for both basic and diluted shares for the quarter was $0.19 compared to $0.92 in the prior year period.

Higher pass through revenues, the higher inherited cost base and higher SG&A costs post spin to support Standalone operations.

These are partially offset by the benefit from the restructuring program, we initiated in the third quarter.

Full year 2023, adjusted EBITDA margin was eight 6% compared to 13, 1% for full year 2022.

In the fourth quarter of 2023, adjusted net income of $16 6 million decreased 79, 7% compared to adjusted net income of $81 6 million in the prior year period.

Adjusted net income for both basic and diluted share for the quarter was 19.

Compared to 92 in the prior year period.

Jill McConnell: Full Year 2023 Adjusted Net Income of $124.5 million decreased 58.8% compared to adjusted net income of $302.2 million in the prior year-to-date period. Full Year 2023 adjusted basic and diluted earnings per share were both $1.40 compared to $3.40 for both basic and diluted earnings per share in the prior year. Turning to customer concentration, our top 10 customers represented nearly half of our 2023 revenues, and one customer accounted for 10.7% of revenues. Regarding cash and liquidity, in 2023, we generated $167.4 million in cash flow from operating activities, compared to $87.5 million generated in the prior year. Free cash flow was $127.1 million, compared to $33.1 million in 2018.

Full year 2023, adjusted net income of $124 5 million decreased 58, 8% compared to adjusted net income of $302 2 million in the prior year to date period.

Full year 2023, adjusted basic and diluted earnings per share were both $1 47.

Compared to $3 <unk> for both basic and diluted earnings per share in the prior year period.

Turning to customer concentration our top 10 customers represented nearly half of our 2023 revenues and one customer accounted for 10, 7% of revenues.

Regarding cash and liquidity in 2023, we generated 167 $4 million in cash flow from operating activities compared to $87 $5 million generated in the prior year.

Free cash flow was $127 1 million compared to $33 1 million in 2022.

Jill McConnell: Cash flows from operations benefited from moderation in the growth of unbilled services and deferred revenue, along with lower cash used for accrued expenses, including lower incentive payouts earlier in the year, partially offset by a decrease in net income. Net accounts receivable and unbilled services were $1.05 billion as of December 31, 2023, compared to $1.02 billion as of December 31, 2022. Day sales outstanding were 92 days as of December 31, 2023, flat to the third quarter and one day higher than December 31, 2022.

Cash flows from operations benefited from moderation in the growth of Unbilled services and deferred revenue along with lower cash use for accrued expenses, including lower incentive payouts earlier in the year, partially offset by a decrease in net income.

Net accounts receivable and Unbilled services or $1.05 billion as of December 31, 2023, compared to $1.02 billion as of December 31, 2022.

Days sales outstanding was 92 days as of December 31, 2023 flat to the third quarter and one day higher than December 31, 2022.

The increase versus the prior year and is primarily due to higher pass through revenues, including the impact of working through the transition process for items that were previously intercompany transactions.

Jill McConnell: The increase versus the prior year end is primarily due to higher pass-through revenues, including the impact of working through the transition process for items that were previously in a company transaction. Over the last 18 months, we have commenced a number of initiatives to improve our DSO position. Because our contracts provide services for multiple years, there is a lag in seeing those changes reflected in our performance. However, we expect them to improve our DSO profile over time. We ended the quarter with a net leverage ratio of 5.7 times based on trailing 12 months adjusted EBITDA, and our target for the net leverage ratio continues to be two and a half to three times over the medium term. Under our credit agreement, we have additional add-backs beyond our adjusted EBITDA results, including public company costs, spin-related costs, and the pro forma benefits from Cost Savings Initiatives. Taking these into account, our leverage for covenant compliance purposes was more than one full turn lower.

Over the last 18 months, we have commenced a number of initiatives to improve our DSO position.

Because our contracts provide services over multiple years, there is a lag in seeing those changes reflected in our performance, we expect them to improve our DSO profile over time.

We ended the quarter with net leverage ratio of five seven times based on trailing 12 months adjusted EBITDA and our target for net leverage ratio continues to be two and a half to three times over the medium term.

Under our credit agreement, we have additional add backs beyond our adjusted EBITDA results, including public company costs spin related costs and the pro forma benefits from cost savings initiatives.

Taking these into account our leverage for covenant compliance purposes with more than one full turn lower.

Based on our current forecast and accounting for the additional add backs, we expect to remain compliant with our covenants throughout 2024 and beyond.

In general our capital allocation priorities are infrastructure investments for timely exit of the transition services agreement.

<unk> investments to drive organic growth and debt repayment.

Before getting into guidance for 2024, I want to touch on the announcement, we made earlier this morning regarding our agreement to divest our endpoint clinical and patient access businesses.

Jill McConnell: Based on our current forecast and accounting for the additional ad backs, we expect to remain compliant with our covenants throughout 2024 and beyond. In general, our capital allocation priorities are infrastructure investments for a timely exit from the transition services agreement. Targeted Investments to Drive Organic Growth and Debt Repayment. Before getting into guidance for 2024, I want to touch on the announcement we made earlier this morning regarding our agreement to divest our endpoint clinical and patient access business. As announced, the price was $345 million.

As announced the price was $345 million.

We anticipate using the majority of the proceeds to pay down our existing debt.

We believe this divestiture will allow us to further sharpen our strategic focus as a pure play CRO and improve our financial flexibility.

<unk> is targeted for the second quarter of 2024.

Moving to our guidance for 2024, I will discuss this from both a full year and first half second half perspective.

We are targeting full year 2020 for total revenue in the range of $3, one 4 billion.

Two to $3 to $1 billion.

Compared to 2023 total revenue of $3 1 billion.

We are targeting adjusted EBITDA in the range of $280 million to $320 million compared.

Jill McConnell: We anticipate using the majority of the proceeds to pay down our existing debt. We believe this divestiture will allow us to further sharpen our strategic focus as a pure play CRO and improve our financial flexibility. Closing is targeted for the second quarter of 2024. Moving on to our guidance for 2024. I will discuss this from both a full year and a first half and second half perspective. We are targeting full year 2024 total revenue in the range of $3.14 billion to $3.21 billion, compared to 2023 total revenue of $3.11 billion. We are targeting adjusted EBITDA in the range of $280 million to $320 million compared to 2023 adjusted EBITDA of $267.3 million. Our guidance is pre-divestiture and assumes foreign exchange rates in effect as of December 31, 2023. For modeling purposes, you can use an estimated post-investiture impact of $250 million in revenue and $30 million in adjusted EBITDA. We anticipate full year 2024 interest expense to total approximately $130 million, based on our current view of market expectations for interest rate fluctuation.

Compared to 2023, adjusted EBITDA of $267 $3 million.

Our guidance is pre divestiture and assumes foreign exchange rates in effect as of December 31, 2023.

For modeling purposes, you can use an estimated post divestiture impact of $250 million in revenue and $30 million and adjusted EBITDA.

We anticipate full year 2020 for interest expense to total approximately $130 million based on the current view of market expectations for interest rate fluctuations.

Now I will provide an update on the transformation efforts that I discussed on our third quarter call.

2024, Mark a transformational year for <unk>, a year, where we plan to return to underlying growth and execute numerous operational improvements.

We remain highly focused on our margin expansion efforts. These continue to be growth through the right mix and volume of new business awards productivity enhancements and SG&A cost reduction.

We are improving our growth profile by increasing our efforts around contracts that deliver our targeted mix of business with proportional balance between full service FSP and clinical Pharmacology awards.

We expect to be able to absorb the growth in the near term translating directly into higher margins for for Korea.

Now let me cover our expected 2020 for revenue and earnings it will be a story of two halves we expected.

Jill McConnell: Now I will provide an update on the transformation efforts that I discussed on our third quarter call. 2024 marks a transformational year for Fortrea, a year where we plan to return to underlying growth and execute numerous operational improvements. We remain highly focused on our margin expansion efforts.

The decline in service fee revenue in the first half of 2024.

This is a result of the decline in net New awards, along with a less favorable mix of business. During the spin here that ran from July 2022 through June 2023.

Assuming we continue to deliver net new business awards to meet quarterly book to Bill ratios of at least one two times, we anticipate revenue growth to improve throughout the second half of 2024 to bring second half growth in line with market growth rates, which are currently seen at roughly 3% to 5% for this year.

Jill McConnell: These continue to be growth through the right mix and volume of new business awards, productivity enhancements, and SG&A cost reduction. We are improving our growth profile by increasing our efforts around contracts that deliver our targeted mix of business with a proportional balance between full service, FSP, and clinical pharmacology awards. We expect to be able to absorb the growth in the near term, translating directly into higher margins for Fortrea. Now, let me cover our expected 2024 revenue and earnings. It will be a story of two halves. We expect a decline in service fee revenue in the first half of 2024.

We are anticipating our margins to follow a similar path.

Turning to adjusted EBITDA, if you consider the midpoint of our range you should expect roughly one third of the annual value to be delivered in the first half weighted more to the second quarter with the remaining two thirds in the second half in.

In the first half the reintroduction of variable pay the ongoing TSA costs and staff retention in anticipation of the growth. We expect in the second half will weigh on the near term margin.

We are targeting the second half margin to improve from the revenue returning to market growth rates on improved productivity from our employee base along with the benefit of the anticipated cost reduction initiatives and TSA exits late in the year.

Jill McConnell: This was a result of the decline in net new awards, along with a less favorable mix of business during the spin year that ran from July 2022 through June 2023. Assuming we continue to deliver net new business awards to meet quarterly book-to-bill ratios of at least 1.2 times, we anticipate revenue growth to improve throughout the second half of 2024 to bring second half growth in line with market growth rates, which are currently seen at roughly 3 to 5 percent for this year. We are anticipating our margins to follow a similar path. Turning to adjusted EBITDA, if you consider the midpoint of our range, you should expect roughly one-third of the annual value to be delivered in the first half, weighted more towards the second quarter, with the remaining two-thirds in the second half.

In 2025, we expect to realize margin improvement from revenue growth in line with market growth rates and with our post TSA exit, including our streamline cost infrastructure increased automation and optimize resource utilization.

We believe this transformation will enable us to reduce our SG&A expenses and empower us to deliver projects faster and more efficiently for our customers.

Assuming our ability to continue to drive quarterly book to Bill metrics of at least one two times and exiting our TSA as per our current plans. We would target 2025, adjusted EBITDA margins consistent with 2022 on a full year basis of approximately 13%.

With a seasoned leadership team and innovative solutions that improve the efficiency of clinical development, we're relentlessly committed to maximizing value for our customers employees and shareholders. We are.

Jill McConnell: In the first half, the reintroduction of variable pay, the ongoing TSA costs, and staff retention in anticipation of the growth we expect in the second half will weigh on the near-term margin. We are targeting the second half margin to improve from revenue returning to market growth rates on improved productivity from our employee base, along with the benefit of the anticipated cost reduction initiative and TSA exits late in the year. In 2025, we expect to realize margin improvement from revenue growth in line with market growth rates and with our post-TSA exit, including a streamlined cost infrastructure, increased automation, and optimized resource utilization. We believe this transformation will enable us to reduce our SG&A expenses and empower us to deliver projects faster and more efficiently for our customers.

On a clear path to establishing <unk> as the top choice zero for pharmaceutical biotech and medical device companies and our growth journey is just beginning.

We are delivering against the growth and margin improvement plan, we have laid out we're streamlining our focus to our core <unk> business and we're executing our transformation plan at pace to capture the unprecedented margin expansion opportunity before us.

Now I'll turn it back to Tom for the remainder of his remarks.

Thank you Jill.

Beyond proud of this team and how far we've come in six short months as an independent company we are.

Now refocusing our company as a pure play CRO, we're winning more business, we're running the business better we're getting past the headwinds of the spin year growth delivery profitability are the priorities.

Jill McConnell: Assuming our ability to continue to drive quarterly book-to-bill metrics of at least 1.2 times and exiting our TSAs per our current plans, we would target 2025 adjusted EBITDA margins consistent with 2022 on a full-year basis of approximately 13%. With a seasoned leadership team and innovative solutions that improve the efficiency of clinical development, we're relentlessly committed to maximizing value for our customers, employees, and shareholders. We are on a clear path to establishing Fortrea as the top choice CRO for pharmaceutical, biotech, and medical device companies, and our growth journey is just beginning.

For trio is a great position.

Zero in the industry, we have the solid medical geographic and operational root systems from Covance, our predecessors, CRO that had been an industry leader for over 30 years, our size and scale are a good fit for customers large and small.

We serve a tremendous number of biotechs and once they're born in the future. We understand that biotechs are looking for support with assets that are potential but might be overlooked by big pharma and thus need special care Timeframes in alignment with funding is critical we have the expertise high touch and agility, but also.

Manageable scale to meet their unique needs.

Thomas H. Pike: We are delivering against the growth and margin improvement plan we have laid out. We're streamlining our focus on our core CRO business, and we're executing our transformation plans at pace to capture the unprecedented margin expansion opportunity before us. Now I'll turn it back to Tom for the remainder of his remarks. Thank you, Jill.

Jill described a few financial elements of 2024 moving into 2025, we expect 2024 to be another year of hard, but fulfilling work continuing our commercial transformation innovating with our customers and largely exiting our former parents infrastructure our business trajectory is up.

Financially it will be a tale of two halves. We believe this year, we will unleash opportunities.

Thomas H. Pike: I'm beyond proud of this team and how far we've come in six short months as an independent company. We're now refocusing our company as a pure play CRO. We're winning more business, we're running the business better. We're getting past the headwinds of the spin year.

In 2025 for both better serve customers and demonstrate we can run this company with better margins and continuing to improve them from there.

We have an extraordinary team of people at fortress to all levels, who are powering us forward driven by our patient and customer inspired purpose and the growth opportunity ahead.

Thomas H. Pike: Growth, delivery, and profitability are the priorities. Fortrea has a great position as a CRO in the industry. We have the solid medical, geographic, and operational root systems from Covance, our predecessor CRO, that have been an industry leader for over 30 years. Our size and scale are a good fit for customers large and small.

We want to have the best culture in the industry.

Guided by the engagement survey feedback from our employees around the world, we sometimes call for trends. We're prioritizing what is most meaningful are people told us that a distinctive vision strategy and values are critical and that's where we've been focusing.

Thomas H. Pike: We serve a tremendous number of biotechs and want to serve more in the future. We understand that biotechs are looking for support with assets that have potential but might be overlooked by big pharma and thus need special care. Timeliness and alignment with funding are critical. We have the expertise, high touch, and agility, but also manageable scale to meet their unique needs. Jill described a few financial elements of 2024 moving into 2025. We expect 2024 to be another year of hard but fulfilling work, continuing our commercial transformation, innovating with our customers, and largely exiting our former parents' infrastructure. Our business trajectory is up. Financially, it'll be a tale of two halves.

I am pleased to report that our engagement index is above the industry benchmarks and our attrition is lower than prepaid pandemic.

It's been a heavy lift so far but we're up for continuing to transform this business for the better competence and commitment creates success and our team is confident and committed for trio is exciting place to be.

Now operator, let's open up for questions. Please.

Thank you as a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced.

To withdraw your question. Please press star one again, please standby, while we compile the Q&A roster.

Thomas H. Pike: We believe this year will unleash opportunities that, in 2025, will both better serve customers and demonstrate we can run this company with better margins and continue to improve them from there. We have an extraordinary team of people at Fortrea at all levels who are powering us forward, driven by our patient and customer-inspired purpose and the growth opportunity ahead. We want to have the best culture in the industry. Guided by the engagement survey feedback from our employees around the world, who we sometimes call Fortreans, we're prioritizing what is most meaningful. Our people told us that a distinct division, strategy, and values are critical.

Your first question comes from David Windley with Jefferies. Your line is open.

Hi, good morning, Thanks for taking my question so.

I want to start with maybe the simpler one on the divestitures I want to make sure I understood.

$250 million in revenue and $30 million in EBITDA for the divested businesses I presume, that's an annualized number for.

For 2024.

That is if I did hear that correctly, that's a higher margin for that business than I guess I would've expected given how it had been performing.

Thomas H. Pike: And that's where we've been focused. I'm pleased to report that our engagement index is above industry benchmarks, and our attrition is lower than pre-pandemic. It's been a heavy lift so far, but we're up for continuing to transform this business for the better. Competence and commitment create success, and our team is competent and committed. Fortrea is an exciting place to be.

And so I wanted to understand I mean, you commented on kind of the focus and so forth, but I wanted to understand.

The decision to divest higher performing higher profitability businesses than the core.

Yes, Dave Thanks for the question I think I'd start by saying that when we looked at the business, we really believe being a pure play CRO is the right focus for our management team.

Operator: Now, operator, let's open up for questions, please. Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again.

And so what we want to do is maximize the value for our customers and for our investors frankly.

David Howard Windley: Please stand by while we compile the Q&A roster. Our first question comes from David Wendley with Jeffries. Your line is open. Hi, good morning.

So we want to focus in that absolutely attractive segment. These businesses, while interesting businesses and I like them are not really core to the mission and so we decided the best thing for for trio was to defense divest them. It does give us more flexibility in our capital structure as well as <unk>.

Thomas H. Pike: Thanks for taking my question. So I want to start with maybe the simpler one on the divestitures. I want to make sure I understood $250 million in revenue and $30 million in EBITDA for the divested businesses. I presume that's an annualized number for 2024. And if I did hear that correctly, that's a higher margin for that business than I guess I would have expected given how it had been performing. And so I wanted to understand, you commented on kind of the focus and so forth, but I wanted to understand the decision to divest higher performing, you know, higher-profit businesses than the core. Yeah Dave, thanks for the question.

Our focus from management team in terms of your question, yes for modeling purposes, we'd give you those numbers $2 50, and 30 the thing that I would remember Dave is that that does not indicate those kind of the numbers that we're giving you for modeling purposes do not necessarily.

Correlate directly to the EBITDA contribution of those businesses.

Because there are other factors associated with EBITDA, but for modeling purposes, we think that Thats fair as we move forward.

Thomas H. Pike: I think I'd start by saying that when we looked at the business, we really believe being a pure play CRO is the right focus for our, and so, you know, what we want to do is maximize the value for our customers and for our investors, frankly. And so we want to focus on that absolutely attractive segment. These businesses, well, interesting businesses, and I like them, are not really core to that mission.

Okay, and then broadening out on the on the core call at remain co.

Your book to Bill in the fourth quarter.

Was above your target, perhaps maybe above market expectations as well.

Had highlighted.

The seller on the accelerant.

Thomas H. Pike: And so we decided the best thing for Fortrea was to divest them. It does give us more flexibility in our capital structure, as well as more focus on management. In terms of your question, yeah, for modeling purposes, we'd give you those numbers, 250 and 30. But the thing that I would remember, Dave, is that those kinds of numbers that we're giving you for modeling purposes do not necessarily correlate directly to the EBITDA contribution of those businesses because there are other factors associated with EBITDA. But for modeling purposes, we think that that's fair as we move forward. Okay, and then broadening out on the core call it remains co, your book to bill in the fourth quarter was above your target, perhaps maybe above market expectations as well.

Situation in the independent review that you had done.

And highlighted that it may have had some impact on the progression of your bookings around the end of the year or into early <unk> and so maybe if you could add a little bit more detail to a couple of things one the concessions that you are giving.

And why you did that in light of.

The independent review outcome, and then to what.

What progress have you made or what how would you assess or describe to us the net effect of those of that situation on the progress in your in your commercial efforts more broadly for bookings to start 2024.

Thomas H. Pike: You had highlighted the Celeron situation and the independent review that you had done and highlighted that, you know, it may have had some impact on the progression of your bookings around the end of the year or into early 1Q. And so, maybe if you could add a little bit more detail to a couple things. One, the concessions that you are giving and why you did that in light of, you know, the independent review outcome. And then two, what progress have you made or what, you know, how would you assess or describe to us the net effect of that situation on the progress in your commercial efforts more broadly for bookings to start in 2024? Now, let me start with your second question first there, Dave. With regard to the bookings, I think as we announced it, J.P. Morgan.

Now let me let me start with your second question first there Dave.

With regard to the bookings I think as we announced at Jpmorgan.

There was probably a little softness in December in biotech.

Pipeline, which may be associated with this and then as we discussed there were a couple of key opportunities that we lost attributed to that situation. As you described we did bring in an expert who is independent and she determined that in terms of the two key issue.

<unk> that we portray a really.

<unk> was not the cause of those.

So we're pleased with that result.

In terms of the effect in this quarter, what we mentioned in my remarks is that we have a solid pipeline and if we execute on it. We believe that we can continue to deliver those desired one two book to bills. So it's been solid.

Thomas H. Pike: There was probably a little softness in December in the biotech pipeline, which may be associated with this. And then, as we discussed, there were a couple of key opportunities that we lost attributed to that situation. As you described, we did bring in an expert who was independent, and she determined that, you know, in terms of the two key issues, Fortrea really was not the cause of those.

We havent seen specific incremental effects since we talked to you in January but we are cognizant, we were cognizant of the potential when you get those kinds of headlines.

I will say, we're pleased to resolve the matter wouldn't be appropriate for us to comment further.

Thomas H. Pike: And so we're pleased with that result. In terms of the effect in this quarter, what we mentioned in my remarks is that we have a solid pipeline. And if we execute on it, we believe that we can continue to deliver those desired 1.2 book to bills. So it's been solid. We haven't seen specific incremental effects since we talked to them in January.

<unk>.

I spent time with their CEO and I'm excited about their company and I wish them well.

Got it. Thank you thanks for taking my questions. Thank you Dave.

One moment for the next question.

Our next question comes from Elizabeth Anderson with Evercore. Your line is open.

Thomas H. Pike: But you know, we're cognizant of the potential when you get those kinds of headlines. I will say we're pleased to resolve the matter. It wouldn't be appropriate for us to comment further. And, you know, I spent time with their CEO, and I'm excited about their company, and I wish them well.

Hi, guys. Good morning. Thanks, So much further question Tom.

Tom You described obviously the demand environment in terms of the book to Bill and sort of the overall demand environment I think in your prior question.

As solid can you maybe talk to us a little bit about sort of what you're seeing in terms of the demand profile from sort of the biotech environment, obviously I heard your comments about December.

Thomas H. Pike: Thank you. Thanks for taking my questions. Thank you, Dick.

Operator: One moment for the next question. Our next question comes from Elizabeth Anderson with Evercore. Your line is open. Hi guys. Good morning.

Obviously, the funding environment. Since then has been quite a bit stronger. So how does that sound transit as we move into the fourth quarter and any sort of major differences between biotech and pharma would be very helpful. Thanks.

Elizabeth Hammell Anderson: Thanks so much for the question. Tom, you described, obviously, the demand environment in terms of the book to bill and sort of the real demand environment, I think, in your prior question, as solid. Can you maybe talk to us a little bit about sort of what you're seeing in terms of the demand profile from sort of the biotech environment? Obviously, I heard your comments about December.

Yes. Thank you Elizabeth a couple of things since about second quarter last year, we have seen solid pipeline for our business and that's been.

Because of that we've been able to deliver these solid book to bills that you've seen in terms of biotech I think the word we would use is solid we have seen the funding for and we see the.

The 2020 for funding looks attractive for biotech we continue to see a solid flow from there in terms of big pharma, we see a solid flow from there as well we see a nice mix of business. So we see a mix of full service plus FSP. So I think the best term for US is that we are.

Thomas H. Pike: Obviously, the funding environment since then has been quite a bit stronger. So how does that sort of translate as we move into the fourth quarter? Any sort of major differences between biotech and pharma would be very helpful. Yeah, thank you, Elizabeth. A couple of things. Since about the second quarter last year, we've seen a solid pipeline for our business. And that's been, you know, because of that, we've been able to deliver these. In terms of biotech, I think the word we would use is solid. We've seen the funding for, and we see that 2024 funding looks attractive for biotech. We continue to see a solid flow from there. In terms of big pharma, we see a solid flow from there as well.

<unk> going to see that solid slow with the exception of that softness in biotech in December so.

Does that get close enough to your question Elizabeth.

That's helpful and maybe as a follow up maybe this is for Joe.

When you think about obviously you've talked about the margin improvement across the course of the year and I take your comments section of the back half weighting of that how do we think about the split between sort of gross margin improvement and leverage that you're getting there from the growth and the mix of business versus some of the SG&A efficiencies and improvements youre, making off of that side. Thanks.

Thomas H. Pike: We see a nice mix of business, so we see a mix of full service plus FSP. So I think the best term for us is that we're continuing to see that solid flow with the exception of that softness in biotech. So, does that get close enough to your question, Elizabeth? Yeah, that's helpful. And maybe as a follow-up, maybe this is for Jill.

Sure Elizabeth.

Then when you think about the back half you'll see it be weighted a little bit more to revenue growth because the TSA exits are happening later in the year. So there will be improvement in SG&A, but youll see more of it coming from revenue because as I hadn't had commented.

Jill McConnell: How do we think about you know, obviously, you've talked about the margin improvement across the course of the year, and I take your comments for sort of the back half waiting for that. How do we think about the split between sort of gross margins and improvements and leverage that you're getting there from growth and the mix of business versus some of the SG&A efficiencies and improvements you're making off of that side? Sure, Elizabeth.

We're holding onto some resource in anticipation of that growth. So we wouldn't expect to have to add a lot of additional resources to support that growth at least in the near term and then you will see some improvement in SG&A, but it is going to be much more weighted to the end of the year.

Jill McConnell: I think that when you think about the back half, you'll see it be weighted a little bit more to revenue growth because the TSA exits are happening later in the year. So there will be improvement in SG&A, but you'll see more of it coming from revenue because, as I had, as I had commented, you know, we're holding on to some resources in anticipation of that growth. So we wouldn't expect to have to add a lot of additional resources to support that growth, at least in the near term. And then you will see some improvement in SG&A, but it's going to be much more weighted towards the end of the year. Thank you for joining us. I've got it.

Got it thanks, so much guys.

Sure. Thank you one moment for the next question.

The next question comes from Max <unk> with William Blair. Your line is now open.

Hey, good morning, Thanks for taking our questions just wanted to follow up on the margin front a little bit here. So.

Can you just help us understand the cadence any more color there for 2024, I think you're expecting about nine 5% at the midpoint for the guide this year, but then exited in the I believe you said at about 13% can you just walk through the margin progression on a quarterly basis and then.

Operator: Thanks so much, guys. Sure. Thank you. One moment for the next question. The next question comes from Max Smock with William Blair. Your line is now open. Hey, good morning.

To provide some more detail around the different drivers behind that really aggressive ramp into the end of the year here.

Maxwell Andrew Smock: Thanks for taking our questions. I just wanted to follow up on the margin front a little bit here. Can you just help us understand the cadence, any more power there for 2024?

Yeah sure Max.

So I'm not going to give you the exact amounts by quarter, but I think in the in the commentary when you think about the one third in the first half and two thirds in the second half and that that third in the first half is going to come much more from the second quarter than the first quarter. The first quarter. It is going to be pretty much the nadir of the impact of this.

Jill McConnell: I think you're expecting about nine and a half percent at the midpoint for the guide this year, but then you know, exit in the year, I believe you said about 13%. Can you just walk through the margin progression on a quarterly basis and then provide some more detail around the different drivers behind that really aggressive ramp into the end of the year here? Yeah, sure, Max.

Soft book to bills that we had in that spin year, because I know if you can talk to some of you we talked about the fact, one year of soft.

Net new business doesn't turnaround in two quarters of good book to Bill, but we will expect to see that start to improve a little bit in second quarter, and then predominantly more into the second half I think when you get to.

Jill McConnell: So I'm not going to give you the exact amounts by quarter. But I think in the in the commentary, when you think about the one third in the first half, and two thirds in the second half, and that that third in the first half is going to come much more from the second quarter than the first quarter, the first quarter is is going to be, you know, pretty much the nadir of the impact of the soft book to build that we had in that spin year, because I you know, I know, as we've talked to some of you, we've talked about the fact, you know, one year of soft, net new business doesn't turn around in two quarters of good book to bill, but we will expect to see that start to improve a little bit in second quarter, and then predominantly more into the second half. I think when you get to the second half, it'll, it'll obviously continue to improve on a ascending trajectory, but not in such a pronounced way, we would see, you know, Little more, more balanced, although not exact. Got it.

The second half it will it will obviously continue to improve on a.

Sending trajectory, but not in such a pronounced way, we would see Q3 and Q4 to be a little more balanced although not exactly.

Got it that's helpful. And then maybe looking even further ahead here. If we think about you exited the year at around 13% and it sounds like Q3, and Q4 not entirely just somewhere kind of in that low teens range in the guidance for this year in total calling for about 95% I guess any sort of detail you can ride on what this implies.

For margins in 2025.

Yeah.

I think 300 plus basis points of margin expansion next year.

Yes, I think.

In my in my remarks, I was trying to say that if we're exiting the year at that trajectory of 13%, we would expect to hold that 13% and deliver that for the full year of 2025. So you definitely would get at least the 300 basis points compared to very well.

Jill McConnell: That's helpful. And maybe looking even further ahead here, if we think about you exiting the year at around 13%, it sounds like Q3 and Q4 are not entirely dissimilar kind of in that low teens range, and the guides for this year in total are calling for about nine and a half percent. I guess, any sort of detail you can write on what this implies for margins in 2025? I mean, is it fair to say we should get at least 300 plus basis points of margin expansion next year? Yeah, I think, in my remarks, I was trying to say that, you know, if we're exiting the year at that trajectory of 13%, we would expect to hold that 13% and deliver that for the full year of 2025. So you definitely would get at least 300 basis points compared to where we'll, who we're guiding for this year. Sorry, Jill, just to be clear, holding that would that be kind of the...

We're guiding for this year.

Sorry, John just to be clear holding that would that be kind of a worst case.

Scenario I guess I'm, just trying to understand because I think you've laid out a path beyond that 13%. So is it.

We would expect that yes, we would expect it obviously to improve slightly as we go through the course of the year because the TSA exits allow us to start to make some of the more significant changes around SG&A, but those things will come at a little bit of a ramp but I think just appreciating how much that is in terms of the total dollar Val.

And that 300 plus basis points I think at this point, we're not going to commit to anything greater than that but we hope that will be upside, but obviously, we will be able to share more of that with more with you on that I would say later this year. If once we confirm that we're fully on our TSA exit trajectory because that's really key to unlocking the SG&A improvement, yes, Max as you can imagine.

<unk> will be working toward progression, but Joe wanted to give you something to model.

Yes, certainly appreciate that and thanks again for taking my questions.

One moment for the next question.

Thomas H. Pike: Worst case scenario, I guess I'm just trying to understand because I think you've laid out a path beyond that 13%. So is it, you know, 13%? Yeah, we would expect it to improve slightly as we go through the course of the year because the TSA exits allow us to start to make some of the more significant changes around SG&A. But you know, those things will come at a little bit of a lag. But, you know, I think just appreciating how much that is in terms of the total dollar value and that 300 plus basis points. I think at this point, we're not going to commit to anything greater than that, but we hope that will be upside. But obviously, we will, we'll be able to share more of that with you later this year, once we confirm that we're fully on our TSA exit trajectory, because that's really key to unlocking the SG&A. Yeah, Max, as you can imagine, naturally we'll be working toward progression, but Jill wanted to give you something to model. Yeah, I certainly appreciate that.

The next question comes from Justin Bowers with DB. Your line is now open.

Yeah.

Hi, good morning, everyone.

Joe just sticking with the margins here.

Just really basic is there could you help us.

Understand what what the ratios.

Our embedded in the midpoint of the guide for direct costs.

And SG&A.

Then my.

My understanding is that you have some there's there's some.

Investments in some reallocation of cost there and when does that when does that normalize is that it sounds like on the previous question, it's going to continue into 2025.

Just trying to get a sense of.

What's the basis.

Where things are going to shake out.

Yeah, I think so in terms of investment.

We've been making those we made them through the second half theyre not theyre not huge from a dollar perspective, we've been very thoughtful about the investments, but there are things that we need to do from a.

Maxwell Andrew Smock: And thanks again for taking our questions. Thanks, one moment for the next question. The next question comes from Justin Bowers with DB. Your line is now open. Hi, good morning, everyone.

Competitiveness and to really address what our customers need from us and that will continue but I don't think youre going to see at least in the near term any huge outsized investments that will probably continue to play a long a consistent trajectory and those are all things that are really improving in that cost of sales space.

Justin D. Bowers: Jill, just sticking with the margins here, just really basic, can you help us understand what the ratios are embedded in the midpoint of the guide for direct costs and SG&A? And then my understanding is that you have some, there's, there's some investments and some reallocation of costs there. And when does that, when does that normalize?

<unk> said that the cost of sale you based on some of the comments I made earlier, you'll see it you'll see more of the improvement there as that revenue grows naturally without having to add a lot of resource at least for the remainder of this year.

That should improve cost of sales SG&A should improve based on what we're doing but the challenge. There again is the timing of the TSA exit and because they're largely.

Jill McConnell: Is that, it sounds like from the previous question, it's going to continue into 2025. But I'm just trying to get a sense of what the base is and where things are going to shake out. Yeah, I think so in terms of investment, you know, we've been making those we made them through the second half. They're not, they're not huge from a dollar perspective, we've been very thoughtful about the investments, but there are things that we need to do from a competitiveness and to really address what our customers need from us. And that will continue. But I don't think you're going to see, at least in the near term, any huge outsize investments that will probably, you know, continue to play along a consistent trajectory.

Q3, really Q4, you won't see a huge amount of the improvement there until right at the end or even into early 2025. So I think you'll see more improvement in the cost of sales margin in the back half of this year before SG&A and then SG&A will pick up and really start to accelerate in 2025.

Okay and then.

Into 2025, then will you have your.

Will you be sort of reporting the costs, the direct costs and SG&A will they be aligned the way that.

In line with sort of peers in the industry yet.

Yes, that's great talked about.

Yeah, that's a great question, sorry, I could've I could've added that but yes, actually youre going to see when we report our Q1 2024 results we will be.

Jill McConnell: And those are all things that are really improving at that cost of sales space. Having said that, you know, cost of sales, based on some of the comments I made earlier, you'll see more of the improvement there as that revenue grows, naturally, without having to add a lot of resources. At least, for the remainder of this year, that should improve cost of sales, and SG&A should improve based on what we're doing. But the challenge there, again, is the timing of the TSAX. You know, Q3, really Q4, you won't see a huge amount of improvement there until right at the end or even into early 2025.

<unk> our cost of sales our SG&A in a manner that we believe is consistent with our peers.

And then hopefully you'll be able to see that trajectory more clearly as those both improve over time.

Okay, Great I will save the rest for follow ups. Thank you.

Thank you.

One moment for the next question.

The next question comes from Patrick Donnelly with Citi. Your line is open.

Hey, guys. Thank you for taking the questions.

Tom maybe one for you just on the competitive landscape can you just talk a little bit about what you're seeing obviously you have the uncertainty there in December that you touched on but can you talk about just the competitive landscape pricing environment as well obviously in the press release, you talked about the concessions that seems specific to the accelerant piece, but just what youre seeing on the pricing.

Jill McConnell: So I think you'll see more improvement in the cost of sales margin in the back half of this year before SG&A, and then SG&A will pick up and really start to accelerate. Okay, and then, into 2025, then will you have your? Will you be sort of reporting the costs, the direct costs, and the SG&A, will they be aligned the way that, you know, in line with sort of peers and industry? Yes. Yes, that's a great question. Sorry, I could have I could have added that.

Side, and just the competitive landscape would be helpful.

Yeah. Thank you Patrick.

We are continuing to see good opportunities as I mentioned in my remarks, a nice mixture of full service and FSP opportunities.

And.

Jill McConnell: But actually, you're going to see when we report our Q1 2024 results, we will be showing our cost of sales and our SG&A in a manner that we believe is consistent with our peers. And then hopefully, you'll be able to see that trajectory more clearly as those both improve over time. Okay, great. I will save the rest for follow-ups. Thank you. Hewitt.

<unk> is at the table I have to say, we talked a little bit about how it's a new brand and we worry at times that some people may know covance and not know for trio or may not know that we're the size and scale and with the capabilities that we are so we're working on that but that being said the larger pharmaceutical.

<unk> a lot of the biotechs, they understand who we are and the capabilities. We have so we feel very good about that we have some.

Patrick Bernard Donnelly: One moment for the next question. The next question comes from Patrick Donnelly with Citi. Your line is open.

Key customer in the office Tomorrow, So very exciting I think we're competitive on all fronts now being at the table the pricing with regard to the pricing specifically for US there isn't much change there is not much to report up or down associated with it.

Thomas H. Pike: Hey guys, thank you for taking the questions. Tom, maybe one for you just on the competitive landscape. Can you just talk a little bit about what you're seeing? Obviously, you have the uncertainty there in December that you touched on, but can you talk about just the competitive landscape and the pricing environment as well? You know, obviously, in the press release, you talked about the concessions that seem specific to the Accelerand piece, but just what you're seeing on the pricing side and just the competitive landscape would be helpful. Yeah, thank you, Patrick. You know, we are continuing to see good opportunities, as I mentioned in my remarks, a nice mixture of full service and FSP opportunities. And, you know, Fortrea is at the table. I have to say, we talked a little bit about how it's a new brand. And you know, we worry at times that some people may know Covance and not know Fortrea or may not know that we're the size and scale and with the capabilities that we are. So we're working on that. But that being said, the larger pharmaceutical firms, and a lot of the biotechs, understand who we are and the capabilities we have.

So.

What we're seeing in the near term is.

No particular pricing pressure from any one party that we're competing with in our deals just the usual pressure you have in this industry, which.

We all we all carefully manage our cost structures and try to be as effective as we can.

Pricing things, but nothing really unusual at this point Patrick.

Okay. That's helpful. And then maybe just one following up on some of the earlier bookings questions.

You guys are probably a little bit of a unique situation here, where we're well into March here and youre kind of talking about the <unk> environment. It sounds like again, a little bit of that uncertainty that you talked about January mostly path and again I guess with three weeks or so left in the quarter you sound pretty confident on kind of clearing one two for the <unk>, but I just wanted to make sure.

Thomas H. Pike: So we feel very good about that. We have some, you know, a key customer in the office tomorrow. So very exciting.

Sure.

The booking environment to start the year.

The trajectory is on track.

Again with <unk> coming close to the end here.

Thomas H. Pike: I think we're competitive on all fronts now being at the table. The pricing, with regard to pricing specifically, for us, there isn't much change, you know; there's not much to report up or down associated with it. So, you know, what we're seeing in the near term is, there is no particular pricing pressure from any one party that we're competing with in our deals, just the usual pressure you have in this industry, which, you know, we all carefully manage our cost structures and try to be as effective as we can, you know, pricing things, but nothing really unusual at this point. Okay, that's helpful. And then maybe just one follow-up on some of the earlier booking questions.

That you are confident on that bookings book to bill. Thanks, So much.

Yes. Thanks whenever you are in the third quarter and Youre talking about your business you have to be you have to be cautious because we have to execute but the pipeline is sufficient for us to continue to drive this one two or better book to bill. So so I can tell you that at this point and again, we feel good about the opportunity.

Set that we're seeing we feel good about the value, we're delivering for the customers and their reaction to it.

I think we feel good about that but as you say like always with the CRO.

Thomas H. Pike: You know, you guys are probably in a little bit of a unique situation here where, you know, we're well into March here, and you're kind of talking about the one-cue environment. You know, it sounds like again, a little bit of that uncertainty that you talked about in January, mostly gone. And again, I guess with three weeks or so left in the quarter, you sound pretty confident about kind of clearing one two for the one cue, but I just wanted to make sure, you know, in terms of the booking environment to start the year, you know, the trajectory is on track. And again, with one cue, coming close to the end here, that you're confident on that bookings book the bill piece. Thanks so much.

That last months of the quarter, you've got to execute you got to work hard otherwise you don't make those numbers and I think the industry is pretty good at that and we are too.

Great. Thank you Tom.

Thank you.

One moment for the next question.

The next question comes from Derik de Bruin with Bank of America. Your line is open.

Hi, Good morning, and thank you for taking my question, Hey, I just wanted to clarify a couple of points.

So your.

So we were sort of that.

First of all on the EBITDA margin for 2025, I mean, your 2024 guide excludes the divestiture.

Thomas H. Pike: Yeah, thanks. Whenever you're in the third quarter, and you're talking about your business, you have to be, you have to be cautious, because we have to execute. But the pipeline is sufficient for us to continue to drive this 1.2 or better book to bill ratio. So, I can tell you that at this point. And again, we feel good about the opportunity set that we're seeing; we feel good about the value we're delivering for customers and their reaction to it. So I think we feel good about that. But as you say, like always, with a CRO, you know, that last month of the quarter, you've got to execute, you've got to work hard. Otherwise, you don't make those numbers.

So your comments on the 2025.

Numbers also.

Are you excluding divestiture, including the best divestiture on that right.

I just want to make sure we're doing the apples to apples on the comment.

So where are we in that in that case, we're saying 13% margin. So it's we're saying we'd be committed to getting to that margin irrespective of divestiture or not.

Okay and.

So and then just also in that 13% did I might have misheard or prior questions. I just wanted to clarify as Maria pointed answer to it.

Are you, saying that what's the opportunity going beyond that 13% I know you had talked about this 300 basis points. Prior to this is that is that it.

Thomas H. Pike: I think the industry is pretty good at that, and we are too. Great. Thank you, Tom.

Operator: Thank you. One moment for the next question. The next question comes from Derik DeBruin with Bank of America. Your line is out.

Or is that are you already captured in that 13% or is there incremental upside beyond 2025.

Derik DeBruin: Um, good morning, and thank you for taking my question. Hey, I just wanted to clarify a couple of points. So, your, you know, you and I were sort of that. First of all, on the EBITDA margin for 2025. I mean, your 2024 guide.

Yeah very good question I think it will depend again on the strength of the book to Bill is the more that we get over a 1.2 and convert that revenue the more likely you are.

From a revenue growth perspective be able to drive that it's also going to depend on.

How quickly we exit those TSA is if we do it again with our plan. It gives us a nice runway in 25 to do that and we're looking at some additional transformational projects there to accelerate that theres a lot of opportunity. It's just how quickly we can execute on it while still maintaining business operations and things. So we certainly hope there will be.

Jill McConnell: Glued to the divestiture. Do your comments on the 2025, Numbers, also, are you excluding the vestiture or including the vestiture on the apples, right? Just want to make sure we're doing apples to apples.

Jill McConnell: So are we in that in that case, we're saying 13% margin. So we're saying we'd be committed to getting to that margin irrespective of divestiture or not. Okay, and, and then also on that 13%, I might have misheard a prior question, so I just want to clarify this from a prior answer to it. Then are you saying that there's an opportunity going beyond that 13%? I know you talked about the 300 basis points prior to this, but is that in it?

Some upside but at this point, we're just not able to commit to it because until we get further along in the year and are certain that the TSA or exiting on the plan and then we can make some of these other changes and we continue to have these quarters of book to Bill, We're just not quite ready yet, but again as I think as we get later in the year and those are more firm than we will have more confidence.

Im longer months, Eric I think I think we still have the same targets. So nothing's changed that we believe.

There is a little bit of scale benefit to being a very large like some of our competitors are associated corporate costs from other costs, but in general we should be able to move this CRO right into the.

Jill McConnell: Or is that already captured in that 13%? Or is there incremental upside beyond 2025? Yeah, it's a very hard question. I think, you know, it will depend, again, on the strength of the book to bills. The more that we get over a 1.2 and you know, convert that revenue, the more likely you are to benefit from our revenue growth. Smith.

Upper mid teens so.

Yes.

Thanks, Tom Thats, what I was looking to clarify on that one thank you.

And I was a little bit surprised on the enabling services just sort of the implied.

Thomas H. Pike: Thank you. Thank you. How quickly we exit those TSAs. If we do it again with our plan, it gives us a nice runway in 25 to do that. And we're looking at some additional transformational projects there to accelerate that. There's a lot of opportunity. It's just how quickly we can execute on it while still maintaining business operations and other things. So we certainly hope there will be some upside, but at this point, we're just not able to commit to it because until we get further along in the year and are certain that the TSAs are leaving the plan and that we can make some of these other changes and we continue to have these quarters of book to bill, we're just not quite ready yet.

Evaluation of that I mean, given that you called out.

Uniqueness of the asset at your analyst day.

What was what why it wasn't just sort of curious as to why the multiples are sort of where they were giving put that business isn't given where the margin is it can you just talk a little bit about the valuation process and how you looked at it.

Okay.

And you're specifically asking in general about the price and that type of thing. So the price of the deal. It just looks a little low relative to what sort of like how the assets were described.

Yes. These are.

Our complex transactions, we did go through a full process. It was announced that Barclays helped us do it we had a fair amount of interest in these assets.

And went through the normal down selection process, and then deep due diligence.

Thomas H. Pike: Yeah, I think I think we still have the same target. So nothing's changed that we believe now that there's a little bit of a scale benefit to being very large, like some of our competitors are associated with corporate costs from other costs. But in general, we should be able to move the CRO right into the, you know, upper mid teens.

Ultimately down selected to a couple and then down selected to one I will tell you I'm really pleased that it's Arsenal I think they have demonstrated.

Willingness to invest in businesses grow businesses over time.

So I'm really pleased.

Got no that team better and we're we're pleased for those businesses.

Derik DeBruin: So, Yeah, thanks, Tom. That's what I was looking to clarify on that one. Thank you. And I was a little bit surprised by the enabling services, just sort of the implied valuation of that. I mean, given that you've called out, you know, the uniqueness of the asset at your analyst day, I guess what was what, why wasn't I just sort of curious why the multiples are sort of where they are given what that business is and given where the margin is on it. Can you just talk a little bit about the valuation process and how you looked at it? Um, and you're specifically asking in general about the price and that type of thing.

From our standpoint, when we did our strategic review.

We just need to concentrate the investments we have on really becoming the CRO of choice.

And.

Arsenal will be better situated to make the investments necessary to maximize those assets Derek and.

There's a timing aspect to all of this so just given the nature of investing cycles our available capital.

What we would see there is that they may be able to make investments faster to be able to.

Thomas H. Pike: Yeah, the price of the deal just looks a little low relative to what it does, sort of like how the assets were described. Yeah, you know, these are complex transactions. We did go through a full process. I think it was announced that Barclays helped us do it. We had a fair amount of interest in these assets and went through the normal down selection process and then deep due diligence and, you know, ultimately down selected to a couple and then down selected to one. I will tell you, I'm really pleased that it's Arsenal.

Let those businesses do what they can do on the other hand, there is a real positive for us and our investors know some investors look at our capital structure, and our debt to EBITDA multiples and things and we'd like to see us lower.

And you May know that our covenants really require us to use about 60% of the proceeds for debt pay down. So we are going to get a little bit of room on our debt, which I think is positive for us and we are looking at some other things as well.

Thomas H. Pike: I think they have demonstrated a willingness to invest in businesses and grow businesses over time. So I'm really pleased, and I've gotten to know that team better, and we're very pleased for those businesses. From our standpoint, when we did our strategic review, we just need to concentrate the investments we have on really becoming the CRO of choice. And, you know, I think Arsenal will be better situated to make the investments necessary to maximize those assets, Derik. And, you know, there's a timing aspect to all of this.

So I think you look across this transaction, we focused the business on this really attractive clinical business phase one before we focused management team because we've got a lot going on so we focused management team on being able to drive business and raise margins, we let those businesses be all they can be because they.

Get the investment attention that they probably deserve in the shorter term and then we address some organizations.

Thomas H. Pike: So given the nature of investing cycles and our available capital, what we would see there is that they may be able to make investments faster to be able to let those businesses do what they can do. On the other hand, there's a real positive for us and our investors. Some investors look at our capital structure and our debt to EBITDA multiples and things and would like to see us go lower. And you may know that our covenants really require us to use about 60% of the proceeds for debt paydown. So we are going to get a little bit of room on our debt, which I think is positive for us, and we are looking at some other things as well. So I think you look across this transaction; we focus the business on this really attractive clinical business phase one to four. We focus the management team because we've got a lot going on. So we focus the management team on being able to drive business and raise margins. We let those businesses be all they can be because they get the investment attention that they probably deserve in the shorter term.

Potential investor concerns about our capital structure. So you look across those four end.

To me Derek I think we've really got to win here.

My next question was going to be on the leverage implications, which you answered that so thank you very much I appreciate it alright.

Alright, thank you.

I show no further questions at this time I would like to turn the call back to Tom <unk> for closing remarks.

Well, thanks, everybody for joining today.

We continue to work hard here for trio for our customers and for our investors and I think the team is doing great job. So we appreciate your continued support in our journey.

This concludes today's conference call. Thank you for your participation you may now disconnect.

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Thomas H. Pike: And then we address some organizations who, you know, potential investor concerns about our capital structure. So you look across those four. And, you know, Derek, I think we really have to win here. Well, Yori, my next question was going to be about the leverage implications, but you answered that. So thank you very much. I appreciate it. All right. Thank you. I have no further questions at this time. I would like to turn the call back to Tom Pike for closing remarks. Well, thanks everybody for joining us today. You know, we continue to work hard here at Fortrea for our customers and for our investors. And I think the team is doing a great job.

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Thomas H. Pike: So we appreciate your continued support on our journey. Thanks. This concludes today's conference call. Thank you for your participation. You may now disconnect.

Okay.

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