Q3 2024 Fortrea Holdings Inc Earnings Call

November 8, 2024

She's got what it takes!

Thank you for watching!

Speaker Change: Ladies and gentlemen, thank you for standing by welcome to four tree of third quarter 'twenty 'twenty four 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 to ask a question.

Speaker Change: During this session you would need to press star one on your telephone you weren't didn't hear an automated message advising your hand just raised.

human Goober: Draw. Your question. Please press Star one again, please be advised that today's conference is being recorded I would like now to turn the conference over to human Goober head of Investor Relations and corporate development. Please go ahead.

Speaker Change: Good morning, Thank you for joining <unk> third quarter 2024 earnings conference call I am he might enjoy head of Investor Relations and corporate development to talk to you on the call with me today are our CEO, Tom Pike, and CFO Didnt economy. The call is being webcast. It in the slides accompanying today's presentation have been posted to the Investor relations.

Speaker Change: <unk> heard us say, what your dot com. During this call we will make certain forward looking statements within the meaning of private Securities Litigation Reform Act of 1995. These statements are subject to significant risks and uncertainties that could cause actual results to differ materially from our current expectations. We strongly encourage you to review. These reports we filed with.

Speaker Change: 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 presentation deck people check the website. Please note that any forward looking statements represent our views as of today November eight 2024 and that we assume no obligation to update the forward look.

Speaker Change: These statements even if estimates change during this call will also be referring to certain non-GAAP financial measures. These non-GAAP measures are not configured to order placement for the comparable GAAP measures, but we believe these measures help investors gain a complete understanding of yourself and reconciliation of such non-GAAP financial measures to the most directly comparable GAAP.

Speaker Change: It's just isn't available in the earnings press release and earnings call presentation slides provided in connection with today's call that I'd like to tell you, though what do our CEO Tom Pike Tom.

Tom Pike: Good morning, everyone welcome to the call, let me start by saying that for Korea had a solid quarter of execution and progress on our strategic objectives, our bookings landed well and we delivered on other key metrics as anticipated.

Tom Pike: Korea as you probably know so pure place heroes, serving phases, one through four we're a leading global provider of clinical pharmacology or phase one development functional service provision, which we call FSP and full service outsourcing for trio is broad and deep in how we address the market.

Tom Pike: Our preferred relationships with some large pharmaceutical firms that have broad exposure to biotech our business. Overall is about 50 50 between large pharma and biotechs are large pharma partners. Appreciate that we have sufficient scale to conduct clinical services almost anywhere in the world. The biotech customers value that were small enough to give our customers the person.

Of all attention they need to drive agile solutions, both types of customers value, our 30 years of experience and expertise since <unk> spun out of our parent our customer net promoter scores have improved especially recently.

Tom Pike: We're getting external recognition too this quarter pharma times recognize the number four trends for their great work, including an in house CRA Global project manager and other roles. In addition, Fortunately has just been named a finalist in fierce Healthcare's excellence and data driven dei award for our <unk>.

Tom Pike: <unk> Board. We're also a finalist in the CRO of the year category and the annual Scrip Awards, both awards will be announced in early December.

Tom Pike: All of that is pretty incredible given that we've only been independent for 16 months.

Tom Pike: Now here are some highlights of our execution and progress during the quarter. We achieved a book to Bill of 123 for the quarter. We closed a number of important projects with larger pharmaceutical customers and we had success with biotechs.

Tom Pike: Our pipeline of opportunities for the next two quarters is solid.

Our exit from our former parent as nearly insight with over 90% of the servers and application systems migrated through our independent portray it environment.

Tom Pike: Our EBITDA and revenue were in line with our expectations and finally, we continue to uncover why this business has underperformed financially and that people process and technology required to fix that.

As usual I'll provide some detail on some of these highlights and Joe will fill in with others.

Speaker Change: Last quarter I discussed the new large pharma relationships and some footholds as we call them of work and other larger companies. This quarter. We made progress getting started with these customers, including responding to some early request for proposals for instance, one of the footholds resulted in an attractive full service engagement. This project is.

Speaker Change: Significant phase III trial.

That's for.

<unk> <unk> hundred one based on our therapeutic expertise in a specific area in our deep investigator relationships. Some other larger projects also came through as planned from longtime larger customers.

Biotech companies also featured strongly in our full service wins in the third quarter across a number of therapeutic areas with key biotech wins in oncology diabetes dermatology in autoimmune disease <unk> known for our oncology expertise across our customer mix. We continue building a strong position in other areas such as ophthalmology.

Our expertise in wet AMD in gene therapy skills are seeing is a strong differentiator.

Speaker Change: For <unk> real World evidence consultants and scientists one several virtually designed observational studies and the Asia Pac region for different pharma customers are consulting and science help us differentiate.

Speaker Change: Our clinical pharmacology business continues to have strong bookings with attractive book to bills customers and indications as we've discussed in the past and with analysts our lead executive for Cps saw some softness in biotech around the time of the spin and has successfully transformed the mix to ensure a strong pipeline of attractive opportunities.

Speaker Change: Team has been particularly successful with larger pharmaceutical firms who are spending.

Speaker Change: Our Cps business also continues to have a solid pipeline of qualified new business for biotech customers for instance, this quarter, we secured an important contract with a new biotech customer for a phase one study supporting its Alzheimer's program. What was significant about this award is that were initially not selected for the program.

We're able to unseat incumbents CRO because of our solutions focus and expertise in the area.

Speaker Change: Our experience with complex programs and Cps helps us transition our strong relationships in phase one into phase one b into as we discussed last time, we're making progress there with an increasing win rate.

We also continue to press ahead with some productivity and innovative technology projects, we have a nice tool that's used by <unk> and a couple of pharmaceutical firms for study oversight and optimization.

Speaker Change: We showed a roadmap to customers and several prospects this quarter and generated a lot of excitement.

Speaker Change: AI and ml as being added to try to improve predictability and utility to that tool.

Speaker Change: We're also looking at some other interesting applications of technology needed tools, AI tools and practical complex areas, such as protocols and amendments Soapies CRA co pilot tool and continuous data cleaning.

Speaker Change: Now, let me address the questions I anticipate youll ask about our second half bookings as we told you going into the third quarter, our pipeline was higher than the average of the prior three quarters with a nice mix of large pharma and biotech.

Speaker Change: Coming into the fourth quarter, the same metric held and the pipeline was greater than the average of the prior three quarters consistent.

Speaker Change: Consistent with our Q2 commentary we continue to target a one two book to Bill for the second half, we know that we need to execute through the quarter.

Speaker Change: Regarding revenue and adjusted EBITDA in light of the backdrop of spin related complexity I am pleased with our execution. In addition to a strong quarter for new business. We delivered on expectations of revenues. We also continued to expand our margin delivering EBITDA as we expected. We know that we have continued work to do but we're making progress.

Speaker Change: <unk>, let me handover to gel and I'll wrap up with some comments about the remainder of the year Joe.

Joe: Thank you Tom and thank you to everyone for joining US today as a reminder, all my remarks relate to continuing operations at <unk>. Following the divestiture of our enabling services businesses unless I note otherwise.

Speaker Change: I'll start by saying that this quarter has delivered as we expected revenues.

Revenues of $674 $9 million declined five 4% year on year.

The reduction versus the prior year was driven by lower service fee and pass through revenues are.

Speaker Change: Our service fee revenue continues to be impacted by a combination of factors, primarily lower new business awards in the pre spin period, along with the mix of later stage and longer duration studies in our portfolio.

Speaker Change: The pass through decline is driven by lower pass throughs on the biomarker study, we've previously called out which is continuing to normalize given its stage in the project lifecycle.

Speaker Change: On a GAAP basis direct cost in the quarter decreased six 6% year over year, primarily due to lower personnel costs as well as lower pass through costs, partially offset by an increase in stock compensation and professional fees.

Speaker Change: SG&A in the quarter with higher year over year by 27, 6%, primarily due to an increase in professional fees and incremental one time costs incurred for exiting the TSA.

Speaker Change: Along with the yield costs related to the receivables securitization program, we initiated in the second quarter.

Speaker Change: The company reclassified $39 million from direct costs to SG&A expense in the prior year comparison period, primarily related to information technology costs and certain non clinic facility charges.

Speaker Change: For the third quarter, you will see SG&A as a percent of revenue on a GAAP basis at 22%.

However, if you exclude the impact of approximately $27 million of one time costs related to the continued separation from our former parent.

Speaker Change: And the incremental impact of a full quarter's worth of expense related to the yield cost underlying SG&A as a percent of revenue was consistent with the last two quarters.

Speaker Change: Net interest expense for the quarter was $22 4 million a decrease of $12 2 million versus the prior year benefiting from the repayments. We made on the term loan a and term loan b during the second quarter.

Speaker Change: When looking at annualized interest expense using outstanding debt securitization usage and rates in effect during the third quarter 2024 annual total cash interest and securitization costs are estimated to be approximately 18% lower compared to the annualized costs. We were incurring at the start of 2024.

Speaker Change: Turning to our tax rate the effective tax rate for continuing operations for the quarter was a benefit of 48, 3%, reflecting an updated split of domestic versus foreign earnings relative to our latest forecast.

Speaker Change: During the third quarter, we recognized a tax benefit of $17 $3 million and continuing operations, primarily due to this update in forecasted pretax loss, partially offset by evaluation allowance on our deferred tax asset related to the carryforward of disallowed interest expense.

Speaker Change: We continue to consider initiatives that we expect could improve our overall tax position over time.

Speaker Change: Our book to Bill for the quarter with 123 times and for the trailing 12 months is 115 times our backlog at around seven 6 billion has grown six 2% over the past 12 months.

Speaker Change: Adjusted EBITDA for the quarter of $64 $2 million decreased five 9% year over year compared to adjusted EBITDA of $68 $2 million in the prior year period.

Speaker Change: Note that adjusted EBITDA increased 16, 3% on a sequential basis in line with our expectations.

Speaker Change: Adjusted EBITDA margin for the third quarter with nine 5% compared to nine 6% in the prior year period.

Speaker Change: Adjusted EBITDA margin in the quarter was negatively impacted by the lower service fee revenues in the quarter, along with higher SG&A costs post spin to support operations as a public company.

Speaker Change: These were partially offset by the benefit from the restructuring program, we initiated in the third quarter of 2023, which is continued into 2024.

Speaker Change: In the third quarter of 2024, adjusted net income of $20 $7 million increased 3% compared to adjusted net income of $20 1 million in the prior year period.

Adjusted net income for both basic and diluted share for the current quarter and the prior year period with 23.

Speaker Change: Turning to customer concentration our top 10 customers represented 51% of third quarter 2020 for revenues.

Speaker Change: One customer accounted for 15, 1% of revenues.

Speaker Change: As I comment on cash flows note. These relate to for trio in total as we have not segregated cash flows from discontinued operations for.

Speaker Change: For the nine months ended September 32024, we reported $245 $7 million in cash flow from operating activities compared to $150 million generated in the prior year.

Speaker Change: Cash flow benefited from the sale of receivables under the securitization facility and an increase in unearned revenue, partially offset by the decrease in net income.

Speaker Change: Free cash flow was $217 million compared to $119 $1 million in the first nine months of 2023.

Speaker Change: Net accounts receivable and Unbilled services for continuing operations were $689 $1 million as of September 32024, compared to $988 5 million as of December 31, 2023.

Speaker Change: Days sales outstanding from continuing operations was 50 days as of September 32024, four days lower than June 32024.

Speaker Change: The reduction versus the second quarter is primarily due to reductions in our Unbilled services balance as we continue to enhance our contracting terms and processes.

Speaker Change: We continue to make changes to our contracting in order to cash processes to enable further improvement to our DSO profile overtime.

Speaker Change: We are fully compliant with the financial maintenance covenants of our credit agreement as of the end of the quarter.

Speaker Change: We ended the quarter with more than $5 billion of liquidity.

Speaker Change: Our capital allocation priorities are unchanged focusing in the near term on infrastructure investments for timely exit of the transition services agreement with our former parent targeted investments to drive organic growth and improved productivity and then debt repayment.

Speaker Change: Now I will provide an update on our transformation program.

Speaker Change: We continue to make progress on our journey towards improving the longer term growth and profitability of for trio.

Speaker Change: Our competitive approach to winning new business Award is a primary objective of our entire leadership team and we regularly leverage their relationships and experiences to enhance our partnerships with our customers.

Speaker Change: On operational execution, our first priority is delivering high quality work for our customers.

Speaker Change: We continue to execute on productivity improvements and actions that speed, our time to study start ups and milestone delivery.

At the same time there are specific areas that we believe require measured investments to ensure revenue growth and enhanced operational effectiveness. For example, we are making select investments in our commercial organization certain operational areas and parts of SG&A, we know that given our current margins we need to deliver savings elsewhere to fund these investments.

Speaker Change: We expect to exit the vast majority of the TSA services by year end with a limited number being exited early in 2025 to ensure business continuity through 2020 for yearend.

Speaker Change: We are continuing with targeted programs to reduce costs, including programs intended to better align our resources with the needs of specific projects, while reducing profit pockets of lower productivity. They.

Speaker Change: Improvement in overall adjusted EBITDA. This quarter is attributable largely to these programs.

Speaker Change: We are continuing with our plans to reduce SG&A costs across our supporting functions.

Speaker Change: We expect the benefit from these to ramp up during 2025 as we believe that full independence from our former parent will enable us to deliver these functions in more efficient ways versus how they were historically delivered.

Regarding 2024 guidance, we have updated our revenue guidance range to $2 $7 billion to $2 $75 billion there.

The reduction in the top end of the range is primarily driven by lower trends impact through <unk>.

Speaker Change: Distant with what I discussed earlier.

Speaker Change: Our adjusted EBITDA guidance range of $220 million to $240 million remains unchanged.

Speaker Change: There are a number of moving parts that we are navigating and managing closely such as the transition of key internal it systems and devices in and around the fourth quarter. These technology transitions do not impact customer facing systems.

Speaker Change: We expect to provide 2025 guidance in the first quarter of 2025.

Speaker Change: Building, our backlog along with efforts to drive margin expansion continued to be the primary focus of our leadership team.

Speaker Change: Im not commenting specifically on 2025 targets as they will be informed by the exact timing of exiting the TSA services from our former parent along with having more certainty on fourth quarter net new business awards, and a better sense of the pipeline of opportunities heading into 2025.

Before I conclude I want to take a moment to acknowledge the significant progress our teams are making towards fully exiting the transition services agreement as well as to build the new infrastructure that will enable us to operate more efficiently and effectively.

Speaker Change: As Tom mentioned more than 90% of our IP applications and servers have been transitioned and the teams leading our HCM and ERP implementations are on track for their respective December and January go live date.

Speaker Change: Easy to think okay. What's next but this demonstrates that our teams have the determination and agility to execute difficult tasks under challenging circumstances. This effort combined with the work we've done to strengthen our capital position is laying the foundation for the long term growth and profitability of our trio there.

There is still work to be done, but we are putting building blocks in place to create long term value for all of our stakeholders.

Speaker Change: With the solid foundation, we have laid in the past year attractive backlog of nearly $7 $6 billion and a talented global team of more than 15500 professionals. We are committed to longer term growth and margin expansion our commitment to execution, along with our focus on innovation and customer satisfaction as shown by our improving NPS.

Speaker Change: Sports are unlocking new opportunities enhancing our position in the market. We are confident in our ability to improve margins and deliver significant value for our customers employees and shareholders over time.

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

Tom Pike: Thank you Joe in closing, let me provide a few thoughts about the remainder of the year.

Tom Pike: During the fourth quarter of 2024, as I mentioned, our pipeline of opportunities has grown and has sufficient large pharma, which should be more predictable. We're targeting one two book to bill in the second half.

Tom Pike: We have looked at qualified opportunities for Q1 and feel it is solid at this point.

Tom Pike: Our customer systems, such as fever metadata are already transitioned and in production and fortress environment I'll be excited to see our new ERP system implemented this quarter next year, a hard working teams will turn their attention to making improvements for four Korea moving.

Tom Pike: Moving to customers.

Tom Pike: Had a number of senior level meetings with our larger pharma customers this quarter and got consistent reports of the strong job. Our teams are doing well the environment is uncertain for some larger pharma organizations, causing companies to increase or decrease their spend in R&D, we're doing our best to help them through whatever they need to do it.

Tom Pike: I've also met with many biotech prospects and customers and the <unk> teams are delivering there well as well they are bullish on their therapeutic assets and know for Korea can provide top quality data packages for regulators, we provide multiple executive touch points to help them achieve their goals often complex goals.

Tom Pike: With clinical research in.

Tom Pike: In Q3, we published our inaugural corporate social responsibility report underscoring our commitment to safety environmental stewardship, fairness and ethical governance and everything that we do.

Tom Pike: In summary for Korea had a solid quarter of execution progress, we're well positioned for growth and value creation in the future.

Tom Pike: I would like to recognize our fortress team around the world that can be challenging to balance the competing demands of working into 30 year old company with the needs and energy of a startup our team is committed to customers and the important work of developing solutions to bring treatments to patients sooner.

Tom Pike: I'm proud of what we've achieved so far and remain excited about what we can deliver in the years ahead. Operator can you. Please open the lineup for questions. Thank you.

Speaker Change: Thank you as a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced and to withdraw. Your question. Please press star one again.

Speaker Change: And our first question will come from Eric Coldwell with Baird. Your line is open.

Eric Coldwell: Thanks, very much good morning good.

Speaker Change: Good job.

Speaker Change: Colin <unk> as you did.

Speaker Change: Wanted to ask about Clinton pharma in particular you have.

Speaker Change: A few studies going in you're in.

Speaker Change: Your various units Theyre not all.

Speaker Change: Diabetes and weight loss, but there are quite a few of them Im curious if you could talk about.

Speaker Change: What the nature of studies of how Thats transitioned this year as is clear from really getting a lift because of the <unk> one type category or are you seeing strength in other therapeutic categories as well what's your overall read on how strong the overall phase one market is.

Speaker Change: Yes, I think I'd start by the way good morning, Eric I think I'd start by saying that one of the things we think about Europe for Korea is given our size and given our breath, we do have a different kind of exposure than the largest CRO.

Speaker Change: The marketplace and the exposure we have is to some attractive large pharmaceutical firms in phase one in particular as well as to biotechs around the world and so the combination of those two.

Speaker Change: Re splice that business in terms of how we target ourselves in the market and we're really trying to target those organizations that are spending well interestingly Eric.

Speaker Change: We do do some work on good ones, but we also have broad exposure across the business as I mentioned.

Speaker Change: Actually I had another point that didn't add in an interesting autoimmune compounds that we have in the U K that we're working on we have a wide variety of things that we worked through so it's actually less GOP, one oriented and it's more oriented across a wide array of such.

Speaker Change: Sophisticated scientific therapies.

Speaker Change: That's good to hear and Tom you mentioned the win rate was.

Speaker Change: The net promoter score is up are there any any stats or metrics you could give us around those.

Speaker Change: I'd rather not.

Speaker Change: Specifics because then you will ask me next time.

Speaker Change: It is good but.

Speaker Change: <unk>.

Speaker Change: But yes, we basically have win rates that are up since the spin year, our cps win rates are quite good.

Speaker Change: And in particular, as we're talking about it and.

Speaker Change: So so I think in the net promoter scores have also taken turns for the better since we spun so we're pretty proud of those things as we move forward.

Speaker Change: Great if I could squeeze one last one and with Jill just a technical one a lot of moving pieces with the.

Speaker Change: The TSA is the.

Speaker Change: The facility rates.

Speaker Change: Rates changing and just a lot moving on here with your interest expense you gave some metrics on the improvements year over year I'm curious if you could give us a sense on where you see sort.

Speaker Change: Sort of normalized.

Speaker Change: Interest expense quarterly what's the exit rate on that as we go into 'twenty five.

Speaker Change: Yeah, I think what you saw this quarter, Eric is pretty consistent because youll remember Q2 was a little bit.

Unusual in that we had with the debt paydown happened during the quarter, but we also had the.

Speaker Change: The yield costs from the original debt that we were amortizing and we had to take a portion of that is a write off in the quarter, which impacted interest expense. So what you saw this quarter is generally representative at all it will depend on how rates move and it also will depend on what we might do if we need to be in and out of the revolver a bit in the quarter, but I think somewhere in this range plus or minus.

Speaker Change: 10% to 15% is a decent approximation going forward hopefully months, hopefully minus but we'll see.

Speaker Change: Okay. Thanks, very much guys.

Speaker Change: Sure. Thank you.

Speaker Change: And the next question comes from Patrick Donnelly with Citi. Your line is open.

Patrick Donnelly: Hey, guys. Thank you for taking the questions.

Tom Pike: Tom maybe just on the bookings environment is really nice to see the book to Bill covered the 123 level.

Tom Pike: The prior commentary was one two in the back half kind of a build right with lower building into a higher <unk> can you just talk about I guess what changed what you saw in the quarter.

Tom Pike: That's much better than it sounds like still one two for the second half maybe just frame up for Q4 as what you've seen so far this quarter would be helpful.

Speaker Change: Yeah, Thanks, Patrick good morning.

We feel good about the back half I think.

Speaker Change: Given the uncertainty we saw in Q1 and Q2, we've decided to stick with our prior commentary that we're looking for one to average in the second half, but as I mentioned in the prepared remarks, we do have a nice mix of large and biotech, which gives us a little bit more predictability in Q4.

Speaker Change: But as you know with Q4, given the holiday schedule that many large pharmaceutical firms have.

Speaker Change: You really have to get a lot done given that holiday period, we have there.

Speaker Change: But I think overall, we feel pretty comfortable with Q4 and I'll also add that we've looked at Q1, and we feel pretty comfortable with Q1 as well so as we look out.

Speaker Change: I'd stick with my prior remarks, but we feel pretty comfortable that if.

Speaker Change: If we execute we can deliver at 1.2 average.

Speaker Change: Okay. That's helpful and then Joe maybe just on the margin front I know the prior commentary was around 11%, 12% EBITDA margin for next year very much contingent on the one two book to Bill in the second half, which obviously, we've just kind of talk through you guys feel good about that.

Speaker Change: Would be helpful.

Speaker Change: At a high level to talk through the confidence level in that EBITDA again, I know the bookings, where the big peaks or at least one quarter through the second half looking pretty good.

Speaker Change: So maybe just talk through the moving pieces and again, just the confidence level with the prior EBITDA commentary.

Patrick Donnelly: Sure Patrick.

Specifically our thing we're going to not give 2025 guidance right now I think it's important yes, we're very pleased obviously with the 123 that we achieved in the third quarter, but we have to deliver in Q4 again and it will depend very much on the mix and also what we see going into the first quarter because youll recall from earlier this.

Patrick Donnelly: This year we've had.

Patrick Donnelly: We've had to change our guidance based on the fact of where we landed in the first half. So I think it's important for US also to understand what that pipeline really looks like it looks good at the moment, but the mix is also important and the timing of those TSA exit is really critical because they're essential we believe we're on track for yearend, but theres still a lot of work.

Patrick Donnelly: And obviously as I mentioned, two big systems getting ready to go live and those are absolutely essential for us in terms of moving into the next generation of SGA.

Patrick Donnelly: SG&A improvement, so we would rather wait and have more clarity on what things look like rather than say something now that they still has a lot of moving parts in it so I'm going to refrain from answering that one directly but explain a little bit of why of we're going to take a pause and give you that feedback or update in the first quarter.

Speaker Change: Understood. Okay, we'll stay tuned on that thank you.

Patrick Donnelly: Sure.

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

Speaker Change: Hi, good morning, everyone.

Tom just one for you you've been in the industry just as long as anyone.

Speaker Change: Could you help characterize the environment, especially with what.

What we're seeing in large pharma now.

And.

Speaker Change: Do you have a sense of maybe where we are in terms of.

Speaker Change: Some of the restructurings and re prioritization so are we.

Speaker Change: Are we closer to the finish line here or is this something that.

We think <unk> for the next year or two.

Speaker Change: Hey, Justin good morning.

I guess, a few things I'd say, we mentioned last time that we've started to categorize the top 20 and they are so much of the spend of the industry into three groups. There are those who are very successful and growing rapidly and frankly spending rapidly on R&D and you even heard some of our competitors talk about it.

It's spilling out into new full service outsourcing projects.

Speaker Change: Opportunities for the industry and then we have two other groups that are kind of easily describe one is the <unk>.

Speaker Change: Really flat to declining group and the other ones have slower growth or they're flat.

Speaker Change: And both of those other groups are doing some level of restructuring so a huge amount depends who you're exposed to.

You're one of the largest CRO as you are probably exposed to most of that mix. So you have a fairly complex puzzle if you're somebody like us.

Speaker Change: We're exposed some of it.

Speaker Change: And.

Speaker Change: We're we've been able to manage it to date I think it would be a way to say it so.

Speaker Change: And I'd also just and I saw your report associated with the market growth and comments and I generally agree with what you said in there I think I think I think there are certain pharmaceutical firms, where R&D is accelerating and the general backdrop. It seems solid on the biotech front, which.

Speaker Change: That in prior quarters I think the recent September funding numbers for instance have indicated that as well so it seems solid not spectacular but solid.

Speaker Change: And so I think that firms can execute against this if theyre commercial organizations manage well.

Yes.

Speaker Change: Got it and then maybe one for Joe I appreciate the EBITDA bridge that.

You guys provided in the deck with respect to the bridge from <unk> to <unk>.

Speaker Change: You have two buckets, one service fee revenue growth and one for cost savings.

Speaker Change: Which one has the greatest variability.

What's the interrelationship between the two if any.

Speaker Change: Yeah, Let me start I think the two buckets when you look at the G&A.

Speaker Change: G&A bucket.

Speaker Change: Margin optimization generally I think as you saw in this quarter that was a big contributor really to the improvement quarter on quarter.

Speaker Change: There is a piece of really related to variable comp and where we end up landing for the year. That's still on the table in that in that kind of will drive how big we are in that range, but the margin improvement that you saw this quarter Youll probably also.

Speaker Change: Note I called out 15500 people, that's come down a little bit from where we were in the past quarter or two and so it's a combination of the work that we've been doing in a very thoughtful way to manage the business and set ourselves up for future success, all while making sure that we prioritize our customers needs and think about the needs of the projects.

Speaker Change: On the revenue side.

Speaker Change: As I had mentioned at Q2 some of the step up in in the second half was going to be related to a large suite of projects that we had won in the clinical pharmacology business as we've been talking about earlier and we did see that step up as we headed into Q3, and we're expecting that to continue into Q4, although.

Speaker Change: Sometimes with the volunteers and things around the holidays things can be a little bit variable. So we wanted to just provide that little bit of range. There because I do think there could be a little bit of movement, just depending on where we land we feel good about it at the moment, but it will very much depend on how things play out over the next couple of months. So those are some of the big drivers.

Speaker Change: In terms of whats driving those two buckets and the range that we provided.

Speaker Change: Understood. Thank you so much sure.

Speaker Change: And the next question comes from Sergey <unk> with Barclays. Your line is now open.

Speaker Change: Great. Thanks, guys.

Speaker Change: I guess can we talk about some of the pricing dynamics here.

Speaker Change: And.

Speaker Change: For the recently won.

Speaker Change: Awards that you guys have.

Speaker Change:

Speaker Change: The fear is that.

Speaker Change: The feedback has been like pricing has been extremely competitive and so how much of this your wins are associated with coming in as one of the lower cost providers.

Yes, good morning Luke.

Speaker Change: As we've said on prior calls we recognize the situation that this organization needs to improve its margins and in general our belief is that we can price at market and based on our capabilities and experience we can wind projects.

So I know there's been some noise out there about different organizations, but in general for US we're trying to price at market because we don't believe our customers make a decision based solely on price. They base. It on if you think about the strategy we have how long the duration is that we propose the prop.

<unk> ability that we can deliver patients in the timeframe that are required for the study. So they are looking at quite a number of things.

Speaker Change: Our customers really arent shortsighted enough too.

Speaker Change: Make choices on that now I will say FSP continues to be competitive you'll hear this everywhere there is less differentiation there but again.

Speaker Change: <unk> of our business.

Speaker Change: At this moment in those most competitive top pharma FSP clinical situations.

Speaker Change: That's not a focus for US right now so I think youll hear from people who are in that area Youll hear an intense focus on price so.

Okay, and then just a follow up here.

Speaker Change: I mean, the just talk about you guys talked about biotech strength.

Larger strategic strength that you guys saw that's driving the bookings.

Can you talk about like from a biotech perspective is this mostly like from the recent our.

Speaker Change: Public raises that we've seen this year.

Speaker Change: Is it mostly broad based so I'm just trying to figure out like the rest of the <unk> have been really choppy and then you guys kind of have.

Speaker Change: <unk> avoided a lot of the bookings and other issues that others are seeing so.

Speaker Change: Can you talk about like how you are positioned in the market differently than the others that you guys arent really seeing this pressure exposure.

Speaker Change: Yes, I think I acknowledge that with the biotechs and you saw this for us in quarters, one and two.

Speaker Change: There is some uncertainty around their decision making process that is the nature of the beast over there and the question is really how well can the commercial organizations manage that you heard US talk last time look that that we've put a lot of intense effort around our commercial organization trying to.

Speaker Change: And those decision processes better trying to we actually created a new process for forecasting. So we had a prior process, but in terms of forecasting book to Bill we added a new process after.

Really late in the second quarter, starting in the third quarter and so I think that that's helping us manage those expectations and make sure we point our resources at the most likely situations and really try to manage the decision process. One of the things you got with <unk> is you get the entire management team involved where we need to be.

Speaker Change: Involved with customers not just in the back offices administering the business. So we're trying to put.

Speaker Change: Not only the sales teams, but the operations team and the leadership.

Speaker Change: When necessary and get them directly involved with customers and frankly, I think that makes a difference.

Speaker Change: That being said again, what we've seen at our size given our exposure as a solid biotech environment, we've been saying this for several quarters and it really is how does your commercial organization execute against that.

Speaker Change: That can help you create some consistency there.

Speaker Change: Does that help Luke and then yes. It does.

Speaker Change: Thank you.

Speaker Change: Thanks.

Speaker Change: And the next question comes from David Windley with Jefferies. Your line is open.

David Windley: Alright, Thanks for taking my questions impressive progress in the quarter.

David Windley: What we've heard and additionally, with some of the other folks have asked already one of the key things we've heard in the quarter has been cancellations.

Speaker Change: So choppiness in the environment difficulty to predict.

Speaker Change: Making timelines things like that but predominantly.

Speaker Change: Cancellations can you talk about what you are seeing or maybe not seeing from the standpoint of.

Clients changing their mind about intention to move forward on projects.

Speaker Change: Yes, Thanks, David I can take that one we've looked at this really closely because we obviously hear what our peers are saying and we have not seen any increase in cancellations. We had called out. The one you remember that late in the first quarter.

Speaker Change: That kind of impacted the first quarter book to Bill, but we have not had any uptick we looked across the portfolio very carefully we have seen it be kind of our normal rates. So.

Speaker Change: Obviously, it can be situational from customer to customer, but fortunately for us it doesn't seem to be an issue.

David Windley: Yes, Dave Dave.

Speaker Change: And just because sort of in full disclosure and Joe and I have talked about it in our clinical pharmacology business, there's almost what I'd call. It a churn where there are cancellations, but it's usually just pulling back a project to re strategize how to deal with it and then it's going to come back later and.

Speaker Change: So.

Speaker Change: We've seen that and I think the industry talks about what happened with CRM on what's happening in the early development stuff and whether it spills into clinical pharmacology, but for us I don't know.

Speaker Change: Just call it a churn it's not really a cancellation rate, it's things moving in and out based on different strategies to customers, who are taking and so but overall <unk> absolutely right. When you look at our numbers overall there.

Speaker Change: Sort of historical norms.

Speaker Change: Got it.

Speaker Change: While I have you on on this.

Speaker Change: This concept the qualified pipeline.

Speaker Change: I appreciate you've you've talked about your comfort there. Thanks.

Speaker Change: Thank you Justin's question, you've talked about kind of the triage of.

Speaker Change: Top 20, and how you think about it.

I'm going to assume but I'm going to let you confirm that when you. When you think about what's in your qualified pipeline and what's moving forward that.

Speaker Change: More of that maybe not all of it but more of that leans toward these folks that are.

Spending more moving more maybe less mired in restructuring and things like that maybe flesh out a little bit more of what gives you the comfort that you expressed.

And the qualified pipeline that youre looking at internally.

Speaker Change: Yeah.

Speaker Change: I'd say interestingly, Dave we do have a mix so.

Speaker Change: I'd love to say that our exposures highly to that top segment, but we do have a mix, but given the exposure that we have.

Speaker Change: They are moving ahead with projects everybody in the industry is moving ahead with projects, even the folks who've talked about restructuring have important projects as they are driving so right now what we're involved in how we're delivering I got some excellent feedback this quarter from some of our large pharma customer.

Speaker Change: <unk> with some terms like that we are doing excellent work in phrases like that that are helping us.

Speaker Change: So we may not be as large, but what we are doing in larger pharma, we're getting some accolades for.

Speaker Change: Got it if I could.

Speaker Change: Sneak one more in fill on the on the TSA exits I. Appreciate that you said the timing is critical I just wanted to make sure I.

Speaker Change: I understand.

As you kind of emphasized to me that the TSA the kind of.

Speaker Change: Removal of the chart that Youre riding to Labcorp for the TSA support services. They are providing that in and of itself is not what drives your margin expansion, but rather.

David Windley: Your ability to manage the business on your own systems and identify areas to take SG&A cost out is that correct is my understanding correct, maybe flesh that out a little bit yes. Your understanding is correct, David and I and I do think that's important I know we have talked about it before so getting added.

David Windley: Those TSA exit is really critical obviously, there's additional cost associated there and the one time cost and you will see I shared this before but for everyone's benefit.

David Windley: The way those things are paid and build youre going to see one time costs through the first quarter just by the nature of how things go but we still believe that we're on track to exit the vast majority of it all by the end of this year right around the end of this year certainly by the time, we're coming out talking about Q4 results with all with all of you and.

That that is then really important will go live on the new systems in and that allows us to bring in different processes, new structures and ways of working will be able to do more volume of transactions.

David Windley: A more efficient effective way so that is really critical it's not an immediate switch that you exited TSA and we get massively reduced SG&A. There are some places as we've talked about particularly with our it infrastructure where because of the work that we're doing with cognizant that we've talked about that before there will be some improvement, but youll see more of that.

David Windley: Those come out over the course of next year, and we'll provide a lot more detail about that journey, when we give our guidance for 2025.

Speaker Change: Fantastic. Thanks for taking my question was on the extra one I appreciate it sure. Thanks, Dave.

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

Elizabeth Anderson: Hi, guys.

Speaker Change: Nice quarter and thanks for the question.

Speaker Change: I'll start out by shorter term question on the cost side.

Speaker Change: Additionally, you've seen at least in the last two years, a nice step down in SG&A in the fourth quarter.

Speaker Change: Could you talk a little bit right is why that happens in sort of your expectations. Obviously, it's in your embedded guidance. So I just wanted to kind of start to truly understand what that is.

Speaker Change: Paul.

Paul: Yes sure Elizabeth.

Speaker Change: Thanks for the question, we typically do and oftentimes over the course of the year, you're managing things right as you guys I mean.

Speaker Change: Most folks would understand that in an organization you get to the end of the year you tend to get a little bit tighter on things. So you see some of that that comes through I do think for us as I mentioned one of the drivers there is around some variable comp and where the year lands in terms of how that plays out but I also highlight the changes we've been making over the course.

Speaker Change: Of this year and I called out the change in head count that's not just operation. That's also parts of SG&A as well, where we can do it a bit more thoughtfully. So.

It's the cumulative impact of those as they've been happening over the course of the year you get a full quarter of benefit in the fourth quarter and then some of the other things that we mentioned, but that I think there is a bit of a most organizations over the course of the year you get closer to the end you tighten up a bit.

Speaker Change: And that you see that but that is generally what's driving the improvements as we go into the fourth quarter, having said that I think as a percent of revenue, it's not going to be it'll be broadly in line with what we've seen over the course of this year, because we really do need to exit those TSA and SG&A to start to be able to drive that really different model.

Speaker Change: Got it that's very helpful. Thank you and then I know in earlier in the year.

<unk> talked about some variability in terms of Ah trial starts and sort of maybe sort of pivoting off of Dave's question at all but just sort of.

Speaker Change: Slower decision, making in biotech, but it seems like maybe what youre, saying and I just want to make sure. We're understanding this correctly is that youre not youre seeing not as perhaps like stabilizing flash, maybe even a little bit better is that a fair characterization.

Speaker Change: Let me take that one Elizabeth good morning, I think we would say we really tried to manage that hard this quarter. So we had two factors we've talked about this a little bit less than one is that can you manage the biotech decision processes better and our commercial team work really hard to try to do that.

Speaker Change: Try to make sure we had the right interactions with executives understood. The processes had less stuff. The last minute. So so we worked hard on that and then the other thing frankly is that we just had a little bit more large pharma in the mix and that does add predictability. So because they have a tendency to stay on schedule.

Speaker Change: Will they don't make decisions. They don't have the board intervene or things that can happen with biotechs. So it was really the combo of those two in the second half that makes us feel better about our second half numbers, but we're I think as an industry. We all as biotech continues to grow as a proportion and continues to be.

Speaker Change: Targeted by various heroes beside US everyone has to get used to and get better at managing those decision cycles.

Speaker Change: Alright, Thank you very much thank you.

And our next question comes from Max Smock with William Blair. Your line is open.

Max Smock: Hi, Tom Hi, Joe Thanks for taking my questions I wanted to follow up on some of your commentary around the pipeline here and you mentioned the environment or the pipeline for the next two quarters are strong but.

Max Smock: I'm just wondering if you think it's healthy enough to support a one two book to Bill beyond the next couple of quarters here. I mean, you had those decisions in <unk> that got pushed out to <unk> on average the last couple of quarters book to Bill of about $1. One how much of the solid bookings. This quarter do you think was a push out of those opportunities from <unk> or do you really think the environment is healthy enough to kind of support that.

Max Smock: One two book to Bill moving forward. Thank you.

Max Smock: Yes, good morning, Max we as I said, we've got a process that we have initiated here, we try to look out and we look at.

Max Smock: Essentially what's in a stage, where it's been awarded not contracted what's still to be awarded and contracted we look at the size. We look at the likelihood that there'll be some kind of issue with the process and so we've done that in quite a bit of detail and so when we look out over the next two quarters, we feel.

Max Smock: We're comfortable that if we execute we can be in that range of that targeted one to now.

Max Smock: Now, it's frankly, it's a little difficult for us to look out that much further.

Max Smock: As such a funny industry, we do have things in the pipeline for next year, but it's such a funny industry because so many things come in on short term Rfps, where theres a 10 day response time.

Max Smock: Those who don't know the industry that wells.

Max Smock: The good news is there is so much volume of this and it's fairly well structured that it's consistent you can manage around the bad news is you have these short cycle Rfps that you deal with all the time and so.

Max Smock: So I think we feel comfortable saying in the next two quarters are have a solid pipeline what Joe was referring to around 2025, I think we'd like to get a little bit further in the quarter and frankly, because we'd be reporting during the first quarter on Q4 results and providing guidance, we'd like to get further along fin.

Max Smock: <unk> out the year understand these TSA is understand where our systems around and then really talk about that full pipeline for next year. So I realize thats, probably not what you want to hear Max but what I can tell you is we have a very rigorous process and.

Max Smock: What we see among our large and small customers looks solid for the next two quarters.

Speaker Change: Yes, that's helpful. Tom Thank you for that color.

Speaker Change: Also I just wanted to follow up on some of your commentary around small biotech. Tom you mentioned there is still some uncertainty around small biotech decision, making timelines, but just wanted to clarify whether you've actually seen those decision, making timelines get better at all over the last few months and if so when do you think were the drivers behind that improvement.

Speaker Change: I guess my question really is do we need to see funding get better from here or do you think the funding environment is actually okay and now that we're past the election and just had another rate cut does that given the smaller innovators. Some more comprehensive go ahead and start spending again.

Speaker Change: Yes, I think.

Speaker Change: On the second part.

Speaker Change: I was thinking about in case, we get near this question Max and we're still kind of in battlefield fog from this election. This week, but there is no question that in general biotech funding is correlated with lower rates and if we have an FCC that's more comfortable with mergers and acquisitions you could.

Speaker Change: See some tailwind to the biotech sector.

Speaker Change: What we if you my father in law is talking about.

Speaker Change: Assuming a positive because it is a better way to live and so if we assume the positive we did see some good things last time like a guy like Scott Gottlieb put in as FDA Commissioner and we did see project Warped speed, which I think we were all hoping would give us the same kind of tailwind for decision, making that you saw.

During.

Speaker Change: The HIV crisis, so and we won't see the IRA expansion or we may not see the IRA expansion that was discussed so.

Speaker Change: So I think there right now we're in battlefield fog, it's very early but but if things continue to progress the way. They are it's possible that we'll see more attractive biotech environment in the coming months here I actually don't think for Korea. It needs to be increased I think given our size.

Speaker Change: And our exposure, if we execute well as the commercial team.

Speaker Change: The solid funding we've seen the numbers that have come out.

Speaker Change: August September are solid enough for us.

Speaker Change: At the beginning of Ipos again, but for the industry. Overall is certainly more funding is always better.

Speaker Change: Does that help thanks again for taking us a little bit.

Speaker Change: No no not at all that was very helpful. Thank you again for taking my question.

And the next question comes from Mac Sykes with Goldman Sachs. Your line is open.

Speaker Change: Yeah.

Good morning, Thanks for taking our questions. This is will or Meyer on for Matt.

Speaker Change: I just wanted to touch on the burn rate given the higher conversion in the quarter and step up that's implied for the fourth quarter, what do you expect expectations for backlog burn going into 2025.

Speaker Change: I thought you were going to talk about fourth quarter and you try to sneak in one on 225, there will but I will say you did see a little bit of a step up in the <unk>.

Speaker Change: In the burn rate from Q2 to Q3, we would expect that to be consistent.

Did talk at Q2 about the fact that some of the improvement we see in the back half would be due to the improvement in the clinical pharmacology business, which has so far come in generally as we expected and it is a bit faster burning I don't think at this point I can comment on 2025 burn rate, except to say that we're continuing to look at ways to improve productivity and.

Speaker Change: That project started faster and focus on improving the timelines of milestone delivery. So it's a focus for us, but we're going to hold off on commenting on 25 burn until we give 25 guidance.

Speaker Change: That's helpful I had to try on 2025.

Speaker Change: And you did well there that lever yet.

Speaker Change: Yeah.

Speaker Change: Just one more from our side when do you think about the drivers of the gross margin improvement.

Speaker Change: Should we be thinking about that between mix and cost efficiencies as you grow that backlog and are there any mixed dynamics to call out that we should think about moving forward.

Speaker Change: Yes, I do think we've been really clear from the beginning that prior to the spin the mix wasn't necessarily in the places we really want to grow the full service clinical business. We all know that that is the strongest.

From a margin.

Delivery and so we're still focused on that we have really seen great strength in clean farm as we talked about earlier and we still like the FSP business, Although as Tom mentioned, it is getting more and more price competitive we still like it though it's very steady revenue and we've learned to navigate that business really well. So we welcome at all but I do think that.

Mix is really important and even within late stage clinical therapeutic mix as you've heard we've talked about some of our peers have talked about the fact that the oncology programs do tend to burn a little bit slower as they get more and more specialized some of them are longer because you have longer term follow up requirements. So the mix is critical we want to be and all of that we've talked.

Speaker Change: Going.

Speaker Change: Two we've got really strong therapeutic breath, but we've we've talked about Arizona continue to focus on cardiovascular neurology. Some of these things with the obesity drugs and.

Speaker Change: And we're making great inroads on all of those but that mix really does drive. So I think that's also part of why we wanted to be really thoughtful as we go into 'twenty five because in a quarter you can have a great book to bill, but if it's all long duration slower burning studies, it's going to impact your revenue rates for the next year. So.

Speaker Change: Looking at all of that but the focus is clearly broad balanced, but we really do want to grow more of that late late stage clinical.

Speaker Change: That's helpful. Thanks, Joe.

Speaker Change: Sure.

Speaker Change: And our next question comes from Michael Riskin with Bank of America. Your line is open.

Speaker Change: Good morning, This is John Kim on for Michael.

Speaker Change: So you've talked about the SG&A and the TSA exit seem to be on track.

Speaker Change: But without giving us the margin details.

If you think about the investments and investments you still have to make.

Speaker Change: The parts of the SG&A that involves the it infrastructure, but you also mentioned commercial organization today.

So I wonder what that entails and earlier, you mentioned that SG&A as a percentage of revenues would be consistent but.

Speaker Change: At least for the next two quarters I'm wondering what.

What the percentage would be for those onetime costs.

Speaker Change: It's fairly high as a percentage of EBITDA.

Speaker Change: Sure I think two things there the in.

Speaker Change: In terms of the investments I did call that out because it is really important to understand as we've come out of.

Speaker Change: The spin.

Speaker Change: One of the reasons you did this let's say that we could focus and have the right attention on the things we need to do to grow for Korea, and so the commercial investments are very much about and we've talked about this previously you know certain therapeutic areas or locations in our sales organization, where we might feel like we're slightly under represented and we want to have more opportunities to go after the great.

Speaker Change: <unk> portfolio of work that's out there and really focus on the pipeline. So that's the commercial investment we're talking about particularly in the biotech space.

Speaker Change: I think the other areas I mentioned operational investments in SG&A operationally, we've talked about really wanting to focus on better resource management tools, which also help with our margin longer term, even though theres a bit of an upfront investment in SG&A, it's very small amounts.

Speaker Change: I will say personally within finance there are a couple of technical expertise areas that we've had to invest in but generally within SG&A. It's not so much significant systems or changes there it might be around how do you think about.

Speaker Change: Places, where you can do work and making sure you invest in the best technology to drive that work. So those are the types of investments, we're making in one time costs, we will see those especially the spin related ones come down that we did expect Q2. It was the highest it has come down this quarter, probably a step down a little bit again in Q4 and it should.

Speaker Change: It's not going to completely go away in the first quarter because there are still some things that happened, but truly as you get through the first half of those one time spin related costs will disappear and we are on track really and really pleased I do theres a lot of focus on this and it might not be as obvious to the outside but the effort to stand up an HCM stand up in ERP.

Speaker Change: Rebuild your entire infrastructure, it's significant so I do think the teams have done a phenomenal job and we feel really good about where we are we have to get a few things over the line and it's a lot of moving parts in the quarter thankfully, they're all internal moving parts. So hopefully it doesn't have any impact on our customers, but there's a lot to navigate here, but we're excited about the fact that once we turn that corner it really.

Speaker Change: Allows us to focus on how we take for Korea forward in the right way for our organization in 'twenty five and beyond.

Speaker Change: Gotcha, and then sorry, if I missed it but.

Speaker Change: In terms of the pharma versus biotech makes it.

Speaker Change: I think Tom mentioned earlier that it's a 50 50 split there and the large yet.

Speaker Change: It seems like the awards are coming in evenly but.

Speaker Change: How is the RFP flow trending.

Speaker Change: Looking ahead, what's your expectation there.

Speaker Change: I think good morning, John I think it's consistent with the prior discussions here is solid.

Speaker Change: We carefully choose our words and we continue to see opportunities that are adequate for us to be able to grow. So we just have to sustain our win rate against those and deliver well and.

Speaker Change: What we see as a solid pipeline for the targets that we have.

Speaker Change: So I think we're out of time operator.

Speaker Change: I think I'd, just close out by saying that we had a solid quarter of execution and progress and we thank all of you for your time.

Speaker Change: This concludes today's conference call. Thank you for participating you may now disconnect.

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Speaker Change: Ladies and gentlemen, thank you for standing by welcome to <unk> third quarter 2024 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.

Speaker Change: To ask a question. During this session you would need to press star one on your telephone you wouldn't.

human Goober: Here, an automated message advising your hand is raised to withdraw your question. Please press star one again, please be advised so today's conference is being recorded I would like now to turn the conference over to human Goober head of Investor Relations and corporate development. Please go ahead.

Speaker Change: Good morning, Thank you for joining <unk> third quarter 2024 earnings conference call I am he might <unk> head of Investor Relations and corporate development at <unk> on the call with me today are.

Speaker Change: Oh, Tom <unk> and CFO did Mcconnell the call is being webcast and the slides accompanying today's presentation have been posted to the Investor Relations page of our website for tier dot com. During this call we'll make certain forward looking statements within the meaning of private Securities Litigation Reform Act of 1095. These statements are subject to significant risks and uncertain.

Speaker Change: <unk> that could cause actual results to differ materially from our current expectations. We strongly encourage you to review. This report will be filed with the SEC regarding disease and uncertainties. In particular those that are described in the cautionary statement concerning forward looking statements and risk factors in our press release and presentation that we posted to the website. Please note that.

Speaker Change: Any forward looking statements represent our views as of today November eight 2024 and that we assume no obligation to update the forward looking statements. Even if estimates change. During this call will also be referring to certain non-GAAP financial measures. These non-GAAP measures are not configured to a replacement for the comparable GAAP measures, but we believe these.

Speaker Change: Measures help investors gain a complete understanding of results and reconciliation of such non-GAAP financial measures to the most directly comparable GAAP measures is available in the earnings press release and earnings call presentation slides provided in connection with today's call with that I'd like to turn it over to our CEO Tom Pike Tom.

Tom Pike: Good morning, everyone welcome to the call, let me start by saying that <unk> had a solid quarter of execution and progress on our strategic objectives, our bookings landed well and we delivered on other key metrics as anticipated for Korea as you probably know superior place Euro serving phases one through four.

Tom Pike: We're a leading global provider of clinical pharmacology or phase one development functional service provision, which we call FSP and full service outsourcing for trio is broad and deep in how we address the market. We are preferred relationships with some large pharmaceutical firms that have broad exposure to biotech our business overall is about 50 50.

Tom Pike: Between large pharma and biotechs are large pharma partners appreciate that we have sufficient scale to conduct clinical services almost anywhere in the world. The biotech customers value that were small enough to give our customers the personal attention they need to drive agile solutions, both types of customers value, our 30 years of experience and expertise.

Tom Pike: Since <unk> spun out of our parent our customer net promoter scores have improved especially recently.

We're getting external recognition too this quarter pharma times recognize the number four trends for the great work, including an in house CRA Global project manager and other roles. In addition, <unk> has just been named a finalist in fierce healthcare's excellence and data driven <unk> Award.

Tom Pike: For our dei dashboard. We're also a finalist in the CRO of the year category and the annual Scrip Awards, both awards will be announced in early December.

Tom Pike: All of that is pretty incredible given we've only been independent for 16 months.

Tom Pike: Our pipeline of opportunities for the next two quarters is solid.

Tom Pike: Our exit from our former parent as nearly insight with over 90% of the servers and application systems migrated through our independent portrait environment.

Speaker Change: As usual I'll provide some detail on some of these highlights and Joe will fill in with others.

Speaker Change: Last quarter I discussed the new large pharma relationships and some footholds as we call them of work and other larger companies. This quarter. We made progress getting started with these customers, including responding to some early requests for proposals for instance, one of the footholds resulted an attractive full service engagements. This project is.

Speaker Change: Significant phase III trial.

Set for.

Speaker Change: <unk> 301 based on our therapeutic expertise in the specific area in our deep investigator relationships. Some other larger projects also came through as planned from long time larger customers.

Biotech companies also featured strongly in our full service wins in the third quarter across a number of therapeutic areas with key biotech winds in oncology diabetes dermatology in autoimmune disease, while we're known for our oncology expertise across our customer mix. We continue building a strong position to other areas such as ophthalmology.

Speaker Change: Our expertise in wet AMD in gene therapy skills are seen as a strong differentiator.

Speaker Change: For <unk> real World evidence consultants and scientists one several virtually designed observational studies in the Asia Pac region for different pharma customers are consulting and science help us differentiate our.

Speaker Change: Team has been particularly successful with larger pharmaceutical firms who are spending.

Speaker Change: It was significant about this award is that were initially not selected for the program, but we're able to unseat incumbents CRO because of our solutions focus and expertise in the area.

Speaker Change: Our experience with complex programs and Cps helps us transition our strong relationships in phase one into phase one and two as we discussed last time, we're making progress there with an increasing win rate.

Speaker Change: We also continue to press ahead with some productivity and innovative technology projects, we have a nice tool that's used by <unk> and a couple of pharmaceutical firms for study oversight and optimization.

Speaker Change: We showed a roadmap to customers and several prospects this quarter and generated a lot of excitement.

Speaker Change: AI and ml as being added to try to improve predictability and utility to that tool.

Speaker Change: We're also looking at some other interesting applications of technology needed tools, AI tools and practical complex areas, such as protocols and amendments as Soapies CRA co pilot tool and continuous data cleaning.

Speaker Change: Coming into the fourth quarter, the same metric held and the pipeline was greater than the average of the prior three quarters.

Consistent with our Q2 commentary we continue to target a one two book to Bill for the second half.

Speaker Change: We know that we need to execute through the quarter regarding.

Speaker Change: Revenue and adjusted EBITDA in light of the backdrop of spin related complexity I'm pleased with our execution. In addition to a strong quarter for new business. We delivered on expectations of revenues. We also continued to expand our margin delivering EBITDA as we expected. We know that we have continued work to do but we're making progress.

Speaker Change: Let me hand over to Jill then I'll wrap up with some comments about the remainder of the year Joe.

Speaker Change: Thank you Tom and thank you to everyone for joining US today as a reminder, all my remarks relate to continuing operations at <unk>. Following the divestiture of our enabling services businesses unless I note otherwise.

Speaker Change #100: I'll start by saying that this quarter has delivered as we expected.

Speaker Change #100: Revenues of $674 $9 million declined five 4% year on year.

Speaker Change #100: The reduction versus the prior year was driven by lower service fee and pass through revenues are.

Speaker Change #100: Our service fee revenue continues to be impacted by a combination of factors, primarily lower new business awards in the pre spin period, along with the mix of later stage and longer duration studies in our portfolio.

Speaker Change #100: The pass through decline is driven by lower pass throughs on the biomarker study we have previously called out which is continuing to normalize given its stage in the project lifecycle.

Speaker Change #100: On a GAAP basis direct cost in the quarter decreased six 6% year over year, primarily due to lower personnel costs as well as lower pass through costs, partially offset by an increase in stock compensation and professional fees.

Speaker Change #100: SG&A in the quarter with higher year over year by 27, 6%, primarily due to an increase in professional fees and incremental one time costs incurred for exiting the TSA.

Speaker Change #100: Along with the yield costs related to the receivables securitization program, we initiated in the second quarter.

Speaker Change #100: The company reclassified $39 million from direct cost to SG&A expense in the prior year comparison period, primarily related to information technology costs and certain non clinic facility charges.

For the third quarter, you will see SG&A as a percent of revenue on a GAAP basis at 22%.

Speaker Change #100: However, if you exclude the impact of approximately $27 million of one time costs related to the continued separation from our former parent.

Speaker Change #100: And the incremental impact of a full quarter's worth of expense related to the yield cost underlying SG&A as a percent of revenue was consistent with the last two quarters.

Speaker Change #100: Net interest expense for the quarter was $22 4 million a.

Speaker Change #100: <unk> of $12 2 million versus the prior year benefiting from the repayments. We made on the term loan a and term loan b during the second quarter.

Speaker Change #100: When looking at annualized interest expense using outstanding debt securitization usage and rates in effect during the third quarter 2024 annual total cash interest and securitization costs are estimated to be approximately 18% lower compared to the annualized costs. We were incurring at the start of 2024.

Speaker Change #100: Turning to our tax rate the effective tax rate for continuing operations for the quarter was a benefit of 48, 3%, reflecting an updated split of domestic versus foreign earnings relative to our latest forecast.

Speaker Change #100: During the third quarter, we recognized the tax benefit of $17 $3 million and continuing operations, primarily due to this update in forecasted pretax loss, partially offset by evaluation allowance on our deferred tax asset related to the carryforward of disallowed interest expense.

Speaker Change #100: We continue to consider initiatives that we expect could improve our overall tax position over time.

Our book to Bill for the quarter with 123 times and for the trailing 12 months is 115 times our backlog at around seven 6 billion has grown six 2% over the past 12 months.

Speaker Change #100: Adjusted EBITDA for the quarter of $64 $2 million decreased five 9% year over year compared to adjusted EBITDA of $68 $2 million in the prior year period.

Speaker Change #100: Note that adjusted EBITDA increased 16, 3% on a sequential basis in line with our expectations.

Speaker Change #100: Adjusted EBIT margin for the third quarter was nine 5% compared to nine 6% in the prior year period.

Speaker Change #100: Adjusted EBITDA margin in the quarter was negatively impacted by the lower service fee revenues in the quarter, along with higher SG&A costs post spin to support operations as a public company.

Speaker Change #100: These were partially offset by the benefit from the restructuring program, we initiated in the third quarter of 2023, which is continued into 2024.

Speaker Change #100: In the third quarter of 2024, adjusted net income of $20 $7 million increased 3% compared to adjusted net income of $20 1 million in the prior year period.

Speaker Change #100: Adjusted net income for both basic and diluted share for the current quarter and the prior year period with 23.

Speaker Change #100: Turning to customer concentration our top 10 customers represented 51% of third quarter 2020 for revenues.

Speaker Change #100: One customer accounted for 15, 1% of revenues.

Speaker Change #100: As I comment on cash flows note. These relate to four <unk> in total as we have not segregated cash flows from discontinued operations for.

For the nine months ended September 32024, we reported $245 $7 million in cash flow from operating activities compared to $150 million generated in the prior year.

Speaker Change #100: Cash flow benefited from the sale of receivables under the securitization facility and an increase in unearned revenue, partially offset by the decrease in net income.

Speaker Change #100: Free cash flow was $217 million compared to $119 1 million in the first nine months of 2023.

Speaker Change #100: Net accounts receivable and Unbilled services for continuing operations were $689 1 million as of September 32024, compared to $988 5 million as of December 31, 2023.

Speaker Change #100: Days sales outstanding from continuing operations was 50 days as of September 32024, four days lower than June 32024.

Speaker Change #100: The reduction versus the second quarter is primarily due to reductions in our Unbilled services balance as we continue to enhance our contracting terms and processes.

Speaker Change #100: We continue to make changes to our contracting in order to cash processes to enable further improvement to our DSO profile overtime.

Speaker Change #100: We are fully compliant with the financial maintenance covenants of our credit agreement as of the end of the quarter.

Speaker Change #100: We ended the quarter with more than $5 billion of liquidity.

Speaker Change #100: Our capital allocation priorities are unchanged focusing in the near term on infrastructure investments for timely exit of the transition services agreement with our former parent targeted investments to drive organic growth and improved productivity and then debt repayment.

Speaker Change #100: Now I will provide an update on our transformation program.

Speaker Change #100: We continue to make progress on our journey towards improving the longer term growth and profitability of for trio.

Speaker Change #100: Our competitive approach to winning new business Award is a primary objective of our entire leadership team and we regularly leverage their relationships and experiences to enhance our partnerships with our customers.

Speaker Change #100: On operational execution, our first priority is delivering high quality work for our customers.

Speaker Change #100: We continue to execute on productivity improvements and actions that speed, our time to study startups and milestone delivery.

Speaker Change #100: We expect to exit the vast majority of the TSA services by year end with a limited number being exited early in 2025 to ensure business continuity through 2020 for yearend.

Speaker Change #100: We are continuing with targeted programs to reduce costs, including programs intended to better align our resources with the needs of specific projects, while reducing profit pockets of lower productivity the.

Speaker Change #100: The improvement in overall adjusted EBITDA. This quarter is attributable largely to these programs.

Speaker Change #100: We are continuing with our plans to reduce SG&A costs across our supporting functions.

Speaker Change #100: We expect the benefit from needs to ramp up during 2025, as we believe that full independence from our former parent will enable us to deliver these functions in more efficient ways versus how they were historically delivered.

Speaker Change #100: Regarding 2024 guidance, we have updated our revenue guidance range to $2 7 billion to $2 75 billion.

Speaker Change #100: The reduction in the top end of the range is primarily driven by lower trends impact consistent with what I discussed earlier.

Our adjusted EBIT guidance range of $220 million to $240 million remains unchanged.

Speaker Change #100: There are a number of moving parts that we are navigating and managing closely such as the transition of key internal it systems and devices in and around the fourth quarter. These technology transitions do not impact customer facing systems.

Speaker Change #100: We expect to provide 2025 guidance in the first quarter of 2025.

Speaker Change #100: Building, our backlog along with efforts to drive margin expansion continued to be the primary focus of our leadership team.

Speaker Change #100: Im not commenting specifically on 2025 targets as they will be informed by the exact timing of exiting the TSA services from our former parent along with having more certainty on fourth quarter net new business awards, and a better sense of the pipeline of opportunities heading into 2025.

Speaker Change #100: Before I conclude I want to take a moment to acknowledge the significant progress our teams are making towards fully exiting the transition services agreement as well as to build a new infrastructure that will enable us to operate more efficiently and effectively.

As Tom mentioned more than 90% of our it applications and servers have been transitioned and the teams leading our HCM and ERP implementations are on track for their respective December and January go live date.

Q3 2024 Fortrea Holdings Inc Earnings Call

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