Release Date: August 12, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Fortrea Holdings Inc (FTRE, Financial) signed several deals and partnerships with top 20 pharma customers, including a new full-service outsourcing partnership.
- The company exited about 60% of the TSA agreements with its former parent and made good progress on transitioning software, servers, and other technology.
- Fortrea Holdings Inc (FTRE) delevered its balance sheet by paying down around $500 million of spin-related debt.
- The company launched an AI Innovation Studio to develop and deploy AI and ML technologies to drive productivity, quality, and enhance site and patient experiences.
- Fortrea Holdings Inc (FTRE) was recognized with CRO Leadership Awards in four categories: capabilities, expertise, quality, and reliability.
Negative Points
- The book-to-bill ratio for the quarter was just under 1, falling short of the 1.2 target.
- Revenues of $662.4 million declined 8.6% year on year, driven by lower pass-through revenues and lower service fee revenues.
- SG&A expenses were higher year over year by 59.7%, primarily due to incremental one-time costs incurred for exiting the TSA with the former parent.
- Adjusted EBITDA for the quarter decreased 23.2% year over year, with an adjusted EBITDA margin of 8.3% compared to 9.9% in the prior year period.
- The company lowered its full-year 2024 revenue guidance to a range of $2.7 billion to $2.75 billion, reflecting lower recent pass-through trends and lower-than-expected new business awards.
Q & A Highlights
Fortrea Holdings Inc (FTRE) Q2 2024 Earnings Call Highlights
Q: You mentioned that service fee revenue was up mid-single digits, which since total revenue is basically flat, means that pass-throughs were down by the same amount. Could you quantify that? And how much should we think about that being a factor that continues through the second half?
A: (Jill McConnell, CFO) We won't quantify, but I will say those biomarker studies in particular are really significant. We think most of the fluctuations of that have now worked their way through. The key to driving improvement in adjusted EBITDA will come from service fee revenues growing, which we are projecting for the remainder of the year.
Q: In the bookings numbers, was this just lower new wins or did you take an outsized pass-through reset or effectively cancellation in the quarter that influenced the overall book-to-bill?
A: (Tom Pike, CEO) It was really just normal bookings. There were no major cancellations and no unusual events in terms of those pass-throughs. We are having some difficulty predicting exactly when biotechs are going to contract. The pipeline is strong, but we need to better understand and influence the timelines.
Q: Can you talk about the confidence level and visibility for achieving a book-to-bill over 1.2 in Q3 and Q4 given the stronger pipeline?
A: (Tom Pike, CEO) We have quite a number of midsize and larger opportunities from large pharma, which are more predictable. We also have a number of things that are awarded and need to be contracted. This gives us more confidence in what we see for the second half of the year.
Q: On the 2025 conversation, it sounds like margin is now in the 11% to 12% range. Can you talk about the levers to get there? How much of it is contingent on a certain level of top-line growth versus cost outs?
A: (Jill McConnell, CFO) It's really going to come from two things: half from gross margin improvements through driving productivity and improving processes, and the other half from SG&A improvements. We need to get through the TSAs and be fully exited to start seeing some of that value.
Q: How have you found the pricing environment in the recent pipeline and some of your recent wins, particularly between biotech and pharma?
A: (Tom Pike, CEO) In biotech, pricing continues to be consistent with what it's been, which is good market-based pricing. In large pharma, full-service outsourcing is reasonable market-based pricing. We do see some competitors lowering prices in FSP, but we are not as exposed to these large volume FSP deals.
Q: How are you positioning Fortrea in biotech versus large pharma, and what steps are you taking in terms of the commercial transformation?
A: (Tom Pike, CEO) In biotech, we focus on scientific support, real-world evidence integration, and accelerating timelines. In large pharma, we are centering ourselves on productivity, leveraging AI and ML technologies to improve efficiency and reduce costs.
Q: Were there any delays or pushouts from Q2 into the second half of the year? Should we think of bookings as being more volatile from quarter to quarter?
A: (Tom Pike, CEO) We are targeting consistently getting to that 1.2 times book-to-bill over time. The pipeline is strong, and we believe we have the mechanism to achieve that.
Q: Can you give us a sense of how decision-making timelines have changed for small biotech across this year?
A: (Tom Pike, CEO) Decision-making timelines have gotten a little slower in biotech due to more involvement from different elements of the organization, causing anticipated schedules to slip. However, the pipeline remains strong.
Q: What was the breakdown of the $54 million spin-related cost in the quarter, and what is the expected level in Q3 and Q4?
A: (Jill McConnell, CFO) The vast majority, about 80%, is IT-related costs. We expect spend in Q3 and Q4 but not to the extent seen in Q2. The average of Q1 and Q2 is a fair approximation for future quarters.
Q: Are there any specific changes you are making to get the bookings going, such as changes in terms, pricing, or sales force focus?
A: (Tom Pike, CEO) We are not making price concessions. We are improving the discipline of our sales meetings and looking at increasing resources for biotech in certain geographies. We are also exploring the use of AI in targeting and RFP development.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
