Fortrea Holdings Inc.

Ladies and gentlemen, thank you for standing by. Welcome to Fortria third quarter 2023 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 during the session, you will need to press R11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would like now to turn the conference over to your speaker today, Hema Nguva, Head of Investor Relations and Corporate Development. Please go ahead.

Good morning, and thank you for joining Fortria's third quarter 2023 earnings conference call. I am Bhima Inguba, Head of Investor Relations and Corporate Development at Fortria. On the call with me today are our CEO, Tom Pike, and our CFO, Jill McConnell. The call is being webcasted, and the slides accompanying today's presentation have been posted to the Investor Relations page of our website, fortria.com. During this call, we'll make certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to significant risks and uncertainties that could cause actual results to differ materially from our current expectations. We strongly encourage you to review the reports we filed with the SEC regarding these results 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 on the website. Please note that any forward-looking statements represent our views as of today, November 13th, 2023, and that we assume no obligation to update the forward-looking statements even if estimates change. During this call, we'll also be referring to certain non-GAAP financial measures. These non-GAAP measures are not superior to or replacement for the comparable GAAP measures, but we believe these measures help investors gain a complete understanding of results. A reconciliation of such non-GAAP financial measures to the most directly comparable gap measures available in the earnings press release and earnings call presentation slide provided in connection with today's call. With that, I'd like to turn the call over to our CEO, Tom Pike. Tom?

Thank you, Hema. Hi, everyone. This is the second earnings call we have done as a public company and the first full quarter where the new management team has been running the newly spun out company. On our last call, we discussed how the year after the spin was announced, been a challenge for Fortrea from a new business quantity and mix standpoint. I also said that based on that sales mix and the cost structure we inherited, that we needed to get our financial health in order. In the third quarter, we adjusted our cost structure for the near-term revenue situation. Every leader of every organization took part. During our last earnings call, we told you that we would benchmark our cost structure to understand more deeply how we compare to peers. We have done that too. We have a lot of work to do to change this company from a division of a division with strong clinical skills and capabilities into a competitive, independent CRO that is the top choice for our customers and delivers results for our public investors. We need to invest in our future while exiting arduous TSAs and delivering a cost structure that is appropriate for a clinical services CRO. This fall, while delivering for customers, we have been planning our course of action for 2024 and 2025. For the next few minutes, I'm going to cover new business, our discussions with customers, and some of our commercial transformation. Then Jill will discuss the numbers, as well as our efforts around investments and operational and SG&A improvements. Finally, I will close with a few thoughts. As we've previously stated, We started the quarter strong in July, and I'm happy to announce that we ended the quarter with a 1.24 book to bill, and importantly, an attractive mix of work. As my leadership team and I visited with large and small customers during the quarter, they're excited to hear the Fortrea story and open to our ideas about how to do clinical research more effectively. We are discussing our investments and focus areas and receiving positive reactions. I spent two weeks in Europe this quarter meeting with customers and our people. In the past two weeks, I've met with three CEOs of top pharmaceutical firms, all of whom want to hear more about what we're doing and how we can work better together. We are at the table. Our strategy is to serve all of biotech and selective larger pharma. Given our size, that is a lot of opportunity. We've been doing work to transform our commercial and customer relationship capabilities to be more effective. This means developing relationships, filling the opportunity funnel, and winning business. It requires select investments in people and systems. I believe the changes we are making will take fully a year to implement to bring the consistency and business impact that we want. In clinical research, sponsors do not change partners overnight, but we are seeing immediate progress. Our pipeline for Q4 is adequate to deliver a solid book to build for the quarter with a healthy mix of work assuming we execute. Building on our past strengths along with the beginnings of our investments to create more distinctive differentiation, we have some interesting wins in the third quarter. Of course, these are just a small sample of the over 3,000 clinical projects that this organization currently touches in some way. Our clinical pharmacology business continues to solidify its leadership standing. We recently announced how a series of investments over the past few years has made a difference for customers as well as volunteers in phase one studies. Our clinical pharmacology expansions, which also included GMP pharmacy capabilities and investments in technology, are complete. These include, for instance, 100% digital bedside capture systems. The clinical pharmacology group secured some meaningful wins in cutting edge early clinical development studies and has a solid pipeline for the fourth quarter. A few examples include an orally administered IL-17 antagonist for treatment of inflammatory and autoimmune diseases, as well as an IL-4 antibody drug conjugate for the treatment of immune inflammatory disease. We were awarded several studies of novel next-generation molecules, including one that modulates a growth factor for the treatment of ALS and another that is a tyrosine kinase inhibitor for cancer. Turning to a few clinical services examples, we saw a large oncology award with one of our full-service large pharma partners. Let me also highlight an award with a mid-sized European firm for one of their newly acquired assets. Based on our level of executive engagement there, we are now entering into a partnership discussion with them to help accomplish their development goals for the next seven to 10 years. Outside of oncology, I would also like to call out two large Phase III fibrosis awards, which contributed over $100 million with another one of our large pharma partner accounts. The most important part of what we do is to delight our customers with delivery. Several oncology programs are achieving milestones faster than planned. For instance, we're meeting enrollment targets ahead of schedule in a complex solid tumor study. We delivered an early database lock in a rare cancer study. Bortrea teams also celebrated with customers when a promising oncology drug received an FDA approval letter and co-presented data with a customer at ESMO, a major conference that recently took place in Europe. This quarter, we closed enrollment on a challenging rare disease study five months ahead of schedule. We delivered a last patient in seven months ahead of schedule in a phase three pediatric metabolic study. Winning in successful delivery and programs are the keys to growth for Fortrea, and we're prioritizing both. Winning takes a great team, and we continue to foster and build our magnet talent. Dr. Jim Bush, who leads our clinical pharmacology physician team, was awarded an honorary fellowship from the prestigious St. George's University of London. Our recently hired chief information security officer, Jim Comelli, was just named a top 100 global CISO. We are adding a top CNS physician to our ranks soon. We've hired Dr. John Doyle, a consulting expert and alumnus advisor, to lead our consulting efforts and help differentiate us. We just hired a recognized expert, artificial intelligence, to lead our important efforts in this space. Now, Jill, please tell us about the numbers, our investments, and our plan to improve margins.

Thank you, Tom. And thank you, everyone, for joining us today. Our third quarter results are essentially in line with the guidance we provided to you in August. As Tom mentioned, we had several significant wins in the quarter, which resulted in a book to bill ratio of 1.24 times revenue. As we said in the second quarter call, we are rebuilding our trailing book to bill metrics from this quarter onward. Our backlog grew 2.2% sequentially, ending the quarter at $7.1 billion under the revised backlog methodology that we announced with our second quarter results. We are laser focused on building on this positive momentum in the fourth quarter and beyond. Our reported results continue to reflect previously disclosed headwinds as a result of the spin year, namely the lower full-service clinical sales and cost of the inherited infrastructure. We are actively taking steps to address both of those, which I will discuss later in my remarks. Revenues were $776 million in the third quarter, representing a 1.8% increase versus the same period last year. Clinical services revenues of $712 million grew 2.1% year-on-year, driven by higher pass-through revenues, partially offset by lower service fee revenues. The lower service fee revenues were due to slower than historic ramp-up of a few longer duration studies, along with the reduced quantity of new business wins during the past spin year, and to a lesser extent, the remaining headwinds from the previously disclosed FSP loss. Enabling services revenues of nearly $65 million were broadly flat year-on-year, driven by growth in our endpoint business and slightly higher pass-through revenue, offset by lower call center activity. Revenues for the nine months ended September 30, 2023, were $2.33 billion, flat year-on-year. Note that currency was not a material impact to our results in the third quarter. Let me provide more detail on our cost base. Direct costs increased 8.8% year-on-year, primarily due to higher pass-through costs, the addition of transition services agreement costs, and personnel costs, partially offset by the removal of former parent corporate allocations and carve-out adjustments for TRIA received prior to the spin. SG&A was higher year-on-year by 11.6% due to an increase in personnel costs, the addition of transition services agreement costs, one-time professional fees, and credit loss provisions, partially offset by the removal of former parent corporate allocations and carve-out adjustments for TRIA received prior to the spin. Net interest expense for the quarter was $34.6 million. We continue to expect full-year interest expense to total approximately $70 million in 2023, incorporating the change in market expectations for interest rate fluctuations in the second half of the year. The effective tax rate was 26.8% for the quarter. We expect the full-year 2023 adjusted effective tax rate to be between 27 and 30%, which is in line with our previous guidance. Recognizing that there is opportunity to bring our effective tax rate closer in line with peers, we are undertaking a review of our structure to ensure it is optimal for our organization. We expect to provide more direction on the benefit and timing of opportunities to optimize our tax structure, along with our 2024 guidance in the first quarter. Adjusted EBITDA for the quarter of $70.5 million decreased 33% year over year, compared to adjusted EBITDA of $105.2 million in the prior year period. Year to date, adjusted EBITDA was $200.1 million, which decreased 32.2% year over year compared to adjusted EBITDA of $295.3 million in the prior year to date period. Adjusted EBITDA margin for the third quarter was 9.1% compared to 13.8% in the prior year period. Adjusted EBITDA margin in the quarter was negatively impacted by the lower service fee revenues and higher pass-through revenues, along with the higher inherited cost base. Year to date, adjusted EBITDA margin was 8.6% compared to 12.6% in the prior year period. In the third quarter of 2023, Adjusted net income of $21.3 million decreased 73.5% compared to adjusted net income of $80.3 million in the prior year period. Adjusted net income for both basic and diluted share for the quarter was 24 cents compared to 90 cents in the prior year period. Year to date, adjusted net income of $107.9 million decreased 51.1% compared to adjusted net income of $220.6 million in the prior year-to-date period. Year-to-date adjusted basic and diluted earnings per share was $1.22 and $1.21, respectively, compared to $2.48 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 year-to-date revenue and one customer accounted for 10.2% of revenues. Next, I'll provide an update on cash and liquidity. Year to date, we generated $155 million in cash flow from operating activities, compared to $59.2 million during the same period last year. Year to date, free cash flow was $124.1 million, compared to $23.2 million in the same period last year. Cash flows from operations benefited from improvement in unbilled services and deferred revenue and lower cash used for accrued expenses, including lower incentive payouts, partially offset by a decrease in net income. Net accounts receivable in unbilled services were $1.05 billion as of September 30, 2023, compared to $1.02 billion as of December 31, 2022. Days sales outstanding was 92 days as of September 30th, 2023. This is an increase of six days versus the second quarter. The increase is primarily timing related, including the impact of working through the transition process for items that were previously intercompany transactions. And the remainder is due to us not using the receivables factoring facility in the third quarter. Over the last 18 months, we have initiated several projects to improve our DSO profile. Because our contracts provide services over extended periods, we experience a lag in seeing those changes reflected in our performance, but expect them to drive reduced DSO over time. We ended the quarter with a net debt leverage ratio of 4.9 times based on trailing 12 months adjusted EBITDA. As noted previously, our near-term capital allocation priorities are, first, infrastructure investments for timely exit of the transition services agreement, Second, targeted therapeutic and technology investments to drive organic growth, and then debt repayment. Our target for net debt leverage ratio continues to be two and a half to three times over the medium term. Moving now to our guidance for 2023. Our revenue guidance has slightly increased compared to what we shared in August. However, the improvement is largely pass-through revenue related. We expect full year 2023 total revenue in the range of $3.08 billion, to $3.13 billion compared to 2022 total revenue of $3.1 billion. We reaffirm our previously provided full year 2023 adjusted EBITDA guidance range of $255 million to $285 million. Our guidance assumes foreign exchange rates in effect as of September 30th, 2023. Now I will turn to our transformation efforts as it is important for us to share some of the actions we have taken and will take to improve our performance over time. First, I will discuss some select organic investments we must make, and then I'll provide more detail on our margin expansion program. On investments, we are starting out as a solid competitor today, but we can and need to do more to grow at or above market rates. We are investing in our relationships with and approach to investigator sites, partnering with them to help them deliver research more efficiently. We are investing and partnering in our data and technology ecosystem in differentiated ways, oftentimes in partnership with recognized leaders. We also need to make investments in geographic, operational, and therapeutic area leadership. These investments are both in people and in assets. They are also crucial to helping us win the types of work that are most attractive as a CRO. Now let me discuss margin expansion in several parts. First, new business mix. Second, productivity tools. And third, SG&A cost reduction. First, we are laser focused on selling a mix of work that brings higher value to our customers and therefore higher margins for Fortrea. The combination of increased volumes and better mix will improve operating and overall margins over time. Second, we will need to make further investments to optimize productivity. Given we recently completed some investments in clinical pharmacology, we are looking to leverage those with higher occupancy and throughput. We have good quality management systems and clinical services, but we need further investment in certain productivity tools that will help us manage our global clinical services workforce of around 17,000 people more effectively, particularly around phase two and three studies. We will start these investments in 2024 and some will continue into 2025. Third, as previously discussed, we recognize the tremendous opportunity in front of us to reduce our SG&A costs and bring EBITDA margins closer to peer levels having been launched as a lift and shift spinoff. In the third quarter, we embarked on our journey of margin improvement and business transformation and have identified multiple levers to enhance margins over time. We now have readouts on how we compare to our peers for each SG&A function, as well as more detailed plans for the changes we can make to improve our SG&A costs as a percent of revenue. The improvements will come in phases over the next few years, as some are heavily dependent upon exit of the TSA agreement. Now let me give you a sense of timing for these initiatives. 2023 has been focused on setting the margin improvement roadmap and taking actions to better leverage our global footprint. Initial actions were taken towards the end of the third quarter to more appropriately align our cost structure to our existing revenue profile. Due to the timing of those actions and lower attrition than we had been seeing historically, there will be limited financial benefit in 2023. 2024 will build on our growth initiatives and delivering consistent net new business awards to drive revenue growth, as well as exiting the transition services agreement with our former parent company and beginning the SG&A improvement work. We need to exit the TSAs as soon as possible to avoid incremental unplanned costs and to improve margins. This is a complex and expensive effort as systems, infrastructure, and processes in many areas remain heavily integrated. We are dependent on support from our former parent to complete many of the exits. This is a top priority, and we have already exited 28 of the TSAs. We have built detailed TSA exit plans with the goal of exiting the majority of the TSAs by the end of 2024. Throughout the business, we will work to align our SG&A costs with benchmarks. As we have mentioned, much of this is focused on reducing high costs in IT, but also improving how we use technology throughout the business. We will benefit from the more modern tools being deployed in our industry now along with AI and automation. As an example, we can improve site selection, leading to better patient recruitment by overlaying IT on our data stack in collaboration with our technology partners. We will soon announce an important advance alongside one of our key technology partners that illustrates the progress we are making. We are also addressing costs through taking our delivery centers to the next level, along with better vendor and facilities management, among other levers. 2025 and beyond will benefit from the reduced cost infrastructure post the TSA exit, along with increased automation, more efficient resource utilization, and moving our SG&A spend closer in line with peer benchmarks. This transformation will also support our customer offering, with productivity and technology advances contributing to our ability to deliver projects faster and more efficiently. Let me close with a few last remarks. As evidenced by our strong book to bill in the quarter, We are no longer seeing or hearing concerns from customers about the potential for spinoff disruption. We are delighted to be an independent organization, and we are excited about the energy and commitment of our employees. We are confident that we can execute on our plan and capitalize on the unprecedented margin expansion opportunity ahead of us. With a proven management team, innovative clinical development solutions, and an unwavering commitment to deliver value to our customers, employees, and shareholders, We are firmly on our journey to establishing Fortrea as the top choice clinical research organization for pharmaceutical, biotech, and medical device companies. Now I'll turn it back to Tom for the remainder of his remarks.

That's great, Jill. Thank you. We believe that we can be an organic grower based on the core capabilities that exist here, augmented by select investments in people and assets. If we can exit the majority of TSAs in 2024 and grow revenues through consistent delivery of industry standard book to bills, at the end of the year, we believe we'll be able to get back to the margins we had in 2022. It will take a tremendous effort, but we have the right team here to do it. Our industry is changing, and many of our competitors built their systems more than a decade ago. We have the opportunity to move a generation ahead of them. While there is hard work in front of this team, there is a real opportunity to improve clinical research and create value for our customers and investors. I'm encouraged by the feedback from our Fortria people around the world. We just fielded our first engagement survey as Fortria with a focus on culture. We don't have all the data in yet, but early signs are that our people are highly engaged and excited about taking part in Fortria. I also want to reemphasize that I'm so pleased with the customer relationship discussions and opportunities we're being presented with. We were talking about the future of clinical development in new and exciting ways. Last time, I told you that because I know so many CRO customers, investors, and analysts, I feel a personal commitment to make Fortrea successful as a business and as an investment. I still do. In closing, I want to make a special call out to our employees who are working so hard to transform Fortria. In particular, I want to make a special call out to those in areas of the world with political unrest. The courage, commitment, and innovation you have shown has impressed us all. And you've done all that without missing a beat in delivering for our customers and remaining dedicated to our patient-focused mission. On a personal note, My wife and I have had a grim reminder this quarter why we all work so hard at clinical research. We lost two of our dearest friends, one to ALS, one to esophageal cancer, in the past few weeks. There is essential clinical research work to be done. Operator, let's open it up for questions.

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. Please limit to one question. And if you have a follow up, please go back into the queue so everyone has an opportunity to ask a question. Please stand by while we compile the Q&A roster. The first question comes from Luke Surgat with Barclays. Your line is now open.

Great, thanks. Good morning, everybody. First one here, I guess, Tom, as you guys are looking, you did this analysis on SG&A and, you know, your peer margin level, and you're looking to exit 24, closer to 22 levels. Can you just walk us through kind of the buckets that you found on SG&A and maybe on the gross margin side, the TSAs, you know, how those contribute to that 400 basis points or how you guys got to those target levels?

Hi, Luke. Good to hear from you. I think let me let Jill start on that, and I may have a comment when she finishes.

Yeah, thanks, Luke. So as we've gone through, we have been able to see some significant margin expansion opportunity with that SG&A benchmarking. Some of that will, however, require full exit from the TSAs for some of the groups, as you can imagine, particularly in IT and in finance. So we will get benefit from some of the reductions and changes that we're making in SG&A. But I would say in terms of getting to that exit rate at the end of 2024, it would be a combination of SG&A savings along with benefit from revenue improvement towards the later part of last year, assuming that we continue to deliver strong book to bills like we saw in the third quarter.

And I think, Luke, I'd add to that that we We used a really high quality organization who has understanding of the cost structures of CROs individually. So it's not some generalized industry structure. And so clearly the biggest area here is IT and IT infrastructure. And as Jill said, it's interrelated with exiting the TSAs as we continue to be on the infrastructure of our former parent company through 2024. But we also have some short-term efforts around facilities, some difficult decisions to make there, some other procurement opportunities. We're looking hard at our delivery center and trying to figure out how we can optimize that based on what we've seen. So you'll see it emerging as through the year, but primarily late in the year as we exit the TSAs.

Okay. And then this kind of follows up on that. So you guys disclosed the $30 million that was kind of layered on top of you guys. Are they going to take that back? And then as you guys are building out the infrastructure, as you're building out the infrastructure and the investments for the future growth and to get back these levels, is there going to be a period where there's overlapping costs? I'm just trying to figure out how the shape of the improvements will look.

You know, Jill, let me try to handle that. LabCorp is a well-managed company, so I don't think they're going to take anything back. I think the reality is, as the business runner who, you know, as the guy who runs this business, I was hoping that more of those numbers would be issues that would not be in our cost structure. But the reality is the majority of them are. And so what we've done is redoubled our efforts to make sure that our cost structures align. As we described, we took these near-term actions where we could, recognizing we're actually selling a lot of business. So, you know, you don't want to cut off your nose, bite your face here. But we did take actions already, and then we'll continue to take them through the year, just to make sure we get this cost structure aligned over time. Great, thanks.

Please stand by for the next question. The next question comes from Elizabeth Anderson with Evercore. Your line is open.

Hi, guys. Thanks so much for the question. So maybe two things. One, can you give a little bit more color on the overall demand environment? I know we've heard so much about like pharma restructuring, And so just wanted to understand, you know, obviously you had very nicely improved results in the quarter and just sort of trying to tease out what is the macro and what sort of organic improvement. And then secondarily, can you give an about to that sort of just like how you're seeing trends by maybe pharma, you know, smid biotech and any other sort of breakdowns you have at that just in terms of how you're seeing those end markets develop? Thank you.

Yeah, thank you, Elizabeth. You know, we continue to see this tremendous innovation in the industry. I just spoke at a CNS summit last week, and one of the things I spoke about is how you take an area like Parkinson's, and we now have 15 relatively new mechanisms of actions and therapies that we didn't have years ago associated with dealing with Parkinson's. And so these are cell therapies, gene therapies, traditional monoclonal antibodies, even some plasma therapies. So you look at the innovations and they continue to be coming toward us rapidly. The velocity is only increasing. On the other hand, there's no question there's some unusual pressures in the market with the Inflation Reduction Act and you're seeing some post-COVID type reductions at certain firms. And so in general, the way I think the CROs are feeling about those is that most of the time when there are discontinuities associated with those types of things, more work comes to CROs because there's pressure on internal headcount, et cetera, but there's still this very attractive pipeline that needs to get done. The IRA in particular might create more work for us because there's going to be an acceleration of development of larger cohorts of patients. They're going to try to do indications that have larger cohorts sooner. And so that might create some acceleration for a period of time. Very difficult to predict. Biotech funding, for us, it's solid. We read the same things that you do. But the net of all that, I'm gonna go back, Elizabeth, to what I often say is it seems to depend what you see. So what we see here is among our larger pharma customers, We don't see a particular slowdown. And among our biotechs, we see an adequate flow of RFPs to give us an attractive mix of business. So based on our size and what we see, who we interact with, how we're proactive, right now the environment seems solid. But there's no question to your point, we have this great time of innovation, but a number of events taking place that cloud exactly what it looks like across the industry. But for us, what we see looks solid. Does that help?

Yeah, that's very helpful. Thank you so much for the call.

Thank you.

Please stand by for the next question. The next question comes from Patrick Donnelly with Citi. Your line is open.

Hey, guys, thanks for taking the questions. Tom, maybe a follow-up on that kind of macro backdrop. I guess on the competitive side, you know, when you guys came out of LabCorp, you cited some disruption and, you know, customers not really wanting to deal with that and kind of waiting you guys out a little bit. It sounds like that's improved. Can you just talk about if you saw you cited a couple large wins, were any of those competitive with some of the bigger CRO players? And then secondarily, just given that you commented on the pass-through impact on the REVs, just wondering if you could frame that piece up on bookings as well. I don't know, maybe a 605, 606 equivalent, whatever it may be. Just trying to get a sense for that strong book-to-bill, just what the pass-through impact was there as well. I appreciate it.

Yeah. You know, it's been interesting, Patrick, for us. When we met with you last time in this big forum, we said we hoped that objections around the spin were behind us. And in fact, we really don't hear them anymore. It's interesting. This quarter, as the quarter went on, people accept us as an independent company. A lot of the uncertainty is out. And so we're really not hearing that objection. Like any company, we hear other objections from time to time, but we don't hear that objection. And so we're really excited about the way we're being treated and the opportunities in the marketplace. And so those large wins, to your question there, yeah, they are competitive with the larger CROs. So the larger CROs show up in most of our opportunities. I would say a very high percentage of our opportunities were competing against the larger CROs. So I think they like the accessibility of management. They like some of the innovation. I have to tell you, our teams are preparing so well now You know, they're really thinking carefully about differentiation. They're thinking about it in broad terms. They're trying to write better executive summaries. It's actually been quite impressive to work with the teams here and see the evolution that's taken place. I'm going to leave Jill with some of the pass-through specifics. But regarding pass-throughs, it definitely appears to be an industry trend. You've seen it among our peers. It does seem to be somewhat related to the inflation happening associated with sites. And then we have a little bit of a mix aspect that's hitting us recently. Jill, do you want to add just a little bit more on that?

Sure, Patrick. So I think in terms of the strength of the bookings, I think you were implying, you know, was 605 as strong as 606? And I can tell you that it was. We're very focused on making sure that the service fee revenue is coming through and the way that we're incentivizing Our commercial team is ensuring that as well. So what we're seeing is a combination of things. Some of it is the inflationary headwinds that Tom mentioned. We also, at this point in time, just happen to have a few studies in our portfolio with heavy biometrics and some other things that are driving that up. We expect that we'll see some of this increase going into next year. Just given the backdrop that Tom talked about with the inflationary cost, but we happen to be in a particularly acute phase just based on a few studies right now that are high in biometrics.

Very helpful. Thank you, guys. Thank you, Patrick.

Please stand by for the next question. The next question comes from Casey Woodring with JP Morgan. Your line is open.

Hi, great. Thank you for taking my questions. So just following up on the margin cadence that you spoke about to get from this kind of low 9% number here in the back half of the year to that, you know, call it 13% exiting next year. Can you maybe break down that progression quantitatively between, you know, how much of that expansion will be from the TSA rollout versus the cost-saving initiatives you called out here today and then top-line drop-through? And then just, you know, just to follow up on the bookings numbers, you mentioned you had an attractive mix of work. Can you just elaborate on that piece, what percent of bookings were full service versus FSP, and maybe any other details around that bookings composition that makes the mix attractive in your view? Thank you.

You know, I'll do the second one first. I think, you know, we were really pleased with this quarter in terms of full service, that it really was essentially we exceeded the proportion of our regular revenues associated with it. I can't really tell you too much more than that, but but we were really pleased with that mix. And again, it's a real focus. It's very important for a CRO of our size and type of CRO we are to really try to focus around what we're selling and the quality of what we're selling so that it turns into attractive work and attractive margins. And we are very, very focused on it. We can't give you too much detail on the TSAs and SG&A, but Jill, do you want to take a shot at doing that for Casey?

Yeah, I think it's building on what I said earlier, Casey, is, you know, as we go through the course of the year, you'll obviously the actions that we're taking take a bit of time to manifest. And we've got the readouts now. We're starting to do some of that. So you'll see that improving over the course of the year. You know, we've committed to being on an exit trajectory at the end of next year when we give our guidance for 24. We'll be able to talk a bit more about exactly how the quarters look. But I think you would expect to see that coming in in the back end of next year in terms of getting to that level of improvement because it will take, you know, amount of effort to work through all the different initiatives that we have underway and to see them actually hit, you know, hit the bottom line.

Great. Thank you for that help, Nancy.

All right. Thank you.

Please stand by for the next question. The next question comes from Max Smock with William Blair. Your line is up.

Hey, good morning. Thanks for taking our question. Maybe just a quick one here for me on your strategy. I think in the prepared remarks, you mentioned you're targeting biotech and being selective among large pharma. Just wanted to confirm whether or not this is a change in strategy and how you think about the portion of large pharma today that's addressable, and how do you think about your opportunity or your ability to compete across the large pharma more broadly moving forward? Thank you.

Yeah, it's a good question. You picked up a nuance. I think we've actually nuanced our strategy a little bit that clearly biotech for an organization of our size and composition represents a very attractive opportunity. And so we definitely want to continue to focus there and That's part of the nuance that you smartly picked up. And then with large pharma, there probably are certain types of situations, certain types of FSP situations or others that we may not be interested in. So I do think that there are certain elements of what large pharma does that I would prefer we focus our resources on other aspects. Again, it's always funny on these calls because it's somewhat like the timing of the SG&A and timing of TSAs. We actually have the detailed plans, but we really don't want to get into them in too much detail because we don't want to, in that case, set an expectation that too early here associated with 2024. We don't want to give you guidance for 2024. And in the same way, we have to be a little cautious about our strategy because these are open calls with our competitors. Suffice to say, we really can serve large pharma very well. And I think some of the strategies that we're bringing to the table are quite unique about how to do flexible resourcing, how to really tuck into their strategies for clinical operations and for the product itself. But we're going to do it selectively so that we can really focus the right resources on it. Does that help, Matt? Yeah, that was great. Thank you.

Please stand by for the next question. The next question comes from Derek DeBruin with Bank of America. Your line is open.

Hi, good morning and thank you for taking my question and nice progress on the bookings. There's a pretty big spread in the consensus 2024 EBITDA estimates. Some estimates are well above, some estimates are well below. I know it's too early to guide, but could you expect adjusted EBITDA dollars to be up year-over-year versus 2023? Josh, you know, we don't

You know, there's, it seems like depending exactly how you look at the numbers, it looks like there's maybe an outlier or two and most others are actually pretty, pretty, um, consolidated toward the middle. I think at this time, Derek, we I'd rather not comment on that. You know, let's get into 2024 guidance. We, I think that this team has done an excellent job of refocusing the business. And at this point, Jill. has given some comments about 2024 and how we think it's going to roll out. But I'd rather not go down a level of detail. I hope you don't mind. I just want to be a little cautious on that.

No, fair enough. It's just such a big spread. I just wanted to see if you had any comment on it. But fair enough. I know it's early. Then switching tacks, how should we sort of think about backlog conversion rates? I mean, most of your peers are in the 9% to 10% range. Is that how we should sort of think about this going forward for portrayal?

Yes, you know, I think, Derek, that that's consistent. We're seeing it settle down a little bit as we get, obviously it's dependent on these new awards, the net new awards that we have coming in, rolling in and starting to go through. So we expect to see that probably tick up ever so slightly as we get those into the pipeline. But as you know, it takes a couple of quarters from the time you win something to really meaningfully see revenue from it. So we would expect over time, you know, because obviously a total backlog conversion is relative to, the way that the methodology is done. But in terms of that, I think we would expect to see that more in line with peers.

Great.

Thank you.

Thank you, Derek.

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

Thank you. I'll just quickly close. I think we've tried to do what we said we would do, and that is put our house in order, deliver the business deliver the new business because it's very important for us to demonstrate that we're effective in the marketplace and then we're planning 2024 and 2025. so we appreciate your support and look forward to seeing you next time thank you this concludes today's conference call thank you for participating you may now disconnect