Fortrea Holdings Inc.

Ladies and gentlemen, thank you for standing by and welcome to Fortria First Quarter 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you would need to press star 11 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 Hema Nguva, Head of Investor Relations and Corporate Development. Please go ahead.

Good morning, and thank you for joining Fortria's first quarter 2025 earnings conference call. I am Hema Nguva, Head of Investor Relations and Corporate Development at Fortria. On the call with me today are our CEO, Tom Pike, and CFO, Jill McConnell. In addition, Peter Newport is also joining us on the call. As mentioned in this morning's press release, Peter has been our lead independent director and will serve as our interim CEO and chairman of the board. The call is being webcasted, and the slides accompanying today's presentation have been posted to the investor relations page of our website, potria.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 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 that we posted on the website. Please note that any forward-looking statements represent our views as of today, May 12, 2025, and that we assume no obligation to update the forward-looking statement, even if estimates change. During this call, we'll be referring to certain non-GAAP financial measures. These non-GAAP measures are not superior to or replacement for the comparable GAAP measures, but we believe these measures help investors gain a more complete understanding of results. A reconciliation of such non-GAAP financial measures the most directly comparable gap measures available in the earnings press release and earnings call presentation slides provided in connection with this call. With that, I'd like to turn it over to our CEO, Tom Pike. Tom?

Thank you. Good morning, everyone. Welcome to the call. Today, we have a number of important topics to discuss, focusing on our current business results and trajectory. Then towards the end of the call, we'll address other announcements. Our revenues and adjusted EBITDA came in just about where we expected, and we are reaffirming our guidance. Our book to bill was 1.02 times for the quarter and our trailing 12 month book to bill is 1.14 times. Let me start with our bookings, the general environment, and our pipeline. Regarding the 1.02 book to bill, we had a good pipeline and closed the anticipated large pharma opportunities, but saw delays to close some biotech awards and a little softness in clinical pharmacology in the quarter. Each quarter, I've shared with you some interesting wins we've had to demonstrate that Portria wins important work. Today, I will highlight a few examples. We expanded a Phase 1, I'm sorry, expanded a Phase 2-3 clinical development partnership with a large pharma customer into an observational development program, applying our real-world evidence expertise and experience. By engaging early and bringing a holistic approach, we're delivering meaningful value to this customer and its type 1 diabetes portfolio. With another large partner, we secured wins across a range of therapeutic areas, including cancer and kidney disease, involving solutions from phase one through late phase, as well as FSP. These wins were based on a longstanding relationship characterized by trust and transparency. We also had some significant wins in the biotech space. We have an established partnership with a larger biotech. Last year, we delivered a smaller monotherapy trial, which led to a first quarter non-compete study to award and evaluate a multi-dose therapy. Biotech customers in particular appreciate that we're large enough to deliver their studies around the world while being small enough to give them the executive attention that helps drive their programs with excellent delivery, timeline efficiencies, and quality data for registration or acquisition. Turning to the market environment, please note that these remarks on the market were prepared before seeing the details of today's announcement regarding the U.S. pursuing the most favored nation drug pricing. As we've said in the past, the different CROs see different slices of the total clinical research spend depending on their size, customers they're exposed to, and the relationships they have. What we are seeing is that Fortrea's larger customers have remained fairly consistent in terms of opportunities and spend since last year before the U.S. election. Certainly, they are speaking of the challenges ranging from patent cliffs to IRA to tariffs to regulatory agency changes, but overall, they're pushing forward. As we've discussed, we are happy with how we're targeting a roughly 50-50 blend of biotech and large pharma. Since the spin, we're trending a bit more toward biotech. Regarding biotech sentiment, some report to us that regulatory meetings and input are timely. Other biotechs are being more cautious, wanting FDA or other regulatory confirmation and support for proceeding, which is slowing down their decision-making. Some biotech customers are discussing a more challenging funding environment. Like you, we've seen reports of a biotech funding slowdown this calendar year, though there have been some nice recent acquisitions, which historically is positive. All that said, we do see our biotech opportunity pipeline growing. Some of that is due to the changes we've made to our commercial organizations and some due to brand building recognition for Portria with biotech. Before moving on, I do want to say that I've been working in life sciences for about 30 years. Pharmaceutical companies and executives are very resilient to administrative and policy changes. The burden of disease is not going away and new and improved medications are critical. Further, innovation in both science and the process of drug development is progressing rapidly. Artificial intelligence is promising and has potential to rapidly accelerate our understanding of biology in our discussion, discovery of targets and therapies. AI, along with the increased use of real-world evidence, will improve the speed, cost, and quality of clinical testing to prove therapies are safe and effective. I believe that well-run CROs will be part of the future. On an apples-to-apples basis, our employees and overhead costs are lower, our productivity is higher, and our ability to change is great. We now have 30 years of deep experience and are part of the reason why the biotech industry has been so innovative. Let me go back to where I started this section. The public CROs can perform differently based on the slice of the market that they serve. Regarding our pipeline, I'm pleased to report that our overall pipeline of opportunities remains solid, higher than the average of the past three years and growing on a trailing 12-month basis. We believe our pipeline has the ability to produce attractive book-to-bills for the remainder of the year, keeping our average bookings pointing toward growth. Regarding the second quarter, it's too early to tell exactly where we will land. April was solid, but we have more biotech exposure this quarter and these opportunities are more challenging to predict in terms of both win rate and timing. Our clinical pharmacology pipe is solid again. There is currently a path to a 1.2 times book to bill, but there is greater uncertainty about the macro environment potentially impacting decision making than at any time since we have spun. We are focused on putting a great value proposition in front of the customers, and in some cases, we do have our regulatory and strategy consultants helping customers think through how to best progress their products in this environment. On the commercial side, our transformation is continuing and we perform well, but we still want to up our customer relationship game. We're now starting to incorporate AI to increase the efficiency, quality and consistency of our proposals, contracts and commercial workflows. This allows us to focus more on the value proposition and less on just dealing with basic qualifications. We've added more sales capacity in biotech, a sales training academy and improved account planning for our larger customers. As I mentioned above, we're reaffirming guidance for the year. I'm pleased with the results of the improvements we've made to our forecasting system since the end of last year. The first quarter was a quarter of solid execution. As we've discussed, we believe that 2025 is a transformation year. We want to win more business in a complex environment. We want to continue to deliver well and improve our customer relationships. At the same time, we know we need to improve gross margins as well as reduce our SG&A costs. Let me discuss how our plan transformation addresses that. Now that we have substantially exited the TSAs, we are focusing on quality, cost structure, operations improvement, and practical innovations. In our clinical pharmacology business, our occupancy is at high levels, so we're focusing on optimizing pricing capacity while still delivering high quality. In FSP, we revised how we manage over the past year and are looking to drive growth. We've been working hard in our full-service outsourcing business, which comprises the majority of our work. Here are a few examples of recent successes in full service. We completed recruitment for a renal product seven weeks ahead of schedule and on budget for a large customer. We accelerated a large cancer study timeline by 12 months. And in the first quarter, we delivered a first patient in for a sophisticated new CAR T therapy. We know that we need to not only deliver well, but we need to improve our gross margins. Here, as we've described to you, we have a combination of complex studies, some slower starting biotech projects among our more recent wins, and what we are now preferring to call longer duration and latent lifecycle studies that are impacting the burn rate. We have several actions underway to improve gross margins. First, aligning our resources to the work, looking for ways to optimize across our therapeutic areas, sites, and geographies to lower the cost of delivery in our global footprint. We have developed tools to assist us with this. Second, we're also reducing our direct but more centralized cost of delivery. Finally, increasing burn rates should increase margins too. The first order of business is hitting milestones on time as well as getting paid for what we do. We're also trying to help biotechs get started faster. We're trying approaches to speed things up such as getting sites started faster, but studies cannot always enroll patients faster. We're pushing and we'll keep our focus here. Generally, this attention is better for our customers and our relationships with them. We have a great team and some long-tenured Portria executives and new leaders to drive change and improve gross margin. They will get it done. Regarding SG&A, we're transforming our support functions to improve service and bring costs more directly in line with benchmarks. All of our SG&A organizations are now doing more with less. We can already see the benefit of having our own tailored ERP systems. For instance, last week, our chief administrative officer was showing me the new, more actionable reports he gets on attrition, spans, layers, and costs of our employees. We expect more improvements over time. We're now optimizing our people around new processes. We'll be implementing automation and AI tools as they become available from our system vendors. When we spun, Fortrea's information technology costs were farthest above benchmarks. Ironically, with that spend, we did not inherit strong systems. From the beginning of 2024 to the end of 2025, if we hit our plan, we expect to reduce IT spend by about one-third on an ongoing run rate basis. That's big. We have reduced IT costs, even though we've had to build many functions like cybersecurity from scratch. Coming off the intense TSA exit process, as well as the divestiture of our enabling services business, We are refocusing technology projects to make Portria better. In the first quarter, we launched an enterprise-wide application rationalization program, which has already identified millions of dollars of savings over the next five years, a number we believe will grow as we complete the evaluation process. We are implementing new project management systems and developing better global resourcing capabilities. I just did a review of our new mobile tool to increase CRA productivity and quality overall, which will ultimately reduce our cost to serve customers. We've also been implementing a series of rapid releases to our own systems to manage studies more effectively. We continue to work with leaders like Viva and MediData to take advantage of their latest innovations. For further optimization and productivity, after a series of pilots last year, we launched co-pilot chat through our Microsoft 365 license, making AI tools available to every employee who has Microsoft licenses. Copilot is improving our productivity and has been rapidly adopted across Fortria. We're seeing more than 50% increases in usage week by week driven by a comprehensive change program. For employees in need of more advanced AI capabilities, Microsoft Copilot Enterprise is our primary solution. We piloted more than 200 use cases last year and demonstrated its power. We are rolling it out this year based on the highest priority use cases. Certain areas like protocol reviews, dealing with protocol deviations, site agreements, quality plans, medical writing, and report reviews are using AI and will standardize around AI assistance in the near future. As a regulated industry, given AI's ability to make mistakes, we still need humans in the loop, but we believe our productivity will continue to improve. We have a strong IT leadership team and excellent partnerships. In coming months, we hope to be able to demonstrate to analysts and investors some of the innovations we have under development or in production. Just a few more things before I hand off to Jill. We cemented a partnership with the Society for Clinical Research Sites, becoming a charter sponsor of Collaborate Forward Working Group, which will explore and develop best practices to reduce administrative burdens across the clinical research ecosystem. We recently announced that Portria was named a leader for both pre and post pharmacovigilance operations by Everest Group in its annual pharmacovigilance operations peak matrix assessment for 2025. Third party recognition is great to have, And we're also getting great feedback about our solutions and service experience directly from customers. Overall, our customer net promoter scores have continued to trend up, meeting our Q1 target with team expertise and project management noted as areas of strength. I must call out our clinical pharmacology group when I talk about NPS. This team continues to earn exceptional scores. At Fortria, we service customers well and are working hard in our transformation. We're building a firm foundation for the future. Now let me pass to Jill for more thorough discussion of our results and initiatives.