Good day, and thank you for standing by. Welcome to the Fortrea Second Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Hima Inguva, Head of Investor Relations and Corporate Development. Please go ahead.

Good morning, and thank you for joining Fortrea Second Quarter 2025 Earnings Conference Call. I am Hima Inguva, Head of Investor Relations and Corporate Development in Fortrea. Before we begin, I want to share that this has been my last call leading Fortrea earnings call as I have decided to leave the company to pursue other opportunities. I'm incredibly proud of what we've built here and deeply grateful for the support of our investors, the commitment of our teams and the opportunity to work alongside such a high-caliber team. We have a robust transition plan for Investor Relations. It's my pleasure to introduce Tracy Krumme, a new Head of IR, who will be joining the call. Welcome, Tracy. I'd also like to welcome our new CEO, Anshul Thakral, who joined Fortrea on Monday. Anshul, we're excited to have you here. With all that said, I'm pleased to introduce our Chairman, Peter Neupert, who served as our interim CEO in the second quarter; and CFO, Jill McConnell, as our speakers of the call today. The call is being webcasted, and the slides accompanying today's presentations have been posted to the Investor Relations page of our website fortrea.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 file 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, August 6, 2025, 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 stay a more complete understanding of results. A 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 Chairman, Peter Neupert. Peter?

Thank you, Hima, and good morning, everyone. I'll add my welcome to Anshul and Tracy today. We're very pleased to have you both on board and hitting the ground running. Now let's turn to the second quarter, which showed another solid quarter of delivery. Fortrea revenue for the second quarter was $710.3 million, with adjusted EBITDA of $54.9 million supported by our continued progress against the company's margin optimization initiatives. The team continues to make progress with its transformation efforts, including reshaping the organization to align with its evolving pipeline mix and customer needs. Backlog as of June 30, 2025, stood at $7.5 billion and the book-to-bill ratio for the quarter was 0.79x, resulting in a 1.1x book-to-bill for the trailing 12 months. While Fortrea did not achieve the level of net new business wins we would have wanted, there are positive signals in the quarter. The volume of RFP opportunities remains high and cancellations continued to be in line with our historical trends. Although the company experienced some customer hesitancy in the quarter, primarily in new to Fortrea biotech customers as the team navigated the CEO leadership transition. Win rates remain consistent for existing large pharma and biotech customers, but declined for new to Fortrea biotech customers. Fortrea experienced a similar phenomenon prior to the spin and then saw that in a reasonably brief period of time, it was able to return to solid net new business wins with new customers once they saw that the focus on delivery remains strong and Fortrea's leaders and employees were committed to their best interest. Other highlights from the second quarter include positive cash flow as expected. The company's liquidity is sound and its capital structure is balanced. Further, Fortrea provided updated guidance for the remainder of the year, increasing the revenue…

Peter, thank you for that introduction. I'm very appreciative of the warm welcome from the Board and from the Fortrea team. While I've only served as CEO for a couple of days, I've already had some opportunities to speak with executives in the pharma and biotech industries whom I have worked with for many years. In the near term, I will be focusing my time on engaging both our customers and colleagues around the world. For the past few years, I have been on the customer side of our industry and a consumer of CRO services. That, coupled with my time as an executive at PPD, I hope to bring a fresh perspective and energy to help drive our ambitions at Fortrea. The fundamental value proposition for CROs remains solid even as market conditions have been a headwind for the industry in the recent past. For me, it's exciting to see how scientific and technological innovation is shaping the future of clinical development. Having delivered growth in this environment in my past career, I know what it takes for us to be successful. Having spoken with current Fortrea customers, both large pharma and biotech, I know they are pleased with how we deliver for them. My role will be to add fuel to our growth engine, bringing energy and discipline in a way that will yield value for our customers, our people, our investors and ultimately, and most importantly, for patients. I'm ready for this opportunity. I too want to thank Hima for all her efforts at Fortrea over the past few years. Additionally, I'd like to welcome Tracy to the team. Tracy, I look forward to working with you once again. But for now, let's return the call to the second quarter results and hand it over to Jill for a deeper dive. Jill, back over to you.

Thank you, Anshul, and thank you to everyone for joining us today. As a reminder, all my remarks relate to continuing operations of Fortrea following the divestiture of our Enabling Services businesses last year, unless I note otherwise. I will start by saying that I warmly welcome Anshul and Tracy to Fortrea and look forward to working with them to demonstrate the excellence I know this organization can achieve. I also want to thank Hima for her many contributions as we launch Fortrea as a stand- alone company. As we put the 2-year spin transition firmly behind us, we welcome this next period as a time to take the grit and resilience we built from the separation efforts and apply it fully towards enabling our customers to develop their life-changing treatments and make them a reality for patients around the globe. It is time. In my prepared remarks, I'll cover the primary factors that influenced our second quarter performance and share an update on the steps we're taking toward achieving our 2025 guidance. I'll highlight our progress against our previously shared cost optimization initiatives. Additionally, I'll spend a few minutes highlighting improvements in our cash flow this quarter and our expectations regarding liquidity going forward. By the end of this call, I wanted to be clear that we are continuing to take appropriate actions to improve our financial performance and capital profile. As Peter highlighted, we delivered a solid second quarter as demonstrated in our financial results. For the quarter, we delivered revenue growth along with sequentially higher adjusted EBITDA following continued execution of our margin optimization initiatives, including delivering 1/3 of our $150 million in gross savings targets in the first half. As expected, we generated positive operating and free cash flow, and we delivered a 5-day improvement in…

[Operator Instructions] And our first question comes from Eric Coldwell of Baird.

I have a 2-parter, both related. First, I'm just curious on these smaller newer to Fortrea hesitant biotech clients. Did they go a different direction? Or did they simply delay decisions? Is there some kind of commentary around what was lost versus what was delayed coming out of 2Q as there was some hesitancy? And then more importantly, welcome to Anshul and Tracy. Anshul, I'm hoping you can make some additional comments on your commercial style, the skills you bring, relationships you bring to the company, how you approach building a successful commercial operation and whether you've any -- 48 hours in, whether you have any initial views on how your approach to building and developing the sales force and commercial marketing team, how that might differ from where Fortrea is today?

Thanks, Eric. I'll take the first part of that question, then I'll turn it over to Anshul for the second part. So with regard to the new to Fortrea biotech, I think candidly, those are biotechs that made a decision to go in a different direction. It's not uncommon. As we had mentioned and Peter mentioned in his remarks, we saw the same thing, if you recall, prior to the spin when there was some uncertainty about leadership. And we saw that very quickly dissipate once the leadership was in place and we removed. So while unfortunate, we're not expecting to have those same uncertainty concerns with customers going forward. So we're hopeful that, that is a relatively short period in transition. Anshul, I'll turn it over to you.

Sure. Eric, thanks for the question. It's day 3. So I'll answer what I can. In terms of commercial style, a couple of important things to point out. To me, this is a professional services business, and I approach the CRO industry like a professional services business. It's to figure out what our customers' needs are, figure out what tools and capabilities we have to meet those needs. And more often than not, it's about delivering high-quality results and trying to bend the time cost curve, everything we did in my prior career. To me, achieving the commercial excellence here is about commercial excellence, financial excellence and operational excellence. And that's what it will take to win the hearts and minds of our customers. But Eric, it's day 3. Ask me again in Q3, and I'll have spent a lot more time with our customers by then, and I'll have a deeper answer for you.

And our next question comes from Justin Bowers of Deutsche Bank.

Welcome, Anshul. So also a 2-parter for me. Number one, can you discuss the overall demand environment in pharma and biotech and how that's evolved throughout the year? And then part 2 is just an update on the Phase I business. That's been fairly robust for you guys. Are you still leaning on third party for capacity support? And if so, when do you expect that to normalize?

Justin, thanks for the question. Let me take the first part about sort of our demand environment, and I'll hand it over to Jill to talk about specifics in our Phase I business. Look, I'm cautiously optimistic. We are seeing our fair share of RFPs. I agree with the broader market sentiment that's been expressed by others in the industry as well. We too are seeing our pipelines trending upwards, both across biotech and large pharma. Now our lack of exposure to vaccines or government-funded programs is a positive in this macro environment for us. In addition, as Jill has indicated and as Peter has indicated, our strong biotech pipeline is another positive for us and not being over-indexed to any one customer segment is something I'm excited about here at Fortrea. So with that, I'll turn it over to Jill to talk a little bit more about how our CPS business is performing.

Thanks, Anshul. Justin, our clinical pharmacology business continues to be an industry leader and perform incredibly well. In fact, as we have shared previously, our biggest challenge at the moment is capacity constraints. And so that has caused us to have to shift some of that work to third parties, and we're continuing to refine scheduling to try to improve that. And we're hopeful in the future, we'll be able to bring more of those awards in-house. But continue to have great success there, both operationally and scientifically, and we're very excited about the continued building of that business.

And our next question comes from Patrick Donnelly of Citi.

Maybe just a follow-up on the bookings environment. Can you just talk a bit about what you're seeing on the cancellation side? It sounds like, again, the visibility, you don't want to talk too much about the go-forward book-to-bill. But just trying to feel out, again, what you saw in the quarter, what the right way to just think about that cancel pieces just competitively, again, how you guys are doing on the win rates would be helpful just to talk through that a bit.

Sure, Patrick. I'll take that one. So in terms of cancellations, we have fortunately continued to see cancellations in line with our historic trends, which are relatively low. Our cancellations are actually even slightly lower than they were in the first quarter. So from a cancellation perspective, we've been pleased to see that trend continue. In terms of win rates, they were relatively consistent with our existing large pharma and biotech customers. But as we called out, we did see a drop in the new to Fortrea biotech customers. And again, hopefully, we'll see that start to turn around as we go through the second half.

Okay. Understood. And then, Jill, maybe just on the margin side, can you just talk about the moving pieces there? Obviously, that has moved around a little bit over the last few quarters. What the right way to think about just that launching point into next year is? And similarly, inside that, the pricing environment, it sounds like it's competitive, what that could mean on margins and maybe just a little more color on pricing.

Yes. Maybe I'll take pricing first. I mean I think many folks have called out that the pricing environment is very competitive. We think that we're competing well. We continue to watch that. Our goal has never been to be the lowest price. We want to be priced at market. So we're monitoring those trends and adjusting as and where we need to. But I think at the moment, we're handling that well. But we don't see anything incredibly aggressive, but I know it continues to be competitive, as you know. And in terms of margin, we're not at a point where we're going to talk about 2026 yet. But you can -- you will expect continuation and annualization, for example, of the initiatives that we put in place, in particular, as we've shared, those SG&A ones that are more weighted towards the second half. So you'll have the benefit of those fully in 2026. And we also have talked previously about continuing to drive additional savings out of SG&A next year while we continue to try to improve gross margin. So I'm expecting to be able to share a little bit more about that in the future. But I think where we are today for the year, it's a little bit too early to talk about '26 margins.

And our next question comes from Elizabeth Anderson of Evercore ISI.

Welcome, Anshul. It's nice to catch up with you. I had a question just in terms of the outlook for the back half of the year. I think you called out that the guidance raise in terms of revenue is largely driven by FX. And I just wanted to make sure I understood all the moving pieces on the EBITDA line. Could you just talk about sort of your FX exposure on sort of like a revenue versus EBITDA basis? And I know, obviously, you have the cost-cutting benefits, but some planned investments. So could you just walk us through that to make sure we have all of our ducks in a row on that point?

Sure, Elizabeth. I'm happy to. No, the raise is not related to FX. We talked about it having a very minor impact. I think it was 60 basis points in this quarter. We're expecting it to be fairly similar as we go forward. I mean, obviously, no one can predict where rates will go, but that is not the driver of the guidance range on the revenue side. So I think it's moving our projects more into intensive phases, especially some of the newer awards that we've won. And there is also some -- there's impact of pass-throughs in there as well.

Got it. And so just in terms of how that flows down to EBITDA, if that's the case, is that sort of a reflection of some like incremental investments or just some conservatism around the call? Just, I guess, with the revenue increase being more operationally driven, I'm just surprised not to see a little bit more flow-through into EBITDA. So I just want to make sure I have that organized in my head.

Yes, sure. Elizabeth, a very fair question, but I think at this point, it's most prudent for us to maintain our guidance, and we'll see how the year plays out. We're pleased with our progress against the margin expansion initiatives, but felt like it was appropriate to maintain our adjusted EBITDA guidance at this point.

And our next question comes from Tucker Remmers of Jefferies.

Just kind of drilling into the second half guidance here. So it sounds like you guys expect a step down in revenue from the second quarter, but maybe more in line with the first quarter. So I guess I'm just trying to put the pieces together of why is kind of burn rate maybe dropping back down in the second half? And how do pass-throughs play a role into that?

Sure, Tucker. So I think we are expecting a little bit, especially towards the end of the year and moderation in pass-throughs. They're still going to be elevated in the second half, but we actually have a very large, very heavy pass-through driven study that was successfully ended early. And so one of the things that's been driving some of the higher one as that winds down will impact revenues in the back end of the year. I think what you'll see is revenues more in line with the first quarter, but with better margins on them, as you can see relative to the maintaining of the adjusted EBITDA guidance as the cost savings initiatives continue to deliver.

Got it. And then one more, if I could. Just unlike the large pharma environment, sort of -- it seems like that environment has been getting a little bit better, but maybe more stuck in the butt in second quarter versus earlier in the year. So I guess, can you explain like what large pharma customers are telling you and kind of where your win rate has been with those larger customers, not the biotechs that sort of, say, went somewhere else because of the CEO transition? And then that's all for me.

Sure, Tucker. With our large pharma, existing large pharma customers, the relationships are strong. The win rates are consistent. We're continuing to get and win new work from them, and we're pleased with that. I think in terms of the conversations, everyone is dealing with the uncertainty and not knowing exactly where the environment is going to land. There's -- I think there was talk on the news on the way this morning that we're going to hear some more news in the next couple of weeks. So we'll all wait and see what that looks like. But I think at this point, people are moving forward with making decisions, and we've been pleased to see them continuing to award us new business.

Our next question comes from Luke Sergott of Barclays.

This is Jake on for Luke. So you've given an initial 2026 framework around pre- and post-spin backlog and sales mix. But given the bookings this quarter, does the framework still stand? And also, what are you doing to increase confidence in those newer to Fortrea customers?

So I think in terms of the pre- and post-spin, we did see continued improvement in post-spin awards adding to revenue this quarter. You saw that a little bit in the uptick in the revenues here in the quarter. I think we're continuing to monitor that situation closely, and they're progressing in the same direction that we expected. They were of our full service clinical development revenue, they're about 30% of that portion of the revenue in the quarter. So a little bit higher than they were in the first quarter. So the guidance we had talked about previously about that reaching more than 50% of that subset of revenue in the back half of next year holds. I think -- and sorry, this was the second -- it was this -- yes, you want to take that Anshul?

Yes, sure. Jake, the second question was about how we think about the new to Fortrea customers. This is where getting to the other side of the CEO transition is extremely important for us as a company. And this is where I see having the greatest impact here in the coming months. My role, as I said earlier, in the next few months is going to be to really engage our customers, both perspective as well as current and our colleagues around the world, and that's how we plan to address it.

And our next question comes from Max Smock of William Blair.

Anshul, I know you've only been in the seat a couple of days here, but just thinking through or maybe a strategic one from our end, talked about leaning into FSP, making yourself more competitive in large pharma, but at the same time, your win rates and down in small biotech. How do you think about prioritizing these opportunities moving forward? And where do you really want to lean in or see the most opportunity for share gains in the near future?

Max, happy to take that question. Look, I think with the uncertainty in the market, we did see a dip in the win rates. But as Jill has said, that's been with new to Fortrea biotech customers. Our win rates have been fairly consistent with our existing customers in both customer segments. And so where I see opportunity is what I talked about earlier is continue to sharpen our commercial discipline, our financial discipline and our operational discipline. But give me the 90 days to get out there and talk to our customers and colleagues and come back to you, and ask me that same question again in 90 days, Max.

Fair enough. I'll hold you to that. Maybe, Jill, just a quick one for me, and apologies if you covered this. I know we've talked about burn rate a little bit already. But can you just walk through what exactly drove that big step-up here in the quarter? And what's really changed as we head into the back half of the year? I think even with your guide anticipating revenue comes down a little bit, still elevated burn in the back half. And before, I think we had talked pretty consistently about burn rate continuing to be under pressure. So can you just walk us through again the drivers in terms of what's really changed and what's driving that increase in burn rate here for the remainder of the year?

Sure, Max. I think in the quarter, we really benefited from the clinical pharmacology reporting unit as that continues to grow. We'll still see some benefit from that. As you know, it's faster burning, and we're continuing to try to find ways to leverage the capacity we have. And again, very pleased with how that business is performing. With the parts of the clinical development business, it's really as we're moving some of the newer awards into more intensive phases of their life cycle, and some of the operational excellence that we've been able to drive. You heard Peter talk about some of those metrics in his remarks, I think is allowing us to see a path to a slightly improved burn rate in the back half compared to what we originally thought, probably in the 8.5% to 9% range, so relatively consistent with first half trends.

And our next question comes from Michael Ryskin of Bank of America.

First, I want to ask on cancellations a little bit more. Really encouraging commentary given what we've seen from others, just especially the fact that you actually have cancellations improved from 1Q to 2Q. Just wondering why you think you're seeing better trends than we've seen elsewhere. Is this just a function of exposure and cancellations being a little bit more concentrated with certain specific large pharma sponsors where you may not have -- might not be as large a part of the mix or just anything you're executing differently, types of programs you're linked to? Just any additional color on why you've been more resilient there and why you think that might continue?

Sure. I'll take that. I think in terms of cancellations, you're right, it is about who you're exposed to. We don't do government work generally. We don't have really a book of business in the government-related or government-funded work, and we have very limited exposure on the vaccine side, which I think is some of the issue that our peers have faced. We also have a relatively conservative bookings policy. So I think that also has helped us to keep our cancellation rates in check. But we monitor it constantly, and we've been pleased to see that it's really remained in line.

Okay. And Jill, just piggybacking on -- I think it was Elizabeth's question earlier on the EBITDA outlook for the second half. Just thinking through the -- what you've seen in the first half so far? And then just the rest of the cost savings program, if that gets you another, I think, $60 million, $70 million net in the second half, that alone should get you more or less to your EBITDA target for the year. So is this just -- like you said, it's just a little bit of conservatism? Are those savings on the SG&A front coming later in the year, so you won't see the full benefit in the second half, you'll get them more in '26. Maybe you could talk about the timing of those coming through, that would be helpful.

Yes, sure. I think you're right in that they're continuing to ramp, particularly in the SG&A functions. As you remember, we had to fully exit the TSA and get up and running in the new ERP system, for example, which takes a couple of quarters before you can start to make broader changes. So some of it is the timing and some of it's also a function of how the service fee revenue will play out in the back half of the year with revenue numbers being slightly lower than they were in this quarter, there's a little bit of that impact as well. And those are the major drivers.

And our next question comes from Jailendra Singh of Truist Securities.

Congrats and best wishes, Anshul and Tracy. Looking forward to working with you both. And Hima, best wishes to you as well, and thanks for all the help in recent years. I want to follow up on the win rate comments in biotech. It seems you were describing win rates outside of the impact of the CEO transition pretty stable. Just trying to better understand the market environment there. Are you seeing increased competition in the space with some of your peers calling out making a push in that market more aggressively? Have there been any shifts in the average RFP time from issuance to award? Just give us a little bit more flavor about the market environment you're seeing outside of the CEO transition impact.

Yes, I'm happy to take that question. I think in terms of win rates, we are -- I mentioned in my remarks, we're seeing still a little bit of the delays in the booking, although they seem to be kind of leveling off. So that's positive in terms of the time you see them until the time people are making decisions. Good science is still getting funded. We did have the impact of the transition in the quarter, which creates a perception of uncertainty. And that, again, we were really pleased that, that transition period was very short, and we expect that to dissipate very quickly as we go through and have the competition. Yes, I think the market environment is competitive. All of our peers have talked about that. But again, with existing biotech customers, we're still winning consistently. So we think it's just a function of now that we can take some of that leadership transition off the table. We will be able to -- we'll be fine there in terms of the new to Fortrea customers. And with existing pharma, we're pleased to continue seeing good awards coming through and continuing to win at consistent rates in existing pharma.

Okay. And Anshul, one for you. Not asking anything specific to Fortrea, but given your strong background in the industry, I would love to get your thoughts on various transitional headwinds, tailwinds the industry is going through or has gone through recently. You're clearly positive on the CRO industry in longer term. But would you be willing to share some thoughts on the -- trying to put the current environment in some perspective, like what it takes the industry to navigate through these challenges, what the focus of technology, focus of transition, focus of clients. Just give us a little bit more flavor of putting the current environment in perspective given your experience.

Sure. I'm happy to do that. I went through this decision-making process as I thought about this industry and its fundamentals before joining the team at Fortrea, and I'm extremely excited with the choice I made to join this team. I will tell you, yes, you see some headwinds. You see some headwinds due to many of the macro level environment. We've talked about that. All of our competitors have talked about that. But I remain steadfast in the market fundamentals. What Jill just said a couple of seconds ago, good science continues to get funded. And that's a statement that applies both at the pharmaceutical -- large pharma companies and it applies at the biotech companies. Good science, good drugs continue to get developed. And the CRO industry is a fundamental tool by which these drugs continue to get developed. So I stay steadfast in the long-term fundamentals of the industry. And listen, that's really why I'm here, and that's why I'm excited to be here. And as I've said a couple of times, over the next few months, I'm going to be traveling, meeting with our colleagues and our customers and really getting a feel for how we're going to leverage Fortrea's strengths with that market backdrop that I just described.

I'm showing no further questions at this time. I'd like to turn it back to Peter Neupert for closing remarks.

we look forward to sustaining our relationship with you.

Thank you.

Thanks everyone.

This concludes today's conference call. Thank you for participating, and you may now disconnect.