All right, looks like the clock is ticking. Good morning. I'm Dave Whindley with Jefferies Healthcare Equity Research, and I do talk loud, so I probably do not need much mic. Welcome to Day 3 of our conference. Appreciate your interest and attendance. Day three of three. We are not quite winding things down, but excited to have another day of presentations today. Our next presenting company is Fortrea. Here with us are the company's recently named CEO, Peter Neubert, and the company's CFO, Jill McConnell. I joked over that one. Sorry, Jill.
It's okay.
So, really pleased to have you here. You've had a lot going on. I thought I'd just start off with the high-level question on, you know, the most recent developments, and Peter, ask you to talk about review process and CEO search and status on those things.
Okay, great. Thanks. Welcome. I'm not surprised to get the question. The good news is, I think, as I said earlier, we're quite close on a CEO. We hope to have somebody in the seat before the summer is over. Nothing more than that to respond. I'm very excited about our slate. There are several good candidates, with deep experience in the business that will come and energize the company. Looking forward to having something to talk about in the future.
Got it. I guess not to understand, you've got an ongoing process. You don't want to reveal too much. In terms of, you mentioned experience. It does seem like to me, you know, when I've, I've followed this industry for a while, my, my perhaps view is somewhat myopic to this industry. You've had broader view than that. It seems like, from a competitive standpoint, from a, you know, industry demand challenges, you know, it's, it's not a particularly easy industry to be navigating right now. That experience, relationships, you know, perhaps ability to, to reach out to clients and say, "Hey, give us a shot," is, is pretty important. Maybe you could, perhaps without talking specifically about candidates, but talk about the, the key criteria that you see as important in this candidate or in this new CEO.
Yeah, no, that's fair. You know, I, so my experience is I'm a software guy back at Microsoft, since 1987. Got to see the restructuring of many industries as the world evolved, to where software eats the world. I think you're right. This is a very complicated business, one that I do think software will make a big difference in over the next 10 years. But it, and it's a very fragmented business in the context that running a clinical trial is really running 10 different components with 10 different business models associated with it. When you deconstruct it, I think it is really important because the evolution in those models is going to be at varying rates.
Having somebody that really deeply understands both the business, the customer, which is different along different segments of that business, has the relationships, but also has a growth mindset that understands what the framing of the problem was over the last 10 years is probably not the framing of the problem over the next 10 years. Somebody that can help bridge what was successful historically to what will be successful in the future and is willing to take some risk along that is an important criteria for us. All the dimensions that you mentioned, relationships, because that is super important, a talent pool perhaps that is super important, and the ability to synthesize information really quickly to make some choices as we evolve our portfolio.
Got it. Helpful. In the meantime, I guess I'll ask, you know, again, the industry doesn't stop while you search for a CEO, a new CEO.
Absolutely.
What are the top priorities that you're focused on to kind of keep moving forward while also searching for this new leader?
Yeah. Certainly the most important thing is to satisfy our customers. Very focused on keeping the team and have had two all-hands meetings already, met with all the executives in the team, keep the leadership team in place. We have a great leadership team. Help them align against some priorities. Delight customers, keep the team motivated. We have a clear set of objectives that we've been clear about with investors, about what our goals are for the year to make sure we hit those goals, because that's probably the most important thing to regain trust with investors, and run the business while we try to find new leadership.
Got it. In thinking, maybe, Jill, these may get into your power alley, but thinking about some of the terminology you've used about, and you may have on the call even tried to move away from this, but pre-spin, post-spin type, you know, business and the differences in how those trials are running, what their profiles are. Perhaps you could get into a little bit of detail on, you know, what are kind of the key differences between pre-spin and post-spin work, and then I'll follow up.
Sure. I, you know, I think it all comes down to how the trials are being executed. We do not think that pricing has been the issue as we look across the course of both types of work, both the ones that were, you know, entered into before we spun and after. It is all about the execution of the trial and probably the way that we approach change orders around those trials. Historically, going after the change orders was not a strength for the business. We have really tried to reinstate that where it is appropriate, of course. You know, historically, when customers ask for changes, we were not always asking for the commensurate compensation for them. We have changed that approach. Now we are also very focused on how we resource the projects. That was historically more of the challenge, is that those inefficiencies were not really being monitored.
Some of it was system-related. Some of it was just around execution. And we have, you know, I think with the older ones, you know, we have been able to get them at a point now where they're plateaued. For the new projects, we're trying to keep those, that operational efficiency in line with kind of industry averages. So far we've been successful with that. That's going to be the big driver in terms of the improvement.
Okay. If I think back to some of the dialogue around the backlog, I suppose at spin or soon thereafter, some of the characterization was maybe that work, you know, things like the Salesforce pre-spin, was not really incented to distinguish between central lab work versus clinical work versus, you know, maybe even preclinical work. It was not incented to look at direct revenue versus, you know, pass-through revenue. From a profile standpoint, it was my understanding that some of the pre-spin work was heavy pass-through, maybe not, you know, duration, I do not know, maybe duration was not particularly attractive, and maybe pricing was, was not as good. I hear you saying that pricing is really not the difference. Maybe we could get into a little bit more granular detail around that.
Yeah, I mean.
Can I take a step back?
Sure.
In terms of framing the challenge, I think realistically, if you zoom out just a little bit, and Fortrea is a spin-out from Labcorp, as many of you know, and as a part of Labcorp, its focus was very different than it is as a standalone business, which is one of the reasons we spun it out. We recognized it was an under-leveraged, if you will, not leveraged in the financial sense, but leveraged in the opportunity sense because we never gave it the focus that it deserves as a standalone business. That focus, unfortunately, during the spin, so much of it was focused on getting the spin done. We announced it, and in nine months we spun it out, which is about nine months faster than most people do it.
During the first 18 months of Fortrea's existence, it was about how do we get out of what we were doing. I would say that the portfolio you cannot characterize as being dramatically different pre and post-spin because the relationships take a long time to evolve. The mix might have changed at the margin, but not to the way you were saying it, Dave, in my opinion.
Okay.
One of the choices that was made as we spun was to keep capacity. That works if you grow. It does not work so well if you do not grow. And we did not grow into the expectations that were part of the original plan. That is the foundational driver on the margin issue, in my opinion. Plus, you have got to recognize in this business, or at least now being on the operator side as opposed to the governance side, the tension between customer delight and investor delight is real. When you are part of a small part of Labcorp, it is very easy to focus on customer delight because you do not have to worry about investor delight. We now have to focus on both. We understand that, and we were making the changes.
We have very detailed plans about those changes, but to get the capacity right-sized to the portfolio mix is going to take a period of time.
Okay. So when, I guess, trying, respecting Peter, that you're trying to keep a bigger picture.
No, I just wanted to say.
Yeah, no, I understood. Yeah, understood. I guess when you look at, you know, this element, I mean, investor delight would be, you know, getting profitability up, et cetera. You know, there is an element of, you know, there has been discussion about differences in cost structure between you and your peers and benchmarking against, you know, gross margin, SG&A, IT costs, et cetera. You know, I am sure at the board level, you are looking at these differences. The differences are.
Start.
Dramatic. Yeah. They are very, very wide. To your point on, I mean, the thing that does resonate with me is your point about, you know, you staffed to grow, and then the growth hasn't come in part, you know, in large part because the industry hasn't been, you know, or the demand environment hasn't been cooperative. How easy is it now? You've done some waves of this, but how easy is it to go in and resize the labor force to get the cost to a level that reflects a non-growth environment?
It's never easy, but it's doable, right? We have clear plans. Jill can be much more eloquent about the plans, the specifics of the plans than I can. I think that really comes in two waves. The first wave is there's the known set of things that we're going to do to hit our goals for this year. If it's important, Jill can describe those. The second thing is, I think, as we bring in new leadership, we are positioned in a difficult challenge of we're a little bit of all things to all people. That probably in a lower growth environment is more difficult to execute on, than originally anticipated.
There'll be some portfolio decisions, I suspect, as new leadership comes in as to how to right-size the various components of that mix, whether it's therapeutic or type or, other, global, those things to get the fit just right so that we can get those out of whack, expense variables into the right alignment.
Got it. To give a, and maybe the answer will be neither, but to give an either/or, you're essentially over-hired, overstaffed for the level of work that you have. You mentioned, Jill, resourcing and certainly the TSA transition tech, et cetera, is going to help that a lot. Are you, like, I'm going to be overly, you know, kind of hyperbolic about this, but do you have people sitting around doing nothing and then you have people that are on trial at kind of an appropriate resourcing level, but you have to absorb these people that aren't, you know, that aren't fully utilized, or are you over-resourcing projects and so you have to take people off projects to, you know, to resize your labor force? It seems like there's a difference in customer delight in those two scenarios.
Yeah, I think it's the former, not the latter.
Okay. Okay. And so presumably getting back to this pre-spin, post-spin dynamic, those changes could be done regardless of trial, right? Timing of trial, where they are in their life, you know, kind of re-resize, either, you know, resizing your labor force can kind of be done across the portfolio. Maybe, transitioning to the TSAs and perhaps, a little bit, I'd love to shine a light on what kind of divorcing yourself from the old systems and the reliance on the former parent, what has that year to date, you know, enabled you to do?
We have talked about the savings opportunities for this year. I'll just remind, there's $150 million that we've committed to externally on a gross basis, and it's $90 million-$100 million net. That's split roughly half and half between what would hit direct costs or gross margin, and the other half would be improving SG&A. On the SG&A front, it is very much around, we are making very deliberate decisions, and I talked a little bit about this with our Q1 results on rationalizing applications, reducing duplication and subscriptions. We are looking at opportunities for labor reductions and arbitrage, but also thinking about how we can use automation now that we're operating in a different infrastructure ecosystem to do things differently.
I've talked about this before, but one of our decisions, for example, with our system choice, ERP and HCM, was to use one system that does both, right? You do things like that to reduce duplicative licensing costs. Those are the nature of the things we're doing, and we are very firmly on that path. I talked about, you know, we'd had about $19 million of that that we captured on a gross basis and around a third in the first quarter. We weren't expecting much, and we are making good progress towards those targets, and we believe that, you know, that we're on track to achieve those for this year.
Those are a rationalization of IT costs. The,
Let me jump in just short there.
Yeah, sure.
Because I think it's an important thing. I focus on infrastructure. More importantly, from a savings point of view, is we now have a bespoke infrastructure that will allow us to run the business more effectively. We get to set it up.
That's great. Yeah.
We get to set it up the way we wanted to set it up. We're still not done. There's a lot more work to get done. As Jill knows, I like to ask 50 questions about various analytics that we're not quite able to do that we'd like to be able to do. But we will be able to get there because it's now our business and not, you know, 10% of somebody else's business that has a very different business rhythm.
Yeah. You read my mind. I was going to say, there's the IT savings, first of all, a little bit on, what's the, what's the timeline? Are you at a point where you can jettison these duplicative IT systems, or are there still transitions and things to be done before you can let them go?
The big systems are done. There are still the application stack from, remember, Fortrea is the agglomeration of four other businesses, so the app stack is pretty diverse. And Alejandro, who runs IT, has a long project ahead of still rationalizing the apps. We now have the infrastructure that allows us to monitor it so that we can rationalize it effectively. That is one of our goals in reducing the total IT cost. While at the same time, we want to invest in building new tools, not too many building, but leveraging existing tools and adding capabilities on them to make the workforce more productive.
From a timeframe standpoint?
You know, I think it's a journey of two years. I think we will see important improvements this year that will be mostly in the rationalization as opposed to the investment in new. I think the investment in new rollout will take a couple of years with some very interesting things already on the horizon, which was actually the topic of one of the all-hands I was able to do, which was well received.
Yeah. And so then you, you went to the, the other area. You get the IT systems in place that allow you to have visibility down into the business and see efficiency of resourcing or not, and, and chase of change orders or not, and things like that. And so, what, you know, is there a, you know, a kind of soon, medium term, long term in terms of the, the actions that you can now take, with that visibility?
Increasingly, yes.
Yeah.
Certainly, any IT roadmap has things you're going to launch next month, next quarter, next year. How that impacts the business, like, we can't predict yet.
Okay. So let's maybe transition to environmental questions. Maybe just in general, describe what you are seeing from clients in terms of demand and intention around product, their candidate portfolios, and if you would distinguish between, you know, kind of large, medium, and small.
Sure. Yeah. With our large pharma partnerships, we're continuing to see a strong pipeline of things coming in, opportunities, when they knew it would work. You know, everyone is mindful of the external environment, but good molecules are still moving forward and things that are being developed are still being developed. With biotech, we're continuing to see opportunities come in, but there are still some delays in the decision-making given the kind of macro environment and the uncertainty. You know, when that will abide, I think nobody knows. It's probably similar to what a lot of our peers are seeing, but we are still continuing to, we're not having challenges with, we're not seeing any change in terms of funding where people are having issues so much with funding or getting paid. That is not the issue for us.
I think it's just the slowness in decision-making while people wait to see how some of these external factors play out.
Yeah. On the large pharma front, so, most of you, I do not know if you have said it as publicly, but most of the peers have talked about the last couple of years being a pretty intense period of procurement and reprocurement, both on cycle, off cycle. You know, it kind of felt like customers were bringing you to the table whether you wanted to or not. Is there still some of that left? Do you have partnerships that are up for renewal in the, you know, say the next 12 months?
There is still, I think that will always be the case. You know, that's just the nature of how business evolves because the world is changing so rapidly. Having said that, we are, you know, our partnerships are continuing. They're all very long in duration. We're in meaningful projects with these customers that are, you know, in some cases very early in their life cycle. We would not expect that to change midstream. We do not take anything for granted. We are always looking at ways to engage our customers on how we can bring them more value and try to help them achieve their goals faster. It's about understanding what's really important to them and trying to bring solutions that are going to help them get answers more quickly because, you know, speed is still obviously important.
There is nothing major imminently in front of us in terms of those renewals, but we do not really consider that an issue anymore because to your point, they can bring you to the table at any point. You have to constantly be thinking about, am I showing up in the best way that I can for this customer?
While we're on the large pharma side, FSP is mostly a large pharma phenomenon or dynamic. I thought that on the 1 Q, maybe the tone or the attitude or willingness toward FSP had changed a little bit in a positive direction. Did I detect that correctly? Could you elaborate on that, please?
Yes, it has. I think that initially when we were looking at all the things that we were trying to achieve as an organization, to Peter's point in those 18 months, a fair amount of focus on the separation and getting ourselves stabilized. Going after large FSP partnerships, given that they have a lower margin profile, we were more focused on full service, and our phase one unit. As we have gotten into a more steady state and we see the value of those partnerships because oftentimes they can morph, we are more interested in FSP. It was not that we were not interested.
I think we talked about the largest customers where the margins were very, very tight, not being of good sense for us, but there's obviously a lot of FSP space out there that still has solid margin that can contribute, accretively, and that's what we're focused on.
Is there a profile of, I think the way to think about these is in like a number of heads that are allocated to a client in an FSP arrangement. Is there a sweet spot that you think Fortrea can both be competitive in because your scale in that business is not nearly as big as, you know, say IQVIA and ICON, but you, you know, so size that you could compete for and yet still make a decent margin?
We do not focus in any size in particular at all. I think it is more around where do we have skill sets that we believe are really important, where we have also enabling technologies that help to make those resources be more effective, and then good partnerships. You know, I think where we are already working with companies in their FSP, they seem to like working with us and tell us that they like working with us, and we are constantly trying to find ways to help them manage their costs and the productivity of those resources. You know, where it is helpful for us to go after is ones where we are not working with the customer.
If there's an opportunity to engage with a customer that we aren't working with in large part now and go into that FSP relationship with them, that seems like an opportunity for us, I think, more than trying to cannibalize where we already work with somebody on full service. Those are the types of things that we'd be looking at. And the global footprint, you know.
I was going to come back to that.
Global footprint, yeah.
The FSP helps in the sense of it takes some of the indirect costs and absorbs them.
Yeah.
The global footprint and the therapeutic footprint are really important in evaluating the overall contribution margin.
Okay. Okay. So when you talk about areas where you have skills to apply, I, you know, and I'm, I'm asking you to correct me here, I think about it as, you know, monitoring, data management, biostats, you know, in some cases, maybe even a study startup FSP or things like that. Are there, are there, flavors of FSP that, that Fortrea either has or is working on that would be a little differentiated?
I mean, I don't think that we're trying to say we want to be focused on FSP in just this one or two areas. Many times when the customer, sometimes we have one partnerships that are focused on specific areas for FSP, but many times they're coming and saying, I'm going to need you in these certain geographies or I'm going to need you for these certain skill sets. It often can be a mix of those issues.
It is about trying to make sure that, again, you bring something to them that helps them understand you are responsive, you can fill the roles quickly with good talent, you know, and in some cases, you are trying to think about your own portfolio and how you redeploy some of the existing resources you have into those roles so that you can get them staffed quickly because speed is often an issue with those as well. It is not, we are not focused on anything in particular, but in terms of saying we want to just be here or here.
Right. Okay. I was flipping to biotech. You talked about certainly the environment funding. We published funding this week, and it's unfortunately not very strong. I mean, really a book to bill question is, is PAN, the business, not just biotech, but in so much as biotech, you know, is a little softer now and with the funding environment the way it is, I mean, could soften further. What are, you know, what are your expectations or what is underpinning your guidance for this year and your ability to hit your goals in terms of contribution from biotech?
Given that we're almost halfway through 2025, the things that we're winning now are not really going to have an impact on 2025. We reaffirmed our guidance, you know, when we came out with our Q1 results in May and still feel that we're in that position. It is more about the future state. I think when it comes to biotech, we obviously stay very close. We have really good relationships. I think that's one of the reasons why we win is because we do build relationships at every level of the organization with those organizations, and we try to stay and keep abreast of what's happening with them. We are much more robust internally in terms of navigating those.
If we see any signs of challenge or distress with a customer, we get in front of it, you know, really early on compared to what we did historically. For us, payments and the issues around them haven't, it's not gotten, it hasn't changed, right? It's consistent. We're continuing to focus. We've talked about the fact our, you know, we're looking to be mid to low 40s on DSO and, given that we're about a 50/50 organization, it's important that we keep on top. I don't think we're seeing challenges. We will have to watch this backdrop, that uncertainty and the slowness certainly has been impacting companies' book to bills. I think while that uncertainty continues, that will, it's still going to play a factor.
How would, in general, how would you describe, you know, the temperature of the water today versus what you saw early in the year? Is it same, better, worse?
I think it's the same, except that the fact that it's gone on a bit longer is probably giving people a little bit more pause. My sense is that we're still seeing opportunities come in. We're still seeing, you know, good volumes of RFP, good dollar values of RFP. It just, people are taking longer to make decisions while they wait to see how some of these trends play out.
Got it. I'll sneak one last question here while we're on biotech. One of the things with biotech that had been discussed maybe, you know, some quarters ago, was biotech's kind of getting to the start date and not being ready or being slow to start. It's kind of all part of this, you know, lack of commitment and decision-making and things like that. Has that improved, relative to, I think it first came up maybe two or three quarters ago? Has that changed or improved?
I mean, is this getting to the start date or post the, post the start date? Just want to clarify.
Both. Let's say, let's say both.
I think the getting to the start date is also, it has not gotten worse. I'd say it is still a bit slower. It is definitely slower than what we see with large pharma in terms of getting to the start date. Post the start date, we do see that once they get going, they burn a little bit faster and maybe some of that slower upfront helps them to be more prepared. Then once they get the money and they are ready to go, and the decision, they want to go. I do not think we are seeing that change afterwards, but it is slow getting to that starting point.
Okay. All right. Appreciate the distinction there. Thank you for being with us today. I really appreciate it. And thanks to our audience for listening in. Hope you have a great rest of the day. Feel free to reach out to the team. Thanks a lot.
Thanks so much.