Financial Data and Key Metrics Changes - Revenues for Q2 2023 were $793 million, essentially flat compared to the same period last year [10] - Clinical services revenues grew 0.4% year-on-year to $726.1 million, driven by higher passthrough revenues, partially offset by lower service fee revenues [10] - Adjusted EBITDA for the quarter was $72.5 million, a decrease of 37.1% year-over-year [13] - Adjusted net income for the quarter was $46.3 million, down 46.2% compared to the prior year [41] - Free cash flow for the first half of 2023 was $128.4 million, an improvement primarily due to a lower incentive payout [16] Business Line Data and Key Metrics Changes - Enabling Services revenues decreased 4.2% year-on-year, impacted by lower call center activity [38] - Adjusted EBITDA margin for Q2 was 9.1%, down from 14.5% in the prior year [41] - Backlog at the end of the quarter was approximately $7 billion, a reduction of $1.27 billion year-over-year due to changes in backlog recognition policies [20] Market Data and Key Metrics Changes - The company expects the CRO market to grow by roughly 3% to 5% in 2024, with a return to higher single-digit growth rates anticipated in 2024 and 2025 [119] - The effective tax rate for Q2 was 26.9%, with expectations for a full-year 2023 adjusted effective tax rate between 27% to 30% [40] Company Strategy and Development Direction - The company is focused on winning new business to drive future top-line growth and is optimistic about the momentum in RFP flow and margin expansion opportunities [23][37] - Management is actively assessing the cost base and has begun forming a margin optimization plan [42] - The company aims to align its cost structure with revenues and improve margins to be on par with industry leaders over time [59][91] Management's Comments on Operating Environment and Future Outlook - Management expressed dissatisfaction with the second quarter and first half results, indicating that they do not reflect the potential performance of the organization as an independent company [26] - There is a focus on improving customer engagement and leveraging technology to enhance clinical development solutions [55][116] - Management is optimistic about the future, citing improvements in RFP flow and new business wins since the spin-off [77] Other Important Information - The company has initiated projects to improve its Days Sales Outstanding (DSO) profile, which was 86 days at June 30, 2023 [43] - The company issued $570 million of senior notes due in 2030 and entered into a $450 million revolving credit facility [44] - The company is prioritizing infrastructure investments and targeted therapeutic and technology investments to drive organic growth [45] Q&A Session Summary Question: Focus on cost structure and year-over-year costs - Management acknowledged the complexity of understanding ongoing costs versus those related to the spin and is working to clarify these differences [62][84] Question: Expectations for customer engagement post-spin - Management noted that while there is no queue of opportunities, they are seeing improved engagement and interest from customers now that the spin is complete [68][69] Question: Long-term growth expectations for the CRO market - Management reiterated expectations for the CRO market to grow by 3% to 5% in 2024, with a return to higher growth rates anticipated in subsequent years [71][119] Question: Staffing levels and capacity - Management indicated that they are working towards being fully staffed, particularly in customer-facing roles, and are optimistic about achieving performance levels seen in 2022 by the end of 2024 [90][91] Question: Impact of FSP contract loss - Management confirmed that the majority of the impact from the FSP contract loss was in the first half of the year, with only minor lingering effects expected in the second half [99]
Fortrea (FTRE) - 2023 Q2 - Earnings Call Transcript