Financial Data and Key Metrics - Full-year 2023 adjusted EBITDA margin was 8 6%, compared to 13 1% for full-year 2022 [16] - Adjusted net income for Q4 2023 was $16 6 million, a 79 7% decrease compared to $81 6 million in the prior year period [16] - Adjusted EBITDA for Q4 2023 was $67 2 million, a 38 8% decrease year-over-year compared to $109 8 million in the prior year period [21] - Full-year 2023 adjusted EBITDA was $267 3 million, a 34% decrease compared to $405 1 million in 2022 [21] - Net interest expense for Q4 2023 was $34 5 million [5] - Cash flow from operating activities in 2023 was $167 4 million, compared to $87 5 million in 2022 [22] - Free cash flow in 2023 was $127 1 million, compared to $33 1 million in 2022 [22] - Net accounts receivable and unbilled services were $1 05 billion as of December 31, 2023, compared to $1 02 billion as of December 31, 2022 [24] - Day sales outstanding (DSO) was 92 days as of December 31, 2023, flat compared to Q3 2023 and one day higher than December 31, 2022 [24] Business Line Data and Key Metrics - Clinical services revenues in Q4 2023 were $709 7 million, a 1 7% year-on-year increase driven by higher pass-through revenues [118] - Enabling services revenues in Q4 2023 were $65 7 million, a 2 8% increase driven by growth in the endpoint platform and higher pass-through revenue [112] - The company achieved a book-to-bill ratio of 1 3 times in Q4 2023, bringing the book-to-bill ratio to more than 1 27 times for the first six months as an independent organization [88] - The backlog grew 3 6% sequentially in Q4 2023, ending the quarter at $7 4 billion [105] Market Data and Key Metrics - The company exited roughly 40% of its TSAs with its former parent by the end of 2023 [4] - The top 10 customers represented nearly half of the company's 2023 revenues, with one customer accounting for 10 7% of revenues [22] - The company expects market growth rates of roughly 3% to 5% for 2024 [11] Company Strategy and Industry Competition - The company is focusing on becoming a pure-play CRO, divesting non-core businesses such as endpoint clinical and Fortrea patient access to Arsenal Capital Partners for $345 million [26][115] - The company is investing in differentiation, including a new advertising campaign to raise brand awareness and visibility at industry events [15] - The company is leveraging partnerships with Medidata and other industry leaders to improve access to diverse population groups in clinical studies and enhance operational efficiency [20][142] - The company is targeting a 2025 adjusted EBITDA margin of approximately 13%, consistent with 2022 levels [28] - The company is focusing on improving its DSO position and targeting a net leverage ratio of 2 5 to 3 times over the medium term [76] Management Commentary on Operating Environment and Future Outlook - The company expects 2024 to be a year of transformation, with revenue growth improving in the second half of the year [11][66] - The company anticipates full-year 2024 interest expense to total approximately $130 million [9] - The company expects to exit 2024 and enter 2025 at a run rate of around 13% adjusted EBITDA margin [105] - The company is confident in its ability to deliver net new business awards to meet quarterly book-to-bill ratios of at least 1 2 times [11] - The company is focused on improving its growth profile by increasing efforts around contracts that deliver a targeted mix of business [10] Other Important Information - The company incurred $5 5 million in costs related to a rare programming error by a third-party vendor, which impacted a customer's trial These costs were excluded from adjusted EBITDA and adjusted net income [106] - The company's effective tax rate for full-year 2023 was 406 3%, driven by non-deductible foreign tax expenses and executive compensation expenses [32] - The company's leverage for covenant compliance purposes was more than one full turn lower than its adjusted EBITDA results, due to add-backs for public company costs, spin-related costs, and cost savings initiatives [25] Q&A Session Summary Question: Margin progression and drivers for 2024 [7][8] - The company expects margin improvement to be weighted more towards the second half of 2024, with one-third of the improvement in the first half and two-thirds in the second half The first quarter will be impacted by soft book-to-bill in the spin year, but improvement is expected to start in the second quarter and accelerate in the second half [8] Question: Impact of divestiture on 2025 margins [38][47] - The company expects to achieve a 13% adjusted EBITDA margin in 2025, irrespective of the divestiture The divestiture is expected to improve financial flexibility and sharpen the company's strategic focus [47] Question: Competitive landscape and pricing environment [42][43] - The company feels competitive on all fronts, with no significant changes in pricing The company is focused on delivering value to customers and maintaining its competitive position [43] Question: Bookings environment and confidence in Q1 2024 [44][91] - The company has a solid pipeline and is confident in its ability to deliver a book-to-bill ratio of at least 1 2 times in Q1 2024 [91] Question: Direct costs and SG&A ratios for 2024 [54][55] - The company expects to see more improvement in cost of sales in the second half of 2024, with SG&A improvements accelerating in 2025 The company will report Q1 2024 results with cost of sales and SG&A in a manner consistent with peers [55] Question: Valuation of divested businesses [147][152] - The company went through a full process for the divestiture, with Barclays assisting The company is pleased with the outcome and believes Arsenal Capital Partners will invest in the divested businesses [152] Question: Leverage implications of divestiture [40][148] - The company plans to use approximately 60% of the divestiture proceeds for debt paydown, which will improve its capital structure [40]
Fortrea (FTRE) - 2023 Q4 - Earnings Call Transcript