Fortrea Holdings Inc. (FTRE) Earnings Call Transcript & Summary

Right. We do look to get started. Thank you for joining us. I'm Patrick Donnelly, the tools diagnostic CRO analyst here at Citi. Happy to have Anshul and Jill with us from Fortrea.

And we can just dive in, Anshul, I guess to start, 3Q, obviously, you saw a nice bounce back on the book-to-bill side. I think it was 1.13x. Can you just discuss what you saw from 2Q to 3Q sequentially on the customer sentiment biotech, large pharma, would be great to just dive into the backdrop and what drove the nice step up for you guys.

Yes, sure. Happy to. Well, first of all, Patrick, thanks for having us here. I think -- thanks for picking a nice warm location. It's awfully cold in New York. So happy to be here. Look, I think the first thing you have to start off with is what we talked about Q2 being an anomaly. I think we had some customer hesitation around the CEO transition, as I had alluded to when I first joined the company, and as Peter alluded to, that disappeared quicker than thought. I mean, I was able to get out and engage with majority of our top customers, but really be on the road with our sales team and our executive team. So the noise around the leadership transition disappeared very quickly. So that was obviously a help. I think in general, we are starting to see some bit of a bounce back in the industry. I'd say I'm probably neutral to positive like the rest of my peers. And so I think we're starting to see biopharma move forward with their pipelines. Not that they canceled anything necessarily was a lot of wait and see. Let's see how things evolve in the landscape. So we saw a bit of that. And I think for us at Fortrea, what really led to the step up was our win rates and our ability to execute commercially. We've really been stepping up our game in how we engage with our clients and specifically in customers that are new to us. And then how we engage with them. And that step up, I think, was largely responsible for our numbers in Q3.

Yes. And then maybe we can just pick up right there in terms of the new to Fortrea clients. I know you talked a little bit about them on the call. Can you give some metrics around it, RFP volumes, win rates, especially on the biotech side? And then what do these new customers look like? Is it biotech, early phase? It would be helpful to dive into that piece.

Yes. It's -- the diversity of mix is important here, and it's a diverse group of customers for us. We are out trying to increase our aperture and be able to get a wider look at the market. So we're refocusing our sales efforts to be able to do that. That is yielding an income of RFP volumes greater than just the market demand picking up, we're out hunting and searching. And so that is customers across the board. Anything from small biotech companies that might be represented at this conference to large-scale, multibillion-dollar small pharma companies and we're pretty well known within the big pharma sector, but these are companies that are new to us. So we've been out. That's been increasing our RFP volume last quarter, and we're starting to see more of that in this quarter as well. So that's been pretty helpful. And it's pretty diverse across Phase I, across Phase II, across large-scale Phase III trials.

Okay. And it does sound like, to your point, it sounds like that momentum continuing into 4Q, I guess, from that piece.

Our pipeline, as I had mentioned on the call as well, our pipeline is strong in Q4, and I'm proud to see where it is, and we're making incremental effort daily, weekly, monthly.

Yes. Okay. And then I know you guys have kind of a specific biotech operating model. Can you just talk about how that translates to -- kind of its more bespoke go-to-market strategy for clients and the traction you're seeing there?

Sure. So biotech operating model, what do we mean about that? At the end of the day, it's a question of how we resource, who we resource and how we show up for these customers. So biopharma typically will require people of phenotype X because they need them to come in and be able to execute against their set SOPs to be able to work in their framework in their countries in their geographies We find that more of our small to midsize customers need more than that. They need more senior people at times. They need people specifically located in countries where their headquarters are, where their offices are, more in the U.S. And what we find is that we need to be able to understand that phenotype. We need to then be able to understand the phenotype of our colleagues and employees and be able to make the right match to the phenotype that's necessary for that situation. That's a nuanced way of resourcing and staffing. And instead of thinking about resourcing and staffing in terms of how many incremental FTEs are we putting on a project, we focus on who needs to be on a project? How do they work with the team on the other side? What kind of dedication do they have? What other things are they working on? Our biotech operating model really is getting behind the science of resourcing and staffing fit for purpose. So we're going to have the best team, not just based on capabilities, but based on phenotype and based on characteristics that's going to work best in that situation.

Yes. And just on the biotech topic, I mean, obviously, funding looks a little bit better. The biotech index seems to hit new highs every day. How long does that stuff take to translate to you guys? Are you sensing a healthier biotech backdrop overall? What are you hearing from that customer base?

Yes. Certainly, hearing a bit of a -- a bit of a comeback. We have biotech customers that were waiting to figure out what the funding environment looks like, waiting to figure out whether or not they were going to be able to get either a pipe or a private investment or an IPO done to be able to get the kind of capital they need for the next stage of trials. And what we're hearing now is a little bit of an opening of the wallet, a little bit returned back to that funding. But I don't think it's still at the same levels as we saw in 2018 and 2019. I think where we are now is better than where we were a year ago. And so there's reasons for folks to be more cautiously optimistic, but we're still not back at sort of historical levels that we were in 2018. And I think that's going to take a bit more time.

Yes. And I know you've been in the seat, maybe 6 months, maybe it's a little less.

Just throughout 5 months.

5 months. And I thought it was interesting on the 3Q call, I think you said the next 2.5 years are going to look very different than the last 2.5 years. I mean, when you kind of look at that at a high level, what are the key puts takes that you put into that and the real initiatives that you want to kind of implement here at Fortrea?

Sure. I think I look at us Fortrea in, let's say, three horizons here, right? There's Fortrea as a -- several years ago, as a business unit or a business unit within a large company like Labcorp. Management, discipline, ways of working, systems, processes that are really more attuned for Labcorp than they are for what is Fortrea today. Then there's the last 2.5 years, I look at that as a second horizon. That's the spin. A spin that frankly had -- was accompanied by a perfect storm of other headwinds, a geopolitical landscape that caused a bit of a contraction in our market, an overall lack of growth in terms of pharma outsourcing over the past 2 years. And a company that, through the spin have to create the systems and processes to be able to be completely independent, but the right talent in place to be able and put all the structures in place to be completely independent. That's horizon #2. Horizon #3, where we're in now is a fully independent company. We're starting to see, as you said, some tailwinds in the market, starting to get some optimism there, starting to see an ability to function in this geopolitical environment and with some of the uncertainty that comes with it being able to function and a return back to growth, and frankly, a new leadership structure, a new focus. So that's how I see Fortrea. And that's why I'm more optimistic about the next horizon. We've got some of the headwinds behind us, and we're operating under new systems, new processes, new talent. We're still executing just as well as we have for the last several decades, but we're operating without some of those headwinds that we were encountering during the spin.

Yes. And then in terms of -- and you think about some of the initiatives to your point, just cleaning some things up, I mean, what is the time line? I think people were surprised how quickly even the book-to-bill picked up from 2Q where you called out some transition changes. But when you look at some of the operational stuff to your point, how -- what's the time line in terms of some of the bigger changes that you're looking to make?

Well, I wish I had a magic ball. I could guess that time line perfectly it'd be out playing mega millions. Look, I don't have a way to give you a time line of -- but change takes time. Change takes time. Change doesn't happen overnight. And we have already made a lot of progress, frankly, even before I got here. Jill and the rest of the executive management team have made a fair amount of progress. We accelerated some of that progress in the last several months that I've been here. And we're on a continuous journey -- continuous journey to continuing to focus on our talent, continue to focus on our project management skills, the things I've talked about in the last call that pillars of sort of the strategy or commercial excellence, operational excellence and financial excellence. I don't think there's an end to that journey. I think that's a continuous journey. I think we'll continue to see progress quarter after quarter, but I don't have a time frame that I can put on that. I'm impatient, though.

Yes. I guess on that point, can you talk about how you guys are specifically optimizing project management, streamlining internal structure, just to enhance that, to your point, the operational excellence integrate therapeutic experts more effectively into project delivery? Maybe just talk a little bit about some of those initiatives and you go forward with them.

I think that has a lot to do with -- as you had asked me the question about biotech operating model. At the end of the day, it's about are we getting the right people in the right places at the right time? And then are we empowering them to actually make decisions when they need to make decisions to move a clinical trial forward. That often requires things like retraining that often requires things like an evaluation to make sure we've got the right people in the right roles that requires a delayering and destructuring. We've gotten somewhat, although entire CRO industry in an effort to go towards efficiency, you get very siloed and you get incredibly good at very vertical tasks that you have to complete in a very efficient manner. Sometimes when you do too much of that, you lose sight of core project management. You lose sight of being able to bring some of that back. So we need to retool some of our systems and retool some of our processes so that we can have a real focus on project management. To me, I always look at the CRO industry or like a professional services industry. We've got clients, we've got projects that are highly scientific in nature, that are long in duration. That are highly complex, and they need people who are not just trained but enabled and empowered to solve real-time problems. And so we are working through our project management organization, but it doesn't just impact our project management organization impacts the rest of operations to be able to get to that vision I have of a true professional services organization.

Yes. Okay. And then I want to talk a little bit about the pricing side. That's been a focus across the broader CRO industry. Have you guys sensed any change on the competitive side, pricing pressure, different therapeutics areas, service lines? And then what's your guys' approach on the pricing side? Some competitors have kind of come out and laid out a little bit of a, I don't want to say, aggressive pricing strategy, but winning with price. Are you seeing that in the market? And how do you guys handle it?

Patrick, I think it's a good question. I think we talked about it last time, too. Everybody wants to talk about price. Let me tell you my perspective, I look at price as two pieces. There's the element of the market that's FSP. FSP is more of a commoditized in the market. It's essentially you're providing staff that are your staff to be able to work on either a project or to be able to work across projects, but they're really being managed by the sponsor or the pharma company. I think in that FSP world, there certainly has been price competition, especially in the last 1.5 years. I think that we've seen real price competition there. I think some of the larger competitors of ours, especially ones that have taken on big cancellations have had to fill their coffers and have gone after that volume. Some of them have publicly stated that they plan to use price as a lever we have not. Given the journey that we're on, given what I'm trying to accomplish what Jill and I tried to accomplish it Fortrea, we have not gone after trying to win on price. In fact, we've walked away from some of that work when the margins have gotten to a point where we don't think that's healthy for our business. We've actively walked away from the work or pulled out of an RFP process. We have continued to win business in FSP where we think we can make money and make margin at a level that we're satisfied with, but we haven't used price as a lever. Then there's the other part of the business, the full service outsourcing, full-service outsourcing. We talk about price, but I think price is an artifact of strategy. I think what people have done, we've chosen not to do is gotten aggressive in their bidding strategy making commitments that frankly may or may not be achievable, committing to design a project to bring it in 6 months or a year earlier than the next competitor is saying to bring it in. What we find is that customers are very smart. I think this is a very sophisticated end customer for us. Whether you're a small biotech company or you're a large pharma company, these are very smart, very sophisticated customers who understand clinical development just as well as anybody and can see through someone's aggressive strategy. And so therefore, you can argue that, that aggressive strategy is a price. Strategy where you're trying to lower your price to be able to win. I don't think most customers respond. And I think that's why you've seen some of my peers walk away from those comments in the last quarter. We've decided to stay true to our bones, which is only go after business that makes sense for us and present strategies that we know we can sign up for and stand behind.

And have you seen, to your point, some of your peers seem to soften a little bit on the pricing comments this quarter. Did you see a pickup and then ease? Was it really noticeable from your guys' conversations in terms of that competitive pressure? What's the...

There's certainly noticeability earlier in the year where things were soft. The entire industry was softer first half of the year and where large FSP processes were being run, right? I think the thing where we saw the pickup in the drop-down was the counter detailing of Fortrea. I think in Q1, Q2 or especially Q2 of this year, there was very significant counter detailing of Fortrea. Walked in first day on the job, first customer I talked to gave me the story around what he had heard from a competitor's -- not CEO, but one level down from CEO about our business. The thing is that did last very long between Jill and I, we had maybe dozens and dozens of conversations within my first month on the job. That we were able to cash pretty quickly. Now we always have competitors that are aggressive, but that narrative around us went up and went down within a quarter, we were able to squash.

Okay. And then maybe on the capital allocation side, I mean the balance sheet is certainly a focus for you guys as well. How do you think about debt repayment, where we are today? How does that line up with growth, margin priorities?

Yes, I'll take that one, Patrick. I mean we have been focused on it. So sense the spin. As you know, we divested two noncore businesses, and that led us to pay down about 30% of the debt last year in the second quarter. And we've been continuing to be focused on what we can do there. We were really pleased. A couple of weeks ago, we announced that we paid down $76 -- almost $77 million of our senior secured notes using cash on hand. And so the focus has been, and you've seen the evolution over the year of us improving our cash flow and being able to improve our DSO and just really being focused on the fundamentals of order to cash. And so longer term, we're going to continue to prioritize that in addition to probably some small targeted investments for organic growth, but the next priority after that is going to be continuing to improve debt paydown and leverage. But I think we've been able to try to optimize that and interest costs associated with it, and we're going to continue to be on that journey.

Okay. And I guess in terms of -- yes, go ahead.

You can elaborate a little bit on that question. So when you were thinking about taking the job and you look at the balance sheet, you have discussions with the Board members and you considered what your options were -- can you share with us a little bit of how you're going to tackle this issue? I mean obviously, there's multiple factors the operations, confidence there's still a lot of debt and you had to have some level of how you're going to handle it.

Same question was quickly. It was on the balance sheet, the debt, your comfort coming in the door on the balance sheet.

Yes. I think that's a great question. I probably wrestled with that a fair amount. And it's -- in order for us to be able to invest in the business, we've got to be able to bring our debt down. That's not a surprise. That's exactly what you're pointing to. I think we can do it. I think that the business is not during the spin with where the TSAs are and where the business is performing commercially wasn't generating as much cash as it needed to be generating. You can see a very big change in Q3. I think this business is going to continue to generate that level of cash now that we're out of the spin. That was my first piece of my calculus. The second piece of my calculus was trying to understand where the business was winning and why it was winning when it was winning and why it wasn't winning when it was winning. And I have a level of confidence in an ability to put together the right team to be able to get us back to taking market share and continuing to grow. I think the combination of getting back to the kind of levels of cash flow we have and what I hope we can accomplish from a book-to-bill standpoint, I think it still takes a couple of years. But if we get that type of a growth that we're looking for, our focus is going to be to use that cash to continue to pay down our debt and to get our debt to a level that is sustainable that we can start going back using our balance sheet for growth. Do I think it's an easy task? No. Do I think it's impossible task? No. And that was my calculus.

Did you think that you have a number in your head better ops near term, I could probably squeeze $100 million to $200 million out. And then through more wins, higher margins, I can move the EBITDA to $250 million, and that's where you start to get to a 3.5 to 4x leverage number. I just want a little more..

Have you snuck into my laptop somehow to I look at my modeling? I mean, look, I don't think we would, in this context, sit here and share exactly that calculus. But you're right on the track, that's the calculus. The calculus is what can we continue doing from rightsizing the organization. And we do finally talk about 2026, you'll see that. What can we do to continue to rightsize the organization to continue to focus on EBITDA, what can we continue to do on the commercial side to continue to build the backlog and what can we do to continue to be very prudent in how we manage cash flow. And you're seeing some of that stuff in Q3. But those are the three parts of the calculus situation you're asking about. Yes, I do have a number in mind. And yes, I think we can get there in the medium term. I don't think it's short term. I don't think it happens overnight. I don't think it happens in the year, but I think we can get there in the medium term.

So the last report are the easy divestitures behind us?

I think the businesses we have now are the businesses that we want to be in, and they're important, and there are inner linkages between them. and they're quite strong, right? Our Phase 1 business has continued to grow, which has been fantastic. We've got a really strong Phase 1 business. And then FSP, we've talked about that being a headwind. Anshul talked about some of the reasons why that is. But we still find places there where we're very good and competitive and can have margin-accretive business, and we're focused on that. And then in FSO, I mean, that's obviously where a lot of his attention on the commercial side is coming in. I think we have demonstrated this year that we can take cost out of the business. I talked about in my remarks, for example, that our controllable SG&A in Q3 of this year was 20% lower than Q4 of last year, and we're going to continue to be focused on that and then rightsizing on the gross margin side. So I think we've got the discipline now. We have more to do from a rightsizing perspective. But do I think we have a lot more to divest? No, and that's not really how we want to. We want to do it through growing and then continue to be really disciplined about our costs.

Yes. And a good segue on the cost side, Jill, I mean you guys have talked about these targeted initiatives to ensure these cost actions lead to real margin expansion next year. Can you just talk about that what you guys are doing? And again, the confidence level on the margin side, we can dive into some of the moving parts as we go.

Sure, Patrick. We've been really pleased this year to be able to continue to -- we've raised our revenue guidance, and I can talk about that briefly, but we've been able to continue to deliver against our guidance for this year, which is really important. We know that people need to know that we're going to deliver and do what we said we would do. So this year, we set out on the cost saving side to take about $150 million of gross savings out and about 40% of that being reinvested back in our employees. That was really important because our employees are how we make money as an organization. And so we've got about $90 million of net savings, and we're on track. So through Q3, we were at $95 million of gross and $53 million of net, but that grew significantly. It was more back-end loaded. So we're still confident that we're on that journey to deliver that. And we have not disclosed '26, but you're going to see similar substantial types of savings that we're going for as we can go forward. But I do think that -- that has been important. On the SG&A side, we needed to wait until we were exited from the TSAs to really make meaningful change there. So we've done that this year, and we have more to do. And then on the top line in terms of gross margin, that's really just about continuing to rightsize the business relative to the portfolio we have. And over -- since the spin, we've taken out more than 2,000 resources, and we're going to continue to be on a journey again. you have to be thoughtful there but rightsizing appropriately but still maintaining those customer relationships that are important.

Right. And the SG&A, how does that stack up? The competitors are still several hundred bps away from you guys. Is there a reason why you couldn't get there? Is that the goal? Is there any long-term kind of expectation?

Longer term, we would like to be more in the 11% to 12% as a percent of revenue, we'll have taken out over 100 points basis this year. We've talked about taking out another 100 or so over the next 12 to 18 months. We'll continue to try to be more efficient there through automation. We're using third parties, right-shoring staff. But some of this will be as we get the commercial engine, hopefully restarted here and build on the groundwork that we've laid in Q3. We are able to absorb growth and have that SG&A stay the same. So that is an important part.

So I think that's the key, absorbed growth. We've got to grow into hitting those industry benchmarks.

Yes. And I guess, Anshul, to that point, there's that balancing act right of cutting -- you don't want to cut too deep when you're trying to also rightsize the top line. I guess how do you balance that? And how aggressive do you want to be on the cost side, knowing that potentially the market is firming up here and you want to be poised to kind of pounce on it

Yes. Look, I think there is a fine line. I don't think we're at that fine line. I still see areas of opportunity in the organization. And I think since my first day on the job have been driving towards the 2026 opportunities. And I know we're not talking about that, but we've already started working on it. And I understand that there's a fine line and there's a balance, but I think we have plenty of opportunity. So we're focused on that. We're focused on continuing to get our cost structure and rightsize the organization. I'm not just rightsizing to hit a cost number. Rightsizing allows us to work and operate differently, allows us to be a bit more nimble, allows us to not be like some of our peers which may be driving an aircraft carrier, but it allows us to drive more of a destroyer or a battleship to be able to navigate the environment to be able to do that. And frankly, I don't mind hiring to grow. I think hiring to grow is a great idea. And so right now, I'm probably pivoting more towards continuing to rightsize the demand is coming back. We'll continue to go after the demand and when we need to hire back, we'll hire back.

Yes. And then, Jill, you touched on the revenue guide. I think now it's $2.7 billion to $2.75 billion. Can you just talk about the moving piece of clinical pharmacology in there? You have FSP, pass-throughs, maybe just break down what you're seeing, how that's kind of evolved throughout the year? And then, yes, maybe just confidence level as we work our way towards the end of the year here.

Sure. We have been calling up our revenue guidance over the course of the year. The majority of that has come through pass-throughs, both in our Phase I, and I can touch on that quickly, as well as in our full-service business. I think it's an industry trend. It's the types of studies that are out there, the phases. We've been really fortunate to have won more Phase IIIs in the last few years, and those bring with them a higher amount of pass-throughs. And in our Phase I business, that actually comes where we have such large cohorts that with the clinics that we have, we can only run so many -- they have to often be run simultaneously. You can only run so many at a time and so we have to sometimes work with third parties, but that's good. I mean that's good because those are strong partnerships with important customers and we win all kinds of work from them. So we've seen that over the course of the year. Pass-throughs are obviously a bit of a margin headwind. So if you exclude the incremental pass-throughs that have come in through the course of the year, we're on track with our guidance to hit the margin we said for this year. We aren't providing guidance for '26, but I think everyone's talking about pass-throughs remaining elevated, but hopefully not the same growth trajectory that we've seen. So hopefully, not as much of an incremental headwind going forward in terms of the growth of them, but I think they're with us based on the portfolio that we have. But of our revenue streams. The largest is our full-service clinical. Next-in size is the FSP and then the smallest but very strong as our Phase I business.

Yes. Yes. And you touched on the pass-through a few peers have kind of called that out as a potential headwind to margins next year. I guess how do you guys balance, we talked about pricing pass-throughs hopefully a little bit better of a backdrop. How do you just message the moving pieces on margins as we work our way into next year, just high level in terms of tailwinds and tailwinds.

Maybe I'll start with that. I think for us, in terms of messaging on margins. First and foremost is we got to focus on the company returning back to growth. Yes. I think getting consistent book-to-bills similar to Q3, we've got to be able to repeat that quarter after quarter. Some of that is a market backdrop. Some of that is us just operating and working differently and working better. As we do that and as you start seeing more and more of the impact of the Q3, Q4 cost-cutting and rightsizing we've done and the changes we're already planning for Q1, Q2, some of that story is going to become self-evident. And look, in a perfect world, you'd be able to -- the entire industry would be showing directs and indirects differently. We don't have that. As Jo indicated to you, if you take out -- if you take out the view of the additional pass-throughs here in 2025, we're right on guidance of what the company has been indicating from the very beginning. I think that's how the story is going to come out on the margin.

Yes. Okay. And yes, maybe on the -- just on the margin front, obviously, the EBITDA number has moved around a little bit. I think now it's $175 million to $195 million

Yes, we've kept the midpoint the same.

Yes. So maybe just talk about some of the inputs there, operational discipline, project mix, variable comp, I think R&D tax credits, I mean, there's a bunch in there. So maybe just talk through what's happened on the EBITDA number this year and yes.

Yes. I think the most important part is that we've been delivering on the cost reduction initiatives. And the good news in terms of revenue is that on the service fee revenue side, which is what drives your margin, we've had really good accuracy with that this year, which I'm really pleased with some of the changes we made in the forecasting processes earlier in the year. So putting aside the pass-throughs, the service fee piece and the bottom line, we're right where we said we would be. To your point, it's a combination of cost cutting. We have had a little bit of headwinds around some of the R&D tax credits this year. Some of it we expected. Some of it was a little bit more pronounced than we thought. But that we've been able to do enough with the savings to be able to offset those. So I think we're coming in exactly where we expected in terms of all the points, and that gives us more confidence to narrow the range, obviously, but also as we think about '26 and knowing what this business can do that when we can come out with guidance in '26, we'll have good confidence about what we're able to deliver.

Pretty much the same story that there were going to be cost savings from TSAs that they were low-margin business that we would go out and get higher margin new revenues, et cetera, et cetera. So my question really is in the execution of a similar plan, what's the difference? It's the same plan, but it's a different CEO. Can you share with us a little bit like how we're doing things differently and why we'll get a better result.

Look, I appreciate that. I'm not burdened with history the same way you are. So I appreciate and understand the lens that you have and the way you're looking at the problem. I think that the time frame that it took to fully come out of the spin and coming out of the spin isn't just the exiting of the TSAs, but it's being able to build the infrastructure, the systems and processes to work fully independent took longer than anyone would have expected. I think that's extremely important to know. So even the focus on execution, let's take one of my biggest focuses, project level profitability. I'm entirely focused on our top 10 customers in understanding project level profitability and diving deep on project level profitability. That's what you have to do with the business of the size of this magnitude, you can't manage it in averages. You've got to get down to an individual project, project level profit. It took time as the company became independent to build the financial systems to be able to do all of that. The difference between the last couple of years and now, if I think about what I'm trying to execute, I have the tools. We're not building the tools. I don't have the overhang of the exit of the TSA and frankly, don't have the burden of history, have the tools we have the talent, we have the people. So we're managing it. You look at our project level profitability, now and you look at what we're doing on projects and how we're advantaging them, how we're following guidelines on a monthly basis to be able to track these projects and how we're engaging our customers, it looks night and day it did 2 years ago. I mean that -- it's hard for me to answer the question because I know you're used to having somebody else stand up here and say, we got to focus on execution. We got to focus on execution, and you didn't see the results. What I'm saying is a lot of the headwinds that were -- that the company faced in trying to achieve those results is finally [indiscernible] over the corner of those headwinds. We're able to do the things. We're starting to see some of the results. That's only 1 quarter in so far. But the way to get this to the results that you're looking for is, one, consistent commercial delivery; and two is to be able to work projects individual project by project to be able to get project profitability right individual project by project.

So you have much better information in how the businesses operate on a day-to-day basis now than...

Much more I have my own -- we have our own systems. We have our information down to a project level. We're able to manage things down to a project level. We're not burdened by our parent company systems, not burdened by our parent companies processes. We're fully self-sustained and fully independent now. So when we're making decisions, I mean, at the end of the day, running a Fortrea or running a PPD or running an icon or running any other CRO in this industry comes down to how you manage projects. You don't have the right information and you don't have the right systems, you don't have the right management discipline, you don't do a great job with that.

And your -- we have a lot of low-margin business, right? So the issue is -- and they were going to upgrade and improve margins on the business. But they just didn't have the tools to get it.

Yes. So I think this is a narrative that has gotten a little misunderstood. I get where it was from this pre-spin versus post-spin backlog. I don't see the world that way. At the end of the day, it's when you think about it is our ability to influence margin. It's not about low-margin business versus high margins, our ability to influence. So let's say you're sitting in 2024. You've got a project that was started in 2022. The contract is fine. The contract is valid. But if you don't have the systems and processes to see how the financials are changing within a 3-, 4-month period, you don't have the ability to go ask the customer for something a year, 1.5 years ago. And if you can't go ask for that, you have a compounding effect of where you've taken on scope or work that you haven't been able to recoup. If you fast forward, whether it's a project that we started in '22 or a project we started in 2025, we now are looking at monthly level of project performance, hours, systems, tooled units being-used and even project started pre-spin. Even project pre-spin, we have the ability to go back to the customer to get what we're owed for scope changes and changes in the project, and we're getting them on a daily, monthly, quarterly basis. So I know there was this narrative used before I got here around pre-spin, post-spin. I'm trying to walk away from it because that makes an implication that I don't think is the right way to interpret it. The implication is when you come out of the spin, projects that were started before or even started right when you entered the spin. If you don't have the information if you don't have the processes and you don't have the management discipline, you can't maintain the profitability in those projects. As you build the information and the visibility of the information, the processes and the management discipline, you can now go and maintain the profitability on those projects. And that we are doing on every single project now, whether that project was started 15 years ago or it started 15 months ago.

I don't think investors really understand how a project can over time scope expansions and order changes.

Happy to explain it to you. a 15-year project. In any given month, okay? In any given month, a project that's been going on for a decade, let's say, in any given month, they have paused the project. they paused the project because some new data came out on a different indication or a new FDA commissioner come in and said some X. And now they issued a protocol amendment to the FDA and others saying, okay, we're going to change this cohort of patients to look at things differently. That project for the life of the remainder of the project is now completely changed. If I don't have the systems, tools and management discipline to go to the customer and say, well, that's a scope change, here's how it's changed, here's my new invoice. Here is my new bill. Here's my new team, here's completely something new, different. Then over the next few months, I'm having margin degradation on that project. It's that level of discipline that you have to manage hundreds and hundreds of projects on a monthly basis.

And maybe I'll show -- just a few minutes left here. Just on the overall backdrop. Can you talk about the cancellations trend, what you're seeing there, what you're hearing from your clients on the cancel side?

Sure. I'm happy to talk about it. I think there's Fortreaand then there's what you're hearing in the marketplace. I think that for us, cancellations have been in accordance with what we expect in accordance to our historical norms. We have a fairly tight policy of what enters our backlog and what doesn't. We have to have a signed -- some sort of a signed contract with the customer before it enters our backlog. So we've been pretty consistent from a cancellation standpoint. They're within expectations. I think there are some players in the industry where this noise is coming up. There's players in the industry that had high exposure to BARDA-funded studies that had high exposure to COVID and flu vaccine studies that are very large and frankly, have high exposure to large GLP-1 studies. And as pricing comes out, some of those studies are quickly disappearing. It happens that those competitors, some of the larger ones, have exposure to two out of three of those. And when you have exposure to even one, let alone two out of three, if not three out of three for two of those players, you're going to see large amounts of cancellations. We don't have exposure to any of those three headwinds. That's why our cancellations are within our expected norms. And we see cancellations because a drug fails or a client reprioritizes but it's normal business course in action.

Yes. And maybe last one, just on the pharma backdrop. Obviously, this announcement 2 months ago starting with Pfizer and then kind of picking up steam since then. It feels like it's lifted a lot of the policy uncertainty you talked to a lot of these folks at the high end of their companies. Are you sensing a more willingness to move forward with certain trials? Was there a holdback where now things are moving -- what's the right way to contextualize it.

Yes, I think the right way to conceptualize it is no different than middle of March in 2020, where all kind of froze deer in the headlights. We didn't know how to operate. You didn't know how to run your business. I didn't know how to run my business in middle of 2020 -- March 2020. But by the time we got to June, we all had adopted the new normal, and you were running your meetings and I was running my meetings and we were all doing business. I think in this new administration, there was a hang on. I don't know what shoe is going to drop. I have a new paradigm in how I'm operating I think Pfizer taking that deal was a first giant step towards, okay, we know how to operate. We know what possibly this looks like. And yes, that did lift some of the hold that was -- I don't think it's like a floodgate, but it did lift some of the reluctance in the marketplace and moving forward because we understand how to operate in what is the new normal.

Okay. I think we're up on time. Thank you guys so much for coming. Appreciate it.

Appreciate it. Thank you, Patrick. Appreciate it. Thank you for having us.