Q4 2023 Earnings Summary
- Fortrea's strategic decision to become a pure-play CRO by divesting non-core businesses is expected to increase focus on its core mission and provide greater flexibility in its capital structure.
- The company has achieved solid book-to-bill ratios above 1.2x, indicating strong demand and a robust pipeline, which is expected to drive future revenue growth.
- Management anticipates significant margin improvement in 2024, with adjusted EBITDA margins expected to improve from approximately 9.5% at the midpoint for this year to around 13% by exiting the year, with potential for further upside in 2025 and beyond.
- Fortrea is divesting higher-margin businesses, including $250 million in revenue and $30 million in adjusted EBITDA, which could negatively impact overall profitability. An analyst noted these are "higher performing, higher profitability businesses than the core." ( )
- The company's adjusted EBITDA margin target for 2025 remains at approximately 13%, the same as in 2022, indicating limited margin expansion despite divestitures and cost-cutting efforts. Jill McConnell stated, "we're saying 13% margin... irrespective of divestiture or not." ( )
- Management expressed uncertainty about achieving margins beyond 13%, depending on factors like exiting TSAs and sustaining book-to-bill ratios, which could pose risks to margin expansion. Jill McConnell noted, "There's a lot of opportunity. It's just how quickly we can execute on it... we're just not quite ready yet." ( )
-
Divesting High-Margin Businesses
Q: Why divest higher-margin businesses than the core?
A: Fortrea believes that focusing on being a pure-play CRO is the right strategy to maximize value for customers and investors. The divested businesses, while interesting, are not core to this mission. The divestiture also provides more flexibility in their capital structure and allows the management team to concentrate on the attractive CRO segment. -
Margin Improvement and Outlook
Q: What is the expected margin progression in 2024 and beyond?
A: Fortrea expects margins to improve, exiting 2024 at around 13%. The improvement is weighted towards the second half of the year, driven by revenue growth and SG&A efficiencies as TSA exits occur. For 2025, they aim to maintain or slightly improve upon the 13% margin for the full year. -
Impact of Acceleron Issue on Bookings
Q: How has the Acceleron situation affected bookings and concessions?
A: Fortrea experienced some softness in the biotech pipeline in December, potentially associated with the Acceleron situation, and lost a couple of key opportunities. An independent review determined that Fortrea was not the cause of the issues. Since then, the pipeline remains solid, and they expect to achieve desired 1.2x book-to-bill ratios if they execute well. -
Biotech Demand Environment
Q: What is the demand outlook from biotech clients?
A: Fortrea continues to see a solid flow of business from biotech clients. Funding for 2024 looks attractive, and they have a good mix of full-service and FSP opportunities. The demand from big pharma is also solid. -
Competitive Landscape and Pricing
Q: What's the current state of competition and pricing?
A: Fortrea is competitive and at the table for key opportunities, despite being a new brand. They haven't observed significant changes in pricing pressure and report no unusual pricing issues from competitors. -
Valuation of Divested Enabling Services
Q: Why does the divested asset's valuation appear low?
A: The divestiture process was thorough, involving interest from multiple parties. Fortrea believes that Arsenal Capital Partners can better invest in and maximize these assets. The divestiture allows Fortrea to focus on the CRO business and improve their capital structure by reducing debt. -
Cost Structure and Peer Alignment
Q: Will cost reporting align with peers in 2025?
A: Starting with Q1 2024 results, Fortrea will report cost of sales and SG&A in a manner consistent with peers. This alignment will provide clearer visibility into improvements in cost structure over time. -
Q1 Bookings and Outlook
Q: Is the Q1 booking trajectory on track?
A: Fortrea has a sufficient pipeline to continue driving a 1.2x or better book-to-bill ratio. They are confident but acknowledge the need to execute diligently in the last month of the quarter.
Research analysts covering Fortrea Holdings.