Good day, and thank you for joining us. Welcome to the Fortrea Q3 2025 Earnings Conference Call. Please note that today's conference is being recorded. I will now turn the call over to your first speaker, Tracy Krumme, Fortrea's Senior Vice President of Investor Relations. Please proceed.

Thank you. Good morning, everyone, and welcome to Fortrea's Third Quarter 2025 Earnings Conference Call. With me today on the call is Anshul Thakral, Chief Executive Officer; and Jill McConnell, Chief Financial Officer. Before we begin, please note that this call is being webcast. There is an accompanying slide presentation, which can be found on the Investor Relations section of our website, fortrea.com. During this call, we'll make certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to significant risks and uncertainties that could cause actual results to differ materially from our current expectations. We strongly encourage you to review the reports filed with the SEC regarding these risks and uncertainties, in particular, those that are described in the cautionary statement concerning forward-looking statements and risk factors in our press release and presentation that are posted on our website. Please note that any forward-looking statements represent our views as of today, November 5, 2025, and that we assume no obligation to update the forward-looking statements even if estimates change. During this call, we will also be referring to certain non-GAAP financial measures. These non-GAAP measures are not superior to or a replacement for the comparable GAAP measures, but we believe these measures provide investors with a more complete understanding of results. A reconciliation of such non-GAAP financial measures to the most directly comparable GAAP measures is available in the earnings press release and the earnings call presentation, which is provided in connection with today's call. Lastly, I would like to add that Anshul, Jill and I will be attending the Citi and Evercore Healthcare Conferences on December 2 and 3, respectively. If anyone would like to meet with us on these dates, please contact me or a sales representative from the firm. And with that, I'd like to turn the call over to Anshul Thakral, Chief Executive Officer. Anshul, please go ahead.

Thank you, Tracy. Good morning, everyone, and thank you for joining us today. As I reflect on my first 100 days in this role, I want to express my gratitude for the warm welcome and support I have received from my colleagues at Fortrea, our Board, our clients, and our wider community of stakeholders. I'm happy to report that Fortrea achieved solid results in the third quarter, meeting our expectations. Revenue for the third quarter was $701.3 million, adjusted EBITDA was $50.7 million, and our backlog exceeded $7.6 billion. Our book-to-bill ratio improved to 1.13x, up from the second quarter, and our trailing 12-month book-to-bill ratio of 1.07x is consistent with the CRO sector. These results, along with the strength of our pipeline, position us well for continued backlog growth. Overall, we witnessed increased demand for our services. Our win rates saw a significant improvement, reaching the highest level in six quarters. Specifically, our win rates for biotech clients doubled compared to the prior quarter. Decision-making timelines for biotech clients have continued to improve, rebounding from a low in the first quarter of 2025. We experienced strong RFP flow in clinical pharmacology and full-service clinical development, and our pipeline remains solid across biopharma and biotech clients. Although there was a slight increase in our cancellation rate, it remains within our historical norms. The overall demand environment is showing positive signs with growth in clinical trial starts this year and rising biotech funding in Q3. Biopharma continues to be resilient, advancing its development portfolios and reflecting the strength of the science. Our cash position is strong, supported by the $25 million final milestone payment received from the divestiture of our enabling services business. We are focused on paying down debt, including a tender offer to repurchase up to $75.7 million of the company's outstanding senior secured notes, partially funded by our improved cash position. These actions demonstrate our commitment to maintaining a robust balance sheet and financial flexibility. This quarter, we also welcomed Bill Sharbaugh to our Board of Directors, who brings extensive experience from his time in clinical development at Bristol-Myers Squibb and PPD. I have worked with him before, and his insights will be valuable as we pursue our strategic plans. Now, let me provide some details on our new business wins in Q3. We secured several significant awards from both new and repeat clients, showcasing our unique capabilities and strong relationships. Our clinical pharmacology business continues to expand with robust wins from leading pharma and biotech partners. The average contract size is increasing, aligning with our expertise in managing complex early-phase clinical trials. Our portfolio is growing in various areas, including metabolic, neurodegenerative, immunologic, and rheumatologic diseases. We are also seeing growth in studies that involve patient cohorts, which we are better able to execute internally within our clinical research units. This also applies to later-phase studies, where our CRUs serve as multipurpose research sites. Our global clinical development business saw diverse awards across multiple therapeutic areas, including a Phase II study in a rare neuromuscular disease. We received repeat business from several clients during the quarter, including two Phase III ophthalmology studies from a biotech client, a Phase III study on a complex respiratory disease from a midsized pharma, and a Phase II oncology study from a large pharma client. Additionally, we were pleased to secure two new strategic partnerships with midsized clients. Looking at client and operational highlights, we are happy to report another sequential improvement in our Net Promoter Scores in Q3, reflecting our commitment to client satisfaction and operational excellence. Our NPS improved year-over-year, supported by measurable delivery achievements such as reducing the time to site selection by 33%, speeding up recruitment in a critical complex respiratory study by three months, and finishing enrollment five months early in a Phase II Alzheimer's study. This demonstrates the execution excellence that builds client trust. With our culture of innovation, we are advancing in technology and AI adoption, leading to productivity gains expected to enhance efficiency, quality, and client delivery. I want to highlight some innovations that are part of our Fortrea technology strategy aimed at modernizing our workflow. Earlier this year, we launched Accelerate Risk Radar, which includes an AI-powered agent designed to improve risk-based quality management in clinical trials. This tool uses AI and machine learning to automate risk identification and recommend mitigation strategies, which helps reduce manual efforts and improve efficiency and patient safety. Start My Day is a new digital experience providing actionable insights and prioritizing tasks in a simple interface for CRAs and study teams, enhancing daily productivity and decision-making. It is currently in the pilot phase, with broader deployment expected in 2026. As part of strengthening CRA workflows, we are expanding the rollout of our ICRA mobile app and digital assistant following successful pilots. We are integrating the app with our Accelerate platform to provide smart reminders, digital site check-ins, and risk metrics. Early users have reported efficiency gains of 5% to 10%, which are expected to increase as we add more functionality, demonstrating that our strategy is effective. These initiatives streamline processes, reduce manual labor, and promote continuous improvement, positioning Fortrea for operational excellence and scalable innovation. Now, I'd like to share more about our progress on our strategic plans. As I mentioned in our last earnings call, my initial 100 days at Fortrea have focused on two priorities: enhancing client-facing activities and boosting employee engagement. To this end, I've traveled extensively across the United States with members of our executive team, as well as to India, China, Japan, the U.K., and Bulgaria, meeting with clients and colleagues. These visits involved discussions with many of our top clients to strengthen partnerships, and I participated in sales efforts such as attending bid defenses and meetings with biotech executives to acquire new clients. Feedback from clients about Fortrea has been overwhelmingly positive. Both large pharma and biotech clients appreciate our global delivery, quality, executive focus, and operational improvements. Biotech clients, in particular, value our combination of scale, agility, and attentiveness to clients. However, like all CROs, we recognize areas where we can improve in project management and overall client relationship management. We held in-person town hall meetings for employees across various locations, engaging about one-third of our workforce. We witnessed grassroots innovation at a hackathon in India, showcasing our study team's creativity. We are cultivating a culture that encourages efficiency throughout our workflows. I am proud of our employees' extensive experience and dedication to our mission of delivering life-changing treatments to patients faster. The team has navigated our leadership transition smoothly, maintaining strong employee engagement with a devoted commitment to serving our clients and preparing for future success. My first 100 days confirmed that our strategy should focus on three pillars: commercial excellence, operational excellence, and financial excellence. Commercial excellence entails how we return to growth, built on three key components: reach, relevance, and repeat. We need to expand our reach by developing our pipeline of new opportunities and acquiring more clients. We must also leverage our expertise in therapeutic and scientific areas that resonate with clients, especially in sectors where we already excel. Finally, we are growing our base of repeat clients through strong relationships and improved account and portfolio management. Operational excellence means consistently delivering quality and productivity to our clients. We are optimizing project management, streamlining our structure, and bringing therapeutic experts closer to delivery. We are enhancing our biotech operating model and equipping our operational teams to accelerate studies with better technology, tools, training, and infrastructure. Financial excellence involves right-sizing our organization while promoting margin expansion. We are implementing targeted initiatives to translate our cost actions into margin improvements moving forward. We must ensure that tightly matching resources to demand remains integral to Fortrea's operations. We continue to refine our capital structure, focusing on positive cash flow and maintaining our days sales outstanding in the low to mid-40s. Furthermore, we are closely monitoring the pricing landscape to balance acquiring new business while securing attractive margins amid competitive pressures. Now, I will turn the call over to Jill for a more detailed look at our financial results.

Thank you, Anshul, and thank you to everyone for joining us today. In my prepared remarks, I'll cover the primary factors that influenced our third-quarter performance and share an update on our 2025 guidance. I'll highlight our progress against our previously shared cost optimization initiatives. Additionally, I'll spend a few minutes highlighting improvements in our cash flow this quarter and our expectations regarding liquidity and our sound capital structure that position us well as we move forward. These results demonstrate that our actions are beginning to deliver results. I wanted to be clear that we are continuing to take appropriate actions to improve our financial performance and capital profile. As Anshul stated, we delivered a solid third quarter. For the quarter, we delivered revenue and adjusted EBITDA that continue our momentum towards our margin optimization initiatives, including delivering nearly two-thirds of our $150 million in gross savings targets in the first three quarters of the year. We generated strong positive operating and free cash flow, and we delivered a 13-day improvement in DSO versus the second quarter as we have now fully unwound the impact of the invoicing costs related to the launch of our new ERP system during the first quarter. Now I'll cover the financial results in more detail. Third quarter revenue was $701.3 million, 3.9% higher than the prior year quarter, driven by increases in both our clinical pharmacology and clinical development businesses with a small benefit from foreign exchange. The increase in our Clinical Pharmacology business was primarily driven by higher demand as well as study mix that is resulting in increased levels of pass-through costs. The clinical development increase was driven by recent net new business awards, including higher pass-through costs, partially offset by lower FSP revenue. On a GAAP basis, direct costs in the quarter increased 9.9% year-over-year, primarily due to an increase in pass-through and stock compensation costs as well as the negative impact of lower research and development tax credits. This increase was partially offset by lower headcount and personnel costs, which declined despite the reintroduction of variable compensation as we carefully balance investing in our employees while delivering on our transformation efforts. SG&A in the quarter was lower year-over-year by 21.6%, primarily due to lower TSA and IT-related costs. If you look at underlying controllable SG&A sequentially, SG&A in the third quarter is 7% lower than in the second quarter of 2025 and 20% lower than our fourth quarter 2024 run rate. This also includes the absorption of reintroducing variable compensation. I'll discuss progress on our ongoing transformation efforts across the organization later in my remarks. Net interest expense for the quarter was $22.6 million, broadly in line with the prior year quarter. Turning to our tax rate. We recognized income tax benefits of $12.8 million, which resulted in an effective tax rate of 44.6%. The effective tax rate for the three months ended September 30, 2025, was higher than the company's statutory tax rate, primarily due to an increase in the company's U.S. operating losses, partially offset by nondeductible compensation expenses, valuation allowance, and withholding taxes on our non-U.S. earnings. Our book-to-bill for the quarter was 1.13x, significantly improved from the second quarter as we navigated the brief period of leadership transition. Book-to-bill for the trailing 12 months was 1.07x. Our backlog is over $7.6 billion. Although cancellations were slightly higher in Q3 than in the last few quarters, they have continued to be in line with our historical trends. Adjusted EBITDA for the quarter was $50.7 million compared to adjusted EBITDA of $64.2 million in the prior year period. The reduction versus the prior year quarter is driven primarily by lower margin related to project mix, including a higher proportion of pass-through costs, the reintroduction of variable compensation, and a reduction in R&D tax credit. Moving to net loss and adjusted net income. In the third quarter of 2025, net loss was $15.9 million compared to a net loss of $18.5 million in the prior year period. In the third quarter of 2025, adjusted net income was $11.7 million compared to adjusted net income of $20.7 million in the prior year period. For the current quarter, adjusted basic and diluted earnings per share were $0.13 and $0.12, respectively. Turning to customer concentration. Our top 10 customers represented 60% of third quarter 2025 revenues. Our largest customer accounted for 19.8% of revenues during the quarter ended September 30, 2025. As I comment on cash flows, note that all references to prior year cash flows are for the entirety of Fortrea as we had not segregated cash flows from discontinued operations for the businesses sold in June 2024. To more clearly see year-to-date and third quarter cash flow metrics, please refer to the investor presentation we posted to our website this morning. For the nine months ended September 30, 2025, we reported negative operating cash flow of $15.6 million compared to positive operating cash flow of $245.7 million in the prior year period. The positive cash flow in the corresponding prior year nine-month period was attributed primarily to the initial sale of receivables under the securitization program initiated in June 2024. For the third quarter of 2025, we generated positive operating cash flow of $87 million and free cash flow of $80 million, which exceeded our expectations. Days sales outstanding from continuing operations was 33 days as of September 30, 2025, 13 days lower than June 30, 2025, and 17 days lower than the same period last year. The significant reduction versus the second quarter primarily demonstrates our continued progress to improve the timeliness of our order to cash processes, although we did benefit from the timing of certain payments in the quarter. Net accounts receivable and unbilled services for continuing operations were $663.2 million as of September 30, 2025, broadly in line with the $659.5 million balance as of December 31, 2024. We ended the quarter with no borrowing on the revolver compared to $50 million outstanding as of June 30, 2025. Our positive operating cash flow in the quarter, combined with our undrawn revolver, resulted in available liquidity in excess of $0.5 billion. We currently target full year 2025 operating cash flow to be slightly negative with the first quarter negative cash flow being mostly offset by positive cash flow generation for the remainder of the year. With our targeted EBITDA and the significant add-backs available under the credit agreement, we expect that we will continue to have ample liquidity for the foreseeable future. As an important reminder, our credit agreement includes add-backs well beyond what we include in our definition of adjusted EBITDA, such as the pro forma benefits from in-flight cost savings initiatives, our public company costs, and costs necessitated by the spin. The maximum net leverage ratio under the amended credit agreement ranges from 5.5x to 6x over the years 2025 and 2026 and reverts to 5.3x as of the first quarter of 2027. While we do not disclose our covenant calculation, we have considerable headroom and our covenant leverage ratio under our credit agreement is significantly better than our reported leverage ratio, generally at least one turn better than our reported leverage. We are currently and anticipate that we will remain fully compliant with the financial maintenance ratios of the credit agreement for the foreseeable future. Our capital allocation priorities continue to be driving organic growth and improving productivity, along with debt repayment, including the closing of our note repurchase that is required under the indenture in connection with the divestiture of our enabling services businesses in 2024, which is expected to take place in the fourth quarter of 2025. Backlog burn in the third quarter was in line with the second quarter of this year and in line with the prior year period. This was supported by growth in our faster burning clinical pharmacology business, along with our progress in moving clinical development projects into more intensive phases of their life cycle. We anticipate this trend to continue throughout the remainder of 2025. Now I'll give an update on how we're executing against our transformation plan. As previously shared, we continue to execute against our target of gross cost reduction of $150 million in 2025 with the expected net benefit of around $90 million this year as some of the cost reductions are being offset by the reintroduction of variable compensation. Year-to-date, we have captured more than $95 million in gross savings with roughly $53 million in net savings contributing to improvements in EBITDA. Year-to-date, these savings have benefited largely gross margin more than SG&A, but we are seeing an increase in SG&A savings as the year progresses, consistent with our planned timing for executing on the SG&A-specific savings program. Building on our ongoing progress to improve our cost base, through the third quarter, we have further leveraged our third-party relationships to optimize the cost of delivering services out of our SG&A functions. We expect our SG&A optimization programs to extend into 2026 as we continue our efforts to bring this spend more in line with peers. For full year 2025, we are raising our revenue guidance and narrowing our adjusted EBITDA outlook. Based on exchange rates as of December 31, 2024, we are increasing our revenue target to a range of $2.7 billion to $2.75 billion. At the same time, we are narrowing our adjusted EBITDA target in the range of $175 million to $195 million, reflecting continued operational discipline and confidence in our execution. In terms of cash flow for full year 2025, we are targeting operating cash flow to be marginally negative with positive operating cash flow expected in the fourth quarter of 2025. The team at Fortrea continues to demonstrate commitment and resilience, and we are pleased to see improving customer satisfaction scores and continued strong employee engagement amidst our efforts to optimize our profitability. We believe we have laid the groundwork to enable stable financial performance that will improve over time. We are energized by what lies ahead and our ability to be laser-focused on delighting our customers. As we advance through our transformation phase and target execution against the three pillars Anshul shared with you in his remarks, we look forward to demonstrating our continued progress towards delivering value for all of our stakeholders. Now we'll open the call for Q&A. Operator, please open the line.

Our first question comes from Eric Coldwell of Baird.

Nice job and glad to have you here, Anshul. I have a couple of questions. First, in the past, the company discussed its mix of pre-spin awards consuming revenue compared to post-spin or next-generation style contracting. Most of that has been related to pre-spin awards, which are now shifting towards more post-spin awards. Can you provide an update on your current status and how you see this evolving through 2026?

It's great to speak with you, Eric. I appreciate your kind words. The first 100 days at Fortrea have been fantastic, and I'm proud of our team for stepping up this quarter. We discussed before the difference between pre-spin and post-spin contracts, and I'm trying to shift the focus away from that terminology. There are contracts that were established long before Fortrea became its own entity, when it was still a Labcorp business unit. We have limited ability to adjust those contracts, but our team is dedicated to making the necessary adjustments wherever possible. Regarding what you referred to as post-bid, I view it as independent contracts within the Fortrea framework. Over the past two quarters, we've concentrated on managing out-of-scope work, addressing overburns, and ensuring proper staffing for our teams. We're starting to see positive results from these initiatives. Do you have a couple of questions, Eric?

Yes. Thank you. I appreciate that. It seems you made some progress with new Fortrea clients this quarter. Last quarter was somewhat hindered by uncertainties surrounding the CEO transition, counter detailing from competitors, and the overall market environment. Could you provide more details, such as the number of new Fortrea customers or any quantitative metrics? More importantly, please discuss how you are approaching that marketplace. Are there new sales strategies or higher-level executive engagement? What will encourage a previously inexperienced customer, someone who hasn't worked with you, to choose Fortrea moving forward?

Sure, Eric. I'm happy to discuss that. Last time we spoke on an earnings call, I believe I was just starting in my role. Now, having completed the CEO transition and achieved solid financial performance, even though we didn't see significant bookings in the second quarter, these factors have built a sense of stability around Fortrea in the eyes of our customers. This renewed confidence was reflected in the numbers we recorded in Q3. Let me share some figures and address your key question about what we are doing differently. One of the metrics I focus on is the increase in RFP volumes from new Fortrea customers. In Q3, RFP volume for us rose nearly 40% compared to the previous quarter with these new customers. Our win rates showed significant improvement, with the rates for these new Fortrea biotechs doubling quarter-over-quarter. Additionally, our win rates with biotech customers have reached the highest levels we've experienced in the last 5 to 6 quarters. Now, regarding your question about our approach, it's all about focus. For all customers, whether big pharma or biotech, we are putting renewed emphasis on account management and enhancing our presence in the sales process. Personally, I’ve dedicated much of my time to visiting sites, being involved in bid defenses myself, and engaging with customers almost every week since I started. It’s all about refining our sales strategy and integrating more medical and operational expertise into the bidding process from the start. To put it simply, we're getting back to the basics.

Yes, that's it. I want to congratulate you on bringing Bill Sharbaugh into the organization. I'm looking forward to catching up with him. He was excellent at PPD, so congratulations on that.

Our next question comes from the line of Patrick Donnelly of Citi.

This is Brendan on for Patrick. I want to touch on a little bit on like the bookings backdrop. I wonder if you'd be able to parse out kind of like what you're seeing there between large pharma and kind of small biotech. And kind of more recently, as we've seen more headlines on the news and pharma tariffs, have you seen any increased activity or interest in moving forward previously pending projects?

Yes. Brandon, happy to answer that question. Look, we don't break down specifics around our bookings numbers between biotech and biopharma. What I'll tell you is from a trend perspective, we're seeing neutral to favorable trends in both segments, in both markets. Let's take a look at our biotech customers. Historically, let's go back to Q1 of 2025, we saw some pretty depressed decision-making timelines, things taking forever. So we're starting to see that pick up. That trend is pretty important in the biotech segment, and that's led to not just increased RFPs, but a slightly faster sales cycle for us over the course of the third quarter. As far as our biopharma customers are concerned, what I would tell you about our biopharma customers is they continue to be resilient and persevere through the ever-changing landscape, be it tariffs, be it pharma pricing, et cetera. And what we're finding with all of our biopharma customers is their prioritized pipelines that are backed by science and innovation continue to move forward. And our conversations with our biopharma customers continue to move at a healthy pace that we've seen all year.

Appreciate that. And then on the pricing environment, this has definitely been kind of a big focus of kind of the CRO industry. And I was wondering if you've seen any changes in the competitive intensity over the last several months? And how do we kind of see that moving forward?

Well, look, I think the pricing environment continues to be competitive but disciplined. Our bid margins, these are margins of the levels at which we submit our proposals and bids have largely stayed consistent this year. In our full-service CRO work, price isn't really a lever we see that wins business at the end of the day. It's leading with science. It's leading with executive engagement. It's leading with staffing the right operational teams and putting the right delivery solutions in front of the client within the desired timeframe. With that said, in the FSP business, we certainly see more aggressive pricing strategies coming specifically from some of our larger CRO competitors. We tend to shy away from areas where pricing makes the business unattractive for us.

Our next question comes from the line of David Windley of Jefferies.

Anshul, congrats on the first quarter. Good to hear your voice. I wanted to ask a question that meanders through a few different topics, but basically around kind of pricing strategy and margin leverage. So I heard $53 million of delivered savings to the P&L, more of that benefiting gross margin than SG&A. I think you had also talked about in meetings in September kind of a focus on maybe long term, growing revenue to drive operating leverage and improve margin. And then we're talking about new to Fortrea client wins among other wins. And so I guess what I'm interested in is, are you, one, trying to at least hold price, if not walk up price a little bit as a method to drive more operating leverage in the long term, thinking that maybe Fortrea in the past has been a little bit low on price at the outset. And then secondly, given that revenue was strong in the quarter, I'd love for you to disentangle, maybe Jill can disentangle the direct fee versus the pass-through to help us understand why that didn't benefit gross margin instead of seeing this gross margin detriment compared to the prior periods. Sorry, long question.

It's great to hear from you, David. I'm pleased to have this conversation again. I'll start by addressing the main points. You raised a few questions and mentioned several aspects, so I'll try to provide a comprehensive response. The core of your inquiry revolves around our pricing strategy and how it relates to margin leverage. Let's discuss our pricing strategy and the margin leverage for this quarter. My primary objective is to maintain prices whenever possible. However, we are in a highly competitive pricing climate. If there are strategic reasons to be competitive for certain customers or therapeutic areas, we will adjust our pricing accordingly. Maintaining our prices is crucial. In the third quarter, I instructed the team to withdraw from proposals if the terms and pricing did not align with my goal of getting Fortrea closer to the industry's typical margins. We take pricing very seriously, and almost every pricing decision is reviewed by myself, Jill, or Mark. We remain vigilant on this front. It's also important to note that the growth in revenue, particularly in direct service fee revenue, is vital for achieving the operating leverage we need. Jill will elaborate on this quarter's performance, which will help clarify how our revenue exceeded expectations and its relation to margin.

Sure. Yes, David, I appreciate the question. So I think if you're thinking holistically about revenue and where it's landed this year, a couple of points. In terms of the makeup and the mix, we have seen more upside in pass-throughs than we expected. And when you think about the guidance and how the guidance has been adjusted through the course of the year, that's predominantly been because we've seen an increased mix of pass-throughs relative to service fees. We have a good handle on our service fee revenue now and have been very successful in being able to forecast that for ourselves. So that's very positive. I think like many of our peers, we're continuing to see increased pass-throughs. So that's driven a lot of the revenue change over the year, and that's why you're not necessarily seeing it either in the adjusted EBITDA dollar or the margin. Does that help answer your question?

Yes. I mean is it possible to put some numbers on that?

David, I'd love for you to lead the charge at getting the entire industry to start doing that because I spent time in prep sessions yesterday with the team saying, maybe we should just start doing that. But if you can get the rest of the industry to do it, I'll do it the same, okay?

Got it. I'll ask a shorter follow-up. Eric inquired about new clients for Fortrea. Is there anything specific you can add to your answer to Eric regarding the biotech client go-to-market strategy, considering your mention of the biotech operating model?

Yes, I have dedicated much of my career to this topic. I began developing biotech-specific strategies and teams before it became common in the CRO industry. At Fortrea, our aim is to tailor our approach for each deal in biotech. It's essential to understand the unique challenges our clients face with their particular trials. This could mean involving our medical and scientific experts when needed or having our clinical team address resource gaps in their clinical operations. In situations where clients require estimates to secure funding, our sales team would take the lead. My focus at Fortrea has been to enhance the skills of our customer-facing teams, which extend beyond just sales, to effectively identify and solve the core problems our clients are experiencing. In the third quarter, I believe we improved in this area, though I am not entirely satisfied with the outcome. This presents an opportunity for us in the coming quarters to engage biotech customers in a more tailored manner than ever before.

Our next question comes from Luke Sergott of Barclays.

I appreciate the talk about like rightsizing the cost structure and stuff. But as we kind of look further out, one of the questions we get asked is like the disconnect that you guys have from a margin perspective versus peers, on your normalized basis, is there any reason why you wouldn't be able to close that gap once you kind of engage all these other productivity programs, et cetera? Just kind of thinking about where these margins could go in a more normalized growth and bookings environment for you or operating environment.

Yes, Luke, I believe Anshul can address this since we have discussed it, and I think he will emphasize that over time, he still doesn’t see a significant issue, but he can provide his insights. As I mentioned earlier, part of the margin challenge this year has stemmed from increased pass-through revenues, which bring their own difficulties. We have been transparent about reintroducing variable compensation this year as we strive to retain and engage our key talent. We are being mindful of balancing these challenges. I believe we have approached this correctly as we have maintained high employee engagement, which is crucial for our customers who rely on stable teams. Over time, we will keep focusing on reducing SG&A expenses as a percentage of revenue. We have made progress this year, but there is still more to accomplish. Additionally, as Anshul has noted, we must continue to adjust the organization according to our current company status. This is an ongoing process, but we have more work ahead. Anshul, would you like to add anything?

Yes. No, that's great. Luke, I think it's as Jill said, and I said this before, now 100 days into the company into the weeds, I don't see any structural reason. I don't see any structural reason why we can't return back to more industry standard margins. But it's going to take a few things. It's not just going to take rightsizing, but it's going to take a consistent growth in our backlog. So if I look at Fortrea, where we are right now, 2.5 years into this journey, the next 2.5 years look very different than the past 2.5 years. In the last 2.5 years, we had headwinds that were market-related headwinds in terms of softening demand, our own issues and coming out of the gate, if you think about the inconsistency in commercial delivery and inconsistency in how we were building the backlog, the serious headwinds related to a spin that was probably messier than anyone could have forecasted and took longer than anyone could have forecasted. And on top of that, we had tons of counter detailing, leadership transition happening from a CEO standpoint that took some time. If I think about it, the market is starting to get neutral to positive, as you've heard from all of my peers, as you all have stated in your reports, we're starting to see green shoots of decision-making timelines and biotech getting better. You saw the funding reports came out this morning, biotech funding, while not at historical levels, is starting to return. So you're starting to see the market go from neutral to positive. You were completely out of the spin. We're a fully independent company, not encumbered by the kind of expenses and frankly, distractions. People think about the spin in terms of cost and forget how much effort it takes to complete that spin. Those distractions, CEO transition being complete. So many of the structural headwinds that have been holding us back from that type of progress are starting to subside. That said, we have a lot of work to do. I don't see any structural reasons in this company why we can't get back to more industry standard margins, but it's going to take work. It's going to take work in two pillars. One is a continuous rightsizing DNA that is all about being a midsized nimble CRO. And the second is a consistent delivery of book-to-bill that gets us to a consistent and diverse building of our backlog. Luke, that's probably more than what you wanted, but hopefully, that answers your question.

Yes, it does. It was just more about like the structural if it was something that you guys had from either business mix or something like that. But I think that kind of gets to the crux of the issue. And then for...

I could have simply said no, but I provided a more detailed response. I understand the feedback I'm receiving during this call.

As we look at '26, I understand it's pretty early here. But if we kind of just assume this kind of stabilized burn rate and then continued bookings and backlog trend here, that kind of gets us to something around like low singles to mid-singles. Do you think that's a decent starting point to think about top line growth next year?

I think we're not giving any '26 guidance right now. It wouldn't be prudent for us to do that. But it's a good way to try to ask that question and sneak that in there. But we're not giving 2026 guidance right now. Let me get another 100 days under my belt. Yes. No, I appreciate it. Kudos on the try. You almost had me there, but give me another 100 days in seat, and we'll talk about guidance.

Our next question comes from the line of Justin Bowers of Deutsche Bank.

So Anshul, I just wanted to sort of extend on Luke's question in some ways about the industry environment. So for you, I mean, you guys, I think, did a little better than what people were thinking and peers are talking about improved industry environment as well. But are there any anecdotes you can provide for us to sort of like to qualify that in terms of maybe terms and decision-making times, et cetera? And then as a follow-up to a lot of the conversation has been focused on biotech, but I'd love to hear what you're seeing in large pharma and some of the conversations you're having there as well.

Certainly. Let me share two brief anecdotes, one from biotech and one from large pharma. Recently, I received feedback from Luke about giving lengthy answers, so I will keep it concise. In the biotech sector, we secured two significant Phase III programs from a valued customer in the third quarter. This customer had been holding onto solid Phase II data, but there was a lot of uncertainty surrounding the FDA and departmental changes. Over the last four to five months, that uncertainty started to ease. This shift altered their decision-making timeline from considering a decision by year-end to asking how quickly we could enroll the first patient by January. We managed to turn around a proposal in just two weeks and finalized the contract within six weeks. I selected this example to illustrate the nature of our current discussions, which can sometimes take nine months or longer with clients, but in this case, we had to mobilize quickly for a Phase III program aimed at patient enrollment in the first quarter of next year. Now, regarding the large pharma side, while I won't disclose any client names, many pharma companies are currently negotiating deals with the U.S. administration. This negotiation reduces a level of uncertainty, although it doesn't eliminate risks to their financials. The reduced uncertainty enables them to finalize their R&D pipeline for 2026. We had one pharma client experience this, and while it's not solely due to their negotiations, the overall atmosphere made them comfortable enough to lock in their plans for the next few years. Once they do that, the next step is often reaching out to a CRO to kickstart discussions about studies they need to launch in the first quarter and to start assembling teams and proposals. I hope this gives you the anecdotal insights you were looking for. All that said, as many of my peers have noted, the overall sentiment is neutral to positive. There are still many headwinds and uncertainties in the market, and while it's not like the market conditions of 2018, there are reasons to feel cautiously optimistic.

And then just one quick follow-up on Phase I. We haven't really talked about that on the call yet. How is capacity utilization there? And any progress on bringing more of that in-house?

Yes, that's a great question. Thank you for inquiring about our clinical pharmacology business, which I'm very proud of. The Phase I business has experienced higher-than-expected growth over the last two quarters. We mentioned this last quarter and are bringing it up again, as we're seeing favorable utilization rates. In looking at this quarter and the next, utilization rates are where we want them to be, and they're healthy in our Phase I clinic. I want to discuss the difference between bringing the work in-house and not doing so. The key factor here is the mix of incoming work. We have certain studies coming in, like large bioequivalent studies in obesity, that require significant cohorts to be run at the same time. Often, you need multiple sites to conduct these studies due to their design. When we run studies simultaneously across multiple sites at the request of the customer, we often rely on external sites. This isn't because we lack the capability to handle that work in-house; it’s due to the necessity of running a certain number of cohorts within the same time frame. In this business, as Jill mentioned, we've also encountered some higher-than-normal pass-through costs. Strategically, this is positive because we're continuing to serve our customers and help advance their pipelines. Additionally, we are receiving a lot of repeat business from some major clients. However, when substantial studies like the obesity bioequivalent studies come in, this is just one example among others, we do experience higher pass-through costs. Therefore, the mix of work is the important narrative in clinical pharmacology, and we are performing well in terms of capacity.

Our next question comes from the line of Jailendra Singh of Truist Securities.

This is Jenny on for Jailendra. I wanted to ask about the FSP sales team that you recently launched. Just curious on the momentum there in the past quarter. What's the traction for the dedicated FSP sales team? And are you seeing shifts in sponsor preferences between FSP and FSO? And then just a quick follow-up to that. I know you're maintaining pricing conversations in FSO, but how are you balancing pricing discipline with the competitive environment in the FSP segment?

I appreciate your questions about FSP, Jenny. Currently, we are noticing a sequential increase in FSP RFPs. Earlier this year, we relaunched our focused efforts in FSP. Although it's still early to evaluate the progress we desire, we are seeing an increase in RFPs. However, FSP RFPs, which can range from 10 to several hundred resources, generally have a longer sales cycle compared to FSO. Therefore, it will require additional time. We're moving forward with caution as we need to balance our outreach to customers in FSP with the business we want to pursue, ensuring it makes sense for us. Some of the FSP work presents margins that aren't ideal for us, and we've opted not to pursue some of these opportunities this quarter. We will continue to take on FSP projects that offer healthy margins. We need to allow more time to observe how our strategy for FSP unfolds.

That's fair. I have a follow-up regarding the momentum in large pharma as they finalize their R&D plans for 2026, potentially moving forward with those decisions in Q1. In the past, Fortrea has indicated that large pharma's decisions tend to be more back-end loaded as they plan for the following year. I am curious whether you are noticing any shifts in decision-making, possibly moving from the latter half of the year to early 2026.

That's a great question. Currently, there isn't a consistent trend in decision-making from biotech or biopharma clients. We're beginning to see a bit of normalization in decision-making timelines. However, even as a smaller public company in the CRO space, this remains a significant customer segment for us. There will always be fluctuations depending on the specific customer, but I'm not observing any consistent trend of decision-making being delayed.

Our next question comes from the line of Elizabeth Anderson of Evercore ISI.

This is Alan Chen on for Elizabeth. I guess a question for Anshul. Given that you're a few months into the role, I was wondering, could you talk about what have been the biggest surprise for you in your time at Fortrea so far?

I'm sorry, I'm having difficulty hearing your question. It's quite vague. Could you please speak up and repeat it?

Yes. So given that you're a few months into the role, could you talk about what have been the biggest surprises for you in your time at Fortrea so far?

Sure, I appreciate the question and I'll do my best to answer regarding the biggest surprises. I think my experiences have been somewhat consistent rather than surprising. As I visited many of our sites, I had the opportunity to engage personally with almost one-third of our colleagues over the last 100 days, which includes several thousand people. Regarding our workforce, the morale and commitment to Fortrea, along with their work ethic and dedication to clients, remains strong and resilient. This was one of my expectations when I took on the role. After visiting multiple continents, regions, and countries, I have consistently observed that employees are engaged and focused. Despite the challenging macro trends in the industry over the past 1.5 to 2 years, including difficulties with the Fortrea spin, those working on client programs are highly engaged and committed with strong work ethics. I've seen this consistently across various locations. While I wouldn’t say it was a surprise, it has been reassuring to confirm my initial expectations.

I'm showing no further questions at this time. I would now like to turn it back to Anshul Thakral, CEO, for closing remarks.

As we come to a close of our time today, I would like to thank all of you for your thoughtful questions and for welcoming me to Fortrea. Fortrea is well positioned as a pure-play midsized global CRO that specializes in the execution of clinical trials from first in human to post approval. We're focused and we're disciplined. That's the message. In addition to our financial progress, it would be remiss of me not to thank our team for making the short list for Best CRO at the Industry SCRIP Award. I also want to note that we earned a bronze EcoVadis rating for our sustainability program, which we have built from the ground up. Our commitment to sustainability is not just important to our colleagues around the world, but it is a requirement of our global client base. What matters to our clients matters to us. I want to thank you for joining us today, and I look forward to speaking with you soon.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.