Welcome to the Fortrea First Quarter 2026 Earnings Conference Call. Operator Instructions: Please be advised that today's conference is being recorded. I would now like to turn the conference over to your speaker for today, Tracy Krumme, Senior Vice President of Investor Relations. Please go ahead.

Thank you. Good morning, everyone, and welcome to Fortrea's First Quarter 2026 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 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, May 5, 2026, 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 nor a replacement for the comparable GAAP measures, but we believe these measures provide investors with a more complete understanding of results. A reconciliation of non-GAAP financial measures to the most directly comparable GAAP measures is available in the earnings press release and the presentation slides that are provided in connection with today's call. Lastly, I would like to add that Bill Holzmann, Vice President of Treasury and Risk Management, and I will be at the Barclays Leveraged Finance Conference in Austin on May 19. If anyone would like to meet with us on these dates, please contact me or a sales representative from the firm. 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 to discuss Fortrea's first quarter 2026 results. We started the year strong in the first quarter and remain on track with our plans. We made progress on our journey back to growth and margin expansion. We delivered solid results that reflect improving commercial traction, continued operational discipline and a clear focus on the actions we control in a market environment that is gradually becoming more favorable. As always, Jill will share a review of our financial performance, but I will start with a few highlights that clearly show the progress on our journey. We delivered revenue and adjusted EBITDA putting us on a track to achieve our full year expectations. We had a Q1 book-to-bill of 1.15x and a trailing 12-month book-to-bill of 1.05x, reflecting improved commercial execution for the third consecutive quarter. We also reached a strategic operational milestone with the recent launch of Fortrea Intelligent Technology, or FIT, as we call it. FIT is our technology suite that integrates persona-driven AI-powered solutions to automate workflows and streamline oversight, helping improve trial speed, predictability and quality. As I get more into the details of the quarter, I'd like to remind you that we are taking a disciplined approach to measure our progress using a framework of 3 pillars: commercial, operational and financial excellence. I'll do a deeper dive into our commercial and operational performance and then Jill will walk through the quarter's financial results. But first, let me speak to the environment, which continues to stabilize with early signs of improvement. Large pharma is more constructive and biotech funding has inflected positively versus last year, supporting a steadier demand backdrop. In addition, we're seeing operational indicators improving. For example, clinical trial starts rebounded this quarter. To address this growing opportunity, we remain focused on our foundational growth drivers that we call the 3 Rs: reach, relevance and repeat. During the quarter, we continued to see evidence that our commercial actions are translating into healthier activity levels and better quality engagement. In short, I was pleased with our sales in the quarter. Not only did we deliver a book-to-bill of 1.15x, which is our third quarter in a row of book-to-bills of 1.1x or higher, we also diversified our customer base, with notable success in biotech, a sector where Fortrea has deliberately been sharpening our approach. Our authorizations in the first quarter skewed toward biotech where we saw a significant year-over-year improvement. These organizations range from early growth innovators with fewer than 200 employees to publicly-listed development-stage companies with core strengths in oncology, cardiovascular, RNA-based therapeutics and other innovative therapeutic areas. Wins were driven by building new client relationships, senior-level engagement and scientific differentiation. We saw the number of RFPs issued in the first quarter for biotech opportunities increase both sequentially and year-over-year, including an increase in new-to-Fortrea biotech evidence that our reach and visibility are improving across the board. I'm pleased with how we continue to build on previous improvements in sales with new-to-Fortrea biotechs. Turning to another priority area for us, that's China, where we also saw strong double-digit growth in our pipeline of opportunities as well as some significant wins in the quarter. We believe we are well positioned in the country with more than 1,000 employees and around 10 strategic clients headquartered in China. Let me share some additional commercial snippets from the quarter that give me confidence in our underlying progress. We had the best first quarter since our founding for authorizations in clinical pharmacology, supported by both new and repeat customers. Beyond that, I'm extremely proud of our clinical pharmacology team for going beyond simple first-in-human and healthy volunteer studies. This quarter, the team at our Leeds clinic successfully performed its first-in-human dosing in patients with immune thrombocytopenia, a rare blood disorder for which new therapies and treatment options are desperately needed. This accomplishment was the result of great collaboration between our team and the sponsor and is another example of how we are on the cutting-edge of helping to bring life-changing therapies to patients. Overall, enterprise cancellations remain within an expected historical range. Beyond the metrics, we are seeing third-party validation that Fortrea's brand awareness is rising, consistent with what we're hearing in client conversations and what we're seeing in the sales funnel. Stepping back, our first quarter performance isn't an accident. It's the result of a deliberate commercial execution, expanding our reach, increasing our relevance through differentiated scientific and operational capabilities, and earning repeat work through better delivery. And that takes me to our second pillar: operational excellence. Operational excellence is how we deliver quality, predictability and efficiency for clients at scale. A major step forward in that strategy is the launch of Fortrea Intelligent Technology, or FIT, which we announced in April. The launch was met with strong reactions from customers, partners and investors. We saw immediate positive feedback from sponsors and technology partners, and it has helped strengthen our commercial narrative around predictability and execution. Over time we expect AI technology and innovation enablement to increasingly support win rate, operational efficiency and longer-term differentiation rather than being viewed as a stand-alone initiative. It's important to be clear, FIT is not a single product. It's an AI-enabled integrated platform strategy combining trial execution, oversight and intelligence, designed to improve predictability, reduce cost to serve, improve quality and strengthen the way we partner with our clients. In light of unveiling FIT, let me say a bit more about AI more broadly as it remains an active discussion topic. Across the industry, leaders have more data, more tools and more AI pilots, yet we haven't seen a commensurate increase in approvals. If we don't redesign how decisions are made, AI will amplify noise rather than improve outcomes. Our goal with AI is not automation. It is to create a force multiplier. Automation improves efficiency. Judgment improves outcomes. In clinical trials, some of the most valuable calls are when to intervene on enrollment, when to change a study strategy or when risk becomes irreversible. These are judgment-heavy decisions, and that's where AI must help, not replace our leaders. The expected AI revolution will require rapid evolution of the kind that has become a hallmark of the CRO industry. I believe CROs are ready for the shift just as CROs were ready for the pandemic. CROs stepped up and delivered significant value at the time it was needed. I believe this industry will do it again. Fortrea's approach is pragmatic and outcomes-focused. It keeps humans in the lead in a tightly connected R&D ecosystem, aided by an integrated and powerful AI-enabled information platform. We are already embedding AI into our workflows and integrating it with our deep therapeutic and domain expertise. We have equipped our award-winning trusted Xcellerate platform with AI and ML, a platform that currently has tens of thousands of users, including employees, clients, SaaS users and even investigator sites. As technology waves continue to revolutionize clinical trials, CROs serve as a change catalyst and as change agents. Alongside technology, we're staying intensely focused on improving delivery. Because in a services business, consistency is paramount. We continue to strengthen project management to increase speed, predictability and efficiency, with a particular focus on investigator sites and patient enrollment. Notably, we have revamped our approach to site activation, adding greater efficiency to significantly compress the time from site selection to site initiation, resulting in both year-over-year and sequential improvements. In the first quarter, we further broadened our site navigator program globally, including expansion in China and Japan. Site navigators provide dedicated support to sites. We also leveraged centralized start-up teams and partnerships with site networks in emerging regions, driving more consistent site performance across geographies. We also strengthened leadership in key areas, including the appointment of Erin Koch to lead our Functional Service Provider or FSP organization, supporting sharper execution and a tighter connection between commercial commitments and delivery. Quality remains foundational at Fortrea. We continue to advance our risk-based quality management approach and we're proud that our Chief Quality Regulatory Affairs and Sustainability Officer, Sandy Kennedy, was voted Chair of our industry association, ACRO. The appointment shows our credibility and leadership in industry quality standards. As the regulatory landscape around the world shifts to embrace and accelerate innovation that can improve patient outcomes, Fortrea is engaged and ready to help sponsors navigate the changes. In our Phase I clinical pharmacology services, we're performing well and adding momentum. For example, we're taking advantage of improving MHRA timelines to drive greater utilization of our flagship clinical research unit in Leeds in the U.K., supporting sponsors looking to move efficiently in early development. Clients across all of our services have experienced the difference from our progress in operational excellence. Our customer Net Promoter Score has improved steadily, reflecting ongoing progress in delivery and day-to-day client experience. Taken together, commercial traction, improving delivery and technology enablement, these actions are reinforcing one another. They strengthen how we compete, how we execute and how we build confidence with sponsors. Our third pillar is financial excellence, driving margin expansion, disciplined cash management and continued focus on the balance sheet. Jill will cover the details including key themes from our quarter and our guidance framework. But importantly, I'll highlight that we're making solid progress on margin expansion, as we journey toward mid-teens in adjusted EBITDA margin percentage over the next 3 to 5 years. Before I close, I want to recognize colleagues from Fortrea for their continued focus and resilience and thank our clients, partners and shareholders for their support. The progress we're making is a result of disciplined execution across the organization and our team's dedication to our patient-inspired mission. Now let me close with 3 takeaways. First, we're seeing improved commercial momentum, including continued strength in book-to-bill and biotech engagement. Second, we're elevating operational performance through better delivery discipline and the launch of FIT, which we believe will be an increasingly important differentiator over time. And third, we remain committed to disciplined execution and financial rigor as we continue this journey back to growth and improve profitability. With that, I'll turn the call over to Jill.

Thank you, Anshul, and thank you to everyone for joining us today. As Anshul stated, we delivered a solid first quarter. I am very proud of what the team achieved, and before getting into the details, I'd like to briefly highlight our progress against financial excellence, the third pillar of our growth strategy. First, as part of our rightsizing initiatives, we delivered quarterly cost savings of nearly $16 million gross and over $9 million net, putting us on track to achieve our full year cost optimization targets. Second, the first quarter of 2026 represented the strongest start to the year since our spin, as evidenced by the year-over-year improvement in margin and in leverage ratios, reflecting our continued focus on rightsizing the business along with improving project mix and delivery. Now I'll cover the financial results in more detail. First quarter revenue was $636.5 million, down 2.3% year-over-year, consisting of a 3.2% constant currency decline, partially offset by a 0.9% currency benefit. The decline was driven primarily by lower pass-through costs in both our clinical pharmacology and clinical development businesses due to study mix as well as continued FSP headwinds. Importantly, underlying full-service clinical revenue grew year-over-year. On a GAAP basis, direct costs in the quarter decreased 4.1% versus the prior year primarily due to lower pass-through costs and headcount-related personnel costs. These reductions were achieved despite a year-over-year increase in variable compensation expense and currency headwinds, demonstrating our ability to balance rewarding our talent while maintaining cost discipline. SG&A in the quarter decreased 17.5% year-over-year, driven primarily by lower IT and headcount-related personnel costs, partially offset by higher variable compensation expense. Interest expense for the quarter was $19.1 million, down $3.2 million versus the prior year quarter, reflecting the $75.7 million repurchase of senior secured notes in the fourth quarter of last year, lower interest rates on variable rate debt and no revolver borrowings in the quarter. Book-to-bill was 1.15x for the quarter and 1.05x on a trailing 12-month basis. Backlog was $7.8 billion, and cancellations remained in line with historical trends. Adjusted EBITDA for the quarter was $47 million, compared to $30.3 million in the prior year period. The increase versus the prior year quarter was driven primarily by the benefits of our cost savings initiatives. Moving to net loss and adjusted net income. In the first quarter of 2026, net loss was $23.6 million, compared to a net loss of $562.9 million in the prior year period. Note that the prior year was impacted by a noncash pretax goodwill impairment charge. Adjusted net income for the quarter was $15.2 million, compared to $1.9 million in the prior year period. Adjusted basic and diluted earnings per share for the first quarter of 2026 were $0.16. In terms of customer concentration, our top 10 customers represented 54.8% of revenue for the quarter ended March 31, 2026. Our largest customer accounted for 17.2% of first quarter revenue. While we are still targeting positive full year 2026 operating cash flow, as expected, our cash generation in the first quarter was negative, primarily due to payments to our employees for variable compensation. However, our lower net loss and continued focus on improving our order-to-cash processes enabled us to offset a large portion of the impact. For the quarter ended March 31, 2026, operating cash flow was negative $17 million, compared to negative $124.2 million in the prior year period. And free cash flow was negative $25 million, compared to negative $127.1 million in the first quarter of 2025. Recall that negative cash flows in the first quarter of 2025 were primarily timing related due to the implementation of our ERP system. In the first quarter of 2026, DSO increased slightly compared to December 31, 2025, increasing from 16 to 20 days, consistent with our expectations. Even with this 4-day increase, year-over-year DSO was 31 days lower than the prior year. Net accounts receivable and unbilled services was $619.6 million as of March 31, 2026, compared to $729 million in the prior year quarter. This reduction is primarily driven by the continued improvements we made in our order to cash processes during 2025. For the second quarter in a row, we navigated the quarter without using our revolver. This combined with our solid cash position resulted in available liquidity in excess of $0.5 billion. Looking ahead, we are currently targeting the remainder of 2026 to be operating cash flow positive. With our targeted EBITDA and significant add-backs available under our credit agreement, we expect to maintain ample liquidity and significant flexibility under our financial covenants for the foreseeable future. Our capital allocation priorities remain driving organic growth, improving productivity and continuing to deleverage. Since the spin, we have paid down approximately 35% of our original debt. This has strengthened our balance sheet and improved our capital position, underscoring our disciplined approach to financial management. Backlog burn of 8.2% in the first quarter was lower sequentially, driven primarily by the impact of previously communicated pricing concessions on a large pharma FSP contract, the timing of change orders, and to a lesser extent, lower billable volumes consistent with historic patterns in the first quarter. As we continue on our journey of commercial, operational and financial excellence, we believe that sustainable revenue growth is key to our transformation, which is why we remain laser-focused on strengthening our commercial engine. The second half of 2025 was a step in the right direction, which continued into the first quarter of 2026. As our commercial engine matures and the market environment continues to normalize, we anticipate that these changes could enable more stable book-to-bill performance over time. With targeted value propositions that attract both large pharma and biotech customers, we believe we are well positioned to capitalize on demand across our end markets. Margin improvement remains a multiyear journey, supported by 2 primary building blocks: revenue diversification and growth, and our ongoing efforts to optimize costs and improve efficiency. Our cost actions continue to strike a balance between maintaining high-quality customer delivery while driving continued operational efficiency. With this combination, we continue to target an achievable path back to mid-teens adjusted EBITDA margin percentages more in line with peers, and our solid performance in the first quarter of this year is a step in that direction. Turning now to guidance. We reiterate our targeted full year 2026 revenue guidance in the range of $2.55 billion to $2.65 billion, and targeted adjusted EBITDA guidance in the range of $190 million to $220 million. As a reminder, the year-over-year anticipated decline in revenue primarily reflects the impact of softer bookings in the first half of 2025, continued FSP headwinds and anticipation of lower pass-through costs. The targeted improvements in adjusted EBITDA are driven by our continued efforts to rightsize the business, improve our efficiency and build a more attractive project mix. As I noted earlier, in the first quarter, we delivered nearly $16 million of new gross savings against our target of $70 million to $80 million, and more than $9 million in new net savings against our target of $40 million to $50 million, with the difference between gross and net being continued investments in our people. The first quarter slightly exceeded our expectations in terms of the pace and benefit of our rightsizing initiatives, putting us on a solid trajectory to achieve our guidance while allowing for targeted investments in our employees and in areas that we anticipate could support longer-term revenue growth. For the second quarter, we anticipate a modest sequential increase in revenue, driven by higher underlying service fee revenue and pass-through costs. We anticipate a slight step-up in adjusted EBITDA as the higher revenue will be partially offset by increased variable compensation costs. In closing, we are pleased to have delivered another solid quarter, demonstrating that we are making progress against our commercial, operational and financial excellence targets on our journey back to growth and margin expansion. Every day our customer-facing and supporting function teams show up with strong engagement and a commitment to accelerating the clinical development process. We remain excited about the future of Fortrea. Now we'll open the call for Q&A.

Operator Instructions: Our first question will be coming from the line of Patrick Donnelly of Citi.

Anshul, maybe one for you just on the overall backdrop here. Pretty encouraging book-to-bill performance. Can you talk about what you're seeing? Last quarter, you talked about maybe a little more constructive conversations with biotech. Are you seeing that continued improvement? It looks pretty good there for a couple of quarters now, in the competitive environment. Would love to just talk through that booking backdrop and the confidence level moving forward here.

Patrick, you're coming in a little bit muffled, but I think the question was around backdrop and the evolution of the backdrop specifically as it relates to the competitive nature in biotech. I think that's right, Patrick. As I said, in the world with large pharma, we're seeing a lot of constructive dialogue. We're seeing pipeline prioritizations have largely passed in 2025. But in biotech, we're seeing a slightly speedier path to recovery. As I mentioned, the RFPs for us were up sequentially in biotech, particularly new-to-Fortrea biotech. One of the things I'm very proud of our team is the reach component of our commercial strategy seems to be working really well. But I think that answers your question. We are seeing a slightly speedier recovery in the biotech space.

Okay. That's helpful. And then, Jill, maybe one for you, nice progress on the EBITDA front, a little bit of a combo on 2Q progression here. Can you talk about the moving pieces? Obviously, the pass-throughs are one impact. Can you talk about the cost levers you guys are pulling and, again, the right way to think about the level of conservatism layered in after the strong performance to start the year here?

Sure, Patrick. Revenue was down sequentially, but I did comment that underlying service fee revenue for the second quarter in a row was up. And so I think that is a good sign that some of the work we've been doing to try to diversify the portfolio and really think about the mix of work we have is starting to recover. We continue to be pleased with our cost optimization efforts. They came in a little bit ahead of where we expected for the quarter. And I think the team just continues to really execute strongly. We've been talking about project efficiencies and how we deliver there. And those things are starting to come together. I think in terms of the guidance, it's one quarter. We want to continue to keep working at it. And if we have upside, quite frankly, there are opportunities where we believe some of those could be used for small investments to try to accelerate future growth. So I think we think sticking with the guidance as it is right now makes the most sense.

Our next question will be coming from the line of Elizabeth Anderson of Evercore.

I was hoping to dig in a little bit on the China comments, Anshul, that you put through. Is that an area of like specific incremental investment given some of the opportunity, the changing market dynamics there? Or is that sort of part of a broader geographic investment mix? That would be helpful to get your broader thoughts on that topic.

Elizabeth, my comment in China is less about an incremental investment. It's a continued strength in China. Fortrea, through its legacy, has always had strength in operations in China, a little over 1,000 colleagues covering a majority of the clinical trial sites throughout the country. I think it's a comment on our continued strength. And as the market evolves and continues to pick up, we are the beneficiary of that, having a strong customer base in China. Again, we are focused on China Go Global, meaning assets that are coming out for the global markets, and we're running global clinical trials for those companies. Elizabeth, hopefully that answers your question.

Yes. No, that's helpful. I was just trying to understand how that was reflecting. So perfect.

Our next question will be coming from the line of Max Smock of William Blair.

Just wanted to follow up on some of the earlier commentary, particularly around small biotech. And trying to bifurcate, I think, between market improvement versus share gains. And the commentary I thought that you provided on the latter was pretty bullish there. So just in general, can you kind of help us understand like how much of that small biotech improvement that you've seen do you think is attributable to the market getting better versus how much is maybe you all taking share from some of the other players? And in terms of the share gains piece, like what are you all doing that's really resonating and allow you to get a bigger portion of the pie here moving forward?

Max, I think that's a great question. Share gain is always a hard question to answer given that you don't have perfect visibility on the data, especially given how many of our competitors are private. So I'll focus on the fact that we're seeing an uptick in activity. We're seeing an uptick in conversations as well as RFPs coming from small and midsized biotech companies. What I'm really proud of is our team. The win rates are broadly consistent with what I would want to see from our commercial team. But more importantly, the aperture is increasing. So we are starting to bring forth more new-to-Fortrea biotech into our pipeline and into our mix. And I think it's our commercial execution that I'm most proud of.

That's very helpful. And then maybe just following up with one on margins. I think, Jill, maybe in your prepared remarks, you mentioned mid-teens margins over the next 3 to 5 years, I think that's the first time I've kind of gotten some detail around the time line there. And if I just think about what that means, call it, 15% by 2030, basically 700 basis points of improvement over the next kind of 4 years there at the midpoint, is that a reasonable way or like a reasonable starting point for thinking about margin expansion moving forward? And then just thinking through the cadence of improvement over the next 3 to 5 years and just the puts and takes behind that improvement as well.

Sure, Max. I think we wanted to start by giving a sense of how we expect to get back on that path. With the building blocks in place, as we said last year, it will be based on continuing to deliver cost optimizations, which we have been and continue to do, and, most importantly, driving top-line growth. We also said it would be important to see more consistency in our commercial execution. We now have three quarters of that, with the pipeline growing and continued momentum and focus, and we believe we are starting to see the foundation that should allow for more significant margin improvement over time. Early on, with low levels of growth, we can absorb and use some of our existing capacity, and then as we grow we will add personnel in a more measured way. We are creating the environment to do that. We mentioned an Investor Day last quarter; we are planning the logistics and will have more to share, likely in the second half of the year, when we will lay out more detail about what that margin progression would look like.

And our next question will be coming from the line of David Windley of Jefferies.

I think Fortrea wins the award for the cleanest quarter this quarter. Congratulations on that. My question is about the cadence of client renewals. Anshul, I think we talked about this fairly recently. My view is that the re-procurement cycle in the last couple of years was a little elevated, but not dramatically so. I’m curious how you view 2026 and 2027 in terms of the larger client renewals you are approaching, what your hopes and aspirations are for those, and when you expect to have visibility on them.

Sure, David. Yes, we've talked about this in the past. I do think there was some level of elevation in terms of re-procurement conversations happening over the last couple of years. I think it was particularly in FSP, especially as there's opportunities for leverage in terms of price. And as we've talked about that in our own case, in one particular strategic client. If I look forward into '26 and '27, I see normal levels. I mean remember, in any one given client, they may have multiple outsourcing models. Within that particular client, they may have multiple therapeutic areas and business units within that particular client. So we've got a team that's focused on these renewals. We continue to see some level of steady progress, a couple a year. I won't comment on the specific numbers of the specific clients. But I think what I will comment on, what is interesting, as we regain stability in the marketplace and as I rebuilt the commercial excellence framework that we've been talking about, we're getting invited to certain renewals that we weren't invited to in the past, from a large and midsized pharma. And that's actually what gives me some pride in terms of what our commercial team is being able to accomplish here in 2026.

And then you touched on the topic of my follow-up, which was around that FSP concession that you called out. I guess I wanted to understand that a little bit better. Was that a rate card or a price level that is baked in and a new level on a go-forward basis? Or Jill, was your call-out about the first quarter highlighting a specific, disproportionately large effect here as we start the year that doesn't necessarily persist? I didn't quite understand the...

I'll make it simple, David. It was a particular client who decided to renew their multiyear FSP contract with several CROs a year early. And it was a rate card impact. And that rate card impact is a go-forward rate. And we've been able to absorb that rate card impact within our business. And some of that shows up here in Q1 because the new rates took effect in Q1. Does that answer your question?

Yes, it does.

And our next question will be coming from the line of Eric Coldwell of Baird.

A couple of things here. First, on the bookings and bookings mix in the quarter, and Anshul, you highlighted your pleasure with the momentum on biotech in particular. Does that by default indicate a heavier skewing towards FSO wins versus FSP? I would assume so, but I'd love your commentary on the kind of the underlying quality of the mix of bookings in the quarter. And then as an adjunct to that, there was some chatter in the quarter leading up to this about rescue wins and various puts and takes across companies in the space, not necessarily new business in terms of demand, but business shifting from one player to the next. I'm curious if you could — would be willing to share any perspective on size or quantity of rescue wins on a net basis as well?

Sure. Eric, I'm happy to share. In terms of booking mix, you're correct in your assumption: our bookings skewed more towards FSO than FSP in the first quarter. And our bookings skewed more heavily towards biotech than biopharma in the first quarter. So you're correct in both of your assumptions there in terms of the mix of the backlog. We have quality bookings going into the backlog that I'm very happy to see. In terms of chatter, Eric, there's always chatter. I'll tell you there's always rescues in any given quarter. Typically, if a CRO has had some financial difficulties or there's been news in the marketplace, everybody is going to counter-detail. It's happened to us. We've done it, vice versa, et cetera. But there is no trend line necessarily of rescues happening in any given quarter. Look, we took on a rescue or two. I'm sure every other CRO took on a rescue or two. But I'll tell you from the perspective of the CRO and the sponsor, rescues are not taken lightly. They're not easy. I mean they're very difficult to execute on. And while they may provide some short-term revenue, they're usually very hard. But there wasn't a trend line, I would say, in Q1 around rescues. Chatter, sure. Counter-detailing, always, but not a trend line. I hope that answers your question.

Yes. That's great. And then I know Jill made the comment that Q2 revenue is expected to be up modestly quarter-over-quarter. And I think there was an implication that that was in absolute dollars, both the service revenue as well as the pass-through revenue. So I wanted to verify pass-through revenue actually reincreasing, if you will, here in the second quarter. And then any kind of a signal you could give us on your expectations for pass-through mix for the full year, whether that's dollars, growth rates, percentages? Just anything to help us get a sense on the pass-through trend line over the next 3 quarters would be great.

Sure. So in terms of the second quarter, you're correct, it's dollars both for service fee revenue as well as pass-throughs, and the step-up being pretty consistent between the two. It's not going to get to the levels that we saw in Q2 and Q3 of last year. As we had shared on the call from year-end, we had a handful of trials. One, we reached the milestones reporting out a year ahead of time, so that trial was winding down. And then we had a few other very large ones that reached more maintenance stages of their life cycle. So we see it stepping up from Q1, but not to the levels that we saw. And I think for the remainder of the year, it will be pretty consistent to a slightly higher level than we saw in Q1, but still below last year. Because you'll recall, that's part of why we have a revenue reduction for the year, is related to a lower expectation around pass-throughs for what we see today.

Yes. Good. And then last one for me, variable comp. I was just hoping you could walk through all of the mechanics of that, what it's up in Q1, what your expectation is for incremental cost in calendar '26 now that you're a quarter in and you've realized Q1 results. I'm just curious where the final tally came on variable comp increases, both in Q1 and then for the full year on a year-over-year basis. And I'll wrap it with that.

Sure. So we've been talking to you all about that journey and how it's important in our organization to make sure that we are compensating our employees in line with market and as they deserve. And we were pleased to be able to, for the first time since the spin, have a variable compensation payout for 2025. However, it was still below the norm. So this year, we're going back to what you would consider more normal levels of variable compensation. And in the quarter, that was a more significant increase because we took it up a little bit over the course of last year. So it's a little bit more of a significant headwind in Q1 this year versus Q1 last year. But it was built into our guidance. And as I mentioned earlier, if we continue to perform strongly, we're going to look at ways to continue to navigate how we compensate our employees and think about things that accelerate growth.

Could you give us the number, the incremental increase?

A full-year estimate for us is about $60 million. Last year we were a little bit north of that, so we paid out about two-thirds, and this year we're expecting to be at a normal run rate.

Eric, you never give up on the number. That's good.

I like numbers.

The next question is coming from the line of Luke Sergott of Barclays.

This is Anna Kruszenski on for Luke. Anshul, you've made a number of leadership changes over the last few months and specifically within the commercial organization. So it would be great to just hear more about any key strategy shift here and how you've seen this drive momentum, especially with the 1Q bookings.

Yes. I think, look, the Q1 bookings are driven through execution. And it's not just the execution of the commercial team, but it's execution of our delivery team, continuing to delight our customers, continuing to ensure we have repeat work and continuing to present strategies in bid defenses that are differentiated and give us a leg-up over competition. It's also driven by execution of our finance team. So it's execution all around, not necessarily leadership changes, that are driving performance right now. And we continue to look for talented colleagues and individuals at all levels to be able to bring into the organization, especially as we return to growth. But it's really execution by our commercial teams, our operational teams and our finance teams that I think is giving us the wins that we need in the marketplace right now.

That was helpful. And then, Jill, if we could go back to margins just a bit, I know you talked about like reinvesting some of the savings that you achieved in the first quarter, but if there's just any other color you can share on like how we should think about the cadence of margins, specifically in the second half of the year, that would be helpful.

Sure, Anna. In terms of margin, again, we would see an incremental step-up, a slight incremental step-up in Q2, and I think it will just trend up slowly over the course of the year as we go forward. You're not going to see the big step-up, because Q1 came in more strongly historically, that 1Q to Q2 has been pretty pronounced. It's going to be much more measured this quarter because of where Q1 came in. And we're really pleased to see how strongly Q1 performed. But I think a slow gradual increase over the course of the year as more of the cost savings initiatives take hold and we continue to see some of the benefits of the new business wins we've had over the last few quarters.

The next question will be coming from the line of Charles Rhyee of TD Cowen.

Can I just follow up there, Jill. You're kind of saying we should see margins kind of still steadily improved. And just to clarify back to some of the other comments, I think you guided to 2Q EBITDA being sort of a step-up from 1Q. But if we think about that, that's like the bulk of the range for EBITDA for the year. And I think to an earlier question, you had said you feel good about where it is right now and there's some investments that you have coming. Just curious, are those known investments that you plan to make particularly in the second half of the year? Or is that you just want to be prepared for more opportunistic on that? And then within this question, right, back to David's question around sort of the FSP, and you talked about the rate card impact, is that impact all already embedded within the 1Q performance and already embedded into 2Q? Or is there anything we would expect from that that could also show up in the second half?

Sure. In terms of investments, first, we've been focused on making sure we properly compensate our people. We are a people business; our revenue comes through our people, and we want to continue compensating them as the market becomes a bit more competitive, staying ahead of that. Some of the investments are definitely targeted toward that, including continued investments in merit. Other investments are relatively smaller and organic, focused in areas like therapeutic expertise and medical capabilities, and in targeted parts of the commercial organization. We believe those will help accelerate revenue growth, which is the key lever to bring margins in line with peers. They're relatively small but important as we prepare and think about 2027 and beyond. Regarding FSP impact, it has largely already manifested in the first quarter and was probably even slightly more pronounced there. That drop was fully built into guidance, so we don't expect any surprises.

Okay. That's helpful. I appreciate that. And then maybe, Anshul, I just wanted to — I appreciate your comments early on when you're talking about sort of AI is for efficiency, but you need people for sort of interpretation and strategic kind of thinking. But I guess the question though is, obviously, with all the focus on AI up and down the chain, what are those discussions like when you're talking with sponsors? Like what are they asking from you in terms of your AI capabilities? And are you starting to see any types of changes in the pricing model to create incentives for partners to use more AI? Or I'm just trying to understand ways that you can still benefit. Because I think the big fear is that AI is going to drive lower cost, and then lower cost drives lower bid sizes, and that's kind of a negative cycle. Maybe you can talk a little bit how you can — are there new scenarios where maybe more outcomes-based or risk-based that could be helpful for you going forward?

Sure, Charles, I'm happy to talk about it. This conversation comes up a lot. That's why I wanted to mention it in my prepared remarks and get ahead of it. I will say this, it's early days. And you're going to get tired of me hearing me say it's early days, because it genuinely is early days. I will tell you that most sponsors are having some version of a conversation, but it's looking to CROs as partners in, okay, we've got a tool here that could be a solution to helping speed up clinical trials. How we exactly use it? We don't know. The tool itself is a singular tool. It's a suite of tools that continue to evolve. The problems that we're solving for are, in some cases, relatively simple, and it's a matter of testing tools, piloting them, and then executing, such as in pharmacovigilance and safety. And then there's problems that are far more complicated, which is having the tool be able to analyze data that leads to better site selection and that leads to better signal detection around things that may or may not be going right or wrong in a clinical trial. But it's early days. I will tell you, almost every conversation we have is constructive in how do we solve it together rather than what are you going to do for me conversation, which I really appreciate, of our clients. So far, we haven't seen any push on a commercial model as you're suggesting, because everyone is in the stages of developing, piloting, testing. We don't have active solutions that are rolling out at mass scale. And when we get there, yes, I'm sure we'll have conversations around commercial models. We'll have various conversations, just like we've had with every form of change, innovation, change to the workflow in this industry over the last 20, 25 years. I think people forget how resilient the CRO industry was in the middle of the pandemic in changing its workflows and models to be able to accommodate a new environment in a very short period of time. And I have full faith, not just in Fortrea, but in the entire industry's ability to do that over the coming years.

Our next question will come from Jailendra Singh of Truist Securities.

So Anshul, I want to stick with the last question around the AI impact. And let me ask it in a slightly different manner and maybe see if you can give us some flavor around how do you think about the directional financial impact for the industry maybe near term and longer term? Would you agree that — I mean clearly, CROs get paid based on billable hours and tasks, some of which could be automated. But on the flip side, you can argue that AI is driving more drug discovery, which could lead to more larger drug development pipeline longer term. And on margins, you should have more efficiencies. So would you agree with this view that AI adoption could result in some top line pressure near term, but then neutral to positive impact longer term, but better margin will offset top line headwinds. So any directional color you can provide would be helpful.

Jailendra, I appreciate the question, though I do think you kind of answered your own question to a certain extent, because I know you and I have talked about this in the past. So look, broadly, I think that it's harder to determine what will happen in the nearer term because it's harder to see the impact given all of the — we have a lot of conversations happening, a lot of noise, a lot — but not a lot of progress just yet. But you are right. I think in the near term, we will see certain areas where workflow can be automated with machine learning, we'll see some margin, I would hope, appreciation for the near term and maybe some revenue headwind. But I would tell you, most, if not all of that, will be countervailed by the fact that, and I've talked about it and other peers have talked about it, is that the industry just continues to invest, reinvest into the next clinical program. We may even see speed pick up in terms of the early phase work as molecules move out of discovery at a greater rate. But long term, I see this as a tailwind and I see this as a net positive for the industry. Longer term, I think we will finally get to a place where clinical trials will get modestly and modestly faster. We haven't seen that in the last decade, but I think we will get there with these new advancements in technology. What that will mean is an opportunity to develop more drugs. They have opportunity to solve more diseases, and CROs continuing to play a vital role in that. So longer term, I do see this as a net-net tailwind for the industry overall, not just for CROs, but for pharmaceutical companies as well as the pace of innovation gets faster.

My quick follow-up on — I know this is a difficult metric to guide for, but how do you feel about sustaining these strong book-to-bill trends for the rest of the year? Should we still model like 1.1x as a baseline backlog for rest of the year? Or do you have a high confidence that it could probably sustain this 1.15x plus/minus range given recent results?

Look, as I mentioned in the past, I don't think trying to give guidance on book-to-bill is the — is a prudent thing to do here. The market is recovering. As I've said, I see recovery in biotech, but I do see a constructive recovery in biopharma. I'm not going to guide to a book-to-bill. I'll tell you I'd drive the team to much higher standards. And what I am really happy is that both my operational and commercial teams are responding to the pressure and the high bar that I've set for all of them.

Next question will be coming from the line of Justin Bowers of Deutsche Bank.

This is Sam Martin on for Justin Bowers and Deutsche Bank. Just two quick questions building on the previous themes of AI that were asked about. One on the commercial launch of Fortrea Intelligent Technology. Can you just dig in a little bit more to the initial reception where it's most concentrated, is among biotech or pharma, or really broad-based? And some of the earliest use cases that some of your customers are looking at applying it to? And then beyond that on AI, just given some peer commentary on efficiencies gain versus the cost to actually implement the solutions, what are you thinking about really a time line for the efficiencies to outweigh the cost and the investment required to kind of put AI-related solutions in your workflow?

Sure, Sam. I'm happy to try to answer both questions. Look, our launch of our FIT platform was received very well, both by technology partners and sponsors. I hosted a two-day workshop in Boston when we launched our FIT platform, inviting both technology partners and sponsor partners. And it was meant as a true workshop in I don't think any one company, whether it's a technology company, a CRO or pharma, is going to be able to solve things on their own. We've got to find a way to work together to collaborate to develop solutions. It's another reason why our FIT platform is based on an open source architecture. We want to be able to invite partners both on the sponsor side as well as in the technology partner side to help us develop solutions because, at the end of the day, we're not trying to be a technology company. We want to be a clinical research services company where we're starting to develop solutions that increase efficiency, increase quality and increase throughput of the development pipeline. That said, all of that said, Sam, the reception was positive. A lot of traction, lots of folks wanting to work on solutions together. It's still early days. We're still in the stage of being able to throw pilots out there to see what's working, what we're able to do at scale, what we're not able to do at scale. And all of this work requires us working with partners, especially our partners on the client side, on the sponsor side. In terms of your question around AI and when will efficiency gains overcome the costs required, I think there's a lot of initial costs required to make sure you have that kind of infrastructure and platform that Fortrea does. And remember, for us, FIT isn't a stand-alone product. FIT is our way of embedding machine learning and AI into our existing workflow into clinical operations, to our Xcellerate platform. For us, now it's incremental cost. It's incremental cost and, more importantly, the incremental cost of technologies, incremental cost to pilots. It's incremental cost of testing the solution. I do think in the near to medium term, we'll start seeing that inflection point of efficiency gains outweighing the cost of running those pilots and the cost of developing the incremental agentic solutions.

The next question is coming from the line of Michael Ryskin of Bank of America.

This is Andrea on for Mike. Given several quarters of strong book-to-bill, how should we think about revenue conversion timing from here? And are study durations or start-up timelines changing versus historical levels?

Yes. I mean I think — Andrea, thanks for the question. In terms of revenue conversion, as we said for the remainder of this year, we're pleased to be affirming our guidance. We will see a bit of a moderate step-up in the second quarter. And as the course of the year plays out, I think you'll see a little bit of continued strength as we go through the course of the year. We are obviously looking at what we can do to try to return to some level of growth in 2027, continuing to execute on the commercial side and get book-to-bills in line with what you've seen over the last few quarters, will be really important. And as I shared before, we do plan to have an Investor Day later in the year where we can lay out a little bit more about the specific journey going forward.

Thank you. This concludes the Q&A session. I would like to turn the call over to Anshul for closing remarks. Please go ahead.

Thank you, everyone. As we conclude, I want to thank you for your continued engagement and really for your thoughtful questions. Our performance this quarter reflects the discipline and operational and financial rigor that is now embedded across Fortrea. We continue to make progress on our strategic priorities to drive growth, expand margins and strengthen our ability to serve clients globally. What matters to our clients matters most to us, and we remain focused on delivering high-quality execution and long-term value. We're confident in our strategy and are taking the right steps to drive continued execution. Thank you once again for your time.

This concludes today's program. Thank you for joining. You may now disconnect.