This paragraph introduces the Charles River Laboratories' Fourth Quarter and Full-Year 2023 Earnings Conference Call, hosted by Todd Spencer, Vice President of Investor Relations. The call will include a presentation by Chairman, President, and CEO Jim Foster and Executive Vice President and CFO Flavia Pease, followed by a question-and-answer session. A slide presentation and webcast replay will be available on the company's Investor Relations website. The company will discuss non-GAAP financial measures and remind listeners of their Safe Harbor statement.

In 2023, Charles River's business model showed stability and resilience despite moderate demand trends and challenges. They achieved 6.5% organic revenue growth and earnings per share of $10.67. The company expects constrained client spending to continue in 2024 but anticipates a modest improvement later in the year. They have adjusted their 2024 financial plan to account for elevated cancellations and a decline in backlog. Early indicators suggest that the macroeconomic environment will stabilize, including successful biotech IPOs in January.

The company's internal indicators suggest that demand for their services may be stabilizing in certain areas. While the market environment is currently challenging, the long-term industry outlook remains strong due to the need for lifesaving treatments and advancements in technology. The company is taking proactive measures to improve productivity and become a stronger partner for their clients. This includes focusing on winning new business and utilizing technology to enhance sales and connect with clients.

Charles River has a culture of continuous improvement and cost management, which will help them take advantage of new business opportunities and improve operating margins in 2024 and beyond. In the fourth quarter of 2023, they reported a decline in revenue due to a challenging comparison to the previous year. However, for the full year, they saw an organic revenue increase of 6.5%. The operating margin decreased in the fourth quarter due to higher corporate costs and health expenses, but for the full year it only declined by 70 basis points.

The decrease in earnings per share in the fourth quarter of 2023 was primarily due to lower revenue and operating margin, as well as non-operating headwinds such as a higher tax rate, the 53rd week in 2022, and the divestiture of the avian vaccine business. The outlook for 2024 is balanced, with stable demand from large biopharmaceutical clients and cautious spending from small and mid-sized biotechnology clients. Organic revenue is expected to be flat to 3% growth, with non-GAAP earnings per share in a range from $10.90 to $11.40. The DSA segment will be discussed in more detail.

In the fourth quarter, DSA revenue decreased by 6% on an organic basis due to a difficult comparison to the previous year and a decline in discovery services and safety assessment revenue. This was caused by cancellations and delays in work being moved to 2024. However, for the full year, DSA revenue increased by 7.9% on an organic basis, meeting the segment's outlook. The backlog declined slightly and the cancellation rate increased, resulting in a net book-to-bill below one times. For 2024, DSA expects flat to low single digit organic revenue growth, with improvement in demand KPIs and study volume in the second half of the year. Modest price increases are also expected to contribute to revenue growth.

The company's $15 million to $35 million impact from NHP pricing is due to lower price increases and their strong relationships with NHP suppliers. The recent acquisition of a controlling interest in Noveprim further supports their strategy of diversifying and safeguarding their NHP supply. The company is also committed to reducing animal use through initiatives such as alternative technologies. However, their Discovery services saw a decline in revenue in the fourth quarter due to low proposal volume and extended decision-making timelines from clients.

Discovery services are a crucial part of the company's early stage portfolio and allow for flexible partnerships with clients. The company is cautiously optimistic about budget replenishment in the New Year, but predicts flat growth for the business in 2024. The DSA operating margin decreased slightly in the fourth quarter due to a decline in revenue. RMS revenue also decreased in the fourth quarter, with slowed demand for small research models in North America and Europe. However, there was healthy growth in China. The company expects flat to low single digit growth for RMS organic revenue in 2024, primarily driven by modest price increases due to the current demand environment in North America and Europe.

The company expects steady demand for small models and services in China, with a decline in revenue due to lower pricing. Expansion of gems capacity and the adoption of the CRADL model are expected to contribute to revenue growth. The RMS operating margin increased in the fourth quarter but decreased for the full year. Noveprim's sale of NHP to external clients is expected to improve the RMS segment's margin in 2024. The CDMO business drove solid double digit growth in both the fourth quarter and full year.

The company's initiatives to improve their CDMO business have been successful, and they are now well positioned in the market. The recent approval to manufacture casgevy by Vertex has generated positive feedback and new client inquiries. The biologics testing and microbial solutions businesses saw modest declines in revenue, but there are signs of improvement as client order activity is picking up and delayed instrument shipments are now confirmed. The biologics testing business also saw an increase in client proposal activity in the fourth quarter, the first quarterly increase in 2023.

The first quarter of the year is typically slow for the biologics testing business, but it is expected to see improvement throughout the year and contribute to modest revenue growth in 2024. The manufacturing segment is also expected to see low to mid single-digit organic revenue growth and a significant improvement in operating margin in 2024, with the CDMO business being a key driver. The company's Chief Commercial Officer, Bill Barbo, will be retiring at the end of 2024 after a 42-year career at Charles River, during which he has played a significant role in the company's success.

The paragraph discusses the retirement of Bill and the transition of responsibilities to Kristen Eisenhauer and Chris evolve. The company's performance in 2023 is also mentioned, with long-term prospects for growth and margin improvement remaining unchanged. The company is taking action to gain market share, enhance commercial initiatives, and strengthen their portfolio through innovation. They are also committed to managing costs and securing their supply chain.

Flavia Pease, speaking to non-GAAP results, discusses the company's financial performance and guidance for 2024. Despite a cautious biopharmaceutical market, the company expects revenue growth of 1-4% and non-GAAP earnings per share growth of 2-7%. They also mention the recent acquisition of Noveprim, a supplier of NHPs in Mauritius.

Charles River has been a long time supplier of Noveprim and acquired a 49% stake in 2022. With a 90% controlling interest, Noveprim's operations will now be consolidated into Charles River's financial results. This acquisition is expected to significantly contribute to Charles River's operating margin improvement in 2024 and add at least $0.30 to non-GAAP earnings per share. Noveprim is expected to generate $40 million to $50 million in third-party revenue for the full year of 2024, which will not impact organic revenue growth until late November. The NHPs used in regulatory required studies will be included in the DSA segment, providing a small benefit to the segment's financial results. Charles River's 2024 outlook is not linear and quarterly performance may fluctuate based on various factors. The second half of 2024 is expected to be stronger in terms of revenue growth and operating margin compared to the first half. Organic revenue is expected to decrease in the first half and increase in the second half.

In 2023, the RMS segment is expected to have flat to low single-digit organic revenue growth due to price increases and the ramp-up of new cradle facilities. The DSA segment is also expected to have flat to low single-digit growth as early stage demand trends stabilize. The Manufacturing segment is expected to have low to mid-single-digit growth, primarily driven by the CDMO business. The operating margin declined in 2023 due to higher corporate costs and a moderating demand environment. Cost-saving actions were implemented to manage the cost structure, and operating margin is expected to improve by at least 50 basis points. Noveprim will contribute to this improvement, along with continued efforts to manage costs and increase efficiency. Significant operating margin improvement is expected from the RMS and Manufacturing segments.

In 2024, Noveprim is expected to contribute 200 basis points to the RMS margin. The profitability of each business unit in the manufacturing segment is expected to improve, with the CDMO business being the largest contributor. Unallocated corporate expenses are expected to be similar to 2023 levels, and the non-GAAP tax rate is expected to increase due to stock-based compensation and geographic mix of revenue. Total adjusted net interest expense is expected to decrease due to debt repayment and lower variable interest rates later in 2024. The borrowing to fund the Noveprim acquisition resulted in an increase in outstanding debt at the end of the fourth quarter.

In the fourth quarter, 75% of the company's $2.65 billion debt was at a fixed interest rate. The gross and net leverage ratios were 2.3x and 2.2x respectively. For 2024, the company expects an increase in free cash flow due to earnings growth and working capital management. Capital expenditures are expected to decrease both in dollar amount and as a percentage of revenue. The company's 2024 financial guidance can be found on Slide 38. In the first quarter of 2024, revenue is expected to decline on both a reported and organic basis, with similar demand trends as the fourth quarter of 2023. Non-GAAP earnings per share are expected to be at least $2, with a decline from the fourth quarter due to lower operating margins and higher unallocated corporate costs.

The paragraph discusses the challenges in comparing the current operating margin to the robust margin in the same quarter last year and the expected impact of a higher tax rate in the mid-20% range due to stock-based compensation. The company expects revenue and operating margin to improve sequentially after the first quarter, despite the cautious biopharma spending environment. The company remains confident in its long-term targets for organic revenue growth and margin expansion, supported by sustained fundamentals in drug development. The company will now take questions from analysts, with the first question addressing the significant ramp in the second half of the year and the factors contributing to the company's confidence in this projection, including a book-to-bill ratio of 0.75-0.8, increased cancellations, and assumed NHP pricing.

The speaker discusses the company's recent pricing trends and mentions that they have had similar ramps in the past. They note that the first quarter tends to be slower as clients sort out their projects, but they are seeing a stabilization in demand. The speaker also mentions increased proposal activity in the Biologics sector and the company's plans to open new facilities. They are also keeping an eye on the biotech IPO market.

The biopharma industry is experiencing a lot of mergers and acquisitions, leading to an increase in cash flow for VCs. This has resulted in a more normal sequential movement in the market. The company has been able to maintain lower prices due to their supply sources, including a new provider in Mauritius. They expect a modest increase in NHP pricing, which will contribute to an increase in revenue. The company also has easy comparisons from the previous year and is confident in their ability to meet their goals.

During a conference call, James Foster and Derik De Bruin discuss the weak back half of the year in 2023 and the company's confidence in their guidance. They also touch on the possibility of China reintroducing NHPs and the current state of the DSA market, which has seen an increase in cancellation rates but stable book-to-bill ratios. Foster mentions the recent biotech IPOs as a potential source of confidence for the future.

The speaker is pleased with the decrease in cancellation rates, but notes that it is only for one quarter and needs to be sustained for a few more quarters. They attribute the high cancellation rates to the elongation of the backlog and clients booking slots without having actual studies planned. The backlog is now at a more rational 12-month period and conversations with clients indicate that they have specific studies planned within that time frame. The speaker also mentions that there is always a certain amount of slippage due to various reasons such as drug readiness, reprioritization, and financial issues.

The company is optimistic that cancellation levels will normalize throughout the year, and they are fine with the current levels. They believe having a healthy backlog is important in case of cancellations or postponements. The margin in the first quarter is lower due to factors such as tax rates and seasonal trends, but it is expected to improve throughout the year with the ramp of Noveprim and CRADL. Corporate expenses and taxes are also higher in the first quarter compared to the rest of the year.

The company is expecting a positive outlook for the year, with a projected increase in margins due to restructuring actions. Their pharma business has been performing well, with long-term contracts and increasing demand from Big Pharma. They are also seeing a trend of pharmaceutical companies buying a variety of their products.

The company has partnerships with biotech and pharma companies for safety work, with pharma being well-financed and making frequent acquisitions. Biotech has been a bigger driver of growth, with many clients relying on the company's services. As the capital markets and VC funding remain strong, biotech is expected to continue growing and partnering with the company.

The speaker discusses their satisfaction with their client base, their high share percentage in drug approvals, and their potential to gain even more market share. They mention the influence of new legislation and their portfolio's ability to speed up the drug development process. The speaker also confirms that the pricing levels for NHPs discussed at the Investor Day are still accurate. A question is asked about Noveprim, but it is not mentioned in the paragraph.

The speaker asks for more details about the expected revenue and margin contribution of Noveprim, a recent acquisition. The company expects it to add $40-50 million in revenue and $0.30 in EPS, with most of the impact seen in the RMS segment. The DSA segment will see a smaller impact, as they already have safety stock from Noveprim and will only see a significant impact once models using Noveprim are incorporated into studies.

The speaker is asked about the pricing environment and the potential impact of smaller competitors with lower cost structures. He acknowledges that some competitors may be more price competitive and that clients may choose to go to these competitors. He also mentions the presence of Chinese capacity and the lower cost of labor there. However, the speaker notes that they try to be rational and professional with their pricing and have long-term contracts with big pharma.

The company's pricing is locked in and they use it to protect their share in big clients and be aggressive in gaining sluggish share. They pass on projects with too low of a price point and aim to increase their market share over time. They believe it is important to have competition regardless of price and to engender trust from big clients. They plan to invest in price and safety in the future.

The speaker discusses the commentary on the nature of the question asked, the current state of the economy, and the cautiousness of clients in regards to post-IND work and clinical work. They also mention being paid well for their work. The next question is about the pros and cons of owning farms and HP suppliers, as well as competition in the industry. The speaker notes that they are the largest player with a 100% lead over their next competitor, LabCorp, and have recently acquired and merged with smaller competitors. The financial status of these competitors is unknown.

The speaker believes that there is enough business to go around in the market, but the key to success is having high quality, fast, and technologically advanced services. The competition is unlikely to change, with a few decent competitors in China. The company has recently acquired a supplier in China, which gives them control over the quality and processes involved in producing non-human primates for research. The company plans to scale up this project and has a close relationship with the government in China. They also own another smaller supplier in China.

The company is considering taking control of its supply sources to ensure high quality and proper training. They recently made a deal to acquire a provider in the NHP toxicology industry, which will bring in significant revenue. The next question is about the manufacturing segment and the breakdown of CDMO versus biologics and microbial. The CEO discusses the challenges and growth in the CDMO business and the efforts to improve it. They have had to redesign and re-staff all three businesses in this segment.

The speaker discusses the success of their company in regulatory audits and their relationship with a key client, Vertex. They also mention other clients they are currently working with and anticipate growth in their biologics and Safety Assessment businesses. The Microbial Business saw slower growth due to clients stockpiling during COVID, but the margins remain strong.

The Biologics business had a slow year in 2020 due to the pandemic, but showed signs of improvement in the fourth quarter. The CDMO segment is expected to drive revenue and margin growth in the future, and the company has reorganized this segment for better efficiency. The operating margin for this segment was around mid-30s before the CDMO business was acquired, and it is expected to continue growing towards that level. The company believes that the commercial work at higher price points will be accretive to operating margins in the long term.

The company is optimistic about the CDMO business and the home manufacturing segment, which they expect to benefit the operating margin. Net bookings for DSA were down sequentially, but gross bookings were still above one. The company expects net book-to-bill to improve when cancellations normalize. They need to see demand trends in the meat segment improve in order to hit the midpoint of their financial guide for this year.

The management team is not commenting on the specific timing of when the low and high end of their guidance will be reached for each segment, but they expect marginal improvement in main trends at the top end and seasonal improvement at the bottom end. Q1 is expected to be a low point, but there will be a $0.25 EPS increase from tax, corporate, and restructuring benefits. The timing of these improvements will vary depending on the business, as the company has a diverse portfolio. The team is confident in a sequential improvement throughout the year, with subtle improvements in the marketplace, M&A space, and capital markets. Demand for their services is high as most clients have no internal capacity.

The company's portfolio is strong and their clients are frustrated with the limited modalities available. However, as access to capital improves, demand is expected to increase. The company is optimistic about the future and their guidance is based on their experience, close relationships with clients, and understanding of competition. They do not anticipate any changes that would affect their projected growth.

The speaker is asked if the improved external indicators in the biotech market have translated into increased inquiry activity or RFPs in DSA. He responds that there has not been a dramatic change, but there is cautiousness among clients due to uncertainty in access to capital. However, there are early indications that this may change in the back half of the year and could accelerate the company's growth rate.

The speaker states that the company has enough physical capacity and is managing headcount according to demand. They believe their headcount is in a good place and will be able to handle future work. The call concludes with closing remarks from Todd Spencer.

This summary was generated with AI and may contain some inaccuracies.