The call is for the Charles River Laboratories First Quarter 2024 Earnings Conference. The operator introduces the host, Todd Spencer, who is joined by CEO Jim Foster and CFO Flavia Pease. A slide presentation is available on the company's website and a webcast replay will be available later. The company will primarily discuss non-GAAP financial measures and the host reminds listeners of the safe harbor statement. CEO Jim Foster begins with a greeting.

The overall market trends for biopharmaceutical clients are stable and there are signs that demand will improve later this year. Biotech funding has increased significantly in the first quarter, leading to positive discussions with clients. However, it may take time for this to translate into new bookings and revenue. The first quarter financial results reflect a continuation of the previous year's trends, resulting in a 3.3% decline in organic revenue. The Manufacturing and RMS segments had solid quarters due to increased order activity and the timing of NHP shipments.

The paragraph discusses the decline in DSA revenue for Charles River in the first quarter of 2024, which was expected due to a challenging comparison to the previous year's strong growth. However, demand trends are stabilizing and there is a focus on the potential impact of the BIOSECURE Act. The company believes the industry's growth prospects will reaccelerate and they are well-positioned as a leader in preclinical drug development. The paragraph also provides highlights of the company's first quarter performance, including a 1.7% decrease in revenue and a 3.3% decline in organic revenue.

In the first quarter, revenue from small and midsized biotechs declined, but there was an increase in revenue from global biopharmaceutical and academic clients. The operating margin decreased due to lower sales volume and higher unallocated corporate costs. Earnings per share also decreased, but exceeded initial expectations due to a timing shift of NHP shipments. For the full year, the company is reaffirming their revenue and non-GAAP earnings per share guidance. The DSA segment's revenue decreased by 8.7% on an organic basis, mainly due to a challenging comparison to last year's growth rate and lower revenue in both Discovery Services and Safety Assessment businesses. The company is making modest adjustments to pricing to drive incremental volume.

The demand for Safety Assessment services has improved, leading to higher proposal activity and fewer cancellations. This trend is expected to continue and result in improved demand in the second half of the year, as clients shift their focus back to IND-enabling studies. The DSA backlog decreased slightly, while gross bookings remained stable. The DSA operating margin decreased compared to the first quarter of 2023, but is expected to improve as demand rebounds. RMS revenue also increased organically in the first quarter.

The RMS segment saw an increase in revenue primarily due to higher sales of small research models and research model services. The growth was seen in all geographic regions, with China leading the way. The resilience of the business is attributed to the essential role of small models in research. Revenue from Insourcing Solutions also increased, with CRADL operations leading the way. The timing of NHP shipments also contributed to first quarter results. However, this will affect the quarterly gating and pressure the second quarter RMS revenue growth rate. The operating margin for the RMS segment also increased by 420 basis points to 27.6% in the first quarter.

The first quarter of this year saw a significant increase in revenue for the company, driven by the NHP revenue and contributions from the Noveprim acquisition. While the RMS operating margin is not expected to sustain at this level for the whole year, there are expectations for margin improvement in the RMS and Manufacturing segments. The Manufacturing Solutions segment saw a 10.4% organic increase in revenue, with all businesses contributing to the growth. There was a rebound in revenue for the Biologics Testing and Microbial Solutions businesses, with increased proposal and booking activity. Clients are returning to core testing activities and destocking activity is winding down. The company's focus on sustainable practices and nonanimal alternatives is evident in the growth of these businesses.

The company has launched an initiative to reduce the use of in vivo testing for viral safety and lot release testing, and is offering alternative methods such as next-generation sequencing. They have also introduced new technology for animal-free and endotoxin testing, showing their commitment to sustainable practices. The CDMO business drove growth in the first quarter and is expected to continue with solid double-digit growth. The Manufacturing segment's operating margin also significantly improved. The company is implementing new initiatives to maintain their leadership in nonclinical drug development.

The company has launched the AMAP program to develop alternatives to animal testing in order to better serve their clients and improve operational efficiencies. They plan to engage stakeholders in this pursuit and have already invested $200 million in similar initiatives. They aim to invest an additional $300 million over the next 5 years and continue leading the industry towards new scientific frontiers. The speaker thanks employees, clients, and shareholders for their support.

Flavia Pease, in her speech, provided details on the company's financial performance in the first quarter of 2024 and their guidance for the rest of the year. She mentioned that their non-GAAP earnings per share exceeded expectations due to increased NHP shipments and strong performance in the Manufacturing segment. The company reaffirmed their annual revenue and earnings guidance, as the first quarter outperformance was mainly due to timing and not expected to impact the full year outlook. They also expect a 50 basis point expansion in operating margin and have implemented restructuring initiatives to generate cost savings.

In the first quarter, unallocated corporate costs were higher than last year, contributing to a decrease in operating margin. The tax rate increased due to stock-based compensation, but was slightly better than expected. Net interest expense remained stable and is expected to trend favorably for the year. Free cash flow improved due to a decrease in capital expenditures. For the full year, free cash flow is expected to be in a range of $400 million to $440 million and capital expenditures are expected to be approximately $300 million. A summary of the 2024 financial guidance can be found on Slide 35.

The company expects a decline in revenue, but a modest increase in DSA revenue in the second quarter. The growth rates for the RMS and Manufacturing segments will be constrained due to timing and anniversary factors. Earnings per share are expected to improve and the company remains confident in their outlook for the year. The company is focused on executing their strategy and gaining market share. A question was asked about the pacing of RMS revenues and the timing of NHP shipments.

The speaker explains that there will be some nonlinearity in the company's quarters due to the addition of the Noveprim business, but they are confident in their guidance for the year. They also mention factors such as funding and proposal volume that give them confidence in the back half of the year ramp. They believe there is pent-up demand from clients and many programs that were paused for funding or prioritization reasons. They also mention a focus on post-IND work.

The company believes that clients will return to filing INDs as funding improves, and they have confidence that things will accelerate in the second half of the year. They also mentioned adjusting prices on new proposals in the DSA segment to drive volume, as competition in the industry is primarily based on price.

The company has been using price as a strategic tool to win work, but they have not done it in a wholesale fashion. They have had more pricing power in the past, but competition's prices have been higher, which has been beneficial for the company's pricing paradigm. They have been cutting prices modestly to be more competitive and attract clients, but they are doing it responsibly and thoughtfully. The decrease in gross margin is mainly due to volume and the ability to cover cost inflation.

The company is experiencing restructuring costs that are affecting their gross margin on a GAAP basis. However, they expect these costs to decrease as their restructuring initiatives are fully implemented and volume increases in the second half of the year. The company also anticipates moderating price increases and potential price adjustments in response to market conditions. They still expect positive pricing for the year and are counting on a rebound in volume to have a positive impact on margins.

The key contributor to margin acceleration throughout the year will be an increase in backlog and expected growth in bookings. The company is not factoring in any potential benefits from the BIOSECURE Act in their guidance, but they anticipate a positive impact. They are not assuming anything imminent and are closely monitoring the situation. There is also no mention of any impact from inflation on pricing.

Flavia Pease discusses the impact of inflation on margins, noting that while inflation has come down, it is still higher than historical levels. This has put pressure on the ability to fully absorb inflation in fixed costs, especially with lower sales volume in the first quarter. Elizabeth Anderson asks about capacity levels and utilization in the industry, and Jim Foster explains that they try to utilize their space as efficiently as possible and are always adding to their capacity based on demand.

The company has some extra capacity in its various businesses and can accommodate an increase in work in the second half of the year. The only potential limitation is the availability of staff, which may require additional hiring and training. The company is in a good position in terms of physical capacity and access to clients. The focus for improving margins in the DSA segment will be on increasing volumes and implementing cost savings measures, such as restructuring actions. The company has seen an increase in proposal activity in the Safety Assessment business, but did not provide a specific number.

The company's dollar proposal activity has increased sequentially and year-over-year. This has resulted in a decrease in cancellations and an adjustment to the backlog. The combination of increased proposals and reduced cancellations is expected to lead to increased bookings in the second half of the year. The company is seeing positive leading indicators in both the biotech and large pharma sectors, with pharma companies continuing to outsource work to the company.

The speaker discusses the company's budgeting process and how they prioritize their clients, with a focus on biotech companies. They note that while biotech companies may be more cautious with spending, they make up a significant portion of the company's volume. The speaker also mentions positive trends in the market, such as an increase in IPOs and VC inflows, and emphasizes the strong assets of their client base. In response to a question, they mention having 12 months of backlog at the end of the previous quarter and expecting a normalized range of 6 to 9 months. The speaker also briefly mentions the safety of Discovery in the quarter.

The backlog has decreased from 12 months to 10 months, which is consistent with clients booking 2-3 quarters in advance. Discovery has been hit the hardest by the economy, but is a small percentage of the portfolio. Pre-IND work is expected to come back first, and the company is focused on its Safety Assessment business. The Discovery franchise is still important to clients.

The company's long-term success depends on their clients' ability to spend on discovery, which has been slow due to the economic situation. The manufacturing segment saw strong growth in the first quarter and the company hopes it will continue throughout the year, with expectations of mid-single-digit growth and improved operating margins.

Flavia Pease and Jim Foster discuss the company's financial guidance for the year, noting that they have modestly adjusted their expectations but do not want to get ahead of themselves in predicting further upside. They also mention the positive impact of their sourcing of NHPs and the recent acquisition. Flavia adds that NHP pricing is still positive, but some competitors are signaling significant decreases, possibly due to coming down to their level.

In response to a question about the CDMO capacity utilization and price disparity with Chinese CROs, Jim Foster, the speaker, says that they have added enough space and have received positive feedback from clients and regulatory agencies. They are also working to stay ahead of the demand and have appropriate options for clients. The Chinese business has done well and is not likely to be impacted by U.S. legislation.

The speaker discusses China's growth and margin potential and then moves on to addressing a question about the pace of cancellations in the DSA side of the business. They mention that cancellations have been moderating and that they need to see a sustained reduction in cancellations to have confidence in the trend. The speaker also mentions that the current economic and competitive conditions are different and that the company is confident in their bookings for the back half of the year. They also note that as funding improves, cancellations should not suddenly increase.

The speaker discusses how the economy has affected their company's operations in the past 1.5 years and mentions their efforts to match capacity with current and anticipated demand. They have learned from past mistakes of building too much space and are working carefully to manage their space and investments for the benefit of shareholders.

The speaker, Jim, discusses the capital expenditures for the business and states that they are not undercapitalizing. They have thought carefully about their spending and anticipate an increase in demand in the future. The speaker, Flavia, adds that the company has historically spent around 5% of revenue on capital expenditures, but in the past few years, they increased it to 9% due to high demand. However, now that demand has normalized, they are planning to spend around 7% of revenue on capital expenditures. The next question is about conversion rates and timing for receiving proposals and booking studies.

In response to a question about the company's timeline and conversion rate, CEO Jim Foster states that the conversions are normal and on track, but there may be a lag due to the current economic climate. He also mentions that proposal volume is increasing and anticipates a stronger second half of the year. CFO Flavia Pease adds that the first quarter saw a beat due to timing shifts and strong manufacturing, but the second quarter may be impacted by these factors.

During the first quarter, the company performed as expected in the DSA business, which was reflected in their guidance for the second quarter. The company also discussed the differences in performance for the other two businesses. In regards to CapEx, the company reiterated their guidance and mentioned that the timing of their capital projects tends to progress throughout the year. In the first quarter, there was a decline in CapEx spending, which was a tailwind to cash flow. The company also mentioned a timing impact in the first quarter for manufacturing and RMS, but there was no update on their guidance.

The speaker discusses the strength of proposals in the manufacturing business in the fourth quarter, which translated to improved business and stronger performance in the first quarter. However, the second quarter may be a bit of a challenge due to tougher comps from the previous year. It is still early to determine if there will be upside to the guidance for the year, but the company has slightly improved their guidance. The conference call has now concluded.

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