The operator introduces the Charles River Laboratories Second Quarter 2024 Earnings Conference Call and reminds participants that the call is being recorded. The host, Todd Spencer, introduces the speakers, Jim Foster and Flavia Pease, who will discuss the company's results for the second quarter of 2024. A slide presentation and webcast replay will be available on the company's website. The host also mentions the company's safe harbor statement and the use of non-GAAP financial measures during the call.

In the second quarter of 2024, the company reported a 3.2% decline in revenue on both a reported and organic basis compared to the previous year. This was due to lower performance from small and midsized biotech clients, while revenue from global biopharmaceutical clients increased slightly. The operating margin increased by 90 basis points, mainly due to lower bonus accruals. Despite this, earnings per share increased by 4.1% and exceeded the previous guidance by $0.40. However, the company is revising its financial outlook for the year due to declining demand from global biopharmaceutical clients.

The company is reducing its revenue outlook for the year due to a decline in demand from biotechnology and biopharmaceutical clients. To offset this, the company is taking measures to streamline their cost structure and improve efficiency. The lack of recovery in demand and emerging softening trends in the biopharmaceutical market has caused the company to have a more negative outlook for the second half of the year. This is expected to result in a decline in revenue for the second half of the year. The company believes this is due to major restructuring programs and tighter budgets from global biopharmaceutical companies.

The revenue for biopharmaceutical clients increased in the second quarter, but proposal activity and bookings declined. The company expects this trend to continue for the remainder of the year and impact the DSA growth rate. Large biopharmaceutical companies are focused on cost-cutting and this may lead to slower spending on early-stage drug development. However, demand from small and midsized biotech clients has stabilized and improved, with an increase in booking activity in the second quarter. Biotech companies make up a significant portion of the company's revenue and proposals and bookings have improved for this client base.

The company is hopeful for a future recovery in demand from their biotech clients, but it will not be enough to improve revenue in the second half of the year. They are working on initiatives to generate more revenue, contain costs, and protect shareholder value. This includes enhancing their commercial efforts, optimizing their sales force, and leveraging technology. They are also aggressively managing their cost structure and finalizing a strategy to further optimize their global footprint and streamline processes. These actions are expected to generate over $150 million in annual cost savings and a more comprehensive update will be provided in November.

In the second quarter, the DSA segment's revenue decreased by 5% due to lower revenue in both the Discovery Services and Safety Assessment businesses. The decline was primarily driven by lower demand from global biopharmaceutical clients, while demand from small and mid-tier biotechs showed some improvement. The net book-to-bill ratio was below 1 times, but gross bookings remained above 1 times. The cancellation rate was consistent with the first quarter, but still not at targeted levels. As a result, the DSA backlog decreased from $2.35 billion to $2.16 billion.

The company has lowered its revenue outlook for the year due to ongoing trends and potential spending pressures from clients. They will adjust their capacity accordingly. The DSA operating margin has decreased due to lower sales volume and pricing. RMS revenue has also decreased, primarily due to lower NHP revenue. Excluding the NHP impact, RMS revenue was essentially flat. The company expects the market environment to remain stable and reaffirms their RMS revenue growth outlook for the full year.

In the second quarter, revenue for small research models increased globally, particularly in China and Europe. This is due to the fact that small models are essential for low-cost research and can help drive price increases. While research model services experienced a slight decline, the CRADL business model continues to be popular for cost-effective vivarium solutions. The RMS operating margin decreased due to lower revenue from NHP shipments, but the overall view for the year remains unchanged. The Manufacturing Solutions segment saw a 3.7% increase in organic revenue compared to the same period last year.

The segment's businesses contributed to revenue growth, with manufacturing growth rate lower than first quarter due to challenging prior year comparison. CDMO growth rate expected to reaccelerate in second half of year. Competitive landscape undergoing transition, offering new opportunities for testing portfolio. CDMO business performing well with strong client interest. Third client received commercial approval and new projects added. Biologics Testing and Microbial Solutions revenue also grew, driven by core testing activities and demand for testing cartridges. Clients have resumed purchases of reagents and consumables.

The manufacturing segment's operating margin has improved due to higher sales volume and the ongoing growth of the CDMO business. Despite budget reassessments and cost management by clients, there is still a demand for life-saving treatments and investment in early-stage R&D programs. The company is actively managing costs and finding new ways to transform the business to enhance shareholder value. The speaker thanks employees, clients, and shareholders for their support. The speaker then hands over to Flavia Pease, who will discuss non-GAAP results and organic revenue growth for the second quarter of 2024, which was in line with expectations for a low to mid-single-digit decline.

The company exceeded their earnings per share outlook due to lower performance-based compensation and growth in operating margin expansion. However, they have lowered their guidance for the full year due to a softer demand outlook. They expect a decline in DSA revenue and pricing, and are implementing additional restructuring initiatives to offset the lower revenue and generate cost savings. These initiatives are expected to generate over $150 million in annualized cost savings.

The company has updated its target for cost savings, which includes actions from last year and planned actions for the third quarter of this year. They expect to save approximately $100 million in 2024. The company is also finalizing a strategy to optimize their global footprint and drive operating efficiency. The Board has approved a new stock repurchase authorization of $1 billion, which will be used to offset share count dilution and will regularly be evaluated for the best use of capital. The company's DSA revenue is expected to decline at a high single-digit rate, while the outlook for the RMS and manufacturing segments remains relatively unchanged.

The company expects a slightly lower operating margin this year due to a revenue shortfall, but cost savings and lower performance-based bonuses will help offset this. The DSA segment is expected to experience pressure, while the manufacturing and RMS segments are expected to see margin expansion. Unallocated corporate costs have decreased due to lower performance-based compensation accruals, and the tax rate has also decreased. Net interest expense has declined and is expected to continue to decrease due to shifting debt to lower interest rate areas and debt repayment. Free cash flow has improved compared to last year due to lower capital expenditures and better working capital management.

The company's capital expenditures decreased in the second quarter due to a decline in demand and a focus on disciplined spending. They expect further decline in CapEx for the year and anticipate a decline in both reported and organic revenue in the third quarter. However, they believe their strategy and efforts to rightsize the business will position them for growth and increased market share in the future. They are now taking questions from investors.

The speaker discusses the decrease in demand from large pharmaceutical companies and the impact it has on their business. They mention the difficulty in predicting when demand will pick up again, but note that their company has a significant share of these companies' work. The decrease in demand is due to cost cutting measures and the need for these companies to restructure their pipelines. There is uncertainty about the timeline for this process, but the speaker has high-level contacts in the industry.

The decisions being made at the C-suite and board level in big pharma are causing cuts and soft demand. It is difficult to predict their actions, but it is likely that this trend will continue into 2025. The focus for pharma is on getting drugs into the clinic and market. The company believes they have a unique portfolio and are not losing market share.

The company is working to improve its sales organization and use of technology, such as the Apollo platform, to better serve clients. They also plan to optimize their infrastructure and reduce costs in response to market demand. The impact of bonus accruals in the second quarter was approximately $20 million, and there may be additional favorability in the second half of the year.

Eric Coldwell asks Flavia Pease about the impact of the decline in demand for Discovery and Safety services on DSA and corporate levels. Flavia confirms that the majority of the impact is at these levels and that there will be additional favorability in the second half. However, she declines to give specific numbers. Eric also asks about the overall Discovery and Safety market and whether RMS is outperforming or underperforming. Flavia mentions that there may be some knock-on effects to research models and services growth in the future due to the decline in demand for safety and tox services.

Jim Foster, a company executive, discusses the current state of the company's portfolio. He mentions that they are holding their own in terms of competition, with strong performance in RMS, China, and Europe. However, the GEMS business has been affected by the slowdown in the pharmaceutical and biotech industries. The CRADL initiative is a good solution for clients during economic stress. The manufacturing business is expected to hold up well, but there is pressure in the DSA portion. Foster predicts that there will be a shift from post-IND work to classic IND work as clients prioritize their spending. He also mentions that the discovery business will improve in the future, but it is difficult to predict when.

Elizabeth Anderson from Evercore ISI asks about the flow-through of DSA and the decline in organic revenue in the third quarter. Jim Foster explains that while biotech companies are improving slowly, big pharma is cutting back on spending, leading to a decline in proposal volume and bookings. This trend has been studied and is expected to continue into July, but there is hope that big pharma will eventually increase spending on drugs in the later stages of development, including IND work.

The speaker believes that the cost of developing a drug is trivial compared to the overall budget and that the company will have enough money to continue investing in the future. They also mention potential share repurchases, which will not have a significant impact on the current year's numbers. The restructuring actions being taken are being ramped up, but there is some uncertainty regarding the decline in large pharma and the potential softening of small biotech funding. The speaker and Flavia will continue to monitor the situation and react accordingly.

The speaker is uncertain about the current state of the market, but believes that there has been an increase in proposals and bookings. However, there is still a sense of caution among clients due to the availability of cash and the impending patent cliff for the pharmaceutical industry. The company is taking measures to align their capacity with expected growth, including cutting costs and potentially consolidating facilities. It is difficult to predict the market for 2025, but the speaker believes that the pharma pullbacks will continue and there may be a cooling off of the biotech industry.

The speaker is uncertain about the impact of the election and wars on their business, but believes that their biotech work and volume could continue to improve. They have already implemented cost-saving measures and plan to do more next year. They expect a modest positive impact on pricing in the second quarter, but anticipate a slight decline by the end of the year. These pricing dynamics have been factored into their margin assumptions.

The company is being selective in providing discounts and is seeing a shift in trend towards lower pricing. The CEO and CFO anticipate that pricing will become more pronounced in the second half of the year and may continue into 2025.

The CEO of a pharmaceutical company discusses the potential impact of the current market conditions on their business. They mention that biotech companies, which have no internal capacity, are less price sensitive and are likely to continue providing work. However, big pharma companies may struggle due to their dependence on external companies and their need for major structural changes. The CEO believes that biotech companies may recover faster than big pharma.

The speaker discusses the importance of CRADL and safety in the manufacturing segment and the need to lean out infrastructure due to potential softness in the market. They also mention seeing broad-based softening in pharma spending across all clients, with a disproportionate impact on tools companies and those in discovery and safety. The focus for pharma companies is on getting drugs into the clinic and market, but approvals for new drugs are currently behind the previous year.

The speaker discusses the challenges faced by pharmaceutical companies, including a patent cliff, IRA legislation, and competition. They predict that the disproportionate focus on the clinic cannot last forever and that there may be cycles in the industry. The speaker also mentions their company's reliance on big pharma and biotech data and the impact of economic stress on their client base. They note that their manufacturing business should continue to do well, but the preponderance of their work is in discovery and preclinical, which is currently less emphasized by big drug companies. A question is then posed by Tejas Savant from Morgan Stanley, prompting the speaker to further discuss their remarks.

The speaker discusses the current state of pharmaceutical companies and their response to patent cliffs and the IRA. They note that companies are not doubling down on R&D to fill the revenue hole, despite it being a common response in the past. They also mention that companies seem more nervous about the IRA and are mentioning it more frequently. The speaker believes that this is unusual and sudden behavior from pharmaceutical companies.

The company did not receive any warning or dialogue from their clients about the shift towards clinical work. However, they feel they are becoming closer to their clients and are anticipating more changes to come. The company also believes that the BIOSECURE ACT will have a positive impact on demand for their services, particularly in the biologics and CDMO sectors. The company's debt is mostly fixed and they do not expect to see much benefit from interest rate cuts, but they may see a decrease in interest income.

On the potential impact of the political situation in China, the company is cautious and does not want to overstate the potential benefit. They have had limited conversations and interest in this issue so far. Some venture capital firms have instructed their portfolio companies not to do work in China, indicating a potential expansion of this trend. However, the company does not expect any changes to their outlook for the year due to the timing of potential interest rate changes and the majority of their debt being fixed.

The company tries to keep very little cash in order to pay down debt. Any decrease in interest rates by the Fed would be positive for the company. NHP pricing in the DSA business is slightly positive but may decline in the future. NHP prices in China have decreased, but prices for Noveprim are stable.

The company has not experienced price pressure in their long-term relationships and does not expect it to happen in the second half of the year. Cancellations have improved for biotech companies, but there has been a slight deterioration for global companies. The company is taking out costs and aligning them with demand, but they can spin up resources again within a quarter's time. It takes 3 to 4 months to train new employees to contribute to the work.

The speaker discusses the importance of staying ahead of the curve in the industry and the need for sufficient staff to take on new work. They mention the challenges of hiring senior scientific and director-level staff, but believe it should be relatively straightforward to hire other employees. They also mention the current soft market for discovery work due to pharma companies cutting budgets, but predict that this trend may not last long as pharma companies continue to outsource work and engage in M&A activities. The speaker acknowledges the recent pullback in spending on discovery and IND work, but believes it may pick up again in the future as pharma companies try to fill the gap left by patent cliffs.

The pharmaceutical industry is facing challenges with decreased spending on IND and discovery, causing them to reevaluate their infrastructure and potentially cut back on therapeutic areas. This could benefit companies like RMS that provide services in this area. However, there may be some impact on RMS as well, particularly in North America where biotech is prevalent. Europe, on the other hand, has been more stable due to its focus on pharma.

The speaker discusses China's growth in the life sciences industry and their confidence in meeting their guidance. They also mention the stability of their RMS division and their high win rate in the safety sector. They attribute their success to their strong portfolio and scientific expertise.

In the paragraph, the speaker discusses the company's market share and performance in the second quarter. They mention that there are small competitors who compete on price, but their market share is still substantial and has been growing. However, they note that their bookings are not improving at the desired rate and that pharma companies pulling back may exacerbate this. The speaker also mentions that a competitor's performance was worse than theirs in the quarter. They believe that the negative outlook is driven by market dynamics rather than competition. The call concludes with the speaker thanking participants and announcing upcoming investor conferences.

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