The paragraph is a transcript from the Charles River Laboratories Third Quarter 2024 Earnings Conference Call. It begins with the operator announcing the call and introducing Todd Spencer, the Vice President of Investor Relations, who welcomes participants. Spencer is joined by Jim Foster, Chair, President, and CEO, and Flavia Pease, Executive Vice President and CFO, who will discuss the company's third-quarter results. A slide presentation and webcast replay will be available on the company’s Investor Relations website. The call will cover forward-looking statements, and mainly non-GAAP financial measures will be discussed to provide a better understanding of the company's core operations.

In the third quarter, financial performance exceeded expectations despite a challenging demand environment for biopharmaceuticals, resulting in a 2.7% decline in organic revenue. Revenue from small and mid-sized biotech clients remained stable, with more favorable demand trends compared to last year, although recovery is slower than initially anticipated. Biotech funding has led to higher DSA bookings and incremental revenue, but uncertainties in the funding environment and interest rates persist. Revenue from global biopharmaceutical clients declined due to budget constraints and pipeline reprioritization, influenced by recent restructuring actions. However, demand trends for these clients improved from the second quarter.

The paragraph discusses the company's outlook and strategic actions in response to current demand trends. Despite slight improvements in demand indicators for their Safety Assessment business, overall recovery is uncertain, and the net book-to-bill is still below one. The company anticipates ongoing pressure on growth rates into 2025, particularly in the DSA segment, due to pricing challenges and reduced biopharma demand. The company is taking steps to manage the current demand environment by resizing infrastructure, focusing on revenue generation, cost containment, and shareholder value protection. This includes restructuring initiatives to align staffing with demand and optimizing operations. Progress has been made in these areas since the last update.

The paragraph outlines the company's strategy to enhance commercial operations and market share by focusing on client experience and leveraging technology, such as the Apollo platform and RMS e-commerce initiatives. They aim to reduce costs and improve efficiency by using technology, adopting a global service model, and optimizing procurement. These efforts include restructuring initiatives that have reduced staffing by over 6% since late 2023 and a comprehensive review of their global footprint to consolidate or divest unneeded sites. The goal is to serve clients more efficiently and protect their operating margin by capturing synergies and savings beyond just reducing facility costs.

The company is implementing a restructuring plan to close or consolidate approximately 15 smaller sites, primarily in the DSA and RMS segments, which is expected to generate $40 million in annual savings by 2026 through cost reductions in overhead, facilities, and headcount. The broader restructuring, initiated in late 2023, aims to save $200 million annually, cutting the cost structure by over 5%, with half of the savings realized this year and at least $150 million by 2025. The third quarter saw record free cash flow of over $200 million, allowing the company to prioritize modest stock repurchases of about $100 million. These efforts are focused on creating a leaner, more efficient organization, improving client partnerships, capturing new business opportunities, and enhancing shareholder value.

In the third quarter of 2024, the company reported a revenue of $1.01 billion, marking a 1.6% decline compared to the previous year, with organic revenue down by 2.7%. This decline was driven by a drop in DSA, despite growth in the Manufacturing segment and RMS revenues. Revenue from small- and mid-sized biotech and global biopharmaceutical client segments also declined, though biotech client revenue was stable sequentially. The operating margin decreased by 60 basis points to 19.9% due to higher unallocated corporate costs, despite improvements within individual business segments. Earnings per share fell 4.8% to $2.59 but exceeded August's outlook, mainly due to better-than-expected performance in the DSA segment. The company has adjusted its full-year guidance, narrowing revenue expectations to a 3% to 4% organic decline and slightly raising non-GAAP earnings per share to $10.10-$10.30, highlighting cost management benefits.

In the third quarter, the DSA segment experienced a 7.4% decrease in revenue on an organic basis, primarily due to lower sales volumes in Discovery services and Safety Assessment. This decline was slightly better than anticipated, as global biopharma demand was stronger than expected. The DSA revenue is projected to decline at a high-single-digit rate organically in the second half of the year. In the Safety Assessment business, the decrease was mainly driven by lower study volume, with pricing remaining flat and expected to slightly decrease in the fourth quarter. While the spot market for Safety Assessment proposals hasn't changed significantly, growth in bookings and reduced cancellations improved the net book-to-bill ratio. Despite existing challenges such as pricing and client restructuring, forward-looking indicators for biopharmaceutical demand showed improvement in the third quarter, suggesting a stable biotech trend and more favorable demand outlook for 2024 compared to the previous year.

The company is taking a cautious approach towards its Safety Assessment business due to uncertain demand trends. The DSA backlog slightly decreased from the second to the third quarter. They are working on integrating their Global Discovery and Safety Assessment into One DSA, led by Shannon Parisotto, to improve synergies and enhance client partnerships. Changes will include a unified salesforce, integrated scientific programming, and better client experiences. Insights gained have led to plans for optimizing their global footprint by consolidating smaller sites. The DSA operating margin improved due to cost-saving actions, showing both year-over-year and sequential increases.

In the third quarter of 2023, RMS revenue reached $197.8 million, marking a 0.6% organic increase, driven by higher pricing and small model sales in China, despite declines in other segments. North America and Europe faced decreased small animal unit volumes due to pharma restructuring and reduced biotech funding, but pricing adjustments helped balance this. In China, geographic expansion has supported growth despite economic pressures. Research Model Services and Cell Solutions saw revenue declines due to reduced demand, leading to CRADL site consolidations. Overall, RMS organic revenue is predicted to remain flat in 2024, and the operating margin improved by 210 basis points to 21%.

The paragraph discusses the strong performance of the company’s Manufacturing Solutions segment, which saw an 11.8% increase in revenue due to higher pricing, a favorable revenue mix, and cost-saving measures. The Contract Development and Manufacturing Organization (CDMO) business led this growth, particularly in cell therapy, and is expected to continue performing well. The Biologics Testing business also performed strongly due to high demand for core testing services, with synergies between CDMO and Biologics Testing boosting efficiency for cell and gene therapy production. Additionally, the Microbial Solutions business showed recovery from previous challenges, driven by demand for Endosafe testing consumables and improved instrument placements. The company is optimistic about continued strong performance in the fourth quarter.

The paragraph discusses the benefits and success of high throughput systems in improving product release testing efficiency and driving incremental cartridge use. It highlights the manufacturing segment's third-quarter operating margin increase due to higher sales volume. The company remains focused on its strategy, managing costs, enhancing client experience, and protecting shareholder value, aiming to strengthen and improve profitability despite challenges. Gratitude is expressed to employees, clients, and shareholders. Following this, Flavia Pease will discuss third-quarter financial performance and the 2024 outlook, focusing on non-GAAP results and organic revenue growth, excluding certain financial adjustments and impacts.

In the third quarter of 2024, the company's organic revenue decreased by 2.7%, performing better than expected. Non-GAAP earnings per share fell by 4.8% but exceeded the projected decline. Improved results in the DSA segment contributed to this outperformance. The company has revised its full-year revenue guidance, now anticipating a 2% to 3% decline on a reported basis and 3% to 4% on an organic basis. RMS revenue is expected to remain flat, DSA revenue to be on the favorable end of a high-single-digit decline, and Manufacturing to see high-single-digit growth. The operating margin is projected to be slightly lower than the previous year. Key updates include additional cost savings from restructuring, stock repurchases, and strong free cash flow. The company is consolidating approximately 15 smaller sites, mainly in the DSA and RMS segments, as part of its restructuring efforts.

The company plans a sale-and-leaseback for its Wilmington site to reduce costs and improve efficiency, aiming for $40 million in savings by 2026. They have identified $200 million in annual savings since 2023, expecting $100 million realized this year and $50 million more in the next two years. Restructuring, including site consolidation and severance, will cost $100 million, with most charges in 2025; these will be excluded from non-GAAP results. Proceeds from real estate sales will offset some costs. They repurchased 500,000 shares for $100 million under a new $1 billion authorization to offset dilution and aim to maximize shareholder value through capital management. The company also achieved record free cash flow of $213.1 million in the third quarter, up from $139.5 million the previous year.

In the third quarter, the company improved its financial performance through disciplined working capital management and reduced capital expenditures, which decreased from $65.9 million last year to $38.7 million. The company expects free cash flow for the year to exceed $450 million, up from a previous outlook of $380-400 million, and CapEx to be between $220-240 million. Unallocated corporate costs rose to $76.8 million, or 6.6% of revenue, mainly due to increased health and fringe costs, and lack of prior benefits from virtual power purchase agreements. The non-GAAP tax rate decreased to 21.3% due to a favorable earnings mix, with an expected year-end rate of 21.5-22%. Adjusted net interest expense fell to $28.8 million due to debt repayment and shifting to lower interest rate geographies, with total net interest expense expected to be at the lower end of the $118-122 million forecast. The company's leverage ratios have also improved thanks to over $300 million in debt repayment.

In the third quarter, the company successfully repaid debt while also initiating $100 million in stock repurchases. They benefited from a $500 million interest rate swap that secured a lower fixed interest rate, with over 85% of their $2.3 billion debt at fixed rates. The swap expires in November. Their fourth-quarter outlook predicts a low- to mid-single-digit revenue decline, with variability expected in different segments due to shipment timings and project schedules. Non-GAAP earnings per share for the fourth quarter are projected to be between $2.45 and $2.65. Looking to 2025, current trends are expected to persist due to global biopharmaceutical restructuring and a gradual biotech recovery. The company will provide a 2025 outlook in February and remains focused on positioning for future growth while maintaining high-quality service and agility.

The paragraph is a Q&A session where Max Smock from William Blair asks about the effects of the current funding environment and election results on the outlook for small biotech companies. Flavia Pease responds by noting that the funding environment began robustly with IPO market support, although at a slightly lower rate as the year progressed. Interest rates have decreased, which benefits biotech, and demand indicators are better than last year, leading to cautious optimism despite initially overestimated recovery expectations. James Foster adds that the election results are unpredictable, but suggests that if the outcome had favored more aggressive changes, such as expanding the IRA to include additional drugs, it might have had more immediate impacts. Nonetheless, drug pricing is likely to remain a key political issue.

In the discussion, participants address the impact of lower incentive compensation on quarterly results, with Flavia Pease clarifying that it had no significant effect in the third quarter, but it will still influence the second half of the year. The majority of adjustments were made in the second quarter. Additionally, Matthew Sykes from Goldman Sachs asks about the large pharmaceutical segment's demand trends, and James Foster suggests that they might be nearing the end of cost-saving and reprioritization efforts.

The paragraph discusses the challenges and strategies of a company, likely Charles River, in addressing budget constraints and demand changes in the pharmaceutical and biotech sectors. Despite a downturn in the latter half of the year, there's optimism that demand won't deteriorate further. The company is focusing on cost-saving measures such as headcount reductions and site consolidations, ensuring they don't harm customer relations or hinder future recovery. They emphasize maintaining quality staff and being strategic with workforce reductions, aligning with their end-of-year guidance and future planning.

The paragraph discusses the company's efforts to align its workforce with demand, emphasizing the need for sufficient training time for new hires, particularly in direct labor roles. The company aims to maintain efficiency and responsibility in managing headcount. David Windley from Jefferies asks about demand dynamics, pricing, and backlog in DSA (presumably "Drug Safety Assessment") and their impact on revenue and margins. James Foster acknowledges stable to slightly declining pricing, with further declines expected by year-end, but refrains from discussing next year's pricing. Despite cost-cutting measures, they aim to sustain margins at the 27% level, with Flavia involved in margin protection efforts.

The paragraph features a discussion between Flavia Pease and David Windley regarding anticipated challenges for a company due to pricing pressures. Pease acknowledges that price reductions are expected to be a headwind in 2025, necessitating cost-saving measures like workforce adjustments and operational optimizations to protect margins. As demand softens, there is a focus on streamlining operations, including implementing a global business service model to improve efficiency. Pease suggests that with costs rising and prices remaining flat, margins will be under pressure, necessitating careful management.

The paragraph discusses updates and strategies for improving operational efficiency within a company. It highlights efforts to enhance digitization, automate processes, and use global business services to operate more effectively and in a standardized manner. Following this, a Q&A session addresses specific business concerns. Eric Coldwell from Baird inquires about the low RMS margins despite positive factors such as high-margin Noveprim cells and favorable pricing in small animals. Flavia Pease responds by attributing potential variations to the timing of large model shipments, particularly from Noveprim and in China, which could affect RMS segment margins and EPS due to their high-margin nature.

The paragraph discusses financial performance and forecasts during a conference call. The speaker mentions guidance is given in a range due to potential shifts in timing affecting financial periods. They highlight mixed factors impacting the RMS margin, such as favorable NHP shipments, growth in lower-margin areas like China, and a decline in services businesses. Then, Justin Bowers from Deutsche Bank inquires about improved bookings and cancellations in Safety Assessment, asking whether the improvement is seen across both biotech and global customer bases, and if the current booking levels suggest a stable run rate. James Foster responds that they are experiencing fewer cancellations across their client base, indicating positive momentum, despite ongoing challenges for pharma companies reducing infrastructures.

The paragraph discusses the current state of the biotech industry, noting a stable demand and booking environment for biotech clients, though growth isn't as rapid as anticipated. Positive indicators include client capture rates, access, and dialogue. The industry's future is influenced by factors like rate cuts, IPO market changes, and election outcomes. While growth drivers have slowed, they are showing improvement. The biotech funding market performed well in September and October, with significant investments despite comparisons to exceptional previous years. The paragraph highlights that fear and conservatism are affecting perceptions, but access to capital is decent, especially for venture firms and large pharma funding biotech. The trajectory is improving, albeit slowly. In response to a query, Justin Bowers asks about current customer booking behavior and if it’s closer to the study's start.

The paragraph covers a discussion between Flavia Pease and Dan Leonard about the current state of the CRADL business amidst restructurings in large pharma companies. Pease notes that study starts vary widely, with some beginning within a month and others booked 6-9 months in advance. The "vivarium-as-a-service" model continues to appeal to both large and small clients, despite some biotech clients reducing space and pharma clients maintaining existing space. Pease observes no significant changes in demand from large clients, whereas biotech clients show reduced utilization, contributing to a dip in IMS services for the quarter. Dan Leonard then asks about the expected sales run rate, to which Pease replies that they are refraining from making long-term forecasts but are satisfied with the stabilized demand trends in the third quarter.

The paragraph discusses the cautious outlook for the upcoming year, highlighting that they will closely monitor trends in the fourth quarter before providing a forecast. They note that while pharmaceutical comparisons will pose challenges in year-over-year growth due to strong performances earlier in the year, they expect stability in current demand trends into 2025. Client discussions in the fourth quarter will offer insights into spending patterns in R&D, including clinical spending and IND filings. They remain hopeful for stability and eventual recovery in big pharma investments and will provide more clarity in their February call after further client feedback.

In the discussion, Dan Leonard asks if the $50 million in incremental cost savings planned for 2025 will be sufficient to handle costs related to incentive compensation, inflation, and other budgeting issues. Flavia Pease responds that it's not sufficient, which is why the company is actively pursuing additional strategies such as footprint optimization to increase savings. In the absence of volume growth and amidst rising costs, maintaining margins is challenging, necessitating ongoing efforts to enhance efficiency. Elizabeth Anderson then raises questions about changes in operations and customer demands in the pharma cycle, particularly from biopharma customers, and inquires about the company's capital deployment strategy, referencing recent share repurchases as possibly being a response to share price dislocation.

In this paragraph, James Foster discusses the strategic approach to share buybacks and cash management, emphasizing the importance of evaluating factors like share price, debt, and earnings. He mentions that a board committee assesses the best use of cash multiple times a year, balancing buybacks and potential mergers and acquisitions while also paying down debt. Foster also addresses the financial challenges faced by biotech clients, who are cautious due to funding concerns and a difficult IPO and secondary market. Despite these challenges, biotech companies lack internal capabilities for certain services, making them reliant on external providers like his company, which maintains close relationships to meet their needs.

The paragraph discusses the current demand and responsiveness in the biopharma sector. It highlights the varying timelines for initiating studies, with some being quick and others taking longer. The company feels confident about meeting client demands efficiently and maintaining high-quality science. It acknowledges differing spending trends within global pharma, with some companies spending heavily while others are cutting costs due to factors like the impending patent cliff and competition over GLP-1 drugs. Despite varying strategies, all companies are closely monitoring their expenses.

The paragraph discusses the reliance of pharma companies on Charles River for toxicology and discovery work, noting the advantages of outsourcing to them, such as reduced costs and faster, higher-quality results. Despite a slowdown in demand, the company anticipates continued interest from both small biotech and large pharma clients as they seek to reduce internal capacities and infrastructure. Michael Ryskin finds the information helpful, while Tejas Savant from Morgan Stanley shifts focus to discuss the DSA margins, noting past performance and querying about future scenarios and appropriate margin floors if demand remains weak.

In the paragraph, James Foster discusses the shifts in market dynamics for his company, mentioning that the ability to increase prices significantly over the past several years is changing to a more constrained pricing environment in 2024. While demand is expected to recover, aided by a lack of external competition, the strategy will include enhancing efficiency and operating margins. Flavia Pease adds that an update on long-term financial goals will be provided later, acknowledging that previous targets set from 2023 to 2026 may not be achievable within the planned timeframe.

The paragraph discusses the belief that the market fundamentals remain strong, with anticipated growth rates and margin goals still achievable, though timing is uncertain. They express confidence in the pharmaceutical industry’s long-term potential. A follow-up questions the impact of project timing on growth in the manufacturing segment, asking about customer concentration in CDMO and interest in acquiring competitor facilities. In response, James Foster suggests that opportunities in Biosecure are being monitored, with concerns over political changes affecting business decisions, particularly regarding work in China.

The paragraph discusses the shifting landscape of the chemistry and safety assessment work, highlighting that while chemistry may move from China to India, safety assessment work might shift back to the U.S. and Europe. The CDMO (Contract Development and Manufacturing Organization) business has had a strong year, driven by high-quality clients, regulatory audits, and improvements in staff and facilities. This positions the business for continued success, particularly in treating difficult diseases. The speaker believes their current work aids in acquiring new clients, serving as effective marketing. Casey Woodring from JPMorgan asks about the synergies between the CDMO and Biologics Testing businesses, noting that over half of CDMO clients now use Biologics Testing. James Foster explains this was a key reason for entering the CDMO space.

The paragraph discusses the company's involvement in drug testing both before clinical use and after commercial approval, emphasizing its role in the CDMO space due to demand from clients who prefer not to validate other providers. The firm has a competitive advantage due to its internal capability for Biologics Testing, which even some competitors lack. Additionally, the paragraph touches on a noted decrease in demand from large pharmaceutical companies, attributed to budget discretion issues at higher decision-making levels, although client communications remain consistent.

In the paragraph, the speaker discusses how conversations with clients about their fiscal 2025 operating plans are crucial for planning and understanding client needs and strategies, especially concerning which projects will be completed internally or outsourced. They emphasize the importance of adjusting plans based on client discussions, as the information provided isn't always precise. Following this, Luke Sergott from Barclays questions about why the recent performance significantly surpassed earlier cautious outlooks, which had been severely adjusted downward, drawing comparisons to the global financial crisis. He inquires what improved from initial expectations and whether the initial conservative stance was based on the presumption that conditions would deteriorate further.

James Foster discusses the current company outlook, noting that nothing has significantly changed but expressing optimism about recent results. They attempt to predict quarterly and yearly performance through close client communication, acknowledging variability. He mentions lower cancellation rates and consistent biotech demand, with pharma presenting some surprises. Foster emphasizes the need for multiple quarters to establish a trend and notes potential positive impacts if the IPO market opens or interest rates are cut. Challenges remain with existing lower-priced work affecting profitability, but overall opportunities are seen as positive.

The paragraph is part of a dialogue where James Foster discusses the strategy of maintaining multiple providers to avoid over-reliance on one source and addresses concerns about shutting down facilities. Despite the closing of around 15 facilities across DSA and RMS, Foster assures that the company is not reducing its footprint to a point where they will lack space when demand returns. The closures are seen as a response to current demand and cost considerations, and the company remains prepared for future demand increases, citing its history of numerous acquisitions.

The paragraph discusses the company's strategy to improve its operations and financial performance by consolidating smaller, less efficient sites with larger, more capable ones to enhance margins, throughput, and site utilization. The company intends to thoughtfully manage its infrastructure as it acquires new businesses. Additionally, there is a positive note on having previously entered into a favorable interest rate swap, which provided financial benefits during a period of rising interest rates. They are optimistic about their current financial position given the first rate reduction.

The paragraph discusses the company's financial outlook and strategy. Despite an expiring swap in November, a significant portion of debt will remain fixed. The company plans to renew its credit facility, which runs until April 2026, early next year. They are pleased with their record free cash flow generation and the ability to meaningfully pay down debt, resulting in strong leverage and facilitating a modest share buyback. Overall, they feel positive about their balance sheet and progress made. The call is concluded by Todd Spencer, expressing anticipation for future conferences.

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