The paragraph introduces the Charles River Laboratories Fourth Quarter and Full Year 2024 Earnings Conference Call. It is hosted by Todd Spencer, Vice President of Investor Relations, and includes speakers James Foster, Chair, President, and CEO, and Flavia Pease, Executive Vice President and CFO. They will discuss the company's fourth-quarter 2024 results and 2025 financial guidance. A slide presentation and webcast replay are available on their Investor Relations website. The paragraph also includes a disclaimer about forward-looking statements and the use of non-GAAP financial measures during the call.

The paragraph discusses the financial performance and market outlook for a company, noting an end-of-year performance in the previous year that exceeded expectations and resulted in higher annual revenue and non-GAAP earnings per share. The company anticipates stable market trends through 2025, with consistent biopharmaceutical demand and flat DSA demand. While small and midsize biotechnology clients benefit from favorable funding, global biopharmaceutical clients are undergoing restructuring and pipeline reprioritization, likely constraining early-stage spending. Overall, the company expects demand levels in 2025 to be similar to 2024, but at lower volumes due to budget resets by global clients.

The paragraph discusses the company's outlook for 2025, highlighting expectations of a stabilizing demand environment for DSA and challenges posed by lower DSA pricing, reduced commercial revenue in the CDMO business, and site consolidation actions, leading to an anticipated organic revenue decline of 3.5% to 5.5%. When accounting for foreign exchange impacts, a total reported revenue decline of 4.5% to 7% is expected. Despite taking restructuring actions anticipated to save $225 million annually by 2026, the company foresees a modestly lower operating margin and non-GAAP earnings per share ranging from $9.10 to $9.60. The report concludes with a recap of 2024 financial performance, noting a 1.8% organic revenue decline in the fourth quarter and a full-year organic revenue decrease of 2.8%, mainly due to reduced DSA revenue.

In the fourth quarter, the company's full-year revenue slightly exceeded expectations, primarily due to strong performances in the RMS segment and microbial solutions. Despite a decline in sales to biopharmaceutical and biotech clients for the year, fourth-quarter revenue from biotech clients began to grow again. The operating margin increased by 80 basis points to 19.9% in the fourth quarter, aided by reduced corporate costs and manufacturing segment improvements, though it decreased by 40 basis points for the full year largely due to challenges in the DSA segment. Earnings per share improved to $2.66 in the fourth quarter due to favorable operating margins and lower expenses, but declined to $10.32 for 2024 due to reduced revenue and margins. DSA revenue also fell by 3.5% in the fourth quarter due to decreased study volume and slightly lower pricing, with safety assessment pricing turning negative. The company discusses the outlook for 2025 for each segment.

In this paragraph, the company discusses its strategic use of pricing and commercial enhancements to gain market share among small and midsize biotech clients, resulting in a stabilized DSA (Drug Safety and Availability) capture rate in 2024. Although key performance indicators like the net book-to-bill ratio showed stability in the fourth quarter, revenue from global biopharmaceutical clients declined in the second half of 2024, affecting expectations for 2025. While cancellation rates remained low and closer to targeted levels, bookings have yet to show sustained improvement. For 2024, DSA revenue decreased by 6.2% organically, aligning with forecasts of a high single-digit decline. The DSA backlog also slightly decreased. Looking ahead to 2025, the company anticipates a decline in DSA revenue at a mid to high single-digit rate, driven by lower pricing and steady volume.

The paragraph discusses expectations for study volume and DSA pricing in the global biopharmaceutical and biotech client segments for 2025, predicting stable volume but lower levels than 2024 due to reduced demand and lower DSA pricing, with consistent quarterly revenue and minor first-quarter seasonal impacts. It also highlights concerns regarding the potential suspension of the trade of non-human primates (NHPs) from Cambodia as discussed at a CITES meeting. Charles River emphasizes the importance of legally sourced NHPs for biomedical research and the unintended consequences that restrictions could have on the global biopharmaceutical industry.

The paragraph discusses Charles River's ongoing efforts to collaborate with various stakeholders to ensure patient safety and emphasize the importance of non-human primates (NHPs) in research, particularly when there are no viable alternatives. The company is working to diversify its NHP supply chain, including through Mauritius-based NovoPrim, with increased use expected after 2026. Financial updates highlight a decline in DSA operating margin due to decreased revenue, though cost savings provided some offset. RMS revenue saw a slight decrease for the year and the fourth quarter, with declines in certain areas offset by higher sales of small research models, driven mainly by price increases. Additionally, the Sales Solutions growth rate was influenced by operational consolidation in California.

In 2025, RMS revenue is projected to grow at a low single-digit rate, primarily due to higher pricing in North America and Europe and improved prospects for research model services like Cradle. Although unit volumes for small research models declined in 2024 due to reduced biopharmaceutical spending, increased pricing and revenue from academic institutions offset these declines. Similar trends are expected in 2025, with North America and Europe seeing pricing gains compensating for lower volumes, while China is anticipated to have flat small model revenue. Despite a minor role for large models in revenue growth, increased NovoPrim third-party NHP sales may offset lower NHP revenue from China. The demand for research model services, particularly Cradle, is expected to recover, contributing to revenue growth. The NIH funding changes are being monitored, as they might affect the academic and government client base, though current direct NIH exposure is minimal.

The paragraph discusses the financial performance and strategic outlook for Cradle's business segments. In a challenging budget environment, Cradle's sites will have dedicated or anchor clients to limit risks. The RMS operating margin saw a minor year-over-year decrease in the fourth quarter but improved overall in 2024 due to price increases, cost savings from restructuring, and increased sales of NHPs from the NovoPrim acquisition. These factors are expected to continue benefiting the RMS margin in 2025. Manufacturing solutions revenue grew modestly, with slower growth in the fourth quarter attributed to lower CDMO business revenue, although microbial solutions performed well. The manufacturing revenue will likely remain flat in 2025 due to reduced revenue from two CDMO clients, which will also affect the segment's growth rate. Biologics testing experienced a temporary boost in 2024, with growth expected to moderate in 2025. Despite commercial setbacks, Cradle has strengthened its CDMO operations with investments in facilities, leadership, and expertise.

The paragraph discusses the business performance and future outlook of a company in the cell and gene, microbial solutions, and manufacturing sectors. Although demand in the cell and gene sector has softened since acquiring the business in 2021, long-term growth prospects are promising, with a strong pipeline of early-stage biotech clients. The microbial solutions business experienced solid year-end growth, particularly with EndoSafe testing products. The manufacturing segment's operating margin improved significantly, driven by increased demand in microbial solutions and biologics testing, and improved efficiencies. The company remains optimistic about returning to an operating margin above 30% in a few years despite challenges in the biopharmaceutical demand environment. Biotech trends are positive, and while client spending is constrained, demand appears to be stabilizing. However, they do not anticipate a recovery in 2025.

The company is actively managing current challenges by rightsizing operations and reducing costs by over 5%, aiming for $225 million in annual savings. They are focusing on cost restructuring, global operations optimization, and process efficiency. Commercial initiatives are enhancing client focus and market share through technology and improved sales strategies. They maintain low leverage and evaluate M&A opportunities, with plans to use free cash flow for stock repurchases in 2025, citing undervaluation as a motivation.

The company plans to repurchase $350 million in stock, surpassing their previous goal of $100 million, to counteract dilution from equity awards. They aim to strengthen and enhance their profitability and client responsiveness by leveraging their scientific and preclinical strengths. James appreciates the efforts of employees and the support from clients and shareholders. Flavia discusses the financial performance, focusing on non-GAAP results that exclude several financial adjustments. Despite a challenging demand environment, their revenue and non-GAAP earnings per share have exceeded expectations due to cost-cutting and infrastructure alignment efforts.

The paragraph discusses the company's financial strategies and achievements. It highlights the anticipated $225 million in annual cost savings by 2026 from restructuring efforts, mostly from headcount reductions and network rationalization. To improve capital structure, the company repurchased $100 million in stock in Q3 2024 and plans to increase repurchases to $350 million in 2025, utilizing its strong cash flow. The current stock valuation is considered depressed due to industry challenges, but the company is optimistic about long-term growth. The company generated $501.6 million in free cash flow in 2024, thanks to controlled capital expenditures and cost savings. Looking ahead, the company expects a constrained biopharmaceutical spending environment to continue in 2025.

The company anticipates a revenue decline of 4.5% to 7% due to the strengthening US dollar, impacting reported revenue by 1% to 1.5%. Non-GAAP earnings per share are forecasted between $9.10 and $9.60. In 2025, the operating margin is expected to fall from 19.9% in 2024 due to cost-saving measures not fully offsetting lower revenue, particularly affecting the DSA segment, though there are margin expansion opportunities in RMS and manufacturing. Unallocated corporate costs in 2025 should decrease to 5% of total revenue, down from 5.7% in 2024, due to cost savings. The non-GAAP tax rate is expected to increase to 22.5% to 23.5%, up from 21.3% in 2024, mainly due to global minimum tax adjustments and stock-based compensation impacts, without repeating 2024's discrete tax benefits.

In 2025, stock-based compensation is expected to impact the tax rate in the mid-twenty percent range due to equity award vesting. Adjusted net interest expense is projected to decrease slightly to between $112 million and $117 million due to lower interest rates on floating rate debt. While borrowing will occur to align with stock repurchases, overall debt levels should remain stable by the end of 2025. In 2024, the company reduced net interest expense by repaying $400 million in debt, lowering leverage ratios to 2.2 times, and amended its credit agreement to a $2 billion revolver. The company had $2.2 billion in outstanding debt at the end of the fourth quarter, mostly at fixed rates. Free cash flow is expected to decline to $350 million in 2025 due to lower earnings and increased working capital needs, compared to $501.6 million in 2024. Capital expenditures in 2025 will remain similar to 2024 levels at about $230 million, focused on maintenance and ongoing projects.

The paragraph discusses a financial outlook for 2025, emphasizing a disciplined approach to capacity and capital investments. The company anticipates a revenue decline for the first quarter due to factors like seasonal business trends and timing of shipments, with non-GAAP earnings per share expected to be at least $2. Challenges include a lower operating margin and higher tax rates influenced by stock-based compensation. Despite these challenges, the company is optimistic about improvement after the first quarter and is implementing strategies such as cost optimization, stock repurchases, and capital management to enhance shareholder value. These steps are expected to strengthen the organization and support sustainable future growth. The paragraph concludes with an invitation for questions from the phone audience.

In the paragraph, Elizabeth Anderson questions the company's bookings and book-to-bill ratio, noting a potential sequential decline but stability over a twelve-month period. Flavia Pease responds that the fourth-quarter book-to-bill ratio was stable, following a previous decline and recovery. James Foster adds that despite typical first-quarter softness due to seasonality in DSA and Biologics and a slight price decrease in DSA, demand from biopharmaceutical and biotech clients has stabilized or slightly improved. He assures that these trends are reflected in their guidance for 2025.

In the paragraph, Matt Sykes from Goldman Sachs asks about the impact of NIH and academic funding on RMS revenues. James Foster explains that direct NIH exposure is less than 2% of total revenue, while academic and government contracts constitute about 40% of RMS revenues. However, overall exposure is about 10% of the company's total revenue, with much of it involving international academic institutions and a minor portion being government-related. Foster suggests that even with potential disruptions, the impact would be manageable due to long-term contracts. Regarding large pharma demand, Sykes notes it has been weak due to cost-cutting and reprioritization, and Foster mentions they might be nearing the end of this cycle but provides no forecast for recovery.

James Foster discusses expectations for the pharmaceutical and biotech sectors in the near future. In 2024, they assume conditions may improve in the latter half of the year due to factors like capital market changes and the completion of reprioritization and restructuring efforts by pharmaceutical companies. While stability is anticipated in the pharma sector, with no expected deterioration, biotech is expected to see slight improvements, contingent on capital market conditions such as successful IPOs and venture capital inflows. Despite some reprioritization, biotech companies, lacking large infrastructures, still depend heavily on external firms. Consistent revenue is expected throughout the year, with a slight decrease in DSA due to pricing challenges.

The paragraph is from a discussion where Tejas Savant from Morgan Stanley asks about the CDMO business’s financials, particularly regarding potential cancellation payment benefits and strategies for mitigating margin impact due to underutilization. Flavia Pease responds, confirming plans for margin expansion in manufacturing, despite challenges in the CDMO segment from the loss of commercial clients. This will be managed by right-sizing infrastructure and staffing. Additionally, strong performance in the microbial business will aid margin growth. Some contractual obligation benefits are included in the 2025 guidance. Tejas also inquires about the CITES decision to defer on the Cambodian NHP trade. He asks James about steps to de-risk the supply chain, possibly by sourcing from other Southeast Asian countries.

In the paragraph, James Foster discusses efforts to mitigate potential disruptions in the Cambodian supply of non-human primates (NHPs) by sourcing them from various locations and providers, including those with long-term contracts and ownership stakes in places like Mauritius. He notes the criticality of these animals for drug development and expresses cautious optimism about influencing regulatory decisions through scientific input. Tejas Savant acknowledges the information. Subsequently, Dave Windley from Jefferies asks Foster about how much visibility clients provide on potential pharma restructuring, given surveys indicating possible upcoming changes. He inquires whether internal knowledge about restructuring is shared with Foster to help him incorporate it into future expectations.

James Foster discusses the company's strategy of maintaining close relationships with clients, particularly in the pharmaceutical industry, to ensure they are aligned with clients' future needs and plans. He mentions that while some clients anticipate increased spending and are eager to move beyond their current constraints, others are still navigating infrastructure reductions. Foster emphasizes the importance of consistent communication with clients to gauge their anticipated workload and needs accurately. Despite uncertainties, he is optimistic that the situation will stabilize and potentially improve as clients conclude their current adjustments. Dave Windley then inquires about the theme of pricing, which has become a key discussion point in the current market environment.

The paragraph features a conversation primarily involving James Foster and Dave Windley about the current pricing challenges in the biotech industry. James Foster explains that biotech companies are becoming more price-sensitive due to difficult access to capital and infrastructure reductions. This situation presents both challenges and opportunities for clients regarding pricing. The company strategically lowers prices to maintain or gain market share without matching competitors' lower prices due to the complexity and cost of their studies. This approach is facilitated by efforts to reduce their infrastructure costs, allowing more competitive pricing while protecting margins. In response to Ann Hynes's question, there is no direct answer about how this downturn differs from previous ones or its recovery trajectory. The discussion suggests that current pricing strategies continue trends seen in the past year, implying no dramatic increase in pricing pressures currently.

In the paragraph, James Foster discusses the differences between the current economic downturn and the one following the 2008 financial crisis. He highlights that the marketplace has changed significantly, with many competitors now being owned by his company and an increase in biotech companies. Unlike the past, big pharmaceutical companies are now leaner and outsource more work, reducing the excess capacity that previously allowed clients to push prices and margins down. Although a patent cliff is approaching, Foster believes there is a strong necessity for clients to resume operations soon due to the high demand for effective drug modalities to treat challenging diseases.

The paragraph discusses the state of the biotech and pharmaceutical industries, noting a significant number of drugs that are not being actively developed, often stalled before the IND phase. Despite this, there is a strong unmet demand and need for these drugs. Ann Hynes inquires about expected growth in the biotech sector by 2025. James Foster responds, indicating a modest growth in biotech is anticipated, supported by capital market inflows and venture firm investment, but this growth won't counterbalance the stable, non-increasing situation in big pharma. Justin Bowers asks for clarification on the stability of bookings in DSA (Discovery and Safety Assessment) and its underlying dynamics, noting that while the demand environment has been stable, there's a projection of a mid- to high-single-digit organic decline in 2025.

In the paragraph, James Foster and Flavia Pease discuss the factors affecting their company's pricing and volume dynamics. Foster explains that the current year's decline is due to a mix of lower prices and reduced volume, unlike the previous year, which was mainly volume-driven. He notes a pricing headwind as they work through their backlog, though volume declines are less severe than expected. Pease adds that prices are stable and clarifies that although they implemented selective pricing strategies and discounts in 2024, leading to a pricing headwind in 2025, no further significant price erosion is expected as the year progresses into 2026. Prices are generally expected to remain flat through the end of the year.

In the paragraph, Lucas Sergott, filling in for Charles Rhee, asks about opportunities for margin expansion in the manufacturing segment, specifically mentioning growth in microbial solutions, rightsizing actions in the CDMO business, and potential payments from terminated client arrangements. Flavia Pease responds by discussing cost-saving measures, including $225 million in cost savings annualized fully by 2026, with $175 million in 2025. These savings will affect all business segments, emphasizing a focus on margin protection. Lucas also inquires about a client's FDA complete response letter, to which James Foster confirms it was one of the clients previously discussed at a JPMorgan event.

In the paragraph, James asks about margin projections for 2025 compared to 2024, estimating a decline of around 100 basis points after accounting for share buybacks and non-GAAP items. Flavia Pease responds by saying they're leaving the interpretation of "modestly below" to analysts like James and Michael, opting to provide qualitative rather than quantitative guidance. Michael Ryskin then asks about pricing stability, acknowledging past price increases and their impact on the business. He questions if current prices are healthy and whether the company foresees stability or potential reset in pricing power over the next few quarters, given the historical context of higher prices.

The paragraph discusses the challenges and fluctuations in the biotech industry, particularly regarding supply and demand dynamics. James Foster emphasizes the transitory nature of the current industry challenges and predicts an eventual resurgence in demand and pricing power, especially in the safety assessment business. He mentions that as drug pipelines become robust again, the demand for capacity will lead to increased pricing power. Flavia Pease provides additional context on the company's performance, noting a modest 40 basis point decline in margins for 2024. In a follow-up question, Max Smock from William Blair expresses surprise about an impairment in the biologics test business, given previous reports of a rebound in that subsegment.

The paragraph is a discussion between Max Smock and Flavia Pease regarding a business segment experiencing goodwill impairment due to the loss of two commercial clients and lower than expected growth in the CDMO business. Although cell and gene therapy has growth potential, it's expected at a lower level than initially anticipated. The impairment is mainly linked to the CDMO business and not the biologics testing segment. Flavia Pease clarifies that the impairment primarily arises from the CDMO adjustments rather than the biologics testing subsegment, which has been performing well recently.

In a discussion led by Jacob Johnson from Stephens, questions were raised regarding the impact of losing commercial customers on the company's business development and guidance. Flavia Pease confirmed that any contractual obligations related to the lost customers are accounted for in the company's guidance, specifically within a 1% headwind. James Foster acknowledged the loss of the largest commercial customer but emphasized that the company still has a strong client base, particularly with those in the clinical phases. He assured that despite the loss, demand for high-quality providers remains strong, and the business is well-managed and staffed to continue gaining new business.

In this segment of the article, Patrick Donnelly from Citi questions Flavia Pease about the book-to-bill ratio after a $150 million decrease in backlog, suspecting it fell to 0.75 from last quarter's low 0.9 range. Flavia clarifies that the book-to-bill ratio is flat quarter over quarter and suggests factors like FX or considerations in the model could impact perceptions. Patrick then shifts focus to James Foster, inquiring about the future margin outlook for DSA (Drug Safety Assessment), given past pressures on pricing and revenue. James Foster responds, indicating that they do not expect continued margin contraction and acknowledging multiple factors affecting the trajectory.

The paragraph discusses the company's efforts to optimize its infrastructure by increasing both physical and human capacity, and digitizing operations to enhance client self-service capabilities. They are cautious about expanding capacity in line with current demand to manage capital expenditure (CapEx) effectively. The company anticipates that as capacity fills and demand increases, customers will be willing to pay more, reducing pricing concerns. It is noted that preclinical drug development comprises 20-25% of total drug development costs, while clinical development takes 70-75%. The company expects improvements in operating margins in the future. The latter part of the paragraph introduces a question from Casey Woodring at JPMorgan about the potential impact of a proposed 25% tariff on pharmaceutical imports by President Trump, asking how it might affect pharmaceutical budgets and preclinical spending.

In the conference call, James Foster addressed a question regarding the potential impacts on the pharmaceutical industry following RFK's confirmation and changes in the new administration. He noted that any predictions would be speculative at this point, and clients have not expressed significant concern about the situation. He mentioned RFK's focus on food and vaccine spending and the possible effects on the FDA and drug development rates. He also briefly commented on tariffs intended to support U.S. drug development, which could benefit U.S. companies. The call concluded with closing remarks from Todd Spencer and the operator.

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