Q4 2019 Earnings Call
[music].
Ladies and gentlemen, thank you for standing by welcome to the Charles River Laboratories fourth quarter 2019 earnings Conference call.
At this time your telephone lines on the listen only mode. Later, there will be an opportunity for questions and answers with instructions given at that time.
If you should require assistance during the conference call. Please press Star then zero and 18 de specialist will assist you offline.
As a reminder, your conference call today is being recorded.
I'll now turn the conference call over to your host corporate Vice President of Investor Relations Dod Spencer. Please go ahead.
Thank you and good morning, and welcome to Charles River Laboratories fourth quarter 2019 earnings in 2020 guidance conference call and webcast. This morning, Jim Foster Chairman, President and Chief Executive Officer, and David Smith, Executive Vice President and Chief Financial Officer will comment on our results for the fourth quarter in the full year 2019.
And our guidance for 2020.
Following the presentation. They will respond to questions. There's a slide presentation associated with today's remarks, which will be posted on the investor Relations section of our web site at IR got few river Dotcom a replay of this call will be available beginning at noon today and can be accessed by calling 866 207.
One zero for one the international access number is four zero to 970 0847. The access code in either case is 809348 for the replay will be available through February 25th you May also access an archived version of the web.
[noise] relations website.
I'd like to remind you of our safe Harbor any remarks that we may may make about future expectations plans and prospects for the company constitute forward looking statements under the securities. The private Securities Litigation Reform Act of 1995.
Actual results may there.
They differ materially from those indicated by any forward looking statement.
During this call we will primarily discuss results from continuing operations and non-GAAP financial measures, which we believe help investors getting a meaningful understanding of our core operating results and future prospects. The non-GAAP financial measures are not meant to be considered superior to or a sub Q4 results of operations are prepared in accordance with gap.
In accordance with regulation G. You can find the can comparable GAAP measures and reconciliations on the Investor Relations section of our website through the financial information link.
I will now turn the call over to Jim Foster.
Good morning.
I'm very pleased to speak with you today about the conclusion of another excellent year for Charles River.
Our expectations for 2020, and the accomplishments, we've made and expect to make as we execute our strategy to achieve our financial targets.
We believe the strong finish to 2019 demonstrates what we've worked hard to achieve.
The breadth of our leading early stage portfolio, which more fully supports the discovery Nonclinical development and safe manufacturer of new therapies for the treatment of disease.
The deep relationships, we Floyd with our clients, both large and small by leveraging our flexible and efficient outsourcing model investments, we've made as scientific capabilities and then the necessary staff and capacity to ensure that we could meet the needs of our clients and greater operating efficiency we.
Thanks to improved speed and responsiveness to clients, while generating margin expansion.
The success of these efforts was evidenced not only in our outstanding financial performance, but also in the fact that we worked on 85% in the drugs approved by the FDA in 2019.
This is an accomplishment few crs can claim and we believe is a testament to the value that our clients place on our contribution to the research efforts.
Let me now give you the highlights of our fourth quarter and full year performance.
We reported revenue of $691.1 million in the fourth quarter of 2019, an increase of 14.9% on a reported basis.
Broad based growth in all three segments resulted in organic revenue growth of 7.4%.
With the largest contribution coming from the DSD segment.
For 2019 revenue was $2.62 billion, where the reported growth rate of 15.7% and organic growth rate of 8.5%.
The organic growth rate was consistent with the 8.7% reported in 2018 in both years were firmly within the high single digit range, which is our goal for the next two years from a client perspective, biotech clients, where our fastest growing client segments in both at quarter end the year as they benefit.
It from third strongest year funding from the capital markets Nvcs.
The operating margin was 21.4% in the fourth quarter, an increase of 110 basis points year over year, driven primarily by the Dsos segment.
This marks the second consecutive quarter. That's a consolidated operating margin has improved year over year as a result of the second half margin expansion. The 2019 full year operating margin improved by 20 basis points to 19%.
We're very pleased with the fourth quarter and full year margin performance as it demonstrates our ability to leverage the investments that we have made and staff capacity in infrastructure to accommodate the robust growth in a more scalable and efficient manner and also provides a clear line of sight to our 20% goal for the full.
Full year 2021.
With more balance investments ahead, coupled with our continued focus on driving greater efficiency, we expect to make meaningful progress towards that 20% to year target in 2020.
Earnings per share with $2 in one sense for the fourth quarter, an increase of 26.4% from $1.59 in the fourth quarter of 2018.
For the full year earnings per share worth $6.73, a 16% increase over the prior year.
We exceeded our prior guidance range of 6050 to 60060 cents.
Due primarily to the robust revenue growth and operating margin improvement in the fourth quarter.
We believe our 2019 performance thoroughly demonstrates the successful execution of our strategy to physician Charles River as the early stage research partner of choice for our valued clients and at the pace of demand from these clients continues to be robust.
Our exceptional market position the strategic expansion of our unique portfolio and the ongoing enhancements of our culture of continuous improvement give us added confidence in that 2020 guidance.
Revenue growth in 2020 is expected to be in a range from 13% to 14.5%.
On a reported basis and 7.75 to 8.7.
5% on an organic basis non-GAAP earnings per share are expected to be in a range $7.45 to $7 in 60 cents.
Or an increase of 10.5% to 13% over last year. These metrics meet our long term targets of high single digit organic revenue growth and earnings per share growth at least in the low double digits I'd like to provide you with additional details on our fourth quarter segment performance and our expectations for 2020.
The getting with the RMS segment.
Mess revenue in the fourth quarter was $131.3 million, an increase of 2.8% on organic basis for the air RMS organic revenue was 5.2%.
We anniversary the commencement of the insourcing solutions contract with the NIH I'd in September which resulted in the expected reduction from the mid single digit growth rate that we had recorded earlier in 2019.
Aside from the NIH I'd anniversary fourth quarter RMS growth was largely driven by similar trends that characterize the first three quarters of the year robust demand for research miles in China and solid growth for research model services, partially offset by lower sales growth for research models outsiders.
In 2020, we believe that the RMS segment will perform in line with its two year target of low to mid single digit organic growth.
The services businesses continued to be a consistent source of revenue growth, even without the year over year benefit from NIH IDIQ contract. The insourcing solutions business or I guess continued to perform very well as clients increasingly adapted flexible models to enhance the operational efficiency.
As Theyve Iberia management and research efforts.
We were awarded new NIH contracts and while collectively smaller than the NIH I'd. They also drove revenue growth in 2020.
These contract awards will be offset partially by the completion of and I ask contract in China.
We are gaining traction with our new biopharma clients through our Cradle initiative, which provides both small and large biopharmaceutical clients with turnkey research capacity.
And the Boston, Cambridge, and South San Francisco Bio hubs.
South San Francisco Cradle Lab opened in January and has already received very favorable client feedback with a number of clients occupying the space and more committed to it.
Through both unique models like cradle and more traditional insource staffing arrangements I asked has become an important partner for clients, who need this type of support for the research programs.
Our research models business in China, which represented slightly less than 10% of RMS revenue had another strong quarter and has continued to deliver double digit revenue growth annually. Since the business was acquired in 2013.
There is substantial demand for our high quality models in this rapidly emerging biomedical research market.
Which we support through continued expansion within China overall, expanding our presence supports our goals of market leadership and achieving a market share in China similar to that in western markets.
With respect to the current a virus outbreak in China.
We're closely monitoring the situation, but at this juncture have only forecasts a small financial impact in the first quarter. At this time, we do not believe that they will be material impacts on the restrictions on the transport of research models within an out of China, because we believe that we can offset most of the potential impact.
Through other sources.
Research models remain an essential regulatory required scientific tool for early stage research and toxicology and a vital component of our portfolio to support our clients and our own DSA segment, which remains the largest client of our research models business.
Sources, you are broad portfolio of high quality scientifically define research models and our exceptional client service as the Foundation foundation from which they can discover new molecules.
To expand our portfolio foundational research tools and enhance RMS as long term growth profile in January we completed the acquisition of Hema care.
In the air provider of human derived cellular products that are used as critical inputs throughout the cell therapy development and manufacturing process.
Combined with our integrated early stage portfolio of discovery safety assessment and manufacturing support services.
The addition of Hema care creates a unique comprehensive solution that enables clients to work with one scientific partner from the earliest stages of this cell therapy programs and iteratively throughout the research process in order to accelerate this speed to market, we believe Hema care will lead more clients.
To start the cell therapy discovery programs at Charles River and remain with us.
In addition to enhancing client retention the acquisition increases our exposure to high growth cell therapy market Invacare is expected to drive profitable revenue growth with estimated growth of at least 30% annually over the next five years.
The RMS operating margin declined by 50 basis points year over year to 24.6% in the fourth quarter, primarily driven by the research models business outside of China.
We strive to outs offset the impact of the volume declines in mature markets with our ongoing efficiency initiatives aimed at optimizing productivity and reducing the RMS cost structure.
Through these efforts our goal is to maintain the RMS operating margin above 25% as we did in 2019 at 26.2% and intend to do so in 2020.
DSA revenue in the fourth quarter was $439.2 million and 9.4% increase on organic basis.
Both discovery and safety assessment business is performing very well for the full year DSE organic revenue growth was 9.1% firmly achieving our high single digit segment outlook for the six consecutive year backlog in bookings in both businesses remained strong in the fourth quarter re.
Enforcing our expectation that DSA segment is well positioned to generate high single digit organic growth again in 2020.
Biotech clients continue to drive revenue growth in 2019.
Demonstrating that these small and midsized clients remain laser focused on innovation and moving their programs forward and are largely unaffected by short term fluctuations in the funding environment because it's estimated that they have three to four years of cash on hand clients continue to choose our flexible and efficient as.
Hosting model for early stage drug development in lieu of maintaining the in house expertise.
The discovery business had an exceptional quarter in a strong year with broad based growth across the majority of its business lines on a continuing efforts to build scientific expertise to the discovery of novel Therapeutics.
To create targeted and flexible sales strategies and to harmonize the discovery portfolio have proven to be successful.
We have enhance our scientific capabilities across our clients major therapeutic areas of focus.
From oncology tests, and CNS to rare diseases.
Our ability to work with clients for a single project, where an integrated program and to structure flexible relationships to meet their specific outsourcing needs is resonating with clients and has led to a number of new business opportunities recently, including that Takeda collaboration.
In order to accommodate our clients diverse outsourcing needs. We will continue to strengthen our discovery tool kit through our partnering strategy, our partnerships with bit bio to expand our translational drug discovery platform related to stem cells and with Fiat genomics to.
To provide bio informatics expertise.
Two recent examples of the continued expansion of our discovery portfolio.
And our exclusive partnership with distributed bio which commenced in October 2018, enhances our large molecule discovery capabilities and fills a gap in our portfolio. It has continued to perform very well as our collaborative offering is gaining traction with our clients.
We firmly believe our unique ability to serve as a single source partner support our clients early stage research needs, we'll continue to attract new discovery business opportunities and further incentivized clients to stay with us into safety assessment.
Our safety assessment business had a strong quarter with balanced growth driven primarily by higher study volume and increased pricing.
These factors coupled with the acquisition of cytotoxic lab resulted in another strong year for the safety assessment business.
Cytotoxic lab continued to perform very well with all major integration milestones remaining on track and its financial performance exceeding the acquisition plan after a strong fourth quarter.
Hi, Techs lab as well as the acquisitions of MPR research in 2018, and Wil research in 2016 have meaningfully enhanced our leading position in the safety assessment market and solidified our scientific capabilities and global scale, allowing us to fully support our clients early stage.
Element needs.
We are pleased with the extensive depth and.
Breadth of our safety assessments portfolio and remain intently focused on continuing to enhance the business and value we provide for our clients.
In addition to M&A, we are evaluating opportunities to add new nish capabilities, both through internal investment and through our partnership strategy.
We believe that our focus on broadening our portfolio scientific capabilities on a global scale over the past several years have further differentiated shelves or from the competition and positioned us very well for 2020 as the partner of choice for our clients broad safety assessment needs.
The DSE operating margin was 25.6% in the fourth quarter and a 240 basis point improvement from the fourth quarter of 2018, driven by both the discovery and safety assessment businesses. The robust margin performance reflects greater leverage of topline growth.
Now that staffing levels are appropriately balance with client demand, we continue to higher in 2020.
To accommodate increasing demand, but expect to do so at a more measured pace than in recent years.
The margin increase also reflects our continued focus on operating efficiency as well as some improvement in cytec slabs operating margin.
Cytoris labs margin is expected to continuing to improve in 2020, primarily through the attainment of increment incremental synergies.
In 2020, we expect all of these factors to contribute to meaningful progress towards our two year DSE target of a mid 20% operating margin.
Manufacturing support revenue was $120.6 million for the fourth quarter growth rate of 6.3% on an organic basis, primarily driven by robust client demand and the biologics testing solutions business.
The slow growth rates for the manufacturing segment in the fourth quarter was due primarily to the microbial solutions business and to a lesser extent avian.
Well again at revenue growth for the year was 10.8% inline with our low double digit target for the segment for the year and over the longer term.
As we've said in the past our businesses not linear and that can be quarterly fluctuations across our portfolio, but on an annual basis. We are confident that the manufacturing segment will continue to grow at low double digit rate organically.
Microbial solutions revenue increased in the quarter, but at a slower rate than prior quarters.
This was due principally to the timing of orders for both Anda safe and Celsis products.
And the availability of new systems for the year revenue increased at a low double digit organic growth rate. Once again microbial solutions is also expected to return to low double digit growth rate.
After the first quarter of 2020, because the first quarter year over year comparison, we effected by last year's large stocking order for Celsis products from our strategic partner in certain non farm or markets, David will discuss the impact of the stocking order when he discusses our first quarter outlook.
Overall, we continue to firmly believe that our ability to provide clients with a total rapid microbial testing solution.
As well as the quality and accuracy of our testing platform. Our key differentiators from the competition, which will lead clients to continue to choose Charles River for the critical quality control testing requirements.
The biologics business reported strong revenue growth for the fourth quarter and for the full year. This performance is indicative of the sustained rapid increase in the number of biologics in development.
As well as new opportunities such as cell and gene therapies that continue to prefer propelled market growth in the low double digits.
We have been successful at gaining business because of our extensive portfolio of services to support the safe manufacturer biologics.
To accommodate robust client demand, we have invested in capacity expansions that transition to the largest site in Pennsylvania is effectively complete.
We are booking new business and continuing to ramp up utilization, while working with the remaining clients who are finalizing the validation efforts. We believe this expansion and smaller ongoing expansions globally as well as our focus on adding new services to our biologics portfolio, particularly in cell and gene therapy.
To support the robust growth, we expect this business to generate for the foreseeable future.
Manufacturing support segment's operating margin was 37.2% in the fourth quarter consistent with a 37.4% reported last year.
We were pleased that microbial solutions, despite the slower growth rate in the fourth quarter continued to benefit from the investments and process improvements that are resulting in better operating leverage for the business. The biologics business faced headwinds from higher cost due impart to growth related initiatives, including capacity expansions.
But now that we have eliminated the duplicate costs in Pennsylvania and manufacturing segment operating margin reached its highest level of the year.
We believe we are extremely well positioned to modestly improved manufacturing full year operating margin in 2020 from 33.9% in 2019 and to achieve our target in the mid 30% range.
We continue to focus on the execution of our strategy to maintain our position as the early stage Cerro partner of choice for our clients drug research development and manufacturing support efforts.
As we look to the future. It's imperative that we continue to expand our portfolio of essential products and services to enhance our ability to comprehensively support our clients drug research efforts, we intend to do so through strategic acquisitions, which is always our preferred use of capital.
Our pipeline of M&A candidates remains robust and we continue to evaluate a number of opportunities ranging from use unique research tools to discovery capabilities to manufacturing support activities.
We also must stay current with new technology, XOMA and modalities for which we will increasingly utilize our partnership strategy to add innovative capabilities and cutting edge technologies with limited upfront risks.
We have also spent the past several years investing internally in capacity and staffing levels that are commensurate with growing demand, while striving to enhance the scalability of the business.
While we need to continue to invest we believe that we have achieved an appropriate balance we now have an enhanced ability to leverage topline growth and drive greater efficiency.
As a result, we're optimistic as we turn the page to 2020.
We believe our annual guidance is achievable and our two year targets are squarely in sight.
Our strong business is delivering value to clients into employees and to shareholders. As result of our position in robust end markets are attractive growth profile and the incremental value that will be derived from achieving meaningful operating margin improvement over the next two years.
In conclusion, I'd like to thank our clients and shareholders for the support and our employees for their exceptional work and commitment.
Now I'd like to David Smith to give you additional details on our financial performance in 2020 guidance.
Thank you Jim and good morning.
Before I begin hiring mining.
And I'll be speaking primarily to non-GAAP results from continuing operations, which exclude amortization and other acquisition related charges costs related primarily to our global efficiency initiatives and certain other items.
Many of my comments will also referred to organic revenue growth, which excludes the impact of acquisitions and foreign currency translation.
My discussion this morning will focus primarily on our Twentytwenty financial guidance.
We believe that we will deliver strong revenue growth this year and achieve meaningful operating margin expansion, which gives us confidence that we are well positioned to deliver a non-GAAP earnings per share between $7.45.
$7 in 60 time.
Supported by a healthy funding environment, we expect client demand will continue to be robot.
Consequently, we expect organic revenue growth this year in a range of 7.75% to 8.75% and reported revenue growth of 13% to 14.5% both of which are consistent with our two year revenue growth target.
The trends in each of our business segments in Twentytwenty are expected to be similar to last year.
RMS segment is expected to achieve low to mid single digit organic revenue growth with heme account acquisition, adding at least $50 million or approximately 10% to the reported RMS growth rate.
In addition to the he MCAC contribution the arm and segments is expected to benefit from robust demand for research models in China.
Broad based growth in the services business from Gems Rads insourcing solution on price.
We expect the display segment to deliver high single digit organic revenue growth.
Based on continued strong contributions from both safety assessment and discovery services businesses.
The manufacturing segment is expected to grow low double digit organic revenue growth again in twentytwenty with both the microbial solutions and biologics businesses driving the increase.
Foreign exchange is expected to contribute 100 250 basis points of our reported revenue growth guidance based primarily on bank for cancer forward rate, which is slightly more favorable than the current spot rate for most currency.
On slide 29, we have provided information on our 2019 revenue by currency and the foreign exchange rate that we are assuming for twentytwenty.
We're very pleased with the collective efforts of our businesses.
Have positioned us to generate profitable revenue growth and meaningful operating margin improvement.
We believe that our operating margin performance in the second half of 29 team reflected our ability to leverage the scalable investments that we have made in staff capacity and infrastructure as well as the continuing focus on operational excellence and cost management.
In light of the investments over the last few years, we were very pleased that the operating margin improved from 29 team by 20 basis points to 19%.
This result included a 30 basis point headwind from a number of items, including the compensation structure adjustment.
Biologics capacity expansion in Pennsylvania, Sams club acquisition, and the NIH I'd contract all of which have not been largely anniversary.
Operating margin improvement will continue to be a top priority this year.
For the full year, we expect to make meaningful progress towards our two year target of a 20% operating margin.
The DSD segment and leverage of unallocated corporate costs.
Our expected to be the most significant contributors to margin improvement.
The Dsos operating margin.
Is expected to make meaningful progress and twentytwenty towards the mid 20% target.
The primary driver of the improvement is enhanced leverage of revenue growth as a result of more measured hiring along with the attainment of incremental acquisition synergy and at the operational efficiency.
The RMS and manufacturing segments operating margins are expected to be consistent with the two year targets of above 25% and the mid 30% range respectively.
While he Mclaren hands on operating margin that is moderately below the arm and segment average it will not prevented from achieving our RMS margin target as we expect this headwind will be offset by RMS operational efficiency.
The manufacturing segments operating margin will benefit primarily from the elimination of duplicate costs from the biologics expansion in Pennsylvania, and the continued ramp up of that site.
Unallocated corporate expenses and Twentytwenty are expected to be approximately 5.5% of revenue compared to 6% of revenue last year.
We have successfully reduced these costs by approximately 50 basis points per year from a peak of 7.5% in 2016 as a result of investments that we have made to build a more scalable infrastructure to liquids growth.
Total adjusted net interest expense.
Is expected to be in a range of $78 million to $18 million.
Compared to $67 million in 2019.
The increase will be driven by higher average debt balances and twentytwenty, resulting from our recent acquisitions, including Hema carrying January as well as a higher blended interest rate primarily associated with the issuance of $500 million of senior notes last October.
As a reminder, adjusted net interest expense is calculated net of interest expense interest income and.
And on FX adjustments related to forward FX contracts recorded in other income.
We continuously evaluate not capital priorities and as always intend to deploy capital to the areas that we believe will generate degrade just returns.
Strategic acquisitions remain our top priority priority for capital allocation, followed by debt repayment our.
Our gross leverage ratio was 2.76 times at the end of 2019 below three times as anticipated when we acquired sites talks lab last April.
The pro forma leverage ratio increased to modestly above three times following the January acquisition of hematite.
Absent any acquisitions, we will continue to repay debt and work towards our preferred leverage target of below three times.
Currently we do not intend to repurchase any shares and twentytwenty unexpected to exit the with our diluted share count slightly more than 50 million Chad.
The non-GAAP tax rate for Twentytwenty is expected to be in a range of 20% to 23.5%.
Which is slightly higher than the 2019 tax rate of 22% as a result to discrete tax benefits in 2000 2019 that are not expected to recur this year.
As a reminder, the first quarter tax rate has been meaningfully lower in recent years due primarily to the excess tax benefits related to stock compensation.
Given our current stock price, we also expected to be true into Twentytwenty, resulting in a non-GAAP tax rate in the mid to high teens in the first quarter.
In addition to driving profit rendering go free cash flow generation is a key measure of our financial performance in 2019 free cash flow was $340.4 million, an increase of $39.3 million or 13% from 2018, and well above our full year guidance.
The increase was due to the strong underlying operating performance of our businesses along with our continued focus on working capital management.
Capital expenditures were $140.5 million of 5.4% of revenue in 2019.
Essentially unchanged from 2018.
For Twentytwenty, we expect free cash flow to be in a range of $350 million to $360 million, representing a mid single digit increase year over year.
Included in this outlook is a cash headwind of approximately $15 million, primarily associated with pension related payments that we will incur in twentytwenty.
Adjusted for this headwind free cash flow with increased at a high single digit rate.
Capital expenditures. This year are expected to total approximately $150 million comprised primarily of capital projects in many of our businesses to support continued growth as well as for the capital requirements of recently acquired business.
A summary of our Twentytwenty financial guidance can be found on slide 38.
Looking ahead to the first quarter of Twentytwenty, our outlook includes year over year revenue growth in the mid teens on the reported basis organic revenue growth will be affected by the compensation to last year's large microbial solutions stocking order that Jim mentioned, which is expected to be more than a 500 basis.
Point headwind to the manufacturing growth rate.
An approximate 100 basis point headwind to the consolidated growth rate.
In addition, we have currently forecast and your small impact from the current a virus to RMS China business in the first quarter, but we will continue to monitor the situation closely.
As a reminder, China represents slightly less than 10% of RMS revenue.
Both of these headwinds will limits, our operating margin improvement in the first quarter when compared to the prior year.
In addition, the operating margin is typically at its lowest points of the year in the first quarter due to the seasonality in the biologics business and fringe costs.
These headwinds combined with the first quarter tax rate in the mid to high teen are expected to result in low double digit earnings per share growth in the first quarter from $1.40 cents last year.
In conclusion, we were very pleased with our financial performance in 2019, and believe that we're well positioned to have another strong year in twentytwenty.
We are confident in our ability to consistently grow revenue earnings and cash flow as well as to achieve our targets of high single digit organic revenue growth and an operating margin of 20% for the full year 2021. Thank you.
That concludes our comments operator, we will now take questions. Thanks.
Thank you ladies and gentlemen, if you do to ask a question. Please press one zero on your Touchtone phone, you'll hear an indication you have been placed in Q and you may remove yourself from Q by repeating the one then zero command.
If you're using a speaker phone we ask you to please pick up your handset before pick pressing any buttons.
In addition, we would like could you please limit yourself to one question per Q.
Again up for questions Press, one then zero at this time.
Our first question will come from the line of Eric Coldwell with Baird. Please go ahead.
Congrats on the nice outlook question on Microbials on you made a couple of comments about the timing of orders.
Just curious where you really focused more on prior year demand comparisons or maybe just some sluggishness in Fourq you development for whatever reason and then secondarily the availability of new systems was brought up a couple of times I'm, hoping you can dig into exactly what you're speaking about about the availability and the issues you've had there if any.
And when those might be resolved. Thanks, so much.
Yes so.
Well.
I guess to start where we continue to be pleased with the growth rate of that business and it grew double digits for 19.
We will grow double digits for 20, Andas essentially growing double digits since we've owned it.
And we're constantly talking with the non linearity of our businesses are pretty much on every call cells or remind you again on this one so.
Nothing really unusual it's the way the orders fell.
We're constantly.
Upgrading our.
Assistance in terms of new generations that both hardware and software staying multiple generations ahead of the competition and sometimes you don't have that right in terms of having a.
Put something new in the marketplace.
And people will wait for that.
So.
There will be harmony between new new products and software new hardware and software in 2020 and going forward.
It was it was a bit out of sync and it's tough to sort of predict what systems people will buy when a stronger third quarter for instance, so.
Nothing, particularly unusual at just the continued cadence of the business and continued innovation.
The business and continued to really enhance assistance we have.
In the in the marketplace based upon feedback and input from our clients who are using them.
We'll next go to line of Tyco Peterson with JP Morgan go ahead. Please.
Okay.
Pardon me Mr. Peterson, if you would re queue by pressing one zero, we seem to have last year.
One moment please.
Mr. Peters your line should be open now.
Okay. Thanks, Jim I'll start with Hema care, you talked in our conference about the opportunity to drive more clients to start cell therapy discovery program. So can you talk a little bit about you know cross selling I think you said that you can happened about 75% of the cell therapy market is there an opportunity to expand that.
Is there an opportunity to do additional M&A around he mccarran, then overall for cell and gene therapy or expanding capacity can you just talk a little bit about incremental capacity adds and how we think about that in the context and the margin targets.
Sure, we're really thrilled with the steel hours I was just visiting the location, that's a really great and enthuse management team and technology is terrific.
The demand is.
Meeting our expectations.
The terrific sales organization, which is being enhanced by the challenger sales organization.
Who's out at a bunch of clients that they wouldnt otherwise have previously accessed.
As the continuity and ability to handoffs cell therapy drugs from product and service within the Charles or a portfolio is really really powerful and not something anybody else can do.
We reported that we have about between 140 $160 million worth revenue nine this space. It's obviously going to increase dramatically hemocue is going to grow at least.
At least 30%.
I will be terrific for the research models segment, but also really expand.
The initiation of so much of this work whether it's in R&D process improvement or manufacturing with clients who are in this space, who can count on us and like all clients.
They're always going to rush to market and the ability not to have to find new providers of particular products or services in this space will be quite powerful we're enhancing our rob.
Ah portfolio of assets and our biologics business, we have capabilities and that microbial business to test. These products, we have special immuno compromised animal models and the research model business and of course, we're going to do this combination studies between discovery and safety.
Which will be powerful as well so it's a wonderful set in our portfolio. It enhances it nicely like a lot of other things that we've been doing in the discovery space in particular gets us to start really early with the client there are.
Other acquisitions and they sell and also in the gene therapy space both on the product on the service side that we are.
Pursuing at various stages.
We're thinking about geographic expansion of this business.
The capacity they have right now to California based operational capacity. They have right now in California is relatively new and will help them growing that locale for awhile, but we want to take advantage of other about a location. So we are Rob we're seriously pursuing I think I'll stay away from the specifics of exactly where that is.
We will move now to the line of Robert Jones with Goldman Sachs.
Question, I guess, just on D.S.A. in and probably more specifically.
On safety assessment, you know Jimmy talked about Cytec lab being largely integrated at this point. Obviously you guys have successfully integrated a few other large deals in the last few years in that space was wondering if maybe you could comment just on where you're running today from a capacity standpoint, and then as it relates to that on the margin side you guys.
Feel very confident about the mid Twentys operating tar margin target, but seems like you're you know I know, there's some seasonality seems like you're getting pretty close to that already. So just was hoping maybe you could just talk about capacity and then the path.
And how comfortable you are with with getting to that 25 or mid twentys and maybe beyond.
Sure.
As a general proposition capacity as well utilized pretty much across the board, having said that we have now we'll continue to add.
Strategic amounts of space at multiple facilities pretty much simultaneously, because we can't drive all of our clients or particular side. So we want we wanted to be able we have the benefit of proximity and the specialization services at certain.
Net debt at certain of our sites are having said that we still have a meaningful amount to space that are MPCI.
Site, which is a very large building we have the space when we bought that site, we're continuing to fill it out but.
We have that additional lever to be able to open runs that are already built out.
Which we're very happy to have we also have some small amount to space.
Available space that came with the cytotoxic deals so between those two locations and remember side Tox has a big locations in France, and Canada smaller ones in other parts of Europe. So the geographic dispersion.
Is very powerful the margins.
For well, which were in the mid teens had been improving the margins.
For sites Hogs lab will continue to improve in that business, we will continue to get price.
And volume and we hope that mix between specialty in general taxes favorable so that should continue to drive margins certainly mid twentys them and longer maybe David wants to say somewhere about margins.
We've been talking about safety assessment, I'll, just say being the most important driver.
Getting Charles River through the 20% target that we committed to get into for the end of next year.
Along with unallocated corporate costs, but some data yet that's a key driver for getting them and we've been signaling that for a while.
It's pleasing to see.
The second half results, but do you say.
Coming in the way that we had signaled.
I know you're talking about you mentioned on the call that you know what kind of at the mid Twentys, we aren't the core to full.
But for the full year, we're still at 22%.
So there's still some.
Opportunities available to us to continue to grow that DSD segment.
To the mid Twentys for full year basis, and that's how we'll see.
Charles River performance get to the 20%.
Our next question will come from the line of Jack Meehan from Barclays.
Go ahead please.
Yes. Thank you good morning, and congrats on the quarter.
I wanted to.
Stick with the DNA topic I'm was hoping you could just comment a little bit more on the discovery side and the deck I think you called it out as having an exceptional quarter. I was wondering just if you look at the third quarter growth relative to the fourth quarter step up on both organic and margins.
How much did discovery contribute to that versus kind of the base safety assessment progress.
Wow.
If you bear with us we're going to <unk>.
Not peel that onion back to match that we watch we look at the DSA segment as a continuum, we want you to do that as well so your guidance about.
High single digit topline growth and operating margin going into the mid Twentys is the composite I would say that.
Discovery is the aggregation of several acquisitions, most small one sort of medium size.
We bought all of those businesses with the goal in the assumption that they could grow it.
At least low double digits and we we bought them with the assumption that they would have at least 20% operating margins. So so I think all I would say as they're continuing to move in that direction them. Both the margins have been improving the topline growth has been improving we've been particularly pleased for last couple of years without early discovery business, which is which is.
A larger piece and sort of.
One of the things that really crystallize solidified the discovery strategy for us starting very very early with the client. So we're seeing some nice.
Growth rate there, we I think we've also called out oncology franchise throughout the year, obviously, obviously given the.
Significant amount to investment power clients and cancer.
We should at other beneficiaries of that so we're very pleased with discovery pleased that 20% to those clients are also doing safety with us that will only be enhance and continued to be improved then.
We're seeing some nice pull through.
From one service offering to another we're also seeing integrate discovery complex integrated discovery deals across multiple sites that are getting some traction.
Well go now to the line of David Windley with Jefferies Go ahead. Please.
Hi, Thanks for taking my question good morning Congratulations.
One of the also focus on discovery, but more around the longer term build out of that that business.
Jim We you know Weve certainly watch the company be very acquisitive in safety assessment. As you said you you built discovery by a lot of mostly small acquisitions.
I think you've laid out a pass those kind of a commitment to acquire another billion dollars revenue and I think.
I am maybe many of US think the discovery is maybe the logical place for that to happen.
Is that right.
Do you think there are no is the path another already a continuing series of relatively small acquisitions. It's my sense, that's probably what's out there and then how does how does that influence.
Or how does your your desire to get to the mid twenties margin on a full year basis influence, what you're willing to buy between now and the into 21.
Yes so.
I would say that discovery is an area of focus.
For M&A, it's not certainly not the only line we have opportunities in our vast and we have opportunities across other parts of the portfolio as well, including biologics and microbial so.
It's a robust marketplace for us to look at deals many of which are private equity out. So we're sort of hours for sale just depending on the timing.
And the price. So there are some straight up discovery opportunities that would that were working and we are interested and adding to our therapeutic area capabilities.
And we're interested in other services in discovery, what you should pay attention to the technology deals that we have been then we'll continue to announce so just to reiterate.
The strategy there, we need to be if not cutting edge close to it and it's very hard to assess.
The strength of all of these new technologies and to place beds. So too.
Enhance the probability that the best so we place a successful, we're making small equity investments or providing some debt financing to a host of of companies primarily in the discovery space.
We have large molecule discovery, we have any idea we harvest.
We have a bio informatics deal.
And several others and several more in conversation and so typically the.
The structured the deal will be for us to be a sales and marketing partner for these companies, which will allow us to interface with the clients and get direct feedback from.
How responsive they are and whether the sciences really as good as like companies say they are in certain instances, we will create negotiate.
Buyouts as a predetermined price so with the certain point in time, we can buy the company's if we want so as I said previously if we have a portfolio of let's say a dozen companies and we look at these are sort of R&D investments as well. So some won't work. So if we ever doesn't companies, maybe three or four will just.
Well it was a stop working with because they didn't look very good.
Maybe three or four what the we are the won't want to buy they won't want to sell and we'll continue to work with them and offer their services.
Or occasionally products and several of them, perhaps also three or four will acquire so I take a much more.
Thoughtful and low risk way of continuing.
To buy additional services and the discovery space. So so we're thrilled whether they are with regard to your question about the margins are going to have margins all over the place so.
Well try that provide anything that that provides too much of a headwind having said that some of some of them we'll be small in some of them will have lower margins, but we won't do the deals unless we think at least.
20% or higher so to very good pipeline right now we're quite active in the things were looking at and they will this continue to.
Enhancing distinguish the portfolio from a competitive point of view and provide a greater ability to service our clients and that more holistic fashion.
Great. Thank you.
And for our next question will go to John Kreger from William Blair. Please go ahead.
Hi, Thanks, very much I can we go back to your remarks about China, it's encouraging that it doesn't sound like it's going to be that big of an impact curious.
You said, it's close to 10% of your RMS business, what about the rest of the portfolio.
And then I guess a quick follow on to that do you expect any weakness just sort of bleed into the second quarter. You think it's just kind of an isolated first quarter impact. Thanks.
You know, where we're closely monitoring the on the impact and.
Relative to movement of animals people in and out of China.
So we feel quite confident that.
Bill obvious small impact in the first quarter since it's kind of an evolving situation day today.
I think it's kind of dangerous for us to predict the impact on the balance of the year, having said that the sort of issues that we think.
Could impact us, we think that we backstop them pretty well so far.
And we think that we will be able to backstop them in a way that it doesn't impact were adversely impact.
Our forecast I would say that Oh, we have and set us and awhile, but we always have a.
Meaningful contingency in our operating plan to cover a whole host of things most of the things we intend to cover our things that.
Have happened in the business from time to time.
While we don't expect them, we know that there are always out there.
And now we think of things like Big pharma mergers that could have an adverse impact on the business and just things beyond our control. So there's certainly falls under the category things beyond our control, we'll we'll manage.
Our activities in China as best as possible I think we're very important.
A part of the drug development and discovery paradigm in China.
We're very interested in.
Making sure that are our colleagues from clients are healthy and and we hope to be able to work with some of our clients too as we begin the search.
For vaccines so.
We we feel that it's a manageable situation for us with with what we know right now I think you. Your first question was what other parts of the business. So the impact we have.
We have a very successful, but rather small microbial detection.
Detection business in China that we've had for years.
That's in our forecast thinking about having only a very small impact in the first quarter.
That we think is quite manageable.
From a guidance play.
Thanks much.
For our next question will go to Patrick Donnelly with Citi Go ahead. Please.
Great. Thanks, Jim maybe just at a high level you know you guys, obviously, a pretty comprehensive view biotech funding environment can you just update us on what you're seeing there obviously the guidance suggests a pretty high level of confidence, but just wanted to get your view of the overall funding environment as we head into 2020 here.
Sure you know it was a third best year in the history of biotech and.
And in of itself just a lot of money went into that directly into the biotech companies. So I think that's a commentary on.
The strength of the of the businesses the success rates the number of ipos than ever companies that are being sold and just the new modalities to treat diseases, which are working. So these are places that invested is a companies in which investors want to place bats.
Because the companies are.
Providing a really nice.
Returns so.
We think they have at least three or four years of cash in the bank.
More money coming in from the capital markets more money coming in directly into the VC funds, which seem to have accelerated the.
Historical five a year five seven year fund raisers seem to be two to three years. So they have a whole bunch of companies to either create or to finance.
Right off the bat.
So and you also have money for sure coming directly from big pharma directly into biotech because ER.
They become the discovery engine so we.
We don't here.
Biotech clients talk about any concern about finding the presently on the future they seem to be busy at work that a pretty full pipelines and we would expect that certainly to continue strongly through 2020, and and we look at the year and look at the world and five year increments, because we do a five year.
Strategic plan that we would expect that funding we remained strong throughout that time frame.
I appreciate it.
We'll move down to the line of Dan Brennan with UBI. Yes go ahead. Please.
Great. Thank you. Thanks for the question I wanted to go back to the he Macaire deal.
You just close this you know not too long ago I was wondering little flavor. Jim from you in terms of you know what's been somebody earlier early customer feedback they receiving and then more broadly as you look at this opportunity I think you've talked about filling in some adjacent season, how should we think about the opportunity around hema care to build out your exposure in this market. Thanks.
So customer feedback to us acquiring the company has been extremely positive because it gives them I.
I don't know give some greater gives him a kid greater context, it goes hemocue greater sales ability technical ability ability to expand.
Geographically.
And having more professional back office, a et cetera.
And when I say contacts you know, it's part of a large portfolio, where we already do significant allowed to work and cell and gene therapy and cell therapy space.
I have to the David I was there the largest client happened to be there and and I don't think Hughes, just saying that's because we just acquired the company but.
This wasn't a brand new company had been around for about 15 years and this was the founder and he said to me that he was would not have been able to grow his company at all without human care, but his reliance on the quality of the cellular products was everything I couldn't rely on anybody else.
He was very happy that we will involve than he he was hoping that we would maintain if not enhance the quality.
Of the company. So we feel really good about the asset that we buy we feel really good about.
Its ability to enhance our portfolio.
As I said earlier, we do have several other acquisition opportunities squarely in the cell therapy.
Product Arena and also service Arena and also we're looking to gene therapy as well, we want to be able to support clients as so many ideas that have been filed by so many companies in this space.
Who all need outside resources develop the drugs because most of them a biotech companies that don't have internal capabilities. So our.
Our ability to do all of this work is really a necessity for these companies we take our responsibility seriously we could continue to add to enhance our own infrastructure, while hopefully acquiring additional companies in this space. So we can provide the the core tools for them to do cell and gene therapy.
Both discovery.
Scale up and ultimately manufacturing other products to go into the clinic.
We have a question in queue from a line of one moment. Please.
Having some difficulty okay. Thank you will have a question here from the line of Donald Hooker with Keybanc. Your line is open.
Great. Good morning wanted the sort of here a little bit more context around your progress in the I asked space Insourcing solutions space within the RMS segment, you commented that there would be a.
A large contract in China, rolling off offset by some new wins in the U.S. with the government.
And just maybe given you had a huge deal last year or.
Is there any way to kind of size. This contextualize. This for us in terms of the ebbs and flows there and would love to hear your general commentary around do you see like any kind of turning point with clients with regards to the service.
Yeah. Thanks. Thanks for that question you know, it's a it's a.
Exceptional service offering that we don't get to talk about that much on these calls.
Which is growing quite nicely around the world not just to U.S. phenomenon, we do it everywhere that we do business.
Its this taking off taking the management to these complex.
Laboratory animal facilities off of the clients hands for clients that already have them and the client could be obviously, the government and academic institution biotech or pharma.
We've never literally size.
Sizes business, but it's a meaningful business that is growing nicely. It has.
It has some great opportunities. It has good legs, so while the NIH and I did contract was particularly large.
There are other government contracts of significant size.
We signed several during 2019 also this cradle initiatives. So so we have the sort of incubators space in Cambridge mass where clients go and we how's the animals for then we either can do the work with them or with them or they can just simply come in and use our space. Obviously, you've got this huge constant.
Duration of biotech and pharma companies in Cambridge, and the space is really well utilized growth rates, a terrific and the margins a terrific as well Weve opened another one of these facilities Justin in South San Francisco, We should have the same uptick and we're considering.
On a longer term basis opening additional these of these cradle facilities, another strong geographies, where that's a big concentration of biotech company.
I do think as I've said historically.
I want you to over read that as spot.
There's no reason why the big pharma companies that had these big facilities and dig staffs to do this work and some of the big biotech companies don't outsource the work to us in the same way that they've outsourced much of safety and increasingly discovery.
We can we can run these facilities more efficiently reduce the cost would do.
And I think enhance the science. So we have helped for a long time that this this business could pop for us.
It hasn't so which is I don't watch it over either but well it hasn't pockets growing very nicely on the constituent parts and pieces are coming together in a meaningful ways. So this will continue to be an important business for us.
Equally as a large clients.
You know have to look at their their cost structures in a more aggressive ways and and get comfortable outsourcing.
And if I heard your question Ryan just a clarification I think you described it as a launch China contract that was running off partially offset by the U.S. contract, it's actually near the way around the contract that we have won the U.S. is larger and therefore is being partially offset by the Chinese contract is being completed.
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Well move onto the line of Elizabeth Anderson.
Just one moment, please while we opened airline.
Mr. Anderson here.
I understand with Evercore ISI your line is open.
Hi, guys and congrats on nice quarter.
Question about biologics capacity.
You mentioned, obviously, they yesterday I finished with the duplicate costs, but how do you see the capacity over the question maybe 2020.
Yes so.
Biologics had a really nice nice growth rate in 2019, notwithstanding the fact that I would say we were.
Slightly capacity constrained so demand is.
I realize list at whole cadre of new biologics being developed.
Pretty competitive business for us, but all of the competitors are doing well because it's so much work, we have a broader geographic portfolio than the competition.
So we added small amounts of space at several of our sites that weren't in the U.S. only at it is this a very very large facility in Pennsylvania, which that's where we had to duplicate costs.
Which have now run off from were largely using the space.
That building in Pennsylvania is kinda give us sort of three maybe five three to five years of incremental growth.
Passively there I hope, it's three and a five yeah I did two things the uptake will be will create significant we added a lot of we had some capacity German operation of rise, which is quite large and really really good science and.
We have some space there, but that should be taken up quickly as well so.
We'll probably have to continue to add capacity certainly nothing meaningful in 20.
But.
The having sufficient capacity and getting getting new assays up and running.
Typically in areas like cell and gene therapy are absolutely essential to continuing to grow this business at the growth rate that we think out the market will will drive us too so feeling very good about where we stand.
Having gotten a new Pennsylvania facility in a good place as we go under 20.
Okay. That's very helpful. Thank you.
Sure.
You have a question in queue from the line of one of in dealing with Bank of America go ahead. Please.
Hi, I'm congrats on a quarter related to last question I guess would you say that the capacity expansion, but you just completed in anbar larger.
That's been solutions.
The bed expansion primarily to serve to maintain the low double digit growth profile linzess business or would you expect to see an acceleration in growth rate as we leverage the new increase capacity.
And related to that I guess.
Youre ready access to pointing 19 with an operating margin in manufacturing support in the high Thirtys.
So what costs or investments outside of incremental capacity, possibly are you looking to undertake over the next year or that would occur.
The margin profile and manufacturing sport in the mid Thirtys.
I take too much piece first yeah, so weve for Uh huh.
A longtime not been commenting that and margin expectation for manufacturing is mid thirties.
And for a while weve been knocking on the Dorothy while even in the mid Thirty's for while 19 was slightly different because we had to double when he called the biologics and that dragged it down.
But we've never really committed to growing the margins above mid thirty's for manufacturing.
There are other things, we can do to invest and Salesforce for instance, there is some R&D that we can do in microbial or other things. We can do in and biologics for instance to enable us to grow that topline continue to get a double digit growth rates in manufacturing and enjoy the.
The sort of mid Thirty's margin. So that has been a signal that we have given to the street for awhile and we see no reason to change that at this stage.
Turning to the growth rate.
We we as I said, we had terrific growth rate in 19 notwithstanding.
I would say tight capacity, so having additional capacity.
Having additional assay is getting some price having having the mix of business continued to.
Improve.
Should help the growth rate in a meaningful way.
Thank you.
And for our next question, we will go to line of hearing right with credit Suisse.
Your line is open.
Great. Thanks.
Right here, but can you describe where you stand now incomes in the hiring staffing level are you, where you want to be and how much wage pressure.
The and then also you commented on M&A opportunities, but I'm curious are you just more willing to offer more partnership model okay.
Partnership I can probably outright M&A and what kind of those partnerships potentially look like thanks.
Sure.
We were hustling and 2017 and 18 because demand exceeded our operating plan that's actually.
Which is a high class problem.
We really hustling to get sufficient numbers of people in the door and getting them trained.
To accommodate the demand and and as you recall.
Based upon your question.
We also ran into south.
Wage.
Inefficiencies are effective ways level, so starting at starting pay so we feel that we've caught up nicely from a from a capacity I T. I know and a head count point of view.
We corrected those those are starting wage anomalies.
Uh Huh generally I think you can stay ahead of that every once in a while you have a geographic locale, we had one or two in particular, it just changes I knew where you've got.
Some big competitors that come in and start businesses out of nowhere and.
They're they're hiring a bunch of people are paying whatever it takes a we have a little bit of that so I think a one time met course correction.
Was quite effective we've got a really good focused staying ahead of the gain HR analysis on every geographic locales. So I think it's highly unlikely we have to going to do that again, we feel really good about the headcount I go to most of the big safety sites every year and you can see that people.
People are much more comfortable with the pace of work.
Pace of training and so well have to hire people to keep pace with the the basic growth rate of that business, but but really nothing extraordinary on the M&A a front.
I think the answer to your questions really park. So we're going to do we have died and we'll continue to do a bunch of these partnerships for sure Celadon will turn into acquisitions for sure as I said earlier some of the.
Prices for the deals will will already be pre negotiated.
The with the terms of the deals which is terrific.
So some of those will turn into acquisitions a lot of those to be in the discovery space.
We have other you know fully baked companies that are further along in their lifecycle that some of these that will help fill out the portfolio really really nicely. So so we'll do both.
I will remind you we have no artificial goals for M&A or or.
Interested and just being bigger for the second being bigger we will pursue deals that I strategic in nature that make our portfolio better than it is now and that are affordable and meet our return metrics or otherwise, we will walk and that goes for the technology deals that if we want to do them and we don't have a pre negotiated purchase price.
And the prices are too high I will walk so we feel really good about both of those ways of increasing and growing the portfolio and I think you'll see us.
Be doing a combination of both going forward.
Thank you.
We do have time for one more question that will be from a line of Tyco Peterson. Please go ahead.
Hey, Thanks for taking a follow up I wanted to ask onto Kate I, just how we should think about $50 million and milestones flowing through and anything embedded in guidance. This year and then Jim you know you mentioned that our conference that you may see other similar deals you can't I'm just curious.
Fine looks like there thanks.
Yes so.
Enthused about the deal very creative I think on both of our parts.
Yes, they've offered us a small portfolio of potential molecules to develop we can pass on on on whichever ones. We want obviously, we'll do some of them the across four different tiers and they're they're milestone based payments notwithstanding a small upfront payment that we get from that which will offset some of that.
Discovery.
Costs, we don't have any meaningful baked into our guidance. We don't know I I don't I think it's unlikely no matter how much rehearsal that we're going to get through much much in 2020, <unk>. Although we do have some upfront payments shrunk from for that so I don't think it'll it'll be.
Not a headwind or tailwind, but we should be progressing with you know maybe wanted one or two molecules I think that's it's further down the road and we want to we're excited whether we had to release, where we didn't want to get ahead of ourselves and trying to its financial contribution.
Yeah, we're open to doing deals like this I wouldn't I don't think wear out working for them or clients want to work that way and of clients only want to work that way and.
We think of structures of the deals makes sense.
We think this one dozen we'd like to client and we like the fact that the other just on big M&A and they've got an interesting portfolio I'm. The it's something that we'll pursue so we have a tiny amount about revenue associated with this milestone deals right now or you know we helped you know as we said I think at your conference if one of the.
These goes all the way through to market approval it will be a nice financial return.
And we'd like to keep the expectations.
Got it.
We hope to fleets ourselves as well so shareholder base.
[noise] that will conclude our question and answer session I'll now turn the conference call back over to Todd Spencer for closing remarks.
Thank you that concludes our us. Thank you for joining us from a call. This morning, we look forward to seeing you at an upcoming Investor Conference. This concludes the conference call [noise].
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