Q1 2020 Earnings Call
Ladies and gentlemen. Thank you very much for standing by and welcome to juice Charles River Laboratories first quarter 2020 earnings conference call at this time. All participants are in a listen-only mode later. We will conduct a question-and-answer session and instructions will be given to you at that time. If you should require assistance during today's call, please press star then zero and an operator will assist you off line, and I would like to turn the conference over to your vice president vice president investor relations top Todd Spencer, please go ahead.
Thank you and good morning and welcome to Charles River Laboratories first quarter 2020 earnings call and webcast this morning Jim Foster chairman president and chief executive officer and David Smith Rock president and Chief Financial Officer will comment on our results for the first quarter of 2020 following the presentation. They will respond to questions. There is a slide presentation associated with today's remarks, which is off on the investor relations section of our website at a replay of this call will be available beginning at 12:30 p.m. Today and can be accessed by access by calling 866-207-1041. The international access number is 402-970-0847. The access code and either fax is 552-5940. The replay will be available through May 20th. You may also access an archived version of the webcast on our investor relations website.
I'd like to remind you of our Safe Harbor all remarks that we make about future expectation plans and prospects for the company constitute forward-looking statements under the private Securities litigation Reform Act of 1995 actual results. May differ materially from those indicated during this call. We will primarily discuss results from continuing operations and non-gaap financial measures, which we believe help investors gain a meaningful understanding of our core operating results and guidance. The non-gaap financial measures are not meant to be considered Superior to or a substitute for results from operations prepared in accordance with gaap in accordance with G. You can find the comparable gaap measures and reconciliations on the investor relations section of our website in addition. Today's remarks will also include estimates of the covid-19 impact on the company truck and assumptions related to how we develop these estimates can be found on slide three. I will now turn the call over to Jim Foster.
Good morning.
Where I discuss our robust first-quarter Financial results and our revised outlook for the year. I will comment on the impact that the global covid-19 demek has and will have on a company and our actions to address it the role that we play in biomedical research is of even greater importance during these unprecedented times given that we are working collaboratively with our club to discover and develop new therapies for the treatment of disease including covid-19 at work would not be possible without the collective efforts of my dedicated child over colleagues. So I'd like to start by expressing my sincere appreciation to them for their hard work and unwavering commitment which allows us to continue to fulfill our mission every day.
To address the cover.
Endemic, we have implemented a number of measures that are focused on maintaining the health and safety of our employees and the continuity of our operations ensuring our ability to support our clients research program and sustaining solid financial position. We have comprehensive business continuity plans in place for each side globally and are continuously updating them to address the evolving covid-19 situation. We implemented the plans in China beginning in January and optimize the plans for other regions as the virus could spread we have encouraged employees to work remotely when possible and for most of our employees who are essential and need to come into our sites to fulfill their responsibilities Thursday. We are hearing to any guidance from government health and other Regulatory Agencies due to the nature of our business most employees already work bio secure environment dead.
That required PPE such as masks and gloves and follow other procedures to safely accomplished the daily responsibilities. So we have found that these additional same precautions have been relatively straightforward to implement.
In this changing environment, we continue to review all applicable Global stay-at-home orders and have determined that we currently meet the criteria to be designated as an essential wage business in each of the jurisdictions and in which we operate nearly a hundred Global site as a result vast majority of our site based staff are able to continue to work on them while other Personnel are working remotely. This has enabled us to keep all of our operating sites open and adequately staffed to accommodate the continued significant client demand walk across most of our businesses are business continuity plans also enable us to provide products and services to clients from their local or preferred site or if needed utilizing an alternate location when possible in addition procurement has played a pivotal role in business continuity as we proactively engaged with our suppliers beginning
January to limit the potential disruption to our supply chain. We believe the long-term growth prospects of our business remained from tax and we have moved swiftly to mitigate the anticipated near-term Revenue loss from covid-19, which is expected to reduce 2020 Revenue by 135 to $215 with most significant headwind in the RMS segment. We have implemented temporary cost reduction initiatives which are expected to result in meaningful savings this year primarily by lowering compensation expense and discretionary spending David will provide more detail on the cost reduction initiatives shortly. We also intend to be prudent with regard to Capital deployment off the pace of our planned m&a activity and meaningfully reducing our plan capital projects for the year collectively. We believe that these actions will enable us to preserve most jobs dead.
sure our ability to continue to
To support our clients research programs and to sustain our solid financial position. We believe that we are particularly essential to our clients now in our in our in continual communication with them to accommodate their evolving needs one biotech R&D had recently commented that we are the backbone required to support their program many other Appliance have sent us know to support and encouragement during this unprecedented time. Noting that they couldn't move their research forward without us today. We are partnering with more than 40 clients and rdsa and Manufacturing segment on their development programs for potential vaccine candidates and Therapeutics to treat covid-19. We believe that this is one of the highest levels in the cro industry and there's another example of our ability to work collaboratively and provide greater value to our clients now safety assessment businesses conducting safety testing and covid-19 off.
Maxine and as a therapeutic said multiple sites across North America and Europe. We are conducting pathology studies in Maryland on an antibiotic treatment are biologics. I'm in Pennsylvania is conducting a study on reusing in ninety-five maps and we will work with our partner distributed bio on antibody-based therapy. Therapeutics clients are always talking to Outsource more projects to us for non covid-19 related programs across multiple therapeutic areas either because their own sites have become inaccessible, but because of the ease and flexibility of Outsourcing projects to an integrated early stage C like Charles River, we believe that providing continued support to clients.
During the covid-19 pandemic will lead to more Outsourcing and long-term business opportunities for Charles River biopharmaceutical clients who were previously conducting more programs internally wrong or with multiple arrows and now choosing to Outsource some of their work to US during these unprecedented times on global scale scientific depth and breadth of our critical mass stage solutions for the differentiate us from the competition even more. So today clients value the stability and efficiency of working with one large scientific partner accommodate the early-stage research program and to support the safe manufacturer of the therapies. We are committed to providing flexible Outsourcing solutions to our clients while adapting to the challenges associated with the evolving covid-19 situation. Overall We Believe Healthcare will fare better than many sectors since we will play a crucial role in finding a solution and yep.
Thanks for those affected by covid-19 specific to Charles River. We believe that are unique non-clinical Focus global scale and comprehensive scientific capabilities are what make our business model more resilient. We believe we will be able to withstand a situation better than many others because of our critical nature of our work abroad portfolio and are flexible options when clients may be facing meaningful disruptions or delays. They can partner with us to continue to move there early stage programs forward across multiple therapeutic a month including the incremental work. They are doing on their covid-19 programs through the first quarter the biotech funding environment remained very strong and client order activity was real life, including bookings and proposal activity in the safety assessment business, which led to our exceptional first quarter results covid-19 cuz only a moderate impact in, New Jersey.
segment
Now provide highlights on our first quarter performance quarterly Revenue surpass $700 for the first time in seven hundred seven point 1 million dollars a seventeen percent increase over last year with the acquisition of citoxlab and hemacare contributing nine and half percent to the reported growth rate organic Revenue growth of 8.2% was driven by the robust performance of our life essay manufacturing support segments, covid-19 had a negligible effect on in manufacturing Revenue in the first quarter. However, it reduced our MS Revenue by 9 million which resulted in a hundred and fifty basis point headwind to the Consolidated Revenue growth rate last year's large stocking order in the microbial solution business reduced Consolidated revenues by an additional hundred twenty basis points. The operating margin was 19% increase of 270 basis points year-over-year the Improvement reflects the flow through of the birth.
Topline performance in the BSA and Manufacturing segment and lower corporate costs as I mentioned last quarter. We are well-positioned to generate greater operating leverage in 2028, because Investments and staff capacity and infrastructure a more a more balanced now earnings-per-share. We're a dollar eighty four in the first quarter an increase of 31.4% from a dollar off in the first quarter of last year strong Revenue growth and operating margin expansion as well as the lower tax rate resulted in earnings per share that were well ahead of our own book.
We were off to a spectacular start in 2020 through mid-march, when covid-19 began to have an impact on our North American and European research models business month going forward covid-19 is expected to have the most significant impact on our segments Revenue growth rate in 20 specifically on the research models business and particularly in the same for the VSA in manufacturing Revenue growth rates are only expected to be modestly affected in total covid-19 is expected to reduce full year 2020 Revenue by $1,000 to $250 million resulting in a reduction of our organic Revenue growth guidance by just over five hundred basis points at midpoint to arrange of one a half to four and half percent growth. We are reducing 2029 cap EPS guidance by sixty cents to the midpoint do to covid-19 to arrange for $6 a month.
$0.75 to $7.10 and revised guidance is based on a range of recovery scenarios for our business, which David will provide in more detail shortly. I'd like to provide you with additional details on our first quarter segment performance as well as the impact of covid-19 on our businesses beginning with our invest segments RMS revenue for the first quarter was a hundred and forty six million a decrease of 1.7% on an organic basis covid-19 reduce the first quarter Revenue growth rate by 660 basis points or nine million dollars, which is nearly evenly split between China and Western markets. Well, we provided a guidance in February. We had anticipated a modest first quarter impact related to covid-19 on a research my own business and China impact in China was in line with our expectations. But as the virus spread you were incremental headwinds to our North American and European research models businesses particularly during birth.
two weeks of the first quarter
The research models business accounted for approximately 60% of global RMS Revenue in 2019. It has been most affected by covid-19 related closures of our clients research facilities to date the research models Services businesses were largely unaffected. We experienced a sharp decline in model demand a stay-at-home order to spread across the globe diminishing order activity from academic clients, which represents about one-third of global Aramis Revenue as these institutions closed abruptly. It was also a significant reduction in or activity for both large biopharmaceutical and swallow biotechnology clients has these clients reduced to close their on-site activities. We expect these Trends will persist through the second quarter in North America and Europe while China is already seeing a gradual ramp up in order activity as the commercial sector returns to work and Academia slowly reopens in North
America and Europe we are cautiously optimistic that there will be a meaningful recovery beginning in the second half of the year as clients are already inquiring whether we will have models available for them to rapidly expand or reconstitute their colonies when they returned to work we expect demand for research miles from improving the third quarter AS Global biopharmaceutical biotech life resume more normal research activities and expect academic demand will begin to Rebound in the fall over all we expect covid-19 will reduce RMS Revenue by at least 10% off again in 2020 with the most significant impact in the second quarter. The research model Services business has performed very well in the first quarter and are expected to experience very little impact from covid-19. We believe the strong performance reflects the value our clients see and Outsourcing these critical services to us.
Or in the case of insourcing solutions or is the efficiency of using our people our capacity to manage their research needs the gems business benefited from strong demand and new business winds across most geography. Some clients had previously manage their proprietary genetically modified model colonies in-house have closed their facilities and our Outsourcing this work to us long. We anticipate that much of the gyms work will remain Outsource after the covid-19 crisis aside, the is business continued to perform very well with contributions from new contract towards the end of last year from the NIH and in Europe. We also continued to gain traction with new biopharma clients through our cradle initiative which provides TurnKey research capacity in Boston, Cambridge and South San Francisco, both of which have remained open and accessible to clients during the covid-19 crisis occupancy of our newest site in South San Francisco has improved nice wage.
Since it opened earlier this year with excellent client feedback hemacare, which we acquired in January had a strong first-quarter as part of Charles River it performed in line with our acquisition place and we perform a revenue growth exceeding 30% in the first quarter you may recall that hemacare is a premier provider of human-derived cellular products that are used as critical inputs throughout the cell therapy development and Manufacturing process We Believe hammock is offering will lead more clients to start their cell therapy Discovery program and remain with us throughout cover e or at least eight development and management and manufactured support process as a result of covid-19. We temporarily closed our clinic for donor Collections, and he macaron mid-march wage order to ensure the owners safety and pause certain integration activities, but the business has remained operational and continues to ship its products to clients. We believe covid-19 will result in Schaumburg.
disruption for this business, but over the
Longer-term Beyond 2020 he McCann's growth profile and excessive 30% annually remains intact the operating margin declined by 510 basis points year-over-year to 23% of the first quarter driven almost exclusively by the impact of covid-19 to do to the fixed-cost nature of the RMS business the cost reduction initiatives that we've implemented cannot offset the shock short-term decline in research model volumes. We believe the RMS operating margin will improve once client order activity returns to more normal levels later in the year. The s a revenue was 438.7 million in the first quarter an exceptional 11.6% increase honor organic basis over the first quarter of nineteen, we continue to benefit from strong client demand for our Discovery and safety Assessment Services, which we believe is a testament to our position as the leading early-stage cro wage.
Well as the strength of the market environment in the first quarter, we benefited from broad-based demand across our client segments led by biotechnology client the acquisition of citoxlab contribute 12.8% to DSA reported Revenue growth. We marked the one-year anniversary of its acquisition last week and are pleased with the progress in sight glass has made as part of Charles River wage has enhanced our leading Market position expanded our Geographic footprint and global scale and solidified our scientific capabilities, which further distinguishes us from the competition during these represented time safety assessment business was a significant driver of the essay Revenue growth which resulted from strong volume and price increases as well as a Tailwind from the Healthy Back bag existing in the fourth quarter as I mentioned earlier proposal activity and bookings were robust and these Trends continue through the end of March would March bookings being particular job.
Restaurant large biopharmaceutical and mid-sized biotechnology clients have largely remained business as usual with regard to their early stages research programs. We believe these climb a compensating for reduced on-site activities due to covid-19 which increased Outsourcing of their ind-enabling safety programs We Believe clients are actively re-evaluation cro Outsourcing strategies to work with fewer trusted Partners to ensure business continuity, and it's the challenges of the covid-19 crisis as well as the supply chains to reduce dependency on Asia, including the use of GMOs and CRM see our own in China and India We Believe are integrated early-stage portfolio from Target ID to log in clinical development is uniquely positioned to enable clients to work with one early stage see whether it be for the attack sensitive covid-19 programs or other important research at home.
across multiple therapeutic areas
Combined with our own business continuity plans and covid-19 preparedness, which clients have told us are A Cut Above the we believe that we offer the expertise stability and flexibility to clients require as we collaboratively navigate today's challenges and those that arise in the future covid-19 headwinds for RDS a segment are expected to be modest income partly offset by clients option crowdsource projects and lose starting new studies in house. We expect an impact on safety assessment growth over the next one to two quarters primarily may result of study slippage. We have experienced a moderate increase in study slippage since since the end of March primarily due to client-driven delays and and resource constraints the study slippage associated with a number of factors including test article availability from our clients as shipments are temporarily delayed from their Partners in India and China for the year. We believe the overall
Pack some slippage and other factors will be modest and the DS a segment will deliver organic Revenue growth at least at the mid single-digit level the discovery Services business all she had a very good quarter particularly early Discovery Services a scientific expertise track record for delivering clinical candidates and efforts to build a cohesive offering generated significant client interests a small number of Discovery clients appear to be slowing the initiation of new programs or delaying projects for at least 1/4 particularly for integrated drug Discovery program as they reduced their own on-site activities related to covid-19 We Believe The Discovery business will Rebound in the second half of the year as clients return to work and resume their programs or initiate new ones.
BSA operating margin improved by 340 basis points year-over-year in the first quarter 22% with significant Improvement in both Discovery and safety assessment business in the first quarter operating performance reflected greater leverage on the strong top-line growth revenue for the manufacturing support segment was 122.4 million and 9.6 per cent increase on an organic basis over the first quarter of last year last year as large stocking order from a non Pharma strategic partner in the microbial Solutions business office reduce the manufacturing growth rate by 680 basis points in the first quarter and microbial Solutions biologics testing Solutions, an avian businesses all had outstanding quarters. Each delivering double-digit Revenue growth when adjusting microbial for the stocking water, whether it be tested for microbial contamination or helping to optimize our clients biologics development wage.
To see these businesses play a crucial role in ensuring the quality and safety of our clients manufacturing activities and finished products. We are seeing little disruption to our clients manufacture operation and are attracting new business opportunities opportunities for treatments related to covid-19 as a result. We believe a pandemic will have a relatively small impact manufacturing business and expect a manufacturing segment to generate High single-digit organic Revenue growth in 2020 manufacturing segments. First quarter operating margin is 35.6% or a 460 basis point increase over last year a significant Improvement was related to enhanced operating efficiency couldn't process improvements in the microbial solution business and operating leverage from higher Revenue in both the biologics and AT&T and biologics. The elimination of duplicate costs related to last year's transition of our new page.
Sylvania facility also drove the
Who got pretty much before I conclude? I'd like to discuss the plan retirement of our general counsel Dave just as a transition of this role last spring Dave announced Our intention to retire as corporate EVP general counsel and chief administrative officer. I want to thank Dave for nearly thirty years of service to the company. He has contributed to our growth and expansion by providing strategic Council and directions to our Global operations and to me which has contributed to our market-leading position. It also like to welcome John kuo to Charles River who will become a vice president general counsel corporate secretary and chief compliance officer at the end of this month John has more than 25 years experience and joins us from Varian Medical Systems where he would advise president general counsel and corporate secretary pleased to have John join us and believe he will continue to provide the Strategic constant guidance. They will support our future growth.
We Believe Charles River will endure this challenge better than many other company all of our operating sites are open and adequately staffed to accommodate our clients needs a client basis resilient wage. We believe that biotech clients which have been our principal source of growth in recent years had approximately three years of cash on hand at the end of q1, which should enable them to withstand any long-term disruption caused by covid-19 global biopharmaceutical clients have the financial strength of scientific resources to survive as well and the biopharmaceutical industry as a whole is working tires tirelessly to find solutions to covid-19 and other diseases on behalf of the patients who rely on on them. We have taken a discipline and determined approach to address the covid-19 crisis and together with our clients. We are committed to delivering Innovative safe and effective medicines to patients as quickly as wage.
Efficiently as possible in conclusion. I'd like to thank our clients and shareholders for the support. And once again our employees for the commitment to our mission. I continue to be amazed by the dedication and hard work of our exceptional employees, especially during these unprecedented times now, I'd like David Smith to give you additional details on the covid-19 impact our financial performance and revised guide.
Thank you, Jim and good morning before I begin. May I remind you that I'll be speaking primarily to non-gaap results from continuing operations. We can exclude amortization and other acquisition-related wage costs related primarily to a global in efficiency initiative and certain other items. Many of my comments will also refer to organic Revenue growth which excludes the impact of Acquisitions and foreign currency translation.
As Jim discussed we are very pleased with our accomplishments in the first quarter. We delivered strong Revenue growth and significant operating margin expansion, which drove earnings per share growth of 35% to $1.84 widely outperforming our expectations.
Operating margin performance was particularly encouraging as a reflect our ability to Leverage The Investments that we have made in staff capacity and infrastructure to accommodate growth in a scalable and efficient manner Thursday. We're Stone start to the changed in March at the covid-19 virus spread and stay-at-home orders again to be adopted globally this led to a reduction in client demands primary source for a research monthly statement.
I will focus my comments on how we are addressing the covid-19 impact from a financial management perspective and provide additional details on our revised guidance as well as an update on our ability and solid financial position. Our goal is to provide as much transparency and insight into our business as we are able which we believe is particularly important to to the fluid nature of the covid-19.
As you mentioned we revised 2020 Financial guidance to organic Revenue growth of 1.5 to 4.5% and non-gaap earnings per share.