Q2 2020 Charles River Laboratories International Inc Earnings Call
[music].
Ladies and gentlemen, thank you for standing by and welcome to the Charles River Laboratories second quarter 2020 conference call. At this time all participants are in a listen only mode. Peter We will conduct a question and answer session and instructions will be provided at that time. If you should require assistance during the call. Please press star and then zero.
As a reminder, this conference is being recorded I'd now like turn the conference over to our host Vice President of Investor Relations Mr. Todd Spencer. Please go ahead Sir.
Great. Thank you good morning, and welcome to Charles over Laboratories second quarter 2020 earnings 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 second quarter of 2020, following the presentation, there or respond to questions.
There is a slide presentation associated with today's remarks, which is posted on the Investor Relations section of our website at <unk> IR thoughts you River Dot com.
A replay of this call will be available beginning at 12 30 PM today and can be accessed by calling 8662 zero 710 for one the international access number is four zero to 970 0847. The access code in either case is one seven 300 403.
Replay will be available through August 18th you May also access an archived version of the webcast on our Investor Relations website I'd like to remind you of our safe Harbor, all remarks that we make about future expectations plans and prospects for the company constitute forward looking statements under the secure 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 substitute for results from operations prepared in accordance with gap.
In accordance with regulation G., you can find the comparable GAAP measures and reconciliations on the Investor Relations section of our web site.
In addition, today's remarks will also include estimates of the Cobot 19 impact on the company certain methodologies and assumptions related to how we developed these estimates can be found on slide three I will now turn the call over to Jim Foster.
Thank you good morning.
As the Coven 19 pandemic continues to pressure the global economy and adversely affect so many lives medical innovation has never been more critical.
The biomedical research community is rising to this challenge, resulting in an unprecedented level of investment.
Charles River has never been so essential to our diverse and growing client base.
Not only how we continuing to work on a wide range of drugs across multiple therapeutic areas utilizing our unmatched suite of early stage solutions, but we are also helping clients develop drugs to sign treatments for and ultimately prevent cobot 19.
As anticipated we experienced challenges related to covert 19 in the second quarter principally in the RMS segment. However, the resilience of our business model has enabled us to whether these challenges extremely well this resilience as demonstrated by our second quarter financial performance, which were.
Widely exceeded our expectations.
The outperformance was due in part to the tireless efforts of our dedicated staff the effectiveness of our comprehensive business continuity plans that enabled us to keep our operating sites open and adequately staffed and the global scale broad scientific capabilities and flexible outsourcing solutions.
Of our unique early stage portfolio on which clients are increasingly relying to move their programs forward in the face of disruptions or delays at their own sites.
We also benefited from persistent client demand across many of our businesses driven by robust biotech funding and continued innovation that is generating scientific breakthroughs across multiple therapeutic areas, including for coated 19 therapeutics.
Before I provide more date details on a second quarter results I want to update you on the impact to cover 19 has had on the company.
I'd like to start by thanking our employees around the globe for their hard work and unwavering commitment. It's because of your extraordinary efforts that we have kept all of our operating sites open and continued to serve our clients throughout the pandemic because of your dedication to our mission our clients are making progress on the critical.
Research.
We believe that providing continued support to clients during the pandemic is leading to more outsourcing opportunities for Charles River clients large and small.
Outsourcing work to us that they previously performed internally or outsourced to others, because working with one large scientific partner like Charles River enables them to implement a more flexible inefficient R&D solution over the longer term.
And helps them navigate the evolving covert 19 situation in the near term.
We are principally seeing the benefit of this outsourcing in our discovery safety assessment biologics and gems businesses.
As we continued to perform these services, we believe clients will become accustomed to our faster turnaround times superior science and cost effectiveness and therefore, we believe we will retain a meaningful amount to this incremental work.
We're also experiencing favorable trends across most of our businesses, including through July and the RMS segment, which was most effective October 19 academic clients are opening their facilities more quickly than anticipated around the world.
Particularly in Europe, and Asia, and the services businesses continued to perform well Hema kids donor clinic reopened and the business has largely returned to full operations. The Dsos segment continues to experience strong demand with high proposal in booking volumes and only a small impact so.
See added with covert 19.
In the manufacturing segment microbial did face some headwinds, but the biologics business continued to perform exceptionally well with significant demand, especially for cell and gene therapy products projects and to a lesser extent covert 19 related activities.
I'll now provide additional details on a second quarter results.
We reported revenue of $682.6 million in the second quarter of 2020.
3.8% increase over last year.
Organic revenue growth of 1.4% exceeded our prior outlook of mid single digit decline because client demand has been resilient and the impact of covered 19 has been less severe than originally anticipated cover 19 had a meaningful impact on the RMS segment, including RMS revenue.
By approximately $35 million in the second quarter. However, the impact to the Diaz say and manufacturing segments was quite small with both reporting healthy organic growth rates of 6.2% and 8% respectively.
The operating margin was 17.3% a decrease of 120 basis points year over year.
The decline principally reflects the significant margin decline in the RMS segment as a result of the lower sales volume and the fixed cost nature of the business.
However, we were quite pleased that both the DSL and manufacturing segments reported meaningful operating margin expansion in the second quarter, reflecting the operating leverage in these businesses as well as the benefit of our operating efficiencies, including temporary cost reduction initiatives in response to covert 19.
Earnings per share were $1.58 in the second quarter, a decrease of 3.1% from $1.63 last year widely exceeding our prior expectation of a 20% to 30% decline.
Overall, we were pleased to be able to generate earnings per share and nearly unchanged from last year, which demonstrates the resilience of our business and our continuity planning during this global crisis.
Based on the better than expected second quarter performance and our expectation that covert 19 will be less of a headwind than originally anticipated, we're increasing our revenue growth and non-GAAP earnings per share guidance for 2020, we now expect organic revenue growth in a range of four to five and a half.
Percent or 175 basis point increase at midpoint non-GAAP earnings per share are expected to be between $7.05 and 7035 cents, which represents a 27.5 cents increase at midpoint and a five.
9% year over year growth.
The revenue loss from cover 19 is now expected to be approximately $100 million.
Which is below our previous range of $135 million to $215 million.
We believe that we are beyond the worst of the covert 19 related headwinds, but we understand that there may still be additional challenges ahead.
We are assessing the situation on an ongoing basis will be diligent about addressing any new challenges just as we did in the second quarter.
Guidance assumes that there will be additional recovery in client demand in the third quarter principally in the research models business, David will provide an update on the assumptions that are included in our revised outlook shortly a.
I'd like to provide you with additional details on our second quarter segment performance beginning with the RMS segment.
RMS revenue in the second quarter was $116.5 million a decrease of 18.4% on organic basis as I mentioned earlier covered 19 reduce the second quarter RMS revenue by approximately $35 million, which was favorable to our initial expectation.
As clients began to gradually resume activities as a research sites earlier than anticipated, particularly in Europe and Asia.
On our last earnings call, we anticipated that demand for research models with improved in the third quarter as biopharmaceutical clients resume more normal research activities.
And we expected that academic demand will begin to rebound by the fall.
However, this return to work process began in the second quarter with clients in Europe, and Japan, returning in the middle of the quarter in North America.
North American clients beginning the process in June.
Academic clients showed the most significant improvement by the end of the quarter. As these clients were most adversely affected when institutions began closing abruptly in the first quarter. Overall. These reopening activities resulted in a significant improvement in client ordering trends in June we expect these favorable trends will come.
Continue in the coming months, but believe it will take time for volumes in our research models business to return to pre covert 19 levels for 2020, we expect RMS revenue to decline at a mid to high single digit rate organically, which is a notable improvement from our prior outlook of at least.
Say, 10% decline.
The research model services businesses continued to perform very well in the second quarter experiencing very little impact from covered 19.
We believe the strong performance reflects the value our clients see in outsourcing. These critical services to us or in the case of Insourcing solutions are I asked the efficiency of using.
Our people our capacity to manage the research needs.
As I mentioned last quarter, we are seeing evidence that some gems clients, who previously manage their model colonies in house have opted to outsource this work to us due to cover 19 restrictions at their own sites, we continue to anticipate.
That much of this gems work will remain outsource after the cover 19 crisis subsides.
After a strong first quarter Hema care was negatively affected by a two month closure of its donor clinic, which reopened in mid may as well as reduced cell therapy development activities at its client sites due to stay at home orders and associated disruptions caused by covered 19. So.
Similar to our research models business client demand improved meaningfully in June we continue to believe that beyond 2020, Hemocue will grow in excess of 30% annually as more clients start their cell therapy discovery programs that Charles River and remain with us through discovery.
Very early stage development and manufacturing support process.
Today, we also announced the signing of an agreement to acquire solera for approximately $38 million, which will complement hema care by enhancing our supply of critical biomaterials, including a wide range of human derived primary cell types to further just support disk.
Cover redevelopment and manufacturer of cell therapies.
The acquisition will expand our access to high quality human derived cellular products with solar as donor sites in both the eastern and Western United States.
So lira will enable us to provide a more comprehensive cell therapy solution, allowing clients to work with us through the cell therapy development and manufacturing process, which will accelerate the speed to market and enhance client retention.
Following the acquisition of Solera, we expect to continue to generate revenue growth for human derived cellular products, including Hema care of at least 30% annually over the next five years.
Getting.
In 2021, the transaction is expected to close in August.
RMS operating margin declined from 25.5% last year to 9.1% in the second quarter driven almost exclusively by the impact of covered 19. The segment operating margin benefited from the temporary cost reduction initiatives that we implemented but due to the fixed.
Cost nature of the business these savings could not offset the sharp short term decline in research model volumes, we believe the RMS operating margin will improve meaningfully in the third quarter as research model volumes continue to increase.
[music].
The essay revenue was $442.6 million in the second quarter, a 6.2% increase in organic basis over the second quarter of 2019.
There was a much smaller impact from covered 19 related study slippage and products project delays than we originally expected.
Due to strong demand across the discovery and safety assessment businesses as well as our efforts to in share ensure both business and resource continuity.
Biotechnology clients.
Was the primary driver of DSA revenue growth, which is not surprising given the capital available to fund scientific innovation and the industry industry is focused on finding a cure for cover 19.
The discovery services business had another excellent quarter, a broad based growth, particularly in early discovery in oncology services in May we commented on indications from a small number of discovery clients that there would slow the initiation of new programs because of covered 19.
There was only a very limited impact in the second quarter as we believe our integrated discovery portfolio.
Scientific expertise and track record for delivering clinical candidates encourage clients to move their programs forward by partnering with us to overcome challenges at their own sites.
With continued strength in bookings, we do do not foresee any change in the robust business environment for our discovery services in the second half of the year.
Safety assessment business perform well.
With sustained growth in study volume as we mentioned at Investor at our Investor confidence in June proposal activity in bookings continued to be strong throughout the second quarter.
We believe both biotechnology clients and large biopharmaceutical companies are compensating for reduce onsite activities with increased outsourcing of their eye, Andy enabling safety programs. We believe our integrated early stage portfolios spanning target identification through non clinical development.
Uniquely positions us to enable clients to work with one trusted partner to ensure business continuity amidst the challenges of the covert 19 crisis.
We believe this has and will continue to be we'll continue to translate into additional outsourcing opportunities as we collaborate with our clients to navigate today's challenges as well as those that arise in the future given the limited impact of covert 19 today and our expectation that the robust outsourcing try.
This will persist in the second half of the year.
We now expect DSA revenue to increase at a high single digit rate in 2020.
Which is effectively the said the same as our original outlook before the spread of covered 19, the DSE operating margin improved 210 basis points year over year in the second quarter, the 23.2% with improvement in both discovery and safety assessment businesses greater operating leverage on the healthy revenue growth.
Both as well as the benefits are operating efficiencies drove improvement.
Revenue for the manufacturing support segment was $123.5 million or an 8% increase on an organic basis over the second quarter of last year, the biologics testing solutions and avian businesses had excellent quarters. However, the revenue growth rate in the microbial solutions business was constrained by covered 19.
For the year, we continue to expect organic growth and the high single digit range for the manufacturing segment.
Microbial solutions was affected by reduced client activity and delayed instrument installations in the quarter as certain client sites were inaccessible due to cover 19. This was a challenge, but one that we expect to overcome as more of these clients allow access to the sites in activity at these sites accelerates, which is already beginning to.
Occur. In addition, we are serving our clients via remote instrument installations. As a result, we expect the microbial solutions growth rate will improve in the second half of the year. Overall, we continue to firmly believe that our ability to provide clients with a comprehensive rapid and efficient 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 their critical quality control testing requirements.
The biologics business reported another exceptional quarter revenue growth was driven in part by the sustained rapid increase in the number of biologics in development as well as new opportunities such as cell and gene therapies and covert 19 therapeutics that continued to propel market growth.
We believe the biologics market opportunity is expanding at a low double digit rate annually, which is why we continue to modestly add capacity to accommodate demand.
Revenue growth was also driven by our successful efforts to gain new business clients see the value of our extensive portfolio of services to support the safe manufacturer Biologics and we will continue to enhance our abilities to support clients by developing new services, such as additional assets a cell and gene therapy.
The manufacturing segment second quarter operating margin was 37.4%, a 650 basis point increase year over year.
The significant improvement was related to enhance operating efficiency in the microbial solutions business, primarily from process improvements and operating leverage from higher revenue in both the biologics and avian businesses in biologics deal elimination of duplicate cost related to last year's transition to our new.
New Pennsylvania facility also drove the improved operating margins.
The demand for our leading portfolio of early stage and manufacturing support solutions remains robust.
Biotech funding levels continue to increase and are expected to reached record levels again in 2020 and biotech IPO activity is accelerating.
After the drug approvals remain healthy fewer clients have delayed or canceled work to the covert 19 than we anticipated just three months ago clients are essentially business as usual cross most of the company as they emphasize investment in their preclinical pipelines to move their programs forward. We believe this.
Underlying strength in our markets and the resilience of our business model have enabled us to withstand the challenges of the cover 19 pandemic better than many other companies today.
Because of our strength and stability, we feel confident and our ability to move forward with the execution of our M&A strategy, albeit cautiously today's announcement of the Solera acquisition is consistent with that strategy.
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 strategic acquisitions have always been our prefer to use of capital.
And after a pause in the second quarter, we're continuing to evaluate new opportunities using our disciplined and mindful approach.
There continues to be an abundance of M&A candidates available and we will evaluate a number of opportunities, including unique research tools discovery capabilities and manufacturing support activities.
We will also increasingly employ our strategic partnership strategy to stay current with new technologies, and our Dallas and add innovative capabilities and cutting edge technologies with limited upfront risk.
We continue to closely monitor.
The risk that covert 19 poses to human health as well as to our clients operations and our own.
The crisis is far from over globally, particularly in the us and they will likely be a prolong recovery and tell the world returned some semblance of normalcy, but as I mentioned earlier, we will continue to assess the situation and be diligent about addressing any new challenges. We believe Charles River has weathered the.
Challenges of the cover 19 pandemic better than many other companies to date because of our clients increase.
Reliance on our outsourcing across a wide range the therapeutic areas resilient biotech funding and as always the efforts of our dedicated staff. As a result, we are confident our and our ability to operate in the current environment and executing our strategy. We fully anticipate this new normal environment.
We'll be with us for the rest of the year unlikely well into next year, if not beyond but we believe the worst is behind us barring any widespread changes and the cover 19 recovery.
We believe that our two year financial targets of high single digit organic revenue growth and a 20% operating margin in 2021 remain intact.
Before I hand, the call over to David I'd like to update you on some of our social initiatives to support our people as well as the communities in which we operate covered 19 is affected assault and it's our responsibility to be good corporate citizens and to lead by example, our immediate priority was to address.
Yes, the needs of our employees and fully support them. During these challenging times through initiatives like enhance workplace safety measures, where necessary flexible work hours and scheduling and other forms of assistance as needed.
Beyond the immediate cover 19 priorities, we are firmly committed to the need for quality in our world. We will not stand for racism inequality discrimination or harassment of any kind of Charles River and our dedicated to supporting those values in our communities, it's more important than ever to support each other.
We have a culture that celebrates and supports our differences and we realize it's more important than ever to support each other in our communities through or posture of respect listening learning and apathy.
Charles River. This is our obligation and part of our core values.
As part of our commitment we launched a 2 million dollar charitable donation campaign in the second quarter and supporting our local communities through a range of initiatives and organizations, there promoted quality and social justice.
And support local food banks first responders use and family organizations stem education and scientific causes.
As a company and the corporate citizen I want us to be able to reflect on this extraordinary period and be proud of our contribution to lifesaving medicines, we proud of how we treat as each other and be proud of how we supported our communities.
Conclusion, I'd like to thank our clients and shareholders for the support and once again, our employees for their commitment to our emission.
Now I'll ask David to give you additional details on our second quarter results and updated 2020 guidance.
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, which exclude amortization and the acquisition related charges.
Cost related primarily to our global efficiency initiative.
I would venture capital and other strategic investment performance on settlement license.
Many of my comments will also referred to organic revenue growth, which excludes the impact of acquisitions and foreign currency translation.
As Jim mentioned, we're very pleased with our strong second quarter results with revenue and earnings outperforming our prior outlook.
The second quarter performance and accelerated return of our research model client.
That's great confidence in our outlook for the second half a year and these collective tactile contributed to the increase in our revenue.
Guidance that sounds good thank you.
We believe that the company will see a more normalized level of activity by the end of the yet.
Our updated guidance takes into consideration several key assumptions that each of our businesses that vary based primarily on the timing of the recovery, particularly for beyond that segment.
These assumptions are consistent with those provided in may and can be summarized by our expectations for additional improvement.
In the research models business in the third quarter, particularly with regard to academic clients in North America and that we do not see a notable change from current robust trend in idea.
We continue to believe that are essential personnel will be able to work on site and that we will have the adequate supplies on resources to support our businesses.
We also have not seen any widespread stay at home orders will resume for the remainder of yet.
As we discussed in May we implemented several cost reduction initiatives to mitigate a near term margin impact, resulting from the expected 19, making your loss principally aimed at reducing compensation expense and discretionary costs.
We're pleased to report that we have already reinstated merit increases and Paul on K contribution earlier than expected in the third quarter, given the stronger financial performance and.
And to appropriately recognize the extraordinary efforts advance that during these challenging period.
Although the benefit from our temporary cost reduction initiative is expected to be below our prior target at approximately 14 million volatility yet.
Better than expected results are more than offsetting the different enabling us to meaningfully increase our and present guidance for the year.
Eight on our outlook for lower cost savings.
Offset by additional topline recovery in the third quarter, we expect the second half operating margin to be similar to our prior expectations, but to increase meaningfully from the first half level, particularly for the army segment.
For the full year, we believe that we are well position to generate some expansion and the operating margin compared to the 2019 level of 19% despite headwinds associated with good 19.
Our updated revenue growth guidance that yet is the result of a more favorable outlook for both the RMS and deities segments, particularly in the second quarter.
RMS and now expect a more moderate mid to high single digit decline in organic revenue growth and low single digit report good.
The detail, we now expect high single digit organic revenue growth and low double digit reported revenue growth.
Our outlook for the manufacturing support segment unchanged, our main with high single digit organic revenue growth.
Our financial position remains very healthy at the end, but the second quarter, we had an outstanding debt balance of $2.3 billion with a gross leverage ratio 3.2 times and the net leverage ratio of 2.6 times, we continue to target reducing outwards leverage to below three times.
At the kind of good 19 situation stabilizes, we intend to continue to evaluate acquisition candidates. After a brief pools in the second quarter as Weve demonstrated today today's announcement to propose the letter acquisition.
Jim said M&A has always been Africa is capital as we believe that investing in strategic assets will support our long term growth strategy and generate the greatest return to shareholders.
Solid financial standing that you're going to strong position to begin to add to our early stage tell you again three strategic M&A.
Free cash flow was $135.5 million than the second quarter, an increase of 29.3% the $104.8 million for the same period last year.
Bringing us to a record level for the personnel.
The primary drivers that will increase we're out strong operating performance and the timing of working capital, including the federal cash tax payments due to recent legislation.
As a result, we have increased our free cash outlook by $20 million that mid point to a range of 350 to 365 million goals for the.
Capex was $26.8 million in the second quarter, an increase of 2 million over the prior year.
We now expect Capex will be approximately $130 million for the full year above our prior outlook of $120 million as we ramp up on capital investment in expectation of need from time to 21 to support growth.
Unallocated corporate costs for the second quarter was 6.1% of revenue compared with 5.3% last year.
The increase was primarily a result initiatives with 82 on kind of get 90 response you.
We continue to expect no unallocated corporate costs to be approximately 5.5% total revenue in twentytwenty.
Total adjusted net interest expense for the second quarter was $19.1 million essentially flat on a sequential basis from the first quarter level.
Full year, we now expect adjusted net interest expense to be slightly lower in a range of $76 million to $78 million, reflecting our expectation for reduced debt levels.
The second quarter tax rate was 21%, representing a 110 basis point decline from 22.1% in the second quarter of last year.
Decrease was due to a 220 basis point excess tax benefit associated with stock based compensation, resulting from higher stock price level and the impact on equity exercise an award activity during the quarter.
As a result that favorable excess tax benefit we are lowering our full year tax rate outlook for a range of 21% to 22% from our prior outlook constitute to 23.5%.
A summary of our revised financial guidance for full year can be found on slide 44.
For the third quarter, while we continue to expect revenue growth rates increased sequentially from the second quarter level based on client conversations and demand with respect to the cobot 19 recovery, we do so with greater confidence as clients have already begun to resume that research activity.
Accordingly, we expect organic revenue growth in the mid to high single digit range on a year over year basis and reported growth to be in high single digit range.
We expect high single digit vishay gross when compared to last years third quarter level of $1.89 cents.
In closing, we're very pleased with that second quarter results and thanks to the efforts on colleagues around the world and the critical nature of the work that we do we continue to demonstrate to our clients that we can and will fully supported by research efforts during the current extraordinary environment and in the future.
And the pace of the challenges presented by the Cabot 19 endemic.
We continue to successfully demonstrate our commitment to our clients employees community and shareholder.
We are focused on the continued execution of our strategy, which includes the resumption of M&A activity as well as achieving our financial and operational targets, including the two year target. So we've set last September of high single digit organic revenue growth and a 20% operating margin in 2021. Thank you.
That concludes our our comments the operator, we'll now take your questions.
Thank you. Please can you do wish to ask the question. Please press one Darryl on your telephone keypad you can withdraw your question at any time by repeat in the one girl command refusing to speakerphone. Please pick up the handset before press the numbers again, it's one handle.
We'll go first to the line Tyco tackle Peterson with JP Morgan. Please go ahead.
Okay.
Thanks, Jim I'm wondering if you can just give us any rough guidance on the bookings.
Okay.
Do they want to hear Tyco, he totally kind of around me no. He did cut out okay, you're still what Thats Hey, Jim can you hear me now.
Yeah, He just totally correct.
Right about that there. The question would just on the bookings from you know coded and any anticipated cold in tailwind Potter vaccine and therapy work are you able to put any numbers around the opportunity.
Now.
We need to be careful not to overstate that so we're we're delighted with the covered work from large and small clients, where we're proud to be participating we we prioritize that work whenever possible we're happy to have it.
I just don't want you to think of that as a material number that's going to significantly drive our financials.
Okay, and then you know you're you're taking up Capex, you talked about maybe faster recovery increases in outsourcing yet at the same time, you're kind of reiterating your two year financial targets. So can you maybe just talk to those dynamics in our the incremental capex investments tied to the increases in outsourcing.
It sounds like.
Everything is trending the right direction and potentially you know getting you to a higher points and where you're guiding to for the next two years, but I'm. Just curious if you can kind of talk to those dynamics.
Yeah, I mean, I will work out.
So you David.
Yep.
Well I'll, just going to say tracker that and we actually brought the capex down.
In the last quarter because at the cobot situation.
What we're really kind of conveying is we're getting back to I sort of normal position again, and so eight more I'm thinking about future thinking about 20 to 21, and basically rebuilding of theirs and capital demands and making sure that we can meet and and the demands we expected 2021.
And I was just add tyco that.
Even though even though we took it down as David said.
We're continuing to be extremely diligent.
I've mentioned actually my prepared remarks and vigilant.
About having sufficient capacity.
Incremental capacity at multiple sites in multiple businesses.
Biologic safety discover I mean pretty much across the board China.
To ensure that we can accommodate increasing.
Demand from our clients and you know it's impossible there the capacity.
And just in time basis, when you get to work.
So we we have to stay ahead of it I think we've done a good job for the last.
I don't know almost decade doing that.
We do that very thoughtfully very strategically.
Being very very careful about spending our cash, but knowing that it's essential in order to safeguard the business them and provide access to clients to our services.
Okay, and just one last one quickly just on the resumption of M&A activities that you highlighted that obviously, you've got some arrow teed up there should we assume similar type deals or are you telegraphing, an appetite to do something maybe more meaningful.
I don't think would.
Trying to telegraph anything specifically with regard to scale.
What we we wanted one part is the fact that.
The business is solid we feel really good about the balance of the year and.
Preliminarily quite good about next year.
We have a.
Fair number of targets out there that was speaking to real time as we always do we kind of resumed those conversations which we had paused in.
In Q2.
Vic.
But across a pretty wide swath of our activities. They are a variety of sizes I would say that.
Nothing real soon soon would be very very big.
But there are a few things that I would say a sort of.
Modest size and certainly bigger than solera, which we're very pleased to do with highly strategic in a very critical feel that obviously, a very small deal.
Okay. Thank you.
Sure.
And next well go to line up air cold or wet.
Robert W. Baird. Please go ahead.
Thanks, very much a first question is hoping to get a little more.
Distinction between the performance in research models and academic accounts versus a bio pharma accounts, if you could give us some sense on the decline magnitude in academic versus versus pharma would be helpful.
Sure.
The big the Big hit Eric was.
Academic accounts, yeah, we had some we had some closures of pharmaceutical sites and some closure of some biotech sites, but the most profound impact.
It was academics and the closures were really fast.
I think we feel and they they feel in retrospect way too fast and they should have de coupled.
Research activity in labs, where people are p. EAD with student.
The risk associated with students, which they would say did so.
Very big very sudden impact and obviously nobody is buying research models.
To use in an academic setting or any setting but in this case, an academic setting when the site to close and then people out there because the the workers moving down the animals to grow kind of grow out of spec. So they pulled back on the lever pretty quickly to sort of stopped buying those folks we had anticipated.
Yes, we had anticipated a return.
Because we were talking to all these academic institutions are pretty high level sort of provosts level.
And there were saying our sorry, we did when making plans to get back open and we and had anticipated they would open more slowly than they have even though they're not all open yet.
So Europe and China in the middle of a quarter and.
And a lot of things opening in June for the U.S.. So pleased with that don't anticipate sort of regardless of whatever whatever the next wave is or isn't.
With cope with it they would do that again given.
Given the fact that people to ground up in these facilities often working on to hoods often have positive pressure in the labs.
And of course, the doing critical work across a whole host of diseases in particularly kogut. So.
We're quite confident that they will continue to open they will continue to too.
By animals, we scaled up.
In preparation for that we've prepared for that.
And so we're being able to service the clients pretty quickly as they open because they want to get right back to work. So most mostly academic and very little pharma, yes, So safe to say 70 80, 90% of your 18% decline was due to academic.
[noise] back.
Like I know that number of hampered our yeah, So I would say that.
So the significant impact was academic and very much secondarily.
It was some farmer closures. So so yes fair enough if I could ask one more on on Hema care.
We did notice in the middle of the quarter you had your donor site reopen in California.
I'm curious what contingency plans you have in place if its forced to close again.
How much of your frozen are preserved inventory you might have worked through during the quarter.
If you did so and then.
Any sense on what's going on with donor activity interest levels on has is that picked back up now that.
The site is open or are there still challenges given the.
You know I think still concerned by a number of citizens about moving about and and the number number of states that are seen increased incidence of covert I'm just I'm curious how that business dynamic looks in the short term.
During our activity looks good there was a lot of repeat owners that we know well and they understand the importance of of donating and.
And it's a really first rate facility so.
I think.
Most of them feel feel a safe there obviously, we made a accommodations with regard to social versus thing within the.
Within the donor clinic to accommodate for that so.
We would hope that we will be able to continue to work.
Works pretty essential and.
In retrospect.
Has there been better plans, we might have been able to keep it open so.
We would be able to do that just just parent theoretically solera, which were in the process of owning.
Kept their donor.
Site open during the pandemic so it's quite possible. So we feel pretty good about that.
Inventories are our strong so in the I think unlikely event that we had another closure, we could still ship frozen product from that side, there's a second site as well. So we would anticipate this business is getting back to the kind of growth rates that we had anticipated when we bought it.
Obviously won't do it for this year, but as we said in her prepared remarks that business is going to grow at.
At least 30%.
For going basis, probably for the next five years or longer.
Cell therapy.
Drugs are develop and process improvements are made and are manufactured so.
We look forward to having a bigger footprint to be able to provide these critical that tools to the companies in the drug business.
Thank you Jim.
Sure.
Our next question here comes from John Kreger with William Blair. Please go ahead.
Hi, Thanks, very much Jim just sticking with that concept can you talk a little bit more about how so lerro and he Medicare differ or are you, just adding sort of a broader donor base or what other.
Capabilities or are you gaining from this deal.
So.
The low level above so we're adding scale, which is just important given just the growth rate of cell therapy investments in those companies minting new companies and third the rapid nature of drug development by these companies. So we wanted to scale number one number two.
You may recall, John that we when we bought he Mikael which was only in January I understand but we did talk at the time about geographic expansion letter to California company. So we're talking about doing something in the Boston area because.
Having more than one site helps the clients to sleep better and.
With some of the cell types you wanted to be really in close proximity thing gets a sells to the to the client quickly. So you know these got these guys have something in the south in a in the west and in the greater Boston area. So we love that we'd love to scale.
They have more disease state cells so clients.
With who have diseases, both oh orphan diseases, and other diseases and they have a mobile ourselves which is a.
Immuno compromised sell certain immunocompromised patients and some stem cells. So we have added some science scientific capabilities that we probably would have had to do on a greenfield basis. So we have that now.
We have overall capacity and we have very important to geographic expansion.
Excellent. Thank you and then I'll follow up you know we've heard reports that some of the coal that work is moving forward at unprecedented rates and curious are you getting that sort of request from clients within a year. The tox work that you would do on these programs and is there even a way for you to accelerate timelines. Thanks.
Yeah.
Yeah, we definitely have all work.
Pretty much across our portfolio, obviously the safety.
Testing.
Safety assessment of these drugs is going to be the most critically important thing.
As they fast track for therapeutics, and the vaccines, particularly the vaccines the safety profile is going to be critical so.
We do have a healthy book of business, we are trying to prioritize what we're doing everything we can.
We've been doing everything we can generally pretty covered or certainly doing everything we tend to take white space out of the process and do things more quickly.
With regard to reporting timelines and just having a client be ready to accept the data when we're ready to give it to them and vice versa. So I think the iterative process.
Communication process and responsiveness on both sides is really there.
Because this is obviously so important to society. So yeah, we're really pleased and proud with our ROE.
Great. Thank you.
Your next question here will come from Ricky Goldwasser with Morgan Stanley. Please go ahead.
Okay.
Hi.
Great. Thank goodness.
Okay.
Okay.
Mark.
Okay.
I'd like to return to historical level.
When do you think how long do you think it's going to take to recapture.
So you broke up at the beginning Ricky So you talk about margins being restored in RMS specifically or was it in.
Yeah.
Paul.
Steve.
Go back.
Yeah, Yeah, you can.
I don't think it down I think it takes longer to our remember I mean Rms.
Unit volume in RMS in in the U.S. in Europe has been you know.
Over the last few years anywhere from down a couple of percentage points to flat to up a couple percentage points, we always get price.
And so this is this is nothing more or less than clients literally being close to not being able to take the animals, let's say that they need for the research where as they opened so they're they're opening nicely as I said earlier.
We were down.
The the services business has been strong not only strong in a covered world, but in some way stronger because it's instigated more outsourcing we continue to build.
Capacity in China.
And you know, there's a little bit a pent up demand by the academic institutions, who are closed.
And are now opening I don't want overstate that Pat.
Pent up demand being in as much as they want to get right back to work so our ability to provide them in animals is important so.
I don't think it's it's obviously not mathematically possible to deliver the margins that we did lets say last year this year because of that.
It's kind of.
Huge dimunition in revenue and profit in the second quarter, but it will continue to build back in the third and fourth quarters.
Very nicely.
Two to two towards historical levels and I would imagine next year would be would be fine barring some unforeseen bizarre covered related.
Event.
Okay and Oh.
The next money doesn't supply sources.
Okay.
That's correct.
So I guess it depends in Asia, So any update.
No.
Okay.
Yeah, we're working really hard at.
Supply chain and yes.
A critical critical tools that we need to do our work and I think we've done a very good job ensuring.
That we have sufficient.
Products or do I work, both living and the NNN inanimate from a variety of sources. Some new many increased from where they were historically and <unk> and some reduced.
From where they were historically, so we feel really good about.
Supply chain for the balance of this year and we'll be very well prepared for next year as well.
Thanks.
Sure.
And next thing going to line up.
Moment here.
Dan brand with you'd be yes. Please go ahead.
Good.
And.
Jim I think earlier in the call maybe I missed it I know there's a question on maybe sizing.
Corporate opportunity for Charles River, whether in the quarter actually look out could you just reiterate.
What you indicated there and then related to that I'm just wondering.
Given the improving kind of your base business, how are you planning and from a capacity standpoint to the extent you know this covert work continues.
Yes so.
What I said was that were delighted to have the work.
It's coming from large and small clients.
We're doing our best to prioritize it when we get it because every once in a rush.
We're doing our best would take time out of the.
Process, we're not going to give a specific number just it's just that we just don't two things like that in.
We have put we'd have to updated every time, we speak to you and I'm just not sure. That's helpful. So we're delighted to have the work, it's obviously going to be beneficial to our financial results but.
It's it's not going to be a huge number in this scheme of the Kosmos I think it's beneficial. So we don't we don't want you all to over read that.
Got it and then and then I think your full year guide well compared to the raising it I think if you do the math it implies a decent deceleration for Q was that just conservatism on an organic growth basis that you're baking that in.
My let my colleague Mr. Smith respond to that.
Well I HM.
I wouldn't say, it's a conservative isn't it's attached to the sentence you and I think we've got a sensible forecast here remember, there's a lot of puts and take.
Site scenario isn't too draconian as we thought it might be when we spoke last quarter. So we've taken that downside risk off the table.
Certainly feel that Weve passed over the full beat for Q2 and increase the revenue a little bit for the second half with the.
Remember the way that are among the building back up you know very had a big fall in Q2, it beginning to build up in Q3.
Not going to get quite to the same level that we would expect from normal Q4, but we're getting toward that so it's too early I think to take charge that you know that RMS is kind of following the cutback in this year sits on a comment that Kim said earlier.
So again and still six months of the together and we think we thought something that.
Protect says for a sensible.
That headwind.
We haven't seen in our forecast that will be a complete.
Worldwide sort of stay more than that we saw appease few months ago.
Just trying to get some consented between.
Passing on the be passing a little bit of upside, but at the same time.
So there's still some uncertainty because they've done that but we don't Wanna get too far ahead on that skis and getting that done sensibly balance and you think that's what we can continue today.
Got it thank you and the David I guess, the warm or interest on the operating margin.
We could do the math and triangulate back in but.
Could you just.
Kind of walk us through maybe a little bit like what an expected range could be on operating margins as we look on a full year basis. Thank you.
Yes, So we said.
That we would have some margin expansion from last year last year was 19%, we again going back to the comment that just made we read hesitating com narrowing that margin range at this stage yeah.
What I could give you a bit of color of course, the first half of this year with an 18.2% margin, which EM is a nice comparison to last year of 17.4, So an 80 basis point increase despite the headwind that we had in research model in Q2, So we but first I'll go.
Very well.
So we're pleased with that.
You you can expect as Jim mentioned, some further improvement in the research models margin as we go through the year, but as I said America wont get to the same margins that we've had historically, we won't get a full recovery until next year.
Manufacturing were already in the mid thirties, which is where we promise so.
And your position I wouldn't read in much more of an expansion in manufacturing and of course. It say is where we've always said, we get a lion's share of our expansion if you're going to 2021, you've seen a nice uptake in the do you think margins that's out there this year, even at the end of last year.
So we would expect to see some continuing improvement year over year on the a thing.
And next we'll go to the line of Dave Windley with Jefferies. Please go ahead.
Hi, Thanks for taking my question Jim on.
Koby will come at this in different ways, but but thinking about.
I guess the timing of.
The cobot opportunity for Charles River in light of your specific kind of category killer position in early development.
It is.
Our your services ones that should be in demand for developers of cobot vaccines.
Throughout the development life of those vaccines or are they heavy and you're only going such that kind of a real opportunity for Charles river's portfolio services is is say in 2020.
Now I think that we will play.
No.
An important role in the development of both the therapeutics and the vaccines as I said earlier, particularly on the safety side.
It's impossible to set to to predict what the size will be so we're just trying to give you all of a sense of what it's like now there's a lot of that activity. We're happy to have the revenue.
I wouldn't I certainly wouldn't say, it's dramatic at the current time.
But I think I think our role is critical and.
Given that were the biggest tax company in the world and given the given the race to market and given the necessity of safety profiles.
To provide the dragon, particularly vaccine for disease that nobody and there's no historical data nobody understands.
It's really high stakes so.
I think that are Iraq I work is going to be are critically important and since I don't think that.
Vaccine is around the corner, even though we hope it is.
And while we may have some short term drugs I think vis vis vis.
This is significant opportunity for more to come down the line and.
Be increasingly refined.
And that we should continue to.
To to play a role here.
Great. Thanks, Yeah, there's certainly an intellectual challenge between the yeah. The societal hope for a vaccine or what we know heart failure rates. So.
Yeah. My my other question is around kind of the theme throughout your comments about.
Additional outsourcing mentioned in cans I think you kind of kind of covered my question there in terms.
The persistency of that but you also mentioned.
Do you guys say and maybe even in some other areas, where there's been a prompting could more outsourcing clients facilities were not as readily accessible and so my question is how do you assess the permanent C.
Those outsourcing here by those clients in the various areas of your business.
We have to assess it by living living a day, but we're seeing it everywhere. So we're seeing a lot of it in a RMS services, particularly I asked gems, we're seeing discovery for people that have begun to develop drugs that they've done a very very earliest of discovery and then they were shut down whether it's the largest small clients.
And they couldn't depend on themselves or that we're using somebody besides Charles River that didn't have a good business continuity plan and they couldn't depend on our now or they did safety.
So for some of the big clients, we did some safety work internally or use a competitive or ours and again.
Couldn't depend on them cost as a huge need to be.
Testing of these drugs.
From Biologics point of view and is there's going to be an increasing need to test them from right CRO wheel.
Contamination point of view once the manufactured as if we go into the clinic or the end end use market. So.
So as I think it says in last quarter's call.
This is very interesting to see a very large portfolio really benefit clients, who for whatever reason might have historically like to do things internally have worked with somebody else or both who now is utilizing us.
And they may make them when we got the work they may have thought okay. So, we'll we'll use shells, where because of the only once that are open and then I think I think over time they'll be.
They'll be.
I think there will be very pleased with the pricing and the speed and the quality the work and I think there will be thinking why would I bring it back house I also think.
Timeframe to bring it back house is going to be substantially elongated I don't think this this is.
Actions going away anytime soon and I think the longer they work with us the greater the propensity and the opportunity is for them to stay with us and like it.
And.
Decommissioning space to utilize the space for something else. So.
So all we can do is live at an all we can do is do great work and all we can do is demonstrate live to see than say anything just demonstrated this is a better value proposition for them and a better business continuity proposition for them because even for big pharma. They can't depend some of them could depend on themselves depending on the geography.
He that they were in so.
We're really pleased with the outsourcing.
Business that we've gotten.
We think that.
A meaningful amount of it will stick.
It's impossible to predict that are size it at the moment, but.
We're really pleased with what what transpired today than what we think will continue.
That's great. Thank you for the answer is only with that.
Sure.
And next we'll go to line of Robert Jones with Goldman Sachs. Please go ahead.
Great. Thanks for taking my questions. This is Jack rubbed off on for Bob.
I wanted to ask about manufacturing support margins, how sustainable are the margins that you're seeing in that segment is in the fourth quarter and around New York at or above your long term guidance and throughout this time you've had some sort of these transfers are there now you saw the microbial solutions revenue impact. So just trying to understand how sustainable the margins that you're seeing our.
Well I take that David.
Yeah, I mean, then.
We signaled hum yet again that we want to mid thirties, and we'd been as you just saying we're operating in the mid thirties.
We've often comments it that rather than drive them aren't you know we want to continue to invest in that business. So that we can continue to get sort of double digit growth rate on the topline.
In the prepared remarks, Jim pulled out that we are continuing to what we plan to expand.
You know biologics as among needed capacity.
As an example of where we will continue to invest in the business.
There are saying you know presses improvements that we have to making in microbial as well.
But again at the end of the day, we're not prepared today to talk about increasing margins for the sold to date the future but to continue to replace how some of that profit back into the business to make sure. We can get not topline growth that double digit continue.
Hey, Thank you.
And next week normal line out.
Karen Greene catches up here, one carbon dano with bank of America. Please go ahead.
Hi.
Thank you.
My question is also on the manufacturers Port segment.
It feels like the microbial solutions business was moderating growth even before covered 19.
Due to a one timer into first quarter last year and then obviously this quarter you noted that there were some good merged into installations. So my question on the microbial solutions business is what level of confidence because you have but you may be able to regain and for staying low double digit growth in this business of specifically.
I'll leave it there thank you.
Yes so.
Yeah, you phrased the question well and.
Thank you identified the areas in the issues that are causing a lower growth one and pretty much no growth. This quarter, we had a massive.
Pre order with a client that does that.
Cause as the year over year comparisons to the out of whack and.
We have a lot of demand for new systems, and we haven't been able to get into the clients to install them.
Let's see it's the RMS and that directly or the big Cove it impacts.
As I said my prepared remarks, it's beginning to loosen up we've installed some some systems remotely which is not surprising clients need them and.
We've been able to walk them through it and that May stick and an increase.
But clients are beginning to open up slowly what you know what happens this year, if we were going to sell them, let's say a a system in the second quarter.
And let's say, it's a it's a when did the one of the under say systems. This is associated number so associated amount of.
Reagents for cartridges that go along with that and even some of the Celsis system. So we don't you sell the the equipment, we have the razorblade to go along with it right. So we are that hit as well so.
Were entirely confident that that business when the clients are open and we can solve the systems, which clients very much want unlike particularly some of the cell systems on a covered world for bacterial contamination.
We should get back to low digit double digit levels were continuing to convert our own clients from conventional.
Methodologies to a more sophisticated systems and we're continuing to take share by having competition.
I haven't clients converged from the competition technology to ours because.
They get any answer much faster so it's an odd sort of air pocket here one and.
I'm happy that you asked the question because we really want people to see through with the business as we said when we're not going to give you. The my exact margins, but as we said in my prepared remarks.
And then David's part of the reason its amazed that the manufacturing margin is over 37% is because the margins are better microbial because the process improvements we made isn't manufacturing process. So.
In addition to I think a more robust top line going forward, we continue to drive efficiency in that business. So it was contributing very nicely to to total Charles River operating margin.
Thank you.
[music].
And next week not alliance Patrick currently with Citi. Please go ahead.
Thanks, Jay maybe one for you you know last quarter, you called out the complex integrated drug discovery projects on the discovery side is an area you were seeing some delays it sounds like you saw some growth.
The small biotechs, how quickly things normalize just the general tone there.
Okay, you cut out, but I think I figured out the question. So I think we had some small clients biotech clients.
Really pull back in Paas would covered here because it just didn't know how would impact them or impact their access to capital or ability to get their work done number one number two.
They were considering very complex multi year pretty expensive integrated projects with us and next well.
If we're going to be conservative that's a good place to be concerned so.
We had a couple of those few a few of those.
And they pause and while I don't think the ones that pause necessarily.
I have reinstituted.
Those studies, we have had others other biotech companies and pharma companies.
Kind of pick up the slack. So I think everyone is kind of figured out.
What cove it means to them in terms of the drug development processes in terms of the really complex discovery work you're doing in terms of the.
Impact that we can have hopefully helping them.
Solve some really complex problems through these integrated studies are.
Our.
I really complex and.
To help solve some problems that somehow our big mystery sort of client so.
Sort of move right through that relatively quickly, but later in the second quarter and yeah. We think that business will continue to be.
Yes, so huge kind of our business for but we'll continue to be an increasingly important one and one that distinguishes us from the competition.
Helpful. Thanks.
Sure.
And next we can go to line up the take Kumar with Evercore ISI. Please go ahead.
Thanks for taking my question I.
I had a two quick ones, maybe I'll rolling that into a single question Jim on that if we create enough the l. RP here heightened those organic or the 20% margin target.
One up on the top line why wouldn't we see RMS that snapping back perhaps that high too.
You know, even perhaps touching them in a low doubles I'm curious you made some comments around in a new normal Nick standing willing to 2021, perhaps put that into context, when I say now second on margins.
You know the 20% for 21 target in place a big step up or worse is.
The comments relative to some margin expansion quick many many.
Curious what types of step up thank you guys.
So we just don't want to get ahead of ourselves here we.
We would be very pleased to them. We hope you out would be very pleased this if we would deliver high single digit.
Revenue growth next year and meet our articulated operating margin target of 20%.
We obviously, we'll do everything we can to always have our numbers be better, but it just would be way premature just given the vagaries in the world right now notwithstanding the fact that word we're performing well.
To do better than that I, specifically your comments about RMS I mean.
As has been low to mid single digit grower.
With.
The cell therapy product businesses growing 30%, that's going to stimulate larger and larger growth rate.
It's a matter.
Gets you to where you're.
What are your directing but but I think directionally the hopefully the growth rate will will exceed low to mid but.
Well, we're not we're not ready to to articulate that we just we just bought those businesses and we wanted to perform and as we surround the second quarter.
He macaire was impacted somewhat by covered so.
We'd be delighted to hit those targets.
We're always driving to push them higher so.
I'm not saying, it's impossible to they could be better I'm, just saying that that's not something we're willing to guide to with the current time.
That's helpful and on something like that.
Sorry, I get your points about the year over year comps from a low dates for our research models, but not the twentytwenty compared to 2021, yes, it's still an organic growth.
But tend to Jim's point, we're still along the way off I'm seeing what Cobiz Thanksgiving Twentytwenty, one, but like I take your point about the direct your comps.
If we get research models back to normal way of looking in 2021, then you would see a one off.
Here are the benefit because we had a low base and quite frankly, but we'll stop signaling that math and that structure. When we get close to two times you're comfortable.
So thank you guys.
Thank you and next well go to the 10 Lyondell, Steven Baxter with Wolfe Research. Please go ahead.
Hey, Thanks for the question hopefully you can hear me, Okay. I wanted to ask a bigger picture question about doing acquisitions will occur environment. Obviously, you can add deal you're announcing today can you talk a little bit about how you're handling the integration process. One obviously traveling for example, the difficult thing to ask people to do.
And would you be able to integrate a larger deal in the current environment or is the ability to integrate anyway a rate limiting factor for you over the next couple of quarters do you think about large deals. Thanks.
Good question.
We have a pretty large sophisticated integration team and so I think our ability to do.
Much of much of the integration the vast majority of integration can be done remote. We certainly are all I need a system stuff all the back office staff. This is not a problem.
Facility issues to the extent the we have to get involved obviously somebody has to go there and we will we have low we have local people. So so we've seen the facilities were buying.
Although we didn't do that we didn't do that en masse.
Ability to help.
Companies that we buy from us.
Sales point of view I think we can do remotely and and we can educate sales organizations.
Hi video et cetera, so no it doesn't strike us that.
That's a headwind to doing deals large or small I think integration something we've got increasingly better at.
It really doesn't matter the size of the deal we wouldn't be particularly wouldn't be hesitant and it's going to be some opportunities and I for one thing for the covert situation will be will be prolonged and we're not just going to sit and wait.
For things to change to be able to get on with our business. So.
We have strong balance sheet, we have oh, we have a lot of targets, we've seen that adding and enhancing the portfolio is is the key competitive differentiator between Charles River and all of our competitors. So we want to continue to advance that through our targets out there and we have a team ready willing and able to do additional.
Ill so.
I think we'll be able to integrate them just fine.
Alright, if there are no further questions I'd like to thank everyone for joining us on the conference call. This morning.
I look forward to speaking with you during several upcoming Investor conferences in September. This concludes the conference call. Thank you.
Thank you Graham action, ladies and gentlemen that does conclude the call for today. Thanks for your participation for using 80 teleconference. You may now disconnect.