Q4 2020 Charles River Laboratories International Inc Earnings Call
[music].
Ladies and gentlemen, thank you for standing by and welcome to the Charles and when you bring the laboratories International fourth quarter earnings Conference call and she tells on 'twenty one guidance call.
Time, all participants are in a listen only mode.
Three of the speaker's presentation, there will be a question and answer session to ask a question you will need to press the star one on your telephone. Please be advised today's conference is being recorded if you require and of further assistance. Please press the star there.
I'd like to hand, the conference over to true Speaker of today, Mr. Todd Spencer corporate Vice President of Investor Relations with Charles River. Please go ahead.
Thank you Mary.
Good morning, and welcome to Charles River Laboratories fourth quarter, 2020 earnings and 2021 guidance conference call and webcast. This morning, Jim Foster Chairman, President and Chief Executive Officer, and David Smith, Executive Vice President and Chief Financial Officer will comment on our results for the fourth quarter and full year, 2000, and 'twenty and our guy.
For 2021.
And as well as our planned acquisition of cognate vital services.
Following the presentation. They will respond to questions. There is a slide presentation of associated with today's remarks remarks, which will be posted on the investor Relations section of our website at IR Dot C River Dot com and.
Webcast replay of this call will be available beginning approximately two hours after today's call and cannot excuse me can also be accessed on our investor Relations website.
Replay will be available through next quarters conference call.
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 private Securities Litigation Reform Act of 1995 actual actual results may differ materially from those indicated.
During this call we will primarily discuss 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 where he substitute for results from operations and prepared in accordance with GAAP.
In accordance with regulation 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 impact on the company certain methodologies and methodologies 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.
Thanks, Paul and.
Good morning, and.
Very pleased to speak with you today about the conclusion of another of extraordinary DNC Charles River and <unk>.
Spectation from 2021 and.
And the expansion of our early stage research and manufacturing support portfolio into complementary high growth sector.
Yeah.
2020, and was an unprecedented year the COVID-19 pandemic challenge that's in many ways, but to date, we've navigated it successfully and reinforce the acquisition is the leading non clinical Sierra and the success.
2020 was due to the resilience of our business model of comprehensive business continuity plans that enabled us to keep on a worldwide operating sites open and adequately staffed and broad scientific capabilities and flexible outsourcing solutions that support.
Point of clients' needs and our employees around the world to meet client needs and the commitment and dedication.
As a result, we have now become even more integral to our valued clients and the only differentiated from the competition. Despite the short term impact of Covid related client disruptions, we benefited from robust underlying client demands across most of our businesses.
This was largely driven by clients intensified the use of strategic outsourcing to overcome challenges at their own sites as they are.
And with us to move the early stage research programs forward joined the pandemic.
In addition record biotech funding environment, which eclipsed the $130 billion last year as the <unk>.
While we had clients to place greater emphasis on R&D investments, particularly in the early stage pipelines. We believe these factors drove our exceptional financial results and the fourth quarter and and for the full year.
We are extremely pleased to report organic revenue growth above, 10% and the fourth quarter and 7% for the year, both metrics and in line with or above our high single digit organic growth target. Despite the short term challenges associated with COVID-19 last year.
We also achieved our two year operating margin target of 20 per cent for the full year one year ahead of schedule.
We are continuing to closely monitor COVID-19, the bill.
I'll leave a strong performance from 2020, and the continuation of robust demand trends.
Record booking and proposal activity and the safety assessment business.
And as well to get off to a strong start in 2021.
COVID-19 pandemic has also enhanced the global focus on scientific innovation.
And is generating biomedical breakthroughs across multiple therapeutic areas, including from COVID-19 vaccines and <unk>.
And as fueled continued investment and and the proliferation of more complex research techniques involving advanced drug modalities, such as cell and gene therapies.
Complexity of these new modalities is increasing our clients and reliance on the high science outsourcing partner on Lake Charles River.
To enhance our ability to meet our clients' needs and these emerging areas of scientific innovation and to take advantage of the significant growth opportunity that leaves you can't strike Mcgalley's present, we are expanding our portfolio and scientific expertise through a combination of acquisitions and strategic partnerships and internal investments.
This morning, we announced our intent to acquire cognate payout services per.
See the ammo partner for clients comprehensive cell and gene therapy development and manufacturing needs.
We believe cognate, which will become part of our manufacturing segment is an excellent opportunity to enter the market.
Because it will allow us to participate in a niche value added sector.
High growth profile that adds to our existing non clinical development and manufacturing support capabilities let.
Let me start by highlighting three key aspects of the strategic rationale.
Cognate and solutions across the major CMO platforms with challenging and therapies, Inc.
The manufacturing and the required analytical testing is critical to drive efficiency.
And the cell and gene therapy sector offers exceptional growth potential.
Cognate and scientific expertise expertise makes it particularly attractive transaction.
Provides CMO services across both cell and gene therapies.
And with its primary area of expertise and the cgmp cell therapy manufacturing.
Cognate also has capabilities and the production of the plasmid DNA, which is and foundational tool from the development of gene modified cell therapies, and gene therapies as well as other endpoints and the C D and low value chain.
And gene therapies are emerging drug modalities, each and as such the science will continue to evolve however, cognates broad capability should enable it to better adapt the shifts in the marketplace cognate has a track record of producing various cell types of technologies.
Use and cellular immunotherapy and immuno oncology regenerative medicine and advanced cell therapy the sin.
And then just accept as the second pillar of the rationale cognate will be highly complementary.
Two our existing non clinical capabilities and establishing a premier scientific progress of cell and gene therapy development testing and manufacturing and providing clients with an integrated solution from basic research to GMP production.
<unk> pharmaceutical clients are seeking to drive greater efficiency and leverage scientific benefits by working with fewer trusted partners, who will have broad and integrated capabilities.
As we are already of provider of expenses and non clinical services from cell and gene therapies. The acquisition of Cognex will enable us to produce drugs and these advance my balance.
We believe the strategic expansion of our portfolio of its particularly synergistic with our biologics testing solutions business.
It will be ideal for clients to be able to seamlessly conduct the analytical testing process development and manufacturing for advanced modalities with the same scientific partner, enabling them to achieve the goal of driving greater efficiency and biologics business as a premier provider of quality control testing the challenging and therapy.
Including assay development analytical testing and cell banking, which are all critical steps and the manufacturing scale up and commercial production processes.
Clients will.
And so have access to our cellular products and that's the starting point from the cell therapy program and we'll be able to work with Charles River through every step of the research and early stages on the process before moving into the cgmp production of cognate and accelerating our clients speed the market for advanced driving liabilities.
With Charles River, and cognate combined we expect to effectively double the revenue base of our comprehensive cell and gene therapy capabilities to approximately 10% of our total revenue.
The cognate will also immediately enhance our growth potential.
Standing on our capabilities and scale into the complementary high growth cell and gene therapy sector.
The addressable market for Cognex, CMO services, principally cell therapy and plasma production is currently estimated at approximately $1 5 billion and expect it to grow at least 25% annually over the next five years.
Growth is being fueled by the robust biotech funding environment.
Ultimately 20 billion was invested and cell and gene therapy companies and 2020.
Fueling the rapid rise of scholars gene therapies, and the R&D pipeline, which now total over 2000 programs.
We believe the demand for cognitive services will intensify as more of these programs progress into late stage development and commercialization.
And the companies that are successful and the market will be able to provide the science the states and the integrated solutions to broadly support clients cell and gene therapy programs, we intend to be one of the successful company.
The purchase price of cognate is expected to be approximately $875 million of cash.
<unk> will be consistent with comparable high growth high science transactions, and the cell and gene therapy CMO sector.
Cognate is expected to generate annual revenue of approximately $140 million and 2021.
Which we project to grow at or above the estimated market rate of at least 25% annually over the next five years.
Because of the market growth potential and the emerging role of cell and gene therapies and treatments for oncology and rare diseases. In particular, we believe cognate will meaningfully enhance our revenue and earnings growth potential and the transactional and achieve our hurdle rates for investment returns and David will provide additional financial details on the transaction, including.
The estimated 2021 and financial impact.
We look forward to welcome and cognates dedicated employees to the Charles River family.
Now, let me give you the highlights of our fourth quarter and full year performance.
The reported revenue of $791 million and the fourth quarter of 2020 and increase of 14, 4% on a reported basis robust client demand across all three business segments drove organic revenue growth of 10, 3%.
The DSA and manufacturing segments reported low double digit organic growth.
And the segment's organic growth rate rebounded to a mid single digit rate recovering from COVID-19 related client disruptions, principally and the second quarter the.
2020 revenue was $2 $92 billion.
And the reported growth rate of 11, five per cent and and organic growth range of 7%. We're very pleased with this high single digit organic growth rate, particularly in light of the revenue headwind from COVID-19.
The operating margin was 28%.
And the fourth quarter, the decrease of 60 basis points year over year margin improvement and both RMS and manufacturing segments was offset by the DSA operating margin decline.
For the full year, the operating margin increased by 100 basis points of 20% achieving our target one year ahead of schedule.
This was an exceptional performance.
Resulting primarily from the inherent operating leverage and our business.
Continued efforts to drive operating efficiency and build them on scalable infrastructure and the benefits from the temporary cost reduction initiatives related to COVID-19, the spa.
Achieving our 20% target. We believe we are well positioned to achieve modest operating margin improvement and 2021.
Earnings per share with $2 39, and the fourth quarter and increase of 18.9% from $2 <unk> and.
And the fourth quarter of 2019 from.
For the full year earnings per share were $8 and 13 status of 28% increase of the prior year, we exceeded our prior guidance range of $7 75 to $7 85.
Due primarily to robust low double digit organic revenue growth and favorable below the line items for the fourth quarter, including the lower tax rate.
We are very enthusiastic about the outlook for 2021, we believe our exceptional market position the strategic expansion of our unique portfolio and.
<unk> focus on operational excellence combined with continuing robust client demand and position us extremely well for the year ahead, excluding cognate and we expect organic revenue growth of 9% to 11% and.
Non-GAAP earnings per share and the range of $9 to $9 25, or an increase of 11% to 14% year over year. The acquisition of cognates expected to be neutral to non-GAAP earnings per share and 21 and at approximately 400 basis points to the reported revenue growth rate, which equates to a reported <unk>.
Revenue growth outlook of 16% to 18% and 2021.
I'd like to provide you with additional details on the fourth quarter segment performance and our expectations for 2021 at the beginning with the DSA segment's results.
DSA revenue and the fourth quarter was $495 million 11, 3% increase on an organic basis.
And by robust demand from global biopharmaceutical and biotechnology clients of both discovery and safety assessment.
For the full year of DSA organic revenue growth was nine 4% we.
We expect organic revenue growth will be approaching 10% and the DSA segment and 2021.
Cause clients, both large and small are increasingly choosing the product of a large reliable CRM like Charles River clients now that utilizing our science and our broad early stage portfolio and a flexible outsourcing solutions.
Propel the research efforts faster and more efficiently than they could do it alone.
This was the amply demonstrated during the pandemic when they face challenges that they're on sites robust biotech funding also continues to fuel a healthy demand environment safe.
The safety assessment business continued to perform extremely well driven by higher steady volume and price increases and the fourth quarter bookings and proposal volume reached record levels and the fourth quarter across all regions and nature of service areas, which we believe positions the safety assessment business favorably for a strong first half of 2002.
'twenty one.
We're pleased with the extensive depth and breadth of our safety assessment portfolio and remain intently focused on continuing to enhance the value we provide to our clients.
We're also seeing greater opportunities to conduct safety and efficacy testing on cell and gene therapies. We believe there is meaningful growth potential inherent and the more than 2000 programs currently in the cell and gene therapy pipeline.
Ultimately two thirds of which are and the preclinical phase.
Testing requirements of cell and gene therapies vary by molecule from complex comp the combination pharmacology safety studies.
And cell therapies and the safety programs that are similar to the traditional large molecule for gene therapies.
We've already built one of the largest early stage testing platforms to support this emerging high growth sector and intend to continue to adapt and enhance our capabilities to meet the specific needs of these emerging drug and the modality.
We're continuing to add new capabilities across many of our businesses, including through strategic partnerships and partnership strategy has proven to be very successful to stay current with cutting edge technologies and innovative capabilities with limited upfront risk.
And the last several months, we have added new partnerships and expanded existing loans across several businesses, including with side pray for the three the tumor modeling and screening immuno oncological compounds and have discovery business and with path of quest and Jade biomedical and our biologics business. In addition last month, we announced the.
<unk> of distributing the dial formerly of strategic partner through which we establish our integrated large molecule discovery platform. This platform fill the gap and our portfolio and expanded our early discovery expertise and the complex drug modality that you see or others can successfully offer.
We believe our clients' willingness to outsource more of the discovery programs will be predicated on our ability to continue to add innovative capabilities to meet the critical research needs.
We believe the combination of the strategic outsourcing trend deep scientific expertise and a willingness to forge flexible relationships with clients led to the tremendous performance of the discovery business, which had another exceptional quarter and year.
Based on demand for our suite of early discovery oncology and CNS services drove the fourth quarter performance to achieve our goals and 'twenty 'twenty, one and beyond we will continue to strengthen our portfolio by expanding our scale of science and our innovative technologies by doing so we are enabling our clients through.
The name with one scientific partner from target identification through IND filing and solidifying our position as the leading early stage CRO the DS.
<unk> operating margin was 23, 2% and the fourth quarter and a decrease of 240 basis points for the fourth quarter of 2019 decrease was driven by increased cost due in part to performance based bonuses and of slightly less favorable study next on the safety assessment business.
2020 of the DSA operating margin improved by 140 basis points to 23, 4%. We are pleased with the full year margin expansion and the DSA segment and believe there will be incremental opportunities from improvement.
On RMS revenue and the fourth quarter was the $156 $7 million and increase of five 2% on an organic basis.
For the year RMS organic revenue declined by three 3%, reflecting and impact of approximately 7% from COVID-19, principally and the second quarter, our outlook for RMS organic revenue growth will be and the high teens for 2021 and as a result of the recovery from last year's COVID-19 headwinds.
And the incremental benefit from adding the high growth cell supply businesses to the organic revenue base. Following the respective anniversaries of the Hemic Kerr and <unk> acquisitions.
As anticipated global demand for research models of improved in the fourth quarter, both on a year over year and sequential basis as clients returned to normalized order activity and all.
Geographic regions following COVID-19 related disruptions earlier in the year that accelerated nicely in the fourth quarter of particularly in China.
We believe that we benefited from market share gains in 2020, especially with academic clients. It's research sites reopen and not all suppliers could meet the clients' needs. We will continue to monitor the evolving COVID-19 situation globally, but at this point and it appears that most academic and biopharmaceutical clients of adapted their pro.
Of the calls to continue working during the pandemic.
Research model services also continued to perform well James is benefiting from renewed outsourcing demand due in part to COVID-19 challenges at our client sites earlier and the year as well as scientists use of use of more complex research models.
We are the natural partner for our <unk> clients. Since we have extensive animal husbandry expertise, which enables us to manage the proprietary models safely and efficiency.
We're also continuing to generate client interest for insourcing solutions through both our Cradle initiative, where we provide turnkey research capacity to our clients as well as through more traditional and source of staffing arrangements.
Revenue from the cell supply of businesses, Haemacure, and solera increased and the fourth quarter on on a comparative basis, the remainder of the growth rate below the targeted 30% level we.
We anticipate that this growth rate will accelerate as COVID-19 constraints ease and we expect to achieve on growth rates for these businesses. In 2021, we continue to work diligently to expand our donor base and the U S and add more comprehensive capabilities at all of our sites to accommodate the robust demand.
And the cell therapy market.
Acquisition of cognate also positions Charles River as a trusted partner that can move cell therapy program forward using the same cellular products through each step.
Of the research and early stage development phases and into cgmp production and cost base.
The RMS operating margin was 25, 1% and the fourth quarter and increase of 50 basis points from the fourth quarter of 19 the.
The increase was driven by operating leverage from higher sales volumes.
And the research models business as well as the benefit from operating efficiency initiatives. The 2020 of the RMS operating margin declined by 420 basis points of 22% to almost entirely to the impact of COVID-19, with the financial impact of COVID-19, and believed to be largely behind us we expect the IMF Rms opt.
Waiting longer and will rebound well above the 25% level and 2021.
Manufacturing revenue was $139 3 million for the fourth quarter of growth rate of 12, 4% on an organic basis, driven primarily by the biologics businesses.
And the microbial solutions and avian vaccine businesses were also meaningful contributors to the fourth quarter revenue growth organic revenue growth for the year was 10, 4%.
Microbial solutions revenue growth rate improved again in the fourth quarter due in part of the year end ordering trends for and to save test and cartridges and we continue to have delayed instrument installations, resulting from COVID-19 restrictions that sort of client sites.
We expect this will constrain the microbial solutions revenue growth rate well into 2021, primarily because of the incremental revenue stream associated with the corresponding sale of consumables.
Including cartridges reagents, and <unk> microbial identification services. The generally followed the installation of our high throughput systems will be delayed.
This is the primary factor that is expected to cause the segment's organic growth rate to be slightly below 10% of 2021.
Coverage.
The <unk> related impact we continue to firmly believe that our ability to provide clients with the comprehensive rapid and efficient microbial testing solution as well as the high quality and accurate testing platform are key differentiators from the competition and the lead client to continue to choose Charles River for the.
Critical quality control testing requirements the <unk>.
<unk> business reported an exceptional quarter and the year with strong double digit revenue growth. We believe that robust market demand will continue to support biologics revenue growth and 2021 due largely to demand for testing of cell and gene therapies.
We developed a comprehensive suite of new assays required the support the unique needs of cell and gene therapies, and we'll continue to add assays and 2021 to accommodate the robust demand the.
The acquisition of cognate is also expected to be highly synergistic to our biologics business and its clients will now be able to outsource GMP cell and gene therapy production and the required analytical testing to one scientific partner, reducing the bottlenecks and inefficiencies of utilized multiple outsource providers.
So expect to derive the benefits from COVID-19 testing.
We believe our biologic business will be providing required production testing.
And as many of the vaccine and move into the commercial production phase and some of the early stage testing activity subsides.
Given the strength of the demand environment, we are continuing to build upon our extensive portfolio of services to support the safe manufacture of biologics and ensure we have available capacity to accommodate client demand.
Part of the strategy, we were pleased to recently announce the we've expanded our partnership with half of quest to build the next generation sequencing lab at our Pennsylvania site and.
Part of the J biomedical to enhance our biologic testing capabilities and geographic reach and China do.
Due to the leverage from strong revenue growth the manufacturing support segment. The operating margin was 37, 3% and the fourth quarter and increase of 10 basis points for the year of the operating margin was 37, 4% above our mid 30% target and consistent with our expectations for 2021.
Moving cognex.
And as I mentioned earlier, we believe that the COVID-19 pandemic has demonstrated that we are even more integral to our clients now we have been intently focused on accommodating the revolving needs. During these challenging times and many clients have told us that they could move they could move their research forward without us.
Clients of outsource incremental work to us across multiple therapeutic areas.
Because of our deep scientific expertise and the ease and flexibility of working with and integrated early stage CRM like Charles River as the results we generated approximately $60 million of revenue last year from our work on COVID-19 vaccines and related therapeutics. We're proud of work on all of the COVID-19 vaccines that have been approved for emergencies by the <unk>.
And then the U K to date, including the Astrazeneca and the journey of vaccine.
Astrazeneca and the two leading biopharma. So capex that we have worked closely with under our respective strategic relationships for many years.
And they have embraced the benefits of outsourcing and driving efficiency through the R&D organizations.
And our relationships with our data and Astrazeneca and demonstrate how we can work together towards the common mission to bring breakthrough treatments to market to save lives, which has been particularly critical now and as we strive to find the loose solutions of the pandemic.
As 2020 as demonstrated we are operating and a robust business environment with excellent growth potential to continue to successfully execute our strategy to maintain and enhance Charles from its position as the leading early stage CRO and to expand on manufacturing support to see demo capabilities.
We will continue to make investments and our scientific capabilities through M&A strategic partnerships and internal development expand capacity and staff to accommodate demand and.
Exploit our digital enterprise to provide critical data from internally use and to enhance connectivity with our clients.
We will continue to evaluate acquisition opportunities across our businesses and across a number of drug modalities and scientific capabilities.
We will invest and a disciplined manner strengthening our portfolio and focusing on speed and responsiveness as we meet our clients' individual needs and promote a more efficient drug development model and our goal is to enhance our position as the trusted scientific partner for pharmaceutical and biotechnology companies academic institutions and government.
And nongovernmental organizations worldwide.
Providing exceptional value of our clients. We believe we will continue to deliver greater value to our shareholders Inc.
<unk> and I want to thank our employees for their exceptional work and commitment and especially during the COVID-19 pandemic and.
And then shareholders for their support.
I'd like David Smith to give you additional details on our financial performance and 2021 on guidance as well as additional details on the acquisition of Cognex.
Thank you Jim and good morning, before I begin may I remind you that I'll be speaking primarily to non-GAAP results, which exclude the amortization and acquisition related charges and costs related primarily to on global efficiency initiatives and event.
<unk> capital in terms of the strategic investment performance and certainly the <unk>.
Many of my comments will also refer to organic revenue growth, which excludes the impact of acquisitions and foreign currency translation.
And then discussion this morning will focus primarily on our financial guidance for 2021, which principally excludes the impact of co pay to buy and services.
By 2021 reported revenue growth of 12% to 14%, excluding cognate and organic revenue growth of 9% to 11%, which includes a benefit of the favorable year over year comparison to last year's COVID-19 revenue impact sustained client demand, including record fourth quarter bookings and the proposal volume and ASP.
Assessment business and the robust biotech funding environment support our growth outlook for 2021.
Based on the strong revenue growth and with modest operating margin expansion. In 2021, we believe we are well positioned this year because of the non-GAAP earnings per share of between $9 and $9 25.
This equates to year over year earnings per share growth of approximately 11% to 14%, which is similar to on top line growth outlook as higher revenue and margin improvement will be partially offset by on client attach rate.
Foreign exchange is expected to provide the 200 to 250 basis point benefit to our reported revenue growth guidance of 'twenty 'twenty, one and the results of the weakening U S dollar on.
FX rate estimates based on the bank forecast for the year, which are currently very close and the spot rates.
We have provided information on our 2020 revenue by currency and the foreign exchange rates that we are assuming the 2021 on slide 40, and we will continue to monitor the fluctuations in the currency market as we progressed through the year.
And from a segment perspective, and a revenue outlook reflects the strong business environment and the fact that most of our businesses have recovered from COVID-19 related disruptions in 2020.
The RMS segment is expected to achieve high teens of organic revenue growth and 2021 as claim of order activity for research models rebounds from COVID-19, and the growth rates of the hemostat and deliver some of the client businesses the accelerates to targeted levels.
We expect the DSA segment to deliver organic revenue growth approaching 10% and 2021 and manufacturing to grow slightly below 10% on <unk>.
Organic basis, and robust biologics and Mendes, partially offset by the continuing impact of Covid on microbial solutions.
We're very pleased that the operating margin improved by 100 basis points to 20% from 2020 and that we achieved our target of 20% full year operating margin one year ahead of plan.
Building. Upon this performance, we believe that we are well positioned to drive additional margin improvement for the full year 2021, despite modest pressures on manufacturing due to carbonate as we continue to leverage strong revenue growth and maintain our focus on operational excellence.
On the segment basis on a.
And this is expected to be of primary contributor to margin improvement and 2021, increasing from the COVID-19 suppressed levels of 2022, well above 25% of share.
The DSA operating margin is expected to continue to make progress towards the mid 20% target and the manufacturing operating margin is expected to be similar to the 2020 level people of Covid.
And we expect unallocated corporate expenses in 2021 to be in the mid 5% range as a percentage of revenue both similar to five six percentage of revenue last year.
Our scalable infrastructure enables us to drive greater efficiency EBIT.
And as we periodically reinvest the detailed goals and the needs of a plane.
Total adjusted net interest expense is expected to decrease to a range of $66 million to $68 million of 'twenty 'twenty, one excluding company.
Compared to approximately 74 million tons of last year.
We expect the day.
Driven by lower average debt balances as well as lower variable interest rates.
The non-GAAP tax rate for 2021 is expected to be in the low 20% range and increase from 18, 9% from 2020, the increase and the tax rate is principally and issue a comparison of 2020, because last year's tax rate was reduced mainly by discrete tax benefit associated with the state tax returns and per.
And thanks credits.
As a reminder, the first quarter tax rates had to be meaningfully lower in recent years due primarily to the excess tax benefits related to stock compensation.
Given our current stock price, we expect this to be true and 2021, resulting in a non-GAAP tax rate and the mid teens and the first quarter.
We remain intently focused on driving strong free cash flow growth as a key measure of them on financial performance and 2020 free cash flow was $380 million and increase of 12% from 2019, but below our current guidance. The decrease in the fourth quarter resulted primarily from higher capital expenditures, which total 100.
And $66 $6 million.
This was above on our prior outlook of low $30 million due to two factors paying.
Paying capital of invoices that schedule in order to secure this game as well as the timing of capital projects. Some projects that would flow due to the COVID-19 related challenges and the second quarter regime and response to the reacceleration of growth and business activity.
At the end of the fourth quarter and a total debt balance was essentially unchanged sequentially the $1 $9 million gross leverage ratio decreased to two three times, primarily because of the strong fourth quarter performance.
With a leverage ratio of below two five times, we will benefit from interest savings on our variable rate debt, reducing the rate by 12 five basis points to LIBOR, plus 100, and total client base.
This points the.
<unk> and 'twenty, one we expect free cash flow to be and the range of $415 million to $435 million based on the anticipated strong operating performance of our business and on continued focus on working capital management.
Capital expenditures this year are expected to total approximately $180 million Thanksgiving and Colgate.
Currently we do not intend to repurchase any shares from 2021 and expect to exit the year with the diluted share count slightly more than 51 million share the.
FX benefit is expected to largely offset the earnings per share dilution from the higher share of Tam.
A summary of our 2021 financial guidance, excluding cognate can be found on slides 49.
Looking ahead to the first quarter of 2021, we expect here at the revenue growth will be in the low double digit range on a reported basis and approaching 10% of on an organic basis, we expect earnings per share and to increase at a high teens ratio of every year from $1 84, and the first quarter of last year and.
And I mentioned earlier, the first quarter tax rate is expected to be in the mid teens, primarily due to the excess tax benefit from stock based compensation.
Before I conclude I will provide some details on our financial outlook, including the acquisition of Covid.
Assuming the acquisition closes by the end of the first quarter <unk> is expected to add approximately $110 million to revenue for the partial year, resulting in a revenue growth outlook of 16% to 18% we.
We expect cognex to be neutral to non-GAAP earnings per share and 'twenty 'twenty, one and so do not expect the acquisition type of meaningful impact on on current guidance.
The acquisition is not expected to have a meaningful impact to challenge where the consolidated operating margin. This year. So we continue to expect to generate modest margin improvement with companies.
We believe there will be opportunities to improve cognex operating margin of over the next few years as we did the acquisition synergies and hence the scale of the business and drive operating efficiency.
We intend to update our full guidance and other financial metrics to reflect cognex next quarter once the acquisition closes.
From both strategic and financial perspective, we believe the acquisition will deliver compelling benefits that will generate revenue for shareholders as the.
The premium challenging therapy, CDMA, we expect company to boost the growth potential of our business and be increasingly accretive to non-GAAP earnings after the first year.
Due to the high growth nature of the emerging cell and gene therapy sector.
Expect to pay 23 times adjusted EBITDA for the next 12 months after the close.
We expect the transaction will achieve a return on invested capital hurdle rate, which is the meet or exceed our cost of capital buying debt.
The overall.
And we plan to finance the <unk> acquisition through on current revolving credit facility and we will also evaluate opportunities to further optimize our capital structure, given the attractive interest rate environment.
On a pro forma gross leverage ratio of closing is expected to increase into the low three times range, which is consistent with the levels of after the recent transactions also consistent with plenty of deal we will focus on repaying debt and a timely manner of following the acquisition and reducing leverage to our targeted level of below three times.
In conclusion, we are very pleased with one of 2020 financial performance and believe that we are positioned to have another strong <unk> and 'twenty 'twenty one.
Over the past five years, we have achieved compound annual growth of 15% per revenue, 16% for earnings per share, 15% of operating cash flow and 10% of the free cash flow with.
And with cognate and future acquisitions as well as the continuation of the robust underlying demand environment. We believe that we will be able to achieve similar growth metrics over the next five years, we intend to provide the business update and more details on our longer term outlook, including and updated financial targets at the virtual Investor day and the spring.
Inc.
That concludes our comments, we will now take your questions.
Thank you, ladies and gentlemen of coupon if he would like to ask a question from the past the.
The star followed by the number one on the telephone keypad.
Again, if you would like to ask the question that's the sidewalk.
One on the telephone.
And the one question per participant on.
Inc.
Our first question and from Eric Coldwell with Baird. Your line is open.
Hey, Thanks, very much and good morning, just two quick ones here first off and.
And I think we could probably triangulate based on those last comments, but.
David could you tell us what the cost of capital Youre using for the cognate deal. It looks like you might be exploring some options on your debt structure related to this and.
And then secondarily there were some comments on mix and safety being slightly favorable and the short term and I'm curious if we could get a little more detail on what what the driver of that was and and what the outlook is for the mix going into 'twenty and 'twenty 'twenty one thanks very much.
Yes, the alright.
In terms of the cost of capital for our return on invested capital calculations, we use the link which is around 7%, but I think the question is also the highway funding.
We we know the interest rates are very low at the moment.
And if that holds and then we will be looking to see how we might stretch trial on our long term debt.
On to finance and company.
And.
So.
And let's say more of course.
And a few weeks or months time, when we come to do that but yes, I think it is definitely on the cause of that with low.
The interest rate environment, we ought to take advantage of that and so although we can from the.
And the investment initially through our revolver and.
And we will do that.
We will be keeping at the science and what markets might do in terms of them longer term and interest rates of our bonds.
And in terms of the DSA margin.
The.
Two aspects of that drove that.
And just step back a moment.
And then we.
And trying to get to the 20%.
The overall margin of the childhood of that for some time I'm really pleased that we've achieved at the share.
The piece that we did at one year ahead of schedule and.
DSA with the meaningful contribute to that.
So the.
The margin grew 140 basis points of the full year.
And but we did have a slight decline in Q4 and.
And that's partly to do with the highest performance based compensation and we had the nine core organic revenue growth and just mentioned the 140 basis point margin improvement and so the wider PSA team and.
And the compensation they got there and secondly to your question on the.
The study mix and we've had this conversation a few years ago.
And we have a situation of land.
We've got a disproportion amount of studies that have large models.
And so does the additional cost initially when those studies to come but.
And the profitability improved over the course of the study and overall and you end up with similar sorts of margins.
So the mix is and it.
<unk> tends to fluctuate, sometimes it bounces up and get the portfolio of occasionally you get like we have from Q4 like we had of figures again.
We've got a particular.
Have you noticed the line on <unk>.
Studies that have largely come to the Gannett.
So.
Overall, we're very pleased with the potential for DSA and still.
Still striving to move that towards the 25%, which I think Jim mentioned in his prepared my remarks as well. So this Q4 impact is mostly from unnecessary.
Your next question comes from Dave Windley with Jefferies. Your line's open.
Hi, Thanks. Good morning, Thanks for taking my question I wanted to focus on.
The cell and gene therapy with my question on your cognate acquisition.
I guess, the two parter, Jim and in the Wil acquisition, there was a small CD and though that came along with it and you decided to sell that kind of decided that you didn't want to be at least and that CDMA business. So part a of the question here is.
Elaborate a little bit on why the CMO.
The opportunity and cell and gene therapy is more attractive to you for Charles River to get into.
And then part B of the question is to sort of flesh out a little bit more.
Of the the pieces that you have now assembled with yourself supply your complementary biologics testing capabilities et cetera.
Little bit more of of the continuum and are there.
Is that fairly complete at this point or are there other additional capabilities that you feel like you need to fill in the white space and your CGT business. Thanks.
Yeah.
Yes.
Thanks.
Yeah.
So many years ago, we did acquire small a small molecule CGM on and it was a perfectly good business and Youll recall kind of we saw the curry.
We told you and other analysts and shareholders that we have done an exhaustive analysis of the industry and we have decided that.
It was.
There were some very very big players and it would be difficult for us to achieve scale and since we'd like to be if possible of the premier player and the spaces and which we work.
We just we felt it was best to exit, which we did and.
And at the time, perhaps overstated.
And.
I decided to remain out of it.
But as you know over the last couple of years and conversations with US I think several things.
Netherlands, and cell and gene therapy has heated up dramatically.
Number two that brings with us growth and opportunity to think of niche play and the.
The CMO space and be at minimally.
Minimally a leader, which were and were entering of this asset as a leader is a leader in the space and potentially the leader of.
Of the time, so we so that sort of dovetails with.
The original comments that we made.
Got you got this 20 billion.
And that's been current gene therapy, just in 2020, you've got 2000 drugs that have been filed.
The vast majority of it two thirds of three quarters I think are in the.
The preclinical.
And phase one and so the demand has heated up dramatically. We have a lot of inbound M&A is derived from request from clients for products and services that they need that they would like us to have either because they trust us more of that.
Unable to and capable of getting these L.
So.
This feels like.
It fills a very important GAAP and the portfolio I don't think of it would be lethal had we had we not kind of missed it would cause clients to have to go outside to get the drugs manufacturing and just to continue the comment and answer your second question.
And we now have an extremely broad portfolio of so you're starting with us literally with itself the research and development.
We're going to be able to do process development for you of your drug we're all obviously going to be able to test that drug and.
The discovery and safety.
Business, we're going to be able to manufacture that Charles.
For the clinic and hopefully the commercial purposes and that of biologics business, what kind of test those drugs before there and go into the clinic or into the marketplace. So at the very very comprehensive suite.
As you've heard us say cell and gene therapy is going to move with this deal from about 5% of our consolidated revenues in fiscal 'twenty and went to the 10. So it's a major it's.
The major move for us strategically.
But we're doing that entirely and response to our clients. So clients can stay with us through the development of the cell and gene therapy products, particularly of cell therapy products we of the.
Got it.
The pondered.
Of this business is focused and.
And the opportunity to be a leading player and that's it.
Right.
Very good it sounds good thank you.
Sure.
Your next question is from John Kreger with the one day.
Your line is open and thank you.
Jim and just a quick follow on on and what you just said.
I assume the the work that cognizant is doing is as clinical at this point, but are you set up for commercial scale production and can you maybe comment on the kind of of the capital footman and investment needs that you think youre going to need to make and the business over the next few years. Thanks.
They've got a they've kind of good geographic footprint.
U S and Europe.
They have definitely of incremental capacity some of which has been.
The.
Added relatively recently.
And which will provide the capacity both to two larger clinical trial lots and if and as those drugs moving into commercial.
And to the commercial domain, obviously to do that work as well, which the clients will want that will want to do that also obviously, there's very few.
The product could exist and cell and gene therapy period.
Although.
So many being worked on right.
And so that's certainly would be the go on the strategy.
The anticipated, we certainly have the technical ability and regulatory ability non.
Knowledge of.
The cgmp production and cellular therapy.
And from people that would come from the host of different company backgrounds.
Performance the strong management team.
Yeah.
Capacity like all of our businesses that are growing well.
And the important.
We built out.
And <unk>.
Somewhat of an advance of.
The of having the demand and anticipating the demand additions of clients.
Of cognates will be very pleased to see it and our hands because the.
And there is the uncertainty of the private equity all of them and what the future of what's the investment portfolio and so this is of clients who are working with this company now and the clinic, who sort of progressing nicely.
And we'll have a high degree of confidence of the drug makes it the.
That we could and perhaps should be the commercial producer of so we'd like the sort of entry point here.
And with a bunch of increased business with our access the clients with their footprint and with us being part of our overall portfolio.
Great. Thank you.
Sure.
Your next question is from Ricky Goldwasser with Morgan Stanley. Your line is open.
Yeah, Hi, good morning, and congrats on completing the acquisition I know you talked about it.
From a year and our conference from.
The.
So congratulations.
Okay.
And my question is around the margin profile clearly you exceeded your margin expectations by.
The year, but from everything I'm hearing it sounds like there's a really nice opportunity for long term margin expansion and I can talk about the.
Like city of.
And if the projects that you are.
The QR and working on and even when I think about sort of the strategic outsourcing. It seems like we're starting to hear from from.
Our company is that they are looking to downsize.
On the their own facilities and their own set of workspace, which equate to kind of like 510 years ago. When we saw the talks and are kind of like.
<unk> was coming down which gave you an opportunity.
So how should we think about the margin expansion and opportunity and when you gave us those long term growth and it's going to be kind of like a two year goal or are we thinking longer term here, especially given kind of flagged on the call at the acquisition that really opens the.
Yes.
New and growing market opportunity.
And give you a general comment David and then when I gave you a slightly more specific comment and I think when we sort of the overall deep dive.
On this important subject safety and Kelly and Terry.
Give longer term guidance.
But I think of the Bottomline proposition.
We are organized to drive efficiency throughout all of the businesses, we're organized to keep our G&A load.
As flat as possible as the busy.
And this continues to grow and I think we've demonstrated that over the last few years. We've also demonstrated our ability to drive efficiency, we're going to be doing some more work on the digital front, which will provide greater connectivity amongst the sites internally and externally and we will certainly take time out of the process, which should generate.
Better returns also.
We certainly will continue to have pricing power across all of our debt inclusive.
You alluded to with the assistance of an average without those.
Basically biotech, while we are a big part.
On the footprint biotech of the principal driver of our growth biotech is extraordinarily well funded and biotech has no internal capacity and doesn't want to have it.
So I would say first and foremost our biggest business segment, which of the DSA definitely has meaningful margin opportunity going forward.
The.
We still have some major acquisitions of that and that business that have improved nicely, but still have.
The more margin to contribute and I think efficiency across all of those businesses will be will be significant the.
The company that we just bought will continue and have improved margin opportunity and you're going to see RMS get back to kind of historical levels for 'twenty, one and then I think it should improve particularly since it has the attractive cell product aspect to it.
I think the manufacturing segment can always get better.
Well, let's see what we decided to say about that.
The largest big of 37% of obviously quite extraordinary having said that I think there's probably still opportunity on the biologics business to drive growth. So you should see some modest improvement in 'twenty, one as we said in our prepared remarks.
And more.
And on a forward going basis and.
We'll give you of it.
The trend the dive.
Dive on that.
And then not too distant future.
I think you've covered all of the main basis that kind of Jim and the other.
I would add is that we constantly.
And if some deep thoughts about where it's the invest.
Is the margin expansion and.
And it's always a balancing act and look for the medium term.
But despite that comment.
As Jim said, we do feel we can get margin expansion. This year and we will say more when we have the virtual investor day and the spring.
Thank you.
Your next question is from one of them Donnell with Bank of America from the line of airplanes.
Yes.
Hi, thank.
Thank you I have a.
A few questions on Rms.
I guess the.
First one is the pent up demand and research models.
See that to be on multiple quarter event and.
And related to that it seems like the supply of non human primates has been severely impacted by COVID-19, and export bans from China are you seeing the benefit in your research model volume sort of clients might need to migrate towards the smaller volumes and the absence of of the bigger models on.
This is the dynamic that that had been sort of tracking and then the last thing is on the <unk> collateral.
It seems like the revenue.
And that came in and the quarter was a little bit lighter than expected and so just curious if youre seeing the lingering impact from the pandemic on the donation centers I'll leave it there. Thank you.
Yes, there's probably a slight lingering impact as you put it on the.
On the sites.
Through the fourth quarter.
And.
We had shut us down and then we opened it and may it's been improving steadily.
There's still obviously of some social distancing going on and we're always looking for the Donaldson.
So.
Probably some slight drag coming out of the year.
As we said in our prepared remarks.
Dissipate that we're competing to improve the autos.
The cover it becomes less of the hopefully by the then even if it doesn't.
We feel we have the operational.
<unk>.
To the structure of this in a way that we should we should achieve the the.
The goals that we had.
Initially the status which is of that.
The 30 per sensor that will continue into.
Two parts to it.
Grow nicely such you're going to ask another question on the <unk>.
Jim and primates, so I'll answer the why and I tried to you're going to ask on <unk>.
Did ask.
Why does the is the supply is definitely constrained around the world.
And I think we've done an exceptional job and.
And.
Adding ensuring tightening up and expanding.
And.
Our supply sources, so that we have multiple supply sources from multiple countries such that we can support the demand, which is quite significant and the sort of changing out of species and moving to smaller species, maybe we should have and offline conversation on that I. Just don't think that's I don't think that's happening.
The work on large molecules really has to be done and largest issues to get the sort of quality of results that we're looking for so I think I think the NH piece will continue to do it.
And a critical role.
In terms of pent up demand for Rms.
<unk> seen much of that play through the academic medical centers that were.
Totally or partially shut in.
And on all three geographic locales, the Asia, Europe, and the U S kind of essentially all opened we don't believe regardless of the.
And the level of infection with Covid debt.
On the go down and go back in the locked out there.
Research has two important day, the sorry that the shut them down and they definitely are out of work.
With hot agents around them and give them their laboratories and usually outside of that.
So.
We think that we are back and kind of a normal cadence and RMS for of the products, which is principally what youre talking about the services obviously.
Not only unaffected, but I think benefited from some of the COVID-19 disruption and a competitive saw.
But in terms of.
Production and sale of research models and I think we're back.
The normal cadence spoke of volume and price.
Enhanced by the by the cellular products and businesses that continues to grow.
Thank you.
Your next question is from Robert Jones from Goldman Sachs. Your line is open.
Great. Good morning, Thanks for the question and Jim I wanted to go back to the comments around the delayed instrument installations and in microbial.
It seems like Youre expecting that I think the the language you used was to affect revenue growth well into 'twenty, one, but it seems like you saw some improvement towards the end of 2020. So just wanted to understand a little bit better what needs to trying to change that the clients front and your mind to heed of Reacceleration of these installations and then relatedly.
I think you gave some some commentary on on margins by segment, but overall it looks like 20 to 30 basis points improved EBIT margins, how could that look if in fact these installations start to come back in a faster in 2021, just to the overall enterprise margin.
Yeah. So it's.
Yeah.
It's an imperfect world of predictive.
But we feel pretty confident on what we told you all of which is debt.
The Shaw, we have had difficulty accessing clients to install our largest and most complex systems.
And then the few.
Cases, we have been able to do this and.
Some of our larger systems on the virtual basis of the clients, we don't really where the.
Oh really needed the system that we're willing to dedicate the people and the time to do it with us and of course.
We had to be creative and the castle to do things.
Virtually.
Now, having said that we've had the FDA and other regulatory agencies positive that's virtually all of the year all of 2020 and clients have done that and we've done the virtual audits of lots of things ourselves and sort of aspects of the company that were and the process of buying so we're in the virtual world. So it's hard to predict.
How comfortable people will get to enhance virtually all of what I was just kind of went away.
We think it will be a similar cadence to what were on the virus is pretty pretty rough right. Now, obviously, so limitations and many of the countries and which we work and replace these systems out of many of the states and the U S.
The air we're not living outside of this into our facilities for instance.
So the impact of that is as follows that we don't place the systems, which are large systems they've got low.
Asps and the quite profitable, but but even more importantly than that every one of these big systems generate substantial amounts of revenue of.
Cartridges, the agents and to some extent and in some instances are accurate genetics I D.
So we're losing all of that associated and the incremental revenue on all of the assistance that werent placed and still havent been placed in fiscal 'twenty.
And what you saw in the end of 'twenty, which is I think confusing you and I understand why.
And is less debt.
And it's opened up and more of that there was just a surge of demand for of cartridges.
At the end of the year pretty.
Pretty much with people that have we of a large installed base of thousands and thousands.
And the systems, most of which are relatively small.
And those the.
That's probably of commentary probably to a small set of people that couldn't get large systems that they kind of got to use their smaller ones more readily.
But more importantly been out of the commentary on just how much work that's out there.
And testing all of these drugs before they get into the market enhanced slightly by a.
And COVID-19 and somewhat the cell and gene therapy.
So the business that sits and the answer of the business Frustratingly has probably never been as good as it is now.
And we'll do the best we can be and created an and.
And selling of those systems, but as the not installed we don't get the incremental revenue and Thats why we are projecting.
And to be slightly below the 10% growth.
Hi, the answer the second part of your question margins are exceptional and that business and both of the microbial business because of the whole manufacturing segment, having said that they have steadily improved we think there's a lot of improvement in biologics.
And there has been sort of improvement and our manufacturing capability and and microbial which is improve the margins as well so.
And stay tuned.
Got it thanks.
Sure.
Your next question is from Tycho Peterson with Jpmorgan. Your line is open.
Yeah.
Hey, Thanks, a couple of follow ups here, Jim starting with the Cognex I want to go back to John <unk> question on on Capex. If we look at some of the other <unk> whether of catalyst the paragon of master cell and thermal with Brahma.
Cost of building out facilities here and not insignificant and the kind of $150 million to $250 million range for commercial cell and gene therapy facility and the context of your Capex guidance being 180 million and I'm. Just curious how we should be thinking about your willingness to take on and maybe more much more significant investments and then too.
Two quick follow ups for David on guidance I'm curious if you can break out any COVID-19 contribution I know $60 million and 2020, so what's baked in.
For 2021.
And then on the margin it does seem like there's a couple of potential drivers to the upside here you did have the DSA price increase you flag.
The mess recovering.
And on current depressed levels and on the manufacturing and installation tailwind sorry headwinds wearing off show all of those seem like they could get you above modest improvement, but I'm. Just curious are there more meaningful offset to that that would continue that thanks.
So the capex will not be insignificant and this business.
And it will be meaningful, but I don't think will be disproportionate.
To the growth potential of this business and so this will be.
And amongst if not the highest growth.
<unk> of our business. So we will have to invest ahead of that as we've said earlier, obviously there's a.
Substantial installed base already that we're buying.
And this business is principally.
<unk> cell therapy manufacturing and secondarily, the protection of Platts plasma DNA.
And.
While the Capex is substantial.
It's less substantial and some aspects of contract manufacturing so.
We're not really going head to head for instance, with.
With some of the curdle and put on more gene therapy manufacturing businesses and it.
And so it's difficult to sort of what the spend is versus biopsy.
Absolutely.
And they won't be it won't be insignificant the it'll be a lower order of magnitude on that way.
Quite confident we will get substantially return and so on and that we've already obviously big through our model and.
If you will give you clarity on that as soon as sort of the process.
Yeah.
David you can pick the true yes.
Yeah sure so.
Short term incentive type of it and the sort of headwind tailwind and the short answer is we've contemplated.
Sensible approach at least we believe the central approach to Covid, we will do.
And our guidance so that's baked in.
And we definitely what we don't know.
Just to unpack that a little bit and so we obviously we had a we had some significant losses.
It's kind of the particularly in on that.
And we did say at the last earnings call that we expected on that.
Broadly.
And the cause of the behind Us and we still believe that to be true academics.
Academics clients seem to be open and.
We're not expecting that to the review time.
But we'll keep an eye on for that.
We generated.
$6 million of revenue that was COVID-19 related.
And PSA some vaccines and some of the mass spec knowing all of that will go away.
We expect to see some of that and continue into 'twenty, one and that's sort of baked into the guidance.
So the output the uptake broadly.
We feel the way we're looking at it we broadly got kind of the behind the other than the things that have already been called out like we've just been talking about microbial price them.
So the bit of them of headwind.
And maybe ahead of your margin.
I'm just.
And just want to so you called out the potential opportunity.
Want to make sure that you're cognizant of the unallocated corporate costs. So historically.
And we've seen of 50 basis points of improvement as a percentage of revenue.
This year, where we're at.
Moving toward.
Pretty much flat and 2020.
And the reason for that is that we have got some investments that we are.
Contemplating the aura and the prices of putting in fact, when Jim talks at the JP Morgan Conference we talked about.
On a different strategic.
Imperatives and one of those.
BTG comparisons, what's the champion technology, and indeed, I think Jim just mentioned the commitment to go.
The design and put in best in class technology.
And our clients essentially access scientific data and real time.
So there is some setup costs associated with that which means that the on the unallocated Coca Cola.
Not giving that 50% basis points that we've historically had but we would expect to have that behind us this year.
Okay. Thank you.
Your next question and from Patrick Donnelly with Citi. Your line is open.
Hey, Thanks for taking the questions Jim maybe maybe a follow up for you on the RMS business certainly proved more resilient even while the pandemic has lingered here can you just talk through what changes you've seen and customer behavior. There and then I know in recent quarters. This one included and you've talked about some academic share gains.
Much of that is increased penetration versus taking share from competition.
Yeah.
Yeah.
Definitely have seen a <unk>.
Change in demand.
Outsourcing demand on the services side of our.
RMS business.
And almost entirely from the academic sector of who really were up against that with Covid with the.
So literally of shutting prematurely.
And the significant amount of research and it was at risk.
And are.
The fact that we were open that we were capable of doing this and and have been able to do it so well for them for this long period of time I think the demonstrated.
So the the frailties of them continuing to do this internally and so theres no.
The question.
That we've seen incremental work that was done internally.
Outsourced and where and.
The highly confident that the meaningful amount of that has stuck.
And just a quick of side. Similarly, you asked the question about Rs.
Some of this and discovery and safety and the second quarter.
The clients who either.
And another provider, who was capable of supporting them during the day.
So the kind of initial outbreaks of Covid and all of their own facilities were shut for something for the period of time and that caused them to the contemplate outsourcing for the first time and contemplate more outsource and what they had been historically and definitely based on the feedback we've gotten to the clients really pleased with.
The services that we provide and the speed with which we're doing either of the.
The price points as well so.
There's no question that we've gone on with some incremental share.
And that was the.
Perhaps not available to anybody that was being done by the clients themselves and for sure. Some work that was outsourced the competition both on RMS that would be a day, where they were unable to do that and that incremental share gain and an expectation of continuing to gain share and certain aspects of our business.
Certainly baked into our 2021 numbers.
Great. Thanks, Jim.
Yeah.
Your next question is from funding the true Securities. Your line is open.
Thanks, So much most of my questions have been asked and answered, but maybe just one quick follow up on the on the microbial testing.
And maybe looking at the other way.
The less about what the getting pulled forward and margin impact, but are there any capacity constraint, Jim or David when when things clear up I'm just trying to think could this be.
All of us of revenue debt than for four quarters higher and then normalizes or do you think it would just sort of returned to a normal level I'm just trying to think through what would have to happen is this just you start to ship it out and put people out or is there a point, where you can only go so fast and so it's just kind of get back to a normal level. Thanks.
Yeah.
I don't think there'll be a bolus of activity and the machines, we will have to be installed virtually are.
We'll probably most real.
And then the clients will have to start the utilize them, obviously that installed base of whatever X number of machines that have either been delivered and not hooked up or waiting to be delivered by us to the clients who is not letting of thin.
And as I said earlier.
Sort of every day every week every month, they don't have the systems, they're not buying of the associated with the <unk>.
Roosevelt.
On.
It's unlikely we're going to install the systems at once and then they've got the subject to use the other ones. Obviously, it's beneficial once we install them because they are larger and they use a disproportionately large amounts of.
Disposables that will be beneficial but.
I think it will be gradual.
Consistent.
And we're continuing to build the.
Our inventory will be and and.
And I've shaved I think youre inferring is that kind of it.
The problem or an opportunity and I think our inventory will be appropriate shape to accommodate.
Demand and and that's associated disposables, but I think it would be steady maybe it's a slightly.
Beneficial in the particular quarter or two but I don't think it's going to be a surge of demand.
Great. Thanks, so much Jim.
Sure.
The next question is from Dan Brennan from UBS. Your line is open.
Great. Thanks for thanks for taking the questions. Congrats on the quarter I said the two questions on the margin follow up and then one more on cognex on on the margins I was hoping you could on.
Just help us on some of the segment margins I know from manufacturing, obviously exiting the year on a go.
Great level, but I'm just wondering what what is the guidance on manufacturing margin for 'twenty, one it's a little unclear from the DAC and from the comments and similarly on RMS and I know you talked about well above 25%. We've talked from 27 and 29 any help on there too on numbers and then out of the follow on.
Right.
So on the manufacturing.
If you exclude cognate we would expect the margins to be similar to the way we exited in 2020.
However, the cognate will be a little bit of a drag. So we are expecting with cognex. The just this year.
And to be somewhere and the ZIP code of the the long term guidance that we've given out of which would be the mix at the mid thirties.
And we'll say more about where we think that kind of go at the Investor day.
And in terms of Ironman, okay, so whether the 25% and off the bat.
All of that.
On the ceiling on that I think.
If you look at from last.
Last year, we were.
Little bit above the 25% at 26%.
I would say somewhere in the debt.
The mid high teens would be we'd get back sort of mid to high twenty's would be about right.
Okay. Thanks, David and then just maybe one more on Cognex I'm just wondering could you give us any color on partnership from a nascent market and any color on the the competitive positioning.
The Paragon of Master cell and I'm sure Wuxi and learned and the big players are all brokerage here as well so just any any color whether it be number of clients or just any color you can get on that front and then I'm just wondering in terms of the senior executives of cognex they locked up.
And given how critical talent and expertise of two.
The run these complex CMO and I'm, just wondering what the Inc.
The deal kind of on that front. Thank you.
So you should.
Think of our principal competitors in this space the <unk>.
One the new sheet and non thermo and Cadillac.
And number one you should consider that the.
Size of our business the business that we're buying is comparable to those two.
Sort of and the same Zip code.
And.
Specifically with regard to the sort of manufacturing capabilities and it will.
Wiring if you look of the totality of our portfolio and cell and gene therapy from the cellular product businesses that we bought last year with this business and the teeing up now and across the whole portfolio of cell and gene therapy capabilities.
Vastly more significant the notes two players and.
And across the continuum.
They can continue to use our services. So we feel really good about our competitive position as I said earlier net.
And so the someone's question, we're entering as a leader.
Specifically the cgmp pod.
Our aspirations and I think the high probability.
And that we could be the leader.
With this.
And the mix of Charles River has a lot of larger portfolio of our reputation and our client cash.
Contact.
And with regards of the management and we've always been successful and keeping key management and obviously well.
Chris will be proceeding to and.
To get contracts in place, it's a matter that we just we just signed the deal so we're quite confident that.
And we'll keep the key management the team in place.
Great. Thanks, Kim share.
Your next question is from Donald Hooker from Keybanc. Your line is open.
Okay, Great and I guess of lot of questions and then asked here, but maybe the big picture, Jim would love your broader perspective kind.
Kind of with your leadership position on the space kind of on.
On the topic of.
Using artificial intelligence and machine learning and drug discovery.
I know you had one partnership there with the company called Adam Wise, you have a bunch of other partnerships I'm not sure if you're dabbling in that area and other ways. What are your what are your evolving use there I know you've mentioned in the past, but just curious if.
And if your viewpoint on that topic has evolved.
Yes.
We think that artificial intelligence and machine learning will Inc.
Increasingly have a role.
And drug development, both on the predictability of successful preclinical trials and predictability of the success of clinical trials and then obviously.
Have a role and the design of those trials and so on the linkage between the animal work and the human work.
On theoretically and and the crack.
Practically all of us.
And if you take a look at the data that we have on thousands and thousands and thousands of molecules.
Some of which have succeeded and many of which have failed.
On can be can be highly important.
And predictive.
How robust the technology is how.
How quickly regulators adopted how quickly our clients and.
Embrace it is really hard to tell.
What what technology to be utilized.
As we make the small investments and these technology deals, we're going to definitely get access to multiple different ways of utilizing that data and we may use them in combination of we may we may just have more of it when that prevails. We've done a lot of work on this and.
Internally and with a bunch of world class experts and.
And we think there is.
And ongoing role we wanted to be very careful in terms of how we invest the shareholders' money and the assumptions that we may cut.
But sort of adoption.
And the users and not either invest in the launch of.
Technology or and.
And thats too aggressively prematurely so on a very measured very thoughtful basis, and we're going to continue the play.
I would say that it's more of it used the word garble.
I don't know, if we're doubling and I think the work.
We're seriously investigating the best way to utilize that kept constant with some powerful AI tools I suspect we will have.
Additional AI technology partnerships going forward.
Yeah.
Thank you.
Yeah.
Your next question is from Tom Roderick.
Wells Fargo. Your line is open.
Thank you. So just quickly anything to be mindful of from a phasing perspective, and your 2021 guide given your comments on the first half outlook for DSA is first half of a larger than typical of proportion of your full year outlook given the visibility of your messaging on the DSA side. Thank you.
Okay, and we don't we don't.
Normally and.
And the big gains in defense of the DSA throughout the day we.
And we see it occasionally and biologics sometimes of Meramec.
And nothing particular to call out from DSA.
And we've tried to give you quite a low of the pieces and give you and the little bit of a handful of Q1 as well.
But other than that and that we don't we don't look at PSA and feel that they're on.
Types of incidents that happened and that would make that funky other them.
Things like we can often have a and.
On a mix issue and that's not to do with the calendar that could be at any point in the year.
Okay. Thanks.
Yeah.
Okay.
And the last question and some Jack and one with MOFCOM Research. Your line is open.
Thank you good morning.
And just to conclude was hoping you could give a little more color on DSA margins and I was wondering.
Obviously, the full year were strong, but fourth quarter underperformed a little bit.
Are you seeing any inflationary pressures just given the amount of demand out there either on wages or on some of the supply.
Constraints around the large models and.
And what's embedded for 2021 in terms of those points.
So we.
We've never really called out that we've had a that's the.
Wage pressure that is atypical from what takes place and those countries.
So the nothing specific to call out of the Charles River the.
The wage inflation et cetera and will be.
And if we take a very close look to what's kind of on country by country and trying to stay competitive there and it was an exception in 2000 and and I think 18 midyear. When we felt that we wanted to bring Charles River for a living wage type of organization, which we called out but there are no.
Real.
Prices in terms of wage inflation or in terms of the supply cost, but we feel that we should be calling out.
Other than what we've already said in terms of Q4 was really to do with the timing and shape.
Other than that and.
We feel that we will get.
Stopped working too well continue to work towards the mid 25% that we've been driving for some time and.
And there's not much more per se.
Thank you.
Yeah.
Great. Thank you for joining us on the conference call. This morning, and we look forward to speaking with you during the upcoming Investor conferences. This concludes the conference call.
Ladies and gentlemen that concludes today's conference call. Thank you everyone for joining in the amount of disconnect.
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