Q1 2021 Charles River Laboratories International Inc Earnings Call

May 4, 2021

[music].

Yeah.

Good day, and thank you for standing by and welcome to the Charles River Laboratories first quarter 2021 earnings conference call.

At this time, all participants are in a listen only mode and.

After the speaker presentation, there will be a question and answer session to ask a question. During the session you will need to press star one on your telephone. Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero and would now like to hand, the conference over to your <unk>.

Today, Todd Spencer Vice President of Investor Relations. Thank you. Please go ahead Sir.

Thank you good morning, and welcome to Charles River Laboratories, first quarter 2021 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 first quarter of 2021.

Following the presentation. They will 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 IR Dot C River Dot com.

Webcast replay of this call will be available beginning two hours. After today's call and can also be accessed on our Investor Relations website. The replay will be available through next quarters conference call.

And I'd like to remind you of our safe Harbor, our 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 1095 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 or a substitute for results from operations 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 I will now turn the call over to Jim Foster.

Thanks, Todd good morning, and.

And very pleased to speak with you today of about another exceptional quarter of Charles River.

Robust first quarter financial performance highlighted by 13% organic revenue growth and the 170 basis points of year over year operating margin improvement demonstrates the strength of the biopharmaceutical market environment and the power of our unique portfolio both of which we believe are as strong as they have ever had.

And then.

We believe clients are increasingly choosing to partner with us for our flexible and efficient outsourcing solutions.

The scientific depth and breadth of our portfolio and our.

And our unwavering focus on seamlessly serving the and diverse needs of clients are opting to work with the smaller number of Ci rados, who offer broader scientific capabilities, which enables them to drive greater efficiency and accelerate the speed of the research and clinical development and manufacturing programs.

The complexity of scientific research is also increasing our clients' reliance on the.

High Science outsourcing partner like Charles River.

And further differentiate ourselves from the competition, we are strategically expanding our portfolio and areas that the liver the greatest value of the client and offer significant growth potential already this year, we have enhanced our scientific capabilities for advanced drug modalities and through the acquisitions of distributed.

Cognate and cloud services and retro genetics.

Distributed bio and <unk> strength and that discovery portfolio and the acquisition of cognate, which was completed on March 29.

The excellent growth opportunity by allowing us to offer <unk> services and the high growth high science cell and gene therapy sector.

We are very pleased to welcome the talented staff at each organization of Charles River, and believe that by continuing to invest and our portfolio and our people, we are maintaining and enhancing our position as the leading non clinical Sierra and <unk>.

Believe the strength of our portfolio and robust industry side of the vessels.

Moving to unprecedented client demand across most of our businesses and the first quarter, we experienced the continuation of the robust demand from the end of last year, including new record booking and propose the levels and the safety assessment business.

Organic revenue was about 10% core of second consecutive quarter, even after normalizing for the last year of COVID-19 impact overall, we believe our robust first quarter performance and solid business trends support our improved outlook for the year.

I will now provide highlights of our first quarter performance quarterly revenue surpassed $800 million for the first time and and $824 6 million for the first quarter of 2021 represented a 16, 6% increase over the last year.

Organic revenue growth of 13% was driven by double digit growth across all three segments. The.

The year over year comparison to last year as COVID-19 related revenue impact, which primarily affected the RMS segment contributed approximately 140 basis points to the revenue growth rates this quarter.

We experienced broad based growth across all client segments with biotech clients, leading the way as they continued to benefit from the robust funding environment.

The operating margin was 27% an increase of 170 basis points year over year. The improvement was driven by RMS and DSA segments and reflected operating leverage and the robust revenue growth as well as our continued efforts to drive efficiency.

We expect the same taxes will drive margin improvement for the year and.

And believe the operating margin was approached 21%.

Above our prior target.

Earnings per share with 2053, and the first quarter and the increase of 37, 5% from the $1 84, and the first quarter of last year.

This outstanding earnings growth, principally reflects the double digit revenue growth and meaningful operating margin improvement.

Based on the first quarter performance and our positive outlook for the remainder of the year, we are meaningfully increasing and our revenue growth and non-GAAP earnings per share guidance for 2021.

We now expect organic revenue growth and a range of 12% to 14% of <unk>.

300 basis point increase from our prior range.

Normalized for the last year as COVID-19 impact, we would still expect low double digit organic revenue growth this year.

Non-GAAP earnings per share are expected to be $9 75 to $10.

Which represents 20% to 23% year over year of growth and an increase of 75 cents at the midpoint from our prior outlook I'd like to provide you with details and the first quarter segment performance beginning of the DSA segment revenue was $501 $2 million from the first quarter and 11.

6% increase.

And organic basis over the first quarter of 2020.

Driven by broad based demand for both discovery and safety assessment and.

The safety assessment business continued to perform exceptionally well, reflecting robust demand both biotech and the global Biopharma clients and price increases bookings and proposal volume reached record highs and the first quarter with strength across all regions and major service areas bookings increased substantially more than.

And our target clients are expanding of quickly preclinical pipeline and intensifying their focus on complex biologics and.

And we believe they of securing space with us further in advance to ensure they do not delay the research, which in turn and provides us with greater visibility.

We believe this positions the safety assessment business extremely well and supports low double digit organic revenue growth and the DSA segment, this year, which is higher than our prior outlook.

We are 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. The discovery business had another exceptional quarter.

Led by broad based demand for oncology early discovery and CNS services.

Our efforts to broaden and strengthen our discovery capabilities and enhance our scientific expertise.

Are enabling us to expand the support we provide for our clients' discovery research and clients increasingly view Charles River as the Premier scientific partner, who can support their efforts to identify new drug targets and discover novel Therapeutics.

We intend to build out of discovery portfolio. So the clients can outsource complex discovery projects to us including for advanced modalities.

Our recent acquisitions distributed bio and retro <unk> enhanced our large molecule discovery capabilities.

Retro genetics through its proprietary cell and microarray technology offers target with sector identification and off target screening services, which will enhance our clients early discovery efforts and also enable them to.

Splore potential preclinical safety liabilities.

The combination of distributed bio a large molecule discovery platform and retro genetics capabilities will further strengthen our integrated end to end solution, the therapeutic antibody and cell and gene therapy of discovery and development we.

We are also continuing to add cutting edge technology through our strategic partnership strategy. Most recently with the new artificial intelligence or AI drug discovery partner.

Balance discovery.

The DSA operating margin increased by 180 basis points of 23, 8% and the first quarter.

Leverage from the robust DSA revenue growth was the primary driver of margin improvement and we expect this trend will continue to propel the DSA margins into the mid 20% range because of the year.

RMS revenue was $176 $9 million and increase of 14, 8% on an organic basis over the first quarter of 2020.

Robust demand from research models in China was the primary driver of first quarter RMS revenue growth and higher revenue for research model services, including channel and a cradle initiatives also contributed approximately 620 basis points of the increase was attributable to the comparison.

The last year as COVID-19 related revenue impacts from client site closures and disruption the may.

And trends for the research models.

Were largely consistent with those prior to the pandemic with growth and China widely outpacing mature market.

Research models business, and China had an exceptional quarter, even after normalizing for the last year as COVID-19 impact driven by a resurgence in demand across all segments.

Medical research and China has returned to pre COVID-19 levels and in some areas, even greater levels and the U S and Europe client order activity has also rebounded Reese.

The research model services also continued to perform well gems is benefiting from renewed outsourcing demand as our clients seek greater flexibility and efficiency afforded to them. When we manage their proprietary model of the model colonies as we did for many clients during the COVID-19 pandemic and addition.

Complex research models will play an increasingly critical role as drug research continues to shift to oncology.

Disease, and cell and gene therapies, which reinforces the value proposition for the Japanese business.

We are also continuing to generate substantial client interest for a cradle initiative or Charles River accelerator and development labs as both small and large biopharmaceutical clients increasingly seek turnkey research capacity, which allows them to invest and people and research and instead of.

Structure.

We have a cradle sites and the Boston, Cambridge, Massachusetts area, and South San Francisco buyer bio hubs and are actively expanding and these regions to accommodate client demand utilize and cradle also provides clients with collaborative opportunities to seamlessly access.

Other Charles River of services from discovery to John's, which further enhances the speed and efficiency of their research programs.

Revenue growth for us sell supply businesses came of care and Salerno remained below the targeted level of the first quarter due to some limitations on donor access we believe cell supply revenue will increase during the year and donor availability continues to improve we are also continuing to work diligently.

And to expand out the owner base and the U S and add more comprehensive capabilities at all of our sites to accommodate the robust demand and the broader cell therapy market.

We believe that the acquisition of cognate, particularly timing tablet because it creates new business opportunities for human cancer later on in the cell and gene therapy development area or <unk>.

Span and capabilities are expanding.

<unk> Charles River as a trusted partner, who can move clients' programs forward using the same cellular products through each step of research and early stage development phases, and and to see GMP production.

And the first quarter of the RMS operating margin increased 570 basis points to 28, 7%.

The significant improvement is due to two factors first last year's 23% by channels the crest.

The onset of COVID-19 related client disruptions and the resulting impact on the research model of order activity. In addition, this year's performance reflects the operating leverage attributable to the robust revenue growth, particularly for research models and China.

Revenue from the manufacturing segment was $146 $5 million.

15, 6% increase on an organic basis over the first quarter of last year. The increase was driven by double digit revenue growth and both the biologics testing solutions and microbial solutions businesses.

The manufacturing segment's first quarter operating margin was stable at 35, 5%. This is consistent with the historical trend and the first quarter and in line with our revised expectations in 2021 from a mid 30% operating margin when factoring in the cognate acquisition and <unk>.

<unk> solutions growth rate rebounded above the 10% level and the first quarter, reflecting strong demand for our and to save endotoxin testing systems packages and core reagents for all geographic regions. We continue to work through the delayed instrument installations that resulted from COVID-19 restrictions and <unk>.

Gaining access to more client sites.

We are pleased with the strength of the underlying demand for our endotoxin testing platform, which performs the FDA mandated lot release testing for our clients critical quality control testing needs.

Clients prefer a comprehensive and efficient microbial testing solutions.

Cause of the quality speed and accuracy of our testing platform.

Biologics business reported another exceptional quarter of strong double digit revenue growth Chris.

Principally driven by robust market demand for testing and cell and gene therapies and COVID-19 therapeutics.

We believe cell and gene therapies will continue to be significant growth drivers for years to come and demand for COVID-19 vaccine testing is intensifying as these therapies move on to the commercial production phase even if some of the early stage testing activity subsides.

Given the strength of the demand environment, we are continuing to build our extensive portfolio of services.

Of course, the safe manufacture of biologics and ensure we have available capacity to accommodate client demand.

We believe the acquisition of cognate will be highly complementary to our biologics business and our portfolio as a whole the acquisition of establishes Charles River as a premier scientific partner, the cell and gene therapy development testing and manufacturing.

And a broader services will provide clients with an integrated solution from basic research through cgmp production, enabling them to add sort of see GMP cell therapy production and the required analytical testing to one scientific partner, reducing the bottlenecks and inefficiencies of.

And multiple outsource providers.

Because we already were provider of extensive non clinical services the cell and gene therapies.

The integration process, which is proceeding smoothly the spin.

Particularly focused on unlocking new business opportunities across the portfolio.

The acquisition of cognate as part of our ongoing strategy to broaden our unique portfolio and scientific expertise and <unk>.

Order to support new paradigms and therapeutic areas of research.

Biopharmaceutical clients seek to drive greater efficiency and leverage scientific benefits by working with fewer trusted partners, who have broad integrated capabilities. We.

We have transformed our business over the last decade to accommodate their needs through M&A.

And to the partnerships internal investment and by promoting a culture of continuous improvement and everything that we do we.

We built the leading safety assessment franchise, and the world and established and integrated end to end discovery offering for both small and large molecules. So given the emerging importance of complex biologics and cell and gene therapies, adding <unk> capabilities as a logical extension for our portfolio.

We will continue to move our growing strength growth strategy forward.

And the M&A and strategic partnerships remain vital components of our strategy as.

As we endeavor to further enhance the scientific expertise.

Global reach and innovative technologies that we can offer clients across all three of our business segments investing and our scientific capabilities as well as internally and the necessary staff and resources will help us ensure that we can meet the needs of our clients and support the robust growth and our markets the.

The biotech funding environment has never been stronger clients are investing more and research and development and it is incumbent upon us to be the scientific partner, who can help them move the programs forward from <unk>.

Onset to non clinical development and the safe manufacture of the life saving therapeutics.

We look forward to discussing our strategy with you and where we think that we can take the company over the next several years at our upcoming virtual Investor day on May 27, and.

Conclusion, and I'd like to thank our clients and shareholders for the support and our employees for their exceptional work and commitment.

David Smith will give you additional details on our first quarter results and 2021 guidance.

Sure.

Thank you Jim and good morning.

And I had the game May remind you cannot be speaking primarily to non-GAAP results, which exclude amortization and the arm.

Acquisition related charges and costs related primarily to ongoing from efficiency initiatives and the Vinci isn't.

As a strategic investment performance and some of them.

And those lines of.

Many of my comments of low to return to organic growth and growth, which excludes the impact of acquisitions and foreign currency translation.

We are very pleased of our accomplishments from the first quarter, which widely outperformed all of our outlook, we delivered strong revenue growth well above the 10% of local I don't know kind of basis.

And significant operating margin expansion of 170 basis points, which drove earnings per share growth of 37 to.

And to go from 52 sons the.

The operating margin performance was particularly encouraging and the <unk>.

System margin improvement reflects our efforts to build the most scalable and efficient infrastructure and the leverage to the bus growth and market.

As Jim mentioned, we've increased the shifts financial guidance to reflect the enhanced growth profile for the full year, including the strong performance this quarter and the addition of companies and.

We have completed.

We now expect to deliver reported revenue growth of 19% to 21% and organic revenue growth and.

And the range of 12% to 14% given the robust top line performance, we expect to drive meaningful operating margin improvement this year with the freemium launch and approaching 21 zone.

This is expected to drive expansion of expected earnings per share and the range of $9 and cents to.

The $10, which represents.

The good grace of those <unk>.

The 2% on segment.

The 2021 continues to reflect the strong business environment and the differentiated capabilities, we put a bunch of coach and client needs RMS organic revenue growth guidance for the year is unchanged from our initial 2000 teams outlook.

And with temporary from the impact of the COVID-19 mentioned confirming loans to exceptional growth in China, and the expectation put on some supply and revenue growth will improve during the year. The DSA segment is now expected to deliver low double digit growth.

Reflecting the strong first quarter performance and the intensifying early stage research uncertainty.

And the manufacturing segment, we now expect to achieve mid teens organic revenue growth with both the biologics and microbial solutions businesses contributed <unk> <unk>.

<unk> the acquisition of a company manufacturing as reported revenue growth range is expected to be and the high 30% range.

Operating margin RMS will continue to be of primary contributor to the overall and improvement for the year with the segment margin meaningfully up of 25%.

We also expect the DSA segment operating margins to increase over the prior year into the mid 20% range when factoring and culminate the manufacturing segment's operating margin is expected to be in the mid 70 percentage range. This year of mantra of speed below the 2020 level.

Unallocated corporate costs and slightly higher than our expectation. So two and six two percentage of total revenue of $51 $2 million and the first quarter compared to five six percentage points.

And last year.

The increase was primarily the result of continued investments to support the cause the pump businesses.

And performance based compensation costs and pumps and the first quarter operating non performance.

And the higher expenses and the first quarter, we continue to expect unallocated corporate costs to be in the mid 5% range as a percentage of revenue fiscal year.

The first quarter tax rate was 14, 5%.

The 20 basis point increase year over year and consistent with the.

February which calls for a tax rate and the mid teens due to the kitchen of the mix.

And from stock based compensation.

We continue to expect our full year tax rate will be in the low 20% range on a non-GAAP basis, which is unchanged from our outlook provided in February.

Central adjusted net interest expense for the first quarter was $17 $1 million, which was essentially flat sequentially and the decrease of nearly $2 million year over year due to lower average debt levels, which resulted in interest rate savings based on all of the leverage ratio at the end of the first quarter, we had $2 $2 billion of that.

On the debt representing a gross leverage ratio of two three terms and the net.

This ratio of one nine times and.

In March we issued $1 billion of senior notes to further optimize our income construction and take advantage of the attractive interest rate environment.

The proceeds of this bond offering we used to redeem our previously issued high rates of 500 million build of bumps.

Pay down the existing term loan and the portion of the revolving credit facility and to finance a portion of the company's acquisition in April we also amended our existing credit agreement to establish a new revolver with borrowing capacity of up to $3 billion. The.

The net result of these actions will reduce our average interest rates and approximately 50 basis points to two 6%.

And overview of our current capital structure is provided on slide six.

On a pro forma basis, including the cognate and retro Xiaomi acquisitions and gross slippage ratio was just under three times and we had total debt outstanding of slightly below the $3 billion.

For the year, the higher debt balances due primarily to the <unk> acquisition will be partially offset by the middle of average interest rates from users' comments and activities, which is expected to result in total adjusted net interest expense of $82 million to $86 million.

Free cash flow was $142 $2 million from the first quarter and a significant increase compared to $42 $9 million last year.

The primary reason for the improvement was the strong first quarter operating performance along with our continued focus on working capital management.

Capital expenditures were $28 million and the first quarter compared to $25 $7 million last year. Looking ahead, we are increasing the capex guidance for 2020, one and $40 million to approximately $220 million. The increase primarily reflects the investments, we're making and content to support.

And its high growth business.

Even with the additional capital.

And Capex will remain below a certain percentage of total revenue this year, which is consistent with the target that we provided at our last investor day and to maintain.

For the full year, we of uptake and a free cash flow guidance to the upper end of the prior range and now expect free cash flow of approximately $435 million for the full year.

We are pleased to be able to increase free cash flow due primarily to the strong first quarter operating performance, even after incorporating the transaction costs and capital needs of company.

A summary of our revised financial guidance for the full year, including company can be found on slide 38.

For the second quarter updated outlook reflects the continuation of the strong demand environment. We now expect second quarter reported revenue growth and so on any of the 30% level, including the contribution of all company.

On the inorganic basis, we expect the second quarter growth rate to be at on the 20%.

This reflects the prior year comparisons of the COVID-19 related revenue and pump, which will contribute approximately 700 basis points to the second quarter of rent and the growth.

As the results of the impact of COVID-19, and the second quarter of last year. We expect this year's second quarter non-GAAP operating margin and earnings per share to increase significantly versus the prior year.

Our expectation from non-GAAP earnings per share was the growth rate of more than 50%.

In conclusion, we are very pleased with the strong first quarter performance, which included robust revenue and stuff.

Great.

Remain confident about the prospects for the year and our ability to consistently grow the top line bottom line customer operation and as such believe.

This is reflected in the two functions and prudent.

Absolutely.

We look forward to hosting our upcoming bridged from the Investor day, and a few weeks at that time with tons of uptake and longer term financial targets, which we believe will reflect the strong demand environment.

That concludes.

Crudes are comments, operator, we will now take questions.

As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound or hash key so that we may be respectful of everyone's time. Please limit your comments to one question with one follow up question.

The standby, while we compile the Q&A roster.

Our first question comes from John Kreger of William Blair. Your question. Please.

Hi, Thanks very much.

And Jim and given all of the cognate commentary you gave us can you just.

Step back and and help us understand what part of the CMO. The industry are you interested in playing and kind of over time longer term development drug product drugs and drug supply. If you could just elaborate on that that would be helpful.

Sure sure John So I'm kind.

Cognate gives us the ability.

And particularly in combination with heme occurrence the layer to provide to actually provide the cells.

To do the process development.

Because of the clinical trial scale up and ultimately to provide commercial quantities specifically of cell therapy products.

And secondarily, we have some of the.

Capabilities.

Are involved in and and facilitate the gene therapy manufacturing as well, but I'd say that the true C. The ammo business will be principally be primarily cell therapies already.

Great. Thanks.

No.

And then.

Last month, you guys talked about.

<unk> strategic relationships, which had some references to AI and machine learning can you just talk a little bit more about.

And how you see machine learning, having applicability within item the <unk> mainline.

Sure.

But because of <unk>.

Huge amount of focus on utilizing data to inform the design of preclinical trials to achieve better outcomes and.

I think ultimately the proof to design the clinical trials to achieve better outcomes and then to provide some correlation between the two of them and so.

The there's a rich amounts of data and I think balance of that.

And the particularly strong.

Okay.

Company.

And we're gonna see and.

Attributes of aspects of this and I think all around our portfolio.

We don't see this as replacements of things that we do but we see the mezz.

Augment the tips and or earlier provide earlier indications.

Of how the drug is likely to perform before we get into let's say.

Non regulated and certainly the regulated.

Safety trials so.

The advent of AI should both enhance speed and hopefully outcomes in terms of the members of drugs and get to market and.

Between the rich datasets that we have and that facility of the day it should be very interesting.

Combination of albeit very early days.

Very helpful. Thank you.

Sure.

Our next question comes from Eric Coldwell of Baird. Your question. Please.

Thank you very much impressive quarter and <unk>.

Focused on safety assessment DSA segment you.

And you cited record Rfps record demand in Q1.

That obviously follows the 2020 DSA segment, ending backlog of $1 4 billion, which was up 40% year over year. Yet you are only forecasting low double digit organic revenue growth and the segment this year.

And we look at prior years, beginning backlog and how that compared to the resulting revenue growth of the mouth would frankly suggest multiples of what youre guiding to and I'm just curious what explains.

This disconnect from past backlog growth too.

To your outlook for low double digit growth this year.

And I'll take a shot at that day.

Hello.

Okay.

David and you feel connected to the story of my view on mute.

I think we lost David and you might have to go back and okay.

That's the case.

The way, we look at the services that we've got.

We're thrilled with the demand with the rest of the backlog where the lives of the way. The you have started.

And where were.

I'm really optimistic about the guidance that we provided the the fact that that segment will.

It will be organic level.

Double digit growth rate.

It is still early in the year so.

We wanted to see how more of the year unfolds, but.

And we're quite confident and comfortable with that guidance for the year and Deb.

And again as we've said.

The discuss quarter after quarter, there is non linearity of our business.

And I think what it's done for the move.

Identically quarter over quarter increase mutually necessarily at the same rate quarter to quarter. So.

We think this will be a very strong year.

Net.

Well, Tim It obviously does it it doesn't look like you're going to miss that target.

I'm, just curious I mean price pricing pricing I mean can't be bad and this environment and.

It just leads me to wonder if there's a big mix shift and the the nature of the the work if there is capacity constraints happening.

And it makes me wonder if there is something in that backlog report from last year that.

You know you changed how you look at backlog of the reporting of the figure because it just historic trend. If I go back you know even stripping out acquisitions. The last five years. So it just.

The growth rates would be.

If history is history repeated itself the growth rates would be materially higher than what you were talking about and it just seems and.

These are awesome numbers, I'm, not complaining and obviously, but it seems like a bit of a disconnect.

So maybe we'll take it offline, but just to provide some comfort of Eric and I understand the nature of the question pricing side.

Our capacity is well utilized but we have sufficient capacity and as I said in my prepared remarks, he actually of clients booking more of work earlier I don't know because they have more work because of the better funded and maybe there's an underlying concern that none of us and our competitors will have the capacity that they want when we need and all of them.

And we worked really hard to do that.

And then the mix is.

It is solid and we're getting a significant amounts of work.

From big drug companies, a little bit instigated by COVID-19, but also just the plethora of biotech companies and stuff.

Nothing but good things are happening.

<unk>.

We're pleased with our articulation of of good things happening.

That looks like in terms of the.

The financial guidance, but.

Maybe we should just talked through off line and get you more comfortable with it.

And so yes, the sounds great and again congrats on overall performance really good thank you Karen and.

And back on and I'm sorry.

And you can speak of thoughts and instead of to meet us and whats happening chats and the way to myself and the one.

The neat I realized I hadn't heard what Jim was saying, but I get the impression that you were discussing about how the backlog has been built up because people are booking out further afield.

And one of the reasons, why and being able to increase our outlook of the shares because we can see and much more of the year. So that was discussed that one of the pizza.

Eric Eric.

And is.

Pleased with what we're doing but thinks that the guidance for the back half of the eye should be materially higher given how are you.

And of the year and given where we are now and given the absence of the business.

Liquid pricing and I I.

And that we were pleased with the year over year guidance the things quite linear.

But nothing but good things going on from the demand and pricing and mix point of view and that's when it came at the.

Okay.

Our next question comes from Dave Windley of Jefferies. Your question. Please.

Hi, Thanks for taking my questions. So.

And I won't exactly follow on Eric's question, and I think you addressed that well enough but.

You have pointed out Jim discovery stronger performance for a couple of maybe three quarters.

And you also commented in general and your prepared remarks about continuing to seek ways to add value for clients and DSA, which is which is the general comment, but I wonder if if maybe its not related to the growing discovery business and potentially pull through there, which we've asked about for years. So I wondered if you could kind of elaborate.

On the adding value to clients and DSA part of your comments.

Yeah.

And you have the discovery business as we've been talking about for at least the couple of years now.

Really come into its own just in terms of client utilization.

Understanding of the depth and strength of of scientific portfolio.

We've been adding additional businesses like the bio and Retroject.

And we have and we have scale now so we've got a terrific organic growth rate, even though we don't break that out and.

The meaningfully improving and I'm pretty much from that segment as well as a pull through.

And to safety and <unk>.

Of course, we're seeing the high growth rates and.

Nice margins and me.

The safety business as well and I think we have a very strong and capacity situation.

And both of our businesses. So yeah, we're really pleased and the demand we're really pleased with the client uptake.

It's the it's largely driven by biotech clients.

Having said that we have a lot of big pharma clients.

And more of their work to us the short and <unk>.

Safety and they have been for a while but increasingly and discovery and as we keep adding these assets either through direct straight up acquisition.

Sure.

The strategic initiatives that we've been pursuing vigorously.

Illinois and Pennsylvania.

When you think about and thanks for that and to follow up.

When you think about your capital deployment.

Appetite.

I guess I'm the there are some deals or deals.

Discussed and the public markets.

Regarding the.

The monetization spinoff of potential assets.

You've you've now dip your toe into contract manufacturing to John's question, and that's a relatively capital intense area I Wonder if you could kind of give us a of a rank order or a priority list of of where your capital deployment of appetite primarily resides.

Sure the size continuing to invest appropriately and our businesses.

All of which are growing.

So most of our Capex is growth related but.

As we reiterated in our prepared remarks, we kind of keep capex just kind of stay.

Steak low 7% of revenue even with the addition of cognitive and the capacity that you acquired the dark right now all of which require additional capacity certainly.

Certainly safety does as well so.

Putting that aside we were going to continue to do these technology deals of which we have about a dozen that aside and another batch of me and compensation and distributed bio was one of those that turned into the acquisition retro <unk> began to be one of those and just pivoted immediately into it and the acquisition and we have other deals and AI and <unk>.

Electromagnetics and digital pathology.

Next generation sequencing and bioinformatics and three of the tumor modeling that cutting edge technologies, and we're gonna and.

And the small amount from those businesses of all of them somebody at some of those for show of the acquisitions and they don't see particularly large companies and particularly expensive acquisitions, but they will grow rapidly and enhance the portfolio and they will distinguish us from the competition tick not entirely but particularly in the discovery.

I would say the size of those deals, which I don't know what the cadence will be but I think we'll have a couple of dozen things of what kind of participating in of about some of them. We're going to do some straight up M&A and the discovery space and hopefully do some more straight up the M&A sort of of the channel and that of cell and gene therapy will do some Australia M&A sort of in the.

<unk> Sciences.

The area.

And we'll do more work and sort of aspects of biologics and Mike.

<unk> and we actually have a couple of things.

That would fall into two out of that so.

The the.

And the conversations as always are several they're almost all of private equity owned.

And <unk>, which means that they're off the sale at the right time and at the right price.

Nothing would take us off the reservation and there would be continued additions of what we're doing.

If you have if the question.

The underlying thesis of the question is.

What additionally might you do it and.

See the ammo space specifically.

And I can't say that categorically, except to say that our focus for the <unk>.

Foreseeable future was primarily and cell therapy, and secondarily and aspects of gene therapy.

And I think that we are.

Currently a meaningful player and the cell therapy space and it could be the most meaningful player in that space, where we put his continued to grow the business and add.

The additional parts of the pizza.

You understand fully the.

So rather than the spelling surrounding the C demo activities and cell and gene therapy is the cell product businesses and.

Just by the biologics business, so that's a powerful portfolio of them.

And it further with the combination trials for the pharmacology and toxicology. So it's a broad suite of offerings.

Well and gene therapy, which is the largest and potentially the most exciting modality and we'll see where it all goes with the cut.

Cash and drugs that are being more kind of right now will probably work line.

The significant number of those.

Yeah. So that's the nature of our focus and M&A in particular and cell and gene therapy.

Right very helpful. Thank you sure.

Our next question comes from Robert Jones of Goldman Sachs. Your question. Please.

Great. Thanks for the question Joe I, just had two related to capacity on the safety assessment side and then the newer <unk> capabilities I know on safety assessment.

Wanted to get a little bit of a better sense on your comments around clients booking further in advance of of actual work and.

Just related to that and how you're thinking about capacity do you think is what you're seeing trend that you might need to be adding capacity I know, it's always the tricky dynamic the match.

Why and demand within within safety assessment, and then just the second question around <unk> I know last quarter.

And you said you were going to assess if you needed to add more capacity. There just I know, it's not too far from when you.

You made that comment, but just curious if there's any updated thoughts on the CDM footprint.

Sure. So we have been adding incremental amounts of capacity every year and.

And then of say five or six years, but I think it's longer.

Because the safety assessment business began to come back strong.

At the end of sort of flatten out in 2012 and begin to come back stronger in 2013, so were probably the charge of seven seven out of it yes.

And since proximity is important and since may of a dozen and safety assessment sites with cancer, we can't and while interest that space of one one locale node, we add all of the states and the U S and all of the space from there so.

I don't know, we havent at least the half of dozen sites and collateral amounts of space depending of client demand depending on the capabilities the Pentagon.

And how the space is currently utilized and and depending on where we see from the market balance. So we have always thought of that so we did in 2020 for this year. We're doing it now for next year and probably for 'twenty three we're obviously real time as we.

As the demand is exceeding our plan and our original guidance, which is the high class problem thinking very carefully about do we have to add more incremental capacity for this year and I don't think I don't think we have an answer to that if we do and it'll be subtle.

And so those of you concerned about our capex spend.

For whatever reason that the IP shouldnt shouldnt be concerned that we have of high growth business and we have to provide the capacity and we won't have the business. We love. The fact by the way the clients of booking.

Earlier.

That's so good for us so much more orderly.

I think this of conduit there with pricing. So I think that the pricing is still an issue with and don't get me wrong, but I think they're less concerned about price and more concerned about the science and getting the slot.

So keeping capacity relatively tight so our margins are good and so clients are desirous of getting and the Q early of two really good thing.

Subject to the caveat that you got one of the right out of space and turn the clients. The way. So as you as you indicated the question, we're always walking that tight rope I think we're really good at it and it's not a perfect science.

But we will add additional space, we are adding it right now and we'll continue that through the year, we probably will crank it up a little more than we would have as long as we feel that this demand will continue certainly for the back half of the share, which I think the gratitude and for the next year on the CMO space, particularly on the <unk>.

Cognate space.

Space, particularly the cell therapy manufacturing.

Aspects of it there is we bought incremental capacity that's in place. So we're fine.

Obviously have to finish.

Finish.

And finish additional space for the next year and beyond and based upon.

Both not only of the client demand, but the nature of the demand. So is it some of clients and phase two of the in phase three and a day.

Hinting about and wanting us to gear up for commercial launch of <unk>. So we have to roll all of those things up we have certainly sufficient capacity to accommodate the advance of this year and probably the beginning of next year and we'll add more space there so the capacity and head count.

And the rate limiting factors and the business not demand driven and it's about.

The rate of any factor right now, which is the beautiful thing.

Having the space is.

And I don't mean to be flip about it but it's relatively straightforward, it's just planning and cash.

And the Gotta get of the planning really early because it takes a while the gold space and on the Tox is probably <unk>.

18 months or so maybe two years to get the space with Delta and validated it's greenfield and maybe 12 to 18 months of mutation.

It's a little bit shorter and the C.

The amount of space, there's probably nine to 12 months, so getting the space built.

Built ahead of when we need it and getting people hired and trained ahead of when they need it.

Accommodates the.

The sufficient capacity to accommodate the the demand.

And it allows us not to be sure and by the same type of we don't want to have too much space or too many people sitting around and I think the too. So it's a constant balancing act.

I appreciate the thoughts thanks, Jim.

No.

Our next question comes from Tycho Peterson of J P. Morgan Your question. Please.

Okay. Thanks, Jim on manufacturing you talked about COVID-19 vaccine tech and intensifying and I'm curious, how we should think about that dynamic I'm curious if you can quantify what's actually baked into the outlook on Kirby and I think last year and you said it was about 60 million of across the portfolio and then and so we think about cognate.

And one question that comes to mind is why people would work with the universities Carolyn and his paragon of mattress shelter and one that as promised so can you just talk a little bit about how you think about competitive positioning for cognex.

Sure.

Okay.

The yes, the numbers, we called out last year, there were clearly COVID-19 related I think fall into a different category.

And we're gonna see this year of what we've seen this year plus I don't think of to useful the piece of that.

Piece of that last year because.

We had a tough second quarter of revenue was down and our mass and a little bit and microbial and a few other things that we were watching our costs tightly and et cetera, et cetera, and we're trying to make sense of it and try and.

That's just kind.

The forward going basis.

While the.

The some meaningful but modest interest.

And as last year could be some amount of continued work on COVID-19 related therapeutics monoclonal antibodies and anti virals drugs to treat people the get the disease.

And perhaps the symptomatic.

Many of the oil or not.

On an ongoing basis, though our buy.

The logic business is kind of do a lot of testing.

Of COVID-19 related vaccines.

And I think we're probably going to moving towards genre of of being flu like and there'll be a booster shot next year and the variance every year and they will always make it cut and I don't know if it's the day will be at least the four companies that already have vaccines and the perhaps others and companies like US will continue the test and so I don't think it's all that useful the break it out of there.

Try to break it out going forward, because I think it will just be and ongoing investments and so of biologics.

While a really strong business for us and there's lots of large molecule products. Besides.

What I'm about to say like monoclonal antibodies and others and there's no question and cell and gene therapy COVID-19.

And related work will.

We will be.

The other really critical.

And why someone would work with us well the company I think the two companies that you mentioned, the principally and the gene therapy manufacturing space. So cell therapy manufacturing space, we have smaller clients, sorry, smaller competitors who are.

Around the same size as we are and cell therapy manufacturing.

But don't have the large suite of services. So the ability to work with us from very very early research to process development to the clinic.

And <unk> and use work I think it's the distinguishing feature.

Of our portfolio and by the way, we continue and hope to continue to add to that so.

Hopefully of more of a holistic approach of the competition helps clients with speed to market and they don't have deposits at each step and work with somebody else.

Yeah.

Okay. That's helpful. And then follow up just curious about the sustainability of some of the trends of you called out and RMS you talked about Jim and she had this resurgence around outsourcing.

The proprietary colonies, how much of that came from the pandemic and how much of that do you think of sustainable and then separately for DSA, you've called out the price increases in the client securing space ahead of kind of the number of times on this call and I'm. Just curious how you think about the sustainability of those trends as well.

I feel really good about the sustainability of both of them. So jazz and this has been a nice growth business for us for at least the decade those models the critically and increasingly important for the.

Basic drug research.

Whole bunch of services associated with producing those animals and then.

The complicated of produce and providing them with the clients.

I think we've got a low pop because of COVID-19, which we will keep and I think the demand for these models, which continued to be more sophisticated made more easily sort of CRISPR.

And all the technologies.

Uh huh.

And it really strong demand for us and we're doing that pretty much across the globe.

And all of our sites.

We're pleased with the DSA pricing, even though and I kind of break that out and we're really pleased with the.

The growth from the government and demand there.

And I see any.

Rationale given the funding environment, giving the new modalities like cell and gene therapy and immunotherapy.

And yes, we got a little bit of increment. The work there to your question, specifically and discovery I would say.

The cost of clients to take a look at us that had.

So and I think the quite happy so we will retain that work and as we add new services like the value like retro Jack I think we will get incremental work so.

I would say some of the pricing paradigm with hold up I would think that clients. This line is the demand.

And we made strong and there is no reason or indications that it was <unk>.

Soften that we'll see more clients booking slots earlier, which is great for them and as I've said earlier way better for us and trusted visibility of planning and.

Getting our calendar straight in terms of of how it spaces utilized because of maximizing that capacity it's really.

Powerful for the bottom line.

Okay. Thank you.

Okay.

Our next question comes from Ricky Goldwasser of Morgan Stanley. Your question. Please.

Yeah, Hi, good morning, and congrats on the quarter.

I wanted to go back of the comments around climb some of securing them.

From an on the the talk side earlier on I mean, this is something that we've been talking about for a long time. So are you starting to have any conversations with your customers around and stuff.

The payable any time of type of deals and the curing.

The capacity for longer periods of time, given and considering that it takes nine to 18 months to build capacity.

Yeah.

And.

That would be nice I think that would that logically follow the instruction from the market situation.

I am a bit we had this over a decade ago, we had a couple of clients.

And just put capacity and take or pay based system.

Pay for the empty until they needed. It so they never had to get in line and I think Ive said, the you and others countless times with.

And if I was running out and diesel and the big drug companies I for sure would.

Committed to the space like that sort of didn't have to worry about it. It's a relatively trivial amount of the cost of developing the drug the whole preclinical costs, it's about 20%.

But the cost of developing a dragon and here.

And so some percentage of that so.

And most of our expense on the planet so.

We've had a few passing and questions and thoughts about that sort of vibrations and some clients are thinking about it.

One of the project to predict whether that will happen and not the just seem reluctant to do that.

Although increasingly where I've seen people book slots earlier, I think that's a book slots earlier and.

The for whatever reason unhappy with the slot.

The rate.

It's made let's sit and wanted to started study and.

And.

In June and we say to them, yes, we can't start until September and that requires some of the other back without further or.

And do something about it.

And the state kind of take or pay base of so.

And anything is possible I do think the market dynamics are such that it would support the basis for your question.

I just think that the the.

Big drug companies in particular have been reluctant to do those sorts of deals and.

And.

And I would say that the we.

And we don't have the concrete evidence that that's on the horizon.

Okay.

And then and then as a follow up question, I mean, and consistently beating and raising organic gross.

Cool.

And you sort of forecast or different from them and.

Considering sort of the mix of business and your performance.

Why what's kind of like still holding you back from operating and long term guide.

Oh I'm not.

Not saying, we're going to give the.

The new long term average day, our best of taxes and a couple of weeks so.

I think we'll wait to do that so nothing is holding us back I think we of AR.

We are of good understanding of the market and a good assessment and the funding paradigm and the modalities and what clients are telling us and obviously, we have a big footprint work with.

Virtually all of the big drug companies and most of the biotech companies. So we have a really good installed base and now we have a clear view of it and we will be putting out on the membership.

Great. Thank you.

Yeah.

Our next question comes from one App and Danone of Bank of America. Your question. Please.

Hi, Good morning, Thank you for the question.

And just building up on the backlog question on BSA and from.

Our strong it is can you give us and update on and the mix of studies that Youre seeing and safety assessment and toxicology How's the mix from.

And you know general toxicology and specialty.

Toxicology cramps, How's the frenzy, and then and how does that compare to prior years.

We don't have any control over that.

Don't get long term studies, unless you do short term studies.

And you don't get.

You, usually I wouldn't say never but you usually don't get specialty work and unless you've got the general toxicology work sort of late.

The common tandem, we like both of which.

And profiles.

Kind of.

Not all of that the similar all of them the price seems a bit easier of the specialty you weren't and so.

It's probably around the 50 50 range, we like it that way as I said, we can't control and so every once in a lot of you hear us say that we have.

And the abundance of long term studies.

And not short term loans or vice versa.

Typically that balances out over time and you know it.

And I was like kind of worried of balance right now.

Got it thank you and the follow up and I'm from yesterday, as well and can you give us an update on and the pull through or the core of the revenue synergies of course and.

And you're seeing right now between discovery and safety assessment and.

And how is that tracking against your long term goals.

Yeah I mean.

And without passing it to finally, because I don't think that's a useful of productive to kind of do this on a quarterly basis. There's no question that we have an increasing number of clients.

They could've been safety clients whenever the discovery with us of discovery clients and beverage the safety or new clients and never did anything with us.

Work with us to help discover and develop pop out of the bed.

Thrilled because we haven't.

Really deep understanding of the molecule to.

To work with us because they trust us because they like the science and see because the cluster.

So you know I think I think over time, we will continue to have a significant of batch of our clients between both with us.

We don't.

The contract with them that way and in other words, we don't say, we want to the discovery work quite as much of the safety and vice versa that would be overreaching and dangerous.

But I think increasingly particularly as the discovery portfolio has grown.

So significantly and with great scientific depth and with great cutting edge technology that we have much more client open open to and are utilizing the discovery.

Some of whom we assessed the safety before the IRA.

Really comfortable just completely and to have us throughout the drug.

Okay. Thank you.

Our next question comes from Dan Brennan of UBS. Your question. Please.

Great. Thanks, Thanks for taking the questions maybe the first one just on margins I know you called out obviously with the strong top line and operating leverage and efficiency could you just maybe break out a little bit.

Maybe some of the components there just what was the what was the impact from our from acquisition of what we're getting back from efficiencies. If you will and just the operating leverage.

In terms of the new guidance that you're providing.

Right.

Yeah, that's right and.

Well, we've given the pizza.

And the different deals we've done and broadly this year, you know cognates of pretty neutral on the margin and earnings per share. So you've got to genetics and given its size.

And the V shape, you know the majority of all of the increase of the Sim is up and it.

And it's not to do the top banks and that together.

And do what's the operational businesses itself.

And of course.

With the topline.

Movements that we posted today and we will.

Get some pull through that will also help with the margin because of course, we've got a lot of the fixed costs and embedded in that.

And once upon a time and used to break out some of our efficiency program and what that was doing two childhood and hold but we stopped doing that for a while now.

The broadly yeah, I mean, we've got good top line growth and the.

<unk> the kicking in as we've described.

And it just sort of looking very well too.

Together at the moment.

But you know.

And there isn't really the M&A, that's causing sort of and upside or a drag.

With the exception of cognates on the manufacturing margin, which is the drag but given the overall performance of the business.

<unk> will come in and that's what you've seen by posting the increase to towards the 21% margin this year.

Got it thanks, David maybe second one would just be on human care I know, what I think of grew below it.

Last quarter, you had talked about some of the drag there given the pandemic and you expected the recovery just where do we stay and in terms of the your guidance for 'twenty, one now what's baked into the human care.

And the remainder of the year.

Well, we haven't broken out the hemostat and.

And the precise numbers, what we have said and people started MOSFET and into Canada.

Sort of stopped and we had hoped but.

But we do see that improving as we go through the bad.

And I just would like to point of it is a relatively small business and the fact that it's had some issues at the beginning of year because of COVID-19 and the access to science et cetera.

We see that improving as we get through the year and of course systems, but still a strong business for the future fiduciary and a small impact from the business.

Got it and then and I know microbial of Weird rebound of Dakota excuse me Similarly standard.

The impact last quarter from the pandemic or actually and the prior quarter just how do we think about the ability for that business too and like is.

Is there further catch up to go given what you saw this quarter versus what the normalized expectation from that segment.

Yeah, So and again as we called out and while we've seen the nice improvements and microbial.

Got the double digit growth.

Earlier than we expected sort of pleased with that but we've not the full access to install new equipment and with all of our clients and were.

And we're making headway in that but of course as we continue to do that but that would be and upside.

And of course that that's been factored into the revised guidance. This morning.

Great and then maybe last one just non cognate and I'm sorry, if I missed it I know you had and gave a lot of details and the deck and the and the presentation, but what specifically is baked into the cognitive here and I think at the time and you did the deal I think you were anticipating what the 15% revenue CAGR of is this correct.

Correct and just wondering hum.

On both of those friends and of its 15% why couldn't it be higher than that given the overall growth rate of that end market strength.

So we added $110 million and revenue.

And that helps.

And in terms of the and when you did the deal I think you talked about it.

Correct me, if I'm wrong within the three year CAGR of 15%.

Just wondering kind of.

What the opportunity is given the end market I think is certainly growing at that rate if not stronger.

Oh for the the total growth rate was the 25% on an annual basis going forward.

Got it thanks David.

Our next question comes from Elizabeth Anderson of Evercore. Your question. Please.

Hi, guys and items.

And to ask a little bit more about how customers are moving to the like post pandemic era of you seem sort of people sort of tweaking of timeshare to think through like what their outsourced and what they're keeping in Russia.

The change of their discovery program or is it just kind of.

Oh, let's get moving because we had all of these projects that were delayed or sort of how would you characterize the the tone of your conversations.

The quite positive.

And the second quarter and our research models business when academic clients were closed.

And and we had difficulty placing some of our microbial solutions systems.

And all of our sites remain open and.

Virtually all of our clients and so.

The handful world and so our clients have been busy the well financed.

The majority of our clients of no internal capability to do anything except discovered drugs and then all the rest of the development and that comes through us though.

I wouldn't see that say that and it's been a dramatic change we just have increasingly intense demand across the board from what we do.

Upon really robust portfolios.

The early stage portfolio.

Most of our clients have.

And enough money to prosecute them broadly as opposed to <unk>.

<unk>.

And we don't see any indications that those elements.

And would soften or the.

The demand with tough and.

Certainly as we move through this year and as we said earlier, we'll give longer term guidance and I thought something.

And where our business we go into the demand is growing and our Investor Conference.

Okay. That's helpful and then as a follow up you talked about sort of capacity constraints in terms of CAD and <unk>.

Standing capacity in terms of the physical infrastructure are you seeing any change in terms of of like the availability of employees or the cost pressures on wages or anything of that type of Oh, yeah versus a couple of you know couple of months ago right.

Uh huh.

And we're hiring a lot of people.

And actually hiring more people than we had planned to hire because the demand for ever.

And we do it exceeded that so as I said earlier with the high class Challenge.

And you know it depends on the geographic locale and in some sort of geographical accounts of the teacher to hire people some of those great kitchen.

Do think we are an attractive place and lots of people.

I'd like to work or want to work at the right kind of over 80% of of the drag for the last three of those people like that.

It's probably the best recruiting tool.

We're always trying to you know we have 110 that low cases locations now so lots of it.

And the countries so the.

The competition for head count because I sort of different in different places than the.

Kind of wage levels are fluid and so we're always trying we're working hard to stay up to or ahead of it so that you know.

Pages and never an issue so I'd say of the ultimate rate limiting factor and a bit.

The ability not just of anybody, but I was really really strong people and.

Understand that we're working for patients and the criticality of the work. So I'd say, we're doing a very good job of I think we've got a really good job of in the first quarter.

With our recruitment and we anticipate significant recruitment through the back half of the year of pretty much across the board around the world.

And so where.

We're working hard and stay ahead of it.

Okay. Thank you very much.

Our next question comes from Patrick Donnelly of Citi. Your question. Please.

Great. Thanks, guys, maybe another one of the cell and gene therapy piece and I understand it's still early days, but can you just talk about some of your customer conversations around cell and gene therapy business now that you've closed cognate have you seen any increased interest and areas like Hema care and tomorrow now that you're more kind of the end to end and cell and gene therapy player.

Should we expect those benefits to be a little more long term.

And then it is early and.

So you know we have the combination of.

Sorry.

Revenue is up more slowly and the first quarter and him accounts Valero because of lack of access the dominoes, coupled with the fact of cognex relatively low.

Most of the two old so I think it's early to tell.

We have no doubt that the thesis is the very strong one, but the clients who use us.

Starting very very early and the process through the process development and the scale up and through the clinic and ultimately took.

The commercial quantities is powerful and no clients kind of built virtually no clients kind of build the stuff themselves I think the.

The competitive marketplaces, it's attractive for us I think really the portfolio that clients and definitely resonating to based upon the conversation they support the up.

And of the cell.

A whole suite of cell and gene therapy services, including <unk>.

And final colleagues and safety testing and coogan.

The logic testing coatings of microbial testing equipment channel across our research models business of <unk>.

Becoming a very big business for us.

And it's no different than everything else, we do we provide a comprehensive holistic.

The portfolio of products and services. So it's more of a solution for clients because.

Small biotech companies.

Hello, everyone.

Everyone, but particularly that they don't have the time or the ability or the desire to work with half of dozen different providers across the different.

Streams of the business and so the whole thesis is about.

Being the the <unk>.

<unk> non clinical CRO, and we can do more for our clients.

And maybe they don't have to do it themselves because they don't want to include that Don talked about the the players.

Got it thanks, that's helpful. Jim.

Our final question comes from George Hill of Deutsche Bank. Your question. Please.

Oh, Hi, it's not the on for George Thanks for taking the question.

Could you talk about your thoughts and the changing dynamics competitive dynamics and the industry. Following there is some vertical integration and if recent deals and the space create opportunities.

The upstream in the later stage of their services.

Yeah.

Yeah, I think I follow that.

And that really quickly but.

Yeah look the consolidation of the clinical side of the.

The business, which you're referring to is really no different than the consolidation of that not only are we.

Sorry, but we participate heavily in the preclinical side so.

As you know we have a way of 12 different sites and probably eight or nine different acquisitions and the safety business.

All of that whole business.

The size of the acquisition and consolidating the industry says it well.

We had more.

The scientific depth and capabilities and we've got a broader geographic footprint.

And so you are seeing and will continue to see the exact same phenomenon and clinical space.

I think it will continue I don't know where it will end up two or three requires probably.

Your question about.

And what that means of portends for us.

Look we look at the clinical space often.

And I can look and discuss it often.

I think you know that we used to of a clinical.

The small clinical of <unk> capability, which and.

It was small molecule, which we sold.

Because it was on the scale and now with that kind of.

And the cell and gene therapy. So we sort of have two big move is one of those.

The amount of space and one of the clinical space. So we've dipped our toe into the she came out of space and like and at least in the cell therapy side of the clinical side.

We could do that I guess.

It doesn't seem that there's a client need and I don't think we should make even contemplate a move like that unless the clients are requesting it.

So the only company that has the clinical and preclinical capabilities programs.

It's a failed expire that part of the clients buy from them.

And on that basis, not only of the contract.

To do the preclinical work all the way through the clinic lots of years, nobody buys that way.

So we haven't had a conversation and all that.

The decade with the clinical CRO of that came together not only of ever called me of clinical care of all that came together the them and I don't think any of us would even contemplate that and move although it would provide a bigger share of the clients' wallet, so that would be attractive but.

Since the clients and buying that way of thinking that way and not not but the.

Zeiss of any of us doing that.

Until and unless excuse me of that changes I don't see any logical rationale for.

Some of the preclinical side and the other people have clinical side to get together and having said that I learned a long time ago never to say never about anything so I don't know at what point.

The demand quotient will change and clients will want one company and multiple companies to do both.

If and when that happens and sport.

Okay.

Well that concludes the call today. Thank you for joining us on the conference call. We look forward to speaking with you during the upcoming investor events, including our virtual Investor Day on May 27, and this concludes the conference call. Thank you.

Thank you for participating you may now disconnect.

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Good day, and thank you for standing by and welcome to the Charles River Laboratories first quarter 2021 earnings conference call.

At this time all participants are in a listen only mode.

The the speaker presentation, there will be of question and answer session to ask a question. During the session you will need to press star one on your telephone. Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero and I would now like to hand, the conference over to your speech.

Today, Todd Spencer Vice President of Investor Relations.

Please go ahead Sir.

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 or substitute for results from operations 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 I will now turn the call over to Jim Foster.

Thanks, Todd good morning, and.

And very pleased to speak with you today of about another exceptional quarter of Charles River.

And then.

We believe clients are increasingly choosing to partner with us for our flexible and efficient outsourcing solutions.

The scientific depth and breadth of our portfolio and our.

And our unwavering focus on seamlessly serving their diverse needs of clients are opting to work with the smaller number of <unk>, who offer broader scientific capabilities, which enables them to drive greater efficiency and accelerate the speed of the research non clinical development and manufacturing programs.

And the complexity of scientific research is also increasing our clients' reliance on a high science outsourcing partner like Charles River.

And further differentiate ourselves from the competition, we are strategically expanding our portfolio and areas that deliver the greatest value of the client and offer significant growth potential already this year, we have and enhanced our scientific capabilities for advanced drug modalities and through the acquisitions of distributed.

Cognate <unk> services and retro genetics.

Distributed bio and <unk> strengthened our discovery portfolio and the acquisition of cognate, which was completed on March 29.

The excellent growth opportunity by allowing us to offer the C. D M. All the services and the high growth high science cell and gene therapy sector.

We're very pleased to welcome the talented staff at each organization of Charles River, and believe that by continuing to invest and our portfolio and our people, we are maintaining and enhancing our position as the leading non clinical and Sierra and <unk>.

Believe the strength of our portfolio and robust industry excited the metals.

Leading to unprecedented client demand across most of our businesses and the first quarter, we experienced the continuation of the robust demand from the end of last year, including new record booking and proposed the levels and the safety assessment business.

Organic revenue was about 10% for a second consecutive quarter, even after normalizing for the last year of COVID-19 impact overall, we believe our robust first quarter performance and solid business trends support our improved outlook for the year.

I will now provide highlights of our first quarter performance.

The revenue surpassed $800 million for the first time and at $824 $6 million for the first quarter of 2021 represented of 16, 6% increase over the last year.

Organic revenue growth of 13% was driven by double digit growth across all three segments.

The year over year comparison to last year as COVID-19 related revenue impact, which primarily affects of the RMS segment contributed approximately 140 basis points to the revenue growth rate this quarter.

We experienced broad based growth across all client segments with biotech clients, leading the way as they continued to benefit from the robust funding environment.

The operating margin was 27% and an increase of 170 basis points year over year. The improvement was driven by RMS and DSA segments and reflected operating leverage and the <unk>.

Robust revenue growth as well as our continued efforts to drive efficiency.

We expect the same taxes will drive margin improvement for the year and believe the operating margin was approached 21%.

Above our prior target.

Earnings per share were 2053, and the first quarter and increase of 37, 5% from the $1 84, and the first quarter of last year.

This outstanding earnings growth, principally reflects the double digit revenue growth and meaningful operating margin improvement.

Based on the first quarter performance and our positive outlook for the remainder of the year.

Meaningfully increasing our revenue growth and non-GAAP earnings per share guidance for 2021.

And now expect organic revenue growth and a range of 12% to 14% of 300 basis point increase from our prior range.

Normalized for the last year as COVID-19 impact, we would still expect low double digit organic revenue growth this year.

Non-GAAP earnings per share are expected to be $9 75 to $10.

Percentage increase on an organic basis over the first quarter of 2020.

Driven by broad based demand for both discovery and safety assessment.

And our target clients are expanding of quickly preclinical pipeline and intensifying their focus on complex biologics and.

And we believe they of securing space with us further in advance to ensure they do not delay the research, which in turn and provides us with greater visibility.

We believe this positions the safety assessment business extremely well and supports low double digit organic revenue growth and the DSA segment, this year, which is higher than our prior outlook.

Led by broad based demand for oncology early discovery and CNS services.

Our efforts to broaden and strengthen our discovery capabilities and enhance our scientific expertise.

We intend to build our discovery portfolio. So the clients can outsource complex discovery projects to us, including for advanced modalities and our recent acquisition of distributed bio and retro <unk> enhanced our large molecule discovery capabilities.

Splore of potential preclinical safety liabilities.

The combination of distributed bio and a large molecule discovery platform and retro genetics capabilities will further strengthen our integrated end to end solution, the therapeutic antibody and cell and gene therapy of discovery and development we.

We are also continuing to add cutting edge technology through our strategic partnership strategy. Most recently with the new artificial intelligence or AI drug discovery partnership.

Balance discovery.

The DSA operating margin increased by 180 basis points of 23, 8% and the first quarter.

Leverage from the robust DSA revenue growth was the primary driver of margin improvement and we.

We expect this trend will continue to propel the DSA margin into the mid 20% range because of the year.

<unk> revenue was $176 $9 million and increase of 14, 8% on an organic basis over the first quarter of 2020.

Robust demand for research models in China was the primary driver of first quarter RMS revenue growth and higher revenue for research model services, including channel and a Cradle initiative also contributed approximately 620 basis points of the increase was attributable to the comparison.

And the last year as COVID-19 related revenue impacts from client site closures and disruption.

The AD trends for the research models.

Were largely consistent with those prior to the pandemic with growth and shadow of widely outpacing mature market the.

The research models business, and China had an exceptional quarter, even after normalizing for the last year of COVID-19 impact driven by a resurgence in demand across all segments.

And that of course search and China has returned to pre COVID-19 levels and in some areas, even greater levels and the U S and Europe client and order activity has also rebounded.

Such models services also continued to perform well Jan this is benefiting from renewed outsourcing demand as our clients seek greater flexibility and efficiency afforded to them. When we manage their proprietary model of the model colonies and as we did from any clients during the COVID-19 pandemic and addition.

Complex research models will play an increasingly critical role is driving research continues to shift to oncology rare disease and cell and gene therapies, which reinforces the value proposition for the Japanese business.

The infrastructure.

We of Cradle sites, and the Boston, and Cambridge, Massachusetts area, and South San Francisco buyer bio hubs and are actively expanding and these regions to accommodate client demand and utilizing cradle also provides clients with collaborative opportunities to seamlessly access.

The other Charles River of services from discovery to John's, which further enhances the speed and efficiency of their research programs.

Revenue growth for us sell supply businesses came of care and Salerno remained below the targeted level of the first quarter due to some limitations on donor access we believe cell supply revenue will increase during the year as donor availability continues to improve we are also continuing to work diligently.

And to expand out of donor base and the U S and add more comprehensive capabilities at all of our sites to accommodate the robust demand and the broader cell therapy market.

We believe that the acquisition of cognate was particularly timing tablet because of creates new business opportunities for hemoglobin and so we're on the cell and gene therapy development area.

Span and capabilities are expanding.

And the first quarter of the RMS operating margin increased 570 basis points the 28, 7%.

The significant improvement is due to two factors first last year's 23% by channel was depressed by the.

The onset of COVID-19 related client disruptions and the resulting impact and the research model of order activity. In addition, this year's performance reflects the operating leverage attributable to the robust revenue growth, particularly for research models and China.

Revenue from the manufacturing segment was $146 $5 million.

15, 6% increase on an organic basis over the first quarter of last year and free.

This was driven by double digit revenue growth and both the biologics testing solutions and the.

The chromium solutions businesses.

The manufacturing segment's first quarter operating margin was stable at 35, 5%. This.

And this is consistent with the historical trend and the first quarter and in line with our revised expectations in 2021 from a mid 30% operating margin when factoring in the cognate acquisition and <unk>.

<unk> solutions growth rate rebounded above the 10% level and the first quarter, reflecting strong demand for and the stake endotoxin testing systems packages and core reagents for all geographic regions. We continue to work through the delayed instrument installations that resulted from COVID-19 restrictions and <unk>.

Gaining access to more client sites.

Clients prefer our comprehensive and efficient microbial testing solutions.

Cause of the quality speed and accuracy of our testing platform.

Biologics business reported another exceptional quarter of strong double digit revenue growth Chris.

Principally driven by robust market demand for testing and cell and gene therapies and COVID-19 therapeutics.

Given the strength of the demand environment, we are continuing to build our extensive portfolio of services and <unk>.

Of course, the safe manufacture of biologics and ensure we have available capacity to accommodate client demand.

We believe the acquisition of cognate will be highly complementary to our biologics business and our portfolio as a whole the acquisition of establishes Charles River as a premier scientific part of it the challenging and therapy development testing and manufacturing.

And a broader services will provide clients with an integrated solution from basic research to cgmp production, enabling them to sort of see GMP cell therapy production and.

And the required analytical testing to one scientific partner, reducing the bottlenecks and and efficiencies of utilizing multiple outsource providers.

Because we already were provider of extensive non clinical services the cell and gene therapies.

The integration process, which is proceeding smoothly, it's particularly focused on unlocking new business opportunities across the portfolio.

The acquisition of cognate as part of our ongoing strategy to broaden our unique portfolio and scientific expertise and all.

Order to support new paradigms and therapeutic areas of research.

Biopharmaceutical clients seek to drive greater efficiency and leverage scientific benefits by working with fewer trusted partners, who have broad integrated capabilities. We.

We have transformed our business over the last decade to accommodate their needs through M&A.

The until the partnerships internal investment and by promoting a culture of continuous improvement and everything that we do we.

And we built the leading safety assessment franchise, and the world and established and integrated end to end discovery offering for both small and large molecules. So given the emerging and points of complex biologics and cell and gene therapies, adding <unk> capabilities as a logical extension for our portfolio.

We will continue to move our growing strength growth strategy forward and disciplined M&A and strategic partnerships remain vital components of our strategy as.

And as we endeavor to further enhance the scientific expertise.

And the biotech funding environment has never been stronger clients are investing more and research and development and it is incumbent upon us to be the scientific partner, who can help them move the programs forward from <unk>.

And Seth to non clinical development to the safe manufacture of the lifecycle of therapeutics.

We look forward to discussing our strategy with you and where.

And we think that we can take the company over the next several years.

Our upcoming virtual Investor day of May 2007, and.

In conclusion, and I'd like to thank our clients and shareholders for the support and our employees for their exceptional work and commitment.

David Smith will give you additional details and our first quarter results and 2021 guidance.

Thank you Jim and good morning.

Go ahead of the game May remind you cannot be speaking primarily to non-GAAP results, which exclude amortization and the.

Acquisition related charges and costs related primarily to upgrades and efficiency initiatives and adventure and the other.

The strategic investment performance and some of those.

And items. Many of my comments will also refer to organic growth and growth, which excludes the impact of acquisitions and come to the translation.

We are very pleased with our accomplishments from the first quarter, which widely and outperformed our outlook, we delivered strong revenue growth well above the 10% of local on an organic basis and significant operating margin expansion of 170 basis points, which drove earnings per share growth of 37 point of pumps.

And from 52 sons the.

The operating margin performance was particularly encouraging and the consistent margin improvement reflects our efforts to build the most scalable and efficient infrastructure and the leverage the robust growth and market.

And as Jim mentioned, we've increased the shifts financial guidance to reflect the enhanced growth profile for the full year.

Including the strong performance of those.

Water and the addition of company.

Acquisition, we have completed.

We now expect to deliver reported revenue growth of 19% to 21% and organic growth and the credit.

And the range of 12% to 14%.

And given the robust top line performance, we expect to drive meaningful operating margin improvement this year with the full year margins approaching 21%.

This is expected to drive expenses on the expected earnings per share and the range of $9 and cents.

The $10, which represents.

Grace of those <unk>.

From a segment.

The 2021 continues to reflect the strong business environment and the differentiated capabilities, we put a bunch of support to our clients meet RMS organic revenue growth guidance for the year is unchanged from our initial high teens outlook.

And recovery from the impact of the COVID-19 pandemic of Austria exceptional growth in China, and the expectation put on some supply and revenue growth will improve during the year. The DSA segment is now expected to deliver low double digit growth portfolio, reflecting the strong first quarter performance and the intensifying.

Research and certainty.

And the manufacturing segment, we now expect to achieve mid teens organic revenue growth, which puts the biologics and microbial solutions businesses contribution Inc.

<unk> the acquisition of a company manufacturing as reported revenue growth rate is expected to be in the high 30% range with regards of operating margin unless we continue to be of primary contributor to the overall improved and for the year with the segment margin meaningfully above 25%.

We also expect the DSA segment's operating margin to increase over the prior year into the mid 20% range when factoring in cognate the manufacturing segment's operating margin is expected to be in the midst of some range. This year of mantra of people always 2020 level.

Unallocated corporate costs and slightly higher than our expectations tier two and six 2% of total revenue of $51 $2 million and the first quarter compared to five 6% of therapy and the first.

The question the.

The increase was primarily the result of continued investments to support the close the pump businesses.

Higher performance based compensation costs due in part of the first quarter operating performance.

Despite the higher expenses and the first quarter, we continue to expect unallocated corporate costs to be in the mid 5% range as a percentage of revenue for the school year.

The first quarter tax rate was 14, 5% currency basis point increase year over year and consistent with the February which calls for a tax rate and the mid teens due to the gating of Nexus.

And it's from stock based compensation.

We continue to expect our full year tax rate will be in the low 20% range on a non-GAAP basis, which is unchanged from our outlook provided in February.

Central adjusted net interest expense for the first quarter was $17 $1 million, which was essentially flat sequentially and the decrease of nearly $2 million year over year due to lower average debt levels, which resulted in interest rate savings based on the leverage ratio at the end of the first quarter of $2 $2 billion of that.

Standard debt, representing a gross leverage ratio of two three times and the net leverage ratio of one nine times and.

In March we issued $1 billion of senior notes to further optimize our kind of construction and take advantage of the attractive interest rate environment.

The proceeds of this bond offering were used to redeem our previously issued higher rates financings of millions on the bumps.

And that the results of these actions will reduce our average interest rates and an approximately 50 basis points to two six months.

And overview of our current capital structure is provided on slide six.

On a pro forma basis, including the cognate and retro xiaomi acquisitions and <unk>.

The slippage ratio was just under three times and we had total debt outstanding of slightly below the $3 billion.

For the year, the higher debt balances due primarily to the <unk> acquisition will be partially offset by the lower average interest rates from these refinancing activities, which is expected to result in total adjusted net interest expense of $83 million to $86 million.

Free cash flow was $142 $2 million from the first quarter and significant increase compared to $42 $9 million last year.

The primary reason for the improvement was the strong first quarter operating performance along with our continued focus on working capital management.

Capital expenditures were $28 million from the first quarter compared to $25 seven millions all of this last year. Looking ahead, we are increasing the capex guidance of 2021 and $40 million to approximately $220 million the.

The increase primarily reflects the investments, we are making and content to support its high growth business.

Even with the additional capital.

Capex will remain below 70% of total revenue this year, which is consistent with the targets that we provided and to our last investor day, and two pump and the monkey.

For the full year, we of uptake and a free cash flow guidance to the upper end of the prior range and now expect free cash flow of approximately 435 million Boes of the Goodyear we.

We are pleased to be able to increase free cash flow due primarily to the strong first quarter operating performance, even after incorporating the transaction costs and capital needs of company.

A summary of our revised financial guidance for the full year, including company can be found on slide 38.

For the second quarter updated outlook reflects the continuation of the strong demand environment.

Now the second quarter reported revenue growth and so on me and the 30% level, including the contribution of accompanied on.

And on organic basis, we expect the second quarter growth rate to be asked on the in terms of December.

This reflects the prior comparison to the COVID-19 related revenue and pump, which will contribute approximately 700 basis points to the second quarter of revenue growth.

As the results of the impacts of COVID-19, and the second quarter of last year. We expect this year second quarter non-GAAP operating margin and earnings per share to increased significantly versus the prior.

And yet our expectation from non-GAAP earnings per share is the growth rate of more than 50%.

In conclusion, we are very pleased with our strong first quarter performance, which include the robust revenue and <unk>.

Comes from Chris.

Remain confident about the prospects of the year and our ability to consistently grow the top line bottom line cash generation and as such the this is reflected and the suspension and prudently.

Absolutely.

We look forward to hosting our upcoming bridge from Investor Day, and a few weeks at that time, we plan to uptake and longer term financial targets, which people Inc. Will reflect the strong demand from them.

That concludes our comments operator, we will now take questions.

Yeah.

Our first question comes from John Kreger of William Blair. Your question. Please.

Hi, Thanks very much.

Jim and given all of the cognate commentary you gave us can you just.

Step back and and help us understand what part of the CMO. The industry are you interested in playing and kind of over time longer term and.

The development drug product drugs and drug supply if you could just elaborate on that that would be helpful.

Sure sure James So cognex gives us the ability.

And particularly in combination with Haemacure and solera to provide to actually provide the cells.

To do the process development.

And to the clinical trials scale up and ultimately to provide commercial quantities specifically at cell therapy products.

And secondarily, we have some of the.

Capabilities.

At are involved in and.

And facilitate gene therapy manufacturing as well and I'd say that the the <unk> business will be principal will be primarily cell therapy. The lady.

Great, Thanks, and I am sure.

And then.

Last month, you guys talked about on the day.

And the strategic relationships, which had some references to AI and machine learning can you just talk a little bit more about.

How you see machine learning and having applicability within item of <unk>, mainly.

Sure.

But because.

Huge amount of focus on utilizing data to inform the design of preclinical trials to achieve better outcomes and.

And I think ultimately the true.

<unk> designed our clinical trials to achieve better outcomes, and then and to provide some correlation between the two of them and so.

The there's a rich of amount of data and I think balance headset.

And the particularly strong.

The company.

<unk>.

We're gonna see.

Attributes or aspects of this.

I think all around our portfolio.

Don't see this as a replacement for the things that we do but we see the mezz.

Augmentative and or earlier provide earlier indications.

Of how the drug is likely to perform before we get into let's say.

Non regulated and certainly the regulated.

Safety trials so.

The advent of AI should both enhance speed and hopefully outcomes in terms of the members of drugs get to market and.

And now between the rich datasets that we have in their facility of the day I should be very interesting.

Combination, albeit very early days.

Very helpful. Thank you.

True.

Our next question comes from Eric Coldwell of day.

Baird Your question please.

Thank you very much impressive quarter I'm focused on safety assessment DSA segment.

You cited record Rfps record demand in Q1.

That obviously follows the 2020 DSA segment, ending backlog of $1 4 billion, which was up 40% year over year, yet you're only forecasting low double digit organic revenue growth and the segment this year.

When we look at prior years, beginning backlog and how that compared to the resulting revenue growth of the math would frankly suggest multiples of what youre guiding to and I'm just curious what explains.

This disconnect from past backlog growth too.

To your outlook for low double digit growth this year.

And I'd take a shot of that David.

Hello.

Okay.

David and you still connected to the story much non U.

I think we lost David and you might have to go back and okay.

That's of course so.

The way, we look at the circles that we've got.

We're thrilled with the demand with the rest of the backlog we're delighted with the way the you have started.

Where we are.

Really optimistic about the guidance that we provided the effect of that segment will.

There will be organic.

Double digit growth rate.

It's still early in the year so.

And what we wanted to see how more of the year Charles but.

And we're quite confident and comfortable with that guidance for the year and Deb.

And again as we discuss quarter after quarter, there is non linearity of our business.

And stuff.

And so that's the the move.

Identically quarter over quarter increase virtually and necessary at the same rate quarter to quarter. So.

We think this will be a very strong year.

True.

Well, Tim and I believe it doesn't look like you're going to miss that target and just.

Curious I mean price pricing pricing I mean can't be bad and this environment and it just.

Leads me to wonder if there's a big mix shift and the the nature of the the work if there's capacity constraints happening.

It makes me wonder if there is something in that backlog report from last year that.

You know you changed how you look at backlog of the reporting of the figure because it just historic trend if I go back even stripping out acquisitions. The last five years. It just.

The growth rates would be.

If history is history repeated itself the growth rates would be materially higher than what you're talking about and it just seems that.

These are awesome numbers, I'm, not complaining and obviously, but it seems like a bit of a disconnect.

So maybe we'll take it offline, but just to provide some kind of it Eric and I understand the nature of the question pricing side.

Our capacity is well utilized but we have sufficient capacity and as I said in my prepared remarks, he actually of clients booking more of work earlier I don't know because they have more work because of the better funded and maybe there's an underlying concern and that none of us and our competitors will have the capacity that they want when we need and all of them.

And we worked really hard to do that.

And then the mix is.

It is solid and we're getting a significant amount to work.

From Big drug companies, a little bit you gave by COVID-19, but also just the plethora of new.

And the biotech companies.

Nothing but good things are happening.

<unk>.

We're pleased with our articulation of of good things happening.

That looks like and strength.

The financial guidance, but.

Maybe we should just talk to you off line and get you more comfortable with the.

And so yes that sounds great and again congrats on of overall performance really good. Thank you.

Yep and background and I'm sorry.

Speaker thoughts and instead of to meet us and whats happening chats and the way to myself and the west.

And I realize that I haven't heard what Jim was saying, but I get the impression that you were discussing about how the backlog is being built up because people are booking out further afield and.

And one of the reasons, why and being able to increase our outlook of the shares because we can see much more of the yet. So it's that was discussed that what we can say.

Eric Eric.

And is pleased.

Pleased with what we're doing but thinks that the guidance for the back half of the eye should be materially higher given how are you.

Ended the year, given where we are now and given the ebbs and flows.

The business of liquid pricing and I I explained that we were pleased with the year over year guidance the things quite linear.

Nothing, but good things going on from the demand and pricing and mix point of view and that's when it came out of it.

Good.

Our next question comes from Dave Windley of Jefferies. Your question. Please.

Hi, Thanks for taking my questions. So.

I won't I won't exactly follow on Eric's question, and I think you addressed that well enough, but yeah.

You have pointed out Jim discovery stronger performance for a couple of maybe three quarters.

And you also commented in general and your prepared remarks about continuing to seek ways to add value for clients and DSA, which is which is the general comment, but I wonder if if maybe its not related to the growing discovery business and potentially pull through there, which we've asked about three years. So I wondered if you could kind of elaborate.

On the adding value to clients and DSA part of your comments.

Yeah.

And the discovery business as we've been talking about for at least the couple of years now.

Really come into its own and just in terms of client utilization.

And understanding of the depth and strength of the scientific portfolio.

We've been adding additional businesses like the bio and retro genex.

And we have and we have scale now so we've got a terrific organic growth rate, even though we don't break that out and the new.

The meaningfully and proving up pretty much from that segment as well as a pull through and.

The safety.

And of course, we're seeing high growth rates and.

Nice margins and me.

Safety business as well and I think we have a very strong and capacity situation.

And both of our businesses. So yeah, we're really pleased of the demand we're really pleased with the client uptake.

It's largely driven by biotech clients.

Having said that we have a lot of big pharma clients.

So we're seeing more of the work to us the short and safety and they have been for a while but increasingly in the.

Discovery and as we keep adding these assets either through direct straight up acquisition.

Or.

The strategic initiatives that we've been pursuing vigorously and catalog.

And that will only intensify.

When you think about and thanks for that and the follow up.

When you think about your capital deployment and <unk>.

Of the tight.

I guess I'm there there are some deals or deals.

<unk> discussed and the public markets.

Regarding.

The monetization spinoff of potential assets.

You've you've now dipped your toe into contract manufacturing to John's question, that's a relatively capital intense area I Wonder if you could kind of give us a of a rank order or a priority list of of where your capital deployment appetite primarily resides.

Sure besides continuing to invest appropriately and our businesses.

All of which are growing.

So most of our Capex is growth related but.

As we reiterated in our prepared remarks, we're going to keep Capex just kind of stay.

The stake low 7% of revenue even with the addition of cognate and the capacity that you acquired the dark right now all of all of which require additional capacity certainly.

Certainly the safety does as well so.

Putting that aside we were gonna get paid and to do these technology deals of which we have about a dozen that aside and the other debt to me and compensation distributed bio was one of those that turned into the acquisition retro <unk> began to be one of those and just pivoted immediately into it and the acquisition and we have by the deals and AI and <unk>.

Electromagnetics and digital pathology.

The next generation sequencing and bioinformatics and three of the tumor modeling that cutting edge technologies, and we're gonna and.

And the small amounts of those businesses are of all of them somebody had some of those for show of the acquisitions and they don't see particularly large companies and particularly expensive acquisitions, but they will grow rapidly and enhance the portfolio and they will distinguish us from the competition tick not entirely but particularly in the discovery.

And I would say besides those deals, which I don't know what the cadence will be but I think we'll have a couple of dozen things of what kind of participating in of about some of the.

And to do some straight up M&A and the discovery space and hopefully do some more straight up the M&A sort of of the channel and bit of cell and gene therapy with the similar straight the M&A sort of the lab sciences.

The area.

And we'll do more work and sort of aspects of biologics and bikes.

<unk> and we actually have a couple of things.

That was the quantum into two of them out so the.

The conversations as always.

Several of them.

They're almost all of private equity owned.

Businesses, which means that Theyre also sale at the right time and at the right price.

Nothing would take us off the reservation and they would be contingent of editions of of what we're doing.

If you have if the crush.

The underlying thesis of the question is what additionally might you do and.

See the amount of space specifically.

And I can't say that categorically, except to say that our focus for the <unk>.

Foreseeable future, primarily and cell therapy, and secondarily and aspects of gene therapy.

And I think that we are currently a meaningful player and the cell therapy space and could be the most meaningful player of that space, where we put these continue to grow the business and add.

And the additional parts of the pizza.

Do you understand fully the.

So rather than the spelling surrounding the seat demo activities and cell and gene therapy is the cell product businesses and Dr.

Just by the biologics business, so that's a powerful portfolio of that.

And it further with the combination trials for the pharmacology and toxicology. So it's a broad suite of offerings.

<unk> and gene therapy, which is the largest and potentially the most exciting modality and we'll see where it all goes with the couple of thousand got sort of a big.

The big worked out right now, we're probably working line.

A significant number of those.

Yeah. So that's the nature of our focus.

And so and shipped there.

Great very helpful. Thank you sure.

Our next question comes from Robert Jones of Goldman Sachs. Your question. Please.

Great. Thanks for the question John I, just had two related to capacity on the safety assessment side, and then the newer <unk> capabilities and I know on safety assessment.

Just wanted to get a little bit of a better sense on your comments around clients booking further in advance of of actual work and just related to that how you're thinking about capacity do you think is what you're seeing trend that you might need to be adding capacity I know, it's always the tricky dynamic the match.

Supply and demand within within safety assessment, and then just the second question around <unk> I know last quarter.

You said you were going to assess if you needed to add more capacity. There just I know, it's not too for far from when you.

You made that comment, but just curious if there's any updated thoughts on the CDM footprint.

Sure. So we have been adding incremental amounts of capacity every year and.

Net of say five or six years, but I think of quagga.

Because the safety assessment business began to come back strong.

And at the end of sort of flatten out in 2012 and begin to come back stronger in 2013, and so were probably the charge of seven seven or eight years.

And since proximity is important and since we have a dozen and safety assessment sites, we cant, we cant and while interest that space of one one locale node, we and all the space and the U S and all of the space from Europe. So.

I Dunno, we added at least the half of dozen sites and collateral amounts of space, depending on the client demand depending on the capabilities the Pentagon.

And how the space is currently utilized and depending on where we see and the market balance. So we have always thought of that so we did in 2020 for this year. We're doing it now for next year and probably for 'twenty three we're obviously real time as we.

And as the demand is exceeding our plan and our original guidance, which is of high class problem thinking very carefully about do we have to add more incremental capacity for this year and.

I don't think we have an answer to that if we do it'll be subtle.

So those of you who concerned about our capex spend.

For whatever reason that the IP shouldnt shouldnt be concerned that we have of high growth business and we have to provide the capacity and we both have the business. We love. The fact by the way the clients of booking.

Earlier.

That's so good for us so much more orderly.

I think this of conduit there with pricing.

I think that the price is still an issue of and don't get me wrong, but I think they're less concerned about price and more concerned about science and getting the slot.

So keeping capacity relatively tight so our margins are good and so clients are desirous of getting and the Q early of two really good thing.

Subject to the caveat that you got one of the right out of space and turn clients. The way. So as you as you indicated the question, we're always walking that tight rope and I think we're really good at it and it's not a perfect science.

But we will add additional space, where we're adding the right now and we'll continue that through the year, we probably will crank it up a little more than we would have as long as we feel that this demand will continue certainly for the back capital to share, which I think we've got it to and from next year on the.

The CMO space, particularly the cognate space.

The space, particularly the cell therapy manufacturing.

The aspects of it there is we bought increments of capacity that's in place. So we're fine.

And obviously half two.

Finish.

And finish additional space for the next year and beyond and based upon.

Both not only of the client demand, but the nature of the demand and so is it some clients and phase two of the phase three and a day.

Hinting about and wanting us to gear up the commercial launch of <unk>. So we have to roll all of those things up we have certainly sufficient capacity to accommodate the advance of this year and probably the beginning of next year and we'll add more space there so the capacity and head count.

The rate limiting factors and the business not demand and started.

The rate limiting factor right now, which is the beautiful thing.

Having the space is I don't mean to be.

Flip about it but it's relatively straightforward, it's just planning and cash.

And the Gotta get of the planning really early because it takes a while to build the space and on Tox is properly.

18 months or so maybe two years to get the space built and validated the Greenfield and maybe 12 to 18 months, the mutation and maybe it's a little bit shorter and less.

The amount of space, there's probably nine to 12 months or so getting the space.

And built ahead of when we need it and getting people hired and trained ahead of when they need it.

Accommodate the.

There was sufficient capacity to accommodate because of demand and <unk>.

Allows us not to be sure and by the same type of we don't want to have too much space or too many people sitting around and I think the do so it's a constant balancing act.

Yeah.

I appreciate the thoughts thanks, Jim.

Our next question comes from Tycho Peterson of J P. Morgan Your question. Please.

Okay, Thanks, Jim and manufacturing he talked about COVID-19 vaccine checking intensifying and I'm curious, how we should think about that dynamic I'm curious if you can quantify what's actually baked into the outlook on COVID-19 I think last year. You said it was about 60 million and across the portfolio and then as we think the that'll cognate and no.

The one question that kind of combined is like people would work with University of Carolyn and his Paragon and master of shelter them on the head of promise. So can you just talk a little bit about how you think about competitive positioning for cognex.

Sure.

Okay.

The yeah. The numbers, we called out last year that were clearly COVID-19 related I think fall into a different category.

And we're gonna see this year of what we're seeing this year plus I don't think of to useful the piece of that.

And we piece of that last year because.

We had a tough second quarter, where revenue was down and I am asking a little bit of microbial and a few other things that we were watching our costs tightly and etcetera, etcetera, and we're trying to make sense of it and.

Investors think of it.

The forward going basis.

While the.

The some meaningful but modest consist.

And I asked last year could be some amount of continued work on COVID-19 related therapeutics monoclonal antibodies and anti viral drugs to treat people the get the disease.

Perhaps the type of manner.

From an oil and that.

On an ongoing basis, though our biologics business is kind of do a lot of testing.

Of COVID-19 related vaccines.

And I think we're probably going and moving towards genre of of being flu like and that'll be a booster shots next year and the variance every year and they are.

And we'll always make it cut and I don't know who the day will be at least the flow of companies, who already have vaccines and the perhaps others and companies like US will continue the test and so I don't think its all of that useful the to break it out or try to break it out going forward, because I think it'll just be and ongoing business and so of biologics.

While a really strong business for us and there's lots of large molecule products. Besides.

What I'm about to say like monoclonal antibodies and others and there is no question of cell and gene therapy COVID-19.

And related work will.

We will be.

The other critical.

Why someone who would work with us well the cup.

I think the two companies that you mentioned of principally and the gene therapy manufacturing space. So cell therapy manufacturing space, we have smaller clients, sorry, smaller competitors who are.

Around the same size as we are and cell therapy manufacturing.

But don't have the large suite of services. So the ability to work with us from very very early research to process development to the clinic.

And <unk> and use work I think it's the distinguishing feature.

Of our portfolio and by the way, we hope to continue to add to that so.

Hopefully of more of a holistic approach and that of competition helps clients with speed to market and they don't have deposits at each step and work with somebody else.

Yeah.

Okay. That's helpful. And then follow up just curious about the sustainability of some of the trends of you called out and RMS you talked about Jim and she had this resurgence around outsourcing.

The proprietary colonies, how much of that came from the pandemic and how much of that do you think of sustainable and then separately for DSA, you've called out the price increases and the client securing space ahead of kind of the number of times on this call and I'm. Just curious how you think about the sustainability of dose strength as well.

I feel really good about the sustainability of both of them. So jazz has been a nice growth business for us for at least the decade. Those models are critically and increasingly important for the.

Basic drug research.

Whole bunch of services associated with producing those animals and the.

And the complicated produce and providing them with the clients.

I think we've got a low pop because of COVID-19, which we will keep and I think the demand for these models, which continued to be more sophisticated made more easily sort of CRISPR.

And other technologies.

And is it really strong demand for us and we're doing that pretty much across the globe.

And at all of our sites.

We're pleased with the DSA pricing, even though and I kind of break that out and we're really pleased with the.

And the growth and the development and demand there.

See any.

Rationale given the funding environment, giving the new modalities like cell and gene therapy and immunotherapy.

And yes, we got a little bit of increment. The work there to your question, specifically and discovery I would say.

The cost of clients to take a look at us that had.

So and I think the quite happy so we will retain that work and as we add new services like the bag like retro Jacks I think we will get incremental work so.

I would say some of the pricing paradigm with the holdup I would think the clients is minus the demand.

And we made strong and there's no reason or indications.

Soften that we'll see more clients booking slots earlier, which is great for them and as I said earlier way better for us in terms of visibility and planning and.

And getting.

Getting a calendar the straight in terms of the highway space and do a lot of People's maximizing that capacity is really.

Powerful from the bottom line.

Okay. Thank you.

Okay.

Our next question comes from Ricky Goldwasser of Morgan Stanley. Your question. Please.

Yeah, Hi, good morning, and congrats on the quarter, Jim I wanted to go back of the comments around kind of some skewing of room on the on the the talk side earlier on I mean, this is something that we've been talking about for a long time. So are you starting to have any conversations with your customers around.

And pay of play time of type of deals and securing.

The capacity for longer periods of time, given and considering that it takes about 18 months to build capacity.

Poverty.

Yeah.

That would be nice.

Q1 2021 Charles River Laboratories International Inc Earnings Call

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