Q2 2021 Charles River Laboratories International Inc Earnings Call
[music].
Good day, Thank you for standing by and welcome to the Charles River Laboratories International Q2, 2021 earnings call.
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Todd Spencer corporate Vice President of Investor Relations. Please go ahead.
Thank you good morning, and welcome to Charles River Laboratories second 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, who will comment on our results of the second quarter of 2021, following the presentation they will respond.
And the questions. There is a slide presentation and associated with today's remarks, which is posted on the Investor Relations section of our website at IR don't see river Dot Com a webcast replay of this call will be available beginning approximately 2 hours after the call today and can be accessed on our investor Relations website.
The replay will be available through next quarters conference call I'd like to remind you of our safe Harbor, all remarks that we make about future expectations plans and prospects for the company constitute forward looking statements under the <unk>.
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 <unk>.
Non-GAAP financial measures are not meant to be considered superior to from a substitute for results of 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.
Good morning, the <unk>.
<unk> of our leading non clinical portfolio was clearly demonstrated in our second quarter financial performance robust industry fundamentals, our leading to unprecedented client demand across most of our businesses and we're extremely well positioned to succeed in this environment.
Quarter organic growth.
Revenue growth was in the mid teens, even after normalizing for last year's COVID-19 impact and exceeded the long term low double digit target that we recently provided at our Investor day in May.
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 unwavering focus on the flawlessly serving the diverse needs.
Utilizing our capabilities enables them to drive greater efficiency and accelerate the speed of the research non clinical development and manufacturing programs. We believe that the average we have made and continue to make.
Differentiate ourselves from the competition are critical as clients choose to work with a smaller number of <unk> to offer broader scientific capabilities.
Due to the sustained demand we are keenly focused on the execution of our strategy. We are strengthening our portfolio as we did through the acquisition of gene therapy, CMO Viagene Biosciences and late June.
Strategically, adding staff and capacity to accommodate the robust demand and support our clients and enhancing our digital enterprise to provide greater connectivity and exceptional service to them. We believe we will make these investments and remain well positioned to achieve our operating margin.
The 22, 5% and 2024, we believe the success of our strategy is reflected in our second quarter performance. So let me provide some of the highlights.
Quarterly revenue surpassed $900 million for the first time and at $914.6 million from the second quarter of 'twenty..1 represented a 34% increase over last year organic revenue growth of 24, 1% was increased by approximately 8%.
And compared to last year's the COVID-19 impact and the second quarter of 2020 with the greatest impact and the research models and services segment.
And after normalizing for the Covid impact.
The reported mid teens organic growth with double digit increases across all 3 business segments. The operating margin was 28% and increase of 350 basis points year over year.
The improvement was principally driven by the RMS segment, reflecting operating leverage from significantly higher sales volume for research models due in part to the comparison to last year's COVID-19 impact.
Notwithstanding this favorable year over year comparison, we were pleased with the margin progression and the first half of the year and are on track to achieve of full year operating margin of approximately 21% or 100 basis points higher than last year.
Earnings per share were $2.61, and the second quarter and increase of 65, 2% from $1.58, and the second quarter of last year. This result widely exceeded our prior outlook of more than 50% and earnings growth for the quarter, primarily as a result of the exceptional demand environment.
Just on the second quarter performance and our expectation for sustained demand through the remainder of the year, we are increasing our revenue growth and non-GAAP earnings per share guidance for 2021, we now expect organic revenue growth and a range of 13% to 15%.
The basis point increase from our prior range non-GAAP earnings per share are expected to be in the range from $10.10 to $10.35.
Which represents 24% to 27% year over year growth.
And an increase of 35.
At midpoint from our prior outlook.
And we attribute this exceptional performance and outlook to the success of our ongoing efforts.
To enhance our position as the leading non clinical contract research and manufacturing organization.
As well as the pace of scientific innovation, and that's fueling a significant increase and biotech funding and FDA approvals, both of which are tracking to near record levels through the first half of the year.
I'd like to provide you with details on the second quarter segment performance beginning with the DSA segment revenue was $540.1 million from the second quarter and 18, 1% increase on an organic basis over the second quarter of 'twenty.
Driven by broad based demand for both discovery and safety assessment services covered only had a small impact and the DSA segment last year.
And it wasn't a meaningful driver of the year over year growth.
Safety assessment business continued to perform exceptionally well, reflecting robust demand from both biotech and global Biopharma clients and price increases book.
Bookings and proposal volume continued to achieve record highs and the second quarter with strength across all regions and major service areas. The strength of biotech funding is enabling clients to meaningfully invest and early stage programs and due to the unprecedented demand. We are now booking work into the next year as I.
Mentioned last quarter clients are expanding their preclinical pipelines and intensifying their focus on complex biologics to ensure they do not delay the research we believe clients of securing space with us further in advance, which in turn and provides us with greater visibility to support our clients we have.
And to add staff capacity and the resources necessary.
To effectively manage the current demand environment and provide our clients of the timely efficient and high quality service that they have come to expect from Charles River and we believe these investments position safety assessment business, well and we will support low double digit organic revenue growth and the DSA segment. This year.
And we believe the combination of the robust funding environment as well as the deep scientific expertise and willingness to forge flexible relationships with our clients led to another exceptional quarter for the discovery business.
Comprehensive portfolio of oncology CNS.
Early discovery and antibody discovery capabilities, which we recently enhanced through the distributed bio and retro <unk> acquisitions is resonating with clients and clients are increasingly choosing to outsource to integrated discovery partners like Charles River the <unk>.
Spice the robust funding biotech clients continued to maintain eliminate of no internal infrastructure opting instead to invest and their pipelines and utilize our services to move their programs forward to support the robust demand from biotech and global biopharmaceutical clients, we will continue to strengthen our portfolio of <unk>.
Expanding our scale.
Science, and and our innovative technologies through a combination of internal investment M&A and a strategic partnership strategy.
Doing so we are enabling our clients to remain with 1 scientific partner from target I'd.
To IND filing and beyond and solidifying our position as the leading non clinical CRO.
The DSA operating margin increased by 30 basis points to 23, 5% and the second quarter leverage from the robust DSA revenue growth was the primary driver of the margin improvement foreign exchange reduced the DSA operating margin by 150 basis points and the quarter as revenue and cost of not naturally hedged at.
Certain DSA sites, including a safety assessment of operations in Canada. We continue to expect the DSA margin will be and the mid 20% range for the year.
And our RMS revenue was $176.7 million and increase of 44, 5% on an organic basis over the second quarter of 'twenty.
Proximately 33, 4% of this growth was attributable to the comparison to last year as Covid related revenue impact from client site closures and disruptions, which reduced research model of order activity at.
Adjusted for the Covid impact the RMS growth rate was above 10% and strong research activity across biopharmaceutical academic and government clients led most of the RMS businesses to grow above the targeted growth rates robust demand for research models and China continued to be the primary.
The driver of environments revenue growth there has been a resurgence of research activity this year and models volumes far exceed pre COVID-19 levels.
Several of the western markets, the client base and China has transitioned from 1 dominated by academic and government accounts 2 of vibrant mid tier biotech and the <unk> client base, which now represents the majority of our clients and China. We believe the expansion of our client base is fueling increased demand and to accommodate the growth we.
We're continuing to expand our model and services offering and our geographic footprint and western and southern China. We are currently experiencing strong double digit revenue growth and China.
Demand for research models outside of China was also quite strong we believe this correlates with the increased level of non clinical research, that's being conducted by biopharmaceutical and academic clients and the western markets research investments and led to biomedical breakthroughs and new drug modalities and we believe the global.
Focus on scientific innovation and sustainable.
We also continued to win new academic clients from the second quarter, resulting from the COVID-19 related client shutdowns last year and and more recently from digital engagements targeting the academic client base Research model services also performed very well Gms is benefiting from strong.
To us and demand as our clients seek the greater flexibility and efficiency gain.
And we manage their proprietary model colonies.
The complexity of scientific research and the proprietary models of our clients are creating further reinforced the value of proposition for the gems business.
Clients need for greater flexibility and efficiency is also driving demand for our insourcing solutions or is business, particularly for our Cradle initiative, which provides both small and large biopharmaceutical clients with turnkey research capacity of Charles River sites, and addition to expanding our existing tradable presence.
And adding clients and the Boston, Cambridge, and South San Francisco Bio hubs. We're also looking to expand into other regions to provide of flexible capacity solution for our clients and emerging biohazard utilize and cradle also provides clients with collaborative opportunities to seamlessly access other Charles River of services.
Which further enhances the speed and efficiency.
The research programs.
The revenue growth rate for our cell supply businesses Hema accounts, he'll arrow improved and the second quarter, but remained below the targeted level due to continued limitations on donor access we believe cell supply of revenue will increase during the second half of the year as donor availability and capacity improve we.
Expanded capabilities, including doubling of capacity at our cell supply sites, and Massachusetts, and Washington State, which we believe will enable us to further expand our database and the U S and accommodate the robust demand and the broader cell therapy market.
<unk> will provide the critical tools for our new cell and gene therapy CMO of business.
Cognate and by chain. We believe this will be highly synergistic for both Charles River and our clients because it will enable us to move clients cell therapy programs forward using the same cellular products from research to cgmp production.
The RMS operating margin increased to 27, 4% from 991% and the second quarter of last year. The significant improvement was primarily due to the comparison to last year's depressed margin associated with Covid related client disruptions and the corresponding reduction in research models.
The activity revenue from the manufacturing segment was $197.8 million of 26, 6% increase.
And it organic basis over the second quarter of last year. The increase was driven by strong double digit revenue growth and both the biologics testing solutions and microbial solutions businesses. COVID-19 did not have a meaningful impact on the segment's revenue in the last year, but testing on Covid vaccine COVID-19 vaccines has helped acts.
Salary and biologics revenue growth rate this year.
Consistent with the first quarter microbial solutions growth rate and the second quarter was well above the 10% level, reflecting strong demand for our and the safe endotoxin testing systems cartridges, and core reagents, and all geographic regions as well as that Keygen ex microbial identification services.
Covid related client access restrictions and effectively behind US we were pleased with the strength of the underlying demand for our endotoxin testing platform, which reforms FDA mandated lot release testing for our clients critical quality control test and need.
And the advantages of our comprehensive portfolio continue to resonate with clients and we believe that our ability to provide a total of microbial testing solution will enable microbial solutions to deliver at least low double digit organic revenue growth this year and beyond which is consistent with the historical trend pre COVID-19.
The biologics testing business reported another exceptional quarter of strong revenue growth that was well above the 20% growth target for this business robust demand for cell and gene therapy testing services continued to be the primary growth driver. There has been a rapid increase and the number of cell and gene therapy programs and development.
2 of approximately 3000 programs now and the pipeline with approximately 2 thirds and the preclinical phase which is expected to continue to fuel the strong growth COVID-19 vaccine work was also a meaningful driver of biologics second quarter growth, but the underlying biologics growth trends remained above the <unk>.
20% level, even without the incremental COVID-19 testing revenue.
We believe the cell and gene therapies will continue to be significant growth drivers over the long term and demand for COVID-19 vaccine test and is showing no signs of abating.
We believe the commercial production of Covid vaccines will continue from any of us to come and supporting the demand for our services. These factors are contributing to the strength of the demand environment and we continue to build our extensive portfolio of manufacturing and services to ensure we have available capacity to accommodate client demand.
The manufacturing segment second quarter operating margin declined by 420 basis points to 33, 2%. The primary driver of the decline was the addition of cognates CMO business as well as higher production costs and the microbial business cognate as of profitable business with the solid operating margin.
And but its margin is below the manufacturing segment.
Coupled with the addition of advising and and the third quarter, we expect a full year of manufacturing margin slightly below the mid 30% range. However, beyond 2020, and why do we expect this headwind to gradually dissipate as we drive efficiency and is the significant growth, we anticipate generates greater economies of scale.
And the optimizes throughout our CMO of sites.
Early in the second quarter cognate bio services officially join Charles River, followed by Viagene Biosciences and late June we were very pleased to us of both teams the teams to the company.
Align with Haemacure and Solera these businesses form the core of our cell and gene therapy, offering and we believe they will be highly complementary to our biologics business and and our portfolio is the hole.
We are pleased with the initial progress and the integration and the addition of the cell and gene therapy CMO services to our comprehensive portfolio, which is resonating with clients and clients are beginning to explore opportunities to streamline and biologics development workflows by using cognate and <unk> services.
And their legacy clients are already looking to utilize other products and services within the Charles River portfolio to drive greater efficiency and the development and manufacturing activities.
We believe the acquisition of <unk> Biosciences with its viral vector based gene delivery solutions fulfills our objective to create a comprehensive cell and gene therapy portfolio, which spans each of the nature of <unk> platforms gene modified cell therapy viral vector and plasma.
<unk> production and combination with cognates Memphis based operations, we are established and end to end gene modified cells therapy solution and the U S, which we believe is critical to support our clients.
The more seamlessly.
Our goal is to enable clients to conduct analytical testing process development and manufacturing for these advanced modalities.
With the same scientific partner, enabling them to achieve the goal of driving greater efficiency and accelerating the speed to market.
As a result of the successful execution of our strategy to date, we believe the portfolio is the strongest it has ever been our assets to enhance our scientific capabilities deliver flexible outsourcing solutions and provide greater value to our clients and <unk>.
Hey, Charles River and important partner for our clients with the biopharmaceutical industry benefiting from record funding levels.
We are experiencing robust demand for our essential products and services to support this demand and to continue to enhance the value. We provide to clients. We will continue to move our growth strategy for acquisitions and strategic partnerships remain vital components of our strategy as we endeavor to expand.
And the scientific expertise global reach and innovative technologies that we can offer clients across all 3 of our business segments investing and our scientific capabilities as well as internally on the necessary staff resources and our digital enterprise will help us ensure that we can meet the needs of our clients.
And the successful execution of our strategy will not only enable us to enhance our position as our clients' partner of choice from concept to the non clinical development to the state manufacturer of the of Lifesaving Therapeutics. It will also allow us to achieve our longer term and financial targets of low double dip.
Organic revenue growth and an average of approximately 50 basis points of operating margin improvement beyond 2021 and <unk>.
Inclusion and I'd like to think of clients and shareholders for support and our employees for their exceptional work and commitment and.
And now I'll ask David to give you additional details on our second quarter results and updated 2020 volume guidance.
Thank you Jim and good morning.
Part of the game and I remind you.
Primarily to non-GAAP results.
We exclude amortization of acquisition related charges.
Hospitals, primarily from our global efficiency initiatives.
The comparable.
The strategic.
And so from a block.
Many of my comments will also refer to organic revenue growth, which excludes the impact.
Foreign currency translation.
Once again, we are very pleased with another strong performance in the second quarter.
Thus revenue from any share.
The growth performed.
The organic revenue growth of 24, 1% and <unk>.
<unk>, 8% relates to each of last year as COVID-19 impact on operating margin expansion of changing 50 basis points.
The primary drivers behind the share growth of 62%.
The 61.
These results also reflect the favorable comparison to the second quarter of last year, and which we experienced the peak of the COVID-19 related impact and kind of disruptions.
Based on our strong second quarter results and and.
Ah patients for the underlying strong demand to continue we have increased our.
Financial guidance, and now expect to deliver organic growth and equally.
And the range of 14% to 15% from full year.
Primarily as a result of the enhanced scope of pumps.
And to a lesser extent favorable tax rate, we raised our earnings per share guidance of 45 sort of range of Campbell and gemstones and 10.
And <unk>.
Which represents a year over year growth.
<unk> reported a 27%.
By segment.
<unk> outlook for 2021 reflects the strong business environment.
And we continue to expect organic revenue growth and the high teens driven by the recovery and research models Ultra and <unk> on the impact of it would take the banking on plumbing last year.
Well as exceptional and channel.
Our outlook for the TSA is unchanged with low double digit organic revenue growth per year.
The reflecting continued strength and early stage research activity.
Thank you and <unk> segments.
And can achieve high teens organic revenue growth.
I'll be volume outlook is based on the exceptionally strong demand and biologics driven primarily by LNG type programs and an increase in contribution from the microbial solutions.
We just expected to return to at least low double digit growth.
And keeping the acquisitions of cognate and more recently <unk> Biosciences manufacturing reported revenue growth rate is expected to be and the low to mid 40% range.
With regard to the operating margin expectations for the segment contribution remained mostly unchanged from <unk>.
The RMS operating margin meaningfully above 21 percentage.
Full year, PSA and the mid 20% range and manufacturing slightly below the Paul.
And the outlook principally reflecting the addition of aging and late June.
No the molecule.
And this contributed to the second quarter margin expansion, taking 5.6 percentage of revenue of $51.2 million and the second quarter compared to 6.1% of revenue last year.
Cable infrastructure enabled us to drive greater efficiency, even as we continue to make investments to support the growth and meet the needs of our clients.
We continue to expect unallocated corporate costs to be.
And the mid 5%.
The range is essentially revenue for the full year.
The second quarter non-GAAP tax rate was 24% representing 60 basis points from 21% from second quarter of last year the.
The decrease was due to a favorable policy.
Associated with stock based compensation, which resulted from increased equity exercise and.
And award activity.
The stock price levels during the quarter.
It was partially offset by higher tax expense.
With the UK tax law change.
For the full year, we are reducing our outlook for a range of 19, 5% to 25% from our point of view of the tax rate and the low 20% range principally driven by the higher.
On the stock based compensation.
Total adjusted intra.
Interest expenses and culture.
Was $28 million and increase of $3.7 moving policy constantly and $1 million year over year due to higher debt balances.
Primarily to the Companys acquisition.
And at the end of the second quarter, we have outstanding debt of $2.7 billion representing growth of multiple of these ratios of about 2 point James.
Subsequent to the end of the second quarter. The completed the acquisition of hygiene on June <unk>.
On a pro forma basis, including banking, our gross leverage ratio remained below 3 times, which we attribute to our robust free cash flow generation of help enable us to weekly.
Patients.
For the full year, we now expect total adjusted.
The interest expense to be slightly below our point of.
And the range of $82 million to $85 million, primarily reflecting the accelerated debt repayment.
Free cash flow was Washington, and $40.2 million bottles from the second quarter and increase of $3.
The day $135 million for the same period last year.
The primary drivers of the increase and a strong quarter.
The operating performance and distributions from long beach, and investments, partially offset by higher capital expenditures and.
View of our robust results and the bulk of the.
Here, we have the increased our free cash flow of.
$65 million and more.
Free cash flow.
Approximately 500 moving dollars for the full year.
Okay. Thanks for the $46.4 million in the second quarter compared to $26.8 million last year the <unk>.
Increase was due primarily to the hung in the project some investments, which will slow the point Julian.
And the COVID-19 disruption plus tool and our dotcom.
Charles.
We continue to expect capex to be approximately $220 million for the full year.
A summary of our revised financial guidance for the full year, including all the recent acquisitions can be found on slide 14 line.
Well third quarter outlook.
Book reflects the continuation of the strong demand environment.
We do expect and growth rates.
And this will normalize from the second quarter levels, because we have all the restaurants of the peak of the COVID-19 related revenue losses last year.
Accordingly, we expect organic revenue growth and the low to mid teens range and reported revenue growth and the low 20% range.
You should note that we are not forecasting of meaningful difference between the first half second half the growth rates.
And normalizing last year as Covid impact and you want the points and as we believe the robust demand environment is showing no signs of abating.
We expect low double digit earnings per share growth when compared to last year's fourth quarter level of $2.43.
I will remind you bumped the DSA operating margin mobile third quarter of last year included a 50 basis point benefit from it the scope of milestone payments, which will impact the income.
In closing, we are very pleased with coke and coal.
The results, which included another quarter of the bus revenue earnings and free cash flow growth.
We continue to be focused on the continued execution of our strategy and achieving our financial and operational target, which we're moving forward toward our longer term targets of 2024.
Yes.
That concludes our comments operator, we will now take questions.
At this time, if you would like to ask the question Press Star and the number 1 on the telephone call calendar of telephone.
And we ask the 2 Lehman and only 1 question.
And your first question comes from the line of carry.
Coldwell with Baird.
Thank you and good morning.
The question is on preclinical safety assessment.
We are hearing and our.
Curious channel checks that sites or book to well into 2022, I know you've made a comment on that and your call.
The hearing that more broadly.
And we're also hearing that some of your competitors have been placing massive long term model purchase commitments multiyear commitment is very large.
Which I think as the sign of the strength of the industry, but it really comes down to the question of capacity and where you stand what kind of investments you're making how do you balance this supply demand imbalance. So your clients don't try to seek other solutions and the marketplace just any thoughts on that would be helpful.
Yes, Eric.
We're investing in capacity.
Thoughtfully and aggressively geographically multiple sites.
At once.
And not dissimilar to what we've done historically.
We're continually reviewing where we think.
And that May add will be for the next few years.
And ensuring that our capacity needs are.
Capacity is sufficient to accommodate that.
I don't think its the.
A bad thing that clients are reserving space earlier, which allows us to plan better obviously gives us greater visibility from a staffing and expense point of view. It also provides a more orderly business models, frankly, and it's not all of that the similar to the way it was years ago.
Where we had similar types of demand and the client base of was quite different so.
We're.
The principal conversations around here.
Ensuring and working hard and ensuring that we have sufficient headcount and physical capacity to accommodate the demand not just and safety by the way obviously safety is our biggest business. So principally the conversation goes they are but.
And certainly across biologics and discovery and other business and so.
And chatter and our best.
Well.
We're relatively focusing on.
And insurance companies.
Sufficient capacity.
What we put this portfolio together.
<unk> to service the clients that the.
Outsource more work so.
We are very much on top of that Eric.
Jim if I could squeeze 1 more and I noticed in the press release, the comment about higher production costs and microbial side.
And to get a little more color on that.
Yes.
Nothing really significant.
And certainly the raw material costs are kind of higher at the moment.
Supply chain issue.
So they're having quite transitory.
Margin is still quite good and that business and the growth rate really was was terrific. So.
Just kind of kind of a short short term blip.
Okay. Thanks, very much good job of at the quarter.
Thanks, Eric.
Your next question comes from the line of sight.
L Peterson with Jpmorgan.
Hey, good morning.
I'll start with the question on manufacturing and the back of the <unk> deal. You had noted clients are beginning to explore opportunities to streamline development with you I guess as you look at your cell and gene therapy portfolio today are.
Are there any existing gaps and can you talk a little bit more about how <unk> fits in with the rest of that business.
Yes.
I think it's a pretty solid portfolio of Tyco.
Have the sales, which at the cell therapy, obviously, there is no cell therapy.
And with scale up without that so we like that we started first with that we now have.
The significant.
<unk> capability and cell therapy.
Manufacturing, particularly modified cell therapies.
And now we have the viral vector and plasmid DNA and capability of both sides of the pond value us and Europe.
And which give us substantial capability as well.
And maybe some nuances and of course, we're always looking and M&A opportunities I don't want to get too specific except to say that I think that M&A would be principally around and just increased scale and and enhanced.
The geographic.
The dispersion and diversity and growth I do think that.
Not unlike other businesses geographic proximity.
And when you're dealing with live cells is not unimportant and we'd be beneficial and clients still like the ability to be relatively close to there.
External providers of services if possible so the.
Is there still a fair number of assets out there that were quite interested in a variety of sizes at the same most of them are on us.
Smaller side.
Some of electrical and so we may have wanted but it goes in a lot of available.
The.
If we are unable for whatever reason or unwilling because of the price point to buy and the of the targets. We currently have I think I think we do have a very.
We have a terrific and installed base and the growth rates of research that will become a big business and of course, just want to remind you that we look at the sell.
Cell and gene therapy assets, which are whatever it is now 18 to 24 of fivefold and we look at those right back to the combination with our biologics business, which is very high growth right. Now you heard us talk about north of 20% terrific capacity here those businesses of joined at the half of the testing of those sales.
Cell and gene therapy products before they go into the clinic and <unk>.
Hopefully after they're approved.
Before they go into patients will be just as essentially of the contract manufacturing pieces of it. So we're thrilled to be able the piece those together pretty big portfolio and I think that we didn't update and Thats called I think we've said the challenging therapy.
Revenues.
Great and the 10% of the total Charles shows is the big number and it's kind of grow disproportionately fast so.
Very pleased from the portfolio.
Alright, and then a follow up on RMS, obviously, a number of those businesses over the past year from from the challenges around the pandemic. If you look at the outsourcing and also the cradle.
And sourcing initiatives I guess and so we're kind of past the halfway point part of this year and working through getting debt to labs and <unk>.
Running how do you feel about the durability of some of those trends.
In particular on around Jensen, and grateful and sourcing.
Really good.
While we certainly got and are enjoying enhanced outsourcing from clients that did work themselves or didn't use us or use the partially and we really.
We really proved the value proposition that we have is by staying open and doing this great work.
The mice, but put it and but putting aside the COVID-19 pop as it were.
This significant demand increasing demand for gems models and specialty models and the more complex models and more translational models for sure. This is business is increasingly more interesting.
And the cradle.
These cradle locations and principally in the.
Cambridge mass and South San Francisco and.
And eventually other other important parts of the world.
High revenue generators high margin businesses and significant feed as to other parts of of our business, particularly the service enterprises, so being in those environments.
Being part of the Cambridge.
So the Kendall square.
Universe has been critically important to us so.
And I think the growth rates and.
Margin contributions are absolutely sustainable and those businesses and we will continue to expand capacity costs and the current places that we are located but also we're going to add new sites as well.
Okay. Thank you.
Sure.
Thank you of a question from the line of day widely with Jefferies.
Close enough I guess good morning. Thanks, Thanks for taking my question.
I wanted to Jim and ask about China tie a couple of things together, there you mentioned that day.
And the demand and China is kind of rotated from the academic.
And government sector to more private sector of client base and I'd be curious your comments about how that and.
Influences your price points and margins for your business in China and then the second part of my question would be.
Given the success, there and models and the evolution and strength in investment in Biopharma and China in general is it time to rethink or start thinking about.
Planting other business lines, and China to leverage off of your existing base.
Yeah. So.
Huge investment instead of the Chinese government annualized sciences.
The venture capital front and center.
A plenty and so.
And we're seeing significant investment and sort of classic and new pharma companies and most of the biotech companies.
While I don't personally I think the market will overtake the U S. I think it's going to be the second largest market for sure.
Yeah, and it provides enormous demand for us.
Okay.
Yes.
Look, we'll always try to get more price general proposition, including in China. So I wouldn't say I wouldn't say otherwise.
No the cost structure is significantly lower than that of the price of the world is of the price points, but the margins are comparable.
We have to be careful given the fact that we have lower.
We have a lot of local Chinese competitors, who I think are.
And part or and whole financed by the government and so they of the ability to really go after us always on price just like we've seen in the U S and Europe.
Our RMS competitors worldwide, principally compete with us on price and not so much of quality.
Or service.
But having said that we'll we'll continue to drive price as much as we can because of course, Costco up and China as well.
And of course, we were growing at least the RMS franchise very nicely. So lots of investments and services is gems et cetera lab testing of ads.
And China, and significant investments and new production facilities.
Facilities.
Second question is a tough 1 to answer so I'll just remind you we have a large and growing RMS business we have.
And they actually of a large microbial business suggest that.
Since the testing is unregulated over there. The total revenue contribution is relatively modest and we have recently within the last 12 months.
And the sort of set of of joint venture and our biologics business which of.
Pretty excited about because we have many of our major competitors over there I think is the general.
Proposition, we would like to do everything we do and China, and we certainly would like to do discovery and safety and as we've said countless times and.
M&A.
Multiples are a real deterrent for us.
And there's no way, we can rationally by companies over there to build out of our portfolio without crushing a return so we're not going to do that so the.
And the issue for us is.
And when do we want to enter and how do we do that thoughtfully and fiscally responsibly with sort of of JV type thing likely talent biologics that salaries of the possibility and do a greenfield.
Our activities, there which is.
It's slower.
Which we wouldn't like that it's obviously, the less money and buying a company but.
Not insignificant.
And just going to have the acute continue and continue to evaluate the market demand I would tell you that we are so busy as you know from our numbers.
And the U S and Europe that we have.
We have lots of work and great growth rates and escalating operating margins and without the complexity and.
Some of the challenges of doing work in China. So.
We're not we're not particularly frustrated with it right now and I would say, it's a longer term strategic conversation.
Moving all the time of the Charles River.
Very helpful. Thank you James.
Sure sure the.
The next question comes from the line of.
The breaker with William Blair.
Hi, Thanks, very much Jim My question relates to the capacity availability for cognate and hygiene can you just remind us where those programs are in terms of their capacity build out should we be assuming on the.
So sorry step up and Capex and the next couple of years or is that already sort of then and the long term plan.
Definitely and our guidance so what we told you about the accretion.
Of those businesses to our top line to our EPS and.
And improving operating margin.
Is real.
Both of those businesses have a significant amount of.
And of available capacity by that I mean.
They were and that process of expanding capacity when we bought the both of them are actually so that will continue it's a significant about the space.
Yes, it's an interesting 1 John the bill.
So potentially sell explosive the.
And the ability to take clients, particularly in the manufacturing piece of the PRC GMO.
Piece for the modified cell therapy is to take the.
The strong clinical production to commercial which we can see when a couple of the client at least.
Depending on how <unk> and.
Impactful.
Thanks.
And will lead up a lot of capacity so.
We're just going to have to live through and we're going to always have to have incremental capacity available by that I mean rent space have a plant to the finish it either all of <unk>.
<unk> and slices sort of chunk out there.
And stay very close to the clients how the.
Of the drags of doing what phase, there and how well financed out of there, what's the competitive and a scenario and.
We're doing that really well so I think 1 of very good place right now as we see capacity for the next set of now.
The areas.
But what kind of have to stay ahead of it.
Yes.
The guidance that we gave recently about we anticipate that capex will be around 7% of our revenue that incorporates and accommodates for.
Significant growth, certainly and safety, certainly and discovery and certainly in the CMO business, which.
And is obviously of new business for Us I don't think its.
Particularly more capital intensive and lots of other things that we do and.
And I know that but in.
That debt the cell therapy type of work that we're doing is and not saying, it's not capital intensive and it's not as intensive as some other aspects of the CDM out of space. So we think we of our arms around sort of scale growth and cost.
And it sounds great. Thank you.
Sure.
The next question comes from the line of Elizabeth Anderson with Evercore.
Okay.
Hi, guys. Thanks, so much of the question.
And you could expand on Tito's question, a little bit and sort of talk more about the cross sell opportunity and cell and gene therapy between RMS and the CBO GMO business so far.
Where are you in terms of the.
Interest of clients due to the whole of the whole sector and with you.
And then sort of how do you see that progressing over the next day.
Thanks.
Yes, I mean, we see progressing well.
And if you look at.
And if you look certainly of most of our large clients I would say that day, they buy most and some buy everything that we sell all of that product and all of our services. So we are and increasing lie and increasingly more important provider significant spend with those companies. We are dealing with very senior people there and they.
They look at us as an essential provider of a whole bunch of things that they need the <unk>.
Small of the clients get particularly of biotech clients.
While many of them are pre revenue of lots of them of public and they've got 10 or 15 of $20 billion market caps. So the non small companies and they have net and while they may have the money. They have no as I said in my prepared remarks zero desire to build these things out of internally and I think thats going to get increasingly more new.
And whilst.
That's the kind of less and the desire of particularly and things like cell and gene therapy of biologics testing or for short of safety.
So the broader of the portfolio.
I think I think the more client and capture that we have we're already seeing almost immediately and as I.
And as I commented on briefly in my remarks clients and we're working with.
And with cognate and Biogen and interested in the.
The broader range of services that Charles River has and.
And Conversely clients that we're working with Charles River very interested that we know of the cell and gene therapy.
Capabilities. So everything is about speed to market with all of these companies regardless of their size and.
And the ability to work with a and do as much as possible of the single source of kind of get the pricing behind you and not have to renegotiate every step of the way definitely accelerates. The whole process also of some of these small companies and a regulatory capability is really helpful to them to kind of guide them for the.
The FDA filings of filings with out of the regulatory agencies around the world. So.
Given the.
The fact that there are 3000 and cell and gene therapy drugs and development, 2 thirds of which are and preclinical.
And hopefully the highest number of which we are already working with and we will continue to work with having these capabilities was really essential for us to participate and a really large portion of the marketplace.
Got it and that's really helpful. Thanks.
Your next question comes from the line of Huang with Bank of America.
Alright, alright, thank you for the question.
Regarding your margin targets from 2021 and 2024.
What would you say is the likelihood or.
The manufacturer and support margins could remain and the low thirty's given the investments and then you can take place in this area and how do you see the negative impact of foreign exchange and DSA margins playing out.
And the rest of the this year and in relation to your 2024 margin target.
Okay I'll share that Jim.
Okay. So I'll take the FX long DSA, but Jonathan.
So you're seeing of 150 basis point headwind.
And DSA for Q2, and basically average it out just just to round about 100 basis points of the first half of the year.
And actually we actually think the second half of the year would be somewhat similar that said and we expect to your question about how the FX might kind of ebbs and the longer term.
As we've seen through the history, we should see that river.
I can't predict when the FX will be the.
At some point, we should see some benefits coming and certainly over the periods of 2024.
And in respect to the question around the.
The the CDMA drag on the margin and.
And in particular cognate.
Well to start we're not expecting to see and.
And meaningful impact on the consolidated operating margin, but to your question. Yes. There is the drag on the manufacturing segment's margin.
And as we've said before.
We expect to see modest margin improvement over the next day yet.
And as we deliver the acquisition acquisition synergies.
We've got a great became of departments. We've got good back office functions that can bring some synergies to those businesses.
And we will continue to have the scale of the business and like we do with debt free.
Breaking unit, we're looking to drive operating efficiency and with the high revenue growth, where we're expecting north of 25% for the foreseeable future we would get economy does as the.
And you feel like the fixed cost become less prevalent.
Back to the whole of business.
So in terms of margin progression, we would expect.
The with time, the manufacturing business and improve.
Certainly from the date position.
And in terms of the longtime guidance that we gave.
Just 3 months ago.
Good day that we were expecting to get into the mid 30% range.
Clearly, we will do what we can to improve that further but at the.
The stage.
We're posting over the next few years mid thirties kind of manufacturing.
Thank you.
Your next question.