Q2 2022 Charles River Laboratories International Inc Earnings Call

August 3, 2022

Ladies and.

Thank you for standing by and welcome.

To the Charles River Laboratories second quarter earnings Conference call.

This call is being recorded at this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During this period you will need to press star one on your telephone.

Do you want to remove yourself from the queue. Please press star two.

Actually if you should need operator assistance. Please press star Zero I would now like to turn the conference over to our host Todd <unk>, Vice President of Investor Relations.

Good morning, and welcome to Charles River Laboratories second quarter 2022 earnings Conference call and webcast. This morning, I'm joined by Jim Foster Chairman, President and Chief Executive Officer, and <unk>, <unk> Executive Vice President and Chief Financial Officer.

He will comment on our results for the second quarter of 2022.

Following the presentation. They will respond to questions. There is a slide presentation associated with today's remarks, which will be posted on the investor Relations section of our website at IR <unk> Com a webcast replay of this call will be available beginning approximately two hours. After the call today and can also be accessed on our Investor Relations website.

The replay will be available through the next quarters conference call.

To remind you of our safe Harbor overview.

Marks 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.

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.

Good morning.

In our financial results reflect the sustained trends that continue to support our businesses.

And resulted in 9.5% organic revenue growth in the second quarter piece.

These trends were offset by headwinds from our <unk> business and foreign exchange, which were the factors that led to the revised second quarter outlook in early June .

Coupled with interest rates have intensified since then leading to todays reduction in our revenue growth and earnings per share guidance for the full year.

We believe that our guidance for the year appropriately reflects the current macroeconomic environment with regard to foreign exchange interest rates and cost inflation, which has changed dramatically since the beginning of the year.

I would also like to note that our revised guidance does not reflect any meaningful slowdown in biotech client activity.

As biotechs continued to be the principal driver of revenue growth and demand remains healthy.

<unk>, we are pleased that at DSA and RMS segments remain on track to achieve their initial revenue outlooks for the year of mid teens and high single digit organic growth respectively.

Our largest business safety assessment continues to benefit from our growing backlog that is well above the prior year level.

Solid booking activity as usual, we continued to monitor key performance indicators and are having regular conversations with our biopharma clients, who spending patterns for the safety assessment programs to date remain largely unaffected by any change in biotech funding.

Calgary services business, which only represents about 15% of DSA segment revenue is experiencing longer decision, making processes by seven science to initiate new projects.

Before I provide more details on these trends, let me provide highlights of our second quarter performance and updated outlook for the year.

We reported revenue of $973 $1 million in the second quarter of 2022, a six 4% increase over last year.

Organic revenue growth of nine 5% was driven by strong performances from the DSA and RMS segment.

<unk> offset by a low growth rate in the manufacturing segment due to the C. D ammo performance.

Lower than expected see BMO revenue reduce the organic revenue growth rate by slightly more than 100 basis points from the second quarter.

The operating margin was 21, 8% an increase of 100 basis points year over year.

The improvement was driven by the DSA segment as well as lower unallocated corporate costs, reflecting actions, we have taken to responsibly manage our expenses.

Earnings per share were $2.77 in the second quarter, an increase of six 1% from the second quarter of last year low.

Low double digit operating income growth was largely offset by higher interest expense and tax rate compared to the prior year.

Second quarter earnings per share were in line with our revised outlook despite incremental pressure from the lower revenue from our CMO business, the strengthening dollar and rising interest rates over the past two months. These factors are the primary reason for the reduction of our revenue growth and earnings per share guide.

For the full year.

We now expect revenue growth in a range of 9% to 11% on a reported basis.

10% to 12% on organic basis for the year Foreign exchange is now expected to reduce the reported growth rate by 350 basis points or 200 basis points more than we forecast in may.

Lower than expected <unk> revenue is expected to be at 150 to 175 basis point drag on the organic growth rate in 2022.

non-GAAP earnings per share guidance is expected to be in a range of $10 70 says to $10 95.

Which represents a reduction of 80 cents at the midpoint.

Foreign exchange and interest expense have generated a combined headwind of a.

Approximately 40 since early June .

<unk> will provide more details on these non operating items shortly.

Tempered expectations for our <unk> business in the near term.

Primary driver of the remainder of the earnings shortfall and are a result of several factors first following last year's completion of a large COVID-19 vaccine production contract cognate UK side, we are retooling that production suites and retraining staff to returning the capacity to its <unk>.

<unk> purpose.

<unk> plasmids, which has taken longer than expected.

We have also invested time and resources and preparing for regulatory audits.

Upgrading other sides to cgmp production quality.

These actions will generate new business opportunities in the future, but they have had a near term impact on the business. Furthermore, likely early discovery acquisition in 2014, the business development process for cell and gene therapy CGM off services is highly tactical and scientifically complex requiring.

Longer lead times for clients took place new projects and partner with us across our expanded offering we are making good progress, bringing our cell and gene therapy services together and working towards these businesses, becoming fully integrated within themselves and with a broader portfolio with regard to the integration of last year's <unk>.

<unk> and <unk> acquisitions.

<unk> implemented a refined vision and a strategy for a combined <unk> business, which includes developing centers of excellence.

Two minutes at a cognate UK operations.

Beryl vectors advised gene in Rockville, Maryland, and for gene modified cell therapy production in Memphis, Tennessee.

We believe this new structure will provide us with a distinct competitive advantage because it will enable us to optimize our internal processes and offer clients greater flexibility efficiency and enhanced speed for the development and go to market efforts. We've also strengthened the management teams and are rebuilding the C D.

<unk> sales team, creating more contact points with clients as we endeavor to further strengthen the pipeline of new projects.

We are also adding new capabilities through modest facility expansions as we announced in June we are expanding our Alderley Park UK operation as part of our center of excellence for plasmids and we're upscaling other sites for regulatory compliance and commercial readiness. We are very pleased to report that our Memphis.

Site was recently audited.

Proved by European regulatory authorities or the EMEA to commercially manufacture cell therapies. This is a significant accomplishment that prepares us to undertake future commercial projects.

We are encouraged that these developments will help improve the performance of the CMO business next year.

Early discovery, we believe our <unk> business is an integral part of our essential portfolio because it enables clients to access a comprehensive solution for cell and gene therapy research development and production from one scientific pod.

Clients are continuing to require high quality scientifically differentiated solutions in the cell and gene therapy sector and this will only intensify as more therapies that commercialized as a result, we believe the <unk> growth opportunity remains robust that we have the right scientific capabilities.

In place to be a uniquely ideal partner for our clients.

I will now provide details on the second quarter segment performance beginning with the DSA segment revenue for the DSA segment was $591 $9 billion in the second quarter.

12, 9% year over year increase on an organic basis. We are very pleased that the DSA organic growth rate improved by 340 basis points from the first quarter level and reached the low double digit range as previously expected.

Performance reinforces our expectation that there will be meaningful DSA growth acceleration throughout the year.

Based on demand and backlog trends, including working through higher pricing already booked we continue to expect that the growth rate will approach 20%.

Second half tracking to our initial plan.

Higher demand in meaningful price increases throughout the sequential growth acceleration in the safety assessment business in the second quarter.

The second quarter backlog increased on a sequential basis and also continued to be significantly above prior year levels.

Backlog, coupled with solid booking activity in the second quarter.

Currently supports our second half outlook.

Clients are emphasizing speed steady lead times and the availability of space today, more so than price when determining which see arrow to partner with for their preclinical programs.

She has several clients have chosen to secure space with us.

Take or pay arrangement to reserve the steady states in advance.

We anticipate that additional clients will agree to similar churns to secure space.

Our speed and flexibility on working with clients.

Our superior client service and our broad scientific expertise continue to resonate with clients and differentiate us from the competition.

With our capacity well utilize both in terms of people and infrastructure, we continue to implement new operational initiatives and evaluate how those two enhanced labor utilization and infrastructure efficiency as well as steady scheduling.

I believe that we are better positioned to accommodate the higher demand that we are forecasting in the second half of the year because of the significant number of staff that we hired over the past year.

Because of the strong backlog, we believe that we have excellent visibility in the safety assessment business.

Confident that the anticipated DSA growth acceleration will continue in 2022 for.

For next year, we already have a large portion of our safety assessment revenue booked into backlog.

The revenue growth rates of the discovery services business improved meaningfully from the first quarter level as expected.

I noted we have experienced some lengthening in a time clients take to commit to and begin new projects given the shorter term nature of the backlog and projects cycles for this business is expected to slow the discovery growth rates for the remainder of the year.

Hi Technology partnership strategy has been a very successful means of broadening our portfolio.

It has enabled us to continue to add heading edge scientific capabilities across many of our businesses with limited risk.

We continue to believe our clients' willingness to outsource more of their discovery programs will be predicated on our ability to provide them with innovative capabilities to meet our critical research needs.

The DSA operating margin increased by 180 basis points to 25, 3% in the second quarter due to increased pricing and leverage from the investments in staff to support higher steady volume.

For the year, we continue to expect DSA operating margin will improve as the growth rate accelerates and we continue to leverage staffing investments.

RMS revenue was $186 4 million.

An increase of eight 5%.

And organic basis over the second quarter of 2021 and in line with our high single digit outlook for the year.

<unk> revenue growth was driven by strong demand at meaningful price increases in the research models business in North America.

Well as for research model services, particularly insourcing solutions and Jess Yeah.

The RMS growth rate did not improve from the first quarter level as previously anticipated.

Due primarily to the research models business in China.

Revenue for our China business increased.

Due to COVID-19 related restrictions in the Beijing and Shanghai regions.

Growth rate was limited and reduce the RMS growth rate by just under 200 basis points in the second quarter.

These restrictions in China have now been eased and the overall revenue impact will be modest. So RMS is still on track to achieve its outlook for the year.

Research model services also had another excellent quarter.

By the Insourcing solutions and <unk> businesses Insourcing solutions growth was driven by the Cradle initiative or Charles River accelerator and development Labs, which provides turnkey research capacity to small and large biopharmaceutical clients in <unk>.

Clients are increasingly adopting this flexible model to access laboratory space without having to invest in internal infrastructure.

Acquisition of explorer labs.

<unk> and April came at an opportune time, enabling us to provide clients with additional capacity.

<unk> capabilities, principally on the West coast. It also added a new growth engine for the RMS segment by allowing us to accommodate more of our biopharmaceutical clients needs, particularly biotech clients, who have limited or no internal infrastructure in which to conduct research to me.

And for creative Atlantic's, Florida continues to be robust and explorer had an excellent first quarter as part of Charles River.

We are continuing to expand the footprint of cradle and explorer to support growth and have added new facilities in California, and London in the second quarter with the goal of operating at least 25 librarians facilities with over 300000 square feet of turnkey rental capacity.

By the end of 2022.

Greg last floor also provide us with a new and unique pathway to connect with clients at earlier stages. As these clients will be able to easily access additional services across a comprehensive discovery and non clinical development portfolio. We are very pleased with the performance of this business and delighted to what.

Awesome explore to Charles River.

In the second quarter, the RMS operating margin declined by 250 basis points to 24, 9% driven primarily by the Covid related revenue impact in China Explorer has healthy margins for our service business had an excellent second quarter, but it is expected to be a smaller margin headwind.

And in that segment for the remainder of the year as it continues to open new sites.

Revenue for the manufacturing segment was $194 8 million, an increase of 1% on an organic basis, reflecting lower revenue and the CMO business as discussed as well as a challenging prior year comparison for the biologics testing and microbial solutions businesses.

With a 26, 6% segment organic growth in the second quarter of last year.

Both of these businesses are expected to generate revenue growth that approach that targeted levels for the year.

Growth prospects for these legacy manufacturing quality control businesses remain robust and they will continue to be principally driven by demand for biologic drugs, including cell and gene therapies and other complex biologics.

Cell and gene therapies will continue to be the primary growth driver for our manufacturing segment.

<unk> the rapid increase in the number of cell and gene therapy programs in development today more than 3000 cell and gene therapy programs are in the pipeline I talked about which has grown at an average rate above 20% over the last three years.

With approximately 70% of programs in our preclinical phase and less than 5% of programs in phase III clinical trials or later, we expect these advanced drug modalities will continue to fuel a robust biologic testing growth and generate new business opportunities for the CMO business, particularly as additional therapies.

Reached commercial approval.

We believe our consolidated biologic solutions offering.

We will provide incremental opportunities for clients to streamline their biologics development workflows and conduct their analytical testing process development and manufacturing activities with Charles River.

Manufacturing segment's operating margin declined by 460 basis points to 28, 6% in the second quarter of 2022.

Alex entirely driven by the CMO business, we have taken actions to manage costs and investments both in the CMO business and in other areas.

To limit the impact of the revenue shortfall for the year.

With regard to our companywide capital priorities, we have built an excellent foundation for cell and gene therapy solutions since 2020 through M&A.

And we will focus on integrating these enhanced scientific capabilities.

As well as all of our recent acquisitions.

We will still evaluate strategic acquisitions, we intend to focus on debt repayment for the remainder of the year.

We also continue to diligently monitor key performance indicators and modify plans for investments, including hiring and capacity expansions should the growth prospects for our business change.

In this regard we are strategically aligning our hiring and facility expansion plans for our CMO business with the current and projected growth rate.

Our goal is to balance the need to continue to make disciplined investments to support our growing businesses responsibly controlling costs and enhancing value for our shareholders.

We have reset our financial outlook for 2020 to account for the escalating headwinds that have emerged throughout the year.

Remain well positioned to deliver low double digit organic revenue growth for the year and stable operating margins amidst todays challenging macroeconomic environment.

Furthermore, we continue to believe that Charles River is a stronger company today than it has ever been and the partner of choice for our clients' non clinical development needs clients are increasingly choosing to partner with us for our flexible and efficient outsourcing solutions side.

The scientific depth and breadth of our portfolio and our unwavering focus on seamlessly serving the diverse needs.

That I would like to thank our employees for their exceptional work and commitment and our clients and shareholders for their support now Flavia will provide additional details on our second quarter financial performance and 2022 guidance.

Thank you Jim and good morning, before I begin may I remind you that I'll be speaking primarily to non-GAAP results, which exclude amortization and other acquisition related adjustments costs related primarily to our global efficiency initiatives.

Gains or losses from our venture capital and other strategic investments and certain other items.

Many of my comments will also refer to organic revenue growth, which excludes the impact of acquisitions divestitures and foreign currency translation and the 50 <unk> week in 2022.

As Jim mentioned, we delivered solid results in the second quarter, including nine 5% organic revenue growth.

Hundred basis points of operating margin improvement despite the challenges related to our CMO business and unfavorable movements in foreign exchange and interest rates.

Headwinds also led to the 80 said reduction in earning.

<unk> per share guidance for the year to a range of $10 70 to $10 95.

With half of the reduction, resulting from unfavorable changes in foreign exchange and interest expense since early June .

Since we provided our initial guidance at the beginning of the year nonoperating items, including foreign exchange and interest expense as well as lower than expected tax benefit from stock based compensation will reduce earnings per share by approximately 65 cents for the year.

We expect to generate low double digit organic revenue growth in a range of 10% to 12% supported by strong trends in most of our businesses.

We also expect reported revenue growth in a range of 9% to 11%.

Jim mentioned lower revenue in our CMO business is expected to reduce our revenue growth by 160 to 175 basis points.

Foreign exchange is expected to reduce the reported growth rate by an additional 200 basis points.

Jim spoke about the impact from the CMO business. So I'll provide more details on foreign exchange and interest expense, which are expected to reduce 2020 to EPS by approximately <unk> 40 cents since early June .

The recent dramatic strengthening of the U S. Dollar has resulted in foreign exchange being more of a headwind than previously anticipated.

Since we revised our outlook in early June foreign exchange has reduced revenue by an incremental 200 basis points.

Earnings per share by nearly 25 cents for the year, assuming the current spot rates in our guidance.

The foreign exchange rates that we are assuming for the reminder of the year are included on slide 31.

The federal reserve rate increases in May and June resulted in a meaningful headwind to our 2022 earnings per share guidance.

With approximately half of our $3 billion that on a floating rate the rate increases will be the primary driver of the $8 million increase in our adjusted net interest expense for the year, which is now in a range of $106 million to $110 million.

In the second quarter total adjusted net interest expense was $22 $9 million, an increase of $2 5 million sequentially and $2 $1 billion year over year.

Due primarily to higher debt balances from recent acquisitions and.

Our rate increases earlier in the year.

The current interest rate on our revolving credit facility based on LIBOR, plus 112, five basis points spread at our current leverage.

80% of our floating rate debt is denominated in U S dollars using the one month LIBOR rate.

We have factored the federal Reserve's 70 basis point increase in July .

Our updated outlook and have assumed that rates will increase by an additional 100 basis points before year end.

At the end of the second quarter, our 3 billion outstanding debt balance represented a gross leverage ratio of two eight times and our net leverage ratio of two seven times.

Jim mentioned, we plan to focus our capital deployment priorities on debt repayment for the remainder of the year.

I will now provide additional details on our financial performance and outlook.

On a segment basis, our revised revenue growth outlook for 2020, Q, primarily reflects the impact of unfavorable foreign exchange rates.

And the impact of lower than expected revenue for the <unk> business.

On a reported basis, we now expect revenue growth rates for the manufacturing segment in the high single digit range.

Say in the low twos.

RMS unchanged in the high single digits.

Our organic revenue growth guidance for the DSA and RMS segments remains unchanged.

At mid teens and high single digits, respectively.

Based on the previously mentioned headwinds, we have reduced our organic growth outlook for the manufacturing segment.

Mid single digits.

Despite the revised revenue outlook for the year, we expect consolidated operating margin to be essentially flat with 2021.

We are appropriately managing costs to limit the margin impact and hold the operating margin.

We continue to expect the DSA segment will generate operating margin improvement in 2022.

However, the RMS and manufacturing operating margins.

I expect it to be lower due to the impact of the explorer acquisition and the software CMO performance respectively.

Lower than expected <unk> results.

Our cash to create a second half headwind of nearly 100 basis points to the consolidated operating margin.

Lower allocated corporate costs contributed to the operating margin improvement for the second quarter.

Corporate costs totaled $4, 1% of revenue or $42 million compared to five 6% last year.

Decrease primarily due to discretionary cost controls we do.

Used sales related costs and lower performance based compensation costs.

As a result, we now expect unallocated costs to be approximately 5% of total revenue for the year compared to our previous guidance of a mid 5% range.

The second quarter tax rate was 21, 1%, representing a 70 basis point increase from the same period last year.

The increase was due to lower benefit associated with stock based compensation, resulting from the lower stock price, partially offset by discrete tax benefits.

For the full year, we continue to expect the tax rate will be within the low 20% range on a non-GAAP basis.

Is unchanged from the outlook we provided in May.

Free cash flow was $66 6 million in the second quarter compared to $142 million last year.

Year over year decrease of more than $70 million was primarily due to higher capital expenditures.

Unfavorable changes in working capital.

Capital expenditures were $82 $9 million in the second quarter compared to $46 $4 million last year, primarily as a result of planned projects to accommodate future.

Based on our lower earnings expectations for the full year, we have moderated our free cash flow guidance to approximately $360 million or $90 million below our prior outlook.

We expect capital expenditures to decline by $20 million from our previous outlook.

Approximately $340 million in 2022.

We always try to be disciplined with our capital investments.

Line extension claim without growth outlook, which led to the modest reduction in capex for the year.

We also remain confident on our future growth potential. So we intend to continue to appropriately invest in our growing businesses, particularly in safety assessment, which requires additional capacity to accommodate client demand.

A summary of our updated financial guidance for the full year can be found on slide 40.

For the third quarter, we expect revenue growth in the high single digits on a reported basis, reflecting the incremental foreign exchange headwinds.

On an organic basis, we expect at least low double digit growth as a result of improvement in both the DSA and manufacturing segments from the second quarter levels.

The quarter earnings per share is expected to decline to a high single digit rate from last year's $2 70.

Due to margin pressure on the manufacturing and RMS segment.

As well as meaningfully higher interest expense and tax rate, which is creating a combined 30 cent headwind compared to prior year.

In closing we continue to be focused on the execution of our strategy.

Im seeing the speed and efficiency in which we operate and delivering solid financial and operational results in today's macroeconomic environment. We.

We believe that significant growth potential continues to exist.

Clients seek to find queues for unmet medical need.

And do so by using breakthrough technologies are new drug modalities that will only enhance demand for a leading non clinical development solutions. Thank you.

That concludes our comments and we will now take questions.

At this time, if you would like to ask a question. Please press the star and one on your Touchtone phone.

Remove yourself from the queue at any time by pressing star too. Please.

Please limit yourself to one question.

Once again that is star one to ask a question, we'll pause for a moment to allow questions to queue.

We will take our first question from Derik de Bruin with Bank of America.

Hi, good morning, everyone.

Hey, Eric.

Jim.

Question I'm getting from clients essentially boil.

Boils down to something like this is like.

<unk>.

Yeah.

Given that everyone's concerned about.

The outlook for.

Biotech and particularly DSA I mean, why not why not use this as an opportunity in a quarter or two.

We trim.

The guide a little bit more put it another way like how much conservatism is built into your.

DSA guide.

Darren do you have enough buffer to sort of like offset any headwinds that goes along with it I mean, I know youre not seeing anything right now, but I mean, just what's the buffer that you built into it.

Yeah, we feel.

Really good of our guidance.

Guidance, we have.

Really strong backlog and safety assessment and escalating prices.

Higher volume staffing to do with capacity to do it.

No dialogue at our clients without spending concerns.

Watching our costs closely.

Indicated that's taken a little bit longer for the discovery folks too.

Commit and book study so that's that's embedded in this.

Any updated guidance.

So we think we're calling this accurately.

Call It Conservative I think I would call realistic.

Just given the sort of unprecedented.

The length of the backlog and the strength of the pricing.

Okay.

Paul.

One follow up if I may.

Sure.

How sustainable the pricing gains.

You can still take price going into 'twenty three.

Yes.

It's early to comment on 'twenty, three except that we booked meaningful amount of studies already in 2003 at higher prices.

I think our competitive strengths of capacity availability and as I said, a moment ago additional staff.

And given the complex increasing complexity of the studies, particularly kind of specialty work.

Call. It today, we would say that we'll continue to have pricing power.

Into next year.

Thank you.

Sure.

We'll take our next question from Eric Coldwell with Baird.

Okay.

Thanks, Good morning, So I have a couple first in the DSA segment, you've got as was just mentioned you have a very strong growth rate expected in the second half.

Is this an immediate jump up to that 20% level or is it more weighted to <unk> I am curious about the phasing and then as part of that with discovery.

Growth moderated.

It appears that the clear.

Signal is that safety actually could be growing above 20%. So a couple of comments on the direction and the color of the growth rate in DSA would be helpful. And then my other question is performance based compensation reduction mentioned in the prepared remarks, how much did that aid.

<unk> operating profit or is that reduction expected in the second half. So just trying to get a sense on the magnitude of the benefit of reducing accruals for performance based comp. Thanks, so much.

I'll take I'll take the first part.

Second question so.

Safety assessment revenue builds.

Through the back half of the year third quarter and the fourth.

And the pricing gets increasingly stronger.

And the volume is as significant as that continues to be a commentary on the demand quotient.

On how little internal capacity most of our clients.

And their desire and need to get drugs through the preclinical stages.

With the FDA. So we again we feel.

We feel good about that I think as we've said multiple times it's on <unk>.

Precedent to demand.

I know the growth rate seems.

Really high and it is but it's compared to <unk>.

Slow first quarter with pricing.

Quite as strong so we feel good about that and we feel that we've taken into consideration.

Some accommodation slowdown and commitments.

Discovery folks have.

Have indicated discovery is only 15% of DSA. So it's pretty much have safety goes so does DSA.

We feel really good about the quality of content.

Thanks, Jim.

Good morning, Eric Thanks for the question and indeed, the second quarter corporate.

Cost benefited from lower performance based compensation as you mentioned.

We adjusted our forecast for the year, we true up the accrual there is not going to continue in the second half of the year.

It was.

Basically in the second quarter.

Flavio should we just look at the Delta and what you reported versus.

Perhaps where you were what expectations, whereas the impact or where there other offsetting factors to consider.

In the second half as we pointed out there will be additional offsetting factor is the.

CMO headwinds continuing.

In the second quarter, you had the benefit of corporate.

At lower level that is not going to continue in the second half.

Okay. Thank you.

We will take our next question from Dave Windley with Jefferies.

Hi, Thank you very much thanks for taking my question good morning.

Perhaps a slightly different version of of Derek Derrick.

Derek in Eric's question on.

On your demand outlook I guess.

Jim.

We see fairly broad kind of acceptance of the idea that.

That is as funds get a little more scarce that.

Clients would kind of circled the wagons around their most important programs those likely being.

The ones fairly advanced in the pipeline.

And that might.

That might have some impact on earlier stage less mature projects and so I guess I'm wondering as you look at some of the CRO competitors that have commented on slowing decision cycles youre seeing that in discovery.

Why are you why it wouldn't be logical to say or.

Shouldn't be that surprising and I'll say it differently it wouldn't be that surprising.

If 234 months down the road.

Safety assessments started to feel that as well.

Maybe you could help to shine a little bit more light I know youre very confident about the demand in that environment.

But why Couldnt safety slowdown and what reactions could you what levers could you pull quickly to adjust to that if that were to happen.

Yes.

Hey, Dave.

Yes as to what the future holds I mean, we can only respond to what we are.

Hearing.

But the dialogue is with our clients pretty much daily.

Asking these questions and so we see.

We see the backlog continuing to build at higher prices, we hear virtually no commentary on the safety side.

Sorry about that.

Pricing.

We see people booking way out.

Well into next year and some of the following.

Way out we've never seen things like this before we have.

Several take or pay contracts to reserve space, which is totally new so.

Demand quotient seems to be sort of contrary.

The way you asked the question.

Having said that safety and discovery.

Thankfully different animals right. So.

Safety is.

The.

As an activity.

Essentially highly outsource new biotech companies have no internal capacity or desire to build any big pharma is increasingly and rapidly outsourcing so.

Marketplace is highly dependent on us and we believe that people that have promising drugs will do everything that agenda to the preclinical work or <unk> work to.

To get those to market.

Whereas discovery is a business that's more internally based.

With the clients, both large and small.

And as you say, it's likely where people will.

Pause would take longer to make commitments so.

We.

That's the situation and discovery, we have a totally different situation and safety we're watching it.

<unk>.

Yes, things suddenly began to change and I, just don't think they could suddenly change given how far out.

We are booked and so we have worked to slide in whenever the slippage cancellations.

But obviously.

Would curtail hiring and we would pull back on our cost structure with travel and other things we watch that.

We very carefully we do we've had people sufficiently to accommodate the work that we have booked the demand that we have.

Which makes us feel even better about the back half of the year. Its capacity is pretty straightforward head count is much more complex.

So having those people on board I think gives us the confidence that we will be able to deliver.

The guidance that we have just updated today.

Excellent if I could.

If I could ask last quarter I know you don't usually do it but last quarter you did give us an update on that DSA backlog I wondered if you'd do that <unk> <unk>.

You've mentioned the take or pay deals what percentage of your backlog do those take or pay deals now represent.

So they're not significant numbers.

And I have talked about for years.

We're surprised people didn't do this a long time ago. So.

If you didn't have your arms around capacity and space was pretty tight and you had heart drugs.

And given the fact that it's a relatively small spend as the preclinical versus the total spend of a drag.

Yes.

Bit incredulous that people haven't done this earlier, but we have a lot of conversations going on I don't think it's going to be a lot.

<unk> proportion of capacity of revenue, but.

It's a much more balanced.

The supply demand quotient that think it makes customers feel better about the ability to start really important studies earlier.

The pricing is really good.

Well, we didnt give it now with the updated 3 billion. So the backlog has increased from the last time, we gave those numbers.

So it's really significant.

Understand we're a much larger company, but we've never seen this sort of commitment that far out.

Enterprise and as we said in our prepared remarks.

The question Sir.

Our increasingly about.

Do you do this kind of work do you have an opening for me how quickly can we get that opening and oh by the way, what's the price, whereas as you know years ago, the pricing conversations seem to be the first line of questioning so it's a.

It's a pretty solid demand curve that we're seeing.

Alright, Thank you for the answers thanks sure sure.

We will take our next question from Sandy Draper with Guggenheim.

Okay.

Thanks, So much my question is on the CMO side.

And.

I'm just trying to understand the dynamics as you said you had the vaccine trial that sort of wound down in your re tooling.

In refill and capacity with plasma I'm, just trying to understand once you've done the <unk>.

<unk> production sites and retrain. The staff is do you have sort of an immediate backlog of business you can rent immediately or once that <unk> then go out and start selling that I'm just trying to understand the timing between that im assuming there is some extent from the retooling and then when you can start generating that revenue coming back in.

Any more commentary on that would be really appreciate it. Thanks.

Sure happy to.

Yes, we're out marketing.

This business.

CMO portfolio as thoughtfully as possible into new business for us it reminds us.

Hi, Jackson.

As early discovery acquisitions that we've made in 2014, so yes, it's an adjacency it's new for US in this case without the chemistry deal in this case, it's new for the World. So there's a limited number of people doing a cell therapy warrants as a limited number of people providing the <unk>.

<unk> added people with.

With the drugs.

A small number of people doing the work.

So the new regulatory oversight. So I think we're all sort of learning as we go so I think as a general proposition.

It's a new area.

<unk> sales cycle is longer than we thought were recapitulated that fair amount of management and sales organization we're building.

Building out space, we're enhancing our regulatory capability, we were preparing for an auto like the successful.

We just had we have clients that are talking to us about going commercial and with this one particular facility that we talked about.

We were primarily using that space for Covid vaccine production and so I think clients begin to forget.

This was a plasmid production operation so sort of so so no I don't think we have an immediate backlog where people are going to jump on this but we will ready to space, we will discuss.

This company was quite good banking solutions.

Sure the two plasmid production generally in the marketplace.

So there is a need for it.

Everything is taking longer than we had anticipated from an overall integration point of view and from an overall.

Market understanding where we are but we're quite confident particularly as we've refined as centers of excellence, which means we've got plasmids in the UK with viral vectors, Maryland.

Yes.

Cell therapy manufacturing.

Yeah.

Yes.

That those will provide a really great footprint to service the clients, particularly in addition in combination with our biologics business microbial business and to some extent.

Safety so.

Everything is taking longer than we would like sandy definitely exacerbated by this contract and the retooling.

Confident that the overall demand the quality of the assets marketing acumen.

Will hold us in good stead.

Okay.

Thanks for the commentary Jim.

Sure.

We'll take our next question from Elizabeth Anderson with Evercore.

Hi, guys. Thanks, so much for the question, maybe just sort of following up on Andy's question a little bit.

So it sounds like.

From what Youre, saying, so note between the retooling of the interest in sort of putting everything together.

That could take.

A couple of quarters. So is that sort of mean that word like exiting the year sort of at a similar kind of like like.

Like low to mid single digit kind of growth rate at MFS.

It seems like from what Youre, saying in DSA as we exit the year yesterday.

Like from what Youre, saying about the backlog and the pricing and everything.

That seems like that to continue kind of.

Double digit growth research models, obviously had the hit from <unk>.

China, but otherwise the demand seems very strong there so I'm just trying to sort of calibrate.

Where we are sort of exiting the year versus some peoples' fears regarding the broader.

Economic environment.

Is that a question about the whole portfolio or just manufacturing.

Specifically, though just like I was just trying to frame the question in general, but specifically on manufacturing support it seems like from what you were saying in answering <unk> question is that.

With the sort of the retooling and the certification and things like that that could be sort of a multi quarter effort, but it sort of it seems like you might be sort of like mid single digits.

Again, it grows like exiting the year there.

Hi, Thanks.

Yes.

I think thats a good analysis.

We made the single the biologics and microbial businesses.

We'll have a much stronger back half of the year and kind of get back to.

Approaching kind of the usual growth rates.

The CMO businesses several businesses that we bought.

You better have improvements will still be way below what we anticipated when we started the year. When we gave you guidance.

Should strengthen materially next year, but yes I.

I think mid single is probably the right way to look at manufacturing for the full year.

And sort of exit and then sort of where we also end up at.

At the end of <unk> kind of range.

Yeah, maybe I'll jump in here.

I think we commented the manufacturing segment as a whole will be forecast that organic growth of mid single digits as Jim said for the year.

We had.

About 10% in the first quarter and reported 1% in the second quarter you can do the math, it's probably going to be a little bit higher than mid single in the second half.

The full year is that mid single, but so you end devices.

Got it okay. That's helpful. Thank you.

We'll take our next question from Kristine <unk> with William Blair.

Good morning, and thanks for taking my question can you elaborate on the extended decision timelines.

For the discovery business.

Where are you seeing this as it is it across the Gordon discovery or any particular areas of client types. Thanks.

No I wouldn't say it.

Obviously, it's the nature of the client base.

Obviously biotech is there's lots of small companies that have no internal ability.

Probably watching very closely that Brian rates, working really hard to get to.

Safety spending that might be there.

Maybe you have some things on hold so.

It's really been kind of an interesting process very active proposal levels still.

Sort of responses that.

We have the work I intend to work with us.

Taking longer to actually book the work side of things.

It's a bit of a wait and see.

Two there.

I guess that makes a fair amount of sense.

The future is a little bit murky in terms of the funding.

Paradigm, so I would say, it's more the nature of the clients and that's about it.

Specific work I think we have a really good portfolio there.

A fair amount of scale very good lead in to safety.

Good international footprint and I think we've done really good work for these folks for almost a decade.

So I don't Ticket's, a commentary in any part of the business.

Q2 2022 Charles River Laboratories International Inc Earnings Call

Request a DemoDemo

CRL

Charles River Laboratories International

Earnings