Q1 2023 Charles River Laoratories International Inc Earnings Call

Speaker 1: And.

Speaker 2: Please stand by. Your program is about to begin.

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Speaker 2: Ladies and gentlemen, thank you for standing by and welcome to the Charles River Laboratory First Quarter 2023 Earnings Conference Call. This call is being recorded.

Speaker 2: At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session.

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Speaker 2: If you want to remove yourself from the queue, please press star 2. Lastly, if you should need operator assistance, please press star 0. I would now like to turn the conference over to our host Todd Spencer, Vice President of Investor Relations. Please go ahead. Good morning and welcome to Charles River Laboratories' first quarter 2020.

Speaker 3: There is a slide presentation associated with today's remarks which is posted on the Investrelation section of our website at ir.criber.com.

Speaker 3: 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 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.

Speaker 3: constitute four looking statements under the Private Security's litigation reform act of 1995. Attra results may differ materially from those indicated. During this call, we will primarily discuss non-gavel financial measures, which we believe help investors gain a meaningful understanding of our core operating results in guidance.

Speaker 3: The non-GAAP financial measures are not meant to be considered superior to or a substitute for results of operations prepared in accordance with GAAP.

Speaker 3: 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.

Speaker 4: Good morning. The strong start to the year, with organic revenue growth at 15.4%, and non-gap earnings per share are $2.78.

Speaker 4: Both wildly exceeding the outlook that we provided in February .

Speaker 4: The year began with a continuation of the strong demand and pricing environment and our DSA segment that we experienced through the end of last year. This was expected based on the strength of the backlog which supports more than a year of DSA revenue.

Speaker 4: Clients continue to choose to partner with Charles River for our industry leading scientific expertise.

Speaker 4: for the breadth and depth of our portfolio, and for the flexible, efficient, outsourcing solutions that we are able to provide to them. We are a large, stable, scientific partner focused on holistically supporting our clients' drug discovery, non-clinical development, and manufacturing efforts.

Speaker 4: which we believe is increasingly important in the current market environment.

Speaker 4: The biopharmaceutical end market seems slightly less robust than last year, which we had anticipated and factored into our initial guidance in February . Clients appear to be more thoughtful about this spending and have prioritized their programs at the beginning of the year. This is not surprising, in light of the changing macroeconomic factors.

Speaker 4: tech still have about three years of cash on hand.

Speaker 4: Although we continue to watch the market closely and are seeing a normalization of demand trends towards pre-pandemic levels, our clients are continuing to move thousands of the critical programs forward with us.

Speaker 4: So we believe these trends and current business development activity firmly support our financial guidance for the year.

Speaker 4: Before I provide more details on my first quarter financial results, I would like to provide a brief update on the non-human primate or NHP supply situation.

Speaker 4: As you know, we suspended shipments of Cambodian NHPs into the US in February . We took this action so that we could develop and implement new testing procedures that would reinforce our confidence that the NHPs we import from Cambodia are purpose-bred.

Speaker 4: We have made advancements towards identifying a new testing platform and implementing the new testing procedures and are engaged with the relevant government agencies in furtherance of the needed resolution. We have also been working in parallel to accommodate our clients' NHP-related study starts.

Speaker 4: by utilizing our global safety assessment site network. Our global scale is one of the key factors which we believe differentiates us from the competition. We believe that these efforts will mitigate some of the NHP supply impact on our clients' programs.

Speaker 4: that we expect during the second half of the year and afford us greater confidence in our 2023 financial guidance.

Speaker 4: Our wider guidance range continues to accommodate a number of scenarios related to the success of our mitigation efforts since our plans have not yet been fully implemented, and NNHP supply remains a fluid situation.

Speaker 4: As a reminder, biologic drugs cannot be approved for commercial use without NHPs. And it is critical that we work diligently with industry and government agencies to resolve the NHP situation and restore this important supply chain so that life-saving therapies can continue to move forward.

Speaker 4: I'll now provide highlights of our first quarter performance.

Speaker 4: We reported revenue of $1.03 billion in the first quarter of 2023, a 12.6% increase over last year. Organic revenue growth of 15.4% was driven by the robust DSA performance as well as solid RMS growth. Lets them develop some new materials.

Speaker 4: the manufacturing growth rate was impacted by a challenging year-over-year comparison, as well as a lower than anticipated biologics testing volume to start the year.

Speaker 4: By client segment, global biopharmaceutical companies, small and mid-sized biotechs, and academic and government accounts all made significant contributions to the growth rate.

Speaker 4: The operating margin was 21.2%, a decrease of 20 basis points year over year. The decline was driven by the manufacturing and RMS segments. Earnings per share were $2.78 in the first quarter, an increase of 1.1% from the first quarter of last year.

Speaker 4: Strong, low, double-digit operating income growth was mostly offset by increased interest expense and a higher tax rate compared to the prior year, as well as the impact of the avn-vax in the vestiture.

Speaker 4: Based on the strong first quarter performance and expectations for the remainder of the year, which remain largely consistent with our initial outlook, we are narrowing our organic revenue growth guidance to a range of 5 to 7.5%.

Speaker 4: and our non-GAAP earnings per share guidance to a range of $9.90 to $10.90 for 2023. We've increased the lower end of the ranges by 50 basis points and 20 cents per share respectively.

Speaker 4: As I mentioned, our outlook continues to reflect the anticipated financial impact of the Cambodian HP supply constraints, which will have a greater impact on the second half results.

Speaker 4: I'd like to provide you with additional details on our first quarter segment performance, beginning with the DSA segment results.

Speaker 4: DSA revenue in the first quarter was $662.4 million, another significant increase of 23.6% on an organic basis. The safety assessment business continued to be the principal driver of DSA revenue growth with significant contributions from study volume and base pricing.

Speaker 4: with NHP pass-throughs also adding to the growth rate.

Speaker 4: Although revenue for Discovery services increased in the quarter, growth rate continued to modulate, which we believe is reflective of the current market environment, coupled with the shorter-term nature of both Discovery projects and the business backlog. The DSA backlog decreased modestly, and the DSA backlog decreased by a quarter.

Speaker 4: on a sequential basis to $3 billion at the end of the first quarter from $3.15 billion at year end.

Speaker 4: As previously mentioned in February , this trend is reflective of the normalization of booking and proposal activity.

Speaker 4: that we experienced at the end of last year and in the first quarter. Clients are not booking work as far out as they did over the past few years.

Speaker 4: And we believe this is the result of their evaluation of pipeline priorities and scheduling with a near-term focus. That said, we believe these trends in the current market environment coupled with the strength of our current backlog, which still affords us 14 months of revenue coverage in our safety assessment business.

Speaker 4: will drive the expected DSA revenue growth this year.

Speaker 4: Our client base remained stable and resilient. Our biotech clients continued to send us new programs and generated healthy double-digit revenue growth in the first quarter.

Speaker 4: It was also encouraging to see that biotech funding levels increased year-over-year by more than 20% in the first quarter to approximately $15 billion. We believe this higher funding...

Speaker 4: demonstrates that venture capital remains a reliable source of funding to enable biotech clients to spend on their promising molecules, and the public markets had a better quarter. Moreover, large biopharmaceutical companies continue to move programs forward with vigor, with first-quarter revenue growth outpacing biotechs.

Speaker 4: demonstrating the strength and balance of our client base. Through the first four months of the year, 14 new drugs were approved by the FDA, which is on pace to exceed last year's total.

Speaker 4: Since we have worked on over 80% of the FDA approved drugs over the last five years, we believe the pipeline of new drugs supports ample future growth opportunities for us. However, after three consecutive quarters with extraordinary revenue growth above 20% level,

Speaker 4: growth rate is expected to moderate over the course of this year due to three primary factors.

Speaker 4: The normalization of the demand trends has just discussed. More challenging year-over-year comparisons as 2023 progresses, and the impact of NHP supply constraints mostly in the second half of the year. We expect less of an impact from NHP supply constraints in the second quarter than originally planned because of our ability to collaborate with our clients, optimize study schedules, leverage our flexible global infrastructure, and also do our extensive backlog coverage across multiple study types. And as I said earlier, the strong first quarter results and our progress with regard to additional mitigation efforts around the NAPS.

Speaker 4: do not believe the competition can provide a better value proposition to clients than we can.

Speaker 4: The DSA operating margin was 29% for the first quarter, the 610 basis point increase from the first quarter of 2022. The increase continued to be driven by operating leverage associated with a meaningfully higher revenue in the safety assessment business, as well as price increases. RMS revenue was $199.8 million.

Speaker 4: an increase of 6.8% on an organic basis over the first quarter of 2022.

Speaker 4: The RMS segment benefited from broad-based demand for small research models in all geographic regions.

Speaker 4: for research model services and for the cell solutions business.

Speaker 4: The RMS growth rate was below the high single-digit target for the year due primarily to RMS China.

Speaker 4: While demand for small models remains strong, the timing of NHP shipments to clients in China impacted the first quarter growth rate.

Speaker 4: Since exports from China were shut down at the beginning of the pandemic, we have been selling a relatively small number of NHP's locally to clients since we were unable to utilize these models in our global safety assessment operations.

Speaker 4: We expect the RMS growth rate to meaningfully improve in the second quarter as the NHPs are shipped in China, and we continue to expect RMS to deliver high-single-digit organic revenue growth in 2023.

Speaker 4: Outside of China, revenue growth for small research models in North America and Europe remain strong, driven by healthy volume increases in North America and continued pricing gains globally. We believe demand for research models is an excellent indicator of the health and stability of early-stage research activity. In demand and pricing trends this year, the U.S. is facing a

Speaker 4: demonstrate that clients are continuing to move their research programs forward which will drive solid RMS revenue growth.

Speaker 4: From a services perspective, revenue growth was also broad-based with the insourcing solutions and GEMS businesses leading the way. Insourcing solutions or IAS growth continued to be primarily driven by our cradle operations which offer flexible, vivarium rental space at Shell's River sites to both small and large biopharmaceutical clients.

having expanded significantly last year through both the acquisition of Explorer Biolabs and by adding nine cradle and Explorer sites, we are now focused on ramping up utilization of the new sites.

as well as continuing to moderately add new sites. This will generate a runway for continued robust revenue growth and margin enhancement opportunities for cradle.

A traditional IaaS model, which provides staffing and vivarium management at our client's site still resonates with clients.

It has historically had a larger academic and government client base, however, commercial clients are also seeking the benefits of driving cost savings and greater operational efficiency by allowing us to manage their internal librarians.

We were pleased to add a new meaningful commercial biopharmaceutical contract in the first quarter. We also continue to expand our GEMS business in North America to accommodate increasing demand from both biopharmaceutical and academic clients as they partner with us to maintain the proprietary societies.

genetically modified model colonies.

These models are playing an increasingly critical role as drug research becomes more complex with a shift to oncology, rare disease, and cell and gene therapies.

In the first quarter of the RMS operating margin decreased by 650 basis points to 23.4%. Most of the decline was driven by the temporary headwind related to timing of NHP shipments within China. Field mix was also a factor due in part to the Explorer acquisition.

in April 2022, and the ramp up of utilization and our cradle and explore operations, which we were expanded last year.

We expect the RMS operating margin to meaningfully improve in the second quarter as these headwinds subside.

Revenue for the manufacturing solution segment was $167.3 million, a decrease of 1.8% on an organic basis compared to the first quarter of last year. The decrease was driven by the CDMO and biologic testing

partially offset by a solid performance for the microbial solutions business.

As we mentioned in February , we expected the segments year-over-year revenue comparison would be challenging due to commercial readiness milestones in a CDMO business and COVID vaccine testing revenue and a biologic testing business.

both of which occurred in the first quarter of last year. We believe these factors will be largely anniversary beginning in the second quarter.

In addition to these factors, the biologics testing business experience is slowest out to the year. Testing volume tends to be seasonally softer in the first quarter, with lower sample volume reflecting reduced client manufacturing activity over the holidays. This year we also experienced lower than anticipated volumes, particularly for viral clearance and cell bank insertors.

because clients seem to be prioritizing their programs and more budget focused at the beginning of the year. Microbial solutions delivered a solid first quarter performance led by the continued strength of the Accugenics Microbial Identification Platform due to both instrument placements and demand for our testing services.

Our advantage is as the only provider who can offer a comprehensive solution for rapid manufacturing quality control testing continues to resonate with our clients.

The cell and gene therapy CDMO business continued to make progress towards its targeted growth rate goal. As expected, the growth rate was affected by the comparison to the commercial readiness milestones paid in the first quarter of last year, but the initiatives that we have implemented to improve the performance of our CDMO business.

continue to gain traction and positive feedback from clients. We believe that the success of these actions and an increasing sales funnel will result in a marked improvement in the CDMO growth rate in the second quarter. And we expect the CDMO business will drive a rebound in the manufacturing segment and organic growth rate over the course of the year.

The manufacturing segment's first quarter operating margin was 13.7%, a significant decline from 33.1% in the first quarter of last year.

The decline was primarily related to lower operating margins in each of the segments business units, particularly CDMO and biologics testing. This was driven largely by the prior year headwinds and the slowest start in the biologics testing business that I discussed, as well as an asset impairment in the segment.

As anticipated, end market dynamics have moderated somewhat in 2023, but it is important to reiterate that our client base remains stable and resilient, particularly biotechs.

These companies have now become the innovation engine for the entire biopharmaceutical industry.

with a number of biopharma companies and active pipelines doubling over the past 10 years.

We believe the early stage research that we conduct is instrumental to our biotech clients achievement of the important milestones that enable them to secure additional funding and therefore they will continue to partner with Charles River for our flexible and efficient platform that accelerates this therapeutic innovation.

These factors couples with a strength and scale of our DSA backlog.

and the substantial visibility that it provides will enable us to better withstand any near-term fluctuation in the market. We believe the power of our unique portfolio differentiates us.

today more than ever from other companies that provide our and de-support services to the bio-farmaceutical industry. We are continuing to further distinguish ourselves scientifically by adding capabilities in biologics and cellulogen therapies by investing in technology partnerships.

to bring cutting edge tools to our clients, and by building greater digital connectivity with our clients, including through the launch of Apollo in March. Apollo will revolutionize client access to real time study data.

planning and cost estimates and other self-service tools.

To conclude, I'd like to thank our employees for their exceptional work and commitment, and our clients and shareholders for their continued support.

Now Flavio will provide additional details on our first quarter financial performance in 2023 guidance.

Thank you, Jim, and good morning. Before I begin, may I remind you that I'll be speaking primarily to non-GAP results, which exclude amortization and other acquisition-related adjustments?

Cost-related primarily to our Global Efficiency Initiative, gains a losses from venture capital and other strategic investments, and certain other items.

expect to deliver reported revenue growth of 2 to 4.5 percent and organic revenue growth of 5 to 7.5 percent for the full year.

as well as non-GAAP earnings per share in a range of $9.90 to $10.90 for the full year.

Our 2023 revenue guidance ranges continue to reflect the estimated impact from the NHP supply constraints, resulting in wider guidance ranges to account for multiple outcomes with respect to our mitigation plans.

We are expecting stronger revenue growth rates in the first half of 2023 due to both the comparison to last year when growth accelerated throughout the year, as well as the anticipated gating of the NHB supply impact, which will principally impact the second half.

Our segment outlook for 2023 revenue growth remains largely unchanged as noted on slide 34.

We'll also continue to expect that the consolidated operating margin will be flat to lower versus prior year, depending on the ultimate success of our plans to mitigate the NHP supply constraints.

An allocated corporate cost was favorable in the quarter, totaling 4.3% of total revenue, compared to 5% of revenue in the first quarter of last year.

The decrease was primarily the result of of the kind of health and fringe costs, which I expected to normalize over the course of the year.

Despite the favorability in the first quarter, we expect unallocated corporate costs to total approximately 5% of revenue for the full year, which is similar to 2022. The first quarter tax rate was 21.7%.

approximately 490 basis points higher year over year as anticipated. The increase was primarily due to a lower benefit from stock-based compensation.

We continue to expect our full year tax rate will be in a range of 22.5 to 23.5%, which is unchanged from our previous outlook.

Total adjusted net interest expense was $33.6 million in the first quarter, essentially flat on a sequential basis.

the significant year-over-year increase from $20.4 million in the first quarter of 2022, which compressed earnings growth in the quarter, primarily reflected meaningfully higher interest rates as a result of the Federal Reserve's monetary policy actions.

since March of 2022. For the year, we continue to expect net interest expense of $133 to $137 million.

As a reminder, nearly three quarters of our $2.75 billion debt at the end of the first quarter was at a fixed rate.

With regards to the remaining variable rate portion of our debt, our outlook can accommodate an additional 50 basis point increase in rates by the Federal Reserve during the remainder of 2023.

At the end of the first quarter, our gross leverage ratio was 2.2 times and our net leverage ratio was 2.1 times.

Precatch flow was $2.5 million in the first quarter compared to $22.2 million last year.

with higher capital expenditures driving the decrease.

As a reminder, the first quarter is a seasonally softer period for free cash flow generation.

Capital expenditures were $106.9 million in the first quarter compared to $80.5 million last year. Do primarily to ongoing extension projects to support continued growth across our business.

Today, we're initiating 2023 guidance for free cash flow and capital expenditures. We expect free cash flow to be in a range of $330 to $380 million, which is flat to a 15% increase from $330 million in 2022.

CAPEX is expected to be slightly below our recently stated target of 9% of revenue at $340 to $360 million this year. The lower capital intensity reflects our disciplined approach to capital deployment.

We are investing in our business based on the growth potential of each business unit and are modifying certain projects in light of the temporary disruption from the NHP supply constraints.

Normalizing the men trends will result in last capital required than we previously anticipated. A summary of our 2023 financial guidance can be found on slide 40. Looking ahead to the second quarter, we expect year-over-year reported revenue growth in a high single-digit range, an organic revenue growth of 10% or better, reflecting continued strong growth trends across many of our businesses. We expect the NHB supply issue to have only a limit.

your earnings growth rate.

In closing, we're pleased with our first quarter performance and are confident about our prospects for the second quarter, as well as our ability to achieve our full year financial outlook.

Even as macroeconomic and biopharmaceutical market conditions evolve, we will continue to execute our strategy of expanding our business to both meet the needs of our clients and to enhance our position as the scientific partner of choice to accelerate biomedical research and therapeutic innovation. Thank you.

That concludes our comments. We will now take your questions. At this time, if you would like to ask a question, please press the star and one on your touch tone phone. You may remove yourself from the queue at any time by pressing star two. We do ask that you limit yourself to one question.

Once again, that is star N1 to ask a question. We'll take our first question from Eric Coldwell with Baird. Thank you. Good morning. Wanted to just clarify, last quarter you highlighted the 200 to 400 basis point potential impact from NHPs this year. I may have missed it, but I didn't see an update on that commentary. Looks like Q1 probably did a little better than the street expected. 2Q looks better than the street expected.

I'm just curious if your range of potential impact is changed or if it's just shifted totally out to the third and fourth quarter. That's the first question I have another.

Good morning, Eric. It's Flavia. Thank you for your question. The range is of the 200 to 400 basis points of the supply NHP impact remains consistent with what we provided earlier in the year.

Okay, and I just maybe a bigger picture question on this topic.

Has any government agency actually blocked importation or exportation or changed any policy or are all of your actions to this point very much proactive and internally driven decisions to just be as safe as possible?

Certainly it's prudent for us not to bring NHP's, at least from Cambodia into the US.

And I would say that the US government is fine with that strategy. So they're certainly not supportive of us doing otherwise. So we're going to cooperate and we're going to run our business with multiple supply sources.

And I would say that the U.S. government is fine with that strategy. So they're certainly not supportive of us doing otherwise. So we're going to cooperate and we're going to run our business with multiple supply sources, doing the work of multiple sites.

and try to work hard to have new testing protocols that show parentage accepted and used universally, we would hope.

We're quite confident in our ability to do that. A little bit difficult for us to have much impact on the cadence of how quickly that goes.

and what the receptivity will be, but we feel good about the science behind that. We actually feel good about all of our supply sources.

And we're doing the best we can to accommodate for the situation as a result of that.

We should have slightly better performance in the second quarter than wasn't better than in our guidance.

There are things that continue to be on our control, which is why we have such a, why we continue to have a guidance range that we do and we'll continue to give you as much information as we can as things, if and as things change.

Okay, I'll let others jump in. Thank you very much. Thanks, Eric. And we'll take our next question from Derek DeBruin with Bank of America.

into China. We're going to China and then...

a lot more money to get them there. I'm just sort of curious where where are the supplies going right now and can you get them back? So we don't have any indication that the supplies are going to China. Of course we did not get animals from all of the suppliers there.

So I don't think this is a situation of getting that supply back from someplace that they'll be gone forever. I think this is a transitory situation. Sort of an unusual 1, frankly.

purpose-breeding and we also think that the veterinary oversight and nutritional oversight and transportation oversight and the found that we utilize it's done really well. So given our experience...

with farms all over the world, including farms that we had ourselves years ago and started on our own, we think it's a good supply source. So again, just to go back to my answer to the first question, we're being very responsive on a timely basis with the folks that are asking us for information.

but we have very little control over the pace and response and how we move forward. But I would be surprised and disappointed if Cambodia doesn't continue to be a source of supply and as you know, really well given your scientific background, not doing a sufficient amount of large molecule work.

It's not optional. And since this is the largest supply source, it's something that needs to be rectified, you know, in as timely a basis as possible.

Great. Thank you. I'll stick to one question. Thanks, Jim. Sure. Thanks, Eric.

We'll take our next question from Sandy Draper with Guggenheim. Thanks very much. I guess maybe just thinking about the quarter, obviously strong quarter total, but it looks like we as well as the street sort of.

I know you don't give quarterly guidance by segment, but with this type of result generally in line sounds like maybe you're a little bit surprised by DSA. Just trying to think about how these results compare and so how we should be thinking about your commentary on full year growth rate by segment. Are those still appropriate or based on the first?

quarter results, should we be sort of rethinking stronger DSA but lighter manufacturing and RMS? Thanks. We'll both answer this. I would say we were not surprised. As we reported all of last year and probably the prior year, demand for safety assessment was unrelenting and growing.

well in excess of a year, in some cases a year and a half. So strong demand, this NHP disruption really was not a factor. RMS has been growing really nicely for several years now. I don't know whether anybody remembers, I hope you did, but if not, we've reminded you.

We knew that manufacturing would be behind the prior year because of some milestone payments that we substantial milestone payments we had in the first quarter with our CDMO business and COVID work for biologics. So quarter track pretty much as we anticipate we're obviously pleased with that.

And Sandy, I think we always talked about how our business is not linear and it's not linear in totality and definitely not at the segment level either. And so to Jim's point, we reaffirmed our full year guidance of high single digits. We talked a little bit about some timing events.

in RMS in the first quarter that will normalize in the second quarter. DSA was very, very strong in the first quarter, as Jim pointed out, continued strength following the second half of 2022. I also commented

that the growth will modulate throughout the year, both given the comp as the growth accelerated in 2022. You'd have a calm dynamic that will impact 2023. And we reaffirmed our guidance of low to mid single digits for the.

The year and manufacturing solutions, as Jim pointed out, had a couple of. Headwinds in the 1st quarter with Colvin vaccine volumes that are no longer existing as well as the milestones. And we talked a little bit about a slower. Starting biologic solutions.

So, we expanded the guidance range a little bit to now include high single digit to low double digit for the year. The previous guidance was low double digits. So we just extended that range.

Sandy, it's worth reminding you and everybody else listening what the cadence was last year. Flavio's point, right? So we had a, for safety, we had a slow first half of the year and a really strong second half of the year. I think some of our shareholders didn't think that that was going to happen. We had 26% growth rate, I think, in the third quarter.

So we're going to have these year over year comparisons. Less tough in the first half, tougher in the second half. Some impact from the NHPs, but we would have that cadence anyway. Linearity is impossible for us to design or even predict.

studies sort of start when they start and end when they add. But as always, you want to listen to our guidance for a full year, particularly in the safety business.

sort of start when they start and when they add. But as always, you want to listen to our guidance for a full year, particularly in the safety business. Great. That's really helpful. Thanks so much for the comment.

And we'll take our next question from Patrick Donnelly with Citi. Good morning. You have Lizzie on for Patrick. So just one more on the NHPUs. It sounds like you're making progress on the test to determine parentage.

I guess how long do you anticipate the rollout of that test once you have it will take throughout your supply and anything that we can expect there? I'll leave it at that. Thank you. Yeah.

And we're quite confident from what we know that our supplier is purpose breeding these animals according to all of our expectations. And we can demonstrate that. The communications is just, as I said a couple of times earlier, is a little bit slower than we would like. We understand that and we'll do the best we can. So we'll give you clarity when we have it. I would say we've been very responsive in terms of coming up with a program, providing that to the various authorities. They looked them over and we just continue to go back and forth. And so.

As a parallel strategy, we're using our international infrastructure and we'll continue to. It's always held us in good stead in all of our businesses, but in this case, particularly in safety that we do the work on so many geographic book houses that it really helps with the current situation when things are a little more complicated in the US. But we're confident that we can prove it and demonstrate it scientifically with us.

some time to operationalize given obviously the supply logistics and

As we continue to work with the government authorities, it will take some time to get this off the ground.

Hi, thanks for taking our question. So I wanted to drill down on a decrease in DSA backlog because I think there's been a fair level of concern around some of the perhaps lower book to bills we've seen here in this part of the business. What are you seeing in terms of proposals and bookings so far here in the second quarter? Are you expecting backlog to continue to get work down here over the next couple quarters given the tougher macro environment?

And then thinking ahead, where do you think you need to see backlog in this year in order to support double digital organic growth for the DSA segment in 2024? Thank you. So we'll both comment comments. Proposals and bookings, you know, continue to be strong, left strong then last year, which was a very unusual year.

enjoyable but unusual and you have a combination of factors but I would say the principal factor is you have clients that

at a certain level of waiting to start this study, it just becomes problematic for them to plan their business and to get drugs into the clinic and ultimately into the market. We're seeing a normalization, or pre-COVID normalization of

that level of demand. Still healthy, still a lot of price, still everybody, not everybody, but almost everybody comes to Charles River for the really complex work and our geographic footprint. So we think this is in the process of normalizing, we think the demand will, I'm not going to talk about 24, but

the demand will remain strong this year. If you didn't have the primate overhang, I think we would have a very strong year in the safety business not to the level of last year. We're not concerned by that. We got a very big denominator in this business. It's a big business now.

We're having nice growth rate, taking share, getting good price. We don't see any amelioration of that. Yeah, so I think if you look at our book to bill on a trailing 12-month basis, which is how many clinical CRs look at their book to bill.

We're still above one time, excuse me. And that formally supports our DSA revenue growth outlook for 2023. We got a question earlier around the NHV supply impact. And I commented again on the 200 to 400 basis points. You kind of do the math. You would be able to back into what would the DSA growth be? We're still above one time.

our next question from Steve Winley with Jeffries.

I do have a brother named Steve Winley. Hi. Hi, good morning. I actually, my brother is actually Steve Winley. So Jim, I'll redirect a little bit. I know you already said no more NHP questions. I'm going to try to ask a positive. Okay.

Yeah, on your, in your proxy you put a kind of a commitment to 24 broadening out your supply chain diligence and how you know how you work around your sourcing of these animals that are needed for research. Appreciate that. I look forward to the information in that. I guess I'm thinking in that context.

Certainly, if we go back to November when the indictments were first unsealed, certainly kind of a big shock to the industry. How has that...

influenced, your proxy calls it risk-based due diligence and risk-based supplier oversight.

How has the environment changed the way you go about evaluating the situation? At SOT, there was a suggestion, I thought I understood that you were not importing Cambodian animals into any part of the business, international or the US, and you're saying US today, so I wanted to understand that. But just kind of the risk management around this situation, how has the environment changed the way you go about evaluating the situation?

you know, the changing environment changed your risk management? That's a big question, Dave.

You know, our methodology hasn't changed very much. We believe we deal with suppliers who are certainly producing purpose-bred animals under strict veterinary oversight and complying with...

CITES permitting procedures and of course, as we talked about for the last two or three years, we have multiple sources of supply, in other words, multiple countries, in some cases, multiple providers in those countries. We own some farms, we own pieces of some farms, we have long-term

supply agreements with I would say almost almost all of them so and We go and we audit them We have a little disruption in that audit because of those audits because of COVID, but we go and audit them. So We are familiar with with the situation so

Just to use your parlance, I think we were more shocked with the indictments because that's not the nature of the work that we're doing, other people that we're working with.

That's obviously concerning any sort of allegations like that. We'll continue to get closer to our suppliers, and I mean that in every way in terms of ownership, people on the ground.

constant audits, the testing that we talked about, you know, 10 minutes ago with all of them and dealing openly and appropriately and professionally with the various oversight bodies in a variety of countries. We for competitive and security and a whole bunch of other reasons we want to.

And we think that's always been a competitive advantage for us and being able to use those sites is really beneficial. Then the last thing I would say, which we haven't said yet, although I take it from me.

the earlier materials is that, you know, we've had extensive conversations with the clients who have been terrific and we said, okay, here's the situation, we don't know exactly how many animals we'll be able to bring in, so you need to prioritize.

studies that you do in terms of what you need to start and when and they're doing that and you also have to be flexible about where you do it. So you know as you know some of our clients, less all the time, but some of our clients are like you know I only want to do the work wherever because I've always done it there. I did a postdoc with a guy or gal that runs this site so they've been terrific. I'd say our client base has really been...

collaborative, working hard with us, being open to getting the work done. They just want the work to start in the most timely fashion. So I would say we're doing a very good job so far disrupting as few clients as possible. We have a strong Q1. We will have a better Q2 with regard to the NHPs than we originally thought.

and beneficial for you all to know, we'll tell you, but it's too changeable and we don't want to be providing.

very, very detailed information that may not be sustainable, but we're very pleased with the way we're handling it and the way our clients are accepting the current situation.

I appreciate that. If I could, that was a long question and answer, but if I could attempt to clarify one thing in the prepared remarks. So you talk about these NHPs and use the term pass-through. The pricing on the NHPs has gone up a lot. I just want to make sure I understand because DSA margin was very, very good, maybe the best of all time. In a nutshell there were 10 different

And that rising price on NHPs, if it is only passed through, would be a pretty significant headwind to your margin. And so I was hoping maybe Flavia, if you could clarify that for us, you know, are the NHPs contributing to margin or are they a detriment to margin? Thanks. Thanks, Dave. So a couple of things.

margin, specifically as you're saying, at a macro level, as you pointed out, it's a pass-through, so it should be neither accretive or dilutive to the percentage margin. The timing on when we start NHV studies.

can have an impact on the mix that they have, that they contribute towards or not to the margin. So, depending on that and how we ended up the year and how many new NHP studies we're starting or not in each quarter can have a modest impact on the margin.

What I would focus all of you on is the strength of the margin in the first quarter in DSA is primarily behind volume and the underlying price. Okay, thank you. Thanks for the extra question. And we'll take our next question from Casey Woodring with JP Morgan. Hi, thank you for taking my questions. So as a follow up to …

environment, you know, just given some of your peer commentary in the CDMO space from earlier this week. Thanks. Yes, so I think we talked about the normalization of the demand trends to more pre-pandemic levels. We had pointed out throughout all of last year that the backlog had extended.

meaningfully in terms of the length of it with people looking really ahead as we have never seen before and that has definitely normalized. I think our clients are focusing on study starts that are sooner rather than a lot into the future.

And as they do that, they also look at studies that were booked before and whether they're ready to initiate them or not. So, as we said, it's a, we see the mobilization from extraordinary levels in 2022. And then just on the manufacturing solutions. I think we had commented and expected a.

Lighter first quarter, these are the overall guidance for the year that originally was low double digit. We not only saw the 1st quarter impact of the tough columns with the. Cdmo milestones and the Colvin. Volume and biologics, but we also talked about a slightly. Laurie junior senior.

slower start of the year for testing and there might be some comments around the industry on bioprocessing. So we widened our guidance range a little bit on manufacturing to accommodate for that. I think we're ready for the next question.

And we'll take our next question from Te'o Sivan with Morgan Stanley . Hey guys, good morning. And Jim, since you've told us not to ask about NHPs, that is exactly what I will do. Just one clarification actually to that first question from Eric.

Flavio, you mentioned sort of the 200 to 400 bps range being the same, but at the same time you also talked about how some of your ongoing efforts should mitigate some of the impact here. So is it fair to assume that at the midpoint, things have moved a little bit towards the lower end of that 200 to 400 bps range? And then Jim, one for you in terms of just dealing with the...

wanted to deal with. How do you think about the near-term tactical competitive landscape in the market at the moment? So maybe I'll just take the first question.

We had provided a wider guidance range obviously this year given the NHP supply situation. And to your point, it included 200 to 400 basis points of impact. As Jim commented, the second quarter is certainly a little bit better than we had planned given the collaboration with our clients to...

be at the lower end of that range, but it's still early in the year. So I'll leave it at that. Jim, do you want to?

So on the NHP competitive scenario, I'd say a couple of things. One is there's obviously a significant number of NHPs in China to be utilized by Chinese CROs to both support their current industry, I mean, their internal China industry, and perhaps

too many, and I think there's a reluctance for a whole bunch of obvious reasons to be taking your new drug, newly patented drugs and doing the work in China, but having said that, I think they'll get the work done wherever they can. With regard to our domestic competitors, I'd remind you that number one, they're smaller, way smaller, number two, number three, number four,

suppliers that we might not use. So we're constantly trying to take the high road in terms of quality, consistency, and volume of supply, and we think we're in a very strong competitive position. Thanks guys, appreciate it.

that we might not use. So we are constantly trying to take the high road in terms of quality, consistency and volume of supply. And we think we're in a very strong competitive position. Thanks guys, appreciate it. Yeah.

subject. There's been some press reports on vans of harvesting of horseshoe crab. Just any comment there on or what the size of that business is for Charles River. Thanks.

So on the CDMO business, you have three parts. We have a self-therapy manufacturing business, which is our largest business in Memphis. It's doing quite well, certainly compared to the prior year. I was just down there with fabulous new facilities, new management team, new sales organization.

significant number of new clients both large and small. We are producing our first commercial product, can't divulge it, but we are. Then we have other clients that are moving in that direction. By that I mean the filing.

with various government agencies in the US and Europe , and or telling us to get ready for audits by either the FDA or the EMA. So moving in the commercial direction, we have new production suites which are available. Some of those have been reserved by a client that are either commercial now or

thinks they will be soon because obviously they don't want to have a product approved and not get there. So we're pleased with the way it's progressing. We also have viral vector business in Rockville, Maryland that it also has been enhanced facilities and management team and sales organization, which is which is strengthening nicely and we have a plasma DNA business in the UK which again has been...

somewhat transformed. We have centers of excellence in both of those sites now where they used to do multiple things. So CDMO business will have a nice growth rate this year notwithstanding the predetermined and expected difficult costs for Q1. That business will continue to strengthen through each quarter.

both on the top line and the bottom line from a comparative basis. But once you crowd thing, you know that that's the reagent that we use for endotoxin tests. I'll remind you that that test is used for medical devices and injectable drugs required by law as a law release test. I'll also remind you that that was our first.

That's water suits related to that. I won't get into all the details, but the punch line is we have some restrictions in fishing those waters, but we also have new locations to harvest, perhaps in other parts of the US, which should hold us in good stead. We're also building the inventories nicely.

I guess the last thing I would say is that our technology as opposed to the conventional technology which is 96 well placed and we still sell lots of that but our forward-looking technology is a more sophisticated device which uses 95% less crude.

So, you know, our need for a crude, which is the blood from the horse your crowd is actually as we transfer the clients to new technologies actually decreasing all the time. So we're in good shape there. Thanks for taking the question.

We will take our next question from Justin Bowers with Deutsche Bank. Hi, good morning, everyone. Just sticking with the CDMO and the improvements there. Sequentially, I think in the deck or the prepared remarks, you talked about returning to those targeted growth rates. Can you just remind us what those are? Or can we kind ofSKs from during the week Stall many other updates. I to scale us over to the current lockers and? Lindsay. Carly. Hello everybody to solve these additions to mutual fund Pushfloor Leadership strategy. The Megan.

Maybe qualitatively, for 2023, are you thinking that that business is sort of above or below the segment growth rates for the year? We're expecting that those businesses in the aggregate, again with Memphis being by far the largest piece, will grow at 20 to 25%, which is what we had anticipated when we bought them. That's a great growth rate.

but as it grows it will be increasingly more creative. So lots of demand, limited competitive scenario. I mean some clients are doing it themselves but I'm talking about it on a contract basis. We have good competitors but not a lot of them. Lots of drugs in development that we're working on the pre-clinical sector.

And then obviously lots of those moving into the clinical domain. Only a few have been approved. Still think it's 13 or 14 totally. We're now making 1 of those gene modified self therapy products. So. We're very pleased and proud of that. Early days from a volume point of view, so it's not not.

not transformational necessarily from that point of view, but I think reputationally with regard to other potential current clients being comfortable with our capability and also the regulatory agencies having monitored us and being pleased with what they saw holds us in good stead. So we're happy with our infrastructure, with the growing client base, with our scientific capabilities, with our ability to...

Sell more effectively. It's a pretty long sales cycle. So, you know, we're out and about well well in advance it does a fair amount of price power in this business because It's complicated and expensive to set it up. And while you may have some very big companies set their own shop up Small and medium-sized biotech is not going to be able to afford it. So Like in safety. Well like in all our businesses. We've got a need to be paid well for a current and future investment in this space, but

We're pleased with the way it's going. We learned a lot last year. We made a lot of fundamental changes in the physical plant and in the scientific and the G&A staff. And just getting the word out that this is something that we do as we go to more scientific meetings and present more papers. So we had a great discussion with the "[ispers and HE Sh

should hit the growth rates that we originally anticipated in our acquisition model. Great and congrats on the commercial production there in Memphis. And then maybe just a quick follow-up on RMS and NHPs in China. Is that, are the, is the messaging there, was there a blip in 1Q and then it's back to normal in 2Q?

Or has something changed in the way that you're sort of going to market there with RMS and UHPs in China? We have supply sources in China that have to stay in China. So we sell the animals to clients in China. Hopefully we can predict the timeframe.

So this just slipped out a little bit, so nothing's fundamentally changed. It's not a huge part of the business, but it's meaningful certainly to our Chinese business and slightly less meaningful, but still meaningful to our RMS. Margins are good.

Animal quality is good and so yeah, that's that's that will continue to be part of a situation over there, but nothing's fundamentally changed. Just split out a little bit. Yes. Purely timing I would characterize. Okay, got it. Thanks so much.

We will take our next question from Elizabeth Anderson with Evercore. Hi guys, thanks so much for the question. You could comment on backlog cancellations in the first quarter. Is that something that you're sort of seeing as broadly studied sequentially?

as we also continue to talk about the size of the backlog, which you had expanded to significantly higher than historical levels. And we talked about the elongation of that backlog, which as one might expect, would drive additional cancellations or slippage.

So first, cancellations and slippage are a normal part of the business. As clients do not have the test articles ready or continue to negotiate design study with the appropriate regulatory agencies, that normally happens in the business. As the backlog elongated in time, that certainly becomes a normal part of the business.

more pronounced as it's harder to predict things that much into the future. So, we had seen that elongate throughout 2022. I think we're getting back to I would say maybe more normalized pre-pandemic levels. And so I think those things will work or will just

The backlog is not going to be perhaps as long and the cancellations and slippage will lower accordingly. Got it. That's super helpful. And then just one of the follow-ups, like, obviously the margin in manufacturing support was impacted a bit by the lower revenue growth, I would imagine, in the quarter. Theirty.

So, let me comment for some of the manufacturing solutions margin in the quarter. So, as Jim talked about, we had some of those prior headwinds with the milestones and CDMO and the biologics COVID volume that we don't no longer have. We also had a lighter start in biologics testing this season.

We were about 20 basis points lower year over year and we continue provided an update on the guidance for the full year of flat to lower versus 2022 given the continued fluidity of the NHB situation that we talked about earlier. to fortunately heal treated all in person and as you can see, an individually made the site for this outbreak and including a limited vanizing stoff support as well.

You know, we were about 20 basis points lower year over year, and we continue, provided an update on the guidance for the full year of FLAT to lower versus 2022, given the continued fluidity of the NHP situation that we talked about earlier. Got it. Thank you.

We'll take our next question from Tim Daly with Wells Fargo. Great. So, Jim, just moving away from all these near-term factors here, wanted to clarify some comments made at a broker conference in March around the RMS segment long-term growth rate. I think I would ask after the break.

Over the past two years, you guys have formally up indexed long-term growth forecasts in RMS from low single, mid single to mid single, high single and DSA from high single to 10%. Where we sit today, are those still the official goal posts or any further updates here on that framework on the segment level?

I mean certainly for this year we feel good about RMS growing at highest end goal. The constituent parts of that business continue to strengthen, actually gaining share in the US and Europe which we haven't seen in a long time. We always get price in that business. Chinese business is growing nicely both in the small animal side and in the NHP business. Most businesses which have great margins.

are growing very nicely. Obviously we did an acquisition last year, which is Explorer Labs, so with all of these new cradles and very important geographies, really great receptivity in a tough economy for these sites and surprisingly, nicely surprisingly, clients are both very large and very small. We thought they would be only smart clients.

and the self-supplied business, which was in the prepared remarks, but we haven't talked about that much. We had a small business, really had probably the only business in the portfolio, really had it tough.

time as a result of COVID and had a very nice 1st quarter. So, I'd say, you know, without getting into 24, obviously that the outlook for that business continues to be stronger. The capacity is extremely well utilized. Competition, while we always respect, I was standing when I'm about to say.

would say is continues to be financially less strong and more fragile and more siloed so I think it's difficult for them to compete with us. So we're feeling really good about that. You know on the DSA side with some moderation from an extremely strong 22.

assuming that the NHP situation gets resolved permanently as we hope it does, we think that's going to be a DSA should be a strong business for us.

Our current guidance, given the vagaries is what is a low to mid single digit, but the current long term guidance out there is low double, I think. So, we'll give updates on all of those growth rates sometime when we have our investor conference. So things are a little bit.

fluid as I said on the NHP side, but we will give guidance assuming that that's clarified or hopefully it will be clarified by the time we have our investor colleagues. But, you know, I think we have pretty much across the board very good demand for what we do. I think we're providing an extraordinarily valuable service and products with very rough out of position and great connectivity across the various parts of our business that should only be enhanced.

given the current portfolio and hopefully as we continue to add to it with very small and perhaps the mid-sized deals. What's the overall China exposure as a percent of revenues?

over under indexed to China and thanks for the time appreciate it. Yeah I think the only business really that that we have a China presence is RMS you know with obviously our models business there but also the services business and so as you can imagine because and then we also have microbial

river sales.

I think it's still less than 5% of total revenue, probably 3 or 4%.

So the last time we updated it was 10 or 15 percent of modernized revenue.

Last time we updated it was 10% or 15% of modernized revenue. You can see your credit card right here.

Thank you. We have no further questions in the queue. I will turn the conference back to Todd Spencer for closing remarks. Thank you for joining us on the conference call this morning. We look forward to seeing you at upcoming investor conferences in June . That concludes the conference call. Thank you. Thank you. That does conclude today's Charles River Laboratories first quarter 2023 earnings call. Thank you for your participation and you may now disconnect.

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