Q4 2023 Charles River Laboratories International Inc Earnings Call
Please standby your program is about to begin.
Operator: Please stand by. Your program is about to begin. Ladies and gentlemen, thank you for standing by, and welcome to the Charles River Laboratories fourth quarter and full year 2023 earnings conference call. This call is being recorded. At this time, all participants are in a listen-only mode.
Speaker Change: Ladies and gentlemen, thank you for standing by and welcome to the Charles River Laboratories fourth quarter and full year 2023 earnings Conference call. This call is being recorded.
Speaker Change: At this time all participants are in a listen only mode.
Operator: 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 1 on your telephone. If you want to remove yourself from the queue, please press star 2.
Speaker Change: After the speaker's presentation, there will be a question and answer session.
Speaker Change: I ask a question during this period, you will need to press star one on your telephone if.
Speaker Change: If you want to remove yourself from the queue. Please press star two lastly, if you should need operator assistance. Please press star Zero I would now like to turn the conference over to our host Todd Spencer Vice President of Investor Relations. Please go ahead.
Operator: 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.
Todd Spencer: Good morning, and welcome to Charles River Laboratories, fourth quarter and full year 'twenty two 'twenty three earnings in 2024 guidance conference call and webcast.
Todd Spencer: Good morning and welcome to Charles River Laboratories' fourth quarter and full year 2023 earnings in 2024 guidance conference call and webcast. This morning, I am joined by Jim Foster, Chairman, President, and Chief Executive Officer; and Slavia, Executive Vice President and Chief Financial Officer. Following the presentation, they will respond to questions. There is a slide presentation associated with today's remarks that can be found on the Investor Relations section of our website at ir.criver.com. A webcast replay of this call will be available beginning approximately two hours after the call and can be accessed on our Investor Relations website. The replay will be available through the next quarterly conference call. I'd like to remind you of our safe harbor.
Todd Spencer: This morning, I am joined by Jim Foster Chairman, President and Chief Executive Officer, and Flavio, Pease Executive Vice President and Chief Financial Officer.
Todd Spencer: I will comment on our results for the fourth quarter of 'twenty, three as well as our financial guidance for 2024. Following the presentation. They will respond to questions. There's a slide presentation associated with today's remarks, which is posted on the Investor Relations section of our website at IR dot she revert dot com.
Todd Spencer: A webcast replay of this call will be available beginning approximately two hours after the call and can be accessed on our investor relations website. The.
Todd Spencer: The replay will be available through the next quarters conference call.
Speaker Change: I'd like to remind you of our safe Harbor, all remarks that we make about future expectations plans and prospects for the company constitute forward looking statements under the private Securities Litigation Reform Act of 1995.
Todd Spencer: All remarks that we make about future expectations, plans, and prospects for the company constitute forward-looking statements under the Private Securities Litigation Reform Act of 1995, and 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. However, non-GAAP financial measures are not meant to be considered superior to or a substitute for results of operations prepared in accordance with GAAP. In accordance with Regulation G, you can find the Comparable Gap Measures and Reconciliations in the Investor Relations section of our website. Good morning.
Actual results may differ materially from those indicated.
Speaker Change: 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.
Speaker Change: non-GAAP financial measures are not meant to be considered superior to or a substitute for results of operations prepared in accordance with GAAP in accordance with regulation G. You can find the comparable GAAP measures and reconciliations on the Investor Relations section of our website.
Speaker Change: I'll now turn the call over to Jim Foster.
Todd Spencer: The stability and resilience of Charles River's business model were very clear in 2020. Although demand trends moderated in the broader life sciences sector, we delivered organic revenue growth of 6.5% and earnings per share of $10.67, both of which were in the upper half of the original guidance ranges that we provided last February. And we also successfully mitigated the impact of the NHP supply disruption in the United States. We are anticipating that constrained client spending will persist into 2024 but that demand will stabilize during the year. At the top end of our financial guidance range, we expect that demand trends will begin to modestly improve later this year. These trends are expected to result in organic revenue that is flat to 3% growth in 2024.
James C. Foster: Good morning.
James C. Foster: The stability and resiliency Charles river's business model were very clear in 2023.
James C. Foster: The demand trends moderated the broader life sciences sector, we delivered organic revenue growth of six 5% and earnings per share of $10 67, plus.
James C. Foster: Both of which were in the upper half of the original guidance ranges that we provided last February.
James C. Foster: We accomplished this despite the pipeline we are re prioritization activity and more cautious spending by many of our biopharmaceutical clients and also by successfully mitigating the impact of the NH P supply disruption in the United States.
James C. Foster: We are anticipating that constrained client spending will persist into 2024.
James C. Foster: Demand will stabilize during the year.
James C. Foster: At the end of our financial guidance range, we expect that demand trends will begin to modestly improve later. This year. These trends are expected to result in organic revenue that is flat to 3% growth in 2024.
James C. Foster: So it's providing a high level outlook at our Investor day in September.
James C. Foster: Further derisked our <unk>.
Todd Spencer: Since providing a high-level outlook at our investor day in September, we have further de-risked... I believe that the macroeconomic environment will stabilize this year, supported by early external indicators that improvement will come, including several successful biotech IPOs in January, providing early signs that the capital markets should reopen and biotech funding will improve. Our internal indicators also suggest that demand trends may be beginning to stabilize in certain businesses, including signs that client destocking activity in microbial solutions is easing and increased proposal activity in the biologics testing business in the fourth quarter. We believe the market environment is transitory The long-term industry fundamentals for drug development remain firmly intact because the overwhelming need to find life-saving treatments for rare diseases and many other unmet medical needs is unchanged.
James C. Foster: 24 financial plan and believe our current outlook is appropriately balanced as cancellations remained elevated and backlog continued to moderately decline in our safety assessment business during the fourth quarter of last year.
James C. Foster: I believe that the macroeconomic environment will stabilize this year is supported by early indicators.
James C. Foster: Prudent well costs, including several successful biotech Ipos January provided early signs that the capital markets should be open and biotech funding on treat our internal indicators also suggest that demand trends may be beginning to stabilize and certain businesses, including signs of decline.
James C. Foster: Docking activity and microbial solutions is easing.
James C. Foster: And increased proposal activity and dialogic testing business in the fourth quarter.
James C. Foster: We believe the macro environment is transitory long term industry fundamentals for drug development remains firmly intact.
James C. Foster: Because the overwhelming need to sign lifesaving treatments for rare diseases and many other unmet medical needs is unchanged.
Todd Spencer: Biotech will again move into favor in the capital markets and will lead the way, using advanced modalities and new technologies to drive innovation. Large pharma has consistently adapted to scientific advancements, the regulatory environment, and a drive to be more efficient. Therefore, we anticipate little change with regard to the industry's healthy, long-term growth prospects and continued investment in R&D. However, in today's market environment, we will not wait for client spending patterns to improve. We are proactively and continuously engaged in actions to streamline our organization, to drive productivity, enhance our speed and responsiveness, and become an even stronger scientific partner to our clients. Business Segments This includes enhanced commercial efforts through optimizing Salesforce to accelerate revenue growth by adjusting the go-to-market strategy, focusing on selling across an entire portfolio, and leveraging technology to enhance sales insights and identify earlier selling opportunities.
James C. Foster: So again moving to favor in the capital markets in a lethal way using advanced modalities and new technologies to drive innovation.
James C. Foster: Raj pharma has consistently adapted to scientific advancements the regulatory environment.
James C. Foster: <unk> to be more efficient there.
James C. Foster: Therefore, we anticipate little change with regard to the industry is healthy long term growth prospects and continued investments in R&D in today's market environment, we will not wait for client spending patterns to improved.
James C. Foster: Proactively and continuously engaged in actions to streamline our organization.
James C. Foster: To drive productivity and enhance the speed and responsiveness and become an even stronger scientific partner to our clients.
James C. Foster: We are doing this by continuing to focus on initiatives to win additional market share.
James C. Foster: New.
James C. Foster: Outsourcing opportunities across all three.
James C. Foster: Business segments. This includes enhanced commercial efforts through optimizing our sales force to accelerate revenue growth digesting go to market strategy.
Focusing on selling across our entire portfolio and leveraging technology to enhance sales insights and identify earlier selling opportunities.
Todd Spencer: Our digital strategy is helping us to better connect with our clients, including through our Apollo cloud-based platform, to provide real-time access to scientific data and self-service tools for clients. We also have a culture of continuous improvement in child... that enables us to drive operational efficiencies and cost-saving action, to proactively manage our cost structure and to become an even more compelling partner for our clients for the longer term. Flavio will outline the cost savings from our restructuring initiative shortly.
James C. Foster: Our digital strategy is helping us to better connect with our clients, including through our Apollo cloud based platform to provide real time access to scientific data and self service tools for clients.
James C. Foster: We also have a culture of continuous improvement of Charles River that enables us to drive operational efficiencies and cost saving actions to proactively manage our cost structure and to become an even more compelling partner for our clients for the longer term.
James C. Foster: Flavio will outline the cost savings from our restructuring initiatives shortly.
Todd Spencer: Overall, a successful execution in these areas will enable us to capitalize on new business opportunities as they emerge, while delivering operating margin improvement in 2024. The company reported revenue of $1. $3.01 billion in the fourth quarter of 2023, a 3.5% decline on an organic basis over the previous year. The decrease was driven primarily by a mid-single-digit decrease in the DSA segment.
James C. Foster: Overall, our successful execution in these areas will enable us to capitalize on new business opportunities as they emerge while delivering operating margin improvement in 2020 for MTI.
James C. Foster: Before I provide more details on our 2024 outlook, let me give you the highlights of our fourth quarter performance.
James C. Foster: Reported revenue of one <unk>.
Speaker Change: Oh $1 billion.
Speaker Change: In the fourth quarter of 2023, and 325% decline on an organic basis over the previous year.
Speaker Change: The decrease was driven primarily by a mid single digit decrease in the DSA segment.
Todd Spencer: As we have regularly mentioned, the year-over-year DSA growth rate was affected by a challenging comparison to the 26.5% growth rate reported in the fourth quarter of 2022. Additionally, as has been the trend throughout 2023, sales to the global biopharmaceutical client segment outperformed small and mid-sized biotechs again in the fourth quarter. For 2023, we were pleased to report revenue of $4.13 billion, with an organic revenue increase of 6.5%. The top line performance was driven by another solid year in our safety assessment business, as well as healthy growth in the RMS sector. The operating margin decreased 130 basis points year over year to 19.1% in the fourth quarter, principally driven by higher unallocated corporate costs due in part to a meaningful increase in health and fringe-related expenses. The DSA operating margin also contributed with a small year-over-year decline driven by lower sales volume in the discovery business. For the full year, the operating margin declined by 70 basis points to 20.3%.
Speaker Change: We have regularly mentioned the year over year DSA growth rate was affected by a challenging comparison to the 26, 5% growth rate reported in the fourth quarter of 2022.
Speaker Change: As has been the trends throughout 2023 sales to the global biopharmaceutical clients segment outperformed small and midsize biotech.
Speaker Change: Again in the fourth quarter.
Speaker Change: For 2023, we were pleased to report revenue of 4.13 billion.
Speaker Change: With an organic revenue increase of six 5%.
Speaker Change: Top line performance was driven by another solid year in our safety assessment business.
Speaker Change: Well as healthy growth in the RMS segment the.
Speaker Change: Operating margin decreased 130 basis points year over year to 19, 1% in the fourth quarter, principally driven by higher unallocated corporate costs due in part to a meaningful increase in health entrenched related expenses.
Speaker Change: The DSA operating margin also contributed with a small year over year decline driven by lower sales volume and the discovery business.
Speaker Change: Full year operating margin declined by 70 basis points to 23%.
Todd Spencer: The decrease was primarily driven by the manufacturing and RFS segments, as well as higher unallocated corporate costs. Earnings per share were $2.46 in the fourth quarter, a decrease of 17.4% from $2.98 in the fourth quarter of 2022. In addition to the lower revenue and operating margin, a higher tax rate, as well as the 53rd week in 2022 and the divestiture of the avian vaccine business in the fourth quarter of 2022, were earnings headwinds. 2023 earnings per share declined by 4%. $10.67, due primarily to the non-operating headwinds, including significantly higher interest expense. In total, interest expense tax and the avian divestiture reduced 2023 earnings per share by over a dollar.
Speaker Change: Decrease was primarily driven by the manufacturing and <unk> segments as well as higher unallocated corporate cost.
Speaker Change: Earnings per share were $2.46 in the fourth quarter, a decrease of 17, 4% from $2 98, since the fourth quarter of 2022.
Speaker Change: In addition to the lower revenue and operating margin higher tax rate as well as the 50 <unk> week in 2022, and the divestiture of the avian vaccine business in the fourth quarter of 2022, where earnings headwinds.
Speaker Change: 23 earnings per share declined by 4%.
Speaker Change: $10 67.
Speaker Change: Due primarily to the non operating headwinds, including significantly higher interest expense in total.
Speaker Change: Interest expense tax.
Speaker Change: Avian divestiture reduced 2023 earnings per share by over.
Speaker Change: Per dollar.
Speaker Change: With respect to 2024, we believe our outlook is appropriately balanced demand from many of our large biopharmaceutical clients is expected to be stable, while small and mid sized biotechnology clients may continue to spend cautiously.
Todd Spencer: With respect to 2024, we believe our outlook is appropriately balanced. Demand from many of our large biopharmaceutical clients is expected to be stable, while small and mid-sized biotechnology clients may continue to act cautiously as they endeavor to extend their cash runways until clear indications of an improving funding environment emerge. At the same time, we expect both of these clients to continue to increasingly utilize strategic outsourcing to gain efficiencies and cost effectiveness in the drug development program.
Speaker Change: I endeavor to extend the cash runway until clear indications of an improving funding environment to Merck.
Speaker Change: At the same time, we expect both of these client segments to.
Speaker Change: Two continue to increasingly utilize strategic outsourcing to gain efficiencies.
Speaker Change: Cost effectiveness and their drug development programs as I mentioned earlier organic revenue in 2024 is expected to be in a range from flat to 3% growth.
Todd Spencer: As I mentioned earlier, organic revenue in 2024 is expected to be in a range from flat to 3% growth. Non-GAAP earnings this year are expected to be in a range from $10.90 to $11.40, including at least $0.30 of earnings accretion from the November increase in our ownership stake in Novaprim, our NHP supplier in Richland. The range represents earnings per share growth of approximately 2 to 7 percent, with earnings growth expected to exceed revenue growth due primarily to operating margin expansion of at least 50 basis points per share. I'd like to provide you with additional details on our fourth quarter segment performance and our expectations for 2024, beginning with the DSA segment. DSA revenue in the fourth quarter was $625.8 million, a decrease of 6% on an organic basis. The quarterly decline reflected a difficult comparison to the 26.5% growth rate last year, as well as a meaningful decline in discovery services revenue in the fourth quarter. Safety assessment revenue has also decreased by the lower rate.
Speaker Change: non-GAAP earnings per share are expected to be in a range from $10 90 to $11 40.
Speaker Change: Including at least 30 cents of earnings accretion from the November increase.
Speaker Change: Ownership stake in Novo prep or an HP supplier in Mauritius.
Speaker Change: The range represents earnings per share growth of approximately 2% to 7% earnings growth is expected to exceed revenue growth.
Speaker Change: Primarily to operating margin expansion of at least 50 basis points. This year.
Speaker Change: I'd like to provide you with additional details on our fourth quarter segment performance and our expectations for 2024, beginning with the DSA segment.
Speaker Change: DSA revenue in the fourth quarter was $625 $8 million decreased 6% on.
Speaker Change: Our organic basis.
Speaker Change: Quarterly decline reflected the difficult comparison to the 26, 5% growth rate last year.
Speaker Change: Well as a meaningful decline in discovery services revenue in the fourth quarter.
Speaker Change: Safety assessment revenue also decreased but at a lower rate.
Todd Spencer: In the safety assessment business, the elevated cancellations throughout 2023 and slippage had a greater impact on the fourth quarter, with work being canceled or stock dates moved out of the fourth quarter and into 2024. For the year, DSA revenue increased 7.9% on an organic basis, which met our segment outlook due to another solid year in the safety assessment business. As anticipated, the backlog coverage enabled us to achieve our DSA financial outlook of high single-digit organic revenue growth in 2023. The year-end VSA backlog modestly declined in 2020 to $2.45 billion from $2.6 billion.
Speaker Change: Safety assessment business, the elevated cancellations throughout 2023, and slippage had a greater impact on the fourth quarter with work being canceled or start dates moved out of the fourth quarter and into 2024.
Speaker Change: For the year DSA revenue increased seven 9% on an organic basis, which made our segment outlook due to another solid year in the safety assessment business as anticipated backlog coverage enabled us to achieve our DSA financial outlook of high single digit organic.
Speaker Change: Revenue growth in 2023.
Speaker Change: The year and DSA backlog modestly declined to 22.
Speaker Change: 245 billion from.
Speaker Change: From $2 6 billion.
Todd Spencer: At the end of the third quarter, the cancellation rate increased from third quarter levels, resulting in a net book-to-bill that remained relatively stable but below one times. However, the net book-to-bill has moved within a similar range throughout each quarter of 2023. With gross bookings remaining about one times at the end of the fourth quarter, we expect demand KPIs to improve modestly once the cancellation rates subside, which is one of the assumptions behind our DSA outlook. We expect flat to low single-digit organic revenue growth in the DSA segment in 2024. The first quarter will exhibit trends similar to the fourth quarter of 2023, due in part to the normal seasonal lag of steady starts at the beginning of the year.
Speaker Change: At the end of the third quarter cancellation rate increased from third quarter levels, resulting in a net book to bill that remained relatively stable to below one times. However.
Speaker Change: Net.
Speaker Change: Book to Bill has moved within a similar range throughout each quarter of 2023.
Speaker Change: With gross bookings remaining above one times at the end of the fourth quarter, we expect demand kpis to improve modestly once your cancellation rate side, which is one of the assumptions behind the idea hey outlook, we expect flat to low single digit organic revenue growth in the DSA segment in 2024 first.
Speaker Change: We took a trend similar to the fourth quarter of 2023 due in part to normal seasonal lag of steady starts at the beginning of the year.
Speaker Change: <unk> studied volume to improve thereafter.
Todd Spencer: But the first half growth rate will be lower before the easier year-over-year growth comparison and improving demand KPIs benefit the second half DSA growth. Another assumption is that DSA revenue growth will be principally driven by modest price increases in 2024. One of the reasons that we are able to navigate a volatile NHP pricing environment is our long-standing, high-quality NHP supply relationships, which give us an important competitive advantage in the preclinical sector. The November acquisition of an additional 41% stake in Novaprim for approximately $145 to a 90% controlling interest firmly supports our stated NHP supply strategy of enhancing safeguides and diversifying our NHP supply through increased ownership and operational control. Novaprim is reported as part of our DSA segment for NHPs vertically integrated into our safety assessment supply chain and the RMS segment for NHPs sold to third-party clients.
Speaker Change: But the first half growth rate will be lower before the easier year over year growth comparison, and improving demand kpis benefit the second half DSA growth right.
Speaker Change: Another assumption you said DSA revenue growth will be principally driven by modest price increases in 2024.
Speaker Change: This includes a $15 million to $35 million impact from an HP pricing, which reflects a significantly lower price increase.
Recent years.
Speaker Change: One of the reasons that we are able to navigate a volatile pricing environment, that's how long standing high quality, an HP supply relationships, which give us an important competitive advantage.
Speaker Change: Preclinical sector.
Speaker Change: November acquisition of an additional 41% stake in <unk> approximately $145 to 90% controlling interest only supports our stated an HP supply strategy of enhancing.
Speaker Change: Diversifying our and HD supply.
Speaker Change: Increased ownership and operational control.
Speaker Change: <unk> is reported as part of our DSA segment's tonnage periods.
Speaker Change: We integrated into our safety assessment supply chain in the RMS segment train Hp's sold to third party clients Flavio will provide more details on our financial impacting Nava plant.
Todd Spencer: Flavia will provide more details on the financial impact of Novaprim, which is now consolidated in our financial... As we often comment, we are also deeply committed to initiatives to modify and reduce animal welfare, which are embedded in our four R's and comparisons of replacement, reduction, refinement, and responsibility. We intend to remain the leader in regulatory-required preclinical development services through both enhanced efforts to secure and safeguard our supply chain and also by championing Methodologies to reduce animal use, including alternative technology
Speaker Change: Which is now consolidated in our financial results.
Speaker Change: As we often comment we are also deeply committed to initiatives to modify and reduce animal use which are embedded in our four artisan comparative replacement reduction refinement and responsibility we intend to remain the leader in regulatory required preclinical development services to both enhanced efforts.
Speaker Change: To secure and safeguard our supply chain.
Speaker Change: <unk> by champion.
One <unk> to reduce reuse, including alternative technologies.
Speaker Change: Over the last four years, we have invested approximately $200 million these technologies.
Speaker Change: Through our strategic partnership activities to add capabilities from AI to next generation sequencing as well as through investments in our digital enterprise and our animal free MSA Trillium testing platform.
Todd Spencer: Over the last four years, we have invested approximately $200 million in these technologies, principally through our strategic partnership activities to add capabilities from AI to next-generation sequencing, as well as through investments in our digital enterprise and our animal-free, endosafe Trillium testing platform. Discovery Services had a challenging, and meaningful revenue decline in the fourth quarter across all client segments. Discovery proposal volume remained low throughout the year, and clients' decision-making timelines for new projects remained extended. Despite these near-term challenges, discovery services remain a critical component of our end-to-end, early-stage portfolio as we are able to partner with clients and often establish a relationship with them earlier in their life cycles. Whether for a single project or an integrated program, we are able to work flexibly by providing clients with cutting-edge capabilities to discover their novel therapeutic potential.
Speaker Change: Discovery services had a challenging year.
Sorry, a meaningful revenue decline in the fourth quarter across all client segments.
Speaker Change: <unk> proposal volume remained low throughout the year.
Speaker Change: Clients' decision, making timelines for new projects remains extended.
Speaker Change: Despite these near term challenges discovery services remain a critical component of our end to end early stage portfolio as we are able to partner with clients and off and establish a relationship with them earlier in their lifecycle, whether for a single project or an integrated program.
Speaker Change: We're able to work flexibly.
Speaker Change: And clients with cutting edge capabilities to discover that novel Therapeutics as we turn the page to 2024, we are cautiously optimistic that replenishment in the new year will lead to healthier demand trends, but have forecast the business to be essentially flat in 2024.
Speaker Change: The DSA operating margin was 26% in the fourth quarter, a 30 basis point decrease from the fourth quarter of 2022 due to the revenue decline in discovery services business for the year DSA operating margin increased 220 basis points to 27, 5%.
Todd Spencer: As we turn the page to 2024, we are cautiously optimistic that budget replenishment in the new year will lead to healthier demand trends but have forecast the business to be essentially flat in 2024. The DSA operating margin was 26% in the fourth quarter, a 30 basis point decrease from the fourth quarter of 2022 due to the revenue decline in the discovery services business. For the year, DSA's operating margin increased by 220 basis points to 27.5% as a result of operating leverage associated with higher revenue and favorable mix in the safety assessment business. RMS revenue in the fourth quarter was $195.8 million, a decrease of 0.4% on an organic basis. For the year, RMS's organic revenue growth was 5.9%. Demand for small research models across all client segments slowed considerably in the fourth quarter, particularly in North America and Europe.
Speaker Change: A result of operating leverage associated with higher revenue and favorable mix in the safety assessment business.
Speaker Change: RMS revenue in the fourth quarter was $195 8 million a.
A decrease of 0.4%.
Speaker Change: <unk> patients.
Speaker Change: Year, RMS organic revenue growth was five 9%.
Speaker Change: Demand for small research models across all client segments slowed considerably in the fourth quarter, particularly in North America, and Europe sales of small models, where the principal headwind to fourth quarter.
Speaker Change: As well as continued softness in cell solutions, because these headwinds were largely offset by healthy revenue growth from China for both small models and NH piece in the fourth quarter. Despite the numerous reports of a difficult demand environment from our life science sectors within the country.
Speaker Change: The 2024, we expect iron as organic revenue.
Speaker Change: We'll be flat to low single digit.
Speaker Change: The current demand environment will likely limit unit volume growth. This year in the research model business in North America, and Europe. So we expect to drive most of the growth from modest price increase in China. We expect continued healthy demand for small models and associated services, albeit Catholics and the robust historical double.
Todd Spencer: Sales of Small Models were the principal headwind to fourth quarter growth. As well as continued softness in the cell solutions business, these headwinds were largely offset by healthy revenue growth in China for both small models and NHPs in the fourth quarter, despite the numerous reports of a difficult demand environment for the life science sectors within the country, will be slapped to low single digits.
Speaker Change: Digit growth rates in the region.
Speaker Change: We expect an HP revenue in China to decline in 2024, due primarily to lower pricing in the region.
Speaker Change: Research model services are positioned to be a notable contributor to revenue growth from 2024.
We are expanding on Jim's capacity in certain regions to accommodate our clients' increasing requirements for our support of their complex research and maintenance of the genetically modified.
Todd Spencer: The current demand environment will likely limit unit volume growth this year in the research model business in North America and Europe, so we expect to drive most of the growth through modest pricing. In China, we expect continued healthy demand for small models and associated services, albeit tempered from the robust historical double-digit growth rates in the region. However, we expect NHP revenue in China to decline in 2024, due primarily to lower pricing in the region. Modeled colonies
Speaker Change: Colin.
Speaker Change: In addition, cradle.
Speaker Change: Largest growth drivers for RMS in recent years is expected to deliver a solid top line performance in 2024 with growth accelerating in the second half of the year due entirely to the ramp up of several new credo sites clients are continuing to adopt a flexible model to access space without having to investing in.
Speaker Change: Channel infrastructure.
Provides a powerful value proposition to biotech clients in particular, who are trying to conserve capital.
Todd Spencer: In addition, Cradle, one of the largest growth drivers for RMS in recent years, is expected to deliver a solid top-line performance in 2024, with growth accelerating in the second half of the year, due in part to the ramp-up of several new Cradle sites. Clients are continuing to adopt this flexible model to access cyberian space without having to invest in internal infrastructure, which provides a powerful value proposition to biotech clients, in particular, who are trying to conserve capital. The RMS operating margin increased by 40 basis points year over year to 23.1% in the fourth quarter, but decreased by 220 basis points to 23% in 2023. The one-month contribution from Novaprim, as well as increased shipments of NHPs within China, were the principal contributors to the fourth-quarter margin improvement, partially offset by lower sales volume in the small-models base. As I mentioned, Novaprim sales of NHTs to third-party external clients have been included in the RMS segment, which is expected to drive meaningful margin improvement in the RMS segment in 2024. The CDMO business drove the segment growth rate with solid double-digit growth in both the fourth quarter and for the full year.
Speaker Change: RMS operating margin increased by 40 basis points year over year to 23, 1% in the fourth quarter, but decreased by 220 basis points to 23 points.
Speaker Change: <unk>, 3%.
In 2023.
The one month contribution from <unk> as well as increased shipments of NH piece within China with the principal contributors to the fourth quarter margin improvement, partially offset by lower sales volume in the small models business.
Speaker Change: I mentioned.
Speaker Change: <unk> sale.
And HPE.
Speaker Change: Third party external clients has been included in the RMS segment, which is expected to drive meaningful margin improvement that.
Speaker Change: Segment in 2024.
Speaker Change: Manufacturing solutions revenue was $191 $9 million for the fourth quarter.
Speaker Change: The growth rate of two 3% on an organic basis in the full year organic growth rate was 2%.
Speaker Change: The CMO business drove the segment growth rate solid double digit growth in both the fourth quarter and for the full year.
Speaker Change: The initiatives, we implemented to improve the performance of our CMO business have proven successful in 2023, we believe the business is now well positioned competitively.
Speaker Change: Centers of excellence for cell therapies viral vectors and plasmids.
Speaker Change: And that investments made over the past two years have enhanced the commercial readiness of our operation.
Speaker Change: Maintenance of the business have been well received positive feedback from clients.
Speaker Change: We are generating additional client interests that have undoubtedly been initiated by our announcement in December.
Todd Spencer: Initiatives that we implemented to improve the performance of our CDMO business have proven successful in 2023. We believe the business is now well positioned competitively with its centers of excellence for cell therapies, viral vectors, and plasmids, and that investments made over the past two years have enhanced the commercial readiness of our operations. The enhancements to the business have been well received and are generating positive feedback from clients. We are generating additional client interest that has undoubtedly been initiated by our announcement in December that our Memphis site received U.S. and E.U. approval to manufacture Caz Chevy by Vertex, the first gene-edited cell therapy targeting severe sickle cell disease.
Speaker Change: The site you see the U S and EU approval.
Speaker Change: Can manufacturer.
Speaker Change: As jelly.
Speaker Change: By vertex.
Speaker Change: Gene edited cell therapy targeting severe sickle cell disease.
Speaker Change: We're very pleased with our relationship with vertex and believe commercial relationships like this will continue to drive new client inquiries coming forward.
Hi, Biologics testing solutions and microbial solutions businesses, both reported modest revenue declines in the fourth quarter microbial solutions did experience a modest increase in the year end client order activity as normally occurs but not to the extent that occurred in the fourth quarter of 2022.
Speaker Change: It's a significant budget flush.
Speaker Change: We are announcing positive signs of client destocking activities, starting to wind down.
Speaker Change: Both large biopharmaceutical and CMO clients as the number of large clients recently resumed their order activity for reagents and consumables. In addition, we're announcing confirmed ship dates for instruments, including the Msa's Nexus 200 automated system that were delayed in 2023.
Todd Spencer: We are very pleased with our relationship with Vertex and believe commercial relationships like this will continue to drive new client inquiries going forward. Our Biologics Testing Solutions and Microbial Solutions businesses both reported modest revenue declines in the fourth quarter. Microbial Solutions did experience a modest increase in year-end client order activity, as normally occurs, but not to the extent that occurred in the fourth quarter of 2022 when there was a significant budget flush. However, we are now seeing positive signs that client destocking activity is starting to wind down at both large biopharmaceutical and CDMO clients, as a number of large clients recently resumed their order activity for reagents and consumables. In addition, we're now seeing confirmed ship dates for instruments, including the end-of-space Nexus 200 automated system, that were delayed in 2023. As we previously mentioned, the biologics testing business had a difficult year due to tighter client spending in its end markets. However, we saw an increase in client proposal activity in the fourth quarter, which was the first quarterly increase in 2023. However, first quarter sample volumes for the biologics testing business are always seasonally soft coming out of the holidays.
Speaker Change: As we previously mentioned the biologics testing business had a difficult year due to tighter client spending in the 10 markets. However, we saw an increase in client proposal activity in the fourth quarter, which was the first quarterly increase in 2023.
Speaker Change: This quarter, our sample volume so the biologics testing business are always seasonally soft coming out of the holidays, but.
Speaker Change: But we believe both biologics testing and microbial solutions, we'll see improving trends over the course of the year.
Speaker Change: Positioned to generate modest revenue growth in 2021.
Speaker Change: In total we expect low to mid single digit organic revenue growth in the manufacturing segment. This year.
Manufacturing segment's operating margin increased slightly to 25, 4% in the fourth quarter.
Speaker Change: Declined by 700 basis points for the year to 21, 8%, while the operating margin decline in each of the manufacturing segment's business you had some 2020 with CDMA business was the most meaningful headwind throughout the year.
Speaker Change: However, as project volumes continue to improve and enhance the businesses margin profile. We expect significant improvement this year contributing to meaningful segment operating margin improvement in 2021, as we mentioned at Investor Day in September we expect the manufacturing segment will drive the improvement.
Todd Spencer: We believe both biologic testing and microbial solutions will see improving trends over the course of the year and are positioned to generate modest revenue growth in 2024. In total, we expect low-to-mid single-digit organic revenue growth in the manufacturing segment this year. The manufacturing segment's operating margin increased slightly to 25.4% in the fourth quarter, but declined by 700 basis points for the year to 21.8%.
Speaker Change: The company's margin expansion targets over the next three years and the CMO business is a key component of that call.
Speaker Change: Before I conclude I'd like to congratulate Bill barbell on a remarkable 42 year career with Charles River as we announced previously Bill will retire as executive Vice President and Chief Commercial officer at the end of 2024.
Speaker Change: His career began with a love of science working as an animal care, ensuring before joining the company as a full time research scientist he continued to assume positions of increasing responsibility.
Todd Spencer: While the operating margin declined in each of the manufacturing segment's business units in 2023, the CDMO business was the most meaningful headwind throughout the year. However, as project volumes continue to improve and enhance the business's margin profile, we expect significant improvement this year, contributing to meaningful segment operating margin improvement in 2020. As we mentioned at Investor Day in September, we expect the manufacturing segment will drive improvement towards the company's margin expansion targets over the next three years, and the CDMO business is a key component of that goal. Before I conclude, I'd like to congratulate Bill Barbo on a remarkable 42-year career at Charles River.
Speaker Change: We are moving into a commercial organization during his time at Chaucer rebuilt numerous initiatives, which contributed to our market leading position and its comprehensive knowledge of our portfolio has made him an indispensable leader of our commercial organization.
Speaker Change: Dell has dedicated his career to ensuring we deliver on our purpose and it's truly embraced our values I greatly appreciate it builds cannot contributions and partnership over the last 42 years and wish him all the best in his next chapter.
Speaker Change: For many years has been working with Christian Eisenhower Senior Vice President responsible for all client services and sales.
Speaker Change: <unk> has now assumed the chief commercial officer role. So we are fortunate to have a succession sites and anticipate a seamless transition. Thanks again.
Speaker Change: And congratulations Krishna.
Speaker Change: In addition to Bill's retirement senior Vice President Kirsten Dol is now assume responsibility for the microbial solutions business and we will now be responsible for our entire manufacturing solutions segment.
Todd Spencer: As we announced previously, Bill will retire as Executive Vice President and Chief Commercial Officer at the end of 2024. Bill's career began with a love of science, working as an animal care intern before joining the company as a full-time research scientist. He continued to assume positions of increasing responsibility, eventually moving into a commercial organization. During his time at Shelter, Bill led numerous initiatives which contributed to our market-leading position, and his comprehensive knowledge of our portfolio has made him an indispensable leader in our commercial organization. Bill has dedicated his career to ensuring we deliver on our purpose and has truly embraced our values. I have greatly appreciated Bill's contributions and partnership over the last 42 years and wish him all the best in his next chapter. For many years, Bill has been working with Kristin Eisenhower, the Senior Vice President responsible for all client services and sales. Kristin has now assumed the Chief Commercial Officer role, so we are fortunate to have a successor in place and anticipate a seamless transition. Thanks again, Bill, and congratulations, Kristin.
Speaker Change: All lines the operational leadership for our cgmp certified distances under Kristen as she has effectively led our biologics testing and see the MRO operations for a number of years to close we were pleased with our solid performance in 2023.
Our long term prospects for revenue growth and margin expansion remain unchanged from the targets, we provided at Investor day.
Speaker Change: Including averaging 6% to 8% organic revenue growth and approximately 150 basis points of cumulative operating margin improvement through 2026.
Speaker Change: Charles river's positions explicitly to meet the evolving needs of our clients and we'll capitalize on the opportunities that emerge in today's business environment.
Demand trends stabilize and eventually improve.
Speaker Change: We are taking action to gain additional market share to enhanced commercial initiatives and by strengthening our leading non clinical portfolio by focusing on innovation, including adding cutting edge technologies from AI to next generation sequencing. We are also committed to driving efficiency and approach.
Speaker Change: Clearly managing our cost structure without sacrificing the flexibility to respond to a changing industry and client requirements and we have stabilized and continue to secure our supply chain, including through the acquisition of an overprint.
Speaker Change: We will continue to lead and to proactively manage the business through the <unk>.
Todd Spencer: In addition to Bill's retirement, Senior Vice President Kirsten Dahl has now assumed responsibility for the microbial solutions business and will now be responsible for our entire manufacturing solution segment. This aligns the operational leadership for our CGMP-certified businesses under Kirsten as she has effectively led our biologics testing and CDMO operations for a number of years. To close, we were pleased with our solid performance in 2023. Our long-term prospects for revenue growth and margin expansion remain unchanged from the targets we provided at Investor Day, including averaging 68 percent organic revenue growth and approximately 150 basis points of cumulative operating margin improvement through 2026. Charles River is positioned exquisitely to meet the evolving needs of our clients and will capitalize on the opportunities that emerge in today's business environment as the demand trends stabilize and eventually improve. We are taking action to gain additional market share, to enhance commercial initiatives, and by strengthening our leading non-clinical portfolio by focusing on innovation, including adding cutting-edge technologies from AI to next-generation sequencing. We are also committed to driving efficiency and appropriately managing our cost structure without sacrificing the flexibility to respond to changing industry and client requirements.
Speaker Change: Dynamic market environment, as well as to deliver value to our shareholders.
Speaker Change: To conclude I would like to thank our employees for their exceptional work and commitment and for our clients and shareholders for their support now I would like Flavio to give you additional details on our financial performance and 2020 for guidance.
Flavio Pease: 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.
Flavio Pease: Costs related primarily to restructuring actions.
Flavio Pease: Gains or losses from certain venture capital and other strategic investments.
Flavio Pease: On the avian divestiture and certain other items.
Flavio Pease: 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.
Flavio Pease: Our fourth quarter 2023 revenue and earnings per share were in line with our expectations and our prior guidance ranges and reflected the continuation of a cautious biopharmaceutical end market demand environment, which we expect will persist into 2024.
Flavio Pease: Therefore, we expect reported revenue growth of 1% to 4% and organic revenue that will be flat to 3% growth in 2024.
Flavio Pease: Higher revenue and moderate margin improvement are expected to drive non-GAAP earnings per share to a range.
Todd Spencer: And we have stabilized and continue to secure our supply chain, including through the acquisition of Novaprim. We will continue to lead and proactively manage the business through this dynamic market environment, as well as to deliver value to our shareholders. To conclude, I would like to thank our employees for their exceptional work and commitment, and our clients and shareholders for their support. Now I'd like Flavia to give you additional details on our financial performance and our 2024 targets. Costs related primarily to restructuring actions, gains or losses from certain venture capital and other strategic investments, gains on the avian divestiture, and certain other items.
Flavio Pease: $10 at 90 cents to $11.40 this year representing year over year growth of approximately Q2, 7%.
Flavio Pease: Our guidance also assumes that the tax rate is less of a headwind to earnings growth than in the prior year and that interest expense will be slightly below 2023.
Flavio Pease: I'll provide more detail on the non operating items a bit later.
Flavio Pease: As Jim mentioned in November we acquired an additional 41% equity stake in Novo create a high quality supplier of NH beef in Mauritius.
Flavio Pease: <unk> has been a long time supplier to Charles River, and we made our first equity investment in 2020 to acquiring a 49% stake.
Todd Spencer: Many of my comments will also refer to organic revenue growth, which excludes the impact of acquisitions, divestitures, foreign currency translation, and the 53rd week in 2022. Our fourth quarter 2023 revenue and earnings per share were in line with our expectations and our prior guidance ranges and reflected the continuation of a cautious biopharmaceutical and market demand environment, which we expect will persist into 2024. Therefore, we expect reported revenue growth of 1 to 4 percent and organic revenue that will be flat to 3 percent growth in 2024. Higher revenue and Moderate Margin Improvement. I expect it to drive non-GAAP earnings per share to a range of $10.90 to $11.40 this year, representing year-over-year growth of approximately 2% to 7%. Our guidance also assumes that the tax rate is less of a headwind to earnings growth than in the prior year and that interest expense will be slightly below 2023. I'll provide more detail on the non-operating items a bit later.
Flavio Pease: Now that we own 90% controlling interest we will consolidate novel <unk> operations into our financial results.
Flavio Pease: The acquisition is expected to be the primary contributor of our operating margin improvement in 2024 and add at least 30.
Flavio Pease: Two non-GAAP earnings per share.
Flavio Pease: The majority of the financial contribution this year will be derived from NH be sold to third party clients, which will be included in the RMS segment.
Flavio Pease: We expect novo claim will generate $40 million to $50 million of third party revenue for the full year 2024.
Flavio Pease: It will not impact organic revenue growth until we anniversary the transaction in late November.
Flavio Pease: And each piece that will be utilizing regulatory required studies will be included in the DSA segment.
Flavio Pease: The transaction will be a small benefit to <unk> financial results as we will now be sourcing. These models internally instead of a third party supplier.
Flavio Pease: Okay.
Flavio Pease: With regard to the quarterly gating of our 2024 outlook as we have said many times our business isn't linear and its quarterly performance can fluctuate based on mix the status of clients' programs the timing of NH be shipments and other related factors.
Todd Spencer: As Jim mentioned, in November, we acquired an additional 41% equity stake in Novaprim, a high-quality supplier of NHPs in Mauritius. Novaprim has been a long-term supplier to Charles River, and we made our first equity investment in 2022, acquiring a 49% stake. Now that we own a 90% controlling interest, we'll consolidate Novoprim's operations into our financial results. The acquisition is expected to be the primary contributor of our operating margin improvement in 2024 and add at least $0.30 to non-GAAP earnings per share. The majority of the financial contribution this year will be derived from NHP sold to third-party clients, which will be included in the RMS segment. We expect Novaprim will generate $40 to $50 million of third-party revenue for the full year 2024, which will not impact organic revenue growth until we anniversary the transaction in late November. NHPs that will be utilized in regulatory-required studies will be included in the DSA segment.
Flavio Pease: We expect the second half of 2024 will be stronger for both year over year revenue growth and operating margin than the first half due in part to the challenging growth comparison in the first half of 2023.
Flavio Pease: We expect organic revenue decrease at a low to mid single digit rate in the first half followed by a second half increase.
Flavio Pease: A mid to high single digit rate.
Flavio Pease: I will now provide additional details on our 2024 outlook, starting with our reportable segments.
Flavio Pease: The RMS segment is expected to generate flat to low single digit organic revenue growth.
Flavio Pease: Just on modest growth for research models, driven principally by price.
Flavio Pease: As well as accelerating growth in the services business with a ramp of new credit facilities in the second half.
Flavio Pease: The DSA segment is also expected to generate flat to low single digit organic revenue growth based on the expectation that early stage demand trends will stabilize during the first half of the yet.
Flavio Pease: Again to improve later in the year.
Flavio Pease: The manufacturing segment is expected to achieve low to mid single digit growth, primarily driven by the <unk> business as well as modest revenue growth in the microbial solutions and biologics testing businesses.
Todd Spencer: The transaction will be a small benefit to our DSA financial results as we will now be sourcing these models internally instead of through a third-party supplier. With regard to the quarterly gating of our 2024 outlook, as we have said many times, our business isn't linear, and its quarterly performance can fluctuate based on orders, the status of clients' programs, the timing of NHD shipments, and other related factors. We expect organic revenue to decrease at a low to mid-single-digit rate in the first half, followed by a second-half increase at a mid-to-high single-digit rate.
Flavio Pease: In 2023, the operating margin declined by 70 basis points to 23%.
This was caused by higher unallocated corporate costs that reduced the consolidated operating margin by 30 basis points, which I'll discuss shortly.
Flavio Pease: And the moderating demand environment during the year, which particularly impacted the RMS and biologics testing businesses.
Flavio Pease: The manufacturing margin was also impacted by higher costs and the CMO business.
Todd Spencer: I will now provide additional details on our 2024 outlook, starting with our reportable segment. The RMS segment is expected to generate flat to low single-digit organic revenue growth based on modest growth for research models driven principally by price, as well as accelerating growth in the services business with a ramp of new cradle facilities in the second half. The DSA segment is also expected to generate flat to low single-digit organic revenue growth based on the expectation that early-stage demand trends will stabilize during the first half of the year and begin to improve later in the year. The manufacturing segment is expected to achieve low to mid-single-digit growth primarily driven by the CDMO business, as well as modest revenue growth in the microbial solutions and biologics testing business. In 2023, the operating margin declined by 70 basis points to 20.3%.
Flavio Pease: Necessary to prepare for regulatory audits and commercial readiness.
Flavio Pease: As well as a lease impairment in the first quarter of 2023.
Flavio Pease: We implemented cost saving actions in 2023, and 2024 to manage our cost structure and align it with the current demand environment.
Flavio Pease: Next time for the savings to rack.
Flavio Pease: These restructuring initiatives will generate approximately $60 million to $70 million in annualized cost savings.
Flavio Pease: Despite the slower topline growth, we expect to generate operating margin improvement of at least 50 basis points.
As I mentioned earlier this improvement will primarily be generated by novo print the balance of the improvement will be derived from continued efforts to manage costs and drive efficiency.
Flavio Pease: On a segment basis, we expect meaningful operating margin improvement from the RMS and manufacturing segments.
Flavio Pease: <unk> is expected to contribute at least 200 basis points to the RMS margin.
Flavio Pease: In the manufacturing segment, we expect the profitability of each business units.
Todd Spencer: This was caused by higher unallocated corporate costs that reduced the consolidated operating margin by 30 basis points, which I'll discuss shortly, and the moderating domain environment during the year, which particularly impacted the RMS and biologics testing business. The manufacturing margin was also impacted by higher costs in the CDMO business necessary to prepare for regulatory audits and commercial readiness, as well as a lease impairment in the first quarter of 2023. We implemented cost-saving actions in 2023 and 2024 to manage our cost structure and align it with the current demand environment, but it takes time for the savings to materialize. These restructuring initiatives will generate approximately $60 to $70 million in annualized cost savings.
Flavio Pease: Improve commensurate with sales volume, but expect the CMO business will be the largest contributor as it grows in scale and adds commercial revenue and costs related to regulatory audit preparation and commercial readiness moderate.
Flavio Pease: The DSA operating margin is expected to be slightly below that.
Flavio Pease: 2023 level.
Flavio Pease: We expect unallocated corporate expenses in 2024 to be similar to the 2023 level at just above 5% of total revenue.
Flavio Pease: 30 basis point increase in 2023 to five 3% was primarily attributable to continued investments in our digital strategy as well as higher health and fringe related costs, which was the primary driver of the fourth quarter increase.
Flavio Pease: The non-GAAP tax rate for 2024 is expected to be in the range of 23% to 24% an increase from 22, 1% in 2023.
Todd Spencer: Despite the slower top-line growth, we expect to generate an operating margin improvement of at least 50 basis points. As I mentioned earlier, this improvement will primarily be generated by Novaprim. The balance of the improvement will be derived from continued efforts to manage costs and drive efficiency. On a segment basis, we expect meaningful operating margin improvement from the RMS and manufacturing segments. Novaprim is expected to contribute at least 200 basis points to the RMS margin. In the manufacturing segment, we expect the profitability of each business unit will improve commensurate with sales volume but expect the CDMO business will be the largest contributor as it grows in scale and adds commercial revenue and as costs related to regulatory audit preparation and commercial readiness moderate. The DSA operating margin is expected to be slightly below the 2023 level.
Flavio Pease: The anticipated increase in the tax rate is principally due to the impact related to stock based compensation as well as the geographic mix of revenue.
Flavio Pease: In addition, we do not expect discrete tax benefits, which benefited 2023 to repeat.
Flavio Pease: The headwind from stock based compensation will cause the first quarter tax rate to be in the mid 20% range because of the more pronounced impact on the tax rate from the timing of vesting of equity awards at current stock price levels.
Flavio Pease: Total adjusted net interest expense in 2024 is expected to be in the range of $125 million to $130 million compared to $131 $5 million last year.
Flavio Pease: The decrease will be primarily driven by debt repayment as well as anticipated lower variable interest rates later in 2024.
Todd Spencer: We expect unallocated corporate expenses in 2024 to be similar to the 2023 level, at just above 5% of total revenue. The 30 basis point increase in 2023 to 5.3% was primarily attributable to continued investments in our digital strategy, as well as higher health and fringe-related costs, which was the primary driver of the fourth quarter increase. The non-GAAP tax rate for 2024 is expected to be in the range of 23 to 24 percent, an increase from 22.1 percent in 2023. The anticipated increase in the tax rate is principally due to the impact related to stock-based compensation as well as the geographic mix of revenue.
Flavio Pease: At the end of the fourth quarter, we had outstanding debt of $2 $65 billion compared to $2 $5 billion at the end of the third quarter.
Flavio Pease: The sequential increase reflected borrowing to fund de Novo Prime acquisition.
Flavio Pease: At the end of the fourth quarter, approximately 75% of our $2 $65 billion in.
Flavio Pease: Outstanding debt was at a fixed interest rate.
Flavio Pease: Our gross leverage ratio was two three times and our net leverage ratio was two two times at the end of the fourth quarter.
Flavio Pease: For 2024, we expect free cash flow will be in a range of $400 million to $440 million, representing a meaningful increase over $365 million in 2023.
Flavio Pease: This increase will be driven by our.
Flavio Pease: Our earnings growth as well as our continued focus on working capital management.
Todd Spencer: In addition, we do not expect discrete tax benefits, which benefited 2023, to repeat. The headwind from stock-based compensation will cause the first quarter tax rate to be in the mid-20% range because of the more pronounced impact on the tax rate from the timing of vesting of equity awards at current stock price levels. Total Adjusted Net Interest Expense in 2024 is expected to be in the range of $125 to $130 million compared to $131.5 million last year. The decrease will be primarily driven by debt repayment, as well as anticipated lower variable interest rates later in 2024. At the end of the fourth quarter, we had outstanding debt of $2.65 billion compared to $2.5 billion at the end of the third quarter. The sequential increase reflected borrowing to fund the Novoprim acquisition. At the end of the fourth quarter, approximately 75% of our $2.65 billion in outstanding debt was at a fixed interest rate.
Flavio Pease: In addition capital expenditures I expect it to decline both on a dollar basis and as a percent of revenue.
Flavio Pease: Capex for 2024 is expected to be approximately $300 million or about 7% of total revenue.
Flavio Pease: <unk> from $318 $5 million or seven 7% of revenue in 2023.
Flavio Pease: This outlook is in line with our long term target level of 7% to 8% of revenue for Capex and reflects our disciplined approach to aligning capacity and capital investments with market demand.
Flavio Pease: A summary of our 2024 financial guidance, including Nova print can be found on slide 38.
Flavio Pease: With regard to the first quarter of 2024, we expect revenue will decline in a low to mid single digit range on a reported basis.
Flavio Pease: And decline in a mid single digit range on an organic basis as we expect demand trends will be similar to the fourth quarter of 2023.
As a reminder, despite the stronger first quarter in 2023, there is typically a seasonal impact in safety assessment, reflecting fewer study starts at the beginning of the year.
Todd Spencer: For 2024, we expect free cash flow to be in a range of $400 to $440 million, representing a meaningful increase over $365 million in 2023. This increase will be driven by earnings growth, as well as our continued focus on working capital management. In addition, capital expenditures are expected to decline both on a dollar basis and as a percent of revenue.
Flavio Pease: <unk> testing business is also impacted by seasonally lower sample volumes in the first quarter.
Flavio Pease: From an earnings perspective, we expect non-GAAP earnings per share of at least $2 in the first quarter.
Flavio Pease: Climbed from the fourth quarter will be primarily driven by a lower operating margin due in part to seasonal business trends.
Flavio Pease: Unallocated corporate costs will also remain above 6% of revenue in the first quarter and similar to the fourth quarter level.
Todd Spencer: CapEx for 2024 is expected to be approximately $300 million, or about 7% of total revenue, down from 318.5 million dollars, or 7.7% of revenue, in 2023. This outlook is in line with our long-term target level of 7% to 8% of revenue for CapEx and reflects our disciplined approach to aligning capacity and capital investments with market demand. A summary of our 2024 financial guidance, including Novaprim, can be found on slide 38. With regard to the first quarter of 2024, we expect revenue to decline in a low to mid-single-digit range on a reported basis and decline in a mid-single-digit range on an organic basis.
Flavio Pease: A challenging comparison to the robust DSA operating margin in the first quarter of last year also impact the year over year comparison.
Flavio Pease: As I mentioned, we expect a meaningfully higher tax rate in the mid 20% range, reflecting a headwind from stock based compensation.
Flavio Pease: We do expect revenue and operating margin will improve sequentially. After the first quarter as we move beyond the seasonal trends at the beginning of the year end market demand improves marginally as the year progresses.
Flavio Pease: In closing despite the ongoing cautious biopharma spending environment.
Flavio Pease: Our business continues to be resilient and we remain confident in the long term health of the industry.
Flavio Pease: Our solid 2023 performance reflected our ability to manage the challenges in the marketplace, while continuing to focus on making disciplined investments to support our businesses and managing costs to capture efficiencies.
Todd Spencer: As we expect, demand trends will be similar to the fourth quarter of 2023. As a reminder, despite the stronger first quarter of 2023, there's typically a seasonal impact on safety assessment, reflecting fewer study starts at the beginning of the year. The biologics testing business is also impacted by seasonally lower sample volumes in the first quarter.
Flavio Pease: Although 2020 for organic revenue growth is forecasted to be below our long term targets. We remain confident in our investor day targets of averaging 6% to 8% organic revenue growth through 2026, and delivering meaningful margin expansion, which is supported.
Todd Spencer: From an earnings perspective, we expect non-GAAP earnings per share of at least $2 in the first quarter. The decline from the fourth quarter will be primarily driven by a lower operating margin, due in part to seasonal business trends. Unallocated corporate costs will also remain above 6% of revenue in the first quarter and similar to the fourth quarter level. A challenging comparison to the robust DSA operating margin in the first quarter of last year also impacts the year-over-year comparison. As I mentioned, we expect a meaningfully higher tax rate in the mid-20% range, reflecting a headwind from stock-based compensation. We do expect revenue and operating margin to improve sequentially after the first quarter as we move beyond the seasonal trends at the beginning of the year, and market demand improves marginally as the year progresses.
Flavio Pease: By the sustained long term fundamentals for drug development, and our position as an industry leader.
Flavio Pease: Okay.
Speaker Change: That concludes our comments, we will now take questions.
Speaker Change: At this time, if you would like to ask a question. Please press the star and one on your Touchtone phone you may remove yourself from the queue at any time by pressing star to please limit yourself to one question once again that is star and <unk>.
Speaker Change: One.
Speaker Change: To ask a question.
Speaker Change: We'll take our first question from Derik de Bruin with Bank of America. Your line is open.
Speaker Change: Hi, good morning, Thanks for taking my question.
Speaker Change: Jim So I'm, a little bit surprised to sort of see the.
Speaker Change: The significant ramp you're embedding in the second half I mean, your book to bills hovering around what points from five eight youre cancellations are up and Youre, assuming some DH and HP pricing, which I think is contra.
Todd Spencer: In closing, despite the ongoing cautious biopharma spending environment, our business continues to be resilient, and we remain confident in the long-term health of the industry. Our solid 2023 performance reflected our ability to manage the challenges in the marketplace while continuing to focus on making disciplined investments to support our businesses and Managing Costs to Capture Efficiency. Although 2024 organic revenue growth is forecasted to be below our long-term targets, we remain confident in our investor-day targets of averaging 6 to 8 percent organic revenue growth through 2026 and delivering meaningful margin expansion, which is supported by the sustained long-term fundamentals for drug development and our position as an industry leader. Thank you.
Speaker Change: Contrary to what some of the market surveys are showing I'm. Just can you can you sort of like break these down for like and how you're sort of like getting the confidence and are doing with that I think particularly on the pricing standpoint, I mean or is it something with the no no prime acquisitions, allowing you to sort of get this incremental pricing. Thanks.
Speaker Change: Sure.
Speaker Change: This would not be the first time and actually we'd be the third time that we've had a ramp.
Speaker Change: 23 was in the first half of the year 'twenty two is back half of the year.
Speaker Change: There were pretty big ramp so it's.
Speaker Change: I don't want to say, it's the nature of the business, but it's not that unusual in the first quarter tends to be a little bit slower as the clients that have sort out what molecules are going to work on.
Operator: That concludes our comments. We will now take questions. At this time, if you would like to ask a question, please press the star and 1 on your touchtone phone.
Speaker Change: What they are going to delay.
Speaker Change: And then there's the.
Speaker Change: Obviously, a lot of issues right. So.
I guess, we're looking at a lot of things that cancellation rates were higher than we would like them.
Derek DeBrun: We'll take our first question from Derek DeBrun with Bank of America. Your line is open. Hi, good morning.
Speaker Change: That's somewhat concerning.
Speaker Change: By the same token we think those were ameliorate.
Speaker Change: We're seeing.
Todd Spencer: Thanks for taking my question. Jim, I'm a little bit surprised to sort of see the significant ramp you're embedding in the second half. I mean, you're booked to bills hovering around, what, 0.75, 0.8, your cancellations are up, and you're assuming some NHP pricing, which I think is, contrary to what some of the market surveys are showing. Can you sort of like break these down and sort of like, and, you know, how you're sort of like getting the confidence you're doing with that. I think, particularly on the pricing standpoint, I mean Thanks.
Speaker Change: Sort of a stabilization in demand and as much as you're seeing on microbial folks.
Speaker Change: Destocking, meaning that you know they they loaded up in the prior year and they've been working through that.
Speaker Change: Bolus of inventory now there we believe that they are getting out of Dubai.
Speaker Change: Incrementally.
Speaker Change: We saw increased.
Speaker Change: Proposal activity in biologics in the fourth quarter that business was down last year again, that's one of those businesses, where the where it comes in very quickly.
Speaker Change: Okay.
Speaker Change: Studies are relatively short term so you turn around very quickly and building very quickly.
Speaker Change: That's a bit of a commentary on the necessity to test in the growth rate of large molecules, which we still feel really positive about it I think everybody does.
Speaker Change: We're looking at a ramp of new cradles that we either delta at the end of last year or are opened or will open next year. So.
Todd Spencer: Sure. This would not be the first time and actually would be the third time that we've had a ramp. 23 was in the first half of the year, 22 was in the back half of the year, and they were pretty big ramps.
Speaker Change: We should see more of that in the back half of the year.
Speaker Change: Yes, we're watching biotech ipos carefully as you all are as everybody else and they were about a half a dozen.
Todd Spencer: I don't want to say it's the nature of the business, but it's not that unusual. The first quarter tends to be a little bit slower as the clients sort of sort out what molecules they're going to work on and what they're going to delay. And then there's obviously a lot of issues, right?
Speaker Change: First quarter, they priced well.
Speaker Change: $8 million was raised and so.
Speaker Change: We feel good about that.
Speaker Change: We're seeing an enormous amount of biopharma M&A. So that's injected a lot of cash into the system V C.
Speaker Change: Vcs are flush with cash.
Speaker Change: So sequential movement after the first quarter is.
Todd Spencer: So, I guess we're looking at a lot of things, yeah. Cancellation rates were higher than we would like, and that's somewhat concerning, and by the same token, we think those were ameliorated. We're seeing sort of a stabilization demand in as much as seeing our microbial folks. We saw increased proposal activity in biologics in the fourth quarter, and that business was down last year. Again, that's one of those businesses where the work comes in very quickly. The studies are relatively short term, so you turn them around very quickly and build them very quickly. And that's a bit of a commentary on the necessity to test and the growth rate of large molecules, which we still feel really positive about. I think everybody should do it.
Speaker Change: I don't want to use the word normal tends to be quite quite usual.
Speaker Change: No.
Speaker Change: Look we're piecing together without trying to over read the situation.
Speaker Change: A bunch of smaller subtle things that in the aggregate.
Speaker Change: Are coming together to provide confidence lots of questions about MH.
Speaker Change: And HP pricing just to sort of bottom line that for you.
Speaker Change: Our prices never got as high as some of the competition, including some of the much smaller.
Speaker Change: So we didn't pay as much we didn't.
Speaker Change: Has along.
Speaker Change: Extremely high prices to our competitors and that's a manifestation I think of the subs.
Speaker Change: Supply sources that we have an area of this new supply source, Nova prep and Mauritius.
Todd Spencer: We're looking at a ramp of new cradles that we either built at the end of last year or are open or will open this year, so we should see more of that in the back half of the year. Now, we're watching biotech IPOs carefully, as you all are, as everybody is, and there were about half a dozen. In the first quarter, they priced well, but $8 billion was raised. And so, you know, we feel good about that. We're seeing an enormous amount of biopharma M&A, so that's injecting a lot of cash into the system, and VCs are flush with cash. So sequential movement after the first quarter is... I want to use the word normal, because it tends to be quite, quite usual.
Speaker Change: Which was always.
We've used them for years, it's always been the highest quality provider and that's going to vote.
Speaker Change: Provide NH piece for safety and also to sell directly to clients and so do you think we can have a modest price increase which is where you're seeing that $15 million to $35 million that we pointed to lots.
Speaker Change: Lots of noise from the competition about reducing prices.
Speaker Change: It's not dispositive of anything that we're going to do because their prices interestingly had been higher than ours.
Speaker Change: So if they bring the prices down whatever they said I think the 10.
Speaker Change: 10, 10, 20, 30%, they're going to get in the same ZIP code that we are.
Speaker Change: So we think we have.
Speaker Change: We think we have a modest amount of HP pricing that was a huge numbers, but we'd be happy to get that incremental revenue.
Todd Spencer: So look, we're piecing together without trying to overread the situation that there are a bunch of sort of smaller, subtle things that, in the aggregate, are coming together to provide confidence. Lots of questions about NHP pricing. So just to sort of bottom line that for you, our prices never got as high as some of the competition, including some of the much smaller competitors. So we didn't pay as much, we didn't, pass along extremely high prices to our competitors, and that's a manifestation, I think, of the supply sources that we have, and now we have this new supply source, Novaprim, in Mauritius, which was always, you know, we've Lots of noise from the competition about reducing prices, but that's not dispositive of anything that we're going to do because their prices, interestingly, have been higher than ours. So, if they bring their prices down, whatever they said, I think 10, 20, 30 percent, they're going to get in the same zip code that we are.
Speaker Change: Supply sources are in really good shape.
Speaker Change: Solidified by the start of a trim acquisition and.
Speaker Change: A whole litany of smaller I don't want to say unrelated smaller strengthening activities across the portfolio. So while it definitely is backend loaded.
Speaker Change: We do think its doable, we also have very easy comps.
Speaker Change: So I'd like to say that but that's a that's a mathematical fact, so the.
Speaker Change:
Speaker Change: Half of the year.
Speaker Change: So.
Speaker Change: So we have a <unk>.
Speaker Change: Meaningful level of confidence in the ramp and definitely in our guidance for the year Derek.
Derek: Thanks, if I can do just one follow up which is any sign that the Chinese are going to reintroduce an HPV to start exploring again.
Speaker Change: Okay.
Speaker Change: There continues to be conversations about it we haven't seen anything either.
Speaker Change: From an importing point of view or an X plane exporting point of view so.
Speaker Change: While it's possible I think its unlikely I mean their thesis is clearly keep those animals within country to provide some sort of competitive advantage, although I don't think it's going to be but.
Speaker Change: They think that's an important sort of natural resources scientific.
Todd Spencer: So, we think we have a modest amount of NHP pricing. I mean, those aren't huge numbers, but we'd be happy to get that incremental revenue. Supply sources are in really good shape, solidified by this Novoprim acquisition and a whole litany of smaller, I don't want to say unrelated, smaller strengthening activities across the portfolio. So while it definitely is back and loaded, we do think it's doable. We also have very easy costs. I don't necessarily like to say that, but that's a mathematical fact.
Speaker Change: We source it gives them a leg up so I think youre going to want to hold onto those animals and use them.
Speaker Change: I think that's been a little bit of noise around that just because the economy. It's a tougher over there than people anticipated and the investment in the life Sciences has been a little less robust. So there hasnt been a fair amount of speculation that they would.
Speaker Change: Export and anything is possible.
Speaker Change: Hospital.
Speaker Change: We're just not seeing it and.
Speaker Change: I'm not sure that's actually a logical reason for them to do it particularly.
Speaker Change: So when when things heat up again in China.
Speaker Change: Thank you.
Speaker Change: Sure.
Speaker Change: And we'll take our next question from Patrick Donnelly with Citi. Your line is open.
Patrick Bernard Donnelly: Hey, guys. Thanks for taking the questions.
Todd Spencer: So the week-to-hour caps for the year are 23. So we have a meaningful level of confidence in the RAMP and definitely in our guidance for the year. There continue to be conversations about it. But we haven't seen anything either from an importing point of view or an exporting point of view. So while it's possible, I think it's unlikely.
Patrick Bernard Donnelly: Jim maybe on the DSA piece, you talked about the cancellation rates picking up a little bit it seemed like the book to Bill was stable.
Patrick Bernard Donnelly: Can you just talk about what youre seeing there it seemed like <unk>, yes, there were signs of a little bit of improvement on the cancellation rates that were kind of take another step back what are you seeing there again you mentioned the biotech ipos that give you a little more confidence how are you thinking about just that backlog step down.
Patrick Bernard Donnelly: As we work our way forward here.
Patrick Bernard Donnelly: Yeah.
Todd Spencer: I mean, their thesis is clearly to keep those animals within the country to provide some sort of competitive advantage, although I don't think it's going to be. They think that's an important sort of natural resource and scientific resource that gives them a leg up. So I think they're going to want to hold on to those animals and use them inside. I think there's a little bit of noise around that just because the economy's tougher over there, and the investment in the life sciences has been a little less robust. So there has been a fair amount of speculation that they will. But I'm not sure there's actually a logical reason for them to do it, particularly not yet, but when things heat up again in China.
Patrick Bernard Donnelly: We've been trying to not over read it we were very pleased to see the cancellation rates, which I'd call.
Patrick Bernard Donnelly: Hi than historically.
Patrick Bernard Donnelly: And they had been historically.
Patrick Bernard Donnelly: Got to come down and we said that's fabulous.
Patrick Bernard Donnelly: One quarter is not dispositive anything and they were up again in the fourth quarter. So we think that that would come down.
Patrick Bernard Donnelly: We do think that we need to see it come down for a couple of quarters.
Patrick Bernard Donnelly: It's somewhat related are very much related to the elongation of the backlog and I think as you'll recall from the last quarter's conference call.
Patrick Bernard Donnelly: We've talked a lot about how.
Patrick Bernard Donnelly: The backlog too crowded to be 18, plus months and that.
Patrick Bernard Donnelly: That felt good to some extent the problem with that was that we definitely had some clients who are just booking slots.
Patrick Bernard Donnelly: Thank you. Sure. And we'll take our next question from Patrick Donnelly with Citi. Your line is open.
Patrick Bernard Donnelly: I wanted to have a slot I'm not actually sure what I'm going to do with that slide prepared to kind of get their 18 months from now I'm sure he'll have some work and what's happened with a lot of a lot of the clients they get to 16 months out and they say Gee, sorry, we actually don't have.
Patrick Bernard Donnelly: Hey guys, thanks for taking the questions. Jim, maybe on the DSA piece, you talked about the cancellation rates picking up a little bit, but it seemed like the book to bill was stable. Can you just talk about what you're seeing there?
Patrick Bernard Donnelly: So we'll give up that slot so elongation of the backlog I think.
Patrick Bernard Donnelly: From that vantage point is probably too long and not all that helpful. So it's back down to about.
Todd Spencer: It seemed like 3Q, you know, there were signs of a little bit of improvement in the cancellation rates. Now we're kind of taking another step back. What do you see in there?
Patrick Bernard Donnelly: 12 months.
Patrick Bernard Donnelly:
Patrick Bernard Donnelly: That seems more rational and it appears from the nature of the conversations we're having with our clients.
Patrick Bernard Donnelly: With real specificity about what theyre up to that they actually have actual studies at the slide again whenever it or whatever it is.
Todd Spencer: Again, you mentioned the biotech IPOs. Does that give you a little more confidence? How are you thinking about just that backlog step down as we work our way forward? You know, we've been trying to not overread it. We were very pleased. I have then historically, The high had only, historically, started to come down. And we said, that's fabulous. But one quarter is not definitive of anything, and they were up again in the fourth quarter.
Patrick Bernard Donnelly: Within that 12 month period, which would.
Patrick Bernard Donnelly: Stabilize the cancellation rate helping to recede.
Patrick Bernard Donnelly: I think as you as you know.
Patrick Bernard Donnelly: Okay.
Patrick Bernard Donnelly: It's always been sort of a healthy amount of slippage in that.
Patrick Bernard Donnelly: The drug isn't quite ready on time, and some percentage of the stuff just canceled because the clients are the.
Patrick Bernard Donnelly: Prioritize things, where the drug is formulating properly or.
Todd Spencer: So we do think that that'll come down. We do think that we need to see it come down for a couple of quarters. But it's somewhat related to, or very much related to, the elongation of the backlog. And I think, as you recall from the last quarter's conference call. We've talked a lot about how, you know, the backlogs have gotten to be 18 plus months. While that felt good, to some extent, the problem with that was that we definitely had some clients who were just booking slots. You know, I want to have a slot. I'm not actually sure what I'm going to do with that slot, but by the time I get there 18 months from now, I'm sure I'll have some work.
Patrick Bernard Donnelly: They run out of cash or blah blah blah.
Patrick Bernard Donnelly: There's a bunch of reasons for it so.
Patrick Bernard Donnelly: We are guardedly optimistic that the cancellation levels are normalizing and we will continue to normalize.
Patrick Bernard Donnelly: Throughout the year that cancellation, sorry backlog.
Patrick Bernard Donnelly: We're fine with it and it doesn't months, we've had years, where it was kind of six to nine months. If it drops even further I think that's fine you want some healthy backlog, so when things do cancel or postpone the clients that.
Patrick Bernard Donnelly: We have something else to slot back in.
Patrick Bernard Donnelly: To that so.
Patrick Bernard Donnelly: Probably somewhat of a normal.
Patrick Bernard Donnelly: Ebb and flow of the bookings and AR.
Patrick Bernard Donnelly: We are happy to see that see it normalize.
Speaker Change: Okay. That's helpful.
Todd Spencer: And what's happened with a lot of the clients is they get to 16 months out, and they say, gee, sorry, we actually don't have a study, so we'll give up that slot. So the elongation of the backlog, I think, from that vantage point, is probably too long and not all that helpful. So it's back down to about 12 months. That seems more rational, and it appears from the nature of the conversations we're having with the client, with real specificity about what they're up to, that they actually have actual studies that they're slotting in, whatever it is, within that 12-month period, which would stabilize the cancellation rate and help it to proceed. I think, as you know, that there has always been sort of a healthy amount of And some percentage of the stuff just cancels because the client's had to reprioritize things, or the drug isn't formulating properly, or they run out of cash, or blah, blah, blah. There are a bunch of reasons for it.
Speaker Change: And then maybe Flavio one for you just on the on the margin cadence for the year can you just talk about the ramp and obviously the <unk> earnings number is a bit late in terms of a percentage of the year a lot smaller than typical so can you just talk about the moving pieces as we work our way through the year on the margin just visibility into our into the ramp and the exit rate there. Thank you so much.
Flavio Pease: Sure Good morning, Patrick.
Flavio Pease: As you pointed out there are a few factors that are putting pressure on the Q1 margin and then throughout the year that those factors are going to ameliorate and and the margin will ramp, namely the tax rate that I talked about in Q1 will be in the mid twenty's.
Speaker Change: Versus our guidance for the year of 23% to 24%.
Speaker Change: Also talked about the ramp.
Speaker Change: The seasonal ramp of our business, which Jim just alluded to.
Speaker Change: With those normal seasonal trends will we will see the margin improving throughout the year and then in addition to the normal seasonal trends you're going to have a tailwind of novo <unk> that tends to be.
Speaker Change: Higher in the later part of the year.
Speaker Change: That aligns with with sort of gestation periods for their colony as well as cradles that Jim talked about that will ramp in the second half and finally.
Todd Spencer: So we are guardedly optimistic that the cancellation levels are normalized and will continue to normalize throughout the year, this cancellation rate, that the backlog... We're fine with it at a dozen months. We've had years where it was kind of six to nine months. If it drops even further, I think that's fine. You want some healthy backlog so when things do cancel or postpone that the clients have, we have something else to slot back in. So... Probably somewhat of a normal ebb and flow, folks. We are happy to see you see it online. Okay, that's helpful.
Speaker Change: Corporate is also a little bit higher in the first quarter vis vis our guidance for the year, so between corporate and tax alone. That's about 25 cents in Q1.
Speaker Change: When you have the normal seasonality.
Speaker Change: The $60 million to $70 million that I talked about in terms of benefit from from some of our restructuring actions that will pick up as the year progresses as well. So we have good line of sight on that margin accelerating throughout the year and confidence.
Speaker Change: That will be able to achieve that.
Speaker Change: Great. Thank you guys.
Speaker Change: Thank you and we'll take our next question from Elizabeth Anderson with Evercore ISI. Your line is open.
Todd Spencer: And then maybe Flavia, one for you, just on the margin cadence for the year, can you just talk about the ramp? You know, obviously, the one Q earnings number is a bit light, and in terms of a percentage of the year, a lot smaller than typical. So can you just talk about the moving pieces as we work our way through the year on the margin, just visibility into the ramp and the exit right there? Thank you. Good morning, Patrick.
Elizabeth Anderson: Hi, guys. Thanks, so much for the question I was hoping you could talk a little bit about I know you talked about the biotech demand environment.
Elizabeth Anderson: Versus mid size could you, maybe specifically talk about some of the pharma demand I think one question people have is some of the restrictions that are going on which seems to be maybe disproportionately impacting preclinical.
Elizabeth Anderson: That seems to be sort of question and then secondarily can you talk about any sort of share gain opportunities. During the year. Obviously, there have been some bills in congress that might potentially impact some of your competitors are willing of some sponsors to work with those competitors. So any comments there would be broadly helpful as well.
Todd Spencer: As you pointed out, there are a few factors that are putting pressure on the Q1 margin, and then throughout the year, those factors are going to improve, and the margin will ramp. Namely, the tax rate that I talked about in Q1 will be in the mid-20s versus our guidance for the year of 23% to 24%. We also talked about the seasonal ramp of our business, which Jim just alluded to. With those normal seasonal trends, we'll see the margin improve throughout the year. And then, in addition to the normal seasonal trends, you're going to have a tailwind of Novaprim that tends to be higher in the latter part of the year.
Elizabeth Anderson: Yeah.
Elizabeth Anderson: Yes.
Elizabeth Anderson: Pharma business and.
Elizabeth Anderson: 23 was particularly strong.
Elizabeth Anderson: Uh huh.
Elizabeth Anderson: We've had a long legacy with the pharmaceutical industry. So that's not necessarily new accept sort of the.
Elizabeth Anderson: Our scale and rates and deaths and.
Elizabeth Anderson: And longevity and when I say longevity I'm, just talking about long term contracts that we have at this point.
Todd Spencer: That aligns with sort of gestational periods for their colony, as well as the cradles that Jim talked about that will ramp up in the second half. And then finally, corporate is also a little bit higher in the first quarter vis-a-vis our guidance for the year. So between corporate and tax alone, that's about $0.25 in Q1.
Elizabeth Anderson: Two to five year contracts.
Elizabeth Anderson: Have have been ticking up.
Elizabeth Anderson: Really really nicely. So we have a lot of our work locked in.
Elizabeth Anderson: For multiple years.
Elizabeth Anderson: Escalating price points.
Elizabeth Anderson: We negotiated.
Elizabeth Anderson: And increasingly we're seeing big pharma bye.
Elizabeth Anderson: Very.
Elizabeth Anderson: Generally across the portfolio so many of them.
Elizabeth Anderson: Everything that we sell.
Todd Spencer: Then you have the normal seasonality and the $60 to $70 million that I talked about in terms of benefit from some of our restructuring actions. And they will pick up as the year progresses as well. So we have a good line of sight on that margin increasing throughout the year and confidence that we'll be able to achieve that. Great, thank you guys. Thank you, and we'll take our next question from Elizabeth Anderson with Evercore ISI. Your line is open.
Elizabeth Anderson: We also have several biotech companies.
Elizabeth Anderson: To all of the let's say.
Elizabeth Anderson: On a constant to August.
Elizabeth Anderson: Safety work with us.
Elizabeth Anderson: Most of the safety work for us and even the ones, where we're not necessarily just a few of them.
Elizabeth Anderson: Where they do a lot of work internally I think.
Elizabeth Anderson: Where the default so I mean, obviously farmer is extremely well financed that's probably the best thing you can say about very well financed placing bets with multiple biotech companies.
Elizabeth Anderson: Hi guys. Thanks so much for the question. I was hoping you could talk a little bit about, I know you talked about the biotech demand environment and sort of small versus midsize. Could you maybe specifically talk about some of the pharma demand? I think one question people have is some of the restructurings that are going on, which seems to be maybe disproportionately impacting preclinical research. That seems to be a sort of question.
Elizabeth Anderson: <expletive> have become the discovery engines you're.
Elizabeth Anderson: Are you seeing lots of acquisitions of drugs or.
Elizabeth Anderson: Geography to sell the drug for entire drug companies almost daily since the beginning of this year with big pharma.
Elizabeth Anderson: Do you think that's going to continue and we always hope that one plus one is more than two for us, but certainly if we're already doing work for the target and the parents.
Speaker Change: We will we will hold onto that work.
Speaker Change: Having said that you know biotech for the last decade.
Elizabeth Anderson: Has been a larger and more aggressive driver of growth.
Todd Spencer: And then secondarily, can you talk about any sort of share gain opportunities during the year? Obviously, there have been some bills in Congress that might potentially impact some of your competitors or the willingness of some sponsors to work with those competitors. So any comments there would be broadly helpful as well. Yeah, so our pharma business in in 23 was particularly strong. You know, we've had a long legacy with the pharmaceutical industry, so that's not necessarily new except sort of the scale, rate, depth, and longevity. And when I say longevity, I'm just talking about long-term contracts that we have with these folks, you know, two to five-year contracts, have been picking up really, really nicely. So we have a fair amount of our work locked in for multiple years at escalating price points that are already pre-negotiated.
Elizabeth Anderson: Just attached to that so while we have much larger.
Elizabeth Anderson: That's a larger amount of revenue that was signed.
Elizabeth Anderson: Pharmaceutical companies, who have very very good clients.
Elizabeth Anderson:
Elizabeth Anderson: Obviously, we have many more biotech clients, none of whom have internal capacity to do the type of work that we do so.
Elizabeth Anderson: Without overstating, how important they're very dependent on either us or some company like us to move a drug.
Elizabeth Anderson: Through preclinical IND filed and how can we get them to the clinic. So.
Elizabeth Anderson: Pleased with the sell through particularly in pharma and as the capital market strength, which they will I mean, we all have our own progress vacation on when that's going to happen, but they will.
Elizabeth Anderson: Little bit happening in January.
Elizabeth Anderson: As VC money continued to be robust so.
Elizabeth Anderson: Pharma companies continue to bet on.
Elizabeth Anderson: Your checking is the modalities.
Todd Spencer: And increasingly, we're seeing big pharma by, very, Thoroughly across, so many of them buy everything that we sell. We also have several all of the, let's say, say, some pharma companies do have their safety work with us. Some that do most of the safety work for us and even the ones where we're not necessarily, Few of them, where they do a lot of work internally, I think, are the default. So, I mean, obviously, Pharma is. , and John W.
Elizabeth Anderson: Continued strength in things like cell and gene in immunotherapy.
Elizabeth Anderson: Biotech.
Elizabeth Anderson: <unk> to ramp up more aggressively with us again.
Elizabeth Anderson: We like our client base is pretty much across the board, we like the share percentage members of drugs work on which is over 80% of all the drugs approved.
Elizabeth Anderson: In the U S over the last more than the last five years probably.
Elizabeth Anderson: Great.
Elizabeth Anderson: The share gain question I do think we have enormous opportunities to take share in virtually everything we do certainly in safety.
Todd Spencer: .. .. .. .. .. .. ....
Todd Spencer: We will. We will hold on to that work. You know, having said that, biotech for the last decade has been a larger and more aggressive driver of growth. So let me just unpack that.
Elizabeth Anderson: Certainly in biologics certainly in the CMO business certainly in discovery.
Todd Spencer: So while we have a much larger market, it's a large amount of revenue that we're selling to pharmaceutical companies who have very, very big clients. Obviously, we have many more biotech companies, none of whom have internal capacity to do the type of work that we do.
Elizabeth Anderson: Even in RMS, where we have.
Elizabeth Anderson: The principal amount of share.
Elizabeth Anderson: Some of that is as you said, it's probably both to die.
Elizabeth Anderson: The new legislation.
Elizabeth Anderson: Some of that is just supported because of our scale and depth of our portfolio and the fact that every client that we work with is very interested in speed to market.
Todd Spencer: So without overstating our importance, they're very dependent on us and like us to move the drug, you know, through preclinical, get their I&D filed, and ultimately get them to the clinic. So, pleased with our sell-through, particularly in pharma, and as the capital markets strengthen, which they will. I mean, it's all, we all have our own prognostications on when that's going to happen, but they will
Elizabeth Anderson: And the nature of our portfolio helps them yet at.
Elizabeth Anderson: It leads to the clinic faster so.
Elizabeth Anderson: We should be able to.
Elizabeth Anderson: Pick up meaningful share as the clients are more comfortable than less cautious conservative with their spending patterns, which we think will be a sequential movements through the back half of the year.
Todd Spencer: A little bit of this happening in January as VC monies continue to be robust and as the pharma companies continue to bet on biotech. And as the modalities continue to strengthen things like cell and gene therapy, and immunotherapy, biotech will continue to ramp up more aggressively with us again. So we like our client base pretty much across the board. We like the share percentage and number of drugs we work on, which is over 80% of all the drugs approved in the U.S. for more than the last five years and probably on the increase.
Speaker Change: Got it thanks, so much Oh and one additional follow up question. The 29000 of average NH P pricing that you cited at your Investor Day is that still the right way to think about sort of the pricing level for 2023 as a whole.
Speaker Change: Yes, Elizabeth it's Flavio ill just say that.
Flavio Pease: Numbers, we sharing the three Q call related to NH piece, whether it's the price the price gain over three years.
Todd Spencer: On the shared gain question, I do think we have enormous opportunities to take share in virtually everything we do, certainly in safety, certainly in biologics, certainly in the C-demo business, certainly in discovery, even in RMS, where we have, you know, we have the principal amount of share. Some of that, as you said, is probably bolstered by new legislation. I think some of that is just supported because of our scale, the depth of our portfolio, and the fact that every client that we work with is very interested in speed to market, and the nature and breadth of our portfolio helps them get things, at least to the clinic, faster. So, we should be able to pick up meaningful share as clients become more comfortable and less cautious and less conservative with their spending patterns, which we think will be a sequential movement through the back half of the year. Thanks so much.
Speaker Change: <unk>.
Flavio Pease: The amount of NH be work as a percent of <unk> revenue, they're all still with the year end results. They all still.
Speaker Change: Similar so there's been no significant update from what we shared with you before.
Speaker Change: Got it thank you very helpful.
Flavio Pease: Thank you and we'll take our next question from Dave Windley with Jefferies. Your line is open.
David Howard Windley: Hi, good morning, Thanks for taking my questions. So on the Nova PRIZM I was trying to quickly scroll back through the deck and unable to find it but I think.
David Howard Windley: It would be helpful for me certainly to understand.
David Howard Windley: A little bit more of the mechanics of how much revenue you expect that to contribute and what the margin structure of that business looks like.
David Howard Windley: Relative to your comments that that is providing.
Flavio Pease: I think you said most or all of the margin lift for the company in 2024, and then I have a follow up.
Flavio Pease: Okay.
Speaker Change: Hi, Dave.
Elizabeth Anderson: Oh, and one additional follow-up question. The $29,000 average NHP pricing that you cited at your investor day, is that still the right way to think about sort of the pricing level for 2023 as a whole? Yeah, Elizabeth. It's Flavia.
David Howard Windley: Yeah, I'll take that good morning.
Speaker Change: Just to reiterate.
Speaker Change: We expect <unk> to add between 40 and $50 million.
Speaker Change: Topline revenue, which will obviously impact reported revenue, but not organic.
Speaker Change: We also expect that Nova PRIZM will add about 30 cents of EPS.
Todd Spencer: I'll just say the numbers we shared in the 3Q call related to NHPs, whether it's the price, the price gain over three years, the units, the amount of NHP work, the percent of city revenue, they're all still, you know, with the year-end results, they're all still, similar. So there's been no significant update from what we shared with you. Got it. Thank you. Very helpful.
Speaker Change: Which if you do the math, it's about 50 basis points of margin expansion and just you articulate a little bit how the construct will work.
Speaker Change: Okay.
Speaker Change: At this point in time, even don't know of a framework it's definitely.
Speaker Change: A move that will allow us to have additional oversight control in <unk> and.
Speaker Change: And eventually higher volume of NH fees in support of our safety business.
Speaker Change: In the short term the majority of the financial impact will be reflected in the RMS segment.
Elizabeth Anderson: Thank you. And we'll take our next question from Dave Windley with Jeffreys. Your line is open. Hi, good morning.
Speaker Change: Where that external revenue will be reported.
David Howard Windley: Thanks for taking my question. So on NovaPrim, I was trying to quickly scroll back through the deck, and I was unable to find it, but I think it would be helpful for me, certainly, to understand a little bit more of the mechanics of how much revenue you expect that to contribute and what the margin structure of that business looks like. Relative to your comments that this is providing, I think you said most or all of the margin list for the company in 2024, and then I have a follow-up. Hi Dave.
Speaker Change: So that 40% to $50 million of third party revenue.
Speaker Change: We will also increase the RMS margin approximately 200 basis points. If you think about the benefit for the safety assessment and DSA segments, it's going to be a relatively small, especially in 2024.
Speaker Change: We obviously already have safety stock of NH fees from Novo cream and other suppliers.
Speaker Change: In the case of Nova print that will require prior to the acquisition. So it's only once we start having or models that.
Speaker Change: Go into studies that benefit from Novo Green being consolidated into Charles River that will start having an impact in the DSA margin and that would be.
Todd Spencer: Yeah, I'll take that. Good morning. So just to reiterate, we expect Novaprim to add between $40 and $50 million of top-line revenue, which will obviously impact reported revenue, but not organically. We also expect that Novaprim will add about $0.30 of EPS, which, if you do the math, is about 50 basis points of margin expansion. And just to articulate a little bit how the construct will work, at this point in time, even though Novaprimo is definitely a move that will allow us to have additional oversight control and eventually a higher volume of NHPs in support of our safety business, in the short term, the majority of the financial impact will be reflected in the RMS segment, where that external revenue will be reported, and so that's $40 to $50 million of third-party revenue.
Speaker Change: Impacted by timing so the majority of the impact in 2024, it will be reflected in the RMS segment.
Speaker Change: Understood. Thank you for reiterating some of that my follow up question is around.
Speaker Change: I guess more general pricing environment.
Speaker Change: Some of your competitors I guess, a couple of different dynamics, one being some of the competitors, albeit smaller competitors have also.
Speaker Change: Addressed cost structure in a way.
Speaker Change: To significantly lower their costs and <unk>.
Speaker Change: Have expressed.
Speaker Change: Express at least to me a willingness to be more price competitive.
Speaker Change: On studies.
Speaker Change: And another angle on this theme to the extent that small biotechs might.
Speaker Change: Evaluate the trade off between.
Speaker Change: Charles River or other providers in the western world or a.
Todd Spencer: We'll also increase the RMS margin approximately 200 basis points. If you think about the benefit for the safety assessment and DSA segments, it's going to be relatively small, especially in 2024, as we obviously already have safety stock of NHPs from Novaprim and other suppliers, in the case of Novaprim, that were acquired prior to the acquisition. So it's only once we start having models that go into studies that benefit from Novaprim being consolidated into Charles River that we'll start having an impact in the DSA margin, and that will be impacted by timing. So the majority of the impact in 2024 will be reflected in the RMS. Understood. Thank you for reiterating some of that. My follow up question is around, I guess more general pricing environment, some of your competitors, I guess a couple different dynamics, one being some of the competitors, albeit smaller competitors, have also address cost structure in a way, to significantly lower their costs and have, express, at least to me, a willingness to be more price competitive, on study, and another angle on this being to the extent that small biotechs might evaluate a tradeoff between, Charles River or other providers in the Western world or an Asian provider at a much lower price.
Speaker Change: And Asian provider at a much lower price.
Speaker Change: And Easter World.
Speaker Change: <unk> primary prices in China have dropped a lot, which makes the cost structure of those competitors significantly lower as well and so the general question here is.
Speaker Change: How much price competition is seeping into the safety assessment market as a result of these lowering cost structures.
Speaker Change: Let me take let me take let me take that one so.
Speaker Change: Dave.
Speaker Change: I would say that all of our competitors and the smaller they get the more this is a factor.
David Howard Windley: Factor compete with us primarily on price.
Speaker Change: And so to some extent, that's an always always and we accept that and claw.
Speaker Change: Clients that either can't afford it or think were too expensive or running out of cash or whatever.
Speaker Change: Further competition, whether its eastern or western.
Speaker Change: Ken and we will.
Speaker Change: We'll go there.
Speaker Change: And that's okay. So I mean that.
Speaker Change: That's not always how it's the Chinese.
Speaker Change: Capacity.
Speaker Change: There are certainly some small let's say U S biotech companies that do the work in China.
Speaker Change: There's a limited amount of capacity in China, So that will happen, though they'll come and go and yes.
Speaker Change: Yes.
Speaker Change: Cost of labor is lower than the cost of everything is lower there.
Speaker Change: I won't comment on the quality of the work I mean, they will have to make that determination.
Speaker Change: Cells.
Speaker Change: We try to be rational and appropriate professional without pricing as I said earlier in my comments, we have a lot of long term contracts with big pharma for some reason most of them came to fruition in fiscal 'twenty three so they've all been re signed the pricing is locked in.
Todd Spencer: In the Eastern world, that primate prices in China have dropped a lot, which makes the cost structure of those competitors significantly lower as well. And so the general question here is... How much price competition is seeping into the safety assessment market as a result of these lower cost structures? Let me take, let me take, let me take that one. So, Dave, and so to some extent, that's an always and forever thing, and we accept that and www. TheBusinessProfessor.com, There are certainly some small, let's say, U.S. biotech companies that do their work in China.
Speaker Change: So that's a significant amount of what we do I do think that folks come to us because.
Speaker Change: Portfolio is larger our proximity is closer or the depth of our science is better.
Speaker Change: And our scale is better and of course, if they know us well.
Speaker Change: <unk>.
Speaker Change: The presumption that were too big too expensive or is it really not true.
Speaker Change: So we will use pricing as well in certain instances I would say that isn't just kind of fall into a few categories, which is to protect share and a big.
Todd Spencer: There's a limited amount of capacity in China, so that will happen. They'll come and go. And yeah, the cost of labor is lower, and the cost of everything is lower there. But I won't comment on the quality of the work.
Speaker Change: Just a big clients that we have.
Speaker Change: That is out shopping for.
Speaker Change: Specifically for price and so we may have to do something there, we certainly will be price aggressive if we're going after a big slug of chair.
Todd Spencer: I mean, they'll have to make that determination themselves. You know, we try to be rational and appropriate and professional with our pricing. As I said earlier in my comments, we have a lot of long-term contracts with Big Pharma. For some reason, most of them came to fruition in fiscal 23.
Speaker Change: With a client that we either don't have at all or have very lives.
Speaker Change: But we often.
Speaker Change: Pass when the price point, just get too low because it's going to be at cost or below cost or at a trivial.
Speaker Change: Operating margin and that's just not worth us worth it given the complexity.
Speaker Change: Understood and I guess, one other thing I would say is that we're at.
Todd Spencer: So they've all been re-signed, and the pricing is locked in. So that's a significant amount of what we do. I do think that folks come to us because our portfolio is larger, our proximity is closer, the depth of our science is better, and our scale is better. And, of course, if they know us well.
Speaker Change: Don't know the exact numbers these days, but it's probably in the high 30%.
Speaker Change: Range, what our market share is while we are pleased and proud of that.
Speaker Change: I do think our share will be much larger over time, but.
Speaker Change: If we only have 30, whatever 6% share there's lots of share there going elsewhere. So.
Speaker Change: I think it's important that we have decent competition, regardless of their price points, regardless of where they do the work and I think it's important to engender.
Todd Spencer: The presumption that we're too big and too expensive is really not true. So we will use pricing as well in certain instances. And I would say those instances kind of fall into a few categories, which is to protect share in big. This is just a big client that we have that is out shopping for, specifically for price. And so we may have to do something there. We certainly will be price aggressive if we're going after a big slug of share with a client that we either don't have at all or have very little, but we often pass. When the price points just get too low, because it's going to be at cost or below cost or at a trivial operating margin, and it's just not worth it, given the complexity.
Speaker Change: Large clients in particular in particular, the big pharma clients to outsource if they feel that they can outsource to.
Speaker Change: To fix it.
Speaker Change: Your bill.
Speaker Change: I think from a pricing point of view, we have been and will continue to hold.
Speaker Change: Okay and safety.
Speaker Change: Before divestments.
Speaker Change: Right.
Speaker Change: I think that's a commentary on lots of things commentary.
Speaker Change: I mean, the nature of your question commentary on the overall economy commentary on our cautiousness of our clients as they put a little more emphasis on post sandy work and clinical work maybe to the detriment of some of the earlier tax were considerably on the discovery work.
Speaker Change: But I think most of the time, we feel that we're being paid quite well for our work.
Speaker Change: I appreciate that answer thank you.
Speaker Change: Thanks, Dave.
Speaker Change: Thank you we'll take our next question from Justin Bowers with Deutsche Bank. Your line is open.
Todd Spencer: I guess one other thing I would say is that we're, I don't know what the exact number is these days, but it's probably in the high 30%. I think from a pricing point of view, we have been and will continue to hold our own. We will address some price and safety issues in fiscal 24, not as much as in fiscal 23.
Justin D. Bowers: Good morning, everyone. So just a two parter for me can you talk about the.
Justin D. Bowers: Sort of like the pros and cons of.
Justin D. Bowers: Owning.
Speaker Change: Yes.
Speaker Change: The NH.
Speaker Change: Yeah.
Speaker Change: Farms in Venice police suppliers I know you.
Speaker Change: We've done this in the past.
Speaker Change: There has been.
Speaker Change: Your your strategy is evolving over the last 18 to 24 months. So can you just.
Speaker Change: Sort of give us some thoughts there on that and then.
Speaker Change: And then part two would just be around competition.
Speaker Change: Just given the demand environment has slowed in general and there had been I think some competitors funded over the last few years, just what are you seeing in the competitive environment.
Todd Spencer: So I think that's a commentary on lots of things. Commentary on the nature of your question, commentary on the overall economy, commentary on the cautiousness of our clients as they put a little more emphasis on post-I&D work and clinical work, maybe to the detriment of some of the earlier talks working certainly on the discovery work. But I think most of the time we feel that we're being paid quite well for our work. I appreciate that answer.
Speaker Change: Environment.
Speaker Change: Competitive environment generally what you're asking about specifically with regard to competition.
Speaker Change: Sorry within like within DSA for example.
Speaker Change: We can come to what we're seeing at least from competitors or anything.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: The competition is pretty static.
Speaker Change: We have we're the largest player by.
Speaker Change: 100%.
Speaker Change: Our next largest competitor.
Speaker Change: Uh huh.
Speaker Change: Kind of lab core and that's capable relatively large stable.
Speaker Change: Enterprise.
Speaker Change: Very good and sort of general toxicology, then you'll have another tier which used to be sort of.
Justin D. Bowers: Thank you. Thank you. We'll take our next question from Justin Bowers with Deutsche Bank. Your line is open. Good morning, everyone.
Speaker Change: Fourth or fifth tier, which kind of became.
Speaker Change: Third tier because.
Speaker Change: We bought three of our competitors in the second tier programs about one of them.
Justin D. Bowers: So, just a two-parter for me. Can you talk about the, sort of like, the pros and cons of owning. , forums. We've done this in the past, and there's been, you know, your strategy is evolving over the last. 24 Mile Circuit, sort of give us some thoughts there on that, and then. And then part two would just be around competition, just given the demand environment has slowed in general and there had been, I think, some competitors funds, over the last few years. Just what are you seeing? Competitive environment generally, what are you asking specifically with regard to competition? I wasn't seeing exits from competitors or anything.
Speaker Change: And those are much smaller company, it's when I say much smaller.
Speaker Change: Maybe they do.
Speaker Change: So I'm just trying to do it quickly in my head maybe they do.
Speaker Change: 5% of what we do maybe they do 8%, 10%, but that's a much much smaller I don't know what their financial.
Speaker Change: Status is one of our competitors.
Speaker Change: Market cap that's shrinking.
Speaker Change: There is enough business to go around but I do think it has to do with quality in science and speed and.
Speaker Change: Technological rigor and particularly.
Speaker Change: And our capabilities.
Speaker Change: I think it's virtually I think that's incredibly unlikely that we'll have new competitors.
Speaker Change: There are several decent competitors in China.
Speaker Change: That I think will focus.
Speaker Change: Theyre, probably doing some work now for western companies, but they're the raison d'etre is to do toxicology work in China for Chinese.
Todd Spencer: The competition is pretty static. We have, we're the largest player by 100%. Thank you. Our next largest competitor is part of LabCorp, and that's a capable, relatively large, stable... Enterprise, very good at sort of general toxicology. Then you have another tier which used to be fourth and a fifth here, which kind of became the third tier because we bought three of our competitors in the second tier and one of them. And those are much smaller companies. When I say much smaller, you know, maybe they do.
Speaker Change: Specific many of them are funded and supported.
Speaker Change: By the Chinese government, so I'd say that the competitive dynamic is kind of is.
Speaker Change: It is what it is unlikely to change it seems to be sufficient.
Speaker Change: This is sufficient that seems to be enough scale to support the client base. So so that's that's promising.
Speaker Change: So that's the other part of your question.
Speaker Change: Don't see.
Speaker Change: I don't see cons.
Speaker Change: Yeah.
Speaker Change: The suppliers. So let's just talk about the one that we just bought we now own 90% happens to be probably the highest quality and the one that we know the most about.
Todd Spencer: I'm just trying to do this quickly in my head. Maybe they do 5% of what we do, maybe they do 8%, maybe they do 10%, but they're much, much smaller. I don't know what their financial situation is... I think it has to do with quality and science. There are several decent competitors in China that I think will focus on...they're probably doing some work now for Western companies, but their raison d'etre is to do toxicology work in China for Chinese drug companies. I think many of them are funded and or supported by the Chinese government.
Speaker Change: And the one that has.
Speaker Change: It's just an exquisite job in terms of.
Speaker Change: The quality of an hps themselves, but.
Speaker Change: It just gives us control on the ground of everything control of Hudson tree breathing.
Speaker Change: Veterinary oversight nutrition.
Speaker Change: Zing ultimately shifting.
Speaker Change: We have a very very close relationship with the government there and we've already spoken to them about scaling up the project over the next number of years.
Todd Spencer: So I'd say the competitive dynamic is kind of... it is what it is and is unlikely to change. It seems to be sufficient. I say sufficient because it seems to be the right scale to support the client base, so that's positive. Now, go back to the other part of your question.
Speaker Change: And have a.
Speaker Change: Have a workforce that we're confident in and.
Speaker Change: So any sort of concern about I don't know transportation or animals getting ill before they're put on put on transport or <unk>.
Todd Spencer: I don't see the cons in owning the suppliers. So let's just talk about the one that we just bought. We now own 90% of what happens to be probably the highest quality and the one that we know the most about, and the one that has. It's just an exquisite job in terms of the quality of the NHPs themselves, but it just gives us control on the ground of everything. Control of husbandry, breeding, veterinary oversight, nutrition, housing, and ultimately shipping.
Speaker Change: Just the overall genetics or breathing methodology.
Speaker Change: Number one it's on us because we own it and number two we have a high degree of confidence in our own ability.
Speaker Change: To do it at the highest quality level, we have I didn't even though the memory.
Speaker Change: Dozens and dozens and dozens of veterinary and a bunch of whom are.
Speaker Change: Got it.
Speaker Change: And in areas.
Todd Spencer: We have a very, very close relationship with the government there, and we've already spoken to them about scaling up the project over the next number of years and having a workforce that we're confident in. And, you know, it's ours. So any sort of concern about, I don't know, transportation or animals getting ill before they're put on transport or just the overall genetics or breeding methodology, you know, number one, it's on us because we own it. And number two, we have a high degree of confidence in our own ability to do it at the highest quality level we have. I don't even know the number anymore, but there are dozens and dozens and dozens of veterinarians, a bunch of whom are primate veterinarians.
Speaker Change: No.
Speaker Change: Another one in China much smaller one.
Speaker Change: We are considering.
Speaker Change: Doing more of this just to just to have control of our supply.
Speaker Change: Sources.
Speaker Change: Some of these providers are newer.
Speaker Change: Just sort of getting there.
Speaker Change: These legs under them and I think we can we're trying to teach them a lot about all the things I, just said, obviously easier to teach them and train them and ensure that they are doing the right things.
Speaker Change: If we own them so.
Speaker Change: We have a very very large revenue base and HP toxicology and growing all large molecules have to be tested then human primates. So the demand will continue to be significant.
Speaker Change: And we need to continue to have access to large numbers of animals, but also the highest quality. So we.
Todd Spencer: So we own another one in China, a much smaller one. We are, you know, considering doing more of this just to have control of our supply and sources. Some of these providers are newer. We don't, you know; they're just sort of getting their sea legs under them.
Speaker Change: We don't see tons.
Speaker Change: We see a lot of pros, we're delighted with the deal that we just did.
Speaker Change: Both in terms of the supply source and.
Speaker Change: The accretion on the top and bottom line.
Speaker Change: Alright, thanks, so much.
Speaker Change: Sure.
Speaker Change: Thank you.
Todd Spencer: And I think we can, we're trying to teach them a lot about all the things I just said. Obviously, it's easier to teach them and train them and ensure that they're doing the right thing if we own them. So it's a very, very large revenue base in NHP toxicology and growing. All large molecules have to and non-human primates.
Speaker Change: We'll take our next question from Jacob Johnson with Stephens. Your line is open.
Jacob Johnson: Hey, Thanks, maybe a two parter on manufacturing the manufacturing segment can you just discuss the it sounds like a lot of that can be driven versus.
Jacob Johnson: From the CMO versus biologics microbial, but maybe if you could talk about the breakdown of that.
Todd Spencer: So the demand will continue to be significant, and we need to continue to have access to large numbers of animals but also the highest quality. So we don't see cons. We see a lot of pros. We're delighted with the deal that we just did, both in terms of the supply source and the accretion on the top and the bottom line. Got it. Thanks so much.
Jacob Johnson: If you'd like to quantify the benefit from the Christopher vertex relationship that'd be great and then just on margins in that segment on the path to 30%.
Jacob Johnson: As we think about that margin expansion opportunity how much of that is it's really driven by the top line or are there cost savings opportunities that could get you there quicker. Thank you.
Speaker Change: So we will see the business has been a huge headwind for us.
Speaker Change: For the past couple of years.
Justin D. Bowers: Thanks. We'll take our next question from Jacob Johnson with Stevens. Your line is open. Hey, thanks. Maybe a two-parter on manufacturing, the manufacturing segment. Can you just discuss, Bobby, it sounds like a lot of that's going to be driven from the CDMO versus biologicals microbial, but maybe if you could talk about the breakdown of that. If you'd like to quantify the benefit from the CRISPR vertex relationship, that would be great.
Speaker Change: Losing money.
Speaker Change: Growing growing OK grew the back half of last year. It grew very nicely, but had been slower than we thought it would be and as you know.
Speaker Change: We literally had to recapitulate redesign re staff all three of these businesses and I'm talking about general management, all the way down to.
Speaker Change: Hum.
Speaker Change: Technicians in the in the study.
Speaker Change: I think we've done a really good job as evidenced by the fact that we've had multiple regulatory audits, culminating in.
Speaker Change:
Speaker Change: With very Texas, new sickle cell drug, which we're going to be producing a large amount of that so couple of things with that that's obviously a marquee clients.
Todd Spencer: And then just on margins in that segment, on the path to 30%, you know, as we think about that margin expansion opportunity, how much of that is really driven by the top line or their cost savings opportunities that could get you there quicker? Thank you. So the CDMO business has been a huge headwind for us for the past couple of years, right? Losing money, growing, growing okay. Growed back after last year, grew very, very slow, been slower than we thought it would be. And, as you know, we've literally had to recapitulate, redesign, and restaff all three of these businesses. And I'm talking about general management all the way down to the technicians in the study rooms.
Speaker Change: That's obviously sort of wonderful.
Speaker Change: Oh, it's almost marketing to be out there weren't other clients.
Speaker Change: They kind of use they got they got to cover taxes I got to ask them about our relationship.
Speaker Change: And we have other clients, who we're talking to right now who are about to file.
Speaker Change: <unk> or finishing phase threes and I do think that.
Speaker Change: What sort of success begets for their business.
Speaker Change: That business, while it won't end fiscal 'twenty four.
Speaker Change: It should have been given our valuation.
Speaker Change: Models will have significantly.
Speaker Change: Better margins and significantly.
Todd Spencer: And I think we've done a really good job as evidenced by the fact that we've had multiple regulatory audits culminating in with Vertex's new sickle cell drug, which we're going to be producing a large amount of. So a couple of things with that. That's obviously a marquee client.
Speaker Change: Higher revenue not growing quite we don't hit our operating plan doesn't have it growing quite at the rate that we thought it would when we bought them, but I still think that's transitory.
Speaker Change: And I think particularly.
Speaker Change: As we get commercial clients, that's going to crank up.
Speaker Change: Nicely. So we're liking this business a lot now it has great connectivity with our biologics business and.
Todd Spencer: That's obviously sort of wonderful, almost marketing to be out there when other clients are thinking about who they're going to use; they're going to call Vertex, ask them about our relationship. And we have other clients who we're talking to right now who are about to file ELAs or finishing phase threes. And I do think that this sort of success begets further business; models will have significantly better margins and significantly higher revenue. Not growing quite as fast, our operating plan doesn't have it growing quite at the rate that we thought it would when we bought them, but I still think that's transitory. And I think, particularly as we get commercial clients, that's going to crank up nicely. So we like this business a lot now. It has great connectivity with our biologics business and also with our safety assessment business. And so the portfolio effect is alive and well. The other two businesses in the manufacturing segment, the first being the microbial business, had its first year; I think it had one year where it grew at 9%. We've owned it for 28 years.
Speaker Change: And also with our safety assessment business and so the portfolio effect.
Speaker Change: Is alive and well.
Speaker Change: The other two businesses in the manufacturing segment.
Speaker Change: First thing the microbial business had its first year I think it had one year, where it grew at 9%.
Speaker Change: We've owned it for 28 years, one year. It grew at 9% every other year it grew at double digit.
Speaker Change: Last year was the only year it grew slowly.
Speaker Change: We've explained that.
Speaker Change: 50 times, what happened there with that business.
Speaker Change: Topline will expand.
Speaker Change: Because the clients have worked through a lot of the.
Speaker Change: Backlog, because they loaded up on supplies during COVID-19.
Speaker Change: And the margins are stunning.
Speaker Change: So that should continue to.
Speaker Change: Most of the operating margin and then biologics, which is a business that 'twenty two and 'twenty one.
Speaker Change: Dynamic top line growth teens.
Speaker Change: And escalating operating margins had a very slow year last year, all because of the economy.
Speaker Change: Numbers of drugs to test.
Speaker Change: It had a bunch of that capacity is filled with COVID-19 stuff is still working through anyway.
Speaker Change: As we said in the prepared remarks.
Speaker Change: Proposal levels were up in the fourth quarter, which is a good sign.
Todd Spencer: One year it grew at 9%, every other year it grew double-digits, and last year was the only year it grew slowly. We've explained that 50 times what happened there, but this time, the top line will expand because the clients have worked through a lot of the backlog because they've loaded up on supplies during COVID, and the margins are stunning in that business. So that should continue to bolster the operating lines. And then Biologics, which is a business that in 22 and 21, and Escalating Operating Margins had a very slow year last year all because of the economy, fewer numbers of drugs to test. It had a bunch of their capacity.
Speaker Change: Where it comes back very very quickly typically and.
Speaker Change: So we should see that whole segment.
Speaker Change: Our business, our largest business but to be <unk>.
Speaker Change: Significant not only in fiscal 'twenty four but if you look at the kind of three year guidance that we gave the CMO business will be instrumental.
Speaker Change: And driving operating margin.
Speaker Change: And revenue growth for sure it will be accretive to the manufacturing segment.
Speaker Change: Also be accretive.
Speaker Change: To the business as a whole and just reorganized that business with new general management, and a different entitled way of selling with separate leadership and more commonality across those businesses because.
Todd Spencer: So the COVID stuff, which they're working through anyway, that business, as we said in the prepared remark, The proposal levels were up in the fourth quarter, which is a good sign that work comes back very, very quickly, typically in. So we should see that whole segment, not our business, not our largest business, but it should be. Significant, not only in fiscal 24, but if you look at the kind of three-year guidance that we gave, the CDMO business will be instrumental in driving operating margin and revenue growth. For sure, it will be accreted to the manufacturing segment, but it will also be accreted to the business as a whole. And just reorganize that business with new general management and a different and tighter way of selling with single leadership and more commonality across those businesses.
Speaker Change: A couple of them, our G&P businesses, which is the same sort of regulatory oversight.
Speaker Change: Sort of mindset is beneficial across.
Speaker Change: Across the across the clients so.
Speaker Change: Important segment has high margin opportunity.
Speaker Change: Last thing just to specifically answer your question is that in that segment before the CMO business was.
Speaker Change: Around mid Thirty's operating margin two years, where it was higher a few years, but it was lower.
Speaker Change: It will continue to grow back towards that.
Speaker Change: It's a little bit difficult to say, if and when it will get higher than that series, but what we did say when we bought the companies.
Speaker Change: Was that we believe that.
Speaker Change: When we had a substantial bolus of <unk>.
Speaker Change: Sure.
Speaker Change: Higher price points.
Todd Spencer: A couple of them are GMP businesses, which have the same sort of regulatory oversight, and that sort of mindset is beneficial across the client. So, important segment, has high margin opportunity, uh, last thing just to specifically answer your question, you know that that segment before we got into the CDMO business was, and it will continue to grow back towards that. It's a little bit difficult to say if and when it will get higher than the mid-30s, but what we did say when we brought the company in was that we believe that when we had a substantial bolus of commercial work at higher price points, with greater efficiency, greater predictability, and just larger volumes of depth, it would be accretive to our operating margins. So, yeah, that's gonna take a while since we've only really signed our first one, but
Speaker Change: With greater efficiency and greater predictability.
Speaker Change: And just larger volumes definitely.
Speaker Change: Would be accretive to our operating margin so that's going to take a while.
Speaker Change: Since we've only really signed the first one but.
Speaker Change: There will be more to follow and as we get more of those.
Speaker Change: And they get locked in for long periods of time that it will definitely benefit.
Speaker Change: The operating margin of that segment. So we feel very optimistic, particularly optimistic about the <unk> business in particular, but quite optimistic about the whole manufacturing segment.
Speaker Change: So our client base.
Speaker Change: The commonality of lot of the work in terms of the potential for.
Speaker Change: Better financial performance.
Speaker Change: Got it thanks for that color, Jim I'll leave it there.
Speaker Change: Sure.
Speaker Change: Thank you we'll take our next question from Max Smock with William Blair. Your line is open.
Todd Spencer: There will be more to follow, and as we get more of those, and they get locked in for long periods of time, that will definitely benefit the operating margin of that segment. So we feel very optimistic, particularly optimistic about the CDMO business in particular, but quite optimistic about the whole manufacturing segment in terms of its importance to our client base, in terms of the commonality of a lot of the work, and in terms of the potential for better financial performance. I got it. Thanks for all that coverage, Jim.
Max Smock: Hi, good morning, Thanks for taking our questions.
Max Smock: Quick one from me here on DSA can you just confirm that net bookings were down sequentially in the quarter and then discuss how youre thinking about net net bookings here moving forward in 2024.
Max Smock: Cancellations, obviously elevated again here in the quarter can you just give us some detail around how gross bookings trended quarter over quarter. I think you caught out still above one, but maybe just sequentially any color there would be helpful. Thank you.
Max Smock: Okay.
Speaker Change: I'll take that.
Speaker Change: I can jump in so yes, the DSA backlog was sequentially down and I think we talked about about $150 million.
Speaker Change: It's still about 12 months as Jim pointed out.
Todd Spencer: I'll leave it. Thank you. We'll take our next question from Max Mock with William Blair. Your line is open. Hi, good morning.
Speaker Change: And the gross bookings were still above one.
Speaker Change: Time, so we're not going to finesse.
Jacob Johnson: Thanks for taking our questions. Just a quick one for me here on DSA. Can you just confirm that net bookings were down sequentially in the quarter and then discuss how you're thinking about net bookings here moving forward in 2024? And, you know, cancellations obviously elevated again here in the quarter. Can you just give us some detail around how gross bookings trended quarter over quarter? I think you caught up still above one, but maybe just sequentially, any color there would be helpful.
Speaker Change: Specific number but.
Speaker Change: Gross bookings still above and as Jim pointed out with hopefully cancellation normalizing, we expect net book to Bill will improve marginally.
Max Smock: When that happens.
Speaker Change: Yeah understood I had to give it a shot there at the gross bookings maybe just a quick follow up for me.
Speaker Change: Even the back half guide can.
Speaker Change: Can you just talk about when you need to see demand trends within each segment start to improve in order to hit the midpoint of the guide for this year, yes that comment in the deck about how at the top end of your financial guide you assumed demand trends will begin to modestly improve later this year, but I just wanted to clarify your assumptions for when demand trends start to pick back up at both the low and the high end of your guide and how that may be different.
Todd Spencer: Thank you. I can jump in. Yeah, the DSA backlog was sequentially down. I think we talked about about a hundred and fifty million dollars still above 12 months, as Jim pointed out, and the gross bookings were still above one time. So we're not going to finesse the specific number, but gross bookings were still above, and as Jim pointed out, with hopefully cancellation, and normalizing, we expect net book-to-bill will improve When that happens, Yeah, in this bit, I had to give it a shot there with the gross bookings.
Speaker Change: By segment. Thank you.
Speaker Change: Yes.
Speaker Change: Like Jim and you go and.
Speaker Change: You can add.
Speaker Change: Max.
Speaker Change: We're not going to comment on the timing to your point by each of the segments and you know.
Speaker Change: When precisely would that have to happen to get to the bottom and the top end of the guidance I think suffice to say at the top end of the guidance as we pointed out we expect demand trends to marginally improve through the year at the bottom and it's more of the seasonal improvement that we tend to see.
Todd Spencer: Maybe just like a quick follow up for me, given the back half guide. Can you just talk about when you need to see demand trends within each segment start to improve in order to hit the midpoint of your guide for this year? You had that comment in the deck about how at the top end of your financial guide, you assume demand trends will begin to modestly improve later this year, but just wanted to clarify your assumptions for when demand trends start to pick back up at both the low end and the high end of your guide, and how that maybe differs by Thank you. Yeah, maybe I'll start, Jim, and you can add later.
Speaker Change: And I think at the top line and then as I said.
Speaker Change: I think I made a comment about the.
Speaker Change: Q1, being a low point in talking about the drivers of that and just to clarify it's a combination of both Pax corporate and the ramp up of our.
Todd Spencer: Max, you know, we're not going to comment on the timing, to your point, by each of the segments and, you know, when precisely would that have to happen to get the bottom and the top end of the guidance. I think, suffice to say, at the top end of the guidance, as we pointed out, we expect dementia to marginally improve through the year. At the bottom end, it's more of the seasonal improvement that we tend to see. And I think at that top line, and then, as I said, and I think I made a comment about Q1 being a low point and talked about the drivers of that. And just to clarify, it's a combination of both tax and corporate and the ramp up of our. The timing of it, it's probably going to defer depending on business. You know, we have a fast portfolio of different businesses that have different drivers, so we're just providing you a top and bottom for the total company. Jim, I don't know if you want to add anything else. I mean, I think I think that was fine.
Speaker Change: <unk> benefits that will together added about 25 cents of EPS. So.
Speaker Change: The timing of it it's probably going to differ depending on business.
Speaker Change: We have a.
Speaker Change: SaaS portfolio of different businesses that have different drivers.
Speaker Change: So, we'll just providing you a top and bottom for the total company.
Speaker Change: Jim I don't know understood I had anything else.
James C. Foster: I mean, I think I think that was fine.
Speaker Change: Sure.
Speaker Change: Quite confidence that we're going to see a sequential improvement.
Speaker Change: Talking about online throughout the year some of that has to do the comps last year. Some of it has to do with our assumptions I went through a bunch of areas, but my first question I answered.
Speaker Change: Business by business.
Speaker Change: Several things that are improving there's definitely some subtle things that are improving in the marketplace and the M&A play space and with the capital markets.
Speaker Change: Look.
Speaker Change: The one thing that you should keep in mind is that there is.
Speaker Change: There would be in there was enormous demand for our services.
Speaker Change: The.
Speaker Change: The preponderance of our clients have to do the work externally they have no internal capacity.
Todd Spencer: I mean, we're, I'm quite confident that we're going to see a sequential improvement in both the top and the bottom line throughout the year. Some of that has to do with the concept last year; some of it has to do with our assumptions. I went through a bunch of those, but the first question I answered, sort of business by business, there are some subtle things that are improving. There are definitely some subtle things that are improving in the marketplace, in the M&A space, and in the capital markets. Look, the one thing that you should all keep in mind is that there is... There would be, and there was, enormous demand for our services. The preponderance of our clients have to do the work externally; they have no internal capacity.
Speaker Change: Their portfolios are quite full and robust given the.
Speaker Change: Lesser of modality that they have to work on them. So.
Speaker Change: Our clients are holding back our clients to re prioritize our clients have.
Speaker Change: Good drug sitting on Michelle.
Speaker Change: <unk>.
Speaker Change: Clearly very frustrated by that and so I think that we think that.
Speaker Change: When we get to the point, where that where they are more comfortable spending because they have greater access to capital.
Speaker Change: It's a demand should improve nicely isn't going to improve overnight in one month.
Speaker Change: One quarter don't know, but we do think that it will sequentially.
Speaker Change: <unk> continued to grow and we've seen this before.
Speaker Change: Several of our businesses wear to work does come in and go out very very quickly, particularly.
Todd Spencer: Their portfolios are quite full and robust given the fact that I think there are a lot of good drugs sitting on the shelves. Our clients are clearly very frustrated by that, and so we think that when we get to the point where they are more comfortable spending because they have greater access to capital, the demand should improve nicely. But is it going to improve overnight in one month, one quarter? I don't know, but we do think that it will sequentially continue to grow. We've seen this before.
Speaker Change: Discovery in biologics and we have we have others that we have very close relationships with our clients and the pricing is all fixed and so their ability to get a slot.
Speaker Change: Is is quite straightforward so we're around.
Speaker Change: We're optimistic.
Speaker Change: So I'm optimistic with our guidance certainly optimistic that the demand comes back it's not if it comes back it's only when it's a little bit murky to call, but we're calling it as best we can given our.
Speaker Change: Decades in the business given the fact that we talked to thousands of clients every week given the chatter I think we have a very good understanding of the competition.
Todd Spencer: There are several of our businesses where the work does come in and go out very, very quickly, particularly Discovery and Biologics. And we have others where we have very close relationships with the clients, and the pricing is all fixed, so their ability to get a slot is quite straightforward.
Speaker Change: Strengths and limitations or so.
Speaker Change: Yes.
Speaker Change: We would be very surprised to say anything.
Speaker Change: To change the slope of growth.
Speaker Change: We see the exogenous things going in our control and things that we see that are within our control or <unk>.
Todd Spencer: We're optimistic with our guidance. We're optimistic that demand will come back. It's not, yes, it will come back.
Speaker Change: Already in <unk>.
Speaker Change: Sort of calculated in that in our guidance, it's unlikely that those things will change.
Speaker Change: Got it thank you for the color and for taking our questions.
Todd Spencer: It's a little bit murky to call, but we're calling it as best we can given our decades in the business, given the fact that we talk to thousands of clients every week, given the fact that we have a very good understanding of the competition and what their strengths and limitations are. Yeah, that's, we would be very surprised if anything happens to change the slope of growth. Obviously, there are exogenous things beyond our control, but the things that we see that are within our control or that are already in, sort of, calculated in our guidance, it's unlikely that those things will change.
Speaker Change: Yeah.
Speaker Change: Thank you and we have time for one more question, we'll take our last question from Dan Leonard with UBS. Your line is open.
Dan Leonard: Thank you very much.
Dan Leonard: Wanted to clarify are you seeing any of these improved external indicators in the biotech market translate into increased inquiry activity or rfps in DSA.
Dan Leonard: And if not what would you expect any lag to look like if there was a sustained capital market's recovery in biotech. Thank you.
Todd Spencer: Got it. Thank you, Wilson, for calling and for taking our question. Thank you, and we have time for one more question. We'll take our last question from Dan Leonard with UBS. Your line is open.
Speaker Change: Okay.
Speaker Change: It typically doesn't turn on a dime and we get asked this question a lot and of course, we've lived through lots of different I hate to turn cycle that lots of different sort of funding.
Dan Leonard: Thanks very much. I just wanted to clarify, are you seeing any of these improvements in external indicators in the biotech market translate into increased inquiry activity or RFPs in DSA? And if you're not, what would you expect any lag to look like if there was a sustained capital markets recovery in biotech? Thank you. You know it typically doesn't turn on a dime, and we get asked this question a lot, and of course, we've lived through lots of different, I hate the term cycle, but lots of different sort of funding time periods in biotech. I think biotech companies have increasingly... gotten very careful about the way they spend their money. Having said that, as I said in the last question, I do think that they will spend more aggressively and more boldly if they have a sense that access to capital is easier and will be sustained as opposed. But I wouldn't say that we've seen any dramatic change in the slope. I mean, we read her book.
Speaker Change: Time, Terry and biotech the biotech companies have increasingly.
Speaker Change: Very.
Speaker Change: Careful about the way they spend their money, having said that I as I said in the last question I do think that they will spend more aggressively and more broadly if they have a sense that access to capital.
Speaker Change: Hum.
Speaker Change: He is here and will be sustained as opposed to something.
Speaker Change: That's going to be lumpy I wouldn't say that we've seen any dramatic change.
Speaker Change: The slope I mean, we watch our bookings.
Speaker Change: We watch the proposal volume and bookings very closely we obviously, we talked about earlier in this call.
Speaker Change: Very interested in cancellation slippage levels, which I think.
Speaker Change: We're hopeful that those will come down.
Speaker Change: The fact that we have 12 month backlog I think it's a positive.
Speaker Change: As I said earlier, if that were to turn into a six to nine month backlog.
Speaker Change: That would be that would be fine as well. So there's a lot of work out there a lot of interests limited competition.
Speaker Change: And and cautiousness.
Speaker Change: Across the board with our clients who are just like we have to hold off until we have a better understanding of when we're going to have better access to capital markets.
Todd Spencer: We watched the proposal a lot in bookings very closely. We are obviously, as we talked about earlier in this call, very, very interested in cancellation and slippage levels, which I think are, you know, we're hopeful that those will come down. You know, the fact that we have a 12-month backlog is positive. And as I said earlier, if that were to turn into a six- or nine-month backlog, that would be fine as well. So there's a lot of work out there, a lot of interest, limited competition, and cautiousness across the board with our clients, who are just like, we have to hold off until we have a better understanding of when we're going to have better access to the capital markets. And, you know, there's certainly some, at least some early indications that that's around the corner.
Speaker Change: Yeah. It's certainly there are certainly some at least some early indications that that's around the corner.
Speaker Change: You can see in our guidance, we believe that we're going to see that the latest in the back half of this year.
Speaker Change: And that will obviously be meaningful too.
Speaker Change: I think most parts of our business.
Speaker Change: And should accelerate our growth rate, we do have sufficient capacity.
Speaker Change: Certainly physical capacity and we're trying to manage their head counts.
Speaker Change: According to demand so I figured I had kind of just some good place so.
Speaker Change: As the work comes we will be able to accommodate it.
Speaker Change: Thank you.
Speaker Change: Sure.
Speaker Change: Thank you.
Speaker Change: I'll now turn the conference back over to Todd Spencer for closing remarks.
Todd Spencer: You can see in our guidance, we believe that we're going to see that at the latest in the back half of this year. And that will obviously be meaningful to, I think, most parts of our business and should accelerate our growth rate. We do have sufficient capacity. Certainly physical capacity, and we're trying to manage our headcount according to demand, so I think our headcount is in a good place.
Todd Spencer: Thanks, Charlie and thank you all for joining US. This morning. This concludes the conference call.
Speaker Change: Yeah.
Todd Spencer: That does conclude today's Charles River laboratories fourth quarter and full year 2023 earnings call. Thank you for your participation and you may now disconnect.
Todd Spencer: Yeah.
Todd Spencer: [music].
Speaker Change: Yes.
Speaker Change: [music].
Todd Spencer: As the work comes in, we will be able to accommodate. Thank you.
Speaker Change: Hum.
Todd Spencer: Thank you. I will now turn the conference back over to Todd Spencer for closing remarks. Thanks, Shelby, and thank you all for joining us this morning.
Speaker Change: Hum.
Speaker Change: [music].
Speaker Change: Yes.
Speaker Change: Uh huh.
Operator: This concludes the conference call. Thank you. This does conclude today's Charles River Laboratories fourth quarter and full year 2023 earnings call.
Speaker Change: [music].
Speaker Change: Alright.
Speaker Change: [music].
Operator: Thank you for your participation, and you may now disconnect. Thank you. Thank you. Thank you, www.larryweaver.com, Hon. Scott Superintendent of Paralimnia-Kington Staff.