Q2 2024 Charles River Laboratories International Inc Earnings Call

August 7, 2024

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Operator: Just a reminder, this call is being recorded. At this time, all participants are in a listen-only mode.

Speaker Change: Just a reminder, this call is being recorded. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session.

Operator: After the speaker's presentation, there will be a question and answer session. I would now like to turn the conference over to our host, Mr. Todd Spencer, Vice President, Investor Relations. Mr. Spencer, please go ahead.

Speaker Change: To ask a question during this period, you will need to press star 1 on your telephone.

Speaker Change: If you would like to remove yourself from the queue, please press star 2. Lastly, if you should need operator assistance at any time, please press star 0. I would now like to turn the conference over to our host, Mr. Todd Spencer, Vice President, Investor Relations. Mr. Spencer, please go ahead, sir.

Speaker Change: This morning, I am joined by Jim Foster, Chair, President, and Chief Executive Officer, and Flavia Pease, Executive Vice President and Chief Financial Officer.

Speaker Change: They will comment on our results for the second quarter of 2024.

Speaker Change: A webcast replay of this call will be available beginning approximately two hours after the call today and can also be accessed on the investor relations section of our website.

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

Speaker Change: The replay will be available through next quarter's conference call.

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

Speaker: In accordance with Regulation G, you can find the comparable GAAP measures and reconciliations in the investor relations section of our website. I will now turn the call over to Jim Foster. Good morning.

Speaker Change: Good morning.

Jim Foster: The top line performance was in line with our outlook, as organic revenue growth in the manufacturing segment was more than offset by DSA and RMS revenue declines. By client segment, we continue to experience lower revenue from small and midsize biotech clients in the second quarter, while revenue from global biopharmaceutical clients increased modestly. I'll provide more details on the evolving trends within these two client segments shortly. We intend to partially offset the headwinds through aggressive actions to streamline our cost structure, optimize our global footprint, and drive greater operating efficiency, which will enable us to limit the bottom line impact going forward.

Speaker Change: By client segment, we continued to experience lower revenue from small and mid-sized biotech clients in the second quarter, while revenue from global biopharmaceutical clients increased modestly.

Speaker Change: The operating margin was 21.3%, an increase of 90 basis points year-over-year.

Speaker Change: Reflecting the reduction in our financial outlook for the second half of the year.

Speaker Change: and lower corporate costs.

Speaker Change: were largely offset by lower margins.

Speaker Change: We are significantly reducing our financial guidance for the year, because forward-looking DSA trend data suggests that demand will not improve during the second half of the year, as we had previously anticipated, and in fact, will decline for global biopharmaceutical clients.

Jim Foster: We believe taking these actions will also enable us to emerge from this period of softer demand as a stronger and leaner organization and better positioned to capture new business opportunities, to both withstand the pressures on our bottom line and to better position the company for when demand cycles back. In contrast to large pharma, demand KPIs for small and mid-sized biotech clients stabilized and trended somewhat more favorably through the first half, reflecting the solid funding environment and favorable sentiment around interest rates.

Speaker Change: Before I discuss the second quarter business segment performance, I will provide more details on these end market demand trends.

Speaker Change: as well as the actions that we are taking to manage through the current environment.

Speaker Change: For the second half of the year. Because of this, the second half revenue growth that we previously anticipated will not materialize. And in fact, demand is expected to continue to soften for global biopharmaceutical clients in the near term.

Speaker Change: These trends for our broader biopharmaceutical client base are expected to lead to a low-to-mid single-digit organic revenue decline in the second half of the year on a consolidated basis.

Speaker Change: likely precipitated by the IRA or pending patent expirations or both.

Speaker Change: And this has undoubtedly led to tighter budgets and additional pipeline reprioritization activities this year.

Speaker Change: Large biopharmaceutical companies are currently focused on resetting their budgets to create leaner cost structures.

Speaker Change: We expect these actions and the resulting softening of our demand KPIs will continue to cause a period of slower spending by a large farmer on their early stage drug development activities, particularly because they are more focused on their clinical pipelines at this time.

Speaker Change: In contrast to large pharma, demand KPIs for small and mid-sized biotech clients have stabilized and trended somewhat more favorably through the first half, reflecting the solid funding environment and favorable sentiment around interest rates.

Jim Foster: Biotech companies are our largest client base at approximately 40% of total revenue and more than half of DSA revenue. We are laser-focused on initiatives to generate more revenue, contain costs, and protect shareholder value. As I discussed earlier this year, we have already begun to enhance our commercial efforts.

Jim Foster: We are focused on optimizing our sales force to accelerate revenue growth by adjusting go-to-market strategies and being a flexible partner for our clients, focusing on selling across the entire portfolio and leveraging technology to enhance sales insights and identify selling opportunities earlier. To drive additional savings and preserve the bottom line, we will continue to aggressively manage our cost structure to ensure that capacity and headcount are aligned with the current software demand environment. In the safety assessment business, lower study volume was partially offset by a small benefit from a price increase.

Speaker Change: We've already consolidated several smaller sites and reduced staffing levels. These recent actions and additional actions that will be implemented by the end of the third quarter are expected to generate over $150 million of annualized cost savings, which will be fully realized in 2025. We are also finalizing them all.

Speaker Change: Our strategy focusing on further optimizing our global footprint driving greater operating efficiency and leveraging our digital platform and global business services to further streamline processes.

Jim Foster: Since we do not expect these trends to improve during the second half of the year, as previously anticipated, and because we will likely be impacted by incremental spending pressures from our global biopharmaceutical client base, we have reduced our DSA revenue outlook to a high single-digit organic decline for the full year. As we mentioned last quarter, we expected the timing of NHP shipments to be a meaningful headwind to the second quarter RMS growth rate. Excluding the NHP impact, RMS revenue is essentially flat year over year, as higher sales of small research models are offset by slightly lower revenue for research model services.

Jim Foster: For the full year, we believe the market environment will remain stable overall, so we are reaffirming our RMS organic revenue growth outlook of flat to low single-digit growth. Research Model Services experienced a slight revenue decline in the second quarter in both GEMS and insourcing solutions. These trends largely reflect the overall biopharma demand environment. However, the benefits generated by clients that utilize our GEMS and IAS solutions can help them overcome their budgetary pressures by driving efficiency.

Jim Foster: Cradle's business model, while not unaffected by the demand environment, continues to resonate with clients who are looking for cost-effective solutions for their vivarium space requirements. Revenue for the manufacturing solutions segment was $192.3 million, an increase of 3.7% on an organic basis compared to the second quarter of last year.

Jim Foster: Each of the segment's businesses contributed to revenue growth. However, as anticipated, the manufacturing growth rate was lower than the first quarter level because of a more challenging prior year comparison for the CDMO business. You may recall that we announced the recovery of the CDMO business in the second quarter of last year. Revenue in our manufacturing quality control testing business, biologics testing, and microbial solutions also continue to grow, rebounding from the more challenging market environment last year. Biologics testing's performance was driven by its core testing activities, including cell backing and viral clearance.

Speaker Change: If you get to the revenue growth as anticipated the manufacturing growth rate was lower than the first quarter level because of a more challenging prior year comparison for the CMO business.

Speaker Change: You may recall that we anniversary the recovery of the <unk> business in the second quarter of last year.

Speaker Change: We expect the <unk> growth rate to Reaccelerate in the second half of the year based on the current pipeline of new projects, particularly for cell therapy. As a result, we expect manufacturing organic revenue growth will be in the mid to high single digit range, a slight increase from our prior outlook. The competitive landscape is also under.

Speaker Change: We're going to transition and certain manufactured market sectors due to M&A or proposed geopolitical regulation, both of which should offer new opportunities to demonstrate the synergies of our comprehensive testing portfolio and win new business.

<unk> business continues to perform well and client interest remains strong.

Speaker Change: <unk> client, who utilizes a viral vector a center of excellence in Maryland received commercial approval last month, and we are also regularly adding new projects across the various phases of clinical development.

Speaker Change: Booking activity continues to improve and the CMO business remains on track to deliver solid double digit growth this year.

Jim Foster: For microbial solutions, the primary driver of revenue growth was demand for our end-of-safe testing cartridge. We expect this trend will continue as the segment rebounds from 2023 and also due to the ongoing increase in the scale of our CDMO business in the second half of the year than previously anticipated for both small and mid-sized biotechnology and global pharmaceutical clients. Therefore, non-GAAP earnings per share guidance is now in a range of $9.90 to $10.20.

Speaker Change: Revenue in our manufacturing quality control testing business biologics testing and microbial solutions also continued to grow rebounding from the more challenging market environment last year Biologics testing performance was driven by its core testing activities.

Speaker Change: <unk> sell backing and viral clearance for microbial solutions. The primary driver of revenue growth was demand for our end to save testing cartridges clients have resumed their purchases of reagents and consumables as destocking activity has subsided.

Speaker Change: The manufacturing segment second quarter operating margin was 26, 6% demonstrating continued improvement with increases of 370 basis points year over year to 130 basis points sequentially.

The improvement is largely a result of leverage from higher sales volume across each of the segments businesses.

Speaker Change: We expect this trend will continue as the segment's rebounds from 2023 and also due to the ongoing increase in the scale of our <unk> business.

Speaker Change: To conclude it is clear that our clients are in the midst of reassessing their budgets re prioritizing their pipelines and managing their cost structures. However, our clients will continue to seek lifesaving treatments for rare diseases and other unmet medical needs in order to do so they will by necessity.

Speaker Change: Reinvigorated investment in their early stage R&D programs over time.

Speaker Change: To emerge as an even stronger partner for our clients. We are working to actively manage our costs initiate new and innovative ways to transform our business protect shareholder value and enhance our clients' commercial experience to gain additional share.

Speaker Change: To conclude I'd like to thank our employees for their exceptional work and commitment.

Speaker Change: Our clients and shareholders for their continued support now Flavio will provide additional details on our second quarter financial performance and 2020 for guidance.

Flavio: 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: Costs related primarily to restructuring action games.

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

Flavio: Many of my comments will also refer to organic revenue growth, which excludes the impact of acquisitions divestitures and foreign currency translation.

Flavio: Second quarter 2020 for organic revenue decreased three 2% right in line with our outlook for the quarter of a low to mid single digit decline. However.

Flavio: However, we delivered non-GAAP earnings per share of $2 86, which exceeded our prior outlook of mid single digit sequential earnings growth by approximately 46.

Flavio: The majority of the earnings outperformance was driven by lower performance based compensation expense.

Flavio: Continued growth in operating margin expansion in the manufacturing segment also contributed.

Flavio: The lower performance based compensation expense was primarily related to adjustments to our bonus accruals in light of the reduced outlook for the year.

Flavio: As Jim discussed in detail, we have significantly lowered our guidance for the full year and now expect a revenue decline of two five to four 5% on a reported basis and 325% on an organic basis.

Jim Foster: Driven primarily by a softer demand outlook in the second half of the year than previously anticipated for both small and mid sized biotechnology and global pharmaceutical clients.

Speaker Change: We expect DSA revenue to decline by approximately 10% organically in the second half compared to six 9% year over year decline in the first half.

Jim Foster: DSA pricing is expected to turn slightly negative by the end of the year, but the largest driver of this change will be the softer demand.

Speaker Change: We will not have time to offset all of the revenue shortfall with additional cost savings at this point in the year.

Speaker Change: Therefore, non-GAAP earnings per share guidance is now in a range of $9 90.

So $10 and 26.

Jim Foster: However, we are implementing additional restructuring initiatives to deliver further cost savings to partially offset the lower revenue and help preserve the bottom line, which will have a more meaningful impact in 2025 and beyond. We're also finalizing a multi-year strategy to optimize our global footprint and drive greater operating efficiency. We intend to commence stock repurchases under the new authorization before the end of the quarter.

Speaker Change: However, we are implementing additional restructuring initiatives to deliver further cost savings to partially offset the lower revenue and help preserve the bottom line, which will have a more meaningful impact in 2025 and beyond.

Speaker Change: As Jim referenced we're implementing additional initiatives to drive incremental cost savings to ensure that our cost structure aligns with the current demand environment.

Jim Foster: Restructuring initiatives are expected to generate over $150 million in annualized cost savings.

Jim Foster: Representing nearly 5% of our operating costs, which is an increase from our prior target of approximately $70 million.

Jim Foster: This updated target includes actions that were initiated last year through dose already planned for the third quarter of this year.

Jim Foster: We expect approximately $100 million of the savings to be realized in 2024.

Jim Foster: Were also finalizing our multiyear strategy to optimize our global footprint and drive greater operating efficiency.

Jim Foster: Which we believe will further our ability to protect operating margins and manage the business through this challenging environment.

Jim Foster: Furthermore, our board recently approved a new stock repurchase authorization of $1 billion.

Jim Foster: Which will add another option to allow us to strategically manage our capital allocation.

Jim Foster: We intend to commence stock repurchases under the new authorization before the end of the quarter.

Jim Foster: Our initial goal will be to offset annual share count dilution from equity awards, but we will regularly reevaluate the best uses of our capital.

Jim Foster: As M&A activity has slowed leverage has remained low at just above two times and the capital intensity of our business has moderated in the current demand environment.

Jim Foster: These dynamics have enabled us to reassess our capital priorities.

Jim Foster: We will also continue to repay that and evaluate strategic acquisitions to enhance our service offering, largely due to the softer domain environment than previously anticipated. From an operating margin perspective, we expect that this year's consolidated operating margin will be slightly below last year's level, as the lower performance-based bonus expense and additional cost savings will nearly offset the revenue shortfall at the margin level in 2024. The decrease was primarily due to favorable geographic earnings as a result of this favorability.

Jim Foster: We will also continue to repay debt and evaluate strategic acquisitions to enhance our service offerings.

Jim Foster: We believe our balanced approach to capital deployment, we will help maintain an optimal capital structure and maximize shareholder value.

Jim Foster: I'll now provide details on our segment outlook and some non operating items.

Jim Foster: By segment, we now expect DSA revenue to decline at a high single digit rate on an organic basis, largely due to the softer demand environment than previously anticipated.

Jim Foster: The outlooks for the RMS and manufacturing segments, I, essentially unchanged with RMS expected to report flat to low single digit organic revenue growth in the manufacturing segment expected to generate mid to high single digit organic revenue growth a slight increase.

Jim Foster: Greece from the outlook in May.

Jim Foster: From an operating margin perspective, we expect that this year's consolidated operating margin be slightly below last year's level.

Jim Foster: As the lower performance based bonus expense and additional cost savings will nearly offset the revenue shortfall at the margin level in 2024.

Jim Foster: On a segment basis pressure in the DSA segment will offset expected margin expansion in both manufacturing and RMS segments.

Jim Foster: Unallocated corporate costs totaled $55 million or four 9% of revenue in the second quarter compared to six 1% of revenue last year.

Jim Foster: This improvement was driven primarily by lower performance based compensation accruals.

Jim Foster: For the full year, we expect unallocated corporate costs will be in the mid 5% range as a percent of revenue.

Jim Foster: Our second quarter tax rate was 21, 1%.

Jim Foster: <unk> of 220 basis points year over year.

Jim Foster: The decrease was primarily due to a favorable geographic earnings mix and higher R&D tax credits.

Jim Foster: As a result of this favorability, we now expect our tax rate will be approximately 22% for the full year.

Jim Foster: In the second quarter net interest expense was $29 8 million, which represented both a sequential and year over year decline.

Jim Foster: For the full year. We also expect total net interest expense will be lower than our prior outlook in the range of $118 million to $122 million. These.

Jim Foster: These reductions are primarily the result of shifting debt to lower interest rate geographies and continued debt repayment.

Jim Foster: As a reminder, over 80% of our $2 4 billion dollar debt at the end of the second quarter was at a fixed rate, including $500 million that is fixed until November.

Jim Foster: And interest rates swap.

Jim Foster: In addition to lowering our interest expense continued debt repayment resulted.

Jim Foster: In growth and net leverage ratios of two two times at the end of the second quarter.

Jim Foster: Free cash flow remains strong with $154 $1 million generated in the second quarter compared to $87 million last year.

Jim Foster: This improvement was driven by lower Capex and working capital management.

Jim Foster: Capital expenditures were $39 $5 million in the second quarter compared to $67 $4 million last year, which reflected the ongoing moderation of our spend in the current demand environment and a disciplined focus on our capital investments for.

Jim Foster: For the year Capex is expected to decline to approximately $250 million and our free cash flow will be in a range of $380 million to $400 million.

Jim Foster: A summary of our 2024 financial guidance can be found on slide 36.

Jim Foster: Looking ahead to the third quarter, we expect both reported and organic revenue will decline at a mid single digit rate year over a year.

Jim Foster: non-GAAP earnings per share is expected to decline in the low double digits year over year as the impact of lower DSA demand will only be partially offset by the benefit of restructuring initiatives.

Jim Foster: The year-over-year revenue growth rates in the RMS and manufacturing segments are expected to rebound from the difficult comparisons in the second quarter. We believe that accomplishing these actions will position the company to gain market share and emerge from this period of softer demand as a leaner, more efficient scientific partner for our clients. Thank you, Mr. Spencer.

Jim Foster: The year over year revenue growth rates in the RMS and manufacturing segments I expect it to rebound from the difficult comparisons in the second quarter, which were affected by the timing of <unk> shipments in the RMS segment and the strong prior year comparison in the manufacturing segment.

Jim Foster: In conclusion, our critical focus at this time is continuing to execute our strategy to right size, the business and to turnaround the financial performance.

Jim Foster: We believe that accomplishing these actions will position the company to gain market share and emerge from this period of softer demand as a leaner more efficient scientific partner for our clients.

Jim Foster: That concludes our comments, we will now take your questions.

Jim Foster: Ladies and gentlemen, at this time, if you would like to ask a question, please press star 1. You know, this is pretty, pretty unexpected and rapid deterioration of a large pharma company's business. Some are probably in the midst of it, but it may take longer for others. It's tough to get a very good line of sight.

Speaker Change: Thank you Mr. Spencer, ladies and gentlemen at this time, if you would ask a question. Please press star one on your telephone keypad, you may remove yourself from the queue at any time by pressing star two and we ask that you. Please limit yourself to one question and one follow up we'll.

Speaker Change: We will go first this morning to Matt <unk> of Goldman Sachs.

Speaker Change: Hi, good morning, Thanks for taking my questions, maybe just on a higher level just thinking about the.

Speaker Change: Your commentary about global Biopharma.

Speaker Change: It seems that demand really.

Speaker Change: It took a bit of a hit post.

Speaker Change: In Q2, and post that and as you think about that client base.

Speaker Change: When you think about sort of the cost cuts have been going on and they've been going on for some time now what kind of rationale can you give for the increased deceleration of that demand and just given the size and scope of these organizations do you think it's going to take longer for that to come back just given that it can be difficult for them to pivot so quickly.

Speaker Change: It's certainly difficult for us to call the timing.

Speaker Change: This is a pretty.

Speaker Change: Pretty unexpected and rapid deterioration of the large pharma companies business.

Speaker Change: The good news is we have a disproportionately large share of big pharmaceutical companies work, particularly in the safety assessment business.

Speaker Change: That's great on the one hand on the other hand of course as they begin to ratchet down their cost structures.

Speaker Change: That causes them to reduce their overall demand.

Speaker Change: Pharma companies have go through multiple processes every few years trying to lean out their infrastructures.

Speaker Change: They do sometimes an adequate job, sometimes they don't I think the IRI legislation coupled with the impending patent cliffs has made essential maybe with the exception of the.

Speaker Change: Two prominent companies would have GOP one.

Speaker Change: So rapid deceleration in cutbacks disproportional impact on us.

Speaker Change: Re prioritization of pipelines some of the companies seem to be through it.

Speaker Change: Probably in the midst of it may take longer for others.

Speaker Change: It's tough to get.

Speaker Change: A very good line of sight, we have very high level contacts.

Jim Foster: You know, we have very high-level contacts in all of the drug companies. We're dealing sometimes with the head of R&D and, sort of minimally, with a number two or three person in R&D. And it's clear that.

Speaker Change: And all of the drug companies were dealing sometimes with the head of R&D and sort of minimally with the number two or three person R&D and it's clear that.

Speaker Change: So many of these decisions have been made and are still being made sort of it's a suite C suite level or the board level and there are profound cuts at big pharma, which some of the people that we're working with don't necessarily have a line of sight was certainly not an early line of sight. So they could want us and work with us. So we're there.

Speaker Change: Partners we.

Speaker Change: We respect and appreciate the opportunity to be so.

Speaker Change: It doesn't mean that we have early indications of what these folks would do so.

Speaker Change: It's a little bit impossible to call, but what we said in our prepared remarks and I'll just repeat is.

Speaker Change: We've seen a slower recovery in biotech, although it's been recovering.

Speaker Change: And we've seen this very soft demand and cutbacks in pharma.

Speaker Change: It feels like that's likely to persist into 2025 is sort of no logical reason to believe that that somehow gets curtailed.

Speaker Change: Subject to my comments.

Speaker Change: It's very very very difficult for us to call pharma in the aggregate, but it's clear that their emphasis is on the clinic.

Speaker Change: To get drugs into the clinic to do pay for their clinical trials, and obviously to get drugs into the market and it would seem I don't know seem logical that they would continue that for some period of time.

Jim Foster: And then just on DSA, and given the comments you've made on the commercial restructuring and shift and go to market, is there a market share issue going on here? Or would you still chalk this up to overall macro pressures? And we certainly don't want to do anything to impair the quality of our science, but we're, as we said earlier, we're going to work hard to lean out our infrastructure, both in terms of staff and facilities, and certainly G&A, so that we can respond to whatever market demand is going forward, you know, in an effort to do the best job we can to have the most positive operating margins possible.

Speaker Change: Got it and then just on DSA.

Speaker Change: And given noting the comments you made on the commercial restructuring and shift and go to market is there a market share issue going on here or would you still chalk this up to overall macro pressures.

Speaker Change: Yes, we think that we're obviously biased, but we think we have a fabulous portfolio that is quite unique.

Speaker Change: We have a much larger geographic footprint, particularly at safety and discovery, we have exquisite in deep science.

Speaker Change: And we have had two in appropriate cases.

Speaker Change: It will be aggressive with our prices I think we will through the back half of this year, we'll have to we'll have to do more.

Speaker Change: We will have to do more of that so we certainly don't think that we're losing share.

Speaker Change: As we continue to refine our sales organization its structure its use of it.

Speaker Change: Its use of Apollo, which is one of our early digitization platforms to allow the clients to get data faster and easier.

Speaker Change: Some pricing.

Speaker Change: And some aggressive timelines and also utilizing the whole portfolio, which I do think we've talked about a lot, which which and can do better in other words, our greatest competitive advantages that we can work with the clients across this very large non clinical portfolio, which.

Speaker Change: Virtually none of our competitors can so.

Speaker Change: We think this is a <unk>.

Speaker Change: Market shift.

Speaker Change: Very sudden with pharma kind of gradual with biotech although getting better.

Speaker Change: And we certainly don't want to I don't want to do anything to impair the quality of our science, but where.

Speaker Change: As we said earlier, we're going to work hard to lean out our infrastructure both in terms of staff and facilities.

Speaker Change: And certainly in G&A.

Speaker Change: So that we can respond to whatever the market demand is going forward.

Speaker Change: And in an effort to do the best job, we can to talk to the most.

Speaker Change: Positive operating margins possible in the midst of a slowdown in demand.

Jim Foster: In the midst of a slowdown in demand, how much of this was in DSA as opposed to, perhaps, research models? I think you kept guidance there, basically, so I'm assuming this is pretty much all DSA. Is that fair?

Speaker Change: Okay. Thank you very much.

Speaker Change: Sure.

Speaker Change: Okay.

Speaker Change: We'll go next now to Eric Coldwell at Baird.

Speaker Change: Okay.

Speaker Change: Thank you very much.

Eric Coldwell: I was hoping to get a quantification of the impact of the bonus accruals I know you said it was.

Speaker Change: The majority or a big chunk of the earnings upside versus.

Speaker Change: Implied guidance, but could you quantify that amount and then.

Eric Coldwell: Tell us how much might be left in the second half to help.

Speaker Change: Help protect earnings in the second half or did you take care of all of this with the second quarter.

Speaker Change: Good morning, Eric It's Claudia I'll take that one it was approximately $20 million in the second quarter excuse me you are about 30%.

Speaker Change: In the second quarter was a true up for the first half of the year.

Speaker Change: <unk> was a true up for the first half so.

Eric Coldwell: What happens in the second half.

Speaker Change: You can expect.

Speaker Change: Additional favorability that would come through the second half as we updated guidance for the full year. So we will probably have additional <unk>.

Speaker Change: CAGR ability.

Speaker Change: Following.

Speaker Change: And was this.

Speaker Change: Is this.

Speaker Change: How much of this was in DSA as opposed to.

Speaker Change: Perhaps research models I think you kept guidance there basically so I'm assuming this is pretty much all DSA is that fair or also at the corporate level.

Speaker Change: You are correct, it's mostly DSA and at the corporate level. The other two segments. As you pointed out are performing well and in line with our plan. So the majority of the impact is at corporate and DSA.

Jim Foster: Or also at the corporate level? Okay, and I know the first half was, I think you said minus seven, I'm toggling a lot of numbers here, but second half, minus 10 organic and DSA. So, I think you kind of talked around this with the last question, but do you think that is, "Soft patches" here in toxicology and discovery? It sounds like you're already seeing some knock-on impact in services, so I'm just trying to get a better sense of what the read is on research models and services growth going into 2025 in zip code 10.

Speaker Change: Okay, and I know first half was.

Speaker Change: Thank you said minus seven I'm talking only in a lot of numbers here, but second half minus 10 organic in DSA. So would we be assuming a.

Speaker Change: Ballpark, 50% more accrual reductions in the second half than you did in the first half here in the second quarter or is it $30 million in the second half.

Speaker Change: Yes.

Speaker Change: We're not going to get to that level of specificity I think as I said, there will be additional favorability in the second half just because the true up that we did so far was only for the first half okay.

Speaker Change: And then.

Speaker Change: Yeah.

Speaker Change: <unk>.

Speaker Change: The minus 10% organic into H.

Speaker Change: I think you've kind of talked around this with the last question, but do you think that is.

Speaker Change: Proxy for the overall discovery and safety market, both in house and outsourced you think youre doing a little better a little worse than the overall market here in the second half what's your what's your read on that and what I'm ultimately trying to get to us.

Speaker Change: RMS historically was much steadier sturdier during soft.

Speaker Change: Patches here in toxicology and discovery you view historically have outperformed.

Speaker Change: In our Rms.

Speaker Change: But yeah.

Speaker Change: You have to think that this kind of a reduction in overall demand has to have some knock on effects to models.

Speaker Change: It sounds like you're already seeing some knock on impact in services. So I'm I'm, just trying to get a better sense of what the readers on research models and services growth.

Speaker Change: Going into 2025.

Speaker Change: Safety and Tox demand is down and the ZIP code of 10%.

Jim Foster: And we feel like we're holding our own, certainly from a competitive point of view, I would say, across the entire portfolio, certainly in RMS, both from a product and services point of view, and, like, for a relatively long time, you know, we've had modest volume declines with meaningful pricing declines across the world. So that will persist. China's quite strong, notwithstanding some of the political issues there. Europe is quite strong, too.

Speaker Change: And we feel like we feel like we're holding our own surely from a competitive point of view I would say across the entire portfolio certainly in Rms.

Speaker Change: Services point of view.

Speaker Change: Like.

Speaker Change: <unk>.

Speaker Change: For a relatively long time, we've had modest volume declines.

Speaker Change: Meaningful pricing declines.

Across the world so that will persist.

Speaker Change: <unk> quite strong notwithstanding some of the political issues in Europe is quite strong and services have been strong now for sure.

Jim Foster: And services have been strong now for, I don't know how long, Eric, maybe a decade. The Janus business is a little softer than we would like just because of the slowdown in both client bases, pharma and biotech. But we think that's, you know, a critical element in doing basic research.

Speaker Change: I don't know how long Eric maybe a decade.

Speaker Change: The Janus business is a little softer than we would like just because of the slowdown in both client basis pharma.

Speaker Change: Biotech and.

Speaker Change: But we think that's a key.

Jim Foster: And our cradle initiative is definitely, in times of economic stress, which I think a lot of our clients are in, that's a really good solution for them. So we have a little bit of facility overlap, maybe a little bit too much capacity in certain locales, opportunities to have more capacity in other locales. So that business should hold up well. The manufacturing business definitely should hold up well. Definitely, the principal amount of pressure is on DSA.

Speaker Change: Critical element in doing basic research and our Credo initiative is definitely.

Speaker Change: In times of economic stress, which I think a lot of our clients are and that's a really good solution.

Speaker Change: For them. So we have a little bit of facility overlap, maybe a little bit too much capacity.

Speaker Change: Locales opportunities to add more capacity in other locales, so that business should hold up well.

Speaker Change: Manufacturing business Delfin should hold up well definitely.

Jim Foster: But if you just look at the SA portion of that, you know, a lot of drugs were parked or have been parked or will be parked by our clients. Got it, thank you. So it's not in an average. Correct. I don't think any of us know Dave, but you may be right that it's cooling off a bit. Having said that, we've had a proliferation of proposals and some improvement in bookings as well. So much of it is psychology, though.

Speaker Change: This will allow to pressure is in.

Speaker Change: DSA, but if you just look at the essay portion of that a lot of drugs were parked or have been parked or will be powered by our clients.

Before <unk> were filed so we have a drug that felt like they have a certain amount of cash to spend and prioritize.

Speaker Change: They will get back to those next.

Speaker Change: So we're seeing a lot of emphasis on post R&D work.

Speaker Change: I will shift to classic A&D work and then at some point when they feel that the coffers are stable, we will get back to more significant spending ensure discovery, but of course as we all know there is no future. There is no preclinical there is no clinical without discovery, so that business should be.

Speaker Change: Should improve as well timeframe, obviously, it's a little bit difficult to call in.

Speaker Change: We think that will be the last thing that recovers.

Speaker Change: Okay.

Speaker Change: <unk>, let others jump in thank you.

Speaker Change: Sure.

Speaker Change: We'll go next now to Elizabeth Anderson with Evercore ISI.

Elizabeth Anderson: Hi, guys. Thanks, so much for the question.

Speaker Change: If we think about how you're flowing that through particularly in DSA in the mid single digit.

Speaker Change: Organic revenue decline in the third quarter.

Speaker Change: What are you seeing and sort of the July timeframe is that sort of stable to how you saw <unk> generally would you say things are still getting a little bit worse I'm just trying to understand how you thought about sort of flow through relative to how the quarter progressed. Thank you.

Speaker Change: And I think a call on that is that the.

Speaker Change: Biotech companies continue to improve slowly more slowly than we had anticipated or that we liked but just in terms of proposal volume and bookings definitely better.

Speaker Change: Spent a fair amount of time over the last.

Bonds really studying the trend because I just want to remind everybody to call that.

Speaker Change: Several things number one as I just said earlier, we have the preponderance of work, particularly safety work for Big Pharma number two big pharma was was fabulously strong for us last year unusually strong because so much of our growth has been.

Speaker Change: Driven by Biotechs, we saw very strong pharma growth last year and solid pharma growth for the first half of this year.

Speaker Change: And then we see this sort of rapid decline in so.

Speaker Change: It's taken us a while the study its type of clients to really understand what was behind it. We're certainly seeing it persist into July as I said, a few moments ago. While this is absolutely. If you look at the big pharma companies an industry phenomenon.

Speaker Change: Cutting back us in infrastructure and of course our pipeline.

Speaker Change: They are in different phases of it although it does seem that said most of them are doing it.

Speaker Change: Same time at some point they'll find sea level, there and they'll put this spending into those drugs, which are post <unk> and in the clinic.

Speaker Change: And.

Speaker Change: We hope.

Speaker Change: Future progress.

Speaker Change: We will find more variety or the A&D workers.

Speaker Change: Obviously extremely important and as a percentage of the cost of developing a drug quite trivial. So we do think that they will have the money to do that.

Speaker Change: At some point and.

Speaker Change: That's important for the future.

Speaker Change: Following that with any specificity at the moment is just a bit murky given the sudden this.

Speaker Change: The unexpected nature and the meaningful nature of this pullback.

Speaker Change: Got it and maybe one clarification question just for you I know you talked about potentially gaining some share repurchase agreement is there any share repo built into the new guidance range or we should consider that to be separate.

Speaker Change: I would consider that to be separate at this point a little bit as I said in the prepared remarks, we will be looking to start.

Speaker Change: Executing on it in Q3.

Speaker Change: The impact is going to be de Minimis at this yourself.

Got it thank you.

Speaker Change: Not in the numbers.

Speaker Change: Correct.

Speaker Change: Thank you we'll go next now to Dave Windley at Jefferies.

Dave Windley: Hi, good morning, Thanks for taking my questions.

Dave Windley: Jim I'm wondering in the restructuring actions that you're taking on it.

Dave Windley: It sounds like you're ramping those up I'm wondering.

Speaker Change: How much Optionality are you thinking about relative to.

Speaker Change: In a range of outcomes and I guess I'm thinking range of outcomes on a couple of vectors one youre talking about large pharma is rapid decline.

Speaker Change: A short period of time.

Speaker Change: And hard to hard to see how that plays out from this distance into late this year and next year.

Speaker Change: And then while small biotech funding has improved year over year. It kind of peaked at the beginning of the year and it has been fading through the year in a way that given economy politics et cetera.

Speaker Change: <unk> may not continue to improve and if that were to be soft and kind of truncate. The recovery of biotech how might you be able to react to that as well.

Speaker Change: Let me take a shot at that and then sorry.

Speaker Change: Sorry to jump in as well.

Speaker Change: As you said biotech funding has been strong was particularly strong in the first quarter second quarter was okay July wasn't great. So.

Speaker Change: I don't think any of US know day, but you may be right that it's coming off a bit.

Speaker Change: Having said that we've had a proliferation of proposals and some improvement in bookings as well.

Flavia Pease: I think our client base is nervous about the consistency of the availability of cash. Obviously, they're going to continue to be conservative. And I think pharma has a lot of work to do in terms of trying to get their infrastructure where they want it to be given the impending patent flip. So, look, all we can say, and you've noticed for a long time, this isn't always, always for us. And I think we do this well.

Speaker Change: So much of it is psychology, though I think of our client bases nervous about the consistency of the availability of cash.

Speaker Change: Obviously, they're going to continue to be conservative and I think pharma has a lot of work to do in terms of trying to get their infrastructure, where they want it to be given.

Speaker Change: The impending patent cliff. So look all we can say in this even though that's a long time. This isn't always always for us and I think we do this well we have our capacity and by that I mean, human capacity and physical passivity in line with our expectations for growth in demand.

Flavia Pease: We have to get our capacity, and by that I mean human capacity and physical capacity, in line with our expectations for growth and demand. We always have to call it, I don't know, 12 to 24 months in advance. Jim, I don't have anything else to add. I think you covered it comprehensively. Flavia, do you want to take that one?

Speaker Change: These have to call. It I don't know 12 to 24 months in advance.

Speaker Change: So our capex investments in growth in a bunch of areas, obviously will slow down dramatically has slowed down dramatically and we will continue to half of our costs at least half of our cost is staff. So we've already made some cutbacks in.

Speaker Change: We'll look to do more.

Speaker Change: Starting at the end of this year through next year.

Speaker Change: And we've had some small facility consolidations and we will look at perhaps.

Speaker Change: Larger ones to see whether those are appropriate.

Speaker Change: Done a really good job over the last decade of having capacity really well utilized across all of our businesses.

Speaker Change: And indeed, as you know been able to add space without impairing our operating margins.

Speaker Change: So we we.

Speaker Change: I think.

Speaker Change: We're in the mid seven will continue to scale back both of them commensurate with what the demand is 25, a little bit tough to call, but as I said.

Speaker Change: A few moments ago.

Speaker Change: It's hard to believe that the pharma pullbacks won't continue and persist through some portion of next year.

Speaker Change: Youre right that were beginning to see a cooling off of biotech which.

Dave Windley: We try to be careful with calling trends Dave.

Because it was actually a pretty good first half of the year. So I don't know if the election I will do I don't know what the rewards will do I don't know what any of those things we will do but.

Dave Windley: Assuming that it's stable and doesn't get worse I do think that biotech will work and volume could continue to improve for us just because there is still <unk>.

Dave Windley: <unk> is a new companies minted every year that don't have any internal capacity and we work with a lot of the <unk> season, a lot of those portfolio companies. So.

Speaker Change: We need to watch it very carefully obviously, we need to call. It today, we've called a lot of the savings the $150 million 100 of which will hit in this year, we've already called that in <unk>.

Implemented a bunch of it and we will continue to and then we will.

Speaker Change: We'll for sure do more next year.

Speaker Change: And Jim I don't have anything now.

Ed: Ed I think you've covered it.

Ed: Comprehensively.

Speaker Change: Great. So then my follow up.

Speaker Change: Around pricing.

Speaker Change: I believe your commentary is talking about modest positive price impact in <unk>, but expect that to flip negatively.

Speaker Change: I know <unk> kind of got at this but I'm wondering we've certainly heard and you and I've talked about some fairly aggressive price discounting by your peers and I'm wondering.

Speaker Change: Kind of a balance as you think about where you feel like you have to chase that down versus maybe some of your softness in bookings is just refusing to chase that down.

Speaker Change: And maybe you could help us to understand the balance there and how you think that plays out and to what extent.

<unk>.

Speaker Change: Included price pressure in your margin assumptions for DSA in the back half of the year. Thanks.

Speaker Change: Bob.

Speaker Change: Alright.

Speaker Change: Yeah.

Dave Windley: Ill take especially the latter part of the question so Dave.

Speaker Change: Pricing the dynamics of pricing that we've experienced so far through the first half as well as what we anticipate the trends to be in the second half and as I said.

Speaker Change: Exiting the year with that.

Speaker Change: Slight price decline.

Speaker Change: <unk> in DSA have been considered in the margin.

Speaker Change: Ill add some comments on.

Speaker Change: On the pricing dynamics and welcome additional color by Jim but.

Flavia Pease: But, as we said in the first earnings call, we're being selective in where it makes sense for us to provide some discounts, depending on the nature of the work, depending on the start of the work. There are pockets of the work that we do where not a lot of competitors have those capabilities, and in those spaces, we don't feel like we need to provide additional price incentives.

Speaker Change: As we said it in the first.

Jim Foster: <unk> call, we're being selective in where it makes sense we are.

Jim Foster: Providing some discounts.

Jim Foster: Pending on the nature of work depending on the start of the work.

Jim Foster: Pockets of the work that we do we're not.

Jim Foster: Not a lot of competitors have those capabilities and in those spaces. We don't feel like we need to provide additional price incentives. There are other pockets that were being selective and are ensuring that.

Patrick Donnelly: There are other pockets where we are being selective and are ensuring that, as appropriate, we do not lose certain volume and certain business. So, I think from a macro trend perspective, in the last couple of years, particularly in 2021 and 2022, pricing was extremely positive, higher than historical levels. And it started to modulate last year. Coming into this year, as we said, it was still slightly up, https://bit.ly.com/great I appreciate the answers. Thank you. We'll go next to Patrick Donnelly now.

Jim Foster: As appropriate we we did not lose certain volume in that business. So.

Jim Foster: I think from a macro trend with.

Jim Foster: Last couple of years.

Jim Foster: Particularly in 2021, and 2022 pricing was extremely positive higher than historical levels and it started to modulate last year coming into this year as we said it was still slightly up in Q2, but we are seeing a shift in trend.

Jim Foster: And plan to exit the year with slight price decline in DSA.

Jim Foster: Jim I don't know if you want to add anything else.

Dave Windley: And then final question Dave.

Jim Foster: Competitors, principally use price as a lever.

Jim Foster: And so.

Jim Foster: We don't like to chase it we try not to.

Dave Windley: As we said sort of in the first half of the year will reduce price pretty sparingly to certainly preserves share and gain share.

Dave Windley: It feels like it's going to be more pronounced in the back half of the year given the sort of.

Dave Windley: Pretty sudden pullback by big pharma, and maybe some concern by biotech clients, but access to capital so price.

Dave Windley: For years became less of an issue until maybe till last year. So it's become more of an issue.

Speaker Change: Sorry, you said it should become more pronounced in the back half of the year, we're anticipating that that's been our guidance.

Speaker Change: Great I appreciate the answers thank you.

Speaker Change: Sure.

Speaker Change: We'll go next now to Patrick Donnelly of Citi.

Patrick Donnelly: Hey, guys. Thank you for taking my questions.

Patrick Donnelly: Jim I guess, maybe one for you just as you think about some of these headwinds it sounds like youre, suggesting a few of them will linger into 'twenty five.

Speaker Change: Certain formal pullback.

Jim Foster: It would be hard to believe if those don't linger into 25. So I guess when you kind of think high-level, you know which of these headwinds persists for several quarters and where you have visibility into things may be improving, I guess, just when you look at the backlog cancellation rate. You know, what are the areas of real concern as we head into 25? And with a lot of them, we have long-term pricing arrangements.

Speaker Change: It would be hard to believe that those don't linger into 'twenty five.

Speaker Change: Guess, what you kind of think high level, which would be headwinds persist for several quarters, and where you have visibility into things maybe improving I guess, just when you look at the backlog cancellation rates.

Speaker Change: What are the areas of real concern as we head into 'twenty five.

Speaker Change: I don't expect to improve at least to start the year, where you're feeling maybe okay to start next year.

Speaker Change: We're going to continue to have this tale of two cities, we definitely dialed into biotech.

Speaker Change: They have no internal capacity, so ESR anticly preclinical phase or moving into it we have a very high probability.

Speaker Change: Meaningful amount of that work.

Speaker Change: And we've said to you.

Speaker Change: For some period of time.

Speaker Change: They historically have been a little less price sensitive the big pharma I know that's.

Speaker Change: A surprising comment, but but it's true so.

Speaker Change: I think we're very much in touch with that marketplace.

Speaker Change: As I said earlier, it's very much about the psychology of access to capital. So we'll just have to see how the capital markets that fall a little bit Rocky right. Now this summer and it's also a very difficult time to Carla.

Speaker Change: Yes.

Speaker Change: Is it maybe it doesn't pharma companies left we're very very close to all of them. We have a very high level relationships I would say the majority of them don't do the work internally. So theyre also quite dependent on us.

Speaker Change: They just add.

Speaker Change: With a lot of them, we have long term pricing arrangements. So thats, while there'll be some pressure on price, it's just going to be more about volume.

Jim Foster: So that's good; there will be some pressure on price there. But it's just going to be more about volume as they cut back and try to preserve their cost structure. So, you know, as we said, we're going to see that persist. I would imagine biotech becoming more positive faster than Big Pharma, who I think have some major structural improvements to make that there's no way they can make them overnight. They're going to look to us to help them make them, so cradles will be important.

Speaker Change: As they cut back and trying to.

Speaker Change: Preserve their cost structure so.

As we said, we're going to see that persist.

Speaker Change: I would imagine biotech true becomes more positive faster than big pharma, who I think has some major restructure major structural improvements to make it there's no way they can make them overnight.

Speaker Change: They are going to look to us to help them make them. So cradles will be important I do think safety will continue to be important and definitely all of our manufacturing segment will be increasingly more important to them. So.

Jim Foster: I do think safety will continue to be important, and definitely all of our manufacturing segments will be increasingly important to them. So, you know, for us, it's... Again, we have a very strong portfolio. We think it's scientifically superior to all of the competitors, both individually and in the aggregate. We just have to lean out the infrastructure dramatically so that we're a little bit less tied to the time frame, assuming that it's softer for longer than we think, but we just don't see any reason why this would change course for 2025, given that we're in August already.

Speaker Change: For us it's again.

Speaker Change: We have a very strong portfolio, we think it's scientifically superior to all of the competitors both individually and in aggregate.

Speaker Change: We just have to lean out the infrastructure dramatically. So so that we're a little bit.

Speaker Change: Sure.

Speaker Change: No. It is tied to the timeframe assuming that it is softer for longer than we think but we did.

Speaker Change: We just don't see any reason why this would change for us for 2020, given that we're not like Australia.

Jim Foster: That's helpful. I might follow up on a few of your points there. I don't know, some of the tools companies probably, definitely folks that are playing in discovery and safety to the benefit of clinical work. So it's all a big push. And by the way, that's where most of the money is spent anyway, but it's all a push to get drugs into clinics and to try to get as many drugs into the market as possible. The stats so far for new drugs that have been approved are meaningfully behind the prior year. So I think that's also another problem with them. But we know it can't be forever.

Speaker Change: That's helpful.

Speaker Change: Following up on a few of your points there I mean.

Speaker Change: In terms of the softness on the pharma side are you seeing it sounds like it's more broad based broad based versus concentrated just a few customers and then also in Europe.

Jim Foster: Conversations with customers are you seeing it more on where you play in the discovery preclinical or your view is it broad based softening kind of across pharma spend thanks, Jim.

Speaker Change: So it's definitely broad based we're seeing it with every client and as I've said before we have a very large.

Speaker Change: Market share is huge for us very increasingly larger dollar volumes across all of big pharma.

Speaker Change: Section of the two companies that are making Q1s.

Speaker Change: Oh.

Speaker Change: Virtually all of them.

Speaker Change: Going through substantial cutbacks staff facilities and portfolio at the same at the same time, having said that there is no question that it disproportionately adversely impacts I don't have some of the tools companies probably.

Speaker Change: Definitely folks who are playing in discovery and safety.

Speaker Change: To the benefit of clinical work. So it's all a big question by the way, that's where most of the mining spent anyway, but it's all a push too.

Speaker Change: Shrugs into the clinic and to try to get as many drugs into the market as possible is that so far for.

Speaker Change: New drugs that have been approved is meaningfully behind the prior year. So I think that's also another problem. So.

Speaker Change: C a patent cliff.

Speaker Change: We're working really hard to get more drugs into the clinic and into the market. That's not easy to do they've got the <unk> legislation to to make that a bit more complex a lot of competition around similar targets.

Speaker Change: What types of molecules and they definitely just have too much to bite off.

Speaker Change: Right now so.

Speaker Change: Again, it's difficult to.

No I wont say, even predict to know how long it will be a disproportionate focus on the clinic.

Jim Foster: Or there would be no pharmaceutical industry. We know that they have to use drugs that successfully get to market to fund more work on the I&D phase and then ultimately, more discovery to start. So we've seen this before.

Speaker Change: But we know champion forever or there is no pharmaceutical industry, we know that they have to use hopefully drugs that successfully get to market to fund more work on the R&D phase and then ultimately more discovery to start so we've seen this before I typically personally don't think there are cycles in this business.

Speaker Change: Got.

Speaker Change: In times of economic stress.

Speaker Change: So I don't think the situations as bad, but we saw in 2910 11 12.

Speaker Change: You have a similar period, where.

Speaker Change: Client base is pretty much in abroad.

Speaker Change: H basis is Washington, spending carefully and all we can do look we're merely reflections.

Speaker Change: Really a reflection of the aggregate amount to work with big pharma biotech guys. Obviously, that's what we do right you don't have any of our molecules and while we have an increasing amount of services.

Speaker Change: In and around the clinics. So that's good our manufacturing business.

Speaker Change: Should continue to do well as we said in our guidance because it's in and around the clinic.

Speaker Change: The preponderance of our work is in discovery and preclinical which is.

Speaker Change: Is less emphasize right now certainly by the big drug companies.

Speaker Change: Thank you. We'll go next now to tie Haas Savant at Morgan Stanley.

Jim Foster: I typically personally don't think there are cycles in this business. But in times of economic stress, I don't think the situation is as bad, but we saw it in 2009, 10, 11, 12, and now we have a similar period where our client base, pretty much on a broad gauge basis, is watching their spending carefully, and all we can do, look, we're merely a reflection. Hey guys, good morning. Jim, sorry to take on that same sort of theme.

Speaker Change: Hey, guys good morning.

Speaker Change: Jim starting to tick on that same sort of theme there is.

Jim Foster: There's a couple of, I guess, remarks you made that I just want to unpack a little bit, right? I mean, generally, in the past when we've had patentless concerns, pharma companies have almost wanted to double down on R&D so that those pipelines or the revenue hole gets filled. It seems to be sort of different this time. Any sort of color on that.

Speaker Change #100: A couple of.

Speaker Change #100: Yes remarks, you, Matt that I, just wanted to unpack a little bit right I mean generally in the past when we've had backroom cliff concerns pharma companies that are most wanted to double down on R&D. So that those pipelines are all of the revenue hole gets gets filled it.

Speaker Change #101: It seems to be sort of different this time, so any sort of color on that and then on the <unk>.

Jim Foster: And then on the IRA, what has changed in the last couple of months here? Pharma companies, were they actually sort of optimistic about reversing this entirely in court? Is it a view on election outcomes making them nervous?

Speaker Change #102: What has changed in the last couple of months here.

Speaker Change #103: Pharma companies would be actually sort of like optimistic reversing this entirely in court is it a view on election outcomes, making them nervous because most larger drug companies went through that draws negotiation process seem to have come out of it feeling reasonably okay with the fallout from the outcome. So maybe you can just elaborate on those.

Jim Foster: Because most larger drug companies who went through that drug negotiation process seem to have come out of it feeling reasonably okay with the fallout from the outcome. So maybe you can just elaborate on those two aspects, and then I have a follow-up. I mean, this is unusual activity for our pharma clients, who we've obviously been servicing forever, and that that was our principal source of revenue and is obviously a meaningful source of revenue right now. I think your comments on the IRA are accurate, except we're surprised that we're hearing more about it lately.

Speaker Change #104: Two aspects and then I have a follow up.

Speaker Change #105: I mean this is unusual activity.

Speaker Change #106: For our pharma clients, who obviously.

Speaker Change #106: Servicing forever.

Speaker Change #108: That was our principal source of revenue is obviously.

But meaningful source of revenue right now.

Speaker Change #109: I think your comments on IRI are accurate.

Speaker Change #110: Surprised that we're hearing more about it lately, so I don't know what sort of restarted that but.

Jim Foster: So I don't know what sort of we started that, but almost all the clients have mentioned that. And you're mentioning the patent, strategically, structurally, and organizationally. We just don't see them doing it right now.

Speaker Change #110: Almost all the clients have mentioned that as I mentioned in the patent cliff.

Speaker Change #110: Even more so the notion that they would double down on R&D to try to offset that which actually makes.

Speaker Change #110: At least on the.

Speaker Change #111: Our in early <unk>. It makes a lot of sense strategically and structurally and organizationally, we just don't see them doing it right now it just as you know.

Jim Foster: It just, as you know, won't have a positive benefit to the demand curve for us across lots of what we do, right? Biologics, CDMO, for sure, some safety, some discovery. I mean, it's pretty profound.

Speaker Change #111: It takes longer to get drugs into the clinic it takes longer for them to get to market and it costs a lot more so.

Speaker Change #111: They're just they just have to work on a smaller number of drugs to offset the impending impact from so many of them.

Speaker Change #111: Yeah.

Speaker Change #111: So mainly over the patent come.

Speaker Change #111: Coming off so feels like unusual activity. It also feels unusually.

Speaker Change #112: Profound and sudden add.

Speaker Change #113: As we said we use the word unexpected because we're really close to these folks I only deal with them every day and where their service provider.

Speaker Change #113: In many ways an extension of their own internal facilities any yet.

Speaker Change #114: It's not like they said to us a year ago I just wanted to tell you we're going to be re emphasis we're going to.

Speaker Change #114: Emphasize clinical work to the detriment of preclinical so you need to.

Speaker Change #114: Prepare for that we will be doing that less work with you. So we didn't get that sort of warning our dialogue.

Speaker Change #115: We're increasingly closer to our clients, we feel that we're sitting on at the same table with them.

Speaker Change #116: I think a lot of these decisions have been taken relatively recently and probably more to come that haven't been taken yet.

Got it helpful.

Speaker Change #117: Then one on sort of the potential for benefit from the <unk> Act I think you will use it to it in the context of the CMO business, but as you think about sort of potential share gains even within discovery services or biologics testing solutions any color on on just dimension the potential up.

Speaker Change #118: Side, there and then a quick clean up on net interest expense for Flavia. So just given that your debt is essentially 80% fixed.

Speaker Change #119: You won't benefit from the interest rate cuts, but the interest income might actually go down as well right. So how are you thinking about that dynamic into the fourth quarter and potentially into 2025. Thank you.

Speaker Change #120: I think it's tangible it's hard to believe that the bio secure act.

Speaker Change #123: I don't have a positive benefit to the demand curve for us across lots of what we do right biologic CMO for sure.

Speaker Change #121: On safety discovery, I mean, its pretty its pretty profile again.

Speaker Change #122: There is a lot of Chinese competitors in that space.

Jim Foster: And there are a lot of Chinese competitors in that space who compete with us principally on price, but they have a very good scale, and clients have been quite happy with them. And while it's quite clear to us that that should have a positive benefit, as we said, I think in our last call and some of the interim conversations we've had at the investor conferences, there's been a very small amount of both conversation and interest, and a tiny amount of work that has come with us.

Speaker Change #122: Who compete with us principally on price.

Speaker Change #122: But we have very good scale.

Speaker Change #122: Thanks.

Quite happy with them.

Speaker Change #122: And while it's quite clear to us that that should have a positive benefit as we said I think on our last call that some of the interim conversations we've had at the investor conferences.

Speaker Change #122: There's a very small amount of both conversation and interest.

Speaker Change #124: Any amount to work.

Jim Foster: So we want to be careful not to overstate the potential, although we think there is potential over time. So we just have to watch it, see how it rolls out, see what the ultimate language is, see what the severity is, and see whether clients follow. We did say, I think it was on our last call, that we had meetings with a couple of very big venture capital firms with whom we work who said they had, quote, instructed their portfolio companies not to do work in China. We thought that was an unusually strong interference with what these portfolio companies do. They didn't say, we would prefer you don't use China. They said, we don't want you to.

Speaker Change #124: That has come with us so we don't want to.

Speaker Change #124: Be careful not to overstate the potential although we think there is a potential over time. So we'll just have to watch it and see how it rolls out see what the ultimate language and see what the severity is and see whether.

Speaker Change #125: Client follow we did say I think it was on our last call that we had.

Speaker Change #125: Meetings with a couple of very big venture capital firms.

Speaker Change #125: With whom we work who said they had quote instructed their portfolio companies not to do work in China.

Speaker Change #125: We thought that was an unusually strong inter.

Speaker Change #125: Sort of.

Speaker Change #125: Interference with what these portfolio companies do.

Speaker Change #125: They didn't say, we would prefer you to use.

Speaker Change #126: <unk>, China. They said, we don't want you to do so.

Jim Foster: So that gave us an indication that that might be something that expands. These are VCs that are creating new companies from scratch. And the fact that they don't even want to start with China is quite interesting. So it feels like it should have a greater head of steam, but it doesn't seem to have much right now.

Speaker Change #126: That gave us an indication that that might be something that expands. These vcs that are creating new coverage from scratch and the fact that they don't even want to start with China quite interesting. So it feels like it should have a greater ahead of steam doesn't seem to have much right now lot of talk about it. So obviously, it's not built into <unk>.

Flavia Pease: There's been a lot of talk about it, so obviously, it's not built into anything that we're saying for this year. And we'll see whether there are any changes post-election on this. And I'll let Flavia take the interest expense question. Thank you all for joining us.

Speaker Change #126: The thing that we're saying for this year and we'll see we'll see whereas any changes post election.

Speaker Change #126: That's why we would take the <unk>.

Speaker Change #127: Interest expense question.

Speaker Change #127: Sure.

Speaker Change #128: Given that the.

Speaker Change #127: Any change in interest.

Speaker Change #127: Rates by the fed will likely be at the end of the tail end of the year.

Speaker Change #129: The timing of these reductions will not really have any meaningful impact on our outlook.

Speaker Change #127: Not to mention also.

Speaker Change #130: 80% of our debt is fixed until November.

Speaker Change #131: When we have the the swap on the $500 million expire I know you talked also about could that puts pressure on your interest income but.

Speaker Change #131: We tried to keep very little cash obviously given that.

Jackie: Jackie this to pay down debt, so that would be de minimis as well and in terms of outlook for next year.

Speaker Change #133: Anything that.

Speaker Change #134: The fed does in terms of bringing interest rates down will obviously be positive for us.

Jackie: Because we will have a little bit less that fixed given the swap will expire.

Jackie: So the amount of floating debt will increase as interest rates come down that would actually be positive for us.

Speaker Change #135: Very helpful. Thanks, guys I appreciate it.

Speaker Change #135: Thank you well go next now to Casey Woodring at J P. Morgan.

Casey Woodring: Great. Thanks for taking my questions I guess first quick one what's your assumption on HP pricing in the context of the comments you've made today on DSA pricing pressure in the back half of the year and I just have one quick follow up.

Casey Woodring: I can take that one Katy so I'll I'll separate it a little bit.

Speaker Change #137: I'm assuming that your question is more focus on and HP pricing in the DSA business, but I'll also provide some commentary.

Speaker Change #137: On the <unk>.

Speaker Change #137: <unk> pricing when we sell it to third parties, which is reflected in the RMS business.

Flavia Pease: So, for DSA, NHP pricing was still slightly positive in the second quarter, as we have indicated, and it's off from the peak levels of last year, but still positive. It will probably follow the same pattern as overall pricing for the DSA business, so probably modulate to slightly decline at the tail end of this year. NHB pricing within RMS. Obviously, we have two parts of that business, I think, as we have commented since we acquired NOVA. Got it. That's helpful.

Speaker Change #137: So for DSA.

Pricing was still slightly positive in the second quarter.

Speaker Change #137: I think you indicated.

Speaker Change #137: And.

Speaker Change #137: It's off from the peak levels of last year, but still positive it will probably follow the same pattern as overall pricing for.

Speaker Change #137: For the DSA business, so probably modulate to slightly decline in the tail end of this year.

Speaker Change #137: Shifting now to the.

Speaker Change #137: And HP pricing within Rms.

Speaker Change #137: Obviously in.

Speaker Change #138: We have two parts of that business I think as we have commented since we acquired <unk>, we have the NH b sales in China for China, and then we have now NH.

Speaker Change #138: <unk> B sales.

Speaker Change #138: Through the Novo Prime acquisition, so in China prices have come down.

Speaker Change #138: They had been reflected.

Speaker Change #138: In our results so far this year.

Speaker Change #138: And we will continue to expect them to be at the levels that we're experiencing them today and then the case of Novo cream.

Speaker Change #138: Rice's are stable.

Speaker Change #138: These agreements are long term relationships.

Speaker Change #138: And we have an experienced price pressure. They are this year do not expect it to happen in the second half of the year.

Jim Foster: And then, you mentioned cancellations are still not back to target levels, and net book-to-bill is below one again this quarter. Just curious how much of that cancellation number in the quarter was from large pharma versus biotech. The impression in the past was that a lot of the cancellations were from biotechs that, you know, couldn't pay for the work that they had booked too far in advance. But now with the large pharma restructuring you called out here, I was wondering if that's really driving the heightened cancellations here and what the expectation for cancellations is moving through the rest of the year. Thank you.

Speaker Change #139: Got it that's helpful. And then you mentioned cancellations are still not back to target levels and net book to Bill was below one again this quarter just curious how much of that cancellation number in the quarter with some large pharma versus biotech the impression in the past had been a lot of the cancellations have been for biotech.

Speaker Change #140: <unk> paid for the work that they had booked too far in advance.

Speaker Change #141: But now with the large pharma restructuring you called out here just wondering.

Speaker Change #142: If that's really driving the heightened cancellations here and what's the expectation for cancellations is moving through the rest of the year. Thank you.

Speaker Change #142: No problem I'll take that one as well Jim and.

Youre correct Casey.

Speaker Change #143: KCB cancellations for sort of biotech small and mid tier.

Speaker Change #143: Companies actually was a slight sequential improvement from Q1, so last cancellation.

Speaker Change #144: And global is actually.

Speaker Change #144: Picked up.

Between Q1, and Q2, so sequentially with a deterioration more cancellations for global in Q2.

Speaker Change #144: And then improvement club mid tier.

Speaker Change #144: Yes.

Luke's forgot: Thank you we'll go next now to Luke's forgot at Barclays.

Luke: Great. Thanks for squeezing me in.

Luke: Just wanted to talk about the <unk>.

Speaker Change #147: You guys are taking out costs and aligning the cost with the demand but.

Speaker Change #148: As the.

Speaker Change #149: As the demand starts coming back in DSA, how quickly can you spin up those resources again.

Speaker Change #150: And just trying to think about the timing is it like a quarter ahead.

Speaker Change #151: Given the visibility that you guys have or is it kind of it will happen have to happen in real time.

Speaker Change #151: Okay.

Speaker Change #152: We have to hire even direct labor probably a quarter ahead. So good that's a good timeframe.

Speaker Change #152: Three to four months to train people.

Speaker Change #152: No background work so.

Speaker Change #152: Not a long period of time, but people really can't start to contribute to the next day. So we try to we.

Speaker Change #152: We try and then I think have been successful in staying ahead of that curve can't take on new work with sufficient staff. So it should be relatively straightforward to get those.

Paul: Paul or higher.

Paul: Hire them back on hire people, obviously senior scientific Patriots day directors and things like that it's much more complicated we would want to hold on to those people at suite.

Paul: Continue to refine our infrastructure.

Paul: Alright, great and then as it.

Paul: It goes on I guess.

Paul: Palin.

Paul: Matt Thanks for asking about the.

Paul: Prioritization I mean this market has been kind of this part of the business and has been soft for a while with.

Jim Foster: Oh, Pharma is continuing to rationalize their discovery work and keep those budgets tight. How long do you think that they can maintain this tight budgetary environment or continue to cut there without it starting to impact the later phase work? You know, it's a good question.

Paul: <unk> pharma continuing to rationalize.

Paul: Our discovery work.

Speaker Change #155: And keep those budgets tightly how long do you think that they can.

Speaker Change #156: They can maintain these this type of budgetary environment are continuing to cut their without it starting to impact the later phase work.

Speaker Change #156: Yeah.

Speaker Change #157: It's a good question I mean pharma is.

Speaker Change #158: I don't know, 50% to 70% of the drugs are.

Speaker Change #158: Externally access so youre going to see pharma continue to do a lot of M&A of small medium and large biotech companies. So I don't think that's going to be much M&A between pharma companies.

Speaker Change #158: So thats thats positive for them.

Speaker Change #159: Mo and much of the work that they're doing particularly in the areas that we work.

Speaker Change #158: Currently being outsourced.

Speaker Change #158: I would say by.

Speaker Change #158: These start up or.

Speaker Change #158: Growth biotech companies.

Speaker Change #158: We're obviously going to continue to work that they would buy those companies. So we should benefit from that as well, particularly if biotech company, who was a client of ours.

Speaker Change #158: Or the front of our company wise as well we haven't seen this level of pullback this severe.

Speaker Change #158: In the long time, but we started years ago and there was another pad so that.

Speaker Change #158: That's just the fact that they can't.

Speaker Change #160: But I can't deny that they have to fill that hole as quickly as possible, hence the emphasis on the clinic.

Speaker Change #160: Yes.

Speaker Change #160: A few times today, it's a bit of an imponderable to try to figure out when Joe reinvigorate pure discovery spending or.

Speaker Change #160: R&D spending, but the IMD spending would come sooner.

Speaker Change #160: Then discovery and its all essential in terms of continuing to fuel the.

Speaker Change #160: The strength of their pipeline. So some level they have to do it all they have to look at their own infrastructure from facilities, absolutely arent G&A there to look at it.

Speaker Change #160: Some of them are cutting back therapeutic areas they have to really refine their infrastructures, which is.

Speaker Change #160: And that's something I think that pharmaceutical industry has historically done all that well, but the point now where it's really a necessity. So that should when the smoke clears whenever that is be a significant benefit to us since we do so much of this work.

Speaker Change #160: Can do so much this work for them.

Speaker Change #160: Deeper science with closer proximity of lower cost et cetera, et cetera, like we have been for years. So.

Speaker Change #160: We have to.

Speaker Change #160: Hanging in there get lean watch our cost structure and try to be as responsive as possible from a sales point of view, so that minimally hold onto share and maximally take share of new work.

Speaker Change #161: Great Thanks for going over time.

Speaker Change #162: Thank you. We'll go next now to Michael Rice skin at Bank of America.

Michael Rice: Great. Thanks, guys.

Given the timing is just going to keep it to one question.

Jim Foster: Q&A Q&A, And our wind range safety has been quite high and pretty consistent over a long period of time. So when we go head to head, given our overall portfolio, given the geography, given the depth of our science.

Speaker Change #164: Sir your commentary on everything that's changing your view on DSA and.

Speaker Change #165: And yet you're maintaining the guide for RMS I realized different businesses, they're slightly different exposures, but I'm, a little bit surprised youre not worried about some bleed through.

Speaker Change #166: The pharma pullback is significant and potentially this protracted.

Speaker Change #167: You would see some impact in RMS as the year went on and possibly next year as well.

Speaker Change #168: Just curious what gives you confidence in that segment.

Speaker Change #169: I think we were probably already seeing a little bit of a food just to use your language and North America.

Speaker Change #170: She has been a bit slower and of course, that's where most of the biotech resides.

Speaker Change #171: Conversely, Europe, which has less biotech and ironically lots of pharma has been solid China is still growing really nicely.

As a function of.

Speaker Change #171: Capital going into life Sciences, just the scale of the country and the scale of our operation because we built some new facilities. So feel pretty good we feel pretty good about our guidance there we've always got price.

Speaker Change #172: As for forever, none of our clients reduced their own animals competition's relatively.

Speaker Change #173: Relatively small.

Speaker Change #174: And while the service parts of RMS are a bit slow at the moment is still quite substantial good operating margins.

Speaker Change #174: They are part of the solution for the clients watching the cost structure. So we would imagine that that work.

Speaker Change #174: With stabilized as well so.

Speaker Change #174: I think as we said RMS will continue to do its thing.

Speaker Change #174: Our guidance is only.

Speaker Change #174: Zero.

Speaker Change #174: Low single digits, so certainly feel quite confident about our ability to deliver that now for three or four reasons I just gave you.

Okay alright. Thanks.

Speaker Change #174: Okay.

Speaker Change #175: Thank you and ladies and gentlemen, we have time for one more question. This morning will take that now from Max Smock of William Blair.

Max Smock: Hey, good morning, Thanks for squeezing me in here I'll keep it to one question as well I just wanted to follow up on some of the prior questions around market share given your commentary is a bit out of line with what we heard from one of your competitors last week I was just hoping you could give some detail around how your win rate and TSA has trended so far in 2024, and whether you've seen that hold up for Newport.

Max Smock: More recently or if theres any sort of drop off to call out here. Thank you.

Max Smock: Yes.

Speaker Change #177: Safety has been fine.

Speaker Change #178: Hi, I'm pretty consistent over a long period of time, so when we go head to head.

Speaker Change #179: Given that our overall portfolio given the geography, given the depth of our science.

Jim Foster: We'll almost always win until there's a serious conversation about price, you know, with a client that just... You know, our market share is still quite substantial, it has been growing, our win rates have been good, the proposal volume has been quite significant, and the bookings have begun to improve, as we said in ourpaired remarks. Just not at the rate that we would need them to improve to really invigorate the back half of the year.

Speaker Change #180: We are almost always win until there's a serious.

Speaker Change #178: Conversation about price with a client that just.

Speaker Change #180: Worried about running out of chat section.

Speaker Change #180: And then they are more open and I think to compromise on the quality I don't think thats the biggest win and often when we don't even bid on that work.

Speaker Change #182: Very small.

Speaker Change #183: Who really compete entirely price so.

Speaker Change #184: Our market share is still quite substantial that has been growing.

Speaker Change #184: Our win rates have been good.

Speaker Change #184: Parcel volume has been quite significant.

Speaker Change #185: Bookings have begun to improve as we said in our prepared remarks, just not at the rate that we would need them to improve to really invigorate the back half of the year. So we think that's going to be.

Operator: So we think that's going to be, you know, less positive than we thought and exacerbated by pharma pulling back at the same time. But you know, I think we continue to hold our own, and do really well from a market share point of view with the entire client base, but certainly particularly biotech. And Max, if I can just add, I think you alluded to one of our competitors that reported last week. You know, if I saw it correctly, and it's a smaller piece of their business, but the piece that we compete more directly with, I think their performance in the quarter was worse than ours.

Speaker Change #185: Less positive than we thought and exacerbated by pharma pulling back at the same time, but.

Speaker Change #185: I think we continue to hold our own do really well from a market share point of view.

Speaker Change #185: With the entire client base, it certainly, particularly biotech.

Max Smock: And Max if I can just add I think you alluded to one of our competitors that reported last week.

Max Smock: If I saw it correctly.

Max Smock: Smaller piece of their business, but the piece that we compete more directly I think their performance in the quarter was worse than ours, and so I think to Jim's point. We believe this is more of a market dynamic as opposed to.

Operator: So I think to Jim's point, we believe this is more of a market dynamic as opposed to a competitive dynamic driving the more negative outlook that we're forecasting. Thank you. Thank you. Great. Thank you, Mr. Spencer. Ladies and gentlemen, again, that does conclude today's Charles River Laboratory., and John Sourbeer.

Max Smock: <unk>.

Max Smock: Dynamic driving the.

Max Smock: The more negative outlook that we're forecasting.

Speaker Change #187: Got it thank you.

Speaker Change #188: Thank you and I apologize.

Speaker Change #188: Okay.

Speaker Change #188: Let's say I apologize, if we didn't get to some of the questions.

Speaker Change #188: It was running long, but I will follow up and thank you everyone for joining the conference call. This morning.

Speaker Change #188: Look forward to seeing you at some of the Investor conferences in September and this concludes our call. Thank you.

Thank you Mr. Spencer, ladies and gentlemen, again that does conclude today's Charles River Laboratories second quarter 2024 earnings call again. Thanks for your participation you may now disconnect.

Speaker Change #188: [music].

Speaker Change #188: Hum.

Speaker Change #188: Hmm.

[music].

Operator: Thank you for joining us. We'll be starting in just a few minutes. Please be seated. We'll be starting in just a few minutes. Please be seated. We'll be starting in just a few minutes. Please be seated. We'll be starting in just a few minutes. Please be seated. We'll be starting in just a few minutes. Please be seated. We'll be starting in just a few minutes. Please be seated. We'll be starting in just a few minutes. Please be seated. We'll be starting in just a few minutes. Please be seated. We'll be starting in just a few minutes. Please be seated.

Operator: We'll be starting in just a few minutes. Ladies and gentlemen, thank you for standing by, and welcome. Just a reminder, this call is being recorded. 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. If you would like to remove yourself from the queue, please press start. Lastly, if you should need operator assistance at any time. This morning, I am joined by Jim Foster, Chair, President, and Chief Executive Officer, and Flavia Pease, Executive Vice President and Chief Financial Officer. They will comment on our results for the second quarter of 2024. Following the presentation, they will respond to questions. There is a slide presentation associated with today's remarks, which will be posted on the investor relations section of our website at ir.criver.com. Additionally, I'd like to remind you of our safe harbor.

Speaker Change #188: [music].

Speaker: 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. 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. We recorded revenue of $1.03 billion in the second quarter of 2024, a 3.2% decline on both the reported and organic basis over last year.

Speaker Change #189: Ladies and gentlemen, thank you for standing by and welcome to Charles River Laboratories second quarter 2024 earnings Conference call. Just a reminder, this call is being recorded at this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During this period that you will need to press star one.

Speaker Change #189: One on your telephone if you would like to remove yourself from the queue. Please press star two.

Todd Spencer: Lastly, if you should need operator assistance at any time. Please press star Zero I would now like to turn the conference over to our host Mr. Todd Spencer Vice President Investor Relations. Mr. Sensor. Please go ahead Sir.

Todd Spencer: Good morning, and welcome to Charles River Laboratories second quarter 2024 earnings Conference call and webcast. This morning, I am joined by Jim Foster sure President and Chief Executive Officer, and Flavia Pease Executive Vice President and Chief Financial Officer, They will comment on our results for the second quarter of 2020.

Speaker: I'll provide more details on the evolving trends within these two client segments shortly. The operating margin was 21.3%, an increase of 90 basis points year-over-year. The increase was principally driven by lower performance-based bonus compensation accruals in the quarter, reflecting the reduction in our financial outlook for the second half of the year. On a segment basis, higher operating margins in the manufacturing segment and lower corporate costs were largely offset by lower margins in RMS and the DSA segment. These lower accruals were the largest contributor to earnings outperformance in the second quarter.

Todd Spencer: Sure.

Speaker Change #191: Following the presentation. They will respond to questions. There is a slide presentation associated with today's remarks, which will be posted on the investor Relations section of our website at IR <unk> River Dot com.

Speaker Change #191: A webcast replay of this call will be available beginning approximately two hours after the call today and can also be accessed on the Investor Relations section of our website.

Speaker Change #191: The replay will be available through next quarters conference call.

Speaker Change #191: To remind you of our safe Harbor.

Speaker Change #191: 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 actual results may differ materially from those indicated.

Speaker Change #191: During this call we will primarily discuss non-GAAP financial measures, which we believe help investors gain a meaningful understanding of the standing of our core operating results and guidance.

Jim Foster: The non-GAAP financial measures are not meant to be considered superior to or a substitute for results of operations prepared in accordance with GAAP in accordance with regulation G. You can find the comparable GAAP measures and reconciliations on the Investor Relations section of our website I will now turn the call over to Jim Foster.

Jim Foster: Good morning.

Jim Foster: I will begin by providing highlights of our second quarter performance and revised guidance.

Jim Foster: We recorded revenue of one point or $3 billion in the second quarter of 2024 or three.

Three 2% decline on both the reported and organic basis over the last year.

Jim Foster: The topline performance was in line with our outlook as organic revenue growth in the manufacturing segment was more than offset by DSA and RMS revenue declines.

Jim Foster: By client segment, we continued to experience lower revenue from small and midsize biotech clients in the second quarter, while revenue from global biopharmaceutical clients increased modestly.

I'll provide more details on the evolving trends within these two clients segment shortly.

Jim Foster: Operating margin was 21, 3% an increase of 90 basis points year over year. The increase was principally driven by lower performance based bonus compensation accruals in the quarter.

Jim Foster: Collecting the reduction in our financial outlook for the second half of the year on a segment basis, a higher operating margin in the manufacturing segment and lower corporate costs were largely offset by lower margins in RMS and DSA segments. These lower accruals were the largest contributor to the earnings.

Jim Foster: And our second quarter earnings per share of $2.80 increased four 1% year over year.

Speaker: Earnings per share of $2.80 increased 4.1% year-over-year and exceeded the implied outlook in our prior guidance by approximately $0.40. We are significantly reducing our financial guidance for the year because forward-looking DSA trend data suggests that demand will not improve during the second half of the year as we had previously anticipated and, in fact, will decline for global biopharmaceutical clients. As a result, we are reducing our revenue outlook to a three to five percent decline on an organic basis this year, and non-gap earnings per share is now expected to be in a range of $9.90 to $10.20.

Jim Foster: Exceeded the implied outlook in our prior guidance by approximately 40.

Jim Foster: We are significantly reducing our financial guidance for the year because forward looking DSA trend data suggests that demand will not improve during the second half of the year as we had previously anticipated and in fact will decline for global biopharmaceutical clients. As a result, we are reducing.

Jim Foster: Our revenue outlook to a 3% to 5% decline on an organic basis. This year and non-GAAP earnings per share is now expected to be in a range of $9 90.

Jim Foster: To $10 20.

Speaker: We intend to partially offset the headwinds through aggressive actions to streamline our cost structure, optimize our global footprint, and drive greater operating efficiency, which will enable us to limit the bottom line impact going forward. We believe taking these actions will also enable us to emerge from this period of softer demand as a stronger and leaner organization and better positioned to capture new business opportunities. Our financial performance to date, including a low single-digit organic revenue decline in the first half, has been largely in line with our initial outlook.

Jim Foster: We intend to partially offset the headwinds through aggressive actions to streamline our cost structure and optimize our global footprint and drive greater operating efficiency, which will enable us to limit the bottomline impact going forward.

Jim Foster: We believe taking these actions will also enable us to emerge from this period of softer demand as the stronger and leaner organization and better positioned to capture new business opportunities.

Jim Foster: Before I discuss the second quarter business segment performance I will provide more details on these end market demand trends as well as the actions we have taken to manage through the current environment.

Speaker: However, the lack of a recovery in demand for our biotechnology clients. These trends for our broader biopharmaceutical client base are expected to lead. As you are aware, most global biopharmaceutical companies have announced major restructuring programs, likely precipitated by the IRA or pending patent expirations or both. We expect these actions and the resulting softening of our demand KPIs will continue to cause a period of slower spending by large pharma on their early-stage drug development activities, particularly because they are more focused on their clinical pipelines at this time.

Jim Foster: Our financial performance to date, including a low single digit organic revenue decline in the first half has been largely in line with our initial outlook. However, the lack of a recovery and demand for our biotechnology clients as well as recently emerging and softening demand trends in our global Biopharma.

Jim Foster: Local client base have caused us to take a much more negative view of our growth prospects for the second half of the year because of this the second half revenue growth that we previously anticipated will not materialize and in fact demand is expected to continue to soften for global biopharmaceutical clients in the near term.

Jim Foster: These trends for a broader biopharmaceutical client base are expected to lead to.

Jim Foster: To a low to mid single digit organic revenue decline in the second half of the year on a consolidated basis.

Jim Foster: As you are aware most global biopharmaceutical companies have announced major restructuring programs.

Jim Foster: We are precipitated by the IRI or pending patent expirations or both.

Jim Foster: And this has undoubtedly lead to tighter budgets and additional pipeline re prioritization activities. This year.

Speaker Change #192: Revenue for this client base continued to increase in the second quarter, However proposal activity and bookings began to notably <unk>.

Speaker Change #192: Decline in diverge from biotech clients during the second quarter, we now expect demand for global biopharmaceutical clients to further deteriorate over the remainder of the year. We anticipate these trends are also likely to impact the DSA growth rate into 2025. So we are working now to reset our cost base.

Speaker Change #192: To both withstand the pressures on our bottom line and to better position the company for when demand cycles back.

Speaker Change #192: Large biopharmaceutical companies are currently focused on resetting their budgets to create leaner cost structures. We expect these actions and the resulting softening of our demand Kpis will continue to cause a period of slower spending by large pharma on their early stage drug development activities, particularly because.

Speaker Change #192: They are more focused on their clinical pipelines at this time, we believe that these clients continue to view strategic outsourcing as a compelling solution to improve their cost efficiency and speed to market presenting a longer term opportunity for us once they inevitably refocus on their preclinical pipelines.

Speaker: We believe that these clients continue to view strategic outsourcing as a compelling solution to improve their cost efficiency and speed to market, presenting a longer-term opportunity for us once they inevitably refocus on their preclinical pipelines. In contrast to large pharma, demand KPIs for small and midsize biotech clients stabilized and trended somewhat more favorably through the first half, reflecting the solid funding environment and favorable sentiment around interest rates. Biotech companies are our largest client base at approximately 40% of total revenue and more than half of DSA revenue, and DSA proposals and ad bookings have improved for this client base this year, focusing on selling across the entire portfolio and leveraging technology to enhance sales insights and identify selling opportunities earlier.

Speaker Change #193: In contrast, the large pharma demand kpis, so small and midsize biotech clients have stabilized and trended somewhat more favorably through the first half, reflecting the solid funding environment and favorable sentiment around interest rates biotech companies, our largest client base at.

Speaker Change #193: Only 40% of total revenue and more than half of DSA revenue and DSA proposals and as bookings have improved to this client base this year.

Speaker Change #193: We experienced an improvement in biotech booking activity in the second quarter as the higher proposal levels that we commented on last quarter have begun to translate into new business wins, while we are cautiously optimistic that these trends will lead to future demand recovery and our biotech client base. They are also not.

Speaker Change #194: To support the DSA revenue improvement in the second half of the year that we previously anticipated and therefore, we do not expect revenue to biotech clients to improve from first half levels.

Speaker Change #194: We are laser focused on initiatives to generate more revenue contain costs and protect shareholder value as I discussed earlier. This year, we have already begun to enhance our commercial efforts. We are focused on optimizing our sales force to accelerate revenue growth by adjusting our go to market strategies and being a flexible part.

Speaker Change #194: For our clients focusing on selling across the entire portfolio and leveraging technology to enhance sales insights and identify selling opportunities earlier.

Speaker Change #194: Our digital strategy is also 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.

Speaker Change #195: To drive additional savings and preserve the bottom line, we will continue to aggressively manage our cost structure to ensure that capacity and head count are aligned with the current softer demand environment.

Speaker Change #195: We've already consolidated several smaller sites and reduced staffing levels. These recent actions and additional actions that will be implemented by the end of the third quarter are expected to generate over $150 million of annualized cost savings, which will be fully realized in 2025.

Speaker Change #195: We are also finalizing our multiyear strategy focusing on further optimizing our global footprint driving greater operating efficiency and leveraging our digital platform and global business services to further streamline processes.

Speaker Change #195: We expect to implement the initial phases of this plan before the end of this year, we will provide a more comprehensive update in November including the incremental savings that these initiatives will deliver.

Speaker Change #195: As referenced in this morning's earnings release, we will also reinstate a stock repurchase program and our <unk>.

Speaker Change #195: <unk> recently approved a new stock repurchase authorization totaling $1 billion.

Speaker Change #195: We intend to reinstate stock repurchase activity before the end of the third quarter Flavio will provide more details on this topic as well as an update on our capital priorities.

Flavio: I'd now like to provide you with additional details on our second quarter segment performance beginning with the DSA segment's results.

Speaker: DSA revenue in the second quarter was $627.4 million, a decrease of 5% on an organic basis, driven by lower revenue in both the discovery services and safety assessment areas. Since we do not expect these trends to improve during the second half of the year, as previously anticipated, and because we will likely be impacted by incremental spending pressures from our global biopharmaceutical client base, we have reduced our DSA revenue outlook to a high single-digit organic The DSA operating margin was 27.1% in the second quarter, a 50 basis point decrease from the second quarter of 2023.

Flavio: <unk> revenue in the second quarter was $627 4 million a decrease of 5% on an organic basis, driven by lower revenue in both the discovery services and safety assessment businesses.

Flavio: And the safety assessment business lowest steady volume was partially offset by a small benefit from price increases.

Flavio: Overall business trends were relatively consistent with those that we have discussed in recent quarters with the exception of diverging demand trends between our global biopharmaceutical client base and small and mid tier biotech.

Flavio: As mentioned earlier, we are beginning to see improvements in proposals and booking activity for biotech clients.

Flavio: It is meaningfully slowing for global Biopharma clients. The combined effect has resulted in a net book to Bill ratio. There was similar to the last five quarters, but below one times in the second quarter gross bookings also remained above one times in the quarter and the cancellation rate was consistent with the <unk>.

Flavio: First quarter levels, which was below its peak, but still not back to targeted levels. As a result of these trends the DSA backlog decreased on a sequential basis to $1 6 billion at the end of the second quarter from $2 three 5 billion.

Flavio: At the end of the first quarter.

Flavio: Since we do not expect these trends to improve during the second half of the year as previously anticipated and because we will likely be impacted by incremental spending pressures from a global biopharmaceutical client base, we have reduced our DSA revenue outlook to a high single digit organic decline for the full year.

Flavio: In the near term.

Flavio: We will ensure that our capacity both space and staffing are aligned with this lower expected level of demand looking beyond that we will continue to speak with our clients and closely monitor for indications that clients are beginning to return their focus to their IMD, enabling programs versus their recent focus on.

Flavio: Post <unk> studies.

Flavio: Demand trends to stabilize or begin to improve across both the global and mid tier client basis.

Flavio: The DSA operating margin was 27, 1% in the second quarter, a 50 basis point decrease from the second quarter of 2023.

Speaker: The year-over-year decline reflected the impact of lower sales volume and moderated pricing, particularly in the discovery services business. The operating margin improved from the first quarter level, which was commensurate with sales volume, lower bonus accruals, and additional cost savings generated by our restructuring efforts. However, research model services experienced a slight revenue decline in the second quarter in both GEMS and insourcing solutions. These trends largely reflect the overall biopharma demand environment. However, the benefits generated by clients that utilize our GEMS and IAS solutions can help them overcome their budgetary pressures by driving efficiency.

Flavio: The year over year decline reflected the impact of lower sales volume and moderated pricing, particularly in the discovery services business. The operating margin improved from the first quarter level, which was commensurate with sales volume lower bonus accruals and additional cost savings generated by our restructuring efforts.

Flavio: RMS revenue was $206 4 million.

Flavio: A decrease of three 9% on an organic basis over the second quarter of 2023. The RMS revenue decline was primarily driven by lower <unk> revenue as.

Flavio: As we mentioned last quarter, we expected the timing of <unk> shipments to be a meaningful headwind to the second quarter Rms growth rate.

Flavio: Excluding the <unk> impact RMS revenue was essentially flat year over year as higher sales of small research models were offset by slightly lower revenue for research model services for the full year. We believe the market environment will remain stable overall, so we are reaffirming our RMS organic revenue.

Flavio: Growth outlook of flat to low single digit growth.

Flavio: Revenue for small models continue to increase in all geographies, particularly in China and Europe. The resilience of the research models business reflects the fact that small models are essential low cost tools for research, which also enhances our ability to continue to realize price increases globally.

Flavio: Our China business has been resilient despite the macroeconomic pressures in the country as the growth rates for small research models has strengthened driven primarily by share gains associated with our geographic expansion within China.

Flavio: Research model services experienced a slight revenue decline in the second quarter in both gems and insourcing solutions.

Flavio: Trends largely reflect the overall biopharma demand environment. However, the benefits generated by clients that utilize our <unk> solutions can help them overcome their budgetary pressures by driving efficiency.

Flavio: <unk> business model, while not unaffected by the demand environment continues to resonate with clients, who are looking for cost effective solutions for their vivarium space requirements.

Speaker: There are pockets of software demand, particularly in South San Francisco, that have led to the consolidation of our cradle capacity there. However, other biohubs continue to perform well. The decline was primarily a result of lower NHP revenue.

Flavio: There are pockets of softer demand, particularly in south San Francisco that have led to the consolidation of our trailer capacity. There. However, other bio hubs continued to perform well.

Flavio: In the second quarter, the RMS operating margin decreased by 330 basis points to 23, 1%.

Speaker Change #196: The decline was primarily a result of the lower <unk> revenue the timing of HP shipments from both <unk> and in China can lead to quarterly revenue fluctuations and since the sales of these large models are quite profitable the timing of shipments can have a meaningful impact on the RMS margins on a quarterly basis.

Speaker: The timing of NHP shipments from both Novaprim and China can lead to quarterly revenue fluctuations. And since the sales of these large models are quite profitable, the timing of shipments can have a meaningful impact on the RMS margins on a quarterly basis. However, our view for the year hasn't changed, and both the RMS and manufacturing segments are expected to deliver operating margin expansion in 2024. Revenue for the manufacturing solutions segment was $192.3 million, an increase of 3.7% on an organic basis compared to the second quarter of last year.

Flavio: However.

Speaker: Each of the segments' businesses contributed to the revenue growth. However, as anticipated, the manufacturing growth rate was lower than the first quarter level because of a more challenging prior year comparison for the CDMO business. You may recall that we announced the recovery of the CDMO business in the second quarter of last year. Revenue in our manufacturing quality control testing business, biologics testing, and microbial solutions also continue to grow, rebounding from the more challenging market environment last year. Biologics testing's performance was driven by its core testing activities, including cell backing and viral clearance.

Speaker: For microbial solutions, the primary driver of revenue growth was demand for our endosafe testing cartridge. Additionally, clients have resumed their purchases of reagents and consumables as destocking activity has subsided. To conclude, it is clear that our clients are in the midst of reassessing their budgets, reprioritizing their pipelines, and managing their cost structures. However, our clients will continue to seek life-saving treatments for rare diseases and other unmet medical needs.

Speaker: In order to do so, they will, by necessity, reinvigorate investment in their early-stage R&D programs over time. To conclude, I'd like to thank our employees for their exceptional work and commitment, and our clients and shareholders for their continued support. Now Flavia will provide additional details on our second quarter financial performance and 2024 guide, including costs related primarily to restructuring actions, gains or losses from certain venture capital and other strategic investments, and certain other items.

Speaker: The lower performance-based compensation expense was primarily related to adjustments to our bonus accruals in light of the reduced outlook for the year, in the second half of the year than previously anticipated for both small and mid-sized biotechnology and global pharmaceutical clients. We expect DSA revenue to decline by approximately 10% organically in the second half of the year.

Speaker: DSA pricing is expected to turn slightly negative by the end of the year, but the largest driver of this change will be softer demand. However, we are implementing additional restructuring initiatives to deliver further cost savings to partially offset the lower revenue and help preserve the bottom line, which will have a more meaningful impact in 2025 and beyond. This, representing nearly 5% of our operating costs, is an increase from our prior target of approximately $70 million. The updated target includes actions that were initiated last year through those already planned for the third quarter of this year.

Speaker: As M&A activity has slowed, leverage has remained low at just above two times, and the capital intensity of our business has moderated in the current demand environment. These dynamics have enabled us to reassess our capital priorities. This improvement was driven primarily by lower performance-based compensation accruals. For the full year, we expect unallocated corporate costs will be in the mid 5% range as a percent of revenue. The decrease was primarily due to favorable geographic earnings. We now expect our tax rate will be approximately 22% for the full year. These reductions are primarily the result of shifting debt to lower interest rate geographies and continued debt repayment.

Speaker: As a reminder, over 80% of our $2.4 billion debt at the end of the second quarter was at a fixed rate, including $500 million that is fixed until November via an interest rate swap. In addition to lowering our interest expense, continued debt repayment resulted, Non-GAAP earnings per share is expected to decline in the low double digits year over year as the impact of lower DSA demand will only be partially offset by the benefit of restructuring initiatives.

Speaker: The year-over-year revenue growth rates in the RMS and manufacturing segments are expected to rebound from the difficult comparisons in the second quarter and the strong prior-year comparison in the manufacturing sector. In conclusion, our critical focus at this time is continuing to execute our strategy. To right-size the business and turn around the financial performance. We believe that accomplishing these actions will position the company to gain market share and emerge from this period of softer demand as a leaner, more efficient scientific partner for our clients. Thank you.

Operator: That concludes our comments. We will now take your questions. Hi, good morning.

Jim Foster: Thanks for taking my questions. Maybe, just on a higher level, I'm just thinking about your commentary about global biopharma. It seems that demand really took a bit of a hit in Q2 and after that. And as you think about that client base and you think about sort of the cost cuts that have been going on, they've been going on for some time now. What kind of rationale can you give for the increased deceleration of that demand?

Jim Foster: And just given the size and scope of these organizations, do you think it's going to take a lot longer for that to come back, given that it's going to be difficult for them to pivot so quickly? You know, this is a pretty, pretty unexpected and rapid deterioration of a large pharma company's business. You know, the good news is we have a disproportionately large share of big pharmaceutical companies' work, particularly in the safety assessment business. So that's great on the one hand.

Jim Foster: On the other hand, of course, as they begin to ratchet down their cost structures, that causes them to reduce their overall demand. You know, the pharma companies go through multiple processes every few years of trying to lean out their infrastructures. They sometimes do an adequate job. Sometimes they don't.

Jim Foster: I think the IRA legislation, coupled with the impending patent cleft, has made it essential, maybe with the exception of the two prominent companies that have GLP-1 drugs. So rapid deceleration and cutbacks, disproportionate impact on us, and reprioritization of pipelines.

Jim Foster: Some of the companies seem to be through it. Some are probably in the midst of it. It may take longer for others. It's tough to get a very good line of sight.

Jim Foster: You know, we have very high-level contacts in all the drug companies. We're dealing sometimes with the head of R&D and, sort of minimally, with the number two or three person in R&D. And it's clear that to get drugs into the clinic, to pay for the clinical trials, and obviously to get drugs into the market, and it would seem, I don't know, seem logical that they would continue that for some period of time.

Jim Foster: And then just on DSA, and given and noting the comments you've made on the commercial restructuring and shift and go to market, is there a market share issue going on here? Or would you still chalk this up to overall macro pressures? Yeah, we think that we're obviously biased, but we think we have a fabulous portfolio that's quite unique. We have a much larger geographic footprint, particularly in safety and discovery.

Jim Foster: We have exquisite and deep science, and we have had to, in appropriate cases, be aggressive with our prices. I think we'll, you know, through the back half of this year, have to do more. Thank you very much. I'm going to go next to Eric Coldwell at Baird. Thank you very much.

Flavia Pease: I was hoping to get a quantification of the impact of bonus accruals. I know you said it was the majority or a big chunk of the earnings upside versus implied guidance, but could you quantify that amount and then you can expect also additional favorability that would come through the second half as we update guidance for the full year, so we will probably have additional favorability following. And was this, was that? How much of this was in DSA as opposed to perhaps research models? I think you kept guidance there, basically, so I'm assuming this is pretty much all DSA. Is that fair?

Flavia Pease: Or also at the corporate level? You're correct. It's mostly DSA and at the corporate level. The other two segments, as you pointed out, are performing well and in line with the plan. So the majority of the impact is at corporate and DSA. Okay, and I know the first half was, I think you said minus seven, I'm toggling a lot of numbers here, but second half, minus 10 organic and DSA. So are we assuming a... Okay. And then, um...

Flavia Pease: The, a proxy for the overall discovery and safety market, both in-house and outsource. Transcripts provided by Transcription Outsourcing, LLC. I know RMS historically was much steadier, sturdier during, and that soft patches here in toxicology and discovery historically have outperformed RMS, but you have to think that this kind of a reduction in overall demand has to have some knock-on effects on models. It sounds like you're already seeing some knock-on impact in services, so I'm just trying to get a better sense of what the outlook is on research models and services growth going into 2025.

Flavia Pease: And so we're seeing a lot of emphasis on post-IND work; that will shift to classic IND work, and then at some point when they feel that the coffers are stable, we'll get back to more significant spending and pure discovery. But of course, as we all know, there is no future, there is no preclinical, there is no clinical without discovery, so that business should improve as well. The timeframe is obviously a little bit difficult to call, and we think that will be the last thing that recovers. Hi guys.

Jim Foster: Thanks so much for the question. If we think about how you're flowing this through, particularly in DSA and sort of the mid-single-digit organic revenue decline in the third quarter, what have you seen in sort of the July timeframe? Is that sort of stable compared to how you saw 2Q generally? Would you say things are still getting a little bit worse? I'm just trying to understand how you thought about the sort of flow-through relative to how the quarter progressed. They're in different phases of it, although it does seem that most of them are doing it at the same time.

Jim Foster: At some point, they'll find C-level there, and they'll put the spending into those drugs, which are post-IND and in the clinic. And we hope that, you know, as the future progresses, they'll find more of our IND work. The IND work is obviously extremely important, and as a percentage of the cost of developing a drug, quite trivial.

Jim Foster: So we do think that they'll have the money to do that at some point, and that's important for the future. Pauling out with any specificity at the moment is just a bit murky, given the suddenness and the unexpected nature and the meaningful nature of this pullback. Thank you. We'll go next to Dave Windley at Jeff... And Jim, I don't have anything else to add.

Flavia Pease: I think you covered it comprehensively and included price pressure in your margin assumptions for DSA in the back half of the year. Flavia, do you want to take that one?

Flavia Pease: Yeah, I'll take especially the latter part of the question. So Dave, the pricing, the dynamics of pricing that we've experienced so far through the first half, as well as what we anticipate the trends to be in the second half, and, as I said, exiting the year with a slight price decline in DSA, have been considered at the margin. I'll add some comments on the pricing dynamics and welcome additional color from Jim, but as we said in the first earnings call, we're being selective in where it makes sense we are providing some discounts. Depending on the nature of the work, depending on the start of the work, there are pockets of the work that we do where not a lot of competitors have those capabilities, and in those spaces, we don't feel like we need to provide additional price incentives.

Flavia Pease: There are other pockets that we're being selective and are ensuring that, as appropriate, we do not lose certain volume in certain business. So it's. I want to thank you, too, but we are seeing a shift in trend and plan to exit the year with a slight price decline in the S&P. Jim, I don't know if you want to add anything else.

Jim Foster: And there's no question, Dave, that our competitors principally use price as the lever. And so we, we don't like to chase it, we try not to, as we said, sort of in the first half of the year, we would use price pretty sparingly, to certainly preserve share and to gain share. I just think it feels like it's going to be more pronounced in the back half of the year, given the sort of, The Unknown Executive, Derik Bruin, Charles Rhyee, Todd Spencer, Birgit Girshick, Colin Dunn, and we'll go next now to Patrick Donnelly. It would be hard to believe if those don't linger into 25.

Jim Foster: So I guess when you kind of think high-level, you know, which headwind persists for several quarters and where you have visibility into things maybe improving, I guess just when you look at the backlog, cancellation rates. You know, what are the areas of real concern as we head into 25? They just and And with a lot of them, we have long-term pricing arrangements. So that's all right, there'll be some pressure on prices.

Jim Foster: It's just going to be more about volume as they cut back and try to preserve their cost structure. So, you know, as we said, we're going to see that persist. I would imagine biotech becoming more positive faster than Big Pharma, who I think have some major structural improvements to make. If there's no way they can make them overnight, they're going to look to us to help them make them. So cradles will be important.

Jim Foster: I do think safety will continue to be important, and definitely all of our manufacturing segments will be increasingly more important to them. So, you know, for us, it's... In terms of the softness on the pharma side, are you seeing it, sounds like it's more broad-based versus concentrated, just a few customers? And then also, in your conversations with customers, are you seeing it more on where you play in the discovery pre-clinical stage, or in your view, is it this broad-based softening kind across pharmaceuticals? Thanks.

Jim Foster: So it's definitely broad-based. We're seeing it with every client. And as I said before, we have very large market shares and, huge for us, very increasingly larger dollar volumes across all of big pharma, and with the exception of the two companies that are making GLP-1, going through substantial cutbacks of staff, facilities, and portfolio at the same time. Having said that, there's no question that it disproportionately adversely impacts them. They see a patent cliff. They're sort of working really hard to get more drugs into the clinic and into the market. That's not easy to do.

Jim Foster: They've got the IRA legislation to make that a bit more complex, a lot of competition around similar targets, similar types of molecules, and they definitely just have too much to bite off right now. So, I don't think the situation's as bad, but we saw it in 2009, 10, 11, 12. You have a similar period where our client base, pretty much on a broad gauge basis, is watching and spending carefully, and all we can do is. Look, we're merely a reflection.

Jim Foster: Thank you. We go next now to Tejas Savant at, I mean, this is unusual activity for a pharma client. So obviously, we've been servicing it forever. And that was our principal source of revenue, and is obviously a meaningful source of revenue right now. I think your comments on IRA are accurate, except we're surprised that we're hearing more about it lately. So I don't know what sort of we started that.

Jim Foster: But almost all the clients have mentioned that, as you're mentioning, the patent strategically, structurally, and organizationally. We just don't see them doing it right now. It's just, as you know, It takes longer to get drugs into the clinic, it takes longer for them to get to market, and it costs a lot more.

Jim Foster: So they just, they just have to work on a smaller number of drugs. I think it's hard to believe that the Biosecure Act..., with whom we work who said they had, quote, instructed their portfolio companies not to do business in China. We thought there was an unusually strong sort of interference with what these portfolio companies do. They didn't say, "We would prefer you don't use China." They said, "We don't want you to."

Jim Foster: So that gave us an indication that that might be something that expands. These are VCs that are creating new companies from scratch, and the fact that they don't even want to start with China is quite interesting. So it feels like it should have a greater head of steam, but it doesn't seem to have much right now.

Jim Foster: There's been a lot of talk about it, so obviously, it's not built into anything that we're saying for this year, and we'll see whether there are any changes post-election on this. And I'll let Flavia take the interest expense question. Sure.

Flavia Pease: And Tejas, given that any change in interest rates by the Fed will likely be at the tail end of the year, the timing of these reductions will not really have any meaningful impact on our outlook, not to mention that 80% of our debt is fixed until November when we have the swap on the $500 million expires. I know you also talked about could that put pressure on your interest income, but we try to keep very little cash, obviously, given that our objective is to pay down debt, so that would be de minimis as well.

Flavia Pease: And in terms of outlook for next year, anything that the Fed does in terms of bringing interest rates down will obviously be positive for us because we will have a little bit less debt fixed given the swap will expire, and so the amount of floating debt of ours will increase, and if interest rates come down, that would actually be positive for us.

Flavia Pease: Thank you. We go next now to Casey Woodring at, This is just in the context of the comments you've made today on DSA pricing pressure in the back half of the year. I can take that one, Casey, and I'll separate it a little bit because I'm assuming that your question is more focused on NHP pricing in the DSA business, but I'll also provide some commentary on NHP pricing when we sell it to third parties, which is reflected in the RMS business. NHB pricing within RMS.

Flavia Pease: Obviously, we have two parts of that business, I think, as we have commented since we acquired NOVA. We have the NHB sales in China for China, and then we now have NHB sales through the Novaprim acquisition. So in China, prices have come down, and that has been reflected in our results so far this year, and we'll continue to expect them to be at the levels that we're experiencing them today. And then, in the case of Novaprim, prices are stable. These agreements are long-term relationships, and we haven't experienced price pressure there this year and do not expect it to happen in the second half of the year.

Flavia Pease: That's helpful. And then, you know, you mentioned cancellations are still not back to target levels, and net book-to-bill is below one again this quarter. Just curious how much of that cancellation number in the quarter was from large pharma versus biotech? The impression in the past had been that a lot of the cancellations were from biotechs that, you know, couldn't pay for the work that they had booked too far in advance. But now, with the large pharma restructuring you called out here, I was wondering if that's really driving the heightened cancellations here and what the expectation for cancellations is moving through the rest of the year. Thank you. No problem. I'll take that one as well, Jim.

Flavia Pease: And you're correct, Casey. The cancellations for sort of biotech, you know, small and mid-tier companies actually were a slight sequential improvement from Q1, so there were fewer cancellations. And global bookings actually picked up between Q1 and Q2. So, sequentially, it was a deterioration, more cancellations for global bookings in Q2, and an improvement for mid-tiers, as you had guessed. Go next now to Luke Sergott at... Great, thanks for squeezing me in.

Jim Foster: So I just want to talk about you guys taking out costs and aligning the cost with the demand. But, you know, as that demand starts coming back in DSA, you know, how quickly can you spin up those resources again? And just trying to think about the timing? Is it like a quarter ahead when you know, given the visibility that you guys have? Or is it the kind of thing that will happen have to happen in real time? Hello.

Jim Foster: You know, we have to hire even direct labor for probably a quarter. That's a good time frame. All right, great. And then this goes on, I guess.

Jim Foster: Farmer is continuing to rationalize this, you know, their discovery work and keep those budgets tight. Like, how long do you think that they can maintain this tight budgetary environment or continue to cut there without it starting to impact the later phase work? You know, it's a good question.

Jim Foster: I mean, pharma, 50 to 70% of the drugs are externally accessed. So you're gonna see pharma continue to do a lot of M&A with small, medium, and large biotech companies. I don't think there's gonna be much M&A between pharma companies, so that's positive for them. Much of the work that they're doing, particularly in the areas that we work in, is currently being outsourced as they buy these startup companies or, As we've said a few times today, it's a bit of an imponderable to try to figure out when they'll reinvigorate pure discovery spending or IND spending, but the IND spending would come sooner. Great, thanks for going over time. Unknown Speaker... slightly different exposures, but I'm a little bit surprised.

Jim Foster: Take that now from Max, quite high and pretty consistent over a long period of time. So when we go head to head, you know, our market share is still quite substantial, it has been growing, our win rates have been good, the proposal volume has been quite significant, and the bookings have begun to improve, as we said in our previous remarks, just not at the rate that we would need them to improve to really invigorate the back half of the year.

Jim Foster: So we think that's going to be, you know, less positive than we thought and exacerbated by pharma pulling back at the same time. But, you know, I think we continue to hold our own, and do really well from a market share point of view with the entire client base, but certainly particularly biotech, for earning a call. Again, thanks for your participation.

Q2 2024 Charles River Laboratories International Inc Earnings Call

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