Q3 2024 Charles River Laboratories International Inc Earnings Call

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Please stand by, we're about to begin.

Speaker Change: We believe these recent restructuring actions further validated our commentary last quarter. However, the forward looking demand trends for global biopharmaceutical clients did not show signs of further deterioration in the third quarter and actually improve from second quarter levels, coupled with the numerous discussions that we've had with clients.

Speaker Change: This leads us to believe that we have correctly call the near term demand outlook for this client base.

Speaker Change: For all these trends translated into slight sequential improvement in the forward looking demand indicators for the safety assessment business in the third quarter, including improvements in net book to Bill and the cancellation rate.

Speaker Change: This is important because it supports our belief that we appropriately reset our financial guidance for the year in August and net book to Bill remains below one times. So it still be too early to assume when a recovery will occur, but we are pleased with the demand environment does not appear to have deteriorated further at this time, it's too early to provide.

Speaker Change: Any specific commentary on 2025 guidance, but we expect the current trends will persist into 2025 and continue to pressure year over year growth rate. This is particularly true in the DSA segment as we anticipate continued headwinds based on the current pricing environment until we anniversary the step down.

Speaker Change: Global Biopharma demand.

Speaker Change: <unk> occurred during the second half of this year.

Speaker Change: As I discussed in August we have taken decisive action to manage the company through the current demand environment, including appropriately right sizing our infrastructure, we are committed to initiatives to generate more revenue contain costs and protect shareholder value.

Speaker Change: I outlined last quarter and to ensure further success, we are focused on taking strategic actions in three areas.

Speaker Change: Restructuring initiatives to maintain costs and generate efficiency by reducing staffing levels to align with the pace of demand as well as evaluating our global footprint to optimize consolidate and simplify operations. We have made meaningful progress on our footprint optimization efforts since we last spoke the <unk>.

Speaker Change: Area is focusing on commercial enhancements to promote a client centric focus and gain additional market share. Our goal is to enhance the client experience and reinforce our role as a flexible and responsive partner to our clients, including through leveraging technology, such as our Apollo platform and RMS ecommerce.

Speaker Change: And finally, we are continuing to evaluate additional strategies to take additional cost out and to drive efficiency.

Speaker Change: We are working on initiatives to further transform how we operate ranging from continuing to better leverage technology to adopting a global business service model to streamline processes as well as generating greater procurement savings.

Speaker Change: The restructuring initiatives that we have implemented to aggressively manage our cost structure are already generating significant savings and as planned we continued to further reduce staffing levels in the third quarter.

Speaker Change: The initiatives that we have implemented since late 2023 have reduced our total head count by over 6%. It is imperative in this environment to keep our staff well utilized in order to protect the operating margin, which is our goal. We have also undertaken a comprehensive review of our global footprint to provide some context, we built many of.

Speaker Change: Our businesses through acquisitions accumulating over 150 sites at peak, we are periodically consolidated divested smaller sites over the past several years to manage our global infrastructure, including the consolidation of seven small sites within the past year.

Speaker Change: Our global footprint optimization efforts are focused on consolidated capacity that is no longer needed and in many cases transitioning the services and clients to other larger sites. We've also taken a client centric approach towards these actions with the goal of serving our clients more efficiently and seamlessly in order to cash.

Speaker Change: <unk> synergies and savings that extend beyond the facility costs.

Speaker Change: Through these optimization imperatives initiatives, we have already begun to implement a process to close or consolidate approximately 15 smaller sites principally focused on the DSA and Rms segments.

Speaker Change: The program is completed in 2026, we expect it will generate an incremental $40 million in annualized net savings through the elimination of overhead and facility costs as well as by reducing head count. We view these as durable savings because we do not believe reinvestment in similar infrastructure will be required.

Speaker Change: When demand improves these footprint optimization efforts will enhance the efficiency and economies of scale and a global infrastructure, leading to a more disciplined operating model.

Speaker Change: In total the restructuring initiatives that we have implemented since late 2023, including head count reductions in global footprint optimization efforts are expected to generate approximately $200 million in cumulative annualized cost savings.

Speaker Change: Eliminating more than 5% of our cost structure.

Speaker Change: Approximately half of the annualized cost savings will be realized this year and at least $150 million in total will be realized in 2025.

Speaker Change: Before I provide more detail on our third quarter results I wanted to provide a brief update on capital allocation.

Speaker Change: We were pleased to report that we generated record free cash flow of over $200 million in the third quarter strong cash generation as a long term hallmark of the company.

Speaker Change: This coupled with moderating capital intensity of our businesses and lower debt has enabled us to reevaluate and rebalance our capital priorities to include modest stock repurchases. This year totaling approximately 100 million third quarter. These.

Speaker Change: These collective efforts from restructuring to capital allocation are aimed at emerging as a leaner more efficient organization when demand returns a stronger partner to our clients and better positioned to capture new business opportunities as well as to protect and ultimately enhance shareholder value.

Speaker Change: I'll now provide highlights of our third quarter performance and updated guidance, we reported revenue of $1.01 billion.

Speaker Change: In the third quarter of 2024, or one 6% decline on a reported basis over last year.

Speaker Change: <unk> revenue declined by two 7% driven by the anticipated decline in DSA, partially offset by low double digit growth in the manufacturing segment and slightly higher Rms revenue.

Speaker Change: By client segment revenue declined for both the small and midsize biotech and the global biopharmaceutical clients segments in the third quarter as expected.

Speaker Change: As I mentioned earlier revenue from biotech clients was stable sequentially.

Speaker Change: The operating margin was 19, 9% a decrease of 60 basis points year over year, the operating margin improve in each of our three business segments due in part to the benefit of cost savings. However, higher unallocated corporate costs resulted in a consolidated operating margin decline in the third quarter.

Speaker Change: Flavio will provide more details on unallocated corporate costs shortly.

Speaker Change: Earnings per share with $2.59 in the third quarter, a decrease of four 8% from the third quarter of last year, reflecting the lower revenue and operating margin. Despite the decline third quarter earnings per share exceeded the outlook. We provided in August due primarily to the better than expected top line performance.

Speaker Change: <unk> in the DSA segment.

Speaker Change: We are narrowing and slightly raising our full year guidance for revenue and non-GAAP earnings per share from the midpoint of the previous ranges to reflect the third quarter performance. We are narrowing our revenue outlook to a 3% to 4% decrease on an organic basis and non-GAAP earnings per share has been slightly raised to a range of $10.

Speaker Change: Let's turn to.

Speaker Change: $10 37.

Speaker Change: While we are never pleased with declining revenue financial outlook already demonstrates that we are beginning to see the benefits of the disciplined management of our cost structure.

Speaker Change: I'd like to provide you with additional details third quarter segment performance beginning with the DSA segment's results.

Speaker Change: DSA revenue in the third quarter was $615 $1 million a decrease of seven 4% on an organic basis, driven by lower sales volume in both the discovery services and safety assessment businesses DSA revenue modestly exceeded our prior outlook of a 10% second half decline because.

Speaker Change: Global Biopharma demand trends held up better than we expected.

Speaker Change: We now believe the DSA segment revenue will decline at a high single digit rate organically in the second half of the year consistent with our full year outlook.

Speaker Change: And the safety assessment business. The revenue decrease was primarily driven by lower steady volume pricing was essentially flat year over year and is expected to trend slightly lower in the fourth quarter, which is consistent with our previous expectations.

Speaker Change: From our perspective, the safety assessment pricing environment or a spot market for new proposals has not materially changed for most of the year.

Speaker Change: We were pleased that gross bookings and cancellations improve from second quarter levels, resulting in an improvement in the net book to Bill ratio.

Speaker Change: Two the most favorable levels since the first quarter of 2023.

Speaker Change: As I mentioned earlier these forward looking indicators for global biopharmaceutical clients rebounded in the third quarter, which reassured us that the demand environment was not further deteriorate. In addition.

Speaker Change: Tech trends remained stable in the third quarter and overall the forward looking demand kpis for this client base and a more favorable in 2024 than last year.

Speaker Change: Headwinds still exist ranging from the net book to Bill ratio remaining below one times to pricing and the overhang from our clients major restructuring efforts and therefore, we will continue to take a cautious view with respect to the near term outlook for our safety business until the sustained demand trends are more supportive.

Speaker Change: Of a return to revenue growth.

Speaker Change: The DSA backlog decreased just slightly on a sequential basis to two point $12 billion at the end of the third quarter from 2.1 dollars 6 billion at the end of the second quarter.

Speaker Change: As part of our ongoing efforts to promote our client centric approach and refine our operating model we are working further.

Speaker Change: We are working to further integrate our global discovery and safety assessment operating structure to one DSA over the next year.

Speaker Change: Last two years, our global DSA operations have been managed by one senior leader Shannon Paris soda. During this time Shannon has comprehensively evaluated the strengths and opportunities.

Speaker Change: Just within the businesses.

Speaker Change: On enhancing and future vision and enhanced it with senior management has developed a plan that we believe will unlock greater synergies and ultimately make us a stronger and even more responsive partner for our clients.

Speaker Change: Many of the changes will be settled.

Speaker Change: Both internally and from a client perspective, they will focus on our combined sales force and leadership approach integrated scientific programming and a more seamless client experience as their programs transition from the discovery to the early development phase.

Speaker Change: The insights we have already gained from modulating towards this model of influence that global footprint optimization plans.

Speaker Change: <unk> consolidation of several smaller sites and transitioning services to other DSA location.

Speaker Change: Operating margin was 27, 4% in the third quarter 20 basis point increase from the third quarter of 2023, and a 30 basis point increase sequentially.

Speaker Change: Year over year and sequential improvements were primarily driven by the increasing benefits from our cost savings actions that we have implemented.

Speaker Change: RMS revenue was $197 $8 million, an increase of 0.6%.

Speaker Change: And organic basis over the third quarter of 2023, RMS revenue was primarily driven by the benefit of higher pricing and small model sales volume in China, largely offset by lower revenue for research model services and sell solutions.

Speaker Change: As has been the case all year small model revenue in North America, and Europe has been driven by higher pricing.

Speaker Change: Volume for small animals has declined this year in conjunction with large pharma restructuring activities that have led to spending cuts and a reduction in research staff and the funding environment has resulted in a slowdown new biotech company creation. These trends has largely been reflected in our original outlook for the year.

Speaker Change: To offset the volume declines. We also continued to realize price increases because small models are essential low cost tools for drug research.

Speaker Change: China business continues to perform well this year, despite the macroeconomic pressures in the country, primarily driven by share gains associated with our geographic expansion.

Speaker Change: Research model services, including a trade of operations.

Speaker Change: It's a modest revenue decline in the third quarter, largely reflecting the overall biopharma demand environment.

Speaker Change: <unk> business model continues to resonate with clients experienced low occupancy as clients selectively narrowed room utilization to cut costs.

Speaker Change: And Jim this has been modestly affected by a similar slowdown in client demand as part of our footprint optimization efforts. We are in the process of consolidated several credo sites.

Speaker Change: <unk> also consolidated our sales solutions operation and its largest site in California existing demand trends are expected to result in essentially flat RMS organic revenue in 2024.

Speaker Change: In the third quarter, the RMS operating margin increased by 210 basis points to 21%.

Speaker Change: The improvement was primarily due to higher pricing a favorable revenue mix related to novo prep and the benefit of cost savings actions.

Speaker Change: Revenue for the manufacturing solutions segment was $196 9 million an increase of 11, 8% on an.

Speaker Change: An organic basis compared to the third quarter of last year each of the segments businesses contributed to the robust revenue growth and given its continued strong performance. We are raising the segment's full year revenue outlook to high single digit organic growth from our prior outlook of mid to high single digit growth. The CMO business led the way with <unk>.

Speaker Change: A robust quarter, particularly for cell therapy as client interest in booking activity was strong in the third quarter <unk> business remains on track to have another solid year.

Speaker Change: Biologic testing business also continued to perform well driven by demand for our core testing activities, including cell banking viral clearance that viral safety testing. We are also pleased that the synergies between our CMO and biologics testing businesses continued to strengthen.

Speaker Change: As it is critical to provide analytical testing capabilities to expedite the production processes for our clients cell and gene therapies more than half of our CMO clients now utilize our biologics testing capabilities, which is a testament to the synergies between these businesses and.

Speaker Change: The microbial solutions business also had a strong quarter driven primarily by demand for our end to save tested consumables as well as improving instrument placements. We believe the third quarter performance demonstrates that demand for microbial products has rebounded from the pressures last year, which resulted from clients destocking activity anti.

Speaker Change: Their budgets and the drug manufacturing sector.

Speaker Change: Our belief is supported by the placement of seven of our large automated systems.

Speaker Change: Nexus platform during the third quarter and a similar number of placements are expected in the fourth quarter. In addition to the fact that these high throughput systems.

Speaker Change: To drive meaningful incremental carpet cartridge use.

Speaker Change: We view installation of these systems is further evidenced with both existing and new clients are utilizing our comprehensive rapid manufacturing quality control testing solutions to enhance their product release testing speed and efficiency.

Speaker Change: Manufacturing segment's third quarter operating margin was 28, 7%, representing an increase of 420 basis points year over year improvement was largely a result of leverage from higher sales volume across each of the segments business.

Speaker Change: To conclude we are continuing to navigate through this challenging period.

Speaker Change: Meaning laser focused on our strategy.

Speaker Change: Resolutely managing our cost structure by enhancing our clients' experience to gain additional share by protecting shareholder value.

Speaker Change: We've always distinguish ourselves through our exquisite science in preclinical focus extending our leading position as a client's preferred global non clinical drug development partner, we have navigated challenges before and we expect to emerge from this period as a stronger leaner and more profitable company and even more responsive partner for our.

Speaker Change: I would like to thank our employees for their exceptional work and commitment and our.

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

Flavia: 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.

Speaker Change: Costs related primarily to restructuring action game.

Speaker Change: <unk> losses from certain venture capital and other strategic investments and certain other items.

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

Speaker Change: Third quarter 2020 for organic revenue decreased at a rate of two 7%, which was better than our outlook of a mid single digit decline.

Speaker Change: We delivered non-GAAP earnings per share of $2 59.

Speaker Change: Which decreased four 8%, but was favorable to our prior outlook of a.

Speaker Change: Low double digit decline.

Speaker Change: The outperformance was largely driven by better than expected DSA results.

Speaker Change: As Jim discussed, we have narrowed and slightly raised our revenue guidance for the full year to reflect the stronger third quarter performance and now expect a revenue decline of two 3% on a reported basis and 3% to 4% on an organic basis.

Speaker Change: non-GAAP earnings per share guidance is now in a range of $10.10 to $10 30.

Speaker Change: By segment the revenue outlook for each segment either narrowed.

Speaker Change: <unk>.

Speaker Change: Alright, Ms revenue will be essentially flat on an organic basis DSO.

Speaker Change: DSA revenue is expected to be at the more favorable end of our prior outlook.

Speaker Change: High single digit organic revenue decline.

Speaker Change: Manufacturing is expected to report high single digit organic revenue growth.

Speaker Change: From an operating margin perspective. The outlook is also unchanged. We expect that this year's consolidated operating margin will be slightly below last year's level.

Speaker Change: Cost savings and lower performance based bonus accruals.

Speaker Change: Nearly offset the revenue shortfall at the margin level in 2024.

Speaker Change: There are three key.

Speaker Change: Updates this quarter that I'll highlight now.

Speaker Change: The additional savings from our restructuring initiatives, the re initiation of stock repurchases and our strong free cash flow generation.

Speaker Change: As mentioned in August we have begun to implement additional restructuring initiatives.

Speaker Change: Deliver further cost savings to help preserve the bottom line.

Speaker Change: This will result in the consolidation of approximately 15 smaller sites, primarily in the DSA and Rms segments.

Speaker Change: Most of which have already started.

Speaker Change: We're also planning a sale and leaseback arrangement.

Speaker Change: Wilmington, RMS and corporate campus, which will reduce fixed costs and improve efficiencies, while enabling us to continue to operate from the site.

Speaker Change: We expect these footprint optimization efforts will be completed in 2026 and generate net savings of approximately $40 million.

Speaker Change: Inclusive of the actions we have taken since late 2023, we have successfully identified annualized savings of approximately $200 million.

Speaker Change: Of which approximately $100 million will be realized this year.

Speaker Change: And an incremental $50 million in each of the next two years to achieve the full run rate in 2026.

Speaker Change: As part of our footprint optimization efforts, we expect to incur roughly $100 million of restructuring charges.

Speaker Change: Associated with site consolidation and transition costs.

Speaker Change: These impairments severance and related items.

Speaker Change: A portion of the cash charges will be offset by the expected cash proceeds from the sale of real estate.

Speaker Change: These restructuring items will be excluded from our non-GAAP results.

Speaker Change: The majority of these charges will be recorded in 2025.

Speaker Change: By taking these actions now we are positioning the company for future profitable growth utilizing a more scalable footprint.

Speaker Change: As you know our board recently approved a new stock repurchase authorization of $1 billion.

Speaker Change: We commenced stock repurchases under the new authorization in August and repurchased a total of 500000 shares for approximately $100 million.

Speaker Change: Which achieved our goal to offset annual share count dilution from equity awards for the year.

Speaker Change: Moving forward, we will continue to regularly reevaluate the best uses of our capital.

Speaker Change: <unk> stock repurchases debt repayment and strategic M&A to accelerate growth and maximize shareholder value.

Speaker Change: As Jim mentioned, we also achieved record quarterly free cash flow with $213 $1 million generated in the third quarter compared to $139 5 million last year.

Speaker Change: The improvement was driven by disciplined working capital management and lower capital expenditures.

Speaker Change: Capex was $38 7 million in the third quarter compared to $65 $9 million last year, which reflected the ongoing moderation of our capacity requirements.

Speaker Change: For the year free cash flow will be over $450 million, an increase from our prior outlook of $380 million to $400 million and Capex is expected to be between 220, <unk> and $240 million.

Speaker Change: I will now provide details on the non operating items that affected our third quarter performance.

Speaker Change: Unallocated corporate costs totaled $76 8 million.

Speaker Change: Six 6% of revenue in the third quarter compared to four 7% of revenue last year.

Speaker Change: The increase was primarily due to higher health and fringe related costs and the absence of benefits from virtual power purchase agreements or ppas that were recognized in the prior year.

Speaker Change: For the full year, we expect unallocated corporate costs to be slightly above the mid 5% range as a percent of revenue.

Speaker Change: The non-GAAP tax rate in the third quarter was 21, 3%, representing a decrease of 30 basis points year over year.

Speaker Change: The decrease was primarily due to a favorable geographic earnings mix.

Speaker Change: For the full year, we now expect our tax rate will be in the range of $21, 5% to 22%.

Speaker Change: Total adjusted net interest expense in the third quarter was $28 8 million, which represented both a sequential and year over year decline.

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

Speaker Change: For the full year, we expect total net interest expense will be at the lower end of our prior outlook of $118 million to $122 million.

Speaker Change: We are pleased with the effectiveness of our capital management activities, we have been able to lower our net interest expense by repaying over $300 million in bet. This year, which has brought our gross leverage ratio to 225 times and our net leverage ratio to two <unk>.

Speaker Change: At the end of the third quarter.

Speaker Change: We were able to continue to repay debt in the third quarter, while absorbing $100 million to Reinitiate stock repurchases in August.

Speaker Change: As a reminder, we also entered into a $500 million interest rate swap two years ago that has proven to be economically advantageous as we have been locked in a lower.

Speaker Change: Fixed interest rate.

Speaker Change: Currently over 85% of our $2 3 billion at the end of the third quarter was at a fixed rate.

Speaker Change: <unk> this swap that expires in November.

Speaker Change: A summary of our 2024 financial guidance can be found on slide 41.

Speaker Change: With one quarter remaining in the year.

Speaker Change: Our fourth quarter outlook is effectively embedded in our full year guidance.

Speaker Change: For the fourth quarter, we expect revenue to decline by low to mid single digit rate on both a reported and organic basis.

Speaker Change: There can be quarterly variability in RMS results due to the timing of <unk> shipments and the manufacturing segment's growth rate is expected to moderate from the strong low double digit performance in the third quarter due primarily to the timing of CDMA projects.

Speaker Change: non-GAAP earnings per share I expect it to be in a range of approximately $2 45.

Speaker Change: To $2 65.

Speaker Change: Looking ahead to 2025, we continue to expect the current trends will persist.

Speaker Change: Largely due to a global biopharmaceutical clients as ongoing restructuring programs and the continued gradual recovery in biotech growth.

Speaker Change: As a reminder, we plan to provide our 2025 outlook. When we report our year end results in February which is our standard practice.

Speaker Change: In conclusion, we're pleased with our third quarter performance in this challenging environment.

Speaker Change: As we look to the future we are focused on being well positioned to drive growth when the market rebounds.

Speaker Change: Our unwavering commitment to continuing to deliver high quality scientific solutions to our clients as we transform into a leaner more agile organization is a testament to our company's strength and resilience.

Speaker Change: Thank you.

Speaker Change: That concludes our comments, we will now take your questions.

Speaker Change: Thank you ladies and gentlemen, the floor is now open for questions. If you would like to signal for a question. Please press star one on your telephone keypad, you can remove yourself from the queue at any time by pressing star to once again that is star one to ask a question and star teacher and leave yourself and the interest of time we.

Speaker Change: Ask that you limit yourself to one question and one follow up question, we will pause for just a moment to assemble the question queue.

Speaker Change: We will go first to Max Smock with William Blair. Please go ahead.

Max Smock: Hey, good morning, Thanks for taking our questions I wanted to follow up on the comment you had around the puts and takes in terms of the funding environment and the interest rate sentiment that keeps your outlook for small biotech measured could you just walk through kind of what those puts and takes are and then in light of last night's election, I'd be curious if theres been any change to your view on the outlook for funding.

Speaker Change: Moving forward.

Speaker Change: Hey, Matt Good morning, I think.

Speaker Change: I'll, let Jim answer on on the election, but in terms of liquids and takes I think.

Speaker Change: From a macroeconomic.

Speaker Change: I'll make perspective.

Speaker Change: And just funding environment.

Jim: It started in the beginning of the year with a more robust funding with IPO market opening we continue to see that getting support throughout the year although.

Jim: Slightly lower clip than the first half of the year.

Jim: Obviously interest rates have started to come down which is.

Jim: Good thing no to the biotech environment and as we said from a demand perspective.

Jim: We continue to see the demand indicators trend more favorably.

Jim: Biotech client base in last year, so while they didn't rebound to the extent that we had anticipated earlier in the year, which was part of the reason why we adjusted our guidance in the second earnings call.

Jim: They are stable and favorable to last year. So.

Jim: We are cautiously optimistic that things will continue to improve but albeit.

Speaker Change: Albeit on a much smaller slower clip.

Speaker Change: So a little bit longer ago.

Speaker Change: Hey election.

Speaker Change: Yes.

Speaker Change: I think that if it had gone the other way.

Speaker Change: Sorry, I might've been beefed up.

Speaker Change: Additional drivers might have been added to it.

Speaker Change: The short term that would be more expansive having said that it is.

Speaker Change: Popular and attractive for any candidate can you just talk about drug prices being too high.

Speaker Change: But I would expect we'd have less of a focus.

Speaker Change: But new administration, we'll have to we'll have to wait and see.

Speaker Change: Yes.

Speaker Change: Got it. Thank you for that and then Bob maybe just a cleanup one for me how much of a benefit did you all recognize from lower incentive comp in the quarter similar to last quarter. It's fair to assume most of that impact was in DSA and at the corporate level.

Speaker Change: Just to confirm Youre talking about that.

Speaker Change: <unk>.

Speaker Change: I didn't see performance based on all performance based comp.

Speaker Change: So that was not a meaningful did not have a meaningful impact in the third quarter. The big adjustment when we adjusted our guidance was really in the second quarter. So this was not.

Speaker Change: The key factor in this quarter's results.

Max Smock: Sorry are you still expecting it could be a factor, though in the second half I think lasse.

Speaker Change: Quarter, when we talked you did $20 million in <unk>, I think rough Matt we've kind of gotten a $30 million in total for the back half of the year. So is it fair to assume there'll still be some impact in <unk> now is that kind of tailwind is that out of margins here in the back half of the year.

Speaker Change: Yes, it's still going to have.

Speaker Change: The impact in the second half, but the majority of that catch up.

Speaker Change: Was was in the second quarter.

Speaker Change: Got it thank you.

Speaker Change: We will go now to Matt <unk> with Goldman Sachs. Please go ahead.

Speaker Change: Hey, good morning, Thanks, taking my questions, maybe just first on the large pharma segment.

Speaker Change: You noted the still challenging environment. However, you also cited demand trends didn't get worse just based on your discussions with these customers do you think we're at the tail end of these cost savings and re prioritization and if so how do you see the slope of demand recovery from this customer segment as we move into 2025.

Speaker Change: Tough to say.

Speaker Change: Yes.

Speaker Change: Probably at the tail end with some of that.

Speaker Change: And it certainly.

Speaker Change: Certainly felt like they were doing at Imas kind of at the same time, even though there is lots of preparation.

Speaker Change: For that so.

Speaker Change: No question Theres been an enormous amount of re prioritization and reduction of costs. Some of it is definitely going on because.

Speaker Change: We're engaged with so many of these clients at the end of the year and see what the spend will be next year with budget looks like.

Speaker Change: Sure.

Speaker Change: R&D or less.

Speaker Change: So I suspect we're not through with it yet.

Speaker Change: No.

Speaker Change: But we really feel that we've reached the point, where it's unlikely to deteriorate further from a demand point of view.

Speaker Change: Pharma was very strong for us last year.

Speaker Change: Pretty strong for us in the first half of this year less strong in the back half of this year, the biotech sort of picking up some of the slack, albeit more slowly so.

Speaker Change:

Speaker Change: So much of what we do is beneficial for our clients to reduce their cost and infrastructure. There's a lot of work that could come out size. So it could be the beneficiaries of that as well.

Speaker Change: Yes.

Speaker Change: But I think it's going to be awhile before with Shirley.

Speaker Change: Got it thanks for that color and then on your cost savings initiatives what.

Max Smock: What gives you confidence that the head count reductions and site consolidations.

Speaker Change: One won't create friction amongst your customer base as youre doing that and to your right size for any recovery. They may happen next year, even if it's more pronounced in your expectations.

Speaker Change: So we'll look we're obviously working really hard at maintaining.

Speaker Change: Our quality staff.

Speaker Change: Everything at Charles River, It's about science, it's about speed to better responsiveness and it's about really understanding.

Speaker Change: Kind of the science being able to contribute to what the client is doing so.

Speaker Change: We've tried to be not tried to be we've been very surgical very thoughtful.

Speaker Change: Workforce reductions, we think that we're in a very good place now given our guidance for the balance of the year and some of our early thoughts for next year, if things were to accelerate and improve more quickly than we anticipated we might anticipate.

Speaker Change: We're quite confident that we could add those people back mostly direct labor.

Speaker Change: You've heard us say before we need some more.

Speaker Change: Meaningful period of time to train those people, but the sort of brain trust. The folks that are overseeing some of it stays in interfacing with our clients.

Speaker Change: We've left.

Speaker Change: Intact. So.

Speaker Change: Look we haven't obligation to get our head count in sync with the demand.

Speaker Change: That's our responsibility and a necessity and I think that we've done that.

Speaker Change: As I said quite thoughtfully and expeditiously.

Speaker Change: Thank you.

Speaker Change: We'll hear next from.

Speaker Change: David Windley with Jefferies. Please go ahead.

David Windley: Thanks excuse me. Thanks, good morning, Thanks for taking my questions.

David Windley: On the first one Jim I wanted to dovetail off the last on demand and in DSA.

Speaker Change: Think about that.

Speaker Change: Ask you about the.

Speaker Change: Pricing in backlog.

Speaker Change: Versus what was flowing through revenue.

Speaker Change: Kind of thinking about the puts and takes on demand there and then more broadly as you think about margin in DSA.

Speaker Change: Pricing that I mentioned, the cost actions that you're taking.

Speaker Change: How should we think about the <unk>.

Speaker Change: Margin sustainability at that 27% level.

Speaker Change: Again it.

Speaker Change: It feels like some moving parts.

Speaker Change: Q1 <unk>.

Speaker Change: I mean, the pricing in the backlog.

Speaker Change: As that.

Speaker Change: Plays through.

Speaker Change: It's obviously going to have some impact price that's kind of been.

Speaker Change: Flat flat.

Speaker Change: Somewhat.

Speaker Change: Actually probably more comparable and what we have said that we anticipate it going to be down further by the end of the year. So we're going to we're going to see that through pricing.

Speaker Change: Pricing for next year.

Speaker Change: Good afternoon.

Speaker Change: And we will see that I'll, let <unk> answer the margin question.

Speaker Change: Is it going to do everything we can protect margins.

Speaker Change: My head count point of view on infrastructure point of view G&A point of view.

Speaker Change: We're doing everything that we think is possible.

Speaker Change: Yes, I think.

Speaker Change: To your question, David how Jim is framing we know that price is going to be a headwind for us next year.

Speaker Change: In a sense that we're already signaling that it will turn.

Speaker Change: Flattish this quarter to slightly down next quarter.

Speaker Change: So we know that that will be something that will we will have going against us in 2025, and that's the reason why we have been working so hard.

Speaker Change: On the cost saving initiatives, whether it is to adjust the workforce to the demand environment I will look at how we can optimize that footprint because we know we're going to have to overcome base to help protect margin.

Speaker Change: So I do think the DSA margin will be pressured given the pricing dynamics, our let's say inability at the current market environment to get price.

Speaker Change: Which was the case when demand was much stronger and so there will be pressure on the margin I think going forward without talking about specifics I don't expect it to definitely not to increase and if you put the pieces together with the headwinds on price I think.

Speaker Change: Well, we'll have to see when we guide to 2025.

Speaker Change: <unk>.

Speaker Change: If you just do the math with costs going up in price not increasing that that will be pressured.

Speaker Change: Okay, and then just if I could get some detail on you mentioned the global business service model I think.

Speaker Change: And to my year, maybe Thats. The first time you did.

Speaker Change: <unk> that or mentioned that and if you could elaborate on the.

Speaker Change: The details of that and how long it will take you to implement.

Speaker Change: Yes, I'll take that one.

Speaker Change: Actually had a little bit of that commentary last quarter as well, but it's.

Speaker Change: But as you picked up on it and the way I would.

Speaker Change: Suggest you think about it is we obviously.

Speaker Change: Continue to look at opportunities for us to streamline and be more effective in how we operate.

Speaker Change: When the demand started softening in the first lever we pulled was on the head count that is directly.

Speaker Change: Associated with the services that we provide.

Speaker Change: We then look at footprint, which is what we provided an update at this call. But then we continue to look at let's say new ways of us to operate and make sure that we are at.

Speaker Change: As effective as we can whether it is continuing to.

Speaker Change: The benefits of our Digitization efforts to automate processes and get efficiencies that way or look at.

Speaker Change: Global business services as a means in a way too, especially in some of our more standard processes functional areas.

Speaker Change: Can we do those in a more effective way so we're looking at opportunities.

Speaker Change: To perhaps change the way we operate operate more in a standardized fashion and a more scalable fashion and thats, what we mean by cooling.

Speaker Change: Pulling that lever on global business services.

Speaker Change: Got it thank you.

Speaker Change: We'll hear now from Eric Coldwell with Baird. Please go ahead.

Eric Coldwell: Hey, thanks very much.

Eric Coldwell: Could you dive into the.

Speaker Change: At least what I would say it might be relatively low RMS margin this quarter given you.

Speaker Change: We did have upside in high margin, Nova themselves and also favorable pricing in small animals right might've expected more of a drop through on the pricing side on the small animals anyway.

Speaker Change: You also if you could also dig into the Lumpiness in large animal timing is.

Speaker Change: Central factor in Q4, and what you are currently thinking you might experience on on that.

Speaker Change: Period, Thanks very much.

Speaker Change: Good morning, Eric Yeah, I'll take that one and I'll answer the latter part of the question. Your first question first.

Speaker Change: So to your point, there is a little bit of.

Speaker Change: Potential lumpiness on.

Speaker Change: On the shipment timing of shipments of large models both.

Speaker Change: Im from Novo <unk>.

Speaker Change: The sales that we have in China for China. So we tried to account for that.

Eric Coldwell: A little bit of a binary event, whether it happens or not right Andy will play into.

Eric Coldwell: On the margins.

Speaker Change: In growth in the IMS sector.

Speaker Change: Segment, excuse me as well as potentially having an impact on EPS given.

Speaker Change: That's part of the business has high margin so.

Speaker Change: Obviously, we guide in a range and so the.

Speaker Change: The range considers.

Speaker Change: Is the outcomes.

Speaker Change: So we try to do to divest we can but sometimes it can shift one weekend. It falls in one calendar year or one quarter or not.

Speaker Change: With regards to the RMS margin this quarter.

Speaker Change: There is explained as you pointed out on one hand.

Speaker Change: The HP shipments are favorable.

Speaker Change: But on the other hand, I think there's a couple of headwinds obviously.

Speaker Change: We still got growth in China.

Speaker Change: Which end volume growth I mean, which is a lower margin part of the RMS models business and then I think you also saw that the services business is.

Speaker Change: Were lighter they actually had.

Speaker Change: Some decline this quarter. So there's some puts and takes there put some pressure on the margin.

Speaker Change: Our next question will come from the line of Justin Bowers with Deutsche Bank. Please go ahead.

Speaker Change: Mr. Bowers I believe your line may be muted.

Speaker Change: Pardon. Thank you and good morning to bookings in safety assessment improved pretty significantly quarter over quarter.

Justin Bowers: I believe you did call out an improvement in cancellations as well.

Speaker Change: That.

Speaker Change: Are you seeing that across.

Speaker Change: Across both customer sets biotech in globals or was that more.

Speaker Change: Honestly, it's one customer and then.

Speaker Change: Is this a good.

Speaker Change: Level I mean the bookings.

Speaker Change: It range from like say $4 50 to 475 for the first three quarters of the year.

Speaker Change: Are we at a good sort of run rate here based on sort of the conversations.

Speaker Change: And what you know now or is it are we still in sort of normal level of volatility around the bookings.

Speaker Change: And we're seeing.

Speaker Change: Yeah.

Speaker Change: Okay.

Speaker Change: Lower rate of cancellations.

Speaker Change: <unk> pretty much.

Speaker Change: Base, which obviously.

Speaker Change: <unk> see.

Speaker Change: Forward momentum for the pharma companies, which are still reducing their infrastructure. So as we talked about earlier.

Speaker Change: He is definitely.

Speaker Change: The issue for them as I said the Hana.

Speaker Change: Strong first half of the year and less strong third quarter.

Speaker Change: No.

Speaker Change: The both the demand and the bookings.

Speaker Change: Biotech.

Speaker Change: Current base looks feels stable.

Speaker Change: Consistent.

Speaker Change: Albeit not growing at the rates that we had perhaps anticipated bet.

Speaker Change: Lot of positive signs there in terms of capture rate in terms of access to clients in terms of dialogue and.

Speaker Change: <unk>, it's all about <unk>.

Speaker Change: <unk> cuts, which we've had one and I would like to comment what happens to the IPO market.

Speaker Change: Thanks, John.

Speaker Change: The election.

Speaker Change: Our clients, both large and small but.

Speaker Change: Biotech has been the principal driver of growth for almost a decade. So it's slowed down a little bit last year seems to be strengthening somewhat this year.

Speaker Change: Having said that as we think about moving into next year one of the trends that we're seeing now are likely to persist for at least some time.

Speaker Change: Yeah.

Speaker Change: And so some of those things happen like the IPO market actually okay.

Speaker Change: I guess the last thing I would say is that the.

Speaker Change: The biotech funding market had a very good September and very good October as well so while everybody continues to compare the results to iron out 'twenty, one 'twenty, two which were crazy exceptional years.

Speaker Change: There's a fair amount of money going into biotech as we've said and I personally said for several quarters now.

Speaker Change: A lot of our psychology of a lot about fear of the unknown and a lot about pulling back and being hyper conservative sort of feeds upon itself actual access to capital is not that bad it's quite good for the venture firms.

Speaker Change: Quite good for Big pharma funding a lot of biotech. So I think the trajectory is improving nicely, albeit a little bit slow more slowly.

Speaker Change: Thank you and just a quick follow up on that.

Speaker Change: What is customer behavior now in terms of bookings how far the are they booking is it closer to study start.

Speaker Change: And then lastly.

Speaker Change: Some of these restructurings that were seeing in large pharma is at yielding opportunities in the creative business or.

Speaker Change: Do you think a lot of those decisions around infrastructure have been made at this point.

Speaker Change: Okay.

Yes, I think.

Speaker Change: In terms of.

Speaker Change: <unk> studies are starting.

Speaker Change: We see kind of both ends of the spectrum there is.

Speaker Change: Starting within a month and there is still people booking six nine months ahead. So we're really seeing the gamut.

Speaker Change: <unk>.

Speaker Change: Study sites and in that sense.

Speaker Change: With regards to cradle.

Speaker Change: Do still believe that our <unk>.

Speaker Change: <unk> as a service if you will type of service continues to resonate with clients kind of big and small.

Speaker Change: We did see some in the biotech.

Speaker Change: Our client base, let's say rationalizing or right sizing how much space they take.

Speaker Change: Some of the pharma clients had already.

Speaker Change: And the startup of our credo business.

Speaker Change: Kind of.

Speaker Change: Establishing this both in <unk> and.

Speaker Change: Spaces, where.

Speaker Change: Were they were anchor clients. So we're not seeing them take more but they had already taken.

Speaker Change: Spacing some facilities.

Speaker Change: And we continue to work with them as they update their footprint in additional opportunity. So I'd say for large clients were not seeing it be positive or negative.

Speaker Change: And in the biotech client stays a little bit.

Speaker Change: Last utilization at this point, which drove the softness if you will one services for IMS this quarter.

Speaker Change: Thanks, so much.

Speaker Change: We'll hear next from Dan Leonard with UBS. Please go ahead.

Dan Leonard: Thank you.

Dan Leonard: Just trying to make sure I understand your view here is it your view that the Q4 sales is the run rate for the business until we see an improved end market demand environment.

Speaker Change: Yes, I think.

Speaker Change: It is.

Speaker Change: We are going to.

Speaker Change: Refrain from answering comments or questions that sort of infer what the outlook is for 2025.

Speaker Change: I think as Jim has said.

Speaker Change: We are pleased that the.

Dan Leonard: Demand.

Speaker Change: <unk>.

Speaker Change: Demand trends and indicators have sort of stabilized in the third quarter.

Speaker Change: I think we called the outlook for this year correctly.

Speaker Change: We're going to continue to watch and see.

Speaker Change: How they evolve in the fourth quarter.

Speaker Change: Four we comment on outlook for next year, what I'll remind everybody is from a comps perspective, right we will have to anniversary.

Speaker Change: Especially the first half of this year, where farmers were still strong.

Speaker Change: So between that and pricing that's why we have the.

Speaker Change: Put it in our prepared remarks that we expect the current demand trends.

Speaker Change: Will continue into 2025 and put some pressure on year over year growth once we start seeing more.

Speaker Change: Pronounce than last day signals of recovery will be will be obviously, the first to tell you all that we have more confidence on the outlook at this point I think.

Speaker Change: Steady state of where we are.

Speaker Change: We will have considerable discussions with our clients in the fourth quarter as we put our plan to better.

Speaker Change: They do the same.

Speaker Change: So we should get it.

Speaker Change: Pretty accurate feedback on spending patterns, how much they're going to be spending in the clinic, how much you're going to be spending.

Speaker Change: For R&D filings not much for post and.

Speaker Change: And what their total R&D spend looks like obviously.

Speaker Change: At some point pig farmers kind of get back to investing in early discovery.

Speaker Change: Yes.

Speaker Change: Early.

Speaker Change: So.

Speaker Change: We have.

Speaker Change: I think we have the best access to clients to understand what's going on in the marketplace for now we're going to have to assume that some of the.

Speaker Change: The situation that we're in and some of that's just kind of persist.

Speaker Change: As Flavio said, we do have sort of comparison to last year, but so.

Speaker Change: We'll know a lot more as we get through the fourth quarter and we get.

Speaker Change: To our February call, when we sort of encapsulate the year I think.

Speaker Change: Prognosis at guidance for the following year.

Speaker Change: But we don't think anything is deteriorating or will deteriorates we have.

Speaker Change: We have some stability here.

Speaker Change: Hopefully some predictability and ultimately improve visibility based on what our clients tell us.

Speaker Change: And we'll certainly share that with you.

Speaker Change: In February.

Speaker Change: And then just a follow up on margins I understand your goal is to May.

Speaker Change: Maintain margins, but is the $50 million of incremental cost savings in 2025 is that enough to offset the reversal or the restoration of incentive compensation inflation, some things, which you would know at this point that would be typical budgeting matters is that fair.

Speaker Change: <unk> million dollars enough.

Speaker Change: Yes.

Speaker Change: And I talked a little bit about this in the second quarter earnings.

Speaker Change: That in a sense quote unquote.

Speaker Change: Not enough and that's why we continue working and we provided additional.

Speaker Change: Color now that our overall savings.

Speaker Change: Have increased with the result of that footprint optimization efforts.

Speaker Change: Efforts that we have been working on over the last two to three months.

Speaker Change: <unk>.

Speaker Change: In an environment, where you don't have volume growth.

Speaker Change: Price is a headwind.

Speaker Change: Costs continue to increase obviously protecting margin is is hard and that's why we continue to look at levers to drive efficiency and to the best we can to ensure.

Speaker Change: We're adjusting our staffing rationalizing our footprint and driving those efficiencies to protect margin in this environment.

Speaker Change: Understood. Thank you.

Speaker Change: We will go next to Elizabeth Anderson with Evercore ISI. Please go ahead.

Elizabeth Anderson: Hey, guys. Thanks, so much for the question and congrats on a nice quarter.

Elizabeth Anderson: Two questions. My first question is you've talked about some of the changes you've been making internally. How you operate incident, obviously, where your estimation of where we are in the pharma cycle, what are customers, particularly biopharma customers asking for differently. In this cycle are you just sort of conceptually working with them in new ways given this changes.

Speaker Change: And then secondly, obviously your focus on capital deployment has traditionally not been is weighted towards share repo is this.

Speaker Change: Obviously that the purchases in the third quarter is that more of a reflection of sort of the dislocation in the share price as you saw it or is that something youre kind of thinking about changing your mix going forward broadly speaking thank you.

Speaker Change: So we.

Speaker Change: We.

Speaker Change: Bought back shares for I'm trying to think at least 10 or 12 years consistently.

Speaker Change: Offsetting dilution.

Speaker Change: Hi.

Speaker Change: Our options being granted and that was something that.

Speaker Change: I think a smart thing to do.

Speaker Change: Of course, it's all contextual depends on the share price it depends on how much debt we have it.

Speaker Change: How robust our earnings are and it depends on whether we have a different or better use for the cash.

Speaker Change: <unk>.

Speaker Change: And so as we've said a few times here, we have a committee of the board that looks at this five times of the year what is the best use of Arca.

Speaker Change: We felt at the time and still feel that.

Speaker Change: So to reintroducing that.

Speaker Change: Offsetting the dilution is the smart thing to do and probably leaves us enough powder to do some M&A as well of course, we've been paying down debt. So.

Speaker Change: Look nothing is forever and everything is contextual so it doesn't.

Speaker Change: <unk>.

Speaker Change: It doesn't necessarily indicate anything about the future although.

Speaker Change: We may feel the same way going forward next year.

Speaker Change: Your first question I would say there are our biotech clients are.

Speaker Change: Looking for funding.

Speaker Change: I said earlier.

Speaker Change: Very concerned from a psychological point of view about epic lack of access to funding the vcs have to put in another round or a larger rounds and they're used to if they can't get an IPO.

Speaker Change: Going.

Speaker Change: And those that we're assuming that they could get a secondary haven't been able to do that so the definitely the definitely more cautious having said that.

Speaker Change: Almost no biotech companies have any internal capacity to do any of the things that we do so they are by definition net outsources, whether they're small and medium or very large frankly, so they're all potentially our client base.

Speaker Change: The majority of them probably are really our client base and so while we can do is stay close to them.

Speaker Change: My answer to their needs as Flavio said it.

Speaker Change: Earlier.

Speaker Change: Yes, right now the backlog is kind of nine months and we can start some studies quite quickly.

Speaker Change: Others.

Speaker Change: If they want to book side that goes out for a while we can do that as well, but it's usually a couple of quarters, so sort of feels like a really.

Speaker Change: Pretty good sweet spot now in terms of.

Speaker Change: Being able to respond to their demand sometimes quickly and sometimes.

Speaker Change: On a forward going basis so.

Speaker Change: I think our clients are pleased with our responsiveness, which is everything and the quality of our science and we do an amazing job given the scale of our company and servicing very small banks.

Speaker Change: Okay. Thank you.

Speaker Change: We will turn now to Michael Raskin with Bank of America. Please go ahead.

Michael Raskin: Great. Thanks for taking the question guys.

Michael Raskin: So I'll just I'll stick with one for me.

Michael Raskin: Our global Biopharma side, you talked about trends overall.

Michael Raskin: Utilization following re prioritization earlier this year I kind of want to ask how.

Michael Raskin: How heterogeneous demand within global pharma, what we're hearing.

Speaker Change: There is sort of a dichotomy, where you've got a handful of that are spending a lot. A handful that are re prioritizing a lot and then sort of everyone's kind of sitting around in the middle of that.

Speaker Change: You see it.

Speaker Change: So for the one that so.

Speaker Change: So far our spending on what gives you confidence that that will continue and they are not just behind everyone else and initiating re prioritization for cost cutting.

Speaker Change: Okay.

Speaker Change: I think they're all watching their costs, even the ones that.

Speaker Change: You are probably talking about but you don't think need to we've actually seen.

Speaker Change: Those companies reduce their infrastructure as well because.

Speaker Change: Patent Cliff is loading in some of these folks with the GOP one drugs everybody's working on the different or a better version of that.

Speaker Change: B.

Speaker Change: It's going to be.

Speaker Change: Quite substantial so.

Speaker Change: Yeah.

Michael Raskin: Not dissimilar from biotech a lot of the pharma companies have no longer have any internal capacity certainly to do toxicology and.

Michael Raskin: A lot of them don't have internal capacity to do some of the discovery work that we're doing.

Michael Raskin: And even if they do have the capacity to hit with Charles River is a SaaS or a less expensive than most.

Michael Raskin: Most often a higher science result.

Speaker Change: So.

Speaker Change: So.

Speaker Change: What's ironic about this kind of slowdown in that demand is that all of our client base doing work with us is a methodology to reduce their cost structure.

Speaker Change: And do less internally.

Speaker Change: Use our capability and that should that should help speed things up so we.

Speaker Change: We certainly still believe that Thats, the case and that we will see demand coming from some of our small biotech clients at some of the larger.

Speaker Change: Turning to our clients as well, we have a very big market shares with big pharma.

Speaker Change: At a time, where they are all being cautious and reducing their infrastructure as we said earlier some of that is done some of thats in process. Maybe some of that is yet to happen, but we will have a much better sense of that as we.

Speaker Change: Terry the ATM during the fourth quarter here.

Speaker Change: Okay.

Speaker Change: Thanks, that's helpful I'll leave it there.

Speaker Change: We will go next to Tejas Savant with Morgan Stanley. Please go ahead.

Tejas Savant: Hey, guys good morning.

Tejas Savant: Jim I wanted to go back to some of the earlier line of questioning on DSA margins here.

Tejas Savant: But I want you to Premier response, ideally with a longer sort of timeframe. If you will I mean back in the day. The FAA has to be a mid to high teens margin business.

Speaker Change: Last year it peaked at 27, 5%.

Speaker Change: A few moving pieces for $25 are not going to ask you to go there because I think you already answered that but help us think about what's an appropriate floor if demand doesn't get better.

Speaker Change: Wil and MPI that got added along the way a much larger scale than you did back in 2015 right. So.

Speaker Change: Help us think about what's the worst case scenario and then I have a follow up thank you.

Speaker Change: I mean, it's just classic supply and demand right. So we've gone from a.

Speaker Change: Genre of.

Speaker Change: Very aggressive ability to take price for the last 567 years, it's just an enormous amount of price, but a lot of share gains.

Speaker Change: And a lot of clients really depending on us.

Speaker Change: Through a period, where they are.

Speaker Change: 24, we have a very small amount to price and as we said earlier in a theater remarks.

Speaker Change: Probably began to decline by the end of the year. So in our space fills wish you well as demand comes back and improves which it will unless you unless you all believe that clear.

Speaker Change: Clients are no longer going to going to invest in new drugs.

Speaker Change: Two questions not the case you have to assume that there's a lot of stuff that's been parked.

Speaker Change: And then for clients wanted to get that to filing IND.

Speaker Change: Do you have large portfolios that have been skinny back in I don't think they've killed those strikes so just sort of waiting in a day and it's so the opportunity.

Speaker Change: Opportunities out there from a demand point of view also from a competitive point of view, it's not a lot of capacity outside of Charles River. There is obviously some butt.

Speaker Change: Since we took out the kind of second tier of competition some time ago.

Speaker Change: There are much smaller companies picking up the slack so as the demand improves space is going to fill and I do think we will ever.

Speaker Change: We'll have an opportunity to invigorate Raj.

Speaker Change: We can't comment on what it's going to be better or worse, 27% or what's the long term goal is going to be as you know we're organized all the time to drive efficiency and improve our operating margins just in terms of our overall structure blood tests that we're doing that right now I think will enhance and improve that.

Speaker Change: Maybe just to add.

Speaker Change: Sure.

Speaker Change: We will provide you an update obviously on our longer term financial targets at some point given that we obviously are not going to be able to deliver on what we shared.

Speaker Change: At least in the timeframe of.

Speaker Change: 2020, It was 2023 to 2026, when we had our analyst day last year, but since then we have said we still believe that the fundamentals of this market are intact and whether it is the 6% to 8% over five to seven.

Speaker Change: We still believe that Thats.

Speaker Change: In the cards, just a matter of when are we going to get there and.

Speaker Change: And in the same way I would say the mid to high 20% range that we provided is as a.

Speaker Change: Goalpost for DSA margin is still doable, it's a matter of.

Speaker Change: Again, when are we going to get there and maybe the lower end of that made or the higher end of the high is going to depend upon how how quickly and how much does the market come back but to Jim's point, if you believe in.

Speaker Change: Drug discovery in the pharmaceutical industry.

Speaker Change: As a viable business.

Speaker Change: That longer term outlook, both in terms of topline and margin is still intact.

Speaker Change: Got it that's helpful.

Speaker Change: And then a quick follow up on the manufacturing side of things I.

Speaker Change: I think Flavio you cited project timing driving a little bit of growth moderation in the fourth quarter can you just give us a sense of what your customer or product concentration looks like on the <unk> side of things at the moment.

Speaker Change: Then separately just on the bio secure sort of shifts underway in terms of cell therapy manufacturing our biologics testing.

Speaker Change: You guys have any interest in picking up some of the competitors facilities, which now appear to be for sale.

Speaker Change: So very secure.

Speaker Change: Should provide some opportunities for us we've said that multiple packed price for several quarters now.

Speaker Change: It's too early for us to have done that.

Speaker Change: But we'll obviously watch it closely and we'll see whether a change in administration changes that or not I.

Speaker Change: I do think that the specter of that happening is concerning a lot of people. We just met with some of our venture capital partners last week and they are quite concerned about it quite reluctant to do any sort of work in China.

Speaker Change: Chemistry has in large part going to China.

Speaker Change: That probably will shift to India $64000 question is.

Speaker Change: For the safety assessment work Thats gone into China, where will that go because you're not going to get a tenant India. So I think a lot of it assuming that it shifts a lot of that will come back.

Speaker Change: To the U S and the Europe, we should have we should have an opportunity there.

Speaker Change: The <unk> business has had a very strong year for us just in terms of the quality of our clients have been a couple of commercial clients, having multiple regulatory audits.

Speaker Change: Simple different part of the organization.

Speaker Change: Both domestic and foreign.

Speaker Change: And enhancement and the quality.

Speaker Change: Experience of our staff in our facilities, so that business feels.

Speaker Change: It's poised to continue to do well continue to distinguish ourselves in.

Speaker Change: Very important modality to treat some really rough diseases, so where ron.

Speaker Change: We're really focused on.

Speaker Change: Continuing to grow that franchise I do think that some of the work. We have now is helping us garner new new clients.

Speaker Change: Best monitoring.

Speaker Change: Approach.

Speaker Change: And.

Speaker Change: We will continue to be strong through the back half of this year.

Speaker Change: Got it I appreciate the color Jim.

Speaker Change: We'll hear next from Casey Woodring with Jpmorgan. Please go ahead, you will get my call.

Casey Woodring: Great. Thanks for taking my questions, maybe just a quick follow up to the manufacturing.

Speaker Change: Good question Ashwin earlier here just can you elaborate on the synergies you're seeing between for BMO.

Speaker Change: The biologics testing business I think you mentioned that.

Speaker Change: More than half of the treaty and our clients.

Speaker Change: Utilizing biologics has grown so I'm just.

Speaker Change: Curious if you can maybe quantify the benefit there.

Speaker Change: Collaborate on the FDA Patrick moving forward that you are trying to.

Speaker Change: Yes that was the that was the principal is the gating factor of us going into the <unk> space.

Speaker Change: We're doing all this testing of the drug before it goes into the clinic.

Speaker Change: Which is required by law and also testing the drugs once their commercially approved and we had a fair number of clients requesting us to move into the <unk> space only because they don't want to take the time to validate another provider. So we would do the testing, but could we manufacture the drug.

Speaker Change: Sure we did the testing and by the way if we were doing safety assessment for them.

Speaker Change: Just a longer trajectory, we could help speed up.

Speaker Change: Speed up the process.

Speaker Change: No.

Speaker Change: Theyre very closely linked I think 50% of our.

Speaker Change: More than 50% of our biotech are biologics clients.

Speaker Change: So you won't see demo is using us for biologics is very closely aligned particularly the analytical testing.

Speaker Change: Aspect of that so.

Speaker Change: And that gives us a competitive advantage by the way.

Speaker Change: <unk>.

Speaker Change: I won't.

Speaker Change: Competition about some of our principal competition in that space has no internal capability to do biologics testing in fact, we do some biologic testing for our competition.

Speaker Change: And so that really.

Speaker Change: Holds us in good stead I would imagine that would continue to be a key distinguishing feature of our service offering as we go forward.

Speaker Change: Got it and maybe just one quick follow up here.

Speaker Change: Last quarter, you mentioned that the drop in large pharma demand was surprising in part because you deal with heads of R&D that don't have as much discretion around budget. So curious just on the client discussions that you flagged today.

Speaker Change: We called out that you are getting some confidence from those.

Speaker Change: Yes.

Speaker Change: Is there any change in how you are communicating with clients. During this time and at the level of visibility that you have in large pharma now thanks.

Speaker Change: The only change is we're still dealing with the same people and I think we're dealing with the right people and as we said earlier, sometimes the decisions are made.

Speaker Change: <unk> made it at a higher level.

Speaker Change: Quickly or.

Speaker Change: In secret just so it doesn't it doesn't leak I do think as we said earlier that the ability to have a conversation with clients as they are finalizing or as they have finalized their operating plans for fiscal 'twenty five.

Speaker Change: Should be and we believe will be helpful for us to kind of zero base, where we are with our clients both large and small kind of build up our plan for next year I mean, that's sort of always been the case for us in the.

Speaker Change: The decision about.

Speaker Change: What molecules still work on with.

Speaker Change: With some of the bigger folks bigger clients, where they work on them internally.

Speaker Change: Smaller companies are going to work is going to go outside how many molecules. So they work on.

Speaker Change: What percentage of the work with Charles River.

Speaker Change: The fact that we will be able to drill down on that.

Speaker Change: We'll put a kind of appropriate discount factor to what they tell us because it's not always exactly what they say, but kind of finishing the year and going into the next year with a fresh budget dussek allows the opportunity for us to plan a lot better and have a good sense of what the client base.

Speaker Change: Is up too so.

Speaker Change: We will be working we are working hard on that right.

Speaker Change: We will refine our own operated square.

Speaker Change: We will take our next question from Lukas <unk> with Barclays. Please go ahead.

Lukas: Awesome great. Thanks.

Speaker Change: I'm just kind of wanted to look at it.

Lukas: On <unk> you cut the guide pretty hard and Jim Your transcript was reminiscent of like the global financial crisis on the outlook.

Speaker Change: And then we get.

Speaker Change: Where we are today with a pretty significant b.

Lukas: And it seems like things are relatively stable getting a little better in biotech a little worse on large pharma, but you look at the macro and all the restructurings and it's hitting the rest of the space I guess kind of what changed.

Lukas: Versus your original expectations, I woke up materially better here.

Speaker Change: Or is it more of just the initial outlook on on your initial cut there was like all right. We're just going to assume that things get way worse than they are.

Speaker Change: I'm not sure anything materially changed.

Lukas: Yes.

Speaker Change: Kind of on the margin here, we do the best we can in terms of.

Lukas: And having a prognosis on what the next quarter.

Lukas: The rest of the year will be.

Lukas: Yes.

Lukas: As I said earlier, we try to do that in a zero base basis, and we build it up client by client and we are in constant communications with our clients.

Lukas: A lot of ebbs and flows though so.

Speaker Change: We wouldn't want you to get out ahead of this conversation about what just happened.

Speaker Change: We are pleased with the quarter, we have some positive signs here as cancellation rates aren't as high as this sort of consistent.

Lukas: Demand at least on the biotech side sequential consistent demand on the biotech side pharma definitely.

Lukas: While it's a bit of a surprise to us and I think a bit of a surprise to some of our clients, but I think that will ameliorate it settled down.

Lukas: It's going to turnaround overnight.

Lukas: So.

Lukas: We will.

Lukas: We're going to continue to put numbers out there that we're confident that we can bank.

Lukas: Without low balling it at high volume.

Lukas: And I do think that we understand the client base well enough to do that.

Lukas: It would be we don't have a trend yet we have some positive indications, which is fantastic I think we need it.

Lukas: A few quarters for that to be a trend and as we said earlier.

Lukas: If and when I guess when the IPO market opens up and this is another rate cut reducing fit.

Lukas: Biotech clients will have more confidence in their ability to spend for the portfolios that they have and even some of the drugs that they are parked.

Lukas: And the Vcs will have to spend less per company and for Dragon, maybe final we'll be weighing in.

Lukas: More aggressively so.

Lukas: Directionally the opportunities are definitely quite positive how quickly that happens.

Lukas: Is unclear and as we said earlier, we're going to have.

Lukas: Some of the work that we have booked at lower price points is going to begin to bleed through.

Lukas: Our P&L, so we're going to have to get through that as well, but I think directionally.

Lukas: We're seeing the beginnings of some positive signs.

Lukas: Great.

Speaker Change: Okay, and then I guess on the.

Speaker Change: <unk> and our relationship with vertex, we just signed launch in.

Speaker Change: In September here for the global solar how is there any changes to your existing relationship there or is that just kind of adding capacity beyond what you guys can provide.

Lukas: Yes, I mean, that's a necessity for grid vertex.

Speaker Change: Number one not to have all their eggs in one basket number two they think this is going to be a really important drug sickle cell anemia is a tough disease, that's a pretty big patient population.

Speaker Change: So having us both doing that.

Speaker Change: I believe they have another provider overseas as well so.

Speaker Change: Just the smart thing to do said no impact on either our relationship with them or the amount of demand that we're seeing.

Speaker Change: So all good.

Speaker Change: Awesome. Thank you.

Speaker Change: Sure.

Speaker Change: Next we'll hear from Patrick Donnelly with Citi. Please go ahead.

Patrick Donnelly: Hey, guys. Thanks for taking my questions.

Patrick Donnelly: Jim maybe one on the facility side. So you guys are kind of shutting down 15, or so facilities across DSA and RMS can you just talk about I guess the decision there I mean I'm sure it's a little bit in response to demand from the cost cuts.

Patrick Donnelly: But where.

Speaker Change: Where the footprint is and then again some of the earlier question, if and when demand comes back what the footprint looks like and how much capacity you guys will have for recovery there.

Speaker Change: So we're certainly not going to reduce our footprint. So that when demand comes back we don't have enough space, particularly the essence of your question.

Speaker Change: Yes, we've done a lot of M&A whatever it is north of 65 acquisitions since we took the company private.

Speaker Change: And all of those acquisitions have at least one if not multiple sites there.

Speaker Change: They're operating businesses.

Speaker Change: Yes.

Speaker Change: Positive growth rates.

Speaker Change: Their margins and so we typically keep them.

Speaker Change: And I think I think one of the things that we can do better and we'll do better it's kind of baked.

Speaker Change: Baked into that.

Speaker Change: This third quarter announcement is our.

Speaker Change: Our ability not to sell the client based upon how we're structured or where our facilities are but sort of.

Speaker Change: To amalgamate.

Speaker Change: These sites. So what we have is we have too many sort of small sites floating around that.

Speaker Change: Don't have particularly attractive.

Speaker Change: Margins that are relatively close to another large site that may have some capacity. So we get to fully utilize the largest site and not have these small sites dangling sort of dangling perishables, which are difficult to do.

Speaker Change: Managing difficult they have good operating.

Speaker Change: Metrics.

Speaker Change: Smaller portfolio is beneficial for us so really feels like a wonderful opportunity right now to clean up some of the small stuff that's floating around amalgamated.

Speaker Change: That should help with margins that should help with throughput that should help with utilizing our sites in a more robust fashion. So we'll continue to do that we'll think more carefully about that as we buy additional companies whatever point.

Speaker Change: So the infrastructure is.

Speaker Change: Just just more rigorously designed.

Speaker Change: Okay. That's helpful and then Florida and maybe just a quick one on the interest expense that you guys did the swap so a little bit of a benefit here can you just high level help us think about the go forward the framework for 2012.

Speaker Change: Below the line stuff would be helpful. Thank you guys.

Speaker Change: Yes, I think we were pleased to have entered into the swap when we did about two years ago. It was definitely economically favorable helped.

Speaker Change: Provided an additional portion of our debt.

Speaker Change: To lock into lower interest rates and the time that the fed.

Speaker Change: <unk> interest.

Speaker Change: Now at the tail end of that with the first rate reduction already obviously in the box and so I think we feel.

Speaker Change: Good we still have even when the swap.

Speaker Change: Buyers in November we will still have a significant portion of our debt will remain fixed.

Speaker Change: We're going to be looking at our credit facility.

Speaker Change: Rich.

Rich: Ill run through I think April of 2026, So we will be looking at renewing that in the early part of next year.

Rich: And I think we feel really good about.

Speaker Change: Obviously record free cash flow generation this quarter.

Speaker Change: What we've done from a capital allocation perspective.

Speaker Change: Are you able to pay down that meaningfully this year leverages in a really good place, which allowed US also to to do a modest share buyback that Jim talked about so overall, we feel really good about the.

Speaker Change: The balance sheet.

Speaker Change: The progress we've made this year.

Speaker Change: Okay. Thank you.

Speaker Change: And once again, ladies and gentlemen, if you would like to signal for a question simply press star one on your telephone keypad again star one we'll pause for just a moment.

Speaker Change: It appears we have no further questions at this time I would like to turn the floor back over to Todd Spencer for closing remarks.

Todd Spencer: Thank you for joining us this morning on the conference call. We look forward to seeing you at upcoming conferences. This concludes our call. Thank you.

Speaker Change: Thank you that does conclude today's Charles River Laboratories third quarter 2024 earnings call. Thank you for your participation and you may disconnect at this time and have a wonderful day.

Speaker Change:

Speaker Change: [music].

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Speaker Change: Yeah.

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Speaker Change: Ladies and gentlemen, thank you for standing by and welcome to the Charles River Laboratory third quarter 2024 earnings Conference call.

Speaker Change: This call is being recorded.

Speaker Change: At this time all participants are in a listen only mode. After the presentation speaker's presentation. There will be a question and answer session to ask a question. During this period you will need to press star one on your telephone if you want to remove yourself from the queue Press star two.

Speaker Change: Lastly, should you require operator assistance, please press star zero.

Speaker Change: I would now like to turn the conference over to our host Todd Spencer Vice President of Investor Relations. Please go ahead.

Todd Spencer: And welcome to Charles River Laboratories, third quarter 2024 earnings conference call and webcast. This morning, I am joined by Jim Foster share President and Chief Executive Officer, and Slavia Pease Executive Vice President and Chief Financial Officer, They will comment on our results for the third quarter of 2024.

Speaker Change: 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 Dot C River dotcom.

Speaker Change: A webcast replay of this call will be available beginning at approximately two hours. After the call today and can also be accessed on the Investor Relations section of our website. The replay will be available through the next quarters conference call.

Speaker Change: I'd like to remind you of our safe Harbor, all remarks that we make about future expectations plans and prospects for the company constitute forward looking statements under the private Securities Litigation Reform Act of 1095 actual results may differ materially materially from those indicated.

Speaker Change: During this call we will primarily discuss non-GAAP financial measures, which we believe help investors gain a meaningful understanding of our core operating results and guidance. 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 Change: 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: Our third quarter financial performance exceeded the outlook that we provided in August.

Jim Foster: Pharmaceutical demand environment remains challenging, but consistent with the trends that we discussed in detail on last quarter's call.

Jim Foster: Leading to an organic revenue decline of two 7% in the third quarter revenue from small and midsize biotech clients was stable compared to the second quarter. However forward looking demand indicators for biotech continued to trend more favorably.

Jim Foster: Versus last year, leading to our belief that the demand environment for this client base will continue to recover just at a more gradual pace than anticipated at the beginning of the year.

Jim Foster: We had already seen more favorable biotech funding translate into higher DSA bookings earlier this year and subsequently incremental revenue for this client base.

Jim Foster: There is still puts and takes in terms of the funding environment and interest rates sentiment it keep our outlook appropriately measured.

Jim Foster: Have to slightly increasing in the first half of the year revenue from global biopharmaceutical clients declined in the third quarter, both sequentially and year over year.

Jim Foster: This was expected due to tighter budgets and accelerated pipeline re prioritization activities. This year in conjunction with the major restructuring actions that many of our large clients have implemented within the past six months to 12 months and for some clients more recently.

Jim Foster: We believe these recent restructuring actions further validated our commentary last quarter. However, the forward looking demand trends for global biopharmaceutical clients did not show signs of further deterioration in the third quarter and actually improve from second quarter levels, coupled with the numerous discussions that we've had with clients.

Speaker Change: <unk> leads us to believe that we have correctly call the near term demand outlook for this client base.

Speaker Change: For all these trends translated into slight sequential improvement in the forward looking demand indicators for the safety assessment business in the third quarter, including improvements in net book to Bill and the cancellation rate.

Speaker Change: This is important because it supports our belief that we appropriately reset our financial guidance for the year in August and net book to Bill remains below one times. So it still be too early to assume when a recovery will occur, but we are pleased with the demand environment does not appear to have deteriorated further at this time, it's too early to provide.

Speaker Change: Any specific commentary on 2025 guidance, but we expect the current trends will persist into 2025 and continue to pressure year over year growth rates. This is particularly true in the DSA segment as we anticipate continued headwinds based on the current pricing environment and until we anniversary the step down.

Speaker Change: A global Biopharma demand.

Speaker Change: Occurred during the second half of this year is.

Speaker Change: As I discussed in August we have taken decisive action to manage the company through the current demand environment, including appropriately right sizing our infrastructure, we are committed to initiatives to generate more revenue contain costs and protect shareholder value.

Speaker Change: I outlined last quarter and to ensure further success, we are focused on taking strategic actions in three areas.

Speaker Change: Restructuring initiatives to maintain costs and generate efficiency by reducing staffing levels to align with the pace of demand as well as evaluating our global footprint to optimize consolidate and simplify operations. We have made meaningful progress on our footprint optimization efforts since we last spoke the <unk>.

Speaker Change: Area is focusing on commercial enhancements to promote a client centric focus and gain additional market share. Our goal is to enhance the client experience and reinforce our role as a flexible and responsive partner to our clients, including through leveraging technology, such as our Apollo platform and RMS ecommerce.

Speaker Change: And finally, we are continuing to evaluate additional strategies to take additional cost out and to drive efficiency.

Speaker Change: We are working on initiatives to further transform how we operate ranging from continuing to better leverage technology to adopting a global business service model to streamline processes as well as generating greater procurement savings.

Speaker Change: The restructuring initiatives that we have implemented to aggressively manage our cost structure are already generating significant savings and as planned we continued to further reduced staffing levels in the third quarter.

Speaker Change: The initiatives that we have implemented since late 2023 have reduced our total head count by over 6%. It is imperative in this environment to keep our staff well utilized in order to protect the operating margin, which is our goal.

Speaker Change: We are also undertaking a comprehensive review of our global footprint to provide some context, we built many of our businesses through acquisitions accumulating over 150 sites at peak, we are periodically consolidated our divested smaller sites over the past several years to manage our global infrastructure, including the consolidation of <unk>.

Speaker Change: Seven small sites within the past year, our global footprint optimization efforts are focused on consolidated capacity that is no longer needed and in many cases transitioning the services and clients to other larger sites. We have also taken a client centric approach towards these actions with the goal of serving our clients.

Speaker Change: More efficiently and seamlessly in order to capture synergies and savings that extend beyond the facility costs.

Speaker Change: Through these optimization imperatives initiatives, we have already begun to implement a process to close or consolidate approximately 15 smaller sites principally focused on the DSA and RMS segments by the time. The program was completed in 2026, we expect it will generate an incremental $40 million in <unk>.

Speaker Change: Annualized net savings through the elimination of overhead and facility costs as well as by reducing head count. We view these as durable savings because we do not believe reinvestment in similar infrastructure will be required when demand improves these footprint optimization efforts will enhance the efficiency and economies of scale.

Speaker Change: And our global infrastructure, leading to a more disciplined operating model.

Speaker Change: In total the restructuring initiatives that we have implemented since late 2023, including head count reductions in global footprint optimization efforts are expected to generate approximately $200 million in cumulative annualized cost savings.

Speaker Change: Emanating more than 5% of our cost structure.

Speaker Change: <unk> half of the annualized cost savings will be realized this year and at least $150 million in total will be realized in 2025.

Speaker Change: Before I provide more detail on our third quarter results I wanted to provide a brief update on capital allocation.

Speaker Change: We're pleased to report that we generated record free cash flow of over $200 million in the third quarter strong cash generation as a long term hallmark of the company. This coupled with moderating capital intensity of our businesses and lower debt has enabled us to reevaluate and rebalance our capital priorities to include modest stock.

Speaker Change: Repurchases this year totaling approximately $100 million in the third quarter.

Speaker Change: These collective efforts from restructuring to capital allocation are aimed at emerging as a leaner more efficient organization when demand returns a stronger partner to our clients and better positioned to capture new business opportunities as well as to protect and ultimately enhance shareholder value.

Speaker Change: I'll provide highlights of our third quarter performance and updated guidance, we reported revenue of $1.01 billion.

Speaker Change: In the third quarter of 2024, or one 6% decline on a reported basis over last year organic revenue declined by two 7% driven by the anticipated decline in DSA, partially offset by low double digit growth in the manufacturing segment and slightly higher RMS revenue by.

Speaker Change: Client segment revenue declined for both the small and midsize biotech and the global biopharmaceutical clients segments in the third quarter as expected.

Speaker Change: As I mentioned earlier revenue from biotech clients was stable sequentially.

Speaker Change: The operating margin was 19, 9% a decrease of 60 basis points year over year.

Speaker Change: Margin improved in each of our three business segments.

Speaker Change: Due in part to the benefit of cost savings, however, higher unallocated corporate costs resulted in a consolidated operating margin decline in the third quarter Flavio will provide more details on unallocated corporate costs shortly.

Speaker Change: Earnings per share with $2 59 third quarter, a decrease of four 8% from the third quarter of last year, reflecting the lower revenue and operating margin. Despite the decline third quarter earnings per share exceeded the outlook. We provided in August due primarily to the better than expected top line performance.

Speaker Change: <unk> in the DSA segment.

Speaker Change: We are narrowing and slightly raising our full year guidance for revenue and non-GAAP earnings per share from the midpoint of the previous ranges to reflect the third quarter performance. We are narrowing our revenue outlook to a 3% to 4% decrease on an organic basis and non-GAAP earnings per share has been slightly raised to a range of $10.

Speaker Change: 10.

Speaker Change: To $10 37.

Speaker Change: While we are never pleased with declining revenue financial outlook already demonstrates that we are beginning to see the benefits of the disciplined management of our cost structure.

Speaker Change: Now I'd like to provide you with additional details third quarter segment performance beginning with the DSA segment's results.

Speaker Change: DSA revenue in the third quarter was $615 1 million a decrease of seven 4% on an organic basis, driven by lower sales volume in both the discovery services and safety assessment businesses DSA revenue modestly exceeded our prior outlook of a 10% second half decline because.

Speaker Change: Global Biopharma demand trends held up better than we expected.

Speaker Change: We now believe the DSA segment revenue will decline at a high single digit rate organically in the second half of the year consistent with our full year outlook.

Speaker Change: And the safety assessment business. The revenue decrease was primarily driven by lower steady volume pricing was essentially flat year over year and is expected to trend slightly lower in the fourth quarter, which is consistent with our previous expectations.

Speaker Change: From our perspective, the safety assessment pricing environment or a spot market for new proposals has not materially changed for most of the year.

Speaker Change: We were pleased that gross bookings and cancellations improve from second quarter levels, resulting in an improvement in the net book to Bill ratio.

Speaker Change: Two the most favorable levels since the first quarter of 2023.

Speaker Change: As I mentioned earlier these forward looking indicators for global biopharmaceutical clients rebounded in the third quarter, which reassured us that the demand environment was not further deteriorate. In addition, biotech trends remained stable in the third quarter and overall the forward looking demand kpis for this client base more.

Speaker Change: Favorable in 2024 than last year.

Speaker Change: Headwinds still exist ranging from the net book to Bill ratio remaining below one times to pricing and the overhang from our clients major restructuring efforts and therefore, we will continue to take a cautious view with respect to the near term outlook for our safety.

Speaker Change: Until the sustained demand trends are more supportive of a return to revenue growth.

Speaker Change: The DSA backlog decreased just slightly on a sequential basis to two point $12 billion at the end of the third quarter from 2.1 dollars 6 billion at the end of the second quarter.

Speaker Change: As part of our ongoing efforts to promote our client centric approach and refine our operating model we are working further.

Speaker Change: We are working to further integrate our global discovery and safety assessment operating structure to one DSA over the next year.

Speaker Change: Last two years, our global DSA operations have been managed by one senior leader Shannon Paris Soto. During this time Shannon has comprehensively evaluated the strengths and opportunities.

Speaker Change: This within the businesses.

Speaker Change: On enhancing and future vision and in concert with senior management has developed a plan that we believe will unlock greater synergies and ultimately make us a stronger and even more responsive partner for our clients.

Speaker Change: Many of the changes will be settled.

Speaker Change: Both internally and from a client perspective, they will focus on a combined sales force and leadership approach integrated scientific programming and a more seamless client experience as their programs transition from the discovery to the early development phase.

Speaker Change: The insights we have already gained from modulating towards this level of influence that global footprint optimization plans.

Speaker Change: <unk> consolidation of several smaller sites and transitioning services to other DSA location.

Speaker Change: Operating margin was 27, 4% in the third quarter 20 basis point increase from the third quarter of 2023, and a 30 basis point increase sequentially.

Speaker Change: Year over year and sequential improvements were primarily driven by the increasing benefits from our cost savings actions that we have implemented.

Speaker Change: RMS revenue was $197 8 million an increase of 0.6%.

Speaker Change: And organic basis over the third quarter of 2023, RMS revenue was primarily driven by the benefit of higher pricing and small model sales volume in China, largely offset by lower revenue for research model services and sell solutions.

Speaker Change: As has been the case all year small model revenue in North America, and Europe has been driven by higher pricing.

Speaker Change: The volume for small animals has declined this year in conjunction with large pharma restructuring activities that have led to spending cuts and a reduction in research staff and the funding environment has resulted in a slowdown new biotech company creation. These trends has largely been reflected in our original outlook for the year.

Speaker Change: To offset the volume declines. We also continued to realize price increases because small models are essential low cost tools for drug research.

Speaker Change: China business continues to perform well this year, despite the macroeconomic pressures in the country, primarily driven by share gains associated with our geographic expansion.

Speaker Change: Research model services, including a trade of <unk> operations.

Speaker Change: There is some modest revenue decline in the third quarter, largely reflecting the overall biopharma demand environment while.

Speaker Change: <unk> business model continues to resonate with clients experienced low occupancy as clients selectively narrowed room utilization to cut costs.

Speaker Change: And Jim this has been modestly affected by a similar slowdown in client demand and as part of our footprint optimization efforts. We are in the process of consolidated several credo sites and have also consolidated our sales solutions operation and its largest site in California.

Speaker Change: Existing demand trends are expected to result in essentially flat RMS organic revenue in 2024.

Speaker Change: In the third quarter, the RMS operating margin increased by 210 basis points to 21%.

Speaker Change: <unk> is primarily due to higher pricing a favorable revenue mix related to novo prep and the benefit of cost savings actions.

Speaker Change: Revenue for the manufacturing solutions segment was $196 9 million an increase of 11, 8%.

Speaker Change: Organic basis compared to the third quarter of last year each of the segments businesses contributed to the robust revenue growth and given its continued strong performance. We are raising the segment's full year revenue outlook to high single digit organic growth.

Speaker Change: Prior outlook of mid to high single digit growth. The CMO business led the way with a robust quarter, particularly for cell therapy as client interest in booked activity was strong in the third quarter <unk> business remains on track to have another solid year.

Speaker Change: Biologic testing business also continued to perform well driven by demand for our core testing activities, including cell banking viral clearance that viral safety testing. We are also pleased that the synergies between our CMO and biologics testing businesses continued to strengthen.

Speaker Change: As it is critical to provide analytical testing capabilities to expedite the production processes for our clients cell and gene therapies more than half of our CMO clients now utilize our biologics testing capabilities.

Speaker Change: Which is a testament to the synergies between these businesses and.

Speaker Change: The microbial solutions business also had a strong quarter driven primarily by demand for our end of safe tested consumables as well as improving instrument placements. We believe the third quarter performance demonstrated that demand for microbial products has rebounded from the pressures last year, which resulted from clients destocking activity anti.

Speaker Change: Their budgets and the drug manufacturing sector.

Speaker Change: Our belief is supported by the placement of seven of our large automated systems.

Speaker Change: Nexus platform during the third quarter and a similar number of placements are expected in the fourth quarter. In addition to the fact that these high throughput systems are expected to drive meaningful incremental carpet cartridge use.

Speaker Change: We view installation of these systems is further evidenced with both existing and new clients are utilizing our comprehensive rapid manufacturing quality control testing solutions to enhance their product release testing speed and efficiency Manny.

Speaker Change: Manufacturing segment's third quarter operating margin was 28, 7%, representing an increase of 420 basis points year over year improvement was largely a result of leverage from higher sales volume across each of the segments business.

Speaker Change: To conclude we are continuing to navigate through this challenging period.

Speaker Change: Meaning laser focused on our strategy.

Speaker Change: Resolutely managing our cost structure by enhancing our clients' experience to gain additional share by protecting shareholder value.

Speaker Change: You've always distinguish ourselves through our exclusive science in preclinical focus extending our leading position as a client's preferred global non clinical drug development partner, we have navigated challenges before and we expect to emerge from this period, a stronger leaner and more profitable company and even more responsive partner for our.

Speaker Change: I would like to thank our employees for their exceptional work and commitment and our.

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

Flavia: 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.

Speaker Change: Costs related primarily to restructuring action gains or losses from certain venture capital and other strategic investments and certain other items.

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

Speaker Change: Third quarter 2020 for organic revenue decreased at a rate of two 7%, which was better than our outlook of a mid single digit decline.

Speaker Change: We delivered non-GAAP earnings per share of $2 59.

Speaker Change: Which decreased four 8%, but was favorable to our prior outlook of a low double digit decline.

Speaker Change: The outperformance was largely driven by better than expected DSA results.

Speaker Change: As Jim discussed, we have narrowed and slightly raised our revenue guidance for the full year to reflect the stronger third quarter performance and now expect a revenue decline of two 3% on a reported basis and three.

Speaker Change: Two 4% on an organic basis.

Speaker Change: non-GAAP earnings per share guidance is now in a range of $10.10.

Speaker Change: $10 30 sites.

Speaker Change: By segment, the revenue outlook for each segment, either narrowed or unchanged.

Speaker Change: Alright, Ms revenue.

Speaker Change: Centrally flat on an organic basis.

Speaker Change: <unk> revenue is expected to be at the more favorable end of our prior outlook of a high single digit organic revenue decline.

Speaker Change: And manufacturing is expected to report high single digit organic revenue growth.

Speaker Change: From an operating margin perspective. The outlook is also unchanged. We expect that this year's consolidated operating margin will be slightly below last year's level as cost.

Speaker Change: Cost savings and lower performance based bonus accruals.

Speaker Change: Nearly offset the revenue shortfall at the margin level in 2024.

Speaker Change: There are three key updates this quarter that I'll highlight now.

Speaker Change: The additional savings from our restructuring initiatives, the re initiation of stock repurchases and our strong free cash flow generation.

Speaker Change: As mentioned in August we have begun to implement additional restructuring initiatives.

Speaker Change: Deliver further cost savings to help preserve the bottom line.

Speaker Change: This will result in the consolidation of approximately 15 smaller sites, primarily in the DSA and Rms segments.

Speaker Change: Most of which have already started.

Speaker Change: We're also planning a sale and leaseback arrangement.

Speaker Change: Wilmington, RMS and corporate campus, which will reduced fixed costs and improve efficiencies, while enabling us to continue to operate from the site.

Speaker Change: We expect these footprint optimization efforts will be completed in 2026 and generate net savings of approximately $40 million.

Speaker Change: Inclusive of the actions we have taken since late 2023, we have successfully identified annualized savings of approximately $200 million.

Speaker Change: Of which approximately $100 million will be realized this year.

Speaker Change: And an incremental $50 million in each of the next two years to achieve the full run rate in 2026.

Speaker Change: As part of our footprint optimization efforts, we expect to incur roughly $100 million of restructuring charges associated with site consolidation and transition costs.

Speaker Change: These impairments severance and related items.

Speaker Change: A portion of the cash charges will be offset by the expected cash proceeds from the sale of real estate.

Speaker Change: These restructuring items will be excluded from our non-GAAP results.

Speaker Change: The majority of these charges will be recorded in 2025.

Speaker Change: By taking these actions now we are positioning the company for future profitable growth utilizing a more scalable footprint.

Speaker Change: As you know our board recently approved a new stock repurchase authorization of $1 billion.

Speaker Change: We commenced stock repurchases under the new authorization in August and repurchased a total of 500000 shares for approximately $100 million.

Speaker Change: Which achieved our goal to offset share count dilution from equity awards for the year.

Speaker Change: Moving forward, we will continue to regularly reevaluate the best uses of our capital.

Speaker Change: Lucid about stock repurchases debt repayment and strategic M&A to accelerate growth and maximize shareholder value.

Speaker Change: As Jim mentioned, we also achieved record quarterly free cash flow with $213 $1 million generated in the third quarter compared to $139 5 million last year.

Speaker Change: The improvement was driven by disciplined working capital management and lower capital expenditures.

Speaker Change: Capex was $38 7 million in the third quarter compared to $65 $9 million last year, which reflected the ongoing moderation of our capacity requirement.

Speaker Change: For the year free cash flow will be over $450 million, an increase from our prior outlook of $380 million to $400 million.

Speaker Change: And Capex is expected to be between 220, <unk> and $240 million.

Speaker Change: I will now provide details on the non operating items that affected our third quarter performance.

Speaker Change: Unallocated corporate costs totaled $76 8 million.

Speaker Change: Six 6% of revenue in the third quarter compared to four 7% of revenue last year.

Speaker Change: The increase was primarily due to higher health and fringe related costs and the absence of benefits from virtual power purchase agreements or ppas that were recognized in the prior year.

Speaker Change: For the full year, we expect unallocated corporate costs to be slightly above the mid 5% range as a percent of revenue.

Speaker Change: The non-GAAP tax rate in the third quarter was 21, 3%, representing a decrease of 30 basis points year over year.

Speaker Change: The decrease was primarily due to a favorable geographic earnings mix.

Speaker Change: For the full year, we now expect our tax rate will be in the range of $21, 5% to 22%.

Speaker Change: Total adjusted net interest expense in the third quarter was $28 8 million, which represented both a sequential and year over year decline.

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

Speaker Change: For the full year, we expect total net interest expense will be at the lower end of our prior outlook of $118 million to $122 million.

Speaker Change: We are pleased with the effectiveness of our capital management activities, we have been able to lower our net interest expense by repaying over $300 million invested this year, which has brought our gross leverage ratio to 225 times and our net leverage ratio to two <unk>.

Speaker Change: At the end of the third quarter.

Speaker Change: We were able to continue to repay debt in the third quarter, while absorbing $100 million to Reinitiate stock repurchases in August.

Speaker Change: As a reminder, we also entered into a $500 million interest rate swap two years ago that has proven to be economically advantageous as we have been locked in a lower.

Speaker Change: <unk> interest rate.

Speaker Change: Currently over 85% of our $2 3 billion at the end of the third quarter was at a fixed rate.

Speaker Change: This swap that expires in November.

Speaker Change: A summary of our 2024 financial guidance can be found on slide 41.

Speaker Change: With one quarter remaining in the year, our fourth quarter outlook is effectively embedded in our full year guidance for.

Speaker Change: For the fourth quarter, we expect revenue to decline by low to mid single digit rate on both a reported and organic basis.

Speaker Change: There can be quarterly variability in RMS results due to the timing of an HP shipments.

Speaker Change: The manufacturing segment's growth rate is expected to moderate from the strong low double digit performance in the third quarter due primarily to the timing of CDMA projects.

Speaker Change: non-GAAP earnings per share I expect it to be in a range of approximately $2 45.

Speaker Change: <unk> to $2 65.

Speaker Change: Looking ahead to 2025, we continue to expect the current trends will persist.

Speaker Change: Largely due to a global biopharmaceutical clients as ongoing restructuring programs and the continued gradual recovery in biotech grill.

Speaker Change: As a reminder, we plan to provide our 2025 outlook. When we report our year end results in February which is our standard practice.

Speaker Change: In conclusion, we are pleased with our third quarter performance in this challenging environment.

Speaker Change: As we look to the future we are focused on being well positioned to drive growth when the market rebounds.

Speaker Change: Our unwavering commitment to continuing to deliver high quality.

Speaker Change: Antefix solutions to our clients as we transform into a leaner more agile organization is a testament to our company's strength and resilience.

Speaker Change: Thank you.

Speaker Change: That concludes our comments, we will now take your questions.

Speaker Change: Thank you ladies and gentlemen, the floor is now open for questions. If you would like to signal for a question. Please press star one on your telephone keypad.

Speaker Change: You can remove yourself from the queue at any time by pressing star Q. Once again that is star one to ask a question and star teacher and leave yourself and the interest of time, we ask that you limit yourself to one question and one follow up question, we will pause for just a moment to assemble the question queue.

Speaker Change: We will go first to Max Smock with William Blair. Please go ahead.

Max Smock: Hey, good morning, Thanks for taking my questions I wanted to follow up on my comment you had around the puts and takes in terms of the funding environment and the interest rate sentiment that keeps your outlook for small biotech measured could you just walk through kind of what those puts and takes are and then in light of last night's election, I'd be curious if theres been any change to your view on the outlook for funding.

Speaker Change: Byron that moving forward.

Speaker Change: Hey, Matt Good morning, I think.

Speaker Change: I'll, let Jim answer on on the election, but in terms of liquids and takes I think.

Speaker Change: From a macroeconomic perspective.

Speaker Change: And just funding environment.

Speaker Change: It started in the beginning of the year with a more robust funding with IPO market opening we continue to see that getting support throughout the year although.

Speaker Change: Slightly lower clip than the first half of the year.

Speaker Change: Obviously interest rates have started to come down which is.

Speaker Change: Good thing no.

Speaker Change: The biotech environment and as we said from a demand perspective.

Speaker Change: We continue to see that.

Speaker Change: Indicators trend more favorably.

Speaker Change: Biotech client base than last year, so while they didn't rebound to the extent that we had anticipated earlier in the year, which was part of the reason why we adjusted our guidance in the second earnings call.

Speaker Change: They are stable and favorable to last year. So.

Speaker Change: We are cautiously optimistic that things will continue to improve but albeit.

Speaker Change: Albeit on a much smaller slower clip.

Speaker Change: So a little bit longer ago.

Speaker Change: Hey election.

Speaker Change: I think that if it had gone the other way.

Speaker Change: Sorry, I might've been beefed up.

Speaker Change: Additional drivers might have been added to it.

Speaker Change: Short term that would be more expansive having said that.

Speaker Change: Popular and attractive for any candidate to just talk about drug prices being too high.

Speaker Change: But I would expect we'd have less of a focus.

Speaker Change: But no we administration well.

Speaker Change: We'll have to wait and see.

Speaker Change: Alright, Thank you for that and then Bob maybe just a cleanup one for me how much of a benefit did you recognize from lower incentive comp in the quarter similar to last quarter. It's fair to assume most of that impact was in DSA and at the corporate level.

Speaker Change: Just to confirm Youre talking about that.

Speaker Change: Sure.

Speaker Change: I didn't see performance based on all performance based comp.

Bob: So that was not a meaningful did not have a meaningful impact in the third quarter. The big adjustment when we adjusted our guidance was really in the second quarter. So this was not.

Speaker Change: The key factor in this quarter's results.

Speaker Change: I'm sorry are you still expecting it could be a factor, though in the second half I think lasse.

Speaker Change: Quarter, when we talked you did $20 million in <unk> I think rough math, we had kind of gotten to $30 million in total for the back half of the year. So is it fair to assume there will still be some impact in <unk> now is that kind of tailwind is that out of margins here in the back half of the year.

Speaker Change: Yes, it's still going to have.

Speaker Change: The impact in the second half, but the majority of that catch up.

Speaker Change: Was was in the second quarter.

Speaker Change: Got it thank you.

Speaker Change: We will go now to Matt <unk> with Goldman Sachs. Please go ahead.

Speaker Change: Hey, good morning, Thanks, taking my questions, maybe just first on the large pharma segment.