Q4 2024 Charles River Laboratories International Inc Earnings Call
Speaker Change: Ladies and gentlemen, thank you for standing by and welcome to the Charles River Laboratories fourth quarter and full year 2024 earnings Conference call. This call is being recorded at this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a quick.
Speaker Change: During this period, you will need to press star and one on your telephone keypad.
Speaker Change: If you want to remove yourself from the queue simply press star and two lastly, if you should require operator assistance. Please press star Zero I would now like to turn the conference over to our host Todd Spencer Vice President of Investor Relations. Please go ahead Sir.
Todd Spencer: Good morning, and welcome to Charles River Laboratories, fourth quarter, and full year 2024 earnings and 2025 guidance conference call and webcast.
Speaker Change: This morning, I'm joined by Jim Foster sure President and Chief Executive Officer, and Flavio P Executive Vice President and Chief Financial Officer.
Todd Spencer: They won't comment on our results for the fourth quarter of 'twenty four.
Todd Spencer: As well as our financial guidance for 2025.
Todd Spencer: Following the presentation, they will respond to questions.
Todd Spencer: There is a slide presentation associated with today's remarks, which is posted on the Investor Relations section of our website at IR got tiered ever dotcom.
Todd Spencer: A web cast replay of this call will be available beginning approximately two hours after the call today and can also be accessed on our Investor Relations website.
Todd Spencer: Replay will be available through next quarters conference call.
Todd Spencer: I'd like to remind you of our safe Harbor, our remarks that we make about future expectations plans and prospects for the company talks to forward looking statements under the private Securities Litigation Reform Act of 1995 actual results may differ materially from those indicated.
Todd Spencer: 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.
Todd Spencer: non-GAAP financial measures are not meant to be considered superior to or a.
Todd Spencer: Substitute for results of operations prepared in accordance with GAAP.
Todd Spencer: In accordance with regulation G. You can find comparable GAAP measures and reconciliation on the Investor Relations section of our website I will now turn the call over to Jim Foster.
Jim Foster: Thank you Todd and good morning.
Jim Foster: Pleased to end the year with our fourth quarter performance that was slightly better than expected, yielding annual revenue and non-GAAP earnings per share higher than guidance that we issued in November.
Jim Foster: Before I provide more details on our fourth quarter results I will provide an update on the market trends 2025 financial guidance.
Jim Foster: Beginning with an update on the market environment I can say that our view of biopharmaceutical demand remains consistent with our last update.
Jim Foster: Overall, DSA demand kpis, including the net book to Bill ratio was stable compared to the third quarter and we expect similar trends throughout 2020 shot.
Jim Foster: Many of our global biopharmaceutical clients continue to move forward with their restructuring and pipeline re prioritization activities, which are expected to constrain early stage spending by many of these clients again in 2025.
Jim Foster: The mid sized biotechnology clients continued to benefit from a more favorable funding environment through the end of 2024 compared to the previous two years and we expect biotech demand trends will be stable to slightly improved in 2025 versus last year. These.
Jim Foster: These combined trends are expected to result in flattish DSA demand sequentially within 2025, However, we expect steady volume to be at a lower level than in 2024, because many global biopharmaceutical clients reset their budgets in the middle of last year.
Jim Foster: We're closely monitoring our clients R&D spending patterns, the funding environment and interest rates as well as new biotech company formations, which has slowed over the past couple of years and believe our expectations for 2025 are appropriately measured.
Jim Foster: As discussed at a recent Investor conference. The primary factors influencing our 2025 outlook are as follows the first relates to our expectation for stabilizing DSA demand environment in 2025.
Jim Foster: As well as an anticipated headwind from lower DSA pricing throughout the year.
Jim Foster: The second item is lower commercial revenue and the CMO business, which will reduce consolidated revenue by approximately 1% in 2025 and finally, our site consolidation actions are expected to reduce revenue by an additional 50 basis points. This year.
Jim Foster: Cumulative effect of these factors is expected to result in a revenue decline of three five to five 5%.
Jim Foster: And organic basis, this year, and when including a foreign exchange headwind of over 1%.
Jim Foster: Reported revenue declined 4.5% to 7%.
Jim Foster: We have taken significant action to protect the operating margin and shareholder value, including restructuring initiatives that are expected to yield annualized savings of approximately $225 million in 2026 of which over $175 million will be realized this year.
Jim Foster: However, we will not be able to fully offset the revenue decline in 2025, particularly in the DSA segment.
Jim Foster: Which is expected to result in a modestly lower consolidated operating margin and.
Jim Foster: And our non-GAAP earnings per share in a range of $9.10 to $9 60.
Jim Foster: Now I'd like to quickly recap, our fourth quarter and full year consolidated performance.
We reported revenue of one one.
Jim Foster: $1 billion in the fourth quarter of 2024, and one 8% decline on an organic basis from the previous year.
Jim Foster: For the year, we reported revenue of four point.
Jim Foster: $5 billion.
Jim Foster: With an organic revenue decrease of two 8% driven primarily by lower DSA revenue.
Jim Foster: Our full year revenue slightly outperformed the range that we provided in November led by better than expected fourth quarter performance in the RMS segment, and a robust year end for microbial solutions sales to both the global biopharmaceutical and small and midsize biotech client segments declined for the full year.
Jim Foster: But in the fourth quarter, we were pleased to see revenue from biotech clients returned to growth for the first time since the third quarter of 2023.
Jim Foster: The operating margin increased 80 basis points year over year to 19, 9% in the fourth quarter, principally driven by lower unallocated corporate cost and margin expansion in the manufacturing segment.
Jim Foster: Cost savings initiatives also helped to limit the margin declines in the DSA and Rms segments.
Jim Foster: The full year, the operating margin declined by 40 basis points to 19, 9%. The decrease was primarily driven by the DSA segment as well as higher unallocated corporate costs.
Jim Foster: Earnings per share were $2.66 in the fourth quarter, an increase of eight 1% from $2.46 in the fourth quarter of 2023.
Jim Foster: Fourth quarter operating margin expansion as well as favorable below the line items, including reductions in interest expense tax rate and share count led to the earnings improvement.
Jim Foster: 24 earnings per share declined by three 3% to $10.32 due primarily to the lower revenue and operating margin, partially offset by the benefit of cost savings initiatives.
Jim Foster: Turning to segment performance I will now provide you with additional details on our fourth quarter and each segment's outlook for 2025.
Jim Foster: DSA revenue in the fourth quarter was $603 3 million a decrease of three 5%.
Jim Foster: Ganic basis, the decline reflected lower study volume as well as slightly lower pricing as anticipated safety assessment pricing turning negative in the fourth quarter as the moderating pricing environment. During 2024 is set to work from backlog into the revenue stream.
Jim Foster: And the current demand environment pricing has become a point of discussion with clients, particularly small and mid sized biotechs.
Jim Foster: We have strategically and selectively utilized pricing and other commercial enhancements, including better integration of our DSA sales force with a global with it.
Jim Foster: <unk> to gain additional market share and believe this strategy has been successful as demonstrated by an improved DSA catch it right during 2024.
Jim Foster: DSA demand Kpis were also stable in the fourth quarter.
Jim Foster: The net book to Bill ratio in cancellation rate and net book to Bill remained below one times in the fourth quarter with a global biopharmaceutical and small and midsize biotech client segments in a similar range. This was consistent with the third quarter. Following the divergence in trends during the second quarter that resulted in revenue.
Global biopharmaceutical clients, taking a step down in the second half of 2024, which will continue to impact 2025.
Jim Foster: Insulation. So also remained at lower levels in the fourth quarter as they have for most of the past year and closer to targeted levels. We believe the clients have largely completed the process of canceling lower priority programs that remained in our backlog. So that's the key for the DSA segment to return to revenue growth.
Jim Foster: A sustained improvement in booking activity, which has not yet occurred.
Jim Foster: For the full year DSA revenue decreased six 2%.
Jim Foster: Organic basis, which was consistent with our expectation in November that TSA revenue would be favorable to our previous outlook of a high single digit decline.
Jim Foster: Year end, the DSA backlog modestly declined to $1 $97 billion.
Jim Foster: From $2 2 billion at.
Jim Foster: At the end of the third quarter.
Jim Foster: In 2025, we expect DSA revenue will decline at a mid to high single digit rate on an organic basis, which will be slightly less favorable than in 2024.
Jim Foster: We expect that both lower pricing and steady volume will have a similar impact on the 2025 decline.
Jim Foster: As I mentioned earlier, we expect steady volume will be relatively stable sequentially throughout 2025, with a global biopharmaceutical and biotech clients segments, but at a lower level than in 2024, due primarily to the softer demand from global biopharmaceutical clients that emerged in the second half of last year.
Jim Foster: In addition, lower realized DSA pricing will add an incremental headwind in 2025 that was not present in 2024 when realized pricing was essentially flat for the full year.
Jim Foster: We have not assumed any meaningful improvement in the DSA demand environment. During 2025 at this time, so the quarterly gating of DSA revenue dollar should be relatively consistent over the course of the year aside from the modest seasonal impact in the first quarter.
Speaker Change: In recent weeks, an HP supply has once again made headlines as a result of a recent proposal at the standing Committee meeting of societies and international body that oversees the trade of animals, including NH piece using biomedical research.
Jim Foster: Actually suspend the trade of NXP is from Cambodia.
Jim Foster: Very pleased to studies did not enacted trade suspension at that meeting in early February and postponed the agenda item on this matter until the end of the year.
Jim Foster: This decision underscores the international community's strong support for sphere accurate and science based review process.
Jim Foster: Adding the necessary time to review the facts and contract in this information being disseminated by other groups.
Jim Foster: Let me be clear.
Jim Foster: So were firmly believes that any action to restrict the availability of purpose spread in hp's from Cambodia could have significant unintended consequences that will impact biomedical research globally legally sourced NH piece, a critical regulatory required models to help ensure human patient safety and <unk>.
Jim Foster: <unk> biologics drug development for the global biopharmaceutical industry.
Speaker Change: Charter, who will continue to work collaboratively with regulatory agencies government officials industry trade associations and our biopharmaceutical clients.
Speaker Change: Patient safety and educate our partners about the scientific importance of NH fees, particularly when viable alternatives do not currently exist.
Speaker Change: With regard to our MH P supply, we will continue to diligently work to diversify and secure our supply chain by procuring in hps and the various supply arrangements outside of Cambodia, including through a controlling interest in novo <unk> in Mauritius and as a reminder, we will be able to utilize an increasing number of Mauritius NH.
And our DSA segment after 2026.
Speaker Change: In the appendix of our slide presentation. Today, we have also updated certain key statistics for 2024.
Speaker Change: <unk> in our NSP report last year.
Speaker Change: DSA operating margin was 24, 7% in the fourth quarter or 130 basis point decrease from the fourth quarter of 2023 and.
Speaker Change: And with 25, 7% for the full year of 2024, representing a 180 basis point decline year over year.
Speaker Change: Both the fourth quarter and full year declines were primarily driven by lower revenue, which was partially offset by the benefit from cost savings.
Speaker Change: RMS revenue in the fourth quarter was $204 3 million a decrease of 0.4%.
Speaker Change: And organic basis for the year RMS revenue was essentially flat with just 0.1% decline on an organic basis for both the quarter and the year lower revenue for research model services, including Cradle and HPE sales in China and sell solutions business was mostly offset by higher sale.
Speaker Change: A small research models in all geographic regions, principally driven by higher pricing sell solutions 2024 growth rate was impacted by the consolidation of its operations to its largest largest California site.
Speaker Change: 2025, RMS revenue is expected to increase at a low single digit rate driven primarily by higher pricing in the North American and European models businesses.
Speaker Change: Improved growth prospects for research model services, including Cradle and from higher and HP sales to Nova third party clients.
Speaker Change: Unit volumes for a small research models continued to be lower in 2024 due in large part to the softer biopharmaceutical spending environment, however, higher pricing and higher revenue from academic institutions more than offset these unit volume declines.
Speaker Change: We expect similar trends in 2025 with higher pricing in North America, and Europe more than offsetting lower unit volumes. We also expect small models revenue in China to be flattish as the life Sciences environment continues to be somewhat challenged given.
Speaker Change: Given the recent news around NIH funding, we will closely monitor the health of our academic and government client base.
Speaker Change: Exposure to the NIH represents less than 2% of our total revenue largely related to insourcing solutions contracts for.
Speaker Change: For Academia small research models are critical components to academic research product projects and considered direct research costs, but we will monitor what if any impacts the NIH is new directive to cap indirect costs will have on these clients.
Speaker Change: Overall large models that are not expected to be a significant contributor to RMS revenue growth. This year as anticipated increase in overprint third party NHK revenue will be partially offset by lower <unk> revenue in China.
Demand for research model services is expected to rebound and become a notable contributor for RMS revenue growth in 2025.
Speaker Change: Gems business is expected to get back on track as clients increasingly utilize these services to support their complex research efforts and maintenance of the genetically modified model colonies moderate growth of Cradle operations is expected to deliver an improved top line performance in 2025, primarily driven by new.
Speaker Change: <unk> sites to limit risk in this tighter budgetary environment and new sites will either have dedicated or anchor clients.
Speaker Change: Clients are continuing to view <unk> as an attractive model to access flexible vivarium space without having to invest in internal infrastructure, which provides a powerful value proposition for clients, who are looking to reduce costs and conserve capital.
Speaker Change: The RMS operating margin decreased by 30 basis points year over year to 22, 8% in the fourth quarter, but increased by 70 basis points to 23, 7% in 2024 for the year. The operating margin improvement was primarily due to higher pricing for small research models.
Speaker Change: Cost savings related to our restructuring initiatives and a favorable revenue mix related to higher sales of NH fees due to the <unk> acquisition.
Speaker Change: We expect similar drivers to contribute to the RMS operating margin in 2025.
Manufacturing solutions revenue was $194 $9 million in the fourth quarter growth rate of two 1% on an organic basis in the full year organic growth rate was six 8% the slower fourth quarter growth rate was primarily driven by lower commercial revenue and the CMO business.
Speaker Change: I've set by a robust year end performance for the microbial solutions business.
Speaker Change: These same drivers will likely result in essentially flat manufacturing revenue and 2025 on an organic basis biologics testing benefited in 2024 from certain client projects that will not repeat which will result in a moderated growth rate in 2025.
Speaker Change: As mentioned at a recent Investor Conference, we expect lower revenue from two commercial CMO clients were reduced consolidated revenue by approximately 1% in 2025.
Speaker Change: The manufacturing segment's growth rate by more than 5%.
Speaker Change: Despite the commercial setbacks, we believe our efforts over the past two years to enhance the <unk> operations has established a solid foundation for this business through investments in facilities leadership and scientific expertise.
Speaker Change: The demand in the cell and gene sector is not as robust as it was when we acquired the business in 2021.
Speaker Change: We believe attractive long term growth opportunities exist and we have a healthy pipeline of biotech clients with early stage clinical candidates ready to help move the <unk> business forward.
Speaker Change: The microbial solutions business reported a strong year end performance with solid growth across all three testing platforms.
Speaker Change: Safe <unk>.
Speaker Change: <unk> and <unk>.
Speaker Change: And this saves continue to lead the way with robust growth the testing consumables as well as another strong quarter for instrument placements. We believe that 2020 performance steadily demonstrated that demand for microbial products has rebounded and our clients are increasingly utilizing our comprehensive rapid manufacturing.
Speaker Change: And quality control testing solutions to enhance their product release testing speed and efficiency.
Speaker Change: The manufacturing segment's operating margin increased by 330 basis points to 28, 7% in the fourth quarter and by 560 basis points to 27, 4% for the full year.
Speaker Change: We were pleased by the operating margin expansion, which was driven by operating leverage from improved demand in the microbial solutions and biologics testing businesses and our continued focus on generating greater efficiencies across all businesses, including CMO.
Speaker Change: We believe the manufacturing segment remains on track to reach its goal to return to an operating margin above the 30% level within a couple of years.
Speaker Change: To conclude we are currently operating in a challenging biopharmaceutical demand environment with continued constrained client spending, but we believe that demand trends are stabilizing on the positive side biotech is trending favorably and we have not seen signs of further deterioration from a global biopharmaceutical clients.
Speaker Change: However, we're not forecasting a recovery in 2025, we have taken decisive action to manage the company through the current environment, including appropriately right sizing, our infrastructure and eliminating over 5% of our cost structure, we remain committed to initiatives to generate more revenue contain costs and <unk>.
Speaker Change: <unk> shareholder value.
Speaker Change: Q.
Speaker Change: To ensure our future success, we continue to make progress on strategic actions in the three main areas.
Speaker Change: Restructuring and other initiatives to manage to manage costs and generate greater efficiency.
Speaker Change: Reducing staffing levels to align with the pacing demand optimizing our global footprint and streamlining processes and operations. We have made meaningful progress on this front and continue to selectively evaluate additional opportunities to cut costs and drive efficiency and now expect to generate approximately 225 million.
Speaker Change: Of annualized cost savings from these initiatives.
Speaker Change: The second area is concentrating on commercial enhancements.
Speaker Change: Promote a client centric focus and gain additional market share.
Speaker Change: Our goal is to enhance the client experience.
Speaker Change: For us our role as a flexible and responsive partner to our clients, including through leveraging technology, such as our Apollo platform and our RMS E Commerce initiatives.
Speaker Change: I mentioned earlier, our enhancements to our DSA sales force and dynamic pricing strategy have enabled us to gain market share over the past year.
Speaker Change: And finally, we are taking a balanced approach to capital allocation and regularly revisiting our best uses for capital.
Speaker Change: Very pleased that our leverage remains low in the low two times range and as we have routinely done we continue to evaluate select M&A candidates.
Speaker Change: Based on our anticipated capital needs this year and coupled with our belief that we are currently undervalued. It as an opportune time to allocate most of our free cash flow.
Speaker Change: As to stock repurchases in 2025 under our $1 billion authorization.
Speaker Change: We intend to repurchase approximately $350 million in stock over the next month or two which exceeds our initial goal of $100 million last year to offset annual dilution from equity awards.
Speaker Change: We have navigated challenges before and we believe our strategic actions will enable us to emerge from this period, a stronger leaner and more profitable company and an even more responsive partner for our clients. We have always distinguish ourselves through our exquisite science in preclinical focus.
Speaker Change: Attending our leading position as a client's preferred global non clinical drug development partner.
Speaker Change: Like to thank our employees for their exceptional work and commitment and our clients and shareholders for their continued support.
Speaker Change: Now Flavia will provide additional details on our financial performance in 2025 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 a goodwill impairment in the fourth quarter of 2020 for amortization.
Flavia: Amortization and other acquisition related adjustments costs related primarily to restructuring action game.
Flavia: Gains or losses from certain venture capital and other strategic investments.
Flavia: Certain other items.
Flavia: Many of my comments will also refer to organic revenue growth, which excludes the impact of acquisitions divestitures and foreign currency translation.
Flavia: We are pleased with our fourth quarter financial results with revenue and non-GAAP earnings per share slightly exceeding our annual outlook.
Flavia: In the face of a challenging demand environment, we have taken decisive actions to navigate these headwinds.
Flavia: Our efforts include aggressive actions to rationalize costs and align our infrastructure with the current demand.
Flavia: As Jim noted the restructuring initiatives we implemented.
Flavia: Becker to result in approximately $225 million in annualized cost savings in 2026, including over $175 million really.
Flavia: Realized this year.
Flavia: Lately ahead of our prior target as we selectively implemented smaller additional initiatives.
Flavia: The multiyear cost savings program is expected to reduce our cost structure by over 5% through head count reductions and network rationalization efforts. The majority of which are underway and are on track.
Flavia: To further balance our capital structure, we leverage our strong cash flow generation to repurchase $100 million in stock in the third quarter of 2020 for achieving our goal to offset the annual share count dilution from equity awards.
Speaker Change: As Jim mentioned under the $1 billion Board authorization, we intend to increase the level of stock repurchases in 2025 to approximately $350 million.
Speaker Change: We believe allocating free cash flow to stock repurchases. This year, we will be prudent in light of our low leverage levels and our current valuation.
Speaker Change: Which is certainly depressed because of the current industry headwinds.
Speaker Change: It also does not ascribe enough value to the favorable long term growth fundamentals that we expect to again re emerge once the biopharmaceutical industry refocuses on investing in their pipelines.
Speaker Change: We are particularly pleased with our strong free cash flow generation of $501 6 million in 2024.
Speaker Change: Achievement reflects the effectiveness of our tightly managed capital expenditures.
Speaker Change: <unk> working capital management and the early success of our cost savings initiatives.
Speaker Change: By maintaining a balanced approach to capital deployment, we continue to demonstrate our commitment to enhance long term shareholder value.
Speaker Change: I will now provide additional details on our 2025 outlook.
Speaker Change: As Jim discussed 2024 reflected a constrained biopharmaceutical spending environment, which is expected to persist into 2025.
Speaker Change: Therefore, we expect a reported revenue decline of four 5% to 7%, including the foreign exchange headwind.
Speaker Change: And three five to five 5% on an organic basis.
Speaker Change: FX has become more of a headwind in recent months as the U S. Dollar has strengthened and is now expected to reduce reported revenue by one to one 5%.
Speaker Change: We have provided additional information on FX rates and our currency exposure in the appendix to our slide presentation.
Speaker Change: non-GAAP earnings per share are expected to be in a range of $9.10 to.
Speaker Change: To $9 60.
Speaker Change: On a segment basis, we have also provided the reported and organic revenue outlook for 2025 on slide 31.
Speaker Change: In 2025, we expect the consolidated operating margin will be modestly lower from 19, 9% in 2024.
Speaker Change: As the cost savings associated with restructuring initiatives will not fully offset the lower revenue this year.
Speaker Change: This is particularly true in the DSA segment for which we expect an operating margin decline.
Speaker Change: However, there are opportunities for margin expansion in the RMS and manufacturing segments.
Speaker Change: On allocated corporate costs in 2025.
Speaker Change: <unk> to be approximately 5% of total revenue.
Speaker Change: These expenses normalize in the fourth quarter of 2024 to five 2% of revenue primarily driven by performance based bonus.
Speaker Change: However, the 40 basis point increase to five 7% for full year 2024 was primarily attributable to higher health and fringe related costs throughout the year.
Speaker Change: We expect corporate costs to decrease in 2025 because of benefits from cost saving actions.
Speaker Change: The non-GAAP tax rate for 2025 is expected to be in the range of $22 five to 23, 5%.
Speaker Change: The increase from 21, 3% in 2024.
Speaker Change: The anticipated increase in the tax rate is principally due to an increase in the global minimum tax as well as a modest impact related to stock based compensation.
Speaker Change: In addition, we have not assumed that discrete tax items, which benefited 2024 will repeat.
Speaker Change: As its typically the case due to the timing of equity award vesting.
Headwind from stock based compensation will be more pronounced in the first half of the year, including an expected first quarter tax rate in the mid 20% range.
Speaker Change: Total adjusted net interest expense in 2025 is expected to be in the range of $112 million to $117 million compared to $117 $7 million last year.
Speaker Change: Slight decrease will be primarily driven by lower interest rates on floating rate debt.
Speaker Change: We do expect to borrow during the year to balance the timing of the stock repurchases earlier in the year with a free cash flow that we will generate.
Speaker Change: But overall expect that balances will be similar at the end of 2025.
Speaker Change: In 2024, we lowered our net interest expense by repaying approximately $400 million in back the highest repayment in recent years, bringing our gross and net leverage ratio to two two times at year end.
Speaker Change: Additionally in December we amended our existing credit agreement to establish a revolver with borrowing capacity of up to $2 billion reduced from our previous 3 billion facility.
Speaker Change: Due to our lower current leverage and anticipated capital needs.
Speaker Change: Importantly, we're able to obtain competitive pricing on this new agreement.
Speaker Change: The end of the fourth quarter, we had outstanding debt of $2 2 billion with approximately two thirds at a fixed interest rate.
Speaker Change: Compared to $2 3 billion at the end of the third quarter.
Speaker Change: By 2025, we expect free cash flow will be in a range of $350 million to $390 million, representing a decrease from 501 $6 million in 2024.
Speaker Change: The decrease will be driven by lower earnings and higher working capital to build inventories, particularly for NH beef.
Speaker Change: Stabilization of receivables after favorable collections in 2024.
Speaker Change: Capital expenditures for 2025.
Speaker Change: Got it to be essentially flat from 2024 levels at approximately 6% of total revenue.
Speaker Change: About $230 million with projects, primarily related to a mix of maintenance capital and the completion of ongoing projects.
Speaker Change: This outlook reflects our disciplined approach to aligning capacity and capital investments with client demand and is well below our peak capex in recent years of eight 2% of revenue.
Speaker Change: A summary of our 2025 financial guidance can be found on slide 37.
Speaker Change: With regard to the first quarter of 2025, we expect revenue will decline at a mid single digit rate on an organic basis and a mid to high single digit decline on a reported basis due to several factors, including first quarter seasonality in the DSA and Biolife.
Speaker Change: Expressing businesses.
Speaker Change: As well as a modest headwind.
Speaker Change: The timing of any b shipments.
Speaker Change: From an earnings perspective, we expect non-GAAP earnings per share of at least $2 in the first quarter.
Speaker Change: The decline from the fourth quarter will be primarily driven by lower operating margin due in part to the seasonal business trends and the timing of NH b shipments.
Speaker Change: And as I mentioned, we expect a meaningfully higher tax rate in the mid 20% range, reflecting a headwind from stock based compensation.
Speaker Change: On allocated corporate costs will also remain slightly above 5% of revenue in the first quarter.
Speaker Change: We expect revenue and operating margin will improve after the first quarter, principally as we move beyond the seasonal trends at the beginning of the year.
Speaker Change: In conclusion, we're confident in our ability to emerge from this period of softer demand as a stronger more agile organization.
Speaker Change: Our decisive actions, including aggressive cost optimization initiatives.
Speaker Change: <unk> purchases and a disciplined approach to capital management demonstrate our commitment to enhancing shareholder value.
Speaker Change: We believe our leaner infrastructure will position us well to capitalize on new business opportunities when they emerge and drive sustainable profitable growth in the future.
Speaker Change: <unk>.
Speaker Change: That concludes our comments, we will now take questions.
Speaker Change: And now to our phone audience. If you would like to ask a question. Please press the star and one on your Touchtone keypad, you may remove yourself from the queue at any time by pressing star into once again, ladies and gentlemen that is star one to ask a question. We will hear first from Elizabeth Anderson Evercore. Please go ahead.
Speaker Change: Hi, Guy.
Elizabeth Anderson: Excuse me good morning, and thank you so much for the question.
Speaker Change: I just had a question about your bookings expectations given the backlog number that you guys had in the fourth quarter. It seems like maybe the book to Bill at least on my math may have taken a bit of a step down.
Speaker Change: And I just wanted to understand like if you look at it on the current quarter basis. So I just want to understand if theres timing, obviously on a TTM basis. It's more stable. So 118 could you could you could you confirm my math and then B. How are you seeing things in the first quarter and can you talk a little bit more about your sort of trending expectations in that regard as we move through 2000.
Speaker Change: 25, thank you so much.
Speaker Change: Okay.
Elizabeth Anderson: Elizabeth I can maybe start just with your question on the <unk>.
Todd Spencer: Book to Bill and then I don't know if Jim wants to add additional commentary on the overall outlook.
Elizabeth Anderson: Actually the fourth quarter.
Elizabeth Anderson: Both gross and net book to Bill was sequentially essentially stable there was no deterioration or improvement either so we were pleased that after the second quarter decline that we saw especially with our global accounts.
Elizabeth Anderson: We had a bounce back in the third quarter, and then stayed flat in the fourth quarter.
Elizabeth Anderson: Okay. Thank you.
Chris: And then Chris.
Elizabeth Anderson: Sure.
Elizabeth Anderson: Yes, Elizabeth Wood.
Speaker Change: For the first quarter, which is typically softer for us.
Speaker Change: We anticipate some seasonality in DSA and biologics.
Speaker Change: Back half of the year will say see stronger sales.
Speaker Change: <unk> for <unk>.
Speaker Change: Should have sort of <unk>.
Speaker Change: Consistent sales so across across the across the year.
Speaker Change: We feel that <unk>.
Speaker Change: Biopharmaceutical.
Speaker Change: Demand has stabilized.
Speaker Change: And that biotech demand has stabilized to be or to be slightly slightly up.
Speaker Change: So we don't anticipate any further deterioration in demand for that from a volume point of view.
Speaker Change: A little bit of a step down in price.
Joe: Hey, Joe.
Speaker Change: First quarter trend that I just talked about.
Joe: Embedded in that guidance.
Joe: Okay. That's super helpful. Thank you.
Joe: Okay.
Speaker Change: Our next question will come from Matt Sykes at Goldman Sachs.
Matt Sykes: Hi, good morning, Thanks, taking my questions.
Matt Sykes: Just in RMS I know you quantified the direct NIH exposure at less than 2% could you just talk about academic as a whole, including NIH. What that is in terms of percentage of mris and what are you kind of seeing real time from that customer base.
Matt Sykes: In terms of the metrics that youre observing or feedback that youre getting.
Matt Sykes: Just given all the uncertainty in that segment.
Matt Sykes: Yes, so I don't think were.
Matt Sykes: We're not seeing much or hearing much yet because a fair amount of speculation about.
Matt Sykes: So it's an indirect cost recovery support they will actually be.
Matt Sykes: Assuming that things are as anticipated as you say, it's about it's about 2% of total.
Matt Sykes: About.
Matt Sykes: Academic and government, so about 40% of the RMS.
Matt Sykes: A lot of that is related to government contracts with the academic.
Matt Sykes: The impact of that will be much less let's say over the over the entire company, even though most of its in RMS, it's about academic or government or about 10% and if you Peel that back a bunch of it's outside of the U S.
Matt Sykes: A bunch of that is an academic institutions and relatively small amount as is government related so.
Matt Sykes: We'll have to see what impact if any that we have particularly with long term contracts for things like.
Matt Sykes: Producing animals for certain institutes at NIH.
Speaker Change: I think it's possible that that would be pretty disruptive to the researches so.
Speaker Change: We feel that given the relatively small percentage of revenue that's associated with that.
Speaker Change: We shipped at times.
Speaker Change: Got it and then just on sort of large pharma demand I mean, you've been calling that out as an area of weakness.
Speaker Change: As you think about sort of the re prioritization cost cutting cycle. We've been through you kind of mentioned where maybe towards the end, but no view on in terms of recovery.
But are you expecting any sort of improvement to that dynamic in the second half of 'twenty fiber should we be thinking more about 26 in terms of recovery from that customer segment.
Speaker Change: Yes so.
Speaker Change: We.
Speaker Change: In 'twenty four we just assumed that things would get better in the back half of the year.
Speaker Change: Thank you for you since we've had the capital markets would open up in this re prioritization stuff would be over and.
Speaker Change: Assuming that things are going to get better.
Speaker Change: Strategy so.
Speaker Change: All we can do is.
Speaker Change: Half of guidance based on conversations with clients that we're dealing with every some bit large pharmaceutical company in the world.
Speaker Change: The replay artesunate pipelines in restructuring their infrastructure to deal with a patent pending patent cliffs et cetera.
Speaker Change: And depending on who you talk too much of that has been done and there's still a fair amount still to be done and it's impossible for us to predict.
Speaker Change: What that will be or when that will be concluded except for what our clients tell us. So we would anticipate that.
Speaker Change: While things have stabilized and while we don't anticipate things will get worse.
Speaker Change: Carriers for that.
Speaker Change: Pharma would be pretty much consistent for the balance of the year and the biotech is more stable and we'd be slightly improving throughout the year.
Speaker Change: Thanks very much.
Speaker Change: On capital markets.
Speaker Change: Several ipos have got mountain priced well, so thats encouraging there's been some really good inflows.
Speaker Change: Two venture capital firms, that's encouraging as well.
Speaker Change: Well there definitely has been some re prioritization for the biotech companies do not have the same sort of large infrastructures to reduce and they don't do anything internally. So they very much ddos and other companies like us.
Speaker Change: So we anticipate kind of a consistent revenue throughout the year.
Speaker Change: But a step down in DSA over 2000, twenty's or because of the pricing headwinds.
Speaker Change: And.
Speaker Change: If it's better than that that will be terrific, but we don't have any indications now that wood.
Speaker Change: Cause us to guide differently.
Speaker Change: Thank you very much.
Speaker Change: Okay.
Speaker Change: Our next question will come from Jay Haas Savant at Morgan Stanley.
Speaker Change: Yeah.
Speaker Change: Hey, guys good morning, and thanks for the time here.
Speaker Change: Maybe one for you Bob.
Speaker Change: On the CMO business, just a couple of housekeeping items for me.
Speaker Change: Any cancellation payment benefit in the fourth quarter or do you expect one to come through in 'twenty five and then what can you do to cushion the margin impact on the segment from under utilization I think I heard you mentioned that there is opportunities for operating margin and manufacturing to actually grow year over year and 25.
Speaker Change: Yeah, Hi, guys. Thanks for the question.
Speaker Change: And I'll take the latter part first you are correct we will.
Speaker Change: We are forecasting margin expansion for the manufacturing segment.
Speaker Change: Margins will be challenged in.
Speaker Change: And the CMO business as you pointed out given the loss of those commercial clients.
Speaker Change: But we're taking actions there to right size, our infrastructure and staffing to the lower sales.
Speaker Change: And then in addition to that the other two businesses within manufacturing.
Speaker Change: You need to do well and perform well.
Jim Foster: So as Jim mentioned in his prepared remarks, a very strong finish for the microbial business.
Jim Foster: We'll continue to help with margin expansion.
Jim Foster: Going back to your first question there are.
Jim Foster: Some.
Jim Foster: Contractual obligations that we will benefit from that.
Jim Foster: Those are embedded in the 2025.
Jim Foster: Our guidance that we provided for the segment.
Jim Foster: So.
Jim Foster: I'll leave it at that.
Jim Foster: Got it that's helpful. And then one for you Jim on the on the <unk> decision to defer the.
Jim Foster: The decision on the Cambodian at HB trade.
Speaker Change: I was just curious as to whether there's any steps you can take proactively over the next 12 months to further derisk your supply chain there.
Speaker Change: Increasing sourcing from other countries in southeast Asia or is it basically lower brand ramping in that 2026, plus timeframe that the real meaningful offset or any Cambodian supply disruptions here.
Speaker Change: We will do everything we can as we always have by the way even without.
Speaker Change: Potential disruption.
Speaker Change: It happens soon too.
Speaker Change: <unk>.
Speaker Change: So as NFC is from multiple geographies and multiple providers some of which we have.
Speaker Change: Long term contracts on which we buy.
Speaker Change: Markets some of which we have an ownership position like in Russia. So we will we'll do everything we can to.
Speaker Change: To protect ourselves in the eventuality that that doesn't go well obviously.
Speaker Change: The rest of the scientific community will provide the outlet valuable scientific input to the sales folks to make the decision.
Speaker Change: Underscore the criticality of.
Speaker Change: Of these animals for drug development, particularly for large molecules around the world.
Speaker Change: Given the fact that there are no.
Speaker Change: So we're guardedly optimistic that that will go well.
Speaker Change: It doesn't.
We will use multiple sources of supply.
Speaker Change: Obviously to try to satisfy the needs of our clients.
Speaker Change: Got it thanks for the color guys I appreciate it.
Speaker Change: Okay.
Speaker Change: Our next question today will come from Dave Windley at Jefferies.
Speaker Change: Hi.
Speaker Change: Jim You commented in your remarks about.
Speaker Change: Your expectations for demand.
Speaker Change: Throughout 2025.
And then also commented about pharma continuing its restructuring.
Speaker Change: May have seen in a couple of surveys we've done recently, where a number of large pharma.
Speaker Change: Respondents talk about expecting kind.
Speaker Change: The second round of restructuring.
Speaker Change: So my question to you is how much.
Speaker Change: Much visibility.
Speaker Change: Our clients able to give you on that type of thing for example.
Speaker Change: If there is another restructuring coming.
Speaker Change: And and the internal people seem to know about it are they sharing that with you.
Speaker Change: You are able to incorporate that in your expectations.
Speaker Change: And then kind of Relatedly your thoughts about 'twenty five as far out as the end of the year is that based on this type of conversation or are you just having to take a conservative posture given limited visibility.
Speaker Change: Hey, Dave.
Speaker Change: As we always do is close to our clients as possible, yes, we have a long term very senior relationships.
Speaker Change: With folks are pretty much every drug company.
Speaker Change: They depend heavily on us for a whole range of things many of them buy across our entire portfolio.
Speaker Change: Is there another shoe to drop here, we're not we're not hearing that I suppose anything is possible some of them have told us sit there.
Speaker Change: Moving away from that.
Speaker Change: We'll be spending more some of them have been asked that just in terms of their overall R&D expenditures, but we do anticipate it still is that it's not it's not over yet so.
Speaker Change: I think we have very good visibility as we possibly can have I mean, they're very much dependent on us doing the work for them. So they need to get out ahead of that in terms of bookings slots.
Speaker Change: Communicating with us in terms of how much work, they anticipate having us do or not do.
And when they get done with their infrastructure reductions, it's likely that they'll want to crank things up meaningfully forgetting that IMT filings, so maybe a discovery spending.
Speaker Change: So I do think it's incumbent upon them to to keep us well informed as I said earlier, we're just not going to make any overall assumptions on what's going to happen.
Speaker Change: Aside from let's say tell us is going to happen and so all we can do is stay in very close communication with them, which we do constantly.
Speaker Change: And so we anticipate that things won't deteriorate for those things will be stable there even if some have a second round. Some of them will be added will be out of that and we'll be moving forward. So it should be a decent upset.
Speaker Change: If I could ask a quick follow up in in the deck.
Speaker Change: Around DSA and pricing you highlighted that.
Speaker Change: In the current environment pricing has become a topic of discussion I wanted to clarify whether that.
Speaker Change: That was.
Speaker Change: In the current environment part of that is that kind of an extension of what you have been telling us or is this a signal that.
Speaker Change: Pricing is kind of the pricing demands from clients are intensifying and maybe taking another step down.
Speaker Change: Yes, no it is.
Speaker Change: Continuation.
Speaker Change: With the biotech guys.
Speaker Change: Where access to capital is difficult and even the big pharma companies, who have been reducing their infrastructure.
Speaker Change: They have been more price sensitive and of course as we've reported multiple times, we do have.
Speaker Change: Several competitors, particularly in the safety assessment business to compete with US primarily on price price becomes an issue and an opportunity for our clients.
Speaker Change: As we've also said, we both strategically and selectively we will utilize.
Speaker Change: Reduction in our own prices to either preserve.
Speaker Change: Garner new share.
Speaker Change: We don't go to the point of matching our competition because the price points, we feel would be too low given the.
Speaker Change: The complexity of the studies and the cost of the studies that we're doing so.
Speaker Change: Issue.
Speaker Change: The work that we've gone to continue to lean out our infrastructure, which I think we've done a really good job at allows us to be slightly more aggressive with our pricing if our cost structure is lower and still.
Speaker Change: Are you able to protect margins as well as possible. So a continuation of kind of a dialogue that we saw last year I don't think thats, a new intensification of that with regard to price.
Speaker Change: Got it appreciate the clarification. Thank you sure.
Speaker Change: Yes.
Speaker Change: Okay.
Speaker Change: Our next question will come from Ann Hynes at Mizuho.
Ann Hynes: Hi, Good morning, Thank you for the question.
Ann Hynes: Do you think is different about this downturn versus other downturns and do you think the recovery from this downturn with the different I guess, what I'm trying to get at it.
Speaker Change: You gave a long term growth rate.
Speaker Change: Right before the industry Alright decline do you think those growth rates will be intact post the recovery from this downturn or do you think there is a structural shift and the growth of any of your business lines.
Speaker Change: Yes.
Speaker Change: Yes.
Speaker Change: I don't think this downturn is.
Speaker Change: And the last time, we had a situation like this it was after the economic meltdown in that way. So we had a tough time.
Speaker Change: 10, 11 and 12.
During that period it was things were fundamentally different.
Speaker Change: Marketplace point of view number one.
Speaker Change: Many of our competitors, we now own so I think we have a bigger infrastructure.
Speaker Change: Principally.
Speaker Change: About safety assessment there were.
Speaker Change: A modest amount to biotech companies now.
Speaker Change: Hundreds if not thousands so many more companies that need that capability and in those days the.
Speaker Change: The big pharma companies were doing a lot of.
Speaker Change: Mortgage companies and they were doing a lot more work internally and Thats thats changed.
Speaker Change: That's changed fundamentally we also we in all of our competitors had built a lot of space.
Speaker Change: Really.
Speaker Change: And excess capacity, which.
Speaker Change: <unk> allows clients to really push pricing way down and margins down as well so situation isn't I mean, everything that I just said it's different.
Speaker Change: Thousands of biotech companies pharma is is much cleaner, we have I would say our capacity utilization isn't optimal and isn't where we'd like it to be but it's not nearly to the position that we.
Speaker Change: Were in previously so.
Speaker Change: The thing that's similar is the clients are.
Speaker Change: Approaching a patent cliff.
Speaker Change: And that's somewhat.
Speaker Change: That's helpful.
Speaker Change: Every decade or so we see that's happening. This one is pretty profound because there's a lot of very expensive drugs.
Speaker Change: Yeah.
Speaker Change: But we do think that.
Speaker Change: There is a necessity for all of our clients, both large and small to get back to work.
Speaker Change: As they feel comfortable doing that from an affordability point of view.
Speaker Change: The host of drug modalities right now to treat really tough diseases is the best it's ever been and there's definitely a lot of drugs that have not been.
Speaker Change: Pursued so they are either parked somewhere or.
Speaker Change: And then may be pockets, where the IND phase somewhere where Brian we're not seeing that as well so.
Speaker Change: We can't predict exactly what the recovery will be but it feels like a fundamentally different situation that the last time and it feels like there's a significant amount of pent up demand and need on the clients.
Speaker Change: Develop.
Speaker Change: These drugs as I said, Richard which are around.
Speaker Change: Very powerful and meeting unmet medical needs.
Speaker Change: Great and just as a follow up.
Speaker Change: Believe you said in 2025 Youre, assuming some growth in biotech can you just elaborate how much growth and why.
Yes in that growth.
I mean just.
Speaker Change: We began to see it tick up a little bit in the fourth quarter and we are in.
Speaker Change: It.
Speaker Change: Feels more stable than the big pharma folks and as I said everything that they do is outsourced so given the.
Speaker Change: Both current and anticipated inflows from the capital markets.
Speaker Change: The venture firms.
Speaker Change: We anticipate.
Speaker Change: An improvement.
Modest.
Speaker Change: A modest improvement that's embedded in that guidance.
Speaker Change: The modest improvement will not be sufficient to offset.
Speaker Change: The situation from the big pharma companies, who will be pretty much stable, but definitely not increasing.
Speaker Change: Great. Thank you.
Speaker Change: Yes.
Our next question will come from Justin Bowers at Deutsche Bank.
Justin Bowers: Hi, Good morning, everyone, just pivoting back to DSA, one clarification on <unk> question with the bookings being stable sequentially is that.
Justin Bowers: In terms of like the nominal bookings in that bookings or just on the book to Bill.
Justin Bowers: And then part two of this is can you can you just help us understand some of the underlying dynamics in DSA.
Justin Bowers: You discussed a fairly stable demand environment from the second half of the year stability in globals modest improvement biotech.
Justin Bowers: It looks like.
Justin Bowers: Organic is down mid single to high single in 2025. So is is is that delta is that price or mix or discovery, just sort of help us peel the onion back a little bit there.
Speaker Change: Let me just take the back half of the question then side they can take the beginning of it.
Justin Bowers: So it will be down.
Speaker Change: Similar range to last year.
Speaker Change: Lightly slightly more.
Speaker Change: Last year, the decline was principally volume.
Speaker Change: And this year, it's going to be sort of half price and half volume.
Speaker Change: So the prices coming through the backlog as we are concerned of the backlog and we actually do it.
Pricing.
Speaker Change: We're lower than that.
Speaker Change: Previously.
Speaker Change: So.
Speaker Change: The good news the good news about that is that we anticipated the volume decline will be lower than it was the prior year. So that's a good thing and but we do have a pricing headwind, which we should which we should move.
Speaker Change: Ru.
Speaker Change: For the balance of the year.
Speaker Change: And so the book to Bill question.
Speaker Change: Yes.
Speaker Change: And I was talking about.
Speaker Change: Growth in that book to Bill in my earlier comments about stability in sequentially in the fourth quarter versus the third quarter.
Speaker Change: Okay, and maybe just one more follow up on pricing.
Speaker Change: If we're looking at.
Speaker Change: The environment now.
Speaker Change: Call. It <unk> is it is it stable versus <unk> or.
Speaker Change: Any changes in either direction with respect to price.
Speaker Change: And DSS.
Speaker Change: I can take that Tim Yes, I think pricing is stable.
Speaker Change: That's the clarification, Dave Windley question that Jim provided additional color when we said the continuation of the environment, we started seeing.
Speaker Change: Some pricing headwinds in the in terms of the bookings we were taking as early as last year and we have signal throughout 2024.
Speaker Change: About that.
Speaker Change: Selective pricing selective discounting that we were conducting.
Speaker Change: That is now materializing and a price headwind in 2025, but we're not seeing a continuation of the erosion of pricing of what we are booking in 2025 towards the later part of 2025 by 2026, if that makes sense. So spot prices I'd say flattish to the end of the year.
Speaker Change: Understood. That's helpful. Thanks, so much.
Charles: We'll hear next from Charles re at TD Cowen.
Charles: Hi, This is Lucas on for Charles re wanted.
Speaker Change: I wanted to dig deeper into the manufacturing segment and the opportunities you see for margin expansion I understand that you guys are expecting margins to improve in 2025 year.
Speaker Change: Driven by microbial growth in microbial solutions.
Speaker Change: You also called out right sizing actions in ceding more business and potential for.
Speaker Change: To receive payments from clients to terminate their arrangements should we think about those two items as the opportunities to see improved margins or are there. Other items that you guys expect to benefit within this segment.
Jim I can take that if you once if I was answering the question about the menu manufacturing solutions margin expansion. So Lucas all the debt.
Speaker Change: Items that you.
Speaker Change: In addition to that.
Speaker Change: We've been looking at right sizing, our let's say staffing across the entire company all throughout last year.
Speaker Change: And the $225 million of.
Speaker Change: Cost savings that will annualize.
Speaker Change: Fully by 2026, but 175 of that will be in 2025 benefit all segments in all businesses within each of the segments right. So biologic solutions excuse me biologics testing microbial NCD memo.
Speaker Change: All had auctions in the works and then as I mentioned.
Speaker Change: We further enhanced the restructurings and CMO given the loss of those two commercial.
Speaker Change: Clients so the focus on margin.
Speaker Change: <unk> has been the case throughout.
Speaker Change: All of last year, and it's going to impact all businesses.
Speaker Change: Okay I appreciate that and then just as a follow up in your 10-K filing. It noted that one of your clients received a complete response letter from the FDA.
Speaker Change: Can you clarify whether this was one of the clients. The two clients that you discussed at Jpmorgan or if this is a new client the filing says it took place on January 25.
Speaker Change: It's one of the one of the two clients that we talked about at JP Morgan.
Speaker Change: Alright. Thanks.
Speaker Change: Sure.
Speaker Change: Our next question will come from Michael Riskin at Bank of America.
Speaker Change: Yeah.
Speaker Change: Great.
Speaker Change: For taking my question first I want to just thinking a little bit on margins for next year I think.
Speaker Change: You generally just said modestly down margins for 25 versus 24, I want to make sure my math is right.
Speaker Change: Once they go through the model sort of add on the share buyback and some of the other non-GAAP items I'm getting.
Speaker Change: Pretty close to down 100 bps something in that ballpark is that is that right or was modestly more than that like 10 to 20 bps.
Speaker Change: Year over year.
Speaker Change: Jim I can take that I think.
Speaker Change: We're going to let each of you interpret what we mean by modestly below.
Speaker Change: Update your models Accordingly, I know.
Speaker Change: You would rather have more quality quantitative guidance, then qualitative but.
Speaker Change: At this point, where we're going to stick with how we provided that color.
Speaker Change: Okay sure and then a quick follow up then.
Speaker Change: You touched on pricing a couple of times I. Appreciate your comments on sort of stable pricing in the answer you gave just a couple of questions go in terms of how price works to the backlog impact from 'twenty five that all makes sense, but I just kind of want take a step back and see how you think about pricing relative to historical levels Theres been a lot of price taken over the last couple of years, obviously youre seeing that as a headwind.
Speaker Change: Pull through now but.
Speaker Change: Maybe sort of ignoring the week to week month to month trends of is there a pricing stability or not do you feel like in general for your business and maybe for the market overall prices and a healthy level.
Speaker Change: Put in other words is could we be seeing something where you get some stability.
Speaker Change: Stability for a few quarters and then another reset or at least maybe stability for a few quarters, but you just don't have pricing power for several years because it is still a little bit on the more expensive side relative to historical it's going to take a step back and take a bigger view of the price question.
Speaker Change: I mean, it's tough to predict accept.
Speaker Change: This is a certainty.
Speaker Change: This cross that we're in and I was told that the biotechs relative to funding in the big the big guys relative to given your infrastructure and good day.
Speaker Change: <unk> is transitory for sure.
Speaker Change: And if you look at our safety assessment business just as an example, given it's such a large business and so impactful.
Speaker Change: Classic supply demand quotient and so as the demand rebuilds as more drugs more ind's are filed and pipelines get robust again and space gets tight again, which which it has.
Speaker Change: For years.
Speaker Change: Most recently as 'twenty, one and 'twenty, two and well again, we think for meaningful amount of time.
Speaker Change: We will have a meaningful amount of pricing power number widened price will be less of an issue for our clients and getting access to capacity in.
Speaker Change: And in a timely fashion will be will be paramount to them.
Speaker Change: As I said, which was half a year, so that's inevitable and that that will be coming back.
Speaker Change: We get price in the research model business every year for 76 years and will again in 2025.
Speaker Change: And we get pricing other businesses with great demand microbial in particular.
Speaker Change: And so.
Speaker Change: It's a very pure supply demand quotient.
Speaker Change: Okay.
Speaker Change: Mike just to come back to your question.
Speaker Change: As I said I'm not going to provide quantitative additional color, but just if helpful. For 2024. We just finished the year. We had said that margins were going to go down modestly and they ended up going down 40 bps. So if that's helpful. As you think about what our modestly moderately mean.
Speaker Change: <unk>.
Speaker Change:
Speaker Change: Just to provide some qualitative color.
Speaker Change: Okay. Thanks.
Speaker Change: Our next question will come from the line of Max Smock at William Blair.
Max Smock: Hey, good morning, Thanks for taking our questions I mean, just a quick one for me here.
Max Smock: Little bit surprised by the impairment for the biologics testing business I think over the last couple of quarters, you've talked about seeing a continued rebound in that sub segment. It seems like things are going well I know you touched on it a bit during the call, but can you just walk through the issues facing that business and how youre thinking about growth there from that sub segment in 2025, and then longer term, whether there has been a material change.
Max Smock: <unk> how are you thinking about the long term potential for that business, which I think going back to the analyst day, you pointed to as being a high single digit or maybe even 10% grow up longer term. Thank you.
Max Smock: Yeah I can take the question on the goodwill impairment. So we obviously do a goodwill assessment of all of our segments.
Max Smock: Annually and in in.
Max Smock: In this case the CMO business is part of.
Max Smock: The segment.
Max Smock: Where the goodwill charge was recorded so as.
Max Smock: You can imagine the loss of the two commercial clients. In addition to eight perhaps more.
Max Smock: Lower level of growth.
Max Smock: In those businesses versus what we had assumed at the time of acquisition was up.
Max Smock: Primarily primary drivers of the impairment.
Max Smock: So while there is still good growth potential, especially with cell and gene therapy. Once the market rebounds. It is at a lower level versus what we had assumed at time of acquisition and the.
Max Smock: The loss of those two commercial clients put additional pressure.
Max Smock: Does that help.
Speaker Change: Yes, Im sorry, maybe I misunderstood was there an impairment related to the it sounds like the impairment was entirely related to the CMO business, maybe misinterpreted your comments around it being related more towards the testing business itself, which again I think has been one of the better performing sub segments and your broader manufacturing business over the last couple of quarters.
Max Smock: Yeah.
Max Smock: The goodwill.
Max Smock: For the CMO business is combined with biologics testing in terms of the how the the segmented test that is conducted.
Max Smock: And so I would say if you think about what triggered that is mostly driven by the CMO adjustments not the biologics testing.
Max Smock: Got it. Thank you that's helpful.
Speaker Change: Our next question will come from Jacob Johnson at Stephens.
Jacob Johnson: Hey, Thanks, Good morning, I've got two on CDMA, then I'll just ask in combination one just clarification. Fabio you mentioned, maybe there is some contractual arrangements around the loss of these commercial customers is that something thats and it's contemplated in guidance is that something that is contemplated in the 1% headwind.
Jacob Johnson: From the loss of those customers and then the second question just.
Jacob Johnson: As velocities commercial customers and you disclosed the 43 in the 10-K is that impacted business development activities I think commercial therapy support as a good selling point as the loss of these these customers make things more difficult. Thanks.
Jacob Johnson: Al why don't I, just wanted to say for a second.
Jacob Johnson: Just take the second Bill Hudson quickly.
Jacob Johnson: Which is that.
Jacob Johnson: Obviously, we're around.
Jacob Johnson: Not thrilled with the lawsuit.
Jacob Johnson: Our largest commercial customer and the second one I would say, we would describe that more as well.
Jacob Johnson: Reduced revenue rather than lost but anyway, so I do think that having those classes.
Jacob Johnson: Has been helpful and beneficial to our sales effort by the same token.
Jacob Johnson: We have a fair number of clients.
Jacob Johnson: We havent continued to continue the cab.
Jacob Johnson: Many in the quarter.
Jacob Johnson: Clinical phase and southern late clinical phase So we should continue to see.
Jacob Johnson: Significant demand.
Jacob Johnson: That business is actually very well, Ryan right now and very well.
Jacob Johnson: Well staffed.
Jacob Johnson: Capabilities have been enhanced significantly and.
Jacob Johnson: So really in need of high quality providers. So.
Jacob Johnson: I don't think its helpful but.
Jacob Johnson: I think that we're going to continue to get this business notwithstanding the loss of those clients.
Jacob Johnson: And Jacob just to confirm the debt.
Jacob Johnson: The contractual obligations that.
Jacob Johnson: We have with one of those clients is contemplated in the guidance and embedded and included in the 100 basis points of headwind.
Jacob Johnson: We talked about.
Got it thanks for taking the questions.
Speaker Change: Our next question will come from the line of Patrick Donnelly at Citi. Please go ahead.
Jacob Johnson: Yeah.
Jacob Johnson: Okay.
Jacob Johnson: Hey, guys. Thank you for taking the questions.
Jacob Johnson: Columbia, maybe one more just on the book to Bill.
Jacob Johnson: Yes, with the $150 million step down in the backlog I was getting closer to kind of a <unk> 75 book to Bill, which would have been down from the low 0.9 range last quarter I know, you're saying, it's flat sequentially to what I guess, what am I missing is it FX or something in there I'm just trying to figure out the book to Bill comment if you could.
Jacob Johnson: Provide a little more color.
Jacob Johnson: Yeah.
Jacob Johnson: Yeah.
Jacob Johnson: To provide additional quantitative commentary other than to say.
Jacob Johnson: The math is.
Jacob Johnson: Mike.
Jacob Johnson: Flat.
Jacob Johnson: Order over quarter so.
Speaker Change: Don't know if FX is playing an impact in your model or remember you have nominated and denominator.
Jacob Johnson: You have the bookings, but also the revenue outlook that plays into it.
Jacob Johnson: So.
Jacob Johnson:
Jacob Johnson: It's flat.
Jacob Johnson: Both gross and net book to Bill Q4 versus Q3.
Jacob Johnson: Okay.
Jacob Johnson: I'll take a look at that.
Jim Foster: And then Jim maybe one for you just kind of.
Jim: Talk about the DSA margin outlook going forward you can certainly understand this year you have the pressure on the price and the revenue locking down mid to high single margin will go down with it.
Jim: You talked a little bit about the manufacturing long term margin outlook can you talk about DSA as we go forward here, how you think about the margin trajectory certainly a question we get a lot about where that goes over the next few years continue to contract or their path higher here and if there's a recovery can you just talk about I guess, the moving pieces inside DSA.
Jim: Can you talk a little bit about the pricing environment going forward.
Jim: But curious how you think about that margin trajectory over multiple years and DSA. Thank you guys.
Jim: We definitely don't think it will continue to contract. So you got two issues. One is three issue shortly when his significant leaning out of the infrastructure, there, which I think we've done a really good job at this year, both in terms of physical capacity.
Jim: And human capacity as well.
Jim: Coupled with technology.
Jim: Digitizing, the company and allowing our clients to <unk>.
Jim: Educated books studies themselves, how things need much less manual than people.
Jim: People oriented and as I said earlier as capacity and buy it.
Jim: The way, we're being very careful in terms of how much capacity, we add given what the demand is right now which is why our capex will be down but.
Jim: In 2025.
Jim: And.
Jim: As the capacity fills in the.
Jim: Backlog elongate.
Jim: We will be willing to pay more we've seen that as I said earlier for multiple years for long periods of time, where pricing suddenly becomes much less of an issue.
Jim: I would remind all of you that while the preclinical spend is not insignificant and its obviously very important to get the drug into the clinic, it's 20% to 25% of the cost of developing a drug in 17, 75% is in the clinic. So.
Jim: They can and should and will begin to spend more in discovery and early development. So if you combine those three.
Jim: Three issues, we should see improvement in operating margin I'm not going to give you a number or quantify that.
Jim: I think that could be meaningfully better than that going forward.
Jim: Understood. Thank you.
Jim: Okay.
Speaker Change: And Casey Woodring at J P. Morgan Your line is open.
Speaker Change: Great. Thanks for taking my question just have one two part question on the New administration.
Speaker Change: The first is on tariffs. So earlier this morning, President Trump's that he would likely impose a 25% tariff on pharmaceutical imports that could come as soon as April 2nd. So just any quick thoughts on how something like that would impact from a budget and that customers customer groups preclinical drug development spending and then second on the New administration, just kind of curious to hear your general thoughts.
Around how customers are thinking through any other potential impacts such as rfk's confirmation just given in the past you've talked about greater scrutiny of pharmaceutical approval.
Speaker Change: Any color you can share there. Thank you.
Speaker Change: Yeah, I mean, it would all be.
Speaker Change: So the speculation at this point, so we're really not hearing much from our clients.
Speaker Change: On the RFK.
Speaker Change: Situation and.
Speaker Change: You've talked a lot about food has talked a lot about vaccines spending and we'll just have to see how that pans.
Speaker Change: Pans out what impact if any will have on.
Both the rate and the quantity of new drugs being developed.
Speaker Change: What if anything will happen to the FDA.
Speaker Change: Have you seen.
Speaker Change: The situation this morning relative to the tariffs.
Speaker Change: Yes.
Speaker Change: <unk>.
Speaker Change: Trying to support U S development of drugs that could be beneficial to use drug companies.
Speaker Change: We'll just have to see how that plays out as well.
Speaker Change: Great.
Speaker Change: I think that concludes the questions for today's call.
Speaker Change: Thank you Sir yes, because that is the final question in our queue. Mr. Spencer I'm happy to turn it back to you Sir for any additional or closing remarks.
Speaker Change: Oh, sorry that was me.
Speaker Change: Yes, no that is that is the conclusion of the call. Thank you everyone for joining us this morning.
Speaker Change: That does conclude today's Charles River laboratories fourth quarter full year 2024 earnings conference call. Thank you for your participation and you may now disconnect your lines.
Speaker Change: [music].
Speaker Change: Mhm.
Speaker Change:
Speaker Change: Hum.
Speaker Change: [music].
Speaker Change: Yes.
Speaker Change: [music].
Speaker Change: Yeah.
Speaker Change: [music].
Speaker Change: [music].
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Yes.
Speaker Change: [music].
Speaker Change: Yes.
Speaker Change: [music].