Q2 2025 Charles River Laboratories International Inc Earnings Call

August 6, 2025

[music].

Ladies and gentlemen, thank you for standing by and welcome to the Charles River Laboratories second quarter 2025 earnings Conference call. This call is being recorded.

At this time all participants are in a listen only mode.

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

Good morning, and welcome to Charles River Laboratories, second quarter, 2025 earnings conference call and webcast.

This morning, I'm joined by Jim Foster share, President and Chief Executive Officer, and Bob The opinions Executive Vice President and Chief Financial Officer. They.

He will comment on our results for the second quarter of 2025, 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 two river dotcom.

A replay of this call will be available beginning approximately two hours after the call today and can also be accessed on our Investor Relations website.

The replay will be available through next quarters conference call.

I'd like to remind you of our safe Harbor, our remarks that we make about future expectations plans and prospects for the company constitute forward looking statements under the private Securities Litigation Reform Act of 1995.

Actual results may differ materially from those indicated.

During the call, we will primarily discuss non-GAAP financial measures, which we believe help investors gain a meaningful understanding of our core operating results and guide.

non-GAAP financial measures are not meant to be considered superior to or a substitute for results from operations prepared in accordance with job.

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.

Thank you Todd and good morning.

We reported another solid financial performance in the second quarter meaningfully exceeding our prior outlook due primarily to favorable Psa results.

Hey business benefited from the strong booking activity that was recorded in the first quarter and a corresponding lift in first half results is the primary driver leading us to raise our financial guidance for the year.

So ex that.

Favorable movements in foreign exchange also contributed to the outperformance in the second quarter.

And to our increased outlook for the year.

We have continued to see clear signs that the demand environment is stabilizing over the past several quarters global biopharmaceutical demand trends appear to have bottomed.

And we believe they are beginning to slowly move upward as more clients have progressed through the restructuring activities and getting back to work.

Biotech environment is stable, but mixed with smaller biotech still being more cash constrained due in part to the slowdown in biotech funding, whereas midsize biotech set performing better as many are able to support their own R&D programs without external funding.

DSA demand trends, coupled with constructive discussions with our biopharmaceutical clients have also reinforced our belief that the preclinical demand environment to stabilizing.

In the second quarter, both gross and net DSA bookings increased at mid single digit rates year over year, resulting in a solid 6% and 13% increases in first half gross and net bookings respectively.

While this bookings performance reflected an improving demand environment in the first half the net book to Bill dip back below one times in the second quarter.

To 0.82 times, which we had anticipated and it was largely driven by a sequential increase in cancellations and the DSA revenue outperformance.

We never expected a straight line recovery in that book.

Bill or broader DSA demand trends and in fact have often said that's a sustained improvement in our businesses will not be linear.

However, we are pleased that the net book to bill trends over the past 18 months have reflected a steady upward trajectory starting.

I think with a net book to Bill.

0.8 times in the first half of 2024 does their ultimate eight five times in the second half and most recently and probably the 0.93 times in the first half of this year.

<unk> business and our overall non-GAAP financial results continued to significantly outperform our expectations and we are making gradual progress towards achieving our return to organic revenue growth.

We recognize that some uncertainty persists across the broader health care landscape and as a result, we continue to take a measured and prudent approach to our outlook, while we have not factored in further demand improvements. This year. It is encouraging that the overall demand environment show signs of stabilization.

We have not observed any meaningful impact on client spending patterns stemming from tariffs or drug pricing concerns. Additionally, the effects of government funding reductions, including at the NIH have been minimal, which I will address further in a context of RMS results.

Before I provide more details on these trends, let me provide highlights of our second quarter performance and updated outlook for the year.

We reported revenue of $1 $3 billion in the second quarter of 2025.

0.6% increase over last year with nearly half of the revenue outperformance driven by foreign exchange.

And organic basis revenue declined 0.5% driven by a low single digit decline in the DSA segment, partially offset by low single digit revenue increases and the RMS and manufacturing segments.

By client segment revenue for small and midsize biotech clients improved slightly for a third consecutive quarter.

Revenue for global biopharmaceutical clients remained below last year's level, but did improve sequentially from the first quarter.

Revenue for global academic and government clients increased at a mid single digit rate in the quarter.

The operating margin was 22, 1% increase of 80 basis points year over year with margin improvement across all three segments, primarily reflecting the benefit of cost savings from our previous restructuring actions and operating leverage from better than expected first half sales volume you.

You may recall that we are on pace to generate run rate of over $175 million in cost savings. This year. In addition, the CMO business benefited from revenue and payments from commercial clients most of which will not repeat in the second half of this year as we've previously disclosed.

Earnings per share were $3 12 in the second quarter, an increase of 11, 4% from the second quarter of last year.

Margin improvement.

Primary driver of this robust earnings growth most of the earnings outperformance versus our prior outlook was operationally driven.

And an additional 12 benefit from a lower than expected tax rate.

Flavio will provide more details on the tax rate shortly including our second half tax headwind from the new U S legislation.

We are raising our revenue and non-GAAP earnings per share guidance largely to reflect the outperformance in the quarter. We are increasing our 2025 organic revenue guidance by 150 basis points.

Through a 1% to 3% decrease and raising our non-GAAP earnings per share guidance by 55 at midpoint to $9 90 to $10 30.

In addition to the DSA driven operational outperformance full year's guidance will benefit by 14th from more favorable FX rates versus our may outlook below the line items will largely offset each other as the second half tax headwind I, just mentioned will be offset by lower interest expense.

For the year.

I will now provide details on the second floor to segment performance beginning with the DSA segment revenue.

Revenue from the DSA segment was $618 million in the second quarter a two.

Two 4% decrease year over year on an organic basis.

Driven by lower revenue for both discovery and safety assessment services.

Lower sales volume was partially offset.

By a favorable mix of higher priced longer duration and specialty studies again this quarter.

Consistent with our commentary in May which is.

The favorable mix.

It does not signal a broader improvement in the pricing environment and as we continue to believe that spot pricing remains stable overall.

Moving to the DSA demand kpis the DSA backlog.

Was.

$193 billion at the end of the second quarter slight decline from $1 99 billion last quarter.

As I mentioned gross and net bookings both improved at mid single digit rates year over year in the second quarter, but clients sequentially, primarily for global Biopharma clients. The sequential decline in the net book to Bill was not a surprise. We had previously said that global biopharmaceutical clients started the strong.

With the resurgence of booking activity for projects that they had delayed do you prioritize at the end of last year and wanted to start quickly. However, we did not expect the first quarter bookings strength to continue through the remainder of the year.

Proposal activity for global biopharmaceutical companies increase at a healthy pace in the second quarter.

Both year over year, and sequentially, which reinforces our belief that demand for this client base is stabilized.

You may and Kpis for small and midsize biotech clients remained consistent with the overall trends that we've described in the first quarter with little change aside from a moderate decline in proposal activity supporting IV.

Lee that demand for this client base is also stable.

We also experienced an increase in DSA cancellations in both client segments to levels consistent with the first half of 2024.

But higher than the last three quarters to higher cancellations were a more focus on longer term post <unk> work.

Trends have cumulatively resulted in quarterly net bookings of $506 million and a net book to Bill 082 times.

Below one times for the quarter first half net book to Bill was at its highest level since the end of 2022 and reflects an upward demand trajectory compared to recent years.

Reflecting our solid second quarter performance and the DSA kpis that underpin our outlook. We now expect DSA organic revenue will decline at a low to mid single digit rate in 2025, an improvement from our prior outlook of a mid single digit decline.

The demand environment continues to support our outlook for the year, which is not predicated on the net book to Bill returning to one times. Furthermore.

We believe the DSA business has stabilized and is beginning to show signs of gradual progress.

In support of our improved demand outlook, we have begun to modestly increase staffing levels. The DSA segment.

We are doing so to ensure we can fully support our clients' programs and to position resources appropriately for the second half of this year.

Due to the increased hiring DSA head count costs are expected to create a headwind of approximately $10 million in the second half when compared to first half levels, which is one of the factors contributing to the company's second half operating margin outlook.

For the second quarter. The DSA segment reported another solid operating margin, increasing by 30 basis points year over year to 27, 4% in the second quarter.

This was primarily a result of the operating leverage from better than expected demand that we accommodated without meaningful head count increases in the quarter as well as the benefit of product cost savings actions.

Before I provide commentary on the RMS and manufacturing segments I would like to provide an update on our NAND strategy or new approach methods.

Recently updated the board on our roadmap and strategic imperatives to continue to build a growing <unk> portfolio.

As we said last quarter, we firmly believe that utilizing more nims enabled approaches will be a gradual long term transition by our clients and thats a scientific capabilities to fully replace animal models do not exist today.

As the leader in preclinical drug development, we have the scientific capabilities regulatory expertise and access to data that make us the logical partner for bio <unk>.

Circle companies to advance they use advance.

And alternative technologies over time.

We already have a growing the ams portfolio that is generating a meaningful amount of revenue or approximately $200 million in annual DSA revenue and increased interest from our clients and.

In addition to some of the well established capabilities that we discussed in May. We are also working on enhancing our NAND solutions across many of our DSA sites. For example in Montreal, we are working on developing an in vitro liver on a chip assay to replace in vivo.

<unk> Tox testing I've sat in Hungary is working on a number of in vitro models for advanced modalities, including using steroids long term metabolism studies.

Our team in Denver US continues to develop and validate a growing number of in vitro assays for regulated safety assessment.

And our retro <unk> business has generated considerable interest for their in vitro off target screening platform.

Overall client interest in our managed portfolio continues to build one of our top priorities in the coming years will be to continue expanding this portfolio of premier and <unk> capabilities through a combination of partnerships.

Because of the timing of NH peak revenue and normal seasonality in the small models business.

Elective M&A and internal development, we look forward to continuing to update you on our progress towards NAND enabled future.

Revenue for the manufacturing segment was $208 million or two 9% increase on an organic basis from the second quarter of last year.

RMS revenue is $213 3 million an increase of two 3%.

The revenue improvement was driven by another solid quarter from our microbial solutions business as well as revenue from commercial CD ammo clients, most of which will not repeat in the second half of the year as one relationship has wound down creating an anticipated revenue and margin headwind.

Inorganic basis compared to the second quarter of 2020 for.

The year over year revenue increase was primarily driven by the timing of NIH P shipments and higher revenue for research model services, including in the gems and insourcing solutions businesses.

<unk> testing business had another slow quarter due to project delays associated with regulatory or funding issues for several clients.

The overall trends in the RMS segment.

System from our commentary last quarter as little has changed aside from the typical quarterly modulations and the timing of NH P shipments to third party clients in China and for Novo trend.

Collectively we continue to expect manufacturing revenue will be essentially flat on an organic basis. This year, which is similar to the first half performance.

As a result, we are maintaining our RMS revenue outlook for the year are flat to slightly positive organic growth.

The microbial solutions business reported another quarter of robust growth led by our active janet's microbial identification services and Celsis microbial detection platform.

Third quarter is expected to be an even stronger quarter for HP revenue due to the acceleration of certain shipments from the fourth quarter.

And to say if also performed well as clients continue to choose our leading portfolio of rapid manufacturing quality control testing solutions.

Revenue from both our academic and government clients segments increased in the second quarter. Despite frequent headlines about potential NIH budget cuts.

Believe microbial solutions is well positioned to grow at a high single digit revenue growth rate for the year as it did in the first two quarters.

We have only experienced a small impact from the uncertainty in Washington, due to a modest reduction in scope and insourcing solutions contract for the NIH National Institute on aging.

The cell and gene therapy, CMO business reported essentially flat revenue.

Totally unexpected revenue loss of approximately $3 million annually beyond that we have not experienced any meaningful revenue loss related to NIH budgets today.

<unk> related to work for one commercial cell therapy client to wind down and transfer their program and revenue from our gene therapy offering also continued to be strong.

As a reminder, north American academic and government client base represents just over 20% of total RMS revenue or approximately 6% of total company revenue.

While our CMO relationship with one commercial client has ended we look forward to continuing to work on other commercial cell therapy program going forward.

Collectively we expect the loss of commercial CMO revenue will reduce the manufacturing solutions growth rate by less than 500 basis points for the year. However.

In addition demand for and sourcing solutions Cradle operations is tracking as planned and occupancy remains stable since our last update.

<unk> revenue grew nicely in the second quarter when normalized for the commercial cell therapy revenue impact.

Rental revenue increased slightly in the second quarter versus the prior year, but as we discussed in may demands from early stage biotech clients for our services remains constrained this year due to funding challenges.

We are continuing to enhance the quality of our operations build our gene therapy presence and reinforce our healthy pipeline of biotech clients with early stage clinical candidates and are continuing to gain traction with those clients.

Revenue for small research models in all geographic regions was relatively flat overall.

Higher pricing continue to offset unit volume declines.

The manufacturing segment's operating margin increased by 620 basis points to 32, 8% in the second quarter due principally to revenue and payments from commercial CMO clients as well as operating leverage for microbial solutions robust growth.

There was an exception as volume continues to increase, albeit at a more moderate pace than historical levels.

Second quarter, the RMS operating margin increased by 220 basis points to 25, 3%.

Due to the fact that revenue from one commercial CMO client will not repeat we do not expect the manufacturing operating margin to be above 30% level for the second half of the year.

The improvement was primarily due to a favorable mix resulted from higher <unk> revenue and higher revenues from research model services as well as the benefit of cost savings, resulting from our restructuring initiatives.

We believe progress we have made on our cost structure and the operating leverage.

We expect the third quarter RMS operating margin will also be robust due to the favorable timing of that HP shipments that are accelerating into the third quarter, followed by a moderation of our fourth quarter operating margin due to the timing of NHK revenue and normal seasonality small models business.

We are able to generate from the robust growth in the microbial solutions business.

The higher manufacturing up.

For the year.

Before I absolutely.

Great.

Our strategic vision.

And ill provide NH.

Revenue for the manufacturing segment was $208 million at two 9% increase on <unk>.

NH.

First the strategic review is well underway.

The progress we've made so far.

Organic basis from the second quarter of last year.

This thorough process takes time, but we are moving forward with a sense of urgency and do not intend to provide updates until the strategic review has been completed.

The revenue improvement was driven by another solid quarter from our microbial solutions business as well as revenue from commercial CD ammo clients.

It's a comprehensive process that is evaluating multiple avenues for value creation, including a strategic review of our portfolio.

Most of which will not repeat in the second half of the year as one relationship has wound down creating an anticipated revenue and margin headwind.

Capital allocation strategy and market position, while balancing it with the understanding that the strength and value of Charles River lies within our broad scientifically distinguished portfolio and leading non clinical market position that truly differentiates us from the competition.

The biologics testing business had another slow quarter due to project delays associated with regulatory or funding issues for several clients.

Collectively we continue to expect manufacturing revenue will be essentially flat on an organic basis. This year, which is similar to the first half performance.

Our goal is to further enhance long term shareholder value and we continue to believe that the company remains undervalued.

The microbial solutions business reported another quarter of robust growth led by our active <unk> microbial identification services and Celsis microbial detection platform.

We are pleased with the progress that we've made this year at the company, including the substantially better performance of the DSA segment and actions to unlock value through stock repurchases and cost savings, which we believe leaves us well positioned for the future.

And the safe also performed well as clients continue to choose our leading portfolio of rapid manufacturing quality control testing solutions.

With regards to the NHS supply update in July the department of interior and U S fish and Wildlife service.

We believe microbial solutions is well positioned to grow at a high single digit revenue growth rate for the year as it did in the first two quarters.

For legal entry into the United States all of the NHS shipments from Cambodia from late 2022 in early 2023 that were under investigation. In addition, we have been informed that the U S Department of Justice is no longer conducting investigations into these shipments.

The cell and gene therapy, CMO business reported essentially flat revenue.

Principally related to work for one commercial cell therapy client to wind down and transfer their program and revenue from our gene therapy offering also continued to be strong.

While our CMO relationship with one commercial client has ended.

Positive developments validate what we have said from the start once the Doj investigators they would conclude that any concerns with respect to Charles for misconduct.

We look forward to continuing to work on other commercial cell therapy program going forward.

<unk>, we expect a loss of commercial CMO revenue will reduce the manufacturing solutions growth rate by less than 500 basis points for the year. However.

Merit.

I would like to thank our shareholders clients and employees for their patience and support as we navigate this process now.

Now Flavio will provide additional details on our second quarter financial performance and updated 2025 guidance.

<unk> revenue grew nicely in the second quarter when normalized for the commercial cell therapy revenue impact.

We are continuing to enhance the quality of our operations Bill that gene therapy presence and reinforce our healthy pipeline of biotech clients with early stage clinical candidates and are continuing to gain traction with those clients.

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.

Costs related primarily to restructuring actions gains or losses from certain venture capital and other strategic investments and certain other items.

Many of my comments will also refer to organic revenue growth, which excludes the impact of acquisitions.

<unk> and foreign currency translation.

Due to the fact that revenues from one commercial CMO client will not repeat we do not expect the manufacturing operating margin to be above 30% level for the second half of the year. However.

We are pleased with our second quarter performance.

Included revenue and non-GAAP earnings per share exceeding the outlook provided in may.

This outcome was primarily driven by operational improvement from better than expected DSA results and to a lesser extent <unk> 12 benefit from lower tax rate and a three point benefit from favorable FX rates in the quarter.

We believe the progress we have made on the cost structure and the operating leverage that we are able to generate from the robust growth in the microbial solutions business will result in a higher manufacturing operating margin for the year.

Before I conclude I would.

As a result of the second quarter outperformance.

I'd like to briefly address our ongoing strategic review and also provide a positive update on NHS supply.

<unk>, our revenue and non-GAAP earnings per share guidance.

We now expect full year reported revenue will decline.

First the strategic review is well underway and I am encouraged by the progress that we've made so far.

Five to two 5% and organic revenue declined 1% to 3%.

This thorough process takes time, but we are moving forward with a sense of urgency and do not intend to provide updates until the strategic review has been completed.

non-GAAP earnings per share are now expected to be in a range of $9 90.

The $10 and 30.

A comprehensive process that is evaluating multiple avenues for value creation, including a strategic review of our portfolio.

The 55 guidance range for 2025 at midpoint is expected to be driven by two main components operational outperformance in the second quarter and a favorable movement in foreign exchange rates from our forecasted mate.

As you May recall, we forecast FX based on recent bank forecast rates rather than current rates.

On the continued weakness of the U S. Dollar we now expect foreign exchange will represent an approximate 50 basis point tailwind to 2025 revenue compared to our prior outlook of an approximate 1% headwind.

Our goal is to further enhance long term shareholder value.

Continue to believe that the company remains undervalued.

This 150 basis points of revenue benefit translates into about a 14% contribution to EPS with most of this EPS benefit in the second half of the year.

With regards to the NHS supply update in July the department of interior and U S fish and Wildlife service.

Our outlook for the tax rate and interest expense has also been updated since may but the net EPS impact.

For legal entry into the United States all of the NXP shipments from Cambodia from late 2022 in early 2023 that were under investigation. In addition, we have been informed that the U S Department of Justice is no longer conducting investigations into these shipments.

Largely offset each other.

I'll discuss each of these items shortly.

Our updated EPS guidance implies that the second half operating margin will be below the first half level of 27%.

Positive developments validate what we have said from the start.

This is largely for reasons consistent with our expectations at the start of the year.

Once the Doj investigators they would conclude that any concerns with respect to Charles River misconduct.

And the gap was further widened by our first half outperformance.

Mary.

I would like to thank our shareholders clients and employees for their patients.

For the year, we now expect the consolidated operating margin will be in a range between flat and a 30 basis point decline, which represents an improvement from our prior expectation of a 20 to 50 basis point decline.

And support as we navigated this process now.

Now Flavio will provide additional details on our second quarter financial performance and updated 2025 guidance.

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.

Due to our outperformance to date and operating leverage from the increased revenue outlook.

Our full year operating margin outlook also includes several headwinds which are occurring in the second half of the year.

Costs related primarily to restructuring actions gains or losses from certain venture capital and other strategic investments and certain other items.

The first headwind is in the CMO business and primarily relate to commercial cell therapy revenue that will not repeat in the second half.

Many of my comments will also refer to organic revenue growth, which excludes the impact of acquisitions.

Since one commercial relationship has ended.

The CMO revenue generated from this client was sizable in the first half at approximately $20 million.

Stitches and foreign currency translation.

We are pleased with our second quarter performance.

Included revenue and non-GAAP earnings per share exceeding the outlook provided in may.

The second is hiring in the DSA segment, where we need more people in order to accommodate the current and forecasted demand.

This outcome was primarily driven by operational improvement from better than expected DSA results and to a lesser extent 812 cent benefit from lower tax rate and a three point benefit from favorable FX rates in the quarter.

As Jim mentioned additional DSA staffing in the second half represents an approximate $10 million cost headwind versus the first half.

And finally, the timing of annual Merit increases for our employees was at the beginning of July this year in most geographies, which creates a headwind when comparing to the first half.

As a result of the second quarter outperformance.

Raising our revenue and non-GAAP earnings per share guidance, we now expect full year reported revenue will decline.

To be clear the CMO and merit timing related headwinds were known and contemplated in our initial outlook.

Five to two 5% and organic revenue declined 1% to 3%.

non-GAAP earnings per share are now expected to be in a range of $9 at 92.

Our decision to begin investing back into DSA head count was a result of the <unk>.

$10 and 30.

<unk> demand trajectory this year and to appropriately position staffing levels for the remainder of 2025 and as we move into next year.

By segment, our updated revenue outlook for 2025 can be found on slide 33.

Aside from FX modifications to the reported growth rate the only change to our segment revenue outlook is that due primarily to the second quarter outperformance. We now expect DSA organic revenue to decline at a low to mid single digit rate.

As you May recall, we forecast FX based on recent bank forecast rates rather than current rate base.

Based on the continued weakness of the U S. Dollar we now expect foreign exchange will represent an approximate 50 basis point tailwind to 2025 revenue compared to our prior outlook of <unk>.

Rather than our prior outlook of a mid single digit decline.

And as a reminder, this does not require an improvement in our net book to Bill metrics.

<unk>, 1% headwind.

This 150 basis point revenue benefit translates into about a 14% contribution to EPS.

And for the RMS and manufacturing segments, those outlooks remain unchanged.

Unallocated corporate costs totaled $67 million in the second quarter or five 9% of revenue compared to four 9% of revenue last year.

Most of this EPS benefit in the second half of the year.

Our outlook for the tax rate and interest expense has also been updated since may but the net EPS impact will largely offset each other.

The increase was primarily due to higher performance based compensation.

I'll discuss each of these items shortly.

The higher bonus accruals will also result in an incremental earnings headwinds in the second half.

Our updated EPS guidance implies that the second half operating margin will be below the first half level of 27%.

Which is the opposite impact of last year when bonuses were a tailwind.

As a result for the full year, we now expect unallocated corporate costs will be at approximately five 5% of total revenue or the upper end of our prior outlook of five to five 5%.

This is largely for reasons consistent with our expectations at the start of the year.

And the gap was.

Further widened by our first half outperformance.

I'll now provide an update on the non operating items, starting with our favorable outlook for interest expense and a higher tax rate expectations for the year.

As I mentioned these items will largely offset each other and not have a meaningful impact on our EPS guidance.

Our outperformance to date and operating leverage from the increased revenue outlook.

Total adjusted net interest expense was $28 9 million in the second quarter, representing an increase of $2 $4 million sequentially.

Our full year operating margin outlook also includes several headwinds which are occurring in the second half of the year.

The first headwind is in the CMO business and primarily relate to commercial cell therapy revenue that will not repeat in the second half.

This increase was primarily driven by the impact from short term borrowings to facilitate the first quarter stock repurchases.

One commercial relationship has ended.

The full year, we now expect.

Net interest expense will be in a range of $100 million to $105 million or approximately $7 million to $12 million lower than our prior outlook.

The CMO revenue generated from this client was sizable in the first half at approximately $20 million.

The second is hiring in the DSA segment, where we need more people in order to accommodate the current and forecasted demand.

This improvement will primarily be a result of a diligent capital planning activities, including shifting that to lower interest rate geographies.

As Jim mentioned additional DSA staffing in the second half represents an approximate $10 million cost headwind versus the first half.

At the end of the second quarter, we had outstanding debt of $2 $3 billion with.

<unk>, 65% at a fixed interest rate compared to $2 5 billion at the end of the first quarter.

And finally, the timing of annual Merit increases for all employees was at the beginning of July this year in most geographies, which creates a headwind when comparing to the first half.

As a result of debt repayments the growth and net leverage ratios also declined to two three times at the end of the second quarter.

To be clear the CMO and merit timing related headwinds were known and contemplated in our initial outlook.

The non-GAAP tax rate in the second quarter was 22, 7%, representing an increase of 160 basis points year over year.

Our decision to begin investing back into DSA head count was the result of the improved demand trajectory this year and to appropriately position staffing levels for the remainder of 2025 and as we move into next year.

The increase was primarily due to the impact from stock based compensation.

However, the second quarter tax rate was more favorable than our prior expectation.

Benefitting EPS by approximately 12 six.

By segment, our updated revenue outlook for 2025 can be found on slide three.

Cause of the timing of the enactment of certain global minimum tax provision as well as an increase in foreign tax credits.

Aside from FX modifications to the reported growth rates the only change to our segment revenue outlook is that due primarily to the second quarter outperformance. We now expect DSA organic revenue to decline at a low to mid single digit rate better than our prior outlook of a mid.

For the full year the tax rate will now be an earnings headwind that had not been anticipated at the beginning of the year.

This will more than offset the second quarter favorability because of U S tax legislation changes enacted on July 4th as part of the one Big Beautiful Bill Act or Ob, three which allows for accelerated bonus depreciation and expensing for domestic R&D expenditures.

Single digit decline.

And as a reminder, this does not require an improvement in our net book to Bill metrics.

And for the RMS and manufacturing segments, those outlooks remain unchanged.

These changes will increase the effective tax rate in the short term, but generate over $40 million of cash tax savings this year, and therefore increase free cash flow.

Unallocated corporate costs totaled $67 million in the second quarter of <unk>.

Five 9% of revenue compared to four 9% of revenue last year.

The increase was primarily due to higher performance based compensation.

We expect the non-GAAP tax rate in the third quarter will be elevated to the 25% to 30% range due to the enactment of Ob three and expected enactment of certain global minimum tax provisions.

The higher bonus accruals will also result in an incremental earnings headwind in the second half, which is the opposite impact of last year when bonuses were a tailwind.

For the full year, we now expect our non-GAAP tax rate outlook will increase by approximately 100 basis points to a range of 23 five.

As a result for the full year, we now expect unallocated corporate costs will be at approximately five 5% of total revenue or the upper end of our prior outlook of five to five 5%.

So 24, 5%.

Free cash flow for the second quarter remains strong at $169 $3 million, an increase from $154 million last year.

I'll now provide an update on the non operating items, starting with our favorable outlook for interest expense.

The higher tax rate expectations for the year.

The improvement was primarily driven by higher earnings and improved working capital.

As I mentioned these items will largely offset each other and not have a meaningful impact on our EPS guidance.

Capex was $35 $3 million or approximately 3% of revenue in the second quarter compared to $39 $5 million last year, reflecting our focus on disciplined capital spending.

Total adjusted net interest expense was $28 9 million in the second quarter, representing an increase of $2 $4 million sequentially.

For the year, we expect that free cash flow will be $430 million to $407 million, an increase from our power outlook of $350 million to $390 million, primarily driven by stronger earnings anticipated cash tax savings, resulting from the recent past.

This increase was primarily driven by the impact from short term borrowings to facilitate the first quarter stock repurchases.

For the full year, we now expect.

Total net interest expense will be in a range of $100 million to $105 million or approximately $7 million to $12 million lower than our prior outlook.

Legislation changes.

And continued working capital management.

This improvement will primarily be a result of our diligent capital planning activities, including shifting that to lower interest rate geographies.

Capex.

Approximately $230 million consistent with our prior outlook and continues to be well below our peak capital spending in recent years.

At the end of the second quarter, we had outstanding debt of $2 3 billion with approximately 65% at a fixed interest rate compared to $2 5 billion at the end of the first quarter.

Strong free cash flow generation is one of the hallmarks of Charles River and the increase this year will enable us to repay debt more quickly and position us to continue investing in our strategic priorities.

As a result of debt repayment the growth and net leverage ratios also declined to two three times at the end of the second quarter.

A summary of our 2025 financial guidance can be found on slide 39.

The non-GAAP tax rate in the second quarter was 22, 7%, representing an increase of 160 basis points year over year.

Looking ahead to the third quarter, we expect reported and organic revenue will decline between 2% to 4% year over a year.

As I mentioned earlier, we expect manufacturing and DSA revenue will decrease moderately in the third quarter, partially offset by higher RMS revenue due to the favorable timing of NH. These shipments in the quarter.

The increase was primarily due to the impact from stock based compensation.

However, the second quarter tax rate was more favorable than our prior expectation.

<unk> EPS by approximately <unk> 12 sites because of the timing of the enactment of certain global minimum tax provisions as well as an increase in foreign tax credits.

Portion of which accelerated from the fourth quarter.

non-GAAP earnings per share I expect that to decline at a low double digit rate year over year, reflecting the impact of lower commercial revenue and associated client payments and the CMO business.

For the full year the tax rate will now be an earnings headwind that had not been anticipated at the beginning of the year.

And increased staffing in the DSA segment as well as the meaningfully higher tax rate within the 25% to 30% range for the quarter.

In conclusion, we are pleased with our performance through the first half of the year, which reflects stronger than expected demand and solid operational execution.

These changes will increase the effective tax rate in the short term, but generate over $40 million of cash tax savings this year, and therefore increase free cash flow.

Our restructuring program the goal of which has been to reduce our cost structure by over 5% is on track to deliver annualized cost savings of over $175 million in 2025, and approximately $225 million in 2026.

We expect the non-GAAP tax rate in the third quarter will be elevated to the 25% to 30% range due to the enactment of Ob three and expected enactment of certain global minimum tax provisions.

In addition, the repurchase of $350 million in shares during the first quarter reinforces our commitment to maximize shareholder value and diligently deployed capital.

For the full year, we now expect our non-GAAP tax rate outlook will increase by approximately 100 basis points to a range of $23 five to.

We remain confident in the resilience of our business and are committed to be financially disciplined as we drive long term value creation.

24, 5%.

Thank you.

Free cash flow for the second quarter remains strong at $169 $3 million, an increase from $154 million last year.

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

At this time, if you would like to ask a question. Please press the star and <unk> on your telephone keypad keep in mind, you can remove yourself from the question queue at any time by pressing star and two in the interest of time, we do ask our investors limit themselves to one question and one follow up.

The improvement was primarily driven by higher earnings and improved working capital.

Capex was $35 3 million or approximately 3% of revenue in the second quarter compared to $39 $5 million last year, reflecting our focus on disciplined capital spending.

We will take our first question from Elizabeth Anderson with Evercore ISI. Please go ahead. Your line is open.

Hi, guys. Thanks for the question and congrats on the quarter.

I was wondering if you could just talk about the current demand environment I. Thanks for the commentary about the differentiation between the different.

Biotech segment that was helpful. But maybe could you hit upon sort of how pharma thinking about the current demand environment and then anything that you've seen in July and early August it would be very helpful. Thank you.

Tax legislation changes and continued working capital management.

Sure.

Capex will be approximately $230 million consistent with our prior outlook.

We will stay away from July, but suffice it to say that that's baked into our guidance going forward.

Continues to be well below our peak capital spending in recent years.

We're pleased with the.

The demand situation is definitely stabilizing for pharma.

Feel that sees some of the demand trends.

Bottoms.

Revenue was up sequentially proposals are up year over year and sequentially.

A summary of our 2025 financial guidance can be found on slide 39.

So cancellations, but that's sort of a commentary on the longer term post sandy work for some of these programs.

Looking ahead to the third quarter, we expect reported and organic revenue will decline between Q2, 4% year over year.

Yes, we had this big resurgence of bookings in the first quarter, having to do with <unk>.

Projects that clearly were delayed at the end of 2024. So we've got a bunch of bookings in the first quarter, which helped us significantly in the second quarter.

I mentioned earlier, we expect manufacturing and DSA revenue will decrease moderately in the third quarter, partially offset by higher RMS revenue due to the favorable timing of <unk> shipments in the quarter, a portion of which accelerated from the fourth quarter.

But won't necessarily repeat but China feels stable and improving and a lot of the.

Improvements and changes in their cost structure.

Good.

non-GAAP earnings per share are expected to decline at a low double digit rate year over year, reflecting the impact of lower commercial revenue and associated client payments and the CMO business.

The government sort of product lines have been.

Give me back.

Biotechs, just a tale of two cities also the demand seems stable, but it's a bit mix.

The smaller companies continue to be cash constrained.

And increased staffing in the DSA segment as well as the meaningfully higher tax rate within the 25% to 30% range for the quarter.

Until the IPO market and secondary market opens up it probably if we're continuing scenario I'm not probably I think definitely that's continuing scenario.

The mid tier mid tier biotech companies seem to be performing better in seem to have enough money to sort of prosecute and develop the drugs that they have.

In conclusion, we are pleased with our performance through the first half of the year, which reflect stronger than expected demand and solid operational execution.

And their portfolios.

Revenue improved slightly year over year for the third consecutive quarter.

Cancellations were also pretty much for the same reasons.

And I think we're most pleased with.

If you take a look.

DSA net book to Bill.

Steady upward trajectory for the last 18 months so.

In addition, the repurchase of $350 million in shares during the first quarter reinforces our commitment to maximize shareholder value and diligently deployed capital.

I guess the bottom line is that we have stabilization across all client bases farmers seem stronger right now just given.

Their access to capital for instance.

We remain confident in the resilience of our business and are committed to be financially disciplined as we drive long term value creation. Thank you.

Aspects of biotech.

Strengthening as well, but we have to what we have to watch the ones that are cash constrained.

I think we call that while there's fair amount of uncertainty out there in the marketplace and with the government and obviously with access to capital as well.

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

At this time, if you would like to ask a question. Please press the star and one key on your telephone keypad keep in mind, you can remove yourself from the question queue at any time by pressing star and two in the interest of time, we do ask our investors limit themselves to one question and one follow up.

We feel good about guidance for the balance of the year.

Got it no that's very helpful.

And maybe just one clarifying question you had mentioned that the new revenue guide you don't need book to Bill to go back above one is it fair to say.

That it should be sort of at at current levels going forward in terms of how youre thinking about that or its fair to say that maybe it would just look at sort of the general seasonality entered.

We will take our first question from Elizabeth Anderson with Evercore ISI. Please go ahead. Your line is open.

DSA revenue performance and that's kind of the way to think about it in the back half of the year.

Hi, guys. Thanks for the question and congrats on the quarter.

Yeah.

I think that's one of them.

I was wondering if you could just talk about the current demand environment I. Thanks for the commentary about the differentiation between the different.

Sure Hi, Elizabeth I think.

You should think of the current ZIP code for the first half.

Biotech segment that was helpful. But maybe could you hit upon sort of how pharma is thinking about the current demand environment and then anything that you've seen in July and early August it would be very helpful. Thank you.

Continuation towards the second half.

I know you talked a little bit about the second quarter being six.

Seasonally low and we did see that for the last few years.

Sure.

And then things rebound a little bit, but I think overall, we have seen this steady improvement for the last 18 months as Jim said right.

We will stay away from July, but suffice it to say that that's baked into our guidance going forward.

We're pleased with the demand situation is definitely stabilizing for pharma you feel that these some of the demand trends.

And we're not as you pointed out expecting a book to Bill two returned to above one to meet our guidance, but to stay within you know over the last 18 months have been between eight and 9.3.

Bottoms.

Revenue was up sequentially proposals are up year over year and sequentially and cancellations, but thats sort of the commentary on the longer term <unk> work for some of these programs.

3.93, excuse me for.

For the first half of this year. So in that general range is I think what you can continue to expect.

Got it thank you very helpful.

We had this big resurgence of bookings in the first quarter, having to do with <unk>.

We'll take our next question from Eric Coldwell with Baird. Please go ahead. Your line is open.

Projects that clearly were delayed at the end of 2020 before so we've got a bunch of bookings in the first quarter, which helped us significantly in the second quarter.

Yeah.

Thanks very much.

Let's see here I'm tug going a couple of things. This morning. So hopefully these aren't two off base, but on the CD MAU I'm, just wanting to dissect the <unk> performance.

But won't necessarily repeat but pharma feels stable and improving and a lot of the.

Improvements and changes in the cost structure.

It feels like maybe there's some extra twist with the revenue that came in in the quarter I know you quantified one client the $20 million, but.

The government sort of product lines have been.

Give me back in.

Biotechs, just a tale of two cities also the demand seems stable, but it's a bit mixed.

Was it just that there was particularly high margin on that amount like less work, but a final payout I'm just hoping you can help us understand the actual impact of the CMO performance.

The smaller companies continue to be cash constrained.

Until the IPO market and secondary market opens up that probably continuing scenario I'm not probably I think definitely that's continuing scenario.

Performance in the quarter versus what's expected in the back half.

And then if I if I can.

Mike is there any technical impact of U S fish and wildlife clearing the Cambodian than hps.

The mid tier mid tier biotech companies seem to be performing better in seem to have enough money to sort of prosecute and develop the drugs that they have.

What actually happens at the at this point now that that has occurred or their financial benefits or other operational changes that come as a result of that thank you. Thank you very much.

And their portfolios.

Revenue improved slightly year over year for the third consecutive quarter.

Cancellations were also pretty much for the same reasons.

Let me take let me take the last part.

So obviously, we're thrilled with this and we're thrilled that.

And I think we're most pleased with.

You take a look the DSA net book to Bill.

We've been able to.

Evidenced the fact that.

Steady upward trajectory for the last 18 months so.

The concerns of the alleged concerns.

But he had with us without merit, but what it does is it gives us enormous amount of flexibility to utilize.

I guess the bottom line is that we have stabilization across all client base as farmers seem stronger right now just given.

Animals that were already in the country.

Their access to capital for instance.

But also to take Tim.

Aspects of biotech.

Cambodian animals into wherever we would license movie, including the United States. So at HP.

Strengthening as well but.

We have to what we have to watch the ones that are cash constrained I think we'd call that well there is a fair amount of uncertainty out there in the marketplace and with the government and obviously with access to capital as well.

Access to.

Sufficient members from multiple countries as an important aspect of managing the business given the proliferation of increasing and HP toxicology work.

We feel good about guidance for the balance of the year.

Got it no that's helpful and maybe just one further clarifying question you had mentioned there is a new revenue guide you don't need book to Bill to go back above one is it fair to say.

Obviously, it's a big big source of high quality NIH piece. So we're really pleased to have the sort of regulatory yolk lifted from our next year end.

That it should be sort of at at current levels going forward in terms of how youre thinking about that right. It's fair to say that maybe it would just look at sort of the general seasonality entered it with DSA revenue performance and that's kind of the way to think about it in the back half of the year.

I think it provides us.

Great facilities that do better planning for that not just the back half of this year, but for next year as well. So we're we're thrilled with this with this noise.

Information from these agencies.

I think thats one of them.

Hello, Bob you take the first check your question.

Sure Hi, Elizabeth I think.

Yeah, Hi, Eric I'll take on the CMO. So just a couple of things the $20 million as you pointed out that the wind down of our.

You should think of the current ZIP code for the first half.

Continuation towards the second half.

Revenue for the first half not just the second quarter.

I know you talked a little bit about the second quarter being a season.

Seasonally low and we did see that for the last two years.

And that's.

At this time.

And then things rebound a little bit, but I think overall, we have seen this steady improvement for the last 18 months as Jim said right.

We will no longer be manufactured for this client.

And yes the margin on this work.

Throughout the first half is I would say, it's a little bit higher than the normal margin.

We're not as you pointed out expecting a book to bill to regard to above one to meet our guidance, but to stay within over the last 18 months have been between eight and nine 393 excuse me for.

And so the second quarter as well as the first half of the year and C. D. M. O is a little bit buoyed by the continuation of this work as we wind down the client and then I think we also talked about that was revenue and also a payment that we received.

For the first half of this year so in that general.

General range is I think what you can continue to expect.

That payment in the second quarter only that also helped the margin in the in the second quarter.

Got it thank you very helpful.

We'll take our next question from Eric Coldwell with Baird. Please go ahead. Your line is open.

Did you quantify that payment Flavio.

Sure.

We did not.

Thanks very much.

We did not and.

Let's see here I'm tug going a couple of things. This morning. So hopefully these aren't two off base, but on the <unk> I'm just wanting to dissect the <unk> performance.

Okay.

<unk>.

We'll take our next question from Dave Windley with Jefferies. Please go ahead. Your line is open.

It feels like maybe there's some extra twist with the revenue that came in in the quarter I know you quantified one client the $20 million, but.

Alright, thanks for taking the questions I'll follow up on Erik So so cadence wise Flavio do I understand on the CD Mo you.

Was it just that there was particularly high margin on that amount like less work, but a final payout I'm just hoping you can help us understand the actual impact of the CMO perf.

You quantified in the prepared remarks that.

The headwind to full manufacturing solutions for this year is 500 basis points to calculate that to be about $38 $5 million. So is it right to think that something a little south of $60 million is your comp number from last year, you got $20 million in the first half.

Performance in the quarter versus what's expected in the back half.

And then if I.

Mike is there any technical impact of U S fish and wildlife clearing the Cambodian in Hps.

What actually happens at this point now that that has occurred or their financial benefits or other operational changes that come as a result of that thank you. Thank you very much.

You don't have anything in the second half that that overall headwind for the year is that.

38, $39 million is that the right kind of framing for this single.

<unk> client that you're losing.

Let me take let me take the last part first obviously, we're we're thrilled with this and we're thrilled that.

Yeah, and I would just clarify couple of things, yes at the beginning of the year you might recall, we talked about about a 40 million dollar headwind from.

We've been able to.

Evidenced the fact that.

The concerns of the alleged concerns.

Changes into our CMO client base.

We have with us without merit, but what it does is it gives us enormous amount of flexibility to utilize.

We spoke about to commercial clients one that.

That had terminated the relationship with us.

Animals that were already in the country.

And then another one that we were adjusting the level of work.

Work, but also to take.

Cambodian animals into wherever we would life, including including the United States. So.

Work that we were going to be doing for them.

On that second client I think in Jim's prepared remarks talked about.

Access to sufficient members from multiple countries as an important aspect of managing the business, given the proliferation and increasing and HP toxicology work.

Doing some level of work for them. This year. So that's why our adjusted our regional guidance I think to your point, Dave We said about 500 basis points and now we've had slightly below 500, so it's a little bit better.

Obviously, Cambodia, so big Big source.

High quality.

But your math that you just described is in the right Zip code.

So we're really pleased to have the sort of regulatory yolk lifted from our next year end.

Bank to DSA and thinking about.

I think it provides us.

The cadence of revenue I'm, Jim I appreciate the kind of six months.

Great facilities that do better planning for the not just the back half of this year, but for next year as well. So we're thrilled with this with this noise.

Sequential progression here.

<unk>.

Information from these agencies.

I guess.

The factor that the kind of supports the near term revenue is really conversion and in.

Hello, Bob you will take the first half of your question.

Yeah, Hi, Eric I'll take on the CMO. So just a couple of things the $20 million as you pointed out that the wind down of.

In your preclinical history.

Backlog conversion has has vary quite widely it went down a lot. When you were booking so much dream during and immediately after the pandemic is it's kind of on its way back up now.

Revenue for the first half not just the second quarter.

That's what will become the headwind in the second half of the year as we don't we will no longer be manufacturing for this client.

Comment that you made about some cancellations in the longer term study arena, probably actually serves to increase the burn rate in the near term as well I was just wondering the bottom line question here is where can that go.

And yes the margin on this work.

About the first half is I would say, it's a little bit higher than the normal margin.

And so.

Both near term and long term I guess to support our revenue base. Despite a backlog decline. Thanks.

The second quarter as well as the first half of the year and <unk> is a little bit buoyed by the continuation of this work as we wind down the client and then I think we also talked about that was revenue and also a payment that we received that payment in the second quarter only debt also.

We think the backlog isn't it.

Robust place.

It's about 10 months.

So stable there for a while so that should allow us to continue to draw.

<unk>.

Margin in the second quarter.

From the counter attack luxury place sorry for that slipped or cancel.

Did you quantify that payment Flavio.

Cancellation rate.

We did not.

Sort of an interesting one.

We did not.

You don't get to sort of pick a designer studies in advance.

Okay. Thank.

What we have.

Thank you.

Fairly large number of really complex large dollar.

We will take our next question from Dave Windley with Jefferies. Please go ahead. Your line is open.

Oh, sorry.

Typically a connected with later stage faces.

Hi, Thanks for taking the questions I'll follow up on Erik So so cadence wise Flavio do I understand on the <unk> you.

Development process, so that can be offset by other types of studies sounds like in general toxicology and earliest studies. These late stage one so.

Quantified in the prepared remarks that.

The headwind to full manufacturing solutions for this year is 500 basis points I calculate that to be about $38 $5 million.

We are in good shape from a physical point of view as we indicated in the prepared remarks, we we actually outperformed them.

Meaningfully ahead of our operating plans, we actually have to hire some people now to make sure that the work is booked on a timely and high quality.

So is it right to think that something a little south of $60 million is your comp number from last year, you got $20 million in the first half.

Fashion it feels like pharma is.

You don't have anything in the second half that that overall headwind for the year is that.

Has strengthened meaningfully and sort of getting through some of the issues that they have to protect themselves against the patent cliffs.

38, $39 million is that the right kind of framing for this single.

The bigger biotech companies are stable as well.

<unk> client that you're losing.

When we begin to see capital markets opening up for the smaller folks like Cisco also enhanced demand. So we feel that the both the backlog and current capabilities.

Yeah, I would just clarify couple of things, yes at the beginning of the year you might recall, we talked about about a 40 million dollar headwind from.

Changes into our CMO client base.

Pretty good place right now.

Got it thank you.

We spoke about to commercial clients one that.

Okay.

We will take our next question from Patrick Donnelly with Citi. Please go ahead. Your line is open.

That had terminated the relationship with us.

And then another one that we were adjusting the level of <unk>.

Hey, guys. Thank you for taking the questions.

Work that we were going to be doing for them.

Jim maybe a follow up on that.

To your point.

On that second client.

A little bit better in terms of in terms of the hiring piece.

I think in Jim's prepared remarks talked about.

You've seen a lot of these cycles I guess, just the confidence that step.

Doing some level of work for them. This year, so that's what our adjusted <unk>.

Stepping in on this hiring the confidence that we are turning the corner here and again I think that some of the other questions. If you have this book to Bill let's call. It nine area for the rest of the year does that support DSA growth next year, just trying to square up what book to Bill if that's the right metric is necessary to think about launching.

Original guidance I think to your point, Dave We said about 500 basis points and now we've had slightly below 500, so it's a little bit better but your math that you. Just described is in the right Zip code.

Back to DSA and thinking about.

To the positive growth next year, just given your hiring and again I'm pretty constructive, particularly on the large pharmacies.

On the cadence of revenue Jim I appreciate the kind of six months.

Sequential progression here.

We will stay what will stay away from for next year, because we give a lot more this year too.

<unk>.

I guess.

The factor that the kind of supports the near term revenue is really conversion and.

To accomplish.

But both the book to Bill in the overall demand curve I think are improving in the right direction.

In your preclinical history.

We're not getting ahead of ourselves on the hiring if thats sort of the essence of your question were really catching up with where we need to be given the current.

Backlog conversion has vary quite widely it went down a lot. When you were booking so much during during and immediately after the pandemic is kind of on its way back up now.

Level of activity this would be our operating plan and so this is a very mature.

This comment that you made about some cancellations in the longer term study arena, probably actually serves to increase the burn rate in the near term as well I was just wondered the bottom line question here is where can that go.

Hi, Matt.

Totally a people related enterprise. So we're engaged in the quality of the work and the speed of the work.

It is essential.

I think the things.

<unk> will help the growth and development next year as <unk>.

Both near term and long term I guess to support our revenue base. Despite a backlog decline. Thanks.

Access to capital for the biotech drugs and.

Some settling down thanks.

We think the backlog is in the Hague.

Things are going on in Washington, I think I think will be helpful as well.

Robust place.

It's about 10 months and it's been.

As we said, we do think that pharma is moving slowly but nicely in the right direction. So as large biotech so.

So stable there for a while so that should allow us to continue to draw from.

The trajectory is positive.

From the current JAK luxury place.

But we'll stop short of trying to give any indications of what we think the growth rates of DSA might be in the next fiscal year.

Neither slip a cancel cancellation rate.

Sort of an interesting one.

You don't get to sort of pick a design our studies in advance.

Understood. Okay, and then maybe just on the pricing side. It seems like it continues to be stable and you guys sound pretty good on that can you just talk through that and then what maybe it's one for Flavio back then and what that implication means for margin certainly understand hiring piece.

What we have.

Fairly large number of really complex large dollar.

Studies.

Typically a connected with later stage phase of our development process. So that can be offset by other types of studies things like in general toxicology and earliest studies recently.

Margins in the second half, maybe just some moving pieces on margins pricing head count et cetera will be helped.

Thank you guys.

Well I'll take that so so price, particularly in DSA is also stable stock pricing seems to be.

Stage, one so I think that.

We are in good shape from a physical point of view as we indicated in the prepared remarks, we we actually are performing meaningfully ahead of our operating plans, we actually have to hire some people now to make sure that the work is done embarked on a timely and high quality.

Pretty solid.

We definitely have.

But it is I would say most if not all of our competitors are using the price.

<unk> it feels like pharma is.

The price card to compete with us.

Sometimes those are very small comprehensive just don't have any.

Strengthened meaningfully and sort of getting through some of the issues that they have to protect themselves against the patent cliffs and that bigger biotech companies are stable as well.

Choice, but to go to the lowest provider is having said that I think.

<unk> that can afford it really want speed quality and regulatory prowess.

Yes.

When we begin to see.

Hello markets opening up for the smaller folks exit cattle also enhanced demand. So we feel that the both the backlog and our current capabilities are probably a pretty good place right now.

We will work with us so.

The mix seems to be enriching nicely.

And we'll use price intermittently unnecessary to either.

Got it thank you.

Yes.

Okay.

Protect or take share but.

We will take our next question from Patrick Donnelly with Citi. Please go ahead. Your line is open.

Feels like there is reasonable stability in the marketplace given the fact that.

Hey, guys. Thank you for taking the questions.

Capital markets are a little bit sluggish.

Jim maybe a follow up on that.

Demand has been off for a while that seems to be coming back.

To your point, feeling a little bit better in terms of in terms of the hiring piece.

We need to distinguish ourselves on science and the quality of our work and in geographic proximity Morgan anything Scott our pencils periodically.

You've seen a lot of these cycles I guess, just the confidence that.

And I will.

Add on the price I think what we have seen in the first half as we said.

Specialty in the DSA was mix.

Favorability that has helped with the price mix equation.

Deposit growth next year, just given your hiring and again I'm pretty constructive, particularly on the large pharmacies.

So price has been.

Stable to slightly better than we anticipated coming into the year.

We will stay what will stay away from for next year, because we give a lot more this year too.

Cause of mix.

Again, as we said in Q1 and again in Q2, we don't count on mix being favorable.

To accomplish.

But both the book to Bill in the overall demand curve I think are improving in the right direction.

That can play into a little bit of that.

Margin dynamics that you described Patrick the second half but.

We're not getting ahead of ourselves on the hiring if thats sort of the essence of your question were really catching up with where we need to be given the current.

Spot prices is stable.

At this time and makes it been what has enhanced our.

The price mix dynamics in DSA.

Level of activity this would be our operating plan and so this is a very mature.

No.

Totally a people related enterprise. So we're engaged in quality of the work and the speed of the work.

Okay.

And we'll take our next question from Casey Woodring with J P. Morgan. Please go ahead. Your line is open.

Is essential.

I think the things that.

It will help the growth and development next year as <unk>.

Great. Thank you for taking my questions.

Access to capital for the biotech folks.

So you noted the higher cancellations this quarter and we're focused on longer term post work can you just elaborate on what's driving that.

Some settling down some of the things that are going on in Washington, I think I think will be helpful as well.

What sort of margin differentials and the work that's getting canceled looks like and then how should we think about this moving forward do you expect that to continue in the second half.

As we said, we do think that pharma is moving slowly but nicely in the right direction. So as large biotech so the trajectory is positive.

I have a huge.

Difference in margin.

But we'll stop short of trying to give any indications what we think the growth rates of DSA might be in the next fiscal year.

<unk>.

Both the price and the margin profile for <unk>.

Different types of work both earlier.

Understood. Okay, and then maybe just on the pricing side. It seems like it continues to be stable and then you guys sound pretty good on that can you just talk through that and then what maybe it's one for Flavio back then and what that implication means for margin certainly understand hiring please.

Are often comparables some of the specialty workers as perhaps.

Slightly higher margins than I was a little less competitive.

No not significantly.

So so where.

Okay.

We don't.

It's tough to predict how long this will continue I think it could be just a point in time very much the nature of a bolus of work that we had booked.

Margins in the second half maybe just the moving pieces on margins pricing head count et cetera will be helpful. Thank you guys.

Well I'll take that so so price, particularly in DSA is also stable spot pricing seems to be.

In the quarter that.

You don't necessarily get the same type of work to book next quarter over quarter. After that it just way just the way the studies fall so.

Pretty solid we definitely have.

But it is I would say most if not all of our competitors are using the price.

I don't think it portends.

Really much of anything.

The price card to compete with us.

Prioritization of.

Portfolio by our clients, that's what they have ready.

Sometimes those are very small comprehensive just don't have any.

Choice, but to go to.

What they are moving.

Lois provider is having said that I think anybody that can afford it really want speed quality and regulatory prowess.

Emphasizing more work in the clinic, what they are trying to push forward much more quickly so.

We'll obviously continue to watch that.

We will work with us so.

Provide provide clarity on that but.

The mix seems to be enriching nicely.

I don't think this is something that will continue.

And we'll use price intermittently unnecessary to either.

Got it that's helpful. And then just on the large pharma piece last week, we saw the administration's set a 60 day deadline for pharma to implement MFN pricing theres noise around tariffs you talked in your prepared remarks about not really seeing any impact.

Protect or take share but.

Feels like there is reasonable stability in the marketplace given the fact that.

Capital markets are a little bit sluggish.

On either of these dynamics.

Dynamics from pharma companies spending currently but just on the forward outlook, how should we think about potential.

Demand has been off for a while that seems to be coming back.

We need to distinguish ourselves on science and the quality of that where I can on geographic proximity more than anything and start doing our pencils periodically.

Headwinds here.

For large pharma to that thank you.

We've tried to be prudent and thoughtful.

When a prognosis as to the balance of the year given the.

And I will.

I'll add on the price I think what we had seen in the first half as we said.

Significant amount of uncertainty in the world and country, particularly some of the things coming out of Washington with regard to drug pricing.

Especially in the DSA was mix.

NIH doing out here going forward, what will the FDA do or not to you going forward. So as we said in our prepared remarks, we have had a miniscule.

Favorability that has helped with the price mix equation.

So price has been.

Stable to slightly better than we anticipated coming into the year because of mix.

Verse impacts from any of this so far we're not really hearing about the Paris from our clients that doesn't mean it won't change we've had a very small amount.

Again, as we said in Q1 and again in Q2, we don't count on mix being favorable.

NIH work that we know has been canceled but we are hearing about that.

So that can play into a little bit of the margin dynamics that you described Patrick in the second half but.

We often from particularly academic.

Spot prices stable.

Clients, let's say to have concern about when the next fall.

At this time and mix has been what has enhanced.

So.

We believe that our.

The price mix dynamics in DSA.

Guidance advocates for things to be rougher.

And we've been thoughtful and prudent about that.

Okay.

And we will take our next question from Casey Woodring with J P. Morgan. Please go ahead. Your line is open.

And probably if the shoe guys fall in any of the sort of street buckets, just outline like you'd have a greater impact on us in 2026 and it works for the balance of this year.

Great. Thank you for taking my questions.

So you noted the higher cancellations. This quarter are more focused on longer term post <unk> can you just elaborate on what's driving that what's sort.

Yeah, and just to echo that I think when we've been talking about.

The net book to Bill range is and again my earlier question to Elizabeth.

Margin differential and the work that's getting canceled it looks like and then how should we think about this dynamic moving forward do you expect that to continue in the second half.

Round.

At stake in this sort of eight ish level that we have seen over the last 18 months with sequential improvement over the last three quarters.

I have a huge.

Difference in margin.

Both the price and the margin profile for <unk>.

Green.

Different types of work both earlier than later.

Half of the year.

Again, the second half.

And comparable some of the specialty workers as perhaps or.

Book to Bill will actually be more relevant to next year's performance as Jim just said, so I think we feel that.

Slightly higher margins than I was a little less competitive but not.

Not significantly.

So we're.

We are well positioned.

Yeah.

We don't.

The guidance that we're providing this year given what we have visibility to at this point.

It's tough to predict how long this will continue it seems to be just a point in time very much the nature of a bolus of work that we have booked.

Okay.

In the quarter that.

We will take our next question from Charles <unk> with TD Cowen. Please go ahead. Your line is open.

You don't necessarily get the same type of work to book next quarter over quarter. After that it just the way just the way the studies fall so.

Alright, thanks for taking the question.

Maybe just touching on the margins in the back half just to make sure.

I don't think it portends.

Really much of anything.

Understanding really sort of the headwinds as we think about it is is it really just.

Prioritization of portfolio by our clients, that's what they have ready.

One in DSA, we have some headwinds from extra hiring I would imagine thats, a little bit of a temporary issue.

What they are moving.

Emphasizing more work in the clinic, what they are trying to push forward much more quickly so.

You kind of ramp up ahead of expected demand and then secondly, we just had better margins in <unk> in the second quarter, which which don't persist and so it's really more of a kind of going back to what are maybe more normalized margins for CMO is.

We'll obviously continue to watch that.

Provide provide clarity on that but.

I don't think this is something that will continue.

Got it that's helpful. And then just on the large pharma piece last week, we saw the administration set a 60 day deadline for pharma to implement MFN pricing theres noise around tariffs you talked in your prepared remarks about not really seeing any impact.

I just want to make sure is there anything else that I'm missing or.

As I think about sort of.

And so the factors driving that.

As we think about first half versus second half.

Yes, Charles I think youre thinking about it correctly I think the last component is also I think I talked about the timing of our married this year July 1st So you have that a little bit playing into the first half second half comp.

On either of these.

Dynamics from pharma company spending currently but just on the forward outlook, how should we think about potential.

Headwinds here.

For watch pharma to that thank you.

As you can expect about three 5% increase in our <unk>.

We've tried to be prudent and thoughtful.

Let's say.

What a prognosis as to the balance of the year given the.

Salary and labor cost pool base.

Significant amount of uncertainty in the world and country, particularly if some of the things coming out of Washington with regard to drug pricing.

When you compare the two.

But yes the DSA.

And the CMO comments that you made are spot on.

The NIH do or not going forward, what will the FDA do or not do going forward. So as we said in our prepared remarks, we have had a miniscule.

Is there any benefit do you see margins with the Doj investigation and designation including ore.

Any of those legal expenses considered onetime and not really in the numbers.

Impacts from any of this so far we're not really hearing about the tariffs from our clients that doesn't mean that won't change we've had a very small amount.

Yeah.

At the time.

Both the legal expenses as well as we actually did write off.

NIH work that we know has been canceled but we are hearing about that.

The inventory.

The east.

These.

We often from particularly academic.

We bought we non-GAAP both expenses.

Clients, let's say to have concern about when the next fall.

Now that we will be able to use.

So.

The HD for the independent purposes.

We believe that.

Guidance advocates for things to be rough.

Spence them.

As we incur.

And we've been thoughtful and prudent about that.

The costs as we run the studies and so essentially unwinding the non-GAAP expense had done for the inventory.

And probably if the shoe does fall in any of the sort of three buckets that I just outlined likely would have a greater impact on us in 2026 and it works for the balance of this year.

Okay, that's how they will treat it as a normal cost yes.

Right. Okay I appreciate it thank you.

Yeah, and just to echo that I think when we've been talking about.

We'll take our next question from Max Smock with William Blair. Please go ahead. Your line is open.

The net book to Bill range is and again my earlier question to Elizabeth around.

Hey, good morning, Thanks for taking my questions, maybe just a little bit of a technical one here on DSA you mentioned that the outperformance was driven by strong bookings activity in the prior quarter, but I think something that kind of new at the time of the first quarter earnings call. So I'm kind of wondering how that exactly drove the outperformance in the second quarter or is it just that that work burn faster than <unk>.

Staying in this sort of eight ish level that we have seen over the last 18 months with sequential improvement over the last three quarters.

Three.

Half of the year.

Again, the second half.

Or is there something else beyond the strong bookings in the first quarter that helped explain why DSA outperformed in <unk>.

Book to Bill will actually be more relevant to next year's performance as Jim just said so.

That's a significant amount of work.

We feel.

The pent up demand by our clients the thing to take price in the back half of last year.

That we are well positioned.

For the guidance that we're providing this year given what we have visibility to at this point.

And again the mix of that work is not it sounds like a weekend predetermined.

We will take our next question from Charles <unk> with TD Cowen. Please go ahead. Your line is open.

Or massage so.

So, it's a healthy mix and <unk>.

A significant amount of work with clients to want to move quickly.

Yes, thanks for taking the question.

Maybe just touching on the margins in the back half just to make sure I'm understanding really sort of the headwinds as we think about it is it really just.

And you get a positive price mix.

I'll take that as well.

Okay. Thank you and that was a little bit of.

Sorry, I was just going to add there's a little bit also a benefit of <unk>.

One in DSA, we have some headwinds from extra.

FX, if youre looking at it.

Extra hiring I would imagine thats, a little bit of a temporary issue as you kind of ramp up ahead of expected demand and then secondly, we just had better margins in <unk> in the second quarter, which which don't persist and so it's really more of a kind of going back to maybe more normalized margins for CMO is.

On a pure dollar basis versus guidance before so about half and half of the beat.

We're operational versus FX and that applies to DSA as well and to Jim's point, Yes, we had strong bookings in Q1, but.

Operationally in Q2.

Just want to make sure is there anything else that I'm missing or is.

While we always have change orders and we always have slippage those were.

As I think about sort of.

So the factors driving that.

Lets say better are to a certain extent that also help with would be you didn't catch it.

As we think about first half versus second half.

Yes, Charles I think youre thinking about it correctly I think the last component is also I think I've talked about the timing of our merit. This year July 1st So you have that a little bit playing into the first half second half comp.

Understood. Thanks, Bob Yeah. That's helpful. Maybe just going back to one more on head count growth and wondering if you could put some numbers around kind of how you're thinking about head count growth in total for this year, and then whether or not it's fair to think about.

Head count growth in DSA as a reasonable proxy for that segment growth in 2026.

As you can expect about three 5% increase in our blood.

Hey.

Okay.

Salary and labor cost pool base.

Putting numbers around that.

When you compare the two halves of the year, but yes, the DSA in the.

Half the size of it.

Current demand and anticipated demand for the rest of the year I think we've done that well over the last decade.

The CMO comments that you made are spot on.

Okay got it.

Areas of.

Is there any benefit do you see margins with the Doj investigation and destination, including ore.

Significant high growth, where we had to get ahead of it.

Obviously, you had some workforce reductions so we're being very careful.

Any of those legal expenses considered onetime and not really in the numbers.

About adding it back in when we're guardedly optimistic.

Yes.

We're seeing the demand stabilize across our client base and little more pronounced.

Time.

Both the legal expenses as well as we actually did write off.

In pharma, so we want to be able to react.

The inventory.

Relatively quickly.

Those and Hps and we both we non-GAAP both expenses.

As the demand improves so.

Feels like an appropriate.

Now that we will be able to use.

So way too to address.

Yes.

The NH before they intended purposes will expense them.

That's the principle of women and factor I concur.

I think our space in a good place to accommodate more work, but we simply can't even contemplate taking at home without a sufficient number of people we asked to actually get from an early and have to train them a.

As we incur.

The costs as we run the studies and so essentially unwinding the non-GAAP expense, we had done for the inventory.

Okay, that's how they will treat it as a normal cost yes.

A lot of people come in as unskilled labor and so.

Okay I appreciate it thank you.

Where.

It actually feels good to come with that.

We'll take our next question from Max Smock with William Blair. Please go ahead. Your line is open.

Yes give or take.

Okay.

<unk>.

I think the quantification that we tried to provide was.

As a headwind to the margin in the second half versus the first half the 10 million that we both spoke about.

Something kind of new at the time of the first quarter earnings call. So I'm kind of wondering how that exactly drove the outperformance in the second quarter or is it just that that work.

And this is is you got to think about it as twofold. It's yes, it's a little bit higher hiring when you compared to the two quarters, but we were also very prudent and not starting that you soon in the first half until we really felt strongly that the demand signals were robust and stable.

<unk> faster than expected or is there something else beyond the strong bookings in the first quarter that helped explain why DSA outperformed in Tokyo.

That's a significant amount of work as a result of pent up demand by our clients the thing to take price in the back half of last year.

<unk>.

And so it's a.

Comp also of May.

Maybe we were lighter in the first half even to deliver the level of revenue that we did.

And again the mix of that work is not something that we can predetermined.

Assai so.

And then we have to kind of.

So it's a healthy mix and.

Pick up on that and then fast you could to deliver the continuation of that demand. So.

A significant amount of work with clients, who want to move quickly.

And you get a positive price mix.

I don't think head count is going to be up year over ear. If you asked me at the end of the year given that we still have declining revenue.

So I'll take that as well.

Okay. Thank you and that was a little bit of.

Sorry, I was just going to add there's a little bit also a benefit.

But it's certainly an increase versus the beginning of the year when we came into.

FX if youre looking at it just on a pure dollar basis versus guidance before so Bob Hoffman half of the beat.

Our guidance that was much worse than we're now looking at so I think very positive signal.

We're operational versus FX and that applies to DSA as well and to Jim's point, Yes, we had strong bookings in Q1, but.

Understood. Thanks, again for taking my questions.

And as a reminder, if you would like to ask a question today. Please press star and one keys on your telephone keypad, we will take our next question from Josh Woltman with Cleveland Research. Please go ahead. Your line is open.

Operationally in Q2.

While we always have change orders and we always have slippage those were.

Lets say better.

To a certain extent that also help with the beat in Q2.

Hey, Thanks for taking my questions I had two that I'll ask then hop off.

Understood. Thanks, Bob Yeah. That's helpful. Maybe just going back to one more on head count growth and I'm wondering if you could put some numbers around kind of how you're thinking about head count growth in total for this year, and then whether or not it's fair to think about.

First Jim It sounds like you think the Kpis point to improving trend in DSA, but wondered if you could comment on how visibility has evolved and the business does it seem like visibility on bookings and cancellations is improving at all.

Head count growth in DSA as a reasonable proxy for that segment growth in 2026.

Or is it still challenging versus what you were accustomed to historically and then.

Okay.

Putting numbers around that.

Related question I wondered if you could comment to the drivers on the increased cancellations of a longer term post R&D studies and whether you've seen increased cancellations elsewhere in DSA.

Half the sales are those now.

<unk>.

Current demand and anticipated demand for the rest of the year and I think we've done that well over the last decade.

Areas of.

Significant high growth, where we had to get ahead of it.

And what the guide assumes more cancellations going forward do they increase or remain stable from here.

Obviously, you had some workforce reductions so we're being very careful.

So I think we do have better visibility.

About adding it back in.

We are optimistic that we are seeing the demand stabilize across our client base and little more pronounced.

Alright clarity from our clients, particularly is hopefully coming out of that.

And pharma, so we want to be able to react.

Pretty cautious Pierre.

Period.

Relatively quickly.

Both says both pharma and biotech so.

As the demand improves so.

Feels like an appropriate size.

And we're trying not to over read that.

So way too to address head count.

Given the role that we play in helping these companies get drugs in the clinic and ultimately to the market and as I said earlier the cancellation.

It's the principal women in factor I concur.

I think our spaces in a good place to accommodate more work, but we simply can't even contemplate taking at home without a sufficient number of people. We are supposed to get from an early enough to train them.

Difficult to predict.

Yes.

That continues and rolls out for the balance of the year.

A lot of people come in as unskilled labor and so.

Had a fair number of very large complex and expensive studies that seem to have.

Where.

It actually feels good to get on with that.

So different clients for totally different reasons usually.

Yes.

Okay.

And the emphasis.

Ken.

In the clinic.

I think the quantification that we tried to provide was.

Slow down some of the preclinical.

Sure.

As a headwind to the margin in the second half versus the first half the 10 million that we both spoke about.

The flip side of that is that we haven't had a lot of posts A&D work for now I don't know, probably a year or year and a half.

And this is is you got to think about it as two fold. It's yes, it's a little bit higher hiring when you compared to the two quarters, but we were also very prudent in that.

General toxicology work was stronger in the quarter. That's a really good thing you want to balance of general work and specialty work.

Because John work.

Starting that you soon in the first half until we really felt strongly that the demand signals were robust and stable.

As into specialty work.

And so I think thats, an important indicator, perhaps again, we were always cautious and careful to say that our business isn't linear that one quarter.

And so it's a.

Comp also of.

Maybe we were lighter in the first half even to deliver the level of revenue that we did.

But it's particularly strong or particularly concerning is not necessarily predictive so we'd like to see what the cadence is of our clients going forward. We're also going to move into familiar soon.

And then we have to kind of.

Pick up on that and then ask you to deliver the continuation of that demand. So.

Where our clients are beginning to put together the 2026 operating plans as well way, we built that up on a case by case basis.

I don't think head count is going to be up year over year. If you asked me at the end of the given that we still have declining revenue.

But it's certainly an increase versus the beginning of the year when we came into.

Zero basis.

With all of our clients and so we'll get a really good sense of how you're thinking about spending.

Our guidance that was much worse than we're now looking at so I think very positive signal.

What concerns they really have about Washington.

Capital markets, what they are prioritizing and whether there's any sort of meaningful swing back balanced spending between development and they're in the clinic.

Understood. Thanks, again for taking my questions.

And as a reminder, if you would like to ask a question today. Please press star and one keys on your telephone keypad.

Yeah.

And Thats.

When we've had it for us is extraordinary.

Our next question from Josh Volkman with Cleveland Research. Please go ahead. Your line is open.

For years, we've had that balance spending.

Obviously for these companies to have a good pipeline several years from now they have to get back to discovery spending and get their IND filed so we were.

Hey, Thanks for taking my questions I had two that I'll ask then hop off.

First Jim It sounds like you think the Kpis point to improving trend in DSA, but wondered if you could comment on how visibility has evolved in the business. So does it seem like visibility on bookings and cancellations is improving at all.

We're hopeful that that will happen, but we're careful what we built into our guidance for the year.

And just to add on the cancellations.

Or is it still challenging versus what you were accustomed to historically and then.

The cancellation rate this quarter in Q2, so think of it as a percent of bookings.

It wasn't actually too dissimilar from the last 18 months and it is.

<unk> question I wondered if you could comment to the drivers on the increased cancellations on the longer term post <unk> studies, and whether you've seen increased cancellations the square in DSA and.

There anything it was more that Q1 was really favorable.

Which we didn't necessarily expect to continue so.

I think maybe this is another way to think about it.

And what the guide assumes more cancellations going forward do they increase or remain stable from here.

Okay got it thanks guys.

We will take our next question from Luca <unk> with Barclays. Please go ahead. Your line is open.

So I think we do have better visibility.

Alright clarity from our clients, particularly is hopefully coming out of.

Hi, guys. This is Andrew.

Thank you for taking my question just one for Matt actually.

Pretty cautious peers.

Period.

Both says both pharma and biotech so.

Can you talk about the sales cycle timing from RFP to award and converting into revenue and just hasn't changed or gotten better at all any color you can share.

And we're trying not to over read that.

Given the role that we play in.

Helping companies get drugs into the clinic and ultimately to the market and as I said earlier the cancellation.

Any particular business that youre talking about or within.

Talking about DSA.

Difficult to predict.

No I don't think the sales cycle has changed and I think we.

That continues to enroll sides of the balance of the year, we had a fair number of very large complex and expensive studies that seem to have.

We've done some.

Structural change of our sales organization.

In our marketing organization as well I think we're much more client centric I think we're doing a much better job selling from discovery into safety in a much more focus so.

So different clients for totally different reasons usually.

Yeah.

An emphasis in the clinic.

I would imagine if anything.

Go down some of the preclinical work the flipside of that is that we haven't had a lot of posts A&D work for now I don't know, probably a year or year and a half.

Our sales cycle is more focused and elegant and probably yielding good results as I said earlier, we got to be careful about if and when we use price it's typically not something that we.

General toxicology work was stronger in the quarter. That's a really good thing you want to balance of general work and specialty work.

The first people to.

To use as a lever, but usually in response or anticipation of our clients using that as their as they are only lever. So.

Because the general work feeds into specialty work.

So that I think that's an important indicator, perhaps again, we were always cautious and careful to say that our business isn't linear that one quarter.

Looking at the cadence and speed with which we get the studies done and report et cetera clients is really everything for that everyone's in a race to market regardless of whether the clients are large or small and so we're always looking to both enhance accelerate and refine.

Whether it's particularly strong or particularly concerning is not necessarily predictive so we'd like to see what the cadence is of our clients going forward. We're also going to move into familiar soon.

That process flow through the <unk>.

<unk> of our.

Capabilities and as I said, a moment ago is kind of the amalgamation of our sales force. So I would say it's.

Where our clients are beginning to put together the 2026 operating plans.

Somewhat improved and enhanced perhaps what it was last year.

Well, we we build that up on a case by case basis.

Aero basis.

Got it thanks for the client.

With all of our clients and so we will get a really good sense of how you're thinking about spending.

Okay.

And we'll take our last question today from Michael <unk> with Bank of America. Please go ahead. Your line is open.

What concerns they really have about Washington.

Capital markets, what they are prioritizing and whether there's any sort of meaningful swing back balanced spending between development and they're in the clinic.

Great. Thanks for squeezing me in so long call. So I'll just ask one.

Maybe sort of a big picture.

Somatic question in terms of how we should think about.

And Thats.

Book to Bill being a leading indicator for revenue growth.

When we've had it for his extraordinary strong growth through the years, we've had that balanced spending.

What I'm getting at is.

Traditionally it's a pretty good leading indicator, we still have 90 kings and im focusing on DSA specifically here.

Obviously for these companies to have a good pipeline several years from now they have to get back to discovery spending and get their IND filed so we were.

But you've also got the backlog sitting there right and as you answer to an earlier question.

We're hopeful that that will happen, but we're careful what we built into our guidance for the year.

When we ask question about the 10th month of backlog gives you. Some buffer can you talk about how that can be used to offset the below one book to bill and what that might translate to.

And just to add on the cancellations.

The cancellation rate this quarter in Q2, so think of it as a percent of bookings.

Next 10 months, how easy it is to convert that.

Just sort of given the backlog there is there what level of book to Bill you think are sufficient to get positive or flat.

It wasn't actually too dissimilar from the last 18 months and mix.

There anything it was more that Q1 was really favorable.

Flat revenue growth.

Which we didn't necessarily expect to continue so.

Okay.

I think first off we're.

I think maybe this is another way to think about it.

We're pleased that the.

Last 18 months since <unk> had sort of had a steady upward trajectory.

Okay got it thanks guys.

We will take our next question from Luca <unk> with Barclays. Please go ahead. Your line is open.

Book to Bill so.

That's positive.

About one above one yes, but it's it's really not essential to get fair I mean.

Hi, guys. This is Andrew.

Thank you for taking our question just one from us actually can.

What else the duration of the backlog is a nature of the backlog is important so I would say is that.

Can you talk about the sales cycle timing from RFP to award and then converting into revenue and just hasn't changed at.

So the basic proposition.

Particularly for non and HP studies, we can almost broadband.

Any color you can share thanks.

Any particular business that youre talking about or.

Backlog for something Thats slipped or cancelled.

Talking about DSA.

Not always but almost always you know it depends on whether the client is a predisposition.

No I don't think the sales cycle has changed and I think we.

The geographic locale or not but.

We've done some.

It's a bit easier and with with appropriate notice.

Structural change of our sales organization and in our marketing organization.

We can do a similar thing with the NIH piece days, which tend to be.

<unk> is well I think we're much more client centric I think we're doing a much better job selling from discovery into safety in a much more focus so.

More cautiously and more complex.

So it does depend on the mix of backlog.

Imagine if anything.

And the certainty of the backlog as you may recall from.

Sales cycle is more focused and elegant and probably yielding good results as I said earlier, we got to be careful about if and when we use price. It's typically not something that we are the <unk>.

Probably three years now.

Now the backlog, which we enjoyed for a while actually elongated too much and it was less than a certainty from our clients.

Initiating studies, so we like where it is now.

First people too.

To use as a lever, but usually in response or anticipation of our clients using that as their as they are only lever. So.

While some things to achieve.

We typically can flex up again, and so I think that backlog isn't it.

Looks like the cadence and the speed with which we get the studies done and report et cetera clients is really everything for them everyone's in a race to market regardless of whether the clients are large or small and so we're always looking to both enhance accelerate and refine that.

For us.

Right now as we go forward.

We had several years, where it was kind of six to nine months 10 months. So it feels like we're in the ballpark to have.

Sufficient backlog to be able to seed.

That process.

Any potential gaps we have in the portfolio and make sure we keep our people busy.

<unk> of our capabilities and as I said, a moment ago is kind of the amalgamation of our sales force. So I would say it's <unk>.

And I think just as a reminder, the.

The preclinical space.

Somewhat improved and enhanced perhaps what it was last year.

The turnaround time is much shorter than clinical right.

Got it thanks for the client.

<unk> was more like six to nine months and so I think that also plays into how.

Okay.

We will take our last question today from Michael <unk> with Bank of America. Please go ahead. Your line is open.

How do you rebuild that that backlog and as you start to look ahead to 10 months ahead. There is there's plenty of time to increase the bookings in that period.

Great. Thanks for squeezing me in so long call. So I'll just ask one.

Jim maybe sort of a big picture.

As well.

Somatic question in terms of how we should think about book to bill being a leading indicator for revenue growth and what I'm getting at is.

In theory.

So I just want to say thank you I think that's all the questions that we have thanks for joining us. This morning, and we look forward to seeing you at an upcoming investor conferences timber.

Traditionally, it's a pretty good leading indicator of what's the underlying bookings and im focusing on DSA specifically here.

And this concludes the call.

But you've also got the backlog sitting there right and as you answer to an earlier question I think was I think it would be when we ask question about the 10th month of backlog gives you some buffer.

Thank you. This does conclude today's Charles River laboratories second quarter 2025 earnings call.

Can you talk about how that can be used to offset the below one book to bill and what that might translate to.

You again for your participation and you may now disconnect.

Next 10 months, how easy it is to convert that.

[music].

Just sort of given the backlog there is there what level of book to Bill you think are sufficient to get positive.

Flat revenue growth.

Uh huh.

Okay.

Well I think first off where we're pleased that the.

Last 18 months have had sort of had a steady upward trajectory of net book to bill So.

That's positive we liked it about one above one yes, but it's really not essential to get there I mean, the backflow of both the duration of the backlog is the nature of the backlog is important so I would say is that.

So the basic proposition.

Particularly for non and HP studies, we can almost.

And if.

Backlog for something Thats slipped or cancelled not always but almost always again it depends on whether the client is a predisposition.

The geographic locale or not but.

It's a bit easier and with with appropriate notice.

We can do a similar thing with the NIH piece days, which tend to be.

More costly and more complex.

So it does depend on the mix of the backlog.

And the certainty of the backlog as you may recall from I don't know its probably three years.

Now the backlog, which we enjoyed for a while actually elongated too much and there was less of a certainty for their clients.

Actually initiating studies, so we like where it is now.

While some things to cancel.

Or slip we typically can slots up again, and so I think that backlog isn't a good place.

For us.

Right now as we go forward.

We had several years, where it was kind of six to nine months 10 months sort of feels like we're in the ballpark to have.

Sufficient backlog to be able to seed.

Any potential gaps we have in the portfolio and make sure that we keep our people busy.

And I think just as a reminder.

The preclinical space.

The turnaround time is much shorter clinical right. So aflac was more like six to nine months.

So I think that also plays into.

How do you rebuild that that backlog and as you start to look ahead to 10 months ahead. There is there is plenty of time to increase the bookings in that period.

Well.

And seriously.

So I was going to say thank you I think that's all the questions that we have thanks for joining us. This morning, and we look forward to seeing you at upcoming Investor conferences in September.

And this concludes the call.

Thank you. This does conclude today's Charles River Laboratories second quarter 2025 earnings call. Thank you again for your participation and you may now disconnect.

Q2 2025 Charles River Laboratories International Inc Earnings Call

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