Charles River Laboratories International Inc (CRL) 2002 Q1 法說會逐字稿

Good morning and welcome ladies and gentleman to the Charles River Laboratory first quarter earnings release conference call.

At this time I would like to inform you that this conference is being recorded and that all participants are on the listen only mode.

At the request of the company we will open up the conference for questions and answers after the presentation.

I will now turn the conference over to Mr. Dennis Shaugnessy, Senior Vice President.

Please go head sir.

Welcome to Charles River investor conference call and Webcast for the first quarter of 2002.

Our intention this morning is to make these quarterly session fully accessible and not exclusionary, with information about the company, our performance, and our financial results made privately available to the investing company.

In our plan remarks today we will review our business performance and financial results for the first quarter and provide some general guidance for future performance.

We plan for up to a one hour session for practical reason, we maybe required to limit the number of questions asked following the presentation.

For your benefit we'll attempt to ensure that the questions are appropriate and focus on the company and our business from investors' perspective.

We trust that you had the opportunity to review yesterday earning release.

If you don't yet have access to a copy you can reach it from our Website.

First quarter financial statement for Charles River Laboratory International, Inc. will be filed with the FCC in form 10Q in the next few days.

Following the retirement of our high yield debt we're no longer required under FCC rules to file separate financial statement for wholly owned operating company.

Those of the laboratories Inc.

Following the formal presentation today in which Jim Foster our Chairman/CEO and Tom Ackerman Senior Vice President and CFO will count on our first quarter results.

They'll be available to respond to questions.

Our operator will coordinate the question-answer segment.

Please note that this call and Webcast is the property of the company and in any redistribution, retransmission, or rebroadcast without the prior written consent of the company is strictly prohibited.

And finally the Safe Harbor.

During the course of this conference call we will make general statements that are forward looking.

Forward looking statement involved risk and uncertainties that could cause actual results that different materially from those expressed or implied.

Such risks and uncertainties described in our current FCC filing will be included in our future filings for the FCC.

These risks include acquisition immigration risk, R&D risk, special interest groups, foreign exchange, contaminations, industry tends, new displacement technologies, outsourcing trends, USDA and FDA regulations, changes in laws, continued availability of product implied, personnel and control.

We do not undertake the publicly updated and revise and forward looking statement in we do plan the benefits of the

for such statements are provided the securities laws.

These note that the content of this call and Webcast contains time sensitive and therefore remains accurate only as of today May 2nd, 2002.

Now I'm please to introduce Tom Ackerman, who will begin our presentation.

will follow Tom, and then the operator will coordinate the Q&A session.

Thank you Dennis and good morning.

Net sales in the first quarter were $133.8 million up 35 percent from last year and almost four million above guidance provided on February 7.

Sales of research models increased 15 percent to $56.9 million.

While sales of the biomedical products and services increased 55 percent to 76.9 Million.

Sales of research models were up in all geographic area due to an increase spending on drug development and continued competitive problems in Japan.

Sales of biomedical products occurred principally by growth and our discovery and development service business to continued strong demand.

And particular we experienced significant demand for toxicology services, transgenic services and contract staffing.

For the first quarter full pharma net sales when adjusted to give affect for the acquisitions in the prior year increase 22 percent before unfavorable currency affects.

Research models increased 17 percent while biomedical products and services increased 25 percent.

With both segments this does not include the affects of unfavorable currency affects.

The unfavorable currency impact on sales was the primarily the result of the weakened Yen and Euro, which reduce sales in total by $2.5 million or three percent in the first quarter when compared to last year.

Gross margins in the first quarter were 37 percent equal to last year.

Research model gross margins were 46 percent of four percent improvement from last year, with increases in all geographic areas.

The improvement were due to the increase demand along with cost savings achieved in Europe from all facility consolidation in France.

Biomedical product and service margins were 31 percent down two percent from last year.

Principally due to the affect of the Primedica acquisition.

Primedica has lower margins than our other products lines and we consolidated it for three months in 2002 verses one month in 2001.

SG&A in the first quarter were 16 percent of sales equal to last year.

Amortization expense decrease $1.2 million from 2001, principally as a result of the changes in economy rules for goodwill under fares 142 and impacted EPS by two cents per share.

Operating income in the first quarter was 21.2 percent compared to 19.6 percent last year.

Improvement as the result of strong sales and improved gross margins.

Research models improved to a 34 percent margin rate from 27 percent last year principally the result of the higher sales line and cost savings.

Biomedical products and services improved to an 18 percent margin rate from 17 percent last year.

Interest expense in the first quarter was $3.9 million compared to $4.4 million in the fourth quarter of 2001 and seven million in the first quarter of 2001.

The decrease from Q4 was principally the result of retirement of 13.5 percent

support made notes with the proceeds from our convertible bond offering.

The income tax rate in the first quarter was 39 percent verses 42 percent last year.

This is the result of the increase in pretax income and improvement in the utilization of foreign tax credits.

Net income before extraordinary items was $14.5 million the first quarter or 31 cents per diluted share.

Compared to net income of $7.2 million or 18 cents per diluted last year.

The EPS for the first quarter received by four cents per diluted share the guidance provided on February 7th and a current first call concerns this estimate.

This is the result of the continuing strong demand for products and services on a world wide basis.

The extraordinary loss $16.8 million is the result of the debt repayment.

On comments on working capital.

Tax on hand at the end of the first quarter was $135 million, compared $58 million compared to the fourth quarter.

Increase is due mainly from the proceeds from our convertible notes offering.

Tax provided by operating activities was $7.4 million for the quarter.

In January 2002 we raised net proceeds of $179 million from our $185 million convertible bond offering.

Approximately $103 million of these proceeds we're used to retire Senior support

notes.

Remaining amount will be used for general corporate purposes.

At the end of the first quarter our total debt was $262 million, a $106 million increase from the fourth quarter due to the convertible bond offering.

In the first quarter DSL was 70 days a one day improvement from the fourth quarter of 2001.

And inventory levels were unchanged from the fourth quarter.

Working capital was $204 million at the end of the first quarter, an increase of $93 million from the end of the fourth quarter.

Principally due to the increase in cash.

Capital expenditures were $4.5 million for the first quarter, we're estimating year capital expenditures to be approximately $35 to $40 million.

EBITA was $33.8 million the first quarter an increase of $8.9 million up 36 percent over last year.

D&A was $5.4 million in the first quarter.

Comments on guidance which are based on the current foreign exchange rates.

We anticipate sales in the second quarter to fall in the range $132 to $135 million or 13 to 16 percent growth over Q2 2001.

This is in line with out expectation and includes one percent unfavorable impact from the Euro and Yen versus 2001.

Sales of research models will decrease slightly in Q2 verses Q1 but will increase over 10 percent versus last year.

This is due to continued strong demand offset by supply improvements at one of our key competitors in Japan.

The biomedical products and services will continue to grow sequentially over Q1 which is line with our expectations for this segment.

Biomedical products and services and sales growth over 2000 will be between 16 and 18 percent.

EPS in Q2 should be in the range at 31 to 33 cents per wholly diluted share an increase from the current first call estimate of 30 cents per share.

For the total EPS should be in the range of a $1.28 to $1.31 up almost 10 percent from the current guidance.

Thank you and now I would like to turn it over to Jim.

Thank you all for joining us this morning.

With so much confusing in the market in recent months regarding corporate earnings and performance.

I'm pleased to open this call today with three clear statements.

First we had a great firs quarter.

Second, we believe conditions are right for us to have an excellent year.

Third, we're confident in the long term outlook for the drug discovery and development market and our leadership position in it.

These three statements should reinforce for our share holders that they have invested in the company poised to continue its long track record of consistence sustainable growth and profitability.

I'll now provide you with an overview of why we're so pleased with our performance and why we remain bullish on Charles River's future.

In the first quarter we're pleased to say that the word that best describes our performance is exceeded.

We exceeded our target for reported or total revenue growth.

We exceeded our goal for organic growth from our existing businesses.

We exceeded our target operating margin.

We exceeded our growth expectation for each of our two business segments.

We exceeded our margin target for each of these two segments.

And finally, as to the bottom line we exceeded the first call consensus estimate EPS by four cents as well as our own earlier EPS guideline.

At the same time our strong and steadily growing cash flow and its successful convertible debt offering allowed us to reduce our high cost debt ahead of schedule, further strengthening our capital structure.

Our positive outlook based on this quarter and prior years results should in no way be misinterpreted as complacency on our part.

We feel extremely fortunate to be able to report such strong results in a time when many of our peer companies experience difficulty.

Our ability to deliver these results is derived entirely from the demand of our customers for our expansive and growing portfolio of products and services.

In telling the latest chapter of our post IPO story it's important that we be very clear about the state of our markets giving the ongoing dialogue about the current condition of the pharmaceutical industry.

As you know we primarily serve as the global pharmaceutical and biotech industries along with universities and teaching hospitals as well the NIH and government agencies.

So as clearly as I can say it to you today the demand for our products and services from all of our customer constituents and all our geographic markets remains very strong.

It's clear from the robust nature of our business that R&D spending in the pre clinical sector on the discovery and development of new drugs continues to be strong.

It's also clear that the demand for out source services has intensified as a result of pharmaceutical mergers.

Our current experience also suggest many more drug targets are being pursued as a result in advancement of

and

science.

Further, more drug researchers are focusing on more complex diseases, such as Cancer, diabetes and Alzheimer's, that require intensive long term research programs that rely on our products and services.

In short the core demand for our expanding pre clinical portfolio of products and services continue to strengthen.

It's important to understand that we are not selling researchers big ticket capital items.

At a times are sensitive to short term budget researchers.

Our products and services tend to be lower cost compared to many other

categories.

We are providing researchers with a very necessities of research, indeed the core ingredients of ongoing drug discovery and development programs.

The services we provide are not optional but rather essential and required elements of the drug development process.

We've spent many years working closely with our customers to build a portfolio that provides them precisely of what they need to do to do a better or efficient jobs in this discovering and developing new drugs.

Our businesses are experiencing increasing demand from both existing and new customers.

Our growth is across virtually all of our products and service offerings.

Demand is especially strong in the United States and also in Japan and Europe.

We are steadily gaining share in our existing markets.

And we are also seeing attractive opportunities to expand into new and complimentary ones.

As a result of all of these positive trends our operating income margin has improved significantly.

When you leave this call today we hope that you at least take away messages of Charles River are clear.

Strong growth, increasing market shares, a broad and expanding and unique portfolio of products and services.

Customer confidence, high and improving margins, reduced high-cost debt, strong and increasing cash flow.

That, in short, is the Charles River story for the first quarter of 2002.

Now lets look at the segment of our business and how they performed.

First, our historical core business, the research model segment standing alone had a great quarter.

We reported to you over the last four years very good quarters in our core business.

All of them above expectations.

We've experience three consecutive years of low double digit growth in North America in this segment.

First quarter of 2002 was truly extraordinary.

Our sales of life rats and other disease models increased 15 percent over last years first quarter.

Itself a strong quarter.

We saw growth in our special disease models such as (transgenic immunodeficient mice).

But also strong growth in our standard models as well.

We experienced strong demand across the board in the U.S.

Surging market share in Japan, an excellent gains in what has generally been a more challenging European market.

In Japan we've capitalized on competitive failures reducing record unit growth in our highest market share position.

Our pricing and product mix contributed to the segments revenue growth across the board we're pleased to say that pure unit growth was the main driver of this segments strong performance.

If you follow our business closely you probably are aware that when sales exceeded expectation in the research model segment.

Much of the incremental revenue drops straight through to the operating income line.

This was true in the first quarter, where are operating income for this segment increases 47 percent over the prior year.

While there's a smaller sect from the acquisition last year of the diabetic rat model company called GMI.

All of that growth is organic.

Our operating margin in the research model segment improved by seven percentage points over last year to 34 percent.

In addition to the long standing needs for research models to test new drug candidates and ethicacy, we believe our research models have become a critical tool in major new initiative undertaken by bio- pharmaceutical companies to increase the number of new drugs candidates and to accelerate their development.

For example, nearly every major pharmaceutical and biotech company now have on ongoing Prodiomics programs.

And our models have some the essential tools used by researcher to define path ways and identify targets in these programs.

The need for morally candidates, more predicted studies, fuller pipelines, faster and more efficient development are contributing to our growth and the research models segment.

Lets turn now to our biomedical products and services segment where we provide pre clinical discovery and development services on an out source basis for our pharmaceutical and biotech clients.

For prospective our development group is almost twice the revenue size as our discovery group.

We believe that through a combination of organic growth and targeted strategic acquisition at the development piece will soon be the largest part of Charles River.

Here we see more of an impact from two acquisitions we completed during the first quarter of last year.

Primedica and PAI which are now fully integrated into our development organization.

Despite the acquisition impact you'll see the organic growth in our services business was very strong.

We are as close to any company in being able to provide a customer with full service.

From the time the compound is identified to the filing of an IND with the Food and Drug Administration.

Our reported growth in a services segment was 55 percent over prior year.

Our operating income was up 67 percent on a pro forma basis meaning considering growth year over year as if we owned Primedica for all of last year's first quarter, rather than just one month.

Our growth and services sales was 25 percent.

You can see that our services businesses are not only the area where we have grown through targeted acquisitions but also one where the core or organic revenue growth rate is higher than our research model segment.

I'd like to point out to you that the operating margin in this services segment was 18.4 percent up 1.3 percentage points from last year.

Our discovery group within the services segment is already well above our 20 percent operating income standard.

While our development group built largely through recent acquisitions is lower, but progressing steadily toward that goal.

Review the lower margin in the required companies is a major opportunity to apply our management systems and discipline to achieve steady improvement towards our 20 percent goal.

The key strategic points to be made here is that we have sacrificed our commitment to high standards of profitability simply to reproduce a higher overall growth rate.

We think our higher growth businesses can and will achieve our 20 percent operating income goal.

Some already have.

In the meantime the exceptionally strong profitability and cash flow of our research models segment continues to compliment the profile of our services segment.

We believe that this focus evolution of our businesses to a product to a service profile is the right strategy.

Within the services segment we saw a number of business units outperform our already high expectations.

We've developed several unique capabilities based on a world class science and the use of high throughput techniques that are in great demand.

In our transgenic services business where we work along side researchers using

and Protiomic techniques to develop new targets halfway then ultimately drugs we open a 70,000 square foot state of the art facility to accommodate our 60 percent revenue growth.

In the fourth quarter alone we added 30 new customers evidencing our continued penetration of the bio pharmaceutical customer base.

The near and long term growth opportunities for this business we believe is truly outstanding.

In our contract staffing business we experienced 40 percent growth in revenue in the quarter.

As we further established ourselves as the leader in providing animal tier and related services to the National Institute of Health nature academic service and commercial research organization.

We added several new contracts in the quarter including within the government and academic commercial sectors.

And yet we just began to scratch the service of the total global opportunity to manage the animal tier and related research operations of the research community.

This business perfectly compliments the

services group.

With no assets and no capitol investment requirements.

In our bioanalytical testing business, part of the Primedica acquisition we've seen surging demand for our high through protesting analytical capabilities.

Our customers require more and better data faster to support the discovery programs.

We've met this market need with strength in both science and operations.

We're excited about the growth prospects for this area of our business.

Where we are successfully industrializing critical scientific methods to meet a large and growing market opportunity.

These are just three examples of the unique position we enjoy in the biomedical research tools and services market.

You know see business that was once exclusively a product business to one that is now 57 percent services.

It's important to understand that the shift reflects the significant building up of our services capabilities organically and through acquisitions and not any weakness in our research model business.

The strategic shift in the portfolio which has been carefully planned over the past several years will continue steady pace with the response to evolving outsourcing of the biomedical research community.

In summary our investors hold shares in a company that grew 19 percent organically in the quarter, 35 percent of the benefit of last year' strategic acquisition.

And with 21 percent operating margin.

A company that substantially reduced its high cost debt while having its credit rating upgraded.

One that is a leader in nearly all of the niche markets and which it participates.

The company with a portfolio that includes strong cash flow businesses, business is growing more than 50 percent.

Others with operating margins of nearly 50 percent.

The global company with great science, dedicated to staff in a strong diversified customer base.

A company with a committed and experience management team focuses on customer satisfaction and shareholder value.

Now just a brief comment on our latest financing transaction.

We completed $185 million dollar convertible debt offering early in the first quarter.

We used the proceeds from this low cost debt with a 3.5 percent coupon intended for and repurchased at 13 and half percent high-yield debt from our September 1999 leverage buyout.

We were very pleased with the interest in the offering and with its execution.

This offering allowed us to substantially reduce our interest cost while generally strengthening our balance sheet.

Next I'll turn briefly to the topic of corporate governess.

Given the Enron situation and all that's followed we thought just a few minutes on how Charles River is governed will be helpful to our investors.

First we now independent board of directors with four of our five directors being unaffiliated.

The directors that were appointed by our former parent and our LVO sponsor have departed as planned.

We expect to add at least two more independent

during the course of year.

All of our committees audit compensation and nominating the committee on directors have only independent members.

We have an experienced director that acts as our lead independent director.

We believe in the value and contribution of independent thinkers with industry and management experience.

And our directors all bought stock in the company.

Our leverage buyout investor group

now Credit Suisse First Boston is no longer legally affiliated with Charles River and their percentage ownership has of December 31st 2001 was approximately only seven percent.

Our former parent company Bausch and Lomb had sold all of its stock as planned.

This marks the end of our transition form LBO company to a truly independent public company.

Despite selling pressure resulting from the disengagement of CSFD and VNL our stock has held up quite well.

Finally we're not a company or a management team that uses accounting to tell investors a story different from the real underlying performance of the business.

And our earnings release we reference an extraordinary charge in the quarter.

That's related to the time entered debt incurred in our leverage buyout and we believe not indicative of our actual operating performance.

We also reference pro forma numbers in our release and our call.

But in a way that provides our investors greater rather than less insight into our performance.

For example by reducing reported growth rates to exclude acquisition and show true organic growth.

We believe that we are diligent in disclosing all of the information about our company that will help an investor evaluate his or her investment.

In other words truly transparent.

We expect the second quarter to also be very strong for us although our share in Japan should moderate somewhat as our major competitor begins to rebuild animal inventories following contamination problems during the past year and a half.

I can't emphasize enough that the foundation for continued growth remains fully in tact.

, customer demand and satisfaction at exceptional levels in our outlook

.

We expect our second quarter revenues to be in the range of $132 million to $135 million.

We expect fully diluted EPS to be in the range of 31 to 33 cents or in the range of 29 to 38 percent growth over the prior year.

Before providing you with a sense of our expectations for the full year, let me remind you of our publicly stated goals for the business.

First, we believe we can achieve organic growth and revenues of approximately 15 percent per year.

Second, we believe we can achieve total growth, both organic and with the benefit of our historical platform acquisition activity, of 20 percent per year.

Third, we expect our net earnings and EPS to grow at a higher rate of up to 25 percent per year.

Consistent with our goals to the company's growth and development, we're confident about the balance of the year.

Trends in our existing markets appear strong.

We're poised, fully staffed, have new capacity online and are ready to execute.

Accordingly, we estimate full year EPS in the range of $1.28 to $1.31, for more than a 40 percent increase over the prior year.

This guidance is of course exclusive of any acquisitions that may occur during the year.

On top of our existing portfolio, we have some very interesting small acquisition opportunities and developments.

It's successful in acquiring one or two of these add on businesses, they would contribute modestly to this year's revenue base and, consistent with our acquisition guidelines, would not be diluted to current EPS.

We're also looking at more substantial add on capabilities in our services segment consistent with our historical practices and, as always, we're looking carefully into in vitro or non-animal technologies that compliment our in vitro products.

We're particularly excited about opportunities for growth in the field of

services, either through startup or partnership.

We hope to tell you more about these areas at our next call in July, if not sooner by press release.

So, in closing, thank you all for your time this morning on behalf of our more than 4,000 employees worldwide.

I'd like to thank all of our investors for their continued support and we now would be pleased to answer any of your questions.

Thank you sir.

The question and answer session will begin at this time.

If you're using a speakerphone, please pick up the handset before pressing any numbers.

Should you have a question, please press one followed by four on your push button telephone.

If you wish to withdraw that question, please press one followed by three.

Your questions will be taken in the order that they are received.

Please stand by for your first question gentlemen.

Our first question in the quene comes from

.

Please state your affiliation followed by your question sir.

Good morning.

This is Phil Mideaux from SG Cowan.

Congratulations on a great quarter.

Tom, one question about the operating margin.

At 21 percent this quarter, do you think that's something that you will be able to maintain throughout the year because of cost savings or will that move down just a little bit?

No, I would think that we would be able to maintain that, Phil.

There may be a little bit of modulation because of seasonality but I think the plus 20 percent margin and in the range of 20 percent, 21 percent is kind of where we see ourselves going.

Great.

Second question.

Apparently the NIH, during the quarter, delayed the release of some funds to academic labs.

Did you see any impact of that on your business?

We didn't Phil.

Our academic and university sectors about 16 percent of our gross revenue.

So just to keep that in proportion.

But that sector remains strong and at that level and that we haven't seen any impact at all.

Great and one final question.

Your business is obviously benefiting quite a lot from the outsourcing trends in the pharmaceutical industry.

Have you seen any change in those trends over the past quarter or six months, first?

And, second, what do you think the biggest risk is to the outsourcing trend, if there is one?

Yeah.

I, We haven't seen any change in outsourcing demand except I would say positively.

It continues to be stronger and stronger as evidenced by the growth and development of our services businesses, the backlogs that many of them have, the contracts that we're signing up in our transgenic services business, which is all outsourcing, the increase in contract staffing, increase in laboratory services.

So, as the pharmaceutical industries come under pressure and really work on their pipelines and really work on their cost structures, I think outsourcing is one of the methodologies that will benefit them.

So, I really don't see that there's a risk to that.

I think it's only about our ability and our colleagues, other companies in the sectors, ability to do the work for them on a timely and high quality basis.

We're obviously very focused on doing both and I know that we do the work as well as our clients.

I know that we do it efficiently and I know that we do it in a cost basis that is beneficial to them and allows them to focus on other areas.

So, I can't imagine what market dynamics would impair or slow down outsourcing.

Great.

Thank you.

Thank you.

Our next question in quene comes from Mr.

.

Please state your affiliation followed by your question sir.

Hi.

Good morning.

David Winley of Jeffries & Company.

Congrats on the quarter.

Excuse me.

I wonder Jim if you could elaborate a little bit, I know you don't like to gate the timing of acquisitions, but elaborate on maybe how far down the road you are in discussions with these, the ones you referenced as being very interesting?

OK.

I'll do my best to be responsive without being overly specific.

The general proposition deal flow has been quite good.

And let me just reiterate the fact that while it's good, we continue to have very stringent requirements of growth and profitability and quality of science and we're trying to do deals that aren't dilutive.

We are seeing a lot of things in our space.

So, let me sort of reiterate that that's pre-clinical, with a focus on additional services in the development arena.

With a focus on in vitro or non-animal technologies to the extent that we can find them.

And with a focus on high

screening methodologies and also the abilities to do more research services or drug efficacy testing.

And I would also say that we're looking at things that are geographically based within that arena we're always looking to expand.

So, I can just say that we have ongoing discussions going on.

There's nothing at the current time that we would say is either material or probable or necessarily on the front burner and even when things are, they don't close until they close.

So, all we can tell you is that it continues to be part of our growth strategy.

We're seeing interesting businesses and if they fit our criteria, you're likely to see us make some announcements perhaps sometime during the year.

OK.

Great.

The, wanted you to clarify for me.

On the last call I believe you talked about in your significant expansion on the corporate headquarters campus, primarily to expand, I believe the transgenic services business and I wanted you to remind me the timing of when that was opened and fully operational.

Right.

We built a 70,000 square foot free standing building entirely dedicated to transgenic services.

If you'll recall from other discussions, transgenic services is a business where we house genetically altered animals for our clients in these plastic bubbles which allows for terrific biosecurity and flexibility on the customer's part.

That business has been growing.

It's our fastest growing business and that's really a major outsourcing focus of our clients.

So, I would say that, that was opened within the last month and, as I indicated, we have 30 new customers.

It's been filling up very rapidly.

This was a major facilities move for us.

We have historically been adding

in this particular business kind of incrementally and slightly ahead of where we need it.

And, in this case, we see so much demand, particularly in the Greater Boston area where multiple biotech's and universities and teaching hospitals that we really thought we could preempt them or save them the cost of building their own facilities or renovating current facilities.

So, it's fully open.

We're growing as fast as we bring in the work.

We are beginning to see if fill up.

We still have space to bring in new clients and we are very pleased with it.

That's fantastic.

Tom, quick question on the biomedical product and services margin.

Can you give me a sense of whether you aspect that margin to steadily improve throughout the year or will it be more of a kind of a jump up to a higher level and then kind of that level or a flat level through the rest of the year?

Yes, I think it will move up a little bit in the second quarter Dave.

While I think it will probably improve a little bit more from that during the year because of the growth and the sales sequentially.

I don't necessarily think it will be dramatic from the second quarter to the third or the third to the fourth.

So, we had talked about a margin rate of 33ish to 34ish, in our guidance for the year.

I would still expect to see us in that range, so we will probably move up to that range in quarter two and then more or less maintain it with a little bit of (modulation).

OK, great, thanks for those answers and thanks for a great quarter.

Thank you Dave.

Thank you, our next question in Que. comes from Mr.

.

Please state your affiliation, followed by your question, sir.

Yes,

with First Boston.

Just wanted to double back on the research model business.

You mentioned that you have a Japanese competitor who is having obviously some difficulties.

I wonder if you could just give us a feel for what was the magnitude of the jump in Japan in the research model business.

You also were talking about some margin improvements coming out of France.

I was wondering if you could, maybe provide some additional details on that.

When do you expect the Japanese competitor to be back up and running?

Well, Tom and I will both answer that.

Hi

.

Our major competitor in Japan had a pretty serious contamination.

Multiple contamination, I should say.

It's been over the last year and a half.

They have steadily been slower to fix that problem than we had anticipated.

The sub-caution conservatism, I think, on the part of our Japanese colleagues because its the competitor that sells the animals at much lower ASP's than we do.

They sell lots of the academic sector, who will want to go back to them in parts when they get up to full strength or full speed.

I should also say though, that they also sell a lot to pharmaceutical clients and they will probably get some of that back, but we hope no more than half.

So, they seem to be struggling getting back up to speed.

I think they have another small contamination, actually another product line.

Which is definitely going to hurt the reputation and make people leery of jumping back with them immediately.

Probably picked up a couple of million dollars of business, which is maybe a point or two in share.

We will get some of that back, but difficult to tell

.

Our Japanese folks are saying that they should be back up to strength and the product line that was a problem

the end of May or early June, we will see.

That's obviously what they are saying.

If they don't, we will continue to be, so it would have a stronger performance in Japan and I think we have been articulated.

Even if we get back 50% of that business, that would be a nice improvement in share and nice growth.

That's a market were we've been very low price moves.

Just before Tom jumps on, that's were the Japanese situation.

I also should kind of delicately say that, I personally think that as we see more activity from a acquisition or merger point of view, in Japan, that we will likely to see a greater demand for our services.

I think we will likely to see a similar trend that we are seeing in the states and also in Europe.

Of course, Europe has benefited from the closure of Charles, over Frances last year.

We have been able to consolidate, use our capacity in France much better, so we have much better margins in our French business.

We also had a extraordinary quarter in Germany.

So, that's really adding to the European performance.

Yes (Dan), just for the follow up, and I think Jim touched on most of the points, but with the Japanese situation,

in slow coming back, and of course that's in building inventory, but just being accustomed

the act.

It's really the principal reason why we expect to see a little bit of decrease in the second quarter.

But, it wouldn't surprise me to be back here in three months indicating that they quite haven't got up to speed and the second quarter was more normal with the first quarter.

These are the historical trends being nonessential.

So, it could be a little bit conservative, because some of the customers are coming back.

Once they had inventory available, it doesn't necessarily shift immediately.

I think some of those customers that will return to that supplier, will probably do it a little bit more slowly than they have done in the past.

OK, so I guess, as you look at the margin on the research model business.

It tells me you are building in some very conservative consumption's for the balance of the year.

Is that a fair statement?

I don't think I would characterize it, quite like that Ken.

I think it could be a little bit conservative, but you know we are up 10% in the second quarter over last year.

I wouldn't characterize that as conservative.

So, I think that there is some upside, to put it differently.

Depending on the Japanese situation, things like that, but I wouldn't characterize it as overly conservative.

OK, last question, on the (transgenic) capacity.

You mentioned the Wilmington facility, scaling up, just ahead of were demand that you're seeing for that

.

When do you expect to have a decision point on the next expansion?

Just to be clear, what I said was that we have historical been adding capacities slightly ahead of when we needed it.

(inaudible gap) this is a much bigger move.

Hope we need it all, very short term, but it is hard to know.

All I can say, it's filling up nicely, we do have a plan for a mirror image of that facility, if and when we fill this one up.

I think we are going to get some use out of this for certainly the balance of this year and for a portion of next year as well.

OK, great quarter, thanks.

Thank you, our next question in Que. comes from Thomas Hancock.

Please state your affiliation followed by your question, sir.

Tom Hancock, with Piper Jaffray.

Tom, just a quick question for you.

On the accounting going forward for the convertible debt.

Have any color on how you will continue to account for that?

Secondly, could you give us a little bit more of a perspective on your acquisition strategy going forward.

OK, I will handle the first part of that.

I don't expect in the near term to have any changes to the way we accounted for it, in the first quarter, Thomas.

Just to put a little bit of color on that, once the quarter comes out, which I believe will be this week, if you look in the footnotes, you will see an actual reconciliation of net income and earnings per share.

Essentially, what we have done, in our calculation, is add back about $700,000 tax effected for the exclusion of the interest expense on the convertible bond and added back about 3.4 million shares, outstanding, as though the convertible bonds had converted.

So, you can't actually tie it out on the face of the footnote.

So, from an accounting standpoint, we actually have 10.5 million shares outstanding, fully deluded in the first quarter verses for instance, 46ish in the fourth quarter of '01.

That's the result of the convertible offering in the accounting treatment.

Similarly, we are taking the interest expense associated with that, and essentially adding it back to net income in the footnotes.

I expect that's how we will continue to do that in the near term.

Those shares outstanding, that I mentioned in the first quarter, will rise a little bit in the second quarter because the convert wasn't done until the end of January.

So, you only have a two month average out of the three.

On a full quarter bases, it probably will be a little bit higher than 50 million shares outstanding.

Great.

Tom, on the acquisition strategy, I would say that our strategy hasn't changed.

The strategy is to continue to build strength in the pre-clinical space or in the same channel.

We are very much focused on that, as I said early.

Deal flow is good.

I think that we are confident and comfortable now that we have the financial ability and operational ability to continue to do

of size of significant.

I'm having

to

and PAI nicely.

Some of the things we are looking at are reasonably large.

We are looking at business, large and small, but continuing to stay in the business area that we know well.

Great, and congratulations on a terrific quarter.

Thanks Tom.

Thank you, our next question in quene comes from Mr. Michael

.

Please state your affiliation followed by a question sir.

Yes.

It's Invest Tech PMG Capital.

Good morning guys.

Very good quarter.

Jim could you tell us something about how you handle growth?

We 're all familiar with businesses that have been experiencing from time to time extraordinary growth numbers like 50-60 percent in business units and that's just not sustainable.

How are you integrating the operations keeping control of the growth?

Well.

You know our organic growth rates about 20 percent and that, you know, that's our goal.

With acquisition, that's our goal with acquisition.

We did the first quarter without them.

I would agree that that is rapid growth, and of course our reported numbers are even more dramatic.

Look Mike, I think it has a lot to do with what we buy.

We buy businesses that we understand.

We buy businesses that fills gaps that we have in our portfolio or strengthen current capabilities that we have or expand our businesses geographically so, they often hit the ground running, even Prim-Medical which had much lower profit margin.

We were able to integrate so well because we really had a need for it in terms of supplying our clients.

Also the people really needed a hole and a context for their business.

So I think it has a lot to do with . . . buy businesses that you understand, buying businesses that fit.

We're very keen on making sure we get good science, so we haven't had to kind of supplement that or, or change that in any way and we've been able to either identify people already in these businesses or people that we already had in Charles River to operate these businesses.

I would also say that we have a methodology of reviewing each P&L on a periodic and consistent basis, so that we always have the details of the business from a competitive point of view and from an operational point of view and we don't sort of assume that they're being managed entirely remotely without any, without any interaction.

So all that I can tell you is that we manage the business as closely we'll still able to do that have our arms around the pieces, and since the pieces all make sense collectively, it has allowed us, I think to continue to add good people both scientifically and operationally and for it all to work.

And, and most of the things that we are looking at now should any of them come to past falls in those sorts of parameters.

And even when those individual pieces like in contract staffing and growing at 40 percent, you just staying very close to the details and making sure it doesn't out grow it's capabilities to deliver profits?

I mean we are, we try, we're not just interested in being big, we're interested in having an appropriately sized business to service our market and maintain the kind of profitability that we've grown accustom to and that our adjuster demand which is around 20 percent pre-taxed.

So look managing, managing growth is...it's always a difficult task.

I'm not making light of it.

I think it's . . . we're cognizant of it every day and we have to continue to do it in a way that doesn't in any way impair quality or margins.

Keep up the good work.

Thanks Mike.

Thanks.

Our next question cue comes from Mr. Bob

.

Please state your affiliation followed by your question sir.

Hi.

Bob Yettet at

Capital.

I thought it was a very good quarter.

I just wanted to ask Tom about bad tax rates.

Tax rates that, you know, turned for the better this quarter.

Was wondering what you think will happen for the balance of the year.

Well right now we're saying 39 percent, you know, because of our historical position coming out of the LPO where we had a lot of debt.

Even though we had good operating margins, our tax rate was very unusually high, excuse me, so it come down dramatically over the last couple of years a little bit less dramatically from '01 to what we're seeing now.

I think there is some potential for it to move down but not, you know, that kind of decrease that we saw, for instances, from 42 percent to 39 percent, I think if anything it might move down below 39 percent.

Depending on fine tax credits and what might happen to our operating income and things like that so, you know, possible some modest upside, but I don't think it would be that dramatic at the current time.

OK.

I just had a follow up question there, just in cap ex.

Be there yet $4.5 million the first quarter but full year looks to be at a much higher rate.

I was wondering if there are any discrete projects there explain, you know the full year forecast.

No not really, I. . . and I hate to have to say this but we tend to, you know, be weighted to a spending capital more actively in the fourth quarter and as the air moves along, I think regarding to that kind of a cycle, for instance last year in the fourth quarter we spent about $15 million in capital and $35 million for the year.

We did have the big projects here at our main campus in terms of the transgenic services building, but I think what the, the businesses that we've added and being an excess of $500 million company, you know, I think the $35 million to $40 million is a good rate of capital for our likes to include the watt of implementation at some of our more sophisticated businesses, some building expansion including in the animal businesses now and I think it will be a little bit weighted towards the end of the year and the third quarter as it's been historically.

OK and its

from broader question.

Your business has been extremely strong.

Some of them a lot of late to pre chronically.

Why do you think you've been so strong while, you know, while some of the tiers that have provide whether capital equipment or other pre-clinical services have been weaker?

Were you talking about Europe or generally?

Just generally.

Yeah, well I mean you sort of answered it in your question, it's a different business model.

They're not big ticket items.

They're not optional items.

You've got to use essentially everything we either sell as a product or provide as a service, not only to determine if you've got a

determine whether it's safe enough and advantageous enough to go into people.

So, you know, it's a portfolio that it's fairly mandated pretty much all over the world and again it.

That's why we put this portfolio together because it has that commonality of being things that, that are of an essentially nature.

So, we're not seeing any of things that we're reading about that others are enduring because it's a totally different product and service mix.

Got it.

Thank you very much.

Thank you.

Thank you.

As a reminder ladies and gentlemen, should you have a question, please press 1 followed by 4 on your press button telephone

.

Our next question comes from Paul Knight.

Please state your affiliation followed by your question.

Its Paul Knight at Tom Weisel Partners.

Hi Jim, Tom.

Could you kind of go over the tone of business as the quarter progress to this.

I hear from others in the industry that it started out light January but kind of picked up speed and continued to show good tone in April.

What's your impression?

We started strong and continued to be strong.

I mean it really, really, was just a terrific quarter you know, we have lots of different businesses in lots of geographical local and you know, we've been fortunately enough really to have them all working in the sync at the same time we have very strong results in Europe as we said, very strong results in Japan, very strong results in the animal business that we've seen and I don't know how long which really is an indication that there's a lot more money flowing into pure discovery at a later stage.

Development, so it was a very strong quarter out of the box and we're not seeing any demolition.

Is it your impression that biotechnology is picking up pace maybe even now rather than former?

Yeah, but I mean that's only through our lens

because but for a couple of things, one is that the biotech's never did any of the things that we do for them internally except maybe the very, very big one so since our business is so much out towards the -- we see a lot of activity and a continuing increasing activity of course when we do acquisitions its those increases, you know the size and scope and activities of biotech's but our final business has been increases very nicely and not just in the product sector in the service sector you'll be surprise to see the sort of distribution of customers buying our services including very large

, so you know, we're looking at businesses large and small but continuing to stay in the business area that we know well.

Thank you, our next question comes from George

, please state your affiliation followed by your question.

And congratulations folks.

A great quarter.

One quick question, you raised your EPS guidance about 10 percent, and I'm just wondering what part of that raise is coming from the lower interest expense from the convertible bonds and what percent, what part of that raise is from the more optimistic outlook for the revenue growth and EPS growth?

Thank you.

At this time, George, none of that's from the convert.

We had given our guidance at year end of 115 and 118.

Then we actually increased that to 118 to 121 because of the convertible offering when we did our conference call.

So, we actually factored that in and it's probably still about the same.

I think it'll be somewhere in the three to four cent range.

And it's actually more created from a cash standpoint but because of the accounting that I referred to earlier, we're actually recording it on a more conservative basis which is it converted.

So, really it's coming from our operational activities.

The stronger first quarter and the continuing strength that we're seeing and pretty much both the segments as Jim had talked about.

OK.

Thank you.

Thank you.

Our next question comes from

.

Please state your affiliation followed by your question.

.

You mentioned academics and universities are about 16 percent.

Could you break down your customer mix by segment?

Yeah.

To this extent, biotech and

pharma are about 80 percent and I'd say that's about 55

pharma and 25 biotech.

Hospitals and universities.

We do lump them together as academic institutions, as I said is 15 or 16 percent and the federal government has been about 5.

OK.

And you said that, in the answer to a previous question, you've seen biotech spending actually ramp up a little faster than pharma?

Well, yeah, we have because they are, their outsource is almost by definition since they have very little of the service capability internally nor the ability or desire to bring it in house.

So, as we make acquisitions in the service sector, we pick up more biotech business and, of course, it grows quite quickly.

But I also said that we're seeing a significant increase in services by our pharma clients worldwide.

Exactly.

Thank you very much.

Thank you.

At this time, there are no further questions.

I will now send the conference back to Mr. Shaughnessy.

That's it.

Thanks for being with us this morning and we look forward to talking with you again in July.

Thank you.

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That concludes our conference call for today.

Thank you all for participating and have a great day.

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