Charles River Laboratories International Inc (CRL) 2002 Q2 法說會逐字稿

Good morning and welcome, ladies and gentlemen, to the Charles River Laboratories second quarter earnings release conference call.

At this time I'd like to inform you that this conference is being recorded and that all participants are in a 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.

Please go ahead, sir.

Good morning and welcome to Charles River's investor conference call and web cast for the second quarter of 2002.

Our intention is to make this and future sessions fully acceptable and nonexclusionary.

Such information about the company and our performance and financial results is made broadly available to the investing public.

In our planned remarks today we'll review our business performance and financial results for the second quarter and provide some general guidance on our future performance.

We plan for up to a one-hour session.

For practical reasons we may be 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 have an investor perspective.

I trust all you have had an opportunity to review the release yesterday.

If you don't have a copy of the release you can retrieve it from our web site now.

Second quarter financial statements for Charles River Laboratories international will be filed with the SEC on form 10-Q within the next few days.

Just a note we're not no longer required to file separate financial statements for Charles River Laboratories, Inc.. following the formal presentation today is Jim Foster, chairman and CEO.

Tom Ackerman, senior vice president and CFO, will comment on our second quarter results they'll each be available to respond to questions our call operator will coordinate the question and answer session for you.

A tape replay of this call will be available over the next week beginning at 11:00 today and can be accessed by calling 1-800-428-6051 and entering PIN number 250904.

The web cast will be archived on our web site and available for two weeks or until August 14th.

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

Now finally the safe harbor.

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

Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those expressed or implied.

Such risks and uncertainties are described in our current SEC filings and will be included in our future filings with the SEC.

These risks include acquisition integration, R and D, special interest groups, foreign exchange, contamination, industry trends, new displacement technologies, outsourcing trends, USDA and FDA regulations, changes in law continued availability of products and supplies, personnel and control.

We do not undertake to publicly update or revise any forward-looking statements and we do claim the benefits of the safe harbor provisions for such statements as provided by the securities laws and regulations.

Please note that the content of this call and web cast contains time sensitive information.

And therefore remains active only as of July 31st, 2002.

Now I'll introduce Tom Ackerman, our CFO, who will begin our presentation.

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

Thank you and good morning.

Net sales in the second quarter were 136.5 million, up 17 percent from last year and almost two million above our guidance provided on May 2nd.

Sales of research models increased 18 percent to 56.5 million, while sales of biomedical products and services increased 16 percent to 80 million.

Sales of research models were up in all geographic areas due to increased spending by pharmaceutical, biotech, governmental and academic institutions.

Sales of biomedical products and services were driven by strong demand across all products and particularly safety assessment, biosafety testing, contract staffing and transgenic [ph] Services.

The net favorable currency impact on sales for Q2 versus last year was less than one percent with a strong Euro being partially offset by the weaker Yen.

On a year-to-date basis net sales were 270.3 million, up 25 percent from last year.

Sales of research models increased 16 percent, while sales of biomedical services and products increased 33 percent.

On a year-to-date basis when adjusted to give effect for acquisitions in the prior year pro forma net sales increased 17 percent.

Research models increased 14 percent while biomedical services and products increased 20 percent.

Net unfavorable currency impact on year-to-date sales versus last year was less than one percent.

Gross margins in the second quarter were 38 percent, an increase of approximately one percent versus last year.

Research models gross margins were 46 percent, two percent improvement from last year, with improvement in all geographic areas.

The improvements were due to the increased demand and cost savings achieved in Europe from our Europe consolidation in France.

Biomedical products and services margins were 33 percent equal to last year but a two percent improvement over the first quarter.

We experienced significant improvement in transgenic services and biosafety testing.

On a year-to-date basis gross margins were 38 percent versus 37 percent last year.

Research models gross margins were 46 percent versus 43 percent last year, while biomedical products and services were 32 percent versus 33 percent last year, due to the impact of the Primedica acquisition.

SG and A in the second quarter was 16 percent of sales, equal to the first quarter, but one percent higher than last year.

On a year-to-date basis, SG and A was 16 percent of sales versus 15 percent last year.

The major reason in both the quarter and year-to-date was the decrease in pension income versus last year.

Amortization expense decreased 1.4 million from 2001, principally as a result of the changes in accounting rules for goodwill and FAS 142 and impacted EPS by two cents per share.

During the quarter we completed our review of intangibles under FAS 142 and did not identify any goodwill impairment.

Operating income in the second quarter was 22 percent of sales compared to 21 percent last year.

The improvement is the result of strong sales and improved gross margins.

Research models improved to a 34 percent margin rate from 29 percent last year, principally the result of the higher sales volume and cost savings.

Biomedical products and services improved to a 20 percent margin rate from 18 percent last year due principally to margin improvement in our development services.

On a year-to-date basis operating income was 22 percent of sales versus 20 percent last year.

The margin for research models was 34 percent versus 28 percent last year, while the margin for biomedical products and services was 19 percent versus 18 percent last year.

Other income was principally the result of net foreign currency gains.

Interest expense in the second quarter was three million, compared to 3.9 million in the first quarter of 2002, and 5.9 million in the second quarter of 2001.

The decrease from Q1 was principally the result of the retirement of our 13 and a half percent senior subordinated notes in the first quarter and the retirement of a term debt in the second quarter.

The income tax rate in the second quarter was 39 percent versus 41 percent last year.

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

For the remainder of the year we're looking at several opportunities to lower our tax rates slightly.

Net income before extraordinary items was 17.4 million in the second quarter, or 36 cents per diluted share compared to net income of 10.6 million or 24 cents per diluted share last year.

EPS for the second quarter exceeded by three cents per share the guidance provided on May 2nd and by four cents per share the current first call consensus estimate.

The extraordinary loss of 1.1 million net of taxes is the result of debt repayments.

On June 8th we purchased Biolabs, a small preclinical services company in Ireland, which added almost 900,000 sales in the month of June with an operating margin of over 20 percent.

The net purchase price of 24 million Euros was eight and a half times last 12 months trailing EBITDA and two and a quarter times last 12 month sales.

Some comments on working capital: Cash provided by operating activities was 46.2 million for the second quarter, increasing our cash on hand at the end of the second quarter to 84.7 million, compared to 135 million at the end of the first quarter.

A decrease is due mainly to the prepayment of our LBO related term date and the acquisition of Biolabs in ire land.

At the end of the second quarter our total debt balance was 188.7 million, a 73 and a half million decrease from the first quarter, due to the repayment of our term debt.

Of the total outstanding debt, we have convertible bonds in the amount of 185 million, with a coupon of three and a half percent.

The conversion price is 3887 and they're not on call until the first quarter of 2005.

In the second quarter DSO was 69 days one day improvement from the first quarter of 2002.

Accounts receivable decreased 5.3 million for tend of the first quarter.

Inventory levels were basically unchanged.

Working capital was 137 million at the end of the second quarter, a decrease of 67 million from the end of the first quarter, principally due to the decrease in cash from the debt repayment.

Capital expenditures were 9.8 million for the second quarter and a 14.3 million year-to-date.

We're estimating total year capital expenditures to be approximately 40 million.

EBITDA was 36 million in the second quarter, an increase in five million or 16 percent over last year, DNA was 5.6 million in the second quarter.

On a year to date basis EBITDA was 69.8 million an increase of 15.9 million or 25 percent over last year.

Year-to-date was 11 million.

Guidance: The following guidance is based on the current exchange rates.

We anticipate sales in the third quarter to fall within the range of 138 million to 140 million or 12 to 14 percent growth over Q3-2001.

We should see a slight decrease in research model sales in Q3 due to Q2 due to normal seasonality trends in the summer but should still see an increase of almost 10 percent versus last year.

Biomedical services will increase sequentially over Q2 increase of 17 percent versus Q3 last year.

We anticipate sales for the total year to increase 18 to 20 percent versus last year.

Currency impacts are negligible while the impact of acquisitions is adding approximately three percent to sales growth.

This compares favorably to the guidance we provided on February 6, 2002, where we indicated sales growth for the year would be 15 percent.

EPS in Q3 should be in the range of 36 to 37 cents per fully diluted share, an increase from the current first call estimate of 34 cents per share.

For the total year EPS should be in the range of 137 to 140.

Up almost 10 cents per share from our prior guidance.

Now I'd like to turn it over to Jim.

Thank you, Tom.

Good morning to all of you and thank you for joining us this morning.

We understand and appreciate the lack of confidence and discomfort that investors are feeling in these uncertain and volatile economic times.

We believe this call today will provide all of you with a renewed level of confidence in Charles River's overall business model and ongoing strategy, which continues to yield strong consistent and improving financial performance.

Let me now briefly and succinctly review the highlights of our second quarter which I will review later in greater depth.

We beat the numbers for the quarter exceeding the first call consensus and our guidance for EPS by almost 10 percent.

Our second quarter EPS is up 50 percent over the prior year.

We met or exceeded our key strategic growth and profitability targets for the first six months.

Free cash flow surged to record levels.

We paid off the balance of our term debt.

Further strengthening our capital structure and moving beyond our LBO transaction.

We remain up beat about the sales and earnings outlook for the coming quarter and the balance of the year.

We believe the trends in Pharma and biotech R and D spending and in particular outsourcing within our particular market segments remains strong.

We don't expect the Pfizer, Pharmacea [ph] Merger to adversely impact our revenues in the near or long-term.

From a governance standpoint we've already strengthened our already independent board of directors.

Our LBO sponsor, Credit Suisse First Boston, has disposed of all of its shares, effectively completing the transition an LBO company to an independent public company.

And finally, we offer our assurances that our accounting is conservative.

Our control is extensive and our numbers fairly and accurately represent our business performance.

And now a bit more color.

Over the past few months investors have taken a hard look at the companies in which they are invested.

And the management teams who they have entrusted with their capital.

Investors are rightfully demanding of management that we demonstrate real and sustainable sales and earnings.

Solid business strategies and fair and accurate financial statements.

For those companies and management teams that haven't been able to respond to those demands, the markets punishment has been quick, severe and apparently justified.

I hope today to reassure all of you who have invested in Charles River Laboratories that we're a company that have real and growing earnings with well conceived business strategies that we're executing successfully within an attractive long-term market.

In other words, we ask that as investors you evaluate Charles River based on our actual performance, rather than what the so-called tools sector as a group may be reporting.

Our portfolio is in fact unique.

And our products and services are essential, required elements in drug discovery and development.

And therefore our performance does not follow in lock step with the handful of other companies that are often identified as comparables within the drug discovery and development space.

Here are our thoughts on why Charles River is a company worth owning.

We beat the numbers again for the eighth consecutive quarter, which is the entire time that we have been a public company.

And remember the targets that we're beating already reflect double digit growth and strong profitability.

A second quarter like so many before it reflected strong reported and organic revenue growth, strong profitability, and an improving capital structure.

Not only have our earnings steadily increased but so has our free cash flow.

We think that virtually on any significant financial performance indicator that you can identify, that we have demonstrated strength and consistent continuous improvement.

We believe Charles River is uniquely positioned within an attractive long-term market.

We believe that the experience, scientifically and to ship to our customers that we bring to the market has secured our long-term leadership position.

Our strong financial results today and for more than five decades flow from our focused strategy, our market leadership position, our management principles, our commitment to excellence, and our unique competitive advantages.

Our numbers are the end result of sound strategy, solid management and relentless execution.

And are not now, nor have ever been, forced to achieve a predetermined outcome.

With that as context and recalling our publicly stated financial goals for the business, being 15 percent organic revenue growth and 20 percent revenue growth with acquisitions, 20 percent operating margins, and up to 25 percent growth in EPS, we think it's clear that the second quarter of 2002 was another winner for Charles River.

We beat the high end of our guidance by nearly 10 percent or three cents per fully diluted share.

We also beat the first call consensus estimate by four cents.

This is an increase in EPS over the prior year of 50 percent.

We grew our revenues by 17 percent, including more than 15 percent organically.

Our operating income grew 24 percent with an operating margin of 22 percent.

Our net earnings grew 64 percent before the extraordinary loss related to early debt repayment.

Our free cash flow from operations increased dramatically.

From 18 million dollars a year ago to 53.6 million dollars this quarter.

We paid off the remainder of our LBO debt way ahead of schedule.

We added a new business to our services segment, with a reasonably priced and accretive strategic acquisition.

And finally we've strengthened our board by adding a fifth independent director, with many years of senior R and D experience within the pharmaceutical industry.

Because we're often focused on quarter to quarter performance, I think it's useful to take a look at our performance for the first six months of the year.

Our results typically have a modest degree of seasonality in them, in that our first quarter is historically our strongest.

We think the best measure of our growth profile is the year over year rather than a sequential quarterly comparison.

So a look at six months performance should help clarify the picture.

For the first half of 2002, our revenues are up 25 percent on a reported basis and up 17 percent organically.

These exceed our long-term goals of 15 percent organic growth and 20 percent growth with acquisitions.

Our research model business is up an unprecedented 16 percent in sales, and our services businesses are up at twice these levels, or 32 percent.

Without the impact of acquisitions, our services businesses were up almost 20 percent.

And our most important measure of performance, operating income, shows we're up 34 percent over the first six months of the year, with an operating income margin of 22 percent.

You'll recall that our goal for operating profit margin is 20 percent.

Operating profits and our research models business are up 43 percent, with an unprecedented 34 percent operating margin.

And our services businesses are up 45 percent with a steadily improving operating margin of 19.4 percent.

When you look at the general health of our business this year, these numbers should give you comfort that our growth and profitability are very much tracking at or ahead of our long-term financial goals.

You should be aware that we do tend to see some moderation in our growth in the second half, as a normal function of how our customers manage their research programs throughout the year.

This is already reflected in our existing full year guidance.

We talked last quarter about our view of Pharma and biotech R and D spending.

At the risk of being repetitive, we continued to see steady worldwide demand and spending for our products and services.

Outsourcing in our market segments appears to be moving ahead at a steady pace.

Long-term, we believe the outsourcing of Marriott support services will be a growing strategic necessity for pharmaceutical and biotech companies worldwide.

Demand for the necessities of drug discovery and development programs like our research models has been very strong consistently for more than three years.

And continues its upward trend this year.

On the services side, we continue to see increasing customer demand.

We have no indications from our customer base that they anticipate using less of our products and services.

In fact, the demand for our portfolio product of and services remains strong.

We also need to remind you we don't sell our intend to sell equipment or other large capital items.

Our products are low cost consumables that are regulated necessities to discover and develop drugs.

They are in no way optional expenditures.

Our services are requirements to convert ideas into leads, leads into candidates, and candidates into FDA approved drugs to be tested in patients in the clinic.

We strongly believe that the industry's overall lack of new block Buster drugs and patent expirations strengthens rather than weaken demand for what we offer researchers and research programs.

As we deliver our portfolio of ingredients necessary to replenish and refresh these pipelines and lead the drug industry to the next generation of products.

Our analysis is that Pharma and biotech spending remains strong is therefore based on what we see every day in their ordering patterns.

In our daily customer conversations, in the number of new projects, and the amount and extent of new contracts.

We believe that our worldwide business of supplying virtually every drug company biotech company hospital and university with key products and services to develop drugs makes us a natural bell weather of what the industry as a whole is doing.

Our vantage point, as well as portfolio of products and service offerings is unique.

And the demand for the totality of our menu of services continues to increase.

Finally, we've looked at our historical selling activity before and after Pharma merges.

While this may seem counter intuitive to some, our sales tend to increase after a merger, especially in our services business.

We think that flows from our strong positions in the largest and strongest Pharma companies, and our contribution to the success of those companies often translates into a larger overall share of the consolidated and more focused R and D operation.

We have now typically seen a fall off in demand once the merger transition is complete.

And the combined R and D operations focus their resources on their combined strengths.

The combined organizations will also invariably work to reduce their cost structure which translates into increased outsourcing, thereby increasing demand for our service offerings.

So in conclusion, at this time we do not foresee a material negative impact on our business resulting from either the Pfizer farm see yeah merger or the [inaudible] Merger nor are we overly concerned about any of the other anticipated mergers.

Now let's look at the segments of our business and how they performed.

First, our historical core business, the research model segment, standing alone had another strong quarter.

We've reported to you over the past two years on very good quarters in our core business, all of them above expectations.

We've experienced three consecutive years of double digit growth in North America in the segment.

The second quarter of 2002 was another terrific one.

Our sales and research models increased 18 percent over last year's second quarter, which itself was a strong quarter.

We continued to see growth in our special disease models, such as genetically altered or immuno deficient mice and in our standard models as well.

We experienced strong demand across the boards in the U.S., continued market share advances in Japan, and solid gains in what has generally been a more challenging European market.

With respect to Japan, I'd like to clarify that while we've seen particular strength resulting from some health problems with our competitors' animal models, he we still expect our business in Japan to remain solid for the balance of the year.

While pricing and product mix contributed to the segment's revenue growth across the board, pure unit growth was again the main driver of the segment's strong performance.

When sales exceed expectations and the research model segment, much of the incremental level dropped straight through to the operating income line.

This was true in the second quarter.

Where our operating income for this segment increased nearly 40 percent over the prior year.

Essentially all of that growth is organic.

Our operating margin and research model segment improved more than 500 basis points over last year, to 33.6 percent.

For the first half of the year our research model sales were up 16 percent and our operating income up 43 percent over the first half of 2001.

Our operating margin and research models improved from 27.7 percent to 34 percent, as this business continued to generate excellent cash flow for us.

Why is the demand so strong for our research models?

Well, in addition to the long standing need for research models to test new drug candidates for safety and efficacy, our research models are also becoming a critical tool in new discovery initiatives.

Undertaken by bio pharmaceutical companies to increase the number of viable new drug candidates and to accelerate their development.

Nearly every major pharmaceutical and biotech company has ongoing genomic and proteomic programs and our models of some of the essential tools used by researchers to identify and analyze Jean function and protein interaction, to find pathways and identify targets in these programs.

The need for more lead candidates, more predictive studies, Fuller pipelines and fast and more efficient development are contributing to our growth in the research model segment.

Let us now turn to our biomedical products and services segment where we provide preclinical discovery and development services on an outsource basis, principally for our pharmaceutical and biotech clients.

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

Our reported sales growth in the services segment for the second quarter was up 16 percent over the prior year.

Our operating income was up at twice that rate, or by 32 percent.

Our services businesses are not only the area where we have grown through targeted acquisitions, but also one where the organic revenue growth rate has been higher than our research model segment.

We are as close to any company in being able to provide a customer with a full testing service to determine drugs that are safe to be tested in humans.

I'd like to point out that the operating margin in the services segment for the quarter was 20.4 percent, up more than 200 basis 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 towards the stated goal.

We view the lower margins and the acquired companies as a major opportunity to apply our management systems and discipline to achieve steady improvement towards tour 20 percent goal.

For the first six months of the year our services segment's revenues were up 32 percent, with operating income up 45 percent.

The operating income margin for our services group was 19.4 percent, up from 17.7 percent for the first six months of 2001.

Now, I'm particularly pleased to report on the continued growth and development of our transgenic [ph] Services business where we worked along side researchers using genomic and proteomic techniques to develop new targets, pathways and ultimately drugs.

We're rapidly filling up a new 70,000 square feet state of the art facility to accommodate our greater than 45 percent revenue growth.

In the second quarter alone we added numerous new customers, evidencing our continued penetration of our bio pharmaceutical customer base.

The near and long-term growth opportunities for this burgeoning business is truly outstanding.

We added a new business to our services group via acquisition this quarter.

Biolabs is a small but growing Irish based preclinical services company, with excellent scientific capabilities, a strong market presence in the UK in Europe, and a strong scientific and management team.

We expect to leverage our presence through Biolabs into a larger service business in Europe.

And we're very pleased with the initial integration program.

We think this acquisition nicely reflects our long standing platform acquisition strategy as we expect to use the existing acquired company to advance our services portfolio with new customers and in new markets.

We also believe that the base purchase price of just 11 times trailing 12 months net, or after tax earnings, nicely reflects our commitment to a value approach to our acquisitions.

We expect the transaction to be modestly accretive to EPS this year.

You now see a business that was once exclusively a product business to one that is now a approximately 60 percent services.

It's important to understand that the shift reflects the significant buildup of our services capabilities organically and through acquisitions and not any weakness in or lack of demand for our research models business.

To the contrary, our research model segment is performing exceptionally well.

This strategic shift in the portfolio, which has been carefully planned over the past several years, will continue its steady pace in response to the evolving outsourcing service demands of the biomedical research community.

In summary, our investors hold shares in the company that grew 15 percent organically in the quarter, 17 percent with a benefit of last year's strategic acquisitions.

And with a 22 percent operating margin.

One that's the leader in nearly all of the niche markets in which it participates, a company with a portfolio that includes strong cash flow businesses, businesses growing more than 50 percent, others with operating margins of nearly 50 percent.

A global company with great science, dedicated staff and a strong diversified customer base.

Next I'll turn briefly to the topic of corporate governance, given Enron, WorldCom and all that's followed we thought a few minutes on how Charles River is governed would be helpful to our investors. 1, we've added to our board of directors Dr. George mill a long time senior executive within the global industry, most recently head of R and D at Pfizer.

Dr. Mill will provide us with a great deal of insight into our largest customer segment, the global pharmaceutical company.

He joins four other independent directors, each with a wealth of experience relevant to our business strategy and operations.

We have a truly independent board of directors.

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

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

And all our directors bought stock in the company.

Our leverage buyout investor group, DLJ, now CSFB, no longer own shares in Charles River, nor does our former owner, Bausch and Lomb.

In other words, there's no so-called overhang of any kind in our stock.

This clearly marks the end of our transition from an LBO company to a truly independent public one.

I'd next like to briefly comment on management ownership.

First our senior management team continues to hold mostly all of the options granted to them as part of our LBO.

Nearly all of which are invested and in the money.

Selling shares and management purchased in the LBO transaction has been at very modest levels pursuant to so-called 10 B five one plans.

These plans ensure that sales are not timed to particular business developments or market dynamics.

In short, management continues to hold a significant equity interest in the company, when compared to their original ownership.

Any small loans extended to management in the LBO to purchase shares have been repaid in full.

Finally a quick review of the proxy statement should confirm for you that cash compensation for senior management is at reasonable and competitive levels and that much of that compensation is tied to financial performance.

Finally, I'd like to add that we believe and have always been appropriately - I'd like to add that we believe we are and have always been appropriately conservative when it comes to accounting practices.

By that, we mean our financial statements are fairly and accurately reflect what is really going on in the business.

We have an active audit committee, an internal audit program and carefully developed controls and systems that ensure fair and accurate financial reporting.

Our positions on critical accounting policies such as revenue recognition are conservative and closely monitored.

We do not use off balance sheet financing vehicles or other mechanisms to complicate or disguise our balance sheet.

And we have a strict policy on how to use our auditing firm.

Moving on to forward-looking guidance.

We expect the third quarter to be another solid one for us, although we expect to once again experience the historical seasonality associated with the third quarter.

In other words, it's best to compare this year's third quarter with last year's, rather than with the first quarter and first six months of this year.

We're projecting third quarter revenues to be in the range of 138 to 141 million.

We project fully diluted EPS to be in the range of 36 to 37 cents, or approximately 40 percent growth over the prior year.

Consistent with our goals for the company's growth and development, we remain up beat about the balance of the year.

Trends in our existing markets appear to us to be at this time to be quite solid.

Accordingly, we are projecting full year EPS in the range of a dollar 37 to a dollar 40.

More than a 50 percent increase over the prior year.

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

Before wrapping up, I'd be remiss if I didn't take this opportunity to publicly thank our nearly 5,000 employees for allowing us to earn special recognition this past spring.

Our hometown newspaper, the Boston globe, named us as the number one public company in Massachusetts, based on several overall performance indicators, including return on equity.

It was wonderful recognition when considered in light of the many terrific companies that call Massachusetts their home.

It marks for us not an ending but rather the beginning of another half century of making a difference in the search for healthier lives.

Thank you for your time this morning, and on behalf of the nearly 5,000 employees worldwide, I'd like to thank all of our investors for their continued support.

And Tom and I would now be happy to answer any of your questions 00:36:36

Thank you, sir.

The question and answer session will begin at this time.

If you are using a speaker phone, please pick up the handset before pressing any numbers.

Should you have a question press star 1 on your push button telephone.

If you wish to withdraw that question, press star 3.

Your questions will be taken in the order they're received.

Please stand by for your first question, gentlemen.

Our first question in queue comes from Thomas Hancock from Piper Jaffray.

Please state your question.

Congratulations on a great quarter.

Question for you, what would be the diluted share count assuming full conversion?

Just a tad over 51 million.

That includes the conversion of the convert, which I believe was your question.

Yes, exactly.

And Jim, a question for you, could you just give us a general sense on trends in demand, geographically.

Yeah, we really see strong demand pretty much all over the world.

Of course we're talking about Japan, North America and Europe.

Pretty much across every product line and pretty much across all of our customer sectors.

So we're seeing consistent strong demand.

Okay.

And just one last question for you Tom.

And I apologize if you already stated this, but unit growth in the research model business.

Well, the total growth was almost 18 percent.

Pricing would be three to five, a little bit of market share take away.

So we are seeing very strong volume growth, if you would, Tom.

Geographically as well, as we talked about earlier.

Great.

Thanks

Our next question in queue comes from Larry Neighbor from Robert W. Baird.

Please state your question.

Good morning.

The follow-up on the unit growth question and the research model business, could you give us some idea of the growth for the research model business between the geographic areas and the growth between development and discovery for research models, plus any comment on growth for more specialized models versus the standard in breadth and outbreadths.

To clarify were you speaking just about research models?

Yes, with this question.

As I said, we saw 18 percent growth overall.

Three to five percent being in pricing.

And in our growth is up substantially across the world, North America actually was our highest growth.

Slightly in excess of 15 percent.

We had a little bit of a contribution from our acquisition of genetic models, but that's very nominal.

So we saw tremendous volume in the U.S. driven across all those executors I talked about earlier, academic has been a significant contributor and I think we're seeing finally an impact from the increase in NAIH spending, which is making its way through the grant process and whatnot.

And Pharma and biotech continues to be strong for us.

Europe we're also at this time seeing double digit growth as well.

So surprisingly, with what's happened in Europe in consolidations and what not in the Pharma industry, we're having actually a better year than we did last year.

And while there's a little bit of lumpiness from equipment, most of that is being driven by small model sales.

And Japan not quite double digits in the second quarter.

Last year it was around this time when our competitor had the contamination issue.

So we're starting to get into that period of time where actually we saw a large pickup last year in their volume from the competitor.

So what we're going to start seeing for a little bit of the remainder of the year is a diminishment in the increase in Japan year-over-year and probably in the fourth quarter.

So shrinkage versus last year.

So demand in the models business is phenomenal Larry geographically as well as in total.

And the split between discovery and development?

Do you have that.

Are you talking in models what might be development versus discovery?

Right your estimation.

I think our estimation would be that 40 percent is discovery and probably as much as 60 percent is development.

I think the growth in those two areas, it's a little bit harder for us to track, especially on a real time basis, but I think we're seeing the same trends in both of those facets of pharmaceutical spending, if you would, versus more in one than the other.

And then finally, your estimation of the research model business, what percentage of your unit shipments might be the more specialized models versus the standards.

We don't track that very closely.

But I'll say specialty models sort of 15 plus incentive of our overall units.

And growing disproportionately fast, but still relatively small numbers compared to our outbread strengths.

Thank you

Our next question in queue comes from Michael Martirelli [ph] From Vastech [ph].

Could you tell us a little bit more about Biolabs.

You mentioned it does get you into some new service categories and some new markets.

Obviously European markets.

But could you just tell us more about that?

Biolabs is important to us for several reasons.

One is it's our first services foray into Europe.

So our European businesses are essentially all research models and so this is going to be a platform for us to build upon.

They have capabilities in the human health area and in the animal health area.

They have - they do work in medical device testing area, which we do in the states.

So we actually share some clients there.

So we're going to have a worldwide capability to service them on both sides of the ocean.

So they have some very specific niches, both in animal and human health.

And we're likely to use them as a vehicle to sell other products and services that we currently use in the states or perform in the states.

And also it will be a leveraging place to add additional services locally.

It's a very strong place to do business in terms of the quality of the people and their knowledge of running a service business.

Sounds like this is maybe one of the better platforms for really leveraging CRL services across multiple customer bases or territories?

We think so.

They're very strong in the British Isles, obviously.

Secondarily, very strong in Europe.

And I think as you know our acquisition strategy is to sell more of the products and services that the same customers need.

So if you look at their customer list, it's the same customer list we have elsewhere.

Just providing them with some additional services and somewhat on a more local basis.

Jim one more question, please.

Speaking of new customers I thought I did hear you mention you got some new customers in the transgenic services business unit as you started to open that new facility up there in Massachusetts.

Can you tell us more about that?

We did say that.

We can't get overly specific, because we never disclose our clients.

I can just say that clearly there is sort of continual pent up demand there, very much driven by proteomic and genomics research.

The scale of this is so much larger than anybody else has either competitively or even our client base that dramatically provides an opportunity for clients to outsource more and more of these models to ourselves.

All I can tell you is that the building is beginning to fill up at a very satisfying clip and I'm also happy to say that we have both the staffing and infrastructure to continue to do really good work for this clientele even though it continues to grow at about 50 percent rate.

Thanks for you help.

Keep up the good work.

Our next question in queue comes from Alison Saint Paul [ph] From Thomas Weisel.

Please state your question.

Great quarter again.

I have a follow-up on the transgenic [ph] Services you said it's filling up nicely do you have any idea what the capacity utilization is, what kind of ramp-up you still have the possibility for in the transgenic [ph] Facility?

We have plenty of space.

It's a very large building.

We figure it had a couple of years possibility to fill up.

I would say it's filling up at least at the initial rate that we thought.

We'd love nothing more than to move on to another building when that fills.

But we're certainly not capacity constrained.

I don't want to give you the impression that it's filling up so fast that it leaves us trying to quickly build another space.

We built this building bigger than anything we had done previously because the demand had been so robust generally and particularly in the greater Boston area, with a large concentration of bio techs and academic institutions.

So we have enough capacity to put this - we have enough capacity to plan for, build and open the next facility.

Right.

And I know you guys stated this already but I missed it.

The margin improvement from biomedical, what was that sum, exactly.

Strong improvement, some of the businesses particularly transgenic [ph] Service which Jim just talked about.

So I think with that facility we put up with the increasing top line I think we're finally starting to see margins that we thought we could see a couple of years ago.

It was one of the key drivers.

And Primedica continues to, the former Primedica continues to have improving margins.

You'll recall those margins were quite low when we bought the company.

And we've been able to consistently improve that towards our goal of 20 percent.

What are Primedica's margins about now?

The gross margins are still below what the total biomedicals are.

It varies by some of the - but in the 20 percent range.

So it's spread throughout the 20 percent.

Depending.

Another area we're seeing tremendous margin improvement is our biosafety testing as well.

Which is one of the areas that we did some combining with some of our Primedica business and I think those synergies are showing themselves up in the margin in that business.

Great.

Thanks

Our next question in queue comes from Phil Amidu [ph] From SG Cowan.

My first question is following the recent mergers both in Europe as well as the United States, what's the size of your largest customer in terms of percent of revenue?

We still don't have a commercial client who represents more than three percent of our gross revenue.

And second, you mentioned that the Biolabs acquisition gives you some local access to customers or gives you a local base for which to service some of your customers over in Europe.

Is that going to be a trend for acquisitions in the future where you maybe extend your reach into Europe or take some local niche players in Europe to give you a better platform?

It may be.

The acquisitions that we made over the last few years have been I think entirely domestic.

And their customer base is very much domestic as well.

So we certainly are trying to sell those services performed in the states overseas.

In some cases that's fine.

In some cases you don't have to have local capability and in some cases you do, depending on what kind of sell lines you're working with.

So depending on the product of service, yes, let's put it this way, we will certainly look seriously at other niche acquisitions to leverage on.

Probably on the continent as well.

And we'll also use this Irish platform to grow a bigger business.

So it will be a combination of probably start up selling from the states and some discrete acquisitions.

And one final question.

I think you might have mentioned this but I missed it.

Is your Japanese competitor that had the contamination problems, are they back up to full speed now or are they in the process of ramping up?

Well, I think they're well along in the process of ramping up.

So we anticipate that they will soon be at that level.

Great.

Thank you

Our next question in queue comes from Cliff Greenberg with [inaudible] Capital.

Just a couple questions.

Just further on the bio red acquisition what's the side of the company at this time and what are the opportunities?

When you look out into Europe as far as creating a services business, do you have the opportunity of creating a multi hundred million dollar business like you have created here in the states?

Additional questions: What is the acquisition - what other acquisitions are we look at and are there any Primedicas or PAIs units, deals that you're potentially pursuing?

And also on the income statement, it looks like your unallocated corporate overhead was much higher this quarter than it had been in other quarters, which means actually somehow the margins understate how good you are, is more in the overhead.

If you just explain that.

That's the strongest question ever.

We'll do the best we can if our memories are that good.

Suffice it to say that our deal flow continues to be good.

We continue to seriously look at companies, some of which are overseas in our space.

Remember, that's preclinical, drug discovery and development.

We're staying very focused in those areas.

And assuming that some of the companies they were looking at meet our pretty stringent financial quality and scientific criteria, we'll continue to be an inquirer.

Having said that we're quite confident and comfortable we can grow this business at least 15 percent organically, without acquisitions.

So we'll do them if and as they make sense.

And we would like to do more.

Certainly there are the market opportunities are significant in Europe and Japan.

I don't think the market size is as significant as it is here.

So you'll probably see us continue to do deals in the U.S. as well.

So again as I said to the earlier question, we'll grow our business in Europe probably through a composite of selling services that we perform in the states over there doing more acquisitions and starting up some new businesses.

And the size of the acquisitions is - it's the whole gamut from relatively small ones to larger ones.

And again our ability to deliver on an acquisition depends on obviously agreement on price and whether it meets our criteria.

So it will continue to be an important part of our growth strategy.

Your unallocated overhead question.

Right.

The biggest factor contributing to the year-over-year variance is the pension increase from last year to this year.

In both cases it's a noncash item for the time being but last year we had a substantial amount of pension income.

This year it's actually nominal expense, I believe.

Not significant but versus last year it is.

And then we've had some increases in corporate staff as a result of being a public entity, things such as public relations, corporate security and things like that where [inaudible] We've increased some activities.

And I think those are the key drivers, essentially.

Thank you

Thank you our next question comes from Bob [inaudible] From [inaudible] Biomedical.

My question is where you make financial projections for the rest of the year, how much do you include potential sales to be not immune for [inaudible] Manufacturing.

We really haven't - we really can't comment on that.

We have no greater insight as to the trajectory of Blue Mist.

And the other thing we've said historically it will have a nonmaterial impact on the business regardless of when it's approved.

We have nothing special in our projections .

So you have not assumed that they're not immune will get approval?

We'll wait to hear from them.

Okay.

Thanks

Thank you our next question in queue comes from Dave Winley [ph] From Jeffries and Company.

Please state your question.

Good morning Dave Winley [ph] At Jeff Fridays.

Congratulations on a great quarter.

I wanted to focus on the bio medical service and revenue growth, I guess with the exception of the small Biolabs, you've now fully lapped the larger acquisitions you made earlier last year.

If I remember correctly, come late last year and maybe first quarter this year your organic growth number you had been giving out there I believe was in the low 20s range, and this quarter overall growth in that segment down into the kind of the mid teens, is there something unique in the quarter that caused that?

Are Primedica and PAI beginning to flatten out after the significant boost that they got from being part of Charles River or what are some of the contributors to that?

No, not really Dave.

I think, for example, if you go back to the beginning of the year, we said we thought the bio medical products and services line could grow at 20 to 22 percent, and I think we're going to exceed that for the year.

I think a couple other Primedica groups got off to a very, very fast start.

And I think we're seeing a little bit of modulation as we go through the year.

But I think our sweet spot has been on the bio medical products and services to be in the 15 to 20 percent range, and ideally closer to the 20, quarter end quarter up.

I think we'll hit those numbers in the year, as I said.

And I think we're growing sequentially as we talked a little bit before.

So I think the numbers continue to track pretty well and in line with our expectations at the beginning of the year and a little bit better than that in fact.

The 20 to 22 percent for the full year was including the higher first quarter because you were still lapping some acquisitions?

Not in organic number.

That's correct.

So the 20 to 22 stated at the outset of the year included the impact of the consolidations.

Second question, and more generally speaking, in the toxicology business, one of the competitors there seems that many foe folks in that space are adding some space.

Not all, but several of them.

One of which or a couple of which have actually already hit full capacity while they're waiting on that new capacity to come on line and there's maybe some suggestion that customers are out there looking for space.

Are you seeing a pickup specifically in near term business in tox because of the scenario like that?

We're continuing to see steady and increasing demand for our tox services.

We've been continued to add space and so we continue to be I think an important player in that space.

So yes, the demand continues.

Great.

Thank you and congratulation ounce the quarter

Thank you at this time there are no further questions in queue.

I will now turn the conference back to Mr. Dennis Shaugnessy to conclude.

That's it.

Thank you very much for being with us today.

We look forward to talking to you next quarter.

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This concludes our conference call for today.

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