Charles River Laboratories International Inc (CRL) 2002 Q4 法說會逐字稿

Good morning and welcome ladies and gentlemen to the Charles River Laboratories fourth quarter and year-end conference call.

At this time, I would 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 would now like to turn the call over to Susan Hardy, Director of Investor Relations.

Please go ahead, ma'am.

Thank you.

Good morning and welcome to Charles River Laboratories fourth quarter and full year 2002 conference call and webcast.

This morning Jim Foster, Chairman, President, and CEO and Tom Ackerman, SVP and CFO will comment on our fourth quarter and full year results.

In our planned remarks today, we will review our business performance and financial results and provide some general guidance on future performance.

Following those remarks, we will respond to questions.

I trust you have had an opportunity to review yesterday's earnings release.

If you don't have access to a copy of the release you can find it on the Investor Relations section of our web site under news release.

A taped replay of this call will be available beginning at 10:30 today and can be accessed by calling 1-800-428-6051 and entering pin number 281902.

The webcast will available for listening until February 11.

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

Finally, the Safe Harbor.

This presentation includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements may be identified by the use of words such as anticipate, believe, expect, estimate, plan and project and other similar expressions that predict or indicate future events or trends or that are not statements of historical matters.

These statements are based on management's current expectations and involve a number of risks and uncertainties that could cause results to differ from those stated or implied by the forward-looking statements.

The company expressly does not undertake any duty to update forward looking statements which speak only as of the date of this document.

Those risks and uncertainties include but are not limited to acquisition integration risks, special interest groups, contaminations, industry trends, new displacement technologies, outsourcing trends, USDA and FDA regulations, changes in law, continued availability of products and supplies, loss of key personnel, interest rate and foreign currency exchange rate fluctuations, changes in GAAP and any changes in business political or economic conditions due as to the threat of future terrorist activities in the U.S. and other parts of the world and related US military action overseas.

For further descriptions of these risks and uncertainties can be found in the risks factors detailed in the company's registration statement on form S3 filed on April 9, 2002 with the securities and exchange commission.

Please note that the content of this call and webcast contains time sensitive information and remains accurate only as of February 4, 2003.

I would now like to introduce Jim Foster.

Thank you, Susan.

Thank you for joining us this morning.

I would like to briefly review the highlights of our fourth quarter and full year results.

We delivered another quarter and year of substantial growth in sales, gross and operating margins, EPS and cash flow.

Net sales gained more than 13% in the quarter and 19% in the year.

The operating margin in the fourth quarter increased 21.7% and for the full year operating margin was 22%.

At 36 cents, our fourth quarter EPS was up 50% over the prior year and $1.42. 2002 EPS exceeded 2001 results by more than 50%.

Free cash flow grew to $29 million in the fourth quarter and 96 million year to date.

We celebrated a number of significant events which contributed to our success in 2002 and will continue to do so in 2003 and beyond.

They were the completion of our new Transgenic services building and the acquisition of Biolabs and Spring Borne labs.

In addition, we launched a joint venture, Charles River Proteomic Services.

We are upbeat about the sales and earnings outlook for 2003.

Finally, we're confident that our accounting is conservative, our controls extensive and that our numbers fairly and accurately represent our business performance.

Let's look at the segments of our business and how they perform.

We've reported to you over the past two years on very good quarters in our research models business.

The fourth quarter of 2002 was another great one although sales in the fourth quarter of 2001 benefited from higher sales in Japan and strong sales of large animals, sales of research models in the fourth quarter of 2002 still increased 8-1/2% over the prior year.

The fourth quarter capped a great year for research models at $224 million. 2002 sales were 13.3% higher than in 2001.

We continued to see growth in our specialty or disease models such as diabetic rats and immuno-deficient mice and in our standard outbread toxicology models as well.

In the fourth quarter, we experienced the strongest demand in Europe followed by North America.

As expected, sales in Japan were up slightly compared to the fourth quarter of last year when our competitor’s animal health problems enabled us to gain market share.

All three geographic locals reported operating margin improvement in the fourth quarter.

For the full year, North America reported strongest sales growth followed by Europe and Japan.

Pricing and product mix contributed to segment revenue growth across the board.

Pure unit growth especially in North America was again a primary driver of the segment strong performance.

This past year was the first time in over a decade that worldwide research models sales increased to double digit levels.

In order to accommodate this growth and also for the first time in a decade, we added production space in three North America locations;

Massachusetts, California, and Montreal, Canada.

As we mentioned before, incremental sales in the research model segment dropped straight through to the operating income line.

This is truly demonstrated in our 2002 results.

Although we increased our infrastructure costs, a 13.3% net sales increase drove a 39.4% improvement in operating income.

And this business continued to generate excellent cash flows for us.

Let's turn to our biomedical products and services segment, where we provide pre-clinical discovery and development services on an outsource basis, principally for our pharmaceutical and biotech clients.

We have built a broad portfolio of services that allows us to provide our customers with the full range of government mandated testing services to identify drugs that are safe to move into the clinic to be tested on people.

Our sales growth in this segment for the fourth quarter was 16.5% and 23.4% for the year.

One of the largest contributors to the growth rate in both the quarter and the year was our Transgenic services business where we work alongside researchers using genomic techniques to develop new targets, pathways and ultimately drugs.

Our new 70,000 square foot state of the art facility outside of Boston is rapidly filling to accommodate our greater than 50% revenue growth in the quarter and full year.

Biolabs, our Irish based human and animal health testing company which we acquired in June 2002, and Spring Borne laboratories, the Ohio based drug safety assessment business we acquired in October, both contributed to sales growth.

Both acquisitions are performing well and in line with expectations.

The proteomic services joint venture formed in October of 2002 is progressing on schedule and we expect sales in the second quarter of 2003.

In the third quarter conference call we discussed the fact that development services sales growth was affected by two small non-strategic businesses that were experiencing lower net sales.

At that time we indicated that the analytical chemistry business has been consolidated within our existing businesses.

And the niche contract business was being evaluated.

We are now pursuing the divestiture of certain assets associated with this business.

In total these businesses accounted for $2.3 million in the fourth quarter and approximately 2% of 2002 sales.

Absent these two businesses, the segments growth rate in both the quarter and the year would have been approximately 4% higher than we are reporting.

Development services were also adversely affected by the performance of two of the smallest service areas which accounted for approximately 5% of 2002 net sales due to ineffective local management, moderating demand and uneven study execution.

We have reorganized development services under a senior executive and making appropriate structural changes at the local entities.

We are confident that these changes will improve operating performance but it will take the better part of 2003 to turn these areas around.

In developing our goals in 2003 we have taken this into account.

We are continuing to improve the operating margin in the biomedical products and services segment.

For the quarter the margin was 20.5% compared to 16% last year and for 2002 the operating margin was 19.9% compared to 17.4% in 2001.

Within the services segment our discovery group which includes Transgenic, laboratory testing, and contract staffing services, and has grown almost entirely organically was already well above our 20% operating margin standard in 2002.

Our development group, which includes the entire range of pre-clinical drug testing services has been built through six acquisitions over the past four years.

Its operating margin was lower but improved 2% for the year and is progressing steadily towards our stated 20% goal.

Overall, we were very pleased with the 2002 results.

We achieved all of our corporate targets, revenues were up 19.1%, operating income was up 35.4% and we had an operating margin of 22%.

Significantly higher operating income and the benefits of having repaid all of our LBO debt earlier last year contributed to a 68% gain in income before extraordinary items.

The resulting EPS of $1.42 represents a 54% increase over last year.

Free cash flow increased to $29 million for the quarter and $96 million for the full year.

At the end of 2002 we had $127 million of cash on hand.

I wanted to take this opportunity to discuss the trends we see in our marketplace and why we believe Charles River’s business focus in the pre-clinical space positions are so well for this market.

We previously discussed the fact that in order to produce more drugs pharma and biotech companies must identify more compounds to put into the pipeline.

With the numbers running somewhere in the vicinity of 10,000 compounds to produce one new drug the volume of compounds in late stage discovery in early development is very high.

In order to make the best use of their assets, pharma and biotech companies must screen compounds quickly to determine their potential as drug candidates before entering the more expensive development phase.

The fact that the number of new IND's was down in 2002 appears to support the premise that drug companies are focusing much of their efforts on early screening.

We believe that in addition to other factors early screening in particular is driving strong demand for research models.

The demand is greater than at any time in the last decade and continues to be strong which is why we are estimating 2003 growth at 12 to 14%.

We are also seeing increasing use of specialty or disease models which are genetically altered to express human disease states.

In 2003 we are offering 15 new models which are genetically engineered to express obesity, diabetes and hyper tension.

These models are important contributors to drug discovery and development because they accelerate the pace of research.

We benefit from this trend both in sales of specialty models and in our discovery services business which include our Transgenic services, laboratory and research services and contract side management services is poised for significant growth.

The Transgenic services business where we provide housing for customers genetically altered disease models has shown strong growth.

Our new facility in Wilmington, Massachusetts, which opened in April 2002 is already half full and we continue to add clients.

It is our belief that this business will continue to grow as researchers develop more Transgenic models and take advantage of the value added services that we provide.

As 2002 came to a close, our wide view of the industry showed us an emerging trend.

We now believe that the drug companies are focusing their efforts on improving the pipeline at 2 ends.

In order to identify the most promising compounds earlier, they are increasing spending on the late stage discovery phase.

Once those compounds are identified, they are then turning their attention back to the clinic and putting an intense emphasis on phase three trials in an effort to get new drugs to market, given the success rate for NDA's in '02 was again quite low.

This dual focus has a barbell effect, heavier spending in discovery and late clinical trials and less spending in the latest stage development and early clinic phases.

We are benefiting from the emphasis on late stage discovery but seen less spending on our development services business.

The pharma and biotech focus on early screening of compounds has resulted in a large number of short term acute toxicology studies rather than the longer term sub-chronic and chronic studies that enhance our services mix in the first three quarters of 2002.

This change in mix affected our development services business in the fourth quarter and we expect that it will continue to do so at least in the first quarter of 2003 as well.

However, our customers have told us that they expect to begin new IND enabling studies in the second, third and fourth quarters of 2003 as they move from early screening into development of the most promising compounds.

Our mix of drug safety assessment, bio-safety testing and other development services is extremely well positioned to benefit from this shift and we are already seeing an increase in bid volume.

The fact that our competitors have brought more capacity on line will certainly affect all of us in the short term.

We have already seen some pricing pressure as our competitors seek to fill space but we view this as a short term phenomenon.

While we have a healthy respect for our competitors, we believe that we offer scientific excellence, a higher quality study report and superior services that assist companies in bringing new drugs to market.

At the end of the day, these qualities and our close institutional relationships with our customers make a Charles River study a value added one.

Although we have recently seen some changes in where dollars are spent, we believe R&D spending will continue to increase in 2003.

Based upon the pharma annual survey, we expect pharma R&D spending to increase between 5 and 7% this year consistent with the past two years.

The larger biotech companies should also increase spending since those companies are still well capitalized and obtain funding from multiple sources such as big pharma and the equity markets.

Most of our biotech customers are the larger companies so we don't expect to be greatly affected by the smaller biotech companies which are showing some disruption in their spending.

The NIH project has been a topic of discussion recently because the annual funding increase may not be as robust as in prior years.

Let me tell you why we don't believe that a change in the level of NIH funding would have a significant affect on Charles River in the short term.

The first reason is that existing grants to universities and hospitals which run for a three to five year term are already funded.

The second reason has to do with where we derive sales from NIH funds.

Our university and hospital customers account for only 15% of our total sales.

Of that amount a small percentage actually comes from NIH dollars.

The other area which we derive sales from NIH is our contract staffing services.

While these revenues could eventually be affected, most contracts are for a period of five years so we don't anticipate any short term impact.

Although NIH funding may not increase as in prior years, department of defense funding is growing.

The DOD is expected to receive $5 billion beginning in April 2003 for biological and chemical research including vaccines and other bacterial handling issues.

We see this as an excellent opportunity for Charles River because we are well positioned to provide the mix of products and services that will be required such as research models, pre-clinical testing for vaccines and endotoxin testing.

Whether the DOD funding materializes or not we expect our In Vitro business will also continue to show strong growth.

We are the market leader in the only non-animal test approved by the FDA.

Our new end of safe IPT test which is aimed at the $50 million market for lot released testing of products derived from human blood and biologicals are used in detecting harmful microbial contamination in drugs, medical devices and a wide range of therapeutic products.

We are expanding our In Vitro market opportunity with a new portable version of our highly successful endotoxin testing platform.

The endo-safe portable testing system which doubles our current market allows endotoxin testing in the field affording researchers more accurate, timely results.

The vaccine support market also continues to show steady growth.

We are the largest provider of specific pathogen free eggs for use for Avian and human vaccine production so we benefit from an increasing market.

As we assess the strengths of the markets in which we do business, we recognize the value of our diverse portfolio businesses covering the spectrum from early stage discovery to late stage development.

The research models, discovery, In Vitro and vaccine support markets are showing great growth potential.

So, while the development market is currently less robust we believe the strength of our other businesses will enable us to deliver substantial sales and earnings growth in 2003.

Based on our targeted portfolio businesses and the market trends, we expect 2003 to be another very solid year for us.

We anticipate net sales increasing 15 to 17% and diluted EPS to be in the range of $1.67 to $1.70, an increase of between 17-1/2 and 20% over 2002 results.

Our business continues to perform exceedingly well and we are committed to continuing to improve our performance through growth.

A long term strategic goal is to be the global leader in providing products and services and to support and enhance drug discovery and development.

In addition, we will continue to pursue our focused strategic acquisition program.

We also stay committed to growing EPS at a rate greater than our revenue growth.

This guidance is of course exclusive of any acquisitions that may occur during 2003.

I'd like to spend a few minutes discussing corporate governance.

We think it is important for our investors to know that we are committed to assuring that our financial results fairly and accurately reflect the company's operations.

We have always been diligent in establishing the accounting principals and are committed to providing information that is transparent, timely and accurate. 2002 was an eventful one for Charles River.

We became a fully independent company when our leverage by out investor group the DLJ Merchant Bank now part of credit Suisse First Boston and our former credit parent company Bausch and Lomb divested their entire positions in Charles River and as a result, we are now a truly independent company with an independent board of directors.

All of our committees, audit, compensation, and governance and nominating have only independent directors.

Our six outside directors bring a wealth of experience in industry, finance and corporate governance and we are pleased to have them serve on our board.

I would like to comment on management ownership.

We recently established guidelines for management ownership of Charles River stock.

The board of directors believes that significant management ownership of stock represents an important commitment by the management team to the long term success of the company as well as to the creation and enhancement to shareholder value.

As a reflection of this commitment, each senior officer of Charles River is required to hold a multiple of his or her salary in shares of Charles River stock excluding options.

I am required to hold at least four times my base salary in Charles River shares.

Executive vice-presidents are required to hold three times.

Senior vice presidents two times and corporate vice presidents one times base salary.

In connection with the management led leverage buyout of the company in 1999, many of the company's senior officers purchased a significant number of shares and received options in the then privately held company.

In order to permit insiders to diversify their holdings while ensuring the highest level of integrity and trading in the company stock, in November 2001 the board approved the use of 10B51 trading plans by officers and directors..

As of December 31, 2002, the five officers listed in the 2002 proxy statement own 3% of the shares outstanding including vested options.

I would like to discuss an upcoming change in our senior management group.

July Palm, SVP of biomedical products and services will be retiring at the end of 2003.

We have already begun to re-align Julie’s responsibilities under two senior executives who have worked and will continue to work closely with her.

Real Renaud was recently promoted to Executive Vice President and General Manager worldwide research model products and services.

In addition to his stewardship of the research model business and because it is so closely related, he is now also responsible for most of our discovery services business which strategically fits well with the model business.

As we mentioned in our third quarter conference call, Dr. Nancy Gillett a world renowned veterinary pathologist who has been the general manager of our Sierra biomedical division since 2001 is now corporate vice president drug discovery development with responsibility for the entire development services business.

I am confident that Nancy and Real will continue to grow these businesses while ensuring they provide services seamlessly to our many clients.

For those of you who are interested, Tom Ackerman will be speaking at 3:30 this afternoon at the UBS Warburg global health care services conference in New York city.

On March 4 we will both be at the Lehman Brothers global health care conference in Miami.

We look forward to seeing many of you there.

Thank you for your time this morning on behalf of our more than 5,000 employees worldwide, I would like to thank all of our investors for their continued support.

I would like to introduce Tom Ackerman.

Thank you, Jim.

Good morning.

Jim has already given you the sales highlights so I will give you additional color on margins, expenses, working capital and 2003 guidance.

Total company results net sales of $142.9 million in the fourth quarter included a net favorable currency impact of 1% versus last year the-result of a strong Euro.

The year to date impact was less than 1%.

Approximately 74% of our sales in the fourth quarter were in North America.

Gross margins in the fourth quarter were 37.2%, an increase of 2.6% versus last year.

Research model gross margins were 39.9%, a 3.3% improvement versus last year principally due to improvement in North America and Europe.

Margins improved due to greater demand, price increases and cost savings such as our facility consolidation in France.

Biomedical products and services margins were 35.6%, a 2.3% improvement over the fourth quarter of last year.

We experience significant improvement in discovery and development services.

On a year to date basis gross margins were 37.7% versus 35.9% last year.

Research models gross margins were 44.2% versus 40.5% last year and biomedical products and services were 33.3% compared to 32.5% last year.

SG&A in the fourth quarter was 14.7% of sales, unchanged from last year.

For the full year, SG&A was 15% of sales versus 14.7% last year.

The major reason for the full year increase was increased administrative expenses and an increase in pension expense versus last year.

Amortization expense was $1.2 million in the quarter and $3.4 million for the year.

A substantial decrease from 2001 principally as a result of the changes in accounting rules for goodwill under FAS 142.

The change added 2 cents per diluted share in the quarter and approximately 9 cents per diluted share for the full year.

When adjusting 2001 to reflect the implementation of FAS 142, EPS increased 41% in 2002 compared to 2001.

Operating income in the fourth quarter was 21.7% of sales compared to 17.8% last year. 3.9% gain was the result of strong sales and improved gross margins.

Research models improved to 25.8% margin rate from 21.2% last year principally result of higher sales volume and cost savings.

Biomedical products and services improved to 20.5% margin rate from 16% last year due principally to margin improvement in our development and discovery services businesses and reduced amortization expense under FAS 142.

On a year to date basis, operating income was 22% of sales versus 19.4% last year.

The margin for research models was 31.7% versus 25.8% last year and the margin for biomedical products and services was 19.9% versus 17.4%last year.

Net interest expense was $1.6 million in the fourth quarter and $9.1 million for the full year compared to $3.9 million and $21.3 million last year.

The decrease was due to the retirement of 13.5% senior subordinated notes in the first quarter and our term debt in the second quarter and an increase in interest income due to higher cash balances.

The income tax rate in the fourth quarter and full year was 38-1/2% versus 39% last year.

This is the result of the lower tax rate associated with Biolabs, our Irish subsidiary acquired in June 2002.

The stated full year effective tax rate excludes the $.5 million benefit associated with release of evaluation allowance in the third quarter.

Income before extraordinary items was $17.5 million in the fourth quarter or 36 cents per diluted share compared to $11.1 million or 24 cents per diluted share last year.

In calculating EPS in the fourth quarter we are adjusting income by $1 million tax affected to eliminate the interest experience on the convertible debt and using a diluted share count of $51.5 million which includes the shares as if the convert had occurred.

For the full year income before extraordinary items were $68.4 million or $1.42 per diluted share compared to $40.7 million or 92 cents per diluted share last year.

For both the quarter and the year, significantly higher operating income and lower interest expense were the main contributors to the results.

Comments on working capital;

Working capital was $165 million at the end of the fourth quarter, a decrease of $8 million from the end of the third quarter principally due to the decrease in accounts receivable.

Cash provided by Operating activities was $45 million for the fourth quarter increasing our cash on hand at the end of fourth quarter to $127 million compared to $117 million at the end of the third quarter.

Pre-cash flow $29 million for the quarter and $96 million for the year.

A number of factors contributed to the increase in cash.

Net income was significantly higher with increases in gross and operating margins and lower interest expense due to balance sheet de-leverage.

DSO was 64 days a one day improvement from the end of the third quarter of 2002 and a ten day improvement from the end of the 2001, reflecting continuing collection efforts.

Actual accounts receivables decreased $4 million from the end of the third quarter and $4 million for the end of 2001 on a full year net sales gain of 19%.

Inventory levels remained relatively stable with a slight increase reflecting our acquisition of Biolabs and Spring Borne and consolidation of joint venture in Mexico.

In the third quarter we restructured our investment in our joint venture Charles River Mexico and we reported the JV sales and operating income in the fourth quarter.

Long term debt was $192 million at year-end, $185 million of which was our convertible debt.

CAPEX was $15.9 million for the fourth quarter and $37-1/2 million for 2002.

EBITDA was $37.6 million in the fourth quarter, an increase of $7.2 million or 24% over last year.

G&A was 6.6 million in the fourth quarter.

For 2002 EBITDA $146.3 million, an increase of $28.8 million or 25% over last year.

G&A was $24 million.

Some additional guidance for 2003.

Sales;

Based on our view of the marketplace using current exchange rates we anticipate a net sales increase of 15 to 17% in 2003, up from $554.6 million in 2002.

The increase is made up of 4% pricing, 4% from acquisitions made in 2002, 2% from favorable currency rates and the remainder a combination of volume and mix.

We are assuming that at current rates foreign currency translation for Euro and yen will have a favorable affect on sales.

But changes in these rates could alter our actual sales growth.

Sales in Europe and Japan in 2003 are expected to account for approximately 25% of total sales.

We anticipate sales from research models will increase between 12 then 14% on a reported basis, the increase is made up of 4% pricing, 4% from foreign currency translation, 1% share gain and the remainder accommodation of volume and mix.

Excluding foreign exchange the estimated growth rate in 2003 is lower than the 13% actual growth rate achieved in 2002 due primarily our belief that 2002 was an unusually robust year for research model sales, reflecting some one time gains which we do not expect to recur in 2003.

Europe benefited from a number of new clients and Japan sales significantly higher due to a competitor's health issues.

Sales for the biomedical products services segment expected to increase 17 to 19% in 2003.

Increase is comprised of 4% pricing, 7% from acquisitions made in 2002, 1% from foreign currency and the remainder from volume and sales mix.

We do not expect foreign currency to have a significant affect on this segment’s sales growth.

On gross margins, we anticipate that the consolidated gross margins will improve modestly in 2003.

Research models gross margins will remain stable since the capacity changes we made in 2002 have added additional infrastructure costs.

Biomedical products and services margins will increase nominally.

As we grow, we are focused on running a lean, efficient operation.

Our SG&A expenses excluding R&D will remain unchanged from 2002 levels at approximately 15% of net sales.

This rate reflects an improvement in spending leverage on base line activities offset by an increase in pension expense.

We anticipate lowering our long term return on pension assets to 9% in 2003 from the current rate of 9-1/2%.

We anticipate spending approximately 5 to $6 million in R&D in 2003.

We expect to spend roughly half of that amount on licensing arrangements and technology deals whereby we gain access to key technology.

The balance of the R&D spending will be deployed in basic in house research, for existing Transgenic services and In Vitro and vaccine support products.

Depreciation expense in 2003 should be between 21 and $23 million versus $21 million in 2002 and amortization of goodwill intangibles will increase to approximately $5 million in 2003 from $3.4 million last year due to the inclusion of a full year of amortization for Biolabs and Spring Borne.

Biolabs was acquired in June 2002 and Spring Borne in October 2002.

We expect the operating margin in 2003 to be slightly better than 2002.

The operating margin for research models will benefit from operating efficiencies in the biomedical products services segment will benefit from gross margin expansion.

In order to better protect operating income in 2003, we have implemented a number of cost savings initiatives in both the cost of sales area and SG&A.

We expect that net interest expense will be approximately $5 million to $6 million in 2003 reflecting increased interest income on investments and lower interest expense due to issuance of convertible notes last year at a rate of 3-1/2%.

We are estimating a tax rate in the range of 38-1/2% in 2003 consistent with 2002.

We are currently analyzing the impact of our Irish subsidiary Biolabs and various state tax initiatives but are not projecting a lower rate at this time.

We are anticipating no changes to the current tax laws that would impact our rate.

EPS;

Taking the expected sales increase and operating efficiencies into account we believe that diluted EPS will be in the range of $1.67 to $1.70, an increase between 17-1/2% and 20% over 2002 results versus a sales increase of 15 to 17%.

Cash flow from operations should be approximately 115 to $120 million.

Assuming capital spending of approximately $45 million, we estimate free cash flow range of 70 to $75 million.

The variance versus 2002 is due to the fact that we had a net reduction receivables in 2002 of $5 million and in 2003 we anticipate an increase in CAPEX versus 2002.

While we do expect to slightly improve our current DSO, we do not anticipate the same level of improvement in 2003 versus 2002.

Strong cash flow in 2003 will afford us many opportunities to invest in the business beyond the current budget level of CAPEX and R&D.

We’ll continue to look at acquisition opportunities which can add to top line growth and expand EPS.

Our acquisitions in 2002 Biolabs and Spring Borne will contribute 5 cents to EPS in 2003.

We currently do not have any plans to repurchase shares or pay dividends.

If it appears appropriate at sometime in the future, we will review these issues with our board of directors.

We recently contracted with an investment banking house to dispose of certain assets associated with our contract production business.

This business accounted for less than 2% of total sales in 2002 and the assets were less than 1% of the total company.

At this time we are anticipating a favorable disposition and not estimating any charges to the P&L.

For the first quarter our experience shows that although there is some seasonality in the business, particularly in research models in the fourth quarter, the sales spread is between 24 and 26% of total revenue each quarter.

In the first quarter of 2003 we expect net sales to increase between 13 and 16% or a range of $151 to $155 million.

We expect diluting EPS to be in the range of 39 cents to 41 cents, an increase of between 26% and 32% over the prior year's first quarter.

That concludes our formal remarks.

We would now like to take your questions.

Thank you, sir.

The question and answer session will begin at this time.

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

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

If you wish to withdraw that question, press star 2.

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

Please stands by for your first question.

Our first question in queue comes from Eric Schmidt with SG Cowen.

Please state your question.

Good morning, guys.

Jim, or maybe for Tom first.

On the R&D side it sounds like you're actually going to start booking a separate R&D line, is that correct, in '03.

Well, not necessarily broke own out in the P&L, Eric.

We will evaluate that.

But we'll continue to report on the numbers, you know, as they evolve.

Okay.

And so where would the R&D be?

Well, reported historically in SG&A.

It's been so small historically that there hasn't been a need to break it out.

Okay.

And in terms of the guidance for the animal models business, you talked about 4% of the growth in '03 being driven by pricing.

Is that consistent with historical levels?

Yes, it is.

You know, we've probably been a little bit higher than that in North America but a little bit lower in Europe and lower than that in Japan so it’s really a blended global number but I would say that is consistent globally where we probably talk about a number that's 3 to 4% if you would.

Okay.

And, also, for the models guidance in '03, the 1% share gains, I think that was a bit surprising to go me given as it is coming on the heels of a year in which you are basically benefited in Japan from the competitor's issues and set yourself up for a bit of a tough compare there.

How do we expect to get further share gains in '03?

This is Jim, Eric.

We’re just doing a better job than the competition from a bio-security point of view so we're tending to continue to be increasing the supplier of choice for major pharmaceutical and biotech customers particularly as they continue to merge, I think our strength gets greater and greater.

So, sort of continuity and consistency from a health point of view in the last 3 years allowed us to take share and we are confident we will be able to do that again.

The last question again on the animals business.

If you could talk about what percentage of the '03 budget is contracted or maybe not contracted but just through your discussions with big pharma partners you have good visibility on.

Yes.

As I think you know, it tends not to be a contractual business.

It tends to be a -- we tend to get indications of demand very early in the year, actually, before our budget and then confirmed again right after the first of the year.

So we -- you know, we have that virtually from all of our major clients and our visibility has always and continues to be good in that business.

Great.

Thanks a lot.

Thank you.

Our next question in queue comes from Paul Knight with Thomas Weisel Partners.

State your question, sir.

Hi, Tom and Jim.

The question is on-- as I went through internal growth it looks like it's somewhere around 8% in Q4 this year and 7.7% a year ago in Q4.

Do those numbers look right to you?

If so, what are the reasons for the seasonality on internal growth rates in Q4?

The pro forma growth rate in the fourth quarter of '02 was about 6-1/2% and if you factor in the businesses that Jim talked about earlier, you know, you're talking about an 8 to 9% growth rate.

I don't have the '01 numbers in front of me, Paul, so I can't comment on that offhand.

I think generally there have been fairly consistent quarter to quarter.

Q4 has historically been a slower quarter for us.

I think that will be and always as long as we are predominantly a live animal product company.

We see between thanksgiving and Christmas significant sort of reductions in use and that really applies to some of the service businesses as well.

So we anticipate that annually.

What do you think the break out is on Q1 on internal?

Q1 of '03?

Yeah.

Well, it's probably a little bit better than we are seeing in Q4 on a pro forma basis for sure.

I think some of those seasonality things that Jim talked about are picking up a little bit in the animal business.

We do have a little bit of favorable currency, so I think directionally Q1 of '03 is actually a little bit better than Q4.

Lastly, when is the expansion going to be complete at the three facilities, Jim?

The physical space is all done, Paul.

It's all built.

And we are, you know, as rapidly as possible sort of populating those animal colonies that already have some sales from that space and will continue to do so.

We added that space because of the significant demand and will continue to add it to keep up with that demand.

So it is ongoing.

Our next question in queue comes from Tom Tierny from American Century.

Good morning.

I have a couple of quick questions.

First on the models business you said for 2003 growth 4% pricing, 4% from 2002 acquisitions and 1% share gains?

For the model business?

Yeah.

Well, for the model business we said 4% from currency.

There's no acquisition impact in '03.

Okay.

So it's 4% currency, 4% acquisitions, 1% share gains.

4% price, 4 % currency and 1% share.

Acquisitions are on the other side of the business.

Okay .

I am also wondering if you could comment on or give us an update on the vaccine contract or -- for the pathogen free eggs with YS and metammune (ph).

You know, we don't give specific information on client activity except to say the egg sales continue to be robust.

We essentially sell our entire inventory and that continues to be a strong customer relationship and we expect that that will continue.

All right.

And, well, maybe you could talk to us about if there are any opportunities for supply, either government or companies that are active in that space for bio-terror initiatives or additional vaccine research.

Are there opportunities there?

Yeah.

That's a good question.

As I said, the power and defense is going to spend increasingly more money and I suspect that that could benefit not only the egg business but our testing business, our animal model business and then for sure our endotoxin testing business, which is used to test those drugs or vaccines before they are in the commercial marketplace.

As a general proposition, that will benefit several lines of our business but we don't really have any specific feed back on that at the current time.

All right.

Last question, you mentioned in the conference call that you're seeing some price competition with short term toxicology tests?

Yes.

Mostly longer term things, actually, so what I said was that there is additional capacity in the system.

There is a propensity at the moment for some of our customers to do more -- put more emphasis on short term work and considerable emphasis on getting drugs into the clinic and a little less emphasis at the current time on later stage studies, which would be sub-chronic and chronic, which are longer term studies.

So since there is less demand at the moment for those, price is paying more of the factor than we have seen historically.

Should we expect any kind of down tick or detriment in operating margins in bio medical services then in the first quarter or first couple of quarters for 2003 then?

No, we wouldn't think so.

Okay.

Thank you much.

Our next question in queue from Ken Kulju from Credit Suisse First Boston.

States your question.

Yes.

Good morning.

Just a question I guess first question just on the management change, obviously, with Julia Palm retiring, Nancy Gillett will be taking over some of the development responsibilities, were as Real Renaud is be taking over more of discovery side.

Could you discuss the improvements or benefits that will be realized from that change just for point of clarification?

That's a great question.

On the sort of model side and on the discovery side, there is a really close relationship between those lines of business, literally it's the same customer at most institutions so the ability both from a selling point of view and from a management oversight point of view to manage those businesses together and manage them internationally, we think it will just give us greater power in the marketplace.

So actually fortuitous opportunity to re-align those businesses and along the same lines, although we actually haven't done it yet, it is likely that Nancy will end up with the development pieces that Julie has and similarly same client base, large and small molecule work done by the same general management team, scientific team and sensitive sales and marketing also allow us to really pull those businesses together.

So I think we are going to get some international leverage, efficiencies of operations, some greater focus from a customer point of view.

Okay.

Also, just on your cash position, you have $127 million in cash and as I understand this, again, just as a point of clarification, your 2003 guidance is does not include the effects of acquisitions that you could potentially make this year.

I was wondering if you could talk about what you actually see in the marketplace right now and what is your intention for that cash.

We're obviously delighted to have a strong cash position, Ken and a really strong balance sheet.

As we said previously, our deal flow in the pre-clinical space continues to be good.

We continue to be very focused in looking for strategic ways to grow current businesses, both in terms of mass and geographically and to fill in.

While we don't have a pre-determined amount of sales that we will add by acquisitions or any sort of artificial growth rate, you know, we continue to be hopeful that we will be able to deploy that cash primarily from an M&A point of view.

Thank you.

Our next question from Michael Martorelli from Investec Securities.

Jim, can you tell us just a little bit more about your R&D effort?

You did mention you are increasing it.

You talked a little bit about more licensing, more effort to develop your own models, it sounds like what you have been working on for a while including the Tufts collaboration.

When can we expect that to be a different kind of revenue generation in the models?

Two ways to look at our R&D spend, Mike.

One is on the animal development side and that will be both externally funding technology leaders to help us develop novel models in response to demands from our clients, particularly diseased areas and also to actually acquire in small lines of business like the GMI diabetic models we brought in a few years ago and will be a combination of funding that directly and externally.

And also, in our endotoxin test kit business we have spent a fair amount of money developing new generations of test kits that have greater uses and expand our model capability and we're sort of bringing those to the final stages of development so that we can commercialize them.

So I think you will see us over time begin to do a little more R&D internally than usual.

We have historically done it all externally but we'll continue to bring in external sources as well, primarily in the model business and in the In Vitro business.

Okay.

Thanks.

Our next question comes from Matt Brunkowski from Jefferies & Co.

Good morning, guys.

I have two questions.

I see that interest expense was 1.6 for the fourth quarter.

I was hoping you could provide me with the gross interest expense.

The gross incident expense is essentially the convert at $185 million and 3-1/2% and there are really some nominal amortization charges on that for the capitalization costs for that.

Okay.

And then my last question is in regard to CAPEX.

What is your estimate for 2003?

Just about $45 million.

Okay.

Great.

Thanks a lot.

You're welcome.

Our next question comes from David Windley with Jefferies & Co. State your question.

Hi.

Good morning.

Thanks for the detail on the call, by the way.

I wanted to follow up on the 5% of -- in the development area, 5% of revenue that you talked about, Jim, being somewhat under pressure and some re-organization of management and so forth.

Is that related to the long term tox pressure or is there more color around that, please?

Yeah.

We talked about that on our last call and that's really related much more to enhancing our internal capabilities to execute the work, strengthen our management team locally and also, it's an effort to pull together -- we have six acquisitions that we made in the last four years which really makes us one of the leading companies in this area and having a central management person to oversee these businesses collectively we think gives us much more power and the ability to have a seamless feeling both internally and externally so it is more related to structure really than market demands.

Okay.

Okay.

And just to understand, you quantified it at 5%.

Total revenue or bio-medical products or service revenue?

That was 5% of our total revenue.

Okay.

And then, finally, is that separate and apart from the analytical chemistry and the contract manufacturing business that you quantified at, I think 2% of revenue?

It is.

That was an additional 2%.

Okay.

Super.

And then just dovetailing on an earlier question about your pipeline, I know you speak mostly in general terms on that.

Does the fact that you have made a number of acquisitions in narrowing in on the pre-clinical toxicology, mail in toxicology, short term and long term area, do you have less of an appetite in that area for a variety of reasons now, or is your appetite still pretty balanced across the board?

That's an area we are still looking at.

We've been looking geographically as well.

Most of our activities in the U.S. at the current time so we have a general sort of desire either through acquisition or through start up to have capabilities overseas in that area and also to fill in a few of the gaps, small gaps we have in our current portfolio.

Okay.

Great.

Congratulations on a good year.

Our next question comes from Larry Neibor with Robert W. Baird.

Good morning.

Actually, it’s Andrew Schramm for Larry Neibor.

One quick question on the research model of the business.

Could you discuss the current dynamic of your Japanese market?

How has your customer attrition been?

Have your major competitors come back on line now?

We picked up some share as a result of our competitors problems and, yes, our competitor seems to be getting back the full strength but we will -- we have retained and believe we will continue to retain probably a point of share as a result of that.

So we continue to be the market leader.

I think that the situation enhanced our reputation in the marketplace and that's the situation we are quite confident we will be able to retain.

Great.

Secondly with this shift in demand by pharmaceutical companies in the discovery services business, has your visibility on those businesses or contracts been diminished as a result of this?

No.

I mean, I think our visibility is still good which is why we can see the shift.

So, you know, we have a very clear view pretty much in a composite basis because we are involved in so many lines of business with these clients.

This is what they are telling us for the short term.

More first quarter sorting out by big pharmaceutical companies than usual but we are confident that will get done in quick order and we continue to be optimistic about movement back until late stage development later in the year.

Great.

Last question.

On the Proteo mix JV, is it expected to generate revenues in 2003?

Is it still your expectation that it will not be accretive until 2004?

That’s correct.

Thank you.

The next question comes from Derik DeBruin with UBS Warburg.

Yes.

My question relates to the first quarter and you talked about 15 to 17% revenue growth for the year.

Should we translate it that this is also what -- that you expect for the first quarter?

I think what we said is because I couldn't quite hear the question clearly so what we said for the year was 15 to 17% growth for 2003 and 13 to 16% in the quarter.

I am not sure if you wanted me to confirm those numbers or was there an additional question.

The question that I have is when we look at it sequentially, that 13 to 16 is sort of a big jump sequentially from the fourth quarter.

So one question I have is how much of that revenue that you are projecting is sort of like in your pocket right now in terms of confirmed contracts?

Right, right.

It's not that big of a jump sequentially, actually.

As we said before the research models is seasonally down in the fourth quarter and we tend to start off in the first quarter a little better so that would account for some of your question.

And on the research models as Jim talked about a little bit earlier, it is more of a static standing order type business that are unconfirmed contracts but tend to be good commitments of order basing from pharma customers, if you would.

So I think we have pretty good visibility into that and on the other side of the business there is obviously some contractual obligations but it still does makeup a smaller portion of our business.

Great.

And could you remind us what the minority interest item is and how we can look at that going forward.

Sure.

The minority interest in '02 and it will be similar in '03 but a different percent is principally the ownership by our Japanese partner [Agena Moto].

So in ’02 that’s principally a minority interest deduct, if you will, for their 34% ownership in Charles River Japan.

In '03 we acquired at the beginning of the year an additional bringing us up to over 85% so now their minority position 15% so that will actually be a little smaller in '03.

The Mexico is also a JV but we'll be consolidating that in '03 so that minority interest goes away or there will be a minority interest piece in '03, still a smaller piece.

Okay.

And can you give us some more color going back to the proteomic initiative what are some of the products and services we can be looking for coming out of that?

It’s really proteomic feed for service analysis that we will be providing to pharma and biotech clients who will be really looking at new targets.

So it's going to help them with their early screening.

So it's really a service as opposed to a product.

Thank you.

Thank you.

At this time, there are no further questions in queue.

I will now turn the conference back to management to conclude.

Thank you very much for joining us this morning on our fourth quarter conference call.

We look forward to seeing you all shortly.

Thank you.

Thank you.

Ladies and gentlemen, if you wish to access the replay for this call you may do so by dialing 1-800-428-6051 or 973-709-2089 with an ID number of 281902.

This concludes our conference call for today.

Thank you all for participating and have a great day.

All parties may now disconnect.