Charles River Laboratories International Inc (CRL) 2003 Q1 法說會逐字稿

Good morning and welcome ladies and gentlemen to the Charles River Laboratories First 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 Miss Susan E. Hardy, Director of Investor Relations.

Please go ahead, ma’am.

Thank you.

Good morning and welcome to Charles River Laboratories’ first quarter 2003 conference call and web cast.

This morning Jim Foster, Chairman, President, and CEO and Tom Ackerman, Senior VP and CFO will comment on our first quarter 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 hope you had an opportunity to review yesterday’s earnings release.

If you don’t have access to a copy, you can find it at ir.criver.com under News Releases.

A taped replay of this call will be available beginning at 10:30 this morning and can be accessed by calling 800-428-6051 and entering pin number 288727.

The web cast will be archived on our web site and available for listening until May 8th.

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.

During this call, we will be discussing some non-GAAP financial measures.

You can find the comparable GAAP measures and reconciliations to those GAAP measures in our earnings release and under the Investor Relations sections of our web site.

Finally, the Safe Harbor.

Any remarks that we may make about future expectations, plans, and prospects for the Company constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from those indicated by any forward-looking statements as a result of very important factors including those discussed in the Company’s most recent annual report on Form 10-K, which contains a risk factor section on file with the SEC.

Now I’d like to introduce Jim Foster.

Thank you, Susan.

Good morning to all of you.

I’d like to briefly review the highlights of our strong first quarter results.

We delivered another quarter of growth in sales, growth in operating margins, earnings per share, and cash flow.

Net sales gained 13.7% in the quarter, gross margin increased by nearly 1% to 38.2%, and the operating margins increased by more than 1% to 22.3% in the first quarter.

Although the market for outsourced development services continued to exhibit slower demand, our broad portfolio businesses, especially our Research Model and Discovery Services businesses, cushioned the effect and enabled us to report results in line with our expectations.

At $0.40, our first quarter EPS was in line with the first call consensus and this result does not include a charge of $0.01 in connection with the writing down of assets of most of our Rockville-based contract production business.

Let’s look at the segments of our business and how they performed.

We’ve reported to you for more than two years on the very good quarters in our Research Models business.

First quarter of ’03 was another robust one and we believe the start of another very good year for the Research Models business.

Although sales growth in the first quarter of ’02 was exceptionally strong due to Japan and sales of large animal models, sales in Research Models still increased 14.5% in the first quarter of ’03 over the prior year.

Europe reported the strongest sales growth at 29%, followed by North America at 10%, and Japan at 9%.

When adjusted for foreign currency translation, which was favorable in the quarter, sales growth was 10% in North America, 7% in Europe, and down 2% in Japan where we had strong growth in the first quarter of last year, due to a competitor’s health issue.

Pricing and product mix contributed to the segment’s revenue growth across the board, but pure unit growth, especially in North America, was again a primary driver of the segment’s strong performance.

And alto we added production space in North America last year to accommodate our continuing sales growth, the first quarter sales increase generated a nice improvement in operating margins to 37.8%, compared to 34.3% in the first quarter of last year.

A number of you have asked why the model sales continue to exhibit such strong growth when other areas of the drug development market have exhibited slower demands.

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

There are no shortcuts and this basic discovery work utilizes large numbers of research models, in addition to proprietary invitro technologies.

These compounds then have to be screened quickly and definitively in research models to determine their potential as drug candidates before entering the more expensive development phase.

With a number of potential compounds still running somewhere in the vicinity of 10,000 to produce one new commercially viable drug, the volume of compounds being tested in late-state discovery and early development is very high.

And research models are critical to that effort.

Whether a drug company does the screening work itself or outsources it, they still require research models to support the effort, which is why we believe that the demand is greater than at any time in the last decade and continues to be strong.

Another factor that somewhat insulates us from the financial pressures facing our clients is the fact that research models represents a relatively small portion of the cost of developing a drug.

We estimate that models are less than 2% of the cost of developing a drug.

So, for example, on a $500,000 study, the model sales are less than $10,000.

That translates to an average research model sale at Charles River of approximately $600 and we make thousands of sales to hundreds of companies every year.

We are extremely pleased with the demand in the Research Model segment and believe that it will again be a key contributor to our full year results.

We continue to hear consistently from our customers on a worldwide basis that they will be expanding their model purchases, as they discover and screen greater numbers of compounds to determine which will be pursued vigorously.

We anticipate Research Model sales will increase 11% to 14% for the year.

Let’s turn to Biomedical Products and Services segment, where we provide preclinical 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 a full range of government mandated testing services, to identify drugs and insure that they are safe to move into the clinical to be tested on people.

The value of this diverse portfolio is clearly evident when the market for certain selected services softens.

Although our Development Services business had a slow quarter for sales growth, its performance was partially offset by strong double-digit growth of our Development Services, In Vitro Technology and Vaccine Support Products businesses.

Sales growth for the Biomedical Products and Services segment for the first quarter was 13%.

Our Transgenic Services business, where we work with researchers to manage their transgenic model colonies, was the largest contributor to the growth.

We have surpassed 50% occupancy of our new 70,000 square foot state of the art facility outside of Boston and are filling up capacity at our Tokyo, San Diego, and Leone, France facilities.

Our customers recognize the value of housing their transgenic colonies with us.

It’s a more efficient, cost-effective solution for managing these assets.

It allows our customers to focus more human and capital resources on the proprietary, basic research that only they can do.

The two other business units in our Discovery Services group, Laboratory and Research Services and Contract Staffing Services, also reported double-digit growth.

And the In Vitro Technologies and Vaccine Support Services businesses reported strong growth in the first quarter, rounding out great performances by three of the four businesses in our Biomedical Products and Services segment.

Development Services business reported a small net sales increase in the first quarter, due to BioLabs and Springborn, which were acquired in the second half of ’02.

Both acquisitions continued to perform well and in line with our expectations.

The level of Development Services sales and the asset impairment charge for a contract production facility resulted in a decline in the Biomedical Products and Services segment’s operating margin.

For the quarter, the segment’s margin was 15.6%, compared to 18.4% last year.

Our niche contract production business effected the Development Services performance in the first quarter.

As you know, we had been looking for a buyer and believed that we could dispose of the assets at fair value.

We recorded an asset impairment charge for this business in the first quarter when it become apparent that we could not secure a buyer for the entire operation for fair value.

Sales for this business continued to decline in the first quarter, representing slightly less than 1% of segment sales.

As with this business, the segment’s growth rate in the quarter would have been approximately 4% higher than we are reporting.

The most significant factor effecting the performance of the Development Services business in the quarter was the market for outsource development services.

Our view of the market place has been based on many years of experience in the Research Models business.

We’ve seen trends in this business, but they’re generally long in duration and slow to change.

We’ve learned more recently, with our entry in the services business, that there can be short-term trends in the services sector, especially in the Development Services that can be less clear to predict.

The slower demand in the fourth quarter of last year continued in the first quarter and we now believe will persist for the balance of ’03.

We also believe that the market will improve by the end of the year and should be better in ’04.

Let me tell you why.

Drug companies continue to fill the drug discovery and development pipeline with compounds and spend time and money identifying the most promising of those and then next will produce the next blockbuster drug.

During our fourth quarter conference call, we discussed the barbell effect in the pipeline, where numerous lead candidates are being identified in late discovery, the early end of the pipeline.

And then the focus shifted to Phase 3 clinicals, the late end of the pipeline, as companies pushed to file new drug applications.

We still believe that this is the case and expect that the backlog of compounds in late discovery will begin to move into the development phase of the pipeline toward the end of this year.

We believe that tighter spending at pharma and biotech companies is a major factor, slowing the progress of development spending this year.

The drug companies are under pressure on a number of fronts - drugs coming off patents, the high price of drugs and generics, just to name a few - making it more critical that they choose the drug candidates with the greatest potential to succeed.

So, before companies begin the expensive IND enabling studies required for FDA approval, they want to insure that the target compounds have real commercial potential.

It can cost as much as $800m to develop a new drug, so, return on investment must factor into the decision to move forward on any compound.

Because the late-stage development studies required for FDA approval are costly and these studies include some of the toxicology work that we do, pharm and biotech companies are waiting until the last possible moment to outsource that work.

In addition, due to financial pressures, a few pharma and biotech companies have temporarily kept work in-house rather than outsource it and have to lay off additional staff.

These developments are occuring in our markets at time when new capacity for outsourced toxicology studies has come on line, resulting in more competitive pricing.

Over the last two months, we’ve spoken with senior decision-makers at many of our clients who tell us that they will be moving forward on development spending and will continue to outsource many of their studies.

The most efficient use of their research talents is in discovery and the most cost effective means of performing safety assessment is through the use of trusted partners like Charles River.

Although we expect the slower demand to extend through ’03, we do have reason for optimism that demand will begin to improve toward the end of the year.

Affirming what our customers are saying, bid volume for our Development Services has and should continue to increase throughout the year.

Therefore, we expect Biomedical Products and Services sales will increase 11-14% for the year.

I’d like to update you on changes we have made to improve the performance of our Development Services businesses.

As we told you last year, we have reorganized our Drug Discovery and Development Services business under a senior executive whose objective is to standardize operating performance across our labs and insure that management of each of the labs operates their facilities with the same standards of scientific excellence, customer service and profitability that are the hallmark of Charles River.

A number of changes have already taken place, including a new General Manager at one of our facilities and a refined sales and marketing structure, which we believe is resulting in stronger client service and marketing organizations.

In addition, we will reduction headcount in the second quarter.

Based on these action and our progress to date, we continue to expect that operating performance for the Development Services businesses will improve by the end of’03.

Before going on to discuss our ’03 guidance, I want to tell you that our Proteomics Services joint venture officially opened for business on April 29th with a well attended open house.

In addition to the press, we had more than 40 potential customers at the open house and expect to record our first sales in the second quarter of ’03.

We’re very excited about the scientific strength of this new organization and believe it will be beneficial in filling the current client need.

As you know from the press release, we are revising our guidance for 2003.

The slowing demand for Development Services is greater than we initially expected.

But the breadth of our portfolio businesses is working in our favor in helping to offset the lower than expected development sales and help us safeguard our margins.

Therefore, we are revising sales guidance to 11-14%.

In order to preserve as much of the bottom line as possible, while at the same time not compromising our businesses that are performing well, we’ve implemented a number of cost savings initiatives.

In addition, we expect to benefit from better than expected performance in some of our businesses and in more profitable business mix.

Therefore, we are revising our expectations for 2003 diluted earnings per share to a range of $1.63 to $1.68, an increase of approximately 15% to 18% over 2002 results.

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

For those of you who are interested, we will be speaking on Tuesday, May 13th at the Robert W. Baird 2003 Growth Stock Conference in Chicago.

In addition, we will be hosting our first ever Investor Day on Wednesday, May 28th in Andover, Massachusetts.

Invitations will be sent out today, so if you don’t receive one and would like to attend, please give Susan Hardy a call.

We look forward to seeing you there.

Our first quarter results demonstrate the value of our balanced portfolio businesses.

The Research Model segment net sales showed strong growth in the quarter, reflecting continuing demand for our market leading products.

We reported good net sales growth in the Biomedical Products and Services segment, where double-digit growth in our Discovery Services, In Vitro and Vaccines businesses both did slower growth in our Development Services business.

We are pleased that through the improved profitability in many of our businesses, we were able to achieve our expected earnings results for the first quarter.

Although we now anticipate that our sales growth for the balance of the year will be lower than we previously expected, we believe the benefit of a broader portfolio of businesses will also be evident in our full year results.

Stronger than expected profit contributions from many of our other businesses should offset lower Development Services sales and the variety of cost saving initiatives we’ve implemented will further take down our margins.

We have strong business franchises and we expect to weather the market trends and continue to deliver sales and earnings growth.

Thank you for your time this morning.

On behalf of our 5,000 employees worldwide, I’d like to thank all of our investors for their continued support.

Now I’d like to turn the floor over to Tom Ackerman.

Thank you and good morning.

Jim has already updated sales trends, so I’ll give you color on margins, expenses, working capital and 2003 guidance.

Net sales of $152.1m in the first quarter included a net favorable currency impact of approximately 4.5% versus last year, the result of a strong Euro and yen.

Approximately 71% of our sales in the first quarter were in North America, compared to 75% in the first quarter of last year.

The higher proportion of sales in Europe and the strength in the Euro were the drivers of the favorable foreign exchange impact.

Gross margins in the first quarter were 38.1%, an increase of approximately 1% versus last year.

Research Model gross margins were 48.6%, a 2.8% improvement versus last year, principally due to improvements in North America and Europe.

Margins improved due to greater demand, price increases, and cost savings such as the closure of a facility in France and the sale of our swine business in the first quarter of last year.

Biomedical Products and Services margins were 3.3%, a 0.8% decrease from last year’s 31.1%, due primarily to Development Services.

The lower Development Services gross margins were only partially offset by improvement in Development Services and In Vitro products margins.

SG&A in the first quarter was 14.6% of sales, 1% better than in the first quarter of last year, due to leverage from higher sales.

Amortization expense was $1.2m in the quarter, an increase of $0.6m from the first quarter of last year, due to the acquisitions of BioLabs and Springborn.

Operating income in the first quarter was 22.3% of sales, compared to 21.2% last year.

The 1.1% gain was the result of increased sales, sales mix, and improved operating efficiency.

Research Models improved to a 37.8% margin rate from 34.3% last year, principally the result of leverage from higher sales and cost savings.

Operating income from Biomedical Products and Services declined slightly to a 15.6% margin rate from 18.4% last year, due principally to a decline in the Development Services margin and the net charge of $0.8m for asset impairment of our contract production facility and a litigation settlement.

Absence of the net charge, the operating margin would have been 16.5%.

Net income expense was $1.6m in the first quarter, compared to $3.4m last year.

The decrease was due to the retirement of our 13.5% senior subordinated notes in the first quarter of last year.

The income tax rate in the first quarter was 38.5% versus 39% last year.

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

Net income was $19.4m in the first quarter or $0.40 per diluted share, including an asset impairment charge of $3.7m for our contract production facility and a litigation settlement in our favor of $2.9m.

The net charge for these two items was $0.8m or approximately $0.01 per diluted share.

These results compared to a loss of $2.2m or $0.05 per diluted share last year.

The first quarter of 2002 included a charge for early retirement of debt in the amount of $27.5m or $0.38 per diluted share.

When adjusting for both charges, this year’s non-GAAP earnings per diluted share was $0.41, a 32% increase over last year’s non-GAAP earnings of $0.31 per diluted share.

In calculating earnings per share in the first quarter, we are adjusting income by $1m tax effected, to eliminate the interest expense on the convertible debt and using a diluted share count of $51.2m, which includes the shares as if the convert had occurred.

Some comments on working capital.

Working capital was $183m at the end of the first quarter, an increase of $18m from last year’s fourth quarter, principally due to the increase in accounts receivable.

Cash on hand at the end of the first quarter was $119m, compared to $128m at the end of the fourth quarter.

Cash provided by operating activities was $9.1m for the first quarter and free cash flow was $3.9m in the quarter.

The major reasons for the change are as follows.

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

On January 2nd, we acquired an additional 19% of equity in Charles River, Japan, our joint venture with the Ajinomoto Company of $10.8m.

We now own 85% of the joint venture, compared to 66% previously.

Accounts receivables increased $12m from the end of the fourth quarter.

The fourth quarter is usually light, reflecting seasonality associated with the holidays and is followed by a stronger first quarter.

DSO was 63 days, a one day improvement from the end of the fourth quarter 2002 and a 9 day improvement from the first quarter of 2002, reflecting continued collection efforts.

Inventory levels remained stable, with a slight increase reflecting our acquisitions of BioLabs and Springborn and the consolidation of our joint venture in Mexico.

Long-term debt was $192m at the end of the quarter, $185m of which was our convertible bond.

The balance declined by approximately $3m from the end of 2002, as a result of repayment of a mortgage on one of our facilities.

Capital expenditures were $5.2m for the first quarter.

Our estimate for the full year is approximately $40m and D&A was $6.9m in the first quarter.

Some additional color on guidance for 2003, based on our view of the market place and using current exchange rates, we now anticipate a net sales increase of 11-14% in 2003.

Both research models and biomedical products and services are expected to increase in that range.

We are assuming that, at current rates, foreign currency translation for both the Euro and yen will continue to have a favorable effect on sales of approximately 2% for the total year.

The changes from those rates could effect or alter our actual sales growth.

Sales in Europe and Japan in 2003 are now expected to account for approximately 27% of total sales.

In view of our current sales expectations, we are taking actions to realign our cost structure and maximize our earnings ability.

We have implemented a headcount reduction, a hiring freeze, and Capex reductions and are reviewing other options available to us.

For those businesses, which are not contributing to our growth, such as the contract production business, we are right sizing by reducing headcount and consolidating operations.

These actions will give rise to a restructuring charge of approximately $1m, which will be recorded in the second quarter of 2003.

We believe that these actions in total will result in savings of approximately $7m in 2003.

Taking the expected sale increase, operating efficiencies, and our cost containment activities into account, we believe that diluted earnings per share will be in the range of $1.63 to $1.68, an increase of approximately 15% to 18% over 2002 results versus a sales increase in the low double-digits.

In the second quarter guidance, 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 second quarter of 2003, we expect net sales to increase between 12-14%, or a range of $153-156m.

We expect diluted earnings per share to be in the range of $0.40 to $0.42, an increase of between 11-17% over the prior year second quarter.

That concludes our remarks.

We’d now like to take your questions.

Thank you, sir.

The question-and-answer session will begin at this time. (Caller instructions follow.)

Gentlemen, please stand by for your first question.

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

Please state your question, sir.

Good morning gentlemen.

Jim, I was wondering if just in kind of the current economic climate and also demand that you’re seeing, or softness in demand from pharmaceutical companies in some of the Development Services sectors, alters your view of the long-term growth potential of the Company?

I know the new guidance here is a little bit below what you’ve in the past indicated is your organic long-term growth rate and obviously in 2003 you’re getting somewhat of an FX benefit.

So, maybe if you’d just comment on what you think this business can do long-term?

Hi Eric.

No, it doesn’t alter our long-term view.

We’re in sort of an unusual confluence of events here, I think, particularly in the development piece, which, in the aggregate, is about 30% of what we do.

Probably about 20% of what we do is effected by that, but here we have some unusual market conditions having to do with the demand quotient capacity in the system, the type of work we do, the propensity to outsource at the current time.

Which is causing a slight adjustment in our sort of long-term outlook of 11-14% instead of our usual 12-15%.

Notwithstanding that, we’re seeing the Research Model of business and demand for the product piece be quite strong and the services related to that be quite strong as well.

So, it really doesn’t alter it.

I think it’s pretty clear to us that the pharma and biotech industries, in order to conserve on spending and focus on the work of discovering new drugs are going to have to continue to outsource large amounts of work, including in the development area.

And we think this is sort of an unusual trend, with greater emphasis and very early discovery and late-stage clinicals and less emphasis than we had been experiencing, certainly last year and the year before, on chronic and sub-chronic products.

Tom, do you have any statistics for growth of either the Development Services business or Biomedical Products and Services business overall, excluding the two acquisitions last year?

I don’t have those, Eric.

In absence of the two acquisitions, the Development area would have been down versus last year, without reporting on what the number was.

But I don’t have that offhand.

Okay, thanks a lot, guys.

Our next question comes from Paul Knight of Thomas Weisel Partners.

Please state your question.

Tom, what will the 10-Q show in pro forma Q1 ’02 revenue?

Paul, clinical you report the question please?

What will the pro forma revenue be in Q1 of ’02?

The pro forma revenue in Q1 of ’02?

Yeah, just to get the organic growth.

Oh, well, I mean if you look at it, what we had said previously, I think you’re talking about Springborn and BioLabs.

You know Springborn, we had said, is about a $15m-ish company annually.

That’s what we had said at that time and BioLabs is a little bit more $10-12m annually or in the range.

So, I think if you circle that back into ‘02 that’ll give you a ballpark number.

Okay and then lastly, Jim, on the Discovery side, can you give maybe a proportion as to how much that is, of the service group?

You mean Discovery or did you mean Development?

I’m sorry, Development.

Yeah.

It’s about 30% of our gross sales and I would say that a portion of the relevant piece seems to be somewhat unaffected at the current time by trends that we’re seeing.

So, I think we’re talking about 20% of our total sales being impacted at the moment.

Do you expect the seasonality of pharma to increase -- do you think pharma increases from Q1 level on their R&D rate, like last year?

We do anticipate that in the service businesses and particularly the Development one.

Business seems to pick up quarter to quarter.

As we talked about, I think, in our last call and a lot of the topics as we’ve going to, a lot of slowness in sorting out by big pharma during the first quarter, so I think their start to the year was slower than usual.

The extent to which they catch that up or pick up that up is somewhat unknown, but the trend is most often to increase through the back half of the year and that’s what we anticipate.

I would say that the increases in bid volumes we’re seeing would tend to support that, at the current time.

Thanks.

Thank you.

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

Please state your question.

Thank you, good morning.

On the $6m in foreign currency gains, was most of that in the Research Models business?

Yes it was, Larry.

If you take that away, then, from the Research Models business, it looks like the growth was more in the 5% or 6% range.

Correct.

On an organic basis then.

How much was the pick up from the consolidation of Mexico?

Mexico is a very small business, a couple of million-ish.

It’s not in the analysis.

Right, yeah, thank you and that’s in Biomedical Products and Services, Larry.

Okay.

I think then you said that unit growth and organic growth was around 10% for models.

How do you reconcile that when you take away the foreign currency impact?

Well, I think where we are, Larry, is the currency impact was about 8%.

So, I think on an excluding currency basis, the Research Models grew about 6%.

And I think the breakdown of the rates, where in North America were double-digits, Europe was high single-digits, and Japan, principally because of the strengthening position of our competitor, was actually down on a constant currency basis.

So, when you net that all down, pretty much you get to a 6% growth rate.

Larry, our largest business overall and our largest business certainly in the Research Model factor is North America.

That business has been growing as organic, because it’s only organic, double-digit rates for five years and has continued to do so in the first quarter and that was up 10%.

Even had some weather difficulties in delivering animals.

So, we would anticipate that North America would continue to be a strong double-digit growth for the entire year.

As Tom said, we have some funky comparisons with Japan, quarter over quarter, year-over-year, because of the weakness that our competitor had and taking back some of that business.

So, we’re pleased with the growth and it’s not different than we’ve been seeing for the last year or two.

Okay.

Earlier in the first quarter you had anticipated that your growth on the Development side would pick up in the second half, because of contracts that you felt you’d have or had or have soon.

What has happened to push that out six months or so?

Well, we still expect the Development business will continue to initiatives successively each quarter, given that that’s sort of the natural trend and given that that’s what we have seen historically.

As I said earlier, we’ve also been told that, by our clients, and they were slower to start, so it’s a combination of seeing bid volume beginning to increase.

Pharma companies are sorting out where they’re at.

I do think that the slowdown for it happening less fast than we had hoped and anticipated is a lot about multiple factors and let me just reiterate those.

There’s an awful lot of capacity in the system.

We’re seeing our pharma customers have a greater focus and very early activities and very late-stage development work and it’s leaving a sort of chronic and sub-chronic tox work on an outsource basis anyway.

A little less robust than we had all anticipated.

Obviously a transitory thing, because that late-stage development work is going to have to happen with abeyance.

We talk to pretty much all the major pharma and biotech companies consistently.

I had occasion to do that personally at the Society of Toxicology meetings and we met with the decision-makers who said that the strategy was to continue to outsource.

That that was the best use of their space not to continue to build a space but to use it for discovery purposes.

So, we’re confident that it will happen, but we have market factors that certainly are causing it to happen more slowly than we had anticipated.

Okay.

Thank you.

Thank you.

Our next question comes from Ken Kulju of Credit Suisse First Boston.

Please state your question

Yes, good morning.

First, wondered if you could just talk to the evolution on your operating margins as you progress through the balance of ’03 and how you see the margin picture in ’04, taking into account some of the recent restructuring in the services side of the portfolio?

And then my second question is a little more macro-based.

Obviously there’s been some reports about Pfizer consolidating 3 of its 25 research facilities and we’ve seen Bristol reorganizing its research organization and then we’ve also seen some reports of companies reporting some bottlenecks in the very early stages of clinical development.

And I was wondering if you could elaborate on what you were characterizing as a barbell approach of the movement from pre-clinical setting in some more advanced development?

Do you ultimately see this purported bottleneck eventually supporting your prospects, say in the ’04 to say ’07 period?

I was wondering if you could just give us your view on that.

Tom and I will split these questions up and let me just talk about your sort of second and third question.

You know the consolidation of the pharma industry is a fact of life for us and we have been experiencing it and responding to it now for a least a half a dozen years.

So, certainly the Pfizer Pharmaceutical one is not unanticipated and while we never and won’t comment on specific mergers and the sort of share we have with each respective customer here, I guess we continue to experience a similar trend.

Which is that we become a great asset to these companies post merger, as they begin to sort out how to best utilize their own facilities and how to best utilize their people.

And so while they will for sure cut costs substantially by reducing numbers of sites, I think they want to do this in the most elegant way to intensify and enhance their ability to get drugs into the market place.

And again, as we continue to say and we say it only because it’s a reflection of what our clients tell us, I think their emphasis is going to continue to be in core discovery.

Hopefully, more of the mergers are complimentary rather than duplicates here, so that the research dollars, as a whole, will be marginally effected if effected at all.

And so we continue to see a similar trend.

Obviously at the current time, on the service side, most closely related on the service side in our Development Services businesses, which continue to grow really significantly, with enhanced margins.

And that’s a clear decision on the drug company’s part not to dedicate space to that.

The Development business is being hurt by the sort of second part of your question, which is there’s no question there’s a bottleneck.

That’s a good thing if the numbers of drugs or potential compounds that they are discovering in early discovery tends to be beneficial and tend to make it through the pipeline on a long-term basis.

Then their emphasis on basic discovery will be successful and will be important.

So, I think long-term, we will all be pleased, and Charles River will be particularly be pleased with that emphasis.

There’s no question that they have to get back to the development work soon.

I don’t think we know exactly what that means, Ken, soon; we think gradually.

During the balance of this year and hopefully, much more significantly, next year we’re not giving any guidance on ’04 at the current time, though.

So, I think the bottleneck will yield consist work and activity for folks like us and should hold the drug companies in good stead.

Tom will take the other part of the question.

Thank you and Ken, let me back up for a minute and just make sure that we’ve answered a couple of the sales-related questions properly, since a couple of folks have been poking around that.

Okay.

We did indicate in the first quarter that we picked up 4.5% on currency.

BioLabs and Springborn acquisitions would have contributed probably a like amount from a percentage standpoint.

You know earlier in the year we had said we thought the acquisitions would give us about 4% of our increase for the year.

That would obviously be a little bit higher in the first quarter, since the acquisitions were done at the end of 2002.

And then, in addition to that, Mexico would have obviously added a smaller amount to that, just a consolidation of RJB.

In addition to that, on the top line, the closure, the imminent closure of our bio production facility down in Maryland probably had a negative impact on sales in the first quarter of ’03, versus last year, of almost 2%.

So, we actually had a pretty good first quarter last year.

That was probably our last good quarter of contract production, I would say and we obviously had a very, very small quarter this year, which of course is the reason for our ultimate decision to essentially close that facility and take the impairment charge moving forward.

So, hopefully that just puts that in better perspective for you and the others.

So, as I look to you question on margins, we obviously had a good margin in the first quarter and we improved margins versus last year, notwithstanding some of the issues that we’ve talked about in the top line.

As I look to the rest of the year, I think the kind of pressure that, you know, the businesses that we’re dealing with, will keep us from expanding margins, I think, in a way that we would have like.

But will not necessarily put pressure on the margins where we’ll actually have a decline in margins.

So, as I look out for the rest of the year, I think we’ll probably transition through the second quarter a little bit as we close the contract production facility.

And actually move a little bit of that business that’s left, that we’re going to keep, to one of our other facilities and transition that and of course we do have the restructuring charge that we’ll deal with in the second quarter.

I don’t necessarily see anything much different from the first quarter, if you would and I’m still hopeful that, for the year, we’ll see margins that are at least equal or slightly better than 2002 as a whole.

So, I think putting that as a backdrop, Ken, I think if things in the market place develop as we expect they will, particularly in the Development area, I think we’ll come out of the year in a strong position.

And hopefully that’ll stead well for us in ’04, both on a top line basis as well as, therefore, on a margin basis.

Great, thank you.

Sure.

Thank you.

Our next question comes from Meirav Chovav with UBS Warburg.

Please state your question.

Hi, it’s Meirav Chovav [ph] and Derik DeBruin [ph].

Let me just start.

When we look at the Biomedical Products and Services and I look at the margins of that business sequentially and going back even several years, that’s been pretty much the lowest margin that I’ve seen you guys pose.

So, what do you think will happen in terms of margins for that part of the business?

And Derek, you had some additional questions?

Yeah, I’ll follow up with that after that.

Okay, thank you.

Well, you’re probably right.

I mean, I think the margin in that business, prior to our acquisitions in early 2002, was always higher than that, for sure.

Many of our Discovery businesses have a higher margin than the average, which of course right now is in the low 30%.

I think that what we’ve talked about on the top line, particularly in the Development area, that’ll obviously continue to put a little bit of pressure on our ability to improve margins.

But, on the other hand, as we’ve pointed out, given the lower sales volume, we’re going to make a bunch of changes in both personnel and the way we’re managing that business, to try to align our costs with sales.

So, I do expect, based on that, that we will see the margin improve during the year, probably to what we’ve seen historically.

And I think it’ll take us until ’04 before we see the improvement that we’d like to see in that business going forward.

You know we’ve talked about that in that past, though, and of course there’s a big gap between the margins in the Biomedical and the margins in the Research Models.

And I don’t think we’ve ever indicated, nor is it our intention to try to get those margins more close together, because I just don’t think its possible on the service side of the business.

So, whilst I think we want to see the margins improve and I think they will improve during the year, it’s not like those margins will improve to the point where the Research Models are.

And Derek has some additional questions.

Yeah, just a couple here.

I mean, in the pre-clinical tox business, it sounds like that overall the supply has gone up while the demand has gone down.

So, could you talk a little bit how much capacity there is out there for doing pre-clinical tox and certainly was that some of the prices involved?

Both in North America and also I’m interested in Europe, given some of the gains, given some of the news out by some of the competitors in this space.

Obviously the capacity is substantial and our reflection or our reference point is mostly domestic, Derek, because that’s where we play.

So, because of the demand quotient, there is “too much capacity” in the system at the moment.

That is resulting in some price pressure, but we think that long-term, that potential, that capacity is going to be essential to support the outsourcing initiatives and demand by the clients.

And I think that this industry or this business has typically been cyclical and it’s always had kind of capacity and demand issues.

This one is little more significant, actually, for good and bad reasons, but the good reason are that we are all building capacity in anticipation of additional outsource demands.

So, it’s also hitting at a time where it’s putting some pressure on our businesses.

We can only sort of watch the Europe and Japanese tox business from afar and we have a unique view of it, because we sell animals, really, to most of the people doing toxicology, including our competitors.

But our sense is that the actual demand and the utilization of the space in Europe is better, because I think they’ve been outsourcing for longer products of time.

And based on at least what we’ve been reading and watching with other people in the industry, they’re just further along in the curve, from an outsourcing point of view.

I suspect that that portends a similar trend for us, as well.

Okay and you’d said that, looking forward, you said that you’ve seen bid volumes increasing.

Increasing relative to what, relative to the fourth quarter or relative to this same time last year?

Relative to what we’ve been seeing for the fourth quarter and the first quarter of this year.

Okay and in terms of the Proteomics, could you just give an idea of, I mean, the type of -- you said you expect to see sales this quarter.

Just some idea of what type of services, I mean, is this biomarker discovery for that?

If you could just give us a little bit more color?

Yes.

It’s a fee for service basis, analytical work, looking for targets and they’re going to be working with clients who are both looking for diagnostic tools and therapeutic tools as well.

We have several large pharma companies and several large biotech companies apparently interested in the services.

I’ve said the reception went extremely well.

It’s a very sophisticated technology.

It’s a unique and positive technology that a client can’t access themselves without going through us, so we think, given the focus on protein analysis, that is a way of finding new targets and pathways, that that will be an important business for us long-term.

So, we’re excited to have it finally launched.

I’m just curious.

It already had, I mean, from my understanding of the Proteomics system, that it is an automated 2-D gel based approach doing this and if you’re talking about some of the pharma companies cutting back on some of their outsourcing for their pre-clinical services.

I’m just curious as to why they shouldn’t cut back on their outsourcing for the research services.

Typically just the push is now to save jobs.

The conversation we’ve had on the Proteomics side, all I can do is reflect that, is that our customers are looking for any technologies, particularly ones that they can’t access, to accelerate the rate at which they identify these proteins.

And so we have had interest even with whatever apparent pull backs there may be, in accessing whatever will help them move the process forward.

So, yeah, of course the business is brand new, so we’ll see, but given the numbers of people that showed up and the level of people and the diversity of clients, it would seem to be that this will be an attractive service for them.

And just one final question on the sustainability of the Research Models growth.

I mean, are you seeing that you’re starting to take some of -- that you’ve seen some waning in some of your competitors, Consomic and Harlan [ph], for example?

I just want to know what your outlook is for the long-term on that business.

I mean, our outlook is increasingly more positive.

The Research Models business has been growing, certainly in North America, as I said earlier, for about five years.

It’s a business where we’re seeing really aggressive unit growth in the specialty models, disease models, and immuno-compromised models.

We don’t have exactly the same portfolio of models for all of our competitors, so it’s different to comment on that.

We have been taking probably a point of share annually in the States.

We certainly took some share in Japan and we continue to feel that our importance in this area of providing, particularly, specialty models is increasing.

So we continue to be very positive about this business.

Thank you very much.

Thank you.

Our next question in queue comes from Steve Rosston of [inaudible] Capital Mgt.

Please state your question.

Yes please, could you talk a little bit more in the toxicology area about the amount of capacity that you see on line, that needs to be used up before pricing and margins will harm in the US?

I’ll try.

That’s a bit of an imponderable.

A significant amount of space was constructed in ’02.

Some is actually continuing to be constructed in ’03.

Some of it in ’03 actually is overseas.

So, it would be difficult to quantify the amount of capacity that was added, except to say that it increased available capacity substantially.

The rate at which it will be billed is highly commensurate with the rate at which drug companies are comfortable outsourcing work again, particularly in this sort of mid-range, mid-several months to several year study.

So, I guess the simple answer to that is that capacity could be utilized quite rapidly as drug companies come out of early discovery and begin to do safety testing on drugs in early and late-stage development.

And the extent to which a portion of that is outsourced will really drive that capacity.

So, as I said earlier, it actually, while it would be probably better for us for a couple of quarters to have less capacity in the system, I think in order to insure that outsourcing will continue significantly.

That additional capacity by all of us has been an important statement that the contract suppliers are serious about the work that they’re doing and have the infrastructure and the capability to allow the drug companies to outsource.

So, I mean, I certainly think it’s capacity that could be utilized, but you know it’s hard to say, in the next 12 to 18 months.

Thank you.

Thank you.

Our next question comes from Alan Kessler [ph] with Oracle Partners.

Please state your question.

Hi.

Have you made any changes to your free cash flow guidance for the year?

This is Tom.

No we have not.

We originally said that that would be between $70m and $75m and I think our expectations would still be in line with that.

Okay and then do you know the currency benefit that was associated with your gross profit margin?

Well that would be non-significant, because the vast majority of our overseas sales are produced locally.

So, whilst we’ve gotten the benefit translating our sales at a better rate, we’ve also translated our local costs and our local SG&A at a higher rate also, so generally that’s not the way it flows through for us, because of that.

Okay, thank you.

You’re welcome.

Your next question comes from Blake Goodner of Bridger Capital.

Yes, hi guys, just a question on the Research Model growth.

If I look at the $65m that you did in the first quarter and I back out the $6m - or $5m or $6m - of FX and I back out the $1m to $2m of the Mexico consolidation, it looks to me like, on a consolidated basis, that business, if you adjust for those two items, grew in the very low single digits.

So, I guess I’m just wondering how your -- I understand the North America side is growing, but I’m just trying to jump from that very low single digit number, adjusting for FX on the Mexico consolidation up to an 11-14% number for the year.

Let’s just review it again.

Firstly, Mexico is not in that.

Mexico is in our avian business and it’s reported on the Biomedical Products and Services so take that out.

North America is growing is growing at double-digit rates and we think it will continue to do so on an accelerating basis.

Japan has an impact of a very negative year-over-year comparison, so we would expect that to be better as well, going forward.

We also have a large animal business that had an unusually strong first quarter last year, just in terms of unit shift.

So, again, the comparison doesn’t look as good for the first quarter, so we’re confident notwithstanding currency, that the Research Model sales will continue to be robust and we haven’t seen any diminution in demand, particularly, for specialty models.

Okay.

That’s very helpful.

The second question I had was related to the Development side.

With respect to the 11-14% growth for the services business, what is your assumption for price?

Well our assumption coming into the year had been about 4%, so we actually said 4% across the board, which broke down, coincidentally, 4% Research Models and 4% Biomedical Products and Services.

I think with the exception of the Development area, I think that 4% would still be an accurate representation of the other Biomedical Products and Services offerings, if you would.

I think that relative to some capacity and the other issues that were talked about in toxicology, I would say that across the board we’ve seen a slight decline in pricing power, versus last year.

You know, something on the order of low single digits, if you would.

So, not dramatic, but I think it’s put a little bit of pressure on it, so if I were to recalibrate our overall pricing, I’d obviously have to take it down on a weighted basis for that, if you would.

Okay and the last question just relates to the changes you’re going to make in the Development business.

How many people are you actually going to be laying off and can you just go into a little more color with respect to some of those restructuring changes that are going garner you the savings in the rest of the year?

We’re really not going to do that.

We’re reducing costs, including headcount in a way that’s significant enough to realign the business and insure that we can deliver the margins for the year.

But we really don’t want to go into detail on that.

And the $7m receiving, that’s included in the new guidance?

Correct.

Yes.

That’s correct.

But you know we’re planning to make those actions next week, so I think that’s why we’re being a little cautious on the numbers and things like that.

Okay.

Sounds good, thanks a lot.

Thank you.

At this time, I would like to turn it back over the management to conclude.

We want to thank you for joining us this morning and look forward to seeing you either in Chicago or at our Investor Day on May 28th.

Thank you very much.

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 288727.

This concludes our conference call for today.

Thank you all for participating and have a great day. 15