Charles River Laboratories International Inc (CRL) 2004 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your Quarter One 2004 Inveresk Research Group earning conference call. My name is Jean . I'll be your conference coordinator. At this time, all lines are in a listen-mode only. At the end of the call, we'll be taking questions. If at any time during the conference call, you need operator assistance, key star, zero, and an operator will be happy assist you. At this time, I'd like to turn the call over to your host, Mr. Matt Dallas. Sir, over to you.

Good morning, ladies and gentlemen, and welcome to the Webcast of Inveresk Research Group's results for the first quarter of 2004. Presenting from the company will be Dr. Walter Nimmo, President and Chief Executive Officer, and Mr. Paul Cowan, Chief Financial Officer. The presentation will be presented simultaneously over the Internet, with access via the company's Web site at inveresk-dot-com. An opportunity will be given for questions to be asked following the presentation. Before we begin, I'd like to remind you of the Safe Harbor disclaimer. Statements contained in this presentation that are forward-looking are based on current expectations that are subject to a number of uncertainties and risks, and actual results may differ materially. Factors that might cause such a difference include, but are not limited to, risks associated with the reduction in research and development activities by pharmaceutical and biotechnology clients, changes in government relations, the effects of interest rate and foreign exchange fluctuations, our ability to attract and retain employees, the loss or delay of contracts due to economic uncertainty or other factors, our ability to efficiently manage backlog, our ability to expand our business through strategic acquisitions, competition within the industry, and the potential adverse impact of health care reform. Further information about these risks and uncertainties can be found in the information included in the company's recent filings with the Securities and Exchange Commission, including the company's Form 10-K. Today's presentation will take place in two parts. Dr. Walter Nimmo will present the operational overview and revised 2004 guidance for the company, and Mr. Paul Cowan will present the financial overview. With that, I would now like to introduce Dr. Walter Nimmo.

Good morning, everyone. Welcome to this presentation of the financial results of the Inveresk Research Group for the three-month period ended March 31st, 2004. We are pleased to report strong results for the first quarter in terms of profits and cash flows for the Inveresk Research Group. In the first quarter, we recorded net service revenues of $76.7 million - a 33 percent increase from the corresponding period in 2003. On the reported basis, diluted earnings per share were 31 cents in the quarter, compared with 20 cents in the first quarter of 2003. I would bring to everyone's attention, however, that the first quarter results included a three-cent one-time benefit relating to the recognition of a deferred tax asset on carried-forward tax losses in our U.S. operations net of share offering expenses and residual restructuring costs for the PharmaResearch acquisition. Paul will discuss this further in the presentation. Inveresk continues to benefit from a strategy in recent years and the diversity of the service offering. In the first quarter, net service revenue in our pre-clinical business increased by 22 percent to $44.4 million. Strong inquiry levels in the last three quarters of CTBR or North American pre-clinical business have been converted into new business signings, resulting in increased revenues and an improved business mix. CTBR recorded excellent results in first quarter, and we expect this to continue for the remainder of the year. At the same time, our European pre-clinical operation maintained its strong performance of 2003 with demand for its toxicology services in particular remaining buoyant. Operating margins in the pre-clinical business increased by 2.3 percent year-on-year to 26.5 percent in the first quarter, reflecting the strength of new business awards across the operations in the last three quarters, improving business mix and a more favorable exchange rate environment. Within the pre-clinical business, we are also experiencing increasing demand for our laboratory services in North - laboratory sciences services in North America. Our ongoing expansion plans remain on schedule for completion. The clinical business segment delivered profits in line with expectation in the first quarter. Inquiry levels remain strong in North America and Europe, although seasonal factors and some project delays impacted revenues in the first quarter. In our clinical business, net service revenue increased by 52 percent in the first quarter to $32.4 million, compared with 2003. This reflects the benefit of a full quarter's revenues from the PharmaResearch acquisition completed in July 2003. Integration benefits associated with the PharmaResearch acquisition and underlying growth combined in our clinical business to drive operating margins up by 2.3 percent, compared with the first quarter of 2003, to 12.9 percent. Moving on to discuss in more detail the breakdown of the net service revenue, you can see that in the latest 12 months, pre-clinical accounted for 58 percent of net service revenue and clinical accounted for 42 percent. Looking at revenues by client type year to date, pharmaceutical companies accounted for 55 percent, biotechnology companies accounted for 33 percent, and other companies - predominantly agro-chemical, veterinary and chemical-related work - accounted for the remaining 12 percent of net service revenues during the same period. Fifty-seven percent of our revenues were derived from clients based in the United States of America, 33 percent from Europe, seven percent from Japan, and three percent from the rest of the world during the same period. You will see from the next slide that we have maintained our core strategy to have a highly diverse client base. In the latest 12 months, our biggest client accounted for 8.7 percent of net service revenues. Our five largest clients accounted for 23.4 percent of net service revenues, and our top 20 clients accounted for only 43.8 percent of net service revenues. We will continue to emphasize that revenues earned from our biggest clients are spread over multiple service offerings and also over multiple research and development programs. The next slide compares our moving annual total of new signed contracts or accumulated last 12 months new business signings with net service revenues over the same period. As you can see, cumulative new business signings total $350 million in the latest 12 months, compared with revenues of $292 million in the same period. The signings data are made of calculations - cancellations. The key to the future success of our business is how quickly we can replace recorded revenue with new signed business. As we have indicated in the past, seasonal factors make it important to look at signings on a rolling 12-month basis rather than from quarter to quarter. Confirmed backlog at March 31st, 2004, was $295 million - compared with $222 million at March 31st, 2003. Because of the short-term nature of large parts of our pre-clinical and phase one businesses, we use new business signings as the leading indicator of underlying health of our businesses rather than backlog. The general environment for all our businesses remains strong. A diverse service offering will allow Inveresk to meet or exceed its growth and profitability objectives for the full year. In light of these factors and our first quarter results, we are increasing our full-year guidance to between $1.36 and $1.39 on a diluted basis. I would now like to turn the call over to Paul Cowan, our chief financial officer, for the financial overview of the first quarter.

Thank you, Walter, and good morning, ladies and gentlemen. In the first quarter of 2004, Inveresk recorded net service revenues of $76.7 million, of which pre-clinical accounted for $44.4 million - an increase of 22 percent year on year, and clinical accounted for $32.4 million - an increase of 52 percent year on year. On a constant dollar basis, the pre-clinical business recorded a 12 percent increase in net service revenue in the first quarter of 2004 compared to the same period in 2003. On the same basis, our clinical business recorded an increase in net services - net service revenues of 43 percent. In the first quarter of 2004, pre-clinical recorded income from operations of $11.7 million, compared with $8.8 million in 2003. In the same period, clinical recorded income from operations of $4.2 million, compared with $2.3 million in 2003. Overall, the company recorded income from operations of $12.8 million in the first quarter, compared with $8.6 million in the corresponding period in 2003. Looking at the profitability of each business segment in the first quarter, you will see that pre-clinical generated an operating margin of 26.5 percent, compared with 24.2 percent in the first quarter of 2003. This also increased sequentially by one percent from the fourth quarter of 2003, reflecting the strength of trading across all our pre-clinical operations, improving business mix and a more favorable exchange rate environment. Clinical generated an operating margin of 12.9 percent in the first quarter, or 14 percent before amortization of intangibles. This compares with 10.6 percent in the first quarter of 2003. This increase reflects the increased scale of Inveresk's clinical business and the integration benefits arising from the PharmaResearch acquisition completed in 2003. In the first quarter of 2004, the company recorded earnings per share of 31 cents on a diluted basis, compared with 20 cents in 2003 - a 55 percent increase. This result included a three-cent one-time benefit relating to the recognition of a deferred tax asset on carried-forward tax losses in our U.S. operation, net of share offering expenses and residual restructuring costs on the PharmaResearch acquisition. In general, our first quarter results benefited from an improving exchange rate environment, particularly with the U.S. dollar's recent strength against the Canadian dollar. Operating income was, however, impacted negatively by costs associated with the recent partial sale of Candover (ph) Shareholding amounting to $.3 million and residual PharmaResearch restructuring costs amount to $.1 million. Similarly, net income was impacted by a negative market-to-market valuation adjustment of $.4 million on our interest rate swaps, which has already largely been reversed so far in the second quarter of 2004. In the first quarter of 2004, we reduced our valuation allowance against carried-forward tax losses in our U.S. operations by $15.4 million. This reflects our increased confidence in the likelihood that these losses will now be utilized. Of this amount, $1.7 million was recorded as a reduction in our first quarter tax charge, and $13.7 million was recorded as a reduction of goodwill relating to our acquisition of ClinTrials in 2001. While there will be no further impact on our profits and goodwill relating to this matter, a significant cash flow benefit will be derived as these losses are utilized. Inveresk maintained its strong capitalization and cash flows in the first quarter of 2004. At March 31, the company had gross financial debt of $56.9 million and cash and equivalents of $24.9 million. The company continues to retain its $75 million of unutilized credit facilities. At the end of March, gross debt capitalization amounted to 22.9 percent, down from 25.1 at the end of 2003. Operating cash flow in the first quarter amounted to $11.1 million, compared with $4.8 million in the first quarter of 2003. During the same period, capital expenditure amounted to $5.8 million - the majority of which is accounted for by the expansion of our pre-clinical facilities in Montreal and Edinborough. Net days outstanding at March 31 totaled 21, compared with 28 at the end of 2003. Ladies and gentlemen, that is the end of our presentation, and I would now like to invite questions from the participants in our conference call.

Thank you, sir. At this time, ladies and gentlemen, if you'd like to ask a question, please key star, one, on your touch-tone phone. If you'd like to withdraw your question, please key star, two. Questions will be taken in the order they are received by us. Please stand by for your first question. I'll take our first question today from Mr. Chris McFaddden (ph), of Goldman Sachs. Please proceed.

Thank you. Good morning, and congratulations on the nice results. A couple of questions, if I might, this morning. One - one of your largest competitors in the toxicology recently announced what they characterize as a strategic relationship with a major pharmaceutical manufacturer for some committed capacity expansion. Can you talk about how you envision those types of relationships developing in the market? And more specifically, are you and your pre-clinical marketing professional focused on the same type of opportunity such that we might see something develop later this year? Thanks.

Good morning. It's Walter. Thanks for the question. As you know, we have a type of relationship like that in Montreal where one client and (ph) (inaudible) on a multi-year basis, our inhalational (ph) facilities. And that is - I guess is a similar type of relationship. We don't focus on that particularly because we have a diverse service and very diverse client base. And so it's really quite driven and we do not focus on that size of relationship particularly.

Walter, does that really focus - you've - for some time, you've talked about concentration as being something you want to avoid. Is it a concentration-related factor or is there a returns or margin characteristic of that type of business relationship that you're less attracted to?

In some ways, it's concentration. But in other ways, it's just natural because clients who have a big program today in pre-clinical don't always have a big program tomorrow. And so the client may become a significant client for a little while and then change as his lead candidate goes through the process and moves into clinical.

Understand. Second question. Can you talk about the kind of cancellation activity in the quarter? And to what extent does that - would that potentially influence your second quarter bookings activity?

It's Paul Cowan here. Cancellation activity in the quarter was - you know, there was, I guess, two cancellations in our pre-clinical business. And we have to remember that these are cancellations which really only account for two rooms out of the 300 or so rooms that we have - which were did - were abnormally high and therefore did impact our signings. So on the fact of it, you know, while signings came in line with expectations, the underlying signings on a gross basis were somewhat stronger. And we can expect to see that now flow through the revenues as we move forwards. But - so that's really what I would say at this point in time. There was an impact, but we're talking really only about two rooms out of 300 in total being impacted. And the strength of signings is so strong at the moment that those rooms will be - if anything, will be needed.

Well, in this man environment, I'd envision it's a good opportunity to refill and replace that capacity.

It's a given. In certain sectors of our business, we're multiple-booked now.

Understand. And then the final question will be - just given the tax effect of this adjustment that you discussed in your prepared comments, any change to your full-year tax-rate guidance relative to the updated EPS guidance you've provided?

No. It was a - it was a one-off benefit in Q1. the expectation is that our tax rate will now revert back to 12 percent, which is what we'd indicated previously.

Very good. Thank you.

OK.

Thank you.

Thank you.

And we'll take our next question from Mr. Steve Omer (ph), of Bear Stearns. Please proceed.

Hi. Good morning.

Morning, Steve.

Morning, Steve.

First question - just high-level. You know, there appears to be a growing need within Pharma for lead-optimization-type services ahead of toxicology, given the expansion of drugs coming out of the discovery labs. Are you guys doing anything in particular to address this issue? It appears to be growing in importance.

Steve, it's Walter. You know, I agree with you. And indeed, we are. In - with Montreal and Edinborough, we've expanded our services in helping the clients with lead optimization in different ways. In Canada, we have a biology group. We're now helping with that. And Edinborough, we have screening for metabolism, which helps with lead optimization. So yes, we have. Although we're not involved in discovery, we've helped them with that.

OK. And is that - are these meaningful revenue generators for you at this moment, or part of your plan for ...

It's part of the plan, yes, and as an increasing revenue generator. Not huge yet, but increasing. Part of our diversification of services.

OK. And then just looking at your business to date - specifically on the Montreal facility - how should we think about the improvement as it flow through in the quarter or throughout the year? Is this - you know, it appears to be happening gradually - the mix is improving rather than a step function. Is that - am I reading that correctly, Paul?

That's correct, Steve. You, know, a lot of the strength in signings really have been in the last two quarters. And you're talking about, you know, two- to three-month lead times possibly on some of these projects. So we're still to see the full effect of those signings come through in the strength in the toxicology business across the board or the pre-clinical businesses across the board.

OK. And then in clinical - could you characterize just the bookings performance? Is - was it - you said there were some delays and so forth. But in terms of how you're generating new business now with the fully integrated business development team, could you give us just a little bit more - like another layer of depth as to how you're doing in the clinical space both in the U.S. and in North America? And then maybe comment on just the phase one facility as a stand-along facility.

OK. The clinical integration is complete and the business development teams are at full strength now, for the first time for little while. And you would remember, Steve, that Q4 had fantastic signings in clinical within America and Europe. In Quarter One, Europe has performed to target, America has been a little bit behind. And that emphasizes what we keep seeing - that you can't expect this every quarter. We would like to look at it more on a moving annual total basis. And the moving annual total for America and Europe are pretty close to target.

With regards to our phase one facility - which as you know, is only in Europe - we believe that inquiries have been down there in the last month or so because of the introduction of the clinical trial directive in Europe, some concern for our clients. But we have gone out and done road shows which have been very successful pointing out that we're compliant with everything that is happening in the United Kingdom and Europe, and so inquiries are now picking up there, also.

OK. Would you say that the performance then in the quarter for the phase one facility was a drain on margins? I mean, that's pretty high-margin business for you, right?

There wasn't so much a drain on margins, Q1, I think. But it's not just as busy as usual in Q2, probably.

OK. OK. So we should expect that. And then, a couple of housekeeping items, Paul. Do you have the geographic breakdown of revenues?

The geographic was - as Walter indicated ...

57.

Fifty-seven percent USA.

Oh, in the quarter, that was - you gave us LTM.

I'm sorry - LTM. It's not going to fluctuate significantly on a quarter-by-quarter basis.

OK. And then was there a foreign exchange gain in the quarter?

On the - as regards to the translation gains through the balance sheet, it was $.3 million.

So $.3 million.

We have - as most of you may have seen, there has been quite considerable appreciation of the U.S. dollar against the Canadian dollar in the first quarter and indeed in recent weeks.

OK. And then overall, is currency no longer now a drain on operating margin? Is that what you meant by that statement in the ...

Yes. But clearly, you'll recall that the guidance that we gave at the beginning of the year was based on a one-thirty -- $1.30 Canadian to $1.00 U.S. exchange rate.

Right.

And, you know, certainly as recently as yesterday, that was at about one-thirty-seven. So again, it's moved positively ...

OK.

... (inaudible) to that.

So was it - was it additive, then?

That is additive. Correct. It'll have less - it'll have little or no impact in revenue-growth terms, but it will be additive in profit terms.

OK. And in the quarter, how much was that?

I - through the P&L?

Right.

I've not quantified that. That's not something we would typically break out.

OK. OK. Thank you.

No problems.

Thanks, Steve.

Steve, what I would say on that is, within the MD&A there is a sensitivity analysis that you can - that you can refer to in terms of the impact on P&L of a five percent increase in the value of the Canadian dollar.

OK. OK.

(inaudible) back into it then.

Great. Thank you. And congratulations, guys.

Thanks.

Thanks.

Take our next question from Mr. Dave Linley (ph) of Jefferies and Company.

Hi. Thanks. I wanted to clarify a couple of things. If I'm calculating- Paul you said the tax rate for remainder of the year should be 12 percent, which was consistent with earlier guidance. Correct?

Right.

Dave Linley Then if I use that and calculate that in this quarter, it looks like the gross tax benefit impact of the EPS was four cents, and then the other items netting that down to a net three-cent impact ...

Correct.

... in the - in the quarter. Correct?

That's correct. Yes.

OK. And then to a question Steve just asked - you said balance sheet translation gains in the quarter were .3 million. Can you comment on the operating kind of above-the-line impact from FX?

Well, the increase in revenues in the pre-clinical business, for instance, were - was 22 percent in the quarter year on year. On a constant dollar term, that came down to 12 percent. So in constant dollars, the increase in revenue year on year was 12 percent. In the clinical business, the increase in revenues on a reported basis was 52 percent. And on a constant dollar basis, the increase in revenues were 43 percent.

OK. Thanks. A general question - maybe a little difficult to answer, but - as I played with my model, the new guidance that you all are giving appears reachable, but appears - you know, at least by my model, which is certainly not universal - but appears a little aggressive. And I wanted to get a sense for your comfort level, is this a number that you feel is fairly easily achievable and could be much better if, you know, say, the environment continues to accelerate? Or does this number require a continued acceleration to get to it?

Yes, no. Remember that this new guidance includes this three-cent impact of the -- of the tax in ...

Right. So operating basis three cents lower than the range ...

Right.

... that you gave?

So - yes, from an operating basis you're talking really only about a two-cent increase that - in the new - in the new guidance.

Right. OK. And then - just as a last clarification - the mark-up on the remaining shares held by Candover expires when?

Mid June. Oh, sorry - mid May. Sorry.

Dave Linley OK. Great. Thanks. Good quarter.

OK. Many thanks.

Thanks, Dave.

Again, as a reminder, it's star, one, for questions. And we'll take our next question from Kevin Cook (ph), of William Blair (ph). Please proceed.

Hi. Good morning. Had a couple questions on specialty toxicology. Wondering if you can quantify for us what percentage of your first quarter '04 pre-clinical revenues were specialty toxicology, and how that compares to last quarter and year to quarter?

We don't - we don't get down to specifics on that, Kevin, but what I - happy to say qualitatively is it's all moving positively - certainly relative to Q4 2003.

And, I mean, there was a great performance in operating margin, but if the mix is improving, just wondering why the gross profit margin is a little bit down from year-ago levels in pre-clinical?

From year ago?

Yes.

Don't forget we're comparing a Canadian dollar, which is 16 percent stronger than the U.S. dollar was 12 months ago.

OK. So that's mostly FX

That's FX impacts, yes.

OK. And stripping that out, we'd see positive margin impact?

Yes. And there's also benefit there on mix, as well.

OK. I think in the past you might have given some general color about specialty being 30 percent of pre-clinical. Is that still a reasonable target to use in the ballpark?

And growing a little bit, yes.

Think it is, yes.

OK. And then on the lab sciences business, is that growing at a faster or similar rate with the toxicology business?

In Canada, it's growing faster. It's a relatively small part of the business in Canada. In Europe, it's growing much the same - maybe slightly less, but much the same.

OK. And are there any different business drivers that would explain faster or slower rates of growth in lab science versus toxicology?

Well, in Edinborough later this year - fact, next month - we open our clinical lab sciences building, which is quite a large expansion and focused on the clinical services - you know, the drug analysis, the biomarkers, the biologics, supporting clinical work. And that will separate more the growth in lab sciences from the growth in toxicology.

OK. And then, one of your large toxicology competitors talked about adding a very large block of capacity. Is there any possibility that you could accelerate your capacity expansions in Montreal or Edinborough to try and come online with them?

By "accelerate," mean faster than we have in the past? Montreal and Edinborough are both growing - Montreal in toxicology, Edinborough in lab sciences. But I think there are plans to grow the toxicology in Edinborough also, faster than it was in the past.

I guess just in terms of opening the additional rooms.

Yes. We - it is likely we will build some more rooms in Edinborough. Remember, over the last few years, although we have added five rooms in the last year, we hadn't added so many rooms in Edinborough as added value by adding lab sciences to the service.

OK, great. Thank you very much.

Thank you.

Again, as a reminder, it's star, one, on your touch-tone phone to ask a question. And we'll move on to our next question from Mr. Kemp Dolliver (ph), of SG Cowen Securities.

Thank you. Couple of questions. With regard to the contract delays referenced in the clinical business, were those strictly around the phase one billing you had mentioned, or was - were you seeing it in other areas?

No, it was - primarily it was in the phase two, three, business.

OK. And you were - I assume that phenomenon's still carrying over in the second quarter, or ...

There - well, there will be - we would expect to see some catch-up.

OK.

(inaudible) are any delays.

Super. And with regard to the competitive environment, I think a couple of quarters ago, you had indicated - and I think it was particularly pre-clinical - that it was harder to raise rates as necessary versus, say, 2002. Has that changed, given what - you know, what seems to be a stronger demand environment - that you're able to get better rates?

It's not so much better rates, Kemp, as it allows you to select - because you've got more demand than you can handle, it allows you to select the highest-margin business. So, yes, it allows us - you, know, because have depth of demand for now specialty and general tox, that then allows us to move in favor of the specialty tox as opposed to the general, which is clearly a higher-margin business for us.

Super. What's the, I guess, environment or interest level at this point for another acquisition, whether it be in clinical, as you did with PharmaResearch, or in the pre-clinical area?

Well, as you know, Kemp, we have stated the shape of the company we'd like to be that 60 percent/40 percent, pre-clinical to clinical. And we added on some clinical last year. At any one time, we're always looking at companies that meet our quality and profit expectations. And then I think you could anticipate that it would maintain the strategy that we have described to invest the sort of shape of the company and the business that we operate in.

And are you seeing more sellers out there or about the same of interested parties talking to you?

More or less - I don't know if it's more or less, really. There're always - there're always some that interest us in the - right in the stages of drug development that interface between pre-clinical and clinical, there's a space we like to operate in. And there are candidates, as I say, who meet our quality and the profit expectations. So it is likely that we would do something.

OK. Last question is - I just want to be clear, on the pre-clinical business on a constant quantity basis, I'm a seven percent number, and I think, Paul, you may have mentioned 12 percent.

Yes, sorry. That's a - that was a - that was an error. It was actually 12 percent.

Super. Thank you.

I'm showing no questions. I'd like to turn it back over to you for closing remarks.

OK. Thank you, Operator. Ladies and gentlemen, thank you for joining the Inveresk Research Group earnings call. As ever, it was a pleasure to talk to you and to take your questions. Look forward to seeing you from time to time, and to talking to you next quarter. Thank you very much.

Ladies and gentlemen, thank you for joining us on the call. You may now disconnect your lines.