Charles River Laboratories International Inc (CRL) 2004 Q4 法說會逐字稿

Good day, everyone, and welcome to the Charles River's Laboratories' fourth-quarter earnings conference call.

Today's conference is being recorded.

For opening remarks and introductions, I would like to turn the conference over to Ms. Susan Hardy, Director of Investor Relations.

Please go ahead.

Thank you.

Good morning and welcome to Charles River Laboratories' fourth-quarter 2004 conference call and webcast.

This morning, Jim Foster, Chairman, President and Chief Executive Officer, and Tom Ackerman, Senior Vice President and Chief Financial Officer, will comment on our fourth-quarter and full-year results for 2005.

Following those remarks, we will respond to questions.

There is a slide presentation associated with today's remarks, which is posted on the Investor Relations section of our Web site at IR.criver.com.

A taped replay of this call will be available beginning at 10"30 this morning and can be accessed by calling 888-203-1 -- (technical difficulty).

The international access number is 719-457-0820.

The PIN number in either case is 568174.

The webcast will be archived on our Web site -- (technical difficulty).

I'd like to remind you of our 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 various important factors, including those discussed on the Company's registration statement on Form S-4 filed with the SEC on September 16, 2004, which contains a risk factors section.

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

We believe that the inclusion of these non-GAAP financial measures helps investors to gain a meaningful understanding of our core operating results and future prospects consistent with the manner in which management measures and forecasts the Company's performance.

The non-GAAP financial measures are not meant to be considered superior to or a substitute for results of operations prepared in accordance with GAAP.

In accordance with Regulation G, you can find the comparable GAAP measures and reconciliations to those GAAP measures on our Web site.

Now, I will turn the call over to Jim Foster.

Good morning.

I'm very pleased to be speaking with you today about another great quarter and year for Charles River.

We are very pleased with these results because they demonstrate the strength of our broad portfolio of essential products and services, our efforts to expand sales to existing customers and our initiatives to target new customers.

In these results, we're just beginning to realize the potential of our merger with Inveresk and we're very excited about the opportunities that our new structure and capabilities affords us.

Net sales increased 52.6 percent to 238 million in the fourth quarter and 25 percent to 767 million for the year.

On a non-GAAP basis, operating income for the fourth quarter rose 42.7 percent to 50.6 million with an operating margin of 21.3 percent.

For the year, operating income rose 26.8 percent to 177.7 million with an operating margin of 23.2 percent.

On a non-GAAP basis, EPS increased 14.3 percent to 48 cents in the fourth quarter and more than 19 percent to $1.98 for 2004.

We generated strong free cash flow of 41 million for the fourth quarter and 129 million for the year and ended 2004 with 212 million in cash and short and long-term marketable securities on hand.

2004 was a strong year for our business, driven by robust spending by pharmaceutical and biotech companies and strong demand for outsourced development services.

Our portfolio of essential, value-added products and services performed exceptionally well with outstanding performance by all of our business segments.

The strength of our balanced portfolio provides us the ability to perform under varying market conditions.

When the demand for our products and services in one area of the drug-development pipeline is less robust, it tends to be stronger in another.

This balance has enabled us to deliver consistent sales and profitability growth year after year.

Today, including Inveresk's results from October 20, we are reporting 2004 sales growth of 25 percent and non-GAAP EPS growth of more than 19 percent.

Before giving you some color on the segment performance, I'd like to comment on our reporting segments.

As a result of the merger with Inveresk, we now have 3 segments, Research Models and Services, or RMS, Preclinical Services, formerly development and safety testing or DST, and Clinical Services.

In the RMS segment, we report the existing Charles River RMS businesses and our antitoxin test kit business, which had been reported in the preclinical segment.

Because of the expanded profile of our preclinical business, we believe the antitoxin business is a better fit in the RMS segment, to which its management also reports.

In preclinical, we report both Charles River's and Inveresk's preclinical businesses.

In the clinical segment, we are reporting Inveresk's clinical business.

For 2004, RMS represented 62 percent of total revenues.

Preclinical was 35 percent, and clinical was 3 percent.

For the consolidation of Inveresk for a full year in 2005, it's fair to say that RMS and preclinical will be closer in size and clinical will represent less than 15 percent of sales.

From an operating income standpoint on a non-GAAP basis before unallocated corporate costs, RMS represented 63 percent of operating income in 2004, preclinical represented 31 percent and clinical represented 6 percent.

With the change in revenue mix in '05, profit contribution will also shift.

We do expect profit improvement in each of the segments, although RMS will continue to contribute a larger share of operating income.

Now, I will turn to the business segment performance.

The RMS segment grew 11.2 percent in the fourth quarter and 11.3 percent in 2004.

Our performance in the fourth quarter was the culmination of the strong year, when we saw a higher spending on research models and more outsourcing of associated services.

Our fastest-growing models were immunodeficient or nude mice, which are the preferred model for our oncology and HIV research, certain inbred strains utilized to create monoclonal antibodies and genetically altered animals, and outbred rats which are used extensively for safety testing.

Sales of certain disease models, especially those used to research in metabolic diseases, showed very strong growth, although they still represent a smaller proportion of the total sales.

Transgenic and laboratory services reported the strongest growth in Europe and Japan, where we opened 2 new facilities at the end of 2004.

We are about to open another new facility in Tokyo next month to support the robust growth we see there.

These new facilities will more than double our overseas capacity, positioning us extremely well to meet our customers' expanding needs for the next few years.

We're very optimistic about the 2005 outlook for RMS.

Pharmaceutical and biotech companies have traditionally been our largest customers, but our share in the academic sector is growing as a result of our targeted sales efforts.

The demand for research models continues to be robust, and we are expecting strong growth for value-added services that we provide.

We continue to identify new service opportunities, such as specialized breathing, surgery and feeding and aging studies, and translate those into new businesses which we believe will contribute in the 10 percent-plus growth we have reported for the last few years.

The preclinical segment reported sales growth of 93.3 percent for the fourth quarter and 43.3 percent for the year.

We are extremely pleased with this performance.

Of course, it reflects the addition of Inveresk for 2 months but also results from robust spending on outsourced development services and our success at converting those opportunities into new sales.

We were particularly well positioned to do so because, as I've discussed in earlier conference calls, we made a significant investment over the last 2 years to integrate and harmonize our U.S.

Preclinical Services business and to make it easier and more efficient for customers to do business with us.

The fact that we've streamlined Charles River's existing preclinical operations puts us in a much better position to undertake the successful integration of Inveresk.

Following the management changes we made in December, we now have a strong, motivated team in place and are continuing to make significant progress with our integration of the Preclinical businesses.

The sales and marketing integration is well underway and an interim sales structure was rolled out at our national sales meeting at the end of January.

We've accomplished our short-term goals of appointing a Senior Director of Global Preclinical Business Development, who owns the sales and marketing effort and (indiscernible) assigning salespeople to accounts, beginning the process of training them to present the entire portfolio of products and services and establishing capabilities to track sales efforts.

We've been encouraged by the excitement and enthusiasm with which our people have embraced our goals and their willingness to participate in the integration at every level of the Preclinical organization.

There have been a number of teams established to address issues such as tactical marketing, bidding and proposals, IT in the Japanese market, just to name a few.

All of these teams report to a senior management group, which is dealing with the organizational and planning issues and the identification and implementation of Best Practices.

One of the most significant issues facing the business is capacity planning.

Based on market trends and our ongoing communication with customers, we believe that strategic outsourcing will continue to accelerate.

In order to accommodate our customers' needs and to position ourselves in a larger role as a preferred provider or a strategic partner, we need to have capacity available.

As you know, we already have expansions underway in Montreal and Edinburgh (ph), which will support our growth in 2005 and '06.

At the beginning of this month, our Board of Directors approved 2 projects, expansion of our Nevada facility and a new facility in Massachusetts.

We have already identified 2 existing facilities in Massachusetts which could be renovated and are evaluating the buyer or lease options for both.

One of the advantages of either of these locations is that they can be sized to provide for rapid and flexible expansion.

For the development of the Nevada and Massachusetts locations, we will be well on our way to establishing full-service, premier facilities on both the East and West Coasts that we believe are necessary to support our customers' efforts and our long-term growth.

The Clinical Services segment reported net sales of 24.3 million and a non-GAAP margin of 13.3 percent.

It's somewhat difficult to make comparisons to the prior year because we only owned Inveresk for 9 weeks of the quarter.

To give you some perspective on these results, I will say that, in total, the Clinical business was up quarter-over-quarter and year-over-year.

Europe/Asia-Pacific, or EAP, provided the strongest results.

As you know, the Phase I business was affected by the European clinical trials directive, but EAP management undertook a very successful sales effort to target new business from clients in Europe and Japan.

By doing so, they were able to compensate for most of the loss of U.S. business.

We expect that the European Phase I business will perform well in '05 because, in addition to our ongoing sales initiatives to target new opportunities, U.S. customers are slowly returning to Europe for their Phase I studies.

To support our clients in the U.S., we will pursue our goal to add a Phase I clinic here in the States.

The U.S.

Clinical business did not perform as well as we expected, which is one of the reasons we made management changes in December.

Since then, morale has improved and sales initiatives have been undertaken with enthusiasm.

The sales efforts are already generating positive results with a significant number of verbal awards in January.

Our goal in '05 is to grow our Clinical business through a focus on therapeutic areas.

We intend to expand our presence in Phase I to IV by building on our existing expertise in ophthalmology, cardiovascular, anti-infective, respiratory and oncology.

We expect to do so while continuing to increase profitability.

Toward that and, we've appointed Dr. Christoph Pertu (ph), a 14-year veteran of Charles River, as General Manager of Clinical services.

Christoph has been Corporate Vice President and head of European research models in France and Italy and of our worldwide transgenic and laboratory and services business until he stepped down from that position in March of '04.

As a result of stock option transactions for which he failed to pay taxes in France, we were unable to allow Christoph to remain in his position as an officer of Charles River.

This was a mistake, which Christoph has acknowledged and remedied by paying his tax obligation.

It is behind us now.

We have asked Christoph to rejoin the Company because we believe he has the unique combination of operational experience, strong strategic skills, and knowledge of Charles River that we need to manage the clinical business and to successfully integrate it into Charles River.

Christoph has a strong scientific background and understanding of the drug-development process.

In addition, he spent much of his first 8 years with Charles River in sales and marketing, developing global strategies to improve sales.

As head of the global transgenic and laboratory services business, Christoph was responsible for integrating the European and U.S. businesses and ensuring that the 2 units worked effectively together.

He has an excellent track record for improving margins and delivering his annual operating plan.

We believe his experience will be invaluable in mapping the future of our Clinical business and to further enhancing the effective working relationship between the U.S. and EAP Clinical operations and with Charles River businesses as a whole.

Glenn Kerkhof, who has been the Interim General Manager of Global Clinical Services, will continue to manage our EAP clinical operations, reporting to Christoph.

Glenn has done an excellent job of implementing the changes we've made so far and will be an integral member of the clinical management team as we move forward with our business strategy.

I'd like to give you a brief update of where we stand with our overall integration and branding efforts.

We've made significant progress on both fronts.

As I mentioned on our third-quarter conference call, planning and implementation of the back-office functions, accounting, IT, human resources and purchasing were well underway and we've continued to advance in those fronts.

We are also making progress on our efforts to identify and implement best operational practices across the worldwide preclinical business.

We expect to achieve our goal of $10 million of cost savings and Tom will give you more detail about that.

I've already noted that the sales and marketing integration is going very well.

One of the most critical elements of the integration is our branding campaign.

We have established that we will be known as Charles River Laboratories because we believe that, by incorporating all of our businesses under one umbrella brand, we will leverage the brand equity that Charles River has established over nearly 60 years.

Our goal is to become a more powerful and visible brand in the marketplace and we believe the best means of accomplishing that goal is by embracing the concept of one company, one brand, one voice.

Feedback from our customers has been positive and we're moving forward aggressively to complete the migration by the end of '05.

As you know from the press release, we are reaffirming our sales and non-GAAP earnings guidance for '05.

We still expect that net sales growth will be in the range of 48 to 52 percent.

Non-GAAP earnings per diluted share, which exclude amortization of intangible assets and other charges related to the merger, are expected to be between $2.30 and $2.40.

We are increasing the gap EPS range to $1.70 to $1.80 due to a revision in the amount of amortization expense for '05.

The sales guidance is based on the addition of Inveresk, continued strength of the demand for our drug-development products and services, and new sales initiatives.

The EPS guidance is based on a combination of higher sales and operating efficiencies and cost synergies in combination with a lower tax rate.

For the first quarter of '05, we expect sales growth in the range of 57 to 60 percent, earnings per diluted share in the range of 39 to 41 cents, and non-GAAP earnings per share between 54 and 56 cents.

In closing, I want to say again that we're very optimistic about our prospects for '05.

The demand for our essential products and services is robust, and our merger with Inveresk has positioned us to support our customers more fully than ever before and across more segments of the discovery and development pipeline than any other provider.

It has given us the platform from which we can become a strategic partner, and we're developing global sales and marketing strategies, which we believe will promote those relationships.

We are pleased with the progress we've made to date in integrating the 2 companies and are moving forward aggressively to establish a single brand identity that signifies global recognition of the values that Charles River embodies -- scientific expertise, outstanding customer service, and a commitment to advancing biomedical research.

I'd like to thank our 8,000 employees for their exceptional work and commitment and our shareholders for their continuing support.

Now, I will turn the call over to Tom Ackerman.

Thank you, Jim, and good morning.

I'm going to give you a brief overview of the fourth-quarter and 2004 full-year financials.

Net sales of 238.1 million in the fourth quarter of 2004 increased 52.6 percent from 156 million in the fourth quarter of 2003.

Net sales for 2004 increased 25 percent to 766.9 million compared to 613.7 million in 2003.

Aside from the addition of Inveresk, the net sales increase was driven by a strong demand for our products and services, price increases, particularly given the improved preclinical environment and foreign exchange.

RMS sales increased 11.2 percent in the fourth quarter of 2004 versus last year and 11.3 percent of the full year.

Preclinical sales increased 93.3 percent in the fourth quarter of 2004 versus last year and 43.3 percent for the full year.

Clinical sales for the fourth quarter and full year 2004 were 24.3 million.

The overall increase in revenues was due primarily to the added revenue from Inveresk.

We completed the merger October 20 and consolidated results for approximately 9 weeks of the quarter.

Sales from Inveresk were higher than we expected, which contributed to our exceeding the high end of our sales range.

At the end of the fourth quarter, backlog for preclinical and clinical businesses was approximately 425 million.

We don't report backlog for the RMS business because the turnaround time from placement to completion of orders is rapid.

We feel our backlog for clinical and preclinical is very strong and provides a good baseline for 2005.

When comparing Charles River to traditional CROs, you need to take into account the fact that the clinical businesses generally have larger backlogs because of the longer timeframes from signing to project completion.

Our clinical business accounts for less than 15 percent of the Company's revenue and less than 25 percent of the combined preclinical and clinical revenue.

In addition, certain service offerings within our preclinical businesses, such as biosafety testing and analytical chemistry, which have a fast turnaround from book-to-bill, don't lend themselves to a backlog.

Because (indiscernible) reporting period for legacy Inveresk and the blending of bookings methodologies, we feel it is more appropriate to report only the backlog at this time and will begin reporting net bookings and in the first quarter of 2005.

I would note, however, that we were very pleased with the new bookings in the fourth quarter.

The gross margin in the fourth quarter was 36 percent, down from 38.2 percent last year, primarily due to the addition of clinical services, which had a gross margin of 22.8 percent.

The gross margin for the full year 2004 increased to 38.9 percent from 38.1 percent in 2003, due to increased capacity utilization in both the RMS and preclinical segments.

While we will be adding increased capacity in the preclinical businesses in 2005, we do not anticipate a negative impact on the gross margin.

SG&A in the fourth quarter was 39.3 million, or 16.5 percent of sales, compared to 23 million or 14.7 percent in the fourth quarter in 2003.

The increase in the percentage SG&A was primarily due to the compensation charges associated with migrating Inveresk's stock option plan to ours as well as integration costs and costs associated with Sarbanes-Oxley.

Those costs also affected the full year 2004 for which SG&A was 121.4 million, or 15.8 percent of sales, compared to 89.5 million or 14.6 percent of sales in 2003.

For 2005, we do expect SG&A to increase as a percentage of sales, principally because Inveresk historically had higher levels of SG&A than Charles River.

Operating income in the fourth quarter was 33.2 million and the operating margin was 14 percent compared to 35.4 million and 22.7 percent in the same period last year.

For 2004 ,operating income was 160.3 million and the operating margin was 20.9 percent compared to 138.6 million and 22.6 percent in 2003.

On a non-GAAP basis, which excludes Inveresk-related amortization of 12.1 million and compensation charges of 2.3 million, operating income for the fourth quarter was 50.6 million with an operating margin of 21.3 percent, compared to 35.4 million and 22.7 percent in the same period in 2003.

Overall, we were very pleased with our non-GAAP margins in Q4.

The slight decline was due to the addition of the clinical business at a lower margin.

For the full year, our operating income was 177.7 million with an operating margin of 23.2 percent, compared to 140.2 million and 22.8 percent in 2003, a margin improvement of 40 basis points.

The RMS operating margin remained flat in the fourth quarter from the same period in the prior year at 29.2 percent even though we added capacity in both Europe and Japan.

The operating margin for the full year was 32 percent, up slightly from 31.9 percent in 2003.

When we exclude a one-time 2.9 million benefit from a litigation settlement which was recorded in 2003, the RMS operating margin in 2004 actually increased 80 basis points.

The operating margin for preclinical was 5.1 percent compared to 16.2 percent in the fourth quarter of 2003.

The decrease was due primarily to amortization associated with the Inveresk merger as well as the closing of our Proteomics venture.

The operating margin for the full year 2004 was 12.6 percent compared to 9.4 percent in the same period in the prior year.

When excluding Inveresk-related amortization and charges as well as other one-time items, the fourth-quarter operating margin would be 18.3 percent compared to 16.2 percent in the fourth quarter of 2003 and the full year would be 17.4 percent compared to 11.9 percent in 2003.

In the Clinical segment, the operating margin for the fourth quarter and full year was 3 percent.

When excluding Inveresk-related amortization and charges, the fourth-quarter and full-year operating margins would be 13.3 percent.

Net interest expense was 4.6 million in the fourth quarter compared to 1.7 million in the fourth quarter of 2003 due to the increased debt associated with the Inveresk merger, offset by higher interest income.

We now have in place a 400 million term loan facility, a 150 million revolver, of which we've drawn down approximately 100 million, and the 185 million convertible debt.

The convert, which as you know is already included in the share count, became callable on February 5, 2005.

Should we choose to call the convert, there would be no reduction in the diluted share count because we believe the holders would force conversion into equity.

The tax rate for the fourth quarter was 31.3 percent, down from 37.5 percent in the third quarter due to our merger with Inveresk.

The effective tax rate for the full year 2004 was 36.3 percent compared to 38.5 percent for 2003.

The decrease in tax rate was due primarily to the Inveresk merger.

The reported income tax rate for 2004 was 40.1 percent, higher than the effective rate because, in the first quarter of the year, we completed a structural reorganization of our European operations.

The result was a net charge of 5.8 million, or 11 cents per diluted share, which was recorded in the provision for income taxes.

Net income was 20.1 million in the fourth quarter, or 32 cents per diluted share, compared to net income of 20.6 million, or 42 cents per diluted share, in the fourth quarter of 2003.

Net income for the full year 2004 was 89.8 million, or $1.68 per diluted share, compared to 80.2 million or $1.64 per diluted share in 2003.

On a non-GAAP basis, net income was 31.2 million or 48 cents per diluted share, compared to 20.6 million or 42 cents per diluted share in the prior year.

On a non-GAAP basis for 2004, net income was 106.7 million, an increase of 31.5 percent, compared to 85.1 million for the same period last year.

Non-GAAP earnings per diluted share were $1.98 compared to $1.66 in 2003, a 19.3 percent increase.

In the fourth quarter and full year, as always, we've adjusted net income by 1 million and 4 million, respectively, tax-affected, for the purpose of calculating our earnings per share.

This adjustment is done to eliminate the interest expense on the convertible debt.

Components of working capital -- the merger transaction and consolidation of Inveresk balance sheet resulted in a number of changes, which decreased working capital for the quarter.

Working capital was 159.3 million at the end of the fourth quarter, a decrease of 97.3 million from the end of 2003, principally due to the addition of our debt.

At the end of the fourth quarter, we had cash, cash equivalents and short-term marketable securities of 207.6 million plus 4.6 million in longer-term marketable securities or a total of 212.2 million.

Given the global nature of the business, a portion of our cash is overseas.

We have not yet made a determination if we will repatriate cash from overseas and expect to evaluate our options in the next several months.

Accounts Receivable were 201.8 million at the end of 2004, 90.3 million more than at the end of 2003, due to the addition of Inveresk.

Due to the different levels of deferred revenue, Charles River and Inveresk have traditionally calculated DSO differently.

As a result of the merger, we have revised our calculation to include the current revenue.

Under the new method, our DSO is currently 33.

Capital expenditures were 23.2 million in the fourth quarter and 45.3 million for 2004.

Our current estimate of capital expenditures for 2005 remains at approximately 100 million, including major expansion projects in our preclinical operations in Montreal, Edinburgh and a new facility in Massachusetts.

Depreciation was 9.5 million in the fourth quarter and 29.5 million for 2004.

Total amortization was 13.2 million in the quarter and 16.8 million for 2004.

Free cash flow was 41 million in the fourth quarter and 129 million year-to-date.

For 2005, we expect cash from operations to be in a range of 230 to 240 million and after CapEx of approximately 100 million, free cash flow in a range of 130 to 140 million.

Lastly, an update on 2005 guidance -- Jim has already given you the sales and EPS guidance.

I'd like to just add 2 more comments.

We have achieved our goal of identifying and implementing those actions which will result in our achieving the expected 10 million in cost synergies for 2005.

We continue to look at other opportunities, which we expect would have a greater impact in 2006.

The difference between GAAP and non-GAAP EPS in 2005 is entirely due to the merger, 53.1 million of intangibles amortization and 7.8 million of compensation charges related to the migration of Inveresk's stock option plan.

Our last estimate of amortization was 60 million, which has since been lowered to 53.1 million.

We've finalized our valuation of intangible assets and do not expect these numbers will change.

That concludes our remarks.

We will now take your questions.

Thank you.

Today's question-and-answer session will be conducted electronically. (Operator Instructions).

Eric Schmidt at S.G. Cowen.

Congratulations.

Let me ask the obvious question, which is just what happened in the last couple of weeks of December that allowed you to blow through your earlier projection for EPS and revenue?

Well, we had strong performance pretty much across the board, both in the research model and services business as well as our services business and just continuing the robust spending patterns that we had seen pretty much all year and continuing right through the end of the year.

It's always difficult to call the holiday season, and I think it sort of portends well for the future that the drug and biotech companies sort of still have their hands on the throttle as we finish.

So it was pretty much across the board.

Tom, would you be willing to give the Charles River organic year-over-year revenue growth rate?

Well, we have not reported that, Eric, and I think, as we move forward into 2005, one of the things that we're going to see as we do our job successfully from an integration standpoint is that the blending of the preclinical businesses will actually make it a little bit more difficult for us to report that prospectively, I think, on a clear basis.

You know, we've made some decisions, as an example in capacity expansion, where at the end of '04 and through the beginning part of '05, we're making a more conscious effort to expand at the legacy Inveresk facilities.

I think, as '05 unfolds, we will see more activity in some of the legacy Charles River businesses.

So, we're not necessarily going to put certain business in a legacy Charles River or a legacy Inveresk facility; we're really going to move it around where it makes best sense for the Company from an integration perspective going forward.

I think, having said that, on an organic/pro forma basis, I think the Company continues to perform in a low double-digit rate and I think, prospectively, that's really what we're still looking at from a target and from an expectation standpoint.

Okay.

You may have given this but I perhaps missed what the endo tox (ph) contribution -- endotox (ph) testing contribution was to Q4 just so we can true-up our models.

Yes, we will provide further clarification of that, Eric, in the K, so in the K, we will report all the quarters.

While we've done that in the fourth quarter to restate the comparative quarters and year-to-date, I think some folks don't necessarily have that in their history.

The endotoxin business, as it relates to the total company, is less than 5 percent with good profit margin, so while I can't give you a specific answer on the telephone right now, we will break that out in the K. I think, from a -- (technical difficulty) -- standpoint, the impact of moving that is really not that significant at all.

Okay.

The last question and then I'll get back in the queue after that -- can you provide a little more guidance on the tax rate for '05 and the share count exiting the quarter?

Yes, yes.

The share count in the quarter was about 67 million and as you know, it's really a weighted number for the fourth quarter, so as we look to '05, the fully diluted share count should be in a range of 72 to 73 million and our tax rate for next year should be approximately 30 percent.

We are still delving into the GAAP and the non-GAAP rates and I would expect, as we report the first quarter, that we will see a slight difference in the 2 rates.

But I do think that the 30 percent would be okay for the non-GAAP rate and potentially the GAAP rate would be slightly lower than that but not substantially.

Randall Stanicky, Goldman Sachs.

Good morning.

Just a couple of questions -- first, you talked about the Inveresk preclinical strength.

Can you maybe comment on how much of that strength was from the Montreal facility versus the EU business?

I think the strength was in both geographic sectors.

With capacity building and demand pretty strong (indiscernible), servicing is essentially different marketplaces Montreal, primarily the U.S. and obviously Edinburgh primarily, Europe as well as a British Isles.

So I think, collectively, those locations have done a good job providing capacity to the clients throughout the world.

Capacity utilization was efficient and concerted at both locations.

As I said earlier, we have finished additional capacity expansion in Montreal, which is open now, and are in the midst of finishing a new space in Edinburgh, which will be open early next year.

You guys have gone through and obviously now had a chance to talk all of the legacy Inveresk customers.

What have been the repeat business trends I guess by business?

As you look at the business on an aggregate or consolidated basis, has there been any pricing impact or your pricing strategy reconsiderations to the tox business generally?

Repeat business has been significant.

I would say that both legacy companies were -- (technical difficulty) -- extremely high statistics in terms of clients coming back.

We are always working on an appropriate blend between historical customers and garnering sufficient new ones to drive growth, going forward.

So I think having a larger footprint, from a capacity point of view and a geography point of view, should enhance our ability to do both, and I think both are important.

From a pricing viewpoint, I think that the pricing continues to be an issue but much less of an issue than it was historically over the last couple of years.

I think the demand is increasing significantly and clients are looking at outsourcing as a strategic lever rather than just a capacity utilization lever.

As a result of that, I think they are being much more forward-looking in terms of tying up space and developing relationships with companies like ours.

I think we are finding the ability to be paid well and fairly for our efforts as a result of the demand.

From a probability perspective, as you guys combine the businesses, how should we be thinking directionally about the consolidated margin?

I guess maybe if you could talk to some of the synergies that you guys have looked at for '05 and how that plays into the combined preclinical margins.

Should we continue to see that uptick, obviously adjusting on a sequential basis for some of the in-vitro?

Yes, Randall.

I think we should expect to see that.

I think you should look at the Company's gross margin.

I'm not sure where you are specifically targeting your question, but I think, as you look at the gross margins, we should see the preclinical uptick somewhat.

I think research models -- we are really looking at a constant type gross margin rate, although there are some opportunities to move that up a little bit.

We're clearly looking for some improvement in the clinical gross margins but given that clinical gross margin is a little bit lower, you know, that will actually temper that a little bit.

So I think, on a consolidated basis for gross margins, we are actually looking to be flat, again notwithstanding the lower clinical margin year-over-year to maybe up a little bit next year versus 2004.

Do you think you can get the business -- I mean Inveresk's historical target they talk about for the clinical was roughly 15 percent.

Do you think you can get that margin north of there at some point?

You're talking about the operating margin?

Yes.

Yes.

Well, I think Inveresk historically has probably been in the 12 to 13 percent range.

You know, we were, on a non-GAAP basis, 13.3 percent.

Our target is obviously to improve that.

Our baseline for all our businesses is 20 percent and while I think we feel that that's sort of at the apex of where we could get to in looking around the clinical space.

Directionally, I think we would like to see ourselves push into the high teens in the next couple of years.

Great.

Then Tom, just one last question on the convert.

Can you just maybe talk to what your plans are there and maybe a more broad comment on capital structure, going forward?

Obviously you're moving through the Inveresk transaction.

As we look to the second half of '05, you know, is there an opportunity to be a little bit more acquisitive, going forward?

I will take the first part of the question from a structural standpoint.

The convert was callable on February 5, as we already mentioned.

We have really not done a comprehensive analysis on the call, although it's not that complex an analysis.

I think the basic reason why we haven't done anything to this point is that we've had an awful lot of work behind us to this point in terms of the acquisition itself, the closing of the acquisition, the due diligence, and then the integration, particularly from a finance standpoint, where we've had to integrate financially at relative quick speed to get their results into ours for year-end and also to complete all the Sarbanes-Oxley requirements.

So really, we've stepped through the year-end closing right now and I think what we're going to do is step back and take a look at what we think the best prospects are going forward.

Clearly, the convert is in the money now, so I think it's in the Company's interest to take a good, hard look at that and probably move forward in a direction where we would do that, although we haven't stated that publicly.

We also haven't taken a long-term look, given everything I mentioned, at where we might go strategically from an acquisition standpoint, so we haven't quite sorted out whether we would call the convert and then do some other financing, or just wait until an acquisition comes along.

But with respect to the capital structure, we are obviously very comfortable with the other debt that we have outstanding.

We feel that having some debt is a good mix between equity and, given our strong cash flow, our ability to absorb and pay down that debt.

I think that's kind of how we will continue to look at it going forward.

So hopefully that answers your question, and if there's some strategic question there about acquisitions, I will let Jim take that, or if not, we can move forward.

Dave Windley at Jefferies & Company.

Good morning, gentlemen.

Congratulations on the quarter.

A few questions -- first some simple housekeeping.

Tom, it looks like to me pretty clearly that there were some costs probably on the Inveresk side that they would have historically categorized as SG&A that you are treating as direct.

Could you characterize that a little bit?

Yes, I would say that's fairly correct, Dave.

I think, if you look at legacy Inveresk and legacy Charles River, we do have a different SG&A as a percent of sales.

You know, their rate is a little bit higher.

We are digging down into the details more and more and you know, there could be some classification-type differences but I don't think that that's major.

You know, part of their business is little different from ours.

If you look at their research models in service business, it's probably a little lower as an SG&A percent, and I think the clinical is probably a little bit higher.

So you do have different structures going at the same time, because there's slightly different businesses.

So I think, as we go to '05, as I said in my remarks, we will see a slight movement up in the Company's percentage of SG&A expense as a total.

But I think it's really from a combination of those things, but primarily just from a different structure.

Okay.

Just to make sure I understand, Inveresk, as a stand-alone entity, would have had gross margins that were at or higher than Charles River, but yet the combination has pushed your gross margin down?

So --?

Well, that's correct.

I would say that, on a go-forward basis, gross margins will probably be flat to slightly better when blending the companies together, which, in the preclinical business, as an example, but they take some of that way on the clinical side.

Okay.

You've mentioned that you will start to report bookings in Q1 '05.

I wanted to ask a couple of questions around bookings and backlog.

When you report bookings starting in 2005, will you give us a comparable look so that we will have a sense for what the Charles River bookings looked like last year when you did not report that for your stand-alone business?

Well, we hadn't intended on that, Dave, so I think that's something that we will have to take a look at and see if we thought that that would be meaningful.

Okay.

On backlog, as I look at Inveresk, again stand-alone backlog mid-year right before about the time you guys would have announced the acquisition of them, I think they had a little bit over $300 million in backlog for both their preclinical and clinical businesses.

That number is now 425 when adding in yours.

What I am trying to get a sense for is how much coverage -- because I know coverage on the preclinical business is typically lower, looking out at forward revenue forecasts -- what is that coverage difference, or where are your comfort levels for coverage of your revenue forecast in preclinical and clinical, respectively?

Right, right.

As I said in the script, we feel reasonably good about the backlog.

I did try to highlight a couple of things that you just said, such as the preclinical doesn't quite have the same coverage as in clinical, and of course, our political business is a little bit smaller than some of the other CROs who folks might compare us to.

I think, generally speaking, we feel pretty good about the backlog.

There are some pieces of our legacy preclinical business where we've not really traditionally reported backlog, such as biosafety testing and things like that, which we are migrating through as we speak and for that matter, we really haven't reported bookings.

So it would kind of create a book-to-bill ratio that would be an anomaly, to a small extent, that we want to clarify internally before we begin report bookings, which we will do in the first quarter.

So you know, we haven't gone back and restated all of the numbers, and you did do your own little look-back, which other people can do as well in terms of what Inveresk was reporting on a legacy basis.

I think, as we've moved through those periods of times, if you look at the last data point for them, I think we are satisfied with where we have come on a legacy basis from an Inveresk perspective and I think, as we begin reporting a combined bit backlog number for Charles River, again I think we're comfortable with that number also. (multiple speakers).

Thanks.

Clarify for me that you mentioned the biosafety testing as an example of an item in your historical business that hasn't -- where you haven't traditionally reported backlog.

Is it in the 425 or not in the 425?

I believe that number is in the 425.

We've done our best effort to true those numbers up.

I don't know if we would have any trueing up necessary at the end of Q1.

I think, if there was, some trueing up, it would be insignificant.

But I think, if there is, we would report that as a trueing up and not as a net booking number as an example, Dave.

So I don't think we would let anything roll into the numbers that was really just a catching-up because we didn't quite capture all the backlog in a business like that.

The other thing, in terms of historical numbers in the backlog and bookings, you mentioned Q1 of last year.

I think once we've established a baseline, and I think once we begin reporting bookings and a backlog number at the end of Q1, you know, that will obviously provide additional information in terms of a book-bill and directionally how the backlog is building and what-not to provide information that may be sufficient without necessarily looking back at Q1 '04, as an example.

Let me ask one more question and I'll jump out.

Jim, strategically, you're adding a lot of capacity.

At the December 15 investor day, I believe Nancy talked about focusing CapEx spending and capacity expansions in preclinical around kind of full-service centers of excellence.

Can you elaborate on that a little bit and put in context your decision to break ground on a new facility in Massachusetts?

Will that be a recipient of some relocated existing operations in Massachusetts and things like that, please?

Yes, the notion is to have centers of excellence, so obviously we look at Montreal Edinburgh (ph) has being 2 of them.

We know it has currently been a center of excellence for us, and we think the West Coast market holds a lot of promise and gives us a lot of strength from a competitive point of view, so that's an area of focus and growth for us as well.

Really what we're looking for is to gradually grow into larger, more flexible expansive quarters in Massachusetts, again, to take advantage of the huge concentration of biotech and pharma clients in this locale.

So yes, you'll see both -- Massachusetts and Nevada being pre-eminent centers of excellence for us in addition to the other 2.

They will be our major areas of focus in terms of growth and development as we go forward.

Just to follow up on one of your prior questions, I did just check my notes and it doesn't appear that the biosafety is in the backlog, so as I said, that would be a type of item that we would true-up in the Q1 reported backlog, but it would also be an item that I would disclose separately, apart from the net bookings for the quarter.

Thanks, nice quarter.

Derik De Bruin at UBS.

Thank you, good morning.

So, I guess how big is the in-vitro business overall?

I guess how do you see it growing and any update on the approval process for the hand-held device?

Could you please repeat that question?

We couldn't hear you very well.

I have a cold.

So how fast is the in-vitro business growing?

Any update on the approval process for the hand-held device?

As we've said historically, it's a business that grows slightly faster than the Company as a whole.

I think your first question, when we could barely hear you, was what's its size?

As Tom said earlier, it's less than 5 percent of our revenue.

We are still standing by our goal of having the PTS portable system approved, FDA-approved, by the beginning of '06.

We're moving through that process I think nicely and should be on track there.

As I think you know, we continue to sell it; we sold it (indiscernible) and continue to sell that system in '05 for research purposes and in-process purposes, not necessarily for final validation of product.

We hope to have clients pre-validate the technology when it's approved, so hopefully a year from now.

Okay, great.

Could you just give us an update on some of your academic initiatives and how you are seeing business there, particularly as we are entering a new NIH funding cycle?

Yes.

I think the funding cycle, which obviously is a little less favorable at the moment than it was historically, is not really going to be an issue for us.

You know, we are sort of under-represented in the academic sector.

I'm talking primarily in the U.S. -- because we're better represented in Japan and Europe there.

Since the stand in academia is almost the same as pharma, it obviously provides a huge opportunity, so I would say the last 3 or 4 years, while we still have a price premium to the competition, that spread has decreased, A. B, we're seeing much greater spending by the academics for quality.

I think some of that is premised upon where the funds come from, because a lot of it comes directly from Big Pharma and not just the NIH.

So, their openness to buy quality as opposed to just buy on price comes with the fact that we've intensified our sales efforts specifically to garner greater sales in that sector -- have been really beneficial over the last 2 to 3 years and we're quite optimistic we will continue to grow that faster than some of the other places that we are selling into.

Okay, great.

One final question before my voice gives out -- could you just talk about the uptake in the clinical business and if you expect -- you certainly said you expect to see that business rebound later this year as more U.S. companies come in.

Could you just give us a little color in terms where the overall process is in terms of the lab as being compliant?

Yes.

What we said was that we expect the Phase I clinic in Europe to have a much better '05 than '04 coming out of the clinical trials directive with clientele both from Europe, Japan, but increasingly from the U.S.

We are also quite optimistic that we're going to have a much better year in the U.S. in our clinical business generally.

That will come from having a better-managed business, a business that's really focused on where we can excel, and those are in about half a dozen therapeutic areas which I enumerated in the prepared remarks.

In addition to focusing on that therapeutic areas, we're going to focus on enhanced profitability in those areas, and so we are quite confident that we are going to be able to grow this business in a more step-wise fashion, taking advantage of our international infrastructure and also taking advantage of the relationship between the preclinical business and the clinical business, which I don't think we've done particularly well by legacy Inveresk.

Of course, as soon as we can -- as soon as we have a Phase I clinic in the States, which we -- (technical difficulty) -- focused on, I think that will also help generate additional U.S. sales.

Thank you.

Larry Neibor with Baird.

Actually, this is Tom Russo for Larry.

Most of my questions have been answered.

I was just wondering, to follow up on the previous question, the overall Company growth is expected to be low double digits.

Is that the same that's built into the forecast for clinical, or what should we be thinking about for organic growth in the clinical piece?

Well, we haven't been breaking out the pieces in that way, so we had provided the growth targets in total but I guess I would say that we do expect all of the pieces to grow really around what our overall growth rate is, so I don't think we're going to have significant -- (technical difficulty) -- way or another.

You know, we do expect the clinical business to grow, in other words.

Okay.

One last question -- is it possible to quantify the FX contribution to Q4?

It was 2 -- let's see, about 2 percent I would say.

I think it was about 3 percent for the year and it did diminish during the year because of the way it ramped up last year, so I'm thinking about 2 percent.

Frank Pinkerton, Banc of America Securities.

Can you please quantify the size of the expansions that are going to happen in Montreal and Edinburgh (ph)?

Well, the best way to quantify them is that they will provide sufficient capacity to take advantage of the demand that we see in the marketplace right now.

So you know, they were sized to at least stay up with the market and to stay slightly ahead of it.

We're going to try to bring on capacity so we stayed ahead of the curve and provide incentives for our clients to continue to utilize us as outsourcing solutions on a strategic basis.

For those 2 facilities, especially on the one that's just recently opened I guess in Montreal, can you speak to pre-selling or how it looks to be filling that capacity out in the near term?

Yes.

Inveresk actually was pre-selling that space while we were in the due-diligence process, so they were actively pre-selling it pretty much through the end of last year.

I'd say that it will be substantially utilized on a forward-looking basis knowing that that business is in hand.

The demand continues to be very, very strong.

A follow-on question on the NIH -- I know that the overall kind of back-row funding there has slowed down but have you seen any change in the way in which the grants are distributed or anything else that would cause any lapses in your business?

We've really haven't.

Our government contract business is relatively long-term and it's locked in, so we wouldn't see any disruption in those contracts.

Our footprint with the NIH is relatively small, and even with our academic clients, -- some of whom get funding directly from NIH, we've seen and uptick because our share is relatively low and we have been focusing on it.

So no, we haven't seen any adverse impact at all.

Great.

Finally, I know historically you've spoken to changes at Big Pharma and having some play in the model and forecast going forward.

With the recent I guess rumors circulating around in the papers about Pfizer restructuring, is that baked into the forward guidance?

Are you aware of anything that Pfizer is doing that might affect you?

We're not aware of anything specifically.

We try not to comment on specific clients, but we are really not aware of anything specifically that we anticipate will impact us.

You know, I guess our feeling is that our clients will invariably and periodically come under pressures and what's essential, I think for their long-term success, is continued focus on basic research funding and moving products through the pipeline.

So I would suspect that cutbacks that are seen in companies like Pfizer will be in the areas that are not basically research oriented and likely to have less impact on us.

John Sullivan at Leerink Swann.

Can you talk about -- in toxicology services, could you just review the -- (technical difficulty) -- capacity adds briefly and then talk about the percentage capacity that will have been added by the end of your existing plans?

Yes, so what we said is that capacity is coming -- has come online in Montreal, is being built now and will come online in Edinburgh next year and capacity will be added this year and next, both on the West and East Coasts of the U.S and that we're doing that in order to stay ahead of what we believe the demand quotient is.

We are really staying away from giving specific percentage increases except to say that we believe it will be sufficient to drive the business commensurate with the market demand, so pretty much commensurate with what we've said historically about the growth rate in that business.

Is the intention for some portion of that capacity to come online -- (technical difficulty)?

We will have a blend of space dedicated and allocated to specific long-term contracts, where we are sort of trying to figure out the optimal mix between dedicated space and space available for shorter studies -- (technical difficulty) -- clients, so yes, some portion of it will be dedicated for long-term studies, but it will be a blend.

I'd like to turn the conference back to Ms. Hardy for any additional or closing comments.

This concludes the conference call.

Thank you for joining us today and we look forward to seeing you soon, either at the UBS conference tomorrow or at the SG Cowen conference on March 15.

Thank you very much.

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