Charles River Laboratories International Inc (CRL) 2005 Q1 法說會逐字稿

Welcome to the Charles River Laboratories first-quarter earnings conference.

At this time all participants are in a listen only mode.

Later we will conduct a question and answer session, giving instructions at that time. (OPERATOR INSTRUCTIONS) As a reminder, today's conference is being recorded.

I would now like to turn the (technical difficulty) Director of Investor Relations Susan Hardy.

Please go ahead.

Thank you.

Good morning and welcome to Charles River Laboratories first-quarter 2005 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 first-quarter results and review guidance 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 website at IR.criver.com.

The taped replay of this call be available beginning at 10:30 this morning and can be accessed by calling 800-475-6701.

The international access number is 320-365-3844.

The PIN number in either case is 777801.

The webcast will be archived until May 11.

I would like to remind you of our Safe Harbor.

Any remarks that we may make (technical difficulty) 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 in the Company's annual report on Form 10-K filed with the SEC on March 9, 2005, 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 (technical difficulty) 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 reconciliation to those GAAP measures on our website.

Now I will turn the call over to Jim Foster.

Good morning.

I'm very pleased to talk with you today about a strong start to the year and our continuing optimism about 2005.

Net sales (technical difficulty) 8.6% to 274 million in the first quarter.

On a non-GAAP basis, operating income for the first quarter rose 56.1% to 62 million, with an operating margin of 22.5%.

On a non-GAAP basis EPS increased to 17% to $0.55 cents in the first quarter.

We generated free cash flow of 22 million in the first quarter, ending the quarter with nearly 220 million and cash and short and long-term marketable securities on hand.

Following on the heels of a strong 2004, 2005 is showing the same robust demand for our essential products and outsource development services.

Through the acquisition of Inveresk we have expanded our portfolio of high-quality, value-added products and services, enabling us to support our clients from discovery through market approval.

This is the right time, and we believe we have positioned ourselves in exactly the right place to play an increasingly more strategic role with our clients.

Before discussing the segment performance I would like to remind you as a result of the acquisition of Inveresk we changed our reporting segments in the fourth quarter of last year.

We now have three segments, Research Models and Services or RMS, Preclinical Services, (technical difficulty) Services.

In the first quarter RMS represented 46.7% of total revenue; preclinical was 41.7%; and clinical was 11.6%.

From an operating income standpoint on a non-GAAP basis before unallocated corporate costs, RMS represents 61.3% of operating income; preclinical represented 33.1%; and clinical represented 5.6%.

The RMS segment grew in 7.1% in the first quarter.

This growth rate is lower than the rate we experienced in the first quarter of last year, but when adjusted for foreign exchange is actually 1.4% higher.

Growth was higher in certain geographic segments, but was offset in part by sales of large animals which were lower than in the first quarter of last year due to timing of shipments.

We believe that worldwide growth will improve in the second quarter, as we continue to see higher on spending on research models and more outsourcing of associated services.

At the end of March we were awarded a five-year $18 million contract for rodent production by the National Cancer Institute.

This was a renewal of an existing contract rather than a new one; but we do expect to see increased revenue in the second quarter due to start-up of new colonies.

As was the case last year, immunodeficient mice, the preferred model for oncology and HIV research, continued to be the fastest-growing strain on a worldwide basis.

Many major pharmaceutical companies and most biotech companies are developing oncology drugs and therapies, which is increasing the need for these mice.

We also saw high growth of outbred mice, which are being used for vaccine testing, and inbred mice, which are used for the development of transgenic animals.

As we mentioned in our fourth-quarter conference call, we opened two new transgenic facilities, one in France and one in Japan, in the fourth quarter.

A third new facility in Tokyo was opened (technical difficulty) on schedule in March this year.

Transgenic services growth at our overseas facility continues in double digits as researchers outsource more of the housing and advanced breeding and testing services.

Space is being filled very quickly in our new facilities, but as the expansions were planned to accommodate growth for the next few years we do have excess capacity now.

We also have some available capacity in the U.S., where researchers continue to direct their attention towards characterizing the models that already exist rather than creating new ones.

In order to improve utilization at our existing and new transgenic facilities, we are utilizing this capacity to produce additional high-volume rodent strains.

Given the significant increase in sales volume, we have expanded capacity by using existing space rather than by building new space.

This helps to maintain our high margins in the RMS segment.

We are very optimistic about the outlook for RMS in '05.

Pharmaceutical and biotech companies are continuing to buy our research models for both discovery and development efforts and are increasing their demand for strategic outsource services.

Pharmaceutical companies continue to be our largest customer segment; but given improved funding from both the capital markets and from big pharma, growth in the biotech sector is significant.

Our market share also continues to climb in academia where we are making progress with our targeted sales efforts.

With the robust demand for research models and the value-added services that we provide, we are confident that '05 will be a strong your for the RMS segment.

The Preclinical Services segment reported sales growth of 114.6% for the first quarter.

The primary growth driver was the addition of Inveresk, but our performance also results from intensified spending on outsource development services and our success at converting those opportunities into new sales.

We continued to see particularly robust demand for strategically driven toxicology services, as pharma and biotech companies continue to move drug candidates through the development pipeline.

All of our preclinical business reported significantly higher revenues, particularly inhalation, large animal, and reproductive toxicology.

The only exceptions were biopharmaceutical services, which was flat, and interventional and surgical services or ISS, asked which was down significantly from the first quarter of '04.

ISS benefited last year from the medical device companies' push to bring drug-eluting stents to market.

We are providing services to test the generation of stents and other coronary and orthopedic devices, but the demand for outsource service device development services is not as large as it was last year.

We anticipate that this part of our business will be slow for the balance of the year.

Because demand for Preclinical Services is so strong, capacity at our facilities has been filling rapidly.

We are now booking studies into September.

As you know we opened new study capacity in Montreal in February, which is already booked through the end of the year.

We are in the process of building in Edinburgh, Scotland, for occupancy in the first quarter of '06.

We're also pursuing projects to expand in Nevada and Massachusetts.

Our goal is to phase in occupancy of both (technical difficulty) beginning with the Massachusetts facility in '06 and the Nevada facility in '07.

Based on market trends and our communication with customers, we believe that strategic outsourcing will continue to accelerate, as evidenced in part by a number of ongoing discussions concerning dedicated space arrangements.

We are building capacity to accommodate our customers' needs and to position ourselves in a larger role as a preferred provider or strategic partner.

By aggressively adding capacity we will support the needs of our clients and provide for own growth.

Six months into our preclinical integration of Inveresk, I'm pleased to report that we have made great progress.

Our senior management team is working extremely well together and is strongly supported by employees across the organization.

I don't believe there is a stronger management team anywhere in the industry.

We are working on initiatives in a variety of areas including worldwide business development, sales and marketing, operational best practices, and infrastructure.

In addition to new growth opportunities, the sales and marketing initiatives include closely monitoring accounts to ensure customer satisfaction, rollout of a new integrated website, and new communication tools.

We are supplementing our best practices analysis with cost-based analysis, which we believe will enable us to understand relative cost and efficiency opportunities, leading to cost savings.

These initiatives are scheduled to be completed at various times during '05, with the largest task, harmonization of protocols and reports, completed by year end.

These are growth aggressive goals, but the progress we have made to date encourages us to believe we will achieve our scheduled completion date.

In addition to our integration tasks, we have initiated a Six Sigma based program in the preclinical business to enhance efficiency and boost productivity.

We also added a global preclinical controller to our team to enhance our operational controls and efficiency.

We are very pleased with our performance in the first quarter and with the status of our preclinical integration.

We are extremely well positioned to capitalize on the strong market demand for our services, and we are working to identify new opportunities to serve our clients on a broader strategic platform.

At the same time we continue with our efforts to integrate and harmonize our business and expect that those efforts will lead to sales growth and higher profitability.

The Clinical Services segment reported net sales of 31.7 million.

We did not own Inveresk until the end of '04, so we cannot make comparisons to the prior year.

However, I'll provide some directional comments.

The European clinical trials directive took effect in the second quarter of '04, and as we have mentioned previously our Phase I business in Europe was affected.

As a result, any comparison between the first quarter this year and last would be difficult, both from a sales and profitability perspective.

Although our targeted sales efforts to obtain new business from clients in Europe and Japan has been successful, the Phase I clinic in Edinburgh continued to be affected by the slow return of U.S. clients in the first quarter.

However, we are encouraged by the strong order flow as U.S. clients returned to our clinic in the second quarter.

A new business development strategy is being implemented in the U.S. where new business signings were off in the third and fourth quarters of '04.

With the management changes in December, we intensified our efforts to improve our business capture rate by focusing on four key therapeutic areas, oncology, ophthalmology, cardiovascular, and infectious diseases.

We are quite pleased with the results, which include a high level of verbal awards in the first quarter of '05.

As Tom will discuss in more detail we do not include verbal awards in backlog, so the benefit of these wins will not be visible in our backlog numbers until we have signed commitments.

We expect to see clinical backlog improvement in the second quarter.

Our new clinical business general manager came on board on February 21.

His first priority has been to continue to improve global business development, working with the sales and marketing people to increase business capture.

On the integration front he and his team are working with the preclinical business to leverage the relationship between the two groups.

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

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

The GAAP EPS range remains at $1.70 to $1.80; and non-GAAP earnings per diluted share, which excludes the amortization of intangible assets and other charges related to the merger, are still expected to be between $2.30 and $2.40.

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, operating efficiencies, and cost synergies, in combination with a lower tax rate.

For the second quarter of '04 we expect sales growth in a range of 57 to 60%, earnings per diluted share in the range of $0.43 to $0.45, and non-GAAP earnings per share between $0.58 and $0.60.

In closing I want to say again that we are extremely pleased with our first-quarter results and the outlook for '05.

The year is off to a strong start, with sales and earnings growth driven by continued demand for our products and services, particularly in the preclinical area, where our customers are outsourcing more services on a strategic basis.

As pharmaceutical and biotechnology companies look for more efficient and cost-effective methods of developing new drugs and therapies, we continue to hear from existing and potential customers that they are looking to outsource more service, more business, that they want to do so with a full-service global provider who can support them over the long term.

Our acquisition of Inveresk, our broader portfolio of essential value-added products and services, our larger global footprint, and our continuing focus on operational efficiency has positioned us extremely well to address this market and to grow profitably.

We are working on new business development strategies designed to position us a strategic partner to our clients.

We believe that those efforts will yield positive results in the coming months.

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 am going to give you a brief overview of the first-quarter 2005.

Net sales of 273.7 million in the first quarter of 2005 increased 58.6% from 172.6 million in the first quarter of 2004.

The overall increase in revenues was due primarily to the added revenue from Inveresk, strong demand for our products and services, and to a lesser extent price increases and foreign exchange.

RMS sales increased 7.1% in the first quarter versus last year.

Preclinical Services sales increased 100.6% in the first quarter of 2005 versus last year.

Clinical Services sales for the first quarter of 2005 were 31.7 million.

At the end of the first quarter backlog for the preclinical and clinical businesses was approximately 427 million.

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

To give you some context on our backlog, on a pro forma basis backlog at the end of the first quarter of 2004 would have been approximately 375 million, indicating a 14% increase.

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 clinical businesses generally have larger backlogs because of the longer time frames from signing to project completion.

Our clinical business accounts for less than 15% of total Company revenue and less than 25% of the combined preclinical and clinical revenue.

In addition, certain service offerings within our preclinical business, such as a biosafety testing and analytical chemistry, which has a fast turnaround from booked to billed, don't lend themselves to backlog.

Our net new bookings were 140 million for the quarter.

Because we take a conservative approach to backlog and report only signed contracts, cancellations are usually very low.

The first quarter tends to be the high point of the year; and at approximately 24 million, first quarter cancellations in preclinical business were higher than normal.

We believe the cancellation rate will be lower in the balance of the year.

Excluding cancellations, the book to bill ratio was 1.1 to 1 in the first quarter.

The gross margin in the first quarter was 38.2%, down from 39.9% in the same quarter last year, primarily due to the addition of Clinical Services, which at 31% had a lower gross margin than either of the two segments.

Compared to the fourth quarter of 2004, the gross margin has increased 2.2%.

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

SG&A in the first quarter was 44.9 million or 16.4% of sales, compared to 28.1 million or 16.3% in the first quarter in 2004.

The increase in SG&A as a percentage of sales was primarily due to the 3 million compensation charge associated with the assumption of Inveresk stock options.

Integration cost and cost associated with Sarbanes-Oxley also factored into the increase in SG&A.

Another factor in the increase was our employee stock grant in February of this year.

Although the SEC has postponed implementation of FAS 123R until 2006, we are continuing our valuation of the cost of stock options and have determined that a greater percentage of our grants should be in restricted shares.

The February grant resulted in expense of approximately 1 million for the first quarter and 6 million for 2005.

The total cost of the grant is 22 million, which will be amortized over three years.

Operating income and the first quarter was 45.4 million, and operate margin was 16.6%, compared to 39.5 million and 22.9% in the same period last year, and 33.2 million and 14% in the fourth quarter of 2004.

On a non-GAAP basis, which excludes Inveresk related amortization of 13.3 million and compensation charges of 3 million, operating income for the first quarter was 61.7 million with an operating margin of 22.5%, compared to 39.5 million and 22.9% in the same period in 2004, and 50.6 million and 21.3% in the fourth quarter of 2004.

The slight decline year-over-year was primarily due to the addition of the clinical businesses, which has a lower margin.

The sequential increase in the non-GAAP operating margin was due to higher sales and increased operating efficiency.

Overall, we were very pleased with our non-GAAP margins in Q1.

The RMS operating margin in the first quarter was 33.1%, up from the 32.4% in the same period in the prior year, and from 29.2% in the fourth quarter of 2004.

The operating margin for Preclinical Services was 11% compared to 14.2% in the first quarter of 2004, and 5.1% in the fourth quarter of 2004.

The decrease year-over-year was due primarily to amortization associated with the Inveresk acquisition.

When excluding Inveresk (technical difficulty) related to the first quarter, operating margin was 20%, essentially the same as the first quarter of 2004 on a pro forma basis, and an increase of 1.7% from 18.3% in the fourth quarter of 2004.

The margin improvement was due to higher global toxicology margins, offset by marginal erosion in interventional and surgical services.

In the Clinical Services segment the operating margin for the first quarter of 2004 was 2.6%, compared to 3% in the fourth quarter of 2004.

Excluding Inveresk related amortization, the first-quarter 2005 operating margin was 12.1%, compared to 13.3% in the fourth quarter of 2004.

The operating margin decline from the fourth quarter was due primarily to a slow start to the year in January and early February.

Work has accelerated since then and we expect a stronger second quarter.

Comparing the 12.1% first-quarter margin to Inveresk (technical difficulty) quarter of 2004 margin of 12.9%, you will see that the margin is down slightly due primarily to the European clinical trials directive.

Net interest expense was 6.3 million in the first quarter, compared to 1.4 million in the first quarter of 2004, due to increased debt associated with the Inveresk acquisition.

To close the acquisition we borrowed 400 million under a term loan facility and drew down 100 million of a 150 million revolving credit facility.

We have since repaid 20 million of the term loan facility in the first quarter.

We also had outstanding 185 million of convertible debt, which we called on March 28, 2005.

All of the debt was converted, resulting in the issuance of approximately 4.8 million shares on April 19, 2005.

As was said previously, calling the convert is a positive for cash flow but has no impact on our diluted EPS, because the shares attributable to the convert were already included in the diluted share count, and we backed out the interest expense when calculating net income.

The only affect on the income statement is that the converted shares will now be reported as both basic and diluted.

We will record the reduction in debt and increase in equity in the second quarter.

The reported tax rate for the first quarter was 27.9%.

The non-GAAP tax rate for the first quarter was 29.25%.

The reported tax rate for 2005 was 40.1% higher than the effective tax rate of 37.5% because in the first quarter of last year we completed a structural reorganization of our European operations.

The result was a net charge of 5.8 million or $0.11 per diluted share, which was recorded in the provision for income taxes.

Net income was 27.6 million in the first quarter of 2005 or $0.40 per diluted share, compared to net income of 17.6 million or $0.36 per diluted share in the first quarter of 2004.

On a non-GAAP basis net income was 38.6 million compared to 23.4 million in the first quarter of 2004, a 65.2% increase over last year.

On a non-GAAP basis earnings per diluted share were $0.55 for the first quarter compared to $0.47 per diluted share in the same period 2004.

Some comments on working capital.

Working capital was 197.2 million at the end of the first quarter, an increase of 36 million from the end of 2004.

At the end of the first quarter we had cash, cash equivalents, and marketable securities of 213.1 million, plus 6.1 million in short and long-term marketable securities, or a total of 219.2 million.

Operating cash flow was 34.2 million, and free cash flow was 21.8 million.

Cash flow is typically at its lowest in the first quarter of the year due to payment of bonuses and capital expenditures incurred in the prior year.

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

We are currently examining our options for repatriation but have not yet made a determination if we will repatriate cash under the American Jobs Creation Act of 2004.

Accounts Receivable were 204.9 million at the end of the first quarter, down 3.1 million from the end of 2004.

Our DSO was 32, unchanged from the end of 2004.

Capital expenditures were 12.4 million in the first quarter of 2005.

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

The total capital spend may increase based on the timing of new projects and the final determination to purchase or lease.

Depreciation was 11.1 million in the first quarter.

Our estimate of depreciation for 2005 is between 45 and 50 million.

Total amortization for the first quarter was 14.4 million.

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

Some comments on guidance.

Jim has already given you the sales and EPS guidance.

I would like to add just a few more comments.

We are on track to achieve our expected 10 million of cost-saving synergies in 2005.

We have identified and implemented those actions which were necessary to achieve the expected savings and continue to look at other opportunities, which we would expect will have a greater impact in 2006.

The difference between GAAP and non-GAAP EPS in 2005 is entirely due to Inveresk acquisition; 54.3 million of intangibles amortization and 7.8 million of compensation charges related to the assumption of Inveresk's stock options.

Our last estimate of amortization was 53.1 million, which has since been revised to 54.3 million.

The increase is due to the effect of foreign exchange.

There is likely to be fluctuation in the amount of amortization each quarter because we adjust it to reflect foreign exchange movements.

Finally, our current 2005 non-GAAP guidance of 230 to 240 is inclusive of the 6 million cost of the restricted stock grant.

That concludes our remarks.

We'll take your questions now.

Thank you.

(OPERATOR INSTRUCTIONS) Dave Windley, Jefferies and Co.

The first question, I just wanted to get a clarification.

On the research models, Jim, I believe you described that one of the primary differences between say last year's growth at this time and this year was a smaller boost from FX.

I missed the quantification of that.

Another 1.4%.

In your discussions of transgenic capacity, can you talk in a little more detail about how you pivot to use that capacity for model breeding?

And then how quickly, maybe as transgenic demand starts to pick back up, and when you might expect that to happen, you can pivot back to make it available for transgenic?

Sure.

The technology that is employed to produce transgenics is similar, in some cases identical, to the technology employed for other specialty strains and species.

So we have been able to utilize the space well on an interim basis, both in the U.S., where as we have said previously demand has slowed, creation of new models has slowed in favor of characterizing the current ones.

And in Europe of course we have just built, Europe and Japan, just built new facilities, so we're cranking that up.

The utilization of the facilities for production of other strains is principally or entirely happening in the States right now.

It's a good offset for us, because we would have had to construct or add additional facilities to do that.

So it easy to pivot, just to use your word, because the space needs are similar, as is the labor component.

In order to switch it back, nothing technologically would have to take place; but we would have to have sufficient space to move the research models out.

I am not even sure we would do that.

Wherever we build the additional space next, that will provide additional capacity for transgenic production as that begins to pick up again.

Great.

Moving on to preclinical it does sound like your visibility continues to increase there.

I will let you comment on pricing;

I assume that is also following a positive pattern.

Can you talk to the discussions that you might be having with regard to longer-term contractual relationships with clients?

And how those might fold into some of the capacity you are opening, or not?

Sure Visibility is indeed improving.

As we said we're booked out through September; and in Montreal where we have added new space we're booked out through the end of the year.

And we see new capacity coming on at multiple locations next year.

As we've always said, I think price will continue to be an issue for all people who are outsourcing.

But it is certainly much less of an issue, and it tends to be at the bottom of the list rather than at the top of the list when we are negotiating.

Look, our clients have made fundamental strategic determination that outsourcing is preferable -- a lot of them -- that outsourcing is preferable to doing it internally.

They are much more interested in locking up or utilizing a space than they are in necessarily garnering the best price upfront.

We have several conversations going on right now with regard to dedicated space that could be anywhere from an entire floor to an entire facility and everything in between.

Again it's about the comfort level that these clients need, as it becomes more difficult to cull (ph) the numbers of compounds they have in the development pipeline to make sure that there is space to handle the fluctuation.

We think that our anticipated additions of space, particularly in the United States, should dovetail very nicely with these discussions.

I can't speak too much about it because our situation isn't finalized, but in at least one of the facilities we will have the flexibility for growth.

And as we are thinking through the space and as we're talking to these clients, we can see the ability to finish more of the space rather than less, to accommodate this dedicated capacity situation.

So I suspect this will be a continuous dialogue that we'll have.

It may even intensify.

For us, it is finding the right balance between dedicated space and new space, to make sure that we maximize both the margin and efficiency; but also that we have space for new biotech companies, in particular, who are starting up that could be larger, more important clients for us in the future.

Great.

I will ask one more and then jump out.

You mentioned in your prepared remarks a Six Sigma initiative.

Along those lines I wonder, how are you ramping that up?

Have you brought in someone from the outside to champion that project?

Secondly, is it a preclinical targeted project only?

Or thirdly, are there initiatives to be drilled into the clinical business?

And if not, are there other cost-saving opportunities in the clinical business to lower your fix cost there and improve the margin?

Thanks.

Sure.

We have retained an outside firm to do that, and I would say that it is Six Sigma and then some.

So it is sort of the core competency, but they marry several different methodologies to improve efficiency and profitability.

They will be working first and principally with the preclinical business, because that is where the primary integration is taking place.

And as we lock onto best practices, after getting further input from our clients, we want to make sure that we maximize efficiency and enhance profitability as well.

So there is a more palpable need for that at the outset.

Our intention is to make this Company-wide.

We want to get some experience under our belt working with this firm, and after we make some inroads in the preclinical business we will move then to clinical and then to our research models and (technical difficulty) business.

So they'll get there eventually.

On the clinical side I really do think that our strategy will help to improve the margins.

Our strategy is, as we have said from the outset, to be much more focused.

As you heard in my remarks we focused on four key therapeutic areas.

We are going to have a much targeted bid proposal process, which we believe will yield and has begun to yield a higher success rate.

As we're able to maximize on the areas where we have substantial expertise and utilize our people capacity better, we are quite confident that we will be able to improve our operating margins going forward.

Great.

Thanks for those answers.

Randall Stanicky, Goldman Sachs.

First on backlog.

Can you just quantify, Tom, maybe the percentage of clinical businesses in backlog?

Secondly maybe just clarify;

I believe you said 24 million in cancellations.

Is that preclinical, clinical, a mixture of both?

Is that the total number?

And then maybe third, just expand on what is driving that.

Is that pons (ph) or projects that have been canceled, or is that business that is being delayed, or going outsource?

Thanks.

On the first question, unfortunately, we're not willing at this point to break out our backlog between preclinical and clinical.

On the second point the cancellation number was 24 million, as I said, and it was primarily in the preclinical.

I think sliding into your third comment, we are generally seeing historically, and this goes back to legacy Inveresk, a higher rate of cancellations in the quarter;

I think more as a result of pharma budgets in the first quarter and reassessment of projects and whatnot.

We do feel that some of those projects will come back later in the year.

There was not any significant data point to mention with respect to one large client or one large customer segments.

So no data points in that regard that we could mention specifically.

So we do think that the numbers will improve.

We have generally seen in the past a higher level of cancellations in the first quarter, primarily because of the new fiscal year of many of our clients, and think things will improve in that regard.

Are these holes that you are able to fill relatively quickly, given some of strength that we are seeing in the industry?

Then maybe could you elaborate specifically on what areas, on what type of preclinical work predominately it was.

Or was it pretty much spread across the board?

It was two or three big studies.

A couple were postponed, one was canceled.

It has to do with shifting priorities on the client's card (ph) and availability of compounds.

Yes, we have been able to slide business in there and pick up the slack.

As I said earlier, we have booked all the new space already.

So we think it is a one quarter phenomenon.

Just one other question.

Again for Tom, on some of the synergy targets.

Can you maybe talk to where some of those savings are reflected?

When we looked at preclinical margin, obviously it was up quarter-over-quarter.

Can you maybe speak to the preclinical margin and some of the unallocated expenses?

And maybe talk to where that is reflected?

And then maybe some of the specific cost savings that you have been able to realize so far.

From the perspective of the 10 million in 2005 synergies that we talked about, the biggest piece of those would come in the corporate areas.

So as we merge the two Companies we did take out a number of expenses in Inveresk corporate staff areas, as an example, which in their legacy statements were not allocated to either preclinical or clinical.

So that impact you would see in the corporate numbers.

To a lesser extent I think we saw some sales in marketing, which would have been in the preclinical; and some purchasing initiatives that we put in place that also would show up in the preclinical.

So I think for 2005 the majority of the actions that we took would not necessarily appear in any meaningful way in any of the reported segments.

I think the actions that we have talked about for 2006 and our working on as we speak, I think those actions would have a much greater impact on the particular segments.

Great, thanks.

Just one real quick last question.

Can you maybe -- you mentioned some of the opportunities in preclinical and clinical in terms of cross-selling.

I guess, Jim, can you give maybe just give some tangible examples?

Does that expedite your sense of urgency in terms of acquiring a Phase I U.S. facility?

Well, I guess it expedites it.

Our focus on acquiring a Phase I facility has been pretty much immediately with the conclusion of the deal.

So it just highlights is maybe a better way to put it.

Yes, there are significant opportunities for us.

It's not something that Inveresk did previously.

There wasn't a close relationship, a working relationship between the preclinical and the clinical areas either in the U.S. or overseas or globally.

So from a client leverage point of view, particularly since many of our large clients are international in structure, I do think it is essential.

So we get some of that cross-selling already overseas, because we do have a Phase I clinic.

But the ability to really establish the leverage will come as a result of having a Phase I clinic in the U.S. and the ability to really speak globally to clients.

We're quite confident that we will be able to make something happen.

And we are quite confident that as a result of that, because we've seen it in Europe, that the cross-selling phenomenon will be a powerful one.

And also expect that we will see, somewhat to a lesser degree, but we'll see cross-selling capabilities from people who sell our research models and the preclinical sales, because of course they are oftentimes the same buyer and the same decision-maker in most companies that we deal with.

Great.

Thanks, guys.

Eric Schmidt, SG Cowen.

First a follow-up question on the dedicated space arrangements, for Jim.

If I interpret your comments correctly, and please correct me if I am wrong, it sounds like you are gaining visibility on these contracts, but maybe giving up a little bit on pricing and margins.

Maybe if you could just discuss how you go about internally deciding whether to take such an arrangement.

Our goal would be, obviously, not to give up anything on margin.

So the state of the conversations are such that I can't really confirm that one way or another right now.

I think the general proposition is that for a lot of dedicated space perhaps there'll have to be some concessions.

But it really depends on the type of work that is being done, and the volume of business that's being done, and whether actually the space is used or not.

Also there are some arrangements where if space isn't being used one is allowed to utilize that for other clients.

Our goal first and foremost would be to do it on a similar basis as other types of work, and have the client depreciate (ph), A, the availability of the space and the quality of the work, specifically in the specialty tox (ph) side where we do get higher margins and a lot of the clients don't have this capability internally.

Let's assume that are going to try to do both; and if we feel that we can't then we are going to have to be quite determined and clear about the percentage of business that we have dedicated and not, so that on a total basis our margins continue to improve year-over-year.

Fair enough.

Then a question on the ISS business, which you mention has sort of been weakish following the loss of excitement in the drug-eluted stents space.

What is the outlook there?

You said kind of slowdown for the rest of '05.

But is there another trend that you can identify in the medical device arena that is likely to make this area more interesting for you in '06?

Or are we just going to wait around for the next greatest thing?

First and foremost we don't think it's going to come back this year.

We felt quite strongly, and still do, that sort of on an intuitive basis and looking at the companies that are in the medical device area, that our expertise in veterinary medicine and bringing that expertise to them on an external basis to do the safety testing has a lot of similarities to the way the drug industry is outsourcing tox work.

So again we think it's right in our sweet spot.

And yes, we're hopeful that in addition to additional cardiovascular devices there will be strength in the orthopedic field, as well as developments in devices for spine-related work.

We believe that the companies will continue to outsource more, and that academic institutions will be less important to them.

We would hope that things would pick up again in '06.

We're a bit disappointed that they have not in '05, frankly, because we thought that the intensity of focus on the drug-eluting stents would continue.

So, yes, I think it's quite likely it will crank up again, but we're not prepared to make that call at the present time.

I always appreciate your candor.

A question for Tom on the FX.

I apologize if you said this, but I was just looking for the total foreign exchange impact on both the top and bottom line.

On the top line it was between 1 and 2% versus the first quarter of last year, positive.

On the bottom line, it would be fairly consistent with that.

The only exception that we have now is that a lot of CTBR's business, as you know, is based in the U.S. in dollar-denominated contracts.

So that does alter it a little bit, but I don't think it would alter it significantly from the 1 to 2%.

On the gross margins, I assume we can expect the preclinical gross margins to improve with higher sales throughout the rest of the year.

We should see that, yes.

Any guidance on gross margins for the clinical business, which have been a little bit variable the last couple of quarters?

We are working hard as we have said to improve them.

We did have a little bit of a setback versus the fourth quarter.

A couple of the things we talked about.

The clinical trials directive continues to sort of hold us back a little bit; and we did get off to a little bit slower start.

So we do expect to see improvement in the top line and the margin in the second quarter, and hopefully we can sustain that through the year.

Thanks a lot.

Ken Kulju with Credit Suisse.

Actually just following on Eric's questions, I was wondering if you could maybe provide also some additional clarification on how the operating margins should behave over the course of the year?

Specifically in Clinical Services, that 12.1% operating margin in the first quarter, it sounds like your European Phase I business is strengthening.

Just looking for a little bit of clarification on how much leverage you have in expanding the operating margin in Clinical Services.

For instance is a low teens operating margin in that franchise doable this year?

Yes, we are working to improve that, Ken.

From outset it was one of the areas that we staked out as being very desirous of improving both the top-line performance, but in particular note getting the margins up to a level that we thought were more acceptable to Charles River Laboratories.

We did make some changes coming out of last year in terms of management structure and some cost reductions.

We do need to drive the top line; and then I think we can get some improvement in the bottom line.

My view would be that we can improve the margin somewhat this year.

But given where we are in terms of the year and the progress that we're starting to make, I don't think that we should expect to see dramatic improvements in that margin rate this particular year.

Ken, we would not have pursued the clinical business unless we felt that we could eventually get the margins into the high teens.

That has been at least our goal.

Phase I facilities typically do even better than that.

So as the Phase I business is intensifying now, so we are quite hopeful that that is going to be a good contributor to some margin improvement this year.

As we continue a more targeted approach to going after proposals and bids, and with getting a more lean organization, greater focus on business development on a global basis, and driving that both operationally and strategically, we are quite hopeful we will improve the margins for sure this year.

I would think again in '06 that we could improve it even further.

So our goal is to get there, and I think we are taking all the steps necessary to do that.

Great.

Also on the backlog.

You mention you have a number of verbal commitments.

Is there any way you can quantify that?

When would you expect the conversion of the verbals to essentially signed contracts?

Is that 2Q, or is it a third-quarter phenomenon?

We really can't quantify it.

I think the good news is that the experience is that the verbal commitment calls almost always convert into signed contracts.

But having said that, we prefer to be conservative and sure of that; so we are going to continue to only report signed backlog.

We are quite optimistic that those will convert in due time and that the incidence of verbal commitments has improved substantially, so that we're quite hopeful that the back of the year will continue to be stronger.

It's really not something we want to breakout on a quantified basis, except to say that they have been robust and, unlike others, we don't roll it into the backlog number that is reported.

Thank you.

Derik de Bruin, UBS.

In your last conference call, you had mentioned that you expected the core Charles River business to have organic growth in the 12 to 13% range.

Do you still see that as being on track?

Yes, we do.

Our definition of core is the whole portfolio.

We have said, yes, low double-digit growth rates; and, yes, we absolutely stand by that, Derik.

What are you looking at for the tax-rate guidance for the year?

Have your expectations of that changed?

No, not at this time.

The numbers that I flagged for Q1 based on where we are today is where we would expect to be for the year.

So that 27.9 level, then?

Correct.

Right.

Looking at other potential acquisitions in the area, you had made some comments that you were looking to potentially add to your clinical business particularly in North America.

Do you still see that as a potential?

Yes.

But what we said, first and foremost, is that from a strategic point of view Phase I capability in North America is sort of the missing element.

We're quite intent on filling that gap.

So our comments with regard to (indiscernible) acquisitions in that area at least at the current time are primarily in that sphere.

Is there anything particularly, has anything changed in the overall outlook in the biosafety and bioanalytical services segment for the business?

I am not sure what you mean by that.

You had commented that you had seen that and the ISS had been a little bit slow in the preclinical segment.

I am just wondering if there has been some change in what customers are doing in that, in terms of large molecule studies.

No, I don't think it is a fundamental change.

As we said on the ISS side it's really about a push that was apparent last year and not now.

Bioanalyticals, for us it tends to be kind of a shift between focus and discovery and development areas.

Oftentimes as that shifts back, particularly in the discovery area, we have more robust sales and better margins in that space.

So hopefully that will improve on the back half of the year as well.

One final question.

What was the impact of pricing on the RMS segment?

This is Tom; 3 to 5%.

Great.

Thank you.

Paul Knight, Thomas Weisel.

What was your cost in the quarter, if you can quantify it, for the Sarbanes and also the consulting that your are obtaining for Six Sigma?

Can you put a dollar value or range on that?

I wouldn't put a range on the Sarbanes at this point, Paul, it has come down, fortunately, from last year, because that was the biggest push.

It actually accelerated for us during 2004.

We do have continuing costs of compliance.

It is less than last year.

But if you look at the first quarter this year versus the first quarter of last year, where we had our lowest spend rate in '04, the numbers are definitely up.

So it's having a small impact in SG&A that is worthy of mention without quantifying it.

Does it stay the same the rest of the year, or go up or down?

I think from a quarter-to-quarter comparison, as we get further out in the year I think will see a switch where, during the third and/or fourth quarter, the number should actually be less than last year.

Our highest level of spend last year, as I said, was in the fourth quarter.

The second highest level of spend was probably in the third quarter, because we continue to ratchet up resources and outside assistance and whatnot during the year, as well as the onset of the ARD (ph) which continued to be a little more expensive than we thought earlier in the year.

So I do think the numbers will be down overall during the year; probably a little bit up year-over-year in the early part of the year; and down in the latter part of the year.

Thanks.

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