Charles River Laboratories International Inc (CRL) 2005 Q4 法說會逐字稿

Thank you for standing by and welcome to the Charles River Laboratories fourth-quarter and full year 2005 earnings conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session; instructions will be given at that time. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded. I would now like to turn the conference over to Susan Hardy, Corporate Vice President of Investor Relations. Please go-ahead.

Good morning and welcome to Charles River Laboratories fourth-quarter and full-year 2005 conference call and webcast. This morning Jim Foster, Chairman, President and Chief Executive Officer, and Tom Ackerman, Executive Vice President and Chief Financial Officer, will comment on our fourth-quarter and full-year results and review guidance for 2006. 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. A taped replay of this call will be available beginning at noon today and can be accessed by calling 800-475-6701. The international access number is 320-365-3844. The pin number in either case is 814-187. The webcast will be archived on our website until February 17th.

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, but not limited to, those discussed in our annual report on Form 10-K which was filed on March 9, 2005 as well as other filings we make with the Securities and Exchange Commission.

During this call we will be discussing some non-GAAP financial measures. We believe that the inclusion of these non-GAAP financial measure 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 website. Now I'll turn the call over to Jim Foster.

Good morning. I'm pleased to take this opportunity to talk with you about our 2005 results and reaffirm our outlook for 2006. Following a better than anticipated fourth quarter with net sales of $291 million, we closed the fiscal year with net sales of $1.12 billion, and increase of 46.3%. On a pro forma basis the growth rate was slightly more than 10%. On a non-GAAP basis operating income for the year was $254.3 million, an increase of 43.1% over last year, and the operating margin was 22.7%.

On a non-GAAP basis fourth-quarter earnings per share were $0.59, a 22.9% increase over $0.48 per share in the fourth quarter of '05. And non-GAAP EPS for '05 increased 15.7%, $2.29. We generated operating cash flow of $237 million and free cash flow of $141 million last year. We paid $205 million of debt, bought back 396,000 shares of stock through December 31st at a cost of $17.5 million and an additional 128,400 shares at a cost of $5.7 million through February 8th, and ended the year with $137 million in cash and short and long-term marketable securities.

In the fourth quarter we were pleased to see the issues which affected the RMS third-quarter performance negatively. Transgenic services, large animal sales and sales in France improved due either actions we implemented to improve operating efficiency or to market factors. As a result the RMS sales growth rate improved from the third-quarter and the operating margin increased 110 basis points from the fourth quarter of '04. This performance gives us confidence that we will achieve our 2006 RMS plan.

Combined with the positive outlook for the Preclinical Services and improvement in the Clinical Services business, we are reaffirming our guidance for 2006 sales and earnings growth. For 2005 RMS represented 45% of total revenues, preclinical was 44% and clinical was 11%. From an operating income standpoint, on a non-GAAP basis before unallocated corporate costs, RMS contributed 56% to profits, preclinical contributed 37% and clinical added 7%. The RMS segment grew 5.5% in the fourth quarter including a negative foreign exchange effect of 3.5%.

Sales gained 5.6% for the year, but due to weakness of the dollar earlier in the year foreign exchange had a negligible effect on full-year sales results. In the research model and production business sales of models in North America, our largest market and most significant portion of our research model sales, increased 12.7%. But excluding the extra week in the fourth quarter the growth rate was 9.4% which compares favorably to the 8% rate we reported for North America in the third quarter of 2005.

The fourth-quarter non-GAAP operating margin increase to 30.3% from 29.2% in the fourth quarter of '04 largely due to higher segment sales. For the full year operating margin was 31.8%, just slightly below 32% reported in '04 primarily as a result of the decline in the U.S. transgenic services sales.

As a result of our performance this year and expectations for '06, we believe that the largest market for drug discovery and development products, the United States, will continue to exhibit robust demand for our products. We were pleased by the fact that we saw strong growth across different product lines -- immunodeficient mice, the preferred model for oncology and infectious disease research; guinea pigs, used for research on vaccines to combat bioterrorism agents; and outbred rats used for safety testing.

Sales in our European research model business were up only 1% in the fourth quarter, but when adjusted for foreign exchange increases 8.8%. We were very pleased to see a strong performance from our French operation which recovered from the issues which affected third-quarter results. Large animal sales also improved as clients took shipments of orders in the fourth quarter. As you may recall, timing of shipments may fluctuate, but in general we expect to sell our entire available supply every year.

Our research model services businesses ended the year up just 2% with the transgenic services business restraining growth. Our transgenics businesses in France and Japan reported double-digit sales growth for the year benefiting from new facilities which opened at the end of '04 and the beginning of '05. The U.S. business continued its decline in the fourth quarter ending a year in which we saw researchers reevaluate and characterize their existing transgenics models and ultimately reduce the number of colonies they maintained with us.

We believe the rate at which the transgenic services business has declined will moderate in '06, but do not expect the U.S. business to increase. Accordingly we have adjusted our plans to accommodate our expectations which include moderating growth rates in Europe and Japan as well.

Although fourth-quarter U.S. transgenics sales were lower than in the third quarter, the headcount reductions we made generated operating improvements in the fourth quarter. The U.S. transgenics operating margin increased 360 basis points from the third to the fourth quarter as a result of operating efficiency. We've also continued to increase our use of transgenics facilities to produce immunodeficient mice. Given the robust demand for immunodeficient models, without the transgenics facilities we would have had to build additional space to accommodate our production requirements.

Preconditioning services also generated higher sales and we expect this growth to continue as we open at least one new [room] in each of our breeding facilities over the next two years. Preconditioning services represents an excellent opportunity for future growth. It capitalizes on our core competency of laboratory animal medicine and we believe that clients will outsource these services because doing so provides them operating efficiency.

The vaccine business, which provides SPF eggs primarily for poultry vaccine production, reported sales for the year slightly higher than in '04. As you know, our '04 results benefited from competitive contaminations with resulted in significantly higher sales of our eggs. Those contaminations occurred in the fourth quarter of '04 so we expected sales growth to improve as we reached the anniversary. This was the case with both the sales growth rate and operating margin improving sequentially in the third quarter of '05.

The in vitro business had an outstanding fourth quarter any year in '05 with strong sales and operating margin growth. Sales benefited from continuing strong customer demand for test kits and for our new portable testing unit, the PTS. As we mentioned before, we signed a contract with a large dialysis clinic for our test kits earlier this year and sales of the PTS have continued to increase.

Just to update you on the status of the PTS, we have been selling an increasing number of units to drug research and development which is the primary market for the product until we receive FDA approval. We expect to receive approval during the first half of '06 and, once we do, we will be able to sell the PTS for LAL release testing of medical devices and injectable drugs, which is a market in which most of our product is currently sold.

We're very optimistic about the PTS because, in addition to its use for the LAL release testing, this flexible platform has the capacity to perform a wide range of types of testing for bacterial contamination. We're taking advantage of this potential by developing a number of different assays for the PTS which we believe will offer us opportunities to expand into new markets.

To summarize, we're very optimistic about the potential for growth in the RMS segment. We've said repeatedly that in the long-term RMS can grow in the high single digits and we continue to maintain that belief. We were very pleased by the growth of North America research models, which is the largest business in this segment, and the in vitro business which offers such great potential for the future. As expected, the fourth quarter also brought improvement in the French and large animal businesses. And while transgenic services will continue to be affected by our customers' shifting focus, we expect preconditioning services to expand as clients take advantage of our expertise in laboratory animal medicine and gain operating efficiencies as a result.

We have held our position as the premier provider of research model products and services through nearly 60 years of experience and innovation and have the ability to more fully support our clients and any other competitor in the research model marketplace. We have the expertise to assist our clients in resolving increasingly complicated issues through adding the use of research models and intend to leverage that expertise and continue to drive sales and operating margin growth.

The preclinical services segment reported sales growth of 40% for the fourth quarter, sales growth was 83.7% for the full year and just over 17% on a pro forma basis. The fourth quarter benefited from our pharmaceutical and biotechnology customers' increasing use of strategic outsource services as well as the addition of Inveresk. Large pharmaceutical companies are increasing the use of outsourced services and our extensive portfolio of Preclinical Services and in-depth expertise is very attractive to them.

In addition, we have the ability to provide the services required to execute a complete IND or CTA program and to assist clients with program development and associated regulatory filing. The fact that our clients increasingly view outsourced services as a strategic requirement is evidenced by the growing number of programs we are asked to manage. By programs we're talking about management of multiple preclinical studies, mostly toxicology, with supporting analysis in pharmacokinetics required for achieving a regulatory endpoint like first-in-man or a U.S. or international marketing permit.

In 2005 globally we worked on programs for over 165 new molecules and we expect that number to increase in '06. Our large number of highly trained scientific personnel, global capabilities, investigative and reporting expertise, and excellent relationships with clients make us an obvious choice to provide the critical testing required to support our clients' drug development efforts.

We were very pleased that one of our large biotechnology clients selected Charles River as their preferred provider for Preclinical Services in '04. The original agreement was amended in the fourth quarter of '05 and now provides for additional services and dedicated space in our Nevada and Ohio facilities. The amended agreement is valued in excess of $10 million in '06 and we believe sales in subsequent years will be similar.

The dedicated space agreement capped a strong year for the Preclinical Services business. Our '05 preclinical performance was particularly gratifying in view of the fact that we successfully integrated Inveresk, the largest acquisition we've made in our history. Strong sales growth and a focus on operating efficiency resulted in a fourth-quarter non-GAAP operating margin of 20.1% compared to 18.3% in the fourth quarter of '04. And for the year we achieved an operating margin of 21.9%, a 450 basis point gain year-over-year.

We did experience a reduction sequentially in the preclinical operating margin in the fourth quarter of '05 of 390 basis points. The 53rd week was the primary cause and foreign exchange and higher operating costs also contributed. Tom will provide further detail shortly.

We're very excited about the new 400,000 sq. ft. facility in Massachusetts. As you know, we purchased an existing building in order to reduce the amount of time that would be required to bring the facility online. Construction is well underway to build out the first phase of what will be a state-of-the-art facility. We believe that demand will continue to increase as Pharma and biotech companies increasingly view strategic outsourcing as an effective means to increase operating efficiency and speed time to market. So we have increased the size of the buildout to approximately 50% of the total space.

We are on track with the renovation and expect to open the facility in the fourth quarter of '06 and complete occupancy of this first phase in the first quarter of '07. Plans are also underway to open a second state-of-the-art facility in Nevada in '07. As we discussed at our investor meaning in December, we are under agreement to purchase a 300,000 plus sq. ft. building and expect to close on the property this quarter. Because we anticipated the purchase, we engaged the same architect and builder for both properties.

As a result, we expect to begin the buildout shortly after closing and occupy approximately two-thirds of the new facility in mid '07. The remaining shelf space in Nevada and Massachusetts will provide flexibility for future growth and potential dedicated space agreements.

While we buildout new facilities in '06, we will continue to add smaller amounts of capacity throughout our worldwide preclinical system. New study rooms will be coming online at the end of the first quarter in Edinburgh which will expand our capacity to take on new long-term studies in that facility. In the second quarter we will be adding space in two of our U.S. facilities to accommodate client demand. These expansions will support our expected low double-digit sales growth rate this year and position us to generate higher growth rates in '07 and beyond.

Based on our conversations with clients and market analysis we see no diminution of demand for strategic outsource services. With large facilities strategically located in North America and Europe, we will be extremely well-positioned to support our clients whether they prefer to work on the East or West Coast in the U.S., in Canada or in the UK. Our expanded facilities will require us to hire and train a significant number of new employees. In support of this critical effort we have developed a detailed plan that we believe will enable us to bring on the right number of people and ensure that they are sufficiently trained to perform and manage the increased work load.

Because the majority of our new capacity will come online towards the end of this year, and in order to minimize the cost impact, we expect to implement our hiring plan later in the year. As we expand our facilities and hire additional personnel we are maintaining a strict focus on operating efficiency and driving improving performance from our business units.

We are continuing to work with the consultants we engaged last summer to assist us with the implementation of a fourth-generation Six Sigma program and are well along the way to establishing the processes and metrics by which we will measure our success. We are currently focusing on operations, business development and sales management and are making excellent progress with the program rollout. The cost savings we expect to achieve are incorporated in our 2006 targets with a greater impact on the second half of the year. We will keep you updated as we move forward.

The Clinical Services segment reported fourth-quarter net sales of $32.8 million bringing the year to a total of $130.5 million. As a niche player in this space our goal for this business are therapeutic focus and margin improvement. Therapeutic focus is a necessity for us since as a smaller provider we believe we can provide the greatest value to our clients and improve our win rate by offering more technical depth in a limited number of specialties. And for a company like Charles River, which focuses on operating efficiency and margin growth, driving the clinical business to a margin of 20% is our goal.

Our focus on five key therapeutic areas -- oncology, ophthalmology, cardiovascular, respiratory and infectious diseases, enabled us to generate a large number of verbal awards in '05. As was the case throughout the industry, the time it takes us to convert a verbal award to a signed contract has lengthened, particularly in the U.S. We have not seen verbal awards won earlier this year convert as quickly as we had anticipated which was the primary reason we did not generate higher sales growth in '05.

Our European, or EAP, business performed very well in '05. The Phase I clinic, which focuses on first-in-man studies, reported slightly higher sales than in '04, an excellent accomplishment in view of the fact that following the European clinical trials directive U.S. clients did much less work overseas. As we've mentioned previously, our EAP sales force generated new business from Europe and Japan which resulted in a more diversified customer base. With the new business in the U.S. clients -- with that new business and U.S. clients now returning to our world-class space, one clinic in Edinburgh, we expect higher sales in '06.

EAP Phase II to IV business had a very good year; a higher rate of verbal awards combined with better conversion than in the states resulted in strong sales growth which we expect will continue in '06. In the U.S. we were not as successful converting awards to signed contracts. In order to help remedy the situation, we have hired a new vice president of global business development and expect to accelerate conversion of the large number of verbal awards we won in '05.

Our focus on improving profitability yielded an excellent improvement in the clinical operating margin in '05, more than 300 basis points to 15.3% compared to 12.1% in the first quarter of '05. We based our comparison on the first-quarter results because we owned the clinical business for only nine weeks in the fourth quarter of '04. Fourth-quarter of '05 operating margin declined to 15.5% from 18.7% in the third quarter; but as mentioned on the third-quarter conference call, the third-quarter margin benefited from favorable comps.

In the fourth quarter we made some administrative headcount reductions and reduced the amount of space we occupied in our Cary, North Carolina facility. These actions were intended to support continued margin expansion in '06. We are optimistic about our prospects for '06 in the clinical business. The focus on specific therapeutic areas has already improved our win rate for verbal awards worldwide.

We expect our success will continue as we enhance our reputation for trial management in these areas. The [aversion] to sign contracts in our EAP business is going well and we expect the conversion rate to improve in the U.S. We expect margin improvement to continue and believe that we will reach our goal of operating margins at approximately 20% in the next few years.

As you know, we've chosen to provide only annual guidance; seasonality and other factors may cause variation in our quarterly sales growth and operating margin rates, but on an annual basis we believe we will continue to generate net sales growth and improve operating efficiency which will drive earnings growth. Our focus on providing our customers with more products and services that support their drug discovery and development efforts has enabled us to drive double-digit sales and earnings growth for the last five years and will continue to do so in the long term.

As we said at our guidance meeting in December, we expect 2006 to be a year of intense internal focus as we build a larger preclinical infrastructure, add research model capacity and continue our focus on clinical margin improvement. We will invest between $175 and $200 million to build the two new state-of-the-art preclinical facilities in Massachusetts and Nevada and expand at some of our existing facilities. And to expand our research model facility in California to support demand for research models from biotech customers on the West Coast.

Although our larger preclinical expansions will not be opening until the end of '06 and '7, we still expect to generate organic corporate growth between 7 and 9% in 2006 which includes a 1% negative affect from foreign currency. FASB expansions will limit margin growth as we hire and train the large number of personnel required to staff new facilities. But we still expect to generate non-GAAP earnings per share excluding, among other items, the impact of 123R in a range between $2.46 and $2.52 or 7 to 10% over 2005 results.

In closing I want to say that overall 2005 was a very good year for Charles River. We experienced challenges but we addressed them with our customary focus on timely resolution and attention to operating efficiency. As a result we reported a year with sales growth above 46% and pro forma growth above 10%, significantly higher non-GAAP operating margins and preclinical and Clinical Services, non-GAAP earnings growth of 15.7% and a stronger balance sheet through repayment of debt and repurchases of stock.

As a larger more diversified company we have an increasing need for management talent to drive strategic growth, develop the best in class infrastructure to support our growth and maintain and enhance our operating and financial controls. Over the last year we have added critical positions in our businesses, operations and in corporate headquarters. Most recently a vice president and corporate controller, a senior vice president of corporate strategy and a senior vice president and chief information officer. We will continue to invest in and train new staff because we believe our employees are the key to our ability to deliver world-class products and services.

The successful acquisition and integration of Inveresk transformed us into a market leading company with the ability to support pharmaceutical and biotechnology companies' drug development efforts from early discovery through market approval. Our focus on our core competencies of lab animal medicine and regulatory compliance Preclinical Services, building a broad portfolio of high-quality value added products and services, and establishing a global footprint which allows us to serve clients wherever they may be has positioned us to support our clients as no other provider can. We believe this focus will continue to drive growth in 2006 and beyond.

I'd like to thank our 8,400 employees for their exceptional work and commitment and our shareholders for their continuing support. Now I'll turn the call over to Tom Ackerman.

Thank you, Jim, and good morning. I'm going to give you some free financial highlights from 2005. I'd like to begin by discussing the 53rd week in our 2005 fiscal year. We report our monthly results on a 4,4,5 basis with four weeks in the first two months of each quarter and five weeks in the last month. Since each quarter contains 13 weeks, this practice does standardize quarter-to-quarter comparisons. However, to true up to December 31st, the Company periodically reports a 53-week year with the 53rd week included in the fourth quarter. This was the case in 2005.

The 53rd week does increase the sales growth, but at a slower than normal rate because of the holidays. Costs during that week are generally constant, so the addition of the 53rd week causes margin erosion. That said, we believe our year-over-year performance was still very good. Backlog was 448.2 million at the end of the fourth quarter, an increase of 17.1 million or 4% from the third quarter of 2005. Our net new bookings were 183.9 million for the quarter compared to 164.6 million in the third quarter, an increase of 12%.

The net book to bill ratio has increased each quarter since we began reporting it in the first quarter of 2005 from 0.96 to 1.1 in the fourth quarter 2005. The increase demonstrates the strength that we have seen in our preclinical bookings during the year. The gross margin in 2005 was 38.2%, down slightly from 38.9% in 2004. The margin decline was primarily because of the higher percentage of services in the business mix which now includes more services revenue due to the greater proportion of preclinical and clinical sales. The decrease was also due to a decline in the RMS gross margin which was a result of lower TTS sales.

SG&A in 2005 was 189.5 million or 16.9% of sales compared to 121.4 million or 15.8% of sales in 2004. The key drivers of the increase in SG&A as a percentage of sales from last year were the fourth-quarter impairments in severance of 8.7 million, the 7.8 million compensation charge associated with the assumption of Inveresk stock compensation plan, our 2005 employee-restricted stock grant which resulted in an expense of approximately 7.6 million in 2005, 2.6 million charge associated with the acceleration of options, and expenses of 1.3 million to repatriate accumulated income earned outside the United States.

Unallocated corporate overhead, which is part of SG&A, increased 63% to 43.3 million in 2005, compared to 26.6 million in 2004, primarily for the same reasons I mentioned in SG&A. The GAAP operating margin for the full year 2005 was 16.1% compared to 20.9% in 2004. On a non-GAAP basis, the operating margin was 22.7% compared to 23.2% in 2004. The slight decrease year-over-year on a non-GAAP basis was primarily due to the higher percentage of services in the business mix in 2005, as a result of sales growth in the preclinical and clinical businesses.

The RMS GAAP and non-GAAP margins for 2005 were 31.8%, down slightly from 32% in 2004, due to a slowdown in the transgenics business as well as lower-than-expected sales in avian products, offset by strong research model sales in North America, laboratory services, and in vitro. The 2000 operating margin for Preclinical Services was 12% compared to 12.6% in 2004. On a non-GAAP basis, the operating margin was 21.9%, up from 17.4% in 2004.

The margin improvement year-over-year was due to higher global toxicology sales, better pricing and increased operating efficiencies. As Jim mentioned, the operating margin declined sequentially quarter to quarter. We had anticipated some erosion as a result of the 53rd week in the fourth quarter, but in addition, costs were higher in Canada both as a result of foreign exchange and additional period costs including property tax reassessments, costs associated with regulatory audits, and utilities. We are still very upbeat about our margins and expect to see upward trends in 2006.

In the Clinical Services segment, the operating margin for 2005 was 4.6% compared to 3% in 2004. On a non-GAAP basis, the 2005 operating margin was 15.3% compared to 12.1% in the first quarter of 2005. The operating margin increase over the course of 2005 was due to higher sales in European Phase II to IV businesses and better pricing and improved operating efficiencies in both the U.S. and Europe. We are extremely pleased with this margin as it demonstrates the success of our efforts to focus on selected therapeutic areas and operating metrics.

Net interest expense was $20.4 million in 2005 compared to $8.5 million in 2004. Year-over-year the interest expense increased due to our increased debt associated with the Inveresk acquisition and the deferred financing cost write-off in the fourth quarter of $2.2 million as a result of paying down debt associated with the repatriation. At the end of 2005 our debt was $296.1 million compared to $685.9 million at the end of 2004. In 2005 we repaid a total of $204.8 million of debt and converted our $185 million bond issue to equity.

To facilitate our repatriation of accumulated income earned outside the U.S., we amended our existing credit agreement in the fourth quarter of 2005 and we borrowed $90 million in Canada and Europe. Some of the proceeds were used to pay down debt in the U.S. The GAAP tax rate for the full year 2005 was 10.3% and the non-GAAP tax rate for the full year 2005 was 28.9%. The GAAP tax rate includes a benefit from repatriation completed in the fourth quarter of 2005.

The Company repatriated $148 million of its accumulated income earned outside the United States in a distribution that qualified for the reduced tax rate under the American Jobs Creation Act of 2004. At the time of the Inveresk acquisition in anticipation of repatriating Inveresk pre acquisition non-U.S. earnings, the Company recorded a $41 million deferred tax liability using its regular U.S. corporate tax rate of 35%.

As a result of the American Jobs Creation Act, repatriation and the decision not to repatriate the remaining pre acquisition non-U.S. Inveresk earnings, the Company recognized a onetime net after-tax benefit of 26.2 million or $0.36 per diluted share. The Company decided not to repatriate the remaining pre acquisition non U.S. Inveresk earnings due to increased demand for cash outside the U.S. to fund expansion of the Company's preclinical facilities and increased United Kingdom pension fund requirements.

On July 28, 2005 our Board of Directors authorized the repurchase of up to 50 million of common stock. On October 27th the Board increased the authorization to 100 million. Since that time we have repurchased a total of 524,400 shares under the authorization at a cost of $23.2 million. Net income was $142 million in 2005 or $1.96 per diluted share compared to net income of $89.9 million or $1.68 per diluted share in 2004.

On a non-GAAP basis net income was $165.8 million compared to $106.7 million in 2004, a 55.4% increase over last year. On a non-GAAP basis earnings per diluted share were $2.29 for the full year 2005 compared to $1.98 per diluted share in the same period 2004, an increase of 15.7%. Working capital in 2005 was $63.7 million, a decrease of approximately 97.5 million from 2004. The reduction in working capital was primarily due to the repayment of debt and the purchase of shares.

At the end of 2005 we had cash, restricting cash and cash equivalents of $117 million plus $20 million in short- and long-term marketable securities or a total of $137 million. Accounts Receivable were $203.3 million at the end of the fourth quarter, down slightly from the third quarter of 2005. Our DSO was 33, down from 38 days in the third quarter due primarily to focused collection efforts and an increase in deferred revenue associated with new business. We are delighted with this improvement.

Operating cash flow was $237.4 million in 2005, an increase of 28.5%. Capital expenditures were $96.7 million and free cash flow for the full year was $140.7 million. This is truly outstanding when you consider we integrated Inveresk, delevered our business and increased our capital expenditures. Depreciation was $44.3 million in 2005 compared to $29.5 million in 2004. Total amortization expense for 2005 was $58.2 million compared to $60.8 million in 2004.

And finally, some additional comments on guidance. As you know, we are reaffirming our GAAP and non-GAAP guidance today. Just to be clear, the GAAP guidance of $1.95 to $2.01 is consistent with the guidance we gave last December of $2.07 to $2.13. The difference between the two ranges of $0.12 stock option expense is related to the implementation of FAS 123R. Our non-GAAP EPS guidance for 2006 excluding 123$ remains at $2.46 to $2.52. Non-GAAP earnings exclude charges of $0.38 related to Inveresk amortization and $0.01 compensation charge as we continue to amortize the cost of Inveresk's stock compensation plan.

Including the effect of 123R, non-GAAP earnings per diluted share are expected to be in a range of $2.34 to $2.40. We currently expect foreign currency to have a negative effect of 1% on our 2006 sales when compared to 2005. However, we expect the impact to be approximately 3% in the first quarter of 2006 and slightly more in cost. That concludes our remarks. We'll now take your questions.

(OPERATOR INSTRUCTIONS). Christopher McFadden, Goldman Sachs.

Good morning, everyone. You've spent some time, Tom, talking about the impact of the week in the quarter. Is there any ability for you to give us an estimate of what you think margins would have been either on a consolidated basis or by line of business excluding the week -- particularly noting your Q3 comments over the nature of revenue growth in that extra week in the quarter?

And then, Jim, you talked in your prepared comments again about it sounds like an uptick in terms of some of the strategic opportunities that you're seeing in the marketplace. I'm struck by how much more total capacity both in Nevada and Massachusetts you're now planning for. What is your broad expectation for what the mix of that capacity utilization will be between traditional market and the more strategic types of opportunities you're seeing in the marketplace? Thank you.

It's a little difficult to clarify and, of course, it varies by business on the impact of a 53rd week, but on the overall corporate margins it will certainly be less than a percentage impact or 100 basis points in total. I think the biggest impacts are probably in the clinical margin because we're billing on charges incurred to our clients and to some extent also in the preclinical business. So the extent that people are not available due to the holiday periods, we're really not able to generate markups on the basis of hours incurred.

Similarly, in the research model business, we ship a live product in most cases and many of our clients are not available to receive those shipments. So as we, of course, talked about in the past, we generally see a huge slowdown in the last couple of weeks in the year, and given that the very last week was, of course, between the Christmas and New Years period it does slow down quite a bit. So the best answer I can give you is probably less than 100 basis points with a little variability between productlines.

Thank you.

Chris, on your capacity issue we are quite positive about the continued demand, excited about bringing on these two locations almost simultaneously. The proximity of them is quite important given the huge concentration of Biotech clients both on the East and the West Coast and a growing number of Pharma clients doing R&D on the East Coast. So that's hugely important. The mix is fair amounts of general tox with an increasing amount of specialty tox.

The Nevada facility is the world's leading facility in large animal toxicology and we'll be moving on to other species there. But we do a range of both general and specialty tox on large animals. The Massachusetts facility has dual capabilities as well. So that will add additional capabilities apart from what we're able to do in Montreal which has been heavily specialty tox.

And what do you think -- as a follow-up, what do you think the impact on '07 will be in terms of CapEx for the Nevada expansion that you're talking about here?

We haven't really given any guidance for '07 except to say that CapEx would likely be similar and we'll have to make a determination. As we indicated, we're going to finish two-thirds of the Nevada facility and a similar amount in the Massachusetts facility. And based upon the demand specifically to dedicated space and the overall interest of our clients, we'll determine how quickly we'll complete the rest of it.

We do have extreme -- extraordinary flexibility in being able to finish that pretty much whenever we want following the completion of the first phase and also to design it from a mix point of view with an emphasis either on specialty or general tox. So we're, for the first time, really happy to have not only substantial capability but to have a [proximate] on both coasts.

I understand. Thank you.

David Windley, Jefferies & Co.

Thanks for taking questions. Tom, I wanted to drill into the 53rd week a little bit more. If I'm looking at the preclinical segment in particular doing some rough calculations, it looks like your sequential increase in revenue did amount to about a week and was quite strong, but obviously gross margin dipped sequentially. And so it would seem to imply that the costs increased by more than a week. I guess you identified FX movements as one of the contributors and I presume that's a Montreal Canadian dollar effect. I wondered if there was any mix issue or anything of that sort fundamentally that might have also contributed to the very strong revenue but yet declines in both margin and absolute dollars of profit contribution?

We did look a little bit at the preclinical because obviously of the shift in margin from Q3 to Q4. And I would say the 53rd week was probably about a 100 basis point impact. As I said to Chris' response, with the people that are away for the holidays and things like that activity slows down a little bit. So we just don't generate the same revenue through that last week, even the last couple of weeks, but we've typically always seen a little bit of slowdown in the fourth quarter and I think this year it was a little bit exacerbated because of that. So I would say that that was about 100 basis points.

You're dead right on the foreign exchange. The Canadian dollar movement against the U.S. dollar where we bill our revenues in U.S. dollars and we saw with the higher exchange rate an increase in costs when we translate back to the U.S. dollar. So that accounted for some of the erosion also. And I did mention some period related costs as well. We didn't mention anything in mix; I think there were some subtleties in mix as well given the shift of businesses that we have -- not necessarily from site to site but just in terms of things like [bioanalytical] chemistry and areas like that where we do have different margin rates on some of our business.

I do think the shift contributed a little bit, but I don't think we're seeing any trends there that are pause for long-term concerns. And if you think about our backlog, our backlog is primarily a result of the toxicology work we're doing. The areas that may cause some mix generally tend to be shorter in backlog duration and more month-to-month short-term quarter-to-quarter activities.

Okay. So as you look at the backlog that stacks up for the preclinical business and visibilities not particularly long there I suppose by comparison to longer-term backlog businesses, but the mix of that backlog suggests a fairly consistent flow of business as to what you've seen in the recent couple of quarters?

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

And moving into RMS real quickly. Clearly the delays in orders for large animals that affected the third quarter came back very strongly in the fourth quarter. Is it possible to smooth that out for us and give us a sense of maybe magnitude and what a more normalized quarterly growth rate might be in that business?

Well, I guess the only way we could respond to that with how that business is doing overall for the year -- and it's similar I would say to our North American small animal model business where we are getting additional units each year and we're probably being a little bit more aggressive on the price. So year-over-year we're seen probably high single digit growth rate I would say. And as Jim talked about in terms of sales and availability, we're essentially selling all of our available inventory. I think given that there are less units involved and higher pricing we tend to see that little bit of fluctuation from quarter-to-quarter.

Okay. And then as a final question, in transgenics you've kind of described a cycle that you've seen play itself out in the U.S. and is continuing to -- and it sounds like you're beginning to see that cycle play out in transgenic services outside the U.S. In the U.S. you've been able to use that capacity for model production, but outside the U.S. growth rates in models are not so robust. Is outside the U.S. transgenic services going to begin to decline on a year-over-year basis as U.S. has, and will you be able to mitigate the margin impact by diverting capacity over to other uses like you have in the U.S.? Thanks.

The primary growth model is immunodeficient mice and we've seen that for multiple years in all geographical locales. Very strong in '05 and we would anticipate a continued trend just because of the value of that model. Like in the U.S., the space in France in particular and in a couple of locations in Japan are quite similar; both the staff and the space can be realized to produce immunocompromised mice.

So we do expect that the growth will moderate and probably decline at some point. They are smaller markets so we think the impact in the overall company will be less. But in any event we're quite confident we'll be able to transition it over. In fact, some of the space in France has already begun to transition over to that purpose. You'll see a pretty much identical trend and while, of course, we would prefer to both have a robust transgenic business and an immunodeficient mouse business, we're pleased to have the same type of capacity be utilized and be filled up rather swiftly.

Okay, thank you.

Eric Schmidt, SG&A Cowen.

A question for Tom. We obviously appreciate all the details on backlog and new bookings. Did you say, Tom, that you expect the book to bill to increase on a quarterly basis throughout the year? Has that been the historical trend?

I didn't say that. What I said is that it's increased -- book to bill has increased during 2005 and, of course, we've really only been recording backlog and bookings since the end of '04.

Do you expect that to be the trend going forward?

Not necessarily a quarterly sequential trend. I think we got off to a slower start during the year and I think we improved our activity during the year. So I'd like to continue to see positive bookings quarter-to-quarter. But I don't necessarily think there's anything seasonal thee that would lend itself to higher bookings later in the year as an example.

That's what I was asking about. And then maybe Jim could just comment on the environment for acquisitions, whether anything has changed there and what sorts of things might be of interest to you going forward?

I think you should think of '06 for sure and maybe '07. But short-term that we're having an intense focus on growing our business aggressively and organically given the demands of the market, given the amount of capital we're deploying to do that and given our expertise in a variety of areas. So first and foremost we're going to continue to stay focused on investing heavily in our facilities and growing them. And I think that while we're a little bit constrained in terms of our top-line growth this year because of lack of capacity, we have said that we anticipate the next couple of years to be growing at low double-digit rates, 11 to 12% on an organic basis.

So it's not essential to drive the top-line that we do acquisitions. I don't think it's essential from a portfolio enhancement point of view either except to say that there are some sub specialty areas in the services, perhaps some geographic moves in our service areas and always a sort of vigilance and examination of potential in vitro technology. So I think the environment is fine, although I think properties are expensive. I think there's a fair number of people out looking to buy companies and there is less of a strategic need for us to make any acquisitions of size at the moment than we've seen historically.

That's helpful. And one last question if I may. Can you just comment on the pricing environment in RMS and when in general sort of during the calendar year you typically take your price hikes?

Prices typically at the beginning of the year with sort of a month's notice -- we tend to be the price leader not just in terms of premiums to the competition but in some cases we do raise our prices earlier. We tend to have competition following us. We do have price playing to our '06 plan which is reflected in our guidance, both in our research model and preclinical businesses. I would say the pricing environment is somewhat favorable but the clients I think are watching their expenses closely and we're required to have conversations with many of them so they understand the rationale of doing that.

But I think people appreciate the quality of the services, the investment in facilities -- in the preclinical business, of course, we're making investments in facilities and staff in lieu of the clients doing it themselves. So we feel that price is both appropriate and that we're seeing a general willingness to pay it given the fact that they don't have to make the expenditures themselves.

Thanks a lot. Congrats on the nice quarter.

Frank Pinkerton, Banc of America Securities.

It's actually Jeff sitting in for Frank. Most of my questions have actually been answered. I think you guys might have touched on this already, can you give me your goals for operating margin in Phase III?

Goals for operating margin in Phase III, was that the question?

Yes.

We've never broken that out specifically and I don't think we'll start. Our goals for collective operating margin in the clinical business is to get to around 20%. So we've already said high teens to around 20%. There are a few companies that have been able to achieve that. While we're a relatively small player we don't think that scale is necessarily the key to margin enhancement. We've improved our margins 200 basis points in '05 and we anticipate improving them again in '06 both through better management of the business, focusing on key therapeutic areas, hopefully growing Phase I and IIa more aggressively.

So stay away from breaking it out by particular phases, but just to say that it's a business that we will be happier with if we're able to continue to drive the margin. And since Charles River has always been very much focused on margin improvement and able to achieve it, we're confident we'll be able to do the same with our clinical business.

Okay, great. Thanks.

(OPERATOR INSTRUCTIONS). Derik De Bruin, UBS.

Can you just give us some guidance on the timing of buyback? Is it going to be pretty consistent over the next few quarters?

We have a 10b5-1 plan out, Derik, which allows us to purchase a certain number of shares at certain strike prices. We have that in place. We intend to continue to execute according to that depending on the variability of the price. And I think we said that -- what were we saying -- the 100 million authorization would be over an 18 month period?

18 to 24 months.

So we'll do it in a -- like we have so far, in a measured fashion, as I said, commensurate with the price and in a way that doesn't disrupt the price.

I think it would be difficult, Derik, for us to give you a little bit more flavor of any kind of planned activity we had. So I think Jim's comments give you a pretty good sense generally about what we're doing for the next year, year and a half.

Okay. And what was the -- could you remind me what the tax rate guidance was for '06?

We pretty much said 29 to 30'ish if I remember correctly. So really not a lot different than what we had been estimating right along for '05, although we did end up a little bit more favorable than we though at the end of the year. So next year I think we had pretty much said 29 to kind of 30'ish.

Okay. And just one quick one. Why do you think some of the verbal commitments were taking longer to actually become -- to convert? And I guess also, how do you see just the overall environment and the orders?

The overall environment for verbal commitments is great and improving and I think that's a very positive sign. The delay in conversion to written orders is really an industry phenomenon and definitely not a Charles River thing. What's happening is that sponsors line up their clinical suppliers first and then they go and deal with the regulatory agencies and historically they did that in reverse to get their FDA protocols set and then they would find someone. I think that has to do with how fast capacity is being eaten up in the system.

Now having said that, we have a more effective and efficient organization in Europe. Some of that's historical. And we do have better conversion rates from verbal to written and we have better margins. We have better top-line growth as a result of that. So our U.S. organization is going to emulate that, they're going to work more closely together. We've got new leadership in the U.S. organization. And while we can't make huge strides in how the industry works, we can still be more focused on trying to get those conversions faster.

So we're confident we'll be able to do that. I think the overall environment continues to be robust from a demand quotient. While we're a relatively small player, we have a healthy proportion of our clients that are large Pharma and large biotech. So we play very well competitively from a quality of work point of view certainly in those [sides] -- key therapeutic areas. And while our margins not at the height -- top of the industry, they're close to it and they're improving nicely and we continue to feel that we can improve them going forward.

Paul Knight, Thomas Weisel Partners.

Jim, when do your comparisons get easier on a transgenic service segment? And then for Tom, what's your tax rate in '06?

When do our comparisons get easier? I wish we could predict that. Our feeling is that the demand is going to continue to decline at least for the foreseeable future and that would be for '06. I mean, it's baked into our guidance, as we said. We do think that the foreign locales will follow and there will be some diminution of demand over time offset by the utilization of that space for other purposes. We keep believing that it's moderated somewhat in that comparitorization process and re-evaluation process has taken hold with a lot of these clients and we hope that they'll maintain the colonies. We have no promises of that and it's difficult to tell how clients will sort these things out over time.

But an awful lot of money has been spent in creating these models. I think there is a hope that they'll generate some meaningful discoveries. I think they've begun to rationalize the colonies down to a point where hopefully they're leaving the ones that they think will be beneficial over time. We'll just have to watch it, Paul, and until and unless we get evidence otherwise, we'll continue to be realistically conservative in our estimates that there will continue to be a decline. But I don't think we've reached the point now where we're comfortable forecasting that we're going to see a reversal in that trend.

And Paul, the tax rate on '06 would be in a range -- non-GAAP in a range of 29 to 30%.

Okay, thanks.

Terri Powers, Robert W. Baird.

This is Terri in for Eric. I wanted to follow up on the facilities discussion, specifically the Massachusetts facility expected to open late in the fourth quarter. I believe at the December IR day you had suggested it would be early fourth quarter. Are you guys pushing that out and is that because you're going to build out a greater portion of the space initially? And when will revenue actually begin to flow from that?

We believe our comments are entirely consistent, in fact exactly what we said on the December call which is that it would open late in the fourth quarter and really substantially open. In other words, the first phase, which is 50% of the (indiscernible) will be completed and open for business in the first quarter. So the revenue will essentially be coming in the first quarter of '07 and maybe a small amount in '06. But it's more about when the facility will first open and when we'll begin to move into it. And obviously that enhances our ability to book orders and know what the demand is for the first quarter.

Okay, that's great. And then just a follow-up on the Edinburgh expansion expected in this particular quarter. Can you -- similar to Chris' question, what type of capacity is being added there and can you give us any sort of a quantification in terms of contribution to the overall segment or anything that you could provide there?

We haven't done that. This is a meaningful addition to that site, to our Edinburgh, Scotland site. And of course the clients are predominantly European over there, so this will allow us to enhance our capability to service that marketplace in a meaningful way.

John Sullivan, Leerink Swann.

Thanks for taking the question. This is actually Isaac Ro in for John. My first question would be regarding state of the Phase I clinical business. Just given some of the dislocations we've seen in the U.S. market recently, have you guys seen any impact to your business in the UK as a result of that? And then secondly, are you seeing any properties available for a Phase I clinical in the U.S. that you see (inaudible)?

Our Phase I clinic in Scotland is relatively small, relatively fully utilized and a lot of it is utilized with European and Japanese clients. Although there's an increasing percentage of work coming from the U.S. So I don't think we would notice it there. Since we don't have a Phase I facility yet in the U.S. where perhaps we could be feeling a benefit from some of the dislocation, as you call it, it's hard to know. I would say at this time the availability of additional properties, as you put it, is anecdotal and not real, so I think we'll just have to see how things sort out with some of the other companies in the field.

Great. And then secondly real quick, just on the good quarter you saw in in vitro. Are you seeing any competitive changes there or is it something else that benefited you in the quarter?

No, our in vitro -- the strength in our in vitro business really comes from the quality of our historical franchise where we always had a leadership position to the two other players. And increasing sales of our new handheld portable unit which, while we expect that -- the approval in the first half of this year, there are other uses that don't require a regulated device earlier on. So we're getting the benefit from having a piece of technology that the competition simply doesn't have at the present time. And certainly post FDA approval we anticipate that that will give us a distinct competitive advantage going forward.

Keith Markey, Value Line.

Thank you for taking my question. I was wondering -- can you give us the number of employees at the end of 2005 and approximately how much that will be changing in 2006?

Number of employees at the end of 2005 we think is around 8,400. I don't have a specific number in terms of what the change will be except that we will be adding people in the last quarter to staff Massachusetts as it comes on line; people have to be hired and trained in advance of when the space is really open. Then probably a quarter after that we'll be hiring people from Nevada. Obviously we continue to hire staff to fuel our current growth rates. And we'll continue to do that commensurate with those growth rates. I'm sorry I don't have a specific number, but we'll have meaningful additions this year.

Okay, thank you. And then if I could ask one more question. Could you give us a sense as to how you see the PTS use expanding?

Yes. Post FDA approval it allows a client to test medical devices and injectable drugs really earlier on in the process so they don't actually have to wait necessarily until final manufacturing. So we foresee clients having multiple units and using them regularly to try to anticipate and understand problems earlier in the process.

The other issue is that since it's really a platform to testing for bacterial contamination we will have other uses beyond endotoxin testing that we don't have now which significantly expands the market. We've said historically that we think it will increase the market by at least 4X of its current size. Again, since we have limited if any competition specifically in those domains we think it will be very beneficial somewhat at the end of '06 and certainly for '07.

And would like to make any closing comments?

You can turn it back over to me. Thank you.

Thank you, Ms. Hardy.

Thank you for joining us today. We look forward to seeing you soon either at our upcoming meetings in New York and Boston or at the UBS healthcare services conference on February 14th. This concludes the conference call.

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