Charles River Laboratories International Inc (CRL) 2006 Q1 法說會逐字稿

Good day, everyone and welcome to today's Charles River Lab International's first-quarter 2006 earnings conference call.

Today's call is being recorded.

At this time I'd like to turn the conference over to Vice President of Investor Relations, Ms. Susan Hardy.

Good morning and thank you for joining us on Charles River Laboratories' first-quarter 2006 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 divestiture of the Phase II to IV clinical business, first-quarter results, strategic initiatives and revised 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 888-203-1112; the international access number is 719-457-0820.

The pin number in either case is 118-6754.

The webcast will be archived on our website until May 30th.

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 14, 2006 as well as other filings we may 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 measures helps investors to gain a meaningful understanding of our core operating results and future prospects consistent with the manner in which management measures and forecasts the Company's performance.

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

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

Now I'll turn the call over to Jim Foster.

Good morning.

We have a lot of ground to cover this morning, so I'll start by commenting briefly on the first-quarter results.

Although our sales and earnings were not what we would have liked, much of the shortfall was driven by a continuation of issues we've previously discussed.

In the RMS we've seen the transgenic market climbing faster than we anticipated, lower vaccine sales and timing issues related to the shipments of large animals.

Last year we implemented actions to mitigate the effect of the transgenic and vaccine issues on operating profit through headcount reduction, facility consolidations and cost reduction activities and we are implementing additional actions now.

In the preclinical segment we are encouraged by the fact that our toxicology facilities are full and we continue to win new studies on the strength of our performance.

Challenges in this segment have been primarily due to capacity constraints, some isolated study delays, the cost structure in certain locations which we've now addressed, a slow ramp in our discovery services business and Interventional and Surgical Services, or ISS, which we are closing.

We expect that taking actions to consolidate some of our smaller facilities within RMS and reduce overall cost structure will have an immediate effect on our operating efficiency.

We expect those efficiencies to be positively reflected in our second-quarter financial results.

I'll give more detail on the first quarter and guidance shortly; but in our view all of the issues which affected first-quarter performance have either been dealt with or are in process.

We do not believe the first-quarter results were reflective of the quality or financial strength of the Company and we expect results to improve for the balance of the year.

You already know from the press release that we have entered into an agreement with Kendle International to sell our Phase II-IV clinical business.

This decision is the result of lengthy consideration about the optimal strategic direction in which we should move the Company.

It has long been our stated goal to provide a broad portfolio of essential products and services that supports our customers from discovery through market approval and to do so by leveraging our core competencies in veterinary medicine and regulatory compliant preclinical services.

After careful evaluation we have decided that while the Phase I business is currently an integral part of our European preclinical development process, the balance of our clinical business is not capitalized on our core competencies.

Furthermore, our scale is insufficient to compete as a first-tier player as we do in our RMS and preclinical businesses.

It's our belief that monetizing the Phase II-IV clinical assets and redeploying the resulting cash in those businesses where we have already established ourselves as market leaders would be more beneficial for our long-term business, our customers and our shareholders.

As we mentioned in the press release, we will be closing our remaining ISS facility in Massachusetts by late '06.

While ISS does capitalize on our core competencies, market demand is cyclical and customers often do not require GLP-compliant studies.

With a realigned portfolio of high-end essential products and services and a leaner cost structure, we expect to enhance our ability to support our customers in their pursuit of drug discovery and development to improve human and animal health.

We're making significant investments across the spectrum on our business from expansion of production space and preconditioning services and the PTS in our RMS segment to the addition of major facilities in Massachusetts and Nevada to capitalize on opportunities in our preclinical services business.

We believe that these investments, all of which leverage our core competencies, support our goal to build a larger, more profitable business.

The opportunities we see in those businesses are exciting.

We are more convinced than ever that forward integration into our customers' space is the key to better supporting their needs while ensuring our continuing growth.

For example, consider the fact that one out of every two research models sold globally comes from Charles River.

Many of those models are preconditioned in some way prior to being used in studies.

Today we provide preconditioning services such as surgery or feed or aging studies to some of our clients, the clients do most of the required preconditioning in-house.

Just as is the case with our preclinical business, we're seeing more clients look to drive efficiencies and speed time to market through strategic outsourcing of services around their research models.

We estimate this global market opportunity to be well in excess of $500 million.

Although we are starting from a small base, our preconditioning services business is growing rapidly and we expect strong growth to continue as we invest in new capacity to accommodate the growing demand.

There are opportunities in model production as well.

We are doubling the size of our West Coast research model facility in order to enhance local product availability and services in the California biotech corridor.

Demand from these customers for models and services is growing and we've been supporting that demand in product from other U.S. facilities.

At this point we want to scale up the facility in California which, in addition to allowing us to better serve the West Coast market, frees capacity in our other U.S. facilities to support growth elsewhere.

Our California expansion is on track and will be operational by mid '07.

We believe that the PTS, our portable testing platform for endotoxin detection, is the first significant advance in endotoxin testing and currently has no viable competition.

There are some new technologies on the market, but none that offer the portability, flexibility and ease-of-use as the PTS does.

We've often mentioned the fact that once the PTS receives FDA approval, which we still expect this quarter, the core market for our endotoxin testing products increases to 200 million from 50 million.

The increase is due in part to expanded uses which are enabled by the PTS' portability, fast analysis capability and ease-of-use.

At 200 million the market size does not encompass other uses for the product outside the scope of endotoxin testing in pharmaceutical, R&D and manufacturing.

Over the long-term using the PTS platform we will be pursuing the development of test cartridges for yeast, molds, proteins and other contaminants which can be sold to existing PTS users and new customers.

In addition, we intend to develop PTS products to measure environmental contamination which could be used a broad range of applications including food packaging, air quality and hospitals and additional products for clinical diagnostics.

These product extensions could double our potential market opportunity.

We are focusing resources on the in vitro business because we believe it affords us a significant avenue for growth.

Our investment in our new preclinical facility is predicated on the assumption that pharmaceutical companies will continue to increase the amount of work they outsource.

As Pharma continues its quest to find more operating efficiencies while increasing the number of compounds in the pipeline, they are increasingly using strategic outsourcing to accomplish their goals.

There are number of reasons why this is so -- first, because it's expected to build and maintain large facilities when they don't run large enough volume of studies to amortize the cost; and second, because they don't develop the same level of expertise we do.

We've run thousands of studies for hundreds of clients and as a result have particular expertise in complex areas such as infusion and inhalation toxicology.

With new drugs which require more high-end safety studies the experience to develop protocols and interpret results is critical and we can provide that expertise to our clients.

Given the number of opportunities for growth in our core markets we continue to believe that our long-term corporate performance targets are achievable.

Those targets are sales growth of 11 to 12%, earnings per share growth of 14 to 15% and operating margin of 25%, steadily improving returns on invested capital and strong cash flow generation.

Combined with strategic acquisitions and share repurchases we believe we will enhance our position as a market leading company with unparalleled ability to support our customers' drug development efforts and at the same time build value for our shareholders.

At this point I'd like to recap the quarter and discuss some of our strategic initiatives in more detail.

First-quarter net sales were $284 million, an increase of nearly 4% over the first quarter of last year; in constant currency the growth rate was nearly 7%.

On a non-GAAP basis operating income for the quarter was $55 million and the operating margin was 19.4% compared to $62 million and 22.5% in the first quarter of last year.

The implementation of 123R, which cost $3.6 million in the first quarter, was the largest contributor to the decline.

The RMS and preclinical operating margins declined due in part to 123R and also the issues I've discussed.

On a non-GAAP basis first-quarter earnings per share were $0.50 compared to $0.55 per share in the first quarter of '05.

On a comparable basis, if 123R had been implemented in '05, first-quarter '05 non-GAAP earnings per share would have been $0.49.

The RMS segment grew 1% in the first quarter but, when excluding foreign exchange, it actually grew 4.7%.

Sales of research models in North America, our largest market and the most significant portion of our research model, sales were strong.

And sales of research models in France and Germany, our two largest European markets, also improved.

Continuing the trends we saw throughout '05, sales of various growth strains used for research on bioterrorism agents increased as did sales of immunodeficient strains.

Immunodeficiency models are especially in demand as the model of choice for drug research in cancer and infectious diseases.

We are extremely well positioned to support the increasing customer demand due to our wide variety of immunodeficient strains and availability of these strains in strategic locations such as East and West of the United States and in Europe and Japan.

The in vitro business was also a strong performer in the first quarter.

With reported sales growth in the midteens and in the high teens when excluding the effects of foreign exchange.

The primary sales driver was a demand for endotoxin test kits both in the U.S. and Europe and sales of the PTS.

There were two product areas which had a negative effect on the RMS segment, vaccine products and large animals.

The vaccine business was up moderately in the U.S. but declined in Europe where concerns about avian flu reduced the demand for poultry and the associated needs for poultry vaccines.

As we've said before, we expect this business to move sideways in the near-term and have begun the closure of two small facilities in order to right size the cost structure.

As for the large animal business, sales in the first quarter of '06 were lower than in the first quarter of '05.

This is not a function of demand since most of the animals are already purchased.

The variability of sales from quarter-to-quarter is solely a function of the timing of customer shipments.

The third area which affected the quarter's results was the services business.

On the positive side sales of preconditioning services gained ground primarily due to strong sales of surgery services.

However, the transgenic services business continued to restrain growth.

Although the European business reported good sales gains excluding foreign exchange, it was not sufficient to offset the continuing decline in the U.S. and a small decline in Japan.

U.S. sales were below our expectations for the first quarter, but the rate of the U.S. sales decline appears to be flattening with monthly sales maintaining approximately the same level over the last six months.

While we don't see a near-term catalyst to drive growth, we believe that with more level sales the business will be less of a drag on the segment growth rate.

Furthermore, the U.S. business began to decline significantly in the second quarter of '05, so our comparisons should ease in the second half of this year.

Higher volume generated an increase in operating margins for North America and Europe research models and in vitro products.

But as a result of lower services, large animal and vaccine sales and the implementation of FAS 123R the segment's operating margin declined to 31.4% from 33.1% in the first quarter of '05.

As I said earlier, the large animal business is a function of timing and we expect to report full-year sales and profit growth.

To mitigate the effects of the transgenic business we are continuing to reduce headcount to consolidate management structure which we expect will yield margin improvement beginning in the second quarter.

Combined with the closure of the vaccine facilities we expect to maintain operating margins in the low 30% range -- where we believe we can achieve through a combination of topline growth and more efficient operations.

The preclinical services segment reported sales growth of 7.4% for the first quarter or 9.1% excluding the effect of foreign exchange.

The GAAP operating margin was 9.9% compared to 11% last year and the non-GAAP operating margin was 16.5% compared to 20% in the first quarter of '05. 123R cost was a significant factor in the margin decline accounting for 1.6%.

Capacity constraints moderated the segment's growth rate and the ISS businesses negatively impacted both the sales growth and operating margin.

Excluding ISS the segment's growth rate would have been 8.8% compared to 7.4% and the non-GAAP operating margin would have improved 110 basis points to 17.6%.

Excluding the effects of foreign exchange the sales result is better still.

The segment's growth rate excluding ISS and foreign exchange would have been 10.7% compared to 9.1%.

The non-GAAP operating margin would have been 18.8% including the impact from 123R.

We're not happy with the margins at this level and, as I mentioned, are taking immediate action to improve the situation.

Between the closure of ISS and a small operating unit in Ireland and cost reduction actions we expect to see improvement beginning in the second quarter this year.

Demand for outsourced toxicology services continued to be very strong with our facilities operating at or close to capacity.

With the exception of Massachusetts and Pennsylvania all of our major toxicology facilities reported double-digit sales increases over the first quarter of '05.

We did experience some study delays in the first quarter in Pennsylvania where we do more long-term reproductive toxicology studies.

These studies are more expensive and generally are performed while the drug candidate is in late clinical development.

As a result reprotox studies are prone to last minute delays and when our capacity is tight rearranging schedules is more challenging.

But studies are also higher margin so delays disproportionately impact the operating margin.

Lack of toxicology capacity also restrained growth, though we expect growth to continue in the second half of '06 when we open a limited number of new study rooms in our new facility and certainly when the first portion of our new Massachusetts facility is fully open in the first quarter of '07.

A significant proportion of the services provided at the current Massachusetts facility are for discovery support including metabolism, pharmacokinetics and pharmacology which assist customers with a process of drug candidate selection.

Based on strong demand last year and our expectation that the business would increase in '06 we expanded our staff to accommodate a larger volume of work.

First-quarter sales were light which pressured the operating margin.

We expect both the sales and operating margin to improve in the second quarter based on customer indication and a more focused sales effort.

We're very pleased with the sales growth in our Montreal facility which, owing to new capacity brought online in April of '05, was in the mid teens range.

The operating margin declined due in part to the strengthening Canadian dollar, but also to increased headcount associated with rapid growth.

As part of our Six Sigma initiative, the goal of which is to improve operating efficiency, our Montreal facility instituted a complete evaluation of the operations to assess process improvements without adversely affecting either quality or customer service.

This evaluation resulted in meaningful headcount reductions primarily in administrative and support areas.

Combined with continuing net sales gains the resulting operating efficiencies should significantly improve operating margin beginning in the second quarter of this year.

I'd like to provide an update on our preclinical facility expansion.

The buildout is continuing at our new Massachusetts facility where we are moving towards our expected late fourth-quarter occupancy date.

We have teams working on construction facility validation, staffing and transition planning all of which are focused on meeting our time frame.

We are very excited about this new facility and the capacity it gives us to meet the increasing demand for outsourced preclinical services from Pharma and biotech companies.

I'm also very pleased to announce that on March 13th we purchased an existing 300,000 sq. ft. building in Reno, Nevada.

Teams are working on the planning process for that location where we expect to build a mezzanine which will bring the square footage to 450,000 ft.

We've leveraged our investment in Massachusetts using the same architect, builder and product (sic) manager to develop this facility.

As a result we expect to occupy approximately 60% of the building on schedule in mid '07.

We are extremely pleased to have purchased these two facilities and look forward to the business expansion opportunities they provide.

Our discussions with customers concerning their long-term plans confirm our belief that the market for toxicology services will continue to increase as Pharma and biotech companies increase the volume of services they outsource to full service providers like Charles River.

We have already booked studies into new capacity which has just opened in Edinburgh and expect to be premarketing the new Massachusetts facility in late summer.

With significant new capacity coming online in Massachusetts and Nevada we look forward to expanding program management and dedicated space arrangements.

We expect that these sales growth opportunities combined with a more efficient operating model will drive a higher level of sales growth and operating profit for the preclinical services segment.

The clinical services segment reported first-quarter net sales of $32.3 million compared to $31.7 million in the same period last year.

Our Phase I clinic in Edinburgh had a very strong quarter.

You may recall that the European clinical trials directive depressed sales in the first quarter of '05, and that we implemented initiatives to target new customers in Europe and Japan to offset the loss of U.S. customers.

In the first quarter of '06, with the eCTD behind us, our Phase I clinic benefited from the return of U.S. customers and new business from Europe and Japan as our sales efforts continue to pay dividends.

As a result of the goodwill impairment charge, the clinical segment reported an operating loss of $127.4 million for the first quarter of '06. non-GAAP operating income was $4.2 million with an operating margin of 13.1% compared to $3.8 million and 12.1% in the first quarter of '05.

The primary driver of the non-GAAP improvement was our Phase I clinic where higher net sales drove the margin performance well above the 20% range.

The U.S. operating margin also improved as a result of actions that we took last year to streamline the operating infrastructure.

The margin improvement was offset in part due to the cost associated with the implementation of 123R.

As a result of the divestiture of Phase II-IV business, the Phase I business will become part of our preclinical services segment where it will enhance the drug development services we can offer to our customers.

As a result of the actions we are announcing today we have revised guidance for '06.

Our revised sales and earnings guidance are based on continuing operations which exclude the Phase II-IV clinical and ISS businesses and reflect the lower-than-expected first-quarter results and the anticipated benefit of the strategic initiatives we're implementing.

We now expect that sales growth from continuing operations for '06 will be in the range of 6 to 8% as compared to our original guidance of 7 to 9%.

RMS sales are expected to grow in mid single-digit rates and preclinical services at low teens rate which is in line with our earlier estimates.

For 2006 the EPS range including the impairment charge is expected to be a loss of between $0.09 and $0.15 compared to original earnings guidance of $1.95 to $2.01.

On a non-GAAP basis the earnings range is expected to be $2.12 to $2.18 per share compared to our original guidance of $2.34 to $2.40 per share.

Strategic initiatives will improve our operating efficiency in the balance of the year, but we do not anticipate making up the first-quarter shortfall.

One of the keys to strengthening our operating margin is our Six Sigma initiative.

We view this initiative as the next phase of our Inveresk integration since it requires the valuation of processes at all of our facilities and identification and implementation of best practices.

After nearly a year of planning and implementing the initiative we have made great strides.

In fact, the strategic initiatives we announce today are derived from efficiency opportunities identified by the project team.

We continue to move forward with the Six Sigma initiative and believe that there are more benefits to be derived.

Our pursuit of operating leverage is not just focused on discrete cost reductions.

We are continuing to invest in infrastructure because we believe that by enhancing our operations we will improve our ability to provide service to customers while increasing our operating efficiency.

Over the past six months I've mentioned new senior management positions at Charles River, all of whom are focused on process improvement and strategic initiative.

The latest addition to our team is Nick Ventresca, Corporate Senior Vice President Information Technology and Chief Information Officer.

Nick joined us from Pfizer where he was Vice President in Business Technology.

His focus will be two-pronged.

First, to enhance client interface so that data is available whenever and wherever they need it; and second, to promote IT as a strategic advantage, changing traditional solutions into competitive advantages.

We're very pleased to have Nick on board.

In conclusion, I want to tell you that the actions we are announcing today from the divestiture of the business to building infrastructure are targeted at the same goal -- to build a larger, more efficient and more profitable Charles River that never loses sight of its core competencies or its goal to provide the best products and services to customers.

The successful acquisition and integration of Inveresk transformed us into a market leading company with the ability to support pharmaceutical and biotechnology company's drug discovery and development efforts as no other company can.

We intend to maintain and enhance that position and by doing so continue to drive growth in 2006 and beyond.

I'd like to thank our 8600 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.

Let me start by summarizing our sales and the corrective actions we are taking.

In the first quarter of 2006 net sales grew 3.7% to $283.3 million from $273.7 million in the same period of 2005.

Sales in the first quarter were negatively impacted by both unfavorable foreign exchange rates and by the slowdown in the ISS business.

On a constant currency basis sales growth was 6.7% and constant currency, and excluding Phase II-IV clinical and ISS, sales growth was 8%.

Several factors contributed to the lower-than-expected sales growth.

In RMS the continuing decline of transgenic sales, a decline in vaccine sales and the timing of shipments of large animals negatively impacted the segment.

In the preclinical segment lower sales in ISS, study delays in Pennsylvania and discovery services contributed to the decline.

The key drivers of lower operating income were as follows -- in RMS transgenic sales, negative foreign exchange on sales in Japan, timing of large animal shipments and vaccine sales.

In the preclinical segment it was lower sales in ISS, study delays in Pennsylvania, and a slow ramp in discovery services along with higher than expected costs in Montreal and the impact of foreign exchange especially in Montreal.

Given the strength of the Canadian dollar we expect that foreign exchange will continue to be an issue in Montreal.

To reduce the impact of the lower sales and improve our margins we implemented several initiatives to reduce costs.

These actions were generally targeted at underperforming areas and are not expected to impact sales or support.

The total cost of these actions, all of which will be recorded in the second quarter of 2006 is expected to be $7.2 million.

As a result of these actions we expect to achieve savings of approximately $16 million in 2006 weighted towards the third and fourth quarters and additional savings in later years.

In the RMS segment we are closing two small vaccine facilities.

The cost of the closure is $1.9 million; the savings in 2006 will be approximately $0.3 million.

In addition, we are continuing our efforts to right size the transgenic business and improve operating efficiency with headcount reductions and management consolidation.

There will be a small charge of $0.1 million associated with these actions and savings will be approximately $0.9 million in 2006.

In the preclinical segment we will close the ISS facility in Massachusetts and a small operating unit in Ireland which provides similar services and record a charge of $3.2 million.

Savings will be approximately $2.4 million in 2006 which includes the benefit from selling our Wisconsin facility -- recently we sold that property to private investors.

In Montreal costs associated with the headcount reduction are expected to be $1.8 million while savings will be approximately $4 million in 2006.

In our (technical difficulty) facility we have implemented a headcount reduction and other cost savings resulting in a charge of $0.2 million and savings of $1.7 million in 2006.

In total we have reduced headcount by approximately 175 positions.

To further support the Company's goal of operating efficiency, cost savings initiatives will be implemented at the corporate level.

There will be no charge associated with these actions which include selective headcount freezes, cuts in discretionary spending, an adjustment of equity and incentive compensation for savings of $6.7 million in 2006.

In the first quarter we implemented FAS 123R at an expense of $3.6 million.

In compliance with the new accounting standard we allocated the expense to the business segments which affected both the gross and operating margins at the segment level.

Approximately 60% of the expense was allocated to the operating units and the remaining 40% is unallocated corporate expense.

Had 123R been implemented in the first quarter of 2005 there would have been a charge of $6 million.

In order to get the allocation of both the restricted stock grant and stock option expense under 123R we have included a reconciliation in the appendix to the slide presentation which you can also find on our website.

Last year the restricted stock grant was expensed, but was accounted for completely in unallocated corporate overhead.

Consistent with the accounting for 123R the portion of the restricted stock grant expense which relates to business unit employees is now reported in the appropriate segment.

In the first quarter of 2006 our non-GAAP operating margin was 19.4% compared to 22.5% in the first quarter of 2005, a decrease of 3.1%.

On a pro forma basis, factoring in the costs associated with 123R in the first quarter of 2005 the non-GAAP margin in the first quarter of 2005 would have been 20.3%.

In the first quarter of 2006 the non-GAAP EPS was $0.50 compared to $0.55 in the first quarter of 2005, a decrease of $0.05.

On a pro forma basis factoring in the costs associated with stock option expense, EPS in the first quarter of 2005 would have been $0.49.

Let me shift to some items below the operating line.

As a result of the pending sale of Phase II-IV clinical business we assessed the goodwill assigned to the clinical segment.

Based on management's estimate of fair value, which includes the projected sale price, we determined that impairment existed.

As a result, we recorded an impairment charge of $129.2 million in the first quarter.

The impairment is not deductible for tax purposes.

Net interest expense was $2.9 million in the first quarter of 2006 compared to $6.3 million in the same period of 2005.

Year-over-year interest expense decreased primarily due to a lower level of debt.

Primarily as a result of the impairment charge the GAAP tax rate for the first quarter was a negative 13.7%.

Excluding the impairment and charges related to the Inveresk acquisition, the non-GAAP tax rate for the first quarter was 29.8%.

While continuing operations, we estimate both our full-year GAAP and non-GAAP tax rates will be in a range of 29 to 30% which does not include the impairment.

At the end of the first quarter we had cash, restricted cash and cash equivalents of $103.8 million plus $6.3 million in short and long-term marketable securities or a total of $110.1 million.

Accounts Receivable were $201.1 million at the end of the first quarter, down slightly from the fourth quarter of 2005.

Our DSO remained flat at 33 days in the first quarter of 2006 when compared to the fourth quarter of 2005.

Operating cash flow was $0.3 million in the first quarter of 2006 versus $31.9 million last year.

The key drivers were income tax payments and increases in prepaid expenses, accrued compensation and other miscellaneous items.

Capital expenditures were $39.6 million versus $12.4 million last year.

As a result of lower earnings expectations we anticipate that free cash flow for 2006 will be in a range of $50 to $75 million.

Depreciation rose slightly to $11.4 million from $11.1 million in the first quarter of 2005 and total amortization expense was $11.2 million compared to $14.4 million in the first quarter of last year.

As you know from the press release and Jim's comments, we are providing guidance for 2006 on a continuing operations basis which takes into account the divestiture of the Phase II-IV clinical business and the closure of ISS.

In addition to those business changes, our revised guidance reflects the lower-than-expected first-quarter results.

We will be reporting the Phase II-IV clinical business and ISS as discontinued starting in the second quarter at which time we will provide historical information.

As a result our full year 2006 results from continuing operations were reduced from our previous estimates by approximately $0.20 per share.

The dilution from the sale of Phase II-IV clinical business will be partially offset by approximately $0.05 per share as a result of stock repurchases we intend to make with the sales proceeds.

This results in a net impact of $0.15 per share.

The benefit associated with the repurchased shares will be limited in 2006 based on the timing of the close, but will have a full-year affect in 2007.

We will also be impacted by lower-than-expected first-quarter earnings of approximately $0.07 per share.

The strategic initiatives we have implemented will offset the sales softness in certain businesses and, as a result, we expect the consolidated operating margin to be in a range of 22 to 23% on a non-GAAP basis including 123R.

Our revised EPS guidance for 2006 is a loss of $0.09 to $0.15 on a GAAP basis and earnings of 212 to 218 on a non-GAAP basis.

We anticipate sequential sales growth from Q1 to Q4 principally from the preclinical services segment.

We also anticipate operating margins increasing sequentially particularly in the second half of 2006 based on the sales growth and the timing of the cost savings.

Consistent with the margins we expect sequential EPS growth more so in the second half of 2006.

For the full year including 123R we expect the RMS and preclinical operations to be similar to down slightly compared to 2005.

The Board approved an increase in our repurchase authorization to 300 million of common stock.

We intend to purchase shares opportunistically from time to time on the open market through block trades or otherwise in compliance with rule [10b18] of the federal securities laws over a period of 12 months.

Our revised 2000 EPS range is based on the expectation that there will be approximately 70 million shares outstanding by year-end.

That concludes our remarks.

We will now take questions.

(OPERATOR INSTRUCTIONS).

Chris McFadden, Goldman Sachs.

Good morning.

Firstly, I was hoping I could just ask a couple of clarifying questions relative to your guidance.

First, on shares, Tom, you mentioned that you're using about a 70 million share count.

I just want to clarify -- that assumes the use of proceeds from the Phase II-IV divestiture is converted into share repurchase?

Does that also assume additional share repurchase as has been authorized concurrent with the release this morning?

And then related to guidance, on page 29 of your presentation you went through a couple of anticipated benefits, $2.4 million ISS, $4 million in Montreal, etc.

Are the benefits also embedded in new continuing operation EPS guidance that you provided?

Thanks.

Yes.

On the share repurchase, Chris, we will repurchase shares on the open market primarily with the use of proceeds and target a 70 million share number by year-end.

So it will obviously take us a little bit of time to get there.

We don't anticipate a closing on the transaction until mid third quarter.

And I think opportunistically we'll also look to continue our program of open share purchases at the same time and make evaluations on that.

But based on the numbers that we provided primarily the change in the share count that you'll see is more in line with the proceeds from the transaction at this time.

And I think your second question about the cost savings initiatives, yes, those are embedded into the improvements in our EPS guidance that we just reflected.

Okay.

And then on follow up -- this is not the first call that we have talked about the large animal business and some of the quarter-to-quarter lumpiness.

And I guess I want to phrase the question this way -- you have a competitor in the market that also is in the large animal business.

They have had what appears to be much better consistency which seems to speak largely to supply as opposed to market demand.

Is there anything about your animal business operationally in terms of your relationship with the suppliers, regulatory or any other matters that perhaps our affecting how the performance in this business has been and if so, could you expand on those?

And then I guess if not is there any other clarity you can bring in terms of what appears to be some disparity in the performance in the segment?

Thanks.

We don't think that our relationship with ours supplier is causing any of the variability.

It's a long-term relationship that we've had probably for a couple of decades now, we're very close to these people and we are their exclusive channel to distribute these animals and always have been.

I think that the process is actually similar between us and the other folks -- the same quality animals coming from the same island.

The variability would come really based upon client's needs and both their ordering patterns but more importantly the patterns by which they take the animals.

So as we said a couple of times on last year's call, what's most important to us is that we're able to price appropriately and sell all of the animals that we get really every year to a whole range of Pharma clients.

There's actually a fair amount of consistency amongst and between those clients in terms of their buying patterns and in the rare occasion that they change those we'll always able to find another client.

So again, animals are available.

They're spoken for.

In most cases they're acquired, invoiced and oftentimes paid for and are awaiting indications from the clients.

So you really have to take a look at the large animal sales sort of year-over-year to get a fair sense of it.

And quarterly variability is something that we don't really think is possible to smooth out, although it could get smoothed out based upon how readily the clients take the animals.

And so Jim, operationally there's nothing that you feel like the Charles River operation has not executed on that impacted some of this performance?

No, we have a very fine-tuned refined operation where we quarantine and condition these animals in Texas before they're sold.

So they're essentially state side when the clients take them.

So we're not really worrying about transportation or shipment issues, government intervention or any of those things that one would normally worry about.

I think that these animals are very high-value and in very short supply.

Clients are very careful about how and when they use them.

And they're also expensive to maintain in-house so they just simply will not and do not take possession of them until they need them.

Notwithstanding the fact that they've already paid us for them.

I understand.

And then finally, you've obviously indicated here that you feel like Shrewsbury is on track for Q1 of '07.

Operationally when do you internally make kind of the final go/no go decision in terms of the final ramp up in staffing, any final regulatory or other building permit or related activities that you can really begin to dial down even more exactly what the launch timeline is going to be for the facility?

Thanks.

I think our comments really indicate the fact that we are on track.

All systems are go on that project.

The construction process is quite aggressively being done and we're melding all of the various constituencies together to make sure that construction is going on simultaneously with validation of environmental systems, simultaneously with staffing.

We have a very robust staffing plan as you would imagine.

As I indicated, we'll begin to aggressively and heavily market that facility in the late summer and that means everything from tours to making the -- what the space looks like available to our clients with the goal of having them resident in the facility at the beginning of the first quarter and doing business there.

So we think we have sufficient time to do this in a thorough fashion.

It's important to have sufficient time in the schedule to train employees appropriately, although we have a lot of resident employees that will take care of the training as well.

So the preparations are going on simultaneously.

There's really nothing that we don't have approval for at the current time that we're waiting to get approval for that would either stand in the way of the process or slow it down.

Thanks for the detail.

Douglas Tsao, Lehman Brothers.

Good morning.

Just sort of starting at a high-level, obviously you're going to be selling Phase II-IV business.

I was wondering, is this -- as far as the sort of changes to the strategic portfolio or are there other potential businesses that you might consider selling?

Well, when we (indiscernible) the clinical business we were pretty clear about the fact that while it was not necessarily a business we had aspired to be in, we were happy to be in it and we were happy to live it from the inside out in terms of being on the field and actually playing.

I think we found that the business was undersized and had insufficient scale for us.

Obviously Kendle now has a larger scale and others in the field do as well.

So scale is an important element.

We're used to playing in the businesses in which we function at the highest level both from the research model business and the preclinical business.

And in order to stay in that business long-term we would have to bulk up dramatically and that would have to be done through a series of very long, complicated and expensive acquisitions getting to we're not sure what point, it's a highly fragmented market.

So we improved the business.

We learned it, we understood it, we dealt with the clients.

We bid on myriad proposals, some we won and some we loss.

It became clear to us that the strategic element of that business was really Phase I. So that's why we kept it, that's why we spun that off.

We have also indicated in this release that we're closing the remaining portion of our ISS, or medical [advice] and testing business.

We do that with some level of disappointment because from a strategic point of view it ought to be in a sweet spot.

It takes advantage of our core competencies in a really powerful way.

But there's really not much of a market there and we found it very cyclical and we're doing really high-end GLP-quality work and the market doesn't really need it.

I think the balance of the portfolio is strong.

There are some small pieces -- I'm not going to get too specific -- there are some small pieces that obviously don't have the growth rates that we would necessarily like.

Some of those businesses are strategic, have good margins, we're market share leader, they service our current client base and so we're happy with them.

As part of a portfolio they're likely to be businesses that we don't invest aggressively in.

We're going to but our emphasis primarily on preconditioning animal sales in our PTS business, in our preclinical business where we have really some dramatic growth opportunities.

Okay, thanks.

Then also you spoke a little bit about continuing to pursue phase one capabilities in the United States.

I was wondering if you could comment a little bit on how much scale you would want to have in the United States.

Would you be looking for something similar in size to what you have in Europe, or would you be looking at something potentially larger?

Obviously, our efforts in that area were [disarailed] by the process of divestment (indiscernible) to the core business, but we will get back to it.

Either are fine.

We have a relatively smalls scale in Scotland.

From a strategic point of view, it works very well in terms of helping to seed business opportunities in the preclinical business.

Having said that, I think we would like a larger scale than that.

And some of the assets that we have looked at previously were considerably larger.

So we will probably look for larger opportunities in the U.S. as well, and hope that we achieve the same sort of strategic pull-through that we are experiencing in Europe.

Finally, you reported single-digit growth in the Massachusetts facility for toxicology.

I was wondering -- which was below the growth rates seen in the other facilities, and I was wondering if there was any sort of color as to what was going on there?

What we said was that there is a lot of discovery work that is done in that facility.

That is very early-stage short-term work that helps the clients select lead candidates.

It was a very strong business last year.

We anticipate it will be strong again.

We staffed up in order to accommodate what we thought would be increased sales.

They were just lighter than we thought.

So nothing really dramatic there, and we think we'll be moving beyond it.

Just as a quick follow-up, what are the plans for that facility once the Shrewsbury facility opens up?

Well, the process of transitioning over time, as we don't need the space we'll vacate it beginning at the end of this year.

The absolute time frame for that really depends on what the market demand is and what other capacity we have.

So we'll take it out faster if we have capacity elsewhere, we'll leave it in longer if the client demand is there.

But our intention eventually is to only be in the new facility that we're constructing.

Okay, great.

Thanks a lot.

(OPERATOR INSTRUCTIONS).

Derik De Bruin, UBS Financial.

Good morning.

Looking at your longer-term outlook for the Company, when you're talking about approaching 15% EPS growth, do you see that being something you could obtain in '07 with the current share buyback plans in place?

Probably not that soon, Derik.

Those numbers are -- you're talking three-year snippets as we put together a three-year plan.

We feel quite confident given the growth opportunities and our investment in preclinical, in PTS and in preconditioning that we're going to get some solid topline growth there, which ought to be accompanied with the efficiency benefits of better, larger, more elegantly designed facilities as well as our Six Sigma initiative.

So we intent to get back to having accelerating earnings ahead of our sales.

We hope to begin to see the beginnings of that next year and I think that will play out over the next two or three years.

Okay.

And I guess given some of the ongoing difficulty there has been in forecasting different bits and pieces of the business, how much confidence do you have that given the fact that you're building out capacity that this time next year we're not having a conversation about capacity constraint but a conversation about excess capacity?

How much confidence do you have in your ability to forecast what the demand is going to be?

You're talking principally about preclinical --

Yes.

-- of course.

And our forecasting is very much dependent and related to the input that we're getting from clients from a demand point of view.

So we can see the consistent demand.

We're talking to clients about their use of internal space or lack thereof -- wanting to utilize our space in lieu of building their own or taking theirs out of commission, also continuing to have conversations with clients about dedicated space.

So we haven't seen any easing of demand.

In fact, I would say it's probably intensified as the pressures on our client base have increased.

A lot of this has to do with whether they feel that we and the other two or three large companies in the field are really serious about dedicating large amounts of very sophisticated space and hiring sufficient people so that they can comfortably give it up.

And I think that historically it's been resonant inside of these companies and they've actually had greater infrastructure than the CROs and I think that's begun to change.

So we're doing a lot of work with some very big pharmaceutical companies who are happy with the work and happy to be able to be doing it themselves.

So I think that the increased space actually helps the predictability, helps the forecasting, helps the relative certainty that clients will be comfortable in outsourcing if they know that the capabilities are there.

Okay, thank you.

Dave Windley, Jefferies & Co.

I'm remote so I apologize if it's not very clear.

Jim, wanted to get a sense for, in the preclinical business in particular, how staffing stability looks.

Are you running at fairly normal levels of turnover or has that changed at all recently?

Staffing turnover is certainly running at normal levels.

We're in the mode really of hiring a lot of people at all levels -- senior levels as well as technicians and study directors.

And I think as the facilities get larger I think our ability to recruit has actually been enhanced because it's become sort of a collegial thing where people want to be with other professionals.

We're finding our ability to recruit particularly out of Pharma and secondarily out of biotech I think has been enhanced.

So whatever turnover we're experiencing is sort of at normal levels.

Okay.

And then maybe drilling into that one step.

In terms of some of the specialty toxicology areas that you've acquired over the years and built out, are there any of those specialty areas where it's particularly difficult to get toxicologists as you enhance or add the capacity in inhalation or whatever it might be?

Not really.

But at the -- at the senior level not really; at the technician level it's all about internal training.

So we spend long periods of time ensuring that people are up to speed before they get put on study.

And that's going to be a scheduling and planning -- important scheduling and planning element as we ramp up Massachusetts and Nevada facilities as well.

So it's more about getting the people ready to do the work as opposed to having them already have the expertise when they come in.

Okay.

Speaking of tox, the Shrewsbury facility you commented is moving along.

In terms of Nevada -- and I did jump on the call late, I apologize -- but did you comment on whether Nevada has closed and is that progressing now from closure?

Yes.

Yes, we bought it in March using the same builder/architect to build it out, so we're picking up a lot of seed.

It's a very similar footprint, it's a large open shell, pretty much we can do with it what we want from a design and efficiency and kind of elegance point of view.

We'll be starting work soon and we intend to be in it sort of the middle of next year.

Okay.

In transgenic, obviously that's continuing to slide further than you thought it might a couple quarters ago.

What kind of reassessment of market demand are you able to do or are you doing as it relates both to the U.S. and to Europe and Japan as to when this downward slide in the cycle stops?

Very difficult to do, Dave.

The assessment is just a continual dialogue with clients.

I would say in that dialogue sometimes strategic decisions are made to change the way they move.

What we did say in our prepared remarks, which is quite important, is that we have had a stabilization of the decline.

While the decline is more severe than we had thought, it's clearly stabilized over the last few months in the U.S.

That's sort of contemporaneous with clients telling us that we should not expect any further decline.

Assuming that they're able to forecast their own needs that gives us some confidence that we've at least stabilized but there's no indication it's going to accelerate.

Europe's actually -- I'm not going to name clients, but it's dependent on a handful of large clients whose demand is actually up over the prior year.

We actually have increased sales in Europe.

And Japan, which is a smaller entity, also is heavily dependent on a couple of clients -- is much slower than we thought.

Remember, in the cases where the demand is slow we have and continue to reutilize the space for other purposes particularly in using immunocompromised mice.

So I would say that while we're certainly not enjoying a decline it feels like it's subsided to the point we're at least going to have better comps going forward through the balance of the year.

Okay.

And when you shift that capacity over two immunocompromised (technical difficulty) is the more active production of those lines evident in RMS revenue growth?

I guess it doesn't appear to me that the demand is necessarily out there to warrant adding capacity even though it is transferring internally.

But allocating more capacity to animal models.

Maybe it's because I'm seeing that as being overshadowed by the movement in transgenic and large animal, but the growth rates in that part of the business just don't seem that high.

The demand is fine.

What you would be seeing if we didn't have these facilities is that we're currently constructing new ones for the immunocompromised mouse production a while ago.

So probably at the beginning of last year.

So it saves us a lot of time and a lot of capital and, as I said before, we certainly would have preferred to still have the transgenic business as we're doing that.

But it allowed us not to miss a beat.

So I'm not sure you'd really see a reflection of the increased space in the demand.

It's really the basic space that we need to produce at the levels that are required.

Okay.

I'll jump out.

Thanks for the answers.

(OPERATOR INSTRUCTIONS).

Terri Powers, Robert W. Baird.

Good morning.

Quickly, just for clarification, Tom, can you take us through moving from non-GAAP EPS guidance of 234 to 240 to 212 to 218?

Can you just take us through the drivers of that?

And then as a follow-up, can you provide the 2005 earnings contribution from the Phase II-IV clinical services business?

So the first question on the change in our guidance, essentially two items.

One is moving the Phase II-IV business for the remainder of the year and going back to Q1 and moving that to discontinuing operations is a dilutive impact of $0.15.

So the divestiture to that impacts our EPS on a non-GAAP basis by approximately $0.15 which takes into account the entire year essentially.

And the other piece is approximately $0.07 which really is our first-quarter shortfall.

You can take those two items together and it essentially bridges the gap from our old non-GAAP guidance to our new non-GAAP guidance.

And then the second part of your question was on 2005 on excluding 2000 Phase II-IV?

However you would like to provide it.

I was looking for the specific earnings contribution from the Phase II-IV clinical services business in 2005?

We hadn't provided that and, as I said in my script, we will provide historical information both with regard to that and the ISS business to help folks like yourself bridge the continuity of numbers.

But really if you just take a look at our historical segment information and factor out a small portion for the Phase I you can in all likelihood get there on you own at the current time.

Fair enough.

And we did provide an estimate of what the sales were for 2005 -- we had noted a number of approximately $990 million for 2005 which would exclude the II-IV and the ISS business in 2005.

I think that will give you obviously what the sales were approximately, and then I think if you look at our historical information and work it way down on a segment basis you should be able to get there reasonably.

Thank you.

Thank you.

[Constance Amaya], [Cohen] Investment Bank.

Thanks for taking my question.

I was just wondering if you could give us a little more color on exactly how long it's actually taking some of your customers to order animals.

And also, along the same lines for your preclinical services.

Could you clarify that question a little more, please?

I'm trying to figure out exactly how long your customers are taking to order, for example, large animals and then actually having them shipped and billed.

Generally or do you mean has anything changed, for example?

It sounds like it's stretching out a bit but I'm not exactly sure how long it's actually taking?

On the large animals it's really not stretching out a bit.

The orders are really from a finite number of clients, mostly repeat clients, even the volumes are relatively similar.

The orders are way in advance and oftentimes the billing is in advance of -- it's very much in advance of when we deliver the animals which is why we have this delay in being able to book the sales.

So clients will want those animals to be allocated to them stateside and ready to be shipped.

So it's really simply a matter of when they have the capacity and the ability to accept them.

And when they do that they ask for them to be shipped.

So we know very far in advance what the outcome will be, as I said earlier.

We do sell all of our large animals every year.

And how far in advance, just an average of what it is for the large animals versus other research models?

It's different for different clients, but we certainly know months in advance.

Smaller animals tend to be ordered on a more regular shorter term basis.

Thank you.

Tycho Peterson, JPMorgan.

Thanks for taking the call.

In thinking a little bit about the ISS business; it wasn't that long ago -- if I'm thinking correctly it was just a couple years ago that you buildout that initiative and that follows the proteomics initiative you had before that.

Is there a now added level of scrutiny that's going into new markets going forward?

I actually thought the ISS made sense when you laid it out so I'm a little surprised that you'd downsize it as quickly as you can.

But can you talk about any changes in the strategic rationale for entering new markets to the extent that there are any?

No, I don't necessarily think we're going to change our methodology because we had two small businesses that didn't pan out the way we anticipated.

I think that would be an overly risk averse way of dealing with it.

So in the proteomics business we perceived a need, we researched it as well as we could, we know there was some risk because we were the first people to be providing this technology.

We had very strong indications from clients, particularly big Pharma, that that was a service that they wanted and it didn't pan out the way we thought.

And so we exited it swiftly.

I think one of the important things is if you think you have a business that's not going to improve notwithstanding your homework or your early prognosis that you get it behind you.

I do think, as I said earlier, that ISS is more disappointing only because it seemed like a natural confluence of demand with our capabilities.

It was less -- we were leading it less than we were with proteomics.

Having said that, it wasn't an enormous investment either and we had -- we certainly had a period of time where we had robust sales and earnings based upon us having those capabilities.

Of course that changed as the throughput for new devices and the need for GLP tests declined.

So while obviously we're disappointed to have to shut or sell or move on from any business, it won't deter us.

I think we always want to be entering new markets and hopefully doing that in a leadership way.

Okay, thanks.

And then second question.

Just wondering if you can comment a little bit on the pricing environment, your ability to (indiscernible) price increases or whether there's increasing pressure or pushbacks from customers?

I think both.

We've been able to get price in our two major segments of business now -- both the research model and the preclinical.

I would way we certainly have a customer base particularly the pharmaceutical clients who are very price sensitive.

As you know, they're all cutting costs and price is an issue.

It's certainly not the primary issue and it's not necessarily high on the list but it is on the list.

So we find ourselves talking about it perhaps more than we anticipated, but notwithstanding that fact, price increases are sticking.

Okay, thank you.

At this time there are no further questions.

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 Banc of America Healthcare conference on May 17.

This concludes the conference call.

Thank you.

Thank you.

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