Charles River Laboratories International Inc (CRL) 2007 Q1 法說會逐字稿

Good day, everyone and welcome to today's Charles River Labs' first-quarter 2007 earnings conference call. Today's call is being recorded. At this time, I'd like to turn the call over to Corporate Vice President, Investor Relations, Susan Hardy. Please go ahead, ma'am.

Thank you. Good morning and welcome to Charles River Laboratories' first-quarter 2007 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 first-quarter results and review guidance for 2007.

Following the presentation, we will respond to questions. There's 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 7194570820. The pin number in either case is 5603104. The replay will be available until May 23. You may also access an archived version of the webcast on our Investor Relations website.

I would 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 February 27, 2007, as well as other filings we make with the Securities and Exchange Commission.

During this call, we will be primarily discussing non-GAAP financial measures. We believe that these non-GAAP financial measures help 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 the Investor Relations section of our website through the Financial Reconciliations link. Now I will turn the call over to Jim Foster.

Thank you, Susan. Good morning. We are off to a strong start this year and are optimistic about our prospects for '07. Before I begin, I would like to remind you that in order to simplify matters and to keep the focus on the underlying metrics of our business, my financial remarks will address non-GAAP results from continuing operations.

For the first quarter, net sales increased 14.6% to $291 million due to strong growth in both the RMS and Preclinical segments. Our 20 largest customers, which include a broad cross-section of top pharma and biotech companies, increased substantially in the first quarter, a testament to their focus on drug discovery and development and the essential nature of our products and services.

The acquisition of Northwest Kinetics contributed approximately two percentage points and foreign exchange added 2.7% to the growth rate. Operating income for the quarter was $63.4 million, an increase of 19.6% over the $53.1 million reported in the first quarter of '06 and the operating margin increased to 21.8% compared to 20.9% in the same period last year.

Higher sales and improved capacity utilization were the primary drivers of the increases and the benefits of the cost savings initiatives we implemented last year also helped to improve the operating margin. At $43.2 million, net income was 24.1% higher than the $34.8 million reported in the first quarter of '06 due primarily to higher operating income. Earnings per share were $0.64, a 33.3% increase over $0.48 per share in the first quarter of '06 due in part to improved operating results and also to the lower number of shares outstanding.

As you know, we repurchased a total of 6.5 million shares between August '05 and March '07 under our ongoing stock repurchase authorization. The actions we took last year to focus on our core competencies of laboratory animal medicine and science and regulatory compliant preclinical services, to streamline our operations and to improve our operating efficiency have yielded benefits, which are visible in our first-quarter results.

For the balance of this year and in the foreseeable future, we intend to maintain our focus on the core, execute our capital expansion programs, make strategic bolt-on acquisitions as appropriate and continue to build our business to support our clients as they work to discover and develop new drugs and therapies.

The RMS segment sales grew 10.9% in the first quarter with foreign exchange contributing 2.6%. The growth was quite broad based with significant contributions from both large and small research models, Transgenic Services and in vitro products.

As you know, we had an extended quarantine at our large research model facility in the fourth quarter of last year, which resulted in shipments being delayed until the first quarter this year. As expected, the majority of those shipments were released in the first quarter, which significantly increased the first-quarter sales, particularly in comparison to the first quarter of '06 when sales had been soft.

We also saw large pharma customers increase their spending on our products and services in the first quarter. You may recall that about half a dozen of our largest customers limited their spending last year, which offset strong spending by other large and midsize pharma and biotech customers.

In the first quarter of '07, robust spending by our pharma customers continued and we were pleased to see stronger sales to some of those large customers who reduced spending last year. Sales of research models were higher with US sales the bellwether for the industry increasing 10%.

Worldwide, Transgenic Services sales also increased and were better than anticipated. We expect Transgenic's sales in '07 to improve from last year's level subject to the risk that a large pharma customer could reduce its spending in this area, particularly in the second half of this year. However, the first quarter starts us off well and we are optimistic about the outlook for the year.

Our in vitro business performed very well in the quarter, largely driven by sales of PTS. We are promoting the PTS through our salesforce and symposia and workshops and customer response continues to be robust. More customers are beginning validation of the PTS, which gives us confidence that we will achieve our growth plan for the year.

First-quarter operating margin increased 170 basis points to 33.1% from 31.4% in the first quarter of '06, benefiting from higher margin sales of large models and improved margins for the Transgenic Services. Due to the contributions from large models, the first-quarter operating margin was higher than we expect for the balance of the year. But we continue to expect the full-year RMS operating margin to be comparable to or slightly higher than the '06 result of 29.4%.

I would like to update you on the status of our California and Maryland RMS expansions, which are progressing on schedule. We hosted a formal opening of our new California building in late April, attended by a large and very enthusiastic group of customers. The first two barrier rooms in our Northern California facility will begin operations by the end of May and production will ramp up throughout the balance of the year. This expansion is vital to our ability to better service the rapidly growing West Coast market with a large facility located there rather than to supplement those customers with shipments from our other US facilities.

We are also excited about the new Maryland facility, which will be shared with the National Cancer Institute. The purpose of the facility is twofold. It will support 112 million, 10-year, dedicated space agreement, the first of its kind with the National Cancer Institute and will enable us to expand our presence in the Mid-Atlantic region, which has many pharma, academic and government customers. Construction is scheduled to begin soon and we are on track to open in the third quarter of '08.

We were very pleased with the RMS first-quarter results. The pickup in sales to large pharma, better results in Transgenics and strong sales in in vitro products, combined with the shipment of the large research models resulted in a strong performance by the segment.

We are optimistic about the outlook for the year notwithstanding the possible negative effect of previously announced pharma downsizing, which could affect the second half of the year. With the new expansions coming on line over the next 18 months, we believe we will have the capacity to support our customers' demand for our high-quality, value added research models and services.

The Preclinical Services segment reported sales growth of 18.3% for the first quarter, including 2.9% from foreign exchange. Northwest Kinetics contributed approximately 5%, which was in line with our expectations. We were very pleased with this growth, especially in view of the fact that capacity constraints continued to be a factor for us. I will comment on the capacity additions in a moment.

The robust sales growth, high capacity utilization and improved operating efficiency, which we gained through a combination of last year's cost savings initiatives and our ongoing Six Sigma programs, generated a 320 basis point improvement in the Preclinical operating margin. The segment reported a 21.4% operating margin compared to 18.2% for the first quarter of '06. Now, as expected, the margin did decline sequentially from 22.7% reported in the fourth quarter of '06 primarily due to margin compression in Massachusetts, which will continue to be a factor throughout this year.

As you know, we opened our new Shrewsbury facility on schedule and initiated non-GLP studies in the first quarter. The validation process was completed on March 31 and customer audits are in process. Feedback from customers has been extremely positive and we already have GLP studies scheduled to begin this month.

In our last conference call, we discussed our desire to accelerate the transition from Worcester to Shrewsbury. The cost of carrying two partially occupied facilities is high. Now although they are located near each other, it is clearly less efficient to move employees between these two locations. By building out a small portion of the second phase earlier than originally planned, we now believe that we can complete the move out of Worcester and be fully operational in Shrewsbury by the end of '07. We are excited by the prospect of moving on an accelerated timeframe of accommodating our clients' studies in a state-of-the-art facility and of gaining operational efficiency by having all of our employees in one location.

The Nevada expansion is also progressing well with construction moving briskly. Many customers have seen the facility and are enthusiastic about working with us there. Initially, we had anticipated a phased-in opening as we did in Shrewsbury with laboratory sciences opening this summer and at the completion of the validation process, GLP functionality in January of '08.

At this time, we are choosing not to phase in occupancy and to open for business in January of '08 as a fully functional, multi-species, multi-service facility. We made this decision for two reasons. First, because we will be better able to accommodate our clients' requirements, always a key driver for us and second, because it will allow us to complete the construction more efficiently.

We believe this decision will have a de minimis effect on our expected sales growth in the second half of '07 and no effect on the building or transition timeline. As previously planned, it will be completed in October. The facility validation will be completed by December and we will exit the older Reno facility by the end of '08.

Our discussions with clients about our preclinical capabilities are quite robust and we continue to explore potential, dedicated space agreements. I pleased to announce that we recently signed a dedicated space agreement with a top 10 global pharmaceutical company. The agreement provides for a base revenue contribution of approximately $17 million over a three-year term and as we expect our relationship with this client and as we expand our relationship with this client, we believe that actual revenues will be higher. We are in advanced discussions with a number of clients concerning dedicated space arrangements, although we cannot say when those might be finalized.

On March 23, we announced the signing of a joint venture agreement with our partner, Shanghai BioExplorer, to provide preclinical services in China. The decision to enter the Chinese market was driven by our strategy to support our international pharma customers' global drug discovery and development efforts in close proximity to their operations. Many of those clients have already begun operations in Shanghai and have indicated their intention to outsource preclinical work to us there.

We intend to renovate an existing 50,000 square-foot facility, which we are leasing in Shanghai and expect to complete it in the second half of '08. Initially, we will provide non-GLP services, but we expect that the demand for GLP services will grow rapidly. So we will be ready to offer GLP services in early '09. We are excited about this opportunity because in addition to enabling us to better support our customers, we expect it to provide a new source of revenue growth.

Overall, we are extremely pleased with our Preclinical performance in the first quarter. The financial results give us confidence that we will meet our goals for the year, including an operating margin consistent with the '06 level. We're optimistic about the potential we foresee with our new facilities in Shrewsbury and Reno, with our expansion into China and for continued growth of outsourced services. We believe our global footprint and expertise in drug development services position us as a premier player in this field with significant opportunity for growth.

Our focus for the foreseeable future is on organic growth, driven by our core competencies and augmented by strategic bolt-on acquisitions. Our goal is to support our customers' drug development efforts with high-quality, value added products and services, which capitalize on our core competencies. We believe we are extremely well-positioned to achieve this goal not only because of our expertise in laboratory and animal medicine and science and regulatory compliant and preclinical services, but also because we offer customers a continuum of products and services from discovery to development and into proof of principle.

For many customers, our broad portfolio of products and services enables them to rely on us rather than to incur the costs of replicating our expertise in-house or manage relationships with multiple suppliers. Our customers can operate more efficiently and cost effectively when they partner with Charles River to achieve the ultimate objective of bringing drugs to market faster.

To support our growth goals, we are continuing to invest in strengthening our senior staff. Our most recent additions are Stephanie Wells, Senior Vice President and Chief Marketing Officer and Dr. Cheri Walker, Senior Vice President of Corporate Development. We are very pleased to welcome Stephanie and Cheri to the team as they bring extensive experience in their respective areas.

Over the last 18 months, we have doubled the ranks of the senior management team, adding seasoned professionals whose expertise in various areas is an excellent complement to our existing team. Now at full strength, we intend to add to our senior staff only as necessary in order to enhance our ability to think creatively and execute effectively as we build a larger, more successful Charles River.

In this our 60th anniversary year, we have rededicated ourselves to our mission to accelerate the search for healthier lives. Following last year's actions to focus on our core competencies and improve our operating efficiency, we have emerged as a stronger, better positioned company. We will continue to invest in our business as we endeavor to enhance our ability to support our customers from discovery through proof of principle and to be the strategic partner of choice for the essential products and services they require to achieve their goals.

In closing, I would like to thank our employees for their exceptional work and commitment and our shareholders for their continuing support. Now I will turn the call over to Tom Ackerman.

Thank you, Jim and good morning. Before I discuss our first-quarter financial performance, I would like to remind you that our discussion today focuses on results from continuing operations. Phase II to IV clinical and ISS businesses have been reclassified as discontinued operations in the current and prior year results.

A $0.5 million loss from the ISS Massachusetts business is included in discontinued operations for the first quarter of 2007 as we continue to operate the business on a limited basis until the closure of the property is finalized, which is expected by the third quarter.

As Jim did, I will focus my comments on non-GAAP results, which exclude all acquisition-related amortization and other items, such as charges associated with the accelerated exit from our Worcester Preclinical facility.

First-quarter operating income increased 19.6% to $63.5 million reflecting strong contributions from both the Preclinical and RMS business segments. In both cases, higher sales resulted in improved capacity utilization and we also benefited from the cost savings actions we implemented in 2006. An increase in unallocated corporate expenses partially offset these gains.

Unallocated corporate overhead increased by $5.4 million (technical difficulty) year over year to $15.7 million in the first quarter of 2007 driven by the expected increase in IT costs, recruiting costs related to senior staff additions and performance-based compensation expense. The first-quarter increase was approximately $3 million higher than expected with almost $2 million of that amount not expected to continue.

For 2007 unallocated corporate overhead, we project the quarterly run rate for the remainder of the year to be similar to the first-quarter level, excluding the nearly $2 million in costs that are not expected to continue. This will also be slightly higher than expected. Beginning in 2007, we are reporting a portion of our global IT costs in unallocated corporate expense. In the past, we have allocated all costs to the business segments, but late in 2006, we reorganized IT with all operating units reporting to the CIO.

In conjunction with this, to centralize some responsibilities and expenses at corporate and beginning in the first quarter of 2007, we have chosen to retain that portion related to our corporate IT functions in the unallocated. For the first quarter, those IT costs were $1.7 million reflecting our investment in global architecture and systems and a write-off of obsolete software.

EPS increased 33% to $0.64 in the first quarter of 2007 from $0.48 in the first quarter 2006. Strong growth in operating income and lower net interest expense in the first quarter were supplemented by the lower number of shares outstanding due to our stock repurchase program. Given the anniversary of our adoption of FAS 123(R) during the first quarter of last year, we will no longer provide the per share impact of 123 (R) stock option expense.

However, we can say that the total equity compensation expense of $5.4 million in the first quarter was in line with our previous expectations and nearly flat versus the first quarter of last year. We expect these costs to increase to roughly $27 million for the year, slightly higher than the previous expectations due to the timing of grants and up from $21 million last year.

First-quarter net interest expense of $2.1 million was comparable sequentially to the fourth quarter of 2006 and down $1 million year over year versus the first quarter of last year. This reflects increased interest income on higher cash balances resulting from the June 2006 issuance of convertible debt and the August 2006 divestiture of the Phase II to IV clinical business. We now expect full-year 2007 net interest expense to be approximately $11 million to $12 million compared to prior guidance of $14 million to $15 million due primarily to debt repayment and more favorable interest rates.

The tax rate decreased slightly to 29.4% in the first quarter of 2007 from 29.7% last year. We implemented FIN 48 in the first quarter, but the Company was not required to book a cumulative effective adjustment as a result of the adoption. We are maintaining our tax rate guidance of 29% to 29.5% for the year.

Now I will turn to balance sheet and cash flow items. At the end of the first quarter, we had cash and cash equivalents of $136.5 million, plus $118.9 million in short and long-term marketable securities for a total of $255.5 million compared to $286.8 million at the end of 2006. The decrease was driven by the use of cash for general corporate purposes, including investment in our capital expansion program, payments made on term loans and the purchase of the remaining interest in our Japanese business from a minority partner.

Accounts receivable were $210.2 million at the end of the first quarter, up from $202.7 million in the fourth quarter of 2006 primarily due to higher sales. Our DSO decreased slightly to 38 days in the first quarter when compared to 39 days for the fourth quarter of 2006. We continue to work on improving DSOs.

For the first quarter of 2007, free cash flow was $1 million, up significantly from -$42 million last year. Typically the first quarter is seasonally weak due to cash payments related to bonuses and taxes. The increase in cash flow from the first quarter of last year was largely driven by first-quarter 2006 tax payments made under (inaudible) repatriated in 2005, higher net income this year and other changes in working capital.

Capital expenditures were $38 million in the first quarter of this year versus $39 million in the prior year period. Our full-year 2007 guidance for free cash flow remains in a range of $25 million to $50 million with CapEx of $200 million to $225 million. Depreciation in the first quarter of 2007 increased $1.5 million to $12.1 million primarily as a result of expansions at existing Preclinical facilities in 2006. Depreciation will increase in the second quarter when we will begin to book depreciation expense for a new Shrewsbury facility. Our full-year depreciation forecast remains at $54 million.

Total amortization expense declined to $7.9 million in the first quarter of this year compared to $9.1 million last year due to a reduction in Inveresk-related amortization expense. Our 2007 forecast for amortization expense remains at $31 million.

I will now update you on the financial impact of our plan to accelerate the exit from our Worcester Preclinical facility. As Jim mentioned, we plan to fully transition into our new, state-of-the-art Shrewsbury facility and exit Worcester by the end of 2007. By exiting Worcester earlier than anticipated, we expect to reduce duplicative costs in Massachusetts by at least $1 million per quarter beginning in the first quarter of 2008.

As a result of the accelerated exit, we incurred a $0.8 million or $0.01 per share non-GAAP charge in the first quarter of 2007 principally related to the impairment of the owned building. For the full year, we expect to incur charges in a range of $0.03 to $0.05 per share for the remaining costs associated with are owned building and the two leased buildings.

The exact impact will not be determined until negotiations are finalized and the exit is complete, but we expect the charges, which will be reported as non-GAAP items, will be weighted toward the back half of the year. The charges associated with exiting Worcester should be partially offset by a gain of approximately $0.02, also non-GAAP, on the anticipated sale of real estate in Scotland. We expect to complete that transaction in the second half of 2007.

We are reiterating our 2007 guidance in line with our prior expectations. The first quarter was a very good start to the year, but we do anticipate headwinds, particularly in the second quarter. Our Preclinical business will continue to experience margin pressure in Shrewsbury. While revenue will continue to ramp up along with booking depreciation expense, Shrewsbury will carry a full load of other facility costs beginning in the second quarter.

In addition, capacity will remain somewhat constrained at existing facilities as we anniversary the addition of completed expansions in Edinburgh and Worcester during the second quarter of last year.

In the RMS segment, we expect to experience some margin headwind sequentially as the significant increase in first-quarter shipments of large research models will normalize in the second quarter. For full year 2007 guidance, lower than expected net interest expense will be offset by higher unallocated corporate costs. As a result, we continue to expect non-GAAP EPS from 243 to 253 or 211 to 221 on a GAAP basis and revenue growth in the 9% to 12% range based on current exchange rates.

That concludes our remarks. We will now take questions.

(OPERATOR INSTRUCTIONS). Eric Schmidt, Cowen & Co.

Good morning. Thanks for taking my call and congrats on a nice quarter. Jim, I was hoping you could provide a little bit more detail on the joint venture with the folks in China, BioExplorer. Specifically the terms of the joint venture, how it might be recognized on your financial statements and whether or not you think getting into China will in any way detract from your existing business in the states?

Good morning, Eric. We are very pleased with our China deal, which of course is signed and will close hopefully in June. BioExplorer we feel is the sort of leading player in the Preclinical space in China and someone that we feel we can work with to build a business there.

Our focus will be to build rationally and gradually in that locale. As we said, we are going to renovate a 50,000 square-foot leased building to initially and immediately service local international pharma companies who are in Shanghai doing basic research. We don't want to make investments in preclinical tox facilities. As their operations expand, ours will as well.

We have a team of people that will be dedicated and allocated to this operation. We are also in the process of recruiting for both general manager, financial folks and people to head up the science who obviously will be totally dedicated in living in that locale.

So we don't in any way feel that this detracts from our focus on getting Worcester and -- I am sorry -- Shrewsbury and Reno up and operational. We think it is a very important, new sort of frontier for the Company and its clients and we are thrilled to be -- thrilled to be there and thrilled to be doing it in a stepwise and logical fashion.

Eric, on your question on the financial impact, we will be a majority shareholder, so we will actually report that on a consolidated basis in the Preclinical and the Services segment naturally. For 2007, we have made some budgeting accommodations to reflect the net expense and at this time, I wouldn't anticipate that there would be any significant impact to our financials in 2007.

Can you comment on what percent majority holder you will be?

We don't believe we commented on that in the release. As I said, certainly more than 50%, but I don't believe we have commented on that yet.

Okay. Thanks a lot.

Douglas Tsao, Lehman Brothers.

Hi, thanks. Good morning. Starting with the Transgenics business, I was just sort of wondering if you could provide commentary if there was any strength across the regions, vis-a-vis US, Western Europe and in Japan. Has any specific pharma client -- you sort of noted the potential reduction in that business in the second half of the year -- have any specific clients warned you that they might be reducing their Transgenic programs?

Good morning, Doug. We saw an increase in Transgenic revenues and demand across the board, so really in all three geographic locales. Our US business is a larger business, so it is more meaningful from a revenue contribution point of view, but we are seeing it across the board. That's really a commentary on the state of the science and the fact that there is some level of refocus, reinvestment and I suppose a resurgence of interest in the Transgenic sector. It is obviously allowing us to be more efficient as we utilize our facilities and hence, we are continuously able to improve our margins there. (technical difficulty)

Hello? You are breaking up.

Sorry. (technical difficulty) Sorry. We are just getting our electronic devices out of the room.

We don't have any specific indications from any client about diminution in interest or demand in the back half of the year, so we don't want you to mislead that. I mean our comments are really about the fact that there are some very large pharma clients in each geographic sector in fact who are more prominent than others, who have much larger programs with us and we are always subject to changes in their philosophy or economic structure or focus on Transgenics. So we have no specific information that will change.

Having lived through countless changes over the last couple of years sometimes without warning, we just want to be reasonable with the way that we look at it. We are very pleased that it is up. Our indications are that it will be up as we said for the year, but we remain sort of guardedly optimistic, but cautious about what our clients will do. We obviously continue to check in with them continuously since we are providing services to multiple clients in the Transgenic sector and obviously they will let us know as soon there are any changes in demand, but we don't expect anything specific at this time.

Across the Company wide, you don't have any customer concentration problems. Could you provide sort of some color on potentially customer concentration within that business unit itself? I mean do you have any like 10% percent, 15% customers?

We haven't given a breakdown on that. We do -- as I said, we do have some very large pharmaceutical clients who meaningful -- represent a meaningful percentage of the sector and both upticks and downticks and their demand and interest in the science does impact our Transgenic revenue as a whole. So we will continue to watch it, but we are very pleased with the results thus far and actually for the last few quarters.

Okay. And then turning to the Preclinical segment, was there any meaningful revenues associated with the Shrewsbury facility this quarter or was most of the strength or the growth in sales related to Northwest Kinetics, as well as growth in the legacy facility?

So revenue was quite strong across the board. We did break out what the impact from Northwest Kinetics was. Sales were strong across the sector and as we've said, we are using our capacity quite well. Again, as you recall, the way we characterized it over the last few calls, we look at Shrewsbury and Worcester facility as one for the time being. We are having staff and processes move from Worcester to Shrewsbury continuously, pretty much -- almost on a weekly basis. So some work was done there both because it was moved and because there was some incremental work, but I would say that the specific revenue from Shrewsbury was not meaningful in the first quarter.

Okay. And then also in Preclinical, was there an impact on the operating margin related to foreign exchange in particular, focusing specifically on the Montreal facility?

Nothing significant in the first quarter. I mean the exchange rates did strengthen over last year, including the Canadian currency, so we saw an improvement in sales and a corresponding drop in operating income. The Canadian dollar always impacts us a little bit negatively in the Canadian operation, which we also saw. But in general, we are seeing trends in currencies for the most part move favorably. I mean they are always dampened by the impact of the Canadian currency as that strengthens at the same time as the other currencies.

Okay. And then the final question for me. With the change in the schedule as far as opening the facility in Nevada, is there any change in the amount of space that is going to be opened? I believe you initially indicated that a third of the space would be opened in the middle of this year. Is that still the plan, just that it is going to be pushed out until January?

It's exactly the same amount of space. It will be -- our ultimate goal is to be GLP-ready by '08, which we still are. So we have no change in schedule. We feel that we have an enhanced (inaudible) in our ability to launch that facility in a smoother, more sophisticated fashion and be more responsive to our clients, but it's exactly the same amount of space.

Great. Thanks a lot for the questions, guys.

Sure.

Alex Alvarez, Goldman Sachs.

Good morning and thanks for taking the questions. I wanted to ask a few things here on the accelerated movement to the new Shrewsbury facility and just wanted to get a little more color in terms of what drove that change in plans. Was it an effort to save on some expenses or was management of two facilities just proving to be either too difficult or perhaps disruptive to some of your employees?

I mean it is really both. We have said for some time that our strong preference was to vacate Worcester as soon as practicable and that means without obviously disrupting existing studies and making sure that the facility was well-validated, staff was hired and trained. We are quite confident and really pleased with the notion that we will have a better operating facility if we don't have two locations with folks running back and forth. That is inherently inefficient and clearly there is unnecessary duplication of costs that don't add anything to the quality of the service we were providing.

So we have been trying to figure out a way sort of physically and in the time available to move the staff over there without disrupting the location, but able to get everybody in one space at one time. We will obviously have a much stronger operating unit with the people all in one place. Clearly as clients take tours of Shrewsbury, there is a strong preference to be there. So the sooner we can get our clients there, I think the better -- the happier they are and I think that our employees are happier working in the new space as well.

And with the expectation to be in one facility by the end of the year, what happens to some of the longer-term projects? Would you complete those in the existing facility or would you have to move some of those and are there any logistical issues there or some impact that that could have to your revenue expectations for the Preclinical segment?

No, it would have no impact on revenue and that is one of the logistical and operational issues. So you can't move an ongoing study that includes animals in the midst of a study, so we have to wait until those conclude. Anything that we would book today would obviously be booked in the new space. So we don't have sort of a tail dragging and so everything will be finished in time to vacate the facility and move into the new one by the end of the fiscal year.

Okay. And in terms of the savings, which are expected to start benefiting the margins next year, I guess why not -- why won't those start providing some benefit this year since you will only be -- I am going to guess by the second half of the year, you will be winding down a lot of the operations in the old facilities. Why is it taking sort of three, four quarters to start to see those savings?

We will see some reduction expenses, Alex, quarter over quarter as we move through the remainder of the year, but the lease costs for instance we can't -- we can't relieve ourself of those until such time as we actually vacate the buildings that we lease. If we are occupying some portions of the building, it is still an awful lot of expense in facilities utilities and whatnot even though we can maybe turn down some thermostats here and there. So I think until we exit it completely, we will see some savings, but they are just not substantial enough to say we could stay there longer or that it wouldn't be a big step-off when we were completely out.

I understand. And if I could ask one last one, in terms of your capital expenditure projections, is there any opportunity here to save -- save some money here by using some of the existing equipment or are we still going to be buying a lot of new equipment? In which case, what do you do with the equipment in the existing facilities?

We will move an awful lot of the existing content-type equipment in the old facility to the new facility. We obviously can't take things like HVAC and those associated things, but caging and things that are readily movable, we will take all our mass specs and HLPCs naturally. So by and large, I think to answer your question, we will be moving what we can move.

So would you expect that to have a material impact to your CapEx projections for the year?

Well, that's the way we actually plan to do it. So if we had stayed in Worcester longer for instance, the lab sciences as an example would have remained in Worcester through 2009 with that equipment and we wouldn't have actually began outfitting new equipment in Shrewsbury.

Okay. Understand. Thank you.

Jon Wood, Banc of America Securities.

Thanks, good morning. Can you provide for us an estimate of the net toxicology capacity you plan to add in '07 after taking into account the exit of Worcester?

Well, we never break that out specifically. We will be adding -- I think we have been consistent in saying this -- we will be adding sufficient capacity to keep up with the market demand as we have seen it and as we anticipate it will be going forward.

Okay. Thought I would give it a shot. Can you comment generally on the pricing trends both in RMS and Preclinical? Did you take a price increase in the first quarter?

Yes, our price increase usually goes into effect at the beginning of the fiscal year. We have been able to get price in both of our businesses pretty much across the board. I think as the outsourcing trend continues and in fact accelerates and is used as a strategic lever by our clients, there is a recognition that given the amount of capital investment that we are making that in order to recoup that investment and get a substantial or appropriate return on it, that we will pass along some of that volume price increase. So I think our customers have been quite rational about that.

I think there is some expectation that we and others will do that. I think there is a feeling that the price increases that we have passed along to them are fair, which we try to be. So yes, we have had it across the board in virtually all of our businesses.

Okay, great. Tom, can you provide the depreciation expense that will come in from Shrewsbury starting in 1Q -- excuse me -- in 2Q '07?

Well, we haven't broken that out, but I guess if you look at the information we have provided you with our first-quarter depreciation and the depreciation forecast for the year, clearly the Shrewsbury expansion is the biggest single event that will happen in the second quarter. So I think if you take those numbers and break them down a little bit, Jon, you can get a pretty good feel for what the Shrewsbury impact probably is.

Okay. And then one last one. It seems as if the corporate overhead expense guidance is ticking a bit higher, but the overall operating margin guidance is consistent. Is there anything -- I mean what is doing better than you thought in the initial guidance?

On margins, Jon?

Yes. On operating margin?

What would be doing better for instance down in the segments or what?

Yes.

Well, I think one of the things that we talked about late last year and into the first quarter of this, year which was a key driver in RMS, was of course the quarantine that we experienced that held up shipments in the fourth quarter and of course, we had that little bit of a backlog to give us a jumpstart on this year and that certainly is a very profitable segment.

Other than that in the RMS, I mean we saw strength, as Jim pointed out, in sales for Transgenic Services. I think that was also a nice contributor in the RMS side and I think in the Preclinical, most of our businesses are actually doing pretty well right now.

Thanks a lot.

Terri Powers, Robert W. Baird.

Good morning, everyone. This is Terri in for Eric Coldwell. I was hoping you would be able to give us an update on the Northwest Kinetics performance. I understand it contributed 5% growth to the PCS segment, but how is demand going for Phase I and also an update on the UK Phase I unit, please?

Good morning, Terri. We are pleased with our Northwest Kinetics acquisition and their performance. It is performing in accordance with our expectations as we thought. I think integration has gone very well and we have a nice cultural match. They were moving into and finishing a new facility as we bought the company, increasing the numbers of beds. We have been working hard to fill up that space. And it feels like demand is improving all the time, was good and improving all the time. So we would anticipate that that operation will continue to function as we thought and it will continue to utilize those beds in a beneficial way.

The UK market is I think a bit more difficult at the moment. I think most of the players in the UK arena would agree with that. It is a combination of factors, but I think there is greater scrutiny by some of the governmental authorities on trials that are done over there and a predisposition frankly to have some of them done in a hospital setting, which very few people have. So I think until the regulatory situation clarifies itself a little bit more, the demand for the service in the UK may not be as robust as for instance we are seeing in the states.

Having said that, we still get the benefit of a close relationship between our UK, our Scottish-based Phase I operation and our large Scottish-based Preclinical operation and we are getting some flow-through from Preclinical into the Phase I unit, which I think will offset somewhat the sort of general pall that hangs over the UK at the moment. So I would say from an overall demand quotient that the UK is continuing -- that the Phase I is continuing to intensify as work moves through Preclinical and of course Preclinical demand has increased for Charles River and others across the board.

Great. In regards to your commentary for the factors impacting the UK, I think we can all understand the greater scrutiny from the regulatory authorities. I assume that is related to that well-publicized trial from last year that had some serious side effects in the patients involved. But in terms of the predisposition to doing a hospital setting, is that something new that you are seeing also related to that trial or has that been something that has been ongoing all along?

No, that is definitely a reaction to that specific trial that was problematic. The notion being that if it gets an adverse effect, it's obviously better to be in a hospital setting. My personal opinion is that that is an overreaction. The pendulum is at least preliminarily swinging too far. I should also clarify that that would only be for first administration in demand. So for the very, very early studies and not necessarily for some of the higher-end follow-on ones. So we have a relatively small clinic over there and I think we will be able to deal with the situation, but it will cause -- some of the work was coming from the states over to the UK. I think it will cause some people to think twice about that. That hopefully would benefit us in our US operation.

Okay. Thank you very much and then if you could actually just provide an update -- I didn't hear any commentary regarding the vaccine business.

No, you didn't. The vaccine business continues to do quite well actually. We are pretty much selling out our full production. While we don't break out the margins, the margins are margins that we are pleased with and they have continued to increase. We maintain a leadership position in that field. And it continues to make a meaningful contribution to our total financial performance.

Thank you very much.

Hari Sambasivam, Merrill Lynch.

Yes, thank you. Just a question for Tom, just a clarification question here. On the Transgenics, are we expecting actually a stronger second half as you mentioned? And I am just wondering because I think in another sort of a comment where you had also anticipated some sort of a headwind from the second half, so I am just trying to clarify which is which that you had specifically mentioned?

This is Jim. I will answer that. We had a very favorable first quarter in Transgenics after a very strong fourth quarter and so our indications are that our performance for '07 will continue to be -- continue to be better than our performance for '06. We have international indicators, so we are seeing that across the board that would underscore the fact that there seems to be a scientific -- international scientific focus on Transgenics again, maybe coming in a wave.

The predictability of it is difficult and so we are trying to continue to drive home the point that the level of planning and amount of information that we have for our clients is relatively limited. It is based upon what they are doing on the short-term basis, but we have no indications after the kind of year and a half or two years of substantial decline and sort of getting there -- Transgenic lines down to a meaningful level, we have no indications that that is going to continue. In fact, to the contrary. It would appear that reinvestment is occurring. So yes, we would certainly expect it to continue in the second quarter and for the balance of the year as well.

That's great. A couple of other quick questions. In terms of some of the delays in Nevada in terms of not necessarily delays, but a slightly later opening of your operations there, what was the sort of rationale that sort of delayed this out? I was just kind of curious because you have gone the other way in Shrewsbury. Is there some sort of rate-limiting sort of function whether it be with the regulatory issues or whether it be construction issues? What exactly is the sort of rationale for sort of delaying this until January of '08?

So, it is not a delay. We need to be clear about that. We have been saying for the last six months that we would have a phased-in opening culminating with GLP capabilities at the beginning of '08. That is still where we are. We actually feel that given the experience that we have had now in building our Shrewsbury and the early part of Reno, that working diligently so that we can get the facility done in October, validated in the fourth quarter and open GLP quality is a much more efficient way to do that from a construction point of view and from a customer service point of view.

The revenue that we had in our plan for the facility was quite small, so it really has no impact and the project launch is exactly the same both in terms of square footage and the configuration of the space. So it is really not a delay; it is just a different way of doing it. We actually feel that it would be less efficient to open it in a stepwise fashion as we had originally anticipated and articulated to you folks.

And the final question I have is on the Endosafe PTS product. It sounds like it is having some robust uptake in the marketplace. In terms of expanding it into secondary markets, Jim, do you require additional FDA approvals for this or is this mostly off label as you go into -- other than say for example the endotoxin testing into other areas -- do you need specific approvals or do you need -- are they -- once it is done, it is done?

Yes, for a lot of these additional activities, of course we have got a fair amount of development work that we have to continue, which we are doing. We also have to continue to find and negotiate deals with appropriate partners because we are talking about marketplaces that we are not going to access ourselves. I believe that for different -- utilizing the device for different purposes, that we will have to go back to the FDA, but we will come back and clarify that with you.

Thank you.

Derik de Bruin, UBS.

Hi, good morning.

Good morning, Derik.

Hi, Derik.

Hey, looking at the dedicated space agreement that you signed, a couple of questions on this. I guess was this included in your original '07 guidance and if so, do you have any others factored in? I guess -- correct me if I am wrong -- this was the first such agreement you have signed. What has been the tripping point? Has it been the new capacity that's coming on line that is making the difference?

So I would say that we don't have -- we don't specifically have any dedicated agreements contemplated in our guidance. This is a client that we already have and do business with, but this is a commitment by them for three years, which is new and why we have no assurances of this. The commentary is that this is sort of the minimal level of business. This is in one of our locations where we already have a dedicated space agreement, so it is really leveraging up on that. It is also a bit of a commentary on the amount of capacity generally available in the industry and the view of big pharma to not be spending the capital themselves. It seems like the interest in dedicated space agreements regardless of size and duration is intensifying.

As we also said, we really have several conversations going on right now by first tier pharma and first tier biopharmaceutical companies with regard to at least three of our four major sites. So it is not just in one geographic locale, so we would expect in the back half of this year to probably have some additional contracts like this. So I don't think anything specifically is instigating it. We would be surprised and disappointed if we don't have some dedicated space agreements with both the new Reno and the new Massachusetts facility just given the fact that they are brand new, highly sophisticated and are in close proximity to lots of clients.

Okay. That's very helpful. Given that you are so close -- you are so close to all the pharma, the biopharma business, what is your outlook for near-term pharma/pharma, pharma/biotech consolidation? Are you hearing anything above the usual noise level?

Nothing -- no, nothing new. I think -- I thought that there will be a few more large mergers in top tier pharma and I would think similarly and probably second tier biotech companies, but nothing specific.

Okay. And then just one final question. Can you remind me when you closed the Northwest Kinetics deal?

October of '06.

Thank you.

Paul Knight, Thomas Weisel Partners.

Hi, Jim.

Hi, there.

How much was the large animal business for revenue in the first quarter?

Well, more than it was in the first quarter of last year. So we don't --.

Well, do you expect a sequential decline in animal -- the RMS segment in Q2?

A sequential decline in Q2? Well, I think, Paul, if you look at -- I mean I wouldn't expect to see anything materially different I guess. We don't want to get into whether it is going to go up a little bit or down a little bit. But I think if you look at our trends, we have always been strong in the first couple of quarters in RMS and in the third and fourth quarter, it has trailed off a little bit. We had a very strong quarter in large animal. But I wouldn't expect it to dramatically impact things in the second quarter of the other line.

Do you have more of those deliveries in the second quarter occurring?

Maybe some, but the majority of them went in the first quarter. So we got whatever -- I was going to say whatever the normal first-quarter revenues would be for large animal. The problem is there is really no normal quarterly gate on that. We can pretty much gauge the annual numbers. So clearly Q1 was disproportionately high because Q4 was disproportionately low. Again, we feel that we will sell all of those animals through the balance of the year. So that should be at some steady-state basis, but we do get a margin pop from that in the first quarter that will decline somewhat.

Okay. Thanks.

At this time, I will turn the conference back to our presenters for any closing or additional remarks.

Thank you for joining us today. We look forward to seeing you at the Baird conference tomorrow or the Banc of America conference on May 31 and hope you will be able to attend our investor day on May 22 at our new Preclinical facility in Shrewsbury. This concludes the conference call. Thank you.

A replay of today's conference will be made available beginning today at 11.30 a.m. Eastern time ending on May 23 at midnight. You may access the replay by dialing 1-888-203-1112 or 719-457-0620 and entering replay passcode 5603104. This does conclude today's conference call. Thank you for your participation.