Charles River Laboratories International Inc (CRL) 2008 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Charles River first-quarter 2008 earnings conference call.

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

Later we will conduct a question-and-answer session.

(OPERATOR INSTRUCTIONS).

As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Vice President of Investor Relations, Ms.

Susan Hardy.

Please go ahead.

Thank you.

Good morning, and welcome to Charles River Laboratories first-quarter 2008 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 2008.

Following the presentation we will respond to questions.

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

A taped replay of this call will be available beginning at noon today and can be accessed by calling 800-475-6701.

The international access number is 320-365-3844.

The access code in either case is 912464.

The replay will be available through May 21st.

You may also access an archived version of the webcast on our Investor Relations website.

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 February 20, 2008 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 reconciliation 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.

Good morning.

I am very pleased to report to you today on another excellent quarter for Charles River.

We reported robust sales of $338 million in the first quarter of '08, a growth rate of 16%, $291 million in the first quarter of '07.

Research Models and Services or RMS, increased 17.8% to $169 million, and Preclinical Services or PCS, rose 14.1% to $169 million.

Foreign exchange contributed 6.3% and 2.1%, respectively to the segments.

Organic sales growth was approximately 12% for each of the segments, and on a consolidated basis was right in line with our long-term growth goal of low double digits.

For the quarter operating income was $71.8 million, and the operating margin was 21.2% compared to $63.4 million and 21.8% recorded in the first quarter of '07.

Operating income growth was due primarily to higher sales and improved capacity utilization in the RMS segment and stable corporate costs.

The operating margin declined to 60 basis points year-over-year as very strong RMS performance offset the expected decline in the PCS margin, primarily due to the significant costs associated with the transition to our new preclinical facility in Nevada.

Earnings per share increased 12.5% to $0.72 from $0.64 in the first quarter of '07.

Robust sales growth and improved operating efficiency in the RMS segment more than offset the costs associated with the Nevada transition and a higher share count, due primarily to dilution from our convertible debt.

As you know from our press release, we are reaffirming our '08 guidance of sales growth in the range of 10% to 13% and non-GAAP earnings per share in the range of $2.87 to $2.97.

Given the strength of our organization and the opportunities we see in our marketplace, we believe that these targets are achievable.

In the first quarter of '08 we saw a continuation of the strong demand that drove our '07 results.

As our clients endeavor to fill their pipelines with new therapies to improve human health and to do so more efficiently and cost effectively.

We have spoken often about the inflection point at which the pharmaceutical industry has arrived, and the industry's increasing willingness to adopt strategic outsourcing as not only a viable alternative but an incredibly efficient means by which to help accelerate drug developments and reduce infrastructure and costs.

We believe we will continue to see a steady flow of outsource work from the pharmaceutical and biotechnology companies over the long-term.

Our investments in infrastructure including facilities, senior staff and information technology, have positioned us extremely well to support the increased demand from our clients.

We have built a strong franchise, a unique continuum of products and services which span the broadest portion of the discovery and development spectrum from the earliest use of research models through proof of concept.

We support and enhance our clients' research process as no other provider can.

And we believe that the expertise we have developed over 60 years, the global network of facilities we have built and continue to expand and a highly talented workforce of more than 8500, are assets which bring great value to our clients.

It is for this reason that we believe we are viewed as a partner of choice and one in which our clients can rely to help them navigate the challenging process of bringing new therapies to market.

Let's review our first-quarter operating segment highlights.

The outstanding performance of the RMS segment in '07 was followed by an even better first quarter of '08.

Sales rose 17.8% in the quarter to $168.6 million.

Growth was broad-based in the segment, with all of our major business lines reporting double-digit growth.

The segment sales benefited from robust spending by pharma and biotech clients at favorable sales mix, a stable pricing environment and market share gains.

Higher sales and improved operating efficiencies generated a 30 basis point gain, and the operating margin to 33.4% compared to 33.1% in the first quarter of last year.

This is one of the best operating margins we have reported since we went public in June of 2000.

We experienced this improvement despite the fact that the first quarter of '07 benefited from a significant increase in sales of large models.

As you may recall, extended quarantine resulted in the shift of a portion of fourth-quarter '06 large model sales to the first quarter of '07 with a positive effect on the margin.

Production and research models was the largest contributor to the first quarter sales growth with all geographic locations.

The United States, Europe and Japan reporting robust sales.

The bellwether US business again reported a double-digit sales increase as it did in '07.

We often remark that sales of research models are a proxy for drug discovery and development since without these critical research tools pharmaceutical and biotechnology companies cannot bringing new drugs to market.

Used extensively for research in oncology and infectious diseases, sales of immunodeficient mice increased significantly in the quarter, and sales of outbred rats which are used in safety testing, also trended higher.

Sales to US academic institutions and government agencies, particularly in the United States, also increased due to both higher spending and market share gains.

Our clients' choice to outsource services which they either view as non-core or for which they choose not to retain the in-house expertise because such services can be obtained more efficiently from a scientific expert like Charles River resulted in higher sales for most of our RMS service businesses.

Our transgenic services business, which has been rebranded as genetically engineered models and services, or GEMS, reported double-digit growth in the first quarter.

We are also gaining traction in our consulting and staffing services or CSS business, through which we provide research model facility management services.

Although contracts often extend for multiple years, the margins for this business are lower than the segment average.

However, the return on invested capital is very attractive since we generally do not own the facilities.

One exception is our new facility in Maryland, which is being built to support our CSS contract with the National Cancer Institute.

As you know, this is the first dedicated resources arrangement in RMS, and through this long-term agreement we gained a platform to provide commercial production and services in the very attractive mid-Atlantic region.

We are looking forward to moving the NCI models to this new high-end space in the second quarter of '08, slightly ahead of schedule.

Our in vitro business again delivered growth about 20%, at a rate even higher than in '07.

We continue to have great success with the PTS.

Growth is increasing not only as a result of a larger number of devices in use, but also due to an increase in the average number of cartridges used per device.

In addition, the device's portability and ease-of-use are driving expanded sales of the PTS.

As we've said before, the PTS is being adopted by nuclear pharmacies and dialysis clinics where rapid response time and ease-of-use are critical requirements.

The rapid response time has also made the PTS an excellent option for compliance with the FDA's PAT initiative, which requires timely testing in order to promote improved quality control in the manufacture of medical devices and injectable drugs.

In addition, a portion of the in vitro sales growth was attributable to a strategic decision to change our distribution channels.

We have slowly been acquiring our small European distributors, which gives us direct access to clients.

Historically the RMS business has been a consistent driver of our sales and earnings growth, and that was amply demonstrated in the first quarter of '08.

Our Research Models and Services are critical components of our clients' ability to successfully launch new therapies.

And for that reason we believe that over the long-term demand for these essential products and services will continue to be strong, and the RMS segment will deliver high single digit sales growth, margins in the 30% plus range, strong cash flows and excellent returns on invested capital.

The PCS segment reported robust sales of $169.1 million in the first quarter, a growth rate of 14.1% over the first quarter of '07.

January was the light month as we experienced the usual slow study starts which occur when pharmaceutical and biotechnology clients establish their compound priorities at the beginning of the year.

February and March were quite strong with numerous studies being initiated at our toxicology facilities.

We were particularly pleased with the growth in Massachusetts, which has continued to make excellent progress toward its goal to shift the sales mix to a greater proportion of GLP toxicology services.

As a result of this progress and the closure of the legacy Worcester facility, the Massachusetts operating margin improved both year-over-year and sequentially.

Our new state-of-the-art facility in Nevada opened on schedule in January and as planned, we expect to have 80% of the building or 370,000 square feet open by midyear.

Our global facilities management group and the dedicated team in Reno worked together to bring this newly validated facility online, on schedule.

We are proud of the facility and very pleased with our clients' positive response to it.

Like Massachusetts last year, clients are eager to begin work in the new facility.

All of our major clients have completed their site audits, and many have already placed studies.

Inquiries are increasing, and we are successfully converting those inquiries to bookings.

Overall, we are extremely pleased with the success of the transition to date and fully expect to meet our scheduled completion date in December.

As we've discussed previously, the cost of transitioning from the legacy to the new Nevada facility is substantial, which is one of the two contributing factors in the PCS first-quarter operating margin.

The operating margin declined to 18.3% cent from 21.4% in the first quarter of '07 and sequentially from 20.6% in the fourth quarter of '07.

With the facility newly opened we believe the Nevada operating margin was at its lowest point in the first quarter.

We expect sequential improvement in the PCS operating margin from this point, driven primarily by improved efficiency in Massachusetts and Nevada.

Foreign exchange in Canada was the other factor that significantly affected the PCS operating margin in the first quarter of '08.

As a result of the strong Canadian dollar the PCS operating margin was reduced by 175 basis points compared to the first quarter of '07 when the US dollar was stronger.

We are continuing to work with our customers to shift our billing to Canadian dollars, which will result in a natural hedge as we have in other countries where we do business.

As we've discussed previously, we expect that by the end of '08, we will the billing slightly more than half of Montreal's sales in US dollars.

Our Phase I business performed in line with our expectations in the first quarter.

Clinical Services Northwest reported strong sales growth, but Clinical Services Edinburgh continue to be impacted by uncertainty surrounding regulation.

Foreign exchange exacerbated the situation with clients preferring to place business in the US to avoid the currency arbitrage.

We have implemented changes in our UK clinic, including a new management team.

We believe these changes will benefit our operation and expect the business to improve by the second half of '08.

As you know, Nevada and Massachusetts were the largest of our expansion projects and the ones that presented the greatest execution risk.

As we move toward completion of the first phase in Nevada I am very pleased to say that both projects went extremely well.

I'm exceeding exceedingly proud of the Charles River teams who dedicated themselves to these projects and who maintain that dedication as we continuously expand our facility to support the demand for services from our clients.

We are working toward an early '09 opening of the facility in Sherbrooke, Quebec and still expect that will be dedicated to one or two large global pharmaceutical clients.

Both Ohio and Edinburgh expansions are progressing well, and will be open in mid '09.

The 50,000 square foot facility in Shanghai will open on schedule in the third quarter of '08, and will likely be dedicated to a small number of large, multinational pharmaceutical clients.

Based on the strength of demand from these clients who are working in China, we are already pursuing the second phase of our operations.

The China market is expanding quickly, and we expect it to be a major venue for multiple Charles River products and services within the next three to five years.

We intend to be a leading provider of drug development products and services to our clients in China, and will judiciously build the infrastructure we need to make that goal a reality.

As we've said before, building capacity while challenging, is not the factor which limits our ability to grow.

Staffing that capacity is the key to our ability to support our clients' demands and our own growth.

As we explained when we transitioned in [mass], we have developed extensive hiring protocols to ensure that we attract the qualified personnel we want and the programs to train them to work successfully in our business.

We did quite well staffing Massachusetts and have expanded and customized the staffing plan for Reno.

Recognizing that Reno would be a more difficult locale from which to draw our employee pool, in '05 we began to reach out to educational institutions in the area in order to raise our visibility as an employer of choice for graduates.

That effort, combined with our staffing plan, has created a larger pool of qualified applicants, and we are successfully hiring to fill new positions.

We are using variations of these staffing plans at all of our locations and are very pleased with the results that we've achieved.

So in conclusion, I would like to reiterate that the growth we experienced in the first quarter of '08 demonstrates the strength of demand for the broad portfolio of essential products and services we offer.

All of our decisions in recent years were directed at positioning Charles River to support the trend toward outsourcing among our pharmaceutical and biotechnology clients.

These decisions included a focus on our core competencies of laboratory animal medicine and science, and regulatory compliant preclinical services.

Capacity expansion, strengthening our senior management team and hiring scientific experts to deepen our knowledge base, strategic bolt-on acquisitions and investments in technology to support the growing information requirements of our business.

We believe that the goals of faster and more efficient drug development will continue to lead our clients to outsource, and the expertise of premier partners like Charles River who have the capacity to support drug discovery and development will continue to enable this trend.

We believe we will continue to see the virtualization of big pharma and biotech, so at Charles River we are building our clients' facilities and hiring staff for them.

In fact, we are becoming our clients' infrastructure, working with them to accomplish their goals of bringing new therapies to market faster and more efficiently.

I would like to thank our more than 8500 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 recap our strong first-quarter financial results, let me remind you that I will be speaking primarily to non-GAAP results, which exclude all acquisition related amortization and other items.

Sales and operating income once again grew at a robust double-digit rate in the first quarter, continuing the momentum from 2007.

This drove a 12.5% year-over-year increase in EPS to $0.72, the consolidated operating margin declined 60 basis points year-over-year to 21.2% as very strong RMS results offset a significant portion of the increased operating cost due to the Nevada transition and the negative impact of foreign exchange in Canada.

Foreign exchange benefited revenue growth by 4.2% in the first quarter or by approximately $12 million.

The RMS segment benefit was 6.3%, due primarily to the continued strength of the euro.

However, the PCS segment gained only 2.1% from FX, primarily as a result of the impact of a weaker British pound on our PCS facility in Edinburgh, Scotland.

$12 million top line gain translated into a nominal benefit to consolidated operating income.

As a result of our natural hedge at most of our locations, we would expect the top line to flow through to operating income at the margin rate.

However, due to our exposure to the Canadian dollar at PCS Montreal where we are not naturally hedged, the flow-through was limited.

Foreign exchange primarily due to the strong Canadian dollar, reduced the PCS segment's operating income by $2.3 million and margin by approximately 175 basis points compared to the first quarter of last year.

We are making progress on our goal to reduce the impact of foreign exchange in operating margins by invoicing more of our PCS Montreal clients in Canadian dollars and expect to reduce Montreal's US denominated sales to slightly more than half by the end of 2008.

This conversion takes time as the change in billing will be prospective and will remain in US dollars for studies in progress or that had already been scheduled.

Foreign exchange did not have a significant impact on sequential PCS margins since the US dollar has not moved much relative to the Canadian dollar in the last six months.

We generated a 6th consecutive quarter of sequential sales growth in the first quarter, driven primarily by the RMS segment.

The consolidated operating margin improved by 50 basis points sequentially versus the fourth quarter of 2007 for a 580 basis point improvement in the RMS margin from the seasonally weaker fourth quarter more than offset the expected decline in the PCS operating margin, as well as a sequential increase in unallocated corporate costs.

The margin increase and a lower tax rate resulting in an 11% sequential increase in EPS during the first quarter.

Unallocated corporate overhead declined by $200,000 year-over-year to $15.6 million in the first quarter of 2008 as costs related to performance-based compensation and the ERP implementation were offset by lower healthcare related expenses.

On a sequential basis unallocated corporate overhead increased by nearly $6 million, driven by the expected increase in healthcare fringe and related costs.

The fourth quarter included favorable true-ups for certain expenses at year end, which did not repeat in the first quarter.

Net interest expense decreased by $600,000 sequentially and $1.4 million year-over-year primarily driven by lower interest rates.

Debt repayment activities also contributed to the year-over-year reduction.

With slightly over one-third of our debt floating-rate the Federal Reserve's aggressive rate cuts have resulted in lower interest expense as the LIBOR based rates declined.

Other expense was $800,000 the first quarter as a result of investment losses on assets associated with the deferred compensation plan.

As expected, our tax rate declined to 27.8% in the first quarter due to a reduction of the corporate tax rates in certain foreign jurisdictions including Germany, the UK and Canada.

Turning to balance sheet and cash flow items, cash and cash equivalents including short and long-term marketable securities declined to $269 million at the end of the first quarter from $289 million at the end of last year.

Accounts Receivable increased to $239 million from $214 million at the end of 2007.

As a result, DSO was less favorable at 38 days versus 35 days at the end of the year but within our targeted range and flat compared to the first quarter of 2007.

Free cash flow was a negative $9 million in the first quarter compared to a positive $1 million last year.

CapEx was slightly higher than last year at nearly $40 million in the first quarter of 2008.

Based on first-quarter levels, we continue to expect CapEx for the year to be between $220 million and $240 million and free cash flow to be in a range of $50 million to $75 million.

Depreciation increased $2.7 million year-over-year to $14.8 million in the first quarter, and we continue to expect it to be $65 million for the year due to new capacity coming online.

Total amortization expense declined $300,000 year-over-year to $7.6 million in the first quarter as a portion of the intangible assets from the Inveresk acquisition were amortized over a shorter, three-year period which ended in 2007.

However, our full year guidance for amortization expense increased to approximately $31 million or $0.30 per share as noted in the guidance table in the press release.

The $0.02 increase versus the previous estimate was primarily driven by foreign exchange rates since our Inveresk related intangible assets are booked in Canada and the UK.

Many of you have asked about our exposure to auction rate securities given the recent turmoil in the credit markets.

We hold only $21 million in these instruments, which are classified as long-term, marketable securities on our balance sheet.

These securities are AAA-rated and backed by government student loans.

As of March 29, we recorded a fair value adjustment on these securities of approximately $600,000 due to the lack of liquidity in the current auction market.

There was no P&L impact since this was booked as an adjustment to cumulated other comprehensive income within shareholders equity.

However, we believe we will get full value for these securities either through future successful auctions or by holding them until maturity.

In the first quarter we repurchased approximately 350,000 shares of our common stock at a cost of approximately $21 million.

We had approximately $75 million remaining on our current buyback authorization at the end of the first quarter which we expect to help offset share dilution from option exercises.

As many of you know, we hold $350 million in convertible notes, which have become more of a focus in recent quarters due to incremental share count dilution and the proposed accounting change by the FASB.

Dilution from the convert was 1.4 million shares in the first quarter of 2008 based on an average share price of approximately $61.

Because our diluted share count for the full year will be contingent on the dilution from the convertible debt we have chosen not to update our 2008 share count guidance.

The dilution is directly correlated with our stock price and can vary from quarter to quarter, making it difficult to forecast share count.

As for the accounting change, FASB recently reaffirmed staff proposal APB 14-a and directed the staff to draft a final FSP.

The final FSP has not been approved or issued at this time, but we believe that it will require us to bifurcate our $350 million convertible note into debt and equity for book purposes, and allocate a higher implied interest rate to the debt portion.

Since this is only a book adjustment, it would have no cash or economic impact on us, only a P&L expense.

Since the expected rule has not been approved and will not be effective until our 2009 fiscal year, we have chosen not to estimate the impact at this time or discuss any potential actions we might take to mitigate the effect.

In April, our Board approved a plan to freeze our US defined benefit pension plan effective April 30th.

At the same time, we also enhanced the 401(k) plan benefits to all US employees.

As a result of the pension curtailment, we expect to incur an estimated onetime gain of approximately $0.04 per share in the second quarter of 2008, which we will exclude from non-GAAP results.

Offsetting this gain, we expect to incur a charge of approximately $0.01 to $0.02 per share in 2008 related to the planned disposition of our legacy preclinical facility in Worcester, MA.

Although we exited this facility at the end of 2007, we continue to hold the owned real estate and are evaluating our options to dispose the property.

We recorded a charge of approximately $700,000 or $0.01 per share in the first quarter, which was excluded from non-GAAP results.

Should there be future charges associated with the disposal, they will also be excluded from non-GAAP results.

Overall, our financial performance in the first-quarter 2008 marked a continuation of the strength we experienced throughout 2007.

We are reiterating our 2008 guidance of sales growth in a range of 10% to 13%, GAAP earnings per share in a range of $2.59 to $2.69 and non-GAAP earnings per share in a range of $2.87 to $2.97.

Our revenue guidance continues to be driven by underlying organic growth of 9% to 12% as we originally discussed last December.

Although the implied FX benefit of approximately 1% for the full year is lower than the 4% benefit generated in the first quarter, we expect to anniversary the significant weakening of the US dollar in the second half of the year, and forecast rates to moderate in the current spot rate.

Looking ahead for the second quarter, we expect to see a sequential improvement in PCS sales which would be consistent with historical trends.

We also expect increasing sales in Nevada will result in improved capacity utilization at the new facility which will benefit the overall PCS operating margin sequentially.

In summary, we are pleased with our first-quarter results and continue to look forward to a strong performance for the remainder of 2008.

That concludes our remarks.

We will now take your questions.

(OPERATOR INSTRUCTIONS) Douglas Tsao, Lehman Brothers.

I was just wondering Tom, or Jim, if you could just walk through some of the mechanics so we can sort of understand why the margin impact this quarter for the move into Reno was greater than what we saw last year.

I understand that Reno is obviously much bigger, and the business mix was a little different, but did you have a change in how you had to staff up in Reno a little more in advance this time?

I don't think the staffing itself had a huge impact, Doug, as Jim diluted we learned some things from Massachusetts, but I would expect that that would be favorable.

Nevada is a much larger facility.

I think as Jim remarked in his comments, we also got off to a slightly slower start in January in part due to what we would consider seasonal trends around the holidays at year end, where there can be an interruption in starts and stops.

It is a larger facility.

We did begin our space utilization in December and then really ramped up aggressively in January.

Originally in Massachusetts we really didn't get into that facility, as I remember correctly, until a little bit later in Q1 and more into Q2.

So I think the biggest impact in Massachusetts as we moved from the old facility to the new facility was really later in the first quarter and more toward the second quarter.

But also as you said, it was a smaller facility, as well.

And then also I was just hoping you could provide some context and hopefully I'm not getting a little ahead of ourselves, but thinking about next year with the new move into the Quebec facility should we anticipate comparable margin pressure?

Or the fact that you anticipate that being filled with the rededicated space agreement, mean that it will be much more profitable from day one?

You should think of the Nevada and Mass facilities as being unusual in their scale and scope.

A lot of replacement space.

And an enormous amount of cost being brought on and some infrastructure actually in place for shelf space that has not even been finished yet.

The Sherbrooke facility is much smaller.

It is actually the first phase of what will be a larger facility as I think you commented on yourself, it is essentially spoken for by one or two global pharmaceutical companies.

So we expect the uptake will be dramatic, not unlike -- even though it was a new facility -- but not unlike when we add space to an existing operation.

So we would not expect significant drag from that facility next year.

And then also sticking to PCS, where there costs related to the opening of the Shanghai facility this quarter?

Was that also a drag on the margin?

Yes, I mean you've got substantial costs in China that really didn't exist at all last year.

We have a relatively modest amount of sales from the legacy company that we acquired.

And of course we are adding staff, both corporate and scientific staff and beginning to build out that facility.

So yes, China is a small drag on our numbers, but fully anticipated and fully reflected in our guidance.

And finally, turning to RMS, which was very strong, did you begin shipments from the new barrier rooms in California this quarter, and did that provide some of the margin loft that we saw in a year on year basis?

Sort of normalizing the nonhuman primate effect that we saw last year?

Yes, but it would be modest.

We did ship from those first two rooms.

They are up to full production.

There is some benefit from that, both in the top line and the margin and how we utilize the rest of our national infrastructure better.

I don't think that is a dramatic factor.

A dramatic factor is that we had broad-based very strong demand across the entire sector, both research model production in vitro, GEMS and other services.

And that is a reflection of both the outsourcing trend and the really increasingly intensified focus of our clients on generating new compounds as there are additional challenges on their fundamental business model and their portfolios.

Okay, great.

Thank you very much.

I will hop out for now.

Thank you.

Eric Coldwell, Robert W.

Baird.

I am curious, first off, on Reno.

It looks like if we exclude the year-to-year foreign currency drag and potentially the start-up expenses and redundancies in Reno that your preclinical margins might have actually been flat to higher excluding those events on a year-over-year basis.

Could you offer any color on that and whether that assessment is correct?

Well, I mean there is a multitude of factors at play.

We have a number of facilities, and clearly we delineated what you said.

And as Jim said, we had strengthened many of our businesses.

So I think on the whole PCS business continues to be very strong, and I think the two or three main factors impacting it either sequentially or versus last year, continue to be Nevada, the foreign exchange in Canada and to a lesser extent some of the activities in our Phase I areas.

China, as Jim mentioned, but some of our other areas are particularly strong as well.

Shifting gears to in vitro, you mentioned you have been kind of slowly acquiring some of your European distributors.

However, at least through calendar '07 we didn't see much of an uptick in cash flow from investing activities on that line item, not a lot of acquisition payouts.

Were more of these events happening in the first quarter of '08 that we haven't yet seen, and can you just quantify how many of these distributors are out there, what kind of acquisition costs you are experiencing?

They are very small.

There are small distributors in multiple countries in Europe.

We wanted to get the benefit of going directly to the client, obviously getting some benefit on margin having control of our own destiny.

I think we did a couple of those small deals last year.

We hope to do a few more.

And again, they are quite small.

We don't know with certainty that we will get them done, but we certainly are pursuing the same strategy, and we've had very good response from the people that we've approached about that being also a good business transaction for them.

Many of the founders or the owners of these small businesses stay with us and continue to work with and for us.

So we've maintained the continuity with clients and get the enhanced benefit of the margin.

So they are small and subtle important strategically, moving the dime a little bit, particularly in the in vitro business.

Jim, is it safe to say that even if you are successful in closing a few more of these deals that the acquisition proceeds from this specific activity would be less than $10 million this year, more than $10 million, can you give us some direction?

Flat.

I mean it is very, very small is what we are trying to tell you.

And while we are getting a little bit of a benefit if you put that all aside the in vitro business which we are very fond of and believe in its growth potential is performing extraordinarily well.

I would say slightly better than our expectations.

We are getting amazing uptick generally in the devices and more importantly because you will recall, we have always articulated that this is a razor blade business and we are beginning to see some discernible results with numbers of cartridges used and frequency of use.

And so fundamental strength of that business is really what is driving it.

This is a little bit of a, just a little of benefit on top of something already performing extremely well.

That's great.

Final question relates to PCS segment.

I think in the prepared commentary and the slide deck there is a discussion about sequential improvement in sales in PCS expected through the year.

Are you referencing increases in dollars specifically or an increase in the reported growth rate?

The comment itself was directed at dollars quarter-over-quarter.

Okay, thank you very much.

Randall Stanicky, Goldman Sachs.

Thanks, guys, very much for the question.

Tom, I may have missed it.

Did you talk about the full-year PCS margin?

I think previously you had talked about a similar level to '07, which would imply I think about 21.5%?

Correct.

And we didn't make that comment on this call, but we did reaffirm that on our fourth-quarter call.

And really we don't expect anything different so obviously if you look at the underlying trends and the other comments we have made in the call, we expect to see sales growth sequentially quarter to quarter and we expect the margin to come up and end up at or about the same place for the full year as last year.

That implies what I would think as some modest improvement next quarter and then a stronger back half just given the timing of some of the China facility and otherwise peaking I guess about 22.5 to 23 as we get later into the year.

I guess the question is as we think about that and we think about the mix of some of the higher margin study space coming on with some of the space early '09, is there a level at which we should be thinking about in terms of operating leverage where this business can get to from a profitability perspective?

You mean as in an ideal margin?

Exactly.

To go back to your first comments, we expect the margins to improve throughout the year.

I wouldn't necessarily say at this time I expect it to improve any more or less in one quarter versus the other; for instance your comment about some in Q2 but more in the back half.

I think based on some of your other comments, while I expect it to improve, given things like mix, pricing and some of the other factors it is not always going to be exactly 50 basis points or 100 basis improvement quarter to quarter to quarter.

I think there is going to be some volatility but directionally I think it is going to continue to improve and go up.

Our stated longer-term goal is to be at 25%.

That is what we are working toward.

A number of our sites are higher than that and we obviously are struggling with the capacity expansion in terms of the level of cost through this period as we bring on those large amounts of space.

But again, it is our stated target which we think we can achieve to really get to 25% although that is going to take some time.

One last follow-up on that or not on that specifically, but as you think you made some comments in your initial release around strength of customer demand, both specifically biotech and pharma.

Have you seen any fluidity at all within biotech space as you think about the different types of customers in that space, or is it strong across the board?

It has been very strong across the board, and it has been very strong internationally, as well.

We are seeing the continuation of the trend that we experienced last year, really not seeing notwithstanding what you read in the press -- some of the indications with the challenges that the clients are facing in workforce reductions and some of the challenges of some of the drugs that have not been approved.

Recently rather than a pullback we are seeing further intensification of demand pretty much across the board.

It is not really segmented by biotech or pharma; as we've always said, it tends to be a blurring of those two in any event.

And we are also getting some benefit particularly in our research model business after years of not being very effective in that marketplace of some penetration into the government sector and into the academic sector as we pick up share as a result of our price point being compressed positively somewhat with the competition.

That's great.

Thanks, guys.

John Kreger, William Blair.

A question for Tom.

You did about 16% revenue growth this quarter but reiterated expectations for 11% to 13%.

In terms of the slowdown that is implied for the rest of the year, should we really think about that just as a foreign currency impact, or are there other parts of the business where you would expect slower growth throughout the rest of the year?

We are really not expecting any downturn, per se, in any of our broad-based businesses.

As I mentioned at the outset, foreign exchange has been significant in Q1.

It has also been very volatile.

So as look forward to where our numbers would be for the year we are expecting a pullback in some of the strength in the overseas currencies, in part because that is what we read.

But also just to be a little conservative on a dollar that has historically at all-time lows.

So we do expect to see some moderation and the other comment that I made in the remarks was that while we are seeing a lot of benefit from foreign exchange in the first quarter we do get nice flow-through on the RMS side but unfortunately with the Canadian dollar we didn't get a lot of flow-through from PCS because of that.

In fact, it was negative.

So the impact on OI/EPS was really not that significant even though the sales impact was very strong.

So I think all of those comments together really align us to pretty much reaffirm our guidance.

It is still early in the year, and because of those factors in the range that we have, we are just reaffirming our guidance at this time.

Great.

Thanks.

And Jim, question, you said earlier on the call that RMS is often viewed as a proxy for drug development.

Can you expand on whether or not you are seeing anything interesting in RMS that might reflect how various customer segments are behaving?

For example, are you seeing any signs of either increased or decreased flow of compounds out of the discovery labs?

And also, are you seeing any changes in the number of models being used per compounds that flow in?

We are really not.

I would say that we continue to see a strengthening in the demand.

We are definitely seeing more compounds getting into the early development process.

The whole goal, of course, of our clients is to have more of them ultimately get to market.

But odds are slightly better.

Of course, that invigorates our business as that space is stronger.

The trends for model usage is relatively similar to the last couple of years with really huge growth in our immunocompromised mouse space given all the oncology work in particular.

Our outbred rat sales are a reflection of the strength in toxicology not just by Charles River, but by our competitors and also our clients who are still doing the work internally.

And we continue to have improvement in some of our disease models in areas like diabetes, which should continue as we have more models that have been developed for specific disease types.

And also, large animal sales continues to be consistently strong as the number of biologics getting into the pipeline continues to increase.

Great, thanks.

And then just one last question on the PCS side.

As you have strategic discussions with your clients, and as you have completed your major facility upgrades, what is really driving their decision to use one of your particular facilities over the other?

Is that a discussion that you can influence, or is that something that they are really driving?

I am trying to get at your ability to do some load balancing going forward.

Very important question and one that we deal with constantly; so I would say the primary decisions are historical relationship with the site, confidence in its management, particularly if scientific management and specifically with certain study directors and the mix of services at a particular site.

So whether it is ancillary laboratory services or some sophisticated toxicological service like infusion or inhalation tox.

So they are drawn to that, and there is a level of comfort that comes through months or years of doing work with a site.

Remember they are looking at these site as adjunctive to their own, and they need to have total confidence.

Proximity is somewhat of an issue all things being equal; I think lots of clients particularly smaller biotech clients like it.

One of the things that we talk about a lot is clients that have a historical relationship and comfort level with a particular site, what is required to get them comfortable with an alternative one.

And I think that if you look at the two big sites that we have now rehabilitated or reinvigorated or improved, it is just going to be time.

It is going to be comfort level of doing studies there -- of getting, having some knowledge base with the scientific staff and feeling that it is comparable to somewhere else that they've done.

So we've talked historically about fungability of sites.

It is probably not literally likely that all sites would be created equal, but we would hope that our major clients would be comfortable with one or two sites for sure and perhaps a third one.

Obviously the more sites they are comfortable with, the more flexibility we have in ensuring that our capacity is fully utilized throughout the globe.

Thank you very much.

Sandy Draper, Raymond James.

Just a couple of housekeeping questions as most of my bigger picture questions have been asked.

One, can you give me the breakout between actual interest income versus interest expense, not just the net?

I don't have that in front of me, but we can get you that off the call.

Okay, great.

And the second question is in terms of you gave some comments around the corporate expense.

Looking back at '07 and even a little bit '06 where you saw the higher first half and declining, is it best to look at corporate expense as sort of a year-over-year and there is a normal, seasonal decline in that?

I am just trying to think the best way to think about modeling that corporate expense line.

One of the items that has created some variability is we have historically had higher healthcare costs in the first half of the year, and we think that is due to the new plan opening and people not doing things around the holiday.

We saw that last year.

We also tend to see payroll taxes and things like that be heavier in the first part of the year and then ease up as an example when people get over the maximum requirements by the government.

This year we saw the same trends but probably not as heavy in the first part of the year; but I really think you should look at it as an overall and expect a little bit of volatility throughout the year.

We also had a couple favorable adjustments in the fourth quarter that pushed it down a little bit that is not really what you call onetime items, but more or less one-offs in addition to the other comments I made.

So you wouldn't expect necessarily to trend back down to that same fourth quarter level as you saw last year?

No, definitely not.

Okay, thanks.

John Sullivan, Leerink Swann.

Just a couple quick ones.

First of all, on the Endosafe-PTS, it sounds like you're finding new customers while including in some locations that maybe aren't traditional Charles River customers.

Just wondering what is the long-term plan for the distribution channel for Endosafe-PTS?

John, I would say that it is not that we are finding new locations to sell, we are continuing to sell in those countries, we just have made some modest acquisitions of some of our distributors so that we have direct relationships with the clients.

And also the benefit of the margin.

So that really hasn't changed.

We are having very good results in acceptance of this technology and the validation and learning curve that clients are going through, on a pre wholesale basis across a very large client base.

And an international client base; as you know it is truly a global product where we are continually making innovation.

So our penetration is as good or better than we anticipated.

What was the second part of your question?

I was just wondering in clinical sites like dialysis centers and the like, you intend to continue to distribute directly to those type of sites?

We do and have been, and also places like nuclear pharmacies.

So we are getting very big and substantial upticks from those locations.

Lastly, switching gears, can you just comment on are there any changes in professional turnover at the Company, specifically at the study director level?

No, we've been having really wonderful response in attracting senior talent from primarily former clients, large pharma and biotech companies, people with marquis names and really great reputations in the field.

I think people are coming, as we said in prior calls, because it is becoming a collaborative society here and a place that really smart scientists want to stay and work.

I think the career opportunities from a longevity and from the long-term factor is stronger at a company like ours than maybe some of the alternatives.

So, to the contrary, it is relatively easy -- and when I say relative, it is relative historically to attract the senior talent, and now we are not losing them at all.

Thank you.

Doug Schenkel, Cowen and Company.

Thanks for taking my questions.

I apologize if I missed it, but did you reiterate the guidance you provided back in February for full-year RMS and PCS growth?

I think you had talked about high single-digit growth for RMS and low to midteens growth for PCS.

We didn't, but we are happy to.

Okay, thank you for that.

Let me take another try at getting some more detail on PCS margins.

Keeping in mind that, one, PCS margin was down 310 basis points year-over-year and that Canadian FX accounted for about 175 basis points of that.

And then I guess thirdly, based on prior commentary I think that you have made, that the elimination of redundancies in Massachusetts provided probably about 100 basis point year-over-year benefit.

Is there any good reason to assume that the delta which I calculate at about 200 to 250 basis points is largely attributable to Nevada, and would it be right to assume that that goes away next year?

Well, I think the largest portion of that would be Nevada, for sure.

And to going away next year, I don't think it would completely go away.

So when you think about Nevada, we are obviously filling up new space.

This is really the biggest impact that we will have Q1.

We had a smaller impact in Q4 as we moved some people to the facilities.

We will actually bring on some additional space through Q2, but we don't anticipate that having the same kind of impact on the margins because we anticipate having more utilization as we move through Q2.

But we wouldn't be fully utilized by year-end as an example.

So I think as we move into next year, we will still be in an underutilized position, just not as dramatic as it is today.

Any chance you will bless that calculation 200 to 250 basis points?

When you say -- do you mean eliminate that just at Nevada through or?

Yes, is that in the ballpark of what the year-over-year impact was from the redundancy in Nevada?

I would have to look at it a little more closely and get back to you, but that is definitely the biggest impact.

I think that is -- now there are other things at play, as we said before.

It is definitely not all of Nevada.

We saw some other foreign exchange impact that was less de minimus, but nonetheless was a little bit negative in certain parts.

Okay, and then large models, clearly you were up against a tough comp year-over-year, but could you clarify if there was a bolus of large models in this quarter that may have contributed to the strength in sales and margins?

And if that were the case, is the supply in demand there to continue that strength moving forward?

We didn't say that.

We had kind of a typical strong quarter.

It was much stronger last year, and that makes our performance in RMS for Q1 even more extraordinary actually.

Okay, so that nothing abnormal this quarter -- sorry to interrupt.

Nothing abnormal.

We have a relatively constant supply source, and we anticipate continuing to sell them throughout the year, it has always been a little bit difficult to call on a quarter by quarter basis, but there was nothing unusual in Q1.

Okay, and one last question.

You talked about the dynamics that are driving strong demand for RMS models in biopharma, what about in academia, where it does look like and I think you actually mentioned you may be picking up share.

Are there dynamics that have developed that are driving greater academic demand in terms maybe areas of focus or are there other reasons you might be gaining share?

I think our improvement in the academic market obviously has nothing to do with NIH spending.

Maybe sometime in the future we will see that.

It has to do with our prices being more comparable to our competitors so we are able to get share.

Also has to do a little bit with the fact that some of the early discovery work is being done at the academic institutions and funded by the pharmaceutical companies.

So there is more funding there generally.

They would be more prone to come to us particularly if the pharmaceutical companies guided them that way.

Thanks for taking my questions.

Jon Wood, Banc of America Securities.

Tom, if you strip out the year-over-year impact, the accelerated primate shipments in 1Q '07 is it possible to estimate what the operating margin expansion in RMS would have been ex that impact?

Well, I mean we could do that, but we really haven't provided that level of detail, and I think we would probably prefer not to.

Understood.

Besides that primate impact, was there any other remarkable mix shifts in RMS in the quarter year-over-year?

No, I would say as Jim said, the bellwether has historically been the US research model market.

And that was strong, as Jim mentioned, that does drive a lot of profitability.

But models pretty much across the globe were strong in Europe and better than it has been historically in Japan.

And really models can really drive the profitability of the business.

So as Jim referred to our customer base, we are seeing good, strong demand across almost all fronts of our customer base.

That international strength is really a strong reflection of what is going on in the research community because we've seen strength primarily in the US the last two years, and we've really seen Europe invigorate in the last year or two.

And Japan is beginning to come around.

So it is global expenditures and of course it is by global pharma companies who are located in all three geographic locales.

Jim, is the competitive landscape abroad different than it is domestically?

The research model side, a little bit.

We have -- I would say in the aggregate we have a larger share of the European market than (inaudible) of the US market.

Okay.

Lastly, Tom, any update to the guidance for net interest expense for 2008?

Well, the first quarter was less than $1 million on a net basis.

What I would say directionally is that as we generate cash globally but spend most of our capital in the US, what is going to happen is our interest income is going to decline sequentially, and we'll actually do some borrowing in the US so our interest expense will increase.

What I would say directionally is that on a sequential basis the number should deteriorate slightly, quarter to quarter.

So it would be higher than the current run rate.

Understood.

Thank you.

Sung Ji Nam, JPMorgan.

I could I am sitting in for Tycho Peterson today.

One quick question.

Could you comment on the pricing trends particularly in the, on the preclinical side given continued facility expenses across the industry?

We are continuing to get 3%, 4% across all of our geographic segments.

Obviously some of the specialty work we get higher pricing but on average we have been able to get that with pretty solid acceptance by our client base.

Thank you.

Douglas Tsao, Lehman Brothers.

Jim, I was wondering if you could provide some context for the strength that you saw in the Transgenics business or GEMS business as you are calling it now.

Yes, it is a -- that is definitely a continuation, and we've spent a lot of time with scientific community really trying to get to the bottom of what is driving the trend.

The answers are consistent across the folks that we speak to whether it is in academia or in the pharmaceutical sector, and that is continued hope and focus on more complex genetically altered animal models being more important discovery tools, providing greater translational information.

Clearly we are seeing an uptick in investment in the creation of these models and a corresponding need for us to perform greater services as we have historically.

So I think the pharmaceutical community needs these models, and we are obviously delighted to perform the services.

And we would expect it to continue.

Was there any particular regional strength or geographic strength relative to US, Japan and Europe?

We were pleased with the strength pretty much across the board and ended up with double-digit growth.

Okay, thank you.

Thanks for taking all the questions.

Speakers, I will turn it back to you for closing comments.

Thank you for joining us this morning.

We look forward to speaking with you soon and to seeing many of you at the Robert W.

Baird and Banc of America conferences next week.

This concludes the conference call.

Have a good day.

Thank you.

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