Charles River Laboratories International Inc (CRL) 2010 Q2 法說會逐字稿

Welcome to the Charles River Laboratories second-quarter 2010 earnings conference call.

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

Later we will conduct a question-and-answer session; instructions will be given at that time.

(Operator Instructions).

As a reminder, this conference is being recorded.

I'd 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 second-quarter 2010 earnings 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 second-quarter results and update guidance for 2010.

Following the presentation we will respond to questions.

There's a slight presentation associated with today's remarks which is posted on the Investor Relations section of our website at IRR.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 164265.

The replay will be available through August 17.

You may also access an archived version of the webcast on our Investor Relations website.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 19, 2010, 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'll turn the call over to Jim Foster.

Good morning.

As you know, we announced last Thursday that we had mutually agreed with WuXi to terminate our acquisition agreement.

We believe that the transaction had long-term strategic benefit for our business and our shareholders and are disappointed that many of our shareholders didn't support it.

However, we value our shareholders' perspective and were committed not to circumvent the process.

We believed in the merits of this transaction which would have created a premier early-stage contract research organization and enabled us to offer our clients an end-to-end solution to their non-clinical drug development challenges.

On this point our strategy hasn't changed.

We intend to be the premier early-stage CRO and will continue to build our early development capabilities, specifically our discovery services, in order to support our clients' efforts across a broader portion of the drug development pipeline.

We will enhance our portfolio of essential products and services, deepen our scientific expertise, and maintain our standards of exceptional client service, all of which distinguish Charles River as an industry leader and make us the strategic partner of choice for early-stage drug development among pharmaceutical and biotechnology companies.

Our core business is strong and, as a result of our past and ongoing efforts to restructure and improve our operating efficiency, it is poised to perform exceptionally well when demand from our large pharmaceutical clients rebounds.

As you know, our Board authorized a $500 million stock repurchase program.

The Board's action reflects both its belief that our stock price is substantially undervalued and also its faith in Charles River's future prospects.

Repurchasing stock is one means of enhancing per share earnings growth and improving shareholder value in advance of our expectation that in time demand will return and drive both sales and earnings growth.

I'd now like to shift the focus to our second-quarter performance.

The second quarter signaled that our business and our pharmaceutical end markets have stabilized.

While there are selected areas of progress overall our industry has not experienced a more robust recovery, particularly in preclinical services.

We reported sales of $292.1 million in the second quarter of 2010, a decline of 5.2% from the second quarter of 2009.

Foreign-exchange reduced net sales slightly compared to a 3.4% the benefit in the first quarter.

Excluding the effect of foreign-exchange, the RMS segment reported an approximate 2% sales increase and the PCS segment declined 13.1%.

Our second-quarter sales performance was below our expectations due primarily to the fact that we did not experience the anticipated sequential improvement in PCS sales.

Although our large pharmaceutical clients maintain their intention to outsource more preclinical services, we have not yet seen them shift a meaningful amount of additional work to us.

Operating income for the quarter was $47.2 million and the operating margin was 16.2%, compared to $61.3 million and 19.9% reported in the second quarter of 2009.

The decreases were primarily the result of lower sales and higher costs associated with our ERP initiative, partially offset by cost saving actions undertaken throughout 2009 and early 2010.

Earnings per diluted share were $0.49 in the second quarter compared to $0.66 into the second quarter of last year.

Earnings per share were in line with the outlook we provided on April 26 of 8% to 10% growth above the first-quarter level, but we are disappointed that we have not yet seen the improvement in demand from our larger clients which would drive earnings growth.

As a result we do not expect to achieve our original 2010 guidance provided at the beginning of the year.

As you read in our release, we are reducing our 2010 guidance to reflect our revised expectations.

We currently expect a 2% to 3% decline in net sales and earnings per share to be in the range of $1.90 to $2.

We are continuing our efforts to manage costs appropriately while maintaining a high level of service which our clients expect from Charles River.

Although we have limited visibility on the timeline, our clients confirm that they will continue to pursue outsourcing as the most viable means of improving pipeline throughput while driving operation efficiency.

We have the capabilities and capacity to support their efforts and are poised to generate improving revenue and earnings growth when the outsourcing demand from our clients materializes.

In the second quarter sales for our RMS segment gained 0.9% year over year to $167.1 million.

Excluding foreign-exchange the growth rate was 1.9%.

On a sequential basis sales declined by $5.1 million due primarily to foreign-exchange which had a greater impact on RMS due to the segment's exposure to the euro, as well as lower sales of large models.

Large models were lower than in the second quarter of 2010 due primarily to timing.

As you may recall, shipments of large models are subject to client requirements and sales are not even over the course of the year.

Our research model production business has continued to exhibit resilience through the last two years despite the economic downturn and pharmaceutical company mergers and cost containment efforts which have led to some moderate pricing pressure.

This resilience stems from our best in class research models, scientific expertise and superior customer service.

Specifically, we are seeing strength in sales of immunodeficient models.

Demand for immunodeficient mice and other strains used in the earlier stages of the R&D process has remained stable, testament to the fact that our clients are continuing to invest in the discovery of new drugs.

One of the most influential factors in the lower level of sales growth has been unit volume of outbred rats, the model of choice and toxicology and one of the highest volume in the and therefore most profitable models we produce.

Demand for outbred rats has remained low from both biopharmaceutical clients and CROs in particular reflecting the impact of pharmaceutical mergers and the fact that the anticipated improvement in preclinical study activity sales to materialize during the second quarter.

We are monitoring sales of these models for signs of increasing demand.

Although we would not expect to see it more than a month or so in advance, a sustained increase in volumes would likely indicate potential improvement in preclinical demand.

The RMS service businesses continue to perform well with an increase in sales in the second quarter even when excluding the 2009 acquisitions of Piedmont and Cerebricon.

We believe this performance is also a function of our clients' ongoing discovery efforts as many of these value added services are utilized early in the discovery process.

The in vitro business had another spectacular quarter with strong high teens sales growth and an improved operating margin.

Our continuing investment in expanding the PTS franchise, as well as our efforts to drive adoption of the PTS and MCS particularly in international markets, has been very effective.

In addition to increasing the number of machines in the field, we are also seeing an increase in the average daily cartridge use as clients embed the PTS in their testing regimens.

We continue to be very pleased with the performance of the in vitro business and expect it to continue to be a strong contributor to sales and margin growth.

We continue to report high single-digit RMS sales growth to academic clients.

This client segment has been the best performer over the past two years benefiting from the restructure of our sales force in 2009.

We are generating this growth even in the absence of a meaningful contribution of stimulus funds.

While a portion of the stimulus funds has been distributed to academic researchers, we believe that much of that funding is being used to supplement shortfalls in state government funding for facilities and equipment.

As a result, we do not forecast an incremental benefit from NIH stimulus funding this year or next.

The RMS operating margin was 29.1% in the second quarter primarily as a result of lower sales of large models and outbred rats and higher IT and compensation costs.

In the face of significant margin pressure from these factors, we are continuing to maintain the operating margin near the 30% level through a combination of modest price increases and tight expense management.

The PCS segment reported sales of $125 million in the second quarter, a decline of 12.3% versus the prior year, but flat sequentially compared to the first quarter of this year and the fourth quarter of last year.

As I've already mentioned, demand for our preclinical services has stabilized as demonstrated by three consecutive quarters with sales in the $125 million range.

We believe that with merger activity having subsided, biotech funding improving, healthcare legislation enacted and some capacity reductions by both clients and CROs we would see an uptick in preclinical demand beginning in the second quarter and improving steadily for the balance of the year.

However, the improvement we expected in the second quarter did not materialize.

In discussion with senior leaders at our global pharma clients, they readily admit that the current pharma model is broken and point to CROs as a primary means to reduce cost and improve efficiency of their early development efforts.

That said, capacity closures and outsourcing decisions by these clients are happening more slowly than anticipated.

Clients are continuing to utilize in-house capacity, rather than outsourcing to CROs as they have not completed their infrastructure reduction.

This is exacerbating the overcapacity situation which in turn is keeping prices depressed.

Pricing has remained stable since early 2009, but it's significantly lower than at the peak in 2008.

At current pricing and mix the increase in studies awarded to us while improving capacity utilization is not resulting in top line growth or margin expansion.

Further compounding the pricing issue are the trends that have persisted over the last two years including the elongation of the time from inquiry to study award and a greater preponderance of short term stripped down studies as clients prefer to hold off investing in more expensive studies until drug candidates are in PHASE III clinical trials.

While we believe these factors are transitory, it's difficult to ascertain for how long they will persist.

With more limited visibility into a rebound and preclinical demand for our large pharma clients, we now expect PCS sales to be flat with the second-quarter level for the remainder of the year.

We've continued to engage in extensive discussions with clients at very senior levels who maintain their position that they are looking to expand their strategic relationships with a reduced and limited number of partners.

We believe that these relationships will ultimately come to fruition, but are hesitant to opine as to when that might be.

We continue to pursue new arrangements which are program rather than project oriented and we can provide value to our clients utilizing our broad portfolio of essential products and services.

We also maintain a keen focus on cost containment and operating a lean and efficient infrastructure.

To that end, as you know, we announced our intention last January to suspend our operations at our PCS Massachusetts facility and transaction clients to our other facilities.

In life studies we were completed in Massachusetts in July and we expect to fully cease operations during the third quarter.

We have been extremely successful at retaining nearly all at our Massachusetts clients within our global PCS network which has helped to improve utilization at our other facilities.

The year-over-year operating margin decline was due primarily to pricing, which is expected to continue to restrict the margin for the remainder of the year.

The 270 basis points sequential operating margin expansion was a result of our continuing focus on cost management and expansion of our Lean/Six Sigma program.

We are very pleased that these efforts have resulted in an operating margin near 20% for the existing in life facility.

However, this improvement was offset by the expected operating losses during the ramp-up phase in our newer in life facilities, Sherbrooke and Shanghai, as well as a sharp decline in our clinical Phase I business.

Our Phase I clinic has been heavily affected by pharmaceutical mergers and constrained early development spending which has resulted in significant pricing pressure.

Phase I businesses are generally subject to fluctuations in demand and based on bookings by major pharmaceutical clients we expect our Phase I business to improve in the second half of the year.

We firmly believe the long-term outsourcing [business] is in tact and that clients will in time make these decisions to rely more on strategic partners like Charles River.

Our discussions with clients validate our view that the business should remain stable in the second half of this year.

But given the lack of visibility and to improving client demand, we believe it is prudent to assume that PCS results for the third and fourth quarters will be flat with the second quarter performance.

Tom will give you more detail on our outlook in a moment.

In the near term we will focus on running our business as efficiently as possible.

As I said earlier, we are poised to benefit from increasing demand from our large pharmaceutical clients, but with continued soft demand from many of our largest clients, we have to use every opportunity at our disposal to drive sales and earnings growth.

From a sales perspective, we believe our greatest near-term opportunities lie with our mid-tier and academic clients.

We have already realigned our sales force to increase its focus on academic clients which has proven to be a winning strategy.

We will now apply the same intensified focus to the mid-tier clients which include many biotechnology companies who are benefiting from increased partnering funds from large pharma.

On the operating side we will drive efficiency through a combination of continued tight management of our cost structure and our Lean/Six Sigma program.

This program has been in place for nearly two years and is becoming entrenched in our culture.

We expect to continue to identify new opportunities to streamline our operations and to generate returns.

We expect the combination of expense management, Six Sigma, and benefits to our ERP system will drive improved operating margins and free cash flow.

In summary, I'd like to say that our disappointment about the WuXi transaction in no way diminishes our enthusiasm for our core business or our strategy to continue to expand our early development franchise to maintain our leadership position.

Our RMS business is the global leader and our PCS business is one of two global leaders in the early development contract research industry.

We are respected for the breadth of our portfolio, our scientific expertise and our exceptional client service.

We will focus on fully utilizing our infrastructure to maximize the value of these franchises and to improve our returns which will drive shareholder value.

During these complex and challenging times I want to thank our employees for their exceptional work and commitment and our shareholders who have accommodated us with their time and consideration.

Now I'll turn the call over to Tom Ackerman.

Thank you, Jim, and good morning.

I will begin my comments with additional details on the share repurchase program that we announced last week.

As Jim said, our Board has authorized a $500 million share repurchase program.

We decided to implement this new authorization to ensure that we could quickly and effectively deploy excess capital in a manner which would deliver immediate returns to our shareholders.

The exact timing of the entire $500 million program has not been finalized, but we are exploring alternatives for timely execution including 10b5-1 plans and other vehicles.

Depending on the timing of the implementation and vehicle used we may fund these repurchases through a portion of available liquidity which includes cash and equivalents of $219 million at the end of the second quarter, availability on our current revolver of $142 million and continued strong free cash flow generation or explore other financing options.

Historically we have utilized repurchases as a key component of our capital allocation strategy.

We repurchased nearly 11 million shares for approximately $455 million under our prior authorization between the third quarter of 2005 and May 2009.

That authorization, which had $145 million remaining, has been canceled.

I would now like to turn my focus to or second-quarter financial results.

As a reminder, I will speak primarily to non-GAAP results which exclude acquisition related amortization, non-cash interest expense related to the convertible debt accounting rules and charges related to cost saving actions, evaluation and termination of the WuXi acquisition and other items.

Overall second-quarter sales declined 1.8% sequentially with three quarters, or approximately $4 million of the decline from foreign exchange predominantly affecting RMS as a result of the segment's euro exposure.

Operating income improved by 7.4% sequentially representing a 140 basis points margin improvement as a result of lower unallocated corporate costs and an improved PCS margin from 9.3% to 12%.

This resulted in an 8.9% increase in second-quarter EPS to $0.49, which was in line with our prior outlook of 8% to 10% sequential EPS growth.

While we are pleased to have met our EPS expectations for the quarter, we believe the sales weakness will continue to pressure operating results for the remainder of the year.

Foreign exchange changed direction and became a slight drag on sales growth in the second quarter compared to a 3.4% year-over-year benefit in the first quarter.

This was a result of the significant weakening of several currencies in May, particularly the euro.

Euro denominated sales represent slightly less than 20% of total sales largely in the RMS segment.

As a result, RMS was more adversely impacted by FX in the second quarter which contributed approximately $3 million of the $5 million sequential decline in RMS sales.

For the year we have factored in recent changes in FX rates and now expect foreign currency translation to reduce sales growth by approximately one person for the year with a greater impact on RMS.

Our topline FX exposure in the RMS segment drops down to operating income at the normal margin rate as our RMS facilities denominate both their sales and cost of sales mostly in local currency.

However, the year-over-year foreign exchange comparison did pressure the PCS operating margin in the second quarter since we are not naturally hedged in Canada.

You may recall that we invoiced roughly half of our PCS Montreal and Sherbrooke sales in US dollars while essentially all of our costs are incurred in Canadian dollars.

Given the Canadian dollar rates in the second quarter foreign exchange reduced the PCS operating margin by nearly 150 basis points on a year-over-year basis.

Unallocated corporate costs declined by nearly $4 million sequentially to $16.4 million and were only slightly higher on a year-over-year basis.

The decline was primarily driven by two factors -- favorability related to healthcare and fringe related costs and adjustments to the projected 2010 incentive compensation expense based on our revised outlook.

ERP costs were also slightly favorable when compared to the first-quarter level as additional costs associated with implementation began to decline.

We continue to expect unallocated corporate cost to be in a range of 5.5% to 6% of sales for the year.

As we indicated previously the first half level of 6.2% should moderate during the second half of the year as we progress beyond the implementation phase of the ERP project and additional costs associated with that effort subside.

The second phase of our ERP project was completed at the end of June with the successful rollout of the system at our PCS Montreal and Edinburgh site.

Our PCS in life operations and our North American RMS units are now live on the SAP platform and we are pleased to report that the transition went smoothly.

The ERP system has already provided us with a more efficient process to access information and the capability to drill down into this data with greater detail.

Due to the successful rollout and the efforts of our dedicated team we expect ERP cost to be $16 million to $17 million in 2010, slightly below our prior guidance.

Net interest expense of $2.7 million in the second quarter remains relatively consistent with recent quarters as a result of moderately lower debt levels, offset by a slight decline in interest income.

Other expense of $0.7 million in the second quarter reflected losses on investments associated with our deferred compensation plan.

Gains and losses on these investments are correlated with market returns and thus unpredictable.

The non-GAAP tax rate declined to 27.5% for the second quarter.

The nearly 200 basis points sequential decline was primarily driven by enhanced benefits from R&D tax credits in Canada and the UK as well as the geographic mix of earnings.

We now expect the non-GAAP tax rate to be in a range of 27.5% to 28.5% for the year as certain items that benefited the second quarter are expected to carry through in the second half of the year.

The items excluded from our non-GAAP results were consistent with what we have previously communicated with the exception of adjustments for WuXi related acquisition costs and the tax impact from repatriation.

At the end of the second quarter we incurred $8.4 million in deal expenses related to WuXi, principally advisory fees.

Given the termination of the acquisition agreement and additional advisory fees incurred we would expect to book an additional $3 million to $4 million in the third quarter plus the $30 million breakup fee.

We also incurred a $2.7 million tax expense in the quarter as a result of a decision to repatriate approximately $27 million of foreign earnings from our RMS Canada operations, which is expected to be completed in the third quarter.

In view of proposed tax legislation changes and stock repurchase authorization we are also evaluating repatriations in other jurisdictions.

Non-GAAP adjustments which reflect the severance costs and operating losses related to the suspension of our PCS Massachusetts operations are tracking slightly below expectations as we continue to progress well.

As Jim mentioned, we completed in life studies in Massachusetts in July and expect to wind down preclinical operations during the third quarter.

After this occurs we expect the stranded costs related to the facility to total approximately $2 million per quarter going forward principally related to depreciation and utilities.

I would like to expand on my earlier comments regarding our liquidity position.

Our cash and marketable securities position of $247.4 million at the end of the second quarter was comparable to the first-quarter level.

We repaid $23 million on our revolver in the second quarter and had $53 million outstanding at quarter end.

Second-quarter DSO was unfavorable at 51 days versus 46 days at the and of March and 41 days in the second quarter of last year, driven by an increase in the receivables aging and a decrease in deferred revenue, which was the result of lower sales volume in PCS and large models.

Deferred revenue offsets Accounts Receivable in the DSO calculation.

We do not believe we have a heightened credit risk as the result of the receivables aging and are actively working on our collections to improve DSOs by year-end.

Free cash flow was strong at $47 million in the second quarter and $66 million year-to-date.

When compared to last year, lower net income in 2010 was largely offset by the expected decline in CapEx spending.

For the year, we have narrowed free cash flow guidance to a range of $130 million to $140 million.

This includes CapEx Of $60 million to $70 million in line with our prior guidance.

As Jim discussed, we are reducing our sales and EPS guidance for 2010.

We have made this adjustment primarily as a result of our expectations of flat PCS sales for the remainder of the year given the undetermined timing of the rebound in outsourced preclinical demand coupled with the corresponding impact on our outlook for research models used in conjunction with toxicology.

We are lowering our sales guidance to a 2% to 3% decrease in 2010, including a 1% negative impact from foreign exchange for the year.

We now expect RMS sales to be flat to slightly higher and PCS sales to be down in the high single digits for the year, reflecting flat sequential PCS sales for the third and fourth quarters.

We've also lowered our non-GAAP EPS guidance to a range of $1.90 to $2 for 2010 as lower sales will have a significant impact on the operating margin.

We plan to continue to tightly manage our costs and expect PCS margins to be flat to slightly higher during the second half of the year.

Normal seasonality and lower sales are expected to preclude second-half margin improvement in the RMS segment.

Despite the changing guidance for this year, we continue to remain steadfast in the long-term growth potential of the outsourced, early-stage drug development market.

Our outlook for 2010 demonstrates that this period of weakness and fundamental demand has extended longer than we anticipated.

However, we continue to believe that the recovery of early-stage demand will occur, a thesis that is supported by our senior level client discussions, coupled with their continued actions to realign and reduce infrastructure.

In the interim, to optimize our strong free cash flow generation capabilities, we are taking the necessary action to drive immediate returns to our shareholders through the $500 million share repurchase authorization.

As we look toward 2011, we plan to maintain a keen internal focus on fully utilizing our infrastructure, to reinvigorate growth and on driving operating efficiency.

These initiatives should lead to operating margin improvement and continued robust free cash flow generation and coupled with our capital allocation objectives, we will deliver improving returns and long-term shareholder value creation.

That concludes our comments.

Operator, would you please take questions now?

(Operator Instructions).

Greg Bolan, Wells Fargo.

Good morning.

Thanks for taking the questions.

So, a couple questions here.

So while the WuXi deal has been scuttled, still I think a fair question is around your expectations for 2011.

Do you still directionally have enough visibility to suggest mid to high teens earnings growth in 2011, especially given the underlying expectations around the buyback?

I think a lot of that -- putting the buyback aside, Greg, obviously depending on the timing of that, that in and of itself will drive earnings.

I'm not sure that's the core of your question, but you did point that out.

So I think that putting that aside for a moment, I think the rebound in earnings and our margin is really predicated on the rebound in sales activity.

So, while we're continuing to look at, and we'll even look a little bit harder in the near-term given the reduced projections for the remainder of the year, to continue to improve margin, I think the real rebound, for instance, in preclinical margins to let's say 20% as an example is more dependent on a rebound in demand itself.

And ultimately I think if we can get sufficient demand to drive the top-line, I do think that we can get there with a stable pricing market, but I think -- and Jim kind of talked about this with regard to the recovery, I think until we can get better visibility in terms of demand and in terms of accelerating it's just hard to say.

That's fair.

And then with regards to your comments on pricing, would it be fair to characterize kind of Charles River's view towards pricing in terms of your aggressiveness as being a little bit late to the game just thinking back to the downfall at the end of 2008, beginning of 2009?

It doesn't appear to us that you had taken the first mover or first move in terms of pricing down your business.

Is that -- I guess does your -- how you guys are thinking about doing things, has that changed over the past six to nine months whereby you've become a little bit more aggressive in terms of -- in filling up utilization?

I wouldn't say so.

Your characterization of late to the game I would say is a positive.

We continue to believe that our infrastructure and our science and our investment necessitates a higher price point.

As we said previously, we really reluctantly began to be flexible with price in order to meet competitors' pricing in order to meet the demands that were being placed on us by our clients.

I would say we continue to be -- try to be very strategic about the way we price to maintain or to build share.

We're not interested in being aggressive in price, meaning to further reduce prices.

I think the price points have actually fallen below rational levels given the amount of investment that Charles River and competitors have made in this field.

So when you have a -- we have a capacity and demand imbalance, we've had that for some period of time now.

That's likely to persist at least another year, although that should ameliorate over time.

We do expect to continue to see space being taken out of operation by our large pharma clients in particular, that's happening more slowly than we had anticipated.

But as that happens and as more work is outsourced, I don't see any necessity for Charles River or anyone, frankly, to more aggressively outsource -- out price, sorry.

That's helpful.

And then just my last question.

Tom, with regards to contract terms with your larger pharma customers, are you seeing any change there in terms of just any elongation or a push-out in terms of the contracts themselves?

What I would say that we're seeing is on the preclinical studies we've always received a certain amount at the placement of the study, for instance.

So we have seen a little bit of pushback in that.

And because the studies are being closer to start dates, we don't have the advantage of having that money for a more advanced period, so to speak.

So I think that and some of the changes in our large animal model business where we had a number of prepaid contracts in addition to normal credit activity is really what's pushed up the days.

Okay.

Thanks so much.

Douglas Tsao, Barclays Capital.

Thanks for taking the questions.

Have you seen any shift in terms of studies to support or your mix between studies to support an IND versus studies used to support an NDA?

I would say not, Doug.

There's been a -- I'd say an earlier emphasis on studies to support INDs for some period out of time now.

The studies seem to be shorter in duration and I think that sort of tracks with the intensified spending by some of the clients in the late stage clinical trials to help you get drugs to market.

So, we have anticipated to see an improvement and an increase in spending post the IND phase with an elongation of studies and obviously utilizing more complex ones.

Particularly given our footprint in specialized toxicology work we would anticipate seeing that (multiple speakers) continue.

And have you seen any evidence -- in terms of the reduction in volume -- any sense that companies might be -- clients might be reducing the number of backup molecules that they're putting into development?

I wouldn't say we have any specific evidence or knowledge of that, Doug.

I suppose anything is possible.

I think much if not most of the pipeline rationalization, which has been dramatic, was dramatic, has occurred for most of the clients.

I do think that they're being very careful about what drugs they move forward through the process; of course, we get paid to help them make that determination as early as possible.

And to the extent to which your question could be answered in the affirmative and, again, I don't have enough data to know that, we would believe that it would be offset both short and long-term by an increase in the amount of work, sheer amount of work that's outsourced.

And we are -- the disconnect that's between financial performance and what we're hearing from clients is that there in some ways seems to be an intensified interest from major trade companies to outsource more we've really met with all of them in the last, I don't know, six months or so, there's a great interest in doing that.

The price point at which we're selling the work really masks a lot of the volume.

And that's some of the profitability as well.

So, I don't think that there we're continuing to see any dramatic reduction in the amount of molecules sold in the pipeline.

Okay, great.

And then just one final quick question.

I wasn't sure if I understood your comment.

Is it that you don't expect to see significant -- meaningful margin improvement without pricing getting better?

Did I interpret that correctly?

Or should you see some leverage just from -- even with more studies leveraged across your fixed cost base?

I think we can both answer it.

It depends on a lot of things.

It depends on the mix, so that's important.

So more complex studies will certainly improve the mix.

We should see some margin improvement I think as capacity continues to build, it is better than it was last year but it's still not optimal.

But pricing has a demonstrative and dramatic impact on margin.

And we've got to see an improvement in price, I think, for it to really materialize.

And, Doug, I assume you're talking about at volumes that are really relatively stable from where they are today.

Obviously the improved volumes at relatively stable pricing I do think the margins will start to come up.

Okay, great.

Thank you very much, Tom, for the clarification.

(Operator Instructions).

Ross Muken, Deutsche Bank.

Thanks.

We heard a lot of comments on the call regarding the capacity and what was being shuttered in-house as pharma.

Can you talk a bit about your view on the other outsource players and the work that's been done to rationalize some of the capacity that was brought on in 2006, 2007, etc., for a demand curve that clearly hasn't manifested itself?

Obviously you closed a large facility on your end.

Talk a bit about what you've seen from some of your peers and whether you think there's been enough done to get to a reasonable competitive level where everyone is going to be pricing in a rational fashion.

I mean, it's a difficult question to answer because many of the competitors are private, so they have -- now they have an obligation or a desire to put that information in the public domain.

Having said that, it appears that there's been a substantial amount of space that's been taken out -- either been taken out of operation or has seized operation in the current space, I guess is the same net result, by most of the significant players including our largest competitor I guess recently.

It's hard to vet that exactly.

I think that determining where we all want the capacity to be is a complicated scenario because as I said in the question that preceded this one.

Our capacity utilization at the moment is actually somewhat better than you all would anticipate.

And I think it's the price point that makes it look less robust.

And in our case to some extent the mix.

So, I guess I can only speak for Charles River, our feeling is that while we still have excess capacity that we've reduced it to a rational level that as work continues to come outside and work space continues to be closed by our clients, that well be able to utilize that space.

And we have different facilities in different geographic locales that have different capabilities and I think the portfolio is essential to maintain.

So, I think that we've gotten our capacity to the point where we think we can be efficient.

Our competition appears to be making similar moves, although it's unclear whether they have reached the point where they would say the same thing as I just did.

Okay, and maybe just a quick question for Tom.

As you think about the various ways to execute the buyback, what's sort of the view between yourselves and the Board in terms of the key points of debate on how to execute?

What's sort of the main factors that you're considering in terms of the best mechanism for executing this?

Well, we'd like to do something that allows us to have a more near-term impact.

So trying to take some shares out of the marketplace in the more near term rather than necessarily spreading it out over say 12, 18 months or 24 months.

Having said that, the notion of doing some level of activity on a weighted dollar average basis is obviously appealing.

We've done both of those in the past, as you know.

At the time of our convert we obviously bought an accelerated amount of stock back immediately and in addition to that did an accelerated share repurchase and subsequent 10b5-1.

So anything that we do accelerate it we need to look at financing options.

We don't have a $1 billion to commitment anymore, so the liquidity that we have is basically cash on hand and a revolver.

So there are some steps like that that we need to walk through with our credit bankers, as well as take the time to meet with bankers that would help facilitate either an accelerated or an accelerated and weighted dollar average purchase over time.

We just announced the breakup of the transaction last week so we really haven't had a lot of time to actually put a plan in place.

And so I think we'll need to do that as quickly as we can right after the quarter, which is now.

Yes, so just one last quick thing.

So it looks like from a liquidity perspective there's about a $150 million delta between what you have on hand, what you have vis-a-vis the revolver, and then maybe kind of cash flow getting ex'd out to some degree by the payment going to WuXi.

So I guess the idea is how do you fill the remaining portion, kind of the last part to consider in terms of doing like an AS$ or something of that sort?

Sure.

I mean obviously if we were -- the more that we were to buy up front, I mean we're constrained by our current capacity.

So, an even when you look at our cash on hand, some of that's overseas, a fair portion of that is overseas.

I did mention in the comments that we repatriated or are in the process of repatriating 27 million from Canada which will come in the third quarter.

We also have a couple of other buckets of cash overseas that we're actively looking at, which we began to look at with the transaction, but have since rolled that analysis over into a non-transaction basic repatriation effort to get more cash into the US.

And so we're looking at the feasibility of doing that.

I think without question we'll probably bring some of it back.

And as long as we can get comfortable with our tax advisors we would bring more of that back.

And so if you add some level of additional cash coming back into the US in our revolver, I mean without another credit facility we're obviously limited by how much we could do upfront.

Right.

And none of this is contemplated in guidance, correct?

I would say that's pretty much correct.

Okay, thank you.

Dave Windley, Jefferies & Co.

Thanks for taking the questions.

So, in your guidance -- prior guidance, excuse me, when you generally expected some improvement in PCS in 2Q and then improving from there.

I guess I'm looking for clarification as to whether that was volume or price that you were primarily leaning on for that improvement?

Dave, I'm not sure I understand the question.

I guess what I'm trying to get at, clarify on is if price has declined further, so I hear the comments about stabilization of the PCS market in general, but I also hear utilization has improved but that's being masked by price.

And I'm trying to understand if price is in fact stable or if it really is declining further from say three or six months ago?

I think we would say that price is stable but certainly not improving.

So it's continuing at the same level and we have a significant amount of conversation pressure in most of our conversation.

So we're filling space at similar price points that we've had now for most of 2009 and all of 2010.

You'll recall that we had a glimmer of some potential upside pricing in general tox in the first quarter.

We weren't focused as much on that broad scale, but we did think that we may get some benefit out of that with some of our clients.

So I do think that until there's an opportunity to improve price, which does go with continued -- what's interesting about it is that while what you say is true -- so space is filling but it masks the performance to some extent.

As space fills for all of us in the industry it will elongate the wait times for our client.

And I do think that corresponding to that elongation of waiting will be the ability for them to want to accelerate the process and that will allow us to get some pricing.

So -- we're probably moving towards that, notwithstanding the fact that it's certainly not occurring obviously in the P&L.

So, Jim, would you say or would you be willing to comment on if not absolute utilization levels now that change and percentage of utilization roughly that you've seen say the last three or four months?

No, obviously for competitive reasons we don't want to do that.

But I would say that capacity utilization for us continues to be below optimal levels which we have said it's 85%.

They are meaningful better than last year; I don't think we gave our specific utilization levels, but the industry levels were kind of 50% to 60%.

And we're seeing that utilization of our facilities and some fashion because Massachusetts has been closed and we're reallocating those clients to other sites.

We haven't brought on any new space in fiscal 2010 although we have some space that we did bring on in 2009.

And so we are pleased with the way it's filling, it used to fill more dramatically though for us to see it at the operating margin line.

Okay.

The last one.

Have you or could you expound on other avenues that you might pursue to build out the discovery services platform?

And could you comment on whether demand for those non-GLP type services is similar or different than what you're seeing in GLP work?

The demand is steady and building.

And I think that as we increase capacity that that paradigm will continue.

So, I think a lot of the sort of non-GLP early ADME, DMPK stuff, we can continue to garner organically.

I think on the in vivo efficacy work, which is where we made some small acquisitions, we certainly intend to grow those organically, but perhaps a small tuck-in acquisition there as well, both on a therapeutic area basis and also expanding the current areas that we're in.

Discovery is an area that has historically -- and I'm talking about big pharma -- has historically been done internally and the availability of external resources is one of the things that's accelerating.

So, I think that there is anticipate continued good demand there, really for a multiplicity of services and we intend to add to that growth organically and through some acquisitions.

Okay, thank you.

John Kreger, William Blair.

Thanks very much.

Jim, I think in the past you've talked about this debate within large Pharma of how to downsize their internal capacity and whether or not they could do some sort of strategic deal with you or your peers versus just shutting that space down.

Have you sensed any real progress on that front?

Is it the debate shifting one way or the other?

Not really, John.

There have been several clients who have tried to sell facilities.

A few of those we know for a fact will not happen, others are in -- are probably still in discussions, but not with us.

We haven't seen any new ones.

One of the things that we said in our prepared remarks, which has actually been somewhat of a surprise and goes in large measure to one of the reasons we're not seeing an uptick in the second quarter is because a lot of the work that we expected to be outsourced has remained inside.

And so that's even a further commentary on your question, which is that not only are we seeing some of those facilities trade or close, but a lot of the drug companies have made decisions to close space and lay off people have actually in some cases gotten on with that but haven't done enough.

So they actually find themselves still with underutilized capacity and headcount and are either not willing to do about it or having not planned to do anything about it from a social point of view I think are somewhat reluctantly doing the work in-house obviously at higher price points than outsourcing them.

And we've talked to a lot of the clients about this and they acknowledge that and they also acknowledge the fact that that is transitory.

So I think the whole shift in internal resources is relatively early on.

And I think that we should see more of the clients that are still working through infrastructure reductions or will have to do a second or a third round to do that.

Now, whether any of these facilities trade to us or our competitors it's hard to comment on that.

It depends specifically on the specific client, what your share is with them, what the quality of the facilities are, what the value proposition is that they provide to you, particularly some substantial book of business for the long term.

So, I think both we and our competitors have to take those one at a time.

But there doesn't seem to be a material shift one way or another at the current time.

All right, thanks very much.

And just lastly, Tom, could you clarify -- I know you mentioned Shrewsbury and the ongoing cost of that facility.

But can you just remind us of the incremental savings you would expect.

Sounds like the third quarter will be a transitional quarter and then by the fourth quarter you should be getting the full benefit of the savings.

Can you just remind us how much that would be?

Well, it's a little bit difficult to put it in that context because we are excluding the losses from our non-GAAP income.

So the real benefit that we're driving is that we're moving the sales volume to other facilities and gaining incremental margin from that since the facility is actually currently losing money.

But we're non-GAAP'ing it, we're not actually seeing a negative benefit in the O/I.

What we're not seeing is a positive benefit from the sales that we're actually developing so as we can move those customers and that sales volume to other facilities will actually turn from neutral income to positive margins at other facilities.

And we haven't -- a couple of folks have asked from time to time, we haven't indicated what the sales volume was there for instance in the second quarter or first quarter or any other point in time, for instance.

Great, thank you.

You're welcome.

Robert Jones, Goldman Sachs.

Thanks for the questions.

Actually just a follow-up on John's question around PCS margins in the back half.

It sounds like the fundamentals, at least at this point, are on pricing and demand are stable.

And there is some, Tom as you mentioned, there's obviously some benefit from shutting down the Shrewsbury facility.

Could you maybe just talk about what the organic margin expectation is for PCS in the back half?

Of 2010?

Yes.

You mean just margin expectations, period?

Yes.

Like if you take out the benefit that flows through from the facility shut down what are the actual expectations -- internal expectations for PCS margins in the back half?

Well, I'll answer your question -- I'll answer what I think is your question and then you can tell me if that is exactly what you asked.

So we did 9-ish percent and 12% for operating income on cap in Q1 and Q2.

As I said in my remarks, notwithstanding the sales being flat for the remainder of the year, we do think that the margins can improve slightly through the third and fourth quarter and that's a combination of some actions that were taken in the first half of the year as well as the transition of Shrewsbury from -- our customers from Shrewsbury to other facilities and things like that.

So even on flat volume we do think that we can get the margin up slightly for the third and fourth quarter.

Okay, that is helpful.

And obviously we spent a lot of time talking about the large biopharma sponsors and kind of their strategic decisions and timing around that.

But I was wondering if you could maybe talk about the smaller biotech clients, the ones that don't actually have internal capacity.

What are you seeing from them now and then maybe what is your expectation within guidance for demand from that client base?

Thanks.

I think that we -- that that sector is relatively strong.

I think we've got very strong share with many, if not most, of the major and second-tier biotech players.

The good news is they're getting a lot of their cash directly from big pharma.

And so it's sort of a proxy for big pharma, the money is coming directly from there and the work is either being directed from big pharma or we're getting it directly from the small players.

Obviously there's no ability, desire or intention to take the work in-house.

They continue to be principle drivers of discovery and innovation for the drug industry.

So they're going to be an increasingly important client base.

And as we said in our prepared remarks, we reported those as mid-tier.

And we are going to continue to emphasize by the way we have our sales organization structured and by the way our senior management spends its time to spend more time with those clients because we really do think there's not only a dramatic amount of money being spent there, but probably over time that that should increase.

Thanks for the questions.

Tycho Peterson, JPMorgan.

Good morning.

Maybe Jim, just if we could get you to start off and talk a little bit about, with the breakup of the WuXi deal, what your thoughts are in China?

How do look at bioexplore from here, do you need other investments?

Can you just talk a little bit about how you're thinking about building out that business?

Yes, our tox operation in China is a first class facility.

I'd say we're in a leadership position in terms of regulatory approvals, the amount of GLP work that we've done and probably in terms of numbers and customer audits and people that have tried the facility, although I would say I don't know that for a fact, I just know it's a number of clients that have both toured and then (inaudible) for that business is quite substantial.

And we have done and are continuing to do GLP work with first-tier marquee clients.

The Chinese business for tox to Charles River and I think for everyone has been slower than we all anticipated.

It's no different than demand in other parts of the world.

And as the drug companies pull back -- have pulled back other places the rate in which they're moving, the pace at which they're moving in China has been again not what we thought.

So, we need more molecules developed there and/or more molecules to come stateside to China.

Having said that, as I said, the client activity is substantial and we're quite optimistic about being able to grow that part of our business.

As we've always said, we would intend to expand the whole Charles River portfolio to China if and when the demand is appropriate and substantial enough for that -- for that as well.

Okay, that's helpful.

In terms of some of the dynamics you saw in preclinical this quarter can you just comment on whether there was any change in cancellation rates or was this really a case of delayed starts?

No, cancellation has thankfully never been in major issue in preclinical, we get very few cancellations that have -- that dramatically impact a quarter.

I'd say slippage is the same or slightly worse than we were seeing earlier, particularly at some of the larger locations.

So, study slippage is always the issue and study slippage becomes an issue when your backlog of business is isn't substantial enough.

So, historically studies have always slipped and we always had a comparable study to slide in there.

And we just don't have that right now.

So, you need stability in slippage, which means that the clients had to prepare better for having their drugs ready and having prioritized them appropriately.

And again, that -- that exacerbates the visibility problem even further.

Okay.

And then last one, you in your comments talked about sales force realignment, I think focusing a little bit more on some of the mid tier clients.

I guess how do we think about your ability to undo that if demand from your larger clients picks up?

Or do you also run the risk that you may miss some uptick if you've shifted your resources?

So, I won't overstate this, nor do I want you to misinterpret it.

We think that our coverage of large pharma is really -- the structure is really optimal right now.

We are -- we have a significant number of very senior people, full-time servicing the top 25 drug companies.

And so we're not indicating at all a shift of those resources to mid tier.

So realignment is probably too strong a word, I think this is a subtle adjustment and emphasis.

We already have realigned our sales force last year, so there is a large number of people focusing on mid tier.

We probably defined that category too broadly in terms of the size and scale of the companies that are involved.

So it's somewhat of an unworkable universe.

So we're going to focus that back down on ex-number of clients -- I don't want to say a specific number, but -- so that we have the same sort of oversight -- similar sort of oversight that we're providing the big pharma with I can provide to mid tier.

And particularly the largest players in the mid tier.

So we'll not be stealing resources from big pharma or anywhere else.

And then just one last clarification on the asset transfers.

You've talked in the past that you don't really have an interest there in larger deals right now and then you also talked about how pharma I guess seems to be keeping some of that work in-house presumably because they're not the buyers of some of these larger facilities.

How long do you think that trend takes to play out and at what point do they just capitulate and start shutting down these facilities?

That's a bit of an imponderable and I think it's different for different clients because there are different reasons to keep them open, most of which are social, having to do with just a lack of desire to reduce their workforce any further.

So, again to be clear, while we're generally not looking to buy space from our clients because we have too much space of our own, we're certainly open to a strategic deal that makes a lot of sense because we increase share and we get a guaranteed commitment of business.

Short of that it doesn't make any sense for us to buy, and frankly it doesn't make any sense for them to sell, yes, they require us or we maintain their headcount, but basically we just further exacerbate the over abundance of capacity.

So I do think that over time the clients and the suppliers, the CROs will get in sync.

Our facilities are built to be much more efficient and I think as the drug companies begin to embrace that or continue to embrace that it will be easier for them to close their own facilities.

Some of these companies are just very big and they moved more slowly than we would like or, frankly, than they would like.

They're moving more slowly than they frankly intend to.

And I think that just a reflection of their sheer size.

But we do think they'll get on with it.

Okay, thank you very much.

Doug Schenkel, Cowen and Company.

Thanks for taking my questions.

I'll just ask two and -- I'll ask them now and then exit.

So, first question is, some have speculated that the WuXi deal would actually protect your sales potential in certain accounts.

To the extent that that's or was a valid argument, are there certain accounts where you would say there is incremental risk to some of the sales potential that would have been essentially locked in via the combination?

The second question is -- I'm just wondering if you can comment on any changes in the sales performance of outbred rats one month into the quarter?

Thank you.

So, I'll just take the easy one.

Our CD rat sales continued to disappoint us all year and are continuing to do so.

And it's tied very much to toxicology usage.

It's also impacted by the large pharma mergers that took place last year.

There's a decreased purchasing of those.

First question, first part of the question was --?

Customer risk with the deal coming apart.

Oh, with regard to the first part of your question, no, we're not concerned about that.

While we're obviously disappointed that we weren't able to do what we think is an important and strategic deal, the value proposition was really upside revenue creation by having a broader gauged program across our whole portfolio.

I think a lot of the additional revenue would have come from China, by the way, after Charles River (inaudible).

So no, I definitely don't think it puts our business at risk.

I think that our current footprint is a strong significant one with our clients and we don't anticipate any adverse impact from the deal.

It obviously doesn't allow us to take advantage of having a bigger portfolio, but I think that's pretty obvious.

Okay, thank you.

Sandy Draper, Raymond James.

Thank you, all my questions have been asked and answered.

I appreciate it.

Thank you, Sandy.

Derik de Bruin, UBS.

Hi, good morning.

Two quick ones.

So, what was the M&A contribution during the quarter?

And I guess also looking at some of the articles and talking to some of the consultants in the CRO industry, it sounds like the preclinical demand has picked up maybe for some of the smaller players, at least from what we've heard, and at the expense of maybe some of the larger players out there.

And I guess the question is, why would the smaller players potentially be seeing us there?

And just from your own standpoint, do you think that some of the cost you've taken out of the business over the last years or so, has that potentially -- as you shut down Shrewsbury, has that potentially made some customers a little bit resistant to go back to you?

I don't think so.

I'm not sure that the commentary that some of the smaller players have an increase in demand.

But if they do it's probably off of a very low base, and if they do it's because of very dramatic price cutting.

So there are some cases where we just -- we certainly won't meet price -- competitive prices.

And as I said earlier, while it's not apparent in the P&L or the guidance, our facilities continue to -- capacity continues to fill which means that we're continuing to get incremental business albeit at lower price points.

So, I do think that directionally the clients will continue to outsource the work.

I think for very, very price sensitive clients or some very, very small clients who are also price-sensitive, they may have a tendency always to go to the smaller players just because they feel that they get better attention than maybe they do with us or our larger competitors.

But I don't think there's any share movement issues afoot here.

Derik, your question on the M&A contribution.

You're referring to sales in the second quarter?

Yes, sales in the second quarter, yes.

Somewhere around 1%, so it's really di minimus.

Great.

Thank you.

Ricky Goldwasser, Morgan Stanley.

Good morning.

Two follow-up questions.

First of all, just to clarify, Tom, what is factored into the low end of the guidance range for the second half in terms of both RMS and PCS?

And second question is really around strategic relationships and you're speaking with existing clients that you already do business with.

And given that you are one of two global leaders, especially in preclinical, what is the incremental revenue and the incremental capacity that you expect from these customers as they already send business to you?

And then what do you think the pricing structure will be under these types of strategic relationships?

I'll take the first part of your question first and then (inaudible) shift responders here.

Nothing overly sophisticated, Ricky, in terms of the guidance range.

It's really just about the sales variability.

So while we're kind of calling it flat for the year, it's more about a lack of visibility than anything else.

So there obviously could be some sales variability there.

And in addition to that, depending on where the mix of earnings is, while we're (inaudible) at a more contemporaneous exchange-rate there's always some variability there.

And the timing of some of the cost reductions that we're putting in place.

So I wouldn't look at anything more sophisticated than just some of variability and range of sales mix and our ability to affect cost reductions during the back half of the year in terms of the high and the low end of the range.

Right, but I still -- kind of like when you think about the low end of the range, obviously I understand that there is variability.

But are you assuming for the low end the demand is going to be flat from second-quarter levels?

Are you assuming a decline in demand just to give us some sense as to what your expectations are and, again, how conservative or aggressive you are when you put a revised guidance together?

Well it's a different sort of time period when I think about the question of being conservative or aggressive or things like that.

I think I could say that we view our guidance as conservative, but on the other hand we don't really have an ability to call any kind of recovery.

So while I think that we still believe in outsource trends and our clients who are moving toward that, it's just really difficult to think about the timing of that.

So the way we're calling it is just to say that until such time as we really see some impact in orders and things like that firmly in our hand that lead us empirically to a higher data point in the next quarter or the quarter after that, we're quite simply saying we just think it's flat, because that's the best that we can call it.

So you could argue that that's conservative, but from where we sit, we might have thought that that was conservative a couple quarters ago.

But from where we sit today, for some reason it doesn't feel like that's being very conservative right now.

So I think the way we've called it in the guidance, at least for the top-line, is PCS moving sideways for the rest of the year which is essentially flat.

And we do typically come under some pressure in RMS in the third quarter because of seasonality and then of course late in the year around the holidays and year-end.

So we're not really expecting anything dramatic in RMS for the remainder of the year also.

And of course some portion of the RMS activity is tied very closely to PCS activity, so that goes hand-in-hand with what we said about PCS.

So is flattened demand basically factored into the midpoint of guidance or is it the lower end of guidance?

I think you're trying to cut it too finely, to be honest with you.

I mean there are obviously a number of factors that go into that including, as I said, cost projections and things like that.

So --

Got you, okay.

-- and it's not a dramatically wide range either.

We've narrowed the range also in that regard.

I think if we had a much wider range I'd feel more compelled to give you more assistance in terms of your question.

But I think with a range that we've narrowed like that, I think we're just trying to get it too close.

And it's just not that easy to call it that close I think is the point on the sales and things like that.

Okay.

And her --

If I remember the other part of your question about 15 minutes ago, it had to do with strategic relationships.

It's an important question, actually.

I do think that the clients are interested in longer term larger relationships and they're looking much more at programmatic activity as opposed to a project at a time.

Typically the tox work has been done a project at a time.

In other words, here's a study, please do that.

And depending on how that study goes there's additional work.

And I think that that's the way the clients want to work, it's much better for us to work that way as well.

And most of our conversations are going that way.

And there's definitely -- it definitely improves the value proposition, it's an opportunity to get incremental work, it's an opportunity to have a much more closer strategic relationship with the client, it's an opportunity to collaborate on scientific results.

So, that's the way the clients are pushing it.

And so we're optimistic about that as we go forward.

So is it fair to say that the strategic relationship really, while it may not have -- at least initiatives significant impact and demand will improve the visibility?

Yes, one would hope so.

Okay.

Thank you.

Thank you, Ricky.

And do you have any closing comments?

We'd just like to say thank you for joining us this morning and this concludes the conference call.

Thank you.

Ladies and gentlemen, that does conclude your conference for today.

Thank you for your participation and for using AT&T executive teleconference.

You may now disconnect.