Charles River Laboratories International Inc (CRL) 2011 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Charles River Laboratories fourth-quarter and full-year 2011 earnings call.

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

Later, there will be an opportunity for your questions, and instructions will be given at that time.

(Operator instructions).

And as a reminder, this conference is being recorded.

I'll now turn the conference over to Susan Hardy, Corporate Vice President, Investor Relations.

Please go ahead.

Thank you.

Good morning, and welcome to Charles River Laboratories fourth-quarter and full-year 2011 conference call and webcast.

This morning, Jim Foster, Chairman, President and Chief Executive Officer, and Tom Ackerman, Executive Vice President and Chief Financial Officer, will comment on our fourth-quarter and full-year 2011 results and review guidance for 2012.

Following the presentation, we will respond to questions.

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

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

The international access number is 320-365-3844.

The access code in either case is 231980.

The replay will be available through February 28.

You may also access an archived version of the webcast on our Investor Relations website.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 expections, plans and prospects for the Company constitute forward-looking statements for purposes of the Safe Harbor provision under the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from those indicated by any forward-looking statement 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 23, 2011, as well as other filings we make with the Securities and Exchange Commission.

During this call, we will be primarily discussing results from continuing operations and 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 Reconciliation link.

Now I will turn the call over to Jim Foster.

Good morning.

I'd like to begin by providing a summary of our fourth-quarter results, before providing commentary on our business prospects.

We reported sales of $291 million in the fourth quarter of 2011, an increase of 3.3% from the same period in 2010.

The 53rd week added approximately 4.5% to sales growth, and the benefit from foreign exchange was negligible.

PCS business finished the year in line with our expectations.

The RMS business delivered a very strong performance in the fourth quarter.

In the RMS, even when adjusting for the 53rd week, most businesses in this segment reported higher year-over-year sales on a constant currency basis, driving the best quarterly results since the end of 2008 and sequentially higher than the third quarter.

The majority of these businesses also reported higher operating margins, driven primarily by the increased sales volume.

The operating margin declined 10 basis points from the fourth quarter of 2010, but it improved 90 basis points sequentially to 17.1%.

The increase was due primarily to the PCS margin, which improved on both a year-over-a year and a sequential basis to 13%.

Cost savings actions implemented in the fourth quarter were the primary driver of the improvement.

Earnings per diluted share were $0.69 in the fourth quarter of 2011 compared to $0.60 in the fourth quarter of 2010, a 15% increase.

The increase in earnings per share was driven primarily by the lower number of shares outstanding.

We continued to return value to shareholders in the fourth quarter through our share repurchase plan, with the purchase of approximately 844,000 shares for $25 million.

This brings our cumulative total repurchases from August 2010 through the end of 2011 to approximately 18.2 million shares, or more than 27% of our outstanding shares.

As you know, we are reaffirming our sales and EPS guidance for 2012.

We believe that demand for regulated safety assessment will remain relatively stable, as it did in the second half of last year, and that the growth drivers we discussed on our guidance call, Discovery Services, GEMS, Insourcing Solutions and In Vitro, will enable us to generate higher sales.

Based on the sales increase, combined with our ongoing efforts to improve operating efficiency and the benefit of our stock repurchases, we maintain confidence in the guidance we gave on December 14.

I would like to provide some details on the segment performance.

In the fourth quarter, RMS sales were $182.4 million, 7.9% higher in constant currency than the fourth quarter of 2010 and nearly 4% higher when adjusting for the 53rd week.

The largest sales contribution came from our avian business, which had a weak fourth quarter in 2010 due to reduced product availability.

The services businesses also contributed to the sales gain, as they did for most of 2011.

In combination, Discovery Services, GEMS, RADS and Insourcing Solutions gained nearly 10%.

And as the volume of these services increased, the operating margin also improved.

The growth of these businesses adds validity to our thesis that biopharmaceutical companies are increasingly choosing to outsource services which they no longer consider core to their drug discovery and development process and that they are choosing to do so with Charles River, the recognized expert in in-vivo biology.

Utilizing our personnel and facilities enables our clients to create flexible drug discovery and development models, which are pivotal to their ability to increase efficiency and reduce costs.

The In Vitro business also delivered robust performance in the fourth quarter.

Sales growth exceeded 10%, as clients continued their adoption of the PTS family of products.

We are encouraged by the fact that the average number of cartridges per liter per day is increasing, especially with the introduction last year of the multi-cartridge system, or MCS.

As you know, the PTS is a razor/razor blade model, so cartridge use is a performance indicator which we watch very closely.

We believe that with this year's anticipated mid-year introduction of the automated MCS for use in our manufacturing client's central laboratory, we will be able to increase this critical indicator.

In general, fourth-quarter sales and research models are seasonably soft due to the slowdown of purchasing through the holidays.

Small model sales in the fourth quarter of 2011 were reasonably stable compared to the same period in 2010, but, demonstrating seasonality, were lower than the third quarter of 2011 when adjusted for the 53rd week.

However, fourth-quarter sales were somewhat better than expected, with Europe the strongest performer in the group.

For the last few years, demand for our research models has maintained a steadier pace in Europe than in North America.

This is likely due to two factors -- the client mix in Europe, which includes more private pharma and government-funded research; and the fact we believe we are taking market share from our largest competitor.

The most significant sales decline compared with the previous year was due to the large model business.

As we mentioned in our guidance call in December, there was declining demand for large models due to the reduction in regulated safety assessment and cost consideration.

The impact on sales was much less significant than the impact on the RMS operating margin, which, including the inventory write-down, was approximately 230 basis points.

This was offset by stronger operating performance from most of the RMS businesses, resulting in an operating margin of 28.8% in the fourth quarter.

This was a decline of just 170 basis points from the previous year.

So as you can see, we made up a significant amount of the large model shortfall.

At $108.5 million, PCI sales in the fourth quarter were in line with our expectations, although 3.9% below the fourth quarter of 2010 in constant currency and slightly below the third quarter of 2011 when adjusted for the 53rd week.

We continue to believe the market for regulated safety assessment is relatively stable.

The sales mix is still characterized by a greater proportion of shorter-term, nonregulated discovery services, which we would expect in view of the shift in our clients' processes to eliminate molecules earlier in the drug development process.

In addition, the ramp-up of expanded preferred provider agreement, which we announced in November, has been and will continue to shift the mix.

We were very pleased with the PCS operating margin, which increased to 13% in the fourth quarter.

This represents a 100 basis point improvement over the prior year and a 370 basis point improvement from the third quarter of 2011.

The improvement was due principally to cost-saving actions we implemented in the fourth quarter and also to a non-income-based tax adjustment.

We were very pleased with the improvement in our operating efficiency and expect to make further improvements in the PCS operating margin in 2012.

I want to take a moment to discuss sales by client type.

As you know, we segment our clients into three categories, global biopharma, mid-tier biopharma and together, academic and government, with separate sales people dedicated to each.

This segmentation, which we implemented at the end of 2009, has benefited us in two major ways.

First, it has enabled us to forge stronger relationships with clients and enhance our understanding of their needs.

This was certainly apparent in our award of an expanded preferred provider agreement by a large global pharma last November.

Through our close relationship with this client and our flexibility in structuring the partnership, we were able to craft a strategic partnership which benefits both parties.

Dedicated salespeople have also been a factor in identifying new opportunities in the midtier and in academic accounts as well.

Second, due to enhanced data provided by our ERP system, our salespeople have a more complete picture of all the products and services that our clients purchase from us.

That knowledge has been very valuable in assisting the sales force to sell more broadly across our portfolio.

In addition, the improved data provided by the ERP system enables us to identify trends in each client segment.

So I can tell you with confidence that the quarterly progression of sales to global biopharma clients in 2011 remained stable for both RMS and PCS, despite declining from 2010 levels.

We did see some positive sales indicators for the global biopharma segment in the fourth quarter, including the award of some longer-term regulated studies in both North America and Europe.

While it is still too early to conclude that demand is returning, we believe these are indicators that some of our large biopharma clients are beginning to move molecules into the development stage.

We were pleased that sales to the midtier biopharma clients increased approximately 5% sequentially from the third quarter, when less funding was available.

Sales to academic and government clients increased more than 5% in the fourth quarter, closing out a strong year for that client segment.

We believe that the expansion of our sales force, its increased focus on specific clients and its enhanced visibility with clients are enabling us to increase market share in both the midtier biopharma and the academic segments.

We also believe that our RMS competitors' steep price increases have reduced the price differential between our products and theirs, which has helped enable us to take market share.

The powerful combination of our premium products and services at competitive prices has served us very well, particularly at this time, when academic and government clients have been spending on basic research tools and services.

We also believe that particularly in the fourth quarter, when the NIH budget had been approved at a higher level than was anticipated, spending by government agencies such as the NIH improved.

I would like to briefly review full-year results as they pertain to the progress we made in 2011 on our four key initiatives.

Sales for the full year were $1.14 billion, an increase of slightly less than 1% on a reported basis and a decline of 1.4% on a constant currency basis.

Through cost savings actions and rigorous management of operating costs, we generated an operating margin of 17.6%, a 130 basis point improvement over 2010.

This was our first key initiative, to improve our operating margin.

Our goal in 2011 was at least 17%, and we surpassed that goal by 60 basis points.

We expect to continue to make progress towards our longer-term goal of a 20% operating margin.

Our second initiative is to improve free cash flow generation.

We were very pleased that operating cash flow increased to $207 million in 2011, the first increase since 2007.

Free cash flow also improved to $158 million, slightly less than we had planned, due to the timing of capital projects already underway.

Because we made better progress than expected, more capital was expended in the fourth quarter.

We continue to expect that our free cash flow in 2012 should be in the range of $160 million to $170 million.

Disciplined deployment of capital, the third initiative, focuses on the appropriate balance between share repurchases, debt repayment, investment in infrastructure and targeted acquisitions.

In 2011, we allocated the largest amount of capital to share repurchases, buying back 8.4 million shares for a total purchase price of approximately $280 million.

We also set a goal to reduce our leverage below 3 times, which we accomplished through a debt reduction of $139 million since the first quarter of 2011.

Acquisitions remain an integral part of our growth strategy.

We will continue to identify and evaluate opportunities and apply rigorous metrics to our assessment and analysis of potential acquisitions.

We didn't make any acquisitions in 2011, but we do expect to make select acquisitions this year, which are targeted at expanding our technical capability and global footprint.

We have not included the impact of any potential acquisitions in our 2012 guidance.

Our fourth initiative, returning value to shareholders, is a constant focus for us.

The share repurchases which we made in 2010 and 2011 were one of the principal vehicles we used to create value, and were a primary driver of the increase in EPS in 2011, which exceeded 28%.

We plan to continue to repurchase shares in 2012 as a component of our initiative to increase shareholder value.

As I said in December, we were very pleased with the progress we made on our goals in 2011 and expect to maintain our focus on these key initiatives in 2012.

We continue to believe that the breadth of our integrated portfolio, our deep scientific expertise in in-vivo biology, rigorous management of our business and intensive focus on these four initiatives have enabled and will continue to enable us to manage our performance during this period when our clients are undergoing such significant change.

We are continuing discussions with our large biopharmaceutical clients.

We believe that many of them are at an inflection point in the complex process of redefining the drug development model.

Having worked through the reduction of therapeutic areas and elimination of molecules from the pipeline, these companies are now in the process of converting from a fixed-cost to a more variable-cost model.

They recognize that outsourcing will enable them to access scientific expertise on a flexible basis and at a lower cost than they could by maintaining the infrastructure internally.

As biopharmaceutical companies limit the number of providers with whom they do business, the opportunities for a top-tier company like Charles River increase.

We believe that the expanded preferred provider agreement with a leading global pharma company is a template that we can use to assist other clients in their efforts to improve the efficiency and cost-effectiveness of their drug development models.

The discussions with other large biopharmaceutical companies that I referenced earlier this year have progressed, some of them to the stage where they are requesting references from the large client with which we are working.

Although we can't say when the next strategic partnership will be established, we are confident that there will be more in the future.

Our clients are increasingly viewing our broad portfolio of essential products and services and our scientific expertise as tools they can use to further their goals to bring more drugs to market sooner at a lower cost.

The demand for our nonregulated Discovery Services is increasing, and we expect this trend to intensify over time, contributing to an improved level of predictability in our business.

We believe that our fourth-quarter results are an early indication of a modestly improving environment on a number of levels -- stable large biopharma demand, increasing demand for nonregulated discovery services, better funding for midtier biopharma companies and consistent growth in the academic and government sector.

It is our goal to ensure that we maintain and enhance our role as a premier provider of in-vivo biology and the strategic partner of choice.

To accomplish this goal throughout this challenging time, we have continued to broaden our portfolio and enhance processes to improve our operating efficiency and cost-effectiveness.

Our portfolio supports the entire spectrum of our clients' in-vivo biology processes and makes us a logical strategic partner as they increasingly choose to outsource services which are no longer efficient or economical for them to maintain in-house.

We will steadfastly pursue this goal to the benefit of our clients, our employees and our shareholders.

In conclusion, I would like to thank our employees for their exceptional work, commitment and resilience and our shareholders for their support.

Now I will turn the call over to Tom Ackerman.

Thank you, Jim, and good morning.

Before I recap our financial performance, let me remind you that I will be speaking primarily to non-GAAP results from continuing operations.

A reconciliation of non-GAAP items can be found in our press release and on our website.

I will start my comments today by reiterating that we are very pleased with our strong fourth-quarter results.

While the fourth-quarter performance was encouraging, we believe the underlying trends that are driving the businesses remain consistent with those which we discussed in mid-December.

As such, our view towards 2012 remains unchanged.

There were three primary factors that led to the sales and EPS outperformance in the fourth quarter, RMS sales, the PCS operating margin and the tax rate.

Two of the factors, RMS sales and PCS operating margin, were the drivers of the $0.69 earnings per share.

RMS sales exceeded expectations in the fourth quarter, gaining almost 4% year-over-year when excluding the 53rd week.

As Jim said, this reflects broad-based sales growth across the services and other products businesses.

We have reported two consecutive quarters of RMS constant currency sales growth exceeding 3%, which gives us confidence in our RMS outlook for 2012 of constant currency sales growth above the consolidated 1% to 3% range.

The RMS sales outperformance drove a sequential increase of nearly $3 million to operating income, which was a factor in the EPS outperformance.

However, the RMS operating margin declined by 170 basis points year-over-year to 28.8% compared to 30.5% in the fourth quarter of 2010 and sequentially by 20 basis points.

The year-over-year decline was due almost entirely to a 230 basis point margin drag from the large models business.

As we discussed in our December guidance call, the large models business has been significantly impacted by challenging market conditions that led to weak results in the fourth quarter, including an inventory write-down of approximately $4 million.

This write-down was included in our non-GAAP results.

We do not expect to see a meaningful improvement in the underlying market conditions for the large models business in 2012, but we do not expect or anticipate any significant inventory write-downs going forward.

Therefore, we expect the RMS operating margin to improve sequentially in the first quarter of 2012.

Another driver behind the fourth-quarter earnings expansions was a notable improvement in the PCS operating margin.

This 370 basis point sequential increase was due primarily to a non-income-based tax adjustment of approximately $1.7 million, and the benefit from the November 2011 cost-savings action.

We continue to expect that the PCS operating margin will expand in 2012 due to continued progress on process efficiency and cost management.

Finally, the full-year tax rate of 24.7% came in slightly below expectations and, coupled with other income, contributed approximately $0.02 to the upside in the fourth quarter.

Our tax rate guidance of 26.5% to 27.5% remains unchanged for 2012.

I will point out that the 53rd week was factored into our prior guidance, so it was not a source of the better-than-expected results.

As Jim mentioned, the 53rd week contributed approximately 4.5% to fourth-quarter sales growth, with a similar impact on both segments.

Excluding the 53rd week, RMS sales grew nearly 4% year-over-year.

PCS sales declined 8% year-over-year, or by approximately $2 million sequentially, which was essentially in line with prior expectations.

To help you with your modeling, fourth-quarter 2011 sales were approximately $279 million if we exclude the extra week.

Despite the sales contribution, the 53rd week provided only a nominal benefit to operating income and EPS, adding less than $0.01 to fourth-quarter earnings per share.

The contribution of light sales during the holiday week was almost entirely offset by a full week of operating costs.

I will now provide additional details on our nonoperating results in the fourth quarter.

Unallocated corporate costs increased by $0.5 million year-over-year and $2.4 million sequentially to $17 million in the fourth quarter.

The 53rd week contributed to both the year-over-year and sequential increases.

However, the sequential increase was also driven by adjustments to certain accruals at year-end, including performance-based bonuses.

We continue to expect unallocated corporate costs to be approximately 6% of sales in 2012, similar to the 2011 level.

We also assume that a slightly greater proportion of these costs will be reported in the first half of the year, consistent with the historical trend.

Net interest expense of $6 million was nearly flat compared to the prior year, but declined almost $1 million sequentially, as expected.

The sequential decline reflects lower interest rates due to the September amendment to our credit agreement as well as debt repayment.

We continue to expect net interest expense of $22 million to $24 million in 2012.

In the fourth quarter, the non-GAAP tax rate increased by 130 basis points sequentially and 260 basis points year-over-year to 24.2%.

You may recall that the prior period tax rates benefited from several discrete items that did not repeat in the fourth quarter of 2011, including a favorable international tax settlement in the third quarter of 2011 and additional R&D tax credits in Canada in the fourth quarter of 2010.

For 2012, we continue to expect that the tax rate will be in a range of 26.5% to 27.5% compared to 24.7% in 2011.

The increase is primarily the result of an anticipated reduction in the level of R&D tax credits in Canada, as well as discrete benefits in 2011 that are not expected to repeat in 2012.

Free cash flow generation increased by approximately $3 million to $158 million in 2011, but was slightly below our guidance of $165 million to $175 million.

This was driven by capital expenditures of $49 million, which exceeded our previous guidance by $9 million.

Higher CapEx also drove a $7 million decline in fourth-quarter free cash flow to $45 million.

The elevated level of capital spending in the fourth quarter was due to the timing of projects.

We were able to make better progress than we anticipated, resulting in higher spending in December.

As you may recall, we are continuing to invest in existing growth businesses on projects such as a new RADS laboratory in Wilmington, a new discovery facility in Finland and a new in-vitro facility in China.

Based on the progress made in these projects in 2011, we recorded capital expenditures of $27.5 million for the fourth quarter.

We do not expect as high a level of spending to persist in 2012, and we are maintaining our 2012 CapEx outlook of approximately $50 million.

We also continue to expect free cash flow of $160 million to $170 million in 2012.

Our capital priorities for 2012 remain consistent with the discussion on our December guidance call.

We continue to target a balance of stock repurchases, debt repayment and potential smaller acquisitions, the timing of which is difficult to predict.

In the fourth quarter, we repurchased 0.8 million shares for $25 million.

With $116.3 million remaining on our stock repurchase authorization as of December 31, we have the available capacity to continue to moderately repurchase shares in 2012 and expect to repurchase approximately 1 million to 2 million shares during the year.

We also reduced our debt balance by approximately $22 million during the fourth quarter, through payments on our term loan, to $718 million as of December 31.

We are comfortable with our leverage ratio at the end of 2011, which was within our targeted range of 2.5 times to 2.7 times, and expect debt to modulate around this level in 2012.

As Jim discussed, we are reaffirming our sales and EPS guidance for 2012.

While foreign exchange currently remains at an approximate 1% headwind to reported sales growth, FX rates continue to be volatile.

We will monitor the impact of foreign exchange, but as a reminder, a 5% movement in foreign exchange rates would be expected to translate into $25 million sales impact, which would then drop to operating income at approximately the margin rate in 2012.

In view of the contribution of the 53rd week to fourth-quarter sales results and the better-than-expected results, we expect a slight sequential decline in first-quarter results.

The sales outlook reflects a 4.5% headwind from the 53rd week in the fourth quarter of 2011.

This should be partially offset by stronger seasonal trends in the first quarter, particularly in the small models business.

The first-quarter outlook also assumes a slight sequential decline in EPS as a result of an increase in unallocated corporate costs, which are typically higher in the first half of the year, as well as a higher tax rate.

We also expect the PCS operating margin to decline slightly on a sequential basis due to the benefit of the non-income-based tax adjustment in the fourth quarter of 2011.

These headwinds should be partially offset by sequential margin improvement in the RMS segment, reflecting normal seasonal trends and less pressure from the large models business.

To conclude, we are pleased with our strong fourth quarter and full-year performance and confident about our business prospects in the current year.

That concludes our comments.

Operator, would you please take questions now?

(Operator Instructions) John Krieger, William Blair.

Good morning.

This is [Ravi Fada] in for John today.

First question I had was on the status of some of your strategic relationships.

Would you say they are trending in line with your expectations?

And how do these relationships compare to the demand that you are expecting from nonstrategic partners that are of similar size in 2012?

In other words, are these guys expecting to grow their business more with you?

Ravi, for some reason, that cut out.

Could you repeat the question, please?

Sure.

It was on the status of your strategic deals.

Are they basically trending in line with your expectations, and how did demand trends in 2012 from these clients compare to some of the other large biopharma clients that are not strategic partners?

As you know, we signed a large deal in November.

This has generated lots of other conversations about similar types of transactions with services across the entire portfolio, with some emphasis on the early discovery work.

It is hard to call a trend; it is just that there is clearly some interest in client who are -- some are aggressively reducing infrastructure, and obviously, some have already done that and others are contemplating it at the current time.

So it appears that many of the large drug companies are directionally interested in large strategic transactions.

That makes sense from a value proposition point of view.

I think that is true for some of the smaller clients as well.

Some of the sort of first-tier and even second-tier biotech clients are getting larger and have expensive drug development projects.

And even though they've always been outsourcers, they are trending towards outsourcing on a more comprehensive basis.

So directionally, it seems that is the way the industry is moving.

I think it is early days.

But we do have several conversations going on right now which would sort of underscore the focus on these types of deals.

Got it.

Thanks.

And the second question is on your comfort level with your footprint at this point.

Are you comfortable with your capacity right now?

And given that it sounds like demand is improving slightly, what would you say the capacity utilization that is baked into guidance at this point is?

Yes, we like our footprint in several ways.

We like the geographic footprint we have, and we like the types of services we do with the specific businesses.

So that seems to be working well in terms of supporting clients, some of whom are interested in proximity.

We certainly have enough capacity to take on additional large strategic deals should that happen.

I think on our last call we commented that we could do two or three of those with our current footprint, and then we would simply have to open some buildings that were constructed but never opened.

And we also have some space that was constructed but never caged.

So we have a good amount of space for the foreseeable future, certainly three plus years, I would say.

Capacity utilization, while we don't give the number, improved during 2011.

It is not -- it didn't improve to the level that we would like it to be at for optimal margin contribution.

But all of the work that we are doing sort of a stable, regulated tox activity, but also increasing amounts of non-GLP discovery work, should continue to fill up the space sort of systematically.

That will obviously improve the margins as that happens.

But we should have sufficient space to take on the type of work that we are talking to clients about now.

Great.

Thanks very much.

Eric Coldwell, Robert W.

Baird.

Just a few quick ones.

The tax item in PCS, can you just tell us what line that applies to?

Is it SG&A?

It actually was in operating income, it was in SG&A.

Because it was not an income tax, it would above the line.

So that was in SG&A, Eric.

Okay, great.

I'm just curious if you can give us an update on trends that you are seeing in the outbred models business.

That business obviously has seen some pressures associated with the slowdown in GLP studies in preclinical.

But just curious if you are seeing any rate change in growth in outbred models.

Not really, Eric.

It has been pretty consistent through probably the last couple of years, seems to have leveled off.

That is probably a commentary on the overall amount of work that is being done throughout the system.

Since we do supply our animals to many of our competitors as well, I think we have a pretty good view of that.

The good news is it has leveled off and we continue to get price increases on top of those.

Conversely, sales in inbred strains and immunocompromised strains have been relatively strong.

So from a value proposition point of view, those tend to offset one another reasonably well.

Great.

Just two more quick ones.

The automated multi-cartridge system, is that launch coming in April?

I think in the slide deck you say midyear, but my impression was that maybe that was earlier in the second quarter.

The automated system will come sort of in the back half of the year.

I think a realistic way to look at that would be second half.

Okay, second half, okay.

And then finally, unless I am misinterpreting something, it looks like you actually had a gain in the -- historically, operating losses in China, Massachusetts and Arkansas, but this time, it looks like maybe it was a profit, if I'm not misreading the press release.

[Exclusions] -- yes, that was due to the sale of the facility.

I'm sorry -- the sale of the --

Facility in Shanghai, which we had previously indicated that we sold.

So we actually excluded that gain from non-GAAP and reported it on that particular line item.

Got it.

Okay, thanks very much.

Sandy Draper, Raymond James.

Thank you very much.

Just a question on the margin guidance, just to make sure I've got the numbers right.

As I'm looking at it, the RMS pro forma margin in '11 was 30.4%, and PCS was 12.6%.

I want to make sure those numbers are right.

And so basically, I think you are suggesting generally flat RMS margins in 2012 and then improving margins for PCS in '12.

Are those numbers correct and those trendlines correct?

I would say yes.

Okay.

So I guess the follow-up to that is then, in terms of -- remind me where you are in terms of the cost savings.

Just generally, would you expect overall costs to be down in '12 on a year-over-year basis as you get full-year impacts of cost savings?

Or maybe I'm thinking about that wrong; I just want to make sure I've got the dollar trendline right, as well.

What we had said in the aggregate was we do have a number of cost benefits playing through 2012, principally as a result of the Q4 actions.

But in addition, unfortunately, going the other way, we do have merit increases, as well other inflationary pressures.

So whilst we continue to cut costs, things like merit increases and price increases from our vendors, even though in some cases those are lower, continues to almost offset the cost savings that we are having.

Okay, great.

That's really helpful.

Appreciate it.

I'll get back in the queue.

David Windley, Jefferies.

Hi.

Thanks for taking the question.

Following up on Eric's question on the automated, wondering how you would view that affecting the In Vitro business.

And then overall, wondered if you would care to characterize the kind of contribution that In Vitro is now making to the overall picture.

The automated PCS is -- moves us into the quality control labs, the manufacturers' sites.

The smaller device is sort of remotely utilized, and then at some point, there is a much larger number of samples that go to the QC lab.

And so that is really powerful and helpful, to be able to load this thing up and walk away and have this thing actually read the cartridges on an automated basis.

The initial interest is quite high on a prelaunch basis.

We sized that on our last call.

We indicated that that is about a $300 million market opportunity, sort of QC lab focus, of which we only have about a 10% share.

So we have a big opportunity there, and while there are certainly competing products, we don't see anything out there with this sort of capability from an automatic point of view.

In terms of helping you size this, we certainly are going to stay away from breaking out the margin contribution.

In terms of the revenue contribution, I think we indicated that it is part of Other, which includes Avian.

This was the larger, fastest-growing portion of the business.

We sort of watched the growth in those two.

You can size that relative (inaudible).

Right.

So on the quality control lab entry, does that cannibalize any of the remote use of the single or the nonautomated?

It is really additive to it, and you see clients sort of adopting the technology throughout their organization and getting comfortable with it remotely and then really wanting to use it in a more robust way.

So the potential for greater penetration on a per client basis is much higher.

Okay, and then moving --

Again, we are looking at cartridge sales -- while we are very happy with the margins on the devices, this is a razor blade business and the MCS device will use a lot more cartridges sort of by definition, and that is a pretty powerful value proposition for us.

Okay, great.

Thanks.

And quickly moving to more of the core business.

In these discussions around broader strategic deals, if my understanding is correct, you are delivering these services through kind of a variety of facilities that would be included or roll up under both the RMS segment and the PCS segment depending on where those skills reside, etc.

I am wondering how important it is to the client that those activities be coordinated in kind of an integrated fashion across the continuum of services.

You've talked about them being interested in the whole portfolio.

So I am curious about how strong or how important that value proposition is to the client that those things be coordinated across that continuum.

I think it is quite important to the client.

In the big deal that we signed where we are using many of our facilities in multiple parts of the world, we are able to use the power of the specialization at those facilities and we are able to coordinate it in a way where the client is working quite centrally and in some areas, therapeutic area expertise is working with therapeutic area expertise that we have.

But in all events, they are looking for us to help them pull it together because that is the way we drive value.

The realignment of our infrastructure that we made -- whatever it was -- six months ago or so, where we've got the formerly separate RMS and PCS operating business managed by a single person in North America and singular person in Asia and Europe have been quite helpful in delivering these services in a more integrated way.

And previously, obviously the work that we had done in our Preclinical business by having a matrix system that pulled the disparate parts and pieces together has also been helpful.

So yes, the volume across the portfolio is increasingly important to our clients.

Our ability to manage that is critical, but rather than viewing us in a fragmented fashion, we are able to have a lot more robust relationship because of the expertise we have across the world.

Super.

Thank you, Jim.

Tycho Peterson, JPMorgan.

Good morning.

Question on some of the underlying trends here.

You talked about midtier biotech being up about 5% sequentially.

Are you pulling share there?

Or can you just talk to some of the underlying dynamics and how sustainable you think that growth might be?

There is a variety of factors.

I think one is the focus of our sales organization.

Two is access to capital in the public markets.

Three, more importantly, is continual funding by big pharma.

Four is we are just doing a much better job with the value proposition.

So the sort of presumption that Charles River is too big and too inflexible to deal with smaller companies, we are simply proving it is no longer the case.

So we may be larger than some of our smaller competitors, but that gives a smaller client access to greater capabilities for fair value.

So yes, we have -- we talked on our last call about lots of small pieces of business that we had with -- whatever it was -- a couple hundred clients, picking up work with them.

Some of that is obviously share.

And that is an important part of the client base right now, and certainly going forward, so much is discovery work being done by the biotech companies.

So we intend to focus aggressively and professionally on that sector as well.

Presumably, this all kind of ties back to your comments on the ERP system and the fact you've got kind of better granularity from the field here, and are able to extract a little bit more value.

How are you feeling about the overall level of IT spend?

We've obviously seen one of your competitors make a big announcement.

A lot of that was central lab and other areas.

But they also talked about technology data capture -- or toxicology data capture.

Can you just talk a little about your level of IT investment, and do you feel a need to step that up in light of this environment or are you happy with what you've got?

We've spent significantly in IT for the last few years, getting our EPR system up, and additional software capabilities, particularly in the Preclinical sector, which enhances our report writing and formatting, but also data capture.

And also portal interface with clients, where we are working on that aggressively this year and probably will continue to do so.

Some of it is customized to the client.

I think we are feeling that it is a manageable, reasonable amount of money that is allowing us to work much more holistically with our clients.

And so yes, we are comfortable with the levels at which we are working and I wouldn't see any need for a dramatic increase going forward.

And then last one, on the academic, you called out competitor price increases here.

Are you little bit more confident that business can maybe show some upside and potentially around share shift for you?

Yes, we are.

This has been the third or fourth year of continued increasing revenue growth in the academic sector.

Going back to 2009, we put a lot more people focusing on that sector because it is just a more laborious sell.

That has worked really well.

And this price disparity, which has historically been the biggest problem we've had with the academic sector, just simply doesn't exist.

There are situations where we have the same price points, and in some, only slightly higher.

So yes, I would anticipate that we will be continuing -- be able to continue to take share in the academic sector.

We do very well in Europe, and we are beginning to do very well in US, and we will continue to focus there.

All right.

Thank you.

John Sullivan, Leerink Swann.

Just a quick one here.

I have a question about -- Jim, could I ask you to give us your current assessment of the capacity profile in the outsource GLP business?

How is capacity changing, and how do you think it compares to the amount of work that is going on?

And lastly, could you just kind of speak firstly about North America and then maybe give us your assessment in Asia, same question?

We never know how much space the clients have, unfortunately, so it is hard to size.

We know that they have more space than the CROs collectively because still the majority of work is done there.

The CROs collectively -- we took out 20% of our space over the last few years, and most of our major competitors have done the same.

A couple have talked about doing even some more in 2012 if demand isn't there.

Certainly we've seen some of the big clients take space out, and there have been some recent announcements by other clients to do the same.

So the good news is that capacity is contracting in the industry.

Our capacity utilization has improved; I suspect others have, as well.

There is still a lot of space available.

The bad news is that puts a little pressure on the margins and pricing in the short term.

The good news is as the work comes outside of clients, we won't have the need to build any incremental space.

So I think that is quite a positive.

Our information on China would be a little bit dated, but I can just tell you that when we were there with our facility, there was not a significant level of consistent interest.

It was very fragmented and we didn't have any large clients to do a significant amount of work.

I would imagine that hasn't changed much.

But having said that, you only have 500,000 or 600,000 square feet, as opposed to several million -- I think it was 8 million -- in the States.

So you have a much smaller square footage profile.

I would suspect it's still thoroughly underutilized and that everyone is in a loss -- continues to be in a loss position over there.

Probably on a proportional basis, the capacity in the States is probably very utilized, but still a lot left to go.

So it is hard to say.

There is probably -- in the US, probably a couple of years, two to three years of space left before there is a need for people to open additional space.

Thanks so much.

Robert Jones, Goldman Sachs.

Just a quick one on the PCS operating profit.

Just so I'm clear on the expectations around operating margins in 2012, should the starting point be what we saw this quarter ex the non-income-based tax adjustment?

Or when you say you expect further improvement off the margins, is that including that non-income-based tax adjustment of $1.7 million?

My comments about expecting improvement are really based on the full-year numbers.

So while we did have a good Q4, our numbers for the full year are slightly below that.

And of course, as we mentioned in the remarks, the tax, non-income-based tax pickup in the fourth quarter is not really something that we would expect to recur, clearly.

Okay, so --

So we do expect to see some improvement off of the full-year rate.

And if you just look at the fourth quarter, obviously, if you exclude the non-income-based adjustment or pickup, you get to at least a more normalized rate in the fourth quarter.

Got you.

That's helpful.

And then, Jim, you continue to highlight acquisitions, obviously, as a key part of the strategy.

Without being too specific can you give us a little bit better of a sense of what areas within the business or regions you would like to build out or bolster?

Any general sense of order of magnitude there?

I have to keep it quite general.

I mean, it would be upstream.

It would be technology-based focus, principally on in-vivo biology; it could be in-vitro as well.

We are certainly looking at other geographies besides the major ones that we are participating in now.

And we are looking to sort of fill in the portfolio that we have, where we have any gaps.

So nothing too needle-moving then?

More bolt-ons, is that the idea?

Probably in the short term, yes.

Okay, great.

Thanks.

Greg Bolan, Sterne, Agee.

Jim, could you just kind of characterize internally personnel, like attrition, retention, how you feel about employment levels at this point, specifically in the mid to senior ranks, please?

Sure.

We have a very strong senior team.

Most of the people have been here a relatively long period of time, so we have really good stability and amazing longevity statistics, people that know the industry well and know the clients well and we all work well together.

The office group is about 30 people.

Most of the businesses that we have, either built from the ground up or acquired, have similar strong longevity statistics as well.

And we have very low turnover over the last few years.

So I would say that we are retaining our people very well.

I think we pay competitively.

I think people work here because what we do makes a difference.

And I would call it a stable environment, obviously, notwithstanding the workforce reductions that we've had, primarily in our Preclinical business over the last three years, where mostly we take the junior people out, but a few at sort of mid-management levels.

That's helpful.

Thanks, Jim.

And then just nearly eight years in the making now, sitting with the Inveresk asset, I'm just trying to think -- I know it is difficult because the two have probably now obviously dovetailed for many years now.

But just thinking about the stickiness with regards to the revenue synergies between PCS and specifically Research Models or Products, how would you characterize that level of synergy at this point?

I would say that for clients of scale, the ability to buy across the continuum has become increasingly important.

We are seeing structurally clients at the large pharmas being responsible for late discovery or early development, depending on what they call it at their individual companies, really focus on and spend pretty much across all that we do.

And it is quite important to them.

So I think that the scale and the breadth of the portfolio continues to be a distinguishing competitive feature for us.

Great.

And just the last one, on the insourcing theme that you had kind of talked about last quarter.

We are certainly starting to see some of the US-based pharma companies looking to potentially -- capacity that they currently have, have best-of-breed partners come in, operate those facilities, thinking one in particular in Indianapolis with regards to discovery chemistry.

What do you think is driving that?

Is that just a better model in some of the pharma companies' eyes?

Or any commentary around that beam or trend would be very helpful, actually.

I don't know if it is a better model.

We have been talking a lot to our clients about insourcing, outsourcing strategy, where they can do both.

So they can utilize our facilities on an external basis when they don't have the capacity or the specific ability to do, let's say, some sort of specialty tox.

And then in facilities that they want to keep or need to keep for whatever reason expertise, let's say, the ability to have someone else manage that and hopefully manage it more efficiently I think really gets their attention.

Then the ability to move compounds within that system, either doing it internally at their own facilities, with their people that we could manage, or at our facility, with our people that we obviously manage, gives them a much bigger footprint and enhances their flexibility.

So I think the clients are increasingly interested in trying that structure, and we have several conversations going on right now about that.

Great.

That's very helpful.

Thanks, Jim.

Tim Evans, Wells Fargo.

Hi, thanks.

Could you talk about which part of the businesses are outperforming to the extent that it requires these merit-based increases that are offsetting your cost savings?

Which businesses outperformed in '11 relative to plan?

I'm just thinking, going forward, there was a question previously where you mentioned merit-based increases -- I think you mentioned 2012 -- that would offset the cost savings that you got.

And I'm just curious what parts of the business is outperforming to warrant those merit-based increases.

Well, it's -- the merit-based increases are more of an inflationary equity type adjustment.

I believe in December, we talked about our range of increases, which, while not uniform across the Company, is fairly consistent based on the localized market.

So we have struggled through the last few years with reductions in headcount.

One year where we had no merit increases, another year where it was below inflation.

So this year, merit is a little bit more across the board.

Obviously, any individuals who are not performing up to appropriate desiring in those particular areas aren't getting awarded as much.

But any exceptions like that are more geographic or an individualized basis, rather than on a business basis.

Okay.

And did you anticipate the inventory write-down and the non-income-based tax adjustment, either of those, in the guidance that you gave in the third quarter?

We anticipated having some issues to deal with.

The amount was a little bit elusive.

So I would say that was something that we were looking at, but it took a fair amount of analysis on our part to actually come up with the number.

Okay.

Great.

Thank you.

Garen Sarafian, Citigroup.

Thank you for taking the questions.

My first question is -- you sort of alluded to this in your product comments, but just wanted to clarify.

The reorganization that you had announced -- was it August -- sometime summer last year, in 2011 -- into two regions to provide a more seamless solution, has this transition been completed yet?

I'm just trying to see, is there more sort of horsepower that your sales force will receive after this transition, if it is not?

It has been completed.

We've had it now for about six months.

We had it completed during the budget process, which was extremely helpful.

And just had our international sales meeting, which we have in mid-January, and it just was very powerful, the interface between the operating folks and the sales organization.

So yes, we've completed it.

We're extremely pleased with it.

The client feedback is great, and the sales force seems better congealed than ever.

Got it.

Just switching gears a little bit, more a big picture question.

I think you mentioned something on the NIH budget.

So yesterday, the President released its fiscal 2013 budget, where he actually proposed NIH funding remain flat year-over-year, which is actually pretty good, given current budget pressures.

So I know you've stated before that Charles River is not too sensitive to the downward pressures of the NIH budget, and it is only early on in the process.

But would better-than-expected NIH funding have any different demand profile for you guys to the upside?

It could.

Our academic sales have increased significantly over the last few years.

We bid on lots of large government contracts, many of which are funded by the NIH.

We are winning a lot of them.

So obviously, there could be incremental work coming out.

We also sell our products directly into the NIH in sales there.

We've been focusing on it more thoroughly, and sales there have increased as well.

So obviously, upside in spending certainly could be beneficial.

As I said earlier, as the price point versus the competition for our research models in particular has flattened, we're getting a lot more traction from a share point of view.

Got.

And then just, I guess, one follow-up on that, was I think you expected a price increase of 2% to 3% in 2012 within RMS.

Can you just shed any color as to how it has been received in the marketplace so far?

It sounds positive, but just wanted to see if you can add more color there.

Thank you.

I think the increase has been received well, with virtually very little pushback, and we are pleased by that.

Great.

Thanks again.

Ricky Goldwasser, Morgan Stanley.

This is Andy Schenker in for Ricky.

I was just looking for a little more detail on revenue guidance.

You targeted 1% to 3%, excluding FX, which to me implies higher growth in RMS and potential year-over-year declines for PCS.

For RMS, clearly you have the price increases.

I mean, how much of that -- of the increase in RMS is really from the price increase and how much is from unit growth?

And then for PCS, should we think of maybe steady growth from 4Q levels, excluding the extra week and any year-over-year declines, are the results of maybe tougher comps from the first half of 2011 levels?

Yes, what we had said was on a constant currency, as you noted, our guidance for '12 was 1% to 3%.

We did say that we expected the RMS to outperform that, and we did say that we expected the Preclinical to be a little bit less than that, which obviously balances out the numbers.

On both segments, as we just talked about somewhat extensively, the 53rd week was obviously a benefit in Q4 and 2011.

It obviously creates a slight wind going into 2012 of about the same percentage on a full-year basis, which we said was about 1% for the full year.

Pricing in RMS is -- overall for 2012 is somewhere in the 2%-ish range.

So clearly, that is part of the uptick in RMS next year.

We talked about some businesses being a little bit better, like Discovery and In Vitro, and some of the small models continuing to be challenged, as well as the large model business.

On the PCS side, we talked about regulator talks continuing to be a little bit of a drag.

And in the non-GLP areas, that would continue to develop positively.

So basically in a nutshell, that is how I would attempt to answer your question.

Okay, and then just looking at maybe sequential progression throughout the year for PCS, I mean, is a good starting point 4Q levels ex the extra week?

Yes, more or less.

With the growth rate overall, we don't expect a lot of dynamic activity quarter to quarter, if you think about where we are year-over-year.

We did say specifically, given the uptick in Q4 because of the 53rd week, that we think PCS will be down sequentially going into Q1.

And really from there, it will probably move sideways to up notionally quarter-over-quarter, but nothing dramatic.

Thank you.

Todd Van Fleet, First Analysis.

On PCS, what is the opportunity for further expense reductions, expense savings, kind of in a flattish environment in 2012?

And I guess maybe asked a little bit differently, what type of environment would have to exist for the Company to consider further expense reductions?

Thanks.

Well, clearly in a flattish environment, as you suggested, we are not rally looking at volume-related type reductions, of which, quite honestly, a lot of historical reductions have been directly related to volume.

But in addition to that, we have changed processes in a number of areas and actually improved our efficiencies as well.

And looking to 2012 and beyond, we do have a number of projects that are sort of ongoing as a result of that performance improvement program in 2011 that was the focal point of the reductions in Q4.

And we still continue to believe that from an efficiency basis, we could continue to do work better and more efficiently, and we will continue to attempt to do that.

I don't expect any watershed moments to come out of that, so I think the efficiencies will be achieved on a sort of constant basis and will result in things like attrition and whatnot as opposed to any watershed activities in a given area.

So Tom, just to elaborate on that then, if we were to have an environment where, let's say, Charles River won a couple of these strategic partnerships, or maybe preferred partnerships, what have you, but maybe the overall environment was a little bit flattish, we could still see a scenario whereby the Company would be able to reduce the expense base, even in the face of the new business from the relationships, the new relationships?

I would say yes, with the exception of it would depend on how meaningful those partnerships were.

So if we were to announce another meaningful partnership, it would be clearly difficult to do that that without affecting headcount directionally up in any manner.

So our view would be continue to try to increase business, win strategic partnership awards, and in some cases, we might have to add incremental heads, but not as many as we would have added historically by being more efficient.

Okay.

Thank you.

James Kumpel, BB&T Capital Markets.

Good morning.

Can you talk a little bit about the nature of demand for the large models?

Do you see a fundamental shift or just an adjustment in inventory for temporary demand?

And then I have a follow-up question on the timing of CapEx and when you expect that to sort of tier down in 2012.

We have been seeing a fundamental shift in the demand quotient for large animals for a while now.

That is related to several things.

The actual amount of safety assessment work that is being done, which of course is off right now, the sheer cost of those studies makes clients more sensitive, and they will wait until the last minute to do them.

And also, clients have become very price-sensitive.

So we have several sources of these animals, and clients are interested in lower-priced animals from lower-cost sources.

So we see how it is hitting both lines, as we indicated in our remarks, has a big impact on operating margin, because this product line has historically been extremely high-margin.

Margins are okay now, but they have certainly declined over the last few years, and it is hard to see what catalysts would change that slope.

Having said that, it will seek a level that is required to continue to fund large animal studies, which of course are required by the FDA.

So it will level out for us.

We have multiple sources of lower-cost animals so we will obviously be able to continue to participate in this market.

And I think we know how to house them and deliver them in a cost-effective fashion.

Okay.

And then on CapEx, obviously, there was a temporary uptick in the fourth quarter due to timing, as you talked about.

Is that going to start tiering down into more normal levels in the first quarter or the second quarter?

Well, I would say, given the few projects that are ongoing now and part of the reason for the little bubble in Q4, we will probably see it not at quite as heavy as Q4, but my guess would be that in 2012, we will see a little bit more activity from a timing standpoint in the first half of the year than the second half of the year.

But even though we had a little bubble in Q4, as we said, we don't expect to spend any more capital in 2012, nor do we expect to spend at that kind of a run rate in a given quarter.

Okay.

Thank you very much.

I will now turn the conference over to Susan Hardy for closing remarks.

Thank you for joining us this morning.

This concludes the conference call.

Thank you, then, ladies and gentlemen.

That does conclude our conference for today.

Thank you for your participation and for using AT&T Executive Teleconference.

You may now disconnect.