Charles River Laboratories International Inc (CRL) 2015 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Charles River Laboratories First-Quarter 2015 Earnings call.

(Operator Instructions)

As a reminder, this conference is being recorded.

I would now like to turn the conference over to Corporate Vice President of Investor Relations, Miss Susan Hardy.

Please go ahead.

Good morning, and welcome to Charles River Laboratories first-quarter 2015 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 first-quarter results and update guidance for 2015.

Following the presentation, we will respond to questions.

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

A 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 357368.

The replay will be available through May 14.

You may also access an archived version of the webcast on our Investor Relations website.

I would like to remind you of our Safe Harbor.

Any remarks that we may make about future expectations, plans and prospects for the Company constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from those indicated by any forward-looking statements as a result of various important factors, including, but not limited to those discussed in our annual report on Form 10-K which was filed on February 17, 2015, 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 Information link.

Jim, please go ahead.

Good morning.

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

We reported revenue of $320.4 million in the first quarter of 2015, a 12.8% increase over the previous year in constant dollars.

Our Early Discovery acquisitions contributed 8% to first-quarter revenue growth.

And from an organic perspective, the Safety Assessment and EMD businesses were the primary contributors.

Sales to mid tier biotechnology clients, again, generated a double-digit revenue increase as robust funding enabled these clients to continue to invest in their pipeline.

And they chose to partner with us because of our broad early-stage drug research portfolio, and extensive scientific expertise.

The operating margin declined 80 basis points year over year to 16.2%.

The DSA segment reported a significant 600 basis point increase in its operating margin.

But the improvement was offset by margin declines in RMS and manufacturing, as well as higher corporate costs.

As you know, because of our high fixed cost base, lower sales volume has a disproportionate impact on the operating margin.

Which is amply demonstrated in the first quarter.

In addition, we have undertaken efficiency initiatives like the facility consolidations in Japan, which have yet to yield cost reduction.

We recognized costs of these initiatives in the first quarter, but don't expect to gain the benefits until the second quarter of this year.

Earnings per share were $0.79 in the first quarter, a decrease of 3.7% from $0.82 in the first quarter of 2014.

The year-over-year decline was due in part to lower RMS revenue, and the negative impact of foreign exchange.

But the largest factor was the gains from limited partnership investment.

The gains were only $0.02 per share in the first quarter of this year, compared to $0.08 in the first quarter of 2014.

Despite the lower than expected first-quarter results, we have not changed our perspective on our full-year performance.

There were improving trends in March and April.

Including higher sample volume for Biologics, and increases in inquiries and backlogs for the Safety Assessment business.

In fact, based on the strength of Safety Assessment, we are increasing our guidance for constant currency revenue growth to a range from 6.5% to 8%.

Because the foreign exchange impact is greater than anticipated, we are reiterating our non-GAAP EPS guidance range of $3.55 to $3.65.

This represents an earnings increase of approximately 4% over last year at the midpoint.

But as we mentioned when we guidance in February, you should note, that when adjusting both 2015 and 2014 for gains on limited partnership investments and foreign exchange the EPS growth rate would be 12%.

We continue to believe that the Company is very well positioned to win new business in 2015.

There is great potential for expanding existing and winning new strategic relationships, and for market share gains.

We have a robust pipeline of acquisition candidates, and execution of any of these acquisitions will enable us to expand the [support] we can offer our clients.

I would like to provide you with details on the first-quarter segment performance.

Beginning with the RMS segment.

Revenue was $120 million, a decline of 2.6% in constant currency as higher revenue from product sales was offset by lower service revenue.

As was the case in the fourth-quarter, sales of research models in North America increased significantly.

This was primarily due to sales of NCI models, which are now recorded as product sales instead of services due to the termination of the NCI contract last fall.

We have successfully executed our plan to transition researchers to directly purchasing their models from us.

And in fact, believe that a portion of the anticipated contract loss is being offset by a greater than expected conversion rate.

The increase in demand for inbred and immunodeficient models, which we experienced last year, continued in the first quarter.

We believe that the trend is being driven primarily by oncology research, where positive results from immunotherapies are driving increased investment.

We also had strong revenue growth in China.

Where we have established Charles River as a high-quality provider of research models.

Revenue in Europe and Japan continued to be soft, consistent with our experience in 2014.

As expected, revenue for Research Model Services declined in the first quarter, as a result of the loss of the NCI contract.

And the significant colony reduction by one GEMS client.

When we noted the gems reduction in the third quarter of last year, we commented that it was the result of the client's normal assessment of the continued need for this specific model.

And was not indicative of any shift away from genetically engineered models, or from our GEMS business.

We still believe this is the case, but we also believe that the nexus of the human genome project and the availability of new model creation technologies is enabling researchers to rapidly create these models with precise multi-gene manipulations which can answer specific questions about the molecular basis of disease, and whether a particular drug impacts it.

As a result, the translational value of the models is improving.

Providing researchers with better information on which to make decisions about potential therapies.

Because technology now enables easier and more rapid model creation, we can foresee an evolution of our GEMS business over the next three to five years.

From primarily long-term [grading] to a combination of model creation to test specific hypotheses about the treatment of the disease, and more short-term breeding.

We fully intend to play a leading role in this emerging opportunity and will adapt our business model to best support the needs of our clients.

We are currently exploring potential acquisitions, licensing agreements, and partnerships to ensure that our GEMS business is well-positioned to address the changes we expect the as market evolves.

We have already obtained a license to use CRISPR/Cas9 technology, and will continue to assess the technology and services we should have in our portfolio.

We'll update you from time to time on our progress.

In the first quarter, the RMS operating margin decreased by 320 basis points to 26.3%.

Due primarily to lower sales of models in Europe and Japan, as well as lower revenues for services, including GEMS and insourcing solutions.

As was the case in the fourth quarter, our efficiency initiatives, particularly the facility rationalization in California and Michigan, generated a significant benefit in the first quarter.

However, the benefit of our two facility consolidations in Japan will not contribute until the second quarter of this year.

We are continuing to identify opportunities to streamline our RMS operations.

And we maintain our belief that an annual RMS operating margin in the high 20% range is achievable.

The Manufacturing Support segment reported revenue of $60.4 million, which represented a growth rate of 5.7% in constant currency.

The EMD business delivered strong growth, which was partly offset by the Biologics business.

Biologics normally has a soft first quarter, as a result of low sample volume following the holidays.

In addition, the comparison to last year was challenging because the business had an unusually strong first quarter.

The volume improved in March and April, which gives us confidence that the Biologics business will report growth in subsequent quarters.

We believe that revenue for this business will continue to increase annually, because the business supports the development of biologic drugs, which are representing an increasing proportion of drugs in development.

The EMD business reported growth of approximately 10% in constant currency, driven by both PTS and poor LAL technologies.

The PTS franchise is continuing to drive the EMD business, as a result of our continuous product innovation.

The PTS micro, which we introduced late last year, is generating significant interest from clients.

The PTS micro is a rapid test for bacterial contamination or bioburden.

And like the PTS, there's an important advance over current testing technologies because it delivers significant faster results than traditional microbial testing methods.

Our introduction of the PTS micro positions us as the only provider of real-time quality control monitoring products and services for pharmaceutical manufacturing.

Who can offer a combination of FDA licensed rapid endotoxin testing, rapid bioburden testing, and microbial identification utilizing Accugenix extensive bacterial libraries.

We believe this is a clear distinction between Charles River and other competitors.

Like our introduction of the PTS, we expect sales of the PTS micro to ramp slowly over the next few years.

But we believe that our ability to provide a total microbial testing solution to our clients will be a key driver of our goal for the EMD business to continue to deliver at least low double-digit organic revenue growth for the foreseeable future.

The manufacturing segment's first-quarter operating margin was 29.9%, a decline of 220 basis points year over year.

The decline was due primarily to two factors, lower revenue for the Biologics business and the impact of foreign exchange on the EMD margin.

Tom will explain EMD in more detail shortly.

But I will say that as the Biologics revenue trend improves in the second quarter, we expect that the Manufacturing segment margin will be in the low 30% range which we consider to be a sustainable level.

CSA revenue was $140 million in the first quarter, a 36.3% increase in constant currency with the Early Discovery business contributing 22.9% to first-quarter growth.

We are pleased with the acquisition of Argenta, BioFocus, and ChanTest.

Which has expanded our relevance to clients, and also with the integrations, which continued to progress extremely well.

We've accomplished the initial tasks which were critical for operations and are moving ahead with strategic inspiration initiatives, designed to enhance the connectivity between the Early Discovery businesses and the balance of the Charles River portfolio.

These initiatives are a major focus for 2015.

Because we believe that they are pivotal to our ability to generate the revenue the synergies which we anticipated in our acquisition plan.

We are continuing with our outreach to heads of R&D and other decision-makers at the leading biopharmaceutical companies, as well as many of the larger mid tier companies.

The addition of Discovery assets to our early-stage drug research portfolio has allowed us to expand discussions with existing clients about playing a larger role in their research efforts and has opened an avenue for discussion with potential new clients.

We are fundamentally changing the conversation, because we can now support the early-stage drug research process.

Our broader portfolio allows us to begin discussions with clients earlier and assist them in the process of planning their approach to outsourcing Discovery.

Much like Safety Assessment 15 years ago, many of our clients are in the process of evaluating what capabilities need to be maintained in-house and which can be outsourced.

Our value proposition is compelling.

Because partnering with Charles River, allows our clients to outsource more services to a single provider, improving the efficiency of their drug research efforts and speeding time-to-market.

The selling cycle is somewhat longer for integrated drug programs.

But we have already won new business as a result of our expanded portfolio.

And are optimistic that clients will continue to choose Charles River as their outsourcing partner.

For the second consecutive quarter, the Safety Assessment business reported a low double-digit revenue increase over the prior-year quarter.

We were exceptionally pleased with this performance, which resulted from a combination of improved client demand from both global and mid tier clients, as well as steady mix and pricing.

The years of effort we made to improve our operating efficiency while continuing to invest in our scientific expertise, enhance our sales efforts and build stronger relationships with existing and potential clients, are paying off now.

When the Safety Assessment market is returning to a growth mode.

We have differentiated ourselves from the competition.

And clients appreciate the value we bring to their research efforts, and the emphasis we place on individualized service.

As our backlog has grown and we approach full capacity, we are now seeing a definite improvement in pricing.

The combination of increased spot market and change order pricing yielded a 5% increase in overall pricing in the first quarter.

The first significant improvement since the economic downturn.

Because of our sustained focus on improving the efficiency and productivity of the Safety Assessment business, leverage from higher revenues was a significant contributor to the operating margin.

The Safety Assessment business exceeded our segment goal of a 20% operating margin and was the primary driver of the DSA segment's 600 basis point operating margin improvement from the first quarter of last year.

At 19.8%, the DSA segment is very close to our 20% goal.

Although I remind you, that margin improvement varies based on a number of factors and should be evaluated on an annual rather than quarterly basis.

As capacity has filled, we have opened small numbers of study rooms in order to accommodate client demand for our services.

Utilizing this approach, we have been able to add capacity without a material impact on the operating margin.

We are continuing with this approach in 2015, and intend to open 15 rooms in Ohio in the second quarter.

And additional rooms in Sherbrooke, our Montreal satellite facility, towards the end of the third quarter.

This will give us sufficient capacity to meet our needs in 2015.

We are currently developing our plan to meet capacity requirements for 2016.

The success of our targeted sales strategies with our global accounts and mid tier biotechnology clients was the primary driver of the DSA segment's first-quarter growth.

We have continued to take market share in both of these segments, as the breadth of our portfolio, our scientific expertise, and our best in class client support resonates with clients.

Excluding the acquired Early Discovery businesses and foreign exchange, DSA sales to both mid tier and global clients increased to low double digits.

And when looking at total Company revenue in the first quarter, sales to global and mid tier clients also increased despite continuing consolidation in the biopharmaceutical industry, particularly in Europe and Japan.

We are continuing to execute our sales and marketing strategy meet with heads of R&D and other senior decision-makers at our global accounts, and larger mid tier clients.

We have been successful at expanding many of our strategic relationships with both global and mid tier clients.

As evidenced by the fact that at nearly 30%, these relationships represented an increased percentage of our total revenue in 2014.

We are in ongoing discussions to expand additional strategic client relationships, and are diligently pursuing new ones.

The strategies I have discussed with you over time; portfolio expansion, sales targeting, scientific expertise, investment in personnel, and efficiency initiatives are key to our ability to provide a compelling value proposition for our clients early-stage drug research efforts.

We are pursuing all of these strategies in order to maintain and enhance our position as the leading early-stage drug research CRO.

This is especially important now when focus on early-stage research is increasing and biopharmaceutical companies are identifying more opportunities to outsource capabilities, which they formerly maintained in-house.

We believe these changes afford us a unique opportunity to continue to gain market share and we intend to capitalize on the opportunity by leveraging the investments we have made, and new ones we intend to make.

While we do not view any single strategy as more important than the others, we believe that continuing to broaden our early-stage portfolio will definitely increase our relevance to our clients.

We intend to continue to identify and acquire businesses and technologies, primarily upstream.

But also for other growth areas of our business.

Such additions will enhance the role we can play in supporting our client's early-stage drug research process by providing critical capabilities and expertise which they do not have in-house, or which enable them to eliminate the internal investment.

We believe that our global biopharmaceutical, mid tier biotechnology, and academic clients are searching for the right partner to support them by taking on a broader role within their organizations.

And Charles River intends to be their partner.

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

Now I'd like to ask Tom Ackerman to give you additional details on our first-quarter results.

Thank you, Jim, and good morning.

Before I recap our first-quarter financial performance and outlook for the remainder of the year, let remind you that I'll be speaking primarily to non-GAAP results from continuing operations.

We experienced a slower than anticipated start to the year, based on a number of factors that effected operated our results, including foreign-exchange.

We believe the slow start for a few of our business was transient, and remain on track to achieve our EPS guidance for the year.

I will now provide additional information on foreign exchange, operating margins, and the limited partnership investments gains, each of which had a significant impact on our first-quarter results, as well as our outlook for the year.

Foreign exchange was the most significant headwind affecting our 2015 guidance.

And has become a larger headwind since we provided guidance in mid February, due to the continued strengthening of the US dollar.

FX reduced revenue growth by 5.8% in the first quarter.

Which was slightly higher than we previously anticipated, and reduced EPS by $0.03.

For the full year, based on current rates, FX is now expected to reduce revenue by approximately 5.5% over last year.

And EPS by an incremental $0.05, for a total of $0.17 per share in 2015.

Foreign exchange has also become an increasingly relevant factor with regard to our EMD business.

We have expanded our global EMD business rapidly over the last decade.

The international expansion, coupled with the fact that the EMD business manufactures products in the US and distributes them globally with the resulting sales recorded in the local currencies, has intensified the manufacturing segments exposure to foreign-exchange.

The continued strengthening of the US dollar caused a meaningful revenue and operating margin headwind in 2015, which drove almost half of the manufacturing segments operating margin decline in the first quarter, or 90 basis points.

In addition to this foreign exchange impact, the first-quarter operating margin was lower than expected due primarily to two factors.

First, as a result of our high fixed cost base, the slower start for a few of our businesses had a disproportionate impact on the consolidated operating margin.

Second, expenses were higher in the quarter as a result of increased corporate and other discrete costs that are not expected to continue at the same level.

We believe that the offset to the slower than expected start in the first quarter and the incremental foreign exchange headwind in 2015 will be accomplished in several ways.

First, we expect the strong Safety Assessment trends will continue over the course of the year, which is supported by improving KPIs, including an increased backlog.

Primarily as a result of our improved outlook for Safety Assessment growth, we raised our constant currency revenue guidance by 50 basis points to a range of 6.5% to 8%.

We also believe that most of the businesses that reported slower than expected results in the first quarter will improve in the second quarter and for the year.

We see evidence of this through improving trends in March and April.

For example, Biologics had seasonally light sample volume at the beginning of the year, which improved thereafter.

The RMS segment growth rate is also expected to improve modestly in the second half the year.

We are cautiously optimistic that the global [mallus] business will stabilize.

And the services businesses will face easier year-over-year comparisons in the second half of the year as we anniversary the termination of the NCI and other smaller government contracts in the insourcing solutions business, and the reduction of a client colony in GEMS.

In addition, we are tightly managing discretionary spending and have identified additional savings in 2015.

As a result of these factors, we are confident that we remain on track to achieve our non-GAAP EPS guidance of $3.55 to $3.65 for the year.

Or $3.72 to $3.82 when excluding foreign exchange.

In addition to FX, the other significant headwind affecting our 2015 guidance was the limited partnership investment gains related to our investment in Life Science Venture Capital Funds.

Our outlook for these investment gains remains largely in line with our February guidance, but continues to be a headwind compared to 2014.

In the first quarter, we reported an investment gain of $0.02 per share, versus a larger benefit of $0.08 per share in the first quarter of 2014.

For the full year, we expect to generate a modest gain of $0.04 per share which creates an $0.08 headwind from the $0.12 of investment gains that we reported in 2014.

Normalizing for both FX and the investment gains in 2014 and 2015, we would be positioned to generate EPS growth of approximately 12% in 2015 at the midpoint of our guidance range.

I will now discuss some of the other income statement items that affected the first quarter.

Unallocated corporate costs increased $3.1 million year over year, $25.6 million in the first quarter of 2015.

The increase was primarily driven by higher stock compensation expense, due in large part to the PSUs which are just after the first year based on financial performance.

Because of the significant 2014 financial outperformance, the base number of PSUs was adjusted upward.

In addition, the first quarter of 2015 included 2014 PSU expense for a full quarter, compared to a partial quarter in the first quarter of 2014.

Primarily as a result of stock compensation expense, including the PSUs in a new retirement vesting provision, unallocated corporate costs in 2015 are expected to be slightly above our prior outlook of approximately 6.5% of revenue.

Unallocated costs are typically higher in the first half of the year.

Though some moderation can be expected from the current quarterly run rate.

Net interest expense was $2.6 million in the first quarter, which was unchanged from the prior year and $200,000 higher than the fourth quarter.

We continue to expect net interest expense to be in a range of $12 million to $14 million in 2015.

This outlook primarily reflects an expectation that LIBOR rates will begin to edge higher later in the year.

Last week, we disclosed that we amended our credit agreement.

We did so for two reasons: to reduce our interest rate by capitalizing on our current leverage ratio, which is slightly below 2.5 times; and to expand the revolving credit facility to provide additional capacity for general corporate purposes, including acquisitions.

The new facility includes a $400 million US term loan, and revolver of up to $900 million.

A portion of which can be drawn in foreign currencies.

The drawn amounts on the new facility were $361.8 million on the revolver, denominated in US dollars, euros and British pounds, and the full $400 million on the term loan.

These amounts are similar to the balances on our pharma credit facility at the end of the first quarter.

The interest rate spread and our current leverage ratio is LIBOR plus 112.5 basis points compared to LIBOR plus 125 basis points for the pharma credit facility.

The term loan matures in 2020, extending the tenor by two years.

In the first quarter, the non-GAAP tax rate decreased by 100 basis points year over year to 26.4%.

The decrease was primarily attributable to lower realized gains from our limited partnership investments, which are taxed at the higher US rate.

Because of normal quarterly fluctuations based on the earnings mix throughout the year, we remain comfortable with our non-GAAP tax rate outlook of 27% to 28% for the year.

In addition, there is pending tax legislation related to R&D tax credits in Canada that, if enacted, could modestly increase our tax rate from the current levels.

Free cash flow declined to $0.6 million in the first quarter of 2015 from $17.3 million last year.

This significant decline was primarily driven by two large items that reduced operating cash flow in the quarter.

First, the [pharmas] based bonus payments were approximately (technical difficulty) higher than last year, due to the Company's outperformance in 2014.

This was previously included in our free cash flow guidance for 2015.

The second item was related to the timing of cash inflows and outflows associated with certain tax items.

Timing reduced operating cash flow by approximately $7 million in the first quarter, but is expected to normalize over the course of the year and will not have a meaningful impact for the full year.

As a result, we remain on track to achieve free cash flow of $195 million to $205 million in 2015.

At $10.6 million, first-quarter capital expenditures was slightly lower than last year.

However, our CapEx outlook for the year continues to be approximately $70 million.

As Jim mentioned, we are working on projects to expand capacity in our Safety Assessment business.

Including adding rooms in Sherbrooke and Ohio, and for other growth businesses.

Our capital priorities have remained unchanged, and our top priority remains M&A.

As Jim noted, we continue to evaluate multiple acquisition candidates, and attempt to pursue any opportunities in 2015.

We continued to buy back shares in the first quarter, repurchasing 683,000 shares of our common stock for $50 million.

We had $128.5 million available on the current authorization at the end of the first quarter.

Our current goal for stock repurchases is to offset dilution from option exercises and equity grants in 2015, so we continue to expect our average share count will remain relatively flat.

I remind you that we regularly evaluate our capital priorities over the course of the year, and often may invest in more or less in certain areas depending on a number of factors, including the availability and timing of potential acquisitions.

To conclude, I will comment on our outlook for the second quarter and 2015.

The second quarter, we expect that sequential improvement will be most visible in the DSA and Manufacturing segment.

And we also expect margin improvement in the RMS business.

Consolidated revenue will increase nicely in the second quarter, both sequentially and year over year in constant currency.

But based solely on the significant foreign-exchange headwind, second-quarter reported revenue is expected to decline at a low single-digit rate compared to the second quarter of last year.

Earnings per share will be similar to or slightly below the $0.97 that we reported in the second quarter of 2014.

Based on the improving trends in March and April, the enhanced growth prospect for Safety Assessment and the confidence that we have in the outlook for the remainder of the year, we expect 2015 consolidated revenue and operating margin to improve substantially from the slower than expected start to the year for some of our businesses.

Our segment outlook for 2015 is unchanged.

We continue to anticipate that RMS revenue will be essentially flat on a constant currency basis.

But the DA segment generating low double-digit growth, including the benefit from Early Discovery acquisitions and the Manufacturing segment remaining on track to achieve high single-digit revenue growth.

Thank you.

That concludes our comments, the operator will take your questions now.

(Operator Instructions)

John Kreger William Blair

Hi, thanks very much.

On the models business, are you seeing any change in a competitive pricing dynamics, given some of the recent consolidation there?

I would say not.

Everybody is getting price, we're probably seeing 2% to 3%.

Everybody typically raises price, although we don't all do it at the same time.

I think on a price list basis, our competitors actually raised their price slightly higher than we did.

But one never knows how that's going to hit the market from a discounted -- on a discounted basis.

It's totally different for different strains and models for different competitors.

But I would say that everyone has raised prices, and God knows increased prices meaningfully.

Great, think that's helpful.

Tom, does the guidance assume an improvement in the models business in Europe and Japan?

Or are you assuming more of the same for the rest of the year?

It includes a modest increase in the overseas markets.

And it also includes an improvement in earnings in Japan because we get the benefit of consolidation of facilities in the second quarter.

We've already done it, but the cost benefit begins to accrue to us then.

So the invest in the margin begin to move back up in that distance total.

Great, thank you, and on one last one.

As you try to bring on some additional capacity for safety assessment, if and when you decide to bring on -- open up some of Shrewsberry, can that also be done in a way that does not impact margins significantly for that segment?

Good question.

We still have a team studying Shrewsberry and interfacing with clients, in particular in the Cambridge and Boston life-sciences hub to get their demand quotient.

I would say that our initial thinking continues to be that we will open a portion of that facility.

Principally for non-GLP work, so in vivo, in pharmacokinetics and things like that.

Hire the staff, get them trained up, do that work.

We're quite confident will be able to do that with low or no drag at all to operating margin.

Of course we can use literally the same space and the same people trained slightly differently to do GLP tox work, so we should be able to liaise into that relatively, in the not-too-distant future.

Although we have to validate equipment and stuff, so we would not be able do that overnight.

So unlike the way we did it the first time, which is opening a very large, very expensive facility, we have no intentions of doing that again.

When we do it, we're going to gradually do it.

Great, thank you

Tycho Peterson, JPMorgan

Jim, you commented that you have a selling cycle, it is getting a little bit longer for the integrated drug programs.

We've heard similar comments from some of the other CROs.

Can you maybe just talk about start delays, whether some of the starts are getting pushed off?

And as the integrated drug programs are becoming a little bit more complex, how is the pricing discussion evolving?

I wouldn't say that they are getting pushed off.

Clients really enthused with the prospect that we can take them literally from target ID to I&D FIling.

They are really enthused with the reality that we can hopefully find them a target with an integrated program, which of course takes a few years and a few million dollars.

We're still working really hard to just even get the word out there that we do this now.

And who is this Argenta BioFocus and can they really do what we say they can?

They have to meet our senior scientists and we have to talk through the pricing and the timeframe and what we actually deliver and we have historically done for the clients.

I think we're doing that really well.

I've had a lot of the conversations myself with R&D heads from almost all the major pharma companies and many of the largest biotech companies and they are all quite interested.

They have different levels of potential engagement.

So I would say it's more just working through the details and the complexities and making sure that we are able to do with they want us to do.

And when we say it's taking longer, it's just a little bit longer than we had anticipated.

But I don't think anything has changed, and I think that their former technology, or the technology of Argenta BioFocus as part of our portfolio is much more powerful sale in conversation with the clients.

And of course now we have the connectivity between that early discovery work in the non-GLP work and then hopefully eventually the tox work.

So yes, we are still quite enthused with the prospect

And can you comment a little bit more on the weakness in GEMS?

I know you've also talked about investments in that business in Pittsburgh in some of these other technologies, but what is driving the weakness right now?

A couple of things.

As we indicated, we have one really large clients who rather quickly reduced their colonies' sizes.

Has nothing to do with us, has nothing to do with anything except the utility of those models or the work that they were doing.

And this is a -- this particular client move real quickly.

We started to talk to you about that in the third quarter.

What we started to talk about is that we think what the beginning of scientific change in the way the business is operated, there are really robust technologies which we have the license for to create models.

More models, more quickly that are multi-genetic knockouts.

And we think that the breeding work associated with that will be lots of shorter-term contracts with some churn as opposed to these long-term contracts where clients were trying to figure out the utility of the model.

The utility of these models now will be much better because of the strength of the genetic mapping and translational benefits that they will give the clients.

We're actually really excited about it.

I was actually in a conversation yesterday with some of the world's leading oncology experts, and I was really pleased listening to them talk about how important GEMS models are to the research.

And the fact that they get increasingly better because they're so exquisite and discrete from a genetic point of view.

And they're actually getting really good information that's extrapolatable to cancer patients.

In some ways, we're more enthused with the future the business.

It's just like so many of our businesses, it is hard to look at it on a quarter to quarter basis.

Okay, last one pricing.

It was good to hear about the 5% increase in the quarter for DSA, are you willing to take a look at shot at where you think pricing could end up for the year for DSA?

I think that's probably not really a good idea.

We are really pleased that were seeing exactly what we thought that our capacity is selling.

So clients more eager to get their work in the queue.

We have a really good mix of specialty versus general talks.

We have a really, really complex study that are requiring some change orders while they're actually in progress.

And we're delighted that our operating margin is already better than we had -- better than our goal.

And our pricing is still materially lower than it was at the high point 2007 and 2008.

So I would just say that directionally, we do think we'll get more price.

We do think that all of those factors that I just indicated, including and particularly mix will continue to be enhanced.

And we're pretty excited about the growth rate and the margin contribution of this business which was obviously very challenging for four years or so.

And we worked really hard to get it to this point, and that's gratifying to be here now.

Okay, thank you.

David Windley with Jefferies

Thanks.

John, can I ask one part of my question which was around Shrewsberry?

Combining Tycho and John's questions together, Jim could you comment on the work -- the rooms that you're bringing on in Sherbrooke and Ohio that you commented on?

And given what appears to be pretty good growth in DSA, I presume GLP driving at least part of that, will these rooms that you're bringing on last you as you had previously signaled to us?

And on Shrewsberry, what do you think is your trigger, what gets you comfortable enough to authorize spending on Shrewsberry to really move toward opening that and out of just an evaluation period?

Those are great questions.

So our Ohio facility, I would say is a particularly efficient, compared to some of our other sites, pretty low-cost operation, does really good work.

And we've built very creative, very flexible new building that we actually stopped.

We were 80% completed and built the last few years, we've begin to finish it a few rooms of the time.

Which I think was a thoughtful way to do it.

We knew we had the envelope, so getting the rooms done was pretty straightforward.

We love that site.

We have a lot of really large and stellar clients there, we like the growth rate and the margin.

And that will help us a lot for 2015 and that site will be beneficial to accommodate work right through at least some meaningful portion of 2016.

Sherbrooke operation is a satellite operation that we built from scratch to the Montreal facility that we acquired when did [in reps] 2004.

Also very, I think creatively built facility.

Slightly lower cost than the core Montreal facility and built for flexibility.

And so what we are doing now is creatively adding additional space in the footprint that we have.

But the building was built to grow 100,000 feet, a tranche with the current HVAC infrastructure.

So will be able to push that facility out, push the walls out and add to it relatively quickly.

So are thinking of that both short-term and longer-term to accommodate growth for this year and next year and beyond.

I would also just remind you that we have some opportunities in Edinburgh and what we call the fallow space in Reno.

It's -- I think you've probably been there.

It's space that's -- the shell is done, the HVAC is there, we just haven't finished the rooms.

Just requires in capital but we can do it relatively quickly.

So we have a fair amount of opportunities.

Shrewsberry is a totally different analysis.

It's a very, very big facility as you know.

That is the challenge.

The opportunity is it is less than an hour from the major center of biomedical research and biotechnology.

We have increasingly increasing number of clients that are interested and asking, when he opening that?

So we like the buzz.

I think we have to feel a couple of things.

We have to feel that we can open it categorically for non-GLP work with, I'd like to say worst-case breakeven, or some slight drag, but really slight.

So that business is doing so well we're kind reluctant to open it up and have any adverse drag.

I suppose this could change but we don't see right now that we would open that immediately and do tox work.

We have enough space and there's a lot of -- lots of biotech that uses a lot of our other facilities, Montreal's not that the faraway.

So I can't say there is one thing that will cause a trigger to make us go forward.

It's just continued conversations with clients, continued refinement of our financial analysis and continuing to be confident with the apparent demand change in demand quotient that we are living with right now.

Thank you for that answer.

If I could switch to RMS and asked just one question there?

Apologize if I missed it, I know you had FX drag there, clearly volume must've also been down and then pricing was up, as you said, 2% to 3%.

Is a volume environment in the RMS business actually softening more?

I guess I'm thinking that Europe and Japan should be coming around on a lag to the North American recovery and models.

So looking for that to stabilize or cycle back up eventually.

But I'm wondering if the volume here in the first quarter actually softened even more.

I would not say the volume is softening.

You have to be a little bit careful with talking about units as you know, because different strange and species have totally different ASPs.

So while there's an overall unit decline principally in Europe and Japan because of continued facility reduction, within some continued facility reduction in the states by the way, as you said, we are getting price.

We are seeing pretty good sales of [inbreds] to CROs and mid tier.

So we love the CRO portion because even work we don't get we actually get a piece of it.

It's fine on the animal, so we like that.

As we pointed out in the prepared remarks, we are seeing continued increase in immunodeficient animals which have really height ASPs in inbreds, which have high ASPs as well.

So the mix is directionally a positive one.

The unit decline is totally predictable on logical and absolutely related to capacity.

With the primary supplier of all these big R&D sites, many of which have closed in the last few years, probably a few more will close.

I am no great sage, but it doesn't look like we are going to have any large sum of mergers.

I think that probably bodes well, additional massive reductions, but we'll see about that also.

So at some point Europe and Japan will stabilize.

Again, we still get pricing there and we're still competitively priced strong.

So it's not about us it's about those markets.

And as we've always seen, they absolutely lag US.

We're not surprised by that either.

So David, if it feels little bit worse probably to you and maybe others than it is because of the margin in the first quarter.

But as we pointed out, that margin will improve back up to the high 20%s throughout the year.

We're any get the benefit of the Japan consolidation, we're going to continue to get the benefit of pricing and hopefully some share in the academic marketplace next year.

So we feel as good about the research part business as we can, given the fact that sort of multiyear decline in units.

We feel that we're holding our own nicely.

Okay, thank you.

Eric Coldwell with Robert W Baird

Thanks very much.

First question, and I'm sorry if I missed this, but you normally provide a breakout between research models, products and services in terms of revenue, I may have just missed it.

But could you possible give us those numbers?

So you didn't miss it Eric.

We've been thinking about this a lot, and the termination of the NCI contract crystallized this whole thing for us.

And we're finding ourselves saying, well, the North American research model business is up, but a lot of that has to do with the NCI contract.

And then we stopped ourselves and said, well, yes, that's kind of the same business, and we're still producing, selling those animals to cancer researchers around the world.

We're actually selling more of them than we thought that we did than we would.

Isn't that the research model business as well?

Yes.

As is the GEMS business, as is the rads business as is the insourcing solutions business as we currently do it.

So we're going to report that sector as one sector and stop nuancing the details because we think it's more confusing than helpful.

Okay, and at risk of sounding frustrated on some of these smaller businesses that perhaps the Street pays less attention to or understands less well because of their size and limited public coverage.

You do have some businesses like GEMS and biologics testing insourcing et cetera that to be fair, I really can't remember the last time you had a consistent year of performance in some of these businesses.

I guess the question really is as you sit back and think about your portfolio, you've been moving to more integrated selling in sort of a soup to nuts model with clients.

But are there any businesses that you look at your portfolio where you ask yourself whether instead of investing more, perhaps you should invest less and perhaps exit because of the lack of a consistent market dynamic or consistent performance and how much influences the overall Company when some of these higher fixed costs businesses go the wrong direction?

Certainly a fair and thoughtful question, Eric.

I would say that we continuously, Management on its own and with the Board, periodically often look at the portfolio the value of the portfolio whether were getting returns our investments whether we like the short and long-term growth metrics, how we feel about the competitive scenario margin contributions and whether we have things that are a distraction to our core strategy.

So all I can tell you is that it is a continuing process.

If and when and as we have businesses that we don't think are core any longer and shouldn't be part of the portfolio and are a distraction, we will think about whether they should remain in the portfolio.

I guess the inverse of that, the fact that we have what we have would be a supporting commentary to the fact that we like the portfolio a lot right now.

If you look at things like biologics which yes, has some variability in it, but if you look at the power, you obviously understand this really well, the power of these large molecules.

And how many are going to market and what the proportion is versus small molecules, that just has to be a better long-term and more consistent business, for instance.

The insourcing solutions business is following a little more slowly than we would have liked.

And of course we have these government contracts in it, which make it lumpier, but as clients reduce infrastructure or have no infrastructure for want to reduce headcounts, we provide -- actually provide a really good solution for them.

I think a lot of this is timing, the way safety assessment has been and was and now looks like it isn't, as discovery is the starting that way.

As the drug industry utilizes external resources better, I think that some of the lumpier businesses, many of which are services, by the way, I think we'll have a more consistent yield for them.

Okay, that is a very fair answer.

I will let others jump in, and thanks for all the comments.

Jeff Bailin, Credit Suisse

Good morning, and thanks for the question.

If I could talk a little bit about the RMS margins.

Typically we see seasonally that those moderate in the second half of the year, but it sounds as though you're confident in the annual margins in the high 20% range.

So are you suggesting the you think that maybe some of the efficiency initiatives and the consolidation in Japan should maybe help the Company buck that typical historical pattern?

That would be part of the answer, as well as trends will be modestly better in a couple of our businesses, but the efficiencies will play into that as well.

I don't know if you want to add anything else, Jim?

We think that a couple of the businesses that are problematic will get progressively better throughout the year.

And we're confident with the sort of recent order activity and North American research model business.

The first quarter's been a little unpredictable in the core animal business, I'd say over the last few years.

Used to be categorical our stronger quarter.

January's been a little bit funky.

Second-quarter tends to be a nice quarter for us.

There are several parts and pieces to that segment.

We think that Europe and Japan continuously get better.

And so we do remain confident, subject to the predictable historical summer doldrums and a little bit of the holidays at the end of the year.

But in terms of year-over-year drag, we feel pretty good about it.

Thanks for all that color, and just for a follow-up for Tom.

Obviously the DSA margins were quite strong, but are you able to help us qualify how much the Canadian dollar might have impacted the margins in that segment this quarter?

I would have to double back on that.

The Canadian currency does provide a benefit to us in cost.

We didn't break out that separately, so let me double back and we'll see if we can get that to you.

Sure a prescient the color.

Ross Muken with Evercore

Good morning.

So you guys have done a great job the last few years with tuck-ins, you're anniversarying some over the next quarter, the balance sheet's still in great shape.

Tuck-ins are still a priority.

Give us a sense of what the pipeline looks like and how you're thinking about, based on where the business is trending in the various developments, where you're thinking about potentially adding capabilities or the like?

I would say that our M&A pipeline is unusually strong.

We have a host of businesses, I would say principally service related.

Many of them upstream, early when the drugs -- molecules are discovered.

We also have some opportunities, and I'm not going to get too specific, but we have opportunities with regard to certain of our other service businesses -- sorry certain of our other high-growth businesses to add to those, both in terms of scale in depth and perhaps geographic diversity.

So we are in the midst of several serious conversations right now.

We always have the fall short of predicting what if anything we'll own by the end of the year because due diligence often uncovers surprises.

And we can't get to a price agreement.

But I would say that we're in a particularly strong position to acquire these companies.

There is some competition lease deals, but not as much as you would think.

We have a lot of our competition that is kind of private equity and venture owned who aren't necessarily at the table looking to add to those assets.

So we're quite optimistic.

And as we said before, we're quite interested in building a larger, more scientifically powerful discovery business because one of the ways that we tease the work out, particularly from big pharma clients is to have really great scientific capabilities where they say, wow, that's great, we don't have to own it ourselves if Charles River does.

Obviously it's easier with biotech who often has limitations on how may people they'll hire.

And of course, we have lots of relationships with venture firms who have virtual companies.

So I don't think we've seen M&A pipeline ever this good.

I actually think it can get better, because we're just working it better than we used to.

We have a much more clear view of what we would buy and add and what it could do for us.

Great, thanks.

Ricky Goldwasser Morgan Stanley

Hi, good morning.

I have a couple of follow-up questions.

The first one is on the margin expansion in DSA, so obviously a very strong operating margin.

And you're getting very close to your long-term target of low 20%s for the segment.

So can you just talk a little bit about how you see that expansion?

Do you think there's an upside to your target?

We're -- I'm just pausing because we are always reluctant to raise those targets because it's taken so long to get here.

Yes, I would say that all-in, including the discovery business which is lower margins, as we've disclosed a few times, we're essentially at 20% right now.

Capacity is getting full, but it's not totally full.

Pricing is still quite low.

So yes, I would say directionally there is some margin opportunity.

I probably would stop short at this time of calling where it could get.

Obviously it will drive margin as effectively as we can.

We obviously think that we should be paid more for the studies.

The pricing is not where he want it to be.

And I think our competitive stature is stronger than it ever has been.

Also, I do think the clients -- if you look at the biotech industry, you've got --you have really good, a lot of companies that have become real operating companies now.

And people are really interested in speed to market and not really interested in waiting very long to initiate the study.

So I do think that the time frames for the little bit frustrating to the clients a little bit beneficial to us in terms of being able to get more price.

So yes, I think directionally we should be able to get more margin.

No, I don't think were ready to call that yet.

We want to continue to live it and have that be a consistent reality for us because it's really taking us a long time to get here.

But we're obviously delighted that we've had two quarters with double-digit growth rates with escalating operating margin and better capacity utilization.

Okay, and then one follow-up on the safety assessment business.

Obviously it's been three or four months since LabCorp Covance deal closed.

Are you seeing any changes in industry dynamics, or any benefit for your book of business from that?

We have.

We had -- before that deal closed, some specific expressed comments from clients saying, not comfortable with the deal, we don't really understand it, makes us nervous, integration risk, blah, blah, blah, and we got some work from that.

Definitely.

We started probably in the fourth quarter and to some extent the first.

I would say as a more general proposition, we are absolutely taking share from many of our competitors.

Many of whom are potentially for sale.

So I think that makes people nervous.

And not the we're going to have all the business, obviously.

We still have very good competition who are credible.

But we have a stable corporate business model, we are in this for the long-term and by nature of our structure, unlike the competition, we are a longer-term solution.

So yes, I would say that the potential dislocation disruption in the marketplace from our competition has helped us get more share.

Thank you.

Doug Schenkel with Cowen and Company

Hi, this is Adam Wieschhaus on for Doug.

My first question was on RMS, you mentioned RMS revenue was strong in China.

Can you talk about some strategies you have to drive more revenue growth in China outside of research models.

For example Vital RIver I believe provided you with an initial footprint in that large China market.

Have you had a chance to speak with those customers to see how leverageable that relationship is in broadening to different products and services?

Yes, well, we're focused principally I would say on the research model part.

So Vital RIver is a research model business we do have a small and obviously potentially much larger GEMS business and diagnostic testing business which are part and parcel of the research model business.

For us to go there is going to be to continue to expand our geography as research moves.

We are in Beijing, I think, and we have a lot of clients in Shanghai, but I think a having a Shanghai presence is going to be essential.

And then moving beyond that as well because there are obviously lots of large cities with lower cost structures in China where research is increasing.

There's a lot of money going to biotech as you know there.

So we want to be clearly the premier player, for sure scientifically, but principally from a scale point of view there.

As you may recall, we had a safety assessment business in China that we built.

Nobody came and we closed.

So we will be very reluctant to go back into China with safety assessment unless there is overwhelming solid demand.

We had so much work in the US and Europe and the quality of the work is so far superior to China that we are not concerned about competition from there nor are we interested in going there.

I would say that China potentially is the place that we would consider in vitro or in vivo biology.

Maybe some chemistry but it's not clear how we would best do that.

But yes, some early discovery work is possible, but I would say that we are principally focused on RMS right now in China.

Okay thank you that is very helpful.

My second question.

You mentioned CRISPR in your prepared remarks, I know it might be too early, but have you had -- or have you experienced a lot of customer interest in that technology?

And could that technology potentially improve efficiencies in the RMS segment as the model of creation there ostensibly be much shorter than a more traditional method?

It's clearly much faster, much better, much more beneficial technology.

It's picking up speed.

And as I said earlier, we do think it will over time.

Not immediately, but over time change how that GEMS business in time, change the ability enough us and others to create models more quickly, better models, more complex models more quickly and to give better translational information to our clients.

So yes, I think it's going to be very helpful to researchers around the world.

And it's clearly a technology that the vast majority of research has embraced and acknowledged its utility and quality.

Okay, thank you.

Rafael Tejada.

Thank you for the questions.

Quickly on Argenta BioFocus.

We were looking for a little bit contribution during the quarter, can you just talk about the growth trajectory, how it's looking.

To start the year and any potential seasonality that's involved at the beginning of the year?

Those businesses performing according to our operating plan.

I'm not sure we know enough about their seasonality yet, but typically tend to have a later in the year -- they're stronger later in the year than some of our other businesses.

I think that is more predictable.

That business is somewhat impacted by our ability to garner larger integrated deals early in the year or throughout the year.

And those are a bit unpredictable as well.

But we're quite confident with our ability to use that portfolio to get Argenta and BioFocus services directly -- to engage them directly with our pharma and biotech clients.

But also to engage them on an integrated basis with those clients as part of a larger offering between our safety assessment business.

So the dialogue and feedback and the business response in terms of new businesses are really quite gratifying.

Okay.

Just one other question.

The final bio similar guidelines were recently issued, can you just remind us of any potential benefit from biosimilars?

Thank you

Yes, I think it's still a little bit murky in terms of what that will mean and what that will yield.

But since it now looks like -- now looks like that those drugs will catch market, there's obviously some opportunity to do some testing with regard to those.

Albeit it will probably force probably greater activity and innovation by companies whose drugs have rolled up pad and now they're a competitive biosimilar.

So they'll have to invest more into discovery platforms.

So yes, that should be beneficial to us, a little bit hard to qualify that late breaking news.

We'll see how many others follow and how quickly.

At this time, this are no more time for questions.

Please close.

Thank you for joining us this morning.

We look forward to seeing you at the upcoming Baird, Deutsche Bank and Jefferies conferences in May and June.

This concludes the conference call.

Thank you

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.