Charles River Laboratories International Inc (CRL) 2015 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Charles River Laboratories fourth-quarter 2015 earnings and 2016 guidance conference call.

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

(Operator Instructions).

As a reminder, this conference is being recorded.

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

Please go ahead.

Thank you.

Good morning and welcome to Charles River Laboratories' fourth-quarter 2015 earnings and 2016 guidance conference call and webcast.

This morning, Jim Foster, Chairman, President and Chief Executive Officer and David Smith, Executive Vice President and Chief Financial Officer, will comment on our fourth-quarter results and provide guidance for 2016.

Following the presentation, they 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 number is 320-365-3844.

The access code in either case is 384261.

The replay will be available through February 24.

You may also access an archived version of the webcast on our investor relations website.

I'd like to remind you of our Safe Harbor.

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

Actual results may differ materially from those indicated by any forward-looking statements as a result of various important factors, including, but not limited to, those discussed in our Annual Report on Form 10-K, which was filed on February 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'm very pleased to say that 2015 was another exceptional year for Charles River.

As was the case in 2014, our financial results demonstrated what we've worked very hard to achieve -- the strongest portfolio that we've ever had, with the ability to support clients from target discovery through preclinical development; deep client relationships where we are a respected and trusted partner; a streamlined organization with the flexibility to respond to a changing industry and client requirements; and employees who are committed to providing exceptional service to our clients.

We are extremely proud of the fact that we worked on 50% of the drugs approved by the FDA over the last two years, an accomplishment that few CROs can claim.

We believe it's a testament to the value our clients place on our contribution to their research efforts and we work every day to enhance that value.

Let me give you the highlights of our fourth-quarter performance.

We reported revenue of $353.9 million in the fourth quarter of 2015, an 11.3% increase over the previous year in constant currency.

Acquisitions contributed 3.4% to fourth-quarter revenue growth and many of our businesses reported organic growth with the most significant contributions from Safety Assessment, Microbial Solutions, Biologics and Research Models.

Sales to midsize biotechnology clients increased at a low double-digit rate and sales to global accounts also increased.

The operating margin increased 410 basis points year-over-year to 20.7%.

We were very pleased with the margin, which benefited both from higher revenue and efficiency initiatives.

At 27.1%, the DSA segment reported the most significant margin improvement; although foreign exchange and a change in Quebec tax law contributed approximately 400 of the 770 basis point gain.

David will provide more detail on that topic shortly, but even adjusted for these items, the DSA margin would have been approximately 23%.

The RMS segment operating margin also improved 220 basis points year-over-year due primarily to the benefit of efficiency initiatives.

Earnings per share were $1 in the fourth quarter, an increase of 23.1% from $0.81 in the fourth quarter of 2014.

The improvement was due primarily to higher revenue and operating income as the shares outstanding in both the quarter and the full year were relatively unchanged as a result of our share repurchase program.

In 2015, revenue was approximately $1.36 billion, a growth rate of 10.4% in constant currency with acquisitions contributing 4%.

The operating margin improved by 180 basis points to 19.4% primarily as a result of leverage from higher revenue and operating efficiencies.

Earnings per share were $3.76, an 8.7% increase over 2014, but a 14% increase when adjusting for the negative impact of foreign exchange and gains from limited partnership investments.

We believe that our strong performance in 2015 thoroughly demonstrates the successful execution of our strategy to position Charles River as the early-stage research partner of choice, a position that we believe will be enhanced by the pending acquisition of WIL Research.

We are optimistic about the opportunities for growth in 2016.

Strong demand for our unique portfolio of products and services, the potential for expanding strategic relationships and continuing gains from productivity and efficiency initiatives gives us confidence in our 2016 guidance.

Revenue growth in 2016 in which we are including only acquisitions already completed is expected to be in the range from 9% to 11% in constant currency.

Non-GAAP earnings per share are expected to be in a range from $4.07 to $4.17, including a gain of $0.04 from limited partnership investments.

This would represent an earnings increase of just over 9.5% from last year at the midpoint.

When including the expected impact from the WIL Research, the revenue growth rate on a constant currency basis rises to a range of 20% to 23.5%.

The non-GAAP EPS estimate increases to a range of $4.27 to $4.40 representing an increase of approximately 15% year-over-year at the midpoint.

I'd like to provide you with details on the fourth-quarter segment performance beginning with the RMS segment.

Revenue was $114.7 million, an increase of 2.1% in constant currency over the fourth quarter of 2014.

Sales of research models were the primary contributor to the increase driven in nearly equal parts by North America and Europe.

In both regions, we continued to see increased demand for inbred research models, which we believe are the models of choice for translational research.

As was the case in the third quarter, sales in Japan continued to decline moderately, but when looking at Asia in total, higher revenue in China more than offset the decline in Japan.

China continues to present a significant opportunity for us as the government and private industry both fund drug research.

Therefore, we are moving ahead with plans to expand our footprint in China, to increase our research model production capacity and provide associated services.

It appears that the adverse effects of consolidation of the biopharmaceutical industry moderated in 2015 in both North America and Europe and that demand in China continued to increase.

We expect similar trends in 2016 in all geographic areas and also expect to realize price increases of 2% to 3%.

As expected, revenue for research model services increased slightly in the fourth quarter.

We had discussed our expectation for a better second half of 2015, which was based primarily on the anniversaries of the NCI contract cancellation in the third quarter and the reduction of the significant GEMS colony by one client in the fourth quarter.

In addition, the insourcing solutions business reported growth in the fourth quarter as a result of new contracts.

In the fourth quarter, the RMS operating margin increased by 220 basis points to 25.4%.

The revenue increase, the consolidation of our facilities in Japan and other efficiency initiatives generated a benefit in the fourth quarter.

We continue to identify opportunities to streamline our RMS operations, particularly through the automation of manual processes and implementation of systems to improve data availability and accuracy.

We maintain our belief that an annual RMS operating margin in the high 20% range is achievable and sustainable.

The Manufacturing Support segment finished a very strong year with fourth-quarter revenue of $78.6 million representing a growth rate of 32.4% in constant currency.

The acquisitions of Celsis and Sunrise contributed 13.7% to growth.

On an organic basis, growth was 18.7% with each of the businesses in the segment, Microbial Solutions, Biologics and Avian, delivering double-digit growth.

Microbial Solutions was the primary driver of the increase, reporting growth of more than 20% on an organic basis.

Client conversion to our rapid endotoxin testing methods has increased both our demand for PTS machines and the associated use of cartridges.

Our continuous product innovation has expanded the applications for the PTS whether as a result of faster processing like the Nexus or improved connectivity like the Nexgen.

We continue to broaden our capabilities with the acquisition of Celsis in July, which positioned Microbial Solutions as the only provider that can offer a unique, comprehensive solution for rapid quality control testing of both sterile and non-sterile biopharmaceutical and consumer products.

The integration of Celsis has progressed well and the sales organization has been extensively trained on selling the broader Microbial Solutions portfolio.

We are optimistic that execution of our sales strategies for both the sterile and non-sterile markets will be a key component of revenue growth in 2016 and that our ability to provide a total microbial testing solution to our clients will be a driver of our goal for Microbial Solutions to continue to deliver at least low double-digit organic revenue growth for the foreseeable future.

The Biologics business reported one of its strongest performances ever in the fourth quarter, delivering robust revenue growth and an approved operating margin.

Our continued investment in expanding our Biologics portfolio through the development of new assays and additional capabilities has enabled us to provide a broader testing solution for our clients.

This investment is particularly important now when the number of biologic drugs in development is increasing.

Our goal is to be well-positioned to participate in this expanding opportunity and we are pleased with the progress we have made to date.

The Manufacturing segment's fourth-quarter operating margin was 33.8%, a 120 basis point decline year-over-year; although well in line with our goal of a low 30% margin.

DSA revenue in the fourth quarter was $160.5 million, a 9.8% increase in constant currency.

The Discovery acquisitions of ChanTest and Oncotest contributed 1.7% to the segment's fourth-quarter growth.

The organic growth of 8.1% was driven primarily by the Safety Assessment business, which reported a low double-digit revenue increase over the fourth quarter of 2014, marking the fifth consecutive quarter with growth above 10%.

We were exceptionally pleased with this performance, which resulted primarily from improved client demand, especially from our small and midsize biotech clients and the successful execution of our targeted sales strategies.

As I noted earlier, when adjusted for the Quebec tax change and foreign exchange, the DSA operating margin would have been approximately 23.1%, an improvement of 370 basis points from the 19.4% in the fourth quarter of 2014.

The improvement was due primarily to the Safety Assessment business as a result of leverage from higher revenue.

We were very pleased to see the Safety Assessment margin above 20% again and believe that we will continue to drive further improvement.

Despite the fact that the DSA segment margin was above 20% for three quarters in 2015, in line with our strategic goal, I remind you that the margin varies from quarter to quarter based on a number of factors.

So margin improvement may not be linear.

In addition, WIL's operating margin is lower than the DSA margin, which we expect will moderate the DSA's segment's potential for margin expansion in 2016.

The expansion of our portfolio to include discovery capabilities has greatly enhanced our ability to support our clients' research efforts.

We have selectively acquired assets and combined them with in-house capabilities to create a Discovery business, which can assist our clients in solving complex challenges of early-stage research.

These capabilities are especially important now when global biopharma companies are making the decision to increase their reliance on CROs and small and midsize biotech companies, which have always relied on external resources, are investing in their pipelines.

Our Discovery business had a challenging year in 2015 primarily due to the cancellation at the end of 2014 of a large contract by a client that reprioritized its pipeline.

We expect 2016 to be a more robust year for revenue growth because of the strength of demand, combined with enhanced strategies for partnering with clients.

We are adept at developing flexible working arrangements, which have become increasingly important to our clients.

Higher revenue will drive margin expansion, as will efficiency initiatives.

We recently implemented plans to consolidate two of our smaller sites by transferring employees and work streams to larger sites.

In addition to improving operating efficiency, these initiatives will centralize scientific expertise, enhancing the opportunities for collaboration and for implementation of best practices.

We are continuing to have extensive discussions with heads of research at global biopharma and small and midsize biotech companies to identify the opportunities to work together across Discovery and Safety Assessment.

The success of our targeted sales strategies was demonstrated by our DSA revenue growth in 2015.

Biotech companies were the primary driver as sales to these clients increased at a mid-teens rate year-over-year.

We were also pleased that sales to global biopharma clients increased in the mid-single digit rate in 2015 due primarily to strong demand for Safety Assessment services as clients chose to work with us.

In addition, we continued to initiate new and expand existing strategic relationships with our clients.

As a result, revenue from strategic relationships gained approximately 300 basis points, representing more than 30% of total revenue in 2015.

As clients have increasingly chosen to work with us, our capacity has filled and we are now operating at near optimal utilization levels in most of our Safety Assessment facilities.

In order to accommodate demand and ensure we have sufficient capacity for future growth, we opened additional study rooms in 2015 and 2015 and reopened a portion of Charles River Massachusetts in January.

At this point, most required positions have been filled at Charles River Mass and we have begun to shift work streams to the facility.

We continue to actively market the facility and client response has been very positive.

Site visits are accelerating and clients are beginning to place their first studies in the facility.

As a result, we are very optimistic that Charles River Mass will meet its targets in 2016.

We believe that the pending acquisition of WIL Research will be another key element of our continued ability to support our clients' early-stage research efforts and our long-term growth goals.

WIL provides capacity for growth, as well as a needed footprint in Continental Europe.

It also strengthens our existing service offerings in different geographic regions, enabling us to provide broader services more proximate to our clients' locations in North America and Europe.

We are moving forward with our integration planning process in order to be well-prepared for an early second-quarter close.

We are investing a significant amount of time meeting WIL's management and continue to be very impressed with their scientific expertise, operational capabilities and client focus.

We are working on a comprehensive management structure for Charles River's Safety Assessment business, which will maximize the talents and best-in-class processes of both organizations.

We are also preparing detailed plans for our sales and finance organizations, as well as for IT and ERP solutions.

Our goal is to get off to a strong start as soon as the acquisition closes, maximizing the benefits of our larger organization and minimizing disruption.

As David will discuss in a moment, our focus for capital deployment in 2016 will be on repaying debt associated with the WIL acquisition so that we can lower our leverage to less than 3 times EBITDA within 18 months of the close.

We intend to continue to assess opportunities to broaden our early-stage portfolio with small strategic acquisitions and in-house development to increase our capabilities and therapeutic area expertise.

However, our priority will be to integrate the acquisitions we have made in order to ensure that we obtain the expected benefits.

We will also continue with our very successful productivity and efficiency initiatives, which have enabled us to enhance our operations and increase the value that we provide to clients.

Offering our unique portfolio, world-class scientific expertise and best-in-class client service at an effective price has been the cornerstone of our value proposition for clients and has clearly resonated.

The disciplined investments we are making in infrastructure, both systems and personnel, are as important as the investments we make to expand and enhance our portfolio.

In previous conference calls, I have discussed the systems we have implemented to provide improved access to data, ERP, inventory and client portals to name just a few.

We have noted additions to our management ranks to augment our scientific expertise and operational capabilities such as the dedicated integration team we established in 2015.

Identifying and hiring the best scientific and operational personnel continues to be one of the most critical components of the effective execution of our business strategy, which is the foundation for our future growth.

By leveraging the investments we have made and new ones we intend to make in our portfolio and infrastructure, we will enhance the role we play in supporting our clients' early-stage drug research processes by providing critical capabilities which they do not have in-house or which enable them to eliminate the internal investment.

We are very enthusiastic about the opportunities that are available to us in 2016 and are working hard to capitalize on them.

All of our efforts to date have been focused on positioning Charles River as the premier early-stage contract research organization with a unique portfolio and the scientific expertise to partner with all types of clients, global biopharma companies, which are increasingly making a more significant commitment to outsourcing as they strive to improve operating efficiency and increase pipeline productivity; biotech companies, which have always preferred outsourcing to build infrastructure; and academic institutions, which are partnering with biopharma to monetize innovation and require partners to provide expertise in drug discovery and development.

We believe that our global biopharma, biotech 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 that 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 David Smith to give you additional details on our fourth-quarter results and 2016 guidance.

Thank you, Jim and good morning.

Before I begin, may I remind you that I will be speaking primarily to non-GAAP results from continuing operations, which exclude amortization and other acquisition-related charges, costs related primarily to our global efficiency initiatives and certain other items.

This morning, I will focus my discussion on our 2016 financial guidance.

We are pleased with our growth prospects for this year, which are highlighted by the potential of higher organic growth in 2016 and the planned addition of WIL Research to our portfolio.

We expect the businesses that performed well in 2015 continue to do so and we believe that others will return to growth.

In addition, we believe that WIL Research will enhance our ability to partner with clients and drive profitable growth and earnings accretion both this year and over the longer term.

To support these growth opportunities both today and in the future, we are investing in our processes and our people to advance our position as a leading early-stage CRO.

These investments and other factors, including the significant operating margin performance in the fourth quarter, will compress our margin expansion in 2016, but we are confident that we'll be able to leverage our growth and enhanced infrastructure to drive greater margin expansion over the longer term.

I will now discuss our 2016 guidance and these factors in more detail.

Since our planned acquisition of WIL Research has not been completed, we are providing 2016 financial guidance both excluding and including the impact of WIL.

I will begin by discussing our 2016 outlook, excluding WIL.

For 2016, we expect reported revenue growth of 8% to 10% and non-GAAP earnings per share of $4.07 to $4.17.

We expect foreign exchange to reduce revenue growth by approximately 1% in 2016 based on current rates compared to 5.3% in 2015 because, with the exception of the Canadian dollar, most foreign exchange rates have been less volatile over the past year.

This translates into a constant currency revenue growth outlook of 9% to 11% in 2016.

The foreign exchange impact on earnings per share is expected to be a moderate benefit in 2016 compared to a $0.09 headwind last year.

The benefit is due primarily to recent volatility in the Canadian dollar, which has weakened to near historic lows compared to the US dollar.

You may recall that our Safety Assessment business in Canada recognizes the majority of its revenue in US dollars but incurs most of its cost in Canadian dollars.

This generates an operating income and EPS benefit when the Canadian dollar weakens.

As noted in our earnings release, 2016 includes a 53rd week, which is periodically required to true up to a December 31st year-end as a result of our 13-week or 4-4-5 quarterly reporting structure.

The 53rd week is characterized by a light week of sales due to the holidays with a normal week of costs.

In 2016, the 53rd week is expected to contribute approximately 1% to revenue growth, which offsets the foreign exchange headwind.

The 53rd week is expected to provide a nominal benefit to earnings per share and a de minimis impact to the operating margin.

On January 7, we provided the expected contribution from the planned acquisition of WIL Research.

That guidance, which remains unchanged, was for WIL to add $150 million to $170 million to our 2016 revenue, which would represent a combined revenue growth rate of 20% to 23.5% on a constant currency basis.

We also continue to expect WIL to be at least $0.20 accretive in 2016, resulting in combined non-GAAP EPS of $4.27 to $4.40.

This outlook assumes that the acquisition will close early in the second quarter of 2016 as we previously anticipated.

In addition to the benefit of acquisitions, we believe that organic revenue growth will continue to improve in 2016 and begin to approach our long-term strategic target of high single digit growth.

Our guidance assumes organic revenue growth of 6% to 8% in 2016 compared to 6.5% last year.

Organic growth is expected to be driven by improving trends in our RMS and Discovery businesses, coupled with continued robust growth in our Safety Assessment and Microbial Solutions businesses.

On a segment basis, including acquisitions that we completed prior to 2016, we expect constant currency revenue growth in the low to mid-single digits in the RMS segment; in the low teens in the DSA segment, excluding WIL; and in the mid to high teens in the Manufacturing Support segment.

These robust revenue trends, as well as our continued focus on generating greater operating efficiency, are expected to contribute to the operating margin again in 2016.

However, margin improvement is expected to be largely offset by higher corporate costs and the operating income impact from the Quebec tax law change resulting in a consolidated operating margin, excluding WIL, that will be similar to or slightly higher than the 2015 level of 19.4%.

Foreign exchange and the 53rd week are not expected to have a meaningful impact on the operating margin in 2016.

Our global productivity and efficiency initiatives continue to be a significant focus at Charles River.

We achieved incremental savings of approximately $38 million in 2015 and expect to generate a benefit of at least $35 million in 2016.

The benefits of the efficiency program in both 2015 and our expectation for 2016 exceeded the outlook that we provided at our Investor Day in August.

This is because we continue to identify new projects and generate larger savings on planned initiatives.

The projects in 2016 are focused on several areas, including automation to replace manual processes in the RMS, Biologics and Safety Assessment businesses; the use of IT and data systems to enhance efficiency and decision-making; and the continued optimization of capacity utilization across our businesses.

Unallocated corporate costs are expected to increase in 2016.

Excluding WIL, these costs are expected to total approximately 7.5% of revenue compared to 7.1% of revenue last year.

The increase in costs is related to several factors.

First, we are continuing to make disciplined investment in our people, processes and systems in order to position Charles River to support future growth.

We believe that these investments will generate benefits over time by providing a scalable platform to leverage revenue growth and accommodate future acquisitions with a more efficient infrastructure.

Second, performance-based compensation costs have been trending higher due to our strong performance over the past few years, including 2015.

Finally, the 53rd week is expected to add nearly $2 million in cost.

Higher corporate costs will largely offset the expected margin improvement in certain business segments.

Segment operating margins are expected to be driven primarily by a modest improvement in the Manufacturing Support segment, as well as a slightly higher DSA margin, excluding WIL.

The Manufacturing operating margin will be driven primarily by infrastructure enhancements in the Microbial Solutions business, as well as synergies associated with the Celsis acquisition.

The DSA margin will benefit from leverage from robust revenue growth, partially offset by a net 80 basis point headwind from the Quebec tax law change compared to 2015.

The reopening of our Charles River Massachusetts facility is expected to have a minimal impact on the full-year DSA operating margin, which we estimate will represent only a 20 basis point headwind and a negligible impact on the 2016 Charles River consolidated margin.

As we noted in January, WIL Research currently has an operating margin in the mid-teens, which is expected to reduce our DSA operating margin by approximately 150 basis points.

The RMS operating margin is expected to be relatively flat in 2016.

Our 2016 non-GAAP earnings-per-share guidance of $4.07 to $4.17, excluding WIL, represents a growth rate of 8% to 11% over 2015.

Revenue and operating income growth are expected to be the primary drivers of earnings growth offset in part by nonoperating items.

The largest headwinds are the Quebec tax law change, which is expected to impact earnings per share by approximately $0.05 and net interest expense, which is expected to reduce earnings by $0.06 to $0.09 before factoring in the debt that will be used to finance the WIL acquisition.

We have also forecasted limited partnership investment gains of $0.04 will be slightly lower than 2015.

Despite the recent stock market volatility in the biotech sector, we are confident in the long-term prospects for these investments and believe it is prudent to continue to forecast a return on our investments in certain life science venture capital funds.

Interest expense is expected to be higher in 2016 due in part to the current rate environment, as well as the planned acquisition of WIL Research.

Net interest expense is expected to be in the range of $17 million to $19 million in 2016, excluding WIL, compared to $13.1 million in 2015.

This outlook is based on our assumption that LIBOR rates will increase by approximately 25 basis points per quarter in 2016.

Financing for the WIL acquisition is expected to add incremental interest expense of $6 million to $8 million in 2016, assuming the transaction closes early in the second quarter.

As previously noted, we intend to finance the WIL transaction through an expansion of our credit facility by $350 million to $1.65 billion.

The interest rate on drawn amounts for this facility is expected to increase to LIBOR plus 150 basis points post-close based on an estimated pro forma leverage ratio of 3.5 times.

I mentioned last quarter that the Quebec Provincial Government had enacted a tax law change in October 2015 that would affect both our fourth-quarter results and our results for future periods.

The substance of the change was to reduce the benefit of provincial R&D tax credits to 14% from 17.5% and make the credit subject to tax.

The effect of the change is a reduction of operating income and an increase in our non-GAAP tax rate.

The effect on our results for the fourth quarter of 2015 was different than it will be in future periods because the legislation provided a one-time retroactive benefit associated with the treatment of R&D tax credits claimed between 2012 and 2014.

This one-time benefit contributed a net 230 basis points to the DSA operating margin in the fourth quarter, but because the credits are now subject to tax, it also resulted in a 280 basis point increase to our fourth-quarter non-GAAP tax rate, which explains the higher rate of 32.9%.

In 2016, the tax law change will reduce our operating income by approximately $1 million and increase our non-GAAP tax rate by approximately 30 basis points.

We expect the net effect on non-GAAP earnings per share in 2016 will be a headwind of approximately $0.05.

The 2016 non-GAAP tax rate is expected to be in the range of 27.5% to 28.5%, excluding WIL, which is slightly lower than the 2015 rate of 29%.

The decrease in the rate is due primarily to the effect of the one-time provision of the Quebec tax legislation on the 2015 full-year non-GAAP tax rate.

The inclusion of WIL is expected to increase our combined non-GAAP tax rate by an incremental 50 basis points because, at approximately 35%, WIL's tax rate is higher than ours due to its geographic earnings mix.

Finally, and as you would expect, we continue to evaluate initiatives to mitigate upward pressure on our tax rate.

Due to the planned acquisition of WIL Research and our goal to quickly repay debt, cash flow generation has become an ever greater focus for us.

We ended 2015 by generating free cash flow of $225 million for the year, surpassing our prior outlook of $205 million to $210 million and a significant increase over the $195.2 million in 2014.

The better-than-expected performance was due primarily to a significant improvement in DSOs during the fourth quarter from 56 days at the end of the third quarter to 51 days at year-end.

We have undertaken an initiative to enhance our cash generation primarily through improvements to working capital management.

This is one example of how the investments that we are making that I mentioned earlier will lead to more efficient processes.

In 2016, we expect these efforts coupled with our continued strong operating performance to result in free cash flow in the range of $235 million to $245 million, excluding WIL.

Capital expenditures are expected to total approximately $70 million in 2016 before accounting for the capital requirements of WIL, which is relatively consistent with the 2015 level of $63.3 million.

Our capital investments in 2016 will be focused on continuing to increase capacity in our Safety Assessment business, including Charles River Massachusetts.

We also plan to expand our RMS business in China, which continues to be an emerging high-growth market.

We are investing in our Microbial Solutions business to improve our manufacturing efficiency and implementing additional projects to enhance the automation and efficiency of other businesses through IT investments.

We intend to update our free cash flow and CapEx guidance after the acquisition is completed.

As we noted when we announced the planned acquisition of WIL, we intend to modify our capital priorities in 2016.

We intend to focus on debt repayment with a goal to drive our pro forma leverage ratio below 3 times within 18 months of the acquisition close.

As a result, we expect to limit our stock repurchase activity in 2016 and be less active in M&A.

We will also be keenly focused on integrating all of our current acquisitions and managing our existing businesses.

We ended the year with approximately 47.8 million diluted shares outstanding.

We did not repurchase any shares in the fourth quarter, but we repurchased approximately 1.5 million shares for $108.8 million in 2015.

We had $69.7 million available on our current stock repurchase authorization at year-end.

Because we do not anticipate any meaningful stock repurchase in 2016, we expect our average diluted share count to increase due to dilution from option exercises and equity awards.

We expect our average diluted share count in the first quarter to be similar to the 47.8 million at the end of 2015, increasing to an average between 48 million to 48.5 million for the full-year 2016.

In the first quarter of 2016, we expect a modest sequential revenue increase from the fourth-quarter level due primarily to higher sales of research models after a seasonally soft fourth quarter.

The consolidated operating margin is expected to decline sequentially due to both a lower DSA margin and higher corporate costs.

The DSA margin will face two headwinds.

The first is seasonal trends, with fewer study starts during the holidays and in January as clients' budgets are prioritized for the year and the second is the Quebec tax law change, which is expected to negatively impact the sequential DSA margin comparison by approximately 250 basis points.

Unallocated corporate costs are also expected to increase significantly, partly as a result of the factors that I discussed earlier and partly because of seasonally higher corporate costs in the first quarter due to health and fringe-related costs.

The combination of these factors is expected to result in first-quarter non-GAAP EPS approximately 10% below the fourth quarter, but a significant improvement from $0.79 in the first quarter of 2015.

The quarterly gating in 2016 is expected to be similar to prior years when the first quarter starts slowly and results improve in subsequent quarters.

Overall, our first quarter 2016 outlook represents double-digit year-over-year revenue and non-GAAP EPS growth, as well as substantial operating margin expansion.

To conclude, 2015 was a very strong year in which we achieved constant currency revenue growth of 10.4% and normalized EPS growth of 14% over 2014 and generated free cash flow of $225 million, or $4.72 per share.

Notwithstanding the headwinds that I have described, we expect to continue on our journey of revenue and earnings-per-share improvement in 2016.

Just to remind you, even without WIL, our guidance suggests EPS growth of 8% to 11% over 2015.

We believe our ongoing focus on enhancing our relationship with our clients, integrating acquisitions, driving global efficiency and investing in initiatives to support future growth was the basis for our financial performance in 2015 and will continue to enable us to achieve our financial targets in 2016 and beyond.

Thank you.

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

(Operator Instructions).

Derik de Bruin, Bank of America.

Good morning.

Congrats on the quarter.

Just one quick question.

How long do you think it will take to get the WIL operating margin up to the Charles River corporate average?

I think the last time we talked about that, we said it would take a couple of years to get it.

The goal is to get it to 20%.

That's been our goal.

Of course, you know that we've surpassed 20% with the rest of the business.

So we're quite confident we have the operating chops and efficiency initiatives and understanding of best practices to be able to employ those benefits to the WIL organization as we bring them closer to Charles River.

So a couple of years to get to about 20%.

So does that mean it's going to be dilutive into 2017 as well?

Slightly.

Okay.

Thank you.

Ross Muken, Evercore ISI.

Good morning, guys.

I appreciate all of the color.

Obviously, you talked a lot about strength in the biotech pipeline.

I think you've given us incremental color on the portion of the book where you have longer-term duration contracts and then you talk to those that have already raised a ton of capital.

As you continue to look at your assumptions for at least the first half of the year, what are you monitoring to get a sense if there's going to be any behavioral changes?

So that's on a downside risk perspective.

And then on the upside, do you feel like share gain in the market, given the differentiated strategy, is also sort of helping to offset that?

Look, we, obviously, spend a lot of time thinking about this, interfacing with our clients and we just had a Board conversation yesterday about this exact topic.

So it's an appropriate and relevant one.

I can just tell you this, that our sales to these clients increased double digits in the fourth quarter.

They were up substantially for the year.

The amount of capital accessed by these biotech companies from the capital markets was the largest in history.

We have informal and formal relationships with venture capitalist who are continuing to raise large funds and fund small startup biotech companies, de novo.

Most of these are virtual companies.

There's a whole host of biotech companies that are operating businesses that have drugs in the marketplace and have sales and profits and sit on their own bottom.

And I guess the most fundamentally important comment that we see as a company that really supports literally every pharma company and almost every biotech company throughout the world in some fashion is that pharma depends increasingly more on biotech to be the Discovery engines.

We had a chart I think we showed when we announced the WIL deal that about 42% of drugs are now in-licensed and that's been increasing every year.

So biotech is not only here to stay, but it's critical to the health of all of us.

And we believe that pharma will continue to fund them aggressively.

We think that they have several years of cash still available and recent pressure on stock prices doesn't really seem to be relevant at all.

And then, of course, there is, I guess, a balance to that.

Sales to our global accounts, which is our euphemism for the big pharma companies, increased nicely.

We continue to expand strategic deals and have conversations about new ones.

We also have an intensified focus on accessing large academic medical centers who, of course, are discovery engines in their own right and are looking for places to develop it.

So we actually think that the client demand quotient is as strong as we've ever seen it.

We think the innovation in immunotherapies, particularly in immuno-oncology, are really primary drivers of a lot of this growth and development and we are living the fact that we are continuing to play an increasingly more important role for all these clients, both large and small, in both discovering, but certainly developing these drugs and getting them to market.

So we feel really good about the marketplace as we move into 2016.

And as you can imagine, we have an awful lot of touch points with clients, not just through the sales side, but through the scientific side and no matter which management team we talk to, all the conversations that we're hearing with clients, they are all positive.

So the feedback we're getting is from clients.

And maybe just to build on that quickly, obviously, you haven't closed the transaction yet, but I'm certain you've heard feedback from the customer base.

Obviously, they had a lot of respect for their scientific knowledge, etc.

What are some of the things that maybe you hadn't thought of, at least maybe prior to the acquisition -- maybe there aren't -- but comments that you heard back that were sort of surprisingly supportive or concepts that you hadn't thought about that were potential relative to the transaction?

So we have to really -- we're (inaudible) to answer this question, but we have to be a little bit careful because the deal hasn't closed, as you know, and we have -- we are not engaging with WIL's clients because they are not our clients at the current time.

We have an understanding of who they are.

We have some euphemistic understanding of their initial reactions to the deal.

It's a smaller client base.

There's some overlap, but there's surprisingly less overlap than we thought, which is quite positive.

Look, I think the best way to respond to that is our attraction to this company was entirely based on its scientific reputation.

And I think that's why their clients gravitate towards them because they do great science and they are responsive and they have a long lineage in history in being that way, as we do.

I think there are a lot of similarities in the companies culture both internally, our ability to attract and retain great scientists and do great work for our clients.

So obviously, we feel very good about the combination.

We feel very good about the expansion of geographic reach and the additional services.

And it's an organization that we have respected for an awfully long time.

And all I can say that to try to answer that question is we will do everything we can to continue to respect their client base and to service them in a way that they have grown accustomed to being serviced.

Great.

Thanks, Jim.

John Kreger, William Blair.

Thanks very much.

My question, I was just hoping you might be able to dig a little bit more into the Discovery business and the legacy Argenta.

I know there were some significant cancellations earlier in the year that has caused the year-over-year growth to not be as good, but can you just dig in, maybe talk about what you are seeing beyond that cancellation?

How has the sequential growth been?

How do you feel about the strategic opportunity to really grab additional share within discovery services?

So we feel very good about the Discovery business.

We feel very good about the portfolio that we've assembled.

We feel very good about our competitive stance.

It's a really fragmented industry.

We feel very good about the connectivity between discovery and other things that we do, particularly when we engage with large clients that we have strategic deals with or ones that we're starting the dialogue for strategic deals.

We love our therapeutic area reach and we also like that we're -- we have an in vivo and in vitro capability.

As I said in my prepared remarks, I would say the Discovery business was somewhat disappointing during the year.

That was largely because of this large piece of business that you commented on that rolled off of Argenta and BioFocus early -- late in 2014, but it affected F2015.

The more we get to know the business, the more we incorporate its selling our sales organization, which is a highly technical one, in understanding that business.

We just finished a large international sales organization -- sales meeting which I attended, and there was a large cadre of sales people there from this organization.

So I think we have a better understanding of the business itself on the competitive scenario and how to sell it better to our clients.

We're seeing strengthening demand, and we have in hand strategies for partnering with our clients that's increasingly more flexible and thoughtful and creative, I would say.

So we're -- and the other thing I would say about all of our businesses, but Discovery for sure and Argenta and BioFocus perhaps in particular is that we're going to work really hard to drive efficiency gains through those businesses as well.

So we're going to be looking at top-line and bottom-line accretion.

So we think that the comparisons with 2015 should be quite positive.

Our engagement with clients has been quite robust, and we have a unique product -- sorry, unique service offering, which is resonating with many, many clients.

Great.

Thanks much.

Dave Windley, Jefferies.

Good morning.

Wanted to follow-up on Charles River Massachusetts.

Jim, you mentioned in your prepared remarks confidence about it meeting its goals for this year.

I was hoping you can flesh out a few things.

One, I think the strategy was to move some work or direct some selling of work that would have normally gone to other facilities in the network and start it at Massachusetts.

Could you help us to understand how is it hitting the ground running; how much work is going into Massachusetts early on?

What does that do to free up utilization or capacity in the rest of the network?

And then to the extent that you can share, if it meets goals this year, what does that mean?

Does that mean getting to half full?

Does it mean getting higher than that?

How might you define those goals for us for 2016?

Thanks.

We had a -- we developed and are executing a very tight plan for this facility.

We've been planning for this for over a year, I would say.

So the facility is in great operating order.

Our work has moved from our Wilmington facility into that facility -- straightaway work and staff -- as anticipated.

Work is beginning to come in from other sites as well, as you say.

It's not going to free up a huge amount of space, but it will free up space at some of our important tox facilities that can be used for high-value studies without having to build new space there.

We're really pleased with our ability to attract senior scientist, and the management team for that facility is really quite exceptional.

A lot of experience, some internal people and some external people who have been at other CROs and in large pharmaceutical companies.

So we feel good about that as well.

We've been interfacing very much with the local Boston/Cambridge biotech community.

I would say the response has been as good or better than we anticipated.

We also have keen interest from lots of East Coast biotech, but also large pharma companies about utilizing their facility for multiplicity of things.

So I think we had a reasonable plan and that acknowledging that it's not trivial to open a facility this size even though we're only opening a portion of it and getting it ready.

It's a much better time to open it than the first time just in terms of the development and maturity of biotech and the clients' receptivity.

We would hope that -- and we're doing a host of things, but as you will recall from earlier dialogues with us, it opens -- it's opened with non-GLP capability and an ability to do in vivo pharmacology work and we're working hard to get it ready to do GLP tox work, which we hope to be able to do that work in the latter half of this year, which would give us a nice running start for 2017 to continue to upgrade -- that's a bad way to say it -- to continue to enhance the value proposition there if we're doing more Safety Assessment, which we think will naturally happen.

So it's still early, but indications are that it's getting off the ground as we had anticipated.

I'd say the client reaction is probably a little bit better than we had anticipated.

We are being very careful not to oversell it.

We have lots of audits through the facility and lots of visits by clients and lots of requests for specific types of work.

Some we actually are doing right away and some we're planning to do.

So we're very pleased to have it open again and very pleased with the potential contribution to the overall business.

You'll recall that we opened half of the space that we originally finished.

So I suppose that's the opportunity for next year.

If we're really cranking, we can then open the part of the facility that's finished.

You'll also recall that there is a substantial part of the site that was never totally finished, so we also have that as well if demand continues to intensify.

Okay, great.

Thanks.

I will step out.

Tim Evans, Wells Fargo Securities.

If I look at your 2016 guidance, the real delta relative to our expectation is the corporate overhead spending and I'm hoping maybe just to get a little bit of longer-term context on this.

In the last five years or so, speaking in very rough numbers, we've seen that line double in size against a revenue base that's only gone up maybe 50%.

I know you are in an investment phase here, but at what point do we reach a level of stability in which that line doesn't grow faster than revenue, or maybe even can come down as a percentage of revenue?

So that's a good question and one we've been exploring.

Let me maybe give you a bit of an insight into what we're doing with some of the corporate investments.

That may help you understand what we're trying to achieve.

So just to give you an example of within the finance department.

We're trying to move towards sort of a shared service, internal shared service sort of structure, but we have a shared service in the US and a shared service in Europe.

And the benefit of that is it will allow us to strategically plug and play M&A, particularly from 2017 onwards, in a better way than we can do at the moment.

We get some halo effects with that in respect to better control environment and so on.

But actually if you look at the return on that investment in the finance department, you actually see that the rate of financial growth will decline.

It will still grow, but it will grow at a shallower rate than we've historically done because we are creating a more modern structure to be able to plug and play.

So we're doing similar changes in IT and we've got some other activities in HR and so on and so forth.

So I would expect to see a better gain maybe 2018 onwards, if that helps you.

It does, thank you.

Greg Bolan, Avondale Partners.

Thanks, guys, for taking the question and congrats on a strong finish to the year.

So I wanted to ask about just the expectations for revenue growth, particularly DSA on an organic constant dollar basis in 2016.

And obviously, there is -- I kind of think of four pillars -- increase wallet share, obviously contribution from small to mid biopharma, marketshare gains and then I guess more dollars being thrown at early stage compounds.

And, Jim, as you think about the guidance for 2016, which of those pillars seem to be, I guess, disproportionate to the others, or are they all kind of equal weighting as you think about 2016?

It's kind of in the same spirit of Ross's questions, earlier question, but just maybe a bit more specific about those four pillars.

So to tease out organic growth DSA a little bit, we would expect the demand to continue to be quite strong.

So if you just want to look at Safety Assessment, we've been growing that business at double-digit rates now for multiple quarters with escalating operating margins and a book of business from large pharma and biotech.

We reported often that we actually have more revenue from mid-tier than pharma, which makes sense because there is a proliferation of those companies that do all their work externally and pharma and the capital markets basically pay for it.

We think we will continue to have very nice growth rates probably in both segments in safety.

Maybe continue to be slightly higher in the smaller and mid-tier companies.

It really depends on our ability to ink -- we're always working on these larger strategic deals.

They are often with larger companies.

When those break, they can be very, very significant.

But kind of short of something that dramatic, which we hope would happen, I think we'll see both with probably the preponderance of the strength coming from the small and mid-tier biotechs.

Discovery obviously had a -- although we didn't give the exact number -- obviously had a slower growth rate in 2015.

We've explained the principle reason, which was rolling off of a large contract from Argenta and BioFocus.

Very optimistic about Discovery this year.

You know we just did an acquisition there, so our oncology franchise is among the strongest in the world with multiple technologies and multiple geographies.

And we'll do lots of work -- so if you were to see our client base, it's really big pharma and it's multiple sizes of biotech.

We would expect a CNS franchise and the ion channel franchises to be strong as well and we're really quite hopeful based upon demand through the back end of 2015 and the client dialogue that we're going to see an intensified growth rate from Argenta/BioFocus.

So I would expect to see organic double-digit growth from both parts of that business even though -- we sometimes nuance it that way, but, as a whole, double digit with DSA collectively.

It's a very strong segment for us.

We hope increasingly that clients will buy across that portfolio and/or we'll do work for them in the Discovery piece and then we'll pull work into Safety Assessment even if they don't literally contract through that whole process.

And I guess I would remind you and others that are listening that the portfolio continues to become stronger and more unique and that provides enhanced opportunities for sell-in to both clients large and small across a much larger continuum and that's increasingly what we're up to here, this more comprehensive holistic solution for our clients with a great value proposition for them and for us.

Does that help?

Very helpful.

Thanks, Jim.

I appreciate it.

Tycho Peterson, JPMorgan.

Thanks.

Jim, wondering if you can comment on pricing.

I know you talked about 2% to 3%, presumably all RMS.

But can you maybe just talk a little bit where you are thinking more opportunistically about pushing through pricing increases?

Well, sure.

The 2% or 3% for RMS is a worldwide number.

Different geographies will have different price increases.

That's kind of a net result that we anticipate given larger contracts and clients that are price-protected, etc., etc.

We anticipate getting a similar increase in safety that we had in 2015, which was around 5%.

We have price increases in some of our smaller businesses that we rarely break out, but we think, all in, we're netting about 2% in 2016.

Okay.

And then can you comment a little more on tax rate, just how you are thinking about the opportunity to bring that down around WIL?

Around WIL.

So we're in the middle of working with external advisors on how we can restructure the legal entities to better fit into Charles River so that we can manage actually cash management, as well as other factors.

It's still a little too early to say exactly how that will fall out, so I don't think there's much more I can say on how we're restructuring the tax to help, but rest assured we're still looking (inaudible).

Okay.

Thank you.

Ricky Goldwasser, Morgan Stanley.

Hi, everyone.

Good morning.

This is Ashley Ponce on for Ricky.

I just had a quick question about organic EPS growth.

It looks like we are getting a 3% revenue contribution from acquisitions already closed.

Is that fair and does that drop to the bottom line as well, or is it slightly less?

So it's fair to say that about 3% is coming from acquisitions that we've currently purchased.

So yes.

And a portion of that will flow through to the bottom line, of course.

Have you broken out what portion, or how much EPS growth you're estimating is organic?

No.

No.

Okay.

Okay, thank you.

Robert Jones, Goldman Sachs.

Thanks for the question.

I guess just looking at revenue from strategic relationships, obviously a nice gain there.

Now representing over 30% of total revenue I think for 2015.

Can you maybe just talk a little bit about what type of work is driving the growth from your strategic partners?

And then I guess just a follow-up to that would be what are you considering in the 2016 outlook for growth from strategic partners?

The reason I ask is, I know on the other side, on the clinical side, it seems like these relationships could obviously drive meaningful healthy growth, but they hit a run rate at some point, which can in fact cause growth to be a little bit more challenged over time.

So just curious what's driving the growth today and then what are you guys factoring in as we think about 2016?

I think our strategic relationships, as we describe them, are really different than the clinical CROs, so I would be careful to draw that analogy.

And we define them quite liberally only because we deem -- we have a strategic relationship with a client who treats us that way, treats us like a strategic partner.

We deal in science.

We get the value proposition out of the way and we are really collaborative.

And often those have no contractual relationships associated with them and the timeframe can be for one year or a quarter.

And then we have some, as you know, because we've talked about them, that are longer term, five years, three years, one year.

So they are always evolving.

We have several conversations going on right now with large clients, principally, who don't typically -- some of them are big outsourcers and some are really early on the outsourcing curve and so as we think about that going forward, we have some level of confidence that we'll expand some of the ones that we have and we'll ink some new ones.

They start in a multiplicity of ways.

It's hard to boil it down to one thing.

I would say most often they start with a conversation about Safety Assessment.

Big drug companies thinking about doing less internally or reducing infrastructure and/or increasingly we have conversations that start with Discovery and then they move into Safety Assessment or vice versa.

Once we have started a dialogue with a large client, let's say about Safety Assessment, the ability to have an arrangement -- we call them enterprise agreements -- that cuts across literally everything we do and provides an incentive with them to do more work with us rather than less is something that lots of companies take advantage of.

So again, as I said earlier, the diversity and the strength of our portfolio is really powerful from a competitive point of view for sure, but also in providing solutions for clients who are trying to figure out what to do with their own infrastructure.

And so as we build our operating plan, it is less about going strategic deal by strategic deal; although we do go from client to client and we just think more about what we're currently doing for them, what the current dialogue is and where we think it could go.

We do build that out client by client.

So I would not expect at all the kind of volatility that I think you're potentially hinting at that you see with the clinical focus, just totally different.

And to the contrary, I think that we have opportunities to continue to expand these relationships with clients and we see that as we launch a new service.

We buy this oncology company.

We buy this chemistry company.

We buy this ion channel company.

Just expands the dialogue with clients with whom we already have, or it provides an opening to have a dialogue with a client that we haven't before because it's really hard on ion channels, for instance, and really want to engage with us on that and it leads to something else.

So it's a fascinating process and one that we're developing constantly and consistently and it keeps changing as our portfolio expands.

And that expansion that was called out of the 30%, it's actually with more client relationships being added to the pool.

We don't have any clients that have a revenue of over 5%, so it's not as if it's anchored in a small handful of strategic relationships that could get to a point of saturation.

The ability to bring more clients into that strategic dynamic is clearly good for us.

That's helpful.

Thank you.

Thank you.

I will turn it back to the speakers for closing comments.

Thank you for joining us this morning.

This concludes the conference call.

Thank you.

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

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

You may now disconnect.