Charles River Laboratories International, Inc. (CRL) Q1 2014 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Charles River Laboratories First Quarter 2014 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I'd now like to turn the conference over to your host, Corporate Vice President of Investor Relations, Ms. Susan Hardy. Please go ahead.

Thank you. Good morning, and welcome to Charles River Laboratories First Quarter 2014 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 2014. Following the presentation, we will respond to questions. There's a slide presentation associated with today's remarks, which is posted on the Investor Relations section of our website at ir.criver.com. A 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 3203653844. The access code in either case is 324004. The replay will be available through May 15. You may also access an archived version of the webcast on our Investor Relations website.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 25, 2014, 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 Reconciliations link. Now I'll turn the call over to Jim Foster.

Good morning. I'd like to begin by providing a summary of our first quarter results before commenting on our business prospects. We reported sales of $299.4 million in the first quarter of 2014, an increase of 2.8% over the previous year or 2.4% in constant currency. Both the PCS and RMS segments contributed to the increase, gaining 3.9% and 1.5%, respectively, in constant currency. Our mid-tier clients were the primary driver of the first quarter sales increase. Improved access to funding and our targeted sales efforts combined to yield a 10% increase from the first quarter through the mid-year. As we anticipated, when we gave guidance in February, our key global accounts started the year slowly. However, bookings accelerated significantly in March, which we believe provides an early indication of a better second quarter for these clients. Year-over-year, the consolidated operating margin improved by 20 basis points to 17%. The PCS operating margin drove the increase, gaining 230 basis points year-over-year due primarily to the foreign exchange benefit from a weaker Canadian dollar, the 2013 U.K. tax law change, which reclassified research and development tax credits, and leverage from higher PCS sales volume. The RMS operating margin was 31.7%, a gain of 20 basis points, as the benefit of our efficiency initiatives offset lower unit sales of research models. Earnings per share were $0.82 in the first quarter, an increase of 18.8% from $0.69 in the first quarter of 2013. Our limited partnership investments contributed $0.08 in the quarter. First quarter results continued to demonstrate the benefits of the actions we have taken to position Charles River as the partner of choice for outsourced drug discovery and development services. Our efforts to create a more streamlined and efficient operation without compromising scientific expertise or client service have enabled us to maintain and enhance Charles River's leading market position as a premier provider of essential early-stage drug discovery and development solutions and to provide those solutions tailored to each client's specific needs. This, in turn, has provided clients with the resources they require in lieu of in-house capabilities and supported their goal to increase their use of outsourced services with a reliable scientific partner. The acquisition of BioFocus and Argenta, which we closed in April -- on April 1, is a pivotal building block in our expansion of services. With this acquisition, we now have expertise to provide early discovery services, including target discovery, medicinal chemistry and complex in vitro biology. This expertise will enable us to engage with clients earlier in the drug discovery process, enhancing the value we can provide by allowing them to outsource integrated drug discovery and early-stage development programs to a single provider. The acquisition is precisely in line with our strategy to build a broader portfolio of essential products and services to support the drug discovery and development continuum and the increasing virtualization of the bio-pharmaceutical industry. Immediately following the close, we implemented a plan to contact the majority of the heads of research and development and of discovery at the leading pharmaceutical and biotechnology companies to inform them of our enhanced service offering. We are now working with many of them to explore an expansion of the services we can provide and are optimistic that many of these clients will choose to utilize Charles River for early discovery services. As result of the acquisition, we are raising our 2014 sales guidance to 9% to 11%. We are increasing non-GAAP earnings per share to a range of $3.15 to $3.25, reflecting both the acquisition and the first quarter gain from our limited partnership investments. We are confident that successful execution of our sales strategies and integration of Argenta and BioFocus will enable us to achieve this guidance. I'd like to provide you with the details on the first quarter segment performance. RMS segment sales were $185.6 million, a 1.5% gain in constant currency. The revenue increase was driven primarily by 3 areas: EMD, Vital River and Research Model Services. As a result of sales growth and efficiency initiatives, the RMS operating margin was 31.7% in the first quarter, 20 basis points higher than in the first quarter of 2013. We credit our efficiency initiatives with enabling us to offset lower sales of Research Models, which continued to be impacted by consolidation in our global key accounts. These initiatives are focused on various areas. Some are directed at improving our capacity utilization, whether by reducing our footprint as with the closure of our Michigan facility or by evaluation and realignment of production to better utilize our existing capacity. Other initiatives are focused on automation to improve data access or reduce manual workload. We are continuing to identify opportunities to streamline our RMS operation, which we believe will enable us to achieve our goal of maintaining an RMS operating margin at or above the 30% level. Despite Vital River's higher sales, Research Model sales declined by approximately 3.5% in constant currency year-over-year. The continuing consolidation of the bio-pharmaceutical industry, the closure of bio-pharmaceutical facilities and the evolution of drug development to eliminate molecules earlier in the process have caused softened demand for our Research Model. We have offset some of that decline with market share gains, particularly in the mid-tier and academia. We were encouraged to see the sales of Research Models to commercial accounts in the U.S. were stable in the quarter. Although in Europe and Japan, which tend to lag the U.S., pharma industry consolidation led to lower demand. I believe that Research Models will continue to be a critical component for drug research is unchanged, and we are committed to our goal to gain additional share with our global biopharma, mid-tier and academic clients. Our GEMS and Discovery Services businesses delivered solid growth in the first quarter, the result of increased outsourcing, as well as our targeted sales efforts to gain market share. We expect both of these businesses to benefit as global bio-pharmaceutical companies increase the use of outsourcing at the earlier stages, and mid-tier biotechnology companies utilize higher funding to invest in their pipeline. And with our expansion into early discovery, we expect to be able to capitalize on demand as it continues to emerge. EMD business was the largest driver of the RMS sales increase, delivering an exceptional sales growth of 18% in constant currency. Every area of the EMD business reported higher sales. The PCS franchise continued to exhibit strength, as we sold additional instruments and cartridges, continued to take share in the conventional testing market. Accugenix performed very well, as clients increasingly utilized our services. The acquisition of our distributor in Singapore last year was reflected in the first quarter results, as was some fourth quarter sales, which was deferred to the beginning of the new budget year. We continue to expect that EMD sales growth will be in the low-double digits in 2014 as new products are introduced, and we continue our efforts to convert large pharmaceutical manufacturers' central laboratories to the PCS cartridge technology. PCS sales were $113.8 million, a 3.9% increase in constant currency. As I mentioned, growth was driven primarily by our mid-tier clients. Over the last few years, we have invested significant resources in building a stronger presence for these companies. As our market shares increase, we are establishing the same working relationship with many of our large and mid-tier clients as we have with our global key accounts. These relationships, combined with greater access to funding, are resulting in higher demand for these premier clients. And although their pipelines are smaller, mid-tier clients tend to stay with the CRO with which they have a relationship. We have seen many of our mid-tier clients return to us as their next molecule reaches the in vivo stage. Now that we include target discovery, medicinal chemistry and in vitro biology services in our portfolio, we believe that these clients will choose to work with us at the earliest stages of their molecule and stay with us through preclinical development. Our global key accounts, which include approximately 25 of the largest bio-pharmaceutical companies, started the year slowly. We had anticipated that this would be the case, and that demand would improve in the second quarter of the year. Bookings in the month of March were significantly higher than in the previous 2 months, which we believe provides an early indication of improved sales in the second quarter. The 230-basis-point operating margin gains to 12.9% was due primarily to the impact of the weaker Canadian dollar on the PCS-Canada margin, as well as to the 2013 U.K. tax law change. Higher sales also contributed to the margin gain because the mix included a greater proportion of specialty toxicology services. Higher sales are resulting in improved preclinical capacity utilization. In fact, demand for our services has increased to the point where we have selectively begun to open new capacity. We opened a small building in Edinburgh last year and are in the process of opening a few rooms in Ohio. We are opening capacity judiciously because we want to ensure that we can fill any new capacity with only a minimal impact, if any, on operating margin. Furthermore, we do not want to impact pricing, which has generally remained unchanged. As industry utilization approaches more optimal levels, we are confident that pricing will eventually improve. However, we continue to believe that while price is an important consideration, expertise and quality are most often considered more critical. We continued to win RFPs, for which we are not the lowest bidder, because as global bio-pharmaceutical companies reduce their infrastructure in favor of reliance from CROs, they do not want to compromise on scientific expertise. When that criterion is critical, Charles River is the preferred choice. Our sales strategies have been very effective in enabling us to gain market share, and we continuously to evaluate those strategies to identify areas where we can enhance our performance. The culture of continuous evaluation and enhancement, which we are promoting at Charles River, also applies to our operation. As you know, from our guidance, we expect $25 million to $30 million in incremental savings in 2004 (sic) [ 2014 ] from our ongoing process efficiency initiatives. These savings are derived from a combination of projects in various areas, including rightsizing capacity, inventory management, logistics, reduction of our energy footprint and purchasing initiatives. We are also using automation and technology to enhance our efficiency. Some of our most exciting innovations have come from the implementation of technology, which can provide benefits in a broad range of areas, from access to information to employee job satisfaction. We remain committed to driving efficiency throughout our global organization and continue to evaluate additional initiatives. I'd like to comment on the recent speculation on consolidation in the bio-pharmaceutical industry. Consolidation in our client base has been ongoing for the last decade, and we take that into consideration as we construct our annual financial plan. Our experience has been that consolidation often causes short-term disruption in our business, but ultimately results in more outsourcing as the acquirer looks to gain efficiencies and cost savings. Although we have been the beneficiary of the outsourcing trend and the trend to place more work with a select number of CRO preferred providers, our largest commercial clients still represents less than 4% of total revenue. We believe that our diverse client base helps to mitigate the effect of consolidation. All of the actions we have taken in recent years have been focused on differentiating Charles River as the preferred partner for early-stage drug development and positioning us to compete effectively when new opportunities become available. You are familiar with many of these actions: expanding our broad early-stage portfolio through internal development and selective strategic acquisitions; maintaining and enhancing our extensive scientific expertise; improving our operating efficiency; providing best-in-class client service; developing state-of-the-art data systems and portals, which offer clients real-time access to data; and structuring creative, flexible solutions that support each client's drug development goal. We will continue to pursue strategies to enhance our position as the leading early-stage CRO because in doing so, we enhance our abilities to support our client. Although it's challenging to anticipate the impact of further consolidation they have on the CRO industry, we believe that there will be numerous outsourcing opportunities. With the acquisition of early-discovery assets, we believe our portfolio is the strongest it's ever been. We can offer support to clients at the earliest stages of drug discovery and stay with them throughout the entire early-stage process, a capability that no other CRO can match. We are continuing to pursue opportunities to expand existing client relationships and forgo and forge new ones, which we believe is fundamental to our ability to drive sales, cash flow and earnings growth in the coming years. 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 Tom Ackerman to give additional details on our first quarter.

Thank you, Jim, and good morning. Before I recap our financial performance, let me remind you that I'll be speaking primarily to non-GAAP results from continuing operations. Let me begin with the operating margin, which improved 20 basis points year-over-year to 17%. Improvement in both segments was partially offset by higher unallocated cost. PCS operating margin improvement was driven by 2 primary factors: The first was foreign exchange, which benefited the margin by more than 100 basis points due to the impact of the weakening Canadian dollar on our PCS-Canada operations. You may recall that because we invoice PCS-Canada clients in both U.S. and Canadian dollars, but incur most of our cost in Canadian dollars, we do not have the same natural hedge that we do in our other foreign locations. PCS operating margin also benefited by approximately 90 basis points as a result of the U.K. tax law change in 2013 that changed the treatment of R&D tax credit. We expect a similar benefit in the second quarter of 2014, but will anniversary the tax law change in the third quarter of the year. Unallocated corporate cost increased $2.4 million year-over-year to $22.4 million in the first quarter of 2014. This was primarily driven by higher compensation cost. For the year, we expect unallocated corporate cost to be slightly below 6.5% of total sales. This is less than our prior outlook of approximately 6.5% of sales due to the acquisition of Argenta and BioFocus, which adds sales without meaningfully increasing corporate costs. In the other income category, the most significant item was a gain of $6.1 million or $0.08 per share on a limited partnership investment. This gain was related to our investment in a large life science venture capital fund. Our primary purpose in partnering with life science venture capital funds is to enable us to access a group of more than 100 emerging biotech companies at an early stage and offer us the opportunity to become the preferred provider for their drug discovery and early development needs. The investment returns, while attractive, have always been a secondary element of these relationships. Since our first limited partnership investment in 2009, we have invested $13.8 million in several venture capital funds, for which we have recorded a carrying value of $19 million on our balance sheet and have already received dividends of $6.5 million in cash and securities. To date, we have committed to invest up to $35 million. We anticipate that we will continue to pursue this strategy and are targeting total commitments in a range no higher than $50 million to $75 million at any one time. However, given the typical life cycle of these funds, we expect that our actual cash investments will not exceed more than half of this total commitment amount at any one time. Other non-operating factors, including interest expense, tax rate and share comp, did not collectively have a meaningful impact on the first quarter EPS. Net interest expense was $2.6 million in the first quarter, which was unchanged from the fourth quarter of 2013, but declined by $1.8 million from $4.4 million in the first quarter of 2013. The year-over-year decline reflects the amendment to our credit agreement and subsequent refinancing of our 2.25% convertible notes in the second quarter of 2013. For the year, we now expect net interest expense to be in a range of $14 million to $16 million or approximately $2 million higher than our prior outlook. The increase is due to higher debt balances related to the acquisition of Argenta and BioFocus on April 1. In the first quarter, the non-GAAP tax rate increased by 70 basis points year-over-year to 27.4%. The increase was primarily the result of a reduction in the benefit of Canadian R&D credits and the U.K. tax law change, partially offset by a favorable earnings mix. However, first quarter tax rate of 27.4% was below our prior outlook of 28.5% to 29.5% in 2014. Due to the lower first quarter rate and the addition of Argenta and BioFocus, which are taxed at a lower rate in the U.K., we expect our non-GAAP tax rate in 2014 to be in a range of 27% to 28% or approximately 150 basis points below our prior outlook. We have also implemented legal entity restructuring initiatives, which are expected to benefit our 2014 tax rate. There is potential legislation in certain foreign jurisdictions that could modestly increase our tax rate in 2014, but this has not been included in our guidance range because the outcome remains uncertain. Free cash flow declined by $6.3 million to $17.3 million in the first quarter, driven primarily by a $4.8 million increase in capital expenditures to $11.2 million. This was in line with our expectation, which was for CapEx to be in a range of $50 million to $60 million this year compared to $39 million in 2013. The acquisition of Argenta and BioFocus will increase our capital spending for the year, so we now expect CapEx in the range of $55 million to $65 million. Also, as a result of the acquisition, we are increasing our free cash flow guidance to a range of $180 million to $190 million in 2014 from our previous range of $175 million to $185 million. Since the acquisition was completed 1 month ago, we have been focused on implementing our comprehensive integration plan. While in the early stages, the integration has progressed well, and we remain confident that Argenta and BioFocus will contribute 6% to sales growth and $0.10 to non-GAAP EPS in 2014. We expect to incur charges totaling approximately $0.16 in 2014 related to the acquisition, which will be excluded from non-GAAP results. These charges include $0.11 of amortization of intangible assets and $0.05 of acquisition and integration-related costs. The $0.05 charge is associated with the cost incurred to evaluate the acquisition, including the engagement of banking, legal and accounting advisors, as well as integration cost. We believe that the acquisition of Argenta and BioFocus was not only outstanding from a strategic perspective, but also because it enabled us to further optimize our capital structure. We were able to partially finance the transaction using foreign cash that accumulates overseas, as well as foreign debt that can be repaid with foreign earnings. We borrowed EUR 85 million or approximately $116 million on our euro-denominated revolver and used approximately $75 million of cash held by foreign subsidiaries to complete the transaction. This equates to a purchase price of approximately $191 million, including payment for estimated working capital, which is subject to final adjustment. At the end of the first quarter, our total debt was $640 million. This does not include the $116 million of financing for the acquisition, which was completed in the second quarter. Following the acquisition, our pro forma leverage ratio is expected to be between 2.5 and 2.75x, and we intend to maintain the leverage ratio for the remainder of the year. We plan to repay debt throughout the year, consistent with the scheduled installments on the term loan. We also intend to continue to repurchase stock with the goal of offsetting dilution from option exercises this year, as well as modestly reducing our share count. We now expect an average diluted share count of slightly below 48 million shares in 2014, which is slightly higher than the outlook we provided in February due to the timing of repurchases. We repurchased approximately 183,000 shares for a total of $9.8 million in the first quarter of 2014. And at the end of the quarter, we have $129.3 million remaining on our stock repurchase authorization. I would like to provide a few other details with regard to our updated 2014 guidance. Our sales guidance of 9% to 11% is the same for both reported and constant currency because we continue to expect foreign exchange to have only a small benefit for 2014, as the sharp movement in the Canadian dollar has been largely offset by changes in other currencies, such as the stronger euro and pound. We now expect that the consolidated operating margin will be about the same as the 2013 margin of 17.3%. This is below our prior outlook because Argenta and BioFocus' operating margin is below our corporate average. The business currently has low- to mid-teen margins, which we expect to improve over time. In addition, I would like to remind you that we have not re-forecast any investment gains or losses in the remaining quarters of 2014 since the performance of our investors and venture capital limited partners -- partnerships is largely based on market returns and, thus, unpredictable. This creates a $0.08 headwind in the second quarter when compared to the first quarter of 2014. Looking at the second quarter, we expect non-GAAP EPS to be similar to the first quarter level of $0.82 despite the $0.08 headwind. Our favorable outlook for the second quarter is driven by higher sales and operating margins in our legacy RMS and PCS business segment on both a year-over-year and sequential basis. The improved demand in bookings in March provides an early indication of a stronger second quarter. In addition to growth in our legacy businesses, we expect Argenta and BioFocus to add $20 million to $25 million to second quarter sales, which is in line with our acquisition plan. We believe that we are well positioned in 2014 to generate meaningful benefits from our ongoing efficiency initiatives and successfully execute our sales strategies in the integration of Argenta and BioFocus. Therefore, we are confident in our ability to achieve our financial guidance for the year. Thank you.

That concludes our comments. The operator will take your questions now.

[Operator Instructions] And our first question, we'll go to Greg Bolan with Sterne Agee. Gregory T. Bolan - Sterne Agee & Leach Inc., Research Division: I want to talk about mix of tox in your portfolio and as it relates to your guidance. So the checks in that we continually -- that we are doing continually bring up this idea that IND-enabling studies are really starting to ramp, and that, obviously, I think, makes sense, following the abundance of non-GLP studies, dose range findings, if you will, over the last year or 2. When you think about your guidance, do you model in any type of divergence from status quo just in terms of the mix of toxicology studies that you're going to be conducting this year? And Jim, if you could maybe just share with us your view on the trend that you guys have been seeing on the level of IND-enabling studies that are being conducted.

We're talking to a lot more clients who are indicating that they have multiple IND programs to put in place this year. As we've said in our prepared remarks, the first quarter was pretty much as we had predicted and very much the way it has been in the prior years. It's a slower sorting-out process to determine what drugs will be worked on at all and what drugs will be worked on internally versus externally from a Big Pharma, where they'll go, if it's biotech. And as we've said, March was a much stronger month, particularly the global. So we anticipate a stronger second quarter sequentially. We would expect to see an improvement in mix between specialty and general tox, which we're beginning to get some evidence of in March. We would begin to see more of the early work moving into more of a balance between the early work and the late-stage work, as you posed the question. We would begin -- we would expect to see biotech continue to be strong, and we expect to see pharma continue to strengthen, given the sorting-out phenomenon that we saw. So we're optimistic about the strengthening balance between long and short at specialty and gen tox by going forward.

And Greg, we are optimistic about our margin. To your more specific question about IND-enabling studies and our forecast, et cetera, we do factor that into our forecast, but more to the extent of what we have in our backlog and with a little bit less emphasis on what might occur a little bit later, given directional indication. So it's somewhat taken into consideration, but not exclusively based on what our clients might be saying, "for the latter part of year," for instance.

We'll go to the line of Eric Coldwell with Robert W. Baird. Eric W. Coldwell - Robert W. Baird & Co. Incorporated, Research Division: Just a couple of quick ones. In PCS, I know it's really difficult to talk about utilization. But on a global basis, where would you say Charles River's global capacity utilization is in toxicology? And then as a follow-up to that, historically, at what levels of capacity utilization have you begun to see more stable and, perhaps, even accelerating price increases? And then I'll have a follow-up to that.

Okay. So without giving the exact number, Eric, which you know, we can't and -- for competitive reasons. Our capacity is improving as we said earlier. We have begun to open new space. That's really a positive thing. We still have some sites that are full. That means 85% or greater capacity utilization. We have others approaching that. So we're in the midst of our strategic planning process. And obviously, our internal dialogue is a lot about what will our space needs be for the next 3 to 5 years. That's a complex scenario. So we have a very good sense of what we'll need and what we're running out of and what clients we're engaging with. We only have anecdotal information about what the competition is doing. But suffice it to say, everybody's space appears to be filling, even if they're not quite as full as we are. Pricing just will not materially improve because pricing stable with some periodic aggression based upon how full people are at the end of a particular quarter, a fair amount of that in the fourth quarter. But pricing will probably only moves in a material way if everybody's pretty full. And we are slowly opening space, and the clients are waiting in line. And there's more of a balance in terms of supply and demand. But we certainly can see it. We can see it on the horizon, and we are winning space, where we're absolutely not the lowest price, not even the second-lowest price provider in something that we bid on. And so there appears to be some rush to quality in science and an acknowledgment, even if it's not verbalized, that pricing is pretty good right now, and clients don't want to push any of the CROs that have to cut any corners. And so I think it's all progressing well in the right direction. Eric W. Coldwell - Robert W. Baird & Co. Incorporated, Research Division: Okay. Great. Just a quick one on Research Models. Hoping you could give us a greater sense of the performance across your catalog lines. In other words, safety versus humanized or immuno-deficient, et cetera, models. And then also, large animal models. At the SOT conference, a few of your competitors and other vendors in the market were talking about seeing an increase in nonhuman primate demand. You have pretty easy comps there. I'm just curious if you can give us an update on if you're seeing yourselves an increase in nonhuman primate with a higher biotech funding and a greater focus on biologic development?

Well, we look at that business as primarily -- while we have still some commercial space, we look at that principally in terms of our ability to supply ourselves. So it's really an increased emphasis in demand for the large animals from a biotech client, so working with large molecules. That probably will persist. So we're working hard to make sure we have physicians in an appropriate and timely supply. On the core rodent business, I guess I'd say a couple of things, but we're seeing an increased demand from CROs. So that's our competition in the CRO industry, and that would track with the fact that we're seeing increased demand for toxicology services, and business is growing. Immunocompromised mice sales are doing well. And all of that is overshadowed a little bit by the fact that because of the consolidation and interest cost [ph] reductions, the total unit numbers are down. But if you try to normalize that, we're getting some price. We have some unit increase in some of the other models. And we saw our North American business stabilize, which had been down in the prior quarter. So that's actually really good signal. So there's some strengthening of demand.

We'll go to Dave Windley with Jefferies.

Jim, following up on that last. The 3.5% RMS or models decline in the context of your comment that U.S. is stabilizing. So is 3.5% better than it has been? I don't think you've given us quite as precise an estimate in prior quarters.

Yes. We're seeing a bit continued decline -- stronger decline in Europe and Japan. It tends to lag the U.S. So our stabilization is domestic, it's a U.S. stabilization. It's a really good sign. It was declining last year. And we're getting some price and still the global number is down 3.5%. So that's the impact of lots of space having come off-line and continuing to come off-line over the last few years. Though, in the midst of that, we've been taking share in the mid-tier and some in the academic marketplace, and we have very, very big R&D facilities that no longer exist. So if that will continue to put pressure on the core business, if we continue to see major reductions today or if we don't or if it slows down in Europe and Japan, we're likely to see more of a global stabilization, and we might even see some upside benefit for the pricing, because we wouldn't have to offset unit decline.

If I could sneak one in, would you mind giving us an update on your activities on the global productivity?

Oh, sure. We're -- we have a host of projects, many, many dozens of projects with team leaders in each one of them. We continue to have teams both in the U.S. and Europe at different levels in the organization look at new areas to pursue. We have multiple facilities that we're looking at to improve our efficiency. We're looking at automation. We're looking at procurement. We're looking at a host of technologies to employ. I'd say it's going at least as well if not better than we have anticipated. We're not quite ready to sort of pronounce what we see for 2015. But we certainly believe it will be a meaningful number. And it really feels good in terms of lots of things that we've been doing for a long time that we can just do more efficiently as that should help drive margin. So we're focused on that. We have a group that's working on that daily at the executive committee, which are the top 6 senior people in this company. We review current projects weekly. So we're shining a really bright light on this one. And given the challenge of getting pricing, particularly in the preclinical business, obviously, driving efficiency is essential to our goal of improving our operating margin. So it's going quite well.

And we'll go to the line of Tycho Peterson of JPMorgan. Tycho W. Peterson - JP Morgan Chase & Co, Research Division: Jim, I just -- I want to get more comfortable with the decision to open up new capacity. I mean, we've all kind of lived through these cycles, and you're still sitting on the Shrewsbury facility. So can you maybe just talk us to whether some of this initial capacity is already spoken for? And how do we reconcile all this with the proposed pharma M&A that's undertaken, assuming there's a lot of capacity that will be coming out of pharma if these deals go through?

A really fair question there, Tycho. We have several sites where we have really great demand, and we have the ability to open relatively small amounts of space without impairing margin and keeping clients, who for whatever reason, prefer those sites, happy and not causing them to have go to other Charles River sites, which would be okay, but maybe not preferable. And certainly, we don't want them to elsewhere. So Edinburgh's has been pretty well utilized in certain species. We opened some space there last year. We've had some really great demand by global clients at that site over the last couple of years, and we think that will continue. I mean, that's our only European site. Ohio is a very, very efficient, low-cost facility with great expertise in general tox and certain specialty areas. And we had built -- you may remember this. We had built the building, but stopped 80% through. It's actually a very flexible, efficiently designed building. So we're kind of finishing that just kind of just in time, just -- yes, we do have our clients for the space at both of those sites. We had -- we didn't talk about it in this call, but we had finished, I don't remember, 30-or-so rooms in Reno that really weren't operational and really weren't caged, and we can kind of stage those and utilize them as we need them. So it's really more a swing space at sites with specific expertise as with the client base, not going to have margin impact, really isn't -- it doesn't sort of get in the way or have much to do with if and when and how we open Shrewsbury. It's certainly something we want to do, but that's a very big site. It's a different order of magnitude decision. And I think that we will have to sort of steadily, carefully and thoughtfully and judiciously, as we've said, open space, a small amount of space. We have multiple sites, as I've said a few minutes ago. We are in the midst of our strategic planning process. And obviously, one of the issues that we're grappling with is where to open space and when and that -- I have to tell you, that feels very good given the last 4, 5 years where we had way too much excess space, and we have a lot less of it right now, putting Shrewsbury aside, putting the Dallas space and Reno aside. The big locations that we have are moving towards the point they're being all well utilized. So we feel comfortable that we're doing this in a thoughtful way that's not going to impair our ability to get priced. It's going to be a competitive -- provide competitive strength for us and keep our clients happy. Tycho W. Peterson - JP Morgan Chase & Co, Research Division: And then on a recent acquisition, it's early days, obviously, but any customer feedback you can share? And any additional thoughts in your ability to cross-sell within their existing customer base?

I've never seen an acquisition of us quite this synergistic from a revenue point of view. So I was just there last week. We spent a lot of time on the go-to-market aspects of this. We have a -- we immediately upon -- actually, before close, but we immediately got clients -- their clients to work with us and, more importantly, our clients to work with them because they wanted a broader offering. We have dozens of really high level meetings set up with a whole bunch of senior people in this organization, have larger strategic conversations to advance current strategic conversations and to expand current strategic deals. I'd say the feedback from clients has been exceptional, not unanticipated, but very, very positive. And it really feels like we are in a very strong competitive position. We're going to be driving those conversations really, really hard for the balance of this year.

And we'll go to John Kreger with William Blair.

This is actually Robbie Fatta in for John. The first one is on your client segmentation. I know you gave us global key accounts and then the mid-tier clients split out. Could you give us any more detail on the mid-tier, maybe tell us which ones are -- at what percentage are self-financed versus which ones rely on the public markets for funding?

Certainly, I couldn't do that off the top of my head. It's a very large client list. It's big biotech, but mostly mid and small. I would say many of those companies are getting funding directly from Big Pharma. And obviously, some are getting money directly from the capital markets. And obviously, lots have got a lot of money over the last year from there. We have a bunch of VC deals, as you know. So we know those companies, while they're getting money directly from venture capital firms, who have had some stunning liquidation events, including a couple of ones that we work with. And they're out now raising funds again, and I think that there's going to be a significant amount of money for early-stage biotech, notwithstanding -- without any need for the capital markets. So I mean, I think the mid-tier marketplace is extremely well financed. If you are concerned that the window is going to close or is closing in biotech funding, as you know, there's extraordinary money raised in 2013 and in the first quarter of this year, so there's lots of cash to drive the growth and development in R&D for a long time forward. I think it's still clearly and increasingly the place where drug discoveries are best made or most quickly made in biotech. And so if there's any shortfall from capital markets, we suspect that the pharma companies will make that up.

Got it. That's very helpful. And one other one, back on the RMS topic, and this might be a difficult question to answer. But in the absence of internal capacity closures, do you have an estimate of what model usage would be? And I guess what we're trying to -- or what I'm trying to get at is whether you feel like there's a structural decline at all in model usage or if this is merely the transitory impact of consolidation?

I mean, I think it's more the latter, so obviously, a tough question to answer because the infrastructure decline -- the infrastructure has step down for the past several years. So it's kind of difficult to find sea level here. Pricing puts us this sort of overall unit numbers for Research Models have been declining for 2 or 3 decades. So it's not new. There's a more judicious use of them, which is appropriate. There are better animal models, which is appropriate. They're more expensive, which is great for us. They're more translational in terms of the information they give, which is good for everyone. There are more compromised animals, and we all see animals being used. So I think it's more a shift in mix type of animal models with some overriding significant reductions in utilization because you have the big site close, while there are probably more to come. And there are obviously a finite number of those facilities. So at some point, that stops. And the companies who are left, along with their biotech and academic partners, I think will need to use more of these early specialized models, and I think we have a very good footprint in the Research Model business. And I think we are managing our capacity really well, and we're doing a very, very good job taking an old, extremely profitable business and looking at it with fresh eyes and driving multiple efficiency initiatives through that, which should be able to actually improve the margins. So it's a change in capacity that we have our arms around.

We'll go to the line of Robert Jones with Goldman Sachs.

Just on PCS and the margin, just trying to understand some of the moving pieces a little bit better. It looks like the 230-basis-point increase year-over-year was helped by the U.K. tax change and FX. The remaining maybe cost 40 basis points in core expansion, probably less than what I would consider, given the nice growth you saw there on the top line. I'm just curious if you can maybe comment around the incremental margin that we should be thinking about today as we think about the revenue trajectory from here?

Bob, is that a question about the whole year?

I guess, just -- Tom, just like on the drop-through. I think, I would have thought given the revenue increase in PCS that the core margin would've expanded more. So I'm just wondering, is there anything at play, any dynamics worth calling out this quarter that we should think about in subsequent quarters?

Not in particular. I mean, as we've talked about this in the past, we would expect, on a normal basis, a drop-through of anywhere from 20% to 30% or more. I mean, before the dynamics changed in the last few years, we used to talk about a higher flow-through than that. But as you know, the prices have come down and things like that, so I think it sort of compressed that. Mix is always an issue, both in terms of study type, as well as client mix. So in some regards, it's always a little bit unpredictable if we do more work with a given client or more work in a specific area or site. Directionally speaking, I do think the trends are positive. We did get out of the gate a little bit slower in the first couple of months, as Jim mentioned earlier, with a strong uptick in March both internally in revenue in business, as well as in booking, indicating a stronger second quarter. So I do think we'll see the margin come up as we move through the year. And some of those particular items were always a little bit difficult to predict, as I had said. But there's really no underlying -- there's really nothing underlying it dramatically that I would say that on a downside, it sort of grows into the equation, so to speak.

Okay. No. Understood. And I guess just maybe for the year, trying to understand bigger picture the operational view post this quarter, if I take into consideration the benefit from the limited partnership and then, obviously, the addition of the acquisitions of Argenta and BioFocus, it seems to me, and I know there's a number of moving pieces at play, that the core EPS guidance has actually reduced slightly. Am I missing any moving pieces there? And if that is the case, I guess what specifically changed post-1Q that would have you thinking operationally a little bit different for the rest of the year?

We don't feel any different about our guidance for the rest of the year than we felt when we gave it. We increased the guidance $0.10 because of Argenta and BioFocus, which is what we have said earlier. And we essentially raised it $0.05 for what was a $0.08 gain on the limited partnership. We really did that for simplification purposes. I mean, we've rounded it up $0.05. Those partnerships can be volatile. So in the second or third quarter, we could always be $0.01 or $0.02 on the downside from those, which has happened before, and we wouldn't want to lower guidance for that. But going to our core base businesses, we don't have any different view on the outlook for the rest of the year as we did when we gave our guidance. And I would attribute the delta and the MPM really to just rounding and the vagaries of what could be additional volatility going forward.

And we'll go to the line of Tim Evans with Wells Fargo.

I just wanted to follow-up on that question about the drop-through. Can you help us just understand, Tom, why the drop-through, even without pricing, wouldn't be higher than 20% to 30%, given kind of the underutilized capacity situation?

It really goes back, Tim, to really what I said. I mean, I think we have seen drop-through in a given quarter a little bit higher than that, and I think we've seen as other comps that drop-through be a little bit less. It depends on what sites clients are using. Not all our sites are at optimal capacity. It depends on the study mix. And it depends on the client. So I do think we've seen, in particular instances, nice flow-through. In other instance, that's -- I would say that in a more competitive situations, the flow-through isn't as great, as Jim had said. Also, we are looking to continue to grow the business and gain market share around some of the situations are a little bit more competitive than others.

We'll go to Jeff Bailin with Crédit Suisse. Jeffrey Bailin - Crédit Suisse AG, Research Division: Now maybe just to follow-up on the Argenta and BioFocus deal and positioning in Discovery Market. That market being a little bit less mature. Are there any geographic or pricing considerations that we should be considering as you grow bigger in that market, either from variations on labor, supply, different geographies, and how that might ultimately impact the margin of that businesses over time?

Not really sure how to respond to that. I think we have extremely efficient operations, the deep -- the wide and deep clients. I think cost structures were actual clients, so from everywhere, so both Europe and U.S., a few from Asia, supporting clients everywhere. We have a limited number of competitors, and we have enormous synergies with the rest of our service offering. So I don't think where we're doing it or who we're supporting geographically is rather that relevant. We do think we have some opportunities through efficiency, scale, and the size of our strategic deals to drive margin. And I'm very, very pleased to be able to access market that's essentially internal with the opportunity because we have a portfolio that clients will be interested in to piece more of this work outside. And a lot of it could be done externally.

And we'll go to Rafael Tejada with Bank of America.

It's Derik De Bruin in for Rafael. I have 2 questions, and they're both related, and they're addressing the question about sort of discussing potentially the question -- maybe what if the Research Models business is more -- are you going to the point -- the question is, is it a secular decline? And both of these are -- looking at some of the other businesses you have in the Research Models business. So the first question is, the PCS business has done really well for you guys. It's been a good grower. Where are we sort of in the penetration of that market? And how much more shift is it going from traditional methods to that? What's the runway there?

So that's a business that notwithstanding the fact that it's growing really well, given the products that we're in the process of launching and the markets we're in the process of accessing, I think the last estimate we had was probably around $650 million. We give indications of the size of this business it's about 10% of our revenue. So we have a lot of runway left. We do think that the margins, while we don't disclose them, you all know they're attractive, sustainable. And our IP is pretty deep, and we're staying well ahead of the competition and moving -- especially moving into additional markets. So we would be very surprised and disappointed at this business if it doesn't have long-term, sustainable, low double-digit growth potential. And obviously, if it gets larger -- as it gets larger, it has bigger impact on the total.

Great. And then you've done a great job in sort of building out your early discovery assets. And I'm just curious from the area of genomics, I mean, we've seen some of your competitors buying, some of your competitors selling. I guess, is this an area that you need to expand in or think it's attractive? Are your customers even asking for more just genomics work as part of the package from you?

It's something that we're going to have to continue to look at, Derik, as we look at our M&A pipeline and think about the services that we'll bringing online. I would say it's not a primary topic of conversation with most of our clients, I think there are some other things that are more short term -- of greater short-term need to continue to expand and fill out our portfolio that we'll likely to look at first.

And we'll go to Doug Schenkel with Cowen and Company.

Actually, maybe a sort of quick follow-up to Derik's last question, not necessarily genetic or sequencing tools, but Bristol-Myers recently announced an acquisition of a company, which uses induced pluripotent stem cell technology to discover novel drug targets and therapies. Is this an area that you're interested in, and something that you might be investing in more, as you try to diversify more into nonanimal models for discovery tox purposes?

Clearly, stem cells are getting increasing attention, and some of the methodologies to produce them are looking to be more efficient, cost effective, and they're going to, obviously, continue to play a larger role of discovery efforts. And let's just say it's an area that we're going to continue to get smart. And if appropriate, and appropriate means we could find a strategic way to do this, we'd be interested in moving more into that area. But I would say it's early days for us, and we're more in the educational mode and really determining which technologies are practical and can be used in a promotional setting or not. But we're certainly interested in that space.

Okay. That's interesting and helpful. And Tom, I guess 1 unrelated follow-up, and it's really just trying to get a little bit more help on some math. You did get a question on EPS earlier, and it does seem like you increased full year EPS guidance by about $0.125 at the midpoint, and that is less than the combined $0.15 to $0.18 benefit associated with Argenta and BioFocus and the limited partnership gain. So with that in mind, I went back and went through your prepared comments on mix pricing capacity again. And it all seems relatively encouraging. But then I look back at what you talked about in terms of margins for Argenta and BioFocus and factored in the FX benefit, which seems incremental at the operating line. And all of this leads me to, in a long-winded way, the question, which is, did you guys actually lower operating margin guidance on a core basis for the year, maybe by as much as 50 basis points? I think you guys had originally talked about that being up 50 basis points year-over-year. Are you now factoring in something less than that?

No. No, we're not. I know we'd probably have to corroborate around some of the numbers. And then originally, we talked about margin being approximately the same to up slightly and what we said now, of course, with Argenta and BioFocus, which does have a lower margin than Charles River corporate. It takes a little bit off on the margin. But our underlying guidance, as I said to, I think, Tim's question a couple of moments ago, I mean, our underlying guidance is about the same. We do have a $0.10 range. There are always some things that move around there a little bit. Tax rate is benefiting a little bit from a couple of things, including the tax break from our Argenta, which was included in our $0.10 guidance with regard to that. So without going through with line by line, I mean, the easiest answer I'd give you is that we haven't changed our assumptions for base Charles River business before or after Argenta or before or after MPM or anything else like that. I noticed some of you guys with the different modeling, you end up at different spots in the range. I mean, that tends to happen. We tend to look at not what everybody's doing, but what some of you guys are doing, and we kind of see how different people get different ends of the range depending on your underlying assumptions. So -- but there's nothing in the base business, for instance, that we feel different about than we did when we gave our original guidance.

And we'll go to Sung Ji Nam with Cantor. Sung Ji Nam - Cantor Fitzgerald & Co., Research Division: Was wondering, Jim, if you could give us more color. You talked about bookings accelerating for your top mid-tier accounts significantly in March. Was wondering, are they largely kind of short-term projects? Or is there increasing appetite for longer-term project from these guys?

Both, but there's definitely -- we're definitely seeing some longer-term studies. We definitely see more specialty work. We're seeing more, and we see more IND-enabling packages. It's exactly what we've said we're seeing, the result of sorting out, making decision in March and kind of placing the bets on what molecules they want to work on this year. So we're pleased to be -- we're pleased to see it where we had anticipated seeing it. It's increasingly the way the big drug companies have been working vis-à-vis their external CRO partners. And we should see a pretty good mix and balance of work going forward, both as the second quarter continues and the balance of the year continues. Sung Ji Nam - Cantor Fitzgerald & Co., Research Division: Great. And then just one quick one. Just was wondering, just out of curiosity, what you're seeing -- obviously, you're seeing really strong growth from mid-tier clients. From a competitive standpoint, what you might be seeing for some of your midsize to smaller competitors? Are they also faring well with this market? Or are you pretty much disproportionately taking a lot of the growth from this segment?

It's always tough to say because so many of our competitors are private out there, and the information is anecdotal. But I would say that, as I commented earlier, pricing's basically stabilized with a little bit of aggression fourth quarter. I think there's more work out there for everybody, though I would suspect that everybody's space is filling more rapidly than perhaps it did. I think everyone's space was filling in '13 and that's continuing in '14. Certainly, well above 2012, so I think that's a positive thing. And I think there's an increasing amount of work out there and increasing reliance by the big clients on external resources as they decidedly and aggressively close internal space. So as we've said before, I think the only thing we don't love about the tox business is the level of price. And this, too, will change. And in the meantime, while pricing's still a little bit of a challenge, we're going to continue to work on driving efficiency. And when there is an opportunity for positive mix, given the nature of our portfolio, we tend to get it. So we feel good about the trajectory in that business.

And we have time for one final question, and we'll go to George Hill with Deutsche Bank.

I got on late -- to the call late, so I apologize if this question was already touched on. But are you starting to see pressure on competitors to exit the Research Models business, given the weak demand environment?

No. There are a very small number of people left in this industry, if you can call it that. There's basically half a dozen other players up now Japan, 1 or 2 in Europe and a couple in the U.S, one of which was a not for profit. I would imagine everybody is shrinking infrastructure. We know that everybody is pushing prices as much as they can. We're largest -- we're larger, and we've historically been the supplier to Big Pharma. So we see things more clearly than perhaps they do. But I don't think -- and we have one of our large competitors, the private equity owner that's apparently for sale, but we don't know that for a fact. But I don't think it's foreseeable at all that anybody's going to go out of business.

And I'll turn it back to the speakers for closing comments.

We know that there are some more questions on the line. We apologize. We don't have the time this morning to get to them, but we will follow up with you. That concludes the conference call. Thank you for joining us this morning.

Thank you, ladies and gentlemen. That does conclude the conference for today. Thank you for your participation. You may now disconnect.