Charles River Laboratories International, Inc. (CRL) Q4 2014 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing-by and welcome to the Charles River Laboratories Fourth Quarter 2014 Earnings and 2015 Guidance Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Susan Hardy, Corporate Vice President of Investor Relations. Please go ahead.

Thank you. Good morning and welcome to Charles River Laboratories fourth quarter 2014 earnings and 2015 guidance conference call and webcast. This morning, Jim Foster, Chairman, President and Chief Executive Office; and Tom Ackerman, Executive Vice President and Chief Financial Officer will comment on our fourth quarter results and provide guidance for 2015. Following the presentation, we will respond to questions. There is a slide presentation associated with today's remarks which is posted on the Investor Relations section of our website at ir.criver.com. A replay of this call will be available beginning at noon today and can be accessed by calling 800-475-6701. The international access number is 320-365-3844. The access code in either case is 350451. The replay will be available through February 25th. You may also access an archive 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 Information link. Jim, please go ahead.

Good morning. I am very pleased to say that 2014 was an exceptional year. Our financial results demonstrate that we 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 respected and trusted partner, the streamline organization, the flexibility to respond to a changing industry and client requirements and employees who are committed to providing exceptional service to our client. The highlights of our fourth quarter performance are as follows: We reported revenue of $329.5 million in the fourth quarter of 2014, a 16.8% increase over the previous year in constant dollars. Our Early Discovery acquisitions contributed 9.3% to fourth quarter revenue growth and from an organic perspective, the safety assessment, EMD, North American research models and AVN businesses were the primary contributors. Sales to mid-tier biotechnology client again generated a double-digit revenue increase. We achieved market shares gains in all of our client segments, but the effect of our targeted sales efforts were greatest in the mid-tier. The operating margin increased 20 basis points year-over-year to 16.6%. Both the DSA and manufacturing segments reported significantly increased operating margins, 260 and 290 basis points respectively. But the improvement was largely offset by higher corporate costs. As was the case in the third quarter, the improved financial performance drove higher incentive and stock-based compensation due primarily to performance stock units issued to management to align its interest with those shareholders. In addition, we invested in new projects to strengthen our financial and scientific systems. When completed, these projects will enable us to operate more efficiently and provide enhanced data both internally and to clients. Earnings per share were $0.81 in the fourth quarter, an increase of 11% from $0.73 in the fourth quarter of 2013. The improvement was due primarily to higher revenue and operating income. In 2014, revenue was approximately $1.3 billion, a growth rate of 11.3% in constant current with acquisitions contributing to 6.3%. The organic growth rate of 5% was at the top end of our original guidance range of 3% to 5%. The operating margin improved 30 basis points to 17.6% primarily the result of leverage from higher revenues and operating efficiencies. Earnings per share were $3.46, an 18.1% increase over the prior year and 11.6% above the upper end of our original guidance range. A combination of higher revenue, the benefits of efficiency and productivity initiative and a lower share count drove the year-over-year increase. I will point out that 2014 EPS included $0.12 of gains from limited partnership investment compared to $0.08 in 2013. Given our strong performance in 2014 and the fact that we believe the company is very well positioned to win new business in 2015, we are optimistic about the opportunities the New Year presents. The potential for expanding strategic relationships, market share gains in each of our client segments and a robust pipeline of acquisition candidates is an encouraging environment in which to operate and we look forward with anticipation for executing our plan in 2015. Revenue in 2015 in which we include only acquisitions already made is expected to be in a range of 6% to 7.5% in constant dollars. Non-GAAP EPS are expected to be in the range of $3.55 to $3.65. This would represent an earnings increase of approximately 4% over last year at the midpoint but you should know that when adjusting both 2014 and 2015 for gains on limited partnership investments and foreign exchange, the EPS growth rate would be 10.5%. Before I discuss the segment results, I'd like to comment on our Early Discovery acquisition. I can’t over emphasize how important acquisitions of Argenta, BioFocus, and ChanTest, are proving to be when our clients look for an early stage outsourcing partner. We now have the ability to work with our clients from target discovery to preclinical development. A product and service portfolio which is unique in the CRO industry and which solves many of the challenges our clients encounter when dealing with multiple providers. In addition, we provide scientific expertise which enables our clients to rationalize in our internal capacity with a confidence that we can provide the expertise that they no longer can afford to maintain in-house. Our scientists are solving some of the most complex challenges of identifying disease target. And the keys which will unlock therapies to treat and hopefully cure diseases in fact in the last 15 years, our scientists at Argenta and BioFocus have identified and delivered 60 drug candidates to client. This is a record which few biopharmaceutical companies can claim and of which we are very proud. Establishments of our early discovery franchise had completely changed the dialogue with our client because we work so closely with them we have ongoing discussions with most of our large biopharmaceutical client. However, these discussions have taken on added dimension as we talk about new working models to support the drug research effort. In 2015, we believe we will add new strategic relationships and expand existing life as clients take advantage of our seamless early stage research portfolio. Integration of our early discovery acquisitions as proceeded on plan and all of the acquisitions are performing very well either in line with or ahead of plan. We are actively evaluating additional acquisitions to build our early discovery franchise as well as to add other capabilities which will enable us to enhance the support we can provide to our client. I'd like to provide you the details on the fourth quarter segment performance beginning with the RMS segment. Revenue was $117.7 million approximately flat in constant currency as higher revenue from product sales was offset by lower services revenue. We were very pleased to see sales of research models in North America increased significantly. This resulted in part from sales of NCI model which are now recorded in product sales instead of services due to the termination of the NCI contract last fall. We have successfully executed our plan to convert researches to purchasing their models directly from that. In addition to the NCI sales, we also saw increased demand for inbred research model. We believe the greater demand for Inbred which persisted for most of 2014 has been driven primarily by a shift to these models for use in oncology research. Demand continued to improve in North America throughout the year which we believe indicates that the effects of consolidation of the biopharmaceutical industry are moderating in North America. We also had strong revenue growth in China although revenue in Europe and Japan continued to be soft, consistent with our experience in 2014. We expect similar trends in 2015 in all geographic areas and also expect to realize price increase of 2% to 3%. As expected, revenue for research model services declined in the fourth quarter. This resulted from the loss of the NCI contract and a significant reduction by one client of a number of GEMS colonies that we maintained. When we noted the GEMS reduction in the third quarter, we commented that this was the result of the normal assessment of the value of specific models by this client and was not indicative of any shift away from genetically engineered model or from our GEMS business. We continue to believe that the research model services businesses will benefit as global biopharmaceutical companies increase their use of outsourcing at the earliest stages of discovery and mid-tier biotechnology companies utilize better funding to invest in their pipeline. In the fourth quarter, the RMS operating margin increased by 30 basis points to 23.2%. The improvement was due primarily to the benefits of our efficiency initiatives partially offset by lower margins for the services business. Our efficiency initiatives particularly the facility rationalizations in California and Michigan generated a significant benefit in the fourth quarter. We expect an additional benefit in 2015 from our two facility consolidations in Japan [ph]. We are continuing to identify opportunity to streamline our RMS operations and we maintain our belief that annual RMS operating margin high 20% range is achievable. The manufacturing support segment finished a strong year with revenue of $62.3 million which represented a growth rate of 14.3% in constant currency. The EMD business was a primary driver of the increase again reporting growth close to 20% in constant currency. The PTS franchise is continuing to drive the EMD business as a result of our continuous product innovation. Each new PTS model is enabling us to target additional market opportunities whether as a result of faster processing like the Nexus or improved connectivity like the Next Gen. Because of these capabilities we are converting clients to use our traditional LAL testing methods to the PTS, and taking market share as new clients make the change from other providers. We introduced our latest innovative product, the PTS-Micro in late October. The PTS-Micro is a rapid test for bacterial contamination or bioburden; unlike the PTS is an important advance of a current testing technologies, because it delivers significantly faster results and traditional microbial testing methods. Our introduction of the PTS-Micro positions us as the only provider of real-time quality control monitoring products and services for pharmaceutical manufacturing, who can offer a combination of FDA-licensed rapid endotoxin testing, rapid bioburden testing and microbial identification, utilizing Accugenix's extensive bacteria library. We believe this is a clear distraction between Charles River and other competitors. We have received numerous indications of client interest in PTS-Micro. But as with the case, with the PTS when we introduced it, we expect sales of the PTS-Micro to ramp slowly over the next few years as we work with our key clients to solve their unmet needs for more rapid detection of their bacterial contamination. We believe that our ability to provide a total microbial test solution to our client will be a key driver of our goal for the EMD business that continue to deliver at least low double-digit organic revenue growth with the foreseeable future. Although our Biologics business was not a major driver of fourth quarter revenue, it did delivered double-digit revenue growth for the full year. We believe that our investments in enhancing our service offering, improving our facility and restructuring our sales effort have enabled us to achieve our goals to become the premier provider of these services. We are exceptionally pleased to have accomplished this goal at a time when biologic represents increasing percentage of drug and development and biotechnology companies are enjoying robust funding. We will continue to invest in the business in order to capitalize on the growth opportunities available in the current market. The manufacturing segment's fourth quarter operating margin was 35%, a gain of 290 basis points year-over-year. The improvement was due to all three segment businesses EMD, Biologics and AVN. The margin benefited from leverage from higher revenue as well as improved efficiency. Although we were very pleased with these results, we expect that our stated target of the margin in the low 30% range with a more sustainable level. DSA revenue was $149.6 million, a 36.9% increase in constant currency. The Early Discovery business contributed 24.3% of fourth quarter growth, significantly ahead of our expectations. As I mentioned, the integration is progressing extremely well and we have continued to make progress on our outreach, the heads of R&D and other decision makers at the leading biopharmaceutical companies as well as many of the larger mid-tier companies. In the fourth quarter, the DSA operating margin improved by 260 basis points to 19.4%. The increase was due to both discovery and safety assessment businesses as a result of leverage from higher revenue and a benefit from foreign exchange. In the safety assessment business, the improvement was also due to mix of services which included a greater proportion of specialty toxicology. As expected Early Discovery margin improved in the fourth quarter and in safety assessment, we were very pleased that we achieved our goal of a 20% operating margin. I'll remind you that the margins for both businesses and the DSA segment as a whole vary from quarter-to-quarter based on a number of factors, so margin improvement may not be linear however we do expect annual improvement and we'll continue our efforts to achieve a 20% margin for the segment as a whole. The safety assessment business recorded a low double-digit revenue increase over the fourth quarter of 2013 and a 3.5% sequential increase from the third quarter. We were exceptionally pleased with this performance which resulted from a combination of improved client demand especially from the mid-tier as well as our intense focus on scientific expertise of exceptional execution and outstanding client service. We believe these last three factors are critical to our client’s decision to choose Charles River as their outsourcing partner. This is true for our global client when they make the decision to reduce in-house infrastructure and for our mid-tier clients who require a partner to provide the capabilities, which they do not have internally. As we work with our clients on the same side of the table, they gain confidence in our ability to provide a superior level of scientific expertise. We also recognize that we are committed to supporting the requirements as efficiently and cost effectively as possible. As a result of all of these factors, backlog has continued to build steadily and we are nearing optimal capacity utilization. We are evaluating our global network of facilities to determine the best methods of capacity expansion in 2015. As you know we have opened small numbers of study to accommodate the increasing demand for our safety assessment services with the goal to fill these rooms quickly and with minimal impact on the operating margin. We will continue with this approach and we are seriously evaluating the option to reopen our Shrewsbury Massachusetts facility. Located only one hour drive from Cambridge and Boston arguably are the hub of the global biopharmaceutical industry to believe the facility is ideally situated to support the improving demand for our services from large pharma and emerging biotech companies as well as academic research institutions which are benefiting from funding by global biopharmaceutical company. We have received considerable client indication of interest and believe this is the right environment in which to reopen the facility however we are proceeding prudently. We will reopen, when we reopen which will take at least a year. We expect to open a portion of the facility and offer only non-GLP services. Validation and staffing for GLP services will follow at a later date depending on demand. We are very enthusiastic that having Shrewsbury back online will give us the capacity we require in order to accommodate demand and continue to grow. The primary reason we believe the timing is right for Shrewsbury is the success of our targeted sales strategy of about three client segment. Global key accounts, mid-tier biotech and academic institutions. We have continued to take market share in each of these segments. As the breadth of our portfolio our scientific expertise and our best in class client support resonated with clients. Sales to global key accounts continued to be stable despite the consolidation in Europe and Japan and the ongoing changes at other global biopharmaceutical companies as they realign their early-stage drug research processing. In 2014, we continued to initiate new and expand existing strategic relationships with our clients. Although sales too few of the existing partners declined year-over-year, revenue from strategic relationships as the percent of total revenue increased to the high 20% range in 2014. Sales to academic clients were also stable as we offset softer sales due to funding uncertainty with expanded relationships in market share gain. Our mid-tier clients with the primary drivers of revenue growth in the fourth quarter and for the year in total, excluding Argenta and BioFocus acquisition. Sales to mid-tier increased 11% for the quarter and 13% for the full year. Total sales to these clients first exceeded sales to our global key accounts in 2013 and that was also true in 2014. The mid-tier clients are benefiting from robust funding both from the capital markets and from global biopharma and are investing heavily in the drug pipeline. As you know the biotech model has always required outsourcing. Since the majority of funding has been directed at drug discovery rather than building infrastructure. We have built long-term relationships with many of these biotechs and executing our plan to extend our existing relationships and add new ones with the broader group of these company. Our investment in limited venture capital partnership is one of the strategies we are employing to reach emerging biotech companies and has worked very well to-date. Through these partnerships we have accessed to a significant number of virtual biotech as well as to the scientific acumen which is resident in the venture capital community. Strategies I have discussed with you overtime. Portfolio expansion, sales targeting, scientific expertise, investment in personnel and efficiency initiative are key to our ability to provide a compelling value proposition for our client for early stage drug research effort. We are pursuing all of these strategy in order to maintain and enhance our position as the leading early stage research CRO. This is especially important now at a time when structural changes are occurring in the industry. We believe these changes have poured us the unique opportunity to continue to gain market share and we intent to capitalize on the opportunity by leveraging the investments we have made and new ones we intend to make. While we do not hue any single strategy as more important than the other. We believe that continuing to broaden our early stage portfolio will definitely increase our relevance to our clients. The addition of our Early Discovery capability is an excellent example which has served to reinforce the point for us. We intend to continue to identify and acquire businesses which will enhance the role we can play in supporting our clients early stage drug research processes by providing critical capabilities which they do not have in-house for which enable them to eliminate the internal investment. We believe that our global biopharma mid-tier biotech and academic clients are searching for the right partners to support them by taking on a broader role within their organization then Charles River intend 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 would like Tom Ackerman to give you additional details on our fourth quarter results.

Thank you, Jim, and good morning. First, let me remind you that I will speak primarily to non-GAAP results which exclude acquisition related amortization, charges related primarily to our global efficiency initiatives and certain other items. This morning, I will focus my discussion on our 2015 financial guidance. In 2015, we expect constant currency revenue growth of 6% to 7.5%. As you know foreign exchange rates have become increasingly unfavorable over the last six months. Based on current rates we expect that foreign exchange will reduce reported sales by approximately 5% in 2015 which is more than double the impact that we provide in October. This translates into reported revenue growth of 1% to 2.5% in 2015. I would like to note that the analyst consensus revenue estimates does not fully reflect the FX impact at current rates. We have updated our revenue exposure by currency for 2014 and provided this information in the appendix two of our slide presentation. On a constant currency basis, we expect 2015 revenue growth to be driven by the DSA and manufacturing segments with growth rates of low double-digit and high single-digit respectively. RMS revenues expected to be relatively flat. By segment, we expect FX to have a greater impact on the revenue growth rates for the RMS and manufacturing segments and a slightly smaller impact on the DSA segment. Our 2015 EPS guidance of 355 to 365 reflects higher revenues and improved operating income to which our efficiency initiatives are also contributing. We expect to generate 75 basis points to 100 basis points of operating margin improvement in 2015 from an operating margin of 17.6% in 2014. We expect margin improvement in each segment particularly the DSA and RMS segment. The RMS improvement is due to the benefit of our global productivity and efficiency initiatives and the DSA improvement is due both leverage from higher sales and efficiencies. The DSA operating margin is also expected to benefit from foreign exchange by approximately 100 basis points to 2015 which is similar to the benefit in 2014. You may recall that this is primarily the results of our FX exposure in Canada we implies more than half of our U.S. dollars to incur more of our cost in Canadian dollars. We expect only a small improvement in the manufacturing segment margin in 2015. While we expect to gain leverage from higher sales and operating efficiencies. We also intend to continue to invest in new products and to support growth. Therefore we believe a low 30% margin is an appropriate target for this segment. We continue to make progress on our productivity and efficiency initiatives and plan to implement new projects. The actions that we have taken to consolidate our research model production capabilities in North America and Europe previously and in Japan in 2015 are significant drivers of the anticipated RMS operating margin improvement in 2015. We're also implementing initiative to enhance our organizational effect in this and client interface with projects ranging from further consolidation of our global procurement activities for the rollout of automation and real-time client monitoring software in our labs. The cumulative impact of these initiatives generated incremental savings of more than $35 million in 2014 and is expected to generate a similar amount of savings in 2015. The savings for both 2014 and 2015 are above our prior outlook because we were able to generate a greater number of new projects than anticipated and drive larger savings on planned initiatives. When looking at our 2015 non-GAAP EPS growth, there are two significant factors which should be taken into consideration. First, at current rates FX is reducing EPS guidance by approximately $0.12. Excluding this FX impact we would expect our 2015 non-GAAP EPS range to be $3.67 to $3.77. The other factor that affects the 2015 EPS growth rate is the limited partnership investment gains which is reported in other income. In 2014, we generated investment gains of $0.12 per share. This creates a net $0.09 headwind in 2015 because we have estimated approximately $0.03 of investment gains in our guidance. Historically we have not forecast these investment gains since they are largely based on market return. In 2015, we believe it is proven to forecast some level of return on the capital invested in these life science venture capital funds but it should be noted that they can also be volatility in these types of investments. Normalizing for FX and the investment gains in 2014 and 2015 we would be position to generate EPS growth of 9% to 12% in 2015 compared to the 2.5% to 5.5% growth using our 2015 guidance range of $3.55 to $3.65. Unallocated corporate cost and non-operating items such as interest, taxes and the share count are not expected to have a significant impact on the year-over-year EPS comparison. I will now discuss these items in further detail. For 2015, we expect unallocated corporate costs to be approximately 6.5% of revenue which is essentially in line with the 2014 level of 6.6% of revenue. Unallocated corporate cost in 2014 totaled $85.7 million which was slightly higher than expected due primarily to higher compensation cost. The company performed very well in 2014 which led to higher performance based bonus accruals as well as higher stock compensation expense related to the performance stock units or PSUs that we begin to issue in 2013. Cost associated with the PSUs increased in 2014 due both to our financial performance and an increase in the number of managers that have been included in the program. Net interest expense is expected to moderately higher in 2015 in a range of $12 million to $14 million compared to $10.8 million in 2014. This outlook is based on our assumption that LIBOR rates will begin to edge higher later in 2015. It also reflects the full year of borrowings for the Argenta, BioFocus and ChanTest acquisitions offset by debt repayment during the year. The 2015 non-GAAP tax rate is expected to be in the range of 27% to 28% which is similar to the 2014 rate of 27.4%. We anniversary the UK tax law change in 2014 that will not meaningfully impact the year-over-year comparisons going forward. I will now discuss the progress that we have made with regard to our cash flow generation as well as our capital priorities for 2015. In 2014, we generated free cash flow of $195.2 million, a significant increase over $169.9 million in 2013. We also exceeded our prior outlook of $180 million to $185 million due primarily to a significant improvement in DSOs as well as the strong fourth quarter financial performance. DSOs declined to 52 days at year end well below the 59 days at the end of the third quarter and 56 days at the end of 2013. The improvement was driven primarily by the outstanding efforts of our collections team which led to reduction in DSOs for larger strategic accounts. The benefit from lower DSOs was partially offset by the expected $18 million increase and capital expenditures to $56.9 million in 2014. 2015 we expect free cash flow to be in the range of $195 million to $205 million as continued improvement in operating cash flow is partially offset by higher CapEx. We expect CapEx of up to $70 million in 2015 with the increase primarily result of additional projects to drive revenue growth. As Jim noted past utilization, our safety assessment business is nearing with optimal levels so we have earmarked the larger capital budget in 2015 for capital expansion. We continue to evaluate the appropriate manner and timing to add capacity contemplating both client needs and minimizing the margin impact. In addition to investing in our infrastructure to support growth, we also intend to continue to invest in strategic acquisitions, stock repurchases and debt repayment in 2015, our top capital priority remains M&A. As Jim noted we continue to rigorously evaluate acquisition candidates and intend to pursue additional M&A opportunities in 2015. Timing of acquisitions is always difficult to predict, it is our strategy to continue to supplement our organic growth with disciplined strategic acquisitions that are accretive to earnings. I will remind you that we regularly evaluate our capital priorities over the course of the year and often may invest more or less in certain areas depending on a number of factors including the availability and timing of potential acquisition. Our current goal for stock repurchases in 2015 is to offset dilution from option exercises and equity grants but we expect our average share count to remain relatively flat. 2014 we repurchased $2.1 million shares for $110.6 million in December our Board increased the stock repurchase authorization by $150 million to an aggregate amount of $1.15 billion and we had $178.5 million available on the current authorization at year end. We also expect to pay debt in 2015 in line with slightly ahead of scheduled installments. Our leverage ratio remains low at just under 2.5 times and the interest rate environment continues to be favorable. In the first quarter of 2015, we expect revenue to be slightly below the fourth quarter level due primarily to a more pronounced impact from foreign exchange. At current rate FX is expected to reduce year-over-year revenue growth by approximately 6% in the first quarter. However first quarter revenue was not expected to decline nearly this much because of sequential increases in RMS and manufacturing support revenue [ph]. In the DSA segment, we have forecast seasonal softness. You may recall that there are typically fewer study and project starts during the holidays and into January which leads to a slower start to the year for the DSA segment. The combination of these factors is expected to result in the first quarter non-GAAP EPS that is similar to the fourth quarter level. The slight sequential revenue decline is expected to be offset by modest margin improvement particularly in the RMS segment following the normal seasonality in the fourth quarter. To conclude I would like to point out a few highlights of our 2014 performance. We achieved revenue growth of 11%. Non-GAAP EPS of $3.46 or 18% EPS growth over 2013 and free cash flow of $195.2 million or $4.10 per share. Progress that we made in 2014 was a result of the success of our targeted sales strategies, our continued focus on driving productivity and efficiency throughout our global organization and the critical upstream expansion of our portfolio that truly differentiates Charles River as the only full service early stage CRO. We believe this momentum positions us well to achieve our 2015 financial targets and to continue to deliver increasingly assurance to our shareholders. Thank you.

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

Thank you. [Operator Instructions]. We’ll go to the line of Dave Windley with Jefferies. Please go ahead.

Hi, thanks for taking my question. Congratulations on the quarter first of all. Question is in DSA, you talked in the, for the second half of ’14 talked about an expectation of the same mid-single-digit growth and the third quarter was lower than that and the fourth quarter was higher. Could you talk about maybe visibility, how far are you’re booking studies, how much visibility do you have, how, but for the seasonal softness that Tom just talked about, how steady do you expect that business to be going forward?

So, I would remind you that this is not a linear business and we have variability from quarter-to-quarter and I think that will always persist. We tend to look at it on an annual basis and it depends when the study start and the mix between specialty and general talks and so we were very pleased with the, very, very pleased with the margin, obviously very pleased with the significant increase in the fourth quarter both sequentially and year-over-year. Visibility continues to get better and we indicated that backlog is better. We get a weekly report on capacity utilization which takes us out four, five months. So we have a pretty good view and we actually see changes week-to-week, we have a pretty good view of customers' demand serve on a facility-by-facility basis and total infrastructure real-time, all the time and kind of rolling a little more than a quarter at a time. We’re selling up rapidly and nicely and there is no question that there is greater demand for the services both relative to the competitive scenario relative to more drugs from the pipeline, more money in the biotech and more outsourcing by big pharma. So, and actually kind of guide into next year pretty much views that out. But I would try to be less impacted by a quarterly variability, which will probably still have and take a look at it most from a year-over-year events [ph].

Thanks Jim. If I could sneak in a follow-up real quick on Shrewsbury I just want to be clear, you said you’re considering opening. And so that suggest to me that it still a consideration and some of the other, your other comments kind of suggest that it's already made decision. Could you be a little bit more clear about at what point are you going to start deploying CapEx into the building to get it ready?

Okay. So, let’s be very clear. We have significant interest from local Cambridge and Boston biotech clients about when you guys can open Shrewsbury, huge bolus of business we have the closest CRO to that. So we're taking that very seriously, obviously that’s happening at a time when our spaces filling rapidly and we have said previously and again today, if we do nothing which we won’t, but if we do nothing our space will be full by the end of the year. So, we’re going to add small tranches of space throughout the year at multiple sites, to accommodate demand with no impact on operating margin that we hope that continues to increase, we expected to increase. We have a multi-faceted and capability team looking at Shrewsbury. And as we said, it will take a while to get it open at least a year. We’re quite, I shouldn’t say quite -- our initial indications are that when we open it, we will open a small portion of it for non-GLP services only. So that does two things that require trivial capital investment that it gets the facility open without this huge infrastructure needs and once it’s open obviously it’s more real to our client to sort of serial conversation we had with them about we opened that someday becomes [indiscernible] open. And then we will assess the demand for GLP-tox services, which we believe we’ll be there and be intense but we won’t make and move that will be a second step move, we won't make that move until the demand is straight. I mean our goal would be to open that non-GLP services assuming the [indiscernible] changes in the year or slightly more and it probably will take a couple of years after that to hire staff put back some of the equipment that we borrowed from that site to do other things, validate the equipment get the staff trained. So we're a while away from GLP-tox which I think is fine that's likely to help enhance the demand.

Great, thank you.

Thank you. We'll go next to the line of Eric Coldwell with Robert W. Baird. Please go ahead.

Thank you very much. I actually have the same question as Dave -- it wasn’t really clear but I think that helps. My other topic was North American research models growth excluding the NCI impact and perhaps also excluding pricing could you give us a sense of what your norm growth rate was in the fourth quarter and I guess what I am really trying to get to a sense on actual volumes of activity as opposed to the revenue impact so kind of an organic volumes.

Number that we have broken out so I think we want to stay away from that it hard to tease but if you tease out the NCI stuff and we have some price in there, we have some shared gains there from academic as we indicated the cost we definitely have some inbred increase in multiple inbred models and immuno compromised models. We would expect that track to continue in 2015 so we continue to be pretty optimistic about that business we produced infrastructure with driving efficiency because of that and generally to make it less and less manual business it's going to get 2% to 3% of price again so you should consider that business is modestly increasing with improvement in operating margin.

Okay, helpful and then just a very technical question on FX granted, the rates are being moving so quickly and so broadly that you know it is fair to say that consensus were fully updated but understandable. In October you talked about a 2% revenue headwind $0.05 of earnings, in January you said 4% of revenue headwind you did not give us an update on the earnings impact but then today 5% with $0.12 so the ratio of revenue impact to earnings impact has remain constant. I am just curious why you didn’t give us the earnings impact in January number one and number two if you can tell us specifically and I may have missed this specifically what day you are basing rates on so we'll know how to think about this given the vast volatility in the rates that we are seeing today.

Yeah, the 5% as indicated today, last night and today essentially Eric really is a current rate where we have done our plan we have actually it's almost crazy that we have monitored almost daily to make sure that when we put out our guidance that we could still say 5% it wasn’t 4.2 or 5.8 and we have to move that so we have monitor that very closely. Each of the rates are slightly different but when we calculate the delta versus last year, all the rates have moved slightly we are still pretty much at the 5% so it's really to cognate. Going back to the January comment I think our view on the EPS number was we kind of sort of put that out there. We felt it was a little easier to give you guys an update on the revenue and given we were in quiet period, I didn’t really want to talk about EPS too much, we did debate that a little bit and I think we just were a little bit more cautious on that and since it really hadn't moved in any kind of meaningful way really just didn't want to get into that at that point in time.

Tom that's a very fair answer. I guess I was kind of thinking perhaps moving the Canadian dollar given your currency mismatch there might have had frankly a more favorable impact and could have offset some of the ratio on revenue to earnings but obviously in total scheme of things that wasn’t the case but helpful answers and I'll let others jump in. Thanks so much.

Thank you, Eric.

We'll go next to the line of John Kreger with William Blair. Please go ahead.

Hi, thanks very much. Jim if you just think about your new awards particularly in DSA in the last three months or so. Can you just talk about what sort of pricing dynamics you saw that perhaps comparing it to awards a year ago. Are you starting to see any uplift in spot market pricing?

We continue to test price consistently daily. We are getting some price it's hard to tell whether it's on a spot price basis any more significant to last year. I would say it's at least the same. We obviously have lots of large clients with lots of large strategic deals many of which lock in the price provide enterprise agreements and benefit for volume. So we obviously don't see price increases there except we do see and can see the benefit of mix with specialty works. I would say the pricing environment deals slightly better kind of guardedly optimistic. It's still a factor about but there is no question that you can feel everybody feeling you can feel all of our -- feeling and I think there is a sense of clients that they want to slot their studies in as quickly as possible and they're willing to make some accommodation of price to do that. We continue not to be the lowest price point most of the time occasionally but not most of the time so client clearly willing to pay for service and science and financial solidity and reputation. So again it's been such a long process it's -- I don't want to predict too much about pricing given that we're still in early February and also the first quarter is kind of an awkward quarter to figure out what demand portion is going to be given that clients still sorting out what studies to do without do internally or what molecules such -- I think we have a much better of sense at the end of the quarter and for sure a very strong sense in second quarters but we continue to fill our space and accomplish as well.

Great thanks. And quick follow up, you mentioned earlier on the call about strategic relationship opportunities. Can you just be a little bit more specific are those, do you see those particularly in one or two key areas or are they more sort of broader bundled relationships that encompass multiple segments.

So we're having a lot of those conversations as we indicated in our remarks. We've reached out to the heads of R&D of all the drug companies of big pharma and biotech when we did Argenta and BioFocus and we have been meeting with all of them that I just met with one two nights ago. And I would say it's the converse -- so yeah we're having a lot of strategic conversations going on now expand current deals and sign new one. I would say the conversation typically starts either with an interest on their part to outsource safety assessment or tox or some kinds of an interest in deterring more about discovery and winds out towards more of that. Typically we end up talking about both of those things and then if their client already does the fair amount with us or it's considering it in most cases particularly with Big Pharma we end up with an enterprise deals that cuts across virtually all that we do client that I just met with that's something across all of our products lines with us. I think that's going to be more usual, they like many of our clients wants smaller number of partners, they want a better value proposition, they want to be important to us, so great turnaround time. So we think these will continue we're continuing to meet with as I said new potential partners and since we don't have any competitor of this portfolio even resemble to ours, we're in a very strong competitive position. And you can sense when clients are going to be open to a conversation about more aggressive outsourcing and variably they kind of come to that conclusion and determination that they're more interested in that discussing with us. So conversations are going really well.

Great, thank you.

Thank you. We'll go next to the line of Andy Draper with SunTrust. Please go ahead.

Thanks very much and congratulations on nice 2014 and good outlook for ’15. My question I think is for Tom just trying to understand the accounting around Shrewsbury. Can you remind me did you back when you shuttered it, was there an asset write-down and if so if you bring that back on how does that impact D&A obviously there will be some CapEx coming on but I'm just trying to understand do you have to bring that back and then fully start amortizing the D&A or is that basically a wash and that once you bring it back on there is a lower level of D&A going forward? Thanks.

Yes, the answer is what we’ve written off previously is written off and wouldn’t be so we capitalize so to speak so the D&A going forward one of the positive aspects of that is that the D&A going forward would be based on today’s capitalized value which would be lower than it has been historically, certainly much lower than it was when we originally capitalized it.

Great, thanks. I’ll stick with that one question again. Congrats.

Thank you.

Thank you. We’ll go next to line of Tycho Peterson with JP Morgan.

Thanks. Just a question on the manufacturing can you just talk about maybe Tom where you expect the operating margins or why you’re expecting to go down from kind of the current mid-30s levels and where do you think they kind of bottom out?

A little bit of what we talked about such as continued reinvestment in the business so in EMD for instance we obviously have good products coming out, it takes an R&D budget we’re increasing our focus on R&D and whatnot and what we said is we think it will stand below 30 so not really a lot different where it is for the full year, our AVN margin and business continues to be strong, albeit a lower than the EMD and the same for biologics so I think it’s obviously a very good margin so we’ll continue to have good margins above 30% but we do want to continue invest in the business and grow it out withstanding our global footprint in EMD as an example with locations and financially to drive the top line and really those are the primary reasons.

Okay and then follow up as we think about M&A Jim can you talk to maybe some of the early revenues synergies you’ve seen with ChanTest around the BioFocus business and then more broadly speaking obviously if there is a lot of targets out there I think even if we go back to analyst day you talked about 4 to 5 dozen targets you’ve been looking at. Maybe just talk to whether the quality is up to par and whether you think you might be more active this year obviously you’re going to continue to look in a lot of stuff but how do you think about the opportunities now?

So ChanTest and BioFocus and Argenta really open up a whole new world for us in terms of dialogue with clients and being more important to them and as we indicated in our remarks Argenta and BioFocus have discovered 60 compounds over the last 15 years which is a pretty extraordinary results so solving complex problem. And that’s really resonating with our clients so ChanTest did really well with Argenta and BioFocus looking at the IN channels we already did some IN channel work with Argenta and BioFocus so this clearly makes us the world leader and it’s a target class that lots of clients are looking at and that’s a very important safety aspect. So we feel really good about the strategy, the growth rate, the importance of client, increasingly improve the operating margin and the doors that it is opening. We have a very robust pipeline of M&A targets not all but most of them I would say are in the discovery space plus multiple therapeutic areas, some in vivo, some in vitro, multiple geographies, no giant companies but a couple of meaningful scale most of it modest smaller and so we’re engaged in multiple conversations right now whether we get traction or not whether we are successful in both due diligence and achieving the right price points we don’t know what the competitive scenario will be for all of these deals but it is a clear it is the principle strategic focus and preferred use of capital to do strategic high growth accretive deals where as I said we’re in the midst of the conversations right now we would be I guess I’ll just say we would be disappointed if we’re not able to do some meaningful R&D in 2015 although it's an impossible thing to predict so, it's high on -- we are very much focused on and there is no question in discovery in particular having a lot of these client conversations that the scale and diversity in-depth portfolio is really critical and some of this work out and the clients are getting them or comfortable with it and so as we continue to expand this portfolio we're quite confident that the work will follow.

And then lastly just on the competitive front, obviously one of your competitors being acquired in this case by Reference Lab. I mean have you been able to kind of approach some of their customers and talk to maybe what you see is the opportunity to pick up some share through to that process.

Yeah, I mean it's already providing opportunity and in some instances we don’t even have to approach clients, they're approaching us. I think movement of competitors to new ownership structures can be concerning to some clients. I do think it's going to continue to provide opportunities and our perception and prediction is that we will see other competitors have probably come to market in the next 12 months this seems to be the cycle that we're in right now I think given our stable and expanding portfolio of that bodes well for us to engage with additional clients into this year.

Okay, thank you.

Sure.

Thank you. We'll go next to the line of Jeff Bailin with Credit Suisse. Please go ahead.

Good morning. Thanks for taking the question. Looking at the acquisitions in the Early Discovery space I think you mentioned those deals were on or had a plan and the revenue contribution of fourth quarter was ahead of expectations. Could you provide us any sense where the underlying organic growth rates are trending in those businesses and maybe where you are seeing a greatest demand from either a service type or customer segment perspective?

Sure. We are seeing as a group A, B and C as we call them Argenta, BioFocus, and ChanTest, are going to continue to delivery at least low-double-digit organic growth for us going forward it's better obviously but we are comfortable with that. We had higher revenues for the second year in a row to mid-tier in the biotech so obviously it's a very strong sector for us grew 13% for the year flushed with cash, it's going to continue to be the path to our door for sure but also we have engaged very well with the big drug coming so we would expect both of those clients segments to be strong drivers of growth in Discovery going forward and we think it will help accelerate our top-line for the company as a whole.

Great, thanks. I'll leave at that.

Thank you. We'll go next to line of Ricky Goldwasser with Morgan Stanley.

Yeah, hi, good morning and congratulations on a good year and a good outlook for ’15. First of all just a one clarification question, you said that you expected to see more of your competitors coming to market this year, so, can you just kind of like clarify the comment or do you expect to see more consolidation in the preclinical space it just wasn’t clear as to what you meant in that comment?

We do it's just base by an input that we have from conversations that others have had with those companies given their ownership structure and given the fact that consolidation peers to be predictable in our business so we've had our largest competitor in the research model business trade last year our largest competitor in the preclinical business trading at the moment. There are additional players in the preclinical space that maybe implied and in some of our other businesses and so like many industries or many service providing businesses, there is strength of scale, there is an expectations from clients to build scale and businesses that are key or VC owned by definition inevitably for sale so I think we're commenting as much on the current ownership structure.

Okay. And from your perspective do you feel that contract was it sounds like what the assets that you have can you just gain share by just kind of like standing kind of like I want to say on the sideline right but letting that industry dynamics involve and gain share or do you feel that you have to build on the assets that you currently have under preclinical tox side.

If I understand that question. As we said earlier our space is selling we have Shrewsbury which we're studying when we could open that. We have a space in Reno that we want to sell and we have a space both in Shrewsbury and Reno that we never built out that just shelf space. And we have the small pockets of space in our other in the few other facilities that need to be full. So absolutely our intention is full eventually fully build out and fully utilize all of our facilities. We also built a modular type facility in Canada that can be added onto easily and at a reasonable price point. So yeah we like our infrastructure but we certainly want to keep utilizing at fully to meet client needs.

Okay. And then one last question and obviously a mid-tier growth clients I think you highlighted like growing it in mid-double digit which is pretty impressive growth rate. Do you think that this is again a reflection of few gaining share in your specific sales initiatives, or are you seeing some structural shift in the marketplace either that we're now kind of like moving back to kind of like more preclinical or early focused or on the outsourcing side.

Yeah I mean it's a manifestation of the fact that except for very few very large companies. Most of mid-tier even the kind of second tier companies so those will be public companies with $3 billion to $5 billion market cap drug in the market and sales and earnings. They do very little of the work internally they do really, really early discovery work internally for sure. But most of the developments of externalized. I can't see any reason that's going to change we're working with also a large number of virtual companies and first, second, third tier companies that have an idea or one drug or limited IP and it's all about getting the proof of concept. So given the bolus of money that have always for the last four or five years come into biotech pharma and given the enormous search of capital is gone in there for the capital market. We would expect to see mid-tier continue with the very growth rate at a very healthy cliff and that they would continue to be aggressive and savvy utilizes about both services.

Great, thank you.

Sure.

We'll go next to the line of Doug Chenko [ph] with Cowen. Please go ahead.

Hi there. This is Adam on for Doug. Thanks for taking my questions. My first question was on academic customers. You've been very successful in providing array of services especially DSA outreach for your pharma and biotech clients, but how successful have you been implementing more comprehensive solutions for the academic community. Have you already planned to make any change that you can call out and how you're interfacing with them to provide more integrated solution?

So we've always have been a supplier to the academic marketplace by research model business. And I would say over the last half -- years we have grown our share in the academic sector which is now mid-20s you see mid-teens. We've done that by having more rational price points for them. Increasingly academic research centers are becoming drug discovery engine so they have their own molecules they outsource that work. We've been engaging with them more closely to make sure they're aware of our discovery and safety assessment portfolio and to try to do larger deals with them. We are working hard to map those big academic institutions the way we originally map big pharma to have multiple relationships talking about personal relationships with the leadership of the business and research leadership at those institution they have a lot of money they do very good research and we are optimistic that overtime we will engage with them more robustly they are more complex organization to work is because of the very nature, funding sources and historically they haven’t been very aggressive users of the social services but that should continue. So we are spending a lot more time organizing ourselves in a way we can take greater advantage in the academic marketplace.

Great. And my second question was on the manufacturing segment, more specifically your investment in the biologics business, seems that biologic are inherently more complex and variable than something like the small molecular inhibitor so will the development improvements of this manufacturing capability be an ongoing process for you or do you see any challenges going forward? And is there enough differentiation in quality among outsourcing companies that could really drive pricing?

So we have a very large international capability we have been in this business for 20 years, we are certainly one of the leaders if not the leader at least half the drugs being discovered right now are large molecules so it’s really important business to be in and we support all of these clients in other ways regarding this sort of testing for them before the drug is going to the clinic or get into the market seems like it has always been like a very logical critical service for us to provide. So yeah we think that our science is that – many of our competitors and better than some we think this is a service this is a technical capability that many clients don’t have and definitely do not want to spend the money to bring in house and given the great infusion of cash the biotech with this business ought to have the wind that is back going forward we’re really pleased with the improvement in profitability and top-line growth that we saw in 2014 and are optimistic we’ll continue to be able to grow it.

Great, thank you.

We'll go next to the line of Tim Evans with Wells Fargo.

Hi, thank you. Jim just to reflect on a big picture question here, the growth in the research models business seems to be a bit of a paradox if you're looking for 2% to 3% price increase next year I assume that’s net realized price than suggest that volumes are going to be down and this is happening despite very strong growth in safety assessment business and I guess it doesn’t feel like the secular trends in that RMS business in terms of volume growth are very good given that dynamic can you try to comment on why the two segments differ so much in the underlying trends?

So you have two factors going on right now, you have a continued reduction in demand from Europe and Japan very severe in 2014 and will be less severe but still a drag in 2015, Europe in particular is a pretty good size business. So the aggregate impact of those I would say is the biggest issue in driving down whereas we get some uptick in North America and we have huge uptick in China but that’s very small, still small business for us. The apparent disconnect is not that much of a disconnect I think the drug companies while more drugs were approved last year than many years before while pipelines are better there is still paired down of what they were historically and clients are very aggressive in making these go or no go decision which of course is a service that basically we are in and killing compounds earlier so while we kind of do business across all of our services products helping them make that determination the ultimate portfolios are smaller. Having said that outright res to [indiscernible] animal model has -- is no longer declining at periodically after certainly stable we’re obviously using a lot of those animals ourselves we are also selling a lot to our competitors so we’re getting a little bit of their business as well. And so we’re actually pleased with the directional trajectory of the animal business and while we didn't say because it's not 2015, there is a point to which the reduction and the infrastructure in Europe and Japan like it has been say it will slowdown and level off and we'll at least have stability in those markets or perhaps increase if nowhere else in pricing. So and we've always said that directionally this is not 15 this is beyond but directionally RMS that includes the service businesses will probably grow low to mid-single-digits with operating margins being sustainable.

Okay. And just a quick related follow-up so basically the headwinds in Europe and Japan are similar to those that you've seen in the US in past years just kind of on a delay.

Right. That's exactly right and they are all -- Europe and Japan are always slower than the US. Europe will come back a little bit faster and Japan probably right after that and we've seen that in other aspects of our business where we slowdown domestically there is a kind of a follow on effect with our rest of world businesses. We're pretty confident that things will slowdown level off here as well.

Thank you.

Thank you. And we have time for one more question and that will come from the line of Ross Milken with Evercore. Please go ahead.

Hey guys, this is Vijay in for Ross. Thanks for taking my question. One quick housekeeping just wanted to confirm that the guidance doesn't have any M&A baked in and second Jim just on sort of Shrewsbury right I know lot of people have asked the questions but going back to the sort 07 peak cycle I think that you guys had a backlog of over six months right so I am just trying to think of this go, no go decision on Shrewsbury particularly when it comes to the GLP side of things. Would that be sort of a trigger point you have six month plus backlog before you construed or make the final go decision of Shrewsbury? Thank you.

No M&A in the plan. It's hard to tell what will help as trigger it will be overall demand from the clients totally marketplace is totally different than it was in 2007. Biotechs on fire right now drugs are being approved. Huge amounts of money coming in there and we're the closest CRO so we'll be very cautious about it but we will have significant demand from multiple clients that we're confident we'll be there rationale price points be able to allow us to open that site.

Okay. Thank you for joining us this morning. We look forward to seeing many of you at the upcoming half dozen conference in February and March and this concludes the conference call. Thank you.