Ladies and gentlemen, thank you for standing by. Welcome to the Charles River Laboratories’ Fourth Quarter 2015 Earnings and 2016 Guidance Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to Susan Hardy, Corporate Vice President of Investor Relations. Please go ahead.

Thank you. Good morning and welcome to Charles River Laboratories’ fourth quarter 2015 earnings and 2016 guidance conference call and webcast. This morning, Jim Foster, Chairman, President and Chief Executive Officer and David Smith, Executive Vice President and Chief Financial Officer will comment on our fourth quarter results and provide guidance for 2016. Following the presentation, they will respond to questions. There is a slide presentation associated with today’s remarks, which is posted on the Investor Relations section of our website at ir.criver.com. A replay of this call will be available beginning at noon today and can be accessed by calling 800-475-6701. The international number is 320-365-3844. The access code, in either case, is 384261. The replay will be available through February 24. You may also access an archived version of the webcast on our Investor Relations website. I would like to remind you of our Safe Harbor. Any remarks that we may make about future expectations, plans and prospects for the company constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by any forward-looking statements as a result of various important factors, including but not limited to those discussed in our Annual Report on Form 10-K, which was filed on February 17, 2015 as well as other filings we make with the Securities and Exchange Commission. During this call, we will be primarily discussing results from continuing operations and non-GAAP financial measures. We believe that these non-GAAP financial measures help investors to gain a meaningful understanding of our core operating results and future prospects consistent with the manner in which management measures and forecasts the company’s performance. The non-GAAP financial measures are not meant to be considered superior to or a substitute for results of operations prepared in accordance with GAAP. In accordance with Regulation G, you can find the comparable GAAP measures and reconciliations to those GAAP measures on the Investor Relations section of our website through the Financial Information link. Jim, please go ahead.

Good morning. I am very pleased to say that 2015 was another exceptional year for Charles River. As was the case in 2014, our financial results demonstrated what we have worked very hard to achieve; strongest portfolio that we have ever had with the ability to support clients from target discovery through preclinical development; deep client relationships where we are a respected and trusted partner; a streamlined organization with the flexibility to respond to a changing industry and client requirements; and employees who are committed to providing exceptional service to our clients. We are extremely proud of the fact that we worked on 50% of the drugs approved by the FDA over the last 2 years, an accomplishment that few CROs can claim. We believe it’s a testament to the value our clients place on our contribution to their research efforts and we work everyday to enhance that value. Let me give you the highlights of our fourth quarter performance. We reported revenue of $353.9 million in the fourth quarter of 2015, 11.3% increase over the previous year in constant currency. Acquisitions contributed 3.4% to fourth quarter revenue growth and many of our businesses reported organic growth with the most significant contributions from Safety Assessment, Microbial Solutions, Biologics and Research Models. Sales to midsized biotechnology clients increased at a low double-digit rate and sales to global accounts also increased. The operating margin increased 410 basis points year-over-year to 20.7%. We were very pleased with the margin, which benefited both from higher revenue and efficiency initiatives. At 27.1%, the DSA segment reported the most significant margin improvement, although foreign exchange and the change in Quebec tax law contributed approximately 400 of the 770 basis point gain. David will provide more detail on that topic shortly. But even adjusted for these items,…

Okay, thank you, Jim and good morning. Before I begin, may I remind you that I will be speaking primarily to non-GAAP results from continuing operations, which exclude amortization and other acquisition-related charges, costs related primarily to our global efficiency initiatives and certain other items. This morning, I will focus my discussion on our 2016 financial guidance. We are pleased with our growth prospects for this year, which are highlighted by the potential for higher organic growth in 2016 and the planned addition of WIL Research to our portfolio. We expect the businesses that performed well in 2015 continue to do so and we believe that others will return to growth. In addition, we believe that WIL Research will enhance our ability to partner with clients and drive profitable growth and earnings accretion, both this year and over the longer term. To support these growth opportunities both today and in the future, we are investing in our processes and our people to advance our position as the leading early stage CRO. These investments under the factors, including the significant operating margin performance in the fourth quarter will compress on our margin expansion in 2016, but we are confident that we will be able to leverage our growth and enhanced infrastructure to drive greater margin expansion over the longer term. I will now discuss our 2016 guidance and these factors in more detail. Since our planned acquisition of WIL Research has not been completed, we are providing 2016 financial guidance both excluding and including the impact of WIL. I will begin by discussing our 2016 outlook, excluding WIL. For 2016, we expect reported revenue growth of 8% to 10% and non-GAAP earnings per share of $4.07 to $4.17. We expect foreign exchange to reduce revenue growth by approximately 1% in 2016…

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

[Operator Instructions] And our first question will go to Derik de Bruin with Bank of America. Please go ahead.

Hi, good morning. Congrats on the quarter. Hey, just one quick question. How long before do you – how long do you think it will take to get the WIL operating margin up to the Charles River corporate average?

I think the last time, good morning, Derik – last time we talked about that, we said it would take a couple of years to get it. The goal is to get it to 20. That’s been our goal. Of course, you know that we have surpassed 20 for the rest of the business. So, we are quite confident we have the operating chops and efficiency initiatives and understanding of best practices to be able to employ those benefits to the WIL organization as we bring them closer to Charles River. So, couple of years to get to about 20%.

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

Slightly.

Okay, thank you.

And we will go to the line of Ross Muken with Evercore ISI. Please go ahead.

Good morning. I’d appreciate all of the color. Obviously, you talked a lot about strengthen sort of the biotech pipeline. I think you have given us incremental color on sort of the portion of the book where you have sort of longer term duration contracts and then you talk to those that have sort of already raised a ton of capital. I mean, as you start to continue to look at your assumptions for at least the first half of the year, what are you monitoring to sort of get a sense there if there is going to be any behavioral changes so that’s on the downside risk perspective? And then on the upside, do you feel like share gain in the market given sort of the differentiated strategy is also sort of helping to offset that?

Look, we obviously spent a lot of time thinking about this, interfacing with our clients and just had a board conversation yesterday about this exact topic. So, it’s an appropriate and relevant one. I can just tell you this that our sales to these clients increased double-digits in the fourth quarter. They were up substantially for the year. Amount of capital accessed by these biotech companies from the capital markets was the largest in history. We have informal and formal relationships with venture capitalists who are continuing to raise large funds and fund small startup biotech companies de novo. Most of these are virtual companies. There is a whole host of biotech companies that are operating businesses that have drugs in the marketplace and have sales and profits and sit on their own bottom. And I guess, the most fundamentally important comment that we see as a company that really supports literally every pharma company and almost every biotech company throughout the world in some fashion is that pharma depends increasingly more on biotech to be the discovery engines yet we had a chart I think we showed when we announced the WIL deal that about 42% of drugs are now in licensed and that’s been increasing every year. So, biotech is not only here to stay, but it’s critical to the health of all of us and we believe that pharma will continue to fund them aggressively. We think that they have several years of cash still available and recent sort of pressure on stock prices doesn’t really seem to be relevant at all. And then of course as I guess the balance to that sales to global accounts, which is our euphemism for the big pharma companies increased nicely. We continued to expand strategic deals and have conversations about new ones. We also have intensified focus on accessing large academic medical centers who of course, our discovery engines in their own right and are looking for places to develop it. So we actually think of the client demand quotient is as strong as we have ever seen it. We think the innovation in immunotherapies particularly in immunooncology are really primary drivers of a lot of this growth in development. And we are living the fact that we are continuing to play an increasingly more important role for all of these clients, both large and small and both discovering but certainly developing these drugs and getting into market. So, we feel really good about the marketplace as we move into ‘16.

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

And maybe just to sort of build on that quickly, I mean obviously, you haven’t close the transaction yet, but I am certain you have heard feedback from the customer base, obviously they had a lot of respect for the scientific knowledge, etcetera, what are some of the things that maybe you hadn’t thought of at least maybe prior the acquisition, maybe there aren’t, but the comments that you heard back that were sort of surprisingly supportive or concepts that you sort of hadn’t thought about that were potential relative to the transaction?

We have to really – we have worked hard to answer this question, but we have to be a little bit careful because the deal hasn’t closed as you know. And we have – we are not engaging with WIL’s clients because they are not our clients at the current time. We have an understanding of who they are. We have some kind of euphemistic understanding of their initial reactions to the deal. To smaller client base, there has been some overlap, but there is surprisingly less overlap than we thought, which is quite positive. Look, I think the best way to respond to that is our attraction to this company was entirely based on its scientific reputation. And I think that’s why their clients gravitate towards them, because they do great science and they are responsive and they had a long lineage in history in being that way as we do. I think there are a lot of similarities in the company’s culture, both internally, our ability to attract and retain great scientists and do great work for our clients. So obviously, we feel very good about the combination. We feel very good about the expansion of geographic reach and additional services and it’s an organization that we have respected for an awfully long time. And all I can say to try to answer that question is we will do everything we can to continue to respect their client base and to service them in a way that they have grown, accustomed to being of serviced.

Great. Thanks Jim.

And we will go to the line of John Kreger with William Blair. Please go ahead.

Hi. Thanks very much. My question – I was just hoping you might be able to dig a little bit more into the discovery business and sort of the legacy Argenta, I know there is some significant cancellations earlier in the year that has caused the sort of the year-over-year growth to not be as good, but can you just dig in, maybe talk about what you are seeing beyond that cancellation, how is the sequential growth then, how do you feel about the strategic opportunity to really grab additional share within Discovery Services?

So we feel very good about the discovery business. We feel very good about the portfolio that we have assembled. We feel very good about our competitive stance, it’s a really fragmented industry. We feel very good about the connectivity between discovery and other things that we do, particularly when we engage with large clients that we have strategic deals with the ones that we are starting to dialogue for strategic deals. We love our therapeutic area reach. We also like that we are – we have an in vivo and in vitro capability. As I have said in my prepared remarks, I would say the discovery business was somewhat disappointing during the year that was largely because of this large piece of business that you have commented and it rolled off of Argenta and BioFocus was kind of early – late in ‘14, but affected ‘15. The more we get to know the business, the more we incorporate it’s selling a sales organization, which is a highly tactical one in understanding that business. We just finished a large international sales organization sales meeting, which I attended. And it was a large cadre of sales people there from this organization. So I think we have a better understanding of the business itself on the competitive scenario and how to sell it better to our clients. We are seeing strengthening demand and we have enhanced strategies for partnering with our clients that’s increasingly more flexible and thoughtful and creative, I would say. So we are – and the other thing I would say about all of our businesses, but discovery for sure and Argenta and BioFocus perhaps, in particular. So we are going to work really hard to drive efficiency gains through those businesses as well. So we are going to be looking at top line and bottom line accretion. So, we think that the comparisons with ‘15 should be quite positive, our engagements with clients has been quite robust and we have a unique product and – I am sorry unique service offering, which is resonating with many, many clients.

Great. Thanks so much.

We will go to the line of Dave Windley with Jefferies. Please go ahead.

Hi, good morning. I wanted to follow-up on Charles River Massachusetts, Jim you had mentioned in your prepared remarks confidence about it meeting its goals for this year, I was hoping you can kind of flesh out a few things. One, I think strategy was to move some work or direct some selling of work that would have normally gone to other facilities in the network and started at Massachusetts, could you help us to understand kind of how is it hitting the ground running, how much work is going into Massachusetts early on, what is that due to free up utilization or capacity in the rest of the network. And then to the extent that you can share, if it meets goals this year, what does that mean, does that mean getting to half fold, does that mean getting higher than that – how do you – how might you define those goals for us for 2016? Thanks.

Yes. Dave, we had a – we developed and are executing a very tight plan for this facility. We are planning for this over a year, I would say. So the facility is in great operating order. Work has moved from Wilmington facility into that facility straightaway work and staff as anticipated. Work is beginning to come in from other sites as well, as you say. It’s not going to free-up a huge amount of space. But it will free-up space at some of our important tox facilities that can be used for high-value studies without having to build new space there. We are really pleased with our ability to attract senior scientists and the management team for that facility is really quite exceptional, a lot of experienced, some internal people and some external people who have been at CRO – the CROs in large pharmaceutical companies. So we feel good about that as well. We have been interfacing very much with the local Boston and Cambridge Biotech Community and I would say the response has been as good or better than we anticipated. We also have keen interest from lots of East Coast biotech, but also large pharma companies about utilizing this facility for multiplicity of things. So I think we had a reasonable plan in that acknowledging that it’s not trivial to open that facility to size even though we are only opening a portion of it and getting it ready. It’s a much better time to open it in the first time just in terms of the development and maturity of biotech and the clients’ receptivity. We would hope that – we are doing a host of things, but as you recall from earlier dialogues with us, it opens – it’s open with non-GLP capability and ability…

Okay, great. Thanks. I will ask that.

And we will go to the line of Tim Evans with Wells Fargo Securities. Please go ahead.

Thanks so much. If I look at your 2016 guidance, the real delta relative to our expectation is the corporate overhead spending and I am hoping maybe just to get a little bit of longer term context on this. In the last 5 years or so, speaking in very rough numbers, we have seen that line double in size against a revenue base that’s only gone up maybe 50%. And I am wondering – I know you are in an investment phase here, but at what point do we reach a level of stability in which that line doesn’t grow – doesn’t grow faster than revenue or maybe even – can come down as a percentage of revenue?

So that’s a good question and one we have been exploring. Let me maybe give you a bit of an insight as what we are doing with some of the corporate investments. That may help you understand what we are trying to achieve. So, just to give you an example of within the finance department, we are trying to move towards a sort of a shared service, internal shared service sort of structure, but we have a shared service in the U.S. and a shared service in Europe. And the benefit of that is it will allow us to strategically plug and play M&A, particularly from 2017 onwards in a better way than we can do at the moment. We get some sort of halo effects with that in respect to better control environments and so on. But actually, if you look at the return on that investment in the finance department, you actually see that the rates of financial growth will decline. It will still grow, but it will grow at a shallower rate than we have historically done, because we are creating a modern structure to be able to plug and play. So, we are doing similar changes in IT and we have got some other activities in HR and so on and so forth. So, I would expect to see a better gain, maybe 2018 onwards if that helps you.

It does. Thank you.

We will go to the line of Greg Bolan with Avondale Partners. Please go ahead.

Hey, thanks guys for taking the question and congrats on a strong finish to the year. So, I wanted to ask about just the expectations for revenue growth, particularly DSA on an organic constant dollar basis in 2016. And obviously, there is – I cannot think of four pillars, increased wallet share, obviously, contribution from small to mid-biopharma market share gains and then I guess more dollars being thrown at early stage compounds. And Jim, as you think about the guidance for 2016, which of those pillars seem to kind of be I guess disproportionate to the others or are they all kind of equal weighting as you think about 2016? It’s kind of in the same spirit of Ross’ questions – earlier question, but just maybe a bit more specific about those kind of four pillars?

So, to tease out organic growth from DSA a little bit, we would expect the demand to continue to be quite strong. So, if you just want to look at Safety Assessments, we have been growing that business at double-digit rates now for multiple quarters with escalating operating margins and a book of business from large pharma and biotech, we reported often that we actually have more revenue from mid-tier than pharma which makes sense, because there is a proliferation of those companies that do all their work externally and pharma and the capital markets specially pays for it. We think we will continue to have very nice growth rate, probably in both segments in safety. Maybe continue to be slightly higher in the smaller and mid-tier companies. It really depends on our ability to – we are always working on these larger strategic deals. They are often with larger companies. When those break, they can be very, very significant, but kind of short of something that dramatic, which we hope would happen. I think we will see both probably the preponderance of the strength coming from the smaller mid-tier biotech. Discovery, obviously, had a – although we didn’t give the exact number, obviously, had a slower growth rate in ‘15. We have explained the principle reason, which was rolling off of a large contract from Argenta and BioFocus. Very optimistic about Discovery this year, we just did an acquisition there, so our oncology franchise is among the strongest in the world with multiple technologies and multiple geographies and we will do lots of work. So, if you were to see our client base, it’s really big pharma and its multiple sizes of biotech we would expect the CNS franchise and the IN channel franchises to be strong as well. And we are really quite helpful based upon sort of demand through the back-end of ‘15 and the client dialogue that we are going to see an intensified growth rate from Argenta and BioFocus. So, I would expect to see organic double-digit growth from both parts of that business even though well, we sometimes nuance it that way, but as a whole, double-digit with DSA collectively. It’s a very strong segment for us. We hope increasingly the clients will buy across that portfolio and/or will do work for them in the Discovery piece and then we will pull work into Safety Assessment even if they don’t literally contract through that whole process. And I guess I would remind you and others that are listening that the portfolio continues to become stronger and more unique and that provides enhanced opportunities for sell in to both clients large and small across the much larger continuum and that’s increasingly what we are up to here. There is more comprehensive holistic solution for our clients with a great value proposition for them and for us. Does that help?

Very helpful. Thanks, Jim. I appreciate it.

Sure.

And we will go to the line of Tycho Peterson with JPMorgan. Please go ahead.

Thanks. Jim, wondering if you can comment on pricing, I know you talked about 2% to 3% presumably all RMS, but can you maybe just talk a little bit where you are thinking more opportunistically about pushing the pricing increases?

Well, sure, the 2% to 3% for RMS is kind of a worldwide number. Different geographies will have different price increases. That’s kind of the net result that we anticipate given larger contracts and clients that are price protected, etcetera, etcetera. We anticipate getting a similar increase in safety that we had in ‘15, which is around 5%. We have price increases in some of our smaller businesses that we rarely kind of breakout, but we think all in we are sort of netting about 2% in ‘16.

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

Around WIL, so we are in the middle of working with external advisors on how we can restructure the legal entities to better fit into Charles River so that we can manage actually cash management as well as other factors. It’s still a little too early to say exactly how that will fall out. So I don’t think there is much more I can say in how we are restructuring the teams to help. But rest assured we are still looking for it.

Okay, thank you.

We will go to the line of Ricky Goldwasser with Morgan Stanley. Please go ahead.

Hi, everyone. Good morning. This is Ashley Ponce on for Ricky. I just had a quick question about organic EPS growth it looks like you are getting a 3% revenue contribution from acquisitions already closed, is that fair and does that drop to the bottom line as well or is it slightly less?

It is fair to say that about 3% is coming from acquisitions that we have currently purchased, so yes and a portion of that will flow through the bottom line, of course.

Have you broken out what portion of – how much EPS growth you are estimating is organic?

No.

No. Okay. Thank you.

And we will go to the line of Robert Jones with Goldman Sachs. Please go ahead.

Thanks for the question. I guess just looking at revenue from strategic relationships, obviously a nice gain there, now representing over 30% of total revenue, I think for 2015, can you maybe just talk a little bit about what type of work is driving the growth from your strategic partners. And then I guess just a follow-up to that would be what are you considering in the 2016 outlook for growth from strategic partners, the reason I ask is I know on the other side, on the clinical side, it seems like it’s relationships can obviously drive meaningful healthy growth, but they hit the run rate at some point, which can in fact cause growth to be a little bit more challenged over time, so just curious kind of what’s driving the growth today and then what are you guys factoring in as you think about ‘16?

I think our strategic relationships as we described really different than the clinical CROs, so I would be careful to draw that analogy. And we define them quite liberally only because we deem – we got strategic relationship with the clients who treats us that way, treats us like a strategic partner, we deal in science, we get them value proposition out of the way and we are really collaborative. And often those have no contractual relationships associated with them and the timeframe can be for 1 year or a quarter. And then we have some issue now because we have talked about them in a longer term, 5 years, 3 years, 1 year. So they are always evolving. We have several conversations going on right now with large clients, principally who don’t typically – some of them don’t on big outsources and some are really early on the outsourcing curve. And so as we think about that going forward, we have some level of confidence that we will expand some of the ones that we have and we will ink some new ones. They started in a multiplicity of ways. It’s hard to boil it down to one thing. I would say most often they start with a conversation about Safety Assessment, big drug companies thinking about doing less internally or reducing infrastructure and/or increasingly we have conversations that start with Discovery and then they move into Safety Assessment or vice versa. Once we have start a dialogue with a large client, let’s say about Safety Assessment, the ability to have an arrangement we call them enterprise agreements that cuts across literally everything we do and provides incentive with them to do more work with us rather than less, it’s something that larger companies take advantage of. So again,…

And the expansion that was called out of the 30% is actually with more client relations being added to the pool. We don’t have any clients have the revenue of over 5%. So it’s not as if it’s anchored in a small handful of strategic relationships that could get to a point of saturation. The ability to bring more clients into that sort of strategic dynamic is critical for us.

Yes, that’s helpful. Thank you.

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

Thank you for joining us this morning. This concludes the conference call.

Thank you. Ladies and gentlemen, that does conclude the conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.