Charles River Laboratories International, Inc. (CRL) Q4 2018 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. And welcome to the Charles River Laboratories Fourth Quarter 2018 Earnings and 2019 Guidance Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder today’s conference is being recorded. I would now like to turn the conference over to our host, Corporate Vice President of Investor Relations Mr. Todd Spencer. Please go ahead.

Thank you. Good morning and welcome to the Charles River Laboratories Fourth Quarter 2018 Earnings and 2019 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 results for the fourth quarter of 2018 and our guidance for 2019 as well as the proposed acquisition of Citoxlab. Following the presentation, they will respond to questions. There’s a slide presentation associated with today’s remarks, which is posted on the Investor Relations section of our website at ir.criver.com. A replay of this call will be available beginning at noon today and can be accessed by calling 800-475-6701. The international access number is 320-365-3844. The access code in either case is 462521. The replay will be available through February 27. You can also access an archived version of the webcast on our Investor Relations website. I’d like to remind you of our Safe Harbor. Any remarks that we make about future expectations, plans and prospects for the Company constitute forward-looking statements under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by any forward-looking statements. During this call, we will primarily discuss results from continuing operations and non-GAAP financial measures, which we believe help investors gain a meaningful understanding of our core operating results and future prospects. The non-GAAP financial measures are not meant to be considered superior to or a substitute for results from operations prepared in accordance with GAAP. In accordance with Regulation G, you can find the comparable GAAP measures and reconciliations on the Investor Relations section of our website through the financial information link. Now I will turn the call over to Jim Foster.

Good morning. I’m very pleased to speak with you today about the conclusion of an excellent year for Charles River and our expectations for 2019 and the continued expansion of our leading early-stage portfolio to support our long-term growth objectives. We are extremely pleased to report a second consecutive quarter with organic revenue growth about 10% and also to have achieved an operating margin consistent with our long-term target above 20% in the fourth quarter. As we previously mentioned, we believe that the pace of demand of our essential products and services accelerated during the second half of the year which positions us extremely well into 2019. We believe that our strong financial performance in 2018 was driven by two factors; robust industry fundamentals and the actions we’ve taken to enhance our position as the leading early-stage CRO. Let me begin with an overview of our industry. We continue to operate in a robust business environment that is showing no signs of slowing, which gives us excellent growth potential. Biotech funding remains strong. 2018 replaced 2017 as the second strongest year on record, with funding increasing 8% to $81 billion. The FDA approved 59 drugs in 2018, a record number and nearly tripled the approvals from a decade ago. Because of our unique early stage portfolio, extensive scientific expertise and client centered approach we worked on 85% of the approved drugs. We are proud that our pharmaceutical clients continue to choose to partner with us as they recognize the value that we provide. Even at this level of success, our addressable market of at least $15 billion provides a long runway for growth. In today’s robust business environment, we will continue to invest in our business both through internal initiatives, technology licensing deals and strategic acquisitions in order to enhance the scientific capabilities that we offer our clients. Before I discuss our performance and guidance, I’d like to share further details on our announcement in a separate press release this morning that we signed a binding offer to acquire Citoxlab for approximately $510 million subject to certain adjustments. We believe this proposed acquisition would further strengthen our business and enhance our ability to achieve our long term growth goals. The proposed transaction is subject to labor consultations and regulatory requirements, as discussed in more detail in the press release. Upon completion of the labor consultations, we expect the Citoxlab shareholders will enter into a definitive purchase agreement. With operations in Europe and North America, Citoxlab is a premier, non-clinical contract research organization, providing a broad suite of early stage services for biopharmaceutical, agriculture and industrial chemical, and medical device companies worldwide. Citoxlab would enhance Charles Rivers capabilities and regulated safety assessment, non-regulated discovery and medical device testing services. Like WIL and MPI, the proposed acquisition of Citoxlab would further strengthen our position as the leading global early stage CRL by expanding our scientific portfolio and geographic footprint, enhancing our ability to partner with clients across the drug discovery and development continuum, and also by driving profitable revenue growth in the immediate non-GAAP earnings per share accretion. Now let me give you the highlights of our fourth quarter and full year performance. We reported revenues of $601.5 million in the fourth quarter of 2018, an increase of 25.7% on a reported basis. Robust client demand across all three business segments drove organic revenue growth of 11.4%. The DSA and manufacturing segments continued to report low double-digit organic growth. The RMS segment’s organic growth rate improved to 8%, driven primarily by the contribution from our NIAID contract that commenced last September. For 2018, revenue was $2.27 billion with a reported growth rate of 22% and an organic growth rate of 8.7%. This is the highest annual organic growth rate that the company has achieved since 2007, which is a testament to the strength of client demand and in particular our focus on enhancing our position as a partner of choice for our clients early stage research and manufacturing support efforts, and further distinguishing ourselves from the competition. From a client perspective, biotech clients were our fastest growing client segment in both the quarter and the year. The operating margin was 28.3% in the fourth quarter, an increase of 60 basis points year-over-year. Margin improvement in the DSA segment drove the fourth quarter increase and we also benefited from leverage on corporate costs. We are very pleased that we are beginning to see the benefits of the investments we are making to accommodate client demand and build a more scalable infrastructure. From strategic hiring and employee engagement initiatives to the expansion of our capacity and scientific capabilities, we’ve worked diligently to make investments that will enable us to forge stronger relationships with our clients and create a more efficient operating model. Primarily as a result of his investments, the 2018 full year operating margin declined 50 basis points to 18.8%, however, we believe we are well-positioned to achieve modest operating margin improvement in 2019 and beyond. Earnings per share were $1.49 in the fourth quarter, an increase of 6.4% from $1.40 in the fourth quarter of last year. For the full year, earnings per share was $6 03, a 14.4% increase over the prior year. We exceeded our prior guidance range of $5.87 to $5.97 due primarily to a higher than expected revenue and operating margin improvement in the fourth quarter, as well as a lower tax rate. Consistent with our prior estimate, we recorded a $0.10 loss from our venture capital investments in the fourth quarter, and a $0.23 gain for the year. Adjusted to exclude Venture capital investment, earnings per share increased by 25.2% for the fourth quarter, and 16.2% for the year, including the contribution from MPI. We believe that our strong performance in 2018 thoroughly demonstrates what we worked very hard to achieve and continue to enhance the strongest portfolio that we’ve ever had with the ability to support clients from target discovery to non-clinical development, deep client relationships, and the successful execution of our strategy to position Charles River as the early stage research partner of choice. We are very enthusiastic about the outlook for 2019. As demonstrated by the strong finish to 2018, we believe the current business trends support our view that robust client demand will continue in 2019. We also believe that our investments to support growth and enhance our scientific capabilities, including the proposed acquisition of Citoxlab position us extremely well to capitalize on new business opportunities in 2019. Excluding Citoxlab, we expect organic revenue growth of 8% to 9.5% and non-GAAP earnings per share in a range of $6.25 to $6.40 or an increase of 8% to 10% year-over-year when adjusted for Venture capital investments. And when including Citoxlab, the non-GAAP earnings per share range is expected to increase to $6.40 to $6.55 a growth rate of 10% to 13% on the same adjusted basis. I’d like to provide you with additional details on our fourth quarter segment performance and our expectations for 2019, beginning with the DSA segment results. DSA revenue in the fourth quarter was $358.2 million, a 12.9% increase on our organic basis, driven by both the discovery and safety assessment businesses. For the full year, DSA organic growth was 10.4%. Client demand remained robust through the year end, positioning us extremely well for the start of this year and to achieve high single digit organic revenue growth in 2019. We believe that the higher DSA growth rate in 2018 and our outlook for 2019 shows their clients both large and small are increasingly choosing to partner with Charles River due to our science, our broad and early stage portfolio and our flexible relationships that enable clients to work with us for a study or project or an entire therapeutic program. Robust biotech funding continued to fuel demand from our biotech clients, and revenue to global biopharmaceutical clients also increased. Our safety assessment business continued to perform extremely well, capacity remained well utilized in 2018, study mix improved over the course of a year as we anticipated, and pricing increased. All of our in-life safety assessment facilities reported higher revenue for the year and MPI continued to exceed our expectation. Proposal volume, bookings and backlog also remained very strong through year-end, which gives us confidence that we are positioned for a strong start in 2019. The discovery business had another excellent quarter and a strong year. Our efforts over the past several years to build scientific expertise for the discovery of novel therapeutics to create targeted sales strategies and to harmonize the discovery portfolio have resonated with our clients. We are attracting new business ranging from single projects to larger integrated programs that encompass multiple businesses. Our outlook for 2019 is encouraging with an expectation for broad based demand for our suite of early discovery, oncology CNS and bio-analytical services. To achieve our goals in 2019 and beyond, we will continue to strengthen our portfolio, by expanding our scale, our science and our innovative technologies. We plan to accomplish this through acquisitions like Brains On-Line in 2017 and KWS BioTest in 2018 last year, and also through alliances to add cutting edge technologies to our discovery toolkit. We believe these initiatives will help to accelerate our client’s drug discovery programs and further differentiate ourselves from the competition. Recently, we added through two alliances. In October, we entered into an exclusive partnership with Distributed Bio to enhance our large molecule discovery capabilities. And last month, we formed a strategic alliance with Atomwise to add artificial intelligence or AI drug discovery capabilities. AI is a cutting-edge, emerging tool and discovery that allows scientists to quickly screen compounds and predict whether a small molecule will bind to a target protein of interest. We also opened the largest site in the South San Francisco biohub at the beginning of this year. This site offers a range of discovery capabilities, enabling us to generate new West Coast business opportunities by providing clinical services proximate to the fast-growing biotech client base. Whether through acquisition, internal investment or alliance, we intend to continue to enhance our position as the premier, single-source provider for a broad portfolio of discovery services. The DSA operating margin was 23.2% for the fourth quarter, 140 basis points above the fourth quarter of 2017. The increase was driven by both the discovery and safety assessment businesses reflecting the benefit of robust topline growth and the normalization of the safety assessment study mix over the course of the year as we had anticipated. We also believe, we have enhanced the scalability of our DSA business with well-thought-out investments in staffing and capacity, and by focusing on our organizational speed and responsiveness. As a result of these investments, we believe that the DSA segment will be the primary driver of the expected modest margin improvement for the company in 2019. For 2018, the DSA operating margin declined 40 basis points to 21.7% primarily reflecting the 30 basis point headwind from our compensation structure adjustment last year, to enhance employee recruitment and retention. We believe, we are well-positioned exceptionally well to provide the support, which our clients require to expedite the drug research efforts, by focusing on expanding our global scale and enhancing our scientific expertise through acquisitions like WIL, MPI, Brains On-Line, KWS BioTest, and Citoxlab in a few months, or strategic alliances like Distributed Bio and Atomwise and by improving our operating efficiency and by providing a more seamless and flexible client experience, we have created a unique, nimble, early stage CRO that can meet our clients extensive needs. This is especially important now on global biopharma companies are increasingly reliant on CRO and small and mid-sized biotech companies, which have always relied on external resources are benefiting from a robust funding environment. In our view, it will continue to be a significant demand for outsourced services for both biotech and pharma companies, and we intend to maintain and expand our position as their partner of choice. For that reason, we are very pleased to express our intent to acquire Citoxlabs at this time. Citoxlab is a strong, strategic fit with both a complementary service offering and geographic footprint. Citoxlab provides a bright suite of early stage services, that would expand our existing capabilities in general and specialties tox, including reproductive toxicology and ocular services as well as ecotoxicology. The proposed acquisition would also double our revenue for preclinical medical device testing services, which has an addressable market opportunity approaching $1 billion. I would also, it would also add Non-GLP discovery solutions, ranging from traditional DMPK to innovative drug transporter and drug-to-drug interaction research and genomics research services. In addition to its strong scientific capabilities Citoxlab would enhance our presence in Europe, particularly in Eastern Europe. The company has nine operating sites in six countries generating approximately 60% of revenue from its European operations and the remainder from North America. Citoxlab has a diverse client base of biopharmaceutical, agriculture and industrial chemical and medical device companies worldwide. Specifically, the proposed acquisition would further expand our small and mid-sized biotechnology client base, which is our fastest growing client segment. From a financial perspective, the proposed acquisition would also deliver compelling benefits, which would generate value for shareholders in which we consider fundamental to any acquisition we do. Citoxlab would be immediately accretive to non-GAAP EPS and would meet or exceed our ROIC hurdle rate within three to four years, and it would enhance our opportunities for organic growth. Following the completion of the Labor consultation and subject to entry into the definitive purchase agreement, as well as regulatory approval and customary closing conditions, we expect to close the acquisition in the second quarter of 2019, but slightly later than MPI or WIL, which closed early in April. On that basis, the acquisition is expected to contribute $115 million to $130 million to our consolidated revenue, and add approximately $0.15 to non-GAAP earnings per share in 2019. We expect greater benefits in 2020, with Citoxlab contributing approximately $200 million to consolidated revenue and non-GAAP earnings per share accretion of at least $0.35. Consistent with the long term target for our DSA segment, Citoxlab is expected to grow at high single digit rate organically as it has recently. As we did with MPI and WIL acquisitions, we will be ready to implement a comprehensive integration on day one. We have appointed two senior operational leaders to manage the integration in North -- in Europe and North America respectively to help ensure a smooth transition. Citoxlab would further solidify our leading position in the $4 billion to $5 billion outsourced safety assessment market, and our business would have the scientific expertise in global scale that was our goal when we entered the market in 1999. Following the proposed Citoxlab acquisition, we believe our safety assessment portfolio would have the ability to fully support our long term organic growth aspirations for this business. As a result, we expect future M&A within the safety assessment business to be centered around niche players, with specific expertise rather than scale. M&A remains a top priority of our growth strategy, and while smaller acquisitions will be evaluated in 2019, we will use this year to primarily focus on the integration of Citoxlab and repaying debt. Over the longer term, we intend to remain acquisitive to enhance the scientific capabilities and scale of our other businesses. Upon closing of the proposed Citoxlab transaction, we will have invested over $2.5 billion in acquisitions, since 2012 which have collectively achieved returns that exceeded our cost of capital to-date. The largest of these WIL and MPI have performed exceptionally well as part of the Charles River family, and we believe that Citoxlab will be no different. The success of our M&A strategy and integration planning is a result of an excellent team, which includes representatives from operations, corporate support functions, senior management and our Corporate Development Group, which provides direction and dedicated integration resources. Joe LaPlume has led our Corporate Development team since 2011 and his oversight has elevated our acquisition planning and execution. I’m pleased to announce that Joe was recently promoted to Executive Vice President of Corporate Development & Strategy in recognition of his outstanding leadership. RMS revenue in the fourth quarter was $128.5 million, an increase of 8.1% on our organic basis. The Insourcing Solutions contract with NIAID, which commenced in September, contributed slightly more than 300 basis points of the increase. As mentioned in November, the profitability of these staffing contracts is typically significantly lower than our RMS segment’s operating margin. The NIAID contract was the primary reason that the RMS non-GAAP operating margin decreased by 80 basis points to 25.1% in the fourth quarter. Adjusting for the NIAID impact and headwinds from the compensation structure adjustment, the RMS operating margin would have increased slightly in the fourth quarter. Excluding the NIAID contribution, RMS organic revenue growth was similar to the third quarter level. For the year, RMS organic revenue growth was 3.7%. Growth for both the quarter and the year driven by demand for research models in China and higher revenue for the GEMS and Insourcing Solutions businesses. Looking ahead, we continue to believe that the RMS segment will grow in line with its long-term target in the low-single digits but the benefit from the NIAID contract is expected to push RMS growth to mid-single digit rate in 2019. Our business in China reported another year of double-digit revenue growth, an accomplishment that – it has maintained annually since the business was acquired in 2013. In China, we continue to add capacity in Shanghai to support the robust market demand and win new business in this important geographic region. To support our expected future growth, we intend to continue to invest in Beijing and Shanghai and expand into other large research hubs in the country. The services businesses also continue to be a source of growth. GEMS is benefiting from our clients’ use of CRISPR and other technologies to create genetically modified models faster and more cost effectively as these complex research models provide scientists with targeted data in their research. Aside from the NIAID contract, the Insourcing Solutions business also performed well, because of client interest in our flexible solutions to address their vivarium management and related research needs. I’d also like to note that the U.S. government shutdown did not have any impact on our business as most of our contracts are for essential services The manufacturing support segment finished another strong year with a superb fourth quarter performance. Revenue for the quarter was $114.9 million with growth of 11.4% on an organic basis, driven by the Microbial Solutions and Biologics businesses, the organic revenue growth for the year was 10.9% to support our expectation that low-double-digit growth will continue over the longer term we continue to invest in these businesses and expand our product and service offerings. As it has throughout the year, our Microbial Solutions business reported strong revenue growth. Growth was driven primarily by demand for our Endosafe testing systems and cartridges and Accugenix microbial identification services. We believe that our ability to provide clients with a total microbial testing solution will be a fundamental driver of Microbial Solutions’ ability to continue to deliver low-double-digit organic revenue growth. There is an abundance of new opportunities to support growth by converting clients to our efficient testing platform and driving greater adoption with existing clients. We are continuing to invest in the Microbial Solutions business to advance its product and service offerings, technological interface, and footprint. The Biologics business also reported strong revenue growth in the fourth quarter and for the full year. The increasing number of biologics in development represents a significant market opportunity for our Biologics business and we have been successful at gaining business because of our extensive portfolio of services to support the manufacture of biologics. We are continuing to invest in capacity expansions to accommodate robust client demand and believe that this is essential to achieving our goal for low-double-digit revenue growth over the longer term. We continue to make progress with our plans to open a new facility in Pennsylvania, as well as other smaller expansions globally. The construction of Pennsylvania facility is complete and we expect to begin generating revenue in the second half of this year as we transition operations to the new site. We are incurring redundant costs during this transition, which is expected to pressure the manufacturing segment’s operating margin until the transition to the new facility is complete. Due to the leverage from strong revenue growth, the manufacturing support segments’ operating margin was 37.4% in the fourth quarter compared to the prior year the operating margin declined by 20 basis points in the quarter, and by 130 basis points to 34.2% for the full year effectively in line with our long-term target in the mid-30% range despite costs associated with capacity expansions. As I said earlier, we are operating in a robust business environment with excellent growth potential to continue to successfully execute a strategy to position Charles River as our leading early-stage CRO it's essential that we continue to make investments in our scientific capabilities through both M&A and internal development, expand capacity at staff and exploit our digital enterprise to provide critical data for both internal and client use. We will do so mindfully promoting a more efficient and scalable organization that focuses on speed and responsiveness as we meet our client's individual needs, with the goal to reduce the development timeline by an additional year. By focusing intently on our strategy, we have become a trusted scientific partner for pharmaceutical and biotechnology companies, academic institutions and government and non-governmental organization worldwide. We have demonstrated the value we can provide to client and believe that this has and will continue to enable us to deliver greater value to shareholders. In conclusion, I’d like to thank our employees for their exceptional work and commitment and our shareholders for their support. Now, I’d like David Smith to give you additional details on our financial performance and 2019 guidance.

Thank you, Jim, and good morning. Before I begin, may I remind you that I'll 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, the divestiture of the CDMO business in 2017 and certain other items. Many of my comments will also refer to organic revenue growth, which excludes the impact of acquisitions, the CDMO divestiture and the impact of foreign currency translation. My discussion will focus primarily on our financial guidance for 2019. Initially, I will provide guidance excluding the impact from Citoxlab, as the proposed acquisition has yet to close. To conclude, I will discuss our outlook including Citoxlab. We believe that we will continue to drive strong revenue growth and modest operating margin expansion this year which gives us confident that we are well-positioned to deliver non-GAAP earnings per share between $6.25 and $6.40 for 2019. As we have indicated throughout last year, we've eliminated the VC investment performance from our guidance in 2019 and consequently have decided to exclude this from our reported quarterly non-GAAP earnings per share beginning in the first quarter in 2019. We’ve recorded a $0.23 gain from our venture capital investments for 2018, including the anticipated $0.10 loss in the fourth quarter, excluding the $0.23 gain. Non-GAAP earnings per share would have been $5.80 in 2018 and on a comparable basis 2019 earnings per share guidance represents a year-over-year increase of 8% to 10%. To bridge the non-GAAP reporting change related to the investments and to provide a comparable prior year figures, we have recast our non-GAAP earnings per share from 2014 to 2018 to exclude the VC investment performance. The reconciliation is included in the appendix to our slide presentation and on the financial reconciliation section of our website. In 2019 robust business trend including favorable bookings and backlog in our safety assessment business and the strong funding environment continue to support our expectation of strong client demand. We expect organic revenue growth in a range of 8% to 9.5% in 2019 and reported revenue growth of 10.5% to 12%. This output is consistent with our long-term growth target of high single digits on an organic basis and low double digits on our reported basis. Foreign exchange is expected to have a small impact on our reported revenue growth guidance. We expect a 50 basis point foreign exchange headwinds based on bank’s forecast of forward rates, which are near the current rates for most currencies.. We have provided information on our 2018 revenue by currency and the foreign exchange rates that are assumed for 2019 on slide 36. From a segment perspective the underlying trend in each of our business segments in 2019 are expected to be similar to those in 2018. The RMS segment is expected to achieve mid-single digit organic revenue growth. This assumes low single-digit growth before the benefit from the NIAID contract which will be driven by robust demand in China, continued growth in the Research Models service businesses and modest price increases partially offset by slightly lower sales volumes for Research Models in mature market. In addition, we estimate the incremental contribution from the NIAID contract will add approximately 250 basis points to RMS’s organic growth rate in 2019. We expect the DSA segment to deliver high single-digit organic revenue growth with strong growth continuing in both the Safety Assessment and Discovery Services businesses. Our manufacturing segment is expected to generate low double-digit organic growth again in 2019, with both the Microbial Solutions and Biologic businesses driving the increase. In addition to revenue growth we expect that modest operating margin improvement will also be a driver of earnings growth this year. We believe that we are beginning to see the benefits from the investments we have made to attract and retain talented staff, to add capacity to accommodate the current pace of client demand and to build a most scalable infrastructure to leverage future growth. We are pleased to be in a position to drive operating margin improvement in 2019 even after factoring in the incremental headwind from the adjustment to our compensation structure which was implemented in July of last year. On the segment basis DSA is expected to be the primary contributor to margin improvement in 2019 along with leveraging unallocated corporate cost. The RMS’s segments operating margin will be pressured by an approximate 50 basis point headwind from the lower margin NIAID contract, while the new biologic facility in Pennsylvania will restrict the manufacturing segments operating margin until the transition to the new facility is largely complete. Unallocated corporate expenses in 2019 are expected to be approximately 6% of revenue compared to 6.5% of revenue last year. The intensity of these costs has declined from a peak of 7.5% in 2015 as the investments that we made in our people, processes and systems to scale the company to future growth are generating the intended goal of greater efficiency and productivity. Net interest expense expected to increase to the range of $63 million to $66 million in 2019 compared to $58 million from 2018. The $5 million to $8 million increase in 2018 will be primarily driven by an additional corporate debt from the MPI acquisition as well as the outlook for higher interest rate in 2019. Tax rate is expected to be meaningful headwind to our 2019% earnings per share guidance. The tax rate for 2019 is expected to be in the range of 23.5% to 24.5% which is a 190 and 280 basis point increase compared to 21.7% in 2018. The expected increase will be driven primarily by discrete tax benefit in 2018 that are not expected to recur and a year-over-year reduction in the excess tax benefits related to stock compensation. The higher tax rate is expected to reduce 2018 and a share growth by approximately 300 basis points. Free cash flow generation is a key tenant of our financial performance and our value proposition to shareholder. In 2018 free cash flow was $301.1 million, an increase of $59 million or 24% from 2017 and slightly above our latest outlook. Free cash flow increase due to the strong underlying operating performance and our continued focus on working capital management. Capital expenditures of a $140 million in 2018 were $58 million higher than in 2017. The 2019, we expect free cash flow to be in the range of $320 million to $330 million, an increase of 6% to 10%. Capital expenditures are expected to increase to approximately $160 million for 2019, approximate two-thirds of the plan 2019 capital projects are related to growth initiative including capacity investment in many of our businesses. As we discussed at our Investor Day last August, in order to support growth we expect CapEx to be in the mid to high single-digit as a percentage of total revenue over the next five years because many our sites are currently operating at near optimal levels of utilization. While the capital requirements of our businesses are expected to modestly increase over the next several years, we believe these investments will generate compelling cash return. We’ll remain intently focused on driving strong free cash flow growth today and over the longer term. A summary of our 2019 financial guidance excluding Citoxlab can be found on slide 44. Moving ahead to our first quarter outlook, we expect year-over-year revenue growth will be about 20% on a reported basis. This will be the last full quarter we anniversary the MPI acquisition at beginning of the April. Similar to the full year, we expect first quarter organic revenue growth in the high single-digit range and modest improvement in the non-GAAP operating margin. Margin improvement in the DSA segment is expected to be partially offset by pressure in the manufacturing segment from the ongoing capacity expansion and lower seasonal sample volume in the biologics business as well as the impact of the NIAID contract on the RMS segment. First quarter earnings per share growth is expected to be in the high single-digit compared to $1.29 last year when excluding gain from the investments. As a reminder, when we report first quarter results we will recast the prior period to exclude the investment performance from the non-GAAP result. This year's first quarter tax rate is expected to be higher than the prior year consistent with the full year tax rate outlook. However, keep in mind that the first quarter tax rate is typically at its lowest quarter level of the year due to the impact of equity vesting and exercise activity on the excess tax benefit for stock compensation. Now, I will provide some details on our financial outlook including the proposed acquisition of Citoxlab. [Indiscernible] in quarter, our guidance for 2019 including the contribution from Citoxlab would be reported revenue growth in a range of 16% to 18% and earnings per share in the range of $6.40 to $6.55. From both strategic and financial perspective believes proposed acquisition would deliver compelling benefit, which will generate value for shareholders. Provides attractive contribution to revenue growth and would be immediately accretive to non-GAAP earnings. It would meet or exceed our return on invested capital hurdle rate in the year [Indiscernible] and it brings us an opportunity to enhance Citoxlab's operating margin. Citoxlab has an adjusted operating margin in the mid-teens range which is similar to WIL acquisition. We believe, through continued growth and operational excellence Citoxlab margins will reach the 20% within approximately two years. Following the acquisition our capital priorities will be focused on debt repayment. We plan to finance the Citoxlab acquisition under our current revolving credit facility and incremental interest expense has been included in the Citoxlab accretion outlook that Jim mentioned. Our pro forma gross leverage ratio at closing is expected to increase to between three and 3.5 times which is consistent with a level after the MPI and WIL transactions. We plan to reduce the leverage in 2019 and drive the leverage ratio below three times within 12 months after the closing or sooner. Currently, we do not intend to repurchase shares in 2019 and expect to exit 2019 with a year end diluted share count approaching 50 million shares. To conclude, we’re are very pleased with our financial performance in 2018 and believe that we are position to have another strong year in 2019 particularly the expected completion of the proposed Citoxlab acquisition and the associated benefit this acquisition provides. We continue to generate value for our shareholders by consistently growing revenue and cash flow. Over the past five years we have achieved a 15% compound annual growth for both revenue and earnings per share and increase free cash flow by 9% and operating cash flow by 13%, while continuing to make necessary investment to support of growth of our business. Thank you.

Thank you, David. That’s concludes our comments. And I would like to say that we do apologize for the audio difficulties. We’re having some phone trouble as you can tell. But now, operator, we will like to take their questions.

Thank you. [Operator Instructions] One moment please for the first question. That will come from the line of Jack Meehan of Barclays. Please go ahead.

Hi. Good morning. I was hoping you could give a little bit more detail into the business mix for Citoxlab specifically how much of revenue is coming from the agricultural and industrial, chemical testing and just what the funding environment looks like then? How it builds into you know what you're expecting for growth in the asset the next couple years?

So the vast provider into the revenue is coming from classic regulated toxicology, largely general and some specific capabilities that we called out in the call like reproductive toxicology and ocular, so big general tox house with some specialty capabilities that enhance areas that we already have. This industrial and chemical piece, we do a lot of that at two of our other sites, so that to increase the capability for us. It's recently small piece of CiTox. We also have medical device testing which doubles the capability that we have corporately and very enthused of our both of those markets particular med device, which is very high growth and significant. And CiTox has exceptional scientific capabilities in this. And I guess, the other thing I want to say about the deal is that the geographic footprint is a very strong force for us. We’re excited to be in Eastern Europe. We think there's a lot of benefits of having and building a business in that geographic locale, given cost structure and the educational level and work I think that we finally have.

Yes. Thanks for the color. Just one other thing I want to hone in on is on the M&A environment. There was a note in the in the presentation that your future M&A can be more focused on niche players rather than scale. So just wondering how we should interpret that? And as you look down in the landscape, what the longer opportunity is for consolidation?

Let us clarify that. So, there was a comments specifically about additional Safety Assessment or tox acquisitions and what we’re really saying is we have substantial scale and geographic footprint and scientific capabilities across the whole variety of areas, including specialty tox areas. So we’re really pleased with that and we have the ability to continue to grow this business ahead of the market, take share and take new share that’s coming out new biotech companies, pharma companies. So any further acquisition in the tox space are likely to be niche deals to that had specific areas and/or some sort of additional geographic players and something we have now. Just to finish the thought, so for the balance of 2019 any further M&A that we do if we do any will be small – something small less than the balance of 2019, integrating this deal and getting our leverage down below three times over the next 12 months or so. We have a variety of large, small and medium-size M&A opportunities in other parts of our business that we’re working on. We may or may not be able to achieve in fiscal 2020, but I think there will be operationally financially organization ready to do something again in 2020. So it is similar dialogue, what we said last year by MPI subject to the caveat that Charles River might be moving to another large Safety deal.

Appreciate. Thanks Jim.

Thank you. Next we’ll go to the line of John Kreger with William Blair.

Hi, guys. This is [Indiscernible] on for John. So just quick question on the manufacturing segment, Just broadly did really well once again this quarter. And I know this is in the presentation and you touched upon a little bit just more broadly with the business that you kind of expect continuing investments in that business and expanded kind of service offerings? Like, specifically what capability or offerings are they looking to add to or enhance within the manufacturing segment? Thanks.

Two biggest pieces of that segment are microbial followed by Biologics. So, the investments that we’re making now, one of them quite significantly in our facility in Pennsylvania, as well as some smaller investments and other geographies provides the necessary capacity for Biologics which is a very high growth business, markets growing at double-digit rates. We have capable competitors but there’s enough work for all of us and so we need to continue to invest in capacity. This is –we’re adding a lot this year, so that's a little bit of a headwind to our operating margins. The microbial business is a business that we continue to scale all the time. It's less capital intensive and less capacity intensive for the Biologics business. That’s a business that has extremely high growth and that's more about investing in technology and IP and periodically making a acquisition return to acquisitions in that space within the last three years, so, really nothing dramatic. We’ve got duplicate costs this year as a result of kind of keeping two facilities going as we bring one up and bring one down, so we don't disturb clients work. As we said a couple of times we’ll be moving throughout fiscal 2019. We’ll take us most of the year to finally make that move and it will be a slight headwind to the total operating margin in manufacturing segment.

Great. Thank you.

We’ll go next to the line of Eric Coldwell with Baird.

Thanks and good morning. Just a couple here. First on manufacturing, I know the comments on the Biologics site investments to transition the redundancy here in early 2019, comments that it will impact your segment operating margin. I was just looking back over the last several years your segment operating margin Q1, Q2, Q3 has bounced around 200, 300, 400 bps quarter-to-quarter. I'm just hoping you can give us a little more detail on where you think the margin plays out as we faced through 2019 in the manufacturing segment, because it's already a pretty volatile segment -- fairly volatile segment as is?

So – and the short answer is that you know and you actually articulated on this call last – we’re not a linear-type business and we’re not linear in manufacturing lines. Although, the margins have been in the mid 30s zip code, and we have bee signaling that we expected to go through the year that would be slightly lower this year because of the pressure we have from the – the move to the Pennsylvania site. So I am not sure we’re in position to actually try and give you more precise color as how we might see that margin and a move from quarter to quarter. But we maintain and we’ve also been proud of our ability to predict where the margin will end up year-over-year, but I can't give you that much more color in terms of the where the Q1 would be, for instance.

Okay. That’s fair. If I shift over to CiTox, I’m pretty familiar with the company, but one thing I'm not certain about is do they actually have a models business? Do they have a product side to the company? I know they do some unique testing and maybe have some models that their specialized in that aren't necessarily common across the entire industry but I'm curious whether they actually sell those models to outside clients or simply use them on their internal work?

They don't have a models business, Eric. So you have to think of as one of our more capable scientifically strong safety assessment competitors, it’s a company we've had admired from afar. I remember when we first got into the tox business they were the big player in Europe albeit in France. They made a bunch of acquisitions and intervening couple of decades to have strong capabilities in North America as well as we said earlier we’re very pleased with the medical device capability and the Discovery Services particularly at transporter science which gives drug interaction testing ability. They also have very strong genomics capability. So we're getting science geography, some new capabilities that actually – new capabilities and an enhancement with some of our categories which was smaller and also access to additional client.

Great. One quick last one for David. I think the slides suggest you’re going to use the revolver for financing but is that a placeholder do you think you might do another bond dealer or maybe some fixed debt here for the CiTox acquisition?

No. It's not a placeholder. We're very comfortable with using the revolver. The European based company that we will be putting the debt in Europe.

Okay.

That gives us the cash that we're generating cash -- gives it a home, it give us something to do, unable to pay down that cash down there. So no bond.

Okay. Thank you very much. Good job guys.

Thanks.

We’ll go to the line of Tycho Peterson with JPMorgan.

Hey, thanks. Jim, maybe I'll start with DSA and some of the capacity expansion you highlighted South San Francisco. Can you maybe just give us a sense as to how we should think about the ramp there, the backlog of work capacity? And then are you planning on having any capacity to MPI? This year I know that was one of the options when you first bought it?

Yes. So, we've got a very interesting cadre of services and South Francisco [Indiscernible] U.S. [Indiscernible] clients want services very proximate to where they are. I want to walk samples over or drive them a mile and then we're literally that close to a whole bunch of biotech and a few pharma companies as well and we'll continue to add to that. So we've -- it's Discovery right now. We've got some Insourcing Solutions capability. And one of the deals that we just didn't like these technology relationships and we've just struck with Distributed Bio, and they're actually right next door. So kind of beginnings of hopefully a larger capability, but it's not a giant footprint right now. We are adding like we have -- we're at least the last half dozen years having small tranches of space at multiple, I'd say six different sites, safety assessment sites throughout the world not just U.S. No and yes we will continue to open space at MPI as we need it. As you know there are lots of non utilize study rooms, some of which are have storage and then some of which are ready for operations. So it's really more about staffing them up. That takes the time. They're readily available. I think that gives us great flexibility for growth in a very measured cost effective manner so that we don't get capacity in excess of the demand and by the same token we don't turn away work because we have insufficient capacity. So we feel very good about some of the new space we're bringing online. We still -- we have a very big footprint and as we add -- as and when we add CiTox we'll have a larger footprint. And that just plays to clients being able to work approximate to where they are and also gives us greater client mobility to be able to say to a client, we're sorry, we're where we're full, and in the space is closest to you, but we have something else that's also reasonably approximate that we can say, stays relatively quickly. So in our focus to enhance speed and take time out of the development process, the breadth and geographic proximity of a portfolio is going to be very powerful.

Okay. And then for the follow up you know I appreciate all the color on CiTox, a couple of quick questions here, Hopefully you know those margins currently around 15% what do you think it takes to get the 20-ish. Is there any kind of cost synergy targets here that you've baked into the EPS accretion you gave us? And then post this deal what's your overall biotech exposure? Where does it take you in terms of biotech exposure for the company?

We're going to stay away from the cost synergies because it's -- we're just signed a binding offer and we have to wait to get through all of our regulatory and labor consultations and actually have a deal. But to very similar to WIL mid teens margins doesn't mean that they're not a good company, MPI had extraordinarily high margins. So efficiency and margin accretion has just been something that we at focused have focused on. And MPI did that as well. And so some of these other companies that are now part of the full, including hopefully CiTox soon, focused on it last I guess is the best way to put it. So, with the sort of scheduling tools that we have and our overall best practices and growth metrics and efficiency initiatives, how we utilize our space, we know this is not just hope. We know we will be able to improve our margin there. And I think we said we probably would get them to 20 in the next couple of years and obviously we have some more to do. We have to do beyond that. Was there a third part to your question?

Is it about biotech exposure overall now post this deal?

Yes. I can’t give you an exact number. This would be clear this would increase it. They have a range of clients both large and small, they have some big pharma clients. I'd say the majority of their work is with mid to small biotech companies, some of whom we already work with and some of whom we doubt they are domestic and they are North American and non-North American. So it would increase -- it would increase that percentage given that the funding levels and the scientific creativity and advancement and innovation and the fact that none of these clients have internal capabilities, we like that increase.

Okay. Appreciate the color. Thanks.

Thank you. We'll go next to the line of Derik De Bruin of Bank of America.

Hi, good morning. Hey, a couple of questions. What's capacity utilization at CiTox now and the follow up to that I guess can you talk about capacity utilization across the industry and I just – sort of like pricing trends and seen we're seeing stable pricing increases, just some general color I know you’re not going to give specifics, but just would appreciate any backdrop?

So I would say that could be capacity utilization at CiTox is if they are essentially fully utilizing their space. Having said that, we do think that just some of our capabilities things that I spoke about a moment ago like the way we are scheduling tool that we have, just overall efficiency initiatives that we have. How we time the end of the study and bring up a new one that we still can we get more capacity utilization out of the CiTox facilities even though they're well utilized. So that's just an opportunity for more margin improvement. We could do this with a trivial amount of investment. Derik, we never know exactly what the industry capacity is. I would say that we bought two of our competitors and we hope to buy a third competitor that we're finding our competitors. MPI being an anomaly just the size of the building that we're finding the industry to be generally well utilizing their capacity well. We don't get a sense that if we tell a client that we can't start a study for three months, let's say that they're running into the competition and they could start earlier. We see very little – we see some, but we very little aggressive pricing which is an indication that everyone's busy, everyone's getting some price. Well, we will say about prices that we did get price in 2018 and we anticipate getting more in 2019 and we would expect that competition would as well. So, kind of feels like everybody's behaving themselves. The demand is quite strong kind of across the client base both pharma and biotech. The internal capacity of pharma is shrinking. The internal capacity of biotech particularly the mid-sized and smaller ones never existed. So they are continue to be now outsourcing. So again, we feel really good about having the capacity that we need to accommodate new business and we are continuing to spend a lot of our time on recruitment and training of our employees to have them ready just slightly ahead of when the work comes in because you just can't hire them and catch up with that demand. So we did -- I think we did a very good job in that at 2018, and I think our hiring capabilities have been enhanced and we feel quite confident we will be able to do that in 2019 as well.

If I can just do one quick one since you mentioned hiring. How much wage pressure you seeing?

No. It's different in every geographic locale and it changes from time to time. You suddenly get some pressure in a Geo. Reno's become an interesting place. Big Tesla battery manufacturing facility, they also have Google and Apple have moved in there. So that's certainly become a place where I'm with that and skill level we have to pay more. I will say that we feel that the entry level enhancements that we made in the middle of last year multiple places in the U.S. and overseas including, China by the way and the alleviation of the compression that had caused. We think we're caught up so we don't think that there’s a lot of pressure and obviously if we ever have to tweak a locale like we I just spoke about would we know what we'll do that. But we're not finding it particularly difficult to recruit people. I’m finding it difficult at all at the highest end. Derek, if you’d find interesting, getting a lot of people from big pharma and biotech, which is fabulous and entry level people you know there's the statistic that we worked on 85% of the drugs. I think people are proud to work in a company that has those metrics and also it's a good recruiting tool. But of course we have to pay well, so we won't let that be an issue and I don't anticipate we'll have another need that sort of wholesale improvement in fiscal 2019.

Thank you.

Sure.

We’ll go next to the line of David Windley with Jefferies.

Hi. Thanks for taking my question. I've jumped on late, so I apologize if I'm repeating. But I wanted to shift to manufacturing support understand the kind of seasonality in margin so we know that you're opening this new facility, I believe that to continue those cost headwinds would continue through the middle of next year. The margin was at least seasonally very good in the fourth quarter. So if you wouldn't mind passing those things apart to the extent that you can I would appreciate it.

Actually we did have a conversation around manufacturing margins going through the quarter. So maybe in the interest of time we could pick that up probably after the call.

Okay. Jim, on Citox, you have as you’ve just said you made these two other acquisitions. I’m interested in what advantage kind of adding yet another acquisition gives you. Is it, I mean are you kind of building a position of market power that that kind of spans all specialty capabilities or is there a specific capability that Citox has that fills a hole that you didn't already have.

That's a that's a really good question. I would say David, it’s sort of a multiplicity of factors here. One is, that the scientific capabilities of the company are just very deep and very well respected and we felt that way competing with them for a long period of time that they continued to distinguish themselves as we’ve dealt with WIL and MPI. But I would say that WIL and Citox were unusually, we saw a lot of client feedback about the strengths and so we like that we like the additional capacity in Europe and particularly in Eastern Europe. We actually have aspired to be in Eastern Europe for a long time, and just haven’t been able to figure out a way to do that. We would always prefer to buy an ongoing operation there are two sites in Hungary, which we are looking forward to expanding and maybe adding some additional services to that. They have strong general tox capability, and also strong specialty in repro and ocular. And we really love the discovery services, some of which we have looked at previously. Now particularly the transporter capability which is really important stuff particularly in drug drug interaction issues, strong genomics portfolio which we hear a lot of our clients asking about. So I’d say and then the medical device capability which is a big big markets about a $1 billion. We have a small capability in that, now this doubles our capability. So definitely, we picked up several scientific capabilities and a broader geographic footprint and obviously additional clients that we didn’t otherwise have. Overall it provides…

Thank you. Super. Thanks.

Thank you. We'll go next to the line of Dan Leonard with Deutsche Bank.

Thank you. Just a visibility question. In the parts of your business where this question is relevant that our capacity driven, you know how much of your real revenue for 2019 would you say is already booked, today versus what that might be a typical level and given forward period?

Yes, I mean that’s something that we report on except to say that we have a strong bookings and backlog scenario, a lot of proposals coming in just we ended the year very strong and we just know it's continuing. We think the demand metrics just in terms of funding, outsourcing and sophistication and elegance of some of the new scientific breakthroughs are really driving a lot of the growth. So we feel very good that the demand will continue and we’ll have some pricing power, that the mix will be that could be beneficial for us in terms of specialty and general tox and having some, having some backlog is really important because studies inevitably will slip, drugs won't be ready on time. So if somebody has booked a slot, you know -- we need somebody else to slot in behind it. Also, we need to try to match our hiring metrics with demand and stay slightly ahead of that. So we a pretty good line of sight let’s say four or five months ahead, in safety as to what the bookings are at each side. And you know I think we’re doing an increasingly more sophisticated job at staffing up to that demand level.

Okay, thank you.

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

Hi. This is [Indiscernible] for Ricky. I just want to ask a question on margins. So looking at the Tox business, it’s already a high margin business. And you mentioned that the DSA segment will be a primary margin driver of the overall improvement in fiscal 2019. So can you give us a bit more color on how much more margin expansion from tox do you expect in 2019 and maybe the longer term outlook?

Signal that for the full year, if you look at just that what’s the total. We’ve said that there will be modest improvements with the margin that we had last year, about 18.8% and that's primarily driven by the DSA segment. Now we haven't actually passed that down cycle by segment where that will come from, but try to get some clearance to where it increased over 80 would come from. And if you've been following that you know that we kind of have a number of headwinds that we're dealing with like we got a headwind from the salary adjustment that we made in July last year which probably puts on about a 20% -- a 20 basis point headwind for the 2019 on total business. And we have headwinds from the NIAID contract even though the revenue is obviously very good, and we've got headwinds from the capacity expansion biologics. However, we do have strong order books. So we do get sort of a tailwind on the DSA in particular and we also get tailwind from the unallocated corporate cost. Now we've been bringing those down 7.5% as a percentage of revenue in 2016, 7% in 2017, 6.5% in 2018 and we’re signaling that we'll be at 6% of revenue this year at 2019. So when you put all of those ingredients together, that's why we feel that on balance that we should see a modest improvement over the margin for the total company for – 2019.

Great. That’s helpful. And my second question is around the biotech funding. And we saw the robust Biotech Fund environment in 2018. And can you maybe talk a bit about how you think about the current industry dynamics and we have heard a lot of discussions around the drug pricing, the rebates in industry. So would you expect any kind of like impact on the large biopharma spending or outsourcing trend based on your interactions with the large biopharma clients?

We feel that large and small biotech clients are extremely well financed. The figure is at least clear for years of cash available. No reason to believe that fiscal 2019 would be a slow year in terms of cash coming into the sector both directly into these companies or to the VC sector or from Big Pharma. That’s just to support biotech. As long as the breakthrough is continuing to happen, you had the first company file RNAi. I got approval on RNAi drug use a bunch of messenger RNA drugs in the market for a thousand gene therapy drugs have been filed obviously continued breakthroughs in immuno oncology. So it's hard to believe that the capital markets won't continue to support these companies. It’s also hard to believe that there would be any sort of federally mandated pricing, ceilings on innovative drugs that are satisfying unmet medical need. That just would be sort of the anti-American and antibusiness and would probably have a chilling effect on these companies’ desire and ability to continue to invest in R&D. So we think that’s a fair amount of noise, maybe there will be some price ceilings on generic drugs for which there are multiple drugs with specific indications. Most of our clients, virtually all of our clients are dealing with the innovative molecules. So would you anticipate a similar demand curve that we saw in 2018 could be better, don’t see how or why it would be worse.

Okay, thanks.

We’ll go next to the line of Robert Jones of Goldman Sachs.

Hi, this is Nathan Rich on for Bob this morning. Just going back to the Citox deal Jim, you mentioned you know access to new customers was one of the components of a rationale for doing the deal. Could you maybe just help us think about how much of the current Citox business are not customers of Charles River right now, and is there anything you need to that customer said and just in terms of like geography your areas of focus. And what do you see as kind of the opportunity to go after those customers and sell them a broader set of your solutions?

It’s a great question so. We’re not going to give a specific number except to say that the overlap with Charles River customers is somewhat more favorable than it was with MPI. So it’s beneficial for us. We did a very good job, and we worked hard at it. We did a very good job with MPI and WIL who wanted to continue to work at MPI and WIL sites with MPI and WIL staff of keeping those clients happy to the extent that they just had business as usual, and we’ll do the same thing with this deal when it happens. The beneficial upside as you pointed to, for both, the legacy clients of the company is that we buy but also legacies Charles River clients to help them, be able to audit and be happy with the possibility of doing work at multiple sites when particular site is full. So, we have many MPI and legacy WIL clients who are now using Charles River sites that they didn’t otherwise use or even have anything understanding of. Also interestingly, we have legacies Charles River clients who are using MPI and WIL site. Tonight, we would expect exactly the same thing with this deal that we now just have a bigger portfolio to provide our legacy clients maybe, a site that’s more proximate, maybe a site that is available, maybe a site that is doing something in a proximate way that another one of that site isn’t. So the magic for our business, is it’s notional claim ability which we talk about a lot to be able to say the clients, the more, the more you are open to and comfortable with a larger number of assets and capabilities, the more quickly we can be responsive to you. And then, we have lots and lots of clients that use multiple sites and are happy with that. These multiple sites for different reasons, so we just feel this expands and enhances that overall capability.

Thanks, appreciate the detail.

We’ll go next to the line of Erin Wright of Credit Suisse

Hey thanks. Can you speak to the compensation structure changes that you’ve talked about previously and are you seeing the response from those initiatives that you would expect in or is there more that you have to do there? And then a separate question. I understand your overall diversity across your portfolio does limit your exposure here, but how should we be thinking about the implications of pharma consolidation across your business? Thanks.

We had a major intervention as we talked about a few moments ago in our [Indiscernible] and the attendant compression last year. And the direct result of that is, we were able to hire a lot of people last year. A lot of them in safety assessments, as we needed and slightly ahead of where we needed them, with the resulting reduction overtime, and a resulting reduction in turnover, which is exactly what we wanted. So we’ll continue to drive those same metrics, continue to drive turnover down, continue to enhance our training methodologies continue to recruit in large numbers, trained people together, cross train them, so there’s more flexibility in terms of the work they do and make sure that we don’t get compression with people that have been with us a long time. So it feels like we’ve stabilized that situation nicely and have moved into 2019 with a stronger headcount and greater ability to recruit people. You know the big pharma merges, they are what they are. We have no clients that are kind of more than 2.5% of our revenues. So our customer concentration is really wild. That’s a great thing. So nobody asked permission before they do this deal. So all we can do is, do great work for all of these companies when they’re independent, which you should assume that the companies that are in the public press these days are clients of ours. We do good work with. If the portfolios are really complementary, that there’ll be a significant amount of work that will be outsourced and that we should continue to get a lion’s share of that work. It’s impossible to know what the punchline is because one of those big deals is isn’t final, and one just was finalized, but we feel very good about our, our position with those clients and our relationship with them. We also think it’s highly unlikely that we’re going to see any more deals anytime. It’s just a small number of clients left. And bigger isn’t necessarily better.

Okay, great. Thank you.

And we have time for one more question, and that will come from the line of Dan Brennan of UBS.

Great, thanks. Thanks for taking the question. David, I just wanted to go back to the fourth quarter on manufacturing margin. I think, I was asked earlier, but it’s unclear, if you could provide some more clarity since the margin was significantly ahead of what we were anticipating despite the revenues kind of being in line. So can you elaborate a bit on what drove that particularly with the capacity expansion that you have ongoing?

I mean, we I think the simple answer is Q4 was a strong performance from all of that segment. You know we’re really pleased with the strength of the revenue that came in, and the operating result that we delivered. And I think there’s nothing more to say than the performance of those underlying businesses beat our expectations and beat our expectations and offset some of the pressure [ph] that we saw from the bilogics move.

Okay. And then maybe one more question on Citox. Jim, I think you or David discussed during the prepared remarks about the deal is expected to exceed your ROIC target tipping by Year 3 or Year 4. Maybe could you just, discuss what those goals are? And I guess implicit in that, is there an assumption that the high single digit growth rate that your stated at Citox is growing at and I presume that number would have to go higher in order to achieve those goals. Maybe you can just address both of those? And thank you.

I missed the beginning of that question.

It was just on ROIC, I think Jim talked about or David you had mentioned [Indiscernible] just kind of what are those goals, maybe a little clarity on that. And then kind of what’s implicit for topline growth in order to achieve those goals? Thank you.

So when we looked at M&A and we have a number of metrics that we’re looking at. One of which is we expect it to be positively accretive out of the gate, and we’re not looking for companies that we want to turn around. One of the other key metrics that we have is a return on invested capital that peaked our WACC by three or four. And what we were trying to figure by that statement was that, we believe that this acquisition will achieve that like target. In New York Investor Day in August last year, we called out quite a bit of that history of how we’ve been doing with our acquisitions. So we were signaling this morning that we will be held to account to that target as we have without prior acquisition. And at some point in the future I’m sure we’ll get an update to where we are in our portfolio about achieving that.

Okay, great. Thank you.

Great. Thank you for joining us on the conference call this morning. We look forward to seeing you at upcoming investor conferences. This concludes the call.

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