Please stand by your program is about to begin. [Operator Instructions] Ladies and gentlemen, thank you for standing by, and welcome to the Charles River Laboratories Second Quarter 2023 Earnings Conference Call. This call is being recorded. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to our host, Todd Spencer, Vice President of Investor Relations. Please go ahead.

Good morning, and welcome to Charles River Laboratories second quarter 2023 earnings conference call and webcast. This morning, I am joined by Jim Foster, Chairman, President and Chief Executive Officer; and Flavia Pease, Executive Vice President and Chief Financial Officer. They will comment on our results for the second quarter of 2023. 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 webcast replay of this call will be available beginning approximately two hours after the call today and can also be accessed on our Investor Relations website. The replay will be available through next quarter’s conference call. I’d like to remind you of our safe harbor. All 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 than those indicated. During this call, we will primarily discuss non-GAAP financial measures, which we believe help investors gain a meaningful understanding of our core operating results and guidance. 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 on the Investor Relations section of our website. I will now turn the call over to Jim Foster.

Good morning. We were pleased with our second quarter financial performance including organic revenue growth of 11.2%. As expected, the revenue growth rates in the RMS and Manufacturing segments improved from first quarter levels and the DSA segment had another strong quarter with low double digit revenue growth and operating margin improvement. DSA performance reflected the substantial scale and duration of our backlog, which has enabled us to effectively manage the business. For the year, we are narrowing our revenue growth and our non-GAAP earnings per share guidance to the upper ends of the previous ranges. This update largely reflects the successful implementation of our mitigation efforts around NHP supply for which I will provide additional details shortly. However, we continue to expect for second half growth rates to be pressured primarily in the DSA segment as a result of three primary factors. First, the current market conditions are resulting in a continuation of the lower backlog and booking trends. Second, the DSA segment faces a challenging year-over-year comparison after having generated organic revenue growth of 23.6% in the second half of 2022 and finally we still expect a modest impact from NHP supply constraints principally in the third quarter. We are also closely monitoring the near term demand trends of our biopharmaceutical clients as they appear to be reprioritizing their pipelines and tightening their R&D budgets. This is affecting our industry and our company, but we will continue to leverage our significant DSA backlog and intend to appropriately manage the business amidst a more cautious biopharma spending environment. During times of funding or macroeconomic uncertainty, clients are looking for even more efficiency and speed to market and we believe they will continue to choose an industry leader like Charles River in order to derive additional value from our flexible…

Thank you, Jim and good morning. Before I begin, may I remind you that I'll be speaking primarily to non-GAAP results which exclude amortization and other acquisition related adjustments, cost related primarily to our global efficiency initiatives, gains or losses from our venture capital and other strategic investments and certain other items. Many of my comments will also refer to organic revenue growth, which excludes the impact of acquisitions, divestitures and foreign currency translation. We're pleased with our results for the second quarter which included organic revenue growth of 11.2% and non-GAAP earnings per share of $2.69. These results, which are consistent with our prior outlook, reflect the continued resilience and stability of our businesses even during times of macroeconomic pressure. As was the case in the first quarter, increased interest expense, a higher tax rate and the divestiture of the Avian vaccine business continue to restrict the year-over-year earnings growth rate. Our first half results and our updated NHP supply outlook support our revenue growth and earnings per share guidance for the full year, which has now been narrowed to the upper end of the prior ranges. We continue to be well positioned to deliver reported revenue growth of 2.5% to 4.5%, organic revenue growth of 5.5% to 7.5%, non-GAAP earnings per share between $10.30 and $10.90 and free cash flow of $330 million to $380 million for the year. Our updated revenue growth outlook for 2023 reflects our revised assumptions about two headwinds that will affect the second half growth rates, particularly in the DSA segment. First, the impact of NHP supply is expected to be below our original estimate of a 2% to 4% impact to total revenue growth. This favorability will be largely offset by the impact of macroeconomic and funding pressures on biopharma client demand…

That concludes our comments. We will now take your questions.

[Operator Instructions] We will pause for a moment to allow questions to queue. And we'll take our first question from Sandy Draper with Guggenheim. Your line is open.

Great. Thanks very much. And I apologize hopefully Jim you didn't cover this. I had to jump on the call a little bit late. But in terms of the demand environment is there a noticeable split between the types of customers large pharma, mid-size pharma, emerging biotech that it's--- is it coming in any particular area any whether by size by therapeutic classes, any way to think about sort of or is it broad based that you're seeing sort of come a little bit more cautious as across all the different therapeutic classes and all the different sizes? Thanks.

Pretty broad based for different reasons obviously. The big pharma companies which are typically flushed with cash, have budgets and they are holding very tight to them. So we've got-- we have some careful spending there and you've got a whole category of very small biotech companies with you know some potential concern about burn rates and running out of cash. So we would say that essentially both of those groups would be careful subject to the following caveat that we have particularly, I think the strong performance from the pharmaceutical sector in the second quarter. So some of the companies are quite strong. Our growth rate has been juiced for the last, I don't know decade, principally by small and midsized biotech, bigpharma has always been an important client base for us, but they have been particularly active and strong to a point and the point being budget. So I'd say some careful spending across the board would be probably the best way to characterize it.

Great. Thanks, Chairman. I'll just keep it to one question for now. Thanks.

Thanks, Sandy.

Thank you. And we'll take our next question from Eric Coldwell with Baird. Your line is open.

Thanks very much. Good morning. Two-part question on DSA first, I know it's modest and better than you originally expected, but, would you care to quantify the more specifically quantified the third quarter impact from NHPs and what you're seeing for the full year versus the original 2% to 4%? And then secondarily on the commentary around backlog declines and cancels, while that was I think fully anticipated, I am curious what your perspective is on the $2.8 billion today, how much of that do you think could be at risk? Or where -- and maybe another way of saying this, would you be looking at similar backlog declines over the next one, two, three quarters? Just trying to get a sense on what you think the underlying safe base is and that that backlog that you're disclosing now? Thanks so much.

Yes, difficult to say where it settles out. So we had a sickly, frothy market and clients, definitely -- concerned about getting slots? And so they booked way out. So yes, we got as far out as you know seventeen, eighteen months, we talked about that. We got about thirteen months of coverage right now, which, feels good. We will have less slippage, so slippage increased, sorry, we've always had slippages increase just because the sheer volume of work has increased by the same token, I think people were holding slots without necessarily knowing what drug they would put into that slot. That's exacerbated by the fact that everybody's sort of refining their pipelines. And so as things continue to normalize which they are and we think they will continue to, I think the good news is that they'll be booking studies somewhat closer to when they start. So that's a good thing for them and for us. We should see a reduction in slippage for sure, but we should still have a substantial amount of business and backlog where it shakes out is a little bit difficult to call. What we've said is it's normalizing instead of returning to the mean, and I think all of that's true. We've gotten a significant amount of price each year for the past half a decade anyway, increasingly so because the studies are more complex. So as we look to the current and the future, we think the price will continue to be an important part of the equation, as will some substantial volume. So we'll just have to walk through this together as we walk through the quarters. The other thing which we keep saying that I'm not sure people pay a lot of attention to it, is we don't have linearity in our business. So, last year we had a very slow first half and a very strong second half. This year we've had a very strong first half and a less, sort of pointing to a less strong second half. That doesn't necessarily tell you much because our clients look at the spending throughout the whole year and we've -- I think we've been able to call, so the annual cadence really well. But we feel that that business is good, demand is solid, we have a strong competitive situation and that our clients will be focusing on studies to start more rapidly than they have over the last two years.

And an average, just to your first question about the DSA impact. We're not going to quantify it precisely, I'm just going to say that it was meaningfully below the previous 2% to 4% range that we provided. We're going to see a little bit of that in Q3 just as we operationalize those the logistics of redistributing work across our geographic footprint. So it should be a small modest impact in Q3 and nothing in Q4. And just one additional comment with regards to the backlog, in addition to everything that Jim just said, I think we pointed out that gross bookings were above one items of the book-to-bill in the quarter. So I think it's really, to Jim's point, canceling of work that was placed when the market was very frothy and the reversed to the mean as you pointed out.

And Flavia, if gross bookings were above one, is I think about this 12% revenue growth in the segment, does that mean gross bookings were up 12% plus as well? Am I thinking about that right?

I -- there's other things there. There's price that is different year-over-year. So I wouldn't necessarily draw that direct conclusion, but growth bookings are going to be supporting continued healthy growth with DSA. That's how we should think about it.

Okay. Thank you.

And we'll take our next question from Derik De Bruin with Bank of America. Your line is open.

Hi, good morning. Thank you for taking my question. So I've got two. Jim, we continue to get a lot of questions from investors about -- speaking about how NHP pricing is going to roll to the business that normalizes and pricing starts to come down. People are worried about your margins. Can you sort of walk through the impact of what that has done in terms of NHP price on your margins and just sort of how you're sort of thinking about mitigating that? Thanks. And then I've got a follow up.

I mean the NHP pricing has been primarily a pass through and so we've -- we're covering our costs and getting reimbursed for them. And so if and as those come down, which I think everybody expects that they will, so it's a little bit difficult to call it because the availability of NHP is sort of ebbs and flows. So let's assume there is a sufficiency of them and we don't have the need to pass on anything incremental. I mean those NHP studies are priced appropriately given the complexity of the work, given the amount of labor and space that's utilized, given how prominent we are in space. So I think we'll continue to be able to hold on to very attractive prices there without being significantly adversely impacted by not having that somewhat unreasonable increase. I mean if you look at the price of NHPs over the last five or six years, it sort of increased at an unpredictable rate. So I think everybody would be pleased with that. I think it'll have a de minimus impact on us.

Great. And then a follow up on the Manufacturing segment, high single digit growth now versus high single low double digit prior. Just a little bit more color there in terms of some of the headwinds in terms of the testing business and just what you're seeing in the CDMO just basically the questions or goes into this is like when do we expect that business to go back to its potential double digit growth rate? Is that feasible going back and looking at 2024?

So that’s getting specific about 2024, I would say it's certainly feasible. I mean the microbial business which is sort of tracking maybe high single has always been at low double. So it has that potential given the pricing and the complexity and diversity of the product line. So that continues to be very strong franchise for us since it’s extremely profitable. The CDMO business which was a big headwind last year is improving nicely both on the top and the bottom line, so that should contribute well. Biologics business is a little bit curious. It always starts slow so that it's not a big surprise. Stayed reasonably slow again second quarter, but we anticipate it will continue to improve in the back half of the year. That testing has to be done before drugs get into the clinic and the big push now is to get things into the clinic. What we're seeing thus in some of this stuff is really expensive is that in viral clearance and cell banking which are expensive and I don't know, a year or two ago they might have done that earlier in the process, we’re waiting until later in the process. So as the drugs continue to develop well they will spend that kind of money and we still feel very good about that franchise and the investments that we've made in capacity and staffing, assays that we put in place to cell and gene therapy. And we’re definitely holding our own from a competitive point of view, but the volume is such that's a bit of a drag right now on margin. So that will continue to ameliorate in the back half of the year. We're beginning to think and plan carefully for our investor conference at the end of September. Well, we'll try to give as much clarity on what we think the absent flows are on the specific businesses across the whole portfolio when we get there.

Thank you.

And we'll take our next question from Tejas Savant with Morgan Stanley. Your line is open.

Hi guys, good morning. I want to go back to that earlier question on price, Jim if I may. You know in the past you've always told us that clients are less focused on price and safety assessment, more focused on start times. Now obviously that concern around start times no longer seems to be as acute anymore and will likely keep coming in lower, if you will. So with that sort of backdrop and the macro cross currents that you're seeing, how should we be thinking about pricing into sort of not just the back half of this year, but perhaps into 2024?

You should assume that pricing will -- that we will continue to be able to garner meaningful price given the complexity of the work, you should assume. Can't really speak for all of our competitors, but I will. You should assume the capacity is going to be tight so while we can start studies faster and the backlog is shorter, the backlog is not trivial and we're very busy on a worldwide basis and we've added more capacity last year and this year, but only enough to accommodate for what we think the anticipated demand will be. So I think as long as there's lots of healthy drug development, which there is, as long as there are multiple new modalities which there are as long as access to capital is -- improves which I think probably everybody on this call has a different sense. But the second quarter was better and yet there's more M&A and you know, so if we have IPO markets open up, let's say the beginning of next year, cash will be readily available. So we're not -- it’s not a major focus of ours and of course it's going to, that's also going to have inflow depending on how busy we are and depending on how people feel about the economy. So some of this is sort of a sector related response and a lot of it's just an overall economic response. So pricing will continue to be meaningful in terms of our ability to get a significant amount.

The only caveat on -- has that I was include is -- over obviously the last couple of years, inflation has been unusually high and as Jim pointed out, given the complexity of the work that we perform, we are able to pass inflationary pressures to our clients and as that modulates and normalizes that level of past will also adjust. So that's the only thing to keep in mind.

Got it. That's helpful. And then Jim, quick follow up there. You talked about sort of framing the long term targets at the Analyst Day, but you also sort of mentioned that normalization of elevated growth that you've seen here over the past decade or so. So is that sort of essentially sort of foreshadowing perhaps your long term growth targets coming in a little bit to that high single digit range?

Yeah. So you'll have to be patient for another month. We'll give you chapter and verse on where we think we're going, both on the top line and bottom line. Let's wait until we do that on Mass. Q - Tejas Savant All right. Thank you. I appreciate the time.

Thank you. We'll take our next question from Dan Leonard with Credit Suisse. Your line is open.

Thank you. My first question on the NHP situation. It sounds from your remarks that the solution you have in place to utilize your global footprint is permanent. What are the implications of that for margins or otherwise?

So, nothing's forever.

But it's possible that it's permanent, right?

We're not looking at it as necessarily transitory, look we're looking at it as utilizing our infrastructure, which is bigger than everybody else's of clients and competitors. Continuing to use it to our competitive advantage and that means multiple supply sources of NHPs that might mean multiple geographies and multiple facilities. So the good news is we have a very big infrastructure and enormous amount of expertise in NHPs around the world. And we'll be able to slide in different providers of NHPs let's say in U.S. market if you don't bring them in from Cambodia. And if we do bring them in from Cambodia, then we'll use multiple sources. So I don't believe it's going to have any impact on our margin without being too specific about we're doing all of this work and then we're getting healthy prices everywhere. Obviously, costs are not identical everywhere that we do work, but on a blended basis. As we keep the volume up, we should be able to generate hopefully increasingly better margins. We're also spending a lot of time on efficiency initiatives, particularly through our digitization effort and sort of standardization of activities. So, if a client is used to getting work done and somewhere in the U.S. and now it's getting it done, for instance, somewhere in Europe, they should feel that the work will be identical.

Understood. And I have a follow up, Jim, on your CDMO business. You mentioned that you have a few other clients reaching commercialization in the next one to two years. Possibly you could speak to whether any of these are more meaningful indications and could be more needle moving. Thank you.

Sorry, meaningful indications of what? You cut out at the end.

Yes, more meaningful indications or more needle moving?

Yes, very difficult. I mean, the needle moving from the point of view that we're having vigorous regulatory and client audits. And if those are successful on both I think that puts us in a very rarefied position from a competitive point of view. So we would anticipate that gives us sort of a clean bill of health and other clients would follow. It's impossible to gauge what the volume will be with these companies. It's possible to gauge what the volume will ultimately be, but I think most of these will start relatively slowly both from a regulatory point of view, insurance coverage point of view, doctors being comfortable with it, of course, as you -- I think you all know of cell and gene therapies facts are still only whatever fourteen drugs that have been approved. So, there's a very serious safety profile. We're thrilled to have multiple clients that are either commercial or talking seriously about it or going through these audits. Hopefully that will pick up and of course almost regardless of the volume itself, you're doing the same thing over and over again. So, since the client is now in a commercial mill year, we should get -- they should get more price, we should get more price as well and we should be able to continually refine the process. So, there's only positives about the work moving in new commercial domain.

Appreciate those thoughts. Thank you.

Thank you. We'll take our next question from Elizabeth Anderson with Evercore ISI. Your line is open.

Hi, guys. Thanks so much for the question. Maybe I have sort of a two-part question, one on the short-term side and one on the longer term side. If we talk about sort of what -- your commentary on, on DSA bookings and cancellations, I'd be curious sort of if you could talk about whether you saw the accelerating cancellations continuing into July? And then on the longer term end of the spectrum like can you help remind us like if we've gone through other sort of biotech funding cycles like if we think back to 2016, 2017 or even back to the financial crisis? Like how do we sort of like thread this sort of improving biotech funding environment that we've been seeing your sort of cancellation commentaries in terms of like when those things sort of the funding sort of might come through to offset that? Thanks.

Yes. So we're going to stay away from giving in to quarter numbers. So we'll stay away from the July question. Sorry about that. The historical cycles are difficult to compare to because every single one of them is something different is instigating it, overall economic conditions are different and the client base is different, both in terms of modality and scale and funding abilities. So it's tough to say. And I've said for years, I don't think this business is particularly cyclical. But we're seeing a little of it now for sure, with clients favoring the clinic to the -- a bit certainly to the detriment of some of the early discovery work. I don't think much to the detriment of the of the safety work because you're not getting anything into the clinic without that. So again, we feel that it's normalizing right before our eyes. We don't know exactly where it's going to shape out -- end up except it was unusual, it was fun, but it was unusually frothy and sort of instigated by COVID and real concern about running out of space. So I think we'll be in a bit-- in a different place and I hope a better place where that the clients can book somewhat sooner, not necessarily overnight but somewhat sooner, prices hold up for sure cancellations and slippage would be reduced as a percentage of the whole and we would be working much more closely with the clients and having less kind of surprises way down the road with this slippage. So everybody is sort of saying the same thing. The really big guys are saying, look we have budgets and we can't blow them and the little guys are saying, we're -- things are looking up, but we need to be a little more cautious until things improve. So depending on how you feel about the next year or two, I think most people think that we'll see an improved economy that should strengthen the demand and it should shake out into a more favorable place.

Got it. That’s helpful. And then just a quick follow up, in terms of the more global NHP work that you talked about before, are you seeing an interest from non-Chinese clients and doing NHP work in China or is that kind of remain like a more dominated by Chinese biopharma companies?

I mean it's tough for us to say since we don't do work there. So it's a bit anecdotal. I think some clients that are extremely price sensitive to the Western clients will go to China. I think the preponderance of the work that is done in China is for -- is by Chinese CROs for Chinese biotech or pharma companies where it's essentially required by law. So we see a little bit of that in conversations with our prospective clients, but not very much.

Got it. Thanks so much.

Thank you. We'll take our next question from Dave Windley with Jefferies. Your line is open.

Hi, I wanted to clarify quickly. In your answer to Eric, Flavia, did you say gross bookings about one times or above one times, just interested in -- are we talking 1.01 or 1.1 or 1.2, just an order of magnitude if you don't mind?

Good morning, Dave. I mean, I said above one, I want once [indiscernible] benefited as precision, but certainly above one.

Okay. Jim, on the international or global activity and repositioning your NHP work, can you talk about -- you mentioned, I think conversations with regulators or work with regulators. Can you, can you talk about the work that you've done there to get either Canada or Europe, European organizations comfortable with the supply chain in a way that the Fish and Wildlife Service is not comfortable?

I probably can't cut too deep into that, but we have other geographies that for sure from a both regulatory and permitting point of view and communication point of view and a support point of view are quite comfortable with the way we're operating given the multiplicity of sources than HP, so it's sort of a different approach. We certainly hope that we get back to a similar relationship with the U.S. obviously we have that with non-Cambodian animals and we think in time to continued conversations that will get to the point that we'll have multiple sources of supply from multiple locations. So it's sort of an interesting inflection point right now where we're getting -- the good news is we're getting our work done for our clients without delays that we're doing our quality basis, we're using our infrastructure well, we're using it flexible way, we're getting significant amount of price and we're using the animals that we have contracted for. And we're happy and somewhat proud of our ability to pivot in the midst sort of a complex situations, but I do think overtime it will continue to ameliorate and improve on a worldwide basis. That's certainly our goal.

Thank you. And just as a quick follow up, you mentioned to Tejas that, I think you're still seeing price or in the current, just thinking short term in the current environment given the changes in demand trend, are you seeing discounting in the market from your competitors at all for safety assessment studies? Thanks. That's all I have.

Yes. I mean it depends on the competitor. It depends on what sort of work we're getting on. I think that periodically there's some more aggressive pricing, certainly as I said earlier, there is from the Chinese competitors and there always is from some of our smaller competitors. Sometimes we play, we participate and sometimes the price points that they have set up are at or below our cost and we're not going to play and we're trying to. We try to maximize the return. We have a lot of long term contracts with some of our bigger clients which has some price protection in it. And probably periodically where we do see prices as well, so we'll do what we can to be responsive to different types of clients, many of whom have been concerned about availability of capital.

Different types of work as well, right? The more complex work, there's less competition and a little bit more -- less resiliency.

Got it. Thank you very much.

Thank you. We'll take our next question from Max Smock with William Blair. Your line is open.

Hi, good morning. Thanks for taking our questions. Maybe just one for me here on the RMS segment. Thinking about demand for research models and indicator of health and stability of early stage research activity more broadly and this quarter we've consistently heard that companies are prioritizing later stage programs and said some more of the same today. I'm just wondering how that is inconsistent with what you're seeing in RMS? Is there anything to call out there other than maybe your exposure to large well funded clients? And how do you think about the likelihood that the macro environment starts to more meaningfully impact that segment moving forward? Thank you.

Yes. The RMS business is particularly strong [indiscernible] it was particularly strong in the second quarter in large measure because of NHP sales in China, service, significant service revenue particularly on the CRAFL and small animals in the U.S. and Europe. So, while there may be less animals acquired for discovery, those animals are obviously used widely in pharmacology and in regulated and non-regulated talks. So I think, I think it will be the minimus and you're not going to get drugs in the clinic next year or the year after or five years from now if the discovery work doesn't start up in a significant way again. So these sort of emphasis on one place or another has to be short lived in terms of the development of pipeline. So, we continue to sell our research models literally to everybody in the world. Business fields between -- quite strong right now we've -- we always have and will and do get price. And we have a much broader portfolio and geographic footprint from the competition. So, while it might be a little bit slow on discovery side, it will continue to improve.

Got it. Thank you. May be and just a follow up one for me here on manufacturing. You mentioned the weakness and things like viral clearance that don't need to necessarily be done right now, but need to be done at some point. I mean, based on this and your visibility into the work that's kind of been delayed here, is it fair to say that this work is actually simply being delayed instead of cancelled? And if so, how do you think about that work flowing through in the future? Is there some bolus maybe building up that at some point, maybe 2024 could be a tailwind to the biologic safety testing business in particular?

That would be nice, and I'm not sure that that's happening, but it's very complex. It's expensive, it's a necessity. Drugs don't get into the clinic unless you can prove that you cleared any sort of human viruses that might be in the mix. We've seen it historically done earlier in the process. And so it's just simply – it's a little bit comparable to safety studies and specialized safety studies that are way more expensive and clients wait until they're in Phase 2 or Phase 3 before they spend the money on that. So it's not that unusual. It's a very smart thing to do and you don't want to expend the money on a drug that's not going to get to the client, which could happen if you do it prematurely. It's difficult to extrapolate as to whether there's any sort of bolus at all. So I wouldn't want to take a guess at that. I think that for sure, people are sort of whittling down their pipeline; it doesn't mean that they're necessarily selling or canceling programs. It just means that they're shelving them. So that could heat up again and that could bolus of all work across multiple work streams.

Great. Thank you.

Thank you. We'll take our next question from Patrick Donnelly with Citi. Your line is open.

Hey guys. Thanks for taking the questions. Jim, may be to circle back up on the backlog cancellation question. I'll try to ask it in a different way. I mean it looks like maybe $200 million or so of cancellations, maybe that 7% of the backlog. Can you frame that up in terms of historically what that looks like? Just trying to get a sense of, again, as a few people have asked what this looks like relative to other cycles, how much has accelerated and just the right way to think about this going forward.

If it's a right or wrong way. You've got more work in backlog, which necessitate which brings with it more slippage and cancellation. So it's -- to some extent, its math. But as it's elongated, I think it's exacerbated and increased it. So it's not particularly comparable to other things that we've seen historically which is fine. This sort of demand curve and competitive scenario, complexity mortalities continues to morph and change all the time. But we're definitely normalizing the situation, which I think will be normalized the situation, and we still have 13 months of backlog. I think it will be a better paradigm to predict the next quarter and to come up with our operating plan for 2024 when we do that.

Okay. That's fair and maybe just a quick one. When we look at 4Q in terms of -- it should be a relatively clean quarter in terms of no NHP headwinds, is it fair to look at -- and it might be for Flavi as well on the EPS side. Is it fair to look at kind of DSA and EPS is a decent kind of run rate jumping off point when we look at 2024? Is there anything left in terms of these headwinds or onetime things that we need to consider on those pieces? Thank you guys.

Yes. I think as Jim has said, we'll provide additional clarity to 2024 in our longer-term outlook in our Investor Day on September 21. But I think just in terms of the normalization of any impact of NHP supply, as we said, there shouldn't be anything in Q4 for 2024. So from that perspective, it should be [indiscernible].

I appreciate it.

I think I'll just up that. I think any one quarter, as Jim said before, that our business isn't linear. So any one quarter is remember a good indicator of a longer-term trend necessarily. I mean we really take a lot of pricing guidance on an annual basis, and I think we've been pretty successful with that so far.

Yes. Understood. Thank you guys.

Thank you. And we'll take our next question from Casey Woodring with JPMorgan. Your line is open.

Good. Hi, thanks for squeezing me in. So you called out emerging biotech budgets is a key driver of some of the cancellations. But you also mentioned that funding level showed the first year-on-year increase in seven quarters on a TTM basis. Last quarter, I think you get a at industry funding grew 20% year-over-year. So curious on sort of the correlation there and maybe what your visibility is into emerging biotech demand. DSA has always been a short-cycle business. So heightened cancellation rate, is that more a function of customers just choosing to book work less fly in advance? Or is there a structural demand is you going on? Thank you.

Discovery work in discovery comes in very rapidly and goes out very rapidly, Sipho [ph]. The demand curve can turn on a dime as our client smaller and some midsized clients get more comfortable with their access to capital. There's lots of tea leaves to reap there, right, it's follow-ons and IPOs and money coming in from big pharma and DCs, et cetera, which appears to be strengthening. At what point the clients are comfortable enough to prosecute a larger cadre of drugs is somewhat unclear, but it seems to be moving in the right direction. So we felt for a long time with the client base. It's been extremely well financed. And I wouldn't say they're poorly financed right now, I'd just say that there has been mounting concern about the weather access to capital would continue or not. So given that the tea leaves look positive, we would think that at some point, they would be more comfortable with that. But right now, there's definitely an enhanced focus on the clinic. That makes a lot of sense. It's not a huge surprise but they have to get back to basic discovery sooner than later.

Got it. And then maybe if I could just follow up quickly, one for Flavia. On the quarterly pacing in the back half for DSA if the supply impact in the first half is mid-teens, that rolls off with no impact from supply in 4Q, as you noted, based on the mid-single-digit guide for the year, is that implied 4Q DSA growth rate flat to negative for 4Q? And then maybe just talk about if that's the right way to think about it and what that exit rate would mean for 2024. Thank you guys.

Yes. So I think between Jim and I, we addressed this in the prepared remarks. There's a few items impacting the second half and in particular, DSA. There is a little bit of NHP supply impact in the third quarter. Just as we finalize the rescheduling of the work across our international footprint. There's also a comp. If you will have the last year, DSA was incredibly strong in the second half. So we have those costs impacting it there. I think as we got it to a mid-single digit in the first half of the SA being about 15%, 17%, you will see a second half deceleration of that growth rate.

I think we can take the next question.

Thank you. We'll move to our next question from Justin Bowers with Deutsche Bank. Your line is open.

Hey good morning everyone. Jim, can you talk about the improvements in the CDMO business and how that's performing this year relative to the growth expectations when you entered the business a couple of years ago?

Sure. We've got three centers of excellence in that business now, which is a change from the companies that we bought. So one company doing gene-modified cell therapy manufacturing, another one doing viral vector manufacturing and another one doing plasmids. We've spoken previously, we have enhanced change and we upgraded pretty much staffing across the board from sales for regulatory folks to our general managers. We definitely have improving books of business in all three of those locales subject to the caveat they all have a slightly different time frame to generate new business. As we said a moment ago, we do have a few clients that we're talking to about moving into a commercial domain in the cell therapy manufacturing business. So it takes some time for a world to actually acknowledge and that we're in this business that we do it seriously, what our products and services are and how they can contrast that with others that they could do the work with. So we had a rough year last year, for sure, just kind of retooling these businesses. They feel like they're a much stronger place right now. Clients seem much happier. We've got some regulators in. And so we're confident that we're going to have higher growth rates this year and meaningful improvement over the past year or last year. And we anticipate that, that will continue. We had great hopes for these businesses, both in terms of top line growth, significant top line growth that would be accretive to both manufacturing for sure and the company as a whole and that the margins would improve as the scale improved, which we still believe.

Got it. And then just in terms of the normalization in DSA, and we all appreciate how dynamic the last few years have been. Is there a way to just sort of care the commentary, I mean before clients were booking more than a year out in advance, can you just help frame sort of what it was like, let's say, maybe pre-COVID and pre some supply chain disruption and whether we think it sort of return to that or somewhere in the middle?

Yes, again, a bit tough to say, but we probably have six to nine month backlog depending on the type of tax work of specialty for general and depending on the client and the locale, they got much longer than that. Historically, never got more than, I would say, nine months. So the kind of pre-COVID was as it was in a good place. And we have more price lately than we used to in those days. So the hope would be that we get back to a reasonably attractive run rate that both allows us to take share and continue to gain our price and continue to be paid for the complexity of our work and utilize our capacity. So I'm pretty comfortable with the capacity situation, both staff and space for us and the industry and for us, particularly since we're the largest player. I think that plays very well to this continuing to be a financially beneficial business with hopefully improving operating margins over time.

Got it. I appreciate it.

Thank you. We'll take our next question from John Sourbeer with UBS. Your line is open.

Thanks for taking my question here. May be just one digging into a little bit more on the microbial business within manufacturing. It sounds like this continues to be a strong growth year. Did this grow double digits in the quarter? And maybe if could you talk a little bit about the sustainability of the outlook here and where you think this has the potential for maybe growth over the long term? Thanks.

So not going to break down the growth rate on the individual pieces on a quarterly basis. But that business continues to have terrific technology, IP that's quite advanced, a broader portfolio than any of the competitors that's using a classic capabilities and our cartridges and now coming [indiscernible] common version of that cartridge using less and less crude out of the [indiscernible] and continued more automation and the utilization of digitization. So that business, which is extremely profitable, we do think has the propensity to be more profitable and certainly grow at historical rates. So – and also has a sort of increasing connectivity with our Biologics business and our cell and gene therapy business. So it was a little more of a – it's always been an attractive business. It's a little bit of an outlier years ago, and it feels much more central to the portfolio than it has historically. So we remain very positive about the current and future prospects of that business

I think we can have our next question please.

Thank you. We'll take our next question from Jacob Johnson with Stephens. Your line is open.

Hey thanks. Good morning. Maybe just one for me. Jim, on cradle, that seems to be a business that's doing pretty well in this environment. Can you just remind us kind of the mix of kind of small biotechs and pharma for that business? And then I'm also curious if you're seeing cross-selling opportunities from new client wins. Is that opening up any new doors for Charles River? Thanks.

Yes. The client base has been and continues to be very surprising. So we thought it would be all tiny biotech companies that we're watching that cash or didn't want to commit to large amounts of space in places like Kendall Square and Cambridge or South San Francisco. And we have a bunch of those. We have a surprising number of really midsized companies and big pharma companies, which is a surprise because even they either run out of space or don't want to build new space and have a hot new drug that they want to work on. And so we love that. So we have some very big pharma footprints in many of these geographic locales. So it's a business that is even more attractive than we originally thought. It has very high growth rates, very high margins. You would be very impressed with the client base at each site. Some of the sites get full before we open them. People go through them and they kind of commit to them. As we said previously, I think the huge opportunity here is the preponderance of the work we do now is often supplying the animals and taking care of them while people do basic research. And that's a perfectly good business, by the way. I think over time, we'll supply the animals, take care of them and participate with the client in running the study or do the entire study for them. And whether or not we do that, this is definitely a business that is currently and will continue to feed other parts of our portfolio, particularly discovery and eventually safety if the drug looks promising. So high-growth, high-margin business, if you looked at it on a see-through basis, it's even higher growth and higher margin. I also think -- I don't mean to be a wise guy with his comment that it's relatively recession-proof -- probably the most recession-proof thing that we do because it's companies large and small, totally depending on our proximity and infrastructure to do their basic research. So we love this business. You saw in the prepared remarks, we have a lot of sites now and a significant amount of square footage. The acquisition that we did last year is doing extremely well to a smart thing for us to do and we love the geographic footprint

I think we can have our last question, please? Hello, Shelby.

And we'll take our last question from Tim Daley with Wells Fargo. Your line is open. Please ask your question.

Good. Thanks. I just wanted to touch on RMS China here. So we called out increased competition, specifically on the large model side. That's consistent with news split for other country. So I just wanted to revisit the previously communicated expectations for RMS China to grow double digits in 2023. Can you update us on the current outlook for the year? And any additional color would be great if you could quantify RMS split between large and small models. And that's it from me, thank you.

So not going to call that time. I mean the large models at every quarter. And the numbers of animals is a little bit difficult to predict as at the price points, but it’s definitely was beneficial to the RMS top line growth rate and margin for the quarter. It continues to be a very attractive market for us. It was adversely impact a little bit over the last couple of years with some of the COVID lockdowns. But we have several new facilities. We're trying to cover the whole country. Competition continues to be local. We're getting a decent price and we like both the growth rates and the margin. We're also beginning to see significant improvement in the service businesses in China as we're seeing in the U.S., in Europe. So it's a marketplace, as we've said many times, it's reminiscent or the U.S. and Europe or maybe 20 or 25 years ago. So we would anticipate additional continued high growth. And we continue to be surprised by the lack of sort of the global players still not getting into China. So we're sort of on our own as a non-Chinese entity.

All right, I appreciate it. Thank you for the time.

Thank you. We have no further questions in the queue. I will turn the conference back over to Todd Spencer for closing remarks.

Thank you for joining us on the conference call this morning. We look forward to seeing you at some upcoming investor conferences as well as our Virtual Investor Day on September 21. This concludes the conference call. Thanks again.

Thank you. That does conclude today's Charles River Laboratory’s Second Quarter 2023 Earnings Call. Thank you for your participation and you may now disconnect.