Ladies and gentlemen, thank you for standing by, and welcome to the Charles River Laboratories’ Fourth Quarter and Full-Year 2023 Earnings Conference Call. This call is being recorded. At this time, all participants are in a listen-only mode. After the speaker’s 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 fourth quarter and full-year 2023 earnings and 2024guidance conference call and webcast. This morning, I’m 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 fourth quarter of 2023, as well as our financial guidance for 2024. 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 the next quarter’s conference call. I would 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 from 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. The stability and resilience of Charles River’s business model were very clear in 2023. Although demand trends moderated in the broader life sciences sector, we delivered organic revenue growth at 6.5% and earnings per share of $10.67, both of which were in the upper half of the original guidance ranges that we provided last February. We accomplished this despite the pipeline, reprioritization activities and more conscious spending by many of our biopharmaceutical clients, and also by successfully mitigating the impact of the NHP supplied disruption in the United States. We are anticipating that constrained client spending will persist into 2024, but that demand will stabilize during the year. At the top end of our financial guidance range, we expect that demand trends will begin to modestly improve later this year. These trends are expected to result in organic revenue that is flat to 3% growth in 2024. Since providing a high level outlook at our Investor Day in September, we have further de-risked our 2024 financial plan and believe our current outlook is appropriately balanced as cancellations remained elevated and backlog continued to moderately decline in our safety assessment business during the fourth quarter of last year. Our belief that the macroeconomic environment will stabilize this year is supported by early external indicators that improvement will come, including several successful biotech IPOs in January, providing early signs that the capital markets should reopen and biotech funding will improve. Our internal indicators also suggest that demand trends may be beginning to stabilize in certain businesses, including signs of the client destocking activity in microbial solutions is easing, and increased proposal activity and biologics testing business in the fourth quarter. We believe the market environment is transitory. The long-term industry fundamentals for drug development remain firmly intact because the overwhelming…

Thank you, Jim, and good morning. Before I begin, may I remind you that I will be speaking primarily to non-GAAP results, which exclude amortization and other acquisition-related adjustments, costs related primarily to restructuring actions, gains or losses from certain venture capital and other strategic investments, gains on the avian divestiture and certain other items. Many of my comments will also refer to organic revenue growth, which excludes the impact of acquisitions, divestitures, foreign currency translation and the 53rd week in 2022. Our fourth quarter 2023 revenue and earnings per share were in line with our expectations and our prior guidance ranges and reflected the continuation of a cautious biopharmaceutical and market demand environment, which we expect will persist into 2024. Therefore, we expect reported revenue growth of 1% to 4% organic revenue that will be flat to 3% growth in 2024. Higher revenue and moderate margin improvement are expected to drive non-GAAP earnings per share to a range of $10.90 to $11.40 this year, representing year-over-year growth of approximately 2% to 7%. Our guidance also assumes that the tax rate is less of a headwind to earnings growth than in the prior year, and that interest expense will be slightly below 2023. I will provide more detail on the non-operating items a bit later. As Jim mentioned, in November, we acquired an additional 41% equity stake in Noveprim, a high-quality supplier of NHPs in Mauritius. Noveprim has been a long time supplier to Charles River, and we made our first equity investment in 2022, acquiring a 49% stake. Now that we own a 90% controlling interest, we will consolidate Noveprim’s operations into our financial results. The acquisition is expected to be the primary contributor of our operating margin improvement in 2024 and add at least $0.30 to non-GAAP earnings…

That concludes our comments. We will now take questions.

[Operator Instructions] We will take our first question from Derek De Bruin with Bank of America.

Jim, so I’m a little bit surprised to sort of see the significant ramp you are embedding in the second half. I mean your book-to-bill is hovering around, what, 0.75, 0.8. Your cancellations are up and you are assuming some NHP pricing, which I think is contrary to what some of the market surveys are showing. Can you sort of like break these down like and how you are sort of like getting the confidence you are doing with that. I think particularly on the pricing standpoint, I mean, is it something with no prime acquisition is allowing you to sort of get this incremental pricing?

Sure. This would not be the first time it actually would be the third time that we have had a ramp. 23% was in the first half of the year, 22% was in the back half of the year and they were pretty big ramps. So I don’t want to say it is the nature of the business, but it is not been unusual. The first quarter tends to be a little bit slower as the clients sort of sort out what molecules are going to work on and what they are going to delay and then there is obviously a lot of issues, right? So I guess we are looking at a lot of things. Yes, cancellation rates were higher than we would like, and that is somewhat concerning. And by the same token, we think those will ameliorate we are seeing sort of a stabilization in demand in as much as seeing our microbial folks destocking, meaning that they loaded up in the prior year, and they have been working through that bolus of inventory now that we believe there getting out to buy incrementally. We saw increased proposal activity in Biologics in the fourth quarter, and that business was down last year. Again, that is one of those businesses where the work comes in very quickly. The studies are relatively short term. So you turn them around very quickly and building very quickly. And that is a bit of a commentary on the necessity to test and the growth rate of large molecules, which we still feel really positive about it. I think everybody has. We are looking at a ramp of new cradles that we either built at the end of last year or are opened or will open this year. So we should see more…

If I can do just one follow-up, which is any sign that the Chinese are going to reintroduce NHPs or start exploring again?

There continues to be conversations about it. We haven’t seen anything either from an importing point of view or an exporting point of view. So while it is possible, I think it is unlikely. I mean, the thesis has clearly keep those animals within country to provide some sort of competitive advantage, although I don’t think it is going to be. But they think that is an important sort of natural resource and scientific resource that gives them a leg up. So I think we are going to want to hold on to those things and use them inside. I think there is been a little bit of noise around that just because the economy has been tougher over there than people anticipated. And the investment in life sciences has been a little less robust. There has been a fair amount of speculation that they would export. And by the way, anything is possible, we are just not seeing it. And I’m not sure there is actually a logical reason for them to do it, particularly not yes, but when things heat up again in China.

I will take our next question from Patrick Donnelly with Citi.

Jim, maybe on the DSA piece, you talked about the cancellation rates picking up a little bit. It seemed like the book-to-bill was stable. Can you just talk about what you are seeing there? It seemed like 3Q, there were signs of a little bit of improvement on the cancellation rates. Now we are kind of taking another step back. What do you see in there? Again, you mentioned the biotech IPOs, does that give you a little more confidence? How are you thinking about just that backlog step down as we work our way forward here.

Yes. We have been trying to not over-read it. We were very pleased to see the cancellation rates, which have gotten higher than historically - they have been historically starting to come down, and we said that that is fabulous. But one quarter is not just positive of anything. And they were up again in the fourth quarter. So we do think that they will come down. We do think that we need to see it come down for a couple of quarters. it is somewhat related or very much related to the elongation of the backlog. And I think as you’ll recall from the last quarter’s conference call. We talked a lot about how the backlogs have gotten to be 18-plus months. And while that felt good, to some extent, the problem with that was we definitely had some clients that were just booking slots. I want to have a slot. I’m not actually sure I don’t want to do with that slot, but by the time I get there, 18 months from now, I’m sure I will have some work. And what’s happened with a lot of the clients if they get to 16-months out and they say, "Gee, sorry, we actually don’t have a study. So we will give up that slot. So the elongation of the backlog, I think from that standpoint is probably too long and not all that helpful. So it is back down to about 12-months, that seems more rational, and it appears from the nature of the conversations we are having with the clients with real specificity about what they are up to, that they actually have actual studies of the sliding in whatever it is within that 12-month period, which would stabilize the cancellation rate and help to recede. I think as you know, there is always been sort of a healthy amount of slippage, and that is when the drug isn’t quite ready on time. And some percentage of the stuff just cancels because the clients or to reprioritize things so the drug is formulating properly or run out of cash or blah, blah, blah - there is a bunch of reasons for it. So we are guardedly optimistic that the cancellation levels are normalizing and will continue to normalize throughout the year, the cancellation that sort we are fine with it in a dozen months. We have had years where it was kind of six to nine-months if it drops even further. I think that is fine. You want some healthy backlog. So when things do cancel or postpone that the clients have - that we have something else to slot back in to that. So probably somewhat of a normal ebb and flow of the bookings, and we are happy to see it normalizing.

Okay. That is helpful. And then maybe, Flavia, one for you. Just on the margin cadence for the year. Can you just talk about the ramp? Obviously, the 1Q earnings number is a bit light in terms of a percentage of the year a lot smaller than typical - so can you just talk about the moving pieces as we work our way through the year on the margin and just visibility into the ramp and the exit rate there?

Sure. Patrick, as you pointed out, there are a few factors that are putting pressure on the Q1 margin and then throughout the year that those factors are going to ameliorate and the margin will ramp. Mainly the tax rate that I talked about in Q1 will be in the mid-20s versus our guidance for the year of 23% to 24%. I also talked about the seasonal ramp of our business, which Jim just alluded to, with those normal seasonal trends, we will see the margin improving throughout the year. And then in addition to the normal seasonal trends, you are going to have a tailwind of Noveprim that tends to be higher in the later part of the year that aligns with sort of gestational periods for their Colony as well as CRADL that Jim talked about that will ramp in the second half. And then finally, corporate is also a little bit higher in the first quarter vis-a-vis our guidance for the year. So between corporate and tax alone, that is about $0.25 in Q1. Then you have the normal seasonality and the $60 million to $70 million that I talked about in terms of benefit from some of our restructuring actions, that will pick up as the year progresses as well. So we have good line of sight on that margin accelerating throughout the year and confidence that we will be able to achieve that.

And we will take our next question from Elizabeth Anderson with Evercore ISI.

I was hoping you could talk a little bit about - I know you talked about the biotech demand environment and sort of versus midsize. Could you maybe specifically talk about some of the pharma demand? I think one question people have some of the restructurings that are going on, which seems to be maybe disproportionately impacting preclinical that seems to be a sort of question. And then secondarily, can you talk about any sort of share gain opportunities during the year? Obviously, there have been some bills in Congress that might potentially impact some of your competitors or willing of some sponsors to work with those competitors. So any comments there would be broadly helpful as well.

Yes. So our pharma business in 2023 was particularly strong. we have had a long legacy with the pharmaceutical industry. So that is not necessarily new, except sort of the scale and rate and depth and longevity. And when I say longevity, I’m just talking about long-term contracts that we have with these two to five-year contracts have been ticking up really, really nicely. So we have an amount of our work locked in for multiple years with escalating price points that are already pre-negotiated. And increasingly, we are seeing Big Pharma by very thoroughly across the portfolio. So many of them buy everything that we sell. We also have several Biotech companies that do all of the, let’s say, pharma companies to have the safety work with us some that do most of the safety work for us and even the ones where we are not necessarily - that is just a few of them where they do a lot of work internally. I think where the default. So I mean, obviously, pharma is extremely well financed. It is probably the best thing you can say about the very well financed, placing bets with multiple biotech companies that have become the discovery engines. You have seen lots of acquisitions of drugs or geography to sell the drugs or entire drug companies almost daily since the beginning of this year with big pharma. I do think that is going to continue. And we always hope that one plus one is more than two for us. But certainly, if we are already doing work for the target and the parents we will hold out of that work. Having said that, biotech for the last decade has been a larger and more aggressive driver of growth. So let me just unpack that.…

Got it. And one1 additional follow-up question. The 29,000 of average NHP pricing that you cited at your Investor Day, is that still the right way to think about sort of the pricing level for 2023 as a whole?

Yes, Elizabeth, it is Flavia. I will just say the numbers we shared in the call related to NHPs, whether it is the price, the price gain over three-years, the units, the amount of NHP work as a percent of Safety’s revenue, they are all still - with the year-end results, they are all still similar. So there is been no significant update from what we shared with you before.

And we will take our next question from Dave Windley with Jefferies.

So on the Noveprim, I was trying to quickly scroll back through the deck and unable to find it. But I think it would be helpful for me certainly to understand a little bit more of the mechanics of how much revenue you expect that to contribute and what the margin structure of that business looks like relative to your comments that, that is providing I think you said most or all of the margin lift for the company in 2024. And then I have a follow-up.

Yes, I will take that. So just to reiterate, we expect Noveprim to add between $40 million and $50 million of top-line revenue, which will obviously impact reported revenue but not organic. We also expect that Noveprim will add about $0.30 of EPS, which, if you do the math, is about 50 basis points of margin expansion. And just to articulate a little bit how the construct will work at this point in time, even though Noveprim is definitely a move that will allow us to have additional oversight control and eventually higher volume of NHPs in support of our safety business. In the short term, the majority of the financial impact will be reflected in the RMS segment, where that external revenue will be reported. And so that $40 million to $50 million of third-party revenue will also increase the RMS margin approximately 200 basis points. If you think about the benefit for the Safety Assessment and DSA segments it is going to be relatively small, especially in 2024 as we obviously already have safety stock of NHPs from Noveprim and other suppliers in the case of Noveprim that were acquired prior to the acquisition. So it is only once we start having models that go into studies that benefit from Noveprim being consolidated into Charles River that will start having an impact in the DSA margin, and that will be impacted by timing. So the majority of the impact in 2024 will be reflected in the RMS segment.

Understood. Thank you for reiterating some of that. My follow-up question is around I guess, more general pricing environment, some of your competitive - I guess a couple of different dynamics. One being some of the competitors, albeit smaller competitors have also addressed cost structure in a way to significantly lower their costs and have expressed at least to me, a willingness to be more price competitive on studies and another angle on this being to the extent that small biotechs might evaluate a trade-off between Charles River or other providers in the Western world or an Asian provider at a much lower price in the Eastern world that primate prices in China have dropped a lot, which makes the cost structure of those competitors significantly lower as well. And so the general question here is, how much price competition is seeping into the safety assessment market as a result of these lowering cost structures.

Let me take that one. So Dave, I would say that all of our competitors and the smaller they get, the more this is factor compete with us primarily on price. And so to some extent, that is an -. And we accept that and clients that either can’t afford it or think we are too expensive or running out of cash or whatever or prefer the competition, whether it is East or Western can and will go there. And that is okay. So I mean, that is an -. The Chinese capacity - there are certainly some small, let’s say, U.S. biotech companies that do their work in China. There is a limited amount of capacity in China. So that will happen. They will come and go. And yes, the cost of labor is lower and the cost of everything that is lower there. And I won’t comment on the quality of the work, I mean they will have to make that determination themselves. We try to be rational and appropriate and professional with our pricing, as I said earlier in my comments, we have a lot of long-term contracts with big pharma for some reason, most of them came to fruition in fiscal 2023. So they have all been resigned. The pricing is locked in. So that is a significant amount of what we do. I do think that folks come to us because our portfolio is larger. Our proximity is closer. The depth of our science is better. And our scale is better. And of course, if they know us well, the presumption that were too big and too expensive is really not true. So we will use pricing as well in certain instances. And I would say those just kind of fall into a few categories,…

We will take our next question from Justin Bowers with Deutsche Bank.

So just a two-parter for me. Can you talk about the sort of like the pros and cons of owning farms and HP suppliers? I know we have done this in the past, and there has been - your strategy is evolving over the last 18 to 24-months. So could you just sort of give us some thoughts there on that? And then part two would just be around competition, just given the demand environment has slowed in general, there had been, I think, some competitors funded over the last few years. Just what are you seeing in the competitive environment competitive environment. Generally, what are you asking about specifically with regard to compensation? Sorry, within like within DSA, for example. Are we seeing exits from competitors or anything? Yes.

The competition is pretty static. We are the largest player by 100%. Our next largest competitor is kind of LabCorp and that is a capable, relatively large, stable enterprise, very good in sort of general toxicology. Then you have another tier, which used to be sort of fourth or fifth tier, which kind of became third tier because we bought 3 of our competitors in the second tier and merged with one of them, and those are much smaller companies. When I say much smaller, maybe they do - I’m just trying to do this quickly in my head, maybe they do. 5% of what we do, maybe they do 8%, maybe they do 10%, but they are much, much smaller. I don’t know what their financial status is. One of our competitors market CapEx shrinking there is enough business to go around. But I do think it has to do with quality and science and speed and technological rigor, particularly IT capabilities. I think it is incredibly unlikely that we will have new competitors. There are several decent competitors in China that I think will focus. They are probably doing some work now for Western companies, but the raise on [indiscernible] is to do toxicology work in China for Chinese drug companies. I think many of them are funded and/or supported by the Chinese government. So I would say the competitive dynamic is kind of - it is what it is and is unlikely to change. There seems to be enough scale to support the client base. So that is positive. To go back to the other part of your question. I don’t see cons in owning the suppliers. So let’s just talk about the one that we just bought. We now own 90% of. It happens to be…

We will take our next question from Jacob Johnson with Stephens.

Maybe a two-parter on manufacturing, the manufacturing segment. Can you just discuss probably it sounds like a lot of that is going to be driven versus - from the CDMO versus biologics, microbial, but maybe if you could talk about the breakdown of that. You would like to quantify the benefit from the CRISPR Vertex relationship, that would be great. And then just on margins in that segment on the path to 30%. As we think about that margin expansion opportunity, how much of that really driven by the top-line or are there cost savings opportunities that could get you there quicker?

So the CDMO business has been a huge headwind for us. For the past couple of years, right? Losing money growing okay. The back half of last year, grew very nicely, but had been slower than we thought it would be. And as you know, we have literally had to recapitulate, redesign, re-staff all three of these businesses, and I’m talking about general management all the way down to the technicians in the study rooms. And I think we have done a really good job as evidenced by the fact that we have had multiple regulatory audits culminating in with Vertex’s new sickle cell drug, which we are going to be producing a large amount of that. So a couple of things with that. That is obviously our key clients. That is obviously sort of wonderful almost marketing to be out there when other clients are thinking about who they are going to use, they are going to call Vertex and they are going to ask them about our relationship. And we have other clients who we are talking to right now who are about to file BLAs or finishing Phase IIIs. And I do think sort of success begets for the business. That business, while it won’t end fiscal 2024, where it should have been given our valuation models will have significantly better margins and significantly higher revenue not growing quite - we don’t have - our operating plan doesn’t have it growing quite at the rate that we thought it would when we bought them. But I still think that is transitory. And I think particularly as we get commercial clients that is going to crank up nicely. So we are liking this business a lot now. It has great connectivity with our biologics business and also with…

We will take our next question from Max Smock with William Blair.

Just a quick one for me here on DSA. Can you just confirm that net bookings were down sequentially in the quarter and then discuss how you are thinking about net bookings moving forward in cancellations obviously elevated again here in the quarter. Can you just give us some detail around how gross bookings trended quarter-over-quarter? I think you called out still above one, but maybe just sequentially, any color there would be helpful.

I can jump in. So yes, the DSA backlog was sequentially down. I think we talked about $150 million still about 12-months, as Jim pointed out. And the gross bookings were still above one times. So we are not going to finesse the specific number, but gross bookings still above. And as Jim pointed out, with hopefully cancellation normalizing, we expect net book-to-bill will improve marginally when that happens.

Yes, understood. Had to give it a shot there at the gross bookings. Maybe just a quick follow-up for me. Given the back half guide, can you just talk about when you need to see demand trends at the meat segment start to improve in order to hit the midpoint of your guide for this year? You had that comment in the deck about how at the top end of your financial guide. You assume demand trends will begin to modestly improve later this year. But just wanted to clarify your assumptions for when the management start to pick back up at both the low end and the high end of your guide and how that maybe differs by segment.

Yes, maybe I will start Jim and you can add. Max, we are not going to comment on the timing, to your point, by each of the segments and when precisely would that have to happen to get the bottom and the top end of the guidance. I think suffice to say, at the top end of the guidance, as we pointed out, we expect the main trends to marginally improve through the year. At the bottom end, it is more of the seasonal improvement that we tend to see. And I think at that top-line. And I think I made a comment about Q1 being a low point and talking about the drivers of that. And just to clarify, it is a combination of both tax, corporate and the ramp-up of our restructuring benefits that will together add about $0.25 of EPS. So the timing of it, it is probably going to defer depending on business. We have fast portfolio of different businesses that have different drivers. So we are just providing you a top and bottom for the total company. Jim, I don’t know if you want to add anything else.

I mean I think that was fine. I mean we are quite confident that we are going to see a sequential improvement in top of the bottom line throughout the year. Some of that has to do with the comps of last year. Some of it has to do with our assumptions. I went through a bunch of those with the first question I answered business by business. There are some subtle things that are improving. There are definitely some subtle things that are improving in the marketplace, in the M&A space and with the capital markets. Look, the one thing that you should all keep in mind is that there is - there would be and there was enormous demand for our services. The preponderance of our clients have to do the work externally. They have no internal capacity. Their portfolio is quite full and robust given the lesser of modalities that they have to work on. And so our clients are holding back. Our clients have reprioritized. The clients have good drugs sitting on the shelf. So our clients are clearly very frustrated by that. And so I think we think that we get to the point where they are more comfortable spending because they have greater access to capital. The demand should improve nicely. Is it going to improve overnight in one-month, one quarter, I don’t know, but we do think that it will sequentially continue to grow when we have seen this before. We have several of our businesses where the work does come in and go out very, very quickly, particularly Discovery and Biologics, and we have others that we have very close relationships with the clients and the pricing is all fixed. And so the ability get a slot is quite straightforward. I’m so optimistic with our guidance so optimistic that the demand comes back. Yes, it comes back, it is only when. It is a little bit murky to call, but we are calling it as best we can given decades in the business given the fact that we talked to thousands of clients every week. Given the fact we actually we have a very good understanding of the competition and what the strengths and limitations are. So yes, we would be very surprised if anything happens to change the slope of growth. Obviously, there are exogenous things under our control, but the things that we see that are within our control or that are already in sort of calculated in our guidance, it is unlikely those things will change.

And we have time for one more question. We will take our last question from Dan Leonard with UBS.

I just wanted to clarify, are you seeing any of these improved external indicators in the biotech market translate into increased inquiry activity or RFPs in DSA - and if you are not, what would you expect any lag to look like if there was a sustained capital markets recovery in biotech?

It typically doesn’t turn on a dime. I mean we get asked this question a lot. And of course, we live lots of different I hate to turn cycle, but lots of different sort of funding time are in biotech. I think the biotech companies have increasingly gotten very careful about the way they are spending money. Having said that, as I said in the last question, I do think that they will spend more aggressively and more boldly if they have a sense that access to capital is easier and will be sustained as opposed to something that is going to be lumpy. I wouldn’t say that we have seen any dramatic change in the slope. I mean, we watch our bookings and we watch the proposal in bookings very closely. We obviously, as we talked about earlier in this call, very, very interested in cancellation and slippage levels, which I think are we are hopeful that those will come down. I mean the fact that we have a 12-month backlog, I think, is a positive. And as I said earlier, if that were to turn into a six or nine-month backlog that would be fine as well, so there is a lot of work out there, a lot of interest, limited competition and cautiousness across the board with our clients who are just like we have to hold off until we have a better understanding of where we are going to have better access to the capital markets. And there is certainly some - at least some early indications that, that is around the corner. You can see in our guidance, we believe we are going to see that at the latest in the back half of this year. And that will obviously be meaningful to, I think, most parts of our business and should accelerate our growth rate. We do have sufficient capacity, certainly physical capacity, and we are trying to manage our headcount according to demand. So I think our headcount is in good place. So as the work comes, we will be able to comment at.

Thank you. I will now turn the conference back over to Todd Spencer for closing remarks.

Thanks, Shelby, and thank you all for joining us this morning. This concludes the conference call.

Thank you. That does conclude today’s Charles River Laboratories Fourth Quarter and Full-Year 2023 Earnings Call. Thank you for your participation and you may now disconnect.