Please stand by, we’re about to begin. Ladies and gentlemen, thank you for standing by, and welcome to the Charles River Laboratories Third Quarter 2024 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 third quarter 2024 earnings conference call and webcast. This morning, I am joined by Jim Foster, Chair, President, and Chief Executive Officer; and Flavia Pease, Executive Vice President and Chief Financial Officer. They will comment on our results for the third quarter of 2024. Following the presentation, they will respond to questions. There is a slide presentation associated with today’s remarks, which will be posted on the Investor Relations section of our website at ir.criver.com. A webcast replay of this call will be available beginning at approximately 2 hours after the call today, and can also be accessed on the Investor Relations section of our 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. Our third quarter financial performance exceeded the outlook that we provided in August. The biopharmaceutical demand environment remains challenging, but consistent with the trends that we discussed in detail on last quarter’s call, leading to an organic revenue decline of 2.7% in the third quarter. Revenue from small- and mid-sized biotech clients was stable compared to the second quarter. However, forward-looking demand indicators for biotechs continued to trend more favorably versus last year, leading to our belief that the demand environment for this client base will continue to recover just at a more gradual pace than anticipated at the beginning of the year. We had already seen more favorable biotech funding translate into higher DSA bookings earlier this year and, subsequently, incremental revenue for this client base. But there are still puts and takes in terms of the funding environment and interest rate sentiment to keep our outlook appropriately measured. After slightly increasing in the first half of the year, revenue from global biopharmaceutical clients declined in the third quarter, both sequentially and year-over-year. This was expected due to tighter budgets and accelerated pipeline reprioritization activities this year in conjunction with the major restructuring actions that many of our large clients have implemented within the past 6 to 12 months and for some clients more recently. We believe these recent restructuring actions further validated our commentary last quarter. However, the forward-looking demand trends for global biopharmaceutical clients did not show signs of further deterioration in the third quarter and actually improved from second quarter levels. Coupled with the numerous discussions that we have had with clients, this leads us to believe that we have correctly called the near-term demand outlook for this client base. Overall, these trends translated into slight sequential improvement in the forward-looking demand indicators for…

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, costs related primarily to restructuring actions, gains or losses from certain 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. Third quarter 2024 organic revenue decreased at a rate of 2.7%, which was better than our outlook of a mid-single-digit decline. We delivered non-GAAP earnings per share of $2.59, which decreased 4.8%, but was favorable to our prior outlook of a low-double-digit decline. The outperformance was largely driven by better-than-expected DSA results. As Jim discussed, we have narrowed and slightly raised our revenue guidance for the full year to reflect a stronger third quarter performance, and now expect a revenue decline of 2% to 3% on a reported basis and 3% to 4% on an organic basis. Non-GAAP earnings per share guidance is now in a range of $10.10 to $10.30. By segment, the revenue outlooks for each segment are either narrowed or unchanged. RMS revenue would be essentially flat on an organic basis. DSA revenue is expected to be at the more favorable end of our prior outlook of a high-single-digit organic revenue decline, and Manufacturing is expected to report high-single-digit organic revenue growth. From an operating margin perspective, the outlook is also unchanged. We expect that this year’s consolidated operating margin will be slightly below last year’s level as cost savings and lower performance-based bonus accruals will nearly offset the revenue shortfall at the margin level in 2024. There are three key updates this quarter that I’ll highlight now. The additional savings from our restructuring initiatives, the…

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

Thank you. Ladies and gentlemen, the floor is now open for questions. [Operator Instructions] We will go first to Max Smock with William Blair. Please go ahead.

Good morning. Thanks for taking our questions. I wanted to follow-up on a comment you had around the puts and takes in terms of the funding environment and the interest rates and things that keep your outlook for small biotech measured. Could you just walk through kind of what those puts and takes are and then in light of last night’s election, be curious if there has been any change to your view on the outlook for the funding environment moving forward?

Hey, Max. Good morning. I think I will let Jim answer on the election part. But in terms of the puts and takes, I think from a macroeconomic perspective and just funding environment, it started in the beginning of the year with a more robust funding with the IPO market opening. We continue to see that getting support throughout the year, although slightly lower clip than the first half of the year. Obviously, interest rates have started to come down, which is a good signal to the biotech environment. And as we said from a demand perspective, we continue to see the demand indicators train more favorably for our biotech client base than last year. So while they didn’t rebound to the extent that we had anticipated earlier in the year, which was part of the reason we adjusted our guidance in the second earnings call, they are stable and favorable to last year. So, we’re cautiously optimistic that things will continue to improve, albeit at a much smaller lower clip. Thank you.

It’s a little bit imponderable of the election. I think that if it had gone the other way, IRA might have been beefed out, additional drugs might have been added to it in the short-term. That would be more expansive. Having said that, it’s popular and attractive for any candidate to just talk about drug prices being too high. But I would expect we’d have less of a focus on it with the new administration. But we’ll have to wait and see what the dialogue is.

All right. Thank you for that. And then, Flavia, maybe just to clean up one for me. How much of a benefit did you all recognize from lower incentive comp in the quarter? And similar to last quarter, it’s fair to assume most of that impact was in DSA and at the corporate level.

Just to confirm, you’re talking about – I didn’t…

Performance of base comp.

Oh, performance of base comp. Thanks. So that was not a meaningful – did not have a meaningful impact in the third quarter. The big adjustment when we adjusted our guidance was really in the second quarter. So this was not a key factor in this quarter’s results.

So, are you still expecting it to be a factor, though, in the second half? I think last quarter when we talked, you did $20 million in 2Q. I think, rough math, we had kind of gotten to $30 million in total for the back half of the year. So is it fair to assume there will still be some impact in 4Q? Or now is that kind of tailwind? Is that out of margins here in the back half of the year?

Yeah, it’s still going to have an impact in the second half, but the majority of the catch-up was in the second quarter.

Got it. Thank you.

We’ll go now to Matt Sykes with Goldman Sachs. Please go ahead.

Hey, good morning. Thanks for taking my questions. Maybe just first on the large pharma segment. You noted the still challenging environment. However, you also cited demand trends didn’t get worse. Just based on your discussions with these customers, do you think we’re at the tail end of these cost savings and reprioritizations? And if so, how do you see this slope of demand recovery from this customer segment as it’s moving to 2025?

I have to say, probably, the tail end was some of that. And it certainly felt like they were doing an on-mask kind of at the same time, even though there’s lots of preparation for that. So no question, there’s been enormous amount of reprioritization and reduction of costs. Some of it’s definitely going on, because we engage with so many of these clients at the end of the year to see what their spend will be next year, what the budget looks like, whether there’ll be more money in R&D or less. So, I suspect we’re not through with it yet. But, we really feel that we’ve reached the point where it gets unlikely to deteriorate further from a demand point of view. But pharma was very strong for us last year and pretty strong for us in the first half of this year, less strong in the back half of this year. The biotech sort of picking up some of the slack albeit more slowly. So much of what we do is beneficial for our clients to reduce their cost and infrastructure. There’s a lot of work that could come outside so we could be the beneficiaries of that as well. But, I think, it’s going to be a while before we throw it.

Got it. Thanks for that color. And then on your cost savings niches, what gives you confidence that the headcount reductions and site consolidations, one, won’t create friction amongst your customer base as you’re doing that and, two, your right sides for any recovery that may happen next year, even if it’s more pronounced than your expectations?

So we’re obviously working really hard at maintaining our quality staff. It’s everything at Charles River is about science, it’s about speed, it’s about responsiveness, and it’s about really understanding how the science is being able to contribute to what the client is doing. So we’ve tried to be – not tried to be, we’ve been very surgical, very thoughtful in our workforce reductions. We think that we’re in a very good place now, given our guidance for the balance of the year and some of our early thoughts for next. The other things were to accelerate and improve more quickly than we might anticipate. We’re quite confident that we could add those people back, mostly direct labor. And as you’ve heard us say before, we need some meaningful period of time to train those people, but the sort of brain trust of the folks that are overseeing some of the studies and interviews with the clients we’ve left intact. So, look, we have an obligation to get our headcount in sync with the demand. That’s our responsibility and a necessity, and I think that we’ve done that, as I said, quite thoughtfully and expeditiously.

Thank you.

We’ll hear next from David Windley with Jefferies. Please go ahead.

Thanks. Good morning. Thanks for taking my questions. On the first one, Jim, I wanted to dovetail off the last on demand in DSA and think about or ask you about the pricing and backlog versus what is flowing through revenue kind of thinking about the puts and takes on demand there? And then, more broadly, as you think about margin in DSA pricing that I mentioned, the cost actions that you’re taking, how should we think about the margin sustainability at that 27% level, again, with feels like some moving parts to and fro?

I mean, the pricing in the backlog is that work plays through. It’s obviously going to have some impact. Prices have been sort of flat, flat to somewhat down, actually probably more comparable. And we have said that we anticipate that it’ll be down further by the end of the year. So, we’re going to see that play through. Pricing for next year, we’re not going to go there yet, but we’ll see that. I’ll let Flavia answer the margin question. Look, I do everything we can to protect margins. So from a headcount point of view or an infrastructure point of view, TA point of view, we’re doing everything that we think is possible.

Yeah, I think to your question, Dave, and how Jim is framing, we know that price is going to be a headwind for us next year. In a sense that we’re already signaling that it will turn from flattish this quarter to slightly down next quarter. So we know that that will be something that will have going against us in 2025. And that’s the reason why we’ve been working so hard on the cost saving initiatives, whether it is to adjust the workforce to the demand environment or look at how we can optimize the footprint, because we know we’re going to have to overcome this to help protect margin. So I do think, the DSA margin will be pressure given the pricing dynamics, our, let’s say, inability at the current market environment to get price, which was the case, when demand was much stronger. And so, there will be pressure on the margin, I think, going forward. Without talking about specifics, I don’t expect it to definitely not to increase. And if you put the pieces together with the headwinds on price, I think, we’ll have to see when we guide to 2025, but if you just do the math with cost going up and price not increasing, that will be pressure.

Okay. And then, just if I could get some detail on, you mentioned a global business service model, I think. And to my ear, maybe that’s the first time you’ve discussed that or mentioned that. And if you could elaborate on the details of that and how long it will take you to implement?

Yeah, I’ll take that one, and we actually had a little bit of that commentary last quarter as well, but it’s good that you picked up on it, and the way I would suggest you think about it is we, obviously, continue to look at opportunities for us to streamline and be more effective in how we operate. When the demand started softening, the first lever we pulled was on the headcount that is directly associated with the services that we provide. We then look at footprint, which is what we provided an update at this call. But then we continue to look at, let’s say, new ways of us to operate and make sure that we are as effective as we can, whether it is continuing to reap the benefits of our digitization efforts to automate processes and get efficiencies that way, or look at global business services as a means and a way to, especially, in some of our more standard processes, functional areas, can we do those in a more effective way? So we’re looking at opportunities to perhaps change the way we operate, operate more in a standardized fashion, in a more scalable fashion, and that’s what we mean by pulling that lever on global business services.

Got it. Thank you.

We’ll hear now from Eric Coldwell with Baird. Please go ahead.

Hey, thanks very much. Could you dive into the, at least what I would say might be relatively low RMS margin this quarter given did have upside in high margin Noveprim cells and also favorable pricing in small animals where I might have expected more of a drop through on the pricing side on the small animals. Anyway, if you could also dig into the lumpiness and large animal timing as a potential factor in Q4 and what you’re currently thinking you might experience on this period? Thanks very much.

Good morning, Eric. Yeah, I’ll take that one, and I’ll answer the latter part of your first question first. So to your point, there is a little bit of potential lumpiness on the timing of shipments of large models, both from Noveprim as well as the sales that we have in China – for China. So we try to account for that. And it’s a little bit of a binary event, whether it happens or not, right? And it will play into the margins in growth in the RMS segment as well as potentially having an impact on EPS given that part of the business has high margins. So, obviously, we guide in a range, and so, the range considers both outcomes, and so we try to do the best we can, but sometimes it can shift 1 week and it falls in 1 calendar year or 1 quarter or not. With regards to the RMS margin this quarter, there is mixed playing there. As you pointed out, on one hand, the NHP shipments are favorable, but on the other hand, I think there’s a couple of headwinds. Obviously, we still got growth in China, and volume growth, I mean, which is a lower margin part of the RMS model’s business. And then I think you also saw that the services businesses were lighter. They actually had some decline this quarter. So there are some puts and takes there. We put some pressure on the margin.

Our next question will come from the line of Justin Bowers with Deutsche Bank. Please go ahead. Mr. Bowers, I believe your line may be muted.

Pardon. Thank you, and good morning. The bookings in Safety Assessment improved pretty significantly quarter-over-quarter, and I believe you did call out an improvement in cancellations as well. With that, are you seeing that across both customer sets, biotech and global, or is that more isolated to one customer? And then, is this a good level, I mean, the bookings, it ranged from like, say, 450 to 475 for the first 3 quarters of the year. Are we at a good sort of run rate here based on sort of the conversations and what you know now or are we still in sort of this normal level of volatility around the bookings?

We’re seeing a lower rate of cancellations for us, pretty much our client base which obviously we’re pleased to see. Forward momentum for the pharma companies which are still reducing their infrastructures as we talked about earlier is definitely an issue for them. And as I said they had a strong first half of the year at less [strong first quarter] [ph], both the demand and the bookings in for the biotech client base looks, feels a lot more stable and a lot more consistent, albeit not growing at the rate that we had perhaps anticipated, but a lot of positive signs there in terms of capture rate, in terms of access to clients, in terms of the dialogue, and you watch them. It’s all about rate cuts, which we’ve had one and another one to comment. What happens to the IPO market? It’s definitely what the election does to our clients, both large and small. But, I think there’s been a principle driver growth for almost a decade, sort of slowed down a little bit last year, seems to be strengthening somewhat this year. Having said that, as we think about moving into next year, a lot of the trends that we’re seeing now are likely to persist for at least some time until some of those things happen like the IPO market actually opening up. The other thing, I guess, the last thing I would say is that the biotech funding market had a very good September and a very good October as well. So while everybody continues to compare the results to, I don’t know, 2021 to 2022, which were crazy exceptional years, there’s a fair amount of money going into biotech. And as we’ve said, and I personally said several quarters now, I think this is a lot about psychology and a lot about fear of the unknown and a lot about pulling back and being hyper conservative sort of feeds upon itself, but actual access to capital is not that bad. It’s quite good for the venture firms and they’re quite good for big pharma funding a lot of biotech. So, I think the trajectory is improving nicely, albeit a little bit slow, more slowly than we thought.

Thank you. And just a quick follow-up on that. What is customer behavior now in terms of bookings? How far are they booking? Is it closer to study start? And then, lastly, with some of these restructurings that we’re seeing in large pharma, is that yielding opportunities in the CRADL business? Or do you think a lot of those decisions around infrastructure have been made at this point?

Yeah, I think in terms of when studies are starting, we see kind of both ends of the spectrum. There’s things starting within a month, and there’s still people booking 6, 9 months ahead. So we’re really seeing the gamut of study starts in that sense. With regards to CRADL, we do still believe that our vivarium-as-a-service, if you will, type of service continues to resonate with clients’ kind of big and small. We did see some in the biotech client base, let’s say, rationalizing or right-sizing how much space they take. Some of the pharma clients had already the start of our CRADL business, kind of established this both in the spaces where they were anchor clients. So we’re not seeing them take more, but they had already taken space in some facilities. And we continue to work with them as they update their footprint in additional opportunities. So I’d say for large clients, we’re not seeing it be positive or negative. And in the biotech clients, there’s a little bit less utilization at this point, which drove the softness, if you will, on services for IMS this quarter.

Thanks so much.

We’ll hear next from Dan Leonard with UBS. Please go ahead.

Thank you. I’m just trying to make sure I understand your view here. Is it your view that the Q4 sales is the run rate for the business until we see an improved end market demand environment?

Yeah, I think if we are going to refrain from answering comments or questions that sort of infer what the outlook is for 2025. I think, as Jim has said, we are pleased that the demand trends and indicators have sort of stabilized in the third quarter. We think we called the outlook for this year correctly. We’re going to continue to watch and see how they evolve in the fourth quarter before we comment on outlook for next year. What I will remind everybody is from a comps perspective, right, we’ll have to anniversary especially the first half of this year where pharmas were still strong. So between that and pricing that’s why we have put in our prepared remarks that we expect the current demand trends will continue into 2025 and put some pressure on year-over-year growth. Once we start seeing more pronounced and lasting signals of recovery will be, obviously, the first to tell you all that, we have more confidence on the outlook. At this point, I think, it’s a steady state of where we are.

We, obviously, will have considerable discussions with our clients in the fourth quarter as we put our plan to bed and they do the same. And so, we should get pretty accurate feedback on spending patterns, how much they’re going to be spending in the clinic, how much they’re going to be spending for IND filings, how much for post-IND and what their total R&D spend looks like. Obviously, at some point, big pharma’s going to get back to investing in early discovery and early development. So, I think we have the best access to clients to understand what’s going on in the marketplace. For now, we’re going to have to assume that some of the situation that we’re in, some of that’s just going to persist. As Flavia said, we do have the sort of comparison to last year, but so we’ll know a lot more as we get through the fourth quarter and we get to our February call, we sort of encapsulate the year and make our prognosis a guide for the following year. But we don’t think anything is deteriorating or will deteriorate. So we have some stability here. Hopefully some predictability and hopefully improved visibility based on what our clients tell us. And we’ll certainly share that with you in February.

And then just to follow-up on margins, I understand your goal is to maintain margins, but is the $50 million of incremental cost savings in 2025, is that enough to offset the reversal or the restoration of incentive compensation, inflation, somethings which you would know at this point that would be typical budgeting matters? Is that $50 million enough?

Yeah. And I talked a little bit about this in the second quarter earnings that in a sense, “it’s not enough”, and that’s why we continue working, and we’ve provided additional color now that our overall savings have increased with the result of the footprint optimization efforts that we have been working on over the last 2 to 3 months. In an environment where you don’t have volume growth, where price is ahead when annual costs continue to increase, obviously, protecting margin is hard, and that’s why we continue to look at levers to drive efficiency and do the best we can to ensure we’re adjusting our staffing, rationalizing our footprint, and driving those efficiencies to protect margin in this environment.

Understood. Thank you.

We’ll go next to Elizabeth Anderson with Evercore ISI. Please go ahead.

Hey, guys. Thanks so much for the question, and congrats on the next quarter. I’m going to have two questions. My first question is, you’ve talked about some of the changes you’ve been making internally, how you operate, and sort of, obviously, your estimation of where we are in the pharma cycle. What are customers, particularly biopharma customers, asking for differently in this cycle? Are you sort of conceptually working with them in new ways, given these changes? And then secondly, obviously, your focus on capital deployment has traditionally not been as weighted towards share repo. Is this – obviously, the purchases in the third quarter, is that more of a reflection of sort of the dislocation in the share price as you saw it? Or is that something you’re kind of thinking about changing your mix going forward, broadly speaking? Thank you.

So, we bought back shares for, I’m trying to think, at least 10 or 12 years, just consistently to offset dilution from our options being granted. And that was something that, I think, that was a smart thing to do. Of course, it’s all contextual, it depends on the share price, it depends on how much debt we have, it depends on how robust our earnings are, and it depends on whether we have it different or better used for the cash. And so, as we’ve said a few times, we have a committee of the board that looks at this 5 times a year. What is the best use of our cash? And we felt at the time, and still feel that sort of reintroducing that, and I was saying that dilution is a smart thing to do and, probably leaves us enough powder to do some M&A as well. Of course, we’ve been paying down on debt. So, look, nothing’s forever and everything is contextual. So it doesn’t necessarily indicate anything about the future, although, we may feel the same way going forward next year. Your first question, I would say that our biotech clients are looking for funding, as I said earlier, very concerned from a psychological point of view about having lack of access to funding. The VCs have to put in another round or larger rounds than they used to if they can’t get an IPO going. And those that were assuming that they could get a secondary haven’t been able to do that. So they’re definitely more cautious. Having said that, almost no biotech companies have any internal capacity to do any of the things that we do. So they are by definition net outsources, whether they’re small, medium, or very large, frankly. So they’re all potentially our client base, and the majority of them probably are really our client base. And so, all we can do is stay close to them, be responsive to the needs. As Flavia said earlier, right now, this sort of backlog is kind of 9-months-ish, and we can start some studies quite quickly. Others, if they want a book site that goes out for a while, we can do that as well, but it’s usually a couple of quarters. So it sort of feels like a really pretty sweet spot now in terms of being able to respond to their demand sometimes quickly and sometimes on a forward-going basis. So, I think our clients are pleased with our responsiveness, which is everything and the quality of our science. And we do an amazing job giving the scale of our company and servicing very small values.

All right. Thank you.

We’ll turn now to Michael Ryskin with Bank of America. Please go ahead.

Great. Thanks for taking the question, guys. A lot has been asked, so I’ll stick with one for me. On the global biopharma side, you talked about trends overall and just sort of some stabilization following reprioritization earlier this year. I kind of want to ask, how heterogeneous is demand within global pharma? But what we’re hearing is there’s sort of a dichotomy where you’ve got a handful that are spending a lot, a handful that are reprioritizing a lot, and then sort of everyone’s kind of sitting around in the middle. Is that how you see it? So for the ones that so far are spending a lot, what gives you confidence that’ll continue and they’re not just behind everyone else in initiating reprioritization or cost cuttings?

I think they’re all watching their costs, even the ones that you’re probably talking about but you don’t think need to. We’ve actually seen those companies produce their infrastructure as well, because the patent cliff is looming and some of these folks with the GLP-1 drugs, everybody’s working on a different or a better version of that, so it’s going to be quite substantial. So, not dissimilar from biotech, a lot of the pharma companies no longer have any internal capacity, certainly to do toxicology, and a lot of them don’t have internal capacity to do some of the discovery work that we’re doing. And even if they do have the capacity, doing it with Charles River is a faster, less expensive, and most often a higher science result. So, what’s ironic about this kind of slowdown in our demand is that all of our client base doing work with us is a methodology to reduce their cost structure and do less internally and use our capability and that should help speed things up. So, we certainly still believe that that’s the case and that we will see demand coming from some of our small biotech clients and some of the larger pharma clients as well. We have very big market shares with big pharma, albeit at a time where they’re all being conscious and reducing their infrastructure. As we said earlier, some of that is done, some of that’s in process, maybe some of that is yet to happen, but we’ll have a much better sense of that as we sort of interrogate them during the fourth quarter here.

Thanks. That’s helpful. I’ll leave it there.

We’ll go next to Tejas Savant with Morgan Stanley. Please go ahead.

Hey, guys. Good morning. Jim, I want to go back to some of the earlier line of questioning on DSA margins here, but I want you to frame your response ideally with a longer sort of timeframe, if you will. I mean, back in the day, DSA used to be a mid- to high-teens margin business, last year it peaked at 27.5%. There’s a few moving pieces for 2025, so I’m not going to ask you to go there, because I think you already answered that, but help us think about what’s an appropriate floor if demand doesn’t get better. I mean, there’s will in MPI that got added along the way, you have much larger scale than you did back in 2015, right? So help us think about what’s that worst case scenario? And then, I have a follow-up. Thank you.

I mean, it’s just classic supply demand here, right? So we’ve gone from a genre of very aggressive ability to take price for the last 5, 6, 7 years, just an enormous amount of price, a lot of share gains and a lot of clients really depending on us to a period where, in 2024, we have a very small amount of price and as we said earlier in our prepared remarks, probably be getting declined by the end of the year. So as space fills, which it will, as demand comes back and improves, which it will. Unless you all believe that our clients are no longer going to invest in new drugs, which of course is not the case, you have to assume that there’s a lot of stuff that’s been parked. And if your clients want to get back to filing INDs, you have large portfolios that have been skinny back and I don’t think they’ve killed those drugs, they’re just sort of waiting in a day. So the opportunities are there from a demand point of view. Also, from a competitive point of view, it’s not a lot of capacity outside of Charles River, there’s obviously some. But since we took out the kind of second tier of competition some time ago, there are much smaller companies picking up the slack. So as the demand improves, space is going to fail, and I do think we’ll have an opportunity to invigorate rides. I really can’t comment on what it’s going to be better or worse for 27%, or what the long-term goal is going to be. As you know, we’re organized all the time to drive efficiency and improve our operating margins just in terms of our overall structure. A lot of things we’re doing right now, I think, will enhance and improve that.

I think maybe just to add, we will provide you an update, obviously, on our longer-term financial targets at some point, given that we obviously are not going to be able to deliver on what we share, at least in the timeframe of, it was 2023 to 2026, when we had our Analyst Day last year. But since then, we have said we still believe that the fundamentals of this market are intact, and whether it is the 6% to 8%, or 5% to 7%, we still believe that that’s in the cards, just a matter of when are we going to get there. And in the same way, I would say the mid- to high-20% range that we provided as a goalpost for DSA margin is still doable. It’s a matter of, again, when are we going to get there? And maybe the lower end of that mid or the higher end of the high is going to depend upon how quickly and how much does the market come back. But to Jim’s point, if you believe in drug discovery and the pharmaceutical industry, as a viable business, that longer-term outlook, both in terms of top-line and margin, is still intact.

Got it. That’s helpful. And then a quick follow-up on the Manufacturing side of things, I think, Flavia, you cited project timing driving a little bit of growth moderation in the fourth quarter. Can you just give us a sense of what your customer or product concentration looks like on the CDMO side of things at the moment? And then separately, just on the Biosecure sort of shifts underway in terms of cell therapy manufacturing or Biologics Testing, do you guys have any interest in picking up some of the competitor facilities which now appear to be for sale?

So, Biosecure should provide some opportunities for us. We said that multiple times, probably for several quarters now. It’s too early for it to have done that. But we’re obviously watching closely, and we’ll see whether a changed administration changes that or not. I do think that the specter of that happening is concerning a lot of people we just met with some of our venture capital partners last week, and they’re quite concerned about it and quite reluctant to do any sort of work in China. Chemistry has in large part gone to China, but that probably will shift to India, a $64,000 question is, for the Safety Assessment work that’s going to China, where will that go? Because you’re not going to get it done in India. So I think a lot of it, assuming that it shifts, a lot of that will come back to the U.S. and the Europe, and we should have an opportunity there. The CDMO business has had a very strong year for us, just in terms of the quality of our clients, having a couple of commercial clients, having multiple regulatory audits, and multiple different auditing organizations, both domestic and foreign, an enhancement in the quality and experience of our staff and in our facilities, so that business feels like it’s poised to continue to do well, continue to distinguish ourselves, and a very important modality to treat some really rough diseases. So we’re really focused on continuing to grow that franchise. I do think that some of the work we have now is helping us guide our new clients, probably our best marketing approach, and should continue to be strong through the back half of this year.

Got it. I appreciate the color, Jim.

We’ll hear next from Casey Woodring with JPMorgan. Please go ahead.

Great. Thanks for taking my questions. Maybe just a quick follow-up to the manufacturing question asked earlier here. Just, can you elaborate on the synergies you’re seeing between the CDMO and the Biologics Testing business? I think you mentioned that more than half of the CDMO clients are now utilizing Biologics Testing. So, I’m just curious if you can maybe quantify the benefits there, elaborate on the attachment moving forward that you’re expecting.

Yeah, I mean, that was the principle instigating factor of us going into the CDMO space. Why is that? We’re doing all this testing of the drug before it goes into the clinic, which is required by law, and also testing the drugs once they’re commercially approved. And we had a fair number of clients requesting us to move into the CDMO space, only because they don’t want to take the time to validate another provider, so we would do the testing, but who would manufacture the drug before we did the testing. And by the way, if we were doing Safety Assessment for them, just along the trajectory we could help speed up the process. So they’re very closely linked, I think more than 50% of our biotech – biologics clients, CDMO is using us for the biologics. They’re very closely aligned, particularly, the analytical testing aspect of that. And that gives us a competitive advantage, by the way, I won’t name the competition, but some of our principle competition in that space has no internal capability to do Biologics Testing. In fact, we do some Biologics Testing for our competition. And so that really holds us in good stead. I would imagine that would continue to be a key distinguishing feature of our service offering as we go forward.

Got it. Maybe just one quick follow-up here. So, last quarter you mentioned that the drop in large pharma demand was surprising in part, because you deal with heads of R&D that don’t have as much discretion around budgets. So curious, just on the client’s discussions that you flagged today, you called out that you’re getting some confidence from those, just – is there any change in how you’re communicating with clients during this time and the level of visibility that you have in large pharma now? Thanks.

I mean, the only change is, we’re still dealing with the same people and I think we’re dealing with bright people. As we said earlier, sometimes the decisions are not made by them, not made at a higher level or made quickly or in secret, just so it doesn’t leak. I do think, as we said earlier, that the ability to have a conversation with clients as they are finalizing or as they have finalized their operating plans, the fiscal 2025, should be and we believe will be helpful for us to kind of zero base where we are with our clients both large and small, kind of build up our plan for next year. I mean that’s sort of always been the case for us and the decision about what molecules they’ll work on with some of the bigger folks, bigger clients, will they work on them internally or not, if the smaller companies are going to, the work’s going to go outside. How many molecules will they work on and what percentage of the work with Charles River get, are facts that we will be able to drill down on, and we’ll put a kind of appropriate discount factor to what they tell us, because it’s not always exactly what they say, but kind of finishing the year and going to the next year with a fresh budget, I do think allows the opportunity for us to plan a lot better and have a good sense of what the client base is up to. So we are working hard on that right now, as we’ll work on our own operating plan.

We’ll take our next question from Luke Sergott with Barclays. Please go ahead.

Awesome. Great. Thanks. I just kind of want to look at it as a high level. On 2Q, you cut the guide pretty hard and, Jim, your transcript was reminiscent of like the global financial crisis on the outlook. And then we get to where we are today with a pretty significant beat. And it seems like the things are relatively stable, getting a little better on biotech, a little worse on large pharma. But you look at the macro and all the restructurings and it’s hitting the rest of the space. I guess kind of what changed versus your original expectations? Like what got materially better here? Or is it more of just that initial outlook on your initial cut there was like, all right, we’re just going to assume that things get way worse than they are?

I’m not sure anything materially changed. It’s kind of on the margin here. We do the best we can in terms of having a prognosis on what the next quarter, the rest of the year will be. As I said earlier, we try to do that on a zero basis and we build it up client by client, and we have pretty constant communications with our clients. There’s a lot of ebbs and flows though. So we wouldn’t want you to get out ahead of this conversation about what just happened. We’re obviously pleased with the quarter. We have some positive signs here as cancellation rates aren’t as high as this sort of consistent demand, at least on the biotech side, sequential consistent demand on the biotech side. Pharma definitely, it was a bit of a surprise to us, I think a bit of a surprise to some of our clients, but I think that will ameliorate and settle down. We don’t think it’s going to turn around overnight. So, look, we’re going to continue to put numbers out there that we’re confident that we can make without low balling it or high balling it. And I do think that we understand the client base well enough to do that. It would be – we don’t have a trend yet. We have some positive indications, which is fantastic. I think we need a few quarters for that to be a trend. And as we said earlier, if and when, I guess when the IPO market opens up, there’s another rate cut. Do you think that biotech clients will have more confidence in their ability to spend for the portfolios that they have and even some of the drugs that they have parked? And the VCs will have to spend less per company and per drug. And maybe pharma will be weighing in more aggressively. So, directionally, the opportunities are definitely quite positive. How quickly that happens is unclear. And as we said earlier, we’re going to have some of the work that we have booked at lower price points is going to begin to bleed through our P&L. So, we’re going to have to get through that as well. But, I think, directionally, we’re seeing the beginnings of some positive signs.

Great. Okay. And then, I guess on the CDMO and the relationship with Vertex, they just signed Lonza in September here for the global. So, like, is there any changes to your existing relationship there? Is that just kind of adding capacity beyond what you guys can provide?

Yeah, I mean, that’s a necessity for Vertex. Number one, not to have all their eggs in one basket. Number two, they think this is going to be a really important drug, sickle cell anemia is a tough disease, and it’s a pretty big patient population. So, having us both doing that, I believe they have another provider overseas as well. So, that’s just a smart thing to do. It’s had no impact on either our relationship with them or the amount of demand that we’re seeing from them. So, all good.

Awesome. Thank you.

Sure.

Next, we’ll hear from Patrick Donnelly with Citi. Please go ahead.

Hey, guys. Thanks for taking the questions. Jim, maybe on the facility side, I saw you guys are kind of shutting down 15 or so facilities across DSA and RMS. Can you just talk about, I guess, the decision there? I mean, I’m sure it’s a little bit in response to demands and the cost cuts. But, where the footprint is? And then, again, some of the earlier questions, if and when demand comes back, what the footprint looks like and how much capacity you guys will have for recovery there?

So, we’re certainly not going to reduce our footprint so that when demand comes back we don’t have enough space, which I guess is the essence of your question. We’ve done a lot of M&A, but whatever it is, north of 65 acquisitions since we took the company private, and all of those acquisitions have at least one, if not multiple sites. They’re operating businesses that have positive growth rates and positive margins, and so we typically keep them, and I think one of the things that we can do better and will do better is kind of baked into this third quarter announcement is our ability not to sell to the client based upon how we’re structured or where our facilities are, but sort of to amalgamate these sites. So, what we have is we have too many sort of small sites floating around that don’t have particularly attractive margins that are relatively close to another large site that may have some capacity. So, we get to fully utilize a larger site and not have these small sites dangling, sort of dangling participles, which are managing difficult to have good operating metrics. And a smaller portfolio is beneficial for us. So really feels like a wonderful opportunity right now to clean up some of this small stuff that’s floating around, amalgamate it, that should help with margins, that should help with throughput, that should help with utilizing our sites in a more robust fashion. So we’ll continue to do that. We’ll think more carefully about that as we buy additional companies at whatever point. So that our infrastructure is just more rigorously designed.

Okay. That’s helpful. And then Flavia, maybe just a quick one on the interest expense. I know you guys need to swap, so a little bit of a benefit here. Can you just high level help us think about the go forward, the framework for 2025, on the bloat line stuff? Would be helpful. Thank you, guys.

Yeah, I think we were pleased to have entered into the swap when we did about 2 years ago. It was definitely economically favorable. It helped provide an additional portion of our debt to lock into lower interest rates in the time that the Fed raised interest. We are now at the tail end of that with the first rate reduction already, obviously in the books. And so I think we feel good. We still have even when the swap expires in November, we still have a significant portion of our debt will remain fixed. We’re going to be looking at our credit facility, which runs through, I think April of 2026. So we’ll be looking at renewing that in the early part of next year. And, I think, we feel really good about, obviously, record free cash flow generation this quarter. What we’ve done from a capital allocation perspective, being able to pay down that meaningfully this year, leverage is in a really good place, which allowed us also to do a modest share buyback that Jim talked about. So overall, we feel really good about the balance sheet and the progress we’ve made this year.

Okay. Thank you.

[Operator Instructions] It appears we have no further questions at this time. I’d like to turn the floor back over to Todd Spencer for closing remarks.

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

Thank you. That does conclude today’s Charles River Laboratories third quarter 2024 earnings call. Thank you for your participation, and you may disconnect at this time, and have a wonderful day.