Charles River Laboratories International, Inc. Price & Performance (CRL)

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 [indiscernible] constitute forward looking statements under the Private Securities Litigation Reform Act of [indiscernible] 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 compared in accordance with GAAP. In accordance with Regulation G, you can find comparable GAAP measures and reconciliations on the Investor Relations section of our website. I will now turn the call over to Jim Foster. Thank you, Todd, and good morning. We're pleased to end the year with a fourth quarter performance that was slightly better than expected.

Yielding annual revenue and non GAAP earnings per share higher than guidance that we issued in November.

Before I provide more details on our fourth quarter results, I will provide an update on the market trends and our 2025 financial guidance. Beginning with an update on the market environment, I can say that our view of biopharmaceutical demand remains consistent with our last up including the net book to bill ratio, were stable compared to the third quarter and we expect similar trends throughout 2025. Many of our global biopharmaceutical clients continue to move forward with their restructuring and pipeline reprioritization activities which are expected to constrain early stage spending by many of these clients again in 2025. Small and midsized biotechnology clients continue to benefit from a more favorable funding environment through the end of twenty twenty four compared to the previous two years, and we expect biotech demand trends will be stable to slightly improved in 2025 versus last year. These combined trends are expected to result in flattish DSA demand sequentially within 2025. However, we expect steady volume to be at a lower level than in 2024, because many global biopharmaceutical clients reset their budgets in the middle of last We're closely monitoring our clients' R and D spending patterns the funding environment and interest rates as well as new biotech company formations, which have slowed over the past couple of years and believe our expectations for 2025 are appropriately measured.

Matt discussed at a recent investor conference, the primary factors influencing our 2025 outlook are as follows: The first relates to our expectation for stabilizing DSA demand environment in 2025. As well as an anticipated headwind from lower DSA pricing throughout the year. The second item is lower commercial revenue in the CDMO business which will reduce consolidated revenue by approximately 1% in 2025. And finally, our site consolidation actions are expected to reduce revenue by an additional 50 basis points this year. The cumulative effect of these factors is expected to result in a revenue decline of 3.5% to 5.5% on an organic basis this year. When including a foreign exchange headwind of over 1%, a reported revenue decline of 4.5% to 7%. We have taken significant action to protect the operating margin expected to yield annualized savings of approximately $225,000,000 in 2026, of which over $175,000,000 will be this year. However, we will not be able to fully offset the revenue decline in 2025, particularly in the DSA segment, which is expected to result in a modestly lower consolidated operating margin and a non GAAP earnings per share in a range of $9.1 to $9.6 Now I'd like to quickly recap our fourth quarter and full year consolidated performance.

We reported revenue of $1,000,000,000 in the fourth quarter of twenty twenty four, a 1.8% decline on an organic basis from the previous year. For the year, $50,000,000 with an organic revenue decrease of 2.8% driven primarily by lower DSA revenue. Our full year revenue slightly outperformed the range that we provided in November, led by a better than expected fourth quarter performance in the RMS segment and a robust year end for microbial solutions. Sales to both the global biopharmaceutical and small and midsized biotech segments declined for the full year. But in the fourth quarter, we were pleased to see revenue from biotech clients return to growth for the first time since the third quarter of twenty twenty three. The operating margin increased 80 basis points year over year to 19.9% in the fourth quarter principally driven by lower unallocated corporate costs and margin expansion in the Manufacturing segment. The cost saving initiatives also helped to limit the margin declines in the DSA and R and S segments. For the full year, the operating margin declined by 40 basis points to 19.9%, The decrease was primarily driven by the DSA segment, as well as higher unallocated corporate costs.

Earnings per share were $2.66 in the fourth quarter, an increase of 8.1% from $2.46 in the fourth quarter of twenty twenty three. The fourth quarter operating margin expansion as well as favorable below the line items including reductions in interest expense, the tax rate and share count led to the earnings improvement. For 2024, earnings per share declined by 3.3% to $10.32 due primarily to lower revenue and operating margin partially offset by the benefit of cost saving initiatives. Turning to segment performance. I'll now provide you with additional details on the fourth quarter and each segment's outlook for 25. DSA revenue in the fourth quarter was $603,300,000 a decrease of 3.5% on an organic basis. The decline reflected lower study volume, as well as slightly lower pricing. As anticipated, safety assessment pricing turned negative in the fourth quarter as the moderating pricing environment during 2024 started to work from backlog into the revenue stream. In the current demand environment, pricing has become a point of discussion with clients We have strategically and selectively utilized pricing and other commercial enhancements, including better integration of our DSA sales force, with the global with the goal to gain additional market share and believe the strategy has been successful as demonstrated by an improved DSA capture rate during 2024.

TSA demand KPIs were also stable in the fourth quarter including the net book to bill ratio and cancellation rate. The net book to bill remained below one times in the fourth quarter with global biopharmaceutical and small and mid sized biotech clients segments in a similar range. This was consistent with the third quarter following the divergence in trends during the second quarter that resulted in revenue to global biopharmaceutical clients taking a step down in the second half of twenty twenty four which will continue to impact 2025. Cancellations also remained at lower levels in the fourth quarter as they have for most of the past year, and closer to targeted levels. We believe the clients have largely completed the process of canceling lower priority programs that remained in our backlog. So that the key for the DSA segment to return to revenue growth will be a sustained improvement in booking activity which has not yet For the full year DSA revenue decreased 6.2% on an organic basis, which was consistent with our expectation in November that DSA revenue would be favorable to our previous outlook of a high single digit At year end, the DSA backlog modestly declined to $1,970,000,000 from $2,120,000,000 in the at the end of the third quarter.

In 2025, we expect DSA revenue will decline at a mid to high single digit rate on an organic basis, which will be slightly less favorable than in 2024. Expect that both lower pricing and steady volume will have similar impact on the 2025 decline.

As I mentioned earlier, we expect study volume will be relatively stable sequentially throughout 2020 the Global Biopharmaceutical and Biotech client segments, at a lower level than in 2024, due primarily to the softer demand from global biopharmaceutical clients that emerged in the second half of last year. In addition, Lower realized DSA pricing will add an incremental headwind in 2025 that was not present in 2024 when realized pricing was essentially flat for the full year. We have not assumed any meaningful improvement in the DSA demand environment during 2025 at this time. So the quarterly gating of DSA revenue dollars should be relatively consistent over the course of the year aside from a modest seasonal impact in the first quarter. In recent weeks, an HP supply has once again made headlines as a result of a recent proposal at the standing committee meeting of CITES an international body that oversees the trade of animals, including NHPs, used in biomedical research. To potentially suspend the trade of NHPs from Cambodia. We were very pleased that studies did not enact a trade this matter until the end of the year.

This decision underscores the international community's strong support for a fair, accurate and science based review process providing the necessary time to review the facts and counteract the misinformation being disseminated by other groups. Let me be clear. Salzurever firmly believes that any action to could have significant and unintended consequences that will impact biomedical research globally. Legally sourced NHPs are critical regulatory required models to help ensure human patient safety and advanced biologics drug development for the global biopharmaceutical industry. Chazuru will continue to work collaboratively with regulatory agencies government officials industry trade associations and our biopharmaceutical clients to promote patient safety and educate our partners about the scientific importance of NHPs, particularly when viable alternatives do not currently exist. With regard to our NHP supply, we will continue to diligently work to diversify and secure our supply chain by procuring NHPs and the various supply arrangements outside of Cambodia including through our controlling interest in NovoPrem in Mauritius. As a reminder, we will be able to utilize an increasing number of Mauritius NHPs in our DSA segment after 2026. In the appendix of our slide presentation today, we have also updated certain key statistics for 2024 that were included in our NH report last year.

DSA operating margin was 24.7% in the fourth quarter, or 130 basis point decrease from the fourth quarter of twenty twenty three. And was 25.7% for the full year of 2024 representing 180 basis point decline year over year. Both the fourth quarter and full year declines were primarily driven by lower revenue, which was partially offset by the benefit from cost savings.

RMS revenue in the fourth quarter was $204,300,000 a decrease of 0.4% on an organic basis. For the year, RMS revenue was essentially flat. With just 0.1% decline on an organic basis. For both the quarter and the year, lower revenue for research model services including CRADL, NHP sales in China and the Cell Solutions business was mostly offset by higher sales of small research models in all geographic regions, principally driven by higher pricing. Cell Solutions 2024 growth rate was impacted by the consolidation of its operations to its largest largest California site. 2025, RMS revenue is expected to increase at a low single digit rate driven primarily by higher pricing in the North American and European models businesses. Improved growth prospects for research model services including FADAL, and from higher NHP sales to NovoPrim third party clients. Unit volume for small research models continued to be lower in 2024 due in large part to the softer biopharmaceutical spending environment. However, higher pricing and higher revenue from academic institutions more than offset these unit volume declines. We expect similar trends in 2025 with higher pricing in North America and Europe, more than offsetting lower unit volumes. We also expect small models revenue in China to be flattish as the life sciences environment continues to be somewhat challenged.

Given the recent news around NIH funding, we will closely monitor the health of our academic and government client base Our direct exposure to the NIH represents less than 2% of our total revenue, largely related to insourcing solutions contracts. For academia, small research models are critical components to academic research projects and consider direct research costs but we will monitor what if any impact the NIH's new directive to cap indirect costs will have on these clients.

Overall, large models are not As anticipated increase in NovoPrim's third party NHP revenue will be partially offset by lower NHP revenue in China. Demand for research model services is expected '25 Our GEMS business is expected to get back on track as clients increasingly utilize these services to support their complex research efforts and maintenance of the genetically modified model colonies. Moderate growth of Cradle operations is expected to deliver an improved top line performance in 2025, primarily driven by new cradle sites, to limit risk in this tighter budgetary environment, the new sites will either have dead Clients are continuing to view Cradle as an attractive model to access [indiscernible] powerful value proposition for clients who are looking to reduce costs and conserve capital.

The RMS operating margin decreased by 30 basis points year over year 22.8% in the fourth quarter, but increase by 70 basis points to 23.7% in 2024. For the year, the operating margin improvement was primarily due to higher pricing for small research models, fast savings related to our restructuring initiatives, and the favorable revenue mix related to higher sales of NHPs due to the Novaprim acquisition. Expect similar drivers to contribute to the RMS operating margin in '20 and on an organic basis and the full year organic growth rate was 6.8%. The slower fourth quarter growth rate was primarily driven by lower commercial revenue in the CDMO business. Offset by a robust year end performance for the Microbial Solutions business. These same drivers will likely result in essentially flat manufacturing revenue in 2025 on an organic basis. Biologics testing benefited in twenty twenty four from certain client projects that will not repeat will result in a moderated growth rate in 2025. As mentioned at a recent investor conference, we expect lower revenue from two commercial 1% in 2025 and the Manufacturing segment's growth rate by more than 5%. Despite the commercial setbacks, we believe our efforts over the past two years to enhance the CDMO operations have established a solid foundation for the leadership and scientific expertise.

Although demand in the cell and gene sector is not as robust as it was when we acquired the business in 2021. We believe attractive long term growth opportunities exist and we have a healthy pipeline of biotech clients with early stage clinical candidates ready to help move the CDMO business forward. The Microbial Solutions business reported a strong year end performance. With solid growth across all three testing platforms and a safe Stelsys and Acugenics. Endisafe continued to lead the way with robust growth for testing consumables as well as another strong quarter for instrument placements. Believe the 2024 performance thoroughly demonstrated that demand for microbial products has rebounded and that clients are increasingly utilizing our comprehensive rapid manufacturing quality control testing solutions to enhance their product release, testing speed and efficiency. [indiscernible] Manufacturing segment's operating margin increased by three thirty basis points to 28.7% in the fourth quarter, and by five sixty basis points to 27.4% for the full year. We were pleased by the operating margin expansion, which was driven by operating leverage from improved demand in the Microbial Solutions and Biologics testing businesses and our continued focus on generating greater efficiencies across all businesses including CDMO.

We believe the manufacturing segment remains on track to reach its goal to return to an operating margin above the 30% level within a couple of years.

To conclude, we are currently operating in a challenging biopharmaceutical demand environment with continued constrained client spending. But we believe that demand trends are stabilizing. On the positive side, biotech is trending favorably We have not seen signs of further deterioration from our global biopharmaceutical clients. However, we're not forecasting a recovery in 2025. We are taking decisive action to manage the company through the current environment, including appropriately rightsizing our interest [indiscernible] We remain committed to initiatives to generate more revenue, contain costs and protect shareholder value.

To ensure our future success, we continue to make progress on strategic actions in these three main areas. Restructuring and other initiatives to manage costs, and generate greater efficiency by reducing staffing levels to align with the pace of demand optimizing our global footprint and streamlining processes and operations. We have made meaningful progress on this front and continue to selectively evaluate additional opportunities to cut costs and drive efficiency. And now expect to generate approximately $225,000,000 of annualized cost savings from these initiatives. The second area is concentrating on commercial enhancements to promote a client centric focus and gain additional market share. Our goal is to enhance the client experience and reinforce our role as a flexible and responsive partner to our clients including through leveraging technologies such as our Apollo platform and our RMS e commerce initiatives. As I mentioned earlier, our enhancements to our DSA sales force and dynamic pricing strategy have enabled us to gain market share over the past And finally, we are taking a balanced approach to capital allocation. And regularly revisiting our best uses for capital. Are very pleased that our leverage remains low. We in the low 2x range. And as we have routinely done, we continue evaluate select M and A candidates.

Based on our anticipated capital needs this year, and coupled with our belief that we are currently undervalued, it is an opportune time to allocate most of our free cash flow [indiscernible] to stock repurchases in 2025. Under our $1,000,000,000 authorization. We intend to repurchase approximately $350,000,000 in stock over the next month or two which exceeds our initial goal of $100,000,000 last year to offset annual dilution from equity awards. We have navigated challenges before and we believe our strategic actions will enable us to emerge from this paradigm stronger leaner and more profitable company and an even more responsive partner for our clients. We have always distinguished ourselves through our exquisite science and preclinical focus, extending our leading position as our clients preferred global nonclinical drug development partner. I'd like to thank our employees for their exceptional work and commitment and our clients and shareholders for their continued support. Now Flavia will provide additional details on our financial performance and 2025 guidance.

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 a goodwill impairment in the fourth quarter of twenty twenty four. Amortization and other acquisition related adjustments costs related primarily to restructuring actions, gains or losses from certain venture capital and others 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 are pleased with our fourth quarter financial results, with revenue and non GAAP earnings per share slightly exceeding our annual outlook. In the face of a challenging demand environment, we have taken decisive actions to navigate these headwinds our efforts include aggressive actions to rationalize costs and align our infrastructure As Jim noted, $25,000,000 in annualized cost savings. In 2026, including over $175,000,000 realized this year slightly ahead of our prior target as we selectively implemented smaller additional The multiyear cost savings program is expected to reduce our cost structure by over 5% through headcount reductions, and network rationalization efforts the majority of which are underway and are on track. To further balance our capital structure, we leverage our strong cash flow generation to repurchase $100,000,000 in stock in the third quarter of twenty twenty four.

Achieving our goal to offset the annual share count dilution from equity awards. As Jim mentioned, under the $1,000,000,000 Board authorization, we intend to increase the level of stock repurchases in 2025 to approximately $350,000,000 We believe allocating free cash flow to stock repurchases this year will be prudent in light of our low leverage levels and our current valuation, which is certainly depressed because of the current industry headwinds but also does not ascribe enough value to the favorable [indiscernible] term growth fundamentals that we expect to again reemerge once the biopharmaceutical industry refocuses on investing in their pipelines. We are particularly pleased with our strong free cash flow generation of $501,600,000 in 2024. This achievement reflects the effectiveness of our tightly managed capital expenditures. Disciplined working capital management and the early success success of our cost savings initiatives. By maintaining a balanced approach to capital deployment, we continue to demonstrate our commitment to enhance long term shareholder value.

I will now provide additional details on our 2025 As Jim discussed, 2024 reflected a constrained biopharmaceutical spending environment which is expected to persist into 2025. Therefore, we expect a reported revenue decline of 4.5% to 7%, including the foreign exchange headwind and 3.5% to 5.5% on an organic basis. FX has become more of a headwind in recent months as the U. S. Dollar has strengthened and is now expected to reduce reported revenue I want percent to 1.5%.

We have provided additional information on FX rates and our currency exposure in the appendix to our slide presentation. Non GAAP earnings per share are expected to be in a range of $9.1 to $9.6 On a segment basis, we have also provided the reported for 2025 on Slide 31. In 2025, we expect the consolidated operating margin will be modestly lower from 19.9% in 2024. As the cost savings associated with restructuring initiatives will not fully offset the lower revenue this year. This is particularly true in the DSA segment, for which we expect an operating margin decline. However, there are opportunities for margin expansion in the RMS and manufacturing segment. On allocated corporate costs in 2025, I expect it to be approximately 5% of total revenue. These expenses normalize in the fourth quarter of twenty twenty four to 5.2% of revenue primarily driven by performance based bonus. However, the 40 basis point increase to 5.7% for full year 2024 was primarily attributable to higher health and fringe related costs throughout the year. We expect corporate costs to decrease in 2025 because of benefits from cost saving actions. The non GAAP tax rate for 2025 is expected to be in the range of 22.5 to 23.5% an increase from 21.3% in 2024.

The anticipated increase in the tax rate is principally due to an increase in the global minimum tax. As well as a modest impact related to stock based compensation. In addition, we have not assumed that discrete tax items which benefited 2024 We'll repeat. As is typically the case, due to the timing of equity award vesting, the headwind from stock based compensation will be more pronounced in the first half of the year. Including an expected first quarter Tax rate in the mid-twenty percent range. Total adjusted net interest is expected to be in the range of 112 to $117,000,000 compared to $117,700,000 last year. The slight decrease will be primarily driven by lower interest [indiscernible] on floating rate that we do expect to borrow during the year to balance the timing of the stock repurchases earlier in the year with the free cash flow that we will generate. But overall expect debt balances will be similar at the end of twenty twenty five. In 2024, we lowered our net interest expense by repaying approximately $400,000,000 in debt the highest repayment in recent years, bringing our growth and net leverage ratios to 2.2 times at year end. Of up to $2,000,000,000 reduced from our previous $3,000,000,000 facility.

Due to our lower current leverage and anticipated capital needs. Importantly, we're able to obtain competitive pricing on this new agreement. At the end of the fourth quarter, we had out outstanding debt of $2,200,000,000 with approximately two thirds at a fixed interest rate. Compared to $2,300,000,000 at the end of the third quarter. For 2025, we expect free cash flow to be in the range of $3.50 to $390,000,000 representing a decrease Be driven by lower earnings and higher working capital to build inventories particularly for NHBs and stabilization of receivables. After favorable collections in 2024. Capital expenditures for 2025 are expected to be essentially flat from 2024 levels. At approximately 6% of total revenue or about $230,000,000 with projects primarily related to a mix of maintenance capital and the completion of ongoing projects. This outlook reflects our disciplined approach to aligning capacity and capital investments with client demand. And is well below our peak CapEx in recent years of 8.2% of revenue. A summary of our 2025 financial guidance can be found on Slide 37. With regard to the first quarter of twenty twenty five, we expect revenue will decline at a mid single digit rate on an organic basis and at a mid to high single digit decline on a reported basis.

Due to several factors including first quarter seasonality in the DSA and Biologics Testing businesses as well as a modest headwind from the timing of NHP shipments. From an earnings perspective, we expect non GAAP earnings per share of at least $2 in the first quarter. The decline from the fourth quarter will be primarily driven by lower operating margin due in part to the seasonal business trends and the timing of NHP shipments. And as I mentioned, we expect a meaningfully higher tax rate in the mid-twenty percent range reflecting a headwind from stock based compensation. On allocated corporate costs will also remain slightly above five of revenue in the first quarter. We expect revenue and operating margin will improve after the first quarter principally as we move beyond the seasonal trends at the beginning of the year. In conclusion, we're confident in our ability to emerge from this period of softer demand as a stronger, more agile organization. Our decisive actions, including aggressive cost optimization initiatives stock repurchases in a disciplined approach to capital management demonstrate our commitment to enhancing shareholder value. We believe our leaner infrastructure will position us well to capitalize on new business opportunities [indiscernible] And drive sustainable profitable growth the future.

Thank you. That concludes our comments. We will now take questions. And now to our phone audience, We'll hear first from Elizabeth Anderson at Evercore. Please go ahead.

Hi, guys. Good morning and thank you so much for the question.

I just had a question about your bookings expectations. So given the backlog number that you guys had in the fourth quarter, it seems like maybe the book to bill, at least on my math, may have taken a bit of a step down. Sequentially. And I just wanted to understand, like if you look at it on the current quarter basis, I just want to understand if there's timing obviously on a TTM basis, it's more stable. So 1A, could you confirm my math? And then, b, like how are you seeing things in the first quarter? And sort of can you talk a little bit more about your sort of trending expectations in that regard as we move through 2025? Thank you so much.

Elizabeth, I can maybe start just with your question on the net book to bill. And then, I don't know if Jim wants to add additional commentary on the overall outlook. Actually, the fourth quarter, both growth and net book to bill was sequentially essentially stable. There was no deterioration or improvement either. So we were pleased that after the second quarter decline that we saw especially with our global accounts, We had a bounce back in the third quarter and then stayed flat in the fourth quarter. Okay. Thank you. [indiscernible] for the first quarter, which is typically softer for us, [indiscernible] anticipate some seasonality in DSA and Biologics. And back half of the year, we'll say, see stronger sales the NovoPrint for NHPs. Should have sort of consistent sales across across the year. We feel that biopharmaceutical client demand has stabilized and that biotech demand has stabilized to be or to be slightly slightly up. So we don't anticipate a from a volume point of view. We'll have a little bit of a step down on price in DSA though. And that first quarter trend that I just talked about is is embedded in our guidance.

Okay. That's super helpful. Thank you.

Our next question will come from Matt Sykes at Goldman Sachs. Hi, good morning. Thanks for taking my questions. Maybe just on RMS, I know you quantified the direct NIH exposure less than 2%. Could you just talk about including NIH, what that is in terms of percentage of MRS? And what are you kind of seeing real time from that customer base in terms of the metrics that you're observing or feedback that you're getting? Just given all the uncertainty in that segment?

Yes. So I don't think we're I don't think we're not seeing much or hearing much yet. There's a fair amount of speculation about what's such an indirect cost recovery support there'll actually be. But assuming that things are as anticipated, as you say, it's about 2% of total It's about academic and governments about 40% of RMS. A lot of that is related to government contracts for the academic impact of that will be much less, let's say, over the entire company, even though most of it's in RMS, it's about academic and government are about 10%. And if you peel that back, a bunch of it's outside of The U. S. A bunch of that is in academic institutions and a relatively small amount is government related. So we'll have to see what impact, if any, that we have, particularly with long term contracts for things like producing animals for certain institutes at NIH, Anything's possible, but that would be pretty disruptive to the researchers. So We feel that given the relatively small percentage of revenue that's associated with that, that we should do times.

Got it. And then just on sort of large pharma demand, I mean, you've been calling that out as an area of weakness. As you think about sort of the reprioritization cost cutting cycle that we've been through, you kind of mentioned we're maybe towards the end, but no view on terms of recovery. Are you expecting any sort of improvement to that dynamic in the second half 'twenty five or should we be thinking more about 'twenty six in terms of recovery from that customer segment?

Yes. So We in 2024, we just assumed that things will get better in the back half of the year for a whole bunch of reasons. We thought the cap markets would open up and this reprioritization stuff would be over. And assuming the things are going to get better, it's not a very good strategy. So all we can do is have a guidance based on conversations with clients. We're dealing with every large pharmaceutical company in the world. They're reprioritizing the pipelines and restructuring their clips etcetera. And depending on who you talk to, much of that has been done and there's still a fair amount still to be done and it's impossible for us to predict what that will be and when that will be. Concluded except for what the clients tell us. So we would anticipate that while things have stabilized and while we don't anticipate things would get worse, so to deteriorate further that pharma would be pretty much consistent for the balance of the year. The biotech is more stable and would be slightly improving throughout the year year. That depends very much on capital markets. They have been some several IPOs that have gotten off and price well.

So that's encouraging. There's been some really good inflows. To venture capital firms. That's encouraging as well. While there definitely has been some reprioritization for the biotech companies they don't have the same sort of large infrastructures to reduce. And they don't do anything internally, so they very much need us and other companies like us. So So we anticipate kind of consistent revenue throughout the year. Little bit of step down in DSA over 2024 because of the pricing headwinds And if it's better than that, that will be terrific. We don't have any indications now that would cause us to guide differently. Our next question will come from Tejas Savant at Hey guys, good morning. And thanks for the time here.

Maybe one for you Flavia on the CDMO business. Just a couple of housekeeping items for me.

Any cancellation payment benefit in the fourth quarter? Do you expect what can you do to cushion the margin impact on the segment from underutilization? I think I heard you mentioned that actually grow year over year in 2025.

Yes. Hi, Ganesh. Thanks for the question. And I'll take the latter part first. You're correct. We will we are forecasting margin expansion for the Manufacturing segment. Margins will be challenged In the CDMO business, as you pointed out, given the loss of those commercial clients, we're taking actions there to right size our infrastructure to the lower sales. And then in addition to that, the other two businesses within manufacturing are going to continue to do well and perform well. Saw, as Jim mentioned in his prepared remarks, a very strong finish for the microbial business. Which will continue to help with margin expansion. Going back to your first question, there are some contractual obligations that we will benefit from. Those are embedded in the 2025 guidance that we provided for the segment. And so I'll leave it at that.

Got it. That's helpful. And then one for you, Jim, on the site's decision to defer the decision on the Cambodian and HP trade, I was just curious as to whether there's any steps you can take proactively over the [indiscernible] to further derisk your supply chain there perhaps increasing sourcing from other countries in Southeast Asia. Or is it basically NovaPrem ramping in that twenty twenty six plus timeframe that's the real meaningful offset any Cambodian supply disruptions here?

We will do everything we can as we always have by the way, even without a potential disruption like we might have from the society saying, To source NHTs from multiple geographies and multiple providers, some of which we have long term contracts, some of which we buy on markets. Some of which we have an ownership position like in Mauritius. So we will do everything we can to protect us and the rest of the scientific community will provide valid and valuable scientific input to the size folks to make the decision. To underscore the criticality of these animals for drug development, particularly for latch molecules around the world. Given the fact that there are no general alternatives. So we're, again, we're guardedly optimistic with that will go well. If it doesn't, we will use multiple sources of supply to obviously to try to run. Satisfy the needs of our clients. Got it.

Thanks for the color guys. Appreciate it.

Our next question today will come from Dave Windley at Jefferies.

Hi.

Jim, you've commented in your remarks about your expectations for demand throughout 2025 and then also commented about Pharma continuing its restructuring You may have seen in a couple of surveys we've done recently where a number of of large pharma respondents talk about expecting kind of a second round of restructuring And so my question to you is, how much visibility are clients able to give you on that type of thing? For example, if there's another restructuring coming, and the internal people seem to know about it are they sharing that with you such that you're able to incorporate that in your expectations And then kind of relatedly, your thoughts about 25% as far out as the end of the year, is that based on this type of conversation? Or are you just having to take a conservative posture given limited visibility? Thanks.

Dave, we're staying as we always do as close to our clients as possible. Possible. We have long term very senior relationships with folks at pretty much every drug company. They depend heavily on us for a whole range of things. Many of them buy across our entire portfolio. Is there another shoe to drop? We're not hearing that. I suppose anything is possible. Some of them have told us that they're they're dying and moving away from this and We'll be spending more. Some of them have announced that just in terms of their overall hour gig expenditures, but we do anticipate that some of that is not over. Yet.

So think we have very we have as good visibility as we possibly can have. I mean, there very much dependent on us doing the work for them. So they need to get out ahead of that in terms booking slots and communicating with us in terms of how much work they anticipate having us do or not do. And when they get done with their interest crank things up meaningfully, getting back to IND filings or maybe discovery spending. So I do think it's a comment upon them to to keep us well informed. As I said earlier, we're just not going to make any overall assumptions on what's going to happen. Aside from what they tell us is going to happen. And so all we can do is stay in very close communication with them, which we do constantly. And so we anticipate that things won't deteriorate further, that things will be stable there. Even if some have a second round, some of them will be out of will be out of that and we'll be moving forward. So it should be a decent offset.

If I could ask a quick follow-up. In In the deck, around DSA and pricing, you highlighted that in the current environment, pricing has become a topic of discussion I wanted to clarify whether that was the in the current environment part of that, is that an extension of what you have been telling us? Or is this a signal that [indiscernible] pricing is kind of the pricing demands from clients intensifying and maybe taking another step down? Thanks.

No, it's a continuation. With the biotech guys that have where access to capital is and even the big pharma companies who have been reducing their infrastructure, They have been more price sensitive. And of course, as we've reported multiple times, we do have several competitors, particularly in the safety assessment business that compete with us. Primarily on price. So price becomes both an issue and an opportunity for our clients As we've also said, we both strategically and selectively will utilize reduction in our own prices to either preserve or garner new share We don't go to the point of matching our competition because those price points we feel would be too low given the complexity of the studies and the cost of the studies that we're doing. So it's an issue Our the work that we've done to continue to lean out our infrastructure, which I think we've done a really good job at, allows us to be slightly more aggressive with our pricing if our cost structure is lower and still be able to protect margins as well as possible. So a continuation of kind of the dialogue that we saw last year. I don't think that's a new intensification of it.

We've got [indiscernible] Got it. Appreciate the clarification.

Our next question will come from Ann Hynes at Mizuho. Hi, good morning. Thank you for the question. What do you think is different about this downturn versus other downturns Do you think the recovery from this downturn would be different I guess what I'm trying to get at is you gave long term growth rates right before the industry saw a decline. You think those growth rates will be intact post a recovery from this downturn? Or do you think there's a structural shift in the growth of any of your business lines?

Thanks.

Yes. So don't think this downturn is And the last time we had a situation like this, it was after the economic meltdown in 'eight. So we had a tough time in 'nine, 'ten, 'eleven and 'twelve. During that period, it was things were fundamentally different from a marketplace point of view. Number one, many of our competitors we now own. So I think we have a bigger infrastructure and type in principle. Principally about safety assessment. There were a modest amount of biotech companies and now there are hundreds, if not thousands. So many more companies that need capability. And in those days, the big pharma companies were doing a lot more. First, there were more pharma companies and they were doing a lot more work internally and that's changed that's changed fundamentally. We also we and all of our competitors have built a lot of space and we were really swimming in excess capacity, which I think allows the clients to really push pricing way down and margins down as well. So situation isn't mean everything that I just said is different. [indiscernible] thousands of biotech companies, pharma is much leaner We have, I would say our capacity utilization isn't optimal and isn't where we would like it to be, but it's not nearly in the position that we we're in previously.

So the thing that's similar is these clients are approaching a patent plus. And that's somewhat Circular, I mean, that's probably every decade or so we see patents happening. This one's pretty profound because there's a lot of very expensive [indiscernible] Out there. But we do think that There's a necessity for all of our clients, both large and small to get back to work as soon as they feel comfortable doing that from an affordability point of view. [indiscernible] the host of drug modalities right now that treat really tough diseases is the best maybe it's ever been. And there's definitely a lot of drugs that have not been pursued. So they're either parked somewhere or and they may be parked before the IND phase. So we're seeing that as well. So we can't predict exactly what the recovery will be, but it feels like a fundamentally different situation than the last time. And it feels like this has significant amount of pent up demand and need on the client's part. To develop these drugs, as I said, which are very powerful and meeting unmet medical needs.

Great. And just as a follow-up, I believe you said in 2025, you're assuming some growth in biotech. Can you just elaborate how much growth?

And what gives you confidence in that growth?

Yes. I mean, just so we're being we began to see it tick up a little bit in the fourth quarter and it's feels more stable than the big pharma folks. And as I said, everything that they do is outsourced. So given the both current and anticipated inflows from the capital markets and into into the venture firms. We anticipate an improvement [indiscernible] A modest improvement. So that's embedded in our guidance. And the modest improvement will not be sufficient to offset the situation from the big pharma companies who will be pretty much stable, but definitely not Great. Thank you. Our next question will come from Justin Bowers at Deutsche Bank.

Hi, good morning, everyone. Just pivoting back to DSA, one clarification on this question. With the bookings being stable sequentially, is that In terms of like the nominal bookings and net bookings or just on the book to bill And then part two of this is, can you just help us understand some of the underlying dynamics in DSA?

You've discussed a fairly stable demand environment from the second half of the year. Stability in global, modest improvement in biotech, But it looks like organic is down mid single to high single in 2025. So Is that delta is that price or mix or discovery? Just sort of help us peel the onion back a little bit there.

Let me just take the back half of the question and then Savi can take take the beginning of it. So it will be down similar range to last year, slightly more Last year, the decline was principally volume. And this year, it's going to be sort of half price and half volume. So the price is coming through the backlog as as work comes out of the backlog and we actually do it where we have prices that were lower than previously. So The good news about that is that the we anticipate that the volume decline will be lower than it was the prior year. So that's a good thing. But we do have a pricing headwind, which we should move through for the balance of the year. I'll let Flavia answer the book to bill questions.

Yes. Justin, I was talking about growth in net book to bill in my earlier comments about stability in sequentially in the fourth quarter versus the third quarter.

Okay. And maybe just one more follow-up on pricing. If we're looking at the environment now, call it 1Q, is it Is it [indiscernible] versus 4Q or any changes either direction? Respect to price. CDSS.

I can take that, Jim. Yes, I think prices, it's stable. I think that's the clarification to Dave Winley's question. That Jim provided additional color when we said the continuation of the environment. We started [indiscernible] some pricing headwinds in terms of the bookings we were taking as early as last year and we have signaled throughout 2024 about that selective pricing, selective discounting that we were conducting. And that is now materializing in a price headwind in 2025.

But we're not seeing a continuation of erosion of pricing of what we are booking in 2025 towards the later part of 2025 or 2026, if that makes sense. So spot prices I'd say flattish to the end of the year.

Understood. That's helpful. Thanks so much. We'll hear next from Charles Rhee at TD Cowen.

This is Lucas on for Charles Re. Wanted to dig deeper into the manufacturing segment and the to to improve in twenty twenty five here, driven by microbial or growth in microbial solutions. You also called out rightsizing [indiscernible] terminated their arrangements. Should we think about those two items as the opportunities to see improved margins or are there other items that you guys expect to benefit within the segment?

Jim, I can take that if you want to. I was in answering the question about the menu manufacturing solutions margin expansion. So Lucas, all the [indiscernible] items that you relayed. In addition to that, we've been looking at rightsizing our let's say, staffing across the entire company all throughout last year. And the $225,000,000 of cost savings that will annualize fully by 2026. But $175,000,000 of that will be in 2025. [indiscernible] all segments and all businesses within each of the segments. Right? So biologics solutions, excuse me, biologics testing, microbial and CDMO, all had actions in the works. And then as I mentioned, we further enhanced the restructurings in CDMO given the loss of those two commercial clients. [indiscernible] the focus on margin protection has been the case throughout all of last year and it's going to impact all businesses.

Okay.

I appreciate that.

And then just as a follow-up, in your guys' 10 ks filing, it noted that one of your clients received a complete response letter from the FDA Can you clarify whether this was one of the clients the two clients that you discussed at JPMorgan or if this is a new client The filing shows that took place in January 25. It's one of the two clients we talked about at JPMorgan. All right. Thanks.

Okay.

Our next question will come from Michael Ryskin at Bank of America.

Great.

Thanks for taking the question. First, I want to just dig in a little bit on margins for next year. I think you generally just said modestly down margins for 25 versus 24.

Want to make sure my math is right.

Once I go through the models of adding the share buyback and some of the other non GAAP items, I'm getting pretty close to down 100 bps, something in that ballpark. Is that Is that right? Or is it mostly more in there like ten, twenty bps?

Year over year. Jim, I can take that. I think Mike, we're going to let each of you interpret what we mean by modestly below and update your models accordingly. I know you would rather have more quantitative guidance than qualitative. But at this point, we're going to stick with how we provided that color.

Okay, sure.

And then a quick follow-up then. You touched on pricing a couple of times. I appreciate your comments on sort of stable pricing and the answer you gave just a couple of questions ago in terms of how price works through the backlog impacts on 25%, that all makes sense. But I just kind of want to take a step back and see how you think about pricing relative to just historical levels. There's been a lot of price taken over the last couple of years Obviously, you're seeing that as a headwind flow through now. But maybe sort of ignoring the week to week, month to month trends of is there pricing stability or not. Do you feel like in general for your business and maybe for the market overall prices in a healthy level I guess put in other words is could we be seeing something where you get some stability for a few quarters and then another reset or at least maybe stability for a few quarters, but you just don't have pricing power for several years because it is still a little bit on the more expensive side relative to historicals. Just kind of want to take a step back and take a bigger view of the price question.

I mean, it's tough to predict except this is a certainty that this cross that we're in is pulled back, the biotechs relative to finding and the big guys relative to getting their infrastructure is transitory. For sure.

And if you look at our Safety Assessment business, just as an example, and given that it's such a large business and so impactful, it's just classic supply demand quotient. And so as the demand rebuilds, as more drugs, more INDs have filed, and pipelines get robust again and space gets tight again, which it has for years. Most recently is 2021 and 2022 and will again, we think for a meaningful amount of time will have a meaningful amount of pricing power number one. And price will be less of an issue for our clients in getting access to capacity and and in a timely fashion will be paramount to them, which as I said, which we saw for years. So that's inevitable and that will be coming back. We get price in the research model business every year for seventy six years and will again in 2025. And we get price in other businesses with this great demand microbial in particular. And so it's a very pure supply demand quotient.

And Mike, just to come back to your question, as I said, I'm not going to provide quantitative additional color, but just if helpful, for 2024, where we just finished the year, we had said that margins were going to go down modestly and they ended up going down 40 bps.

If that's helpful as you think about what our modestly, moderately means, Just to provide some qualitative color.

Okay.

Our next question will come from the line of Max Smock at William Blair.

Hey, good morning. Thanks for taking our questions. Maybe just a quick one for me here. Was a little bit surprised by the impairment for the Biologics test business. I think over the last couple of quarters, you talked about seeing a continued rebound in that subsegment. It seems like things are going well. I know you touched on it a bit during the call, but can you just walk through issues facing that business and how you're thinking about growth there from that sub segment 2025? And then longer term, whether there's been a material change to how you're thinking about the long term potential for that business, which I think going back to the annuity Analyst Day, you pointed to as being a high single digit or maybe even 10% grower of long term? Thank you.

Yes. I can take the question on the goodwill impairment. We obviously do a goodwill assessment of all of our segments annually. And in in this case, the CDMO business is part of the segment where the goodwill charge was recorded. So as you can imagine, the loss of the two clients in addition to a lower level of growth in those businesses versus what we had assumed at the time of acquisition. Were the primarily primary drivers of the impairment. So while there's still good growth potential, especially with cell and gene therapy, once the market rebounds. It is at a lower level versus what we had assumed at time of acquisition and the the loss of those two commercial clients put additional pressure. Does that help?

Yes. And sorry, maybe I misunderstood. Was there an impairment related to the sounds like the impairment was entirely related to the CDMO business. I maybe misinterpreted your comments around it being related more towards the testing business itself, which again I think has been one of the better performing sub segments in your broader manufacturing business over the last couple of quarters?

Yes. The goodwill For the CDMO business is combined with biologics testing in terms of the how the The segment is test that is conducted. And so I would say you think about what triggered that is mostly driven by the CDMO adjustments, not the biologics testing?

Got it. Thank you. It's helpful.

Our next question will come from Jacob Johnson at Stephens.

Hey, thanks. Good morning. I've got two on CDMO that I'll just ask in combination. One, just clarification. Flavia, you mentioned maybe there's some contractual arrangements around the loss of these commercial customers. Is that something that's and it's contemplating guidance. Is that something that is contemplated in the 1% headwind from the loss of those customers? And then the second question just has the loss of these commercial customers and you disclosed the 43 the 10 ks, has that impacted business development activities I think commercial therapy support is a good selling point as as the loss of these customers made things more difficult. [indiscernible] I just take the second quickly. Which is that Obviously, we're not thrilled with the loss of our largest commercial And the second one, I would say, we would describe that more as reduced revenue rather than a loss. But anyway, so I do that having those clients has been helpful and beneficial to our sales effort. By the same token, we have a fair number of clients that we have and continue to get [indiscernible] who are in the clinical phase and some in late clinical phase. So we should continue to see significant demand.

I think that business is actually very well run right now and very well very well staffed and capabilities have been enhanced significantly. And clients are really in need of high quality providers. So don't think it's helpful, but, I think that we're going to continue to get this business notwithstanding the loss of those clients.

And Jacob, just to confirm, the contractual obligations that we have with one of those clients is contemplated in the guidance and embedded in that we talked about.

Got it. Thanks for taking the questions.

Our next question will come from the line of Patrick Donnelly at Citi.

Please go ahead.

Hey, guys. Thank you for taking the questions. Flavia, maybe one more just on the book to bill.

I guess with the $150,000,000 step down in the backlog, I was getting closer to kind of a 0.75 book to bill, which would have been down from the low 0.9 range last quarter.

I know you're saying it's flat sequentially. So what guess what am I missing? Is it FX or something in there? I'm just trying to figure out that book to bill comment.

If you could provide a little more color. [indiscernible] I won't provide additional quantitative commentary other than to say the math is It's like very flat quarter over quarter. So don't know if FX is playing an impact in your model or remember you have nominator and denominator and you have the bookings but also the revenue outlook that plays into it.

So It's flat. Both gross and net book to bill Q4 versus Q3.

Okay. All right.

Take a look at that.

And then Jim, maybe one for you, just to kind of talk about the DSA margin outlook going forward. You certainly understand this year the pressure on the price and the revenue obviously down mid to high single margin will go down with it.

Yes, you talked a little bit about the manufacturing long term margin Can you talk about DSA as we go forward here, you think about the margin trajectory Certainly a question we get a lot about where this goes over the next few years. Is it continue to contract Are there past higher years as there's a recovery you just talk about, I guess, the moving pieces inside DSA? I know you talked a little bit about the pricing environment [indiscernible] But curious how you think about that margin trajectory over multiple years in DSA?

We definitely don't think it will continue contract. So you've got two issues. One is three issues really. One is significant leaning out of the infrastructure there. Which I think we've done a really good job at this year, both in terms of physical capacity [indiscernible] human capacity as well. We coupled with technology digitizing the company and allowing the clients to self educate and book studies themselves and have things be much less manual than people people oriented. And as I said earlier, as capacity and by the way, we're being very careful in terms of how much capacity we add given what the demand is right now, which is why our CapEx will be down. But [indiscernible] 2025. But And as the capacity fills and the backlog elongates, People will be willing to pay more. We've seen that, as I said earlier, for multiple years, for long periods of time where pricing suddenly becomes much less of an issue.

And I would remind all of you that while the preclinical spend is not insignificant and is obviously very of developing a drug and 75% is in the clinic. So they can and should and will begin to spend more in discovery and early development. So if you combine those three, three issues, we should see improvement in operating margin. I'm not going to give you a number or or quantify that. But I think that could be meaningfully better than they are now going forward.

Understood. Thank you.

And Casey Woodring at JPMorgan Great. Thanks for taking my questions. Just have one two part question on the new administration.

First is on tariffs. So earlier this morning, President Trump said he would likely impose a 25% tariff on pharmaceutical imports.

Could come as soon as April 2. So just any quick thoughts on how something like that would impact pharma budgets and that customers preclinical drug development spending.

And then second on the new administration just kind of curious to hear your general thoughts around how customers are thinking through any other potential impacts such as RFKs confirmation just given in the past you've talked about greater scrutiny of pharmaceutical approvals? Any color you can share there?

Yes. I mean, it would all be a little speculation at this point. So we're really not hearing much from our clients. On the RFK situation.

And he's talked a lot about food and he's talked a lot about vaccine spending and we'll just have to see how that that pans out, what impact if any will we have on both the rate and the quantity of new drugs being developed and what if anything will happen to the FDA [indiscernible] situation this morning relative to the tariffs trying to support U. S. Development of drugs. So that could be beneficial to U. S. Drug companies. We'll just have to see how that plays out as well.

Great.

I think that concludes the questions for today's call. In fact, sir, yes, that is the I'm sorry, that was me.

That is the conclusion of the call. Thank you everyone for joining us this morning.

That does conclude today's Charles River Laboratories Fourth Quarter and Full Year twenty twenty four Earnings Conference Call. Thank you for your participation and you may now disconnect your lines.