Charles River Laboratories International, Inc. (CRL) 2024 Q2 Earnings Call Summary

Optimistic Highlights

• Revenue from Global Biopharmaceutical Clients Increased: Despite overall revenue decline, revenue from global biopharmaceutical clients saw a modest increase.
• Operating Margin Improvement: The operating margin increased by 90 basis points year-over-year, mainly due to lower performance-based bonus compensation accruals.
• Earnings Per Share Growth: Earnings per share grew by 4.1% year-over-year, exceeding the implied outlook by approximately $0.40.
• Manufacturing Segment Growth: The Manufacturing Solutions segment reported a 3.7% increase in organic revenue compared to the same quarter last year.
• Cost Streamlining Initiatives: Aggressive actions to streamline cost structure and optimize global footprint are expected to generate over $150 million of annualized cost savings by 2025.

Pessimistic Highlights

• Revenue Decline: Reported a 3.2% decline in revenue on both reported and organic basis over last year.
• Reduced Financial Guidance: Significantly reduced financial guidance for the year due to anticipated declines in demand, especially from global biopharmaceutical clients.
• DSA Segment Challenges: Discovery and Safety Assessment (DSA) segment experienced a 5% decrease in organic revenue, with lower revenue in both Discovery Services and Safety Assessment businesses.
• RMS Segment Decline: Research Models and Services (RMS) revenue decreased by 3.9% on an organic basis, primarily due to lower NHP revenue.
• Softening Demand Trends: Recent trends indicate softening demand from the global biopharmaceutical client base, leading to a more negative view of growth prospects.

Company Outlook

• Revenue Outlook Reduction: Revenue outlook reduced to a 3% to 5% decline on an organic basis for the year, with non-GAAP earnings per share expected to be in the range of $9.90 to $10.20.
• DSA Revenue Decline: DSA revenue outlook revised to a high single-digit organic decline for the full year.
• RMS and Manufacturing Segments: RMS expected to report flat to low single-digit organic revenue growth, while Manufacturing segment expected to generate mid- to high single-digit organic revenue growth.
• Cost Savings and Efficiency: Initiatives underway to drive incremental cost savings and ensure cost structure aligns with current demand environment.

Q & A Highlights

• Q: Can you provide rationale for the increased deceleration of demand from global biopharma? (Matt Sykes, Goldman Sachs)

  A: It's difficult to call the timing. This is a pretty unexpected and rapid deterioration of the large pharma companies' business. The IRA legislation and pending patent expirations have led to tighter budgets and additional pipeline reprioritization activities. (Jim Foster)

• Q: Is there a market share issue in DSA, or is it more about overall macro pressures? (Matt Sykes, Goldman Sachs)

  A: We believe we have a fabulous portfolio and are adjusting our go-to-market strategies and being a flexible partner for our clients. We don't think we're losing share. It's more about market shift and soft demand. (Jim Foster)

• Q: Could you quantify the impact of the bonus accruals on earnings? (Eric Coldwell, Baird)

  A: It was approximately $20 million in the second quarter or about $0.30. The second quarter was a true-up for the first half of the year. (Flavia Pease)

• Q: How quickly can you spin up resources in DSA as demand starts coming back? (Luke Sergott, Barclays)

  A: We have to hire even direct labor probably a quarter ahead. It's kind of 3 to 4 months to train people that have no background in this work. (Jim Foster)

• Q: How has your win rate in DSA trended so far in 2024, especially with recent proposals? (Max Smock, William Blair)

  A: Our win rate in Safety has been quite high and consistent. The proposal volume has been significant, and the bookings have begun to improve, just not at the rate needed to invigorate the back half of the year. (Jim Foster)