Ladies and gentlemen, thank you very much for standing by, and welcome to the Charles River Laboratories First Quarter 2020 Earnings Conference Call.I would now like to turn the conference over to your Vice President, Investor Relations, Todd Spencer.

And welcome to Charles River Laboratories First Quarter 2020 Earnings Call and Webcast. This morning, Jim Foster, Chairman, President and Chief Executive Officer; and David Smith, Executive Vice President and Chief Financial Officer, will comment on our results for the first quarter of 2020. Following the presentation, they will respond to questions. There is a slide presentation associated with today's remarks, which is posted on the Investor Relations section of our website at ir.criver.com.A replay of this call will be available beginning at 12:30 p.m. today and can be accessed by calling (866) 207-1041. The international access number is (402) 970-0847. The access code in either case is 5525940. The replay will be available through May 2020. You may also access an archived version of the webcast on our Investor Relations website. I'd like to remind you of our safe harbor. All remarks that we make about future expectations, plans and prospects for the company constitute forward-looking statements under the Private Securities Litigation Reform Act of 1995.Actual results may differ materially from those indicated. During this call, we will primarily discuss results from continuing operations and 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 from 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. In addition, today's remarks will also include estimates of the COVID-19 impact on the company. Certain methodologies and assumptions related to how we develop these estimates can be found on slide three.I will now turn the call over to Jim Foster.

Good morning.Before I discuss our robust first quarter financial results and our revised outlook for the year, I will comment on the impact that the global COVID-19 pandemic has and will have on the company and our actions to address it. The role that we play in biomedical research is of even greater importance during these unprecedented times, given that we are working collaboratively with our clients to discover and develop new therapies for the treatment of disease, including COVID-19.Our work would not be possible without the collective efforts of my dedicated Charles River colleagues, so I'd like to start by expressing my sincere appreciation to them for their hard work and unwavering commitment, which allows us to continue to fulfill our mission every day.To address the COVID-19 pandemic, we have implemented a number of measures that are focused on maintaining the health and safety of our employees and the continuity of our operations, ensuring our ability to support our clients' research programs and sustaining a solid financial position.We have comprehensive business continuity plans in place for each site globally and are continuously updating them to address the evolving COVID-19 situation. We implemented the plans in China beginning in January and optimized the plans for other regions as the virus has spread. We have encouraged employees to work remotely when possible.And for most of our employees who are essential and need to come into our sites to fulfill their responsibilities, we are adhering to any guidance from government, health and other regulatory agencies. Due to the nature of our business, most employees already work in biosecure environments that require PPE, such as masks and gloves and follow other procedures to safely accomplish their daily responsibilities. So we have found that these additional safety precautions have been relatively straightforward to implement.In…

Thank you, Jim, and good morning.Before I begin, may I remind you that I'll be speaking primarily to non-GAAP results on continuing operations, which exclude amortization and other acquisition-related charges, costs related primarily to our global efficiency initiatives and certain other items. Many of my comments will also refer to organic revenue growth, which excludes the impact of acquisitions and foreign currency translation.As Jim discussed, we are very pleased with our accomplishments in the first quarter. We delivered strong revenue growth and significant operating margin expansion, which drove earnings-per-share growth of 31% to $1.84, widely outperforming our expectations.The operating margin performance was particularly encouraging, as it reflects our ability to leverage the investments that we have made in staff, capacity and infrastructure to accommodate growth in a scalable and efficient manner. Where our strong start to the year changed in March as the COVID-19 virus spread and stay-at-home orders began to be adopted globally.This led to a reduction in client demand, primarily for our research models business. I will focus my comments on how we are addressing the COVID-19 impact from a financial management perspective, and provide additional details on our revised guidance as well as an update on our liquidity and solid financial position.Our goal is to provide as much transparency and insight into our business as we are able, which we believe is particularly important due to the fluid nature of the COVID-19 situation. As Jim mentioned, we revised 2020 financial guidance to organic revenue growth of 1.5% to 4.5%, and non-GAAP earnings per share of $6.75 to $7.10. We believe that COVID-19 will reduce full year revenue by approximately $135 million to $215 million. Its impact will be greatest in the second quarter, specifically on the RMS segment.This guidance considers multiple recovery scenarios for each of our…

Thank you, David. That concludes our comments. The operator will now take your questions.

[Operator Instructions] Our first question comes from the line of John Kreger with William Blair. Please go ahead.

Thanks for all the detail, Jim, I think it sounds like you're messaging that the primary COVID impact is showing up in RMS model orders being down, but not really in Safety Assessment, assuming I got that right. Can you just talk a little bit about how you're seeing this crisis play out compared to 2009 and '10, when you saw RMS and Safety Assessment order flow get hit?

Yes. So I absolutely confirm that the impact is principally in research models, the services part of the RMS business has been essentially unaffected. So research models, and principally as a result of the rapid and almost sudden closure of academic institutions, both in Europe and the United States, as well as the closure of some small biotech companies and some of the pharmaceutical companies sites as well.So you're not going to buy animals that you can't use because you're not coming to work to do your study. So that's a logical principal rationale for the situation, conversely. Steady volume and demand was pretty quite good across the rest of the business, including Safety Assessment.Totally different obviously, totally different set of circumstances from the 2008 situation, which was things weren't closed. There was just a sort of pullback as the economy imploded, and there was less work for us. Academic institutions were open and pharma businesses were open. And I don't remember exactly what the impact was on a research model business, but it was less way less severe than this.People still did basic research. As you recall at that time, we and all of our competitors have built an awful lot of safety assessment space. And for a rapidly growing marketplace and then the pullback close caused that space to essentially remain vacant for some period of time.So not enough work, vacant space, too much overhead that wasn't absorbed. And revenue in safety was actually in free fall for several years following that, so totally different set of circumstances, I'd say, that our business was. And we're guiding it to be essentially largely unaffected.We're going to have some impact on the non-research models in DSA and Microbial in the second quarter, some, but not much. A little bit of study slippage in the safety business principally, and then a rebound in the back half of the year also anticipate a rebound in the back half of the year, particularly, in the last quarter in research models. So different set of circumstances. I think that our portfolio is weathering the storm has weathered and will continue to weather the storm quite well.

And our next question comes from the line of Eric Coldwell with Baird. Please go ahead.

A couple of quick ones here, hopefully. I'm curious on the academic sales research model sales. You've talked about reconstituting colony, something that we've picked up in our channel checks as well. I'm curious if you can give us some history on what that might have normally looked like as academic institutions reconstitute individually over time? And then what kind of potential impact that could have either in 3Q or 4Q? My second question is on Avian. And I'm curious if you've seen any impact from vaccine production for animal vaccines? The vet markets around the world are pretty slow. And also, any early thoughts on the potential impact from what should be a very heavy flu vaccine season? And I might have one follow-up.

Sure. The Avian business had a really strong first quarter, and we anticipate its continued strength. The vast majority of those actually is for veterinary pharmaceuticals and vaccines and some relatively small amount to use for human flu. And we're the largest producer with a very limited production universe, so we should continue to see good results there.On the academic side, research models, you've got lots of academic institutions and some small biotech clients as well, particularly in academics that will develop specialty strains of animals, sometimes with our help, sometimes not, for some very discrete research that they're doing and breed the relatively small colonies of that just to have the so the elegance of the animals being right there. And so you can imagine with this academic shut down and it was sudden, it was two weeks that they had to reduce those colonies, clear them out and stop their work. So they sent us a fair amount of that work.And so I think we'll see two things. This isn't going to be a period of time for however prolonged this is, where our client base is going to rethink what they do internally and how they think about us. And so obviously, we have lots of work that's outsourced to us on a growing basis pre-COVID.But there's some clients that have to split the work between multiple providers and some clients who like to do things internally, like have their own colonies, and I think there'll be less of that. I think they'll utilize us more to produce colonies for them, which, by the way, we do in the genetically engineered models business quite robustly. Those models are much more complex to rear and raise and keep clean.And so we have a lot of business where we just breed those animals for them, and then we ship them to them on adjusted time basis. And I wouldn't be surprised to see the colonies that clients have that, a, we'll reconstitute them and perhaps send them back or perhaps not send them back and there'll be more of that work that will be outsourced.So it's an opportunity for them to reconsider how they'll work with us. And I think rely on us more, both in terms of our facilities and people because during this pandemic, our animal facilities are up and running. If we had all of the colones to begin with, we could have taken care of them and they wouldn't miss a beat, and now they're going to have to sort of start that back up again. So we anticipate we'll see a lot more of this work.

If I may, a quick follow-up or a question on API issues. In all of my channel checks so far, I think I've probably heard of, I don't know, call it a dozen cases have been cited, where a preclinical CRO or a client has mentioned having to delay work because they couldn't get product out of India, typically. I'm curious if you have any stats on what you've seen internally? And do you think that some of these global logistical issues that we're seeing could actually change the landscape for where product is sourced? And perhaps bring it back to, for lack of a better word, back to western markets?

Yes, good question. I think lots of people are rethinking and reevaluating their reliance on China and India for API and the core ingredients of the drugs. So we have, as we said in the prepared remarks, we had some test article delays, which caused some study slippage. And so in English, that means that the client says oh yes, we'd love to start the study that we're that we told you was booked for whenever, but we can't get our test article out of either it was China at first, and now it's India. So that's obviously concerning to them.And I think this I don't want to get into the politics, but I think the continuing tensions between the U.S. and China, and just the distance, I think, it's getting people to rethink that paradigm. So tough to predict where we'll go, but definitely, we're hearing some of that. And we've seen some work on the tox side and the discovery side come out of China to us.So yes, I would say it's subtle. We always have study slippage, a little bit more than usual related to difficulty getting the test article out. We anticipate that, that will continue to some extent, some modest extent in the second quarter, and begin to ameliorate in the back half of the year, either because people have stopped relying on them or they've gotten over some of their issues.

And our next question comes from the line of Ricky Goldwasser with Morgan Stanley. Please go ahead.

My question, I mean, obviously there's some limited visibility for 2020, but thinking out for 2021, there are two parts to the question. One is, how long will it take to catch up with the delayed project, based on the time frame that you built your assumptions around? And second of all, when you think about kind of like slowing your M&A activity, how is that going to impact kind of like your 2021?

Yes. So I'm not sure how things catch up, but what we anticipate is, on the research model side, the academic institutions will begin to open slowly in Europe in the summer and open slowly in the fall in the U.S. And there were some people that think that they could open more quickly than that. But we based our guidance on the assumptions that I just gave you. So I think that the research model activity and orders will commence third quarter and heavily in the fourth quarter. And similarly, whatever modest slowdown we've experienced and it has been modest in the DSA segment.We had a little bit of a slowdown in these complex studies that we do for some small biotech companies in Discovery and this test article and dilemma that I was just talking about with Eric. That should ameliorate in the third quarter and fourth as well. So we would anticipate being on a kind of a regular steady clip in the back half of the year for our DSA segment, we've talked about mid-single digits, which, of course, is slower than we typically would have reported.And we would imagine we would anticipate that barring some untoward new twist to COVID that obviously, we're getting way ahead of ourselves and things are fluid and complicated, but it was kind of back to our usual growth rates in 2021 throughout the portfolio, with improved margins as well.M&A is an interesting one. So my stream of consciousness on that would be that, we have multiple conversations going on real time, as we always do. We have while we are engaged with these folks, we have paused any sort of real movement in seriously moving forward with those. Because we anticipate a challenging second quarter, which we've articulated I think quite well in our prepared remarks.And if it's no worse than we anticipated and we get through that well and we see things beginning to improve in the third quarter, we will relook at M&A. We'll relook at the wisdom of doing it, we'll see what prices are like. We'll see what's still available, and we'll see whether these we still think these things are critically important for our portfolio.So it's been a critical part of our growth and development for at least the last decade. I think it's we've created a very powerful impactful portfolio. And we want to continue to do that, but we want to continue to do that smartly. So pause, relook at it in the next quarter or two, and we will begin to see business generally be coming back well in the back half of the year, particularly in the fourth quarter.

And my follow-up is around the comment on clients rethinking their dependency on Asia. How is that kind of like impacting your China expansion strategy? And if you can remind us what percent of your China business is domestic versus work for clients that are outside China?

Yes. So good question. So I'll remind you of several things. Number one, our China business is well, it's primarily research models, we have a little bit of Microbial solutions. It is entirely for Chinese companies, Chinese biotech, pharma and, to a less extent, academic institutions. And you'll recall that we're engaged in trying to dramatically enhance and improve the quality of research models in China. So I think the Chinese dialogue that we just talked about, with API tried to get API out for studies that are done in the U.S. or Europe, is a totally unrelated comment to what we're doing in China.And of course, our activities are only research models-based. So we intend to continue to invest in China. We anticipate a significant high-growth rate as things get back to normal there. We're beginning to get back to normal on the pharmaceutical side, and we anticipate the academic market will improve as well.

And our next question comes from the line of Tycho Peterson with JPMorgan. Please go ahead.

Jim, in terms of some of the offsets, I'm wondering if you could give us a sense of how much preclinical work can and is being done remotely? And then you noted some clients opting to outsource more projects because their own sites are inaccessible. Is that anecdotal, or is that actually meaningful? And then and a follow-up to China, you noted both headwinds and tailwinds with RMS improving, but studies see slippage, I'm just curious, is China going to get better or worse in the second quarter?

So China, for us, for the research model business, should continue to improve. As I said there, we're back to work. Increasingly, clients are open and back to work. I would say that the vast majority of our commercial clients are open and working and Tycho but pharma and biotech, similar to the U.S., the academic institutions closed abruptly there. Again, barring research models. So sales were hampered significantly. And they're beginning to open up slowly.So should be a steady improvement and increase over the rest of the year, including in the second quarter. Sorry, the beginning of your question was about preclinical what was the specific...

Just about some of the offsets, how much preclinical work can actually be done remotely? And then also, you mentioned clients coming to you because their own sites are inaccessible, is that a meaningful trend?

Yes. Well, we hope so. I'd say that preclinical is largely outsourced now, whatever we say, 55% to 60%, which means that you still get some clients that do it themselves, mostly big pharma, mostly kind of a historical preference to do that. And I think it's been a continuing process of outsourcing. We've said often that it's going to get to at least 85% outsourced and probably 100%.I think that a situation like this could absolutely accelerate it that OK, so suddenly their sites are closed. They've got critical studies that have to move forward. They stop. They can't do anything about it, and yet they give them to us, and they continue. So that's what the whole outsourcing paradigm is about. It's about we all need to do what we do best and who can you rely on? And how can you continue your velocity to get your drugs to market?So I think we're demonstrating that. We're demonstrating the power of the remote facilities. We're demonstrating the power of an international footprint, we're demonstrating the power of having capacity available for them and being able to be nimble in moving that about.So I think that, while this is a horrible situation, and it was certainly we all wish we weren't in it, I do think it's magnified the benefits of working with us across the portfolio. And in some ways, particularly safety, just because that footprint is so substantial there.

If I could ask just one last one on cancellations. A lot of the discussion has been about delays, but are you able to comment at all on work getting canceled or at risk of getting canceled in the next quarter?

Very few cancellations. So cancellations are no worse than usual. They happen all the time for a whole variety of reasons. Clients are charged for cancellations, meaning, we've usually set aside animals and staff and runs, and depending on the nature of the cancellation, we usually get paid something for that. So usually a small percentage of what we do, it's not increasing. And as I said before, slippages has increased slightly, very modestly, but noticeably, with the explanation that, yes, I'd like to start my study, but I can't get my test article out of China or India.

Our next question comes from the line of Robert Jones with Goldman Sachs. Please go ahead.

I guess just the first one, Jim, to follow-up on RMS, obviously, that's where the impact seems to be felt the most so far and where you anticipate to see the impact felt. Are there any milestones that you can share with us as far as what you're looking for or what you're hearing from your clients that have had these issues in accessing their own sites, as far as their comfort in getting back online? Anything that they've shared with you as far as what they're looking for to get back up and running?

The only anecdotal information I can give you is that we've had several calls from clients, and this is in the script, I believe, just saying, we anticipate we'll be back up at a certain time frame. We need to make sure that you are up and running, and you've got all the strains and species of animals available, because we're going to need them. Implications are that there'll be some significant sort of kind of surge in demand, either they're going to crank up a bunch of research seemingly all at once, so they're going to reconstitute colonies that they had to take down.So I'd say I don't want to overstate it, but some level of concern or almost nervousness on their part and that might be because they're concerned about some of our competition, maybe not, not being as available or as robust or this hurting them more than us. So it's very basic. We'll see it immediately. Animals that typically purchased, particularly by big pharma and biotech companies consistently week after week after week, based upon early orders in the year or in the quarter, and they just buy them every week.So it's quite consistent and predictable, and it's quite consistent and predictable that it's not going to happen when their facilities are closed. And pretty much I don't know that literally the minute they're open, but the week that they're open or the second week that they're opened, you can see them getting back to getting the studies cranked up again.So I think there's a huge interest. I think that there's one other thing I'd like to point out is, there's a lot of dialogue going around right now about whether colleges will start in the fall. I've heard that Harvard might not and MIT might, for instance. So there's even a dichotomy between big well-funded institutions like that.I think that even if students don't come back, that academic medical centers and research organizations, research parts of those institutions will open. Think about R&D labs, where people are gowned up, off and working in hoods, so they'll spread them out a little bit more. I think the potential of the virus is very, very low in those domains. So they shut down the whole institution, I think the first things that will open are the research centers within them.

Yes. I think that makes sense. I guess just a follow-up, taking a step back on the guidance, and clearly, you guys have factored in a number of scenarios it seems around the guidance and the outlook. Just playing out a scenario where maybe things take longer to come back, or are they worse. Other than the cost measures that you guys outlined today, are there other levers you could talk about as far as what you can do to offset maybe a more prolonged impact to demand?

Sure. So if the academic institutions don't open up as anticipated, let's say they don't open up, they're a quarter later or they don't open up at all this year, and/or the second wave of the virus is way worse than everyone is anticipating, and they open and they shut again, we have played through countless scenarios. But that would be a couple of bad situations. We have additional cost control measures, a continuation of some of the things that we have started on the compensation side, for sure on the travel side, for sure, that we can and would execute, which would backstop certainly some of the operating margin and EPS associated with a lower revenue delivery.So yes, we I think we have substantial ability to offset a worse story. Our guidance is based on a very realistic to quasi-pessimistic story, but there's a lot of parts and pieces. We have different assumptions for different businesses and different parts of the world. But based on where we sit now, based upon you have to understand that we have conversations with hundreds, if not thousands of clients a week about what they anticipate, what they'll buy, what's happening to them, how they're thinking about their studies on the academic side, when they're thinking about opening.We do have a couple of high-level academics on our board, deans of a veterinary school and a medical school, who are still quite connected to the academic milieu and have given us their the best prognosis. So we think that we've done it realistically, but we definitely have more cost control measures to offset a further decline if it gets worse than we've guided you to.

And our next question comes from the line of Patrick Donnelly with Citi. Please go ahead.

Maybe another one on the cost side. DSA, you guys long talked about kind of this mid-20% op margin goal, saw some pretty nice progress this quarter to the 22% number. Can you just talk about the implementations you have going in that segment? Again, it seems like it's hanging in a little better, very temporary in terms of the pullback. How aggressive are you being in preserving the margins there, kind of pursuing that mid-20% goal in the near-term here?

Yes. I mean our cost control measures have pretty much cut across all of our businesses, and we would prefer and intend to have them be temporary. By that, I mean the sales will increase, and we don't have to continue with them or make them more severe, and that's what we anticipate seeing. I think on the DSA business, as we said in our prepared remarks, we're looking for a meaningful and there's only been a modest impact, and there will only be a modest impact for the year.We're looking for a strong back half of the year, particularly in safety assessment, which is the largest business that we have, given the desire of our clients to continue to prosecute the drugs that they have in development, particularly for IND-enabling studies, both for COVID-related de novo work for COVID stuff, but also multitude of therapeutic area-based work.So the work is continuing, and there's been a very modest decline. So we would continue to see believe we continue to see strong demand there and our ability to continue to generate strong operating margins, particularly in that segment.

Okay. And then maybe just a quick follow-up on the Discovery side, and I know you talked about clients in some situations slowing projects, delaying things maybe just a quarter. I guess, how confident are you that's just going to be a quarter? What's your visibility into those conversations, things coming back in two or three months rather than getting pushed out longer, again, assuming things normalize somewhat in the near term?

Discovery had a really strong first quarter, which was great. And the type of work that we're talking about slowing down is these very complicated, we call them integrated drug discovery projects, that they tend to be multiple years and multiple millions of dollars, they're very expensive and very complex.And so we're seeing and by the way, we don't do a lot of them. There's a relatively small number of them. And they're for pretty sophisticated but often small biotech companies. So you can imagine as this pandemic has broken that clients that we were in discussions with about initiating these studies would just want to pause, so they've said, let's pause and see how this thing rolls out.So I think it's possible that they continue to pause. If they do, again, it's a small piece of Discovery, and Discovery is a small piece of DSA. So we're talking about a very modest impact to the Discovery business and to the DSA segment. The rest of the Discovery segment has done quite well, and we would anticipate continuing to see that happen and perhaps some benefit, some work that was historically done internally, and clients getting comfortable or preferring to utilize outside resources to get that work done. So we feel pretty good about the trajectory there.

And our next question comes from the line of Elizabeth Anderson with Evercore. Please go ahead.

I think you've answered it partly in bits and pieces, but I just want to make sure I understand how you guys are seeing the bookings trend in April into May, and then also among sort of different sized clients? Obviously, biotech is well funded, but are you seeing any differences as we progress through in different sized clients?

Yes. The proposal line in bookings for Q1 were really strong, and I think we said in the prepared remarks that March was really strong. So we ended the first quarter with in a very good place. We had a really strong April, particularly in Safety Assessment on the bookings side of the situation. So as we said, it's pretty much business as usual for a whole host of clients, and it's hard to tease out much of a discernible difference between big pharma and biotech.I would say that biotech's feeling well-funded if they've got drugs that they need to develop, particularly for IND-enabling studies, particularly kind of worried about the FDA going to be too busy, so let me get my work in early. I think that's a pretty good push there. So we would anticipate continuing to see strong proposal volume and bookings across DSA, but particularly in SA, particularly in Safety, for both large and small clients, we have a really big international footprint and the capacity to accommodate that work.And there's no logical reasons, even with the virus situation being more prolonged because there's not much the clients have to do. So they give us the molecule and we literally do the work for them. We have to talk to them, but we can do that by computer. So they simply have to be able to they simply have to have the molecule and be able to afford it. So being closed or shut down or disrupted doesn't really have much of an impact on this, which is the whole basis of the bargain of our outsourcing model. So we will continue anticipate continuing to see that be strong demand.

And our next question comes from the line of Sandy Draper with SunTrust. Please go ahead.

I guess, maybe a follow-up on HemaCare, Jim. You commented that you shut down the facilities there, and you're expecting that to stay down and so there to be a negative impact. Can you talk about sort of and I don't know if this is the right way to think about it, sort of how long the supply or how big a supply you typically keep in inventory? So like how long you can run the business before you, you absolutely need to start reopening? And just trying to think through the dynamics of how HemaCare reacts to this environment?

Yes. Fair questions, Sandy. So we've shut so the business is still operational. We have product that we're shipping. We also have product that we can source from others. So we don't think the inventory will be a problem. All we've closed is the donor clinic, where people come in and donate their blood for obvious reasons in the midst of COVID. And so we have plans to reopen that. I can't give you an exact date, but it won't be too prolonged.So we'll get that business cranked up again. Inventory won't be a problem. Obviously, it's been disrupted from a revenue and profit-generating point of view for some a short period of time, but given the strength and interest in the work that's being done in the cell therapy space, we anticipate it will continue to be a very strong business in the back half of the year and going forward.

Our next question comes from the line of Dave Windley with Jefferies. Please go ahead. We'll go on to the next question from Juan Avendano with Bank of America. Please go ahead.

I guess, can you give us a quantitative update on your current level of capacity utilization in Safety Assessment? What you define as full? And how does it compare to the last couple of years?

Yes. Capacity utilization is we have good flexibility and in a good place. Citox, we picked up a bunch of new sites, where we have some capacity. We still have a substantial amount of capacity from the MPI deal, that's a big site in Michigan, which gives us enormous amount of flexibility to bring studies in there as long as we have the staff. And in 2019, as we have in the prior five or six years, we've added incremental modest incremental space at multiple sites, let's say five or six sites at once.So we definitely have sufficient capacity to take on the work. Our headcount is in a good place. As you recall, we worked really hard in 2018 and 2019 to get our staffing hired and trained, so that we could accommodate an increase in work, we're in a really good place right now, overtime is low; turnover is low; people are well-trained and actually happy to have not only happy to have jobs, but proud to be working in this environment on work generally and specifically with COVID. So our definition has never really changed.Full capacity utilization is kind of in the low-80s. I'm not going to give you an exact number, it would not be useful, except that we're essentially very efficient. You can see that in the margin accretion in the first quarter. So we've been able to add capacity slightly ahead of where we need it, which we have done and will continue to do. And then we have kind of this Mattawan facility, which is kind of our ace in the hole, because it's so large, and we do provide so many different services there, that we can accommodate a lot of clients' demands. So capacity is in a good place.

And our next question comes from the line of David Windley with Jefferies. Please go ahead.

This is Dan Layenne on for Dave. Can you hear me? I don't know if I was on mute earlier. Okay. Great. I just want to say congrats on the quarter. My question is, you put through a rate increase in 2018 because of a somewhat tight labor market, does the spike in unemployment change that dynamic? And when will the cost savings need to be reinstated?

So I don't think it changes the dynamic. I'm not really sure what you mean. We certainly feel that we're paying people well. So we don't feel that we have the need to do anything additionally. We certainly don't want to pay people less because the economy is difficult. So I think we're in a good place, as I said a moment ago, from a staffing point of view.From a turnover point of view, I think the economy has, generally helps with that. But in the locales where we needed to catch up, we did catch up well. And we're going to stay more vigilant on just testing the local markets, because demand changes from time to time from a competitive point of view, depending on who else is hiring folks. So that should not be an issue for us going forward.

Our next question comes from the line of Erin Wright with Credit Suisse. Please go ahead.

Just one quick one here on your Manufacturing. I just want to ask about the relative resiliency across the Manufacturing segment? I guess, what parts of that business are inherently more or less immune or insulated to the COVID environment?

So manufacturing has been relatively unscathed, those three pieces, and we're providing products and services related to our clients, principally producing drugs and vaccines and, to some extent, sterile products. So I would say, it's pretty clear that Manufacturing is happening, in some ways, in a more robust fashion than pre-COVID. I mean lots of drugs are being manufactured. Lots of new drugs will be manufactured to be tested in the clinic for COVID, and hopefully, to get into the market in the fall, both vaccines and drugs.So I think we'll see, worst-case, sort of a continued demand and potentially an intensified demand for manufacturing for our manufacturing products and services, that business has held up really well in the first quarter. We're anticipating relatively unscathed by this going forward. The work that we do is essential to products being released to go into the clinic, and products that have been manufactured to go into the market for sale to patients can't be released until we do the testing on them. So it's a really critical sort of FDA-required aspect of the whole drug development and delivery paradigm.

And our next question comes from the line of Dan Brennan with UBS. Please go ahead.

Thanks for taking the questions. Jim, I was hoping to get a little color just on safety assessment. I think the DSA, you guys have talked about mid-single-digit-plus for the year, and you qualified it as a modest impact, but yet it sounds like after Q2, it sounds like you're expecting a pretty sharp recovery. So I'm just wondering, is that mid-single-digit-plus? Is that you also mentioned with your guidance it likely has a bit of a quasi conservative element. So should we characterize that area as conservative? Just kind of maybe clarify some of the commentary on DSA?

So what we said was at least mid-single digits, so we were pretty clear about that comment. It's obviously a segment that's been in the high single digits, so it will be lower. It would be great if it would be higher than that. But we're guiding exactly to that language. I don't think I said that our guidance is conservative. We always try to have our guidance be realistic based upon what we see in here and what we predict for the rest of the year. I did say that it's kind of a patchwork of, obviously, different businesses and different geographies, which will be impacted more or less. The challenge with this situation is obviously that the there's not a lot of historical guideposts here.So we don't know how this virus will continue to develop or not. And we don't know exactly what the impact will be on us. We know what we think and we know what our clients are telling us. So yes, so you could apply the word conservatism, only I would use a different word, which is that there's a fair amount of unknowns. But we as we stand here today, we have a high level of confidence in our guidance. We obviously hope it's better, but we're not going to guide to that. So I wouldn't read too much into it. If we deliver mid-single digits in DSA, we'll be quite pleased with that.

Great. And maybe one follow-up. Just clinical peers, kind of a topic a lot of folks have latched onto is the percentage of sites that are affected today and how that potentially could progress throughout the year as maybe a signpost toward the rate of acceleration or kind of the pickup in revenue growth. So for your businesses, obviously you're talking to hundreds of customers a week, you have deans of a university on your Board. Absent us digging in with customer calls, like what are some of the signposts you think we can watch to kind of assess kind of the pace of recovery? Obviously, biotech funding is critical, so that's something we'll all watch. But if we're thinking about research models and DSA, what are some of the things you think we should be looking at?

Yes. I mean, just the dialogue around the reopening of major academic institutions in the U.S. and Europe and the reopening of some of the smaller biotech companies, many of which closed for short periods of time and some of the big pharma sites as well. So there clearly will be announcements of that, particularly on the academic side. Yes. I mean, you can watch biotech funding, and then funding comes in from a bunch of different sources. First quarter was really strong. VC funding continues to be strong. IPOs are slowly coming back.Pharma will continue to bank biotech companies as they always have. And I would imagine, as the at least the U.S. economy gets has a take on how this COVID situation will develop and/or it continues to see the biotech companies distinguish themselves developing drugs for COVID and other diseases that I think that continues to be one of the few places to put your money if you're an investor that has a likely positive outcome. So those are indices that are easy to watch, and I think should give you comfort in the demand curve for our portfolio.

Excellent. Thank you for joining us on the conference call this morning. We look forward to meeting with you at several virtual investor conferences this spring. This concludes the conference call.

Thank you. Ladies and gentlemen, that does conclude your conference for today. Thank you very much for your participation. You may now disconnect.