Good day. Thank you for standing by and welcome to the Charles River Laboratories International Q2 2021 Earnings Call. At this time, all participants are in a listen-only mode. After this speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the call over to your host, Todd Spencer, Corporate Vice President of Investor Relations. Please go ahead.

Thank you. Good morning and welcome to Charles River Laboratories' second quarter 2021 earnings conference 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 second quarter of 2021. Following the presentation, they will respond to questions. There is a slide presentation associated with today's remarks, which is posted on the Investor Relations' section of our website at ir.criver.com. A webcast replay of this call will be available beginning approximately two hours after the call today and can be accessed on our Investor Relations' website. The replay will be available through next quarters' conference call. 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 these Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated. During this call, we will primarily discuss non-GAAP financial measures, which we believe help investors gain a meaningful understanding of our core operating results and guidance. The non-GAAP financial measures are not meant to be considered superior to or a substitute for results of operations prepared in accordance with GAAP. In accordance with Regulation G, you can find the comparable GAAP measures and reconciliations on the Investor Relations' section of our website. I will now turn the call over to Jim Foster.

Thanks, Todd. Good morning. The strength of our leading non-clinical portfolio was clearly demonstrated in our second quarter financial performance. Robust industry fundamentals are leading to unprecedented client demand across most of our businesses and we're extremely well positioned to succeed in this environment. Second quarter organic growth - revenue growth was in the mid-teens, even after normalizing for last year's COVID-19 impact and exceeded the long-term low double-digit target that we recently provided at our Investor Day in May. Clients are increasingly choosing to partner with us for a flexible and efficient outsourcing solutions, the scientific depth and breadth of our portfolio, and our unwavering focus on flawlessly serving their diverse needs. Utilizing our capabilities enables them to drive greater efficiency and accelerate the speed of their research, non-clinical development and manufacturing programs. We believe that the efforts we have made and continue to make to differentiate ourselves from the competition are critical as clients choose to work with a smaller number of CROs, who offer broader scientific capabilities. Due to this sustained demand, we are keenly focused on the execution of our strategy. We are strengthening our portfolio as we did through the acquisition of gene therapy CDMO, Vigene Biosciences in late June. Strategically adding staff and capacity to accommodate the robust demand and support our clients and enhancing our digital enterprise to provide greater connectivity and exceptional service to them. We believe we will make these investments and remain well positioned to achieve our operating margin target of 22.5% in 2024. We believe the success of our strategy is reflected in our second quarter performance. So let me provide some of the highlights. Quarterly revenues surpassed $900 million for the first time and a $914.6 million in the second quarter of '21, represented a 34% increase over…

Thank you, Jim and good morning. Before I begin, may I remind you that I'll be speaking primarily to non-GAAP results, which exclude amortization and other acquisition related charges, costs related primarily to our global efficiency initiatives, our venture capital and other strategic investment performance 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. Once again, we are very pleased with another strong performance in the second quarter. Robust revenue and earnings per share growth outperformed our prior outlook. Organic revenue growth of 24.1%, including 8% related to last year's COVID-19 impact, and operating margin expansion of 350 basis points were the primary drivers behind earnings per share growth of 65.2% to $2.61. These results also reflect a favorable comparison to the second quarter of last year, in which, we experienced the peak of the COVID-related impact and client disruptions. Based on our strong second quarter results and expectations for the underlying strength of demand to continue, we have increased our full year financial guidance and now expect to deliver organic revenue growth in a range of 13% to 15% for the full year. Primarily as a result of the enhanced growth prospects this year, and to a lesser extent, favorable tax rate, we raised our earnings per share guidance by $0.35 to a range of $10.10 to $10.35, which represents a year-over-year growth of 24% to 27%. By segment, our updated outlook for 2021 reflects the strong business environment. For RMS, we continue to expect organic revenue growth in the high-teens, driven by the recovery in Research Model order activity from the impact of the COVID-19 pandemic last year, as well as exceptional growth in China. Our outlook for DSA is unchanged, with…

That concludes our comments. Operator, we will now take questions.

And your first question come from the line of Eric Coldwell with Baird.

Thank you. Good morning. Main question is on preclinical safety assessment. We are hearing in our various channel checks that sites are booked well into 2022. I know you made a comment on that in your call. We're hearing that more broadly. We're also hearing that some of your competitors have been placing massive long-term model purchase commitments, multiyear commitments very large, which I think is a sign of the strength of the industry. But, it really comes down to the question of capacity, and you know, where you stand, what kind of investments you're making? How do you balance this supply-demand imbalance, so your clients don't try to seek other solutions in the marketplace? Just any thoughts on that would be helpful.

Yeah, Eric. We're investing capacity thoughtfully, aggressively, geographically multiple sites at once, not dissimilar to what we've done historically. We're continually reviewing where we think the demand will be for the next few years and ensuring that our capacity meets our - because that capacity is sufficient to accommodate that. I don't think it's a bad thing that clients are reserving space earlier, which allows us to plan better, and obviously gets us greater visibility from a staffing and expense point of view. It also provides a more orderly business model, frankly, and it's not all that dissimilar to the way it was years ago, where we had similar types of demand even other client base was quite different. So, where, you know I'd say the principal conversations around here are ensuring - working hard and ensuring that we have sufficient headcount and physical capacity to accommodate the demand, not just in safety by the way, obviously, safety is our biggest business. So principally, the conversation goes there, but certainly across Biologics and Discovery and other business and certainly China as well where it's relatively focusing on - and ensuring sufficient capacity, it's what we put this portfolio together for to service the clients that they outsource more work. So, we are very much on top of that, Eric.

Okay, Jim if I could squeeze one more in. I noticed in the press release a comment about higher production costs in Microbials. I was hoping to get a little more color on that.

Yeah, nothing really significant, just certain raw material costs are kind of higher at the moment. So supply chain issues that, you know, lots of businesses are having I think that's quite transitory. Mic that is still quite good within that business and the growth rate really was terrific. So just kind of kind of short-term blip.

Okay, thanks very much. Good job with the quarter.

Sure. Thanks, Eric.

Your next question comes from the line of Tycho Peterson with JP Morgan.

Hey, good morning. I'll start with question on Manufacturing. You know, on the back of the Vigene deal, you noted, you know, clients are beginning to explore opportunities to streamline you know development with you. I guess, as you look at your Cell & Gene Therapy portfolio today, you know are there any existing gaps? And can you talk a little bit more about how Vigene fits in with the rest of that business?

Yeah, I think it's a pretty solid portfolio, Tycho. You know, we have the cells, which it's a Cell Therapy, obviously, there is no Cell Therapy R&D, will scale up without that. So we'd like that we started first with that, we now have significant capability in Cell Therapy, Manufacturing, particularly modified cell therapies. And you know we have this viral vector and plasmid DNA capability on both sides of the pond now in the US and Europe, which give us a substantial capability as well. There may be some nuances. And of course, we're always looking at M&A opportunity. So I want to get too specific stuff, just to say that I think that M&A will be principally around in just increased scale and enhanced geographic dispersion and diversity and growth. I do think that not unlike other businesses, geographic proximity, you know, when you're dealing with live cells is not unimportant and would be beneficial. And clients still like the ability to be relatively close to their external providers of services, if possible. So there still a fair number of assets out there that we're quite interested in, there are a variety of sizes, I'd say most of them are on a smaller side, several hundred ones, we may have one of course and those are no longer available. If we are unable, for whatever reason or unwilling because of the price point, to buy and meet the targets we currently have, I think we do have a very - we have a terrific installed base and the growth rates will be such that will become a big business. And of course, just want to remind you that we look at the Cell & Gene Therapy assets, which are whatever it is now 18 months to 24 months old, we look at those very much in combination with our Biologics business, which is very high growth right now, you heard us talk about north of 20%, terrific capacity here, those businesses that join that they have to the testing of those Cell & Gene Therapy products before they go into the clinic, and hopefully, after they're approved, before they go into patients will be just as essential as the contract manufacturing pieces of it. So, we're thrilled to be able to piece those together. Pretty big portfolio now. I think that - we didn't update it on this call, but we said you know it's Cell & Gene Therapy revenues are greater than 10% of the total Charles River, is a big number and it's going to grow disproportionately fast. So, very pleased with the portfolio.

All right, and then a follow-up on RMS, you know, obviously a number of those businesses, you know, benefited over the past year from the challenges around the pandemic. If you look at the you know the GEMS outsourcing and also, you know, the CRADL and insourcing initiatives, I guess, as we're kind of, you know, past the halfway point part of this year and working through, you know getting back to labs up and running, you know, how do you feel about the durability of some of those trends? You know, in particular, around GEMS and then CRADL insourcing?

Really good. While we certainly got, and are enjoying enhanced outsourcing from clients that did work themselves or didn't use us or used us partially, and we really proved the value proposition that we have by staying open and doing this great work. The mark - by putting aside that COVID pop, as it were, this significant demand - increasing demand for GEMS models and specialty models and more complex models and more translational models, for sure. This IS businesses increasingly more interesting. The CRADL you know, these CRADL locations and principally in Cambridge, Mass and South San Francisco and eventually other important parts of the world, above high revenue generators, high margin businesses and significant feeders to other parts of our business, particularly service enterprises. So being in those environments, but you know, being part of that Cambridge, cameo - sort of Kendall Square universe has been critically important to ourselves. I think the growth rates and margin contributions are absolutely sustainable in those businesses, and we will continue to expand capacity growth in the current places that we are located, but also we're going to add new sites as well.

Okay, thank you.

Sure.

Next, you have a question from the line of Dave Windley with Jefferies.

Close enough, I guess. Good morning. Thanks. Thanks for taking my question. I wanted to Jim ask about China tie a couple things together there. You mentioned that the demand in China has kind of rotated from the academic and government sector to more private sector client base. I'd be curious your comments about how that influences your price points and margins for your business in China? And then the second part of my question would be, you know, given the success there in models and the evolution and you know strengthen the investment in biopharma in China in general, is it time just to rethink or start thinking about planting other business lines in China to leverage off of your existing base?

Yeah. So huge investments by the Chinese government in the life sciences, venture capital firms are aplenty and so we're seeing significant investment in sort of classic and new pharma companies and mostly biotech companies. So but while I don't personally think the market will overtake the US, I think it's going to be the second largest market for sure. Yeah, I mean, provides enormous demand for us. You know, I think look, we'll always try to get more price to general proposition, including in China. So, I wouldn't say, otherwise. You know, that the cost structure is significantly lower than other parts of the world as to the price points, but the margins are comparable. We have to be careful, given the fact that we have lower - you know, we have a lot of local Chinese competitors, who I think in part or in whole financed by the government, and so they have the ability to really go after us always on price, just like we've seen in the US and Europe. I mean, our RMS competitors worldwide principally compete with us on price and not so much of quality or service. But having said that, you know, we'll continue to drive price as much as we can, because of course, costs go up in China as well. And of course, we've - we're growing at least the RMS franchise very nicely. So lots of investments and services, IS, GEMS, et cetera, lab testing in China, and significant investments in new production facilities. Your second question is a tough one to answer. So, I just remind you, we have a large and growing RMS business, we have - we actually have a large Microbial business. It's just that since the testing isn't regulated over there, the total revenue…

Very helpful. Thank you, Jim.

Sure. Sure, Dave.

The next question comes from the line of John Kreger with William Blair.

Hi, thanks very much. Jim, my question relates to the capacity availability for Cognate and Vigene. Can you just remind us where those programs are in terms of their capacity build out? Should we be assuming a necessary step up in CapEx in the next couple of years? Or is that already sort of in the long-term plan?

Definitely in our guidance. So what we've told you about the accretion of those businesses to our top line to our EPS and improving operating margin, is real. Both of those businesses have a significant amount of available capacity, by that, I mean, you know, they were in that process of expanding capacity when we bought both of them more actually. So that will continue. It's a significant amount of space. It's - you know it's an interesting one, John, the business is so potentially so explosive, the ability to take clients, particularly in the Manufacturing pieces in the pure CDMO piece for modified cell therapies to take those from clinical production to commercial, which we can see with a couple of the clients, at least, depending on how impactful those new drugs are, will lead up a lot of capacity. So we're just going to have to live through, we're going to always have to have incremental capacity available, by that, I mean, you know, rent space have a plan to finish it either all at once or in slices sort of, you know, chunk that's out there and stay very close to the clients, how the drugs are doing, what phase they're in, how well financed, are they - what's the competitive scenario and you know we're doing that really well. So, I think we're in a very good place right now, as we see capacity for the next I don't know, a couple of years. But we're going to have to stay ahead of it. You know, the guidance that we gave recently about, we anticipate that CapEx will be you know around 7% of our revenue that incorporates and accommodates for significant growth, certainly in Safety, certainly in Discovery and certainly in the CDMO business, which is obviously a new business for us. I don't think it's particularly more capital-intensive in lots of other things that we do, and I know that. But - and particularly that, that the Cell Therapy type of work that we're doing is, I'm not saying it's not capital-intensive, but it's not as intensive as some other aspects of the CDMO space. So, we think we have our arms around for the scale, growth and cost.

Sounds great. Thank you.

Sure.

Next question come from the line of Elizabeth Anderson with Evercore.

Hi, guys. Thanks so much for the question. I was wondering if you could expand on Tycho's question a little bit and sort of talk more about the cross-sell opportunity in Cell & Gene Therapy between RMS and the CDO - CDMO business so far, sort of where are you in terms of the interest of clients to sort of do the whole spectrum with you, and then sort of how do you see that progressing over the next few years? Thanks.

Yeah, I mean, you know, we see it progressing well. If you look at - just if you look certainly at most of our large clients, I would say that they buy most and some buy everything that we sell, all our products and all of our services. So, you know, we are an increasingly - increasingly more important provider, significant spend with those companies we're dealing with very senior people there, and they look at us as an essential provider of a whole bunch of things that they need. The smaller the clients get, particularly our biotech clients while many of them are pre-revenue, lots of them are public and they've got $10 billion or $15 billion or $20 billion market caps. So they're not smaller companies. And they have - while they may have the money, they have no, as I said in my prepared remarks, zero desire to build these things out internally. And I think that's going to get increasingly more nuanced, that they're going to have less of a desire, particularly in things like Cell & Gene Therapy or Biologics Testing or for sure, Safety. So, the broader the portfolio, I think, the more client capture that we have. We're already seeing almost immediately, as I commented on briefly in my remarks, clients who are working with Cognate and Vigene interested in the broader range of services that Charles River has. And conversely, clients that we're working with Charles River very interested that we now have the Cell & Gene Therapy capabilities. So you know, everything is about speed to market with all of these companies, regardless of their size, and the ability to work with a - as much - to as much as possible with a single source to kind of get the pricing behind you. And I have to renegotiate every step of the way, definitely accelerates the whole process. Also as some of these small companies, our regulatory capabilities really helpful to them to kind of guide them for their FDA filings or filings with other regulatory agencies around the world. So, given the fact that there were 3,000 Cell & Gene Therapy drugs in development, two-thirds of which are in preclinical, a lot of how - hopefully a large number of which we are already working with that we'll to work with, having these capabilities was really essential for us to participate in a really large portion of the marketplace.

Got it. That's really helpful. Thanks.

Your next question comes from the line of Juan with Bank of America.

Hi, thank you for the question. Regarding your margin targets in 2021 and 2024, what would you say is the likelihood or a risk the Manufacturing support margins could remain in the low-30s given the investments that need to take place in this area? And how do you see the negative impact of foreign exchange on DSA margins playing out for the rest of this year and in relation to your 2024 margin target?

Okay, I'll take that, Jim. So I'll take the FX one on DSA data. So you've seen a 150 basis point headwind in DSA for Q2, and basically averages out just roundabout 100 basis points for the first half of the year. And actually, we actually think the second half of the year would be somewhat similar. That said, in respect to your question about how the FX might turn out in the longer-term, as we've seen through history, we should see that reverse. I can't predict when that FX will reverse. But at some point, we should see some benefits coming in certainly over the period of 2024. In respect to the question around, you know, the CDMO drag on the margins, and in particular, you know, Cognate, we - well, to start, we're not expecting to see a meaningful impact on the consolidated operating margin. But to your question, yes, there is a drag on the Manufacturing segments' margin. And as we said before, you know, we expect to see modest margin improvement over the next few years you know as we deliver the acquisition synergies, you know, there's, we've got a great procurement department, we've got good back office functions that can bring some synergies to those businesses. We will continue to enhance the scale of the business and like we do with every operating unit, we know we're looking to drive operating efficiency. And with the high revenue growth, where we're expecting north of 25% for the foreseeable future, we would get economies as those you feel like the fixed costs become less prevalent respect to the whole of business. So, in terms of margin progression, we would expect to see with time, the Manufacturing business improve, certainly from today's position. And in terms of long-term guidance that we gave just two months ago, we did say that we were expecting to get into the mid-30% range. Clearly, we will do what we can to improve that further. But at this stage, we're posting over the next few years mid-30s from Manufacturing.

Thank you.

Your next question is from the line of Donald Hooker with KeyBanc.

Great, good morning, I was curious if you all could elaborate a bit on any potential inflationary pressures, obviously tremendous demand for what you're doing. I'm wondering if, you know, it might be more expensive to hire the scientific talent now than it was before - have you see any trends there? How do you manage that?

Want to take that, David?

Yeah, I'll take that. So while we take - I'll take the broader question, first on just wage and inflation pressures. I mean, you know I'd like, many people who picked up that many companies, you know, it's a global issue, pressures across most industries. I can't say every industry, but certainly most industries and regions. And certainly wage pressure and recruitment, for Charles River has been and always in terms of, you know, we're continually growing and we got to keep up with that. We've spoken about this at many of our earnings calls, you know, we've discussed some of the investments that we've made and initiatives to address that in the past like the live and wage, you know, work-life balance initiatives that's form. And yet, we're seeing our revenue growth is ahead of our initial expectations. So as you can imagine, we're working very hard in multiple geographies to actually make sure we're hiring and meeting that real most event. So really, the - to your question about looking that between workgroups, it's more about bringing in the staff of the sort of the wider growth that we're seeing as opposed to specific category. Of course, with, you know, 19,000 people, there's going to be some departments where we may feel that there are some needs to pay more to make sure that we can, you know, get that type of resource in. But we're not seeing a blanket issue with respect to scientific staff or with other staff, it's more about just managing the sheer growth within Charles River vis-a-vis the wider churn that we're seeing in the wider economy, because of COVID people, many people are looking for change. So we continue to drive some of these work-life balance type issues, because that will go a long way to helping with retention as well. But notwithstanding all of that, that I've described, you know, we've factored that into the guidance for this year, we still feel that that's still relevant in respect of the longer-term guidance that we've given. So we should still see that 150 basis points increase over the next three years, not for this year, how that will pan out within the years too early to call. But certainly we feel with the extra growth that we're benefiting from that helps pay for some of these global issues that we're all facing.

Great, thank you.

Your next question come from the line of Patrick Donnelly with Citi.

Hey, thanks for taking the questions, guys. Jim, maybe just on kind of an increased demand in the backlog going out for next year? Can you just talk a little bit about the pricing environment? You know are you seeing clients book on things like pay basis just to reserve space when they need it? And what kind of pricing are you guys kind of talking about in some of these you know bookings to the out years?

No, take a pay yet. Frankly surprises me if I was in the client's shoes, I would do that. Just to protect myself, so I could go to the front of the line and not have to get in line. But that's their business and their call. So yeah every once in a while we get quite a serious question about that. So what would that look like? And we give them a quote and I guess it's too expensive. We're really pleased with the price. You know, we're not going to disclose the prices we haven't for years, but we're really pleased with the pricing you know we're getting in Safety. You know, with the studies continued to be incredibly complex, more complex than it used to be oftentimes, end points are added as the drug progresses and looks more promising those days get more expensive. And, you know, we continue to have a nice mix between what we call, general toxicology and special toxicology which provides sort of an enhancement to the overall price paradigm. You know, we have to be conscious cognizant and professional about the pricing, because not unlike so many of our other businesses, like RMS for instance, we have competitors, particularly smaller ones that compete with us principally on price, allegedly on speed and flexibility, which is not true, I like to play the card that Charles River must be too slow, because it's so big that's just not true. So and when we have new opportunities to get on new work, unless we're trying to take work from our competitor, we're pretty much always driving the price out. So I would say that pricing is increasingly, it's certainly an important focus of our clients. But I would say as demand has intensified and as capacity continues to fill, even with new capacity being built, that price is not the first thing that clients talk about, and I think that provide some opportunities for us. We've been pretty pleased with that pricing yield for the last, I'd say three years anyway, and I wouldn't anticipate any change in that going forward.

Great. Thanks, Jim.

Sure.

There are no other questions at this time.

Great. Well, thank you for joining us on the conference call this morning. We look forward to speaking with you during an upcoming investor conference. This concludes the call.

This concludes today's conference call. You may now disconnect.