Charles River Laboratories International, Inc. (CRL) Earnings

Management highlights

### Strategic Progress under Pathway to Purpose Framework - Completed divestitures of non-core European Discovery Services sites, CDMO, and Cell Solutions businesses in 2026, enabling 420 basis points of sequential Q2 operating margin improvement to 20.5% as the company refines its portfolio to focus on core regulated testing competencies. - Deepening client partnerships via strategic collaborations, including a partnership with Eli Lilly's ToonLab AI drug discovery platform to provide wet lab testing expertise for model optimization, and a collaboration with Aravella Therapeutics to deliver NGS services for cell and gene therapy cancer treatment development. - Investing in internal modernization: launched an AI-enhanced end-to-end digital pathology solution that targets cutting at least one week from standard pathology timelines, driving internal efficiency and faster client program delivery. - Expanding core lab capacity globally: five ongoing lab sciences expansions, including a new bioanalytical lab at Heriot-Watt University Research Park in Scotland, which also enables talent pipeline development with the university to support future growth. ### End Market Demand Trends - Biopharmaceutical demand continued to strengthen in Q2, led by the DSA segment: DSA net book-to-bill hit 1.19x, the third consecutive quarter above 1x and the highest level in nearly four years. Net bookings rose 12.6% sequentially to $701 million, pushing DSA backlog to $1.97 billion. - Small and mid-sized biotech demand is improving amid a resilient funding environment, with 12-month trailing funding near $100 billion, just below pandemic peak levels, and notable increases in IPO activity alongside solid VC and follow-on funding. Organic revenue from this segment was flat in Q2, an improvement from recent declines. - Global biopharma demand is also strengthening: most large clients have completed restructuring and pipeline reprioritization, and organic revenue from global biopharma continued to grow in Q2, with broad-based improvements in demand KPIs. - Non-human primate (NHP) regulated safety assessment studies have become a key competitive advantage for Charles River, following acquisitions of NHP suppliers in Cambodia and Mauritius that secure a reliable supply of this critical research model. ### Financial Q2 Performance Highlights - The company delivered its first organic total revenue growth (0.1% year-over-year) since Q3 2023, exceeding prior guidance that projected a low single-digit organic decline. - Non-GAAP operating margin hit 20.5%, up 420 basis points sequentially, with 47% sequential growth in non-GAAP EPS to $3.02, which outperformed the prior outlook of at least 30% sequential growth. - Repurchased $100 million of shares in Q2 at ~$174 per share under the $1 billion repurchase authorization, bringing year-to-date repurchases to $300 million. Net leverage improved slightly to 2.5x at quarter-end.

Guidance

- **Full-year 2026 organic revenue guidance**: Raised from prior expectation of a 0.5% to 1.5% decline to a range of flat to 1% growth, a 150 basis point improvement. Reported revenue is expected to decline 2.5% to 3.5% due to completed divestitures. - **Segment guidance updates**: DSA full-year organic growth guidance raised to low single-digit growth (up from prior contraction expectation); manufacturing organic growth guidance raised to low to mid-single-digit; RMS guidance remains unchanged at a low to mid-single-digit organic decline. - **Profitability guidance**: Continues to expect 120 to 150 basis points of full-year operating margin expansion, driven by the DSA and manufacturing segments. At least 500 basis points of sequential margin improvement is projected for the second half of 2026 compared to the first half, with ~50% of the improvement coming from completed portfolio actions (full divestiture benefits and lower NHP sourcing costs). - **Non-GAAP EPS guidance**: Raised to $11.15 to $11.45, representing 8% to 11% year-over-year growth, a $0.25 increase at the midpoint of prior guidance, driven by improving DSA trends and better-than-expected manufacturing performance. - **Free cash flow guidance**: Raised to $400 million to $420 million, up from the prior $375 million to $400 million range, driven by higher full-year earnings. - **Third quarter 2026 guidance**: Organic revenue growth is projected at 1% to 3% year-over-year (reported revenue is expected to decline 4% to 6% due to divestitures); operating margin is expected to improve 200 basis points sequentially from Q2; non-GAAP EPS is guided to $2.90 to $3.00, representing ~20% year-over-year growth. - **Unallocated corporate cost guidance**: Updated to ~6.0% of full-year revenue, up from the prior 5.5% outlook, due to higher performance-based compensation. - **Non-GAAP tax rate guidance**: Updated to 23% to 24%, an increase of ~100 basis points from prior guidance, driven by proposed tax legislation changes in a foreign jurisdiction, creating a 20 cent headwind to full-year EPS.

Segment performance

1. **DSA (Discovery and Safety Assessment)**: Q2 2026 reported revenue was $607 million, a 1.9% year-over-year decrease driven by completed divestitures. Organic revenue grew 0.2% year-over-year, the first organic growth for DSA since Q3 2023. Operating margin was 25.6%: 180 basis points lower year-over-year (due to higher study-related direct costs) but 460 basis points higher sequentially from Q1. For full-year 2026, DSA is guided to low single-digit organic revenue growth. It contributes ~41% of total company revenue. 2. **RMS (Research Models and Services)**: Q2 2026 revenue was $209 million, with a 1.4% organic year-over-year decline. Lower volumes for small models and research model services in North America (driven by constrained academic/government client spending from flat NIH budgets) were partially offset by strong demand for research models in China. Operating margin was 24.5%, an 80 basis point year-over-year decline due to lower sales volume and unfavorable geographic revenue mix. Full-year 2026 guidance for RMS remains low to mid-single-digit organic revenue decline. It contributes ~14% of total company revenue. 3. **Manufacturing**: Q2 2026 revenue was $188 million, with 1.3% organic year-over-year growth. Excluding the recently divested CDMO business, organic growth hit mid-single-digit, driven by high single-digit growth in microbial solutions (endotoxin testing reagents and rapid testing cartridges) across all major regions. Biologics testing growth remained modest due to a lingering client-specific headwind. Operating margin was 37.8%, a 500 basis point year-over-year improvement driven by the CDMO divestiture. Full-year 2026 manufacturing organic growth guidance is raised to low to mid-single-digit. It contributes ~13% of total company revenue.

Risks & headwinds

- Macroeconomic risks: Continued uncertainty around interest rates, inflation, and potential shifts in the biotech funding environment, which could impact client R&D spending and demand for Charles River's services. - China market risks: Increasing competition from Chinese CROs expanding into regulated testing services, and potential in-sourcing of early-stage R&D by large firms operating in China, which could pressure market share for Western-based CROs. - Timing uncertainty: There is a multi-quarter lag between biotech funding, project booking, and revenue recognition, so improved demand trends may take longer than expected to flow through to top-line growth. - Regulatory/tax risk: Proposed tax legislation changes in a foreign jurisdiction are expected to increase the full-year effective tax rate, creating a 20 cent headwind to EPS, with the outcome still pending final regulatory action. - Industry risk: Pricing improvements have not yet materialized amid the early stage of demand recovery, and any pricing improvement would not flow through to earnings until 2027 at the earliest, due to the lag in backlog conversion.

Analyst Q&A

• Q: How will AI-driven drug discovery impact preclinical pipelines and Charles River's business, and what is your appetite for further portfolio changes or M&A after recent divestitures?

  A: Management expects AI-driven improvements in target identification and molecule design will increase the number of programs moving into preclinical validation and safety assessment, which is core to Charles River's business, creating a long-term tailwind for demand. While the impact will ramp gradually over the next 1-2 years, the company already sees AI-native biotechs running more programs on average than traditional biotechs. On portfolio strategy, the company is now comfortable with its core focus on regulated testing after recent divestitures, which are already delivering clear margin benefits, but will continue to evaluate portfolio refinement as needed. Management maintains a healthy appetite for M&A targeting capabilities that strengthen its core business, with a strong balance sheet (2.5x net leverage after Q2 repurchases) to support deals.

• Q: What is your outlook for large biopharma demand, and how do you assess risks from growing Chinese CRO competition and in-sourcing in China?

  A: Management notes that both small/mid-sized biotech and large global biopharma are seeing strengthening demand, with large biopharma having largely completed restructuring and pipeline reprioritization over the past few years, and now booking more work with fewer cancellations. For the China market, rising domestic CRO capabilities are concentrated in early-stage chemistry and biology work, which Charles River already divested, and penetration of Chinese CROs in regulated safety assessment remains limited. Management also notes that large biopharma in-sourcing in China is mostly limited to early-stage research, not the regulated development work that is Charles River's core. The company remains well-positioned to differentiate via its expertise, speed, and secure supply chain for Western clients.

• Q: What is the current state of NHP demand and supply, and what is the cadence of margin benefits from the recent KF Cambodia NHP acquisition?

  A: Management confirms that NHP studies are seeing strong demand as clients focus on more complex modalities, and Charles River's vertical integration (via acquisitions of farms in Mauritius and Cambodia) gives it unique control over quality, timing, and capacity, creating a strong competitive advantage. Management notes that the company can ramp NHP supply to meet growing demand, is already seeing an uptick in capture rate (win rate) for NHP studies, and is well-positioned to gain market share from less integrated competitors. On margin cadence, the cost benefit from lower-cost Cambodian NHP will be minimal in Q3 2026, with the vast majority of the margin benefit hitting Q4 2026, due to the required timelines for importation, quarantine, acclimation, and placement on client studies.

• Q: What is the capacity outlook for DSA as demand improves, and what is the current pricing trend?

  A: Management notes that after years of modest volume declines, Charles River has sufficient existing capacity to absorb growing demand for the foreseeable future, with no immediate bottlenecks in animal facilities or lab space. The company is executing on planned lab expansions and gradual staffing increases to support long-term growth in 2027 and beyond, with no need for large abrupt capacity increases. On pricing, management says pricing has remained stable in Q2 2026, with no change in discounting levels from recent years, and the company is already seeing an uptick in capture rates indicating its current pricing strategy is effective. Pricing improvement will likely come as utilization rises, but due to the multi-quarter lag between proposal, booking, and revenue recognition, any pricing increases will not flow through to earnings until 2027.