Charles River Laboratories International, Inc. Q2 FY2025 earnings call

• Reported solid financial performance in the second quarter, exceeding prior outlook mainly due to favorable DSA results. DSA business benefited from strong booking activity in Q1 and foreign exchange movements. Demand environment is stabilizing. DSA revenue, bookings, and operating margin details. RMS and Manufacturing segments' revenue and outlook. Updated NAMs strategy, with growing NAMs portfolio. Positive update on NHP supply, with U.S. agencies clearing Cambodian NHP shipments. Ongoing strategic review to enhance long-term shareholder value.

DSA segment

• Revenue in the second quarter was $618 million, a 2.4% year-over-year decline on an organic basis. It contributes approximately 60% of the company's revenue. For 2025, DSA organic revenue is expected to decline at a low to mid-single-digit rate. In the second quarter, the DSA segment reported an operating margin of 27.4%, an increase of 30 basis points year-over-year.

RMS segment

• Revenue was $213.3 million in the second quarter, a 2.3% increase on an organic basis compared to the second quarter of 2024. The outlook for 2025 is flat to slightly positive organic growth.

Manufacturing segment

• Revenue was $200.8 million in the second quarter, a 2.9% increase on an organic basis from the second quarter of last year. The outlook for 2025 is essentially flat organic revenue. In the second quarter, the operating margin increased by 620 basis points to 32.8%, but the manufacturing operating margin is not expected to be above 30% level for the second half of the year.

• Raised revenue and non-GAAP earnings per share guidance. Now expects full year reported revenue to decline 0.5% to 2.5%, organic revenue to decline 1% to 3%, and non-GAAP earnings per share to be in the range of $9.90 to $10.30. Consolidated operating margin expected to be between flat and a 30 basis point decline. Third quarter reported and organic revenue expected to decline between 2% to 4% year-over-year, non-GAAP earnings per share expected to decline at a low double-digit rate year-over-year.

• Uncertainty in the broader healthcare landscape. CDMO business has revenue and margin headwind due to commercial client relationship ending. DSA segment hiring creates a cost headwind in the second half. Timing of annual merit increases for employees creates a headwind. U.S. tax legislation changes impact tax rate outlook.

Q: Congrats on the quarter. I was wondering if you could sort of talk about the current demand environment.

A: We're pleased with the demand situation, it's definitely stabilizing for pharma. Pharma feels stable and improving, revenue is up sequentially, proposals are up year-over-year and sequentially and so is cancellations, but that's sort of a commentary on longer-term post-IND work for some of these programs. Biotech is a tale of two cities, smaller companies continue to be cash constrained, mid-tier biotech companies seem to be performing better.

Q: On the CDMO, I'm just wanting to dissect the 2Q performance. It feels like maybe there's some extra twist with the revenue that came in, in the quarter.

A: The $20 million is the wind down of revenue for the first half, margin on this work throughout the first half is a little bit higher than the normal margin. The second quarter as well as the first half of the year in CDMO is a little bit buoyed by the continuation of this work as we wind down the client. And we did not quantify the payment.

Q: You noted the higher cancellations this quarter are more focused on longer-term post-IND work. Can you just elaborate on what's driving that?

A: Not a huge difference in margin. Both the price and the margin profile for different types of work, both earlier and later are often comparable. Some of the specialty work is perhaps slightly higher margins and is a little less competitive, but not significantly so. It's prioritization of portfolio by our clients. It's what they have ready. It's what they are moving -- emphasizing more work in the clinic, what they're trying to push forward much more quickly.

Q: Can you talk about the sales cycle timing from RFP to award and then converting into revenues? And just has this changed or gotten better at all?

A: I don't think the sales cycle has changed. And I think we've done some structural change of our sales organization and our marketing organization as well. I think we're much more client-centric. I think we're doing a much better job selling from discovery into safety and are much more focused. So I would imagine, if anything, our sales cycle is more focused and elegant and probably yielding good results.