Charles River Laboratories International, Inc. Q1 FY2026 earnings call

• Outlook increased by ~$8M to $103 - $108M due to short-term borrowings for stock repurchases. Net leverage at 2.6 times at end of first quarter. Non-GAAP tax rate in first quarter 22.5%, down 20bps y-o-y. Full-year non-GAAP tax rate guidance unchanged at 22% - 23%. Free cash flow negative $15M in first quarter, decline expected and driven by higher performance-based cash bonus payments. CapEx declined to $56M, ~5.6% of revenue. Reaffirming 2026 organic revenue and non-GAAP earnings per share guidance, factoring in divestitures. Planned divestiture of certain European discovery sites to be completed in May, and divestiture of CDMO and cell solutions businesses completed this week. Organic revenue decline expected 0.5% - 1.5%, non-GAAP earnings per share $10.80 - $11.30 or 5% - 10% growth over 2025. Reported revenue outlook reduced by 50bps to 4.0% - 5.5% decline due to less favorable FX rates. Earnings accretion from stock repurchases to offset FX headwind. Acquisition of KF assets, divestitures, and efficiency initiatives expected to result in operating margin expansion. Expect ~120 - 150bps improvement in 2026, most benefit in second half. Second half operating margin expected over 500bps higher than first six months, over half improvement from acquisitions, divestitures, and planned sale of European discovery sites. Second quarter expected to see substantial sequential financial improvement due to operating margin improvement and seasonal trends. Reported revenue expected to decline mid to high single digits y-o-y, organic revenue projected to decline low single-digit rate y-o-y. Earnings per share expected to improve significantly, increasing at least 30% from first quarter. First quarter headwinds in RMS and DSA segments expected to subside in second quarter. Manufacturing operating margin to benefit from CDMO divestiture. CFO focused on driving profitable growth through M&A, acquisitions integration, and efficiency initiatives. Plan to host investor day in September for more comprehensive strategy and financial outlook.

Organic revenue outlook for each segment unchanged from February. Reported revenue outlook updated to reflect divestitures and less favorable FX impact. Reported revenue decrease expected in low to mid single digits for DSA segment and mid single digits for RMS and manufacturing segments. Most significant margin improvement in 2026 expected from manufacturing and DSA segments.

• 2026 free cash flow outlook unchanged at $375 - $400 million. • Reaffirming 2026 organic revenue and non-GAAP earnings per share guidance, factoring in divestitures. • Organic revenue decline expected 0.5% - 1.5%, non-GAAP earnings per share $10.80 - $11.30 or 5% - 10% growth over 2025. • Reported revenue outlook reduced by 50bps to 4.0% - 5.5% decline due to less favorable FX rates. • Expect ~120 - 150bps operating margin improvement in 2026, most benefit in second half. • Second quarter expected to see substantial sequential financial improvement, reported revenue decline mid to high single digits y-o-y, organic revenue decline low single-digit rate y-o-y, earnings per share expected to improve significantly.

Q: Double-click on the demand environment, talk about typical seasonality and NAMs.

A: DSA business has slow start due to budgets being approved and reprioritization. Biologics testing business has seasonality with Christmas manufacturing closures. Microbial business has seasonality with fourth quarter ramping up. BioTech funding better, IPOs reopening, pharma clients reprioritizing programs. NAMs part of toxicology study, availability accelerated, made acquisitions in this space, not a separate business, will continue to grow.

Q: Follow-up on proposals, year over year and sequentially, and client segment proposals.

A: Proposals up high single digits year over year in both global biopharmaceutical and biotech segments, positive trend sequentially with three quarters in a row.

Q: Question on AI, if seeing play out yet.

A: Sample set of AI discovered or assisted drug programs very small, AI assisted drug discovery companies work on many programs, optimistic trend will show, theoretically AI will have impact on early discovery cost.

Q: Question on margin side, 2H step up.

A: Expect significant sequential increase in margins from Q1 to Q2, high teens margin in first half, 500bps improvement in second half, over half improvement from acquisitions and divestitures, corporate costs, cost savings initiatives, timing of NHP shipments, and lower costs in DSA.

Q: Question on small, midsize, early biotech portion, demand.

A: IPOs are bigger companies with easier funding access, smaller biotech is sluggish, funding lower, discussions cautious, but seeing some improvement as clients get more confidence.

Q: Question on incremental ambitions, capital allocation.

A: Ongoing review of businesses, M&A roadmap with clear areas of investment, continue to look at all areas of capital allocation for best returns.

Q: Question on conversion rates and velocity of decision-making, large pharma and INDs.

A: Conversion rates accelerated, from discussion to proposal to bookings in 1 - 2 quarters. Pharma companies talk about more programs into IND, but with same budget, refocus on preclinical and earlier stage efforts.

Q: Question on global pharma accounts, bookings, trend.

A: Global biopharma bookings below last year, but adequate and supporting more work, proposals up indicating bookings to come up.

Q: Question on biotech M&A, access to wallet share.

A: Often work with small biotechs before acquisition, retain work, focus on getting higher share of wallet from pharmaceutical companies through client centricity.

Q: Question on margins, NHP supply, margin impact.

A: Still working through higher NHP costs in first half, Q4 for DSA segment to see big improvement, bought KF for supply chain resiliency.

Q: Question on biotech revenue pacing, China strength.

A: Biotech segment revenue still down in Q1, expected to rebound in Q3, Q4. RMS China business ~5% of revenue, critical for access to Chinese market, no physical presence in China for DSA, watching market closely.

Q: Question on $300M cost program, AI risk.

A: Cost savings ~$300M, incremental $100M this year, too early to talk about 2027 - 2028. AI used for cost efficiencies, drug development, clients investing in early stage, not expected to insource preclinical work.

Q: Question on RMS demand in China, normal pattern.

A: Comment on RMS China was specifically to China, saw better demand in China for CROs and biotech, indication of rebounding market.

Q: Question on go-to-market strategy, pricing, mix.

A: Balanced revenue stream, go-to-market strategy focused on customized approach, investing in tools and platforms for client centricity, stable pricing environment, discounting strategically, on right track with proposal volumes, bookings, capture rates.

Q: Question on competitive landscape, Asia.

A: Asia has trend of outsourcing early-stage routine work to lower-cost countries, evaluating China for complex or regulated work, watching in-licensing of programs from China, core market in North America, EU, and Asia, will double down on that.