Charles River Laboratories International, Inc.

Good day, and thank you for standing by. Welcome to the Charles River Laboratory's first quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I will now like to hand the conference over to your speaker today, Todd Spencer, Vice President of Investor Relations. Thank you. Please go ahead, sir.

Thank you. Good morning and welcome to Charles River Laboratory's first 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 first 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 two hours after today's call and can also be accessed on our investor relations website. The replay will be available through next quarter's 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 four 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 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 substitute for results from operations prepared in accordance with GAAP. In accordance with Regulation G, you can find the comparable gap 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. I'm very pleased to speak with you today about another exceptional quarter at Charles River. Our robust first quarter financial performance, highlighted by 13% organic revenue growth, and 170 basis points of year-over-year operating margin improvement demonstrates the strength of the biopharmaceutical market environment and the power of our unique portfolio, both of which we believe are as strong as they have ever been. We believe clients are increasingly choosing to partner with us for our flexible and efficient outsourcing solutions, the scientific depth and breadth of our portfolio, and our unwavering focus on seamlessly serving their diverse needs. Clients are opting to work with a smaller number of CROs who offer broader scientific capabilities, which enables them to drive greater efficiency and accelerate the speed of the research, non-clinical development, and manufacturing programs. The complexity of scientific research is also increasing our clients' reliance on a high science outsourcing partner like Charles River. To further differentiate ourselves from the competition, We are strategically expanding our portfolio in areas that deliver the greatest value to clients and offer significant growth potential. Already this year, we have enhanced our scientific capabilities for advanced drug modalities through the acquisitions of distributed bio, cognate bioservices, and retrogenics. Distributed bio and retrogenics strengthen our discovery portfolio, and the acquisition of cognate which was completed on March 29, provides an excellent growth opportunity by allowing us to offer CDMO services in the high-growth, high-science cell and gene therapy sector. We are very pleased to welcome the talented staff at each organization to Charles River and believe that by continuing to invest in our portfolio and our people, we are maintaining and enhancing our position as the leading non-clinical CRO. We believe the strength of our portfolio and robust industry fundamentals are leading to unprecedented client demand across most of our businesses. In the first quarter, we experienced a continuation of the robust demand from the end of last year, including new record booking and proposal levels in the safety assessment business. Organic revenue was about 10% for a second consecutive quarter, even after normalizing for last year's COVID-19 impact. Overall, we believe our robust first quarter performance and solid business trends support our improved outlook for the year. I will now provide highlights of our first quarter performance. Quarterly revenues surpassed $800 million for the first time, and at $824.6 million for the first quarter of 2021, represented a 16.6% increase over last year. Organic revenue growth of 13% was driven by double-digit growth across all three segments. The year-over-year comparison to last year's COVID-related revenue impact, which primarily affected the IRMS segment, contributed approximately 140 basis points to the revenue growth rate this quarter. We experienced broad-based growth across all client segments, with biotech clients leading the way, as they continued to benefit from the robust funding environment. The operating margin was 20.7%, an increase of 170 basis points year over year. The improvement was driven by RMS and VSA segments and reflected operating leverage and the robust revenue growth, as well as our continued efforts to drive efficiency. We expect the same factors will drive margin improvement for the year and believe the operating margin will approach 21% above our prior targets. Earnings per share were $2.53 in the first quarter, an increase of 37.5% from $1.84 in the first quarter of last year. This outstanding earnings growth principally reflected the double-digit revenue growth and meaningful operating margin improvement. Based on the first quarter performance and our positive outlook for the remainder of the year, we are meaningfully increasing our revenue growth and non-GAAP earnings per share guidance for 2021. We now expect organic revenue growth in a range of 12% to 14%, a 300 basis point increase from our prior range. Normalized for last year's COVID-19 impact, we would still expect low double-digit organic revenue growth this year. Non-GAAP earnings per share are expected to be $9.75 to $10, which represents 20% to 23% year-over-year growth, and an increase of 75 cents at the midpoint from our prior outlook. I'd like to provide you with details on the first quarter segment performance, beginning with the DSA segment. Revenue was $501.2 million in the first quarter, an 11.6% increase on an organic basis over the first quarter of 2020, driven by broad-based demand for both discovery and safety assessment. Safety assessment business continued to perform exceptionally well, reflecting robust demand from both biotech and global biopharma clients and price increases. Bookings and proposal volume reached record highs in the first quarter with strength across all regions and major service areas. Bookings increased substantially more than our target. Clients are expanding their preclinical pipelines and intensifying their focus on complex biologics and we believe they are securing space with us further in advance to ensure they do not delay their research, which in turn provides us with greater visibility. We believe this positions the safety assessment business extremely well and supports low double-digit organic revenue growth in the DSA segment this year, which is higher than our prior outlook. We are pleased with the extensive depth and breadth of our safety assessment portfolio and remain intently focused on continuing to enhance the value we provide to our clients. The discovery business had another exceptional quarter, led by broad-based demand for oncology, early discovery, and CNS services. Our efforts to broaden and strengthen our discovery capabilities and enhance our scientific expertise are enabling us to expand the support we provide for our clients' discovery research. and clients increasingly view Charles River as a premier scientific partner who can support their efforts to identify new drug targets and discover novel therapeutics. We intend to build our discovery portfolio so that clients can outsource complex discovery projects to us, including for advanced modalities. Our recent acquisitions distributed bio and retrogenics enhanced our large molecule discovery capabilities. Retrogenics, through its proprietary cell microarray technology, offers target receptor identification and off-target screening services, which will enhance our clients' early discovery efforts and also enable them to explore potential preclinical safety liabilities. A combination of distributed bio, our large molecule discovery platform, and retrogenics capabilities will further strengthen our integrated end-to-end solution to therapeutic antibody and cell and gene therapy discovery and development. We are also continuing to add cutting-edge technology through our strategic partnership strategy, most recently with a new artificial intelligence or AI drug discovery partner, Valence Discovery. The DSA operating margin increased by 180 basis points to 23.8% in the first quarter. Leverage from the robust DSA revenue growth was the primary driver of margin improvement and we expect this trend will continue to propel the BSA margins into the mid-20% range for the year. RMS revenue was $176.9 million, an increase of 14.8% on an organic basis over the first quarter of 2020. Robust demand for research models in China was the primary driver of first-quarter RMS revenue growth and higher revenue for research model services including GEMS and our cradle initiative, also contributed. Approximately 620 basis points of the increase was attributable to the comparison to last year's COVID-related revenue impact from client site closures and disruption. Demand trends for the research models were largely consistent with those prior to the pandemic, with growth in China widely outpacing mature markets. The research models business in China had an exceptional quarter, even after normalizing for last year's COVID-19 impact, driven by a resurgence in demand across all segments. Biomedical research in China has returned to pre-COVID levels and in some areas, even greater levels. In the U.S. and Europe, client order activity has also rebounded. Research model services also continue to perform well. GEMS is benefiting from renewed outsourcing demand as our clients seek greater flexibility and efficiency afforded to them when we manage their proprietary model of colonies, as we did for many clients during the COVID-19 pandemic. In addition, complex research models will play an increasingly critical role as drug research continues to shift to oncology, rare disease, and cell and gene therapies, which reinforces the value proposition for the general's business. We are also continuing to generate substantial client interest for our Cradle Initiative, or Charles River Accelerator and Development Labs, as both small and large biopharmaceutical clients increasingly seek turnkey research capacity, which allows them to invest in people and research instead of infrastructure. We have cradle sites in the Boston, Cambridge, Massachusetts area and South San Francisco biohubs, and are actively expanding in these regions to accommodate client demand. Utilizing Cradle also provides clients with collaborative opportunities to seamlessly access other child service services, from Discovery to GEMS, which further enhances the speed and efficiency of their research programs. Revenue growth for our cell supply businesses, Hemacare and Solero, remain below the targeted level in the first quarter, due to some limitations on donor access. We believe self-supply revenue will increase during the year as donor availability continues to improve. We are also continuing to work diligently to expand our donor base in the U.S. and add more comprehensive capabilities at all of our sites to accommodate the robust demand in a broader cell therapy market. We believe that the acquisition of Cognate is particularly timely because it creates new business opportunities for Hemokin and Celero in the cell and gene therapy development area. Our expanded capabilities are expanding and establishing Charles River as a trusted partner who can move clients' programs forward using the same cellular products through each step of research in early stage development phases and into cGMP production. In the first quarter, the RMS operating margin increased 570 basis points to 28.7%. This significant improvement is due to two factors. First, last year's 23% margin was depressed by the onset of COVID-related client disruptions and the resulting impact on the research model order activity. In addition, this year's performance reflects the operating leverage attributable to the robust revenue growth particularly for research models in China. Revenue for the manufacturing segment was $146.5 million, a 15.6% increase on an organic basis over the first quarter of last year. The increase was driven by double-digit revenue growth in both the biologics testing solutions and microbial solutions businesses. The manufacturing segment's first quarter operating margin was stable at 35.5%. This is consistent with the historical trend in the first quarter and in line with our revised expectations in 2021 for a mid-30% operating margin when factoring in the cognate acquisition. Microbial solutions growth rate rebounded above the 10% level in the first quarter, reflecting strong demand for our endosafe endotoxin testing systems, cartridges, and core reagents for all geographic regions. We continue to work through the delayed instrument installations that resulted from COVID-19 restrictions and are gaining access to more client sites. We are pleased with the strength of the underlying demand for our endotoxin testing platform, which performs FDA-mandated lot release testing for our clients' critical quality controlled testing needs. Clients prefer our comprehensive and efficient microbial testing solutions, because of the quality, speed, and accuracy of our testing platform. The biologics business reported another exceptional quarter of strong double-digit revenue growth, principally driven by robust market demand for testing cell and gene therapies and COVID-19 therapeutics. We believe cell and gene therapies will continue to be significant growth drivers for years to come, and demand for COVID-19 vaccine testing is intensifying as these therapies move on to the commercial production phase, even as some of the early stage testing activities subsides. Given the strength of the demand environment, we are continuing to build our extensive portfolio of services to support the safe manufacture of biologics and ensure we have available capacity to accommodate client demand. We believe the acquisition of Cognate will be highly complementary to our biologics business and our portfolio as a whole. The acquisition establishes Charles River as their premier scientific partner for cell and gene therapy development, testing, and manufacturing. Our broader services will provide clients with an integrated solution from basic research through cGMP production, enabling them to outsource cGMP cell therapy production and the required analytical testing to one scientific partner, reducing the bottlenecks and inefficiencies of utilizing multiple outsourced providers. Because we already were a provider of extensive non-clinical services for cell and gene therapies, our integration process, which is proceeding smoothly, is particularly focused on unlocking new business opportunities across our portfolio. The acquisition of Cognate is part of our ongoing strategy to broaden our unique portfolio and scientific expertise in order to support new paradigms and therapeutic areas of research. As biopharmaceutical clients seek to drive greater efficiency and leverage scientific benefits by working with fewer trusted partners who have broad integrated capabilities, we have transformed our business over the last decade to accommodate their needs through M&A, scientific partnerships, internal investment, and by promoting a culture of continuous improvement in everything that we do. We built the leading safety assessment franchise in the world and established an integrated end-to-end discovery offering for both small and large molecules. So given the emerging importance of complex biologics and cell and gene therapies, adding CDMO capabilities is a logical extension for our portfolio. We will continue to move our growth strategy forward. Disciplined M&A and strategic partnerships remain vital components of our strategy and as we endeavor to further enhance the scientific expertise, global reach, and innovative technologies that we can offer clients across all three of our business segments. Investing in our scientific capabilities, as well as internally in the necessary staff and resources, will help us ensure that we can meet the needs of our clients and support the robust growth in our markets. The biotech funding environment has never been stronger. Clients are investing more in research and development and it is incumbent upon us to be the scientific partner who can help them move their programs forward from concept to non-clinical development to the safe manufacture of their life-saving therapeutics. We look forward to discussing our strategy with you and where we think that we can take the company over the next several years at our upcoming Virtual Investor Day on May 27th. In conclusion, I'd like to thank our clients and shareholders for their support and our employees for their exceptional work and commitment. Now, David Smith will give you additional details on our first quarter results and 2021 guidance.