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.

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. We are very pleased with our accomplishments in the first quarter, which widely outperformed our outlook. We delivered strong revenue growth, well above the 10% level on an organic basis, and significant operating margin expansion of 170 basis points, which drove earnings per share growth of 37.5% to $2.53 today. The operating margin performance was particularly encouraging, as the consistent margin improvement reflects our efforts to build a more scalable and efficient infrastructure and leverage the robust growth in our end market. As Jim mentioned, we have increased this year's financial guidance to reflect the enhanced growth profile for the full year, including the strong performance for the first quarter and the addition of Cognate and other acquisitions that we have completed. We now expect to deliver reported revenue growth of 19% to 21% and organic revenue growth in a range of 12% to 14% for the whole year. Given the robust top-line performance, we expect to drive meaningful operating margin improvement this year with the full-year margin approaching 21%. This is expected to drive better-than-expected earnings per share in a range of $9.75 to $10, which represents year-over-year growth above 20%. By segment, our outlook for 2021 continues to reflect the strong business environment and the differentiated capabilities we provide to support our clients' needs. RMS organic revenue growth guidance for the year is unchanged from our initial high-teens outlook, reflecting recovery from the impact of the COVID-19 pandemic last year, exceptional growth in China, and the expectation that our sales supply revenue growth will improve during the year. The DSA segment is now expected to deliver low double-digit growth this year, reflecting the strong first quarter performance and intensified early stage research activity. For the manufacturing segment, we now expect to achieve mid-teens organic revenue growth with both the biologics and microbial solution businesses contributing, including the acquisition of Cognate, manufacturing's reported revenue growth rate is expected to be in the high 30% range. With regard to operating margin, RMS will continue to be a primary contributor to the overall improvement for the year, with the segment margin meaningfully above 25%. We also expect the DSA segment operating margin to increase over the prior year into the mid-20% range. When factoring in cognate, the manufacturing segment's operating margin is expected to be in the mid-30% range this year, or moderately below its 2020 level. Unallocated corporate costs were slightly higher than our expectations, totaling 6.2% of total revenue, or $51.2 million in the first quarter, compared to 5.6% of revenue in the first quarter of last year. The increase was primarily the result of continued investments to support the growth of our businesses and high performance-based compensation costs, due in part to the first quarter of breaking out performances. Despite the higher expenses in the first quarter, we continue to expect unallocated corporate costs to be in the mid-5% range as a percentage of revenue for the full year. The first quarter tax rate was 14.5%, a 20 basis point increase year-over-year, and consistent with our outlook in February, which called for a tax rate in the mid-teens due to the gating of the excess tax benefit from stock-based compensation. We continue to expect our full-year tax rate will be in the low 20% range on a non-GAAP basis, which is unchanged from our outlook provided in February. Total adjusted net interest expense for the first quarter was $17.1 million, which was essentially flat sequentially and a decrease of nearly $2 million year-over-year due to lower average debt levels, which resulted in interest rate savings based on our leverage ratio. At the end of the first quarter, we had $2.2 billion of outstanding debt, representing a gross leverage ratio of 2.3 times and a net leverage ratio of 1.9 times. In March, we issued $1 billion of senior notes to further optimize our capital structure and take advantage of the attractive interest rate environment. The proceeds of this bond offering were used to redeem a previously issued higher rate $500 million bond to pay down the existing term loan and a portion of the revolving credit facility and to finance a portion of the Cognate acquisition. In April, we also amended our existing credit agreement to establish a new revolver with borrowing capacity of up to $3 billion. The net results of these actions will reduce our average interest rate on debt by approximately 50 basis points to 2.65%. An overview of our current capital structure is provided on slide 36. On a pro forma basis, including the cognate and retrogenic acquisitions, our gross leverage ratio was just under three times, and we had total debt outstanding of slightly below $3 billion. For the year, the higher debt balances due primarily to the cognate acquisition will be partially offset by the lower average interest rate from these refinancing activities, which is expected to result in total adjusted net interest expense of $83 to $86 million. Pre-cash flow was $142.2 million in the first quarter, a significant increase compared to $42.9 million last year. The primary reason for the improvement was the strong first quarter operating performance, along with our continued focus on working capital management. Capital expenditures were $28 million in the first quarter, compared to $25.7 million last year. Looking ahead, we are increasing our CapEx guidance for 2021 by $40 million to approximately $220 million. The increase primarily reflects the investments we are making in Cognate to support its high-growth business. Even with the additional capital, we expect CapEx will remain below 7% of our total revenue this year, which is consistent with the target that we provided at our last investor day in 2019. For the full year, we are updating our free cash flow guidance to the upper end of the prior range and now expect free cash flow of approximately $435 million for the full year. we are pleased to be able to increase free cash flow due primarily to the strong first quarter operating performance, even after incorporating the transaction costs and capital needs of Cognate. A summary of our revised financial guidance for the full year, including Cognate, can be found on slide 38. For the second quarter, our updated outlook reflects a continuation of the strong demand environment. We now expect second quarter reported revenue growth at or near the 30% level, including the contribution of Cognate. On an organic basis, we expect the second quarter growth rate to be at or near 20%. This reflects the prior year comparison to the COVID-related revenue impact, which will contribute approximately 700 basis points to the second quarter revenue growth. As a result of the impact of COVID-19 on the second quarter of last year, we expect this year's second quarter non-GAAP operating margin and earnings per share to increase significantly versus the prior year. Our expectation for non-GAAP earnings per share is a growth rate of more than 50% year-over-year. In conclusion, we are very pleased with our strong first quarter performance, which included robust revenue aims and pre-cash flow growth. We remain confident about our prospects for the year and our ability to consistently grow to top-line, bottom-line in cash generation, and as such, believe this is reflected in substantial improvement in our outlook. We look forward to hosting our upcoming Virtual Investor Day in a few weeks, At that time, we plan to update our longer-term financial targets, which we believe will reflect the strong demand environment. Thank you.

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

As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound or hash key. So that we may be respectful of everyone's time, please limit your comments to one question with one follow-up question. Please stand by while we compile the Q&A roster. Our first question comes from John Krieger of William Blair. Your question, please.

Hi, thanks very much. Jim, given all the cognate commentary you gave us, can you just step back and help us understand what part of the CDMO industry are you interested in playing in kind of over time, longer term? development, drug product, drug supply. If you could just elaborate on that, that would be helpful.

Sure. Sure, John. So Cognic gives us the ability, and particularly in combination with Hemacure and Solero, to actually provide the cells to do the process development, to do the clinical trial scale-up, and ultimately to provide commercial quantities specifically of cell therapy products. And secondarily, we have some of the capabilities that are involved in and facilitate gene therapy manufacturing as well. But I'd say that the pure CDMO business will be primarily cell therapy related.

Great, thanks.

Sure.

And then last month you guys talked about of Dayland Strategic Relationships, which had some references to AI and machine learning. Can you just talk a little bit more about how you see machine learning having applicability within, I assume, DSNA mainly?

Sure. Look, there's a huge amount of focus on utilizing data to inform the design of preclinical trials to achieve better outcomes. And I think ultimately to design better clinical trials to achieve better outcomes and then to provide some correlation between the two of them. And so there's a rich amount of data, and I think Balance is a particularly strong AI company. You know, we're going to see attributes or aspects of this, I think, all around our portfolio. We don't see this as replacement for things that we do, but we see them as augmentative and or provide earlier indications of how a drug is likely to perform before we get into, let's say, non-regulated and certainly regulated safety trials. So the advent of AI should both enhance speed and hopefully outcomes in terms of the numbers of drugs that get to market and between the rich data sets that we have and the facility with AI. It should be a very interesting combination, albeit very early days.

Very helpful. Thank you.

Sure.

Our next question comes from Eric Colwell of Baird. Your question, please.

Thank you very much. Impressive quarter. I'm focused on safety assessment, DSA segment assessments, You cited record RFPs, record demand in Q1. That obviously follows the 2020 DSA segment ending backlog of $1.4 billion, which was up 40% year over year. Yet you're only forecasting loadable digital organic revenue growth in the segment this year. When we look at prior years beginning backlog and how that compared to the resulting revenue growth, the math would frankly suggest multiples of what you're guiding to. I'm just curious what explains that. this disconnect from past backlog growth to your outlook for low double-digit growth this year.

I'll take a shot at that, David. Hello?

David, are you still connected? I saw you might be on mute. I think we lost David. He might have to go back in.

OK. That's OK. So the way we look at this, Eric, is that we're thrilled with the demand. We're thrilled with the backlog. We're delighted with the way the year has started. We're really optimistic about the guidance that we provide. The fact that that segment will be organic double-digit growth rate. It's still early in the year. So we want to see how more of the year unfolds. But we're quite confident and comfortable with our guidance for the year. And, and again, you know, as we discussed quarter after quarter, there is non linearity in our business. Things that are moved identically quarter to quarter increase literally necessarily the same rate quarter to quarter. So We think this would be a very strong year that we've added to.

Well, Jim, it certainly doesn't look like you're going to miss that target. I'm just curious. I mean, pricing can't be bad in this environment. And, you know, it just leads me to wonder if there's a big mix shift in the nature of the work, if there's capacity constraints happening. it makes me wonder if there's something in that backlog report from last year that, you know, you changed how you look at backlog or the reporting of the figure because it just, historic trend, if I go back, you know, even stripping out acquisitions the last five years, it just, the growth rates would be, you know, if history repeated itself, the growth rates would be materially higher than what you're talking about. And it just seems, these are awesome numbers. I'm not complaining, obviously, but it seems like a bit of a disconnect.

So maybe we'll take it offline, but just to provide some comfort, Eric, and I understand the nature of your question. Pricing's fine. Capacity is well utilized, but we have sufficient capacity. And as I said in my prepared remarks, you actually have clients booking more work earlier, I don't know, because they have more work because they're better funded, and maybe there's an underlying concern that none of us are competitors. will have the capacity that they want when we need it, although we work really hard to do that. The mix is, is solid. And we're getting a significant amount of work from big drug companies a little bit instigated by COVID, but also just a plethora of new biotech companies. So nothing but good things are happening. We're pleased with our articulation of good things happening and and what that looks like in terms of the financial guidance. But maybe we should just talk to you offline and get you more comfortable with the evidence.

Yeah, that sounds great. And, again, congrats on overall performance. Really good. Thank you.

And I'm back on. I'm sorry. I hit speaker button instead of the mute button. I was happily chatting away to myself. And when I came to the mute, I realized that I hadn't heard what Jim was saying, but I get the impression that you were discussing about how the backlog has been built up because people are booking out further afield. And one of the reasons why we've been able to increase our outlook this year is because we can see much more of the year. So if that was discussed, I won't repeat it.

Eric is pleased with what we're doing, but thinks that the guidance for the back half of the year should be materially higher given how we ended the year, given where we are now, and given the absence of the business, including pricing. And I explained that we were pleased with the year-over-year guidance, that things weren't linear, that nothing but good things was going on from the demand and pricing and mix point of view. And that's when he came in there. Good.

Our next question comes from Dave Winley of Jefferies. Your question, please.

Hi. Thanks for taking my questions. So I won't exactly follow on Eric's question. I think you addressed that well enough. But you have pointed out, Jim, discovery, stronger performance for a couple, maybe three quarters. And you also commented in general in your prepared remarks about continuing to seek ways to add value for clients in DSA. which is a general comment, but I wonder if maybe it's not related to the growing discovery business and potentially pull through there, which we've asked about for years. So I wondered if you could kind of elaborate on the adding value to clients and DSA part of your comments.

Yeah. You know, the discovery business, as we've been talking about for at least a couple of years now, has really come into its own just in terms of client utilizations, understanding of the depth and strength of the scientific portfolio. We've been adding additional businesses like dBio and Retrogenics, and we have scale now. So we've got terrific organic growth, even though we don't break that out, and meaningfully improving operating margins in that segment, as well as a pull-through into safety. And, of course, we're seeing high growth rates and nice margins in the safety businesses. Well, I think we have a very strong capacity situation in both of our businesses. So, you know, we're really pleased with the demand. We're really pleased with the client uptake. It's largely driven by biotech clients. Having said that, we have a lot of big pharma clients who are sourcing more of their work to us, for sure in safety, and they have been for a while, but increasingly As we keep adding these assets, either through direct, straight-up acquisition or through these strategic initiatives that we've been pursuing vigorously, I think that will only intensify.

When you think about – thanks for that. To follow up, when you think about your capital deployment appetite, I guess there are some deals discussed in the public markets regarding monetization, spinoff of potential assets. You've now dipped your toe into contract manufacturing. To John's question, that's a relatively capital-intense area. I wonder if you could... could kind of give us a rank order or a priority list of where your capital deployment appetite primarily resides. Thanks.

Sure. Besides continuing to invest appropriately in our businesses, all of which are growing. So most of our CapEx is growth related, but as we reiterated in our prepared remarks, we're going to keep CapEx is going to, stayed below 7% of revenue, even with the addition of Cognate and the capacity that's required there. But, you know, all of our businesses require additional capacity. Certainly safety does as well. So putting that aside, we're going to continue to do these technology deals, of which we have about a dozen that are signed and another dozen in conversation. Distributed Bio was one of those that turned into an acquisition. Retrogenics, began to be one of those and just pivoted immediately into an acquisition. And we have other deals in AI and bioinformatics and digital pathology and next generation sequencing and bioinformatics and 3D tumor modeling that are cutting edge technologies and we're going to invest small amounts in those businesses or loan them some money and some of those for sure will be acquisitions. And they won't be particularly large companies and particularly expensive acquisitions, but they will grow rapidly they'll enhance the portfolio, and they will distinguish us from the competitions, not entirely, but particularly in the discovery. And I would say besides those deals, which I don't know what the cadence will be, but I think we'll have a couple of dozen things that we're kind of participating in, and we'll buy some of them. We're going to do some straight-up M&A in the discovery space. We're going to hopefully do some more straight-up M&A sort of in the general ambit of cell and gene therapy. We'll do some more straight-up M&A sort of in the lab sciences space. area will do more work in aspects of biologics and microbial. We actually have a couple of things that would fall into R&S. The conversations, as always, are several. They're almost all private equity-owned businesses, which means that they're all for sale at the right time and at the right price. Nothing would take us off the reservation. There would be continued additions of what we're doing. If you have, if the question, if you're, the underlying thesis of the question is what additionally might you do in CDMO space? Specifically, you know, I can't say that categorically except to say that our focus for the foreseeable future is primarily in cell therapy and secondarily in aspects of gene therapy. And I think that we are currently a meaningful player in the cell therapy space and could be the most meaningful player in that space where we just continue to grow the business and add additional parts and pieces. And I think you understand fully that surrounding the CDMO activities and cell and gene therapy is the cell product businesses and buttress by the biologics business. That's a powerful portfolio, and then that's added further with the combination trials for pharmacology and toxicology. So it's a broad suite of offerings in cell and gene therapy, which is the largest and potentially the most exciting modality. We'll see where it all goes. There's a couple of thousand drugs that are being worked on right now. We're probably working on a significant number of those. Yeah, so that's the nature of our focus in M&A, particularly in cell engine therapy. Great.

Very helpful. Thank you. Sure.

Our next question comes from Robert Jones of Goldman Sachs. Your question, please.

Great. Thanks for the question. Jim, I just had two related to capacity on the safety assessment side and then the newer CDMO capabilities. You know, I know on safety assessment, Just wanted to get a little bit of a better sense on your comments around clients booking further in advance of actual work and just related to that, how you're thinking about capacity. Do you think as what you're seeing trend that you might need to be adding capacity. I know it's always a tricky dynamic to match supply and demand within safety assessment. And then just the second question around CDMO. I know last quarter you said you were going to assess if you needed to add more capacity there. I know it's not too far from when you made that comment, but just curious if there's any updated thoughts on the CDM footprint.

Sure. We have been adding incremental amounts of capacity every year. I'm going to say five or six years, but I think it's longer because the safety assessment business began to come back strong and began to sort of flatten out in 2012 and began to come back strong in 2013. So it's probably seven or eight years. And since proximity is important and since we have a dozen safety assessment sites, we can't and won't just add space at once. one locale, nor would we add all the space in the U.S. or all the space in Europe. So, I don't know. We added at least a half a dozen sites, incremental amounts of space, depending on client demand, depending on capabilities, depending on how the space is currently utilized, and depending on where we see the market going. So, we have always done that. So, we did it in 2020 for this year. We're doing it now for next year and probably for 2023. We're obviously real-time as the demand is exceeding our plan and our original guidance, which is a high-class problem, thinking very carefully about do we have to add more incremental capacity for this year, and I don't think we have an answer to that. If we do, it will be subtle. So those of you who are concerned about our capex spend, for whatever reason that might be, shouldn't be concerned. We have a high-growth business, and we have to provide the capacity or we won't have the business. We love the fact, by the way, that clients are booking earlier. That's so good for us. It's so much more orderly. I think there's a conduit there with pricing. So, you know, I think that pricing is still an issue with them, don't get me wrong, but I think they're less concerned about price and more concerned about science and getting a slot. So keeping capacity relatively tight, so our margins are good and so clients are desirous of getting in the queue early is a really good thing, subject to the caveat that you don't want to run out of space and turn clients away. So as you indicated in your question, we're always walking that tightrope. I think we're really good at it. It's not a perfect science, but we will add additional space. We're adding it right now. We'll continue to add through the year. We probably will crank it up a little more than we would have as long as we feel that this demand will continue, certainly from back half of this year, which I think we've got it to, and for next year. On the CVMO space, particularly on the cognate space, particularly the self-therapy manufacturing aspects of it, we bought incremental capacity that's in place, so we're fine. We obviously have to add and finish additional space for next year and beyond based upon not only the client demand, but the nature of the demand. So is the client in phase two? Are they in phase three? And are they hinting about and wanting us to gear up for commercial launch or not? So we have to roll all of those things up. We have certainly sufficient capacity to accommodate the demand for this year and probably the beginning of next year, and we'll add more space there. So capacity and headcount. the rate limiting factors in the business not demand demand it's not a rate limiting factor right now which is a beautiful thing um having the space is i i don't mean to be flip about it but it's relatively straightforward it's just planning and cash and you've got to get the planning really early because it takes a while to build space you know in talks it's probably 18 months or so, maybe two years to get the space built and validated. It's Greenfield and maybe 12 to 18 months if it's an addition. Maybe it's a little bit shorter in the CDMO space. It's probably nine to 12 months. So getting a space built ahead of when we need it and getting people hired and trained ahead of when they need it accommodates the sufficient capacity to accommodate to the demand and allows us not to be short. And by the same token, we don't want to have too much space or too many people sitting around and nothing to do. So it's a constant balancing act.

Appreciate the thought. Thanks, Jim. Sure.

Our next question comes from Tycho Peterson of J.P. Morgan. Your question, please.

Hey, thanks. Jim, on manufacturing, you talked about COVID vaccine testing intensifying. I'm curious how we should think about that dynamic. I'm curious if you can quantify what's actually baked into the outlook on COVID. I think last year you said it was about $60 million across the portfolio. And then as we think about Cognate, one question that comes to mind is why people would work with you versus Catalan that has Paragon and MasterCell, Thermo that has Brommer. So can you just talk a little bit about how you think about competitive positioning for Cognate?

Sure. The numbers we called out last year that were clearly COVID-related I think fall into a different category than what we're going to see this year, what we're seeing this year. Plus, I don't think it's useful to tease it out. We teased it out last year because we had a tough second quarter where revenue was down an RMS and a little bit in microbial and a few other things that we were watching our costs tightly and et cetera, et cetera. We were trying to make sense of it for our investors. I think on a forward-going basis, while there's going to be some meaningful but modest, because it was modest last year, there's going to be some amount of continued work on COVID-related therapeutics, monoclonal antibodies and antivirals, drugs to treat people that get the disease, perhaps to take the vaccine or not. On an ongoing basis, though, our biologics business is going to do a lot of testing of COVID-related vaccines. And I think we're probably going to move into a genre of it being flu-like, and there will be booster shots next year and new variants every year. And they will always make it cut. I don't know who they will be. At least the four companies that already have vaccines and perhaps others. And companies like us will continue to test it. So I don't think it's all that useful to break it out or try to break it out going forward because I think it'll just be an ongoing business. And so biologics, while a really strong business for us, and there's lots of large molecule products besides what I'm about to say, like monoclonal antibodies and others, there's no question that cell and gene therapy and COVID-related work will be really, really critical. Why someone would work with us? Well, I think the two companies that you mentioned are principally in the gene therapy manufacturing space, so cell therapy manufacturing space. We have smaller clients, sorry, smaller competitors who are around the same size as we are in cell therapy manufacturing but don't have the large suite of services. So the ability to work with us from very, very early research through process development through the clinic to end use work, I think it's a distinguishing feature of our portfolio. And by the way, we hope to continue to add to that. So hopefully more of a holistic approach in our competition helps clients with speed to market and they don't have to pause at each step and work with somebody else.

Okay, that's helpful. And then follow-up, just curious about the sustainability of some of the trends you called out. At RMS, you talked about gems, you know, this resurgence around outsourcing, you know, managing proprietary colonies. How much of that, you know, came from the pandemic and how much of that do you think is sustainable? And then separately for DSCA, you've called out, you know, the pricing increases and clients securing space ahead of time a number of times on this call. I'm just curious how you think about the sustainability of those trends as well.

I feel really good about the sustainability of both of them. So GEMS has been a nice growth business for us for at least a decade. Those models are critically and increasingly important for basic drug research. There's a whole bunch of services associated with producing those animals, and they're complicated to produce and providing them to the client. I think we got a little pop because of COVID, which we will keep. And I think the demand for these models, which continue to be more sophisticated, made more easily through CRISPR and other technologies, is a really strong demand for us. We're doing that pretty much across the globe at all of our sites. We're pleased with DSA pricing, even though we're not going to break that out, and we're really pleased with the you know, the growth and development and demand there. I don't see any rationale given the funding environment, giving the new modalities like cell and gene therapy and immunotherapy. And, yes, we got a little bit of incremental work there to your question, but specifically in discovery, I would say, that caused some clients to take a look at us that hadn't. So, and I think they're quite happy. So we will retain that work. And as we add new services like the bio, like retrogenics, I think we'll get incremental work. So, um, I would think that the pricing paradigm would hold up. I would think that clients, as long as the demand remains strong, there was no reason or indications that it will soften. There we'll see more clients booking slots earlier, which is great for them. And as I said earlier, way better for us in terms of visibility and planning. and getting our calendar straight in terms of how our space is utilized because maximizing that capacity is really powerful for the bottom line. Okay, thank you.

Our next question comes from Ricky Goldwasser of Morgan Stanley. Your question, please.

Yeah, hi, good morning, and congrats on the quarter. Jim, I wanted to go back to the comments around clients securing room on the talk side earlier on. I mean, this is something that we've been talking about for a long time. So are you starting to have any conversations with your customers around sort of pay-or-play type of deals and securing capacity for longer periods of time, considering that it takes about 18 months? right, to build capacity?

Yeah, that would be nice. I think that would, that logically follows from the market situation. I'm a bit, you know, we had this over a decade ago. We had a couple of clients that would book, just book capacity and take a pay basis and pay for it to be empty until they needed it so they never had to get in line. I think I've said to you and others countless times that if I was running R&D for one of the big drug companies, I for sure would commit to a space like that so I didn't have to worry about it. It's a relatively trivial amount of the cost of developing a drug. The whole preclinical cost is about 20% of the cost of developing a drug, and getting on top is some percentage of that. And most of the money spent in the clinic. So we've had a few passing questions and thoughts about that they use some vibrations with clients are thinking about it. I wouldn't want to project or predict whether that will happen or not to just seem reluctant to do that. Although increasingly, we are seeing people book slots earlier, I think if they book slots earlier, and they're, for whatever reason, unhappy with the slot, let's say it's May, let's say they want to start a study in June and we say to them, yeah, we can't start until September, then that requires them to either back it up further or do something about taking the space on a take-or-pay basis. So anything's possible. I do think the market dynamics are such that it would support the basis for your question I just think that the big drug companies in particular have been reluctant to do those sorts of deals. I would say that we don't have any concrete evidence that that's on the horizon.

That is a thought question. You've been consistently beating and raising organic growth goals in your forecast for the different segments. um, considering sort of the mix of business and your performance, uh, why, what's kind of like still holding you back from upping long-term guide?

Oh, um, not saying we're going to give, uh, new long-term numbers in our best practice in a couple of weeks. So I think, I think, I think we'll wait to do that then. So nothing's holding us back. I think we have a, We have a good understanding of the market and a good assessment of the funding paradigm and the new modalities and what clients are telling us. Obviously, we have a big footprint to work with virtually all the big drug companies and most of the biotech companies. So we have a really good installed base. So now we have a clear view of it, and we will be putting out our new numbers shortly.

Great. Thank you. Our next question comes from Juan Avendano of Bank of America. Your question, please.

Hi. Good morning. Thank you for the question. I guess building up on the backlog question on DSA and how strong it is, can you give us an update on the mix of studies that you're seeing in safety assessment in toxicology? How is the mix from general toxicology and specialty toxicology trends, how is that trending and how does that compare to prior years?

You know, we don't have any control over that. You don't get long-term studies unless you do short-term studies and you don't get, you usually, I wouldn't say never, but you usually don't get specialty work unless you've done a general toxicology work. So they, you know, they come in tandem. We like both. Action profiles are kind of Not all that dissimilar, although the pricing is a bit easier on the specialty work. So it's probably around the 50-50 range. We like it that way. As I said, we can't control it. So every once in a while you hear us say that we have an abundance of long-term stays and not enough short-term ones or vice versa. Typically that balances out over time, and it feels like we're in balance right now.

Got it. Thank you. And a follow-up on DSA as well. Can you give us an update on the pull-through or the revenue synergies across, you know, that you're seeing right now between discovery and safety assessment, and how is that tracking against your long-term goal?

Yeah, I mean, without parsing it too finely because I don't think that's useful or productive to kind of do this on a quarterly basis. There's no question that we have an increasing number of clients. They could have been safety clients who never did discovery with us or discovery clients who never did safety or new clients who never did anything with us that work with us to help discover and develop a compound and then are thrilled because we have a really deep understanding of the molecule to work with us, A, because they trust us, B, because they like our science, and C, because it's faster. So, you know, I think over time we will continue to have a significant amount of our clients be doing both with us. We don't contract with them that way. In other words, we don't say we won't do the discovery work with us unless you do safety or vice versa. That would be overreaching and I think dangerous. But I think increasingly, particularly as the discovery portfolio has grown so significantly and with great scientific depth and with great cutting edge technologies that we have much more clients open to and are utilizing us for discovery. some of whom used that safety before that are really comfortable just continuing to have us develop the drug. Okay.

Thank you.

Our next question comes from Dan Brennan of UBS. Your question, please.

Great. Thanks for taking the questions. Maybe the first one is on margins. I know you called out, obviously, with the strong top line operating leverage and efficiency. Could you just maybe break out a little bit maybe some of the components there. Just what was the, you know, what was the impact from acquisitions? What was the impact from, you know, efficiencies, if you will, and just operating leverage just in terms of the new guidance that you're providing?

Yeah, that's right. Well, we've given the pieces for the different deals we've done, and broadly this year, you know, Cognate is pretty neutral on the margin and earnings per share. So is Retrogenics, given its size. So, for this year, you know, the majority, well, all of the increase that you're seeing is, if I put it either way around, is not to do with Cognate and Retrogenics. It's to do with the operational businesses itself. And, of course, with the top-line improvements that we've posted today, we'll get some fall-through that will also help with the margin because, of course, we've got a lot of fixed costs embedded in there. Once upon a time, we used to break out our efficiency program and what that was doing to Charles Rover as a whole, but we stopped doing that for a while now. But broadly, yeah, I mean, we've got good top-line growth. You know, the efficiencies are kicking in, as we described. It's all working very well together at the moment. But, you know, there isn't really the M&A that's causing sort of an upside or a drag, with the exception of Cognate on the manufacturing margin, which is a drag. But given the overall performance of the business, we will cover that, as you've seen, by posting the increase towards the 21% margin this year. Got it. Thanks, David.

Maybe the second one would just be on human care. I think it grew below, I think, last quarter. You had talked about some of the drag there, given the pandemic and you'd expected the recovery. Just where do we stand in terms of the guidance for 21 now? What's baked in for human care for the remainder of the year?

Well, we haven't broken out human care yet. in precise numbers. What we have said in the pre-procurement marks that Medicare had a slower start than we had hoped, but we do see that improving as we go through the year. I just would like to point out it is a relatively small business, and the fact that it's had some issues at the beginning of the year because of COVID and donor access to sites, et cetera, we see that improving as we go through the year, and of course, it's still a strong business for the future. So this year it's a small impact on the business. Got it.

And then I know microbial rebounded this quarter. Excuse me. Similarly, it had an impact last quarter from the pandemic or actually in the prior quarter. Just how do we think about the ability for that business to, like, is there further catch-up to go given what you saw this quarter versus what, you know, the normalized expectation for that segment?

Yeah, so, again, as we called out, while we've seen a nice improvement in microbial, it's It's got the double-digit growth earlier than we expected, so we're pleased with that. But we've not got full access to install new equipment with all of our clients. We're making headway in that, but, of course, as we continue to do that, that would be an upside. And, of course, that's been factored into the revised guidance this morning.

Great. And then maybe the last one, just on Cognate, Jim. Sorry if I missed it. I know you gave a lot of details in the deck and the presentation. But what specifically is baked in for Cognizant this year? And I think at the time you did the deal, I think you were anticipating, what, a 15% revenue tag? Is this correct? Just wondering on both of those fronts. And if it's 15%, why couldn't it be higher than that given the overall growth rate of that end market? Thanks.

So we added $110 million in revenue. If that helps.

And in terms of the, you know, when you did the deal, I think you talked about, correct me if I'm wrong, was it a three-year tag or 15%? Just wondering kind of, you know, what the opportunity is given the end market, I think, is certainly growing at that rate, if not stronger.

Oh, the total growth rate was 25% on an annual basis going forward.

Got it. Thanks, David.

Our next question comes from Elizabeth Anderson of Evercore. Your question, please.

Hi, guys. I just wanted to ask a little bit more about how customers are moving through the, like, post-pandemic era. Are you seeing sort of people sort of taking a time to sort of think through, like, what they're outsourcing, what they're keeping in, or sort of think through changes to their discovery program? Or is it just kind of, you know, oh, let's, like, get moving because we had all these projects that were delayed? Or sort of how would you characterize the tone of your conversations?

They're quite positive, except in the second quarter in our research model business when academic clients were closed and we had difficulty placing some of our microbial solution systems, all of our sites remained open and virtually all of our clients, except a handful, were open. So our clients have been busy. They're well-financed. The vast majority of our clients have no internal capability to do anything except discover drugs and then all the rest of development comes to us. So I wouldn't say that there's been a dramatic change. We just have increasingly intense demand across the board for what we do based upon really robust portfolios, early stage portfolios that most of our clients have and enough money to prosecute them broadly, as opposed to chunk it. And we don't see any indications that those elements would soften, or that the demand would soften, certainly as we move through this year. And as we said earlier, we'll give longer-term guidance and our thoughts on where our business is going and the demand is going at our investor conferences.

Okay, that's helpful. And then as a follow-up, you talked about some capacity constraints in terms of expanding capacity in terms of the physical infrastructure. Are you seeing any change in terms of the availability of employees or any cost pressures on wages or anything of that sense versus a couple months ago?

We're hiring a lot of people. We're actually hiring more people than we had plan to hire because the demand for everything we do is exceeding that. As I said earlier, it's a high-class challenge. It depends on the geographic locale. In some geographic locales, it's easier to hire people. Some, there's greater competition. I do think we are an attractive place that lots of people like to work or want to work at. We worked on over 80% of the drugs for the last three years. People like that. It's probably our best recruiting tool. We're always trying to, you know, we have 110 locations now, so lots of different countries. So the competition for headcount, as I said, is different in different places. Then the kind of wage levels are fluid. So we're always trying, we're working hard to stay up to or ahead of it so that, you know, pay is never an issue. So I'd say it's the ultimate rate limiting factor in our business is availability, not just of anybody, but of really strong people who understand that we're working for patients and the criticality of their work. So I'd say we're doing a very good job. I think we did a really good job in the first quarter with our recruitment. We anticipate significant recruitment through the back half of the year, pretty much across the board and around the world. And so we're working hard to stay ahead of it.

Great. Thank you very much.

Our next question comes from Patrick Donnelly of Citi. Your question, please.

Great. Thanks, guys. Maybe another one on the cell and gene therapy piece. I understand it's still early days, but can you just talk about some of your customer conversations around cell and gene therapy business now that you've closed Cognate? Have you seen any increased interest in areas like Hemacare and Solero now that you're more kind of an end-to-end cell and gene therapy player? Or should we expect those benefits to be a little more long-term?

I mean, it is early. So, you know, we have the combination of, sorry, you know, revenues up more slowly in the first quarter in Hemokin and Solero because of lack of access to donors, coupled with the fact that Cognate's relatively new. It's a month or two old. So I think it's early to tell. We have no doubt that the features is a very strong one, that clients who can use us starting very, very early in the process through process development and scale up through the clinic and ultimately to commercial quantities is powerful. No client's going to build, virtually no client's going to build this stuff themselves. I think the competitive marketplace is attractive for us. I think we have a unique portfolio that clients are definitely resonating to based upon conversation, based upon the uptake in business and our ability to sell a whole suite of cell and gene therapy services, including pharmacology and safety testing, including biologic testing, including some microbial testing, including some cross-air research model business. It's becoming a very big business for us. Look, it's no different than everything else we do. We provide a comprehensive, holistic, portfolio of products and services so that it's more of a solution for clients because particularly small biotech companies, everyone, but particularly them, they don't have the time or the ability or the desire to work with half a dozen different providers across those different streams of business. And so our whole thesis is about being the largest non-clinical CRO so that we can do more for our clients. And A, they don't have to do it themselves because they don't want to, and B, they don't have to work with multiple players. Gotcha. Thanks. That's helpful, Jim.

Our final question comes from George Hill of Deutsche Bank. Your question, please.

Hi, it's Maxine for George. Thanks for taking the question. Could you talk about your thoughts on the changing dynamics, competitive dynamics in the industry following the recent vertical integration trend and if recent deals in space create opportunities to move upstream into later stage research services? Thanks.

Yeah, I think I followed that. You said that really quickly. But, yeah, look, the consolidation on the clinical side of the of the business which you're referring to is really no different than the consolidation that not only we saw, but we participate heavily in the pre clinical side. So you know, as you as you know, we have a, we have 12 different sites and probably eight or nine different acquisitions in the safety business. So all that whole business is directly decided acquisition and, and consolidating the industry so that we had more scientific depth and capabilities, and we had a broader geographic footprint. So you are seeing and will continue to see the exact same phenomenon in clinical space now that it's started. I think it will continue. I don't know where it will end up, two or three players probably. Your question about what that means or portends for us, look, We look at the clinical space often. When I say look, I think we at least discuss it often. I think you know that we used to have a small clinical CDMO capability, which was a small molecule which we sold just because it was under-scaled, and now we're back in it with cell and gene therapy. So we sort of have two big moves, one is CDMO space and one is the clinical space. So we've dipped our toe into that. CDMO space and like it, at least on the cell therapy side. On the clinical side, we could do that, I guess. It doesn't seem that there's a client need, and I don't think we should even contemplate a move like that unless the clients are requesting it. So the only company that has a clinical and preclinical capability is Covance. I think it's a failed experiment. I don't think clients buy from them on that basis, knowing of a contract's to do preclinical work all the way through the clinic. That's years. Nobody buys that way. So we haven't had a conversation in the last decade with the clinical CRO about getting together. No one's ever called me a clinical CRO about getting together with them. And I don't think any of us would even contemplate that move, although it would provide a bigger share of the client's wallet. So that would be attractive. But Since the clients aren't buying that way or thinking that way and not desirous of any of us doing that, until and unless that changes, I don't see any logical rationale for us on the pre-clinical side and other people on the clinical side to get together. Having said that, I learned a long time ago never to say never about anything, so I don't know at what point the demand quotient will change and clients will want one company or multiple companies to do both. If and when that happens, we'll explore it.

Well, that concludes the call today. Thank you for joining us on the conference call. We look forward to speaking with you during our upcoming investor events, including our virtual investor day on May 27th. This concludes the conference call. Thank you.

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