Charles River Laboratories International, Inc.

and gentlemen, thank you for standing by and welcome to the Charles River Laboratory's second quarter 2025 earnings conference call. This call is being recorded. At this time, all participants are in a listen-only mode. After your speaker's presentation, there will be a question and answer session. To ask a question during this period, you'll need to press star 1 on your telephone. If you would like to remove yourself from the queue, please press star and 2. Lastly, if you should need any operator assistance, please press star and zero. I would now like to turn the conference over to our host, Todd Spencer, Vice President of Investor Relations. Please go ahead, sir.

Good morning, and welcome to Charles River Laboratory's second quarter 2025 earnings conference call and webcast. This morning, I am joined by Jim Foster, Chair, President, and Chief Executive Officer, and Flavia Pease, Executive Vice President and Chief Financial Officer. They will comment on our results for the second quarter of 2025. Following the presentation, they will respond to questions. There is a slide presentation associated with today's remarks, which will be posted on the investor relations section of our website at ir.driver.com. A replay of this call will be available beginning in approximately two hours after the call today 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 forward-looking statements under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated. During the 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 a substitute for results from operations prepared in accordance with GAAP. In accordance with Regulation G, you can find the comparable GAAP measures and reconciliations on the investor relations section of our website. I will now turn the call over to Jim Foster.

Thank you, Todd, and good morning. We reported another solid financial performance in the second quarter, meaningfully exceeding our prior outlook due primarily to favorable DSA results. The DSA business benefited from the strong booking activity that was recorded in the first quarter, and the corresponding lift in first-half results is the primary driver leading us to raise our financial guidance for the year. To a lesser extent, favorable movements in foreign exchange also contributed to the outperformance in the second quarter, and to our increased outlook for the year. We have continued to see clear signs that the demand environment is stabilizing. Over the past several quarters, global biopharmaceutical demand trends appear to have broadened, and we believe they are beginning to slowly move upward as more clients have progressed through their restructuring activities and getting back to work. The biotech environment is stable but mixed, with smaller biotechs still being more cash-constrained, due in part to the slowdown in biotech funding, whereas midsize biotechs are performing better, as many are able to support their own R&D programs without external funding. EDSA demand trends, coupled with constructive discussions with our biopharmaceutical clients, have also reinforced our belief that the preclinical demand environment is stabilizing. In the second quarter, both gross and net DSA bookings increased at mid-single-digit rates year-over-year, resulting in a solid 6% and 13% increases in first-half gross and net bookings, respectively. While this bookings performance reflected an improving demand environment in the first half, the net book-to-bill dipped back below one times in the second quarter, to 0.82 times, which we had anticipated and was largely driven by a sequential increase in cancellations and the DSA revenue outperformance. We never expected a straight-line recovery in the net book-to-bill or broader DSA demand trends and, in fact, have often said that the sustained improvement in our businesses will not be linear. However, we are pleased that the net book-to-bill trends over the past 18 months have reflected a steady upward trajectory, starting with a net book to build of 0.80 times in the first half of 2024 to 0.85 times in the second half, and most recently, improved to 0.93 times in the first half of this year. The DSA business and our overall non-GAAP financial results continue to significantly outperform our expectations, and we are making gradual progress towards achieving a return to organic revenue growth. We recognize that some uncertainty persists across the broader healthcare landscape. As a result, we continue to take a measured and prudent approach to our outlook. While we have not factored in further demand improvements this year, it is encouraging that the overall demand environment shows signs of stabilization. To date, we have not observed any meaningful impact on client spending patterns stemming from tariffs, or drug pricing concerns. Additionally, the effects of government funding reductions, including at the NIH, have been minimal, which I will address further in the context of RMS results. Before I provide more details on these trends, let me provide highlights of our second quarter performance and updated outlook for the year. We reported revenue of $1.03 billion in the second quarter of 2025, a 0.6 percent increase over last year, with nearly half of the revenue outperformance driven by foreign exchange. On an organic basis, revenue declined 0.5 percent, driven by a low single-digit decline in the DSA segment, partially offset by low single-digit revenue increases in the RMS and manufacturing segments. By client segment revenue, for small and mid-sized biotech clients improved slightly for a third consecutive quarter. Revenue for global biopharmaceutical clients remained below last year's level, but did improve sequentially from the first quarter. Revenue for global academic and government clients increased at a mid-single-digit rate in the quarter. The operating margin was 22.1%, an increase of 80 basis points year over year. with margin improvement across all three segments, primarily reflecting the benefit of cost savings from our previous restructuring actions and operating leverage from better than expected first half sales volume. You may recall that we are on pace to generate a run rate of over $175 million in cost savings this year. In addition, the CDMO business benefited from revenue and payments from commercial clients, most of which will not repeat in the second half of this year, as we previously disclosed. Earnings per share were $3.12 in the second quarter, an increase of 11.4 percent from the second quarter of last year. Operating margin improvement was the primary driver of this robust earnings growth. Most of the earnings outperformance versus our prior outlook was operationally driven with an additional 12-cent benefit from a lower than expected tax rate. Flavia will provide more details on the tax rate shortly, including the second half tax headwind from the new U.S. legislation. We are raising our revenue and non-GAAP earnings per share guidance largely to reflect the outperformance in the quarter. We are increasing our 2025 organic revenue guidance by 150 basis points to a 1% to 3% decrease and raising our non-GAAP earnings per share guidance by 55 cents at midpoint to $9.90 to $10.30. In addition to the DSA-driven operational outperformance, full year guidance will benefit by 14 cents from more favorable FX rates versus our May outlook. Below the line items will largely offset each other as the second half tax headwind that I just mentioned will be offset by lower interest expense for the year. I will now provide details on the second quarter segment performance, beginning with the DSA segment. Revenue for the DSA segment was $618 million in the second quarter, a 2.4% decrease year-over-year on an organic basis, driven by lower revenue for both discovery and safety assessment services. Lower sales volume was partially offset by favorable mix of higher price, longer duration, and specialty studies again this quarter. Consistent with our commentary in May, the favorable mix does not signal a broader improvement in the pricing environment as we continue to believe that spot pricing remains stable overall. Moving to the DSA demand KPIs, the DSA backlog was $1.93 billion at the end of the second quarter, a slight decline from $1.99 billion last quarter. As I mentioned, gross and net bookings both improved at mid-single-digit rates year over year in the second quarter, but declined sequentially, primarily for global biopharma clients. The sequential decline in the netbook to bill was not a surprise. We had previously said that global biopharmaceutical clients started the year strong with a resurgence of booking activity for projects that they had delayed or deprioritized at the end of last year and wanted to start quickly. However, we did not expect the first quarter booking strength to continue through the remainder of the year. Proposal activity for global biopharmaceutical companies increased at a healthy pace in the second quarter, both year over year and sequentially, which reinforces our belief that demand for this client base has stabilized. Demand KPIs for small and mid-sized biotech clients remain consistent with the overall trends that we described in the first quarter, with little change aside from a moderate decline in proposal activity supporting our belief that demand for this client base is also stable. We also experienced an increase in DSA cancellations in both client segments to levels consistent with the first half of 2024, but higher than the last three quarters. The higher cancellations were more focused on longer-term post-IND work. These trends have cumulatively resulted in quarterly net bookings of $506 million and a net book to bill of 0.82 times. While below one times for the quarter, our first half net book to bill was at its highest level since the end of 2022 and reflects an upward demand trajectory compared to recent years. Reflecting our solid second quarter performance and the DSA KPIs that underpin our outlook, We now expect DSA organic revenue will decline at a low to mid single-digit rate in 2025, an improvement from our prior outlook of a mid single-digit decline. The demand environment continues to support our outlook for the year, which is not predicated on the net book to bill returning to one time. Furthermore, we believe the DSA business is stabilized and is beginning to show signs of gradual progress. In support of our improved demand outlook, we have begun to modestly increase staffing levels in the DSA segment. We are doing so to ensure we can fully support our clients' programs and to position resources appropriately for the second half of this year. Due to the increased hiring, DSA headcount costs are expected to create a headwind of approximately $10 million in the second half when compared to first-half levels, which is one of the factors contributing to the company's second-half operating margin outlook. For the second quarter, the DSA segment reported another solid operating margin, increasing by 30 basis points year-over-year to 27.4% in the second quarter. This was primarily a result of the operating leverage from better-than-expected demand that we accommodated without meaningful headcount increases in the quarter, as well as the benefit of prior cost savings actions. Before I provide commentary on the RMS and manufacturing segments, I would like to provide an update on our NAMS strategy or new approach methods. We recently updated the board on our roadmap and strategic imperatives to continue to build our growing NAMS portfolio. As we said last quarter, we firmly believe that utilizing more NAMS-enabled approaches will be a gradual, long-term transition by our clients and that the scientific capabilities to fully replace animal models do not exist today. As the leader in preclinical drug development, we have the scientific capabilities, regulatory expertise, and access to data that make us the logical partner for biopharmaceutical companies to advance their use of NAMs and alternative technologies over time. We already have a growing NAMS portfolio that is generating a meaningful amount of revenue or approximately $200 million in annual DSA revenue and increased interest from our clients. In addition to some of the well-established capabilities that we discussed in May, we are also working on enhancing our NAMS solutions across many of our DSA sites. For example, in Montreal, we are working on developing an in vitro liver-on-a-chip assay to replace in vivo gene tox testing. Our site in Hungary is working on a number of in vitro models for advanced modalities, including using steroids for long-term metabolism studies. Our team in Denbos continues to develop and validate a growing number of in vitro assays for regulated safety assessment. And our retrogenics business has generated considerable interest for their in vitro off-target screening platform. Overall client interest in our NAMS portfolio continues to build. One of our top priorities in the coming years will be to continue expanding this portfolio of premier NAMS capabilities through a combination of partnerships, selective M&A, and internal development. We look forward to continuing to update you on our progress towards a NAMS-enabled future. RMS revenue is $213.3 million, an increase of 2.3% on an organic basis compared to the second quarter of 2024. The year-over-year revenue increase was primarily driven by the timing of NHP shipments and higher revenue for research model services, including in the GEMS and insourcing solutions businesses. The overall trends in the RMS segment are consistent from our commentary last quarter, as little has changed aside from the typical quarterly modulations in the timing of NHP shipments to third-party clients in China and for Novoprim. As a result, we are maintaining our RMS revenue outlook for the year, a flat to slightly positive organic growth. The third quarter is expected to be an even stronger quarter for NHP revenue due to the acceleration of certain shipments from the fourth quarter, Revenue from both our academic and government client segments increased in the second quarter, despite frequent headlines about potential NIH budget cuts. To date, we have only experienced a small impact from the uncertainty in Washington due to a modest reduction in scope of an insourcing solutions contract for the NIH's National Institute on Aging, totaling an expected revenue loss of approximately $3 million annually. Beyond that, we have not experienced any meaningful revenue loss related to NIH budgets to date. As a reminder, the North American academic and government client base represents just over 20% of total RMS revenue, or approximately 6% of total company revenue. In addition, demand for insourcing solutions cradle operations is tracking as planned, and occupancy remains stable since our last update. Cradle revenue increased slightly in the second quarter versus the prior year, but as we discussed in May, demand from early-stage biotech clients for our cradle services remains constrained this year due to funding challenges. Revenue for small research models in all geographic regions was relatively flat overall as higher pricing continued to offset unit volume declines. China was an exception as volume continued to increase albeit at a more moderate pace than historical levels. In the second quarter, the RMS operating margin increased by 220 basis points to 25.3 percent. The improvement was primarily due to a favorable mix resulting from higher NHP revenue and higher revenue from research model services, as well as the benefit of cost savings resulting from our restructuring initiatives. We expect the third quarter RMS operating margin will also be robust due to the favorable timing of NHP shipments that are accelerating into the third quarter, followed by the moderation of the fourth quarter operating margin due to the timing of NHP revenue and normal seasonality in the small models business. Revenue for the manufacturing segments was $200.8 million, a 2.9% increase on an organic basis, from the second quarter of last year. The revenue improvement was driven by another solid quarter from our microbial solutions business, as well as revenue from commercial CDMO clients, most of which will not repeat in the second half of the year as one relationship has wound down, creating an anticipated revenue and margin headwind. The biologics testing business had another slow quarter due to project delays associated with regulatory or funding issues for several clients. Collectively, we continue to expect manufacturing revenue will be essentially flat on an organic basis this year, which is similar to the first half performance. The microbial solutions business reported another quarter of robust growth, led by our Acugenics microbial identification services and Celsus microbial detection platforms. End-to-safe also performed well as clients continued to choose our leading portfolio of rapid manufacturing quality control testing solutions. We believe microbial solutions is well positioned to grow at a high single-digit revenue growth rate for the year, as it did in the first two quarters. The cell and gene therapy CDMO business reported essentially flat revenue, principally related to work for one commercial cell therapy client to wind down and transfer their program, and revenue from our gene therapy offering also continue to be strong. While our CDMO relationship with one commercial client has ended, we look forward to continuing to work on our other commercial cell therapy program going forward. Collectively, we expect the loss of commercial CDMO revenue will reduce the manufacturing solutions growth rate by less than 500 basis points for the year. However, CDMO revenue grew nicely in the second quarter when normalized for the commercial cell therapy revenue impact. We are continuing to enhance the quality of our operations, build our gene therapy presence, and reinforce our healthy pipeline of biotech clients with early stage clinical candidates and are continuing to gain traction with those clients. the manufacturing segment's operating margin increased by 620 basis points to 32.8% in the second quarter, due principally to revenue and payments from commercial CDMO clients, as well as operating leverage from microbial solutions robust growth. Due to the fact that revenue from one commercial CDMO client will not repeat, we do not expect the manufacturing operating margin to be above 30% level for the second half of the year. However, We believe the progress we have made on the cost structure and the operating leverage that we are able to generate from the robust growth in the microbial solutions business will result in a higher manufacturing operating margin for the year. Before I conclude, I would like to briefly address our ongoing strategic review and also provide a positive update on NHP supply. First, the strategic review is well underway. and I am encouraged by the progress that we have made so far. This thorough process takes time, but we are moving forward with a sense of urgency and do not intend to provide updates until the strategic review has been completed. This is a comprehensive process that is evaluating multiple avenues for value creation, including a strategic review of our portfolio, capital allocation strategy, and market position, while balancing it with the understanding that the strength and value of Charles River lies within our broad, scientifically distinguished portfolio and leading non-clinical market position that truly differentiates us from the competition. Our goal is to further enhance long-term shareholder value, and we continue to believe that the company remains undervalued. We are pleased with the progress that we have made this year at the company, including a the substantially better performance of the DSA segment, and actions to unlock value through stock repurchases and cost savings, which we believe leaves us well positioned for the future. With regard to the NHP supply update, in July, the Department of Interior and U.S. Fish and Wildlife Service cleared for legal entry into the United States all of the NHP shipments from Cambodia from late 2022 and early 2023 that were under investigation. In addition, we have been informed that the U.S. Department of Justice is no longer conducting investigations into these shipments. These positive developments validate what we have said from the start. Once the DOJ investigated, they would conclude that any concerns with respect to child service conduct are without merit. I would like to thank our shareholders, clients, and employees for their patience, trust, and support. as we navigated this process. Now, Flavia will provide additional details on our second quarter financial performance and updated 2025 guidance.