Release Date: August 07, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Charles River Laboratories International Inc (CRL, Financial) reported revenue of $1.03 billion in the second quarter of 2024, which was in line with their outlook.
- Operating margin increased by 90 basis points year-over-year to 21.3%, driven by lower performance-based bonus compensation accruals.
- Earnings per share increased by 4.1% year-over-year to $2.80, exceeding prior guidance by approximately $0.40.
- The Manufacturing Solutions segment saw a 3.7% organic revenue increase, with each business within the segment contributing to the growth.
- The company is implementing aggressive cost-saving measures expected to generate over $150 million in annualized savings, which will be fully realized in 2025.
Negative Points
- Revenue declined by 3.2% on both a reported and organic basis compared to the previous year.
- The DSA segment experienced a 5% organic revenue decline, driven by lower revenue in both Discovery Services and Safety Assessment businesses.
- The RMS segment saw a 3.9% organic revenue decline, primarily due to lower NHP revenue.
- The company significantly reduced its financial guidance for the year, now expecting a 3% to 5% organic revenue decline.
- Demand from global biopharmaceutical clients is expected to continue to soften, impacting revenue growth into 2025.
Q & A Highlights
Q: What rationale can you give for the increased deceleration of demand from global biopharma clients, and do you think it will take longer for them to pivot back?
A: James C. Foster, CEO, President & Chairman: The rapid deterioration in demand from large pharma was unexpected. The IRA legislation and impending patent expirations have led to tighter budgets and pipeline reprioritization. While some companies may recover faster, it’s difficult to predict the timing. We expect the current trends to persist into 2025.
Q: Is there a market share issue in DSA, or is it more about overall macro pressures?
A: James C. Foster, CEO, President & Chairman: We believe we have a strong portfolio and are not losing market share. We are refining our sales organization and leveraging technology to enhance sales insights. The current situation is more about market shifts rather than losing share.
Q: Can you quantify the impact of the bonus accruals on earnings, and what should we expect for the second half?
A: Flavia H. Peas, Corporate Executive VP & CFO: The bonus accruals had a $20 million impact in the second quarter, contributing about $0.30 to earnings. There will be additional favorability in the second half as we updated guidance for the full year.
Q: How are you managing the restructuring actions given the uncertain demand environment?
A: James C. Foster, CEO, President & Chairman: We are aligning our capacity and staffing with expected demand. We have already made some cutbacks and will continue to do so. We are also consolidating facilities and reducing G&A costs to respond to the market demand.
Q: What are your assumptions on NHP pricing in the context of DSA pricing pressure?
A: Flavia H. Peas, Corporate Executive VP & CFO: NHP pricing in DSA was slightly positive in the second quarter but is expected to modulate to a slight decline by year-end. In RMS, NHP prices in China have come down, while Noveprim prices remain stable.
Q: How are cancellations trending, and what is the expectation for the rest of the year?
A: Flavia H. Peas, Corporate Executive VP & CFO: Cancellations from small and mid-tier biotech improved sequentially, while cancellations from global biopharma increased. We expect this trend to continue into the second half of the year.
Q: How quickly can you ramp up resources in DSA if demand improves?
A: James C. Foster, CEO, President & Chairman: It typically takes about a quarter to hire and train new staff. We aim to stay ahead of the curve to ensure we have sufficient capacity to meet demand.
Q: What gives you confidence in maintaining the RMS guidance despite the DSA softness?
A: James C. Foster, CEO, President & Chairman: RMS has been resilient with stable pricing and strong performance in Europe and China. The services part of RMS is slightly slow but still substantial. We are confident in our guidance of flat to low single-digit growth.
Q: How is the BIOSECURE ACT expected to impact your business?
A: James C. Foster, CEO, President & Chairman: The BIOSECURE ACT should positively impact demand across various segments, including biologics and CDMO. However, the current impact has been minimal, and we are monitoring the situation closely.
Q: How are you addressing the competitive pricing pressures in DSA?
A: James C. Foster, CEO, President & Chairman: We are being selective with price reductions to preserve share and gain new business. While competitors use price as a lever, we focus on our scientific quality and comprehensive portfolio to maintain our market position.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
