Thank you for joining us, and welcome to the Charles River Laboratories First Quarter 2024 Earnings Conference Call. This call is being recorded. I will now hand it over to our host, Todd Spencer, Vice President of Investor Relations. Please proceed.

Good morning, and welcome to Charles River Laboratories First Quarter 2024 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 provide comments on our first quarter 2024. 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 approximately 2 hours after the call today, and can 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 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 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.

Good morning. I'd like to begin by providing an update on the overall market trends. There has been an increasing focus on market sentiment through the first 4 months of this year from clients, investors, and other stakeholders. We still believe that the end market trends for our biopharmaceutical clients remain stable with signs that demand will begin to improve later this year, which is consistent with the outlook that we gave in February. One of these signs is an improvement in biotech funding after 2 years of tempered activity. Biotech funding increased significantly in the first quarter of 2024 to approximately $23 billion, the fourth highest quarter on record. These trends and the improving market sentiment have led to positive discussions with our clients, including at the Annual Society of Toxicology Conference in mid-March, with clients specifically referencing the improving funding environment and optimism that this would lead to additional spending on the early-stage programs this year. We saw increased proposal activity in the first quarter. And while this is encouraging, and we have available capacity to start certain types of work relatively quickly, our outlook for the year remains appropriately measured. We expect it will take time for additional funding and proposal activity to translate into new DSA bookings and revenue generation. Therefore, we continue to expect demand will improve later this year, consistent with our initial outlook from February. Our first quarter financial results reflect a continuation of the demand trends and client spending patterns that we experienced at the end of last year, resulting in an organic revenue decline of 3.3% in the first quarter, in line with our outlook in February. The Manufacturing and RMS segments both reported solid quarters, primarily driven by a rebound in order activity in the Microbial Solutions and Biologics Testing businesses as well as the timing of NHP shipments benefiting the RMS segment. As expected, DSA revenue declined at a high single-digit rate organically, due in part to the challenging comparison to the strong organic growth rate of nearly 24% in the first quarter of last year. Demand trends are continuing to stabilize, reflecting the more positive sentiment in our end markets and reinforcing our financial outlook for the year. There has also been an increasing focus on the BIOSECURE Act this year. It is too early to determine the final outcome of this proposed legislation, both the content of the final bill, if passed, and the potential impact on the broader biopharmaceutical industry. With approximately 95% of our revenue base in North America and Europe, we assume that the potential impact on Charles River would likely be a net positive, should the bill be passed, but it's too early to determine the magnitude of the potential impact. The long-term industry fundamentals for drug development also remain firmly intact because the overwhelming demand to find life-saving treatments for rare diseases and many other unmet medical needs is unchanged. Biotechs are beginning to move back into favor in the capital markets and will lead the way while large pharma has consistently adapted to scientific advancements, the regulatory environment, and a drive to be more efficient. Therefore, we firmly believe the industry's healthy growth prospects will reaccelerate. It's not a matter of if, but when clients will reinvigorate their investments in early-stage R&D. As the leader in preclinical drug development, Charles River is the logical outsourcing partner to advance our clients' programs and enhance their speed to market. I will now provide highlights of our first quarter performance. We reported revenue of $1.01 billion in the first quarter of 2024, a 1.7% decrease on a reported basis over last year. Organic revenue declined 3.3%, as solid performances from the Manufacturing and RMS segments were offset by the anticipated decline in DSA revenue. By client segment, revenue from small and midsized biotechs declined, partially offset by higher revenue from global biopharmaceutical and academic clients. The operating margin was 18.5%, a decrease of 270 basis points year-over-year. The decline was principally driven by a lower DSA operating margin, reflecting the impact of lower sales volume as well as higher unallocated corporate costs. The restructuring initiatives that we implemented have not yet generated a full quarterly cost savings, which will occur in the second half of 2024. Earnings per share were $2.27 in the first quarter, a decrease of 18.3% from the first quarter of last year. The decline reflects the lower revenue and operating margin as well as a higher tax rate. First quarter earnings per share exceeded our initial outlook in February, due in part to a timing shift of NHP shipments, which moved into the first quarter and benefited RMS results. For the full year, we are reaffirming our revenue and non-GAAP earnings per share guidance. We continue to expect revenue growth of 1% to 4% on a reported basis and flat to 3% growth on an organic basis. Our non-GAAP earnings per share guidance remains in a range of $10.90 to $11.40. As I mentioned, there were some movements in the forecast between quarters, but our outlook for the year is essentially unchanged. I'd like to provide you with additional details on our first quarter segment performance, beginning with the DSA segment's results. DSA revenue in the first quarter was $605.5 million, a decrease of 8.7% on an organic basis. Quarterly decline reflected a challenging comparison to the 23.6% growth rate last year as well as lower revenue in both Discovery Services and Safety Assessment businesses. Lower study volume in the Safety Assessment business was partially offset by a small benefit from pricing. We are modestly adjusting price on new proposals, when appropriate, to drive incremental volume. Looking at the broader demand trends, Safety Assessment, proposal activity, and cancellations improved on both a year-over-year and sequential basis. This has not yet translated fully into improved bookings, but we are cautiously optimistic that these trends will lead to improved demand during the second half of the year. As we have noted in the past, the study mix routinely shifts back and forth over time. And we believe that new funding will enable our clients to shift their R&D focus back to IND-enabling studies from post-IND work that has been the focus for much of the past year. As a reminder, there's a natural lag between the time that a client gets new funding and reaches out for a study proposal to when the client will book and subsequently begin the new work with us. The process can take a few quarters, which is factored into our expectation that demand will improve modestly later in the year. As a result of these trends, the DSA backlog decreased modestly on a sequential basis to $2.35 billion at the end of the first quarter from $2.45 billion at year-end. Gross bookings remained stable at above 1x, while the net book-to-bill ratio remained below 1x, but did improve slightly due to the lower cancellation rate in the first quarter. The DSA operating margin was 23.5% in the first quarter, a 550 basis point decrease from the first quarter of 2023. The year-over-year decline reflected the challenging comparison to last year's outstanding operating margin performance. However, the first quarter operating margin was also below our longer-term targeted level in the mid- to high 20% range because lower sales volume and moderating price increases in Discovery and Safety Assessment businesses were unable to cover cost inflation. We expect the DSA operating margin to move towards targeted levels as demand rebounds in the second half of the year. RMS revenue was $220.9 million, an increase of 3.3% on an organic basis over the first quarter of 2023. The RMS segment benefited primarily from higher NHP revenue as well as from higher sales of small research models in all geographic regions, due primarily to sustained pricing increases and from research model services. Revenue for small models increased in North America, Europe, and China, due primarily to pricing, with growth in China leading all regions. While the growth rate in China has been compressed by the well-chronicled macroeconomic challenges in the country, we believe RMS demand has been less affected than other life science sectors. We believe the resilience of the Research Models business, both in China and the rest of the world, comes from the fact that small models are essential, low-cost tools for research and without which research cannot proceed. From a services perspective, revenue increased modestly. Insourcing Solutions, or IS, continued to generate higher revenue led by the CRADL operations. And we also signed new contracts for our legacy IS Vivarium management solutions. As we mentioned in February, the CRADL growth rate is expected to accelerate during the year. We are monitoring the occupancy rates and new facility ramp in light of the biotech demand environment, which remains healthy overall. We are balancing opening new sites in higher demand bio-hubs like Boston, Cambridge, and San Diego, with consolidation of capacity in more saturated regions like South San Francisco. The timing of NHP shipments to third-party clients also benefited first quarter results, both in China and from Noveprim, the Mauritius-based supplier in which we acquired a controlling interest late last year. These shipments accelerated into the first quarter. So although it would not change our RMS revenue outlook this year, it will affect the quarterly gating and pressure the second quarter RMS revenue growth rate. In the first quarter, the RMS operating margin increased by 420 basis points to 27.6%. The robust improvement was primarily driven by the benefit from higher NHP revenue in the first quarter, including the contribution from Noveprim. We do not expect the RMS operating margin will be sustained at this level for the full year as the gating of NHP shipments normalized, but continue to expect margin improvement in the RMS and Manufacturing segments will enable us to achieve our outlook for the year. Revenue for the Manufacturing Solutions segment was $185.2 million, an increase of 10.4% on an organic basis compared to the first quarter of last year. Each of these segment's businesses contributed to the revenue growth, led by the CDMO business. We were pleased that, as expected, revenue rebounded in both our Biologics Testing Solutions and Microbial Solutions businesses in the first quarter and Biologics Testing improved fourth quarter proposal volume led to the solid first quarter performance. Proposal and booking activity also increased meaningfully year-over-year in the first quarter, which confirmed the trends that emerged at the end of last year are continuing. Clients appear to be returning to the core testing activities, including cell banking and viral clearance, which were the services that slowed at the beginning of 2023. In Microbial Solutions, we continue to see signs that destocking activity is winding down and believe it is now largely complete. Clients have resumed their purchases of reagents and consumables, and spending on new instruments was reactivated with an increase of new orders, particularly for the Endosafe MCS endotoxin testing system. We believe that our comprehensive manufacturing quality control testing portfolio, which continues to resonate with clients and will help to reinvigorate the Manufacturing segment's growth rate in 2024. Our Biologics Testing and Microbial Solutions businesses are excellent examples of our focus on sustainable practices and the advancement of nonanimal alternatives. In Biologics Testing, we have launched an initiative with our clients to end the remaining in vivo testing use of viral safety and lot release testing, replacing it with in vitro methodologies. One of the alternative methods is next-generation sequencing testing that we are able to offer to clients through our partnership with PathoQuest. Our Microbial Solutions business also introduced the cartridge technology to our animal-free and Endosafe Trillium Endotoxin Testing platform, which will promote Trillium's adoption to those clients who are looking to implement more sustainable testing practices. These are two examples of how we are already responsibly driving progress to reduce animal use and adopt alternative technologies, and I will provide additional details shortly on our new program to advance alternatives. The CDMO business drove the segment's growth rate in the first quarter as a good for most of last year, generating solid double-digit growth. Client interest continues to be strong with new projects starting almost weekly across the various phases of clinical development. Cell therapy production activities for our two commercial clients are beginning to ramp up as well. The second quarter growth comparison will be more challenging for the CDMO business as we anniversary the recovery of the business in the second quarter of last year. But the sales funnel remains robust, and we continue to expect solid double-digit growth this year. Manufacturing segment's first quarter operating margin was 25.3%, a significant improvement from 13.7% in the first quarter of last year. The increase was driven primarily by higher sales volume as each of the Manufacturing segment's businesses are regaining traction as well as the comparison to last year's lease impairment in the CDMO business. Before turning the call over to Flavia, I'd like to provide an update on new initiatives that we are implementing to maintain our leadership position in nonclinical drug development. Last quarter, I discussed client-facing initiatives that we have implemented to become an even stronger scientific partner to our clients as well as actions to drive greater operational efficiencies. In April, we launched our AMAP, or AMAP program, to drive positive change and better position the company for the future state of the industry. AMAP, or the Alternative Message Advancement Project, is aimed at initiatives dedicated to developing alternatives to reduce animal testing. We intend to remain at the forefront of evaluating and implementing new and innovative technologies, including alternative technologies, to enhance the role that we play in helping our clients bring their life-saving therapies to market more efficiently. We anticipate these technologies will have a greater impact on drug discovery as they already have begun with screening for lead compounds rather than a regulated safety testing process. Change will take time, which is why we intend to engage key stakeholders, including clients, partner organizations, thought leaders, policymakers, and NGOs, in the pursuit of scientific and technological innovation focused on advancing animal alternatives. We have already been exploring alternatives to reduce animal testing through our initial investment of $200 million over the past 4 years. A portion of that investment enabled us to acquire a partner and internally develop more sustainable technologies, including the animal-free Endosafe Trillium Endotoxin test and our partnership with PathoQuest for next-gen sequencing that I just mentioned. Over the next 5 years, our goal is to invest an additional $300 million to fund similar initiatives under AMAP to enhance the development and utilization of alternative technologies. We intend to continue to lead the way in driving our industry to its next frontier. To conclude, I'd like to thank our employees for their exceptional work and commitment and our clients and shareholders for their continued support. Now Flavia will provide additional details on our first quarter financial performance and 2024 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 adjustments, costs related primarily to restructuring actions, gains or losses from certain venture capital and other strategic investments, and certain other items. Many of my comments will also refer to organic revenue growth, which excludes the impact of acquisitions, divestitures, and foreign currency translation. First quarter 2024 organic revenue decreased at a 3.3% rate, in line with the February outlook. However, we delivered non-GAAP earnings per share of $2.27, which exceeded the outlook that we provided in February of at least $2. The primary drivers of the earnings outperformance were the acceleration of NHP shipments into the first quarter and a strong performance from the Manufacturing segment, which delivered organic revenue growth of 10.4%. As Jim mentioned, we continue to expect full year reported revenue growth of 1% to 4% and organic revenue growth of flat to a 3% increase as well as non-GAAP earnings per share in a range of $10.90 to $11.40. We reaffirmed our annual revenue and non-GAAP earnings per share guidance because the first quarter outperformance was largely driven by the timing of NHP shipments, which only affects the quarterly gating in 2024 and not our full year outlook. Our segment outlook for 2024 revenue growth remains essentially unchanged as noted on Slide 30. We also continue to expect consolidated operating margin expansion of at least 50 basis points in 2024. We are diligently managing the cost structure and our focus on driving efficiency, with restructuring initiatives expected to generate approximately $70 million of annualized cost savings or the upper end of our prior range. As anticipated, unallocated corporate costs were just above 6% of revenue at 6.2% compared to 4.3% of revenue in the first quarter of last year, contributing to the operating margin headwind in the first quarter. For the full year, we continue to expect unallocated corporate costs will moderate from first quarter levels to just above 5% of revenue. The first quarter tax rate was 23.3%, an increase of 160 basis points year-over-year. The increase was primarily due to the impact from stock-based compensation. This was slightly better than our February outlook of a mid-20% tax rate because stock-based compensation was favorable due to a higher stock price during the quarter. We continue to expect our full year tax rate will be in the range of 23% to 24%, which is unchanged from our previous outlook. Net interest expense of $32.8 million in the first quarter was similar to both the prior year and fourth quarter levels as floating interest rates and debt balances were relatively stable. For the year, we expect net interest expense to trend slightly favorable, which would put us at the low end of our prior outlook of $125 million to $130 million. As a reminder, nearly 3/4 of our $2.7 billion debt at the end of the first quarter was at a fixed rate. At the end of the first quarter, our gross leverage ratio was 2.4x, and our net leverage ratio was 2.3x. Free cash flow was $50.7 million in the first quarter compared to $2.5 million last year with a $28 million decrease in capital expenditures, driving much of the improvement. Capital expenditures were $79.1 million in the first quarter compared to $106.9 million last year, due primarily to moderating capacity expansions to match current demand. For the year, we continue to expect free cash flow to be in a range of $400 million to $440 million and CapEx is expected to be approximately $300 million. A summary of our 2024 financial guidance can be found on Slide 35. Looking ahead to the second quarter, we expect reported and organic revenue will decline at a low to mid-single-digit rate year-over-year. Our second quarter expectations include a modest sequential increase in DSA revenue as trends begin to improve. The second quarter revenue growth rates for both the RMS and Manufacturing segments are expected to be constrained by the timing of NHP shipments in RMS and the anniversary of last year's CDMO growth rebound in the Manufacturing segment. Earnings per share are expected to improve from the first quarter level with an outlook of mid-single-digit sequential earnings growth over the $2.27 reported in the first quarter. We expect the tax rate and interest expense will remain relatively stable from the first quarter levels, and the operating margin will remain somewhat constrained until the second half of the year when we recognize the full benefit from the cost savings and the revenue growth rate reaccelerates to cover more of the annual cost inflation. In conclusion, we are pleased with our first quarter performance and are confident in our outlook for the year. Demand for our unique nonclinical portfolio is resilient, and we remain focused on executing our strategy, driving efficiency, and gaining market share.

That concludes our prepared remarks. We will now take your questions.

We'll take our first question from Michael Ryskin with Bank of America Securities.

This is Wolf on for Mike. My first question is about how to approach the pacing of RMS revenues in light of the increased NHP shipments we've experienced. Could you provide insight into how we should expect the revenue cadence for the remainder of the year? We also have a related follow-up.

What was the beginning of the question?

I believe he was indicating that he was substituting for Mike. The inquiry pertains to the timing of NHP shipments in RMS. I can address that. We have mentioned that our quarters are not linear, and when we provided guidance for this year, I noted that incorporating the Noveprim business would introduce additional nonlinearity in our quarters since those shipments do not occur consistently at the same time each year. This will create some variability quarter-to-quarter. However, as we noted in our prepared remarks, this represented a shift from the second quarter to the first quarter. Looking at the year overall, we feel very comfortable and confident with our guidance. While it might complicate things for you in pinpointing the segment within the quarters, this is simply the nature of that segment of the business.

Okay. Wonderful. And hopefully, you can hear me a bit better now. Then I would just like to ask on kind of your confidence in the ramp through the year, given your book-to-bill is still trending below one. I know you noted some improvements there, but just anything to make us more comfortable there would be great.

Our confidence in the latter half of the year is based on several factors. We are seeing inflows into venture capital, significant funding in the capital markets, which was the fourth highest in biotech history last quarter, an increase in proposal volume, a slight decrease in cancellations, and ongoing discussions with our clients. Additionally, we have the comparison to last year's performance and the observation of pent-up demand among our clients. There seems to be a number of projects on hold because of funding and prioritization issues, as we have discussed in previous quarters regarding the focus on post-IND work. We believe our clients will return to actual IND filings, which are essential for getting drugs into clinical trials. As funding conditions improve and our clients feel more optimistic about access to funding, we are quite confident. We have experienced similar cycles over the past two years, which might be surprising to our shareholders, where one year showed stronger performance in the first quarter and another in the second. This pattern is evident again. We frequently remind ourselves that we cannot control when studies start and stop, and as mentioned earlier, we do not have linearity in our business and never will. Considering our experiences, the shifting funding landscape, and our ongoing daily conversations with thousands of clients, we feel strongly that there will be significant acceleration in the latter half of the year.

And we'll take our next question from Max Smock with William Blair.

Starting with DSA, you had the comment in the deck about modestly adjusting price on new proposals, when appropriate, to drive incremental volume. Just wanted to follow up and get a little bit more color around the rationale behind that decision and specifically how NHP pricing is playing into pricing for these proposals in the DSA segment more broadly.

So the principal way our competitors compete with Charles River is with regard to price. So competition has prices pretty much across the board, a bit slower than ours. I certainly don't think the workers is good or the science is as substantive or the infrastructure is as significant. But it's a fact. And so in challenging financial times, and people are sort of worried about access to capital, I think pricing is more important. So we have thoughtfully and strategically utilized price as necessary to preserve and more importantly, to win work. We haven't done this in a wholesale fashion because the studies are very complicated, and we feel that we need to be paid well. So we'll continue to use the strategy as long as it's necessary. We've obviously had - historically where we had more pricing power, and we didn't have to do that. On the NHP pricing side, I would say that it's a meaningful part of what we do. Competition's prices have been higher. And so on the NHP work and on what they pay for the NHPs, and so I think that actually is - has been somewhat beneficial to us in the whole pricing paradigm. So not the first time we've used price as an important strategic tool.

Got it. And just following up on that. Were you anticipating having to cut prices so much coming into the year? Or has this been more of a reaction to how competitive dynamics have changed over the last few months? And then in regard to the price cuts, is there any detail you can give us around just how dramatically you've been cutting prices on some of this work? And what it means for gross margin, specifically gross margin on services, which is down, I think, nearly 350 basis points year-over-year and the lowest number that we've seen in over 5 years here.

I mean that's one of our volume. I wouldn't say we've been dramatically cutting prices. I would say that we've been cutting prices very modestly, to be more competitive, to have clients that are on the edge, to say that Charles River's science is better. I want to work with that. But I need better price and are concerned about access to capital. So as I said, we feel that we're doing it responsive, responsibly and thoughtfully.

Yes. I would like to address the margin situation, which Jim hinted at. The volume is primarily driving the pressure on margins due to the need to manage cost inflation. There are some restructuring costs that are affecting the gross margin on a GAAP basis as well. We previously mentioned our expected annual savings of $70 million, which also influences gross margin. Additionally, we discussed how we anticipate these conditions will change throughout the year. We expect that as volume strengthens in the second half and our restructuring efforts are fully realized, this will positively affect both gross margin and operating margin.

We'll take our next question from Dave Windley with Jefferies.

I wanted to follow up on Max's question on price and maybe ask a slightly different way. So in your deck, you talked about moderating price increases and Flavia, the point you just made about inflation and then this discussion of adjusting prices down. I guess what I'm wondering is, does price, over the course of this year, based on what you're pricing into the backlog, does price move from what has been a pretty good contributor to a moderate contributor in the first quarter to a headwind as we move through the year? Is that kind of the way we should think about price contribution?

Yes, Dave, what I would say is price is definitely not going to be as much of a tailwind as it had been in the past few years. And I think we are, as Jim said, appropriately, pricing given the market conditions and the domain environment. In our guidance for the year, we still contemplate positive pricing. And at the top end of our guidance, we are also contemplating some flat to slightly up volume. And so I think what will be critical in the margin impact is seeing that rebound in volume as Jim said, the strength in biotech funding starts translating into not only proposals for bookings and then revenue, which we fully expect will happen. I think as we said, it's not a matter of this but when. And that will be the key contributor to the margin accelerating throughout the year.

Understood. From the level of the first quarter, to reach your segment guidance for DSA, you're anticipating a notable increase within the year. How much of that growth can be attributed to your substantial backlog compared to pre-pandemic levels, along with your earlier comments regarding volume improvement? Additionally, is there any consideration for BIOSECURE in those expectations, or is it viewed separately as potential upside if the bill is approved?

We are unable to see a significant amount of revenue, as not all of it is visible to us. However, proposal volume has been growing well, and we expect that bookings will follow, even though there is typically a lag. It will take us a couple of quarters to see the results, but we are confident based on our discussions with clients. The BIOSECURE Act is an interesting topic; although it is not yet legislation, the conversations around it appear promising. We have not factored anything regarding the BIOSECURE Act into our guidance, as that would be premature. Nonetheless, we would be surprised if it does not benefit us, given the considerable discussions with clients and a small amount of work we have specifically due to this. Our facilities are mainly located in the U.S. and Europe, making us an alternative for clients who cannot or do not wish to continue their operations in China. Therefore, we consider this a positive direction to monitor. As I mentioned, we would be surprised if it does not lead to some benefit for us. However, we are not assuming anything will happen imminently.

Got it. If I could just sneak one last one in on the price relative to inflation comments. So Flavia, you talked about inflation that impacting margin. I guess, my assumption would have been that inflation would have been moderating along with price. Maybe you could put those in relation as to what is kind of still propping up the inflation cost side of the equation there, in terms of price to cost.

Yes. What I would say, Dave, is that over the last couple of years, when inflation has increased significantly beyond historical levels, we were able to recover that and even more. The pricing has remained strong, but costs have risen more substantially than usual. Inflation is now decreasing somewhat, which is also leading to a decrease in our prices. However, I want to point out that the balance between these two factors was perhaps more favorable in the past couple of years than it is currently. With lower volumes, especially in the early part of the year, our sales were still down in the first quarter. This is putting pressure on our ability to fully manage inflation regarding our fixed costs.

We'll take our next question from Elizabeth Anderson with Evercore ISI.

I was curious, Jim, if you could expand on your comment about sort of ability to start work right away. Can you sort of talk to capacity levels in the industry? Where are you guys on space utilization? And sort of what have you sort of doing, in terms of its probably hard to titrate with the demand now versus what you're expecting in the back half of the year? So any further commentary there would be helpful.

So general proposition is that we try to utilize our space as fully and efficiently as possible. So we don't have huge amounts of empty space in any of our businesses. And as you know, depending on the demand, we're always adding to our capacity. Having said that, we have some incremental capacity in some of our businesses across the board. So we do have the ability to accommodate increased work in the back half of the year across multiple businesses and particularly in Safety Assessment. And if it's better than we anticipate, we would have the capacity to do that as well. The potential rate-limiting factor is availability of staff. So as we see things improving, we'll have to add incremental staff and because there's some training time associated with that. So physical capacity, I think fine. Access to clients is very good, in terms of our ability to get out there with the sales force. Staffing generally, in a very good place now, from an efficiency and margin point of view given the current demand but will require some incremental adds as business intensifies.

Got it. That's very helpful. If we consider the incremental changes in DSA margins as we progress through the year, what are the key focuses on volumes and cost savings? Are there any other potential positives, or any significant factors we should highlight regarding this progression in DSA?

No, I think you highlighted the key point. We are anticipating sequential improvement in DSA revenue both in dollar and percentage terms. With a larger business size, this will positively impact margins. There are some fixed costs associated with our operations. Additionally, as I mentioned when we provided guidance, the restructuring actions we have implemented will be fully executed in the second half of the year, which will serve as an extra boost for margins.

We'll take our next question from Dan Leonard with UBS.

My first question, is it possible you could quantify that increase in proposal activity you talked about in Safety Assessment?

Yes. I don’t think we will specify the increase in dollar proposal activity. We mentioned that it is up both sequentially and year-over-year. You also heard us discuss the net effect on the backlog regarding bookings and cancellations. Cancellations improved sequentially in the first quarter, and our adjustment to the backlog showed a smaller decrease compared to Q4 versus Q3. However, I don't think we will discuss specific percentages regarding the increase we saw in proposals.

And the combination of increased proposals and reduced cancellations portends increased bookings. And as I said earlier, we always have a lag on that. Clients have to be confident that the funding improvement is sustainable. And I think we all believe that it is sustainable. April was a very good funding month, by the way, for biotech as well. So we're quite confident that we'll see it. It's built into our guidance. And those are the 3 metrics that we watch cancellations, proposal volume, and ultimately, bookings. So I think we're on a track to achieve second half improved performance.

Understood. And Jim, you talked a lot about the leading indicators in biotech. Can you speak to what leading indicators you're seeing on the large pharma front as well?

Yes, they are fundamentally similar. Pharmaceutical companies have been actively outsourcing many of the services we provide, especially in Safety Assessment and to a lesser degree, discovery, for several years. We are able to complete this work faster, at a lower cost, and generally with better scientific outcomes. Only a few pharmaceutical companies remain resistant to outsourcing. It's notable that, despite having strong financial positions, they are still hesitant to commit to projects. This reflects their need to manage budgets like any public company while also prioritizing their initiatives. Surprisingly, we have not observed a significant difference in activity levels between pharma and biotech. There are indeed some fragile biotech firms that are more cautious with spending as they focus on reaching proof of concept or getting drugs into clinical trials, often working with fewer assets. Nevertheless, our overall volume with biotech firms is historically and presently much higher, making them a crucial part of our client base. Therefore, while spending may be more significantly impacted by biotech, we anticipate gradual improvements over time. We have strong confidence in this, though it is subject to various external factors that could influence perceptions. The IPO market appears to be gaining momentum, venture capital inflows have been substantial, and M&A activity remains positive. Our clients, regardless of size, currently possess strong assets that address unmet medical needs and are eager to continue their development and advance these drugs into clinics. Overall, the environment seems quite encouraging.

We'll take our next question from Casey Woodring with JPMorgan.

I guess a two-parter here. First is, did you give how many months of backlog you have? I think at the end of 4Q, you had 12 months, and you talked about your normalized ranges kind of 6 to 9 months time frame. So can you walk us through that? And then you talked a lot about safety in the prepared when talking about DSA, but can you just elaborate on how Discovery fared in the quarter relative to your expectations?

The backlog is currently at 10 months. To your point, Casey, it was around 12 months for 2 or 3 quarters last year, but it has been gradually coming down. Historical norms have been between 6 to 9 months. What we're hearing from clients indicates a reversal to that norm, as they are now booking 2 to 3 quarters in advance, which aligns with what we're hearing from clients regarding their projects and their desire to book ahead.

So Discovery is an interesting one. So no question that's been the hardest hit of all of our businesses by overall economy. And there's a lot of dialogue around as funding continues to improve, how quickly will that come back? And it certainly will come back. Studies, to some extent, shorter. But unlikely to come back first. A lot of our pharma clients still do that work internally. And as I said earlier, what we think will come back first are pre-IND work for drugs that have already been developed but haven't been filed yet as opposed to post-IND work. We feel strongly they're going to get back to funding that more quickly. Discovery is a relatively small percentage of our DSA portfolio. So we're focused primarily on Safety Assessment business in terms of our growth rate. And it's unlikely to be the canary in the coal mine that we talked about so often, just because as you look at the whole drug development process, going to be much more important for them to get stuff into regulated safety trials. So we like our discovery franchise. We have important assets that clients, large and small, continue to use but have used in larger measure historically. As funding becomes more sufficient and they're funding the assets that have already been developed, obviously, the long-term health of our client base is premised on their ability to do appropriate and impactful discovery spending. So still slow, still impacted, still small. We'll let you know as soon as that changes, but clearly has had the greatest adverse impact from the overall economic situation in the country. And I think our competition across discovery is in exactly the same place.

That's helpful. And maybe just if I can sneak one more in, just because we haven't touched on it, is on the manufacturing rebound in the quarter. It looks like each business there is seeing nice growth, and the segment came in above Street expectations. Curious if you think there was upside to the guide in manufacturing this year just in terms of how quickly that business has began to turn to start the year?

That would be great. We definitely hope for that, but it's not reflected in our guidance. We are very pleased with the strong growth we experienced across the entire segment in the first quarter. It's evident that business is picking up in biologics, and we have a robust franchise there. Companies that previously had large inventories of disposables have now worked through those, and our microbial and CDMO businesses are performing well as double-digit growers. We're gaining traction as people recognize the quality of our assets. We are also progressing on some commercial drugs, and our facilities have expanded nicely. At the very least, we expect this business to remain strong, and we're projecting mid-single-digit growth for the year with significantly improved operating margins, although the comparisons on the CDMO side are relatively easier. All three of those businesses are set to continue improving. However, we need to be cautious at this point in the year about suggesting there's upside to those numbers.

Yes. And I think to Jim's point, we've modestly adjusted, right? I think the guidance in the beginning of the year was low to mid-single digit, and I think we're now saying mid-single digits. So we raised a little bit the bottom end there. But I think that's a reflection of the strength of the first quarter, but we don't want to get ahead of our skis, as Jim said, to say that there is upside to the guidance that we just provided you today.

And we'll take our next question from Tejas Savant with Morgan Stanley.

Jim, one quick one for you on NHP pricing actually. I know you talked about pricing more broadly here, but I think last time, you guys have called out about a modest $15 million to $35 million benefit in the guide for your ability to reach pricing in light of competitors being higher. Is that still the right view? Or is that now essentially off the table in light of those strategic, selective pricing adjustments you alluded to?

We would say that that's still the view. Competition had prices significantly higher than we. So they had to come. They've had to bring their prices down. I think it gives us a little bit of pricing power actually. So we're also really pleased with our sourcing of NHPs, particularly given the acquisition that we recently made.

Yes. And I'll just add. I think NHP pricing is still positive in the first quarter. We are seeing it come down from the peak, if you will. And I think as I've been saying for the last couple of quarters, I think some competitors are signaling to significant decreases. I think it's more because they're coming down to our level. So we still experienced year-over-year, a modest increase in NHP pricing, although as I said in Q1, it is modestly down from peak levels.

Got it. That's helpful. I have a couple of unrelated follow-ups. First, regarding the CDMO piece, Jim, what is the current capacity utilization? What is included in the guidance for where you expect to finish the year given the increasing backlog of work? Next, regarding your comments on China, are you noticing any widening in the price disparity compared to Chinese CROs, especially outside of China as we evaluate defense share? Lastly, are there any early indicators from the stimulus introduced in March that might benefit local demand in China towards the end of this year or possibly in 2025?

We have secured an adequate amount of space. The CDMO manufacturing facility undergoes numerous audits by clients and regulatory agencies, placing us in a strong position to serve our existing commercial clients and potentially attract more in the future. Additionally, we are onboarding more clinical clients, and I am personally managing some of these relationships. The feedback on our facilities has been very encouraging. We are committed to maintaining the capacity needed to keep up with demand. Recently, I received positive feedback from the audit team that evaluated our facilities. The price differences compared to Chinese competitors have presented challenges but have also given an advantage to the Chinese market, especially with upcoming legislative changes likely prompting businesses to seek alternative locations for their work. This means they will require quality services at competitive prices, and we are focused on ensuring our portfolio meets this demand. Our Chinese operations, primarily involving small animals and still relatively minor, have performed well thanks to recent capital investments. These operations will probably remain unaffected by U.S. legislation since we operate in China primarily for the Chinese market, and we expect this trend to continue. Overall, China remains a valuable market for us in terms of growth and profitability.

We'll take our next question from Patrick Donnelly with Citi.

Jim, maybe one more on the DSA side, just in terms of the pace of cancellations. I think in 3Q, they got a little bit better, 4Q they stepped back down, 1Q got better. How are you thinking about just the trends there? And I guess the million-dollar question is, when do you think we can get back to that kind of 1.0 book-to-bill? What's the visibility? What did cancellations trend like in the quarter? Certainly, if you have any April thoughts, that would be welcome.

Yes. So everything that happened in April is embedded in our guidance. So I don't want to cut it month-by-month. We're pleased with what's been happening, the moderation and decline of cancellations. By the way, as you know, we always have cancellations. I mean all we can say is what we said, which is that we have to see a reduction in cancellations for some sustained period of time to have confidence that it's meaningful and will continue. We believe that, that's the trajectory that we're on, but we have to. We have to experience that for that to be beneficial and in terms of our backlog. So it's an almost impossible trend to comment on what's happened historically is not necessarily relevant. You get different market conditions right now and different economic conditions and totally different competitive scenario, particularly on the Safety Assessment business. We're so much larger and I think so much more critical to the marketplace that, again, we're confident that as if and as the cancellations continue to decline, given the proposal volume, the booking should intensify. That supports our notion for the back half of the year. One would imagine that as funding continues to improve, that cancellations wouldn't suddenly crank up again. So that's definitely a function of the economy we've been dealing with for the last 1.5 years.

Okay. That's helpful. And then maybe just on kind of the broad demand environment. I think in the slides around the cash flow piece, you talked about moderating capacity expansions to match current demand. You talked, obviously, a lot of questions about the pricing piece. It seems like maybe softening a little bit given the demand environment yet you sound very good in terms of kind of these conversations and the expectations of demand improvement as we go through this year. Can you just kind of marry that up and just frame up the right way to think about the demand, given again the capacity and price piece, along with your positive commentary on demand?

We work really hard, and I believe we've been quite successful at this for at least 1.5 decades. We need to align capacity with anticipated demand. It’s not only about current demand since we have to prepare space a year or two ahead. We experienced a challenging time in the past where the industry, including us, built too much space, which negatively affected our margins. It’s difficult to manage an excess of space, so we aim to avoid that situation. We have put significant effort into ensuring we do not have insufficient space. However, the risk remains that if we don’t prepare adequately, we could face a capacity shortfall. Therefore, we diligently adjust our demand forecasts alongside the competitive landscape when planning new space at various locations. We must balance that with current demand and the utilization of our existing space. I believe we are handling that correctly. We must be very prudent with our shareholders' funds. From a capital expenditure perspective, I don't believe we are under-investing in the business, both for maintenance and growth. We are investing exactly where we should. It’s crucial to anticipate these needs early, and we give it considerable thought. We've recently gone through a period of high demand and extensive building, so it would be irresponsible to maintain our spending at that level given the current demand trends. That said, we expect demand to improve next year and the following year compared to today. We have a three-year guidance in place, and we are building towards that.

Yes. And maybe if I can just add, I think to Jim's point, we lived through a couple of years of unprecedented demand. And at some point, we said we were going to increase our CapEx to almost 9% of revenue. And historically, we'd be more in the 5%. That was both a combination of historically, we added some capacity through M&A, and now we were doing organically as well as fueling that unprecedented demand. I think demand has normalized now. And our guidance for the 3-year horizon is 7% to 8% of capital as a percent of sales. And this year, our guidance contemplates kind of the low end of that at 7%. And so I think as Jim pointed out, we are being appropriately thoughtful in matching up the capital investment with the main environment that we're seeing.

We'll take our next question from Josh Waldman with Cleveland Research.

Jim, two for you, I think, if I may. First, you've talked about seeing better proposal activity in DSA. Can you comment on what you are seeing from a conversion standpoint, the timing from when you receive proposal? The proposal to booking the study and then recognizing rev? I guess have you seen the timeline and conversion rate return to normal would be great to hear how you're contemplating this, and your outlook and if you've had to tweak that piece of the forecasting assumption at all.

I'm not entirely sure what the normal looks like, but I would consider it to be reasonably typical. As previously mentioned, other than a few instances where demand surged, there's typically a delay between proposals and bookings. Especially now, as people are working to build confidence in capital access. The conversion rates are aligning with our expectations, and we hope to see improvement. However, it may take a couple of quarters for these figures to strengthen. We're encouraged by the current proposal volume; it seems that people are becoming more open, recognizing their access to capital and eager to expand their portfolios. This optimism supports our expectation that the latter half of the year will show significant strength. Overall, things are proceeding largely as we anticipated.

Got it. Okay. And then the follow-up on that. Just wondering if you could provide more context on how DSA performed versus your expectation in the quarter? And then curious whether there's been any change to your assumption for Q2 or the slope of organic recovery in that business for the second half.

Maybe I'll take that. I think as we said in our prepared remarks, I think what was different and drove the beat in the first quarter and is also impacting how we guided the second quarter is, obviously, RMS. There was a timing shift with NHP shipments that accelerated into the first quarter. So that was a tailwind in the first quarter and will be a headwind in the second. And then we talked about the strength of manufacturing in the first quarter, which was encouraging. I think we were silent in DSA in the sense that it performed according to our expectations, both in the first quarter and the impact of that is contemplated on the guidance for the second quarter. So I think we spoke about what was different than our expectations of the other 2 businesses.

Thank you. We'll take our last question from Jack Wallace with Guggenheim Securities.

Just quickly on the CapEx commentary. It looks like you reiterated the guide, there's the moderating of capacity expansions. You comment in the deck and just reiterate a couple questions ago. Can you just help us kind of bridge the rate or guide against those comments? And should we think about that as being more CapEx in the back half of the year? Or is the dollars being spent differently than capacity expansions?

Yes, I will address that. The guidance for the year remains unchanged, and we have reaffirmed our outlook. The timing of our capital projects tends to evolve throughout the year. As you may have noticed, our free cash flow was robust in the first quarter, and there has been a year-over-year decline in capital expenditures. We began the year with capital spending positively impacting cash flow, and we will continue to advance some of our projects as the year continues. However, there are no new updates to share.

Got it. In your prepared remarks, you mentioned some timing element in the first quarter for manufacturing and RMS. Was there any unexpected snapback demand that might not continue in the second quarter, or did I misinterpret that comment?

Sure, I'll address that. There were two main points. First, the timing impact was primarily in RMS. In manufacturing, we found it encouraging that our proposal activity strengthened in the fourth quarter, particularly in our testing business, which led to improved business and performance in the first quarter. However, for the manufacturing sector, we noted that last year's second quarter was one of our strongest, so we face a bit of a year-over-year challenge when we move into the second quarter this year.

Got it. The reason we wouldn't want to raise the guidance based on the stronger demand in the first quarter relates to tougher comparisons from last year, not an expectation that the strength seen in the first quarter won't repeat in the upcoming quarters. Is that correct?

Correct. And I would say for the year, when you think about guidance, it's still pretty early. I think there was a question earlier around whether we think there's upside to our manufacturing guidance. And as I mentioned, we slightly improved it, given that the guidance in the beginning of the year was low to mid-single digit, and I think we're now saying mid-single digits. So we raised a little bit the bottom end there. But I think that's a reflection of the strength of the first quarter, but we don't want to get ahead of our skis, as Jim said, to say that there is upside to the guidance that we just provided today.

Thank you. We have no further questions in queue. I will turn the conference back to Todd Spencer for closing remarks.

Great. Thank you for joining us on the conference call this morning. We look forward to seeing many of you at some upcoming investor conferences. This concludes the conference call. Thanks again.

Thank you. That does conclude today's Charles River Laboratories First Quarter 2024 Earnings Call. Thank you for your participation, and you may now disconnect.