Thank you for joining us today for Charles River Laboratories Second Quarter 2024 Earnings Conference Call. This call is being recorded, and all participants are currently in a listen-only mode. After our speaker's presentation, we will have a question-and-answer session. I will now hand over the call to Mr. Todd Spencer, Vice President of Investor Relations. Mr. Spencer, the floor is yours.

Good morning, and welcome to Charles River Laboratories second 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 comment on our results for the second quarter of 2024. 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.criver.com. A webcast replay of this call will be available beginning approximately 2 hours after the call today and can also be accessed on the Investor Relations section of our 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 of 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 will begin by providing highlights of our second quarter performance and revised guidance. We reported revenue of $1.03 billion in the second quarter of 2024, a 3.2% decline on both the reported and organic basis over last year. The top line performance was in line with our outlook as organic revenue growth in the Manufacturing segment was more than offset by declines in DSA and RMS revenue. By client segment, we continued to experience lower revenue from small and midsized biotech clients in the second quarter, while revenue from global biopharmaceutical clients increased modestly. I'll provide more details on the evolving trends within these two client segments shortly. The operating margin was 21.3%, an increase of 90 basis points year-over-year. The increase was principally driven by lower performance-based bonus compensation accruals in the quarter reflecting the reduction in our financial outlook for the second half of the year. On a segment basis, a higher operating margin in the manufacturing segment and lower corporate costs were largely offset by lower margins in RMS and the DSA segments. These lower accruals were the largest contributor to the earnings outperformance in the second quarter. Earnings per share of $2.80 increased 4.1% year-over-year and exceeded the implied outlook in our prior guidance by approximately $0.40. We are significantly reducing our financial guidance for the year because forward-looking DSA trend data suggests that demand will not improve during the second half of the year as we had previously anticipated and, in fact, will decline for global biopharmaceutical clients. As a result, we are reducing our revenue outlook to a 3% to 5% decline on an organic basis this year, and non-GAAP earnings per share is now expected to be in a range of $9.90 to $10.20. We intend to partially offset the headwinds through aggressive actions to streamline our cost structure, optimize our global footprint, and drive greater operating efficiency, which will enable us to limit the bottom line impact going forward. We believe taking these actions will also enable us to emerge from this period of softer demand as a stronger and leaner organization and better positioned to capture new business opportunities. Before I discuss the second quarter business segment performance, I will provide more details on these end market demand trends as well as the actions we are taking to manage through the current environment. Our financial performance to date, including a low single-digit organic revenue decline in the first half, has been largely in line with our initial outlook. However, the lack of a recovery in demand for our biotechnology clients as well as recently emerging and softening demand trends in our global biopharmaceutical client base have caused us to take a much more negative view of our growth prospects for the second half of the year. Because of this, the second half revenue growth that we previously anticipated will not materialize. And, in fact, demand is expected to continue to soften for global biopharmaceutical clients in the near term. These trends for our broader biopharmaceutical client base are expected to lead to a low to mid-single-digit organic revenue decline in the second half of the year on a consolidated basis. As you are aware, most global biopharmaceutical companies have announced major restructuring programs likely precipitated by the IRA or pending patent expirations or both. And this has undoubtedly led to tighter budgets and additional pipeline reprioritization activities this year. Revenue for this client base continued to increase in the second quarter. However, proposal activity and bookings began to notably decline and diverge from biotech clients during the second quarter. We now expect demand for global biopharmaceutical clients to further deteriorate over the remainder of the year. We anticipate these trends are also likely to impact the DSA growth rate into 2025, so we are working now to reset our cost base to both withstand the pressures on our bottom line and to better position the company to when demand cycles back. Large biopharmaceutical companies are currently focused on resetting their budgets to create leaner cost structures. We expect these actions and the resulting softening of our demand KPIs will continue to cause a period of slower spending by large pharma on their early-stage drug development activities, particularly because they are more focused on their clinical pipelines at this time. We believe that these clients continue to view strategic outsourcing as a compelling solution to improve their cost efficiency and speed to market, presenting a longer-term opportunity for us once they inevitably refocus on their preclinical pipelines. In contrast to large pharma, demand KPIs for small and midsized biotech clients have stabilized and trended somewhat more favorably through the first half, reflecting the solid funding environment and favorable sentiment around interest rates. Biotech companies are our largest client base at approximately 40% of total revenue, and more than half of DSA revenue. And DSA proposals and net bookings have improved to this client base this year. We experienced an improvement in biotech booking activity in the second quarter as the higher proposal levels that we commented on last quarter have begun to translate into new business wins. While we are cautiously optimistic that these trends will lead to a future demand recovery in our biotech client base, they are also not sufficient to support the DSA revenue improvement in the second half of the year that we previously anticipated, and therefore, we do not expect revenue to biotech clients to improve from first half levels. We are laser-focused on initiatives to generate more revenue, contain costs, and protect shareholder value. As I discussed earlier this year, we have already begun to enhance our commercial efforts. We are focused on optimizing our sales force to accelerate revenue growth by adjusting go-to-market strategies and being a flexible partner for our clients, focusing on selling across the entire portfolio and leveraging technology to enhance sales insights and identify selling opportunities earlier. Our digital strategy is also helping us to better connect with our clients including through our Apollo cloud-based platform to provide real-time access to scientific data and self-service tools for clients. To drive additional savings and preserve the bottom line, we will continue to aggressively manage our cost structure to ensure that capacity and headcount are aligned with the current softer demand environment. We have already consolidated several smaller sites and reduced staffing levels. These recent actions and additional actions that will be implemented by the end of the third quarter are expected to generate over $150 million of annualized cost savings, which will be fully realized in 2025. We are also finalizing our EA strategy, focusing on further optimizing our global footprint, driving greater operating efficiency and leveraging our digital platform and global business services to further streamline processes. We expect to implement the initial phases of this plan before the end of this year, and we'll provide a more comprehensive update in November, including the incremental savings that these initiatives will deliver. As referenced in this morning's earnings release, we will also reinstate a stock repurchase program, and our Board recently approved a new stock repurchase authorization totaling $1 billion. We intend to reinstate stock repurchase activity before the end of the third quarter. Flavia will provide more details on this topic as well as an update on our capital priorities. I'd now like to provide you with additional details on our second quarter segment performance, beginning with the DSA segment's results. DSA revenue in the second quarter was $627.4 million, a decrease of 5% on an organic basis, driven by lower revenue in both the Discovery Services and Safety Assessment businesses. In the safety assessment business, lower steady volume was partially offset by a small benefit from price increases. The overall business trends were relatively consistent with those that we have discussed in recent quarters with the exception of diverging demand trends between our global biopharmaceutical client base and small and mid-tier biotechs. As mentioned earlier, we are beginning to see improvements in proposals and booking activity for biotech clients, but it's meaningfully slowing for global biopharma clients. The combined effect has resulted in a net book-to-bill ratio that was similar to the last 5 quarters, but below one time in the second quarter. Gross bookings also remained above one times in the second quarter. And the cancellation rate was consistent with first quarter levels, which was below its peak, but still not back to targeted levels. As a result of these trends, the DSA backlog decreased on a sequential basis to $2.16 billion at the end of the second quarter from $2.35 billion at the end of the first quarter. Since we do not expect these trends to improve during the second half of the year, as previously anticipated, and because we will likely be impacted by incremental spending pressures from our global biopharmaceutical client base, we have reduced our DSA revenue outlook to a high single-digit organic decline for the full year. In the near term, we will ensure that our capacity both space and staffing are aligned with this lower expected level of demand. Looking beyond that, we will continue to speak with our clients and closely monitor for indications that clients are beginning to return their focus to their IND-enabling programs versus their recent focus on post-IND studies and for demand trends to stabilize or begin to improve across both the global and mid-tier client bases. The DSA operating margin was 27.1% in the second quarter, a 50 basis point decrease from the second quarter of 2023. The year-over-year decline reflected the impact of lower sales volume and moderated pricing, particularly in the Discovery Services business. The operating margin improved from the first quarter level, which was commensurate with sales volume, lower bonus accruals and additional cost savings generated by our restructuring efforts. RMS revenue was $206.4 million, a decrease of 3.9% on an organic basis over the second quarter of 2023. The RMS revenue decline was primarily driven by lower NHP revenue. As we mentioned last quarter, we expected the timing of NHP shipments to be a meaningful headwind to the second quarter RMS growth rate. Excluding the NHP impact, RMS revenue was essentially flat year-over-year as higher sales of small research models were offset by slightly lower revenue for research model services. For the full year, we believe the market environment will remain stable overall. So we are reaffirming our RMS organic revenue growth outlook of flat to low single-digit growth. Revenue for small models continued to increase in all geographies, particularly in China and Europe. The resilience of the research models business reflects the fact that small models are essential low-cost tools for research, which also enhances our ability to continue to realize price increases globally. Our China business has been resilient despite the macroeconomic pressures in the country as the growth rate for small research models has strengthened driven primarily by share gains associated with our geographic expansions within China. Research model services experienced a slight revenue decline in the second quarter in both GEMS and Insourcing Solutions. These trends largely reflect the overall biopharma demand environment. However, the benefits generated by clients that utilize our GEMS and IS solutions can help them overcome their budgetary pressures by driving efficiency. CRADL business model, while not unaffected by the demand environment, continues to resonate with clients who are looking for cost-effective solutions for their vivarium space requirements. There are pockets of softer demand, particularly in South San Francisco that have led to the consolidation of our CRADL capacity there. However, other biohubs continue to perform well. In the second quarter, the RMS operating margin decreased by 330 basis points to 23.1%. The decline was primarily a result of the lower NHP revenue. The timing of NHP shipments from both Noveprim and in China can lead to quarterly revenue fluctuations. And since the sales of these large models are quite profitable, the timing of shipments can have a meaningful impact on the RMS margins on a quarterly basis. However, our view for the year hasn't changed and both the RMS and manufacturing segments are expected to deliver operating margin expansion in 2024. Revenue for the Manufacturing Solutions segment was $192.3 million, an increase of 3.7% on an organic basis compared to the second quarter of last year. Each of the segment's businesses contributed to the revenue growth. As anticipated, the manufacturing growth rate was lower than the first quarter level because of a more challenging prior year comparison for the CDMO business. You may recall that we anniversaried the recovery of the CDMO business in the second quarter of last year. We expect the CDMO growth rate to reaccelerate in the second half of the year based on the current pipeline of new projects, particularly for cell therapy. As a result, we expect manufacturing organic revenue growth will be in the mid- to high single-digit range, a slight increase from our prior outlook. The competitive landscape is also undergoing a transition in certain manufacturing market sectors due to M&A or proposed geopolitical regulation, both of which should offer new opportunities to demonstrate the synergies of our comprehensive testing portfolio and win new business. The CDMO business continues to perform well and client interest remains strong. The third client who utilizes our viral vector center of excellence in Maryland received commercial approval last month, and we are also regularly adding new projects across the various phases of clinical development. Booking activity continues to improve, and the CDMO business remains on track to deliver solid double-digit growth this year. Revenue in our manufacturing quality control testing business, Biologics Testing and Microbial Solutions, also continued to grow, rebounding from the more challenging market environment last year. Biologics Testing's performance was driven by its core testing activities, including cell banking and viral clearance. For Microbial Solutions, the primary driver of revenue growth was demand for our Endosafe testing cartridges. Clients have resumed their purchases of reagents and consumables as destocking activity have subsided. The manufacturing segment second quarter operating margin was 26.6%, demonstrating continued improvement with increases of 370 basis points year-over-year to 130 basis points sequentially. The improvement is largely a result of leverage from higher sales volume across each of the segment's businesses. We expect this trend will continue as the segment rebounds from 2023 and also due to the ongoing increase in the scale of our CDMO business. To conclude, it is clear that our clients are in the midst of reassessing their budgets, reprioritizing their pipelines, and managing their cost structures. However, our clients will continue to seek life-saving treatments for rare diseases and other unmet medical needs. In order to do so, they will, by necessity, reinvigorate investment in their early-stage R&D programs over time. To emerge as an even stronger partner for our clients, we are working to actively manage our costs, initiate new and innovative ways to transform our business, protect shareholder value and enhance our clients' commercial experience to gain additional share. 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 second 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. Second quarter 2024 organic revenue decreased at a 3.2% rate, in line with our outlook for the quarter of a low to mid-single-digit decline. However, we delivered non-GAAP earnings per share of $2.80, which exceeded our prior outlook of mid-single-digit sequential earnings growth by approximately $0.40. The majority of the earnings outperformance was driven by lower performance-based compensation expense. Continued growth in operating margin expansion in the manufacturing segment also contributed. The lower performance-based compensation expense was primarily related to adjustments to our bonus accruals and in light of the reduced outlook for the year. As Jim discussed in detail, we have significantly lowered our guidance for the full year and now expect a revenue decline of 2.5% to 4.5% on a reported basis and 3% to 5% on an organic basis, driven primarily by a softer demand outlook in the second half of the year than previously anticipated for both small and midsized biotechnology and global pharmaceutical clients. We expect DSA revenue to decline by approximately 10% organically in the second half compared to a 6.9% year-over-year decline in the first half. DSA pricing is expected to turn slightly negative by the end of the year, but the largest driver of this change will be the softer demand. We will not have time to offset all of the revenue shortfall with additional cost savings at this point in the year. Therefore, non-GAAP earnings per share guidance is now in a range of $9.90 to $10.20. However, we are implementing additional restructuring initiatives to deliver further cost savings to partially offset the lower revenue and help preserve the bottom line, which will have a more meaningful impact in 2025 and beyond. As Jim referenced, we are implementing additional initiatives to drive incremental cost savings to ensure that our cost structure aligns with the current demand environment. Restructuring initiatives are expected to generate over $150 million in annualized cost savings, representing nearly 5% of our operating costs, which is an increase from our prior target of approximately $70 million. This updated target includes actions that were initiated last year through those already planned for the third quarter of this year. We expect approximately $100 million of the savings to be realized in 2024. We are also finalizing a multiyear strategy to optimize our global footprint and drive greater operating efficiency, which we believe will further our ability to protect operating margins and manage the business through this challenging environment. Furthermore, our Board recently approved a new stock repurchase authorization of $1 billion, which will add another option to allow us to strategically manage our capital allocation. We intend to commence stock repurchases under the new authorization before the end of the quarter. Our initial goal will be to offset annual share count dilution from equity awards, but we will regularly reevaluate the best uses of our capital. As M&A activity has slowed, leverage has remained low at just above 2 times and the capital intensity of our business has moderated in the current demand environment. These dynamics have enabled us to reassess our capital priorities. We will also continue to repay debt and evaluate strategic acquisitions to enhance our service offerings as we believe a balanced approach to capital deployment will help maintain an optimal capital structure and maximize shareholder value. I'll now provide details on our segment outlook and some non-operating items. By segment, we now expect DSA revenue to decline at a high single-digit rate on an organic basis, largely due to the softer demand environment than previously anticipated. The outlook for the RMS and manufacturing segments are essentially unchanged with RMS expected to report flat to low single-digit organic revenue growth and the manufacturing segment expected to generate mid- to high single-digit organic revenue growth, a slight increase from the outlook in May. From an operating margin perspective, we expect that this year's consolidated operating margin to be slightly below last year's level as the lower performance-based bonus expense and additional cost savings will nearly offset the revenue shortfall at the margin level in 2024. On a segment basis, pressure in the DSA segment will offset expected margin expansion in both manufacturing and RMS segments. Unallocated corporate costs totaled $50.5 million or 4.9% of revenue in the second quarter compared to 6.1% of revenue last year. This improvement was driven primarily by lower performance-based compensation accruals. For the full year, we expect unallocated corporate costs will be in the mid-5% range as a percent of revenue. The second quarter tax rate was 21.1%, a decrease of 220 basis points year-over-year. The decrease was primarily due to a favorable geographic earnings mix and higher R&D tax credits. As a result of this favorability, we now expect our tax rate will be approximately 22% for the full year. In the second quarter, net interest expense was $29.8 million, which represented both a sequential and year-over-year decline. For the full year, we also expect total net interest expense will be lower than our prior outlook in the range of $118 million to $122 million. These reductions are primarily the result of shifting debt to lower interest rate geographies and continued debt repayment. As a reminder, over 80% of our $2.4 billion debt at the end of the second quarter was at a fixed rate, including $500 million that is fixed until November via an interest rate swap. In addition to lowering our interest expense, continued debt repayment resulted in gross and net leverage ratios of 2.2 times at the end of the second quarter. Free cash flow remained strong with $154.1 million generated in the second quarter compared to $80.7 million last year. This improvement was driven by lower CapEx and working capital management. Capital expenditures were $39.5 million in the second quarter compared to $67.4 million last year, which reflected the ongoing moderation of our spend in the current demand environment and a disciplined focus on our capital investments. For the year, CapEx is expected to decline to approximately $250 million and our free cash flow will be in the range of $380 million to $400 million. A summary of our 2024 financial guidance can be found on Slide 36. Looking ahead to the third quarter, we expect both reported and organic revenue will decline at a mid-single-digit rate year-over-year. Non-GAAP earnings per share is expected to decline in the low double digits year-over-year as the impact of lower DSA demand will only be partially offset by the benefit of restructuring initiatives. The year-over-year revenue growth rates in the RMS and manufacturing segments are expected to rebound from the difficult comparisons in the second quarter, which were affected by the timing of NHP shipments in the RMS segment and the strong prior year comparison in the manufacturing segment. In conclusion, our critical focus at this time is continuing to execute our strategy, to rightsize the business and to turn around the financial performance. We believe that accomplishing these actions will position the company to gain market share and emerge from this period of softer demand as a leaner, more efficient scientific partner for our clients. Thank you.

That concludes our comments. We will now take your questions.

We'll go first this morning to Matt Sykes of Goldman Sachs.

Maybe just on a higher level, just thinking about your commentary about global biopharma. It seems that demand really took a bit of a hit post in Q2 and post that. And as you think about that client base and you think about sort of the cost cuts that have been going on, they've been going on for some time now, what kind of rationale can you give for the increased deceleration of that demand? And just given the size and scope of these organizations, do you think it's going to take a lot longer for that to come back, just given that it's going to be difficult for them to pivot so quickly?

It's certainly difficult for us to call the timing. This is a pretty unexpected and rapid deterioration of the large pharma companies' business. The good news is we have a disproportionately large share of big pharmaceutical companies' work, particularly in the safety assessment business. So that's great on the one hand. On the other hand, of course, as they begin to ratchet down their cost structures, that causes them to reduce their overall demand. The pharma companies have to go through multiple processes every few years to try to lean out their infrastructures. They do sometimes an adequate job, sometimes they don't. I think the IRA legislation, coupled with the impending patent cliff has made it essential, maybe with the exception of the two prominent companies that have GLP-1 drug. Rapid deceleration and cutbacks, disproportionate impact on us, reprioritization of pipelines, some of the companies seem to be through it. Some are probably in the midst of it, may take longer for others. It's tough to get a very good line of sight. We have very high-level contacts in all of the drug companies. We're dealing sometimes with the head of R&D and sort of minimally with the number two or three person in R&D. And it's clear that so many of these decisions have been made and are still being made sort of at the C-suite level or the board level, and there are profound cuts at big pharma, which some of the people that we're working with don't necessarily have a line of sight or certainly not an early line of sight, so they could warn us and work with us. So we're their partners. We respect and appreciate the opportunity to be so. It doesn't mean that we have early indications of what these folks would do. So it's a little bit impossible to call. But what we said in our prepared remarks, and I'll just repeat, is we've seen a slower recovery in biotech, although it's been recovering, and we've seen this very soft demand and cutbacks in pharma. It feels like that's likely to persist into 2025. There's sort of no logical reason to believe that, that somehow gets curtailed subject to my comments that it's very, very, very difficult for us to call pharma in the aggregate. But it's clear that their emphasis is on the clinic, to get drugs into the clinic, to pay for their clinical trials, and obviously to get drugs to market. And it would seem, I don't know, it seems logical that they would continue that for some period of time.

And then just on DSA and noting the comments you made on the commercial restructuring and shift in go-to-market, is there a market share issue going on here? Or would you still chalk this up to overall macro pressures?

We believe we have a unique and outstanding portfolio, with a significantly larger geographic presence, especially in Safety and Discovery. Our scientific expertise is exceptional and comprehensive. In certain cases, we've had to be competitive with our pricing, and we expect to continue to do so in the latter half of this year. We don't believe we're losing market share. As we refine our sales organization and structure, including our use of IT and the Apollo platform for quicker data access for clients, we aim to enhance pricing and timelines while utilizing our entire portfolio more effectively. Our main competitive advantage lies in our ability to collaborate with clients across our extensive nonclinical portfolio, which most competitors cannot match. We see this as a notable market shift, rapid in pharma and gradually improving in biotech. We remain committed to maintaining the quality of our science. As mentioned before, we will work diligently to streamline our infrastructure, including staff and facilities and cut down on general and administrative costs, to better respond to market demands and strive for positive operating margins even amidst a demand slowdown.

We'll go next now to Eric Coldwell at Baird.

I was hoping to get a quantification of the impact of the bonus accruals. I know you said it was the majority or a big chunk of the earnings upside versus implied guidance, but could you quantify that amount? And then tell us how much might be left in the second half to help protect earnings in the second half? Or did you take care of all of this with the second quarter?

It's Flavia, I'll take that one. It was approximately $20 million in the second quarter or about $0.30. And the second quarter was a true-up for the first half of the year.

2Q was a true-up for the first half. So what happens in the second half?

You can expect also additional favorability that would come through the second half as we updated guidance for the full year. So we will probably have additional favorability following through.

How much of this was in DSA compared to research models? I believe you maintained guidance there, so I'm assuming this is mostly all DSA, is that correct? Or does it also apply at the corporate level?

You're correct. It's mostly DSA and at the corporate level. The other two segments, as you pointed out, are performing well and in line with the plan. So the majority of the impact is at corporate and DSA.

And I know first half was, I think you said, minus 7%, I'm toggling in a lot of numbers here. But second half, minus 10% organic in DSA. So would we be assuming a maybe a ballpark 50% more accrual reductions in the second half than you did for the first half year in the second quarter? Is it $30 million in the second half?

Yes. I'm not going to get to that level of specificity. I think, as I said, there will be additional favorability in the second half just because the true-up that we did so far was only for the first half.

And then the minus 10% organic in 2H, I think you've kind of talked around this with the last question. But do you think that is a proxy for the overall Discovery and Safety market, both in-house and outsourced? You think you're doing a little better or a little worse than the overall market here in the second half? What's your read on that? What I'm ultimately trying to get to is I know RMS historically was much steadier, sturdier during soft patches here in toxicology and Discovery. You historically have outperformed in RMS. But you have to think that this kind of a reduction in overall demand has to have some knock-on effects to models and it sounds like you're already seeing some knock-on impact in services. So I'm just trying to get a better sense of what the read is on research models and services growth going into 2025. The safety and toxic demand is down in the zip code of 10%.

We believe we are maintaining our position competitively across our entire portfolio, especially in RMS regarding both products and services. For quite some time, we have experienced slight volume declines alongside significant pricing decreases globally, and this trend is expected to continue. China remains robust despite some political challenges, and Europe is also performing well. Our services have been strong for a considerable period, possibly around a decade. The GEMS business is not as strong as we would prefer due to a slowdown in our pharma and biotech client bases, but we consider it essential for basic research. Our CRADL initiative provides a valuable solution during economic stress, which many of our clients are currently facing. We have some facility overlap and perhaps excess capacity in certain areas, providing opportunities for growth in others, indicating that this business should perform well. The manufacturing business is also expected to hold up strongly, though we are experiencing significant pressure in DSA. Many drugs have been put on hold by our clients before INDs were filed; thus, as they reassess their priorities and have available funds, they will return to these projects. Consequently, we are noticing increased focus on post-IND work, which is likely to transition back to classic IND work. Eventually, when financial conditions stabilize, clients will likely resume more substantial investments in core discovery. However, it’s important to note that discovery is essential for future preclinical and clinical work, so that aspect of the business should also improve. The timeline for recovery, however, is challenging to predict, and we anticipate that this will be the last area to bounce back.

We'll go next now to Elizabeth Anderson with Evercore ISI.

If we think about how you're flowing this through, particularly in DSA, and sort of a mid-single-digit organic revenue decline in the third quarter, what have you seen in sort of the July time frame? Is that sort of stable to how you saw 2Q generally? Would you say things are still getting a little bit worse? I'm just trying to understand how you thought about the sort of flow-through relative to how the quarter progressed?

I believe the biotech companies are gradually improving, although it's happening more slowly than we had hoped. However, the volume of proposals and bookings is certainly better. We've spent considerable time in recent months analyzing this trend because I want to remind everyone that we have a significant amount of work, especially safety work, for large pharmaceutical companies. Last year, large pharma performed exceptionally well for us, largely driving our growth through biotech. We experienced strong pharma growth last year and solid performance in the first half of this year, followed by a noticeable decline. We've taken some time to investigate this situation with our clients to fully understand the reasons behind it. It appears that this trend has continued into July. As I mentioned earlier, this phenomenon within the big pharma sector involves cuts to budgets, infrastructure, and pipeline, with companies at different stages of this process, yet most are acting simultaneously. Eventually, they will reach a point where they will allocate funds to drugs that are post-IND and in the clinic. We hope that moving forward, they will allocate more of our IND work. The IND work is crucial and represents only a small fraction of drug development costs, so we believe they will have the resources to pursue it at some point, which is vital for our future. However, providing specific details on this is challenging right now due to the abrupt and unexpected nature of this pullback.

And Flavia, maybe one clarification question just for you. I know you talked about potentially doing some share repurchase agreement. Is there any share repo built into the new guidance range? Or we should consider that to be separate?

I would consider that to be separate at this point, Elizabeth. As I said in the prepared remarks, we'll be looking to start executing on it in Q3, but the impact is going to be de minimis in this year still.

So it's not in the numbers.

Thank you. We'll go next now to Dave Windley at Jefferies.

Jim, I'm wondering, in the restructuring actions that you're taking, sounds like you're ramping those up. I'm wondering how much optionality are you thinking about relative to range of outcomes? And I guess I'm thinking range of outcomes on a couple of vectors. One, you're talking about large pharma's rapid decline in a short period of time, and hard to see how that plays out from this distance into late this year and next year. And then while small biotech funding has improved year-over-year, it kind of peaked at the beginning of the year and has been fading through the year in a way that given economy, politics, et cetera, may not continue to improve. And if that were to be soft and kind of truncate the recovery of biotech, how might you be able to react to that as well?

Let me take a moment to address that and then Flavia can add her thoughts. As you mentioned, biotech funding has been robust, especially in the first quarter, but the second quarter was just average and July was not great. We don’t have a clear understanding, Dave, but you may be onto something about it possibly cooling off a bit. That said, there has been a surge in proposals and some improvement in bookings. A lot of this is psychological; our clients seem worried about the reliable availability of funds and will likely remain cautious. Additionally, the pharmaceutical sector has significant work ahead to align its infrastructure, especially with the upcoming patent expirations. What we can say is that we need to ensure our capacity—both human and physical—aligns with our growth and demand expectations, often forecasting it 12 to 24 months in advance. Consequently, our capital expenditures for growth in various areas have dramatically slowed and will continue to do so. At least half of our costs are staff-related, and we have already initiated some workforce reductions and plan to implement more at the end of this year into next year. We have seen some minor facility consolidations and may consider larger ones if appropriate. Over the past decade, we have effectively utilized our capacity across all our businesses while adding space without negatively affecting our operating margins. Currently, we are scaling back commensurate to demand. Predicting 2025 is challenging, but as I mentioned earlier, it’s hard to believe that the pullbacks in pharma won’t continue into at least some part of next year. If you’re correct about the possible cooling in biotech, which we approach cautiously, it is worth noting that the first half of the year was quite strong. The future is uncertain with potential impacts from elections and global conflicts, but if things remain stable, I believe that biotech work and volume could continue to improve for us. There are still many new companies being established each year that lack internal capacity, and we collaborate with numerous venture capitalists and their portfolio companies. We need to monitor these developments closely. We’ve already identified approximately $150 million in savings, with $100 million expected to take effect this year, a process we have begun and will continue. Next year, we will certainly pursue additional savings.

And Jim, I don't have anything else to add. I think you covered it comprehensively.

I want to follow up on pricing. I believe your comments mentioned a slight positive price impact in the second quarter, but you expect that to turn negative. I know Eric touched on this, but I am curious about the aggressive price discounts we’ve heard from your competitors. How do you balance the need to respond to that versus possibly seeing some softness in bookings due to not pursuing those discounts? Could you shed some light on this balance and how you've factored in price pressure in your margin assumptions for DSA in the latter part of the year?

I’ll focus on the latter part of your question. Regarding pricing, we've seen certain dynamics in the first half of the year and have expectations for trends in the second half. We anticipate a slight price decline in DSA as we finish the year, which has been factored into our margins. I'll provide some insights on the pricing dynamics and welcome Jim to add his perspective. We mentioned in our first earnings call that we're being selective in our pricing strategies. In areas where we have unique capabilities, we don't feel the need for additional price incentives. However, in other areas, we are selective to make sure we maintain certain volumes of business. The macro trend over the last couple of years showed very positive pricing, particularly in 2021 and 2022, which was above historical levels. Last year, we noticed a moderation, and while Q2 was slightly up, we do see a shift in that trend and expect a slight price decline in DSA by year-end. Jim, would you like to add anything?

There's no question, Dave, that our competitors principally use price as the lever. And so we don't like to chase it. We try not to. As we said sort of in the first half of the year, we reduced price pretty sparingly to certainly preserve share and to gain share. I just think it feels like it's going to be more pronounced in the back half of the year given the sort of pretty sudden pullback by big pharma and maybe some concern by our biotech clients about access to capital. So price, which for years became less of an issue and maybe for the last year or so, it's become more of an issue. As Flavia said, should become more pronounced in the back half of the year. We're anticipating that, that's embedded in our guidance.

We'll go next now to Patrick Donnelly of Citi.

Jim, I guess maybe one for you. Just as you think about some of these headwinds, it sounds like you're suggesting a few of them will linger into '25. I know you kind of said pharma pullbacks, it would be hard to believe that those don't linger into '25. So I guess, when you kind of think high level, which of these headwinds persist for several quarters and where you have visibility into things may be improving? I guess, just when you look at the backlog, cancellation rates, what are the areas of real concern as we head into '25 that you don't expect to improve at least at the start of the year? And where are you feeling maybe okay to start next year?

We are going to continue to see a disparity in the market. We've focused on biotech, which currently lacks internal capacity. If they are in or moving to the preclinical phase, we have a high likelihood of securing a significant amount of work. Historically, biotech has been less sensitive to pricing compared to big pharmaceutical companies, which may come as a surprise but is accurate. We are closely monitoring that market, and it largely depends on the state of capital access. The current capital markets are somewhat unstable, and summer poses additional challenges for predictions. There are only a handful of pharma companies remaining, with whom we maintain strong relationships. Most of them do not conduct work internally and are dependent on our services. They tend to adjust their strategies and many have long-term pricing agreements with us. While there may be some pricing pressure, it will primarily be about volume as they look to maintain their cost structure. We expect this trend to continue. I believe biotech will experience positive shifts more quickly than big pharma, which faces significant structural challenges that cannot be resolved overnight. They will seek our assistance in navigating these changes. CRADL and Safety will remain crucial, and our Manufacturing segment will become increasingly vital to them. Overall, we possess a robust portfolio that we believe is scientifically superior to competitors, both individually and collectively. However, we need to streamline our infrastructure significantly to avoid being overly tied to a timeline, particularly if market softness persists longer than anticipated. Despite this uncertainty, we see no reason for our outlook to change for 2025.

Following up on a few of your points, regarding the softness in the pharmaceutical sector, it appears to be more widespread rather than limited to just a few customers. In your discussions with customers, is this softness more related to the discovery preclinical phase, or do you perceive it as a general decline in pharmaceutical spending across the board?

It's definitely widespread. We're observing it with every client, and as I've mentioned, we hold significant market shares with increasingly large dollar volumes across the entire big pharma sector. Aside from the two companies producing GLP-1s, nearly all others are executing substantial staff, facility, and portfolio cutbacks simultaneously. That said, it undoubtedly has a disproportionate negative effect on certain tool companies, particularly those involved in discovery and safety, which benefits clinical work. This sector represents where most spending occurs, but there’s a push to advance drugs into clinics and maximize the number of drugs entering the market. The number of new drug approvals this year is significantly lagging behind last year, which presents another challenge for them. They're facing a patent cliff and are striving to bring more drugs to clinics and the market, a complex endeavor complicated by IRA legislation and intense competition around similar targets and molecules. It's challenging to predict the duration of this disproportionate focus on clinical work, but it cannot last indefinitely or the pharmaceutical industry will be in jeopardy. They must utilize successful drugs reaching the market to finance more work in the IND phase, leading to further discovery efforts. We’ve seen similar patterns before; while I typically don’t believe in cycles within this industry, during economic stress, we recognize that our client base is closely monitoring expenditures. We're essentially reflections of the overall activities of big pharma and biotech. We don’t develop our own molecules, but while we're expanding our services surrounding clinical research, which is positive, our manufacturing business, as previously guided, should perform well because it aligns with clinical work. The majority of our operations focus on discovery and preclinical areas, which are currently receiving less emphasis from major drug companies.

We go next now to Tejas Savant at Morgan Stanley.

Jim, sorry to come that same sort of theme. There's a couple of I guess, remarks you made that I just want to unpack a little bit, right? I mean, generally, in the past, when we've had patent cliff concerns, pharma companies have almost wanted to double down on R&D so that those pipelines or the revenue hole gets filled. It seems to be sort of different this time. So any sort of color on that? And then on the IRA, what has changed in the last couple of months here. Pharma companies, were they actually sort of like optimistic of reversing this entirely in court? Is it a view on election outcomes making them nervous? Because most larger drug companies who went through that drug negotiation process seems to have come out of it feeling reasonably okay with the fallout from the outcome. So maybe you can just elaborate on those two aspects. And then I have a follow-up.

This activity is unusual for our pharmaceutical clients, whom we've been serving for a long time and who have been a significant source of revenue for us. While it's still a substantial revenue stream, we are surprised by the increased discussions around the IRA lately. Many clients have mentioned this, along with patent expirations, more frequently. It makes sense for them to invest more in R&D to counter these challenges, but right now, strategically and structurally, we don't see them taking that route. Bringing drugs to clinical trials and then to market takes longer and is more expensive, requiring them to focus on fewer drugs to manage the impact of numerous patent expirations. This activity feels out of the ordinary and has occurred quite suddenly. We described it as unexpected because we are closely connected with our clients and interact with them daily as their service provider, often acting as an extension of their internal teams. However, we weren't given forewarning that they planned to prioritize clinical work at the expense of preclinical studies. We feel we are becoming closer to our clients, but many of these decisions seem to have been made recently, with more changes likely yet to come.

And then one on sort of the potential for benefit from the BIOSECURE ACT. I think you alluded to it in the context of the CDMO business. But as you think about sort of potential sort of share gains even within Discovery Services or biologics testing solutions, any color on just dimensioning the potential upside there? And then a quick cleanup on net interest expense for Flavia. So just given that your debt is essentially 80% fixed, you won't benefit from the interest rate cuts, but the interest income might actually go down as well, right? So how are you thinking about that dynamic into the fourth quarter and sort of potentially into 2025?

I find it hard to believe that the BIOSECURE ACT won't positively impact our demand across various areas, including biologics and CDMO, along with some aspects of safety and discovery. It's a significant development, especially considering the presence of Chinese competitors in this space who primarily compete with us on price but are well-established, and our clients have had satisfactory experiences with them. While we believe this change should yield positive benefits, as we mentioned in our last call and subsequent conversations at investor conferences, the actual conversation and interest from clients have been minimal, and we've seen very little work come our way. We want to be cautious not to exaggerate the potential, even though we see promise over time. We need to monitor how it unfolds, the final language of the act, its intensity, and whether clients will take action. During our last call, we noted discussions with some major venture capital firms we collaborate with who indicated they had instructed their portfolio companies to refrain from working in China. This directive struck us as an unusually strong stance. They didn't just suggest preference; they outright stated their disapproval. This provides a clue that there may be an increase in the shift away from China. These VCs are starting new companies and their reluctance to engage with China is noteworthy. It seems like there should be growing momentum, yet there doesn't appear to be much at the moment. There's been a lot of discussion, but as of now, it's not incorporated into our projections for this year. We'll see if there are any changes after the election.

Sure. Tejas, since any changes in interest rates by the Fed are expected toward the end of the year, the timing of these reductions will not significantly affect our outlook. Additionally, 80% of our debt is fixed until November when the $500 million swap expires. I understand your concern about potential pressure on our interest income, but we maintain very little cash as our goal is to pay down debt, so that impact would be minimal. Regarding our outlook for next year, any actions by the Fed to lower interest rates would be beneficial for us because we will have less fixed debt once the swap expires. This would increase the floating portion of our debt, and if interest rates decrease, it would actually be advantageous for us.

We'll go next now to Casey Woodring at JPMorgan.

I guess first quick one. What's your assumption on NHP pricing in the context of the comments you made today on DSA pricing pressure in the back half of the year? And I just have one quick follow-up.

I can take that one, Casey. I'll separate it a bit because I believe your question is more focused on NHP pricing in the DSA business. I'll also provide some commentary on NHP pricing when we sell it to third parties, which is reflected in the RMS business. For DSA, NHP pricing was still slightly positive in the second quarter, as I've indicated. It's down from the peak levels of last year, but still positive. It will likely follow a similar trend as overall pricing for the DSA business, so we might see a slight decline towards the end of this year. Now, regarding the NHP pricing within RMS, we have two segments in that business, as we've mentioned since acquiring Noveprim. One is the NHP sales in China, and the other is through the Noveprim acquisition. In China, prices have decreased, and this has been reflected in our results so far this year. We expect prices to remain at the current levels. In the case of Noveprim, prices are stable. These agreements are long-term relationships, and we haven't experienced price pressure there this year, nor do we expect it in the second half of the year.

And then you mentioned cancellations are still not back to target levels and net book-to-bill was below one again this quarter. Just curious how much of that cancellation number in the quarter was from large pharma versus biotech. The impression in the past have been a lot of the cancellations have been from biotechs that couldn't pay for the work that they had booked too far in advance. But now with the large pharma restructuring you called out here, just wondering if that's really driving the heightened cancellations here? And what's the expectation for cancellations moving through the rest of the year?

No problem. I'll take that one as well, Jim. And you're correct, Casey, the cancellations for sort of biotech, small and mid-tier companies, actually was a slight sequential improvement from Q1. So less cancellations. And global has actually picked up between Q1 and Q2. So sequentially, it was a deterioration, more cancellations for global in Q2 and an improvement for mid-tiers as you had guessed.

We go next now to Luke Sergott at Barclays.

I wanted to discuss how, as you are cutting costs to align with demand, you plan to quickly ramp up resources again once demand starts to return in DSA. Considering the visibility you have, will this be something you can manage a quarter in advance, or will it need to be adjusted in real time?

We need to hire direct labor about a quarter in advance, which is a reasonable timeline. It takes roughly 3 to 4 months to train individuals who lack experience in this field. While this isn't a long training period, new hires can't immediately start contributing. We’ve been effective in staying ahead of this challenge because we can't take on new work without enough staff. Therefore, it should be relatively easy to recruit new employees or bring back former staff. However, hiring senior scientific personnel and directors is more complex, and we plan to retain those individuals as we work on improving our infrastructure.

This market has been somewhat soft for a while as the pharmaceutical industry continues to rationalize their discovery efforts and keep budgets tight. How long do you think they can maintain this tight budgetary environment or continue to make cuts without it starting to impact later-phase work?

It's a good question. In the pharmaceutical industry, 50% to 70% of drugs are sourced externally. Therefore, we can expect continued mergers and acquisitions of small, medium, and large biotech companies by pharmaceutical companies. However, there likely won't be much M&A among pharma companies themselves, which is a positive sign for them. Much of their work, especially in our areas of focus, is being outsourced. When they acquire startup or growth biotech firms, they will continue to utilize their services, which is beneficial for us, especially if those biotech firms are our clients or the pharma companies that acquire them. We haven't experienced such a severe pullback in a long time, reminiscent of previous patent cliffs. This is an unavoidable issue for them, and they need to address it swiftly, hence the focus on clinical work. As we've mentioned several times today, it's uncertain when they will start increasing their spending on pure discovery or IND projects, but IND spending will likely resume sooner. Both types of spending are crucial for maintaining a strong pipeline. They have to manage everything, including their own infrastructure and general and administrative costs, and some are scaling back in certain therapeutic areas. Refining their infrastructure is something the pharmaceutical industry has struggled with historically, but it's now essential. Once this uncertainty settles, it should be a significant advantage for us since we handle a lot of this work. We can provide deeper scientific support, closer proximity, and lower costs, as we have done for years. We need to remain resilient, streamline operations, manage our costs wisely, and be as responsive as possible from a sales perspective to maintain our market share and capture new opportunities.

We go next now to Michael Ryskin at Bank of America.

Given the time, I'm on just going to keep it to one question. I hear your commentary and everything that's changing your view on DSA and yet you're maintaining the guide for RMS. I realize different businesses there, slightly different exposures. But I'm a little bit surprised you're not worried about at least some bleed-through if the pharma pullback is this significant and potentially this protracted that you wouldn't see at least some impact in RMS as the year went on and possibly next year as well. So just curious what gives you confidence in that segment?

I believe we are already observing some impact in North America, which has been slower and is where most biotech companies are located. In contrast, Europe, which has fewer biotech firms but many pharmaceutical companies, has performed well. China continues to grow strongly, driven by investments in life sciences and our expanded operations due to new facilities. We feel optimistic about our outlook in that region. We have consistently secured pricing in RMS, as none of our clients raise their own animals and competition is relatively limited. Although the service aspect of RMS is currently facing some delays, it remains significant with healthy operating margins. This part of our business is essential for clients managing their costs. We anticipate that this segment will stabilize as well. Therefore, we believe RMS will continue performing as expected. Our guidance is set at 0 to low single digits, and we are confident in our ability to meet this target for the reasons mentioned.

And ladies and gentlemen, we have time for one more question this morning. We'll take that now from Max Smock of William Blair.

I'll keep it to one question as well. I just wanted to follow up on some of the prior questions around market share, given your commentary is a bit out of line with what we heard from one of your competitors last week. I was just hoping you could give some detail around how your win rate in DSA has trended so far in 2024 and whether you've seen that hold up for new proposals more recently or if there's any sort of drop-off to call out here?

Our win rate in Safety has consistently been high over a long period. When we compete head-to-head, considering our overall portfolio, geography, and the depth of our expertise, we usually succeed unless discussions about price arise with clients who are concerned about their cash flow. In those cases, they may be more willing to compromise on quality, but we often choose not to pursue that work. There are small competitors who primarily focus on pricing. Despite this, our market share remains substantial and has been growing, with good win rates and significant proposal volume. While bookings have started to improve, they haven't increased at the pace needed to truly boost the second half of the year. We anticipate that the situation may be less favorable than expected, compounded by pharma's pullback. Nevertheless, we continue to perform well in terms of market share with our entire client base, especially within biotech.

And Max, if I can just add, I think you alluded to one of our competitors that reported last week, if I saw it correctly, and it's a smaller piece of their business, but the piece that we compete more directly, I think their performance in the quarter was worse than ours. And so I think to Jim's point, we believe this is more of a market dynamic as opposed to a competitive dynamic driving the more negative outlook that we are forecasting.

I was going to just say, I apologize if we didn't get to some of the questions. It was running long. I will follow up, and thank you, everyone, for joining the conference call this morning. We look forward to seeing you at some of the investor conferences in September, and this concludes the call. Thank you.

Thank you, Mr. Spencer. Ladies and gentlemen, again, that does conclude today's Charles River Laboratories Second Quarter 2024 Earnings Call. Again, thanks for your participation. You may now disconnect.