Charles River Laboratories International, Inc. Q1 FY2026 Earnings Call

Ladies and gentlemen, thank you for standing by, and welcome to the Charles River Laboratories First Quarter 2026 Earnings Conference Call. This call is being recorded. Operator instructions were provided. I would now like to turn the conference over to our host, Todd Spencer, Vice President of Investor Relations. Please go ahead.

Good morning, and welcome to Charles River Laboratories First Quarter 2026 Earnings Conference Call and Webcast. This morning, I am pleased to be joined by Birgit Girshick, who became our Chief Executive Officer this week, and to introduce our new Executive Vice President and Chief Financial Officer, Glenn Coleman. They will comment on our results for the first quarter of 2026 as well as our financial guidance. 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 the call, we will primarily discuss non-GAAP financial measures, which we believe help investors gain a meaningful understanding of our core operating results and guidance. The non-GAAP financial measures are not meant to be considered superior to or a substitute for results of operations prepared in accordance with GAAP. In accordance with Regulation G, you can find the comparable GAAP measures and reconciliations on our Investor Relations section of our website. I will now turn the call over to Birgit Girshick.

Thank you, Todd. It is a privilege to speak to you today as the CEO of Charles River. I would like to acknowledge Jim Foster for building this company into an industry leader and reiterate my gratitude for the mentorship that he has provided to me over the years. I step into this role with a clear understanding of Charles River today, what we can become and the tremendous responsibility we have to our clients, to the patients who rely on us, to our nearly 20,000 employees worldwide and also to you, our shareholders. I am not taking these responsibilities lightly, and I'm energized by what lies ahead as we continue to work to help create healthier lives, to capitalize on the significant opportunities ahead of us, both in science and in the marketplace, and to enhance shareholder value. Our teams have already put forth significant efforts to plan for the future, and I'm proud to lead the company into its next chapter of growth and evolution. The world is changing rapidly around us. Science is advancing faster than it ever has, and our clients require greater speed, best science and more collaboration. As the industry changes, Charles River will evolve alongside it and lead the way. Together as a company, we will create our own future by reimagining the way we operate and embracing the opportunities ahead of us. We will accomplish this through our refreshed strategic framework, which we are calling Pathway to Purpose. Pathway to Purpose is a disciplined approach to driving growth and shareholder value through the following key priorities: modernizing our company and the industry, strengthening our world-class scientific portfolio by enhancing our capabilities in strategic locations, while delivering a customized client-centric approach. We will also continue to maintain rigorous oversight on animal welfare, biosecurity and regulatory compliance as well as fostering an exceptional employee experience. We have already established a solid foundation, including through the execution of strategic initiatives and enhancements made over the past few years. And this refreshed focus, Pathway to Purpose, will enable us to realize our full potential and ensure our future success. This will lead us to drive profitable revenue growth and optimize our financial performance. We will also continue to take a balanced and disciplined approach to capital deployment, including organic investments, M&A and other uses of capital. We plan to take a much deeper dive into our overall Pathway to Purpose strategy and these priorities when we host an Investor Day in September. For now, I will provide a high-level overview of each priority as well as some of our recent accomplishments. First, we are diligently working on opportunities to modernize Charles River by building a future version of the company that will be faster, more agile, connected and data-driven. We endeavor not only to transform operationally by driving greater efficiencies and streamlining and simplifying processes, but by creating an environment that allows scientific insights and information to move more quickly. This will enable us to partner even more seamlessly with our clients and expedite the speed at which we're able to deliver solutions, supporting their goals and deepening our relationship with them. We have already made substantial progress in our efforts to drive greater operating efficiencies and optimize processes. As previously discussed, we expect to generate at least $100 million in incremental cost savings this year above the 2025 levels, primarily driven by efficiency initiatives. Cumulatively, we expect to generate over $300 million in cost savings on an annualized basis from actions taken over the past few years. However, our pursuit of operating efficiency does not stop here. We are evaluating new initiatives designed to enable us to continue to modernize the company and how we operate and drive additional savings to generate meaningful operating margin expansion in the future. We have already made great progress on our efforts to further strengthen our leading scientific portfolio, including through actions taken as part of our comprehensive strategic review last year. As we mentioned last quarter, our acquisition of the assets of K.F. Cambodia earlier this year, now Charles River Cambodia, further strengthens and secures the non-human primate supply chain for our Safety Assessment operations. Combined with Noveprim, in which we acquired a controlling stake in 2023, we own and expect to internally source most of our future NHP supply requirements for the DSA segment. In April, we completed the acquisition of PathoQuest to continue advancing our NAMs, or new approach methodologies, capabilities by adding this in vitro next-generation sequencing platform for quality control testing for biologics drugs. We are pleased to have completed the previously announced divestiture of the CDMO and Cell Solutions businesses on May 6. We also expect to complete the planned sale of certain European discovery sites later this month in May. These strategic transactions will help us refine and refocus our portfolio on our core competencies and drive synergistic growth in areas in which we have differentiated scientific expertise, including drug development testing. In addition to our efforts to modernize the company and drive incremental efficiency savings, these divestitures and the K.F. acquisitions are expected to be meaningful levers for future operating margin improvement, including the principal drivers of margin expansion for the year. As we move forward, providing the best science will remain paramount at Charles River. With the combined strength of our core capabilities and scientific rigor, we intend to set new standards for what modern science can achieve and to help our clients enhance the efficiency and speed to market for their life-saving therapeutic programs. We will continue to build our world-class portfolio by investing in core growth areas and providing scientific solutions that are critical to our clients. In particular, we will further strengthen our capabilities in a regulated testing environment, including early-stage drug development, where we remain the industry leader, and in complementary testing opportunities to support the clinical and commercial phases. We have identified areas of future growth, including in vitro and related testing services to extend our existing capabilities as well as adding additional NAM solutions and continuing to evaluate our geographic presence, particularly in Asia. To further enhance our growth profile, we are doubling down on our client-centric approach with a go-to-market model that deepens and further customizes client relationships and reinforces our position as a preferred partner to the biopharmaceutical industry. We are leveraging technology, including AI, to improve sales effectiveness, KPI transparency and lead generation while investing in collaborative tools that enhance how we engage with clients and generate insights. Our Apollo cloud-based platform has already been a core enabler of our client-centric strategy and differentiates us in the marketplace through the speed that we can work with our clients. Apollo delivers a seamless self-service client experience with real-time access to scientific data and decision support tools. Its scope has expanded from RMS e-commerce and DSA pricing into study design, CRADL and our manufacturing businesses with further expansion underway. Technology is embedded throughout our strategy and in everything that we do. We are investing in broadly using technology to help harmonize and streamline processes, including through digitizing core work streams and lab automation, which will enable us to gain better data insights, enhance connectivity with our clients and accelerate their speed to market. AI has been a particular focus in recent months. Our view is quite simple: AI will support the work that we and our clients do. We believe the efficiencies gained from AI over time will be reinvested in R&D by our biopharmaceutical clients, enabling them to work on more programs throughout the regulated drug development process, including safety assessment. To support this constructive view, recent discussions with our clients and industry surveys indicate that large biopharmaceutical companies are primarily utilizing AI in R&D to enhance the speed and efficiency of the early discovery process, including target identification, drug design and screening capabilities, and also around clinical trial monitoring and logistics. In addition, a Deloitte survey last year indicated that nearly 60% of surveyed biopharmaceutical R&D executives expect AI and lab automation investments will result in an increase in IND approvals due in part to a faster pace of drug discovery over the next several years. Like NAMs, the use of AI will be an exciting but gradual evolution led by science and the proper validation of new capabilities. We are leveraging AI and machine learning across the company, including as part of our strategic priority to strengthen our NAMs portfolio through our pioneering approach to virtual control groups, or VCGs, for safety assessment studies. The recent independent scientific review demonstrated the effectiveness of our VCG process, which preserves scientific integrity with no observed adverse effects compared to traditional control groups while reducing reliance on animal models. The VCG program is guided by our Alternative Methods Advancement Project, or AMAP initiative, focused on reducing the use of animals in research and is also a key priority for our Scientific Advisory Board led by our Chief Scientific and Innovation Officer, Dr. Namandjé Bumpus. Before I discuss our first quarter financial performance, let me provide a brief update on the end market trends. The overall biopharma demand environment stabilized last year, and we are currently seeing pockets of improvement for both global biopharmaceutical and small and mid-sized biotechnology clients. Many of our global biopharma clients progressed through their restructuring and pipeline reprioritization activities and demand trends have improved even though overall spending levels aren't yet back to historical norms. Revenue from our global biopharmaceutical client segment increased in the first quarter. From a biotech perspective, demand trends from our biotech clients improved over the past two quarters as a result of the reinvigorated funding environment as we exited 2025 and continued health in 2026. The recent increase in biopharma M&A activity has also provided another source of capital infusion and an exit strategy for biotechs, which we view favorably. More mature biotechs have better access to capital as they approach IND or enter the clinic, while demand from start-up biotechs remains tepid because the earlier-stage and seed funding environment remains constrained despite a recent uptick in IPO activity. Overall, revenue from our small and mid-sized biotech clients declined in the first quarter, primarily reflecting softer DSA booking activity last summer and a normal lag between booking and revenue generation. However, given recent biotech KPIs, we expect the revenue trend to improve in the upcoming quarters. Government uncertainty, including funding-based pressures at the NIH, has modestly impacted client spending levels, but revenue from our global academic and government client base remained stable in the first quarter, reflecting the essential nature of the research solutions that we provide to them. Moving to our financial performance. Let me start by providing several key takeaways from the first quarter. First, we delivered our first quarter results despite the anticipated pressure from several discrete margin headwinds and now have a clear line of sight into the meaningful operating margin improvement that we have forecasted in the second quarter and beyond. In addition, the DSA demand environment remains solid as demonstrated by a net book-to-bill of 1.04x in the first quarter and continues to support a return to DSA organic revenue growth in the second half of the year. And finally, due to the execution of our strategic initiatives around acquisitions, planned divestitures and efforts to modernize our operations, we continue to expect to generate significant operating margin expansion of approximately 120 to 150 basis points in 2026, which supports our goal of driving profitable growth for many years to come. Overall, the first quarter results were in line to slightly favorable compared to our prior outlook. In the first quarter and as expected, revenue declined 1.5% on an organic basis. The non-GAAP operating margin declined 280 basis points to 16.3% and the non-GAAP earnings per share declined 12% to $2.06. The quarterly operating margin and earnings decline were largely driven by several discrete factors, including higher stock compensation expense, NHP study-related costs in the DSA segment as well as lower NHP revenue in the RMS segment, primarily due to the timing of shipments. RMS revenue declined 5.5% organically, driven principally by lower revenue for small models in North America and for NHPs due to the timing of shipments. However, these declines were partially offset by solid demand for small models in China from mid-tier biotech and CRO clients. DSA revenue declined 1.4% organically, driven by lower revenue for discovery services, although revenue for Safety Assessment services was essentially unchanged in the quarter. As previously mentioned, we are encouraged that the overall DSA demand environment is tracking to our expectation, resulting in a net book-to-bill of 1.04x and a slight sequential increase in backlog to $1.92 billion at the end of the first quarter. Net bookings totaled a solid $622 million, remaining above the $600 million threshold, driven by continued strength from our small and mid-sized biotech client base. Over the past two quarters, biotech net book-to-bill and net bookings were at the highest level in over two years, showing a resurgence in demand on the heels of the robust funding environment. Demand trends for global biopharmaceutical clients also remained solid in the first quarter, but declined moderately year-over-year after pharma bookings rebounded to start 2025 following a period of budget cuts. Proposal activity posted a healthy increase in the first quarter, a signal that the positive bookings momentum may continue. The strong bookings performance at the end of 2025 and a continuation of favorable trends to start this year leave us cautiously optimistic that the net book-to-bill will average above 1x for the year and support the upper end of our DSA outlook, including a return to organic revenue growth in the second half. However, as a reminder, our business isn't linear, so this does not mean net book-to-bill will be above 1x every quarter. Manufacturing revenue increased 2.9% organically, driven by continued solid demand for Microbial Solutions. Overall, underlying demand trends for Microbial Solutions and Biologics Testing, our manufacturing quality control testing business, remain strong as clients continue to advance their late-stage development and commercial programs. The Biologics growth rate is expected to rebound as the year progresses after we anniversary a client-specific challenge that has been a headwind for the past several quarters. As we look ahead, I'm energized by our refreshed strategic vision, and I am confident in the path we are taking to create the future for Charles River. Our focus remains on enhancing our clients' experience, delivering results and increasing long-term shareholder value. I also want to thank our employees for their continued dedication, hard work and commitments to our clients and mission, as well as our shareholders for their continued support. I'm pleased to welcome our new CFO, Glenn Coleman, who joined Charles River on April 6. As I mentioned last quarter, Glenn is a seasoned financial leader and operationally oriented CFO with over a decade of experience in the health care industry. Glenn has been CFO for three public companies and also has extensive international operating experience. Glenn will help to ensure that we continue to take a balanced and disciplined approach to capital deployment, including M&A, and also ensure we maintain the rigor to drive additional cost savings and efficiencies across the company. Now I will turn the call over to Glenn to provide more details on our first quarter financial performance as well as our 2026 guidance. Thank you.

Thank you, Birgit, and good morning. I'm pleased to be joining the Charles River team as Chief Financial Officer. I joined the company because of its mission-driven culture and its position as a leader in the life sciences industry. Over the past three decades, I have led global organizations through financial and operational leadership roles and have been committed to instilling operational and financial discipline, effective capital allocation and driving long-term shareholder value. I look forward to leveraging that expertise and experience as I partner with Birgit and the leadership team to build upon Charles River's strong foundation. As I step into this role, my priorities are clear and fully aligned with supporting our Pathway to Purpose strategy and driving profitable growth. I'll be focused on continuing to efficiently manage costs, including the delivery of over $100 million in incremental savings this year and identifying new areas of efficiency and process improvement to generate additional savings and drive future operating margin expansion. We will maintain a disciplined and balanced approach to our capital priorities and invest to drive our growth strategy forward. This includes executing on M&A opportunities that strengthen our core capabilities, ensuring the successful integration of acquisitions and regularly evaluating all areas for capital deployment, including organic investments, stock repurchases and debt repayment. Before discussing our financial results, I'll remind you that I'll be speaking primarily to non-GAAP results, which exclude amortization and other acquisition and divestiture-related adjustments, costs related primarily to restructuring and efficiency initiatives 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. I'll now provide highlights of our first quarter 2026 performance. Overall, our financial performance in the quarter was in line or slightly better than expected across our key financial metrics. We reported revenue of $996 million, representing growth of 1.2% compared to last year. On an organic basis, revenue declined 1.5% and was in line with our February outlook of a low single-digit organic decline. The operating margin was 16.3%, a decrease of 280 basis points year-over-year. The expected decline was primarily driven by lower NHP third-party revenue in the RMS segment, the timing of stock compensation related to the CEO transition and higher NHP sourcing costs and study starts in our DSA segment. As I will discuss in more detail shortly, we do expect the second quarter operating margin to improve meaningfully from these levels as many of these first-quarter discrete margin headwinds subside, and we begin to see a margin benefit from divestitures. Earnings per share were $2.06 in the first quarter, a decrease of 12% from the first quarter of last year, primarily driven by the lower operating margin. This exceeded our prior outlook of a high teens decline, largely due to better-than-expected operating performance in the Manufacturing and RMS segments. Another highlight from the first quarter is the repurchase of approximately $200 million in shares under the $1 billion stock repurchase authorization approved last October. This supports our balanced and disciplined approach to capital deployment as well as the confidence we have in our long-term growth and strategic plan. Moving to details on our segment performance. DSA revenue was $597 million in the first quarter, a decrease of 1.4% on an organic basis compared to the first quarter of 2025. Lower revenue for discovery services due in part to prior site consolidation activities was partially offset by stable revenue for Safety Assessment services. The DSA operating margin decreased 290 basis points to 21.0% in the quarter, mostly due to increased study-related direct costs, including higher NHP sourcing costs and study starts. In RMS, revenue was $208 million, representing an organic decline of 5.5% year-over-year due to lower sales of small and large models as well as research model services. Small models revenue was pressured by lower volume in North America, partially offset by a solid increase in China volume. As previously anticipated, large model revenue is primarily affected by the timing of NHP shipments with NHP unit volume in the first quarter expected to be the lowest point for the year. The RMS operating margin declined by 240 basis points to 24.7% in the first quarter due largely to an unfavorable revenue mix from the timing of NHP shipments and lower sales volume of small models in North America. The Manufacturing segment reported first quarter revenue of $191 million, an increase of 2.9% on an organic basis due to strong growth from the Microbial Solutions business, primarily driven by Endosafe and Celsis manufacturing quality control testing platforms. The segment operating margin improved by 280 basis points to 25.9%, driven largely by leverage from higher revenue and the benefit from cost savings. As a reminder, the first quarter CDMO growth rate was negatively impacted by the loss of a large commercial client last year. And as a result, the CDMO performance reduced the manufacturing organic revenue growth rate by approximately 350 basis points in the first quarter. However, this comparison will no longer have a meaningful impact going forward because of the completion of the CDMO divestiture this week. Moving on to other financial metrics. Unallocated corporate costs totaled $63 million in the first quarter or 6.4% of revenue compared to 5.3% last year. The anticipated increase was primarily due to the timing of stock compensation expense related to the CEO transition. For the full year, we continue to expect unallocated corporate costs will be approximately 5.5% of total revenue. Net interest expense was $26 million in the first quarter, a decline of $0.8 million year-over-year. For the full year, our net interest expense outlook has increased by approximately $8 million to a range of $103 million to $108 million, primarily attributable to short-term borrowings to fund stock repurchases in the first quarter. At the end of the first quarter, our net leverage was 2.6x. The non-GAAP tax rate in the first quarter was 22.5%, a decrease of 20 basis points year-over-year due primarily to the favorable impact from last year's enactment of the One Big Beautiful Bill. Our non-GAAP tax rate guidance for the full year remains unchanged at 22% to 23%, although it's currently trending towards the lower end of the range due to a favorable geographic mix. Free cash flow was negative $15 million in the first quarter or a reduction of $127 million compared to the prior year period. This decline was expected and mainly driven by higher performance-based cash bonus payments for 2025, which are paid in the first quarter. CapEx declined modestly to $56 million or approximately 5.6% of revenue in the first quarter from $59 million last year. Our free cash flow outlook remains unchanged at $375 million to $400 million in 2026. Turning to 2026 full year guidance. We are reaffirming our organic revenue and non-GAAP earnings per share guidance, which have previously factored in the impact of the divestitures. All of our guidance referenced today assumes the planned divestiture of certain European Discovery sites being completed in May. And as Birgit mentioned, we have completed the divestiture of the CDMO and Cell Solutions businesses this week. We continue to expect an organic revenue decline of 0.5% to 1.5% and non-GAAP earnings per share of $10.80 to $11.30 or 5% to 10% growth over 2025. This guidance includes earnings accretion of approximately $0.10 per share from the divestitures. On a reported basis, we reduced our revenue outlook by 50 basis points to a 4.0% to 5.5% decline because FX rates have become less favorable this year due to the recent strengthening of the U.S. dollar. From an earnings perspective, this FX headwind compared to our original outlook will be essentially offset by the accretion from stock repurchases. As a reminder, the acquisition of the assets of K.F., or Charles River Cambodia, the divestitures and incremental cost savings from our efficiency initiatives are expected to result in meaningful operating margin expansion this year. We expect approximately 120 to 150 basis points of improvement in 2026, with most of the benefit generated in the second half of the year. Combined with the abatement of the discrete margin headwinds in the first quarter, we expect the second half of the year operating margin will be over 500 basis points higher than the first six months of the year, with over half of this improvement being driven by completed acquisitions and divestitures as well as the planned sale of certain European Discovery sites. From a segment perspective, our organic revenue outlook for each of the segments remains unchanged from February. Our reported revenue outlook for the segment has been updated to reflect the impact of the divestitures as well as less favorable FX impact. As a reminder, the divestitures are expected to reduce our reported revenue outlook by approximately 500 basis points in 2026. By segment, we now expect a reported revenue decrease in the low to mid-single digits for the DSA segment and in the mid-single digits for both RMS and Manufacturing segments. We expect the most significant margin improvement in 2026 will come from the Manufacturing and DSA segments. Moving to our second quarter outlook. As I mentioned earlier, we expect financial results to improve substantially on a sequential basis due primarily to operating margin improvement and normal seasonal trends in the DSA and biologics testing businesses. We expect reported revenue to decline at a mid- to high single-digit rate year-over-year due primarily to the impact of the divestitures, while organic revenue is projected to decline at a low single-digit rate year-over-year, similar to the first quarter. However, we expect second quarter earnings per share to improve significantly on a sequential basis, increasing at least 30% from the first quarter level of $2.06. The first quarter headwinds from the timing of NHP shipments in RMS and the NHP sourcing costs and study starts in the DSA segment are expected to subside in the second quarter. In addition, the manufacturing operating margin is expected to benefit from the CDMO divestiture. As a result, we expect all three segments will show a sequential improvement in operating margin in the second quarter. To conclude, as I step into the CFO role, I'm focused on driving initiatives to generate profitable growth through the disciplined execution of our Pathway to Purpose strategy. This includes advancing our M&A priorities, successfully integrating acquisitions and delivering on our efficiency initiatives. Collectively, these efforts will strengthen our foundation and position us to deliver long-term shareholder value. Finally, I look forward to meeting many of you in the coming months. As Birgit mentioned, we plan to host an Investor Day in September, where we will provide a more comprehensive update on our strategy, priorities and long-term financial outlook. Thank you.

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

Operator instructions were provided. We'll take our first question from Elizabeth Anderson with Evercore ISI.

Welcome, Glenn. Nice to be with you again. And for my question, I wanted to just sort of double-click maybe on the demand environment. I appreciate all of the comments about the environment. Can you talk about the typical seasonality that we sort of think about in terms of the demand cycle? I know we've typically seen a little bit of a slower start to the year sometimes as people get ramped up in January and February. And then it sort of seems to do that plus obviously, what you were talking about, about some of the funding environment. And then as a follow-up question, I was wondering if you could comment on sort of NAMs and what you're sort of seeing, any updates in terms of demand conversations with clients?

Certainly. Thanks, Elizabeth. Happy to update on demand seasonality and NAMs. So let me start maybe with the seasonality. We have several of our businesses that see some seasonality in terms of bookings and proposal volume. Our DSA business is one of them where we're seeing proposals and bookings starting a little slow in the beginning of the year, sometimes also on a revenue basis that we see a slow start. And it generally has to do with budgets being approved and our clients coming back to work, often in January; there's a reprioritization of programs. So it just takes a little while to ramp up. We have a couple of other businesses. Our biologics testing business definitely has seasonality. They support manufacturing of biologics, and more often than not, the Christmas time is the time that manufacturing is closed down for maintenance and revalidations. So we are not seeing the same amount of samples coming in. Our microbial business is another one where we see definite seasonality into the fourth quarter for this business, where the business is ramping up often in the fourth quarter because companies may have budgets they want to use up. So nothing abnormal. We have seen the same seasonalities this year. It's expected, and we generally consider that when we do our budgets and our guidance. As far as the demand environment, I think we all share cautious optimism. Biotech funding has been quite a bit better over the last couple of quarters, IPO reopening—again, cautiously optimistic that this will continue. And then our pharma clients have definitely worked through a lot of their restructuring and reprioritization of programs. Any discussions we have with them are about speeding up their work, getting more programs through the pipeline rather than holds and reprioritization. So from that perspective, we're quite comfortable with what we're seeing. But certainly, it's early stage, and we always will be cautious about going too far out on our skis. Then let me jump into the NAMs or new approach methods. NAMs are a part of what we do. They are part of a toxicology study. We have spent essentially three decades on the reduction of animals. NAMs availability has accelerated a little bit over the last decade; we have made some acquisitions in this space. We just did one literally a month ago. So the PathoQuest acquisition is squarely in the NAMs category. As we continue to evolve our business, we will continue to bring NAMs into our business model, either through organic development, in-licensing or M&A. As technology evolves, and as AI's ability to predict insights evolves, we will evolve our business model with it. It's an evolution, not a revolution; it will take time, but you will hear more and more about us bringing those technologies in. What I want to point out is it's not a separate business. It will always be part of our DSA and other divisions' revenue model, and it will just continue to grow. I hope I answered your question.

Yes, that was super helpful.

We'll turn now to Max Smock with William Blair.

Glenn, maybe just following up on that prior question around activity so far here. Start to hear there was some commentary in the deck around seeing a healthy increase in proposals in the first quarter. Wonder if we could just get some more color around what proposals looked like year-over-year and sequentially? And then just more detail around how proposals trended among each client segment would be helpful.

Yes, happy to. So we've been quite happy with the proposal volume year-over-year in both segments, so both in our global biopharmaceutical as well as in our biotech segment. Proposals were up quite nicely, in the high single digits, which gives us a lot of confidence that our booking trend will continue and our net book-to-bill trends will continue. So it does show us that there are a lot of clients that are ready to get restarted on work and the smaller clients and that our pharmaceutical clients, as they have indicated verbally to us, are looking to put more work, more programs through the pipeline to get to more INDs and to get more programs into the clinic. So quite happy to see that.

And I would just add there on a sequential basis, we've seen proposals increase three quarters in a row sequentially. So positive trends sequentially as well.

Got it. So the high single digit was year-over-year for both cohorts. And then Glenn, you're saying you've also seen some improvement sequentially as well.

Correct. We're three quarters in a row.

Okay. Maybe another unrelated question here on AI. Birgit, it sounded like your comments in the prepared remarks indicated you feel pretty comfortable with the idea that AI investments in drug discovery are going to lead to more preclinical testing longer term. Are you seeing that play out at all yet? Or is that more something that we really probably don't see until we get a couple of years into the future here?

Thanks for that question. I'm personally very excited about AI and what it will do for the industry and for Charles River in particular. Right now, the sample set of AI-discovered or AI-assisted drug programs is very small, so it's hard to draw broad conclusions. What I can tell you is that AI-assisted drug discovery companies generally work on many different programs rather than one program at a time. As we work with them on their wet-lab programs, I'm optimistic that this trend will show itself and that we will see more programs coming through from AI. AI should lower the cost of early discovery and with that, create more money for reinvestment. But again, it's very early days; there are so few AI-assisted programs in the pipeline. Theoretically, we know AI will have a positive impact.

We'll move next to Patrick Donnelly with Citi.

Glenn, maybe one for you on the margin side. Certainly appreciate the color on the second-half step-up. And again, it feels like you guys have real tangible reasons to kind of build that. Can you just talk through a little bit? It sounds like half of it is M&A, half of it some of the other moving pieces. Can you just talk through kind of the bridge there on the second half? And then any reason why that momentum wouldn't kind of continue to build into—obviously, it's early to talk 2027—but just going forward, given the K.F. acquisition, what that means to margins, any reason that momentum wouldn't continue into the go-forward?

Sure. If we look at the first half of the year, we're expecting to be down year-over-year, but we do expect a pretty significant sequential increase in our margins going from Q1 to Q2 that supports the greater than 30% increase in earnings per share. We expect a meaningful step-up in our operating margins. That being said, when we look at the half-to-half numbers, we're going to be in the high teens margin-wise in the first half of the year and expect 500 basis points improvement in the second half of the year. As I mentioned in my prepared remarks, over half of that improvement is coming from acquisitions and divestitures. In addition, corporate one-time discrete items in Q1 that don't recur and some cost savings initiatives will drive another significant portion of the half-to-half improvement, coupled with the timing of the NHP shipments in RMS and some additional lower costs we're expecting to come out of DSA. So we've got a clear line of sight. I know it's a big jump when you look at the half-to-half numbers, but we feel very confident in the numbers, and we've got a clear line of sight about how we get there. Relative to 2027, the only comment I'll make is on acquisition and divestiture impact: we previously gave annualized impact numbers. For acquisitions, about $0.60 annualized from K.F.; for divestitures about $0.30. For 2026 part-year, those were about $0.25 from acquisitions and $0.10 from divestitures. So roughly, you can expect about $0.50 to $0.55 of accretion from acquisitions and divestitures in 2027 versus 2026. I think that's the comment we'll make around 2027 margin numbers.

Yes. Makes a lot of sense. And then, Birgit, maybe just on the demand side, I certainly appreciate all the color you've given. Can you just talk about that kind of small mid-sized early biotech portion, what you're seeing there? Obviously, to your point, the funding has looked really healthy here for a couple of quarters. How much improvement are you seeing in those conversations? Are those dollars really starting to show up? Where are we in the cycle of that early piece from your perspective?

Happy to. When we talk about our biotech clients, there's considerable size differences between the clients. A lot of the funding we're currently seeing—IPOs—are coming from somewhat bigger, later-stage companies; they have easier access to funding. That's where we're seeing quite a bit of an uptick in demand. The smaller biotechs, very early-stage, are still a little sluggish; funding is lower and discussions are more cautious. We do see that when funding comes in, companies get more confidence and start spending, so we're seeing some of that. But the early-stage segment is still a little below where we'd like to see it. We have areas like our CRADL business unit where we don't see demand where we'd like it yet. So it's mixed and there's room for improvement.

We'll hear next from Kallum Titchmarsh with Morgan Stanley.

Just as we think about the business review and some of the acquisitions and divestitures announced over the past six months or so, any incremental ambitions to add or subtract from the business today? Or can we assume most impactful changes have been actioned? And obviously, I see the buybacks, too. So maybe just level set us on capital allocation ambitions from here.

Happy to, Kallum. We will continue to review our businesses to see which ones are synergistic to the core business, which are profitable, where we should be located and what solutions we should provide to our clients. That will be an ongoing review with our Board. From time to time, you may see consolidation of a site, a closure, or divestitures. From an M&A perspective, you already saw a couple of transactions this year. We have a clear roadmap of where we believe the company should invest via M&A and some smaller partnerships. It's hard to predict timing as targets must be available and make sense from a returns perspective. We will also continue to invest organically. And yes, we will consider buybacks when appropriate. We will continue to look across all areas of capital allocation and make decisions to maximize long-term strategic execution and shareholder value.

Great. And I think you called out $200 million of annual DSA revenue from NAMs before. I'm not quite sure where that is post these acquisitions and divestitures, but could you just give us a sense of the latest and how that's been growing?

That $200 million number was provided around late 2024 into 2025. Since then, we've added some programs and done M&A, including PathoQuest, which is squarely in the NAMs space where we replace some in vivo virology work with next-generation sequencing. With the divestiture of the European discovery assets, we'll retain roughly two-thirds of the NAMs revenues we had previously called out. Taking those together and some organic investment, we're roughly back to where we were, and we'll continue to drive NAMs. Our focus is on the regulated space where most of our business is. We have established a Scientific Advisory Board under Dr. Bumpus and many activities in this space. You'll continue to hear about technologies and how we integrate them; we view NAMs as an integrated, hybrid approach alongside conventional methods.

We'll hear next from Justin Bowers with Deutsche Bank.

Two-parter for me. One, can you talk about the conversion rates and the velocity of decision-making that you're seeing across the increasing proposal volume over the last three quarters? And then part two, I just wanted to clarify on the comment on large pharma verbally saying that they want to put more work into INDs. Does that imply that pharma is increasing their overall budget or intend to for preclinical spend this year and beyond?

Happy to. On conversion rates, if you look back to the COVID period when capacity was tight, customers planned very far ahead and booking lead times were very long. Currently, we see an acceleration: clients come in, request a proposal and book faster. When we model it, typically it's one to two quarters from discussion to proposal to booking and then another one to two quarters to revenue. In some instances, particularly with long-term customers, it can accelerate so that proposal to revenue occurs within the same quarter. This improved conversion gives us better quality for backlog because programs are more likely to proceed. On the IND question, pharma contacts often say they want more programs to IND and into the clinic. Sometimes they say it must happen within the same budgets, which isn't always possible, but we are seeing a refocus on earlier-stage and preclinical efforts in many companies—otherwise they wouldn't get the programs to the clinic.

We'll hear next from Joshua Waldman with Cleveland Research.

Birgit, I wondered if you could comment more on what you're seeing from global pharma accounts here to start the year? Were bookings from these accounts any better or worse than you expected? And then did the trend improve through the quarter? It sounded like you saw a slow start, but I'm curious if you were more encouraged based on what you saw here in March and April.

For global biopharma, bookings were below last year's extreme booking quarter. To give context, last year we had an incredible booking quarter as many global pharma companies came out of reprioritizations and booked significant work early in the year. This isn't surprising. We feel bookings are adequate and support what we're hearing that those clients want to do more work. So I would characterize this segment as stable and improving; we also see proposals up for them, which suggests bookings should increase in upcoming quarters.

Okay. And then you mentioned more biotech M&A being favorable in terms of funding for these accounts. But historically, have you seen higher M&A activity drive improved access to biotech wallet share? Given your stronger share position in large pharma, do you think large pharma accounts acquiring small biotech ultimately means you get better access to these accounts? Is this a dynamic you've seen historically?

A lot of times we work with small biotechs before they get acquired by pharma, and in many cases we retain the work post-acquisition and gain access to the pharma company’s programs. Sometimes the opposite happens, but generally, it's not a headwind; it's either neutral or a tailwind. Our objective is to increase our share of wallet, particularly with pharma, and that is why our client-centric programs and improving ease of engagement are so important. We see M&A as generally favorable when it advances programs rather than halting them.

We'll turn next to Cassidy Epps with Jefferies, standing in for David Windley.

So digging a little bit more into margins. With most of your NHP supply now internally owned, how should we think about the margin impact specifically within DSA? And does this change management's longer-term margin framework for the segment?

I'll take this. Keep in mind we're still working through some higher NHP costs in the first half of the year. It will improve in Q2, but the real big improvement is expected in Q4 for DSA. We're not going to call out a specific DSA margin improvement number today. A big part of why we acquired K.F. was to improve supply chain resiliency and predictability, and that will lead to financial performance improvements. We'll provide more guidance on 2027 when appropriate.

Okay. Perfect. And then following up, how much of the NHP supply from Noveprim and K.F. is still obligated to external customers? And when does that fully become available to Charles River?

The external customer arrangement you're referring to relates to our Mauritius farms. When we acquired those farms, we acquired the external supply relationship. Ultimately, the goal is to use those animals for our own safety assessment studies and transition over time. That transition will occur over the next few years and is already progressing—you're likely to see more animals used in our safety studies, and the external obligations will wind down over the next several quarters.

I'll turn now to Casey Woodring with JPMorgan. Sebastian Sandler is filling in for Casey.

I wanted to first double-click on expectations for biotech revenue pacing over the balance of the year. Within that bigger, later-stage client segment that's been benefiting from M&A and funding starting toward the end of last year, do you expect this specific segment to return to growth in Q2, maybe ahead of smaller biotechs and biopharma? Or should we just expect more of a back-half rebound consistent with your expectation for total DSA growth?

In Q1 this segment was still down on a revenue basis due to lower bookings last year, but we believe it will rebound over the next quarter or two because of the stronger bookings we are currently seeing. There's typically about a one-quarter to two-quarter lag between bookings and revenue, so we expect this segment to show more growth as we enter Q3 and Q4.

And then you called out strength in research models in China. Can you remind us of the revenue base in China within RMS, what that grew in the quarter and then expectations for the full year? And then more broadly, how are you thinking about your current exposure to the China market within RMS and DSA outside of the recent NHP acquisitions? And what is your overall level of interest in expanding that through M&A in the future?

Our RMS China business is a small part of overall Charles River revenue—approximately 5% or less—but it is a critical asset because it provides access to the Chinese market. The Chinese RMS business is a leader in the industry for research models and services. For DSA, we currently don't have physical facilities in China, though we do receive work from companies that operate in China or want to file there. We continue to monitor the market closely as drug programs in-licensed from China increase. We will consider expanding our presence in China based on customer demand, growth rates and geopolitical risk, and we remain open to M&A opportunities if they make strategic sense.

Our next question will come from Ann Hynes with Mizuho Securities.

Your $300 million cost program, can you remind us what you'll be annualizing as we exit 2026 and any incremental uptake for 2027 and 2028? And then secondly, just on AI, given recent news about big pharma companies investing in AI, during the Great Recession a lot of the big pharmaceutical manufacturers closed capacity for early development. Do you think there could be a risk that they increase their capacity again over the next few years?

On the cost savings: the roughly $300 million of costs removed over the last several years equates to about a 5% reduction in our cost base. For this year, we expect an incremental $100 million. It's too early to give specific numbers for 2027 and 2028, but we will continue to look for efficiency gains as we modernize operations, and we'll provide more detail at Investor Day. Regarding AI, we invest in AI to improve efficiency, maximize capacity, streamline client communication and reduce animal use where appropriate. Our clients are mainly investing AI in early discovery and some clinical applications. We do not expect clients to in-source the regulated preclinical work that we do: our services are highly outsourced, require specific capacity and regulated expertise, and most clients prefer partnering with specialists. We may see some in-sourcing in very early discovery or certain clinical areas, but not in preclinical regulated testing.

I'll add that the $300 million of cost reductions has helped preserve margins as top-line growth has been modest. Many cost increases from inflation have been offset by these initiatives. That point is important as we manage through the current environment.

We'll turn next to Yujin Park with Baird.

You mentioned that for RMS, 1Q saw increased demand in small models from CRO clients. Was that comment specifically on China? Or was it broad-based geographically? And is this a normal pattern? Or could this be a signal of improving market dynamics?

That comment referred specifically to China. We saw better demand there, particularly from CROs and biotech, which indicates the Chinese market is rebounding and accelerating in demand for research models. It's a positive indicator for that business segment.

We'll move next to Charles Rhyee with TD Cowen.

Birgit, you mentioned biotech being at the highest levels you've seen in the last two years and large pharma slowly rebounding. Does that suggest biotech will present more opportunities over the next couple of years? Does that change your go-to-market strategy at all? And can you comment on pricing differences between those customer types and where you see the mix headed?

We are fairly balanced between pharma and biotech revenue. Historically we have large pharma share, but biotech is significant as well. Our go-to-market strategy has always been to customize engagement for small and large companies so both get appropriate collaboration and support. That won't change. We are investing in tools, platforms and training to improve our client-centric approach and increase our share of wallet. Pricing has been relatively stable; discounting happens strategically but pricing shifts materially only when capacity changes. For now, we're focused on being competitive and capturing more wallet share, and our proposal and booking trends indicate we're on the right track.

Our final question will come from Ryan Halsted with RBC.

Maybe going back to the discussion on Asia, but asking it from a competitive standpoint. A lot of attention has been on competition from Asia in drug development work. I'd appreciate your perspectives on the competitive landscape for the business.

From Asia, specifically China and to some extent India, there has been a trend of more outsourcing of early-stage, routine work to lower-cost countries. We have evaluated this over time. We still generally do not see much outsourcing of complex or regulated work to China, where most of our revenue is generated, but we continue to monitor it. That's part of why we're considering how and when to expand in China. In-licensing of programs from China into global biopharma is another dynamic we watch—sometimes we work on those programs—which affects the industry and where we choose to play. Our core relationships remain very strong in North America and the EU and to a growing extent in Asia. We'll continue to double down on those markets while monitoring competitive and geopolitical factors.

With no further questions in queue, I will turn the conference back to Todd Spencer for closing remarks.

Thank you for joining us on the call, and we look forward to seeing you at upcoming investor events. This will now conclude the call. Thank you.

Thank you. That does conclude today's Charles River Laboratories First Quarter 2026 Earnings Call. Thank you for your participation. You may now disconnect.