Ladies and gentlemen, thank you for standing by, and welcome to the Charles River Laboratories' Third Quarter 2023 Earnings Conference Call. This call is being recorded. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] 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' third quarter 2023 earnings conference call and webcast. This morning, I am joined by Jim Foster, Chairman, President and Chief Executive Officer; and Flavia Pease, Executive Vice President and Chief Financial Officer. They will comment on our results for the third quarter of 2023. Following the presentation, they will respond to questions. There is a slide presentation associated with today’s website [ph], which is posted on the Investor Relations section of our website at ir.criver.com. A webcast replay of this call will be available beginning approximately two hours after the call today and can also be accessed on our Investor Relations website. The replay will be available through the 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 than 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. We reported third quarter organic revenue growth of 4.1% and earnings per share of $2.72, both of which exceeded our prior outlook. As anticipated, our growth rates declined from first half levels, reflecting the difficult comps from last year and the moderating demand that is affecting our businesses this year. Looking at the biopharmaceutical end market environment, we believe certain demand trends slowed -- showed some early positive signs, but clients also remain cautious with their spending. Biopharmaceutical clients are continuing to reprioritize their pipelines and in some cases, conserve cash or streamline their cost structures. This has led to a meaningful impact on some of our businesses this year, including Discovery Services and our Manufacturing segment and began to have a more discernible impact on the RMS business in the third quarter. We believe the current client spending patterns will persist in the near-term. However, we are also seeing some early encouraging signs starting to emerge, which support our belief that the demand environment will stabilize. In the Safety Assessment business, we were pleased to see sequential improvement in both the study cancellation rate and the net book-to-bill ratio in the third quarter. These favorable trends are supported by external indicators, including a stable biotech funding environment. The third quarter was the second consecutive quarterly increase in biotech funding on a trailing 12-month basis, led by venture capital investments. I will now provide highlights of our third quarter performance. We reported revenue of $1.03 billion in the third quarter of 2023, a 3.8% increase over last year. Organic revenue growth of 4.1% was driven by all three business segments, led by a mid-single-digit increase in the DSA segment. As I mentioned earlier, the third quarter growth rate was affected by a difficult comparison to last year that included organic growth of 15.3% in the third quarter of 2022. By client segment, third quarter revenue growth was driven by solid demand from global biopharma clients and academic institutions. As has been the case throughout the year, the growth rate for small and midsized biotech slowed as these clients are being more selective with their spending. Growth of biotech clients last year also outpaced all other client segments, driving the particularly difficult comparison in the second half of the year. The operating margin was 20.5%, an increase of 10 basis points year-over-year. The slight improvement was driven primarily by the DSA segment as well as lower unallocated corporate costs. These improvements were largely offset by margin pressure in both the RMS and Manufacturing segments. Earnings per share were $2.72 in the third quarter, an increase of 3.4% from the third quarter of last year. This exceeded our prior outlook, due primarily to the top line outperformance. In addition, the year-over-year headwind from interest expense is beginning to dissipate. We have tightened our revenue and non-GAAP earnings per share guidance ranges for 2023 as we move into the final quarter of the year. We are narrowing our organic revenue growth guidance to a range of 5.5% to 6.5%, and our non-GAAP earnings per share guidance to a range of $10.50 to $10.70, which raises the bottom end and trims the top end of our prior range by $0.20 per share, respectively. The guidance update is primarily due to shifts in the gating of our forecast between quarters and the favorable impact of lower third quarter cancellations in the Safety Assessment business being largely offset by a reduced outlook for our Manufacturing Solutions segment in the fourth quarter. I'd like to provide you with additional details on our third quarter segment performance, beginning with the DSA segment's results. DSA revenue in the third quarter was $664 million, an increase of 5.3% on an organic basis. Safety Assessment business continued to drive DSA revenue growth with contributions from base pricing and higher study volume, driven by non-NHP related work and post-IND studies. NHP pricing was a modest benefit to the growth rate. But as I will discuss shortly, NHP study volume declined year-over-year. Discovery Services remained an integral component of our end-to-end early-stage portfolio because it enables us to forge relationships with clients at earlier stages of the R&D process. However, the business continues to be impacted by the overall biopharma demand environment as clients focus on post-IND work and getting their drugs to the clinic to the detriment of discovery spending. As I mentioned earlier, we saw some early signs of more favorable demand trends in the third quarter for our safety assessment business. The cancellation rate improved sequentially and was at the lowest level since the second quarter of 2022. The net book-to-bill ratio also improved sequentially, but remained below one times. As a result, the DSA backlog declined in the third quarter to $2.6 billion from $2.8 billion at the end of the second quarter. However, as the lower cancellation suggests clients appear to be moving further along in their pipeline reprioritization processes, which we believe will lead to a higher quality and more reliable book of business. With the net book-to-bill remaining below one times, we believe the current demand trends will persist in the near term, including in the fourth quarter, which, as a reminder, already faces a difficult comparison to DSA organic growth of 26.5% reported last year. Overall, we believe stabilizing demand trends and significant backlog coverage will enable us to achieve our financial targets, including high single-digit DSA organic revenue growth for 2023, which is above our prior outlook for the segment. The DSA operating margin was 27.2% in the third quarter, a 100-basis-point increase from the third quarter of 2022. The increase continued to be driven by operating leverage associated with higher revenue in the Safety Assessment business. Before moving on to RMS, I'd like to comment on our NHP-related study work. At our Investor Day in September, we provided some information around the benefit from NHP pricing on our DSA revenue growth rates. We believe that additional information would be useful for investors and analysts to gain a better understanding of the impact of NHP pricing and NHP-related safety assessment studies on our business. Over a three-year period, ending in 2023, NHP pricing is expected to benefit DSA revenue growth by a total of just $230 million or approximately 30% of our total DSA revenue growth since 2020. Without the impact of NHP pricing, DSA revenue would still have increased at a high single-digit growth CAGR since 2020. In total, NHP Safety Assessment study revenue, which includes both services and the embedded NHP revenue, is expected to represent approximately 30% of DSA segment revenue in both 2022 and 2023. NHP pricing has rapidly escalated since 2020 due to both NHP supply constraints and the continued increase of biologic drugs in development. Supply constraints began in China around the pandemic and intensified last year due to the Cambodian NHP supply situation in the US. This has caused NHP pricing to increase by approximately $20,000 per model in aggregate since 2020. In 2023, we expect to utilize approximately 11,400 NHPs in safety assessment studies worldwide. This represents a reduction of approximately 25% from over 15,000 in the prior year, principally driven by the current level of biopharmaceutical demand and our clients' focus on their post-IND safety assessment work, which generates higher service revenue per model due to the longer-term nature of these studies, with fewer NHPs are used to generate that service revenue. A long-standing strategic imperative of the company is responsible animal use, which includes modifying or reducing animal usage. Responsible animal use is firmly embedded in our commitment to animal welfare and the 4R principles. And its adoption accelerated this year as a result of the NHP supply constraints. One example of our progress is the introduction of virtual control groups for toxicology studies. Virtual control groups, or VCGs, replaced the animals and control groups with existing randomized data sets and statistical evaluations. It will take some time to adopt, but we are having active discussions with our clients about VCGs. As many of you are aware, we have committed to providing additional disclosure on NHP sourcing, and a comprehensive update on our NHP strategic initiatives in early 2024. The timing of this strategic update will be ideal as we recognize the industry is changing, and these shifts are causing disruptive technologies to emerge and societal needs to evolve. With the industry at an inflection point, we will reinforce our critical role in preclinical drug development and maintain our leadership position. We will do this by leading with science, remaining committed to our essential mission of creating healthier lives and ensuring patient safety and by consistently challenging ourselves to raise the bar. And as we look to the future, we will be focused on ensuring a sustainable supply chain, particularly for NHPs. And we'll also pursue a longer-term strategy to lead the industry in adopting animal alternatives. Our team is diligently working to continue to enhance our processes and key initiatives in these areas. We've already made several investments in non-animal technologies, ranging from our Endosafe Trillium launch this summer for endotoxin detection testing, to our technology partnerships with Valo for Discovery AI, PathoQuest for next-gen sequencing for in vitro viral study safety testing and Cypre for 3D tumor modeling. We look forward to sharing our NHP strategic update in early 2024. RMS revenue was $186.8 million, an increase of 3.2% on an organic basis over the third quarter of 2022. This is below the year-to-date high single-digit revenue growth rate for two primary reasons: slower demand from mid-tier clients, including biotechs and CROs; and the timing of NHP shipments within China as we anticipated last quarter. The timing of NHP shipments within China is transitory. We expect NHP revenue in China will improve in the fourth quarter, although some shipments will slip out of 2023. For the year, we expect RMS organic revenue growth will be in the mid to high single-digit range. In the third quarter, we generated revenue growth in our small research models business and in the services business. Our client segment demand from global biopharma clients and academic institutions remain robust and drove RMS revenue growth. But as I mentioned, this was offset by mid-tier clients affected by the broader biopharma demand environment as well as by softer demand from government accounts. Small molecules revenue increased across all geographic regions, including China, principally driven by price. Our services business continued to report healthy growth, led by in-sourcing solutions and our CRADL operations. Our CRADL sites, or our flexible vivarium rental space, remain well utilized overall and continue to generate significant year-over-year revenue growth. In the third quarter, the RMS operating margin decreased by 460 basis points to 18.9%. The significant decline was driven by the mix of business, which favored academic clients in our Insourcing Solutions business as well as the timing of NHP shipments within China. We expect the RMS operating margin will rebound in the fourth quarter due in part to the timing of the China NHP shipments. In addition, as we mentioned at Investor Day, we are reviewing the profitability of certain Insourcing Solutions contracts, which should benefit the RMS operating margin in the future. Revenue for the Manufacturing Solutions segment was $175.7 million, an increase of 0.9% on an organic basis compared to the third quarter of last year. The segment is experiencing softness across the broader end markets, which we attribute to a post-COVID slowdown from biopharma manufacturers, CDMOs and their suppliers. These market conditions started to more noticeably impact the Microbial Solutions business in the third quarter. Clients, particularly CDMOs, are cutting costs as part of their COVID destocking efforts and reducing testing volumes and fewer programs advanced into the clinic, but these clients must continue to manufacture commercial products. So we believe the long-term growth trends for our Manufacturing segment will reemerge after a period of right-size. For Microbial Solutions, the global biopharma demand environment is affecting our Endosafe endotoxin testing product line as clients reduce both testing volumes and investments in new instruments. This includes China, where we have a small microbial operation and like many life science instrumentation companies, have seen a decline in client demand. However, other areas of the business, such as Accugenix microbial identification services, continued to perform well. Third quarter trends in biologics testing were similar to those experienced since the beginning of the year. The sector continued to be challenged by the tighter funding environment, which is resulting in clients reprioritizing projects and reducing demand for services that can be conducted at various times during the development process, including viral clearance and cell banking. While not immune to the end market challenges, in the other manufacturing businesses, with cell and gene therapy, CDMO business had another solid quarter. Its strong double-digit growth rate in the third quarter reflected the success of the initiatives the CDMO team has implemented since the beginning of 2022 to improve performance. We are working diligently to continue to expand our CDMO sales pipeline of new products and are pleased to have cleared several regulatory audits in recent months, including European EMA approval of our Memphis site for the production of a second cell therapy product. We believe that successful regulatory audits will generate additional client interest and support our expectation that we will add new commercial clients. The Manufacturing segment's operating margin declined by 410 basis points year-over-year to 24.5% in the third quarter of 2023, but did improve again sequentially. The year-over-year margin decline reflected the lower revenue growth rate and the softer demand trends across the manufacturing end markets. We are intently focused on driving operating margin improvement in the Manufacturing segment, including the profitability of the CDMO business, as this segment is expected to be the largest contributor to achieving our 2026 margin targets. We believe our leading position as an outsourcing partner for our clients' drug discovery and nonclinical drug development efforts is helping us to manage in the current demand environment. The IND enabling and associated nonclinical services that we provide are mandatory to help clients advance their programs into the clinic and eventually to commercialize drugs. Our portfolio also differentiates us in the marketplace, because of our unique focus on early-stage R&D solutions, and our ability to distinguish ourselves scientifically. We believe that these attributes combined with our continued ability to leverage the significant DSA backlog, will enable us to achieve our financial targets. Our value proposition of delivering exquisite science and driving greater efficiency and speed to market continues to differentiate Charles River in the marketplace and is reinforced with today's more budget-focused client base. 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 third quarter financial performance and updated 2023 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. We're pleased with our third quarter results, which included 4.1% organic revenue growth and an operating margin of 20.5%, representing a 10-basis-point increase on both a year-over-year and sequential basis. Non-GAAP earnings per share of $2.72 for the quarter, represented a 3.4% increase over the prior year. As expected, increased interest expense, a higher tax rate and the divestiture of the Avian Vaccine business continue to restrict year-over-year earnings growth rate, but the headwind is beginning to dissipate as we anniversary last year's interest rate increases. Our third quarter results outperformed our prior outlook, but as Jim discussed, we remain cautious with regard to the biopharmaceutical end market demand environment. Our updated outlook for the year reflects our normal practice of narrowing our guidance ranges, as we move into the fourth quarter as well as a shift in the gating of our forecast between the third and fourth quarters. This is due in part to lower cancellations and study slippage than forecasted in the third quarter in the DSA segment, offset by a reduced outlook for the Manufacturing segment in the fourth quarter. Given the cumulative effect of these factors, we have narrowed our revenue growth and non-GAAP earnings per share guidance for the full year. We now expect revenue growth in a range of 2.5% to 3.5% on a reported basis and 5.5% to 6.5% on an organic basis, which represent the low end to midpoint of our prior ranges. We expect continued pressure in the Manufacturing segment, reflecting the softer demand trends, including in the Microbial Solutions business, which we believe will be partially offset by a more favorable outlook for our DSA segment for the year. We expect that the consolidated operating margin will be modestly lower than in 2022, resulting in non-GAAP earnings per share guidance in a range of $10.50 to $10.70 compared to our prior outlook of $10.30 to $10.90. We'll continue to manage the business in a disciplined manner, with a focus in setting achievable financial targets, protecting our operating margins by managing costs and driving greater efficiency, remaining disciplined with our investments, taking share and implementing other initiatives to improve performance and manage effectively in this environment. We continue to evaluate our operations and we'll appropriately manage our cost structure to align with the current domain environment. Restructuring actions implemented this year are expected to generate approximately $40 million in annualized cost savings. Our updated revenue growth outlook reflects slight revisions for each of our segments. As I just referenced, we are reducing the outlook for our Manufacturing segment to be flat to low single-digit organic growth from our prior outlook in the high single digits. For the RMS segment, we have widened the bottom end of our outlook to mid to high single-digit organic growth. This reflects the timing of NHP shipments in China, some of which may be deferred to 2024. And our RMS segment also experienced a more discernible impact from mid-tier biopharma clients' softer demand. Our improved outlook for the DSA segment to high single-digit organic revenue growth, principally reflects the lower cancellations and study slippage in the third quarter that I referenced. I will now provide some additional details on the non-operating items that affected our third quarter performance. Unallocated corporate costs in the third quarter totaled $48 million, or 4.7% of total revenue compared to 5.8% of revenue last year. The decrease was primarily due to benefits achieved through our virtual power purchase agreements, or VPPAs. Despite the favorability in the third quarter, we continue to expect unallocated corporate costs to be approximately 5% of total revenue for the full year. As we announced in October, we have achieved 90% renewable electricity globally through a solar VPPA in North America and a wind VPPA in Europe. These agreements have enabled our facilities in those regions to achieve 100% renewable electricity, providing a key component of our efforts to reduce Scope 1 and 2 greenhouse gas emissions. The third quarter non-GAAP tax rate was 21.6%, representing a 140-basis-point increase from the same period last year. The higher tax rate year-over-year was due primarily to the geographic mix of earnings. However, the tax rate was favorable to our expectations, principally because of discrete tax benefits related to U.S. R&D tax credits. For the full year, we now expect the tax rate will be at the low end of our prior range, or approximately 22.5%, due primarily to the discrete tax benefit. Total adjusted net interest expense for the third quarter was $32.4 million, representing a decrease of $1.2 million sequentially, due primarily to debt repayment. For the full year, we have narrowed our total adjusted net interest expense outlook by $1 million to a range of $131 million to $133 million, as any further rate increases by the Federal Reserve before the end of the year will not have a meaningful impact on our 2023 results. At the end of the third quarter, approximately 80% of our $2.5 billion in outstanding debt was at a fixed interest rate. Our gross and net leverage ratios were both approximately 1.9 times at the end of the third quarter. Free cash flow was $139.5 million in the third quarter compared to $60.4 million last year. The year-over-year increase was primarily due to favorable changes in working capital as well as lower capital expenditures. For the year, we have narrowed our free cash flow guidance to a range of $340 million to $360 million. Capital expenditures were $65.9 million in the third quarter compared to $72.4 million last year. For the year, we now expect CapEx to be in the range of $330 million to $340 million or below our prior outlook of $340 million to $360 million. We continue to take a disciplined approach to managing our capital deployment and are committed to aligning our capacity and capital investments with the current demand trends. A summary of our updated financial guidance for the full year can be found on Slide 37. With one quarter remaining in the year, our fourth quarter outlook is effectively embedded in our guidance for the full year. For the fourth quarter, we expect revenue to decline by nearly 10% on a reported basis and at a mid-single-digit rate on an organic basis. This will result in flattish year-over-year organic revenue growth in the second half of the year, which is consistent with the outlook provided in August. Non-GAAP earnings per share are expected to be in the range of $2.30 to $2.50. The fourth quarter outlook largely reflects a very challenging comparison to the prior year when we reported organic revenue growth of 18.8%, including DSA growth of 26.5%. In conclusion, we're pleased with our solid third quarter performance, which is evidence of the resilience of our business, despite a cautious biopharma spending environment as growth rates normalize to pre-pandemic levels. We'll continue to manage our business prudently in response to the challenges we are seeing in the broader market environment and work diligently to achieve our financial targets. Thank you.

That concludes our comments. We will now take your questions

[Operator Instructions] We'll take our first question from Eric Coldwell with Baird. Your line is now open.

Thank you very much. Good morning and truly appreciate all the additional details on the NHPs. I'm curious, in 3Q, could you provide commentary on the gross awards in DSA? Were those positive, above one, below one? Just any color on gross bookings in the quarter? And then on the backlog, $2.6 billion. I'm wondering if you have additional thoughts on where and when that backlog may stabilize at what level? What -- how long it might take for the net reductions to come to an end? Thank you.

Good morning, Eric, yes, the gross bookings were above one in the third quarter. And we also, as you saw in our prepared remarks, had a sequential improvement in net book-to-bill in the quarter. So the backlog came down a little bit from the second quarter. It's at $2.6 billion now. It was $2.8 billion in the second quarter. So I think it demonstrates that things are stabilizing, and we're reverting back to the pre-COVID norm as we have been talking about.

Jim, if I could just jump in with one more. You had an Investor Day not so long ago. Some new updates here on the timing of 3Q, 4Q impacts, maybe some additional market change over the last month or two. I'm just curious, does -- anything you're seeing today change your outlook on the LRP that was provided just a while ago, achievability, confidence levels? And then specifically on 2024, I know you plan to give guidance later, but Street's hovering around $11 of earnings. I think this update might provide some controversy about whether that's a realistic target. I'm just comfort with high-level views on your comfort levels with where Street expectations are for next year? Thank you.

So Eric, we feel confident about our three-year guidance that we just gave. I think those numbers are achievable both on a segment basis and on a total company basis. And I would say that, relative view on 2024, which we talked about a little bit on that call, hasn't significantly changed. But it's a complex market environment. We definitely want to see how the fourth quarter ends. We've only had a month. So it's really too early to provide any more details on 2024, but we feel good about the three-year numbers.

Okay. Thank you very much.

Thank you. We will take our next question from Elizabeth Anderson with Evercore. Your line is now open.

Hi, guys. Thanks so much for the question. Just in terms of DSA bookings, just a follow-up from Eric's question. Do you see any impact from like push-outs or timing issues? I just want to make sure that we're just looking at everything on sort of like an apples-to-apples basis? And secondarily, can you talk about the cash flow in the quarter? It's a little weaker than we had been expecting. So I just wanted to make sure I understand -- understood all of the puts and takes there. Thank you very much.

So we -- slippage and cancellations isn't always obvious. We've talked about that a lot. Definitely higher this year, but we're seeing a slowdown in cancellations. We definitely saw that third quarter. So pleased to see that. So it feels like things are normalizing. We're kind of getting back to pre-COVID cadence. We certainly want to finish the quarter and put it an apostrophe after that -- a period after that, I mean. So it's always part of the business, got more pronounced because that we had studied volumes we're booking out 18, 24 months. In some ways, that was really nice. In some ways, that was probably too long because we saw clients just booking slots that would not necessarily knowledge that they had a study and often when they got to the point of actually committing, didn't have a study. So that's been a little bit disruptive. So we've got pretty good backlogs now. Not as long as they were, but not as sure as they were years ago. Impossible to tell where that's going to settle out. But it's moving towards a better place with more predictability, more consistency and probably a more normal cancellation rate. I think Flavia will answer the other part of that question.

Good morning, Elizabeth, on free cash flow, the quarter actually was pretty solid. We reported about 100 -- close to $140 million in -- that was up almost $80 million or 130% versus prior year, although last year was a relative slow base. For the year, cash flow is a little pressured. Some movement on working capital, receivables and inventory and timing of that, but I think it's still a very solid performance. We actually have lowered our CapEx for the year a little bit. Our guidance, as you saw to reflect modulation of our investment in capacity, given the current demand environment in Q3, CapEx was a little bit above 6% of sales which is below what we've been -- we told you all at Investor Day that our target would be 7% to 8%. I think we are navigating the current demand environment well, fortifying our performance, and we'll deliver solid free cash flow for the year.

So you're not seeing an incremental slowdown in like pharma payments or biotech payments, given the current environment? And then is that CapEx the way to think about things going forward? Just to double quick on two things you said there.

Yes. So I'll parts those two comments out. So we are not seeing any impact or any significant impact with regards to bad debt or any similar metrics of creditworthiness. There's nothing unusual and significant in the receivables side. And then from a capital perspective, we're not coming off of the 7% to 8% that we provided about 1.5 months ago. I'm just saying that relative to that, we were lower in the third quarter.

Got it. Thank you so much.

Thank you. We will take our next question from Derik De Bruin with Bank of America. Your line is open.

Hi, good morning and thank you for taking my question. Hey, Jim, I appreciate the additional top line commoner on the NHPs. But I think the key question investors have is what's been the benefit from margins and EPS since 2019? And what happens when pricing goes back? I mean, rough back of the envelope, and you can always check my math. It looks like it's about a $3 benefit this year to earnings, assuming the margins are similar, but I see they're accretive. You really think that would really help clear the air, if you just sort of like talked about what -- how you sort of think about pricing trends? I know it's not going to go back immediately to -- prices aren't going to fall back, but I do think this is like the one question that keeps coming up with investors is like, what does EPS looks like as NHP pricing normalizes?

Derik, it's Flavia. I'll start, and then Jim can comment. I think it's a little bit of an impossible when and if prices will come down. We have -- as I think we provided in our additional disclosures, price has been a benefit, but perhaps not as much of a benefit as people have predicted. We have diversified supply base, which helps mitigate and manage -- help us mitigate and manage through price fluctuations and volatility. As we said in our Investor Day, we have taken into consideration a modulation of pricing of NHP in our outlook. So we already took that into consideration as we provided you all our LRP numbers for the next three years. I speak more than that. I don't know -- I have any additional comments. Jim?

I mean I think because the prices have risen dramatically, some of that is reflected. Most of that is passed through. We think that the prices will flat, moderate perhaps, be reduced because there are sufficient numbers. We still think we'll get price besides the incremental price for NHPs as we have for the last few years and volume and mix as a result of the types of studies, what the duration is. So there's been a benefit, but I think it's more modest than people are thinking -- are anticipating. I think that's really all that we could say to -- we really like to stay away from pricing.

Great. Okay. And just switching to something different as a follow-up, can you sort of like quantify what the -- how much microbial was down in the business? And how much of that was China versus the rest of the world? And also, what was the impact to RMS from the NHP push-out to China in 3Q? Thanks.

Yes, so without giving you the actual numbers, the China NHP sales are not consistent. So they sort of shift from quarter-to-quarter. And so we'd like to look at that on an annual basis. So we're likely to see more of that happen in the fourth quarter. Some of that might slap over into 2024. And the first part of your question was?

Microbial.

Microbial. So yes, several things working there, for sure. Some impact from China. We have a small but not -- we have a small but profitable and interesting Chinese business, which has had just some difficulty in terms of supply. With local regulations, we should be moving past that. Like many parts of the business, I mean, the microbial business is providing a lot of release testing for drugs that are going into the clinic or have been approved, but require that law. That's a good news. Probably a less good news is that, there's less drugs going through that testing modality these days. So that has some impact. We also have clients that bought an awful lot of product from us at the end of last year. Of course, we don't know at the end of this year will be like, but it seems to be sort of an unloading of inventory or the fact that they stock up so much that they probably need less. The business is an interesting inflection point with the recombinant products being available. I think it will take a while for us to get traction. But some aspect of our client base has been looking forward to there. We have a very good product. So we feel good about that. So a slightly slower growth rate than we would have liked, but I think that's kind of consistent with demand that we're seeing across the board, particularly from biotech.

Derik, just to add specifically on the NHP, it is just a modest headwind to the RMS revenue in the third quarter. We're not going to specify the amount, but it's a modest impact. And to Jim's point, while the Microbial China business is still relatively small, it has been growing nicely for us. So that slowdown does affect the microbial growth rate.

Thank you.

Thank you. We will take our next question from Casey Woodring with JPMorgan. Your line is open

Great. Thank you for taking our question. So just a quick follow-up. I wanted to touch on the bookings. So did gross bookings grow sequentially? Or did cancellations just drop quarter-over-quarter? And then I just have one quickly on the revenue per NHP. It looks like if we use the numbers that you gave here, 30% of DSA revenue per year is exposed to NHPs. If you back out the implied, it looks like revenue per NHP grew close to 42% year-on-year in 2023. Just how should we contemplate revenue per NHP on a forward-looking basis? Thank you.

So I'll maybe take the question on cancellations and growth in that book-to-bill. So I think we also stated in our remarks, the cancellation level in the third quarter was the lowest that we had seen since the second quarter of 2022. So I think we have been talking about a normalization of the domain environment, people going through their pipeline, reprioritization, and we had speculated that, that would eventually modulate. As Jim said, slippage and cancellation is a normal part of the business, but we had certainly seen a higher level of cancellations as the backlog expanded significantly at its peak to 17 months. And so there was a lot of, I would say, rationalization and people prioritizing their compounds. The gross book-to-bill in the quarter was above 1, as we said. And so the lower cancellations did help improve the net book-to-bill sequentially in the third quarter versus the second quarter. So I hope that answers your question. And can you repeat the part about the NHP pricing?

Yes. It was just the less NHPs used this year has led to a lot higher amount of revenue per NHP. So just thinking about that on a forward-looking basis, just trends there? Any color around that trend? Thank you.

Yes. Thanks for clarifying that. Yes. And the last NHP usage and still, on a relative basis, higher revenue is driven by the types of studies that we're conducting more so. As clients seem to be prioritized and post-IND work, we are seeing the impact of that into our study mix as well. And we do a significant amount of post-IND work. These studies are longer in nature. And so from a mix perspective, they result in less units, but relatively higher revenue since you -- they last longer, as I said. So it really will depend on what happens with the demand. It's -- we -- if clients are going back to pre-IND work, you see a reverse of higher numbers of units being used. So it's hard for us to predict, at this point, given that we don't know our clients are going to be clients are going to be prioritizing their pipeline if they're focusing on pre or post-IND studies.

Thank you. We will take our next question from Patrick Donnelly with Citi. Your line is open.

Hi, guys. Thanks for taking the questions. Flavia, maybe one for you, just on the margin side. Gross margins came in a little light. I mean was that just to do with the lower manufacturing side? And then you guys, obviously, offset that with the SG&A being quite a bit lower. Can you just talk about, I guess, the moving pieces on those two and the right way to think about them going forward?

Sure. So yeah, the gross margin was dominant. You saw and appropriately pointed manufacturing. And also as we commented, RMS was a little bit impacted by the domain environment with the growth slowing down to about 3% versus last quarter, putting aside the timing of shipment of NHPs. So those two businesses were pressured in margin and our ability to leverage fixed overhead, we did have the benefit in G&A, and I talked in my prepared remarks about the impact of our VPPA. So you put it all together, DSA had another strong margin quarter for us with operating margin expanding 100 basis points year-over-year. So in total, we were about 10 points -- excuse me, 10 bps better at 20.5 versus Q2 as well as prior year. And there's a little bit of mix of businesses there. As I also indicated in my prepared remarks, we are -- as I would expect, remaining disciplined in ensuring that we adjust our footprint and our infrastructure to the current demand environment. We have implemented some restructurings that will -- when all completed, will translate into annualized savings of about $40 million. And so you think about the margin as we are rightsizing our businesses to the current demand environment, there's a little bit of a lag in terms of when you're going to see the benefit of these actions. But I think we commented that we expect -- continue to expect OI to be flat to slightly down versus last year. And we provided some insights to you all in our Investor Day in terms of what we expect for the next three years in terms of margin expansion.

Okay. No, that's helpful. And then maybe just one more quick one on the gross bookings side. Can you just help us think about what the gross book-to-bill was last quarter? Again, just trying to feel out the numbers here without the cancellations on the gross bookings side? I appreciate it.

Yeah. So we haven't disclosed a specific number. What we have said is growth. Book-to-bill has been above one in Q3 as well as Q2. So it continues to be above. And as I said to an earlier question, what influence the net book-to-bill to be sequentially up in the third quarter versus the second quarter was the fact that cancellations were lower in the third quarter.

All right. Thank you guys.

Thank you. We will take our next question from Dave Windley with Jefferies. Your line is open.

Hi, good morning. Thanks for taking my question, and thanks for the additional disclosures. I appreciate that very much. I wanted to try to follow up on a couple of prior questions. So, on the kind of Casey's question, I guess, on the revenue per NHP implied. Flavia, I understand your point about -- I think you're talking about like maybe long-term CAR studies or something of that sort that are -- that run longer without needing more animals. Is that the exclusive impact? Or is there also like a reuse that's not in the -- I'm thinking if you have 11,000 unique animals, for example, and then there are also some reuses of those animals, that would also have the effect of lowering that revenue per annum. I just want to make sure I understand the various contributors to these numbers that you've disclosed this morning.

Sure, David. Yes, the primary impact is your first point. Yes, it's card studies, repro studies, those tend to last longer. So we can still get the same revenue with less units. So that's the primary driver. And those types of studies, all post-IND, they were up significantly in Q3. And they have been up sort of Q3 year-to-date versus last year as well. So that, again, goes back to my earlier point of clients prioritizing post-IND work.

So we have a reduction in numbers of NHPs use, with a meaningful amount of revenue associated with those just because of studies are much higher value -- or much longer and are really essential to be getting drugs through the clinic. So a little bit of a shift at least for this year. It's difficult to say help, but we usually have a pretty good balance between IND files and post-IND work, but that's a really good explanation for why the units are down.

Got it. Okay. Jim, on the -- there are a couple of comments, I think, in the deck this morning about kind of technology references. I know in the past, the general view has been that as much as we'd like to be able to spare animals or shift to virtual technologies and silicon technologies, that those are probably a long way off. One of your lines in the deck this morning kind of references that like maybe there's a little bit more promise there. And I wanted to -- and kind of that we're going to lead the industry context. I wondered, if you'd comment on that is, am I over reading that?

Well, I'm glad you asked that, Dave. So, Charles River has a responsibility to utilize alternative adjunct technologies to the extent that they actually exist and work, and regulators and clients will embrace that. And they'll give us decent information. And so, as the largest provider of research models, as the largest [indiscernible] company, we have to lead. So we have multiple investments, relatively small, except for one multiple investments and a whole bunch of different technologies, particularly AI, next-generation sequencing, 3D modeling would be once it come to mind immediately. I met with a company yesterday that's in the AI field, so that's probably going to be another one. And it's impossible to tell how much traction we'll get, but I do think that there's a fair amount of work being done right now. And I can see it sooner than later in discovery, and we can see it sooner than later in helping the clients identify a lead compound and moving away from other drugs that we're working on that probably don't show efficacy and being able to do that with non-animal technologies or less animals. And hopefully, that would speed up the whole process of them moving towards the clinic. So we feel really good about that. Dave, I couldn't guess how far away this is, but I think we'll see some of the discovery impact. And I think -- we think that's beneficial for the industry and for us sometime maybe in the next five years. I don't think it will be substantial. But I do think it will be real. To the extent to which those technologies work, those are likely to be companies that we buy or technologies that we license. And never is a long time, so I won't use the word never, but from everybody that we speak to, we think it's highly unlikely that you're going to see any post-sale replacement of animals and classic toxicology just because it's all about safety in a wholly animal model appears to be the best use -- the best way to do that, but -- and so the extent to which the non-animal technologies ever get any traction tax, I think -- we think that's way off. Having said that, we're just going to do a lot of work, Dave, in all of this stuff. Study it, write about it, utilize it, talk to our clients about it, talk with regulators about it and make multiple shots on goal with these potentially valuable technologies to see what really has traction. So we're going to continue to talk about it because we do think it's important. We do think it's possible in some domain, and we do think that if anybody is going to lead it, it really needs to be us.

Got it. Relatedly, one of the other areas that you had hoped, I think, to lead on was around this parentage testing and providence of animals. Is that still relevant? Or is that kind of faded and not strategically relevant anymore?

I think that directionally, that's going to be important, not just for regulators, regardless of the country, but for ourselves just to know that and for our clients just to make sure that these animals are purpose spread. So yes, it's going to be sort of slow going to get kind of a sense from government agencies that they like what we're doing. We actually found several places that we could do this on a cost-effective basis and really sort of nail down the fact that those animals are as we desire. We got out really fast working on it. I think the government is going to be a little more slow in their uptake of even having a conversation with us. But I do think that's something that again, Dave, that I think it's essential. I think we have to -- have the leadership position there. I think that, that -- it's not very complicated by the way. As you know, we have this whole -- the whole being able to identify the genetics -- genome -- the specific animals is relatively straightforward science. It's a lot of animals, so it's not trivial from a cost point of view. But I think we can do it cost effectively and whatever it is other going to pass it on. So we still, I would say, in the background, Dave, but we'll get back to it at some point, for sure.

Got it. Thank you.

Sure.

Thank you. We will take our next question from Justin Bowers with Deutsche Bank. Your line is open.

Hi, good morning, everyone. So with booking -- a two-parter for me. With the bookings stabilized and sort of if I look at the revenue and safety assessment for the first three quarters, does that seem like sort of a good run rate like on the go forward? And I just -- if I look at what the guidance implies for 4Q, for example, and we adjust for the extra week last year, it sort of gets at DSA revenues flat, plus or minus Q-over-Q. So that's the first one. And then just with the improvement in the bookings that you're seeing, and I understand flow of cancellations. Is there any way to parse that out in terms of the nature of those cancellations and how it's sort of improved? Is it like -- is it more less of the empty rooms versus programs that are in flight being canceled? Just any additional color there would be helpful.

The reduction cancellation is a good thing. I hope people are getting that. Because of capacity limitations, demand, availability of everything, including NHPs, and funding seemingly being better whatever last year and the year before, I think we had clients that were really worried that they wouldn't get a slot. And so they booked way out, which is some of that was good news and some of that was just booking a slot without a study. So that's disruptive, particularly when you get to the point of planning to set aside a certain number of animals and a certain cadre of staff, and then people can -- and yes, they have a penalty when they cancel it. That was really great. So I think the normalization of cancellation, which, by the way, isn't always -- cancellation slippage is an obvious -- is really a good thing. We're getting back to probably pre-COVID levels. And as we said a couple of times, it's always been there. And that's in the calculus of our forecasting and our guidance and how we plan for headcount and allocation held. So I think that's actually a good thing. I would stop short of sort of trying to quantify what the growth rate of the Safety Assessment business is on a forward-going basis. It's a business where -- we continue to be the market leader. We continue to get some price. We continue to get a significant amount of volume. I think we just said that we have a lot of stuff moving into this post-IND phase, which is fine, but we want both. Obviously, we're doing some IND work as well. But it's important that we have both long-term studies and short-term studies. And I think what's happening is we're going to have a slow normalization of demand. We have a second quarter where biotech funding is pretty good. VC funding is fabulous, a lot of money coming in from pharmaceutical companies. And so companies, as you've heard us say before, that have few drugs for unmet medical needs will get funded, and they don't all have to come to us, but lots of them will come to us. So, we feel optimistic about the demand going forward. As I said earlier, we stand behind those three-year guidance numbers that we gave at our Investor Day. The sort of speed and cadence of all of this is not particularly clear. It hopefully will be a little more clear as we finish this quarter, and talk to you folks in February about specific guidance for next year.

And we can maybe follow-up with you later on the DSA revenue for the fourth quarter, just -- to make sure that we get the math correct. When we provided guidance by segment, it's on an organic basis. And so the DSA, at high-single-digits for the year, leads the fourth quarter there, would imply probably a negative growth in the fourth quarter. And again, to remind everybody, we had an extraordinary fourth quarter in 2022 with 26.5% growth for DSA. So there's a bit of comps there that impacts it. So I don't know if it's the impact of the 53rd week when you did your math.

Yes. I was looking -- I was referring more sequentially versus year-over-year, but happy to work through that offline.

Sequentially, you're right. It should be flattish.

Okay. Got it. Thank you.

I thought you were talking year-over-year.

Yes.

Thank you. We'll take our next question from Dan Leonard with UBS. Your line is now open.

Thanks for taking the question. I want to make sure I fully understand the direction of travel here in DSA, and I appreciate all the color on gross bookings. But specifically, I'd like your thoughts on at what point is the continued weakness in Discovery impact your outlook for safety?

Hardly at all. So I understand why you asked the question. So our strategy and goal is very much that Discovery is a feeder for safety. So that's obviously the essence of your question so. It's a trivial part of the DSA revenue right now. Although we love the business, and we have good science and good parts and pieces, we're in an air pocket right now, but that's going to be transitory. To sort of refresh my answer to your question, if Discovery is rocking that's beneficial to our safety business, particularly if we if we hold on to work. And just generally speaking. But I would say that it's kind of a tale of two cities. Our safety business is actually in this kind of funky economic environment is performing extremely well. We're getting price and share and lots of big studies and our capacity is well utilized when I say capacity, both people and space. So as you think about the future, which I assume you are and if you assume that Discovery sheer pocket continues, and I don't know whether that's true or not. It will matter. It won't really fundamentally affect the size and scope and growth rate and our margin profile for the Safety Assessment business. And if it comes back strong, which, by the way, can on very short notice or no notice, it just would be beneficial and add some incremental revenue to the sector. Also has I guess last also has good margins. So I don't want you to forget that even though it's slower than we would certainly like the Discovery business has gotten nicely profitable had wonderful growth rate last year, the year before and the year before that. And I think we're holding our own very well. But it's just -- it's very simple. You've got clients, big and small, emphasizing post-IND preclinical work and clinical work just because they have to get some drugs to market to generate more revenue. That's -- and that's sort of an always-always. But if they don't spend money on discovery, which, of course, is what they do, what biotech only does, they don't spend money on Discovery, then they'll have nothing whatever, two years, three years, one year from now in the clinic. So it's not our opinion. It's a certainty that the pendulum has to swing back a little bit difficult to call because it's definitely related to funding and the overall economy. And I think it's related to that much less being related to the strength of the scientific modalities, which are going to be quite powerful. We got some really great drugs with these companies we're working on that are better life saving. So we'll watch you. We'll let you know as soon as Discovery begins to come back. And as I said a moment ago, it will come back sort of surprisingly fast. Studies are short. We don't give a lot of notice on them. The turnaround time is pretty good, so is the pricing.

Appreciate that clarification, Jim. And if it's possible to ask an unrelated follow-up. I was hoping you could frame proportionately how much of your manufacturing business is driven by commercial products versus early-stage products that might be more subject to the reprioritization that you talked about on the call?

Good question. So the CDMO business is all pretty much all clinical. So that's not manufacturing that stuff. So it's a little bit different than the rest. Yeah, I mean, a big piece of microbial is to lot release for commercial products. So yeah, for sure and less stuff goes through the pipeline as less stuff is approved as they're trying to spend money in the clinic and maybe manufacture less of their other products. It slows down a little bit. Similarly, with biologics, that's also -- we have to test those drugs before they go into the clinic. So just so I don't confuse you, yeah, a lot of stuff is focused on the clinic and going into the clinic, but less than they would otherwise like to go into the clinic just because they care. But we talked about the reprioritization of their pipelines. So even big companies, big pharma, who is well financed, has budgets and they're very tight on the budgets, both in terms of headcount and other things. So we've definitely seen just a conservatism on the part of almost our entire client base who has -- they have really good portfolios. They are just not developing and prosecuting their entire portfolios, maybe the way they did in 2021 and 2022. Again, it's all transitory. So as stuff gets through the clinic and into the market, and when the economy feels better for these folks, I'm not an economist, so I have my opinion that kind of -- not useful on this call, I do think we'll start to see a lot more spending in discovery. But to answer your question specifically, you'll see a lot more testing of commercial products to go into the clinic.

Thanks, Jim.

Thank you. We will take our next question from Tejas Savant with Morgan Stanley. Your line is open.

Hey, guys. Good morning, and appreciate the time here. Maybe one on RMS, more of a cleanup really. Flavia, can you parse out that 460 bps decline in RMS margin across the NHP timing in China and the academic in-sourcing mix? I know you mentioned it was mainly the latter as far as top line growth. So is it fair to assume that, that sort of flows through to the margin sort of dynamic as well? And over what time frame do you expect to see a little bit of help from exiting the lower margin and sourcing contracts? I mean, is that a 2024 dynamic? Or is that more 2025 and beyond?

Hi, Tejas, how are you? So the RMS impact, both on top line as well as margin was a combination, as I said, of the lack of significant shipments of NHPs in China as well as a mix of businesses in our RMS segment. As you pointed out, we had a higher growth of some of the lower -- on a relative basis, lower margin subsegments within RMS. So we expect that to continue into the fourth quarter. We're seeing, from a demand perspective, more resilience on the larger pharmaceutical clients and government contracts. So that plays into the margin. And then in the fourth quarter, though, we will have NHP shipments. So the margin for RMS will pick up in the fourth quarter. I think we had telegraphed data or signal that in Q3, we weren't going to have any meaningful shipments and therefore, the margin was going to come down. So again, this is consistent with what we have been expecting. As far as the government contracts that we expect that we announced in the Investor Day, that are lower margin and that we would be exiting will likely start in the 2024 horizon.

Got it. That's super helpful. And then one on just the margin outlook here on a go-forward basis. Jim, I mean, obviously, you mentioned in your prepared remarks, manufacturing support is the biggest driver of margin expansion. Just in light of the 3Q headwinds here, what flattish margins next year be a fair additional assumption? I know it's a complex environment, but you also called out RMS seeing a little bit of macro headwinds here beyond China NHPs. So just any directional color for -- sort of on 2024 margin trajectory would be super helpful. Thank you.

I know it would be super helpful, but I have to wait until February to get that clarity, but I appreciate you asking.

Tejas, I would say, though, we still feel good about the 150 bps over a three-year period that we shared with all of you during Investor Day. The timing of that, as Jim said, it's not linear in that three-year horizon. And obviously, the main environment will play into that as we go into 2024. But we also, as I indicated in my prepared remarks, have also appropriately adjusted or started to ensure we are appropriately reflective of the current demand environment with some of the actions that we took already this year. So I'll let you take those pieces and make your estimates for 2024 until we provide guidance in February.

All right. Thanks, guys. Appreciate the time

Thank you. We will take our next question from Max Smock with William Blair. Your line is open

Hi, all. Thanks for taking our questions. To start, maybe I'll try to get at Derik's question from a lot earlier here, just in a different way. So your disclosures imply about $780 million of NHP-related revenue in 2023. How do the margins associated with this NHP work compared to your DSA operating margins this year? And how have the margins on that NHP were changed over the last few years as a result of the pricing increases on the NHP side? And then in terms of assumptions moving forward, I'd be curious to hear your take on what you actually have baked in for margins on NHP work as part of your midterm guide here, given your comments about pricing normalizing some here as we move forward. Thank you.

So maybe I'll start, and Jim can add. And I think I've -- we commented on this over the last several quarters. NHP work, on a relative basis, has slightly higher margins than some of the other species more -- we do. They tend to be more complex, sometimes longer. And so there is a mix impact that has been favorable as biologics had grown, and that drives higher demand for NHP work within our total study species work that we do. So that has been a tailwind. We don't know if that will continue or not, but that is unrelated to the discussions that we've been having on price. And I think maybe, Jim, if you want to add some comments.

I think that's all.

Okay. Perfect. And then maybe just following up on Dan's question from a couple of minutes ago here. You mentioned the slowdown in discovery doesn't change your strategy in preclinical. But I just wanted to confirm that I heard you right, that we're not close to the point where the slowdown in discovery that we've seen over the last couple of quarters here starts to impact gross bookings and safety assessment. And then ultimately, gets work is like the pipeline towards the clinical stage. Like when do you think do we get to that point? And when should we start to get concerned? I guess, at the slowdown we've seen in discovery will start to impact preclinical more heavily and eventually clinical trial demand? Thank you.

Don't be concerned. It's not the first time this has happened. When times are good, we see a balanced spending in discovery and development. That benefits our whole portfolio. When client base is concerned about revenues, they tend to nuance the clinic. And with regard to preclinical stuff, the post-IND stuff, and there before. And in terms of the growth in development and solidity and strength of the companies, they have to go back and spend a discovery. So it's just a matter of time, and it's impossible to call it, although we'll obviously have to call for our operating plan for next year. But as I said before, our discovery business, which we're pleased with the scale, pleased with what we put together is still trivial by comparison. So it's really going to have no impact on the growth of our safety assessment business any time soon. As I said before, positive about as we continue to work hard to have a flow-through for successful molecules for discovery safety, it could be a benefit, but I really don't see this being a detriment. I suppose if the business was much larger, and 90% of our clients were moving stuff from discovery to safety, I might give you a different answer, but that's -- maybe we'll be there someday. It's not where we are right now. So I understand that they are connected, but it's actually useful to look at it on a connected basis. So what you see when we report DSA is essentially primarily our safety assessment results.

Okay, perfect. Thank you so much for taking my questions.

Thank you. We'll take our next question from Charles Rhyee with TD Cowen. Your line is open.

Thank you for taking the question. I had a question on the fourth quarter guidance, just generally how to think of cadence overall. I think pre-COVID, your fourth quarter was typically your strongest quarter in terms of earnings. Obviously, that wasn't the case during the COVID period and certainly not the case this year from tough comps, as well as some of the trends you're discussing. If we think about the range here for the fourth quarter, is this a good jumping off point, though, as we're going to the ex-COVID period? It seems like backlog is normalizing. Cancellation rates are slowing, and we're maybe getting to a more normal period. And so would we expect the jump-off point for the fourth quarter to think of first quarter next year at least sequentially down and we be getting back to a more normal cadence of earnings?

It depends on what you mean by jump-off point from a growth rate, right? Our first -- our fourth quarter, as I indicated in my remarks from an organic revenue, it's mid-single-digit decline, which is not, I think, how you should be thinking about the outlook for 2024. Without putting -- without giving any guidance into 2024, we -- I think the fourth quarter is being impacted by comps, because we had extraordinarily high performance in the fourth quarter of 2022, with close to 19% growth. So if you're talking about growth rates, I have to be careful.

Right. Some color on from a dollar standpoint?

Yes. So I think from a dollar standpoint, I think I commented earlier, it's sort of flattish, I think, to slightly down versus the third quarter. Normally, our fourth quarter tends to be our largest quarter from a dollar perspective. But we do, as you pointed out, we've seen some impacts from the demand environment, and that plays a little bit into the fourth quarter. We really encourage you guys to look at us on an annualized basis. We have fluctuations quarter-to-quarter. There's comps when we compare to last year, first half, second half, as we pointed out. First half was relatively lower, second half was very strong from a growth rate, and then there's other things like the timing of the NHP shipments in China, as I pointed out.

Great. And if I could just quickly follow-up on that?

Use the entire year as the jumping off point, I think it's what we're saying. So we had -- we've had some complicated comps this year and last year, first half year versus second and vise versa. The sort of assumption that quarters will be at certain growth rate is almost a positive for us to discern. I think we do a very good job at giving you annual guidance. So try to embrace what the full year is growth rate and margin is as some sort of reasonable jumping off point, subject to whatever we do with pricing and whatever volume we can gather for the next year. But if you just assume that whatever the fourth quarter is just going to continue, I think that's going to give you an erroneous result.

Yes, understood. If I could follow-up on that NHP. Just what is the sort of root cause on the kind of the difference in timing of shipments? Has that always just been a constant in this business just not very noticeable or just not having needed to be called out until more recently? Or is there something more specific happening over the last year or so?

Yes. No, I mean it's always been there. We had to call it out, because it was sort of unpredictable and the numbers are pretty big. The impact when we get it is quite positive. We don't have a lot of control and we have x number of NHPs available. We have a handful of local clients, Chinese clients who want them. And sometimes that slides, they say they want them in a certain quarter, and they don't take them or they don't take all of them. So it's again, a little bit unpredictable, but we should end up selling all that we had anticipated during the fiscal year. So we have said earlier that numbers of animals available was slightly less than they were a couple of years ago. And so that has an impact as well.

Great. Thank you, so much.

Sure.

Thank you. We'll take our next question from Jack Wallace with Guggenheim Securities. Your line is open.

Hey, thanks for taking my questions. Quick one on NHPs and again, I appreciate all the disclosure. I think you recall that there was expected to be about half or certainly less than the $190 million -- or $160 million impact for the back half of the year due to supply constraints. It looks like there was a solid beat in DSA in the quarter, possibly related to that. Was there any NHP revenue drop there or impact that was you previously called out that we experienced in the third quarter?

Yes. So I think we've been -- the team has done an incredible job throughout the year of ensuring we could support the needs of our clients and mitigate almost all the impact of the supply disruptions that we were expecting in the beginning of the year. And so as a result of that, as you saw, we actually updated our full year guidance for the DSA segment now to high single digit. And so I think the impact of NHP supply disruption would really -- has really been de minimis and has allowed us to actually increase the DSA guidance.

That's fantastic. And then quickly over to manufacturing, thinking about the testing business. Just to put the demand for testing in context for vaccines, roughly, where are we today in terms of demand mix versus, say, pre-COVID? Just trying to get an idea if there's -- as inventories have been diminishing, whether there's a snapback here. We're still above -- at an elevated level compared to historical norms. Thank you.

I think the historical levels of testing or higher. A lot of the work got sort of high-jacked with COVID that should be coming back. What we're encompassing now is just to pull back the numbers of drugs to be tested just generally a huge emphasis in getting stuff through the clinic. Again, our biologics business, not unlike discovery snapback quickly -- get snapback quickly. We have very short-term valuable studies with -- they just come in regard of lotus. Historically, there's been more of a more of a predictable cadence that we're experiencing this year. But we do think that going forward, we're heading back to sort of historical onset the discovery -- the biologic [indiscernible] had very good growth rates and margin accretion over the last few years. Microbial has been a steady grower for 25 years literally, with exceptional margins. And we do think our CDMO business, which nobody has asked about, but in our prepared remarks, now is performing well, growing nicely, bunch of regulatory audits, several clients hopefully move it from a clinical phase of the commercial phase. That will -- that obviously will be accretive to the manufacturing segment's top and bottom line as the margins improved.

Appreciate it. Thank you.

Sure.

Thank you. We'll take our next question from Josh Waldman with Cleveland Research. Your line is open.

Hey, good morning, guys. Thanks for squeezing me in. Just one here on DSA. Jim, I guess I wondered if you could comment on any changes you're seeing in the competitive landscape and safety assessment? Curious, whether demand fluctuations, cancellations or maybe capacity availability have resulted in any changes in recent discounting levels or the broader competitive landscape?

We're not. We are significantly larger, deeper science and a much broader footprint than our competitors. And we also have the connectivity on the other parts of our business, particularly discovery aspects of manufacturing -- the manufacturing business. So we're not seeing any fundamental changes. We have smaller competitors. I would say that without exception, they compete with us primarily and essentially on price. I think they can do an okay, general toxicology study for you, but definitely not an okay complex study for you. And some of them have very small footprints and very limited capacity. So I think we're holding and taking share. I think we're getting price when appropriate. I won't tell you that we never have aggressive pricing. We'll get aggressive if somebody's attacking a big client that we have or we're bidding on new de novo business. But generally, we feel that over the last few years, we've got much better paid for the complexity of our work. So I don't think the competitive dynamic is going to change. It's probably a complex, expensive business where you have to have a lot of history for your clients. So appreciate you. So I think folks that know better tend to come to us we're working hard to have sufficient capacity. So we don't turn them away. And when I say capacity, I'm talking about staffing and facilities. And not just facilities in one place, but facilities all over the world. So we feel particularly good about our competitive posture in most of our businesses, but I would say particularly in safety.

Got it. Appreciate the detail.

Thank you. We'll take our next question from Tim Daley with Wells Fargo. Your line is open.

Great, thanks for fitting me here. So first, just noticed that there wasn't really a mention this quarter on the call of the recent reorg of the large model, safety tox infrastructure, kind of like quasi-offshoring. So just curious, does that mean we've kind of stabilized all that set in place, no more disruptions to top line or profits? And then what was the year-to-date margin headwind from this undertaking, if we were to think about that on the DSA margins specifically?

So I assume the first part of your question is about NHP disruption that we encountered at the beginning of the year and thought it might be more profound. So all that we can tell you is that we have a large international infrastructure. We have multiple sources of supply, some of which we have an ownership position, some we have JVs, and all of them we have long-term contracts. So we have sufficient numbers of NHPs. I can't guarantee anything about the future, except to tell you that we are operating in very good harmony with local regulatory authorities. We have sufficient numbers of very high-quality healthy animals from multisources. We've had no disruption to and with our clients are really pleased with the way we've been handling it. We will have the same assumption in terms of stability of NHP supply as we move into next year for sure, and unless something case happens in the next couple of months, which we don't anticipate. So your question was a little was looking for some guarantees. We don't anticipate any disruption, and we're doing everything we can to ensure that we don't have disruption and we had disruption at the beginning of the year as we think through no fault of our own, as our set of circumstances. But right now, things are very stable from a client support point of view. I take the second part of that question.

The second part in terms of impact to margin, I think the DSA margin, both on the quarter and on a year-to-date basis, has been strong. And so as Jim said, I think we've done -- our teams have done a tremendous job on making sure that we navigated the situation, and there was practically no impact into the margin of any supply movement that we made to accommodate the demand.

All right. Got it. That's really helpful. And Jim, just a follow-up here. On the supply side of things, in the 2Q 10-Q filing, there was a mention of a post quarter end acquisition of the majority stake of a prior JV large animal model supplier in the DSA business. I think kind of grossing it up gets to almost $0.5 billion valuation for that entity. So could you just please provide us some detail on that? Location, plan, strategy, just some help there would be great. Thank you. A – Jim Foster: Sure. So I can't be too specific since it hasn't closed yet. But the first tranche, we bought. So we own a big piece of this business. So very high-quality source of supply that we worked with for years. I quite confident that the rest of it will close, we will essentially own that site. And obviously, we will participate in running the site and hopefully, expanding it over time. And that's just -- that's another way to ensure the availability of high quality -- it's a particularly good location. We'll be able to give you clarity on that, hopefully, in the not-too-distant future, who it is, where it is and what the positive ramifications are.

Got it. Look forward to it. Thanks. A – Flavia Pease: I think that was probably the last question we had. Before we wrap up, I do want to go back to Derik's question or Matt on the $3 per share of NHP pricing, as we suggested. Because that would mean that almost all of the $235 million of cumulative benefit of NHP pricing that we share with all of you over the past 3 years would have dropped down to OI and EPS. And that -- it's just not true because our costs from NHP suppliers also have gone up meaningfully over the last 3 years. And so we're not going to provide details on how much they increase for competitive reasons, as you might imagine. But I can assure you that the costs have come up meaningfully. So the math on the $3 per share, I think, overstates that significantly.

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

Great. Thank you for joining us on the conference call this morning. We look forward to seeing you at upcoming investor conferences and have a great day. Thank you. This concludes the call.

Thank you. That does conclude today's Charles River Laboratories Third Quarter 2023 Earnings Call. Thank you for your participation. You may now disconnect.