Ladies and gentlemen, thank you for standing by, and welcome to the Charles River Laboratories First Quarter 2024 Earnings Conference Call. This call is being recorded. [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 First Quarter 2024 Earnings Conference Call and Webcast. This morning, I am joined by Jim Foster, Chair, President and Chief Executive Officer; and Flavia Pease, Executive Vice President and Chief Financial Officer. They will provide comments on our first quarter 2024. Following the presentation, they will respond to questions. There is a slide presentation associated with today's remarks, which is posted on the Investor Relations section of our website at ir.criver.com. A webcast replay of this call will be available beginning approximately 2 hours after the call today, and can be accessed on our Investor Relations website. The replay will be available through next quarter's conference call. I'd like to remind you of our safe harbor. All remarks that we make about future expectations, plans and prospects for the company constitute forward-looking statements under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated. During this call, we will primarily discuss non-GAAP financial measures, which we believe help investors gain a meaningful understanding of our core operating results and guidance. The non-GAAP financial measures are not meant to be considered superior to or a substitute for results from operations prepared in accordance with GAAP. In accordance with Regulation G, you can find the comparable GAAP measures and reconciliations on the Investor Relations section of our website. I will now turn the call over to Jim Foster.

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

Thank you, Jim, and good morning. Before I begin, may I remind you that I'll be speaking primarily to non-GAAP results, which exclude amortization and other acquisition-related adjustments, costs related primarily to restructuring actions, gains or losses from certain venture capital and other strategic investments and certain other items. Many of my comments will also refer to organic revenue growth, which excludes the impact of acquisitions, divestitures and foreign currency translation. First quarter 2024 organic revenue decreased at a 3.3% rate, in line with the February outlook. However, we delivered non-GAAP earnings per share of $2.27, which exceeded the outlook that we provided in February of at least $2. The primary drivers of the earnings outperformance were the acceleration of NHP shipments into the first quarter and a strong performance from the Manufacturing segment, which delivered organic revenue growth of 10.4%. As Jim mentioned, we continue to expect full year reported revenue growth of 1% to 4% and organic revenue growth of flat to a 3% increase as well as non-GAAP earnings per share in a range of $10.90 to $11.40. We reaffirmed our annual revenue and non-GAAP earnings per share guidance because the first quarter outperformance was largely driven by the timing of NHP shipments, which only affects the quarterly gating in 2024 and not our full year outlook. Our segment outlook for 2024 revenue growth remains essentially unchanged as noted on Slide 30. We also continue to expect consolidated operating margin expansion of at least 50 basis points in 2024. We are diligently managing the cost structure and our focus on driving efficiency, with restructuring initiatives expected to generate approximately $70 million of annualized cost savings or the upper end of our prior range. As anticipated, unallocated corporate costs were just above 6% of revenue at 6.2% compared to 4.3% of revenue in the first quarter of last year, contributing to the operating margin headwind in the first quarter. For the full year, we continue to expect unallocated corporate costs will moderate from first quarter levels to just above 5% of revenue. The first quarter tax rate was 23.3%, an increase of 160 basis points year-over-year. The increase was primarily due to the impact from stock-based compensation. This was slightly better than our February outlook of a mid-20% tax rate because stock-based compensation was favorable due to a higher stock price during the quarter. We continue to expect our full year tax rate will be in the range of 23% to 24%, which is unchanged from our previous outlook. Net interest expense of $32.8 million in the first quarter was similar to both the prior year and fourth quarter levels as floating interest rates and debt balances were relatively stable. For the year, we expect net interest expense to trend slightly favorable, which would put us at the low end of our prior outlook of $125 million to $130 million. As a reminder, nearly 3/4 of our $2.7 billion debt at the end of the first quarter was at a fixed rate. At the end of the first quarter, our gross leverage ratio was 2.4x, and our net leverage ratio was 2.3x. Free cash flow was $50.7 million in the first quarter compared to $2.5 million last year with a $28 million decrease in capital expenditures, driving much of the improvement. Capital expenditures were $79.1 million in the first quarter compared to $106.9 million last year, due primarily to moderating capacity expansions to match current demand. For the year, we continue to expect free cash flow to be in a range of $400 million to $440 million and CapEx is expected to be approximately $300 million. A summary of our 2024 financial guidance can be found on Slide 35. Looking ahead to the second quarter. We expect reported and organic revenue will decline at a low to mid-single-digit rate year-over-year. Our second quarter expectations include a modest sequential increase in DSA revenue as trends begin to improve. The second quarter revenue growth rates for both the RMS and Manufacturing segments are expected to be constrained by the timing of NHP shipments in RMS and the anniversary of last year's CDMO growth rebound in the Manufacturing segment. Earnings per share are expected to improve from the first quarter level with an outlook of mid-single-digit sequential earnings growth over the $2.27 reported in the first quarter. We expect the tax rate and interest expense will remain relatively stable from the first quarter levels, and the operating margin will remain somewhat constrained until the second half of the year when we recognize the full benefit from the cost savings and the revenue growth rate reaccelerates to cover more of the annual cost inflation. In conclusion, we are pleased with our first quarter performance and are confident in our outlook for the year. Demand for our unique nonclinical portfolio is resilient, and we remain focused on executing our strategy, driving efficiency and gaining market share. Thank you.

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

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

This is [ Wolf ] on for Mike. I guess the first one would be on how should we think about pacing RMS revenues given the accelerated NHP shipment that we saw? The cadence through the back of the rest of the year would be great. We have a related follow-up.

What was the beginning of the question?

I think he was just saying he was stepping in for Mike. And the question is about timing of NHP shipments in RMS. Maybe I can take that. I think we have commented that our quarters are not linear, and I actually added when we provided guidance for this year that the -- adding the Noveprim business into the [indiscernible] would result in additional nonlinearity in our quarters because those shipments are not timed in a way that they always happen at the same time in every year. So it is going to introduce a little bit of lumpiness, if you will, quarter-by-quarter. But as we spoke in our prepared remarks, this was a shift between the second quarter and first quarter. And within the year, we feel very comfortable and confident with the guidance. So it's going to make your guys' lives a little bit more challenging to pinpoint the segment within the quarters, but that's just the nature of that part of the business.

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

I mean our confidence in the back half of the year ramp is premised on a multiplicity of things. Inflows to the VCs, wonderful funding in the capital markets, fourth best in the history of biotech last quarter, the increase in proposal volume, modest reduction in cancellations and just the general dialogue with our clients, a; b, the comps of last year; and c, the fact that we can see pent-up demand on the part of our clients. And it seems like there were a fair number of [indiscernible] across the board with our clients that drugs were developed, lead compounds were developed and for funding reason and prioritization reasons, sort of paused. We talked a lot in the last quarter and the quarter before that, about post-IND work being focused on. We think clients need to and will get back to actual IND filing work because that's the most critical thing that they do to get drugs into the clinic. So as the funding is improving and their feelings about continued access to funding is more positive, we're pretty confident. We've had a very similar situation in the last 2 years that I know we're -- I don't know about concerning, but we're a bit maybe surprising to our shareholder base that things -- we had 1 year where things were much stronger in the first quarter and other year, the second, and this is a similar phenomenon. We've talked often about the fact that we have no control or when studies start and stop. And as Flavia just said, we don't have linearity in our business and never will. So given from whence we've come and the change in the funding environment and our constant conversations on a daily basis with literally thousands of clients, we have a high degree of confidence that things will accelerate meaningfully in the back half of the year.

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

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

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

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

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

Yes. And I would comment on the margin, I think Jim started alluding to that. It's really more the volume that is putting pressure on margins given the ability to cover cost inflation. There's a little bit of restructuring costs that are impacting on a GAAP basis, the gross margin as well. We talked about our $70 million of savings that we're going to get on an annualized basis. So that impacts gross margin as well. But I think we also talked about how this will evolve throughout the year, and we expect that as volume comes back stronger in the second half and our restructuring initiatives fully implemented that, that will have a positive impact on margin -- gross margin as well as operating margin.

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

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

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

Got it. And then from this first quarter level, to get to your segment guidance in -- for DSA, you're looking at a pretty significant intra-year increase, I guess, how much of that -- your backlog is still fairly substantial versus historical pre-pandemic standards. How much of that growth can you see in backlog versus the point that you just made and seeing volume improve? And then as an additional part to this question, is there anything built into those expectations relative to BIOSECURE? Or is that kind of left on the side, would be upside if the bill passes?

So a significant amount of revenue we can't see, we see not all of it. But as I said, proposal volume has been increasing nicely, and we anticipate that bookings will follow. There's usually a lag. So we're going to need a couple of quarters to see this, but we're confident given the dialogue with the clients that we will. BIOSECURE Act is an interesting one. Not legislation yet, but dialogue opportunity seems positive. So no, there's nothing built into our guidance that assumes anything about the BIOSECURE Act because it would be premature to do that. Having said that, we would be surprised if there isn't some benefit to us. There's a fair amount of conversation with clients and a trivial amount of work that we've got specifically as a result of that. You understand that our facilities are principally in the U.S. and Europe. So we are an alternative for folks that either can't or don't want to continue to do their work in China. So I think directionally, it's something positive to watch. As I said, we would be surprised, if it doesn't have a benefit to us. But we're certainly not assuming that there's anything that's imminent and it's certainly [indiscernible] .

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

Yes. What I would say, Dave, is over the last several -- couple of years when inflation definitely escalated beyond historical levels. I talked about we were actually recouping that and plus some more, right? And so price is very strong, but also the costs have increased more meaningfully than historically. Obviously, inflation is now coming down a bit. And so obviously, our price is coming down as a result of that as well. But what I'm just saying is the relationship between those 2 maybe was a bit more favorable in the last couple of years than obviously, it is right now. And because we don't have as much of the volume, especially in the earlier part of the year, sales are still down in the first quarter. That's putting pressure on the ability to fully absorb inflation in the fixed cost that we have.

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

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

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

Got it. That's very helpful. And then if we just think about like the incrementals in terms of DSA margins as we move through the year. What -- so the key focus is volumes and then the cost savings, any other like potential positives and then potential -- like any other major like pluses or minuses to call out as we think about that progression specifically in DSA?

No. It was a bit -- I -- Flavia -- I think it's really what you just highlighted. We are expecting sequential improvement in DSA revenue on a dollar basis, obviously, on a percentage basis as well. But with that bigger size of business, it would obviously drive margins. There's some fixed costs in our business. And in addition to that, to your point as I said, when we provided guidance, the restructuring actions that we have put in place will be fully executed in the second half. And so that also will be the additional tailwind to drive margins.

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

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

Yes. We're -- I don't think we're going to quantify the dollar proposal activity increase. I think we talked about it being sequentially up both year-over-year at being up both sequentially and year-over-year. And I think you also saw us talk about the impact -- the net impact into the backlog of bookings and cancellations. Cancellations also went improved sequentially in the first quarter. And so our adjustment to the backlog, the decrease was smaller than the decrease on Q4 versus Q3. but I don't think it will talk specifics in terms of what percentage of the increase we saw in proposals.

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

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

Yes. They're not fundamentally different. Pharma has been aggressively and continuously outsourcing loss of the type of work that we do, particularly Safety Assessment and some lesser extent, discovery to us for a period of years. We can and do, do the work faster at a lower price point and usually with better science than that. So it's a small number of pharma companies that are holding on to those. It's interesting since they have very rich balance sheets that there's still been hesitancy on their part to book work. And that's just a function of trying to make budgets like any public companies do and also the necessity to prioritize. So we -- surprisingly, I wouldn't say we've seen a fundamental difference in the activity between pharma and biotech. Obviously, there's some fragile biotech companies that are worried about getting to proof of concept or getting the drugs at the clinics that are very -- perhaps more careful about spending and working on a smaller number of assets. Having said that, historically and actually currently, our volume is much higher with biotech. So it's an important client base for us. So you probably have a greater impact on spending with the biotech companies than pharma but again, it won't be overnight. I do think they're going to have to continue to see month-after-month improvement, and we have a high level of confidence, subject to the caveat that control over this. And there's a lot of factors going on in this world that could affect people's viewpoint, but it feels like the IPO market has opened up nicely. VC inflows have been dramatic actually. M&A activity has been positive as well. And I think as you all know, our client base, whether it's large or small, really has very strong assets right now molecules for unmet medical needs, that they absolutely want to get back to developing and getting those drugs into the clinic. So I think the overall environment is quite positive.

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

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

Yes. I'll just take the question on the backlog and then Jim can talk about Discovery. So the backlog is at 10 months. So to your point, Casey, I think, for 2 or 3 quarters of last year, kind of hovered around 12, trickling down a little bit. But I think we've been saying that to your point, historical norms were 6 to 9. So what we're hearing from clients is actually that kind of reversed to the norm of they are booking 2 to 3 quarters in advance. So I think that tends -- feels consistent with what we're hearing from clients terms of what they're working on and what they want to book ahead.

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

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

Well, that would be nice. That would be nice. We certainly hope so. We certainly don't have that in our guide. It certainly would anticipate, necessarily anticipate that, but we're very pleased that we've had strong growth across the entire segment in the first quarter. You see that people are back to business in biologics, and we have a very strong franchise there. You see that folks that had big inventories of disposables. I have worked through those in our microbial business and the CDMO business to a distinct pleasure as a double-digit grower that we're getting a lot of traction as people recognize the quality of our assets, and we have some commercial drugs that we're working on and the facilities are -- have been expanded nicely. So at a minimum, we would expect that business to continue to be a strong one with -- I think we're saying now mid-single-digit growth for the year with significantly better operating margins, although those are relatively easy comps on the CDMO side. But all 3 of those businesses will continue to improve. We would have to stop short, particularly at this point in the year saying that there's upside to those numbers.

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

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

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

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

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

Got it. That's helpful. And then a couple of unrelated follow-ups. One on the CDMO piece, Jim, where is capacity utilization today? And what's embedded in the guide in terms of where you finish the year just in light of the ramping backlog of work are? And then on your comments on China. Are you seeing any sort of widening in that price disparity versus the Chinese CROs, particularly outside of China as we look to defense share at all? And any early sort of green shoots from the stimulus that just went -- I mean, that was put out there in March, in terms of how that could benefit local demand in China into your end or perhaps '25?

So we've added an appropriate amount of space. I guess, I would say that the CDMO manufacturing facility in that is lots of audits by clients and regulatory agencies. So we're in very good shape to accommodate the client base where we have already a couple of commercial clients. Hopefully, we'll have more. And we're also getting additional clinical clients I'm dealing with some of those clients myself. The feedback on the facilities has been positive. So obviously, we'll work hard to stay ahead of that, so we have sufficient capacity. But just had a call this week, in fact, that -- and the feedback from the audit team that had gone there was really positive. The disparity with Chinese prices for some things has been an issue and has been beneficial to the Chinese marketplace given some of the impending legislation that's likely to change. And folks will look for different places to do the work, and they'll have to get it, too, for they'll have to get quality work, but lowest price point. So we're working hard to have our portfolio be have appropriate options for them. Our Chinese business, which is relatively small and not entirely, but principally small animals, has done well given the infusions of capital there. Unlikely to be impacted by any sort of U.S. legislation since we do work in China for China, and anticipate continuing to do that. So China is -- continues to be a good place for us from a growth and margin point of view.

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

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

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

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

We work really hard, and I think we've done this quite successfully -- I don't know, for at least, 1.5 decades. The marry capacity with anticipated demand. It's not just current demand because we have to build space a year or 2 in advance. And we've lived through a period -- a long time ago, but it was painful where we and everybody else in the industry just built too much space. And that has a deleterious impact on your margins, and it's tough to manage that when you're swimming in space. So we never want to get back to that. We have worked really hard, and I think successfully and not having an adequate amount of space. That's the risk, of course. You get the [indiscernible] work and you don't have capacity. So we never want to get there. So all I can say is we work hard to titrate our demand and anticipated demand and the competitive dynamic with building out new space at multiple sites. You have to titrate that against what the current demand is and how your current space is filling up. So I think we're doing that appropriately. We have to be really careful with the shareholders' money. And from a CapEx point of view, I don't think we're in any way under capitalizing this business, both from a maintenance and a growth point of view. I think we're spending exactly where we need to be. And as I said, we need to call that right in advance. So we give it a great deal of thought. So I think it's -- we come through such an aggressive period of demand and aggressive building that it's just irresponsible to continue to spend at the same level given the current demand curve. Having said that, we obviously anticipate that demand will be better next year and the year after than it is today. We have 3-year guidance out there. And so we're building to that at least.

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

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

Jim, 2 for you, I think, if I may. First, you've talked about seeing better proposal activity in DSA. Can you comment on what you are seeing from a conversion standpoint, the timing from when you receive proposal? The proposal to booking the study and then recognizing rev? I guess have you seen the time line and conversion rate return to normal would be great to hear how you're contemplating this, and your outlook and if you've had to tweak that piece of the forecasting assumption at all.

Not sure what normal is. But I'd say it's reasonably normal. As I said before, except maybe for some periods where the demand was overwhelming, there is a lag between proposals and bookings. And particularly in this period where people are trying to ensure that they have confidence in accessibility of capital. So the conversions are pretty much as we would have expected. And hopefully, that will improve, but there's going to be kind of 2 or 3 quarters necessary to get this to be more robust. We're heartened to see the proposal volume as is. People feel -- seem to be coming out of their shells, acknowledging access to capital, obviously, desirous of developing the rest of their portfolios. And that's underlying our anticipation at the back half of the year will be much stronger. So I think it's pretty much as anticipated.

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

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

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

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

Yes. I think I'll take that one. The guidance for the year is the same for -- I think everything we reaffirmed the guidance, right? And so the timing of our capital projects tends to kind of progress throughout the year. Obviously, our free cash flow was quite strong in the first quarter. You saw a decline of CapEx spend year-over-year. So we started the year with capital expenditures being a tailwind to cash flow, and we're going to continue to progress some of our projects as the year progresses. But there's no update, I guess, is the point.

Got it. And then in your prepared remarks, I think you mentioned some timing element in the first quarter for manufacturing as well as RMS. Was there any kind of snapback demand that was [indiscernible] surprising that might not continue in the second quarter? Or did I misinterpret that comment?

Again, I'll maybe take that. So 2 things. The timing impact was really in RMS. In manufacturing, what we saw, which was encouraging and positive is we have seen strength of proposals in the fourth quarter, especially in our testing business and that did translated improved business and stronger performance in the first quarter. What we said in the second quarter for the manufacturing business is that last year, the second quarter was one of the strongest quarters that we've had. So from a comp perspective, it's a little bit of a headwind year-over-year when we get into the second year -- second quarter.

Got it. So there's no -- so basically, the reason why we wouldn't necessarily want to raise the guidance here based on the stronger demand in the first quarter just has to deal with the tougher comps, not because that there's an expectation that the level of the strength in the first quarter wouldn't necessarily repeat in the upcoming quarters. Is that right?

Correct. And I would say for the year, when you think about guidance, it's still pretty early. I think there was a question earlier around whether we think there's upside to our manufacturing guidance. And as I mentioned, we slightly improved it, given that the guidance in the beginning of the year was low to mid and now, we are mid. So we reflected a little bit of that straight already, but it would be premature to say that there's upside to the guidance that we just updated now. I think that's the point. Thank you.

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

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

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