Susan E. Hardy - Charles River Laboratories International, Inc. James C. Foster - Charles River Laboratories International, Inc. David R. Smith - Charles River Laboratories International, Inc..

Derik de Bruin - Bank of America Merrill Lynch Steven Reiman - JPMorgan Securities LLC David Howard Windley - Jefferies LLC John C. Kreger - William Blair & Co. LLC Luke Sergott - Evercore Group LLC Jack Meehan - Barclays Capital, Inc. Ricky R. Goldwasser - Morgan Stanley & Co. LLC Sara Silverman - Wells Fargo Securities LLC.

Ladies and gentlemen, thank you for standing by. Welcome to the Charles River Laboratories First Quarter 2017 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session; instructions will be given at that time. As a reminder, this conference is being recorded.

I'd now like to turn the conference over to Susan Hardy, Corporate Vice President of Investor Relations. Please go ahead..

Thank you. Good morning, and thank for joining us for our first quarter 2017 earnings conference call and webcast this morning. This morning, Jim Foster, Chairman, President and Chief Executive Officer; and David Smith, Executive Vice President and Chief Financial Officer, will comment on our first quarter results and updated guidance for 2017.

Following the presentation, they will respond to questions. There's a slide presentation associated with today's remarks, which is posted on the Investor Relations section of our website at ir.criver.com. A replay of this call will be available beginning at noon today and can be accessed by calling 800-475-6701.

The international access number is 320-365-3844. The access code in either case is 422034. The replay will be available through May 24 and you may also access an archived version of the webcast on our Investor Relations website. I'd like to remind you of our Safe Harbor.

Any remarks that we may make about future expectations, plans and prospects for the company constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from those indicated by any forward-looking statements as a result of various important factors, including but not limited to those discussed in our Annual Report on Form 10-K, which was filed on February 14, 2017, as well as other filings we make with the Securities and Exchange Commission.

During this call, we will be primarily discussing results from continuing operations and non-GAAP financial measures.

We believe that these non-GAAP financial measures help investors to gain a meaningful understanding of our core operating results and future prospects, consistent with the manner in which management measures and forecasts the company's performance.

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 to those GAAP measures on the Investor Relations section of our website through the Financial Information link. I will now turn the call over to Jim Foster..

Good morning. I'm very pleased to say that following an exceptional year in 2016, we're off to a strong start in the first quarter of 2017. We've succeeded in our strategy to become the early-stage CRO of choice as a result of a three-pronged approach which we live every day.

First, we are continuing to expand our unique portfolio of essential products and services, which increases our relevance to our clients' drug research, development, and manufacturing efforts.

Second, we continue to expand and enhance our scientific expertise and depth, which we believe is unique and unparalleled in the early-stage CRO universe, and a strong differentiating factor.

Third, we maintain an intense focus on efficiency and responsiveness, which enables us to provide exceptional, flexible service to clients without adding significant cost. Because of the strategy, we were gratified that three sell-side analyst surveys issued this spring placed Charles River as the best-positioned CRO to win preclinical work.

We will never take our position for granted, and will utilize our entrepreneurial culture to identify new paths in which to execute our strategy. Let me give you the highlights of our first quarter performance. We reported revenue of $445.8 million in the first quarter of 2017, a 25.6% increase.

Our portfolio delivered robust organic growth of 8.2%, at the upper end of our guidance range of 7% to 8.5%. Each of our client segments, Global Accounts, Biotech and Other, and Academic and Government, generated higher revenue. The operating margin was 18.5%, an increase of 10 basis points year-over-year.

We were very pleased with the margin improvement in the Manufacturing segment which was the primary driver of the increase. DSA margin declined year-over-year, however, it continued to exceed our long-term target as a result of higher revenue and efficiency initiatives.

Earnings per share were $1.29 in the first quarter, an increase of 31.6% from $0.98 in the first quarter of 2016.

Acquisitions, primarily WIL, and higher revenue for legacy portfolio were the primary drivers of the increase, as well as a larger-than-expected excess tax benefit associated with stock compensation and a $0.05 gain on venture capital investments.

Dave Smith will provide more information about the stock compensation matter and its effect on our tax rate, so I will simply say that it was the primary reason that we increased the top end of our non-GAAP EPS guidance range by $0.05 with a new range at $5 to $5.15. We continue to be very enthusiastic about the outlook for 2017.

Demand for our products and services is robust, and we continue to gain market share which, combined with the strong start to the year, supports our expectation for organic growth in a range from 7% to 8.5% in 2017, and non-GAAP earnings per share in our increased range of $5 to $5.15.

We believe that our first quarter performance continues to demonstrate what we've worked very hard to achieve.

First, the strongest portfolio than we've ever had, with the ability to support clients from target discovery through non-clinical development; second, deep client relationships; and third, successful execution of our strategy to position Charles River as the early-stage research partner of choice.

I'd like to provide you with details on the first quarter segment performance beginning with the DSA segment. DSA revenue in the first quarter was $227.8 million, a 5.1% increase on an organic basis.

The Discovery Services business continued to improve, with revenue for the legacy businesses only slightly below last year and Agilux performing better than our expectation.

As was the case in the third quarter of last year, revenue growth for the legacy Safety Assessment business was in the high-single digits, but as we have often noted, growth in this business is not linear.

We generally expect the first quarter to begin slowly for Safety Assessment as clients prioritize projects in the new budget year; however, this year started more slowly than we expected. Business increased steadily through the quarter, with inquiries and bookings for the month of March at the highest level since we acquired WIL.

We also had a significant increase in backlog which supports our expectation that the Safety Assessment revenue growth rate for the year will be consistent with our guidance of low-double digits. Biotech revenue and pricing were factors in the first quarter Safety Assessment growth rate.

Organic revenue growth for biotech clients was lower than we have experienced in other quarters. I'll speak about this shortly, but again based on bookings, we expect both biotech and large biopharma to be strong drivers of revenue growth for the balance of the year.

Pricing was stable in the first quarter due to competitive dynamics in late 2016 and early 2017 when bookings were slower. Based on market demand and recent bookings, we are not concerned about pricing in the Safety Assessment business and continue to expect pricing in a range of 3% to 5% in 2017.

The revenue mix and acquisitions impacted the DSA operating margin, which declined 240 basis points to 20.9% in the first quarter compared to the year-ago period. However, the operating margin remained above our 20% long-term target. As the revenue mix improves throughout the year, we expect the margin will improve as well.

And as we continue to make very good progress on the WIL synergies, we're confident that we will achieve our operating margin target for WIL, which is consistently at or above 20% by the end of 2017. For the RMS segment, revenue was $127.2 million, an increase of 4.7% on an organic basis.

You should note that the growth rate is somewhat overstated as a result of the comparison to the first quarter of last year, which included the light holiday week. Because of the 53rd week last year, the holiday week was in the fourth quarter of 2016 rather than the first quarter this year, leading to a favorable year-over-year comparison.

We continue to expect RMS growth rate for the full year will be in a low to mid-single digit range. As was the case throughout 2016, RMS revenue growth in the first quarter was driven both by the Research Models and Research Model Services businesses. For Research Models, the strongest performance was in China and the U.S.

China continues to be a strong growth driver for us, as funding for drug research increases and clients recognize that Charles River provides a superior product and better service and support. In both China and the U.S., we continued to see robust demand for inbred research models, which we believe are the models of choice for translational research.

In Research Model Services, both the GEMS and Insourcing Solutions businesses delivered strong performance.

Clients are using new technologies, like CRISPR, to create more – new models faster, and partnering with our GEMS business, because we provide extensive scientific expertise and a more flexible and cost efficient alternative to maintaining capabilities in-house.

The Insourcing Solutions business also increased, due primarily to increased staffing on existing contracts. The RMS operating margin was unchanged in the first quarter at 30.1%. This is higher than our long-term target of a high 20% range.

But as you know, the Research Model business is seasonal, with the first quarter generally being the strongest from a volume perspective. As the business is highly leveraged to volume, the margin usually benefits when volume is high.

That said, we continue to identify opportunities to streamline our RMS operations, particularly through automation of manual processes and implementation of systems to improve availability and accuracy. The Manufacturing Support segment reported an extremely robust first quarter, with revenue of $90.8 million.

The organic growth rate was just above 20%, led by the Microbial Solutions and Biologics Testing Solutions businesses. Microbial Solutions was the larger driver of the increase, reporting revenue growth above 20% on an organic basis.

Demand for our Endosafe testing systems and cartridges, and Accugenix microbial identification services has remained strong, and was the primary driver of the Microbial Solutions revenue increase.

Higher cartridge sales were driven by the continued expansion of the installed base of machines, and by the sale of additional Nexgen and MCS units in the first quarter. In addition, revenue from microbial ID services increased significantly, as we continued to raise our profile with clients in Europe and Asia.

The advantages of our unique portfolio, which includes both rapid endotoxin and bioburden testing systems and microbial identification libraries, continue to resonate with clients.

We're optimistic that our ability to provide a total microbial testing solution to our clients will be a driver of our goal for Microbial Solutions to continue to deliver at least low-double digit organic revenue growth for the foreseeable future. The Biologics business again reported very strong revenue growth in the first quarter.

Our continued investment in expanding our Biologics portfolio has enabled us to provide a comprehensive portfolio of both bioanalytical and biosafety testing services, with the ability to support biologic and biosimilar development from discovery through clinical phases in commercial manufacturing.

As clients increasingly recognize the value this portfolio provides, and our flexibility in structuring working relationships, the demand for our services increases. In order to accommodate the demand, we are continuing to add small tranches of capacity, much as we do in Safety Assessment.

By doing so, we can expand revenue without a noticeable impact on operating margin. We believe that investment in our Biologics business is particularly important now, when the number of biologic drugs in development is increasing.

Our goal is to be well-positioned to capitalize on this expanding opportunity, which we believe will support our growth in the coming years. Manufacturing segment's first quarter operating margin was 33.2%, a 190 basis point increase year-over-year.

The improvement was driven by the Microbial Solutions and Biologics businesses, both of which benefited from increased volume and efficiency initiatives. As we continue to broaden our unique portfolio and enhance our scientific expertise, we are enhancing the value we can provide in support of our clients' early-stage drug research efforts.

This was again demonstrated in the first quarter by the fact that each of our client segments, Global Accounts, Biotech and Other, and Academic and Government, contributed to our revenue growth. We were very pleased to see our global accounts drive the most significant contribution to revenue growth.

This was due in part to our successful efforts to expand our strategic relationships, several of which have been initiated or renewed over the past year.

Most of the relationships were initially driven by the need for outsourced safety assessment, which is still the predominant service; however, we are seeing expansions that include discovery, DMPK and bioanalysis.

The ability to create a more flexible research organization through the optimal use of outsourcing is critical to our clients' ability to improve the productivity of their pipelines and the cost effectiveness of their R&D investments.

Revenue from our Biotech and Other segment also increased, although at a slower organic rate than we experienced last year. We're aware of the discussion among investors over the ability of biotech companies to maintain a high level of investment in R&D.

As you know, we believe that biotechs have at least three years of cash on hand, which was likely reinforced by funding from the capital markets in 2016 and again in the first quarter of this year. And as I mentioned earlier, bookings, which are a leading indicator for revenue, increased materially for our biotech clients in the first quarter.

This fact gives us confidence that the demand from biotech clients is robust and that the DSA growth rate will be in line with our annual guidance. Biotech pipelines are flourishing with novel, important drugs for human health.

This is driving persistent demand for outsourced services, because these companies do not invest in infrastructure, preferring a more flexible and cost-efficient structure which enables them to move drugs through the pipeline more effectively.

Many of these clients prefer to partner with Charles River because of the breadth of our portfolio, which enables them to work with one CRO across the early-stage drug research process, and because of our focus on scientific expertise.

Clients, particularly those with limited in-house infrastructure, want a strong scientific partner who can assist them in making the critical go/no-go decisions as to which drugs have the greatest potential for development. Regarding R&D spending, there's another issue I'd like to discuss.

We have received numerous questions from investors regarding our view on whether the government will implement legislation on drug price controls, and the resulting effect on R&D spending if there is legislation.

It seems highly unlikely to us that the government will find a legislative solution that would be acceptable to both Democrats and Republicans and implausible that the pro-business administration would propose legislation that would impair the biopharma industry. Biopharma is an important part of the economy, and biotech is a uniquely U.S. phenomenon.

It was effectively invented here and the U.S. is widely regarded as the global biotechnology leader. Biotechs have discovered drugs that are treating or curing previously incurable diseases, keeping people out of hospitals and reducing their need for care.

This is the primary reason we believe that pricing for novel, life-saving drugs will not be the target of legislation. Rather, there's likely to be pressure whether legislative or from one of the agencies to limit pricing on off-patent drugs and predatory pricing practices.

We have spoken with clients, government sources, and many others who share this view. Offering our unique, early-stage portfolio, world-class scientific expertise, and best-in-class client service at an effective price has been the cornerstone of our value proposition for clients, and has resonated with them.

Our first quarter results put us right on track to achieve our guidance for the year. Organic revenue growth was 8.2%. We achieved 10 basis points of operating margin expansion. And earnings per share increased at a mid-teens rate when adjusting for excess tax benefit and gains from venture capital investments.

We are very pleased with the performance of the collective portfolio, which is driving both revenue and earnings per share growth. There will continue to be quarterly variations in segment growth rates, but we expect the consolidated portfolio to deliver high-single-digit organic growth.

We intend to continue to assess opportunities to broaden our early-stage portfolio with strategic acquisitions and in-house development to increase our scientific capabilities and therapeutic area expertise and to invest in efficiency and productivity initiatives.

By leveraging investments we have made, the new ones we intend to make, we will continue to differentiate Charles River as the CRO partner of choice for early-stage research which is the foundation for our future growth. In conclusion, I'd like to thank our employees for their exceptional work and commitment and our shareholders for their support.

Now, I'll ask David to give you additional details on our first quarter results and updated 2017 guidance..

an excess tax benefit associated with stock compensation and earnings mix. As I mentioned in February, we expect an excess tax benefit associated with stock compensation this year due to the required adoption of the new FASB rule, ASU 2016-09. We had expected a benefit of nearly $6 million for the entire year or approximately $0.12 per share.

The actual benefit was $7.5 million in the first quarter or $0.15 per share, approximately $0.03 higher than our full year estimate. Our initial guidance was based on our analysis of anticipated option exercise activity and a pre-earnings stock price in the low-$80 range.

We exceeded the full year estimate in the first quarter alone, due in part to the effect of the higher stock price, following our earnings and guidance release in mid-February. Having reevaluated the outstanding equity awards, assuming the current stock price, we do not believe that there will be any meaningful activity for the remainder of the year.

With no meaningful tax benefit anticipated from stock compensation, we expect our non-GAAP tax rate to average approximately 30% for the remaining three quarters in 2017. This will result in a full year tax rate at the lower end of our prior outlook of 28% to 29%. We have reviewed the recent issued proposal for U.S.

tax reform, but do not plan to incorporate it into our guidance until the probability, timing and final language of any legislation are clear. The $0.15 excess tax benefit was partially offset by the earnings mix which was a tax headwind in the first quarter, reducing earnings per share by approximately $0.05 when compared to the prior year.

This was a larger headwind than previously anticipated due primarily to the higher-than-expected venture capital investment gain in the first quarter which is taxed at the higher U.S. tax rate. The net effect of the excess tax benefit and the earnings mix was a $0.10 benefit in the first quarter.

The $0.05 gain from venture capital investments also contributed to the first quarter earnings outperformance. We exceeded our annual forecast for venture capital investment gains, which was previously $0.04 for the year, in the first quarter.

We expect an annual return on our investments in these venture capital funds in line with our weighted average cost of capital, but do not forecast the performance of these funds beyond our annual expected return; therefore, we have not forecast any additional gains from these investments for the remainder of the year.

Primarily as a result of the higher-than-expect tax benefit associated with stock compensation, we raise the upper end of our earnings per share guidance, revising the non-GAAP range to $5 to $5.15.

As I mentioned earlier, our outlook for revenue growth and operating margin improvement is unchanged, and we are also maintaining the segment outlook that we provided in February. Our outlook for several other non-operating items is slightly more favorable.

We have factored the additional $0.01 from venture capital investments into our guidance as well as slightly favorable interest expense. We expect net interest expense to be at the low end of our prior range of $29 million to $31 million for the year.

This is slightly favorable to our initial outlook because we used the net cash proceeds from the CDMO divestiture to repay debt. While we intend to invest the CDMO proceeds in future growth opportunities, including strategic acquisitions, the most attractive short-term use was to repay debt.

First quarter net interest expense increased by $2.8 million year-over-year to $6.8 million, reflecting the impact of additional borrowings related to acquisitions, primarily WIL. Unallocated corporate costs are trending in line with our expectations, increasing $1.9 million year-over-year to $33.5 million in the first quarter.

We continue to expect unallocated corporate costs to be approximately 7% of total revenue in 2017. Free cash flow was $18.8 million in the first quarter, a decrease of $18.8 million compared to last year, primarily reflecting timing related to working capital and higher capital expenditures.

You should note that prior-year cash flow amounts have been recast to reflect the retrospective adoption of three new accounting standards. We have included recast cash flow information in the appendix of our slide presentation. We continue to believe that we will achieve our free cash flow outlook of $265 million to $275 million for the year.

Capital expenditures were $15.9 million in the first quarter, and our outlook of $75 million to $85 million also remains unchanged for the year. Our capital priorities are also consistent with those that were communicated in February.

Acquisitions remain our top priority to enhance or expand our scientific capabilities and supplement our organic growth. The timing of M&A activity is always difficult to predict, which is why we used the net cash proceeds from the CDMO divestiture to repay debt in the first quarter and further reduce our leverage ratio to 2.5 times.

We continue to look at numerous M&A opportunities, but absent a transaction, we will allocate capital to stock repurchases and debt repayment. We reinitiated stock repurchases in the first quarter following a period when we were focused on reducing our post-WIL leverage ratio below 3 times.

We repurchased 363,000 shares for a total of $32.1 million in the first quarter, and had $37.6 million outstanding on the stock repurchase program at the end of the quarter.

Yesterday, our board of directors increased the authorization of our stock repurchase program by $150 million to $1.3 billion, which provides additional capacity to continue to repurchase shares as we execute our goal of offsetting dilution from option exercises and equity awards.

Before I discuss our outlook for the second quarter, I will recap our updated 2017 financial guidance. We're maintaining our guidance for most financial measures. Our tax rate and interest expense are expected to be at the lower end of their previous ranges.

As a result of this modest favorability, we have raised the upper end of our non-GAAP earnings per share guidance by $0.05, to a range of $5 to $5.15. I will also remind you that we reduced our GAAP earnings per share guidance to a range of $4.18 to $4.33, primarily to reflect the $0.15 net impact of the CDMO divestiture.

For the second quarter, we expect year-over-year reported revenue growth will be in the mid-single digits, reflecting the anniversary of the WIL acquisition.

Organic growth will be within our guidance range for the year, based on our expectation that the RMS and Manufacturing growth rates will moderate from the first quarter of the year, and DSA organic growth will improve. We expect the consolidated operating margin to be similar to the second quarter of last year.

As I mentioned earlier, we expect the non-GAAP tax rate to be approximately 30% for the remaining three quarters in 2017, since we have not forecast any meaningful tax benefits associated with stock compensation.

Also, we have not forecast any additional venture capital investment gains compared to the $0.06 contribution in the second quarter of last year.

Our expectation for earnings per share in the second quarter is a slight increase from the second quarter of last year, which represents mid to high-single digit growth when normalizing for last year's venture capital investment gains.

We were pleased with our strong start to the year on both the top and bottom line, including 8.2% organic revenue growth, and mid-teens earnings per share growth when excluding the excess tax benefit and venture capital investment gains. We're focused on continuing to build upon the progress that we made over the last several years.

We are engaging with our clients and delivering solutions that are best suited to their individual needs. We are enhancing our operation efficiency to drive greater value to both our clients and our shareholders. And we are managing the business to meet both our near-term and long-term goals. Thank you..

That concludes our comments. The operator will take your questions now..

Thank you. And our first question, we'll go to Derik de Bruin with Bank of America. Please go ahead..

Hi. Good morning..

Good morning..

Hey, Jim, can you – I know you've talked about it in detail in the biotech customer base, but if you could just – if there's any additional color on that, as you said, we've gotten a ton of questions on that from investors.

And I guess, the – you saw this across some of the other players in the industry, and I just – is it just in terms of just readjusting (33:26) timing of what's going on, there were people worried about what's going on in Washington and that's what slowed it? I mean, did you get any – a bit more additional feedback from what's going on with that?.

Yeah. There's really no additional color, Derik, in terms of people expressing any concern about Washington at all, any concern about funding at all. As we've said, the quarter started a little bit more slowly than we had maybe anticipated, or would have liked. We saw bookings.

We saw sort of interest, inquiries, and bookings steadily increase, so there's crescendo in March. Feel really good about the backlog. So, we – it's large universal clients that we're dealing with, both U.S.

and Europe, obviously biotech is primarily U.S., but large, medium and small biotech companies, let's say, if you want to call it an industry, that group of clients is extremely well funded, developing a lot of breakthrough drugs, a lot of money coming in from a variety of sources. And we really didn't hear anything to the contrary from anyone.

And we know, when we look at our business volume, but we're checking in sort of real time with very senior people about this stuff, because we're hearing a lot, primarily from our investors, who – sort of news-generated as opposed to reality. So, didn't see any evidence of anything.

And then actually, the quarter was enhanced by significant demand from our global clients because we re-upped several, actually, of our long-term agreements. They sort of all came together kind of in one quarter. We signed new ones, and we expanded some old ones and licensed some old ones.

So, that always feels like it's shoring up the infrastructure for us. It gives us better visibility and predictability of our business model. So, look, we were very happy with the 8.2% top line.

We would have, obviously, liked the DSA segment to have a stronger top line, but we really feel that the quarter strengthened so significantly and the bookings in backlog are so good. We still feel confident with our sort of full-year look at that, which we believe it'll be low double digit.

And it's got this, sort of, by definition, a variable cadence. A lot of that work in safety in particular, even the discovery work. I mean, studies don't start and end at the beginning and the end of the quarter, and we're going to have some variability.

And as we had in the conversation of the third quarter last year, we'd like to get people to look at sort of at least kind of the annual view of this. And so we feel good about what we're hearing, but more importantly of what we're experiencing from a bookings point of view..

Great. Thank you..

Sure..

Thank you. We have a question from Tycho Peterson with JPMorgan. Please go ahead..

Hey, guys. This is Steve Reiman on for Tycho. Thanks for taking my question. So, with leverage continuing to move lower, can you talk about or give a little more color on the deal funnel? Public market prices are obviously continuing to hit all-time highs. So, curious to what you're seeing on the private side.

And has it hit a point where the high prices have become an impediment to kind of driving your M&A strategy?.

Yeah. So, we're obviously happy with our leverage. We continue to move it down as indicated and as we desire. Deal flow is great. Yeah, it's moderate PE, venture capital and some privately owned businesses of, I would say, small to modest size – mid-size.

We don't always know, but we're increasingly feeling that we're likely to be the only or perhaps one of a couple of strategic buyers that were often competing with financial buyers who should never and often can never win a competitive bid process, given the cost and the revenue synergies that we have.

So, look, we remain extremely disciplined in what we will pay. So, public company comps aside, we're not going to overpay for anything, we haven't done a deal in a long time, there was anything worse than neutral and many – most have been accretive. So, we're quite focused on that and gain the returns that we want.

We have a whole range of targets that – all of whom would enhance our portfolio in a material and strategic fashion. We're looking at acquisition opportunities virtually in all of the areas where we feel that we have substantial growth and will make us a broader solution for our clients. So, yeah, we're very busy.

As you know, we don't have any arbitrary goals for the year, except that our preferred use of capital is strategic M&A, we'll do good deals if we can get that done and the due diligence work (39:09) we won't do them if none of those things happen.

Having said that, I suppose we'll be somewhat surprised and disappointed if we don't have some M&A concluded this fiscal year..

Got it. Appreciate the color..

Sure..

Thank you. We have a question from Dave Windley from Jefferies. Please go ahead..

Hi. Good morning. Thanks for taking my questions. Wanted to target my question around guidance and some components thereof. So, if you could explain the – I think in the first quarter, the $0.15 tax benefit item, but then for the quarter you're quantifying that as $0.10. Wondering what specifically the $0.05 mitigation factor is.

And then how much of that is being included or rolled forward into the full year guidance that you are maintaining, I believe? And then, I guess, trying to understand how in that full year guidance, I suppose kind of the above-the-line or the margin expectations are changing if we have a maintained EPS target with a new tax benefit included in that.

Thanks..

So, well, there's a multi-part question there. So, let me see if I can go through....

I tried my best. Yeah..

Yeah. Okay. So, first of all, the $0.05. So, we had a different mix as a consequence of the VCs, because that has the U.S. tax burden to bear. You also saw very good performance in our Manufacturing sector and Microbial made up a component of that, and that also leveraged to the U.S. tax rate. So, the $0.05 there is to do with those two components.

If we just kind of step out a little bit here, I mean, your wider question was how we might see the guidance for the whole year and where did the $0.05 come from. So, let me talk about $0.05 and then let's talk about the guidance for the year.

So, the $0.05, I guess the way simplistically to look at this is that we were guiding on the VCs $0.04 for the entire year and we saw $0.05 in Q1. So, there's $0.01. We have also guided to the lower end of our guidance range for the interest expense, and so there's another $0.01.

In terms of the excess tax benefit on the stock compensation, we were forecasting $0.12 for the entire year, and we saw $0.15 in Q1. So, there's another $0.03, and that essentially makes the $0.05.

Yes, we're kind of guiding that we're not expecting to see much in a meaningful manner coming from the excess tax benefit on the stock compensation for the remainder of the year. There may be some, but we should remember that this is now part of the effective tax rate calculations.

So, we have lots of puts and takes, and this new ruling on the stock compensation is just another put and take that we have within our effective tax rate. So, we feel that we're guiding correctly. 28% to 29% is what we said for the effective tax rate for the full-year and we now feel that we're at the lower end of that range.

So overall, the benefits that you're seeing in the increased guideline or the guidance is coming from the VCs, tax and interest.

Just a reflection that I have, if you look at Q1, we delivered at the total level on sales, OI, and earnings per share if you adjust for the VCs and the tax, we're saying the same thing for the full-year on operational total sales, total OI (43:05), EPS will still be, we feel, delivered.

What we're seeing is that within the actual segments, we're seeing a mix change. So, we're seeing good performance in the revenue in both RMS and Manufacturing and we have stated that that will probably moderate as we go through the year. Within exchange, we should see an increase in the DSA segment.

In particular, we think the margin will climb again partly because of the revenue mix and we call that how we felt about the pipeline, but also the margin gets benefit because we still got the WIL and Agilux acquisitions in there and we continue to drive the integration and drive those margins up.

So, that's another component as to why the DSA margin will improve..

All right. Thank you..

And we'll go to the line of John Kreger with William Blair. Please go ahead..

Hi. Thanks very much. Just wanted to come back to some of the comments you made on slide 10.

Just to clarify, the slow start to the year, was that primarily among your smaller biotechs or did you see them among large pharma as well? And I think in the past, you were getting a point where some new study starts were starting to get a little bit delayed reflecting sort of a stronger demand.

Are you still seeing that or at this point, is it – are we not seeing any study start delays within tox? Thanks..

Study starts within tox are inherent in the toxicology business. So, we'll always see them. Companies who used to do the work themselves always suffer internally, it's (44:52) when the drug is ready on time, ease or difficulty formulating it, priorities within the business. So, that goes to backlog.

And as backlog improves, that's always less of an issue. So, we saw, as I said earlier, we saw a strong global client impact in the first quarter because of lots of signings of big deals, that's always a good thing even though our revenue is slightly larger for the biotech clients.

And we're seeing sort of an evaluation that always happens in the first quarter of what drugs they want to approve, and when they want to get started, so safety is typically lighter anyway was kind of what we expected, maybe a little bit slower.

But as I said earlier, extremely pleased with the solidification and the intensification of demand and inquiries pretty much on a world-wide basis, pretty much throughout the entire client base as the quarter ended. So, we're seeing very good client interaction. And it's hard to slice it because we have so many clients, both very large and very small.

You have to remember that very small has never had any internal infrastructure, so they are totally dependent on Charles River, or the companies like us. So, if the work is available, it will come outside..

Great. Thank you..

Sure..

We will go to the line of Ross Muken with Evercore ISI. Please go ahead..

Hey, guys. It's Luke on for Ross. I guess on the Biologics and Manufacturing Testing, it's been such a strong driver for you guys lately.

Can you just talk about where you think we are in the cycle and about how your entire portfolio kind of helps you forecast from you have the tox in the beginning with the DSA and then that goes all the way through manufacturing, where we can kind of see if it's like a leading or lagging indicator?.

So, it doesn't strike me that it's sort of cycle-related. And it's not necessarily particularly well-correlated with other parts of the business, although that may change over time.

So, the business is increasingly improving, I'd say, the last two or three years, we've seen the sort of growth rates that we had desired and the operating margins that we had desired. We're investing significantly in capacity and scientists, and then our capabilities, which are continuously broad gauged.

So, as the industry has more biologics that get to the clinic, whether they get to market or get to the clinic, that work almost entirely goes outside. When the drugs are approved, sometimes it goes inside, but often it stays outside as well.

So, I guess it's most closely correlated to the increase and enhanced number of biologics that are both in the pipeline and getting to market. If and as that continues to increase, which I think everybody would agree, it will continue to increase.

The power of those drugs are sort of undeniable, to be a very, very good business model – business for us. We have a very good geographic footprint, which I think is a competitive advantage for us.

And obviously, the – while other parts of our business may not be predictively correlated, clients increasingly want to buy more services from a small number of providers.

And so, if they can get the biologics service from us, even if it's not specifically a drug that we've done tox for them or pharmacology with them, but it's a bigger relationship and a better value proposition, they will do that. So, we're seeing that increasingly.

We had a conversation yesterday about a client that's gone from having 28 providers of their work to one. Don't think that's unusual. I think that's – that makes their business easier – everyone is in a rush to market, so managing their outside suppliers kind of is a distraction.

So, if you could find a scientific partner who will help you from a regulatory point of view and scientific point of view and a speed point of view, and you can buy multiple services and, I suppose, products as well from that provider, it's definitely a win-win for them, and obviously for us as well..

Good. Great. Thanks..

Sure..

We'll go to the line of Jack Meehan with Barclays. Please go ahead..

Thanks. Good morning. I wanted to dig in a little bit more on the safety assessment trends in the quarter.

Could you elaborate on the commentary related to the competitive environment? Was this something one-off going on or broader, and what do you think was driving the behavior?.

Yeah. It's not all that different than we see. I mean, I think the competitive environment is what it is, right? You've got about half a dozen big players and that's it. We're the largest player. The first quarter tends to be a little bit slower. There's a sorting out period, prioritization, which we always see.

The fourth quarter is often slow, it's kind of difficult to predict. I think all of us – can't really speak for our competitors – so I think all of us are hard at work making sure we have a strong start to the year. We utilize our capacity well.

And I think that we saw that happening in the very, very early part of the quarter, for sure January, a little bit less, but – February as well, and then very strong fortification and a lot of activity in March. It's really not that unusual. So, I don't think it's all that different. I do think that all of us appear busy.

Demand is, I think, good, both short-term and long-term indications. We're not seeing any sort of crazy, overly aggressive pricing dynamics. And I think people's capacity, competitors' capacity as well as ours, are well utilized.

So, it feels like a very rational, somewhat respectful business environment, and we feel that we can build upon the first quarter for the rest of the year..

Great. Thanks..

And we'll go to line of Ricky Goldwasser with Morgan Stanley. Please go ahead..

Yeah. Hi. Good morning..

Good morning..

Most of my questions have been asked, but just a couple of clarifications here. So, Jim, one of your competitors talked about some weakness in their business.

Do you think that the organic growth that you're achieving, does that reflect kind of like market growth, or are you gaining share? And then, secondly, we are starting to see kind of like an increased wave of zero (52:33) consolidation on the clinical side.

I was wondering if you have any views on what's driving it?.

Yeah. You know, we're not experts in the clinical side. I think what's driving it, I think there's a lot of players, and scale is obviously really important. There's a couple of really big ones. So, not really surprised. Then a couple of the people that are being consolidated haven't had the best performance.

So, probably on a consolidated basis, with appropriate synergies, the businesses will just be stronger. So business is very much outsourced right now. So, not surprising, not surprising at all. With regard to safety, we are unquestionably taking share from multiple competitors, I think we have for a while.

I think the business volume – I think you have two things going on. You have pharma continuing to dismantle capacity and outsource. Pharma tends to like the really big players. So, we're getting a lot of that work, and I could think of one, and perhaps one other competitor who might be seeing a lot of that work.

And then of course, you have lots of new biotech companies who didn't exist last year, didn't have drugs that were available to be tested, and they didn't have the technologies or the funding, whatever, and of course, they never had any internal capacity.

So, I do think that the demand proposition is an extremely attractive one and one that should be persistent and somewhat consistent over a year. And the point that we really want to make that – well, so let me make it again – is that there has been variability from quarter-to-quarter. It's not something that's unlikely that we'll see again.

We feel very strongly about the double-digit organic growth rate proposition for the DSA segment and for safety in and out of itself over a year's period. Felt quite good about that. We hope it's up double-digit every quarter, it just kind of not the way it's probably going to turn out just because of the cadence of the work.

And so we certainly look beyond the modest variability from quarter-to-quarter as we utilize our space well, make the appropriate investments in people. So, we feel very good about the demand..

Okay. Thank you..

Sure..

And we have a question from Erin Wright with Credit Suisse. Please go ahead..

Hi. This is actually Hong (55:25) on for Erin. Thanks for taking our question. We just have one really quick one.

Would you guys mind giving us an update on your Early Discovery business, what you're seeing there in regards to sort of your large pharma customers and just sort of your outlook for the rest of the year?.

Yeah. So, the Early Discovery business continues to stabilize and strengthen. We have new management, we have new sales organization, we have an integrated drug development group that cuts across multiple therapeutic areas and in vivo and in vitro capabilities. We've done some creative deals. We announced a big deal with Nimbus during the quarter.

We announced an extension with Chiesi during the quarter. It's a modest amount of our deals, but we're being much more creative with the way we structure deals. We did well with pharma in the quarter, we did well with small biotech companies as well. So, while Early Discovery was still slightly down, it is strengthening both top and bottom line.

And most importantly, the client – the universe of clients that we're engaging with and signing work with is increasing. So, we really feel good about its stabilization and its future prospects..

Great. Thank you..

And our last question will come from Tim Evans from Wells Fargo. Please go ahead..

Hi. This is Sara Silverman on for Tim. I want to see if you guys could elaborate a little bit more on the specific mix issues that you're seeing impacting the DSA margin outside of acquisitions this quarter, like any additional color there would be helpful. Thanks..

Yeah. I'll give you some more color, but I'll keep it a little bit general. So, when we talk about mix, we talk about the mix between short and long-term studies. By the way, you don't get long-term studies unless you do the short one.

The mix between general and specialty tox, specialty tox is often, not always, but often later in a clinical trial process, tends to be higher margin, less price sensitive and often the clients never had the capability and some of our competitors don't as well.

And we also take a look at the ancillary or necessary laboratory scientist work that goes along with those. The predictability of what that mix will be amongst all of those six elements is impossible, just put it that way. The good news for us is we have a very large capability in specialty toxicology.

So, over a year's period, we'll see a pretty good mix. We'll see good mix of lab scientist work as well and we hope obviously that the work that we start with short-term studies, assuming the drugs look promising, move into later stage. So, you can infer from what I just said that the mix was a little less desirable in the first quarter.

Again, totally beyond our control, but sort of directionally and with some level of certainty that will enhance and strengthen and approve during the back half of the year..

Okay. Thank you..

Speakers, I'll turn it back..

Thank you. Thank you for joining us this morning. We look forward to seeing you at the Bank of America Merrill Lynch Healthcare Conference next Tuesday or the Jefferies Healthcare Conference on June 7. This concludes the conference call. Thank you..

Thank you, ladies and gentlemen. That does conclude your conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect..