Good day and thank you for standing by. Welcome to the Charles River Laboratories Fourth Quarter and 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. . Please be advised that today's conference is being recorded. .
I would now like to turn the conference over to your speaker today, Todd Spencer, Vice President of Investor Relations. Please go ahead..
Good morning and welcome to Charles River Laboratories fourth quarter 2021 earnings and 2022 guidance conference call and webcast.
This morning, Jim Foster, Chairman, President and Chief Executive Officer, and David Smith, Executive Vice President and Chief Financial Officer, will comment on our results for the fourth quarter and full year of 2021 and our financial guidance for 2022. Following the presentation, they will respond to questions.
There is a slide presentation associated with today's remarks, which will be posted on the Investor Relations section of our website at ir.criver.com. A webcast replay of this call will be available beginning approximately 2 hours after the call today, and can also be accessed on 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 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'm very pleased to speak with you today about another exceptional year for Charles River and our expectations for 2022. We believe that Charles River is a stronger company today than it has ever been.
We were extremely pleased to report organic revenue growth of 15% for the full year or low-double digit growth when normalizing for the COVID-19 impact in 2020 and a second consecutive year of 100 basis points of operating margin expansion.
We have seen unprecedented demand across most of our businesses, and we believe that this demand coupled with robust industry fundamentals will fuel low teens revenue growth in 2022.
As a result, we're continuing to invest to add people and capacity to accommodate growing client demand and to build a scalable operating model to enhance our scientifically distinguished portfolio and to strengthen our relationships with clients through our flexible efficient outsourcing solutions.
To further differentiate ourselves from the competition, we have strategically expanded our portfolio to provide clients with the critical capabilities they require to discover, develop and safely manufacture new drugs.
We have enhanced our scientific capabilities for advanced therapies in areas that offer significant growth potential with six acquisitions over the past two years.
By doing so, we have built an end-to-end non-clinical portfolio of cell and gene therapy solutions to support clients from early stage research through cGMP production, and we expect to generate nearly 15% of our total revenue in 2022.
The greater complexity of scientific research is encouraging the biopharmaceutical industry to rely on Charles River's bioscience capabilities when choosing an outsourcing partner.
Because of our extensive scientific expertise, client-centric approach, and unique non-clinical portfolio, we worked on more than 85% of the FDA approved drugs in 2021, including all of the CNS drugs and more than 90% of the oncology drugs.
We are proud that our biopharmaceutical clients continue to choose to partner with us as they recognize the value that we provide. Now, let me give you the highlights of our fourth quarter and full year. We reported revenue of $905.1 million for the fourth quarter of 2021, an increase of 14.4% on a reported basis.
Organic revenue growth of 10.5% was driven primarily by continued double-digit growth in the manufacturing and RMS segments. The COVID impact in 2020 resulted in a modest 50 basis point increase to the organic revenue growth rate. The 2021 revenue was $3.54 billion, with a reported growth rate of 21.1% and an organic growth rate of 15.1%.
On an annual basis, the COVID impact in 2020 resulted in a 280 basis point increase to the organic revenue growth rate. Adjusted for the COVID impact, we were very pleased that we achieved low-double digit normalized growth on a consolidated basis, and that each segment achieved its longer-term organic growth target in 2021.
The operating margin was 20.9% in the fourth quarter, an increase of 10 basis points year-over-year. For the full year, we met our outlook of 21%, representing the second consecutive year of 100 basis points of operating margin improvement.
This demonstrates the operating leverage inherent in our business, as well as our continued efforts to drive operating efficiency and build a more scalable infrastructure.
We expect to generate modest operating margin improvement in 2022, which will moderate from the past two years as we continue to make the investments needed to support growth, principally related to staffing and because of a 20 basis point headwind from the 53rd week this year.
Earnings per share were $2.49 in the fourth quarter, an increase of 4.2% from $2.39 in the fourth quarter of 2020. Strong revenue and operating income growth were partially offset by a higher tax rate and interest expense. For the full year, earnings per share were $10.32, a 26.9% increase over the prior year.
We exceeded our prior guidance range of $10.20 to $10.30 and reported a second consecutive year with earnings growth above the 20% level. Our outlook for 2022, which we initially provided in January, demonstrates our firm belief that the sustained demand environment will continue this year.
We believe this trend, combined with higher pricing, will drive organic revenue growth in the range of 12.5% to 14.5% in 2022. We continue to expect non-GAAP earnings per share will be in a range of $11.50 to $11.75.
Earnings per share are expected to grow at a similar rate to revenue, as modest operating margin improvement will be largely offset by less favorable below-the-line items, including a higher tax rate.
We are enthusiastic about the year ahead and look forward to new opportunities to scientifically differentiate ourselves in the marketplace, enhance our ability to meet clients' needs and achieve our financial goals.
I'd like to provide you with additional details on our fourth quarter segment performance and our expectations for 2022, beginning with the DSA segment's results. DSA revenue in the fourth quarter was $534.1 million, a 6.7% increase on an organic basis.
Biotechnology clients remain the primary driver of DSA growth in the fourth quarter, as the industry remains well funded and ended the year on a strong note. As anticipated, the DSA segment's organic growth rate for the quarter was below 10%. But also as expected, DSA achieved a low-double digit growth rate for the year at 12.2%.
As we've said before, growth rates for our businesses are not linear. So, quarterly fluctuations should be expected. In 2022, we expect DSA organic revenue growth will be in the mid-teens.
The increase from last year's growth rate is based on our belief that sustained client demand will continue and higher price increases than in 2021 will help offset higher compensation costs and other inflationary cost pressures.
The DSA growth rate is expected to accelerate during 2022 due in large part to the current pricing working through the backlog. The first quarter growth rate is also expected to improve from the fourth quarter level. Our Safety Assessment business continued to perform very well, benefiting from strong demand and price increases.
Bookings and proposal volume remain at record levels, with total DSA backlog increasing 70% or by $1 billion to $2.4 billion at year-end 2021. We are booking work into 2023, which translates to greater visibility and a strong book of business that supports our growth expectations.
The acceleration of demand during 2021 was reflected in the fact that we added nearly twice as many Safety Assessment staff in the second half of 2021 as we did in the first half. We expect these recent hires will help us accommodate client demand in 2022.
In addition to closely managing the workload by continuing to add staff, we are taking a similar approach to capacity additions, investing in new space in a disciplined manner to ensure we meet future demand. Our Discovery Services business also continued to perform well, with strong performances for early discovery and CNS services.
Similar to the Safety Assessment business, we are accommodating robust client demand for Discovery Services by closely managing staffing levels and adding cutting-edge capabilities. We believe this will continue to enable us to achieve an annual growth rate in the low-double digits or better.
Our efforts to broaden and strengthen our discovery capabilities and enhance our scientific expertise are enabling us to expand the support we provide for our clients' discovery research.
As a result, clients increasingly view Charles River as a premier scientific partner who can support their efforts to identify new drug targets and discover novel therapeutics.
This is leading to new opportunities for our Discovery business, including significant client interest in integrated drug discovery programs, in which clients trust us with multiple services or their entire discovery program to advance their early stage therapeutics.
We intend to continue to build our discovery portfolio, including through strategic partnerships and acquisitions. Acquired in early 2021, Retrogenix, with its proprietary cell microarray technology and off-target screening services, had a very successful first year as part of the Charles River family.
Combined with Distributed Bio's large molecule discovery platform, clients can now partner with us for integrated end-to-end solutions for therapeutic antibody and cell and gene therapy discovery and development.
Our partnership strategy has proven to be a successful approach to staying current with cutting-edge technologies and adding innovative capabilities with limited upfront risk.
We recently signed a new partnership with Valo Health to deliver a new type of offering that combines Valo's artificial intelligence or AI-enabled drug discovery and development platform with our own capabilities to expedite the discovery of small molecule therapies for clients.
This partnership has the potential to accelerate the discovery process as we utilize Valo's Opal closed-loop in silico platform to rapidly identify compounds and optimize them using our leading in vitro and in vivo capabilities.
We also recently announced an expanded partnership with SAMDI Tech's innovative assay technology to further expedite the discovery process around high throughput screening of lead compounds.
Our innovative discovery toolkit will enable us to become a technological disruptor in the industry and positions us as an indispensable research partner who can enable clients to identify and discover new drugs faster, which will ultimately reduce their time to market.
The DSA operating margin was essentially unchanged at 23.1% in the fourth quarter, despite a 40 basis point headwind related to foreign currency translation. For 2021, the DSA operating margin improved by 30 basis points to 23.7%. Foreign exchange has an 80 basis point headwind.
The DSA segment is expected to be the primary contributor to the company's operating margin improvement in 2022. RMS revenue in the fourth quarter was $165.6 million, an increase of 13.3% on an organic basis, which excludes the RMS Japan divestiture. The comparison to the COVID impact in 2020 increased the fourth quarter growth rate by 2.3%.
For the year, RMS organic revenue increased by 19.5%, with approximately half the increase or 9.8% being driven by the comparison to the COVID impact in 2020. Normalized for the COVID impact, we reported high-single digit growth in 2021, which is consistent with the RMS organic growth outlook for 2022.
Our 2022 outlook reflects a continuation of the strong global demand for research models and associated services generated by the ongoing robust early stage research activity within the biopharmaceutical industry, as well as at academic and government institutions.
This outlook includes robust growth for our in-sourcing solutions business as we continue to expand our cradle footprint. It also assumes improvement in the cell supply growth right throughout 2022 as our efforts to enhance the operating performance of HemaCare and Cellero gained traction during the year.
The underlying industry fundamentals within the cell therapy sector remain strong. Research models remain foundational regulatory required tools for early stage research and toxicology and a vital component of our ability to support our client.
Revenue for research models has increased globally during the COVID-19 pandemic due to both higher pricing and improved demand, reflecting the renewed focus on scientific innovation and the critical role that research models play in generating scientific breakthroughs and ensuring the safety of life saving therapy.
Demand in China was exceptionally strong in 2021, reflecting the resurgence of biomedical research activity following China's emergence from COVID-related shutdowns in 2020, as well as a shift towards a mid-tier biopharma and CRO client base and our expanded product offering.
While we expect the growth rate in China will moderate in 2022, including in the first quarter after an exceptionally strong stat last year, we are continuing to expand our geographic footprint to support the continued double-digit revenue growth that is expected in this region.
The heightened level of research activities also driving demand for our research model services, which continued to perform very well in the fourth quarter and full year. We are a natural partner for GEMS and in-sourcing solutions, or IS.
With our extensive animal husbandry expertise and our ability to provide clients with flexible and efficient solutions, GEMS is benefiting from strong outsourcing demand, driven by the greater complexity of scientific research and the proprietary models that our clients are creating.
IS is benefiting from the continued growth of our cradle initiative, which provides both small and large biopharmaceutical clients with turnkey research capacity at our sites and facilitates the use of other Charles River services as their research progresses.
We intend to continue to expand our existing cradle footprint in the Boston, Cambridge and South San Francisco bio hubs and also into new regions in 2022, including Southern California and China due to significant client interest in the service.
The RMS operating margin was 26.9% in the fourth quarter, an increase of 180 basis points from the fourth quarter of 2020. The increase was driven by operating leverage from higher sales volume in the research models business, particularly in China. Through 2021, the RMS operating margin increased by 530 basis points to 27.3%.
The significant improvement was primarily due to the comparison to the depressed margin in 2020 associated with COVID-related client disruptions. Manufacturing revenue was $205.3 million in the fourth quarter, a growth rate of 21.2%.
on an organic basis, driven primarily by double-digit organic growth across the microbial solutions, biologics testing and avian vaccine businesses. For the full year, organic revenue growth was 20.6%, with 210 basis points of the increase coming from the comparison to the COVID impact in 2020.
In 2022, we expect mid-teens organic growth for the Manufacturing segment.
The moderation from the exceptional 2021 performance reflects a return to more normalized growth rates for the microbial solutions business after an incremental benefit from COVID-related instrument and cartridge replenishment in 2021 and in the biologics testing business due to a reduction in some COVID vaccine testing revenue, as that revenue stream settles into a steadier state.
We're very pleased with the mid-teens growth rate forecast for 2022 and expect the Manufacturing segment will achieve its 2024 target of approaching 20% growth once the benefit of the high growth CDMO businesses fully reflected in the organic growth rate and the CDMO scale continues to increase.
Microbial solutions growth rate in the fourth quarter and for the year remained well above 10%, reflecting strong demand across our portfolio of critical quality control testing solutions.
We were pleased with the strength of the demand for our endotoxin testing systems and cartridges, which perform FDA-mandated lot release testing on injectable drugs and medical devices.
The advantages of our comprehensive portfolio continue to resonate with our clients, and we believe that our ability to provide a total microbial solution will enable microbial solutions to continue to deliver revenue growth at or above the 10% level.
The biologics testing business reported another exceptional quarter and year of strong double-digit revenue growth. Robust demand for cell and gene therapy testing services continued to be the primary growth driver, with COVID-19 vaccines and traditional biologics also being meaningful contributors.
While we expect a moderation of the COVID vaccine testing revenue in 2022, we believe cell and gene therapies will continue to be significant growth drivers over the longer term to support our 20% target for the biologics business this year and beyond.
Our CDMO business is continuing to make great progress on the integrations as we gain traction on business development activities to support its robust growth outlook in 2022. We've established an end-to-end gene modified cell therapy solution, which we believe is critical to support our clients more seamlessly.
Our comprehensive cell and gene therapy portfolio is resonating with clients and they continue to explore opportunities to streamline their biologics development workflows and drive greater efficiencies by outsourcing to us.
The strength of demand for CDMO services necessitates our continued investment and capacity to ensure we have available space to serve our clients and to build upon our extensive portfolio of manufacturing services.
The Manufacturing segment's operating margin declined by 160 basis points to 35.7% in the fourth quarter of 2021 and by 320 basis points to 34.2% for the full year. These declines primarily reflect the inclusion of the CDMO acquisitions in 2021 of Cognate and Vigene.
These businesses are profitable, but their margins are below overall Manufacturing segment. We expect this margin headwind to gradually dissipate as we drive efficiency and as the significant growth we anticipate generates greater economies of scale and optimize the throughput at our CDMO sites.
In 2022, we will continue to move on growth strategy forward. Disciplined M&A and strategic partnerships remain vital components of our strategy as we endeavor to further enhance the scientific expertise, global reach and innovative technologies that we can offer clients across all three of our business segments.
We will also focus our efforts internally on ensuring that we have the necessary staff and resources to meet the needs of our clients and support the robust growth in our market, on enhancing real time digital connectivity with clients and on continuing to integrate our end-to-end non-clinical offering to create a more seamless solution across all drug modalities.
It's incumbent upon us to be the scientific partner who can help clients move their programs forward from concept to non-clinical development to the safe manufacture of their life-saving therapies. By providing exceptional value to our clients, we believe we will continue to achieve our financial targets and deliver greater value to our shareholders.
In conclusion, I'd like to thank our clients and shareholders for their support and our employees for their exceptional work and commitment. Now, I'd like David Smith to give you additional details on our financial performance and 2022 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 changes, costs related primarily to our global efficiency initiatives, the gain on the sale of RMS Japan, our venture capital and other strategic investment performance and certain other items.
Many of my comments will also refer to organic revenue growth, which excludes the impact of acquisitions, divestitures, foreign currency translation, and the 53rd week in 2022. My discussion this morning will focus primarily on additional details regarding our financial guidance for 2022, which was originally provided on January 11.
We continue to expect reported revenue growth of 13% to 15% in 2022 and organic revenue growth of 12.5% to 14.5%. Our revenue growth outlook for 2022 is supported by the continuation of unprecedented client demand and a healthy funding environment along with price increases to help offset higher inflationary cost pressures.
We remain well positioned to expand margins while continuing to invest in the business, resulting in non-GAAP earnings per share between $11.50 and $11.75 per share, or approximately 11% to 14% growth compared to 2021. By segment, our outlook is also unchanged from last month.
We expect organic revenue growth in the high-single digits of the RMS segment, the result of continued robust global demand for research models and associated services, as well as improvement in the cell supply growth rate. This will be partially offset by a moderation in the RMS China growth rate after an exceptional performance in 2021.
For the DSA segment, we expect mid-teens organic revenue growth, driven by continued strong contributions from both the Discovery and Safety Assessment businesses. The growth rate of the safety assessment business is expected to accelerate during the year, principally as current pricing works through the backlog.
We also expect a mid-teens organic revenue growth in the manufacturing segment, reflecting a slice moderation in the microbial solutions and biologics growth rates, along with the incremental contribution from the high growth cell and gene therapy CDMO business once we anniversary the Cognate and Vigene acquisitions.
The CDMO business is expected to contribute nearly 150 basis points to our consolidated organic revenue growth rate in the second half of the year. We continue to expect foreign exchange to provide a headwind of approximately 100 basis points to our reported revenue guidance in 2022 as a result of the strengthening of the US dollar.
FX rate estimates are based on the bank forecasts for the year, which are currently very close to the spot rates on those currencies. Based on our current rate assumptions, FX will be a moderate headwind to earnings per share.
We have provided information on our 2021 revenue by currency and the foreign exchange rate that we are assuming for 2022 on slide 32, and we'll continue to monitor fluctuations in the currency market as we progress through the year.
We were pleased with the operating margin of 21% last year and the fact that it was the second consecutive year with 100 basis points of margin improvement.
We remain well positioned to drive modest operating margin improvements in 2022, although the improvement will be less than the prior two years due to two principal factors – higher compensation costs due to both hiring and wage increases and the impact of the 53rd week which is expected to reduce the operating margin by approximately 20 basis points.
On a segment basis, the DSA operating margin is expected to be the primary contributor to the margin improvement in 2022 and the leverage from higher revenue growth is expected to drive the operating margin towards its longer-term target in the mid 20% range.
Corporate expenses are expected to be in the mid 5% range, as well as slightly below the 2021 level of 5.6% of the total revenue.
We expect unallocated corporate expenses to be a small contributor to the margin expansion this year because our scalable infrastructure and investments, including in our digital enterprise, enable us to drive greater efficiencies and leverage corporate costs.
The non-GAAP tax rate for 2022 is expected to be in the low 20% range, which will be a slight increase from 18.9% in 2021.
The increase is principally due to the discrete tax benefits in 2021, associated with R&D tax credits, and the favorable excess tax benefit related to stock-based compensation, neither of which is expected to recur at the same level. Our 2022 tax rate guidance assumes no impact from potential US tax reform initiatives at this time.
As a reminder, the first quarter tax rate has been meaningfully lower in recent years due primarily to the excess tax benefit related to stock compensation. Given our current stock price, we expect this to continue to be true in 2022, resulting in a non-GAAP tax rate in the mid-teens for the first quarter.
Total adjusted net interest expense in 2022 is expected to increase to a range of $83 million to $87 million compared to $79 million last year. We expect a year-over-year increase to be driven by the outlook for higher variable interest rates, primarily in the US, partly offset by repayment of debt.
Our assumptions for interest rates include several rate increases this year, which is generally consistent with the Federal Reserve's guidance. It is important to note that the interest rate impact will be somewhat muted by the fact that slightly more than 50% of our debt is in fixed rate bonds that will not fluctuate.
At the end of the fourth quarter, we had an outstanding debt balance of $2.7 billion, equating to gross and net leverage ratios of approximately 2.5 times. We continuously evaluate our capital priorities and, as always, intend to deploy capital to the areas that we think will generate the greatest returns.
Strategic acquisitions remain our top priority for capital allocation. Absent any meaningful M&A, we will evaluate other uses of capital, including debt repayment. Our expectations for the diluted share count will be to exit the year, with slightly more than 52 million shares outstanding, which does not assume any stock repurchases at this time.
In 2021, free cash flow was $532 million, an increase of 40% from the preceding year and above our prior outlook of approximately $500 million due to the strong operating performance and working capital management. As indicated in January, we expect free cash flows for 2022 to be approximately $450 million.
This is a decrease of $80 million from last year due entirely to an anticipated $130 million increase in capital expenditures or expected to total approximately $360 million in 2022.
With robust client demand exceeding our expectations in 2021 and expected to continue, we believe we will require CapEx of approximately 9% of total revenue in 2022 to provide the additional capacity needed to keep pace with demand.
Legacy businesses are driving most of the year-over-year capital increase, with safety assessment responsible for approximately two-thirds of the increase and the remaining from the manufacturing segment. A summary of our 2022 financial guidance can be found on slide 40.
As a reminder, we will add a 53rd week at the end of the fourth quarter of 2022, which is periodically required to true-up our fiscal year to a December 31 calendar year end. The 53rd week has historically been characterized as a partial week of revenue simply because during the holiday full week of costs.
Looking ahead to the first quarter of 2022, our outlook includes year-over-year revenue growth of approximately 10% on both a reported and organic basis. As Jim mentioned, the DSA revenue growth rate is expected to improve in the first quarter compared to the fourth quarter level.
This will be offset by a low RMS growth rate, reflecting the comparison to an exceptionally strong start in China last year.
We are also confident that the revenue growth rate will accelerate during the year, reflecting the robust DSA order book which extends into 2023 and includes higher pricing as well as the anticipated improvement in the RMS growth rate from the first quarter level.
First quarter non-GAAP earnings per share are expected to increase at a high-single digit rate from $2.53 last year, reflecting a mid-teens tax rate and year-over-year increase in interest expense. In conclusion, we are very pleased with our financial performance in 2021 and believe that we are well positioned to deliver another strong year in 2022.
Our expected 2022 performance reflects our ongoing focus on disciplined investing to support the growth of our businesses, our efforts to drive efficiency, the speed and responsiveness with which we operate and our goal to continually enhance our relationships with our clients.
We are also confident in our ability to achieve our 2022 financial targets, including approximately 150 basis points of operating margin expansions from the 2021 level. Thank you. .
That concludes our comments. Operator, we will now take questions..
. Our first question comes from Derik de Bruin with Bank of America..
Jim, just getting some questions this morning from people that are trying to square your commentary on the really high bookings number. And I think some people think that maybe the fourth quarter DSA came in a little bit light and the Q1 guide is a little bit below what some people thinking.
Can you just sort of walk through the sort of like how to reconcile the bullish outlook in the bookings number with what people are perceiving as maybe a little bit softer numbers?.
It's a further manifestation of our continued articulation that these studies sort of star and when they start and stop, and then they don't care about our fiscal quarters. But by the same token, we've been able, I think, to call the years pretty accurately – or very accurately.
So, we had over 12% growth in DSA segment last year, which we're proud of and we just got it to stronger growth mid-teens this year. So I can say several things. So, it kind of ended the year where it ended. We just said that the first quarter will be better. We have a lot of things going on, Derek. We have literally studies booking into 2023.
You've known us a long time. That's sort of new. We ended 2021 with a backlog that was a billion dollars higher than the prior year, which is also quite extraordinary. We're getting a lot of price. We're going to stop short as usual of breaking out that price, but we're getting a significant amount of price.
And a lot of that price sort of builds through the back half of the year as we've had all these studies book into the back half of the year. So, we have, I would say, the best visibility we've ever had. We've had bookings elongated out more than they ever had with, I don't know, if it's the best pricing.
I think it's probably the best pricing that we've seen as well. And very strong conversations about clients, about focus primarily on do you have a slot for me and when can you start and do you perform this sort of work rather than always starting with price.
So, we're very pleased that we're getting paid for what has become, and I know you understand this well, very, very complex studies. The studies have grown increasingly more complex as you're looking at immunological impacts or genetic impacts.
So, we feel really good about DSA, really good about safety assessment, in particular really good about having hired more people in the second half of the year – I'm talking now about 2021, than the beginning of the year, which means that we're rolling into 2022 with a higher workforce that's trained and available to do the work.
So, I hope that helps. We feel particularly strong about how we've guided you all for the year in that business..
I know you normally don't give bookings numbers, but is there any sort of like color you can give on the quarter-to-quarter improvement?.
Tests, we do it on a quarterly basis. But I think that backlog number is quite interesting. That's a big pop year-over-year, quite solid, a lot of pricing in there. So, we will see it continue to improve as the year unfolds..
If I can squeeze in one follow up, and I'll leave the biotech financing question to somebody else. But I'm getting a bunch of questions on cell and gene therapy demand and just your confidence in that demand for that market sort of being there.
I think some investors are a little skeptical of the cell and gene therapy, the expectations about demand being built out of capacity out there is ultimately to be filled, just given the complexities of that market.
I guess, what's your confidence that the capacity you're building out, the demands you're assuming for cell and gene therapy is going to materialize?.
We're relatively early days here, but deep into the integration of all of these assets we bought last year. I would say that our client-facing capability and design is being well received. Demand is increasing and business is improving in most of those businesses.
For us, it's about getting the word out that we have these services and what the breadth of the portfolio is. But we think we're in a very strong competitive position, particularly if you link that with the rest of the portfolio. 15% of our revenue is going to come from there. So, we're seeing good demand from cell and gene therapy.
We're going to see that exemplified in the Manufacturing segments, both in biologics, both in the CDMO space, we're also going to see that play through some aspects of discovery and safety. So, we're seeing anticipated level of demand that we expected when we did those deals. .
Our next question comes from John Kreger with William Blair..
I'll ask the biotech funding question. Jim, you said in your comments that funding is great. It looks like the first quarter, at least from an IPO standpoint, will maybe be the first quarter that it will be down quite a bit.
From your standpoint, does that sort of impact the way you guys think about the year and budgeting or do you think funding from other sources is still big enough to offset slowness there?.
It really doesn't. It really doesn't, John. Last year was a very strong year. I don't know, I feel it's the second strongest. Even the fourth quarter was, I think, in the top five strongest. We've done a very bottoms-up careful analysis of some balance sheets of all of our clients.
We think there is at least still three years of cash available for them from a sort of capital markets, I guess, from a variety of sources. And so, they've got the capital markets, they've got direct inflows into the VC funds, and of course, they've got direct inflows from pharma, as they always have.
As I think we are literally the canary in the coal mine, I can tell you that we have no conversations at all with any clients about their concern, about several things, about any sort of articulation of a pullback or slippage, overweight or we can't prosecute our full portfolio with none of that, either current or forward looking.
We have nobody that's not paying the bills. I do think that – as I said for many years, the biotech industry, particularly not wastefully. I think they're very well banked right now.
I think the multiple modalities, particularly many of the new ones, particularly cell and gene therapy and the RNAi drove – continued to strengthen the outlook and funding capabilities to these companies.
And I think a quarter blip, if it even lasts a quarter in the IPO market relative to interest rates and all the other stuff that's going on, I understand why you asked the question.
People looking at, I think it's potentially over reading the situation or kind of waiting for things to be less robust, but we think they're very well financed going forward and they're not articulating any concern. We pay attention to that stuff every day and we listen for it as well.
And we make sure that we're communicating with our clients in a way that we understand how they're looking out into the future.
I guess, conversely, if somehow this situation I just described, would it change in any meaningful way or significant way, which I absolutely don't think it will, I think we'd hear it first, given our footprint and given how much interface we have with so many clients.
So, no indications at all that there's any concern, and I don't really think there's any significant impact of the spending abilities. .
Quick follow-up on CapEx. It looks like your budget is about $130 million.
Can you just talk about where those investments are going?.
I think first thing to just think about is just the scale of the company. So, it's a much larger company and we're growing faster. So, those are sort of two kind of basic comments. Third is that we have a pretty big infrastructure, whatever it is, 5 million square feet of space. So, on a maintenance basis, we have a lot of facilities to take care of.
Having said that, most of the increase is for new growth and development. It's incremental work. And most of that is in legacy businesses, and particularly in safety assessment.
So, we are working really hard as the safety assessment continues to escalate, growth that escalates, which it is, again, with all the pricing, all the things we just talked about. We have to get the capacity in place relatively well in advance. So, as we said, previously, kind of 18 to 24 months in advance.
So, increasing that capacity builds for probably the back half of 2023 and 2024, which is what we're doing now because we've already built what we need for 2022 and the first half of 2023, isn't optional.
As you know, we're very careful not to over step our bounds and not to overbuild by the same token, and we definitely don't want to be capacity constrained with a market that's growing quickly. And we're gaining share and encountering more work.
So, I think there we have new businesses, particularly the cell and gene therapy, CDMO businesses which are adding to that, but they aren't adding to that in a way that somehow intensifies the span, but just it's part of a larger business. So, I'd say the principal determinant is the growth rate and space need for safety assessment business..
Our next question comes from Tycho Peterson with J.P. Morgan. .
Ain't to split hairs here, but are you going to talk at all about January trends or year-to-date trends? I understand you're booking studies out to 2023 and you're expecting.
But can you just talk as to whether things did hold up the beginning of the year so far?.
We typically don't do that. I think I'd rather say that we ended the year strong, we anticipate improvement in several of our businesses in the first quarter, principally, and particularly the DSA business. The demand is certainly there for those businesses, in particular.
And as I said a moment ago answering another question, we see those bookings and the escalation and the price continuing to unfold through the back half of the year. And we don't see any logical rationale why that won't happen.
These are the first time we booked that far out into the next year, I think ever, and that's a commentary on the volume of work, how well capacity is utilized across the system, not just the Charles River, and how much the robust nature of the discovery pipelines that these clients have.
So, we're looking for sequential improvement principally in DSA in the first quarter..
And the follow-up, I know you've shied away in the past from kind of quantifying price increases, but is there any way you can just help us think about kind of the magnitude, whether this could be a source of friction with clients? And then, I guess, in your view, what constitutes margin improvement? And how do we think about the trade-offs here between wage inflation, CDMO you're integrating and the price increases you talked about?.
I'll let David jump in in a minute, but, again, without giving the explicit pricing increases, our price increases, principally in safety assessment, which I think is at the root of your question, increased 2021 over 2020 meaningfully and will increase meaningfully again 2022 over 2021. And that's like fact. These are booked studies.
And as I said, they actually improve in the back half of the year – continue improving in the back half of the year. It's all a function and a manifestation, demand and capacity, available space and the complexity of the work that's going on. So, we feel very good about that pricing and we feel that it's at appropriate levels.
David, why don't you take the sort of offsetting nature of price increase and inflation, et cetera. .
Just to pick up on that price conversation, it's best to say that the segment where we have the highest price increases is actually in our largest segment, which is DSA. And you've already heard, Jim mentioned earlier that we've seen a billion dollar increase in the order book going out into 2023.
So, we've got our biggest segment as a massive step up in the order books, and we have the highest price increases in the area. So, that helps us offset some of these higher inflationary costs that everybody's seeing in 2022. And we've also got continued investments in our business, not least of which are digital.
And it's worth calling out that despite that, we expect to deliver a modest margin improvement. And we have a 20 basis point headwind from the 53rd week this year. So, it would be nice if we didn't have the 53rd week because we could add that 20 basis points in and we might get a bit more than the modest improvement over last year.
And we still believe in the long-term targets for 2024, another 150 basis points if you take this year and the next couple of years. So, we do feel that we're in a position that we can pass on, if you like, some of these cost pressures to our customers through the pricing. So, it's nice to be in a position that we can do that. .
Our next question from David Windley with Jefferies..
I wanted to try to tie a couple of themes together and questions that I'm also getting. So, thinking about growth in the progression of growth, it sounds like, particularly in DSA, you're expecting to improve off a – I think it's about an 8% number in the fourth quarter.
But if I'm to read the tea leaves, it sounds like maybe not quite reaching double digits. Your full-year expectation is mid-teens for DSA.
So maybe you could help us understand, you've mentioned pricing unfolds as the year progresses, but help us understand how you get to the mid-teens target for the full year against comps that get a little tougher as we progress through 2Q and 3Q, starting off at a level that maybe is about a little better than half that growth rate..
We get there by increased demand, so accelerating demand, with sufficient capacity, with considerably higher price points and the knowledge that this will occur, given how far back into the back end of the year this is booked. So, it's actually the best visibility we've had in an awfully long time. So, that's how we get there..
Let me just add some points there. So, Dave, Q1 is somewhat handicapped by a drop in RMS, which we called out because of the strong computations that we had in Q1 last year with China. Right? So, in a way that kind of compresses Q1. At the same time, DSA is doing well from our perspective as we pick up from Q4 position.
So, that's one thought just to bear in mind. Another way of putting it, if we didn't have that compression from RMS, we would be posting higher numbers. Another point to bear in mind is that, as we get into the second half of the year, we do have the CDMO businesses becoming organic.
And we did call out that there's 150 basis points improvement in the second half of the year or broadly that, that sort of in the second half of the year. So that also helps with the second half of the year. So those are two of the softer points to point out.
The major point is the one that Jim pointed out that we've got more demand, more price, great visibility, we can see it, we can see what's being booked in Q3 and Q4. And we know what prices that I'll put into those places too.
So, from our perspective, the Q1 is somewhat depressed because of RMS, but as you go through the remainder of the year, you get that bounce from the CDMO becoming organic. But the real driver here, the core driver here is the improvement in DSO with the volume and pricing.
Again, focusing on DSA, in particular, Jim, you said earlier that the – to John's question on CapEx that the spending you're embarking on now is more for late 2023, 2024 capacity, you have the 2022 and 2023 capacity in place.
I guess I'm wondering, does that mean now? Or is it rolling out through the year? Another way to ask the question is, are you somewhat capacity constrained from a volume standpoint to start off the year until maybe some new capacity comes on? Or yet another way to ask the question is when your clients are approaching you and saying do you have a spot for me, why isn't the answer yes, I do in 1Q to start off the year even faster?.
I would describe it that we're not capacity constrained. We have lots of long-term studies that are booking out for a long period of time. We have reserved spots for shorter term studies to get people in earlier. It's a very positive situation, just in terms of kind of a supply/demand quotient that we have.
We have sufficient space to accommodate our clients' needs. We're also getting our clients to prioritize what studies they actually need to start early, as opposed to saying we have 10 studies, we want them all to start in two months, which is typically what we've had in years past.
So, I'd say it's a much better dialogue with where we're causing and requiring our clients to plan, which is not something historically they've done well. We've caused them to prioritize, which is very, very powerful for us. And we've been able to slot them in throughout the year. So, I wouldn't say that we're capacity constrained.
I would say that the capacity for the industry, if you can call us an industry, is sort of appropriate, so the demand curve is enough to accommodate new work, but not tomorrow. There's some waiting period. And, of course, we build space slightly in advance of how much we think we'll need.
Which, of course, we have a plan for the next five years and we have to extrapolate that and build it out accordingly. So, I think we've done a very good job for probably 10 years now staying ahead of the demand curve, which is obviously and clearly intensifying, just as we've become a bigger player.
I feel very good about the capacity, both in terms of overall square footage, but perhaps more importantly, the proximity of our sites to clients, which puts us in a stronger position than the competition..
Our next question comes from Patrick Donnelly with Citi. .
Jim, maybe one on China? Obviously, you guys have exposure areas like RMS there more than the corporate average. So, can you just talk about the outlook there? Obviously, not a direct impact, but there's been some disruption on the CDMO side with the unverified list and things like that.
So, can you talk about your outlook there? It's been a nice growth vertical for you guys in RMS. I'm just curious the outlook on that front..
It's pretty much the same as it always has been. We have another small business, the microbial business. So, basically, with the research models and services play for us in China and we really have no plans to expand that.
I'd say the research model and services business is performing so well just from a quality point of view that we have – I don't know how to put it, I have no interference or support from the government to put it that way, but I think there's an acknowledgement that we are an important element in the whole drug research and development paradigm in China that there's real professionalism and ensuring bacteriological and virological and genetic quality of animals.
And so, it's a market that is very big, it's huge investments, recently sort of a mid-tier. And in biotech, there's CROs cropping up, investment obviously also in the pharmaceutical industries and sort of a bunch of lower quality government-owned competitors that we've had for a period of years.
So the business is growing to double-digit growth business, has very good operating margins, it's very capacity dependent because it's a big country. So, the necessity and our ability to expand geographically is sort of underlying our growth rate. So, we continue to add new sites.
There's a pretty much an immediate uptake – or uptick in the demand, rather than trucking or flying animals over very long distances, we're very close by. I've said for a number of years, it sort of feels the way Europe and the US did several decades ago. So, I think it's a long runway. I think this will be a meaningful business for us.
We're beginning to branch out. We start with the research model, production side of the business, just making models. And now we're in all of our services, including GEMS and RED and IS, and now we have a cradle operation over there. So, all of the things that we do in that business in a worldwide basis, we brought to China.
So, the government either doesn't care about us or kind of quietly acknowledges that we're enhancing the level of play or the quality of research in China and is supporting us. And I'll just remind you, just so that that will totally make sense to you, is that we bought a preexisting Chinese company. And we didn't buy all of it.
We own almost all of it now, but we didn't buy all of it at the beginning. So, we do think that that asset has always been looked at by the Chinese government as a Chinese company, even though it's owned by a US company. And so, we're enjoying our run there. I think it's an important business.
It's one of the growth drivers of our research model business. We don't anticipate any sort of government difficulty or intervention. We think the competitive scenario is quite favorable for us. .
Maybe just a quick follow-up on the capital allocation side. I know you mentioned share repurchases are possible, given where the stock is.
Maybe just on the M&A side, can you talk a little bit about your philosophy? It certainly doesn't sound like you're wavering – leaning in on areas like cell and gene therapy, areas that are a little more tied to the high growth funding environment.
Any changes to your desire to continue to increase exposure to those types of areas inorganically here?.
And some of the areas that we're in, we'd like to have larger capabilities. And some of the areas that we're in, we'd like to have broader geographic reach.
So, we're staying focused in the areas in which we play, in which we have oftentimes the leadership position or at least a strong position, and which is responsive to continued demands from our clients or expectations from our clients in terms of the products or services that we provide them that they either can't get elsewhere or can't get it all or don't want to do themselves.
So, yeah. I guess, additionally, I would add that we have these 16 technology deals that we've done. Some of those deals, like a Distributed Bio, which is a large molecule discovery platform, will become acquisitions.
Some of those will fall by the wayside because the technologies don't work, but some of those will become acquisitions after very thorough due diligence. So, yeah, we aim to continue to strengthen the portfolio principally through M&A..
Our next question comes from Elizabeth Anderson with Evercore ISI. .
I guess on the first side, just on the sort of bookings commentary that you mentioned, is there anything you can say in terms of mix of clients? Like, has there been any changes in terms of more larger clients or larger biotechs or anything like that that's sort of different from historical trends that you've been seeing?.
Probably not. We don't give that fine-tuned clarity. We talked about it with you folks, except to say that pharma continues to outsource more work, they continue to – they definitely don't build any new space to do the things we do. I would say they are rapidly outsourcing most of the things that we do with, with some, but very few exceptions.
They look to biotech to be the discovery engines, for sure. So they provide funding. And then, I would say that biotech, both large, medium and small, is a disproportionate driver of our growth, for obvious reasons.
The obvious reasons are that biotech companies, with a handful – literally one handful of exceptions, and you can name all five of those companies, and even those companies are principally outsourcers, but any biotech startup, even a biotech company that's a few years old, that's gone public and pre-revenue, they have no internal capability to do anything that we do.
None. And they have no internal capability – forget us, they have no internal capability to develop their own drug. So, they have to go outside, they have to externalize it's not optional. They have to decide who they're going to work with. And interestingly – and I know you've heard this before, but I think it's worth repeating.
Interestingly, I would say, as a class of clients, they are less price sensitive than big pharmaceutical companies, just because they're in a race to get to market, they often have one shot on goal, they often have a single drug or single modality or a single concept that maybe they have IP on and getting a slot, working with a company like us that actually understands the science and the regulatory environment and getting them over the finish line is more important to them than the price of the study.
Because if they don't do it in a timely fashion, if it's not done well, they can miss getting to market. So, we like the blend of clients. There is – what is it? Maybe there's 10 big drug companies left in the world. And I think there will be further consolidation. So, we love them. They're very big clients, they're very big outsourcers.
But on a fully going basis, biotech will continue to be the principal driver of our growth..
I think if we look back historically, last time, there was sort of like a decline in biotech funding on the order that we're seeing was sort of maybe the 2016 kind of timeframe. And it did seem that that year, actually, your organic growth accelerated and then the growth actually slowed in the subsequent year.
And I know, obviously, your business mix is different versus then.
But is there anything you can point to in terms of visibility into say 2023? I know you've talked about some of your DSA being booked sort of through that time period that could sort of help give us comfort into sort of that longer term growth profile?.
Just to sort of reflect further, I guess what I said earlier, it's unprecedented to be booking this far in advance. The strength of the pricing paradigm is quite interesting.
I think that's a commentary on how much work there is out there and limited number of providers and the complexity of the work, for sure, because we basically said, your studies were way more complex, you need to pay us for that because you can't do it yourself with regard to big pharma and biotech. Certainly can't do it themselves.
I'd say, we have multiple years of cash, much of which came from the capital markets, but pharma will continue to be a principal source of funding as well, money that's going into the VC sector. We have a lot of work from VC clients.
I think we said it the last time we had one of these calls around – or slightly more than 10% of our revenue is coming from VC portfolio companies. So, that's quite positive. And just again, we have no dialogue about pricing or concerns about funding. We only have a dialogue about, can you accommodate our work.
So, I don't have a crystal ball that provides great clarity on what's going to happen for the future.
But given the strength of the modalities, given the strength of our competitive posture, given the funding environment, even if it moderates a bit, we think we're in a very strong position to continue to grow our franchise at levels that we've talked about, low-double digits, like I think we said through 2024, operating margin is getting to 22.5%.
We remain very confident about that. And I'd say that the current situation was starting the year with bookings that much higher than the prior year, billion dollars higher and start booking – work booking into the next year is a bit unusual and I think a sort of a manifestation of the demand curve..
Our next question comes from Tejas Savant with Morgan Stanley..
Just one quick follow-up there, Jim, on Elizabeth's question regarding customer mix.
Is there any sort of data points that you can share on what your exposure is to pre-commercial stage customers? I guess the question we're all getting is the, this public market funding slowdown might sort of disproportionately impact customers in that category versus large or mid-sized pharma that already have products in the market.
So just curious as to anything you can share along those lines..
We've never broken it down that way. And obviously, lots of companies, maybe most – not maybe, most companies in the biotech space have pre-revenue. So, I'm not sure how helpful that distinction would be for you.
So, if the companies are well funded, if the companies, more importantly, have breakthrough technology, if the companies have technology that could provide either a therapy or a cure for an unmet medical need, it's sort of inconceivable to us that there would be funding either directly from the capital markets or from big pharma who will want those assets.
Again, we built up our analysis on how much money available to the client – that client. And we talk to these clients every day and we hear no concern at all about funding, either immediate or in the future. Just none, not part of the dialogue. So, I have no idea if or when that would change.
I don't see why it would, given that there are several years of cash available to them. So, we have sort of a meaningful amount of our clients probably fit that category. I don't know the exact percentage, and we've never broken it down that way probably..
On HemaCare and Cellero, Jim, I think you called out sort of hoping for an improvement here through 2022.
Can you just give us an update on some of the initiatives you have in place outside of the market dynamics itself that can help you get there?.
We continue to strengthen and enhance the management team there. I'd say kind of particularly on the sales side and connected with other parts of the company. Both the specific cell and gene therapy assets that we have bought, but also other parts of the business,. so that we have this sort of elegant pull-through. I'd say that's number one.
Number two, we've redesigned our donor rooms to accommodate for some of the COVID concerns. And perhaps more importantly than that, we've opened additional donor rooms. So, our capacity has expanded dramatically. And the last thing that we've done is dramatically sort of enhanced our social media outreach to both identify donors and qualify them.
So, much more rigor in that process or rigor in the capacity. Much more, I think, elegant and conservative outlook as the demand remains quite strong. And so, we're more mindful of the fact that that business will continue to improve throughout 2022..
One final cleanup for me on biologic safety testing. I know you mentioned this COVID vaccine lot release testing revenue that's expected to moderate in 2022.
Can you just help put some numbers around what it was like in 2021 and where we should expect that to go this year?.
We won't give you the numbers, except to say that those were big contracts that have moderated. They blew the biologics revenue up to a 30% growth rate we reported in the second and third quarter. If you back those out, that business is growing at about 20%, which we reiterated this morning. So, it was nice to have it.
We'll still have some of that because, obviously, there's considerable work still going on with the older vaccines and perhaps some new ones, anticipating some variants and just sort of vaccine work generally.
But the principal driver of growth for the biologics business is, obviously, the plethora of large molecules generally, but specifically demand for cell and gene therapy drugs. So, we continue to feel very good about the short and long-term growth part of that business.
We anticipate improving operating margins in that business and we have a very strong competitive capability, particularly enhanced by the cell and gene therapy assets that we bought. From a competitive point of view, we just have a much broader portfolio of products and services that we can sell..
Our next question comes from Donald Hooker with KeyBanc..
A lot of questions have been asked here. I'll just stick with kind of one for me kind of high level, Jim. You've been asked this a number of times, but I'll ask it again, just to hear any updated thoughts. You called that Valo, the partnership there in the AI/ML space.
I'm just wondering if you can provide any updates around any case studies using AI and ML and different ways that actually can impact what you're doing and more than just theory? And is there any kind of pushback from staff around change management to the extent that any of that stuff disrupts people's daily workflows?.
It's very, very early days. So, that deal was just signed. That company looks to have some promising technology that should help get to a lead compound quicker. Or put it conversely, to kill the potential lead compounds that really won't pan out.
And that technology in concert with some of the things that we do, both in vivo and in vitro, should benefit the discovery part of our business, in particular, but also the services that we provide to clients who are looking – all of them are looking to get things to market faster. So, it's very early days. This won't be the only AI deal that we do.
There are multiple AI technologies out there. So, we're probably going to have several shots on goal. But this is a – the company is pretty advanced and quite sophisticated and the technology looks extremely promising. If it works, I think that's not disruptive at all to what we do.
I think it's an enhancement to what we do to provide that as part of our service and our portfolio to probably – not probably, to reduce the timeframe. I would anticipate increased revenue and profit as a result of being able to pull things forward since time is certainly money for these folks.
And yeah, to your question, I think so much of AI is anecdotal. But so much of AI should work and should benefit both preclinical and clinical aspects of drug development by designing better trials with better predicted outcomes. I think everybody believes that some aspect of that is possible.
The question is, how long will it take and how profound will it be and how much will it transform things. We're looking at it sort of very surgically that that would help us with certain aspects of our discovery business to get to get to a lead candidate faster. So, we'll give updates as this relationship develops.
Valo will probably give its own updates. We'll try to do some things on a combined basis, but it's going to take a while to prove the thesis out, for sure. .
Our next question comes from Sourbeer with UBS..
Microbial is expected to normalize growth this year after some of the COVID benefits, but still grow 10%? Can you talk a little bit on the sustainability of that outlook and what is the current market penetration and any way to think about what percentage of the manufacturing segment is microbial?.
It's a business that has pretty much for the entire time we've owned it, which is 25 years, grown at double-digit rate. So, it's an extraordinary business. It's the only business that we do pure R&D and we have IP on all of our technology, and we're generation or two ahead of the competition. And so, we have very good visibility.
A lot of that business now is the sort of razor and razor blade structure. We have these handheld devices that we sell that have cartridges that are used and thrown away, usually daily. So, we have this built in base and we have thousands of those machines out there.
And once clients validate working with our machine, which by the way, is a higher price per test than the competition or even our own historical technology, but gives you a much faster answer, which the speed is money to the client. So, had a little bit of disruption from COVID as machine deliveries and reagents were back up, but we're past that.
We have several technologies in that business. We have an endotoxin testing business, but also business that looks for bacterial contamination and also identifies what the bacterial contamination was. So, if you produced a lot of drug and it was contaminated, you need to know how it got contaminated and where it got contaminated. We're able to do that.
It's all required by law, by the way. So, business has enormous long-term benefits. We're by far the market leader. I'm not going to give you explicit numbers because we've never done it. But we're in the process of transferring some a lot of clients that have used our historical technology to this new technology.
And we still have a long way to go in that transformation. And it will be at much higher price points and much higher margins.
So, we're well into it, providing advancements to the technology all the time, staying close to the regulatory authorities all the time and really continuing to have terrific penetration into some very, very big pharma companies that utilize this in a whole host of both medical device and drug companies as well.
In some ways, it's the most stable, high growth business. We've just been growing at this double digit level, as I said, the whole time we've owned it. It's going to be a very big business now. I think we've given some details.
You may be able to figure out the size of it, as what portion of the manufacturing piece, but we don't explicitly or specifically break that out. .
If you consider microbial, biologics testing, CDMO and avian, the four units, of those four units, microbial is the largest piece. We have called that out..
Thank you. And I'm currently showing no further questions at this time. I'd like to turn the call back over to Todd Spencer for closing remarks..
Great. Thank you for joining us on the conference call this morning. This concludes the call. Thank you. .
This concludes today's conference call. Thank you for participating. You may now disconnect..