Q2 2025 Earnings Call Transcript

Ladies and gentlemen, thank you for standing by, and welcome to the Charles River Laboratories Second Quarter 2025 Earnings Conference Call. This call is being recorded. [Operator Instructions] I would now like to turn the conference over to our host, Todd Spencer, Vice President of Investor Relations. Please go ahead, sir.

Good morning, and welcome to Charles River Laboratories Second Quarter 2025 Earnings Conference Call and Webcast. This morning, I am joined by Jim Foster, Chair, President and Chief Executive Officer; and Flavia Pease, Executive Vice President and Chief Financial Officer. They will comment on our results for the second quarter of 2025. 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 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 the next quarter's conference call. I'd like to remind you of our safe harbor. All remarks that we make about future expectations, plans and prospects for the company constitute forward-looking statements under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated.

During the call, we will primarily discuss non-GAAP financial measures, which we believe help investors gain a meaningful understanding of our core operating results and guidance. The non-GAAP financial measures are not meant to be considered superior to or a substitute for results 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.

Thank you, Todd, and good morning. We reported another solid financial performance in the second quarter, meaningfully exceeding our prior outlook due primarily to favorable DSA results. The DSA business benefited from the strong booking activity that was recorded in the first quarter and the corresponding lift in first half results is the primary driver, leading us to raise our financial guidance for the year. To a lesser extent, favorable movements in foreign exchange also contributed to the outperformance in the second quarter and to our increased outlook for the year.

We have continued to see clear signs that the demand environment is stabilizing. Over the past several quarters, global biopharmaceutical demand trends appear to have bottomed, and we believe they are beginning to slowly move upward as more clients have progressed through their restructuring activities and getting back to work. The biotech environment is stable but mixed with smaller biotechs still being more cash constrained due in part to the slowdown in biotech funding, whereas midsized biotechs are performing better as many are able to support their own R&D programs without external funding.

Key DSA demand trends, coupled with constructive discussions with our biopharmaceutical clients, have also reinforced our belief that the preclinical demand environment is stabilizing. In the second quarter, both gross and net DSA bookings increased at mid- single-digit rates year-over-year, resulting in a solid 6% and 13% increases in first half gross and net bookings, respectively. While this bookings performance reflected an improving demand environment in the first half, the net book-to-bill dipped back below 1x in the second quarter to 0.82x, which we had anticipated, and was largely driven by a sequential increase in cancellations and the DSA revenue outperformance.

We never expected a straight-line recovery in the net book-to-bill or broader DSA demand trends. And in fact, have often said that the sustained improvement in our businesses will not be linear. However, we are pleased that the net book-to-bill trends over the past 18 months have reflected a steady upward trajectory, starting with a net book-to-bill of 0.80x in the first half of 2024 to 0.85x in the second half, and most recently, improving to 0.93x in the first half of this year. The DSA business and our overall non-GAAP financial results continue to significantly outperform our expectations, and we are making gradual progress towards achieving a return to organic revenue growth.

We recognize that some uncertainty persists across the broader health care landscape. As a result, we continue to take a measured and prudent approach to our outlook. While we have not factored in further demand improvements this year, it is encouraging that the overall demand environment shows signs of stabilization. To date, we have not observed any meaningful impact on client spending patterns stemming from tariffs or drug pricing concerns.

Additionally, the effects of government funding reductions, including at the NIH, have been minimal, which I will address further in the context of RMS results. Before I provide more details on these trends, let me provide highlights of our second quarter performance and updated outlook for the year. We reported revenue of $1.03 billion in the second quarter of 2025, a 0.6% increase over last year, with nearly half of the revenue outperformance driven by foreign exchange. On an organic basis, revenue declined 0.5%, driven by a low single-digit decline in the DSA segment, partially offset by low single-digit revenue increases in the RMS and Manufacturing segments.

By client, segment revenue for small and midsized biotech clients improved slightly for a third consecutive quarter. Revenue for global biopharmaceutical clients remained below last year's level, but did improve sequentially from the first quarter. Revenue for global academic and government clients increased at a mid-single-digit rate in the quarter. The operating margin was 22.1%, an increase of 80 basis points year-over-year, with margin improvement across all three segments, primarily reflecting the benefit of cost savings from our previous restructuring actions and operating leverage from better-than- expected first half sales volume.

You may recall that we are on pace to generate a run rate of over $175 million in cost savings this year. In addition, the CDMO business benefited from revenue and payments from commercial clients, most of which will not repeat in the second half of this year as we previously disclosed. Earnings per share were $3.12 in the second quarter, an increase of 11.4% from the second quarter of last year. Operating margin improvement was the primary driver of this robust earnings growth.

Most of the earnings outperformance versus our prior outlook was operationally driven with an additional $0.12 benefit from a lower-than-expected tax rate. Flavia will provide more details on the tax rate shortly, including the second half tax headwind from the new U.S. legislation. We are raising our revenue and non-GAAP earnings per share guidance largely to reflect the outperformance in the quarter. We are increasing our 2025 organic revenue guidance by 150 basis points to a 1% to 3% decrease and raising our non-GAAP earnings per share guidance by $0.55 at midpoint to $9.90 to $10.30. In addition to the DSA-driven operational outperformance, full year guidance will benefit by $0.14 from more favorable FX rates versus our May outlook.

Below-the-line items will largely offset each other as the second half tax headwind that I just mentioned will be offset by lower interest expense for the year. I will now provide details on the second quarter segment performance, beginning with the DSA segment. Revenue for the DSA segment was $618 million in the second quarter, a 2.4% decrease year-over-year on an organic basis, driven by lower revenue for both discovery and safety assessment services. Lower sales volume was partially offset by favorable mix of higher-priced, longer duration and specialty studies again this quarter.

Consistent with our commentary in May, the favorable mix does not signal a broader improvement in the pricing environment as we continue to believe that spot pricing remains stable overall. Moving to the DSA demand KPIs. The DSA backlog was $1.93 billion at the end of the second quarter, a slight decline from $1.99 billion last quarter. As I mentioned, gross and net bookings both improved at mid-single-digit rates year-over-year in the second quarter, but declined sequentially, primarily for global biopharma clients.

The sequential decline in the net book-to-bill was not a surprise. We had previously said that global biopharmaceutical clients started the year strong with a resurgence of booking activity for projects that they had delayed or deprioritized at the end of last year and wanted to start quickly. However, we did not expect the first quarter booking strength to continue through the remainder of the year. Proposal activity for global biopharmaceutical companies increased at a healthy pace in the second quarter, both year-over-year and sequentially, which reinforces our belief that demand for this client base has stabilized.

Demand KPIs for small and midsized biotech clients remain consistent with the overall trends that we described in the first quarter with little change aside from a moderate decline in proposal activity, supporting our belief that demand for this client base is also stable. We also experienced an increase in DSA cancellations in both client segments to levels consistent with the first half of 2024, but higher than the last 3 quarters. The higher cancellations were more focused on longer-term post-IND work. These trends have cumulatively resulted in quarterly net bookings of $506 million and a net book-to-bill of 0.82x.

While below 1x for the quarter, our first half net book-to-bill was at its highest level since the end of 2022 and reflects an upward demand trajectory compared to recent years. Reflecting our solid second quarter performance and the DSA KPIs that underpin our outlook, we now expect DSA organic revenue will decline at a low to mid-single-digit rate in 2025, an improvement from our prior outlook of a mid-single-digit decline. The demand environment continues to support our outlook for the year, which is not predicated on the net book-to-bill returning to 1x. Furthermore, we believe the DSA business has stabilized and is beginning to show signs of gradual progress.

In support of our improved demand outlook, we have begun to modestly increase staffing levels in the DSA segment. We are doing so to ensure we can fully support our clients' programs and to position resources appropriately for the second half of this year. Due to the increased hiring, DSA headcount costs are expected to create a headwind of approximately $10 million in the second half when compared to first half levels, which is one of the factors contributing to the company's second half operating margin outlook. For the second quarter, the DSA segment reported another solid operating margin, increasing by 30 basis points year-over-year to 27.4% in the second quarter.

This was primarily a result of the operating leverage from better-than-expected demand that we accommodated without meaningful headcount increases in the quarter as well as the benefit of prior cost savings actions. Before I provide commentary on the RMS and Manufacturing segments, I would like to provide an update on our NAMs strategy or new approach methods. We recently updated the Board on our road map and strategic imperatives to continue to build our growing NAMs portfolio. As we said last quarter, we firmly believe that utilizing more NAMs-enabled approaches will be a gradual long- term transition by our clients and that the scientific capabilities to fully replace animal models do not exist today.

As the leader in preclinical drug development, we have the scientific capabilities, regulatory expertise and access to data that make us the logical partner for biopharmaceutical companies to advance their use of NAMs and alternative technologies over time. We already have a growing NAMs portfolio that is generating a meaningful amount of revenue or approximately $200 million in annual DSA revenue and increased interest from our clients. In addition to some of the well-established capabilities that we discussed in May, we are also working on enhancing our NAMs solutions across many of our DSA sites.

For example, in Montreal, we are working on developing an in vitro liver on a chip assay to replace in vivo gene tox testing. Our site in Hungary is working on a number of in vitro models for advanced modalities, including using steroids for long-term metabolism studies. Our team in Den Bosch continues to develop and validate a growing number of in vitro assays for regulated safety assessment. And our Retrogenix business has generated considerable interest for their in vitro off- target screening platform.

Overall, client interest in our NAMs portfolio continues to build. One of our top priorities in the coming years will be to continue expanding this portfolio of premier NAMs capabilities through a combination of partnerships, selective M&A and internal development. We look forward to continuing to update you on our progress towards a NAMs-enabled future. RMS revenue was $213.3 million, an increase of 2.3% on an organic basis compared to the second quarter of 2024. The year-over- year revenue increase was primarily driven by the timing of NHP shipments and higher revenue for research model services, including in the GEMS and Insourcing Solutions businesses.

The overall trends in the RMS segment are consistent from our commentary last quarter as little has changed aside from the typical quarterly modulations in the timing of NHP shipments to third-party clients in China and for Noveprim. As a result, we are maintaining our RMS revenue outlook for the year of flat to slightly positive organic growth. The third quarter is expected to be an even stronger quarter for NHP revenue due to the acceleration of certain shipments from the fourth quarter. Revenue from both our academic and government client segments increased in the second quarter despite frequent headlines about potential NIH budget cuts.

To date, we have only experienced a small impact from the uncertainty in Washington due to a modest reduction in scope of an in-sourcing solutions contract for the NIH's National Institute on Aging, totaling an expected revenue loss of approximately $3 million annually. Beyond that, we have not experienced any meaningful revenue loss related to NIH budgets to date. As a reminder, the North American academic and government client base represents just over 20% of total RMS revenue or approximately 6% of total company revenue. In addition, demand for in-sourcing solutions CRADL operations is tracking as planned and occupancy remains stable since our last update.

CRADL revenue increased slightly in the second quarter versus the prior year. But as we discussed in May, demand from early-stage biotech clients for our CRADL services remains constrained this year due to funding challenges. Revenue for small research models in all geographic regions was relatively flat overall as higher pricing continued to offset unit volume declines. China was an exception as volume continued to increase, albeit at a more moderate pace than historical levels.

In the second quarter, the RMS operating margin increased by 220 basis points to 25.3%. The improvement was primarily due to a favorable mix resulting from higher NHP revenue and higher revenue from research model services as well as the benefit of cost savings resulting from our restructuring initiatives. We expect the third quarter RMS operating margin will also be robust due to the favorable timing of NHP shipments that are accelerating into the third quarter, followed by the moderation of the fourth quarter operating margin due to the timing of NHP revenue and normal seasonality in the small models business.

Revenue for the Manufacturing segment was $200.8 million, a 2.9% increase on an organic basis from the second quarter of last year. The revenue improvement was driven by another solid quarter from our Microbial Solutions business as well as revenue from commercial CDMO clients, most of which will not repeat in the second half of the year as one relationship has wound down, creating an anticipated revenue and margin headwind. The Biologics Testing business had another slow quarter due to project delays associated with regulatory or funding issues for several clients. Collectively, we continue to expect Manufacturing revenue will be essentially flat on an organic basis this year, which is similar to the first half performance.

The Microbial Solutions business reported another quarter of robust growth, led by our Accugenix microbial identification services and Celsis microbial detection platform. Endosafe also performed well as clients continued to choose our leading portfolio of rapid manufacturing quality control testing solutions. We believe Microbial Solutions is well positioned to grow at a high single-digit revenue growth rate for the year as it did in the first 2 quarters. The cell and gene therapy CDMO business reported essentially flat revenue, principally related to work for one commercial cell therapy client to wind down and transfer their program, and revenue from our gene therapy offering also continued to be strong.

While our CDMO relationship with one commercial client has ended, we look forward to continuing to work on our other commercial cell therapy program going forward. Collectively, we expect the loss of commercial CDMO revenue will reduce the Manufacturing Solutions growth rate by less than 500 basis points for the year. However, CDMO revenue grew nicely in the second quarter when normalized for the commercial cell therapy revenue impact. We are continuing to enhance the quality of our operations, build our gene therapy presence and reinforce our healthy pipeline of biotech clients with early-stage clinical candidates and are continuing to gain traction with those clients.

The Manufacturing segment's operating margin increased by 620 basis points to 32.8% in the second quarter due principally to revenue and payments from commercial CDMO clients, as well as operating leverage from Microbial Solutions robust growth. Due to the fact that revenue from one commercial CDMO client will not repeat, we do not expect the manufacturing operating margin to be above 30% level for the second half of the year. However, we believe the progress we have made on the cost structure and the operating leverage that we are able to generate from the robust growth in the Microbial Solutions business will result in a higher manufacturing operating margin for the year.

Before I conclude, I would like to briefly address our ongoing strategic review and also provide a positive update on NHP supply. First, the strategic review is well underway, and I am encouraged by the progress that we have made so far. This thorough process takes time, but we are moving forward with a sense of urgency and do not intend to provide updates until the strategic review has been completed. This is a comprehensive process that is evaluating multiple avenues for value creation, including a strategic review of our portfolio, capital allocation strategy and market position, while balancing it with the understanding that the strength and value of Charles River lies within our broad scientifically distinguished portfolio and leading nonclinical market position that truly differentiates us from the competition.

Our goal is to further enhance long-term shareholder value, and we continue to believe that the company remains undervalued. We are pleased with the progress that we have made this year at the company, including the substantially better performance of the DSA segment and actions to unlock value through stock repurchases and cost savings, which we believe leaves us well positioned for the future. With regards to the NHP supply update, in July, the Department of Interior and U.S. Fish and Wildlife Service cleared for legal entry into the United States, all of the NHP shipments from Cambodia from late 2022 and early 2023 that were under investigation.

In addition, we have been informed that the U.S. Department of Justice is no longer conducting investigations into these shipments. These positive developments validate what we have said from the start. Once the DOJ investigated, they would conclude that any concerns with respect to Charles River's conduct are without merit.

I would like to thank our shareholders, clients and employees for their patience, trust and support as we navigated this process. Now Flavia will provide additional details on our second quarter financial performance and updated 2025 guidance.

Thank you, Jim, and good morning. Before I begin, may I remind you that I'll be speaking primarily to non-GAAP results, which exclude amortization and other acquisition-related adjustments, costs related primarily to restructuring actions, gains or losses from certain venture capital and other strategic investments and certain other items. Many of my comments will also refer to organic revenue growth, which excludes the impact of acquisitions, divestitures and foreign currency translation. We are pleased with our second quarter performance, which included revenue and non-GAAP earnings per share exceeding the outlook provided in May.

This outcome was primarily driven by operational improvement from better-than-expected DSA results and to a lesser extent, a $0.12 benefit from lower tax rate and a $0.03 benefit from favorable FX rates in the quarter. As a result of the second quarter outperformance, we're raising our revenue and non-GAAP earnings per share guidance. We now expect full year reported revenue will decline 0.5% to 2.5%, and organic revenue will decline 1% to 3%. Non-GAAP earnings per share are now expected to be in a range of $9.90 to $10.30. The $0.55 guidance raise for 2025 at midpoint is expected to be driven by two main components: operational outperformance in the second quarter and a favorable movement in foreign exchange rates from our forecast in May.

As you may recall, we forecast FX based on recent bank forecast rates rather than current rates. Based on the continued weakness of the U.S. dollar, we now expect foreign exchange will represent an approximate 50 basis point tailwind to 2025 revenue compared to our prior outlook of an approximate 1% headwind. This 150 basis point revenue benefit translates into about a $0.14 contribution to EPS, with most of this EPS benefit in the second half of the year. Our outlook for the tax rate and interest expense have also been updated since May, but the net EPS impact will largely offset each other.

I'll discuss each of these items shortly. Our updated EPS guidance implies that the second half operating margin will be below the first half level of 20.7%. This is largely for reasons consistent with our expectations at the start of the year, and the gap was further widened by our first half outperformance. For the year, we now expect the consolidated operating margin will be in a range between flat and a 30 basis point decline, which represents an improvement from our prior expectations of a 20 to 50 basis point decline due to our outperformance to date and operating leverage from the increased revenue outlook.

Our full year operating margin outlook also includes several headwinds, which are occurring in the second half of the year. The first headwind is in the CDMO business and primarily relates to commercial cell therapy revenue that will not repeat in the second half since one commercial relationship has ended. The CDMO revenue generated from this client was sizable in the first half at approximately $20 million. The second is hiring in the DSA segment, where we need more people in order to accommodate the current and forecasted demand.

As Jim mentioned, additional DSA staffing in the second half represents an approximate $10 million cost headwind versus the first half. And finally, the timing of annual merit increases for our employees was at the beginning of July this year in most geographies, which creates a headwind when comparing to the first half. To be clear, the CDMO and merit timing-related headwinds were known and contemplated in our initial outlook. Our decision to begin investing back into DSA headcount was a result of the improved demand trajectory this year and to appropriately position staffing levels for the remainder of 2025 and as we move into next year.

By segment, our updated revenue outlook for 2025 can be found on Slide 33. Aside from FX modifications to the reported growth rates, the only change to our segment revenue outlook is that due primarily to the second quarter outperformance, we now expect DSA organic revenue to decline at a low to mid-single-digit rate, better than our prior outlook of a mid-single-digit decline. And as a reminder, this does not require an improvement in our net book-to-bill metrics. And for the RMS and Manufacturing segments, those outlooks remain unchanged. Unallocated corporate costs totaled $60.7 million in the second quarter or 5.9% of revenue compared to 4.9% of revenue last year.

The increase was primarily due to higher performance-based compensation. The higher bonus accruals will also result in an incremental earnings headwind in the second half, which is the opposite impact of last year when bonuses were a tailwind. As a result, for the full year, we now expect unallocated corporate costs will be at approximately 5.5% of total revenue or the upper end of our prior outlook of 5% to 5.5%. I'll now provide an update on the nonoperating items, starting with our favorable outlook for interest expense and our higher tax rate expectations for the year.

As I mentioned, these items will largely offset each other and not have a meaningful impact on our EPS guidance. Total adjusted net interest expense was $28.9 million in the second quarter, representing an increase of $2.4 million sequentially. This increase was primarily driven by the impact from short-term borrowing to facilitate the first quarter stock repurchases. For the full year, we now expect total net interest expense will be in the range of $100 million to $105 million or approximately $7 million to $12 million, lower than our prior outlook.

This improvement will primarily be a result of our diligent capital planning activities, including shifting debt to lower interest rate geographies. At the end of the second quarter, we had outstanding debt of $2.3 billion with approximately 65% at a fixed interest rate compared to $2.5 billion at the end of the first quarter. As a result of debt repayment, the gross and net leverage ratios also declined to 2.3x at the end of the second quarter. The non-GAAP tax rate in the second quarter was 22.7%, representing an increase of 160 basis points year- over-year.

The increase was primarily due to the impact from stock-based compensation. However, the second quarter tax rate was more favorable than our prior expectation, benefiting EPS by approximately $0.12 because of the timing of the enactment of certain global minimum tax provisions as well as an increase in foreign tax credits. For the full year, the tax rate will now be an earnings headwind that had not been anticipated at the beginning of the year. This will more than offset the second quarter favorability because of U.S. tax legislation changes enacted on July 4 as part of the One Big Beautiful Bill Act, or OB3, which allows for accelerated bonus depreciation and expensing for domestic R&D expenditures.

These changes will increase the effective tax rate in the short term, but generate over $40 million of cash tax savings this year and therefore, increase free cash flow. We expect the non-GAAP tax rate in the third quarter will be elevated to the 25% to 30% range due to the enactment of OB3 and expected enactment of certain global minimum tax provisions. And for the full year, we now expect our non- GAAP tax rate outlook will increase by approximately 100 basis points to a range of 23.5% to 24.5%. Free cash flow for the second quarter remained strong at $169.3 million, an increase from $154 million last year.

The improvement was primarily driven by higher earnings and improved working capital. CapEx was $35.3 million or approximately 3% of revenue in the second quarter compared to $39.5 million last year, reflecting our focus on disciplined capital spending. For the year, we expect that free cash flow will be $430 million to $407 million (sic) [ $470 million ], an increase from our prior outlook of $350 million to $390 million, primarily driven by stronger earnings, anticipated cash tax savings resulting from the recent tax legislation changes and continued working capital management. CapEx will be approximately $230 million, consistent with our prior outlook and continues to be well below our peak capital spending in recent years.

Strong free cash flow generation is one of the hallmarks of Charles River, and the increase this year will enable us to repay debt more quickly and position us to continue investing in our strategic priorities. A summary of our 2025 financial guidance can be found on Slide 39. Looking ahead to the third quarter, we expect reported and organic revenue will decline between 2% to 4% year-over-year. As I mentioned earlier, we expect manufacturing and DSA revenue will decrease moderately in the third quarter, partially offset by higher RMS revenue due to the favorable timing of NHP shipments in the quarter, a portion of which accelerated from the fourth quarter.

Non-GAAP earnings per share are expected to decline at a low double-digit rate year-over-year, reflecting the impact of lower commercial revenue and associated client payments in the CDMO business and increased staffing in the DSA segment, as well as the meaningfully higher tax rate within the 25% to 30% range for the quarter. In conclusion, we are pleased with our performance through the first half of the year, which reflects stronger-than-expected demand and solid operational execution. Our restructuring program, the goal of which has been to reduce our cost structure by over 5%, is on track to deliver annualized cost savings of over $175 million in 2025 and approximately $225 million in 2026. In addition, the repurchase of $350 million in shares during the first quarter reinforces our commitment to maximize shareholder value and diligently deploy capital.

We remain confident in the resilience of our business and are committed to be financially disciplined as we drive long- term value creation. Thank you.

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

[Operator Instructions] We'll take our first question from Elizabeth Anderson with Evercore ISI.

Congrats on the quarter. I was wondering if you could sort of talk about the current demand environment. I think for the commentary about the differentiation between the different biotech segments, that was helpful. But maybe could you hit upon sort of how pharma is thinking about the current demand environment? And then anything that you've seen in July and early August would be very helpful.

Sure. We'll stay away from July, but suffice it to say that that's baked into our guidance going forward. We're pleased with the demand situation, it's definitely stabilizing for pharma. We feel that these -- some of the demand trends have bottomed.

Revenue is up sequentially, proposals are up year-over-year and sequentially and so is cancellations, but that's sort of a commentary on longer-term post-IND work for some of these programs. We had this big resurgence of bookings in the first quarter having to do with projects that clearly were delayed at the end of 2024. So we got a bunch of bookings in the first quarter, which helped us significantly in the second quarter, but won't necessarily repeat. But pharma feels stable and improving, and a lot of the improvements and changes in the cost structure and drug development sort of product lines have been skimmed back.

And biotech is just a tale of two cities. Also, the demand seems stable, but it's a bit mixed because the smaller companies continue to be cash constrained. And until the IPO market and secondary market opens up, that probably is a continuing scenario. Not probably, I think definitely that's a continuing scenario.

The mid-tier biotech companies seem to be performing better and seem to have enough money to sort of prosecute and develop the drugs that they have in their portfolios. Revenue improved slightly year-over-year for the third consecutive quarter. Cancellations were also up pretty much for the same reasons. And I think we're most pleased that if you take a look at the DSA net book-to-bill, it sort of had a steady upward trajectory for the last 18 months.

So I guess the bottom line is that we have stabilization across all client bases. Pharma seems stronger right now, just given their access to capital, for instance. Aspects of biotech are strengthening as well, but we have to watch the ones that are cash constrained. And I think we've called it well.

There's a fair amount of uncertainty out there in the marketplace and with the government and obviously, with access to capital as well. And we feel good about our guidance for the balance of the year.

Got it. No, that's very helpful. And maybe just one further clarifying question. You mentioned that for the new revenue guide, you don't need book-to-bill to go back above 1. Is it fair to say that it should be sort of at current levels going forward in terms of how you're thinking about that?

Or it's fair to say that maybe we just like look at sort of the general seasonality and sort of improved DSA revenue performance, and that's kind of the way to think about it in the back half of the year?

Want to take that, Flavia?

Sure. Elizabeth, I think you should think of the current ZIP code for the first half as continuation towards the second half. I know you talked a little bit about the second quarter being seasonally low, and we did see that for the last 2 years and then things rebound a little bit. But I think overall, we have seen this steady improvement for the last 18 months, as Jim said, right?

And we're not, as you pointed out, expecting book-to-bill to return to above 1x to meet our guidance. But to stay within -- over the last 18 months, we've been between 0.8x and 9.3x -- 0.93x, excuse me, for the first half of this year. So in that general range is, I think, what you can continue to expect.

We'll take our next question from Eric Coldwell with Baird.

Let's see here. I'm toggling a couple of things this morning. So hopefully, these aren't too off base. But on the CDMO, I'm just wanting to dissect the 2Q performance.

It feels like maybe there's some extra twist with the revenue that came in, in the quarter. I know you quantified one client at $20 million, but was it just that there was particularly high margin on that amount, like less work, but final payouts? I'm just hoping you can help us understand the actual impact of the CDMO performance in the quarter versus what's expected in the back half. And then if I might, is there any technical impact of U.S.

Fish and Wildlife clearing the Cambodian NHPs? I mean, what actually happens at this point now that, that has occurred? Are there financial benefits or other operational changes that come as a result of that?

Let me take the last part first. Obviously, we're thrilled with this, and we're thrilled that we've been able to evidence the fact that the alleged concerns that anybody had with us were without merit. But what it does is it gives us an enormous amount of flexibility to utilize animals that were already in the country for work, but also to take Cambodian animals into wherever we would like, including the United States. So NHP -- access to NHPs, sufficient numbers from multiple countries is an important aspect of managing the business given the proliferation and increase in NHP toxicology work.

And obviously, Cambodia is a big source of high-quality NHP. So we're really pleased to have the sort of, I don't know, regulatory yoke lifted from our next year. And I think it provides us a great facility to do better planning for not just the back half of this year, but for next year as well. So we're thrilled with this noise -- this information from these agencies.

I'll let Flavia take the first half of your question.

Yes. Eric, I'll take on the CDMO. So just a couple of things. The $20 million, as you pointed out, that's the wind down of revenue for the first half, not just the second quarter.

And that's what will become the headwind in the second half of the year as we don't -- we will no longer be manufacturing for this client. And yes, the margin on this work throughout the first half is, I would say, it's a little bit higher than the normal margin. And so the second quarter as well as the first half of the year in CDMO is a little bit buoyed by the continuation of this work as we wind down the client. And then, I think we also talked about there was revenue and also a payment that we received that payment in the second quarter only, that also helped the margin in the second quarter.

Did you quantify that payment, Flavia?

We did not. We did not.

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

I'll follow up on Eric. So cadence-wise, Flavia, do I understand on the CDMO, you quantified in the prepared remarks that the headwind to full manufacturing solutions for this year is 500 basis points. I calculate that to be about $38.5 million. So is it right to think that something a little south of $60 million is your comp number from last year?

You got $20 million in the first half. You don't have anything in the second half. That overall headwind for the year, is that -- $38 million, $39 million, is that the right kind of framing for this single CDMO client that you're losing?

Yes. I would just clarify a couple of things. Yes, in the beginning of the year, you might recall, we talked about a $40 million headwind from changes into our CDMO client base. We spoke about two commercial clients, one that had terminated the relationship with us, and then another one that we were adjusting the level of work that we were going to be doing for them.

On that second client, I think in Jim's prepared remarks, we talked about doing some level of work for them this year. So that's what adjusted our original guidance. I think to your point, Dave, we said about 500 basis points, and now we said slightly below 500 basis points. So it's a little bit better.

But your math that you just described is in the right ZIP code.

Yes. Back to DSA and thinking about kind of the cadence of revenue. Jim, I appreciate the kind of 6 months sequential progression here. I guess the factor that kind of supports the near-term revenue is really conversion.

And in your preclinical history, backlog conversion has varied quite widely. It went down a lot when you were booking so much during and immediately after the pandemic. It's kind of on its way back up now. This comment that you made about some cancellations in the longer-term study arena probably actually serves to increase the burn rate in the near term as well.

I just wondered the bottom line question here is, where can that go, both near term and long term, I guess, to support a revenue base despite a backlog decline?

We think the backlog is in a robust place. It's about 10 months, and it's been sort of stable there for a while. So that should allow us to continue to draw from the current backlog to replace studies that either slip or cancel. Cancellation rate, sort of an interesting one.

You don't get to sort of pick and design the studies in advance. And what we have is a fairly large number of really complex large dollar studies that typically are connected with sort of later-stage phase of drug development process. So that can be offset by other types of studies, things like in general toxicology and earlier studies in these late-stage ones. So I think that we are in good shape from a physical point of view.

As we indicated in the prepared remarks, we actually are performing meaningfully ahead of our operating plans. We actually have to hire some people now to make sure that the work is done both in a timely and high-quality fashion. It feels like pharma has strengthened meaningfully and sort of getting through some of the issues that they have to protect themselves against the patent cliff and that bigger biotech companies are stable as well. And when we begin to see capital markets opening up for the smaller folks, I think that will also enhance demand.

So we feel that both the backlog and our current capabilities are in a pretty good place right now.

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

Jim, maybe a follow-up on that. To your point, feeling a little bit better in terms of the hiring piece. You've seen a lot of these cycles. I guess just the confidence that stepping on this hiring, the confidence that we are kind of turning the corner here.

And again, I think to some of the other questions, if you have this book-to-bill of, let's call it, 0.9x area for the rest of the year, does that support DSA growth next year? Just trying to square up what book-to-bill, if that's the right metric, is necessary to think about launching to positive growth next year, just given your hiring and again, pretty constructive, particularly on the large pharma piece.

We'll stay away for next year because we have a lot more this year to accomplish. But both the book-to-bill and the overall demand curve, I think, are improving in the right direction. We're not getting ahead of ourselves on the hiring, if that's sort of the essence of your question. We're really catching up with where we need to be given the current level of activity vis-a-vis our operating plan.

And so this is very much totally a people-related enterprise that we're engaged in and the quality of the work and the speed of the work is essential. I think the things that will help the growth and development next year is access to capital for the biotech folks, and some settling down of some of the things that are going on in Washington, I think, will be helpful as well. As we said, we do think that pharma is moving slowly, but nicely in the right direction, so is large biotech. So the trajectory is positive, but we'll stop short of trying to give any indications of what we think the growth rate for DSA might be in the next fiscal year.

Understood. Okay. And then maybe just on the pricing side, it seems like it continues to be stable and you guys sound pretty good on that. Can you just talk through that?

And then what -- maybe it's one for Flavia on the back end, what that implication means for margins? Certainly understand the hiring piece, moving margins in the second half, but maybe just the moving pieces on margins between pricing, headcount, et cetera, would be helpful.

Why don't we both take that? So price, particularly in DSA is also stable. Spot pricing seems to be pretty solid. We definitely have some competitors.

I would say most, if not all of our competitors are using the price card to compete with us. Sometimes those are very small companies that just don't have any choice but to go to wherever the lowest provider is. Having said that, I think anybody that can afford it and really want speed, quality and regulatory prowess will work with us. So the mix seems to be enriching nicely, and we'll use price intermittently and necessary to either protect or take share.

But it feels like there is reasonable stability in the marketplace given the fact that capital markets are a little bit sluggish and demand has been off for a while that seems to be coming back. And we need to distinguish ourselves on our science and the quality of our work and our geographic proximity more than anything and sharpen our pencils periodically.

And I'll add on the price. I think what we have seen in the first half, as we said, especially in the DSA was mix favorability that has helped with the price mix equation. So price has been stable to slightly better than we anticipated coming into the year because of mix. Again, as we said in Q1 and again in Q2, we don't count on mix being favorable.

So that can play into a little bit of the margin dynamics that you described, Patrick, in the second half. But spot price is stable at this time, and mix has been what has enhanced the price/mix dynamics in DSA.

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

So you noted the higher cancellations this quarter are more focused on longer-term post-IND work. Can you just elaborate on what's driving that? What sort of margin differential in the work that's getting canceled looks like? And then how should we think about this dynamic moving forward? Do you expect that to continue in the second half?

Not a huge difference in margin. Both the price and the margin profile for different types of work, both earlier and later are often comparable. Some of the specialty work is perhaps slightly higher margins and is a little less competitive, but not significantly so. So we don't -- it's tough to predict how long this will continue.

It seems to be just a point in time. And very much the nature of a bolus of work that we had booked in the quarter that you don't necessarily get the same type of work to book next quarter or the quarter after that, just the way the studies fall. So I don't think it portends really much of anything. It's prioritization of portfolio by our clients.

It's what they have ready. It's what they are moving -- emphasizing more work in the clinic, what they're trying to push forward much more quickly. So we'll obviously continue to watch that and provide clarity on that. But I don't think this is something that will continue.

Got it. That's helpful. And then just on the large pharma piece, last week, we saw the administration set a 60-day deadline for pharma to implement MFN pricing, there's noise around tariffs. You talked in your prepared remarks about not really seeing any impact on either of these dynamics from pharma company spending currently.

But just on the forward outlook, how should we think about potential headwinds here for large pharma demand?

We've tried to be prudent and thoughtful on what our prognosis is for the balance of the year, given the significant amount of uncertainty in the world and in the country, particularly some of the things coming out of Washington with regard to drug pricing, what will the NIH do or not do going forward, what will the FDA do or not do going forward. So as we said in our prepared remarks, we have had a miniscule adverse impact from any of this so far. We're not really hearing about the tariffs from our clients. That doesn't mean that won't change.

We've had a very small amount of NIH work that we know has been canceled, but we are hearing about that fairly often from particularly academic clients that they do have concern about when the next will fall. So we believe that our guidance accommodates for things to be rougher and that we've been thoughtful and prudent about that. And probably, if the shoe does fall in any of the sort of three buckets that I just outlined, it's likely to have a greater impact on us in 2026 than it would for the balance of this year.

Yes. And just to echo that, I think when we've been talking about the net book-to-bill ranges, and again, my earlier question to Elizabeth around it staying in this sort of 0.8-ish level that we have seen over the last 18 months with sequential improvement over the last 3 halves of the year. Again, the second half book-to-bill will actually be more relevant to next year's performance, as Jim just said. So I think we feel that we are well positioned for the guidance that we're providing this year, given what we have visibility to at this point.

We'll take our next question from Charles Rhyee with TD Cowen.

Maybe just touching on the margins in the back half. Just to make sure I'm understanding really sort of the headwinds as we think about it. Is it really just, one, in DSA, we have some headwinds from extra hiring? I would imagine that's a little bit of a temporary issue as you kind of ramp up ahead of expected demand.

And then secondly, we just had better margins in CDMO in the second quarter, which don't persist. And so it's really more of a kind of going back to what maybe a more normalized margins for CDMO is. Just want to make sure, is there anything else that I'm missing or as I think about sort of the factors driving that as we think about first half versus second half?

Yes, Charles, I think you're thinking about it correctly. I think the last component is also -- I think I talked about the timing of our merit this year was July 1. So you have that a little bit playing into the first half, second half comp as you can expect about 3.5% increase in our, let's say, salary and labor cost pool base when you compare the 2 halves of the year. But yes, the DSA and the CDMO comments that you made are spot on.

Got it. And is there any benefits to DSA margins with the DOJ investigation concluding? Or were any of those legal expenses considered onetime and not really in the numbers?

Yes. At the time, both the legal expenses as well as we actually did write off the inventory of those NHPs, and we non-GAAP both expenses. Now that we will be able to use these NHPs for the intended purposes, we'll expense them as we incur the costs as we run the studies. And so essentially unwinding the non-GAAP expense we had done for the inventory. So they will be treated as a normal cost.

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

Maybe just a little bit of a technical one here on DSA. You mentioned that the outperformance was driven by strong bookings activity in the prior quarter, but I think something that kind of new at the time of the first quarter earnings call. So I'm kind of wondering how that exactly drove the outperformance in the second quarter. Is it just that, that work burned faster than expected?

Or is there something else beyond the strong bookings in the first quarter that helped explain why DSA outperformed in 2Q?

That's a significant amount of work as a result of pent-up demand by our clients, the things that they paused in the back half of last year. And again, the mix of that work is not something that we can predetermine or massage. So both a healthy mix and a significant amount of work with clients that want to move quickly and get a positive price mix as a result of that as well.

And that was a little bit of -- sorry, I was just going to add, there's a little bit also a benefit of FX if you're looking at it just on a pure dollar basis versus guidance before. So about half and half of the beat were operational versus FX, and that applies to DSA as well. And to Jim's point, yes, we've had strong bookings in Q1. But operationally in Q2, we -- while we always have change orders and we always have slippage, those were, let's say, better to a certain extent that also helped with the beat in Q2.

Understood. That's helpful. Maybe just going back to one more on headcount growth. I wondering if you could put some numbers around kind of how you're thinking about headcount growth in total for this year, and then whether or not it's fair to think about headcount growth in DSA as a reasonable proxy for that segment growth in 2026.

I don't think we can necessarily put numbers around that. We have to size our headcount with current demand and anticipated demand for the rest of the year. And I think we've done that well over the last decade. We had areas of significant high growth where we had to get ahead of it, and we've obviously had some workforce reductions.

And so we're being very careful about adding it back. And we're guardedly optimistic that we're seeing the demand stabilize across our client base and a little more pronounced in pharma. So we want to be able to react relatively quickly as the demand improves. So it feels like an appropriate and thoughtful way to address headcount.

It's the principal limiting factor. I think our space is in a good place to accommodate more work, but we simply can't even contemplate taking it on without a sufficient number of people. We also have to get them in early enough to train them. A lot of people come in as unskilled labor.

And so we're -- it actually feels good to get on with that.

Just want to add again. I think the quantification that we tried to provide was as a headwind to the margin in the second half versus the first half, the $10 million that we both spoke about. And this is -- you got to think about it as twofold. Yes, it's a little bit higher hiring when you compare to the 2 quarters, but we were also very prudent in not starting that too soon in the first half until we really felt strongly that the demand signals were robust and stable.

And so it's a comp also of maybe we were lighter in the first half even to deliver the level of revenue that we did. And then we have to kind of pick up on that and then staff to deliver the continuation of that demand. So I don't think headcount is going to be up year-over-year, if you ask me at the end of the year, given that we still have declining revenue. But it's certainly an increase versus the beginning of the year when we came into a guidance that was much worse than we're now looking at.

So I think very positive signal.

[Operator Instructions] We'll take our next question from Josh Waldman with Cleveland Research.

I had two that I'll ask and hop off. First, Jim, it sounds like you think the KPIs point to improving trend in DSA. But wondered if you could comment on how visibility has evolved in the business? Does it seem like visibility on bookings and cancellations is improving at all?

Or is it still challenging versus what you were accustomed to historically? And then a related question, I wondered if you could comment to the drivers on the increased cancellations of the longer-term post-IND studies, and whether you've seen increased cancellations elsewhere in DSA and what the guide assumes for cancellations going forward? Do they increase or remain stable from here?

So I think we do have better visibility and better clarity from our clients, particularly as hopefully, they're coming out of a pretty cautious period, both sets, both pharma and biotech. So -- and we're trying not to overread that, just given the role that we play in helping these companies get drugs into the clinic and ultimately to the market. As I said earlier, the cancellation, difficult to predict how that continues and rolls out for the balance of the year. We had a fair number of very large complex and expensive studies that seem to have canceled different clients for totally different reasons, usually an emphasis in the clinic to slow down some of the preclinical work.

The flip side of that is that we've had a lot of post-IND work for now, I don't know, probably a year or 1.5 years. General toxicology work was stronger in the quarter. That's a really good thing. You want a balance of general work and specialty work because the general work feeds into specialty work.

And so that -- I think that's an important indicator perhaps. Again, we're always cautious and careful to say that our business isn't linear, that one quarter. Whether it's particularly strong or particularly concerning is not necessarily predictive. So we like to see what the cadence is of our clients going forward.

We're also going to move into [ milieu ] soon where our clients are beginning to put together the 2026 operating plans. As will we, we build that up on a case-by-case basis, on a 0 basis with all of our clients. And so we'll get a really good sense of how they're thinking about spending, what concerns they really have about Washington and the capital markets, what they're prioritizing and whether there's any sort of meaningful swing back balanced spending between development and the clinic. And that's when we've had quarters of extraordinary strong growth or years, we've had that balance of spending.

Obviously, for these companies to have a good pipeline several years from now, they have to get back to discovery spending and get their INDs filed. So we're hopeful that, that will happen, but we're careful what we built into our guidance for the year.

And just to add on the cancellations, the cancellation rate this quarter in Q2, so think of it as a percent of bookings, it wasn't actually too dissimilar from the last 18 months. And if anything, it was more that Q1 was really favorable, which we didn't necessarily expect to continue. So I think maybe this is another way to think about it.

We'll take our next question from Luke Sergott with Barclays.

This is Anna Krasinski on for Luke. Just one from us actually. Can you talk about the sales cycle timing from RFP to award and then converting into revenues? And just has this changed or gotten better at all? Any color you can share?

Any particular business that you're talking about or perhaps talking about...

Within DSA.

DSA? No, I don't think the sales cycle has changed. And I think we've done some structural change of our sales organization and our marketing organization as well. I think we're much more client-centric.

I think we're doing a much better job selling from discovery into safety and are much more focused. So I would imagine, if anything, our sales cycle is more focused and elegant and probably yielding good results. As I said earlier, we got to be careful about if and when we use price. It's typically not something that we are the first people to use as a lever, but usually in response or anticipation of our clients using that as their only lever.

So look, the cadence and the speed with which we get the studies done and reports out to our clients is really everything for them. Everyone is in a race to market regardless of whether the clients are large or small. And so we're always looking to both enhance, accelerate and refine that process, both with the digitization of our capabilities. And as I said a moment ago, kind of the amalgamation of our sales force.

So I would say it's somewhat improved and enhanced over perhaps what it was last year.

And we'll take our last question today from Michael Ryskin with Bank of America.

It's a long call, so I'll just ask one. Jim, maybe sort of a big picture thematic question in terms of how we should think about book-to- bill being a leading indicator for revenue growth. And what I'm getting at is, traditionally, it's a pretty good leading indicator, at least the underlying bookings, and I'm focusing on DSA specifically here. But you've also got the backlog sitting there, right?

And as you answered to an earlier question, I think it was Dave Windley's question about the 10th month of backlog gives you some buffer. Can you talk about how that can be used to offset the below 1x book-to-bill and what that might translate to next 10 months? How easy it is to convert that? Just sort of given the backlog that is there, what level of book-to-bill you think is sufficient to get positive or at least flat revenue growth?

Well, I think, first off, we're pleased that the last 18 months has sort of had a steady upward trajectory of net book-to-bill. So that's positive. We'd like it above 1x, yes, but it's really not essential to get there. I mean the backlog -- both the duration of the backlog and the nature of the backlog is important.

So I would say as the basic proposition, particularly for non-NHP studies, we can almost slot in a study of backlog for something that's slipped or canceled. Not always, but almost always. It even depends on whether the client has a predisposition on a particular geographic locale or not, but it's a bit easier. And with appropriate notice, we can do a similar thing with the NHP studies, which tend to be more costly and more complex to set up.

So it does depend on the mix of the backlog and the certainty of the backlog. As you may recall from -- I don't know, it's probably 3 years, now the backlog, which we enjoyed for a while, actually elongated too much, and there was less of a certainty from the clients in terms of actually initiating studies. So we like where it is now. While some things do cancel or slip, we typically can slot something in.

And so I think that backlog is in a good place for us right now and as we go forward. We had several years where it was kind of 6 to 9 months. So 10 months sort of feels like we're in the ballpark to have a sufficient backlog to be able to seed any potential gaps we have in the portfolio and make sure we keep our people busy.

And I think just as a reminder, the preclinical space, the turnaround time is much shorter than clinical, right? So our cycle was more like 6 to 9 months. And so I think that also plays into how you rebuild that backlog. And as you start to look ahead 10 months ahead, there's plenty of time to increase the bookings in that period as well.

Sorry, I was going to say thank you. I think that's all the questions that we have. Thanks for joining us this morning, and we look forward to seeing you at an upcoming investor conference in September. And this concludes the call.

Thank you. This does conclude today's Charles River Laboratories Second Quarter 2025 Earnings Call. Thank you again for your participation, and you may now disconnect.