Q1 2026 Earnings Call Transcript

Ladies and gentlemen, thank you for standing by, and welcome to the Charles River Laboratories First Quarter 2026 Earnings Conference Call. This call is being recorded. [Operator Instructions] I would now like to turn the conference over to our host, Todd Spencer, Vice President of Investor Relations. Please go ahead.

Good morning, and welcome to Charles River Laboratories First Quarter 2026 Earnings Conference Call and Webcast. This morning, I am pleased to be joined by Birgit Girshick, who became our Chief Executive Officer this week, and to introduce our new Executive Vice President and Chief Financial Officer, Glenn Coleman. They will comment on our results for the first quarter of 2026 as well as our financial guidance. 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 the Investor Relations section of our 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 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 of operations prepared in accordance with GAAP. In accordance with Regulation G, you can find the comparable GAAP measures and reconciliations on our Investor Relations section of our website.

I will now turn the call over to Birgit Girshick.

Thank you, Todd. It is a privilege to speak to you today as the CEO of Charles River. I would like to acknowledge Jim Foster for building this company into an industry leader and reiterate my gratitude for the mentorship that he has provided to me over the years. I step into this role with a clear understanding of Charles River today, what we can become and the tremendous responsibility we have to our clients, to the patients who rely on us, to our nearly 20,000 employees worldwide and also to you, our shareholders.

I'm not taking this responsibilities lightly, and I'm energized by what lies ahead as we continue to work to help create healthier lives to capitalize on the significant opportunities ahead of us, both in science and in the marketplace and to enhance shareholder value. Our teams have already put forth significant efforts to plan for the future, and I'm proud to lead the company into its next chapter of growth and evolution. The world is changing rapidly around us. Science is advancing faster than it ever has, and our clients require greater speed, best science and more collaboration.

As the industry changes, Charles River will evolve alongside it and lead the way. Together as a company, we will create our own future by reimagining the way we operate and embracing the opportunities ahead of us. We will accomplish this through our refreshed strategic framework, which we are calling pathway to purpose. Pathway to Purpose is a disciplined approach to driving growth and shareholder value through the following key priorities: modernizing our company and the industry, strengthening our world-class scientific portfolio by enhancing our capabilities in strategic locations, while delivering a customized client-centric approach.

We will also continue to maintain rigorous oversight on animal welfare, biosecurity and regulatory compliance as well as fostering an exceptional employee experience. We have already established a solid foundation, including through the execution of strategic initiatives and enhancements made over the past few years. And this refreshed focus pathway to purpose will enable us to realize our full potential and ensure our future success. This will lead us to drive profitable revenue growth and optimize our financial performance.

We will also continue to take a balanced and disciplined approach to capital deployment, including organic investments, M&A and other uses of capital. We plan to take a much deeper dive into our overall pathway to purpose strategy and these priorities when we host an Investor Day in September. For now, I will provide a high-level overview of each priority as well as some of our recent accomplishments. First, we are diligently working on opportunities to modernize Charles River by building a future version of the company that will be faster, more agile and connected and data-driven.

We endeavor not only to transform operationally by driving greater efficiencies and streamlining and simplifying processes, but by creating an environment that allows scientific insights and information to move more quickly. This will enable us to partner even more seamlessly with our clients and expedite the speed at which we're able to deliver solutions, supporting their goals and deepening our relationship with them. We have already made substantial progress in our efforts to drive greater operating efficiencies and optimize processes. As previously discussed, we expect to generate at least $100 million in incremental cost savings this year above the 2025 levels, primarily driven by efficiency initiatives.

Cumulatively, we expect to generate over $300 million in cost savings on an annualized basis from actions taken over the past few years. However, our pursuit of operating efficiency does not stop here. We are evaluating new initiatives designed to enable us to continue to modernize the company and how we operate and drive additional savings to generate meaningful operating margin expansion in the future. We have already made great progress on our efforts to further strengthen our leading scientific portfolio, including through actions taken as part of our comprehensive strategic review last year.

As we mentioned last quarter, our acquisition of the assets of K.F. Cambodia earlier this year, now Charles River Cambodia, further strengthens and secures the non-human primates supply chain for our Safety Assessment operations. Combined with Noveprim, in which we acquired a controlling stake in 2023, we own and expect to internally source most of our future NHP supply requirements for the DSA segment. In April, we completed the acquisition of PathoQuest to continue advancing our NAMs or new approach methodologies capabilities by adding this in vitro next-generation sequencing platform for quality control testing for biologics drugs.

We are pleased to have completed the previously announced divestiture of the CDMO and Cell Solutions businesses on May 6. We also expect to complete the planned sale of our certain European discovery sites later this month in May. These strategic transactions will help us refine and refocus our portfolio on our core competencies and drive synergistic growth in areas in which we have differentiated scientific expertise, including drugs development testing. In addition to our efforts to modernize the company and drive incremental efficiency savings, these divestitures and the K.F. acquisitions are expected to be meaningful levers for future operating margin improvement, including the principal drivers of margin expansion for the year.

As we move forward, providing the best science will remain paramount at Charles River. With the combined strength of our core capabilities and scientific rigor, we intend to set new standards for what modern science can achieve and to help our clients enhance the efficiency and speed to market for their life-saving therapeutic programs. We will continue to build our world-class portfolio by investing in core growth areas and providing scientific solutions that are critical to our clients. In particular, we will further strengthen our capabilities in a regulated testing environment, including early-stage drug development, where we remain the industry leader and in complementary testing opportunities to support the clinical and commercial phases.

We have identified areas of future growth, including in vitro and related testing services to extend our existing capabilities as well as adding additional NAM solutions and continuing to evaluate our geographic presence, particularly in Asia. To further enhance our growth profile, we are doubling down on our client-centric approach with a go-to-market model that deepens and further customizes client relationships and reinforces our position as a preferred partner to the biopharmaceutical industry. We are leveraging technology, including AI, to improve sales effectiveness, KPI transparency, and lead generation while investing in collaborative tools that enhance how we engage with clients and generate insights.

Our Apollo cloud-based platform has already been a core enabler of our client-centric strategy and differentiates us in the marketplace through the speed that we can work with our clients. Apollo delivers a seamless self-service client experience with real-time access to scientific data and decision support tools. Its scope has expanded from RMS e-commerce and DSA pricing into study design, CRADL and our manufacturing businesses with further expansion underway. Technology is embedded throughout our strategy and in everything that we do.

We are investing in broadly using technology to help harmonize and streamline processes, including through digitizing core work streams and lab automation, which will enable us to gain better data insights, enhance connectivity with our clients and accelerate their speed to market. AI has been a particular focus in the recent months. Our view is quite simple. AI will support the work that we and our clients do.

We believe the efficiencies gained from AI over time will be reinvested in R&D by our biopharmaceutical clients, enabling them to work on more programs throughout the regulated drug development process, including safety assessment. To support this constructive view, recent discussions with our clients and industry surveys indicate that large biopharmaceutical companies are primarily utilizing in R&D to enhance the speed and efficiency of the early discovery process, including target identification, drug design and screening capabilities and also around clinical trial monitoring and logistics. In addition, the Deloitte survey last year indicated that nearly 60% of surveyed biopharmaceutical R&D executives expect AI and lab automation investments will result in an increase in IND approvals due in part to a faster pace of drug discovery over the next several years.

Like NAMs the use of AI will be an exciting but gradual evolution led by science and the proper validation of new capabilities. We are leveraging AI and machine learning across the company, including as part of our strategic priority to strengthen our NAMs portfolio through our pioneering approach to virtual control groups or VCGs for safety assessment studies. The recent independent scientific review demonstrated the effectiveness of our VCG process, which preserves scientific integrity with no observed adverse effects compared to traditional control groups while reducing reliance on animal models.

The VCG program is guided by our Alternative Methods Advancement Project, or AMAP initiative, focused on reducing the use of animals in research and is also a key priority for our Scientific Advisory Board led by our Chief Scientific and Innovation Officer, Dr. Namandjé Bumpus. Before I discuss our first quarter financial performance, let me provide a brief update on the end market trends. The overall biopharma demand environment stabilized last year, and we are currently seeing pockets of improvement for both global biopharmaceutical and small and mid-sized biotechnology clients.

Many of our global biopharma clients progress through their restructuring and pipeline reprioritization activities and demand trends have improved even so overall spending levels aren't yet back to historical norms. Revenue from our global biopharmaceutical client segment increased in the first quarter. From a biotech perspective, demand trends from our biotech clients improved over the past 2 quarters as a result of the reinvigorated funding environment as we exited 2025 and continued health in 2026. The recent increase in biopharma M&A activity has also provided another source of capital infusion for an exit strategy for biotechs, which we also feel favorably.

Mid-sized for the more mature biotechs have better access to capital as they approach IND or enter the clinic, while demand from start-up biotechs remains tepid because the earlier-stage and seed funding environment remains constrained despite a recent uptick in IPO activity. Overall, revenue from our small and mid-sized biotechs declined in the first quarter, primarily reflecting softer DSA booking activity last summer and a normal lag between booking and revenue generation. However, even the recent biotechs KPIs, we expect the revenue trend to improve in the next upcoming quarters. Government uncertainty, including funding-based pressures at the NIH has modestly impacted client spending levels, but revenue from our global academic and government client base remained stable in the first quarter, reflecting the essential nature of research solutions that we provide to them.

Moving to our financial performance. Let me start by providing several key takeaways from the first quarter. First, we delivered our first quarter results despite the anticipated pressure from several discrete margin headwinds and now have a clear line of sight into the meaningful operating margin improvement that we have forecasted in the second quarter and beyond. In addition, the DSA demand environment remains solid as demonstrated by a net book-to-bill of 1.04x in the first quarter and continues to support a return to DSA organic revenue growth in the second half of the year.

And finally, due to the execution of our strategic initiatives around acquisitions, planned divestitures and efforts to modernize our operations, we continue to expect to generate significant operating margin expansion of approximately 120 to 150 basis points in 2026, which supports our goal of driving profitable growth for many years to come. Overall, the first quarter results were in line to slightly favorable compared to our prior outlook. In the first quarter and as expected, revenue declined 1.5% on an organic basis. The non-GAAP operating margin declined 280 basis points to 16.3% and the non-GAAP earnings per share declined 12% to $2.06. The quarterly operating margin earnings decline were largely driven by several discrete factors, including higher stock compensation expense, NHP study-related costs in the DSA segment as well as lower NHP revenue in the RMS segment, primarily due to the timing of shipments.

RMS revenue declined 5.5% organically, driven principally by lower revenue for small models in North America and for NHPs due to the timing of shipments. However, these declines were partially offset by solid demand for small models in China from mid-tier biotech and CRO clients. DSA revenue declined 1.4% organically, driven by lower revenue for discovery services, although revenue for Safety Assessment services was essentially unchanged in the quarter. As previously mentioned, we are encouraged that the overall DSA demand environment is tracking to our expectation, resulting in a net book-to-bill of 1.04x and a slight sequential increase in backlog to $1.92 billion at the end of the first quarter.

Net bookings totaled a solid $622 million, remaining above the $600 million threshold, driven by continued strength from our small and mid-sized biotech client base. Over the past 2 quarters, Biotech's net book-to-bill and net bookings were at the highest level in over 2 years, showing a resurgence in demand on the heels of the robust funding environment. Demand trends for global biopharmaceutical clients also remained solid in the first quarter, but declined moderately year-over-year after pharma bookings rebounded to start 2025 following a period of budget cuts. Proposal activity posted a healthy increase in the first quarter, a signal that the positive bookings momentum may continue.

The strong bookings performance at the end of 2025 and a continuation of favorable trends to start this year leave us cautiously optimistic that the net book-to-bill will average above 1x for the year and support the upper end of our DSA outlook, including a return to organic revenue growth in the second half. However, as a reminder, our business isn't linear, so this does not mean net book-to-bill will be above 1x every quarter. Manufacturing revenue increased 2.9% organically, driven by continued solid demand for Microbial Solutions. Overall, underlying demand trends for Microbial Solutions and Biologics Testing, our manufacturing quality control testing business remains strong as clients continue to advance their late-stage development and commercial programs.

The Biologics growth rate is expected to rebound as the year progresses after we anniversary a client-specific challenge that has been a headwind for the past several quarters. As we look ahead, I'm energized by our refreshed strategic vision, and I am confident in the path we are taking to create the future for Charles River. Our focus remains on enhancing our clients' experience, delivering results and increasing long-term shareholder value. I also want to thank our employees for their continued dedication, hard work and commitments to our clients and mission, as well as our shareholders for their continued support.

I'm pleased to welcome our new CFO, Glenn Coleman, who joined Charles River on April 6. As I mentioned last quarter, Glenn is a seasoned financial leader and operationally oriented CFO with over a decade of experience in the health care industry. Glenn has been CFO for 3 public companies and also has extensive international operating experience. Glenn will help to ensure that we continue to take a balanced and disciplined approach to capital deployment, including M&A and also ensure we maintain the rigor to drive additional cost savings and efficiencies across the company. Now I will turn the call over to Glenn to provide more details on our first quarter financial performance as well as our 2026 guidance.

Thank you.

Thank you, Birgit, and good morning. I'm pleased to be joining the Charles River team as Chief Financial Officer. I was joined to the company because of its mission-driven culture and is positioned as a leader in the life sciences industry. Over the past 3 decades, I have led global organizations through financial and operational leadership roles and have been committed to instilling operational and financial discipline, effective capital allocation and driving long-term shareholder value.

I look forward to leveraging that expertise and experience as I partner with Birgit and the leadership team to build upon Charles River's strong foundation. As I step into this role, my priorities are clear and fully aligned with supporting our pathway to purpose strategy and driving profitable growth. I'll be focused on continuing to efficiently manage costs, including the delivery of over $100 million in incremental savings this year and identifying new areas of efficiency and process improvement to generate additional savings and drive future operating margin expansion. We will maintain a disciplined and balanced approach to our capital priorities and invest to drive our growth strategy forward.

This includes executing on M&A opportunities that strengthen our core capabilities, ensuring the successful integration of acquisitions and regularly evaluating all areas for capital deployment, including organic investments, stock repurchases and debt repayment. Before discussing our financial results, I'll remind you that I'll be speaking primarily to non-GAAP results, which exclude amortization and other acquisition and divestiture-related adjustments, costs related primarily to restructuring and efficiency initiatives 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.

I'll now provide highlights of our first quarter 2026 performance. Overall, our financial performance in the quarter was in line or slightly better than expected across our key financial metrics. We reported revenue of $996 million, representing growth of 1.2% compared to last year. On an organic basis, revenue declined 1.5% and was in line with our February outlook of a low single-digit organic decline.

The operating margin was 16.3%, a decrease of 280 basis points year-over-year. The expected decline was primarily driven by lower NHP third-party revenue in the RMS segment, the timing of stock compensation related to the CEO transition and higher NHP sourcing costs and study starts in our DSA segment. As I will discuss in more detail shortly, we do expect the second quarter operating margin to improve meaningfully from these levels as many of these first quarter discrete margin headwinds subside, and we begin to see a margin benefit from divestitures. Earnings per share were $2.06 in the first quarter, a decrease of 12% from the first quarter of last year, primarily driven by the lower operating margin.

This exceeded our prior outlook of a high teens decline, largely due to better-than-expected operating performance in the Manufacturing and RMS segments. Another highlight from the first quarter is the repurchase of approximately $200 million in shares under the $1 billion stock repurchase authorization approved last October. This supports our balanced and disciplined approach to capital deployment as well as the confidence we have in our long-term growth and strategic plan. Moving to details on our segment performance.

DSA revenue was $597 million in the first quarter, a decrease of 1.4% on an organic basis compared to the first quarter of 2025. Lower revenue for discovery services due in part to prior site consolidation activities was partially offset by stable revenue for Safety Assessment services. The DSA operating margin decreased 290 basis points to 21.0% in the quarter, mostly due to increased study-related direct costs, including higher NHP sourcing costs and study starts. In RMS, revenue was $208 million, representing an organic decline of 5.5% year-over-year due to lower sales of small and large models as well as research model services.

Small models revenue was pressured by lower volume in North America, partially offset by a solid increase in China volume. As previously anticipated, large model revenue is primarily affected by the timing of NHP shipments with NHP unit volume in the first quarter expected to be the lowest point for the year. The RMS operating margin declined by 240 basis points to 24.7% in the first quarter due largely to an unfavorable revenue mix from the timing of NHP shipments and lower sales volume of small models in North America. The Manufacturing segment reported first quarter revenue of $191 million, an increase of 2.9% on an organic basis due to strong growth from the Microbial Solutions business, primarily driven by Endosafe and Celsis manufacturing quality control testing platforms.

The segment operating margin improved by 280 basis points to 25.9%, driven largely by leverage from higher revenue and the benefit from cost savings. As a reminder, the first quarter CDMO growth rate was negatively impacted by the loss of a large commercial client last year. And as a result, the CDMO performance reduced the manufacturing organic revenue growth rate by approximately 350 basis points in the first quarter. However, this comparison will no longer have a meaningful impact going forward because of the completion of the CDMO divestiture this week.

Moving on to other financial metrics. Unallocated corporate costs totaled $63 million in the first quarter or 6.4% of revenue compared to 5.3% last year. The anticipated increase was primarily due to the timing of stock compensation expense related to the CEO transition. For the full year, we continue to expect unallocated corporate costs will be approximately 5.5% of total revenue.

Net interest expense was $26 million in the first quarter, a decline of $0.8 million year-over-year. For the full year, our net interest expense outlook has increased by approximately $8 million to a range of $103 million to $108 million, primarily attributable to short-term borrowings to fund stock repurchases in the first quarter. At the end of the first quarter, our net leverage was 2.6x. The non-GAAP tax rate in the first quarter was 22.5%, a decrease of 20 basis points year-over-year due primarily to the favorable impact from last year's enactment of OB3 or the One Big Beautiful Bill.

Our non-GAAP tax rate guidance for the full year remains unchanged at 22% to 23%, although it's currently trending towards the lower end of the range due to a favorable geographic mix. Free cash flow was negative $15 million in the first quarter or a reduction of $127 million compared to the prior year period. This decline was expected and mainly driven by higher performance-based cash bonus payments for 2025, which are paid in the first quarter. CapEx declined modestly to $56 million or approximately 5.6% of revenue in the first quarter from $59 million last year.

Our free cash flow outlook remains unchanged at $375 million to $400 million in 2026. Turning to 2026 full year guidance. We are reaffirming our organic revenue and non-GAAP earnings per share guidance, which have previously factored in the impact of the divestitures. All of our guidance referenced today assumes the planned divestiture of certain European Discovery sites being completed in May. And as Birgit mentioned, we have completed the divestiture of the CDMO and Cell Solutions businesses this week.

We continue to expect an organic revenue decline of 0.5% to 1.5% and non-GAAP earnings per share of $10.80 to $11.30 or 5% to 10% growth over 2025. This guidance includes earnings accretion of approximately $0.10 per share from the divestitures. On a reported basis, we reduced our revenue outlook by 50 basis points to a 4.0% to 5.5% decline because FX rates have become less favorable this year due to the recent strengthening of the U.S. dollar. From an earnings perspective, this FX headwind compared to our original outlook will be essentially offset by the accretion from stock repurchases. As a reminder, the acquisition of the assets of K.F. or Charles River Cambodia, the divestitures and incremental cost savings from our efficiency initiatives are expected to result in meaningful operating margin expansion this year.

We expect approximately 120 to 150 basis points of improvement in 2026, with most of the benefit generated in the second half of the year. Combined with the abatement of the discrete margin headwinds in the first quarter, we expect the second half of the year operating margin will be over 500 basis points higher than the first 6 months of the year, with over half of this improvement being driven by completed acquisitions and divestitures as well as the planned sale of certain European Discovery sites. From a segment perspective, our organic revenue outlook for each of the segments remains unchanged from February.

Our reported revenue outlook for the segment has been updated to reflect the impact of the divestitures as well as less favorable FX impact. As a reminder, the divestitures are expected to reduce our reported revenue outlook by approximately 500 basis points in 2026. By segment, we now expect a reported revenue decrease in the low to mid-single digits for the DSA segment and in the mid-single digits for both RMS and Manufacturing segments. We expect the most significant margin improvement in 2026 will come from the Manufacturing and DSA segments. Moving to our second quarter outlook.

As I mentioned earlier, we expect financial results to improve substantially on a sequential basis due primarily to operating margin improvement and normal seasonal trends in the DSA and biologic testing businesses. We expect reported revenue to decline at a mid- to high single-digit rate year-over-year due primarily to the impact of the divestitures, while organic revenue is projected to decline at a low single-digit rate year-over-year, similar to the first quarter. However, we expect second quarter earnings per share to improve significantly on a sequential basis, increasing at least 30% from the first quarter level of $2.06. The first quarter headwinds from the timing of NHP shipments in RMS and the NHP sourcing costs and study starts in the DSA segment are expected to subside in the second quarter.

In addition, the manufacturing operating margin is expected to benefit from the CDMO divestiture. As a result, we expect all 3 segments will show a sequential improvement in operating margin in the second quarter. To conclude, as I step into the CFO role, I'm focused on driving initiatives to generate profitable growth through the disciplined execution of our pathway to purpose strategy. This includes advancing our M&A priorities, successfully integrating acquisitions and delivering on our efficiency initiatives.

Collectively, these efforts will strengthen our foundation and position us to deliver long-term shareholder value. Finally, I look forward to meeting many of you in the coming months. As Birgit mentioned, we plan to host an Investor Day in September, where we will provide a more comprehensive update on our strategy, priorities and long-term financial outlook. 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.

Welcome, Glenn. Nice to be with you again. And for my question, I wanted to just sort of double-click maybe on the demand environment. I appreciate all of the questions comments about the environment.

Can you talk about the typical seasonality that we sort of think about in terms of the demand cycle? I know we've typically seen a little bit of a slower start to the year sometimes as people get ramped up in January and February. And then it sort of seems to do that plus obviously, what you were talking about, about some of the funding environment. And then as a funding -- follow-up question, I was wondering if you could comment on sort of NAMs and what you're sort of seeing, any updates in terms of demand conversation with clients?

Certainly. Thanks, Elizabeth. Happy to update on demand seasonality and names. So let me start maybe with the seasonality.

So we have several of our business see somewhat seasonality in terms of bookings, even proposal volume. Our DSA business is one of them where we're seeing proposals and bookings starting a little slow in the beginning of the year, sometimes also on a revenue basis that we see a slow start. And it generally has to do with budgets being approved, our clients coming back to work, often in January, there's a reprioritization of programs. So it just takes a little while to ramp up.

We have a couple of other businesses. Our biologics testing business definitely has a seasonality. They support manufacturing of biologics. And more often than not, the Christmas time is the time that manufacturing is closed down for maintenance and revalidations.

And so we are not seeing the same amount of samples coming in. Our microbial business is another one where we see definite seasonality into the fourth quarter actually for this business, where the business is ramping up often in the fourth quarter because companies may have budgets they want to use up because this is there basically a range you can keep on the shelves in inventory often, we see a spike in businesses there. So nothing abnormal. We have seen the same seasonalities in some manner this year.

It's expected, and we generally consider that when we do our budgets and our guidance here. As far as the demand environment, I think we all share cautious optimism. Biotech funding quite a bit better over the last couple of quarters, IPO reopening, again, cautiously optimistic that this will continue. And then our pharma clients have definitely worked through a lot of their restructuring, reprioritization of programs.

Any discussions we have with them is about speeding up their work, getting more programs through the pipeline rather than holds and reprioritization. So from that perspective, we're quite comfortable with what we're seeing. But certainly, it's early stage, and we always will be cautious about going too far over on our skis. Then let me jump into the names or new approach methods.

So names new approach methods are a part of what we do. So they are part of a toxicology study. And we have spent basically 3 decades on the reduction of animals. Names have always been a part of that.

NAMs availability has accelerated a little bit over the last maybe decade we have made some acquisitions in this space. We just did one literally a month ago. So the PathoQuest acquisition is squarely in the names category. So as we continue to evolve our business, we will continue to bring names into our business model, either through organic development, in-licensing or M&A.

And as technology evolves, as maybe AI -- the ability of AI to predict insights evolves, we will evolve our business model with it. It's an evolution. It's not a revolution. So it will take time, but you will hear more and more and more about us bringing those technologies in.

What I want to point out, it's not a separate business. It will always be part of our DSA and other divisions revenue model, and it will just continue to grow. I hope I answered your question.

Yes, that was super helpful.

We'll turn now to Max Smock with William Blair.

Glenn, maybe just following up on that prior question around activity so far here. Start to hear there was some commentary in the deck around seeing a healthy increase in proposals in the first quarter. Wonder if we could just get some more color around what proposals looked like year-over-year and sequentially? And then just more detail around how proposals trended among each client segment would be helpful.

Yes, happy to. So we've been quite happy with the proposal volume year-over-year in both segments, so both in our global biopharmaceutical as well as in our biotech segment, proposals were up quite nicely in the, I would say, high single digits. And which would -- gives us a lot of confidence that our booking trend will continue and our net book-to-bill trends will continue. So it does show us that there is a lot of clients that are ready to get restarted on work and the smaller clients and that our pharmaceutical clients, as they have indicated verbally to us, are looking to put more work, more programs through the pipeline to get to more INDs, to get to more programs into the clinic.

So quite happy to see that.

And I would just add there on a sequential basis, we've seen proposals come up 3 quarters in a row sequentially. So positive trends sequentially as well.

Got it. So the high single digit was year-over-year for both cohorts. And then Glenn, you're saying you've also seen some improvement sequentially as well.

Correct. We're 3 quarters in a row.

Okay. Maybe another unrelated question here on AI. Birgit, it sounded like your comments -- your prepared remarks, it sounded like you feel pretty comfortable with this idea that AI investments in drug discovery are going to lead to more preclinical testing longer term. Are you seeing that play out at all yet?

Or is that more something that we really probably don't see until we get a couple of years into the future here?

Yes. Thanks for that question. So I'm actually personally very excited about AI and what it will do for the industry and for Charles River in particular. So right now, the sample set of AI discovered or assisted, I should say, drug programs is very, very small.

So it's hard to make a real conclusion from that. What I can tell you is that AI-assisted drug discovery companies generally work on a lot of different programs rather than one program at a time. And as we're working with most of them or all of them on their programs as they are wet lab, I'm optimistic that this trend will show itself and that we will see more programs coming through from AI. It also should still need to be seen, lower the cost of early discovery.

And with that, there's more money for reinvestment. But again, it's very early days. There's so few programs in the pipeline that are AI assisted. But just theoretically, hypothetically, we know that AI will have a nice impact on that.

We'll move next to Patrick Donnelly with Citi.

Glenn, maybe one for you on the margin side. Certainly appreciate the color on the 2H step-up. And again, it feels like you guys have real tangible reasons to kind of do that build. Can you just talk through a little bit?

It sounds like half of it is M&A, half of it some of the other moving pieces. Can you just talk through kind of the bridge there on 2H? And then any reason why that momentum wouldn't kind of continue to build into -- obviously, it's early to talk '27. But just going forward, given the K.F. acquisition, what that means to margins, any reason that momentum wouldn't continue into the go forward?

Sure. No, thanks for the question. If we look at the first half of the year, obviously, year-over-year, we're expecting to be down, but we do expect a pretty significant sequential increase in our margins going from Q1 to Q2 that supports the greater than 30% increase in earnings per share. So we do expect a pretty meaningful step-up in our operating margins.

That being said, when we look at the half-to-half numbers, we're going to be in the high teens margin-wise in the first half of the year and expect 500 basis points improvement in the second half of the year. I did mention in my prepared remarks, over half of that improvement just coming from acquisitions and divestitures. In addition, if you look at our corporate costs, the onetime discrete items in Q1 that don't recur and some cost savings initiatives, that will drive another big portion of the half-to-half improvement, coupled with the timing of the NHP shipments in RMS and some additional lower costs we're expecting to come out of DSA.

So we've got clear line of sight. I know it's a big jump when you look at the half-to-half numbers, but we feel very confident in the numbers, and we've got a clear line of sight about how we get there. Relative to 2027, I think the only comment I'll make is from an acquisition and divestiture point of view, we've already given numbers around the annualized impact of acquisitions and divestitures. So we said for acquisitions on an annualized basis, about $0.60 from K.F. and for divestitures is $0.30. And for this year, in 2026, the equivalent numbers on a part year basis is $0.25 for acquisitions and $0.10 for divestitures.

So said differently, if you take the $0.90 less the $0.35, you can expect roughly $0.50 to $0.55 of accretion just from the acquisitions and divestitures in 2027 versus 2026. I think that's the only comments we're going to make around the '27 margin numbers.

Yes. Makes a lot of sense. And then, Birgit, maybe just on the demand side, I certainly appreciate all the color you've given. Can you just talk about that kind of small mid-sized early biotech portion, what you're seeing there?

Obviously, to your point, the funding has looked really healthy here for a couple of quarters. How much improvement are you seeing in those conversations? Are those dollars really starting to show up? Where are we in the cycle of that early piece from your perspective?

Yes, happy to. So the -- when we talk about our biotech clients there's obviously considerable size differences between the clients. A lot of the funding we're currently seeing IPOs are a little bit bigger companies, later stage. They have easier access to funding.

That's definitely also where we're seeing quite a bit of an uptick in their demand. I would say the smaller biotechs, very early stage, that is still a little sluggish, and we see that the funding is a little lower and then also the discussions are still more cautious in that regard. We do see that clients often when they see just general funding come in, get more confidence in their ability to get funding later on and start spending. So we're seeing that a little bit.

But we still have this segment was that early company starts being a little bit lower than we would like to see. So we have areas of our business like our CRADL business unit where we don't see the demand being where we would like to see it yet. So still a little bit mixed and still opportunity for improvement there.

We'll hear next from Kallum Titchmarsh with Morgan Stanley.

Just as we think about the business review and some of the acquisitions and divestitures announced over the past 6 months or so, any incremental ambitions to add or subtract from the business today? Or can we assume most impactful changes have been actioned. And obviously, see the buybacks, too. So maybe just level set us on capital allocation ambitions from here.

Yes, happy to, Kallum. So we will continue and always have to look at our businesses to see which ones are synergistic to the business, which are profitable, where should we be located, what solutions should we provide to our clients. So that will be an ongoing review that we do with our Board. And at times, you will see certainly that we will either consolidate a site or close a site or divestitures could come up again.

So that is just the nature of how we run our business. From an M&A perspective, you already saw a couple of M&As this year. We have a clear road map of where we believe the company should be investing in, in terms of M&A and a couple of other smaller partnerships. That is hard to predict as you quite never know when the target is available, can you actually acquire the target?

Does it make sense from a returns perspective? And then we continue to invest organically in our business. And then you already mentioned the buyback. So we will continue to look at all areas of capital allocation and make decisions for the best returns for long-term strategy execution as well as shareholder value.

Great. And I think you called out $200 million of annual DSA revenue from NAMs before. I'm not quite sure where that is post these acquisitions and divestitures, but could you just give us a sense of the latest slides and how that's been growing?

Yes. So that was the number we had provided, I think, in 2020 -- late 2024, 2025 and since then, we have added a few different programs and actually in M&A, so the PathoQuest acquisition is squarely in the NAMs space, where we are replacing in vivo virology work with next-generation sequencing, a really good technology. And then you're right, with the divestiture of the discovery assets in Europe, there is roughly -- we will retain roughly 2/3 of the NAMs revenues that we had called out. So if you take those 2 together, a little bit of organic investment we have done in other areas, we're probably kind of back to where we were.

But we will continue to drive that and our focus is on the regulated space here where most of our business is. So it continues to be a very strong commitment of Charles River. And we have established a Scientific Advisory Board under Dr. Bumpus.

And we have a lot of activities going on in that space right now. So you will continue to hear about technologies and how we look at this, how we bring new technologies in, what it will replace. We also just made an announcement on virtual control groups and was actually part of our remarks. Just another example of how we look at NAMs for our business and we see it as an integrated approach where we will bring in more and more technologies and run them as hybrid studies together with our conventional approach.

We'll hear next from Justin Bowers with Deutsche Bank.

So 2-parter for me. One, can you talk about the conversion rates and the velocity of decision-making that you're seeing across the increasing proposal volume over the last 3 quarters? And then part 2, I just wanted to clarify on the comment on large pharma verbally saying that they want to put more work into the INDs. Does that imply that pharma is increasing their overall budget or intend to for preclinical spend this year and beyond?

Yes, happy to. So let me start with the conversion rates. So if you look back to the, I guess, the COVID time lines where capacity was quite tight, companies had to plan way ahead. Discussions were like literally 2 years ahead of placing a study.

So really long. customers booked out very long because they had to. What we're seeing currently is quite an acceleration of when clients come in, want a proposal and then book and place the study. Generally, when we model it, we're saying from a discussion to proposal to bookings, it's 1 to 2 quarters and then maybe 1 to 2 quarters to get to revenue. However, in some instances, particularly with customers we have a long-term relationship with, that often accelerates because they got scientific data or they're reprioritizing a program, and we sometimes see literally from a proposal to getting revenue within the same quarter.

And so conversion rates are obviously generalized accelerated. And this is actually something that gives us a better quality of our backlog because we know that those programs are actually being run and not being canceled later on because reprioritization of budgets have changed. To the second question about the INDs, as you can imagine, every pharma company we talk to talks about more programs into IND, more programs into the clinic. And our counterparts, our contacts will always talk about, but we have to do it with the same budget.

But you can imagine that's obviously not possible. But we do see a refocus on the preclinical and earlier-stage efforts in those companies. Otherwise, they would not get the programs to the clinic.

We'll hear next from Joshua Waldman with Cleveland Research.

Birgit, I wondered if you could comment more on what you're seeing from global pharma accounts here to start the year? Were bookings from these accounts any better or worse than you expected? And then did the trend improve through the quarter? It sounded like you saw a slow start, but I'm curious if you were more encouraged based on what you saw here in March and April.

Yes. So for the Global Biopharma, bookings specifically was below last year's bookings. But let me take you back to last year. We had an incredible booking quarter last year because a lot of the global pharma companies had literally reprioritized for months and then they -- early in the year, they got their new budgets, and there was just a slew of bookings that came in.

So this isn't something we didn't expect. We feel bookings are adequate and they are supporting what we're hearing from them that they want to do more work. So with that, I would say that overall, this is a segment that is quite stable and increasing for us. We also see proposals up for them, which will -- which tells us basically that in the next quarters, we should see that bookings rate to come up.

Okay. And then you mentioned more biotech M&A being favorable in terms of funding for these accounts. But I'm curious, in the past, have you seen higher M&A activity drive improved access to biotech wallet share? I guess just given your stronger share position in large pharma, do you think large pharma accounts acquiring small biotech ultimately means you get better access to these accounts?

Is this a dynamic you've seen historically?

Yes. So a lot of times, we actually do work with those small biotechs before they get acquired from pharma. And in that case, we retain the work, and we'll continue to work with them. Some cases, they get acquired, and we actually -- we work with a pharma company and any new programs we get access to.

So it's a little bit of a mixed model. So as long as they continue the program, and that's why they're actually acquiring them, we will get our share -- our focus is certainly on making sure that we get a higher and higher share of the wallet from our -- particularly from pharmaceutical companies. And that is why our client centricity program, our initiative of making working with our clients easy and easier, providing them with better solutions and faster time lines is so important. So it could go either way.

But in general, it's not a headwind. It is either a tailwind or it's just net neutral.

We'll turn next to Cassidy Vanepps with Jefferies. Cassidy on for David Windley today.

So digging a little bit more into margins. So with most of your NHP supply now internally owned, how should we think about the margin impact specifically within DSA? And does this change management's longer-term margin framework for the segment?

I'll jump in and take this one. Just keep in mind, we're still working through some higher NHP costs really for the first half of the year. It will get a little bit better in the second quarter, but the real big improvement is Q4 for our DSA segment. We're not going to specifically call out the margin improvement.

I think a big part of the reason why we bought K.F. was the supply chain resiliency and giving us better predictability of the supply chain. And obviously, with that, you come improvements in our financial performance, but we'll give more guidance on 2027 and what it means when we get to February of next year.

Okay. Perfect. And then following up, so how much of the NHP supply from Noveprim and K.F. is still obligated to external customers? And then when does that fully become available to Charles River?

Yes, I can talk about that. So the external customer that you're referring to is actually from our Mauritius farms. And the -- and when we bought the Mauritius farm, we bought the external relationship with the supply. Ultimately, the goal is to use the animals on safety assessment studies and moving them over.

And that will kind of be a transition over the next few years. And as you can see, you'll probably see that we already have more and more animals on our safety study. And then that will kind of end over the next few quarters.

I'll turn now to Casey Woodring with JPMorgan.

This is Sebastian Sandler on for Casey. I wanted to first double-click on expectations for biotech revenue pacing over the balance of the year. Within that bigger, later-stage client segment that's been benefiting from M&A and funding starting towards the end of last year, do you expect this specific segment to return to growth in 2Q, maybe ahead of smaller biotechs and biopharma? Or should we just expect more of a back half rebound consistent with your expectation for total DSA growth?

Yes. So if you -- so what we're currently seeing in Q1 is that this segment from a revenue perspective is still down. That is coming from the lower bookings last year. And we think -- we believe that will rebound over the next quarter or 2 because of the bookings we're currently seeing.

So there's a lag of about a quarter to 2. And so we will definitely see this segment to rebound to more of a growth rate as we enter, I would say, Q3, Q4 for sure.

And then you called out strength in research models in China. Can you remind us of the revenue base in China within RMS, what that grew in the quarter and then just expectations for the full year? And then more broadly, how are you thinking about your current exposure to the China market within RMS and DSA outside of the recent NHP acquisitions? And what is your overall level of interest in expanding that through M&A in the future?

Yes. So our RMS China business is a small part of overall Charles River revenue. It's approximately 5% and -- or actually less than 5% but it is a critical asset for us as it provides us access to the Chinese market. So the Chinese RMS business is one of the leaders in the industry for providing research models as well as many services that are -- that we also offer here in the Western part.

From other services and solutions, specifically the DSA that you asked, we currently don't have any facilities in China. We do get some work from companies that work in China or want to file INDs in China, but not a physical presence. We are continuing to watch this market very closely as a lot of the drug programs are in-licensed from China because of the accelerated innovation. And we certainly will continue to look at this to see if we should expand our structure in China based on customer demand growth rates, but also looking at geopolitical risk on that.

Our next question will come from Ann Hynes with Mizuho Securities.

Your $300 million cost program, can you remind us what you'll be annualizing as we exit 2026 and any incremental uptake for 2027 and 2028? And then secondly, just on AI, and there's been in the news a lot, some of the big pharma companies investing in AI. And I know during the Great Recession, a lot of the big pharmaceutical manufacturers closed their capacity for early development. Do you think there could be a risk that they increase their capacity again over the next few years?

Yes. Let me start and then on the cost savings, and then I will move over to AI. And if Glenn has any additional add-ons to the cost saving, I will ask him to chime in here. But -- so the cost savings are roughly $300 million of costs that we have taken out over the last several years, about 5% of our cost base.

For this year, we said it's an incremental $100 million. It's too early to talk about '27 and '28. But as we said, we are continuing to look for cost efficiencies, modernizing the company, seeing how we can reduce time lines, making the operations more efficient. So you should continue to think that -- think about us having cost efficiencies, but we're not in a position right now to give you any specific numbers on '27 and '28. We will provide long-range financial numbers probably through in our Investor Day, and we will also talk more about where those cost efficiencies are coming from. AI is an interesting topic, both for cost efficiencies but then also for how drug development is being performed.

So for us specifically, we invest in AI in multiple areas to, a, be more efficient, maximize our capacity, streamline our communication with our clients and also to reduce the number of animals needed on a drug program. Our clients are investing primarily in the early stage and a little bit in the clinical space. In the early stage, that is things like target identification, molecular design that will allow them, hopefully, at some point, if AI delivers to bring drugs into the regulated safety assessment space faster and maybe more programs. I do not think that our clients will want to in-source any of the work that we are doing.

So our work that we do is very highly outsourced and not a lot of companies still have capacity nor the skill set to do the work. So -- and from what we're hearing with our clients and the discussions, they are actually looking more for a collaboration on how they can utilize AI in the earlier stage. So before we get the work rather than doing the work that we are doing. So you might see more of in-sourcing in the really early or even in the clinical trials.

But definitely, I would not expect it in the preclinical stage. There's just so many complexities and capacity and regulated expertise that is required, it would not make any sense.

Birgit, the only thing I would add to your comments is a lot of the great work the team has done over the last couple of years of taking out all of these costs and $300 million of cost has been needed to preserve margins because the top line has not been growing. And so a lot of the cost increases that we see in the business for inflation and normal increases across the business have been offset by these initiatives and cost reductions. I just want to make that point.

We'll turn next to Yujin Park with Baird.

You mentioned that for RMS, 1Q saw increased demand in small models from CRO clients. Was that comment specifically on China? Or was it broad-based geographically? And is this a normal pattern? Or could this be a signal of improving market dynamics?

So that comment was specifically to China. We have said that we saw much better demand in China and specifically for CROs and biotech. So we see this as an indication that the Chinese market is rebounding and accelerating and for the need and the demand of the research models that we're providing to them. So a positive indication for the business.

We'll move next to Charles Rhyee with TD Cowen.

I'll just leave it with one question here, and this is just kind of going back to the demand environment. Birgit, you kind of mentioned in the slides, biotech kind of highest levels you've seen in the last 2 years, maybe more large pharma kind of slowly rebounding or maybe just more of a year-over-year comps. It kind of suggests maybe that biotech is going to present more opportunities perhaps over the next couple of years? And does that change at all sort of your go-to-market strategy?

And maybe any kind of impact on how. Maybe give a sense of how any of those businesses are priced on either side of that? And any kind of comments on that and where you see that mix going?

Yes. So we are pretty balanced in our revenue stream from pharma versus biotech. So we have -- historically, we have a very big share with the pharmaceutical clients, but we are -- also have a considerable share with the biotech industry. So our go-to-market strategy for years has focused on a customized approach to make sure that we cater to both small as well as large companies, making sure that they get the collaboration they need and that our teams are basically on the same table with no matter if it's a small or a large company.

So -- and that won't change. However, we are investing in a lot of tools and platforms and training to make sure that we are continue to improve this go-to-market customer centricity program that we have in place, so we can be an even better partner for our clients, but also get more of a share of their wallet. In terms of pricing, we see a pretty stable pricing environment. It has really not changed over the last couple of years.

Discounting is still strategically, it's still happening. Pricing will change when capacity is changing. So something that will come probably automatically. But at the current time, we are making sure that we stay competitive and that we get the share of the wallet that we want from our clients.

And from our proposal volumes, bookings and capture rates, I think we're on the right track here.

Great. Congrats on the results.

Our final question will come from Ryan Halsted with RBC.

Maybe going back to the discussion on Asia, but asking it from a different perspective from a competitive standpoint. A lot of attention, I think, has been made on competition from Asia and drug development work. And just would appreciate your perspectives on the competitive landscape for the business.

Yes. Thanks, Ryan. Interesting question. So yes, so from an Asia perspective, specifically China, a little bit in India, there definitely has been a trend of more outsourcing, early-stage routine work outsourcing going to lower-cost countries.

And this is something that we have evaluated for quite a while. We still don't see a lot of outsourcing going to China in complex work or regulated work where we do most of our revenues, but we are evaluating that. And that is also why we said a couple of times now that overall, we're looking at the Chinese market to see how or when we should play in a larger scale there and what are the solutions that we have the right to play with in a marketplace like that. From another perspective, obviously, the in-licensing of more programs from China into the U.S., into global biopharma is another area that we are watching.

A lot of times, we actually get to work on some of those programs, but it will have an impact on the industry itself, and we'll need to see where this is playing out too. So definitely, China, a little bit of India outsourcing is a focus areas of us to make sure that we understand what's going on there. But at this point, our core market and our core relationships are very, very strong here in North America, the EU and a little bit in Asia, and we will continue to double down on that.

With no further questions in queue, I will turn the conference back to Todd Spencer for closing remarks.

Thank you for joining us on the call, and we look forward to seeing you at upcoming investor events. This will now conclude the call. Thank you.

Thank you. That does conclude today's Charles River Laboratories First Quarter 2026 Earnings Call. Thank you for your participation. You may now disconnect.