CHARLES RIVER LABORATORIES INTERNATIONAL, INC. Q4 2025 earnings call

Good morning, and welcome to Charles River Laboratories' Q4 and full year 2025 earnings and 2026 guidance conference call and webcast. This morning, I am joined by Jim Foster, Chair, President, and Chief Executive Officer, Birgit Girshick, Executive Vice President and Chief Operating Officer, and Michael G. Knell, Senior Vice President, Interim Chief Financial Officer, and Chief Accounting Officer. They will comment on our results for the Q4 of 2025, as well as our financial guidance for 2026. Following the presentation, they will respond to questions.

There is a slide presentation associated with today's remarks, which we posted on the investor relations section of our website at ir.criver.com. A webcast replay of this call will be available beginning about two hours after the call today and can also be accessed on our investor relations website. The replay will be available through next quarter's conference call.

I'd like to remind you of our safe harbor. All remarks that we make about future expectations, plans, and prospects for the company constitute forward-looking statements under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated. During 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 Jim Foster.

Thank you and good morning. As Todd mentioned, I'm pleased to be joined today by Birgit Girshick, who will become our next CEO when I retire in May, as well as our interim CFO, Mike Knell. Birgit will provide an overview of our 2026 guidance and the key drivers behind our outlook. Before I hand the call over to her, I will provide details on our Q4 and full year 2025 financial results, as well as an update on our latest developments and market trends. We were pleased that our 2025 financial results were at the upper ends of the revenue and non-GAAP earnings per share ranges that we provided in November.

Beyond our financial results, the Q4 capped a year that was marked by the stabilization of the biopharma demand environment, including substantial improvements in DSA net bookings, particularly during the first and Q4. We also advanced several strategic initiatives that will enable the company to better capitalize on future growth opportunities and renewed our focus on scientific innovation that will reinforce our position as the leader in preclinical drug development. At different points during 2025, demand from both global biopharmaceutical clients and small and mid-sized biotechnology clients showed signs of improvement. Many of our global biopharma clients progressed through their restructuring and pipeline reprioritization activities, and after holding back spending in 2024, moved their programs forward with more urgency when new budgets were released in early 2025, which led to strong DSA bookings at the start of last year.

The biotech funding environment slowed in the first half of 2025, and we subsequently experienced softer demand trends from our small and mid-sized biotech clients during the summer months. However, with a reinvigorated funding environment in the second half of the year, including a record level of $28 billion in the Q4, biotech clients were the primary driver behind a steady sequential increase in the DSA net book-to-bill in each month during the second half of the year.

As we disclosed at an investor conference last month, the DSA net book-to-bill improved to 1.1 times in the Q4. Taking these factors into account, we are cautiously optimistic that the favorable DSA demand trends will continue in 2026 and result in a return to organic revenue growth in the second half of the year for both the DSA segment and the overall company.

We have also made substantial progress on the strategic actions that we outlined in November to unlock long-term shareholder value, including strengthening and refining our portfolio, driving greater efficiency, and maintaining a balanced yet disciplined approach to capital deployment. To strengthen our portfolio, in January, we announced the planned acquisitions of the assets of K.F. Cambodia and PathoQuest. Both of these acquisitions are squarely aligned with our core competencies and are the result of lengthy, successful partnerships. K.F., the acquisition of which has already closed, has been a longtime NHP supplier in Cambodia and will further strengthen and secure our DSA supply chain.

We expect it will generate meaningful operating margin improvement starting later this year through significant cost savings on NHP sourcing. Between K.F. and NovaPrim, we expect to own and internally source most of our future annual NHP supply requirements for the DSA segment.

We continued to advance our NAMs capabilities with the planned acquisition of PathoQuest, which is expected to close within the next month. The company has been a partner of our biologics testing business since 2016 and provides an in vitro approach to manufacturing quality control testing for biologics.... The Celsis and PathoQuest acquisitions are excellent examples of capital deployment in core areas that will enhance our financial profile and advance our scientific capabilities as we endeavor to capture greater share of wallet from our clients.

We will continue to evaluate additional M&A, including in the areas of bioanalysis and geographic expansion, in order to support our clients as they seek to drive greater efficiency and success in their drug development programs. We are also focused on continuing to build our NAMs portfolio, or new approach methodologies, in the areas that are most relevant to clients and their scientific needs.

We believe we have already established a solid foundation of NAMs capabilities, including our Retrogenix cell microarray platform for off-target screening and toxicity, our development of virtual control groups for safety assessment studies that utilize machine learning and other techniques, and most recently, PathoQuest's innovative next-gen sequencing platform. We are excited about current and future applications for NAMs and related innovations, including AI, and we view these as enabling technologies to support the work that we do and is complementary to it. NAMs, including AI, has promise, but it still has challenges with data availability and proof of concept, so it will be a gradual, longer-term evolution led by science and the validation of new capabilities over time, particularly in a regulated safety assessment environment where patient safety is paramount.

Since we began to discuss NAMs in more detail last spring, there have not been any significant technological changes in drug development, and we have not experienced any notable changes in client behavior other than more frequent conversations about NAMs. We also continued to make progress on our plan to divest businesses, totaling approximately 7% of 2025 annual revenue. These processes and negotiations with potential buyers are ongoing, and we continue to expect the planned divestitures will be completed by middle of 2026.

Assuming all transactions are completed, the expected Non-GAAP earnings per share accretion of $0.30 on an annualized basis from the planned divestitures will be less for the partial year, 2026, or closer to $0.10 per share, because expected improvements in the operating performance of these businesses throughout the year. Now I will recap our Q4 and full-year consolidated performance.

We reported revenue of $994.2 million in the Q4 of 2025, a 2.6% decline on an organic basis from the previous year, with revenue declines in all three business segments. For the full year, we reported revenue of $4.02 billion, with an organic revenue decrease of 1.6%, driven primarily by lower revenue in the DSA and manufacturing segments. By client segment, sales to both the global pharma, biopharma, and small and mid-sized biotech client segments declined modestly for the full year. In the Q4, sales to global biopharma clients rebounded meaningfully versus the prior year, as these clients got back to work after pulling back on spending at the end of 2024.

Good morning, everyone. First, I want to sincerely thank you, Jim, for the tremendous mentorship and close partnership you have provided over the years to prepare me for this incredible opportunity, and also for your significant contributions to build the company into the industry leader that we are today. I also want to thank and acknowledge our board of directors for the trust that they have placed in me. I'm deeply honored to become Charles River's next CEO and am committed to building upon the solid foundation that Jim has established.

With the talented team at Charles River, we will continue to work tirelessly to lead the industry, to accelerate the progress we have made in scientific innovation, to advance drug development through our best-in-class science and client service, and by continuing to focus on ensuring the company remains leading edge with world-class processes, a client-centric service offering, and technology enablement. I am very excited to lead Charles River's next phase of growth. I will now provide details on our 2026 financial guidance and the improving trends that we expect. Organic revenue in 2026 is expected to range from down 1% to at least flat, compared to a 1.6% decline in 2025.

We expect the operating margin will improve by 20-50 basis points from 19.8% in 2025, driven principally by the benefit from the acquisition of the assets of K.F. Cambodia. This is expected to translate into non-GAAP earnings per share in a range from $10.70-$11.20, representing growth of approximately 4%-9%. We continue to expect that the acquisition will add approximately $0.25 to earnings per share this year, which has been embedded in this guidance. By segment, we expect RMS revenue to decline at a low- to mid-single-digit on an organic basis in 2026. There are two primary factors driving the decline. First, NHP revenue is expected to be below 2025 levels and represents an approximate 200 basis point headwind to the RMS growth rate.

This is primarily due to the timing of shipments, which favored 2025 and will have a particularly significant impact on the year-over-year comparison in the Q1 of 2026. A reduction in NHP volume commitments to certain third-party clients will also affect the growth rate. The other meaningful RMS headwind in 2026 will be cradle occupancy levels, which are expected to continue to be constrained as demand from early-stage biotech clients remains subdued.... Global revenue for small research models is expected to be flat to slightly higher in 2026 as unit volumes declines, particularly in North America, and will continue to be offset by favorable pricing. We expect DSA revenue will be in a range between slightly positive and a low single-digit decrease on an organic basis in 2026.

As Jim discussed, we are cautiously optimistic that the favorable DSA demand trends will continue in 2026, supported by the recent improvement in biotech funding. We believe the strong bookings performance at the end of 2025 and a continuation of favorable trends this year will result in a return to DSA organic revenue growth in the second half of 2026. In order to achieve the top end of our DSA revenue outlook for the year, it would require continuous momentum in the bookings environment, resulting in the Net Book-to-Bill average and above 1x for the year. This does not mean that every quarter will be above 1x, as our business isn't linear, and factors like backlog conversion and the timing of bookings or study starts also heavily influence the DSA growth potential.

For the manufacturing segment, we expect the organic revenue growth rate will rebound to a low single-digit increase this year. This favorable outlook, compared to a 1.6% organic decline last year, principally reflects the anniversary of the loss of a commercial cell therapy client, whose program generated about $20 million in CDMO revenue during the first half of 2025. Microbial Solutions is expected to report a growth rate in the mid-single digits, similar to its 2025 levels. And we expect that some of the client-specific challenges that impacted the biologics testing growth rate last year will be alleviated, resulting in a slightly better performance in 2026. Moving on to operating margin. We expect that the DSA segment will be the primary driver of the 20-50 basis points of consolidated margin improvement in 2026.

As previously mentioned, the margin expansion will largely be driven by the acquisition of KF, as lower sourcing costs to procure NHPs to support DSA studies will generate meaningful margin improvement in the second half of the year, once the modeled source post-acquisition begin to be placed on studies. For the year, we expect KF acquisition will benefit the operating margin by more than 50 basis points on a consolidated basis and by more than 100 basis points in the DSA segment. We expect the RMS and manufacturing operating margins will be stable in 2026. From an earnings perspective, we expect most of the earnings per share improvement in 2026 will be generated from operations driven by margin expansion.

We expect to generate at least $100 million in incremental cost savings above the 2025 level to help protect the operating margin, because revenue growth will not offset the level of annual cost inflation this year. As we discussed in November, the incremental savings will be primarily driven by initiatives designed to drive greater operating efficiencies through process improvement, procurement synergies, and implementation of an integrated global business services approach. As a reminder, we are now expected to generate a cumulative total of over $300 million in cost savings on an annualized basis, based on actions that we implemented over the last three years. I have personally led many of the company's efforts to reduce costs through restructuring and efficiency initiatives designed to keep cost structure aligned with the pace of demand and to drive process improvement.

I will continue to focus on streamlining our processes and ensuring we operate a nimble, responsive, and technology-enabled organization going forward. In addition to significant cost savings and the $0.25 per share benefit from the KF acquisition this year, below-the-line items are expected to contribute more than a $0.30 benefit at midpoint to 2026 earnings per share, principally driven by a lower tax rate. We expect the Q1 operating margin will be in the mid-teens, pressured by a few discrete factors, including an unfavorable mix from the timing of NHP shipments in the RMS segment, the acceleration of stock compensation expense due to the CEO transition, and higher DSA costs, primarily related to NHP sourcing and staffing.

These factors are not expected to be a meaningful headwind after the Q1, and we expect the operating margin will improve significantly thereafter.

Mike will provide additional details on our Q1 outlook, as well as the below-the-line items shortly. Before I conclude, I'm pleased to announce that we will be adding two experienced senior leaders to our team this spring. Glenn Coleman will join us on April 6 as Executive Vice President and Chief Financial Officer. Glenn is a seasoned financial leader and operationally oriented CFO with over a decade of experience in the healthcare industry. Glenn has over 30 years of strong financial and operational management experience and has been CFO for multiple public companies, as well as a Chief Operating Officer with experience managing clinical, R&D, and manufacturing teams. I also would like to thank Mike Knell for his leadership of our finance organization during the CFO search.

Mike will continue in his current position as Senior Vice President and Chief Accounting Officer, and will play an instrumental role in the success of our organization. I'm grateful for his dedication and commitment to Charles River. We are also pleased to have Carrie Daly join us on March thirtieth as Senior Vice President and Chief Legal Officer. Carrie brings 25 years of sophisticated legal experience to Charles River and is an experienced leader that has been focused on advising multinational life science companies across complex regulatory environments.

Good morning, and thank you, Birgit. It's been an honor to lead our talented finance team for the last several months, and I look forward to continuing to work closely with them and our new CFO to drive our future success. I would also like to thank you, Jim, and the board for the opportunity to be interim CFO. 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, impairments, costs related primarily to restructuring initiatives, 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. Let me start by providing some additional details on our 2026 guidance. Birgit highlighted our organic revenue growth and non-GAAP earnings per share outlooks.

On a reported basis, we expect revenue will be between at least flat and 1.5% growth. FX is expected to be a tailwind as the US dollar has continued to weaken and is expected to benefit reported revenue by 1-1.5%. We also expect a small revenue benefit from PathoQuest once the acquisition closes later this quarter. We have provided additional information on FX rates and our currency exposure in the appendix of our slide presentation. On slide 31, we have also provided the segment outlook for 2026, which includes reported and organic revenue expectations. As Birgit mentioned, we expect several headwinds to impact the Q1 operating margin and earnings per share.

Our outlook for the Q1 of 2026 assumes revenue will be essentially flat to slightly negative on a reported basis and will decline at a low single-digit rate on an organic basis. By segment, the RMS growth rate will be negatively impacted by lower NHP revenue due primarily to the timing of shipments, which will have a nearly $10 million impact on Q1 RMS revenue. The manufacturing segment's growth rate will reflect the difficult year-over-year comparison with regard to commercial revenue in the CDMO business, which also has an approximately $10 million impact on Q1 manufacturing revenue. We expect the DSA rate of decline will improve slightly from second half 2025 levels, but as a reminder, the benefit from strong bookings activity in the Q4 will not yet be evident in DSA revenue in the Q1.

From a Q1 earnings perspective, we expect non-GAAP earnings per share will decline at a high-teens rate year-over-year. As Birgit mentioned, there are several discrete factors that will impact the operating margin in the Q1, resulting in an operating margin in the mid-teens. The two primary factors are the timing of NHP shipments and higher stock compensation costs, due largely to an acceleration of the expense related to the CEO transition. Stock compensation is expected to approximate a $0.15 headwind to EPS in the Q1. In addition, the DSA margin will continue to be pressured in the Q1, as it was in the Q4, by higher NHP sourcing costs due to higher than anticipated demand for these studies, as well as increased staffing costs. But these DSA headwinds are expected to dissipate after the Q1.

Normalizing NHP study-related costs, due in part to the KF acquisition, improving demand trends and the strong year-end bookings are expected to benefit revenue and generate sequential improvement in the DSA operating margin as the year progresses. I will now provide details on non-operating items. Unallocated corporate costs in 2026 are expected to be similar to the 5.5% of total revenue reported in 2025. We expect unallocated corporate costs in the Q1 to be elevated due to the timing of stock compensation expense related to the CEO transition, but this does not have a meaningful impact on the full year. For the remainder of the year, we expect unallocated corporate costs to trend favorably because of the benefit from prior cost-saving initiatives, and performance-based bonus accruals are expected to be lower as targets are reset for the new year.

The Non-GAAP tax rate for 2026 is expected to be in the range of 22%-23%, a decrease from 24.6% in 2025. The anticipated decrease in the tax rate is primarily driven by the 2026 tax rate benefits related to the enactment of the One Big Beautiful Bill Act, or OB3, and a favorable geographic mix. In 2025, we lowered our net interest expense by shifting debt to lower interest rate geographies and by repaying debt borrowed for stock repurchases earlier in the year. At the end of the Q4, we had outstanding debt of $2.1 billion, with approximately 70% at a fixed interest rate, compared to $2.2 billion at the end of 2024.

This equated to a gross leverage ratio of 2.1 times and a net leverage ratio of 2.0 times at the end of the Q4. We expect gross and net leverage ratios will remain below 3 times after funding the KF and PathoQuest acquisitions. Total adjusted net interest expense in 2026 is expected to be in a range of $95 million-$100 million, compared to $102.1 million last year. We expect higher average debt balances in 2026 as a result of the KF and PathoQuest acquisitions, but the decrease in net interest expense reflects the full year benefit of 2025 interest rate reductions and the favorable geographic interest rate mix.

As we discussed in November, we will continue to take a disciplined approach to capital deployment and plan to regularly evaluate the optimal balance between acquisitions, debt repayment, stock repurchases, and other uses of cash. For 2026, with the deployment of over $500 million in capital for the KF and PathoQuest acquisitions, we currently intend to focus more on debt repayment and maintaining dry powder as we continue to evaluate potential M&A opportunities. We will also continue to regularly evaluate all uses of capital throughout the year, including stock repurchases. However, we currently expect the average diluted share count will be slightly higher in 2026. For 2026, we expect free cash flow will be in a range of $375 million-$400 million, representing a decrease from $518.5 million in 2025.

The decrease primarily reflects two main drivers: higher performance-based cash bonus payments due to the 2025 outperformance, which are paid in the Q1 of 2026, and deferred compensation payments related to the planned CEO retirement. Capital expenditures for 2026 are expected to be approximately $200 million, or approximately 5% of total revenue, and a slight reduction from the 2025 level of $219.2 million. This outlook reflects our disciplined approach to managing capital investments while continuing to invest strategically in areas to support client demand. A summary of our 2026 financial guidance can be found on slide 39. In conclusion, we remain encouraged by the recent demand trends and by the potential to return to organic revenue growth in the second half of the year.

We are laser focused on driving our strategy forward, including through selective and strategic M&A that aligns with our core competencies, taking decisive actions to deliver continued benefits to drive efficiency and process improvements that will strengthen our organization and enhance our flexibility as demand rebounds, and through maintaining a disciplined capital allocation approach. These actions position us well to drive long-term shareholder value creation. Finally, I want to thank Jim for his tremendous leadership and many contributions during my time at Charles River and throughout his career, and we look forward to continuing to execute on our strategy under Birgit's leadership. Thank you.

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

Thanks very much. I wanted to dig into the broader topic of NHPs. There seemed to be some, I don't know, dichotomy in the outlook and results here between RMS and DSA. Hoping you can just walk us through this and help clear it up. So, RMS is facing material headwind from lower NHP volume. We've also heard lower sales from one of your one of your competitors. But at the same time, DSA is facing a material headwind from higher NHP sourcing costs and strong demand for NHP studies.

So I'm just hoping you can walk us through some of these dynamics, the nuances between what's happening in RMS and what's happening in DSA, and then talk about, , some of the drivers of the higher sourcing costs that are impacting you in the near term. Thanks very much.

You guys wanna take that?

Yeah, happy to take it. Hi, Eric. Let me start with the RMS volume. The RMS volumes, the impact in Q4 is primarily timing. Looking for the full year, the shipments have shifted. And with that, Q4 was lighter than the year before. Looking forward, we talked about RMS volumes being a driver of less revenue in Q1. That is both timing as well as a little bit lower volumes. For our DSA business, we talked about higher sourcing costs, particularly in Q4, having some impact in Q1. We had more NHP studies coming in than we had expected in 2025 and early 2026.

So with that, we had to go to the open market and buy some NHPs at a higher price, which will have an impact on our ROI. Part of the disconnect or what you're seeing here is also the fact that we always have two sources, so an Asian source as well as a Mauritius source, and they don't always connect perfectly of what we have available and internally from our own farms versus what we have to buy on the open market. So it's really mostly timing as well as timing between the RMS business shipments when they're coming in, but also what kind of source we are needing, how quickly we're needing them, and that we had to source from the open market, if that makes sense.

What? It does. And if I could just ask a follow-up. What is the, you provide in your appendix, the NHP utilization for 2024, and you gave an update for 2025, which was pretty notable growth. Is it too early, or would you care to share your thoughts on the full year for internal demand, compared to that data point provided in 2025?

For 2026? Yeah, it's a little bit-

Yeah.

Too early. We're really just starting the year. But for 2025 compared to 2024, what you're seeing here is a higher number of NHP studies coming through, which is a little bit of mix, but also substantiate the need for this very important research model, and that this research model is here to stay for a long time, which also required us to assert our supply chain and therefore the K.F. Cambodia acquisition.

Thanks very much.

Thanks, Eric.

Great, thanks for the question, guys. So I just kinda wanna talk about the, , the backlog here and the DSA bookings. They're starting to ramp the continued strength there, but you guys also hired ahead of what was expected to be that demand. So as bookings environment, , baked within your guide, continue to improve, can you talk about your hiring needs as you continue to ramp whatever you're gonna do on the DSA to exit the year? Do you guys have enough, or should we expect some type of pickup there? Just trying to rightsize what the cost outs plus the capacity utilization and your hiring needs of what's going forward.

We from a capacity point of view have sort of two issues. We have physical capacity, which is in pretty good shape right now, so we're not optimally using our facilities, which obviously that's a goal of ours, but still, as hopefully the demand increases, we'll be able to utilize space that's already built and be able to fill that. We've been really careful for years actually, but really careful the last two or three years to get our headcount in sync with demand and with our revenue. Obviously, this is a people business, and it's more than half of our costs. And last year, , in 2025, we added some incremental people in our lab sciences building business and to fill vacant spots. So I think we're in good shape.

Senior scientific staff and study directors and people like that are in particularly, particularly good shape, and principally we're looking at direct labor. We need to bring direct labor on probably a quarter before we actually need them, 'cause there's some training associated with that. But, we're quite confident we'll be able to do that in a measured fashion to both accommodate the work and, not be a drag on our operating margins.

Got it. Kind of related to that, and this is kind of the overall with the AI fears baked within the market and particularly within your business. You kind of gave the number there from an FTE perspective of percentage of cost. But, , as you guys continue to restructure, get more efficient, talk about, , I don't think that there's AI risk, but clearly, the market doesn't agree with me. So kind of walk us through the bull case and why you aren't going to be impacted by any AI coming through, considering how much wet lab work you guys need to do.

... Yeah. So thanks for that. So we were frankly surprised at the sort of violent share price reaction to sort of the AI, AI conversation that's been going on across multiple industries, actually, for the last couple of weeks. So it is what it is. We got caught up in that. And so, , there's several things that , we'd like to say about that. AI is in NAMs, and we're focused on NAMs to the extent that the science is beneficial, the science is additive. And we view AI as an enabling technology to support our work over long term and to complement it. But we don't see it as a disruptor.

AI and so discovery has been around for a while by many of our large, , clients, so that's not new. The conversations really haven't changed at all. And so, , for us, AI and NAMS is sort of a broader, longer term evolution rather than something that's immediate. We continue to see ourselves as, , an essential and logical partner to help validate NAMS, , including AI, as they, if and when they become, , beneficial and additive, as I said. And we hope to be able to run interference in a positive way for both our clients and the regulatory agencies, , to validate these technologies, , if they're, if they're beneficial. The NAMS are basically crude right now. AI is really early.

, it is the promise of AI that we think could be beneficial to discovery, and we don't quite see it in safety. , we've had some investments in AI to virtual control groups, which we talked about in our prepared remarks, some of our scientific report writing, our sales effectiveness. , we have data scientists that are working on this. So, , we're embracing... I guess the bottom line for us is we're embracing alternative technologies sort of strategically, but the science will prevail. So the extent to which these technologies are beneficial, great, we'll use them. We think we'll use them more, we, the whole industry, in discovery to help our clients get to a lead compound faster.

Hopefully, that will have more molecules moving through preclinical tox and more molecules moving into the clinic and hopefully, more molecules being approved. So, we acknowledge it. We embrace it. We're participating in it. We actually don't see it as a threat to the company. And, if these technologies are better in any way, besides just being augmentative, , they'll be embraced by the whole industry. But definitely nothing's imminent.

Great. Thanks.

Mm-hmm.