Charles River Laboratories International, Inc. 2026 Q2 Earnings Call

This morning, I am pleased to be joined by Birgit Girshick, our Chief Executive Officer, and by Glenn Coleman, our Executive Vice President and Chief Financial Officer. They will comment on our results for the second 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 be accessed on our investor relations website. The replay will be available through next quarter's conference call. I'd like to remind you of our safe harbor.

All remarks that we make about future expectations, plans, and prospects for the company constitute forward-looking statements under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated. During this call, we will primarily discuss non-GAAP financial measures, which we believe help investors gain 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 the reconciliation on the investor relations section of our website. I will now turn the call over to Birgit Girshick.

Thank you, Todd, and good morning. Today, I would like to discuss the progress that we made during the second quarter, both financially and on our refreshed strategic framework, Pathway of Purpose. I'm pleased to report that we delivered on our second quarter financial targets, exceeding our prior outlook for the quarter, and that we are raising our financial guidance for the year. We continue to remain focused on execution, on achieving our financial targets and driving increased shareholder value, as well as executing on our Pathway of Purpose strategy, which includes working to modernize our company and the industry, strengthening our world-class scientific portfolio, and offering a customized client-centric approach to drive growth. Execution of our Pathway of Purpose strategic initiatives and our financial goals will be the key to our future success.

Let me now provide you with the recent highlights that demonstrates our progress on our Pathway of Purpose initiatives, as well as our second quarter performance. First, we were encouraged that the biopharmaceutical demand environment continued to strengthen in the second quarter, particularly in the DSA segment. The DSA net book-to-bill rose to nearly 1.2 times in the second quarter, making this the third consecutive quarter that the DSA net book-to-bill has been above one time and also the highest level achieved in nearly four years. Our constructive view was also supported by a return to organic revenue growth of 0.1% for the total company, which marks the first time that revenue has improved organically since the third quarter of 2023. We firmly believe these trends positioned us well to drive higher organic growth during the second half of the year.

As part of our efforts to further deepen client relationships, in June, we announced a unique collaboration with Eli Lilly's TuneLab drug discovery platform. In support of Lilly's goal to advance R&D modernization efforts, we will provide our non-clinical or reg lab testing expertise to help build and optimize Eli Lilly's AI and machine learning drug discovery model. We believe this type of collaboration demonstrates that the future state of drug discovery and development will require traditional in vivo and in vitro solutions, even when integrated with AI or other in silico approaches, to help enhance the speed and scientific data needed to support our clients' R&D programs. Charles River is a scientific partner that is uniquely positioned to be able to integrate traditional in vivo, in vitro, and new innovative capabilities into one comprehensive solution for the biopharmaceutical industry.

We are also utilizing new technologies, including AI, to modernize and strengthen our own scientific portfolio, including an enhanced digital pathology solution that delivers AI-enabled end-to-end workflows designed to improve study turnaround times and increase pathology's efficiency. With over 140 trained pathologists on staff, pathology always has been one of Charles River's greatest strengths, and this enhanced digital solution will drive both internal operating efficiency and greater speed for our clients' programs. Our goal for clients that utilize our fully integrated digital pathology solution will be to cut at least one week from standard pathology timelines. As I discussed in detail last quarter, we completed the divestitures of certain European discovery services sites in May 2026, as well as the CDMO and cell solutions businesses.

The partial quarter benefit from the divestitures was one of the drivers of the 420 basis points of sequential operating margin improvement in the second quarter to 20.5%, and helps us refine the portfolio to create a more streamlined offering focused on our core competencies in regulated testing solutions. We are also continuing to invest organically in our scientific capabilities to support our future growth and accommodate more of the testing requirements for our clients' therapeutic programs, including in the area of lab sciences and specifically bioanalysis. Demand for lab science services has been growing nicely over the past five years, driven by large molecule bioanalysis, biomarkers, and additional testing requirements in both regulated and non-regulated programs, including in the clinical development phase. To support this growth, we recently embarked on an expansion to add bioanalytical laboratory capacity at Heriot-Watt University's Research Park in Scotland.

This expansion, which is one of five ongoing lab sciences expansions globally at Charles River, will also offer an opportunity to partner with Heriot-Watt University on the talent pipeline to further support our future growth in bioanalysis and in the region. My final highlight demonstrates how our broader strategy is working to support our client-centric approach. We recently announced a collaboration with Arovella Therapeutics to provide next-generation sequencing or NGS services to accelerate progress toward their alternative cancer treatment approaches using cell and gene therapy. This collaboration shows that by strengthening our scientific capabilities with an innovative in vitro NGS testing solution through our recent acquisition of PathoQuest, we are able to deepen client relationships and expand the possible opportunities for collaboration. In today's dynamic marketplace, there are abundant opportunities to further differentiate Charles River from the competition.

We stand alone with our strong financial profile, refreshed strategic vision, and scientific expertise focused on our core regulated testing capabilities that span early-stage development through the clinic and beyond. Clients are expecting their scientific partners to help them drive greater innovation, speed, and efficiency. We are making great progress under our Pathway of Purpose strategic framework to become an even more modern, client-centric organization that will operate more simply with more agility and enhanced digital connectivity. The biopharma demand environment improves, this will enable us to become an even more essential partner to our clients, work with them across our differentiated portfolio, and gain a greater share of their R&D spend. Let me provide a brief update on the end market trends. I mentioned, we believe the biopharma demand is continuing to sustainably improve.

Small and mid-sized biotech clients are leading the trend as a result of the invigorated funding environment demonstrated by a trailing 12-month funding of nearly $100 billion, which is just shy of peak levels achieved during the pandemic. We continue to monitor for changes in the funding environment, whether it be from interest rates and inflation pressures or other macroeconomic factors, funding activity has been resilient and broad-based to date, including a notable increase in IPO activity as well as solid VC and follow-on funding. Revenue from small and mid-sized biotechs was essentially flat organically in the second quarter, which is an improvement from declines in recent quarters. A reminder, there is a natural lag of several quarters between studies are booked into backlog and work their way through to revenue.

We are just beginning to see the benefit from improved DSA booking activity from late last year. Therefore, the strengthening booking activity that we have experienced through the middle of this year gives us greater confidence that we will generate incremental organic revenue growth starting in the third quarter on both a consolidated basis and in the DSA segment. Global biopharmaceutical clients were also a significant contributor to the improving DSA demand KPIs in the second quarter. As I mentioned last quarter, most of our global biopharma clients have progressed through restructuring and pipeline reprioritization activities over the last several years. Demand trends have been improving gradually over the last 18 months with continued evidence this year. Revenue from global biopharmaceutical clients continued to increase organically in the second quarter. I will now provide some highlights from our financial performance before Glenn provides additional detail.

First, we are pleased that our second quarter results exceeded our prior outlook for revenue on non-GAAP earnings per share. Second quarter revenue increased 0.1% on an organic basis compared to our prior outlook of a low single-digit decline. In addition to the solid top-line performance, the operating margin increased 420 basis points sequentially to 20.5% due to two primary factors. First, less pressure from several discrete margin headwinds that impacted the first quarter as we had anticipated. Second, a partial quarter benefit from the divestitures that enabled the manufacturing segment's operating margin to jump to 37.8% in the second quarter.