CHARLES RIVER LABORATORIES INTERNATIONAL, INC. Q2 2025 earnings call

Good morning and welcome to Charles River Laboratories' Second Quarter 2025 Earnings Conference Call and Webcast. This morning, I am joined by Jim Foster, Chair, President and Chief Executive Officer, and Flavia Pease, Executive Vice President and Chief Financial Officer. They will comment on our results for the second quarter of 2025. Following the presentation, they will respond to questions. There is a slide presentation associated with today's remarks, which will be posted on the Investor Relations section of our website at ir.criver.com. A replay of this call will be available beginning approximately 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 from operations prepared in accordance with GAAP. In accordance with Regulation G, you can find the comparable GAAP measures and reconciliations on the Investor Relations section of our website. I will now turn the call over to Jim Foster.

Thank you, Todd, and good morning. We reported another solid financial performance in the second quarter, meaningfully exceeding our prior outlook, due primarily to favorable DSA results. The DSA business benefited from the strong booking activity that was recorded in the first quarter, and the corresponding lift in first half results is the primary driver leading us to raise our financial guidance for the year. To a lesser extent, favorable movements in foreign exchange also contributed to the outperformance in the second quarter and to our increased outlook for the year. We have continued to see clear signs that the demand environment is stabilizing. Over the past several quarters, global biopharmaceutical demand trends appear to have bottomed, and we believe they are beginning to slowly move upward as more clients have progressed through their restructuring activities and getting back to work.

The biotech environment is stable but mixed, with smaller biotechs still being more cash constrained, due in part to the slowdown in biotech funding, whereas mid-sized biotechs are performing better as many are able to support their own R&D programs without external funding. DSA demand trends, coupled with constructive discussions with our biopharmaceutical clients, have also reinforced our belief that the preclinical demand environment is stabilizing. In the second quarter, both gross and net DSA bookings increased at mid-single-digit rates year-over-year, resulting in a solid 6% and 13% increases in first half gross and net bookings, respectively. While this bookings performance reflected an improving demand environment in the first half, the net book-to-bill dipped back below one times in the second quarter to 0.82 times, which we had anticipated and was largely driven by a sequential increase in cancellations and the DSA revenue outperformance.

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

While we have not factored in further demand improvements this year, it is encouraging that the overall demand environment shows signs of stabilization. To date, we have not observed any meaningful impact on client spending patterns stemming from tariffs or drug pricing concerns. Additionally, the effects of government funding reductions, including at the NIH, have been minimal, which I will address further in the context of RMS results. Before I provide more details on these trends, let me provide highlights of our second quarter performance and updated outlook for the year. We reported revenue of $1.03 billion in the second quarter of 2025, a 0.6% increase over last year, with nearly half of the revenue outperformance driven by foreign exchange. On an organic basis, revenue declined 0.5%, driven by a low single-digit decline in the DSA segment, partially offset by low single-digit revenue increases in the RMS and manufacturing segments.

By client segment, revenue for small and mid-sized biotech clients improved slightly for a third consecutive quarter. Revenue for global biopharmaceutical clients remained below last year's level, but did improve sequentially from the first quarter. Revenue for global academic and government clients increased at a mid-single-digit rate in the quarter. The operating margin was 22.1%, an increase of 80 basis points year-over-year, with margin improvement across all three segments, primarily reflecting the benefit of cost savings from our previous restructuring actions and operating leverage from better-than-expected first-half sales volume. You may recall that we are on pace to generate a run rate of over $175 million in cost savings this year. In addition, the CDMO business benefited from revenue and payments from commercial clients, most of which will not repeat in the second half of this year, as we previously disclosed.

Earnings per share were $3.12 in the second quarter, an increase of 11.4% from the second quarter of last year. Operating margin improvement was the primary driver of this robust earnings growth. Most of the earnings outperformance versus our prior outlook was operationally driven, with an additional $0.12 benefit from a lower-than-expected tax rate. Flavia will provide more details on the tax rate shortly, including the second half tax headwind from the new U.S. legislation. We are raising our revenue and non-GAAP earnings per share guidance, largely to reflect the outperformance in the quarter. We are increasing our 2025 organic revenue guidance by 150 basis points to a 1%-3% decrease and raising our non-GAAP earnings per share guidance by $0.55 at midpoint to $9.90-$10.30. In addition to the DSA-driven operational outperformance, full-year guidance will benefit by $0.14 from more favorable FX rates versus our May outlook.

Below-the-line items will largely offset each other, as the second half tax headwind that I just mentioned will be offset by lower interest expense for the year. I will now provide details on the second quarter segment performance, beginning with the DSA segment. Revenue for the DSA segment was $618 million in the second quarter, a 2.4% decrease year-over-year on an organic basis, driven by lower revenue for both discovery and safety assessment services. Lower sales volume was partially offset by a favorable mix of higher price, longer duration, and specialty studies again this quarter. Consistent with our commentary in May, the favorable mix does not signal a broader improvement in the pricing environment, as we continue to believe that spot pricing remains stable overall.

Moving to the DSA demand KPIs, the DSA backlog was $1.93 billion at the end of the second quarter, a slight decline from $1.99 billion last quarter. As I mentioned, gross and net bookings both improved at mid-single-digit rates year-over-year in the second quarter, but declined sequentially, primarily for global biopharma clients. The sequential decline in the net book-to-bill was not a surprise. We had previously said that global biopharmaceutical clients started the year strong, with a resurgence of booking activity for projects that they had delayed or deprioritized at the end of last year and wanted to start quickly. However, we did not expect the first quarter booking strength to continue through the remainder of the year.

Thank you, Jim, and good morning. Before I begin, may I remind you that I'll be speaking primarily to non-GAAP results, which exclude amortization and other acquisition-related adjustments, costs related primarily to restructuring actions, gains or losses from certain venture capital and other strategic investments, and certain other items. Many of my comments will also refer to organic revenue growth, which excludes the impact of acquisitions, divestitures, and foreign currency translation. We are pleased with our second quarter performance, which included revenue and non-GAAP earnings per share exceeding the outlook provided in May. This outcome was primarily driven by operational improvement from better-than-expected DSA results and, to a lesser extent, a $0.12 benefit from lower tax rates and a $0.03 benefit from favorable FX rates in the quarter. As a result of the second quarter outperformance, we're raising our revenue and non-GAAP earnings per share guidance.

We now expect full-year reported revenue will decline 0.5%-2.5%, and organic revenue will decline 1%-3%. Non-GAAP earnings per share are now expected to be in a range of $9.90-$10.30. The $0.55 guidance raise for 2025 at midpoint is expected to be driven by two main components: operational outperformance in the second quarter and a favorable movement in foreign exchange rates from our forecast in May. As you may recall, we forecast FX based on recent bank forecast rates rather than current rates. Based on the continued weakness of the U.S. dollar, we now expect foreign exchange will represent an approximate 50 basis point tailwind to 2025 revenue compared to our prior outlook of an approximate 1% headwind. This 150 basis point revenue benefit translates into about a $0.14 contribution to EPS, with most of this EPS benefit in the second half of the year.

Our outlook for the tax rate and interest expense have also been updated since May, but the net EPS impacts will largely offset each other. I'll discuss each of these items shortly. Our updated EPS guidance implies that the second half operating margin will be below the first half level of 20.7%. This is largely for reasons consistent with our expectations at the start of the year, and the gap was further widened by our first half outperformance. For the year, we now expect the consolidated operating margin will be in a range between flat and a 30 basis point decline, which represents an improvement from our prior expectations of a 20-50 basis point decline due to our outperformance to date and operating leverage from the increased revenue outlook. Our full-year operating margin outlook also includes several headwinds, which are occurring in the second half of the year.

The first headwind is in the CDMO business and primarily relates to commercial cell therapy revenue that will not repeat in the second half since one commercial relationship has ended. The CDMO revenue generated from this client was sizable in the first half at approximately $20 million. The second is hiring in the DSA segment, where we need more people in order to accommodate the current and forecasted demand. As Jim mentioned, additional DSA staffing in the second half represents an approximate $10 million cost headwind versus the first half. Finally, the timing of annual merit increases for our employees was at the beginning of July this year in most geographies, which creates a headwind when comparing to the first half. To be clear, the CDMO and merit timing-related headwinds were known and contemplated in our initial outlook.

Our decision to begin investing back into DSA headcount was a result of the improved demand trajectory this year and to appropriately position staffing levels for the remainder of 2025 and as we move into next year. By segment, our updated revenue outlook for 2025 can be found on slide 33. Aside from FX modifications to the reported growth rates, the only change to our segment revenue outlooks is that, due primarily to the second quarter outperformance, we now expect DSA organic revenue to decline at a low to mid-single-digit rate, better than our prior outlook of a mid-single-digit decline. As a reminder, this does not require an improvement in our net book-to-bill metrics. For the RMS and manufacturing segments, those outlooks remain unchanged. Unallocated corporate costs total $60.7 million in the second quarter, or 5.9% of revenue, compared to 4.9% of revenue last year.

The increase was primarily due to higher performance-based compensation. The higher bonus accruals will also result in an incremental earnings headwind in the second half, which is the opposite impact of last year when bonuses were a tailwind. As a result, for the full year, we now expect unallocated corporate costs will be at approximately 5.5% of total revenue, or the upper end of our prior outlook of 5%-5.5%. I'll now provide an update on the non-operating items, starting with our favorable outlook for interest expense and our higher tax rate expectations for the year. As I mentioned, these items will largely offset each other and not have a meaningful impact on our EPS guidance. Total adjusted net interest expense was $28.9 million in the second quarter, representing an increase of $2.4 million sequentially.

This increase was primarily driven by the impact from short-term borrowing to facilitate the first quarter stock repurchases. For the full year, we now expect total net interest expense will be in a range of $100 million-$105 million, or approximately $7 million-$12 million lower than our prior outlook. This improvement will primarily be a result of our diligent capital planning activities, including shifting debt to lower interest rate geographies. At the end of the second quarter, we had outstanding debt of $2.3 billion, with approximately 65% at a fixed interest rate compared to $2.5 billion at the end of the first quarter. As a result of that repayment, the growth and net leverage ratios also declined to 2.3 times at the end of the second quarter. The non-GAAP tax rate in the second quarter was 22.7%, representing an increase of 160 basis points year-over-year.

The increase was primarily due to the impact from stock-based compensation. However, the second quarter tax rate was more favorable than our prior expectation, benefiting EPS by approximately $0.12 because of the timing of the enactment of certain global minimum tax provisions, as well as an increase in foreign tax credits. For the full year, the tax rate will now be an earnings headwind that had not been anticipated at the beginning of the year. This will more than offset the second quarter favorability because of U.S. tax legislation changes enacted on July 4th as part of the One Big Beautiful Bill Act, or OB3, which allows for accelerated bonus depreciation and expensing for domestic R&D expenditures. These changes will increase the effective tax rate in the short term, but generate over $40 million of cash tax savings this year and therefore increase free cash flow.

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

Hi guys, thanks for the question and congrats on the quarter. I was just wondering if you could sort of talk about the current demand environment. Thanks for the commentary about the differentiation between the different biotech segments, that was helpful. Maybe could you hit upon sort of how pharma is thinking about the current demand environment and then anything that you've seen in July and early August would be very helpful. Thank you.

Sure, we will stay away from July, but suffice it to say that that's baked into our guidance going forward. We're pleased with the demand situation. It's definitely stabilizing for pharma. We feel that some of the demand trends have bottomed. Revenue units up sequentially, proposals are up year-over-year and sequentially, and there were cancellations, but that's sort of a commentary on longer-term post-I&D work for some of these programs. We had this big resurgence of bookings in the first quarter having to do with projects that clearly were delayed at the end of 2024. We got a bunch of bookings in the first quarter, which helped us significantly in the second quarter, but won't necessarily repeat. Pharma feels stable and improving, and a lot of the improvements and changes in their cost structure and drug development sort of product lines have been skinny back.

Biotech is just a tale of two cities. Also, the demand seems stable, but it's a bit mixed because the smaller companies continue to be cash constrained until the IPO market and secondary market opens up. That probably is a continuing scenario. I'm not probably, I think definitely that's a continuing scenario. The mid-tier biotech companies seem to be performing better and seem to have enough money to sort of prosecute and develop the drugs that they have in their portfolios. Revenue improves slightly year-over-year for the third consecutive quarter. Also, cancellations were also up pretty much for the same reasons. I think what most places, if you take a look at the DSA net book-to-bill, it's had a steady upward trajectory for the last 18 months. I guess the bottom line is that we have stabilization across all client bases.

Pharma seems stronger right now just given their access to capital. For instance, aspects of biotech are strengthening as well, but we have to watch the ones that are cash constrained. I think we've called it well. There's a fair amount of uncertainty out there in the marketplace and with the government and obviously with access to capital as well. We feel good about our guidance for the balance of the year.

Got it. No, that's very helpful. Maybe just one further clarifying question. You mentioned that for the new revenue guide, you don't need book-to-bill to go back above one. Is it fair to say that it should be sort of at current levels going forward in terms of how you're thinking about that, or it's fair to say that maybe we just look at sort of the general seasonality and sort of improved DSA revenue performance, and that's kind of the way to think about it in the back half of the year?

Want to take that, Flavia?

Sure. Hi, Elizabeth. I think you should think of the current zip code for the first half as continuation towards the second half. I know you talked a little bit about the second quarter being seasonally lower, and we did see that for the last two years, and then things rebound a little bit. I think, overall, we have seen this steady improvement for the last 18 months, as Jim said, right? We're not, as you pointed out, expecting book-to-bill to return to above one to meet our guidance. To stay within, over the last 18 months, we've been between 0.8 and 0.93, excuse me, for the first half of this year. In that general range is, I think, what you can continue to expect.

Got it. Thank you. Very helpful.

Thanks very much. Let's see here. I'm toggling a couple of things this morning, so hopefully these aren't too off base. On the CDMO, I'm just wanting to dissect the 2Q performance. It feels like maybe there's some extra twist with the revenue that came in in the quarter. I know you quantified one client at $20 million, but was it just that there was particularly high margin on that amount, like less work, but a final payout? I'm just hoping you can help us understand the actual impact of the CDMO performance in the quarter versus what's expected in the back half. If I might, is there any technical impact of U.S. Fish and Wildlife clearing the Cambodian NHPs? I mean, what actually happens at this point now that that has occurred? Are there financial benefits or other operational changes that come as a result of that? Thank you.

Thank you very much.

Let me take the last part first. Obviously, we're thrilled with this, and we're thrilled that we've been able to evidence the fact that the alleged concerns that anybody had with us were without merit. What it does is it gives us an enormous amount of flexibility to utilize animals that were already in the country for work, but also to take Cambodian animals into wherever we would like, including the United States. You know, NHP, access to NHPs, sufficient numbers from multiple countries is an important aspect of managing the business given the proliferation and increase in NHP toxicology work. Cambodia is a big source of high-quality NHP. We're really pleased to have this sort of, I don't know, regulatory yoke lifted from our necks here.

I think it provides us a great facility to do better planning for not just the back half of this year, but for next year as well. We're thrilled with this noise, with this information from these agencies. I'll let Flavia take the first half of your question.

Yeah. Hi, Eric. I'll take on the CDMO. So just a couple of things, the $20 million, as you pointed out, that's the wind-down of revenue for the first half, not just the second quarter. That's what will become the headwind in the second half of the year as we don't, we'll no longer be manufacturing for this client. Yes, the margin on this work throughout the first half is, I would say, it's a little bit higher than the normal margin. The second quarter, as well as the first half of the year in CDMO, was a little bit buoyed by the continuation of this work as we wind down the client. I think we also talked about there was revenue and also a payment that we received, that payment in the second quarter only, that also helped the margin in the second quarter.

Did you quantify that payment, Flavia?

We did not. We did not.

Okay. Thank you.

Hi. Thanks for taking the questions. I'll follow up on Eric. Cadence-wise, Flavia, do I understand on the CDMO, you quantified in the prepared remarks that the headwind to full manufacturing solutions for this year is 500 basis points. I calculate that to be about $38.5 million. Is it right to think that something a little south of $60 million is your comp number from last year? You got $20 million in the first half. You don't have anything in the second half. That overall headwind for the year is that $38 million-$39 million. Is that the right kind of framing for this single CDMO client that you're losing?

Yeah. I would just clarify a couple of things. Yes. In the beginning of the year, you might recall we talked about a $40 million headwind from changes into our CDMO client base. We spoke about two commercial clients, one that had terminated the relationship with us, and then another one that we were adjusting the level of work that we were going to be doing for them. On that second client, I think in Jim's prepared remarks, we talked about doing some level of work for them this year. That's what adjusted our original guidance. I think to your point, Dave, we said about 500 basis points, and now we said slightly below 500. It's a little bit better. Your math that you just described is in the right zip code.

Yeah. Back to DSA and thinking about kind of the cadence of revenue, Jim, I appreciate the kind of six months sequential progression here. I guess the factor that kind of supports the near-term revenue is really conversion. In your preclinical history, backlog conversion has varied quite widely. It went down a lot when you were booking so much during and immediately after the pandemic. It's kind of on its way back up now. This comment that you made about some cancellations in the longer-term study arena probably actually serves to increase the burn rate in the near term as well. I just wondered, the bottom line question here is where can that go, both near term and long term, I guess, to support a revenue base despite a backlog decline. Thanks.

We think the backlog is in a pretty robust place. It's about 10 months, and it's been sort of stable there for a while. That should allow us to continue to draw from the current backlog to replace studies that either slip or cancel. Cancellation rate is sort of an interesting one. You don't get to sort of pick and design the studies in advance. What we had is a fairly large number of really complex, large dollar studies that typically are connected with sort of the later stage phase of the development process. That can be offset by other types of studies, things like in general toxicology and earlier studies than these late stage ones. I think that we are in good shape from a physical point of view. As we indicated in the prepared remarks, we actually are performing meaningfully ahead of our operating plans.

We actually have to hire some people now to make sure that the work is done both in a timely and high-quality fashion. It feels like pharma has strengthened meaningfully and is sort of getting through some of the issues that they have to protect themselves against the patent cliff and that bigger biotech companies are stable as well. When we begin to see capital markets opening up for the smaller folks, I think that'll also enhance demand. We feel that both the backlog and our current capabilities are in a pretty good place right now.

Got it. Thank you.

Hey guys, thank you for taking the questions. Jim, maybe a follow-up on that. To your point, I think you're feeling a little bit better in terms of the hiring piece. You've seen a lot of these cycles. I guess just the confidence that, you know, stepping in on this hiring, the confidence that we are kind of turning the corner here. I think to some of the other questions, if you have this book-to-bill of, let's call it, 0.9 area for the rest of the year, does that support DSA growth next year? Just trying to square up what book-to-bill, if that's the right metric, is necessary to think about launching to positive growth next year, just given your hiring and, again, I'm pretty constructive, particularly on the large pharma piece.

We'll stay away from next year because we have a lot more this year to accomplish. Both the book-to-bill and the overall demand curve, I think, are improving in the right direction. We're not getting ahead of ourselves on the hiring, if that's sort of the essence of your question. We're really catching up with where we need to be given the current level of activity. These will be our operating plan. This is very much a totally a people-related enterprise that we're engaged in, and the quality of the work and the speed of the work is essential. I think the things that will help the growth and development next year are access to capital for the biotech folks and some settling down of some of the things that are going on in Washington, I think, will be helpful as well.

As we said, we do think that pharma is moving slowly but nicely in the right direction, so is large biotech. The trajectory is positive, but we'll stop short of trying to give any indications of what we think the growth rate for DSA might be in the next fiscal year.

Understood. Okay. On the pricing side, it seems like it continues to be stable, and you guys sound pretty good on that. Can you just talk through that and then what maybe it's one for Flavia on the back end, what that implication means for margins? Certainly understand the hiring piece, moving the margins in the second half, but maybe just the moving pieces on margins between pricing, headcount, etc., would be helpful. Thank you guys.

The price, particularly in DSA, is also stable. Spot pricing seems to be pretty solid. We definitely have competitors. I would say most, if not all, of our competitors are using the price card to compete with us. Sometimes those are very small companies that just don't have any choice but to go to where the lowest provider is. Having said that, I think anybody that can afford it and really wants speed, quality, and regulatory prowess will work with us. The mix seems to be enriching nicely. We'll use price intermittently and as necessary to either protect or take share. It feels like there is reasonable stability in the marketplace given the fact that capital markets are a little bit sluggish and demand has been off for a while. That seems to be coming back.

We need to distinguish ourselves on our science and the quality of our work and on geographic proximity more than anything and sharpen our pencils periodically.

I'll add on the price. I think what we have seen in the first half, as we said, especially in the DSA, was mix favorability that has helped with the price-to-mix equation. Price has been stable to slightly better than we anticipated coming into the year because of mix. Again, as we said in Q1 and again in Q2, we don't count on mix being favorable. You know that can play into a little bit of the margin dynamics that you described, Patrick, in the second half. Spot price is stable at this time, and mix has been what has enhanced the price-mix dynamics in DSA.

Great. Thank you for taking my questions. You noted the higher cancellations this quarter are more focused on longer-term post-I&D work. Can you just elaborate on what's driving that? What sort of margin differential in the work that's getting canceled looks like? How should we think about this dynamic moving forward? Do you expect that to continue in the second half?

Not a huge difference in margin. Both the price and the margin profile for different types of work, both earlier and later, are often comparable. Some of the specialty work has perhaps slightly higher margins and is a little less competitive, but not significantly so. It's tough to predict how long this will continue. It seems to be just a point in time. It's very much the nature of the bolus of work that we had booked in the quarter that you don't necessarily get the same type of work to book the next quarter or the quarter after that. It's just the way the studies fall. I don't think it portends really much of anything. It's prioritization of portfolio by our clients. It's what they have ready. It's what they are moving, emphasizing more work in the clinic, what they're trying to push forward much more quickly.

We will obviously continue to watch that and provide clarity on that. I don't think this is something that will continue.

Got it. That's helpful. Then just on the large pharma piece, last week we saw the administration set a 60-day deadline for pharma to implement MSN pricing. There is noise around tariffs. You talked in your prepared remarks about not really seeing any impact on either of these dynamics from pharma company spending currently. Just on the forward outlook, how should we think about potential headwinds here for large pharma demand? Thank you.

Yeah. We've tried to be prudent and thoughtful on what our prognosis is for the balance of the year, given the significant amount of uncertainty in the world and in the country, particularly some of the things coming out of Washington with regard to drug pricing. What will the NIH do or not do going forward? What will the FDA do or not do going forward? As we said in our prepared remarks, we have had a minuscule adverse impact from any of this so far. We're not really hearing about the tariffs from our clients. That doesn't mean that won't change. We've had a very small amount of NIH work that we know has been canceled, but we are hearing about that fairly often from particularly academic clients that they do have concern about when the next shoe will fall.

We believe that our guidance accommodates for things to be rougher and that we've been thoughtful and prudent about that. Probably if the shoe does fall in any of the sort of feed, like I said, I just outlined, likely to have a greater impact on us in 2026 than it would for the balance of this year.

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

Yeah. Thanks for taking the question. Maybe just touching on the margins in the back half, just to make sure I'm understanding really sort of the headwinds as we think about it. Is it really just, you know, one, in DSA, we have some headwinds from extra hiring? I would imagine that's a little bit of a temporary issue, you know, as you kind of ramp up ahead of expected demand. Then, secondly, we just had better margins in CDMO in the second quarter, which don't persist. It's really more of a kind of going back to what maybe a more normalized margin for CDMO is. Just want to make sure, is there anything else that I'm missing or as I think about sort of, you know, sort of the factors driving that as we think about first half or the second half?

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

Is there any benefit to DSA margins with the DOJ investigation concluding, or were any of those legal expenses considered one time and not really in the numbers?

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

Okay, that's helpful.

They will be treated as a normal cost. Yeah.

Right. Okay. Appreciate it. Thank you.

Hey, good morning. Thanks for taking our question. Joe, just a little bit of a technical one here on DSA. You mentioned that the outperformance was driven by strong bookings activity in the prior quarter. I think something that kind of knew at the time of the first quarter earnings call. I'm kind of wondering how that exactly drove the outperformance in the second quarter. Is it just that that work burned faster than expected, or is there something else beyond the strong bookings in the first quarter that helped explain why DSA outperformed in Q2?

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

Okay, thank you.

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

Understood. Thanks, Flavia. That's helpful. Maybe just going back to one more on the headcount growth and wondering if you could put some numbers around kind of how you're thinking about headcount growth in total for this year and then whether or not it's fair to think about, you know, headcount.

Growth in DSA is a reasonable proxy for that segment growth in 2026.

I don't think we can necessarily put numbers around that. We have to size our headcount with current demand and anticipated demand for the rest of the year. I think we've done that well over the last decade. We had areas of significant high growth where we had to get ahead of it, and we obviously had some workforce reductions. We're being very careful about adding it back. We're gladly optimistic that we're seeing the demand stabilize across our client base and a little more pronounced in pharma. We want to be able to react relatively quickly as the demand improves. It feels like an appropriate and thoughtful way to address headcount. It's the principal limiting factor. I think our space is in a good place to accommodate more work, but we simply can't even contemplate taking it on without a sufficient number of people.

We also have to get them in early enough to train them. A lot of people come in as unskilled labor, and it actually feels good to get on with that.

I think the quantification that we tried to provide was as a headwind to the margin in the second half versus the first half, the $10 million that we both spoke about. You have to think about it as twofold. Yes, it's a little bit higher hiring when you compare it to the two quarters, but we were also very prudent in not starting that too soon in the first half until we really felt strongly that the demand signals were robust and stable. It's a comp also of maybe we were lighter in the first half even to deliver the level of revenue that we did. We have to pick up on that and then have to deliver the continuation of that demand.

I don't think headcount is going to be up year-over-year if you ask me at the end of the year, given that we still have declining revenue. It's certainly an increase versus the beginning of the year when we came into a guidance that was much worse than we're now looking at. I think very positive signal.

Understood. Thanks again for taking our questions.

Thank you. Thanks for taking my questions. I had two that I'll ask and hop off. First, Jim, it sounds like you think the KPIs point to improving trend in DSA, but wondered if you could comment on how visibility has evolved in the business. Does it seem like visibility on bookings and cancellations is improving at all, or is it still challenging versus what you were accustomed to historically? A related question, wondering if you could comment to the drivers on the increased cancellations of the longer-term post-I&D studies and whether you've seen increased cancellations elsewhere in DSA and what the guide assumes for cancellations going forward. Do they increase or remain stable from here?

Yeah, so I think we do have better visibility and better clarity from our clients, particularly as hopefully they're coming out of a pretty cautious period, both CDMOs, both pharma and biotech. We're trying not to overread that, just given the role that we play in helping these companies get drugs into the clinic and ultimately to the market. As I said earlier, the cancellation, it's difficult to predict how that continues and rolls out to the balance of the year. We had a fair number of very large, complex, and expensive studies that seem to have canceled, different clients for totally different reasons, usually an emphasis in the clinic to slow down some of the preclinical work. The flip side of that is that we've had a lot of post-IND work for now, I don't know, probably a year or a year and a half.

General toxicology work was stronger in the quarter. That's a really good thing. You want a balance of general work and specialty work because the general work feeds into specialty work. I think that's an important indicator, perhaps. Again, we're always cautious and careful to say that our business isn't linear, that one quarter, whether it's particularly strong or particularly concerning, is not necessarily predictive. We like to see what the cadence is of our clients going forward. We're also going to move into a middle year soon where our clients are beginning to put together the 2026 operating plans, as will we. We build that up on a case-by-case basis and a zero basis with all of our clients.

We'll get a really good sense of how they're thinking about spending, what concerns they really have about Washington and the capital markets, what they're prioritizing, and whether there's any sort of meaningful swing-back balance spending between development and the clinic. When we've had quarters of extraordinary strong growth or years, we've had that balance of spending. Obviously, for these companies to have a good pipeline several years from now, they have to get back to discovery spending and get their INDs filed. We're hopeful that will happen, but we're careful what we built into our guidance for the year.

To add on the cancellations, the cancellation rate this quarter in Q2, as 1% of bookings, was not actually too dissimilar from the last 18 months. If anything, it was more that Q1 was really favorable, which we did not necessarily expect to continue. I think maybe this is another way to think about it.

Got it. Thanks, guys.

Hi, guys. This is Anna Krasinski on for Luke. Thank you for taking our questions. Just one from us, actually. Can you talk about the sales cycle timing from RFP to award and then converting into revenue? Has this changed or gotten better at all? Any color you can share? Thanks.

Any particular business that you're talking about?

Within DSA.

Talk about DSA. No, I don't think the sales cycle has changed. I think we've done some structural change of our sales organization and our marketing organization as well. I think we're much more client-centric. I think we're doing a much better job selling from discovery into safety and are much more focused. I would imagine if anything, our sales cycle is more focused and elegant and probably yielding good results. As I said earlier, we got to be careful about if and when we use price. It's typically not something that we are the first people to use as a lever, but usually in response or anticipation of our clients using that as their only lever. Look, the cadence and the speed with which we get the studies done and reports out to our clients is really everything for them.

Everyone can race to market regardless of whether the clients are large or small. We are always looking to both enhance, accelerate, and refine that process, both with the digitization of our capabilities and, as I said a moment ago, it's kind of the amalgamation of our sales force. I would say it's somewhat improved and enhanced over perhaps what it was last year.

Got it. Thanks for the color.

Great. Thanks for squeezing me in. It's a long call, so I'll just ask one. Jim, maybe sort of a big picture thematic question in terms of how we should think about book-to-bill being a leading indicator for revenue growth. What I'm getting at is, you know, traditionally, it's a pretty good leading indicator, at least the underlying bookings, and I'm focusing on DSA specifically here. You've also got the backlog sitting there, right? As you answered to an earlier question, I think it was Dave Woolley's question about the 10th month of backlog gives you some buffer.

Can you talk about how that can be used to offset the below one book-to-bill and what that might translate to next 10 months, how easy it is to convert that, just sort of, you know, given the backlog there is there, what level of book-to-bill you think is sufficient to get positive or at least, you know, flat revenue growth?

I think first off, we're pleased that the last 18 months have sort of had a steady upward trajectory of net book-to-bill. That's positive. We'd like it above one, yes, but it's really not essential to get there. The backlog, both the duration of the backlog and the nature of the backlog, is important. I would say as a sort of a basic proposition, particularly for non-NHP studies, we can almost plot in a steady backlog for something that's slipped or canceled. Not always, but almost always. It depends on whether the client has a predisposition on a particular geographic locale or not, but it's a bit easier. With appropriate notice, we can do a similar thing with the NHP studies, which tend to be more costly and more complex to set up. It does depend on the mix of the backlog.

The certainty of the backlog, as you may recall from, I don't know, it's probably three years now, the backlog, which we enjoyed for a while, actually elongated too much, and there was less of a certainty from the clients in terms of actually initiating studies. We like where it is now. While some things do cancel or slip, we typically can slot something in. I think that backlog is in a good place for us right now. As we go forward, we had several years where it was kind of six to nine months, so 10 months sort of feels like we're in the ballpark to have a sufficient backlog to be able to seed any potential gaps we have in the portfolio and make sure that we keep our people busy.

As a reminder, the preclinical space turnaround time is much shorter than clinical, right? Our cycle is more like six to nine months. I think that also plays into how you rebuild that backlog. As you start to look ahead or 10 months ahead, there's plenty of time to increase the bookings in that period as well.

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