Charles River Labs Reports Mixed Q2 Earnings Call

Charles River Laboratories Intl ((CRL)) has held its Q2 earnings call. Read on for the main highlights of the call.

The earnings call for Charles River Laboratories International presented a mixed sentiment. While the company showcased strong performance in its Discovery and Safety Assessment (DSA) segment and raised its financial guidance, it also faced challenges such as declining DSA revenue, increased cancellations, and headwinds in the Contract Development and Manufacturing Organization (CDMO) business. The highlights and lowlights were balanced, reflecting both optimism and caution.

Strong DSA Performance

The DSA business of Charles River Laboratories exceeded expectations with mid-single-digit year-over-year increases in both gross and net bookings in the second quarter. This resulted in a solid 6% and 13% increase in first-half gross and net bookings, respectively, showcasing the strength of this segment.

Increased Financial Guidance

In light of the second-quarter outperformance and favorable foreign exchange rates, Charles River Laboratories raised its full-year revenue and non-GAAP earnings per share guidance. The non-GAAP earnings per share guidance increased by $0.55 at the midpoint, reflecting the company’s confidence in its financial trajectory.

Record Operating Margin

The company reported a record operating margin of 22.1%, an increase of 80 basis points year-over-year. This improvement was driven by cost savings from restructuring actions and operating leverage from better-than-expected first-half sales volume.

Positive Update on NHP Supply

A significant development was the clearance of Non-Human Primate (NHP) shipments from Cambodia by the Department of Interior and U.S. Fish and Wildlife Service. Additionally, the U.S. Department of Justice is no longer investigating, providing greater flexibility for future operations.

Solid Free Cash Flow

Free cash flow increased to $169.3 million in the second quarter, driven by higher earnings and improved working capital. The company raised its full-year free cash flow outlook to a range of $430 million to $470 million.

DSA Revenue Decline

Despite the strong performance in bookings, the DSA segment revenue was $618 million in Q2, marking a 2.4% decrease year-over-year on an organic basis. This decline was attributed to lower revenue for both discovery and safety assessment services.

Increased Cancellations

The DSA segment faced increased cancellations in both client segments, particularly in longer-term post-IND work. This impacted the net book-to-bill ratio, which dipped to 0.82x in the second quarter.

CDMO Revenue Headwinds

The CDMO business is expected to face revenue and margin headwinds in the second half as revenue from one commercial client will not repeat, impacting the overall manufacturing segment growth.

Higher Tax Rate

The non-GAAP tax rate increased to 22.7% in the second quarter due to changes in U.S. tax legislation. This will impact future earnings despite short-term cash tax savings.

Flat Manufacturing Revenue Outlook

The manufacturing revenue is expected to be essentially flat on an organic basis for the year, with a slowdown in the Biologics Testing business due to project delays.

Forward-Looking Guidance

Looking ahead, Charles River Laboratories announced an increase in its financial guidance for the year, driven by strong demand in its DSA segment and favorable foreign exchange movements. The company raised its 2025 organic revenue guidance by 150 basis points to a 1% to 3% decrease and increased its non-GAAP earnings per share guidance by $0.55 at the midpoint, now expected to be between $9.90 and $10.30. The DSA backlog ended the quarter at $1.93 billion, reflecting a stabilizing demand environment, particularly from global biopharmaceutical clients.

In conclusion, the earnings call for Charles River Laboratories International highlighted a balanced sentiment, with strong performance in certain segments and challenges in others. The company’s increased financial guidance and strategic developments provide a cautiously optimistic outlook for the future.