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Charles River Laboratories International, Inc. (NYSE:CRL)

Q4 2011 Earnings Call

February 14, 2012 08:30 am ET

Executives

Jim Foster – Chairman, President and CEO

Tom Ackerman – EVP and CFO

Susan Hardy – Corporate VP, Investor Relations

Analysts

Robbie Fatta - William Blair & Company

Eric Coldwell - Robert W. Baird & Co

Sandy Draper - Raymond James

David Windley - Jefferies & Company

Tycho Peterson - JP Morgan Chase & Co

John Sullivan - Leerink Swann, LLC

Robert Jones - Goldman Sachs Group, Inc

Greg Bolan - Sterne Agee & Leach, Inc

Timothy Evans - Wells Fargo Securities, LLC

Garen Sarafian - Citigroup Global Markets, Inc

Andy Schenker - Morgan Stanley

Todd Van Fleet - First Analysis

James Kumpel - BB&T Capital Markets

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Charles River Laboratories’ Fourth Quarter and Full-Year 2011 Earnings Call. At this time, all lines are in a listen-only mode. Later there will be an opportunity for your questions and instructions will be given at that time. (Operator Instructions). And as a reminder, this conference is being recorded.

I’ll now turn the conference over to Susan Hardy, Corporate Vice President, Investor Relations. Please go ahead.

Susan Hardy

Thank you. Good morning and welcome to Charles River Laboratories’ fourth quarter and full-year 2011 conference call and webcast. This morning, Jim Foster, Chairman, President and Chief Executive Officer; and Tom Ackerman, Executive Vice President and Chief Financial Officer will comment on our fourth quarter and full-year 2011 results and review guidance for 2012. Following the presentation, we will respond to questions.

There is a slide presentation associated with today’s remarks, which is posted on the Investor Relations section of our website at ir.criver.com. A taped replay of this call will be available beginning at noon today and can be accessed by calling 800-475-6701. The international access number is 320-365-3844. The access code in either case is 231980. The replay will be available through February 28th. You may also access an archived version of the webcast on our Investor Relations website.

I’d like to remind you of our Safe Harbor. Any remarks that we may make about future expectations, plans and prospects for the company constitute forward-looking statements for purposes of the Safe Harbor Provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by any forward-looking statements as a result of various important factors, including but not limited to those discussed in our annual report on Form 10-K, which was filed on February 23rd, 2011, as well as other filings we make with the Securities and Exchange Commission.

During this call we will be primarily discussing results from continuing operations and non-GAAP financial measures. We believe that these non-GAAP financial measures help investors to gain a meaningful understanding of our core operating results and future prospects, consistent with the manner in which management measures and forecasts the company's performance. 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 to those GAAP measures on the Investor Relations section of our website through the financial reconciliation link.

Now, I’ll turn the call over to Jim Foster.

Jim Foster

Good morning. I’d like to begin by providing a summary of our fourth quarter results, before providing commentary on our business prospects. We reported sales of $291 million in the fourth quarter of 2011, an increase of 3.3% from the same period in 2010. 53rd week added approximately 4.5% to sales growth and the benefit from foreign exchange was negligible.

PCS business finished the year inline with our expectations. The RMS business delivered a very strong performance in the fourth quarter. The RMS even when adjusting for the 53rd week, most businesses in the segment reported higher year-over-year sales on a constant currency basis driving the best quarterly results since the end of 2008 and sequentially higher than the third quarter.

The majority of these businesses also reported higher operating margins, driven primarily by the increased sales volume. The operating margin declined 10 basis points from the fourth quarter of 2010, but it improved 90 basis points sequentially to 17.1%. The increase was due primarily to the PCS margins, which improved on both the year-over-year and a sequential basis with 13% cost savings actions implemented in the fourth quarter with a primary driver of the improvement.

Earnings per diluted share were $0.69 in the fourth quarter of 2011 compared to $0.60 in the fourth quarter of 2010, a 15% increase. The increase in earnings per share was driven primarily by the lower number of shares outstanding. We continued to return value to shareholders in the fourth quarter through our share repurchase plan with the purchase of approximately 844,000 shares for $25 million. This brings our cumulative total repurchases from August 2010 through the end of 2011 to approximately 18.2 million shares or more than 27% of our outstanding shares.

As you know we’re reaffirming our sales and EPS guidance for 2012. We believe that demand for regulated safety assessment will remain relatively stable, as it did in the second half of last year and that the growth drivers we discussed on our guidance call. Discovery Services, GEMS, Insourcing Solutions, and In Vitro will enable us to generate higher sales. Based on the sales increase combined with our ongoing efforts to improve operating efficiency and the benefit of our stock repurchases, we maintain confidence in the guidance we gave on December 14th.

I’d like to provide some details on the segment performance. In the fourth quarter, RMS sales were $182.4 million, 7.9% higher in constant currency in the fourth quarter of 2010 and nearly 4% higher when adjusting for the 53rd week. The largest sales contribution came from our Avian business, which had a weak fourth quarter in 2010 due to reduced product availability.

The services businesses also contributed to the sales gain, as they did for most of 2011. In combination Discovery Services, GEMS, RADS, and Insourcing Solutions gained nearly 10% and as the volume of these services increased, the operating margin also improved. The growth of these businesses adds validity to our thesis that biopharmaceutical companies are increasingly choosing to outsource services which they no longer consider core to their drug discovery and development process. And that they’re choosing to do so with Charles River, the recognized expert in Vivo Biology.

Utilizing our personnel and facilities enables our clients to create flexible drug discovery and development models, which are pivotal to their ability to increase efficiency and reduce costs.

In Vitro business, also delivered a robust performance in the fourth quarter. Sales growth exceeded 10% as clients continued their adoption of the PTS family product. We’re encouraged by the fact that the average number of cartridges per reader per day is increasing, especially with the introduction last year of the Multi-Cartridge System or MCS. As you know the PCS is a razor-razor blade model, so cartridge use is a performance indicator which we watch very closely. We believe that with this year, as anticipated, mid-year introduction of the automated MCS for use in our manufacturing clients’ central laboratories, we will be able to increase this critical indicator.

In general, fourth quarter sales of research models are seasonably soft, due to the slow down of purchasing through the holidays. Small model sales in the fourth quarter of 2011, were reasonably stable compared to the same period in 2010. But demonstrating seasonality we were lower than the third quarter of 2011 when adjusting to the 53rd week. However, fourth quarter sales were somewhat better than expected with Europe the strongest performer in the group.

For the last few years demand for our research models has maintained a steadier pace in Europe than in North America. This was likely due to two factors. The client mix in Europe, which includes more private pharma and government-funded research and the fact that we believe we’re taking market share from our largest competitor. The most significant sales decline compared with the previous year was due to the large model business.

As we mentioned in our guidance call in December, there was declining demand for large models, due to the reduction in regulated safety assessment and cost considerations. The impact on sales which was much less significant than the impact on the RMS operating margin, which including the inventory write-down was approximately 230 basis points.

This was offset by stronger operating performance from most of the RMS businesses resulting in an operating margin of 28.8% in the fourth quarter. This was a decline of just a 170 basis points from the previous year. So as you can see we made up a significant amount of the large model shortfall.

At $108.5 million PCS sales in the fourth quarter were inline with our expectation, although 3.9% below the fourth quarter of 2010 in constant currency, and slightly below the third quarter 2011 when adjusted for the 53rd week.

We continue to believe the market for regulated safety assessment is relatively stable. The sales mix is still characterized by a greater proportion of shorter term, non-regulated discovery services which we would expect in due of the shift in our clients processes to eliminate molecules earlier in the drug development process.

In addition, the ramp-up of expanded preferred provider agreement which we announced in November has been and will continue to shift the mix. We were very pleased with the PCS operating margin which increased to 13% in the fourth quarter. This represents a 100 basis point improvement over the prior-year and a 370 basis point improvement in the third quarter of 2011.

The improvement was due pointedly to cost saving actions we implemented in the fourth quarter and also to a non-income base tax adjustment. We were very pleased with the improvement in our operating efficiency and expect to make further improvements in the PCS operating margin in 2012.

I want to take a moment to discuss sales by client type. As you know, we segment our clients into three categories; global biopharma, mid-tier biopharma and together academic and government with separate sales people dedicated to each. This segmentation which we implemented at the end of 2009 has benefited us in two major ways.

First; it has enabled us to forge stronger relationships with clients and enhance our understanding of their needs. This was certainly apparent in our award of an expanded preferred provider agreement by a large global pharma last November. Through our close relationship with this client and our flexibility in structuring the partnership, we were able to craft a strategic partnership which benefits both parties. Dedicated sales people have also been a factor in identifying new opportunities in mid-tier and in academic accounts as well.

Second; due to enhanced data provided by our ERP system, our sales people have a more complete picture of all the products and services that our clients purchase from us. That knowledge has been very valuable in assisting the sales force to sell more broadly across our portfolio. In addition, the improved data provided by the ERP system enables us to identify trends in each client segment. So I can tell you with confidence that the quarterly progression of sales to global biopharma clients in 2011 remained stable for both RMS and PCS, despite declining from 2010 level.

We did see some positive sales indicators for the global biopharma segment in the fourth quarter, including the award of some longer term regulated studies in both North America and Europe. While it’s still too early to conclude that demand is returning, we believe these are indicators that some of our large biopharma clients are beginning to move molecules into the development stage.

We were pleased that sales to the mid-tier biopharma clients increased approximately 5% sequentially from the third quarter when less funding was available. Sales to academic and government clients increased more than 5% in the fourth quarter closing out a strong year for that client segment.

We believe that the expansion of our sales force, its increased focus on specific clients and its enhanced visibility with clients are enabling us to increase market share in both the mid-tier biopharma and the academic segment. We also believe that our RMS competitors’ steep price increases have reduced the price differential between our products and theirs, which has helped to enable us to make – to take market share. The powerful combination of our premium products and services at competitive prices has served us very well, particularly, at this time when academic and government clients have been spending on basic research tools and services.

We also believe that particularly in the fourth quarter when the NIH budget had been approved at a higher level than was anticipated spending by government agencies such as the NIH improved.

I like to briefly review full-year results as they pertain to the progress we made in 2011 on our four key initiatives. Sales for the full-year were $1.14 billion, an increase of slightly less than 1% on a recorded basis and a decline of 1.4% on a constant currency basis. Through cost savings actions and rigorous management of operating cost we generated an operating margin of 17.6%, 130 basis point improvement over 2010. This was our first key initiative to improve our operating margin. Our goal in 2011 was at least 17% and we surpassed that goal by 60 basis points. We expect to continue to make progress towards our longer term goal of 20% operating margin.

Our second initiative is to improve free cash flow generation. We were pleased that operating cash flow increased to $207 million in 2011, the first increase since 2007. Free cash flow also improved to $158 million slightly less than we had planned due to the timing of capital projects already underway, because we made better progress than expected, more capital was expended in the fourth quarter.

We continue to expect that our free cash flow in 2012 should be in the range of $160 million to $170 million. Disciplined deployment of capital, the third initiative focuses on the appropriate balance between share repurchases, debt repayment, investment in infrastructure and targeted acquisitions.

In 2011, we allocated the largest amount of capital to share repurchases buying back 8.4 million shares for a total purchase price of approximately $280 million. We also set a goal to reduce our leverage below three time, which we accomplished through a debt reduction of $139 million since the first quarter of 2011. Acquisitions remain an integral part of our growth strategy.

We will continue to identify and evaluate opportunities and apply rigorous metrics to our assessment and analysis of potential acquisitions. We didn’t make any acquisitions in 2011, but we do expect to make select acquisitions this year which are targeted at expanding our technical capabilities and global footprint. We’ve not included the impact of any potential acquisitions in our 2012 guidance.

Our fourth initiative, returning value to shareholders is a constant focus for us. The share repurchase points we made in 2010 and 2011 were one of the principal vehicles we use to create value and were a primary driver of the increase in EPS in 2011, which exceeded 28%. We plan to continue to repurchase shares in 2012 as a component of our initiative to increase shareholder value.

As I said in December we were very pleased with the progress we made on our goals in 2011, and expect to maintain our focus on these key initiatives in 2012. We continue to believe that the breadth of our integrated portfolio, our deep scientific expertise in, In Vivo biology, rigorous management of our business and intensive focus on these four initiatives have enabled and it will continue to enable us to manage our performance during this period when our clients are undergoing such significant change.

We're continuing discussions with a large biopharmaceutical client, we believe that many of them are at an inflection point in the complex process of redefining the drug development model.

Having worked through the reduction of therapeutic areas and elimination of molecules from the pipeline, this company is now in the process of converting from a fixed cost to a more variable cost model. They recognize that outsourcing will enable them to access scientific expertise on a flexible basis and at a lower cost and they could by maintaining the infrastructure internally. And as biopharmaceutical companies limit the number of providers with whom they do business, the opportunities for a top tier company like Charles River increase.

We believe that the expanded preferred provider agreement with a leading global pharma company is a template that we can use to assist other clients in our efforts to improve the efficiency and cost effectiveness of their drug development models. The discussions with other large biopharmaceutical companies that I referenced earlier this year have progressed. Some of them to the stage where they’re requesting references from the large clients with which we’re working, although we can’t say when the next strategic partnership will be established, we’re confident that there will be more in the future.

Our clients are increasingly viewing our broad portfolio of essential products and services and our scientific expertise as tools they can use to further their goals to bring more drugs to market sooner, at a lower cost. The demand for our non-regulated discovery services is increasing. And we expect this trend to intensify over time, contributing to an improved level of predictability in our business.

We believe that our fourth quarter results are an early indication of a modestly improving environment on a number of levels, stable large biopharma demand, increasing demand for non-regulated discovery services, better funding for mid-tier biopharma companies and consistent growth in the academic and government sector.

It’s our goal to ensure that we maintain and enhance our role as a premier provider of In Vivo biology and a strategic partner of choice. To accomplish this goal throughout this challenging time, we’ve continued to broaden our portfolio and enhance processes to improve our operating efficiency and cost effectiveness.

Our portfolio supports the entire spectrum of our clients’ In Vivo biology processes, and makes us the logical strategic partner as they increasingly choose to outsource services, which are no longer efficient or economical for them to maintain in-house. We’ll steadfastly pursue this goal to the benefit of our clients, our employees and our shareholders.

In conclusion, I’d like to thank our employees for their exceptional work, commitment and resilience, and our shareholders for their support.

Now, I’ll turn the call over to Tom Ackerman.

Thomas Ackerman

Thank you, Jim, and good morning. Before I recap our financial performance, let me remind you that I’ll be speaking primarily to non-GAAP results from continuing operations. Our reconciliation of non-GAAP items can be found in our press release and on our website.

I’ll start my comments today by reiterating that we’re very pleased with our strong fourth quarter results. While the fourth quarter performance was encouraging, we believe the underlying trends that are driving the businesses remain consistent with those, which we discussed in mid-December. As such, our view towards 2012 remains unchanged. There were three primary factors that led to the sales and EPS outperformance in the fourth quarter, RMS sales, the PCS operating margin and the tax rate.

Two of the factors, RMS sales and PCS operating margin were the drivers of the $0.69 earnings per share. RMS sales exceeded expectations in the fourth quarter, gaining almost 4% year-over-year when excluding the 53rd week.

As Jim said, this reflects broad-based sales growth across the services and other products businesses. We’ve reported two consecutive quarters of RMS constant-currency sales growth exceeding 3%, which gives us confidence in our RMS outlook for 2012 of constant currency sales growth above the consolidated 1% to 3% range.

The RMS sales outperformance drove a sequential increase of nearly $3 million to operating income, which was a factor in the EPS outperformance. However, the RMS operating margin declined by 170 basis points year-over-year to 28.8%, compared to 30.5% in the fourth quarter of 2010, and sequentially by 20 basis points.

Year-over-year decline was due almost entirely to 230 basis point margin drag from the large models business. As we discussed in our December guidance call, our large models business has been significantly impacted by challenging market conditions that led to weak results in the fourth quarter, including an inventory write-down of approximately $4 million. This write-down was included in our non-GAAP results.

We do not expect to see a meaningful improvement in the underlying market conditions for the large models business in 2012, but we do not expect or we anticipate any significant inventory write-downs going forward. Therefore, we expect the RMS operating margin to improve sequentially in the first quarter of 2012.

Another driver behind the fourth quarter earnings expansions was a notable improvement in the PCS operating margin. This 370 basis points sequential increase was due primarily to a non-income based tax adjustment of approximately $1.7 million and the benefit from the November 2011 cost-savings action.

We continue to expect that the PCS operating margin will expand in 2012 due to continued progress on process efficiency and cost management.

Finally, the full-year tax rate of 24.7% came in slightly below expectations and coupled with other income contribute approximately $0.02 to the upside in the fourth quarter. Our tax rate guidance of 26.5% to 27.5% remains unchanged for 2012.

I’ll point out that the 53rd week was factored into our prior guidance, so was not a source of the better-than-expected results. As Jim mentioned, the 53rd week contributed approximately 4.5% to fourth quarter sales growth with a similar impact on both segments.

Excluding the 53rd week, RMS sales grew nearly 4% year-over-year, PCS sales declined 8% year-over-year by approximately $2 million sequentially, which was essentially inline with prior expectations.

To help you with your modeling, fourth quarter 2011 sales were approximately $279 million, if we exclude the extra week. Despite the sales contribution, the 53rd week provided only a nominal benefit to operating income and EPS adding less than a penny to fourth quarter earnings per share. The contribution of light sales during the holiday week was almost entirely offset by a full week of operating costs.

I’ll now provide additional details on our non-operating results in the fourth quarter. Unallocated corporate costs increased by $0.5 million year-over-year, and $2.4 million sequentially to $17 million in the fourth quarter. The 53rd week contributed to both the year-over-year and sequential increases. However, the sequential increase was also driven by adjustments to certain accruals at year-end including performance-based bonuses.

We continue to expect unallocated corporate costs to be approximately 6% of sales in 2012, similar to the 2011 level. We also assume that a slightly greater proportion of these costs will be recorded in the first half of the year consistent with historical trend.

Net interest expense of $6 million was nearly flat compared to the prior-year, but declined almost $1 million sequentially as expected. The sequential decline reflects lower interest rate due to the September amendment to our credit agreement as well as debt repayment. We continue to expect net interest expense of $22 million to $24 million in 2012.

In the fourth quarter, the non-GAAP tax rate increased by 130 basis points sequentially and 260 basis points year-over-year to 24.2%. You may recall that the prior-period tax rates benefited from several discrete items that did not repeat in the fourth quarter of 2011, including a favorable international tax settlement in the third quarter of 2011, and additional R&D tax credits in Canada in the fourth quarter of 2010.

For 2012, we continue to expect tax rate will be in a range of 26.5% to 27.5% compared to 24.7% in 2011. The increase is primarily the result of an anticipated reduction in the level of R&D tax credits in Canada as well as discreet benefits in 2011 that are not expected to repeat in 2012. Free cash flow generation increased by approximately $3 million to $158 million in 2011, but was slightly below our guidance of $165 million to $175 million. This was driven by capital expenditures of $49 million, which exceeded our previous guidance by $9 million.

Higher CapEx also drove a $7 million decline in fourth quarter free cash flow to $45 million. The elevated level of capital spending in the fourth quarter was due to the timing of projects. We were able to make better progress than we anticipated resulting in higher spending in December.

As you may recall we are continuing to invest in existing growth businesses on projects such as a new RADS laboratory in Wilmington, a new Discovery facility in Finland, and a new In Vitro facility in China. Based on the progress made on these projects in 2011, we recorded capital expenditures of $27.5 million for the fourth quarter. We do not expect this higher level of spending to persist in 2012 and we’re maintaining our 2012 CapEx outlook of approximately $50 million.

We also continue to expect free cash flow of $160 million to $170 million in 2012. Our capital priorities for 2012 remain consistent with the discussion on our December guidance call. We continue to target a balance of stock repurchases, debt repayment and potential smaller acquisitions, the timing of which is difficult to predict. In the fourth quarter we repurchased 0.8 million shares for $25 million. With $116.3 million remaining on our stock repurchase authorization as of December 31st, we’ve the available capacities continue to moderately repurchase shares in 2012 and expect to repurchase approximately 1 million to 2 million shares during the year.

We also reduced our debt balance by approximately $22 million during the fourth quarter through payments on our term loan to $718 million as of December 31st. We are comfortable with our leverage ratio at the end of 2011, which was within our targeted range of 2.5 times to 2.7 times, and expect debt to modulate around this level in 2012.

As Jim discussed, we are reaffirming our sales and EPS guidance for 2012, while foreign exchange currently remains at an approximate 1% headwind to reported sales growth. FX rates continue to be volatile. We will monitor the impact of foreign exchange, but as a remainder a 5% movement in foreign exchange rates would be expected to translate into 25 million sales impact, which will then drop to operating income at approximately the margin rate in 2012. In view of the contribution of the 53rd week the fourth quarter sales results in a better than expected results, we expect the slight sequential decline in first quarter results. The sales outlook reflects a 4.5% headwind in the 53rd week in the fourth quarter of 2011. This should be partially offset by stronger seasonal trends in the first quarter particularly in the small models business.

The first quarter outlook also assumes a slight sequential decline in EPS as a result of an increase in unallocated corporate costs, which are typically higher in the first half of the year as well as a higher tax rate. We also expect the PCS operating margin to decline slightly on a sequential basis due to the benefit of the non-income based tax adjustment in the fourth quarter of 2011. These headwinds should be partially offset by sequential margin improvement in the RMS segment reflecting normal seasonal trends and less pressure from the large models business.

To conclude, we’re pleased with our strong fourth quarter and full-year performance and confident about our business prospects in the current year.

Susan Hardy

That concludes our comments. Operator, would you please take questions now?

Question-and-Answer Session

Operator

Certainly. (Operator Instructions). Our first question will come from John Kreger with William Blair. Please go ahead.

Robbie Fatta – William Blair & Company

Hi. Good morning. This is Robbie Fatta in for John today. The first question I had was on the status of some of your strategic relationships, would you say they are trending inline with your expectations and how do these relationships compare to the demand that you are expecting from non-strategic partners that are of similar size in 2012? In other words, are these guys expecting to grow their business more with you?

Susan Hardy

Robbie, for some reason that’s cut out. Could you repeat the question please?

Robbie Fatta – William Blair & Company

Sure, sure.

Susan Hardy

Sorry.

Robbie Fatta – William Blair & Company

It was on the status of your strategic deals. Are they basically trending inline with your expectations and how the demand trends in 2012 from these clients compare to some of the other large bio-pharma clients that are not strategic partners?

Jim Foster

So we – as you know we signed a large deal in November. This has generated lots of other conversations about similar types of transactions with services across the entire portfolio with some emphasis on the early discovery work. Its hard to call a trend, its just that there is clearly some interesting clients who are, some are aggressively reducing infrastructure and obviously, some have already done that and others are contemplating at the current time. So it appears that many of the large drug companies are directionally interested in large strategic transaction, that makes sense from a value proposition point of view; I think that’s true for some of the smaller clients as well, some of the sort of first-tier, and even second-tier biotech clients are getting larger and have expensive drug development projects and even though they’ve always been outsourcers they’re tending towards outsourcing on a more comprehensive basis. So, directionally it seems that that’s the way the industry is moving, I think its early days, but we do have several conservations going on right now which would sort of underscore the focus on these types of deals.

Robbie Fatta – William Blair & Company

Got it. Thanks. And the second question is on your comfort level with your footprint at this point. Are you comfortable with your capacity right now and given that it sounds like demand is improving slightly; what would you say the capacity utilization that’s baked into guidance at this point is?

Jim Foster

So, yes; we like our footprint in several ways. We like the geographic footprint we have, and we like the types of services we do with the specific businesses and so, that seems to be working well in terms of supporting clients, some of whom are interested in proximity. We certainly have enough capacity to take on additional large strategic deals, should that happen. I think on our last call we commented that, we could do two or three of those with our current footprint, and then we would simply have to open some buildings that were constructed, but never open. And we also have some space that was constructed, but never caged.

So we have a good amount of space for the foreseeable future certainly three plus years I’d say. A capacity utilization, well we don’t give the number, improved during 2011 its not, it didn’t improve to the level that we would like it to be as for optimal margin contribution, but all the work that we’re doing sort of a stable, regulated tox activity, but also increasing amounts of non-GLP Discovery work should continue to fill up the space, sort of systematically that will obviously improve the margins as that happens. So we should have sufficient space to take on the type of work that we’re talking to clients about now.

Robbie Fatta – William Blair & Company

Great. Thanks very much.

Operator

Your next question is from Eric Coldwell with Robert W. Baird. Please go ahead.

Eric Coldwell - Robert W. Baird & Co

Thanks. Just a few quick ones. The tax item in PCS, can you just tell us what line that applies to, is it SG&A?

Tom Ackerman

It actually was an operating income, it was in SG&A because it was not an income tax it would be above the line. So that was in SG&A, Eric.

Eric Coldwell - Robert W. Baird & Co

Okay, great. Am just curious, if you can give us an update on trends that you’re seeing in the outbreed models business, that business obviously has seen some pressures associated with the slowdown in GLP studies in preclinical, but just curious if you’ve seen any rate change in growth and out bred models?

Jim Foster

Not really Eric, its been pretty consistent through probably the last couple of years, it seems to have leveled off, that’s probably a commentary on the overall amount of work that’s being done throughout the system since we do supply our animals to many of our competitors as well, I think we have a pretty good view of that. The good news is it’s leveled off and we continue to get price increases on top of those. Conversely sales in the inbred strains and immunocompromised strains have been relatively strong, so from a value proposition point of view those tend to offset one and other reasonably well.

Eric Coldwell - Robert W. Baird & Co

Great, just two more quick ones. The automated multi-cartridge system, is that launch coming in April? I think in the slide deck you say mid-year, but my impression was that may be that was earlier in the second quarter?

Jim Foster

Yeah, the automated system will come sort of in the back half of the year. I think a realistic way to look at that would be second half.

Eric Coldwell - Robert W. Baird & Co

Okay. Second half, okay. And then finally, unless I’m misinterpreting something, it looks like you actually had a gain in the historically operating losses in China, Massachusetts and Arkansas, but this time it looks like maybe it was a profit, if I am not misreading the press release?

Tom Ackerman

Solutions, yeah – that was due to the sale of the facility.

Eric Coldwell - Robert W. Baird & Co

I’m sorry, the sale of the …?

Tom Ackerman

Facility in Shanghai, which we had previously indicated that we sold.

Eric Coldwell - Robert W. Baird & Co

Right.

Tom Ackerman

So we actually excluded that gain from non-GAAP and reported it on that particular line item.

Eric Coldwell - Robert W. Baird & Co

Got it. Okay. Thanks very much.

Tom Ackerman

You’re welcome.

Operator

We will go next to Sandy Draper with Raymond James.

Sandy Draper - Raymond James

Thank you very much. Just a question on the margin guidance; I just want to make sure I’ve got the numbers right. As I am looking at it, the RMS pro forma margin in ’11 was 30.4% and PCS was 12.6%. I want to make sure that these numbers are right, and so basically, I think you’re suggesting generally flat RMS margins in 2012 and then improving margins for PCS in ’12, are those numbers correct and those trendlines correct?

Tom Ackerman

I would say, yes.

Sandy Draper - Raymond James

Okay. So, I guess the follow-up to that is then, in terms of reminding where you are in terms of the cost savings, just generally would you expect overall costs to be down in ’12 on a year-over basis, did you get full-year impacts of cost savings or maybe I am taking that – about that wrong, I just want to make sure I’ve got the dollar trend line as right as well.

Tom Ackerman

What we had said in the aggregate was; we do have a number of cost benefits playing through 2012 principally as a result of the Q4 actions. But in addition, unfortunately going the other way, we do have merit increases as well as other inflationary pressures, so once we continue to cut cost, things like merit increases, and price increases from our vendors even though in some cases those are lower, continues to almost offset the cost savings that we’re having.

Sandy Draper - Raymond James

Okay, great. That’s really helpful. I appreciate it. I’ll get back in the queue.

Tom Ackerman

Yeah.

Operator

We will then move on to David Windley with Jefferies. Go ahead please.

David Windley - Jefferies & Company

Hi, thanks for taking the question. Following up on Eric’s question on the automated; wondering how you would view that affecting the In Vitro business and then overall I wondered if you can care to characterize the kind of contribution that In Vitro is now making to the overall picture?

Jim Foster

The automated PCS is [moves] us into the quality control labs of the manufacturers sites have smaller devices sort of remotely utilized and then at some point it’s a much larger number of samples that could go to the PC lab and so that’s really powerful and helpful to be able to load this thing up and walk away and have this thing actually to read cartridges on an automated basis, and the initial interest is quite high on a pre-launch basis. We sized that on our last call, we indicated that that’s about a $300 million market opportunity, sort of QC lab focus of which we only have about 10% share. So we've a big opportunity there and while there are certainly competing products we don’t see anything out there with this sort of capability and from an automatic point of view.

In terms of helping you size this we’re certainly kind of stay away from breaking out the margin contribution. In terms of the revenue contribution I think we indicated that it’s part of – its part of other which includes …

Tom Ackerman

Avian business.

Jim Foster

Avian and this is the larger, fastest growing portion of the business that we sort of watched the growth in those two, you can size that relatively [easily].

David Windley - Jefferies & Company

Right. So, on the quality control lab entry, does that cannibalize any of the remote use of the single or the non-automated?

Jim Foster

It’s really added to it. And you see clients sort of adopting the technology throughout their organization and getting comfortable with it remotely and then really wanting to use it in a more robust way. So the potential for greater penetration on a per client basis is much higher.

David Windley - Jefferies & Company

Okay. And then moving …

Jim Foster

In general, we are looking at cartridge sales while we are very happy with the margin on the devices. This is a razor blade business and the MCS device we use a lot more cartridges sort of by definition and that’s pretty powerful value proposition for us.

David Windley - Jefferies & Company

Okay, great. Thanks. And then quickly moving to more of the core business. In these discussions around broader strategic deals, from my understanding, it’s correct you are delivering the services through kind of a variety of facilities that would be included or rolled up under both the RMS segment and the PCS segment depending on where those skills reside et cetera. I am wondering how important it is to the client that those activities be coordinated in a kind of an integrated fashion across the continuum of services you talked about then being interested in the whole portfolio. So I am just -- I am curious about how strong or how important that value proposition is to the client that those things be coordinated across that continuum?

Jim Foster

I think it’s quite important to the client in the big deal that we’ve signed where we are using many of our facilities in multiple parts of the world. We are able to use the power of the specialization of those facilities and we are able to coordinate it in a way where the client is working quite centrally and in some areas therapeutic, therapeutic area expertise is working with therapeutic area expertise that we have. But in all events they’re looking for us to help them pull it together because that’s way we drive value of the realignment of our infrastructure that we made whenever, it was six months ago or so, where we’ve got the formally separate RMS and PCS operating business managed by single process in North America and single process in Asia and Europe have been quite helpful in delivering these services in a more integrated way.

And previously, obviously the work that we have done at our preclinical business by having a metric system that pull the disparate parts and pieces together has also been helpful. So, yes, the value across the portfolio is increasingly important to our clients. Our ability to manage that is critical, but rather than viewing us in a fragmented fashion we are able to have a lot more robust relationship because of the expertise we have across the world.

David Windley - Jefferies & Company

Super. Thank you, Jim.

Jim Foster

Okay.

Operator

Your next question is from Tycho Peterson with JP Morgan. Please go ahead.

Tycho Peterson – JP Morgan Chase & Co

Hey, good morning. Question on some of the underlying trend where you talked about mid-tier biotech being up about 5% sequentially, are you pulling share there or can you just talk to some of the underlying dynamics and how sustainable you think that growth might be?

Jim Foster

Yeah. There is a variety of factors. I think one is the focus of our sales organization. Two is access to capital in the public markets. Three, more importantly, is continual funding by big pharma. Four is we are just doing a much better job with the value proposition. So there is sort of presumption that Charles River is too big and too flexible to deal with smaller companies, we are simply proving that’s no longer the case. So we maybe larger than some of our smaller competitors, but that gives a smaller client access to greater capabilities for fair value.

So yeah, we are – we have – we talked on our last call about lots of small pieces of business that we had with, whatever it was, a couple of 100 clients picking up work with them, some of that is obviously share. And that’s an important part of the client base right now and certainly going forward, in so much of discovery, [work] being done by the biotech companies. So we intend to focus aggressively and professionally on that sector as well.

Tycho Peterson – JP Morgan Chase & Co

And presumably this all kind of ties back to your comments on the ERP system and the fact you’ve got kind of better granularity from this field here and are able to extract a little bit more value. How are you feeling about the overall level of IT spent? We’ve obviously seen one of your competitors make a big announcement, lot of that was central lab and other areas, but -- and they also talked about technology data -- toxicology data capture, can you just talk a little bit about your level of IT investment and do you feel a need to step that up in light of this environment or are you happy with what you’ve got?

James Foster

We’ve spent significantly in IT for the last few years, getting our ERP system up and additional software capabilities particularly in the preclinical sector, which enhances our report writing and formatting, but also data capture and also portal interface with clients, where we’re working on that aggressively this year and probably we’ll continue to do so.

So, it’s customized to the clients. I think we’re feeling that it’s a manageable, reasonable amount of money that is allowing us to work much more holistically with our clients. And so, yeah, we’re comfortable with the levels at that which we’re working and I wouldn’t see any need for dramatic increase going forward.

Tycho Peterson – JP Morgan Chase & Co

And then last one on the academic, you called out competitor price increases this year, or are you a little bit more confident that, that business can maybe show some upside in potentially around share shift for you?

James Foster

Yeah, we’re -- this has been the third or fourth year of continued increase in revenue growth in the academic sector. And going back to 2009, we put a lot more people focusing on that sector because it’s just – it’s a more laborious sell. That’s worked really well, and this price disparity, which has historically been the biggest problem we’ve with the academic sector just simply doesn’t exist their situation where we’ve the same price points and some slightly higher. So, yeah, I’d anticipate that we’ll be continuing – be able to continue to take share in the academic sector. We do very well in Europe, and we’re beginning to do very well in U.S., and we’ll continue to focus there.

Tycho Peterson – JP Morgan Chase & Co

All right. Thank you.

Operator

Our next question is from John Sullivan with Leerink Swann. Please go ahead.

John Sullivan - Leerink Swann, LLC

Hey, good morning guys. Just a quick one here, I’ve a question about -- Jim, can I ask you to give us your current assessment of the capacity profile in the outsourced GLP business, how is capacity changing and how do you think it compares to the amount of work that’s going on? And lastly, could you just kind of speak firstly about North America and then maybe give us your assessment in Asia, same question?

James Foster

Yeah. We never how much space the clients have, unfortunately. So, it’s hard to size. We know that they’ve more space than the CROs collectively because still the majority of work is done there.

The CROs – we took our 20% of our space over the last two years and most of our major competitors have done the same, a couple have talked about doing even some more in 2012 as demand isn’t there. Certainly, we’ve seen some of the big clients spaced out, and there have been some recent announcements by other clients to do the same. So, the good news is that capacity is contracting in the industry, our capacity utilization has improved. I suspect others have as well. There is still a lot of space available. The bad news is that puts a little pressure on the margins and price in the short-term, but the good news is that work comes outside of clients, we won’t have the need to build any incremental space. So, I think that’s quite a positive.

Our information on China would be a little bit dated, but I can just tell you that when we were there with our facility, there wasn’t a significant level of consistent interest, it was very fragmented and we didn’t have any large clients to do a significant amount of work. I’d imagine that hasn’t changed much. But having said that, you only have, I don’t know, 500,000 or 600,000 square feet as supposed to several million, I think it was 8 million in the state. So we’ve a much smaller square footage profile. I’d suspect it’s still thoroughly underutilized and that everyone is in a loss, continues to be in loss position over there. Probably on a proportional basis, the capacity in the state is probably very utilized, but still a lot left to go. So, it’s hard to say that’s probably in the U.S. probably a couple of years, two to three years of space left before there is a need for people to open additional space.

John Sullivan - Leerink Swann, LLC

Thanks so much.

Operator

We’ll go next to Robert Jones with Goldman Sachs. Please go ahead.

Robert Jones – Goldman Sachs Group, Inc

Great, yeah, just a quick one on the PCS operating profit, just sort of I’m clear on the expectations around operating margins in 2012, should the starting point be what we saw this quarter ex the non-increase based tax adjustment or when you say you expect further improvement off the margins, is that including that non-income based tax adjustment of $1.7 million?

Tom Ackerman

Well, our comments about expecting improvement are really based on the full-year numbers. So, while we did have a good Q4, our numbers for the full-year are slightly below that, and of course the – as we mentioned in the remarks, the tax – non-income based tax pickup in the fourth quarter is not really something that we’d expect to recur clearly.

Robert Jones – Goldman Sachs Group, Inc

Okay, so the …

Tom Ackerman

So, we don’t expect to see some improvement off for the full-year rate and if you just look at the fourth quarter, obviously, if you exclude the non-income based adjustment or pickup, you get to at least a more normalized rate in the fourth quarter.

Robert Jones – Goldman Sachs Group, Inc

Got you. That’s helpful. And then, Jim, you continued to highlight acquisitions obviously as a key part of the strategy, I mean, without being too specific, can you give us a little bit better of a sense of what areas within the business or regions you’d like to build out or bolster, any general sense of order of magnitude there?

James Foster

I’ve to keep it quite general, I mean, it would be upstream; it would be technology-based focused principally on In Vivo biology, it could be in deep trouble as well. We’re certainly looking at other geographies besides the major ones that we’re participating in now. We’re looking to sort of fill-in the portfolio that we’ve where we’ve any gaps.

Robert Jones – Goldman Sachs Group, Inc

So, nothing too needle moving then, more -- a bit more bolt-ons, is that the idea?

James Foster

Probably in the short-term, yes.

Robert Jones – Goldman Sachs Group, Inc

Okay, great. Thanks.

Operator

Thank you. We’ll go next to Greg Bolan with Sterne Agee. Please go ahead.

Greg Bolan - Sterne Agee & Leach, Inc

Hey, thanks. Jim, could you just kind of characterize internally personal like attrition, retention, how you feel about employment levels at this point, specifically in the mid to senior ranks, please?

James Foster

Sure. We’ve a very strong senior team. Most of the people have been here relatively long period of time. So, we’ve really good stability and amazing longevity statistics, people that know the industry well, the clients well, and we all work well together, that’s -- the office group is about 30 people.

Most of the businesses that we’ve either built from the ground up or acquired have similar strong longevity statistics as well, and we’ve very low turnover over the last few years. So, I’d say that we’re retaining our people very well. I think we take competitively. I think people work here because what we do makes a difference. And I’d call it a stable environment, obviously not withstanding the workflows reductions we’ve had primarily in our preclinical business over the last three years where mostly we take junior people out, like, a few at sort of mid-management level.

Greg Bolan - Sterne Agee & Leach, Inc

That’s helpful. Thanks, Jim. And then, just nearly eight years, in the making now, sitting with the Inveresk asset, I’m just trying to think – I know it’s difficult because the two have probably now obviously dovetailed for many years now. But just thinking about the stickiness with regards to the revenue synergies between PCS and specifically research models or products, how would you characterize that level of synergy at this point?

Jim Foster

I’d say that for clients of scale, the ability to buy across the continuum has become increasingly important. We are seeing structurally clients at the large pharma is being responsible for late discovery or early development, I don’t know what they call it, at their individual companies, really focused on extend pretty much across all of that we do. And it’s quite important to them. So I think that the scale and the breadth of the portfolio continues to be a distinguishing and competitive feature for us.

Greg Bolan - Sterne Agee & Leach, Inc

Okay, great. And this is the last one on the insourcing theme that you had kind of talked about last quarter, we’re certainly starting to see some of the U.S. based pharma companies looking to potentially, capacity that they currently have, have best of breed partners come in, operate those facilities thinking one particular in the Indianapolis with regards to discover chemistry. Is that – what do you think is driving that? Is that just a better model in some of the pharma company’s eyes or any commentary around that beam or trend would be very helpful actually?

Jim Foster

I don’t know if it’s better model. We’ve been talking a lot to our clients about insourcing, outsourcing strategy where they can do both. So they can utilize our facilities on an external basis when they don’t have the capacity or the specific ability to do, let’s say some sort of specialty tox. And then in facilities that they want to keep or need to keep for whatever reason, expertise, lets say, the ability to have someone else to manage that and hopefully manage it more efficiently I think is – really gets their attention. Then the ability to move compounds within that system either doing it internally at their own facilities with their people that we could manage or at our facility, with our people that we obviously manage gives them much bigger footprint and enhances the flexibility. So I think the clients are increasingly interested in trying that structure. We have several conversations going on right now about that.

Greg Bolan - Sterne Agee & Leach, Inc

Great. That’s very helpful. Thanks, Jim.

Operator

Next question is from Tim Evans with Wells Fargo. Go ahead please.

Timothy Evans - Wells Fargo Securities, LLC

Hi. Thanks. Could you talk about which part of the businesses are outperforming to the extent that it requires recent merit-based increases that are offsetting your cost savings?

Tom Ackerman

Which businesses outperformed in ’11 relative to plan?

Timothy Evans - Wells Fargo Securities, LLC

I’m just thinking, going forward, there was a question previously where you mentioned merit-based increases, I think you mentioned 2012 that would offset the cost savings that you were going to – that you got and I’m just curious what parts of the business is outperforming to warrant those merit-based increases?

Tom Ackerman

Well, it’s -- the merit-based increases are more of a inflationary equity type adjustment. I believe in December we talked about the range of increases, which – while not uniform across the company, it’s fairly consistent based on the localized market. So, we’ve struggled through the last few years with reductions in headcount, one year, where we had no merit increases and another year where it was low inflation. So -- this year, merit is little bit more across the board, obviously, any individuals who are not performing up to appropriate desiring in those particular areas aren’t getting awarded as much, but it’s any exceptions like that or more geographic or an individualized basis rather than on a business basis.

Timothy Evans - Wells Fargo Securities, LLC

Okay. And did you anticipate the inventory write-down and the non-income based tax adjustment, either of those in the guidance that you gave in the third quarter?

Tom Ackerman

We anticipated having some issues to deal with. The amount was a little bit lucid. So, I’d say that was something that we were looking at, but took a fair amount of analysis on our part actually come up with the number.

Timothy Evans - Wells Fargo Securities, LLC

Okay, great. Thank you.

Operator

We’ll go next to Garen Sarafian with Citigroup. Go ahead please.

Garen Sarafian - Citigroup Global Markets, Inc

Hi. Thank you for taking the questions. My first question is, you sort of alluded to this in your prior comments, but I just wanted to clarify, the reorganization that you’ve announced, I suppose it’s August, some time summer last year, in 2011 into two regions to provide a more seamless solution, has this transition been completed yet? I’m just trying to see is there more sort of horsepower that your sales force will receive after this transition if it’s not?

James Foster

It has been completed. And we had it now for about six months and we’ve it completed during the budget process, which was extremely helpful, and just to add, our international sales meeting, which we’ve in mid-January and it just was very powerful the interface between the operating folks and the sales organization. So yeah, we completed it, we’re extremely pleased with it, the client feedback is great, and the sales force seems better congealed than ever.

Garen Sarafian - Citigroup Global Markets Inc

Got it and then, just switching gears a little bit, more a big picture question. I think you mentioned something on the NIH budget, so yesterday the present release its fiscal 2013 budget where you actually proposed NIH funding remained flat year-over-year which is actually pretty good given current budget pressures. So I know you stated before that its not, Charles River is not too sensitive to the downward pressures with NIH budget, and its only early on in the process, but would better than expected NIH funding have any different demand profile for you guys to the upside?

James Foster

I mean it could, our academic sales have increased significantly over the last few years, we bid on lots of large government contracts, many of which are funded by the NIH, we’re winning a lot of them. So obviously they could be incremental work coming out. We also sell our products directly into the NIH and sales there we’ve been focusing on it more, more thoroughly and sales there have increased as well. So obviously upside in spending certainly could be beneficial as I said earlier as the price point versus the competition for our research models in particular has flattened, we’re getting a lot more traction from a share point of view.

Garen Sarafian - Citigroup Global Markets Inc

Got it, and then just, I guess, one follow-up on that was, I think you expected a price increase of 2% to 3% in 2012 within RMS; can you just shed any color as to how its been received in the market place so far it sounds positive, but just want to just see if you can add more color there. Thank you.

James Foster

Price increase has been received well, with virtually very little pushback and we’re pleased by that.

Garen Sarafian - Citigroup Global Markets Inc

Great. Thanks again.

Operator

Your next question is from Ricky Goldwasser with Morgan Stanley. Please go ahead.

Andy Schenker – Morgan Stanley

Hi this is Andy Schenker in for Ricky. I was just looking for a little more detail on revenue guidance, you targeted 1% to 3% excluding FX, which to me implies higher growth in RMS and potential year-over-year declines for PCS. For RMS clear you have the price increases, I mean how much of that of the increase in RMS is really from the price increase, and how much is from your unit growth. And then for PCS should we think of maybe steady growth from 4Q levels excluding the extra week in any year-over-year declines as a result to maybe tougher comps from the first half of 2011 level?

Tom Ackerman

Yes, what we had said was on a constant currency as you noted, our guidance for ’12 was 1% to 3%. We did say that we expect that the RMS to outperform that and we did say that we expect that the preclinical to be a little bit less than that which obviously balances out the numbers. On both segments, as we just talked about somewhat extensively 53rd week was obviously was a benefit in Q4 and 2011 it obviously creates a slight win going into 2011 – 2012 of about the same percentage on a full-year basis, which we said was about 1% for the full-year. Pricing in RMS is overall for 2012 is somewhere in the 2-ish percentage range. So clearly that’s part of the uptick in RMS. Next year we talk about some business is being a little bit better like Discovery and Vitro and some of the small models continuing to be challenged as well as the large model business on the PCS side, we talked about regulated talks, continuing to be a little bit of a drag and in the non-GLP areas that would continue to be developed positively. So basically in a nutshell that’s how I’d attempt to answer your question.

Andy Schenker – Morgan Stanley

Okay. And then just looking maybe sequential progression throughout the year for PCS, I mean, as a good starting point 4Q level – the extra week or …?

Tom Ackerman

Yeah more or less, I mean, with the growth rate overall, we don’t expect a lot of dynamic activity quarter-to-quarter. If you think about where we are year-over-year, we did say specifically given the uptick in Q4 because of the 53rd week that we think PCS will be down sequentially going into Q1 and really from there it will probably move sideways to up notionally quarter-over-quarter, but nothing dramatic.

Andy Schenker – Morgan Stanley

Okay. Thank you.

Operator

We have a question from Todd Van Fleet with First Analysis. Go ahead please.

Todd Van Fleet – First Analysis

Hi. Good morning, guys. On PCS, what’s the opportunity for further expense reduction, expense savings kind of in a flattish environment in 2012 and I guess maybe I ask a little bit differently, what type of environment would have to exist for the company to consider further expense reductions? Thanks.

Tom Ackerman

Well, clearly in a flattish environment as you suggest that, we are not really looking at volume related type reductions of which, quite honestly a lot of the historical reductions have been directly related to volume. But in addition to that, we’ve changed processes in a number of areas and actually improved our efficiencies as well. And looking to 2012 and beyond, we do have a number of projects that are sort of ongoing as a result of that performance improvement program in 2011, that was the focal point of the reductions in Q4 and we still continue to believe that from an efficiency basis, we can continue to do work better and more efficiently and we’re continuing to attempt to do that. I don’t expect any watershed moments to come out of that. So I think the efficiencies will be achieved on a sort of constant basis and will result in things like attrition and what not as opposed to any watershed activities in a given period.

Todd Van Fleet – First Analysis

So Tom just to elaborate on that then, if we were have an environment where lets say, Charles River won a couple of other these strategic partnerships or maybe preferred partnerships, what have you, but maybe the overall environment was a little bit flattish, we could still see a scenario whereby the company would be able to reduce the expense space even in the phase of the new business from the relationships – in the relationships?

Tom Ackerman

I’d say yes, with the exception of it will depend on how meaningful those partnerships were. So if we were to announce another meaningful partnership, it would be clearly difficult to do that without affecting headcount directionally in any manner. So, our view would be continue to try to increase business, win strategic partnership awards, and in some cases we might have to add incremental heads, but not as many as we would have added historically by being more efficient.

Todd Van Fleet – First Analysis

Okay. Thank you.

Operator

Thank you. And our final question will come from James Kumpel with BB&T Capital Markets.

James Kumpel – BB&T Capital Markets

Hi. Good morning. Can you talk a little bit about the nature of demand for the large models? Do you see a fundamental shift or just an adjustment in the inventory for temporary demand? And then I’ve a follow-up question on the timing of CapEx and when you expect that to sort of Tier down in 2012?

Jim Foster

We have been seeing a fundamental shift in the demand quotient for large animals for a while now. That’s related to several things. The actual amount to safety assessment work, its being done, which of course is off right now. The sheer cost of those studies makes our clients more sensitive and they will wait until the last minute to do them. And also clients have become very price sensitive. So we – yeah, we’ve several sources of these animals and clients are interested in lower price animals from lower cost sources. So we’d see how its hitting both lines as we indicated in our remarks, has a big impact in operating margin because this historic line has historically been extremely high margin, margins were okay now, but they’ve certainly declined over the last few years and its hard to see what catalyst would change that slope.

Having said that, I mean, that will seek a level that its required to continue to fund large animal studies, which of course required by the FDA. So it will level out for us, we have multiple sources of lower cost animals, so we will obviously be able to continue to participate in this market and I think we know how to house them and deliver them in a cost effective passion.

James Kumpel – BB&T Capital Markets

Okay. And then now on CapEx, obviously there was a temporary uptick in the fourth quarter due to timing, as you talked about, is that going to start tiering down into more normal levels in the first quarter or the second quarter?

Tom Ackerman

Well, I’d say given the few projects that are ongoing now and part of the reason for the little bubble in Q4, we will probably see it, not as quite heavy as Q4, but my guess would be that in 2012 we will see a little bit more activity from a timing standpoint in the first half of the year than the second half of the year. But even though we had a little bubble in Q4, as we said, we don’t expect to spend any more capital in 2012 and nor do we expect to spend at that kind of a run rate in a given quarter.

James Kumpel – BB&T Capital Markets

Okay. Thank you very much.

Operator

I’ll now turn the conference over to Susan Hardy, for closing remarks.

Susan Hardy

Thank you for joining us this morning. This concludes the conference call. Thank you.

Operator

Thank you. Then ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.

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