Charles River Laboratories 2008 Guidance Call Transcript

Dec.13.07 | About: Charles River (CRL)

Charles River Laboratories (NYSE:CRL)

2008 Guidance Conference Call

December 13, 2008 8:30am ET

Executives

Susan Hardy – Director Investor Relations

Jim Foster – Chairman, President & CEO

Tom Ackerman – Executive Vice President & CFO

Analysts

David Windley – Jefferies & Company

John Kreger – William Blair

Douglas Tsao – Lehman Brothers

Alex Alvarez – Goldman Sachs

Tycho Peterson – JP Morgan

[Nick Yulian] – Robert W. Baird

Robert Gilliam – UBS

Doug Schenkel – Cowen & Company

John Sullivan – Leerink Swann

Operator

Welcome to the Charles River Laboratories 2008 guidance conference call. [Operator Instructions] At this time I’d like to turn the call over to our host Ms. Susan Hardy, please go ahead.

Susan Hardy

Good morning and welcome to Charles River Laboratories 2008 guidance conference call and webcast. This morning, Jim Foster, Chairman, President and CEO and Tom Ackerman, Executive Vice President and CFO will comment on our business outlook and guidance for 2008. 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 atwww.ir.criver.com.

A taped replay of this call will be available beginning at noon today and be accessed by calling 800-475-6701. The international access number is 320-365-3844, the pin number in either case is 892071. The replay will be available until December 27th. You may also access an archived version of the webcast on our investor relations website.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 provision under the Private Security 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 27, 2007, as well as other filings we make with Securities and Exchange Commission.

During this call we will be primarily discussion 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 a comparable GAAP measures and reconciliations to those GAAP measures on the investor relation section of our website through the financial reconciliations link.

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

Jim Foster

We are pleased that you joined us today to discuss the details of our 2008 guidance. We are quite enthusiastic about the coming year when many of our current expansion projects will be up and running and new projects will take their place. It’s an exciting time to be a preclinical CRO when our pharmaceutical and biotechnology clients are depending on us in new and unprecedented ways creating greater opportunity for us to support them as they endeavor to increase the efficiency and cost effectiveness of their drug development efforts.

We were asked recently what is driving pharmaceutical companies to outsource now. We believe it is a confluence of events; drugs coming off patent, fewer drugs gaining approval, pressure to find drugs to cure diseases and an urgency to push the growing number of new compounds through the drug development pipeline.

All this comes at a time when the preclinical contract research industry is stronger than ever before offering clients access to expertise and capacity from large financially stable providers. At Charles River we have focused on building core competencies in laboratory animal medicine and science and regulatory compliant preclinical services which are unrivaled in the industry. We are expanding our global footprint adding high end multi-service, multi-species facilities on the East and West Coast of the United States to compliment our large facilities in Canada and Scotland, and expanding existing preclinical and research model facilities.

We are consistently adding specialty services, broadening and deepening our portfolio of services. We believe that our expertise has exceeded the in house capabilities of our clients making us a valuable partner in the development of new drugs and a more flexible, efficient and cost effective alternative to developing and maintaining that expertise in house.

Wherever our clients want to work in North America, Europe and soon in China, we have the capacity and the expertise to support those demands.

That our clients have reached an inflection point and are increasingly use of strategic outsourcing is quite clear. We see evidence in our sales growth and the fact that our facilities are opening in high utilization rates and new space is filling quickly. We see it in the declining investment in preclinical toxicology and animal facilities by most large pharma and biotech companies and in the extensive discussions we are having with clients about Charles River Dedicated Resources, through which we offer more broad based partnering agreements designed for clients based on their individual needs.

All of these outsourcing indicators against the backdrop of increased research and development spending and robust funding for biotech, support our belief in the strength of the market for our essential products and services and give us confidence that we can achieve our goals for 08’ and beyond.

Recapping our guidance, we expect 08’ sales growth to be in the range of 10% to 13%, including approximately 1% from foreign exchange. To put that in perspective our guidance of 14% to 16% in 07’ includes approximately 5% in total from the acquisition of Northwest Kinetics and through foreign exchange. On an apples to apples basis we are forecasting a similarly strong organic growth range in 08’. We expect that non-GAAP earnings per share will be in the range of $2.87 to $2.97 which represents 11% to 15% growth roughly in line with sales.

We expect the consolidated operating margin will approximate the anticipated 07’ levels as leverage from higher sales is offset primarily by the start up and transition costs associated with our new preclinical facility in Nevada.

Investment in infrastructure is critical to our ability to support our client’s information requirements and to our continuing growth. As you know we made strategic investments in information technology and senior staff is 07’, most significant of which was the initiation of an ERP project. This is a multi-year effort to which we have dedicated substantial resources and engaged outside consultants to ensure the project is properly planned, managed and executed. The major benefit that we expect to gain from this project will be the ability to conduct our operations in a more integrated and efficient manner, with improved accessibility of data from across the company.

Together with other systems such as the new Human Resources Information System which has improved our access to resource availability, the ERP system with streamline such tasks as resource scheduling, capacity management. We believe the ERP project is the cornerstone of our goal to build a leading edge information system that will enable us to expand service offerings to our customers and provide them enhanced data accessibility.

As expected and due in large part to our increase IP investments we experience a step up in corporate overhead in 07’. In 08’ our expenditures will increase in absolute dollars but corporate overhead should remain stable or decline slightly as a percentage of sales. Our goal is to keep those expenses at a constant or a low percentage of sales as the investments we make enable us to manage our growing business without a significant increase in overhead.

Let’s discuss the outlook for each of our business segments beginning with the Preclinical Services (PCS) Business. In 08’ we estimate another strong year with segment sales growth in the low to mid teens. Similar to the projected organic growth rate in 07’. Our continuing discussions with clients about the support they require to accelerate the pace of drug development gives us confidence that this growth rate is achievable. Clients requirements can be as simple as a single study or extensive as with Charles River Dedicated Resource Agreements which we expect will represent approximately 10% of PCS revenues in 08’. In whatever capacity they choose to work with us we provide the broad range of services and expertise they require, which significantly reduces if not eliminates the need for them to invest in preclinical infrastructure themselves.

Without the need for extensive in-house expertise and facing the challenge of inflexible facilities approaching obsolescence, outsourcing is an increasingly appealing alternative for pharmaceutical companies. With access to expert resources such as those we offer it’s not surprising that an increasing number of pharmaceutical companies are adopting strategic outsourcing to improve their efficiency and through play.

Over the past two years we saw several large pharma companies announce the closure of one or more research and development facilities. Once they achieve the operating efficiencies from closing facilities and reducing or redeploying the workforce we believe it’s unlikely they will reinvest to bring those services back in-house.

It’s for this reason that beginning in 05’ we undertook the most ambitious expansion program in the company’s history. Our goal is to build space to accommodate the growing demands for preclinical drug development services and to support our growth. Towards that end we made a strategic decision to establish state of the art multi-service multi-species facilities on both the East and West coasts of the US, specifically situated to be proximate to the largest concentrations of pharma and biotech companies. Exit our less efficient Legacy facilities in Massachusetts and Nevada.

Two and one half years later we have made tremendous progress. We are just completing the transition to our new facility in Shrewsbury. We expect to shut down our old Worchester facility on schedule at the end of the month. The new Reno, Nevada facility is open, validation is nearing completion and clients have booked GLP studies for 08’. We are opening a large portion of the Reno facility in 08’, approximately 370,000 square feet, or 80% of the building. In order to manage the process effectively we have planned to phase in the space over the first half of 08’, so that by mid-year the entire 80% will be online. Just as was the case in Massachusetts we will transition to the new Reno facility throughout 08’.

Unlike Massachusetts we have decided to retain a portion of the older facility for quarantine space. We are choosing to do so because it’s a less expensive alternative to allocating space in the new higher cost facility. This decision has no affect on the 08’ margin since both facilities will be open throughout the transition phase.

I also want to be clear that although we are retaining the older facility we will move all services to the new facility by the end of 08’ as planned, at which point we will begin to see improvement in the PCS segment margin. We are expecting the PCS segment operating margin in 08’ to be comparable to 07’. We believe this will be a very positive outcome given the higher operating costs associated with Nevada.

Those operating costs are expected to be substantially higher than those we experience in Massachusetts due to the fact that we are opening a larger portion of the building in the first phase. We are expecting all of our other PCS facilities to either maintain their existing margins or improve slightly. We expect the Massachusetts margin will improve significantly in 08’.

Not all expansion projects are on the scale of Massachusetts and Nevada. To accommodate demand at our other facilities we have completed the construction of a new large animal facility in Scotland which opened for business in the fourth quarter of this year. We also broke ground in September for the first phase of the new facility in Sherbrooke, Quebec, and in 08’ we’ll undertake an expansion in Ohio. PCS Ohio has delivered excellent performance in the last few years and has a very consistent customer base which is why we have chosen to invest in its expansion.

As you know we began renovation of our 50,000 square foot facility in Shanghai last September. China represents an exciting opportunities for the long term which is why we are entering the market at this stage. We intend to be the first international CRO to reach GLP status in China, which will effectively set the standards for the industry in this locale. Over the next decade we expect to see an increasing investment in China by multi-national drug companies and it’s our intent to support them right from the start. We’ve been asked to do so by some our largest clients and expect that the majority of the new facility will be committed to Charles River Dedicated Recourses arrangement. The success of our initial foray will determine the speed at which we will continue to invest in China. We believe it will ultimately become a significant location for us.

In the Research Models and Services (RMS) segment we expect 08’ sales growth to be in the high single digits. For the second year in a row we expect customer demand will return to the levels we achieved in the first half of this decade. We expect that sales growth will be broad based generated by the worldwide model production, services, including transgenic and in vitro businesses. Demand for Research Models, particularly in the US is expected to continue at a robust pace, as customers invest in the discovery and development of new drugs.

As was the case in 07’, we anticipate that ongoing research in oncology, which is one of the two largest areas of therapeutic focus and infectious diseases will drive sales in the immunodeficient mice, the model of choice for those types of research. Sales of CD rats used extensively for safety testing are also expected to be robust. In addition, we are anticipating higher sales of inbred and out bred mice as pharmaceutical and biotechnology companies focus on discovery of new drugs. The use of new and existing drugs from multiple indications. As we said before, whether or not drug compounds become commercially successful they still need to be tested and research modeled and Charles River is the provider of choice.

The West coast, with its large cut for biotech companies continues to be a robust market for us as you know we’ve expanded our production facility in Northern California to accommodate the increased demand. We are just beginning to ship from the two barrier rooms which we opened last June and are on schedule to open a third room in the first quarter of 08’.

I want to remind you that we are more than 165 barrier rooms in production around the world, so three rooms is not a significant increase, however, now that new rooms in California are in production we can fulfill our West coast customer’s requirements more efficiently from that facility rather than shipping from across the country. That also frees up capacity in our East coast facilities which we can use to support demand in those locales.

We are making good progress on our new facility in Maryland, which is being constructed both for RMS production and services and in support of our $112 million ten year contract with the National Cancer Institute for management of its research model colonies. We’ve been working with the NCI for more than a decade providing management services in its facilities. This is the first Charles River Dedicated Resources agreement in the RMS segment where we are both constructing space and providing staff dedicated to a specific client. We take this outsourced approach to colony management will work equally well for commercial clients and believe that as they think more strategically about outsourcing they may choose this option in the future.

We expect that the Transgenic Services business, which improved nicely in 07’, will continue to perform well in 08’. As we discussed on our third quarter conference call we believe researchers are focusing on more complex polygenic models, in which multiple genes are involved. Most human diseases have complex mechanisms of action so a disease model with a similar genetic profile is likely to have better predictive value of drug efficacy in humans. As researchers develop more complicated models they have an increased need for the scientific expertise in transgenic production and the ancillary services we offer.

That is why we believe the demand improved in 07’ and why we are anticipating that growth will continue in 08’. We do not expect 08’ growth to be at the same rate as 07’ which was quite strong in comparison to 06’. We do expect worldwide transgenic services to grow in line with or slightly higher than the RMS segment in total.

The Portable Test System (PTS) is expected to drive another year of high teens growth in our In Vitro business. The PTS is winning acceptance from many clients both in the US and in Europe. Its portability and ease of use are very appealing from an efficiency standpoint and customers are converting from the conventional test kit to the PTS. As we’ve said previously the FDAs Process Analytic Technologies (PAT) initiative and its pending regulation of nuclear pharmacies are two of the factors driving the adoption of the PTS.

PAT promotes real time in process test measurements and is the only FDA approved real time endotoxin test. The PTS is tailor made to this initiative. The ease of use and rapid response time are also strong selling points in nuclear pharmacies many of which are adopting the PTS in anticipation of the FDA finalizing its proposed regulation. Nuclear medicines have a very short shelf life and must be used properly in patients, critical to testing occur quickly, reliable results criteria which the PTS meets exactly.

All of our RMS businesses are expected to report sales growth in 08’. A non-GAAP operating margin is expected to be comparable to the estimated 07’ operating margin. At that level the RMS segment operating margin is extremely strong, benefiting from operating efficiencies as pricing, volume and market share gains drive the sales growth rate. As services continue to become a larger proportion of the sales mix they put pressure on the margin, however, we believe that we have future opportunities to expand the service businesses margin as volume and mix improve.

Our capacity expansion projects are key investments in our future as customers look to strategically outsource services which they increasingly prefer not to do internally. Either because it’s not cost effective or because they lack the extensive expertise we have developed over 60 years in business.

Our new PCS and RMS facilities and the expansions at existing facilities will drive our growth into the next decade. Including our investment and information technology we estimate that our capital investment in 08’ will be in the range of $220 to $240 million. This a slightly higher range than our 07’ estimate of $200 to $225 million, due in part to our decision to expand our Ohio facility.

With increasing demand for the broad portfolio of the essential products and services we offer and substantial new capacity poised to come online over the next few years we believe we have significant opportunities to enhance what we provide for our customers drug discovery and development efforts and to expand our presence as a premier provider of research models and services and outsource preclinical services. We have spent the last decade positioning ourselves as the partner of choice by high end drug development of products and services. This strategy has prepared us extremely well to capitalize on the intensifying demand from pharmaceutical and biotechnology companies. Our success is evident in our 07’ results and outlook for 08’.

All of our efforts as well our intention to make strategic goals on acquisition are geared toward building a stable franchise which provides global solutions for our customers while maximizing the breath and power of our competencies. As always we continue to build our business with a focus on profitability and shareholder value.

Now I’ll turn the call over to Tom Ackerman who will review the details of the 08’ budget.

Tom Ackerman

Good morning. As Jim did, I’ll focus my comments primarily on non-GAAP guidance measures. In 2008 we are forecasting a strong financial performance building on the momentum in 2007. Sales growth is estimated in the range of 10% to 13% in 2008, including approximately 1% from foreign exchange. This is comparable to the solid organic growth we expect this year.

Primary sales growth drivers in 2008 are price and volume. Price increases are expected to be approximately 3% to 4% in 2008 consistent with historical trends. We continue to experience a stable pricing environment despite our clients cost sensitivity as they understand the value we create for them and also our need to offset our own cost inflation.

Volume growth is also expected to remain robust led by growth across all of PTS and RMS businesses. As I said, foreign exchange will contribute approximately 1% to the sales growth rate. We are not forecasting 2008 results based on current exchange rates because given the dollar is at historical lows compared to the Euro, Pound and Canadian dollar we believe that a more moderate view would be prudent. Therefore we forecast that the US dollar will strengthen somewhat with 2008 FX rates below the spot but higher than the average in 2007.

Jim has already given you the sales growth highlights so I’ll focus on the operating margin and other expense items. We project that the 2008 non-GAAP operating margin will be comparable to 2007 levels which is expected to be moderately below the year to date operating margin of 21.9%, primarily due to normal RMS seasonality and in the fourth quarter. The 2008 operating margin will be affected by a number of factors.

Although margins in Massachusetts are expected to continue to strengthen as steady mix improves and we exit the older facility at the end of this year, we expect these gains to be offset by a similar transition in Nevada throughout 2008. FX rates in Montreal with the majority of sales derived in US dollars but most costs are incurred in Canadian dollars are expected to have a slightly negative impact in 2008 but not as meaningful as the drag we experienced in 2007.

Having improved significantly in 2007 the Transgenic Services margin is expected to stabilize at the current higher level but is not expected to provide the same tail wind in 2008. Corporate costs are also expected to restrict margin expansion. IT costs are expected to increase again in 2008 as we continue to make investments to support our growth as our total equity compensation expense and other corporate costs however all of these costs will be growing at a slower rate than 2007 so as Jim said, we expect unallocated corporate overhead will be flat to slightly lower as a percentage of sales.

We expect 2008 non-GAAP operating margins in both business segments to be comparable to 2007 levels. In the RMS segment operating leverage from higher sales is expected to be offset by a high proportion of services in the sales mix.

PTS margins will benefit from substantial improvement in Massachusetts offset by higher costs in Nevada as we start up and transition into the new facility. However, unlike Massachusetts, we do not expect to incur any one-time charges to exit the existing Nevada facility. We will exit the Worchester, Massachusetts facility in December but there may be some residual charges in 2008 associated with the disposition of the facility. We will not expect these charges to material and consistent with our 2007 presentation would exclude them from non-GAAP results.

Turning to EPS guidance we anticipate 2008 non-GAAP EPS to be in the range of $2.87 to $2.97 which represents year over year earnings growth in a range of 11% to 15%. Besides the sales and operating income growth drivers that I discussed earlier 2008 earnings will benefit from slightly lower net interest expense and a lower tax rate which should be more than offset by an increase in the number of shares outstanding.

Net interest expense is expected to be $7 to $9 million below 2007 levels due to lower interest rates as the Federal Reserves interest rate reductions throughout 2007 subsequently decreased the libor rate as well as debt repayment. We expect our 2008 tax rate to decline by approximately 100 basis points to a range of 27.5% to 28% on a GAAP basis and a range of 28% to 28.5% on a non-GAAP basis. The reduction of our tax rate will be primarily driven by lower corporate tax rates in certain jurisdictions including the UK and Germany.

Diluted shares outstanding are expected to average slightly over $7 million in 2008 an increase of over one million shares from the projected 2007 range average. Stock repurchases under our existing authorization are expected to substantially offset dilution due to equity compensation awards but we will experience dilution from our convertible debt. Based on current stock price levels we anticipate approximately $.05 of incremental dilution from the convert in 2008.

As a result the strong sales growth and improved operating efficiency we expect to generate significantly more operating cash flow in a range of $280 to $305 million. Although still constrained by the capital requirements through our expansion projects, which as Jim said, we estimate in a range of $220 to $240 million we expect free cash flow to improve to a range of $50 to $75 million in 2008 and more meaningfully in future years as operating cash flow continues to grow and capital intensity declines.

To give you some perspective on the amount we are investing in expansion, maintenance represents just over 25% of the capex budget which means that nearly 75% is for expansion projects.

As we said previously the capex budget for the three years from 2006-2008 is inflated by the additional investment associated with replacement of the Massachusetts and Nevada facilities. In 2009 when these projects are completed we would expect to see the capital intensity moderate.

Depreciation is expected to increase by $12 million to $65 million, primarily driven by the new facilities coming online. Amortization expense is expected to decline by $4 million to $29 million as we amortize a portion of the intangible assets from the indirect acquisition over a shorter three year period which ended in 2007.

Many of you have asked about returns in invested capital, we are pleased to report that this metric continues to improve as a result of the strong growth in net income fueled by aggressive investment to expand our revenue generating infrastructure. We expect to improve returns again in 2008 as we move closer to our near term goal of 10%.

In the first quarter 08’ we expect year over year operating margin comparison to be constrained by two factors; first, costs for Nevada are expected to step up in the first quarter resulting in pressure on the preclinical segment margin, second the RMS margin in the first quarter 2007 benefited from shipments of large models that had been quarantined for an extended period in 2006, an event which will not recur in the first quarter of 2008.

To summarize, we expect the momentum from 2007 to continue driving another strong performance in 2008 we are reaffirming our 2007 financial guidance and initiating 2008 guidance of 10 to 13% revenue growth or $1.335 to $1.375 billion. GAAP EPS of $2.59 to $2.69 and non-GAAP EPS of $2.87 to $2.97.

That concludes our remarks; we’ll now take your questions.

Question-and-Answer Session

[Operator Instructions] Our first question today comes from the line of David Windley of Jefferies & Company, please go ahead.

David Windley – Jefferies & Company

I wanted to start on preclinical, Jim; you gave quite a bit of detail around different facilities, capacity expansion, margins improving and some drag in others. One of the things that have been an initiative that I didn’t really hear you touch on is six sigma, lean sigma, sigma light, initiatives and I’m wondering a little bit about the rest of the system improving margins to an extent that would more than offset the Reno drag?

Jim Foster

Several things are going on, Dave, one is that as we go forward the new facilities are inherently more flexible and more efficient and better designed so we should see margin improvement going forward as they begin to fill up and as we achieve the proper mix and balance of business. We do have a drag, obviously in 07’ and 08’ due to the fact that a large proportion of 2006 we were building replacement space.

Again, as we look forward our space almost entirely in the future will be incremental. We had a very sophisticated six sigma light initiative for the past year and a half which has really helped us bring best practices to the forefront across many of our facilities. Many of those initiatives have been implemented we are in the process of taking that to the next level and focusing primarily on our preclinical segment. We should get a combination of better design, more flexible facilities a focus on best practices and probably some enhancements on operating efficiencies typically a patch to utilization as we continue to drive forward in our ERP initiative.

David Windley – Jefferies & Company

Those things net net in 2008, that’s still flat margin year over year and you mentioned that that’s a good outcome if you are able to hold it flat.

Jim Foster

The scale of the Nevada facility is really unprecedented for us and maybe for anyone in the industry. We’ll be opening almost 400,000 feet yet a fair amount of that is replacement. That’s a lot costs to bring online also we have the duplicate cost of the existing Legacy facility. We’re going to have a slow transition as we had in Massachusetts making sure we don’t disrupt other ongoing studies.

We’ve learned a lot from the Massachusetts operation and we’re really pleased that we anticipate significantly improved operating margins in Massachusetts than we had in 07’, as that facility continues to get a stronger mix of higher revenue and margin business. The drag from Nevada will essentially offset that.

David Windley – Jefferies & Company

On revenue in that segment I believe you described your low to mid teens assumptions as consistent with your assumptions for 07’, correct me if I’m wrong on that. As I look at the 07’ it looks to me like organically revenue growth is actually outpaced that level, certainly did in the third quarter and I’m just wondering with more capacity available, lots of demand out there assumption of mine being that you opened the capacity nice new high tech leading edge capacity and volume will flock to that. Seeing your revenue growth assumptions seem maybe a little bit on the conservative side on preclinical.

Jim Foster

We think they are realistic, we think that they have us growing slightly ahead of the market and we do comparable and consistent with our growth rates this year. Yes, we’ll bring online new space in a variety of places, some its replacement, but we have sufficient incremental space to grow ahead of the market. You have to remember, Dave, the principle and primary factor continues to be the availability of staff and a time required to train them up. We are pleased with our hiring process, we are pleased with the people we are getting in the door, please are pleased with the training initiatives we’ve put in place. It’s hard to accelerate that much more without imperring part of the work we do and everything is about execution as we continue to garner more work compliant to strategic outsourcing a primary lever for them to pull.

We’re pleased with our growth rate; we are comfortable at the rate in which we are adding facilities, we are delighted with our ability to bring staff on. Online and on time and not dramatically ahead of when we need them and be able to retain them and develop their expertise. It’s the growth rate that we are happy with compared with the current year and as we look out to the future you can get slight variations in that growth rate to the positive side and if you are able to get the sort of perfect mix we talked about that historically as well and kind of mix of specialty versus more tranditional toxicology work and of course we have a lot of specialty work. Those assumptions are playing to the guidance for 08’.

David Windley – Jefferies & Company

One last question, this is a quick one. On your unallocated corporate overhead, if I do the math on percentage of sales it looks like the number would increase maybe about $8 million or so and if I look at it over a two year period 07’ and 08’ the growth in the unallocated corporate overhead line is approaching twice the growth of revenue. I’m just wondering if you’re willing to talk a little bit about the longer term and how much of that unallocated corporate overhead is going to finite projects that at some point will be in place and no longer have this heavy spend on them and say in 09’ could we expect an absolute decrease in dollars of unallocated corporate overhead once these types of things have been completed?

Tom Ackerman

I don’t have the dollar amount of the increase in front of me but we are growing in our at or about slightly below sales year over year.

David Windley – Jefferies & Company

In 08’ but in 07’ it was significantly higher than that.

Tom Ackerman

One of the key driver in 07’ which is a driver in 08’ that obviously given the increase is lower as a percent that continues to be IT. As we put projects in motion, particularly the ERP as Jim mentioned, as we move forward I do hope there is more opportunities for leverage but as we bring some of these systems online there will be a certain amount of maintenance and ongoing support required for them and so I don’t think that we’d be able to say given a couple of years or three years of significant investment in areas like that, that the numbers would drop off dramatically.

I think once we bring on systems like that it will just take more people to maintain them and keep them current. As we said, this year and going forward I’d like to think that we would get a little more leverage because we wouldn’t need to increase as much.

David Windley – Jefferies & Company

Thanks.

Operator

Next we’ll go to the line of John Kreger representing William Blair, please go ahead.

John Kreger – William Blair

Just a follow up to one of David’s questions. How are things going in terms of staffing of the new Reno facility and can you give us a better sense about when you try to bring those people on? Are they already hired, for example, or will you be literally hiring as you bring the space online?

Jim Foster

It’s really a combination of both; I’d say we are in very good shape in Reno with the senior staff. It’s always been one of the premier preclinical CROs in terms of scientific excellence and leadership particularly in the large animal area. We have that base to build upon and also to attract other people. So rate limiting factors, that’s always the technician level, the good news is that we don’t have a lot of similar types of companies to compete with for this sort of talent so people that like this type of work, veterinary based work, tend to be attracted to us.

As I think I said before, we learned a lot from the staffing in Massachusetts, while we are opening more space it’s still a very large scale operation and we did well there so we’ve adopted similar methodologies, we’ve utilized lots of local universities and colleges and trade schools to bring people on directly from there and we’ve installed a full time trainers to get them up to speed. We bring the people on, it depends on the job, it can be anywhere from a couple of weeks to a couple of months in advance of when they need to start, depending how much training they need. Obviously we would bring them on in accordance with those timelines in advance of when they need them to generate the revenues. We have staffing in place certainly to generate the work in the first quarter and as we continue to open more space in that facility we’ll continue to staff appropriately.

We hope to get the right balance we want people ready to take on work, we don’t want a whole lot of people sitting waiting for work and we certainly don’t want to be understaffed which would cause us to turn work away. We are pleased with the way it’s going, I guess would be the summary of this.

John Kreger – William Blair

If you look across your various expansion projects in PCS how has the cost per square foot come in relative to your budget, any surprises there and would you be willing to quantify what your cost per square foot has been?

Jim Foster

We would not be willing to quantify it, but we are rigorously running all of these projects simultaneously and they are coming in very much according to plan both in terms of timeframes and budget. We think the cost, we benchmarked the cost across the whole industry and we are comfortable that our cost per square foot is competitive. I guess we’d say that we believe the sophistication and flexibility of our space is probably at the leading edge of preclinical facilities, both from a competitive point of few and our users.

John Kreger – William Blair

One last question, if you look at your PCS capacity utilization do you expect that to go up or down, in other words, do you expect to add space at a greater pace than your revenue growth or less?

Jim Foster

Our goal is to keep the facilities substantially fully utilized. I don’t think we can give what percentage we consider that at; we have a goal which we are at or exceeding at the current time. We have some facilities that aren’t fully full, which sounds great it doesn’t allow you to take on any other business that specific. We’re adding space across the world in anticipation and in advance of when we need it. Kind of on a phase basis, periodically we get constrenuous but basically we have sufficient space to grow. Europe is a place we tend to add space almost annually because it’s that we have a single facility there and the space gets utilized very quickly as we build itself. Again, the goal is to bring on space slightly ahead of when you need it.

The wonderful thing about the two big projects that we are bringing online, one is online and one is coming online in Nevada and Massachusetts is that they both have a significant amount of shelf space that isn’t yet built out. If we have unprecedented demand for something like major dedicated resources agreements or clients are shutting down space faster and want to commit more quickly. We have the ability to get those facilities done relatively quickly because we are not starting from scratch. We really feel we are in a unique position now where we have large multi species, multi capability facilities which are sophisticated that have incremental space that can be brought online relatively quickly.

Supported by smaller very focused facilities, focused geographically in terms of the types of work that they do. Those, by the way, are substantially very well utilized and have been for the last couple of years and we talked about Ohio for instance is one of those examples. We have a very specific consistent customer base there, we will be adding more space, we are quite confident that will fulfill as we build it.

John Kreger – William Blair

Thanks very much.

Operator

Our next question will come from the line of Douglas Tsao with Lehman Brothers, please go ahead.

Douglas Tsao – Lehman Brothers

Jim, you just touched on it, but I was wondering if you could give us an update on Shrewsbury, specifically, and if you have any plans for additional build out of any of the shelf space as well as an update and comment on your expectations for the study mix in Massachusetts which you’ve been sort of trying to improve a little bit vis-à-vis, the historical mix and Worchester?

Jim Foster

Two studies have really gone well, it’s substantially quite full, as we said earlier it filled initially with similar work to that which we have done historically in our old Worchester facility, tend to be more discovery oriented and shorter term oriented. We had been experiencing through the year conversion to longer term higher value studies, which is one of the reasons we are optimistic about improved operating margins in 08’ from that facility. We are definitely seeing a shift, we have much more sophisticated staff and the facilities to do different types of work in addition to the discovery work which we’ve done historically.

In terms of the second part, we are working on design plans for that, we’re actually having discussion with several clients who specifically want space in that locale which would probably be dedicated resources agreement, nothing is finalized yes so we have nothing to report. We won’t pull the trigger on that new space until client demand is sufficient to warrant that. Similarly that would be the case with Nevada as well. We’ll be preparing designs that will allow us to finish both the incremental spaces in both of those locales as the customer demand intensifies.

Douglas Tsao – Lehman Brothers

What do you expect the timeline to go from sort of plans to actually starting to build out the space? What do you expect the lag to be?

Jim Foster

We could start very quickly so, we’ll get to the point where the plans are, unless we get into conversations where we have to customize some space for clients, it will be ready to pull the trigger. I think we’ve said, historically, depending on the design we could finish the space 12 months after we could decide to go. That’s probably a year and a half or two years faster than doing that on a greenfield basis. We’ll be very pleased with that and again clients that we’re discussing with us some specific needs I think quite palatable it’s obviously much faster than they can do it themselves and much faster for the competition if they want large amounts of space, which probably isn’t available elsewhere.

Douglas Tsao – Lehman Brothers

One more question and then I hop out. In terms of the phase one businesses it looks like there has been a nice acceleration through the first three quarters of the year. How much do you think that is related to the increase in the beds, if you could give us a sort, I know you extend capacity in the facility, how do you feel that your capacity in the Phase one business is this something that you are actively pursuing in terms of expansion and potential acquisitions?

Jim Foster

Our Northwest Connecticut acquisition has gone according to plan. That was a business that had a small facility that was literally building a larger one as we did the acquisition. Many of us have been up to the clinic recently; it’s filled up very nicely and continues to do so. That’s considered sort of a mid to large scale operation and has a strategic geographic focus. We are pleased with what’s gone on there, the UK continues to have some regulatory pressures and some currency issues associated with that. Again, it’s a smaller clinic and so we’ve been able to rationalize that situation. We continue to look at phase one strategic relevance to us. The most important part of phase one is really provide pull through to our preclinical business and does it somehow enhance the preclinical revenues. While we’ve definitely seen that Scotland it’s unclear how much of that is driving the increase in revenues in the Northwest part of the US. We are going to continue to validate that proposition before we go ahead and add any other resources to that part of our business.

Douglas Tsao – Lehman Brothers

Thanks a lot.

Operator

Next we’ll go to the line of Alex Alvarez representing Goldman Sachs

Alex Alvarez – Goldman Sachs

I was hoping you could walk us through the rationale for opening up 80% of the new Nevada facility with the initial phase early next year and how significant the additional expenses are in terms of opening that amount of space versus say 60% that you opened up in Shrewsbury early this year?

Jim Foster

We opened the space commensurate with the demand in that locale. Remember that both of the operations in Massachusetts and Nevada are strategically located to service primarily huge concentrations of biotech companies in those locales. Additionally there are some straight pharma business as well. Given the need to replace existing space and given our desire to build incremental space at the same time, where as Massachusetts was more of a replacement scenario in phase one, 80% ended up to be the right amount of space for us to open to achieve both replacement and build new space as well and service the needs of the client, particularly given the kind of competitive scenario on the West coast.

We didn’t think that we could justify finishing all the facility we thought that 50% or 60% would be insufficient to support the demand out there and yes, that certainly brings us certain cost burdens with that for 08’, which we feel that we are very pleased to offset that essentially and be able to maintain our margins. I also hold some good steps for 09’ to have that much incremental space available to build a business and to grow that franchise.

Alex Alvarez – Goldman Sachs

In terms of the strategy in preclinical it certainly seems that it’s changed somewhat in that a year ago you were talking about potentially consolidating some of the smaller facilities and now there are plans to expand Ohio. How did that change in plans impact the long term margin of goal for preclinical and secondly, could there be additional plans down the line to expand some of the other smaller satellite facilities or are you happy just kind of leaving them at what appears to be operating near full capacity?

Jim Foster

It’s a really good question, when we first got in this business and as we continue to add parts and pieces we did expect the smaller facilities would be less relevant, less strategic and make less of an impact. We did have some designs on some consolidation because it frees administration and things like that. The reality is that the demand is so robust and the customer concentration from a geographic point of view are such that we really feel it’s given us a nice competitive edge and a way to service a whole range of different types of clients. We have smaller clients, clients that need space relatively close by, clients that want specific types of work that prefer working in those locales, sometimes they prefer working in them because of the people who staff them, sometimes they just like the fact that they are a larger client in a smaller locale.

We also really like the fact that we are sort of providing all of the solutions to our clients. People that want very large facilities can work with Charles River and people that want smaller facilities with maybe less specialty work don’t have to look to another company to provide that, they can also do the work with Charles River. We are very pleased with that.

I guess my final comment would be, you have to remember we exist only to service our clients. We don’t do anything in those facilities, and as long as the demand is significant, which it is, I would say that all of those small facilities are fully utilized, some totally utilized and also the margin contribution in all of them I would say is at or north of the 25% operating margin goal that we have. Not only are they not a drag but I would say they are an enhancement to our operating margin aspirations, which we weren’t sure of three or four years ago, they are an important part of the puzzle, I can’t really imagine pulling one of them out now. There wouldn’t be any benefit either from a margin point of view and certainly from a customer service point of view in doing that.

Alex Alvarez – Goldman Sachs

One last one, Tom, you brought up the interest on returns on invested capital, based on what you are seeing out of Shrewsbury can you discuss the tax returns you would expect to achieve from the investments being made both in Shrewsbury and the Nevada facilities and how those returns would compare to returns from a more traditional capacity addition to an existing facility?

Tom Ackerman

We are seeing the ramp up in returns that we anticipated although to fully realize those; obviously they will take more time. When you say returns in comparison to existing I assume you mean in preclinical. For instance in some of our older preclinical sites, some of the assets have been depreciated over a number of years. From a return on the amount of investment some of those returns obviously would be higher at this point in time.

Alex Alvarez – Goldman Sachs

I was talking more I guess with Shrewsbury and Nevada being more replacement plus additional capacity. Is it going to take longer for you to achieve an attractive return compared to replacement component versus just say adding a wing to an existing preclinical facility?

Tom Ackerman

I would say yes, of course we are putting a lot of assets in place on the replacement portion whereas if you look at either of the older facilities in many cases those assets had been depreciated for a number of years so the asset base itself was much lower.

Alex Alvarez – Goldman Sachs

Thank you.

Operator

[Operator Instructions] We go to Tycho Peterson with JP Morgan, please go ahead.

Tycho Peterson – JP Morgan

I wanted to follow up on a comment you made about dedicated facilities, potential interest from the commercial partners, can you give us a sense of what the timeframe might be around that, then how large that opportunity could be?

Jim Foster

Dedicated facilities, specifically?

Tycho Peterson – JP Morgan

You made it in reference to your National Cancer Institute comment and you said there may be interest from commercial partners for dedicated facilities.

Jim Foster

No, what we said was that was our first dedicated resources arrangement in the RMS business, we think it’s a very interesting and beneficial arrangement for the client and that same sort of structure ought to work well for the commercial sector as it does for the not for profit. We’ll be able to use that as a template as we go and talk to our for profit clients who are thinking about utilizing these sorts of consulting staffing services that we have.

The same drivers that are driving the preclinical business are driving many of the service components of the RMS business. We don’t have any specific conversations that are well along in that area, but we are having conversations about projects like that and structures like that with large drug companies just to make sure they are aware that that opportunity is available and that we have considerable experience on doing that kind of work.

Tycho Peterson – JP Morgan

With regards to the near term capacity additions, can you give us a sense as to how much of that is now dedicated?

Jim Foster

I think we said in our comments that by the end of 08’ about 10% of our PCS revenues would fall into the dedicated resources bucket.

Tycho Peterson – JP Morgan

On the Shanghai collaboration, are you expecting anything meaningful in terms of revenues over the next couple of years, how do we think about the ramp there?

Jim Foster

What you mean by meaningful, I think the best way to look at it is that it will be strategically relevant to us. You can sort of triangulate in other revenue if you like given the size of that facility about 50,000 feet, we don’t think we will have any trouble filling it. If the demand continues to be substantial we will roll into building a larger facility from that but I don’t think it’s going to change the direction the company in the next couple of years, although as China becomes more important we will have had a foothold quite early.

Tycho Peterson – JP Morgan

How do you look at the competitive landscape over there? We’ve seen some of the API manufacturers move into the CRO space not necessarily into animal models but they’ve been talking about it. Do you see any major changes in the near term?

Jim Foster

I think that we see a fair amount of local competition over there, we think that ultimately many if not all of the major international players will be there. There will probably be sufficient amount of business to support multiple players. It was important to us to be the first international CRO that had GLC capability and so we’ve done that.

Tycho Peterson – JP Morgan

Thank you.

Operator

We move on to the line of [Nick Yulian] with Robert W. Baird, please go ahead.

[Nick Yulian] – Robert W. Baird

One quick question, most of my questions has been answered. On the third quarter call you mentioned that we should expect 4Q07 share count to be just above 69 million shares. In light of the guidance you have given for 2007 share count is that still a reasonable assumption for the fourth quarter?

Tom Ackerman

Yes it would be and you didn’t ask the question but just to put it into perspective in case anybody is thinking, the average of course will be lower than that in 07’ that ties to our comment about the increase to 08’ with a count of being more than 70 million. The actual share count has increased during the year, obviously, so we have a lower average for the year than in the fourth quarter. But your comments in the fourth quarter are correct.

[Nick Yulian] – Robert W. Baird

Thank you.

Operator

Our next question will come from the line of Robert Gilliam with UBS, please go ahead.

Robert Gilliam – UBS

Just two quick housekeeping questions. First, as far as the share repurchase, I just wanted to get an update on what remains as of today on the current plan and then what is factored into 2008 guidance for share repurchases?

Tom Ackerman

We have slightly in excess of $100 million remaining on our current authorization which is an amount up to $400 million. We are operating under a 10B51 plan so the company is actually buying right now under that plan. When we raised our plan to $400 which was the middle of the year we said that that would probably be a couple of years worth of activity. It’s always difficult to say whether we would accelerate or decelerate buying but the guidance that we wanted to give folks at that time was that was that we essentially weren’t going to rush out and spend that money the next day.

Robert Gilliam – UBS

One other quick question as far as FX impact. What’s factored into guidance as far as the non-cash, the hit to essentially the other income line on the income statement?

Tom Ackerman

The activity that tends to flow through there are really either one ops or transaction losses for foreign exchange and our investment activity on our deferred comp program and generally as we look out through the year we try to manage that at or around zero so we don’t typically plan an awful lot of activity in that particular line item.

Robert Gilliam – UBS

Thanks a lot.

Operator

We’ll move on to the line of Doug Schenkel from Cowen & Company, please go ahead.

Doug Schenkel – Cowen & Company

I was hoping, and I’m not sure if you can do this, but I was wondering if there is any way to quantify how much of the PCS growth outlook is driven by mix and pricing versus volume and capacity increases?

Jim Foster

We talked about pricing, we didn’t specifically say volume but I think out of the three drivers, mix would probably be the smallest driver, without giving you an exact quantification, I think in rank order that would be the smallest driver in PCS in total. I think we talked about it in Massachusetts as being a key driver but overall to PCS it would be a smaller driver.

Doug Schenkel – Cowen & Company

That’s very helpful, obviously the Nevada transition is going to offset the Massachusetts benefits in 2008 and the IT spend is a bit of a drag on the year, at least it keeps things flat. Assuming these items that drag on margin subside by year end 08’. Is there anything that you would be willing to mention in terms of longer term variable that would constrain margin improvement 2009 and beyond?

Jim Foster

No, there is nothing beyond what we’ve said. By 2009 the replacement space will be built, we hope full and we hope we have continued beneficial mix there and of course we should continue to get some price. The new space will be more efficient and more flexible. We should be able to continue to improve the margin in those two facilities over the next two or three years. We will continue to incrementally build space at smaller facilities where we already have good margins and are able to build on those.

As we build out the incremental space in the new facilities it is incremental space we can do that in as large or small pieces as we want. We intend to do that in a way that enhances the margin contribution but also obviously satisfies the demands of our client base. We think we are structured in a very positive way to utilize our facilities going forward. Again, our goal is to get to a 25% operating margin in the preclinical sector where there was virtually all of the facilities Mass and Nevada have a drag, Mass will improve in 08’ and Nevada should improve in 09’.

Doug Schenkel – Cowen & Company

One last one, you obviously bumped up capital spending and guidance just a bit for next year. I think over the summer at your analyst meeting you mentioned that you were expecting a moderation in 2009. You mentioned that again today. Does the incremental bump up for 08’ guidance in any way change the level of moderation that you expect in 09’?

Jim Foster

I don’t think so. From an overall vantage point as we said we are going to have some level of capex going forward we haven’t quantified that, but that will be clear to us as this year goes along. We are going to continue to aggressively and appropriately add incrementally primarily to our preclinical sites and also our RMS sites as required. We can’t concede that we will continue to be spending at this level after the duplicate cost need subsides.

Doug Schenkel – Cowen & Company

But the flip side to that is it would be hard for you to get back to that 25% level that Tom referenced in your prepared remarks, given the need to continue building out capacity, albeit not at the same levels that you spent over the last few years?

Tom Ackerman

The 25% was a reference to the maintenance portion. I think that that level would probably continue at or above there and then it would be a function of the amount that we would spend on expansion and what we are considering expansion the 75% that we referenced a portion of that is actually replacement.

Doug Schenkel – Cowen & Company

Thank you.

Operator

We have time for one more question today and it will come from the line of John Sullivan with Leerink Swann, please go ahead.

John Sullivan – Leerink Swann

Just a quick question regarding perhaps future expansion plans that you might contemplate. Any plans in Eastern Europe, do you feel as though you have a need to add Eastern Europe in the long term?

Jim Foster

We don’t have any specific plans now, John, we have a couple of small operation in our RNS business in Eastern Europe, which works well for us when we were in the latest stage clinical business we had some Eastern Europe CMO locations as well. We don’t see necessity at the current time to be expanding in that area.

John Sullivan – Leerink Swann

Can you just speak for one second about commitment to in vitro assay activities like toxicology testing, is that an area where you are seeing your clients show any more interest. I know that you talked about polygenic models being very popular but are in vitro assays gaining in any part of your businesses?

Jim Foster

I think there is always an interest in in vitro technologies. We continue to look at them. We are looking at some right now. The whole issue with in vitro technologies with the drug companies is will they spend the time to validate it and the answer is usually not. Is it validatable at all and the answer is sometimes they are and sometimes they’re not. Will the FDA accept them as the basis of regulated submission? I think everybody is pushing for that very early on. We always thought of that as a strategic adjunctive business that we could add to our portfolio. We continue to look and we haven’t found anything commercially viable. Some of our clients have their own capabilities in-house that they use on a proprietary basis. Again that is very early on as well, I would say generally there is an interest in it but the practical implications are that they probably too crude to make a significant impact in the short term.

John Sullivan – Leerink Swann

Thanks very much.

Operator

Did you have any final remarks today?

Susan Hardy

Thank you for joining us today, we look forward to speaking with you soon and to seeing you at the JP Morgan conference in January. This concludes the conference call, thank you.

Operator

Ladies and gentlemen, this does conclude our conference for today, thank you for your participation and for using the AT&T executive teleconference service.

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