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Executives

Patty Frank - Director IR

Candace Kendle - CEO

Buzz Brenkert - SVP and CFO

Chris Bergen - President and COO

Analysts

Glenn Garmont - Broadpoint Capital

Randall Stanicky - Goldman Sachs

Todd Van Fleet - First Analysis

Amy Stevens - Susquehanna Financial

Eric Coldwell - Robert W. Baird

Sandy Draper - Raymond James

Doug Tsao - Lehman Brothers

Kendle International Inc. (KNDL) Q1 2008 Earnings Call May 7, 2008 9:30 AM ET

Operator

Welcome to Kendle's first quarter 2008 Earnings Call and webcast. As a reminder, this call is being recorded. At this time I will turn the call over to Patty Frank, Kendle's Director of Investor Relations. Please go ahead.

Patty Frank

Thank you. Good morning, everyone, and welcome to our conference call. With us today are Dr. Candace Kendle, Kendle's Chairman and CEO, Chris Bergen, Kendle's Chief Operating Officer, and Buzz Brenkert, Kendle's Chief Financial Officer.

By now you should have all received a copy of our earnings release. This release also is posted on our corporate website at www.kendle.com or via PR Newswire at www.prnewswire.com. If you are interested in listening to a replay of this call, a telephone version is available through June 6, by dialing 706-645-9291 and entering access code 41241978, or you may access a webcast of the archived call at www.kendle.com.

All participants are currently in a listen-only mode. A question and answer session will be conducted following management's formal remarks. (Operator Instructions) Please note webcast participants do not have the capability to ask questions.

Before I turn the call over to Dr. Kendle, I would like to remind everyone that statements made during today's call that are not historical might be considered forward-looking. Today we will be talking about our expectations regarding a number of activities in which Kendle is engaged. Reliance should not be placed on such forward-looking statements because they involve risks and uncertainties that may cause our actual results to differ materially from those which we are going to discuss or which we may imply. Those risks and uncertainties are outlined in our Securities and Exchange Commission filings.

With that, I would like to now turn the call over to Dr. Kendle.

Candace Kendle

Thank you, Patty, and good morning to all. Buzz, would you like to begin?

Buzz Brenkert

Certainly. Good morning, everyone. This was a very strong quarter. Net service revenues for the quarter totaled over $114 million, another quarterly record and a 20% increase over last year's first quarter. Operating income for the quarter totaled $14 million, a 12% increase over prior year, and operating margin was 12.2% compared to 13.1% in the first quarter of last year. For the quarter, we're reporting earnings per share of $0.38, which represents a 36% increase over last year's first quarter. Diluted earnings per share in Q1 of last year totaled $0.28. Focusing on revenue, as I mentioned earlier, over $114 million of revenue for this quarter represents 20% growth over last year and 9% growth over the previous quarter. Fluctuations in foreign exchange rates accounted for about 6% of year-over-year growth and 1% of growth over Q4.

Revenue in our late-stage operation was strong at almost $105 million, growing 18% over Q1 2007 revenue of $88 million. Revenue in our early-stage units at $5.6 million was 4% ahead of last year's first quarter. While all regions experienced significant revenue growth, we continue to see proportionally higher growth in Latin America and Asia Pacific. For instance, North American based service revenues grew almost 12% from Q1 last year, and were 46% of total company revenues, down from 50% of total revenues in Q1 last year, and European revenues grew over 17% and were 42% of total, down from 43% last year. On the other hand, Latin American revenues grew 94%, increasing from 4% of total last year to 7% this year, and Asia Pacific revenues grew 73%, increasing to 5% of revenue from 3% last year.

Customer concentration, as measured by our top five and top ten customers in terms of revenue, increased versus the first quarter of last year. This quarter, our top five customers accounted for 31% of revenue as compared to 26% in the first quarter of last year, and our ten largest customers accounted for 44% of revenue versus 39% last year. No customer accounted for as much as 10% of revenue.

Looking at income, income from operations for the quarter was $14 million, or 12.2% of net revenue compared to $12.5 million in Q1 2007, or 13.1% of revenue. The reduced operating margin is due to increased selling, general and administrative expenses, as SG&A grew from 31.4% of revenue in Q1 of last year to 33% of revenue this year.

Included in SG&A this year are several one-time items, as well as expenses associated with enhancing the company's infrastructure including over $420,000 in costs related to an internal global leadership meeting, over $375,000 in additional stock-based compensation related to the issuance of various equity-related awards to certain retirement-eligible Kendle associates, over $275,000 of executive recruiting fees and incentives, over $150,000 of costs associated with enhancing our financial systems as part of our ERP project, and a $431,000 increase in the bad debt reserve related to potential collection issues on a study inherited through our Charles River CS acquisition in 2006. Most of these costs were anticipated in our earnings guidance for the year. Other items affecting first-quarter SG&A expenses are the usual payroll taxes and other benefits expenses, as well as ongoing costs associated with establishing a new Asia-Pacific regional headquarters.

Pre-tax income for the quarter totaled $8.7 million, up from $6.6 million last year, an increase of 33%. Net other expenses include a $2.4 million loss resulting from foreign currency fluctuations and a one-time $700,000 loss on termination of our interest rate collar. The FX losses are primarily related to the strength of the euro, particularly in relation to the British pound and the U.S. dollar. The tax rate for the quarter was 35.4% compared to 36% in the same quarter last year, leading to net income of $5.6 million compared to income of $4.2 million for Q1 of the prior year, a 34% increase. As I mentioned earlier, the diluted earnings per share was $0.38 versus $0.28 last year, a 36% year-over-year increase.

Cash flow from operations for the quarter was a negative $9.4 million, reflecting significant growth in net accounts receivable. Capital expenditures totaled $5.6 million, the bulk of which were IT related.

Turning to the balance sheet, we ended the quarter with cash and marketable securities totaling over $32 million, down from over $46 million at the start of the quarter. Accounts receivable at the end of the quarter totaled over $168 million split evenly between billed and unbilled. Advance billings totaled almost $89 million, resulting in net receivables of almost $80 million and DSO of 45 days, down from 41 days for the same period last year. Working capital aggregated almost $70 million. On the liabilities side, borrowings of $200 million outstanding at the end of the quarter represent the convertible notes.

And with that, I'll turn it over to Candace to discuss business development.

Candace Kendle

Thank you, Buzz. I will begin my comments with our new business development and pipeline performance, followed by comments on our strategic outlook. Gross sales for the quarter were a record $180 million, representing a 20% increase over first quarter last year and a 3% sequential increase from the fourth quarter last year. Cancellations were $25 million or 14% of gross sales. Net sales were $155 million compared with net sales of $136 million in the same quarter last year. This represents a 14% increase, a net book-to-bill of 1.4. Net sales increased 8% sequentially from Q4 '07.

Our total business authorizations once again totaled an all-time company high of $917 million for the quarter compared to $700 million for the same quarter last year, representing a 31% increase and sequentially a 6% increase from the end of last quarter's backlog of $869 million.

We continue to see growth in mega trials in our backlog, both in the absolute number as well a percentage of backlog. We continue to experience a consistent flow of RFPs with a continued overall growth in dollar value. We saw an increase of more than 100% in the average dollar volume of RFPs received compared to Q1 '07, and more than a 24% increase from the end of 2007, a trend consistent with our strategy and in line with the market and industry research regarding the opportunities for global CROs.

Our top five customers represent 37% and 43% of total gross and net sales respectively. This is down from 45% and 50% from Q1 2007, as we continue to broaden our customer base and expand our business.

Our sales reflect our globalization efforts as more work is performed outside the U.S. In the first quarter 2007, the U.S. generated 66% of sales, whereas in first quarter 2008 the U.S. represents 55%. Europe and our emerging regions continue to drive sales growth to other parts of the world. This is consistent with the increase in revenues in non-Europe U.S. regions, as discussed earlier by Buzz.

With regard to our strategic outlook, Kendle's strategy for 2008 through 2010 focuses on driving growth in our early- to late-stage clinical development business and on meeting the specific development pipeline needs of key customers. Geographic depth and breadth are key to this strategy. By 2020, emerging markets will contribute more than 50% of worldwide pharmaceutical market growth, up from 13% of growth in 2001 and an expected 33% in 2011.

To this point, our Latin American business continues with strong growth and performance. Earlier in the year we shared with you the addition of Dr. Ross Horsburgh who brings 20 years of CRO and pharmaceutical industry experience in Asia-Pacific. We are continuing to see success in terms of both the increase in RFP value as well as revenue growth with Asia-Pacific revenues now representing 5% of net revenues, up from 3% of the same quarter last year. With regard to RFPs, Asia-Pacific site participation has grown 50% in the last year.

I would like to move to comments on the leadership necessary for growth. To drive our growth strategy and provide the leadership strength to support our needs as a larger global organization, Kendle has announced several leadership promotion and appointments in recent weeks, most notably the promotion of Simon Higginbotham, former CMO, to President, the appointment of Alan Boyce to Vice President and Chief Marketing Officer, and Patricia Williams as Vice President, Commercial Operations.

In his new role, Mr. Higginbotham is providing global leadership for worldwide customer and business expansion to include strategic customer relations and new market opportunities. Mr. Boyce, who is returning to Kendle, brings extensive senior-level industry sales and marketing experience, as well as an in-depth understanding of the Kendle organization. The recent appointment of Patricia Williams, who comes to us with significant contract management experience within the CRO industry, most recently at Quintiles and prior to that at Covance, provides us with important new leadership for global contract execution and negotiation, including the securing and maintaining of master service agreements.

These executive leadership changes, along with additions mentioned in previous quarters, for example, Phase I Asia-Pacific finance and accounting leadership, further align us with our long-term growth strategy and position Kendle to deliver improved value to our customers and shareholders.

At this time I would like to make a few comments about our global resources. In addition to building our leadership, we are continuing to attract and retain the industry's top talent throughout the organization. Project leadership as well as senior support staff are key to our future growth and success. We continue to move forward against our hiring objectives. Attrition has dropped 9 percentage points since its high in the early months following the CRL CF acquisition, and is below the reported industry average of 20%.

Historically, Kendle attrition has been in the mid to high teens. Our move to a more comprehensive compensation program, improved performance assessment systems, and enhanced training have all helped to drive down turnover. Today our headcount stands at 3,471 associates, up 3.3% from Q4 '07. Alignment of our leadership team and workforce to the Kendle vision and strategy remains a top priority in driving our global connectivity.

Before I close and move to Q&A session, I would like to comment on our guidance and expectations. This quarter Kendle exceeded its budget for revenue, operating margin, and EPS. We want to work to give you better visibility to our expectations. The one-time expenses in the quarter were higher than should be expected in subsequent quarters, but for the most part were anticipated, resulting in our having exceeded our internal expectations.

While we do not share our budget, we would say that we expect to see continued revenue growth in the second quarter. We will continue to make investments in Kendle, particularly in the areas of leadership and system, but this should taper off towards the end of the year. We would expect operating margin growth, particularly in the third and fourth quarter. We remain confident in our annual guidance of revenue, $450 million to $600 million, operating margins. I'm sorry, I'm being corrected, $450 million to $460 million, operating margin 13% to 14%, and an EPS of $1.90 to $2.07.

At this point, Operator, I would like to move to Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Glenn Garmont with Broadpoint Capital

Glenn Garmont - Broadpoint Capital

Thanks. Good morning. Just a quick question. I'm just looking for a little more detail on sort of the composition of the new business wins in the quarter. Has there been any material change, I know you mentioned obviously the number of larger trials is increasing, but has there been any change in terms of, is the business being originated with Big Pharma, with biotech, with sort of small mid-tier pharma? Any additional color there would be appreciated. Thanks.

Candace Kendle

Sure. We continue to see about 70% of our business with the Big Pharma customer base, but the mega trial awards are spread across the smaller and larger customers more equally.

Glenn Garmont - Broadpoint Capital

Okay. Thank you.

Operator

Your next question comes from Randall Stanicky with Goldman Sachs.

Randall Stanicky - Goldman Sachs

Great. Just a couple questions. First a follow-up on the last question. What's your average duration on what you would characterize as a mega trial, a $10 million or so trial?

Candace Kendle

We don't give the average trial length, but what I will say is that the trial length, for both the smaller trials and the larger trials, have remained consistent over the last three quarters, and there is about a 25% increase from the smaller trials to the larger trials.

Randall Stanicky - Goldman Sachs

But it's fair to say that as your trial sizes increase, the duration of that backlog would likely increase over time, as well. Is that fair?

Candace Kendle

That's correct. It's about a 25% increase in the mega trials over the smaller trials.

Randall Stanicky - Goldman Sachs

Now, as you think about that shift and the shift that you talked about to ex-U.S., does that affect the profitability profile of your book of business at all?

Candace Kendle

Ask me again. I'm sorry.

Randall Stanicky - Goldman Sachs

As you think about that shift to ex-U.S. business, which I think has been a broader industry trend, does that impact your margin profile? In other words, is there a profitability difference between your U.S.-based trials versus the trials that you're doing overseas?

Candace Kendle

It is a mix. I think it's because there are a combination of things. First of all, there are escalating costs even in the emerging regions. So I think some of what we think of as lower-cost environments are seeing inflation in those areas. Number two, customers expect to get a savings in lower-cost environments to share those savings with you. And the third thing is that the cost of running larger trials over multiple countries is extremely high.

Take, for example, the increase in oncology trials where you can have small numbers of patients in larger numbers of countries in order to speed the enrollments. Those can be very expensive trials on the project leadership side per patient. So while profitability, you can expect some increase in profitability, but not, perhaps, to the extent that you might expect.

Randall Stanicky - Goldman Sachs

Okay. And then I just--I have just another question on a different topic. It looks like your 3,471 employee count, it looks like that's continuing with your January figure of roughly a 50 to 60 person add per month. Is that a fair comment? And then as you think about the full year, is that the proper trajectory that we should be thinking about?

Candace Kendle

I think you can escalate up from there as we've been able to force attrition down. As we have improved our recruiting efficiencies through the HR improvements, I think you'll see an improvement quarter-over-quarter.

Randall Stanicky - Goldman Sachs

An improvement in? I'm trying to understand how many?

Candace Kendle

I mean an increase in number of the headcount growth.

Randall Stanicky - Goldman Sachs

So you're going to hire a higher amount going forward on a monthly basis?

Candace Kendle

That's correct.

Randall Stanicky - Goldman Sachs

Okay. And then so my last question would be as we think about the 13% to 14% margin, which clearly I guess would be more back-end weighted, it seems like given the number this quarter, has that a mix of efficiency? In other words, you've gotten past some of that infrastructure as we get to the second half, or is it assumed operating leverage as we get later in the year?

Candace Kendle

A little bit of both.

Randall Stanicky - Goldman Sachs

Okay. Thanks a lot.

Operator

Your next question comes from Todd Van Fleet with First Analysis.

Candace Kendle

Hi, Todd.

Todd Van Fleet - First Analysis

Good morning. I want to make sure I understand something correctly with respect to the way you guys are looking at the 2008 landscape from a financial point of view, and how I think the Street might be understanding it because obviously there was a pretty big difference between what was expected by the Street this quarter and what was yielded by the company. I think operationally it was a very strong performance, but there are some disconnects here that maybe you can help us with so that we don't have to deal with these sorts of differences moving ahead.

And I guess I just want to start first off on the $1.65 million, I guess, of one-time SG&A related expenses that you recorded in the quarter, just to get a better feel for how much of a one-time nature we should view them? I mean, if you look at the list that Buzz articulated here, it's $420,000 for the internal global meeting, $375,000 for stock-based comp, and so on and so forth. I mean, the only thing that's on that list that would seem to be more of a one-time nature is the $430,000 of bad debt expense. So is the conference not something that's going to recur every year? Is it the stock-based compensation awards that were a part of some one-time comp plan for, you said, people approaching retirement age? I guess I'm just wondering why, first off, we should view these as more one-time oriented expenses?

Buzz Brenkert

And let me just go through each of them and talk to you a little bit about them. The global leadership meeting, that does not happen every year, but the point really was it certainly is, all the costs go into one quarter, so from a 2008 standpoint, you're not going to see that cost recurring in future quarters.

The stock-based compensation for the retirement-eligible associates at $375,000, that really basically would ordinarily be amortized over the vesting period of the award, but because the award would immediately vest were the individual to retire, the entire cost is thrown into the first quarter, so into the quarter when the award was made. So while there will be continuing awards and expense associated with the stock, for instance, in Q2 we'll have the director awards will come in later in the year, those costs where they were budgeted will not be recognized because they will have already been recognized.

The executive recruiting fees and incentives, you know the level of hiring that we have done. There are likely to be some costs similar to these in the future, but not to this extent. The costs associated with enhancing the financial systems in the ERP project, these are costs that are not capitalize-able. Once the project is in full development, most of the costs will be capital costs and will not be expensed. So expect a little bit of that in Q2, but beyond Q2 we don't expect those expenses to continue.

Todd Van Fleet - First Analysis

Okay.

Buzz Brenkert

And then the bad debt cost, significant bad debts are very rare. And so I would not expect that sort of thing to continue in future quarters. And, of course, then there is the non-operating expenses such as the $700,000 loss on termination of the interest rate collar associated with our old Term B debt that will not recur.

Todd Van Fleet - First Analysis

Okay. I'll circle back on that, Buzz. But the $1.65 million, is that mostly in corporate as opposed to being allocated to a business unit?

Buzz Brenkert

Mostly in corporate, correct.

Todd Van Fleet - First Analysis

Okay. Going back to that, those other charges, the $2.6 million, the majority of that is the foreign currency issue popping up, right?

Buzz Brenkert

Correct.

Todd Van Fleet - First Analysis

Okay. And so the $2.6 million, the total composition of that, could you give us a breakdown between what's ForEx related and non ForEx related?

Buzz Brenkert

Foreign exchange is $2.4 million, net.

Todd Van Fleet - First Analysis

Net, okay. If I go back to, and I'm just trying to reconcile some comments that you made last quarter and what Candace had said regarding your guys' major internal EPS target. If we go back to last quarter, I think you had said that the ForEx charge for the full year was going to be about $4 million to $5 million.

Buzz Brenkert

That's what we anticipated.

Todd Van Fleet - First Analysis

Right. And so now are you anticipating a much larger number for ForEx based on the $2.4 million that we've seen here in Q1?

Buzz Brenkert

It all depends really on what's going to happen with exchange rates. In the first quarter, the euro strengthened by over 7% versus the pound, and over 7% versus the U.S. dollar.

Todd Van Fleet - First Analysis

Right.

Buzz Brenkert

So far in the third quarter, it has been relatively stable. Actually, the dollar has strengthened against the euro, so I'm not backing off. I think we have cushion, but I don't think we're going to get the kinds of exchange rate fluctuations we've seen in the first quarter. But it's anyone's guess, to be honest with you.

Todd Van Fleet - First Analysis

Okay. So you're not going to back off the $4 million to $5 million at this stage, and the $2.4 million has occurred in Q1.

Buzz Brenkert

That's correct.

Todd Van Fleet - First Analysis

I guess my broader point is, I think there probably is some signaling that you guys could do to the marketplace to indicate that there's going to be some heavier SG&A expense in Q1. We expect and have factored into our thinking a heavier ForEx loss factored into Q1 so that we don't see the type of variations or differences between your internal EPS target and what people are left to devise from an external point of view? So that's more of a comment I guess, but I'll just--I'll leave it at that. Thanks, guys.

Candace Kendle

That's fair enough. In looking back, we felt we had made the comments on investments, but maybe not loudly enough, and also on the FX, so we take your point. We do want to work with you to give you the kind of visibility that helps us work together. Again, we remain confident on the annual guidance. We obviously need to help do more work on giving you quarter-to-quarter visibility.

Todd Van Fleet - First Analysis

Thanks.

Operator

Your next question comes from Amy Stevens with Susquehanna Financial.

Amy Stevens - Susquehanna Financial

Yes, good morning. Thanks for taking the question. I wanted to follow up a little bit on the comment about the escalating cost in emerging regions. To what extent are those encompassed in contracts that you've already made, and to what extent are some of them perhaps higher than what you may have already established in contracts? And those might be pricing issues that you would need to push through later in future contracts.

Obviously there's been the inflation that we've seen on certain raw material costs, and transportation costs have been in excess of what a lot of companies had predicted. So is that true for you, and are you needing to pass some of those costs on, on a forward-going basis, or was it all fully reflected in contracts made?

Candace Kendle

There are a couple things. First of all, remember that escalating costs on things like travel that would be driven by commodity costs are all pass-through costs.

Amy Stevens - Susquehanna Financial

Right, yes.

Candace Kendle

So that's one thing. The majority of our costs are personnel costs, and there's quite a bit of transparency to escalating salaries, and so it's not as difficult as it is in some other industries. The other thing is that we do have inflationary cost clauses in all of our contracts.

Amy Stevens - Susquehanna Financial

Okay. All right. And those would encompass escalating costs of salaries in geographic regions, that kind of thing?

Candace Kendle

Yes. That's really what they're based on. Salaries are our big cost.

Amy Stevens - Susquehanna Financial

Right. Okay. And so when you say, could you be a little more specific in terms of regions where you're seeing those real pickups in salary levels?

Candace Kendle

Yes. I mean, I think everybody knows. If you look at China, there are 40% to 50% increases in salaries in some of the labor pools. India is somewhat less than that, maybe in the 30% range annually. Latin America, a little bit less than that, but all of these emerging markets, of course, are very tight on technically competent individuals.

Amy Stevens - Susquehanna Financial

Yes. But you were talking a little bit about how clearly the client expects to share somewhat in the cost savings that they would anticipate in these regions. Does that come out in the price competition between you and your competitors, or?

Candace Kendle

Yes. I mean, but. Yes, but there are ranges, as you can imagine, rate ranges in various labor categories that customers are willing to accept.

Amy Stevens - Susquehanna Financial

Okay, all right. And then in terms of the headcount, you gave a number in terms of how you would expect it to increase based on hiring, and I wasn't sure if that was sort of net of attrition or if that was meant to be not net of attrition.

Candace Kendle

Net of attrition.

Amy Stevens - Susquehanna Financial

Okay. All right. I guess that's it. Thank you.

Candace Kendle

Thank you.

Operator

Your next question comes from Eric Coldwell with Robert W. Baird.

Eric Coldwell - Robert W. Baird

Okay, thanks. First off, Buzz, you said that foreign currency was $2.4 million net, but you meant pretax, correct?

Buzz Brenkert

Correct.

Eric Coldwell - Robert W. Baird

Okay.

Buzz Brenkert

I'm sorry. When I say net, I meant net of the hedging activity that we have or the hedges that we have for the inter-company notes.

Eric Coldwell - Robert W. Baird

Given that FX is costing you more than a dime in the first quarter which was the difference between a beat and a miss, why is there not more of a focus on better hedging and better natural and I guess matriculated hedges here? What's the holdup?

Buzz Brenkert

Most of the loss that we have on FX hedges or on FX is unrealized losses, and the challenge becomes really at what point in time do you want to turn those into something that's costing you money? So we're trying some different things as far as balancing inter-company accounts and doing things along those lines that would not cost us money and not affect the FX losses, Eric.

Eric Coldwell - Robert W. Baird

Is it safe to say that we would expect some ratable improvement in the volatility over time based on these initiatives? Is there anything more immediate that you can do?

Buzz Brenkert

There will be improvement. I don't know how to quantify it, to be honest with you.

Eric Coldwell - Robert W. Baird

Okay. Early stage sales were down $74,000 quarter-to-quarter. EBIT was down $1.3 million and we had 2,200 basis points of margin decline quarter-to-quarter. What is going on there?

Buzz Brenkert

Early stage, we do have a full quarter of our leadership and efforts in early stage. We have two early stage units, if you will, and the unit in Morgantown pretty much meeting our expectations at this point in time. The unit in the Netherlands has much more work that needs to be done there.

Candace Kendle

Eric, this is Candace. I think you're it's going to be the third and fourth quarter before we see a recovery in the Netherlands.

Eric Coldwell - Robert W. Baird

Okay. There were comments on the call about being above budget internally on sales margin and earnings, but your stock is down over 10% as we speak, and I'd just like to reiterate what I think Todd said pretty well which is having been public for 11 years, it sure seems like you would have learned by now how to communicate with the Street, how to signal these things. You don't have to give quarterly specific guidance, but I think you caught everybody off guard here yet again, and it's the fourth time in eight quarters. It's getting a little bit old, to be frank.

And I'll just follow up with, I guess, a question. Sales are currently at a $456 million run rate at above the midpoint of your annual guidance. She just said second-quarter sales would be up, so are you signaling no growth in sales in the third and fourth quarter, or is it another case of just really not having the guidance together here?

Candace Kendle

I don't think I said sales will be up. I think what I said is revenue will be up. We're not prepared to move off the revenue operating margin and EPS guidance at this time. We will review it next quarter, and if we think it's appropriate, we'll move at that time, but we are not prepared at this point. We think it's a little early to change the revenue, operating margin and EPS annual guidance.

Eric Coldwell - Robert W. Baird

Okay.

Operator

Your next question comes from Sandy Draper with Raymond James.

Sandy Draper - Raymond James

Thank you. Just a couple of housekeeping things, I guess, at this point. One, Buzz, what was the total FAS 123 number?

Buzz Brenkert

It was a little over $450,000.

Sandy Draper - Raymond James

Okay. And $375 of that was a little bit higher than normal, so a pretty substantial chunk.

Buzz Brenkert

Right.

Sandy Draper - Raymond James

Okay. And then what was the amortization for the quarter?

Buzz Brenkert

I'm sorry, the amortization of the?

Sandy Draper - Raymond James

Of intangibles, yes.

Buzz Brenkert

Of intangibles? The Charles River amortization?

Sandy Draper - Raymond James

Yes.

Buzz Brenkert

Is about $800,000.

Sandy Draper - Raymond James

Okay. And then just to make sure I understand, the $2.4 million of negative impact of FX, that includes the $700,000 loss?

Buzz Brenkert

No.

Sandy Draper - Raymond James

Okay. So where was that $700,000 loss? Which line does that show up in?

Buzz Brenkert

Yeah. It's in interest expense.

Sandy Draper - Raymond James

So netting out your normalized interest expense is running more like 2.2?

Buzz Brenkert

Correct.

Sandy Draper - Raymond James

Okay. And so you would expect that to immediately drop down next quarter?

Buzz Brenkert

Correct.

Sandy Draper - Raymond James

Okay.

Buzz Brenkert

Absent any Treasury activities.

Sandy Draper - Raymond James

Yes. Okay, right. Okay. Well, those are my questions. And I would hate to harp on this, but I would certainly echo the comments earlier that it seems like a real shame when you're selling well, you're executing well on growing your business and doing a lot of things right to have your stock lag because of just miscommunications or misperceptions between what you guys are seeing and the Street. And I think that one of the frustrations that as a shareholder, I mean, I obviously can't be a shareholder, but if you're a shareholder, it's very frustrating to hear a company say that we met all our targets, and then have the stock down 10%.

That can be very frustrating, so I would just not only second but third those comments. And whatever you can do, you're doing a lot of things right in terms of growing the business, and hopefully the other can get sorted out. So with that I'll drop off.

Operator

Your next question comes from Doug Tsao with Lehman Brothers.

Doug Tsao - Lehman Brothers

Hi, good morning. So just to sort of follow on Eric's questions regarding the performance of the early development business. I mean, the operating income being down so substantially, how much of the cost that we saw in this quarter were related to the new leadership hires? Because it seems like it can't just be that, I mean, over one quarter.

Candace Kendle

There were investments in the unit and needed equipment and some upgrades for specific customers.

Doug Tsao - Lehman Brothers

Wouldn't most of that equipment be a capitalized expense and so we wouldn't see that much of a spike?

Candace Kendle

Not all of it.

Doug Tsao - Lehman Brothers

Okay. And then turning to the geographic breakdown of revenues, I mean, we saw revenues now have been fairly flat over the last three quarters vis-à-vis the U.S. business where most of the growth has come, ex-U.S. in particular, very strong growth in Latin America. I was just wondering if you had some expectation in terms of the performance of the U.S. business on a go-forward basis.

Candace Kendle

I'm not sure what you're asking.

Buzz Brenkert

I am not sure I understand, Doug.

Candace Kendle

But what we.

Doug Tsao - Lehman Brothers

In terms of U.S. revenues, I mean.

Candace Kendle

Most of the time, actually is that the business will move to emerging markets. The entire business will grow, but the U.S. will grow at a lesser rate than the emerging markets. Is that what you mean?

Doug Tsao - Lehman Brothers

Yes. So you continue to anticipate you're up $7 million or so, or you're $10 million in the late-stage business sequentially, and the U.S. business is up $300,000 or so. And so the question is do you continue, do you expect the difference in growth rates here in the U.S. and ex-U.S. to continue being this great?

Candace Kendle

Yes. I mean, we're no different than the rest of the market. If the late-stage business is growing at 15% to 17% but we expect the emerging regions to grow much more rapidly, then you can expect that proportionately the U.S. and, to some extent, all of Western world will grow at a lesser rate than the rest of the world.

Doug Tsao - Lehman Brothers

Okay.

Buzz Brenkert

And, Doug, just to be clear. I'm not sure what period you're talking about with the growth, but growth in the U.S. revenue from a year ago, U.S. revenues have grown 12%, so.

Doug Tsao - Lehman Brothers

Well, no. I'm thinking sequentially, right, because sequentially you were at around 52.1, and now you're at 52.5, so roughly $400,000 increasing.

Buzz Brenkert

And I wouldn't put too much store in that short a period of time.

Doug Tsao - Lehman Brothers

Okay. I mean, it was only and then finally.

Buzz Brenkert

And the reason I say that is because it's basically how many days are in the quarters that the driving factors in there vary from period-to-period. And so there's a lot of noise in the kinds of growth rates you've got there. So you really want to look at least a 12-month growth rate.

Doug Tsao - Lehman Brothers

Okay. And then following up on the point some have made about the communication regarding this quarter, I don't feel a need to add to that. But I guess I am going to ask are there any issues that you are aware of that we should be aware of when we think about how we should model the second quarter?

Candace Kendle

I will at the close of the call repeat the comments on our expectations going forward to make sure everybody hears the same message. But we certainly understand that together we need to communicate more clearly and to give better visibility with regard to our expectations. But I will repeat the comments before we close.

Buzz Brenkert

And let me just repeat the items I've pointed out that are going to be continuing into the second quarter. We will have the director stock awards in the quarter which will be fully expensed in the quarter. There will be more executive recruiting costs. There will be more costs associated with the financial systems and the ERP.

Operator

(Operator Instructions)

Candace Kendle

Okay. Just going over our expectations for the future quarters in 2008, we would expect to see continued revenue growth in the second quarter. We also will continue to make investments, particularly with regard to leadership and all the costs associated with leadership, some of which Buzz has mentioned, and continued costs with regard to improving our infrastructure, our systems, but we expect that these costs will taper off towards the end of the year. We would expect operating margin particularly to grow, particularly in the third and fourth quarters.

And again, we remain confident about our annual guidance and will update you on guidance at the call next quarter. If there are any changes, obviously we will come out with them before the quarterly call.

At this point I want to thank everyone and assure you that we're committed to working with you on the visibility. Thank you so much.

Operator

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.

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Source: Kendle International Inc. Q1 2008 Earnings Call Transcript
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