Prepared remarks
Ladies and gentlemen, thank you for standing by, and welcome to the Charles River Laboratories Second Quarter 2026 Earnings Conference Call. This call is being recorded. Operator provides instructions to callers. I would now like to turn the conference over to our host, Todd Spencer, Vice President of Investor Relations. Please go ahead.
Good morning, and welcome to Charles River Laboratories Second Quarter 2026 Earnings Conference Call and Webcast. This morning, I am pleased to be joined by Birgit Girshick, our Chief Executive Officer; and by Glenn Coleman, our Executive Vice President and Chief Financial Officer. They will comment on our results for the second quarter of 2026 as well as our financial guidance. Following the presentation, they will respond to questions. There is a slide presentation associated with today's remarks, which will be posted on the Investor Relations section of our website at ir.criver.com. A webcast replay of this call will be available beginning approximately 2 hours after the call today and can be accessed on our Investor Relations website. The replay will be available through next quarter's conference call. I'd like to remind you of our safe harbor. All remarks that we make about future expectations, plans and prospects for the company constitute forward-looking statements under the Private Securities Litigation Act of 1995. Actual results may differ materially from those indicated. During this call, we will primarily discuss non-GAAP financial measures, which we believe help investors gain a meaningful understanding of our core operating results and guidance. The non-GAAP financial measures are not meant to be considered superior to or a substitute for results of operations prepared in accordance with GAAP. In accordance with Regulation G, you can find the comparable GAAP measures and the reconciliation on the Investor Relations section of our website. I will now turn the call over to Birgit Girshick.
Thank you, Todd, and good morning. Today, I would like to discuss the progress that we made during the second quarter, both financially and on our refreshed strategic framework, Pathway to Purpose. I'm pleased to report that we delivered on our second quarter financial targets, exceeding our prior outlook for the quarter and that we are raising our financial guidance for the year. We continue to remain focused on execution on achieving our financial targets and driving increased shareholder value as well as executing on our Pathway to Purpose strategy, which includes working to modernize our company and the industry, strengthening our world-class scientific portfolio and offering a customized client-centric approach to drive growth. Execution of our Pathway to Purpose strategic initiatives and our financial goals will be the key to our future success. Let me now provide you with the recent highlights that demonstrate our progress on our Pathway to Purpose initiatives as well as our second quarter performance. First, we were encouraged that the biopharmaceutical demand environment continued to strengthen in the second quarter, particularly in the DSA segment. The DSA net book-to-bill rose to nearly 1.2x in the second quarter, making this the third consecutive quarter that the DSA net book-to-bill has been above 1x and our highest level achieved in nearly four years. Our constructive view was also supported by a return to organic revenue growth of 0.1% for the total company, which marks the first time that revenue has improved organically since the third quarter of 2023. We firmly believe these trends position us well to drive higher organic growth during the second half of the year. As part of our efforts to further deepen client relationships, in June, we announced a unique collaboration with Eli Lilly's TuneLab drug discovery platform. In support of Lilly's goal to advance R&D modernization efforts, we will provide our nonclinical or wet lab testing expertise to help build and optimize Eli Lilly's AI and machine learning drug discovery model. We believe this type of collaboration demonstrates that the future state of drug discovery and development will require traditional in vivo and in vitro solutions even when integrated with AI or other in silico approaches to help enhance the speed and scientific data needed to support our clients' R&D programs. And Charles River is a scientific partner that is uniquely positioned to be able to integrate traditional in vivo, in vitro and new innovative capabilities into one comprehensive solution for the biopharmaceutical industry. We are also utilizing new technologies, including AI, to modernize and strengthen our own scientific portfolio, including an enhanced digital pathology solution that delivers AI-enabled end-to-end workflows designed to improve study turnaround times and increase pathologists' efficiency. With over 140 trained pathologists on staff, pathology always has been one of Charles River's greatest strengths. And this enhanced digital solution will drive both internal operating efficiency and greater speed for our clients' programs. On goal for clients that utilize our fully integrated digital pathology solution will be to cut at least one week from standard pathology timelines. As I discussed in detail last quarter, we completed the divestitures of certain European discovery services sites in May 2026 as well as the CDMO and Cell Solutions businesses. The partial quarter benefit from the divestitures was one of the drivers of the 420 basis points of sequential operating margin improvement in the second quarter to 20.5% and helps us refine the portfolio to create a more streamlined offering focused on our core competencies in regulated testing solutions. We are also continuing to invest organically in our scientific capabilities to support our future growth and accommodate more of the testing requirements for our clients' therapeutic programs, including in the area of lab sciences and specifically bioanalysis. Demand for lab science services has been growing nicely over the past five years, driven by large molecule bioanalysis, biomarkers and additional testing requirements in both regulated and nonregulated programs, including in the clinical development phase. To support this growth, we recently embarked on an expansion to add bioanalytical laboratory capacity at Heriot-Watt University's Research Park in Scotland. This expansion, which is one of five ongoing lab sciences expansions globally at Charles River, will also offer an opportunity to partner with Heriot-Watt University on the talent pipeline to further support our future growth in bioanalysis and in the region. My final highlight demonstrates how our broader strategy is working to support our client-centric approach. We recently announced a collaboration with Arovella Therapeutics to provide next-generation sequencing or NGS services to accelerate progress towards their alternative cancer treatment approaches using cell and gene therapy. This collaboration shows that by strengthening our scientific capabilities with an innovative in vitro NGS testing solution through our recent acquisition of PathoQuest, we are able to deepen client relationships and expand the possible opportunities for collaboration. In today's dynamic marketplace, there are abundant opportunities to further differentiate Charles River from the competition. We stand along with our strong financial profile, refreshed strategic vision and scientific expertise focused on our core regulated testing capabilities that span early-stage development through the clinic and beyond. Clients are expecting their scientific partners to help them drive greater innovation, speed and efficiency, and we are making great progress under our Pathway to Purpose strategic framework to become an even more modern client-centric organization that will operate more simply with more agility and enhanced digital connectivity. As the biopharma demand environment improves, this will enable us to become an even more essential partner to our clients, work with them across our differentiated portfolio and gain a greater share of their R&D spend. Let me provide a brief update on the end market trends. As I mentioned, we believe the biopharma demand is continuing to sustainably improve. Small and midsized biotech clients are leading the trend as a result of the invigorated funding environment demonstrated by a trailing 12-month funding of nearly $100 billion, which is just shy of peak levels achieved during the pandemic. While we continue to monitor for changes in the funding environment, whether it be from interest rates and inflation pressures or other macroeconomic factors, funding activity has been resilient and broad-based to date, including a notable increase in IPO activity as well as solid VC and follow-on funding. Overall, revenue from small and midsized biotechs was essentially flat organically in the second quarter, which is an improvement from declines in recent quarters. As a reminder, there is a natural lag of several quarters between studies being booked into backlog and work their way through to revenue. So we're just beginning to see the benefit from improved DSA booking activity from late last year. Therefore, the strengthening booking activity that we have experienced through the middle of this year gives us greater confidence that we will generate incremental organic revenue growth starting in the third quarter on both a consolidated basis and in the DSA segment. Global biopharmaceutical clients were also a significant contributor to the improving DSA demand KPIs in the second quarter. As I mentioned last quarter, most of our global biopharma clients have progressed through restructuring and pipeline reprioritization activities over the last several years. Demand trends have been improving gradually over the last 18 months with continued evidence this year. Revenue from global biopharmaceutical clients continued to increase organically in the second quarter. I will now provide some highlights from our financial performance before Glenn provides additional detail. First, we are pleased that our second quarter results exceeded our prior outlook for revenue and non-GAAP earnings per share. Second quarter revenue increased 0.1% on an organic basis compared to our prior outlook of a low single-digit decline. In addition to the solid top line performance, the operating margin increased 420 basis points sequentially to 20.5% due to two primary factors: First, less pressure from several discrete margin headwinds that impacted the first quarter as we had anticipated. And second, a partial quarter benefit from the divestitures that enabled the Manufacturing segment's operating margin to jump to 37.8% in the second quarter. For the remainder of the year, we continue to have a clear line of sight into the drivers behind at least 500 basis points of margin improvement expected in the second half of the year with the largest drivers being the actions that we have already taken to strengthen and refine our portfolio. Non-GAAP earnings per share of $3.02 increased 47% sequentially, which was well above our prior outlook of at least 30% sequential growth. Glenn will provide more details on the operating margin and earnings drivers in a moment as well as our increased financial guidance. RMS revenue declined 1.4% organically. This represents an improvement from the first quarter level due principally to the timing of NHP shipments, which were more normalized in the second quarter and did not have a meaningful impact on the year-over-year growth rate. The primary drivers of the year-over-year revenue decline were lower revenue for small models in North America as well as for research model services, including Genetically Engineered Models & Services or GEMS. These declines were largely offset by continued robust demand for research models in China from mid-tier biotech and CRO clients. For the year, we continue to expect a low to mid-single-digit organic revenue decline in the RMS segment, with much of this decline driven by lower volumes for research models in North America. This is largely because spending from academic and government clients has been constrained by flat NIH budgets and slower grant processing. DSA revenue returned to growth, increasing 0.2% organically in the second quarter. As noted, it takes several quarters for projects booked to work through the backlog and into the revenue stream. So we are just beginning to see the benefits of the improved biopharmaceutical demand trends from the end of last year. The second quarter improvement was broadly driven across multiple study types and modalities, including a more discernible uptick in IND-enabling studies as clients shift their research focus earlier to replenish their pipelines and continued strength for NHP-related studies, reflecting our clients' focus on complex biologics. Regulatory required safety assessment studies utilizing NHPs have become a competitive advantage for Charles River because of our more reliable supply of these critical research models after strengthening our portfolio through the acquisitions of suppliers in Cambodia and Mauritius in recent years. We expect the DSA growth rate to accelerate in the second half of the year, supported by encouraging trends in the DSA demand environment to date. Net bookings increased significantly year-over-year and by 12.6% sequentially to $701 million in the second quarter, resulting in an increase in the DSA backlog to $1.97 billion and a net book-to-bill of 1.19x. The second quarter improvement was broad-based across both global biopharmaceutical and small and midsized biotechnology client segments. As noted, these were the highest levels for the net book-to-bill and net bookings in nearly four years since the third quarter of 2022 and the third consecutive quarter that the net book-to-bill was above 1x. These trends, combined with another strong increase in proposal activity during the second quarter, leave us cautiously optimistic that the positive momentum will continue. Underlying DSA market demand is improving as supported by the recent strength in biotech funding and the improvement in our KPIs. In this environment, we continue to differentiate ourselves in the marketplace through our financial stability, scientific expertise, global scale and digitized client experience, which accelerates the speed with which we are able to work with our clients and enables us to take share. As a result of these collective trends, we have raised our DSA outlook to low single-digit organic revenue growth in 2026. That said, we continue to expect the recovery will be marked by gradual progress. Manufacturing revenue increased 1.3% organically. Revenue for Microbial Solutions continued to increase at a high single-digit rate in the second quarter, partially offset by more modest growth in the Biologics Testing business. The manufacturing organic growth rate is expected to improve to mid- to high-single-digit rates in the second half of the year when the biologic testing growth rate rebounds after we anniversary a client-specific challenge that has been a headwind since the middle of last year. In addition, CDMO was also a headwind to organic growth for the partial quarter because it wasn't divested until May. As I close today, I want to share a reflection for my first few months as CEO. I've had the privilege of visiting more than 40 Charles River sites across seven countries, meeting with employees in town hall and individual settings and hearing firsthand about their work, their challenges and their ideas. What struck me most was the consistent passion, commitment and sense of purpose I saw everywhere I went. Those conversations left me even more confident in the future of Charles River and our ability to deliver long-term success for our clients and shareholders and the patients we ultimately serve. They also reinforced for me how critical our Pathway to Purpose strategy is in guiding our decisions, strengthening our culture and positioning the company for sustainable growth. I remain incredibly optimistic about what we can achieve together and look forward to building on the strong foundation we have created. Now I will turn the call over to Glenn to provide more details on our second quarter financial performance as well as our 2026 guidance.
Thank you, Birgit, and good morning. As a reminder, my comments on financial performance will largely be related to non-GAAP results, which exclude amortization and other acquisition and divestiture-related adjustments, costs related primarily to restructuring and efficiency initiatives and certain other items. Many of my comments will also refer to organic revenue growth, which excludes the impact of acquisitions, divestitures and foreign currency translation. We are pleased with our financial performance for the second quarter with both revenue and non-GAAP earnings per share exceeding our prior outlook. On an organic basis, revenue was essentially flat year-over-year compared to our prior forecast of a low single-digit decline, driven by better-than-expected performance in our DSA and Manufacturing segments. The non-GAAP operating margin of 20.5% was in line with our forecast, but improved by 420 basis points on a sequential basis over the first quarter. Non-GAAP earnings per share of $3.02 also exceeded our expectations with over half of the outperformance driven by better-than-expected top line results and the remainder by a favorable contribution from nonoperating items, which I'll discuss in more detail shortly. In the second quarter, we also repurchased $100 million in shares at approximately $174 per share under the $1 billion stock repurchase authorization approved last October. This brings our total year-to-date share repurchases to $300 million and reflects the continuation of our thoughtful and diligent approach to capital deployment to enhance shareholder value as we balance organic investments in the business, pursue strategic acquisitions and repay debt. Our updated guidance assumes an average diluted share count of approximately 48.5 million shares for the full year 2026. Moving to details on our segment performance. DSA revenue was $607 million in the second quarter, a decrease of 1.9% on a reported basis compared to the second quarter of 2025 due primarily to the impact of the divestiture of certain European discovery sites. On an organic basis, revenue increased 0.2% and was also the first time we reported organic growth in DSA since the third quarter of 2023. Year-over-year, operating margin decreased by 180 basis points to 25.6%, however, increased by 460 basis points on a sequential basis from the first quarter. The year-over-year decline was primarily due to higher study-related direct costs. However, we expect this year-over-year margin headwind to turn favorable in the coming quarters as we benefit from lower NHP sourcing costs as a result of the acquisition of our Cambodian NHP supplier. The lower sourcing costs for Cambodian NHPs will begin to benefit the DSA operating margin in the third quarter, but will have a more significant margin contribution in the fourth quarter as we increase our use of these models on studies. As a result, we expect the operating margin in DSA to be the highest in the fourth quarter. Shifting to the RMS segment. Revenue was $209 million in the quarter, representing an organic decline of 1.4% year-over-year. Small model revenue experienced lower volume for research models in North America and for research model services, partially offset by continued strong demand in China. Operating margin declined by 80 basis points to 24.5% in the second quarter due largely to the impact of lower sales volume and an unfavorable geographic revenue mix. Wrapping up the segment performance, the Manufacturing segment reported second quarter revenue of $188 million, an increase of 1.3% on an organic basis. The CDMO business reduced the segment organic revenue growth rate by nearly 400 basis points in the quarter, with the segment growing at a mid-single-digit organic growth rate, excluding CDMO. The strong performance in our Manufacturing segment was largely driven by high single-digit organic growth in our Microbial Solutions business as we saw increases in demand across our three major geographic regions for endotoxin testing reagents, including our PTS rapid testing cartridges as well as adding new clients to our strong broad-based quality control testing platform. Operating margin improved by 500 basis points year-over-year to 37.8%, driven primarily by the benefit of the CDMO divestiture. We expect the Manufacturing segment to remain a meaningful contributor to margin expansion during the second half of the year with the operating margin approaching 40% with the full benefit being recognized from the CDMO divestiture. Moving on to other financial metrics. Unallocated corporate costs were higher than expected in the second quarter, totaling $72 million or 7.2% of revenue compared to 5.9% in the prior year period. The increase was primarily driven by increased costs related to our deferred compensation plan of $6 million or $0.10 per share due to the market performance of the plan assets during the quarter. To fund the deferred compensation plan, we separately invest in certain funds, which experienced gains of $19 million or $0.29 per share in the second quarter. These gains are included in other income. The net benefit associated with our deferred compensation plan was $0.19 per share in the second quarter, which we do not expect to recur. Based upon our second quarter results and updated forecast, which also encompasses higher performance-based compensation, we now expect unallocated corporate costs of approximately 6.0% of revenue for the full year compared to our prior outlook of approximately 5.5%. Net interest expense was $28 million in the second quarter, a decline of $1.2 million year-over-year. For the full year, our net interest expense outlook remains unchanged at $103 million to $108 million on a non-GAAP basis. At the end of the second quarter, our net leverage improved slightly to 2.5x from the first quarter. The non-GAAP tax rate in the second quarter was 23.8%, an increase of 110 basis points year-over-year due primarily to the impact of discrete items. For the full year, we now anticipate our non-GAAP tax rate will be in the range of 23% to 24%, an increase of approximately 100 basis points from our prior outlook, primarily as a result of the unfavorable second quarter rate and a higher tax rate due to proposed tax legislation changes in a foreign tax jurisdiction. The higher tax rate outlook for the year is expected to be a $0.20 headwind to earnings per share with about half of the impact in the third quarter. Free cash flow was $149 million in the second quarter, a decrease of $21 million compared to the prior year period. This decline was primarily driven by the timing of working capital. CapEx declined to $31 million or approximately 3.1% of revenue in the second quarter from $35 million last year. For the full year, we're raising our free cash flow projections to be in the range of $400 million to $420 million compared to our prior outlook of $375 million to $400 million, largely driven by higher earnings. Turning to full year 2026 P&L guidance. We are increasing both the reported and organic revenue outlook due primarily to the DSA and manufacturing outperformance in the second quarter and our expectations for further improvements during the remainder of the year. We now expect reported revenue to decline in the range of 2.5% to 3.5%, driven by the impact of completed divestitures. We're also raising our organic revenue growth in the range of flat to a 1% increase, which represents a 150 basis point improvement to our prior guidance. By segment, on an organic basis, we're increasing our DSA revenue outlook to low single-digit growth for the year, and we're also adjusting our manufacturing revenue outlook higher to a low to mid-single-digit growth rate. Our RMS outlook remains unchanged. Moving to profitability. We continue to expect operating margin expansion of approximately 120 to 150 basis points in 2026, with the Manufacturing and DSA segments driving the year-over-year increase. We have a clear line of sight into the second half improvement of at least 500 basis points compared to the first half of the year. As shown on Slide 14, approximately 50% of the second half improvement will be attributable to the portfolio actions already completed, including the full benefit of the divestitures as well as the lower NHP sourcing costs from the K.F. acquisition, which will largely benefit the fourth quarter. Lower corporate costs are estimated to drive approximately 150 basis points of the improvement with the balance derived from other operational contributors, including efficiency savings. Lower corporate costs in the second half will reflect favorable stock compensation expense related to the CEO transition and fringe costs, which are typically lower in the second half of the year. We are also increasing our non-GAAP earnings per share guidance to a range of $11.15 to $11.45, which represents 8% to 11% year-over-year growth and an increase of $0.25 at the midpoint of our prior outlook. The increase reflects the expected operational outperformance for the year, driven primarily by improving trends in the DSA segment and a better-than-expected performance in the Manufacturing segment. Separately, we expect the $0.19 net benefit associated with the deferred compensation plan will not have a meaningful impact on non-GAAP earnings per share in 2026 as it is expected to be entirely offset by the higher tax rate outlook for the year, which is an approximate $0.20 headwind. For the third quarter, revenue is expected to decline approximately 4% to 6% on a reported basis, primarily driven by the impact of the completed divestitures. We expect organic revenue growth of approximately 1% to 3% year-over-year, reflecting improving demand trends in the DSA segment and an expected rebound in Biologics Testing growth rate, which will drive higher manufacturing revenue growth. In addition, operating margin is projected to improve approximately 200 basis points sequentially versus the second quarter due largely to lower corporate costs and a full quarter benefit from the divestitures. For the third quarter, we expect non-GAAP earnings per share in the range of $2.90 to $3.00, representing an approximate 20% year-over-year increase. As previously mentioned, the higher tax rate outlook creates a $0.10 headwind to third quarter earnings per share, which has been included in the guidance. In conclusion, I'm encouraged by the recent improvement in the underlying business trends and our first half performance, including the execution of our strategic priorities, which demonstrate our commitment to our Pathway to Purpose strategy and enhancing long-term shareholder value. Over the past several months, I've had the opportunity to meet with employees across our global organization as well as shareholders and other stakeholders. These interactions have further strengthened my confidence in our capabilities, our people and the momentum we are building across the organization. I look forward to continuing to work with the team to execute our strategy and to sharing more information about our long-term priorities and financial targets at our upcoming Investor Day on September 24. Thank you.
That concludes our comments. We will now take your questions.
Questions and answers
Operator provides instructions to callers. We'll go first to Kallum Titchmarsh with Morgan Stanley.
Wanted to start actually on AI. We've been fielding quite a lot of questions on the space in relation to preclinical work, and you called out some of the partnerships here. So maybe just talk us through your expectations for the preclinical pipeline evolving from that smarter drug discovery and whether that seems like a plausible thesis to you based on the discussions you've had with customers. I think we're just trying to work out when that impact starts creeping into numbers via more IND-enabling studies, but would love your views there.
Thanks, Kallum, and absolutely happy to. So obviously, AI is a hot topic everywhere. And we talk to a lot of clients about it, what their expectations are, where they're investing. From our perspective, a lot of the articles and the pieces that were published support our thesis on it. Once AI provides more productivity into molecule design and target identification, and makes more molecules available to move into the validation stage and the regulated safety assessment stage and makes the molecule design more efficient, we expect more programs to work their way through the safety assessment and validation stage, the area that is core to us. We expect that it will actually be a tailwind for us and drive demand. Timing is a little more difficult to estimate. Companies have worked on AI for a long time, but technology is accelerating, so we'll have to see when those efficiencies are delivered and when the cost savings for our clientele can materialize. What we are already seeing is that many companies that are AI-native or drug discovery companies that use AI platforms are generally running more programs than a typical biotech that generally comes in with one or two programs. The numbers are still very small, but that will accelerate materially over the next year or two. So we should see some impact — positive impact — over the next few years, but it will take some time to really ramp that up. When it's going to be material is a little harder to estimate, but I think you will see some ramp-up over the next couple of years: more programs, more validation, more data needed to validate the platforms. So all of that should be a tailwind for the work we do. In addition to that, we, as a company, are investing in AI tools and enabling platforms that give us more insights and allow us to put efficiencies in place. Those are all really focused on the work we do: validation and safety assessment that is core to us. That will allow us to differentiate ourselves to help our clients move faster — time is money — and also provide us with some efficiencies. So we are really excited about AI. I think it will be an enabler and a differentiator. But the technology has to advance, continue to advance and then prove itself. Great question, Kallum.
Yes. That's great color. And then just secondly, when we think about the portfolio refinement we've seen over the past year or so, clearly, benefits starting to come through from that. Is it fair to assume you're now comfortable with the current shape of the business? Maybe just talk through appetite for maybe more deals or divestitures and then more broadly to capital allocation.
Yes. I'm going to start on that, and then I'll let Glenn chime in a little more on capital allocation. From a point of divestitures, we absolutely are seeing the benefits from that, both financially in terms of our operating income improvements and from an ability to focus on the core portfolio. That was a big driver for us to get back to what we do best, where we have the biggest relevance to our clients and where we provide the highest value. That will allow us as a leadership team, our sales organization and our operational organization to really focus on being the best partner possible for our clients. We continue to look at our portfolio as we always have. Over the years, Charles River has divested other businesses. We have had a program of site consolidations, but we also have a healthy appetite for M&A. So we will continue to look at all of that. Nothing imminent on divestitures. We're still continuing to execute on some site closures that we had announced last year. From an M&A perspective, we have a good roadmap and clear target areas we are interested in. But it's always difficult to estimate when targets are available and at what price. So more to be seen. But we will keep it broad-based and continue to look at refining our portfolio.
And the only thing I'd add is our balance sheet is in very good shape. We can support our acquisition strategy going forward. If you look at where our leverage is, we ended around 2.5x even after the most recent $100 million share repurchase we did in the second quarter. We generated strong cash flows in the quarter. We actually raised our free cash flow guidance. We have plenty of capacity under our existing revolver at very attractive rates. So I think we're very well positioned from a balance sheet perspective to support our acquisition strategy. You can never predict when transactions will happen, but we'd like to be able to add a couple of additional companies to our portfolio.
Operator provides instructions to callers. Our next question comes from Ann Hynes with Mizuho.
Great. On the call, you talked about how demand in biotech was accelerating. Can you talk about your other customer segments, especially how large biopharma is doing?
Yes, happy to, Ann. It's great to see that both our major client segments are strengthening, and we're seeing more demand from both of them and our forward-looking demand KPIs are strengthening in both segments. Looking at global biopharma specifically: most or all of our global biopharma clients — we work with all of them — have moved through their portfolio prioritization and restructurings over the last few years. Over the last 18 months, we've really seen them coming back to work, booking more work, having more discussions, more proposals and fewer cancellations. So it's going in the right direction. We have a lot of discussions with those clients. Their focus right now is on getting more molecules into the clinic and more molecules approved and available for commercial distribution to patients. It's all about more programs, more speed and more agility, and I think we are a differentiated partner to help them execute on that.
Great. And my follow-up question is just about China. I get asked a lot about this. I think there are two competitive debates investors are focused on. One is the increasing capability of Chinese CROs and the other is whether large pharma is bringing more preclinical work in-house in China. Maybe can you talk about these as real risks and how you think about it long term?
Yes. We certainly watch China very closely. It's an innovative market and interesting for serving directly. We have a strong research models and services business in China and are a well-established, highly respected participant. We continue to look for options to expand that business. Regarding competition in China and adding capabilities, this trend started probably a decade or longer, focused initially on early-stage capabilities in chemistry and biology. That market has structurally changed and moved into lower-cost countries, including China and India. We're now watching their ability to take on more regulated work — that is still the minority and generally focused on companies doing Phase I work in China. We are prepared to differentiate ourselves in the West with our services, speed and supply chain and be the best partner for our clients. Some of our global biopharma clients are establishing R&D centers in China and adding capabilities there, but from what I see, that's more at early-stage R&D and not so much in regulated safety assessment. All our global biopharma clients understand it's hard to maintain scale and capability in that regulated area. So we believe their investments are more in early R&D, and we continue to support them in the development stage.
Operator provides instructions to callers. We'll move next to David Windley with Jefferies.
I'll forewarn you. This is a multi-part question. I'm interested in demand environment. You talked in the prepared remarks about pretty balanced demand in DSA across study types. I'm hearing that large molecule or large animal NHP-specific studies are in quite high demand to the point that maybe some of your competitors are running short on capacity in the near term. So my questions are: what is your view of the demand landscape by study type? And then help us to understand a little more clearly the availability of NHPs that you have from previous Mauritius and more recently, K.F. — how much excess capacity or animal supply can you dip into? Or do you have to wait for contracts to run out? Are they already committed, etc., to be able to service what I think is growing NHP demand?
Certainly, David. Looking at demand, we referred to both pre-IND and post-IND studies, which have balanced out quite a bit, which is positive because we need both. We also saw healthy demand in the more complex areas and specifically in NHP studies, which is very positive. It shows clients are reinvesting in early-stage pre-IND work and are focused on more complex modalities, which provides additional revenue opportunity, not only in in vivo study work but also in bioanalysis because complex modalities have more associated testing. Specific to nonhuman primate supply: we acquired a Mauritius farm a few years ago and the Cambodian farm more recently. By owning the supply, we can control quality, logistics and timing of shipments, which is helping a lot. We can also control capacity: we can breed more, which takes time, but we can accelerate some shipments or hold back others. We still have third-party supplier contracts that we are executing on; those are ramping down and we will work through that with customers over the next few years and move more of those animals into client studies in our DSA segment. Overall, we are quite happy to be integrated into the supply chain. We are in a healthy state of having animals available, and we are differentiated because of that supply. We see this as an opportunity to gain market share.
Great. If I could just squeeze in a follow-up quickly on the same topic. I think as I'm looking at both consensus and our numbers relative to the guidance that you're giving for third quarter, I think the primary difference is cadence of perhaps your access or the benefit of the NHP cost drop to your margin. It sounds like it's landing mostly in the fourth quarter rather than the third quarter. Maybe I don't know if this is a Glenn question, but could you talk a little bit about the cadence? Are there animals that are going to be in quarantine in the third quarter that are affecting that impact a bit, just the third quarter/fourth quarter cadence as to how that K.F. benefit materializes?
Yes. Relative to margins, we're expecting a minimal impact in Q3. There will be some impact, but very small. The large impact will be in Q4. We expect to see a very meaningful move in margins in DSA in the fourth quarter as a result of the NHPs being placed on studies and those direct costs going lower in Q4. That's where we'll see the biggest impact.
David, you got it right. Thinking through the timing: importation, quarantine, acclimation and then getting them on study and generating revenue — it takes time to import them, quarantine them, acclimate them and then get them on study and generate revenue. It's a matter of timing.
Operator provides instructions to callers. Our next question will come from Charles Rhyee with TD Cowen.
Just wanted to follow up a little more on that cadence question. Glenn, you said that Q4 DSA margin will be the highest. Is that the right run rate to think about as we look into 2027? Because when we've seen strong demand uptick and continuous improvement in the book-to-bill, maybe the Q4 is the right jump-off point? Or is there anything because it's delayed from Q3 to Q4 that might be a one-time-ish benefit so we shouldn't use that as the jump-off point?
Charles, to clarify my earlier comments: my comment about the fourth quarter was around margin being the highest for DSA in Q4, driven by lower NHP sourcing costs. As we look at sequencing of margins: I mentioned approximately a 200 basis point sequential improvement from Q2 to Q3, largely driven by lower corporate costs and some benefit from divestitures. Then we expect about another 300 basis point improvement into Q4 to get to our full year guidance numbers, and most of that will come from the acquisition of K.F. Cambodia and the benefit we'll see in the DSA segment. So that describes how we're sequencing Q3 and Q4 margins, and those comments refer to margins, not revenue.
Okay. That's helpful. Sorry, I must have misheard. And then maybe just a quick follow-up on the tax rate change. You said part of it is due to a proposed tax legislation change. Do we know when that will actually be finalized? Is this an estimation of a proposed change? Is there a chance that it doesn't go through?
Thanks for the question. This is associated with Mauritius, and we are expecting to hear back literally any day now on what the changes will be. We've been in close contact with the local authorities and understand what this could be. We've modeled in our guidance the impact we are expecting. If the impact is less, it would obviously be upside to our guidance. To be clear, when we raised our EPS guidance for the year by $0.25 at the midpoint, that's all operational. We have about a $0.19 gain overall that we expect to flow through the year, but we're anticipating a $0.20 tax headwind to offset that. So if this tax legislation change does not happen, there would be upside to our EPS numbers. But from what we know, we're comfortable it's likely to happen and we've factored it into our guidance.
Operator provides instructions to callers. Our next question will come from Michael Ryskin with Bank of America.
Congrats on a great quarter. Birgit, maybe going back to DSA strength and the book-to-bill commentary. You talked about demand trends in both biotech and pharma. I'd love to hear your views on your capacity to support this. You've tweaked capacity in DSA in prior years. Just talk about where you feel you are now in terms of ability to absorb demand as funding flows through. Any incremental investments required? Where are you looking 12, 18, 24 months out on that front?
Thanks, Mike. Because of volume declines over the last few years, we currently have sufficient capacity for a while. It depends on the growth rate, but at this stage, we don't see issues from an in vivo perspective — animal rooms and equipment — though we will make adjustments in staffing as needed. From a lab perspective, we have expansions in progress that are geared toward future demand; they are meant for the next couple of years. We are comfortable with current capacity and expect utilization to improve, which is positive, and we don't see a bottleneck at this time.
Okay. And maybe a quick follow-up on pricing, both on NHPs and more broadly. What did you see in Q2 and what are your expectations for the second half? How is pricing playing out with the uptick in demand?
So Q2 mostly reflects proposals booked a few quarters ago, and that is what's flowing through now. Overall, pricing has not materially improved yet — it has been stable at the levels we've seen for the last few years. There's not more discounting and not less discounting. We are aggressive going after work, which shows in our capture rates — we're seeing an uptick in capture rates, indicating our go-to-market approach and pricing strategies are working and our differentiation is effective. We expect pricing to improve as capacity tightens over the next few quarters, but note the timing: a proposal today generally takes a quarter to go into bookings and another quarter or two to generate revenue. Any pricing uptick we might see in the upcoming quarters would flow through in 2027, not before. So we believe pricing will improve as capacity becomes tighter.
Operator provides instructions to callers. We'll take our next question from Justin Bowers with Deutsche Bank.
Going back to China, on the clinical side, we're starting to see some in-licensing flow back in the U.S. And given the demand profile there and what we think is some upward pressure on price, are you starting to see an uptick in work from biotechs that might have otherwise gone over there, stay here or come back here? Can you talk about the opportunity set there? And then on pricing, are you starting to see approach parity around the DSA side?
On the first question: most of the work that was being done in China was early-stage chemistry and biology, which we no longer do — that was part of the business we divested because it didn't have the synergies we sought. For us, the regulated work we focus on has had very little shift to China so far. So I'm not seeing that early-stage work coming back to the West in a way that affects our business directly. From client discussions, there is some uncertainty and a wait-and-see approach, but the early-stage work moves relatively quickly and many will continue until circumstances change. Regarding pricing, some Chinese providers that do work for Western clients have pricing that is moderating and not far off Western pricing, though still lower. Pricing for purely Chinese biotech clients remains considerably lower. So while the gap is moderating in some cases, it remains significant for Chinese domestic work.
Operator provides instructions to callers. Our next question comes from Casey Woodring with JPMorgan.
I want to go back to the competitive comments you made about NHP-related safety assessment studies becoming a competitive advantage for you because you have security of supply. Can you elaborate? You've historically been a leader in this space. Have your win rates increased as a result of more in-sourcing? How much higher could your share go in the near term?
Casey, share is hard to estimate publicly because many competitors are private. Internally, we look at capture rates to see if our pricing and differentiation strategies are working, and we've seen a nice uptick in capture rate over the last few months. I wouldn't call it yet a long-term trend until it continues, but it's encouraging. Regarding differentiation from NHP supply: that has always been a risk for the industry. Owning the supply chain and controlling timing, quarantine and shipment gives clients assurance they can run studies when needed without time delays. That is a significant benefit and is deepening client relationships and preferred partnerships.
Got it. That's helpful. One more quickly on RMS. You mentioned academic and government is still weak. We've heard mixed signals from tools vendors on that end market. What are you seeing there? Also, can you comment on how CRADL performed in the quarter?
On academic and government: this client segment is primarily served by our RMS business and represents about 10% of the total company. Right now demand is stable but not growing. Historically this was a growth segment for RMS, but currently it's constrained by flat NIH budgets and slower grant processing. NIH budgets have been approved and grants are being issued, but many grants are multiyear and some grantees are adjusting to that, which is holding back RMS demand in North America. Regarding CRADL: revenue is stable but not growing at historical rates. CRADL serves new companies and early-stage biotechs that use our vivarium facilities. Company formation is growing modestly, far off COVID levels. We need to see stronger new company formation to return CRADL to former growth rates.
Operator provides instructions to callers. Our next question comes from Elizabeth Anderson with Evercore ISI.
As we think about the bookings, which were a nice step-up in the quarter, can you talk more about the mix of services within those bookings? Are they similar to your current revenue mix? Are you seeing incremental demand in certain places within DSA versus previously? Any additional qualitative color would be helpful.
Elizabeth, what we're seeing is a bit of a shift from more post-IND work to more pre-IND work. Over the last few years, because funding was stronger for later-stage programs, post-IND had a heavier component. In the last quarter, we saw that pivot back a little into pre-IND work, which is positive since pre-IND work leads into later-stage, more complex work and specialty work. We need both pre- and post-IND work for profitability and capacity utilization, and seeing this shift is a good sign that market funding and client demand are strengthening.
Got it. As a follow-up, how do you feel about incremental investment levels? I understand your comment about AI investments helping, but as demand increases, are you comfortable with utilization and staffing levels into the back half of 2026 and into 2027?
We are adding staffing based on demand expectations. We'll hire and train staff so they're ready as revenue picks up. The lab expansions I mentioned are aimed at future demand; they won't impact revenue in 2026, but they allow growth in 2027 and beyond. We're also modernizing labs with automation to increase throughput and speed, and we are investing in digital connectivity and systems to drive efficiencies and utilization. We'll continue to focus on modernization across segments and functions and will provide more detail at Investor Day.
Operator provides instructions to callers. We'll go next to Ryan Halsted with RBC.
My question is on the guidance raise. Could you offer more color on the incremental visibility you have into the bookings that you now expect to convert in the second half? Did these bookings come in the middle of this year or are they from prior periods?
Ryan, the confidence in the raise to our revenue and EPS is primarily based on the bookings we saw come through in Q2. Most of the benefit will be realized this year from bookings already in backlog, though sustained book-to-bill above 1 will primarily impact 2027. Given the strength in our key leading indicators — net book-to-bill, proposal volumes and capture rates — we feel confident we will see better performance in the second half. The guidance raise for EPS is associated with revenue, and we raised our organic revenue growth rate about 150 basis points.
Got it. That's helpful. And as a follow-up, regarding your modernization initiatives, specifically NAMs, should we look for collaborations and partnerships with biotech companies that have interesting innovation in NAMs?
Yes. We have a strong NAMs focus and commitment. Last year, we established a Scientific Advisory Board and hired a Chief Scientific Officer to particularly focus on NAMs development. We're focusing on NAMs where they can reduce animal use and provide more insights and evidence to clients. This will be a broad mix of technologies and assays that we already have, are developing, or will in-license or partner on. Expect internal development followed by licensing and partnering. We are working with clients on areas of interest and will give a deeper dive on NAMs at Investor Day. There will never be a NAMs-only business for Charles River — NAMs will be integrated into Safety Assessment workflows — and that integration is where adoption will occur. We're well-positioned to lead in that integration across multiple technologies.
Operator provides instructions to callers. Our next question comes from Luke Sergott with Barclays.
Just wanted to ask about whether you are seeing any demand pickup from the Department of Defense list related to WuXi being placed on a no-go list. I know that was in June, but any signs of early wins or conversations with those customers?
Luke, generally most of that work is early-stage chemistry and biology, which we are no longer in the business of. I can't say specifically whether clients are looking for other providers there, but we have had a few discussions with clients in regulated spaces. Western clients are not yet shifting regulated work to China, so those discussions are limited at this stage.
Okay. Perfect. And on the guide with the DSA business and given your strong bookings, the guide implies a deceleration in the conversion or burn rate. Is that mix, or is it conservatism in the guide?
It's more about timing — the time it takes from proposal to booking and then booking to revenue. Some of the work we're doing was booked last year, and the net book-to-bill improvement will have more impact into the second half and into 2027. It's primarily a timing matter.
Keep in mind DSA had negative organic growth in the first half of the year, and now we're projecting low single-digit organic growth in the back half. We're reflecting that improvement here and would like to see that continue to accelerate into 2027.
Operator provides instructions to callers. Our final question today comes from Joshua Waldman with Cleveland Research.
I'll keep it to one. Birgit, it sounds like you feel comfortable with existing safety capacity. When you think about better utilization on existing capacity, the impact of NHP costs, etc., how do the moving pieces leave you feeling on the margin setup into next year? How are you thinking about margin potential for the business in Q4 and into 2027?
We will stay away from commenting on 2027 specifics at this time. There are areas we've called out — the K.F. Cambodia acquisition and the divestitures — that will have a positive impact on margin next year, and we can walk through those. For the second half of this year, we called out at least 500 basis points of improvement, with a big impact in Q4 because of the timing of nonhuman primates making their way onto the revenue line. But I wouldn't translate Q4 directly into a 2027 run rate at this stage.
Don't take the Q4 run rate and assume that's the run rate going forward. Year-over-year into 2027, based on previous comments, we would expect to see some margin expansion from the full impact of divestitures and the Cambodia acquisition, which will have a tailwind in 2027. But we're not ready to give guidance on margins for next year yet.
We have no further questions in queue. I will now turn the conference back to Todd Spencer for closing remarks.
Thank you for joining us on the conference call this morning. For those interested in our Investor Day on September 24, please visit the Investor Relations section of our website at ir.criver.com to register for the webcast or contact me for any additional details. This concludes the conference call. Thank you.
Thank you. That does conclude today's Charles River Laboratories Second Quarter 2026 Earnings Call. Thank you for your participation, and you may now disconnect.