Netflix Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 9, 2023

There are 14 speakers on the call.

Operator

And welcome to the Charles River Laboratories Second Quarter 2023 Earnings Conference Call. This call is being recorded. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer I would now like to turn the conference over to our host, Todd Spencer, Vice President of Investor Relations. Please go ahead.

Speaker 1

Good morning, and welcome to Charles River Laboratories' 2nd quarter 2023 earnings conference call and webcast. This morning, I am joined by Jim Foster, Chairman, President and Chief Executive Officer and Flavia Phees, Executive Vice President and Chief Financial Officer. They will comment on our results for the Q2 of 2023. Following the presentation, they will respond to questions. There is a slide presentation associated with today's remarks, which is posted on the Investor Relations section of our website at ir.seariver.com.

Speaker 1

A webcast replay of this call will be available beginning approximately 2 hours after the call today and can also be accessed on our Investor Relations website. The replay will be available through the 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 Reform Act of 1995. Actual results may differ materially than those indicated.

Speaker 1

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 reconciliations on the Investor Relations section of our website. I'll now turn the call over to Jim Foster.

Speaker 2

Good morning. We were pleased with our 2nd quarter financial performance, including organic revenue growth of 11.2%. As expected, revenue growth rates in the RMS and Manufacturing segments improved from 1st quarter levels And the DSA segment had another strong quarter with low double digit revenue growth and operating margin improvement. DSA performance reflected the substantial scale and duration of our backlog, which has enabled us to effectively manage the business. For the year, we are narrowing our revenue growth and our non GAAP earnings per share guidance to the upper ends of the previous ranges.

Speaker 2

This update largely reflects the successful implementation of our mitigation efforts around NHP Supply, for which I will provide additional details shortly. However, we continue to expect the second half growth rates to be pressured primarily in the DSA segment as a result of 3 primary factors. 1st, The current market conditions are resulting in a continuation of the lower backlog and booking trends. 2nd, organic revenue growth of 23.6 percent in the second half of twenty twenty two. And finally, we still expect a modest impact From NHP supply constraints, principally in the Q3.

Speaker 2

We are also closely monitoring the near term demand trends of our biopharmaceutical clients as they appear to be reprioritizing their pipelines and tightening their R and D budgets. This is affecting our industry and our company, but we will continue to leverage our significant DSA backlog and intend to appropriately manage the business amidst a more cautious biopharma spending environment. During times of funding or macroeconomic uncertainty, clients are looking for even more efficiency and speed to market, And we believe they will continue to choose an industry leader like Charles River in order to derive additional value from our flexible and efficient outsourcing solutions. With regard to NHP Supply, We have been effective in our efforts to leverage our global safety assessment infrastructure to alleviate the overall impact of supply constraints caused by the suspension of Cambodian imports into the U. S.

Speaker 2

And have made significant progress To better utilize our sites outside of the U. S, based on our progress to date, we believe that we have successfully mitigated The logistical challenges posed by the current NHP supply constraints by conducting more studies outside of the U. S. And better leveraging our global infrastructure, which is a competitive advantage for Charles River. We have been able to Effectively transfer safety assessment work between sites because much of our capacity was built flexibly to accommodate multiple species of both small and large models.

Speaker 2

The transition of this work to our international sites this year As required time to implement study scheduling, logistics, quarantine operations and retraining of some staff, as well as working with local government agencies. However, we have already made significant progress with these initiatives and do not Any meaningful NHP supply constraints affecting the business in the Q4 and next year. As a result, we now expect the impact from NHP supply constraints will be less than our initial outlook of 2% to 4% impact to consolidated revenue growth this year. We have narrowed our DSA organic revenue growth outlook Going forward, we are operating under the assumption that we will conduct meaningfully less NHP related study work in the U. S.

Speaker 2

As our international infrastructure will be sufficient to accommodate this work. I will now provide highlights of our 2nd quarter performance. We reported revenue of $1,060,000,000 in the Q2 of 2023, an 8.9% increase over last year. Organic revenue growth of 11.2% was driven by strong performance in the RMS and Segment as well as an improvement in the manufacturing growth rate led by the CDMO business. By client segment, 2nd quarter revenue growth was broad based across global biopharma, biotechs and academic and government institutions.

Speaker 2

However, Demand from Global Biopharmaceutical clients modestly outpaced small and midsize biotech clients for the 2nd consecutive quarter. This demonstrates the diversity and stability of our overall client base as global continue to move their critical programs forward at a time when biotechs are being more selective with spending to extend their cash runways. The operating margin was 20.4%, a decrease of 140 basis points year over year. The decline was driven by continued margin a decrease of 2.9% from the Q2 of last year. As anticipated, the year over year increase in interest expense And the tax rate continued to be meaningful headwinds to earnings growth this year as was the divestiture of the Avian vaccine business.

Speaker 2

As I mentioned earlier, we have narrowed our revenue and non GAAP earnings per share guidance ranges for the year to the upper ends of the ranges, Due largely to the successful implementation of our NHP mitigation efforts, we are narrowing our organic revenue growth guidance to a range of 5.5 percent to 7.5 percent and our non GAAP earnings per share guidance to a range of $10.30 to $10.90 for 2023. We have increased the lower end of the ranges by 50 basis points and $0.40 per share respectively. We believe our existing DSA backlog and our in-depth Depth assessment of the normalizing demand trends gives us continued confidence in our financial outlook for this year. I'd like to provide you with additional details on our 2nd quarter segment performance, beginning with the DSA segment's results. DSA revenue in the Q2 was $663,500,000 an increase of 11.7% On an organic basis, the Safety Assessment business continued to drive VSA revenue growth and contributions from base pricing and study volume.

Speaker 2

NHP pricing was a small benefit to the growth rate, although less of a benefit than in prior quarters. The Q2 performance of the Discovery Services business, which posted lower revenue compared to the prior year, was reflective of the current market environment, coupled with the shorter term nature of both Discovery projects and the business' backlog. The TSA backlog decreased modestly on a sequential basis to $2,800,000,000 at the end of the second quarter from $3,000,000,000 at the end of the Q1. Net bookings and proposal activity continued to trend lower with net to bill remaining below 1 times on a quarterly basis. This was primarily driven by the cancellation rate, which trended higher and accelerated in the Q2.

Speaker 2

We believe the cancellation rate has increased because during the peak demand environment over the last few years, Clients book studies further in advance when the work would be required. Now that clients are rationalizing lower priority projects in their pipeline, They are canceling the associated studies. We view this trend as largely a reversion to the mean We expect that as clients complete the pipeline rationalization process, cancellation rates will decline and the backlog will be more reliably reflect the actual study demand. We believe that cancellations will decline because incoming new business awards Our gross booking activity that is not adjusted for cancellations remain robust, resulting in our gross book to bill remaining about 1 times in the second Quarter. We now see clients booking closer to when studies are required, which increases the reliability of the backlog.

Speaker 2

The current level of gross bookings can support healthy revenue growth rates, which suggests that solid underlying growth prospects For the Safety and Assessment business, we'll return once the rate of cancellation subsides. We believe the stabilization of the demand trends will be supported by encouraging macroeconomic indicators as well as stable to improving biotech funding levels. In the Q2, biotech funding showed the 1st quarter over year increases in 7 quarters on a trailing 12 month basis. We also have an average of 13 months of revenue coverage in our safety coverage in our safety assessment backlog. This solid backlog coverage affords us the ability to appropriately manage the business through fluctuations in demand environment, backfill gaps in study schedule and meet our near term financial targets.

Speaker 2

In addition, our level of backlog coverage for the remaining quarters And 2023 is well above the historical pre pandemic averages, which gives us additional confidence about the resilience of the business and our ability to achieve our financial goals. The DSA margin was 27.6 percent in the 2nd quarter, a 2 30 basis point increase from the Q2 of 2022. The increase continued to be driven by operating leverage associated with higher revenue in the Safety Assessment business. In addition, we are closely monitoring capacity utilization for both physical infrastructure and labor, including the pace of capital spending and hiring, and are committed to keeping these metrics closely aligned with the current demand environment as the DSA growth rate normalizes. RMS revenue was $209,900,000 an increase of 13.9% on an organic basis over the Q2 2022.

Speaker 2

The RMS segment continued to benefit from broad based growth in all geographic regions for small research models and another exceptional performance from our Insourcing Solutions business led by our CRADLE initiative. In addition, as we referenced last quarter, the timing of large model shipments within China benefited the 2nd quarter growth rate, leading to the outperformance compared to our full year RMS outlook of high single digit organic growth. The growth rate Small models in China also benefited from the comparison to last year's modest impact from COVID related restrictions in the Beijing in Shanghai region. While growth rates cooled a bit in the second quarter, we are continuing to see stable demand and pricing for small research models North America and Europe, which reinforces our growth outlook for the year. As you know, these models are essential tools that enable scientists In the RMS segment, as more than half of RMS revenue was generated from academic and government institutions and large biopharmaceutical clients.

Speaker 2

The services businesses continued to be the primary growth driver for RMS with Insourcing Solutions or IS leading the way. IES' Cradle operations are continuing to expand and generate excellent client interest. We recently opened a new site in Seattle and our first location Philadelphia. Including these locations, we now have 32 cradle sites totaling over 400,000 square feet in 5 states with growing Biohub's as well as in London and China. The Philadelphia site is expected to cater to a large base of cell and gene therapy companies in the region, a sector of the market which we continue to believe will generate abundant growth opportunities across our portfolio.

Speaker 2

Our Cradle network supports the flexible growth of the entire life sciences ecosystem in each Biohub allowing researchers to utilize our flexible vivarium rental space instead of building their own infrastructure. In the Q2, the RMS operating margin increased by 150 basis points to 26.4%. This improvement was driven primarily by leverage from higher revenue growth in China Due to the timing of large model shipments and last year's COVID related impact, because the timing of large model shipments in China is not linear, but we are expecting the 3rd quarter RMS revenue growth rate and operating margin will be a bit lighter than the 2nd quarter as a result of fewer shipments. Revenue for the Manufacturing Solutions segment was $186,500,000 an increase 6.6% on an organic basis compared to the Q2 of last year. The increase was driven by the CDMO and Microbial Solutions businesses partially offset by continued softer demand for biologics testing.

Speaker 2

The cell and gene therapy CDMO business had Strong quarter, reporting a solid double digit growth rate. We are very pleased That's the initiatives the CDMO team implemented over the past 18 months to improve performance have been successful and are beginning to generate the intended results. The creation of centers of excellence in gene modified cell therapy, viral vectors And Plasmids has more optimally aligned the business and investments in the commercial readiness of our operations And efforts to continue to improve the sales funnel for new projects have also contributed to the performance improvement. We are also pleased to be working with a commercial cell therapy client in Memphis and have a few other clients who are nearing commercial launches Over the next 1 to 2 years at both Memphis and our Gene Therapy Center of Excellence in Maryland, Microbial Solutions delivered a solid second quarter performance led by the continued strength of the Acugenix microbial identification platform. Last month, we were very pleased to have completed the launch of our EndoSafe Trillium recombinant cascade reagent or CR for bacterial endotoxin testing.

Speaker 2

This animal free solution reinforces our commitment to sustain initiatives and provides her a common alternative for EndoSafe clients who wish to become early adopters Of more sustainable testing methods, Trillium utilizes 3 biological proteins, which we believe provides superior accuracy and testing outcomes to competitors' single protein alternatives as well as equivalents to LAL based testing measures. With the launch of reagent kits in July, We plan to have Trillium cartridges available this winter, which clients will be able to utilize in their existing EndoSafe systems for a seamless transition from LAL to RCR. We believe the client adoption will be gradual over the next several years as most clients will likely continue to rely on our LAL based EndoSafe cartridges, which utilizes 95% less LAL than traditional methods. The introduction of the Animal Free Trillium solution supports our advancement of responsible science and further enhances our industry leading position as the only provider We can offer a comprehensive solution for rapid manufacturing and quality control testing. Testing volume in the biologics testing business improved from the seasonally soft first quarter level, but the year over year growth The current market dynamics of clients reprioritizing projects and becoming more budget focused, particularly for services that could be conducted at various times during the development process.

Speaker 2

The Manufacturing segment's operating margin declined by 5 70 basis points year over year to 22.9% in the Q2 of 2023, but did improve sequentially as anticipated. The year over year decline was primarily driven by the Biologics Testing and CDMO businesses, But we do expect the segment margin to continue to trend higher, particularly as the CDMO performance continues to improve. We were very pleased with the 2nd quarter results, which gave us the confidence to narrow our 2023 revenue growth and non GAAP earnings per share guidance to the upper ends of the previous ranges. Although some demand trends are moderating, we believe that the fundamental drivers of our business are intact And we are well positioned to manage through any near term fluctuations for several reasons. First, Our clients are under intense pressure to bring new drugs to market.

Speaker 2

We believe they will always seek a large experienced scientific partner like Charles River Who can provide the greatest value to them through unmatched scientific expertise and flexible and efficient outsourcing solutions. 2nd, The scale and duration of our DSA backlog provides us the visibility to more effectively manage the business through timing and location using our global network of facilities. And third, we will continue to drive a culture of continuous improvement, speed and efficiency as a result of our digital transformation, which provides us with better access to data and insights internally to appropriately manage costs and investments and enables our clients to access real time data, e Commerce Solutions and other self-service tools. And finally, we believe the power of our unique portfolio differentiates us today more than ever from other companies that provide R and D support services to the biopharmaceutical industry. As part of our annual strategic planning process, we recently completed a thorough review of the current market environment, our growth prospects the strategic imperatives for our company.

Speaker 2

Through this process, we believe the current end market trends could be characterized as a normalization from the past several years when there was unprecedented focus on investment in biomedical research However, we are optimistic that we will be able to capitalize on the many opportunities our markets provide. We intend to share more of our conclusions and update our longer term financial targets at our Virtual Investor Day, which we have planned for Thursday, September 21. To conclude, I'd like to thank our employees for their exceptional work and commitment and our clients and shareholders for their continued support. Now Flavia will provide additional details on our Q2 financial performance and 2023 guidance.

Speaker 3

Thank you, Jim, and good morning. Before I begin, may I remind you that I'll be speaking primarily to non GAAP results, which exclude amortization and other acquisition related adjustments. Costs related primarily to our global efficiency initiatives, gains or losses from our venture capital and other strategic investments 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're pleased with our results for the Q2, which included organic revenue growth of 11.2% and non GAAP earnings per share of $2.69 These results, which are consistent with our prior outlook, reflect the continued resilience and stability of our businesses, Even during times of macroeconomic pressure, as was the case in the Q1, increased interest expense, A higher tax rate and the divestiture of the Avian vaccine business continue to restrict the year over year earnings growth rate.

Speaker 3

Our first half results and our updated NHP supply outlook support our revenue growth and earnings per share guidance for the full year, which has now been narrowed to the upper end of the prior ranges. We continue to be well positioned To deliver reported revenue growth of 2.5% to 4.5 percent, organic revenue growth of 5.5 to 7.5 percent, non GAAP earnings per share between $10.30 $10.90 and free cash flow of $330,000,000 to $380,000,000 for the year. Our updated revenue growth outlook for 2023 reflects our revised assumptions about 2 headwinds that will affect the second half growth rates, particularly in the DSA segment. First, the impact of NHP supply is expected to be below our regional estimate of a 2% to 4% impact to total revenue growth. This favorability will be largely offset by the impact of macroeconomic and funding pressures on biopharma client demand trends.

Speaker 3

For the DSA segment, we expect the cumulative effect of these factors to result in a slightly more favorable outlook for the year, with revenue growth rates in the mid single digits on a reported and organic basis for the year. The Manufacturing segment benefited from continued traction in the CDMO business in the Q2, but we expect continued pressure on the biologics testing growth rate due to a more budget focused client base. As a result, we're reducing our reported growth outlook for the Manufacturing segment to a low to mid single digit decline and narrowing our organic segment growth outlook to a high single digit increase. The RMS segment growth outlook remains unchanged with a high single digit growth on both a reported and organic basis. With regard to the consolidated operating margin for the full year, We expect the margin to be flat to slightly lower than in 2022.

Speaker 3

We will continue our efforts to manage costs, reduce discretionary spending and drive efficiency, as well as monitor the demand environment to ensure our cost structure is closely aligned. I will now provide some additional details on the non operating items in the 2nd quarter. Unallocated corporate costs totaled $65,100,000 or 6.1 percent of total revenue in the 2nd quarter, compared to 4.1 percent of revenue last year. The increase was primarily related to the timing of corporate expenses, which fluctuate on a quarterly basis. With a lower level in the Q1, corporate costs averaged 5.2% of revenue in the first half of the year, and we expect approximately 5% for the full year.

Speaker 3

The 2nd quarter tax rate was 23.3 percent, representing a 220 basis point increase from the same period last year, but consistent with our full year outlook. The year over year increase was primarily due to a lower benefit associated with stock based compensation and other headwinds related to discrete tax items. For the full year, we continue to expect the tax rate will be in the range of 22.5% to 23.5%, which is unchanged from the outlook we provided in May. In the Q2, total adjusted net interest expense was $33,600,000 which is essentially flat sequentially. For the full year, We now expect total adjusted net interest expense will be in the range of $131,000,000 to $134,000,000 This is slightly lower than our prior outlook, primarily as a result of our assumption that the Federal Reserve will take a less aggressive stand towards interest rate hikes for the remainder of the year.

Speaker 3

As a reminder, at the end of the second quarter, approximately 3 quarters of our $2,680,000,000 in BAT was at a fixed interest rate. With regard to the variable rate portion of our debt, our outlook can accommodate an additional 50 basis points of rate increases for the remainder of 2023. At the end of the second quarter, Our outstanding debt balance represented a gross leverage ratio of 2.1 times and a net leverage ratio of 2 times. We continuously evaluate our capital priorities and intend to deploy capital to the areas that we believe will generate the greatest returns. Over the longer term, we continue to believe that strategic acquisitions would generate the greatest shareholder returns by enhancing our growth potential.

Speaker 3

But in the near term, we intend to continue to focus on debt repayment. Free cash flow was $80,700,000 in the 2nd quarter compared to $66,600,000 last year. The year over year increase was primarily due to favorable changes in working capital. For the year, Our free cash flow guidance of $330,000,000 to $380,000,000 remains unchanged. Capital expenditures was $67,400,000 in the 2nd quarter compared to $82,900,000 last year, primarily as a result of timing of projects.

Speaker 3

We will continue to monitor the demand environment and intend to keep capacity and capital investments closely aligned with market trends. We continue to which is in the 8% range as a percent of total revenue. A summary of our updated financial guidance for the full year can be found on Slide 40. We are expecting the second half consolidated organic revenue growth rate to average in the range of flat to low single digit growth. The slower growth from first half levels is due to 3 principal factors, including the modest NHP related supply impact in the 3rd quarter, A more cautious biopharma spending environment and also difficult growth comparisons to the second half of last year.

Speaker 3

These items will have the most significant impact on the DSA growth rate. The Manufacturing segment's Performance is expected to continue to improve from the first half levels and the RMS segment is expected to continue to deliver solid performance with the 3rd quarter IMS growth rate and operating margin a bit lighter due to the timing of large model shipments in China. For the Q3, we expect low single digit revenue growth On both a reported and organic basis, non GAAP earnings per share is expected to decline by approximately 10% from the Q3 2022 level. In closing, we continue to focus on the execution of our strategy and delivering solid financial and operational results. We're pleased with our first half performance and despite some macro economic and funding pressures on our biopharma clients, we believe the fundamental drivers of our business and our solid financial position will enable us to successfully navigate this environment.

Speaker 3

We operate in a durable industry with attractive long term growth prospects And we'll continue to leverage our capabilities, expertise and proven strategy to fully support our clients' evolving needs and achieve our full year financial outlook. Thank you.

Speaker 1

That concludes our comments. We will now take your questions.

Operator

And we'll take our first question from Sandy Draper with Guggenheim. Your line is open.

Speaker 4

Great. Thanks very much. And I apologize, hopefully, Jim, you didn't cover this. I had to jump on the call a little bit late. But in terms of the demand environment, Is there a noticeable split between the types of customers large pharma, midsize pharma, emerging biotech That it's is it coming in any particular area, any whether it's by size, by therapeutic classes, Any way to think about sort of or is it broad based that you're seeing sort of some a little bit more cautiousness across all the different therapeutic classes and all the different size Thanks.

Speaker 2

Pretty broad based for different reasons obviously. The big pharma companies which are Typically flush with cash have budgets and they're holding very tight to them. So we've got we We have some careful spending there. And you've got a whole category of very small biotech companies with Some potential concern about burn rates and running out of cash. So we would say that essentially Both of those groups would be careful subject to the following caveat that we had particularly I see the strong performance from the pharmaceutical sector in the Q2.

Speaker 2

So the pharma companies are quite strong. Our growth rate has Then choose for the last, I don't know, decade, principally by small and midsize biotech. Big pharma has always been an important Client base for us, but they have been particularly active and strong to a point and the point being budget. So I'd say some careful spending across the board would be probably the best way to characterize it.

Speaker 4

Great. Thanks, Jim. And I'll just keep it to one question for now. Thanks.

Speaker 2

Thanks, Sandy.

Operator

Thank you. And we'll take our next Question from Eric Coldwell with Baird. Your line is open.

Speaker 5

Thanks very much. Good morning. Two part question on DSA. First, I know it's modest and better than you originally expected, but Would you care to quantify the more specifically quantify the 3rd quarter impact from NHPs and What you're seeing for the full year versus the original 2% to 4%? And then secondarily, on the commentary around backlog declines and cancels while that was I think fully anticipated.

Speaker 5

I am curious what your Perspective is on the $2,800,000,000 today. How much of that do you think could be at risk? Or maybe another way of saying this, Would you be looking at similar backlog declines over the next 1, 2, 3 quarters? Just trying to get a sense on what you think the underlying Safe base is in that backlog that you're disclosing now. Thanks so much.

Speaker 2

Difficult to say where it settles out. So we had a particularly frothy market and clients definitely Concerned about getting slots and so they booked way out. So we got as far out as 17, 18 months, we talked about that. We got about 13 months of coverage right now, which feels good. We will have less slippage.

Speaker 2

So slippage increase Sorry. We've always had slippage that increased just because the sheer volume of work has increased. By the same token, I think people are holding slots without necessarily knowing what drug they would But into that slot, that's exacerbated by the fact that everybody is sort of refining their pipelines. And so as things continue to normalize, which they are and we think they will continue to, I think the good news is that There'll be booking studies somewhat closer to when they start. So that's a good thing for them.

Speaker 2

And for us, we should see a reduction in slippage for Sure. But we should still have a substantial amount of business and backlog. Where it shakes out is a little bit difficult to call. What we've said is it's normalizing and sort of returning to the mean and I think all of that's true. We've gotten a significant amount of price each year for the past half a decade anyway, increasingly so because the Studies are more complex.

Speaker 2

So as we look to the current and the future, we think the price will continue to be an important part of the equation As will some substantial volumes. So we'll just have to walk through this together as we walk through the The other thing which we keep saying that I'm not sure people pay a lot of attention to is that we don't have linearity in our business. So Last year, we had a very slow first half and a very strong second half. This year, we've had a very strong first half and a less Yes, sort of pointing to a less strong second half. It doesn't necessarily tell you much, because our clients look at the spending Throughout the whole year and I think we've been able to call sort of the annual cadence really well.

Speaker 2

We feel that business is good, demand is solid, we have a strong competitive situation and that our clients will be focusing on Studies have started more rapidly than they have over the last 2 years.

Speaker 3

And Aria, just Your first question about the DSA impact. We're not going to quantify it precisely. I'm just going to say that it was meaningfully below the previous 2% to 4% range that was provided. We're going to see a little bit of that in Q3 Just as we operationalize the logistics of redistributing work across our Geographic footprint, so it should be a small modest impact in Q3 and nothing in Q4. And just one additional comment with regards to the backlog.

Speaker 3

In addition to everything that Jim just said, I think We pointed out that gross bookings were above 1 in terms of the Book to bill in the quarter. So I think it's really to Jim's point, canceling work that was Place when the market was very, very frothy and a reverse to the mean as you pointed out.

Speaker 5

And Flavia, if gross bookings were above 1%, as I think about this 12% revenue growth in the segment. Does that mean gross bookings were up 12% plus as well? Am I thinking about that right?

Speaker 3

There's other things there. There's price That is different year over year. So I wouldn't necessarily draw that direct conclusion, but Growth bookings are going to be supporting continued healthy growth with ESA. That's how I should think about it.

Speaker 6

Okay. Thank you.

Operator

And we'll take our next question from Derik De Bruin with Bank of America. Your line is open.

Speaker 7

Hi, good morning. Thank you for taking my question. So I've got 2. Jim, We continue to get a lot of questions from investors about thinking about how NHP pricing is going to roll to the business as that normalizes And pricing starts to come down and people are worried about your margins. Can you sort of walk through the impact of What that has done in terms of NHP price on your margins and just sort of how you're sort of thinking about mitigating that?

Speaker 7

Thanks. And I've got a follow-up.

Speaker 2

I mean, the NHP pricing has been primarily a pass through. And so we've We're covering our costs and getting reimbursed for them. And so if and as those Come down, which I think everybody expects that they will. So it's a little bit difficult to call it because The availability of NHP sort of adds and flows, but let's assume there's a sufficiency of them and we don't have the need to pass on anything incremental. I mean Those NHP studies are priced appropriately given the complexity of the work, given the Amount of labor and space that's utilized given how prominent we are in space.

Speaker 2

So I think we'll continue to be able to hold on to very attractive Prices there without being significantly adversely impacted by not having that Somewhat a reasonable increase. I mean, if you look at the price of NHP over the last 5 or 6 years, It's an increased at an unpredictable rate. So I think everybody would be pleased with that. I think it will have a de minimis impact on us.

Speaker 7

Great. And as a follow-up on the Manufacturing segment, high single digit growth now versus high single to low double digit prior. Just a little bit more color there in terms of some of the headwinds in terms of the testing business and just what you're seeing Just basically the questions are goes into this. It's like when do we expect that business to go back to its potential double digit growth rate? Is that feasible going back into looking at 2024?

Speaker 2

So without getting specific about 2024, I would say it's certainly feasible. I mean the microbial business, which is sort of tracking maybe high single has always been a low double. So it has that potential given the Pricing and the complexity and diversity of the product line. So that continues to be a very strong franchise for us and is The CDMO business, which was a big headwind last year, is improving nicely both on the top and the bottom line. So that should Well, Biologics business is a little bit curious.

Speaker 2

It always starts slow, so that's not a big surprise. Stayed Reasonably slow again in the Q2, but we anticipate it will continue to improve in back half of the year. That testing has to be done before drugs get at the clinic. A big push now is to get things into the clinic. What we're seeing thus and some of this stuff is really expensive Is that Enviro clearance and cell banking, which are expensive.

Speaker 2

And I don't know, a year or 2 ago, they might have done Earlier in the process, they're waiting until later in the process. So as the drugs continue to develop well, they will spend that kind of money. We still I feel very good about that franchise and the investments that we've made in capacity and staffing assays that we put In place to sell on gene therapy. And we're definitely holding from a competitive point of view, but the volume as such, that's a bit of a drag right now On margin, so that will continue to ameliorate in the back half of the year. We're beginning to think and plan carefully for our investor conference at the end of September.

Speaker 2

We'll try to give as much clarity on what we think the ebbs and flows are on the specific businesses across the whole portfolio when we get there.

Speaker 7

Thank you.

Operator

And we'll take our next question from Tejas Sezal with Morgan Stanley. Your line is open.

Speaker 6

Hey, guys. Good morning. I want to go back to that earlier question on price, Jim, if I may. In the past, you've always told us that clients are less focused on price and safety assessment, more focused on start times. Now obviously that concern around start times no longer seems to be as acute anymore and will likely keep Coming in lower, if you will.

Speaker 6

So with that sort of backdrop and the macro crosscurrents that you're seeing, How should we be thinking about pricing into sort of not just the back half of this year, but perhaps into 2024?

Speaker 2

You should assume that pricing that we will continue to be able to garner meaningful price Given the complexity of the work, you should assume can't really speak for all of our competitors, but I will. You should assume the capacity is going to be tight. So while we can start studies faster And the backlog is shorter. The backlog is not trivial. And we're very busy on a worldwide And we've added more capacity last year and this year, but only enough to accommodate for what we anticipated demand will be.

Speaker 2

So I think as long as there's Lots of healthy drug development, which there is as long as there are multiple new modalities, which there are as long as Access to capital improves, which I think probably everybody on this call That's a different sense, but the Q2 was better. And there's more M and A. And so if we have IPO market open up, let's say, beginning of next year, Cash will be readily available. So we're not a major focus of ours. And of course, it's going to that's also going to ebb and flow depending on how busy we are and depending on how people feel about the economy.

Speaker 2

So Some of this is sort of a sector related response and a lot of it's just an overall economic response. So Pricing will continue to be meaningful in terms of our ability to get a significant amount.

Speaker 3

The only caveat I have that I would include is, Johan, overall, within the last couple of years, inflation has been Unusually high. And as Jim pointed out, given the complexity of the work that we perform, we are able to pass Inflationary pressures to our clients and as that modulates and normalizes that A lot of the law passed will also adjust, so that's the only thing to keep in mind.

Speaker 6

Got it. That's helpful. And then Jim, quick follow-up there. You talked about sort of framing the long term targets at the Analyst Day, but you also sort of mentioned That normalization of elevated growth that you've seen here over the past decade or so, so is that sort of essentially sort of foreshadowing perhaps your long term growth

Speaker 2

We'll give you chapter number of some where we think we're going both on top line and bottom line. Let's wait until we do that on mass.

Speaker 6

All right. Thank you. Appreciate the time.

Operator

Thank you. We'll take our next question from Dan Leonard with Credit Suisse. Your line is open.

Speaker 4

Thank you. My first question on the NHP situation, it sounds from your remarks that the Solution you have in place to utilize your global footprint is permanent. What are the implications of that for margins or otherwise?

Speaker 1

So

Speaker 2

nothing's forever. It's possible that it's permanent, right? We're not looking at it as necessarily transitory. We're looking at it as Utilizing our infrastructure, which is bigger than everybody else's, both clients and competitors, Continuing to use it to our competitive advantage and that means multiple supply sources of NHPs and that means multiple geographies and multiple So the good news is we have a very big infrastructure and enormous amount of expertise In NHPs around the world and we'll be able to slide in different providers of NHPs, let's say, in the U. S.

Speaker 2

Market, If you don't bring them in from Cambodia, and if we do bring them in from Cambodia, then we'll use multiple sources. So I Don't believe it's going to have any impact upon our margin, without being too specific about we're doing all this We're getting healthy prices everywhere. Obviously, costs are not identical everywhere that we do work, but on a blended basis. As we keep the volume up, we should be able to generate hopefully increasingly better margins. Ross is spending a lot of time on efficiency initiatives, particularly through our digitization effort and sort of standardization of activities.

Speaker 2

So If a client is used to getting work done in somewhere in the U. S. And now is getting it done for instance somewhere in Europe, They should feel that the work will be identical.

Speaker 4

Understood. And I have a follow-up, Jim, on your CDMO business. You mentioned that you have a few other clients reaching commercialization in the next 1 to 2 years. Possibly you could speak to whether any of these are more meaningful indications and could be more moving? Thank you.

Speaker 2

Sorry, meaningful indications of what you cut out at the end?

Speaker 4

Yes, more meaningful indications or more needle moving.

Speaker 2

Yes. Very difficult. I mean, the needle moving from the point of view that we are having Vigorous regulatory and client audits and If those are successful on both sides, I think that puts us in a very rarefied position From a competitive point of view, so we would anticipate that gives us sort of a clean bill of health and other clients would follow. It's impossible to gauge what the volume will be with these companies. It's possible to gauge what the volume will ultimately be, but I think most of these will start relatively Slowly, both from a regulatory point of view, insurance coverage point of view and doctors Being comfortable with it, of course, as you I think you all know of cell and gene therapies 5 is still on the whatever, 14 drugs that have been approved.

Speaker 2

So that's a very serious safety profile. We're thrilled to have multiple clients that are either Commercial, we're talking seriously about it. We're going through these audits. Hopefully, that will pick up. And of course, Almost regardless of the volume itself, you're doing the same thing over and over again.

Speaker 2

So Since the client is now in a commercial mill year, we should get they should get more price we should get more price as well and we should be able to continually Refine the process. So there's only positives about the work moving into commercial domain.

Speaker 8

Appreciate those thoughts. Thank you.

Operator

Thank you. We'll take our next question from Elizabeth Anderson with Evercore ISI. Your line is open.

Speaker 9

Hi, guys. Thanks so much for the question. Maybe I have sort of a 2 part question, 1 on the short term side and 1 on the longer term side. If we talk about sort of what your commentary on DSA bookings and cancellations. I'd be curious sort of if you could talk about whether you saw the accelerating cancellations into continuing into July?

Speaker 9

And then on the longer term end of the spectrum, like can you help remind us like if we've gone through other sort of biotech Funding cycles, like if we think back to 2016, 2017 or even back to the financial crisis, like how do we sort of Like thread, the sort of improving biotech funding environment that we've been seeing, your sort of cancellation commentaries in terms of like When those things sort of the funding sort of might come through to offset that? Thanks.

Speaker 2

Yes. So we're going to stay away from giving into the Quarter numbers. So we'll stay away from the July question. Sorry about that. The historical cycles are difficult To compare to because every single one of them is something different, instigating it, overall economic conditions are different and the Client base is different both in terms of modality and scale and funding ability.

Speaker 2

So it's tough to say. I've said for years, I don't think this business is particularly cyclical, but we're seeing a little of it now for sure With clients favoring the clinic certainly to the detriment of some of the early discovery work, I don't think much to the detriment of the safety work because you're not getting anything into the clinic without that. So again, We feel that it's normalizing right before our eyes. We don't know exactly where it's going to shape out End up except it was unusually it was fun, but it was unusually frothy and sort of instigated by COVID and real concern about running out of space. So I think we'll be In a different place and I hope a better place where that the clients can book somewhat sooner, Not necessarily overnight, but somewhat similar prices hold up.

Speaker 2

For sure, cancellations and slippage would Be reduced as a percentage of the whole and we would be working much more closely with the clients and having less Kind of surprise is way down the road with this slippage. So Everybody is sort of saying the same thing. The really big guys are saying, look, we have budgets and we can't blow them. And the little guys are saying, where things are looking up, but We need to be a little more cautious until things improve. So depending on how you feel about the next year or 2, I think most people think that we'll see an improved economy that should strengthen the demand and it should shake out in a more favorable place.

Speaker 9

Got it. That's helpful. And then just quick follow-up. In terms of the more global NHP work that you talked about before, are you seeing an interest from non Chinese Client in doing NHP work in China? Or is that kind of remain like a more dominated by Chinese biopharma companies.

Speaker 2

I mean it's tough for us to say since we don't do work there. So it's a bit anecdotal. I think some clients that are extremely price sensitive to Western clients will go to China. I think the preponderance of the work that is done in China is for is by Chinese CROs for Chinese biotech For pharma companies, we're essentially required by law. So we see a little bit of that Conversations with our prospective clients, but not very much.

Speaker 9

Got it. Thanks so much.

Operator

Thank you. We'll take our next question from Dave Windley with Jefferies. Your line is open.

Speaker 8

Hi. I wanted to clarify quickly. In your answer to Eric Flavia, did you say gross bookings about one times or above one times. Just interested in, are we talking 1.01 or 1.1 or 1.2 or just order of magnitude, if you don't mind?

Speaker 3

Good morning, Dave. I mean, I said above 1. I won't say that Precision, but certainly above 1.

Speaker 8

Okay. Jim, on the international or global activity and repositioning your NHP work. Can you talk about, you mentioned, I think, Conversations with regulators or work with regulators, can you talk about the work that you've done there to get Either Canada or European Organizations comfortable with The supply chain in a way that the Fish and Wildlife Service is not comfortable?

Speaker 2

I probably can't go too deep into that, but we have other geographies that's for Sure. From both regulatory and permitting point of view and communication point of view and support point of view, I'm quite comfortable with the way we're operating given the multiplicity of sources than HP. So it's Just sort of a different approach. We certainly hope that we get back to a similar Relationship with the U. S.

Speaker 2

Obviously, we have that with non Cambodian animals. And we think in time to continue conversations that we'll get to the point that We'll have multiple sources of supply for multiple locations. So we're at sort of an interesting inflection point right now where We're getting look, the good news is we're getting our work done for our clients without delays. We're doing it on a quality basis. We're using our infrastructure well.

Speaker 2

We're using a flexible way. We're getting significant amount of price and we're using the animals that we have contracted for. And we're happy and somewhat proud of our ability to pivot in the midst of sort of a complex situation. But I do think over time it will continue to ameliorate and improve on a worldwide basis. That's certainly our call.

Speaker 8

Thank you. And just as a quick follow-up, you mentioned, Tejas, that I think you're still seeing price in the current just thinking short term in the current environment given the changes in Demand trend, are you seeing discounting in the market from your competitors at all for safety assessment studies? Thanks. That's all I have.

Speaker 2

Yes. I mean, it depends on the competitor. It depends on what sort of work we're bidding on. Think that periodically there's some more aggressive pricing. Certainly, as I said earlier, there is from the Chinese competitors and There always is from some of our smaller competitors.

Speaker 2

Sometimes we play, we participate and sometimes the price points that they Have set up our at or below our cost and we're not going to play and we're trying to maximize the return. We have a lot of long term contracts with some of our bigger clients, which has some price protection in it. And probably periodically we're reducing prices as well. So we'll do what we can to be responsive to different types of clients, Many of whom have been concerned about availability of capital.

Speaker 3

Different types of work as well, right? The more complex work, There's less competition and a little bit more less visibility.

Speaker 8

Got it. Thank you very much.

Operator

Thank you. We'll take our next question from Max Mach with William Blair. Your line is open.

Speaker 10

Hi, good morning. Thanks for taking our questions. Maybe just one for me here on the RMS segment. Thinking about demand for research models as an indicator of health and stability of early stage research Activity more broadly. This quarter, we've consistently heard that companies are prioritizing later stage programs and said some more of the same today.

Speaker 10

I'm just wondering How that isn't consistent with what you're seeing in RMS? Is there anything to call out there other than maybe your exposure to large well funded clients? And how do you think about the likelihood that the macro environment starts to more meaningfully impact this segment moving forward? Thank you.

Speaker 2

Yes. The RMS business is particularly strong, Pimala. It was particularly strong in the second quarter In large measure because of NHP sales in China, service significant service revenue particularly On the cradle and small animals in the U. S. And Europe.

Speaker 2

So While there may be less animals acquired for discovery, those animals are obviously used widely in Pharmacology and regulated and non regulated talks. So I think it will be de minimis and You're not going to get drugs into the clinic next year or the year after or 5 years from now if the discovery work doesn't Startup in a significant way again. So these sort of Emphasis one place or another has to be short lived in terms of the developmental pipeline. We continue to sell our research models literally to everybody in the world. The business feels Quite strong right now.

Speaker 2

We always have and will and do get price, and we have a much Broader portfolio and geographic footprint from the competition. So while it might be a little bit slow on the discovery side, it will continue to improve.

Speaker 10

Got it. Thank you. Maybe just a follow-up one for me here on manufacturing. You mentioned weakness in things like viral clearance that Don't need to necessarily be done right now, but need to be done at some point. I mean based on this and your visibility into the work that's kind of Been delayed here.

Speaker 10

Is it fair to say that this work is actually simply being delayed instead of canceled? And if so, how do you think about that workflow and do in the future? Is there some bullets maybe building up that At some point, maybe 2024 could be a tailwind to the biologic safety testing business in particular?

Speaker 2

That would be nice. I'm not sure that that's happening, but it's very complex. It's expensive. It's a necessity. Drugs don't get into the clinic unless you can Prove that you've cleared any sort of human viruses that might be in the mix.

Speaker 2

We've seen it historically done earlier in the process. And so it just simply it's a little bit Comparable to safety studies and so specialized safety studies that are way more expensive and Clients wait until they're in Phase II or III before they spend the money in that. So it's not that unusual. It's a very smart thing to do and you don't want to Expand the money on a drug that's not going to get to the clinic, which could happen if you do it prematurely. It's difficult to extrapolate as to whether there's any sort of bolus at all.

Speaker 2

So I wouldn't want to take a guess at that. I think that for sure people are sort of whittling down their pipelines. That doesn't mean that they are Necessarily selling or canceling programs, it just means that they're shelving up. So that could heat up again and that could cause the bolus of work Across multiple work streams.

Speaker 11

Great. Thank you.

Operator

Thank you. We'll take our next question from Patrick Donnelly with Citi. Your line is open.

Speaker 4

Hey guys, thanks for taking the questions. Jim, maybe to circle back up on the backlog cancellation question, I'll try to ask it in a different way. Mean, it looks like maybe $200,000,000 or so of cancellations, maybe about 7% of the backlog. Can you frame that up In terms of historically, what that looks like, just trying to get a sense of, again, as a few people have asked, what this looks like relative to other cycles, how much is accelerated, And just the right way to think about this going forward.

Speaker 2

If it's a right or wrong way, You've got more work in backlog, which necessitate not necessitates, which brings with it more slippage and cancellation. So it's To some extent, it's math, but as it's elongated, I think it's exacerbated it and increased it. So It's not particularly comparable to other things that we've seen historically, which is fine. This sort of demand curve and competitive scenario, complexity of modalities continues to morph and change All the time. But we're definitely normalizing the situation, which I think will be Normalize the situation and we still have 13 months of backlog.

Speaker 2

I think it will be a better paradigm to predict the next Quarter end to come up with our operating plan for 2024 when we do that.

Speaker 4

Okay. That's fair. And maybe just a quick one. When we look at 4Q in terms of it should be a relatively clean quarter in terms of no NHP headwinds. Is it fair to look at and it might be for Flavia as well on the EPS side.

Speaker 4

Is it fair to look at kind of DSA and EPS as a decent Kind of run rate jumping off point when we look at 2024, is there anything left in terms of these headwinds or one time things that we need to consider on those pieces? Thank you guys.

Speaker 3

Yes. I think, as Jim has said, we'll provide additional clarity But I think just in terms of the realization of any impact of NHP supply, as we said, there shouldn't be anything in Q4 for 2024. So from that perspective, it should be

Speaker 4

I appreciate it. And I'll

Speaker 1

just step in. I think any 1 quarter, as Jim said before, that our business isn't linear. So any 1 quarter is never A good indicator of a longer term trend necessarily. I mean, we really take a lot of pricing guidance on an annual basis, and I think we've been pretty successful with that So far.

Speaker 4

Yes. Understood. Thank you, guys.

Operator

Thank you. And we'll take our next question from Casey Woodring with JPMorgan. Your line is open.

Speaker 12

Great. Hi. Thanks for squeezing me in. So you called out emerging biotech budgets as a key driver of some of the cancellations. But you also mentioned that funding levels showed the 1st year on year increase in 7 quarters on a TTM basis last quarter.

Speaker 12

I think you gave us that that Industry funding grew 20% year over year. So curious on sort of the correlation there and maybe what your visibility is into Emerging Biotech demand. DSA has always been a short cycle business. So the heightened cancellation rate, is that more of a function of customers just choosing to book work Less far in advance or is there a structural demand issue going on? Thank you.

Speaker 2

And Discovery the work in Discovery comes in very rapidly and goes out very rapidly. So The demand curve can turn on a dime as our client smaller and some midsized clients Get more comfortable with their access to capital. There's lots of tea leaves to read there, right? It's follow ons and IPOs, money coming Big Pharma and BC, etcetera, which appears to be strengthening, at what point that clients are comfortable enough to Proseccute a larger cadre of drugs is somewhat unclear, but seems to be moving in the right direction. So We felt for a long time this client base has been extremely well financed.

Speaker 2

And I wouldn't say they're poorly financed right now. I'd just say There has been mounting concern about that whether access to capital would continue or not. So Yes, but that's a tea leaf look positive. We would think that at some point, they would be more comfortable with that. But Right now, there's definitely a enhanced focus on the clinic that makes a lot of sense.

Speaker 2

It's not a huge surprise, But they have to get back to basic discovery sooner than later.

Speaker 12

Got it. And then maybe if I could just follow-up quickly one for Flavia on the Quarterly pacing in the back half for DSA, if the supply impact in the first half is mid teens that rolls off with no impact from supply in 4Q as you noted. Based on the mid single digit guide for the year, is that implied 4Q DSA growth rate flat to negative for 4Q? And then maybe just talk about if that's the right way to think about it and

Speaker 3

Yes. So I think Between Jim and I, we addressed this in the prepared remarks. There is a few items impacting the second half and in particular DSA. There is a little bit of NHP resupply impact in the Q3, just as we Finalize the appropriate scheduling of the work across our international So it's Brent. There's also a comp.

Speaker 3

If you look at the last This year, DSA was incredibly strong in the second half. So we have those comps impacting it there. So I think as you look at as we guided to mid single digit in the first half of the SAB about 16%, 17%, you will see a second half deceleration of that growth rate.

Operator

Thank you. We'll move to our next question from Justin Bowers with Deutsche Bank. Your line is open.

Speaker 4

Hey, good morning, everyone. Jim, can you talk about the improvements in the CDMO business and how that's performing this year relative to the growth Expectations when you entered the business a couple of years ago?

Speaker 2

Sure. We've got 3 centers of excellence in that business now, which is a change from the companies that we bought. So one company doing Gene modified cell therapy manufacturing, another one doing viral vector manufacturing, another one doing plasmids. We've spoken previously, we have enhanced change and We upgraded pretty much staffing across the board from sales to our regulatory folks to our general managers. We definitely have improving books of business in all three of those locales subject to the caveat they all have a slightly different Time frame to generate new business.

Speaker 2

As we said a moment ago, we do have a few clients that we're talking to about Moving into a commercial domain in the cell therapy manufacturing business. So it takes some time for the world to Actually acknowledging that we're in this business, that we do it seriously, what our products and services are and How they can contrast that with others that they could do the work with. So we had a rough year last year for sure, just kind of retooling These businesses, they feel like they're in a much stronger place right now. Clients seem much happier. We've had some regulators in.

Speaker 2

And so we're confident that we're going to have higher growth rates this year and Meaningful improvement over the past year and over last year. We anticipate that that will continue. We had great hopes for these businesses both in terms of top line growth, significant top line growth that would be accretive to both manufacturing for sure and the company as a whole and that the margins Would improve as the scale improved, which we still believe.

Speaker 4

Got it. And then Just in terms of the normalization in DSA, and we all appreciate how dynamic the last few years have been. Is there a way to just sort of pair the commentary? I mean, before clients were booking More than year out in advance, can you just help frame sort of what it was like, let's say, maybe Pre COVID and pre some of the supply chain disruption and whether we think it sort of returns to that or somewhere in the middle.

Speaker 2

Yes, again, a bit tough to say, but we probably had 6 to 9 month backlogs depending on the type of tox work of specialty or general and depending on the client and the locale, They got much longer than that. Historically, never got more than, I'd say, 9 months. So the kind of pre COVID It was in a good place. And we have more price lately than we used to in those days. So the hope would be that We get back to a reasonably attractive run rate that both allows us to take share and continue to guide our price and continue to be Pay for the complexity of our work and utilize our capacity.

Speaker 2

So I'm pretty comfortable with the Capacity situation, both staff and space, for us and the industry and for us, particularly since we're the largest player, I think that plays very well to this continuing to be a financially beneficial business with hopefully improving operating margins over time. Got it. Appreciate it.

Operator

Thank you. We'll take our next Question from John Sauerbier with UBS. Your line is open.

Speaker 11

Thanks for taking my question here. Maybe just I have one digging into a little bit more on the microbial business within manufacturing. It sounds like this continues to be strong growth here. Did this grow double digits in the quarter? And Maybe could you talk a little bit about the sustainability of the outlook here and where you think this has the potential for me to growth over the long term?

Speaker 11

Thanks.

Speaker 2

So we're not going to break down the growth rate on the individual pieces on a quarterly basis, but that business continues to have Terrific technology, IP that's quite advanced, a broader portfolio than any of the competitors, uses of classic Capabilities and our cartridges and our Recombent version of that cartridge using less and less Crude out of the horseshoe crab. So and continued more automation and the utilization of digitization. So that business, which is extremely We do think it has the propensity to be more profitable and certainly grow at historical So and also has sort of increasing connectivity with our biologics business and our cell and gene therapy business. So It was a little more of an it was a but it's always been an attractive business, but a little more of an outlier years ago and it feels much more central to the portfolio That it has historically. So we remain very positive about the current and future prospects of that business.

Speaker 1

We can have the next question please.

Operator

Thank you. We'll take our next question from Jacob Johnson with Stephens. Your line is open.

Speaker 13

Hey, thanks. Good morning. Maybe just one for me, Jim, on Cradle, that seems to be a business that's doing pretty well in this environment. Could you just remind us kind of the mix of kind of small biotechs and pharma for that business? And then I'm also curious if you're seeing Cross selling opportunities from new client wins, is that opening up any new doors for Charles River?

Speaker 13

Thanks.

Speaker 2

Yes. The client base has been and continues to be very surprising. So we thought it would be all tiny biotech companies that We're watching that cash and didn't want to commit to large amounts of space in places like Kendall Square and Cambridge or South San Francisco. And we have a bunch of those. We have a surprising number of really midsized companies and big pharma companies, which is a surprise, Because even they either run out of space, they don't want to build new space and have a hot new drug that they want to work on And so we love that.

Speaker 2

So we have some very big pharma footprints in many of these geographic locales. So it's a business that is even more attractive than we originally thought of. It has very high growth rates, very high margins. You would be very impressed with the client base at each site. So most sites get full before we open them.

Speaker 2

People go through them and they kind of commit to them. As we said previously, I think the Huge opportunity here is because the preponderance of the work we do now is often supplying the animals and taking care of them While people do basic research and that's a perfectly good business by the way, I think over time we'll supply the animals, take care of them and Participate with the client in running the study or do the entire study for them. Yes. And whether or not we do that, this is definitely a business that is currently and will continue to feed Other parts of our portfolio, particularly discovery and eventually safety if the drug looks promising. So High growth, high margin business, if you looked at it on a see through basis, it's even higher growth and higher margin.

Speaker 2

I also think, I don't mean to be a wise guy with this comment that it's relatively recession proof. It's probably the most recession proof thing that we do because It's companies large and small, totally depending on our proximity and infrastructure to do their basic research. So We love this business. You saw in the prepared remarks, we have a lot of sites now and a significant amount of square footage. The acquisition that we did last is doing extremely well.

Speaker 2

It's a smart thing for us to do, Len. We love the geographic footprint.

Speaker 1

I think we can have our last question, please.

Operator

And we'll take our last question from Tim Daley with Wells Fargo. Your line is open. Please ask your question.

Speaker 1

Great, thanks. Just wanted to touch on RMS China here. So called out increased competition specifically on the large model side That's consistent with news we've heard of the country. So just wanted to revisit the previously communicated expectation for RMS China to grow double digits in 2023. Can you update us on the current outlook for the year?

Speaker 1

And any additional color would be great if you could quantify RMS split between Large and small models. And that's it for me. Thank you.

Speaker 2

So not going to call it that time. I mean, the large models Aren't every quarter and the numbers of animals is a little bit difficult to predict as of the price It definitely was beneficial to the RMS top line growth rate and margin for the quarter. It continues to be a very attractive market for us. It was adversely impacted a little bit over the last couple of years with some of the COVID lockdowns. But We have several new facilities.

Speaker 2

We're trying to cover the whole country. Competition continues to be local. We're getting decent price. And we like both the growth rates and the margin. We're also beginning to see significant improvement in the service businesses in China we're seeing in the U.

Speaker 2

S. In Europe. So it's a marketplace as we said many times that's reminiscent of the U. And Europe were maybe 20 or 25 years ago. So we would anticipate additional continued high growth and we continue to be surprised by The lack of sort of the global players still not getting into China.

Speaker 2

So we're sort of on our own As a non Chinese entity.

Speaker 1

All right. Appreciate it. Thank you for the time.

Operator

Thank you. Good morning. We have no further questions in the queue. I will turn the conference back over to Todd Spencer for closing remarks.

Speaker 1

Thank you for joining us on the conference call this morning. We look forward to seeing you at some upcoming investor conferences as well as our virtual Investor Day on September 21st. This concludes the conference call. Thanks again.

Operator

Thank you. That does conclude today's Charles River Laboratories 2nd quarter 2023 earnings call. Thank you for your participation and you may now disconnect.

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