Charles River Laboratories International Q4 2023 Earnings Report

Charles River Laboratories International EPS Results

• Actual EPS: $2.46
• Consensus EPS: $2.39
• Beat/Miss: Beat by +$0.07
• One Year Ago EPS: $2.98

Charles River Laboratories International Revenue Results

• Actual Revenue: $1.01 billion
• Expected Revenue: $991.25 million
• Beat/Miss: Beat by +$22.23 million
• YoY Revenue Growth: -7.90%

Charles River Laboratories International Announcement Details

• Quarter: Q4 2023
• Date: 2/14/2024
• Time: Before Market Opens

Charles River Laboratories International (NYSE:CRL) provides drug discovery, non-clinical development, and safety testing services in the United States, Europe, Canada, the Asia Pacific, and internationally. It operates through three segments: Research Models and Services (RMS), Discovery and Safety Assessment (DSA), and Manufacturing Solutions (Manufacturing). The RMS segment produces and sells rodents, and purpose-bred rats and mice for use by researchers. This segment also provides a range of services to assist its clients in supporting the use of research models in research and screening pre-clinical drug candidates, including research models, genetically engineered models and services, insourcing solutions, and research animal diagnostic services. The DSA segment offers early and in vivo discovery services for the identification and validation of novel targets, chemical compounds, and antibodies through delivery of preclinical drug and therapeutic candidates ready for safety assessment; and safety assessment services, such as toxicology, pathology, safety pharmacology, bioanalysis, drug metabolism, and pharmacokinetics services. The Manufacturing segment provides in vitro methods for conventional and rapid quality control testing of sterile and non-sterile pharmaceuticals and consumer products. This segment also offers specialized testing of biologics that are outsourced by pharmaceutical and biotechnology companies. It also provides contract vivarium operation services to biopharmaceutical clients. The company was founded in 1947 and is headquartered in Wilmington, Massachusetts.

Charles River Laboratories International Q4 2023 Earnings Call Transcript

Presentation

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the Charles River Laboratories' Fourth Quarter and Full Year 2023 Earnings Conference Call. This call is being recorded. [Operator Instructions]

I would now like to turn the conference over to our host, Todd Spencer, Vice President of Investor Relations. Please, go ahead.

[Todd Spencer, Corporate Vice President, Investor Relations at Charles River Laboratories International]

Good morning, and welcome to Charles River Laboratories' Fourth Quarter and Full Year 2023 Earnings and 2024 Guidance Conference Call and Webcast. This morning, I am joined by Jim Foster, Chairman, President and Chief Executive Officer; and Flavia Pease, Executive Vice President and Chief Financial Officer. They will comment on our results for the fourth quarter of '23, as well as our financial guidance for 2024. 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.criver.com. A webcast replay of this call will be available beginning approximately two hours after the call and can 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 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 reconciliations on the Investor Relations section of our website.

I will now turn the call over to Jim Foster.

[James C. Foster, Chairman, President & Chief Executive Officer at Charles River Laboratories International]

Good morning. The stability and resilience of Charles River business model were very clear in 2023. Although demand trends moderated in the broader life sciences sector, we delivered organic revenue growth of 6.5% and earnings per share of $10.67, both of which were in the upper half of the original guidance ranges that we provided last February. We accomplished this despite the pipeline reprioritization activities and more cautious spending by many of our biopharmaceutical clients, and also by successfully mitigating the impact of the NHP supply disruption in the United States. We are anticipating that constrained clients spending will persist into 2024, but that demand will stabilize during the year. At the top end of our financial guidance range, we expect that demand trends will begin to modestly improve later this year. These trends are expected to result in organic revenue that is flat to 3% growth in 2024.

Since providing a high-level outlook at our Investor Day in September, we have further derisked our 2024 financial plan and believe our current outlook is appropriately balanced as cancellations remained elevated and backlog continued to moderately decline in our Safety Assessment business during the fourth quarter of last year. I believe that the macroeconomic environment will stabilize this year is supported by early external indicators that improvement will come, including several successful biotech IPOs in January, providing early signs that the capital markets should we open and biotech funding will improve. Our internal indicators also suggest that demand trends maybe beginning to stabilize in certain businesses, including signs of the client destocking activity in Microbial Solutions is easing and increased proposal activity in Biologics Testing business in the fourth quarter.

We believe the market environment is transitory. The long-term industry fundamentals for drug development remained firmly intact because the overwhelming need to find life-saving treatments for rare disease and many other unmet medical needs is unchanged. Biotech will again move into favor and capital markets and will lead the way, using advanced modalities and new technologies to drive innovation. Large pharma has consistently adapted to scientific advancements, the regulatory environment, and a drive to be more efficient. Therefore, we anticipate little change with regard to the industry's healthy, long-term growth prospects and continued investments in R&D.

In today's market environment, we will not wait for clients' spending patterns to improve. We have proactively and continuously engaged in actions to streamline our organization to drive productivity, enhance our speed and responsiveness, and become an even stronger scientific partner to our clients. We are doing this by continuing to focus on initiatives to win additional market share and new outsourcing opportunities across all three business segments. This includes enhanced commercial efforts through optimizing our sales force to accelerate revenue growth by adjusting go-to-market strategies, focusing on selling across our entire portfolio, and leveraging technology to enhance sales insights and identify earlier selling opportunities. Our digital strategy is helping us to better connect with our clients, including through our Apollo cloud-based platform to provide real-time access to scientific data and self-service tools for clients.

We also have a culture of continuous improvement at Charles River. That enables us to drive operational efficiencies and cost-saving actions to proactively manage our cost structure and to become an even more compelling partner for our clients for the longer term. Flavia will outline the cost savings from our restructuring initiatives shortly. Overall, a successful execution in these areas will enable us to capitalize on new business opportunities as they emerge, while delivering operating margin improvement in 2024 and beyond.

Before I provide more details on our 2024 outlook, let me give you the highlights of our fourth quarter performance. We reported revenue of $1.01 billion in the fourth quarter of 2023, a 3.5% decline on an organic basis over the previous year. The decrease was driven primarily by a mid-single-digit decrease in the DSA segment as we have regularly mentioned the year-over-year DSA growth rate was affected by a challenging comparison to the 26.5% growth rate reported in the fourth quarter of 2022. As has been the trend throughout 2023, sales to the global biopharmaceutical clients segment outperformed small and midsized biotechs again in the fourth quarter.

For 2023, we were pleased to report revenue of $4.13 billion with an organic revenue increase of 6.5%. The top-line performance was driven by another solid year in our Safety Assessment business, as well as healthy growth in the RMS segment. The operating margin decreased 130 basis points year-over-year to 19.1% in the fourth quarter, principally driven by higher unallocated corporate costs, due in part to a meaningful increase in health and fringe related expenses. The DSA operating margin also contributed with a small year-over-year decline driven by lower sales volume in the Discovery business. For the full year, the operating margin declined by 70 basis points to 20.3%. The decrease was primarily driven by the Manufacturing and RMS segments, as well as higher unallocated corporate costs.

Earnings per share were $2.46 in the fourth quarter, a decrease of 17.4%, from $2.98 in the fourth quarter of 2022. In addition to the lower revenue and operating margin, a higher tax rate as well as the 53rd week in 2022, and the divestiture of the Avian Vaccine business in the fourth quarter of 2022 were earnings headwinds. 2023 earnings per share declined by 4% to $10.67, due primarily to the non-operating headwinds, including significantly higher interest expense. In total, interest expense, tax, and the Avian divestiture reduced 2023 earnings per share by over $1.

With respect to 2024, we believe our outlook is appropriately balanced. Demand from many of our large biopharmaceutical clients is expected to be stable, while small and midsized biotechnology clients may continue to spend cautiously, as they endeavor to extend their cash runways until clear indications of an improving funding environment emerge. At the same time, we expect both of these client segments to continue to increasingly utilize strategic outsourcing to gain efficiencies and cost-effectiveness in their drug development programs. As I mentioned earlier, organic revenue in 2024 is expected to be in a range from flat to 3% growth.

Non-GAAP earnings per share are expected to be in a range from $10.90 to $11.40, including at least $0.30 of earnings accretion from the November increase in our ownership stake in Noveprim, our NHP supplier in Mauritius. The range represents earnings per share growth of approximately 2% to 7%, with earnings growth expected to exceed revenue growth, due primarily to operating margin expansion of at least 50 basis points this year.

I'd like to provide you with additional details on our fourth quarter segment performance and our expectations for 2024, beginning with the DSA segment. DSA revenue in the fourth quarter was $625.8 million, a decrease of 6% on an organic basis. The quarterly decline reflected the difficult comparison to the 26.5% growth rate last year, as well as a meaningful decline in the Discovery services revenue in the fourth quarter. Safety Assessment revenue also decreased by the lower rate. In the Safety Assessment business, the elevated cancellations throughout 2023 and slippage had a greater impact on the fourth quarter, with work being canceled or start dates moved out of the fourth quarter and into 2024.

For the year, DSA revenue increased 7.9% on an organic basis, which met our segment outlook due to another solid year in the Safety Assessment business. As anticipated, the backlog coverage enabled us to achieve our DSA financial outlook of high-single-digit organic revenue growth in 2023.

At year end, DSA backlog modestly declined to $2.45 billion from $2.6 billion at the end of the third quarter. Cancellation rate increased from third quarter levels, resulting in a net book-to-bill that remained relatively stable but below 1 times. However, the net book-to-bill has moved within a similar range throughout each quarter of 2023. With gross bookings remaining above 1 times at the end of the fourth quarter, we expect demand KPIs to improve modestly once the cancellation rate subsides, which is one of the assumptions behind our DSA outlook. We expect flat to low-single-digit organic revenue growth in the DSA segment in 2024. The first quarter will exhibit trends similar to the fourth quarter of 2023, due in part to the normal seasonal lag of study starts at the beginning of the year. We expect study volume to improve thereafter, but the first half growth rate will be lower before the easier year-over-year growth comparisons and improving demand KPIs benefit the second half DSA growth rate.

Another assumption is that DSA revenue growth will be principally driven by modest price increases in 2024. This includes a $15 million to $35 million impact from NHP pricing, which reflects a significantly lower price increase than in recent years.

One of the reasons that we are able to navigate a volatile NHP pricing environment is our long-standing, high-quality NHP supply relationships, which give us an important competitive advantage in the preclinical sector. The November acquisition of an additional 41% stake in Noveprim for approximately $145 to a 90% controlling interest firmly supports our stated NHP supply strategy of enhancing safeguards and diversifying our NHP supply through increased ownership and operational control. Noveprim is reported as part of our DSA segment for NHPs, vertically integrated into our safety assessment supply chain, and the RMS segment for NHPs is sold to third-party clients. Flavia will provide more details on the financial impact of Noveprim, which is now consolidated in our financial results.

As we often comment, we are also deeply committed to initiatives to modify and reduce animal use, which are embedded in our 4Rs comparatives of replacement, reduction, refinement, and responsibility. We intend to remain the leader in regulatory required preclinical development services through both enhanced efforts to secure and safeguard our supply chain and also by championing methodologies to reduce animal use, including alternative technologies. Over the last four years, we have invested approximately $200 million in these technologies, principally through our strategic partnership activities, to add capabilities from AI to next-generation sequencing, as well as through investments in our digital enterprise and our animal-free Endosafe Trillium testing platform.

Discovery services had a challenging year and saw a meaningful revenue decline in the fourth quarter across all client segments. Discovery proposal volume remained low throughout the year and clients' decision-making timelines for new projects remained extended. Despite these near-term challenges, Discovery services remain a critical component of our end-to-end early-stage portfolio as we are able to partner with clients and often establish a relationship with them earlier in their life cycles. Whether for a single project or an integrated program, we are able to work flexibly by providing clients with cutting-edge capabilities to discover their novel therapeutics.

As we turn the page to 2024, we are cautiously optimistic that budget replenishment in the new year will lead to healthier demand trends, but have forecast the business to be essentially flat in 2024. The DSA operating margin was 26% in the fourth quarter, a 30-basis point decrease from the fourth quarter of 2022, due to the revenue decline in the Discovery Services business. For the year, DSA operating margin increased by 220 basis points to 27.5% as a result of operating leverage associated with higher revenue and favorable mix in the Safety Assessment business. RMS revenue in the fourth quarter was $195.8 million, a decrease of 0.4% on an organic basis. For the year, RMS organic revenue growth was 5.9%.

Demand for small research models across all client segments slowed considerably in the fourth quarter, particularly in North America and Europe. Sales of small models were the principal headwind to fourth quarter growth as well as continued softness in the Cell Solutions business. These headwinds were largely offset by healthy revenue growth in China for both small models and NHPs in the fourth quarter, despite the numerous reports of a difficult demand environment for the life science sectors within the country. For 2024, we expect RMS organic revenue will be flat to low-single-digit growth. The current demand environment will likely limit unit volume growth this year in the research model business in North America and Europe, so we expect to drive most of the growth through modest price increase. In China, we expect continued healthy demand for small models and associated services, albeit tempered from the robust historical double-digit growth rates in the region. We expect NHP revenue in China to decline in 2024 due primarily to lower pricing in the region.

Research model services are positioned to be a notable contributor to revenue growth in 2024. We are expanding our GEMS capacity in certain regions to accommodate our clients' increasing requirements for our support of their complex research and maintenance of their genetically modified model colonies. In addition, CRADL, one of the largest growth drivers for RMS in recent years, is expected to deliver a solid top-line performance in 2024, with growth accelerating in the second half of the year, due in part to the ramp-up of several new CRADL sites. Clients are continuing to adopt this flexible model to access vivarium space without having to invest in internal infrastructure, which provides a powerful value proposition to biotech clients in particular who are trying to conserve capital. The RMS operating margin increased by 40 basis points year-over-year to 23.1% in the fourth quarter, but decreased by 220 basis points to 23.23% in 2023. The one-month contribution from Noveprim as well as increased shipments of NHPs within China were the principal contributors to the fourth quarter margin improvement, partially offset by lower sales volume in the small models business. As I mentioned, Noveprim's sale of NHPs to third party external clients has been included in the RMS segment, which is expected to drive meaningful margin improvement in the RMS segment in 2024.

Manufacturing solutions revenue was $191.9 million for the fourth quarter, a growth rate of 2.3% on an organic basis, and the full year organic growth rate was 2%. The CDMO business drove the segment growth rate with solid double-digit growth in both the fourth quarter and for the full year. Initiatives that we implemented to improve the performance of our CDMO business have proven successful in 2023. We believe the business is now well-positioned competitively with its centers of excellence for cell therapies, viral vectors, and plasmids, and that investments made over the past two years have enhanced the commercial readiness of our operations. The enhancements to the business have been well received and are in positive feedback from clients. We are generating additional client interest that has undoubtedly been initiated by our announcement in December that our Memphis site received U.S. and EU approval to manufacture CASGEVY by Vertex, the first gene-edited cell therapy targeting severe sickle cell disease. We are very pleased with our relationship with Vertex and believe commercial relationships like this will continue to drive new client inquiries going forward.

Our Biologics Testing Solutions and Microbial Solutions businesses both reported modest revenue declines in the fourth quarter. Microbial Solutions did experience a modest increase in the year-end client order activity, as normally occurs, but not to the extent that occurred in the fourth quarter of 2022 when there was a significant budget flush. We are now seeing positive signs that client destocking activity is starting to wind down at both large biopharmaceutical and CDMO clients, as a number of large clients recently resumed their order activity for reagents and consumables. In addition, we're now seeing confirmed ship dates for instruments including the Endosafe Nexus 200 automated system that were delayed in 2023.

As we previously mentioned, the Biologics Testing business had a difficult year due to tighter client spending in its end markets. However, we saw an increase in client proposal activity in the fourth quarter, which was the first quarterly increase in 2023. First quarter sample volumes for the Biologics Testing business are always seasonally soft coming out of the holidays, but we believe both Biologics Testing and Microbial Solutions will see improving trends over the course of the year and are positioned to generate modest revenue growth in 2024. In total, we expect low- to mid-single-digit organic revenue growth in the Manufacturing segment this year. The Manufacturing segment's operating margin increased slightly to 25.4% in the fourth quarter, but declined by 700 basis points for the year to 21.8%. While the operating margin declined in each of the Manufacturing segments business units in 2023, the CDMO business was the most meaningful headwind throughout the year. However, as project volumes continue to improve and enhance the business' margin profile, we expect significant improvement this year, contributing to meaningful segment operating margin improvement in 2024. As we mentioned at Investor Day in September, we expect the Manufacturing segment will drive the improvement towards the company's margin expansion targets over the next three years. And the CDMO business is a key component of that goal.

Before I conclude, I'd like to congratulate Bill Barbo on a remarkable 42-year career at Charles River. As we announced previously, Bill will retire as Executive Vice President and Chief Commercial Officer at the end of 2024. Bill's career began with a love of science, working as an animal care intern before joining the company as a full-time research scientist. He continued to assume positions of increasing responsibility, eventually moving into our commercial organization. During his time at Charles River, Bill led numerous initiatives which contributed to our market-leading position, and his comprehensive knowledge of our portfolio has made him an indispensable leader of our commercial organization. Bill has dedicated his career to ensuring we deliver on our purpose and has truly embraced our values. I greatly appreciate Bill's contributions and partnership over the last 42 years, and wish him all the best in his next chapter.

For many years, Bill has been working with Kristen Eisenhauer, the Senior Vice President responsible for all client services and sales. Kristen has now assumed the Chief Commercial Officer role, so we are fortunate to have a successor in place and anticipate a seamless transition. Thanks, again, Bill, and congratulations, Kristen.

In addition to Bill's retirement, Senior Vice President, Kerstin Dolph, has now assumed responsibility for the Microbial Solutions business and will now be responsible for our entire Manufacturing Solutions segment. This aligns the operational leadership for our CGMP-certified businesses under Kerstin, as she has effectively led our Biologics Testing and CDMO operations for a number of years.

To close, we were pleased with our solid performance in 2023. Our long-term prospects for revenue growth and margin expansion remain unchanged from the targets we provided at Investor Day, including averaging 6% to 8% organic revenue growth and approximately 150 basis points of cumulative operating margin improvement through 2026. Charles River is positioned exquisitely to meet the evolving needs of our clients and will capitalize on the opportunities that emerge in today's business environment as the demand trends stabilize and eventually improve.

We are taking action to gain additional market share through enhanced commercial initiatives and by strengthening our leading non-clinical portfolio by focusing on innovation, including adding cutting-edge technologies from AI to next-generation sequencing. We are also committed to driving efficiency and appropriately managing our cost structure without sacrificing the flexibility to respond to a changing industry and client requirements. And we have stabilized and continued to secure our supply chain, including through the acquisition of Noveprim. We will continue to lead and to proactively manage the business through this dynamic market environment as well as to deliver value to our shareholders.

To conclude, I would like to thank our employees for their exceptional work and commitment, and for our clients and shareholders for their support. Now I'd like Flavia to give you additional details on our financial performance and 2024 guidance.

[Flavia Pease, Corporate Executive Vice President & Chief Financial Officer at Charles River Laboratories International]

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 restructuring actions, gains or losses from certain venture capital and other strategic investments, gains on the Avian divestiture, and certain other items. Many of my comments will also refer to organic revenue growth, which excludes the impact of acquisitions, divestitures, foreign currency translation, and the 53rd week in 2022.

Our fourth quarter 2023 revenue and earnings per share were in line with our expectations and our prior guidance ranges, and reflected the continuation of a cautious biopharmaceutical end market demand environment, which we expect will persist into 2024. Therefore, we expect reported revenue growth of 1% to 4% and organic revenue that will be flat to 3% growth in 2024. Higher revenue and moderate margin improvement are expected to drive non-GAAP earnings per share to a range of $10.90 to $11.40 this year, representing year-over-year growth of approximately 2% to 7%. Our guidance also assumes that the tax rate is less of a headwind to earnings growth than in the prior year, and that interest expense will be slightly below 2023. I'll provide more detail on the non-operating items a bit later.

As Jim mentioned, in November, we acquired an additional 41% equity stake in Noveprim, a high-quality supplier of NHPs in Mauritius. Noveprim has been a longtime supplier to Charles River, and we made our first equity investment in 2022, acquiring a 49% stake. Now that we own a 90% controlling interest, we'll consolidate Noveprim's operations into our financial results. The acquisition is expected to be the primary contributor of our operating margin improvement in 2024 and add at least $0.30 to non-GAAP earnings per share. The majority of the financial contribution this year will be derived from NHPs sold to third party clients, which will be included in the RMS segment. We expect Noveprim will generate $40 million to $50 million of third-party revenue for the full year 2024, which will not impact organic revenue growth until we anniversary the transaction in late-November. NHPs that will be utilizing regulatory required studies will be included in the DSA segment. The transaction will be a small benefit to our DSA financial results as we will now be sourcing these models internally instead of a third-party supplier.

With regard to the quarterly gating of our 2024 outlook, as we have said many times, our business isn't linear, and its quarterly performance can fluctuate based on mix, the status of clients' programs, the timing of NHP shipments, and other related factors. We expect the second half of 2024 will be stronger for both year-over-year revenue growth and operating margin than the first half, due in part to the challenging growth comparisons in the first half of 2023. We expect organic revenue will decrease at a low- to mid-single-digit rate in the first half, followed by a second-half increase at a mid- to high-single-digit rate.

I will now provide additional details on our 2024 outlook, starting with our reportable segments. The RMS segment is expected to generate flat to low-single-digit organic revenue growth, based on modest growth for research models, driven principally by price, as well as accelerating growth in the services business with the ramp of new CRADL facilities in the second half. The DSA segment is also expected to generate flat to low-single-digit organic revenue growth based on the expectation that early-stage demand trends will stabilize during the first half of the year and begin to improve later in the year. The Manufacturing segment is expected to achieve low to mid-single-digit growth, primarily driven by the CDMO business, as well as modest revenue growth in the Microbial Solutions and Biologics Testing businesses.

In 2023, the operating margin declined by 70 basis points to 20.3%. This was caused by higher unallocated corporate costs that reduced the consolidated operating margin by 30 basis points, which I'll discuss shortly, and the moderating domain environment during the year, which particularly impacted the RMS and Biologics Testing businesses. The Manufacturing margin was also impacted by higher costs in the CDMO business necessary to prepare for regulatory audits and commercial readiness, as well as a lease impairment in the first quarter of 2023. We implemented cost-saving actions in 2023 and 2024 to manage our cost structure and align it with the current demand environment, but it takes time for the savings to ramp. These restructuring initiatives will generate approximately $60 million to $70 million in annualized cost savings.

Despite the slower top-line growth, we expect to generate operating margin improvement of at least 50 basis points. As I mentioned earlier, this improvement will primarily be generated by Noveprim. The balance of the improvement will be derived from continued efforts to manage costs and drive efficiencies.

On a segment basis, we expect meaningful operating margin improvement from the RMS and Manufacturing segments. Noveprim is expected to contribute at least 200 basis points to the RMS margin. In the Manufacturing segment, we expect the profitability of each business units will improve commensurate with sales volume, but expect the CDMO business will be the largest contributor as it grows in scale and adds commercial revenue, and as costs related to regulatory audit preparation and commercial readiness moderate. The DSA operating margin is expected to be slightly below the 2023 level. We expect unallocated corporate expenses in 2024 to be similar to the 2023 level at just above 5% of total revenue. The 30-basis point increase in 2023 to 5.3% was primarily attributable to continued investments in our digital strategy as well as higher health and fringe-related costs, which was the primary driver of the fourth quarter increase.

The non-GAAP tax rate for 2024 is expected to be in the range of 23% to 24%, an increase from 22.1% in 2023. The anticipated increase in the tax rate is principally due to the impact related to stock-based compensation as well as the geographic mix of revenue. In addition, we do not expect discrete tax benefits, which benefited 2023, to repeat. The headwind from stock-based compensation will cause the first quarter tax rate to be in the mid-20% range because of the more pronounced impact on the tax rate from the timing of vesting of equity awards at current stock price levels.

Total adjusted net interest expense in 2024 is expected to be in a range of $125 million to $130 million, compared to $131.5 million last year. The decrease will be primarily driven by that repayment as well as anticipated lower variable interest rates later in 2024. At the end of the fourth quarter, we had outstanding debt of $2.65 billion compared to $2.5 billion at the end of the third quarter. The sequential increase reflected borrowing to fund the Noveprim acquisition. At the end of the fourth quarter, approximately 75% of our $2.65 billion in outstanding debt was at a fixed interest rate. Our gross leverage ratio was 2.3 times and our net leverage ratio was 2.2 times at the end of the fourth quarter.

For 2024, we expect free cash flow will be in a range of $400 million to $440 million, representing a meaningful increase over $365 million in 2023. This increase will be driven by our earnings growth as well as our continued focus on working capital management. In addition, capital expenditures are expected to decline both on a dollar basis and as a percent of revenue. Capex for 2024 is expected to be approximately $300 million, or about 7% of total revenue, down from $318.5 million, or 7.7% of revenue in 2023. This outlook is in line with our long-term target level of 7% to 8% of revenue for capex, and reflects our disciplined approach to aligning capacity and capital investments with market demand. A summary of our 2024 financial guidance, including Noveprim, can be found on Slide 38.

With regard to the first quarter of 2024, we expect revenue would decline in a low- to mid-single-digit range on a reported basis and decline in a mid-single-digit range on an organic basis, as we expect demand trends will be similar to the fourth quarter of 2023. As a reminder, despite a stronger first quarter in 2023, there is typically a seasonal impact in Safety Assessment, reflecting fewer study starts at the beginning of the year. The Biologics Testing business is also impacted by seasonally lower sample volumes in the first quarter.

From an earnings perspective, we expect non-GAAP earnings per share of at least $2 in the first quarter. The decline from the fourth quarter will be primarily driven by a lower operating margin, due in part to seasonal business trends. Unallocated corporate costs will also remain above 6% of revenue in the first quarter, and similar to the fourth quarter level. A challenging comparison to the robust DSA operating margin in the first quarter of last year also impacts the year-over-year comparison.

As I mentioned, we expect a meaningfully higher tax rate in the mid-20% range, reflecting a headwind from stock-based compensation. We do expect revenue and operating margin will improve sequentially after the first quarter as we move beyond the seasonal trends at the beginning of the year and market demand improves marginally as the year progresses.

In closing, despite the ongoing cautious biopharma spending environment, our business continues to be resilient, and we remain confident in the long-term health of the industry. Our solid 2023 performance reflected our ability to manage the challenges in the marketplace while continuing to focus on making disciplined investments to support our businesses and managing costs to capture efficiencies. Although 2024 organic revenue growth is forecasted to be below our long-term targets, we remain confident in our Investor Day targets of averaging 6% to 8% organic revenue growth through 2026 and delivering meaningful margin expansion, which is supported by the sustained long-term fundamentals for drug development and our position as an industry leader.

Thank you.

[Todd Spencer, Corporate Vice President, Investor Relations at Charles River Laboratories International]

That concludes our comments. We will now take questions.

Questions and Answers

[Operator]

[Operator Instructions] We'll take our first question from Derik de Bruin with Bank of America. Your line is open.

[Derik de Bruin, Analyst at Bank of America]

Hi. Good morning. Thanks for taking my question. Jim, so I'm a little bit surprised to sort of see the significant ramp you're embedding in the second half. I mean, your book-to-bill is hovering around, what, 0.75, 0.8. Your cancellations are up. And you're assuming some NHP pricing, which I think is contrary to what some of the market surveys are showing. I'm just -- can you sort of break these down, so like -- and how you're sort of like getting the confidence in you're doing with that? I think particularly on the pricing standpoint, I mean, are -- is it something with the Noveprim acquisition that's allowing you to sort of get this incremental pricing? Thanks.

[James C. Foster, Chairman, President & Chief Executive Officer at Charles River Laboratories International]

Sure. This would not be the first time and actually would be the third time that we've had a ramp. '23 was in the first half of the year, '22 was in the back half of the year. And they were pretty big ramps. So, it's -- I don't want to say it's the nature of the business, but it's not that unusual. The first quarter tends to be a little bit slower as the clients sort of sort out what molecules they're going to work on and what they're going to delay. And then there's obviously a lot of issues, right?

So, I guess, we're looking at a lot of things. Yeah, cancellation rates were higher than we would like, and that's somewhat concerning. And by the same token, we think those will ameliorate. We're seeing sort of a stabilization demand inasmuch as seeing our Microbial folks destocking, meaning that they loaded up in the prior year and they've been working through that bolus of inventory, and now we believe that they're getting out to buy incrementally. We saw increased proposal activity in Biologics in the fourth quarter, and that business was down last year. Again, that's one of those businesses where the work comes in very quickly. The studies are relatively short-term, so you turn them around very quickly and build them very quickly. And that's a bit of a commentary on the necessity to test and the growth rate of large molecules, which we still feel really positive about. I think everybody does. We're looking at a ramp of new CRADLs that we either built at the end of last year or opened, or will open this year. So, we should see more of that in the back half of the year. We're watching biotech IPOs carefully, as you all are, as everybody is, and there were about a half a dozen. In the first quarter they priced well, about $8 billion was raised, and so we feel good about them. But that -- we're seeing an enormous amount of biopharma M&A. So, that's injecting a lot of cash into the system. VCs are flushed with cash.

So, sequential movement after the first quarter is -- I want to use the word normal, tends to be quite usual. So, look, we're piecing together, without trying to overread the situation, that there are a bunch of sort of smaller, subtle things that in the aggregate are coming together to provide confidence. Lots of questions about NHP pricing. So, just to sort of bottom line that for you, our prices never got as high as some of the competition, including some of the much smaller competitors. So, we didn't pay as much, we didn't pass along extremely high prices to our competitors. And that's a manifestation, I think, of the supply sources that we have. And now we have this new supply source, Noveprim in Mauritius, which was always -- we've used them for years, but it's always been the highest-quality provider. And that's going to both provide NHPs for Safety and also to sell directly to clients.

And so, we do think we can have a modest price increase, which is where you're seeing that $15 million to $35 million that we pointed to. Lots of noise from the competition about reducing prices. That's not dispositive of anything that we're going to do because their prices, interestingly, have been higher than ours. And so, if they bring their prices down, whatever they said, I think 10%, 20%, 30%, they're going to get in the same ZIP code that we are. So, we think we have a modest amount of NHP pricing. Those aren't huge numbers, but we'd be happy to get that incremental revenue.

Supply sources are in really good shape, solidified by this Noveprim acquisition, and a whole litany of smaller, I don't want to say unrelated, smaller strengthening activities across the portfolio. So, while it definitely is back end-loaded, we do think it's doable. We also have very easy comps. I don't necessarily like to say that, but that's a mathematical fact. So, the weak back half of the year in '23. So, we have a meaningful level of confidence in the ramp and definitely in our guidance for the year, Derik.

[Derik de Bruin, Analyst at Bank of America]

Thanks. If I can do just one follow-up, which is, any sign that the Chinese are going to reintroduce NHPs or start exporting again?

[James C. Foster, Chairman, President & Chief Executive Officer at Charles River Laboratories International]

There continues to be conversations about it. We haven't seen anything either from an importing point of view or an exporting point of view. So, while it's possible, I think it's unlikely. I mean, their thesis is clearly keep those animals within country to provide some sort of competitive advantage, although I don't think it's going to be. But they think that's an important sort of natural resource and scientific resource that gives them a leg up. So, I think they're going to want to hold on to those animals and use them. Inside, I think there's been a little bit of noise around that just because the economy has been tougher over there than people anticipated and the investment in life sciences has been a little less robust. So, there has been a fair amount of speculation that they would export. And by the way, anything's possible. We're just not seeing it, and I'm not sure there's actually a logical reason for them to do it, particularly not if, but when things heat up again in China.

[Derik de Bruin, Analyst at Bank of America]

Thank you.

[James C. Foster, Chairman, President & Chief Executive Officer at Charles River Laboratories International]

Sure.

[Operator]

And we'll take our next question from Patrick Donnelly with Citi. Your line is open.

[Patrick Donnelly, Analyst at Smith Barney Citigroup]

Hey, guys. Thanks for taking the questions. Jim, maybe on the DSA piece, you talked about the cancellation rates picking up a little bit. It seemed like the book-to-bill was stable. Can you just talk about what you're seeing there? It seemed like 3Q, there were signs of a little bit of improvement on the cancellation rates, now we're kind of taking another step back. What do you see in there? Again, you mentioned the biotech IPOs. Does that give you a little more confidence? How are you thinking about just that backlog step-down as we work our way forward here?

[James C. Foster, Chairman, President & Chief Executive Officer at Charles River Laboratories International]

Yeah. We've been trying to not overread it. We were very pleased to see the cancellation rates which have gotten higher than historically -- higher than they had been historically, started to come down and we said that that's fabulous. But one quarter is not dispositive of anything. And they were up again in the fourth quarter. So, we do think that they'll come down. We do think that we need to see it come down for a couple of quarters. It's somewhat related, or very much related to the elongation of the backlog. And I think, as you'll recall from the last quarter's conference call, we talked a lot about how the backlogs have gotten to be 18-plus months. And while that felt good to some extent, the problem with that was that we definitely had some clients that were just booking slots. I want to have a slot, I'm not actually sure what I'm going to do with that slot, but by the time I get there, 18 months from now, I'm sure I'll have some work. And what's happened with a lot of the clients is they get to 16 months out and they say, geez, sorry, we actually don't have a study, so we'll give up that slot.

So, the elongation of the backlog, I think, from that vantage point, is probably too long and not all that helpful. So, it's back down to about 12 months. That seems more rational. And it appears from the nature of the conversations we're having with the clients, with real specificity about what they're up to, that they actually have actual studies that they're sliding in whatever it is within that 12-month period, which would stabilize the cancellation rate and help it to recede. I think, as you know this, there's always been sort of a healthy amount of slippage, and that's when the drug isn't quite ready on time. And some percentage of the stuff just cancels because the clients either reprioritize things or the drug isn't formulating properly or they run out of cash or blah, blah, blah. There's a bunch of reasons for it.

So, we are guardedly optimistic that the cancellation levels are normalizing and will continue to normalize throughout the year, the cancellation -- sorry, the backlog. We're fine with it at a dozen months. We've had years where it was kind of six to nine months. If it drops even further, I think that's fine. You want some healthy backlog. So, when things do cancel or postpone that the clients have -- that we have something else to slot back in to that.

So, probably, somewhat of a normal ebb and flow of the bookings. And we are happy to see it normalizing.

[Patrick Donnelly, Analyst at Smith Barney Citigroup]

Okay. That's helpful. And then maybe Flavia, one for you. Just on the margin cadence for the year, can you just talk about the ramp? Obviously, the 1Q earnings number is a bit light, and in terms of a percentage of the year, a lot smaller than typical. So, can you just talk about the moving pieces as we work our way through the year on the margins and just visibility into the ramp and the exit rate there? Thank you so much.

[Flavia Pease, Corporate Executive Vice President & Chief Financial Officer at Charles River Laboratories International]

Sure. Good morning, Patrick. As you pointed out, there are a few factors that are putting pressure on the Q1 margin, and then throughout the year, that -- those factors are going to ameliorate and the margin will ramp. Namely, the tax rate that I talked about in Q1 will be in the mid-20s versus our guidance for the year of 23% to 24%. I also talked about the ramp, the seasonal ramp of our business, which Jim just alluded to, with those normal seasonal trends, we'll see the margin improving throughout the year. And then in addition to the normal seasonal trends, you're going to have a tailwind of Noveprim that tends to be higher in the later part of the year, that aligns with sort of gestational periods for their colony, as well as CRADLs that Jim talked about that will ramp in the second half. And then finally, corporate is also a little bit higher in the first quarter vis-a-vis our guidance for the year. So, between corporate and tax alone, that's about $0.25 in Q1. Then you have the normal seasonality. And the $60 million to $70 million that I talked about in terms of benefit from some of our restructuring actions, they will pick up as the year progresses as well. So, we have a good line of sight on that margin accelerating throughout the year and confidence that we'll be able to achieve that.

[Patrick Donnelly, Analyst at Smith Barney Citigroup]

Great. Thank you, guys.

[Operator]

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

[Elizabeth Anderson, Analyst at Evercore ISI]

Hi, guys. Thanks so much for the questions. I was hoping you could talk a little bit about -- I know you talked about the biotech demand environment and sort of small versus midsized, could you maybe specifically go -- talk about some of the pharma demand? I think one question people have is some of the restructurings that are going on, which seems to be maybe disproportionately impacting preclinical. That seems to be a sort of question. And then secondarily, can you talk about any sort of share gain opportunities during the year? Obviously, there have been some bills in Congress that might potentially impact some of your competitors or willing of some sponsors to work with those competitors. So, any comments there would be broadly helpful as well.

[James C. Foster, Chairman, President & Chief Executive Officer at Charles River Laboratories International]

Yeah. So, our pharma business in '23 was particularly strong. We've had a long legacy with the pharmaceutical industry, so that's not necessarily new, except sort of the scale and rate and depth and longevity. And when I say longevity, I'm just talking about long-term contracts that we have with these folks, kind of two- to five-year contracts, have been picking up really, really nicely. So, we have a fair amount of our work locked in for multiple years with escalating price points that are already pre-negotiated. And increasingly, we're seeing big pharma buy very thoroughly across the portfolio. So, many of them buy everything that we sell. We also have several biotech companies that do all of their, let's say, pharma companies do all their safety work with us, some that do most of the safety work for us, and even the ones where we're not necessarily, it's just a few of them, where they do a lot of work internally, I think we're the default.

So, I mean, obviously pharma is extremely well-financed. That's probably the best thing you can say about them. Very well-financed, placing bets with multiple biotech companies that have become the discovery engines. You're seeing lots of acquisitions of drugs or geography to sell the drugs for entire drug companies almost daily since the beginning of this year with big pharma. I do think that's going to continue, and we always hope that one plus one is more than two for us. But certainly, if we're already doing work for the target and the parent, we will hold out of that work.

Having said that, biotech, for the last decade, has been a larger and more aggressive driver of growth. So, let me just unpack that. So, while we have much larger amount of revenue that we're selling to pharmaceutical companies, and they're very, very big clients, obviously, we have many more biotech clients, none of whom have internal capacity to do the type of work that we do. So, without overstating our importance, they're very dependent on either us or some company like us to move their drug through preclinical, get their IND filed, and ultimately, gets them to the clinic.

So, pleased with our sell-through, particularly in pharma, and as the capital markets strengthen, which they will, I mean, we all have our own prognostication on when that's going to happen, but they will and a little bit happening in January as VC monies continue to be robust and as the pharma companies continue to bet on biotech, and as the modalities continue to strengthen things like cell and gene and immunotherapy, the biotech will continue to ramp up more aggressively with us again.

So, we like our client base pretty much across the board. We like the share percentage and numbers of drugs we work on, which is over 80% of all the drugs approved in the U.S. for the last -- more than the last five years and probably on the increase.

On the share gain question, I do think we have enormous opportunities to take share in virtually everything we do, certainly in Safety, certainly in Biologics, certainly in the CDMO business, certainly in Discovery, even in RMS where we have the principal amount of share. Some of that, as you said, is probably bolstered by new legislation. I think some of that is just supported because of our scale, the depth of our portfolio, and the fact that every client that we work with is very interested in speed to market and the nature and breadth of our portfolio helps them get things, at least to the clinic, faster. So, we should be able to pick up meaningful share as the clients are more comfortable and less cautious and less conservative with the spending patterns, which we think will be a sequential movement through the back half of the year.

[Elizabeth Anderson, Analyst at Evercore ISI]

Got it. Thanks so much. One additional follow-up question. The $29,000 of average NHP pricing that you cited at your Investor Day, is that still the right way to think about sort of the pricing level for 2023 as a whole?

[Flavia Pease, Corporate Executive Vice President & Chief Financial Officer at Charles River Laboratories International]

Yeah, Elizabeth, it's Flavia. I'll just say the numbers we share in the 3Q call related to NHPs, whether it's the price, the price gain over three years, the units, the amount of NHP work, the percent of Safety's revenue, they're all still -- with the year-end results, they're all still similar. So, there's been no significant update from what we shared with you before.

[Elizabeth Anderson, Analyst at Evercore ISI]

Got it. Thank you. Very helpful.

[Operator]

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

[David Windley, Analyst at Jefferies Financial Group]

Hi, good morning. Thanks for taking my question. So, on the Noveprim, I was trying to quickly scroll back through the deck and unable to find it, but I think it would be helpful for me, certainly, to understand a little bit more the mechanics of how much revenue you expect that to contribute, and what the margin structure of that business looks like relative to your comments that, that is providing, I think, you said most or all of the margin lift for the company in 2024. And then I have a follow-up.

[Flavia Pease, Corporate Executive Vice President & Chief Financial Officer at Charles River Laboratories International]

Hi, Dave. I'll -- yeah, I'll take that. Good morning. So, just to reiterate, we expect Noveprim to add between $40 million and $50 million of top-line revenue, which will obviously impact reported revenue, but not organic. We also expect that Noveprim will add about $0.30 of EPS, which, if you do the math, is about 50 basis points of margin expansion. And just to articulate a little bit how the construct will work at this point in time, even though Noveprim is definitely a move that will allow us to have additional oversight, control and eventually higher volume of NHPs in support of our Safety business, in the short term, the majority of the financial impact will be reflected in the RMS segment where that external revenue will be reported. And so, that $40 million to $50 million of third-party revenue will also increase the RMS margin approximately 200 basis points.

If you think about the benefit for the Safety Assessment and DSA segments, it's going to be relatively small, especially in 2024, as we obviously already have safety stock of NHPs from Noveprim and other suppliers, in the case of Noveprim that were acquired prior to the acquisition. So, it's only once we start having models that go into studies that benefit from Noveprim being consolidated into Charles River, that will start having an impact in the DSA margin and that will be impacted by timing. So, the majority of the impact in 2024 will be reflected in the RMS segment.

[David Windley, Analyst at Jefferies Financial Group]

Understood. Thank you for reiterating some of that. My follow-up question is around, I guess, more general pricing environment. Some of your competitor -- I guess, a couple of different dynamics. One being some of the competitors, albeit smaller competitors, have also addressed cost structure in a way to significantly lower their costs and have expressed, at least to me, a willingness to be more price-competitive on studies. And another angle on this being to the extent that small biotechs might evaluate a trade-off between Charles River or other providers in the Western world, or an Asian provider at a much lower price in the Eastern world, that primate prices in China have dropped a lot, which makes the cost structure of those competitors significantly lower as well. And so, the general question here is, how much price competition is seeping into this Safety Assessment market as a result of these lowering cost structures? Thanks.

[James C. Foster, Chairman, President & Chief Executive Officer at Charles River Laboratories International]

Let me take that one. So, Dave, I would say that all of our competitors -- and the smaller they get, the more this is a factor, compete with us primarily on price. And so, to some extent, that's an always-always, and we accept that, and clients that either can't afford it or think we're too expensive or running out of cash or whatever, or prefer the competition, whether it's Eastern or Western, can and will go there. And that's okay. So, I mean, that's an always-always. The Chinese capacity, there are certainly some small, let's say, U.S. biotech companies that do their work in China, there's a limited amount of capacity in China. So, that will happen. They'll come and go. And yeah, the cost of labor is lower and the cost of everything is lower there. And I won't comment on the quality of the work. I mean, they'll have to make that determination themselves. We try to be rational and appropriate and professional with our pricing. As I said earlier in my comments, we have a lot of long-term contracts with big pharma. For some reason, most of them came to fruition in fiscal '23, so they've all been resigned. The pricing is locked in. So, that's a significant amount of what we do. I do think that folks come to us because our portfolio is larger, our proximity is closer, the depth of our science is better, and our scale is better. And of course, if they know us well, the presumption that we're too big and too expensive is really not true.

So, we will use pricing as well in certain instances, and I would say those instances kind of fall into a few categories, which is to protect share in big -- just a big client that we have that is out shopping specifically for price, and so, we may have to do something there. We certainly will be price-aggressive if we're going after a big slug of share with a client that we either don't have at all or have very little. But we often pass when the price point just get too low, because it's going to be at cost or below cost or at a trivial operating margin. And it's just not worth it given the complexity of the studies.

And I guess one other thing I would say is that where -- I don't know what the exact number is these days, but it's probably in the high-30% range what our market share is. While we're pleased and proud of that, I do think our share will be much larger over time. But if we only have a 36%, whatever, share, there's lots of share that are going elsewhere. So, I think it's important that we have decent competition regardless of their price point and regardless of where they do the work. And I think it's important to engender large clients, in particular, particularly big pharma clients, to outsource that they feel that they can outsource to folks that are capable. But I think from a pricing point of view, we have been and will continue to hold our arm. We were best in price in Safety in fiscal '24, not as much as in fiscal '23.

So, I think that's a commentary on lots of things, commentary on the nature of your question, commentary on the overall economy, commentary on the cautiousness of our clients as they put a little more emphasis on post-IND work and clinical work, maybe to the detriment of some of the earlier talks work, and certainly, on the Discovery work. But I think most of the time, we feel that we're being paid quite well for our work.

[David Windley, Analyst at Jefferies Financial Group]

I appreciate that answer. Thank you.

[James C. Foster, Chairman, President & Chief Executive Officer at Charles River Laboratories International]

Thanks, Dave.

[Operator]

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

[Justin Bowers, Analyst at Deutsche Bank Aktiengesellschaft]

Morning, everyone. So, just a two-parter for me. Can you talk about sort of like the pros and cons of owning the -- the farms and the NHP suppliers? I know you've done this in the past and there's been -- your strategy is evolving over the last 18 to 24 months. So, could you just sort of give us some thoughts there on that?

And then part two would just be around competition, just given the demand environment has slowed in general, and there had been, I think, some competitors funded over the last few years, just what are you seeing in the competitive environment?

[James C. Foster, Chairman, President & Chief Executive Officer at Charles River Laboratories International]

Competitive environment, generally, what are you asking about specifically with regard to competition?

[Justin Bowers, Analyst at Deutsche Bank Aktiengesellschaft]

Sorry. Within like -- within DSA, for example.

[James C. Foster, Chairman, President & Chief Executive Officer at Charles River Laboratories International]

Always a competition.

[Justin Bowers, Analyst at Deutsche Bank Aktiengesellschaft]

Are we seeing exits from competitors or anything, like, yeah.

[James C. Foster, Chairman, President & Chief Executive Officer at Charles River Laboratories International]

The competition is pretty static. We have -- we're the largest player by 100%. Our next largest competitor is part of Labcorp and that's a capable, relatively large, stable enterprise. Very good in sort of general toxicology. Then you have another tier which used to be sort of fourth or fifth tier, which kind of became third tier because we bought three of our competitors in the second tier, and the company has bought one of them. And those are much smaller companies. When I say much smaller, maybe they do -- so, I'm just trying to do as quickly in my head, maybe they do 5% of what we do, maybe they do 8%, maybe they do 10%, but they're much, much smaller. I don't know what their financial status is. One of our competitors has market cap that's been shrinking. There is enough business to go around. But I do think it has to do with quality and science and speed and technological rigor, particularly IT capabilities. I think it's incredibly unlikely that we'll have new competitors.

There are several decent competitors in China that I think will focus -- they're probably doing some work now for Western companies. But their raison d'etre is to do toxicology work in China for Chinese drug companies. I think many of them are funded and/or supported by the Chinese government. So, I'd say the competitive dynamic, it's kind of -- it is what it is and is unlikely to change. It seems to be sufficient. When I say sufficient, it seems to be enough scale to support the client base. So, that's positive.

Let's go back to the other part of your question. I don't see cons in owning the suppliers. So, let's just talk about the one that we just bought. We now own 90% of -- happens to be probably the highest quality and the one that we know the most about and the one that has just done an exquisite job in terms of the quality of the NHPs themselves. But it just gives us control on the ground of everything. Control of husbandry, breeding, veterinary oversight, nutrition, housing, ultimately shipping. We have a very, very close relationship with the government there, and we've already spoken to them about scaling up the project over the next number of years, and have a workforce that we're confident in. And it's ours. So, any sort of concern about, I don't know, transportation or animals getting ill before they're put on transport or just the overall genetics or breeding methodology, number one, it's on us because we own it. Number two, we have a high degree of confidence in our own ability to do it at the highest quality level. We have, I don't even know the number anymore, but dozens and dozens and dozens of veterinarians, a bunch of whom are primate veterinarians.

So, we own another one in China, much smaller one. We are considering doing more of this just to have control of our supply sources. Some of these providers are newer. They're just sort of getting their sea legs under them. And I think we can -- we're trying to teach them a lot about all the things I just said. Obviously, easier to teach them and train them and ensure that they're doing the right things if we own them. So, it's -- we have a very, very large revenue base in NHP toxicology and growing. All large molecules have to be tested in a nonhuman primate. So, the demand will continue to be significant, and we need to continue to have access to large numbers of animals, but also the highest quality.

So, we don't see cons, we see a lot of pros, and we're delighted with the deal that we just did, both in terms of the supply source and the accretion on the top- and the bottom-line.

[Justin Bowers, Analyst at Deutsche Bank Aktiengesellschaft]

Got it. Thanks so much.

[James C. Foster, Chairman, President & Chief Executive Officer at Charles River Laboratories International]

Sure.

[Operator]

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

[Jacob Johnson, Analyst at Stephens]

Hey, thanks. Maybe a two-parter on manufacturing, the Manufacturing segment. Can you just discuss, Flavia, it sounds like a lot of that's going to be driven versus -- from the CDMO versus Biologics, Microbial, but maybe if you could talk about the breakdown of that, if you'd like to quantify the benefit from the CRISPR-Vertex relationship, that'd be great.

And then just on margins in that segment, on the path of 30%, as we think about that margin expansion opportunity, how much of that is really driven by the top-line or are there cost savings opportunities that could get you there quicker? Thank you.

[James C. Foster, Chairman, President & Chief Executive Officer at Charles River Laboratories International]

So, the CDMO business has been a huge headwind for us for the past couple of years, right? Losing money, growing, growing okay. The back half of last year grew very nicely, but had been slower than we thought it would be. And as you know, we've literally had to recapitulate, redesign, restaff all three of these businesses. And I'm talking about general management all the way down to the technicians in the study rooms. And I think we've done a really good job, as evidenced by the fact that we've had multiple regulatory audits culminating in with Vertex's new sickle cell drug, which we're going to be producing a large amount of that.

So, a couple of things with that. That's obviously a marquee client. That's obviously sort of wonderful, almost marketing to be out there. When other clients are thinking about who they're going to use, they're going to call Vertex and they're going to ask them about our relationship. And we have other clients who we're talking to right now who are about to file ELAs or finishing Phase 3s. And I do think that sort of success begets further business. That business, while it won't end fiscal '24 where it should have been given our valuation models, will have significantly better margins and significantly higher revenue. Not growing quite, we don't -- our operating plan doesn't have it growing quite at the rate that we thought it would when we bought them. But I still think that's transitory, and I think particularly as we get commercial clients, that's going to crank up nicely.

So, we're liking this business a lot now. It has great connectivity with our Biologics business and also with our Safety Assessment business. And so, the portfolio effect is alive and well.

The other two businesses in the Manufacturing segment, first being the Microbial business, had its first year, I think it had one year where it grew at 9%. We've owned it for 28 years. One year it grew at 9%, every other year it grew double-digit. Last year was the only year it grew slowly. And that's -- we've explained that 50 times what happened there. But that business, the top-line will expand because the clients have worked through a lot of the backlog, because they loaded up on supplies during COVID. And the margins are stunning in that business. So, that should continue to bolster the operating margin.

And then Biologics, which is a business that in '22 and '21 had dynamic top-line growth in the teens and escalating operating margins, had a very slow year last year, all because of the economy, less numbers of drugs to test, it had a bunch of their capacity filled with COVID stuff which they were working through anyway. That business, as we said in the prepared remarks, proposal levels were up in the fourth quarter, which is a good sign that work comes back very, very quickly, typically. And so, we should see that whole segment, not our largest business, but to be significant not only in fiscal '24, but if you look at the kind of three-year guidance that we gave, the CDMO business will be instrumental in driving operating margin and revenue growth. For sure, it'll be accretive to the manufacturing segment, but it will also be accretive to the business as a whole. And we just reorganized that business with new general management and a different and tighter way of selling with single leadership and more commonality across those businesses because a couple of them are GMP businesses, which is the same sort of regulatory oversight. And that sort of mindset is beneficial across the client.

So, important segment, has high margin opportunity. Last thing, just to specifically answer your question, that segment, before we got in the CDMO business, was around mid-30s operating margin. We had a few years where it was higher, we had a few years where it was lower. It will continue to grow back towards that. It's a little bit difficult to say if and when it will get higher than mid-30s. But what we did say when we bought the companies was that we believe that when we had a substantial bolus of commercial work at higher price points, with greater efficiency and greater predictability and just larger volumes, that definitely would be accretive to our operating margin. So, that's going to take a while since we've only really signed that first one. But there will be more to follow. And as we get more of those and they get locked in for long periods of time, it will definitely benefit the operating margin of that segment.

So, we feel very optimistic, particularly optimistic about the CDMO business in particular, but quite optimistic about the whole manufacturing segment in terms of its importance to our client base, in terms of the commonality of a lot of the work, and in terms of the potential for better financial performance.

[Jacob Johnson, Analyst at Stephens]

Got it. Thanks for all that color, Jim. I'll leave it there.

[James C. Foster, Chairman, President & Chief Executive Officer at Charles River Laboratories International]

Sure.

[Operator]

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

[Max Smock, Analyst at William Blair]

Hi, good morning. Thanks for taking our questions. Just a quick one for me here on DSA. Can you just confirm that net bookings were down sequentially in this -- in the quarter and then discuss how you're thinking about net bookings here moving forward in 2024? And cancellations, obviously, elevated again here in the quarter. Can you just give us some detail around how gross bookings trended quarter-over-quarter? Is it -- I think you called out still above 1, but maybe just sequentially, any color there would be helpful. Thank you.

[James C. Foster, Chairman, President & Chief Executive Officer at Charles River Laboratories International]

Do you want to take that, Flavia?

[Flavia Pease, Corporate Executive Vice President & Chief Financial Officer at Charles River Laboratories International]

Yeah, I can jump in. So, yeah, the DSA backlog was sequentially down. I think we talked about $150 million, still above 12 months as Jim pointed out. And the gross bookings were still above 1 time. So, we're not going to finesse the specific number, but gross booking is still above. And as Jim pointed out, with hopefully cancellation normalizing, we expect net book-to-bill will improve marginally when that happens.

[Max Smock, Analyst at William Blair]

Yeah, understood. Had to give it a shot there at the gross bookings. Maybe just a quick follow-up for me. Given the back half guide, can you just talk about when you need to see demand trends within each segment start to improve in order to hit the midpoint of your guide for this year? You had that comment in the deck about how at the top end of your financial guide, you assume demand trends will begin to modestly improve later this year. But just wanted to clarify your assumptions for when demand trends start to pick back up at both the low end and the high end of your guide, and how that maybe differs by segment. Thank you.

[Flavia Pease, Corporate Executive Vice President & Chief Financial Officer at Charles River Laboratories International]

Yeah, maybe I'll start Jim and [Speech Overlap]...

[James C. Foster, Chairman, President & Chief Executive Officer at Charles River Laboratories International]

Go ahead.

[Flavia Pease, Corporate Executive Vice President & Chief Financial Officer at Charles River Laboratories International]

...you can add. Max, we're not going to comment on the timin, to your point, by each of the segments and when precisely would that have to happen to get the bottom and the top end of the guidance. I think suffice to say at the top end of the guidance, as we pointed out, we expect demand trends to marginally improve through the year. At the bottom end, it's more of the seasonal improvement that we tend to see, and I think at that top-line. And then as I said, and I think I made a comment about Q1 being a low point and talking about the drivers of that, and just to clarify, it's a combination of both tax, corporate, and the ramp-up of our restructuring benefits that will together add about $0.25 of EPS.

So, the timing of it, it's probably going to differ depending on business. We have a vast portfolio of different businesses that have different drivers. So, we're just providing you a top and bottom for the total company.

Jim, I don't know if you want to add anything else.

[Max Smock, Analyst at William Blair]

Understood.

[James C. Foster, Chairman, President & Chief Executive Officer at Charles River Laboratories International]

I mean, I think that was fine. I mean, we're quite confident that we're going to see a sequential improvement in the top- and the bottom-line throughout the year. Some of that has to do with the comps of last year, some of it has to do with our assumptions. I went through a bunch of those, but the first question I answered, business by business, there are some subtle things that are improving. There are definitely some subtle things that are improving in the marketplace, in the M&A space, and with the capital markets.

Look, the one thing that you should all keep in mind is that there is -- there would be, and there was, enormous demand for our services. The preponderance of our clients have to do the work externally. They have no internal capacity. Their portfolios are quite full and robust given the plethora of modalities that they have to work on. And so, our clients are holding back. Our clients have reprioritized. Our clients have good drugs sitting on the shelves. Our clients are clearly very frustrated by that. And so, I think that we think that we get to the point where they are more comfortable spending because they have greater access to capital, the demand should improve nicely. Is it going to improve overnight? In one month? One quarter? Don't know. But we do think that it will sequentially continue to grow, and we've seen this before. We have several of our businesses where the work does come in and go out very, very quickly, particularly Discovery and Biologics. And we have others that we have very close relationships with the clients. The pricing is all fixed. And so, their ability to get a slot is quite straightforward.

So, we're optimistic that -- optimistic with our guidance, certainly optimistic that the demand comes back. It's not if it comes back, it's only when. It's a little bit murky to call though, but we're calling it as best we can given our decades in the business, given the fact that we talk to thousands of clients every week, given the fact that I think we have a very good understanding of the competition and what their strengths and limitations are. So, yeah, that's -- we would be very surprised if anything happens to change the slope of growth. Obviously, there are exogenous things beyond our control, but the things that we see that are within our control or that are already in sort of calculated in our guidance. It's unlikely that those things will change.

[Max Smock, Analyst at William Blair]

Got it. Thank you, both, for the color and for taking our questions.

[James C. Foster, Chairman, President & Chief Executive Officer at Charles River Laboratories International]

Thank you.

[Operator]

Thank you. And we have time for one more question. We'll take our last question from Dan Leonard with UBS. Your line is open.

[Dan Leonard, Analyst at UBS Group]

Thanks very much. I just wanted to clarify, are you seeing any of these improved external indicators in the biotech market translate into increased inquiry activity or RFPs, in DSA? And if you're not, what would you expect any lag to look like if there was a sustained capital markets recovery in biotech? Thank you.

[James C. Foster, Chairman, President & Chief Executive Officer at Charles River Laboratories International]

It typically doesn't turn on a dime. And we get asked this question a lot. And of course, we've lived through lots of different -- I hate the term cycle, but lots of different sort of funding time periods in biotech. I think the biotech companies have increasingly gotten very careful about the way they spend their money. Having said that, as I said in the last question, I do think that they will spend more aggressively and more boldly if they have a sense that access to capital is easier and will be sustained as opposed to something that's going to be lumpy. I wouldn't say that we've seen any dramatic change in the slope. I mean, we watch our bookings and -- we watch the proposal volume and bookings very closely. We obviously, as we talked about earlier in this call, very interested in cancellation and slippage levels, which I think are, we're hopeful that those will come down. The fact that we have 12-month backlog I think is a positive. And as I said earlier, if that were to turn into a six- or nine-month backlog, that would be fine as well.

So, there's a lot of work out there, a lot of interest, limited competition, and cautiousness across the board with our clients who are just like we have to hold off until we have a better understanding of when we're going to have better access to the capital markets. And it's certainly -- there's certainly at least some early indications that that's around the corner. You can see in our guidance that we believe that we're going to see that at the latest in the back half of this year. And that will obviously be meaningful to, I think, most parts of our business and should accelerate our growth rate. We do have sufficient capacity, certainly physical capacity, and we're trying to manage our headcount according to demand. So, I think our headcount is in a good place.

So, as the work comes, we will be able to accommodate it.

[Dan Leonard, Analyst at UBS Group]

Thank you.

[James C. Foster, Chairman, President & Chief Executive Officer at Charles River Laboratories International]

Sure.

[Operator]

Thank you. I will now turn the conference back over to Todd Spencer for closing remarks.

[Todd Spencer, Corporate Vice President, Investor Relations at Charles River Laboratories International]

Thanks, Shelby [Phonetic] And thank you, all, for joining us this morning. This concludes the conference call.

[Operator]

[Operator Closing Remarks]

Participants

Corporate Executives

• Todd Spencer, Corporate Vice President, Investor Relations
• James C. Foster, Chairman, President & Chief Executive Officer
• Flavia Pease, Corporate Executive Vice President & Chief Financial Officer

Analysts

• Derik de Bruin, Bank of America Co.
• Patrick Donnelly, Smith Barney Citigroup
• Elizabeth Anderson, Evercore ISI
• David Windley, Jefferies Financial Group Inc.
• Justin Bowers, Deutsche Bank Aktiengesellschaft
• Jacob Johnson, Stephens
• Max Smock, William Blair
• Dan Leonard, UBS Group AG