Inotiv, Inc.

Welcome to Initiv, Inc.' 's third quarter fiscal 2022 financial results conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Devin Sullivan of the Equity Group. Thank you. You may begin.

Thank you, Alex. Thank you, everyone, for joining INITIV's third quarter fiscal 2022 financial results call. Before we begin, I'd like to remind everyone that some of the statements that management will make on this call are considered forward-looking statements, including statements about the company's future operating and financial results and plans. Such statements are subject to risks and uncertainties that could cause actual performance or achievements to be materially different from those projected. Any such statements represent management's expectation as of today's date. You should not place any undue reliance on these forward-looking statements and the company does not undertake any obligation to update or revise forward-looking statements, whether as a result of new information, future events, or otherwise. Please refer to the company's SEC filings for further guidance on this matter. Management will also discuss certain non-GAAP financial measures in an effort to provide additional information for investors. A definition of these non-GAAP measures and reconciliation to the most comparable GAAP measures are included in the company's earnings release, which will be posted in the investor section of the company's website at innotiveco.com and is also available in the Form 8-K filed with the Securities and Exchange Commission today. Joining us from the company this afternoon are Bob Leisure, President and Chief Executive Officer, Beth Taylor, Chief Financial Officer, and John Sagarts, Chief Strategy Officer. Bob will begin with some opening remarks, after which Beth will present a summary of the company's financial results. Then we'll open the call for questions. It is now my pleasure to turn the call over to Bob Leisure, President and CEO of Innative. Bob, please go ahead.

Thank you, Devin, and good afternoon, everyone. We appreciate you taking the time to join us today. By almost any measure, our third quarter results were above our expectations at this point in our growth and integration development strategy. Driven by a combination of the positive impact of well-positioned acquisitions, organic growth, and a favorable pricing environment, we reported record revenues, adjusted EBITDA, and backlog. We continue to make investments in expanding capacity and developing new service lines in response to demand from existing clients, clients of businesses reacquired in recent acquisitions, and new clients we've attracted as we've continued to build the product and service portfolio, and positive reputation of Intative as a fully integrated service provider. We've implemented a site optimization plan to enhance services and improve our business model at our research model services or RMS business. This will allow us to achieve scale at RMS sites, augment existing facilities, and improve future margins. We also continue to add scale in our Discovery and Safety Assessment, or DSA, business to meet increasing customer demands, drive revenue growth, and improve efficiencies and margins. This requires that we continue to invest in our recruiting, internal processes, facilities, equipment, technology, and existing personnel. In our view, INITI's performance so far in fiscal 2022 reflects our continuing evolution towards being a world-class provider of preclinical CRO services to the global pharmaceutical and biotech industries as they pursue their development of life-changing new medicines. I think as a company, we're much better today than we were nine months ago, but we're not nearly as good as we need to be nine months from now. The total revenue for fiscal 2022 third quarter grew sevenfold to 172.7 million and adjusted EBITDA increased to 37 million or 21.4% of total revenues. Our DSA and RMS business segments each performed well. Turning first to our DSA business, we had an exceptional quarter generating revenues of 49.2 million an increase of 26.3 million or 115% from the 22.9 million of revenue we achieved in Q3 of 2021, and a 25.8% increase over revenue we achieved just the prior quarter. In the year-over-year growth, the historical internal investments to increase capacity and expand our capabilities allowed us to experience organic growth of 20.9 million, 91.3% from the growth achieved in the same period last year. And 5.4 million of incremental revenue came from the acquisitions of Histatox Labs, Boulder Biopaths, Gateway Pharmacology, Plato Biopharma, BioReliance, ILS, and two months contribution from the recently acquired Histion. Subsequent to the end of the third quarter, we acquired Protipia. an emerging protein and peptide bioanalytical company that adds large molecule bioanalytical capabilities to our already established small molecule bioanalytical offerings. This highly specialized use of mass spectrometry technology significantly enhances our ability to support clients in the development of safe and effective medicines, particularly in the areas of immuno-oncology, cell and gene therapy. We added new capabilities and capacity in Rockville, Maryland to conduct GLP studies for in vitro cytogenetics and bacterial mutation assays as components of the standard battery of genetic toxicology studies required to support first in human evaluations of novel therapeutics. We continue to develop our suite of genetic toxicology services. This began with our acquisition of key genetic toxicology assets from Millipore Sigma's BioReliance portfolio in July of 2021, followed by the acquisition of North Carolina-based integrated laboratory systems, LLC, in January of 2022. We're now offering a wide range of in vivo and in vitro general and genetic toxicology services, including pathology and toxicology expertise, genomics, bioinformatics, and computational toxicology services. To meet current demand for existing services, we're continuing to increase capacity and capabilities across our existing enterprise from Fort Collins and Boulder, Colorado to Rockville, Maryland to North Carolina. These expansions were initiated in early fiscal 2022 and are expected to come online during fiscal 2023 and into fiscal 2024. In aggregate, once completed, these expansions will increase our DSA capacity by approximately an additional 35%. In Fort Collins, we are expanding operations to more than double the revenue run rate capacity at this location. We expect this additional capacity will become available during the third quarter of fiscal 23. We're currently increasing the capacity of our recently acquired ILS facility in North Carolina by 30%. and hope to have this additional capacity available by the first quarter of fiscal 23. We also plan to increase square feet at this facility by approximately 45%, which is expected to be available by the first quarter of fiscal 24. We are in the process of building out a new 48,000 square foot leased facility in Rockville, Maryland for biotherapeutics and genetic toxicology growth. which is still on track to be completed by the end of Q2 fiscal 23. We are starting to see some backlog in revenue from the initial phases, which have been completed. And in Boulder, we are building out operations to provide approximately 30% additional capacity. We anticipate this capacity will become available by the end of Q1 fiscal 2023. While we are very focused on building out new capacity, as clients are continually telling us they want to place more work with us and buy a broader range of services from us, we are very thoughtful about the pace to which we bring up that capacity. It is entirely driven by the customer demand we can see and the customers are talking to us about on a frequent basis. Using this approach in the past, we have generally found that we are able to fill the newly expanded facilities within 12 months of bringing them online. And we feel very good about our ability to do so again with the expansions we are investing in right now. Turning now to our RMS segment. This contributed $123.4 million of revenue in the third quarter, reflecting strong incremental revenue, well above the run rate of the business had when we announced the InVigo acquisition in November of 2021. This quarter also included a full quarter of contribution from Orient BioResource acquisition we completed in January 27th of 2022. In addition to the revenue growth we are achieving, we have taken significant actions at RMS designed to enhance future margins by increasing our operating leverage through optimizing our network footprint. In May, we announced the closure of two InVigo RMS facilities in Virginia. The closure of our Cumberland facility is expected to be completed by mid-September. Cumberland comprised of less than 1% of our total innovative revenue and did not contribute to profits for our RMS segment since the acquisition of that business in November 2021. Operations at our Dublin facility, along with our previously announced facility closures in Hazlett, Michigan and Boyertown, Pennsylvania, are being relocated to other facilities which have recently been expanded or refurbished. We believe these closures and consolidations will help generate operational efficiencies, enhance future margins, reduce the need for capital expenditures from closed sites, and improve our ability to service our clients. The transition for these three sites is underway and is expected to be completed by the end of March 2023. Concurrently, we continue to invest in facility improvements with a focus on animal welfare along with environmental and safety improvements. These include enhanced water systems and air quality controls, electrical upgrades and enhancements, improved sewer systems, housing, and veterinary care facilities. Across our business operations and support functions, we continue to fill critical positions and enhance our bench strength. We have promoted and attracted to INITIV industry veterans with strong track records to take up key operational leadership roles in both the DSA and RMS segments. We recently filled critical roles in facilities management and planning, marketing, information technology, procurement, financial planning, corporate governance, pathology leadership, and veterinarian support. We have made substantial progress in filling many of the organizational changes to allow us to continue to grow and improve our business. Based on recent sales trends and growth in our backlog, we are amending our guidance for fiscal year 2022, a revenue of at least $550 million, up from a prior annual revenue guidance of at least $510 million, and adjusted EBITDA margin of not less than 17% of forecasted revenues, up from prior guidance of adjusted EBITDA margin of not less than 15% of forecasted annual revenues. As implied in the updated guidance, there will likely be a decrease in revenue in EBITDA during Q4 relative to Q3 due to revenue mix and the timing of RMS shipment. As such, we believe that the annualized six-month figure ending Q4 will be more indicative of the underlying run rate of our business. We are aware of the recent broader market concerns and commentary, and as we did in the last quarter, I'd like to further address a few of those. During the last quarter, we saw record requests for quotes and an increasing backlog. As a reminder, when we report new awards, they are net of cancellations. We did see an increase in cancellations this past quarter. However, the total net awards were the same as the previous quarter. The main reason for cancellations in this quarter was due to molecules not being ready as expected for projects that were awarded 12 to 18 months ago. We have seen instances where we have not received awards due to our lead times. which other CROs could meet. We saw a need to outsource some of our services due to high demand, and we still have demand we cannot meet for services which we are currently in the process of building out. Overall, we continue to see high demand for services and believe our current expansion efforts will allow us to accommodate demand from existing clients and increasingly position us as an attractive provider for new clients. We believe we've benefited from continue to grow business from our existing clients, plus the new clients we've secured from several acquisitions. We also believe we further benefited from additional sales and marketing support we have added in the marketplace over the last quarter. We continue to market our clients' liquidity closely. We have continued to build out projects that we started last year, and we have over the last four years As we have over the last four years, we will continue planning for additional expansions and evaluate acquisition opportunities. We have reviewed our capital expansion plans with an eye on the overall economy and our commitment to a disciplined capital allocation. We expect our capital expenditures to be approximately 8% to 9% of revenue versus our planned 10% to 11% we outlined in the fall of 2021. Our maintenance capital expenditures have been 3% of revenue, we expect them to remain at this level, and we will also focus on growth projects. The environment is fluid, and we will continue to monitor developments and react as necessary. As for hiring, over the last six months, we added in incremental positions, which increased our headcount by 13.5% to fill open positions and support our growth. Over the next six months, we expect to increase headcount by approximately 8.5% to continue to fill these open positions and support growth. We have seen our revenue per employee improve, and we continue to work on efficiencies as we grow. Our leadership changes, site optimization plans, building out new services, and scaling our existing operations are significant to our next year's plans. With that, I'll turn it over to our Chief Financial Officer, Beth Taylor. Beth, please go ahead with financial overview.