Inotiv, Inc.

Good afternoon and welcome to the Innative Second Quarter Fiscal 2023 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 that this conference is being recorded. I will now turn the conference over to our host, Devin Sullivan, of the Equity Group. Thank you. You may begin.

Thank you, Diego, and thank you, everyone, for joining us today for INITIB's fiscal 2023 second quarter financial results conference 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 expectations as of today's date. You should not place 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 has been posted to the investor section of the company's website, www.initiveco.com. and is also available in the Form 8-K filed with the Securities and Exchange Commission. Joining us from the company this afternoon are Bob Leisure, President and Chief Executive Officer, Beth Taylor, Chief Financial Officer, and John Sagarts, the company's Chief Strategy Officer. Bob will begin with some opening remarks, after which Beth will present a summary of the company's financial results, and then we'll open the call for questions from our analysts. It is now my pleasure to turn the call over to Bob Leisure, Bob, please go ahead.

Thank you, Devin, and good afternoon, everyone. We appreciate you taking the time to join us today. Our results for the second quarter reflected growth across both of our business segments. The total revenues increased 8% to $151.5 million from $140.3 million in last year's second quarter, with revenues at our DSA and RMS business segments increasing 20%, 20.2%, and 3.3% respectively from last year's second quarter. Our DSA business is benefiting from the targeted investments we have made and continue to make to expand our service offerings. And we are excited about the progress that we're and what these enhancements can deliver for our clients, our industry and our shareholders. As we continue to make progress as planned and filling our growing capacity, we expect improvements revenue and margins as we continue through the year. In our RMS business, in the second quarter, we did ship some of the NHPs in our inventory after verifying their origin as purpose-bred. Although NHP volumes were significantly below historical levels, we realized benefits from the favorable pricing we implemented during the second quarter. We have also continued to implement various consolidation and optimization activities in our RMS operating footprint, which are expected to improve production efficiencies and animal welfare as they come online and are completed. We returned to a positive adjusted EBITDA in the second quarter, achieving $17.1 million, which was below the $25.3 million we reported in the same period last year, but represented a significant improvement from the negative $5.5 million we reported in the first quarter of fiscal 2023. Adjusted EBITDA included an increase in G&A expenses in the second quarter of $7.7 million compared to the same period last year. G&A expenses in Q2 included $6.7 million of legal and third-party fees primarily related to Cambodian NHP matters, the Cumberland, Virginia ongoing investigation, the third amendment to our credit agreement, and defense on pending securities litigation. By way of comparison, the legal and third-party fees in Q1 were $3.4 million. These legal and third-party expenses are not being adjusted out of the adjusted EBITDA. Based on current information, we expect legal and third-party fees to be lower in the third quarter fiscal 2023. Let's move on to a discussion on performance over DSA and RMS business segments. I'll then turn things over to Beth for review of our results. Our DSA business generated second quarter revenues of $47 million, up 20.2% from revenue of $39.1 million in last year's second quarter. Our performance rebounded as expected from what is typically a seasonally slow first quarter. The improvement in our DSA business driven by increasing revenue within the existing operating structure, plus we are beginning to see new customers and increasing sales in the genetic toxicology services we brought online at our facility in Rockville, Maryland. Our facility build-out at Rockville is now substantially complete, and we are continuing to validate the equipment and assays required to support growth in both the genetic toxicology and biotherapeutic businesses. We also have seen increasing quoting and activity related to recently expanded areas in our discovery and histopathology service lines. The expansion of our Fort Collins facility remains on track and should be operational towards the end of fiscal 2023. The book to bill ratio at DSA in the second quarter was 0.95 times. Our backlog was 145.7 million. up from $133.6 million in Q2 of 2022. Turning to RMS revenues rose 3.3% to $104.5 million from $101.2 million in last year's second quarter. Revenues at RMS increased nearly $23 million from the first quarter of fiscal 2023. As a reminder, we closed the Invico transaction on November 5th, 2021. So for comparative purposes, we are for the first time since the acquisition comparing full quarter over quarter operational results. The increase this quarter was driven by favorable pricing for multiple product lines, including NHPs, mall research models, and TechLad diet, which helped offset lower NHP volumes, as well as increased expenses which we discussed in Seoul in Q1 fiscal 2023. Our site optimization plan for the RMS segment remains on track. We made good progress during our second quarter of 2023. We completed the plan shutdowns of Hazlet, Michigan and Boyertown, Pennsylvania facilities and their consolidation into a newly renovated facilities in Denver. The consolidation of two additional facilities in Indianapolis to other operating facilities is underway, and that activity will be completed by the end of the current quarter. The relocation of our RMS facility in France to the recently updated operations in the Netherlands is now underway. We expect to have this process completed by the end of this current third quarter. We have also completed the consultation and planning process to relocate our Blackthorn UK facility to our other existing operations in the UK and currently expect this relocation to be completed in the third quarter of fiscal year 2024. During Q2 of fiscal year 2023, we announced that we will be closing the small RMS facility in St. Louis and relocating its operation into existing facilities in St. and other facilities. This will be completed by the end of this quarter, the third quarter. In connection with these closures and relocations, we are in the process of revising our product distribution plans, including our delivery route and warehousing, and this will allow us to further improve efficiencies, elevate customer service, and enhance margins. With respect to the NHP situation, as we indicated in previous calls, sent a five-member team to Cambodia in early February 2023 to conduct an audit of the two facilities owned and operated by Vanny's Science Development Limited. The audit consisted of a review of select animal history and health records, diet composition logs, water testing results, breeding records, animal treatment records, animal welfare practices. The audit was conducted on a sample basis for a select number of NHPs. There were zero critical findings. They did demonstrate commitment to future genetic testing for parentage with an investment in laboratory analytical and support equipment aimed at supporting future exports of NHPs from Cambodia. We'll continue to work in concert with our suppliers and scientists both inside and outside our organization to develop a new long-term standard for DNA testing to verify the origins of NHPs and ensure ourselves and our clients will continue to only import and sell purpose-bred NHPs. I will remind you that also any such testing we develop may be subject to review and acceptance by government agencies, including U.S. Fish and Wildlife Service. We will not be in a position to respond to any questions on any open matters concerning our suppliers, our competitors, or any ongoing government investigation. In the meantime, we are continuing to identify import and sell NHPs from sources other than Cambodia suppliers, and we believe that we have an adequate supply of NHPs to meet our internal DSA client demands to support the ongoing discovery of life-changing and life-saving therapies. As it relates to our outlook, we expect margin and earning improvements from the combined effective of our DSA expansions, integrations, synergies, and RMS site optimization initiatives once completed and fully operational. We believe the additional capacity and services being added should eventually allow for an annualized 50% increase in DSA revenue compared to fiscal year 2022 revenue, and DSA gross margins could increase from approximately 30% to the mid to high 30s. We also believe once we complete all of our DSA NRMS site optimization integration synergy initiatives, we should produce approximately 20 million of annualized cost savings compared to fiscal year 2022. We expect to begin realizing more of these benefits early in the fourth quarter of fiscal year 2023. We are reiterating our full year fiscal 2023 revenue guidance of at least 580 million in revenue. And as a result of the increased legal and third party fees incurred during Q2, we are updating our guidance for adjusted EBITDA to be at least 70 million down from the previous guidance of 75 million. We continue to expect that we will remain in compliance with our financial covenants for fiscal year 2023. We continue to expect that capital expenditures should moderate from 2022 and be no more than 5% of sales during fiscal year 2023. As a reminder, this guidance is based on the assumptions that we continue shipping NHPs from Cambodian origins that had been recently confirmed to be purpose-bred from our existing inventory for the remainder of fiscal year 2023. In closing, I want to emphasize again how pleased I am with the progress being made to optimize our operations, our continuing response to the NHP situation, and the performance of our employees. Despite lingering headwinds in our RMS business, I'm convinced that we are headed in the right direction via investments, innovation, hard work. We remain committed to maintaining our leadership role and helping our clients discover and develop life-changing therapies. With that, I'll turn it over to Beth Taylor, our Chief Financial Officer. Beth? Please go ahead with the financial overview.