Inotiv, Inc.

Good afternoon, ladies and gentlemen, and welcome to the e-notif third quarter 2023 earnings conference call. At this time, online is in a listen-only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Thursday, August 10, 2023. I would now like to turn the conference over... To Mr. Bob Yedid, thank you. Please go ahead.

Thank you, Operator, and thank you, everyone, for joining today's call with Innative's management team. 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. 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 Investors section of the company's website, www.investors.com. www.initiveco.com, and it's also available in the Form 8K filed with the Securities and Exchange Commission. If you haven't obtained a copy of today's press release, you may do so by going to the Investors section of Initive's website. 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's my pleasure to turn the call over to Bob Leisure, CEO. Bob, please go ahead.

Thank you, Bob. Good afternoon, everyone. Before we dive into the quarter's results, I want to start the call by framing some of our efforts today, noting how far we've come in the last few years and how we position ourselves to continue to execute our plans and goals. Our investments and growth have been guided by seven strategically planned key objectives. First, right-size the infrastructure. After several acquisitions, we are currently in the final stages of optimizing our infrastructure and right-sizing the company's global footprint in order to improve client service and program management, as well as competitively position our company as a mid-sized, full-service CRO and research model and diet provider. We feel that completing this objective will allow us to compete even more effectively with smaller as well as larger CRO and research model providers. Second, we reduce the dependency on third-party providers and focus on becoming a full-service provider. In order to meet our clients' needs, we developed internal capabilities both organically and through acquisitions, and in doing so, we have been able to reduce our reliance on third parties or external services. This, in turn, reduces costs but also enhances speed, quality, and overall value for our customers. We expect this will support continued gross margin improvements. Third, strategic capital investments. Our capital investments have included updating our global technology, which was appropriate, and necessary now that it is a significantly larger organization. We've also updated our enterprise resource planning and customer relationship management systems, as well as our enterprise solution and laboratory systems for managing preclinical studies and our labs. Additionally, we are committed to addressing deferred maintenance and acquired sites and expanding acquired facilities to allow for growth and leveraging our fixed cost structure. Fourth, rebranding. We've rebranded our services business as Initive, and we are driven by a philosophy that customers should expect more from their CRO and further the awareness that we now provide a more complete spectrum of services. Fifth, animal welfare. We are passionate regarding our continued commitment to and standards for animal welfare. This has included focusing increased monies and attention to retain experienced and caring staff, recruiting and retaining talented and passionate leadership, providing appropriate training, implementing our site optimization plan, and making investments and facilities when required. Sixth, workplace satisfaction. We have worked diligently to foster a positive and entrepreneurial work environment around our shared purpose of helping clients bring life-saving therapies to people around the world. This shared purpose, combined with fair compensation, goes a long way to recruiting and retaining top talent. To this end, we are very proud to have been selected as the recipient of EnterGage's Top Workplaces USA Award earlier this year and have seen significant improvement in our ability to recruit and retain people. Seventh, supply chain synergies. We've been working with our supply chain and vendors to generate synergies from increased volumes, from acquisitions, and a broader range of services. This has led to additional vendors and alternative supply opportunities, which enables cost reductions, from greater purchasing power that we continue to realize. I also think it's important to reiterate briefly how the company has evolved over the past six years and how our focus on these key objectives outlined today have prepared us for the next chapter of our story. Early 2018, with two locations and 120 people, the company was firmly focused on preclinical safety assessment segment of the drug development market. In 2018 and 2019, we completed several acquisitions and began to develop new services organically. That organization became innovative in 2019, targeting small to mid-sized biopharma companies that our clients believed were being underserved by larger CROs. Over the next four years, some of these organically grown service offerings included safety pharmacology, juvenile toxicology, SEND reporting, clinical pathology, biotherapeutics, and genetic toxicology. Expanding our range of services has now enabled us to reduce our reliance on third-party suppliers to meet our clients' needs, enhance margins, and improve the overall value provided to our customers. In 2021, we began to further expand our offering through the acquisitions, which not only enhanced ENIFIS preclinical services, but also provided a strong foundation to build our discovery-based platform. In fiscal year 2022, we secured access to key research models to support and complement our DSA services and became a major supplier of both small and large research models and diets through the acquisition of NVCO and subsequently two other critical research model providers. Acquiring these businesses enhanced our ability to access critical research models and addressed a major risk we identified in the supply chain. Also, these acquisitions provided our customers with the additional confidence in our ability to meet their needs, which is even more important now that access to NHPs is limited. Since the expansion into research model business, we've prioritized improvements in animal care and welfare by enlarging our veterinary team, consolidating facilities, which allowed us to make significant infrastructure improvements in the remaining facilities. Ultimately, we believe these efforts will allow us to increase our margins, remain competitive with regards to new business development while continuing our key strategic objective of enhancing animal welfare. Today, through these acquisitions and the eight organically developed service offerings, We now currently operate 24 sites across the US and Europe, serving over 3,000 customers, employing over 2,200 professionals worldwide, including industry-recognized experts across a wide range of scientific disciplines. We have evolved into a CRO with the ability to serve clients who require a full breadth of products and services under one roof while delivering those services with a personal touch and being highly responsive with scientific credibility. We still have room for improvement, but we are but we get better every month, and we believe we will be much better in the future. If you haven't done so recently, I encourage you to review the solutions page of our INITF website. There you'll find a comprehensive suite of discovery preclinical and clinical safety assessment services and an extensive offering of standard and custom research models, support services, diets, and vetting for research and development. At present, INITF has become an organization that enables clients to advance programs, concept to clinic by strategic filling the gaps with our spectrum of services and products. Now our story is shifting to enter this next chapter and our strategy will continue to evolve in 2023 and further take shape in 2024 as we plan to further improve our service levels, profitability, and continue our growth. With this in mind, let's get to the financial results. Year-to-date 2023 revenues were 431.7 million, which are up 9% versus the same period last year. Our revenue for the last nine months of our discovery and safety assessment and research model services grew 11% and 8% respectively, as compared to the same period a year ago. The third quarter of 2023 was the strongest performing quarter of the fiscal year, with revenues of 157.5 million For Q3 2023 versus Q3 2022, revenues were down 9% year-over-year. However, it was our first quarter of profitability. DSA revenue decreased 5% year-over-year, and Q3 primarily driven by our discovery services, which we believe was a result of the decline in the overall biotech funding in the market, plus the timing of some general toxicology issues. services, somewhat offset by increased revenues from the genetic toxicology services in connection with the new business at a Rockville facility. RMS revenue for the quarter was down 10%, mainly due to significantly reduced volume of NHPs and small animal sales, somewhat offset by increased pricing. Integration plans remained on target for this quarter. This has been important to increase effectiveness and reduce our costs. We have previously announced nine site closures and completed eight as planned by the end of this June. The ninth previously announced planned closure is Blackthorn facility in the UK whose consolidation into Hillcrest is expected to be finalized by the end of Q3 of next year. In addition, we are closing a small facility in Spain which is now substantially complete and we will relocate our facility in Everett, Washington to our expanding operations in Fort Collins, Colorado, which we expect to complete in fiscal Q1 of 2024. Over the last 12 months, we have largely now completed nine of the 11 closures, mainly by consolidating the operations of these closed facilities into existing operations. Moreover, most of the planned expansions are now also fleeted. The final expansion in Fort Collins remains on track to be completed by the end of the fourth quarter of this fiscal year. We already have work booked to fill this increased capacity and expect revenue to begin in Q1 of fiscal 2024. We are now focused on the sale of assets from sites which were closed, including Boyertown and Cumberland, along with our Israeli businesses, which are under contract. And negotiations are ongoing regarding the sale of other locations in Hazlet, Michigan, Spain, France, and Blackthorn in the UK. We believe these asset sales may potentially be completed over the next two to three quarters. Our integration efforts and site closures have also given us the opportunity to restructure our transportation system for research models business, which is currently in process. In addition to improved margins related to consolidating our operations, We also believe the sale of the site's plan for closure will generate additional cash for the company. From the perspective of future growth, we will focus on optimizing operations with our new facility footprint, realizing the benefits from the investments recently made at many of our sites, which will also allow us to bring more service capabilities online. Overall, we expect to grow our DSA business from $160 million in 2022 to to an estimated $180 million in 2023 to an excess of $200 million in 2024. We ultimately believe these DSA expansion projects we've just recently completed will allow us to grow our DSA sales by 40% to 50% above the 2022 DSA sales levels and allow us to leverage our DSA fixed cost structure and infrastructure. We also anticipate we have capacity to grow the RMS business and expect to reduce our RMS expenses by approximately 20 million after all these restructuring changes are implemented. We believe the lack of NHP imports from Cambodia continues to affect the industry's entire supply of research models being imported into the U.S. According to the USDA's Global Agricultural Trade System, 2023 imports of NHPs to the U.S. year-to-date through June are now 47.9% lower than those the same period of 2022. We have begun to identify additional suppliers and increased our imports of NHPs from countries outside of Cambodia. Pricing of NHPs and related costs continue to increase. We continue to generate positive margins. We've been meeting our customers' requirements. Our safety and assessment service offerings have not been impacted by the industry shortage. However, the suppliers identified in countries other than Cambodia and China and the NHP volume available from them are not sufficient to make up for the volume of NHP exports from Cambodia in prior years. We sold fewer NHPs in Q3 than we did in Q2. Q2 was less than Q1. we expect to have fewer NHPs available for sale in Q4 than we actually sold in Q3. We will sell less NHPs in fiscal 2023 versus fiscal 2022. And if the situation in Cambodia and China stay the same, we expect we will have fewer NHPs available for sale in fiscal 2024 versus fiscal 2023. Due to increases in pricing, our sales dollars have remained fairly consistent this year despite the reduced volumes. If we're able to implement continued price increases, we could see similar sales dollars in 2024 compared to 23 on lower volumes. Based on the current trends and taking into account the unknowns that exist for the NHB We believe the future quarters for the company will be able to achieve normalized averaged EBITDA run rate of about 20 million per quarter. And that should be achievable through all of fiscal 2024. As we begin to utilize the recently added DSA capacity in selling new services, and if there is an increase in supply of NHPs available for sale, these estimates may increase. We continue to expect improvements in our business as we optimize and integrate our DSA and RMS segments and see results from our focus on key initiatives. We will continue to monitor the NHP situation and adjust our plans accordingly with or without imports from Cambodia. We understand this is a significant industry issue in the U.S. and needs to be resolved in order to maximize the industry's ability in the U.S. to bring important life-saving therapies to the market. Looking to the future, as we continue to explore how we can better support our customers and their development of novel medicines going forward, we have embarked on a program to standardize the capture of our data generated in discovery, safety, and clinical studies. The goal is to structure our data in a way that should, in the future, enable an AI approach to integrate them to find correlations between discovery and safety data and clinical outcomes that can innovate and accelerate our translational medicine offering. Longer term, we are confident in the product service portfolio we have assembled and continue to optimize. And our customer service value proposition that is particularly attractive to the biopharma sector and in the skill and experience of the team we have globally executing on our vision. With this, I would like to call over to Beth for the financial overview.