Inotiv, Inc.

Good afternoon, ladies and gentlemen, and welcome to the Innotive Second Quarter 2024 Earnings Conference Call. At this time, all lines are in a lesson-only mode. Following the presentation, we'll 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 Wednesday, May 15, 2024. I would now like to turn the conference over to Bob Yedid. Please go ahead.

Thank you, Julie, and good afternoon, everyone. Thank you for joining today's quarterly call with the Initiative'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 a result of new information, future events, or otherwise. Please refer to the company's FCC 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. 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.init2co.com and is also available in the form 8-K Files with Securities and Exchange Commission today. If you haven't obtained a copy of today's press release yet, you can do so by going to the Investors section of the company's website. Joining us today from the company this afternoon are Bob Leisure, President and Chief Executive Officer, and Beth Taylor, Chief Financial Officer. John Sagartz, Chief Strategy Officer, will join us for the Q&A session. Bob will begin with some opening remarks, after which Beth will present a summary of the company's financial results for the second quarter of fiscal 2024 and the six months added March 31, 2024. And then we'll open the call for your questions. With that, it's now my pleasure to turn the call over to Bob Leisure, CEO. Bob, please go ahead.

Thank you, Bob, and good afternoon to everyone. Thank you for joining today's call. Let's quickly run through the broad strokes of this quarter's results as we continue to operate in a mixed industry environment. Total revenue came in at $119 million for Q2 of fiscal 2024, which is down 21.5% year-over-year. Segment top line results consisted of DSA revenues of $46.6 million, which was only down 400,000 or less than 1% versus the comparable period a year ago. Revenue from RMS included NHP sales, diets, bedding, small animal models was down 72.4 million in Q2, a decrease of 32 million or 31% from the prior year period. 26.2 million of the 32.1 million decrease was driven by substantially lower NHP revenue. In addition, we have a decrease in revenue of $3.1 million from the sale of our Israel business in August of 2023. Revenues this past quarter were well below our expectations. The lower revenue came as a result of many of the potential risks we discussed in our last quarterly call coming to fruition, primarily weak demand for NHPs and slower DSA discovery-related sales, which were somewhat offset by the growth in our new safety assessment services. 2023 was a challenging funding environment for the biopharma industry, and we saw companies reprioritize their use of capital, resulting in product reprioritizations and some cancellations as companies rationalized their R&D spending. In addition, as we have discussed in the past, the industry faced challenges and volatility resulting from the U.S. Attorney's Office criminally charging a Cambodian government official on alleged charges of conspiracy to illegally import NHPs in the US, and our considered decision to suspend Cambodian imports and the subsequent effective industry ban on the importation of Cambodian NHPs into the US in late 2022. This ultimately resulted in lower NHP availability in the US and heightened concern among customers regarding their ability to access NHPs to develop their pipeline products, which together drove increased NHP pricing in 2023. The uncertainty and available supply to the U.S. also resulted in some discovery in preclinical studies moving outside the U.S., which further impacted drug discovery and development and overall demand for NHPs in the U.S. We indicated in our prior quarterly call that we expected this year could be choppy as it relates to NHP sales. We believe the industry continues to reset and refocus pipeline priorities, and our second quarter results reflects the after effects and volatility caused by the NHP market dynamics at the end of 2022 through 2023 and the first half of fiscal 2024. We're currently witnessing some positive signs in the industry, such as marked improvement in the capital markets funding for biotech and small pharma companies during the first quarter of calendar 2024 as compared to the prior two years. While this is a positive sign for these companies and the CRO industry, we expect biopharma companies in the short term to continue to take a restrained, conservative approach to the pipeline products in order to prioritize the use of capital to the most important projects. Accordingly, the sales cycle has been slow as customers continue to evaluate and rationalize their product pipelines. This has impacted us predominantly through a further reduction in Q2 discovery sales versus the prior year and in the RMS NHP business. In our research models and services RMS business, some of our major CRO NHP customers have seen delays and slowdowns in their ability to acquire new discovery and safety assessment studies requiring NHPs. In other cases, it also became apparent this quarter that certain customers mitigated supply chain risk in 2023 by purchasing NHPs well in advance of their needs and are now able to delay purchasing additional NHPs until they deplete their current inventories. So this year, unlike 2023, we are now seeing customers align their NHP purchases more closely to their immediate project needs. Taking these dynamics collectively, we believe these pressures will normalize later in the year as customer NHP inventories are depleted and they focus on ordering to meet shorter-term needs. Internally, we remain encouraged by the results and benefits of many of the critical actions we took in 2023 are taking in 2024, such as the integration efforts of our acquisitions. We are seeing lower cost and improved service from our RMS site optimization project. We anticipate the RMS site optimization and cost reduction initiatives we started last year are going to be completed by the end of July 2024, and the transportation initiatives, which we announced in December of 2023, are currently being implemented to create further cost and customer service benefits. Additionally, we are pleased to secure new contracts with two research organization customers who wish to occupy space within our UK RMS facilities. In addition to generating recurring income from the use of the space infrastructure and services, we are identifying opportunities to provide these customers with additional products and services to support their scientific research. In DSA, new service offerings are now contributing to increases in safety assessment revenues, which have helped offset some of the decreases we have seen in Discovery Services portion of that segment. In Discovery, We believe the additional salespeople and initiatives we implemented in Q1 of fiscal 2024 will help to increase our market awareness and quoting activity as we go through the remainder of the year. With many of our announced projects now completed or nearing completion, we have also been able to reduce our overall operating expense. Further, due to current market conditions and certain efficiencies we've been able to achieve, we affected a small reduction in force in April, which will help further reduce expenses in future quarters. Overall, net new DSA quarters for this quarter were 35 million versus the 44.6 million last year. For the year-to-date period ending March 31, 2024, we've booked net new orders of 98.9 million versus 84.6 million for the six months ended March 31, 2023. The conversion rate this quarter was 30.1% versus 32% in the prior year. The DSA cancellations in Q2 were consistent with prior year period, and in the first six months of fiscal 2024 were slightly less than they were the same period in 2023. For the six months ended March 31st, 2024, we generated positive cash from operating activities of 10.4 million, and completed many of the investments and initiatives started almost 20 months ago. Capital investments were $7 million in the second quarter and $12.6 million in the year-to-date period. We expect these investments will be reduced further in the next two quarters and until we see further recovery in revenue. In Q2, we completed the sale of the Blackthorn UK and Dublin, Virginia facilities. In April, we completed the sale of our Hazlet, Michigan facility. We expect to complete the sale of our Cumberland, Virginia facility in the third quarter and have listed for sale an additional 85 excess acres of land we have in Pennsylvania. With the investments that we have completed in DSA business, we believe that we have the physical capacity to accommodate increased DSA revenue of 40% over the 185 million recognized in 2023. This capacity still represents a substantial opportunity to improve our DSA sales and margins in the future. For these next two quarters, Initive remains on track to further achieve financial benefits from our investments and growth initiatives, increase sales and marketing, and the organic addition of new services, and our consolidation integration projects with the related efficiency gains. I want to update you now briefly on material legal issues we previously disclosed. With respect to the Cambodian government official indicted by the U.S. government, that official was found not guilty on all counts and has now returned to Cambodia. At this time, we do not have any further updates related to the status of potential future imports of NHPs into the U.S. from Cambodia. With respect to the investigation by the DOJ and other federal and state law enforcement agencies related to the Cumberland, Virginia facility, which we closed in September of 2022, we have been in discussions to resolve the open matters relating to the investigation. Since we believe this resolution is now probable and estimatable, we have recorded an accrual as of March 31st, 2024 of $26.5 million. We would expect to pay 6.5 million of this 26.5 million in fiscal year 2024, and the remaining 20 million would be a non-current liability to be paid over three to five years. This resolution is not finalized and not signed as of today. Until then, we cannot comment further. We have determined that in the last two years, we have incurred expenses of approximately 22 million for the investigation related so far to this Cumberland facility that we closed in 2022. The total expenses include third-party fees to comply with subpoena information request, legal fees, and the cost to close the facility. Some of these fees have been added back as restructuring costs and calculated and adjusted EBITDA, but if possible, we would like to resolve this matter and put it behind us. With that, I'll turn the call over to Beth, who will provide detailed synopsis of Inita's results for the quarter.