Greetings, and welcome to the Inotiv, Inc.'s Fourth Quarter and Full Year Fiscal 2022 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Devin Sullivan, Managing Director for The Equity Group. Thank you, Devin. You may begin.

Thank you, Paul. Good afternoon, everyone, and thank you for joining us for Inotiv's fiscal 2022 fourth quarter and full year 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 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 will be posted on the Investors section of the company's website at inotivco.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 Leasure, President and Chief Executive Officer; Beth Taylor, Chief Financial Officer; and John Sagartz, 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. Then, we will open the call for questions from our analysts. It is now my pleasure to turn the call over to Bob Leasure, President and CEO of Inotiv. Bob, please go ahead.

All right. Thank you, Devin, and good afternoon, everyone. We appreciate you taking time to join us today and appreciate your patience with respect to the delay in announcing of our results for the fourth quarter and full year. Following a very strong third quarter, total revenue for the fourth quarter of fiscal 2022 rose fivefold to $150.5 million from $30.1 million in last year's fourth quarter. For the full year 2022, revenues improved to $547.7 million from $89.6 million last year, with the increase across our DSA and RMS business segments reflecting approximately 31% organic growth plus the contribution from acquisitions. Adjusted EBITDA for fiscal Q4 improved to $18.3 million or 12.1% of total revenues from $4.3 million or 14.4% of total revenues in last year's fourth quarter. For the full year, adjusted EBITDA grew from -- grew to $90.5 million or 16.5% of total revenues from $9.3 million or 10.4% last year. This was a very solid year of continued growth and was reflective of our ongoing evolution into a comprehensive provider of non-clinical CRO services and research products to the global pharmaceutical and biotech industries. During 2022, we consummated several acquisitions that enhanced both our geographic footprint and portfolio of service offerings. We began the integration and optimization of our acquired operations and created a path to what we believe will be sustainable growth in sales and expansion of margins. We're pleased with the progress we made in fiscal year 2022 and have entered '23 with specific plans to continue to improve our overall business model while addressing what we estimate will be a temporary disruption in our NHP business, which I'll discuss in greater detail shortly. During the fourth quarter, we did experience unexpectedly higher operating costs related to company-wide recruiting and the validation of new…

Thanks, Bob, and good afternoon. Total revenue for the fourth quarter of fiscal 2022 rose to $150.5 million from $30.1 million in last year's fourth quarter, driven primarily by significant incremental revenue from our RMS segment and higher revenue in our DSA segment. DSA segment revenues grew 46.8% in the fiscal 2022 fourth quarter to $44.2 million, up from $30.1 million in the fiscal 2021 fourth quarter, and that was driven by $2.1 million of incremental revenue from acquisitions over the same period last year and an incremental increase in revenue from internal growth of $12 million during the quarter. The fiscal 2022 fourth quarter revenue was lower than fiscal 2022 third quarter revenue due to higher benefits in the third quarter from cancellation fees and the fourth quarter revenue being impacted from less canines being available for studies. However, the canine shortage issue is improving and we expect to see the benefit of this starting in the second quarter of fiscal 2023. Our RMS segment revenue in the fiscal 2022 fourth quarter was $106.3 million. We did not have any revenue for our RMS segment in the last year's fourth quarter. RMS segment revenue was lower in fiscal 2022 fourth quarter compared to the 2022 third quarter due to shipping less units of NHPs during the quarter. Our total gross profit increased to $42.2 million or 28% of revenue, up from total gross profit of $10.3 million or 34.2% of revenue in last year's fourth quarter. Gross profit for our DSA segment improved to $13 million or 29.4% of segment revenue from $10.3 million or 34.2% of segment revenue in last year's fourth quarter. The percentage decline in gross profit was primarily driven by laboratory capacity investments and cost associated with the recruitment of additional scientists to support new…

All right. In closing, I'd like to take a moment to thank our 2,200-plus employees who work tirelessly every day to provide unique Inotiv experience for all of our customers. The reason -- they are the reason our customers want to grow with us and I truly appreciate all they do. This concludes our prepared remarks. And with that, operator, please open the call for questions.

Thank you. [Operator Instructions] Thank you. Our first question is from Frank Takkinen with Lake Street Capital Markets. Please proceed with your question.

Hey, thanks for taking my questions. I wanted to start with a couple on the NHP dynamic. First clarifying question. I think I heard you correctly, Bob, that you stated Cambodia is still exporting NHPs. But if I understand correctly, you guys have elected kind of interesting conservatism to not take importation from Cambodia. The first clarifying there. And then, two, kind of walk through the process of the audit that you plan to go through with your on-site visit? And how would it look in Q2 and forward as you can return to shipping NHP, how quickly that can occur again?

Well, okay, first, let's -- hi, Frank. I think as far as Cambodia, the Cambodia government officials have said that they will be exporting. So, I'll leave it at that. As far as our -- this is our internal decision that we will not bring in imports until we have had a chance to be on site to audit the facilities in Cambodia. This is something that's really not been allowed since COVID. I think the last time people on-site were in January of 2020. Of course, we did not own the business back then. But due to COVID, nobody's been allowed on-site. We've recently been notified that we will be allowed on-site, and we're looking forward to people going over there shortly in order to be able to audit those facilities. So, we'll wait and see how those audit turnout before we make the decisions to import, but that will be the next critical path. As far as what the audit will tell, no, we will not talk about what audits we're doing internally or externally with the NHPs at this point.

Okay. That's helpful. And then, maybe on the cancellation theme, it sounds like you're not alone in that dynamic, but maybe just kind of think -- speak to how you're thinking about the cancellation trend as you move into 2023? And what you kind of baked into your guidance on that front in the DSA business?

Did you say the cancellation?

Yes. You stated higher cancellations than average. How are you thinking about cancellations and what's baked into guidance…

The DSA business?

Yes, DSA business, correct.

Yes, I know. I think that's definitely a headwind that we face. We have seen and we're going to have to continue to see our quoting increase to overcome the cancellations that are out there. It's something that we started preparing for probably nine months ago as we saw this and it's turned out to be true. We've been increasing our sales and marketing efforts and budgets, while we've also been adding additional salespeople. So, I expect that we continue that strategy and continue investing our sales and marketing dollars, and how we can be more intelligent with how we're investing and how we're selling. But that's something we'll do hopefully daily in order to get smarter and better to get more shots on goal, if you will, and more opportunities, and then what can we do to be more effective in closing.

Okay, great. And then, maybe one last one for me, a bigger picture question. Prior to all the NHP disruption, the big picture growth commentary and business model profile was a high single, low double digit, in aggregate, with DSA outpacing that and eventually reaching 18% to 22% EBITDA margin profile. But once we cross over some of these NHP disturbances, has your thought process around that business model, that business profile changed at all? Or do you feel it's still fully achievable once we reach a time of more predictable NHP supply?

I think it is fully achievable. I think that we -- as we indicated that -- I think that the first quarter -- the fourth quarter and the first quarter, we had some inflationary pressures on our business, specifically our RMS business. But I think with the price increases that we implemented this January and the price increases we implemented with the NHP business -- remember, we still do sell NHPs. They're not all from Cambodia. And along with the new services that we're adding and I think the site consolidations that we're doing, I think we -- those -- still optimistic those are very achievable targets.

Great. Okay. I'll stop there. Thanks for taking the questions.

Thanks, Frank.

Thank you. Our next question is from Matt Hewitt with Craig-Hallum. Please proceed with your question.

Good afternoon. Thanks for taking the questions. Maybe first up on the flip side of the cancellations, are you seeing a more normalization in the bookings, meaning you're not getting customers coming in a year or 18 months early to book? As you built out capacity, are you feeling like you're getting back to a more normalized bookings timeline?

Matt, I think there may be a little bit of that, but I would tell you that we do have some projects that are booked out into 2024 already. So, as I look at our 2023 backlog for the rest of this year, we probably have 65% of our business already in the backlog, which is I think probably more normal. And I think that we are booking things into 2024. And I think as people get more concerned again about access to NHPs -- because if the trend continues, there will be less available this year. I think that will have people booking further out again.

Got it. And then, I guess, on the NHP side, how much of a headwind to EBITDA margins does that represent over the near-term while you're basically holding those the Cambodian NHPs until you determine whether or not it's safe to give those to your customers? What kind of a margin hit does that represent? And how much of a benefit it will be when you're able to finally kind of get those out the door?

Well, when and if we get them out the door, when we do, it will be a positive. But in the meantime, we're still selling NHPs, and margins will remain very good with the ones we have, because the demand is very high, and there are fewer available. But I can tell you with the pivot that we did -- and you can tell we pivoted the business a little bit in the last three months since we probably talked. And we're less focused on acquisitions. We don't need to go out and hire 860 people. More focused on efficiencies, a little less capital expenditures. Basically, that's allowed us to look at our expenses in our workforce. We did have a small reduction in workforce take place in December. We are reducing some expenses, the hiring and recruiting expenses. We're starting to see synergies still that we had not gotten to before. And we're starting to see some of the benefits for the site optimization plans. So, I'm pretty optimistic that we have made some significant changes in the business that have not been seen yet by our results and not been seen in market, because of the changes that we have -- that we had started a year ago with the site consolidation plans. But we're now starting to finish -- and then some of the investments that we needed to make initially, there's a lot of travel, for example, in introducing the sites to one another. Our IT programs, at one point, I think, given the examples, we had 220 software programs. We consolidated down to 120. There are many examples like that where we get synergies and those take a year to run off. So, as we start to see those things take place and come to fruition -- and again hiring and recruiting 860 is not a -- 35% of the workforce is -- this is pretty substantial feat for any company if you're growing that fast. And so, I think those sort of things that we're going to be much more efficient about next year and why we're going to see some improved margins, not just -- it's just not about how many NHPs can we sell.

Got it. And then, maybe one last one and it touches on that a little bit as far as the site optimization. You have been building out some capacity, particularly in some newer markets. How quickly -- I mean, what does the pipeline for those services look like? How quickly do you think you can ramp up on the sales side to kind of offset some of the upfront costs that you've borne getting those services ready to go?

Well, that's a good question. And I would like it to be a lot faster than that it is, but I'm probably -- I'm not very realistic. So -- but I would tell you, in Rockville, we've only brought it probably 25% -- probably 20% right now. The capacity is available in what we've built in Rockville. But what I've seen grow over the last three months during the quarter we just finished in December 31, very optimistic about the level of quoting activity, the backlog we built, and how we're ramping up those revenues. Now, again, it's only 20% of the facility and the capabilities available. But seeing that ramp up has been very encouraging. But I don't think -- that's something that I think that facility should eventually do $25 million to $30 million. That's not going to happen overnight. That will take a couple of years to build that up, I believe two or three years realistically. But I'm very pleased with what I've seen to date in the first 90 days that was open. And as we bring -- we'll bring on more capacity by March and, again, by June, and so far, the response to what we're building is very positive. And that doesn't only impact just Rockville, but some of the things we're doing in Rockville impacts our other facilities, because it's -- when we acquire company, remember, we pick up those sales and benefits from many other locations. And we're already seeing what we're picking up in Rockville benefiting other locations that we have. So, I'll remain optimistic at this point and I think that will be good investment for us.

Thank you. Our next question is from Dave Windley with Jefferies. Please proceed with your question.

Hi, thanks. Can you hear me okay, Bob?

Hi, David. Yes.

Okay. Hi, good afternoon. Thanks for taking my question. My first question is what percentage of 2022 -- fiscal 2022 revenue was represented by your NHPs, and maybe more specifically the Cambodia NHPs?

David, I think in our last press release in November, I believe we indicated that maybe the Cambodian NHPs were $140 million of our revenue. Now, it's not top of my head, but I believe that's what we said in the November. Beth, is that correct? Beth, are you on the phone?

Yes, that's correct. It's about -- yes, 25.5%.

Okay. And that takes you through the end of the fiscal year? That was kind of for the full year?

Yes, that was fiscal '22.

Okay. And then, as I think about your guidance and the progression, you, obviously, are guiding toward a lower level of activity in the first quarter. As we sit here today, I mean, you may not have the books closed, but the first quarter is done. What drives the sequential improvement -- what's the difference between the factors impacting 1Q versus what you're going to get in 2Q and beyond? And maybe you could provide a little more detail as to whether 2Q, 3Q, 4Q looks similar, or do you expect a kind of a progression -- an improving progression through the balance of the year?

You're breaking up through some of that call, David. So, I think you're asking if -- where we're going to see Q2 versus Q1, where would some of the sales increases come from?

Yes. I apologize if I'm breaking up. So, just trying to get at the differences in 1Q, which is already now done versus your step-up in both revenue and profit margin 2Q and beyond.

Yes. I think that we will see some benefits from price increases. So, the price increases in the NHP business are going to be somewhere around 65% to over 100%, depending on where they came from. And those didn't go in effect until January. So, I think those will be substantial, because we are still selling NHPs. In addition, I think, we'll start seeing some of the additional services come on board from the DSA business. And then, the price increases we took on the RMS business range and the other models other than NHPs were somewhere between 5% and 25%. So, I think we will see some increase in sales from those. Between now and the end of the year, I do expect that we will see increasing sales from NHPs.

Okay. So, then maybe my question on DSA would be, in terms of the cadence of impact, you said you're still putting out record levels of quotes, but those are being dampened or diluted by cancellations. And normally, cancellations have a nearer-term impact and the quotes have maybe an out-quarter impact. Is that the right way to think about the new business -- the net new business that is coming in?

It is. It puts additional pressure on the short-term operation to be flexible to move things around as things open up, or to go back out to the market and see if somebody else has a need for the capacity that just opened up. And -- so, it does require a little bit more flexibility in how we handle the operations.

Okay. Then my last question on the debt front. You described a number of -- you and Beth, both, the movements in your delayed draw on your revolver and the covenants or the limitations disclosed in the press release tonight. From a practical standpoint, do you see those limitations through March of '24 as preventing you from doing what you want to do in the business?

No, I don't. Those -- the changes we -- the pivots we made in the business were done before those amendments just came in place obviously in the last week or two. And I don't -- and I think with the relationship we have with our senior lenders, I believe that if we felt a need to change again for an opportunity that we have the kind of relationship that they would be open to listening to and we could work through those things. But at this point, for us, I think we have a lot we can do to become much more efficient and get to the synergies and finish the site optimization plans that are going to enhance our margins, and that's why I'd like to make sure we're doing in the short term. If we get through all those sooner than later and opportunities come up, we'll get -- we can go back and talk to them, but right now that is not our [indiscernible].

Okay. Thanks, Bob. I appreciate the answers.

Thank you. There are no further questions at this time. I'd like to turn the call back to Bob Leasure for any closing remarks.

No, again, I'd just like to thank everybody. We had the opportunities to look internally to figure out what we can do smarter and better. This had us refocus and ask a lot of questions about our business and what we should do different. And that was a great opportunity for us to pivot. And I think that, as a result, we'll be a much better company for this and much better position in the future. So, again, I want to thank all the people that worked with us over the last six or eight weeks. I apologize for the delay, but we'll look forward to moving forward into 2023 and what we can deliver. So, thank you very much.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.