Good afternoon, and welcome to Inotiv’s Second Quarter Fiscal 2023 Financial Results Conference Call. At this time all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] 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 many begin.

Thank you, Diego, and thank you everyone, for joining us today for Inotiv’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 also will 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 Investors section of the company’s website www.inotivco.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 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, and then we’ll open the call for questions from our analysts. It is now my pleasure to turn the call over to Bob Leasure. Bob, please go ahead.

Thank you, Devin, and good afternoon everyone. We appreciate you taking 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 – and what these enhancements can deliver for our clients, our industry, and our shareholders. As we continue to make progress as planned in filling our growing capacity, we expect improvements in DSA 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 return 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…

Thank you, Bob, and good afternoon everyone. Total revenue for the 2023 second quarter rose 8% to $151.5 million from $140.3 million in last year’s second quarter, driven by a 20.2% or $7.9 million revenue increase in our DSA segment, and 3.3% or $3.3 million revenue increase in our RMS segment. Higher DSA segment revenue was primarily driven by increasing revenue within the current operating structure and continued increases of our genetic toxicology services at our new business facility in Rockville, Maryland. The increase in revenue at RMS was due primarily to favorable pricing across several of our animal models, specifically NHPs, but also including Teklad diet. The favorable pricing helped partially offset the negative impact of lower volumes of our NHP sales. Total gross profit improved slightly to $44.9 million, or 29.6% of total revenues from $44.7 million or 31.9% of total revenues in last year’s second quarter. Gross profit for our DSA segment improved to $15.1 million or 32.1% of segment revenue from $12.3 million or 31.5% of segment revenue in last year’s second quarter. The 600 basis point increase in margin was driven by higher sales within our current operating structure. RMS segment gross profit in the second quarter of fiscal 2023 was $29.8 million, or 28.5% of total revenues compared to $32.4 million or 32% of revenues last year. The decrease in margin in the current quarter was driven by several factors including product mix inflation and the absorption of duplicate costs as we implement our site optimization plan, as noted. We expect to begin seeing a decline in these duplicative costs and margin expansion in early Q4 fiscal year 2023. The margin decrease was partially offset by favorable pricing for certain of our product lines and some initial benefit from the closures of our Cumberland…

Thank you. [Operator Instructions] Our first question comes from Matt Hewitt with Craig-Hallum. Please state your question.

Good afternoon and thank you for taking the questions. Maybe first up regarding the NHP situation, I realize you can’t answer many questions, but one I’m curious about, once you have the test in place, how quickly can you get things geared up from importing, I’m not sure what the exact quarantine period is, but how quickly once that test is in place, can you kind of get things turned around where you’re starting to record revenues from that market?

Well, we’ve made great progress in our testing and platform for being able to import. I think the bottleneck may be when U.S. Fish and Wildlife, will again consider allowing imports from Cambodia and if they’ll consider allowing imports from Cambodia, that could be a longer lead time that is unknown to us. But once we have that, I think it would, we could move very quickly. We have relationships, they’re not NHPs available to bring in, there’s transportation available and we have quarantined space available. Now there’s a normal lung table, normal quarantine time, but I don’t think that there needs to be a, there won’t be a large time to time, between the time somebody says you may move forward and we can begin importing. Ever since November 16, we have say – we have really focused on two goals for us. One is to be ready to import Cambodian NHPs when, and if they do allow us to import NHPs. The others will make sure we have a business model, which is not dependent on imported NHPs from Cambodia. And we’ve made great progress to both of those. We’ll be ready for either event.

That’s great, thank you. And then regarding the general business environment, obviously a lot of questions about the health of small pharma and biotech companies, but maybe what are you seeing from customers? I know the last couple quarter’s cancellations were maybe a little bit elevated relative to historical levels, but has that come down? What are you hearing from customers? Thank you.

Well, I think our customers have been and will continue to be very cautious in spending their money. And as a result, they may choose to continue to cancel orders as they look and see what is best for them. Overall, last quarter, we grew our awards were up 20% over the prior quarter, and we had a book-to-bill, close to one-to-one, but our sales were up 20%. Our new orders were up 20%. Our quoting activity, because over new services has been up even much higher than that. So again we’re – we’re a very – we’re a small business concise compared to the size of our industry. And when we’re looking at trying to increase 10, 20, 30, whatever it’s, we’re trying to increase, it’s a small percent of the market share. And what we’re trying to do is increase, continue to increase our market share during this time. But I don’t think we have to be limited to the – to what the macro is. So as a result to change that, we’ve added sales, we’ve added marketing and we’ve added new services and those bring in new customers, and those new customers try us one service, and then again, they expand to multiple services. So, I’m pleased with what we’re seeing and I’m not underestimating the need to be aggressive and in increasing our market share. But I do think the customers will continue to be very cautious and, they’re not expecting this be given to us without hard work.

Understood. Maybe one last one then I’ll hop back into queue. As far as the staffing has concerned, as you continue to roll out some of these new services consolidate some of your sites in different locations, are – do you feel like you’re at the right level from a headcount perspective and what are your expectations from a hiring perspective over the course of the year?

I think we’re in much better shape. Last year, we had to hire 850 people and we on-boarded a lot of people. We’re fine tuning our organization all the time. I don’t think we’ve net increased our headcount probably since the end of the fiscal year last year. And I think we can see a lot of our growth without a significant increase in headcount going forward. I think we’ve done a good job of bringing people on board, training in their helping us develop the assays, validate the equipment and assist good – and I think we’re making good progress. And one of the things notable in last quarter is that we increased our sales, what maybe $28 million. And of that, if you back out that increase in legal fees, we probably sell $25 million, $26 million, go to the bottom line, almost $0.90 on the dollar, go to the bottom line. Because we had already brought in some of those people, we were prepared for that. So, I think it was a great performance by our people and I think that we have got a great team in place and I don’t see a need to significantly add that for the growth that we’re projecting.

That’s very helpful, thank you.

Thank you. [Operator Instructions] Our next question comes from Dave Windley with Jefferies. Please state your question.

Okay, good. Hi, it’s Dave. Good afternoon. I was not hearing the confirmation tone, so I wasn’t sure if I was in the queue. Thanks for taking my questions. I was wondering if you could overall or in maybe an RMS more specifically breakdown for us the differences or the contributors in terms of volume and price? I know the growth was relatively smaller there, but I guess I’m just trying to understand the moving parts, probably volume down and price up, but if you could put numbers on that, that’d be great.

I would try to do the best I can, actually the volume of NHPs we sold in this quarter, in the Q2 was actually less than the numbers, than the amount of NHPs we sold in Q1 and significantly less than the numbers we sold in Q2 of last year.

Okay.

So, I think that indicate, fairly significant change in our business model.

Right, right. And so appreciate that. On, I think you had talked last quarter that included in some of your strategies to try to mitigate the limited availability of NHPs you were taking price or, the price environment had increased in NHP, but you were also going to take some price in small animal. I think, Bob, I heard you mention that, but I didn’t hear Beth mention that. I wanted to make sure I heard that right. And how is the small animal price increase sticking?

We did increase the small animal pricing in January and it is sticking. And our volumes remain, I would say in terms of numbers, fairly flat. I think we’ve been able to see some increase in our Teklad sales and but overall fairly flat maybe in terms of volumes and prices are doing fine. When we’re also, as you can imagine, we are holding those volumes or we are significantly reducing our footprint and the number of facilities we have, which means the number of people we have, the transportation we have. So that’s really our focus right now. We’re now starting to also right now come back and focus on, and now that we have these changes made and we have the capacity, how can we go ahead and start increasing our sales volume? And then we’re coming back and we’ll start focusing on that also. But those prices are held and then the NHP prices, we did implement starting in January and they continued to increase through the quarter. So the – our average prices that we were selling for in January and then increased again in February and increased again in March. So, but as to some of our expenses and third party expenses.

Right. So in the, you mentioned the new business opportunities that, you’ve invested in, you’re building out, sounds like you’re getting some traction. Mentioned the genetic talks a couple of times. How much of the bookings in the quarter are representative of your biotherapeutics and genetic toxicology and those new businesses to the DSA segment? Can you quantify that?

Yes. I mean, I wouldn’t say we – so we had a 20% increase in this, I wouldn’t say it’s all because of that. We probably started both booking those things, in late December, built in January, February, March, and it’s ramping up the quoting activities, ramping up. And the progress I’m seeing this quarter is continuing to build up. So but if you say, where did the $7 million or $8 million in DSA bookings increase come from? It would have to be, less than 20% probably from that service.

I’m sorry, less than 20% of?

Less than 20% of the increase of bookings from our Q1 to Q2.

Okay. Understood.

Why this is so important is, it has been important in all of our acquisitions is this is really the old buyer reliance customer base that we – that we are bringing our board, which they’ve been waiting for. And the exciting thing for us is it brings new customers that we have not had. They’re looking for the service. We can offer right now a really great lead time since we’re just starting up. And I think that’s helpful. We have great quality, great people that the customer base knows, because they have experience with them. And when we bring on those new customers, once they start working with us, then they start looking at our other services. And that generally helps us across the board. That’s why we’re looking forward to this and seeing how this develops. And same thing with safety pharmacology and some of the other things that we’re bringing on board, it also significantly reduces our outsourcing, helps us control speed to market and the service aspect for our customers.

Great. Thanks for the answers. I’ll drop back in the queue.

Thank you, Dave.

Our next question comes from Frank Takkinen with Lake Street Capital Markets. Please state your question.

Yep. Thanks for taking the questions. I was hoping to start with one on the plus/minus around the net bookings in the quarter. Could you just walk through how the demand has been? How gross bookings have trended? And then I know cancellations have came up in the past, so maybe if you could touch on cancellations and if there’s anything to note of change in that area of the plus/minus?

Plus/minus, cancellations, I would say in Q2 were probably less than Q1. Could be smoothly less actually, but I don’t want to, I’m not going to sit here and assume that cancellations won’t exist in the future and that trend will continue. I think people are going to be very cautious of how they spend their money. We need to be very aware of that and not underestimate what that I impact may have, which is why we need to be very aggressive in our sales and marketing efforts right now, and make sure we have a high degree of customer satisfaction, reoccurring customer base. So I think, we’ll hope that continues, but I’m not going to sit here and expect it to continue. I think we’re in the midst of a, of making sure that people are very careful with their dollars, so we’ll continue to work with them. Sometimes they want to delay projects; we work with them there, so we try to be a company that people can work with.

Okay. Fair enough. Second one for me on the income statement was hoping you could kind of bridge us to how you’re thinking about well, I guess beyond the income statement, the free cash flow profile for the back half of the year. And what I’m really looking to get at is just do we expect to generate cash through year end and can we continue to continue on the trend of putting a little bit more push in between where we are and where those covenant calculations are?

Yes. I mean, remember for our covenant calculations, we have a lot of ad backs that may not be an adjusted EBITDA. So some of the legal fees I outlined, for example, are add backs for covenant purposes. So, I think right now we’re in good shape and I – and I’m looking forward to – from the guidance that we’ve given, you can tell, we are a fairly positive outlook for Q3 and Q4. We do think that would generate significant cash and as these projects, the –as the site optimization projects and some of these growth projects wind down, I think that will also help generate a additional cash. So, we’ve been in this process of the site opposition growth for two years, since it’s part of the integration and it’s part of what needed to be done to really have improve margins really address animal welfare address things that we wanted to address. So, I’d be excited to see those come to an end. We’re about 90% plus done. I also had that, six months ago, even three months ago, I think I had people concerned that we were just doing too much at once. Too many variables, too many of the moving parts. So, I think that hopefully everybody should – get some confidence in fact that we have actually brought these things in according to plan on time, if not ahead of time. And we’re now down to the end of some of these things where we can really now focus on optimizing what we have left and delighting the customer. So, I look forward to the next couple months and yes, I do think it should be very positive.

Okay, perfect. Thanks for taking the questions.

Our next question comes from Dave Windley with Jefferies. Please state your question.

Hi. I was trying to drop out, not hog the mic in case there were other people that wanted to ask questions. I guess the list wasn’t that long. So, I did want to come back and ask if you could quantify the duplicative operating costs that I presume will, I think you’ve described a lot of those winding out of the business, maybe the end of this quarter and through the second half of the year. Is it possible to quantify all those?

I have not quantified those. It’s hard. It’s all, there are a lot of hidden costs in that transporting duplicate and severance bringing on new people training. And so we’ve not tried, I don’t know, I could do a very good job of quantifying that for you. We did, I think, and I did this time, try to give an idea of the kind of cost we expect coming out now as a result of this. And I think that is significant and I believe that, people have seen our guidance and are concerned about how do we achieve that guidance. And I think that to give a little more color to it, to tell them what kind of costs were coming out and the what we’re expecting sales increase and the kind of March improvements we’re seeing were important to be able to share why these investments have been so important to us.

So related to that last part, Bob, so EBITDA guidance was $75 million now $70 million, is the change strictly $5 million in increased legal and third-party? Or is that number bigger than that netted down by something else?

No, it’s, it really is specifically related to we’ve incurred, close to $9 million and legal and third party expenses to address some of these, what we’ll call overhangs that are out there. Based on what we know today, I think we’ve done a lot to address some of those things and so hopefully we will see that go down to the future, but that is higher than we expected when we gave guidance and that is the change for guidance. Everything else is pretty much as we expected.

Okay. And to clarify, $9 million is the year-to-date amount not the full year guidance amount?

No, not, I was adding what was Q1 plus, what we have seen so far in Q2 to talk about, what the legal and third party expenses have been.

Okay. So that just through the first half. Okay…

Right. So that was higher than we said, but again, as I think previously asked that, some of that could be backed out for covenant purposes. So, I think that, so that is, and it’s not, we have not put that in our adjusted EBITDA.

Got it. So last question for me, and maybe too close to the fire on NHPs, but the two-part, I guess would be in light of the kind of alleged in, while catching of the animals by Vanny and that activity happening during periods, when audits would have been able to have been completed by predecessors to you, so acquired entities. How do you think about stiffening improving the audit procedures to better detect, or said differently, how do you assure yourself, that the animals are purpose-bred when, if the DOJs allegations are correct, those that slipped by previous audits, how do you get comfortable with that?

Well, what I do not know, what the DOJ has exactly approved, what is purpose-bred and what is wild card and they’ve not shared that with us. So, I can tell you going forward and what, and either over the last six months to nine months if we are going to import from anywhere and we’re not importing anywhere from Cambodia, right nor and we did stop that, immediately on November 16. So, we’ve not had anything from there. We’ve audited there, we’ve worked with them, we’ve talked about how we would go forward, and that’s what we’re focused on. As far as anywhere else in the world that we’re importing from. We have our veterinarians go out before anything comes over. If we’ve been auditing several farms in touch with many people, learned quite a bit about the other farms and we’ve done quite a bit of work in multiple locations to determine what comfortable, what farms we may be comfortable working with. So, I think that’s what the best we can do right now and we’re really focusing on what we’re doing going forward.

Got it. I appreciate the answers. Thanks a lot. Have a great evening.

Thank you.

Thank you. And there are no further questions at this time. I’ll hand the floor back over to Bob Leasure for closing remarks.

All right. Thank you very much for your time and attention. And although challenges do remain, we’re making excellent headway in transforming our organization. We have a number of investor conferences coming up beginning later this month. We look forward to we’ll be engaging with investors at Benchmark Virtual Healthcare Conference on May 23. Craig-Hallum Conference on May 31 in Minneapolis, Jefferies Healthcare Conference in New York City, June 6, and June 7. We look forward to any follow-up questions or calls anybody may have, and I hope everybody has a good day. Thank you very much.

Thank you. And that concludes today’s call. All parties may disconnect. Have a great evening.