Good afternoon, ladies and gentlemen. And welcome to Inotiv’s Third Quarter 2023 Earnings Results Conference Call. At this time, all lines in listen-only mode. [Operator Instructions] This call is being recorded on Thursday, August 10, 2023. I will now turn the conference over to Mr. Bob Yedid. Thank you. Please go ahead.

Thank you, operator. And thank you everyone, for joining us today with Inotiv’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 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. If you haven’t obtained a copy of today’s press release, you may do so by going to the investor section of Inotiv’s website. 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’s my pleasure to turn the call over to Bob Leasure, CEO. Bob, please go ahead.

Thank you, Bob. Good afternoon, everyone. Before we dive into the quarter’s results, I'm going 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 positioned ourselves to continue to execute on our plans and goals. Our investments and growth have been guided by seven strategically planned key objectives. First right structure after several acquisitions, we are currently in the final stages of outmoded infrastructure, right sizing the company's global footprint in order to improve client service and program management. As well as competitively positioned 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 keep things 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 client's 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 for external services. This in turn, reduces cost but also enhances speed, quality, 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 Inotiv is 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 her labs. Additionally, we are committed to addressing deferred maintenance and acquired site and expanding acquired facilities to allow for growth and leveraging our fixed cost structure. Four, rebranding, we've rebranded our services business as Inotiv.…

Thanks Bob. For the nine months ended June 30 2023, revenues totaled $431.7 million, a 9% increase from the $397.2 million recorded during the first nine months of 2022. RMS revenue for the nine months increased 8% to $296.8 million from $276.1 million in the same period in 2022. In our math, we continue to operate in an extremely dynamic pricing environment for larger research models in particular NHP. DSA revenue for the nine months increases 11% as compared to the same fiscal period last year. The increase in DSA revenue was primarily driven by additional year-to-date fiscal 2023 revenue generated from Integrated Laboratory Systems that was acquired in January 2022. Plus new services related to genetic toxicology, inorganic growth in general toxicology services, these increases in DSA service revenues were partially offset by decreases in our discovery services primarily related to the decline in overall biotech funding in the market. For the 2023 third quarter, total revenue decreased 9% to $157.5 million from the $172.7 million recorded during the prior year period. DSA revenues for the fiscal third quarter decreased by 5% to $46.8 million when compared to the prior year period. As previously mentioned, the lower revenues experienced in our DSA segment were primarily driven by declines in overall biotech funding in the market. Plus the timing of general toxicology services somewhat offset by increased revenue from genetic toxicology services in connection with our new business t our Rockville facility. RMS revenue for the fiscal third quarter was down 10% to $110.7 million year-over-year, mainly due to reduce volume of NHP sale somewhat offset by favorable pricing over several products, particularly the NHP. For the quarter, total gross profit improved to $55.2 million, or 35% of total revenues from $50.9 million or 29.5% of total revenues in last…

[Operator Instructions] And your first question comes from the line of Tim Daley from Wells Fargo.

Great. Thanks for the question here. So Bob, very impressive book-to-bill here in DSA at 1.08 implies roughly $5 million sequential increase in net orders in the quarter. So were there any pull up here, any pull forward. Just how our bookings going in the fourth quarter so far, just trying to kind of help us figure out a bookings rate on a sequential basis moving forward.

Both or Beth, there, are you there to answer Tim's question?

I'm sorry. I think it was on mute. Sorry Bob. Alright. Tim, sorry. Thank you. I've been talking here. Nobody could hear me. I apologize. So Tim, to answer your question, our bookings for the third quarter actually very strong, one of our strongest ever. The net bookings, so came just over one because the cancellations. So we're still seeing high level cancellations as we have in previous quarters. And I think that will continue. It's one of the reasons why we increased the salesforce over the last year. And as we've done that, we've seen our ability to increase in quotes, for our quoting level for the quarter was probably record for us, as was our closing. And I think we hope to see, continue to see those trends. One of the areas where we've been off in the last six to nine months is in the discovery service. As we talked about revenues in discovery are going to one of the reasons, we decrease guidance is because our discovery revenues are going to be out this year from what we originally projected. However, I also said in the last call in March, we added a specific discovery sales team to the market back in the first half of this calendar year in January, February and March. And we're starting to see really a significant improvement there. And I'm starting to see really good trend in the discovery, which maybe is an indication that some of the biotech funding is back, and they're coming back and putting some of the projects back in, because that's been one of the strengths so far in the first part of this quarter. So I don't have the ability to predict going forward. How this will -- booking will be, but I do expect cancellations will continue as people were very cautious with their money. I think that the quoting activity remains fairly strong. I'm hopeful that we'll continue to close a good level. And so far, pleased with what we're seeing so far this quarter.

All right. Great. And then I guess just for Beth, I think you guys called out assuming that Cambodia and China conditions remain a $20 million quarterly run rate of EBITDA is a good number for 2024. So is that kind of a way to be thinking about at least the baseline for 2024 is $80 million of EBITDA for the full year. And thank you for time, appreciate it.

Yes, I would be thinking of it in terms of $80 million for the year with an average of $20 million per quarter.

We average, if you look at the last two quarters, were probably 48, which is an average of 24. And I would say that we look at the 48% reduction of what's coming into country. There'll be a significant reduction. We're looking at that and pricing and saying okay, let's make sure as I said, let's set a conservative estimate that we feel like we can depend on, and if nothing is changed. If the biotech funding goes up, if we're able to recover some of these discovery sales, if we're able to see some other additional opportunities for those fees, then that'd be great. But at this point, let's recognize the environment that we're in.

And your next question comes from the line of Matt Hewitt from Craig-Hallum Capital Group.

Good afternoon. Thanks for taking the questions. And congratulations on navigating what's a pretty challenging environment. Maybe first up regarding the NHPS. I heard what you said as far as Cambodia still pretty locked down. It sounds like you're finding some supply in some other geographies or some other countries. But as we think about opportunity there, I guess, well, there's maybe two questions. First, were you able to unlock some of your existing inventory? Or sell some of the existing inventory? And I guess number two, is there an opportunity for you to take in animals in one or more of your international sites? Or is that not an option?

What was the last question, Matt?

Would it be possible yes, to take to take custody of animals in one of your European locations?

Okay. First, we do actually distribute NHPs in Europe. And we have and that market, we don't --we have not ever taken Cambodians into Europe, don't expect to net markets really not changed for us. So that has never been part of our, Cambodians have never been part of a European plan. And we don't anticipate changing that. We're not going to do anything with Cambodians for the moment, anywhere. So I think that was a part of it. And the first part of the question was, yes, we have been able to bring in from other countries, and others. And it kind of depends on what also our customers want. But you asked about our inventory. I don't want to get, really don't want to get into a lot of inventory. But yes, we have sent in the past sold from our inventory. But no, we have not sold all of our inventory, and we've not really installed our inventory.

Got it. All right. And then maybe second question, as you look at, as you rolled out some of these new services, and clearly, you're having some success there. Have you looked at? Or is there any kind of a metric that you can provide that if you look across your 3000, over 3000 customers worldwide? How many are using two services or three services? And maybe how is that metric changed over the past year? Thank you.

I don't have a good metric on that, Matt. I know that we have -- we're bringing our DSA groups together, discovery and with our safety assessment group. And combining those we are now looking forward, we're starting to discuss and figure out how to do a better job of bringing our research models, customer base to our discovery base, which will evolve into our safety assessment base. And to do that, we'll be making some changes, adding some scientific strength to our bench in the coming year. And looking quite forward to evolving that part of the business so we really could bring the RMS business a lot closer with the discovery business and having cross sell more than we have in the past. But did I think we need to make some improvements to the scientific team. And we're planning to do that. And those will be announced in the future. So looking forward to that. And I think what we can do now that we've kind of what I say finished a lot of what were the brick and mortar changes that we needed to make. And I think there's an opportunity, lot of opportunity that we've not touched yet.

And your next question comes from the line of Dave Windley from Jefferies.

Hi. Good afternoon. Thanks for taking my questions. Bob, I'm wondering if you wouldn't mind breaking out your bookings from some of your newer services. I think you've pulled out in the past, biopharmaceutical gene tox, wondering how much traction how much those are contributing so far.

Yes, I'd say, thank you, Dave. I do have somewhat awareness, this and I don't have a right in front of me. But we started those services up the end of calendar year last year. And we've started to see that in that backlog grow in the services start to grow. It's still, we still are not exceeding a million a month in those services for those new facilities, but it's grown fairly rapidly over the last six months. And that backlog is grown quite a bit. But it's, it may be put in perspective that maybe $3 million to $4 million, $5 million in their backlog, $4 million of backlog now. And it's really hard to pull apart because many of those services are part of much larger programs. And some of those services were things that we were selling before, but we are outsourcing. So it's sometimes really hard to say, that's something we didn't have in a backlog before. Because all we're outsourcing before.

Okay, that's good reminder there. In that regard, sticking on that side of the business, but thinking about your adjusted guidance, I think you're attributing most of the revenue decline in the full year guide to availability of NHPs. You also mentioned in an earlier answer, a little bit of discovery. It looks like overall revenue; you expect your revenue to be sequentially down by $30 million-ish. Should we think about that all coming out of RMS? Or is some of that DSA? And I'm thinking again, because your net book-to-bill this quarter was pretty decent as I think Matt said.

Yes, we're going to see most of that come out of the RMS. So and I don't slide down $30 million. I think it's done. We've brought it down $10 million.

$10 million reduction guide, I mean sequential from the third quarter. Sorry, that wasn't clear enough.

Yes, so I think it's been different from what we thought and I think that will come from the RMS side, not the DSA side. And that will be primarily NHP related so that for the year our NHP revenue is probably a little higher than I thought we would be, I thought our DSA sales a little lower than I thought would be for the year.

Okay, interesting. Okay. So then, on the RMS side, can you, Beth, give us a sense of how much of the revenue either for the quarter or year-to-date is still tied to NHPs? How much your NHP is driving RMS now?

Well, it's always been an important part of our revenue. But I, Dave, put a kind of a little bit of perspective for it, the volume of NHPs that we sold in the third quarter this year, probably in excess of number of NHP, are probably at least 40% less than we sold last year. So when I say that what the imports from the US are down 40. I think what I say 49%. We're seeing that. And we, as a result, we have much less gone out the door now on a quarterly basis. We don't break out any, don't think we break out NHP revenues from RMS revenues.

Okay. So but thinking about your commentary, which appreciate the helpful comments to begin to frame ‘24. Thinking about $110 million number in the third quarter. And it sounds like your base case expectation is that the volume of NHP that will be available to you will continue to shrink. And so I guess I'm wondering how much of that revenue run rate is subject to the decline accessibility to NHPs. And how much is kind of more stable because it's tied to [inaudible].

Here's interesting thing. I think when I just told you the volume, the number, the volume of NHPs went up in third quarter was down over last year. If you, so that $110 million included 40% reduction in volume, right, from last year. Okay. I think overall, we could be down 40%, 45% next year. So I don't know that we, I think-- I don't know we could see a greater fall off next year in the sales of any space than we saw from an RMS business that we saw in the third quarter. Because that now that is baked in that reduction is significant baked in. I do think that based on when things are coming in, we could have some variations between quarters of when they go out. So it may not be every quarter either, it may be some quarters are better than others. But I think overall, on average, the quarter that we saw may be the quarter that with that significantly less volume that we could see.

Okay, last question for me is –

I hope that helps out.

Yes. So you're kind of saying no more decline from the third quarter volumes.

On average. David, we could have quarters that we, in total, I think that we see it fairly consistent. It doesn't mean that every quarter is going to be the same. And that's, it could but on average for the year, I think that's counting on that 40% decline is something that 40%, 45% decline is something that we can have to maybe get used to.

Right. Okay, last question for me, earlier in the year, both at the entity Inotiv level and the industry level, there's a lot of conversation about working with the US Fish and Wildlife Service to both get approved, kind of have a pathway and get approved a parentage test, to try to satisfy and kind of reopen the supply chain satisfy the Fish and Wildlife Service about the provenance of animals coming from Cambodia and reopen that supply chain. Your competitor yesterday, it really didn't come up. I'm wondering if you could give us an update on where that stands, what progress has been made, if any, and what upcoming court case and [inaudible] meetings might mean for that dialogue?

Well, David, I have to the conclusion that we're not big enough and important enough to really make a big difference in what's going to take place with US Fish and Wildlife, or the DOJ, the government and those actions, we follow it closely. But they're going to do what they want to do; what they choose to do what they think is best. And I really don't have the ability to predict what they're going to do, which I think is why we're trying to just be realistic given the landscape we have today, we're trying to figure out how to play within the landscape we have today. If that changes, what, great, we're ready for it. But if it doesn't change, let's make sure our business model works based on status quo today. And I think it's very tough thing for our industry. It's very tough for drug discovery development in the US to see that happen. But as far as our company, let's take that as the basis and move forward from there, instead of everyday wake up frustrated, that it's not changed, let's wake up realizing that is today's normal. And when it's ready to change, we'll be ready for it. And let's set that expectation. And it's really important for our management team. And I think for our leadership team, I want them to wake up every day knowing they're successful. And having them come to work every day thinking they're not successful because of something we're really waiting for the government to do or not do is not fair to them and not fair to us. So let's adjust our plans. So they can wake up feeling successful every day and not feel like we're dependent on something we can’t control.

Your next question comes from the line of Frank Takkinen from Lake Street Capital Markets.

Great. Thanks for taking the questions. I wanted to clarify on the renewed EBITDA guidance. I understand the revenue guidance change but was hoping to get a little bit more color on the EBITDA guidance change, figure it would be maybe a little bit less than the same proportion of revenue coming down, but maybe talk to margin expectations. And then is there an expected uptick in operating expense as well to get to that $60 million.

Well, As I outlined, for the year compared to where we are, I'm pretty pleased with the -- even with the reduction of volume, the pricing for the NHPs has held up fairly well, the RMS sales held up pretty well. But they're really two major things for the year that we're offering. Our discovery sales may be down about $10 million from where we'd like to plan for them to be. And that's a reduction in top line. And then we probably had legal fees in excess of $9 million or $10 million, where they got to be. On the discovery sales, probably 80% of that goes to the bottom line. So that those two things make up a pretty big between that I think should make up the biggest difference where we're off for this year versus where we hope to be. But given all the challenges we had this year, and all the changes that have taken place in industry, and the biotech funding and the NHPs, we're pretty pleased with this quarter, we're very pleased with where we are today, and the ability to get all of these things that we had a year ago in December, people talk to me say how in the world are you going to finish four or five expansions and eight or nine site closures and change this and that it's good news our organization has done that. And now those things are done. So we have a lot less variables. As far as this quarter what we thought is, again, just what I told David, let's look at where we are realistically with NHPs, where we are at the market. And let's make sure that we identify something realistic, yes, we could lead guidance really high and try to…

Got it, that's helpful. And then now that you have a lot of the site closure, broadly speaking, site optimization behind you, you've got a solid infrastructure to grow off of now. Maybe speak to your confidence behind your longer term 18% to 22% EBITDA margins. And if you're at all thinking about a timeline to when we could reach a profitability profile like that.

Well, I think as biotech funding, or as we increase our market share, we have great leverage, I think in our DSA model. And I think there's an outline this before how we get to this 22% with the increase margins from the DSA business as we grow that. And as the costs continue to come out of our RMS side, and those things will continue over the next six to nine months. What I'm doing by outlining this current guidance is probably taking a lot of pressure growing to DSA sales business, in the midst of a reduced biotech funding, I hope we can -- we grew and about 10%, last year 160 to 180. So maybe it's trending in 160s. So they were low single digit double digits. Maybe we can do that again next year. When we were doing this two years ago, when biotech funding was high, we were growing that business at 25%- 30% a year. But this environment is a little different. For what I'm trying to say is, okay, it's okay. It doesn't matter if it takes us 12 months to get there or 18 months to get there, doesn't need to take us six months. And let's put a realistic expectation. Yes, I hope we can get there sooner, our team could help them get there sooner, and we're looking at how to drive it sooner. And every once awhile, we see some pretty good momentum. So if we don't get there next year to the 22% maybe 19% here, obviously, it's possible. And we don't have all the cost and savings in and we don't have all the margins in. And so it's obviously possible for us to get to 22%. But I think what we need to do is make sure we get there in a way that we're building the company for with a very strong foundation for the future. We don’t need to be in hurry. We are off this mark.

And your last question comes from the line of Yuan Zhi from B. Riley.

Thank you for taking our questions. Bob, high level, can you provide some comments on the demand of NHPs? How does that compare to last year based on your observation? You mentioned the supply part from government tracking data, then I have a couple of follow up questions.

Yes, Yuan, our demand I think fairly high. And I think it's going to continue to be there because I think it's going to -- when the supply chain takes a while to empty out. People had inventory. People have things in quarantine, people have things getting acclimated. So it takes a while for the supply that existed in November, to start to be reduced. Now that we're only importing half of what we had before this, this supply bottlenecks are going to get, are going to get a little tough, I believe. There are also some changes going on to what type of NHP somebody may want now, it may not be Cambodia, and maybe they're choosing to go to different space. So I think there's a shift and what people were looking for. We continue to look at that closely. But I think that the demand is still there. If we had more, I think the demand would be there for more. But that's, I don't think that's going to be the case.

Got it. In addition, can you please clarify the accounting method relative to NHP biologic assets? Did you use first in first out or locking last first out to calculate the inventory and cargo.

We are, actual cost. So each animal will have its cost of what it costs to bring it, buy it and import it. And so as we saw that the actual cost is against that. We do as we as I may or may not have alluded to earlier, we do have overhead, it has to be covered by those margins, such as speeding, labor, utilities, sewage, insurance, transportation, a lot of those costs are expensed. They're not in our inventory. We expense those as we go.

Got it. And the one last questions on the supply of NHP is outside of Cambodia. Have you noticed an increase of cost of those supplies? And do you have some kind of contract or price locking in place for those supplies?

We do have some price contracts which lock in prices. And yes, we have seen prices increase. And I expect that to continue to --

Mr. Leasure, there are no further questions at this time. Please proceed.

All right. Thank you, everyone for joining today's call. It's a lot of great questions, a lot of information. Our team looks forward to what the future holds for Inotiv. We've positioned the company for strong growth. And I'd like to thank our investors for being part of this journey with us. We understand our industry has faced some challenges and some changes. We've made adjustments to address these challenges. We also believe that we have substantial opportunities going forward, as all of our efforts to date has significantly enhanced our capabilities in the marketplace. Moreover, our capital investment program has largely been accomplished already and we expect lower CapEx spend as a percent of revenue going forward, and completing the necessary infrastructure upgrades to the business, we now have the advantage of both scale and in house capabilities. We believe that we can continue to effectively increase our sales volume through greater cross selling to our existing customers while developing relationships with new customers alike. We are now well positioned to better control the timing of start and delivery of projects, as well as to provide high levels of customer service of all times. We look forward to the next call, and seeing many of you at upcoming Healthcare Investment Conferences. Thank you and I may add one more. Happy birthday, Robert. Thank you very much.

Thank you, ladies and gentlemen. That does conclude our conference for today. Thank you all for participating. You may all disconnect.