Inotiv, Inc. (NOTV) Q4 2024 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to today's Inotiv Fiscal 2024 Fourth Quarter Financial Results. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question-and-answer session. [Operator Instructions] Today's conference is being recorded. [Operator Instructions] It is now my pleasure to turn the floor over to Steve Halper.

Thank you, Margery, and good afternoon, everyone. Thank you for joining today's quarterly call 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 will also discuss certain non-GAAP financial measures in an effort to provide additional information for investors. Definition of these non-GAAP measures and reconciliations 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 yet, you can do so by going to the Investors section of Inotiv's website. Joining us from the company this afternoon are Bob Leasure, President and Chief Executive Officer; and Beth Taylor, Chief Financial Officer. John Sagartz, Chief Strategy Officer, will join us for the question-and-answer portion of this call. Bob will begin with some opening remarks, after which Beth will present a summary of the company's financial results for our fiscal fourth quarter and full-year ended September 30, 2024, and then we'll open the call for your questions. It is now my pleasure to turn the call over to Bob Leasure, CEO. Bob, please go ahead.

Thank you, Steve, and good afternoon to everyone joining our call today. Fourth quarter was again productive for Inotiv. We accomplished many of our goals during the quarter, and believe we are good position falling into 2025. As you are aware, during 2024, we experienced volatility within our earnings and cash flow. Volatility was mainly related to challenges in our NHP business within the RMS business model, but we also saw continued conservative spending within the biotech industry. The initiatives we put in place over the last year were designed to reduce risk and address volatility, improve the customer experience, and draw new customers to the business, all while enhancing our cash flow model in calendar 2025. I'd like to spend a few minutes on our fourth quarter '24 results and fiscal '24 highlights. For the fiscal 2024 fourth quarter, total revenue was $130.4 million compared to $105.8 million in the third quarter of 2024, representing a 23% increase in quarter-over-quarter revenue, though it was down 7.3% compared to the fourth quarter in fiscal 2023. During the fourth quarter of 2024, in the RMS business, we continue to make progress improving our North American transportation and distribution systems. We also completed the RMS site consolidation and facility improvements we announced almost two years ago as we completed the closure of our Blackthorn facility in the U.K. and the planned investments in our U.K. Hillcrest facility. We saw a significant increase in NHPs sold in Q4 compared to Q3 as we more than doubled the number sold in Q3. During Q4, we sold much of our higher cost NHP inventory, which impacted margins in the quarter, and will continue to impact margins in Q1 of fiscal 2025. We also already have strong commitments for purchases from both existing and new customers for calendar 2025. Within the RMS business, we also saw strong performances in the NHP colony management services, the diet, bedding, and enrichment business line, as well as our European and U.K. RMS business lines. DSA revenue and operating income decreased in Q4 2024 as compared to Q4 2023 due to safety assessment study mix and lower discovery service revenue. However, DSA revenue and operating income were relatively consistent in Q4 2024 compared to Q3 2024. From Q3 2024 to Q4 2024, we saw a continued trend of strong revenue for new services at our Rockville facility, and a decrease in revenue related to discovery services. On the operational side, we continue to drive efficiency which allowed us to further reduce our general and administrative expenses on a year-over-year basis. While we made some incremental improvements to the balance sheet this quarter, we continue to evaluate opportunities to improve our balance sheet further and enhance our liquidity. In Q4, we still saw some of the same trends experienced in previous quarters, which we monitor closely, and continue to navigate through. These include overall general business conditions in the biotech industry, impacted and created price pressures in our business. Although biotech funding in the market increased in the first nine in calendar 2024, we believe that the reduced biotech funding in the market during 2022 and 2023 and the increased cost of capital has continued to influence our clients' spending patterns for early stage research and development. Now, let me provide some comments on what we are seeing in the market today and some forward-looking thoughts on our different business segments. We expect biopharma companies in the short term to continue to take a restrained conservative approach to the preclinical pipeline products in order to prioritize the use of capital to their most important projects. We will continue to capitalize on our innovation and scientific expertise to assist our clients in the improvement of speed, of product development and achieve the appropriate economic returns. We are emphasizing our efforts on growing our existing customer base through cross selling our broad portfolio of products and services and attracting new customers to gain market share. We believe the additional investments we've made in our sales team in 2024 will continue to benefit us in fiscal 2025. For the 12 months ended September 30, 2024, net new orders for DSA were ahead of the prior year's pace by approximately 5%. We are pleased we've been able to accomplish this in spite of industry price pressure that we've seen in fiscal 2024 and an approximate 11% decline in revenue and 23% decline in orders in Discovery business. In the RMS segment, we're optimistic that we will see reduced volatility in 2025. We have added new customers and based on our pre-sales of NHPs and demand for Colony Management Services, we are cautiously optimistic about increased NHP related revenue in calendar '25. We have expanded our NHP supply base and continue to work with our existing and newly qualified NHP suppliers in multiple countries. Critically, we continue to audit them for animal welfare, health standards and compliance related matters and will not source from suppliers who do not or cannot meet those standards. In the RMS non-NHP business in 2025, we will initiate the next phase of our site optimization program to further improve and consolidate facilities in the U.S. This next phase is another important program which is projected to eliminate another $4 million to $5 million in operating expenses and further improve our RMS margins when completed. Most of these financial improvements are not expected to be seen until fiscal 2026. We also believe we can achieve another $500,000 to $1 million in cost reductions from our continued integration of our North America transportation and distribution system. We're confident going into 2025, but recognize there are geopolitical market conditions, risks and uncertainties. In 2023 and '24, we incurred several challenges as did some of our customers and others in our industry. As a company, I'm proud of our people, our leadership, board, suppliers, customers and lenders who work together to address these challenges creating a stronger foundation for our business going into 2025. As we overcome the challenges we've faced over the past two years, we believe our business is well positioned for the future. We have continued to integrate our acquisition to optimize our facilities as we have also implemented several initiatives to mitigate these risks and related challenges. We have lowered our cost, improved our service and responsiveness to our customers. Inotiv is well positioned as a midsized full service CRO and provider of research models diet bedding enrichment products and services. We remain committed to building a business that will create value for our customers, employees and our shareholders and look forward to 2025. With that, I'll turn the call over to Beth who will provide a more detailed synopsis of Inotiv's results for the quarter and full-year.

Thank you, Bob, and good afternoon, everyone. For the fiscal 2024 fourth quarter, total revenue was $130.4 million compared to $105.8 million in our third quarter 2024 and $140.7 million during the fiscal 2023 fourth quarter. Compared to Q3 of 2024, we saw our RMS revenue increased $24.2 million or 39.3% and our DSA revenue increased $0.4 million or 0.9%. Compared to Q4 of 2023, we saw a decrease in total revenue of 7.3%, primarily due to an 11.2% decrease in DSA revenue and a 5.2% decrease in RMS revenue. We actually saw a 177.9% increase in the number of NHPs sold in Q4 2024 compared to Q3 2024 and a 48.9% increase in the number of NHP sold versus Q4 of 2023. The NHP average selling price in Q4 2024 was 7.7% higher compared to Q3 of 2024 and the NHP average selling price in the current quarter compared to the prior year period was down approximately 33.4%. 2023 RMS revenue also included revenue of $1.7 million from our Israeli operation, which was sold in August of 2023. For the 12 months ended September 30, 2024, consolidated revenue was $490.7 million down 14.3% compared to $572.4 million for fiscal 2023, mainly due to the decrease in NHP sold in Q2 and Q3 of fiscal 2024 as well as a decrease in NHP pricing and the sale of the Israeli businesses in August of 2023. DSA revenue in the 2024 fourth quarter was $44.6 million compared to $44.2 million in Q3 of 2024 and $50.2 million in Q4 of 2023. The decrease in the DSA revenue from prior year period was primarily driven by a decrease in general toxicology services due to a change in study mix and a decrease in discovery services revenue as a result of lower overall biotech activity in the market. These impacts were partially offset by growth in the newer service lines at our Rockville, Maryland facility. DSA revenues for the 12 months ended September 30, 2024 was $180.1 million, 2.7% lower compared to prior year revenue of $185.1 million. The decrease in DSA revenue was primarily driven by a $5 million decrease in discovery services revenue as a result of the decline in overall biotech activity in the market. Overall, net new DSA orders this quarter were $33.7 million versus $32 million in the same quarter last year. For fiscal year ended September 30, 2024, we booked net new orders of $173 million versus $165.2 million for the 12 months ended September 30, 2023. The conversion rate in the 2024 fourth quarter was 33%, slightly down from 34% in the prior year period. The DSA cancellations and negative change orders in the 2024 fourth quarter were approximately 32% lower compared to the prior year period and in fiscal 2024 were approximately 16% less than in fiscal 2023. RMS revenue for the fiscal fourth quarter increased $24.2 million or 39.3% compared to Q3 2024 and declined by 5.2% to $85.8 million compared to $90.5 million in the same fourth quarter of 2023. The decrease in the fourth quarter 2024 compared to the same quarter in 2023 was due to lower NHP related product and service revenue mainly as a result of pricing. Additionally, in Q4 of fiscal 2024, there was a decrease in RMS revenue as a result of the sale of our Israeli businesses in Q4 fiscal 2023 with the remaining decrease primarily due to a decline in small animal model sales. For the 12 months ended September 30, 2024, RMS revenue was down 19.8% to $310.6 million compared to $387.3 million in fiscal 2023. The decrease was primarily due to the negative impact of lower volumes and lower pricing of NHP sales of $60.4 million and lower revenue as a result of the sale of our Israeli business in fiscal 2023 of $10.6 million. The remaining decrease in RMS revenue was due primarily to decreases in small animal sales and RMS services in the U.S. due to lower demand, partially offset by an increase in diet, bedding, and enrichment product sales and an increase in small animal sales and services outside the U.S. Regarding NHP pricing, we indicated on our past conference calls that NHP prices were coming down from the highs we saw in Q4 of fiscal 2023 and the first two quarters in fiscal 2024. As noted, above the average sales price of NHPs did increase slightly in Q4 of 2024 compared to Q3 2024. As we sold higher cost NHPs that were purchased in late calendar 2023 and early calendar 2024, we saw lower margins in fiscal year 2024. Now that we have worked through much of our higher cost NHP inventory, we believe our RMS margins in calendar 2025 should begin to improve. Overall, operating loss for the fourth quarter fiscal 2024 was $13.2 million and improved from operating loss in Q3 fiscal year 2024 of $20.8 million. The operating loss in the fourth quarter of 2024 compared to operating income of $2.5 million from last year's fourth quarter was primarily due to lower NHP margins on increased costs and reduced revenue, and lower DSA margins on reduced revenue. These items were partially offset by decreases from the impact of the sale of our Israeli businesses, decreases in restructuring costs, transportation costs, and costs related to sites closed in connection with our site optimization plan. Operating income for our DSA segment in the fourth quarter was $1.9 million or 1.5% of total revenue compared to $6.8 million or 4.8% of total revenue in last year's fourth quarter. Operating income for our RMS segment in the fourth quarter was $1 million or 0.8% of total revenue compared to $11.8 million or 8.4% of total revenue in last year's fourth quarter. Consolidated net loss attributable to common shareholders in the fourth quarter of fiscal 2024 totaled $18.9 million or a $0.73 loss per diluted share. This compared to consolidated net loss attributable to common shareholders of $9.7 million, or $0.38 of loss per diluted share in the fourth quarter of fiscal 2023. For the fourth quarter, adjusted EBITDA was $5.4 million, or 4.1% of total revenue, compared to $23.7 million, or 16.8% of total revenue for last fiscal year's fourth quarter. For the 12 months ended September 30, 2024 adjusted EBITDA was $18.2 million or 3.7% of total revenue compared to fiscal 2023 adjusted EBITDA of $65.8 million or 11.5% of total revenue. Consolidated net loss attributable to common shareholders for the 12 months ended September 30, 2024, totaled $108.4 million or a $4.19 loss per diluted share. This compared to consolidated net loss attributable to common shareholders of $105.1 million or $4.10 loss per diluted share for fiscal 2023. Non-GAAP operating income for our DSA segment for the fourth quarter was $7.4 million or 5.6% of total revenue compared to $12.6 million or 9% of total revenue in last year's fiscal year's fourth quarter. Non-GAAP operating income for our DSA segment for fiscal 2024 was $30.3 million or 6.2% of total revenue compared to $38.6 million or 6.7% of total revenue in fiscal 2023. As our new DSA services come fully online and we begin to fill newly added capacity, we believe we will see margin improvement through operating leverage. The book-to-bill for DSA in the fourth quarter of fiscal 2024 was 0.78 times to 1. Our full-year fiscal 2024 book-to-bill was 0.99 times to 1. DSA backlog was $129.9 million at September 30, 2023, compared to $132.1 million at September 30, 2023. In our RMS segment, non-GAAP operating income in the fourth quarter of fiscal 2024 was $12.7 million or 9.7% of total revenue compared to $24 million or 17% of total revenue in last year's period. In our RMS segment, non-GAAP operating income for fiscal 2024 was $44.3 million or 9% compared to $88.9 million or 15.5% for fiscal 2023. Again, the NHP pricing and margins in the sale of our Israeli businesses in August of 2023, partially offset by favorable cost reductions related to a structuring cost accounted for most of these changes. Interest expense in Q4 2024 increased to $12.3 million, up from $11.3 million in last year's fiscal fourth quarter due to an increase in interest rates, additional second lien debt, and periodic growth on our revolving credit facility. Our balance sheet as of September 30, 2024 included $21.4 million in cash and cash equivalents as compared to $35.5 million on September 30, 2023. Total debt, net of debt issuance cost as of September 30, 2024 was $393.3 million compared to $377.7 million as September 30, 2023. This includes $110 million of convertible notes as of September 30, 2024, and our new second lien debt of $17.8 million. Net cash used in operations for the 12 months ended September 30, 2024 was $6.8 million compared to cash provided by operations of $27.9 million in fiscal 2023. Cash used in operations during fiscal 2024 included $6.5 million paid under the resolution agreement with the DOJ. In October 2024, we entered into a Third Amendment with the seller of OBRC and extended the note payable to January 27th of 2026. The Seventh Amendment to our credit agreement entered into on September 13, 2024, established a maximum capital expenditure limit and a minimum adjusted EBITDA test effective September 13, 2024. It waived the previously existing financial covenants from the date of the Seventh Amendment until June 30, 2025, and established additional new financial covenants for quarters starting June 30, 2025 and thereafter. Capital expenditures in the fourth quarter were $5.3 million, or approximately 4.1% of total revenue. For the 12 months ended September 30, 2024, capital expenditures were $22.3 million, or approximately 4.5% of total revenue, as compared to $27.5 million, or 4.8% for the fiscal year 2023. The capital expenditures reflect investments in facility improvements, finalizing the Hillcrest, U.K. site expansion, enhancements to laboratory technology, improvements for animal welfare and system enhancements to improve the client experience. In terms of our capital improvements in site optimization plans, I'm pleased to report that we've completed the investments and initiatives started mid calendar year 2022. We expect to spend less than 4% of revenue for CapEx in fiscal 2025. With respect to guidance, as you know, we withdrew our fiscal 2024 financial guidance after we reported fiscal Q2 2024 results. While we're so good about the progress we made in the most recent quarter, we are not providing fiscal 2025 guidance at this juncture. We hope to provide guidance once we have greater clarity on the market and customer demand. Management has developed a comprehensive fiscal 2025 annual operating plan designed to continue to optimize our capital allocation and expense base, and improve our operating results, as discussed above. The plan forecasts compliance with the updated covenant under our latest amendment to the credit agreement in September 2024. And with that financial overview, we will turn the call over to our operator for questions.

Thank you so much. [Operator Instructions] We'll take our first question from Frank Takkinen from Lake Street Capital Markets. Please go ahead.

Hi. Thanks for taking the questions. Congrats on the all progress. Was hoping to start with one clarifying question really around gross margins in NHPs. Anything you can do to help quantify exactly how much of a headwind it was that quarter. The reason I'm asking is it seems like there was really good sequential improvement in both volume and units. And I think that that gross margin is just lagging because of some of that higher dollar old inventory, but anything you can quantify in there to give us a feel for what that gross margin may mature into once we get into a more normalized environment?

I don't have a way to do that off the top of my head. Beth, if you have a way that you can articulate those, but I'm guessing we were probably half -- at least half of what we would normally achieve. Beth can you see that?

Yes, if we look quarter-over-quarter this '24 fourth quarter to last year's, we were about half of the margin percentage and dollars.

Yes, and it was important for us to move that out when we needed to move the higher cost inventory, but too, from a space standpoint, we really needed to start bringing in additional lower cost inventory. And we really need to move that to make room as our bottleneck is how much boarding capacity we have. So, it was important that we could move that out. The market was there, demand was there, so we were able to move those out.

Okay, got it. And that was going to be my second-half, it feels like we're seeing that really stabilize. What can you say about 2025, can you maybe speak to just how much of the business is now contracted, any inventory commentary from your customers, just any other commentary around that to give us a feel for NHPs next year?

Well, yes, the NHP business is one we have definitely pre-sold more going into '25 than we did going into '24. And that includes multiple new customers. In addition, what we've really done a pretty good job with over the last couple years is growing our colony management services, and it's mainly boarding and services related around that. It's been growing the 20%-25% a year, which is very good reoccurring revenue for us. So, we've been expanding those boarding capabilities and services. So, we expect that will continue to grow next year. So, I think for us it's important that we see a more consistent reoccurring sales base as we have -- really we had two weak quarters. It was our fiscal Q2 and Q3 of last year that somewhat caught us by surprise and had lower demand. And we're working with our customers this year to make sure that that does not happen. And I think we're doing a better job of communicating with them. So, I think we'll see a much more consistent demand cycle. And I think what we sold last quarter should be more of a reoccurring quarter going forward. I think we will still have some depressed margins in our fiscal Q1, the quarter we're in today. But after that, I think we will be much more normalized base, much like we probably saw in '22 and early '23.

Okay, that's helpful. And then, maybe just for my last one, a bigger-picture question. I know, in the past, you've talked to adjusted EBITDA margins maturing over a longer period of time into the 18% to 22% range. In light of all the site optimizations you've done, the contracted NHP business, do you feel that that 18% to 22% target is still a reasonable, we'll call it, midterm target over time for the business to mature into?

I do. I think to get to the higher end of that, we'd have to see some recovery in the industry, because there's some pricing pressure right now and some volume issues, because I think of the overall demand in small animals in some of those areas. But if you look at where we're going to see our improvements next year because of some of the site optimization things that we did, what we're seeing in our diet enrichment business, what we're seeing in U.K. and Europe, what were the costs we're able to take out in transportation in the U.S., combined within our improvements in the NHP business and then what we're seeing in our DSA business currently. And I do expect we'll probably see some recovery in the DSA business next year, one from new services, and from some of the other things that we've been able to grow. So, anyway, I'm optimistic that we'll be able to get back to that 18% to 22%, but I think to get to the higher end of that, it's going to require recovery in the industry.

Perfect. That's helpful. I'll stop there. Thank you.

Thank you. Our next question comes from Matt Hewitt from Craig-Hallum. Please go ahead.

Good afternoon. Thank you for taking the questions. Maybe first up and I appreciate that you're not providing guidance, but is it safe to assume that we should anticipate growth in '25 off of 2024s kind of a low watermark?

Yes, yes, I think just on the NHPs, we'll see some growth. I think we'll also see it in diet, bedding and enrichment. We'll see continued growth I believe right now in U.S. and in, say, U.K, in Europe. So, those and it wouldn't surprise me completely that we see growth next year in the discovery. I think I believe that we're hopefully seeing the bottom of that and starting to see some maybe some recovery. So, I think we will see growth in all those areas. I don't think we'll see a lot of growth in pricing. I think it will be mainly in the NHP business. I think it will come mainly from volume.

Got it. That's helpful. Thank you. And then, I just want to maybe touch on the price. It's come up a couple of times. Obviously, you're seeing some price competition. Are you being forced to match to retain or even pick up some incremental share? Or are you able to kind of highlight your white glove treatment of customers and so you're not having to perfectly match? You can maybe have to come down a little bit, but you're still able to retain or pick up incremental share because of the treatment and your strong customer relationships?

Well, I think pricing is coming down for a couple of reasons. One, pricing is coming down because the NHP prices have come down and so people's costs have come down. And second of all, I think there's been some margin compression also. So, I think in general there's been some pricing. And that's mainly in the DSA business, more so than the other businesses. But I think the NHP business also drove some of that pricing down.

Got it. Okay. And maybe one last one for me and I'll hop back into the queue. But I just want to mesh a couple of comments. So, I think earlier in your prepared comments, Bobby, you had stated that the higher cost NHPs are going to impact gross margins for that segment in '25. And then, Beth, you commented that you're expecting RMS gross margins to improve over the course of '25. Is that kind of as you were just alluding to Bob, maybe first quarter, you've got some of that higher cost inventory that you have to kind of get through. Once you're through that, you should start to see some lift in gross margins over the remainder of the year. Am I hearing that correctly?

Yes, Matt. I think what we're saying is that we think that there'll be some margin pressure in this quarter, but what we will see in calendar 2025 should be much stronger.

Got it. All right. Thank you.

Yes, I think it was a calendar versus a fiscal issue. But we're fairly optimistic going into calendar '25, but we want to make sure that what we have left, we have kind of clear out in this quarter.

Got it. All right, thank you.

Thank you. And with no further questions, I'd like to turn the call back over to Mr. Bob Leasure for any closing remarks.

All right. Well, thank you everyone for joining today's call. I think our site optimization, integration, ability to reduce our third-party expenses and presales of NHPs have put us in a much better position going into our fiscal 2025. In 2025, we will continue to build Inotiv as a high-touch flexible provider with strong scientific capabilities focused on our customer needs. We will continue to pay attention to the details. Our metrics related to customer service, quality, and delivery are continuing to improve, and we continue to get better every day. We are still a young company in our industry, and believe our best days are ahead. And thank you for your time today.

Thank you. And ladies and gentlemen, that does conclude today's program. Thank you for your participation. You may disconnect at any time.