Greetings, and welcome to the Inotiv's Fourth Quarter and Full Year 2023 Earnings Call. At this time, all participants are in a listen-only mode. A 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 Bob Yedid, Investor Relations. Thank you. You may begin. Great.

Great. Thank you very much, Doug. And thank you, everyone, for joining today's call with Inotiv’s management team. Before we begin, I'd like to remind everyone that some of the statements that manage will make on the 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 achievement to be materially different from those projected. Any such statements represent management's expectations as of today's date. You should not place any undue reliance on these forward 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 today. If you haven't obtained a copy of today's press release yet, you can do so by going to the Investors section of the company's website. Joining us from the company today are Bob Leasure, President and CEO, Beth Taylor, Chief Financial Officer, and John Sagartz, 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 your questions. With those prepared remarks, it's now my pleasure to turn the call over to Bob Leeser, CEO. Bob, please go ahead.

Thank you, Bob, and good afternoon, everyone. As we head into the end of the year and the holiday season, on behalf of the Inotiv team, I want to wish everyone a warm welcome to our Q4 earnings call. I can confidently say that 2023 has been a year of operational success and transformation. The Inotiv team collectively expanded our full service pre-clinical CRO service capabilities, offering a growing customer base, nimble solutions and custom capabilities. In addition, we also executed on a plan to integrate and optimize our research models facilities, which provide stronger foundation for future operational efficiencies and performance of that business. Since 2018, we believe that the best course of action for generating strong long-term shareholder returns was to transform and build our business with aspirations to become a competitive leader and in the industry as a global preclinical CRO. Now in less than six years, through both acquisitions and adding new services organically, we've expanded our discovery and safety assessment or DSA capabilities, as well as the RMS business, growing the top line from $24 million to $572 million with annual revenues -- annual revenues, which is where it stands today, producing a compounded annual growth rate of nearly 70% in this time period. Today, amidst market challenges across the CRO and biotech industries, we continue advancing our businesses, integrating our acquisitions, and right-sizing our operational footprint, all while expanding Inotiv’s global service offerings. We understood that achieving our goals would not happen overnight and we've been able to maintain focus on our long-term vision. We've made significant investments and our business continue to build on the comprehensive suite of products and services we can offer to our customers across the drug development continuum from early discovery to bringing a new medicine and products to…

Thank you, Bob. Our fiscal year ended September 30, 2023. Revenues totaled $572.4 million, a 4.5% increase from the $547.7 million recorded during fiscal year 2022. RMS revenue for 2023 increased 1.3% to $387.3 million from $382.4 million in 2022. In RMS, we continue to operate in an extremely dynamic pricing environment for larger research models, in particular the NHPs. DSA revenue increased 12% to $185.1 million in fiscal year 2023 as compared to $165.3 million in fiscal year 2022. The increase in DSA revenue was primarily driven by additional fiscal year 2023 revenue, generated from integrated laboratory systems that was acquired in January 2022, plus new services related to genetic toxicology and favorable pricing 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 fourth quarter, total revenue decreased 6.5% to $140.7 million from the $150.5 million recorded during the prior year period. DSA revenues increased by 13.6% to $50.2 million when compared to the prior year period of $44.2 million. As previously mentioned, the higher revenues experienced in our DSA segment were primarily driven by new services related to genetic toxicology and favorable pricing in general toxicology services, which were partially offset by declines in discovery services, which were impacted by lower biotech funding. RMS revenue for the fiscal fourth quarter was down 14.9% to $90.5 million year-over-year mainly due to a reduced volume of NHP sales, somewhat offset by favorable pricing over several products, particularly NHPs. Consolidated net loss attributable to common shareholders in the fourth quarter of fiscal 2023 totaled $9.7 million or a $0.38 loss per diluted share. This compared to consolidated net loss attributable to common shareholders of $244.2 million…

Thank you. Ladies and gentlemen, at this time we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Tim Daley with Wells Fargo. Please proceed with your question.

Great, thanks. So, I think it's just a good place to start off. I know I'm getting a bunch of inbounds on this. So the guidance for RMS in 2024, I know you guys are thinking, initially NHP volumes will be down, but can you just help us understand the price volume dynamic there? So roughly flat, slightly down revenues. Is that down 20% on volumes, offset mostly of price? Order of magnitude would be really helpful here.

Hey, Tim. A couple of things. One, I think I indicated, we thought our Q1 volumes would be down versus Q1 of last year. Overall, year-over-year, I'm not sure that we will see a decrease in volumes over the 12 month period. I think what we could see and what we're expecting to see is a reduction in price. So the guidance that we're providing is probably more based on a price reduction than it is a volume reduction. We saw pretty good price increases last year. I think the price increases have slowed down. And I think that we will begin to see additional imports coming into the market next year. As I indicated, we had a new supplier, we have a couple new suppliers coming on board. I think we will have some increase in volumes, but I also think others will have increase in volumes, which could start to see decreasing in pricing and margins. So I think that's what we are anticipating. It's probably not happened yet, but that's kind of what we're looking for in Q2, what our fiscal Q2 would be through the rest of the year. So it's not a predictable market. It's not a real sophisticated market, but it's our best guess at this moment, and we want to be cautious going into the year.

I appreciate that. And then my second question here is on discovery, specifically, just drilling into that. So a bit more common positive tone on the discovery outlook than kind of most in the general kind of field we're getting out of the industry. So I know you guys have taken some idiosyncratic steps to help yourself in discovery, but could you just help us frame how much was discovery down this year overall? Maybe kind of what did that get worse or better in terms of the declines in the fourth quarter? Just any additional help here would be really helpful and thanks again everybody. Appreciate the time.

Sure, Tim. So for the year our discovery sales were down about 10% from the prior year. So we anticipated to see some growth. It was actually down. So we were probably down $9 million or $10 million in sales in discovery from where we expected a year ago. It was one of the big -- one of the misses we had for last year in addition to some of our legal fees that we've talked about previously. So we've kind of looked at this closely, because we also built up some capacity. The worst quarter, I think, was our quarter in the June 30, which would be our third quarter, was down the furthest. And we saw -- we didn't know some of that could have been related to Silicon Valley Bank because we have over 10% of our customer base is -- which we went back and evaluated at the time that that collapse occurred that we had over 10% of that discovery base was doing business at Silicon Valley Bank. And we think that did impact the quarter into June 30th. We saw that begin to rebound in July of this year. And again, the question was, was some of that rebound because the Silicon Valley Bank was getting solved and people had gotten access to the cash, and could that be maintained? Through the last four or four months, we've been able to see that our quoting and our awards have been up in excess of -- now of course, we're going over a comp last year that was a little bit lower, but they've been up -- they've been up in double digits from where they were a year ago, more than making up the 10% decline. So that is -- that's going through this week and, and is -- or through last week, I should say, is the latest that I have available. So it's good to see and I hope we can see that trend continue. So we've put some effort -- we've put some effort towards that. I think it's starting to pay off and maybe the market's beginning to recover, but we'll wait and see what happens over the next quarter. But so far, it's been a positive 10 to 12 months and the increase is in excess of the decrease we saw last year.

Great, thank you. Appreciate it.

Our next question comes from the line of Frank Takkinen with Lake Street Capital Markets. Please proceed with your question.

Perfect. Maybe I'll start with one on the book-to-bill. I heard the comment around higher cancellations in line with the trend that's been occurring over the last couple of quarters. Can you maybe bring us a little bit deeper into where some of those cancellations reside, if it's a specific customer profile, and then talk a little bit more about the backlog, if you've looked into that in depth and understand if there's any heightened cancellation risk within that backlog and the expectations for cancellations as we look at fiscal year 2024?

Yes, Frank. We did have a couple large jobs that cancelled in our fiscal Q4, which drove those cancellations up to significant $10 million, $15 million of our backlog and it’s back into those numbers of what we provided, it's close to $15 million. It's pretty significant. And some of those were pretty big. And it also generated some cancellation charges, which benefited our quarter. So, that was a big quarter. We actually have changed some of our internal processes of how we communicate, look, and track those. Today, though through this quarter, it's down significantly. We're down over half of that. As a matter of fact, it could be closer to 25% of that rate that we're seeing. It's a significant drop off. Not saying that that will be the way the quarter ends, but looking at we're not aware of anything. We have cancellations, but we're not aware of anything significant like we had last quarter. And right now, we're not seeing the high cancellations, but I will say we are at times having people call in and delaying, so something that was going to start, in December they may want to start move the start date into February or February after June. And some of those things can cause some pressure on our quarters. But we're not seeing cancellations near like we saw, I would say, for the last four or five quarters. So that's encouraging. We also don't have the backlog going out two years like we did a year ago. We may now be looking at backlogs that go out six to 12 months, not 12 to 24 months. So some of that has a little bit to do with it. And as I say, they don't cancel, but they may delay. So we'll see where that goes. But right now, this quarter is looking fairly positive for book-to-bill compared to prior quarters.

Okay, that's helpful. And then maybe just for my second one to circle back to the NHP dynamic. I heard the comments around a new supplier coming on board and the expectations for more in 2024. Can you help level set us just on where we are from a quantity basis? I was a little surprised to hear that prices may be coming down. I figured we would still be in a very supply constrained environment, but maybe some of these suppliers are bringing on more volume than anticipated. So I don't know if there's anything quantifiable you can provide, just how significant some of these new suppliers can be and what kind of supply we could see in 2024 versus previous years?

Yes, this is, again, just our opinion. I don't have anything quantifiable. I can't tell you on the world market, there are additional farms that are increasing and have been for the last several years increasing their breeding and their availability of NHPs. So I think the population on the world market may be increasing. And if you look over the last year, it's been a year since the Cambodian imports were taken out of the US market. But they're still going everywhere else in the world. So they're still available on the world market. They're just not available to the US. And many people are still importing or using Cambodians. We just are -- we are not at this time. So we're just looking at and seeing, okay, we think that we have -- some people have found supply. It's had a year to adjust. They found ways around it. And we're expecting that some of the pricing that went up last year may not stay at that level. So we'll see how that evolves in fiscal Q2 and Q3. But yes, we have additional suppliers. We feel like our volume could, as I said earlier, we may be able to achieve the same volume we did last year, but I'm just not sure that the margins will stay the same. On the world market, I will also say that I think some of the pricing will begin to come down as that capacity is out there. And then there's still the unknown what will happen with China and then the unknown what could eventually happen with Cambodia. So with those things being out there we felt at this point. And if that capacity comes on the market, it would put additional price pressure. With those issues being out there over the next 12 months, a ton of the opposite trends that we saw 12 months ago, and we thought this time we should be fairly cautious. We don't have anything for sure and we don't have anything that we can definitely point to from a quantitative standpoint, but at this point we wanted -- we want to be cautious about what we're saying, how that market could turn out.

Got it. Okay. That's good color. Thanks for taking the questions. I'll stop there.

Thanks Frank.

Our next question comes from the line of Matt Hewitt with Craig Hallam. Please proceed with your question.

Good afternoon, and I guess congratulations on kind of pushing through here over the past year. I know it was not an easy environment. Maybe the first question regarding gross margin and EBITDA margin, How should we be thinking about the progression over the course of this year? It sounds like Q1 is going to be off to a strong start and then maybe we start to see some pricing pressure weighing on those margins as the year progresses? Or can volumes help offset that so that you could maybe even see flat to up a little bit as the year progresses on those two lines? Thanks.

First, start with Q1. I think Q1 typically has been our slowest quarter of the year. Last year, I think we're coming off a base of Q1 was only $122 and it's -- at that time we it was down because we stopped selling the NHPs and then this year I think the NHP volume will be less than last year. That being said, I think we'll exceed the $122 million, because some of the NHP pricing still is staying strong this quarter. I think we'll see again continued reduction of expenses in our RMS business and I think we'll continue to see hopefully some improved margins from our DSA business on sales growth in the DSA business. But typically, this is our slowest or lowest quarter. So I'm not looking for anything really great out of Q1, but it sure exceeded last year, which put a lot of pressure on us for the rest of the year and put a lot of pressure on our trailing 12. So, I hope to eliminate that. As far as the rest of the year, again, a lot of that will depend on where the NHP margins come out and what -- and what do other people do in terms of imports. But I don't see it changing a whole lot from last year. I think it's still -- eventually we're still going to be back in the $20 million plus EBIT dollar range. I think we still -- if you look backward, now $23 million [indiscernible] $23 million, seven out of the last eight quarters if you take out the Q1. And I think, I don't know that we'll see that in Q1, but I think if you look at the average going beyond that, I think it'll continue to be fairly strong for us. And I do hope we'll see some of the margins improve from the other businesses, but you know the NHP is less predictable at this time.

Got it. And maybe one additional question regarding bringing the transportation in-house. How complex of a process is that and how much will that help margins once you get that fully integrated? Thank you.

That was the release we made, I think, last week. And this is something that we think is important to service. And there will also be another way to pay an expense. But the importance of service is our drivers are the face of our business. Many times they interact with our customers. They deliver the product. They get feedback. And we would like to drive a closer relationship between our drivers, our customer service, and our salespeople and our customers to enhance the service and the feedback. So we know what we can do to do better and become closer to that experience. Second of all, I do think that there's some duplication of costs between the two companies and the supplier we are using was doing a nice job for us. I don't have anything naked to say about it, but I think there are some duplication of cost that we could eliminate as we do this transition. And I'm very pleased that they're willing to help us and work with us to transition this service back to us in-house. But things such as insurance and audits, professional fees and some of the qualities, some of the things that there's some duplicate costs that will probably come out. So, ultimately, it could save us a few million dollars, $2 million or $3 million more as we get that implemented. I'm very, very pleased with their ability to work with us. We went to all of their sites on Friday. We have 11 distribution facilities where our people went to all 11. We interviewed the people. We interviewed the drivers. They have a lot of very good people. Within 48 hours we had a majority of their team have already applied for jobs with us and we were moving forward quickly and hope to be able to transition all those people with over the next two weeks. So very pleased working with how this is working out and with their cooperation and I think we'd like to make this as seamless as possible as we go through this process and really again want to appreciate people at Vanguard for understanding this is the direction we want to go and willing to work with us to make sure that this can happen seamlessly and take care of all the people and the suppliers along the way.

Got it. All right. Thank you.

Our next question comes from the line of Dave Windley with Jefferies. Please proceed with your question.

Thank you for taking my questions. [Technical Difficulty]

Mr. Windley, your line is cutting in and out. We can't hear you.

Little better?

A little.

[Technical Difficulty]

You're asking something about 2023?

Yes, I apologize. [Technical Difficulty]

Are you asking what the average price was increase over 2023? I'm sorry, I was trying to—

We're losing you, Mr. Windley.

David, was the question what is the average price increase we saw in 2023 for NHPs? I can't hear him. Doug, can you hear him?

No, I can't hear him either.

Doug, maybe we can just re-pole for questions, see if there's any other questions on the line. And maybe David could dial back in.

[Operator Instructions]

Now, I think we should just wrap up and then turn it over to Bob Leasor.

Mr. Leasure, the call is yours to conclude.

Okay, thank you everyone for joining today's call. I'm going to just quickly, did Dave call back in? No, okay. We believe we've laid out critical groundwork for Inotiv’s success going into 2024. As we continue to effectively execute across our planned initiatives, we hope to see a continued increase in awards for discovery services and reduction in cancellations for the New Year, as well as closing contracts related to the final asset sales as part of our optimization plan. In NHP, we will continue our efforts to qualify new NHP sources and seek to reduce costs in the small animal and diet businesses. We will also continue our efforts to expand our quotes and awards in the DSA business where we have added capacity. We'll validate the new facilities and equipment and seek efficiencies across SG&A. We have improved our operating model significantly and the ability to leverage our current scale and a broad range of products and services. In completing -- as competing as a leading mid-size pre-clinical CRO, we currently operate 24 sites across the US and Europe, serving over 3,000 customers. We support these efforts with over 2,000 professionals worldwide, including industry-recognized experts across a wide range of scientific disciplines, and it is our aspiration to grow our reputation and become a leading CRO provider of choice. As the majority of our capital investment program has largely been completed, we believe we are well positioned to achieve this through increased sales volume driven by greater cross-selling to our existing customers in addition to our enhanced commercial teams capturing new customer relationships. Thank you once again for your support as Inotiv enters this new stage of growth possibilities. Have a good afternoon. We look forward to speaking with everyone on our next call. Thank you.

Ladies and gentlemen, this does include today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.