Good afternoon ladies and gentlemen and welcome to the Inotiv’s Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] This call is being recorded on Wednesday May 15, 2024. I would now like to turn the conference over to Bob Yedid. Please go ahead.

Thank you, Julie, 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 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-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 Company's website. Joining us today 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 Q&A section. Bob will begin with some opening remarks, after which Beth will present a summary of the company’s financial results for the first quarter of fiscal 2024 and the six months ended March 31, 2024 and then we’ll open the call for your questions. With that said, it’s my pleasure to turn the call over to Bob Leasure, CEO. Bob, please go ahead.

Thank you, Bob, and good afternoon to all of you joining us on our call today. Let's quickly run through the broad strokes of this quarter's results as we continue to operate in a mixed industry environment. Total revenue came in at $119 million for Q2 of fiscal 2024, which is down 21.5% year-over-year. Segment top line results consisted of DSA revenues of $46.6 million which was only down $400,000 or less than 1% versus the comparable period a year ago. Revenue from RMS included NHP sales, diets, bedding, small animal models was down $72.4 million in Q2, a decrease of $32 million or 31% from the prior year period. $26.2 million of the $32.1 million decrease was driven by substantially lower NHP revenue. In addition, we have a decrease in revenue of $3.1 million from the sale of our Israel business in August of 2023. Revenues this past quarter were well below our expectations. The lower revenue came in as a result of many of the potential risks we discussed in our last quarterly call coming to fruition, primarily weak demand for NHPs and slower DSA discovery related sales, which were somewhat offset by the growth in our new safety assessment services. 2023 was a challenging funding environment for the biopharma industry and we saw companies reprioritize their use of capital, resulting in product reprioritizations and some cancellations as companies rationalize their R&D spending. In addition, as we have discussed in the past, the industry faced challenges and volatility resulting from U.S. Attorney's Office criminally charging a Cambodian government official on alleged charges of conspiracy to illegally import NHP in the U.S. And our considered decision to suspend Cambodian imports and the subsequent effective industry ban on the importation of Cambodian NHPs into the U.S. in late 2022. This…

Thank you, Bob, and good afternoon, everyone. Before I start, we have one correction to note. The incurred expenses for the investigation related to the Cumberland facility were $19 million not $22 million. Now for the current financial results, for the 2024 second quarter, total revenue was $119 million compared to $151.5 million during the prior year period, a decrease of 21.5% primarily due to a decrease in the number of NHP sold in the current quarter. For the six months ended March 31, 2024, consolidated revenue was $254.5 million, down 7.2% compared to $274.2 million for the same period last year due to the decrease in NHP sold, which was primarily offset by a 3.6% increase in DSA revenue. DSA revenues in the 2024 second quarter decreased by less than 1% to $46.6 million when compared to the prior year period of $47 million. The decrease in the DSA revenue was primarily driven by our discovery services as a result of the decline in overall biotech funding and separately a decrease in medical device surgical services due to cancellations we experienced in the fourth quarter of fiscal '23 and Q1 of 2024 and also delayed projects. Partially offsetting this, we continue to see increased revenue from our new service offerings in genetic toxicology and biotherapeutic analysis in connection with new business at our Rockville facility, plus the timing of general toxicology services. DSA revenue for the six months ended March 31, 2024 were $91.3 million or 3.6% higher compared to the prior year of $88.1 million. The increase in DSA revenue primarily driven by the mix of general toxicology services and continued increases from value added services in connection with new business at our Rockville facility, partially offset by a decrease in revenue related to our discovery services as…

[Operator Instructions] Your first question comes from Dave Windley from Jefferies.

I wanted to start on NHPs. I heard you say that pricing in 2Q was just 2% lower than 1Q. Could you maybe put help us with some numbers around that? Where was pricing at the -- I think you referenced peak of 3Q of your last fiscal year. Where was that? Where is the kind of down 2% in 2Q put you? And then given the low volume that you're highlighting, where is that price moving as we sit here today?

I think the peak was Q4 of last year and Q1 was down 18%. I think we said Q2 is down 2%. So I mean, we'd be down 20% from where it was Q4 of last year. More recently, I've not seen it slip since Q2, but it could. And one of the things that's keeping up is our cost are still high. So you've got to look on the world market to see where the pricing is, where's China, where's Cambodia, where's Vietnam, they're still selling across the world and some of those prices are staying a little bit stronger. But I expect we could see those come down in this quarter and next quarter, depending on what happens in Cambodia specifically. And so we'll just have to see how that goes.

Okay. Bob, so in terms of the revenue in the quarter, I just want to understand kind of your calculus around supply demand. Your revenue was down $26 million I forget the exact percentage, maybe 30% or something like that. Only 2% of that is price, so volume is down a lot. You mentioned costs. I mean the customer.

Our average cost would be higher than last year's average cost and the supply is down significantly and our inventory is also down. But we do have plenty of inventory right now to meet our customers' needs.

And I guess so -- sorry, go ahead. Sorry.

So we did see a very weak second quarter in terms of the units, the number of NHP sold.

And so that's a provocative question. I guess, why not drop price to sell more volume?

I'm not sure that would do it. The challenge is they don't need the volume right now. So could price become an issue? It could. It's not been an issue. The issue has been people have inventory. And so, some that have reoccurring monthly or quarterly shipments did not need any or needed very few just in the last quarter. I believe that we do have some visibility on some of the inventory and the levels. I think they are coming down and I think we're starting to see some of that rebound in some customers, not all customers yet. We also see some customers that have lower demand probably because they have lower orders.

And on the stocking point, these animals have an age window in which they are applicable. They're usable for research studies. So they can't, they being the client can't stock them indefinitely. Help us understand a little bit. I know you talked about selling and then contract boarding for some clients, but in those cases, you would know what you have on property. Help us to understand a little bit how this advance buying and inventory stockpiling of live animals works or worked?

Well, they would they can always take first in inventory be the first out of inventory. So they're quite adaptive managing the age limits that they need. And also remember some animals need mature or some studies need mature animals and some need more immature animals. So there are different there are different ages that may be needed at different times. But that is a customer by customer decision. And we've been able to manage our inventory accordingly.

One more question on NHP and our yield. In your press release this afternoon, you disclosed the NHP related revenue decline and then the cost of revenue in the $7.2 million range. So that works out to about a 72% gross margin. Is that the right gross margin to be thinking about on NHP related revenue?

No. I think that is not. That just shows the some of those indications of that cost didn't go down as much because the average cost per NHP sold went up was higher.

So the year-over-year change is not a congruent of pro-rata change?

I noticed that also yesterday when we were looking at this. That can be misleading. That's not the margin, it's just indicative that the price that you would think it did, the average price was going up.

Your next question comes from Matt Hewitt from Craig-Hallum.

Maybe just a couple more on the NHPs. Regarding Cambodia, it's still unknown what's going to happen there, but let's assume for sake of argument that that market opens back up to U.S. importation. What does that do to the supply demand dynamics and ultimately the pricing?

Well, one, we don't know when and if that will open. And two, I'm not going to sit here and try to predict the future of commodities. I think anything is possible. Again, it's a world market. Remember, Cambodians have been used everywhere but the U.S, still are -- could that help decrease the price of the cost? Yes. Will that -- but second of all, will that impact margin dollars? It could. I think it but right now, I don't think we can sit here and predict commodity pricing. What's important to us is that we need we really need to make this and we have been making it more of a service business than just selling NHP. And we continue to do that with boarding and with breeding. And at some point, yes, we're selling a significantly less amount of NHPs than we did in the past. So it's a matter of margin dollar per NHP, but it's also obviously, you can see it's very dependent on the number of NHPs that we sold.

And then kind of transitioning from there. So I guess and you just touched on it a little bit, but as you transition more customers to the contracts versus the prior year and a half of buying at the spot market, have you had success with that? When do you start to see that materialize from a margin perspective? And I guess maybe that has something to do with inventory, but when does that start to help on the margin front having a more consistent or better visibility via the contracts into the costs associated with those?

Yes. We have had some success and we're working on calendar 2025 contracts. Importantly, right now, we're also working on what is going to be needed at the back half of the year as the inventories start to deplete. Some people have more inventory than others. So I think we will see some of that change also. Longer term and I've said this before is that we want to make sure that we had a business two years ago that was fairly dependent on these NHPs and NHP margins. And I think what we're building right now is a business that's going to be much less dependent on our NHP margins going forward. So we're not -- we probably, will continue focusing on growing margins in our small animal tech lab and DSA business. We're not going to probably see, I don't think, at least we're not going to put in our projections a bit on it, margins ever coming back to what we saw the last two years. If it does, that's great. But I don't think that's not the business model we're going to build. In addition, as I said before, we'd like to see DSA be over 50%, closer to 70% of our business versus 30%-70%. So we'll continue to work that direction and continue to build our services segment and decrease the dependency on NHP margins. And if they happen, that's great. But I don't think that once that's not going to be the business model that we count on for the next five years. The other margins have to continue to grow. If this might have look what we've done. That's why it's important. We can grow that DSA business because I think we'll get with that next $60 million I think we'll see over $30 million of that go to the bottom line. I think with the RMS costs we're taking out, we'll see over $20 million of costs coming out. We see the SG&A costs coming out. You start looking at that and you add up to that $40 million, $50 million, $60 million that's why it's important to get those dollars out. So we're not really as dependent on those NHP margins going forward and that's what we're setting up.

And then maybe last one for me and I'll hop back into the queue. But regarding the early stage discovery work, the delay that you saw this quarter, you're not alone, others have kind of talked about how the funding environment improved or has improved yet these companies are a little bit slower to deploy that capital. We're now into the third quarter for month and a half into the quarter. Are you starting to see some of those dollars flow at this point or anything that you can provide from a color perspective for how Q3 is shaping up?

Yes. I think we've seen safety assessment for ourselves stay relatively strong. I think we sell safety assessment actually has increased probably 8% or 9% year-over-year. It's the discovery that's down 10% plus year-over-year that's really hurting us. And that we saw and we were down from weak comparisons from a year ago. So the discovery is the area where I think where we're seeing the greatest impact in our business and to our margins and our top line. And so we started making those sales changes and how we operate six months ago. Now, I think what we are seeing now is an increase in the amount of customers who are starting to work with us, and then we should hopefully, we'll start seeing an increase in the amount of awards and the size of the awards. But I'm pleased with the progress that the sales team is making. It's not going to happen overnight but they've been very focused. They've done a great job. We are seeing incremental new customers. We're starting to see some of the size increase. Will that happen overnight? Will we see that next quarter or two quarters out? That's hard for us. That's why we're not giving that guidance right now. But we are seeing some momentum.

[Operator Instructions] Your next question comes from Frank Takkinen from Lake Street Capital Markets.

I'll also start with one on the NHP business. Maybe just from a higher level Bob, trying to market. Obviously, supply is constrained and some heard the comments about some of the business moving overseas. If we're thinking about just the U.S. market, what's kind of the quantity change of NHP is being used in the U.S. last year versus maybe kind of thinking about projections for this year? And I know it's going to be tough to track exactly, but maybe a percentage reduction estimate would be a good way to be thinking about it.

Frank, the information I have that we look at is coming from the USDA. And I think if you look at it in broad terms and I believe was it in the 30,000 plus NHPs imported in '22. And I think it dipped down to, like, 19,000 in '23, into the U.S. And so that's a pretty substantial I think reduction. And then we found, I think, some of the inventories did not really go down and some of our customers' inventories may have actually increased. So I think it's a function of what moved overseas. It's a function of people getting smarter, redesigning studies, maybe use less NHPs and less studies overall. So I don't have any exact numbers. I'd say our safety assessment business internally has stayed very full and we've stayed it's been one of the positive and very pleased with is our ability to maintain our same level in use of NHPs. But we're a very small user compared to some of the -- compared to the overall market and some of the other CROs. So that it's -- but I think the reduction in the numbers I gave you are substantial. And so a slight recovery there will be substantial.

And I know you pulled the guide and are reluctant to kind of comment forward, but is it, how are we thinking about where we are in the destocking process? I think I heard some comments that maybe some of your customers are getting ready to reorder, but do we feel like the worst of the destocking is over? Or is there still a decent slug of customers that have good inventory and we should expect kind of this level or this run rate from the RMS business for the next couple of quarters?

Well, Frank, if I had that specific answer, we wouldn't withdraw it. We would have put out new guidance. I think it's, so I'm going to be careful. I don't have a really good feel for that right now. We can see some customers coming back and ordering, but we're meeting with them and on-site at their facilities. Hopefully, we get a better feel for them. And as we do and we have a better feel for it then I think we'll come back and be able to do something with guidance again. But right now, that's one of the things that has us concern is where are we in that process overall. But I think last quarter was fairly weak. I'd hope that we don't have a -- I'd hope we don't get any weaker than that.

And then last one for me. In relation to the DOJ matters, if the agreement in principle is signed in its current form, just a clarifying question, does this resolve all outstanding DOJ matters? Or is there still pending investigation ongoing beyond what's in that agreement in principle?

Well, there as far as I know I think we had this was the Virginia matter. The last time we received a subpoena from the NHP matters, which we've talked about, I think, was in June of 2021. So I don't know that we ever find out and have a resolution from that. Could they ask more questions? I guess they could. But the last time we received a subpoena related to the NHP matter, which was in Miami, Florida was June of '21. This was the only active one that we currently had subpoenas. I believe we've referred to other cases like SEC inquiries, which we've been cooperating with, but I don't I'm not aware of any other DOJ matters as we speak of today. We've had really three substantial overhangs in the past three years. One was the DOJ Virginia matter, which has been massive for us. Also the DOJ NHP matter, which we've also spent several $1 million on the last two years following and looking into that, and then we have the downturn of the biotech funding market. What I'm looking forward to is, seeing the conclusion of all three of these, quantifying what it's going to cost us and move forward. And I you know, overall, yes, I give their sales a little bit of -- it's been difficult. Those were, first of all, very expensive matters. I outlined $20 million or $19 million I think that said in legal fees, I think the $22 million includes actually the cost of closure of the facility in the $22 million and $19 million is just the third-party fees. Is that right, Beth?

No, I think the total is $19 million.

Okay. So if you look at that and you look at that money spent and you look at where we are unless on our sales margins being less than we expected due to this reduction in our industry later. We're behind where we'd like to be with cash right now in liquidity. But I would say, I'll give ourselves on managing the balance sheet. As outlined, we've generated $32 million in cash. The team has done a good job of managing the balance sheet, continue to make all the cost cutting and integration side optimization projects come to fruition. We're about done with those now, so that that should be significantly reduced. We invested over $22 million in infrastructure and animal welfare improvements in the facilities we purchased, significant. Those are coming to made -- most of those that we wanted to do. So we've done a good job, I think of managing our balance sheet. We sold some assets, did a little bit better than we thought on the sale of the assets. And we've maintained very good lender support. So I'm really pleased that even though last week we found that we may have this event that is probable and estimatable that with being able to work with our lenders in a very short period to get the amendment we did yesterday, I think shows fabulous cooperation. Really appreciative of them being attentive to our needs and continuing to work with us. So, I think we have some positives, but, yes, there's been -- we've had a couple tough things go against us. We've managed through it. We continue to stay focused on the long-term. And, yes, I'm pleased that we've also had some pretty good wins throughout. So we'll get through this and then we'll figure out how to manage forward.

[Operator Instructions] Your next question comes from Matt Hewitt from Craig-Hallum.

Quick question regarding the BIOSECURE Act. It's been front of mind for a lot of investors here over the past couple of months. And with it moving through the house today, I'm just curious what, if any impact you could see on your business if [Fuji Eptek] uptick is ultimately blocked from the U.S. market? I assume that would be a positive, but what are you hearing from customers and how are you thinking about that?

Well, first of all, I said, I don't -- I've not followed what came out today. So if something just happened today, I'm not familiar with it. I might have an update. We have followed it. [Fuji Eptek] is a large player in our market and discovery, and to take the assessment. I'm not consider until we’re going to build a business plan based on our competitor having something negative happen to them nor we’re going to bet on it. The things that they moved to China would probably be a significant -- takes some significant capacity out of the U.S. And, yes, get ourselves and the other CROs in the U.S. benefit from that. Well, that's not lost upon us. There could be some head -- some wind to our back with that, actually, and that and that may help us out. But I'm not going to sit here and tell you we're going to bet our business on somebody having a bad day and what the government's going to do, and I don't want to wish anybody bad luck. I've dealt with my own DOJ government issues and I know it can be challenging.

Your next question comes from Dave Windley from Jefferies.

Bob, you talked about in the kind of geographic mix of studies that some studies moved out of the U.S. I think you mentioned Europe, Canada, I think was also a net recipient. In terms of your supply of NHP is kind of emphasizing the point that you don't do a lot of the of SA study conduct in NHP. So most of your NHPs are selling to others that are doing that. Are you not able -- is it not part of your business to supply NHPs to users outside the United States?

We do sell NHPs in Europe, but we do not sell them anywhere else. So, but we quarantine and distribute in Europe and U.S.

So for those studies that moved to Europe, you would be able to continue or you would see customers continue to buy from you for that or would have over the last year or so?

We would. I don't think the European safety assessment business is big enough to make it that big to make a big dent. We don't see that big of a change over there in what we can sell.

And then on the cash flow, several parts that I wanted to kind of understand if the benefits of which may still be in the future for you. So like proceeds from the sale of Blackthorn, proceeds from the Haslett, Michigan facility, proceeds from sale of Cumberland, are those all, have you received those yet or would those all add to your cash balance post March 31? And how much would that be?

Those at March 31, they were not all closed yet. Well, Cumberland's not closed. That'll close this quarter. And that's what closed after March 31. When did Dublin and UK just close? Do you know?

Dublin closed in Q2 and Haslett closed in April. So we'll have two and Blackstone was in April -- no, in Q2.

In Q2.

So we'll have two closures in Q3.

Okay.

Can you give approximate kind of net proceeds from those in Q3?

Haslett is like $150,000 immaterial. And what we get for Cumberland will pretty much offset the expenses to prepare the site for closure.

So just a last question then. On the cash flow, you had $10 million in positive cash flow, $10.4 million in positive cash flow in the quarter, a couple of fairly significant moving parts there year-to-date. Are there other items that are, say, timing of payments, timing of accruals that you would expect to reverse in the next quarter that would cause the delta between operating losses and positive cash flow to narrow significantly?

I don't think so. Yes, I don't see any significant prepaid in the next quarter. And inventory will probably, it will go down significantly from whatever NHP we settle. So no significant. Yes.

The most significant would be if we settle with the DOJ and make a payment, that $6.5 million we talked about. Other than that, we as we look out over the next 12 months and we look at our cash flows and our different models in the next 12 months, we do not see that we have a liquidity problem. We have sensitized that, looked at it. I would -- I'd like not to be that tight, but, no, we will not have a liquidity issue. But what we talk about is working with our lenders if we have covenant issues, but we have time to address that.

And there are no further questions at this time. I will turn the call back over to Bob Leasure for closing remarks.

Well, thank you everyone for joining today's call, and I want to close today by reiterating our thinking on the long-term future for our industry, our company, the investments we've made to position ourselves for the future. The new spending on research and development for new medicines historically ebb and flow based on either the industry specific factors, such as timing of patent expirations or macroeconomic or geopolitical factors. But over any long-term analysis, the trend has always been robustly up over time. Our global population is getting older and people are looking for higher quality of life as they age, and there's still a multitude of largely unmet medical needs. The companies that work in this space, our customers are committed to providing that and have historically reinvested more strongly after every down cycle. Within the broader industry context, we believe we're building ourselves a high touch flexible provider that is really attractive to biotech customers who appreciate personal service and attention to detail they can get from Inotiv. We've done a lot of work over the last couple of years in an effort to both drive our top line for the long-term with investments and additional capacity, new service lines and stronger sales and marketing efforts and drive our bottom line through operating leverage gained from optimizing our site footprint, transportation and logistics. I feel very positive about our team, what we've accomplished, our ability to navigate through our current challenges and how the next 12 months look for our industry and our company. And thank you for your time today.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect. Thank you.