Good day, everyone and welcome to this Inotiv Third Quarter Earnings Conference Call. [Operator Instructions] And it’s now my pleasure to turn the floor over to Mr. Bob Yedid. Please go ahead, sir.

Thank you, Jim 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 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 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 company’s website. Joining me today from Innotiv 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 provide a summary of the company’s financial results for the third quarter of fiscal 2024 and the 9 months ended June 30, 2024 and then we’ll open the call for questions. With those remarks, it’s my pleasure to turn the call over to Bob Leasure, CEO. Bob, please go ahead.

Thank you, Bob and good afternoon to everyone joining our call today. Our third quarter was very productive for Inotiv. There were several critical events and accomplishments since our last quarterly call, which we believe will advance us towards our goal of being a leading mid-sized preclinical CRO in the marketplace. We can outline some of these for you now. These include: first, we reached a resolution of the Virginia DOJ investigation and related settlement, which we announced earlier. Second, we are announcing for the first time that on July 23, 2024 the U.S. Attorney’s Office for the Southern District of Florida informed the company that it was no longer investigating the company or its subsidiaries with respect to the procurement of NHPs from foreign suppliers or NHP importation practices. Third, we had completed the UK site construction in Hillcrest and the consolidation projects at our RMS segment as of the end of July and further reducing our expenses and allowing for additional contracts to startup in the UK to enhance our revenue. Fourth, further integrating and optimizing our transportation operations from which we are now seeing the benefits, including improved service levels, reduced cost through streamlined processes and increased efficiencies, producing faster response times and better experiences for our clients. Fifth, achieving year-to-date and quarter-over-quarter sales increases and margin improvements in our diet business globally. Sixth, achieving year-to-date and quarter-over-quarter sales increases and margin improvements in our European and UK RMS business lines, with the exception of NHPs. Seventh, achieving an approximate year-over-year year-to-date 32% increase in NHP boarding and breeding service revenues. Eighth, our newer safety assessment service offerings, including genetic toxicology and biotherapeutic bioanalytical service lines, we saw year-over-year growth in revenues and backlog year-to-date fiscal 2024 compared to year-to-date fiscal ‘23. Ninth, we implemented further integration…

Thank you, Bob and good afternoon everyone. For the fiscal 2024 third quarter, total revenue was $105.8 million compared to $157.5 million during the prior year period, a decrease of 33% primarily due to a decrease in the number of NHPs sold and an approximate 35% reduction in NHP average price in the current quarter compared to the prior year period. The sale of the Israeli businesses in August 2023 and lower safety and discovery services revenue. For the 9 months ended June 30, 2024, consolidated revenue was $360.3 million, down 16.5% compared to $431.7 million for the same period last year due to the decrease in NHPs sold and the sale of the Israeli businesses in August of 2023. DSA revenues in the 2024 third quarter decreased by approximately 6% to $44.2 million when compared to the prior year period of $46.8 million. The decrease in the DSA revenue was primarily driven by a decrease in general toxicology services due to a change in the mix of studies conducted in the 2024 third quarter compared to the 2023 third quarter, and a decrease in DSA products and discovery services revenue. These impacts were partially offset by increases in genetic toxicology and biotherapeutic analysis revenue in connection with our newer service lines at our Rockville facility. DSA revenues for the 9 months ended June 30, 2024 were $135.5 million, which was slightly higher compared to the prior year period of $134.9 million. Overall, net new DSA orders this quarter were $40.4 million versus $48.6 million in the same quarter last year. For the year-to-date period ending June 30, 2024, we have booked net new orders of $139.2 million versus $133.3 million for the 9 months into June 30, 2023. The conversion rate this quarter was 31% versus 30% in the…

Thank you. [Operator Instructions] We will hear first from Matt Hewitt at Craig-Hallum. Sir, actually, we have a problem with the conference the Q&A. [Operator Instructions]. Dave Windley at Jefferies. Your line is open. Please go ahead. Alright, Mr. Hewitt, is your line open, sir, can you hear us?

I can hear you fine. Apparently he couldn’t hear me. But alright, a lot to unpack there, obviously, but it sounds like you’re starting to see some signs of progress, maybe. First up regarding the NHP business, one, it’s great to hear that the Florida DOJ situation is resolved. And I’m just curious what does that mean from a legal expense standpoint? That goes down, goes away. And I guess in general, it sounds like your legal expenses are going to drop pretty dramatically. Is that fair?

Beth, do you want to address that? What we’ve spent so far in legal expenses and yes, it hope, it would begin to see those significantly reduced.

Yes. In regards to this particular matter, we hadn’t received a subpoena since, I believe, June of 2021 but we were incurring some expenses in obviously monitoring the situation. So between that and the legal expenses for the Cumberland matter, I mean, we should see expenses – legal expenses come down for those matters by about, probably about $2 million to $3 million a quarter.

Can you tell them what we – how much we spent over that, on those cases in the last 2 years?

Yes, on the one Cumberland case in the last 2 years, to address the legal inquiries and the closure of the site, we have spent – before the settlement, it was approximately $21 million.

Alright, that’s great to have that behind you finally, and it sounds like you’re starting to see some signs of recovery. Do you expect that with Q4 we start to see the signs that that’s improving, or is it really ‘25 with the contracts in place, the kind of the pricing reset, both on the sales side as well as on the cost side? I’m just trying to triangulate when that really starts to impact the numbers.

We are going to see a, obviously, an improvement in Q4, we’re going to sell potentially 120% – 130% more NHPs in Q4 that we did Q3, matter of fact, I think we’ll probably sell, potentially sell 20% more than we did a Q4 of last year. So this will be one of the first quarter-over-quarter improvements we have seen. And in several quarters, the pricing will be in-line with what it was last quarter, and probably closer what it was again in 2022 and early ‘23 before all this started taking before the Cambodian issues started taking place in late ‘22. I believe that our margins, since we have higher cost NHPs and inventory right now, for some we bought the end of last year, we’ll sell most all of those out in the Q4 period. So we’ll start to see some of the margin improve going into 2025 and then I think we will see much more consistency as we start to sell off the contracts in calendar 2025 but I believe that the bump that we’re seeing in Q4 is very encouraging, somewhat of a whiplash, almost from where we’ve been in the last two quarters. And so that’s, that’s probably an encouraging sign.

No, that’s fantastic to hear. It’s, it’s been a tough slog, but it’s nice to see the light at the end of the tunnel there. One of your peers reported yesterday and was talking a little bit about some of the headwinds that I think they were implying the industry is facing regarding not only small pharma, and I think you spoke to this a little bit, but small and medium sized farm on pharma companies kind of holding that capital tight, even if they recently raised. But then also even large pharma being a little more focused on clinical or later stage programs versus earlier stage. It doesn’t sound like you’re necessarily seeing that some of the – seeing, given some of the commentary made, but do you want to discuss that a little bit, what you’re seeing in the market?

Well, I remind everybody that – in our DSA sales, less than 5% is to large pharma and to the top pharma. So we are over 95%, 97% of our sales is biotech. We still believe we’ve been able to differentiate ourselves on service, and we’ve still are taking advantage of some of the services that we built, that we’re still, I think, developing and gaining some market share. So some of that, I think, has helped offset that. I think still has the opportunity to again, to help us in the future. And remember, if you’re comparing this other public companies in our space, we are still much smaller than they are. So again, we’re $180 million, $200 million of DSA business. We can move the needle a little bit more with a $20 million increase in sales. We can also lose it a little bit more if we lose that $20 million. But so far, I think that we’re focusing on what we can do to make sure we gain new counts and grow with the counts that we have. And yes, I do think that we have seen a little bit of pricing pressure and that we responded in case by case where we have to, but for the most part, I think we still, we feel we’re in a pretty good position for what we see in the back half of this year. So we’ll see what happens.

Well, that’s great to hear as well. Congratulations on some of the progress that you’ve made here in a rather tough environment.

Thank you. Yes, we’re looking forward to maybe controlling our destiny a little bit more next year.

[Operator Instructions] Our next question today comes from the line of Frank Takkinen at Lake Street Capital Markets.

Hey, great. This is Nelson Cox on for Frank. Good to hear. You are starting to see some normalcy starting to return. Can you kind of touch on the end customer, NHP inventory a bit more. I know it’s maybe hard to quantify, but how do you think about that kind of reaching a normal inventory level, and is that kind of still six months out? Is it a year out, or is it sooner than that with kind of the comments you have made?

Well, I think there are a couple of things that impact our customers demand. One is their inventory level. Two is what volumes they have internally. Remember, many of these are CROs that have – and some of the CROs are, as you can see from the reporting, are down or flat. So, I think both of those things can’t practice. But I believe many of them last year bought more than they needed in solid sales, less than they expected. Those results had a lot more NHPs. Right now, we have got good inquiry, good amount of POS in-house. I think people are being a little bit more cautious. But what we also don’t have very good visibility too, is what all of our competitors situation is. But right now, we feel like we are in a pretty good position, and I like two things. One, I like the current POS we have in-house. I like the momentum I see towards the 2025 contracts. And three, I really like the fact that we are diversifying our customer base. I think at one point, we had our customer base. We had 25 – one customer represented over 25% of our business. I think right now, in this quarter, we don’t have anybody over 10% of our sales. Is that correct, Beth, to make sure I say that right.

That’s correct.

Yes. And so I think we have done a really good job of also diversifying our customer base, which is helping us a little bit.

That’s great. And then maybe just quickly one more, can you just talk a bit more about the investments you have made in the sales force and maybe the fruits you are starting to see from that so far?

Well, yes, I think last year, we announced that we – about this time last year, we did not have a really early stage discovery, separate discovery sales force, and we started building that last year, and really through the end of through the end of the calendar ‘24 and into 2025, we were building that, that early stage discovery sales force to go out and try to gain some market share. And as we continue to again, to add to our services, our scientific talent and getting more scientists also more involved in the sale process. So, that doesn’t happen overnight, as we are developing relationships. But I think we are starting to see some of that, the fruits of our labor there. Again, in the DSA business, we continue to look for ways to improve the way we approach the market where and how to grow our customer base, and we have to balance that in line with our ability to add capacity, hire people and are in our equipment, and brick and mortar, and making sure that we can provide a great customer experience. We have – so this goes hand-in-hand with really building our operations. What we don’t want to do is acquire a customer and then not deliver. So, we have been focusing on again, our operations, our metrics, our systems, to make sure we can deliver that client experience and we feel comfortable, then we go out and try to grow. So, to-date, I think that some of the growth that we have had this year, is not showing up because of some of the decrease in pricing, and a lot of the decrease in pricing, by the ways is in the NHP market, because a lot of those are pass-through costs. Obviously with the NHP cost being down, we are not passing that on as aggressive. But I think that we still have the opportunity to continue to grow. I think we have a great team, a great group of scientists believe in our team, and we look forward to seeing what we can do in 2025.

Great. Thanks guys. Appreciate it.

Our next question today will come from the line of Dave Windley at Jefferies.

Let’s try this again. Can you hear me this time?

Sure.

Okay. Fantastic. Glad to hear it. I want to pick up on Frank’s question there on – and your answer, Bob on the NHP business. So, if I understood what you were getting, that was – I think what you were saying is the DSA price compression was attributable to NHP pricing coming down to the extent that that passes through the study price. I was under the impression that your DSA business didn’t do a lot of NHP testing. So, maybe give us a sense of that mix and is that shifting and is – you are kind of improving stability of NHP supply influencing your ability to do more NHP study work.

We do NHP toxicology, safety assessment studies, and that business has stayed for us at a very high level of occupancy, maximizing out our occupancy for the last 2 years or 3 years. So, we have seen good demand. Every once while, we may see a difference in revenue because of mix and some of the projects or because of some of the NHP pricing, but we have seen that safety assessment business stay very fairly consistent and fairly busy for us. We probably used about 10% of NHP historically for our own internal use. So, we are not near as big as our competitors in that business, but we are in the safety assessment business, and do large animal safety assessment.

Alright. Okay. That’s helpful. I appreciate that. On the long-term contracts, can you give us a sense of, I would say, how many customers, what percentage of your RMS revenue, roughly, that these long-term contracts might engage and cover?

It’s anywhere – it’s probably going to be anywhere between 1 year and 5 years. And some of these involve boarding and investments so that we have made, or there we will be making, and deposits and so many of them are longer term in nature.

Okay. But in terms of, like, just thinking about your NHP customer base, is this one or two customers that are willing to enter into these long-term contracts? Is it 10 or 20 customers that are – and then, when you think…

More than two, but I don’t know that we have – there aren’t really 20 reoccurring buyers out there. I think we are talking of, in more than range of a half dozen to a dozen that would make up 80% of our sales.

Got it.

But I have got it – we will see – I do think we will see, a significant portion of our sales committed to long-term – committed to long-term contracts. We will also have spot market sales and others that we are selling. But we will have over 50% probably over 75% be in long-term contracts, and look for that, look forward to the reoccurring revenue.

Sure. And for clarity, sorry, go ahead, sorry.

I have said best. We will give up some margin dollars to have reoccurring consistent revenue.

Got it. And just for clarity, 80% of your NHP sales, is that right?

Yes, total RMS sales, but NHP sales. That is correct.

Okay. And then in terms of…

That’s the goal, Dave. We are not there yet, but that is…

Understood. In terms of cost structure, you have done, quite a bit of site consolidation. You have talked for at least a couple of quarters about your transportation, in housing your transportation, and streamlining that, are there other targets that you have in mind for potential efficiency or cost takeout?

No, not at this point. We have been focused on this since 2022 and in order to close sites and optimize sites, it costs us money. We have made large investments to get there too. But I think that we have accomplished a lot of the major brick and mortar changes we need to make. I think that we will see more of those benefits come out this quarter and the next quarter, because some of them were still coming to fruition. But I don’t – we don’t have any where I am going to tell you that we have ability to make a $20 million, $30 million cost improvement.

Got it. Okay. Maybe a last question is for Beth. Beth you, in your comments talked about you will provide guidance FY ‘25. I believe you said guidance at a later date, when you have more visibility. Are we to interpret that as at the normal time for FY ‘25, which I assume would be on your fourth quarter call for ‘24 or could it actually be further into FY ‘25, in air quotes, as you get greater visibility?

Well, we will certainly focus and try to provide some guidance as early as we can. So, we will have to see where we are with the – primarily, the NHP contracts, because that’s going to provide us, really some more stable guidance going forward. So, if we can certainly do it on our next quarterly call, we can, but we will just, we will have to take that as the contracts are finalized.

Okay. Alright. Great. Thank you.

We will hear next from the line of Eric Coldwell at Baird. Please go ahead.

Thanks. Good afternoon. I have a few around tech lab. And I was hoping, I am sorry I am not as familiar with all of the input to some of the earlier guys on the call here. But can you remind me the growth that you quoted this quarter, and then whether or not that was against an easier comparison last year or so, it’s a recovery, or is it really an acceleration off of a stable performance in the diet and bedding business last year?

The growth that we are seeing, and our diet business has been pretty consistent growth, we started seeing 2 years ago. And we are seeing growth in volume and in pricing, and been very pleased with that. So, that was the business that as we look at our segments, it’s probably seen a pretty significant turnaround, and what in its profitability, some of that because we are using up a higher level capacity. Some of that because we are doing much better in transportation. Some because we are doing much better in buying the commodities. And some because we are gaining market share, we are picking up new customers, and we are doing a great job of delivering a quality product. So, I don’t know what that – I think that we have had consistent growth since we have been involved in business since 2022. So, I don’t think we have ever had a down year. But again, I have only been in the business 2.5 years, now.

I think what I am trying to get to Bob is whether there is more to learn about the global model market, as opposed to your company outperforming on a number of fronts, and you mentioned some of these items, which included, better transport, gaining share, better buying, pricing that I am not sure how much it really tells us about the broader market. Have to admit, I was sort of hoping, you would say, no, no, the overall animal research models markets growing faster, and maybe that’s a part of it at some level, which maybe seems a bit hard to digest after some of the updates we have seen recently from your peers. But I was hoping maybe you could give us a better sense on whether there were certain geographies, animal models, diets for certain animal models, that maybe were standing out in terms of demand?

Well, I see what you are asking. I will say that our diet business growth, I believe is outpacing what we are seeing in small animals and outpacing what we are seeing in large animals. So, I think we are picking up market share. I don’t think we are seeing the growth because the market is growing.

That’s where I was trying to go. Yes, much.

No, I have been – if we look, we look at a lot of metrics, our speed in quoting, our percent we deliver on time, our customer complaints, a lot and were all related – a lot of things related to transportation and delivery. All of those metrics, customer service metrics we are looking at, and our delivery and they are all really seeing a lot of improvements in the last 2 years. And I think we are just doing a much better job of delivering. I think our customers are pleased, and I think that’s why we are getting more work.

That’s exceptionally helpful. And then I am not sure what level of transparency you are providing on the number of NHPs, we have heard all the growth and the recovery in demand here in the next couple of quarters. But are you sharing any numbers on actual volume in terms of selling?

We have never actually shared volume like I can tell you that, we were in terms of our volume, again, Beth, what we were – we were down this quarter, volume – price was down, and our volume was down another 30% from last quarter, which we thought was low. But we now think that our volume could – we could see next quarter up 120%, 130% from this quarter in terms of volume alone. And we think it could be literally another 15%, 20% more than we saw even a quarter a year ago. And that’s, as I have said, that would be the first quarter-over-quarter increase that we have seen in quite a while. Now, I know your question is, is that a macro, well, I think one, we are seeing some customers that need some inventory. And two, what we can’t see is what other competitors have in terms of their inventory, and what that general market is. Are we picking up market share because of volatility in market, maybe some inventories. Are there people out of inventory, some of those are good questions, we don’t have the answer to. But I know that we are seeing a nice increase, and we are seeing good response to are desired to work with us in 2025.

That’s a good update. Thank you very much for that.

And that is all the time we have for questions today. Mr. Leasure, I am happy to turn it back to you sir for any additional or closing remarks.

Yes. Thank you everyone for joining the call today and I think our restructurings and integration reorganization, new customer contracts are providing us the ability to address some of the past industry and economic challenges. We are also pleased to see the conclusion of certain government investigations. It’s now critical that we do not compare ourselves to where we have come from, but remain focused on where we need to go to from here. I want to close today by really reiterating our confidence in the future of our industry, our company, and the investments we have made to position ourselves for the future. We will continue building ourselves as a high-touch flexible provider is really attractive to our customers, who appreciate the personal service and attention to detail they can get from Inotiv. Our metrics related to customer service, quality and delivery are continuing to improve, and we continue to get better every day in all aspects of our business. We are still very young company in our industry, and believe our best days are ahead. Thank you for your time today.

Ladies and gentlemen, this does conclude today’s teleconference, and we thank you for your participation. You may now disconnect your lines.