Good day, everyone, and welcome to today's Inotiv Second Quarter Fiscal 2025 Earnings Call. [Operator Instructions] Please note, today's call will be recorded and I will be standing by should you need any assistance. It is now my pleasure to turn the conference over to Steve Halper of LifeSci Advisors. Please go ahead.

Thank you, Chloe, 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, including risks and uncertainties that could cause results to differ from forward-looking statements. Management will also discuss certain non-GAAP financial measures in an effort to provide additional information for investors. Definitions 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 Investor section of the company's website, www.inotiv.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 Investor 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 the call. Bob will begin with some opening remarks, after which Beth will present a summary of the company's financial results for our second fiscal quarter of 2025, and then we'll open the call for questions. It is now my pleasure to turn the call over to Bob Leasure, CEO. Bob, please go ahead.

Thank you, Steve. Good afternoon, everyone. During the second quarter, there were some announcements and events which are likely to impact our industry and our business. Over the last past five years, Inotiv has been evolving and has embraced challenges and changes that we've seen in our business. We believe we are a better company because of the changes we have faced. We also -- we have also made significant investments to better prepare us for the future. These include acquisitions, the businesses that we have started, the RMS site optimization plans and the RMS and DSA site investments. This quarter, we stayed focused on our plans and continue to execute on many of the objectives, including continuing to focus on client satisfaction, client relationships, continued integration of our scientific services and efforts as one company, moving forward and improving upon the next phase of our RMS site optimization plan, and expanding our NHP boarding and colony management services. We also had the opportunity to settle open litigation related to a 3-year-old case in which we were a plaintiff, which we inherited with the Envigo acquisition. We settled this case for approximately $7.6 million and the proceeds were received in March. I'll spend a few minutes on our second quarter results and highlights. For the second quarter of fiscal 2025, total revenue was $124.3 million compared to $119.9 million in Q1 of fiscal 2025 and $119 million in Q2 of fiscal 2024, representing a year-over-year increase of $5.3 million or 4.4%. The year-over-year increase was mainly due to an increase in RMS segment revenue of $6.6 million, partially offset by a decrease in DSA segment revenue of $1.3 million. The RMS revenue growth was primarily due to higher NHP revenue. As I mentioned in our call in February, we continue…

Thank you, Bob, and good afternoon, everyone. For the second quarter of fiscal 2025, total revenue was $124.3 million compared to $119 million in the second quarter of fiscal 2024. This was a $5.3 million or 4.4% increase in revenue from the prior year quarter. And as Bob said earlier, most of this increase was a result of increased NHP revenue within our RMS segment. RMS revenue for the second quarter of fiscal 2025 increased $6.6 million or 9.1% compared to Q2 of fiscal 2024. The increase in RMS revenue was primarily due to the higher NHP volumes sold, partially offset by lower average selling price for NHPs compared to the prior year quarter. DSA revenue in the fiscal 2025 second quarter was $45.3 million compared to $46.6 million in Q2 of fiscal year 2024. The year-over-year decrease in DSA revenue was primarily driven by a decrease in general toxicology services revenue. Overall, net new DSA orders this quarter were $44.5 million, which is a 5% increase over last quarter and a 27% increase over Q2 of fiscal 2024. The conversion rate in the second quarter of fiscal 2025 was 34.1%, up from 30.1% in the prior year period. The DSA cancellations and negative change orders in the second quarter of fiscal 2025 were approximately 28% lower compared to the prior year second quarter. Cancellations in the trailing 12-month period were approximately 7% less than the prior period. The overall operating loss for the second quarter of fiscal 2025 decreased $40.2 million from $43.1 million in the second quarter of fiscal 2024 to $2.9 million in Q2 of fiscal 2025, primarily due to the $26.5 million charge related to the agreement in principle and subsequent Resolution Agreement and Plea Agreement with the Department of Justice that was incurred in the…

[Operator Instructions] And we'll take our first question from Matt Hewitt with Craig-Hallum Capital Group. Your line is open.

Congratulations on a good quarter and the progress that you've made, Bob and Beth. Maybe first up, and thank you for providing the details on some of the movement you've seen here with the FDA and NIH. But regarding the FDA, I'm just wondering, and you provided some of the services that you're already providing that kind of address what the FDA is seeking or looking for. But I guess, since that announcement came out, have you changed your marketing to make sure that your customers understand how you can help them navigate these changing times? And what are you hearing from customers on that front? Are you -- are they already coming in and saying, boy, we like that you offer this. We want your help. Anything along those lines would be helpful. Thank you.

Hi Matt, thank you for the question. We have been integrating these services, some of it we've acquired over the last couple of years into our business over the last two or three years. We mainly sell these as part of our discovery sale process and discovery and translational sciences, I should say. And I would say that they have been out there and we're including them more and more and we have seen some of those increasing, but not at the pace people may expect. The computational toxicology, the proteomics are things that we're including in our quotes, people and we're -- and people are becoming more educated about it. And we have some great capacity available as -- and I think it will take off and we are seeing some growth right now actually in those areas. But it's not taken off as much as maybe we had expected start from looking back in 2022. But yes, we have been including those. I think we're becoming much more educated. Our customers are becoming educated. And I think some people are changing their approach. But I think it's mainly right now in the discovery and translational sciences more than probably we are seeing in the safety and efficacy segment. And I'll ask John. John, do you want to add anything to that? John Sagartz is on the phone, and he may have a better insight to this. John, do you have anything you want to add?

Well, I would just echo what you've said about not really seeing an impact immediately, but I struggle a little bit with what NAMs really means because many of these are old approach methodologies. They've been around for decades, but they obviously continue to evolve. And of course, you can point to examples of genetic toxicology testing, computational tox, quantitative structural activity relationship, primary cell cultures using animal or human cells, cell lines, patient-derived xenografts. These have all been part of our toolkit and I think what the FDA announcement has given us the opportunity to do is to really collate and describe the contributions that they're making to the company and to our industry. As I mentioned, these continue to evolve. We're looking for opportunities to participate in that evolution. But in terms of feedback from clients, customers, not really seeing that emerge at this point. I think one thing I would just mention is that the headlines that came out after the FDA announcement, I don't think really match what was in the communication. And many of the changes that FDA is proposing are things that can be celebrated by innovators because for certain therapeutic modalities, they reflect an ability not to have to check boxes, but to use a weight of evidence approach to evaluating the safety and efficacy of the compounds.

That’s really helpful. Thank you. Maybe shifting gears a little bit, Bob, you kind of spoke to the refined optimization plans for your RMS business or RMS sites that you're kind of going through. It sounds like you're trying to get closer to the customers, if I heard you correctly. Is there -- are there one or two or three items in particular that you're really focused on with that kind, the revised plan? Or is it more broad than that?

Well, we announced the plan originally back in December. The revised plan came about a couple of ways. One, we are looking at how to improve our efficiencies and optimize our facilities quite a bit. And also, we can see increasing costs and we don't see necessarily that the small animal market is increasing in size. The number of animals that are being sold are not increasing. So I don't know that we need -- we have the ability to grow, but I don't know that we need to build out that capacity right now. In addition, with the transportation system that we've been able to develop after we acquired it in 1.5 years ago, about 18 months ago, I guess, we've become much more efficient of transporting. And I don't think we need as many facilities all over the place. So we considered all of that and thought about how can we really maximize these dollars. If you look at the dollars that we have already achieved and then you look at the dollars that we hope to achieve on that segment of our business, it's a pretty good-sized turnaround for that business and it's starting to contribute. So we think this is a much better animal welfare plan and much better for our clients and allows us to be much more efficient. It will press us to be much more efficient. And I think that's -- and a much better job planning. And I think we -- as we have evolved, we found that we have the ability to do that. And I think that -- I think this is a great move. I applaud our team for coming up with this. I think it was a much better plan than what we originally are. And I'm glad that they're always evaluating and looking for opportunities to do a better job. And I think this was significant on their part. Not only did we increase the annual benefit, we also accelerated the time in which we can get it implemented and we'll start seeing some benefits immediately. So I think it was really a win-win all the way around. And I just applaud them for continuing to find ways to be smarter and better about everything we do.

And maybe one last one for me, but I think you mentioned during your prepared remarks that you saw kind of an increase in demand in Q1 from the beginning of the quarter to the end of the quarter. How have things started off here this quarter? Are you -- has that increased demand that you exited Q2 with, has that kind of contributed or increased here in Q3? Or where do we sit today? Thank you.

Yes, Matt. I think -- remember, we started this quarter, we had a lot of weather-related issues. If you recall, we had a lot of ice. We had a lot of facilities at ice. We had people spending the night at facilities. And I think some -- things seem to start a little slow in January, if you ask me. Quoting was good, but people weren't making decisions yet because I think they're fighting some of the other weather-related issues out there. But whatever -- after it picked up towards the end of the quarter. And so we're able to have a positive book-to-bill, which was we expected. And I would say this quarter, we're now six weeks, I guess, into it, five, six weeks into it. Yes, I've been very pleased with the level of quoting and closing. We've had a great start to this quarter.

Congratulations.

We indicated -- and I think you indicated, I think we'll see year-over-year improvement in revenue over the next two quarters for this fiscal year. And I also think that we'll start to see a reversal in the decline of the discovery business that we've seen for the last two or three years. I think we'll start to see that reverse in the next six months. So I'm optimistic on both of those fronts.

That’s great. Thank you.

We'll move next to Frank Takkinen with Lake Street Capital Markets. Your line is open.

Great. This is Nelson Cox on for Frank and congrats on all the progress this quarter. Maybe just starting on the NIH side, maybe talk a bit more about any potential impacts you're seeing out there or not seeing and what the feedback is you're hearing? And then I guess, more broadly, how insulated do you believe your current customer mix is from potential -- from potentially fluctuating NIH funding?

Well, I think like the rest, we've heard a lot about the NIH funding. We've heard about proposed budgets. I think that's -- and I think I heard news today, people are debating that, whether that's healthy or not. So I think there's ways to go before we determine what NIH funding is going to do. We've also had, at times, we hear concerns from universities about their funding. But overall, I would say that we've not seen a dramatic impact yet in our business. We do have sales to the government and we do have sales to universities. That is -- and I'd have to ask Beth what -- exactly what percent that is. So we're keeping a close eye on that. But right now, I don't know that we've seen any significant changes as a result of the NIH funding. We may have had one or two customers that have said they're not doing anything. But also on the other hand, we may have one or two customers that are picking up and increasing their orders. And that's not unusual. That's normal in the ordinary course of business. So I don't know that I see anything that I would say is, that's not ordinary yet. Beth, anything you want to add in terms of the mix of what percent we are?

Yes. For fiscal year 2024, our government revenue to total company revenue is approximately 7%. And I will say, quarter-over-quarter for Q2, we've actually seen on the DSA side and on the RMS side, an increase in revenue in the government sector, U.S. government sector.

Thank you, Beth. Got it. That’s helpful. And then positive book-to-bill in line with last quarter. Last quarter, you talked about there being kind of one large project that drove cancellations higher. I mean, were there any onetime events like that this quarter that may have impacted those metrics or anything to call out there?

No, I think Beth indicated that our cancellations were down quite a bit this quarter, weren't they, Beth?

Yes, it were.

And so I think that that was encouraging. But that -- again, we had a big cancellation in the last quarter. We didn't have any really big cancellations in our Q1. We didn't have any big ones in Q2. Not saying we will or won't have any in Q3. We'll wait and see how that trend develops. But as you look back over 12 months, I think as Beth indicated, our cancellations have started to decrease while our quoting and awards have started to increase. So I think that's overall a good trend.

Yes. Quarter-over-quarter, we saw a 28% decrease.

Got it. Perfect.

And the awards were 27% increase over last quarter. So I think that was -- that's a pretty good indicator of some momentum.

And then maybe just one last one. I mean, strong quarter from an adjusted EBITDA perspective and I heard the commentary on expecting continued growth, $8 million in adjusted EBITDA this quarter. I understand you're not providing formal guidance. But given all the moving pieces, is there any other color you can maybe provide directionally that may be helpful as we work on our models?

No. I think that in my remarks, I commented on the one area I think we need to improve upon, which is our DSA margins. That deteriorated a little bit over the last two quarters. We gave some reasons for that. Some of those jobs are jobs that are coming through that were probably quoted a year ago. And I think a year ago, pricing was -- there is some more discounts offered than probably they are in the more recent months. But we're evaluating that and making sure that we're going to focus on that. I would like to see us really pick up those margins in the future months. And I have a lot of confidence we can do that between that and leveraging some of the growth that we have going on and the discovery. I think we have some opportunities to do a better job on the margins there. But that's -- I think overall, our G&A costs and some of the things that we're doing, we indicated we thought those would be coming down. I think we're -- right now, those are coming down and we're in pretty good shape.

Perfect. Thanks again guys and congrats.

Thank you.

We'll take our next question from Dave Windley with Jefferies. Your line is open.

Hi, thanks. Good afternoon. Thank you for taking my questions. On the last one, Bob, is that -- are those steps that you've identified in the areas in DSA on margin, things that you think you can impact quickly? Or should we assume that that's a 2-, 3-quarter horizon?

I think -- well, first of all, I would say that we just didn't identify with this quarter's results. I think it's been something we've been concerned about for three or four months. So we have been addressing it. And I think we should start to see some of the benefits sooner than later. As a matter of fact, during the quarter, I think we saw improvement between January, February, and March. So I think some of it is in growth and some of it will come in pricing and some of it has come in -- we know that we had some higher cost NHPs. If you recall, last -- in the end of -- or Q1 of '25, we had low margins in RMS because we had higher cost NHPs that were going through that. And those higher cost NHPs were still going through those studies on the DSA side. So that's kind of what related to some of the higher animal costs. And then we had some -- we had additional utilities and supplies that come with some of the weather-related issues. So I think we'll see some immediate benefit. And I'm looking forward to see what we can do as we get that focus. But I'm confident we'll get where we need to be.

So a couple of clarifications. So the point you're making on the higher cost NHPs, I understand historically, the pointing was to RMS, but you're saying, in 2Q, those higher cost NHPs were still a factor in DSA cost structure?

Yes. So they would be -- they would still be on studies that we're floating into the first three or four months of calendar '25. So I think as we go into May, most of those are behind us, but we had some of those still in the system through April.

We were together at SOT and I talked to a number of other folks there as well as I'm sure you did. One of the themes that I thought was pretty prevalent was an intensification of price discounting. Has that -- and that was, call it mid-March. Has that dramatically changed that quickly?

Dave, I think we heard some of this. I think the price discounting six to 12 months ago was bigger than it is today. I think that some of the -- I don't know that it's as prevalent as it was before. I know we don't hear as much about it. But on the other hand, we have some pretty good reoccurring clients that have been -- that haven't pushed. And I think we're offering a very, very fair price right now, too, by the way. So we're not -- I don't think we're at the pricing where we were two and three years ago. So compared to three years ago, yes, there's still some discounting. But I don't think it's a level it was six to 12 months ago.

And you've kind of answered the question, but I thought it worth asking just to make sure, in RMS, the increase coming from NHP revenue and I think Beth more specifically said higher volumes of NHP sales at lower prices. I wanted to see if the NHP services had any part in that? And if so, how much?

Yes. The NHP services actually are continuing to increase. And I would tell you, we're actually bringing a lot of boarding capacity on board this quarter, actually. And so it will continue to increase. But I know for the year, we were going to see about a 20% increase. I don't know what it is quarter-over-quarter. Beth, do you have that immediately available? I don't know.

We will -- yes, we'll have it here in a few seconds.

Okay. Well, let's stick with that.

I'll ask you the last question then. So you mentioned in your prepared remarks, continuing to integrate your scientific services. Is that just a reference to continuing to kind of better integrate the acquisitions that you've made over a number of years? Or is there something more specific there like a consolidated client portal or technology stack or something like -- or say, a go-to-market in the sales force that is pulling those together in a different way. I just wanted to explore your choice of words there.

Right. I'll do the best to kind of explain what I mean. We believe and I believe that our clients do value speed and time. So we track very closely our ability to deliver what we say we're going to deliver on time. That's a really key component of our business. The other key component to speed is when we integrate our services, we can also help our client and accelerate their speed and the product development. And integrating those services are really critical. But it doesn't -- when we put 14 companies together two and three years ago, we were 14 companies. We weren't integrated. So developing the project management systems that we have developed in-house has taken multiple years, changing the culture to get people to respect those project management systems and use them and have great data in so we have great data out has also been an important evolution of our company. So as we have been able to integrate those services so that we can combine the science, what we learned in the development stage through the safety assessment stage, we can add more value for our clients. And when we add more value and deliver on time and we can accelerate speed, again, that's the value proposition that we are after. So when I say integrate, yes, it means being one company, but it is also how do we integrate and communicate that we create more value for our clients and more speed and improve the ability to interpret that data so we can improve their scientific development schedule. And John, is that -- did I say that right?

You got it pretty close. Yes, it's a combination, Dave, of making organizational realignments, providing the software tools to be able to track project movement and creating accountability and an expectation that on-time delivery is not an option.

Thank you, David. Beth, did you find that data?

Yes. Our NHP service revenue did increase quarter-over-quarter by about 10%.

Okay. Thank you.

Thank you, David.

Thank you.

And it does appear that we have no further questions at this time. I would now like to turn it back to Bob Leasure for any additional or closing remarks.

I'd like to thank everyone for joining today's call. And obviously, we're feeling optimistic with the level of DSA quoting and awards that we're seeing. We were pleased with our RMS results this past quarter and we feel that there is a path to improving the DSA margin starting in Q3 of fiscal '25, stay best. We will continue building Inotiv as a high-touch flexible fighter and strong scientific -- with strong scientific capabilities that is focused on our clients' needs and a positive environment for employees to have a career and grow and generate positive returns for our shareholders. We'll continue to pay attention to these details to get better every day. Also I'd like to add that we are going to be planning an Investor Day at our facility in Rockville, Maryland, on Thursday, May 29. We look forward to further expanding on our strategic plan and our focus on client excellence. Thank you for your time today.

This does conclude today's program. Thank you for your participation. You may disconnect at any time and have a wonderful evening.