Inotiv, Inc. (NOTVQ) Earnings Call Transcript

Good day, everyone, and welcome to today's Inotiv First Quarter Fiscal 2025 Earnings Conference Call. [Operator Instructions]. Please note this call may be recorded, and I will be standing by, if you should need any assistance. It is now my pleasure to turn the floor over to Mr. Steven Halper. Please go ahead, sir.

Thank you, Jess, and good afternoon, everyone. Thank you for joining today's quarterly call with Inotiv's management team. Before we begin, I'd like to remind everyone that some of the statements that management will make on this call are considered forward-looking statements, including statements about the company's future operating and financial results and plans. Such statements are subject to risks and uncertainties that could cause actual performance or achievements to be materially different from those projected. Any such statements represent management's expectations as of today's date. You should not place undue reliance on these forward-looking statements and the company does not undertake any obligation to update or revise forward-looking statements, whether as a result of new information, future events, or otherwise. Please refer to the company's SEC filings for further guidance on this matter, 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 Investors 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 Investors section of Inotiv's website. Joining us from the company this afternoon are Bob Leasure, President and Chief Executive Officer; and Beth Taylor, Chief Financial Officer. John Sagartz, Chief Strategy Officer, will join us for the question-and-answer portion of this call. Bob will begin with some opening remarks, after which Beth will present a summary of the company's financial results for our fiscal first quarter fiscal quarter of 2025, and then we'll open the call for your questions. It is now my pleasure to turn the call over to Bob Leasure, CEO. Bob, please go ahead.

Thank you, Steve, and good afternoon to everyone joining our call today. During the first quarter, we moved forward with many of our objectives, which included improving the company's liquidity position, reducing revenue volatility, reduced our -- continuing to focus on client satisfaction and client relationships, and continued integration efforts as one company. I'll spend a few minutes on our first quarter results and highlights. To enhance liquidity, our recent equity offering provided net proceeds of $27.5 million. We are very pleased with the investor interest and outcome of this offering. The additional equity will help reduce liquidity risk going forward, allow us to continue to make long-term strategic decisions, and provide additional stability. To reduce RMS volatility, we have expanded our NHP client base for calendar 2025 and presold much of our NHP inventory, which we anticipate should deliver more consistent revenue streams. In addition, we also expect to continue to see an increase in our revenue from quality management services in calendar 2025 as we did in 2024, and we continue to invest in our NHP facilities in order to maintain this momentum. We continue to make progress integrating and improving our North American transportation distribution systems, which we brought in-house about a year ago. We believe this has helped to improve the client experience as well as our efficiency. Last quarter, we announced we would continue our site optimization program in North America for the RMS business, which included closing 3 additional sites, of which 2 are owned and one is leased while expanding an existing leased location. We continue to execute on this initiative. This expansion is expected to be approximately a $5 million investment, and we intend to use tenant improvement dollars along with proceeds from the sale of the 2 owned facilities to pay for this consolidation project. Once completed, we expect to be -- which we expect to be at the end of fiscal 2026, we estimate approximately $4 million to $5 million a year in cost savings from reduced repair and maintenance expenses on facilities, lower cost of production, along with improved service for clients while production capacity is expected to be unchanged. For the first quarter of fiscal 2025, total revenue was $119.9 million compared to $135.5 million in the first quarter of fiscal 2024, representing a decrease of $15.6 million or 11.5%. This decrease was mainly due to a $13.5 million reduction in the NHP revenue, which was driven primarily by pricing. The lower pricing and some lingering high-cost inventory again negatively impacted NHP margins during Q1 of fiscal 2025. In Q2 of fiscal 2025, we expect to see these margins improve compared to Q4 fiscal year 2024 and Q1 fiscal year 2025. DSA revenue decreased slightly from $44.7 million in Q1 of fiscal '24 to $42.8 million in Q1 of fiscal 2025. While DSA operating margins have remained stable, the decrease in DSA revenue was mainly due to a decline in our Discovery Services revenue. We had a strong quarter for new DSA awards, which was partially offset by cancellations. We saw a continued trend of strong awards for our new Safety Assessment services that were added over the last 2 years, and we saw a 16% increase in Discovery Service awards in Q1 of fiscal 2025 versus Q1 of fiscal 2024. This was the first quarter of reported growth we saw for Discovery Service awards in the last 2 years. For the trailing 12 months, Discovery Service awards are still down 17% compared to the prior 12-month period. So, it's still too early to say whether this is truly a trend, but it is encouraging and we believe that some of the changes we made to our Discovery Services sales team and marketing team and the sales approach a year ago are beginning to have an important impact. Now let me provide some comments on what we are seeing in the market today and some forward-looking thoughts on our different business segments. Going into the calendar year 2025, we will continue to focus on process optimization innovation, exceeding client expectations. We expect to see year-over-year revenue and adjusted EBITDA growth each quarter for the remainder of fiscal 2025 as well as reduced NHP revenue volatility as compared to fiscal 2024. In the DSA business, we are emphasizing growing our existing client base through cross-selling our broad portfolio of products and services and attracting new clients to gain market share. We believe the additional investments we made in our sales team in 2024 and planned investments for 2025 will continue to benefit us in fiscal 2025 and '26. In the RMS segment, we've added new clients and based on our NHP presales, current purchase orders, and demand for quality management services, we are optimistic about our goals for increasing RMS revenue in calendar 2025. Overall, we remain confident going into 2025, and we are also preparing for 2026 and 2027. The geopolitical and market condition risks and uncertainties will remain with us as they do for all companies. However, we are committed to building a business that will create value for our clients, employees, and our shareholders, and look forward to our future. I'll now turn the call over to Beth, who will provide a more detailed synopsis of Inotiv's results for the quarter.

Thank you, Bob, and good afternoon, everyone. For the first quarter of fiscal 2025, total revenue was $119.9 million compared to $135.5 million in the first quarter of fiscal 2024. This was a $15.6 million or 11.5% reduction in sales from the prior year quarter. And as Bob said earlier, most of this reduction was a result of reduced NHP pricing in the U.S. within our RMS segment. RMS revenue for the first quarter of fiscal 2025 decreased $13.7 million or 15.1% compared to Q1 of fiscal 2024. As discussed earlier, the decrease in RMS revenue was due to the lower NHP-related product and service revenue, mainly as a result of a lower average selling price for NHPs in the U.S. We sold approximately the same number of NHPs in fiscal Q1 2025 compared to fiscal Q1 of 2024. However, the NHP average selling price in the U.S. in Q1 of fiscal 2025 was approximately 30.3% lower than in Q1 of fiscal 2024 and 1.6% lower than that in Q4 of fiscal 2024. We have indicated on previous conference calls that NHP sell prices declined from the highs we saw in Q4 of fiscal 2023 and the first half of fiscal 2024. The lower pricing and higher cost inventory again negatively impacted NHP margins during Q1 of fiscal 2025, and we believe RMS margins for the remainder of calendar 2025 should improve from here. DSA revenue in the fiscal 2025 first quarter was $42.8 million compared to $44.7 million in Q1 of fiscal 2024. The quarter-over-quarter decrease in DSA revenue was primarily driven by a decrease in Discovery Services revenue. Overall, net new DSA orders this quarter were $42.3 million versus $33.7 million last quarter and $63.8 million in Q1 of fiscal 2024. The conversion rate in the first quarter of fiscal 2025 was 32.8%, slightly up from 32.6% in the prior year period. The DSA cancellations and negative change orders in the first quarter of fiscal 2025 were approximately 54% higher compared to the prior year period, which had the lowest cancellations in the last 2 years. Cancellations in the trailing 12-month period were approximately 1% less than the prior period. So overall, our operating loss for the first quarter of fiscal 2025 was $15.5 million compared to an operating loss of $9.4 million in the first quarter of fiscal 2024, primarily due to lower NHP margins as previously discussed. Partially, offsetting the decreases in NHP margins were decreases in restructuring costs, transportation costs, and costs related to sites closed in connection with our optimization plan. There were slightly lower DSA sales, which resulted in relatively flat DSA operating margins. Consolidated net loss attributable to common shareholders in the first quarter of fiscal 2025 totaled $27.6 million or a $1.02 loss per diluted share. This is compared to the consolidated net loss attributable to common shareholders of $15.4 million or $0.60 of loss per diluted share in the first quarter of fiscal 2024. For the first quarter of 2025, adjusted EBITDA was $2.6 million or 2.2% of total revenue compared to $9.6 million or 7.1% of total revenue for the first fiscal quarter of 2024. Non-GAAP operating income for our DSA segment in the first quarter was $7.1 million or 5.9% of total revenue compared to $6.9 million or 5.1% of total revenue in the last fiscal year's first quarter. As we continue to fill recently added capacity, we believe we will see margin improvement through operating leverage. The net book-to-bill ratio for DSA in the first quarter of fiscal 2025 was 1.01x:1. Our trailing 12-month book-to-bill was 0.87x:1. DSA backlog was $130.4 million at December 31, 2024, compared to $129.9 million at September 30, 2024, and $152.3 million at December 31, 2023. In our RMS segment, non-GAAP operating income in the first quarter of fiscal 2025 was $9.4 million or 7.9% of total revenue compared to $16.9 million or 12.5% of total revenue in the first quarter of fiscal 2024. Interest expense in Q1 of fiscal 2025 increased to $13.8 million from $11.4 million in the first fiscal quarter of 2024 due to an increase in interest rates, interest associated with the second lien notes issued in September 2024, and periodic draws on our revolving credit facility. Our balance sheet as of December 31, 2024, included $38 million in cash and cash equivalents as compared to $21.4 million on September 30, 2024. Our quarter-end cash balance includes the net proceeds from our recent equity offering. Total debt, net of debt issuance costs as of December 31, 2024, was $396 million compared to $393.3 million on September 30, 2024. This excludes $111.6 million of convertible notes as of December 31, 2024, and our second lien notes of $19.2 million. Net cash used in operations for the 3 months ended December 31, 2024, was $4.5 million compared to cash used in operations of $6.5 million in the 3 months ended December 31, 2023. In October of 2024, we entered into a third amendment with the seller of OBRC and extended the payable to January 27, 2026. Capital expenditures in the first quarter of fiscal 2025 were $4.5 million or approximately 3.7% of total revenue. In the first quarter of fiscal 2024 capital expenditures were $5.6 million or 4.1% of revenue. We expect to spend less than 4% of revenue for CapEx in fiscal 2025. With respect to guidance, as you know, we withdrew our fiscal 2024 financial guidance after we reported Q2 2024 results. While we continue to feel good about the progress we have made in recent quarters, we are not providing fiscal 2025 guidance at this time. As we have stated previously, we hope to provide guidance once we have greater clarity on the market and client demand. Needless to say, management has developed a comprehensive fiscal 2025 annual operating plan designed to continue to optimize our capital allocation and expense base and improve our operating results as discussed earlier. The plan forecasts compliance with the updated covenants under our latest amendment to the credit agreement entered into in September of 2024. And with that financial overview, we will turn the call over to our operator for questions.

[Operator Instructions] We'll go first to Frank Takkinen with Lake Street Capital Markets.

I was hoping to start with maybe a little bit more of an update around NHPs. I was hoping to kind of ask 2 parts to it. One, have we worked through some of the higher-cost NHPs throughout the first quarter? Or do we still have some of that to work through in the remainder of the year? And then 2, just any update from ordering patterns from customers would be good to hear as well.

Well, going into calendar '25, we have worked through all the higher-cost NHPs at this point. So I think that, that headwind is passed. As far as ordering patterns, we have significantly changed we said we would do last February. We significantly changed our approach this year. Last February, we went into the year without any real commitments, we were selling most on the open market. It's still fairly volatile. And that people didn't want -- at that point, I wasn't sure, even wanted to lock into commitments. Going into this year, as prices normalized a little bit and stayed stable over the last 2 or 3 quarters, we do have more solid commitments for this year going into this year. We do know what people's expectations are. We can deliver and they may move a week or 2, we'll work with our customers. But what we also do now is, we may sell them more so they can board them with us. So that gives us the ability to be a lot less volatile than we have. So I think we'll be a little more consistent. We can still see as we have in prior years, things slip between the quarters, large shipments may take place, slip from a couple of weeks or a month to the next, which can shift some things through quarters. But for the most part, as I look at our cash flow and our stability and our volatility, we're going to be much less. And I think we're in a much better position going into this year. I think it will be significant as we get into Q2, Q3, and Q4 going into this year.

And then I was hoping I could ask one about the site's development. I know it's a little bit challenging to predict exactly how it's going to go. But with the contemplation of Cambodia NHPs being -- no longer being able to be exported worldwide, how could that impact your dynamic? I realize it was pushed to the following year, but clearly, there's some modest skepticism around that supply base. So maybe just talk through theoretically how that could impact the global NHP supply-demand dynamic.

Well, obviously, Cambodia is an important part of the global supply base, and they're still exporting out of Cambodia, I think, in the range of 9,000 a year. So if you take that out of the global supply base, that puts a lot of more pressure on what is available from the other existing supply bases. They did have a South East meeting this week. I think they pushed that decision off. They're going to revisit again probably in November of '25. But right now, that we were ready for -- I would say we're prepared for either event. And we have a lot of contracts starting this year on the sell side and buy side. And whatever the South East people choose to do, we were prepared for it. I understand it's very important, but we can't control that. We need to be able to adapt. We've worked very hard in the last 2 or 3 years to diversify the countries and diversify the people we work with to qualify additional suppliers. And we continue to keep maintaining relationships with farms in Cambodia. And we will comply with whatever they decide and adjust accordingly. But I'm very proud of the team we have, how they have adjusted, they've become much more agile. And I think it's -- our customers are looking for ways to reduce risk. And with that, the business continues to evolve, we'll evolve with it.

And then just the last one for me. I was hoping you could help us out a little bit with maybe adjusted EBITDA cadence throughout the year. I heard the comment around staying in compliance with the covenants. But now that we're through some of the higher cost NHPs and expecting a gross margin lift, how should we expect that to flow into adjusted EBITDA for the fiscal second quarter ended March?

Well, so I think what we'll see over for the year, and I'm not giving guidance, but for us to hit those covenants, it's probably clear as some of you have identified in your analyst reports, that we have to grow sales. And we expect sales will grow year-over-year, and I think I alluded to that in my comments. So, seeing sales grow year-over-year and having just seen that quarter that we finished have lower sales, you can pretty well see that we think that we will have a pretty good Q2, 3, and 4. I think you also see that in our original covenants, we are supposed to have a trailing 12-month EBITDA in December. But Beth, I believe it's $1.5 million. That's trailing 6 months, 2 quarters was our covenant at $1.6 million. And we're coming out of this quarter at positive, I believe, closer to $8 million so we're obviously ahead of where we thought we would be, and we're pleased with the results. And I think that the trailing 9 months now going into March, I think our covenant as said, I believe it's $13.5 million, Beth?

Yes.

And so we're in pretty good shape. And as we look to future quarters, we're fairly bullish compared to where we have come from. We have some, I think, great opportunities in front of us with what we have done. We have rightsized all of our facilities for pretty good economics. And that's something we've worked hard on in the last 2 years. So we don't want to worry about as much other than the site consolidation we have going in North America in a couple of sites. We don't worry much about brick-and-mortar rightsizing. We've done a lot of the integration and we started up some new services and expanded some sites. And in the DSA business, as those sites grow, we're going to see some significant margin improvement at those sites. So, I'm excited to see those grow. And we saw good growth, as I just alluded to, in our [ DTI ] Discovery services and some of the service our start-ups, which I think will enhance, we'll see in the back half of this year. So I think we'll see some margin improvement for sure, we'll see some EBITDA -- adjusted EBITDA improvement in the back half of the year on the increase in sales and improving margins.

[Operator Instructions] We'll move next to Matt Hewitt with Craig-Hallum Capital Group.

Maybe to follow up on one of the things you said earlier, Bob, you kind of noted how there tends to be some lumpiness, particularly at the end of quarters with NHP sales. Did you have any of that this quarter? Did any of those sales slip out of Q1 into Q2?

Yes, we probably did. We could have some next quarter. And swing -- that could swing $3 million or $4 million of sales very easily. But again, overall, if it flips 4 or 5 weeks, we're not -- last year, it could flip 6 months. We don't have anything like that. We flip for 4 or 5 weeks or 6 weeks even. We're okay with that. So I'm not really worried about that. Last year was a lot different market, I think, than what we see going into this year. Last year, people had inventory. They were reducing inventory. And then this year, we even have some deposits going in, which back up some of those sales and orders. So again, I think we'll see less volatility. And I think we're doing -- hopefully, we're doing a good job. This year, one of the big differences last year, we had brick-and-mortar, we had integration, we had optimization, and we had volatility. This year, we've taken a lot of that out. This year is what we need to focus on is customer satisfaction and being very customer-driven. We take care of the customer. We're small enough, we're agile enough. The rest of our business works very well. The economics are set up well right now. What we're doing, we have good people. One of the things we talked about, that last year, we had some challenges between the DOJ issues and some of the things going on. And we probably have some customers that made [indiscernible] . And right now, I'm optimistic. I see some of those customers returning. I see our turnover as low as it's ever been. And that was a challenging year for our industry and for our business. And as others go through that, I'm really, really pleased with the lower turnover. Our management team has stayed together. It gives us a much better opportunity to do a great job for our customers. So, we're going to keep that customer focus, continue to bring them back, continue to make sure we keep our employees satisfied. And, I think the business will take care of itself. No, we don't have all the tailwinds that we have going into a biotech funding that's up 20%, 30%, 40% right now nor are we expecting that. If that happens, that's great. But right now, we don't see that. We're not expecting that, but I still think we're going to grow despite that.

Got it. And then shifting gears a little bit. The book-to-bill and a couple of the other metrics kind of been bouncing around a little bit. The one in particular that I wanted to mention was the cancelations. It seemed like the last couple of quarters, you were seeing some improvement that those cancelations were declining, kind of getting back to a normalized level. It seems like that bounced back up here a little bit. Is that just a function of what's going on with pharma companies kind of reprioritizing pipelines and kind of acting quicker on the fill-and-kill decisions? Or is there some other reason that you saw that number elevated here in Q1?

Matt, I think we saw it elevated because we had one large project, which was about $4 million that got canceled, and that's over $4 million, and that's significant to us. So, we have large POs. If one project cancels, it's significant. And so one project can make a difference. And usually, we don't have those large projects canceled this quarter. We had an anomaly. We did have a large project that got canceled which drove that book-to-bill number down or it would have been positive. And so again, I'm not overly worried about it because I think that was one that we'll see every once in a while like that. But hopefully, we don't have a lot of those out there typically. I think what you can take away is that we were really pleased. We made a lot of changes in our sales organization a year ago on how we approach discovery, translational sciences, and even a little bit of Safety Assessment. And seeing that 14% to 15% growing awards for the 3 months in Q1 in Discovery, for me is a pretty good green shoot. We're looking for that where we expect to go. But that's something that we've seen year-over-year decline for several years. And that's a pretty important business. It's a very high cost structure. We have a lot of leverage. With the increase in sales, a lot of those can go to a large percentage that goes to the bottom line. So I was encouraged -- although the cancelation was discouraging, I think I think that probably have more positive takeaways from the quarter because I think that was a one-off, one large project that really drove that negative cancelation number up.

One last one for me, and then I'll hop back in the queue. But as you look at the remainder of this year and given some of your success with some of the newer tests or services that have been rolled out here recently, do you envision rolling out some additional services over the course of this year? Or is it more about just selling more of your existing portfolio?