Inotiv, Inc. (NASDAQ:NOTV) Q2 2023 Earnings Call Transcript May 11, 2023

Inotiv, Inc. misses on earnings expectations. Reported EPS is $-0.34 EPS, expectations were $-0.16.

Operator: Good afternoon, and welcome to Inotiv’s Second Quarter Fiscal 2023 Financial Results Conference Call. At this time all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note that this conference is being recorded. I will now turn the conference over to our host Devin Sullivan of the Equity Group. Thank you. You many begin.

Devin Sullivan: Thank you, Diego, and thank you everyone, for joining us today for Inotiv’s fiscal 2023 second quarter financial results conference call. 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. Management also will discuss certain non-GAAP financial measures in an effort to provide additional information for investors. A definition of these non-GAAP measures and reconciliation 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. Joining us from the company this afternoon are Bob Leasure, President and Chief Executive Officer; Beth Taylor, Chief Financial Officer; and John Sagartz the company’s Chief Strategy Officer. Bob will begin with some opening remarks, after which Beth will present a summary of the company’s financial results, and then we’ll open the call for questions from our analysts.

It is now my pleasure to turn the call over to Bob Leasure. Bob, please go ahead.

Bob Leasure: Thank you, Devin, and good afternoon everyone. We appreciate you taking time to join us today. Our results for the second quarter reflected growth across both of our business segments. The total revenues increased 8% to $151.5 million from $140.3 million in last year’s second quarter with revenues at our DSA and RMS business segments increasing 20% – 20.2% and 3.3% respectively from last year’s second quarter. Our DSA business is benefiting from the targeted investments we have made and continue to make to expand our service offerings, and we are excited about the progress that we – and what these enhancements can deliver for our clients, our industry, and our shareholders. As we continue to make progress as planned in filling our growing capacity, we expect improvements in DSA revenue and margins as we continue through the year.

In our RMS business, in the second quarter, we did ship some of the NHPs in our inventory after verifying their origin as purpose-bred, although NHP volumes were significantly below historical levels, we realized benefits from the favorable pricing we implemented during the second quarter. We have also continued to implement various consolidation and optimization activities in our RMS operating footprint, which are expected to improve production efficiencies and animal welfare as they come online and are completed. We return to a positive adjusted EBITDA in the second quarter, achieving $17.1 million, which was below the $25.3 million we reported in the same period last year, but represented a significant improvement from the negative $5.5 million we reported in the first quarter of fiscal 2023.

Adjusted EBITDA included an increase in G&A expenses in the second quarter of $7.7 million compared to the same period last year. G&A expenses in Q2 included $6.7 million of legal and third party fees, primarily related to Cambodian NHP matters, the Cumberland, Virginia ongoing investigation, the third amendment to our credit agreement and defense on pending securities litigation. By way of comparison to legal and third party fees in Q1 were $3.4 million. These legal and third party expenses are not being adjusted out of the adjusted EBITDA. Based on current information, we expect legal and third party fees to be lower in the third quarter fiscal 2023. Let’s move on to a discussion in performance over DSA and RMS business segments. I’ve then turn things over to Beth for review of our results.

Our DSA business generated second quarter revenues of $47 million, up 20.2% from revenue of $39.1 million in last year’s second quarter. Our performance rebounded as expected from what is typically seasonally – a seasonally slow first quarter. The improvement in our DSA business was primarily driven by increasing revenue within the existing operating structure, plus, we are beginning to see new customers and increasing sales in the genetic toxicology services we brought online at our facility in Rockville, Maryland. Our facility build out at Rockville is now substantially complete, and we are continuing to validate the equipment and assays required to support growth in both the genetic toxicology and biotherapeutic businesses. We also have seen increase in quoting an activity related to recently expanded areas in our discovery and histopathology service lines.

The expansion of our Fort Collins facility remains on track and should be operational towards the end of fiscal 2023. The book-to-bill ratio at DSA in the second quarter was 0.95 times. Our backlog was $145.7 million, up from $133.6 million in Q2 of 2022. Turning to RMS segment, revenues rose 3.3% to $104.5 million from $101.2 million in last year’s second quarter. Revenues at RMS increased nearly $23 million from the first quarter of fiscal 2023. As a reminder, we closed the Envigo transaction on November 5, 2021. So for comparative purposes, we are for the first time since the acquisition, comparing full quarter over quarter operational results. The increase this quarter was driven by favorable pricing for multiple product lines, including NHPs, while research models and Teklad diet, which helped offset lower NHP volumes as well as increased expenses, which we discussed and saw in Q1 fiscal 2023.

Our site optimization plan for the RMS segment remains on track. We made good progress during our second quarter of 2023. We completed the plant shutdown to Haslett, Michigan and Boyertown, Pennsylvania facilities and their consolidation into our newly renovated facilities in Denver. The consolidation of two additional facilities in Indianapolis to other operating facilities is underway, and that activity will be completed by the end of the current quarter. The relocation of our RMS facility in France to the recently updated operations in the Netherlands is now underway with respect to have this process completed by the end of this current third quarter. We have also completed the consultation and planning process to relocate our Blackthorne, UK facility to our other existing operations in the UK, and currently expect this relocation to be completed in the third quarter of fiscal year 2024.

During Q2 of fiscal year 2023, we announced that we will be closing the small RMS facility in St. Louis and relocating its operation into existing facilities in St. Louis and other facilities. This will be completed by the end of this quarter, the third quarter. In connection with these closures and relocations, we are in the process of revising our product distribution plans, including our delivery route and warehousing, and this will allow us to further improve efficiencies, elevate customer service, and enhance margins. With respect to the NHP situation, as we indicated in previous calls, Inotiv sent a five-member team to Cambodia and early February, 2023 to conduct an audit of the two facilities owned and operated by Vanny Science Development Limited.

The audit consisted a review of select animal history and health records, diet composition logs, water testing results, breeding records, animal treatment records, animal welfare practices, and the audit was conducted on a sample basis for a select number of NHPs. There were zero critical findings. They did demonstrate commitment to future genetic testing for parentage with an investment in laboratory, analytical and support equipment aimed at supporting future exports of NHPs from Cambodia. We’ll continue to work in concert with our suppliers and scientists both inside and outside our organization to develop a new long-term standard for DNA testing to verify the origins of NHPs and ensure ourselves and our clients we’ll continue to only import and sell purpose-bred NHPs. I will remind you that also any such testing we develop may be subject to review and acceptance by government agencies including U.S. Fish and Wildlife Service.

We’ll not be in a position to respond to any questions on any open matters concerning our suppliers or competitors or in any ongoing government investigations. In the meantime, we are continuing to identify import – identify import, and sell NHPs from sources other than Cambodia suppliers, and we believe that we have an adequate supply of NHPs to meet our internal DSA client demands to support the ongoing discovery of life-changing and life-saving therapies. As it relates to our outlook, we expect margin and earning improvements from the combined effective of our DSA expansions, integrations, synergies, and RMS site optimization initiatives once completed and fully operational. We believe the additional capacity and services being added should eventually allow for an annualized 50% increase in DSA revenue compared to fiscal year 2022 revenue and DSA gross margins could increase from approximately 30% to the mid-to-high 30s.

We also believe once we complete all of our DSA and RMS site optimization integration synergy initiatives, we should produce approximately $20 million of annualized cost savings compared to fiscal year 2022. We expect to begin realizing more of these benefits early in the fourth quarter of fiscal year 2023. We are reiterating our full year fiscal 2023 revenue guidance of at least $580 million in revenue, and as a result of the increased legal and third party fees incurred during Q2, we are updating our guidance for adjusted EBITDA to be at least $70 million down from the previous guidance of $75 million. We continue to expect that we will remain in compliance with our financial covenants for fiscal year 2023. We continue to expect that capital expenditures should moderate from 2022 and will be no more than 5% of sales during fiscal year 2023.

As a reminder, this guidance is based on the assumptions that we continue shipping NHPs from Cambodian origins that have been reasonably confirmed to be purpose-bred from our existing inventory for the remainder of fiscal year 2023. In closing, I want to emphasize again how pleased I am with the progress being made to optimize our operations, our continuing response to the NHP situation and the performance of our employees. Despite lingering head with our RMS business, I’m convinced that we are headed in the right direction via investments, innovation, hard work. We remain committed to maintaining our leadership role in helping our clients discover and develop life changing therapies. With that, I’ll turn it over to Beth Taylor, our Chief Financial Officer.

Beth, please go ahead with the financial overview.

Beth Taylor: Thank you, Bob, and good afternoon everyone. Total revenue for the 2023 second quarter rose 8% to $151.5 million from $140.3 million in last year’s second quarter, driven by a 20.2% or $7.9 million revenue increase in our DSA segment, and 3.3% or $3.3 million revenue increase in our RMS segment. Higher DSA segment revenue was primarily driven by increasing revenue within the current operating structure and continued increases of our genetic toxicology services at our new business facility in Rockville, Maryland. The increase in revenue at RMS was due primarily to favorable pricing across several of our animal models, specifically NHPs, but also including Teklad diet. The favorable pricing helped partially offset the negative impact of lower volumes of our NHP sales.

Total gross profit improved slightly to $44.9 million, or 29.6% of total revenues from $44.7 million or 31.9% of total revenues in last year’s second quarter. Gross profit for our DSA segment improved to $15.1 million or 32.1% of segment revenue from $12.3 million or 31.5% of segment revenue in last year’s second quarter. The 600 basis point increase in margin was driven by higher sales within our current operating structure. RMS segment gross profit in the second quarter of fiscal 2023 was $29.8 million, or 28.5% of total revenues compared to $32.4 million or 32% of revenues last year. The decrease in margin in the current quarter was driven by several factors including product mix inflation and the absorption of duplicate costs as we implement our site optimization plan, as noted.

We expect to begin seeing a decline in these duplicative costs and margin expansion in early Q4 fiscal year 2023. The margin decrease was partially offset by favorable pricing for certain of our product lines and some initial benefit from the closures of our Cumberland and Dublin facilities. General and administrative expenses rose to $29 million in the second quarter of fiscal 2023 from $21.3 million in last year’s second quarter. G&A expenses for the second quarter reflected $6.7 million in legal and third party fees primarily related to Cambodian NHP matters, the Cumberland, Virginia ongoing investigation, the third amendment to our credit agreement and defense on pending securities litigation. Based on current information, we expect legal and third party fees to be lower in the third quarter of fiscal 2023.

Operating loss for the quarter was $2.1 million, down from $7.9 million of operating income in last year’s second quarter, reflecting both the $7.7 million higher G&A expenses and a $2 million increase in amortization expense. Interest expense increased to $10.5 million up from $7.5 million in last year’s second quarter, reflecting our higher debt balance for borrowing obtained for the acquisitions and capital investments and higher interest rates. Consolidated net loss attributable to common shareholders in the second quarter of fiscal 2023 totaled $10 million or a negative $0.39 per share. This compared to consolidated net loss attributable to common shareholders of $6.1 million or a negative $0.24 per diluted share in the second quarter of 2022.

Adjusted EBITDA was $17.1 million or 11.3% of total revenue as compared to adjusted EBITDA of $25.3 million or 18% of total revenue in last year’s second quarter, and a negative $5.5 million in Q1 of fiscal year 2023. DSA backlog was $145.7 million compared to $133.6 million at March 31, 2022. Net cash provided by operations was $5.4 million compared to cash provided from operations of $4 million in the same period last year. The increase in cash provided by operations was primarily driven by improved net working capital compared to the same period last year. CapEx in the second quarter was $8.5 million or 5.6% of total revenue and reflected investments in completing our DSA capacity expansions in Boulder, Colorado, Rockville, Maryland, and Fort Collins, Colorado, enhancements in laboratory technology and improvements for animal welfare.

For the first six months of fiscal year 2023, capital expenditures totaled $16.8 million; we continued to expect that our fiscal 2023 CapEx will not exceed 5% of projected revenue. Our balance sheet as of March 31, included $24.6 million in cash and cash equivalents up from $4 million from December 31, 2022, and we maintained a $0 borrowing on our $15 million revolving credit facility. Total debt net of debt issuance cost as of March 31, 2023 was $374.1 million compared to $373.2 million at December 31, 2022. The company extended by one year the maturity of a $3.7 million unsecured seller payable pursuant to the stock purchase agreement with Orient Bio, Inc. The payable, which was originally due on June 27, 2023 is now due July 27, 2024. We were in compliance with our debt covenants as of March 31, 2023, and continued to expect that we will remain in compliance for fiscal year 2023.

We remain pleased with our financial performance and the progress that we are seeing in higher revenue from the additional capacity investments in our DSA segment, and we remain optimistic as we continue to grow and capture a significant portion of the opportunities in our market. And with that financial overview, we will turn the call over to our operator, Diego, for questions.

Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from Matt Hewitt with Craig-Hallum. Please state your question.

Operator: Thank you. [Operator Instructions] Our next question comes from Dave Windley with Jefferies. Please state your question.

Operator: Our next question comes from Frank Takkinen with Lake Street Capital Markets. Please state your question.

Operator: Our next question comes from Dave Windley with Jefferies. Please state your question.

Operator: Thank you. And there are no further questions at this time. I’ll hand the floor back over to Bob Leasure for closing remarks.

Bob Leasure: All right. Thank you very much for your time and attention. And although challenges do remain, we’re making excellent headway in transforming our organization. We have a number of investor conferences coming up beginning later this month. We look forward to we’ll be engaging with investors at Benchmark Virtual Healthcare Conference on May 23. Craig-Hallum Conference on May 31 in Minneapolis, Jefferies Healthcare Conference in New York City, June 6, and June 7. We look forward to any follow-up questions or calls anybody may have, and I hope everybody has a good day. Thank you very much.

Operator: Thank you. And that concludes today’s call. All parties may disconnect. Have a great evening.