Inotiv Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 10, 2023

There are 9 speakers on the call.

Operator

Afternoon, ladies and gentlemen, and welcome to the Inotives Third Quarter 2023 Earnings Conference Call. At this time, all lines are in a listen only mode. Following the presentation, we will conduct a question and answer session. This call is being recorded on Thursday, August 10, 2023.

Speaker 1

I would now like to turn

Operator

the conference over to Mr. Bob Yerid. Thank you. Please go ahead.

Speaker 2

Thank you, operator, and thank you, everyone, for joining today's call with Initive's management team. Before we begin, I'd like to remind everyone that some of the statements The 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.

Speaker 2

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 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 atinitiveco.com and it's also available in the Form 8 ks filed with the Securities and Exchange Commission. If you haven't obtained a copy of today's press release, you may do so by going to the Investors section of Innovative's website. Joining us from the company this afternoon are Bob Leisure, President and Chief Executive Officer Beth Taylor, Chief Financial Officer and John Sagards, the company's Chief Strategy Officer.

Speaker 2

Bob will begin with some opening remarks, after which Beth will present a summary of the company's financial results,

Speaker 3

And then we'll open

Speaker 2

the call for questions from our analysts. It's my pleasure to turn the call over to Bob Leisure, CEO. Bob, please go ahead.

Speaker 3

Thank you, Bob, and good afternoon, everyone. Before we dive into the quarter's results, I want to start the call by framing some of our efforts How far we've come in the last few years and how we position ourselves to continue to execute on our plans and goals. Our investments and growth have been guided by 7 strategically planned key objectives. 1st, right size the infrastructure. After several acquisitions, We are currently in the final stages of optimizing our infrastructure, rightsizing the company's global footprint in order to improve client service and program management, as well as competitively position our company as a midsized full service CRO research model and diet provider.

Speaker 3

We feel that completing this objective will allow us to compete even more effectively with smaller as well as larger CRO and research model providers. 2nd, we reduced the dependency on 3rd party providers and focus on becoming a full service provider. In order to meet our clients' needs, we developed internal capabilities both organically and through acquisitions. And in doing so, we have been able to reduce our reliance on third parties for external services. This in turn reduces cost but also enhances speed, quality, overall value for our customers.

Speaker 3

We expect this will support continued gross margin improvements. 3rd, strategic capital investments. Our capital investments have included updating Our global technology, which was appropriate and necessary, navigated a significantly larger organization. We've also updated our enterprise resource planning and customer relationship management systems as well as our enterprise solution and laboratory systems for managing preclinical studies and our labs. Additionally, we are committed to addressing deferred maintenance and acquired sites and expanding acquired facilities to allow for growth and leveraging our fixed cost structure.

Speaker 3

4th, rebranding. We've rebranded our services business as Innovative and we are driven by a philosophy that customers should expect more from their CRO and further the awareness that we now provide a more complete spectrum of services. 5th, animal welfare. We are passionate regarding our continued commitment to and standards for animal welfare. This has included focus and increased monies and attention to retain Site optimization plan and making investments in facilities when required.

Speaker 3

6th, workplace satisfaction. We have worked diligently to foster a positive and entrepreneurial work environment around our shared purpose of helping clients bring life Saving therapies to people around the world. This shared purpose combined with fair compensation goes a long way to recruiting and retaining top talent. To this end, we are very proud to have been selected as the recipient of Entergage's Top Workplaces USA award earlier this year and have seen significant improvement in our ability to recruit and retain people. 7th, supply chain synergies.

Speaker 3

We've been working with our supply chain and vendors to generate synergies from increased volumes from acquisitions and a broader range of services. This has led to additional vendors and alternative supply opportunities, which enables cost reductions from greater I also think it's important to reiterate briefly how the company has evolved over the past 6 years and how our focus on these key objectives today have prepared us for the next chapter of our story. Early 2018 with 2 locations and 120 people, the company is firmly focused on preclinical safety assessment segment of the drug development market. In 2018 2019, we completed several acquisitions and began to develop new services organically. That organization became innovative in 2019 targeting small to midsized biopharma companies that our clients believe were being underserved Over the next 4 years, some of these organically grown service offerings included Safety pharmacology, juvenile toxicology, Zend reporting, clinical pathology, biotherapeutics and genetic toxicology.

Speaker 3

Expanding our range of services has now enabled us to reduce our reliance on third party suppliers to meet our clients' needs, enhance margins and improved the overall value provided to our customers. In 2021, we began to further expand our offering through the acquisitions, which not only enhanced And it is preclinical services that also provided a strong foundation to build our discovery based platform. In fiscal year 2022, we secured access to key research models to support and complement our DSA services and became a major Supplier of both small and large research models and DIEPs to the acquisition of Impeco and subsequently 2 other critical research model providers. Hiring these businesses enhanced our ability to access critical research models and address the major risk we identified in the supply chain. Also these acquisitions provided our customers with additional confidence in our ability to meet their needs, which is even more important now that access to NHP is limited.

Speaker 3

Since the expansion into research model business, we prioritized improvements in animal care and welfare By and large in our veterinary team, consolidating facilities, which allowed us to make significant infrastructure improvements in the remaining facilities. Ultimately, we believe these efforts will allow us to increase our margins, remain competitive with regards to new business development, while continuing our key strategic objective of enhancing animal welfare. Today, through these acquisitions and the 8 organically developed service offerings. We now currently operate 24 sites across the U. S.

Speaker 3

And Europe, serving over 3,000 customers and pulling over 2,200 professionals worldwide, including industry recognized experts across a wide range of scientific disciplines. We have evolved into a CRO with the ability to serve clients who require a full breadth of products and services undergoing real far delivering those services With a personal touch and being highly responsive to scientific credibility, we still have room for improvement, but we get better every month and we believe we will be much better in the future. If you haven't done so recently, I encourage you to review the Solutions page of our Inifig website. There you'll find a comprehensive suite of discovery preclinical and clinical safety assessment services and an extensive offering of standard and custom research models, Support services, diets, and betting for research and development. At present, Innovative has become an organization that enables clients to advance programs Our concept to clinic, our strategic filling the gaps with our spectrum of services and products.

Speaker 3

Now our story is shifting to Enanta's next chapter And our strategy will continue to evolve in 2023 and further take shape in 2024 as we plan to further improve our service levels, Profitability and continued growth. With this in mind, let's get to the financial results. Year to date 2023 revenues were $431,700,000 which were up 9% versus the same period last year. Our revenue for the last 9 months of our discovery and safety assessment and research model services grew 11% and 8%, respectively, as compared to the same period a year ago. The Q3 of 2023 was the strongest performing quarter of the fiscal year, with revenues of $157,500,000 for Q3 2023 Versus Q3 2022, revenues were down 9% year over year.

Speaker 3

However, it was our Q1 of profitability. DSA revenue decreased 5% year over year in Q3, primarily driven by our Discovery Services, which we believe services, somewhat offset by increased revenues from general from the genetic toxicology services in connection with the new business at a Rockville facility. RMS revenue for the quarter was down 10%, mainly due to significant reduced volume of NHP And small animal sales somewhat offset by increased pricing. Integration plans remain on target This has been important to increase effectiveness and reduce our cost. We have previously announced 9 site closures and completed 8 as planned by the end of this June.

Speaker 3

The 9th previously announced planned closure is Blackbaud facility in the UK. This consolidation into Hillcrest is expected to be finalized by the end of Q3 of next year. In addition, We are closing a small facility in Spain, which is now substantially complete and we will relocate our facility in Everett, Washington To our expanding operations in Fort Collins, Colorado, which we expect to complete in fiscal Q1 of 2024. Over the last 12 months, we have largely now completed 9 of the 11 closures, mainly by consolidating the operations of these closed facilities into existing operations. Moreover, most of the planned expansions are now also completed.

Speaker 3

The final expansion in Fort Collins remains on track to be completed by the end of Q4 of this fiscal year. We already have workbooked to fill this increased capacity and expect revenue to begin in Q1 to fiscal 2024. We are now focused on the sale of assets from sites which were closed, including Boyertown and Cumberland, along with our Israeli businesses, which are under contract. And negotiations are ongoing regarding the sale of other locations in Hazel, Michigan, Spain, France and Stockton in the UK. We believe these asset sales may potentially be completed over the next 2 to 3 quarters.

Speaker 3

Our integration efforts and site closures have also given us the opportunity to restructure our transportation system for research models business, which is currently in process. In addition to improved margins related to consolidating our operations, we also believe the sale of the site's planned foreclosure will generate additional cash for the company. From the perspective of future growth, We will focus on optimizing operations with our new facility footprint, realizing the benefits from the investments recently made at many of our sites, which will also allow us to bring more service capabilities online. Overall, we expect to grow our DSA business from $160,000,000 in 2022 to an estimated $180,000,000 in 2023 to in excess of $200,000,000 in 2024. We ultimately believe these DSA expansion projects We've just recently completed, will allow us to grow our DSA sales by 40% to 50% above the 2022 DSA sales levels I'll also leverage our DSA fixed cost structure and infrastructure.

Speaker 3

We also anticipate we have capacity to grow the RMS We expect to reduce our RMS expenses by approximately $20,000,000 after all these restructuring changes are implemented. We believe the lack of NHP imports from Cambodia continues to affect the industry's entire supply of research models being imported into the U. S. According to the USDA's global agricultural trade system, 2023 imports NHPs to the U. S.

Speaker 3

Year to date through June are now 47.9% lower than those of the same period of 2022. We have begun to identify additional suppliers and increased our imports of NHPs from countries outside of Cambodia. Pricing of NHP's and related costs continue to increase. We continue to generate positive margins and have been meeting our customers' requirements. Our safety and assessment service offerings have not been impacted by the industry shortage.

Speaker 3

However, The suppliers identified in countries other than Cambodia and China and NHP volume available from them are not We did in Q2. Q2 was less than Q1. We expect to have fewer ASPs available for sale In Q4, we actually sold in Q3. We will sell less annual fees in fiscal 2023 versus fiscal 2022. And if the situation in Cambodia and China stay the same, we expect we have fewer HPs available for sale fiscal 2024 versus fiscal 2023.

Speaker 3

Due to increases in pricing, Our sales dollars have remained fairly consistent this year despite the reduced volumes. If we're able to implement continued price increases, we could see similar sales dollars in 2024 compared to 23 on lower volumes. Based on the current trends and taking into account the unknowns that exist for the NHP situation, We believe the future quarters for the company will be able our company will be able to achieve normalized average EBITDA run rate of about $20,000,000 per quarter, And that should be achievable to all of fiscal 2024. As we begin to utilize the recently added DSA Capacity in selling new services and if there is an increase in supply of NHP available for sale, these estimates may increase. We continue to expect improvements in our business as we optimize and integrate our DSA and RMS segments and key results from our focus on key initiatives.

Speaker 3

We will continue to monitor the NHP situation and adjust our plans accordingly with or without imports from Cambodia. We understand this is a significant industry issue in the U. S. And needs to be resolved in order to maximize the industry's ability in the U. S.

Speaker 3

To bring important life saving therapies to the market. Looking to the future, as we continue to explore how we can better support our customers and their development of novel medicines going forward, We have embarked on a program to standardize the capture of our data generated in Discovery, Safety and Clinical Studies. The goal is to structure our data in a way that should in the future enable an AI approach that can innovate and accelerate our translational medicine offering. Longer term, we are confident The product service portfolio we have assembled and continue to optimize and our customer service value proposition that is particularly attractive to the biopharma sector and in the skill and experience of the team we have globally executing on our vision. With this, I would like to turn the call over to Beth for the financial overview.

Speaker 1

Thanks, Bob. For the 9 months ended June 30, 2023, Revenues totaled $431,700,000 a 9% increase from the $397,200,000 recorded during the 1st 9 months of 2022. RMS revenue for the 9 months increased 8% to $296,800,000 from $276,100,000 in the same period in 2022. In RMS, we continue to operate in an extremely dynamic pricing environment for larger research models, in particular, NHP's. DSA revenue for the 9 months increased 11% as compared to the same fiscal period last year.

Speaker 1

The increase in DSA revenue was primarily driven by additional year to date fiscal 2023 revenue generated from Integrated Laboratory Systems that was acquired in January 2022 plus new services related to genetic toxicology and organic growth in general toxicology services. These increases in DSA Service revenues were partially offset by decreases in our discovery services, primarily related to the decline in overall biotech funding in the market. For the 2023 Q3, total revenue decreased 9% to $157,500,000 from the $172,700,000 recorded during the prior year period. DSA revenues for the fiscal 3rd quarter decreased by 5% to $46,800,000 when compared to the prior year period. As previously mentioned, the lower revenue oncology services, somewhat offset by increased revenue from genetic toxicology services in connection with our new business at our Rockville facility.

Speaker 1

RMS revenue for the fiscal Q3 was down 10% to $110,700,000 year over year, mainly due to reduced volume of NHP sales, somewhat offset by favorable pricing over several products, particularly the NHP. For the quarter, total gross profit improved to $55,200,000 or 35% of total revenues from $50,900,000 or 29.5 percent of total revenues in last year's Q3. Gross profit for our DSA segment in the fiscal third quarter decreased The $17,300,000 or 37 percent of segment revenue from $21,800,000 or 44.3 percent of segment revenue in last year's Q3. Overall, we were pleased with the DSA gross profit as it showed improvements over the last 12 months. The decrease in gross profit versus last year's Q3 was primarily due to an unusually high gross profit in Q3 of 2022 due to the mix in timing of studies in our safety assessment services.

Speaker 1

DSA gross profit in 2023 was also impacted by the lower revenue in our discovery services. As our new services start to come online, we expect to generate further demand from both New and current customers alike, ultimately based on this broader range of services and growth, we believe we will be able to boost Our DSA margin from 30% to the mid-thirty percent range in 2024 with long term targets going into the upper 30% range. The net book to bill ratio for DSA in the 3rd quarter was 1 point $149,100,000 at June 30, 2023 compared to $143,200,000 at June 30, 2020 Additionally, our conversion rate, which is our ability to convert our backlog to sales, has continued to improve over the last three quarters. RMS segment gross profit in the Q3 of fiscal 2023 was $37,900,000 or 34.2 percent of total revenues compared to $29,100,000 or 23.6 percent of revenues in last year's period. The increase in margin in the current quarter was driven by several Factors including improved pricing for several product lines, partially offset by the absorption of duplicate Cost as we implemented our site optimization plan.

Speaker 1

General and administrative expenses rose to $26,600,000 in the Q3 of fiscal 2023 from $21,700,000 in last year's Q2. However, these expenses were down by $4,100,000 in legal and third party fees primarily related to Cambodian NHP matters, The Cumberland, Virginia ongoing investigation, defense on pending securities litigation and recognition of a charge to fully accrue for a settlement of a purported class action and a related action in California. The settlement is subject to court approval. This compares to the previously reported legal and third party fees in Q2 of 2023 of $6,700,000 Operating income for the quarter was $8,800,000 an increase from $4,800,000 of operating income during last year's Q3, reflecting both the $4,900,000 in higher G and A expenses and a $4,600,000 decrease in other operating expenses driven primarily by decreased acquisition, Integration and restructuring expenses. Interest expense increased to $10,800,000 up from $8,400,000 in last year's Q3, reflecting our higher debt balance for borrowing obtained for acquisitions and capital investments and higher interest Consolidated net income attributable to common shareholders in the Q3 of fiscal 2023 totaled $1,800,000 or $0.07 per diluted share.

Speaker 1

This compared to consolidated net loss attributable to common shareholders of $3,700,000 or a $0.15 loss per diluted share in the Q3 of 2022. Adjusted EBITDA was $30,500,000 or 19.4 percent of total revenue as compared to adjusted EBITDA of $37,000,000 or 21.4 percent of total revenue in last year's Q3. We are pleased with the $30,500,000 of adjusted EBITDA this quarter as it sequentially increased each quarter this year, up from adjusted EBITDA of $17,100,000 or 11.3 percent of total revenue in the Q2 of fiscal 2023 and a negative $5,500,000 of adjusted EBITDA in Q1 of fiscal year 2023. Net cash provided by operations for the Q3 was $3,700,000 compared to cash used by operations of $9,400,000 in the same period last year. The increase in cash provided by operations was primarily driven by improved networking capital compared to the same period last year.

Speaker 1

Trappex in the 3rd quarter was $4,500,000 or 2.9 percent of total revenue and reflected investments in completing our DSA capacity expansions in Rossville, Maryland and Fort Collins, Colorado Enhancements in laboratory technology and improvements for animal welfare. For the 1st 9 months of fiscal year 2023, Capital expenditures totaled $21,300,000 Our balance sheet as of June 30, 2023 included $22,200,000 in cash and cash equivalents as compared to $24,600,000 at March 31, 2023. Total debt, net of debt issuance costs as of June 30, 2023, was $375,600,000 compared to 374,100,000 dollars at March 31, 2023. The balance sheet also includes assets held for sale of $8,700,000 and liabilities held for sale of $2,300,000 Due to the decreasing availability of NSPs in the U. S, We are recasting our full year revenue guidance to at least $570,000,000 in revenue, which is down from $580,000,000 in previous guidance.

Speaker 1

We are also updating fiscal 2023 adjusted EBITDA guidance to be at least $60,000,000 down for the year from the previous guidance of $70,000,000 We expect to continue to remain in compliance with our financial covenants for the fiscal year. We still expect capital expenditures to be approximately 5% of revenue in fiscal 2023. We anticipate a more modest level of capital investment in 2024 of less than 5%. The capital expenditures are down from our 5 year average of 14% as we build capacity, New service offerings implemented our site optimization plan. We are pleased with our sequential Financial performance this fiscal year and the progress that we are seeing from our investments, our site optimization implementation and 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.

Speaker 1

And with this financial overview, we will turn the call over to our operator for questions.

Operator

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Questions will be taken in the order received. Thank you. And your first question comes from the line of Tim Daley from Wells Fargo.

Operator

Please go ahead.

Speaker 4

Great. Thanks for the question here. So Bob, very impressive book to bill here in DSA at 1.08 Implies roughly $5,000,000 sequential increase in the net orders in the quarter. Were there any head on offs here, any pull forward? Just how are bookings going in the Q4 so far?

Speaker 4

Just trying to kind of Help us figure out a bookings rate on a sequential basis moving forward.

Speaker 2

Bob or Beth, are you there to answer Tim's question?

Speaker 3

I'm sorry. I'm sorry. I think I was on mute. Sorry, Bob. All right.

Speaker 3

Tim, sorry. Thank you. I've been talking here. Nobody could hear me. I apologize.

Speaker 3

So Tim, to answer your question, our bookings for the Q3 were actually very strong, One of our strongest ever. The net bookings though came just over 1 because of cancellations. So we're still seeing a high level of cancellations as we had in previous quarters And I think that will continue. It's one of the reasons why we increased this sales force over the last year. And As we've done that, we've seen our ability to increase in quotes.

Speaker 3

So our quoting level for the quarter was probably a record for us As was our closing, and I think we hope to continue to see those trends. One of the areas where we've been off In the last 6 to 9 months, within the Discovery Services, as we talked about, our revenues in Discovery are going one of the reasons we decreased guidance is because our Discovery revenues are going to be up this year from what we originally projected. Revenues are going to be up this year from what we originally projected. However, As I also said in the last call, in March, we added a specific Discovery sales team to the market Back in the first half of this calendar year in January, February, March, we're starting to see really a significant improvement there. And I'm starting to see a really good trend and the discovery, which maybe is an indication that some of the biotech funding is back and then they're coming back and putting some of the projects back in because that's been one of the strengths so far 1st part of this quarter.

Speaker 3

So I don't have the ability to predict going forward kind of how this would what the bookings will be, but I do expect cancellations will I think that the quoting activity remains very strong. I'm hopeful that we'll continue to close At a good level. And so far, sort of pleased with what we're seeing so far this quarter.

Speaker 4

All right, great. And then, I guess just for Beth, I think you guys called out Assuming that Cambodian China conditions remain, a $20,000,000 quarterly run rate of EBITDA is a good number for 2024. So Is that kind of a way to be thinking about at least the baseline for 2024 is $80,000,000 of EBITDA for the full year? And thank you for the time. Appreciate it.

Speaker 1

Yes. I would be thinking of it in terms of $80,000,000 for the year with an average of $20,000,000 per quarter.

Speaker 3

We average, if you look at the last two quarters, we're probably 48, which is an average of 24. And I would say that we look at The 48% reduction of what's coming in the country, expect that there'll be a significant reduction. We're looking at that and And pricing and saying, okay, let's make sure, as I said, let's start a conservative estimate that we feel like we can depend on. And then if things change, if the biotech funding goes up, if we're able to recover some of these discovery sales, if we're able to see some additional opportunities for HPs, Then that will be great. But at this point, let's recognize the environment that we're in.

Speaker 4

All right, perfect. Thank you for the time.

Operator

Thank you. And your next Question comes from the line of Matt Hewitt from Craig Hallum Capital Group. Please go ahead.

Speaker 5

Good afternoon. Thanks for taking the questions and congratulations Navigating what's a pretty challenging environment. Maybe first up, regarding the NHPs, I heard what you said as far as Cambodia Still pretty locked down. It sounds like you're finding some supply in some other geographies or some other countries. But As we think about opportunity there, I guess, well, there's maybe 2 questions.

Speaker 5

First, were you able to unlock some of your And I guess number 2, is there an opportunity for you to Taking animals in 1 or more of your international sites or is that not an option?

Speaker 3

What was the last question, Ken? Take it.

Speaker 5

Would it be possible yet to take custody of animals in 1 of your European locations.

Speaker 3

Okay. First of all, we do actually Distribute NSPs in Europe, and we have. And that market, we don't we have not taken Cambodians into Europe, Don't expect to and that market has really not changed for us. So that has never been part of our the Cambodia has never been part of our European plan, and we don't anticipate changing that. We're not going to do anything with Cambodians for the moment Anywhere.

Speaker 3

So I think that was a part of it. And the first part of the question was, Yes, we have been able to bring in from other countries and others and it kind of depends on what Also our customers want, but you asked about our inventory. I don't want to give up really don't want to get into a lot of inventory, but yes, we have. I've said in the past, sold from our inventory. But no, we have not sold all of our inventory and we've not released all of our inventory.

Speaker 5

Got it. All right. And then maybe a second question. As you look as you've rolled out some of these new services, Clearly, you're having some success there. Have you looked or is there any kind of a metric that you could provide that would if you look across your 3,000 over 3,000 Customers worldwide, how many are using 2 services or 3 services?

Speaker 5

And maybe how has that metric changed over the past year? Thank you.

Speaker 3

I don't have a good metric on that, Matt. I know that we have a We're bringing our DSA groups together, Discovery and with our safety assessment group and combining those. We are now looking forward. We're starting to discuss and figure out how to do a better job of bringing our research models customer base to our discovery base, which will evolve into our safety assessment base. And to do that, we'll be making some changes and adding some scientific strength to our bench in the coming year and looking quite forward To evolving that part of the business, so we really could bring the RMS business a lot closer with the Discovery business And hasn't cross sell more than they have in the past.

Speaker 3

But I think we need to make some improvements to the scientific team. And we're planning to do that, and those will be announced in the future. So looking forward to that. And I think what we can do now that we've kind of what I'd say finished a lot of what were the brick and mortar changes that we needed to make. But I think there's a lot of opportunity there.

Speaker 3

A lot of opportunity there, we've not touched yet.

Speaker 5

Understood. That's helpful. Thanks very much.

Operator

Thank you. And your next question comes from the line of Abe Wandley from Jefferies. Please go ahead.

Speaker 6

Hi, good afternoon. Thanks for taking my questions. Bob, I'm wondering if you wouldn't mind breaking out your bookings from some of your newer services. I think you've called out in the past iPharmaceutical GeneTox, I'm wondering how much traction, how much those are contributing so far?

Speaker 3

Yes. Let's see if I can think of it. I do have Somewhat awareness, I don't have the right front of me, but we started those services up the end of calendar year last year, And we've started to see that in that backlog grow and those services start to grow. It's still we still We're not exceeding $1,000,000 a month in those services for those new facilities, but it's grown Fairly rapidly over the last 6 months. And that backlog has grown quite a bit, but it's maybe Put in perspective, it may be $3,000,000 to $4,000,000 or $5,000,000 net backlog $4,000,000 of backlog now.

Speaker 3

And It's really hard to pull apart because many of those services are part of much larger programs. And some of those services were things that we were selling before, but we are outsourcing. So it's sometimes really hard to say that that's something we didn't have in the backlog before Because of what we were outsourcing before.

Speaker 6

Okay. Okay. That's a good reminder there. In that regard, sticking on that side of the business, but thinking about your adjusted guidance, I think you're attributing most Of the revenue decline in the full year guide to availability of NHPs, you also mentioned in an earlier answer a little bit of discovery. It looks like overall revenue, you expect your revenue to be sequentially down by $30,000,000 ish.

Speaker 6

Should we think about that all coming out of RMS Or some of that DSA and I'm thinking again because your net book to bill this quarter was pretty decent As I think Matt said, so how should we think about paying?

Speaker 3

We're going to see most of that Come out of the RMS. So I think it's not down $30,000,000 I think it's down we brought it down $10,000,000

Speaker 6

$10,000,000 reduction guide, I meant sequential from 3rd quarter, sorry, that wasn't clear enough.

Speaker 3

Yes. So I think So I think it's been intended for what we thought. And I think that will come more that will come from the RMS side, not the DSA side. And that will be primarily in HP related. So For the year, our NXP revenue is probably a little higher than I thought we would be.

Speaker 3

It's our DSA sales been a little lower than I That would be for the year.

Speaker 6

Okay, interesting. Okay. So then on the RMS side, Can you or Beth give us a sense of how much of the revenue either for the quarter or year to date It's still tied to NHPs. How much are NHPs driving RMS now?

Speaker 3

Well, it's always been an important part of our revenue. But I would but David put it try to put a little bit of perspective for it. The volume of NHPs that we sold in the Q3 this year Probably in excess of a number of HP, but probably at least 40% less than we sold last year. So When I say that the imports coming to the U. S.

Speaker 3

Are down 40%, I think what I say, 49%, 49%, we're seeing that. And we as a result, we have much less going out the door now on a quarterly basis. Right. We don't break out.

Speaker 5

We don't break out any I don't think

Speaker 3

we break out NSP revenues from our NSP revenues.

Speaker 6

Okay. Okay. So but thinking about your commentary, which appreciate the helpful comments to begin to frame 24, Thinking about a $110,000,000 number in the 3rd quarter and it sounds like Your base case expectation is that the volume of NHP that will be available to you will continue to shrink. And so I guess I'm wondering how much of that revenue run rate is subject to The decline in accessibility of the NHPs and how much is kind of more stable because it's tied to rodents?

Speaker 3

Here's the interesting thing. I think when I just told you the volumes, the number, the volume of NHP The Q3 was down over last year. If you so that 110 included that 40% reduction Right. From last year, okay. I think overall, we could be down 40%, forty 5 Next year.

Speaker 3

So I don't know that we I think I don't know we're going to I don't know if we could see a Create a fall off next year in the sales of NSPs than we saw from the in the RMS business than we saw in the Q3 because that now that is baked in. That reduction is significantly baked in. I do think that based on when things are coming in, We could have some variations between quarters of when they go out. So it may not be every quarters even. It may be some quarters are better than others.

Speaker 3

But I think overall, on average, the quarter that we saw maybe the quarter that With that significantly less volume that we could see.

Speaker 6

Okay. Last question for me is I

Speaker 3

hope that helps out.

Speaker 6

Yes. So you're kind of saying no more decline from the 3rd quarter

Speaker 3

So in what level of 3rd quarter volumes? On average, David, we could have quarters that we and in total, I think that we see it fairly consistent. It doesn't mean every quarter is going to be the same. And that's because it could but on average for the year, I think Counting on that 40% decline is something that 40%, 45% decline is something that we can have to Maybe you get used to.

Speaker 6

Right. Okay. Last question for me. Earlier in the year, both At the Innovative level and the industry level, there's a lot of conversation about working with the U. S.

Speaker 6

Fish and Wildlife Service To both get approved kind of have a pathway and get approved a parentage test To try to satisfy and kind of reopen the supply chain, satisfy the Fish and Wildlife Service about The provenance of animals coming from Cambodia and reopen that supply chain, your competitor yesterday, it really didn't come up. I'm wondering if you could give us an update on where that stands, what progress has been made, if any, And what upcoming court case and CITES meetings might mean For that dialogue?

Speaker 3

Well, David, I've come to the conclusion We're not big enough and important enough to really make a big difference in what's going to take place With U. S. Fish and Wildlife, the DOJ, the government and those actions, we follow it closely, But they're going to do what they want to do, what they choose to do, what they think is best. And I really don't have the ability to Predict what they're going to do, which I think is why we're trying to just be realistic. Given the landscape we have today, We're trying to figure out how to play within the landscape we have today.

Speaker 3

If that changes, you know what, great, we're ready for it. But if it doesn't change, let's make sure that Let's make sure our business model works based on status quo today. And I think it's very tough thing for our industry. It's very tough for Joint Discovery involvement in the U. S.

Speaker 3

To see that happen. But as far as our company, let's take That is the basis and move forward from there and still an early day wake up frustrated that it's not that that's not changed. Let's wake up realizing that is today's model and when it's ready to change, we'll be ready for it. And as I said, I just set that expectation. And it's really important to add for our management team, I think for our leadership team, I want them to wake up every day knowing they're successful and having them come to work every day thinking they're not successful because Something we're waiting for the government to do or not do is not fair to them and not fair to us.

Speaker 3

So let's adjust our plans So they can wake up feeling successful every day and not feel like we're dependent on something we can't control.

Speaker 6

Right. Understood. I appreciate the perspective. Thank you.

Operator

Thank you. Your next question comes from the line of Frank Tuckinen from Lake Street Capital Markets. Please go

Speaker 3

ahead. Great.

Speaker 7

Thanks for taking the questions. I wanted to clarify on the renewed EBITDA guidance. I understand the revenue Guidance change, but was hoping to get a little bit more color on the EBITDA guidance change. I figured it would be maybe a little bit less than the same proportion of revenue coming down, but Maybe talk to margin expectations and then is there an expected uptick in operating expense as well to get to that 60,000,000

Speaker 3

Well, as I say, Alan, for the year, compared to the year, I'm pretty pleased with even with the reduction in volume, the The pricing for the NHP has held up pretty well. The RMS sales have held up pretty well. There are really 2 major things for the year that we're offering. Yes. Discovery sales may be down about $10,000,000 from where we'd like them and plans for them to be.

Speaker 3

And that's a reduction in Top line and then we probably had legal fees in excess of $9,000,000 or $10,000,000 where they thought to be. On the Discovery sales, probably 80% of that goes to the bottom line. So those two things make up a pretty big between that and the Eagles, you'd make up the biggest difference where we're off For this year versus where we hope to be. But given all the challenges we have this year and all the changes that are taking place in the industry and the biotech funding and the NHPs, We're pretty pleased with this quarter, very pleased with where we are today and the ability to get all of these things that we had a year ago in December, People talk to me and say, Howard, they will. Are you going to finish 4 or 5 expansions and 8 or 9 site closures and You changed this and that.

Speaker 3

The good news is our organization has done that. And now those things are done. So we have a lot less variables. As far as this quarter, what we thought is again, just what I told David, let's look at where we are realistically With NHP's where we are at the market, and let's make sure that we identify something realistic. Yes, we could Yes, we can leave guidance really high and try to stretch and do something that's not natural for the company and achieve a short term A quarter to meet it, to meet the guidance, but that probably is not the best long term decision for our company.

Speaker 3

What I try to give guidance to is what I think is the best Long term decision for our company. And what Beth referred to in her point was what is really a reoccurring expectation. Our last 2 months quarters are pretty good, 24,000,000 Do you think that we can maintain that? Yes. Our goal is obviously to maintain at least that.

Speaker 3

But let's set an expectation that We feel comfortable with those lower volumes of NXPs that we may see in the future And timing when they may come in and be available for sale. Some cases, we're expanding the quarantine periods. That may take If we do that, it would take an extra 4 weeks of quarantine for whatever we're being very careful that may Change when things go out and when we ship things. So now you if the NSP is going to 30,000, 40,000 piece, you change when 300 NSPs go out, you Change the top line by bottom line significantly. It's $10,000,000 a year, 50% of that could go to the bottom line, at least 30%.

Speaker 3

So, there's we've got to be very careful of how we set those expectations. Plus we have a as far as the NXP business, if you think about it, we have a very high fixed cost structure and a very high Standard for animal welfare. So even though we have less than each piece going, we still have to cover that fixed cost structure. So those on that lower volume, that remains we can't take a shortcut on animal welfare and our investments. So we're watching these things very closely.

Speaker 7

Got it. That's helpful. And then now that you have a lot of the site closure, broadly speaking, site optimization behind you, you've got a A solid infrastructure to grow off of now. Maybe speak to your confidence behind your longer term 18% To 22 percent EBITDA margins and if you're at all thinking about a timeline to when we could reach a profitability profile like that?

Speaker 3

Well, I think as biotech funding as we increase our market share, We have great leverage, I think, in our DSA model. And I think there's outlined this before how we get to this 22% On the with the increased margins from the DSA business as we grow that and as Costs continue to come out of our RMS side and those things will continue over the next 6 to 9 months. What I'm doing by Outlining this current guidance is probably taking a lot of pressure off growing the DSA sales business In the midst of a reduced biotech funding. I hope we can we grew it in About 10% last year, we're at 160% to 180%. So maybe it's 29% to 160%, so maybe low single digit double digits.

Speaker 3

Maybe we can do that again next year. When we were doing this 2 years ago, when product had funding was high, we were growing that business 25%, 30% a year. But this environment is a little different. So what I'm trying to say is, okay, it's okay. It doesn't matter if it takes us 12 months to get there, 18 months to get there, doesn't need to take it 6 months.

Speaker 3

And let's put a realistic expectation. Yes, I hope we can get there sooner. Our team would hope we can get there sooner. And we're looking at how to get to contract it sooner. And every once in a while, we see some pretty good momentum.

Speaker 3

So, if we don't get there next year to the 'twenty two, we do 19% here. Obviously, it's possible And we don't have all the cost and savings in and we don't have all the margins in. So it's obviously possible for us to get to 22. But I think what we need to do is make sure we get there in a way that we're building the company with a very strong foundation for the future. We don't need to be

Speaker 4

in a circle yet. We don't

Speaker 3

need to be in a circle

Speaker 7

yet. Right. Makes sense. Got it. Thanks for taking

Speaker 3

the questions. I'll stop there. Thanks.

Operator

Thank you. And your last question comes from the line of Ewan Lee from B. Riley. Please go ahead.

Speaker 8

Thank you for taking our questions. Bob, on a high level, can you provide some comments on the demand of Keith, how does that compare to last year based on your observation? You mentioned the supply part from government tracking data. Now I have a couple of follow-up questions.

Speaker 3

Yes. Our demand is staying fairly high and I think it's going to continue to be there because I think It's going to it took when the supply chain Takes a while to empty out. People have inventory. People have things in quarantine. People have things getting acclimated.

Speaker 3

So it takes a while for the supply that existed in November to start to be reduced. Now that we're only importing Half of what we had before, the supply bottlenecks are going to get a little tougher, I believe. There are also some changes going on to what type of HP somebody may want. Now it may not be a Cambodia, maybe they're choosing to go to different species. So I think there's a shift And what people are looking for.

Speaker 3

We continue to look at that closely, but I think that the demand is still there. If we had more, I think the The demand will be there for more, but that's I don't think that's going to be the case.

Speaker 8

Got it. In addition, can you please clarify the accounting method related to the NXP Biologic assets? Did you use first in, first out or last in, last first out to calculate the inventory and COGS?

Speaker 3

We use actual, actual cost. So Each annual have its cost, what it cost to bring it to buy it and import it. And so as we So that the actual cost is against that. We do as we as I may or may not believe to there, We do have overhead and has to be covered by those margins, such as feeding, labor, utilities, Sewage, insurance, transportation, a lot of our those costs are expense. They're not in our inventory.

Speaker 3

We expense those as we go.

Speaker 8

Got it. And one last question. On the supply of NHP outside of Cambodia, Have you noticed an increase of cost of those supplies? And do you have some kind of contract or price lock in place for those supplies.

Speaker 3

We do have some price contracts that should lock in prices. And yes, we have seen prices increase. Got it. That's all from us. I'm assuming you do.

Speaker 3

Got it. That's all from us. Yes. Thank you, Han.

Operator

Thank you. Mr. Leisure, there are no further questions at this time. Please proceed.

Speaker 3

All right. Thank you, everyone, for joining today's call. It's a lot of great questions, a lot of information. Our team looks forward to what the future holds for Innovative. We have positioned the company for strong growth.

Speaker 3

I would like to thank our investors for being part of this journey with us. We understand our industry has faced some challenges and some changes, and we've made adjustments to address these challenges. We also believe that we have Substantial opportunities going forward as all of our efforts today have significantly enhanced our capabilities in the marketplace. Moreover, our capital investment program has largely been accomplished already and we expect lower CapEx spend as a percent of revenue going forward. In completing the necessary infrastructure upgrades to the business, we now have the advantage of both scale and in house capabilities.

Speaker 3

We believe that we can continue to effectively increase We are now well positioned to better control the timing of start and delivery of projects as well as to provide high levels of customer service at all times. We look forward to the next call and seeing many of you at upcoming healthcare investment conferences. Thank you. And may I add one more happy birthday, Robert. Thank you very much.

Operator

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you all for participating

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Earnings Conference Call
Inotiv Q3 2023
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