Q2 2021 Inotiv Inc Earnings Call
[music].
Greetings and welcome to <unk> second quarter fiscal 2021 financial results conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.
Once you require operator assistance during the conference. Please press Star Zero on your telephone keypad. As a reminder, this conference is being recorded I would now like to turn the conference over to your host Mr. Kelly All of the equity group. Please proceed sir.
Thank you Latanya and good afternoon, everyone.
<unk>, Inc. Second quarter fiscal 2021 financial results were released today after the market close.
A copy of the earnings release can be found on the investors section on the company's website at Www <unk> co dot com.
As a matter of formality I need to remind you 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 statements represent management's expectations.
As of today's date.
And you should not place undue reliance on these forward looking statements. The company does not undertake any obligation to update or revise forward looking statements whether.
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.
Definition of these non-GAAP measures and reconciliation to the most comparable GAAP measures.
Is included in the company's financial results press release and corresponding form 8-K.
Joining us from the company. This afternoon are Bob Leisure, President and Chief Executive Officer.
Beth Taylor, Chief Financial Officer, and John <unk>, Chief Strategy Officer.
Bob will begin with some opening remarks, after which Beth will present, a summary of the company's financial results.
Then we will open the call for questions now, it's my pleasure to turn the call over to Bob.
Yeah.
Thank you Kelly and good afternoon, everyone. Thank you for joining us this afternoon.
We've made significant progress this fiscal year advancing our goal of becoming the preferred research partner to emerging Biopharma and other companies.
Providing best in class customer service and building a comprehensive suite of solutions across the drug discovery and preclinical development continuum.
In this regard we believe that <unk> is uniquely positioned in North America to fill the gap between the smaller independent service providers and the large multibillion dollar crows.
We believe that on our agility responsiveness breath of preclinical services frequently sets us apart from our competition.
The start of fiscal 2021 has been busy and transformative period for the company as we continue to invest in new talent.
Enhanced capabilities broaden our services improve infrastructure systems and add capacity, while successfully raising capital and completing.
Two complementary acquisitions in the month of April.
Last month, we raised approximately $49 million in net proceeds following the close of an underwritten public offering of our common shares and secured debt.
Additional 28 million in additional debt financing.
Enabling us to complete the recent acquisitions of his to talk slabs, and Boulder bio path, and which will provide additional capital for internal expansions and development.
His to talks brings a scientific talent new capabilities and expertise in cell typing bio distribution gene therapy and.
A novel biomarker assay development.
Thriving business that has achieved compound compounded annual revenue growth in excess of 30% over the last three years. It's a client base have been less than 20 per cent overlap with ours and consisting of predominantly emerging biopharma companies with a focus on cell and gene therapy as well as those discovering traditional small molecule <unk>.
<unk>.
That's an excellent cross sell provides us excellent cross selling opportunities.
As additional capacity to support future growth.
And its current 15900 square foot Boulder, Colorado facility.
Its neighbor.
As older bio path.
On a bio path as far as scientific talent, new capabilities expertise and non clinical pharmacology and pathology, particularly in in vivo models of arthritis.
I am a terror inflammatory bowel disease, and central nervous system diseases, as well as other autoimmune inflammation and pain models.
It's a platform that registered compounded annual revenue growth in excess of 20% from three years prior to the bid day pandemic.
It's another client base, having an excess.
Having less than 20% overlap with ours and consisting of predominantly emerging biopharma companies.
Again provides excellent cross selling opportunities and has available capacity for future growth. It is 24500 square foot facility, which was expanded and it's basically tripled the size. It was in 2019.
Combined with our planned expansion in St. Louis.
Which we also announced in April these acquisitions position us to offer comprehensive laboratory solutions and D. M. P K in cell and molecular biology I.
I mean.
Immuno histochemistry chemistry.
And pharmacology models support to clients pursuing preclinical drug safety and efficacy programs.
We plan to exercise our option to buy the St. Louis facility for approximately $4 $7 million contingent upon business incentives.
The 50000 square foot facility is comprised of 30000 square feet on finished laboratory space and office space.
Which is included in the 30000 and an additional 20000 square feet of unfinished shelf space.
The expansion will finish the shut our expansion will finish the shelf space, adding office and laboratory capacity to accommodate additional growth our growing client base and diversity of service offerings.
In March our shareholders approved our formal corporate name change to intuitive com, a dash or comma Inc.
Which unifies our organization under the philosophy of expect more.
And the fundamental goal of delivering exceptional client experiences.
Just to talk slabs and Boulder bio path. It's about similar Accredo is can we expect smoothed cultural transition.
During the integration.
Finally, we believe that.
Both transactions are financially accretive and it is before revenue synergies.
We also are making internal investments in people systems capabilities designed to drive future growth.
Our success, attracting and recruiting high caliber.
<unk> and scientific members to our team continued in the second quarter.
For example in February we were pleased to appoint Greg Baby as our Chief operating officer. He brings his 30 plus years of contract research experience, including more than two decades and operational leadership roles at Charles River laboratories, where he drove growth.
Billety across multiple business units.
It is already is benefiting from his extensive industry experience and perspectives.
In January we expanded our scientific talent.
Veterinary clinical pathology with the hiring of pad them all back who provides us a unique knowledge in the area area of experiment on Biomarkers and we bolstered our surgical models team with the appointment of Daniel sneak who came to us from Colorado State University Veterinary teaching hospital, where he was preferred.
And cheap a small animal surgery and dental oral surgery.
In the second quarter, we also invested in the design and implementation of an enterprise technology solution for study management partnering with the technology services company centric consulting LLC.
By integrating study management activities and migrating multiple legacy systems into a new singular platform.
We will ultimately improve processes enable a more seamless automated workflow and improve client deliverables.
We have started to reduce our sub contracted and outsource work for example on the second quarter, we invested in software solutions that support bringing in house certain data management and delivery services that were previously outsourced in the area of <unk>.
S M D.
Or the standard for exchange non clinical data.
Moreover, this quarter, we announced plans to expand our service offerings to add cardiovascular safety pharmacology evaluations to the existing capabilities for respiratory and central nervous system safety pharmacology.
Previously we relied on sub contractors for these cardiovascular assessments.
All of these internal and external investments should enable us to better serve our customers drive revenue growth.
[noise] achieve greater scale and deliver higher margins given the operating leverage inherent in our businesses.
Moving to our second quarter financial results, we achieved year over year growth of $17 one per cent all of which was organic and 106 basis point improvement in gross margin.
Similarly, our first half gross margin increased by 333 basis points to approximately 33, 3% ilk.
Illustrating the inherent operating leverage potential as we expand.
As I discussed the augment future revenue growth, we have increased our strategic investment in G&A, including people capacity.
Infrastructure systems and services.
These growth initiatives, along with higher unallocated corporate along with higher unallocated corporate expenses for due diligence legal support and integration planning and related related to our purchase of his thoughts on slabs and Boulder bio path in April temporarily dampened operating margin in the quarter.
Given the expected contribution from these acquisitions the anticipated return on internal investments are second quarter book to Bill ratio of 1.51.
The one in our quarter ending backlog of $53 9 million, we anticipate higher revenue greater scale and eventual improved operating margins.
Recapping our growth strategy. We're currently focused on providing flexible superior customer service to our clients per.
Pursuing selective strategic acquisitions that dovetail, well with our current assets and services and provide cross selling opportunities.
Integrating our acquisitions, and then adding services people equipment and capacity to drive subsequent organic growth.
Investing in internal growth initiatives and capacity.
Driving ongoing operational efficiencies.
Scaling our business to realize operating leverage in order to drive improved profitability and cash flow.
We remain optimistic about the long term growth opportunity in front of us.
We help clients reduce time and cost to bring drugs to market through click through critical outsourced discovery and development services.
Which otherwise would require a significant client overhead.
We strive to outperform our larger and smaller CRO peers with service flexibility innovation and attention to details, creating a unique opportunity for us to grow in this space.
With that I will turn the call over to Ben Taylor, Our Chief Financial Officer to recap our fiscal 2021 second quarter financial results in more detail.
Please go ahead.
Thanks, Bob and good afternoon.
In the second quarter of fiscal 2021, our revenue increased seven 1%.
The $18 $8 million from 16.
$16 million.
Horrible period.
Period.
Service segment revenue in the second quarter.
2021.
17000 acres.
9 million.
Pinpoint tumors.
Comparable prior year period.
Gross margin increased 33, 3% in the second quarter.
From 32 eight per se.
In the comparable price.
Gary.
And our product segment revenue increased three four per se.
$849000.
Quarter on fiscal 2021 from $821000.
Comparable prior year period.
Product gross margin increased to 38 five per se.
Quarter.
From 25, 5% in the comparable prior year period, driven by expense reductions implemented.
Yes.
And if Chris Martin.
Okay.
Operating loss in the second quarter of fiscal 'twenty one.
So on $521000 compared to an operating loss.
$95000.
In the prior year period.
The increases in operating expenses.
Great.
Right.
This quarter's growth oriented investments.
Operating.
Consulting fees for Infinera.
Our new enterprise value management.
Higher compensation, which includes non cash.
Cash stock compensation expense.
Recruiting and relocation fees on board.
Cost of services in house.
And increases.
Alright.
And expenses to increase capacity and service offerings.
All combined corporate unallocated G&A much of which was growth oriented.
Approximately 18% of revenue in the second quarter of fiscal 2021 compared to approximately 10% of revenue in the second quarter that's physical.
Approximately 15 per se in the first quarter and fiscal 2021.
I also want to point out that this quarter selling expenses were higher as compared to prior periods due to our increased book to bill ratio and we pay upfront.
We win new orders prior to the recognition of corresponding revenue.
And this increase was partially offset by a decrease in travel expenses.
<unk> elimination.
Due to the COVID-19 pandemic.
Net loss from the second quarter of fiscal 'twenty, and 'twenty, one totaled $723000 or negative.
Uh huh.
Sure.
Weighted share compared to a net loss of $588000 or a negative.
For diluted share in the comparable prior year period.
Adjusted EBITDA equal to approximately $1 1 million in the second quarter of fiscal 2021.
As well as in the comparable prior year period.
The book to Bill ratio for the second quarter of fiscal 'twenty one.
Right.
On it.
Our backlog at the end of the second quarter of fiscal 2021 was $53 $9 million 19 per se.
$45 3 million on December 31st 2020, and.
50% or 36 million on March 31st 2020.
Briefly reviewing our first half fiscal 2020, one Russell total revenue increased 26, 6%.
$36 6 million driven by $6 2 million of internal growth and $1 5 million of incremental revenue from a book six months of operations at our Fort Collins, Colorado location that was acquired in December 2019.
Compared to the prior year period first half 2021 gross margin expanded 333 basis.
The 33, 3%.
Net loss narrowed by approximately $900000 to one $1 million or a negative <unk> 10 cents per diluted share and adjusted EBITDA increased 51, 3% to $4 million.
Cash flow from operations during the first half of fiscal 2021 totaled four 5 million, which primarily reflect the add back of depreciation and amortization of $2.2 million.
The increase of customer advances of $3 $8 million, partially offset by an increase in accounts receivable of $1 nine.
$10 million.
Capex for the first half of fiscal 2021 totaled $2 $4 million.
Our balance sheet at March 31st 2021 included cash on cash equivalent to $2 million in long term debt.
$9 million.
Total debt was $26 2 million, which included a $5 $1 million balance of our PPP loans.
We believe the benefit of the P. P. P. M. On has allowed us to continue to retain our employees and safely maintain business operations to recent periods.
Have submitted our application for forgiveness at $4 9 million of the violence to the bank for their review.
Following our recent equity capital raise and the purchase of Bluebird bio path, we estimate a diluted share count of approximately 16 5 million and an equity market cap of approximately $430 million based on our closing share price of 20 per seller from 27.
On May four 2021.
Overall, we are pleased with the direction our business is heading and feel confident on continuing to invest in our seat share.
This concludes our prepared remarks, so with that I will turn it over to Latanya to open the call for questions.
Thank you at this time, we will conduct a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.
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One moment, while we poll for our first question.
Our first question comes from Calabaza with colleagues Securities. Please proceed.
Great. Thank you congratulations on all the updates it's certainly been very busy here, maybe I'll start with your acquisition strategy.
As you look at.
A subsequent acquisitions I'm, just wondering how you're prioritizing new targets, you've been able to to be opportunistic with the very high quality targets and at nice transaction multiples are you are you prioritizing converting outsourcing services to in house services such as.
Genetic toxicology or maybe tuck in acquisitions.
To add.
Base that could benefit from from cross selling opportunities are both I'm just kind of.
I'm wondering how you're prioritizing targets right now.
Thank you Tal John do you want to answer.
The answer.
Kyle.
Sure Theres a lot wrapped up Kyle on that question, but I.
I guess I can think about the prioritization process as being multifactor low.
First of all I think it's really important that we identify opportunities that share a cultural philosophic fit with respect to our core values.
Especially.
Their approach to client experience that that is a major part of our brand historically and will remain a major part of our brand going forward.
You asked about tuck ins, we certainly want to look for opportunities to bring expanded capabilities to extend our reach within our market space.
But obviously, it's also a great value when we have opportunities to to bring accretive revenue on accretive profit by using other.
The capabilities that we have elsewhere within the company.
And you mentioned a decreasing are dependent upon external service providers for key programmatic activities and certainly with the recent announcements about.
Major players exiting from genetic toxicology, specifically, it's causing us to rethink our approach to our dependents on through third parties. So we certainly look for those.
Opportunities, but I think ultimately any deal that we contemplate has to create value for our shareholders and bye.
I don't know if you're on and take it back in and just respond a little bit more on on the value side of these opportunities.
Sure I think.
Good day gets into the pricing and the opportunities but.
John outlined very carefully what we're looking forward. In addition, we want to make sure. All these acquisitions are going to.
Provide real value for the clients, but were also real value for our shareholders and then third it's a very important they were true.
Creating a place where people want to work and the more services and more talent, we surround ourselves with.
The easier it is to recruit and.
Clients want associate with Us and I think it all works hand in hand with all of.
The shareholder value works I think these last two.
We're very positive and they're very fair deals. They were they were great for the sellers, but they are also great for our shareholders.
So I hope, we can continue to find opportunities such as these.
Got it great debt, that's that's very helpful and rigor.
Regarding the expansion in the St. Louis facility.
You mentioned $4 7 million will be to buy the facility and then there's the 20000 square feet.
Unfinished shelf space incremental to the existing 30000 square feet of finished space.
Have you talked about what you anticipate the incremental capex spend to be to finish this.
I don't think we've talked about it but I would tell you that.
We estimate it's going to be between two and a half from three and a half million dollars.
Probably from three to $3 $5 million to complete that space and to equip it with some of the equivalent we'd like to just start off with.
And we hope that we can complete that build out.
Over nine months, but we were still waiting to hear back from the state of Missouri, and then once we get those answers, but we will make further decisions.
Got it.
And I know <unk> talked about that on allocated G&A bucket I think it was 18% correct me if I'm wrong any sense to how how this could trend over the next call. It 12 to 24 months is this is a key source of leverage from what I understand and so just kind of true.
On to get a sense of how we should model that going forward.
Yes, Kyle I mean, it's something that I watch closely and we don't make investments like this lightly.
We make sure we.
Our cash flow and positive, but but these are significant investments we've made this quarter and really in the first quarter, but if you look at if you look at the number the unallocated G&A I think last quarter was a I'm going to I'm going to give you some figures and that would probably help give a little bit the direction. We're headed I think allocated G&A was $3 4 million on 18 point.
$8 million of sales.
That's what it is generated 18%.
So in a theoretical business model, if we were to $25 million on the same three or four we'd be 13%.
We're probably some expenses in that quarter that we were at least at 230000 trained.
Transaction related expenses and net quarter between due.
Due diligence.
And.
Legal transition cost so if you say it.
He was a more normalized maybe its three one on the same quarter.
Quarter of about $100 million run rate, which would be $25 million that would be 12, 5%.
Mhm.
I think that during the.
Calls on raising money I I may have used the number I thought that we ought to try to get to 15% when we got to $115 million to $120 million.
So basically it's simply if you keep it the same logic.
When you say you're at a $150 million would be a 20 28 million $29 million per quarter.
Assuming the same $3 one and.
You know you get to the unallocated G&A is coming down to 10 points.
And that combined with some of the insourcing of they were doing at that source of outsourced I thought we could pick up a point and a half that really gets you to the to the 15% EBITDA level closer to that 115 to 120, Mark. So that's some of the math that goes that goes into it I think we've built an infrastructure up.
That is capable of supporting debt level of investment.
So you know hopefully for US also will continue to to to invest.
And so.
The court unallocated corporate G&A, we had this past quarter I expect we'll still see additional transition cost and integration costs come through this quarter and possibly into the to the.
The fourth quarter, so the third and fourth quarter could also see those continued cost and we're going to continue to be aggressive and looking for those opportunities too.
To grow and invest.
But if we were to if we were to slow if we were to slow down on it I think that's that's where we would be at 115 to 120 and there's probably.
That's what gets us to the 15% range and I think as I said before so we can move up to 150, then I think you've been moving closer to the to the <unk> 20 per cent range got it.
I hope that's helpful. That's a lot on a lot of numbers, but I thought it.
They'll just come up a couple of times before and I wanted to kind of give it a little bit of idea of how we get there.
That's perfect I appreciate that.
And then just lastly, if I may.
What.
If you know if we're looking at organic growth rate going forward I know, we just had the two acquisitions that closed.
Can can you talk about what a reasonable target is I mean is it is it.
Still close to 20% just trying to understand how we should model that as well. Thank you.
Well, obviously, we're six months is pretty strong and we're really pleased with the organic growth rate would get last quarter.
Some of that kind of I guess as a function of you know our I believe our.
I believe our Q3.
Three of 2019.
Basis completed $15 8 million.
So in essence, if we.
If we're able to duplicate the quarter, we just had.
We would we would see about 20% growth.
Just duplicating the quarter on the on the on the base, we're coming off to in the next quarter.
And with the backlog as you know I think we have a.
We have a good.
The backlog going into this quarter, so I don't want to give guidance, but you know so.
So far we have we've set a pretty hard bar bar for ourselves and.
You know we've we've now demonstrated that we have the capacity to exceed debt too.
At or exceed that 20% next quarter.
Beyond that I prefer not to get into to the.
To some of the future quarters beyond that.
Okay got it that's great I appreciate you taking the questions and congratulations on all the progress here.
Thank you.
Once again, ladies and gentlemen to ask a question at this time. Please press star one on your telephone keypad.
There are no further questions in queue at this time I would like to turn the call back over to Mr. Bob. Please you for closing remarks.
Yeah.
Yeah.
Alright, well I would like to thank everybody for participating in our call. This afternoon.
Do you have any questions. Please reach out to our Investor relations firm the equity group, if you're interested in scheduling a follow up call. We look forward to talking to you.
We look forward to reporting back to you in August when we can release, our third quarter fiscal 2021 financial results I Hope everyone has a good day. Thank you very much.
Thank you. This does concludes today's teleconference. You may disconnect. Your lines at this time and thank you for your participation and have a great day.