Q2 2022 Inotiv Inc Earnings Call
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Greetings welcome to initiatives incorporated second quarter fiscal 2022 financial results Conference call.
At this time, all participants are in listen only mode.
A question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero from your telephone keypad.
As you know this conference is being recorded.
I'll now turn the call over to Kelly all of the equity group Kelly you May now begin.
Thank you. Thank you everyone for your patience, we apologize for the delay in the call I'll start time.
<unk> second quarter fiscal 2022 financial results press release was delayed due to a technical issue.
However, the company has proceeded to file an 8-K with the second quarter of fiscal 2022 financial results, which can be found on the SEC website.
A copy of the earnings press release will be available as soon as possible in the investors section of the company's website at to the go 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 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 will be posted in the investors section of the company's website at <unk> Dot com.
And as also filed in the 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'll open the call for questions.
Now, it's my pleasure to turn the call over to Bob.
Alright, Thank you Kelly and good afternoon, everyone and thank you for joining us today.
Apologize for the delay.
And we'll find out the reasons later and try to remedy that.
But in the meantime, I guess, well well listen with renewed interest since you've not seen the results yet second.
Second quarter fiscal 2022, we achieved another period of very exceptional growth I'm very pleased and drip.
Driven by the positive impact of strategic acquisitions strong ongoing demand across both of our segments discovery and safety assessment or DSA and research model and services or R. S.
Our DSA quoting levels awards and backlog all reached quarterly records.
Total revenue grew year over year by more than seven fold.
<unk> 140 <unk>.
$3 million and adjusted EBITDA increased sharply to.
$25 3 million or 18%.
This quarter's results highlight our progress in building and it turns into a thriving world class contract research organization copper.
Comprehensive.
And in preclinical research services and complementary research model capabilities.
Yeah.
Our foundational DSA business continues to perform very well with segment revenue more than doubling to $39 1 million from $18 8 million in the period.
One.
Prior year quarter.
Yes, they benefited from $7 4 million or 36, 5% with internal growth augmented by incremental revenue from strategic acquisitions of Hyster talk slabs older bio path bio reliance gateway pharmacology.
<unk> Biopharma and ILS.
Made to expand our suite of preclinical solutions.
We continue to optimize integrate DSA operations.
The <unk> acquisition closed on January 10, and therefore contributed only partially to our results this quarter.
Unless operates in a 50000 square foot.
It will be located near research Triangle Park in North Carolina, and brings immediate capacity and expertise to our developing genetic technology services, including in vivo in vitro toxicology pathology and molecular biology, bioinformatics and computational toxicology services we.
We believe ILS will eventually integrate with the assets, we acquired from Millipore Sigma fiber lines portfolio in July of 2021.
Also in January we announced the collaborate a collaboration with some extra life Sciences and clinical biomarker analysis Research services company that will accelerate our development of Biomarkers and central to the understanding of safety and efficacy of novel Biotherapeutics.
After the quarter end, we further expanded our specialized pathology services with the April 'twenty tuck in acquisition of <unk>, which brings us core competencies and highly specialized plastics medical device pathology.
This acquisition supports the expansion of our surgical model in medical device services.
And Fort Collins, Colorado.
This quarter, we continue to make internal investments to drive future growth and our DSA segment.
In January we completed our St. Louis, Missouri facility expansion and are currently recruiting recruiting.
To meet growth opportunities.
And Fort Collins, we are expanding operations to double the revenue run rate at dislocation.
We anticipate this additional capacity will become available during the second quarter of fiscal 2023.
We are increasing our recently acquired ILS capacity by 30% and hope to have that available by the first quarter of fiscal 2023.
We are in the process of building, a new 48000 square foot leased facility in Rockville, Maryland for biotherapeutics genetic toxicology growth.
Which should be completed by April of 2023.
We're starting to see some revenue from initial phases of establishing this business.
And in Boulder, we are.
Building out operations to provide 50% to 70% additional capacity. We anticipate this capacity will become available in January of 2023.
We're making these investments in response to the strong demand and quoting activity we are experiencing.
For our preclinical services from current customers customers acquired in recent acquisitions and with new clients.
And second quarter. In addition to record DSA sales in Q2, we had record New awards and our DSA book to Bill ratio remained a robust 152 times.
The period ended with.
With the backlog for DSA totaling $133 6 million.
Which is up 147, 9% from $53 9 million a year ago.
And an increase of 27, 7% from $104 6 million as of.
December 31 2021.
Moving to our RMS segment.
The integration and the optimization of the recently acquired research model services businesses are proceeding this.
Businesses contributed $101 2 million of incremental revenue this quarter.
Well ahead of the run rate when we announced the acquisitions.
We have begun investing across the organization to improve the solar facilities and animal welfare and streamline operations.
We are also investing in locations to expand capacity in the U S.
And in Europe .
By adding capacity and resources, we anticipate supporting growth and services and consolidating two existing RMS locations and the recently acquired <unk> business into these sites.
By calendar year end.
These investments also part of our plants and has enhanced our EMS margins and improved facilities.
The examples of facility improvements, we're making to enhance animal welfare include investments in water system air quality, electrical upgrades and enhancements improved sewer systems housing and memory care facilities.
At the end of January we announced the purchase of a b or C. A nonhuman primate importer and quarantine facility located near our existing facility in Dallas, Texas.
This acquisition provides an opportunity to further expand our services and address client needs.
When the industry demand is outstripping supply.
I'd like to note that we are beginning to experience tangible cross selling opportunities between our RMS and DSA segments. The opportunities. We are experiencing are driving some of our expansion decisions.
We continue to invest in our people systems and infrastructure to support both business segments.
On that note in February we're thrilled to recruit and appoint modesta gear.
And it is.
Chief Technology Officer.
<unk> is passionate about applying technology information technology to enable more rewarding experiences for our clients as employees. It has knowledge of the life Sciences industry.
In addition to leading and overseeing global technology operation as key responsibilities will include continuing to develop.
The continuing.
Continuing development of an industry, leading digital strategy branches.
Creating a strategic data analytics and insights platform.
Building, a scalable technology platform to enable additional growth.
Continually upgrading our cyber security program.
And creating solutions to improve quality and communication accelerate speed to market and drive efficiencies and profitability.
In April we are also very pleased to recruit and appoint Fernando where Aldi finance Fernando broadly as company's general counsel and corporate Secretary.
And that brings that that's approximately 15 years of corporate legal counsel ethics and compliance experience.
Including prior executive roles with public companies.
Other critical positions were filled over the last four months as we have continued to recruit upgrade and build out our scientific team veterinarian staff safe.
Sales marketing client experience finance technology, human resources, and accounting teams with an eye towards creating best in class talent and a proactive contemporary organization to support future growth the best client experience and continued improvements across both segments.
During the second quarter of fiscal 2022, the company spent $9 5 million on capital expenditures or approximately six 8% of revenue for the six months ended March 31, 2021. The company spent $15 2 million on capital expenditures of approximately $6 eight.
<unk> of revenue.
In addition, we have made investments in our startup activities for new service offerings and expansion of existing services, which includes validation of new equipment recruiting and training.
Based on the recent trends in backlog, we are providing guidance for revenue.
$290 million in total for Q3 and Q4 fiscal 2022.
Which we.
We will be at least $510 million of total revenue for fiscal 'twenty, two implying year over year internal growth of 30% or more.
We expect our adjusted EBITDA for fiscal 2022, well not the less and our adjusted EBITDA for the six months ended March 31 2022.
15%.
Our integration and optimization of acquired businesses is going very well, we anticipate additional operating leverage as we complete our investments and continue our expansion and consolidation plans.
We are aware of the recent broader market concerns and commentary so let me address a few of those.
We have not seen any cancellations of orders out of the ordinary course of business. We are not aware of any cancellations due to lack of funding.
We have not seen any capsule any collection issues due to lack of funding.
We continue to monitor our top clients liquidity and we have not seen any fundamental changes.
We believe our business is on solid footing, delivering both strong growth and positive cash flow, while we continue to invest in our future.
We have developed a strong and reoccurring client base and are the preferred primary supplier for many of our customers.
Well it has become a much larger organization over the last few years, we remain steadfast in our emphasis on white glove client service, which we believe is paramount for our continued success.
Our investments and recruiting.
Driven by responding to customer requests and to continually improve our service enhanced communication accelerate speed to market and improve the experience and environment for our employees in research models.
With that I'll turn it over to our Chief Financial Officer Beth Taylor.
Please go ahead with the financial overview.
Thanks, Bob and good afternoon.
In the second quarter of fiscal 2022, our total revenue increased to $143 million from $18 8 million in the comparable prior year period, driven by a $23 million increase in DSA revenue.
$101 2 million dollar increase of incremental Rms revenue.
Our DSA segment revenue grew 108% year over year to $39 1 million.
Reflecting $12 9 million of incremental service revenue from the acquisitions that hits the top labs Bluebird bio path Gateway pharmacology, Plato's Biopharma bio reliance and ILS, plus seven $4 million of higher service revenue from internal growth.
Our RMS segment revenue totaled $101.2 million, we did not have any RMS revenue in the comparable prior year period.
Orient Bio resource, which was acquired on January 27, 2022 contributed two months of revenue to this quarters result.
In the second quarter of fiscal 2022, our total gross profit increased to $44 $7 million or 31, 9% of revenue.
That is up from $6 $3 million or 33, 5% of revenue in the comparable prior year period.
DSA gross profit was $12 3 million or 31, 5% of DSA revenue.
Our DSA gross profit percentage was lower than the comparable prior year figure of 33, 5% due to our investment in capacity recruiting training and capability to meet increasing customer demand.
As we began to utilize this recently added capacity, we anticipate a favorable impact to DSA gross profit margin.
RMS gross profit in the second quarter of fiscal 2022, with $32 4 million or <unk> 32.
<unk> of RMS revenue.
We did not have any RMS gross profit in the prior year comparable period. This quarter, we incurred $2 6 million of noncash inventory step up amortization, which negatively impacted the RMS gross profit percentage by two 6%.
Operating income in the second quarter of fiscal 2022 totaled $7 $9 million compared to an operating loss of $5 million in the comparable prior year period, reflecting higher revenue and higher gross profit, partially offset by increased operating expenses.
Increased operating expenses in the quarter reflect acquisition related cost and higher strategic investment and unallocated corporate G&A to support future revenue growth and this includes additional head count recruiting and relocation expense.
Greater investment to build out new service offerings.
Higher selling expenses due to an increase in travel costs as our sales and marketing teams have traveled more as the COVID-19 pandemic has eased.
And increased commissions due to higher sales awards.
During the quarter, we continued to invest in internal capabilities to provide additional service offerings, such as medical device pathology pharmacology biotherapeutics and genetic toxicology.
All combined adjusted corporate unallocated G&A totaled approximately 10, 8% of revenue in the second quarter of fiscal 2022 compared to approximately 21, 5% of revenue in the second quarter of fiscal 2021.
Our long term objective is for unallocated corporate G&A to reach between six.
<unk> to 8% of revenue.
I'd also like to point out that this quarter selling expenses were higher compared to the prior year period due to our increased book to bill ratio as we accrued commissions when we win new orders prior to the recognition of the corresponding revenue.
Net loss in the second quarter of fiscal 2022.
Totaled $6 1 million or negative <unk> 24 per diluted share compared to a net loss.
$7 million or six cents per diluted share in the comparable prior year period.
But we want to note that this quarter's reported figure was impacted by $6 8 million of tax expense, which was the result of a change in the companys forecasted effective annual tax rate, primarily due to the favorable earnings impact of acquisition.
Adjusted EBITDA increased to $25 3 million or 18% in the second quarter of fiscal 2022, compared to $1 3 million or six 9% in the comparable prior year period.
The book to Bill ratio for our DSA service business in the second quarter of fiscal 2022 with 152 times, we continue to build our infrastructure for growth.
Which included additional head count transaction and integration costs, and internal investments and new service offerings technology and systems.
Our DSA backlog at the end of the second quarter of fiscal 2022 was $133 $6 million up 27, 7% from one hanger and for $6 million on December 31, 2021, and 147 nine.
<unk> from $53 9 million on March 31, 2021.
Cash flow from operations during the second quarter of fiscal 2022 totaled $5 $2 million compared to $2 9 million in the <unk>.
Comparable prior year period.
Capex in the quarter totaled $95 million or six 8% of revenue and for the six months.
Capex totaled $15 2 million or six 8% of revenue, which included investments in facility improvements site expansions enhancements to laboratory technology and system enhancements to improve the client experience.
Our balance sheet as of March 31, 2022 included cash and cash equivalents of $47 million.
And total debt of $337 $6 million at quarter end, we had a zero balance on a $15 million revolving credit facility.
Zero balance on a new $35 million delayed draw term loan per our amended credit agreement in January 2022.
We are pleased with the continued increase in our earnings book to Bill and backlog and the general direction of our business is heading and we felt confident in continuing to invest in our future.
This concludes our prepared remarks and with that operator, please open the call for questions.
Thank you at this time, we'll now be conducting a question and answer session.
If you'd like to ask a question today. Please press star one from your telephone keypad, a confirmation tone will indicate your line is in the question queue.
Press Star two if he would like to move your question from the queue.
For participants using speaker equipment, it may be necessary to pick up your handset before Christmas turkeys.
One moment, please pull for questions. Once again that is star one thank you.
Thank you. Our first question is from the line of Frank <unk> with Lake Street Capital markets. Please proceed with your question.
Great and congrats problems berth on another fantastic quarter.
Bob wanted to circle back to your comments on the biotech market. Appreciate the color. It's really helpful. And then obviously the quarter and the guide kind of speaks for itself to in this category, but I was hoping you could comment more on why your business may be seeming a little bit more insulated to some of the other.
Market headwinds that other players and peers in the market are speaking to.
Okay.
Thank you Frank.
Yeah.
But I can't speak to our peers I think that.
Overall, our DSA business is a very small part of a very big market.
And we have done a lot of acquisitions over the last year and then there's acquisitions, we've acquired a lot of clients.
So.
We have a lot of clients that are still not doing business with if they could do business with us are interested in doing business to those acquisitions.
So I think.
Being a very small part of a very large market.
And being acquisitive.
And is it hasnt required a lot of clients.
I think we have.
Opportunities that maybe are a little different.
Then.
And the company that may be in statement, but that has not been an acquisitive mode.
So I think we have a lot we have opportunities.
As a result of that.
I'm, not saying that we're completely insulated.
I think some of the things that people are saying are predicting out in the future. So I'm not going to get into predicting the future, but I do know that we have a very.
Yeah.
The client base and.
Many more opportunities I think which we could explore we're still happened to know quote activity at this point.
Because of capacity.
Yeah.
Great. That's good color and then I wanted to shift over to just the broader acquisition strategy, obviously, a lot going on over the last couple of years and the the results again speak for themselves. So you've done a nice job of integrating and organically growing these acquisitions, but maybe just talk a little bit about the strategy as you look forward.
Now that you've been up as much as you have do you continue to expect to be as active as you have been in the history or do you think maybe youre going to start to digest, what you have in and work with what you would you currently have under the umbrella.
I like what we currently have one I think some of these acquisitions are taking advantage of the scale opportunities we have within the sites and to leverage that fixed cost structure. So we can see margins improve.
Top line improve in unallocated G&A of course come down.
That being said, we obviously just did a small tuck in acquisition, which accelerated our move into the histopathology for medical device business is something we announced that we were going to start last July we've been building and this allowed us to accelerate that a little.
Quicker, we'll continue to look for those opportunities and we will continue to be active in the market and exploring those those.
Opportunities.
As they become available.
So how we finance that may change down the road, but.
We will we will continue to evaluate and we will.
With the market and.
I think we did a really nice job last year of playing the opportunities that came in front of us.
Using our strengths and.
We will continue to be able to do that in the future.
Okay, and then just last one for me on the balance sheet, we've gotten a number of questions just about leverage profile and covenants that are out there.
What this report cash balance and the EBIT number out there I think it.
It's much more breathing room between where it deleverages right now in the covenant that is out there can you confirm that and just maybe comment about the financial position and your comfort with that at this point.
Yeah, I think that this is something we alluded to before and I heard the same concerns when we did the transaction and people were worried about the leverage based on a historical look back if you look at this quarter and you look at what we're now.
The filing is the run rates for the next two quarters.
Goodbye.
With that our EBITDA run rate would be would be over $100000 a year.
And I think that changes the debt profile.
And the leverage profile, a little bit from where people anticipated solar senior debt.
It's $240 million plus.
Plus in cash so net debt of one to 10 to 20.
We have the.
Portable notes of maybe another 140, but I think the senior debt.
At 100 million run rate of two two times and with the with the senior notes at 100 run rate will probably have close to three six.
So I think those are those are coming in line with where we identified six months ago or four months ago, I guess, when we sort of thought where we where we are targeting to attain.
Perfect I'll stop there congrats Greg Congrats again on all the progress.
Thank you.
Our next question comes from the line of Matt Hewitt with Craig Hallum. Please proceed with your question.
Good afternoon, and thank you for taking the questions.
Maybe first one and then kind of.
Thinking back to last fall post the <unk> acquisition.
One of the things that you mentioned one of the areas that you are most concerned about was actually from a capacity standpoint, and staying on top of the hiring and I'm. Just curious if you could give us an update on your hiring how thats proceeding are you able to find the people that you need to stay in front of things from a capacity standpoint.
Yeah.
Yes.
Thank you.
In the last six months have made some substantial efforts.
Building up our human resource Department made some great hires I think building a very strong team.
I'm very pleased with that.
I think that and looking at the <unk> acquisition for example in the last six months, we were able to add another 100 people more than they did six months prior to the acquisition.
We have done so.
A lot of market research to make sure we're moving people.
In line with the market and giving merit increases.
And we've been much more proactive in doing that and the DSA and RMS business and as a result, I think its thing, it's paying dividends and our ability to recruit.
Any one time, we're still always recruiting 10% to 15% of our workforce. So if we have 2000 people now probably at 300 open jobs, but we've been able to fill those.
Where we see the most pressure and turnover right now is maybe some of the entry level positions.
And some of the bigger challenges that may that may exist in the entry level positions.
The.
The scientific positions of veterinary positions the pathology positioned some of it.
The.
Higher level positions I think we've done a very nice job.
Filling some of those roles and I think we're becoming in some cases, a preferred place to work and I'm very proud of that.
It's a constant battle in today's market and we have to stay vigilant.
But not a week goes by that we don't talk about it quite a bit and look at the metrics.
But I think that we've.
We've made some we've made some progress.
I think our turnover rate is down but hopefully we can continue to do better.
That's great. Thank you for that color.
And thank you for the details regarding what's youre seeing from a market perspective, maybe another way to look at it is there any way.
For you to break down like what percentage of your revenues is coming from large and maybe medium pharma and biotech versus the other end of the spectrum the small.
Pharma companies, maybe some of the private equity anything along those lines just that divergence I think would be helpful.
With the recent.
Questions that have come up with that that we have looked at that is what are the awards from a pre commercial customers.
And what is the base of business right now it's changed quite a bit with you with the recent acquisitions.
A couple of years ago, we were very heavily biotech.
Today, if you look at our overall sales we estimate about 20% of our sales are.
From pre commercial customers some biotechs.
We do keep an eye on those we do keep.
Some of the publicly funded private fund it as we looked at the private funding it looks like it stayed very strong I understand that the comments on the public side.
But the last couple of years, we're extremely strong in the biotech funding market in many of our customers.
Pretty good supply of cash at this point.
I think that.
I think the funding that came into the market is much greater than the capacity that was added to the market.
So I think as a result, I think as I listened to the other <unk>.
And here, what you're doing I think everybody's backlog is still out through.
The summer of next year and as we look at as we get those orders and we you know we look at the balance sheets at the time.
And we find that theres still in fairly good shape.
We also have the opportunity to go back and look at some of the discovery pharmacology businesses that we acquired.
Last year and what did they do.
The prior downturns.
And some of those companies actually did quite well and grew.
During those periods.
As I think some people look to outsource they don't build during those periods. They are a little more conservative maybe doing some more outsourcing and some of these biotechs don't build up quite the internal capacity.
We continue to keep an eye on all of those all of those.
Concerns and opportunities.
And right now we.
Still feel good about what we're doing and the opportunities.
Do we have in front of us, but I think they're all very good questions and we're very cognizant.
The comments in the commentary in the market.
Thank you for that that's very helpful color and then maybe one last one for me and I'll hop back in the queue.
Any update on the supply channel are there any.
You know I don't know.
As noted on the call. This morning, there were some questions about vials or blister packs and I realize that's less of an issue for you but is there anything from a supply channel thing that maybe.
Maybe you're trying to stock up a little extra inventory just in case or you've been able to kind of manage through some challenges.
Anything on that side. Thank you.
We're not seeing or hearing anything like that a couple of years ago at this time.
When the pandemic first started we heard more of that and by having multiple sites with some sites with low other sites, we're able to help out.
We probably built up our PPD inventory, a little bit more than we had before but for the most part that has not been a concern.
Bye bye.
By any of our sites.
Our facilities.
For the last couple of quarters that I've really heard about.
That's great. Thank you very much.
Thank you.
Thank you at this time, we've reached the end of the question and answer session I'll turn the call over to Bob leisure for closing remarks.
Alright, Thank you everyone for participating on our call. This afternoon, and we look forward to reporting back to you in August when we released our third quarter of fiscal 2022 results financial results.
I see that our press release it looks like they have just come out.
Hope everybody has a great day. Thank you.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.