Q4 2022 Inotiv Inc Earnings Call

Greetings and welcome to the <unk>, Inc, fourth quarter and full year fiscal 2022 financial results conference call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad as a reminder, this conference is being re.

Accordingly, It is now my pleasure to introduce your host Devin Sullivan managing director for the equity group. Thank you Devin you may begin.

Thank you Paul Good afternoon, everyone and thank you for joining us for <unk> fiscal 2022 fourth quarter and full year financial results call.

Before we begin I'd like to remind everyone that some of the statements that management will make on this call are considered forward looking statements, including statements about the company's future operating and financial results and plants 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.

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 will also 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 on the investors section of the company's website at in a ZIP code dotcom.

And is also available in the form 8-K filed with the Securities and Exchange Commission today.

Joining us from the company. This afternoon are Bob Leisure, President and Chief Executive Officer, Beth Taylor, Chief Financial Officer, and John Cigar Companys Chief strategy Officer.

Bob will begin with some opening remarks, after which Beth will present, a summary of the Companys financial results. Then we will open the call for questions from our analysts.

It is now my pleasure to turn the call over to Bob Leisure President and CEO of inactive Bob. Please go ahead.

Alright, Thank you Devin and good afternoon, everyone. We appreciate you taking time to join US today and appreciate your patience with respect to the delay in announcing our results for the fourth quarter and full year.

Following a very strong third quarter total revenue for the fourth quarter of fiscal 2022 rows five fold to $150 5 million from $30 1 million in last year's fourth quarter.

For the full year of 2022 revenues improved $547 7 million.

$89 6 million last year.

With the increase across our DSA and RMS business segments, reflecting approximately 31% organic growth plus the contribution from acquisitions.

Adjusted EBITDA for fiscal Q4 improved to $18 3 million or 12, 1% of cohort total revenues from $4 3 million or 14.4% total revenue revenues in last year's fourth quarter.

For the full year adjusted EBITDA grew from 90 point grew to $90 5 million or 16.5% of total revenues from $9 3 million or 10, 4% last year.

This was a very solid year of continued growth is reflective of our ongoing evolution into a comprehensive provider of <unk>.

Non clinical.

CRO services research products to the global pharmaceutical and biotech industries.

During 2022 consummated several acquisitions that enhance both our geographic footprint.

Portfolio of service offerings.

Began the integration and optimization of our acquired operations and created a path to what we believe will be sustainable growth in sales expansion margins.

We're pleased with the progress we made in fiscal year, 2022, and a better 'twenty three.

With specific plans to continue to improve our overall business model, while addressing what we estimate will be a temporary disruption at our <unk> business, which I will discuss in greater detail shortly.

During the fourth quarter, we did experience unexpectedly higher operating costs related to company wide recruiting and.

And the validation of new DSA services.

As well as certain nonrecurring cost related to restructuring charges legal fees for closures of facilities and consolidation expenses.

To move operations from double in Virginia to other facilities. We also began preparation for moves from Hayslett boyertown.

We had acquisitions integration cost, including expenses from terminated M&A deals, which will not close and financing transactions and the discontinuation of a capital project.

Let's move to a brief discussion of our DSA and RMS business segments.

Overall, our DSA business had an exceptional year generating revenue of $165 3 million.

And 84, 5% increase from 2021 organic DSA revenue growth in 2022 was $49 6 million representing incremental growth of approximately 66%.

By $26 1 million of incremental revenue from strategic acquisitions.

For 2023, we've already added new capabilities and capacity in Rockville, Maryland to conduct good laboratory practices or G. O P studies for in vitro.

Oh genetics and bacterial mutation assays as components of the standard battery of genetic toxicology studies required to support first in human evaluations of novel Therapeutics.

We continue developing our suite of genetic toxicology services and look forward to seeing continued growth Rockville as we also complete.

All the build out and launch our biotherapeutics business.

We are completing other projects to build out the capacity and capabilities across our existing enterprise specifically completing a project in Boulder, Colorado. This expansion was initiated in early fiscal 2022, and it will be coming online during fiscal 'twenty three.

We are expanding operations as well in Fort Collins, Colorado, but will be narrowing the plan, which was scheduled for 2023. Once completed these expansions will increase our DSA facility capacity by 30% and our DSA revenue capacity by an estimated $50 million.

Dollars.

These expansions will also improve the overall quality and efficiency of our service offerings, while reducing our reliance on third party outsourcing certain services.

We are re prioritizing some of our capital plans that we believe can generate quick returns and overall, reducing our spend in fiscal 'twenty three.

Conversely, we will delay our previously announced expansion activities at our ILS facility in North Carolina, which we acquired in January 2022.

The slowdown of our expansion does not impact our near term growth prospects and we will evaluate these needs and investments in the future.

Our RMS segment contributed $382 4 million of revenue in the year, reflecting strong incremental revenue well above the run rate when we entered the RMS market with R&D go acquisition in November 2021.

Organic revenue growth in 2022 was $91 3 million representing incremental revenue growth of approximately 24%.

This was our first year in the RMS business, we've had a chance to gain further knowledge of this business and have taken significant actions to improve the operations and enhance future margins through site optimization plans enhanced pricing across the product portfolio and other significant operational changes.

We have also made significant progress on our comprehensive site optimization masterplan.

In June we announced the closure of two RMS facilities in Virginia, the closure of Cub, Maryland, Virginia facility was completed by the end of fiscal 2022.

Cumberland revenue was less than 1% of our total revenue and did not contribute to adjusted EBITDA.

The operations at our Dublin facility in Virginia ceased in November of 2022, and the customers were transferred and are now being served from other locations.

Since the closings the Dublin property has been sold and the facility is in the process of being sold.

The previously announced facility closures and the Hayslett, Michigan and border town, Pennsylvania are now in process and should be completed by March of 2022.

Or to March of 2023.

We recently announced the closure of two facilities in Indianapolis.

Activity of these Indianapolis facilities will be relocated to other existing facilities and should be completed by June of 2023.

We also introduced the proposed consolidation plans cannot France, and Blackburn U K into existing facilities, which if approved we hope to complete in 2023 and 2024, respectively.

Yeah.

Now I want to move to give a little bit more detail on our non human primate business.

Stated on our November 16th 2022 release out of an abundance of caution.

We have not initiated any shipments or imports and each piece from Cambodia, Although we do continue to sell an important niche piece from other countries.

Cambodia is a critical supplier of in each piece of the U S and the absence of imports from China anybody who represented over 60% of the NH P imports. According to CDC CDC statistics.

We continue to work with external and internal resources to review our current H P inventory from Cambodia and will begin shipments.

In Hps only after such time that we can reasonably reasonably determined in each piece in our possession a purpose spread not wildcat.

While we are not currently aware of any outside constraints on importing nxp's from Cambodia, and it will not import from Cambodia until we can complete satisfactory onsite audits of our suppliers.

We are in communication with our Cambodian suppliers and we expect that we will be able to be onsite in Cambodia to complete these audits during these audits during this quarter.

We do understand Cambodian officials have stated that they will be shipping in each piece.

Even in a significantly constrained market.

We believe the DSA business, we'll have our DSA business will have ample access to each piece to meet our clients' needs.

Having access to the supply along with our desire and ability to have a positive impact on this industry. What's critical factor in the decision to purchase and Vigo and Orient buyer resources.

We believe the current situation shows the need to implement changes within our industry and we look forward to working with others in our industry and with the government to continue to lead changes to this industry.

With respect to broader market conditions and commentary during the fourth quarter of 2022 and increased level.

Our quoting activity translated into a higher backlog at year end.

As a reminder, when we report New awards they are net of cancellations. Despite.

Despite the growth in backlog. We also continued to experience a high level of Cancelations due primarily to molecules not being ready is expected for projects that were awarded 12 to 18 months ago and the abandoning our projects.

Which were seen as risky.

We have seen some market commentary that the industry is seeing a downturn in the body.

So tech funding and spending we.

We have experienced a few occasions recently, where this has been the case with our clients we continue to monitor market conditions closely.

The operational investments, we made in 2022 and areas such as recruiting internal processes facilities technology personnel have been significant.

We've allowed has allowed us to further integrate our acquisitions and begin to achieve synergies.

We invested over $36 3 million internal projects during 2022.

We believe these investments will allow us to broaden our service offerings improve margins and enhance our overall level of customer service and maintain a high level of animal welfare.

Within our RMS business, specifically the investments will allow us to implement our comprehensive site optimization plan, which currently includes closing nine now.

Nine of the 24 sites, we acquired with the RMS business.

In addition to the operational investments in 2022, we've also had an opportunity to review our cost and pricing.

As a result, we have been able to amend customer contracts and pricing.

Many of the pricing changes began to go into effect in January of 2023.

These will help offset inflationary cost increases, which we experienced in 2022 and during Q1 fiscal 2023.

During the 12 months ended December 31 2022.

We hired approximately 860 people, which is over 35% of our current workforce. This is a significant investment in was needed to support our growth and improvements last year.

We've seen our retention rate increase and were able to successfully reduce our turnover rate.

Present critical operational leadership positions are all filled.

Overall in 2023 expect employment to stay consistent with our current levels.

And we expect our growth to <unk>.

Our growth in 2023 from efficiency gains.

As a result of market conditions and what we have.

What we have been able to achieve over the last four years and 2023, we expect to be less focused on acquisitions.

They did earlier, we have also delayed and reduced certain expansion activities. We had previously announced related to our DSA business.

We believe that this course of action is prudent given the current state of capital markets and our desire to focus on integrating and optimizing the businesses. We acquired have built over the past two years.

We believe our strong organic growth for fiscal 2022 has exceeded the industry average of low double digit growth for discovery services and mid to high single digit growth for safety assessment, which speaks to our ability to increase market share.

As for guidance for 2023 for fiscal year end Youre ending September 30th 2023, we are providing guidance of at least $580 million of revenue and at least $75 million of adjusted EBITDA.

Due to the recent disruption of our an HP supply chain.

The guidance of $580 million of revenue includes a range for Q1 fiscal 'twenty three revenue from $118 million to $122 million and approximately $460 million of revenue during the nine month period.

Q2 through Q4 of 2023.

The guidance of $75 million of adjusted EBITDA.

Includes an expected negative adjusted EBITDA margin in Q1.

And adjusted EBITDA margins of approximately 17% during Q2 through Q4.

We will continue to focus on organic growth and market share gains with our expanding service offerings in the DSA business.

With a strong backlog growth through 2022, we have good visibility on DSA revenue heading into 2023.

We look for efficiency improvements to leverage our fixed cost structure on increasing sales to enhance DSA margins.

Our or are in minutes business will benefit from the price increases implemented in January of 2023, and the expected market share gains.

Further margin expansion will be driven by our shop site optimization plans were.

We also continued to invest in enhancing our animal welfare programs.

Our guidance does assume a reduction in the number of an H P sales from last year.

Although we've experienced a short term disruption we are not aware of any importation banned from Cambodia and H P sales could increase throughout the year from our guidance level. If we are able to resume full importation levels.

We hope to get further knowledge and comfort on 2023 importation levels based on the additional supplier audits theyre expected to take place during this quarter.

Even if the total volume of NH piece is lower than 2020 to 22, we expect to benefit from price increases.

<unk>, PS, which could range between 65% to over 100% throughout this year.

And as highly supply constrained environment.

Although we were impacted by the N H P supply issue in Q1, we believe the business is well positioned to achieve above market revenue growth rates and expansion in margins. I stated previously for 2023, we are focused on optimizing organic revenue growth and improving margins and less focus on acquisition opportunities.

We continue to guide long term revenue growth high single to low double digits and long term EBITDA margins of 18% to 22%.

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.

Total revenue for the fourth quarter of fiscal 2022, well that's 250.

5 million and 30.

$1 million.

And last year's fourth quarter.

Primarily by significant incremental revenue from our RMS segment and higher revenue in our DSA segment.

Segment revenues of 46, 8%.

2022 fourth quarter for sure.

$4 $2 million.

$31 million in the fiscal 2021 fourth.

Fourth quarter and that was driven by $2.1 million.

Rental revenue from acquisition over the same period last year and an incremental increase in revenue from internal growth.

During the quarter.

2022 fourth quarter revenue was lower than fiscal two.

2022 third quarter revenue due to higher benefit in the third quarter from a cancellation fee in the fourth quarter revenue being impacted from last canine being available for Scott.

However, the canine shortage issue is improving and we expect to see the benefit of that starting in the second quarter of fiscal 2023.

Our RMS segment revenue in the fiscal 2012 fourth quarter was $106 $3 million.

We did not have any revenue for RMS segment in last year's fourth quarter.

RMS segment revenue was already in fiscal 2022 fourth quarter compared to the 2022 third quarter shipping.

Shipping the last units with an H P. During the quarter.

Our total gross profit increased to $42 $2 million or 28% of revenue kind of total.

Total gross profit of $10 3 million or 34, 2% of revenue in last year's fourth quarter.

Gross profit for our DSA segment improved to $13 million or 29, 4% of segment revenue.

$10 3 million or 34, 2% of segment revenue in last year's fourth quarter. The percentage decline in gross profit was primarily driven by laboratory capacity investment and cost associated with the recruitment of additional scientists to support new capacities in services.

Work currently being conducted includes development of assays validation of equipment and establishment of good laboratory practices that will be coming up during the last half of fiscal 2023.

RMS segment gross profit in the fourth quarter of fiscal 2022 was $29 $2 million or 27, 5% of RMS revenue.

Gross profit in the fourth quarter included approximately 200000 of noncash inventory step up amortization, which negatively impacted gross profit percentage by approximately 8%. We did not have any RMS gross profit in last year's fourth quarter.

Our operating loss for the fourth quarter was $242 5 million.

An increase in operating expenses.

U $271 million from $13 $7 million in last year's fourth quarter.

As we now know press release higher operating expenses were driven primarily by a noncash goodwill impairment charge of $236 million related to our RMS segment.

Part of our impairment assessment, we determined that the carrying amount of goodwill attributed to our RMS segment was in excess of.

It's fair value, primarily driven by the sustained decrease in our share price as compared to our share price at the time of N V go acquisition.

There isn't any increase in operating expenses reflected restructuring charges and legal fees related to the previously announced closures of our facilities and Cumberland and Devlin, Virginia acquisition and integration costs, which included M&A due diligence for opportunities we explored during the quarter at one time.

Charge for the write off of deferred legal and accounting fees for our S. One registration statement that was withdrawn and a noncash charge for amortization of inventory step up.

Adjusted corporate unallocated G&A totaled $14 $5 million or nine 6% of revenue in the fourth quarter of fiscal 2022 compared to $3 2 million or 10, 5% of revenue in the fourth quarter of fiscal 2021.

900 basis point decrease was due to the advantage of scale as revenue has gone up.

We continue to maintain a long term objective for adjusted unallocated corporate G&A to be between 6% to 8% of revenue.

Interest expense increased to $8 9 million from <unk> five.

5 million in last year's fourth quarter, reflecting our higher debt balance for borrowings obtain for the acquisition and an increase in interest rate.

Consolidated net loss.

Beautiful to common shareholders in the fourth quarter of fiscal 2022 totaled $244 $2 million or a negative $9.54 per share and included the $236 million noncash impairment charge for the RMS segment.

Compared to consolidated net income attributable to common shareholders of $9 $4 million or 59 cents per basic share and six cents per diluted share in the fourth quarter of 2021.

Adjusted EBITDA increased to $18 $3 million or 12, 1% of total revenue.

From $4 3 million or 14, 4% of total revenue in Q4 fiscal 2021.

Our book to Bill ratio for DSA segment in the fourth quarter of fiscal 2022.

1.3 times down from $1, one nine <unk>.

<unk> in the immediately preceding third quarter of fiscal 2022.

For the year, our book to Bill was 133 times.

In the fourth quarter and fiscal 2022, we experienced another record quarter of quotes issued however, the sequential quarterly decline in the book to Bill was the result of an increase in project cancellations as Bob referenced earlier.

Which was higher than what we saw in Q3 of fiscal 2022.

As Bob noted the majority of the cancellations reflected the unavailability of molecules for projects that had been booked up to a year and a half in advance and clients abandoning projects, what youre seeing is risky and more recently a number of projects being put on hold due to lack of funding are pending or pending funding.

DSA backlog improved to $147 2 million at September 32022 up from $143 2 million at June 32022, and that was compared to $81 $4 million at September 32021.

Net cash used in operations for the 2022 fiscal year was $5 $2 million compared to cash provided by operations of $10 $7 million last year.

Use of cash during the year reflected our increased in net working capital for our N H P.

Due to timing between deposits made our suppliers and when the shipments are received and then when the cash is collected from our customers.

Capex in the fourth quarter totaled $5 million or three 3% of revenue.

With total 2022, capex totaling $36 2 million or six 6% of revenue.

Capex for the year reflected investments in facility improvement slight expansion enhancements to laboratory technology and system enhancements to improve the client experience.

We expect our fiscal 2023 capex to be approximately 3% to 4% of projected revenue, which we believe will be less than $25 million.

Capex investments will focus on completions of DSA capacity expansions in Boulder in Rockville, and an initiation of an expansion project in Fort Collins completion environments deferred maintenance projects and continued animal welfare enhancement project.

Our balance sheet as of September 32022 included $18 5 million in cash and cash equivalents.

And 15 million dollar balance on a $15 million revolving credit facility and a zero balance on our $35 million delayed draw term loan.

In October we drew down the entirety of the $35 million delayed draw term loan and a portion of the proceeds were used to repay the $15 million balance on our revolving credit facility.

Total debt net of debt issuance costs as of September 32022 was $353 $7 million.

Including the balance on the revolving credit facility, we were in compliance with our debt covenants as of September 32022, we currently have $15 million of availability on our revolving credit facility and based on our financial guidance, we anticipate that we will be in compliance with our financial covenants.

2023.

Well 2022 did present some challenges we made significant progress to improve our services they'll capacity integrate and optimize our acquired operations and implement plans to enhance margins. We remain pleased with our financial performance and the foundation that we've built to continue to grow.

And capture a significant portion of the opportunities in our market.

And with that overview of the financials I will turn the call back over to Bob.

Yeah.

Alright in closing I'd like to take a moment to thank our 2200, plus employees, who work tirelessly everyday to provide unique and it did experience for all of our customers. The reason they are the reason our customers want to grow with us and I truly appreciate all they do this.

This concludes our prepared remarks and with that operator, please open the call for questions.

Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to remove your question from the queue for participants using speaker equipment, it would be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.

Thank you. Our first question is from Frank <unk> with Lake Street Capital markets. Please proceed with your question.

Hey, Thanks for taking my questions wanted to start with.

A couple on the HP dynamic first clarifying question I think I heard you correctly, Bob that you stated akimbo.

Cambodia is still exporting and hps, but if I'm understanding correctly you guys have elected.

Interesting conservatism to not take importation from Cambodia first clarifying there and then to kind of walk through the process and the audit you plan to go through with your on site visits and how would it look in Q2 and forward as you can.

Return to shipping and Hps, how quickly that can occur again.

Well.

First of all it's a hi, Frank I think as far as Cambodia. The Cambodian government officials have said that they will be exporting.

So oh I'll leave it at that.

As far as our and this is our internal decision that we will not bring in imports until we've had a chance to be onsite to audit the facilities in Cambodia. This is something that's really not been allowed since COVID-19 I think the last time people are on site where in January of 2020.

Of course, we did not own the business back then.

Due to Covid Nobody has spent a lot of on site. We've recently been notified that we will be allowed on site.

We're looking forward to.

People going over there shortly.

Or to be able to audit those facilities. So we will wait and see how those audits turn out.

Before we make the decisions to important but those that will be the next critical path.

As far as what the artist won't tell no we will not talk about what audits were doing internally or externally.

Within each piece at this point.

Okay.

That's helpful and then maybe on <unk>.

Cancellation.

It sounds like you're not alone in that dynamic, but maybe just kind of speak to how you're thinking about the cancellation trend as you move into 2023, and what you've kind of baked into your guidance on that front in the DSA business.

Did you say the cancellation.

Yes.

You stated a higher cancellations in average how are you thinking about cancellations and once the DSA DSA business.

Correct, Yes, I know I think.

That's definitely a headwind that we face.

We have seen and we're gonna have to continue to to see or are quoting increase overcome.

The cancellations that are out there.

It's something that we start preparing for probably nine months ago. As we saw this and it's turned out to be true, we've been increasing our sales and marketing efforts and budgets.

We've also been adding additional salespeople so.

I expect that we continue that strategy and continue investing in our sales marketing dollar.

And.

How we can be more intelligent with with.

We're investing and how we're selling but that's something we would do.

Hopefully daily in order to get smarter and better to get it to get more shots on goal. If you will and more opportunities and then what can we do do be more effective at closing.

Okay, Great and then maybe one last one for me a bigger picture question, probably until the end HP disruption the big picture.

Growth commentary and business model profile with a high single low double digit in aggregate with DSA outpacing that and eventually reaching a 18%, 22% EBIT margin profile, but once we are crossover at some of the HP disturbances.

Your thought process around that business model, our business profile changed at all or do you feel it still fully achievable once we reach that time with more predictable.

Peace of mind.

I think it's I think it is fully achievable I think that.

We cause.

As we indicated I think that's the first quarter in the fourth quarter the first quarter.

We had some inflationary pressures on our business specifically, our Rms business.

But I think with the price increases that we implemented this January and the price increases we implemented with the with the.

And HP business.

Remember, we still do so hp's, they're not all from Cambodia.

And.

Along with.

The new services that we're adding and I think the.

Site consolidations that we're doing I think those are still optimistic those are there's a very achievable targets.

Great. Okay I'll stop there thanks for taking the question.

Thanks, Greg.

Thank you. Our next question is from Matt Hewitt with Craig Hallum. Please proceed with your question.

Good afternoon. Thanks for thanks for taking the questions maybe first of on the flip side of the cancellations are you seeing a more normalization in the bookings, meaning you're not getting customers coming in.

A year or 18 months early to book.

As you've built all capacity or are you feeling like you're getting back to a more normalized bookings timeline.

Oh man I think there may be a little bit of that but I would tell you that we do have some projects that are booked out into.

2024 already.

So as I look at our 2023 backlog for the rest of this year, we probably have 65% of our business already in their backlog.

Which is I think you know.

Probably more normal.

And I think that we are booking things into 2024 and I think it is.

Get more concerned again about access to NH piece.

Because it.

Yes.

If the trend continues there will be there'll be less available. This year I think that will that will have people booking further out again.

Got it and then I guess on the NH piece side, how much of a headwind to EBITDA margins does that represent over the near term, while you're basically holding those the Cambodian in hps.

Until you determine whether or not that it's safe to say.

Give those to your customers.

Yeah.

Well when and if we get them out the door when we do it will be it will be a policy, but in the meantime, we're still selling NH piece and the margins.

Very good with once we have because the demand is very high and there are fewer available.

But I can tell you with a pivot that we did with you you can tell we could at the business a little bit in the last.

Three months since we've probably talked with less focus on acquisitions, we don't need to go out hire 860 people.

I'm more focused on efficiencies a little less capital expenditures.

Basically that's that's allowed us to look at look at our expenses and our workforce.

We did have a small reduction in workforce take place in December we are reducing some expenses the hiring and recruiting expenses, we're starting to see synergies still that are that we had not gotten to before.

And we're starting to see some of the benefits are decided optimization plans.

So I'm pretty optimistic that we have made some significant.

Changes in the business, but have not been seen yet by our results and not been seen in the market because of the changes that we have that we had started.

A year ago with a sudden site consolidation plans, but we're now starting to finish and then you know.

Some of the investments that we needed to make initially there was a lot of travel for example in introducing the sites to one another.

You know our I T program. So you know it's at one point I think giving you. Examples we had 220 software programs will consolidate down to 120 too. Many examples like that where we where we get synergies and those just take a year to run off so as we start to see those things take place and come to fruition and again hiring recruiting 860, it's not.

35% of a workforce.

Is this a pretty substantial feat for any company.

You are growing that fast and so I think those are the sort of things that we're going to be much more efficient.

Out next year, and where we're going to see some improved margins not just its just not about how many NH piece can we sell.

Got it and then maybe one last one and it touches on that a little bit as far as the site optimization.

<unk> been building out some capacity, particularly in some newer markets how quickly I mean, what does the pipeline for those services look like how quickly do you think you can ramp up.

On the sales side to kind of offset some of the upfront cost that you're born getting those services ready to go.

Well that's a good question.

Yeah, I would like it to be a lot faster than that it is but I'm, probably not very realistic.

So.

But I would tell you that in Rockville.

We've only brought it probably 20, 25% probably 20% right now the capacity is available what we built in Rockville.

But what I've seen grow over the last three months during the.

The quarter, we just finished in December 31.

Very optimistic about the level of quoting activity. The backlog is built and how we're ramping up those revenues now again, it's only.

Only 20% of the.

Facility and the capabilities available, but seeing that ramp up has been very encouraging but I don't think that's something that you know what I think that facility should eventually do $25 million to $30 million, that's not going to happen overnight that'll take a couple of years to build that up to you know two or three years realistically.

But I'm very pleased with what I've seen to date in the first 90 days it was open.

And as we bring will bring on more capacity by March.

And again by June and so far the risk.

The response to what we're building is very positive.

And that doesn't only impact just rockville, but some of the things we're doing in rockville impacts or other facilities, because when we acquire a company remember.

We pick up those.

Those sales and benefits for many other locations and we're already seeing what we're picking up in Rockville benefiting other locations that we have so I'm I'm I'll remain optimistic at this point, but I think I think that'll be it.

Good investment for us.

Thank you. Our next question is from Dave Windley with Jefferies. Please proceed with your question.

Alright. Thanks can you hear me Okay Bob.

Hi, David Yes.

Okay, Hi, good afternoon. Thanks for taking my question. My first question is what percentage of 'twenty 'twenty. Two fiscal 2022 revenue was represented by your own Hps and maybe more specifically the Cambodian NH piece.

Yeah, David I think in our last press release in November I believe we indicated that maybe the Cambodian NH piece or $140 million of our revenue.

And I'm just off the top my head, but I believe that's what we said in the in the.

November Betsy.

Is that correct that you are you on the phone, yes, that's correct it's about yes.

Five 5%.

Okay and that takes us through the end of the fiscal year that was.

For the for the full year yeah.

'twenty two.

Okay.

And then as I think about your guidance and the progression.

You're obviously guiding toward a lower level of activity in the first quarter as we sit here today I mean, you may not have the bus for the first quarter is done.

What.

What drives the sequential.

The improvement or what's the difference between.

The factors impacting one Q versus what youre going to get into <unk> and beyond and maybe you could provide a little more detail as to whether to Q3 Q4 to look similar or do you expect a kind of a progression and improving progression through the balance of the year.

Yeah.

And you were breaking up through some of that cold David Trone.

I think you're asking if we're we're we're we're gonna see Q2 versus Q1, where were some of the sales increases come from.

Yes, I apologize if I'm breaking up so just trying to get at.

The differences.

And <unk>, which is already now done that.

Versus your step up in both revenue and profit margin two two and beyond.

Yes, I think that we.

We will see.

Some benefits from price increases so the price increases and then HP business.

Are going to be somewhere.

Somewhere around 65 to over 100%, depending on where they came from and those didn't go into effect until January . So I think those will be substantial because we are still selling in each piece.

In addition.

We will start seeing some of the additional services come on board from the DSA business.

And then the price increases we took on the RMS business range and then the other models other than the NH piece, we're somewhere between 5% and 25%.

So I think we will see some increase in sales from.

From from those between now and the end of the year I do expect that we will see our increase increasing sales from NH piece.

[laughter].

Okay.

<unk>.

Okay.

So.

Then maybe my my question on DSA would be.

In terms of the cadence of impact you said youre still putting out record levels of quotes but those are being dampened or diluted by cancellations in normally.

Cancellations have a nearer term impact in the quotes have maybe an out quarter impact is that the right way to think about.

The new business.

That is coming in.

It is it does it puts additional pressure on the short term operations to be flexible to move things around as things open up or to go back out to the market and see if somebody else has it has a need.

So the capacity that just opened up.

And so it does require a little bit more flexibility in how we handle the operations.

Okay and my last question on the debt front and you described a number of you.

Both.

The movements in your your delay draw on your revolver.

And the covenants or the limitations disclosed in the press release Tonight.

From a practical standpoint, do you see those limitations through March of 'twenty four.

Preventing you from doing what you want to do in the business.

No I don't.

Those changes.

Changes with the pivots, we made in the business. We're done before those amendments just came in place obviously in the last in the last week or two.

And I don't I don't and I think with the relationship we have with our senior lenders I believe that if we if we felt a need to change again for an opportunity that we have the kind of relationship that there would be open to listening to and we could work we could work through those things, but at this point for US I think we have a lot we can do to become much more efficient.

And really get to the get to the synergies.

And finish the site optimization plans are going to enhance our margins and that's what I'd like to make sure. We're doing in the short term if we get through all of those sooner than later and opportunities come up we'll get what we can go back and talk to them, but right now that is not or from 45, California.

Okay. Thanks, Bob I appreciate the answers.

Yeah.

Okay.

Thank you there are no further questions at this time I'd like to turn the call back to Bob leisure for any closing remarks.

No again I'd just like to thank everybody who was.

We had the opportunity to look internally to figure out what we can do smarter and better.

This had us refocus and ask a lot of questions about our business and what we should do different.

And that was a great opportunity for us to pivot and I think that as a result will be a much better company for this in much better position.

In the future so again I'm going to thank all the people that work with us over the last six or eight weeks.

Apologize for the delay, but it will look forward to.

Moving forward into 2023, and what we can what we can deliver so thank you very much.

This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.