Inotiv - Q3 2024

Transcript

Operator (participant)

Good day, everyone, and welcome to this Inotiv Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode, but later you will have the opportunity to ask questions during the question-and-answer session. You may register to ask a question at any time by pressing the star and one on your touchtone phone. I will be standing by should you need any assistance. It is now my pleasure to turn the floor over to Mr. Bob Yedid. Please go ahead, sir.

Bob Yedid (Managing Director)

Thank you, Jim, and good afternoon, everyone. Thank you for joining today's quarterly conference call with Inotiv's management team. 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 the 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 will also discuss certain non-GAAP financial measures in an effort to provide additional information for investors. Definition of these non-GAAP measures and reconciliations to the most comparable GAAP measures are included in the company's earnings release, which has been posted to the Investors section of the company's website, www.inotivco.com, and is also available in the Form 8-K filed with the Securities and Exchange Commission. If you haven't obtained a copy of today's press release yet, you can do so by going to the Investors section of the company's website. Joining me today from Inotiv are Bob Leasure, President and Chief Executive Officer, and Beth Taylor, Chief Financial Officer. John Sagartz, Chief Strategy Officer, will join us for the question-and-answer portion of this call.

Bob will begin with some opening remarks, after which Beth will provide a summary of the company's financial results for the third quarter of fiscal 2024 and the nine months ended June 30th, 2024. Then we'll open the call for questions. With those remarks, it's my pleasure to turn the call over to Bob Leasure, CEO. Bob, please go ahead.

Robert Leasure (President and CEO)

Thank you, Bob, and good afternoon to everyone joining our call today. Our third quarter was very productive for Inotiv. There were several critical events and accomplishments since our last quarterly call, which we believe will advance us towards our goal of being a leading mid-sized preclinical CRO in the marketplace. I'm going to outline some of these for you now. These include, first, we reached a resolution of the Virginia DOJ investigation and related settlement, which we announced earlier. Second, we're announcing for the first time that on July 23rd, 2024, the U.S. Attorney's Office for the Southern District of Florida informed the company that it was no longer investigating the company or its subsidiaries with respect to the procurement of NHPs from foreign suppliers or NHP importation practices.

Third, we completed the U.K. site construction in Hillcrest and consolidation projects in our RMS segment as of the end of July, and further reducing our expenses and allowing for additional contracts to start up in the U.K. to enhance our revenue. Fourth, further integrating and optimizing our transportation operations, from which we are now seeing the benefits, including improved service levels, reduced cost through streamlined processes and increased efficiencies, producing faster response times and better experiences for our clients. Fifth, achieving year-to-date and quarter-over-quarter sales increases and margin improvements in our diet business globally. Sixth, achieving year-to-date and quarter-over-quarter sales increases and margin improvements in our European and U.K. RMS business lines, with the exception of NHPs. Seventh, achieving an approximate year-over-year, year-to-date, 32% increase in NHP boarding and breeding service revenues.

Eight, our newer safety assessment service offerings, including genetic toxicology and biotherapeutic analytical service lines, we saw year-over-year growth in revenues and backlog, year-to-date fiscal 2024 compared to year-to-date fiscal 2023. Ninth, we implemented further integration initiatives and organizational changes, which allowed us to further reduce general administrative expenses. 10th, we are beginning to see early signs of recovery of the NHP market and increase in existing purchase orders. If we deliver on these orders, we could double the volume of NHP sold in Q4 2024 compared to those sold in Q3 of 2024, and estimate this volume would also exceed those we sold in Q4 of fiscal 2023. Eleventh, we believe we are developing a solid foundation for a potential recovery in the NHP business starting in calendar year 2025.

A key feature of some of the negotiations currently underway is a migration to long-term recurring contracts, and we will seek to continue to diversify our customer base, a critical shift we initially announced in our February earnings call. 12th, we amended our loan agreement with our senior debt holders for the DOJ settlement, received a waiver for non-compliance with our financial covenants as of June 30th, 2024. And lastly, we finalized the sale of the assets we had listed for sale. All these positive items notwithstanding, we also still have headwinds, which we are watching closely and working to overcome. These include pricing pressures in our DSA business, which has impacted revenue growth and margins. Year-over-year declines in sales in our discovery business, which are due to the softness of the market.

We did implement a reduction in workforce related to our discovery business while increasing our sales and marketing efforts. The sales of the NHPs has come down along with the cost of acquiring them. The sale price of our NHPs, I should say, has come down along with the cost of acquiring them, and we expect pricing to remain in line with Q3, which is about 35%-40% less than it was Q4 of 2023. However, we still have some higher-cost NHPs in inventory to sell. We will sell these higher-cost NHPs, and as we sell these, our margins in Q4 of 2024 will be impacted within the RMS segment. NHP sales and margins for Q2 and Q3 of fiscal 2024 were down significantly compared to the same periods in fiscal 2023.

NHP profits are down approximately $36 million for the first nine months of fiscal year 2024 versus the same period in 2023. Overall, our Adjusted EBITDA is roughly—is down roughly $29 million year to date over the same period, as financial improvements in many other areas of our business are being recognized and some of, and some of the optimization projects are being completed. Now I'll give some comments on what we are seeing in the market today. In the DSA segment, the improved funding levels for biotech companies in the first half of calendar 2024 have been positive. We are seeing projects awards, project awards by some clients that have recently raised capital.

However, we expect biopharma companies in the short term to continue to take a restrained, conservative approach to their preclinical pipeline products in order to prioritize the use of limited capital to their most important projects. So far in fiscal 2024, our discovery and safety assessment business has not seen the growth we have seen in recent years due to weakness in the discovery market and related pricing pressures, which have impacted sales and margins. Our goal is to take advantage of our size and agility and continue to focus on quality, delivery, and service. We are still a young company which can grow with its existing customer base and attract new customers to gain market share.

For the nine months ended June 30th, 2024, net new orders for DSA are running ahead of last year's pace by approximately 5%, even with the industry price pressures we have seen in fiscal 2024 and approximately 10% decline in both revenue and orders in the early-stage discovery business. We believe many of our NHP customers have been depleting the NHP inventories they accumulated last year, as we have discussed on our last call. Their on-hand inventory levels are now returning to more normalized levels, so we expect to see increased demand from these customers going forward, as evidenced with the level of current purchase orders for Q4 of fiscal 2024 to date.

The most significant challenge we've faced financially this year and in fiscal 2023, has been related to the volatility of sales and margins in our RMS business segment, and more specifically, our NHP business. As we have discussed in the past, the preclinical testing industry faced challenges and volatility resulting from the U.S. Attorney's Office criminally charging a Cambodian government official on alleged charges of conspiracy to illegally import NHPs into the U.S. and the subsequent industry ban on the importation of Cambodian NHPs into the U.S. in late 2022. This ultimately resulted in heightened concern among customers regarding their ability to access NHPs to develop their pipeline projects, which together drove higher NHP pricing in fiscal 2023.

The uncertainty in available supply in the U.S. also resulted in some discovery and preclinical studies moving to other countries, which further impacted drug discovery and development and overall demand for NHPs in the U.S. We previously indicated this year could be choppy as it relates to NHP sales, reflecting the aftereffects and volatility caused by the NHP market dynamics at the end of 2022, through 2023, and into the first half of fiscal 2024. We continue to evaluate options to reduce this volatility, and in addition to our qualified and existing suppliers, we continue to expand and work with multiple suppliers in multiple countries. Critically, as we evaluate new potential sources of NHPs, we continue to audit them rigorously for animal welfare and health standards and will not source from suppliers who do not and cannot meet those standards.

This year, we have seen NHP customers work towards reducing some owned inventory and aligning their NHP purchases more closely with their immediate needs. As we enter long-term supply contracts for NHP starting in calendar 2025, we will hopefully be increasing and restoring the reliability consistency of our RMS revenues. Within our non-NHP RMS business, over the last quarter, we've enjoyed solid demand in our small animal and service business in the U.K. and Europe, and globally for our diets and bedding business. Before turning the call over to Beth, I'd like to provide a review of our recent operational challenges and a broader strategic view of how the company has progressed over the last few years. Over the past four years, Inotiv has dramatically grown and added multiple new product and service offerings, while also integrating and optimizing the business we have acquired.

Our operating goals included the company's effort to integrate and optimize facilities, improve our operations, take costs out of the business while improving service levels. We also completed significant investments to grow our service and to introduce ourselves to the market, to obtain new customers and grow existing customers. Inotiv has faced some unexpected challenges over the past two years, as discussed above, but we continue to adapt and develop our business model for the long-term success. We believe we have improved our competitive position as a mid-sized, full-service CRO and provider of research models and diet. We have made progress in consolidating our facility footprint over the past three years, while also expanding and improving our existing facilities and operations. As a result, we have seen lower cost and improved service and efficiencies from our operations.

We remain committed to building a business that can create value for our customers, employees, and shareholders. As we have addressed some of the legal challenges and industry-related headwinds, we recognize our liquidity has been negatively impacted. We'll continue to evaluate our opportunities to improve our balance sheet and enhance our liquidity. In summary, starting in fiscal 2025, we expect to see a full year impact of the positive changes and cost efficiencies achieved to date, as we are positioning ourselves to not be dependent solely on a potential market recovery to improve our operating results and cash flow. With that, I'll turn the call over to Beth, who will provide a more detailed synopsis of Inotiv's results for the quarter.

Beth Taylor (CFO)

Thank you, Bob, and good afternoon, everyone. For the fiscal 2024 third quarter, total revenue was $105.8 million, compared to $157.5 million during the prior year period, a decrease of 33%, primarily due to a decrease in the number of NHP sold and an approximate 35% reduction in NHP average price in the current quarter compared to the prior year period. The sale of the Israeli businesses in August 2023 and lower safety and discovery services revenue.

For the nine months ended June 30, 2024, consolidated revenue was $360.3 million, down 16.5% compared to $431.7 million for the same period last year, due to the decrease in NHP sold and the sale of the Israeli businesses in August of 2023. DSA revenues in the 2024 third quarter decreased by approximately 6% to $44.2 million when compared to the prior year period of $46.8 million.

The decrease in the DSA revenue was primarily driven by a decrease in general toxicology services due to a change in the mix of studies conducted in the 2024 third quarter compared to the 2023 third quarter, and a decrease in DSA products and discovery services revenue. These impacts were partially offset by increases in genetic toxicology and biotherapeutic analysis revenue in connection with our newer service lines at our Rockville facility. DSA revenues for the nine months ended June 30, 2024, were $135.5 million, which was slightly higher compared to the prior year period of $134.9 million. Overall, net new DSA orders this quarter were $40.4 million versus $48.6 million in the same quarter last year.

For the year-to-date period ending June 30, 2024, we booked net new orders of $139.2 million versus $133.3 million for the nine months ended June 30, 2023. The conversion rate this quarter was 31% versus 30% in the prior year. The DSA cancellations in Q3 were consistent with the prior year period, and in the first nine months of fiscal 2024, they were slightly less than the same period in fiscal 2023.

RMS revenue for the fiscal third quarter was down 44.4% to $61.6 million, compared to $110.7 million the same quarter last year, due primarily to the lower NHP-related product and service revenue, mainly as a result of product volumes and pricing. In addition, there was a decrease in revenue of $3 million as a result of the sale of our Israeli businesses in August of last year. For the nine months ended June 30, 2024, RMS revenue was down 24.3% to $224.8 million compared to $296.8 million in the same period last year.

The decrease was due primarily to the negative impact of lower volumes of NHP sales, lower revenue as a result of the sale of our Israeli businesses in fiscal 2023. The remaining decrease in RMS revenue was due primarily to decreases in small animal sales and RMS services in the U.S., partially offset by an increase in diet and bedding sales on a global basis. Regarding NHP pricing, we indicated on our last conference call that NHP prices were expected to come down from the highs we saw in Q4 of fiscal 2023, and the first two quarters in fiscal 2024. We did see the average sales price of NHPs in Q3 of fiscal 2024, on average, come down roughly 23% sequentially from Q2 of 2024.

This was an approximate 35% decrease to the comparable period of fiscal 2023. As we are selling higher cost NHPs that were purchased in late calendar 2023 and early calendar 2024, we are realizing lower margins in fiscal year 2024. The current cost and anticipated cost in future contracts for the acquisition of NHPs are expected to be lower, which should favorably impact future margins. As we work through the higher cost NHPs in our inventory, RMS margins in the short term will continue to be depressed. Operating loss for the third quarter fiscal 2024 was $20.8 million, compared to operating income of $8.8 million from last year's fiscal third quarter, primarily due to a lower volume of NHP sales and lower margins on these sales.

An additional $2 million charge related to the settlement agreement on June third with the DOJ to adjust our estimate that was recorded in Q2 fiscal 2024, and the impact of lower margins following the sale of our Israeli businesses. These items were partially offset by decreases in our provision of expected credit losses, restructuring costs, severance, remediation costs, and legal and third-party fees. Consolidated net loss attributable to common shareholders in the third quarter of fiscal 2024 totaled $26.1 million, or $1 loss per diluted share. This compared to consolidated net income attributable to common shareholders of $1.8 million, or $0.07 earnings per diluted share in the third quarter of fiscal 2023.

For the third quarter, adjusted EBITDA was $0.1 million, or less than 1% of total revenues, compared to $30.5 million, or 19.4% of total revenue for last year's third quarter. For the nine months ended June 30, 2024, adjusted EBITDA was $12.8 million, or 3.6% of total revenues, compared to the prior year period of $42.1 million, or 9.8% of total revenue. Non-GAAP operating income for our DSA segment in the third quarter was $7.8 million, or 17.6% of segment revenue, compared to $10.2 million, or 21.8% of segment revenue in last year's third quarter.

As our new DSA services come fully online and we begin to fill newly added capacity, we believe we will see margin improvement through operating leverage. The book-to-bill ratio for DSA in the third quarter was 0.94 to one. Our nine-month year-to-date fiscal 2024 book-to-bill was 1.06 to one, and our trailing twelve-month net book-to-bill was 0.95 to one. Year-to-date, June 30, 2024, we booked net new orders of $139.2 million versus $133.3 million for the nine months ended June 30, 2023. The DSA cancellations in the third quarter were consistent with the prior year period, and year-to-date for the last nine months were slightly less than the same period in the prior year.

DSA backlog was $139.4 million at June 30, 2024, compared to $149.1 million at June 30, 2023. In our RMS segment, non-GAAP operating income in the third quarter of fiscal 2024 was $6.5 million, or 10% of segment revenues, compared to $35 million, or 31.6% of segment revenues in last year's period.

The lower non-GAAP operating income in Q3 fiscal year 2024 was primarily the result of a decrease in NHP sales and margins in the sale of our Israeli businesses in August of last year, and that was partially offset by favorable cost reductions related to legal and third-party fees, remediation costs, impairment charges, severance, and a decrease in our provision for expected credit losses and restructuring costs. Interest expense in Q3 of 2024 increased to $12.1 million, up from $10.8 million in the last year's third quarter due to higher interest rates. Our balance sheet as of June 30, 2024, included $14.4 million in cash and cash equivalents as compared to $35.5 million on September 30, 2023.

Total debt, net of debt issuance cost as of June 30, 2024, was $382.4 million, relatively consistent with the $377.7 million as of September 30, 2023. This includes $115.3 million of our convertible notes as of June 30, 2024. Net cash used by operations for the nine months ended June 30, 2024, was $4.4 million, compared to cash provided by operations of $9.1 million in the same period last year. Cash provided by operations for the trailing 12 months was $14.3 million.

During the quarter ending June 30, 2024, the cash used in operations included $6.5 million paid under the settlement with the DOJ for the investigation related to the Cumberland facility that we closed in 2022. As of June 30, 2024, we were not in compliance with the financial covenants under our credit agreement. However, we received a waiver from our lenders. Capital expenditures in the third quarter were $4.4 million, or 4.2% of total revenue. For the nine months ended June 30, 2024, capital expenditures were $17 million, or 4.7% of total revenue, as compared to $21.3 million, or 4.9%, for the year-to-date period for 2023.

The capital expenditures reflect investments in facility improvements, site expansions, enhancements to laboratory technology, improvements for animal welfare, and system enhancements to improve the client experience. In terms of our capital improvements and site optimization plans, I'm pleased to report that we have completed many of the investments and initiatives started in mid-calendar year 2022. We expect these investments will be reduced further in the next two quarters and until we see a further recovery in revenue. Let's now turn to our guidance. We withdrew financial guidance last quarter for fiscal 2024. We expect to provide guidance for fiscal 2025, once we have greater clarity on the market and customer demand. With that financial overview, we will turn the call over to our operator for your questions.

Operator (participant)

Thank you. And to our phone audience joining today, if you would like to ask a question at this time, simply press star and one on your telephone keypad. Pressing star and one will place your line into a queue, and we'll take your questions one at a time. Once again, ladies and gentlemen, that is star and one, if you would like to ask a question. We'll hear first from Matt Hewitt at Craig-Hallum. Or, sir, actually, we have a problem with the conference, the Q&A. Please re-signal with Star and One, sir. Dave Windley at Jefferies, your line is open. Please go ahead. All right, Mr. Hewitt, is your line open, sir? Can you hear us?

Matthew Hewitt (Analyst)

I can hear you fine. Apparently, you couldn't hear me, but.

Operator (participant)

Please go ahead.

Matthew Hewitt (Analyst)

Yeah. All right. A lot to unpack there, obviously, but it sounds like you're starting to see some signs of progress. Maybe first up, regarding the NHP business. It's great to hear that the Florida DOJ situation is resolved, and I'm just curious, what does that mean from a legal expense standpoint? That goes away, and I guess in general, it sounds like your legal expenses are gonna drop pretty dramatically. Is that fair?

Robert Leasure (President and CEO)

Beth, you want to address that, what we've spent so far in legal expenses? And, and yes, I hope it, it would begin to see those significantly reduced.

Beth Taylor (CFO)

Yeah. In regards to this particular matter, we hadn't received a subpoena since, I believe, June of 2021, but we were incurring some expenses in obviously monitoring the situation. So between that and the legal expenses for the Cumberland matter, I mean, we should see expenses, legal expenses come down for those matters by about, probably about $2 million-$3 million a quarter.

Robert Leasure (President and CEO)

Can you tell him how much we spent over that, on those cases in the last two years?

Beth Taylor (CFO)

Yes. On the Cumberland case, in the last two years, to address the legal inquiries and the closure of the site, we have spent. Before the settlement, it was approximately $21 million.

Matthew Hewitt (Analyst)

Wow!

Robert Leasure (President and CEO)

Okay.

Matthew Hewitt (Analyst)

All right.

Beth Taylor (CFO)

In total.

Matthew Hewitt (Analyst)

It's great to have that. Yeah, that's great to have that behind you finally. And it sounds like you're starting to see some signs of recovery. Do you expect that with Q4, we start to see the signs that that's improving, or is it really 25 with the contracts in place, the pricing reset, both on the sales side as well as on the cost side? What? I'm just trying to triangulate when that really starts to impact the numbers.

Robert Leasure (President and CEO)

We're gonna see a, obviously, an improvement in Q4. We're gonna sell potentially 120%-130% more NHPs in Q4 than we did Q3. Matter of fact, I think we'll probably sell-- potentially sell 20% more than we did in Q4 of last year. So this will be one of the first quarter-over-quarter improvements we have seen in several quarters. The pricing will be in line with what it was last quarter and probably closer to what it was, again, in 2022 and early 2023, before all this started taking, you know, before the Cambodian issue started taking place in late 2022.

I believe that our margins, since we have higher cost NHPs in inventory right now for some we bought at the end of last year, we'll sell most all of those out in the Q4 period. So we'll start to see some of the margin improve, going into 2025. And then I think we'll see much more consistency as we start to sell off the contracts in 2025 in calendar 2025. But you know, I believe that the bump that we're seeing in Q4 is very encouraging. Somewhat of a whiplash, almost, from where we've been in the last two quarters. So that's probably an encouraging sign.

Matthew Hewitt (Analyst)

No, that's fantastic to hear. It's, it's been a tough slog, but it's nice to see the light at the end of the tunnel there. One of your peers reported yesterday and was talking a little bit about some of the headwinds that, I think they were implying the industry is facing regarding not only small pharma, and I think you spoke to this a little bit, but small and medium-sized pharma and bio pharma companies kind of holding that capital tight, even if they recently raised. But then also even large pharma being a little more focused on clinical or later-stage programs versus earlier stage. It doesn't sound like you're necessarily seeing that, some of the seeing, given some of the commentary you made, but do you wanna discuss that a little bit, what you're seeing in the market?

Robert Leasure (President and CEO)

Well, I'll remind everybody that in our DSA sales, less than 5% is to large pharma and to the top pharma. So we are, you know, over 95%-97% of our sales is biotech. We still believe we've been able to differentiate ourselves on service, and we still are taking advantage of some of the services that we built that we're still, I think, developing and gaining some market share. So some of that, I think, has helped offset that, and I think still has the opportunity to, again, to help us in the future. And remember, if you're comparing us to other public companies in our space, we are still much smaller than they are. So, again, we're $180 million-$200 million of DSA business.

We can move the needle a little bit more with a $20 million increase in sales. We can also lose it a little bit more if we lose that $20 million. But so far, I think that we're focusing on what we can do to make sure we gain new accounts and grow with the accounts that we have. And yes, I do think that we have seen a little bit of pricing pressure, and that we've responded in case by case where we have to. But for the most part, I think we still feel we're in a pretty good position for what we see in the back half of this year, so we'll see what happens.

Matthew Hewitt (Analyst)

Well, that's, that's great to hear as well. Congratulations on some of the progress that you've made here in a rather tough environment.

Robert Leasure (President and CEO)

Thank you. Yes, we're looking forward to maybe controlling our destiny a little bit more next year.

Operator (participant)

And once again, to our phone audience, that is star and one, if you would like to ask a question. Our next question today comes from the line of Frank Takinen at Lake Street Capital Markets.

Nelson Cox (Analyst)

Hey, great. This is Nelson Cox on for Frank. Good to hear you're starting to see some normalcy starting to return. Can you kind of touch on the end customer NHP inventory a bit more? I know it's maybe hard to quantify, but how do you think about that kind of reaching a normal inventory level, and is that kind of still six months out? Is it a year out, or is it sooner than that, with kind of the comments you've made?

Robert Leasure (President and CEO)

Well, I think there are a couple things that impact our customers' demand. One is their inventory level. Two is what volumes they have internally. Remember, some, many of these are CROs that. And some of the CROs are, you know, as you can see from the reporting, are down or flat. So I think both of those things can impact us. But I believe many of them last year bought more than they needed and saw sales less than they expected. Those results had a lot more NHPs. Right now, we've got good inquiry, good amount of POs in-house. I think people are being a little bit more cautious. But what we also don't have very good visibility into is what all of our competitors' situation is.

But right now we feel like we're in a pretty good position, and I like two things. One, I like the current POs we have in-house. I like the momentum I see towards our 2025 contracts. And three, I really like the fact that we're diversifying our customer base. I think at one point we had—our customer base, we had 25, one, one customer represented over 25% of our business. I think right now, in this quarter, we don't have anybody over 10% of our sales. Is that correct, Beth? Make sure I say that right.

Beth Taylor (CFO)

Yes, that's correct.

Robert Leasure (President and CEO)

All right. So I think we've done a really good job of also diversifying our customer base, which is helping us a little bit.

Nelson Cox (Analyst)

That's great. And then maybe just quickly, one more. Can you just talk a bit more about the investments you've made in the sales force and maybe the fruits you're starting to see from that so far?

Robert Leasure (President and CEO)

Well, yes, we've. I think last year we announced that we, about this time last year, we did not have a really early-stage discovery, separate discovery sales force. And we started building that last year, and really through the end of the calendar 2024 and into 2025, we were building that early-stage discovery sales force to go out and try to gain some market share. And as we continue to, again, add to our services, our scientific talent, and getting our scientists also more involved in the sale process. So that, you know, doesn't happen overnight as we're developing relationships, but I think we're starting to see some of that the fruits of our labor there.

Again, in the DSA business, we continue to look for ways to improve the way that we approach the market, where, and how to grow our customer base. And we have to balance that in line with our ability to add capacity, hire people, and our equipment and brick-and-mortar, and making sure that we can provide a great customer experience. We've so this goes hand-in-hand with really building our operations. What we don't wanna do is acquire a customer and then not deliver. So, we've been focusing on, again, our operations, our metrics, our systems, to make sure we can deliver that client experience, and we feel comfortable, then we go out and try to grow.

So to date, I think that some of the growth that we've had this year is not showing up because of some of the decrease in pricing. A lot of the decrease in pricing, by the way, is in the NHP market because a lot of those are pass-through costs. We obviously, with the NHP costs being down, we're not passing that on as aggressively. But I think that we still have the opportunity to continue to grow. I think we have a great team, a great group of scientists, believe in our team, and we'll look forward to seeing what we can do in 2025.

Nelson Cox (Analyst)

Great. Thanks, guys. Appreciate, appreciate it.

Operator (participant)

Our next question today will come from the line of Dave Windley at Jefferies.

Dave Windley (Analyst)

Let's try this again. Can you hear me this time?

Robert Leasure (President and CEO)

Sure.

Dave Windley (Analyst)

Okay, fantastic. Glad to hear it. I wanna pick up on Frank's question there on the and your answer, Bob, on the NHP business. So if I understood what you were getting at was the... I think what you were saying is the DSA price compression was attributable to NHP pricing coming down to the extent that that, you know, that passes through the study price. I was under the impression that your DSA business didn't do a lot of NHP testing, so maybe give us a sense of that mix. And, you know, is that shifting, and is, you know, your kind of improving stability of NHP supply influencing your ability to do more NHP study work?

Robert Leasure (President and CEO)

We do NHP toxicology safety assessment studies. That business has stayed for us at a very high level of occupancy, maximizing out our occupancy for the last two or three years. So we've seen good demand. Every once in a while, we may see a difference in revenue because of mix in some of the projects or because of some of the NHP pricing, but we've seen that safety assessment business stay very fairly consistent and fairly busy for us. We probably used about 10% of our NHPs historically for our own internal use. So we're not near as big as our competitors in that business, but we are in the safety assessment business and do large animal safety assessment.

Dave Windley (Analyst)

Right. Okay. Okay, that's helpful. I appreciate that. On the long-term contracts, can you give us a sense of, you know, say, how many customers, what percentage of your RMS revenue, roughly, that these long-term contracts might engage and cover?

Robert Leasure (President and CEO)

It's probably gonna be anywhere between one year and five years. Some of these involve boarding and investments so that we've made or they will be making, and deposits, and so many of them are longer term in nature.

Dave Windley (Analyst)

Okay. But in terms of, like, I was thinking about your NHP customer base, is this one or two customers that are willing to enter into these long-term contracts? Is it 10 or 20 customers that are, and then-

Robert Leasure (President and CEO)

No, no.

Dave Windley (Analyst)

When you think-

Robert Leasure (President and CEO)

It's more than two. You know, but I don't know that we have. There aren't really 20 recurring buyers out there. I think we're talking of, you know, in more in the range of six to 12 that would make up, you know, 80% of our, 80% of our sales.

Dave Windley (Analyst)

Got it, got it.

Robert Leasure (President and CEO)

But I do think we will see, I do think we will see, you know, a significant portion of our sales committed to long-term contracts. We will also have spot market sales and other, and others that we're selling, but it, we'll have over 50%, probably over 75% committed in long-term contracts and, and look forward to the recurring revenue.

Dave Windley (Analyst)

Sure. And for clarity.

Robert Leasure (President and CEO)

Oh.

Dave Windley (Analyst)

Sorry, go ahead. Sorry.

Robert Leasure (President and CEO)

I've said in the past, we will give up some margin dollars to have recurring, consistent revenue.

Dave Windley (Analyst)

Got it. That, just for clarity, 80% of your NHP sales, is that right?

Robert Leasure (President and CEO)

Yeah.

Dave Windley (Analyst)

Not total RMS sales but NHP sales.

Robert Leasure (President and CEO)

That is correct.

Dave Windley (Analyst)

Okay. And then in terms of, I guess the cost.

Robert Leasure (President and CEO)

That's, that's the goal, Dave. We're not there yet, but that is, that's the goal.

Dave Windley (Analyst)

Understood. Understood. In terms of, of cost structure, you've done some, quite a bit of site consolidation. You've talked, you know, for at least a couple of quarters about your transportation, in-housing your transportation and streamlining that. Are there other targets that you have in mind for, you know, potential efficiency or cost takeout?

Robert Leasure (President and CEO)

No, not at this point. We have been focused on this since 2022, and in order to close sites and optimize sites, it costs us money. We've made large investments to get there, too. But I think that we have accomplished a lot of the major brick-and-mortar changes we need to make. I think that we will see more of those benefits come out this quarter and the next quarter, because some of them are still coming to fruition. But I don't, we don't have any where I'm gonna tell you that we have the ability to make a $20-$30 million cost improvement.

Dave Windley (Analyst)

Got it. Okay. Maybe, maybe a last question is for Beth. Beth, you, in your comments, talked about you'll provide guidance, FY 2025, I believe you said, guidance at a later date when you have more visibility. Are we to interpret that as at the normal time for FY 2025, which I assume would be on your fourth quarter call for 2024? Or could it actually be further into FY 2025, you know, in air quotes, "as you get greater visibility?

Beth Taylor (CFO)

Well, we will certainly, you know, focus and try to provide some guidance as early as we can. So we'll have to see where we are with the primarily the NHP contracts, because that's gonna provide us, you know, really some more stable guidance going forward. So if we can certainly do it on our next quarterly call, we can, but we'll just we'll have to take that as the contracts are finalized.

Dave Windley (Analyst)

Okay. All right, great. Thank you.

Operator (participant)

We'll hear next from the line of Eric Coldwell at Baird. Please go ahead.

Eric Coldwell (Analyst)

Thanks. Good afternoon. I have a few around Teklad, and I was hoping. I'm sorry, I'm not as familiar with all of the inputs as some of the earlier guys on the call here. But can you remind me the growth that you quoted this quarter, and then whether or not that was against an easier comparison last year, or so it's a recovery, or is it really an acceleration off of a stabler performance in the diet and bedding business last year?

Robert Leasure (President and CEO)

I don't know, the growth that we're seeing in our diet business has been pretty consistent growth we started seeing two years ago. And we're seeing growth in volume and in pricing, and been very pleased with that. So that was the business that, as we look at our segments, that it's probably seen a pretty significant turnaround. And it's profitability, some of that because we're using up a higher level of capacity, some of that because we're doing much better in transportation, some because we're doing much better in buying the commodities, and some because we're gaining market share, we're picking up new customers, and we're doing a great job of delivering a quality product. So, I don't know what the.

You know, I, I think that we've had consistent growth since we've been involved in business, since 2022. And I, so I don't think we've ever had a down year in it, but I've, again, I've only been in the business two and a half years now.

Eric Coldwell (Analyst)

I think what I'm trying to get to, Bob, is whether there's more to learn about the global model market as opposed to your company outperforming on a number of fronts. And you mentioned some of these items, which included you know, better transport, gaining share, better buying, pricing it. I'm not sure how much it really tells us about the broader market. I have to admit, I was sort of hoping you'd say, "No, no, the overall animal research models market's growing faster," and maybe that's a part of it at some level, which maybe seems a bit hard to digest after some of the updates we've seen recently from your peers.

But I was hoping maybe you could give us a better sense on, you know, whether there were certain geographies, animal models, diets for certain animal models that maybe were standing out in terms of demand?

Robert Leasure (President and CEO)

Well, I see what you're asking. I will say that our diet business growth... I believe, is outpacing what we're seeing in small animals and outpacing what we're seeing in large animals. So I think we're picking up market share. I don't think we're seeing the growth because the market is growing.

Eric Coldwell (Analyst)

That's, that's where I was trying to go. Yeah, very much.

Robert Leasure (President and CEO)

No, I've been—you know, if we look at a lot of metrics, our speed to quoting, our percent we deliver on time, our customer complaints, and a lot of it all related, a lot of things related to transportation and delivery. All those metrics, customer service metrics we're looking at and our delivery are all really seeing a lot of improvements in the last two years. And I think we're just doing a much better job of delivering. I think our customers are pleased, and I think that's why we're getting more work.

Eric Coldwell (Analyst)

That's, that's exceptionally helpful. And then, I'm not sure what level of transparency you're providing on the number of NHPs. I've—we've heard all the growth and the recovery in demand here in the next couple of quarters. But, are you sharing any numbers on actual volume?

Robert Leasure (President and CEO)

In terms of, we've never-

Eric Coldwell (Analyst)

You're selling? Yeah.

Robert Leasure (President and CEO)

No, we've never actually shared volume. I can tell you that, you know, we were in terms of our volume, you know, again, Beth, what we were, we were down this quarter, volume. Price was down, and our volume was down another 30% from last quarter, which we thought was low.

Beth Taylor (CFO)

Yes.

Robert Leasure (President and CEO)

But we now think that our volume could. We could see next quarter up 120%-130% from this quarter in terms of volume alone. And we think it could be literally another 15%-20% more than we saw even a quarter a year ago. And that's, as I said, that'd be the first quarter-over-quarter increase that we have seen in quite a while now. I know your question is, is that a macro? Well, I think, one, we are seeing some customers that need some inventory. And two, what we can't see is what other competitors have in terms of their inventory and what that general market is. Are we picking up market share because of, because of their volatile market, maybe some inventories, other people are out of the inventory?

Some of those are good questions we don't have the answer to, but I know that we're, you know, we're seeing a nice increase, and we're seeing good response to our desire to work with us in 2025.

Eric Coldwell (Analyst)

That's, that's a good update. Thank you very much for that.

Operator (participant)

That is all the time we have for questions today. Mr. Leasure, I'm happy to turn it back to you, sir, for any additional or closing remarks.

Robert Leasure (President and CEO)

Yeah, thank you, everyone, for joining the call today. And I think our restructurings and integration, reorganization, new customer contracts are providing us the ability to address some of the past industry and economic challenges. We're also pleased to see the conclusion of certain government investigations. It's now critical that we do not compare ourselves to where we have come from, but remain focused on where we need to go to from here. I want to close today by really reiterating our confidence in the future of our industry, our company, and the investments we've made to position ourselves for the future. We'll continue building ourselves as a high-touch, flexible provider that is really attractive to our customers, who appreciate the personal service and attention to detail they can get from Inotiv.

Our metrics related to customer service, quality, and delivery are continuing to improve, and we continue to get better every day in all aspects of our business. We're still a very young company in our industry and believe our best days are ahead. Thank you for your time today.

Operator (participant)

Ladies and gentlemen, this does conclude today's teleconference, and we thank you for your participation. You may now disconnect your lines.