Earnings Call Transcript - NOTV Q2 2025

Operator, Operator

Good day, everyone, and welcome to today's Inotiv Second Quarter Fiscal 2025 Earnings Call. Please note, today's call will be recorded and I will be standing by should you need any assistance. It is now my pleasure to turn the conference over to Steve Halper of LifeSci Advisors. Please go ahead.

Steve Halper, LifeSci Advisors

Thank you, Chloe, and good afternoon, everyone. Thank you for joining today's quarterly 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 the 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, including risks and uncertainties that could cause results to differ from forward-looking statements. Management will also discuss certain non-GAAP financial measures in an effort to provide additional information for investors. Definitions 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 Investor section of the company's website. If you haven't obtained a copy of today's press release yet, you can do so by going to the Investor section of Inotiv's website. Joining us from the company this afternoon 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 the call. Bob will begin with some opening remarks, after which Beth will present a summary of the company's financial results for our second fiscal quarter of 2025, and then we'll open the call for questions. It is now my pleasure to turn the call over to Bob Leasure, CEO. Bob, please go ahead.

Bob Leasure, CEO

Thank you, Steve. Good afternoon, everyone. During the second quarter, there were some announcements and events which are likely to impact our industry and our business. Over the last five years, Inotiv has been evolving and has embraced challenges and changes that we've seen in our business. We believe we are a better company because of the changes we have faced. We have also made significant investments to better prepare us for the future. These include acquisitions, the businesses that we have started, the RMS site optimization plans, and the RMS and DSA site investments. This quarter, we stayed focused on our plans and continued to execute on many of the objectives, including continuing to focus on client satisfaction, client relationships, the continued integration of our scientific services and efforts as one company, moving forward and improving upon the next phase of our RMS site optimization plan, and expanding our NHP boarding and colony management services. We also had the opportunity to settle open litigation related to a three-year-old case in which we were a plaintiff, which we inherited with the Envigo acquisition. We settled this case for approximately $7.6 million, and the proceeds were received in March. I'll spend a few minutes on our second quarter results and highlights. For the second quarter of fiscal 2025, total revenue was $124.3 million compared to $119.9 million in Q1 of fiscal 2025 and $119 million in Q2 of fiscal 2024, representing a year-over-year increase of $5.3 million or 4.4%. The year-over-year increase was mainly due to an increase in RMS segment revenue of $6.6 million, partially offset by a decrease in DSA segment revenue of $1.3 million. The RMS revenue growth was primarily due to higher NHP revenue. As I mentioned in our call in February, we continue to see geopolitical and macroeconomic risks and uncertainties for our company as do many other companies and industries at this time. We expect to continue to see year-over-year revenue and adjusted EBITDA growth for the next two quarters of fiscal 2025. Our RMS second quarter revenue saw year-over-year growth, and some of this was due to a very light Q2 of fiscal year 2024. We believe we do have some momentum in 2025 that we did not see in 2024 and, as a result, we believe we will continue to see year-over-year RMS growth in fiscal 2025 versus 2024. Our overall RMS operating margins improved and were the strongest operating margins since Q1 of fiscal year 2024. We believe we have further opportunity to drive margins higher as we complete the next phase of the RMS site optimization plan, which we announced in December of 2024. We also indicated this expansion plan was expected to be approximately $5 million investment with the intent to use tenant improvement dollars along with proceeds from the sale of owned facilities to pay for this consolidation project. We originally estimated completion was expected to be before the end of fiscal year 2026. Additionally, we estimated this plan would have an annual cost savings of approximately $4 million to $5 million a year from reduced repair and maintenance expense on facilities and lower cost of production, along with improved service for clients, while production capacity would be unchanged. We have continued to refine our optimization plan and related timing for this project and have further revised this plan. We now anticipate net annual savings of $6 million to $7 million on a capital investment of approximately $6.5 million, which will be paid for with the use of tenant improvement dollars and a portion of the settlement dollars received this month. In connection with our revised plan, we continue to have two properties under contract to be sold and those proceeds will be used to repay principal on our term loans. This project is now anticipated to be completed by March of 2026, which is approximately six months earlier than our original plan, and we anticipate beginning to see savings benefits as soon as Q4 fiscal 2025. As with previous projects we have executed in RMS, these additional investments will help modernize our existing footprint while allowing us to close older facilities. This revised plan will reduce capacity, and we believe will create operating efficiencies and continue to support our animal welfare objectives. Additionally, we believe this plan allows us to remain agile and to increase capacity in the future if needed. We also continue to integrate and improve our North American transportation distribution systems, which we brought in-house in the first half of fiscal 2024. Over the past three years and including the current optimization plan, these initiatives have upgraded our operating facilities, improved efficiencies, decreased expenses, and improved margins, all while enhancing animal welfare, quality, and delivery for our clients. In aggregate, we believe these projects have delivered and will continue to deliver for Inotiv and for our clients and are improving the competitive positioning of our RMS business. Moving now to DSA. Revenue for fiscal Q2 was slightly down versus the prior year quarter and ahead of Q1 2025. We recognize we have had a deterioration of DSA margins over the last two quarters, which we are addressing. We had several expenses that were higher than normal, such as higher cost base NHPs being used in toxicology studies, plus we saw increased overtime and labor costs, additional utility costs, and an increase in operating supplies. Some of this margin deterioration can also be attributed to a mix in business and lower general toxicology service revenues and some related to pricing. We will be focused on these variables and efforts to improve margins in future quarters. On a positive note, DSA quoting and awards remain in line with the last nine months as our book-to-bill in the second quarter of fiscal 2025 remained at 1.01:1, and our new orders were 27% ahead of Q2 of fiscal year 2024. Again, the start of this quarter saw strong quoting activity with awards picking up towards the end of the quarter. So far in the current quarter, we remain pleased with the level of quoting and awards. Discovery awards for the first half of the year are still running 6.2% ahead of the six months ended March 31, 2024, and we expect discovery revenue to begin to see sequential and year-over-year improvements in the second half of fiscal 2025. We consider one of our foundational attributes as a contract service and research model provider to be our commitment to our clients to have a high-quality experience when they choose us as a partner. Our focus is to meet and exceed our clients' needs and expectations. We believe we accomplish this through scientific talent and speed we can bring to bear on projects and the care and efficiency with which we produce and distribute our feed, bedding, and enrichment products, and research models. At critical steps along our clients' journeys with us, we monitor metrics of the quality of our product, our delivery, and the satisfaction of our client base. We have been very pleased with the efforts of our teams on all of these fronts, and we continue to see improvements in these metrics we use to track the quality of the client experience. We believe this ongoing focus is critical to building confidence for both our new and existing clients and leads our clients to choose Inotiv as a preferred provider. Now, let me provide some comments on what we are seeing in the market today and on recent activities that have generated questions related to our industry. There's no doubt this has been an interesting time for our industry with recent announcements by the U.S. administration on tariffs to be levied on our international trading partners and more recently by the FDA on the future direction of drug development, and the active discussions surrounding changes within the NIH funding and objectives. First, on the FDA announcement, we broadly support the FDA's stated goals of reducing animal testing and the desire to reduce the time and cost required to bring new medications to market. In their recent official statement, the FDA noted the potential critical role that new approach methodologies or NAMs could have in achieving these goals. Such NAMs include technologies such as computer modeling, using cell and organoid-based methods, and the use of human tissues ex vivo as a contributory model for drug safety and efficacy. At Inotiv, many of our acquisitions and investments have been implemented, at least in part, if not wholly with the intent to help position us for the future, which is in line with the goals outlined in the 2022 FDA Modernization Act 2.0. Examples of some of our current service offerings, which are in line with these goals include predictive computer software, computational toxicology, bioinformatics, proteomics, ex vivo and in vitro cell-based assays, and assays we run in human cells and tissues. I want to remind everyone that we have been building these capabilities over many years, and we consider the continuation of development of them to be critical for the future of smarter drug development and our role in this initiative. As we adopt these advanced new technologies, we see these potentially reducing the need for using animals in some circumstances and over some time period, but we do not yet foresee the complete replacement of the use of animals in bringing safe and effective new medicines to humans and animal patients. Indeed, on April 29, the NIH also made an announcement on the future of NAMs and their intent to prioritize the use of human-based research technologies. In their announcement, they made clear their hope that NAMs could enable drug discovery and development to be smarter and more efficient in the future. But they also noted, and I quote, "traditional animal models continue to be vital to advancing scientific knowledge". We plan to continue our role helping develop and validate the NAMs alternatives, but until they are sufficiently predictive of complex human biology and are fully accepted as alternatives by regulatory authorities, we believe animal-based safety and efficacy testing will remain critical. Since the FDA announcement, I've also been asked specifically what percentage of our business comes from monoclonal antibodies, as they were a major focus of that announcement as the first wave of drugs that would be looked at for NAMs-based testing. We do not track our business at this time in a way that enables us to specifically identify that data. However, from publicly available data, we know that around 15% of all medicines in development are monoclonal antibodies. Moving now to U.S. government's recent introduction of tariffs on virtually all of our international trading partners and the potential for those tariffs to meaningfully increase if the U.S. does not reach specific trade agreements with each of those partners. Let me address the potential direct impacts of the tariffs currently in place. For the majority of our business, the primary components of our products and services are sourced within the same geographies. That is, most of what we need to deliver our products and services in the U.S., we source within the U.S., and the same is true for outside of the U.S. A material exception to this rule is the sourcing of NHPs, which we bring into the U.S. from certain Asian and African countries. For these, based upon current tariff levels, we will be paying the 10% tariffs and we will be working with suppliers and customers to mitigate the financial impact of these additional costs. Should the much higher tariff rates that have been talked about previously come to pass, we also expect to work with suppliers and customers to mitigate those potential additional costs as the NHPs are mission-critical to the safety testing of new medicines. If the higher tariffs are put into place and exist for some time, we are not in a position at this juncture to predict if or how our clients may prioritize studies or how our suppliers may prioritize and allocate their supply going forward. Based upon current tariffs announced, we have not yet seen any material change in demand. We believe we are beginning to see some cost inflation that is being linked to tariffs, for example, quotes for certain lab equipment and materials for construction projects. We are working to adapt our sourcing and planning strategies to largely mitigate these costs. Should higher tariffs come into play and/or be imposed for extended periods of time, we will continue to assess the financial impact and consider whether we will try to pass along some, if not all, of these costs to our client base. Overall, we remain confident going into the second half of fiscal 2025 and are also now preparing for '26 and '27. As I said earlier, the geopolitical and macroeconomic condition, risk, and uncertainties will remain with us as they do for all companies. We continue to improve and we remain committed to building a business that will create value for our clients, employees, and our shareholders and look forward to our future. I'll now hand things over to Beth to provide a financial overview.

Beth Taylor, CFO

Thank you, Bob, and good afternoon, everyone. For the second quarter of fiscal 2025, total revenue was $124.3 million compared to $119 million in the second quarter of fiscal 2024. This was a $5.3 million or 4.4% increase in revenue from the prior year quarter. As Bob said earlier, most of this increase was a result of increased NHP revenue within our RMS segment. RMS revenue for the second quarter of fiscal 2025 increased $6.6 million or 9.1% compared to Q2 of fiscal 2024. The increase in RMS revenue was primarily due to the higher NHP volumes sold, partially offset by a lower average selling price for NHPs compared to the prior year quarter. DSA revenue in the fiscal 2025 second quarter was $45.3 million compared to $46.6 million in Q2 of fiscal year 2024. The year-over-year decrease in DSA revenue was primarily driven by a decrease in general toxicology services revenue. Overall, net new DSA orders this quarter were $44.5 million, which is a 5% increase over last quarter and a 27% increase over Q2 of fiscal 2024. The conversion rate in the second quarter of fiscal 2025 was 34.1%, up from 30.1% in the prior year period. The DSA cancellations and negative change orders in the second quarter of fiscal 2025 were approximately 28% lower compared to the prior year second quarter. Cancellations in the trailing 12-month period were approximately 7% less than the prior period. The overall operating loss for the second quarter of fiscal 2025 decreased to $2.9 million from $43.1 million in the second quarter of fiscal 2024, primarily due to the $26.5 million charge related to the agreement in principle and subsequent Resolution Agreement and Plea Agreement with the Department of Justice that was incurred in the second quarter of fiscal 2024, and the $7.6 million settlement payment we received during the second quarter of fiscal 2025, in addition to the $5.3 million increase in revenue previously mentioned. Consolidated net loss attributable to common shareholders in the second quarter of fiscal 2025 totaled $14.9 million or a $0.44 loss per diluted share. This is compared to consolidated net loss attributable to common shareholders of $48.1 million or $1.86 of loss per diluted share in the second quarter of fiscal 2024. For the second quarter of 2025, adjusted EBITDA was $8 million or 6.4% of total revenue compared to $3.1 million or 2.6% of total revenue for the second fiscal quarter of 2024. Non-GAAP operating income for our DSA segment in the second quarter was $5 million or 4% of total revenue compared to $8.2 million or 6.9% of total revenue in the last fiscal year second quarter. As Bob mentioned, we are focused on our DSA margins and we expect to see improvement in future quarters. Additionally, as we experienced an increase in discovery service revenue and continue to fill recently added capacity, we believe we will see margin improvement through operating leverage. The book-to-bill ratio for DSA in the second quarter of fiscal 2025 was 1.01:1. Our trailing 12-month book-to-bill was 0.93:1. DSA backlog was $130.8 million at March 31, 2025, compared to $130.4 million at December 31, 2024, and $142.1 million at March 31, 2024. In our RMS segment, non-GAAP operating income in the second quarter of fiscal 2025 was $15.6 million or 12.5% of total revenue compared to $8.2 million or 6.9% of total revenue in the second quarter of fiscal 2024. Interest expense in Q2 of fiscal 2025 increased to $13.4 million from $11.1 million in the second fiscal quarter of 2024, primarily due to interest incurred in relation to the second lien notes issued in September of 2024. Our balance sheet as of March 31, 2025, included $19.3 million in cash and cash equivalents as compared to $21.4 million on September 30, 2024, and $38 million on December 31, 2024. In the second quarter of fiscal 2025, we saw significant fluctuations in our working capital based on the timing of NHP deposits required by our suppliers and when we get paid for sales of NHPs by our clients. Total debt, net of debt issuance costs as of March 31, 2025, was $399.5 million compared to $393.3 million on September 30, 2024. This includes $113.1 million of convertible notes as of March 31, 2025, and our second lien notes of $20.5 million. Cash used in operating activities was $17.3 million for the first six months ended March 31, 2025, compared to $10.4 million of cash provided by operations for the six months ended March 31, 2024. Capital expenditures in the second quarter of fiscal 2025 were $5.5 million or approximately 4.4% of total revenue. The second quarter fiscal 2024 capital expenditures were $7 million or 5.9% of revenue. We continue to expect our annual spend for CapEx for fiscal year 2025 to be less than 4% of revenue. We have not provided formal financial guidance for fiscal year 2025. While we continue to feel positive about the progress we have made in recent quarters, we are not providing formal fiscal 2025 guidance at this time. As we stated previously, we hope to provide guidance once we have greater clarity on the market and client demand and clarity on any impact to our business once there is more information on tariffs. Our current operating plan forecasts compliance with the updated covenants under our latest amendment to the Credit Agreement entered into in September 2024. And with that financial overview, we will turn the call over to our operator for questions.

Operator, Operator

And we'll take our first question from Matt Hewitt with Craig-Hallum Capital Group. Your line is open.

Matt Hewitt, Analyst

Congratulations on a strong quarter and the progress you’ve made, Bob and Beth. Thank you for sharing the details regarding the developments with the FDA and NIH. Concerning the FDA, I’m curious if, since the announcement, you’ve adjusted your marketing to ensure your customers are aware of how you can assist them during these changes. What feedback are you receiving from customers? Are they expressing appreciation for your offerings and seeking your support? Any insights on that would be valuable. Thank you.

Bob Leasure, CEO

Hi Matt, thank you for the question. We have been integrating these services, some of which we've acquired over the last couple of years into our business over the last two or three years. We mainly sell these as part of our discovery sale process and discovery and translational sciences, I should say. I would say that they have been out there and we're including them more and more and we have seen some of those increasing, but not at the pace people may expect. The computational toxicology and proteomics are things that we're including in our quotes, and people are becoming more educated about it. We have some great capacity available, and I think it will take off, and we are seeing some growth right now in those areas. But it's not taken off as much as maybe we had expected looking back in 2022. Yes, we have been including those aspects. I think we're becoming much more educated, and our customers are becoming educated, and I think some people are changing their approach. But I think it's mainly right now in the discovery and translational sciences more than probably what we are seeing in the safety and efficacy segment. I'll ask John, John Sagartz is on the phone, and he may have better insight on this. John, do you want to add anything to that?

John Sagartz, Chief Strategy Officer

Well, I would just echo what you've said about not really seeing an impact immediately, but I struggle a little bit with what NAMs really means because many of these are old approach methodologies. They've been around for decades, but they obviously continue to evolve. And of course, you can point to examples of genetic toxicology testing, computational toxicology, quantitative structural activity relationship, primary cell cultures using animal or human cells, cell lines, patient-derived xenografts. These have all been part of our toolkit, and I think what the FDA announcement has given us the opportunity to do is to really collate and describe the contributions that they're making to the company and to our industry. As I mentioned, these continue to evolve. We're looking for opportunities to participate in that evolution. But in terms of feedback from clients, customers, we're not really seeing that emerge at this point. I think one thing I would just mention is that the headlines that came out after the FDA announcement, I don't think really match what was in the communication. And many of the changes that FDA is proposing are things that can be celebrated by innovators because for certain therapeutic modalities, they reflect an ability not to have to check boxes but to use a weight of evidence approach to evaluating the safety and efficacy of the compounds.

Matt Hewitt, Analyst

That’s really helpful. Thank you. Maybe shifting gears a little bit, Bob, you kind of spoke to the refined optimization plans for your RMS business or RMS sites that you're working through. It sounds like you're trying to get closer to the customers, if I heard you correctly. Are there one or two or three items in particular that you're really focused on with that revised plan? Or is it more broad than that?

Bob Leasure, CEO

We originally announced the plan back in December, and the revised plan developed through a couple of avenues. First, we are focused on improving our efficiencies and optimizing our facilities significantly. We are noticing rising costs, and it appears that the small animal market is not expanding in size; the number of animals sold is not increasing. While we have the capacity to grow, expanding that capacity is not currently necessary. Furthermore, after our acquisition of the transportation system 18 months ago, we have made strides in improving transportation efficiency, which means we don't require as many facilities dispersed across various locations. Considering all these factors, we aimed to maximize our resources. The financial gains we've already seen, combined with the prospects for that segment, represent a substantial turnaround for the business that is beginning to contribute positively. We believe this revised animal welfare strategy is not only better for our clients but also enhances our efficiency. It will push us to operate more effectively. Throughout our evolution, we've recognized this potential, and I truly believe this is a positive move. I commend our team for devising this new plan, which surpasses our original strategy. Their continuous evaluation and pursuit of improvement is commendable. We've increased the annual benefits and expedited implementation, allowing us to see immediate advantages. Overall, this seems like a win-win situation. I appreciate their efforts to keep finding smarter and better ways to operate.

Matt Hewitt, Analyst

And maybe one last one for me, but I think you mentioned during your prepared remarks that you saw kind of an increase in demand in Q1 from the beginning of the quarter to the end of the quarter. How have things started off here this quarter? Has that increased demand that you exited Q2 with contributed or increased here in Q3? Or where do we sit today? Thank you.

Bob Leasure, CEO

Yes, Matt. Remember, we started this quarter with a lot of weather-related issues. If you recall, we had a lot of ice, and a lot of facilities were affected. People were spending the night at facilities. I think things seemed to start a little slow in January. Quoting was good, but people weren't making decisions yet because I think they were dealing with some of the weather-related issues out there. But after it picked up towards the end of the quarter, we were able to achieve a positive book-to-bill, which we expected. I would say this quarter, we're now about six weeks into it, and yes, I've been very pleased with the level of quoting and closing. We've had a great start to this quarter. We indicated and I think you indicated, we'll see year-over-year improvement in revenue over the next two quarters for this fiscal year. I also think we'll start to see a reversal in the decline of the discovery business that we've seen over the last two or three years. I think we'll start to see that reverse in the next six months. So I'm optimistic on both of those fronts.

Operator, Operator

We'll move next to Frank Takkinen with Lake Street Capital Markets. Your line is open.

Nelson Cox, Analyst

Great. This is Nelson Cox on for Frank and congrats on all the progress this quarter. Maybe just starting on the NIH side, maybe talk a bit more about any potential impacts you're seeing out there or not seeing and what the feedback is you're hearing? More broadly, how insulated do you believe your current customer mix is from potentially fluctuating NIH funding?

Bob Leasure, CEO

We've certainly heard a lot about the NIH funding and the discussions surrounding proposed budgets. There are varying opinions on whether this is beneficial or not, so it's still too early to predict the effects of NIH funding. We've also received feedback from universities regarding their funding concerns. However, so far, I would say there hasn't been a significant impact on our business. We do sell to both the government and universities, and I would need to check with Beth for the exact percentage of that. We're monitoring the situation closely, but at this point, we haven't observed any substantial changes linked to NIH funding. There have been a couple of customers who mentioned that they aren't proceeding with projects, but we've also seen some customers increase their orders. This variability is not unexpected in the regular course of business. As of now, I don't see anything particularly unusual. Beth, do you have any additional insights on our customer mix percentages?

Beth Taylor, CFO

Yes, for fiscal year 2024, our government revenue to total company revenue is approximately 7%. I will say, quarter-over-quarter for Q2, we've actually seen an increase in revenue in the government sector, U.S. government sector.

Nelson Cox, Analyst

Thank you, Beth. Got it. That’s helpful. Positive book-to-bill in line with last quarter. Last quarter, you talked about there being one large project that drove cancellations higher. Were there any one-time events like that this quarter that may have impacted those metrics or anything to call out?

Bob Leasure, CEO

No, I think Beth indicated that our cancellations were down quite a bit this quarter, weren't they, Beth?

Beth Taylor, CFO

Yes, they were.

Bob Leasure, CEO

I think that was encouraging. Again, we had a big cancellation in the last quarter. We didn't have any big cancellations in Q1. We didn't have any big ones in Q2. Not saying we will or won't have any in Q3. We'll wait and see how that trend develops. But as you look back over 12 months, I think as Beth indicated, our cancellations have started to decrease while our quoting and awards have started to increase. So I think that's overall a good trend.

Beth Taylor, CFO

Yes. Quarter-over-quarter, we saw a 28% decrease.

Nelson Cox, Analyst

Got it. Perfect.

Bob Leasure, CEO

And the awards were a 27% increase over last quarter. I think that's a pretty good indicator of momentum.

Nelson Cox, Analyst

And then maybe just one last one. I mean, strong quarter from an adjusted EBITDA perspective and I heard the commentary on expecting continued growth, $8 million in adjusted EBITDA this quarter. I understand you're not providing formal guidance. But given all the moving pieces, is there any other color you can provide directionally that may be helpful as we work on our models?

Bob Leasure, CEO

I think I mentioned that we need to improve our DSA margins, which have declined slightly over the last two quarters. We provided some reasons for this, including that certain projects were quoted a year ago when pricing included more discounts than we see now. We are assessing this and intend to focus on enhancing those margins. I believe we can increase our margins in the coming months, especially with the ongoing growth and discovery opportunities. We also expect our G&A costs to decrease, and currently, they are trending in a positive direction.

Nelson Cox, Analyst

Perfect. Thanks again, guys and congrats.

Bob Leasure, CEO

Thank you.

Operator, Operator

We'll take our next question from Dave Windley with Jefferies. Your line is open.

Dave Windley, Analyst

Hi, thanks. Good afternoon. Thank you for taking my questions. On the last one, Bob, are the steps you've identified in the DSA areas regarding margin things that you can influence quickly, or should we expect those to take about 2 to 3 quarters?

Bob Leasure, CEO

I think, first of all, I would say that we just didn't identify this with this quarter's results. I think it's been something we've been concerned about for three or four months. We have been addressing it. I think we should start to see some benefits sooner than later. As a matter of fact, during the quarter, I think we saw improvement between January, February, and March. Some of it is in growth, some of it will come in pricing, and some of it has come from knowing that we had some higher cost NHPs. Recall that in Q1 of '25, we had low margins in RMS because we had higher cost NHPs floating through that. Those higher cost NHPs were still going through those studies on the DSA side. That's what related to some of the higher animal costs. We had additional utilities and supplies that came with some of the weather-related issues. I think we'll see some immediate benefit. I'm looking forward to see what we can do as we get that focus. But I'm confident we'll get where we need to be.

Dave Windley, Analyst

So a couple of clarifications. The point you're making on the higher cost NHPs, I understand historically, the pointing was to RMS, but you're saying, in 2Q, those higher cost NHPs were still a factor in DSA cost structure?

Bob Leasure, CEO

Yes. Those would still be on studies that we're floating into the first three or four months of calendar '25. As we go into May, most of those are behind us, but we had some still in the system through April.

Dave Windley, Analyst

We were together at SOT, and I spoke with several others there, as I'm sure you did too. One theme that stood out to me was an increase in price discounting. Has that changed so rapidly since mid-March?

Bob Leasure, CEO

I think we heard some of this. The price discounting six to 12 months ago was greater than it is now. It seems less prevalent than before, and we don't hear about it as much. However, we have strong recurring clients who haven't pushed for discounts. I believe we're offering a fair price at this point. We're not at the pricing levels we saw two or three years ago. Compared to three years ago, there is still some discounting, but it's not at the level it was six to 12 months ago.

Dave Windley, Analyst

And you've kind of answered the question, but I thought it worth asking just to make sure. In RMS, the increase coming from NHP revenue and I think Beth more specifically said higher volumes of NHP sales at lower prices. I wanted to see if the NHP services had any part in that? And if so, how much?

Bob Leasure, CEO

Yes. The NHP services are continuing to increase. I would tell you, we're actually bringing a lot of boarding capacity on board this quarter. So it will continue to increase. For the year, we were expecting about a 20% increase. I don't know what it is quarter-over-quarter. Beth, do you have that immediately available?

Beth Taylor, CFO

Yes. Our NHP service revenue did increase quarter-over-quarter by about 10%.

Dave Windley, Analyst

Okay, thank you.

Bob Leasure, CEO

I want to clarify what I meant. When I referred to integrating your scientific services, I was referencing the continuing integration of the acquisitions that you've made over the years. It also includes consolidating the technology stack and streamlining the client experience. Right. I'll do my best to explain. We believe our clients value speed and time. We track very closely our ability to deliver what we say we're going to deliver on time; that’s a key component of our business. Integrating our services helps our clients accelerate their product development and timing. But it doesn't just mean combining companies; it also involves having integrated project management systems and cultivating a culture that respects those systems. The integration allows us to combine learnings from development to safety assessment, creating added value. I hope that clarifies what I meant, as it's about creating one cohesive entity while enhancing the value proposition for our clients. Thank you for joining today's call. We're feeling optimistic with the level of DSA quoting and awards. We were pleased with our RMS results this past quarter, and we feel that there is a path to improving the DSA margin starting in Q3 of fiscal '25. We will continue building Inotiv as a high-touch flexible fighter with strong scientific capabilities that are focused on our clients' needs and a positive environment for employees to have a career and grow while generating positive returns for our shareholders. We'll continue to pay attention to these details to get better every day. Also, I'd like to add that we are planning an Investor Day at our facility in Rockville, Maryland, on Thursday, May 29. We look forward to further expanding on our strategic plan and our focus on client excellence. Thank you for your time today.

Operator, Operator

This does conclude today's program. Thank you for your participation. You may disconnect at any time and have a wonderful evening.