Neogen Corporation

Good day and welcome to the New Gen Corporation first quarter fiscal year 2023 earnings call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one. on a touch-tone phone. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to John Aydin, CEO and President. Please go ahead.

Good morning, and welcome to our regular quarterly conference call for investors and analysts. Today we will be reporting on the first quarter of our 2023 fiscal year, which ended on August 31st. As usual, some of the statements made here today could be termed as forward-looking statements. These statements are subject to certain risks and uncertainties, and our actual results may differ from those that we discussed today. The risks associated with our business are covered in part in the company's Form 10-K as filed with the Securities and Exchange Commission. In addition to those of you joining us by live telephone conference, I also welcome those of you joining us via the Internet. Following our prepared comments this morning, we will entertain questions from participants who have joined this live conference. I'm joined this morning by Steve Quinlan, our Chief Financial Officer, who will provide some additional details on our results for the quarter. As we stated in our press release this morning, we reported 3% growth across our business in the first quarter of our new fiscal year. despite the challenging business environment that we've been operating under throughout these months. Steve will talk about it more in his comments later on the call, but we faced particularly strong currency headwinds that impacted our business. Without these, total revenues would have increased 6% and our food safety business would have been up 9%. I can't say enough about our incredible team here at Neogen and their continued dedication to our mission and Neogen's success. The first quarter presented us with many challenges, both with the current state of the economy and the added responsibilities of our existing job duties as we work to close the 3M food safety transaction on September 1. Thanks to the collective efforts of the NIAGEN team and our new 3M team members from around the world, we are pleased to successfully close the transaction on the morning of September 1 and begin the integration of the former 3M food safety business with our operations. Since day one, members of our NIAGEN team, including myself, I've been traveling to visit our new food safety teams in person. I just returned home from a trip abroad where I was able to visit many of our new locations and team members. On my trip, I met with teams across Europe, and I returned home more excited than when we announced the deal. The enthusiasm among our team members was fantastic, and we were able to discover new synergies between our businesses. I feel confident that under the new management structure, we can accelerate the growth of the business and capture this untapped potential. The sales teams are very excited to be part of the Neogen team and are very eager to begin cross-selling Neogen products with their former 3M food safety products. I also visited the Bridgend facility in the UK that we obtained in the merger, and it was tremendous. I was so impressed with the team's resources and capabilities there, and I'm really excited about the opportunity to grow that business. The team is excellent, and having been a pilot site for 3M's SAP implementation, they will be one of the first teams to implement our SAP platform. They've been instrumental in assisting with the blueprinting of the system, and their assistance and expertise will be invaluable in the months to come. While I was there, I found our Bridgen team and our Ireland-based Megazine business had already found opportunities to increase the efficiencies of both locations because of similar manufacturing processes and systems. These are just a few examples of what we believe can be achieved with these businesses as we more fully integrate them into Neogen. I really enjoyed being able to interact face-to-face with these new members of the Neogen family, answering questions and providing updates in person. The excitement I gained from this trip is a great motivator as we look to the rest of the fiscal year. These are very strong teams that bring great value to Neogen, and I'll be looking to them to strengthen our leadership across Europe. We also welcomed our new Food Safety Division leaders to our corporate headquarters in Lansing, Michigan. during the second week of September, where they connected with their teammates and began holding important conversations regarding our 30-, 60-, and 90-day plans. And they've helped us identify a number of new sales and operational synergies. Overall, it's been an incredibly positive first month as a combined company, and I feel very confident about the team that we've put together. This has been a busy time for Neogen with many positive changes, and we're very excited about the future. We're well positioned at the forefront of food safety and digitization, and together as a global industry leader in food security, we'll be able to better serve our customers at every stage of the food chain, from behind the farm gate all the way to the dinner plate. Now I'm going to turn it over to Steve for some more insights into our numbers for the quarter.

Thank you, John, and welcome to everyone listening this morning. Before I talk about the numbers, I'd like to also recognize our NIAGEN team members for both their efforts in the quarter and and in getting the 3M food safety transaction across the finish line. Earlier today we issued a press release announcing the results for our first quarter, which ended on August 31st. Revenues for the quarter were $132.3 million, an increase of 3% compared to $128.3 million in the same quarter a year ago. Excluding the impact of currency translations, this increase would have been 6%. Income for the quarter was $5.2 million, or $0.05 a share compared to $17.1 million or $0.16 a share a year ago, excluding $13.7 million in deal costs associated with the 3M transaction. And after adjusting for taxes, net income would have been $15.9 million or $0.15 a share. In the next few minutes, I'll give you some color around the numbers, and I'll start by talking about the negative currency translation impacts to the business in the first quarter. The pound and euro have each devalued 13% against the U.S. dollar compared to the first quarter a year ago. And to a lesser extent, we also experienced negative impacts of a weekend Australian dollar and Argentine peso. In total, revenues would have been 3.9 million higher in the first quarter had currency been neutral, which would have resulted in 6% growth. Our overall organic increase, excluding the currency impact, was 4% for the quarter. with the acquisitions of CapInnovet, DELF, GVS, and Thai Neo Biotech contributing the remainder of the growth. The dollar is strengthened further into the second quarter, which will adversely impact our top line for this quarter as well. Revenues for the food safety segment were $64.6 million in the first quarter of fiscal 23, an increase of 3% compared to $62.7 million in last year's first quarter. As our UK and Ireland operations report through the food safety segment, most of the adverse currency impact was felt here. Excluding currency, overall food safety segment sales increased 9% and organic sales increased 7%. International revenues rose 2% for the quarter. This increase was 10% excluding the currency headwinds. Our UK operations posted a 5% increase when the sales were converted to US dollars but rose 19% in pounds, partially due to the contribution of DELF, the cleaner and disinfectant business in Liverpool we acquired in November 2021. Organic growth for our UK operation in pounds was 12%, led by strength in aflatoxin test kits, cleaners and disinfectants, genomic services, vet instruments, and animal care products. Offsetting some of this growth were lower sales in several of our diagnostic product lines, as softening market conditions in Europe and the Russia-Ukraine conflict are impacting customer buying patterns. At our Brazilian operations, fiscal 2023 first quarter sales increased 13%, driven by strong sales of aflatoxin and deoxynavalanol test kits, as increased presence of these mycotoxins during harvest season are requiring more testing. Brazil also posted strong increases in sales of vet instruments and genomic services. At Neogen's Latin American operations, sales increased 19%, led by broad-based gains on our diagnostic test kits and culture media. Rodent control products and cleaners and disinfectants sold through distributors also recorded revenue increases. Sales in China were down 18% in U.S. dollars, and 14% in Chinese Yuan. Our business there was negatively impacted by COVID-19 lockdowns in the first quarter. Our domestic food safety business was flat for the quarter. As I already mentioned in regards to Europe, we're also seeing the impact of inflation and softening market conditions in the US and Canada. Our sales team is seeing customers tightening their belts and reducing testing volumes where they can. They've also reported prolonged pipelines, especially in regards to equipment sales. Increases in aflatoxin test kits, Solaris consumables, and food quality test kits were offset by a significant decline in Solaris equipment due to a difficult comparison against strong sales in the prior year. Our allergen and environmental sanitation product lines also declined due to reduced buying patterns from customers and supply chain disruptions on certain products. On a worldwide basis, sales of our mycotoxin test kits increased 3%, food quality products manufactured by Megazyme in Ireland increased 9%, and Solaris consumables increased 6%. Offsetting some of this growth, allergens decreased 9%, general sanitation products declined 2%, and Solaris equipment placements were lower. The animal safety segment recorded revenues of $67.7 million for the quarter, up 3% over the $65.6 million achieved in last year's first quarter. Our Australian business reports through this segment, and the Australian dollar was 7% lower in this year's first quarter compared to the same period a year ago. On a neutral currency basis, animal safety segment revenues increased 4%. This increase was 1% after excluding contributions from the CAP InnoVet and genetic veterinary sciences acquisitions. Sales of our core animal care products, including supplements and vitamin injectables, increased 16% over the prior year with continued strong end customer demand. We also recorded a 14% increase in insect control products and a 7% increase in cleaners and disinfectants. Partially offsetting these increases, rodent control products declined 12%, the result of diminished rodent pressure in the U.S., and sales of veterinary instruments declined 6% off a very strong quarter in the prior year. Genomics revenues recorded in the animal safety segment increased 7%, with sales from the GVS acquisition partly offsetting lower sample volumes in the porcine market and and a difficult prior year comparison due to a large research project in fiscal 22. On a worldwide basis, genomics revenues increased 5% as our international labs were negatively impacted by currency headwinds in the UK and Australia, and COVID-19 related closures in China. Excluding the FX impact, growth here was 8%. Gross margins were 47% for the quarter compared to 46.8% in last year's first quarter. The slightly improved gross margin is a result of pricing actions taken earlier in the year and favorable product mix in the animal safety segment. We're still experiencing significantly higher freight costs than a couple years ago, but I'm pleased to report our costs for inbound container shipments have gradually come down over the past several months. Operating expenses included $13.7 million of 3M transaction-related costs. Excluding these charges, operating expenses increased 11%. Of this growth, $2.1 million was the result of our recent acquisitions. Within sales and marketing, which rose 14%, business travel, trade shows, and other customer-facing activities increased significantly as in-person events were still limited in the first quarter of last year. Compensation and other personnel-related expenses also increased, including headcount from recent acquisitions, as did shipping costs on higher rates and volume. G&A expense increased 6% after excluding the deal costs, primarily due to higher accruals for performance-based incentives and new expense, including amortization from recent acquisitions. R&D expense increased 13%. This includes incremental expense at GVS from R&D personnel absorbed in the acquisition and a large increase on external product development costs. Operating income for the first quarter was $6.1 million compared to $21.7 million in last year's first quarter. Excluding the $13.7 million in 3M food safety deal costs, operating income was $19.8 million. Expressed as a percent of revenues, adjusted operating income was 15 percent compared to 16.9 percent in last year's first quarter. We recorded $969,000 in interest income as yields on our investment portfolio continue to rise due to higher interest rates. This compares to $203,000 in the prior year. Our effective tax rate for the first quarter was 21.8 percent compared to 21.4 percent in last year's first quarter. There was minimal tax benefit in the first quarter from the exercise of stock options. Our adjusted EBITDA was 26.9 million or 20.4% of sales compared to 28.9 million or 22.5% of sales in the first quarter of the prior year. On a balance sheet, our net receivable balances declined by 6.6 million compared to year end and our days to collect is currently at 60. compared to 59 in the prior year first quarter and 62 at May 31. Inventory increased by 6.7 million, or 5%, on raw material cost increases and increased safety stock levels to avoid back orders and delays caused by the ongoing and unpredictable global supply chain issues. Our operating cash flow was negative for the quarter, due in large part to payments made relating to the 3M deal, and to a lesser extent increases in inventory. Deal expenses will continue into the second quarter and we should then return to positive cash generation from operations in the third quarter. On the September 1st close of the 3M food safety business, we assumed $1 billion of debt and we'll be paying the principal down aggressively in the next few months as we unwind our marketable securities portfolio. At the end of September, we plan on paying down $60 million on the term loan. In addition to the 3M food safety transaction, we made a small acquisition in July purchasing our Thailand distributor, which provided some minor incremental revenues and also created a legal operating entity in the country, making it easier to absorb the 3M business in Thailand. Although we'll be laser-focused on the integration of the 3M business, We will continue to look at smaller acquisitions that add to our product or geographic portfolio and that are good fits with our existing business. Our teams continue to perform in a very challenging operating environment, and we're grateful for and proud of their efforts. We got a lot accomplished in the first quarter, and despite some of the headwinds currently in our faces, are cautiously optimistic for the remainder of the year ahead. At this point, I'll turn it back to John for further comments.