Neogen Corporation

Thank you for joining us this morning for the discussion of the third quarter of our 2025 fiscal year. I'll briefly cover the non-GAAP and forward-looking language before passing the call over to our CEO, John Avent, who will be followed by our CFO and COO, Dave Namura. Before the market opened today, we published our third quarter results, as well as a presentation with both documents available in the investor relations section of our website. On our call this morning, we will refer to certain non-GAAP financial measures that we believe are useful in evaluating our performance. Reconciliations of historical non-GAAP financial measures are included in our earnings release and the presentation, slide two of which provides a reminder that our remarks will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These forward-looking statements are subject to risks that could cause actual results to be materially different from those expressed in or implied by such forward-looking statements. These risks include, among others, matters that we have described in our most recent annual report on Form 10-K and in other filings we make with the SEC. We disclaim any obligation to update these forward-looking statements. I'll now turn things over to John.

Thanks, Bill. Good morning, everyone, and welcome to the earnings call for the third quarter of our 2025 fiscal year. You may have seen the press release issued earlier today announcing that I will be stepping down as CEO. It's been an honor to lead Neogen, and I'm incredibly proud of the team we've built and everything we've accomplished, including making a significant amount of progress on the complex integration of a transformational acquisition. I would like to extend my sincere gratitude to the team for all their hard work and sacrifice over the last several years and firmly believe these efforts have put the company in a stronger position. I will remain in my role while the board conducts a search for my successor, and I'm fully committed to ensuring a smooth transition for our customers and employees. With that behind us, let's move into some color on the quarter. Over the course of the third quarter, we saw the broad development of uncertainty, primarily related to the goals and policies of the U.S. government, most notably deregulation, government spending cuts, tariffs, and global trade. As we've all seen, the administration is aiming to reduce federal spending and has made cuts across a number of government agencies, including those relevant to food safety like the FDA and the USDA. While these cuts could possibly affect the speed with which outbreaks of foodborne illness can be addressed or possibly delay or eliminate certain research spending, we don't currently see them as having a significant effect on food safety testing. This is still a developing environment. but the leaning out of these agencies could result in more testing being pushed to the plants, which is where the ultimate responsibility lies for safe food production. Food quality, which by extension includes food safety, appears to be a priority for the administration, and we believe it has the potential to be a tailwind over time. The administration's position on tariffs and the actions announced last week have added to this uncertain environment. Despite almost half of our revenue being generated outside of the US, a significant portion of our manufacturing is based in the US. As it relates to our purchases, the situation is similar. Within our food safety business, approximately 75% of our direct purchase spend is in the US. In animal safety, the number is about 2 thirds, with our needle and syringe products having initially been subjected to tariffs back in September of last year. While acknowledging the tariff landscape, has been and can continue to be fluid, we believe that our domestic manufacturing footprint provides some level of insulation in this environment, particularly in our largest markets, the U.S. We have been exploring alternative sources for supply for certain items procured from outside the U.S. and will continue to do so. Given our large domestic manufacturing footprint, we are closely monitoring responses from other countries and will consider those impacts as they become more clear. With respect to the retaliatory tariffs announced by China last week, a small portion of our total revenue is generated there, roughly 2.5%. Of that revenue, approximately 40% is served by U.S. manufacturing. We believe that uncertainty increased as the quarter progressed and read through to our end markets, which contributed to our third quarter results being below our expectations. In the face of faltering consumer confidence, a lack of clarity with respect to global trade, and concerns about the potential for recession, we saw both domestic and international distributors and customers being less willing to commit to inventory. This uncertainty was reflected in our proxy for global food production, which decelerated for the first time in six quarters. Food safety is typically a resilient end market that has historically been relatively insulated against periods of economic weakness. The unique combination of lingering inflation, which had been particularly acute in food, and the current elevated macro uncertainty has resulted in an end market that's still growing, but we believe at a rate below normal levels. Our performance in food safety is also impacted by the challenges we've discussed with our sample collection product line. which relocated from a former 3M facility to one of our own. It took longer than we had originally anticipated, but the relocated product lines are now producing at the prior levels. From this point forward, our immediate focus is on improving the production efficiency and catching up with our customers' demand. Outside of the specific challenges and sample collection, core revenue in our food safety business was up 7% in the quarter. In our animal safety segment, we believe we continue to work through the cyclical trough of the market. Inventory levels in the distribution channel remain broadly stable, and stood the positive level of sales out of our products. Although it's a relatively small part of the business, we saw notable softness in China amidst the uncertain macro environment there, with many of our distributors being in a wait-and-see mode, or in some cases, opting for local supply. Outside of the decline in genomics, our animal safety core business was down just over 1% on a year-over-year basis. For our genomics business in total, third quarter core revenue was down mid-single digits year-over-year. We believe the actions we took last quarter to focus and restructure this business were the right moves to make. We are focusing the business on our leading differentiated bovine product offering and have either stopped or will wind down most of the rest of the business over the coming quarters. Although genomics in total has been a headwind for the past seven quarters, our bovine business has performed better during this period, including many quarters of growth. On the integration front, we continued to make progress in the quarter. With sample collection recovering to prior production levels, Petri film remains the last outstanding integration workstream. Construction of the new facility is complete, as is the installation of the first two Petri film production lines. The shipment of the second production line has landed in Lansing and is in the process of being staged and rigged for installation. And we remain on track for our goal of beginning initial test production in the fall of 2025. As we mentioned on our prior earnings call, we are undertaking actions to accelerate the building of a more profitable focused near gym. We have made solid progress on this front with one potential portfolio action in the later stages and one that has started in the marketing phase. These actions represent a step towards focusing our business on the highly attractive food safety and market and are expected to be accretive to margins, with net proceeds being prioritized for debt repayment. Last week, we completed the refinancing of our Term Loan A, extending the maturity by close to three years and realizing 60 basis points of interest rate savings. Combined with the expected near-term debt repayment, This provides us with balance sheet flexibility as we continue to work to bring down our net leverage. In addition to future EBITDA growth, improving cash flow is a priority to contribute to the reduction of net leverage. Some of the improvements in free cash flow is expected to come naturally as a result of integration capex reducing in fiscal year 2026 and then mostly tapering off in fiscal 2027. We expect to see additional improvement come from the significant opportunity we have to reduce working capital over time. We have seen some progress from our initial actions, but a larger opportunity remains, mostly related to our inventory levels. The evolution of our leadership team has continued with a number of changes recently made. We have a new head of R&D, we have a new head of our North America Commercial Organization, and a new commercial head for North American Food Safety in place. as well as a new chief human resources officer who started this week. We continue to make good progress on the search for a chief commercial officer, and we expect to fill the role in the first quarter of fiscal 2026. The standing up of our own Petri film production is progressing well, but we nonetheless want to ensure that we are de-risking as much as possible. To that end, we have made additions to the operating team to enhance key areas of expertise and I also expanded the existing project governance. As it relates to our outlook for the full year, the current environment is very dynamic. With respect to the macro environment, it is not yet clear what the ultimate impact and duration might be from the rising level of uncertainty. We are updating our full year VU based on the information we have today to reflect the third quarter being below our expectations and a fourth quarter that will likely not be as strong as we had previously anticipated. given the softening market backdrop and the uncertain impact of tariffs. We also plan to take further actions to ensure the cost base is more aligned with the current level of revenue and the macro environment, the full impact of which will be reflected in fiscal 2026. The sample collection production delays have improved. We have targeted commercial plans that we expect will return that product line to more normal revenue levels over the coming quarters. In genomics, We restructure a portion of the business in the second quarter and will continue to focus on a differentiated offering for the more attractive bovine market. We are taking actions to control what we can control to navigate the current situation and to de-risk the final piece of the 3M integration. I'll turn the call over today for some more insights into our results for the quarter and our outlook.

Thank you, John, and welcome to everyone on the call today. Jumping into the results, our third quarter revenues were $221 million. Core revenue growth, which excludes the impact of foreign currency acquisitions and discontinued product lines, came in at 20 basis points for the quarter, while foreign currency was a headwind of 310 basis points compared to the prior year. At the segment level, revenues in our food safety segment were 153 million in the quarter, down 3.2% compared to the prior year, with core revenue growth of 1.5% offset by the negative impact of FX. The core growth was led by our biosecurity products in the bacterial and general sanitation product category, which benefited from strong growth in pathogen detection products. In the indicator testing, culture media, and other product category, solid growth in our food quality and petrofilm product lines was partially offset by a decline in sample collection as we continue the process of ramping up the relocated production in our facility. Excluding the headwinds and sample collection, core revenue in the food safety segment grew 7%, which we believe reflects a solid underlying business. Quarterly revenues in the animal safety segment were 68 million, which includes a core revenue decline of 2.6% compared to the prior year quarter. Within our animal care and other product category, solid growth was driven primarily by small animal supplements with an increase in private label business. This growth was offset mainly by lower sales of vet instruments and disposables. Our global genomics revenue was down in single digits on a core basis. Core revenue growth and our differentiated bovine business was offset by declines in other areas and consistent with the focused restructuring we executed in Q2 of this year. From a regional perspective, core revenue growth in the third quarter was mixed. Growth was again led by Latin America, which saw double-digit growth and a strong performance across most key product categories. Asia-Pacific core revenue was up mid-single digits on a year-over-year basis with solid growth in petri film and pathogen detection, partially offset by decline in sample collection. Our business in Europe was down mid-single digits on a core basis with growth in cleaners and disinfectants and food quality and nutritional analysis offset by declines in genomics, general sanitation, and sample collection, as well as petri film, which came down after strong growth in Q2. In our US and Canada region, which has experienced the largest carryover impact from last year's shipping delays, core revenue was also down mid-single digits compared to the prior year period. Solid growth in food quality and nutritional analysis was offset by declines in most other food safety product categories, including a larger impact in sample collection. In the animal safety segment, solid growth in the biosecurity and animal care products categories was offset by declines in genomics and vet instruments. Gross margin in the third quarter was 49.9%, representing a decrease of 120 basis points from 51.1% in the same quarter a year ago. Excluding integration and restructuring costs, as well as the reclassification of certain expenses in the prior year period gross margin, Q3 was down 30 basis points year over year, primarily due to lower revenues. Adjusted EBITDA was $49 million in the third quarter, representing a margin of 22%, roughly flat from Q2 on lower revenue. On a year-over-year basis, the decline in adjusted EBITDA margin was driven primarily by the lower revenue level. Third quarter adjusted net income and adjusted earnings per share were $21 million and 10 cents, respectively, compared to $26 million and 12 cents in the prior year quarter, due primarily to the lower adjusted EBITDA and a nominally higher effective tax rate. We ended the quarter with gross debt of $900 million, 61% of which is at a fixed rate and a total cash position of $128 million. Free cash flow in Q3 was an outflow of approximately $14 million, representing an improvement of $49 million compared to Q3 of fiscal year 2024. Networking capital was a $10 million source of cash in the quarter, reflecting some progress on our multi-year improvement journey. Capital expenditures in the quarter were elevated, driven in part by some acceleration of spending related to our new Petrofilm plant and production equipment. As John mentioned earlier, last week we completed the refinancing of the $550 million remaining on our term loan A. we issued a new $450 million term loan A with an upsized $250 million revolving facility on which we've drawn $100 million and obviously utilized those funds as part of the payoff of the previous $550 million term loan. Further, this draw on the facility, which allows us to currently maintain the same $150 million of available liquidity, should be taken as indicative of a portion of our near-term expectations for the portfolio actions we've discussed. In addition to extending the maturity of our term loan by over two and a half years, we were able to realize 60 basis points of interest rate savings. Moving to our outlook, the market environment softened as the third quarter progressed, and we believe the macroeconomic uncertainty has led to somewhat of a pause taken by many customers and channel partners. In addition to the uncertain trade environment, grocery inflation in particular has persisted and continues to affect the consumer, contributing to the move backwards that we saw in our proxy for global food production. In animal safety, we see healthy channel inventory levels and positive sales out of the channel, but saw a slowdown of sales into some of our larger distributors. We expect these impacts that we saw in Q3 will continue through Q4 when we will also begin to see the impact of tariffs. We are therefore updating our revenue outlook for the year to approximately 895 million. We are accordingly also updating our outlook for adjusted EBITDA to approximately 195 million. With a lower adjusted EBITDA and some acceleration of CapEx, which we now expect to be approximately 100 million, our current view of free cash flow for the year is an outflow of approximately 20 million. We would emphasize that the end market conditions are about as dynamic as we have seen, but we will focus on what is within our control, which includes the near-term actions John is highlighting. I'll now hand the call back to John for some final thoughts.