Neogen Corporation

I'd like to extend a special welcome to Mike on his first earnings call at Neogen. I will now turn things over to him.

Thank you, Bill. Good morning, everyone, and thank you for joining the call today. When I was approached about the opportunity to leave Neogen a few months ago, I was drawn by a strong reputation as a leader in both food and animal safety. Few companies have the chance to shape a safer, healthier world through innovations like Petri film, and comprehensive environmental monitoring. However, I also found a company not yet reaching its full operational and financial potential. I saw an opportunity to make a transformative impact and position Neogen for sustained success. Having led the turnaround of the point of care diagnostics business at Siemens Healthineers over three years, I drove step changes in performance, and I'm confident that experience equips me to deliver similar results at Neogen. In my first nine weeks, I've prioritized engaging with our talented team, customers, partners, and shareholders. Neogen's employees are deeply passionate, and our loyal customer base is equally committed to our mission. We're a leader with unique scale, product depth, and global capabilities in a highly attractive market, but execution challenges are holding us back. Moreover, I do not believe a major strategic overhaul is needed. we can unlock significant growth through disciplined focus, prioritization, and scaling of effective processes. Part of my comprehensive review of the business includes reexamining our strategic initiatives and aligning them with our targeted improvement plan to drive sustainable growth. In the short term, we are focusing on the critical priorities of driving top-line growth, right-sizing our cost base, reinvigorating innovation, and deleveraging. To right-side our cost base, we're acting urgently to streamline our organizational structure, boost agility, and scale key processes like sales and operations planning, or SNOP. At the end of September, we took actions to reduce operating expenses by approximately $20 million on an annualized basis through a global headcount reduction of approximately 10% of existing and planned positions, as well as non-labor cost reductions. These savings include some level of targeted reinvestment we plan to direct towards enhancing our commercial and R&D capabilities, and we do not believe the cost actions will have a negative effect on demand generation. This was not a decision that was taken lightly, but the costs added by the company over the last few years to scale up capabilities and absorb the 3M transaction contemplated higher levels of revenue. This action better aligned our costs with the current revenue of the business. For top line growth, we're empowering our commercial teams to execute with precision, targeting higher growth markets, particularly accelerating growth in the United States. We are optimizing our portfolio for market share gains and profitability, including targeted price increases where we are under index. Additionally, we will evaluate adding commercial headcount select markets to capture incremental growth opportunities. The addition of a chief commercial officer a role we're currently recruiting for, will provide dedicated global commercial leadership as we work to put the company on the trajectory of improving growth. To reinvigorate innovation, we will strengthen our R&D pipeline in core food safety and animal health categories, prioritizing fewer high-impact projects, investing in top talent, and enhancing our innovation processes. We are also tackling critical projects with urgency, Advancing feature film production integration, addressing sample collection inefficiencies through productivity enhancements, and optimizing inventory management with a robust SNLP process to reduce write-off and streamline our supply chain. With respect to feature film specifically, we recently began initial product testing with the intent of demonstrating that the different steps of production are able to execute processes within the required parameters. The early results have been promising. and we expect the production testing process to be completed within the next couple of months before we begin transitioning individual SKUs to align for full validation. I've spent a significant amount of time meeting with the team driving this project and feel comfortable that a solid plan is in place and we are managing it very closely. In addition, we are anticipating potential challenges and working in tandem with a primary machine builder who has kept the team on site to assist. We have also had a number of our employees spend extended time in Poland over the last year, observing a feature film production there and refining their understanding of the manufacturing through detailed process documentation. We have multiple employees with legacy feature film expertise, including the key manufacturing engineers who set up feature film production in Poland, know the process inside out, enjoyed NeoGen at the time of the 3M transaction. We believe we have a significant amount of knowledge in-house as it relates to both the art and science of feature film manufacturing and are currently tracking to the timeline laid out in April, which has us completing the transfer of feature film production during the second quarter of the next fiscal year. Furthermore, we intend to have production available at our manufacturing partner during the transfer process to ensure continuity of supply and a smooth transition. The goal of the focused approach to these priorities and critical projects is to drive EVA growth and free cash flow generation, which ultimately results in deleveraging the business. With the right sizing of the cost base, we anticipate the enhanced commercial and innovation focus will drive future revenue growth that comes through at attractive incremental margins, particularly with respect to feature film. One of the contributing factors to the recent elevated inventory write off is simply the fact that we're carrying too much inventory, tying up an unnecessarily large amount of cash. The aim of the work underway to optimize our S&OP process is to release a significant amount of excess inventory over time, further bolstering cash generation. Finally, the integration of sample collection product line has been a meaningful drag on cash over the last several quarters. We are acting with urgency on this issue and expect to see improvement over the balance of the fiscal year. Turning to some brief comments on our Q1 results specifically, Neogen delivered revenue approximately $209 million, up 0.3% year-over-year on a core basis, which was in line with our expectations. In food safety, key product lines in which we've been investing, like food quality and pathogens, showed solid growth in the quarter. Petri film, which has had a core revenue caterer in the mid-single-digit range over the last few years, had a mid-single-digit decline in the first quarter. We do not believe this decline reflects an underlying change in the demand for Petri film, but rather a couple of changes with our distributor base that we believe are temporary in nature. We made a distributor change in Asia and saw what seems to be the normalization of buying patterns at a large distributor in the US. We have decent visibility into sales out of Peterson from the distribution channel in the US, and those numbers continue to indicate solid growth in the quarter. Adjusted EBITDA margin was aligned with our expectations and primarily impacted by lower revenue higher tariff costs, and higher operating expenses. The last two items are being addressed with a combination of pricing and resourcing actions, as well as the previously mentioned headcount reduction. Pre-cash flow in the quarter represented a significant improvement compared to the prior year, with lower investment in CapEx and working capital being the biggest drivers. With Q1 behind us and the trend we saw in September, we are confident in reaffirming our full-year guidance. Now, to share with you more details on our Q1 results, I'd like to pass it to Dave.

Thank you, Mike, and welcome to everyone on the call today. Jumping into the results, our first quarter revenues were $209 million. Core revenue, which excludes the impact of foreign currency, divestitures, and discontinued product lines, was about flat at positive 30 basis points for the quarter, while foreign currency added 50 basis points and divestitures and discontinued products were a headwind of 440 basis points compared to the prior year. The impact from divestitures was attributable to the sale of the cleaners and disinfectants business midway through the quarter. At the segment level, revenues in our food safety segment were 152 million in the quarter, down 4.6% compared to the prior year, including a core decline of 1.7%. We saw growth in most of our core food safety categories, other than our indicator testing and culture media product category. We had mid-single-digit growth in pathogens and also grew in allergens and bacterial and general sanitation, as well as sample collection, which benefited from an easy prior year compare. As Mike mentioned, Petri film core revenue declined in the quarter, which we believe is primarily attributable to adjustment of distributor inventory levels in the U.S., as well as changing a large distributor in Asia Pacific. Sales out of the distribution channel in the U.S. showed solid growth in Petri film, giving us confidence in the underlying demand profile of the product line. In APAC, we were winding down inventory at a large distributor and expect to see our new channel partner begin to load in inventory in the third quarter. Quarterly revenues in the animal safety segment were $57 million, a decline of 0.8%, but the core revenue growth of 5.8%. benefiting in part from an easy compare to Q1 of fiscal 2025. We experienced solid growth in our animal care product category, led by higher sales of biologics and wound care products. Growth in the life sciences product category was driven by higher sales of substrates and reagents, and the biosecurity product category saw strong growth in insect control products. As we've discussed, we believe this end market has been in or around a trough for several quarters now. Our global genomics business had core growth of 4% with solid growth in the bovine market, partially offset by weakness in companion animal testing. This marked the first quarter of growth for the total genomics business since fiscal year 2023, reflecting the move away from certain less attractive end market exposures. From a regional perspective, core revenue growth in the first quarter was mixed. Growth was led by our LATAM region, up mid-single digits, with strong sales of pathogen detection and general sanitation products. The US and Canada region had core growth in the low single-digit range, with food safety about flat and mid-single-digit growth in animal safety. Growth in pathogen detection, sample collection, food quality, and general sanitation products was offset by a decline in petri film in the US, which, as I noted before, we mostly attribute to some inventory rebalancing in the distribution channel. We declined mid-single digits in EMEA and high single digits in our APAC region. EMEA saw growth in most major food safety product categories outside of sample collection, which was offset by declines in genomics and cleaners and disinfectants during the period when we still owned that business. The APAC region was a mixed story by country. with better than anticipated performance in Japan and Korea, more than offset by headwinds in China and the ASEAN countries, where we have seen a greater impact from shifting supply chains in response to global trade policies, as well as the switch of a large distributor. Gross margin in the first quarter was 45.4%, a sequential improvement from the fourth quarter of fiscal 2025, which was significantly impacted by inventory write-offs. Although the inventory impact in Q1 improved sequentially, we continue to see an elevated level of sample collection production inefficiencies. Last quarter, we noted our focus on certain core process improvements in driving efficiency in the sample collection product line. These are multi-quarter activities that we made progress on during Q1, which should continue to improve as we progress through the year. Finally, We also saw tariff impacts in the quarter as the higher tariff rates in Q4 flowed out of inventory, impacting gross margin in Q1. Adjusted EBITDA was $35.5 million in the quarter, representing a margin of 17%. In addition to lower volume, the adjusted EBITDA margin was negatively impacted by the previously noted gross margin headwinds, as well as higher operating expenses. As Mike noted, we have executed on a reduction in force to better align spending with the current operating environment, which will provide run rate benefit beginning in October through the remainder of the fiscal year. First quarter adjusted net income and adjusted earnings per share were $9.4 million, respectively, compared to $14.7 million in the prior year quarter. due primarily to the lower adjusted EBITDA, which more than offset the lower interest expense. Moving to the balance sheet, we ended the quarter with gross debt of 800 million, 68% of which is at a fixed rate and a total cash position of 139 million. During Q1, we completed the divestiture of our cleaners and disinfectants business, which resulted in approximately 115 million in net proceeds that was used to pay down $100 million in debt in Q1, representing annualized interest savings of roughly $6 million at current rates. Free cash flow in Q1 was an outflow of $13 million, representing an improvement of $43 million compared to the prior year Q1 and included $24 million of capex, a high point for the year as we continue to work through our plant-related integration expenditures. In addition to lower CapEx compared to the prior year, free cash flow benefited from improved trade working capital efficiency, which contributed an inflow of about 30 million, a 300 basis point reduction in working capital as a percentage of last 12 month sales compared to the prior year Q1. As Mike noted, we are reaffirming our full year guide for fiscal 2026. The first quarter came in about as anticipated, with margin improvement expected in the balance of the year as we work to improve in certain areas, namely sample collection, productivity, and inventory write-down performance. The first quarter is typically our seasonally lowest revenue quarter, and this year's first quarter included approximately $6 million of revenue from the divested cleaners and disinfectants business. Based on historical seasonality, we would expect the second quarter to see a modest sequential step up from the baseline revenue in the first quarter. The actions that we have taken on cost, a portion of which were contemplated in our original guidance, will help us protect EBITDA and cash flow as the remainder of the year continues to develop. Elaborating briefly on the actions that Mike referred to, we implemented a reduction of force that impacted about 10% of headcount planned for the year. These actions net some level of reinvestment and a few targeted growth priorities are anticipated to have an annualized impact of about 20 million, from which we expect to see a benefit of about 12 million this fiscal year, more than half of which was contemplated in our initial guide for the year. As we noted last quarter, the guide for fiscal 2026 includes our genomics business, which, as you know, we are involved in a process to sell. We are not providing details on that process, but we will share that it continues to progress well. At the time there is a sale of that business, we will adjust our guidance accordingly for the remaining post-sale portion of the year. I'll now hand the call back to Mike for some final thoughts.