Q2 2022 Neogen Corp Earnings Call
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Sure.
22 second quarter 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 any question. You May Press Star then the one on a touchtone phone.
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Please note. This event is being recorded I would now like to turn the commentary to John <unk> CEO. Please go ahead.
Good morning.
Welcome to our regular quarterly conference call for investors and analysts today, we will be reporting on the second quarter of our 2022 fiscal year, which ended on November 30th.
As usual some of the statements made here today could be termed as forward looking statements. These.
These statements are subject to certain risks and uncertainties and our actual results may differ from those that we discuss 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 who are joining us by live telephone conference I also want to welcome those of you joining us online.
Additionally, I want to give a warm welcome back to those of you who may have joined us for our announcement regarding our agreement to combine three EMS food safety business into our existing operations.
Following our prepared comments. This morning, we will address questions from participants who have joined this live conference.
I'm joined again this morning by Steve Quinlan, our Chief Financial Officer, who will provide some additional details on our results for the quarter.
As noted in our press release. This morning, we've seen the business continued to rebound from the impacts of the COVID-19 pandemic and we are pleased to report yet another strong quarter with 13% revenue growth across our worldwide business compared to the prior year second quarter.
We also reported double digit growth for both our food and animal safety business units as well as our fourth straight quarter of double digit organic growth across both units. This continues our track record of over 22 years of compounded annual revenue growth rate of approximately 15%.
As mentioned, we also had other news last week.
On December 14th we announced that we had reached an agreement to combine three EMS food safety business with our existing operations. This.
This is a major milestone for neogen as we pursue our goal of protecting the world's food supply and providing our global customer base with the best in class food and animal safety solutions.
As the world increasingly focuses on sustainability food safety and supply chain solutions. We believe this is the perfect time to combine to create a global innovator and food security.
The combined company will have an enhanced geographic footprint innovative product offerings, digitization capabilities and financial flexibility to capitalize on robust growth trends and sustainability food safety and supply chain integrity, together, we will be well positioned to accelerate growth and drive significant additional VAT.
Hugh for customers employees and shareholders.
Combined we have a total of 70 years of industry defining innovation in food safety and helping our customers protect the world's food supply.
Newly bolstered team of approximately 200, scientists and engineers will be able to provide new and innovative solutions to these customers helping to change the food security landscape moving forward.
Together, we will possess the digital capabilities to lead the growth and digitization of the food and animal safety industry.
Complementary product offerings combined with Neogen data driven analytics approach will create a compelling solution as customers seek innovative partners to increase efficiency and enhanced food safety protocols.
Following the close of the transaction, which we expect will occur by the end of the third calendar quarter of 2022, our enhanced product range will mean that we will have an expanded offering in food safety, particularly an indicator testing and pathogen detection areas, which complement neogen as existing microbiology lives near.
The engine will be able to offer three EMS food safety customers, our genomics services, which deliver innovative DNA testing this expanded product range, along with Neogen to animal safety business increases the solutions with which we can help customers protect the world's food supply from behind the farm gate, all the way to the dinner plate.
I believe that the cultures of Neogen and three in food safety, our collective dedication to work that protects the world's food supply and our shared values of serving our customers and creating environments in which our employees can thrive are what makes this transaction a great fit for both organizations.
I want to state again, how excited I am to welcome the three M food safety employees to the Neogen team upon closing and thank our team here at Neogen for their hard work and dedication over the years without them. This would not have been possible.
We've also had several other notable acquisitions during the quarter include.
Including companion Animal Health Company compete event, Inc. In September.
U K based manufacturer and supplier of animal hygiene industrial cleaning products Dell U K limited on December 1st and.
In companion animal genetic testing company genetic veterinary services, Inc. On December nine.
These acquisitions each demonstrate our commitment to diversifying our portfolio and finding businesses that synergistically pair with our food and animal safety segments offering our customers around the world new products and solutions that help protect people animals and food.
More on that later.
This quarter represents a massive step forward for Neogen, our employees, our shareholders and our customers and we're looking forward to seeing how these additions strengthen our business in the third quarter and the rest of the fiscal year.
Now I'll turn it over to Steve for some insight into the numbers for the quarter Steve.
John Let me first start by saying how excited I also am about our planned merger with <unk> food safety business I'm looking forward to three EMS food safety team, joining the Neogen family and I'm optimistic this combination will accelerate growth for products from both businesses.
This will clearly be a transformative deal for the company and we incur significant costs in the quarter to get there I'll go into the details in a few minutes, but I need to point out that these costs will continue throughout the remainder of our fiscal year is there still a lot of work to be done to finalize the combination and also to continue the preparation for the.
<unk> of the businesses.
Let me get into some of the details on our second quarter financials.
Sales for the second quarter were $135 million 13, and a 5% increase over the prior year.
Revenues for our food safety segment increased 17% to $67 1 million, while revenues in our animal safety segment were $63 4 million a 10% increase.
Our food safety revenues were positively impacted by the December 2020 acquisition of magazine, our Ireland based producer of food quality and nutritional analysis products and.
On an organic basis sales for the food safety segment increased 11% and for the fourth consecutive quarter, both the food and animal safety segment have reported double digit organic growth.
On a constant currency basis revenues were approximately $1 million higher than the current quarter than the same period last year, primarily from the British pound strengthening against the U S dollar.
In our current fiscal year, we've seen a lot of our customers benefit from improved economic conditions or a return to pre COVID-19 activity levels, but on the other hand, we've also been experiencing supply chain issues that are negatively impacting our ability to get product to customers and increasing our costs are.
Our operations team is working hard to find alternate suppliers and faster and more reliable shipping methods and are also looking for creative ways to attract and retain labor that being said I have some strong numbers to report on.
And the food safety side natural toxin sales rose, 10% from strength with domestic pet food manufacturers and also an increased testing due to regional the axiom that Val now or D. O N outbreaks in France, and Germany. This is especially impressive considering sales of our aflatoxin test kits.
Its were down significantly in Brazil is an extended drought there has greatly reduced the corn crop and associated testing sale.
Sales of Neogen culture media products increased 11% in the second quarter compared to the prior year. This was primarily driven by strength in the U K is our new workflow called one broth. One plate has been adopted by many commercial labs.
Our Solaris rapid microbial testing product line increased 22% in the second quarter on strong sales of our Soliris N G instrument, which continues to gain market acceptance more than a year after its launch.
Acupoint N G. Another newly launched reader used in environmental sanitation testing also had a strong quarter with sales up 19% and our innovative listeria right now test system continued its growth with a 36% increase over the prior year.
Allergen test kits increased 6% in the quarter.
Growth in this line was constrained by supply issues and I expect this situation to improve in the third quarter sales.
Sales of our dairy drug residue test kits declined 23% as I've mentioned on previous calls we ended our agreement with our European distributor and have experienced ongoing competitive pressure against this product line.
Like most businesses recently, we've been impacted by rising costs labor shortages and ongoing supply chain issues.
While the number is not material, we did have to push some sales from the second quarter into the third due to our inability to obtain raw materials or build adequate volumes of inventory.
Moving on to the animal safety segment, our veterinary instrument line, which includes needles and syringes. Once again had a strong quarter with 30% growth, resulting in large part from recently one private label business.
Our line of animal care products increased 18% and strengthen the equine and companion animal markets.
This category also includes the relaunched viral cure supplement line and sales of Parasiticide products recently obtained in the cap Intervet acquisition.
In the second quarter insect control products increased 46% and strengthen the stand guard product line. Our sales team has done a great job of steadily increasing our market share. Since this line was acquired in July of 2020.
Rodent control product sales were down 14% in the second quarter due to difficult comparison to the prior year in which we had very strong sales due to rodent outbreak in the U S. Sales in this line were also negatively impacted by supply constraints.
Genomics services reported through the animal safety segment increased 7%.
Growth was primarily from our Australia operation has improved economic and weather conditions, there led to increasing sampling for beef and sheep.
Revenues in our Lincoln lab were flat as growth in dairy and beef cattle and poultry markets were offset by lower volumes in companion animal the result of difficult comparisons due to strong growth in the second quarter of the prior year.
On a worldwide basis genomics revenues increased 8% with nice growth in our Scotland, Brazil, China, and Canada labs.
Overall, the company had strong growth in the quarter with U S revenues, increasing over 9% and international operations up 20%.
Excluding the magazine acquisition International sales were up 14%.
Our U K operations rose, 20% in the second quarter from strength in culture media sales related to our new one broth, one workflow and natural toxin sales from the D. O N outbreaks I previously mentioned.
Our quiet calm operation also continued to have strong disinfectant sales into Asia, driven by the African swine fever outbreak and the middle East and new business earned.
Sales in Brazil decreased 5%, primarily from the lower aflatoxin sales I previously mentioned somewhat offset by increases in other food safety diagnostic kit and genomics revenues.
Revenues in China increased 28% with magazine sales gains in natural toxins and several soliris equipment placement.
Gross margins in the second quarter were 46, 4% compared to 46, 3% in the prior year second quarter as.
As I've mentioned previously we've experienced higher freight labor and material costs in the current fiscal year.
While we did receive some benefit from product mix I am proud that the team has been able to maintain overall gross margins, while dealing with adverse operating conditions.
We have taken some price increases as necessary to help cover our cost increases and our operations team has been focused on reducing costs where possible.
Sales and marketing expense for the quarter was $21 2 million, an increase of 20% over the prior year.
This increase is the result of higher compensation costs due to increased head count and performance shipping expenses, which rose due to volume and higher rate.
And also higher spend on travel trade shows and other customer facing activities the.
The increased travel expense was planned as prior year activity was minimal due to COVID-19 restrictions.
General and administrative costs were $22 6 million compared to $12 2 million in the second quarter of the prior year.
As we mentioned in the press release, we incurred $9 3 million in professional fees this quarter associated with due diligence consulting and legal services related to three M deal.
Excluding these deal costs G&A expense increased 9% in the quarter due to higher salaries and bonus accruals, resulting from improved operating performance and additional senior management hires legal and amortization expenses from the Mega Zyman casinos that acquisitions and a rise in depreciation expense related.
Two it investments.
Research and development expense was $4 3 million, a 7% increase over the prior year. The increase is primarily the result of personnel absorbed in the magazine acquisition and outside services for development spending on new products.
Operating income for the second quarter after excluding the $9 3 million and three M deal costs was $21 8 million or 16, 7% of sales an increase of 13% compared to $19 3 million or 16, 7% of sales in the prior year.
Quarter.
Other income for the quarter was 459000 included in this interest income of 224000 is down from 560000 from the prior year due to lower yields on our marketable securities balances are.
Our effective tax rate in the second quarter was 16, 2% compared to an effective rate of 17, 8% in the prior year. The lower tax rate is primarily due to lower pretax income, resulting from the three M cost.
Our tax benefit from option exercises in the quarter was 859000 compared to 1.060 million in last year's second quarter.
Of note on the balance sheet inventory levels have risen $6 4 million or 6% since year end.
Proximately $1 million of that increase is the result of our recent acquisitions.
Supply chain issues that forced us to review our safety stock levels and increased balances in several areas to ensure adequate balances of key raw materials and minimize back orders to our customers I expect higher levels of inventory to continue for the remainder of this fiscal year, we generated 41.1.
Million in cash from operations during the first half of the year and invested $27 million of that in acquisitions to wrap up we had a solid quarter and are optimistic for the remainder of the fiscal year.
Much credit and thanks goes to our 2000 employees worldwide, who continue to deliver these results. We will continue to drive that operating performance, while working on the integration planning for the three of them combination.
I'll now return it to John for his closing comments.
Thanks, Steve.
Our Big news has definitely taken the spotlight for the quarter I do want to emphasize on how strong of a quarter. This was for our existing business and the momentum that it presents as we look to our third quarter.
We're happy to continue to see the business rebounding from the lows of the COVID-19 pandemic as customers continue to gain confidence within the marketplace.
As we have for the last two years, we will continue to remain vigilant monitoring the ongoing pandemic and the omicron variant.
Our number one priority continues to be keeping our employees and customers around the world safe and healthy.
To further touch on the series of acquisitions that I mentioned earlier.
I mentioned this briefly in the first quarter call, but on September 20th we announced our acquisition of <unk>, a companion animal Health company that provides high quality and high value pet medications, specifically parasiticide for the veterinary market. These products will blend naturally into our animal safety segment, and we're pleased with the progress that.
We have made in integrating the company with Neogen operations.
On December <unk>, we announced our acquisition of Delphi U K Manny.
The manufacturer and supplier of animal hygiene and industrial cleaning products, we see this as an opportunity for us to expand our offerings of performance Jerry chemicals and believe the industrial cleaning products will complement our quad <unk> disinfectant and cleaner offerings, helping to enhance our biosecurity portfolio and.
And then finally on December nine we announced our acquisition of genetic Veterinary Sciences, a companion animal genetic testing company.
This acquisition will enhance and diversify our portfolio of genomic tests, allowing us to better serve the growing companion animal market.
The acquisition of GBS, along with the acquisition of <unk> as part of our strategy to grow our companion animal offerings, we've seen incredible worldwide growth of this market over the past two years, and we want to expand and grow with it. This is a big focus of ours as we move forward and these two new businesses are helping us move in the right direction.
It's been a very strong and exciting quarter for us as a company and I am extremely happy with our entire Nugent teams continued hard work and dedication to our mission as well as how they have responded as we've announced big changes.
Our R&D pipeline remains strong and we're looking forward to introducing some new products very soon.
We have a lot of momentum carrying us into the third quarter and we're excited to see how the business continues to grow over the remainder of the fiscal year and into the future.
Now I'll open up the floor for any questions you have for Steve and I.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
We're using a speakerphone please pick up your handset before pressing the keys if at any time. Your question has been addressing you would like to withdraw. Your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
Yeah.
Our first question comes from Cristina range from William Blair. Please go ahead.
Hey, good morning, Great application.
My first question is that I was hoping you could talk about how we M product lineup, that's very true.
Yeah.
And also perhaps how there.
Geographic differences there alright, great.
And then my second question also on <unk>.
And if you could just kind of walk through the integration plan, there and I think about how you're equipped to handle such a large transaction.
Thanks, Kristina how much time do you have.
Please.
So on product offering it's really complementary the flagship in that line is the pizza business, which is the indicator testing.
Testing business, we have nothing in that space.
The pathogen lines are fully complementary there both within pathogen, but as you know pathogen is such a big market. They don't compete and do the same things and then our microbiology line is something that <unk> doesn't offer our analytics blockchain as something they don't offer.
We both have an allergen line, but.
So the acquisition they did quite recently Insureds realm.
A relatively small and then lastly is the ATP line.
We both have that business.
It's a big market, it's a lot of business.
There's a number of competitors in that market.
Those are the line lineup is going to work from a customer basis.
Same thing really excited about the complementary look.
It's interesting because it's a lot of different businesses worldwide both of our businesses represent a little over 40% of our total sales.
We are strong in different markets, which we're excited about so you think about.
Some of the growth areas and opportunities.
Three of them is really strong in the Japanese market and we do very little niche in the Japanese market.
Really strong in the Australian market. They don't do very much in the Australia market. So we really see big opportunities to expand sales by utilizing best channels.
Both markets and we see that kind of across the whole globe. So that's been exciting for us.
Available on the last on the integration.
We know how important this is we've got a really strong team we've got some.
Strong team built and put together.
We started on the integration planning phase, one which is now to close.
We've got that find out who is responsible for what we've got the team members I mean, we've got the goals and objectives really started pushing that already even before the start of the.
Keller started the new calendar year.
And we know that.
Extremely important to do that right and then once we finished phase one we'll move right into phase III on integration.
Working through bringing those.
Facilities and people onboard into the management team.
Steve you have anything you'd add to that.
No I think you've covered it John I think it's important to know that as we move forward with integration plan will be keeping you up to date.
On calls that we have to let you know progress we're making on that.
Again, if you have a question. Please press Star then one on.
Our next question will come from David Westenburg from Piper Sandler. Please go ahead.
Hi, Thanks for taking the question and I didn't get on the integration call. Our three AMCOL. So congrats on that since I haven't got to tell you that.
Yes, Thanks, Brian.
I want to start the <unk>.
<unk> question is about the complementarity of.
Three am and your existing business now.
In the past and maybe I'm thinking of Jim Herbert.
Neogen business, but I I thought of international is this long term.
Cash flow negative war I would take margin.
Dilutive kind of venture I don't know if that's still the case can you frame for them. That's still the case and do you think that the three of them.
Asian, maybe changes that P&L equation is something where it's not it hasn't it won't be a dilutive thing going international because youll have that scale.
Finally need.
Yes sure David its a good question I think.
Think it's dilutive only at the beginning right. So if you think about where we go and invest greenfield like what we did in India, and China and some dealers China was dilutive for a while now China is making money for us.
So it really depends on how long we've been in that market.
The international with the <unk> business is established markets just like our established international markets. So our established international markets like the profitability I mean, we saw really good growth and profitability for our Australian business, our UK business Brazilian business, Mexico has done extremely well southern cone and came out of the gate.
Strong.
So it really is where we are on the growth trajectory and because those are established business and a lot of them have already.
Direct sales teams.
And that's only going to accelerate that growth. So I think it's when we go in and say, okay, we're going to a greenfield or it is dilutive, but that's only because it takes us time to.
Established a sales team build everything up and drive revenues forward.
Gotcha, Alright, alright, thank you very much and and you know.
Im.
Not trying to attack here I, just think that you guys are doing a ton with the <unk> acquisition. I mean, you are going to double the revenue.
Can you give us kind of a little bit of reassurance.
You are expanding into companion animal I don't know, it's just are you already have been in companion animal I apologize Derik.
You're moving more into companion animal while doubling your revenue in the food safety side, what kind of what can you tell the investors that maybe youre not biting off more than you can chew.
With doubling it in the companion animal while simultaneously integrating doubling your food safety.
Yeah sure David I mean, if you look we have really done a nice job I think of strengthening our team over the last four or five years to continue to get ready for growth right. So if you look at the leadership group the strength of the individuals we brought in the people we've promoted from internally.
We're really excited about the strength of the team.
We also have the ability because the businesses are managed and run.
By different leadership groups.
While yes, corporately and food safety is going to do it extremely heavy lift.
The integration with three of the animal safety business is going to be relatively.
Unscathed by this right because it's just the corporate resources, perhaps they're going to have to do a little bit more on their own because of corporate resources are going to be are going to be pushed to working with <unk>. So so for them to grow and expand in the animal safety, we feel really comfortable and confident about and there's a couple of reasons to that.
Give me.
Excitement you look at what we did with the <unk>.
Stand guard products from <unk>.
Alright that was a product that was languishing within their portfolio, we took it and double the business right.
We think.
We know we can do that with the product offerings that are coming out of a computer.
And I really like our acquisition also.
Our genetic veterinary sciences.
The west in Washington, not only is it a new product offering that focus is within that same space on genomics companion animal genomics, which we really like but it's a really strong team.
And we're adding not OLED products, but this great infrastructure of the lab and the team members out there, they're going to allow us to leverage them to grow the platform even more so we're picking up a lot of these cases, not just product, but also strong team members that are going to help us grow.
Alright gotcha. Thank you very much. Thank you Brian I guess, just a final final question on consolidation trends with your customers.
Obviously food safety food I would say food producers have seen a pretty decent amount of consolidation over the years, but now you are dealing with supply chain issues do you think that maybe youre seeing a slow or you could be seeing a slowdown in consolidation amongst your food food production customers and could that be a beneficial net net for pricing of it.
And I'll just hop off.
Yes.
Yes, that's a tough one.
It's hard to slow down kind of that momentum and consolidation because of the efficiencies you gain I think.
I think you could see that from depending on the new administration on how they want to position that consolidation roadwork.
Consolidation blueprint.
But while it is a probably a benefit on pricing.
We do very well with our pricing for large customers, because we're able to supply a much broader offering and solutions package than any of our competitors right. So when when we work with a customer.
Yes.
Let's say, we have a yogurt customers we work with we don't just start at the plant, we're working with that customer they are using our genetic services to choose the right animals on the dairy farms out there than using our dairy chemicals are cleaner is to clean the animal and the equipment.
They are using our disinfectants to clean the line in the tanks.
The customer is also using our mycotoxin testing to make sure that the feed they're feeding that animals to help this quality feed then by the time it gets to the plant that are using our dairy antibiotic test to make sure Theres no antibiotic residues.
Then they are using our soliris system to make sure that there is no Houston mold in the finished product or using our allergen test to make sure Theres no.
Board, Adam Allergens R&D pathogens in the product and then lastly, the issues are.
<unk> offering and product quality to make sure that what's in what's on the packages in the product. So we've got this tremendous.
A lot of products that touch so far along in the pipeline that.
I think as they get bigger were more valuable so.
There could be competitive pricing pressures, but we are more valuable and they can deal with one company over six or seven to do the exact same thing.
Got you. Thank you very much and congrats on the acquisition and nice quarter.
Thanks, David.
This concludes our question and answer session I would like to turn the conference back over to John <unk> for any closing remarks.
Thanks, Scott I appreciate everyone getting on the call and your continued support of Neogen as Steve and I have talked about we're really excited about.
The merger with <unk> in the business of bringing this forward.
The solutions and product offerings, we're going to be able to offer to our customers and really the value. We think we know we can create for employees shareholders and customers. So with that I'd like to wish all of you and your families a very safe and happy holiday season, and thank you again for joining us.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.