Q3 2022 Neogen Corp Earnings Call
Good day and welcome to the Neogen Corporation third quarter fiscal year 2022 earnings Conference call.
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I would now like to turn the conference over to John <unk>, President and CEO . Please go ahead.
Good morning, and welcome to our regular quarterly conference call for investors and analysts today, we'll be reporting on the second quarter 2022 fiscal year, which ended on February 28 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 result.
May differ from those that we discuss today the risks associated in 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 live telephone conference I also welcome those of you joining us online following our prepared comments. This morning, we will address questions from participants who are joining us live.
I'm joined this morning by Steve Quinlan, our Chief Financial Officer, who will provide some additional details on our results for the quarter and our press release. This morning, We announced continued revenue growth with an increase of 10% over the prior year its been an exciting quarter for us as we made a number of announcements that really showcase our vision for the future and growth mindset.
Under which we are operating in our second quarter call I talked at length about our agreement to combine three arms food safety business with our existing operations, but I want to mention it again as we continue our mission to be the leading company in the development of marketing solutions for food and animal safety. The combined company will be well positioned to become the global innovator.
Food security and I'm pleased with the progress we've made since the announcement I also once again want to state how excited I am to welcome the three of them food safety employees to the Neogen team upon closing and thank our team here at Neogen for their hard work and dedication both throughout this process and over the years on top of this we announced two new acquisitions this quarter.
On December 1st we announced our acquisition of United Kingdom based manufacturer and supplier of animal hygiene industrial cleaning products Delph limited delfs more than 40 years of experience in UK dairy hygiene market will be a huge benefit to us as we look to expand our offerings of performance Jerry chemicals. These products will enhance our product portfolio centered.
Complementing our quiet calm disinfecting and cleaning offerings on December 9th we announced our acquisition of genetic Veterinary Sciences, Inc. A companion animal genetic testing company based in Spokane, Washington, as we've noted in previous calls we feel the companion animal market is one of our relatively untapped markets, especially with the growth in.
Pep parenting around the world in the last five years, we can now expand and diversify our portfolio of genetic tests available for companion animals. We're pleased with our integration process of each of these locations and feel optimistic about how they will continue to contribute to our business in the future Neogen has a proven ability to grow new acquisitions for example.
To stand guard insecticide product line has grown significantly since we acquired in August of 2020. Additionally, our magazine acquisition continues to grow and gain acceptance both domestically and internationally recorded growth of approximately 16% in the first year since we acquired the food diagnostic company. The products have had a particularly strong showing this quarter as we can.
<unk> integration with our U S sales and marketing teams and have been detailing the benefits to our customers. We are confident that we'll be able to do the same with these new acquisitions as well dedicating the proper resources to make them not only grow but flourish within the marketplace in this quarter our products continue to perform well in a market with solid increases in our allergen test.
And kits and equipment sales of our Soliris next generation spoilage detection system I'm very pleased to see that both our core product lines and our next generation detection equipment are performing well in the marketplace. Another highlight comes from our sales of veterinary instruments, where we see in another quarter of exceptional growth. This signals to us that we're continuing to gain mark.
Get share from our competitors by offering high quality and reliable instruments and that these tools recommit more trusted and recognizable in the marketplace. However, this quarter was full of challenges for us that impacted our performance COVID-19, and omicron hit us, particularly hard in December and January sideline in many of our workers. Our first priority always is.
The health and safety of our employees. So we took all the necessary steps to make sure our workplaces around the world were safe and then we were slowing the spread of the virus because of the resurgence we saw significant increase in overhead costs and Steve will get into the specifics here in a minute, but we saw health care costs increase we also had increased labor spend.
As we brought in temporary workers to fill in for those with Covid. In addition, we continued to manage the rising raw material costs as supply chains were disrupted price increases were implemented and freight costs continued to rise thankfully.
Thankfully, we've seen case numbers decreasing significantly and we're already feeling the effects of the members of our team and our business. We've constantly had to adapt throughout the Covid pandemic and we continue to demonstrate the resiliency of our business as we manage through these challenging times now I'll turn it over to Steve for some insights into the numbers for the quarter Steve.
Thanks, John as John indicated it was a busy quarter with two closed acquisitions, our announced merger with <unk> food safety business and a resurgence of COVID-19, and its variance China's spoken to the why is the acquisitions, we closed during the quarter as well as the three of them merger. The three M combination in particular will clearly be a <unk>.
Transformative deal for the company and we've continued to incur significant costs in the quarter on it I'll go into the details in a few minutes, but I need to point out that these costs will continue through the remainder of our fiscal year and into the deal closing in the first half of the next fiscal year is there still a lot of work to be done to finalize the combination and also to <unk>.
Continue the preparation for the integration of the businesses I'll now get into some of the details on our third quarter results sales for the quarter were $128 2 million, a 10% increase over the prior year quarter revenues for our food safety segment increased 7% to $62 8 million, while revenues in our animal safety segment, where <unk>.
$65 5 million, a 12% increase our food safety revenues were positively impacted by the December 2020 acquisition, a magazine or Ireland based producer of food quality and nutritional analysis products and our December 2021 acquisition of Delphi UK limited.
A manufacturer of cleaners on an organic basis sales for the food safety segment increased 4% negatively impacted by the AUM crime variant of COVID-19, and a number of our markets worldwide animal safety organic sales rose, 9% with additional sales from our acquisition of casino that in September of 2020.
One and genetic veterinary sciences in December of 2021 on a constant currency basis revenues were approximately 900000 lower in the third quarter than the same period last year as a number of currencies in countries in which we operate in were weaker versus the U S dollar compared to last year's third quarter during.
The first half of the year, we saw improved economic conditions in many of our markets with returns to pre COVID-19 levels of activity. However, as John noted in December and January the Omicron variant affected a number of our manufacturing locations as well as numerous markets in which we operate further disrupting the supply chain.
And impacting both our operating costs and our revenues Covid pressure started easing in February and markets across the world begin to open again, having said that a number of areas in China, including where our operations located have gone into lockdown as that country attempts to stop the spread of the virus there.
On the food safety side, Allergan sales increased 12% and sales of our Acupoint environmental sanitation product line, which includes a recently launched next generation reader rose, 16%, our innovative listeria right now test system continued its growth with a 13% increase over the prior year sales.
[noise] of Neogen culture media products increased 11% in the third quarter compared to the prior year. This was primarily driven by strength in the U K is our new workflow one broth. One plate continues to penetrate the commercial lab market sales of our dairy drug residue kits declined 55% as I've mentioned on previous.
MS calls we ended our exclusive agreement with our European distributor and have discontinued some sales of noncore and low margin products in this product line within the animal safety segment, our veterinary instruments line, which includes needles and syringes once again had a strong quarter with 43% growth resulting in large.
Part from recently, one private label business or line of animal care products increased 12% on strength in the equine and companion animal markets with strong growth in vitamin injectable antibiotic business in the third quarter insect control products increased 11% on strong demand in the farm and home channels from several.
Large distributors rodent control product sales declined 5% in the third quarter due to a difficult comparison to the prior year in which we had very strong sales due to rodent outbreak in the U S. Genomic services reported through the animal safety segment increased 11% growth resulted primarily from our Australia operation on.
<unk> volume in beef cattle and sheep testing, resulting from improved economic conditions in these markets and newly won business revenues at our Lincoln lab decreased 6% due to lower volumes in companion animal services. The result of difficult comparisons due to strong growth in the prior year on a worldwide.
Basis genomic revenues increased 10% with robust growth in our Scotland, and Brazil Labs. In addition to the increase in Australia overall international revenues rose, 10% in the third quarter, excluding the magazine and Delta acquisitions International sales were up 5% as I mentioned earlier.
Your currency wins were in our face during the quarter and took about 2% off the international growth numbers, our U K operations were up 9% organically in the third quarter and continued strong cleaner and disinfectant sales into the UK and Asia, driven by African swine fever, and strength in culture media sales related to our new one.
On broth, one workflow sales in Brazil decreased 2% with lower sales of dairy drug residue test kits as we discontinue sales of certain noncore low margin kits offsetting increases from genomic services and natural toxin test kits.
Revenues in China decreased 17% as the country's zero Covid strategy created lockdowns and restricted travel and a number of markets. Additionally, lower pork prices at the producer level resulted in lower sales of cleaners and disinfectants gross margins in the third quarter were 44, 8% compared to $46.
1% in the prior year third quarter, primarily the result of lower gross margins in the animal safety segment due in large part to lower sales of higher margin rodenticide products and genomic services to the companion animal market and higher raw material costs. In addition, as I've mentioned previously supply chain issues.
Continued to drive increases in freight costs in the third quarter alone freight costs rose $2 2 million over the prior year and in a number of cases, we air freighted products in at significant cost penalty to ensure we have adequate product on hand to serve our customers. We have taken price increases as necessary to help cover that.
These cost increases and we'll continue to do so other significant cost increases were for selected salaries to drive employee retention health insurance costs as employees utilize services postponed during the pandemic and scrap and contracted services sales and marketing expense for the quarter was $21 5 million.
An increase of 15% over the prior year. This increase is the result of higher personnel costs due to additional head count and sales volumes higher shipping expenses and also increased spend on travel trade shows and other customer facing activities as I've noted on prior calls the increased travel expense was <unk>.
Land as prior year activity was minimal due to COVID-19 restrictions general and administrative costs were 25 million, including $10 6 million of consulting and legal fees related to the three M. Deal. This compares to $15 1 million in the third quarter of the prior year as I noted last quarter, we will continue to incur <unk>.
<unk> professional fees through the close of the <unk> transaction, primarily for legal and consulting as we continue to work on integration activities to ensure we are ready to execute on day one excluding these deal costs and additionally, adjusting for $2 3 million incurred in last year's third quarter for an acquisition, which we were unsecured.
Accessible and completing run rate G&A expense increased $1 5 million or 12% in the third quarter. The increase was primarily due to increased personnel costs senior management hires and amortization expenses from recent acquisitions research and development expense was $4 6 million, an 8% increase.
Over the prior year. The increase is primarily the result of personnel related expenses and includes personnel absorbed in the magazine acquisition operating income for the third quarter. After excluding the $10 6 million of three M deal related costs was $17 million or 13, 2% of sales.
An increase of 8% compared to $15 8 million or 13, 5% of sales in the prior year quarter.
Active tax rate in the third quarter was 18, 1% compared to an effective tax rate of 16, 3% in the prior year. The increased effective rate is due to lower benefit resulting from a significant reduction in stock option exercise activity, our tax benefit from option exercises in the quarter was 33000 compared to one.
83000 in last year's third quarter on the balance sheet inventory levels have risen $12 7 million or 13% since may 31st approximately $2 million of that increase is the result of our recent acquisitions and the remainder of the increase reflects higher raw material costs and higher safety stock level.
As we've increased balances in several areas to ensure adequate quantities of key raw materials to minimize back orders to our customers as supply chain issues persist I expect higher levels of inventory to continue for the near term until we see some relief from these supply chain issues, we've generated 47 six.
Million in cash from operations during the first nine months of the year and we invested $38 million in our acquisitions now to wrap up considering the headwinds we had in our face overall it was a solid quarter and we're cautiously optimistic for the remainder of the fiscal year and excited for the future of the company as we prepare for the combination with.
<unk> food safety business I'd be remiss, if I didn't thank our more than 2000 employees worldwide for all their efforts in making this company. What it is today will continue to drive for improved operating performance, while working on the integration planning for the three of them combination I'll now.
Now return it to John for his closing comments.
Thanks, Steve earlier, I mentioned, our agreement to combine <unk> food safety business with our existing operations and I wanted to provide an update on where we were in the integration planning process. Since the announcement members of our leadership team I've set off across the country and around the world to host meet and greets at three P. M food safety locations touching base with employees.
Introducing the engine, who we are and what we do as well as answering initial questions and laying out the vision of our future as one combined company. The meetings have gone extremely well and we have learned so much from all of the three of them food safety employees I feel incredibly confident that together, we're going to build something truly special we've established twenty-five teams to help.
Tackled a huge project and is planning the integration of our two companies. These teams comprised of key leaders are working to ensure that both the neogen team and the three M team are ready for day. One those teams also our partner with Merit teams on three M side to make sure that we're covering every aspect of the business and leaving no room for error once we close it.
We're ready to begin building our new company.
Feel very grateful for the hard working members of both the <unk> teams are leading us forward and helping us create something special and the more we meet and interact with our future team members. The more excited we get about our new company overall, we have a very positive outlook on the state of the company and we're excited for the fourth quarter Neogen is strong our people are excited.
And we're all United under one mission this hasn't been an easy quarter, but I continue to be impressed by the resilience of our employees and their desire to drive Neogen success now I'll open up the floor for any questions you have for Steve and I.
We will now begin.
And answer session.
Good question.
And the one on you touched on.
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Yes.
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This time, we will pause momentarily to assemble our roster.
The first question today comes from Kristine <unk> with William Blair. Please go ahead.
Hey, good morning.
Okay.
I know you don't give explicit guidance I was hoping you could talk broadly about the outlook for the fourth quarter, specifically on the top line and margin kind of thing.
Yes.
Christine.
Fourth quarter.
As I said.
We're cautiously optimistic there are headwinds in our face we talked about currency going against us.
On the supply chain issues continue.
The after effects.
The latest Covid.
Outbreak are still out in our markets.
As you said, we don't give guidance.
We were 10% in the third quarter.
I think thats the best we could probably.
We give for the fourth quarter.
Dan.
Christine as you think about like third quarter and the similarities I mean couple of things to really look at.
Big drop the IB.
Impact on margin was primarily coming out of our our animal safety business margins for food safety were flat.
We consider was actually really good considering all the supply chain challenges and cost increases because we were able to do price increases to our customers as well.
COVID-19 had a really big impact on this quarter.
We average about 300 hours of absenteeism.
Per month, and it jumped to 4000 hours per month.
In the quarter.
Now, it's getting better, but it's not back to 300, so when that happened and I don't think this was just so we saw that not only with.
Our business, but with our suppliers and our customers that they are just a number of people out.
And so running.
We're running test Kevin customers perform to us getting the raw materials, we need was very challenging for the quarter.
But that's starting to get better which makes me feel pretty good about fourth quarter.
Yeah.
I think the biggest thing is.
The costs were going to incur working on the <unk>.
Neil.
Put together.
A very strong team like I mentioned, we've got 25 work teams.
And we met for the quarter we met.
<unk> thousand 500 hours of meetings, where that's ram counterparts to to put the business together, so we're making great progress on that while continuing to drive our business forward.
Okay, that's really helpful color there.
So on the food safety side.
Obviously, there was some of that.
Mix shifts.
Thank you.
Even though our margin.
Jason.
Yeah.
The deceleration from last quarter, primarily data.
Is there something else.
No I'd say that was primarily driven by <unk>.
Okay. That's really helpful and then a couple on <unk>.
For me.
You mentioned that you expect.
And integration cost.
For the remainder of the year.
Yes.
Thank you.
$9 million.
For the past couple of quarters is that what we should do.
Okay.
Before I went into the deal.
That's correct.
Yes, Kristine Thats, probably a fair number, particularly in this fourth quarter as you know we filed our registration statement and proxy.
Last week and there was a fair amount of legal work there so.
I would say that those numbers are for the fourth quarter in particular would be.
Reasonable approximation of what we're going to spend in the quarter.
Okay. Thanks.
One last one for me.
So I think that's right.
<unk> business grew in the high single digits for the quarter.
<unk>.
So I guess my question is how do you your results.
The low double digit growth profile targeting given that.
Yes, I think a couple of reasons one is.
That is a very small business within a very large company.
And.
If you think about how <unk> structured those salespeople reported into health care.
And while.
It's a very interesting business for us the healthcare team can make their number or without food.
Food safety to make their number at all of them through.
So we think.
Giving.
Giving some clarity and guidance.
Waking up every day to work on.
<unk> the world's food supply is going to be something that the new organization is going to be hyper focused on.
So we think there's tremendous opportunity there.
The other is <unk>.
It's been challenging for that group to get resources, and I think thats common with any company when it's less than 1% of your revenues you may not be the highest.
Just for resource allocation.
That is our core business.
It's an area, where we're going to invest to grow the business. So.
Those are the things that give me very very confident and then third is talking to customers.
We've talked to a number of customers and universally they have been very very supportive of the deal.
And that's because.
<unk> provides a very high.
Hi, touch service level, which is going to allow us to continue to meet customer needs.
And help them and identified problems. That's one of the things, we do really really well is.
When a customer has an issue and we don't have we don't currently have a solution for them.
We work with those customers to develop new products, new lines and solutions to bring to the marketplace and we.
That's only going to accelerate as we add the <unk>.
And food safety team and bringing in those line of products and those customers to continue that pipeline.
Great. Thanks, so much further detail and congratulations.
Pending transaction.
Yes, Thanks Christy.
As a reminder, if you have a question. Please press Star then one can we go into the question queue.
Next question comes from David Watson Berg with Piper Sandler. Please go ahead.
Hi, guys. Thank you for taking the question so.
I used to think it was your market share and maybe my number was off.
Food and animal safety is around each one of them around 10% and yes, we always liked it because you had.
Fairly.
Non consolidated market and I think you guys are close to the top of market share and that's like respective markets can you talk about where you think you will be post <unk> acquisition and market share in food and animal safety respectively.
Yes, so there'll be no change on animal safety, because I really don't have any business.
Food safety.
Thank you your numbers are about right pre merge we were about 10% within that segment and tremendous opportunity to grow right. So if we double the size of that business. It will give you.
That gives us 20, and still tremendous runway right.
The key things I get really excited about the way the market continues to grow from.
We've got tremendous opportunities in the pathogen segment.
New allergens continue to come in.
That business the strength of that business has been great. We did another 12% this quarter that continues to grow as Steve mentioned, our new ATB reader, which we watch reader sales really importantly in our soliris readers of our ATP readers are growing double digit really strong growth, which then.
Translates into greater consumables as we move forward.
So.
Really looking forward to that David and then it's.
Really thinking about how are we going to approach the new product portfolio with our customers right. So how are we going to work with customers, who maybe have experience with the <unk> product, but not a three arm product or vice versa. So really show them. The full portfolio of the company going forward and all the things we can do.
To meet their needs to simplify their lives because I think thats one of the greatest things is that it's going to be a lot easier for our customers.
Now theyre going to be working with one organization rather than two that is going to be a lot.
More streamline and it's going to be a lot more receptive for them. So those are some of the things that we're really excited about.
Okay I appreciate all the color there and you did give a lot of commentary on the gross margins and why they were down.
Year on year here.
No I do and correct me if I'm wrong on this.
Logic, but I do think when food prices go up.
Food safety it seems like you would be able to get that pricing.
Damn because just conceptually like you still want.
You referred to be safe of course, alright. So can you talk about maybe how the flow through might be or they might be able to take price or expand that margin in the next couple of years.
Considering that concept I think still holds.
Yes.
That's exactly right.
We're really learning a lot about that business and we've had great meetings with the mirror teams, which is their counterparts at three.
It's really fun is the one thing I hear repeatedly from the team is so nice to talk to somebody who actually understands our business right because we understand the business every day and we get up and we do this business.
So I think there are opportunities to really understand what are the value propositions for our customers and thinking.
Thinking about the total value proposition of the new portfolio.
It's going to really be able to for us to show.
The customers the true value of the <unk> product line going forward.
So on EBITDA margins going forward and are close to $1 billion in sales, it's a really really strong business.
Really appreciate that.
Sorry, if I put the securities you guys on next year's growth historically or in over the last couple of years, you've given really good commentary about.
The food waste that goes on when the end customer is eating at restaurants versus when they're consuming food at home and all out of that made a lot of sense. We are seeing restaurants open up open back up I mean in this next year.
Are you guys prime to really crush numbers on the on the food safety front and sorry to put you guys on the spot yes no.
I think we are I mean, I think we saw that kind of when the markets opened up.
And what would be our first and second quarter and things loosened up we had really strong double digit growth. This quarter was a little bit tougher things clamp down the challenge David too is you got to think about this worldwide.
You can really see where all micron was moving around the world and our business.
It goes in the U S. It was challenging with <unk>, so as the UK and some of the European businesses.
We're going to have that in the fourth quarter for rest of the world because I will tell you like we were talking to our employees in China.
And our general manager there.
It's actually I don't want to over 10000 people or something on a block or in their building and they found three positives and they shut the whole building now for 14 days.
Come to work.
So China has taken that strategy are just they just shut everything down and so.
While I feel good about the U S and it has a bigger impact and so this is where our major manufacturing is the international. This wave is kind of moving now internationally in other parts and that's going to have an impact.
On our international business, but your premise is right I agree with your premise is just.
And I'd love to get this thing behind us. So we can just get quarter after quarter like we did the last three where we're able to stack one on top of the other.
10% on the top and 8% on OPI like alright.
Yes, 16 is better than 12 is better and Thats where were heading.
Got it thank you very much and congrats again on the for the Mbo.
You bet David.
Okay.
This concludes our question and answer.
I would now like to turn the conference back over to John for any closing remarks.
Thank you.
I mean, one of the things we didn't cover that I wanted to cover was in <unk>.
March we stopped all of our sales to Russia.
That will have about a half a million dollar impact for the quarter.
The thing that Neogen has done is we've identified a number of agencies working in the Ukraine to help the people and animals there.
And that we serve so we've identified the agencies at Neogen is working with and we are doing a company match program.
For employees as we helped drive donations.
That country and the people there so.
We're trying to do all we can to help support the Ukrainian people in this very very challenging time and I just wanted to group to know that so thank you very much and we really look forward to talking to you all again in July when we present fourth quarter and year end results.
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