Q4 2022 Neogen Corp Earnings Call
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Good morning, and welcome to the Neogen Corporation fourth quarter and full year 2022 conference call.
All participants will be in a listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions.
To ask a question you May press Star then one on your telephone keypad to withdraw your question. Please press Star then two.
Please note.
This is being recorded.
I'd now like to turn the conference over to Mr. John Aden.
Residents and CEO . Please go ahead, good morning, and welcome to our regular quarterly conference call for investors to Atlas today, we'll be reporting on the fourth quarter of our fall 2022 fiscal year, which ended up may 31.
As usual some of the statements today could be termed as forward looking statements. These statements are subject to certain risks and uncertainties and our actual results may differ from those that we discuss today.
The risks associated with our business our covenant part in the company's Form 10-K as filed with the Securities and Exchange Commission.
In addition to those of you joining us by live telephone we also want to welcome those of you online.
Following our prepared comments. This morning will address questions from participants who have joined this live conference.
I'm joined this morning by Steve Quinlan, our Chief Financial Officer, who will provide some additional details on our results for both the quarter and the full fiscal year.
As we reported in our press release. This morning, we're pleased to report record revenues of our 2022 fiscal year with an overall increase of 13% over the prior year.
Incredibly proud of our entire management team for all their hard work and their continued dedication to our mission to be the leading company in the development and marketing solutions for animal and food safety.
It hasn't been an easy year, but their enthusiasm and hard work everyday inspire us as we work toward our goals.
The fourth quarter was a strong conclusion to a great fiscal year reporting revenue growth of over 10% from the prior fiscal year.
To achieve a fourth quarter with double digit top and bottom line growth while preparing for the integration of the <unk> business is a tremendous accomplishment and shows the strength of our exceptional team.
The momentum from this quarter is helped propel us into a new fiscal year and toward the close of our three M food safety transaction.
We were pleased to see gains in our food safety products this quarter with particular strength across our diagnostic testing portfolio.
Our natural toxin test kits performed well within the market, particularly our aflatoxin T one Don and through modest and test kits.
We're seeing grain supplies become more valuable, making natural toxin testing very important for grain suppliers around the world.
Our <unk> fleet solution continued to lead growth within our culture media testing is more labs in the U S and the UK adopted the product, which simplifies the classic microbiology testing for the detection of Listeria and salmonella within the food and environmental samples.
We also saw growth along our general sanitation product line as our Acupoint advanced next generation handheld ATP sanitation monitoring system gain market share the system, which we launched in May of 2021 quickly and effectively protects ATP as a measure of the cleanliness of our facility.
This system connects to our Neogen analytics platform, which helps customers manage their testing data and create streamlined processes, providing them immediate access to critical information within their environmental monitoring programs.
This software as a service which connects to both our <unk> and answer systems help users implement sanitation monitoring systems that reduce risk and elevate food safety compliance.
We'd see this software is an invaluable resource and this has been validated by our customers as we've seen a 95% contract renewal rate among management and analytics customers. Additionally at sites for Neogen analytics is activated we've seen a 38% increase in sales of ancillary neogen products.
Our animal safety segment also had strong results for the quarter as we continued to see our veterinary instruments gain market share from competitors. We continue to drive impressive growth of the stay on guard insight product line, a testament to <unk> ability to successfully integrate acquisitions into our existing business.
In our genomics business, we're pleased with our genetic veterinary Sciences acquisition completed in December of 2021, the team out in Spokane, just recently moved into a larger lab space more than doubling the size in expanding their capabilities as our seventh global genomics facility and third North American facility the lab.
<unk> recently received its ISO 17 O two five accreditation the highest quality standard in the world for testing and calibration laboratories overall, a very strong quarter to close out a very strong year now I'm going to turn it over to Steve to talk a little bit more about our numbers for the quarter and the year.
Thank you John and good morning to everyone on the call today is John indicated fiscal 2022 was another solid year and our team overcame a lot of headwinds to allow us to report the numbers. We're sharing today. This morning, we issued a press release announcing the results of our fourth quarter and full year, which ended on May 31.
As John mentioned revenues for the quarter increased 10% to $140 1 million.
$127 4 million in the prior year for the full fiscal year revenues rose nearly 13% to $527 2 million from last year's $468 5 million.
Net income for the quarter was $15 million or <unk> 14, a share compared to $15 8 million a year ago or <unk> 15, a share.
These results included $5 7 million in <unk> related deal expenses for the quarter. Excluding these costs. Our adjusted net income was a strong $19 1 million or <unk> 18, a share an increase of 21% over last year.
Full year net income for fiscal 'twenty, two was $48 3 million or <unk> 45, a share excluding the $25 6 million and <unk> expenses. Our adjusted net income was $67 9 million an increase of 12% over last fiscal year's $60 9 million or <unk> 57, a share.
There.
As John noted tremendous top and Bottomline performance achieved under difficult operating conditions.
On a constant currency basis revenues were approximately $1 6 million lower in the fourth quarter than the same period last year as the U S dollar strengthened against the pound Euro and the Australian dollar.
For the full year, we had about 844000, a benefit from currency fluctuations compared to the prior year.
Sales from recent acquisitions also contributed to our revenue increase in fiscal 'twenty two for the fourth quarter organic sales increased 6%. The increase was 8% on a constant currency basis and for the full year, our organic sales rose 9% overall.
Overall revenues in the food safety segment increased 5% in the fourth quarter and 11% for the year. The fourth quarter was negatively impacted by Lockdowns in Shanghai, which shutdown our Chinese operation in April and May.
Additionally, we've noticed some belt tightening from our customers is inflationary pressure and economic concerns over the Russian and Ukraine War are affecting testing quantities and order patterns.
Our data shows, we're gaining new business and retaining customers, but there is some softness in our markets.
Highlights in the food safety segment for the full year include a 12% increase in sales of our general sanitation line driven by higher sales of our new Accu point reader, which was launched late in our 2021 fiscal year.
Sales of our allergen test kits increased 9% and sales of natural toxin test kits rose, 6% as we started to see increased business related to Brazil, corn harvest in the fourth quarter.
You might remember that the drought decimated last year's harvest, which led to very low sales of our aflatoxin test kits and our first and second fiscal quarters. This year.
Our listeria right now product continues to gain market share with 25% growth and as John mentioned, the UK has had great success with their new laboratory workflow called one broth one place.
This contributed towards a 16% increase this year.
I am pleased that sales of our Solaris product line, which detects microbial organisms, such as east and mould increased 4% for the year despite difficult prior year comparisons driven by high sales of our popular new reader.
We continue to face competitive pressures with our lower margin drug residue product line as those sales declined 33% in fiscal 'twenty two.
Magazine sales increased 6% in the fourth quarter on a global basis. This business, which was acquired in December of 2020 has now been fully integrated into our operations and has met our expectations in fiscal 2022.
Looking elsewhere internationally sales were up 14%. Despite the challenges presented by China's lockdowns and the conflict in the Ukraine.
Sales in the U K increased 13% for the year led by a 25% increase in sales of cleaners, and disinfectants, primarily due to new business won in the UK and ongoing strong sales to Asia to address African swine fever.
Revenues in our Brazilian food safety operations were flat for the full year as this business was negatively affected by a decline in dairy drug residue kit sales and the impact of the greatly reduced corn crop in the first half of the fiscal year.
We were pleased with their fourth quarter results in which sales increased 18% in reais.
Sales at our Mexican operation increased 9% for the quarter in pesos or.
Our China operation ended the year flat due to the Covid shutdowns in April and May.
Revenues for the animal safety segment rose, 15% for the quarter and 14% for the full year. Excluding contributions from recent acquisitions organic sales increased 10% in the fourth quarter and 12% for the year.
The increase in animal safety revenues for the year was led by a 35% increase in sales of veterinary instruments, particularly our line of detectable needles and syringes as we gain new business and took market share from a competitor.
Our insecticides lines increased 32% with higher insect pressure driving demand and market share gains into the farm and home channels. Our animal care line of products increased 16% led by strength in small animal supplements and our biologics line, which includes our higher margin vaccine to prevent.
Botulism be in horses.
Our disinfectant sales sold through this segment increased 6%, while our line of rodent control products was down 4% for the year due to difficult comparisons from a strong fiscal 2021.
Genomics revenues reported through our animal safety segment were up 11% in fiscal 2022, partially aided by the December acquisition of genetics Veterinary Sciences located in Spokane, Washington.
Sales through our Australia lab were also strong with large volume increases in beef and sheep testing.
On a worldwide basis genomics revenues increased 11%.
Gross margins were 46, 4% for the quarter compared to 45, 3% last year as we benefited from mix shifts to higher margin products in both segments.
For the year gross margins were 46, 1% compared to 45, 9% in the prior year I'm really proud of the team for this improvement in gross margin since we were negatively impacted throughout much of fiscal 'twenty two by significantly increased freight costs on container shipments inflationary raw material cost increases.
And labor shortages the commercial team has done an outstanding job of offsetting this with price increases where possible.
We did start to see a decline in container shipment costs in the fourth quarter, although costs are still much higher than 12 months to 18 months ago.
Overall operating expenses were up 26% for the fourth quarter and 31% for the full year.
However, both of these percentages include our spending on professional fees related to the <unk> transaction.
Excluding these costs operating expenses rose, 10% for the quarter in line with the revenue increase and rose 14% for the full year sales.
Sales and marketing expense increased 4% in the fourth quarter and was up 15% for the year with higher spending on travel and other customer facing activities as COVID-19 restrictions eased in fiscal 'twenty two.
Excluding the <unk> related professional fees general and administrative expenses rose, 25% for the quarter and 12% for the full year, primarily due to new head count increases in bonus accruals due to company performance higher stock based compensation expenses and incremental <unk>.
<unk>, including noncash amortization from recent acquisitions.
Fourth quarter expense was also affected by some timing issues as prior year fourth quarter expense was unusually low benefiting from economic tax credits recorded late in fiscal 2021 at our Lincoln, Nebraska genomics facility.
Research and development expenses decreased 6% in the quarter as the prior year included significant spend on development costs for our Nextgen Acupoint reader.
For the full year R&D expense increased 5% to $17 million.
Excluding the costs related to the <unk> transaction adjusted operating income for the fourth quarter at $23 7 million was up 17% over the prior year quarter due to the previously discussed increase in gross margin.
As a percent of revenues adjusted operating income was 16, 9% compared to 15, 9% in the prior year and.
For the full year, our adjusted operating income was $84 2 million or 16% of sales compared to $74 2 million or 15, 8% of sales in the prior year.
Our 2022 adjusted operating income represented a 14% increase over fiscal 2021.
I want to point out that this quarter, we began to report our results on an EBITDA and adjusted EBITDA basis as well.
These non-GAAP metrics, we believe will help investors better understand our operating results going forward as unusual charges, such as our deal expenses and noncash amortization charges relating to intangible assets acquired in the transaction are added back to our GAAP earnings.
These numbers should be used for informational purposes only.
Supplement, but do not replace our GAAP reporting.
For the for the year adjusted EBITDA was $115 4 million versus $104 2 million last year, an 11% increase.
Other income for the year was $1 6 million compared to $1. One in the prior year. We recorded a 484000 increase in interest income in the fourth quarter as interest rates are rising.
Our effective tax rate for the fourth quarter was 29%. This compares to 21, 8% recorded in last year's fourth quarter for the full year. The effective rate increased from 19, 1% in fiscal 'twenty, one to 19, 8% this year due to lower benefit from stock option activity in the <unk>.
Half of the year.
We also recorded a $600000 charge in our first quarter relating to a tax increase in the U K.
We generated $67 6 million in cash from operations for the full year versus $81 million in the prior fiscal year and invested about $25 million in property and equipment and another $38 million in acquisitions during the year.
Inventory balances increased $21 6 million in fiscal 'twenty two.
Part of the increase is due to raw material cost increases and some of this was timing as we received a number of large shipments late in the year.
But we also made a business decision to increase inventory levels in certain areas of the business in fiscal 'twenty two to combat supply chain issues and ensure we had product available for our customers.
Our accounts receivable balances rose by 9% over levels at last year and in line with our revenue increase our days sales outstanding improved to 62 days at May 31, compared to 66 days a year ago.
This has been a busy year for the Neogen team as the organization has integrated recent acquisitions and also spent considerable time preparing for the integration of the three M food safety business. Despite this it is evident from our results that the team is still made it a priority to focus on our current business minimizing the effects of inflation.
Supply chain and ongoing COVID-19 issues around the world.
Going into fiscal 'twenty, three we're preparing to welcome the <unk> food safety team to Neogen soon and I am excited to see what our combined company will achieve in the next year.
Now I'll turn it back over to John .
Thanks, Steve This fiscal year was a year of growth for Neogen in many ways the acquisition of GBS delve in cap and <unk> to.
The announcement of the three of them food safety merger, which will strengthen our position in helping our customers protect the world's food supply.
Recognize that there are still challenges in front of us, particularly with inflation as we've seen some customers begin to tighten their belts and continued supply chain issues, but I am confident in our team and our business. We also have so much to look forward to as we go through our first quarter in our new fiscal year the.
The biggest of course is the closing of the <unk> food safety transaction. Once the deal closes we will be one combined company well positioned to accelerate growth and drive significant additional value for our customers employees and shareholders. Together, we will have an enhanced geographic footprint and product range, allowing us to better serve our global customer.
Base, we're excited to begin building, our new company together post close we're fully entrenched in the integration planning process and we've taken major steps toward the closing of this transaction, which we anticipate will occur in the third quarter of 2022 calendar year over the last quarter, we shared employment details of the three on food safety employees.
<unk> beginning the process of welcoming the team of Neogen. The conveying team members are in the process of reviewing employment information and completing the process.
We're very pleased with the collaboration of the teams and the spirit of partnership as we become one company.
Our neogen and <unk> teams kicked off the next stage of transition planning with a meeting at <unk>, Minnesota headquarters in late June where we finalized workflows and details for day one.
Together, we discussed our progress and mapped out each company's responsibility during the transition period, we identified any gaps that we work together to identify the solutions.
Following the sessions in St. Paul with our U S. Canadian teams, we extended the day one readiness sessions to include the international teams.
Overall, our teams are feeling very confident and ready to become one company.
On July six we also announced that we acquired <unk> biotech our long time distributor of food safety products in Bangkok, Thailand.
Through this acquisition, we establish a physical office in the region, which will aid us as we integrate our businesses. There. This acquisition will be an asset to the combined company post close and we're excited to work together to expand our genomic and agricultural solutions in the region.
We also serve only broke ground last week on the $70 million expansion of our food safety manufacturing facility here in Lansing, Michigan. This.
This 170000 square foot expansion is centered around the construction of a three storey dedicated manufacturing building for our food safety products, which will eventually include our feature film indicator organism testing line of products.
We are pleased to increase our employee footprint in Lansing, adding up to another 100 jobs in the area when fully operational.
This project is a big step forward for Neogen and together with <unk> food safety transaction, we will enter the new era of <unk> growth.
I want to once again reiterate our incredibly proud I am of team for all they've accomplished this year to.
To achieve record results, while working on the integration plans of the three M. Food safety business is truly incredible performance.
It's been a tremendous undertaking for the entire team, but they have stepped up and taken on the challenge. We continue to work toward closing sometime in the third quarter of 2022 calendar year, and we look forward to the talented <unk> team joining neogen post close.
Now I will open the call for any questions.
Thank you we will now begin the question and answer session.
Ask a question you May press Star then one on your telephone keypad.
We are using a speaker salary please pickup your handset before pressing the keys.
With Joe Your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
That's the first question comes from Andrew <unk> with <unk>.
William Blair. Please go ahead.
Hi, guys. Good morning, Thanks for taking the questions and glad to be back on these calls with you.
Maybe to start here, just as we sort of nearer deal closing on the <unk> side can you just sort of talk to us about how your expectations for that pro forma model may have changed since you. Initially gave them late last year I know that you've got a little bit of a higher interest rate on the debt that was versus what was initially sort of talked about inflation thats certainly been.
Different than we expected. So just curious how youre thinking about revenue growth synergies and earnings accretion now that we have a little bit more information. Thanks.
Yeah. Thanks, Thanks, Andrew Good question.
The bulk of the assumptions remain intact.
We're very comfortable with our growth assumptions, our synergy assumptions as you said.
Interest rates have moved up in the period between.
The signing in today, and we are going to be paying more interest.
Then we had assumed in the December pro foremost.
Our results have come in a little stronger than I think.
Were in those initial models.
And I know that three <unk>.
A number have.
That remained pretty static there is some.
There was some Russian revenues.
Inflation is hit.
On the Cogs line.
Line.
And then obviously currency has impacted both companies, but the basic thesis is still.
Still intact, John do you have anything on that yeah, No I think Steve is exactly right.
From a deal standpoint, I think we are.
We feel really comfortable where we are at the pro forma as there is.
Some minor changes that Steve just went through.
The more we get into it the more excited we are and the more opportunities we're actually seeing from a synergy capture standpoint. So we're just ready to get this thing done and get going.
Okay I appreciate that color and then maybe you called out some of the integration activities that are underway. Thanks for that color, but I guess just broadly speaking John can you just sort of talk maybe about some of the moves you've made on the neogen sort of Standalone business over the last couple of years to really bolster the middle part of that organization and how.
That might help you as you sort of bring in <unk>.
Yes, Andrew absolutely.
You can see.
The impact kind of the.
The way that we've restructured.
I shouldn't say restructure the way that we continue to modify the business as we grew.
And to be able to grow the core business, while you have a team.
Caring for and integration of the size of the performance we had.
Outstanding because everybody had an excuse of why they didn't after performed this quarter and nobody did everybody just went out and ran the business. So this started five years ago. When we started developing our personal development plans for all of our employees and beginning our succession planning and identifying key individuals and then doing all of our leader.
Ship trading so we have really been working hard to build strength throughout the organization, whether that's supervisor.
Level, the manager level, the director or the vice president level and.
We identified high growth people, we train them promoted him.
This year, we had 80 internal promotions, which I'm really proud of at Neogen. So we continue to fill our own pipeline with our employees and what that allows us to do is.
To take on.
Some complex challenges and continue to grow.
Just three of them we've been working on we integrate in GBS, we integrated <unk>, we integrated cabinet of that yes.
Yes, we continue to grow the core business so.
I'm really really proud of the team and that's the strength of the group we have the dedication they have and their hard work and it's just been it's been really fun to watch as a leader.
Okay, Thanks, and kudos to you on that and then lastly, Steve I think you mentioned some belt tightening from Thomson testing customers out there can you just maybe be a little bit more specific on what youre seeing there and maybe some of the things that are in more of your control at the Navy overcome some of those headwinds.
Yes, I can.
I can talk to you Andrew.
Yes, we're seeing I mean.
With an inflationary environment.
Customers cost even.
So our costs going up to the customers. We have seen that they are being thoughtful in the amount of testing they are doing and the way you overcome that.
As you grow the business you find new customers or you sell more to the customers you have and I think one of the things I pointed out was our success in our Neogen analytics platform I was very very pleased that when subscription renewals came up this year, we had a 95% retention rate, which just shows customers really value to us.
And when they're.
Neogen analytics say by 38% more product than what they are purchasing before they put our neogen analytics peers, we're showing them the value of the products throughout their whole food safety system.
So it's continuing to find ways to grow.
This is what gives me confidence that gets me excited COVID-19.
Covid hits managing grows.
Fly chain hits Neogen gross inflation hits Neogen grows.
We are and Thats, what we do and so Thats why were excited.
Continue along this path.
We keep growing the organization.
Great. Thanks, guys.
Thanks, Andrew.
And if you have a question. Please press Star then one.
Our next question comes from David Westenburg with Piper Sandler.
Hi, This is John on for David Thanks for taking the questions.
First of all I just wanted to follow up on Andrews questions, we have gotten some.
Questions from investors looking for an update on <unk> III.
And your.
Our revenue growth projections could you just talk about how the revenue growth numbers are.
How do you think that they are tracking that given the guidance that was given when the deal was announced and how we should think about.
Organic growth in AD compared with Nielsen's existing food safety business, which I believe saw about 3% organic growth in the quarter.
Yeah. Thanks, Shannon I think the but that the organic growth number was five two.
Well look that up and then had.
Okay.
On a constant currency basis was $5 two so yes, sorry.
What we're seeing is that base.
Based on our pro forma they are really coming in.
Alright, where they thought they were going to come in.
And that was one of the thesis of.
Doing this deal was that we.
We grow faster than they do and we think that we can accelerate their growth with our leadership and that's not a knock on them. It's just that.
It is a small business within a large company and you saw today.
Food safety was buried in healthcare, which <unk>.
It really wasn't interested in and how you see it.
Even the bigger unit is now a business or divesting so.
We think there's tremendous opportunities for us to take the very highly skilled team dedicated team and give them some direction.
Excellent support and resources to help them meet the goals that they have.
To grow that business.
On a double digit basis, which is kind of our historical standard.
Great. Thank you could you also.
You have any comment on the product back in China and India.
And progress towards getting towards cash.
Cash flow positive post acquisitions in those geographies.
Jack could you repeat the error, yes can you repeat that Jamie.
Product yet.
Yes product product mix in China.
Okay. Okay. Okay. Yeah, you said product bag Aerospace Amendment, we launched a new product.
Yes, so product mix.
What we're seeing is with the African swine fever.
One African swine fever is really moving we saw our product mix shift towards cleaners, and disinfectants and we saw a decrease in genomics.
Kind of flip flop now because it is starting to normalize as we saw an increase in genomics.
The group did exceptionally well considering that we were pretty much locked out of the lab for two months because of the lockdowns.
So we're really pleased with.
How that team has performed and we see a tremendous backlog there of I think opportunity to continue to grow this year is that.
If we can get the COVID-19 lockdowns to end in that business to normalize.
Steve can talk to you a little bit about the financial side of those businesses.
Yes, as John said, I mean, we got hit with the Covid Lockdowns in China, but that business has been performing.
Performing very well for us for the last couple of years and we are.
We are north of breakeven significantly in China.
I think one of the milestones we had with India. This year that we're proud of us.
They broke even for the full year and have had some very strong growth and budgeted for further growth next year. So.
Both businesses.
We're very excited about their future yeah, and as you know once you get past breakeven and then we really like the accelerated growth because you've done the hard work you've put in the infrastructure.
And those were early markets for us in India is still in the early kind of.
Early phased growth.
And out of your China is the same way so we see those as significant markets for us in the future.
Great. Thank you and.
Lastly, before I jump back in the queue can you talk about your views on bolt on acquisitions going forward like.
Are you thinking more along the lines of lower lower multiple.
Companies.
Things along the lines of distribution from Eddie cleaners.
In fact in or maybe something more aggressive.
I think we have.
<unk>.
So the answer to that is yes, yes, and yes.
But really what we're looking at.
Yes.
Continuing to grow in the spaces that we know well.
We are very strong and where the markets have.
Growing markets.
I understand the technology. So if you think about what we did this year right. So.
We did a cleanup disrespected air cleaner and disinfectant with Dell.
It came in genomics.
GBS.
Did canine anti parasiticide with cap. It so you see like the canine space because thats gross.
It grows faster than the production animal space, it's a.
A little it's Scott.
We consider more of the emotional side of the business versus the economic economical side of the business. So we like that space.
We're going to continue to to drive kind of those pillars.
In those areas.
Like we talked about the business is diverse enough that.
The European team did the Delta acquisition, the integration did a fantastic job for genomics team.
GBS.
On their own they did a fantastic job and so while food safety and corporate was working very very heavily on.
During that time period, we were able to execute those others integrated very well because we had other pieces of the business that are more isolated. So we're going to continue that and I think with our new size and scale generally we're going to look for we will continue to bolt on strategy, where it makes sense, but what we also will have the capability to do bigger deals.
And that's something that.
We will continue to do and we feel that we've got the right team and we've got it.
A track record of execution, and we're going to keep doing it.
Great. Thank you.
This concludes our question and answer session I would now like to turn the conference back over to Mr. John <unk> for any closing remarks.
Yes. Thank you.
Again, I'd, just like to reiterate I'm really proud of the team because.
Great performance for the quarter, great performance for the year. It really did three times the work what we normally do is preparing for the <unk>.
The needed.
<unk> food safety acquisition and it shows that.
We can continue to execute on large deals and stay focused on our core business, which is the key.
We're focused intensely on our customers.
It's an exciting time in Asia, we are celebrating our 14th year of operation This year and really the things that we're doing are going to consider to setup.
Really going to allow us and set us up for 40 more years of consecutive growth. So we're excited we're ready to go and we thank you for your support.
Well Frank has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
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Yes.
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