Q4 2023 Neogen Corporation Earnings Call
Good day and welcome to the Neogen Corporation.
Fourth quarter fiscal year 2023 earnings conference call.
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I would now like to turn the conference over to Dell wealthy.
Head of Investor Relations. Please go ahead.
Thank you for joining us this morning for the discussion of the results of the fourth quarter of our 2023 fiscal year <unk>.
I'll briefly cover the non-GAAP and forward looking language before passing the call over to our CEO , John Evans, who will be followed by our CFO David Maura.
Before the market opened today, we published our fourth quarter results as well as the presentation with both documents are available in the Investor Relations section of our website.
On our call. This morning, we will refer to certain non-GAAP financial measures that we believe are useful in evaluating our performance.
Reconciliations of historical non-GAAP financial measures are included in our earnings release and the presentation Slide two of which provides a reminder, that our remarks will include forward looking statements within the meaning of the private Securities Litigation Reform Act.
These forward looking statements are subject to risks that could cause actual results to be materially different from those expressed in or implied by such forward. Looking statements. These risks include among others matters that we have described in our most recent annual report on Form 10-K and in other filings.
Make with the SEC.
We disclaim any obligation to update these forward looking statements.
I'll turn things over to John .
Okay.
Thanks Bill.
Morning, everyone and welcome to our earnings call covering the fourth quarter of our 2023 fiscal year.
We're pleased to be with you today to provide.
On an update on our performance and our initial thoughts on 2020 for fiscal year.
We delivered a solid performance in the quarter with core growth of both of our segments. Despite the softening market conditions and food safety. Many large food producers have continued to experience lower unit volumes on a year over year basis.
Which has negatively affected the volume of tests they use.
Well end user demand remains broadly supportive of our animal safety segment, we saw the impact of Destocking in the distribution channel.
It was the result of some level of macro uncertainty than normal cyclicality in production and wind markets.
Our animal safety business also faced a difficult comparison against double digit core growth in Q4 of the prior year.
In the former three and food safety Division, we saw a significant improvement in the third quarter with higher future phone production levels at our transition manufacturing partner contributing to solid core growth and a reduction in past due orders.
We're optimistic that we're suddenly going to a steadier operating rhythm.
Elevated reporting structure, and our expanded onsite presence paying dividends and providing us with significant inputs into key decisions.
While improving the transition production levels of the flagship feature from product line has certainly been a recent focus. We are also prioritizing continued innovation to further capitalize on its leading market position.
An example of our team's efforts in this area as the future from plate reader advanced.
Which a numerator 11 different feature phone place in six seconds or less utilizing AI to improve speed and accuracy.
Although this product launched in 2021 I've mentioned it now for two reasons.
First it was just awarded the prestigious Red Dot Award for product design last month, and one of the world's largest design competitions.
Second that same team that developed plate reader is now part of the near term.
Well, we believe we are placing an even greater emphasis on innovation on this product line.
Future film as the clear market leader in indicator testing yeah. It has significant potential for growth not only in core food safety markets, but also near adjacent markets like commercial labs and pharmaceuticals.
This development team is actively working on next generation initiatives that we believe will allow us to capture additional market share and drive growth well into the future.
In addition to the transition management agreement integration activities are progressing well.
The four main product lines of the former three in business. We expect those three will be completely integrated into <unk> facilities by the end of our fiscal third quarter.
Well hygiene monitoring manufacturing operation was conveyed to us at closing and we've accelerated the relocation of a sample handling and packaging product lines.
We're also planning to fully exit two of the transition agreements by the end of the third quarter, those covering back office functions and distribution services.
Despite the numerous integration work streams, we have underway, we're not losing focus on our customers and finding new ways to meet their needs.
We are the leader in natural toxin testing with our reveal assays, providing fast results, both qualitative and quantitative so food producers keep consumers safe.
Recently, we have further expanded our REO portfolio to include quantitative assays for histamine and fish and dry animal proteins.
As well as for Don in Aflatoxin, Greens and Green byproducts.
And our genomics business, where we are the leading provider of animal testing services, we broadened our identity bioinformatics systems to include the high growth market for beef on dairy cattle.
<unk> is a simple genomic tests for calves from dairy animals crops with beef genetics to identify performance traits and three percentages for producers to use to improve their profitability.
Additionally, marketing managing and feeding their animals.
All of our genomic tests improve quality and efficiency for our customers, including the environmental benefits of reducing consumption of water and feed <unk>.
Reduced use of antibiotics and more efficient use of land.
Our comprehensive product portfolio is a differentiating factor in the marketplace and we're planning on continued portfolio expansion to help protect the quality of the food chain in the future.
We're making great progress and remain excited about the future of the fully combined business and our market leadership position I'm looking forward to the opportunities ahead of us in this new fiscal year with that I'm going to turn the call over to Dan for some more insights into our results for the quarter.
Thank you John and welcome to everyone listening this morning jumping into the results our fourth quarter revenues were $242 million, an increase of 73% compared to the same quarter a year ago.
Core growth, which excludes the impact of both foreign currency and acquisitions was 2% for the quarter acquisitions added 72%, while foreign currency was a 1% headwind compared to the prior year.
The segment level revenues in our food safety segment were $169 million in the quarter, an increase of 151% compared to the prior year, including core growth of three 9%.
Sales in our culture media and other category grew high single digits on a core basis with strong growth in food quality and nutritional analysis products in our major design business within bacterial and general sanitation solid growth in our Soliris microbiological testing products was partially offset by law.
<unk> sales have general sanitation, and pathogen testing products, some of which transitioned to product lines of the former <unk> business rounding.
Rounding out our larger food safety product categories natural toxins and allergens had a slight core revenue decline due to the discontinuation of our product line of drug testing kits for international dairy markets.
Quarterly revenues in the animal safety segment were $73 million up modestly over last year's fourth quarter on a core basis sales of our vet instruments and disposables had the strongest core growth led by a new line of business at a large retail customer.
This growth was partially offset by lower volumes of small animal supplements and vitamin injectables in the animal care and other product category.
Within our bio security portfolio solid growth in cleaners, and disinfectants and Rodenticides was offset by lower insecticide volumes due mainly to the timing of orders versus the prior year.
Worldwide genomics revenue was up mid single digits on a core basis led by solid growth in international beef markets as well as in companion animal testing.
The performance of the former <unk> food safety Division improved significantly with core revenue growth of almost 8% on a pro forma basis. The growth was led by Petrie film, which grew low double digits and included a reduction in backlog of past due orders. We've made good progress with our transition manufacturing arrangement for.
Peter film and believe we are on a path to sustainable levels of higher production.
Including the former <unk> business core growth for Neogen as a whole was mid single digits on a pro forma basis.
Gross margin in the fourth quarter was 59% representing an increase of 450 basis points from 46, 4% in the same quarter a year ago with the increase primarily driven by the addition of higher margin business into three <unk> food safety transaction as well as a positive price cost.
<unk>.
Adjusted EBITDA was $63 million representing growth of 97% from the prior year quarter, driven by the merger with the former <unk> food Safety Division.
Adjusted EBITDA margin was 26, 1% a year over year increase of 320 basis points. The increase was driven by gross margin expansion, which more than offset cost added in the quarter to accommodate the larger scale of the combined business.
Adjusted net income was $30 million for the quarter with adjusted earnings per share of <unk> 14.
Compared to $22 million in 'twenty, one respectively in the prior year period.
The increase in adjusted net income was driven by higher adjusted EBITDA, which more than offset the increase in interest expense, while adjusted earnings per share was impacted by the increase in weighted average shares outstanding from the food safety transaction.
We ended the fourth quarter with gross debt of $900 million, 67% of which is at a fixed rate and our total cash position of $246 million driven in part by working capital improvements in the quarter for a net leverage ratio of two eight times on a pro forma basis.
As we look to fiscal 'twenty four we expect full year revenue between 955 and $985 million. This outlook compares to $920 million in fiscal 'twenty three revenue on a pro forma basis and reflects challenging end market conditions, continuing through the first half of the fiscal year.
With respect to adjusted EBITDA, we expect a full year range of $235 million to $255 million, which compares to $230 million in fiscal 'twenty three on a pro forma basis. This expected range takes into account incremental operating expenses that enabled the exit of the back office and distribution transition.
<unk> services arrangements planned for the end of the third quarter as well as some commercial investment and go to market initiatives to drive future growth.
As it relates to the first quarter, specifically, we anticipate seeing the lowest core revenue growth of the year and also the lowest adjusted EBITDA margin of the year, which still would represent over 100 basis points of expansion compared to the prior year 22, 8% margin on a pro forma basis.
We expect our typical seasonal shape of the year to apply to revenue dollars with the first quarter being the lowest followed by the third quarter than the second quarter and the fourth quarter being the highest.
The largest year of capital spending for the food safety integration is expected to be fiscal 'twenty four.
Which we anticipate will have a total of approximately $130 million of Capex of this total amount approximately $30 million would be normal maintenance and growth capex related to the ongoing business.
Additionally, as we prepare to exit the transition agreement for distribution services, we expect a onetime investment in inventory of approximately $40 million to bring the three of them finished goods inventory onto our balance sheet.
These are significant outflows for the year, but we also anticipate that EBITDA growth and improved working capital performance, particularly on the legacy side of the business should allow these investments to be mostly if not fully funded in the year by cash from operations.
With respect to adjusted net income, we anticipate an effective tax rate of around 21% and quarterly interest expense of approximately $18 million.
I'll now hand, the call back to John for some closing thoughts.
Thanks, Dave.
Neogen has a leading solutions provider in both food safety and animal safety two segments. So we believe some great end markets.
The current conditions being soft we fully expect the historical trend of Brazilians to continue.
Beyond the end markets I am very pleased with the progress we've made on the integration while maintaining focus on growing our business.
It's about 2024 will be an exciting year for neogen by the end of this fiscal year, we expect to have all former three of our product lines, excluding future from fully integrated Indonesian facilities.
It will be focused on driving efficiencies in production.
We also expect to be fully independent with respect to back office functions and distribution and similarly focused on driving efficiencies.
Construction of the new production facility in Lansing is coming along well and in the interim we believe the positive developments in our transition manufacturing arrangements are sustainable.
We are continuing to prioritize product development as a means of differentiating ourselves in the market.
On this front.
To fully leverage of different skills and expertise of our new and existing team members to drive innovation and ultimately revenue growth.
And lastly, I want to thank our team members around the world for their hard work and dedication throughout the past fiscal year.
And their enthusiasm and excitement as we move into the 2020 for fiscal year.
The success, we've had in the progress we have made it not come easily and if required extraordinary efforts for everyone involved.
This team has fully embraced the one neogen mindset and we're all working together to achieve one common goal to be the global leader in food security.
Now I'll turn things over to the operator, and we will begin the Q&A.
Yeah.
Thank you we.
We will now begin the question and answer session.
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At this time, we will pause for Obama to assemble our roster.
Our first question today will come from Tim Daley of Wells Fargo. Please go ahead.
Great. Thanks Tyler.
Everybody and congrats on a great quarter and I appreciate the color on the year. So I guess just first one here on the on the pizza business, So strong sequential uptick in revenues.
Really good to hear that you're chipping away at that backlog here, but I.
I don't know maybe David if you've got the numbers could you help us understand how much of that lift sequentially was the backlog work down versus maybe changes in the transaction manufacturing her grandson persons.
Core growth.
So it's kind of those three buckets I guess.
Any directional color earlier.
Yes, Tim I think some directional color here I think what you saw the sequential improvement was comparing.
A period of backlog build to a period of backlog reduction and if we look through it.
Alright.
Alright, I appreciate that and and you know second question here No John call you guys called a companion animal you know as being a nice support of growth in genomics and just just you know wanted to get an update here on the macro environment <unk>.
Winds, there and how we should kind of think about.
Oh, how animal plays next year, you know into the numbers that were provided today hopefully your basic sure sure thanks to them and welcome to the call. We're glad to have you on.
I think if you're thinking about a two ways one is on the larger things from livestock.
We talked about the cyclicality this business and we've been in an uptrend and.
I think you're starting to see that we are.
Approaching the top and a lot of these markets again and it was really bad call on the bottom and so I said I'm not gonna call the top because I won't be good at it but.
But you start to see you know you've seen some of the things where.
The dairy segment producers are dumping milk, because it's just there's not enough processing and the prices are cheap.
The story beef price right now is high because we're seeing you know not a lot of cabs Caroline feed numbers are still pretty good.
This one guys are hanging in there, but it's not right.
So I think the protein side, you're starting you're seeing.
Really dairy moving first but I you know my expectation going forward, you know you're gonna start seeing that'd be a little bit tougher market companion animal is a tough compare because during COVID-19 you had all those COVID-19 puppies and all the COVID-19 cats, but the longer term.
Traditional growth rates were companion, if you look out over a longer period rhythm last coupla years, it's still a really great market and and you know that's why we invested in that market space Coupla years ago, even improve our.
Service and product offerings around companion Pat.
And you know that's an area that we really think is going to be a strong focus for us going forward. It's a great and growing market. You know we've got tests on the genomic side that others don't have we just launched our new Cat test. These are things that are new to the market place and continued to solidify our leadership position.
Alright, great. Thanks for your time I appreciate it.
Thank you.
Our next question will come from Brandon <unk> William Blair. Please go ahead.
Hi, everyone. Thanks for taking the question and congratulated I strung into the yoga nice guidance I'm looking forward to the rest of the year. First question is just some guidance on the top line can you guys talk a little bit about you guys and.
Maybe we're getting a little color on it now, but anything you can give us on the <unk> what are you expecting an animal health versus food safety.
In terms of growth, especially you know animal health is still seen some kind of macro headwinds that you were just talking about John so.
Or maybe some distributor destocking, so cannot business kind of get back to mid single digits growth next year or is that not what's baked into guidance.
Yeah.
As Dave I think we see both segments in the mid single digit range with food higher than than animals, that's kind of how it shaped the year, obviously, the guy just kind of mid single digit guide, but higher on the food safety side.
Okay, and then on on Pizza films supply. It sounds like this is great things are going in the right direction feels more durable.
Can you any sense of are you guys at this point able to kind of go on the offensive are you opening new accounts today or is that still a benefit that's kind of kind of come up in becoming quarters.
No I think we are I mean, it it it's really nice I mean, we we just solve our national sales meeting. This week, we're finishing up actually today in Detroit for you sack and the teams are Super excited you know, it's like a weight lifted off of everybody's shoulders right.
The first conversation to have our customers now is not about when they're gonna get their product. The first conversation I was what can we do to help you.
Make sure that you're protecting your consumers.
And I think that's been really positive I was in Asia last month. The same thing. So I think you're gonna see we've got some real nice tailwind going into this next fiscal year with the teams on the front foot now we got to repair some damage right. I mean, we we heard some relationships over the last couple of years with not having product Ava.
Animal and.
I don't blame those customers to say yeah, great place shop for the last couple of months, let's make sure you can keep it going and so that will take a little time to repair the trust, but the sales teams are on the front foot now, which I'm really excited about.
Okay, Great and then maybe I'll sneak one last one in here maybe for Dave I, If I'm doing my math correctly. The physical 24 guidance is implying something like a mid twenties EBITDA margin kind of at the midpoint at the guide so yeah I think you're at 26 this quarter 25 or.
Call. It mid twenties for full year next year, what are the puts and takes year they've kind of keeping you flat and then really what gets you that incremental five points to get you to the 30 per.
Per cent EBITDA margin for physical 25 got it thanks guys yeah.
Great Great question, Brandon So it you're right Ah kind of mid twenties, and what you see is gross margin expansion next year at least that's what we're planning offset by some higher opex and that takes on two flavors. One we've invested this year commercially in in the in the back office to get off some of these agreements we have a full year annualization of that plus.
We'll add some more both <unk> both in.
[noise] back office to exit the arrangements for three M. But also to further you'll get on the offensive as you noted with some of the new businesses at at the highest.
When we look forward.
And we look at I won't call third settle called three $300 million you know I think if you do the math you would say we need to continue to drive the gross margin expansion, you've heard us talk about that and.
And then with that it comes down to 2024 is the investment year on Opex.
25 is not right and so I think the math would say that that combined with.
Historically precedented mid single digit growth rate, even for 2025 between the Zona what we've talked about yeah, and if if if I can jump in on that bringing them too.
I totally agree with Dave I mean, we're investing this year and opex for growth.
If you look at what we're doing you know, there's there's really two areas that were really driving and it's investing in the sales teams around the world right and that includes in the U S. I mean, we're putting head counts because when.
When you look at the opportunity we have with our sure we can grow our market share and just because we need more representation that we need more feet on the street.
So we see that in the huge opportunities for us not only an international but also in the U S. Because we've got we've got open areas and we're seeing that with some of the the talent that we're requiring tune to approach those customers and close those gaps.
Same thing internationally like Asia, a huge opportunity.
Doubling some of the size of the teams we have in Asia.
So that's we're investing and then lastly, we're investing in athletics.
We've doubled the number of sites from last year to this year my expectations were going double it again next year I mean, we're really pushing that because we think we have a very strong competitive advantage versus everybody else in the marketplace and.
So we we are making the decision to invest in this year rather than harvest on these two areas.
Again, it is star and then one to ask a question. Our next question will come from David Westenburg Piper Sandler. Please go ahead.
Hi, Good morning, guys and congrats on real strong finished in a year.
Thanks to I don't know if they if it's possible to find like maybe get these like quantities or or maybe it's just purely as simple as per cent of revenue. That's P. G film, but the the question I had I wanted to ask as as you know we go into 2024.
What percentage of of products are gonna be under your control versus three M's control and you know as we get into 2025.
You know what percentage is it and you know maybe maybe it's as simple as that calculation of what's the percent of revenue. That's pizza you found but you know if it's something else, let us know because I didn't know you were saying things you know like <unk>.
Back off and it's all gonna be under your control you know a a as as soon as you know maybe Q3, so I I don't know if that's the right way to think about it in any way to quantify it would be really helpful.
It is David and your ex but you're right I mean, that's we will have everything.
In our shop by the end of the third quarter, except feature films. So it'd be this backup future from everything else would be run by an agent right.
And that's from a manufacturing standpoint, and at the same time will be exiting the TSA, which is all the ordered a cashback office and the distribution. So distribution will be in in our hands also at that same time period. So yeah, just take feature from out and everything else will be under and we're we're really excited about doing that and I'm like we talked about.
Last quarter, we've accelerated that for the two other lines, which is the pathogen line in the sample out of my life.
And we're we're getting those in place set behind I was moving along a little bit faster, we got men and almost next week. So.
At least starting with some of the lines. So we will have those fully integrated by the end of the third quarter.
Perfect. Thank you very much and then can you talk about is there any new product launches that are expected to hit 20 that are in the 24 guidance that we should take about and what kind of a market segment or there's going to be in.
There are.
You know I'm not I'm not gonna.
Go ahead too far, but I I think you saw what we did this year with the number of launches. We had I think we have close to time and it was across the gamut right you saw we we.
The new histamine analogy and we lost in the quantitative test for dawn and Aflow on the toxin side.
So with the new I'm really excited about the new reader really getting great uptick in the near future from reader you know, we can do 11 tests in under six seconds.
We continue to to make next gen. So that's the next thing is what is the next upgrade from the equipment.
So I think you're gonna see equipment upgrades, you're gonna see continued expansion in the core lives just.
Just like this year and this year, we had a toxin allergen pathogen and that's something we strive for you know to continue to improve those lines every year.
Gotcha, and then I just wanted to speak what maybe one more and cause labor labor tends to be kind of a topic and and all the companies I met you know we're dealing with right now and as we're looking at your customers. You know how are they prioritizing labor spanned versus you don't want my.
Willingness to try new products or you know <unk> willingness to to really integrate food safety versus controlling labor cost and and and how they're kind of prioritizing not and then I'm just kind of quiet for it [laughter] how should we think about your labor markets for for for for you I'm in you know in this in this really tight.
Labor market in terms of controlling up Sg&a's then thanks.
Yeah, so when.
When the tight labor market is that's a that's a benefit for us because what our systems do isn't.
It was it allows us to be more efficient than traditional methods and our competitors. So we're able to say.
Our customers time and manpower.
Which was why our customers were so upset with the bad quarters, a feature film because we're forcing them to have more people involved to do their testing right. So.
We are very it's it's a positive for us when the labor markets are are very very tight.
And.
Not only in addition to that we also see that.
It improves efficiency and effectiveness right because when they are in new people in your training on the new people make mistakes you Gotta get them trained you know once you set up our equipment and run it you're set up and walk away and and you have very high confidence on the results coming out of the equipment. So.
So that's a very that's a that's a positive for us it's something it's a great selling point for US is something we focus on one of their customers and they're they really.
Ah receptive to those messages.
On our front.
You know, we're like everybody else I think what we do that helps us as a as a growth company.
We don't have a lot of.
Times are we have to restructure and lay off large amounts of people. So we have a pretty good reputation in the markets where we serve.
When you come to work for an edge and that's a strong company that you know if you do a good job and you work hard there's gonna be an opportunity for you to continue to grow.
We had you know almost four.
And Julie was telling me.
47 in the quarter internal promotions.
So we can turn that we continue to promote internally, which is a great thing for recruiting so.
I think you know we're in smaller markets, but the way that we're moving our new centralized warehouse to Kentucky that's a.
Great market there, it's a great growth market, we were pulling from really strong.
The walls of employees.
So knock on wood right now or at the lowest turnover rates, we've had in close to five years.
Which has been.
Been a lot of work on a lot of different things, but I think we're really heading in the right direction.
Thanks, John and congrats again on the great finished any ear.
Oh, you bet. Thanks, I would appreciate it.
This time, we will conclude our question and answer session.
I'd like to turn the conference back over to John Aiden for any closing remarks.
Thank you Alison.
We really appreciate your support and and once again I want to thank the agent team it has been a.
Challenging 2023, and the team did a fantastic job to deliver outstanding results. We're really excited about 2024, there's a lot of change going on but we we really are excited about what we see coming out and we look forward to talking to you about first quarter results in the fall.
The conference has now concluded we thank you for attending today's presentation. He may now disconnect your lines.