Q1 2024 Neogen Corp Earnings Call

Welcome to the Neogen Corporation first quarters, once you're talking three or four earnings call.

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What's your question Your press Star then one on your touch on phone just try a question. Please press Star then two please note today's event is being recorded without China converts over to Milwaukee, Vice President of Investor Relations. Please go ahead Sir.

Thank you for joining us this morning for the discussion of the first quarter of our 'twenty 'twenty four fiscal year <unk>.

Briefly cover the non-GAAP and forward looking language before passing the call over to our CEO , John agents, who will be followed by our CFO David Emera.

Before the market opened today, we published our first 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, we make with the SEC we.

We disclaim any obligation to update these forward looking statements with that I'll turn things over to John .

Thanks Bill.

Good morning, everyone and welcome to our earnings call covering the first quarter of our 'twenty 'twenty four fiscal year.

We've made significant progress across a number of fronts on the integration of the former three I'm food safety business, while continuing to navigate soft market conditions are.

Our results for the quarter were largely as anticipated with two primary exceptions.

Later than expected weakness in Asia and in genomics, along with a couple of unanticipated cost items.

For Neogen in total we saw core revenue growth decline by 0.4% in the quarter on a pro forma basis, which includes a negative impact from China of approximately 1%.

And our legacy food safety business core revenue growth was in the mid single digit range, including positive volume growth.

In an end market, where food production volumes continue to be down on a year over year basis for many producers. Additionally.

Additionally, certain producers are taking capacity offline in order to rightsize output from higher levels last year to the current environment.

And our animal safety segment, we continued to see the impact of Destocking in the distribution channel.

Sales out of the channel to our end customers remain positive compared to the prior year, but large veterinary distributors continue to reduce their purchases based on the data we have from the larger distributors in North America channel inventories are at a three to four year low.

And the former three and food safety Division the progress made with production levels at our transition manufacturing partner in Q4 of last year was maintained.

For the former three on division in total core revenue grew by approximately 1% in the first quarter on a pro forma basis.

Backlog remains at reasonable levels following the progress in the prior quarter catching up on past due orders, which helped drive a strong fourth quarter.

We continue to work on rebuilding demand through targeted initiatives as we demonstrate reliable supply of future trial and progress has been notable.

Although pro forma growth was lower in Q1 <unk>.

Impacted by weakness in Asia.

Tough comparison against some elevated activity last year.

And a strong Q4, where we caught up on fulfilling orders we have seen good progress so far in Q2 and remain very optimistic about the opportunities ahead of us.

As we operate through a rather dynamic market environment. We are encouraged by our performance. The destocking in animal safety will ease as inventories right sized and end user sales out of the distribution channels continue to grow.

On the food safety side, we are dealing with a few challenges unique to us in Asia Pacific and macro weakness in China, specifically that is common to most companies.

However outside of Asia Pacific, Our food safety core revenue grew over 4% with positive volume. Despite the lower production volumes, we see across much of the food production landscape demonstrating the resiliency of our business.

On the integration front the relocation of a former three on pathogen and sample handling product lines and in Neogen facilities remain on track for completion in the third quarter.

Hiring and training of new employees and inventory builds are underway.

As our initial equipment transfers or site preparation expected to wrap up later this month.

These two product lines account for nearly 30% of the revenue of the former three mm business are a strong complement to the mansion product portfolio that we're looking forward to have fully embedded within our operations.

After these moves we will have nearly 50% of the former three M product launch fully integrated all about future for them.

The plan to exit two transition services agreements those covering back office functions and distribution are also on track to be completed in the third quarter.

A key step that enables the exit of these agreements is the implementation of our new ERP system, which will allow us to take over order fulfillment services currently provided for the former three M products.

Last month, we had the initial go live with our food safety business in the U S from Canada as well as corporate make.

Making the cutover to the new ERP on which we are now up and running.

Implementation is generally gone well.

And that we are fully operational on the new system processing orders and shipping products, but as is typical we are not as efficient yet on the new system as we were on the old.

As a result, we've exited the month of September with an elevated level of open orders and our legacy food safety business that we expect will mostly ship in October and November but as we continue to work our way up the efficiency curve. It is possible that some.

Some level of revenue will shift from Q2 into Q3.

What would be most important however is continuing to see end user demand in line with our expectations and working diligently to satisfy it.

The final phase of integration activities and involves the construction of our new facility in Lansing, which will house the production of feature film and other products from the legacy Neogen portfolio.

The new facility continues to progress on track with construction of the exterior I expect to be completed during Q3.

At which point the focus will shift to the completion of the interior work and the installation of the custom manufacturing equipment.

We're pleased with the progress we've made on the integration to date and are focused on the execution of the upcoming key transition activities in the second and third quarters that will bring the former three in business closer to full autonomy within the one Neogen we're building now.

Now I will turn the call over to do for some more insights into our results for the quarter.

Thank you John and welcome to everyone on the call jumping into the results. Our first quarter revenues were $229 million, an increase of 73% compared to the same quarter a year ago core revenue, which excludes the impact of foreign currency acquisitions and discontinued product lines declined just.

Over 1% for the quarter acquisitions and discontinued product lines added a net 73% while foreign currency was a 1% tailwind compared to the prior year.

On a pro forma basis for the <unk> transaction core revenues declined modestly down 40 basis points compared to the prior year quarter or approximately $4 million to $5 million below our expectations driven primarily by lower sales in Asia.

In Asia Pacific customers were more impacted by the feature film supply constraints, we experienced last fiscal year, leading to what we believe will be slightly longer path to demand recovery.

Our China exposure is small representing less than 3% of total company revenue a worsening macro conditions, there contributed to significantly lower sales in the quarter.

Moving now to the segment level revenues in our food safety segment were $166 million in the quarter, an increase of 157% compared to the prior year, including core growth of four 5%.

The core growth was led by the bacterial and general sanitation product category, which benefited from new microbiological testing business in the U S and U K.

Natural toxins and Allergan has also had solid core growth with a notable increase in sales of milk and gluten allergen test kits.

Within the indicator testing culture media and other category modest core growth in culture media was offset by a decline in food quality and nutritional analysis sales due in part to international distributor ordering patterns.

Quarterly revenues in the animal safety segment were 63 million eight core.

Klein of just under 7% compared to the prior year quarter, albeit generally in line with our expectations animal safety revenue was a bit lighter than anticipated driven primarily by continued destocking large veterinary distributors.

This destocking was the primary reason for the core revenue decline and vet instruments and disposables, while supply constraints played a role in the lower sales of small animal supplements and vitamin Injectables in the animal care and other category.

These declines were partially offset by solid growth in our bio security products with higher volumes and insect control products and cleaners and disinfectants.

Worldwide genomics revenue was down modestly on a core basis with growth in international beef markets offset by declines in poultry and pork.

Driven primarily by the attrition of a couple of large customers in the U S.

In the former three M food safety Division core revenue grew modestly on a pro forma basis as John mentioned, which includes a compare headwind of a few points and also follows a very strong Q4 the.

The bacterial and general sanitation product category saw the highest growth this quarter with particularly strong sales of clean trace hygiene monitoring products. This growth was partially offset by modest core revenue decline in Petri film with the largest driver being the aforementioned weakness in Asia and China in particular.

Importantly, we were pleased to see that the improvements made in transition manufacturing during Q4 were sustained into Q1, providing stability of supply and allowing us to focus on demand generating activities.

From a geographical perspective results were mixed growth was led by EMEA, which grew in the high single digits in Latam in the mid single digits, you Sac was down low single digits due mainly to the destocking at large animal safety distributors as well as the lower sales in genomics, while the food safety business grew in the.

Low single digits.

Finally, APAC declined mid single digits as a result of slower than anticipated recovery in three M demand fallen the Petri film supply constraints and also across the board softness in China.

Recall that China represents less than 3% of our global revenues, but we experienced a decline in the high twenty's. So the impact was measurable, particularly at the regional level.

Gross margin in the first quarter was 51% representing an increase of 400 basis points from 47% in the same quarter a year ago.

With the increase primarily driven by the addition of higher margin business from the three M food safety transaction as well as positive price cost.

On a pro forma basis gross margin expansion was 180 basis points.

Adjusted EBITDA was $52 million representing growth of 94% from the prior year quarter, driven by the merger with the former three M food Safety Division.

Adjusted EBITDA margin was 22, 9% a year over year increase of 250 basis points, including approximately 100 basis points of negative impact from a nonrecurring billing adjustment from our transition manufacturing partner and transaction FX on a pro forma basis adjusted EBITDA margin expansion was <unk>.

10 basis points lower than we had anticipated due to the nonrecurring items, I mentioned and volume being a bit lighter than expected.

Adjusted net income was $24 million for the quarter with adjusted earnings per share of <unk> 11.

Operator: Welcome to the Eogen Corporation, first quarter of 2024 earnings call. Our participants will be in listen only mode. Should you need assistance, please send to our conference specialist for pressing the star key followed by zero.

Compared to $18 million and 16, 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 negatively impacted by the increase in weighted average shares outstanding from the food safety transaction.

Operator: After today's presentation, there will be an opportunity to ask questions. To ask a question, you will press stars and one on your touch on the phone. To throw your question, please press stars and two. Please note, today's event is being recorded.

We ended the fourth quarter with gross debt of $900 million, 67% of which remains at a fixed rate and.

Bill Waelke: I would now turn the conference over to Bill Waelke, Vice President of Vestor Relations. Please go ahead, sir. Thank you for joining us this morning for the discussion of the first quarter of our 2024 fiscal year. I'll briefly cover the non-GAP and forward-looking language before passing the call over to our CEO, John Adent, who will be followed by our CFO, Dave Naemura. Before the market opened today, we published our first quarter results, as well as the presentation with both documents available in the investor relations section of our website.

In a total cash position roughly unchanged from Q4 at $239 million.

Resulting in pro forma net leverage of two nine times and total liquidity of over $375 million.

Although the first quarter is typically our lowest quarter seasonally this year's was a bit lower than we had anticipated, but generally aligned with how we anticipated the year developing from what we've seen through the first month of Q2. The demand environment continues to appear consistent with what we had expected as John noted though.

Bill Waelke: On our call this morning, we will refer to certain non-GAP financial measures that we believe are useful in evaluating our performance. Reconciliation of historical non-GAP 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 Security's 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 10K and in other filings we make with the SEC. We disclaim any obligation to update these forward-looking statements.

We are fully immersed in our ERP implementation, which will enable us to extract ourselves from the transition service arrangements.

We have with three M.

The inefficiencies he mentioned will make shipments more challenging in Q2 and.

And we will likely have carryover of some food safety open orders into the initial weeks of Q3 as a result.

Based on this dynamic we could see a broader range of outcomes for the second quarter, depending on how the backlog of open orders develops.

Our current base case view is that we should see a modest sequential increase in revenue, which assumes we exited the quarter with an elevated level of open orders as well as a modest sequential increase in adjusted EBITDA margin if.

If we do see some amount of revenue shift from Q2 to Q3, this would correspondingly affect the normal seasonality of our business.

In which the second half of the year typically accounts for 52% of the year's revenue.

John Adent: With that, I'll turn things over to John. Thanks, Bill.

John Adent: Good morning, everyone. And welcome to our earnings call covering the first quarter of our 2024 fiscal year. We've made significant progress across a number of fronts on the integration of the Form 3M Food Safety Business while continuing to navigate soft market conditions. Our results for the quarter were largely as anticipated, with two primary exceptions, greater than expected weakness in Asia and in genomics, along with a couple of unanticipated cost items. For an ageing in total, we saw core revenue growth decline by 0.4% in the quarter on a pro-formal basis, which includes a negative impact from China of approximately 1%.

Based on our first quarter results and the normal seasonality of the business as well as the expectation of an improved end market environment in the second half we are maintaining our full year outlook I'll now hand, the call back to John for some closing thoughts.

Thanks, Dave.

As you've heard today, we believe we're making solid progress on the integration of the former <unk> business and are on track to be completely independent from three of them in the third quarter outside of pizza from manufacturing, where we feel that arrangement is in a stable place.

Our new ERP system is up and running after the phase one launch which is a significant step to have behind us and.

And we will work diligently through the backlog of open orders as we continue to become more efficient in our new ERP system.

John Adent: In our legacy food safety business, core revenue growth was in the mid-single digit range, including positive volume growth. In an end market where food production volumes continue to be down on a year-over-year basis for many producers. Additionally, certain producers have taken capacity offline in order to right-size output from higher levels last year to the current environment. In our animal safety segment, we continued to see the impact of destocking in the distribution channel.

We still have significant work ahead of us with.

With key activities, taking place in the second and third quarters as we implement the final steps needed to relocate production and exit the transition services agreements and.

In addition to the important step of gaining full operational control of this part of the business. There. There. So there are the associated savings, we expect to see from exiting the agreements and we fully anticipate ultimately achieving greater efficiency and utilization in our footprint.

John Adent: Sales out of the channel to our end customers remained positive compared to the prior year, but large veterinary distributors continued to reduce their purchases. Based on the data we have from the larger distributors in North America, channel inventories are at three to four-year low, in the former three-in-food safety division, the progress made with production levels at our transition manufacturing, partnering Q4 of last year was maintained. For the former three-in-the-visioned total, core revenue grew by approximately 1% in the first quarter on a pro-forma basis.

Having now crossed the one year anniversary of the three of them transaction.

We're excited about the opportunities we have to leverage our leading position in the food safety markets.

Our sales and R&D teams are now approaching one year of working together on the combined product portfolio.

Building momentum that will result in new commercial opportunities, particularly as the market conditions improve.

Our team members around the World I've worked tirelessly on advancing the integration process and I want to wrap up here today by thanking them for their hard work.

John Adent: Backlog remains at reasonable levels following the progress in the prior quarter catching up on past two orders, which helped drive a strong fourth quarter. We continue to work on rebuilding demand through targeted initiatives as we demonstrate reliable supply of feature film and progress has been notable. Although pro-forma growth was lower in Q1, impacted by weakness in Asia, a tough comparison against some elevated activity last year, and a strong Q4, where we caught up on fulfilling orders, we have seen good progress so far in Q2 and remain very optimistic about the opportunities ahead of us.

We have a shared goal so we're ever mindful of so we remain the global leader in food safety and help protect the world's food supply.

Now I'll turn things over to the operator to begin the Q&A.

Yes. Thank you at this time, we will begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.

If youre using a speakerphone please pick up your handset before pressing the case just trying a question. Please press Star then two.

Time, we'll pause momentarily to assemble the roster.

Yeah.

And the first question comes from Brandon Vazquez with William Blair.

John Adent: As we operate through a rather dynamic market environment, we encourage our performance. The destocking and animal safety will ease as inventory is right size and any user sales out of the distribution channels continue to grow. On the food safety side, we are dealing with a few challenges unique to us in Asia Pacific and macro weakness in China, specifically that is common in most companies. However, outside of Asia Pacific, our food safety core revenue grew over 4% with positive volume, despite the lower production volumes we see across much of the food production landscape, demonstrating the resiliency of our business.

Good morning, everyone. Thanks for taking the question I guess first just to start on guidance that kind of a high level.

I think some of the weakness in the quarter was coming from worsening macro, especially like in China, given updates seem to be kind of negative out of there.

I'm just curious what gives you guys kind of confidence around reiterating the guidance range, obviously that was encouraging to see maybe an indication of the underlying momentum you guys are seeing but again and kind of a worsening backdrop in macro that seems to be out of your control a little bit. What are you guys seeing that's giving you guidance or comfort in that guidance range.

John Adent: On the integration front, the relocation of the former three on pathogen and sample handling product lines in the Asian facilities remain on track for completion in the third quarter. Hiring and training of new employees and inventory builds are underway as our initial equipment transfers with site preparation expected to wrap up later this month. These two product lines account for nearly 30% of the revenue of the former 3M business under a strong complement to the engine product portfolio that we're looking forward to have fully embedded within our operations.

Yeah, Thanks, Brian and thanks for being here I think I'm, specifically to China.

What we're saying is that.

It's a relatively small piece of the business, it's only 3% of revenues so while.

China was a challenge as.

As we look forward.

It was a particularly tough quarter that.

Had a tough comp, but I don't think is going to repeat so we don't see that big of a drag for the overall markets.

It's pretty similar to what we've been saying in a food production volumes are slow the distributed channels Destocking Thats kind of what we thought was going to happen for the year.

John Adent: After these moves, we will have nearly 50% of the former 3M product lines fully integrated, all but putry film. The planned exits of the two transition services agreements. Those covering back office functions and distribution are also on track to be completed in the third quarter. A key step that enables the exit of these agreements is the implementation of our new ERP system, which will allow us to take over order fulfillment services currently provided for the former 3M products.

And so while this quarter was about a $4 million Miss what we expected it to be we we feel pretty comfortable about where we are on end user demand.

I think like we talked about kind of the wildcard is.

Making sure that we're getting it into the product out the door with the S&P conversion I'm really proud of the team.

To do under the SAP conversion.

You hear all the horror stories, but you don't hear the good stories. This is one of the good stories right.

John Adent: Last month, we had the initial go live with our food safety business in the US and Canada as well as corporate, making the cut over to the new ERP on which we are now up and running. Implementation has generally gone well in that we are fully operational on the new system, processing orders and shipping products, but as is typical, we are not as efficient yet on the new system as we were on the old.

30 days, then were immediately able to do order to cash bill customers pick pack and ship manufacturer, but we're just not as efficient and it's going to take us a little while to get that efficiency up so were caught a little bit behind we think we can catch up in October and November , but as Dave talked about there may be a little bit of carryover going into the third quarter.

So I'll, let Dave talk a little bit more about guidance.

John Adent: As a result, we've exited the month of September with an elevated level of open orders in our legacy food safety business that we expect will mostly ship in October and November. But as we continue to work our way up the efficiency curve, it is possible that some level of revenue will shift from Q2 and the Q3. What will be most important, however, is continuing to see end user demand in line with our expectations and working diligently to satisfy it.

Yeah, No I think that hey, Brian and I think I think John summarized it pretty well.

I guess I'd just highlight we've talked about the first half being.

Being softer and that's what we're seeing but outside of Asia Pacific where I think we have some some challenges that we noted in the prepared remarks, we saw particularly the food safety business grow pretty good outside on a global basis outside of.

As your pack. So there is some strength there, but I think the environment is not too different than we'd anticipated.

John Adent: The final phase of integration activities involves the construction of our new facility in Lansing, which will house the production of feature film and other products from the legacy Neogen portfolio. The new facility continues to progress on track with construction of the exterior expect to be completed during Q3, at which point the focus will shift to the completion of the interior work and the installation of the customer manufacturing equipment. We're pleased with the progress we've made on the integration debate, and are focused on the execution of the upcoming key transition activities in the second and third quarters that will bring the former three in business closer to full economy within the one-engine we're building.

Okay.

Dave maybe as a follow up to that you just hit on you guys mentioned on the prepared remarks, a little bit but there are some I think the phrase John had us with unique challenges to neogen in APAC can you guys. Maybe talk about some of those challenges that are unique to you guys, what youre doing to try to make.

Maybe fix some of those efforts.

Yeah, well, what we mean by that was one three.

Three of them was struggling with their production of feature film.

APAC was asymmetrically hurt regarding supply.

And so you had almost.

24 months of.

John Adent: Now we'll turn the call over today for some more insights into our results for the quarter.

Supply disruption.

Which.

Really challenged customers because they just they had to do other solutions and they had to find ways to continue to run their business without the future front product.

David Naemura: Thank you, John, and welcome to everyone on the call. Jumping into the results, our first quarter revenues were 229 million, an increase of 73% compared to the same quarter a year ago. Core revenue, which excludes the impact of foreign currency, acquisitions, and discontinued product lines decline just over 1% for the quarter. Acquisitions and discontinued product lines added a net 73% while foreign currency was a 1% tailwind compared to the prior year.

And so the unique challenge to US is we have to earn back their trust Brandon We've got a strong we have supply.

One quarter, there like grades but show me another quarter. So now we're two quarters in where supply is where it needs to be but.

It's going back to those customers and winning back their trust that you know now under our regime, we fix the supply issues that weren't able will be fixed for two years.

David Naemura: On a pro-forma basis for the 3M transaction, core revenues declined modestly down 40 base points compared to the prior year quarter or approximately 4 to 5 million dollars below our expectations driven primarily by lower sales in Asia. In Asia-Pacific, customers were more impacted by the Petru Film Supply constraints we experienced last fiscal year leading to what we believe will be slightly longer path to demand recovery. Our China exposure is small, representing less than 3% of total company revenue, but worsening macro conditions there contributed to significantly lower sales in the quarter.

And earn their trust back and get that business back.

Okay, maybe I'll throw one last follow up to that and then I'll, let someone else get in queue here, but.

You look at APAC, and you're talking about winning trust back do you guys have a sense of where those customers are going I think often when we talk to experts they fall in kind of like backup plans are they moving to competitors do you think this is kind of temporary any thoughts around that thanks.

Yes.

It's a little bit of both.

Not so much traditional methods there we did see some move to competitors.

But we're seeing those customers come back that's why I said in prepared I was encouraged because we're starting to see that move.

David Naemura: Moving now to the segment level, revenues in our food safety segment were 166 million in the quarter, an increase of 157% compared to the prior year, including core growth of 4.5%. The core growth was led by the bacterial and general sanitation product category, which benefited from new micro-biological testing business in the US and UK. Natural toxins and allergens also had solid core growth with a notable increase in sales of milk and gluten allergen test kits.

That move back but it's.

And it takes you two years to lose them and it's going to take us a little while to get them back, but I think we're really confident that our solution and our.

The things that we provide around our product portfolio of solutions and people are just head and shoulders above our competitors. So we're going to get that business back.

Okay. Thank you and the next question comes from Tim Daly with Wells Fargo.

David Naemura: Within the indicator testing, culture media and other category, modest core growth and culture media was offset by a decline in food quality and nutritional analysis sales due in part to international distributor ordering patterns. Quarterly revenues in the animal safety segment were 63 million, a core decline of just under 7% compared to the prior year quarter, albeit generally in line with our expectations, animal safety revenue was a bit lighter than anticipated, driven primarily by continued destocking large veterinary distributors.

Great. Thanks.

So John just you know could you give us a bit more detail on the genomics.

The term is attrition of two U S customers. Please.

Yeah.

I kind of like a below.

Hello expectations revenue in the quarter. So yeah. Thanks, Tim so.

We had two large.

Customers that.

Our in very challenging markets right now on poultry and swine.

And we're putting an extreme pressure on.

David Naemura: This destocking was the primary reason for the core revenue decline in vet instruments and disposables, while supply constraints played a role in the lower sales of small animal supplements and vitamin injectables in the animal care and other categories.

Pricing and other solutions for us and for years.

These have been good volume customers, but relatively low margin customers and you've seen that we've been moving to transition the genomics business too.

Different species that are higher value higher margin.

David Naemura: Gary. These declines were partially offset by solid growth in our biosecurity products with higher volumes in insect control products and cleaners and disinfectants. Worldwide genomics revenue was down modestly on a core basis with growth in international beef markets offset by declines in poultry and porcelain, driven primarily by the attrition of a couple of large customers in the U.S. In the former 3M Food Safety Division, core revenue grew modestly on a pro forma basis, as John mentioned, which includes a compare headwind of a few points and also follows a very strong Q4.

And when the pressure came in they wanted a significant price decrease we declined so we made the decision that <unk>.

Even though it was going to hurt us on volume, but it wasn't as significant from a profitability standpoint. So that's.

That's really what drove that decision.

Alright, now I appreciate that detail.

And just you know.

Just thinking about those two customers is there is there something that we could take out of the rent model here in terms of 23 revenues any any color around percent of revenue maybe those two customers accounted for or would've accounted for going forward.

David Naemura: The bacterial and general sanitation product categories saw the highest growth of this quarter with particularly strong sales of clean trace hygiene monitoring products. This growth was partially offset by a modest core revenue decline in poultry film with the largest driver being the aforementioned weakness in Asia and China in particular. Importantly, we were pleased to see that the improvements made in transition manufacturing during Q4 were sustained into Q1, providing stability of supply and allowing us to focus on demand generating activities.

Look Tim Hey, it's Dave.

I think it's in the guide I would say the new news for us a little bit in the quarter wasn't this wasn't these folks.

I would say things came in generally a little bit lighter I think some because of some of the end market pressures, but I think this more describes the kind of the absolute growth rate and I would say it's contemplated in the guide.

Alright got it perfect and then I'm thinking about the Destocking, just I know new commentary around I think the channel is that low pretty low levels here just when when should we think that rebound or how long should these low levels sustain as inventory before going back to normal or are we at new normal at low levels.

David Naemura: From a geographical perspective, results were mixed. Growth was led by Amia, which grew in the high single digits and Latam in the mid-single digits. Yusac was down low single digits due mainly to the destocking at large animal safety distributors, as well as the lower sales in genomics, while the food safety business grew in the low single digits. Finally, APAC declined mid-single digits as a result of a slower and anticipated recovery and 3M demand followed the petri film supply constraints and also across the board softness in China.

Any thought there and timing.

Yeah, Tim I don't think we're at new normal I think this is abnormally low.

And based on what we're seeing.

End user demand so we see what goes in and what goes out on end user demand.

You know like I.

Told you have always been bad at call. It a bottoms, but to me. This is not a sustainable model. So I feel pretty comfortable like we talked about second half of the year.

David Naemura: Recall that China represents less than 3% of our global revenues, but we experienced a decline in the high 20s, so the impact was measurable, particularly at the region level. Growth margin in the first quarter was 51%, representing an increase of 400 basis points from 47% in the same quarter year ago, with the increase primarily driven by the addition of higher margin business from the 3M Food Safety Transaction, as well as positive price cost.

You know we.

We think that you can't drive inventories down that low and still provide the type of service levels.

I know the distributors want to provide to their customers. So I think this is a.

It's something that you know we.

We think probably in the back half of the year is going to.

Going to improve.

Alright got it and then final one for me and I'll pass along.

So could you just walk us through that.

David Naemura: On a pro forma basis, growth margin expansion was 180 basis points. Adjusted EBITDA was 52 million, representing growth of 94% from the prior year quarter driven by the merger with the former 3M Food Safety Division. Adjusted EBITDA margin was 22.9%, a year over your increase of 250 basis points, including approximately 100 basis points of negative impact from a non-recurring billion adjustment from our transition manufacturing partner and transaction effects. On a pro forma basis, adjusted EBITDA margin expansion was 10 basis points, lower than we had anticipated due to the non-recurring items I mentioned and volume being a bit lighter than expected.

The transition.

Transition agreement here in terms of the you know.

Pathogen and sample handling.

<unk> line as a percent of like you know you called out 30% of revenues how much of that I guess.

Transition manufacturing agreement cost are those product lines and you know how should we think of as like the day one margin impact.

Dual costs roll off if you will.

Yeah, Jim look, we're we're obviously standing up a reasonable amount of costs from.

Kind of move in kind of onetime in nature, but we're standing up recurring costs.

To accept those product lines in and when those happened to your point.

We won't be paying the manufacturing transition fee I think net net that's accretive to us.

David Naemura: Adjusted net income was 24 million for the quarter with adjusted earnings per share of 11 cents compared to 18 million and 16 cents 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 negatively 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 remains at a fixed rate, and a total cash position, roughly unchanged from P4 at 239 million.

Tough to quantify to sharply and some of the costs were overlapping.

But we you would seen us put forward as scheduled in the spring about where we expected to be from an integration standpoint at the end of our third quarter. Hopefully you took away from the call that we feel at least your after the first we continue to track to that I think the other thing I'd add is that on the Opex line. You know we have some duplicate costs as well that we'll see come out.

For the fourth when we.

When we're able to.

Get to that point of integration, we previously noted so.

David Naemura: Resulting and performing that leverage of 2.9 times and total liquidity of over 375 million. Although the first quarter is typically our lowest quarter seasonally, this year was a bit lower than we had anticipated, but generally aligned with how we anticipated the year developing. From what we have seen through the first month of Q2, the demand environment continues to appear consistent with what we had expected. As John noted, though, we are fully immersed in our ERP implementation, which will enable us to extract ourselves from the transition service arrangements we have with 3M.

Just under 23% adjusted EBITDA margin for the first I talked about 100 basis points of some kind of unanticipated headwinds, but there's probably another 100 basis points of duplicate cost in there. So we got to manage it well, but I think the fourth quarter and really the exit rate for the year is how I would think.

About it this is where we should see is down to just manufacturing transition fees related manufactured in Petri film.

And then of course that becomes an issue in the coming years. So maybe not as precise an answers you were looking for but hopefully that contextualize.

No that was great I appreciate the time thanks, everybody.

David Naemura: The inefficiencies he mentioned will make shipments more challenging in Q2, and we will likely have carry over some food safety open orders into the initial weeks of Q3 as a result. Based on this dynamic, we could see a broader range of outcomes for the second quarter depending on how the backlog of open orders develops. Our current base case view is that we should see a modest sequential increase in revenue, which assumes we exit the quarter with an elevated level of open orders, as well as a modest sequential increase in adjusted EBITDA margin.

Thanks, Tim Thanks, Tim.

Thank you and then ask David Watson Berg with Piper Sandler.

Hi, This is John on for Dave Thanks for taking the questions. So can you give any.

Additional details on the ERP implementation.

There was some revenue that was shifting from.

Between the different quarters from the second quarter.

Can you just walk us through what the implementation issues were what the degree of the the shift was and what the areas where that metric towards mostly around.

David Naemura: If we do see some amount of revenue ship from Q2 to Q3, this would correspondingly affect the normal seasonality of our business, in which the second half of the year typically counts for 52% of the year's revenue.

Yeah. Thanks, John .

We've talked about.

Paired remarks, when you when you go to a new ERP system.

You will not be as efficient.

Day, one as you are on the old system, because you'd spent 20 years on the health system and he knew it backwards and forwards so.

John Adent: Based on our first quarter results and the normal seasonality of the business, as well as the expectation of an improved and market environment in the second half, we are maintaining our full year outlook.

Like I said the good news was the business was up and running we were able to do all the functions nothing stops. It's just we're not as fast.

John Adent: I'll now hand the call back to John for some closing thoughts. Thanks, Dave. As you heard today, we believe we're making solid progress on the integration of the former 3M business, and our on track to be completely independent from 3M in the third quarter, outside of peachy from manufacturing, where we feel that arrangement is in a stable place.

And really around.

Warehousing.

We are and everything else that we were before so we're finding a way to to continue to train. The teams. We're seeing sequentially daily that that is improving day by day, but we had a period of time, where that wasn't at our average and so we have to.

John Adent: Our new ERP system is up and running after the phase 1 launch, which is a significant step to have behind us. And we will work diligently through the backlog of open orders as we continue to become more efficient in our new ERP system. We still have significant work ahead of us, though, with key activities taking place in the second, third quarters, as we implement the final steps needed to relocate production and exit the transition services agreements.

Over performed to get to the average and I know Dave has got a couple of comments on that.

To make sure we're clear so this didn't affect the end of the first quarter. So we went live for.

For the first day of the second quarter. So what we're looking at is.

The FERC the first month of our second quarter here and how shipments are out the door and we carried over.

Open orders from September into October .

And that was you know.

Low double digit millions.

John Adent: In addition to the important step of gaining full operational control of this part of the business, there are the associated savings we expect to see from exiting the agreements, and we fully anticipate ultimately achieving greater efficiency and utilization in our footprint.

Whereas it usually be much much lower than that as.

As we ship at a slow rate and we got to make that up right. So.

As do we carryover some of that.

Out of the out of the second so our goal here was to share.

John Adent: Having now crossed the 1 year anniversary of the 3M transaction, we are excited about the opportunities we have to leverage our leading position in the food safety markets. Our sales and R&D teams are now approaching 1 year of working together on the combined product portfolio, building momentum that will result in new commercial opportunities, particularly as the market conditions improve.

I think first and foremost that the implementation went well I think that's the headline.

As anticipated.

Maybe we were shipping a little bit slower than we otherwise may have in that.

We got our we're kind of calling it out as potentially a shipment timing risk for the second some of that might push to the third.

But.

John Adent: Our team members around the world have worked tirelessly on advancing the integration process, and I want to wrap up here today by thanking them for their hard work. We have a shared goal that we are ever mindful of to remain the global leader in food safety and help protect the world's food supply.

Well, we're really got our ion as the demand backdrop and I would say through the first month, hopefully you heard from us that feel supportive.

Got it thank you.

Also we heard that Walmart had suggested the consumers are reducing their buying because of the <unk> are you actually hearing food producer, saying anything similar.

Operator: Allow certain things over to the operator to begin the Q&A. Yes, thank you.

Operator: At this time, we will begin the question and answer session. To ask a question, you may press a star then one on your touch to phone. If you're using a speaker phone, please hook up your hands up before pressing the keys.

We're hearing the same things that you're hearing most of them are watching.

They're they're understanding that.

It may have an impact and we're looking at the same thing John I think.

Operator: To throw your question, please press star then two. At this time, we will pause voluntarily to assemble the roster.

If you look at it in a relative scale and size of our business G. L. P. One will be a headwind.

Brandon Vazquez: And the first question comes from Brandon Vazquez with William Blair. Morning everyone. Thanks for taking the question. I guess first, just to start on guidance at kind of a high level, you know, I think some of the weakness in the quarter was coming from worsening macro, especially like in China, given updates seem to be kind of negative out of there. I'm just curious what gives you guys kind of confidence around reiterating the guidance range.

But it is gonna be a relatively small headwind compared to the big tailwind we have around this business around increased regulatory environment increase.

Increased customer usage.

Spanning into new geographies developed new products, so while it.

It may be a headwind going forward, it's going to be.

I think a de minimis headwind.

Got it thank you and just one last one sorry, if I missed it but.

Brandon Vazquez: Obviously, that was encouraging to see maybe an indication of the underlying momentum you guys are seeing. But again, in kind of a worsening backdrop in macro, that seems to be out of your control a little bit. What are you guys seeing that's giving you guidance or comfort in that guidance range? Yeah, thanks, Brandon. Thanks for being here. I think specifically to China, what we're seeing is that it's a relatively small piece of the business.

Have you do you think that any customers start.

Dmitry film earlier in the year.

During supply constrained governments.

Sorry, I didn't get the question can you say it again, it's been up a little bit again John .

Yeah, sorry, if I missed it.

But.

Is it your understanding that any customers talked Petri film earlier in the year.

Brandon Vazquez: It's only three percent of revenue. So while China was a challenge, as we look forward, you know, it was a particularly tough quarter that had a tough comp that I don't think is going to repeat. So we don't see that big of a drag for the overall markets. It's pretty similar to what we've been seeing. You know, food production volumes are slow. The distributed channels be stocking. That's kind of what we thought was going to happen for the year.

More supply constrained environment.

No I don't think I don't think we've seen that.

No no.

<unk>.

Got it thank you.

Thank you.

Thank you and this concludes our question session I would like to turn the Florida management for any closing comments.

Thank you yeah.

Brandon Vazquez: And so while this quarter was about a $4 million miss on what, you know, we expected it to be, we feel pretty comfortable about where we are in user demand. I think like we talked about kind of the wild card is, you know, making sure that we're getting the product out the door with the SAP conversion. I'm really proud of the team on what we're able to do. And the SAP conversion, you know, you hear all the horror stories, but you don't hear the good stories.

We stated earlier.

Well the quarter was.

A little softer than anticipated I think what we wanted to talk about was the success really of.

The integration and moving off our too.

Transition services agreements and standing up ERP and for those of you that I've been involved in a lot of different companies those were significant risk factors that could derail organizations.

Brandon Vazquez: This is one of the good stories, right? We're 40 days in. We're immediately able to do order to cash, build customers, pickpack and ship, manufacture. But we're just not as efficient and it's going to take us a little while to get that efficiency up. So we're caught a little bit behind. We think we can catch up in October, November, but as they've talked about, there may be a little bit of carry over going in the third quarter.

I'm really proud of the team and the work they've done and the ability to plan and execute kind of seamlessly to continue to move to the new neogen into one neogen environment. So we're really excited about the future. We look forward to talking to you at the end of second quarter. Thank you.

Thank you. The conference has now concluded. Thank you for attending today's presentation and we now have a central lines.

Brandon Vazquez: So I'll let Dave talk a little bit more about games via Save It Bad. Yeah. I think that, hey, Brandon, I think I think John summarized pretty well. I guess I just highlight. We talked about the first half being being softer and that's what we're seeing. But, you know, outside of Asia Pacific where I think we have some, some challenges that we noted in the prepared remarks, you know, we saw particularly the food safety business grow pretty good outside on a global basis outside of Asia Pac.

Brandon Vazquez: So, you know, there's some strength there, but I think the environment's not too different than we anticipated. Okay. And Dave, maybe as a follow up to that, you, you know, you just hit on, you guys mentioned on the prepared remarks a little bit that there are some, I think the phrase John had used with the unique challenges to Neogen and APEC. Can you guys maybe talk about some of those challenges that are unique to you guys, what you're doing, yeah, try to maybe fix some of those efforts.

Brandon Vazquez: Yeah, well, what we mean by that was when 3M was struggling with their production of Petri film, APAC was asymmetrically hurt regarding supply. And so you had almost, you know, 24 months of supply disruption, which really challenged customers because they just, they had to do other solutions and they had to find ways to continue to run their business without the Petri film product. And so the unique challenge to us is we have to earn back the trust, Brandon.

Brandon Vazquez: We've got a strong, we have supply with, you know, one quarter, they're like great, but show me another quarter. So now we're two quarters in where, you know, supply is where it needs to be, but it's going back to those customers and winning back their trust that, you know, now under our regime, we fixed the supply issues that weren't able to be fixed for two years and earn their trust back and get that business back.

Brandon Vazquez: Okay, and maybe I'll throw one last follow up to that and then I'll let someone else get into here. But, you know, as you look at APAC and you're talking about winning trust back, you guys have a sense of where those customers are going. I think often when we talk to experts, they fall on kind of like backup plans or they are moving to competitors, you think this is kind of temporary, any thoughts around that?

Brandon Vazquez: Thanks. Yeah, it's, it's a little bit of both. It's not so much traditional methods there. We did see some move to competitors, but we're saying those customers come back. That's why I said I'm prepared I was encouraged because we're starting to see that move back. But it's, you know, it takes you two years to lose them and it's going to take us a little while to gain them back, but I think, you know, we're really confident that our solution and our, the things that we provide around our product portfolio solutions and people are just heading shoulders above our competitors. So, we're going to get that business back. Thank you.

Tim Daly: And the next question comes to Tim Daly as well as Fargo. Great. Thanks.

John Adent: So, John, just, you know, could you give us a bit more details on the genomics, I think the term as a trition of two U.S, customers, please? Yep. And, you know, yeah, that impact that kind of, like a low expectations revenue in the quarter. So yeah, thanks, Tim. So that we had two large customers that are in very challenging markets right now in poultry and swine and we're putting extreme pressure on pricing and other solutions for us.

John Adent: And for years, these have been good volume customers, but relatively low margin customers. You've seen that we've been moving to transition to genomics business to different species that are higher value, higher margin. And when the pressure came and they wanted a significant price decrease, we declined. So, you know, we made the decision that even though it was going to hurt us on volume, it wasn't as significant from a profitability standpoint. So, that's really what drove that decision. All right, no, appreciate that detail.

David Naemura: And just thinking about those two customers, is there something that we could take out of the rent model here in terms of 23 revenues, any color around percent of revenues, maybe those two customers accounted for or what have accounted for going forward? Well, Kim, hey, it's Dave. I think it's in the guide. I would say the new news for us a little bit in the corner wasn't these folks. I would say, you know, things came in generally a little bit lighter. I think some because of some of the end market pressures. But I think this more describes the kind of the absolute growth rate. I would say it's contemplated in the guide. All right, got it. Perfect.

Tim Daly: And then I'm thinking about the destocking just I know new commentary around. I think the channel is that low, you know, pretty low levels here. Just when should we think this rebound or how long should these low levels sustain as inventory before going back normal or are we at new normal at low levels, just addition to box here and timing. Yeah, Tim, I don't think we're at new normal. I think this is abnormally low.

Tim Daly: And based on what we're seeing on end user demands. So we see what goes in and what goes out on end user demand. You know, like I told you, I've always been bad at calling the bottoms, but to me, this is not a sustainable model. And also, I feel pretty comfortable like we talked about second half of the year, where, you know, we think that you can't drive inventories down that low and still provide the type of service levels that.

Tim Daly: I know the distributors want to provide to their customers. So I think this is a. It's something that, you know, we contemplated and we think probably in the back half of the year is going to improve. Alright, got it.

David Naemura: Then Dave found one for me and I'll pass along. So could you walk us through the, you know, transition agreement here in terms of the, you know, pathogen and sample handling lines as a percent of like, you know, you call it out of 30% of revenues. How much of the, I guess, transition manufacturing agreement cost are those product lines and, you know, how should we think of like the day one margin impact as those will cost roll off the two.

David Naemura: Yeah, Tim, look, we're, we're obviously standing up a reasonable amount. There's there's costs from, you know, kind of move and kind of one time in nature. But we're standing up for current cost to accept those product lines in and when those happen to your point, we won't be paying the manufacturing transition fee. I think net net, that's a creative to us tough to quantify too sharply and some of the costs are overlapping.

David Naemura: But, you know, we, you would see us put forward a schedule in the spring about where we expected to be from an integration standpoint at the end of our third quarter. Hopefully it took away from the call that we feel at least you're after the first. We continue to track to that. I think the other thing I'd add is that on the off X line, you know, we have some duplicate costs as well that we'll see come out for the fourth when we You know, when we're able to get to that point of integration, we previously noted.

David Naemura: So, you know, it just under 23% adjusted EBITDA margin for the first. You know, I talked about 100 basis points of some kind of unanticipated headwinds, but you know, there's probably another 100 basis points of duplicate cost in there. So, you know, we got to manage it well, but I think, you know, the fourth quarter and really the exit rate for the years, how I think about it is where we should see us down to.

David Naemura: Just manufacturing transition fees related, manufacturing, and Petri film. And then of course, you know, that becomes an issue in the coming years. So, maybe not as precise an answer as you're looking for, but hopefully that contextualizes it. No, I was great. Appreciate time. Thanks really. Thanks Tim.

Operator: Thank you.

David Westenberg: And then ask us a question, David Westenberg with Piper Sandler. Hi, I'm John on today. Thanks for taking the questions. So, can you give any additional details on the ERP implementation, though there was some revenue that was shifting from between the different quarters from the second quarter. So, can you just walk us through what the implementation issues were, what the degree of the shift was, and what the areas were that that shift was mostly around.

David Westenberg: Yeah. Thanks, John. Like we talked about in the prepared remarks, when you go to a new ERP system, you will not be as efficient. They won as you were on the old system because you spent 20 years on the old system and you knew it backwards and forwards. So, like I said, the good news was the business was up and running. We were able to do all the functions, nothing stopped. It's just we're not as fast and really around warehousing that we aren't everything else that we were before.

David Westenberg: So, we're finding a way to continue to train the teams. We're seeing sequentially daily that that is improving day by day, but we had a period of time where it wasn't at our average. And so, we have to over perform to get to the average and I know Dave's got a couple comments on this. Yeah, just to make sure we're clear. So, you know, this can affect the end of the first quarter.

David Westenberg: So, we went live, you know, for the first day of the second quarter. So, what we're looking at is, you know, the first, the first month of our second quarter here and how shipments are out the door. And we carried over open orders from September into October. And that was, you know, low double digit millions, whereas it usually be much, much lower than that. As we ship a slower rate, we got to make that up, right?

David Westenberg: So, the question is, you know, do we carry over some of that out of the out of the second? So, our goal here was to share, you know, I think first and foremost that the implementation went well. I think that's the headline. And as anticipated, you know, maybe we're shipping a little bit slower than we otherwise may have. And that, you know, we're kind of calling it out as potentially a shipment timing risk.

David Westenberg: For the second, some of that might push to the third. But what we really got our eye on is the demand backdrop. And I would say through the first month, hopefully you heard from us, that feels supportive. Got it. Thank you. So also, we heard that Walmart had to go through the consumers are reducing their buying because of GLP one. Are you actually hearing food producers saying anything similar? We're hearing the same things that you're hearing.

David Westenberg: Most of them are watching. They're their understanding that, you know, it may have an impact. And we're looking at the same things. And I think if you look at it in the relative scale and size of our business, GOP1 will be a headwind, but it is going to be a relatively small headwind compared to the big tailwinds we have around this business, around increased regulatory environment, increased customer usage, expanding in the new geographies, developing new products.

David Westenberg: So while it, it may be a headwind going forward, it's going to be a, I think, the minimum is headwind. Got it. Thank you. And I just one last one. Sorry if I missed it, but have you, do you think that any customers stocked a Petri film earlier in the year during supply and stirring environments? Sorry, I didn't get the question. Can you say it again, John? Yes, sorry if I missed it, but is it your understanding that any customer stocked Petri film earlier in the year during more supply and stirring environments? No, I don't think we've seen that. No, I mean, I should know. Got it. Thank you.

Operator: And this concludes the question and session.

John Adent: I would like to turn to four to management for your closing comments. Thank you. Yeah. We stated earlier. Well, the corner was a little softer than anticipated.

John Adent: I think what we wanted to talk about was the success really of the integration and moving off our two transition services agreements and standing up ERP. And for those of you that have been involved in a lot of different companies, those were significant risk factors that could derail organizations and I'm really proud of the team and the work they've done and the ability to plan and execute kind of seamlessly to continue to move to the new knee agent and the one knee agent environment. So we're really excited about the future. We look forward to talking to you at the second quarter. Thank you.

Operator: The conference was now concluded. Thank you for attending today's presentation and we're now to centralize.