Q3 2024 Neogen Corp Earnings Call
Operator: Good morning, ladies and gentlemen, and welcome to the Neogen Corporation third quarter 2024 earnings call. At this time, all lines are in listen-only mode.
Good morning, ladies and gentlemen, and welcome to the Neogen Corporation third quarter 'twenty 'twenty four earnings call.
At this time all lines are in listen only mode.
Operator: Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Tuesday, April 9, 2024. I would now like to turn the conference over to Bill Waelke. Please go ahead.
Following the presentation, we will conduct a question and answer session.
If at any time during this call you require immediate assistance. Please press star zero for the operator.
Bill Waelke: This call is being recorded on Tuesday April 9th 'twenty 'twenty four I would now like to turn the conference over to Bill well Keith. Please go ahead.
Bill Waelke: Thank you for joining us this morning for the discussion of the third quarter of our 2024 fiscal year. I'll briefly cover the non-GAAP 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 third-quarter results, as well as a presentation, both documents available in the investor relations section of our website.
Bill Waelke: Thank you for joining us this morning for the discussion of the third quarter of our 2020 for fiscal year.
I'll 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 <unk>.
Bill Waelke: Before the market opened today, we published our third quarter results as well as a presentation with both documents are available in the Investor Relations section of our website.
Bill Waelke: 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. With that, I'll turn things over to John.
None: On our call. This morning, we will refer to certain non-GAAP financial measures that we believe are useful in evaluating our performance reckon.
None: 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.
None: 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.
None: 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.
None: We disclaim any obligation to update these forward looking statements.
None: With that I'll turn things over to John.
John Edward Adent: Thanks, Bill. Good morning, everyone, and welcome to our earnings call for the third quarter of our 2024 fiscal year, which saw us complete a number of milestone achievements on our integration journey. We completed the relocation of the former 3M pathogen detection product line and are now manufacturing in one of our Lansing facilities. We also completed the first two phases of our four-phase relocation of a former 3M sample handling product line to one of our facilities in Lexington, with the remaining two phases expected to be completed by the end of the fiscal year and production beginning in Q1. The manufacturing of putrefilm will continue under the current transition agreement until we have our own putrefilm line operational in our new facility in Lansing.
John: Thanks Bill.
John: Good morning, everyone and welcome to our earnings call for the third quarter of our 2020 for fiscal year.
John: Which saw us complete a number of milestone achievements our integration journey.
We completed the relocation of the former three I'm pathogen detection product line and are now manufacturing in one of our Lansing facilities.
We also completed the first two of our four phased relocation of a former three I'm sample handling product lines, one of our facilities in Mexico.
John: With the remaining two phases are expected to be completed by the end of this fiscal year and production beginning in Q1.
John: The manufacturing of future for all of them will continue under the current transition agreement.
John: So we have our own future phone line operational in our new facility in Lansing.
John Edward Adent: The construction of the facility is almost complete, work has begun on the interior, and we have taken delivery of several initial shipments of production equipment, with the more significant shipments expected to arrive in the fall. Our plan is to exit the petrofilm transition agreement gradually, as we first qualify and then ramp up our own production. The initial term of the Petri film agreement ends in August of 2026, with our goal clearly being to exit before that time.
The construction of the facility is almost complete.
John: Because began outfitting the interior and we've taken delivery of several initial shipments of production equipment.
John: The more significant shipments expected to arrive in the fall.
Our plan is to exit the future film transition agreement gradually.
As we first qualify and then ramp up our own production.
John: The initial term of the feature film agreement ends in August of 2026, with our goal clearly being to exit before that time.
John Edward Adent: Over the past several quarters, we've scaled up our back office and distribution capabilities, and during the third quarter, completely exited the transition services and distribution agreements we have with 3M. This, in combination with the related system implementation, has, however, created inefficiencies in our operations that we're continuing to work through. These inefficiencies have negatively affected the rate at which we're able to meet end-user needs and ship products to customers. This has contributed to an extended period with a higher-than-usual backlog of open orders that, invariably, has negatively impacted demand when our products are not readily available. In most instances, we believe these situations represent lost sales more than lost customers, but there are clearly some customers we're going to have to win back.
John: Over the past several quarters, we've scaled up our back office and distribution capabilities.
John: During the third quarter completely exited the transition services and distribution agreements, we have with three of them.
John: This in combination with the related system implementation.
John: However, created inefficiencies in our operations that we're continuing to work through.
John: These inefficiencies have negatively affected the rate at which we're able to meet end user needs and ship products to customers.
John: This has contributed to an extended period with a higher than usual backlog of open orders that invariably is negatively impacted demand in one of our products have not been readily available.
In most instances we believe these situations represent lost sales more than lost customers, but there are clearly some customers we're going after it went back.
Moving to the results of the quarter.
John Edward Adent: Moving to the results of the quarter, we had solid core revenue growth in both segments, although it was below our expectations due to the aforementioned shipping inefficiency. We're encouraged, though, by the continued improvements we've seen in the end market environment on the food safety side of the business. Most food producers saw continued sequential improvement in unit production volumes, a trend that we expect to continue. Our food safety core revenue grew in the mid-single-digit range, led by another strong quarter of Petri film sales, including a return to growth in Japan, where we had previously experienced some customer attrition due to supply constraints. In animal safety, stocking in the large veterinary distributors was no longer ahead, with inventory levels having normalized, and some distributors having selectively begun to rebuild inventory and certain product categories based on end market demand.
John: We had solid core revenue growth in both segments, although it was below our expectations due to the aforementioned shipping inefficiencies.
John: We're encouraged though by the continued improvements we've seen in the end market environment.
John: On the food safety side of the business. Most feed producers saw continued sequential improvement in unit production volumes the trend that we expect to continue.
John: Our food safety core revenue grew in the mid single digit range led by another strong quarter of future film sales, including a return to growth in Japan, where we had previously experienced some customer attrition due to supply constraints.
John: And animal safety Destocking at a large veterinary distributors was no longer a headwind.
John: So the inventory levels have normalized and some distributors, having selectively begun to rebuild inventory and certain product categories based on end market demand.
John Edward Adent: Our core revenue growth in this segment was also in the mid-single-digit range, led by our broad portfolio of biosecurity products and vet instruments. Excluding our genomics business, animal safety core revenue growth in the quarter was strong, up in the mid-teens range, albeit on an easier comparison against a de-stocking quarter in the prior year. We're seeing the business stabilize as we shift our focus toward the large animal end of the market. Although still down on a year-over-year basis, we did see core revenue trend positively for the second quarter. While the end market environment is improving, we're updating our full-year outlook to reflect the expected impact of our shipping issues. We believe these challenges are temporary and that we will be able to recover the lost revenue, but we do expect to see a near-term impact on lower shipments in Q3 and the rate we're carrying into Q4.
John: Our core revenue growth in this segment was also in the mid single digit range led by a broad portfolio of bio security products and vet instruments.
Excluding our genomics business animal safety core revenue growth in the quarter was strong.
John: Up in the mid teens range, albeit on an easier compare against a destocking quarter in the prior year.
John: And genomics, we're seeing the business stabilize as we shift our focus towards the large animal enter the market.
John: Although still down on a year over year basis, we did see core revenue turned positive for the second quarter.
John: Well the end market environment is improving we're updating our full year outlook to reflect the expected impact of our shipping issues.
John: We believe these challenges are temporary and they will be able to recover the lost revenue, but we do expect to see a near term impact of the lower shipments in Q3 and the rate we're carrying into Q4.
John Edward Adent: It is clear that it will take additional time to get the shipping levels where they need to be on a sustainable basis to serve end market demand. Resolving these challenges and meeting our customers' needs is our highest priority. On the product development front, we continue to see benefits from our broad R&D capabilities, particularly as it relates to our pathogen detection product offering. We recently received approval of a new molecular detection assay from AOAC, which is an independent body of analytical science professionals that validates testing methods for the food safety industry. This new assay, which we expect to officially launch later this month, provides rapid and specific detection of two Salmonella serotypes that are highly relevant for the poultry industry. We believe this assay utilizes a simpler protocol and is more user-friendly than competitive options, and it allows users of the Neogen Molecular Detection System platform to seamlessly run these additional serotype tests.
John: It is clear they will take additional time to get the shipping levels, where they need to be on a sustainable basis to sort of end market demand.
Resolving these challenges in meeting our customers' needs our highest priority.
John: On the product development front, we continue to see benefits from our broadened R&D capabilities, particularly as it relates to our pathogen detection product offering.
John: We recently received approval of a new molecular detection assay from a always see.
Which is an independent body of analytical science professionals that validates testing methods for the food safety industry.
New assay, which we expect to officially launch later this month provides rapid and specific detection of two salmonella serotypes that are highly relevant for the poultry industry.
John: We believe this assay utilizes a simpler protocol and is more user friendly than competitive options.
John: It allows users of the Neogen molecular detection system platform seamlessly run these additional serotypes tests.
David H. Naemura: Pathogen detection is a significant area we are focused on to drive growth, leveraging the complementary product technologies and technical capabilities of our combined organization. We also continue to drive innovation in our food quality and nutritional analysis business. We have recently developed a testing method utilizing proprietary technology that allows bioethanol producers to determine how much of their production is from cellulose versus starch-based raw materials. This test is the first of its kind and can provide significant value to these producers, as they are able to command a premium for cellulose-based bioethanol. Food quality and nutritional analysis is an attractive market, and we're excited about the additional opportunities we have to capitalize on the demand for greater visibility and food content overall.
John: Pathogen detection as a significant area, we're focused on to drive growth.
John: Leveraging the complementary product technologies and technical capabilities of our combined organization.
John: We also continue to drive innovation in our food quality and nutritional analysis business. We have recently developed a testing methods utilizing proprietary technology that allows bio ethanol producers to determine how much of their production is from cellulose versus starch based raw materials.
John: This test is the first to market of its kind and can provide significant value to these producers as they're able to command a premium for cellulose based bio ethanol.
Food quality and nutritional analysis is an attractive market.
John: And we're excited about the additional opportunities we have to capitalize on the demand for greater visibility and food content overall.
David H. Naemura: When we made the strategic decision to expand our scale and solidify our position as the global leader in food safety by acquiring the former 3M Safety Division, we recognized it would be a complex and challenging carve-out and integration of the business. While I am not pleased with the present inefficiencies, we are committed to navigating the challenges and ultimately realizing the long-term benefits of this combination. I'll now turn the call over to Dave for some more insights into the results for the quarter.
John: When we made the strategic decision to expand our scale and solidify our position as the global leader in food safety by acquiring the former three M safety Division, we recognize that it would be a complex and challenging carve out and integration of the business.
John: While I'm not pleased with the present inefficiencies we are committed to navigating the challenges and ultimately realizing the long term benefits of this combination.
John: I'll now turn the call over to Dave for some more insights into the results for the quarter.
David H. Naemura: Thank you, John, and welcome to everyone on the call today. Jumping into the results, our third quarter revenues were $229 million. Core revenue, which excludes the impact of foreign currency, acquisitions, and discontinued product lines, grew over 6% for the quarter, while foreign currency was a headwind of 140 basis points compared to the prior year. As John mentioned, this growth was impacted by our shipping inefficiencies as we did not reduce our past-due backlog as we had planned, and our extended lead times negatively impacted demand. Moving to the segment level, revenues in our food safety segment were $158 million in the quarter, an increase of 4% compared to the prior year, including core growth of almost 6%. The core growth was led by the indicator testing, culture media, and other product categories, which benefited from double-digit growth in our petrofilm and sample handling product line, primarily driven by North America and Europe. Within the natural toxins and allergens category, solid growth and allergens from tree nut test kits and improved product availability in North America were offset by a decline in natural toxins due mainly to reduced product availability.
Dave: Thank you John and welcome to everyone on the call today.
Dave: Jumping into the results our third quarter revenues were $229 million core revenue, which excludes the impact of foreign currency acquisitions and discontinued product lines grew over 6% for the quarter, while foreign currency was a headwind of 140 basis points compared to the prior year as.
Dave: As John mentioned this growth was impacted by our shipping inefficiencies as we did not reduce our past due backlog as we have planned in our extended lead times negatively impacted demand.
Dave: Moving to the segment level revenues in our food safety segment were $158 million in the quarter, an increase of 4% compared to the prior year, including core growth of almost 6%.
Dave: The core growth was led by the indicator testing culture media and other product category, which benefited from double digit growth in our pizza film and sample handling product lines.
Dave: Similarly, driven by North America and Europe.
Dave: Within the natural toxins and elegance category solid growth and allergens from tree nut test kits and improved product availability in North America was offset by a decline in natural toxins due mainly to reduced product availability.
David H. Naemura: The Bacterial and General Sanitation product category saw growth in microbiology, and General Sanitation was partially offset by a decline in pathogenesis, due primarily to shipment delays to Latin America and Asia. Quarterly revenues in the animal safety segment were 71 million, which included a core revenue increase of 7% compared to the prior year quarter. We saw the destocking trend normalize, with non-genomic cells that go primarily through distribution up 15% on a core basis, a significant improvement from the second quarter. We saw core growth in all major product categories, led by our biosecurity portfolio, as a result of new business wins and increased demand related to the ongoing avian flu outbreak. Our vet instruments and disposables products also experienced strong growth due mainly to higher sales of detectable needles and syringes.
Dave: The bacterial and general sanitation product category saw growth in microbiology.
Dave: In general sanitation, partially offset by a decline in pathogens.
Dave: Due primarily to the shipment delays to Latin America and Asia.
Dave: Quarterly revenues in the animal safety segment were $71 million, which includes a core revenue increase of 7% compared to the prior year quarter.
Dave: We saw the Destocking trend normalize with non genomics sales that go primarily through distribution up 15% on a core basis, a significant improvement from the second quarter.
We saw core growth in all major product categories led by our bio security portfolio, a result of new business wins and increased demand related to the ongoing avian flu outbreak.
Dave: Our vet instruments and disposables products also experienced strong growth due mainly to higher sales of detectable needles and syringes.
David H. Naemura: Finally, in the animal care and other category, similarly strong growth was led primarily by higher sales of vitamin injectables and biologics. However, worldwide genomics revenue was down mid-single digits on a core basis, which marked a slight improvement from the second quarter. The decline continued to be driven by small production animals, reflecting the strategic shift away from this end of the market. However, the effects of this shift in focus offset growth in Europe and in dairy genomics in China.
Dave: Finally in the animal care and other category. Similarly strong growth was led primarily by higher sales of vitamin Injectables and biologics.
Dave: Worldwide genomics revenue was down mid single digits on a core basis, which marked a slight improvement from the second quarter.
Dave: <unk> continued to be driven by small production animals, reflecting our strategic shift away from this and that the market.
Dave: The effects of this strategic shift in focus offset growth in Europe and in dairy genomics in China.
David H. Naemura: From a geographical perspective, revenue growth was mixed. Growth was led by North America, which saw high single-digit, strong growth across most key product categories, including petrifilm, pathogens, sample handling, hygiene monitoring, biosecurity, and vet instruments. Our business in Europe grew mid-single digits on a core basis with strength in petri film, pathogens, and sample handling, as well as genomics. Asia-Pacific Core Revenue was roughly flat on a year-over-year basis, with strong growth in allergens, biosecurity products, and genomics, offset by declines in pathogens and sample handling. Notably, we saw a return to growth in China and Japan, including petrofilm, which had been challenged by some lost customers due to product availability. In Latin America, core growth was also roughly flat after strong growth in the second quarter.
Dave: From a geographical perspective core revenue growth was mixed growth was led by North America, which grew high single digits.
Dave: Strong growth across most key product categories, including feature film pathogens sample handling hygiene monitoring bio security embedded instruments.
Dave: Our business in Europe grew mid single digits on a core basis with strength in Petri film pathogen and sample handling as well as genomics.
Dave: Asia Pacific core revenue was roughly flat on a year over year basis with strong growth at allergens bio security products and genomics.
Offset by declines in pathogens and sample handling, notably we see we saw a return to growth in China, and Japan, including feature film, which had been challenged by some lost customers due to product availability issues.
In Latin America core growth was also roughly flat after strong growth in the second quarter.
David H. Naemura: Higher sales of allergen test kits, biosecurity products, vet instruments, and genomic services were offset by lower sales of culture media, pathogens, and sample handling products, due in part to shipping constraints impacting our export levels. Gross margin in the third quarter was 51.1%, representing an increase of 160 basis points from 49.5% in the same quarter a year ago, with the margin expansion driven primarily by the recovery in sales of the former 3M product, particularly Petrifil, compared to the prior year. Adjusted EBITDA was $53 million in the quarter, with an adjusted EBITDA margin of 23%, representing a year-over-year decline of 50 basis points. The margin decline resulted from growth in operating expenses more than offsetting the gross margin improvement. During the last 12 months, we have added costs to extract ourselves from the transition service agreements and also experienced certain inefficiencies, mostly in logistics, as we work through the integration of distribution activities.
Dave: Higher sales of allergen test kits bio security products vet instruments and genomic services.
Dave: Offset by lower sales of culture media pathogens and sample handling products due in part to shipping constraints impacting our export levels.
Dave: Gross margin in the third quarter was 51, 1%, representing an increase of 160 basis points from 49, 5% in the same quarter a year ago with.
Dave: With the margin expansion driven primarily by the recovery in sales of the former <unk> products, particularly Petri film compared to the prior year Q3.
Dave: Adjusted EBITDA was $53 million in the quarter.
Dave: With an adjusted EBITDA margin of 23% representing a year over year declined 50 basis points. The margin decline resulted from growth in operating expenses more than offsetting the growth gross margin improvement.
Dave: During the last 12 months, we have added costs to extract ourselves from the transition service agreements and also experienced certain inefficiencies mostly in logistics as we worked through the integration of distribution activities. Finally, we've added additional investment that contemplated the business being at a higher operating level and we are planning to address those costs.
David H. Naemura: Finally, we have added additional investment that contemplated the business being at a higher operating level, and we are planning to address those costs and others during Q4. Adjusted net income and adjusted earnings per share were essentially flat to the prior quarter at $26,012,000, respectively. The higher adjusted EBITDA in the current year Q3 fell through to adjusted net income at a lower rate primarily due to higher depreciation expense related to our ERP implementation. We ended the quarter with gross debt of $900 million, 67% of which remains at a fixed rate, and a total cash position of $168 million. CAST was impacted by planned integration CapEx and further purchases of finished goods inventory as we exited the 3M distribution network. Cash was further impacted by an elevated accounts receivable balance, driven mostly by the back-end loaded nature of the quarter, as well as a semi-annual interest payment on our bond.
Dave: And others during Q4.
Dave: Adjusted net income and adjusted earnings per share were essentially flat to the prior year quarter at 26 million and 12, respectively. The higher adjusted EBITDA in the current year Q3 fell through to adjusted net income at a lower rate primarily due to higher depreciation expense related to our ERP implementation.
Dave: Mentation.
Dave: We ended the quarter with gross debt of $900 million, 67% of which remains at a fixed rate and a total cash position of $168 million.
Dave: Cash was impacted by planned integration Capex and further purchases of finished goods inventory as we exited the three and distribution network.
Dave: <unk> was further impacted by an elevated accounts receivable balance driven mostly by the backend loaded nature of the quarter as well as the semiannual interest payment on our bonds as.
David H. Naemura: As John mentioned earlier, we are encouraged by the positive direction in which our end markets are trending. However, the impact of our shipping efficiencies impacted Q3 and will continue in Q4 at a rate higher than previously anticipated. As a result, we are updating our full-year guidance and now expect revenue to be between $910 and $920 million and adjusted EBITDA to be in the range of $210 million to $215 million. We continue to expect full-year capital expenditures of approximately $130 million, including integration-related capital expenditures of approximately $100 million, the majority of which we do not expect to repeat next year. I'll now hand the call back to John for some closing thoughts.
Dave: As John mentioned earlier, we are encouraged by the positive direction in which our end markets are trending however, the impact from our shipping efficiency impacted Q3 and will continue in Q4 at a rate higher than previously anticipated.
Dave: As a result, we are updating our full year guidance and now expect revenue to be between 910 and $920 million and adjusted EBITDA to be in the range of $210 million to $215 million. We continue to expect full year capital expenditures of approximately $130 million, including integration.
Weighted capital expenditures of approximately $100 million the majority of which we do not expect to repeat next year I will now hand, the call back to John for some closing thoughts.
Thanks, Dave.
John Edward Adent: Thanks, Dave. The third quarter marked a significant step in the integration of our ultimate journey towards full autonomy as a combined business. Certain aspects of the integration, however, have taken longer than we anticipated, and while the operational inefficiencies we are currently experiencing are disappointing, we have our arms around the key issues and are fully committed to resolving them in the near future. We expect to return to more typical growth levels, but we have initiated a comprehensive review of our operating infrastructure to identify where we can better balance investments in the business with the growth that we've seen this year and the growth we expect to The integration process we've made has also come with substantial investment in working capital and CapEx this year, which we expect will reduce significantly in 2025.
John: The third quarter marked a significant step in the integration and our ultimate journey towards full autonomy as a combined business.
Certain aspects of the integration, however have taken longer than we anticipated and while the operational inefficiencies. We are currently experiencing are disappointing.
John: We have our arms around the key issues and are fully committed to resolving them in the near future.
John: We expect to return to more typical growth levels.
John: But I have initiated a comprehensive review of our operating infrastructure to identify where we can better balance investments in the business with the growth that we've seen this year and the growth we expect to achieve.
Given our leadership position in an attractive end market.
John: The integration process. We've made is also Tom a substantial investment in working capital and Capex This year.
John: Should we expect will reduce significantly in 2025.
John: We've spoken in the past about reviewing different parts of our portfolio and that work has accelerated.
John Edward Adent: We've spoken in the past about reviewing different parts of our portfolio, and that work has accelerated. Importantly, the external market weaknesses we have been navigating for the past several quarters are improving, unit production volumes in the food industry are still mostly negative, but they are improving, and animal safety distributor inventory levels have largely come back into balance. It is our job now to address the internal challenges from the integration, to capitalize on the improving end market environment, and also bring back customers who may have gone elsewhere during inconsistencies of supply, and we will. Our team members around the world have worked tirelessly and continue to do so, not only on integration but also on positioning the company to capitalize on its multiple long-term growth opportunities. I want to thank them again for their efforts and dedication. Now, we'll turn things over to the operator to begin the Q&A.
John: Importantly, the external market weaknesses, we have been navigating for the past several quarters is improving.
John: Unit production volumes in the food industry are still mostly negative but are improving.
John: And animal safety distributor inventory levels have largely come back into balance.
John: It is our job now to address the internal challenges from integration to capitalize on the improving end market environment and also bring back customers, who may have gone elsewhere during and consistency of supply and we will.
John: Our team members around the World have worked tirelessly and continue to do so not only in integration, but also on positioning the company to capitalize on its multiple long term growth opportunities.
None: I want to thank them again for their efforts and dedication.
None: Now I'll turn things over to the operator to begin the Q&A.
Operator: Thank you, ladies and gentlemen. We will now begin the question and answer session. Should you have a question, please press star followed by the one on your touchtone phone. A prompt will tell you that your hand has been raised. Should you wish to come from the polling process, please press star followed by the two. If you are using a speaker phone, please lift the headset before pressing any key. Your first question comes from David Westenberg with Piper Sandler. Please go ahead.
None: Thank you ladies and gentlemen, please allow me to begin the question and answer session should you have a question. Please press star followed by the one on your Touchtone phone.
None: Sure.
Operator: You bet your hand as they rate should you wished it came from the polling process. Please press star followed by the Q. If you are using a speaker phone. Please lift the handset before pressing Arlington.
Operator: Your first question comes from David Steinberg with Piper Sandler. Please go ahead.
David Michael Westenberg: Hey, yeah, thank you for taking the question. And good morning.
David Michael Westenberg: Hey, Thank you for taking the question and good morning.
Operator: So can you talk about some of the working capital and inventory? Of course, you had an inability to fulfill. But just as we're projecting kind of the working capital cash flow, I think you said fulfillment won't completely get done in Q4. But can you just kind of talk about how that inventory is going to kind of like trend into Q4 and then into the first half? And I get that there's a lot of moving parts and you're not exactly giving guidance on free cash flow and kind of what that's kind of moving. But just help us understand conceptually what's going on as we model forward.
David Michael Westenberg: Just can you talk about some of the working capital and inventory of course, you had the inability to.
David Michael Westenberg: Phil.
David Michael Westenberg: But just as we're projecting kind of a working capital cash flow.
David Michael Westenberg: I think you said fulfillment won't completely get done in Q4, but can you just kind of talk about how that inventory is going to trend into Q4, and then into the first half and I get that there's a lot of moving parts and youre not exactly giving.
David Michael Westenberg: And free cash flow and kind of.
David Michael Westenberg: What that's kind of moving but can you just help us understand Ken.
David Michael Westenberg: Conceptually whats going on.
David Michael Westenberg: As we model forward.
David H. Naemura: Yeah, thanks.
None: Yes, Thanks, David.
David H. Naemura: Thanks, David. If we look at the quarter itself, this was the second quarter in a row where we brought 3M finished goods inventory into our distribution channel. So we've brought in between Q2, mostly in Q2 and Q3, about $48 million of inventory, which should be the size of the transfer here. There were some other cash outflows in the quarter, some of them planned.
None: If we look at the quarter itself.
Ken: This was the second quarter in a row, where we brought three finished goods inventory into our distribution channel. So we've brought in between Q2, mostly in Q2 and Q3 about $48 million of inventory.
Ken: Which should be the the size of the transfer here.
Ken: Yes, there were some other cash outflows in the quarter some of them planned integration Capex was about 23 in the quarter and we think we.
David H. Naemura: Integration CapEx was about 23 million in the quarter, and we think we're on track for the full year estimate of around 100 million in integration CapEx plus 30 of recurring. Receivables were higher in the quarter as a result of the back-end, kind of loaded nature of the corridor as we ramped up throughout the quarter, but to your point, as we've come off the order-to-cash cycle with 3M and have that fully in-house, there are some moving pieces. At the beginning of the year, we talked about the full year free cash outlook for the year at about flat, albeit a bit of an aspirational number given the desire to improve working capital on the legacy side of the business. Improving working capital. We're seeing some of that, but we are hampered by inventory on the legacy side of the business. But more – so I would say that all of the things being equal, we would not be flat.
Ken: We believe we are on track for the full year estimate of around $100 million of integration Capex plus 30 of recurring.
Ken: Receivables was higher in the quarter as a result of the Bakken.
Ken: Loaded nature of of the quarter as we ramped.
About the quarter, but to your point as we've come off the order to cash cycle with three M to have that fully in house. There are some moving pieces at the beginning of the year, we talked about full year free cash outlook for the year at about flat, albeit a.
Ken: A bit of an aspirational number given the desire to improve working capital.
Ken: On the legacy side of the business.
Ken: Working capital, we're seeing some of that but we are hampered in inventory on the legacy side of the business, but more so I would say all other things being equal we would not be flat we would be off.
David H. Naemura: We would be off, you know, maybe 25 to 30 full years. But two additional headwinds to that, principally higher 3M inventory. We had thought 40. It's coming in now, call it 50, 48.
Ken: Maybe 25% to 30 full year, but two additional headwinds to that.
Ken: Principally our higher <unk> inventory, we had thought 40, it's coming in now cost 50, 48, and then of course lower EBITDA for the year, we think that all results in a free cash.
David H. Naemura: And then, of course, lower EBITDA for the year. And we think that all results in a free cash, negative free cash, full year of around $75,000, agreeing with your caveat that there are a lot of moving pieces as we work through the integration and the impacts on inventory of the inefficiencies in the plant. Kind of the last part of your question, looking forward, not ready to go there. We think a significant, though, step down in integration capex. So, we've seen improvement year-over-year from that, as well as, you know, the impact of better efficiencies and better linearity in the quarter all towards going to what you've heard me say before, which is that I believe once we get through integration, a hundred percent free cash conversion basis here.
Ken: Free cash full year of around 75 with agreeing with your coffee out that there are a lot of moving pieces as we worked through the integration and the impacts on inventory of the inefficiencies in the plants.
Ken: The last part of your question looking forward not ready to go there we think significant those step down integration capex that we see an improvement year over year from that.
Ken: As well as the.
Ken: The impact of better efficiencies and better linearity in the quarter all towards going to what you've heard me say before is I believe once we get through integration.
Ken: 3rd% free cash conversion basis here.
David H. Naemura: Got it. No, that's a lot of great detail, Dave. Sorry, John. I cut you off, didn't I? No, no, no. Good job, John.
None: Got it.
None: A lot of great detail Dave.
Dave: Alright, John I cut you off Tonight.
No no banks have done.
Dave: Got it.
John: Specifically can you talk about what's left in an integration I know theres integrate I think its indicator testing and sample handling is kind of what's left can I got to give us some of the data here.
David Michael Westenberg: Specifically, can you talk about what's left in integration? I think it's indicator testing and sample handling is kind of what's left. Can you give us some of the dates here, further details on dates, and can you just remind us what's going through the facility? Key product categories might have to deal with some of the integration left, and just confirm and sorry, I'm squeezing in one more, and I promise this last one is every facility now on SAP, and all the ERP stuff is now behind you. Sorry. I know that's a lot. Thank you
John: For further details on dates and can you just remind us on.
John: What is going through.
John: The facility I mean, what what Youre kind of in housing to Lansing just.
John: Kind of give us an indication of what kind of what.
John: Key product categories might have to deal with some of that the integration last and just to confirm sorry squeezing in one more and I promise. This last one is every facility now on SAP and all of the ERP stuff is now behind you sorry, I know that's a lot. Thank you.
John Edward Adent: Thanks, David. So regarding the integration, we've done two phases of the four-phase step for sample handling. So we expect sample handling to be completed. The majority will be done in the fourth quarter and will be done by Q1. So that's the one piece we have with the sample handling piece. Again, Petri film, the plant is pretty much done.
None: Yes, Thanks, David.
None: So regarding the integration.
None:
None: We've done two phases of the <unk> faced.
None: For sample handling so we expect sample handling to be completed.
None: Majority will be done in the fourth quarter.
None: That would be done by Q1, so thats. The one piece, we have with the sample handling piece.
None: And then future film.
None: Plant is pretty much done we've started to bring in shipments already.
John Edward Adent: We've started to bring in shipments already of equipment and set up. We expect the majority of those shipments of the main equipment to be coming in during, you know, two, three quarters. Again, the indicator goes through 2026, but our plan is to move off of that, you know, as judiciously as we can. And again, it's not a hard cutover.
None: Equipment and setup.
None: We expect the majority of those shipments of the main equipment to become an enduring.
None: Two to three quarters again, the indicator goes through 2026, but our plan is to move off of that.
None: As judiciously as we can and again, it's not a hard cutover remember we're doing the ramp up ramp down where we are.
John Edward Adent: Remember, we're doing the ramp up, ramp down where we have. Indicator testing, and feature film being made in two plants, today on the 3M side. And as we qualify ours and ramp up production, we'll start to draw from there. So we feel like supply from that will be. We can handle that fairly well because it's not a hard cutoff like we did on some of the other ones. Pathogen testing is done. That's at our facility in Lansing. So, you know, that's a big milestone.
None: Indicator testing feature film be made in two plants today on the <unk> side as we qualify ours and ramp up production, we will start to draw there. So we feel like supply from that will be.
None: We can handle that fairly well because it's not a hard cut off like we did on some of the other ones.
None: Pathogen testing is done that's in our facility in Lansing. So.
None: That's a big milestone we are very excited about bringing that in house and the growth we've had in those areas.
John Edward Adent: We're very excited about bringing that in-house and the growth we've had in those areas. [inaudible] Regarding SAP. The major facilities in the U.S. are already on SAP, so we are not going to do a full rollout on some of the international locations. They're just too small. We have SAP Lite, so to speak, SAP One, and some of our external locations. But you remember a lot of our international businesses don't have manufacturing. They're just real sales and distribution offices. So that's why we're not going to roll it out across the country or across the world. It doesn't need to do that.
None: Regarding SAP.
None: The major facilities in the U S are already on SAP, we are not going to do a full rollout on some of the international locations are just too small we have.
Light so to speak as if you won and some of our external locations, but you remember a lot of our international businesses don't have manufacturing that is real sales and distribution offices. So that's why we're not going to rollout out across the country or across the world who doesn't need to do that.
David Michael Westenberg: Got it. Thank you so much for the detail.
None: Got it. Thank you so much for the detail.
None: Yep.
None: Your next question comes from Brandon Vazquez with William Blair. Please go ahead.
Operator: Your next question comes from Brandon Vazquez with William Blair. Please go ahead.
Brandon Vazquez: Good morning, everyone. Thanks for taking the question I wanted to focus a couple kind of near term questions first.
Brandon Vazquez: Morning, everyone. Thanks for taking the question. I wanted to focus a couple of near-term questions first on first on the inefficiencies of kind of integrating the 3M business. Did they get worse quarter over quarter? I think last quarter you were talking about a $10 million headwind. I'm not sure if you guys were giving a number this quarter on what that headwind was, but maybe just talk about it sequentially. I think there was some hope last quarter that things would improve through the rest of the fiscal year. Are things kind of going that way? Do you guys think you have a handle on what needs to be done, and what is it, and what gives you the confidence to be able to do it?
Brandon Vazquez: First on the inefficiencies of kind of integrating the <unk> business today do they get worse quarter over quarter I think last quarter, you were talking about a $10 million headwind.
Brandon Vazquez: Not sure. If you guys were giving a number this quarter on what that headwind was but maybe just talk about sequentially. I think there was some hope last quarter that things would improve into the through the rest of the fiscal year.
Brandon Vazquez: Things kind of going that way do you guys think you have a handle on what needs to be done and what is that and what gives you the confidence to be able to do that.
Brandon Vazquez: Brandon Good morning. This is Dave let me, let me add a point or two and then pass it to John.
David H. Naemura: Brandon, good morning. It's Dave.
David H. Naemura: Let me add a point or two and then pass it to John. If we think of back orders or in-house orders that are unfulfilled, That was about flat from Q2 to Q3, and as you'll note, as you point out, we were hoping to make an improvement there. The impact on demand is tougher to measure, but recall that on the legacy side of the business, we were shipping through this under this new format for all of Q2, but only about half of Q2 were we shipping 3M, and we were shipping obviously both for the full third quarter. So the actual ramp, which John can talk about more, was greater than I think appears when we see flat revenue sequentially.
None: If we think of.
Dave: Back orders are in house orders that are unfulfilled that was about flat from Q2 to Q3 and as Youll note as you point out we were hoping to make improvement there.
Dave: The the impact of demand is tougher to measure, but recall that the legacy side of the business. We were shipping through this under this new format for all of Q2, but only about half of Q2, where we shipping.
Dave: And we're shipping obviously, both for the full third quarter. So the actual ramp which John can talk about more.
Dave: Was was greater than I think appears where we see flat revenue sequentially.
David H. Naemura: Before I pass it to John, I would say, you know, there's a significant amount of cost in the SG&A line from our outbound logistics that manifests in a number of areas but, you know, from shipping partials to other inefficiencies that come through as well. So we see it both on the top line side and on the OPEC side, in terms of John.
Dave: I'll pass it to John I would say there is significant amount of costs in the SG&A line from our outbound logistics.
Dave: That manifest from a number of areas, but from shipping parcels to other inefficiencies.
Dave: That comes through as well so we see it both on the topline side and on the Opex side I'll turn it to John.
John Edward Adent: Yeah, thanks Dave. So Brandon, the big issue we have is getting orders to drop in the warehouse from SAP to the SAP module of EWM. And we've got SAP fully engaged with us, with our integration partner, PwC, and our teams trying to drive this. And when we talk about the efficiencies, let me quantify it for you a little bit.
John: So Brian the Big issue we have is.
John: Getting orders to drop in the warehouse for SAP to the S&P module VW AUM and we've got S&P.
John: Fully engaged with us with our integration partner Pwc and our teams.
John: Drive this and when we talk about the efficiencies.
John: Let me quantify it for you a little bit so in Q2.
John Edward Adent: So in Q2, about 40% of our shipments happened in less than five days. In Q3, that went up to 80, right? So we're making progress. Now, the goal is 24 hours, right? You order today, and we ship tomorrow.
John: About 40% of our shipments happened in less than five days.
John: In Q3 that went up to 80.
John: So we're making progress in other goals 24 hours great you order today ship Tomorrow, that's what we've done for years and years. So you saw what happened to our efficiency.
John Edward Adent: That's what we've done for years and years. So you saw what happened to our efficiency. I think the only thing to remember is... As Dave talked about, you know, our shipping in total dollars has grown exponentially because we brought in the 3M business, where we shipped in Q3 152% of what we shipped in Q2. And if you think about Q1, it was 175%. Right?
None: I think the other thing to remember is this.
None: As Dave talked about.
None: No.
None: Our shipping in total dollars has grown exponentially because we brought in the <unk> business where.
None: We shipped in Q3 of 152% of what we shipped in Q2.
And if you think about Q1 it was 175%.
John Edward Adent: So we really are ramping up the amount of products going out of our warehouse. So, you know, every day we set new records on what we're shipping out, but we have to get that turnaround time back to 24 hours, and that's what we're going to do.
None: So we really are ramping up.
None: Amount of products going out of our warehouse.
None: So every day, we set new records on what we're shipping out, but we have to get that turnaround time back to 24 hours and that's what we're going to do.
None: Okay.
Brandon Vazquez: Okay, maybe another near-ish term question, but a little more specific on the margins, maybe for Dave. Look, I know we don't have perfect numbers here, so I'm doing rough math, so correct me if I'm off the mark, but, you know, if I'm still assuming the 3M business is in the high 20s, 30% EBITDA margin, it kind of implies a Neogen kind of legacy business that's three or four points below what it historically used to be, arguably even potentially a sub 20% EBIT I just want to read it; is that math ballpark correct? And then two, is that really just all from operational efficiencies?
None: Maybe another nearest term question, but a little more specific on the margin maybe for Dave.
Dave: No. We don't have perfect numbers here, so I'm doing rough math, so correct me if I'm off the mark, but if I'm still assuming the three businesses high 20%, 30% EBITDA margin it kind of implies a neogen.
Dave: Legacy business.
Dave: Three or four points below what it historically used to be arguably even potentially a sub 20% EBITDA margin I guess, one is that math ballpark correctly and then two.
Dave: Is that really just all from operational efficiencies.
None: I think theres a couple of components you, Brian just I think it's difficult at this stage in the game to try to look at it as two separate P&L I think going back to kind of history is a little tough there, but I think underlying your question is the fact that we've added significant amount of cost.
David H. Naemura: There are a couple of components here, Brandon. I think it's difficult at this stage in the game to try to look at it as two separate P&Ls. I think going back to kind of history is a little tough there, but I think underlying your question is the fact that we've added a significant amount of costs that were necessary to come off the transition agreement and other investments to kind of operate at our new billion-dollar-ish company size. And by our own admission, we're not where we thought we would be from a revenue scaling standpoint, with the high fall through, you know, that's been more And that's something that we need to probably rephase here as we move into the next year, given the kind of current profile of the ramp. But we know the business can come back in a hurry once we get through some of these issues. But since we're behind, we probably need to address the cost structure to some degree as well.
None: <unk> to come off the transition agreements.
None: And other investments to kind of operated our new billion.
None: Company size.
None: By our own admission were not where we thought we would be from our revenue scaling standpoint with the high fall through.
None: That's been more impactful.
None: Then we would like to have seen here and thats something that we need to probably restage here as we move into the next year, given given kind of the current profile of the ramp now we know the business can come back in a hurry once we get through some of these issues but.
None: Since we are behind we need to we need to probably address the cost structure to some degree as well.
None: Okay and Dave on that same note on a follow up to that.
Brandon Vazquez: Okay, and Dave, on that same note, on a follow-up to that, as we start kind of thinking about our fiscal 25 numbers, I appreciate you guys will give us official guidance for the next quarter probably, but how should we think about the progression of how these things get rectified over the coming quarters and how that kind of translates into EBITDA margins on a go-forward basis, even if you just talk at a high level without giving
None: As we start kind of thinking about our fiscal 'twenty five numbers I. Appreciate you guys will give an official guidance on the next quarter, probably but how should we think about the progression of how these things get rectified over the coming quarters and how that.
Dave: Kind of translates into EBITDA margins.
On a go forward basis, even if you just talk high level without giving a specific numbers.
David H. Naemura: [inaudible]
Dave: Yeah.
David H. Naemura: You know, let's see where we are at the next quarter, to your point. But I think what it's fair to say about next year is we should have a bit of an easy comparator that's going to help growth next year, given some of the constraints we've had this year. So assuming we rectify things in the timelines that we believe we can, that'll be helpful on the growth side. And obviously, we would see 25 as a better margin year than we've experienced here in 24. Beyond that, I want to be like, you know, I want to be careful. And, you know, those are the same things you would assume. I know, Brandon, but let's get a quarter from now, and we'll bring something more fulsome.
Dave: Let's see where we're at at the next quarter to your point, but I think what's fair to say about next year as we should have a bit of an easy compare that's going to help growth next year given some of the constraints. We have had this year. So assuming we rectify things in the timelines that we believe we can that'll be helpful.
Dave: On the growth side, and obviously, we would see 25 is a better margin year that we've experienced here in 'twenty four.
Dave: And that I want to be want to be careful and those are the same things you would assume I know Brandon, but let's get a quarter from now and will will bring.
Dave: We'll bring something more fulsome.
None: Okay, and one last one for me sorry for a bunch of questions. This morning, but maybe John for you as you look high level at the deal.
Brandon Vazquez: Okay, and one last one from me. Sorry for a bunch of questions this morning.
Brandon Vazquez: But maybe, John, for you, you know, as you look high-level at the deal, you know, there's clearly, you know, we've all talked a lot and done a lot of work on this, and it seems like there are a lot of opportunities for the company. But as you look at now, kind of a couple years into this, you're talking about a little bit of potential share loss from some customers that you have to go back and win back. What's your confidence? How do you feel about kind of still hitting? I know timing is uncertain, but is this structurally a business that can still do high single digits plus growth and a 30% plus EBITDA margin? Or is there some work that needs to be done in order to give you the confidence that that's the level that this company can be at? Thanks, guys.
None: Theres clearly, we've all talked a lot in that a lot of work on this.
John: Like there's a lot of opportunities for the company, but as you look at now kind of a couple of years into this you were talking a little bit of potential share loss.
John: From some customers that you have to go back and win back what's your confidence how do you feel about kind of still eventually hitting I know timing is uncertain, but is this structurally a business that can still do high single digit plus growth and a 30% plus EBITDA margin or is there is some work that needs to be done in order to give you the.
And so thats the level that this company can be thanks, guys.
David H. Naemura: [inaudible]
John Edward Adent: I think you're right, Brandon. I mean, the issue is going to be around the timing, but absolutely it can. Because, again, when we talked about those numbers, that was always our jumping off point from when the businesses were combined. But we knew this was going to be a challenging integration, right? We weren't the only business that looked at this, like the 3M business, but a lot of companies didn't want to take on this type of integration and carving out. And we knew it was going to be challenging.
None: I think youre right Brandon.
None: Issues issue is going to be around the timing, but absolutely. It can because again when we talked about those numbers that was always our jumping off point from when the businesses are combined.
None: But we knew this was going to be a challenging integration.
None: We werent the only business that looked at us like the <unk> business, but a lot of companies Didnt want to take on this type of integration.
None: Carve out and we knew it was going to be challenging.
John Edward Adent: You know, I'm frustrated that it's taken us this long to get two modules from SAP to work together in a way that I think makes it easy for us to do business. And so we're addressing that. I think it's a short-term issue because our customers are on a subscription basis, and when we can't supply them, they can't just stop. So it's allowed some competitors to get qualified and come in.
None: You know I am frustrated that its taken us this long to get two modules between SAP to work together in a way that I think makes it easy for us to do business.
None: And so we're addressing that.
None: I think it's a short term issue because our customers are on a subscription basis and when we can't supply them. They can't just stop so thats allowed some competitors get qualified and come in we've seen that.
John Edward Adent: Now we've seen that when we have our product and our things in line, these customers come back as we have the best solution, but, you know, we've opened the door for some of the competitors to come in. Now, we've seen that when we have supply, those customers come back. We've seen that with growth in other areas. We've seen that with, you know, the bounce back of Petri film around the world where we, you know, have supply, and it comes back. So I feel very confident about that. But yeah, look, I'm frustrated and irritated. And, you know, you don't want to be sitting in my office because this is not generally how we efficiently run our operations. And while there are a lot of great things we've already done, and we made a lot of progress, you know, I'm not pleased with where we're at today. So we're going to double down, make sure that we're going to get our customers' needs met. And once we get back to that, I think you're going to see really high growth rates.
None: When we have our product and our things aligned that these customers come back because we have the best solution, but.
None: We've opened the door for some of the competitors to come in and out we've seen when we have supply those customers come back we've seen that with growth in.
None: In other areas, we've seen that with you.
None: The bounce back of feature film around the World, where we have supply that comes back so I feel very confident about that but yeah look I'm I'm frustrated and irritated.
None: You don't want to be sitting in my office because.
None: This is not generally.
None: We efficiently run our operations and while Theres a lot of great things, we've already done and we've made a lot of progress.
None: I'm not pleased with where we're at today so.
None: So we're going to double down and make sure that we're going to get.
None: Our customers' needs are met and once we get back to that I think youre going to see really strong growth rates.
None: Ladies and gentlemen, as a reminder, should you have a question. Please press star one.
Operator: Ladies and gentlemen, as a reminder, should you have a question, please press star 1. There are no further questions.
None: There are no further questions at this time I will now turn the call over to the company.
Operator: Thank you all for joining us today. We look forward to talking to you at the end of our fiscal year, and we'll talk to you soon.
Well. Thank you all for joining US today, we look forward to talking to you at the end of our fiscal year.
None: We'll talk to you soon thank you.
Ladies and gentlemen, this concludes your conference call for today, we thank you for participating and ask that you. Please disconnect your lines.
Operator: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.
None: Yeah.
None: Okay.
None: Okay.