Q4 2024 Neogen Corp Earnings Call
Good morning, ladies and gentlemen, and welcome to the Neogen Corporation fourth quarter 2024 earnings call.
At this time all lines are in a listen only mode.
So in the presentation, we will conduct a question answer session.
If at any time during this call you required immediate assistance. Please press star zero for the operator. This call is being recorded on Tuesday July 30th 'twenty 'twenty four I would now like to turn the conference over to Bill well Keith. Please go ahead.
Thank you for joining us this morning.
Bill: Discussion of the fourth quarter of our 2020 for fiscal year <unk>.
unknown: 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 Maura.
Before the market opened today, we published our fourth quarter results as well as a 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 presentation.
Bill: 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 disclaim any obligation to update these forward looking statements.
Bill: With that I'll turn things over to John.
Thanks Bill.
Good morning, everyone and welcome to the earnings call for the fourth quarter of our 2020 for fiscal year.
Okay crossing multiple significant integration milestones in the third quarter progress continued on multiple fronts in the fourth quarter.
We finished relocating the former three I'm sample handling product lines in our facility in Lexington, Kentucky.
And they're now in the process of ramping up to full production levels, which we expect to be at the end of next month.
We also saw improvement throughout the fourth quarter and our shipping performance and this progress has allowed our commercial teams to return their focus to what they do best demand generation.
<unk> production volumes remain mostly down on a year over year basis as customers continue to be under pressure, but the end market environment was stable in the fourth quarter.
Well the belief that food inflation in particular will continue to ease.
Production volumes are generally expected to slowly improve over the course of our 2025 fiscal year.
Along with improving end market backdrop.
Our commercial teams are leveraging the broadest product portfolio in the industry and our reputation for consultative customer service to drive demand.
Now for our results for the quarter.
Total food safety core revenue grew in the mid single digit range following solid growth in the fourth quarter of fiscal 2023.
Animal safety channel inventory levels of end user demand for our product categories remain roughly stable compared to the prior quarter.
Our lower quarterly sales in this segment are due primarily to our genomics business in the U S and where otherwise flat on a core basis.
And our genomics business globally core revenue was still down on a year over year basis.
In the first quarter, we began to round trip most of the impact of the strategic shift towards larger production animals, which is primarily impacted the U S business.
We are focusing our efforts on driving growth in the direct to producer beef and dairy business as well as managing through a mostly flat companion animal market by expanding our direct to consumer genetic testing offerings.
With respect to product technology, we've seen notable developments recently related to two of our priority growth areas pathogen detection and teach yourself.
In early June the USDA is food safety inspection service named imaging molecular detection system or Mds.
Primary screening method for Salmonella and listeria in beef eggs in poultry.
So Manila Listeria represent the majority of pathogen testing in these food categories and the selection by the USDA further validates the effectiveness reliability and ease of use of our Mds testing platform.
We believe we have a significant opportunity for growth and pathogen detection and plan to leverage the core capabilities of the Mds platform as a key part of our product development initiatives in this area.
The USDA announcement was followed in late June by the loss of our future film automated reader, which automates the load into future someplace.
Readers are specifically designed for high volume labs and allows users to automatically feed and numerate up to 300 features someplace.
While integrating with existing lab workflows and systems.
This level of automation removes the need for lab technicians to mend blue load individual place into the reader, reducing labor and providing more capacity for data analysis.
We expect the growth of this product it takes some time to wrap up.
But it allows us to more effectively target the market opportunity for high volume testing environments. Those labs, typically running over 100000 and such tests annually.
We believe feature film is a clear market leader in indicators testing and are planning continued investments to maintain its market leadership and unlock additional opportunities.
On our last earnings call, we committed to resolve the distribution inefficiencies stemming from our S E T and our new warehouse management system by the end of the first quarter.
Bill: Although the fourth quarter was impacted by these issues right.
Now effectively been resolved and our commercial efforts are squarely focused on winning back the sales that were impacted.
Bill: With respect to the integration there is still work ahead of us.
Vast majority involves the completion on outfitting of our new feature film production facility, which we do not expect will affect the rest of our operations.
Now I will turn the call over to Dave for some more insights into our results for the quarter.
Thank you John and welcome to everyone on the call today.
Jumping into the results our fourth quarter revenues were $237 million.
Core revenue, which excludes the impact of foreign currency acquisitions and discontinued product lines grew 2% for the quarter, while foreign currency was a headwind of 420 basis points compared to the prior year.
Although we made significant progress during the quarter. Our total revenue was impacted by our lower order fulfillment rates.
Moving to the segment level revenues in our food safety segment were $167 million in the quarter, a decrease of 1% compared to the prior year, including core growth of over 4%.
The core growth was led by the indicator testing culture media and other product category, which benefited from double digit growth in our feature film product line as well as solid growth in culture media and food quality nutritional analysis.
The bacterial and general sanitation product category saw growth and pathogens and general sanitation.
Partially offset by slight decline in microbiology, due primarily to a higher level of equipment sales in the prior year period.
Within the natural toxins and allergists category modest growth and allergists was offset by a decline in natural toxins due mainly to reduced product availability.
Quarterly revenues in the animal safety segment were $70 million, which includes a core revenue decline of 3% compared to the prior year quarter.
Overall inventory levels in the channel remained largely stable with our decline in core revenue being driven by a couple of specific product category dynamics.
Is that instruments and disposables product line had another quarter of solid core growth in the animal care and other product category core growth was led by higher sales of our vitamin Injectables and biologics products.
Bill: Within our portfolio bio security products strong growth in insect control was offset by declines in cleaners, and disinfectants and rodent control due primarily to compare challenge on strong growth in the prior year quarter and timing of current year shipments.
Bill: Worldwide genomics revenue was down mid single digits on a core basis solid growth in beef markets in EMEA and Latin America was offset by the shift away from small production animals in the U S. The impact of which we expect to decrease as we exit the first quarter.
From a regional perspective core revenue growth in the fourth quarter was mixed.
Growth was led by Latin America, which saw growth well into the double digits with strong performance across most key product categories. The growth was driven by progress on on back order fulfillment some level.
Distributor restocking and additional business at key food producers our business in Europe grew low single digits on a core basis with strength in culture media Petri film General sanitation and sample handling.
Partially offset by a decline in bio security products.
Asia Pacific core revenue grew mid single digits on a year over year basis with strong growth in Petri film and general sanitation offset by declines in pathogen and sample handling.
Our U S and Canada region saw the largest impact in the quarter from the shipment delays in our main distribution center with core revenue down in the mid single digit range. Despite the impact Pizza film did see a modest level of growth, which was offset by declines in most other food safety product categories in the animal safety segment performance was.
Mixed with vet instruments, and animal care offset by declines in bio security and genomics.
Gross margin in the quarter was 47, 9% representing a decrease of 300 basis points from 59% in the same quarter a year ago.
Adjusting for transaction and integration related costs.
The gross margin decline in Q4 was about 210 basis points.
The decline was driven primarily by costs related to stabilization of our distribution and logistics operations and a higher than usual level of inventory adjustments.
Adjusted EBITDA was $53 million in the fourth quarter, representing an adjusted EBITDA margin of 22, 4% a year over year decline of 370 basis points. The decline in adjusted EBITDA margin resulted primarily from the decline in gross margin with some additional negative impact of transaction FX.
Bill: Overall, the adjusted EBITDA margin came in below what we believe is our underlying run rates at this level of revenue by approximately 100 basis points as a result of some higher charges in the quarter that should not recur.
Fourth quarter, adjusted net income and adjusted earnings per share were <unk>, $22 million.10, respectively compared to $30 million in 14.
In the prior year quarter the declines in the current year Q4 were driven primarily by the lower adjusted EBITDA.
We ended the quarter with gross debt of $900 million, 67% of which remains at a fixed rate and a total cash position of $171 million compared to the third quarter cash was roughly flat with outflows for capital expenditures offset by operating cash inflows.
Moving to our outlook for the fiscal year 'twenty five.
<unk> core revenue growth in the mid single digit range on the back of an end market environment, we expect to slowly improve as the year progresses with total revenue anticipated between 925 and $955 million we.
We expect the first half of fiscal 'twenty five to be a little wider than its usual seasonality of around 48% as we continue our focus on winning back sales following the shipment constraints, we experienced in the second half of fiscal 'twenty four.
Adjusted EBITDA for the full year is expected to be between $215 million and $235 million, reflecting margin expansion of approximately 100 basis points and an incremental margin of over 70% at the midpoint.
We expect this margin expansion to be driven by improvements in gross margin and operating expense efficiency and aligned with revenue growth throughout the year.
With respect to capital expenditures, we are anticipating a sizable decrease as we move past the peak integration spend of fiscal 'twenty four for fiscal 'twenty five we expect capital expenditures of approximately $85 million was approximately 55 million specifically related to integration items, we believe higher.
Adjusted EBITDA combined with lower Capex and the three of them working capital loaded not repeating.
Bill: Results in free cash flow being well into positive territory.
I'll now hand, the call back to John for some closing thoughts.
Thanks, Dave.
The last couple of quarters have seen a tremendous amount of integration progress as we extricated ourselves from the services previously provided by our transition partner.
This progress came with the inefficiencies in our distribution center that we discussed and are now resolved.
Fiscal 2024 represented the peak of cash outflows for the integration.
In terms of both capital expenditures and working capital investments.
Outside of the new facility, we're building with three M. Food safety operations have now been combined with Neogen and we're able to shift a significant portion of our operational focus towards driving improvements in these combined operations.
Commercially we're excited to see a continued trend of improvement in our end markets and look forward to operating in a much more normal environment.
We were able to bring the combined power of one neogen the demand generation on an unconstrained basis.
As demonstrated by some of our recent product launches innovation remains a top priority.
We're continuing to invest behind our key technology platforms, where we believe we have a meaningful opportunity to drive growth, particularly in regions, where we are underrepresented today.
Bill: Simultaneously, we are exploring a number of new technologies that can improve the quality and ease of food safety testing and strengthen our leadership position in the industry.
Well, we have a significant amount of work that's behind US we understand and are committed to executing on the opportunities ahead of us to continue to position the business for long term growth.
Speaking of work all of the progress we've made but not have been possible without the dedication and sacrifices made by our team members around the world.
Loud and what they've achieved to date I want to thank them all again for their continued efforts.
Now I will turn things over to the operator to begin the Q&A.
Speaker Change: Thank you, ladies and gentlemen, well now begin the question and answer session should you have a question. Please press star followed by the one on your Touchtone phone.
You'll hear a prompt but your hand has been raised should you wish to decline from the polling process. Please press star followed by the Q.
If you are using a speaker phone please lift the handset before pressing I know Keith.
Your first question comes from David Western Berg with Piper Sandler Your line is now open.
Hey, guys.
Thank you for taking the question.
Congrats on a good end of the year right.
Big beat numbers.
Alright and.
Guidance in line. So let's go with the Petri film, Let me ask just a.
A bunch on feature film on kind of one question because I think that is a pretty important business. So as we look at the retrospective on Peachtree film.
Can you give us some sort of rate.
Have customers that you've won back on customers that are still.
To come back and then can you talk about how that new automated Petri film reader can maybe drive.
Business to that.
Petri fill them and of course Amit.
About the high volume customers can you give us a distribution of what percent of your customers are high volume customers versus low volume customer.
Just would love to figure out how much of your customers would apply would actually be able to convert to that system. So that was a lot.
Apologies, sorry, I got it thanks, if I can.
Miss something David Let me now thanks for the question so.
<unk>.
Yes regarding future from I mean, I think you saw we had a nice quarter in the fourth quarter. We saw feature phone and the grew double digits in the low teens, we thought that was a.
Nice growth for US I think you saw what we did in Japan, where we lost customers.
Claw that back in Japan actually had growth for the year.
We see that kind of continuing.
It's a great opportunity for us.
The end markets are still a little soft I mean, we still see that.
They're at low single digit declines so that's a little bit challenging for us in the food production segment.
And we think that's going to continue with a gradually improving you know in our next fiscal year kind of on the back half is where we think we're going to see some change there.
Regarding the reader.
I mean look we're excited to have that because.
A day, you're manually feed that in and now we can do.
300, plus.
Stacked to haven't read in it's really focusing David on the food safety high throughput labs.
And when we talk about our market share at 20%.
A portion of those of the remaining areas and those high throughput labs.
Speaker Change: Alright, and Thats really where to see where we're going to we're going to target that growth.
It's going to be an opportunity for us though longer term.
Sure approach non food producing labs in an ancillary market with that same type of equipment, that's going to take us a little bit longer because we're developing products today.
That we're going to use to address those markets.
But we can't really produce those until we are manufacturing in our house, because we expand the SKU line coming out of three of them. So we're excited about having the reader, we think it's going to be an opportunity to really address those high throughput food producing labs that we currently work with these are labs that do over 100000 tests.
Speaker Change: Those are the ones that were really targeting with that and then it's going to open a broader opportunity for new market for us.
Probably in the next couple of years as we develop skus to meet those markets.
Got it no that's helpful. Just maybe.
If I could dive in a little bit so it does sound like those high volume customers may do represent a pretty high percentage of the revenue in pizza you founded did I catch that right.
And anyway, so it's a lower number of David as a lower number of customers, but they do more volume. So I don't I wouldn't say it's of that remaining 80% I wouldn't say, it's the higher piece I'd say is it's less than half, but it's.
It's more targeted because they do a lot of volume, but it's a handful of customers.
Got it perfect and then you have another analysts on there so I'll just keep it to two.
So can you talk and this one's for Dave I Wonder you talked about the gross margin decided that distribution and inventory I think you said owe more than 200 basis points.
Of.
A headwind there that does sound like it would be pretty temporary so as we're doing our model into next year should we think about that rolling off pretty quickly or should we have that as a couple of quarter drag and just as we think about modeling it.
If you can cite any other year over year to compare to think about as we're modeling out our 2025 fiscal year I'll stop there. Thank you.
Yeah. Thanks, Thanks, David I think the fourth quarter gross margin fundamentally came in lighter than where we think the business is running.
As a function of some higher inventory write down which again, we're working on stabilizing our distributional logistics footprint and ultimately as we've worked through that over a.
Whats amounted to two five quarter period, it's resulted in some higher level of inventory.
Inventory write down as well as some continued inefficiency.
Speaker Change: So I think if you step back from the quarter net net.
Probably a couple hundred basis points of inefficiency on the gross margin side.
A little lower opex than that I think representative of the run rate. So I think that the EBITDA margin line, probably around 100 basis points light I think we see the gross margin some of those efficiencies come back over time, I think hopefully second half we see some of that.
Recovery as you know gross margin is also reasonably volume dependent given our higher incrementals.
So I think you'll see improvement ratably.
At both the gross margin line and accruing down to the EBITDA margin line as 2025 <unk>.
Progresses, and thank you for the question.
Thanks, guys and congrats on ending the year well.
Thanks, David fiscal year round.
Your next question comes from Brandon Vazquez with William Blair. Your line is now open.
Hey, everyone. Thanks for taking the question maybe on a high level first can we just start John can you just talk about as you look at the organization now most of the integration of the business is done here what are the opportunities and then even the risks as you look at the call. It. The next one to two years from a commercial perspective, and then maybe Dave can you also.
Frame.
From the P&L side same kind of discussion of like what are the remaining risks and opportunities here in the next one to two years.
Yeah. Thanks, Brandon look the growth opportunities in the next one to two years are now that we have.
Dave: Substantially everything that pizza from in house to take the one neogen portfolio to our customers and drive share growth right.
Doing that across multiple regions.
As we've talked about in the past we feel that we're still underpenetrated in Asia. We're underpenetrated in Europe are Underpenetrated Latam macro are underpenetrated in the U S. So we still have a 20% share opportunities to continue to grow in these core markets. So that's number one.
Secondarily, you see what we're doing with.
Mds you saw that Mds, we had an opportunity.
Or we saw that the USDA chose our molecular detection system as the choice for Salmonella testing and listeria testing in poultry eggs and meat.
I don't know if you saw yesterday. They also said that now they're going to start requiring salmonella testing in all poultry products.
So when we were asked what does that do.
Just to get the USDA contract really isn't that big of a.
Revenue deal.
Now as they continue to move testing farther and push it along that we are the testing of choice really helps us as they continue to drive this throughout the industry So big opportunities.
To continue in new product development like we saw with our Mds.
Pathogen testing as you talked about David the readers going to open up the opportunity in the high throughput labs.
David Michael Westenberg: First starting with the food high throughput labs with an opportunity to really past two years to look at it.
Commercial labs in general that are using future from I was talking to the group.
I don't ask for a lot you know the only thing I'm asking for is everybody uses petri dishes in the world should be using feature phones.
It's not a lot to ask for so I think thats something.
And aspire to as a group.
David Michael Westenberg: I think if you think about the risk side, our biggest risk is still bringing in the new feature film manufacturing and the Lansing.
Now the team was in Taiwan. The equipment is up it's running we performance tested it in Taiwan, we were very pleased with the results. So we've approved signed off silver breaking down the equipment, that's going to be sent over to the U S. So we're right on track, where we need to be on that progress, but to me that's the number one.
And secondarily I, just like to I'd like to see our customers get back to some growth.
The unprecedented.
Inflation that we've had has really had an impact on the market that I haven't seen in seven years here.
And you still see it I mean, I don't know if you saw Mcdonald's comments, but.
You've got people revolting that fast food prices are too high you know its tough its tough out there so I'd like to see some of that is.
We think that could help a little bit in the second half witches and Dave will kind of take you through kind of the quarters, but we are seeing second half's going to be stronger for us.
Is that eases, a little bit, but I'd like to see the markets improve a little bit and you know as we've talked about we're kind of kind of going to be in the trough for animal safety. The good news is the smaller part of our business, but that business is not going to be growing as fast. This next fiscal year because of the kind of the economics right now in the production animal segment.
Hey, Brandon just to follow up on second part of your question I would say maybe in the near term and then the longer term I would say in the near term, we need a year, where we're not.
Faced with a sizeable integration challenge in 'twenty three we have the supply side constraint from three am and then of course in 'twenty four.
We did the shipping logistics order to cash integration, which resulted in constrained on our capacity shift and some of that impact now flow through particularly into the first half.
David Michael Westenberg: Fiscal 'twenty five.
You know from being around here that we typically see the first half is a little lighter than the second half I think historically in the kind of 48 52 type of range I think what we'll see in 'twenty five again in the near term is a little lighter first half.
And then a little better second half with better growth rates in the second half.
What amounts to an easier compare we've got some share to recapture as result of some of the shipping constraints.
David Michael Westenberg: We'll see that mostly impact Q1, which historically is always our lowest quarter from both a revenue and an EBITDA margin perspective, so it'll put pressure earlier in the year.
David Michael Westenberg: As we worked through that like we did following the.
The supply constraint of feature film in 'twenty, three we should see we should see that recover.
The meteor immediate intermediate to longer term, we've talked about the integration the integration thesis remains intact and I think.
It really does you've always talked about the P&L performance here, yes. There is always this or that this put her that take but at the end of the day. This is going to P&L performance will come down to volume, so getting back to unconstrained growth being able to tackle the markets as John <unk>.
Elaborated on is what really unlocked the opportunity for the P&L.
I'll stop there.
Okay.
Okay, Thanks, David and maybe to follow up on what you were talking about at the end there if I look at guidance for the year at the midpoint, let's call it a $75 million.
Dollar delta towards EBITDA to get to that $300 million pro forma goal you guys previously put out there without kind of going into timing of getting there I think you guys want to take things a year at a time, which I understand but talk about what the bridge is how do you get that incremental $75 million and EBITDA. What are the drivers that get you from like a physical too.
25, EBITDA number up to eventually and an undisclosed timeframe $300 million EBITDA number.
Yes, I appreciate that I think the levers first obviously growth we've stated that the $300 million.
EBITDA numbers associated with over $1 billion in revenue and we need to move into that we need to move into that territory.
To do that I also think as we move through years of significant integration activities that we're able to also drive better fall through and efficiencies. We continue to work the P&L.
It was a noisy year, but underlying that is a lot of operational improvements throughout the organization and bringing some new perspectives to the teams that I think we're going to accrue benefits over over time. So it's really it's really the combination of those two factors.
The strong incrementals that the company can do on that growth, including the three <unk> products, which are which have shown up in.
Fuller feature film to have very very strong fall through so.
Market timing aside integration activities aside we still think Thats. That's in play to your point, we're only guiding one year at a time, but we believe that.
The post integration thesis financial thesis remains intact.
David Michael Westenberg: It's just a function of time and Thats a function of.
That will drive the growth.
Okay, and maybe one last one for me Dave again can you talk a little bit about what is baked into the high and the low end.
Revenue and EBITDA guidance ranges thanks, guys.
Sure first of all look we talk John said in his remarks I elaborated on it a little bit.
Speaker Change: We constrained.
Speaker Change: Supply to our customers for the better part of two and half quarters, and there's implications for that and I think we'll see that in the first half of the year the shape, it which we recover that.
Is meaningful to the shape of the year. So I would say we've contemplated at least a couple of points impact from that in the midpoint of the guide, but obviously, that's a tough number to estimate even even with the data that we have so that fundamentally can be better or worse.
Speaker Change: We look at our customers their production levels.
We think we're in a reasonably soft spot.
In the food safety and market kind of.
Speaker Change: Through the cycle, it's not flat and we think right now we're in a more difficult part of the cycle, we're planning on reasonably.
Speaker Change: Slow recovery.
But that again can be better or worse and we're also assuming that we remain in the lower part of the little more cyclical animal safety market. So theres market implications I think sharron share recapture implications here.
And I think those would be the big.
The big Influencers, plus or minus the midpoint Brendan.
Ladies and gentlemen, as a reminder, should you have a question. Please press star one.
There are no further questions at this time I will now turn the call over to John Adams for closing remarks.
Great well thanks, everyone. Appreciate you joining us today and.
We look forward to updating you again on our first quarter call in October so navigate summer. Thank you.
Ladies and gentlemen, this concludes your conference call for today, we thank you for participating and I. Thank you. Please disconnect your lines.
Speaker Change: Sure.