Q2 2025 Neogen Corp Earnings Call
Thank you for joining us this morning for a discussion of the second quarter of 2025 fiscal year.
Speaker Change: 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 Hi Mara.
Speaker Change: Before the market opened today, we published our preliminary second quarter results as well as a presentation with both documents are available in the Investor Relations section of our website.
Speaker Change: We are in the process of finalizing our quarterly financials and while we do not expect them to actual results could differ from the preliminary results being discussed today.
Speaker Change: On our call. This morning, we will refer to certain non-GAAP financial measures that we believe are useful in evaluating our performance reckon.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: Disclaim any obligation to update these forward looking statements.
John Agents: I'll now turn things over to John.
John Agents: Thanks Bill.
John Agents: Good morning, everyone and welcome to the earnings call for the second quarter of our 2025 fiscal year <unk>.
John Agents: Second quarter reflected steady progress as we saw improvement across the business compared to the first quarter with core revenue growth accelerating both of our segments.
John Agents: Margin expansion and significantly better free cash flow.
John Agents: In our food safety segment.
John Agents: And market continues to work through unprecedented times stemming from a significant inflation in food prices and resulting lower levels of food production.
John Agents: However, we've continued to see gradual improvement.
John Agents: With our proxy for the global food production is beginning to approach flat levels on a year over year basis. This graduate end market improvement has coincided with what we see is an increasing focus on food safety from both consumers and regulators given the number of recent food contamination incidents some of which are tragic consequences.
John Agents: From a regulatory perspective, we are seeing an increased level of interest in food borne pathogen mitigation. Following the usda's declaration over the summer Osama that was in adulthood, and Brett It stopped chicken products. The agency has more recently proposed to expanded framework under which salmonella would be declared in adulthood, and additional walpole cheap products.
John Agents: It would also include additional monitoring and sampling requirements.
John Agents: The public comment period for this proposed framework ends next week.
John Agents: Any final determination on the path for like would it be made in late 2025. The agency also announced last month that it'll be taking new steps to strengthen this oversight facilities producing ready to eat food products.
John Agents: Specifically in response to several recent food borne illness outbreaks, resulting from exposure to listeria monocytogenes.
John Agents: The USDA issued a series of notices and directives that provided more robust approach to listeria mitigation and include additional data collection and training.
As well as enhanced testing by the agency for Listeria species and guidelines for an effective food safety assessment methodology from a consumer perspective, the fact of food content more broadly was a prominent topic in the recent U S presidential election.
John Agents: Seem to resonate with many people bodes well for our market.
John Agents: We fully expect consumers to continue to demand not only the obvious and safe food, but also increasing disclosure on the content of food and beverage products.
John Agents: With the broadest product portfolio in the industry Neogen is of course able to offer solutions to food producers will help to address all of these concerns last month, we further expanded our product portfolio Pete yourself with the addition of the silliest serious contemplate.
John Agents: Which is the first new feature films play it launched in the last seven years.
John Agents: Underscoring our commitment to build on this product platform is a part of Neogen.
This ready to use played it expands our future from offerings include another persistent food safety threat eliminates the prep work associated with traditional methods.
John Agents: Delivering an easy to interpret a high confidence results and there's almost 20 hours.
John Agents: We continue to leverage our product portfolio and the increasing focus on food safety to drive growth. Despite the temporary headwinds from sample collection production in May.
John Agents: Further progress in the quarter, winning back market share we ceded from shipping delays late last fiscal year and our animal safety segment core revenue growth improved 11% from the first quarter.
John Agents: Our last earnings call. We made the observation that we did not believe the lower first quarter revenue in animal safety was the result of a broader destocking trend.
John Agents: We were pleased to see the return to growth in the second quarter.
John Agents: Despite inventory in the distribution channel being at low levels growth of the sales of our product out of the channel remain positive.
John Agents: It's difficult to make a call on when the market will turn but we continue to believe we're operating are off cyclical lows and are encouraged by the growth we saw in the quarter and our genomics business globally second quarter core growth was down mid single digits on a year over year basis.
John Agents: We have round trip the impact of the strategic shift towards larger production animals.
John Agents: Did see growth in our differentiated cattle business in the quarter.
John Agents: This growth was offset by ongoing weakness in the companion animal side of the business.
John Agents: Driven by a lower number of pet adoptions and continued inflationary pressure on consumers as well as a reduced level of outsourced testing with respect to the integration.
John Agents: We have discrete initiatives underway to drive improvements in the efficiency of our fully integrated shipping and distribution operations.
John Agents: We will expect to begin to show a benefit in the third quarter.
John Agents: Regarding the relocated sample collection production the process of ramping up is continuing although the product lines are operational and we believe we're on track to reach prior production levels by the end of the third quarter.
John Agents: Our new feature film facility continues to progress well.
John Agents: For the first two major shipments of production equipment, having already arrived in Lansing.
John Agents: With an extensive process of unpacking assembling and rigging for installation has already begun.
John Agents: We're on track for our goal of beginning initial test production and the new facility in the fall of 2025.
John Agents: While our primary focus has shifted to winning in the market. We have also undertaken actions to accelerate the building of a more profitable focused neogen.
During the second quarter, we initiated restructuring actions focused mainly on right sizing our genomics business to drive a higher level of profitability with a more streamlined operations focused on our differentiated large animal offerings.
John Agents: We expect additional restructuring activities in the third quarter as we continue to work on opportunities to protect margins and streamlined different parts of our business, including further actions planned in genomics over the last several quarters. We've mentioned that portfolio review has been a priority and that theres been a significant amount of work being done on the <unk>.
John Agents: That the.
John Agents: The internal portion of that work is now mostly behind us.
John Agents: We have multiple projects underway to explore strategic alternatives for a meaningful portion of our animal safety segment.
John Agents: We have not finalized any portfolio moves, but we currently have engagement with them.
John Agents: Parties will review opportunities on the basis of creating value for shareholders by improving profitability and further focusing the company on the attractive food safety market.
John Agents: With the first half of the year now behind US we are updating our full year outlook.
John Agents: Revenue in the first half was in line with the expectations, we communicated including progress on share recovery.
John Agents: The largest portion of the change in guidance is due to additional foreign exchange headwinds and lower genomics revenue from our restructuring actions as well as the longer ramp up period, we're working through for sample collection production. The change in adjusted EBITDA guidance, primarily reflects the change in the anticipated revenue as well as a <unk>.
John Agents: First half margin that was a little lower due mainly to higher freight and distribution costs and some elevated inventory impairments.
Speaker Change: We have projects underway, specifically to address freight and distribution from which we expect to see a benefit in the second half. In addition to the restructuring actions taken these initiatives in combination with higher second half revenue are expected to support higher margins and build on the progress. We've made in the second quarter now I will turn the call over to <unk>.
Speaker Change: Dave for some more insights into our results for the quarter and our outlook. Thank you John and welcome to everyone on the call today jumping into the results. Our second quarter revenues were $231 million core revenue, which excludes the impact of foreign currency acquisitions and discontinued product lines grew 335% for the quarter.
Speaker Change: <unk>, including a positive contribution from pricing, while foreign currency was a headwind of 250 basis points compared to the prior year.
Speaker Change: At the segment level.
Speaker Change: Revenues in our food safety segment were $164 million in the quarter flat compared to the prior year due to the negative impact of FX, which offset core growth of nearly 4%.
Speaker Change: The core growth was led by our bio security products and the bacterial and general sanitation product category, which benefited from strong growth in our ATP product line.
Speaker Change: In the indicators testing culture media and other product category solid growth in our food quality culture media and Petri film product lines was offset by a decline in sample collection as we continue the process of ramping up the relocated production in our own facility.
Speaker Change: Within the natural toxins and allergens category modest growth in <unk> was partially offset by a slight decline in natural toxins <unk>.
Excluding the headwinds in sample collection core revenue in the food safety segment grew 8%, which we believe is more reflective of the underlying business, albeit on an easier compare.
Speaker Change: Quarterly revenues in the animal safety segment were $67 million, which includes core revenue growth of three 2% compared to the prior year quarter.
Within our bio security product category, we saw growth in all major product lines.
Speaker Change: In the animal care and other product category solid growth was driven primarily by biologics and wound care products as well as vitamin Injectables, which saw the easing of the supplier backlog situation.
Speaker Change: The vet instruments and disposables product category accelerated from the first quarter to modest growth in the second quarter, driven mainly by sales of needles and syringes.
Speaker Change: Outside of genomics core revenue in our animal safety segment was up over 7%.
Speaker Change: Our global genomics revenue was down mid single digits on a core basis.
Speaker Change: Both in U S and international beef markets was primarily offset by a decline on the companion animal side of the business.
Speaker Change: From a regional perspective core revenue growth in the second quarter was mixed.
Speaker Change: Both was again led by Latin America, which saw double digit growth.
Speaker Change: With a strong performance across most key product categories, including new business wins, our business in Europe grew high single digits on a core basis.
Speaker Change: Led by growth in <unk> film General sanitation and natural toxins.
Speaker Change: Pacific core revenue was up slightly on a year over year basis with solid growth in Petri film, partially offset by declines at pathogen sample collection.
Speaker Change: In our U S and Canada region, which has experienced the largest carryover impact from last year's shipping delays.
Speaker Change: Core revenue was roughly flat compared to the prior year period solid growth in culture media and food quality and nutritional analysis was offset by declines in most other food safety product categories, including a larger impact in sample collection as we continue the process of recapturing market share.
Speaker Change: In the animal safety segment solid growth across most key product categories was partially offset by the decline in genomics.
Speaker Change: Gross margin in the second quarter was 49% representing a decrease of 190 basis points from 59% in the same quarter a year ago.
Speaker Change: Excluding integration and restructuring costs gross margin in Q2 was roughly flat compared to the prior year.
Speaker Change: Adjusted EBITDA was $51 million in the second quarter, representing a margin of 22, 2% for a sequential improvement of 210 basis points on.
Speaker Change: On a year over year basis, the decline in adjusted EBITDA margin was driven primarily by having the full cost to exit the various transition agreements, which we did not fully half in the prior year period.
Speaker Change: This also includes some impact from higher shipping and distribution costs, where we expect to see improvement in the second half of this year from cost reduction initiatives, we have underway.
Speaker Change: Second quarter, adjusted net income and adjusted earnings per share were <unk> 24 million and 11, respectively.
Speaker Change: Compared to $25 million and 11 in the prior year quarter.
Speaker Change: The lower adjusted EBITDA in the current year Q2 was mostly offset by lower effective tax rate due largely to regional profitability mix.
Speaker Change: Our GAAP net income in the quarter was significantly negative due to the noncash goodwill impairment charge related to the acquisition of the former <unk> food safety Division.
Speaker Change: We continue to have full confidence in the post integration prospects of the business. The impairment charge, primarily reflects from the accounting perspective, the slower start we've had as a result of some of the end market and integration complexities.
Speaker Change: We ended the quarter with gross debt of $900 million, approximately 60% of which is at a fixed rate with our interest rate swap having reduced by $50 million at the end of the quarter and a total cash position of $140 million.
Speaker Change: Free cash flow in Q2 improved by approximately $80 million compared to Q1.
Benefiting primarily from lower capital expenditures improved working capital performance and the semiannual bond interest payment not repeating.
Speaker Change: With capital expenditures expected to step down in the second half. We believe that we are still on track to positive free cash flow for the year.
Speaker Change: Moving to our outlook as John mentioned, we are updating our guidance to account for several changes compared to the assumptions underpinning our guidance entering the fiscal year.
Speaker Change: First half revenue developed in line with the expectations. We communicated however, with the continued strength of the U S. Dollar, particularly post election, we are now facing an elevated FX headwind, which is the biggest change reflected in our updated guidance. Additionally, the restructure of our genomics business has resulted in additional intentional.
Speaker Change: Krishnan of some less attractive revenue as we focus our end market exposure and streamline our operating footprint.
Speaker Change: Finally, the ramp up of sample collection production to full capacity has taken longer than originally anticipated reducing our revenue in this product line as we have been unable to fully meet demand.
Speaker Change: Due to normal seasonality the expected ramp of sample collection and continued share recovery, we expect second half revenue to be more weighted towards the fourth quarter.
Speaker Change: With the restructuring actions taken and anticipated reductions in our freight and distribution costs combined with operating expense efficiency, we expect to build on the sequential margin improvement we saw in the second quarter and see further expansion in the second half of the year.
Speaker Change: Our updated adjusted EBITDA guidance, primarily reflects the decrease in revenue and the lower first half margin as well as some offsetting efficiencies from our restructuring actions, we expect our quarterly margins in the second half to generally be aligned with revenue and higher in the fourth quarter.
Speaker Change: As I mentioned earlier, we expect capital expenditures to decline in the second half and are maintaining our original outlook.
Speaker Change: Specifically related to the goodwill impairment charge, we will be filing form <unk> 25 later today to provide additional time to complete the audit procedures related to our impairment analysis, we do not expect impairment charge included in the financials in our earnings release to change, but until we file our.
Speaker Change: Form 10-Q, the results technically remain preliminary we plan to file our 10-Q next week within the Grace period provided by SEC rules.
Speaker Change: When we do file our 10-Q. It will include the conclusion, we have had.
Speaker Change: <unk> sees in the control activities and information and communication components of the coast. So internal control framework that constitutes material weaknesses at a high level. These deficiencies are primarily related to the timely execution and documentation of controls.
Speaker Change: But we have performed additional analysis and other procedures to ensure that our financial statements are free from material Misstatement, we remain on the journey of improving our global controls environment and are working through remediation actions, which will be ongoing as we continue to progress through the integration and strengthen our capabilities.
John Agents: I'll now hand, the call back to John for some final thoughts thanks, Dave.
Speaker Change: The second quarter represented additional progress for Neogen.
John Agents: We saw improved revenue margins and cash flow from the first quarter.
And our primary food safety end markets continued to show signs of gradual improvement.
John Agents: We're also taking the actions that covered earlier to protect margins and further focus of business.
John Agents: Part of the process of building the engine for the future and repositioning our company to win in the end markets.
John Agents: Along these lines. We also announced this week that Dave will be taking on the role of Chief operating officer and.
John Agents: In addition to his duties as Chief Financial Officer.
John Agents: With the operations organization already reporting to Dave. This additional responsibility will allow data to further strengthen the coordination and strategic alignment between the finance organization and the rest of our business.
John Agents: With the goals of optimizing margin improvement opportunities and capital allocation.
Speaker Change: They've expanded role coincides with the update we provided that Doug Jones, our current Chief operating officer, who will be making his retirement official at the end of February <unk>.
Speaker Change: Afterwards, you will remain available to us through 2025 to ensure a smooth transition to our new chief commercial officer to provide other assistance as needed.
Speaker Change: We're well under the process of hiring a chief commercial officer with multiple rounds of interviews conducted with a number of highly qualified candidates and we're excited at the opportunity. We have further strengthened our team with the addition of someone will be solely focused on driving growth globally.
Speaker Change: The new Chief commercial officer will supplement the strong regional leaders, we've put in place and we'll be able to leverage our global scale comprehensive product portfolio and the largest technical support team in the industry.
Speaker Change: Well, we're not relying on the regulatory environment to drive growth the increasing level of regulatory interest in the U S highlights not only the importance of food safety overall, but also the significant room for improvement that exists our long history and experience going back to the early days of food safety testing puts us in a position to be a trusted partner.
Speaker Change: <unk> food producers and regulators to help in the mission of reducing the frequency and severity of food borne illness.
Speaker Change: I'll now turn things over to the operator to begin the Q&A.
Speaker Change: Thank you and ladies and gentlemen, we will now begin the question and answer session to ask a question. Please press star one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing any Keith did withdraw your question. Please press Star Q1 moment. Please for your first question.
And your first question comes from the line of Brandon Vazquez with William Blair. Please go ahead.
Speaker Change: Hey, good morning, everyone. Thanks for taking the question I'll start off with one kind of high level question I think part of the discussions that we've had about putting this business together and reaching kind of higher profitability targets has always been based on volume and I know a lot of the revenue coming down at Campbell and genomics is something you proactively.
Speaker Change: Thirdly, taking but probably still has P&L impacts so maybe talk to us a little bit about like we're going to have lower and lower revenue base to some degree here what are the implications on what the margins of this business can be is this still a business as we're coming closer to 900, rather than closer to $1 1 billion in sales can we.
Speaker Change: We still think of this as a high 20% EBITDA margin in the foreseeable future.
Speaker Change: Yeah, Hey, Brandon it's Dave.
Speaker Change: You know.
Speaker Change: When we talk about portfolio you hear us talking about components of the business that maybe you don't have the growth profile or the margin profile that we aspire to for Neogen and I think what we've seen in genomics over the last.
Speaker Change: Call. It as an example, here where senior genomics over the last year and a half is a business that hasnt hasnt grown we're seeing commoditization and we've seen decline from an EBITDA perspective.
Speaker Change: It's a big component of bringing down the year was pulling out genomics.
Speaker Change: Heard us talk about restructuring parts of that business, but we think by focusing it more we can support the margin profile that were that were really after here. We have a really good franchise focused on cattle and that's the focus of the restructuring the restructuring actions we've done.
Speaker Change: I guess I would just further add that.
Speaker Change: When we think about animal safety, you've heard us say a lot we don't view it as one large business, we think it's a component.
Speaker Change: It's made up of.
Speaker Change: Four or five different components, all up a little bit of different profile. So we're really doing the analysis at that level, but the objective to your point. The objective is to yes from a revenue standpoint, potentially be smaller but be higher quality from a margin and probably less cyclicality perspective as well.
Brian It's John I would just add to what Dave said.
The other piece, we're doing as we talked about the restructuring activities were taken to make sure that we can continue to drive to our targets.
Speaker Change: And where we put the guide.
Speaker Change: Mid 20 range and the.
Speaker Change: Second half of the year for EBITDA.
Speaker Change: Okay.
Speaker Change: That makes a lot of sense, maybe a little bit more granular question on.
Speaker Change: Near term trends on a sample handling can you just talk to us a little bit about obviously in the past when you've had some issues in distribution things like that this is food safety customers need to task. They move to someone else are you guys getting in a position now.
Speaker Change: The manufacturing is taking a little longer and sample handling to ramp are you kind of losing some share there or is this going to be something that even if it's fixed I think John said it at the end of fiscal Q3, we're going to probably have several quarters of headwinds after it because you need to go out re engaged with those customers and get that share back again.
Speaker Change: Yeah, I think that's exactly right.
Speaker Change: Brian and you see that.
Speaker Change: That business is a consumable business right. So when you lose when you don't have.
Speaker Change: Available you lose the sale and the customer has to go by that.
Speaker Change: Product from somewhere else, so I think it's.
Speaker Change: It's been a bit of a challenge we talked about some of the things that happened with it.
Speaker Change: We weren't able to get the desired safety stock up we brought four lines over it was one line thats kind of been the challenge.
Speaker Change: Product line wasn't decommissioned right. So we began production in our facility in second quarter worried about half that I'll put now of historic we think we're going to be at 100% for Q3.
Speaker Change: We think.
Speaker Change: Q1, the impact was about $4 million to $5 million, we think Q2, it's probably growing a little bit to six but we see that easing in the second or the third quarter, and then going into fourth because we're going to be able to bring those capacity rates back up by the end of the third quarter.
Speaker Change: Okay, Great and John one last one another big picture, one you talked a lot about the evolving food regulation space.
It seems like there is even some.
<unk> for a separate food administration, which would be great.
Speaker Change: I think theres a lot of it there tends to be a lot of questions just around what could this mean for food safety regulation in general and then what it can mean for Neogen. So I know you touched a little in the prepared remarks, but maybe you talk about like what are some realistic scenarios you could see playing out here and where can you see benefits because some of your biggest customers are probably already extensively.
Speaker Change: Food testing right, so where can you see benefits to the business and an increasingly fluid regulatory environment.
Speaker Change: Yeah, Thanks, Brandon look I.
Speaker Change: The.
The tailwind from this could be very significant for.
Speaker Change: For neogen over the longer term.
Speaker Change: When you look at some of the challenges that companies have had recently and all of US are aware those are very established companies that have had very significant food safety programs I think the thing that people need to recognize as food safety monitoring and testing is very much like cyber security it never ends.
Speaker Change: And there's always new threats and Theres always new pathogens in ways. These pathogens can kind of get into your system and therefore.
Speaker Change: These updating and improving our risk analysis as <unk>.
Speaker Change: Extremely important.
Speaker Change: And I think that's what's going to help continue to drive <unk> success in the future because we have the broadest portfolio. We have the broadest team are going to be able to help those customers.
Speaker Change: Meet those challenges and you see it from a regulatory basis, where theyre going to say this is now the new minimum but I also think customers are understanding that just because you haven't had an issue in 10 years does not mean youre not going to have an issue tomorrow. It is a it is a day to day constant monitoring.
Speaker Change: In a way that we can help our customers win that fight so they provide safe food to their to their consumers.
Speaker Change: Thank you.
Speaker Change: Yes. Your next question comes from the line of Super lumpy with Guggenheim. Please go ahead.
Speaker Change: Hey, guys. Good morning, Thank you for taking my questions.
Speaker Change: Touched on this a little could you give us some more color on magnitude for each currency genomics attrition and the delay in sample collection production that resulted in a 25 million reduction in guidance.
Speaker Change: And then could you break out some of the after 30 days.
Speaker Change: Getting to that guidance number that's all thank you.
Speaker Change: Yeah, Hi, Sue Thanks for the question. So when we think about the guide reduction at the midpoint, which I think is the heart of the question.
Speaker Change: The two biggest components is really FX.
Speaker Change: And and the the genomics reduction, which makes up a significant portion call. It over two thirds of the reduction.
Speaker Change: FX has strengthened significantly post election.
Speaker Change: In November and December the U S. Dollar has strengthened so that headwind is has grown and then of course as we've proactively taken these actions and genomics. So thats the biggest piece of it within some other items, netting but really sample collection being kind of the third piece to get to $25 million and when we think of it the EBITA.
Speaker Change: Line there is some fall through on that less so from less so from.
Speaker Change: The genomics because.
Speaker Change: Also hand in hand, restructure out a lot of the a lot of the infrastructure associated with that.
But from you get the fall through from FX, which actually given our profitability.
Speaker Change: And not having as much kind of overhead and infrastructure internationally come through at a little above the fleet average rate and then and then.
Speaker Change: Also as well as simple sample collection and other products come through and then I think it's worth pointing out we've talked consistently through the year that from a shipping and distribution cost standpoint, we knew we had inefficiencies last year.
Speaker Change: We had planned.
Speaker Change: To improve on that this year, we've been running higher than we had thought particularly in the first half year that we have actions in place.
Speaker Change: Do better there, which is not restructuring, but those are operational actions, we're working on that for the second but ultimately the second half, but ultimately that impacts the year guide as well.
Speaker Change: Thank you for that David.
Speaker Change: Why did it take another quarter diluting our lives. This you should know enough of this.
Speaker Change: Heading into the other day.
Thank you for being so blunt here.
Speaker Change: Are you talking specifically about shipping and distribution costs I think a lot.
Speaker Change: What we are.
Speaker Change: Well, we definitely saw the impact in Q1, and I think we talked with folks about that when we saw.
The margins lower than we thought in Q1 as the gross margin level. It also impacts opex panel, what kind of shipping and distribution.
Speaker Change: It is we did see some improvement sequentially in Q2.
Speaker Change: But it's really about responding to.
Speaker Change: Your questions really fair <unk>, but also I think it requires a look back at what we went through last year and shipping and distribution, where we were just focused on trying to get things out the door and our post integration environment and then as we're settling that out.
Speaker Change: We had to kind of bottom out I think what it looked like in a normalized state. So and I think we were really working through that coming into the year in a normal course business that isn't going through these integration activities I agree with you, but I think it's more of a symptom of the changes we've gone through over the last four quarters and to be honest it's.
Speaker Change: Been compounded by some shipping rate issues, which are a little difficult to predict particularly as it relates to ocean freight.
Speaker Change: Okay.
Speaker Change: And then I have a similar question is Brandon backfill that your phone is showing a couple of quarters together on offense after losing some customers share, but now youre trying to win it back where does the current customer sentiment stand today, and our customers holding off before recommitting.
John Agents: Yes, that's super it's John I'll take that I mean.
John Agents: I think customer sentiment gets better every day, because we are continuing to show them that we have supply and we can meet their needs and we saw that.
John Agents: Where are we.
John Agents: Kind of regaining back to those customers.
John Agents: Over the different over Q2 over Q1, and you know, while we know that it's going to be.
John Agents: Challenging to get everybody back we.
We do see that the customers are coming back they are happy with us.
John Agents: And the ones that take a little bit longer what we need to do is what we're doing now we need to offset that with new customers and growth and that's really what we're focused on so.
We've seen the customers come back, but this is something where we need to prove ourselves to them every day and we are in each day, we do it the more comfortable they get.
John Agents: Got it.
John Agents: This is a smaller part of your business, but it's a significant one you mentioned Q1<unk> animal safety peaked in U S. In 'twenty two and then decline last two years are you expecting that again for the remainder of this unit or are there any early indicators that that is happening any factors that would give you a different reaction.
John Agents: Yeah, I mean I get into this a lot.
John Agents: I hate to pick the tops and the bottoms, but last quarter when we saw the.
John Agents: When we saw animal safety kind of drop.
John Agents: We made sure to say look it was there really wasn't.
John Agents: Kind of a fundamental destocking and we saw really good sequential improvement.
John Agents: To that second quarter, and really like we said that first quarter was a couple of specific issues on a few large distributors that.
John Agents: But we didn't think it was a broader issue and in fact that was the case.
John Agents: We had a bit of a backlog that.
John Agents: But we had on a third party supplier, which required in the quarter that really helped us.
Speaker Change: Thank <unk>.
John Agents: On pretty solid footing right now for animal safety.
John Agents: We continue to see our move out through distributors being positive.
John Agents: So to me that gives me confidence going forward in animal safety.
Okay fair enough. Thank you guys.
Speaker Change: Thank you Sundar. Thank you.
Speaker Change: And your next question comes from the line of David The Rustenburg with Piper Sandler. Please go ahead.
Speaker Change: Alright, thank you.
Speaker Change: Okay.
Speaker Change: Well.
David we're not able to hear you.
Speaker Change: Really good.
Speaker Change: Depot model homes, what about now can you hear me.
Speaker Change: Now we can you hear me now.
Speaker Change: Okay perfect alright, thank you.
Speaker Change: So so.
Speaker Change: You mentioned about the the freight and distribution costs can you help out piece out how much of it is related to just distribution channels center changes.
Speaker Change: Kind of can that reorganization versus external factors, such as oil prices or.
Speaker Change: So you mentioned kind of see shipping where I'm just trying to get a handle of.
Speaker Change: Just when that code and how that comps in Whatsapp you do we need to probably continue to worry about in the future just because you obviously can't control oil prices or shipping.
Speaker Change: Yes.
Speaker Change: Yeah, Yeah, no look David good good good question.
Speaker Change: I think the majority of it relates to.
Speaker Change: Where we ended up kind of bottoming out internal costs associated with our.
Speaker Change: Internal logistics and distribution operations once we kind of got through.
Speaker Change: What we went through last year, we are seeing higher rates I would also say I think we have opportunity in rates and that is.
Speaker Change: One of the threats that we're pursuing for second half is renegotiating some of those contracts, but I think.
Speaker Change: Look look we're also bringing in some additional <unk>.
Speaker Change: Talent internally on that side, we just had someone start that we're really enthusiastic about who will be taking a new strategic look at our whole global network. So these things are difficult to move in the short period of time, because the priority is to keep them moving.
Speaker Change: We'll have a number of number of actions I think youll see the change in the future being driven more operationally than by external factors.
Speaker Change: Got it.
Thank you and then I'm just going to ask on the on the genomics and focusing on profitability here.
Speaker Change: You mentioned on the call.
Speaker Change: You have a little bit more focus on large animal does that mean, you're exiting companion.
If you are can you talk about some of the how that might impact some of the other areas in terms of companion animal for example.
Speaker Change: Set aside or.
Speaker Change: I know you have a clean do you have the companion.
Speaker Change: Our cleaners and disinfectants line anything like that I'm, just I'm, just trying to think about it as kind of a continuation of brandon's question about how are.
You are you have you you grow by volume, but at the same time, you might be reducing something so.
Speaker Change: Can you just run us through how you came up with the decision there.
Yes look historically genomics wasn't really good growth source for us both organically and inorganically, but in recent years, we've seen kind of the competition expand and while some of the markets are attractive some of the commoditized.
Speaker Change: That's why we're really focusing on where we can add value is when we sell a product with insights directly to customers. So we're helping the customer take that data and make good decisions.
Speaker Change: Which is the case in our differentiated cattle when do you think about small production animals and even companion.
Speaker Change: Today, the current big pieces of our business as we supply the rod genomic results.
Speaker Change: And then the <unk> market and then that customer it takes those results and then they interpret or are they then change it and give it to their customer base. So while we're not exiting that what we see is that.
Speaker Change: That that.
Speaker Change: Companion genomics market.
Speaker Change: It is slowing down we havent seen the puppy boom that we saw for <unk>.
Speaker Change: Covid has been slowing down so that market is slowing down and we're seeing a lot of those tests being more outsourced because it's rod genomic data right now.
Speaker Change: So what whats.
Speaker Change: Challenging demand and Frustrates me is.
Speaker Change: Because that market's declining if I like.
Speaker Change: What gets me interested and excited about the business I think genomics out of second quarter for animal safety.
Speaker Change: The growth rate goes from three 5% to seven to seven 3%.
Speaker Change: Alright, so we have it.
Speaker Change: And I have a similar thing and then food safety, if I take a sample handling.
Speaker Change: Q2 growth goes from three six to $8, one and year to date goes from two four to six.
Speaker Change: So I have.
Speaker Change: A couple of really bespoke issues that we are working diligently on.
To fix but that's what kind of.
Gets me excited and see where the underlying business is growing versus these two things that are really headwinds for US yeah. David Let me add let me add two points to what John said, So I think I think Jon mentioned this ballroom fortunate that.
Speaker Change: We're seeing less outsourcing and that's what we do we do the back office testing for companion versus having our product direct to the consumer. So we're seeing that decline and we anticipate seeing that continued to a trip frankly, but to your other point the relationship to other companion products, we're not exiting companion, we're exiting specific.
Speaker Change: Specifically the back office work that we do without exiting we see it a treaty frankly now and it is unrelated to our other products that would be focused on companion you know that most of our products are focused on on production animals, but we do have some focused on companion, but a lot of times when we talked that we're talking production of <unk>.
Course, so there wouldn't be any additional spillover from that.
Sure. If you guys can you hear me I am having conducted excuse me.
Speaker Change: Thank you so much.
Speaker Change: Okay. Thanks, David. Thank you were ready for next question. Please.
Speaker Change: Your next question comes from the line of Thomas <unk> with Nephron Research. Please go ahead.
Thomas: Hey, guys.
Speaker Change: Question, I guess relates to hey.
Speaker Change: My question relates to kind of animal safety had I guess, the pruning of the portfolio or potentially.
Speaker Change: I guess.
Selling parts.
Speaker Change: Hi.
Speaker Change: It's a little difficult weather.
Speaker Change: Is kind of.
Speaker Change: I guess plays out over a longer period of time. So is there a certain time period, where you would expect this.
Speaker Change: It has to occur and that if not this is really the portfolio going forward or how do you think about kind of the timeframe.
Speaker Change: Towards I guess, making any strategic decisions or kind of I guess.
Speaker Change: Growing off the base that you had.
Speaker Change: Yeah. Thanks, Thanks, Tom I mean, well look it's difficult to talk too specifically until we've got something completed but let me kind of take you through our approach because I think that will help you kind of think how we're doing so look as you know animal safety is made up of like four or five product categories. It is not a monolithic business and we'd look.
Speaker Change: With those.
Speaker Change: Each category in our portfolio analysis, and then what we did is we focused on.
Speaker Change: Those few categories that we have that are lower growth lower profitability in more cyclical.
Speaker Change: We did the internal work on those categories and we've moved into the next stage with active engagements.
Speaker Change: Right.
Speaker Change: Collectively we are targeting a significant amount of animal safety revenue probably around half.
Speaker Change: And that's kind of the process that we're in right now and so.
Speaker Change: We'll keep you guys updated as developments happen.
Speaker Change: Great. Thank you very much I appreciate it.
Tom: Thanks, Tom.
John Agents: And Im showing no further questions at this time I would like to turn it back to our CEO John <unk> for closing remarks.
Tom: Thank you so.
Tom: Thanks, everybody thanks for being on the call with us today.
Tom: I want to thank our team members for all their hard work.
Tom: In 2024, and the work they continue to do.
Tom: We've accomplished a tremendous amount in 2024 and are looking forward to a much better 2025, we hope all of you have a prosperous and happy 2025, so thanks for joining us.
Speaker Change: Thank you presenters, ladies and gentlemen. This concludes today's conference call. Thank you all for participating you may now disconnect.
Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Okay.
Speaker Change: [music].