NEOGEN CORP Q1 FY2025 earnings call

Management Statement and Operational Highlights

• Crossed two-year anniversary of 3M Food Safety transaction, solidifying position in food safety market where ~two-thirds of revenue is generated.
• Food safety market has secular tailwinds like increasing regulatory requirements, consumer expectations for food transparency, and high costs of contaminated products.
• Animal Safety segment managing through cyclical lows in U.S. market, with sales to distributors influenced by order timing and inventory levels.
• Genomics business saw first quarter revenue down y/y but improved from Q4, with growth in beef markets offset by shift from small production animals.
• Integration progress: ERP-related challenges at primary distribution center resolved, Petrifilm facility progressing well with equipment shipment expected in January, and efforts ongoing to recapture market share through constructive customer dialogues.

Segment Performance

• Food Safety Segment: Revenues were $159 million in the quarter, a decrease of 4% compared to the prior year, including core growth of 1%. Core growth was led by Indicator Testing, Culture Media, and others, partially offset by a decline in Sample Collection.
• Animal Safety Segment: Revenues were $58 million, with a core revenue decline of 8% compared to the prior-year quarter. Strong growth in Rodent Control products was offset by declines in other categories.
• Genomics Segment: Worldwide revenue was down mid-single-digits on a core basis. Solid growth in beef markets was offset by the shift away from small production animals in the U.S., though most of this impact was anniversaried by the end of Q1.

Guidance

• Maintaining previously issued guidance.
• First quarter adjusted EBITDA margin expected to be the lowest of the year, with margin improvement in the rest of the year driven by higher revenue volumes, gross margin improvement, and operating expense efficiency.
• First quarter CapEx expected to be the highest level of the year, followed by the second quarter.
• Anticipate free cash flow for 2025 to be positive due to higher adjusted EBITDA, lower CapEx, and 3M working capital load-in not repeating.

Risks

• Risks described in recent annual report on Form 10-K and other SEC filings.
• Shipping challenges and distributor order timing/inventory levels impacting sales.
• End market conditions in Animal Safety segment at cyclical lows affecting sales.

Question and Answer

• Q: How are you looking at investments in sales and marketing, R&D towards food safety now with the 3M portfolio? A: Dave Naemura mentioned significant commercial investment in international regions and Petrifilm as an R&D priority. John Adent stated they'll continue investing in products with strong profitability profiles as per the deal thesis.
• Q: Thoughts on debt and capital allocation for reducing leverage and tuck-ins? A: John Adent said capital allocation priority is funding integration first, then reducing leverage, with M&A capacity freed up as leverage is reduced.
• Q: Customer recovery ratio for Petrifilm and broader business? A: John Adent said Petrifilm customers in Japan have been won back and seeing growth, but broader business affected by EWM system issues still needs to rebuild trust with customers for consistent supply.
• Q: Customer losses quantification and customer interactions? A: Dave Naemura mentioned ~$8 million share headwind in Q1, mostly in U.S. John Adent discussed customer frustration and showing improvements like MDS efficiency gains to win back customers.
• Q: Feedback on high-volume Petrifilm feeder and impacts of hurricanes? A: John Adent gave an anecdote about a customer impressed with the feeder. Dave Naemura said no quantification of recent hurricanes' impacts at the time.
• Q: Chief Commercial Officer role, portfolio review, and China market? A: John Adent talked about splitting roles for focus, ongoing portfolio review for capital allocation, and emphasizing international regions including Asia Pacific for growth, not relying solely on China.