NEOGEN CORP Q2 FY2025 earnings call

• The second quarter showed steady progress with core revenue growth accelerating in both segments, sequential margin expansion, and better free cash flow. • In the food safety segment, end markets showed gradual improvement despite food price inflation, and Neogen expanded its product portfolio with the addition of Sirius Count plate. • Restructuring actions were initiated in the genomics business to drive higher profitability, with additional restructuring activities expected in the third quarter. • Sample collection production ramp-up is continuing, with all product lines operational and on track to reach prior production levels by the end of the third quarter. • The new petri film facility is progressing well, on track for initial test production in the fall of 2025. • Dave Naemura will take on the role of chief operating officer in addition to his duties as Chief Financial Officer.

In the food safety segment, revenues were $164 million in the quarter, flat year-over-year due to foreign exchange (FX) headwinds offsetting core growth of nearly 4%. The core growth was led by biosecurity products and the ATP product line. The animal safety segment had revenues of $67 million, with core revenue growth of 3.2% compared to the prior year quarter. The global genomics revenue was down mid-single digits on a core basis, with growth in the differentiated cattle business offsetting weakness in the companion animal side of the business.

• Updated guidance accounts for FX headwinds, revenue impact from genomics restructuring, and a longer ramp-up period for sample collection production. • Adjusted EBITDA guidance reflects changes in anticipated revenue, lower first half margin due to higher freight and distribution costs and inventory impairments. • Expect margin expansion in the second half from restructuring actions and operational cost initiatives. • Full year free cash flow is still expected to be positive.

• Foreign exchange headwinds continuing to impact revenue. • Integration complexities leading to a non-cash goodwill impairment charge. • Material weaknesses in internal controls related to timely execution and documentation. • Challenges in sample collection production ramp affecting revenue. • Shipping and distribution inefficiencies impacting margins in the first half.

Q: Talk about the implications of a lower revenue base on margins and EBITDA margin prospects.

A: Dave Naemura stated that genomics restructuring focuses on creating a higher quality, margin-focused business. John Adent mentioned that restructuring actions are in place to drive towards a mid-twenty percent EBITDA margin in the second half.

Q: Near-term trends on sample handling and share loss.

A: John Adent said sample collection production ramp was delayed, with Q3 expected to be at 100% capacity, and the Q1-Q2 impact was approximately $4-6 million, easing in the third quarter and recovering in the fourth.

Q: How does the evolving food regulation space impact Neogen?

A: John Adent said increasing regulatory interest creates long-term tailwinds, and Neogen's broad product portfolio helps customers meet new food safety challenges.

Q: Magnitude of currency, genomics attrition, and sample collection delay impact on guidance.

A: Dave Naemura said FX and genomics attrition are the biggest components of the guidance reduction, with sample collection delay being the third piece, and EBITDA fall-through from FX, genomics, and sample collection.

Q: Shipping and distribution cost impact and timeline.

A: Dave Naemura said the majority of shipping and distribution costs relate to internal logistics, with operational actions in place to improve in the second half, impacting the year's guidance.

Q: Genomics focus on large animal and impact on companion.

A: John Adent and Dave Naemura explained that focusing on large animal, the companion genomics market is slowing due to less outsourcing, with no spillover to other companion products.

Q: Portfolio pruning in the animal safety segment.

A: John Adent said there are active engagements on strategic alternatives for a portion of the animal safety segment, targeting value creation for shareholders.