Neogen Corporation (NASDAQ:NEOG) Q2 2024 Earnings Call Transcript
Neogen Corporation (NASDAQ:NEOG) Q2 2024 Earnings Call Transcript January 9, 2024
Neogen Corporation misses on earnings expectations. Reported EPS is $0.11 EPS, expectations were $0.15. NEOG isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, and welcome to the Neogen Corporation Second Quarter 2024 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note, this event is being recorded. I would now turn the conference over to Bill Waelke, Head of Investor Relations and Treasury. Please go ahead.
Bill Waelke: Thank you for joining us this morning for the discussion of the second 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 second quarter results, as well as a presentation with both documents available in the Investor Relations section of our website. On our call today, 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 2 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. With that, I'll turn things over to John.
John Adent: Thanks, Bill. Good morning, everyone, and welcome to our earnings call covering the second quarter of our 2024 fiscal year. This is an exciting time at Neogen as we're approaching several near-term milestones on the journey of integrating the former 3M Food Safety business. Following the launch of our new ERP system in September, we made further progress by initiating the exit of several transition service agreements that we have with 3M, while continuing to ramp up our internal capabilities. On the manufacturing front, we also successfully completed the first phase of the relocation of the former 3M pathogen and sample handling product lines into Neogen facilities. The final relocation of the sample handling production we now expect to complete in Q4, but otherwise remain on track to exit all transition agreements outside of Petrifilm manufacturing by the end of the third quarter.
Moving to our results for the quarter, they were in line with the expectations we communicated on our last earnings call, with second quarter revenue and adjusted EBITDA margin modestly ahead of the first quarter. The backlog of open orders we mentioned on our last earnings call remained at the end of the second quarter, primarily affecting legacy Neogen Food Safety products and negatively impacting our core revenue growth by approximately 300 basis points to 400 basis points. We're encouraged by the orders we have in hand and are prioritizing working through the current backlog. In our Food Safety segment, while core revenue grew modestly, it would've been up in the mid-single digit range absent the elevated open order backlog. We experienced solid growth in Petrifilm compared to the prior year, and we saw an acceleration in Asia Pacific from the first quarter, with Japan and China showing improvement through a combination of winning back and replacing share that was lost due to historical inconsistencies in supply from our transition manufacturing partner.
The strongest performance in Food Safety came in pathogen detection, where we leveraged the complementary Neogen and 3M microbiological capabilities to win new business in a core product category where we see significant growth opportunities. In our Animal Safety segment, the distributor destocking we've been experiencing moderated in the quarter. Inventory levels in the channel remain low, but the overall destocking was at a reduced rate. Excluding genomics, where sales do not go through distribution, core growth in Animal Safety saw a nice improvement from Q1, with the rate of decline in Q2 improving by 400 basis points. In genomics, we are seeing some incremental headwinds from the strategic shift to focus to larger, more profitable production animals, as well as companion animals.
Although the environment remains dynamic, we're encouraged by the signs of improvement we've seen in our end markets. In addition to the moderating destocking in Animal Safety, the end user demand backdrop remained stable for the first quarter. On the Food Safety side, inflation is beginning to ease, albeit slowly, and there is a general view that a continuation of this trend will lead to volume inflection for food producers in calendar 2024. We view these as positive developments, but with the greater visibility the first half of the year now affords us, we believe these improvements are happening at a slower pace than our full year outlook had originally contemplated. Accordingly, we're updating our full year outlook to reflect the current view of these impacts, including the strategic shift underway in our genomics business.
With the largest external challenges we've been experiencing seemingly beginning to stabilize, our focus remains on the value creation opportunity we have through continued progress on the integration of the former 3M Food Safety business, while positioning ourselves to capitalize on an improved end market environment. Now, I'll turn it over to Dave for some more insights into our results for the quarter.
Dave Naemura: Thank you, John, and welcome to everyone on the call today. Jumping into the results, our second quarter revenues were $230 million, essentially flat compared to the same quarter a year ago. Core revenue, which excludes the impact of foreign currency, acquisitions, and discontinued product lines, declined just under 1% for the quarter. Acquisitions and discontinued product lines added a net 20 basis points, while foreign currency contributed 50 basis points compared to the prior year. Notably, we passed the one-year anniversary of the 3M Food Safety transaction on the first day of our second quarter, and accordingly, those revenues are now included in our core growth. Moving to the segment level, revenues in our Food Safety segment were $164 million in the quarter, an increase of 2% compared to the prior year, including core growth of 1%.
The core growth was led by the bacterial and general sanitation product category, which benefited from the pathogen business wins John mentioned, as well as increased distributor orders in Latin America. Within the Indicator Testing, Culture Media, and Other category, solid growth in Petrifilm and food quality and nutritional analysis sales was offset by declining in Culture Media due mainly to a large one-time order in the prior year. Natural toxins and allergens had a mid-single digit core decline, with growth in allergen test kits offset by decline in natural toxin test kits, due primarily to shipment delays. Quarterly revenues in the Animal Safety segment were $65 million, which includes a core revenue decline of 5% compared to the prior year quarter.
The destocking trend abated somewhat, with non-genomic sales that go primarily through distribution, down less than 3%, which was a notable improvement from the first quarter. Core growth in this segment was led by life sciences, a result of increased demand for substrates used by manufacturers of diagnostics tests and vet instruments and disposables, with higher sales of detectable needles and syringes. Growth in these product categories was offset by continued lower sales of certain animal supplements and wound care products in the animal care and other category due mainly to ongoing supply constraints. Our biosecurity products experienced a slight core revenue decline, with higher volumes and rodent control products offset by decline in insect control products, largely the result of the phasing of certain distributor booking programs.
Worldwide genomics revenue was down mid-single digits on a core basis, which marked a deceleration from the first quarter. We continued to see a decline related to small production animals, reflecting our strategic shift away from these offerings. The effects of this strategic shift in focus offset growth in international beef markets. From a geographical perspective, core revenue growth was mixed. Growth was led by Latin America, which grew low double digits from strong Petrifilm, pathogen, and hygiene monitoring sales. Asia Pacific grew modestly, with solid growth in genomics in Australia and China mostly offset by a slight decline in Food Safety sales. We saw a trajectory of recovery in Japan, while China, although a very small part of our total business, showed significant improvement from the first quarter.
In the US and Canada, core revenue declined in the mid-single digit range. Food Safety sales were mostly flat, with solid growth in Petrifilm and pathogens offset by the compare-driven decline in Culture Media, while Animal Safety sales, which include genomics, were down mid-single digits. The US and Canada is the region most impacted by the build and backlog that we saw during the quarter. Finally, sales in our EMEA region also declined in the mid-single digit range, as strong growth in pathogens was primarily offset by the aforementioned shipment delays in certain other Food Safety product categories. Gross margin in the second quarter was 50.9%, representing an increase of 200 basis points from 48.9% in the same quarter a year ago, with the margin expansion driven primarily by benefits from favorable product mix.
Adjusted EBITDA was $55 million in the second quarter, with an adjusted EBITDA margin of 24%, representing a sequential improvement of 110 basis points from the first quarter. On a year-over-year basis, last year's second quarter followed the closing of the 3M Food Safety transaction, and adjusted EBITDA at that point did not include a full reflection of necessary expenses, which were only beginning to ramp up at that time to accommodate the increased size of the company and enable the exit of various transition arrangements. Adjusted net income was $25 million for the quarter, with adjusted earnings per share of $0.11, compared to $31 million and $0.15, respectively in the prior year period. The decline in adjusted net income was driven by lower adjusted EBITDA, which more than offset the reduced interest expense.
We ended the quarter with gross debt of $900 million, 67% of which remains at a fixed rate, and a total cash position of $230 million. Relative to the first quarter, cash was impacted by an increase in working capital, primarily reflecting the purchase of finished goods inventory from 3M as we move the acquired products into our own distribution network as part of our transition agreement exit activities. As John mentioned earlier, with the first half now behind us, we are in a better position to update our view of the fiscal year. While we believe things are beginning to stabilize in our end markets, we do not believe they're improving as steadily as contemplated in the original guidance we provided in July. We are updating our guidance to reflect the slower pace of recovery, as well as incremental headwinds in our genomics business, and now expect full year revenues to be between $935 million and $955 million.
Taking into account the impact of the lower expected revenue, we now expect adjusted EBITDA will be in the range of $230 million to $240 million. We continue to expect capital expenditures to be approximately $130 million, including integration-related capital expenditures of approximately $100 million, the majority of which we do not expect to repeat next fiscal year. With respect to the third quarter, we expect a modest increase in revenue from the second quarter, despite it historically being seasonally lower, and some impact from our ongoing work with transition agreement exits and the elevated backlog. We expect our adjusted EBITDA margin in the second half of the year to be higher than the first half. This would reflect sequential improvement in the third quarter and more substantially in the seasonally higher fourth quarter, driven by increased volumes and the exit of transition agreements.
I'll now hand the call back to John for some closing thoughts.
John Adent: Thanks, Dave. We took significant integration steps in the second quarter, launching our new ERP system and initiating the exit of our transition services agreements, which are important parts of the journey we're on to integrate the former 3M Food Safety business. While working on the integration, we've also been navigating end market weakness, which has unusually been happening simultaneously in both Food and Animal Safety, primarily driven by the post-COVID recovery in terms of inflation and rightsizing of output. Encouragingly, the second quarter we began to see signs that this end market weakness is abating, particularly as it relates to food production volumes and distributor inventory levels. We believe our end markets are supported by secular tailwinds, and the progress we've been making on the integration and prioritization of key growth initiatives only strengthens our position from which to capitalize as they improve.
Moreover, as we continue to move forward through the integration, it puts us closer to what we believe is an even more attractive financial profile post integration, particularly as capital spending settles in at normal levels. Our team members around the world have expended tremendous effort on the integration of these high-quality businesses and continue to do so ahead of our upcoming milestones. And I want to wrap up here today by once again thanking them for their hard work and dedication. I'll now turn things over to the operator to begin the Q&A.
See also 15 Best Software Stocks to Buy Now According to Coatue Management and 11 Cheap Pot Stocks to Buy.
To continue reading the Q&A session, please click here.
