Neogen Corporation (NEOG) Earnings Call Transcript & Summary

Welcome to the 2020 Annual Meeting for Neogen Corporation. Our host for today's call is Jim Borel, Chairman of the Board. [Operator Instructions] I will now turn the call over to your host, Mr. Borel. You may begin, sir.

Good morning, everyone. I'm Jim Borel, Chairman of the Board of Directors of Neogen Corporation. Welcome to the Neogen 2020 Annual Meeting. It's the 38th annual meeting of the company, the 31st Annual Meeting of Shareholders as a publicly held company, and of course, it's the first ever virtual annual meeting of Neogen's shareholders due to the safety considerations of the COVID-19 pandemic. We appreciate your understanding of the need to handle this meeting virtually, and we're pleased to have you attending today. In order to provide a fair and informative meeting, we've established rules of conduct for the meeting. The rules of conduct can be found in the lower right corner of your screen. We'll conduct the meeting in agreement with these rules and your adherence to the rules of conduct is greatly appreciated. [Operator Instructions] We ask that questions be appropriate and concise, and we'll respond to the relevant questions during the allotted time that we have today. First, let me introduce the company officers. I'll start with John Adent, President and Chief Executive Officer. Steve Quinlan, Vice President and Chief Financial Officer; Doug Jones, Vice President and Chief Commercial Officer; Julie Mann, Vice President and Chief Human Resource Officer; Joe Corbett, Vice President, Animal Safety Sales and Marketing; Shane Fitzwater, Vice President, Animal Safety Operations; Dr. Jason Lilly, Vice President, International Business; Marylinn Munson, Vice President, Genomics; Rob Donofrio, Vice President, Research and Development; and Jerome Hagedorn, Vice President, North American operations. Now I'd like to take a few moments to acknowledge a key leadership transition that's concluding as we close fiscal year 2020 and this annual meeting. Neogen's founder and long-time CEO and Chair, Jim Herbert, is not standing for reelection to the Board this year. This leadership transition began in 2017 with the appointment of John Adent as the President and CEO. Mr. Herbert then stepped down as Board chair in April of this year. Of course, I'm honored and humbled to take on the role of Board Chair for this great company, and I recognize the big shoes I have to fill following Mr. Herbert. But now as he leaves the Board of Directors, we will sorely miss his strong leadership, his deep industry understanding and insights and his determination and, of course, his ever-present wit. We'd like to do 2 things. First, I'd like to share a resolution on regarding Mr. Herbert's tenure that we passed as a Board yesterday unanimously. And if you'll give me just a moment, I'll read that to you. This is an honor of the outstanding service to Neogen of James L. Herbert, whereas James L. Herbert was selected by fellow company founders to become the Chief Executive Officer of a start-up company that would become Neogen Corporation in 1982; and whereas, Mr. Herbert served as Neogen's Chief Executive as the company grew from just an idea to annual revenues of more than $361 million in 2017; and whereas Mr. Herbert served on Neogen's Board of Directors, including stands as Board Chairman, from the company's founding until October of 2020; and whereas, Mr. Herbert's vision extended beyond creating a great company to an unwavering commitment to Neogen's home communities and its global employees; and whereas Mr. Herbert's actions helped to positively shape the food and animal safety industries Neogen serves and impacted the society at large to the impact of the company's products and services and shared expertise; and whereas, Neogen would clearly not exist without Mr. Herbert's tremendous talent and drive, he saw a need for what Neogen could become and worked tirelessly over the years to achieve his dream. Therefore, now be it resolved that the Board of Directors acknowledges and recognizes the retirement of James L. Herbert from its Board of Directors at the close of the Annual Meeting of Shareholders on October 8, 2020, and extended the company's deepest appreciation and heartfelt thanks for its very existence. Thank you, Jim. And I'd also like to share a brief video that highlights some of the significant contributions that Jim Herbert has made in the founding and long leadership of Neogen. [Presentation]

Mr. Herbert, congratulations on your outstanding career and contributions. And on behalf of the Board, shareholders, customers and employees of Neogen, thank you. Now let me give the floor to Mr. Herbert for a few remarks.

Wow, I hope there's a copy of that. This is the first time I'm seeing it so. Well, it was a great tribute. Thank you so much for that tribute. And thank you now for giving me a couple of minutes to talk to these shareholders, strictly as a shareholder to shareholders. So it was effective today for the first time in Neogen's 38-year history, there's not a Herbert on the Board of Directors. Well, actually, I've not been involved in active management in the last couple of years. I've stayed on the Board in hopes to help with some continuity. John has been building his own management team. And based on the quarterly announcement of a couple of weeks ago, it appears that they're gaining some traction. Revenues and earnings are improving. And I know that they've introduced 7 new products in the last 4 months and updated or upgraded to several others. The end of the 2018 fiscal year was a good time for me to turn over the reins to John who had been on board then for about a year. Revenues for that year reached our goal of once again doubling revenues in 5 years. We reached $400 million in revenue. We've done this 4 times in 5-year campaigns, from $20 million to $50 million, from $50 million to $100 million, from $100 million to $200 million and then to $400 million. I was a bit like a coach retiring after capturing a national championship. I've often been asked what I accounted for Neogen's success. And my answer was and continues to be that we took advantage of being at the right place, at the right time with the right products, and most importantly, with the right people. I've often said, if you take care of your employees, they'll take care of your shareholders. And I believe that to be true. To our shareholders, thank you for your support, your ideas, and at times, your patience. Because I'm not really retired, I'm just changing my office locations. I'm still on several boards, and I'm working closely with a couple of universities and I still have my Texas ranches. But congratulations to these new Board members. About 50% of this new Board will have 2 years or less experience on the Neogen Board, and I'm sure they'll bring some fresh, new ideas. Once again, my thanks to our shareholders, employees and directors. Let's stay in touch. Thank you.

Thank you, Jim. Thanks for everything you've done and we will look forward to staying in touch for sure. Now let's move into our regular business of the meeting. To simplify voting procedures, we would appreciate all the votes being cast by proxy. Rod Poland, Investor Relations manager; and Sarah Demey, Assistant Secretary, have been appointed to serve as the voting tabulation committee for today's meeting. If there's anyone who has not submitted a proxy or who would like to vote by proxy today or wishes to withdraw or recast a vote, please select the Vote Here button on the annual meeting portal. Your indication -- or excuse me, your identification and number of shares eligible to vote will automatically be recorded. So first, do we have a quorum present by proxy?

The company's bylaws require that a majority of shares eligible to vote must be present in person or by proxy to enable the company to proceed with this annual meeting. There are 53,031,168 shares eligible to vote at this annual meeting. Based on preliminary numbers, 49,506,152 shares have been voted by proxy. This accounts for 93% of the total shares eligible, and therefore, a quorum is present.

Thank you, Sarah. Based on this report, I hereby declare the annual meeting of Neogen Corporation to be duly convened. All shareholders of record as of August 11, 2020, should have received a copy of the company's annual report for the 2020 fiscal year, including the audited financial statements. BDO is the independent auditor for the company. [ Rick Babb ], assurance partner; and Steve Maniaci, tax partner, from our auditing firm of BDO, are with us today. Rick, are there any matters concerning the company's audited financial statements other than those presented in the audited statements that you believe should be called to the attention of the shareholders?

Thanks, Jim. No, I don't have any comments to make at this time.

Thank you. If there are questions concerning the company's audited financial statements that anyone would like to have addressed by the company's auditors, they will be -- they can be addressed during the question-and-answer session. At this time, I'd call for a motion of shareholders to accept the financial statements.

Mr. Chairman, I move that we accept the financial statements as published.

Thank you. Is there a second?

I second.

All those in favor of the motion, say aye. [Voting]

Thank you. Opposed? Nay. [Voting]

Hearing none, the motion passes. The Board of Directors of your company met 7 times in regular meetings and numerous committee meetings during the fiscal year 2020. The Board believes it discharge its responsibilities to the best of its ability. At this time, I request a motion ratifying the actions of the Board of Directors during the 2020 fiscal year.

So moved.

It's been moved. Is there a second?

Second.

It's been moved and seconded. So all in favor, please say aye. [Voting]

Opposed? Nay. [Voting]

And the motion passes. In the notice of this annual meeting, 3 issues were listed to be brought before the shareholders for their action. The first issue is a proposal #1, the election of directors. And I'd like to first introduce the Board members who were not up for election this year. First are the Class I directors whose term expires in 2021. First is myself, Jim Borel; Chancellor Ronnie Green and Ambassador Darci L. Vetter. The Class II directors whose terms expire in 2022 are Mr. John Adent; Dr. William Boehm; and Mr. James Tobin. And now I'd like to introduce the Class III directors who have been nominated to serve until 2023 or until their successors have been elected. They are Mr. Bruce Papesh; Dr. Catherine Woteki; and Mr. Ralph Rodriguez. No additional nominations for directors have been received. Therefore, I call for the vote. Sarah, would you please provide the results of the tabulation of votes by proxy?

At least 42,005,640 shares were voted in favor of election of all nominees. No more than 3,966,399 shares were selectively withheld for any individual director. 91% of shares voting in this proposal were cast for the election of all nominees. Based on these preliminary numbers voted by proxy, proposal 1 passes.

Thank you. I hereby declare the nominated candidates to be elected as directors, and a special welcome to our 2 new directors. We're glad to have you aboard. The second proposal to come before the shareholders that was described in the proxy is for the approval by a nonbinding vote of the compensation of the company's executives each year. Neogen's proxy statement contains a section entitled Compensation Discussion and Analysis. Federal law requires that shareholders be given an opportunity to express their approval of compensation of company executives. Even though the federal legislation requires that shareholders be allowed to vote on executive compensation, the vote is -- the vote of approval or disapproval isn't binding on the Board. But we, as stated in proposal #2 in your proxy, the Board of Directors recommends that shareholders approve on an advisory basis the compensation of the company's named executive officers as were disclosed in the company's proxy statement. Sarah, would you please provide the results of the tabulation of votes by proxy on proposal 2?

45,025,311 shares were voted in favor of proposal 2. 837,846 shares were opposed. 108,882 shares abstained in this vote. 98% of shares voted were cast for proposal 2. Based on these preliminary numbers voted by proxy, proposal 2 passes.

Thank you. The third proposal to come before the shareholders is proposal 3, which calls for the ratification of appointment of BDO as the company's independent auditors for fiscal year 2021. Again, I call for the vote. Sarah, would you please provide the results of the tabulation of votes by proxy for proposal 3?

49,114,027 shares were voted in favor of proposal 3. 348,359 shares were opposed. 43,766 shares abstained. 99% of shares voted were cast for proposal 3. Based on these preliminary numbers voted by proxy, proposal 3 passes.

Thank you for that approval. And so I hereby declare the approval of ratification of the company's auditors. So at this point, I'd like to turn it over to our President and CEO, John Adent, for his thoughts. John?

Thank you, Jim. And I'd also like to welcome everyone to our 2020 Annual Shareholder Meeting. I'm joined this morning by our Chief Financial Officer, Steve Quinlan, who is going to provide some details on our results for the year. Normally, we've used our annual meeting to provide perspective on the performance of our various business segments, but our 2020 fiscal year is anything but normal. Starting with the second half of the year, our team worked tirelessly to fight the COVID-19 global pandemic and ensure a safe food supply for all of our customers around the world. We moved really quickly to secure and diversify our supply chain as early as last December as our Asian markets were the first to be affected. As the virus began to spread around the world, we took immediate action to protect our employees and our business. We established an emergency response team that held frequent meetings to constantly refine our response plan and implement all those plans. In early March, we shifted nearly -- or 70% of our administrative sales and other nonmanufacturing employees to work remotely from home and we banned all travel. Those who were essential to our on-site operations were protected with split shifts, elimination of inter-office travel, temperature checks, social distancing, face masks and many other safety measures. We have constant communication with our team members as we continue to operate at our new normal. We consider ourselves very lucky not to have lost a Neogen employee during this extremely dangerous time. But we realize this fight is far from over and now is not the time to let up. I am extremely proud of how our Neogen employees responded to this crisis. It's their hard work, creative solutions to unprecedented challenges and dedication to doing the right thing that has safely gotten us through this so far. To protect our business, we made adjustments to our workforce levels to better match our customer demands, and we instituted cost control to better protect Neogen's financial health. Steve is now going to provide a bit more color on our 2020 financial results. Steve?

Thanks, John. Revenues for fiscal 2020 were $418.2 million, which was a 1% increase over 2019's $414.2 million. Full year net income for fiscal 2020 was $59.5 million or $1.13 a share, a little bit less than the $60.2 million or $1.15 a share we earned in all of fiscal 2019. Now we were significantly impacted by currency movements in our international operations during fiscal 2020. When the magnitude of the COVID-19 pandemic became evident and as it began moving around the world, there was a move towards the safety of the U.S. dollar, and that hurt the currencies in our international locations, particularly those where the outbreaks were less controlled like the Brazilian real and the Mexican peso. As a result, our comparative revenues were $6 million less for the year than they would have been in a neutral currency environment. And of that $6 million, $3.5 million was the impact in just the fourth quarter. Overall revenues in the Food Safety segment were $212.7 million flat for the full year and were negatively impacted by the pandemic. Highlights in the Food Safety product line for the year include 4% increases in sales of both natural toxin and allergy test kits. Our AccuPoint product line, which monitors environmental sanitation and food processing environments, rose 7% for the year and our Listeria Right Now product, which detects listeria in the environment in food processing plants, rose 24% as we continue to penetrate the market with this fairly new product. Offsetting this growth were lower sales of Culture Media products due to lower end market demand at our largest customers. Sales of drug residue test kits decreased 30% for the year due to lower demand in our European distributor. We made a number of smaller acquisitions during the year, buying a supplement manufacturer in England, 3 diagnostic kit distributors in the Southern Cone area of South America and distributors in Italy and Australia. These acquisitions continue to expand the Neogen footprint and add to our portfolio of capabilities in areas across the world that we consider important. Our European business finished the year strong with a 17% increase in cleaners and disinfectants and veterinary instruments in the fourth quarter and a 15% increase in Culture Media products as orders delayed from the third quarter shift in the fourth. Overall sales from our Scotland-based operations rose 8% in local currency for the full year and were up 5% after translation to the U.S. dollar. Genomic services in Europe rose 7% for the year as we continue to expand our share in those markets, particularly in poultry and beef cattle. Revenues in our Brazilian Food Safety operations were flat for the year in local currencies as the loss earlier in the year of a large commercial lab customer using our forensic kits was offset by strong gains in customers testing for aflatoxin in corn and DON wheat. When these sales were translated to U.S. dollars, revenues in Brazil declined 10%. Genomic services in Brazil declined 26% for the year, as a project in fiscal 2019 for the Brazilian government for a study on cattle did not recur in the current year. And we won new business with the government for further genome testing at cattle, and we'll be receiving samples in the first half of fiscal 2021. Our insecticide business in Brazil was up 5% for the year due to sales to government health organizations. Revenues were up 11% for the year in local currency for our Mexican operations, with strong market gains across the Food Safety diagnostic portfolio, partly offset by weakness in sales to our larger distributors of biosecurity products in Mexico and Central America. When translated to U.S. dollars, that growth was reduced to 6%. China had a strong year with revenues up 26% in local currency and 22% in the U.S. dollar, and continued sales increases of cleaner and disinfectants to help fight against outbreaks of African swine fever and COVID-19 in that country. And upticks in our Food Safety diagnostic business on equipment and bio sales of our Soleris product line, which is used to detect spoilage organisms in processed foods. Revenues for the Animal Safety segment, which were soft for most of the year due to continued tariff wars and the result in weakness and uncertainty in the agricultural markets we serve were $205.5 million, an increase of 2% for the year, primarily as the result of a 13% rise in genomic services revenues at our laboratory operation in Lincoln, Nebraska, driven by strong market gains into the domestic companion animal service space, growth in the commercial beef market and increased volumes in the domestic swine market. Additionally, our business in Australia rose 18% for the year on share gains in the sheep testing market in Australia, increases in biosecurity products and $420,000 increase in sales of Food Safety diagnostic products aided by the March 2020 acquisition of Cell Biosciences. Other highlights in the Animal Safety segment for the year were an 8% rise in water treatment disinfectant sales on share gains in the swine and poultry markets and a 9% increase in wound care products. Partially offsetting these gains were an 8% reduction in sales of animal care products and a 7% reduction in veterinarian instrument, primarily needles and syringes to our largest U.S. distributors, the result of continued weakness in end user sales and inventory reductions at these distributors due to the uncertainty of COVID-19. Overall, we did a nice job of controlling expenses for the year, they rose 4%. As John indicated, given the initial uncertainty of demand during the initial stages of the pandemic, we took a number of steps to protect the business and lower our operating costs. These actions included temporary pay reductions at the senior management level, furloughing or reduced hours for approximately 5% of our U.S. workforce, reduction of discretionary spending throughout the organization and an almost complete halt to most business travel. These actions resulted in savings of approximately $2 million in the fourth quarter of the year. Our sales, customer service and technical service teams have adjusted to the new normal. They are conducting -- or contacting and engaging customers via video conference, e-mails and even the old-fashioned and phone calls. And our IT infrastructure has been rock solid during the first few months of the pandemic as hundreds of our employees continue to work effectively from home. One of the areas where we significantly increased our spending in fiscal 2020 was in our research and development group. Expenses here rose 15%, primarily due to development costs for some exciting new products that we've launched or will be launching in fiscal 2021. At the end of 2020, your company had $344 million in cash and investments, no debt and a fortress balance sheet. We continue to produce strong cash flow, generated $87 million from operations in fiscal 2020 versus $64 million in 2019. And we've continued to reinvest that cash into acquisitions, machinery and equipment to improve the quality and enhance the efficiency, software and most importantly, people. In addition, during the year, we completed a major capacity enhancement to our lab space in Lincoln and renovated a building to house our sales, marketing and product management groups here in Lansing. Each of those products were $2-plus million investments. A couple of weeks ago, we announced the results for the first quarter of our 2021 fiscal year. The year started off strong, with revenues for the quarter up 8% to $109.3 million and our net income was $15.9 million or $0.30 a share compared to the prior year's quarterly income of $14.7 million or $0.28 a share. And in the first quarter, we were once again challenged by currency headwinds due to the strength of the U.S. dollar. In a neutral currency environment, our sales would have been $2.1 million higher this quarter. Nonetheless, a good start for fiscal 2021. While last year was a challenging year in many respects for the company, we are very proud of our almost 1,800 employees worldwide and how they pulled together during the initial stages of this crisis. While we do know that there will be many more challenges in front of us as we adjust to this new normal, there is much to look forward to, and we continue to be optimistic and excited for the remainder of the 2021 fiscal year. We're looking to get back to the strong top line growth that Neogen has always been known for. And we thank you all for your continued support. I'll now turn it back over to John for some perspective on our future. John?

Yes. Thank you, Steve. As I've said many times, our mission matters today more than ever. As the world fights through this crisis to eventual recovery, there are a few things more important than the continued safe and plentiful food supply. And Neogen was always built to respond in times of crisis, and we have responded. We've done our best to assist the broader civic efforts to combat COVID-19 by making our sanitizers and disinfectants available outside of our traditional agriculture and veterinary markets. As Steve indicated, we are well positioned financially to weather the continuing and expected threats to the global economy in 2020 with a significant cash flow and investment balances, no debt and a really strong free cash flow. As we have responded to pandemic, we've also launched some significant new products from our R&D pipeline. We launched our new Soleris Next Generation, which is an automatic test system that detects microorganisms such as yeast and mold and is done in a fraction of the time of traditional testing methods. As I said in the first quarter press release, we've had tremendous positive market reaction to this product's launch. We've sold many units and especially sold them in the nutraceutical and cosmetic industries. We also launched an improved test for gluten, which has been one of our major food allergen tests. The improved test rapidly detects gluten in food products, raw ingredients and environmental samples. So what that means for our company is now that they can use the same method to test for allergens in food and environmental samples as opposed to using different methods for different sample types. We believe that this is a major advancement for one of our core product lines, and we're in the final stages of development for similar improvements to more of our food allergen tests. We also expect other major product launches in the coming months. We feel good about the robustness of our international supply chain and our abilities to secure raw materials we require in produce or products. Where necessary, we've secured alternative suppliers to ensure the continued availability of critical raw materials. And once again, I can't say it enough. I'm extremely proud of how our team acted and reacted to this unprecedented business and social environment. Neogen is well prepared, positioned for whatever our future holds for us, with the products and the services our customers need to operate throughout pandemic and what lies beyond and the financial and organizational strength to rapidly adapt to the known and unforeseen challenges we're going to face. Let me stop at this point and entertain any questions you may have.

Thanks, John, and Steve, for those comments. And this is the time in the meeting when we'll open it up for questions. So let's see. Are there any questions that have come in?

Jim, there are none.

No questions now? Let's give it just a second to make sure somebody is not putting one in right now from what you just shared. Anything now?

No.

Okay. Well, if there aren't any questions, I will hereby declare the Annual Meeting of Shareholders to be officially adjourned. I want to thank everybody for your participation and for helping us make this virtual meeting successful today. So thank you very much, and this concludes the meeting.

This now concludes the meeting. Thank you for joining, and have a pleasant day.