Neogen Corporation (NEOG) Earnings Call Transcript & Summary

I'm Jim Borel, Chairman of the Board of Directors of Neogen Corporation. Welcome to Neogen Corporation's 2021 Annual Meeting, the 39th annual meeting of the company and the 32nd annual meeting of shareholders as a publicly held company. And as you're aware, this is our second virtual annual meeting of Neogen shareholders due to the practical safety considerations of the COVID-19 pandemic. Last year's virtual meeting, we believe, went well. And we appreciate your understanding of the need to continue to handle this virtually. In order to provide a fair and informative meeting, we've established rules of conduct for this meeting. The rules of conduct can be found in the lower right corner of your screen. And we'll conduct the meeting in accordance 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 we have today. Let me first introduce the leadership team: John Adent, President and Chief Executive Officer; Joe Corbett, Vice President, Animal Safety Sales and Marketing; Dr. Rob Donofrio, Vice President, Research and Development; Shane Fitzwater, Vice President, Manufacturing; Jerome Hagedorn, Vice President, North American Operations; Doug Hopek, Senior Director, Corporate Development; Doug Jones, Chief Commercial Officer; Dr. Jason Lilly, Vice President, International Business; Julie Mann, Chief Human Resources Officer; Terri Morrical, Senior Director of Special Projects, Marylinn Munson, Vice President, Genomics; Steve Quinlan, Chief Financial Officer; and Dr. Amy Rocklin, Vice President, General Counsel and Corporate Secretary. Amy just joined our company in March. And so we're happy to have her here. Welcome, Amy. I'd like to move right into the regular business of the meeting. Now to simplify voting procedures, we would appreciate that all votes be cast by proxy. Steve Quinlan, our CFO; and Amy Rocklin, General Counsel and Corporate Secretary, have been appointed to serve as Voting Tabulations Committee for today's meeting. If there's anyone who has not submitted a proxy and would like to vote by proxy today, or wishes to withdraw and recast a vote, please select the Vote Here button on the annual meeting portal. The 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 107,481,509 shares eligible to vote at this annual meeting. Based on preliminary numbers, 100,475,609 shares have been voted by proxy. This accounts for 93% of the total shares eligible, and therefore a quorum is present.

Based on this report, I hereby declare the annual meeting of Neogen Corporation to be duly convened. All shareholders of record as of August 10, 2021, have received a copy of the company's annual report for the 2021 fiscal year, including the audited financial statements. BDO is the independent auditor for the company. Rick Baab, Assurance Partner with BDO, is 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 shareholders?

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

Thank you. If there are any questions concerning the company's audited financial statements that anyone might like to have addressed by the company's independent auditors, they will be addressed during the Q&A session. At this time, I would call for a motion of shareholders to accept the financial statements.

Mr. Chairman, I move that the Neogen shareholders accept the financial statements as presented in the 2021 annual report.

I second that motion.

As been moved and seconded, all those in favor of the motion, say aye. [Voting]

Opposed, nay. [Voting]

The motion passes. The Board of Directors of your company met 7 times in regular meetings and numerous committee meetings during fiscal year 2021. The Board believes it has discharged its responsibilities to the best of its ability. And at this time, I would request a motion ratifying the actions of the Board of Directors during the 2021 fiscal year.

Mr. Chairman, I move that we ratify the actions of the Board of Directors during the 2021 fiscal year.

I second that motion.

As moved and seconded, all those in favor, please say aye. [Voting]

Opposed, nay. [Voting]

The motion passes. In the notice of this annual meeting, 5 issues were listed to be brought before shareholders for their action. The first issue is proposal 1, the election of directors. And I'd first like to introduce the Board members who are not up for election this year. I'll start with Class II directors whose terms expire in 2022: Mr. John Adent, Dr. William Boehm and Mr. James Tobin. The Class III directors whose terms expire in 2023: Mr. Ralph Rodriguez and Dr. Catherine Woteki. I'd next like to introduce the Class I directors who have been nominated to serve until 2024 or until their successors have been elected. And they are: Mr. James Borel, Dr. Ronnie Green and Ms. Darci Vetter. No additional nominations for directors have been received. Therefore, I call for a vote. Amy, would you please provide the results of the tabulation of votes by proxy?

At least 89,232,907 shares were voted in favor of election of all nominees. No more than 5,386,764 shares were selectively withheld for any individual director. 94% of shares voting on 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. The second proposal to come before the shareholders that was described in the proxy is for the approval of an amendment to the company's related articles of incorporation to increase the number of authorized shares. The Board believes that the authorized share increase is necessary and advisable in order to maintain our financing and capital raising ability and to generally maintain our flexibility in today's competitive and rapidly changing environment. If the proposal is approved, the number of authorized shares will increase by 120 million shares. As stated in proposal 2 in the proxy, the Board recommends that shareholders vote for the approval of the proposed amendment to our articles of incorporation to increase the number of authorized shares to 240 million. I'll now call for the vote. Amy, would you please provide the results of the tabulation of votes by proxy for proposal 2?

90,879,965 shares were voted in favor of proposal 2. 3,691,069 shares were opposed. 48,637 shares abstained in the vote. 96% 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 shareholders that was described in the proxy is for the continuation of the Neogen Corporation employee stock purchase plan. With the expiration of the 2011 ESPP, the 2021 ESPP is proposed. The purpose of the plan is to encourage employee stock ownership by offering employees the right to purchase Neogen Corporation common shares at discounted prices. Management believes that the plan offers a convenient means for Neogen Corporation employees who might not otherwise own Neogen Corporation common shares to purchase and hold such an investment. As stated in the proposal #3 in your proxy, the Board of Directors recommends that shareholders vote for approval of the plan. And I now call for the vote. Amy, would you provide the results of the tabulation of votes by proxy for proposal 3?

93,476,064 shares were voted in favor of proposal 3. 1,090,685 shares were opposed. 52,922 shares abstained in this vote. 99% of shares voted were cast for proposal 2. Based on these preliminary numbers voted by proxy, proposal 3 passes.

The fourth proposal to come before 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. The federal law requires that shareholders be given the opportunity to express their approval of compensation of company executives. Even though federal legislation requires that shareholders be allowed to vote on executive compensation, their vote of approval or disapproval is not binding on the Board of Directors. But as stated in proposal #4 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 disclosed in the company's proxy statement. I now call for the vote. Amy, would you please provide the results of the tabulation of votes by proxy for proposal 4?

91,114,077 shares were voted in favor of proposal 4. 3,300,741 shares were opposed. 204,853 shares abstained in this vote. 96% of shares voted were cast for proposal 4. Based on these preliminary numbers voted by proxy, proposal 4 passes.

Thank you. The fifth and final proposal to come before the shareholders is proposal #5, which calls for the ratification of appointment of BDO as the company's independent auditors for 2022. So I now call for the vote. Amy, would you provide the results of tabulation of votes by proxy for proposal 5?

99,413,492 shares were voted in favor of proposal 5. 944,684 shares were opposed. 117,433 shares abstained in this vote. 99% of shares voted were cast for proposal 5. Based on these preliminary numbers voted by proxy, proposal 5 passes.

Thank you. And thank you for that approval. I hereby declare the approval of ratification of the company's auditors. And now let me turn the floor over to our CEO, John Adent, for some of his comments.

Thank you, Jim. Good morning and welcome, everyone, to our 2021 Annual Meeting for Shareholders. Today, I'll be discussing our 2021 fiscal year, which ended on May 31, and talk a little bit about why we're excited about the future. As usual, some of the statements today could be termed as forward-looking statements. These statements are subject to certain risks and uncertainties, and our actual results may differ from those that we discuss today. The risks associated with our business are covered in part in the company's Form 10-K as filed with the Securities and Exchange Commission. Fiscal 2021 was a very challenging year in large part due to the COVID-19 pandemic. And while we're starting to see some relief with the rollout of the COVID vaccines, particularly in the U.S. or in Latin America, we still recognize the pandemic is a global issue. And as a global company, we have to remain diligent, continually monitoring the spread of any new variants and any new lockdowns that go into effect. We're eagerly awaiting our new normal, whatever that's going to look like. And we're ready to take on whatever comes our way. While the pandemic has been challenging, our dedication to serving our global community has not wavered. We're pleased to report strong top line growth during fiscal 2021. All the while, we took the appropriate steps to protect our people, stay focused on remaining connected with our customers, and growing our business. We recognize the important role we play in protecting the global food supply and keeping people animals and food safe, especially during a global pandemic. The new products that we launched during fiscal year '21 helped lead this growth in all areas of our business. Despite our inability to travel and conduct much business face to face, our teams continue to innovate and connect with our customers, providing new solutions that are making it easier than ever to potential hazards in the global food supply. I've mentioned Soleris NG systems before, but I still want to mention it again. This next-generation spoilage detection system, which we launched in 2021, evaluates microbial activity and provides quality diagnostics to customers in the food, beverage, nutraceutical, cosmetics, cannabis -- and cannabis industries, helping us to expand on our food safety mission. This product has been well received in the marketplace and a strong growth for the year. In addition to Soleris NG, we recently relaunched our ThyroKare canine hypothyroidism supplement. And sales have taken off nicely as we've regained business after leaving that market in 2016. Our December 2020 acquisition of Megazyme continues to drive sales in our Food Safety segment as we've integrated the company and their expertise in food quality and nutrition into our existing business. Megazyme's diagnostic assay kits and reagents are used to measure dietary fiber, polysaccharides and sugars and acids, such as lactose. This acquisition has added more products to our portfolio, which in turn allowed us to offer more solutions to meet the needs of our customers. We were able to grow revenues by 12% in 2021 fiscal year with double-digit increases in both our food and animal safety segments, showcasing the continued strength of our business stretching across dozens of industries across the world. All in all, a very strong performance in an incredibly challenging year. I continue to be extremely proud of our Neogen team members and the results they've been able to generate. Now I'm going to turn it over to Steve to provide a little more color on the financials.

Thanks, John. Fiscal 2021 revenues were $468.5 million, a 12% increase over last year's $418.2 million. Net income for fiscal 2021 was $60.9 million or $0.57 a share compared to $59.5 million or $0.56 a share for fiscal 2020. You'll remember that we announced a 2-for-1 stock split effective June 4, and these per share amounts have been adjusted to reflect this. Overall revenues in the Food Safety segment increased 10% for the year. Excluding the Megazyme acquisition and several international acquisitions of distributors in fiscal '20, our same-store sales growth was 6% for the year. In the first half of the fiscal year, the Food Safety segment struggled with some core product lines as many of our customers were disrupted by COVID and were forced into shutdowns or reduced capacity at their operations around the globe. We saw business in many markets start to increase in the second half of fiscal '21 as restrictions were eliminated, but still have adverse market conditions in several countries in which we have operations such as India, Brazil and portions of the U.K. Highlights in the food safety product line for the year include a 19% increase in sales of our Soleris product line for general microbial testing such as yeast and mold. This was driven by strong sales of our next-generation instrument, Soleris NG, which exceeded our expectations in fiscal 2021. Additional placements of this instrument have also resulted in higher sales of the consumables line used for ongoing testing. Sales of our natural toxin test kits increased 6%, while sales of our allergen kits rose 5%. Our Listeria Right Now product continued its steady growth, increasing 21% for the year. Internationally, sales were up 11%, despite COVID-related challenges throughout most of the year in several of the countries we operate in. Sales in the U.K. increased 10%, with some of this growth coming from a stronger pound compared to the dollar. Our increase in pounds was 4%. The growth was led by a 22% increase in sales of cleaners and disinfectants, primarily due to strong sales to customers in Asia as that country continues to fight the African swine fever outbreak and COVID-19, as well as high sales of hand sanitizers to the U.S. government early in the year. After a difficult year resulting from COVID-related lockdowns in Europe, Food Safety sales are starting to increase with our One Broth One Plate micro workflow solution, to detect listeria and salmonella, and increased allergen testing leading the way. Sales in Brazil increased 15% for the year in local currency but decreased 8% when converted to U.S. dollar as the real devalued significantly against the dollar, especially in the first half of the year. Higher sales of aflatoxin test kits for corn, culture media and genomic services for the bovine market contributed to the overall revenue increase here. Sales at our Mexican operation increased 13% for the year in pesos. This converted to a 9% increase in U.S. dollars. Broad-based increases in our diagnostic test kits, biosecurity products and veterinary instruments led to growth. Our China operation had a great year with revenues more than doubling in U.S. dollars from continued sales increases of cleaners and disinfectants to help in fighting against outbreaks of African swine fever and COVID-19 in that country. Our genomics business in China also had higher sales to the bovine and porcine markets. Revenues for the Animal Safety segment rose 14% for the full year, with broad-based increases in animal care products such as vitamin injectables, small animal supplements and antibiotics up 31% driven by an increase in spending on companion animals, especially dogs and cats during the pandemic. Our thyroid replacement product ThyroKare, which we reintroduced late in the year, produced strong sales and much excitement in the fourth quarter with high expectations for fiscal '22. Veterinary instruments such as needles and syringes increased 16%, while rodenticide increased 42% due to significant rodent pressure in the U.S. throughout the year. Our insecticide line increased 15%, with notable benefit from our acquisition of the StandGuard product line last July. Partially offsetting this growth was a $2.5 million decline in sales of dairy supplies due to the June 2020 termination of an agreement in which we distributed these products for a large manufacturer of dairy equipment. Cleaner and disinfectant sales sold through this segment were also down 15% from lower sales of water treatment products in the U.S. and a transfer of a product line to our U.K. operation. Revenues at our Lincoln, Nebraska genomics lab increased 10% in fiscal '21 as companion animal sales continue to grow, with pet adoptions increasing significantly during the past year as a result of COVID and our service was offered in more retail operations. We also benefited from a strong increase in bovine sales from higher sales to beef associations and dairy AI companies, with additional increases in the aquaculture market driven by a new partnership with a large customer and a new test for shrimp. Our business in Australia rose 78% for the year. A portion of the full year growth is from our acquisition of a food safety distributor at the end of February in 2020 to add to our product portfolio in that country. Our organic growth for fiscal '21 was an impressive 59%. Our sales team exceeded expectations with food safety products, and our genomics lab continued to post impressive gains. Sales of companion animal tests more than doubled as Australians also flocked to pet ownership during the pandemic, and we recorded a 39% increase in beef markets. On a worldwide basis, genomics revenues increased 13% for the year. Gross margins were 45.9% compared to 46.9% last year as we experienced significantly higher costs for freight and personnel costs due to both increased volume and rate increases resulting from labor shortages. International freight-in costs rose throughout the year across the business as port delays and supply constraints drove sea rates higher, while air freight rates also rose during the year, again the result of lower supply as a result of fewer commercial airliners flying during the pandemic. These conditions do still persist and we've taken steps to address them, including consolidation of orders, purchasing larger orders less frequently, changing modes, and passing on increases to customers where appropriate. We also recorded higher outside contracted services costs related to our newly launched instruments. And health insurance expenses, driven by elective procedures postponed during the initial phase of the pandemic, increased in the second half of the year. Overall, operating expenses rose 9% for the year. While we're still not at pre-COVID levels of travel, our sales teams in certain areas of the world have started to have face-to-face interaction with customers again in the last few months of fiscal '21. And as a result, our sales and marketing expenses increased 25% in the fourth quarter but only rose 5% for the full year. Increases in salaries and commissions and shipping expense, all in line with revenue growth, were offset by a $3 million decrease in spending on travel and meals for the year. General and administrative expenses rose 15% for the full year. Earlier in fiscal '21, we spent $3.1 million on consulting, legal and other professional fees related to acquisition activity for targeted business, which we were ultimately not successful in acquiring. Excluding those costs, the increase in G&A for fiscal '21 was 8%. Increases in head count, including a number of senior management positions where we added a General Counsel and a Chief Commercial Officer; incremental amortization expenses, which are noncash, resulting from recent acquisitions; and higher levels of IT investment contributed to the increase. We continue to invest in new product development, and our research and development expenses increased 10% for the year. As a percent of sales, R&D expense was 3.5% of sales in both the current and prior years. Operating income for the full year was $74.2 million or 15.8% of sales compared to $67.5 million or 16.1% of sales in the prior year. Our 2021 operating income represented a 10% increase over fiscal 2020. Excluding the $3.1 million spent on acquisition opportunities in which we were unsuccessful, operating income would have increased 14% over 2020. While we do have plenty of room for improvement, we're very proud of our 2021 operating performance, particularly given the pandemic and considering the supply chain and labor challenges we've faced in the past year. We experienced a $4.4 million drop in interest income for the year despite having higher cash balances throughout the year, due to a significant drop in yields on our marketable securities portfolio resulting from U.S. Federal Reserve efforts to stimulate the economy during the pandemic. At the end of 2021, your company had $381 million in cash and investments, no debt and a fortress balance sheet. We continue to produce strong cash flow, generating $81 million from operations in fiscal 2021 versus $86 million in 2020 and have continued to reinvest that cash into acquisitions; machinery and equipment to improve quality and enhance efficiency; software; and most importantly, people. A couple of weeks ago, we announced the results for the first quarter of our 2022 fiscal year. The year started off strong, with revenues for the quarter up 17% to $128.3 million. And our net income was $17.1 million, 8% higher than last year's first quarter net income of $15.9 million. A good start for fiscal 2021, particularly considering the ongoing supply chain and labor shortages that we continue to face. Well, thank you all for your continued support. And I'm now going to turn it back to John for his perspective on our future. John?

Thank you, Steve. Steve is right, there were a lot of variables which affected our performance last year. And we recognize that it was a COVID year, and we continue to actively manage the effects that the pandemic has had on Neogen. Like so many others around the world, Neogen has been dealing with supply chain issues due to the pandemic. We've seen our costs of both inbound and outbound freight increase tremendously; and in some cases, quadrupling, and have been dealing with the impacts on our margins and earnings all year. We've established a plan, as Steve mentioned, to help curb these costs going forward. We've been actively addressing our inbound and outbound freight, and we're using data to build a strategy on how to reduce these costs moving forward. Despite these headwinds, I continue to be extremely excited about the year. In the first quarter of fiscal 2022, we fully integrated Megazyme into our U.S. and international sales and marketing teams. We've already seen a tremendous amount of excitement from our customers regarding the products offered by Megazyme, and we look forward to carrying that excitement into the marketplace and offering these new solutions. Our Animal Safety segment had a strong recovery year on the strength of animal care products, veterinary instruments and biosecurity products. We received EPA approval for the U.S. distribution of Neogen Viroxide Super and launched it domestically at the World Pork Expo in June. Demand continues to be strong for rodent control products across the U.S. as we move into fiscal '22, and I look forward to seeing the continued growth of this segment in the next fiscal year. Our worldwide genomics offering continues to grow, reaching new markets and new customers. We're especially excited about the growth we've seen in the agriculture sector. Earlier this year, we announced the continuation of our partnership with the Center for Aquatic (sic) [ Aquaculture ] Technologies, a leader in the field of genomic improvement for aquatic species, which continues to open doors for us to work with aquatic breeders to help make more informed breeding decisions and ensure sustainable farming. Our canine parentage tests remain the most common tests done in the United States and are used by the American Kennel Club, and our sales more than doubled in Australia. We also see tremendous potential in the new Igenity Canine Wellness test, which we launched in December of 2020. This test gives veterinarians opportunity to screen for predisposed risk factors, so they can make informed recommendations on diet and exercise as well as screen for possible health concerns. In May, we launched our new AccuPoint NG ATP Sanitation Monitoring System, which has been redesigned to be more user friendly than before while offering the fastest, most precise and easy to monitor testing data. We feel confident that this new system will continue to gain market acceptance within the food, beverage and health care industries in fiscal 2022. Last fiscal year, we began offering our new Neogen Analytics food safety and risk management software as a service. This delivers the most comprehensive environmental monitoring program automation solutions for food companies and is compatible with innovation technologies -- innovative technologies like our AccuPoint NG and our ANSR systems. With it, users can implement systems that increase the visibility of food testing results, reduce risk, and elevate food safety standards. In the fourth quarter of 2021, we quadrupled the number of sites using Neogen Analytics, and we have a strong strategy in place to continue increasing this number throughout fiscal year 2022. We also recently received AOAC approval for our Soleris Direct Yeast and Mold test for use in cannabis, allowing us to provide a valuable service to the growing cannabis industry, offering safety and security from potentially harmful microorganisms. Internationally, we're seeing signs of a strong recovery from pandemic lows. In the U.K., food safety sales are up on the strength of our One Broth One Plate workflow solution in a large global commercial testing laboratory that has recently implemented the solution as its primary detection method for Listeria and Salmonella in the U.K. We're also seeing the recovery of our allergen test kits as the food safety industry begins to open back up after COVID shutdowns. In Mexico, we're continuing to see food safety sales increase on the back of equipment sales, including the Soleris NG and ANSR systems. Our Animal Safety segment continues to benefit from the success of Neogen Viroxide Super in China as the country manages the African swine fever outbreak and COVID-19. A couple of weeks ago, we announced the purchase of CAPInnoVet, a companion animal health company that provides high-value pet medications to the veterinary market. This acquisition provides us entry into the fastest -- in the fast-growing $12 billion retail parasiticide market. And we're excited about the prospects of this business as we integrate it into our Animal Safety segment. Once again, I'm very proud of our Neogen team members for how they were able to tackle a very challenging year head on, leading through new products and acquisitions, continuing to grow our market share, and giving our customers solutions that make their jobs easier and the global food supply safer. Our entire team has done a great job of adapting to the changing business landscape and working hard to give us this positive momentum as we head into the 2022 fiscal year. We have several new products and service offerings preparing to launch that will help our customers. I continue to believe that we have the right people and the right products and services to enable the company to execute on our mission of protecting the animals and people we care about. Let me stop at this point and entertain any questions we may have. Jim, I don't see any questions?

Thank you, John and Steve, for your comments. And at this point, we see no active questions. Let's pause for just a second in case anybody is just planning to enter one. So nothing. Okay. Well, seeing no questions at this point, I hereby declare the Annual Meeting of Shareholders to be officially adjourned. Thank you all for your participation and for helping us make this virtual meeting successful, and we wish everybody happy and healthy next fiscal year. Thank you.