Neogen Corporation (NEOG) Earnings Call Transcript & Summary

Good afternoon, everyone. Next up, we have Neogen, a global leader in food and animal safety providing diagnostic testing solutions used across the food supply chain and animal health markets worldwide. We're pleased to have with us Mike Nassif, President and CEO; and Bill Waelke from the IR team with us today. Over to you, team.

Thank you, [ Prad ], and thank you all for being here. Before we start, I wanted to pose a question to you. Just think about your day to day. You probably grabbed something to you this morning, maybe grab something from the market to go for lunch. And maybe when you're not in a conference, you're at home buying groceries to make dinner your family or even if you have to buy baby formula. How many times do you pause and ask yourself, is this safe for me to consume before you buy it? If you're like me, you probably never do that, right? We live under this cloak of comfort that our food is safe. And it's not trust that I think is really the opportunity that's ahead of us. The CDC -- according to the CDC, last year, there was 50 million food-borne illness cases. Of those, 100,000 were serious enough that they had to be hospitalized. And unfortunately, of those 100,000, 3,000 people lost their life to food-borne illnesses. My name is Mike Nassif. I have the privilege of leading a company that is at the forefront of creating solutions to make sure that the food that we consume is safe. What we're going to talk about today in unlocking Neogen's potential is I'm going to give you a little bit about the market and the portfolio but really talk to you about our strategy to turn this business around. What are we doing in the short term? And what are we doing in the long term? I'll do the pause for disclaimer. I think that's long enough. So at the heart of Neogen is really ensuring that a world where food is safe, sufficient and suitable for everyone as a top priority for us. Producers, manufacturers, partners, processors, all of them are under relentless pressure, and we really view ourselves at Neogen as playing a role to make their job easier in this highly regulated market. Neogen, we deliver essential testing, diagnostics and expertise to protect the food supply chain. When we look at the market, it's a very sizable market, and it's expanding, growing by food complexity, stricter regulations, rising customer and consumer expectations of quality and safety. And it's a really diverse, broad customer base from small to large, covering every major category and segment from processors, animal health, global protein producers. Now at Neogen, we're structured in 2 global business units: 1 focused on food safety, 1 focused on animal safety. We participate in very attractive markets with long-term growth drivers across our portfolios. We've got market leadership in specific categories, spanning from pathogen detection indicators, positioning us really from a food safety perspective as really the scale provider. Now as we think on our broad portfolio that serves customers, it's really a consumable-driven portfolio. So what that means from a financial perspective is that recurring revenue and a lot of resilience in the portfolio. I believe that we have an unmatched breadth across categories making Neogen truly the industry's only scale provider when it comes to food safety. Indicators for us is a segment of the market where we have a market leadership with our iconic brand, Petrifilm, and animal safety with the recent divestiture of C&D, also the announcement of our genomics divestiture has really allowed us to focus the animal safety portfolio on higher growth, more profitable markets. Now I wanted to take an example from our portfolio to give you an idea of how our products work within a typical food manufacturer. And in this example, I'm using Petrifilm, our #1 product in the portfolio and #1 in the world. Microbiology testing is a high-frequency embedded control point within the food processing plant. So they're looking for pathogens, hydrogen indicators, spoilage, and it's driven by strict regulations, and the need for confidence and quality in the results is paramount. Petrifilm solves this complexity with really driving simplicity. It's a ready-to-use plate that's faster, more standardized and ensures reproducible results versus the traditional Petrifilm dish that you would see in a lab. A lot of these food processors either send out their testing to a third-party lab or some, if they're large enough, will have their own lab on site. But that still takes time and the Petrifilm is definitely faster. I think what customers really appreciate about Petrifilm is just the simplicity. Just in 3 simple steps, they're able to get a result. And the good thing about it is that it reduces operator variability and make sure that we've got the right testing at the right time. And Petrifilm can be used at different stages within the food processing value chain. So intake -- raw material intake, in process and finished goods. And Petrifilm is really just part of the end-to-end solution that Neogen can provide when it comes to food safety. When you look at our overall portfolio, it really delivers on a holistic food safety solution from integrated detecting, monitoring and diagnostics that deliver continuous visibility across the value chain for our customers. I think what's just as important is it's reinforced with deep expertise and services. So our technical support, our application knowledge, the guidance that we provide our customers in building their food safety programs but also helping them with the challenges and the things that they need to manage on a day-to-day basis is highly valued. I've been here for 5 months now, and I've had the opportunity to travel the world and meet with all of our customers. Some of these are customers who purchase 100% of their food safety needs from Neogen. There's other customers who purchase some products from us but also from our competitors. But there's one common theme that I took from all of our customers. They see Neogen as a trusted authority beyond testing, okay? Our reference material, protocols, handbooks, they establish best practices that are widely adopted within the industry. And I think that really speaks to the power of the Neogen brand when it comes food safety, which also presents a huge opportunity. Now I have to acknowledge that in face of a strong market fundamentals and a strong portfolio, Neogen has struggled in the last couple of years. And that was really largely due to strategically the right decision to acquire the 3M Food Safety business. However, it doubled the business overnight and integrating a global business like 3M into original Neogen proved to have some challenges. In the last couple of years, the business has been working through that. I truly believe that we're beyond those difficult times, and I think the best days are ahead for Neogen. And having been here for the first 5 months, I really believe that when I look at the challenges that are ahead of us, they're all within our control. And there are definitely things that we can do to stabilize the business. And if you look at our recent Q2 results, that should give us an indication that what we're doing is working. And now we really need to make sure that we continue to build that foundation to return this business to growth. And it's not too aspirational to expect this business once we are fully operational with the management team and running well to achieve mid- to high single digits on the top line and profit margins, adjusted EBITDA north of 20%, up to 30% in the right time line. Now to achieve all of this, we've rebuilt the entire management team at Neogen. In the past 5 months, I've hired 5 external leaders with deep experience coming from top-tier companies who know what good looks like, who have been in turnarounds, who understand how to operate in global businesses. I think that paired with strong internal talent that understands the challenges that we have and have been trying to solve for that really, I think, brings forward a renewed leadership team that has new skills, heightened accountability and really a commitment on turning this business around. I mean these are leaders who thought the same thing I did when I looked at Neogen as an opportunity. Wow, that looks like a company that is having a lot of challenges. But I was able to figure out that I think there's a huge opportunity here with strong end market fundamentals and a strong portfolio. And these leaders see the same thing, and they were happy to jump onboard. And I'm super excited to have a full management team in 5 months to really help us continue to accelerate the turnaround. Now our turnaround strategy is very simple. There's 3 simple stages: stabilize, accelerate, expand. Stabilization is really all about driving top line, managing our costs, and looking at cash flow conversion. And many of the turnarounds I've been in, those that have been successful and those that have not been successful, have really been about driving the top line. And when you have a portfolio like ours that's very broad, that's global, I think focusing there and creating oxygen for the organization so that we're able to focus on the operational and other elements gives us a lot of headway. Now if we do that correctly and we build the foundation, that sets us up for accelerated growth in fiscal year '27. Now another component that is extremely important for the trajectory of this business is innovation. As the market leader, as having market-leading products, it's incumbent on us to shape the industry and deliver against the needs of our customers. So Jeremy Yarwood, who was my first hire, Chief Science Officer, he was in a previous slide, strong diagnostics background. He is almost 100% focused on driving innovation. So as we are trying to stabilize the business in the short term, he's thinking about our innovation processes. He's talking to customers trying to understand their needs, and he's looking at how do we take our flagship products like Petrifilm and really continue to address customer needs by expanding the portfolio. And if we do that correctly, fiscal year '28 and beyond, I think we'll start to see innovation kick in and really take Neogen's portfolio and growth profile to a higher level. Now the Petrifilm site is extremely important. So I think many of you are aware that we're building a stand-alone Petrifilm site in Lansing, Michigan. That's part of the agreement from 3M. I'm happy to report today that, that is on track. We're very happy with the progress that we're making. The foundational work is complete. The key equipment is installed. Initial production testing looks really good. We started product validation and product production testing. That's underway, and that's meeting our expectations. So the goal continues to be that by November of 2026, we have transferred over, ready for production all 17 SKUs from 3M. Now with that time line, that allows us an additional 9 months with the agreement with 3M. So if there was to be any challenges with any of our SKUs, we will continue to have the relationship with 3M for additional 9 months to make sure that our customers are not impacted by anything there. And I spoke earlier about reinvigorating innovation. This is one of my top priorities. I see huge opportunity to drive innovation within Neogen. With a deep diagnostics expertise, our large installed base and really as a trusted partner in food safety in a regulated environment, I think we have permission to really drive innovation and meet customer expectations. And so Jeremy and the team are very much looking at how do we need to enhance our capabilities when it comes to innovation, what are the problems that we really need to solve for our customers. And my mindset around innovation is less about technology led but more about solving the needs. So this is where we want to make sure we're clear on what it is we're trying to do, and I have every intent on increasing investment in R&D, but we're only going to do that if we have very tangible projects that we believe are really going to solve a problem with our customers but also differentiated and scalable and something that we really want to put our investment dollars behind. So I'm super excited about what the innovation portfolio is going to look like in a road map. We are looking to have an Investor Day later in the calendar year, probably the later part of the calendar year '26. And hopefully, we can bring to life a little bit more about our innovation work with Jeremy and the team have had a chance to build that up. Now we're still in the early stages of the turnaround. I think we have a clear path on how we're going to achieve that and what are we going to do. But I think it's important for me to share with you what I and Bryan Riggsbee, our new CFO, really believe this company can be. So what you see up here on the slide is what I think is what a market-leading company like Neogen can achieve. Now in order for that to be true, there are some things that have to happen. One, I really think that we need to continue to focus on discipline and execution. We need to have extreme customer intimacy. We got to understand what -- how do we need to solve our customer issues and challenges that they have. And then lastly, we got to make sure that we become masters in the fundamentals the business. We've got to scale these processes and really mature how Neogen operates as a global leader in food safety. Now with our overperformance in Q2, we felt comfortable raising the guide in this past Q2 earnings. I would say that our guide reflects just a careful measured plan to restore and sustain a predictable performance. Bryan and I are very well aware that Neogen has really had a difficult time meeting expectations and meeting our commitments. And we're sensitive to that, and we want to make sure that as we are managing this business that we continue to recognize the importance of honoring the investment community and rebuilding that trust. So being cautiously optimistic, making sure we're managing it appropriately, I think, is important. But also, we need to give space for our new management team, which we had 2 new hires last week. I'm sure you saw the announcement. So we got to give them time to kind of get their hands on the business. So net, we're very encouraged by the early progress, and I really believe we have a strong path forward. And we're on the path of recovery. We're in a very attractive market. I think that everything that we need to do to make sure that this company is successful and continues to deliver what's expected of us in the market with our customers is within our control. And I think that's the biggest opportunity. But it's also the exciting part about being part of Neogen and the management team that we built is now we get to focus on the blocking and tackling of improving how this company operates. So thank you, and we'll open it up for questions.

I'll get started with a few questions that I've received here, and then we can also open it up to the floor. But to kick off, based on your experience with the company so far, what do you believe are like the greatest opportunities and more importantly, challenges for the company as you look forward over the next few years?

Yes. I think the biggest opportunity is just what I was talking about, the end market long-term secular trends. I think this is a very attractive market, food safety. It's not -- demand for food safety is not driven by reimbursement or government funding. It's regulations. It's a necessary step to ensure the safety of our food safety supply chain. And I think that despite some of the challenges and operational challenges that we have, Neogen having the broadest portfolio and really being a scale provider when it comes to food safety is a huge opportunity. And the hypothesis that I had when I -- before I joined, which is really a lot of the challenges are within our control are really more operational, 5 months in, I still believe the same thing. I have not uncovered anything new that tells me otherwise. So I think it's a great market. We've got great customers who want us to succeed. We've got a great portfolio. The challenge will be how quickly can this management team get their hand around the business; how can we scale the processes to get this business maturing and operating as a global company; and lastly, how quickly do we change the culture in the organization to help really raise the bar on our performance. Early indicators tell me that they are adapting really well to the changes, and I think our performance in Q2 reflects how the team is really leaning in to the new ways of working.

Yes. That makes a lot of sense. Moving on to a little bit and to the extent you could share at this point, historically, many of the technologies used in this industry have been relatively low tech, such as lateral flow or culture-based media solutions. Do you see that changing over time?

Yes. Listen, my background is in med device diagnostics. I've learned that you never lead with the technology. You need to first understand what is the problem you're trying to solve. We are in an industry where efficiency, quality and cost becomes extremely important. I've been part of many organizations where they're trying to build a Cadillac when you need a Honda, okay? We're not going to make that mistake. We're going to make sure that we really understand what is it our customers are challenged with and what is the minimally viable product that addresses their concern. That will dictate the level of technology that we need, and that will dictate how we go and innovate. And that's the work that Jeremy is trying to identify right now.

Makes sense. And you alluded to this fact just earlier here, but you reported a much improved second quarter with results coming in well ahead of consensus for costs. However, you didn't raise full year guidance meaningfully. Was there anything onetime in nature or anything that gives you caution as you look forward to the next half of the fiscal year?

Yes. I mean the only caution is what I was sharing earlier in a sense that we're happy with the results, but 1 quarter's 1 data point is not a trend. I'm very proud of how the team has really adopted the new ways of working, driving more focus and discipline around commercial execution and breaking down silos and working on collaborating and really solving those issues that have been in the way of the commercial team and doing what they need to do for our customers. But we still have work to do. We have a new management team that needs to get their hands around the business. And Bryan and I are very much focused on building a predictable, sustainable business, and we're just -- we have a new management team. So I think we need to give a little bit of room for the team to get their hands around what we're trying to accomplish, and we'll see how things transpire in the coming quarters.

This is a little bit in the past, but the company has discussed its plans of divesting its genomic division, but we haven't seen any official announcement yet. You mentioned on your call that you would expect a transaction to occur by the end of this fiscal year. A, what gives you the confidence in that timing? And could there be -- are there asset divestitures as part of this portfolio review?

Yes. Well, let me answer the second question. No. So the genomics is the only one. Of course, I can't comment on ongoing negotiations. We're happy with the progress, and we are looking to make an announcement on the latter part of the year.

Okay. And then from your seats, just on the valuation side of things, is there anything that you think that investors just fundamentally under appreciate or miss about the Neogen story today?

I think that's a great question. I should ask investors about that, get their thoughts what they have to say. I think there's 3 things that I underestimated to be honest with you. I don't know if everybody thinks of it the same way. But coming from the human diagnostics and being in med device, it's a highly regulated business that's driven by reimbursement codes, government funding. In food safety, that's not the case. I mean these are mandated testing regulated industries where that's a tailwind, right? So we're not constrained there. I think the other one is the innovation cycle. So when I was in a point-of-care diagnostics with Siemens Healthineers, to get a new assay through the FDA, you cannot do that without a 2-year clinical with $20 million. And then you're crossing your fingers hoping that the design of the clinical was enough that the FDA was going to give you approval. In food safety, we don't have to do that. We don't have to run clinicals. Now of course, we've got to do validations and everything to make sure it's safe and meets the quality standards. But the hurdle to get approval and the investment level is much less, which means that our innovation cycle should be much faster. So as the market leader in food safety, it's incumbent on us to really drive innovation. And this is where I'm very excited about what we're going to be able to do with the broad portfolio that we have and Jeremy and the new team and the competency that we're building. And then lastly, the same concern that I had, the same concern when I started and had a chance to interact with all of our investors that they had. They all felt that the end market was great. Neogen has a portfolio. For all intents and purposes, this company should be successful, but it's not. And the conclusion that I believe they all came to was that this company is not well run. That is another, I think, opportunity for us that is now manifesting itself in the other way around, right? So yes, the company was not well run. I agree to that. But we're starting to do some things right, and I think that continues to be the biggest opportunity. It's 100% in our control, and by us building what I think is a very strong leadership team that has experience with top tier organizations that knows what good and great looks like that are able to just run and establish the right processes in place, I think if we do everything correctly, we should continue to see improvements in how this company operates. And I think -- I don't want anybody to underestimate the amount of effort that takes. It sounds easy when you say, well, we just focused on execution. Let me give some examples. But in reality, when you're trying to change the culture of execution for a 3,000-person company at a global scale, it's very different than doing a turnaround on an Excel spreadsheet. So I think that that's something we have to really keep in mind that it's an opportunity for us, and that's the one that we're going to be focused on.

Perfect. That makes sense. We'll also quickly go to the audience to see if there are any questions. If not, we'll just pass it back to you to -- for any closing comments that you would like to make.

No. Thank you very much for this opportunity. We are super excited about the progress we made. We're super excited about all of the engagement of the investors and trying to learn more about Neogen. Thank you for the support, and we're going to just continue to do what we're doing and focus on getting this business back to market leading growth. Thank you for your time today.

Thank you so much.