I'm David Westenberg, the diagnostics analyst here. I'm joined by Neogen, a global leader in food and animal safety. So let's kick it off with something a little bit more on the high level here. Where is Neogen relative to other companies in food safety, and what does it mean when you say you're a pure play?
Yeah, good question. So I think let's start with the pure play part. I think what you see from us is more focused on a smaller set of end markets, right, with a broader line offering. I think if you look at a lot of the other players in the industry, in a segment or two of where we sell, we might compete with a different set of players, you know, across our broader portfolio, and those folks might be buried in a larger company. So similar to, say, what you would see with the food safety division of 3M, that we obviously acquired, except on a smaller scale. So we see a lot of competitors that compete with a subsegment of us that can be typically buried inside a larger conglomerate. So pure play, you know, you interpret it as you will.
I think our point is we're a more focused player in a specific set of targeted end markets.
Got it. Can you tell me how you intersect with the global food supply? And you know, what it means to be both an animal safety company and a food safety company?
Yeah, sure. I think the first part, people care more about what's in their food. I think our expectation of the safety of our food is only increasing, not just from a nutritional value, but that it's free of adulterants and contaminants, and that's directly where Neogen plays. I think not just in the increasing standard in developed markets, but as we see emerging economies, the standard going up as emerging economies continue to develop. You know, we're directly positioned to be part of securing the world's food supply. Now, to the second part of your question, we have a lot of focus on production animal. And you've heard John say, "Food starts behind the farm gate," but his point being that, you know, that is food, right?
And, best example might be our genomics testing capability that helps increase the efficiency of the herd, right? And, so, you know, we start at the, at the production animal level through the food producer, in our focus on securing the world's food supply.
Great. Can you talk about a little bit about the composition of the markets? I know it's pretty fragmented. Can you talk about that fragmentation, and then can you just talk about some of the maybe overall market growth rates in both food and animal safety?
Yeah. Great, Dave. It is highly fragmented, as you, as you point out. By far, I would say we're the largest focus player. And if you were to say, "Who do you compete against?" We would probably name six to eight, e ight folks. We won't, we won't go there, but, highly fragmented, and again, repeating what I said, but I think it's important. A lot of, a lot of things buried inside other businesses. I shouldn't say buried, but, you know, components of other larger conglomerates. On the food safety side of the business, we see that as a, you know, kind of mid to high single digit underlying growth rate, call it, you know, 6%-8%.
Maybe a little slower on the animal safety side, but still a good, solid mid-single-digit growth rate, maybe kind of more 4%-6% growth rate. Not linear, you know, we see a little more cyclicality on the animal safety side, given the cyclical nature of herd sizes, but, you know, very good, stable, and market growth drivers for food, as you would imagine.
Maybe you can give us a little bit of to dive into that a little bit more. I mean, we don't need to give your competitors any airtime, but maybe you can take a high-level composition of them. Are they just life science tools companies, like? What type of companies? Are they private equity-backed? What's kind of the look of the competitors?
Yeah. I'd say the first lesson, you know, kind of equipment guys, more people making consumables. Again, not necessarily... Some private equity-backed, but some buried or components of, you know, very good other businesses. That's maybe the good 3M example. Not many of them. You know, I'd say we're the only one top of mind that you would look at as a standalone public company, where you would get, you know, with a focus on our end markets. We like the fragmentation of the markets. We have very good competitors. You know, we tend to be a top three player in the places we choose to participate, and we do it with a focus on some subsets of the market.
We have a number of competitors in, say, genomics, which is about 10% of our overall business, but we tend to focus a little more in areas, say, like cattle, and to a lesser degree, but also companion, which is to us. Whereas you have other folks that play in a more, in a more broad line. So it, it really is highly fragmented, and, you know, that makes for a very attractive industry in our, in our minds.
Gotcha. Let's go back to some of the Neogen-specific stuff. You, you gave the targets of $1 billion in revenue and, and 30% EBITDA margin, following the acquisition. Where do you stand today? What improvements have you already made, and what improvements still need to be made in order to hit that target?
Yeah. Look, I think we gave those targets at the time the deal was announced, in December of 2021, and at this conference last year, I think we talked about that being still a viable target. But occurring later because of the change in the overall market conditions and frankly, currency rates and some of the performance of the acquired business between the period of sign and close. So we've talked about not necessarily 30%, we talked about over $1.3 billion of Adjusted EBITDA as our objective for our fiscal 2025. It's a dynamic end market environment. I think ultimately the biggest variable in our hitting that number is growth.
We're a high gross margin and a higher incremental margin product business, and, you know, we need to see good growth rates that are well supported by our historical growth rates to achieve that. We need to make progress on the integration, which we're on track doing, because, you know, as long as we work with our integration manufacturing partner, that drags along a little extra cost. I think we're tracking to our expectations there. And then, you know, driving overall performance of the business, regardless of the market conditions. And I think that, you know, will be an ongoing continuous improvement journey, but we're making the type of progress that we had set out to.
So I think, you know, it's a little noisier of an end market environment for sure. The macroeconomic influences here, inflation in the U.S., ultimately, the impact of higher interest rates and trying to tamp down the, you know, depressurize the economy a little bit. I think those things are all reading through in different ways. So look, we need to get through 2024 and see where we land and our jumping off point in the, in the state of the markets, and then we'll talk about what we see for 2025, but we have not moved off that objective, as you've heard us say.
Yep. Great. Just another question on the GLP-1s. Will this impact food supply or, or production in any way? I'm, you know... Maybe you could talk about your guys' stock purchase and, what business lines, if any, and I'm assuming very little impact, but, what lines, if any, on Neogen, would, be impacted or not impacted?
Yeah. So GLP-1, you know, we get a lot of questions in this regard, and, I know there's a lot of frenzy around this, but, you know, we, we just, we just don't think we see them or, or, we or we're going to see a measurable impact here, particularly in relation to the good end market drivers that we see. I think it's early days for GLP-1, and we got to see the duration of people on it, the adoption rates, how it ultimately plays out, and we're paying attention. But if, if you were to ask us today, and John would say the same thing, if he was sitting right here, we don't think there's going to be a measurable impact to us, but we'll keep an eye on it and keep looking at how it evolves over time.
You know, as far as our specific business, I think we benefit from serving a very broad range of food producers, whether it's proteins or produce or prepared foods. So I think, I think that diversity will help us regardless of our opinion around ultimately around the impacts. And then your question about stock purchases was?
Oh, yeah. I mean, I know that you, the insiders made some big purchases.
There was some. Yeah, for sure. Look, we're Neogen believers, obviously. You got a lot of people who've joined the company recently. You've got an executive team that is very enthusiastic and motivated, and if we see the. You've seen some instances where maybe we thought the stock had a little dislocation of value and took the opportunity to buy.
Great. Let's just talk about the ERP implementation.
Mm-hmm.
You know, what were you on before? What were you going on now? Where are we at today in terms of the timeframe and what steps we still have ahead?
So we had a multiple ERPs historically, and if I just back up for the question for a minute. I think when you step back and you look at the 3M Food Safety Division acquisition, what we really have is an opportunity to re-platform the company, and I think that's what we're doing with ERP as well. We needed... It was a carve-out, didn't come with an ERP system, so we're using this as an opportunity to implement a new version of ERP to accept in some of those product lines from 3M. That—Our starting point for that has been our food safety business in the U.S., and that is the most critical component for us to bring in those new businesses and get them out of some of those onto our back office and our distribution network.
We, in essence, implemented our what will eventually be our global footprint of SAP in U.S. food safety. That's the biggest, most complicated piece of the business, is the initial implementation of our operating model, and we're working through that. The good news is, you heard us say on the Q1 call, "Hey, we're up and running." And not everybody achieves that, right?
Mm.
But at the same time, less efficiently than we would like. And then we said on the Q1 call that we saw that reading through as us not being able to get as much of the demand that we're seeing shipped in the quarter, at least at that point in time, that's what we thought. So no update on that, but, you know, we were five weeks into the quarter-
Mm.
when we came out with earnings, and that was, we shared that as a result of kind of our experience quarter to date. We've got some lessons learned from this initial implementation. We've got some process actions we need to take, some data things we need to clean up, and we'll do those before then we proceed further. The other two big steps, think about it as generally international locations and then also in the animal safety business. But those will be much easier after this initial implementation of our new global SAP operating model.
Got it. And, you know, just to be clear, I've covered plenty of companies in the past, and the ERP implementations are hard, so I don't think you're seeing any worse than any of the other ones. But-
Maybe better. Maybe better.
Maybe better.
Thank you.
If you can, just remind us on the timeframe on moving to the other parts of the business, and then just a reminder on your percent global revenues, because I think you're much more diverse than I think.
That's great
internationally, than I think most people realize.
Timeline for the rest of the businesses, over the next couple of years. International, I think, now is about 60% international, 40% domestic, roughly speaking. Or maybe closer to 50/50, but the acquired food safety division, you know, was more international, I think, than domestic, and so that helped give us more critical mass internationally. We see now, with that critical mass, you've seen us implement new leadership—not leadership, but we've expanded the regional leadership organizations and the dedicated leader over Asia-Pacific, over EMEA. We already had one in Latin America, and we think that, you know, in-region leadership will really help us grow what we think are some good geographical expansion opportunities.
Gotcha. And then can you remind me of any of the one-time ERP call-outs that you had in the quarter, or that you called out? Were there any?
Well, the biggest thing we called out in the quarter was the timing of shipments. So we said, I think, double-digit $millions we could see at risk of maybe moving low double-digit $millions of demand that we might cross over the quarter line and ship after the end of the second quarter here. We said that after 5 weeks. You know, we noted at the time that we were behind in where we wanted to be. We're nearing the end of the quarter. We'll see how we come in. But you know, to us, what's important is really that underlying demand environment. And if we ship some revenue a couple of weeks later, you know, we're very focused on taking care of our customers, so that's our highest priority.
Ultimately, we'll get a feel for what the demand environment is, which is more about orders than shipments. That'll help us get a read on the first half of the year and help inform, you know, how we feel about the second. Look forward to having that conversation in January.
Gotcha. Well, this is a perfect segue into the supply chains.
Mm-hmm.
You know, are they back to normal in your mind, and what COVID or stocking or interest rate environment still remain in the system?
Look, I think supply chains, you know, are back to normal, which is to say, nothing's ever perfect, but you always have issues. But I think the supply chain constraints that we saw through coming through COVID, you know, I think that world has generally normalized. I think what we're seeing in our markets is, you know, an over-capacitizing of things following COVID, and now some of that capacity coming back out of the system. I think this isn't necessarily an abnormal cycle when you have some macroeconomic trends, but it's been exaggerated by the COVID and the post-COVID environment, and now normalizing back from that.
So I think we see, you know, we see the dynamic getting amplified, and that's some of the correction that we're seeing now, and the impacts of, you know, external artificial stimulus to cool off inflation, and those things reading through. You know, so we see that in some of our end markets. We pay close attention to a number of food producers. We have good insights into animal safety distribution channels, particularly domestically. So we pay close attention to that, try to be pretty transparent about what we're seeing out there. So we'll see how it develops. But recall, when we entered the year, I think we said this is kind of what we're anticipating.
So we anticipated seeing animal safety channels continue to destock, at least in the first half of our fiscal year, and that food production levels, the volume of food production, was lower. And, you know, we had seen, on average, maybe low single-digit declines, and we saw that environment persisting through the first half of our fiscal year. So we're nearing that. We'll see, we'll see what we think the outlook for the second is. But generally speaking, you know, when we talked in the first quarter, we said the first at least four months of the year had developed reasonably consistent with what we'd expected entering the year. And, so, you know, more to come here in a... When we talk in January, but, you know, I think it's fair to say that, what we'd seen was kind of what we'd anticipated.
Got it. All right, so how should we think about pricing in food and animal safety? And we're kind of looking at this from an end market perspective. Is it north or south inflation overall? How do you think food producers are thinking about price in an inflationary environment?
Look, Dave, I read the same stuff you do, and I think we see food producers talking about consumers that are being highly impacted by inflation and are spending less money. And I think that's got to read through into pricing at some level. We'll see, right? But I think most folks are focused less on price and more on price cost, pricing for inflation. We all tend to have similar objectives there. So we'll continue to read the inflationary environment and adjust accordingly. And I think then the other variable that I think gets often forgotten is value, and providing value and pricing accordingly to the value you provide to create, you know, an appropriate value proposition for your customers. So look, I think the environment has definitely changed from what we saw in 2021 and 2022.
And as we move into 2024, we'll see what the environment holds. I think it's cooled off for sure. But you know, it'll be a function of all those factors, including the inflationary environment, which I think we would all think relative to what we've seen over the last few years is cooling off as well.
Gotcha. Can you talk about remind us the date you no longer have tax consequences or covenants on, in terms of your lockout, following the acquisition?
Yeah. So following the RMT, which closed September 1, 2022, the vast majority of any restrictions we have are two years in nature, so two years from that date.
What is your strategy right now with capital deployment, whether it be debt paydown or any other things? How are you looking about that?
Sure. Look, our number one capital allocation priority right now is what we've loosely called integration capital. We're building this great plant in Lansing. We're capacitizing it for Petrifilm production. We're bringing Petrifilm inventory into our distribution chain. We're doing the system work you earlier alluded to. That's the focus this year and into next year. I think then you'll continue to see us focus on deleveraging through both, you know, continuing to grow EBITDA dollars, but also reducing net debt by building cash. And then as we come through that, getting back to a balance of deleveraging and looking at, you know, M&A opportunities. You alluded to the structural nature of the markets earlier.
There's a lot of interesting stuff in our markets, where historically we've been a serial bolt-on acquirer, and I don't think you ever turn M&A off, right? So I'm not saying we've done that now, but probably more of a return to that focus in a couple of years as we see leverage come down, and we get through the cash associated with the integration activities.
Got it. So I'm going to talk about more, move on to, to some of the stuff that, you specifically, right? So, you know, you've had experience at big companies, and what brought you to Neogen as the CFO? Why, why, why did you choose that?
That's a great question. Look, I think Neogen, when you step back from it, the opportunity with Neogen is what this business can look like after we get through with this 3M integration. You know, we see well over a billion-dollar business, capable of accelerating to over 30% EBITDA margins with a very, very attractive end market, where we're the number one player in this attractive niche market. That vision for the post-3M integration, I think, is what gets the entire executive management team excited. Also tell you, look, it's we have an end market and a great business.
When you look at, and you're familiar with the legacy of Neogen, this is a great, a great business that was built by really, really smart, dedicated people. And now we have the opportunity to continue the evolution through to the next stage. All those things get me pretty excited, and frankly, I enjoy the team that John's put together and John himself. And I think you got a lot of people that enjoy working together, that are, you know, believers in the mission, and that all equates to, you know, pretty good fulfillment.
Gotcha.
and exciting opportunity.
You know, you have a lot of different SKUs. Can you remind us the number of SKUs that you have in, in the company, and what are maybe some of the favorite products or key products that investors should really be looking at when they think about Neogen?
I don't know the SKU count. It's probably a little bigger than I'd like, but a lot of those are really important, as you note. What to get excited about? Look, I think anything in our historical core Neogen product line, focused on the, you know, allergens, which continues to evolve, natural toxin space, we should always get excited about those as the products that are core to the business, high margin products. You know, clearly, the SKUs that came in from 3M, we should be focused on because, you know, look, it's a carve-out. Great business, 3M did a great job building it, but we think through focus and being this kind of focus player in the end markets that we play in, you know, we have an opportunity to do even more with these great assets.
So I think that should be a focus, with the top of the list being Petrifilm. You know, which in and of itself is a tremendous franchise with, great global applicability, and I think through some continued focus on innovation, investment in capital projects and other things, you know, we have the opportunity to kind of use what historically has been a great growth rate, and continue to add some fuel to that going forward. So a lot to be excited about.
Gotcha. So the year is 2028, you're back here at the Piper Healthcare Conference.
Mm-hmm.
What are you most proud of that Neogen accomplished over these last five years?
Well, look, I'd hope to be able to say that vision that we had talked about, you know, three or four years prior, four or five years prior, you know, came to fruition, and that we're able to step back and go, "Hey, Neogen 2.0 is everything we talked about it being." That'd be pretty great.
Gotcha. And what are the most misunderstood parts of the Neogen story in your mind?
You know, I think you noted one earlier, which is we have a lot more global presence than people tend to appreciate. I think the opportunity for further market penetration in international geographies is underappreciated. You know, we talk about the 3M business. That gave us critical mass in Asia-Pacific, and frankly, is our entree to Korea and Japan, which are really important end markets that we hadn't penetrated before. We think there's a lot of market penetration in mainland Europe and large developed countries like Korea and Japan, that go underappreciated.
I think people underappreciate the increasing importance of what we do, how much people care about what's in their food, the expectations that, you know, you're not going to get sick from something you eat, and I think kind of the mission-critical nature of our products to our customers. But, you know, as we continue to tell the story, and as Neogen continues to be a bigger and bigger company, you know, we'll make sure people understand that.
Well, that's all the time we have for today. Thank you very much, Dave.
Thank you, Dave.