Good morning. Welcome to The 42nd Annual JPMorgan Healthcare Conference. My name is Edwin Zhang. I'm a member of the JPMorgan Healthcare team and the moderator for this session. Today, I would like to introduce you to the team from Neogen. Please join me in welcoming our presenter, John Adent, CEO of Neogen.
Thank you, Edwin. It's very nice to be here. Good to see you again. So good morning, everyone, and thank you for being here today. As Edwin said, I'm John Adent, President and CEO of Neogen, and I will be providing an overview of Neogen for you this morning. Just a quick reminder that in our presentation today, there will be some forward-looking statements, so at your leisure, please read our disclaimer. I know that some of you may not be familiar with the Neogen story, so I wanted to spend a little time taking you through that. And really, what Neogen is about is we fuel a brighter future for global food security. That's what we focus on every day. We envision a world where everyone has access to a safe, sufficient, and sustainable food supply.
And we know, right, that's a really lofty goal, but it's one that we think we're uniquely positioned for because over 40 years, our mission has been to keep the food supply safe. And when we do that, we try to further human and animal well-being. We really champion sustainable practices that affect our land, our water, and our world. And you have to think about all the decisions that are made on the farm, in the lab, and at the processing plants affect global food security. And we're there every step of the way to help our customers make sure that we're supplying a secure global food source. We were founded in 1982 in Michigan State University. We have about 2,500 employees.
Half of those employees are happy that Michigan won the national championship, and half are very upset that Michigan won the national championship, but it's a 50/50 split. We have over 300 scientists and engineers today, and we work in nearly 40 countries, where we have people on the ground in sales, support, and technical service, and we're headquartered out of Lansing, Michigan. As a result of all the expansion, you know, we are the global leader in food security today, and we operate mainly through two business units. Our first business unit is Food Safety. Our Food Safety really focuses on a range of rapid diagnostic tests and related products to detect the presence of unwanted things.
I think that's the easiest way we put it, and what we mean by unwanted things is pathogens, toxins, allergens, things you don't want, adulterants you don't want in the food supply. Our tests find those for our customers to protect their consumers. And then, on the Animal Safety side, we view that as an extension of food security. A lot of our competitors start at the manufacturing processing plant or at the lab level, and really, food starts at the farm. So we've extended that to the farm through our disease prevention, our enhanced animal care products, and optimizing the genetic selection of animals for our customers. We talked about our global presence. You can see on this slide the countries that we're in today. We've got sales and marketing and tech teams in really over 40 countries following the 3M acquisition.
With that, we've changed our leadership structure. We have put in new regional leadership, so we operate with four Regional Vice Presidents who report into our COO, Doug Jones. Those regions are North America, LATAM, Asia Pacific, and Europe, and we're making significant investments in those. So we have very strong teams today in the U.S. and our LATAM business. We continue to invest in those businesses, and we're starting to see those investments pay off. For example, in LATAM, we had a great double-digit quarter this last quarter in growth because of the people we had hired earlier to really drive more customer intimacy in those markets.
We feel that we're under-penetrated in some of our markets, specifically in Europe and in Asia Pacific, and to address that, we've added significant resources in Europe, and we've really doubled the sales team and tech services team in Asia Pacific. We think there's a tremendous opportunity for us to increase the reach and frequency with our customers and continue to drive growth in developing markets. The reason we're able to drive that kind of growth is because we also have the leading portfolio. When you look at this, it's the broadest portfolio in the industry, and our product offering consists of over 95% consumable business. So when you look at the first three columns, those really represent our Food Safety diagnostics, and we'll start with column one, which is our indicator testing and culture media.
The indicator testing is Petrifilm. It really is the gold standard in the industry for indicator testing. It's a fantastic franchise. It's a franchise that came over from 3M Food Safety that we acquired about 15 months ago. Complementary to that is Neogen's culture media and sample handling business that really focuses on accurate sample collection, incubation, and time to results. It allows us to be the demonstrated leader in this indicator testing market. Another big segmentation for us is bacterial and general sanitation, and it's microbial detection of pathogens. This is whether it's our MDS platform or some of our other platforms. That is, the pathogen detection is an area where we've had really strong growth. I think this last quarter, that line was up 15% worldwide.
And that's a testament to some of the things that we've been doing on cross-training and taking some of the technologies we saw from 3M to the existing Neogen customer base. Pathogen detection is a big market, and it's a big opportunity for us. Hygiene monitoring is another in that segmentation, and that is a surface test to detect the presence and absence of ATP. So it's very simple cleanliness tests, high use, high frequency, and opportunities for us to continue to bring this to really emerging markets as they think about how do they improve their Food Safety and food security protocols in their plants and for their customers. Allergens and natural toxins is the foundation, really, of what Neogen started.
It is our, our long historical leadership in our lateral flow rapid detection, and it is the core business of Neogen from our legacy standpoint. We were the first to use lateral flow rapid technology to first develop a rapid toxin, aflatoxin test. We then followed that up. We were the first to use it as an allergen test. So we have led in that space for a long, long time and continue to find new technology or find ways to leverage that technology to help our customers. These areas continue to grow. I think we talked about this last year. I mean, there are 13 known allergens in Europe. The U.S. just added a ninth.
So you will continue to see rapid lateral flow testing play a big role around allergen and toxin testing because it's things that people need to understand what's in their food, and we're seeing more and more opportunity to do that with the new allergens coming online. The other two regard our Animal Safety product line. Our Animal Safety product line, like I talked about, it's an extension really of food because we start at the farm. We start from behind the farm gate all the way to the dinner plate. It's a line that makes sure that we have developed. Once we have chosen the right animal, we have put them in an environment that now we wanna make sure it's free of pathogen.
Because the only way an animal is gonna grow efficiently is if you make sure that the facility it's in is clean, and you're keeping the pathogens out. And the way that pathogens enter those clean facilities are generally in three ways: They hitch a ride on people, they come in on insects, or they come in on rodents. So I think, I get a lot of questions, "Well, how can rodenticide and insecticide, you know, be relevant for a Food Safety company?" It's because you have to be able to keep those pathogens out, and those three vectors are how they come in. So this is how we keep that supply chain, and we keep that farm system clean. The last piece of our business is our genomics business, and genomics really covers across all points of our business. It's extremely important in Food Safety regarding 16S.
If you think about pathogens today, you hear- you may have heard about Salmonella outbreaks. You may hear about E. coli outbreaks. But what you don't realize is there's roughly 144 strains of Salmonella. Some strains, you can eat it, and you'll be fine. Some strains, you eat it, and you will be deathly ill and may die, right? So our customers wanna know, "Well, John, look, great. We know we have Salmonella. What Salmonella is it?" We use our 16S so we can, we can find the genetic trait and that genetic blueprint for that pathogenic Salmonella strain. So extremely important for us in using that across our food sector. We also use it to help our customers make the right decisions around their farm for their animals.
By choosing the right genetic traits, they're able to be more efficient, make sure that they're meeting the needs they wanna meet, whether it's lower water consumption, whether it's greater milk production, the things they wanna do to make themselves, better operators. And then lastly, we use our companion animal business in three different types. One is parentage. So you get a puppy over COVID, you wanna know, is it half Dachshund, half Saint Bernard, right? We can let you know that. We also have a test for wellness. So you buy a new pup, you take it to the vet, you run Neogen's wellness test, and we can pick the genetic markers to help you understand, is this puppy prone for hip dysplasia? Is it prone for certain liver diseases?
And allow you to work with your veterinarian to be proactive to say, "This is the type of exercise regime we need to put the puppy on. This is the type of diet this animal needs to be on to help a long, healthy life for your pet." And then, lastly is when we are looking at a certain specific breed. So we work with the AKC. AKC, I don't know if you just saw, they, they announced there's a new breed of dog that just came out. It's interesting we're still finding new breeds, but we work with them to do that.
So instead of a parentage test that says, "This is what's in the dog," this is a very specific test that says, "These breeds have these specific markers and don't have these." And so we work closely with breeders, with the American Kennel Club and others to help them keep their books of records very straight about those specific breeds and animals. We're really well-positioned to address, you know, the kind of global food security challenges that the world is facing. Our scale and portfolio allows us to do that.... There's really nobody else in the industry that has the reach and frequency we have, and the broadness of our portfolio lines. And we serve what we like, are very large markets that have mid- to high single-digit growth rates. So we're in very, very strong markets.
We're the leader in a very strong niche market. We've got very strong secular tailwinds. I mean, we, we've talked about this before. We talked about there's new allergens coming, and if you think that there's 13 in Europe and the nine in the U.S., that's not just because the Europeans are more allergenic, right? It's that they are taking the time to understand what's causing those allergies, and wanna make sure they're protecting their consumers around those things, right? I remember when I was a kid, there was no such thing as a gluten allergy, right? Now, think of what's out there. So the, the market is constantly changing, and consumers are demanding to know what's in their market. I, I love going shopping. I've got five kids, you know, the oldest is 24, the youngest is 12.
I would tell them, "When I went to the grocery store and we would get a can of SpaghettiOs, you just knew it was SpaghettiOs. You didn't know what was in it." My children are very specific. They wanna know the protein content, the number of grams of protein in that product. They wanna know the dietary fiber of that product. They're looking at the sugar in that product. That's not going to get less. That's only gonna get more, and that's what we do. We have the products, whether it is our lines that show dietary fiber. We can help you, as a customer, explain to your consumers what is in and out of your food products. That's what Neogen does to help you connect with that consumer. We also see rising incomes and food standards around the world.
Edwin and I were just talking about this. You know, I was in China in the 1990s. Edwin just went back. When I would go to the wet market in China in the early '90s, I would buy a piece of pork, and it'd be hanging in the stall, and I didn't know if that pork was there for an hour or two days, right? And so you bought it, you cooked the heck out of it, and you knew you were gonna get sick 50% of the time. You go to China now, with the rising income levels of those people, they demand not only new food, but they demand that it be safe food. They're not gonna tolerate being sick like it was in the old days.
So we see that around the world, and that's a huge tailwind for us, and people are gonna continue to push their governments along that path. We also see increases of regulations from the government, right? We saw that with the allergen testing. I think you will start to see that more with pathogens. We see that as a big opportunity for pathogens. E. coli is known, is a known adulterant, so you have to test for it, but you don't have to test... It isn't for Salmonella, it isn't for Listeria, it isn't for Campylobacter, but I think you're gonna start seeing the government head that way. And today, we are the USDA-approved method to test for Salmonella. We've seen some RFPs come out that we think look exciting, to think that the government's gonna go a certain way.
And that's extremely positive because if it's not an adulterant, you don't have to test for it. Now, you know, Dave, my CFO, is new to the company, Bill's new to the company, and I tell all the new employees when they join that it's great to work at Neogen. You're gonna love working here, but you're never gonna eat out again. That's the downside of Neogen, right? Because you start to learn. And what I will tell you is, unfortunately, there is Listeria in every single plant in the U.S. The issue is, you have to keep it away from the food, right? You've got to make sure that the surfaces and the areas that you're cleaning are free of those pathogens and those, you know, contaminants and adulterants. It's not realistic to think that they are free of Listeria.
There may be some that are very, very rare, but generally, you can always find something in a drain or something else. So that's how we use kind of our analytics platform to help tie together the protocols of the customer to make sure that they are tracking their Food Safety protocols and processes, so they can have a robust way to understand where they were testing, what the results were, how do they interdict if there's an issue, and how do they keep going forward? The other thing I really like about our business is our broad diversification. If you look on the far right, you know, culture media and indicator testing is 36% of our business, but we've got really strong categories in bacterial and in general sanitation, allergens, toxins, and Animal Safety products, and genomics, so really nice mix.
And the other is, geographically, we're very strong, right? 55% of our business is in the U.S. and Canada. We're pretty much 15% in the other three regions. You will see—we will have robust growth in U.S. and Canada, but you will see that number come down because we are gonna outgrow in some of those regions, like we talked about. We had really strong growth in LATAM for the quarter of double-digit growth. We see that continuing to happen. So those are things that, you know, we get excited about for the future. It's a... This slide shows you kind of how complex the food chain is. Think about protecting that grain of rice, protecting that leaf of lettuce, protecting those things through this whole process and how many times it changes hands, and it's very, very difficult to do.
But that's where we are there to be the glue and the conduit to help all the way through the global food supply chain. We do that with data and information in our analytics platforms, and we do that with products and services that are tailored for each person and for each entity at those specific levels. It's a way in which you can see Neogen's breadth and reach across customers and industries. We've got some significant growth drivers, right? And, and we're gonna leverage our core capability to continue to drive growth. We've talked about this. Our two foundational platforms really are microbiological, with Petrifilm franchise, and our culture media, and our immunoassays, which is our lateral flow technology that drives allergen and toxins.
Well-established, known in the industry, gold standard in the industry, and the ability to continue to add product lines and meet new needs as the market continues to change and regulations demand. So when we came out with a new allergen, the new known allergen of celery last year, by the time that was demanded to be in, product had already been launched three months in advance, already had trained all the customers. We continue to see growth in those core segmentations. The other thing with that we've seen, specifically around microbiology, is when we bought that business from 3M, it was very specific that that technology was to be only used in Food Safety. That platform can be used in a different, very attractive adjacencies.
Now, it's not something we're gonna do in the next 12 months, but when you think longer term of where you're gonna see growth in three, five , 10 years for Neogen, this is a really big opportunity for us to take this fundamental technology and use it in other areas, looking for other type of diagnostic testing markets we can move into. We talked a little bit about the regional expansion, right? So the local leaders are in charge of their P&L. They drive commercial operations there. We're closer to the customers than we've ever been.
As I talked about, we have strong teams in the U.S. and LATAM that we've continued to invest in, and we really invest and spend it—we really did some investment spending in Asia and APAC because we felt we were under-penetrated, an opportunity to hire more salespeople, improve the tech service teams, increase reach and frequency to help us drive faster growth in those regions. Then the last is innovation. We got a very strong team that came over from 3M. We had two separate groups that were working on different projects, trying to understand how they were fitting together, and what we did this year was really focus the team to make sure that they are laser-focused on what our strategic goals are for driving the growth.
So while we were gonna invest across all segmentations, Food Safety, Animal Safety, and genomics, the majority of our investment is gonna be where we can get the greatest return, and that's in Food Safety. That's where we're gonna drive the team. So we are focusing those resources, whether they're R&D, capital, money, to the right things that are gonna get us the greatest growth for the future. But to do that, you have to have a multigenerational roadmap. You have to know where the industry is going and where these products are going. So we've done that, we know that, and we're making sure that we're aligning those R&D products and tests and research to align with our roadmap, so we are fully aligned to continue to drive growth going forward.
So I'd love to talk about the future and growth, but obviously, we are in the middle of a huge acquisition, and, you know, as people say, the, the pig is still in the python, right? But we are working our way through this. We made significant progress in the last 15 months. So as you can see, we are on track to be off of all of our service agreements by the end of third quarter, excluding Petrifilm. We may have one small manufacturing that drips into the fourth quarter because we wanna make sure we take care of our customers and can build enough inventory before we bring that over. But after that, the only agreement we have with 3M is Petrifilm production on a toll manufacturing basis for the next couple of years.
Now, I want you to think about the work that was taken to accomplish that. We re-platformed the company in the last 15 months. We implemented SAP. We made it the book of record for the company. We changed our process and procedures to do that. As soon as that was done, we immediately then doubled the size of the business by bringing all the 3M products into our distribution network, and we did all order to cash. So now we take the order, pick the order, bill the order, talk to the customer, collect the money. That's all done in-house, right? That's what we did during the second quarter when we finished up. Now, we've been doing it for 15 months. That is a big deal, right?
So when we take the opportunity to look up for a minute to see where we're going, that's why I get really excited. And that's kind of where we are when you think about our post-integration expectations. Like, this business will be a mid to high single-digit grower on a core annual growth. It's what the business has did historically, it's what we know we can do, it's, and it's the ability for us to continue to drive that, you know, that growth rate that people have known Neogen to be for a long, long time. We will be a 30%+ adjusted EBITDA margin business. I think the other thing is that, like, these are not the end goals. This is just where we're starting when we're together. So these will be better. These are not where I'm saying we're gonna finish.
This is how we're gonna start this business and the opportunities to get better from there. We're gonna be a 100% free cash flow business on an adjusted net income basis, right? We throw off cash. It's a great business. We're gonna use that cash to strategically pay down leverage, so our net leverage target's gonna be below two. Once we start getting into that range, we will then use capital to look at other acquisitions, other opportunities to continue to drive growth and profitability, because our flow, our free cash flow and flow to the bottom line is very, very strong with incremental growth. So those are the things that we're gonna do to continue to drive the business forward. I get really excited about the future.
I know that there's a lot of near-term choppiness, and we're kinda working through that, but if you take a step back and look at how the business has performed with all the things that we're doing, once we're through that and we focus on execution and meeting our customer needs and continue to service our customers and have all this other noise through it, it's gonna be a fantastic business, and we're really, really excited about it. Now, for those of you who fell asleep during this, this is the highlight. So Bill said, "Half people fall asleep in mine," so we have to put this in. So if you have a chance, you can read it, but with that, I'm done, and I'd love to answer any questions from the group.
Thank you so much for that, John. We will now begin the Q&A portion of the session. So if you have a question, please raise your hand, and we'll bring a mic to you. John, I'd love to kick off with a question.
Sure
... from my side.
Yep.
Right, so, you know, the end market environment is on top of many people's minds, and you've talked about seeing signs of improvements, right, in these end markets. So we're curious as to, like, what are you currently seeing at the moment?
Yeah. I mean, when we put out our forecast in May of last year, we had talked about a challenging first two quarters and then an improvement of the market that was gonna be followed with an improvement in our business. And while we see the market improving, Edwin, it's not improving to the level as fast as enough as we thought it was gonna be. And we monitor a number of our customers, and I think if you have a chance, you can go look at some of these customers, who have said the same thing, that they're seeing. For example, one was down nine in the quarter, now they're down three. Sequentially, it's better, but it's still not positive growth. So we're optimistic that we're gonna get there.
We just think it's pushed out a little bit as we continue to monitor what's going on and help our customers.
Great. Thank you so much for that.
Yep.
So another question from my side. You've recently talked about some negative demands related to the Petrifilm business in APAC because of transitional supply issues. Is this, like, a broader concern for you at the moment?
It's not. I mean, it was a big challenge because that for some reason that region was starved for product. You know, everyone knows, if you were here last year, we were at that point, we were struggling with getting 3M to produce Petrifilm for us. And I know there was a lot of consternation about, "Well, how do you have any leverage? What can you do?" Well, a lot of us, we just went and worked, and we put our own employees in the plant, and for the last nine months, we have not had a supply issue for Petrifilm. And what we saw was, sequentially, we had a 20% increase quarter-over-quarter in our sales in China. We saw Petrifilm worldwide grow, Bill, was it number eight?
So 8% growth worldwide for Petrifilm for the quarter, so we're really excited, one, about the region. So China came back strong. Our, our Japanese business came back strong. You know, when we were, when we were supply-constrained, our, our Japanese business lost 400 customers because we just couldn't get them the product. We've got over 200 of those back already in the first 90 days. So it shows the resiliency of the Petrifilm. It shows the power of that brand, and when we have supply, we can bring customers back because it's the best solution for them.
Great. Thank you so much. I'm happy to ask one more here.
Sure.
It's been over a year since the 3M acquisition. How do you feel about the acquisition overall?
I feel tired. It's been a lot of work, but I think what gets us going is when you look up and see, like, what the company is becoming. I mean, it's just gonna be an absolute powerhouse. I mean, you think about a business that's gonna be a high mid-single-digit grower, 30%+ EBITDA margins, the leader in a growing niche market. It's a really great business. I'm really excited to see where we're gonna go, and the team's worked really hard. Our team's worked really hard to do this, and they're super dedicated, and I always thank them at the end of every quarter for their hard work, 'cause without them, we couldn't get it done. So, I'm excited about the future.
I think, you know, if some of you haven't seen some of the things that are going on with Food Safety, there was a documentary that dropped on Netflix called Poisoned, and it talks about a range... Did you see that? I mean, you need to take a look at it, right? Because then you'll start to understand the importance of Neogen and what we do. It is, it is a worldwide issue of protecting the world's food supply and global food security, and that's what we do every single day. So, we're really excited about the future. Thanks, everyone.
Great. Maybe I'll just close out here with one final question. You know, you talked about the sort of success of the 3M acquisition and some of the future opportunities. Like, what do you foresee M&A and sort of inorganic growth as a key part of the Neogen strategy going forward?
Yeah, we do. And, you know, the first is we've got to get this one integrated, right? And I think we've done a lot, so we're feeling very excited about some of the opportunities because the pipeline for acquisition is there. We've got stuff in the pipeline today. We know the targets we're looking at. We wanna get through this year. We have a big capital expenditure because we're building a plant. We had to buy some inventories through the transition agreements. But once we're through that and that normalizes, the free cash flow we have, our number one objective is gonna be to pay down the debt, but then number two is gonna find really attractive acquisition opportunities that are gonna be accretive to the business and drive share of the value.
Gotcha. Thank you so much for that, John.
Thank you.
I think that concludes the presentation. Another round of applause for John.
Yeah, thank you.