To the RBC Capital Markets 2024 Global Healthcare Conference. I'm Conor McNamara, the Life Science Tools and Diagnostics Analyst at RBC. It's my pleasure to welcome Neogen to the conference.
Thank you.
Up on stage with me is John Adent, CEO, because I'm West of the Mississippi. Thank you for joining us. Really appreciate you.
My pleasure. Thanks for having me.
You know, Neogen is a very unique company. So, can you give us a background of, you know, what attracted you to Neogen? Where do you guys stand today? And what is it that, you know, makes it such a unique?
Sure. Well, first is we're the only pure-play food safety company in the market, right? What attracted me to join the business is a couple of things. One is that market is a dynamic and growing market. It's really exciting when you think about the things we do every day to protect the world's food supply. We make sure that we help our customers understand and show their customers what is in and out of their food. As you know, you know, it really has strong secular tailwinds. You know, we're of similar ages, right? I used to tell my kids when, you know, when I was growing up and you went to the store and bought a box or, you know, some food in the store, it didn't tell you what was in it.
Nowadays, people are very in tune with what's going into their bodies, and that's only going to continue to grow. So with that, we help our customers explain to their consumers what's in and out of the food. So whether it's free of allergens, right? So we have allergen testing to explain to them that this is free of gluten, free of egg, free of all the milk, free of the other things that are allergen-free. Same with toxins, right? We want to make sure we keep toxins out of the food supply. Same with pathogens. Pathogen is another good example. Just recently, the USDA and the FDA decided that they named Salmonella a known pathogen for breaded chicken products. So think about nuggets and other things like that. Well, you technically don't have to test until it's an adulterant, and now it is an adulterant.
We have these secular tailwinds of people want to know what's in their food. They want to understand what they're putting in their bodies. The US has nine known allergens today. Europe has 14. We'll see those things continue to grow. That's what allows us to continue to be excited about the marketplace we're in and continue to help our customers understand and tell other consumers what's in their products.
Right. And what are the products that you're offering? And where in the chain do you guys, do you guys?
Yeah. So in food safety, we have products around rapid testing. And really, we thrive on rapid diagnostics. We're 95% consumables, but it is around allergens, mycotoxins, pathogens, indicator testing. So really, what we're testing for is all the bad things that you want to keep out. That's what we're doing and trying to show and help our customers explain to their consumers.
How different is this than, you know, obviously, I cover human diagnostics. But if you talk about this, you know, point-of-care testing, what, you know, is it similar? You sell a box and some something that goes, I don't know exactly what's the what's the offering.
Yeah, it is, Conor. So, COVID made this explanation a lot easier for me.
Everyone knows what PCR is.
Right? Exactly. And so what we have is lateral flow rapid test diagnostics. So if you got sick and you started to feel like, "Oh, I don't feel well," you would take and you do a rapid diagnostic test. If you got a positive, you would then get a PCR test. Very similar to what our customers do. If they, in their protocols, they'll run rapid diagnostic testing. If they get a positive with our test, they generally take the sample and then send it out to an external lab for verification. The external lab will run our test to see if they match. If they get a positive, then they'll run PCR to do confirmatory testing. So it's the exact same thing that you would do on COVID is kind of what we do in the food safety sector.
But at home, the at-home antigen version that we all got.
Yeah, except we are strictly B2B. So we work straight with our consumer customers.
That's great. And you're within, I'm assuming, in the retail center or just at the food—like, who are the big customers in the US?
So all the big main food producers, right? So everyone that's processing food, because we get built into their food safety protocols. I think that's what's very important, is that, you know, when you think about kind of what we do, not only is it helping them explain to their customers, but it really is safety, because our brand safety, our cost as an input for those customers is very, very small. But an outbreak is devastating, right? A Listeria outbreak in any food producer would be devastating. So it's relatively cheap insurance to use our products to help continue to drive safety.
Now, one of the hot topics over the last 12 months or more in healthcare is the, you know, the emergence of these GLP-1s, GLP-1s. And so, how do you think, you know, the idea that food consumption would go down or food consumption would change where that is done? I mean, what is there any impact that you're seeing? And is that, is there a way that investors should think that, "Oh gosh, you're exposed to the GLP-1s and any negative impact or vice versa"?
No. I mean, we looked at it and we looked at how the customer preferences were changing and it really had no impact on us. I mean, it was a hot story. It was funny. I was just asking one of our investors, you know, six months ago it was a hot story. What are they hearing now? And everybody's moved on to something else.
Stock market's done kind of the same thing. All right. Now, talk to me about this large transaction you did and kind of the background there and where you stand as far as integration and kind of the opportunity set that's ahead of you with that.
Yeah. Well, we had a great opportunity to add a really premium asset in 3M's food safety business. It was a fantastic franchise. We added a tremendous product line. We got four product lines. We got a cleaners and a sample handling business. We got a pathogen business, MDS business. But really, the gemstone of it is really the indicator testing with Petrifilm. And it's a tremendous line. And we also had an ATP business with it. Premium franchise in Petrifilm, been around 40 years, really is the standard in the marketplace. And in addition with the lines, we got a lot of great people with a tremendous amount of expertise that were working, you know, it was about 1% of the sales for 3M. So they were kind of buried within their larger healthcare business.
So excited to get up and work with a team that actually knew what they did every day. The more we've gotten into it, the more excited we are at the business opportunity. When we looked at it, it was interesting. We had very little overlap of customer base. We had about a 20% overlap. So having the opportunity to take our expanded portfolio to both customer bases was really exciting to us. Now, it was a complex deal, right? RMT, carve out. Basically, what we got in the deal was sales, marketing, and R&D. Everything else we had to do, we had to stand up and we had to use service agreements with 3M to continue continuity. So we really had seven main things we had to do. The first was to transfer those four manufacturing lines. ATP came over at close. So that came over immediately.
We brought in the pathogen line this quarter. The sample handling line is coming in also this quarter. So we're going to have those three are finished. To come off of the service agreements, which was distribution and back office, we had to stand up SAP. So we stood up SAP in the second quarter. Things went really well. We put on legacy Neogen food safety business. We got to about $50 million in revenues and in volume. And then in pure Neogen style, 90 days later, we doubled the volume. And we brought in the 3M system. So we brought in all the 3M products. We jumped to about $90 million of going through SAP within the first three months. So did that, came off of the distribution agreement, came off of the back office agreement. And really, the only thing we have left is Petrifilm.
While that's extremely important, we've got a great plan for that. We will have production in our facility. We'll start producing in the summer-fall of 2025. We still have two years left on our contract manufacturing with 3M. And it's going to be a ramp-up and ramp-down. So it's not a lift and ship. So as we bring our capacity online, we'll start to pull down 3M's capacity. That way, we can make sure we continue to grow and service our customers.
So first off, for the record, I think you're the first management team that I've ever talked to that smiles when you talk about an ERP implementation, because usually it's a huge headache and it's the opposite. So that's good for you. You were doing something right. So not to bash SAP, but I've heard some nightmare stories. So that's great that that went well.
It's a lot of work. But we've had challenges, right? But it's how quickly can you solve those challenges? And to think about it, we didn't go from $50 million down to $10 million. We went from $50 million to $90 million.
I didn't know which way your story was going. I was like, "Uh-oh, this sounds bad.
It's how quickly you do it. We've had some challenges that were a little bit sticky. One of the things we had was we were having some issues with SAP working with their EWM warehouse system. We talked about that on our last call. We made some really good progress with that in the quarter, and we're on track to having that fixed by first quarter, like we talked about on our Q3 earnings call.
Okay. All right. And there's more on the acquisition. You know, I've seen it in multiple companies, specifically in diagnostics and some in life science tools, where you have a business that's very small within a larger organization where there wasn't investment made into that business, whether it's on the manufacturing or on the research side. And so, you know, as you, you know, get deeper and deeper into this, are there more and more areas that you're seeing, "Well, like, wow, they never did this and we could do that." And they never built out automation or whatever it may be. And is there still a lot of opportunity ahead of you?
Yeah, it's funny. It's like you looked at it, right? Automation was one of the keys. So just right as we closed the deal, 3M was launching their first automated reader for Petrifilm after being in the market for 35 years. We are following that up with version two, and we're also doing a high throughput reader that's coming out in a couple of months. So great opportunities to increase automation to help our customers read it faster and really improve the efficiency of what they were doing. Secondarily, you're right. I mean, they had to compete for resources within all of 3M. And because the group was relatively small, they had a really good fundamental understanding of strategically where they wanted to go, but sometimes didn't get funded because they were such a small piece of the business. And they were buried within the healthcare team.
So salespeople reported into healthcare. So if you made your healthcare number, you were fine. If you didn't make your food safety number, it didn't really matter because you could cover it up with healthcare. So perfect carve-out opportunity.
And just, okay, that's great. And then as far as the growth opportunities, I mean, you talked about 20% customer overlap. So was that kind of where the synergy would lie on the combined company, as you can go after a larger customer base? Or is there anything else that you see, you know, longer-term adds to the top line?
Yeah, a number. Like we talked about, because this was a carve-out, there wasn't the traditional synergies of back office because we didn't get any. So we had to stand all those up. So really, we saw the synergies relate to, number one was cross-selling, right? Like we talked about, very little customer overlap. So increasing the reach and frequency of both sales teams and bringing those kind of opportunities across platform. The other was international growth. We had 16 locations internationally, and we went to 40 after the end of the deal. So that really allowed us to have feet on the ground, infrastructure on the ground that was going to allow us to grow. A great example was outside of the US, Japan was the number one country for 3M's food safety business. Neogen had no sales in Japan.
Not that we didn't know the Japanese market was a good market, but it's a challenging market to greenfield to get into. So we were going into other markets around there because it had a better ROIC, a quicker return for us. But now with the infrastructure in place, we're able to leverage that to grow the businesses internationally. Last opportunity, or one of the other big opportunities for growth, is the strength of the team and the R&D group we got. So we added a tremendous amount of expertise in immunoassays and in our microbiology teams, which is going to allow us to kind of take that with what we have and figure out what is the next generation. So we've done three-year roadmapping for all of our product categories.
We understand where we are, what we need to develop, and where this market is going and where we want to lead it in food safety.
Last question in food safety, probably. But if you don't, you know, for accounts that you don't win or you go in and try and sell and you don't get that account, are they going to another standalone diagnostics company? Or is there just a lot of under-testing in the market, or they're doing it themselves in-house or sending it off to a lab? You know, what's the real competition?
Yeah, yes, yes, and yes, right? We have a lot of competition, but it's very fragmented. Our competitors look a lot like 3M did. They developed a technology in something else and then threw it across and said, "Let's do that to food safety." Like, you know, Bio-Rad's a good example. Bio-Rad's got a food safety business, right? They don't spend a lot of time on it.
I don't talk to them about it.
That's exactly right. So you take a look at them, you take a look at DSM, you take a look at bioMérieux. Very strong competitors and very specific niches because the technology was developed for something else. Yeah, so when we talk about competition, Petrifilm's a good example. The biggest competition in Petrifilm is traditional methods. Taking a plate, putting in media, inoculating it, growing it, culturing it, and reading it. We have about 20% market share in that business, and it continues to grow every single year. But our biggest 60% of the market is still traditional methods. So we're much stronger in the US than we are in Europe. We're going to work really hard with our European colleagues to break tradition and get them to kind of move along to show, because the value proposition is fantastic.
A lot cheaper to produce a test, a lot easier to do. Savings on manpower and time to results are all big wins when you use Petrifilm.
All right. So like I said, maybe the last question on the food safety. So you've got another business on the animal safety. So can you just talk about, you know, that's what, 30% of sales? What is it that you're doing there? And what are the overlaps and what are not the overlaps?
Yeah, well, we view the food safety or the animal safety business as an extension of food safety. Almost all of our competitors say food safety starts at the processing plant. And we say, "Look, food safety starts where food starts is at the farm." So having our ability to be able to provide those customers a way to grow food safely is going to help the chain all the way through. So you start with our genomics business. Like Danone is a great example of a customer of ours where they use our genomic testing to help them choose the right animals that make their herds most efficient. Well, after you choose that animal, it's extremely important that you have them in an environment that's clean. So you use our cleaners and disinfectants to clean that environment.
Once that environment's clean, you have to protect the animals from, you know, pathogens coming in. They come in by rats. They come in by flies and insects. They come in by people, right? Our rodenticides and insecticides do that. Our cleaners and disinfectants help for those three vectors. You want to make sure that you make them the most efficient. You want to feed them the right way. They're in a clean environment. They're healthy. Give them the best quality food. They can't have mycotoxins in it. Mycotoxins will give subpar performance. Worst case, it kills animals, right? You got to test with our mycotoxin testing. When they start milking, they use our cleaners and disinfectants to clean the milkhouse, clean the cows. You use our general ATP to be checking, is the milk truck coming clean? Is it sanitary?
Is it a way that do we know that now we're taking it from a good environment before we bring it into our facility? Once it gets into the facility, they use a number of different products for ours. And it starts with our Neogen Analytics platform. So we have an environmental mapping platform that helps our customers digitize their food safety process and procedures. Conor, there's one thing that really shocked me when it came to the industry, I was out talking to a customer, and she was the head of food safety for a significant company. And I said, you know, take me through your food safety protocol when you have an FDA inspection. And she reaches down. She grabbed a three-ring binder, and she set it on the desk. And she's going through it. And I thought, you know, we can help.
So we can do a little bit better than this, right? So we started down that path. And you know, we have over 500 sites now that have our analytics platform. Our equipment then ties to that. So now when an FDA inspector comes in, you just scroll over that cleaning area, and it pulls up who cleaned it, what was the result. If the results were a negative result, who recleaned it, what was the retesting, and all the history. Now, as we go forward, we're going to think about predictive analytics, right? We're going to be able to start to track where things are moving within the plant, right? So then when we have those things in the plant, now we're working with them and saying, "Okay, now let's test food safety." So we use our Listeria Right Now product, checks for Listeria.
It's really an environmental test. So is presence, absence of Listeria? So think about it. You're running a plant, and before you run $2 million worth of ice cream, would you like to know whether the conveyor is clean or not before you start running? And it's a one-hour test where a normal Listeria test takes, you know, 24 to 36 hours. You run it, comes back negative. Fine. You run it. You still check the finished product. But now all of a sudden, you have security and understanding, before I run $1 million worth of stuff, I'm not going to have it contaminated with Listeria and have to throw it away.
Then when you get to finished products, it's the things we talked about before, checking all the allergens, you know, making sure that, you know, when Danone's growing, when you're growing yogurt, you're growing a lot of other stuff too. You want to make sure you're checking for yeast and mold. That's our Soleris products. And then you want to really make sure that you can explain what's on. And we have a food quality business that explains, that talks about, you know, what are the polysaccharides in this? What is the dietary fiber? So it's really the whole process with customers that we're helping them make sure that their product for their consumers is safe to eat, and they can explain it very well for their consumers.
Is there any overlap between the production animal companies and the food companies? And do you ever have that full?
The big ones, Danone's a great example. They have their own dairy cows all the way through. JBS has their own cattle all the way through to meat processing. Yeah, there's a handful of them.
Does that help you win on either side? Or is there no real overlap in sales?
They're different buyers. But what helps us win is when, like, for example, Nestlé, right? When we are accredited with Nestlé on six, seven, eight different types of product lines, and we want to come to them and say, "Look, we want to talk to you about rodenticide," you're not lumped in with all the other rodenticide groups. It's, "Oh, this is our trusted partner, Neogen." Okay, go and let's bring these guys in and talk to them. They've already do a ton of business with them.
All right. That's great. Now, just talk about, you know, you're still integrating the 3M business. What are your capital allocation priorities from here? Is it, you know, is this going to be the start of a roll-up story? Or is it, you know, other areas of capital allocation that you prioritize?
This year was our heavy spend. We did a, you know, about $100 million in capital allocation for building the plant and bringing in inventory as we came off those distribution agreements. Next year, we'll still be a little bit of that spend. We'll still have more to bring in to get that plant up and running. And then we'll kind of normalize in 2026. Our normal kind of growth and maintenance operating capital is about $30 to $40 million. So we'll kind of see that. What we'll want to do is we've got a great flow-through business, right? So we've got about a 100% adjusted free cash flow business. It's got a 60% fall-through rate. So as we grow the business, the plan is, look, we want to pay down debt. We're about 3.2 x today. We want to pay that down.
And then we'll look at redeploying, you know, capital into acquisitions of things that we've done to continue to grow the business.
What's your ideal leverage ratio before you start looking at more M&A?
If we're down to two and we don't have stuff in the hopper, somebody needs to be yelling at me. Yeah, because we can find ways to do a better return on investment for our customers.
Is there, I mean, you said there was a lot of fragmentation out to the customer base. And so is that where you're looking at? Or is it, you know, adding additional testing capabilities to your current customers? Or is it just, you know, buying different regions where?
There's a lot of different ones. I mean, there's ways to strengthen the portfolio in regions, right? I think there's an opportunity for us to continue to expand internationally. There's places to add feet on the ground with certain countries in Southeast Asia. I think we ought to be looking at Vietnam. You know, we're not in there today. We work through distribution, but that's probably a great country. We can do that. We can continue to look at R&D growth. So we're always looking at where is the industry growing? And what can we do to lead the industry in driving new technology? So whether it's investment, whether it's working with universities, whether it's COEs, the things that we do to kind of make sure that contract groups to make sure that we're driving investment in technology and leading the industry, we'll invest in that also.
And then it's feet on the street, right? We have to continue to have reach and frequency with our customers. We have 800 sales reps plus our tech service teams. You know, we're kind of known as a standard of quality and service that nobody else has. And with that, you know, I think we need to continue to reinforce that and grow those teams.
What if you just look over the next 12 months? The targets that you want to hit that say, you know, "Okay, we've executed on this. This was a great idea for us. We executed as planned or better than planned." And, you know, what is it that you want to see to hit those targets versus what, you know, maybe investors may be asking about from you? Because it seems like there's a little bit of disconnect between you feel like you're going well with this integration, but maybe you're getting some pushback from investors on, you know, what you're reporting.
Well, investors are more quarter-to-quarter. I'm playing for the bigger prize, right? Now, I am not taking my eye off the quarter, right? And, you know, look, we've got a couple of weeks left in our final Q4. And, you know, I like what I see. We're on track with what we said for Q3 for being in line for our Q3 guidance. So we're on track with that. But really, it's about making sure that we're building the company that's going to give us this platform that we can continue to grow. And the carve-outs aren't easy. I wish, I more than anyone wish it could be faster, but it only moves at the pace it can move at. It can only go so fast.
Do you think going through this, I'm sorry, last one, going through this integration, do you think the next one becomes easier and the next one after that easier? Because you have to put a lot of elbow grease into getting this, you know, building up the SAP and getting that fully integrated.
Yeah, you absolutely learn a lot. What it does is it builds a platform for greater growth and faster growth, right? If you think about it, the company was about $400 and some million in sales before we did the deal. We're approaching $1 billion now. We have a platform for $5 billion.
That's amazing. Great. Well, John, thank you for your time today. We really appreciate it. Thank you for being at the conference.
Yeah, and for those of you who are listening, packed house. Okay.
Yeah, I know.
Thank you.
Yeah, there were questions left and right, and we had to.
Thanks, everybody. Appreciate it.