We're ready to get going. I'm the diagnostics analyst here at Piper Sandler. I'm here with CEO of Neogen, John Adent. So John, you had an update this morning, so why don't you just inform us on in terms of the updates that you made?
Yeah, we did. Great. Thanks for having me. So, we just finished our second quarter on Saturday, so we wanted to give a preliminary view. We saw revenues coming around $230 million, which we were pleased about. We also saw our core growth rates improve sequentially over the quarter, and both were positive, which I think is very exciting around our animal safety business 'cause if you remember Q1, that business was down about 8%. So we were excited to see that as well. The other thing we talk about is, you know, first quarter, we had some challenges around margins.
We've talked about some of the things that we're doing to address margins through some initiatives that we've taken that are gonna be taking effect in third and fourth quarter going forward, and we'll spend a little time on our earnings call in January to go into deeper detail.
Yeah. So appreciate you having an update already just four days after close. So, let's just start at a high level for those that don't know. What does Neogen do, and why are you the only pure play in food and animal safety?
What Neogen does is we get up every day to protect the world's food supply, and we're all throughout the channel. And the way we do that is we have rapid diagnostic tests to check for various pathogens, toxins, allergens in food products. So we help our customers to make sure that they're protecting their consumers and their end markets around those pathogens. We wanna keep all the bad things out, and we also wanna help them be able to explain to their customer base what is in and not in their food. So on packaging, when you think about anything that says free of allergen or free of soy, free of milk, these are all tests that Neogen do to help our customers be able to explain to their consumers. We grew the business over 40 years. We've been in this market for a long time.
We were the first one to develop rapid tests for allergens, the first one to develop rapid tests for toxins. So we really are the market leader, and I, I think that's, that's why, you know, we're, we're pretty much the only pure play in this market space because we grew the market. Neogen was the one that really started and grew this market, and we've continued to do that through innovation and acquisition. I, I think, you know, the big acquisition that we did two years ago was with, to acquire 3M's food safety business. It's a great franchise. The Petrifilm indicator testing was a market that we were not participating in but was a very important market within food safety. You know, we're very excited about where we are with our progress on that integration and, you know, really look forward to the future.
Gotcha. No, I appreciate that. So let's talk about the 3M deal. I mean, I think it was a you know, perfect kinda synergies for you guys. And the margins from Petrifilm and the ability to scale internationally, I think were pretty important there for that deal. And anyway, if you could talk about the investments that you still need to make internationally and you know, some of the ways you can get some of that margin from 3M because you know, it has the potential to be a pretty impactful deal.
Yeah. It's a great growth driver for us. The Petrifilm franchise is an extremely strong franchise, and it's got great flow through on profitability for us. So we see a tremendous impact as we grow that Petrifilm line for the profitability of the business. International's a big market growth opportunity. When we bought the 3M business, it allowed us to grow in 16 more countries with a direct sales team and tech service team. We have over 900 customer-facing reps around the world, that far exceeds anybody else within our space. We continue to see outpaced growth in the developing countries, and you know, you would imagine that to be the case. As excited as we are with our leadership position, we're only 20% share of market in our markets. And we see opportunity for accelerated growth within those international markets.
For us, adding the infrastructure, we now have regional teams in LATAM, Asia Pacific, and Europe. It's really allowing us to have broader discussions, more reach and frequency with customers. It's gonna allow us to really grow that business faster.
Gotcha. And then if you could talk about some of the challenges in terms of integration, and what, what's left to do, the biggest hurdles left, essentially.
Yeah. Look, we're not in Neogen. We're not for the faint-hearted, right? I think a lot of people have paused when they do an ERP conversion or when they buy a business or when they have to stand up 16 international sites within 18 months or when they have to move, you know, three manufacturing facilities and stand up a worldwide distribution center. But we did that all at once within 18 months, and we're able to accomplish it. So doing those things, we knew that it was gonna cause us to be a little bit internal focused because you had to be to drive those things. But now we have one piece left, and the piece left is moving the Petrifilm manufacturing.
Of the four manufacturing lines we acquired from 3M, three are already in our facilities, and we're manufacturing and improving the efficiency of those businesses. The last one's Petrifilm. The difference between kinda the Petrifilm manufacturing and the others, the others were a lift and shift. We had to stop production, build inventory, stop production, move equipment, recommission it, and bring it back up. We're not doing that with Petrifilm. Petrifilm, we have built all new custom equipment. It's the same equipment as the last design they did but much larger and solely designed for Petrifilm. We have three years left on our total manufacturing agreement with 3M. We think that we'll be fully up and running in two years.
As we ramp up production, we will ramp down 3M, so we feel very confident that we're gonna be able to make sure that we can meet the demands of our customers from a supply standpoint, going forward. So we're excited to have that behind us and be, you know, the majority of the integration work behind us and really be driving growth and getting back to be customer-focused.
Very helpful there. One of the things that's, I mean, I've covered this talk for since 2017, and one of the issues I always have is trying to dissect the macro environment and just try to understand it. And there's always these puts and takes. You'll see, I don't know, things like trade or a virus or an outbreak or something like that. And, you know, what is going on in the macro environment today in food safety? I guess maybe the topic today would be inflation or roll-off of inflation. So, you know, what's going on there? How does that impact food safety? And are there other macro factors to think about?
Yeah, there are. I mean, I, I think, you know, we've talked about this a lot. Our business is not recession-proof, but our delta is more narrow. So while we have had a customer base that really unprecedented has seen declining unit growth now for almost seven or eight quarters, we've never seen that before. And that really was driven by an inflationary environment that, that we had not seen, you know, in our professional lifetime, right? Now, we're seeing those unit declines become smaller. So quarter on quarter, they become smaller. They're not, they're not positive yet, but they become smaller. Now, even with that, it's not a really good indicator for our business because we continue to still grow on a core growth basis.
Mm-hmm.
And we see that because we think the food safety core growth, even in this kind of challenging market, is kinda the mid-single digits. In a normal market, it is probably high single digits. So we see that the macro environment's pulling that down probably two to three points. But within that, you still have the opportunity to continue to grow in food safety. And the reason why you can't use a CPG company as the barometer, even though we look at 15 different companies, is that when you've got a, you know, someone making a frozen lasagna is a great example that Dave uses. You know, it's not just that producer doing one test.
Mm-hmm.
It's the 18 other manufacturers that are making the sauce, the noodles, the cheese, the vegetables. Everything that goes into that product also uses our product line within kinda the food supply chain, so we have a very strong reach into the total food supply chain, not just at the CPG companies.
Gotcha. So maybe we could talk about some of the changing political landscape. I mean, normally, well, if you're Tyson Foods, you're always protecting your brand and, you know, no matter what. But sometimes, at times, the small producers do respond to certain kinds of regulation. Now, the incoming administration probably will not be pro-regulation. At the same time, RFK, a little bit of a wild card there with maybe some pro-food labeling or anything like that. What are your thoughts on the puts and takes, and of course, you don't have a crystal ball.
Yeah.
Our political team doesn't have a crystal ball on this.
Well, I, I think.
Perfect one.
I think what's interesting is, you know, we have a pretty good barometer for what the administration did last time in office.
Mm-hmm.
Even though the administration views itself as pro-deregulation, we saw a very consistent growth track where even during that administration, we saw the administration add a new allergen, right, for known allergens. We continue to see the food safety trend really as agnostic to administrations because I haven't met a politician yet who said, "I am pro-unsafe food," right? It's a pretty easy platform to be on to be stronger for health and safe food. We see that kind of along the way. I think it is interesting with the appointment or with, you know, the appointment of RFK and his stance on healthy food. That's kinda the first time I've seen that, right, where this is raised to this level, you know, other than when we were building the food pyramids, right, for schools.
It's kinda the last debate around food. I think this is kind of another time. So anytime that exposure happens, that's a positive for Neogen because I think everyone in the food chain wants to have safe food. I don't have very many customers that wanna go out and cause an outbreak. So I think that apparently the industry desire for that, the consumer desire for that, and governmental is just gonna be a tailwind for us.
Gotcha. Now, your team has bought a lot of stock. What are you looking at in the market and you're saying that you think maybe investors are undervaluing or, what was the key, your key thesis in your team buying stock? Both you and Dave.
Yeah. I mean, look, I think maybe we take a little bit longer-term view of where the business is and the reason why it's undervalued. The challenge with doing an RMT and a carve-out over a four-year period is it takes a long time. And while we've told everybody where Neogen's gonna be at the end of this, everyone says, "That's great. What are you gonna do next quarter?" And so while you're trying to do these massive changes, carve out this big business, stand up a new ERP system, integrate three new manufacturing, add into 16 new countries distribution and sales, I think our expectation was we knew the prize we were playing for, and it's a very, very big prize, and we see where the company can be from a revenue, earnings, and cash flow perspective, and it gets us really excited about it.
While I think maybe the market looks at it and says, "Quarter to quarter." Now, the good news is, like we talked about today at 2:30 P.M., you know, that will be analysts' expectations. It's gonna be second, you know, couple quarters in a row. We're right where we said we were gonna be. So hopefully, we're gonna build some confidence back into the marketplace that when we say the number we're gonna hit, we're gonna that's the number we're gonna hit. So, you know, we're excited about that.
Now, I'm not going to hold you to a number outside of, you know, what you've said in terms of guidance, but in terms of core growth going forward, you know, give any timeframe you want. Maybe we can even just talk about industry growth. What do we expect to see going forward, and what business lines do you expect the growth to come from? And you know, again, you don't have a crystal ball.
Yeah.
The industry's been a little depressed. So, I mean, do you have any indications on when the industry?
Look, I'm pleased that we are seeing the improvement in unit sales for our customers, right? Now, it still hasn't turned positive, but it's very, very close. In normal markets, right, pre kind of all the craziness we've had, our business has been a high single-digit grower, and I think that's exactly where we see our business growing as we get into a more normalized market phase. Where we see that growth is a lot of different opportunities. And we talked about one already, international, right? Reach and frequency around international is gonna give us an opportunity to outpace that growth in some of these emerging markets in the areas that we're focusing in.
When you talk about product lines, we see tremendous opportunities, and we're seeing it already with indicator testing really taking the 3M product line and pushing it and helping our customers understand the value of that. We've done that with some automation. That product was 100% read manually. We've added automation now that we can automate that process to make it even more simpler and easier and faster for our customers. So we think aligning that is gonna be a really big help. We continue to see growth in pathogens. Our MDS platform is a very strong platform. You saw that it was chosen again by the government as the test of choice for pathogens around Salmonella. So we are very pleased about that. It shows that we are the leader within that market space.
So we continue to see pathogens as a really big growth opportunity kind of across our platform and portfolio. And then we continue to see growth around our Neogen Analytics. And while it's not a big piece, it is a strategic piece because it is really helping our customers build an environmental monitoring platform that they don't have today that integrates all their systems and testing into one area and one consolidated database to allow them to look across multiple plants, multiple tests, and really help them develop better risk analysis around, you know, kind of the things they're doing in their facilities. And this is the thing I think people sometimes miss about food safety. And I kinda equate it to cybersecurity. You're never done with food safety. You're never done with your testing. And it's part about your risk analysis.
You know, you've seen some of the big headlines. You saw the headlines with McDonald's on E. coli, right? These are brand-damaging challenges for some of these companies. You saw Boar's Head. You know, these are some really, really big challenges. It's not that they didn't have a food safety protocol. They did. Sometimes people have to realize you constantly have to upgrade your risk assessment. Where are new threats coming from? Are they coming from new suppliers? Are they coming from new ingredients? Do I have to change the frequency in which I am testing? And that's really what Neogen has developed in helping our customers around the environmental monitoring platform that really the industry doesn't have. Normally, you set your HACCPs. These are my good manufacturing, my GMPs. Once I'm done, I stick with that.
I'm gonna do it for a decade. That doesn't work anymore. Everything is changing. How do we make sure we're helping our customers update that risk, those risk assessments? And those are things that we're doing to help them make sure that they're putting out very safe, healthy, nutritious products for their customers.
Got it. Let's just maybe talk about the guide. This year or 2025 fiscal year, 2% growth rate at the midpoint on a reported basis. Can you talk about that in relation to global averages for the markets you compete in? If you are, you know, I think you mentioned some share losses. Can you talk about the categories where you would be having share losses? And is there a strategy or maybe new products or anything that would help those, you know, get to market growth or even above market growth?
Yeah. So we're right on track for where we said we were gonna be for the first half of the year. It's very similar to the guidance that we gave. I think the big difference is the FX. When we gave the guide, FX is really strengthened versus when we gave that guide, you know, six, seven months ago. But we're right on track with that. We feel very comfortable about where we're at with that. Dave's told me I can't reaffirm second half of the year, so I'm not. So I think I am very optimistic about where we are within the organization and what we wanna do. I think the other piece, what was the second part of that question?
Oh, just in terms of market share and ability to.
So that was a big challenge, right? When we were going through all this massive change, we had some operational challenges where we were shorting customers because we could not get product shipped out. We felt, you know, that was about a $30 million headwind. We've seen market share gains come back. We saw it in the first quarter, and we saw it accelerate in the second quarter, which is what you would think happened, right? Customers are not gonna rush all back at the exact same time. So in the first quarter, we saw that business come back. Second quarter, we saw it, accelerate off the first quarter, first quarter recovery.
So, you know, that is one piece of business we are getting back that we had lost, but we also are gaining new share, which, you know, I think is what's really gonna help us propel us in the fiscal year 2025.
Gotcha. I'm gonna shift to genomics, which, you know, for those that are not familiar, maybe you can describe what you do in genomics both from a cattle and companion animal perspective. And this was once, you know, one of the more faster growing businesses and, you know, one of the more technological, you know, fairly tech-savvy kind of business. So, what's been happening of late and when do we expect a rebound?
Yeah, so this is one of the things that we talked about with kind of our restructuring, and a large part of that is done in genomics. And what changed in that market was we had two distinct types of businesses. We had a B2B business where we did very large genomic analysis, and we gave raw data to large customers, right, whether those are the big breeders like Tyson and others. And what we saw was that business very quickly became commoditized. And I think you see this in a lot of different genomics businesses, right? You've seen pretty much every genomics business is up for sale right now. There. That's been rapidly commoditized on the raw data side.
Where we have decided to focus the business and where we continue to see growth and opportunity is in our working in the B2C side, which is on the dairy and the beef side. And that's where we're working with individual customers and farmers that are helping them make the right choices about what they wanna do to improve their herds based on their criteria. And that's where we can add a lot of value because, you know, when you're just giving raw data and large companies have, you know, 20 geneticists and data scientists on their team, they can interpret the data. We're helping in the B2, in the B2C side, those customers interpret the data and make the right decisions. And, and that's really the market we wanna be in. We did that strategic shift away from kind of the commoditized business about a year ago.
We're starting to lap kind of that business. But with that, we had to do some restructuring around the size of the infrastructure that we had because we moved away from that segmentation.
Gotcha. And we already touched on this, but ERP integration, are we fully integrated or is there still a little bit more to go in?
We're not doing any ERP changes for the rest of this year.
Gotcha. Okay. And then, let me go with distribution. I believe you called out some improvements still need to be made. What's left to be done on the distribution side? And, can you maybe give us a timeline on when? I mean, I think you might have had that started in last year's fiscal year. So, you know, is there some comp benefits that you might be able to see?
Yeah. We saw in Q1, and this is one of the reasons why animal safety was down 8% in Q1, is we saw a couple of distributors that had what we felt were kind of these were bespoke problems or challenges that they were facing and not industry-wide. And I think that thesis proved true where you saw now core growth become positive in the second quarter and animal safety. So it was kind of a one-quarter issue with a very specific customer. So we didn't think it was an industry problem. The industry, you know, I told you historically I'm terrible at calling the bottoms and the tops, but I do think, you know, we are at the trough of the animal safety side. We continue to see sales out of distribution be positive.
So, you know, we think that we've kinda started to turn the corner on that, on that market.
Gotcha. Maybe we can talk about some of the capital deployment and, are you, I mean, for years, Neogen was known for making the tuck-ins. Is that still something you're evaluating on a very frequent basis? I know you've also, you know, historically, Neogen also hasn't had debt before. So it just, you can think about the different capital deployment decisions that you're.
Yeah.
Making.
I think our strategy, on one side has not changed, right, where we continue to look at new and innovative technology that we can bring into our market space that will help us kinda drive innovation and change in food safety. We did that with our Soleris where we brought in that technology. We did that with allergens. We did that with toxins. So we constantly look at new technology that we think can help drive platform changes. That's not gonna change. What you're gonna see is probably on the acquisition side, we'll do larger, more meaningful. You're not gonna see as many small, you know, $2-3 million tuck-ins.
Mm-hmm.
That we used to do. We're gonna try to do a little bit bigger, and we see opportunity for that in the pipeline. We're comfortable today with our debt. We're at about three times debt to EBITDA ratio. We will be, you know, our target is to be cash flow positive this fiscal year. That will help drive down some of that leverage, and when we do that and we, you know, get below three, you'll see us get back on the acquisition trail to really go out and try to drive growth with the acquisition as a lever.
Gotcha. You have eight seconds. Any parting thoughts?
No. I'm glad you're here. I'm pleased with the quarter. I'm pleased with the revenue. And, we look forward to talking to everybody at our earnings call in January.
All right. Thank you so much.
Yeah. Thank you.
Good job.
Thanks.
All right. Good morning, everyone. I'm here with Fulgent CEO Ming Hsieh. We have Brandon and we have Paul as well, joining us, CFO, COO. And I'm Dave Westenberg, of course, the life science tools and analyst at Piper. So you have a number of businesses. Can you talk about, can you lay out the businesses that you're in and, at a high level, start us off?
Yeah. Yeah. I can take that one. Thanks for having us today, by the way. We appreciate being here. At the highest level, we break our business down into laboratory services and drug development. So I wanna focus on laboratory services for right now. That's the revenue-generating part of our business. The lab services further break down into precision diagnostics, anatomic pathology, and biopharma services. So if we look at those three, we'll break it down one more level. So on the precision diagnostic side, we're mostly talking about next-generation sequencing. That would be anything from reproductive healthcare, carrier screening, NIPT, you know, prenatal diagnostic testing, pediatric rare disease, you know, neurology rare disease, oncology, both somatic and hereditary, heme, and all the way up to, you know, you know, adult genetics and, you know, neurodegenerative and things like that. So that's the precision diagnostic side of the business.
You look at the AP side. I mean, it's kind of in its namesake. It's anatomic, you know, pathology services. So this would be the part of the business where, you know, we are accepting, staining, and analyzing tissue. We're making sure the primary diagnosis. I'm sure most people are familiar with anatomic pathology services, and then the last part of the lab services business would be biopharma services. So all the same precision diagnostic services, the anatomic pathology services, we make all those available to our biopharma partners in addition to other products and services too that are not on the diagnostic side, the clinical side, such as, you know, spatial biology, proteomics, some transcriptomics, etc. So, that's the lab services side, and then going back to the highest level, we have the drug development side as well.
And then from a numbers perspective, our guidance is for $280 million of revenue. The precision diagnostics is about $170-$171 million. AP's about $95-$96 million. And then the rest is,
Biopharma.
Biopharma services, and then Ming can, you know, make a few commentary about our therapeutic side of the business.
Yes. For the therapeutic side of the business, we have a unique position with the so-called nano delivery platform. This platform gave us the capability to use the nanotechnology to encapsulate the.