Good afternoon, everyone. Thanks for joining us today. My name is Richard Meland. I'm an Associate on the investment banking team here at JP Morgan. It's my pleasure today to be introducing Neogen. Presenting today is John Adent, CEO of Neogen, and we're also joined by Dave Naemura, CFO and COO. We'll have some time for Q&A after the presentation, and with that, I'll hand it over to you, John.
Thank you, Richard. Good afternoon, and thank you for being here. As Richard said, I'm John Adent, President and CEO of Neogen, and I'll be providing an overview of Neogen for you this morning or this afternoon. This is our disclaimer. So just as a reminder, in this presentation, we're going to have forward-looking statements, so you can read through that. So one of the big questions is, why does Neogen exist? And we're here to help protect the world's food supply. And we do that through our purpose of fueling a brighter future for global food security and our vision for a world where everyone has access to a food supply that's safe, sufficient, and sustainable. Since our founding in 1982, we've been committed to helping protect the global food supply. We are the global leader in food security today.
Following the 3M transaction, we've grown to over 3,000 employees. We have over 300 scientists and engineers with sales and support teams in nearly 40 countries. We operate our business through two segments. Our food safety division has a range of rapid diagnostic solutions and related products to detect the presence of unwanted, dangerous contaminants, and our animal safety division is really food safety starting at the farm, preventing disease, enhancing animal care, and optimizing herd selection. We have the broadest portfolio in the industry. Our product line consists of over 95% consumable business. The first three columns on this slide represent our food safety diagnostic solutions, so the first is our indicator testing and culture media, which contains Petrifilm. Petrifilm is really the gold standard of indicator testing, and also in this category, complementary products focused on accurate sample collection and incubation.
The second column is our bacterial and general sanitation, which focuses on microbiological detection of pathogens and surface tests to detect the presence of organic matter. The third is our allergens and natural toxins. That was the foundation of Neogen's establishment as a company. There are lateral flow tests that provide rapid detection of allergens in food processing lines and mycotoxins in grains. Our animal safety products reduce the spread of disease from humans, insects, and rodents, and our animal care products improve the well-being of animals. Our genomics business provides deep genetic analysis with powerful interpretation tools that help our customers optimize their herd selection and improve companion animal care. With our global scale and broad product portfolio, we're well positioned to address global food security. We serve a number of large markets with what we believe have mid-single-digit plus growth rates. These markets have really long-term secular tailwinds.
And you see it pretty much every year, such as the increasing prevalence of food allergies, the rising incomes and standards for food and food safety in emerging markets, the changing consumers' demands to know more about what is in and not in the food they're eating, increased outbreaks, and the associated high reputational and financial costs that accompany those outbreaks, and increasing traceability and government requirements. We see that today the USDA is increasing its focus on pathogen mitigation. So last year, the USDA declared Salmonella as an adulterant in breaded stuffed chicken. They extended that proposed framework to all raw poultry products this year. They've also proposed more oversight in ready-to-eat food facilities, specifically in response to the recent Listeria outbreaks in ready-to-eat facilities. So food safety is a global issue that's not going away anytime soon.
Food safety has been very topical lately with the increased regulations I just mentioned in the national discussion regarding highly processed foods. So we talk a lot about food safety, but I want to spend a little bit of time telling you exactly what we do in food safety. So this slide is not intended to scare anyone. It may, and it does me. But it will show you that there are many unwanted contaminants out there that can be present in food. Bacteria has gotten a lot of attention lately, but there are many other things that food producers need to be mindful of that can be harmful or even deadly for their customers. The primary focus of food safety testing is to protect consumers. I mean, that's why we're here. We want to make sure that the food they're eating is safe.
To achieve this, there are industry standards and regulatory requirements that the food producers need to adhere to, including disclosure of what is in and not in their food products. Our secondary focus is quality, so when we work with our customers on the quality side, it's around minimizing loss related to spoilage and contamination and producing appealing, nutritious products for their customer base. Our comprehensive portfolio of food safety solutions covers two primary applications. The first is environmental monitoring. This is the process of verifying the cleanliness of the food production environment, so think about where sandwiches are being made in ready-to-eat facilities, the manufacturing lines for hamburger patties. That's an environmental monitoring process where you're making sure that the environment is clean.
Second is food testing, which is the process to detect potential contaminants in the food products themselves, where we check the product to make sure that it is free of allergens, free of milk, free of eggs. Those are the areas that we do in the food testing segment. Our food safety testing solutions cover the entire food supply chain. I want to give you one specific example of how our tests are used in a real-life-type facility. We just picked one, which was poultry. We have this for basically all of our customer segments. If you use a poultry processing operation, as an example to highlight the breadth of testing, we start with the poultry house. Our customers use the indicator organisms and pathogen detection tests to enumerate contamination load. So they're testing to see how dirty those houses are. It sets a base.
At the pre-chill stage, we use rapid tests for indicator organisms and pathogens, including Salmonella and Campylobacter. This also sets a baseline to show reduction in contamination throughout the whole process. At the post-chill stage, rapid tests of indicator organisms and pathogen testing for generic E. coli, for Salmonella, for Campylobacter are used as the final intervention step to reduce pathogens on the carcass before processing. In the ready-to-cook stage, we use our rapid tests for indicator organisms and pathogen detection to continue to verify that the final product complies with regulations and the customer specifications for quality and safety. At the ready-to-eat processing, the finished product is tested again for indicator organisms and pathogen detection for Listeria and Salmonella and to verify our regulatory compliance. In that stage, there's a number of regulatory rules that must be followed at these facilities.
These tests, including ATP testing throughout the production environment to prevent finished product contamination, can lead to over 75% of our tests being conducted per process cycle at each facility. So I think when you think about that, they do one Neogen test in the facility. It's a very complex ecosystem of testing throughout, not to mention what is happening in some of these things that are raw materials coming into their plants even before this process starts. This slide provides one example of how we test. So many of you are familiar with Petrifilm. It's the largest product line we acquired from 3M. It's the industry standard for rapid indicator testing. And Petrifilm offers a number of benefits compared to the primary alternative, which is the traditional agar testing using a Petri dish. There is no time or expense for mixing different agar broths.
If you're using the traditional method, you simply inoculate the indicator media, which gives you a shorter incubation time. It's easier to read. You get faster results, whether it's visually or automated through our Petrifilm Plate Reader Advanced system. So you don't have any lab techs that are counting colonies under microscopes. There's also additional sustainability benefits. Using Petrifilm, you use less energy, less water and waste, and no seaweed used for traditional agar. Recently, we added our Bacillus cereus plate. It's the first new Petrifilm plate launch in seven years. I think that shows our commitment to investing in and continuing growth in this product platform. And Petrifilm has continued to grow well under our stewardship. We grew 10% in fiscal year 2024 and an additional 10% in the first half of fiscal 2025, or halfway through our fiscal year.
Both 3M and Neogen food safety businesses have long track records of annual core growth in the high single-digit range. What's different about the current environment is that it's something we really haven't seen since Neogen was founded, and that was a significant food inflation and resulting effects on food production. We're dealing also with weaknesses in both of our end markets, which is really pretty unusual for us, while working through the effects of some of our integration issues. All of these things are contributing to the current lower growth environment that we're in today. Despite this, our food safety business grew 8% in our latest quarter if you exclude our sample collection production line. Our end market conditions have been gradually improving, and we're working to position the business to capitalize on our long-term growth opportunities.
On the left side here, this also lays out kind of our primary high-level initiatives that we're focused on to drive growth, which is leveraging our core capabilities, continuing our regional expansion. This is a strong growth driver for us, and executing on our product innovation roadmaps. It hasn't always been completely smooth, but we've made significant progress with the integration of the 3M food safety business. Of the seven key integration work streams, six are effectively done, with sample collection production expected to return to normal levels next month. Our ERP implementation, which allowed us to exit the transition service agreements with 3M, is complete, and all the related shipping delays that we had three quarters ago are behind us. Our new Petrifilm facility is progressing well. You can kind of see it in the background of that slide.
What's important there is the building is up, the building is built, we're assembling equipment on site, and we're on track for our goal to initiate initial testing of products, initial production of products in the fall of this year. The right side of the slide kind of lays out our post-integration profile that we're working towards. As we see our end markets continue to improve, we believe that we're going to move towards the revenue growth levels that the business has historically seen, which is that high single-digit organic growth rates. With incremental margins around 60%, revenue growth is going to go a long way towards moving the business towards our 30% EBITDA margin goal. We'll still have some integration spending in FY 2026, but the bulk of the CapEx is really behind us.
Along with working capital improvement, we really don't see why the business shouldn't convert free cash flow at around 100% of adjusted net income. So we expect EBITDA growth and improved cash generation to help the business deleverage, which is going to allow us to open the door for additional capital allocation opportunities that we really haven't had to do, or we haven't had the opportunity to do while we were working through this integration. So we've also spoken recently about our portfolio actions, which is going to allow us to further continue to focus the business on our faster-growing, higher-margin food safety business. This is really a recap of kind of what I went over. And it talks about why Dave and I and the team are so excited about the future of the business. So I'll let you take a moment to look at that. I want to thank all of you for joining us today, and we'll open it up for some Q&A.
Thanks so much, John. For the audience here, if anyone has a question, please just raise your hand, and we'll get to you with a microphone. But maybe to start with one from me. Basically, since the 3M transaction closed, it seems you've been managing through soft conditions in the food safety end market. Can you speak to that and also what you've been seeing more recently?
Yeah. I mean, we talked about that in the slide, was that it's really unprecedented for us to have both of our segments kind of facing difficult headwinds at the exact same time. The unprecedented inflation rate in food really impacted our CPG customers because we saw really seven quarters of declining unit growth.
Now, that has been sequentially improving over the last four or five quarters. It is now to a point where it is, I think, last quarter in our basket of customers is a negative one. So while it's still not positive, it has improved dramatically over the last seven or eight quarters. We see the same thing a little bit on the animal safety side. I don't like to call the tops and the bottoms, but I feel really comfortable that we're on solid footing right now. We saw that the market was challenged for the last 18 months or so. But I think we're on solid footing now. We see our sales out to customers improving, and I think we're going to see that market start to turn the corner.
Got it. That's great to hear. On your earnings call, you talked about some developments in the regulatory environment. Can you elaborate on those and what they could mean for Neogen?
Yeah. It's like we said in the presentation. The regulatory environment for us is one of many tailwinds, but it's a very strong tailwind. I think the last time a pathogen was introduced was in the 1990s where E. coli was named a known adulterant. It took us a long time to get to Salmonella. But what was interesting was the USDA started with Salmonella and breaded chicken and included all chicken this year. I think it's showing a speeding up of kind of the regulatory environment and looking at how we are going to protect the consumer. We had some very notable outbreaks this year. I think it had everybody's attention. I think everybody's well aware of some of the challenges some of those companies faced.
So I think we're going to continue to see that momentum continue forward. And also, it's kind of the first time that I've seen that you started in a presidential election cycle, people talking about food, highly processed food, food quality. And another area of focus that the government's really focusing on is this ready-to-eat, right? So when you're preparing sandwiches or the ones we had for lunch here at JPM, really making sure that they are doing the testing needed because Listeria has been a really big problem in the ready-to-eat segment. And I think we're going to continue to see more focus on that going forward.
Thanks, John. You've also discussed winning back some market share that was lost due to shipping delays from your ERP implementation last fiscal year. Can you update us on how those efforts are progressing?
Yeah. So, first quarter, we recognized that was about an $8 million headwind. We saw an acceleration of getting those customers back in second quarter. We saw that to be about a $4 million. So we cut that back. We continue to see new growth and new customers. I would say by the end of third, that's probably going to be halved again, roughly. And then from then on, it's just going to be that's really not a number we're going to focus on. It's going to be part of how do we go and get new customers to continue to grow the segmentation.
Got it. On your earnings call last week, you brought down the full year guidance. Could you talk about what the primary changes were driving that change?
Yeah. I'm going to let Dave do that one.
Yeah. Richard, briefly. So we brought down the midpoint of the revenue guide about $25 million. The biggest components of that, the significant majority was a combination of foreign currency and a restructuring of our genomics business where we walked away from some of the less attractive, less profitable business, which allowed us to drive some restructuring activities to also take out some of the company and infrastructure. The other component, which would have been kind of in the mid-single-digit range, was an additional quarter of time necessary to stand up our sample handling production as we work to get back to previous production rates and hopefully after the end of our third quarter, hopefully beyond previous production rates.
Got it. Maybe switching to the portfolio. So from a portfolio perspective, you've said that the portfolio review work that you've been doing has now been moved to the next phase and that you have active projects underway. So how should we think about what those could look like and what any potential proceeds could be used for?
Dave, you want to take that one?
Sure. We've been talking for a few quarters that we were actively doing a strategic review of components of the business, mostly focused, frankly, on the animal safety side of the business. I think what we were trying to highlight was that we're not just thinking about it or doing analysis. We've kind of moved on to the next stage. What we dimensionalized was we think of that business, first of all, it's not one monolithic business, but it's probably four or five separate businesses.
We're looking at a couple of segments which have lower growth, higher cyclicality, and lower profitability. These things are tough because you don't have anything to announce until you have something to announce. I think what we shared with folks is that we're actively engaged and hopefully in the coming quarters, we're able to announce something that we've generally sized at about probably half of the animal safety segment revenues over time here, which we think ultimately will have a margin enhancing and growth-enhancing impact to the extent we do transact something that provides proceeds. Those proceeds would be used first and foremost after a little bit of tax friction to delever further, accelerate deleveraging, I should say.
Great. Thank you very much for being here. If we don't have any more questions, so.
Oh, we got one back there.
As we move into maybe some different food criteria based on what the current administration is thinking, do you think that where you are now has an advantage there as far as food sensing for organics that are going to be maybe overwhelming the system or non-vaccinated this and that?
Yeah. Look, that's really the nice space about being in food safety is it doesn't matter what type of food. So if you think about it, most people tend to relate foodborne illness to meats, and it's almost the opposite. The majority of foodborne illness is from fruits and vegetables. So whether it is an organic fruit or non-organic, you still have to test. Whether it is organic meat, non-organic meat, you still have to test. Whether it is a patty for a hamburger made from beef or made from a consolidation of beans, you still have to test.
I think you saw, I don't know if everybody saw, but you saw the banning of Red Dye Number 5, right? You're going to see a change. That's just going to help our food quality and nutritional analysis business, right? Where you're going to have to be more specific about, again, what is in and not in your food. And I think it continues to show that people look back and say, okay, Neogen historically grew 10% organically over the last 20 years. 3M's business grew about 9% organically over the last 20 years. What's going to keep that going? This is what's going to keep it going. It's going to be regulatory, and it's going to be consumer preference. People want to know what's in their food, right?
We're not going to go back to a day where you, and I tell my kids this all the time, is that I remember going to buy cereal, and it was cereal. You didn't know what was in it. It was either cereal with a toy or cereal without a toy, right? My kids now look at it, and they want to know the protein content. They want to know the added sugar. They're looking at polysaccharides. They're looking at fiber content. That's only going to continue to accelerate. So I think that's why it gives us a lot of confidence and excitement about kind of the long-term secular tailwinds in this industry. Great. Thanks for coming.
Thank you.
Thank you so much for being here, and thank you, everyone, for joining us today. Thank you.