Good morning.
Good morning, everyone. Thank you for joining us here. My name is Brandon Vazquez. I am the research analyst here at William Blair covering Neogen. I am required to inform you that for a complete list of disclosures, please go to our website at williamblair.com. Happy to have CFO and COO Dave Naemura with us from Neogen this morning, who's going to present. He will go over a presentation if we have a couple of minutes. Like usual, I'll ask a couple of questions here, and then we'll go to a breakout session. I will turn it over to Dave.
That's great. Thanks, Brandon. Really happy to be here at the conference. I have a few quick slides we'll go through, and then happy to take some questions. See if I can get the—there we go. There will be some forward-looking statements today. Of course, this is the related disclaimer. Nothing you haven't seen before. We think we play—this is our purpose in our vision. We think we play an important role in food security, which admittedly is a lofty goal. As the world's largest food safety testing company, we think we're uniquely positioned to help protect the world's food supply. How we do that?
We do that through really two segments of our business: our food safety testing segment, which is a series of rapid tests, which is the largest and broadest portfolio in the food safety testing area, and then animal safety, which is we consider kind of food safety beginning at the farm, where we protect both the well-being from a preventative standpoint and a care standpoint of production animals. How did we get to the broad food safety testing platform? It was really through a transformational acquisition that happened almost three years ago. Prior to the acquisition of the 3M Food Safety Division, Neogen was a little over a $500 million company, of which about 38% of the business was food safety testing, but had a significant portion focused on animal safety and then a genomics business as well, focused on both production animals and companion animals.
The 3M Food Safety Testing business is 100% food safety testing. That was just under a $400 million business when acquired. Collectively, it has reshaped the portfolio now where food safety testing is almost 2/3, or call it 65% of the overall portfolio. This is a high-level look at our portfolio. The first three columns on the left are our primary food safety testing categories. The first column, indicator testing and culture media. This includes PetriFilm. PetriFilm is the gold standard and indicator, a convenience method indicator testing. We also have sample collection devices to help preserve and collect samples for testing, as well as culture media to help incubate samples. Bacterial and general sanitation is the biological detection of the presence of pathogens, as well as the detection of swabs and things for the detection of cleanliness in a food production environment.
Allergens and natural toxins is really the foundation of Neogen and the legacy food safety testing business: rapid tests for presence of allergens and toxins within grains and foods. Animal safety products are really focused, again, on the prevention of disease in production animals, as well as care for principally cattle and other production protein categories. Our genomics business, we have a large, probably the largest. We have a very nice position in cattle genomics, where we can help optimize herds. We also play in companion genomics, which helps with the preventative care for our pets. I won't go too much into this. You've probably seen this slide before, but we serve large markets. The full round bar represents the TAMs, and the smaller light green represents the segment that we participate in.
We generally have market exposures that historically have grown in the mid-single-digit plus type range. They are driven by a number of attractive drivers. At the end of the day, food is increasing. Emerging market middle class is growing faster than the overall population. We are seeing more and more outbreaks in foods. We are seeing a higher number of allergens and people's sensitivity to allergies. Overall, we think these are great secular drivers for the food safety market. I will not go into our—I will not go into the right side too much right now, but I will talk more about our transformational journey. Following the acquisition of the 3M business, we went from being a small company to maybe almost double the size company. It has been a significant transformation for this company. We are well along that journey. We are approaching three years and a quarter.
We'll be at three years since the acquisition of the 3M business. We're estimating another kind of year and a half from now, probably, until we're fully integrated with the 3M businesses. It's been, for sure, more challenging than we would have anticipated. We're down to a key workstream, which is the integration of PetriFilm manufacturing. Six of the seven workstreams are now completed. We'll talk more about that in a moment. Ultimately, we will have reshaped the portfolio to have the bar on the right that I showed you about the two combined businesses. As we've announced the divestiture, also a few of our animal safety businesses. We announced the signing of the sale of our Cleaners and Disinfectants business, which is one of the four product components within our animal safety business.
We're actively marketing a second piece of our animal safety space, which is really the genomics platform. As things have been a little rougher, we're very focused on improving execution and, frankly, driving better results. We have put out, and you may have seen, and I'll show it here later, a series of execution focus areas that the company's working on, kind of nine key areas that are what we anticipate being the focus areas that we'll talk a lot about over the next year or two. A quick update on where things are at. I don't know if you—for those of you that don't know, we're a May fiscal year-end, so last Saturday.
This is usually—we hit this conference with some numbers that are pretty fresh, and we're not in a position to talk about where we finished, but we try to do our best to give some directional guidance. We think that our Q4 revenues for the quarter just ended will materially approximate where we had put our guide. We have a lot of work to do to kind of finish closing the books and that kind of thing. It takes us more than two business days. Early results would say we're in the zone, so to speak. We are seeing some transitory headwinds that will negatively impact gross margin, but they are—that'll flow through to EBITDA margin. We would expect EBITDA margin to probably be around the high teens once we get things fully closed and ready to report.
The market conditions that we talked about in Q3, we talked about seeing softening, both from macroeconomic headwinds, particularly in the U.S., to some uncertainty internationally related to global trade. We definitely saw those persist through the fourth quarter. Sample collection, which was a difficult integration workstream for us, bringing in that manufacturing from 3M, had been rough. We exited Q3 with improved production rates as planned, and we saw that continue through Q4. Very focused on taking care of our customers here. We saw—I don't know, probably, again, it's not all done yet, but we saw significant uptake in revenue in Q4 from what we did in Q3. We saw those efforts kind of hold, which was very good. As I said, we're announcing that the second divestiture that we're working on is our genomics business.
We had talked about having a second divestiture in the marketing phase, but had not talked about specifically what business that is. We can now say it's the genomics business. You saw maybe in an 8K a few weeks back, we've done a reasonable amount of work to identify what would be the net impact of tariffs as they sit right now. After mitigating efforts and some agricultural exemptions and a little bit of pricing and looking at what we have in inventory and redirecting supply chain, we think that there's a reasonably nominal impact to us for the full year next year. Again, based on the tariff rates that are in place today, we still at about $5 million annually. I talked about the areas we're focusing on for improvement. These are them.
I won't go through all these, but they're kind of categorized into three buckets: growth acceleration and margin expansion. We participate in what has traditionally been very kind of stable growth, mid to high single-digit growth, and markets. The markets are under a little bit of pressure today because of some of the external headwinds, but we would anticipate that we will return to kind of some of the growth rates that we've enjoyed historically. It is our job to make sure we have products manufactured and delivered on time to do that. Particularly in the U.S., we have opportunities to go kind of reassert ourselves in the markets that we serve and the customers that we serve. We have to complete the 3M integration. We have the PetriFilm manufacturing line to complete. That is a stand-up of a new plant.
It's not a cutover or bringing in a facility. It is phasing up production while we phase down the supply that we put on our manufacturing partner, 3M. That will continue to happen over the next kind of year and a half timeframe. We've had a number of changes to the leadership team. We think we're now coming closer to having kind of the team that'll scale into the future. We continue to have some efforts ongoing there. We've made very good progress in recent quarters. We talked about simplifying and focusing the portfolio through a couple of named divestitures. Those proceeds from those divestitures will be used to help delever from the debt that we took on as part of the 3M acquisition.
Finally, from a governance and compliance standpoint, as we operate as a larger company, both governance activities being focused on by the board, as well as just kind of becoming a larger company and having the associated processes, are focus areas for us as we move into the future. We will not go through the standard investment highlights here other than to say we serve really attractive end markets. We like being the large player servicing an attractive niche market. We have a great portfolio of products, about 95% of which are consumable in nature. We think we have a market position and a global footprint that allows us to take advantage of our leadership position. We have to do a few things better, and we are focused on those, as you can see from the action plan.
We have a number of actions underway to help us kind of enjoy the benefits of the market we participate in. With that, happy to go to some questions.
Thanks, Dave. Maybe in our broader group here, and the breakout will go into more specifics, but let's start with some of the Q4 updates that you just provided. Let's start on margins, right? What can you tell us about these transitory headwinds? What is it and what's transitory about them? Part of the question is trying to understand, is this a one-quarter transitory impact? Is it multi-quarter as people are trying to sharpen their pencils or on their models on fiscal 2026? How do we think about that going forward?
Yeah. Too tough to quantify exactly right now, I would say. As we came out of fiscal 2024, we had gone through a period of kind of supply constraint, and we have kind of remedied that. Over the course of fiscal 2025, have loaded inventory into our new larger global footprint. I think what we have seen is the underlying processes to get the right inventory in the right place need to be improved, and we are working on that. The result has been an elevated level of inventory write-offs that we have seen beginning in Q3 and then actually being a little larger in Q4. We have gotten to the root cause of it, and we will get that fixed. We should see that abate over the coming quarters.
If I'm understanding correctly, there isn't an underlying fundamental gross margin issue. It's in the accounting, writing inventory off. You should be able to kind of return, I guess at this point, it's too early to say at what timeframe you can return to more normalized margins. If I can push, is it a one-quarter or is it several quarters?
I think it's a couple quarters.
Okay. Okay. And then this, I assume, is part of the just EBITDA line, right? Because the just EBITDA line in high teens is, frankly, one of the lower numbers you've printed in a long time.
Yeah.
That's coming from the gross margin right now.
That's right. I think it'd be in the low 20s if not for the elevated inventory write-downs.
Okay. Good context. Market conditions, let's hit on that as well. Since you guys talked about that, what do the market conditions being weak mean for you guys? Talk to us a little bit more, especially if there's any investors here newer to the story. We always think of food safety as this really resilient market. What are you guys still seeing from the end markets in terms of things being a little weak in Q4?
Yeah, I think there's two pieces. The people we sell to are food producers. We're seeing, we monitor in a number of spaces, kind of food production. We're seeing that under pressure from the kind of 25 or longer year high in grocery inflation, so 40-year high. As we've seen production volume under pressure, that doesn't mean food safety testing is negative when production volume is negative, but it negatively impacts the range of growth in our marketplace. We think food safety testing space is growing slower than the range we would usually grow in. That has been persistent for the last probably close to 10 quarters. It had been on a sequential improvement path for six quarters up until last quarter, where we saw production volumes in the proxies that we measure move backwards again.
We think that softness is for sure carried into the fourth quarter. I think the global trade environment, too, has created a level of uncertainty. Exports from Latin America, exports from Asia-Pacific, particularly in areas like ready-to-eat foods, where the volumes that will be produced and the volumes that will be exported to the U.S. is now far less certain. Some of those folks internationally are not losing some volume. They are losing a customer. That definitely impacts the level of testing. Testing is different depending on the end market. I think that uncertainty has people kind of taking a step back. At the same time, I believe we work in a or we serve a market that kind of cannot hold its breath that long. I mean, people will eat. We had seen things continue to improve.
Although this recent period seems to have moved backwards some, we think the kind of robust nature of this end market remains fully intact. It is just we are going through a time that has been impacted by some unprecedented things like 40-year high inflation.
Yeah. Okay. Again, going down the next Q4 update that you had provided here, sample collection side, volume continues to improve. They sustain. I think the prior commentary you've given around this last quarter call was that this should be within the next one to two quarters resolved. Is this update meant to suggest you're still on track for that maybe in the next quarter or so?
We are. Yeah. The teams have done some great work to get production volumes up, albeit it's very inefficient. We are incurring more startup costs than we'd like. We'll dimensionalize that for you guys when we get to July. We are looking at weekly production rates and shipping rates, and those have been achieved as per our plan.
Okay. Maybe before we go, just the genomics, and it might even actually tie into this question, which essentially, at this point, you guys just closed the book. So I'm not going to ask you to give us a number.
Haven't closed them yet.
The books are in the process of being closed.
There you go.
As we think of fiscal 2026, though, walk us through, again, in the spirit of a lot of investors here trying to sharpen their models for what fiscal 2026 EBITDA or even on the revenue line can look like. Walk us through the puts and takes of both the top line and on the bottom line, what we should be keeping in mind for that model.
Yeah, that's great. If we look at the two divestitures that we've named, Cleaners and Disinfectants was about $60 million, roughly, of revenue contribution to fiscal 2025. Genomics will be about $90 million. Collectively, those two businesses, I think net of maybe a little bit of stranded cost, would contribute probably low 20s EBITDA to fiscal 2025. That revenue and that EBITDA would kind of come out next year. Now, we anticipate a Q1 close for Cleaners and Disinfectants. Genomics remains in the marketing stage. We think about them more as kind of maybe a mid-year close, end of Q2, assuming everything stays on track and these things aren't fully predictable. If you were to just kind of lift them out, that would be the impact.
Genomics has been an area we've talked about a lot recently because we went through a big restructuring of that business here in the second quarter of fiscal 2025 that had us walk away from some revenue that was less profitable, but it also improved the profitability. At about a $90 million revenue contribution, set aside the potential divestiture they're working on, all of the things being equal, we would see that business declining modestly in fiscal 2026. Although we are eventually really focused on the cattle portion of that, there's other business that will continue to take. We're seeing a ramp down of the companion business because we do a lot of testing outsourced from others that are now insourcing some of that. That ramp down will be reasonably slow.
Even with a modestly lower EBITDA or sorry, modestly lower revenue for fiscal 2026, all of the things being equal, we would actually expect EBITDA for that business to be higher in fiscal 2026 because we get a full year of the post-restructured business, which happened mid-year fiscal 2025. That is probably the color I would give you on how to handle that year over year.
In the genomics, now that we know it's genomics business that's being targeted for the second divestiture, is the game plan the same? Use the proceeds to pay down debt?
It is.
Okay. And annualized direct tariff impacts of $5 million. Talk to us about what you're assuming. I assume that doesn't assume things go back up. We're kind of steady from here. Is that fair?
That's fair. Although we do, the area where we focus the most is things where on the animal safety side, we buy and resell from China. We have significant amounts of inventory. And many of those areas we're looking to redirect supply chain. So even if they did, I think we'd still have other mitigating actions, maybe go up some, but maybe not as bad as we were initially thinking.
Okay. Outside of the Q4 update, let's take a step back, Dave. We have sample handling as one of the last things that need to be integrated here. We have PetriFilm, of course, but PetriFilm remains on track for the prior timelines that we've known of for later in this year to start ramping. What else, as investors start to take a fresh look at this story, what else needs to be done here, right? It almost feels like we're at a point where integration is largely finished, except PetriF ilm again. What else do you need to do to kind of, I think I'll use my own phrase, grow this business up to what it is as a much larger entity now? What do you have to do still ahead of you?
Yeah, good question. Look, I think we tend to focus on the big milestone type items like PetriFilm manufacturing or getting sample handling up and running. I think the key is after we complete those, kind of demonstrate the robustness of the end market and the return to growth. It's been a bumpy ride. We've had some implications from those bumps. You see those are the things that kind of read through the focus areas that we're very much zeroed in on at the executive level and really broadly throughout the company as well as at the board. I think we need to demonstrate execution and performance. We made a lot of changes to the team, and I think that's going to help a lot. A couple of things still to go there, a couple of big items still to go.
I think we think we're zeroing in on the team in the future and positioning ourselves to kind of execute. I think that's something that we got to not talk about, but demonstrate.
Can you also spend a minute? It's been a couple of years since we've really even discussed this because there's been a lot of integration headwinds, as you've mentioned. The real big selling point of this deal with buying 3M's Food Safety business was to go on the offensive and take share in this space, right? You'll be the big peer play here. You have the golden product with PetriFilm. I guess the pushback that I often get, I'd be curious to see what the strategy around it is, is, look, in somewhere like sample handling, you've actually lost some share. It's a difficult market to get back. Some of these markets are a little less differentiated. Talk to us what it is as a post-integrated business in the next foreseeable future.
How does this organization take share in kind of a tricky market like that?
Yeah. I think, first of all, we have to be a good supplier, which we are. We are a good supplier, but we've had enough bumps that we need to kind of redemonstrate that to folks. As we do that, being the broad player, being the folks that have been in the industry for 40 years, excuse me, people like doing business with us. We're differentiated by our technical field sales support and the breadth of offering that we have and our global penetration, right? I think we've seen areas where we have lost some share and we've seen it come back, okay? In the area of sample collection, I think we'll see that share come back a little faster than we otherwise may have thought. Maybe that product is a little more differentiated than we thought.
It's not a huge margin product for us by any means, but it's an important product to the portfolio. When you sell testing, you need a way to kind of collect samples, and it ties together certain components of the portfolio that's very important. We got a lot of feedback from customers that said, "No, we want your product." It told us it's a little less commoditized than we may have otherwise thought. It starts with kind of consistently executing on behalf of our customers. As we do that, we think we'll see demand come back, maybe not overnight. I think we've seen that as we got through some of the integration challenges of 2024.
I think we demonstrated that across 2025, even going back before some of our integration issues when we had some constraint of PetriFilm that came that was really before the deal closed that we inherited. In some tough markets like Japan, we got all that back and more. I think the portfolio performs well when we're there with the products. These are mission-critical products.
On the divestiture side of the animal safety, that pie continues to shrink more and more. What's the ultimate goal here between animal safety and food safety mix? What should we think about in the long run?
I think looking at it now with the two divestitures is how you should think about it. We haven't announced anything beyond that. I think the profile of the remaining businesses is probably a little higher margin than people appreciate with a low OpEx burden. We kind of never say never, but we kind of like the position if we complete these two divestitures. I think it reduces animal safety to a reasonably low but important part of the pie and allows us to kind of focus our investment from an OpEx and a CapEx standpoint on the higher growth market exposure of food safety.
Okay. I'll ask kind of one more big picture question here, and then maybe we'll break a minute or two early for the breakout session. As you look at the next 12 months specifically, Dave, what are your biggest risks and your biggest opportunities in the next 12 months as you look at fiscal 2026, essentially?
Yeah. I do not know if it is the biggest risk, but our biggest focus area for sure remains PetriFilm manufacturing standup. I mean, it is a big project. A lot of you folks have actually seen it firsthand. When you look at it, you go, "Wow, this is a big deal." When you have people that are highly confident that have done this before and built these kinds of plants within 3M that now work for us, and you talk to them, you get a lot more confident because they have done it before. It is super important, super big investment of capital, and it kind of completes the transition. We have to complete that in good order. I think the big opportunity is really having that baseline year where we are operating without having something. We can take two steps forward without taking a step or two back.
We have not posted that year since the deal was announced. I think we have the opportunity to do that. If we do that successfully in fiscal 2026, and we sell better, and we operate better, and work our way through the integration items better, and create a better foundation year to then jump off of and carry some momentum into fiscal 2027, I think that is the opportunity before us. I mean, the opportunity is inherent in the business. I guess this is a we need to execute against it. Thank you.
Okay. Thanks, everyone. We are going to the breakout room, Adler. So we'll start.
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