Hello, and welcome everyone here in the room and on the webcast. Thank you for joining us for what we believe is Neogen's first ever Investor Day. I'm Bill Waelke. I'm heading up investor relations, as well as FP&A for the time being, and we are very excited to tell you about the progress that we've made over the course of the last year, and also the strategic things we are focused on to deliver on what we see as significant potential for Neogen in the future. Before we get to those exciting things, though, please bear with me as we walk through the forward-looking statements language. I think, as you are aware, we may make reference to forward-looking statements here in the room today under the meaning of the Private Securities Litigation Reform Act of 1995.
Our actual results may differ materially from what we tell you in these forward-looking statements. Additional information concerning these factors can be found in our 10-K, in our 10-Qs, and other reports that we make with the SEC, and the presentation that we've issued in connection with today's meeting. We encourage you to review those documents, and we do not undertake any obligation to update those forward-looking statements. With that behind us, Neogen, at its most basic level, has the mission of protecting the world's food supply. We advance this mission through our two segments, food safety and animal safety. In food safety, which accounted for almost $650 million of revenue in fiscal 2026, we believe we are the clear global leader.
Our portfolio of food safety solutions includes a range of immunoassay and microbiological diagnostics and related products, mainly to identify the presence of undesirable things in products we all consume on a daily basis. Whether it's the presence of yeast, or mold, or E. coli, salmonella, aflatoxins, allergens, or a number of other things, our diagnostics aim to provide food producers with fast, reliable, accurate, and easy-to-use solutions around the world. These solutions are relatively inexpensive, as you would expect, compared to the cost of wasted inventory or the costs associated with contaminated products reaching the shelves, and more importantly, consumers. The history of Neogen dates back to the early days of food safety testing. The company was founded almost 45 years ago in 1982.
Given this longstanding expertise we have in the industry, we believe we're viewed not just as a supplier, but as a trusted partner of food producers that can help them design and implement robust food safety testing programs. Our animal safety segment, which represents about 25% of the total company's revenue, is complementary to our mission of helping to protect the world's food supply. The majority of this segment is focused on preventive care and the well-being of production animals. We have a number of well-recognized brands that play important roles in the health of production animals, and also longstanding relationships with key channel partners, which in this market are the primary route to the farmers and the ranchers that use these products.
Together, these two segments provide depth and breadth of expertise with a global reach and recognized solutions to help food producers, ranchers, and farmers ensure that our food supply globally is as safe as possible. After nearly 45 years, we have developed a significant global presence, which we believe is the broadest in our markets. With almost half of our revenue generated outside of the U.S., we serve over 70,000 customers in 135 countries and have an installed base of over 50,000 instruments. While we do have some diagnostics that can be run without instruments, our focus in food safety is very much on the razor blade business model. Instrument placements generate sales of consumables, and in our animal safety segment, that product portfolio is almost entirely consumables, meaning that as a total company, over 90% of our revenue comes from sales of consumables.
Our customers around the world use our products to run over 300 million tests each year, which means a tremendous amount of data is generated. We will expand on the data opportunity later today, but continuing to build out a digital ecosystem containing not only data, but data-driven insights, is a key priority for Neogen moving forward. Protecting the world's food supply is a global challenge shaped by scale, complexity, and constant change. I think to most people, it might not be fully appreciated how complex this mission is, but let's take a look and get a little bit of insight into how complex this is on a global basis.
Thanks, Bill. Good morning.
Good morning.
My name is Mike Nassif. I am the President, Chief Executive Officer for Neogen. Welcome. Neogen has been a public company for 37 years, but this is our first investor day, and it comes at a really important moment for the company and gives us an opportunity to share with you where we are, where we are going, and more importantly, how we are going to get there. When I joined 14 months ago, one of the first things I did was meet with as many investors and our analysts as I could to really understand their perspective on what is happening. You were very clear to me about the challenges that the company was facing. You saw the challenges of integrating a large carve-out, you saw the challenges with supply and service, and you rightly questioned whether management could consistently execute and, most importantly, reduce surprises.
I think those were very fair concerns. My commitment to you was that in 2026, our goal was going to be about stabilizing the business and building credibility. When you asked me how we are going to do that, I said by focusing on the fundamentals. What I also said was, if we do that correctly, the first place we should see it is in our top line. I think it has. I believe we have reached an inflection point, and our transformation initiative is taking hold. We have delivered positive core growth in four consecutive quarters. Our commercial and cross-functional teams are working better together. Our supply reliability has improved. Our customers are getting better service from us. Now, all that matters, but I do not want to get ahead of myself. We still have work to do.
What these results tell us is that the changes that we have put in place over the past 14 months are taking hold. They are making an impact. At the same time, the market tailwinds behind us are substantial. We operate in a durable, non-discretionary market, serviceable addressable market in animal and food safety of over $7 billion, growing at a blended rate of 4%-5%. However, market growth alone is not going to determine our success, and we have to earn it. We do that by having stronger customer relationships, broader adoption across our portfolio, innovation that solves real customer challenges, and most importantly, consistent execution. As a category leader, our objective is not simply to participate in growth. Our objective is to outgrow the market, strengthen our differentiation, and expand profitability over time.
If the opportunity is there, the question is simple: how are you going to do that? The answer is through our very focused strategy built around three pillars, commercial prowess, high-impact innovation, and operational excellence. You have heard me speak of these priorities consistently since I joined. They are not slogans. They are how we run the business. Commercial prowess is all about execution discipline at scale, strengthening global relationships, and expanding our portfolio solutions to more customers. High-impact innovation starts by understanding our customers. What are their real challenges, and how do we take those insights and turn them into growth? Lastly, operational excellence means improving reliability, productivity, reducing complexity, and strengthening our margin and cash generation capabilities. Taken together, these three pillars are not just about growth. They are about building a sustainable and profitable company for the future.
Now, our path so far has taken a very structured three-phase approach that I shared on day one. Fiscal year 2026 was about stabilization and building credibility. 2027 is about acceleration. It is about taking the foundation and the fundamentals that we have built in the past year, expanding them at scale and with greater efficiency. 2028 is about expansion, expanding our markets, our differentiation, and our margin. This is also when we expect to see the investments that we have made today in innovation and operational improvement to start to meaningfully impact our P&L. What gives us confidence in the opportunity is not simply the size of it. It is the combination of our market position, the breadth of our portfolio, our capabilities, and the execution that we have demonstrated so far this year. The need for effective food safety solutions has never been more acute.
Foodborne illness outbreaks have increased by 50% over the past 10 years. The cost of these recalls is $75 billion+ per year. Governments have responded by increasing spending significantly in food safety, while consumer confidence remains under pressure. As food supply chains become more complex, our customers are being asked to do more. Increasingly, they are looking for partners that can address multiple food safety challenges across their operations, and most importantly, at scale. I believe this is where Neogen is uniquely positioned. We operate close to the point of processing, where quick decision, reliability, and accuracy are paramount. As the leader in food safety, Neogen has significant advantages than any other player in the market. We have 10 leading platforms, with six of them with market-leading position.
We offer one of the industry's broadest portfolios with over 10,000 SKUs. More than half of our revenue, as Bill said, comes from outside the U.S. What that means is that it gives us a global network and deep relationships around the world with a lot of these large strategic account customers. Taken together, all of these strengths, combined with our manufacturing capability, our global reach, our technical expertise, give us the foundation for growth and innovation. Having these advantages just by themselves is not enough. Our goal is to connect them more effectively, make it easier for customers to realize the full value of Neogen, and turn those advantages into a stronger margin expansion, stronger growth, margin expansion, and cash generation. When you look at the competitive set that is supporting this industry and the growing challenges, you see two things.
You see very specialized niche players on one side, and then you see large multi-industry conglomerates on the other. Neogen brings the capabilities of both. I really think that is what makes us unique. We combined a dedicated food safety focus at global scale. We bring together scientific expertise, manufacturing and distribution capabilities, customer and technical support, and a broad portfolio that integrates into workflows of our customers. The advantage is not any one of these individual capabilities. It is really the combination of all of them. Our opportunity is to make these advantages work better together than they have in the past. That is how we intend to turn our market position to solve these real challenges and turn it into financial performance. It brings us back to our strategy and our three pillars. I believe we have built the industry-leading management team to support this transformation.
You will hear directly from the leaders responsible for the results of each pillar today. Tammi and Joe are going to discuss commercial prowess. Jeremy is going to give you his plans around high impact innovation. Jim will talk about operational excellence. Of course, we'll have Bryan come up, connecting all these priorities and translating them to how we expect them to impact our financial performance. As I reflect on the last 14 months and the work that we've done so far, I really have more confidence in the company and the direction we're going than I did when I joined.
That confidence is really based on the progress that we've made, how the organization has adapted to the changes so quickly, the discipline that's taking hold across the organization, and most importantly, the capabilities that I've witnessed of our colleagues around the world and our management team. Our objective today is to give you a very clear and credible view of the path forward, the opportunity we see, the actions we are taking, and introduce you to the leaders accountable for delivering these results. Thank you for being here, and I'd like to ask Tammi to come up.
Thank you so much, Mike. Every year, the world is moving nearly $5 trillion of food through a supply chain that most people never think about until something goes wrong. Somewhere in that system, safety has to be proven every single day at every single step invisibly before anything reaches a shelf. That invisible layer of trust before is what I want to spend the next few minutes on because that is the business that we are in, and that is where this company earns its right to lead. Good morning. I'm Tammi Ranalli, the GM of our Food Safety business, joined today by Joe Freels, our Chief Commercial Officer, who will take you inside how we're built to earn that trust every day in plants all over the world.
To understand why that trust is so hard to earn, you have to understand what is at stake when it fails. I want to start with what's at stake for our customers, because that is what creates the demand behind everything Joe and I are about to show you. Peanut Corporation of America is on this slide, not for shock value, but because it remains the industry's reference point for how asymmetric that risk is. Decades of brand equity, an entire company dissolved, and a criminal sentence, all traced back to a product that should have never shipped. That asymmetry is why food safety is one of the most defended line items in our customers' budgets, in good economies and in bad ones. That risk has not been engineered out of the system.
This summer alone, I think we're all well aware of, we've lived through the largest cyclospora outbreak in history. Shredded iceberg lettuce from a single supplier sickened nearly 13,000 people across 21 states and put 570 people in the hospital. At the same time, salmonella moved through jalapenos from one growing region into national restaurant chains and through shell eggs from one producer into grocery stores across the South. Different pathogens, different commodities, and the same lesson. One input, one supplier, and the exposure becomes national within days. It doesn't stop at our borders. Earlier this year, one contaminated ingredient pushed infant formula recalls into 99 different countries. For customers, the takeaway is clear. Your brand is only as safe as the least-tested input into your supply chain. Finding that out at the end is finding out too late. What does this mean?
It means that companies are changing how they buy. They are moving from testing at the end to preventing at the source. Testing earlier at more points in the supply chain and connecting those results so they can now act in hours instead of days. That shift raises both how often they test and what they're willing to pay for that confidence. It's the strongest structural tailwind in our category, and it is precisely the category that Neogen is built for. This is why they can't afford to get that decision wrong, and it's why companies like theirs are rethinking who they trust to help them make that. Rather than me telling you what they need, let's hear from some of our customers around the globe.
I'm looking for people that want to go fast. When we think about pathogen detection, that could be 24, 48, 72 hours, up to 10 days if you've got to get into speciation. What if we had that answer in four hours, eight hours? That is the kind of partners that we're looking for that are investing in innovation, but also looking to think outside the box.
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What you heard was not a set of testimonials. It is a signal about how these companies now decide who they are buying from. Across our global voice of customer work, that signal is remarkably consistent. Several themes come back again and again, and taken together, they describe a significant shift. The question our customers used to ask was, "Do you have this test?" The question they are now asking is, "Can you run my program?" That is why they want an integrated partner rather than 12 different vendors with 12 different systems. It is why speed and simplicity play such a critical role in the buying decision. A result that arrives too late to act on has no value, no matter how sophisticated that result is. Another theme that we have heard about time and time again revolves around the data.
Customers are not just buying a result anymore. They are buying the trend behind it, the insight it gives them, and the confidence to walk into any audit prepared. Finally, I want to mention that our customers are frustrated. They are frustrated with juggling different fragmented vendors and systems, frustrated in waiting several days for results from a central lab, and frustration is reshaping the buying decision and creating a clear opening for Neogen. That is why the criteria our customers now value the most, integrated, fast, on-site, connected to data, are precisely the capabilities that we have spent the last year organizing this company around. This is strategy meeting market momentum, and it is why Neogen is positioned to lead what comes next. There is a structural shift that makes this moment especially favorable for Neogen. Testing is moving out of the lab and into the line.
For decades, food safety testing was built around a centralized lab model. Collect a sample, send it out, and wait for a highly trained specialist to deliver that result. The model delivers accuracy, but it separates that answer from the operation. In a modern plant, every hour of waiting turns into tying up inventory, capacity, and working capital. Today, easier-to-use validated methods, rapid diagnostics, and connected data are allowing customers to move testing closer to the point of processing, where the people running the line can see the risk sooner and make the decision while there is still time to act. Picture a pallet of finished product sitting in a warehouse on a Friday afternoon.
It can't ship, not because there's anything wrong with that pallet, but because there's a sample sitting in a queue at a commercial lab somewhere, and no one on the plant floor can tell you when that answer is coming back. So take that pallet, multiply it across every plant, every day, and that is what a $9 billion centralized lab model looks like from the inside. Certainty, eventually, but never certainty in a timeframe that matters. So our customers are tired of waiting on that pallet. The industry has started moving that answer to where the question is being asked, onto the line, into the hands of the person that needs to make that call. That's not a forecast.
This is already a $5 billion market today, and it's the fastest growing $5 billion in food safety, adding roughly $140 million a year and expanding $700 million over the next five-year horizon. Here is why this matters. That pallet in the warehouse floor is moving towards the one place we've spent our history standing. We didn't have to reposition for this shift. The market is repositioning towards us. Joe and I have lived this shift before. We've both spent many years in clinical diagnostics helping move testing out of the central lab and into the point of care right next to the patient. We know what it takes for a customer to trust a result outside the lab and how fast the markets will move once they do. So we're bringing that same playbook to the point of processing. The real question you may ask is simple.
When testing moves to the line, why does Neogen win? So go back to that plant manager standing next to the pallet and follow them through what actually happens the moment they're calling us instead of the lab. They're swabbing the line themselves. With Petrifilm and our rapid diagnostics, they're not waiting for a courier or a lab queue. They have the answer in minutes to hours standing right where that product is. That result doesn't just sit on a printout. Neogen Analytics picks it up instantly and turns it into a release decision in real time. So instead of that pallet sitting in a warehouse waiting, it's now on the truck going to customers. Six months later, when an auditor walks in and asks them to prove it, they're not having to scramble.
More than 100 AOAC and AFNOR validated methods, and those are two of our major international regulatory bodies, means the answer that they're trusting on the floor is the same answer that an auditor is accepting. That's the regulatory credibility that Mike was referencing, made real in a single workday. So that is why Neogen wins at the point of processing. Speed, breadth, connected data, and validated methods from a single partner. That combination is hard to replace and hard to displace. Notice what just happened. They didn't have to call five different vendors to get through that day. That's not an accident. That is the model. Before us, most plants like theirs lived in that fragmented environment, getting pathogens from one vendor, allergens from another, environmental monitoring, sample collection, and digital records, all were disconnected.
The result was more complexity, slower decisions, and a pallet that is sitting longer than it needs to. Once they trust us with one result, they started asking us to take on the rest. Pathogens, allergens, indicators, all on one platform, all from the same partner, already standing beside them. This is where the story turns into economics. Every one of those conversations expands our share of wallet within the plant, makes us harder to replace, and converts into recurring consumable and software-linked revenue that we did not have to win from scratch. Let me show you what that actually looks like inside a real plant in an industry that we know really well, dairy. Picture a dairy processor.
There is a tanker of raw milk that is arriving before dawn, and long before it becomes a carton on a shelf, someone has to make that same version of this pallet decision at every single step. You have got reception, pasteurization, processing, environmental monitoring, and finally, release. In that fragmented model, each of those decisions belongs to a different vendor in a different data silo. Six separate stories that are never talking to each other. Now with Neogen, they become one connected story from start to finish. The result is a faster release decision at the end of the day, problems caught earlier in the line instead of after the fact, and an audit file that is already built. The exact outcomes those customers are asking about in the video.
We followed milk from the truck to the pallet, but there is one more thing we have not talked about yet, and it is the most valuable thing in the plant, and that is the data. Go back to that dairy plant. It is 2:00 in the morning, someone is swabbing a drain near a filler. It comes back positive. Now, in most plants today, the result becomes a line on a clipboard or a cell in a spreadsheet, filed away, disconnected from everything that has happened that week. Watch what happens with Neogen Analytics. The result shows up on a map outside the plant. It shows that this is the third hit near that same filler in the last six weeks. It kicks off a corrective action with a named owner, and before a single pallet moves, the release team is already aware of what has happened.
That is the moment a result stops being a record and starts being a warning while there is still time to act on it. What surprised us even more was that you might expect better data to lead to less testing, but the opposite has actually happened. Once a quality leader can actually see their plant, they want to see more of it, more sample points, more frequency, more confidence. Customers who adopted Neogen Analytics increased their consumable use by more than 1.5 times. Now that is the flywheel. They see more, they test more. They test more, they trust us more. That is recurring consumable pull-through with software-linked revenue on top. Once their history, their workflows, and their audit trail live inside our platform, we are no longer a vendor they buy from. We are the ecosystem they are relying on. That is one plant.
Picture this happening across thousands of them. Joe is going to show you how we're building our commercial model to ensure that we're going to be standing next to everyone. Joe, over to you.
Thank you, Tammi. Let me connect you to the customer needs that Tammi has been mentioning and the opportunity we have and how we're building the commercial model. The customer need is clear. Faster, connected, audit-ready, food safety decisions closer to processing and the point of need. As Tammi mentioned, I've seen that shift before in clinical diagnostics, where bringing testing closer to the patient delivers speed of decision making, better quality metrics, and reduces cost of care. That same shift is happening in food safety, moving testing closer to processing, faster decisions and insights, and more connected workflows. That gives Neogen the right to win. We have point-of-processing access, a broad portfolio, technical and regulatory credibility, and analytics that connects tests to workflow decisions.
In the near term, the opportunity for us is not creating a new market, it's extending our category leadership through sharper focus, consistency, and accountability. Let me show you how we convert that differentiated position into growth. This is the commercial transformation in one picture. We have a strong foundation, trusted partnerships, quality and regulatory credibility, science and technical support, and portfolio breadth. But a strong foundation alone does not sustain category leadership. We have to execute on the fundamentals at scale, and that's what we've put into place. A global go-to-market focus, solutions-based selling, stronger funnel discipline, clearer accountability, and that delivers consistent execution across regions. In my own experience in leading global commercial teams, it's not the teams that deliver the most activity, it's the teams that have the clearest priorities, operating cadence, and accountability that win.
That same discipline is what we are applying here. To convert Neogen's foundation into deeper relationships and sustainable, profitable growth, we have to prioritize our efforts toward the highest impact geographies, segments, and customers. The clearest example of this is the work we're doing in strategic accounts. Our strategic accounts are growing at 6.2% year- to- date. That's an early proof point that the tighter focus is working, and we're on pace to deliver 8% + by year-end. For us, a global strategic account is one of the largest customers who operate in multiple geographies around the world. These are brands that you likely know and trust. Despite their strategic importance historically, we've had many different representatives covering these customers through local relationships and quite frankly, fragmented engagement by location, category, or region.
This means that a global customer that has 30 locations in 10 countries may have been covered by 10 or more Neogen representatives. We are changing that. We will now have a dedicated global strategic account team where we will have one Neogen representative accountable for the relationship in order to bring value to these customers. The model is simple. Engage enterprise-wide, standardize solutions, and expand share of wallet. As Jeremy will talk about a little later in the morning, Neogen Analytics development work that we are doing with some of these customers is moving Neogen from simply a product supplier to a workflow partner and innovator. While we are on track to deliver our targeted growth, we are also deepening our relationships with our global customers to meet their needs and extend our value.
In addition to our strong position in food safety, we also believe we have a strong animal safety business. Animal safety remains critical to our overall growth and health as a business. It is a business with trusted brands and attractive recurring demand. This is a compelling opportunity for us because this is a business that has been built primarily in the U.S. with only 15% international business with very little focus. That creates an opportunity for us across Europe, Latin America, and Asia-Pacific, but this will not take focus away from our food safety business because we already have a separate team of resources delivering results today. We are applying the same commercial operating model with this team to drive sustainable and profitable growth.
You should think about the international growth as primarily a route to market opportunity where we have the capability to activate distribution, extend trusted brands to international geographies, and use Neogen's global infrastructure to improve our reach. The takeaway here is capital efficient expansion built around products and brands that already have a strong foundation, but serves as a great complement to our overall growth strategy, but does not diminish our food safety focus. As a part of that focus, we also have to improve efficiency through differentiated coverage models by using digital commerce. Digital commerce is about meeting customers where and how they want to buy while making it easier for them to access our products, information, and the support that they need. Different customers need different types of engagement.
Strategic accounts require higher touch. Core accounts need field and channel support, while smaller or more repeat buyers often value speed and self-service. By improving digital access, we reduce friction in routine purchasing, we improve responsiveness, and let customers engage with Neogen when and how it works best for them. For Neogen, it also creates a more scalable coverage model, allowing our commercial teams to focus on our higher touch resources where customers need deeper technical, strategic, or enterprise level support. The goal is better customer experience, broader reach, and more productive growth, not simply a lower cost to serve. The effectiveness of this model really depends on our execution, our accountability, and alignment across the commercial organization, which is where our strategy is critical. A strategy alone only creates value when the organization is ready to execute it consistently. That execution requires clarity and transparency.
Over the past year, we've built commercial operating models around three disciplines. Sharper account targeting, which is about working the right opportunities, maintaining price discipline, and strategic prioritization of the right segments. Our sales operating model provides our teams with a clear framework of how we execute to translate our broad portfolio into valuable customer solutions and serves as a clear standard for accountability across the sales and supporting commercial teams. I've executed this at scale, and I know what it takes, but it only works if our teams are on board. We have a very talented team around the world, and they know what right looks like. They want to be enabled. They want to have confidence in our direction.
I'm excited to report that at our recent global sales meeting, we did a survey of a little over 200 sales marketing associates, and we asked them how they were feeling about confidence in our direction and in leadership. I'm happy to report that confidence and clarity of direction has improved 62%, from 58% - 94%. That's significant because alignment matters, but it's not the end measure. The proof will be in our performance. Pipeline quality, opportunity wins, price realization, customer retention, and revenue growth. The team is aligned, they're engaged, and they are hungry to win. The cadence is in place, and now we carry that momentum into consistent commercial performance. We're seeing the early evidence. The team is driving stronger funnel creation with new opportunities up 32%. That has helped us generate a qualified pipeline of $142 million.
Quarter one wins of $13 million. Our service levels are also improving with help from Jim Walter and his team. On-time fulfillment is up 5%. Back orders are down 27%. These are all things that reduce friction with our customers and provide fuel for the commercial engine. Let me be clear. These are indicators of improvement, but they're not the finish line. But they matter because they tell us early whether the things that we're doing to improve the commercial engine are working before the results show up in the numbers. So we'll continue to manage with this type of discipline, building a higher quality pipeline, improving conversion, growing revenue, deepening strategic account momentum, and holding ourselves accountable for measurable progress. What I want you to take away from our section is pretty simple.
Neogen already has the customer access, the portfolio, the science and regulatory credibility required to lead. The commercial transformation is about converting these strengths into consistent performance. So we're focusing our resources where we have the greatest right to win. We're going deeper in strategic accounts. We're expanding proven businesses into under-penetrated geographies. We're building scalable digital coverage, and we're operating with greater discipline and accountability. The early indicators are encouraging, but we understand that we must maintain a high standard of performance. The measure of success will be sustained profitable growth and consistent execution. That is why the commercial team exists, and that is what we drive every day. We also know that as we look into the future, our innovation engine will be a key component of fueling our commercial engine.
I am excited to introduce Jeremy Yarwood, who will walk you through how high impact innovation will ignite our future.
Good morning, everyone.
Morning.
I am thrilled to be here as Neogen's Chief Scientific Officer. I would like to share insights on how we believe innovation can drive real value for our customers and our business. Since I have joined the company, I have had the opportunity to meet with customers around the globe, from small regional players to major multinationals. Almost without exception, they are looking at us to be a holistic solution provider and a real partner in solving their food safety challenges. You heard from Mike and Tammi how big a problem this still is, both in terms of human health and economically, an area that is truly ripe for innovation. As a category leader, we have the presence and ability to deliver solutions throughout the value chain to address each of those core customer needs that you heard Tammi talk about.
To do so, we are building on existing capabilities and harnessing new ones to enable rapid, high confidence decision making, seamless integration into their larger workflows, driving insights that eliminate the risk of contamination, and allowing testing to happen nearest the point of processing. In order to bring those innovations to life, we are building best in class approaches to new product development. You heard Mike talk about stabilizing the business in our first year. Part of that investment was building a robust, disciplined process to uncover unmet customer needs and applying rigorous cross-functional and financial prioritization to drive focus on the very best ideas coming from a very deep funnel of opportunities. This process gives us the opportunity to concentrate resources on the highest value solutions most likely to create meaningful customer impact and attractive returns.
Our first exercise of this process yielded 18 projects across multiple product categories that we are moving forward with today. While we continuously feed this already deep funnel with concepts surfaced by our customers and our highly knowledgeable Neogen team, this is how we raise our new product vitality index, the percentage of revenue coming from new products, more than tenfold over the next five years, and renew our industry leadership in innovation. Our innovation strategy is designed to stay ahead of emerging needs and technology trends by combining internal development, strategic partnership, and co-development models that accelerate delivery of new solutions while reducing risk and time to market. While we have got extensive internal technical capabilities, we know there is also opportunity to leverage breakthroughs in other fields, including diagnostic technologies and machine learning.
As a category leader, we are often the first point of contact for companies or teams with emerging technology seeking to enter the food safety market. This gives us a great opportunity to assess and test the best technology out there, align it against market needs, and validate the solutions with our customers. We have also seen interest by government agencies to sponsor advanced technology to support food safety. One example is a multimillion-dollar grant secured from the Disruptive Technologies Innovation Fund established by the Irish government. This grant invests in AI-assisted functional protein design, building on a capability that our internal teams had already demonstrated. This capability would allow us to accelerate the development of assays that perform across the incredibly diverse range of food types and materials, much more complex than you will find in clinical diagnostics.
As an example, think about the range of food products in your local grocery store. Looking for gluten in a baked cookie, for example, can require a very different assay design than that same gluten in the raw flour being used in that same recipe. Modernizing our tool set will help us innovate at the speed that our customers do. One of the things that excited me in joining this company, coming from the medical diagnostics world, is the ability to drive value creation in much shorter cycle times. In med tech, new diagnostics were often a journey of five years or more. We are able to move much faster, and this is particularly energizing, knowing that we have so many areas in which we can drive value through innovation. We have both near term as well as longer-term growth drivers.
Those near term drivers include expanding our claims on existing products to a broader range of use cases and food materials. This is particularly true for our international customers. As they deploy new food and drink products, for instance, shelf stable ready to drink beverages, which are exploding in popularity in Asia-Pacific region, we can validate solutions for those new products and enable their safe release. We also see the potential for significant value, which we will talk more about shortly, in providing digital solutions that can be deployed with our customers in a matter of weeks or months. As an example, we were able to develop and deploy a mobile application in less than three months for a major company that wanted to use the Neogen Analytics capability on their factory floor using company devices.
As we invest this year in NPI, we expect those to meaningfully contribute to incremental growth in fiscal year 2028 and beyond. All of this allows us to deliver a regular cadence of innovation to the market and achieve that tenfold increase in our vitality index within the next five years. We've heard loud and clear from customers their desire to get answers that make sense and to get them sooner. To that end, we are investing in technologies across multiple platforms that move testing closer to processing, increase workflow integration, and transform food safety from retrospective compliance into real-time operational decision-making. As we're modernizing these platforms, we're also creating the additional plumbing or connectivity to allow the collection of more data that can translate into actionable insights for the customer. An example is location tracking.
This would allow us to accurately marry where the test point was collected to the resulting data point, allowing seamless intervention literally where it matters. Let me give you some additional detail on one of those platforms, pathogen detection. While there's been testing for decades for pathogens in food, it hasn't really moved the needle on human health. Unfortunately, foodborne illness rates continue to rise. This is particularly true for pathogens like salmonella. While salmonella species are commonly detected, only a fraction of those species actually cause human disease, and they change over time. So just seeing salmonella is not enough. We've got to isolate and focus on the strains that matter. This is something that regulators are talking about and seeking advanced solutions for.
We propose to help drive that by developing next-generation testing technology that targets those strains of interest, informed by analytics and risk models that focus testing on where it's most likely to catch the issue. By doing so, we seek to link testing to interventions and process controls that matter, truly making food safer for humans. One of the key areas we're investing in is our core platform of Petrifilm. For the first time in Petrifilm history, we will soon have the entire development capability fully internalized. From early innovation and development through pilot capabilities and production capacity that you'll hear more about from Jim. Every Petrifilm we add to our line can drop through at highly attractive margins and help us achieve the 30% EBITDA target for the corporation.
As we pivot the teams now working on Petrifilm manufacturing transfer to working on innovation, we'll be able to develop and scale Petrifilm at a cadence that was not possible in the long history of this product line and unmatched by competitors. Our primary focus is building value on core market of food and beverage, where we believe there's significant additional opportunity to innovate. But over time, we do believe that the Petrifilm value proposition of a prepared plate in an easy-to-use format will also resonate in adjacent markets that still rely on traditional media. We're thinking about ways to best do that, whether through distribution partnerships or otherwise. Overall, we believe this opens up the Petrifilm-accessible market by more than 2.5-fold from where it is today.
Now, while I was in medical diagnostics, I could have only dreamed of the ability to test and improve a diagnostic solution early in development inside a hospital. Not too many hospitals willing to let you practice on their patients. But here we have the opportunity to test and iterate where our customers live every day, literally in their factories and in their laboratories. I can't think of a better way to incubate innovation. This ensures that the solutions that we develop meet real needs, and when launched, are quickly embedded into customer workflows. In this customer-focused innovation model, we are partnering with real segment leaders. This approach aligns well with the commercial strategic account focus that you already heard about from Joe. As an example, one of the data solutions we developed helped a strategic account identify an emerging Listeria risk.
By intercepting this trend, they avoided a potential multimillion-dollar product recall. They're rolling out this system across factories in North America. They're just one of more than 40 strategic customers we are working with on innovation. To me, this is a great example of problem-solving together with industry-leading customers. As we help them create best practices, we can leverage those learnings to level up less mature customers to implement best-in-class procedures, particularly through digital workflows. Already, our customers generate more than 300 million data points annually. 300 million using our products alone. More than any other food safety business, and that's only going to increase. As category leader, we have the opportunity to connect and leverage those data sets to drive best practices, both by the customers themselves as well as the industry as a whole.
This includes how they implement and monitor their testing programs, where and when they sample, and how to demonstrate the effectiveness of their corrective actions or interventions to prevent an issue from happening in the first place. It's important to remember that every decision our customers make to release product is a risk-based decision. It's impossible to test every leaf of lettuce, every pound of beef, every wheel of cheese. It's a bet multiple times a day that that food is safe and of high quality before it goes out the door. To make that decision, a quality manager is assessing not only the result of our test, but data from the factory floor, raw materials, sanitation, and many others. It's like a doctor diagnosing a patient. Not only are they checking a diagnostic test result, but they're evaluating the patient for fever, movement, medical history.
As Tammi mentioned, unfortunately, producers are often relying on an extensive but often disconnected set of data points from throughout their supply chain, including our test results. We believe this creates a tremendous opportunity to create value, providing customers with the right data at the right time to make the best decisions, allocating their resources in the most productive way to reduce their risk. As we look forward, these inputs will allow us to create a flywheel, driving better insights and decision-making, further accelerated by additional data sources such as weather and climate information to predict toxin outbreaks, emerging pathogens that threaten certain food crops, or factory operations that raise the risk of a contamination event.
While others can create digital workflows, none have the food safety expertise that Neogen built over decades to identify the real risks out of a universe of signals, why they matter, and what to do about it. The holy grail of food testing, truly point of processing, is real-time, non-destructive testing. One of the companies that's helping to enable that is Hinalea Imaging, using advanced hyperspectral imaging to truly see things that the human eye can't and to transform laborious, offline, or highly qualitative tests into real-time insights. Briefly, what is hyperspectral imaging? Where a regular camera records three bands of light, red, green, blue, a hyperspectral sensor can capture 100 or more, building a detailed spectral fingerprint for every pixel in an image. This makes it possible to identify materials, detect chemical changes, spot problems that no other imaging method can see.
You can see that right here in the image, a mix of white powders that are tough to distinguish by eye, but vastly different when viewed with hyperspectral imaging. We're very excited to announce this week an investment in and collaboration with Hinalea Imaging to develop new-to-the-world solutions for food testing. This gives us exclusive rights for applications within food safety testing. While hyperspectral imaging has been a known technology for many years, it's been hamstrung by cost and practicality. Hinalea Imaging has figured out how to make that technology accessible and economically attractive to food producers and processors. Just this week, they're announcing another step change in camera costs with a new model that's 70% less expensive than the previous version.
By the way, if you haven't had a chance to visit with him in our lobby, please do so, as I know Barry's happy to share a demo of the system itself. Hinalea Imaging is already realizing value with segment leaders in food testing, and we're thrilled to partner to accelerate that value creation. Not only do we believe that advanced imaging applied together with our current testing systems could unlock real value in things like Petrifilm automation, we believe that significantly expands the range of problems that we can help our customers solve. This creates real opportunity to build value in processes like product quality testing, food grading, and automated inspection that we don't access today. One of the applications for advanced imaging that we're very excited about is the potential to significantly reduce the time to result for our Petrifilm products.
We've heard repeatedly from food producers that getting answers more quickly unlocks another level of value for them and their ability to safely release product and intercept potential issues. While we are the industry leader in dry film media for food safety, 70% of the addressable market of $1.2 billion still uses traditional culture media. This doesn't even count some of the adjacent markets I talked about a minute ago. Using advanced imaging technology and next generation formulations, we believe we can meaningfully reduce the time to answer, expand our competitive edge, and convert substantially more of the traditional media users to Petrifilm. Neogen is building on a foundation 40 years of industry leading expertise in food safety science to become a discipline growth engine focused on anticipating customer needs, commercializing differentiated solutions, and delivering measurable returns through revenue growth, product vitality, and innovation productivity.
Through extensive customer-focused innovation, we will be their preferred partner to deliver real solutions. Through a systematic and sustained cadence of new product launches, we seek to not only compete, but to change the future of food safety. Now I'd like to turn it over to Jim Walter, who's going to tell you how we're transforming operations. Thank you.
Thank you, Jeremy. Morning.
Good job.
As Tammi and Joe mentioned, customer demand is moving towards faster connected audit-ready decisions at the point of processing. They also showed how Neogen is focusing its commercial model on strategic accounts, priority markets, and integrated solutions. Jeremy showed how high impact innovation expands the products, applications, and markets we can serve. We have built a world-class organization, and I will show you how we convert those commercial and innovation opportunities into reliable supply, scalable capacity, stronger margins, and cash generation. Our unique capabilities worldwide, coupled with our ability to scale, make the operations team a force multiplier for Neogen. With operations as the nucleus, we have stabilized the operating foundation. We are now using that foundation to accelerate and expand to unlock margin expansion. Commercial creates focused demand. Innovation creates differentiated solutions. Operations and supply chain make both repeatable and profitable at scale.
Let me start with what we are doing to improve the operating platform and why it gives us confidence that Neogen can scale to the next phase of growth. Over the past year, our first responsibility was to restore control across quality, service, inventory, and the global operating network. The results matter. Complaints are down 65%, inventory is down 23%, and service levels have improved 45%. Those are not isolated improvements. They show greater visibility, clearer accountability, and more consistent execution across one global operations organization. That matters even more after what we heard from Tammi and Joe. If customers expect faster decisions, integrated solutions, and reliable testing at the point of processing, our operating system must deliver products consistently to support that promise. We have moved from stabilizing individual issues to managing capacity, demand, inventory, service, quality, and investment as an integrated global system.
That gives us the platform to accelerate without rebuilding the foundation beneath us. With that foundation in place, the question becomes how operations turns focus growth into financial leverage. We create leverage in three ways. First, we scale efficiently by building capacity ahead of demand and improving utilization so revenue can grow without cost increasing at the same rate. Second, we improve structural cost through automation, productivity, material efficiency, and network simplification. Third, we accelerate innovation by controlling critical manufacturing capabilities and moving products from pilot to commercial scale faster and with less risk. These are connected. Clear demand improves capacity decisions, better manufacturing control speeds commercialization, greater volume improves utilization and margin. Together, these capabilities expand gross margin, strengthen cash generation, and higher EBITDA margins.
As Mike mentioned, we are doing all three to support Tammi, Joe, and the commercial teams, allowing them to accelerate supporting what our customers are asking for. I will begin with scale because the sharper commercial priorities you just heard give us a much clearer view of where to deploy operating resources. The new commercial model is concentrating growth around strategic accounts, focused markets, and Petrifilm expansion. That focus gives operations clearer demand signals than a broad, undifferentiated pursuit of every opportunity. For strategic accounts, we position capacity and inventory around visible, committed enterprise growth, and broader solution adoption. For focused markets, we configure service, supply, and fulfillment around the segments and geographies where Neogen has the strongest right to win. For Petrifilm, we have built manufacturing readiness ahead of adoption and future launch demand. The economic equation is straightforward.
Concentrated demand plus targeted capacity and resources allows revenue growth to outpace cost growth. Petrifilm is the clearest example of how manufacturing control creates the capacity and economics to support that growth. So who in the room has seen the facility? I know I recognize a couple of faces from the last tour, so great. Several of you have had a chance to see it. That's fantastic. It's no longer a facility project. It's a controlled manufacturing platform for scale and innovation. The facility has its occupancy permit. Production equipment is 100% validated. Our critical regulatory certifications are on track, and we've made more than 75,000 plates and tested them through validation. Together, these milestones establish readiness across the facility, equipment, quality system, and product evidence. We have built state-of-the-art, highly automated capacity that is more than three times the current Petrifilm capacity.
That capacity supports the commercial strategy by giving us the headroom to expand adoption, serve integrated customer workflows, and support growth at the point of processing. Control also improves the visibility into quality, supply, cost, and capacity and gives innovation a platform for new applications and products. Readiness is established. The next task is to transition deliberately, protecting customers first while we move into let the economics build over time. As we said on yesterday's earning call, the transition will be multi-quarter because each SKU advances only when validation, supply readiness, customer continuity, and cost performance are ready. Four conditions govern the pace: customer continuity, safety stock, supplier management, and discipline sequencing. That approach matters because the same customers adopting broader integrated Neogen solutions depend on us to protect the Petrifilm supply while we move manufacturing. We will not trade customer service for speed.
We will protect the customer first, then scale the economics. The end state is full manufacturing capacity with greater quality, supply, and cost control on a platform built to scale that can support growing demand and innovation through commercialization. That controlled platform also expands the number of ways Neogen can move innovation from idea into commercial output. Innovation creates value only when it can be manufactured reliably, sourced at scale, and delivered consistently to customers. Our innovation sources now include internal R&D, strategic partners, strategic suppliers, and operations and supply chain. Engaging operations earlier addresses manufacturability, sourcing, quality, capacity, and cost before a product reaches the final stages of development. That directly supports what customers told us they want: faster, simpler, connected solutions that work reliably at the point of processing. The result is more innovation pathways, faster time to market, lower launch risk, and a broader growth opportunity.
Our role is not simply to manufacture what is developed, it is to help design solutions for scale from the beginning. Mid last fiscal year, we leaned into the foundational work necessary to drive innovation in Petrifilm by purchasing a Petrifilm pilot line to accelerate innovation in Oakdale, Minnesota. This is the most tangible example of that commercialization model in practice. The Petrifilm pilot line is a small-scale version of our commercial Petrifilm equipment, and it will be installed right where our innovation team sits. This dedicated Petrifilm pilot capability separates experimentation from production serving customers today. Teams can test new products, process changes, generate validation evidence, and solve scale-up issues quickly and at a small scale compared to doing the work on the larger manufacturing lines. Once proven, the product and process can transfer into controlled full-scale manufacturing with capacity and quality systems already in place.
That creates a repeatable sequence from prototype to validation, to transfer to commercialization. It also enables new products to be developed and commercialized without disrupting the manufacturing transition, scale-up, and commercialization of the new manufacturing facility. Petrifilm is the proof point. The broader capability is a commercialization engine that supports a larger pipeline of future growth opportunities. Scale and innovation create the growth opportunity. Now, operations must help deliver that growth through structurally more efficient cost models. Our structural cost agenda is organized around three operating drivers. Productivity uses automation and process improvement to raise throughput and lower unit cost. Planning integrates demand and supply decisions to improve asset utilization and working capital performance. Logistics efficiency simplifies fulfillment to lower cost to serve while improving reliability. These mechanisms also reinforce the commercial promise. Faster decisions that customer require, reliable product availability, disciplined inventory, and a responsive fulfillment network.
Together, higher productivity, better asset utilization, and lower cost to serve creates operations contribution to the 30% adjusted EBITDA margin. The next slide translates those mechanisms into the long-term gross margin pathway. The pathway from current margin base to the high 50% range is built through automation efficiencies, planning, and logistics. Again, automation improves throughput, labor, productivity, quality, and fixed cost absorption. Planning improves our asset utilization, inventory intensity, and the quality of demand and supply decisions. Logistics reduces network complexity, freight expense, and cost to serve customers. Petrifilm is a major contributor, but the broader point here is that we are building a portfolio of repeatable levers across the entire operating system. That diversification makes margin pathway more durable than just relying on one project. Let's look at these three margin expansion areas in more detail.
We are taking a portfolio approach targeting automation where capacity, labor productivity, consistency, and margin can improve together. In Clean-Trace, the new consumables line creates capacity to support more than 10% annual growth. In Soleris, the AI-enabled manufacturing pilot has established an 82% line operating efficiency, which is a significant improvement over the baseline. As Tammi's dairy slide showed, sample collection provides the foundation for Neogen's testing solutions, and the high-speed automated line is expected to create five times the throughput capacity. The operating logic is consistent across all three. More throughput, less manual work, better utilization, and stronger margins as volume grows. This is how operations prepares the portfolio to fulfill the commercial growth ambition without proportionate cost growth. Planning discipline creates another form of value by releasing cash while continuing to protect customer service.
Inventory is one of the clearest tests of whether an operating system is making coordinated decisions. There are four specific ways we drive improvement. Global sales and operations planning and network visibility help us see risks sooner. Dedicated ownership helps us decide earlier. Root cause cadence and replenishment controls help us act with discipline. Common metrics and governance help sustain the gain. This connects directly to the commercial story. A broader share of customer workflow creates value only if we can supply reliably across the integrated portfolio. When we do this, we lower inventory, releasing cash. We lower write-offs, reducing costs, and better planning protects service. Logistics applies the same discipline to the physical flow of products through the network. We've realized a 5% reduction in outbound freight costs versus prior year. At the same time, our order cycle time reduced significantly from 6.1 days to 1.2 days.
That combination matters because we are reducing cost while improving the customer experience. We are simplifying the network, optimizing transportation, and improving fulfillment flow to reduce fixed cost and complexity, lower freight expense, and improve reliability. Tammi and Joe emphasized speed, simplicity, and point-of-processing decisions. Our fulfillment network must support the same expectation with product availability and faster flow. When these capabilities work together, the operations value proposition becomes straightforward. Let me close by connecting operations back to the broader Neogen strategy. Commercial focus concentrates demand where we have the strongest right to win and deepens Neogen's role in customer workflows. High impact innovation expands the solutions, applications, and markets we can address. Operations converts both into scalable, reliable, and profitable output by scaling efficiently, accelerating commercialization, improving structural cost, and strengthening working capital discipline. The result is operating leverage. Growth scales faster than cost.
That supports the financial targets shown here. Adjusted gross margin in the high 50% range, adjusted EBITDA margin of approximately 30%, and stronger free cash flow. These are supported by multiple reinforcing capabilities, not just Petrifilm alone, automation alone, or a single cost program. We have established the engine. The next phase is to scale it with discipline. Operations creates the capacity, control, cost structure, and commercialization engine required to scale profitably. We are a force multiplier for all the great work that commercial and R&D teams are doing to grow our business. We are what differentiates Neogen from all the rest. Bryan will now show how these capabilities translate into revenue growth, margin expansion, cash generation, and shareholder value. Thank you. There you go, Bryan.
Thanks, Jim. Good morning. I'm Bryan Riggsbee, Chief Financial Officer of Neogen. Today, I'll walk through how we are creating shareholder value through disciplined financial stewardship. My goal is straightforward, to show that stabilization work was not the destination, it was the foundation. I'll connect what you've heard in the prior presentations to what it means for Neogen's improving financial performance, the levers behind that performance, and our view of the company's future performance potential. I'll start with where we've been and how that work has set the foundation for what comes next. This profile was one of the things that I found most attractive when I joined Neogen just under a year ago.
As I got to know Mike and learn more about the business, my assessment was that this was a business that had really good products that met real customer needs, and it was really just a matter of execution. The opportunity to be in a business like that and partner with Mike was one of the things that I just couldn't pass up. With that context, let me start with the stabilization work that creates the platform for acceleration. During the stabilization period, the work came down to four things. First, improving commercial execution by getting back to the basics, the blocking and tackling of how we go to market. Joe talked about this during his presentation, but instituting typical commercial processes and organizational structure, much of this simply did not exist. The initial impact has been meaningful, but it will only get more impactful over time as it matures.
Second, applying operational discipline to right-size spending and stabilize adjusted EBITDA margin. This really came down to assessing how we were allocating operating capital. This should not only result in a more efficient overall spend, but ensure that we're investing in important areas of the business, like research and development. Third, disciplined capital deployment with a focus on ROIC was part of our thinking that led to our portfolio optimization, which includes divestitures that accelerate de-levering and free up capital to reinvest in the business. Fourth, strengthening governance and controls to improve cash predictability and risk management. That last point is more important than it may sound. Predictability is what gives us the confidence to commit to targets publicly. This stabilization work is now largely behind us, and it opens the door to acceleration. As you've heard throughout the morning, four goals define the next chapter.
A long-term goal of high single-digit, low double-digit revenue growth, targets of high 50% gross margin, adjusted EBITDA margins approaching 30% and 80% free cash flow conversion by 2031. How do we get there? We are transforming our financial profile through operational improvement, which I think of as three engines running together. The first engine is commercial capability. Joe touched on this earlier, but we have built a new go-to-market strategy with sharper targeting and customer segmentation, and we are driving deeper, more strategic relationships with our customers, and that is the foundational engine behind our revenue target. The second engine is work Jeremy highlighted, reinvigorating our innovation pipeline. We are increasing R&D investment in fiscal year 2027, concentrating that investment in our most critical markets, and evaluating technology licensing deals that can strengthen our market-leading positions.
The third engine is operational efficiency and technology enablement, aggressively addressing areas of value leakage across the business. Combined with disciplined capital deployment, these three engines support the targets I just laid out. Let's double-click on the first engine, the path to more consistent top-line growth. The path to more consistent top-line growth begins with enhancing our commercial capability. Oh, did it go to the next slide? There we go. Thank you. Accelerating top-line growth is the key driver that creates more capacity for us to deliver on the plan. We start with successful business stabilization, the normalization of our core business. Moving into fiscal year 2027, we expect continued acceleration of core growth as commercial execution improves. We then layer on to that commercial execution, taking advantage of market trends, capturing our share of growth, expanding share where we have the right to win.
Next is reinvigorating the innovation pipeline through R&D, where we grow the pie by delivering solutions that solve real customer needs. Finally, we will explore opportunistic, accretive M&A and other non-organic growth areas. This has historically been an important element of Neogen's growth model, adding complementary products to the portfolio and helping us move towards a double-digit top-line growth rate. Stacking these together, you arrive at our long-term outlook. The important point is that no single component must be heroic. This is market growth plus incremental execution, plus innovation and the potential for selective M&A, each contributing a manageable slice. The bottom line is we believe we have a clear path to consistent high single digit, low double digit top-line growth. With the growth bridge established, the next question is how that growth converts into higher gross margin.
The path to high for 50% gross margin range, there are five opportunities that we see. First is the Petrifilm manufacturing transition and the incremental sales that come with it. As we complete the transition, we have an opportunity to expand margins through process improvements and greater utilization of the manufacturing infrastructure. We believe that we have the opportunity over time to expand Petrifilm margin by 200-300 basis points following the transition. Second is supplier management savings, a more rigorous centralized approach to how we buy, both in terms of pricing and quality. Third is global manufacturing and logistics consolidation, taking cost out of the footprint and network as we address deferred integration opportunities. Fourth is gross margin benefit from innovation. Newer products simply carry better economics and Petrifilm SKUs can generate meaningful incremental contribution margin.
Fifth, and probably the most obvious, is the benefit of leveraging infrastructure and scale that comes from spreading cost over a largely fixed base. What I would emphasize here is the mix. These are not five versions of the same cost-cutting story. Two are manufacturing and footprint, one is sourcing, one is product mix through innovation, one is operating leverage. The diversification is what gives us confidence in the path because we are not dependent on any single initiative landing perfectly. Now let me highlight some of the near-term drivers in our fiscal 2027 plan. While there are longer structural opportunities embedded in the gross margin path, there are a few that will have more of an impact on fiscal 2027 and that teams are focused on today. First, targeted improvements to inventory write-offs. We are targeting best-in-class levels for inventory write-offs.
This represents a $15 million long-term targeted reduction compared to our fiscal year 2026 results, enabled by our S&OP process and new software tools. That is not aspiration. It is a process toolset that we are putting in place. We have already started to see the results in the first quarter. Second, benefits from material cost discipline. We have invested in greater capability and talent in our sourcing organization. Think of this as moving from a historical purchasing organization to more of a strategic sourcing construct. Third, automation investments that drive margin improvement. Specifically, we expect to achieve a 15%-20% gross margin in our sample collection category through these investments. This new automation will roll out in the back half of fiscal year 2027 in our Lexington facility, and it is a key component of that automation.
These are the foundational elements that will set us on the path to our long-term gross margin target. How does that gross margin support improved EBITDA? The thing I want to highlight here in all transparency is it is not a straight line from where we are today to the 30% target. Obviously, the gross margin improvement is a tailwind for our EBITDA goals. But we are also absorbing over the time period a 300 basis point impact from incremental R&D to drive innovation. We are choosing to spend that. It is an investment in the growth algorithm that I described earlier, and we would rather fund the pipeline than optimize a single year. We are also leaning into new ways of working. For example, AI-enabled technology tools are expected to enhance productivity to partially offset inflationary cost growth over the period.
We are focused on managing operating expense so that over time, we can grow without adding net headcount at the same pace. That requires the business to deliver productivity benefits that help offset natural inflation in the cost base. This discipline not only improves cost management, it also creates a scalable organization that can handle higher volumes and absorb non-organic growth. These are only a few examples of how we plan to manage our operating expenses in support of our overall adjusted EBITDA margin target. Margins are one side of the equation. The next slide turns to how those earnings convert into cash. Our long-term goal is free cash flow at approximately 80% of adjusted net income, and three levers play a significant role in getting us there. First, significant improvements to net working capital, moving to industry best-in-class levels.
You've heard about the improvements we've made in operations, the S&OP process, and our overall operating discipline. These efforts have already produced a benefit in fiscal year 2026, and we believe there is more opportunity, especially in inventory and how much we hold on the balance sheet. Better processes and accounts payable and accounts receivable will also have an impact, but inventory is the real story here. Second, declining CapEx investments. We carried an elevated spend through larger projects, most importantly, the Petrifilm manufacturing transition, which accounted for in excess of $200 million over the last few years. However, there are some smaller deferred maintenance investments that we need to make, and we'll do so. However, fiscal year 2027 CapEx will take a step down from fiscal year 2026, and we expect to achieve long-term CapEx of 3%-4% of revenue.
That reduced CapEx flows directly to the free cash flow line. Third, lower interest expense. Debt repayment combined with lower interest rates through refinancing could meaningfully reduce our interest burden. Once we complete the genomics transaction, we intend to use the net proceeds to reduce our debt, and in addition, our improving operating cash flow will allow us to de-lever further. As a reminder, our bonds become callable in July of next year, and our plan is to refinance, which we believe will be at a lower interest cost given the improving leverage profile of the business. Working capital, declining CapEx investments, and lower interest expense, together, these levers support our path to 80% conversion. With stronger cash generation, the next question is how we deploy that cash to maximize value. Our capital deployment strategy is a classic priority stack. First, enterprise capabilities and technology solutions.
These carry exceptionally high ROIC with an accelerated payback. Some of these investments you're seeing us make now, and we've talked about as part of our $25 million transformation investment that we highlighted in our fiscal year 2027 commentary. Second, R&D. We're targeting approximately 5% of revenue by fiscal year 2031. Internally developed technologies generally carry higher returns on invested capital. Third, acquisitions. With a focus on accretion and returns exceeding our cost of capital, we are disciplined here. Bolt-on and accretive, not transformative is how we are currently thinking about this lever. Fourth, debt paydown to achieve our net leverage target of below 2.5 x. And fifth, returning excess capital to shareholders, most likely through share repurchase. The takeaway is that we are focused on disciplined capital allocation prioritization. Let me close by tying these commitments back to the value creation story.
Neogen is building a framework to support continuous, robust top-line growth, targeting high single-digit, low double-digit long-term revenue growth. We have a path to industry-leading gross and adjusted EBITDA margins by 2031. High 50% gross margin, 30% adjusted EBITDA margin. Transitioning our balance sheet to a position of strength through significantly improved cash generation and a better debt structure, targeting long-term net leverage below 2.5 x. Our capital deployment strategy is focused on internal technology and innovation investments, coupled with integrating bolt-on accretive acquisitions. The opportunity is to drive significant shareholder value as we execute on the plan. We know the levers, we have built the governance to hold ourselves accountable, and we are focused on converting operational improvement into sustained financial performance. Thank you, and now I'll turn things back over to Mike for some closing comments.
Thanks, Bryan.
Okay. We started this morning with one objective, to give you a clear picture of where we're headed, the opportunities we see, how we plan on achieving them, and also give you a flavor of the caliber of our management team that's going to be accountable for delivering those results. As you leave here today, there's a few things I want you to take away. One, the business has stabilized, and we're gaining momentum. Two, the needs of the food safety market continue to increase, making the solutions that Neogen provides more necessary. And three, Neogen's got the breadth, the portfolio, the capability, and the technical prowess to be able to deliver and support our customers in these challenging times. Lastly, we've got a clear strategy, and we have the team that knows how to execute it.
Our confidence comes from what we've been able to deliver so far, the plans that you saw today, and we realize that the work ahead of us, but we're confident in our ability and the team that we put in place and our colleagues. Before we transition to Q&A, I do want to just take a moment and thank our colleagues who are on watching us today around the world, who come to work every single day, who have adopted this new way of working, who've really been working hard and has allowed us to come to you today and share the results that you've seen. I want to thank them for all their efforts. We're excited about the progress we've made, but we're very excited about where we can go and what we can do with this company and really change how food safety is done.
Thank you, and we're now going to transition to our Q&A. I'd like to ask the team to come up on stage. This anymore. I knew it was weird. Go.
Can you guys hear me? Okay.
Yeah.
Everyone. Brandon Vazquez from William Blair. Thanks for taking the questions, and thanks for putting this day together. This is incredibly helpful and a lot of information, so it is really helpful. A lot to go into, but I want to actually start first at a high level on Petrifilm because it is so critical to a lot of what is going to come in the coming years. I go back almost five years now when the deal was first announced to acquire that 3M food safety business, there was a lot of talk about Petrifilm going into new markets. There are opportunities that it is under-penetrated in. It always seemed like over the years it was rather nuanced in where these products can go and unclear on how we get there.
I guess the question that I would pose to you guys, what kind of work have you guys done internally that has made you feel confident in these incremental opportunities with Petrifilm? Because we have heard many of these Petrifilm opportunities before. Then talk a little bit about what are some of the most tangible opportunities we can see in the next couple of years as you ramp up your product line?
Yeah. I will start. Thanks, Brandon. I would say a couple of things. Jeremy shared as the category leader in food safety, we tend to be the first place that customers come to, either for challenges they are facing and/or new technologies. That has historically been true, so it is true what you said, previous customers have done that. I think what the challenge has been is that Neogen, given that prior to the transition, a third party was managing the commercialization, there was not the innovation engine established. It is very difficult when you have got a constrained commercialization engine to introduce time to do innovation because that shuts down your commercialized product. We saw that opportunity, and we discussed this early on, and I believe it was second quarter that we made a decision to lean in and actually build the innovation capability, what we are putting in Oakdale.
What that allows us to do is the innovation team can run 24/7 samples, products that our customers are asking for. Then given the Lansing site, which has got 3X capability, we do a tech transfer just like we are doing now, and we have had plenty of experience doing that by the end of the transition, and then we are ready to scale. I think the need has always been there. The challenge has been how do we get to it given the constraints? But now this is the first time that Neogen will have the control of the entire innovation and commercialization and scalability, and that is what gives us confidence. Maybe, Jeremy, you can speak a little bit about what you are hearing from customers and what we can do more with this product.
Yeah. Thanks, Mike, and I probably have a little bit more perspective than most because I supported this product line way back when I started my career at 3M. I can tell you that some of the investment opportunities there, especially those that went beyond food safety, just didn't get a lot of air time. I think now we have got the capability, the team, the willingness to be able to fund and support those opportunities as they make sense. Quite frankly, I represent a technical team where a lot of ideas and thoughts have been left on the shelf over time. Things we have tried, opportunities to provide additional differentiation just, again, didn't have support in the past, and I think that is changing now.
Whether it is cosmetics, whether it is expanded food and beverage, whether it is oil and gas, each of those over time, we have been approached by customers in each of those segments over the past few years expressing interest and desire for Petrifilm that meets their particular needs. Again, some of the tools weren't in place previously to allow us to do the initial, let us say, pilot work to quickly iterate and be able to create those solutions, nor, quite frankly, the manufacturing line time to then be able to test and run those. As we bring those in-house, I think it just opens up the number of leader. Again, as long as Petrifilm has been around, 40+ years, it is surprising how much of the market particularly uses traditional media and how much opportunity there is to continue to convert that.
Yeah. Good. On the financial side, Bryan, you alluded to this, so I will follow up on it.
Sure.
and take the lead on it. As you guys think about your adjusted EBITDA target over time, it's not maybe a linear line, right? Talk to us a little bit about, over the coming years, what are the big incremental unlocks we should expect? Is this more of a step function over the coming years? Maybe the new facility comes on and ramps. And the other, maybe a follow-up I'll throw in with that is, as I've talked to a lot of investors about the story, one of the questions that I often get, is there an opportunity to remove OpEx, not just grow OpEx slower than the top line, but is this a business that didn't invest in the back end as much as it should in the past, and that would lend itself to literally a reduction in OpEx?
So just maybe talk about those two as well. Thank you.
Sure. In terms of the profile for the growth over the period, as I highlighted, there are going to be some things that we're going to invest in R&D specifically, and we're making those investments this year. It's part of the reason why we guided adjusted EBITDA roughly flat in the current year. I would expect that things like the Petrifilm transition would be helpful relative to the improvement, and we've talked about the timing of that in terms of getting through the transition and then sort of a year of operational improvement. The thing that also is very helpful is the growth profile in terms of accelerating top-line growth over the period and how impactful that is from a leverage standpoint. So I think that'll be meaningful. And you sort of started to see the ramp in that here over the course of the last 12 months or so.
Not a straight line, and I was really just trying to highlight some of the drivers there. With respect to OpEx overall in terms of how we think about how that will look over time, obviously, we're not guiding to specific line items, and it's contemplated in our overall 30% sort of target over the period. But we are focused on opportunities that we'll have to utilize new technology, in some ways not necessarily to reduce costs, but to allocate operating capital into areas that we think are more helpful relative to driving the overall top line.
Sometimes it gets a little bit difficult to think about it as driving down so much as opposed to, "Hey, we would rather spend this more efficiently in a different part of the business in order to help support the top line." We've been doing that this year, and you've seen that in some of our sales and marketing where we've pulled back and reduced in certain areas, and have redeployed to support our go-to-market strategy because that has a better impact on the top line.
Thank you very much. David Westenberg from Piper Sandler. First I'm going to start with Neogen Analytics. It's not something that's been traditionally talked about. It probably comes up in the earnings call very rarely, or maybe not as often as it should. What I want to know is, can this be a revenue contributor, or is this just purely a means of cross-selling or generating more tests per account? Can you talk about what the penetration rate is in Neogen Analytics and what you could see that be over time? Then I have a related follow-up to that same exact question.
Yeah. I'll start and ask Jeremy to give some thoughts there. I think the opportunity has always been there, and as we had a chance to speak to customers around the world more and more, we learned that it's less about testing at the specific point of processing, but it's more about them feeling that they have control, that they can monitor the entire chain of their manufacturing line. You can only do that successfully through a digital solution. Neogen Analytics, I think, is a big untapped opportunity that sat or sits within the Neogen portfolio that now we really feel there's an opportunity to expand that even further with partnership with some of our key customers. Maybe Jeremy can speak to kind of what we're doing there and maybe a little bit more, Tammi, on the bigger opportunity with data.
Yeah. Again, it's been a probably underutilized asset that we've had historically, and there's sort of multiple levels of value. Of course, Tammi already talked about the consumable lift that happens, and part of that being, hey, I meant to be testing this much, and now I find out that my policy wasn't being implemented the way that I thought it was. So that's sort of the initial lift. The second sort of piece there that I think again remains particularly is untapped is this idea of I can help you make better decisions in almost this top layer of I can be more predictive. I can help you intercept something before it happens. That's where the data sets that we bring together. Neogen Analytics becomes a source of that data.
It also becomes a capability that builds over time to allow them to be more predictive, to focus their sampling pan, to focus the work that they do to intercept risk. Is there value in that? Yes, I think there's value in that. To reduce a company, a plant's overall risk profile. I think we're still early in valuing what that opportunity could look like, but you saw the impact of some of these, this outside asymmetric impact of some of these events that are happening. To be able to reduce that for those companies, I think does have tremendous value.
Tammi.
As expected, currently, we're really seeing the influence of Neogen Analytics in these really large strategic customers. The true untapped potential grows as we can push this farther down into those small to medium-sized customers as well. We are looking at different models. Yes, there's a lot of great pull-through in the consumables, pull-through in our other parts of the portfolio, but we are looking at different revenue models based on some of these growing capabilities that we're starting to build into the Neogen Analytics ecosystem.
Got it. All right. I wanted to talk about the larger customers and the complete portfolio selling. Why was this not maybe necessarily a bigger focus in the past? Or maybe the better question is, why have you not been able to fully capitalize on selling the complete portfolio? Second, and related to that, do you feel confident that you have the complete portfolio and that customers won't need to buy some of the onesie-twosies from the competitors? You have touched on tuck-in M&A as one of the strategies. So if, for example, if you did have some of these holes where there's onesie-twosies that they still have to buy from a competitor, is there a way to plug those holes with portfolio bought or built?
Yep. Long question. I'm going to do my best not to miss anything that you asked, but I'll start from the last one, and then I'll ask Joe to fill in a little bit on strategic accounts. Look, our innovation approach is using our technical capability organically, where we believe we've got the know-how. Looking for partners that have technologies that we want to bring into food safety that doesn't exist today because it complements our portfolio. The third one is looking for those opportunities where there is a solution out there that's accretive, that we believe, combined with our total solution, brings more value to customers. So I've always got to look at it from that lens. I think your second question was around. Sorry, what was the second part of your question?
It was all about having a complete portfolio-
Yeah.
and selling all the products.
Yeah, do we think we have a complete portfolio? I think that was a part. Yeah, I believe we do. I think when you look at the full chain of what our customers are trying to do, we have got the full portfolio, and I think there's an opportunity to expand it even more, especially when you think about the data in Neogen Analytics. Historically, Neogen was more comfortable selling product versus product, versus looking at the holistic solution. I think the reason for that is we were very much focused on the local manufacturers versus talking to the large strategic accounts. Now I'll transition to your first part of your question, which is, why now strategic accounts and why not before?
I can't answer why past decisions were made, but what I can tell you is the team that you see in front of you are used to working with big global customers, and we understand the opportunity we have. As we've gone on our roadshow, we've all done it. We're seeing consistency across these global strategic accounts of the need they have at multiple sites. How do I drive consistency, and how do I bring the solutions that are consistent? Because I need, as a brand, to be able to feel confident that my brand is protected, and I'm not recalling something somewhere else that's going to impact me across the globe. When we started to look at how do we build the infrastructure to support it, we weren't set up the way that we needed to set up.
Part of the go-to market that we've talked about is how do we realign the existing resources from low value to high value, where we believe strategic accounts is one of them. That is really the change in approach that we've put in place in the past six months or so. Maybe, Joe, you can give us a bit more about how we're thinking about it.
Yeah, I think you answered the question for the most part. The only thing I would add is one of the trends that we've seen over the past few years is just more integrated decision-making at top levels within some of these global organizations. With that integration taking place, it only makes sense for us to align our resources to the right stakeholders within these accounts to be able to make decisions top-down. When we think about the list of these global strategic customers, one of the segmentation elements that we pay attention to is their ability to drive top-down decisions, and how integrated is their decision-making. So that we go from this bottoms-up approach, where we win a deal in one country and then have to figure out how to scale it to another country.
We're actually addressing the stakeholders who can make the decisions for both of those locations at one time.
Yeah, I think experience matters in this, just to complete that. I'll give you an example. We're talking about Neogen Analytics. It's a great product. It's a great part of Neogen's portfolio.
Yeah.
But it's very difficult to scale a solution like that at the local level. You need experience. The people who know how to work at the strategic level and working with these customers to develop that product in a way that's going to work within their systems, and then they drive the scalability of it to include the halo of our consumable. So there's a huge opportunity in that. But that only comes from experience, and I think a lot of people you see up here have done that in the healthcare industry, and we're kind of carrying that over here, and putting that into practice because we see a big opportunity. And customers, frankly, are asking for it. Subbu?
Thank you. Subbu Nambi from Guggenheim. A follow-up to Dave's question. If we think about transitioning to more of this solution-based product rather than specific product lines, can you quantify what your wallet share is today and what you're targeting by 2031, at least across the major food accounts?
Well, I'm not going to sit here today and give targets on each of those. What I would say is that it's certainly contemplated in our growth trajectory and what we shared with you today. A lot of this opportunity that we see is actual real feedback from our customers and the challenges that we see them having. Tammi shared how frustrated they are with having to work with multiple vendors, for not having consistency, for having the trust in somebody that understands how these products work, and trust in the entire system.
And just from experience in having these conversations, they're asking for it, and we are now finally changing how we sell, how do we go to market, and how do we come to them with not a product-by-product discussion, but more about what is it you're trying to achieve with your quality management system within your four walls, and how can Neogen bring not only the products, but expertise and a full solution to help you address the need. And lots of times, customers are not even 100% sure exactly what they're looking for, and they're looking to us as the market leader to help them quantify that with the solutions that we bring to them.
One of the biggest dislocations from an end market perspective has been the projections of growth, but also the comments around not having a ton of market data to help predict trends. So given the headwinds both in this market and your projection has changed, why are these the right numbers? What can investors be comfortable with year in and year out?
Sorry, I want to make sure I understand your question. Is your question?
Market growth of 4%-5%.
Yes.
That you projected.
Okay.
Why are those the right numbers?
Yeah.
We know GLP-1s, and I am not saying people are consuming less food, but there is no clarity on what the
Yeah
base growth of the market is, so how did you arrive at that?
Yeah. No, good question, and thank you for asking it. I think it is the nature of our industry. We are the only public company. There are a lot of players who are part of industry conglomerates, other niche players who do not report. So it is a little bit challenging to get exact data, but we do have plenty of data. So when we think about our two businesses, we do see high demand for food safety and 6%, 7%, maybe 8% with the right portfolio. Animal safety is less growth, so as we think about Neogen's growth profile in the market, it is really a blended rate of those two, so 4%-5%. And the way we think about the progression of growth is that we believe that with our existing portfolio and the solutions and the line extension, we can meet and exceed current market growth within food safety.
Innovation is going to get us above that, and then we start to think about those bolt-on M&A gets us to what Bryan said, more of the low double-digit type growth.
Super helpful, Mike. And Joe, one question for you. While I know 3M was not investing in innovation, there were other competitors who were investing, and they probably are penetrating. So there is an adoption of at least some of the competitors that we know. So why would now, with the recent innovation, would it place you in a position of strength when the competitors have been marching all along?
Yeah. So I would point to a couple of things. One is we still have sort of the deepest technical knowledge with respect to Petrifilm, and as sort of simple and elegant as the product looks, I can tell you the complexity of being able to scale that and to do so with the highest possible quality is a challenge that Jim and I have been working through firsthand. And we will have sort of from a performance standpoint, we believe the best quality product. Then you think about the, and I sort of alluded to this earlier, that same team has left a lot of things on the shelf, so to speak, over time. We said, "Man, if we could try this, we could do this, we could do this flavor right." So we're now sort of opening up that capacity to be able to drive that.
Then the third piece, again, is sort of scale. I'm not aware of competitors that have sort of the same scale and the ability to ultimately not only iterate the product but then to validate. So briefly, I think Tammi talked about the validation scheme, 100+ validations across our portfolio. We still have the largest set of validations, and that's partly because of the markets and the food types and the categories that we test. So not just Petrifilm, not just innovation, but also what it takes to actually place it in the market. We think we have sort of that collective-
Yeah.
capacity that no one else does.
Super.
In addition, I think it's also where you choose to innovate, and some of our larger competitors are choosing to innovate in the commercial lab space rather than in point of production, point of processing. I think as we're pushing that point of production, point of processing, testing methodology, that's where you're going to see us differentiate ourselves. Again, that's where it derives a lot of customer value because their desire is to bring testing closer to where they need to make the decision, and that's where we're investing a lot of our innovation.
Super helpful. Excited for you guys.
Yeah. The other thing I would add, since we're adding on this, if competitors want to compete with us on scalability and innovation, they're going to have to spend plus $200 million building a site like we are in Lansing. We're going to have a state-of-the-art manufacturing site. Jim shared what that looks like. That's a huge competitive moat. Then you layer on the automated pilot line that will drive innovation. The entire ecosystem is much more accelerated, higher quality, and all within the same team and ecosystem. So that's why we get really excited about that opportunity versus before.
Hi, Bob Labick, CJS Securities. Congratulations on a great day today and really on the last 14 months and the transformation, which has been tremendous. I want to say that Jim's put up all the numbers so far. It's kind of up to Jeremy and Tammi to take it from here, but congratulations on all the
Thank you.
hard work and the operational turnaround. It's been great. Mike, it's been about 14 months or so. What are the biggest surprises for you since getting here? And then really, what are the kind of known blind spots you're still working on and the milestones ahead to get Neogen's poor performance where you want it to be or where you expect it to be?
Yeah. Thank you for your comments and your questions. I would say that the biggest surprises are more on the positive side. I've had a chance now to visit multiple customers around the world, big and small. And I have been very surprised at how much they want us to succeed because they know we can help them succeed. And so yes, they're frustrated with us because of our previous supply issues and the challenges, but they're asking us to do better so that we can help them because they're really finding complexity and challenges. I think that was very surprising to me. In my previous industry in healthcare, there's a lot of options. So once you sort of are not doing great, they kind of move on, and it's very difficult to go back into that. It's very different here.
They want to come to Neogen for food safety because they trust our 40 + years of expertise. That is one surprise. The other surprise, and I really just have to say I have never experienced this before is one of the biggest reasons we have been able to show positive turnaround growth in a very short period of time, which I have never experienced at this rate, is really because of the people we have at Neogen and their ability to adopt new ways of working, their excitement, they want to be successful, they want to succeed, they care about this business. They just needed clarity of strategy and sort of how do I do this at a global scale, given that we are a global company that is highly complex.
That is the reason why one of the first things I did was build an industry leading management team who has worked for large companies, who understands complexity, they know how to simplify it. We all speak the same language from an operational perspective, and that has been a surprise to me is how quickly Neogen has adopted that, and that is really been driven. So to me, that gives me a lot of hope that we are just getting started. Now we are just scaling it. The other one is really, I think you are asking for the watch outs or-
Yeah, blind spots that-
Blind spots, yeah.
you are still working through.
Yeah, I think the biggest blind spot, I do not know if it is a big blind spot, but something we have to be aware of is we have to stay humble. There is still work to do. This is a great business, and we are very excited about the results, but we are working our way through the P&L. I said if this transformation works, the first place you should see it is in the top line. It is showing that, and we feel good about where we are, and Joe is going to take that to the next level. The next is gross margin, then we have to think about EBITDA margin.
We are kind of working through the P&L and our transformation, and this is where if we consistently do that, and we just make sure that we do the best we can to run this business properly, but more importantly, innovate and solve customer challenges at the same time, that there is going to be a point when we get around fiscal year 2028, 2029, where we are running a much leaner, efficient organization that is now kicking off two, three, five plus innovations for the years to come. Then that really gets the whole engine going. We just have to be mindful of the task in front of us, and the discipline we need to bring to work every day.
Great. Then just for my other question I wanted to ask, digging further on Petrifilm really, the opportunity ahead of you, I think you said 3x the capacity at the new facility, which is beautiful. You put up a slide that said target areas for non-food were pharma, cosmetics, personal care, and oil and gas even, which was, I guess, a surprise to me. You have the pilot program, but what is the path to get beyond food and what are the opportunities by SKUs? Because I think you have 17 SKUs now in food, and I think the top five are more than half your sales.
Yeah.
Right? What's the opportunity size in these other markets as you go into new markets and new areas?
Yeah, I'll start by saying, and I'll ask Tammi and Jeremy to share their thoughts on this as well, because they're running this now. I would say first and foremost, we see huge opportunity just within food safety and expanding our portfolio. That's going to be our number one priority as we look into the next 12 -1 8 months. At the same time, we are engaging with these customers to understand what are their specific needs and how can we take our expertise in Petrifilm and translate that into something that would be valuable for them and solve their challenges. Maybe, I don't know who wants to start, Tammi and Jeremy.
Sure. I think one of the things you're seeing is that there's still a pretty, I think Jeremy showed on his slide, there's still a pretty large traditional culture market that exists today, even within food safety. We're in the process of going out and actively transitioning that market to dry film. At the same time, those other markets that were listed on there, we're in the process of evaluating truly the size of those opportunities, what the right product fit needs to be for those opportunities, and then who would potentially be some of the right partners if it's not something that we're going to commercialize ourselves to go and address those. But we're pretty early on in the outside the food.
We do play today in the cosmetic industry, so we are currently selling to a variety of different cosmetic manufacturers, and so that's probably where we're a bit more advanced than some of the others. But we think there's a tremendous. These are all markets that do use some level of traditional culture media today.
Yeah.
They are ripe for opportunity to convert. We just need to understand what the right product fit and go to market strategy needs to be to address those.
Anything to add, Jeremy?
Yeah. I continue to see there is multiple dimensions of growth for Petrifilm. In some cases, as I talked about, faster time to result is the thing that will convert traditional media users today to say, "Okay, now if I am sub 24 hours," or whatever the answer is, "That has real value and I am going to convert." Another one is, can we take some of our existing plates and use them in other markets? Potentially, yes. Then there is other cases where we say we have got to make new products, new markets, new flavors of Petrifilm in order to be able to serve an oil and gas customer. All of those are fair, all of those are possible. As Mike shared, we will start with food and beverage. We will start to continue to validate and expand the effect of our current products.
Pretty quickly, and even as we speak today, we have got new Petrifilm programs going to be able to expand that portfolio both within the food and beverage market, but then in some of those adjacencies. Some of that will happen through partnerships, some of that will be things that we deliver directly.
Great. Thank you very much.
Thank you. Any other questions? Do you mind if I ask if there's any online questions? Because we have several hundred, I think. Any online questions? For those online listening, we encourage you to ask questions. Bill will let us know, and we'll be able to answer them. Subbu, you had another question. Oh, sorry. Mr. Gates.
Hey, sir.
Yep.
Jeff Gates from Gates Capital Management. My question's on the Petrifilm transition. Just remind me how many SKUs it is, and do you do it one by one, and do you end up with duplicate costs during that transition? So just how does that exactly work?
Yeah, I'll start and then I'll ask Jim, and Bryan can cover the duplicative cost. So yeah, there are 17 SKUs that we are transitioning, and we are not doing them one by one. We are concurrently running them through sort of the three phases of product validation, operations, and then validation at the end. Equipment validation, operation, and then validation. We're doing that concurrently as we go through. We did rank them through the ones that were most difficult to the least difficult because we wanted to make sure that we have the highest standard in how we execute. And one of the major de-risking, I think, milestones is that we communicated yesterday that we have our first, one of the technically difficult SKUs fully validated, which give us confidence that everything that we have put in place is working.
And we have many more going through sort of that process. Maybe Jim, you can speak a little bit more on the complexity of that and how we're managing it.
Thanks for the question. I thought I was going to get by on one of these without answering.
No, I was going to find a question for you.
One of the interesting things about where we are right now in the phase of transitioning is we have, in some cases, experimental work going on with some of our later products that we haven't run. Now, we've made every single item in Lansing at least once. We've proven that capability. Mike mentioned the one that's completely validated, and we have multiple SKUs happening across several weeks at different phases of that transition process. As we work through them, they get tested in the labs out in Oakdale to look for repeatability, to look for them being the same as the 3M product. As we manage through that piece of it, that gives us additional confidence then that we're ready for full-scale manufacturing and then begin to take on the business.
That's the part where I talked about in my presentation here, we want to manage that very carefully. It may be SKU by SKU in a particular month as we're transitioning, depending on customer uptake, how much safety stock we have, et cetera. But we want to protect the supply chain as we scale up through the transition into Neogen being the full manufacturer, which is why it's multi-quarter, which is why we're going to group them or even individualize them, just depending on which SKU it is, what the demand is, how much revenue it generates, and how much inventory we've built. We minimize, I'll turn it over to Bryan here in a second. Our goal is to minimize the duplicate cost and carrying cost, and we have that because we're running our operations, and we're also buying from 3M.
But we're going to manage that down through the course of the next year or so in the most efficient way possible without, in any way, shape, or form, affecting the customer experience. That's the most important thing for us. We'll protect the customer at an opportunity where we can minimize the amount of additional money we're spending for the duplicate facilities. Bryan can talk a little bit more about how we're accounting for that and planning for it. Did that answer at least the tactical part of your question?
Yeah. What's the soonest you could be completely out of getting product from 3M?
The soonest completely out, we have an agreement with 3M through August of 2027. That's really where we're at. We don't plan on using all of that time, but we have that as our stability buffer for backup supply to make sure we protect the customer. We will start to see transitions to Neogen-made product in the early part of the calendar year, next calendar year.
Does the unit cost of what you're buying from 3M change at all during that period? Because they'll have under-absorption on those lines, correct?
Yeah, I'll-
No change in the cost. We do have duplicate costs, and we've highlighted those in our. We have contractual relationship with them on the supply and no change in the cost profile for that. But we'll have duplicate manufacturing cost through the course of the year. We highlight that in our non-GAAP reconciliation in terms of what the level of those costs would be. We would expect those to trend downward as we work through the transition. The thing now highlighted is, we contemplated that and said on our Q4 call that we expect to have meaningfully better free cash flow on a GAAP basis in fiscal year 2027. That would speak, I think, to sort of how we would think about that in terms of the order of magnitude, year period over period.
Just one last question. You talk about 10,000 SKUs in your 10-K. Is that too many?
Yeah. I would say that just given our strong market position in 10 platforms, six in a leadership position, of course that's going to account to a number of SKUs. That said, it's good business hygiene and process to constantly be looking at SKU rationalization, which we actually significantly did that with sample collection just recently, and that's part of normal practice as Tammi and her team start to look at each portfolio. As we introduce innovation, the idea is always that you're introducing innovation, if it's not a transformational innovation, it's replacing something that's already there. So we're building that mechanism to make sure we've got exactly the right number of SKUs, but also as we introduce innovation, we're not just adding to more complexity, we're making it less complex. Mm-hmm. Sorry.
Hi, Konstantin Tcherepachenets from Mutual of America. Appreciate you guys hosting the Investor Day. Can you talk about Petrifilm and how to think in your plans for fiscal 2031 in terms of its growth rate? Then for fiscal 2031, what would success look like to you in terms of you guys able to move the market more towards Petrifilm from Culture Media?
Yeah. I will shy away from giving you a growth forecast by product in fiscal year 2031. I'm not very good at that. I can tell you that the product for indicators in Petrifilm continues to be very healthy. I think we closed the most recent quarter in the low double digits on Petrifilm. We're the market leader. I think we've had consistent growth on Petrifilm. There's a huge need for Petrifilm. As we transition from lab to point of processing, Petrifilm is the ideal solution and innovation. All of those things are going to drive more demand and why we're leaning in on innovation, and we've got a site that's able to scale at a very efficient way of doing that.
I think that we expect that obviously to be, given the size of it in our portfolio and the focus that you heard today, that will be a major growth driver, not only in top line, but also profitability. As we get beyond the current demand level and we start to bring innovation on Petrifilm that really solves the needs of food safety, but also other segments, we expect the margin to be much higher, which is going to help contribute to the 30% EBITDA margin that we're talking about.
Can you also talk about free cash flow conversion? I think you said 80%. What's the leaky bucket? Why is it not close to 100%?
Yeah, I think 80% is a really solid free cash flow conversion goal, first of all. The things that we'll see through the period, I think one of the biggest things is, and we called out and spoke to it earlier, is just the Petrifilm duplicate costs. We had some incremental costs related to sample collection last year that were leaky, so we should see lower non-GAAP adjustments that have a free cash flow impact. In addition, some of the cash usage we've seen historically in the balance sheet. We talked about some of the levers that we'll have there. We think those will play a positive role as well in terms of getting to higher cash conversion level.
Hey, guys. Brandon Vazquez again. Thanks for taking the follow-up. Bryan, I want to just ask one follow-up on the financial targets you guys are putting out there. Maybe it'd be good to address this now. When you're saying a high single digit to low double digit growth rate on the top line, is that a goal by fiscal 2031? Is that a CAGR through fiscal 2031? Just so that we can make sure we're shoring up our models appropriately. The other part of this is maybe spend a minute talking to us about the build to get there. I know you guys put up a 4%-5% end market growth number. Are we there right now? That's part of why I'm asking the question. I think the end markets have been a little depressed over the past couple of years.
So as you think of the long term, how do you get to that build? Thanks.
Yeah, I guess first of all, in terms of the build, we were intentional in terms of not providing data points between where we are today and there. I think the way that we think about it is that what we're trying to convey is that we believe this is the profile that is possible for Neogen in terms of high single digit, low double digit growth, and the type of margin profile that we talked about. I think of it as more the framework that we're building in terms of how we create an organization that can grow at that type of level with that type of profitability and free cash flow generation. Not going to provide sort of specific targets along the way.
Just if I could speak to the end market, because I think it's a good point for me to share a learning that I've had in this industry is that the end market food volume production and the food testing volume are not 100% correlated. Actually, very little correlation. The reason for that is when you think about a manufacturing site that's making, I'm just going to pick ground beef as an example. When they have to look at it, their sampling plan is a predictive model of how many samples do I take in order to predict the risk level I'm comfortable with, that there's no pathogens in that whatever volume of beef. The reason for that is pathogens are not homogeneous across sort of the sample size.
This is where even though when food volumes come down, customers still have to test, and in fact, they're testing more because as they move away from processed foods and other things, or more natural foods, they're having to test more just because they don't want the recalls, and recalls are very expensive. So the correlation is not the same. There's very little correlation with food production volume and food testing volume. So it's a very resilient industry for us to be in. Subbu? Oh, sorry, there's a question over here.
Appreciate all the detail on the food safety side. Just understanding you're going through a divestiture, but just what the rest, sort of the 15%-20% that's animal safety, that'll be pro forma, the relative growth rate there, and how additive anything you're doing for margin on the animal safety side is to getting to 30%, or is it just all mixed to food safety?
Yeah. As I've shared before, to return Neogen to financial health, we need both businesses to be able to contribute to that. I think the divestitures were the right move to help us to reduce our debt leverage. That's one thing, and the remaining business are actually in attractive markets where there's high customer demand for that. It is a little bit lumpy, but there is high customer demand for the products that we provide. Our focus is on making that the most efficient. The same process we have taken on food safety, which we focused on first. We are now doing exactly the same thing with the animal safety business to continue to drive the discipline that Joe talked about. Greg Hastings is here somewhere, is in the back. He's our GM, equivalent to Tammi on Animal Safety. We're looking at that business.
How do we make it more profitable? How do we expand it outside the United States? Because there's a huge opportunity for growth. If there's incremental investment around innovation that makes it more competitive, we certainly want to think about doing that, as long as we're not taking away from sort of our main focus of our portfolio, which is food safety. Animal safety will continue to be a very important part of our growth and return to financial health.
Thank you. Thank you for taking the follow-up. Tammi and Joe, are drivers of growth different in different countries, given your footprint? Do you see a bigger opportunity in any one geographical area?
I think we're seeing some tremendous opportunities in Asia Pacific as well as in Latin America. Both of those areas we're seeing some higher single digit to double digit growth, and part of that is due to penetration, part of that's just due to changes in the market there relative to the United States. We are seeing some amazing opportunities that they're going to obviously vary by country because in Latin America, there's a huge focus in on proteins testing. We are seeing a lot of imports into the United States from Asia Pacific, so they're testing according to the U.S. rules-
Yeah.
which drives an increase in testing in certain areas. So Thailand, and I think Jeremy mentioned this increase in these ready-to-drink beverages, driving a lot of new testings. There's a lot of new product development going on in different regions, and so we're trying to take advantage of that with our current portfolio. But there definitely is portfolio shifts depending upon which region we're in.
Food safety is not often seen as an industry where you have pricing power. So when you talked about pricing discipline, could you elaborate on that? What did you mean by that, Joe?
Yeah. Well, I think the big thing to think about there is when you make this transition strategically from sort of positioning yourselves as a product provider to more of a solutions partner, that's where you can gain pricing power. When your customers see you as a more indispensable partner, then obviously you can drive a better price discipline there. So when we say those words of price discipline, I go back to the sales operating model that we're deploying throughout the organization, where it's about how do we align to the strategic goals and objectives of our customers and position ourselves as a solution to those goals and objectives, rather than just simply being the Petrifilm supplier, for example, or indicator supplier. If we can do that successfully, and I believe we can, then that's where we are able to maintain the pricing discipline.
I would add, given the breadth of our portfolio and the solutions that we can bring and the innovation plan we're putting in place, that's a multiple of these platforms. Innovation, solving real challenges that a customer has, allows us to price at the right point given what we're trying to deliver and what we're trying to solve for. I think innovation will play a huge part in price realization. And why it matters most to us is because the breadth of our portfolio, we're able to innovate across multiple platforms at the same time.
Yeah. I would also say that's where Neogen Analytics can play an important role.
Yeah.
The one thing that we haven't spoken about on Neogen Analytics is the stickiness that it provides for your solution. So when customers are integrating a product like Neogen Analytics for data and insights and predictive capabilities, it makes you a much more indispensable, sort of sticky partner.
I think we have an online question.
Yes, we do. One came in regarding the Petrifilm transition and the logistics of how that plays out over the next few quarters, which I think we've addressed. The other part of the question is, we've talked about potential improvements to gross margin from Petrifilm. How reliant are we on those potential margin improvements for Petrifilm to hit the targets that we've laid out for the company as a whole?
Want to speak to that, Bryan?
Yeah. I think we talked about that in the bridge, in multiple levers of gross margin expansion, so it's just one element. I think part of the thing that makes us feel confident in it is it's just one piece, and nothing along that path has to land perfectly in order for us to sort of deliver on the overall gross margin goal. So, it's part of it. We feel really confident, as we've gone through the process, that we've identified areas where we have opportunities. But it's not the only thing.
It's a good question, and it allows me to share something. One of the first things that as I started, I shared with you that one of the first things I did was talk to our analysts and investors. A lot of you asked me right away, "How are you going to get to 30% EBITDA margin?" Because that was shared out of JP Morgan the prior year. I had just started. I don't know if it was a fair question, but I kept that in my mind. I hope today during the presentation, you saw that we're trying to share with you how we believe we can get there from multiple angles. So it's not reliant on any given lever or anything else. It's a multi-business approach where we see a lot of opportunities that will help contribute to get to that 30%.
So we definitely agree we can do that, but it takes multiple things, and that's how we're thinking about it. I hope you appreciate the detail we try to provide in the presentation on how we plan on getting there, versus just saying, "Oh, this business has the potential to get there." Yep. Another online question? Oh. Let's take Oh.
Yeah, go ahead.
Hi, I'm David Goldsmith, Baron Capital. On that point of margin progression, sample handling-
Yes
flat to negative gross margins. You talked about 15%-20% improvement.
Yeah.
Still well below the 50%.
Yes.
Talk about is that the waypoint, the 20%, or can you improve that to get-
Yeah.
corporate level margins? If not, what's the outcome?
We do.
investing in that business?
One of the biggest challenges to sample collection, achieving 15%-20% profitability, is the manual aspect of sample collection today. What Neogen received from the integration was a line that was not efficient and was not able to produce sample collection. Neogen had to rely on manual labor to drive that. Now, we've driven significant efficiency in that manual process. A few quarters ago, maybe three quarters ago, you heard us share in an earnings call that we leaned in and invested in an automated line that's going to come online at the end of this year.
Half of the year.
Yes. Okay.
Calendar year.
Calendar year. That is going to be the key enabler that reduces manual labor by 40%+ that allows us to then start to make that product more profitably. But also, we need to drive demand for that product. That product has been consistent. Given the quality issues, I think it dropped by 50% share in the market for Neogen. I think you guys are fully aware of that. We are gaining back credibility of that, and we are going to have to continue to drive that and consumer confidence that we fixed the quality and supply issue with the sample collection. Because reality is, sample collection is a gateway product to the rest of our portfolio. They start with sample collection, and then they move on to ATP, they move on to other things. We cannot exclude sample collection.
In the future, will sample collection be low 20s profitability? Yes, and we are okay with that because of the role that it plays in our portfolio and the halo effect that it will have. I hope that answers your question. Let us take an online question. Do you have an online question?
There is one more. I will kind of paraphrase here, but we have talked about a number of high-profile outbreaks recently of foodborne illness. When these things happen, what is kind of the feedback from the market? Do we see an uptick in discussions with customers about these incidents, and what is the nature of those discussions when things like this happen?
You want to take that?
I think, yeah, absolutely it drives discussions, and the reactions, again, may not be immediately linked to when it shows up in the news, right? But it does increase, obviously, concern and awareness. Then obviously the FDA and the USDA, within the U.S. at least, also look at how do we further improve testing protocols and patterns in order to deal with these things. Because they become a big deal, right? And our customers definitely start to think and rethink about their testing protocols and their quality systems when these things enter the news stream, and people, consumers are becoming more aware. That drives down consumer confidence, and therefore starts to have these companies who are really concerned about brand damage rethink about what their strategy is to prevent that from happening with their facilities.
Tammi, I would just add, it definitely drives discussion by regulators and standards bodies as well, right? I mentioned salmonella as an example. There's a lot of concern and questions about is the current sampling regime sufficient to be able to catch the risk, and what else do we need to do? The dynamics between industry and regulators will play out over time. But at the end of the day, having more advanced solutions there that much better intercept the issue, I think is going to be critical to providing value.
Okay. George Dai from Weatherbie Capital. First of all, congratulations on the quick turnaround, and we have seen that in your top line. So fantastic, keep it going. Innovation is a critical part for the long-term success of any growth company. Question one for Jeremy, that is the R&D is going to approach 5% of the revenue in a few years. How do we think about the R&D opportunities in animal safety? Is that kind of like they're going to get the benefit of the R&D spending the food safety, so it's kind of a nice spillover effect, or maybe you identify some specific opportunities in animal health, animal safety segment. So that's question number one. A quick question for Bryan, that is high single digit, low double digit top line growth. What percentage of that is organic?
Because for a growth company, the organic part has to be very, very important. If you can give a little bit more clarity on that would be great. Thank you.
Yes, I'll start. Just to start with, I really do believe that there's additional opportunity in animal safety. The team there is starting to surface some potential concepts that could drive growth. We're very early in the assessment of those opportunities. When the time is right, we'll come back and share more of that. Quite frankly, as Greg Hastings will share, that's been a business that's been vastly under-invested in over the past few years. Then to your question of sort of a spillover effect. Probably less about the technology side, but certainly from a process capability, process side, how we understand needs, how we translate those into new product programs, and how we ultimately commercialize. We are standardizing that across the food safety and animal safety businesses. I've come over time to appreciate how critical that process is in getting things right.
That's a process that we're building sort of universally across Neogen.
Just with respect to the profile, what I would say is that you're right. I think we focus on organic growth. That's why when you look at the order in which we talked about these things. We started with the base, the core growth, the sales execution, and then we talk about innovation. It comes through that way even when we talk about our capital allocation prioritization. Then it turns to things like, okay, what assets might be out there that fit with the strategy where we might deploy capital? That's what really we believe, if you looked at the company historically, to see them get to sort of that low double-digit growth rate, it was really through some bolt-on M&A that they had done. Really, the more meaningful piece I think of is the innovation engine that we're building.
Any other questions in the room? Online? Well, if that's it, thank you very much for spending your morning with us. I hope you had a good chance, probably the first time, to really see what Neogen can do and the plans that we have. We're super excited about the progress we're making. We appreciate all of the questions and your attendance. If we can help with any further questions, please reach out to us. Thank you very much.
Thank you.
Thank you.