Earnings Labs

Neogen Corporation (NEOG)

Q1 2022 Earnings Call· Tue, Sep 21, 2021

$9.24

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Transcript

Operator

Operator

Good day, and welcome to the Neogen First Quarter Fiscal Year 2022 Earnings Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to John Adent, President and CEO. Please go ahead.

John Adent

Analyst

Thanks, Betsy. Good morning. And welcome to our regular quarterly conference call for investors and analysts. Today, we are going to be reporting on the first quarter of our 2022 fiscal year, which ended on August 31. As usual, some of the statements made here today could be termed as forward-looking statements. These statements are subject to certain risks and uncertainties and our actual results may differ from those that we discuss today. The risks associated with our business are covered in part in the Company's Form 10-K as filed with the Securities and Exchange Commission. In addition to those of you joining us by live telephone conference, I also want to welcome those of you on the internet. Following our prepared comments this morning, we will entertain questions from participants who joined us via conference. With me this morning is Steve Quinlan, our Chief Financial Officer who will provide some additional details on our results for the quarter. As you saw in our press release this morning, we're pleased to report a strong first quarter to our 2022 fiscal year. We had a 17% revenue growth across our worldwide business compared to the prior year's first quarter. We also had double digit growth in both our Food and Animal Safety segments, including double digit organic sales growth in both units. In addition, our overall gross margin improved versus last year's first quarter. That improvement really was due to a shift in product mix toward our higher margin food safety products and a price increase that we implemented on August 1. So, for the first time in seven quarters, I think we're beginning to see business return close to a pre COVID environment in the US. With the loosening of restrictions, it's really allowed our sales team to get back…

Steve Quinlan

Analyst

Thanks John. And welcome to everyone listening this morning. Before I talk about the numbers, I'd like to echo John's comments about how proud we are of our global team. Our results this quarter are largely results of their collective hard work. Earlier today, we issued a press release announcing the results for our first quarter, which ended on August 31. Revenues for the quarter were $128.3 million, an increase a 17% compared to $109.3 million in the same quarter year ago. Net income for the quarter was $17.1 million, or $0.16 a share compared to $15.9 million or $0.15 a share a year ago. The earnings per share for both periods reflect our 2-for-1 stock split on June 4 of this year. In the next few minutes, I'll give you some color around the numbers and I'll start by talking about the currency impacts to the business in the first quarter, which were positive. Several currencies in which we operate were stronger against the dollar in the first quarter as compared to the first quarter of fiscal '21, including the pound which was 9% higher and the Mexican peso, up 11%. Even the Brazilian real, which has devalued significantly in the last couple of years was 3% higher against the dollar in this year's first quarter. Revenues were $2.3 million higher on a comparative basis for the first quarter due to these currency tailwinds. Most of that impact was felt in the Food Safety segment, as the majority of the international businesses report in through this segment. Revenues for the Food Safety segment were $62.7 million in the first quarter of fiscal 2022, an increase of 16% compared to $54.2 million in last year's first quarter. Megazyme, our acquisition from last December contributed to the increase. Excluding these sales,…

John Adent

Analyst

Thanks, Steve. So I think you can see we feel this first quarter was an excellent start to our new year and Steve is lined out we remain hopeful in the face of COVID and the Delta variant. While we see the success of the beginning of a rebound, we also recognize that there are still many variables at play that can move one thing one way or another. We will talk a little bit on the question-and-answer about supply chain because that's something that we've pointed out. With addition to that the Delta variant continues to be a real concern around the world and we're actively monitoring the state of the pandemic as we move forward. Going into our second quarter though, and looking at the rest of the year, I'm optimistic and excited about the things that are going to come for Neogen. As Steve mentioned, if you didn't see yesterday, we announced our acquisition of CAPInnoVet, it's a companion animal health company that provides really high quality high value pet medications to the vet market. I'm really excited about this acquisition as it gives us entry into the fast growing $12 billion retail Parasiticide market. Company is going to be a great fit, is going to go right with it, right inside our animal safety segment. And I'm pleased to announce that John Tatum will be joining Neogen as our VP of Operations and Business Development. Leslie Cash, she's going to be our new VP of Commercial Pet and Healthcare, and CAPInnoVet, Co Founder, Rudy Hauser is going to work with us as a trusted business consultant. The integration of Megazyme, the food diagnostic company that we acquired back in December of 2020, with our sales and marketing team is now complete. Our staff is fully trained,…

Operator

Operator

[Operator Instructions] And our first question comes from David Westenberg with Guggenheim Securities.

DavidWestenberg

Analyst

Hi, and thanks for taking the question and good job on the toplines this quarter. So, I want to start with CAPInnoVet, kind of what you're doing strategically there. And when I think of Neogen, I think of it more as devices diagnostics in food safety and animal safety. I don't necessarily think of it as a drug company. So strategically, is this something where you kind of see this as inability to layer on pharmaceutical products or is this more just taking the existing products into the markets that you have right now?

JohnAdent

Analyst

I think, thanks for the question, David. I think it's a little bit of both. So our -- we have a lot of products in animal safety that you wouldn't technically view as diagnostic, right? Whether it's anything in our animal care line, whether it's our wound care or needle syringes, just many, many different things, right? And this is really going to allow us, and ThyroKare is another great example, right, ThyroKare which we just relaunched, this is really going to allow us to expand our existing portfolio into that segment into the vet channel, because we're already there today. So, we already reached those customers, we already have a relationship with them, and it's going to allow us to expand that. And going forward, we're always looking for new and novel, or like product mix, that's going to allow us to continue to grow the business and profitably grow the bottom line to those existing customer bases. So, we think it's a great way to add accretive margin in sales and really fast-growing categories. Like parasiticides, biologicals, therapeutics, I mean, those are great markets. Having an opportunity to participate in the $12 billion, fast growing parasiticide market is interesting.

DavidWestenberg

Analyst

Okay, thank you very much. And then I guess, moving on to culture media, you had really strong year-over-year growth. Can you recall it, is there any specific products you want to call out in that particular product line that I've done that in terms of how we should think about this in the forward quarters?

JohnAdent

Analyst

I'm not sure we had, I mean, last year, we had opportunistic sales to vaccine manufacturer. But really, this is just growth. And I think this is growth across the line, like we talked about that Steve and I talked about is we're seeing a bit of normalization in the US and our customers going to come back online, and we're benefiting from that. So, I don't see any one particular product that really did better than the other. So, it's really a broad growth across the portfolio.

DavidWestenberg

Analyst

Got it. In a similar type question on the other side of your business, the private label business that you called out in veterinary instruments, was there any one-time sales or again, is this something that we should see continuing on a forward basis and also [multiple speakers]

JohnAdent

Analyst

Yes, no, that was not a one-time sale, that was just products that we had private label for someone that are really starting to take off in the marketplace.

Operator

Operator

[Operator Instructions]. The next question comes from John Kreger with William Blair.

JohnKreger

Analyst · William Blair.

Hey, thanks very much. John just another follow up on CAPInnoVet. Can you tell us any more details on the financials if you're willing to share? Revenues, margins, and maybe what you paid for it?

JohnAdent

Analyst · William Blair.

Yes, it's a -- I won't tell you what we paid. It's a small business. It's really, it's a pipeline business. So, they've got relatively small products today, revenues today, because they just launched last year a permethrin and a fipronil product for dogs and cats, which is just starting out, but that's a big market. So, if you think about permethrin that's really a like for like with K9 Advantix. And the fipronil is really a like for like with FRONTLINE Plus. So we're excited to get a hold of that. This group didn't have much of a sales team, was more of a developmental shop. So, we're excited about that, and we've got products in the pipeline that gets us pretty excited. So, and you know what those margins look like John, you're always comparing me to pharmaceutical companies anyway. So, you know that market pretty well.

JohnKreger

Analyst · William Blair.

Alright, thanks. That's helpful. And, John, do you expect to put R&D dollars to work there to bring new products out after those two or not necessarily?

JohnAdent

Analyst · William Blair.

Yes, I think so. I mean that's why I'm excited about the, it's not only the line, but the team we have coming over, those guys. John and Leslie have been on that market for a long, long time. Rudy started that business. So having their experience to help us navigate and look at those opportunities is a big benefit for us. And on our management team, we added Doug Jones; Doug's got a lot of experience in this marketplace. We've really strengthened the team, top to bottom kind of in our companion animal segment, which makes us very comfortable getting into this market and growing it.

JohnKreger

Analyst · William Blair.

Great, thanks. And then one last one. Can you talk a little bit about your outlook for the food safety business, and in particular the institutional side, are things kind of getting back to normal there? Are we still on a fairly steep ramp in terms of back-to-school and restaurants reopening and the like?

JohnAdent

Analyst · William Blair.

I think we're getting back and again, I prefaced it in the US, right? Because we do business in so many different places and it's hard to say that we're coming out of it because it really depends by region. But in the US, we are starting to see a return to normal. Now we can debate whether or not we should be, right, but I think we are. And you've seen it kind of in the last three quarters; we've had really strong growth in the last three quarters across the businesses and in the food safety segment. So, I think like I said, I'm optimistic about the rest of this fiscal year, we're really pushing hard and the team's doing a good job.

JohnKreger

Analyst · William Blair.

And you make a good point about geography. Should we assume your non US food safety businesses perhaps lag in the coming year? Or do you expect strong growth there too?

JohnAdent

Analyst · William Blair.

I expect strong growth there. It's just, it's -- they're not out of the woods around COVID, John, and we've got Australia continues to do lockdowns off and on; China's continuing to do lockdown. India is doing that. Europe moves back and forth, depending on which country we're in. So but during that environment last year, we also grew, our expectation is to grow. So I'm just -- it's not going to be easy.

Operator

Operator

The next question is a follow up from David Westenberg from Guggenheim Securities.

DavidWestenberg

Analyst

Hey, thank you for taking the follow ups. So can you talk a little bit about more than the labor headwinds that you said continue to persist? Is this a global issue? Or is there anything specific to maybe Lansing or Lexington or any other specific stuff you might need to call out?

JohnAdent

Analyst

No, this is a, David, this is a global, not a global, it's a definitely US problem. I saw something the other day that talked about participation in the labor force between men between 18 and 64. And how over the last 30 years, it's dropped 26%. And the question was how these people survive, right. And so there was a lot of consternation around that. But we're missing a couple things. Steve talked about supply chain, and you guys cover a lot of businesses, the supply chain disruptions are real. And it's a challenge. And it's an everyday challenge. And it's not just freight costs. It's getting stuff in and when Hurricane, you think about on the animal safety side, when Hurricane Ida came and shut down the ports down in New Orleans and in the south, you instantly saw the grain prices drop. You couple that kind of with getting ships and getting containers as well we're seeing I mean the rise in the container costs is crazy. I mean if you're moving low volume products or low value products, you can have freight be more than what the product is worth. That's nuts. So those are things that are real, then we did address it. So we are raising wages, but we're also doing that in our way where we're trying to be using technology to be more efficient. So where we may have had 10 people at $50,000, we're going to do eight people at $65,000 where you're going to see that your total costs don't change that much. But there are some cases on the hourlies, where we've just got to get competitive to get people in the door and get the product out the door.

DavidWestenberg

Analyst

Got it. Thank you. And then maybe if I can do one last one on trends in China, I know it's been a long; China and India have been a long term focus already for you. Do you have any; can you give us maybe any color in terms of percent of revenue, profitability in that area and growth? And then as we look at China in the future, are there any regulatory geopolitical or any kind of procurement grist on that could present itself from that could stop from getting your aspirational goals in that specific market? And I'll stop after that question, because I realized that was pretty intense.

JohnAdent

Analyst

Yes, I'll let Steve do the first part. But on the second, David, yes, of course. I mean I think if you watch what Xi Jinping is doing over in China, and kind of the relation between the US and China, it's going to be interesting and I can't forecast what is going to happen there. But what we're going to do is we're going to make sure that we are able to adapt and move quickly around those existing markets. I mean I think yesterday stock market dropped because of the real estate business in China shows everything is connected, right? So it's an important market for us. They're still having challenges with African swine fever. You're still saying hog prices severely depressed. It's just a very challenging time for him right now. But our business has been good. And I'll let Steve give me the numbers.

SteveQuinlan

Analyst

Yes. And David, I think your question first was, what percent they are our overall sales. And it's been growing very nicely for us. But our growth across the world has been nice as well. So China's still less than 5% of our overall revenues. As that growth has occurred in China, profitability has also grown very nicely. We're very happy with the profit performance of China relative to our other businesses.

Operator

Operator

We have one more question. The follow up from John Kreger with William Blair.

JohnKreger

Analyst

Hey, thanks. Thank you. Just a few follow up. I know just snuck it in. I think these are both, Steve, for you. Can you just clarify that I think the total revenue growth in the quarter of 17%. Can you just sort of break down what that would have been on a constant currency basis? And then constant currency organic, just to make sure there's no confusion there?

SteveQuinlan

Analyst

Sure. So on constant currency, John, our revenue would have been 15%. In organic, that number is 12%.

JohnAdent

Analyst

Hey, that still good, really impressive.

JohnKreger

Analyst

That's impressive, yes. Thank you. And then, one last one, John. I think Brazil was pretty weak. And if I'm remembering correctly, last quarter was quite good. And I typically I think they've been very strong on the animal experts psyche. Just talk a little bit about why it was weakened and what you expect in the coming year.

JohnAdent

Analyst

Yes. So one of it was, Steve mentioned that non-reoccurring in [Indiscernible]. The other big part of it was we had really nice sales of aflatoxin test kits last year. And I don't know if you've seen but John first corn harvest and Brazil is a wreck. I mean, they had such a drought that it's down 30%, 40%. And so Brazil is actually the South is always important corn, but the North, the bigger regions have not, but now they're starting to import corn. So it really was a function of the size of the corn harvest. Because there just wasn't that much corn to test. Now, again, this is because of the way that countries spread over the northern southern hemisphere, this is their first corn harvest, the second corn harvest is bigger, and they're going start planting now. But this first corn harvest was pretty rough on them now. We think that's an opportunity, right? Because now they're going to be importing, we've got with our acquisition in Argentina and Uruguay and Chile, they're going to be pulling from the southern corn, and we think that's an opportunity to get the business on that side from those countries. So that's what we're focused on.

JohnKreger

Analyst

Okay, so it sounds like your outlook for Brazil is better for the rest of the year than what you saw in Q1?

JohnAdent

Analyst

I mean, they've got their challenges because of that but I don't know if it's going to be -- it's not going to be a big hockey stick bounce back, John. I mean, that corn harvest goes through a couple of quarters. So it's going to have a bit of a drag, but the total international business like you saw for this quarter, we're optimistic they're going to do really well the whole business for next quarter.

Operator

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to John Adent for any closing remarks.

John Adent

Analyst

Thanks Betsy. Well, thank you everyone for joining the call and being big supporters of Neogen. Just a reminder, if you haven't already, please get your proxy votes for our annual shareholders meeting, which is going to be on Thursday, October 7, and we'll talk to you all again on December. Thank you.

Operator

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.