Good day and welcome to the Neogen Corporation Third Quarter Fiscal Year 2022 Earnings Conference 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.

Good morning and welcome to our regular quarterly conference call for investors and analysts. Today, we will be reporting on the second quarter of our 2022 fiscal year, which ended on February 28. 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 in 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 who are joining us by live telephone conference, I also welcome those of you joining us online. Following our prepared comments this morning, we will address questions from participants who have joined this live conference. I'm joined this morning by Steve Quinlan, our Chief Financial Officer, who will provide some additional details on our results for the quarter. In our press release this morning, we announced continued revenue growth with an increase of 10% over the prior year. It's been an exciting quarter for us as we made a number of announcements that really showcase our vision for the future and growth mindset under which we are operating. In our second quarter call, I talked at length about our agreement to combine 3M's Food Safety business with our existing operations, but I want to mention it again. As we continue our mission to be the leading company in the development and marketing of solutions for food and animal safety, the combined company will be well positioned to become the global innovator in food security, and I'm pleased with the progress we've made since the announcement. I also, once again, want to state how excited I am to welcome the 3M Food Safety…

Well, thanks, John. As John indicated, it was a busy quarter with 2 closed acquisitions, our announced merger with 3M's Food Safety business and a resurgence of COVID-19 and its variants. John has spoken to the why of the acquisitions we closed during the quarter as well as the 3M merger. The 3M combination in particular will clearly be a transformative deal for the company, and we've continued to incur significant costs in the quarter on it. I'll go into the details in a few minutes, but I need to point out that these costs will continue through the remainder of our fiscal year and into the deal closing in the first half of the next fiscal year as there's still a lot of work to be done to finalize the combination and also to continue the preparation for the integration of the businesses. I'll now get into some of the details on our third quarter results. Sales for the quarter were $128.2 million, a 10% increase over the prior year quarter. Revenues for our Food Safety segment increased 7% to $62.8 million, while revenues in our Animal Safety segment were $65.5 million, a 12% increase. Our Food Safety revenues were positively impacted by the December 2020 acquisition of Megazyme, our Ireland-based producer of food quality and nutritional analysis products; and our December 2021 acquisition of Delf (UK) Ltd., a manufacturer of cleaners. On an organic basis, sales for the Food Safety segment increased 4%, negatively impacted by the Omicron variant of COVID-19 in a number of our markets worldwide. Animal Safety organic sales rose 9% with additional sales from our acquisition of CAPInnoVet in September of 2021 and Genetic Veterinary Sciences in December of 2021. On a constant currency basis, revenues were approximately $900,000 lower in the third quarter…

Thanks, Steve. Earlier, I mentioned our agreement to combine 3M's Food Safety business with our existing operations, and I wanted to provide an update on where we were in the integration planning process. Since the announcement, members of our leadership team have set off across the country and around the world to host meet-and-greets at 3M's Food Safety locations, touching base with employees, introducing Neogen, who we are and what we do as well as answering initial questions and laying out the vision of our future as one combined company. The meetings have gone extremely well, and we have learned so much from all of the 3M Food Safety employees. I feel incredibly confident that together, we're going to build something truly special. We've established 25 teams to help tackle the huge project that is planning the integration of our 2 companies. These teams comprised of key leaders are working to ensure that both the Neogen team and the 3M team are ready for day 1. Those teams also are partnered with mirror teams on the 3M side to make sure that we are covering every aspect of the business and leaving no room for error once we close and are ready to begin building our new company. I feel very grateful for the hardworking members of both the Neogen and 3M teams who are leading us forward and helping us create something special. The more we meet and interact with our future team members, the more excited we get about our new company. Overall, we have a very positive outlook on the state of the company, and we're excited for the fourth quarter. Neogen is strong, our people are excited and we're all united under one mission. This hasn't been an easy quarter, but I continue to be impressed by the resilience of our employees and their desire to drive Neogen's success. Now I'll open up the floor for any questions you have for Steve and I.

[Operator Instructions] The first question today comes from Christine Rains with William Blair.

I was hoping -- I know you don't give explicit guidance, but I was hoping you could talk broadly about the outlook for the fourth quarter, specifically on the top line and margin side of things.

Yes, Christine. Fourth quarter, we're -- as I said, we are cautiously optimistic. There are headwinds in our face. We talked about currency going against us. Supply chain issues continue, and the aftereffects of the latest COVID outbreak are still out in our markets. As you said, we don't give guidance. We were 10% in the third quarter. I think that's the best we could probably give for the fourth quarter.

And Christine, as you think about like third quarter and the similarities, I mean, a couple of things to really look at. Big drop, the impact on margin was primarily coming out of our Animal Safety business. Margins for Food Safety were flat, which we consider was actually really good considering all the supply chain challenges and cost increases, but that's because we were able to do price increases to our customers as well. COVID-19 had a really big impact on this quarter. We average about 300 hours of absenteeism per month, and it jumped to 4,000 hours per month in the quarter. Now it's getting better, but it's not back to 300. So when that happened, and I don't think this is just us, we saw this not only with our business, but with our suppliers and our customers that there are just a number of people out. And so running tests, having customers perform to us, getting the raw materials we need was very challenging for the quarter. But that's starting to get better, which makes me feel pretty good about fourth quarter. I think the biggest thing is the costs we're going to incur working on the 3M deal. We put together a very strong team. Like I mentioned, we've got 25 work teams. And we met for the quarter. We met almost 1,400 hours of meetings with the 3M counterparts to put the business together. So we're making great progress on that while continuing to drive our core business forward.

Okay. That's really helpful color there. So on the Food Safety side of things, obviously, there was some of that negative mix shift due to Animal Safety growing faster and being lower margin. But on the Food Safety side of things, was the deceleration from last quarter primarily due to Omicron? Or is there something else we should be thinking about there?

No, I'd say that was primarily driven by Omicron.

Okay. That's really helpful. And then a couple on the 3M side for me. You mentioned that you expect the deal and integration costs to continue for the remainder of the year and then into next year. I think it's been about like a $9 million to $11 million run for the past couple of quarters. Is that what we should expect going forward until the deal closes or some step-down or step-up there?

Yes. Christine, that's probably a fair number, particularly in this fourth quarter. As you know, we filed our registration statement and proxy last week, and there was a fair amount of legal work there. So I would say that those numbers are -- for the fourth quarter in particular would be a reasonable approximation of what we're going to spend in the quarter.

Okay. And then one last one for me. So I think the 3M Food Safety business grew in the high single digits for the quarter. And then -- so I guess my question is, how do your results in there will stick to the low double-digit growth profile you've been targeting given that?

Yes. I keep -- I think of a couple of reasons. One is that is a very small business within a very large company. And if you think about how 3M is structured, those salespeople report into health care. And while it's a very interesting business for us, the health care team can make their number without having Food Safety make their number at all within 3M. So we think giving some clarity and guidance and waking up every day to work on protecting the world's food supply is going to be something that the new organization is going to be hyper focused on. So we think there's tremendous opportunity there. The other is it's been challenging for that group to get resources. And I think that's common within any company. When it's less than 1% of your revenues, you may not be the highest on the list for resource allocation. Well, that is our core business, and it's an area where we're going to invest to grow the business. So those are things that get me very, very confident. And then third is talking to customers. We've talked to a number of customers. And universally, they've been very, very supportive of the deal. And it's because Neogen provides a very high-touch service level, which is going to allow us to continue to meet customer needs and help them in unidentified problems. That's one of the things we do really, really well is when a customer has an issue and we don't have -- we don't currently have a solution for them, we work with those customers to develop new products, new lines and solutions to bring to the marketplace. And we think that's only going to accelerate as we add the 3M Food Safety team and bringing in those line of products and those customers to continue that pipeline.

Great. And congratulations on the pending transaction.

Yes. Thanks, Christine.

[Operator Instructions] The next question comes from David Westenberg with Piper Sandler.

So I used to think of your market share, and maybe my number was off in Food and Animal Safety is around -- each one of them around 10%. We always liked it because you had a -- it's a fairly nonconsolidated market. And I think you guys were close to the top of market share in those like respective markets. Can you talk about where you think you will be post-3M acquisition in market share in Food and Animal Safety, respectively?

Yes. So there'll be no change on Animal Safety because they really don't have any business in that. In Food Safety, I think your number's about right. Pre-merged, we were about 10% within that segment and tremendous opportunity to grow, right? So if we double the size of that business, it will give you -- that gives us 20% and still tremendous runway, right? And the key things I get really excited about is the way the market continues to grow from -- we've got tremendous opportunities in the pathogen segment. New allergens continue to come in. That business -- the strength of that business has been great. We did another 12% this quarter. That continues to grow. As Steve mentioned, our new ATP reader, which -- we watch reader sales really importantly. And our Soleris readers and our ATP readers are growing double digit, really strong growth, which then translates into greater consumables as we move forward. So really looking forward to that, David. And then it's really thinking about how are we going to approach the new product portfolio with our customers, right? So how are we going to work with customers who maybe have experience with the Neogen product but not a 3M product or vice versa to really show them the full portfolio of the company going forward and all the things we can do to meet their needs to simplify their lives. Because I think that's one of the greatest things is that it's going to be a lot easier for our customers because now they're going to be working with one organization rather than two that's going to be a lot more streamlined and it's going to be a lot more receptive for them. So those are some of the things that we're really excited about.

I appreciate all the color there. And you did give a lot of commentary on the gross margins and why they were down year-on-year here. Now I do -- and correct me if I'm wrong on this logic, but when I do think when food prices go up, food safety, it seems like you would be able to get that pricing to them because just conceptually, like you still want your food to be safe, of course. So can you talk about maybe how the flow-through might be -- or they might be able to take price or expand that margin in the next couple of years, considering that concept, I think, still holds?

Yes. I think that's exactly right. I mean we're really learning a lot about that business, and we've had great meetings with the mirror teams, which is the counterparts at 3M. And what's really fun is the one thing I hear repeatedly from the team is, "It's so nice to talk to somebody who actually understands our business," right? Because we understand the business every day and we get up when we do this business. And so I think there are opportunities to really understand what are the value propositions for customers and thinking about the total value proposition of the new portfolio, which is going to really be able for us to show the customers the true value of the Neogen product line going forward. And then it's like we continue to do, David. We continue to launch new products. And I think that's a real opportunity coming out of 3M is the ability to fund and launch new products that are going to be significant margin contributors. Because as you saw from the pro formas, it's a great business. I mean the combined company is going to be -- we're going to have 30% EBITDA margins going forward, close to $1 billion in sales. It's a really, really strong business.

Really appreciate that. And sorry, I'm going to put the screws to you guys on next year's growth. You've historically -- or over the last couple of years, you've given really good commentary about -- with the food waste that goes on when the end customer is eating at restaurants versus when they're consuming food at home. And a lot of that made a lot of sense. We are seeing restaurants open up -- open back up. I mean in this next year, are you guys primed to really crush numbers on the food safety front? And sorry to put you guys on the spot.

Yes. No, look, I think we are. I mean I think we saw that kind of when the markets opened up in what would be our first and second quarter and things loosened up. We had really strong double-digit growth. This quarter was a little bit tougher. Things clamped down. The challenge, David, too, is you got to think about this worldwide, right, where -- you can really see where Omicron was moving around the world in our business. Because in the U.S., it was challenging with Omicron and so as the U.K. and some of the European businesses. We're going to have that in fourth quarter for rest of the world because I will tell you, like we were talking to our employees in China and our General Manager there, her -- I think -- I don't know what she told me -- over 10,000 people or something on our block or in their building. And they found 3 positives, and they shut the whole building down for 14 days, like she can't come to work. So China has taken that strategy of just -- they just shut everything down. So while I feel good about the U.S., and it has a bigger impact because this is where our major manufacturing is, the international -- this wave is kind of moving now internationally in other parts, and it's going to have an impact on our international business. But your premise is right. I agree with your premise. It's just -- I mean I'd love to get this thing behind us so we can just get quarter after quarter like we did the last 3 where we were able to stack one on top of the other. But 10% on the top and 8% on OP, I like, right? I mean, yes, 16% is better and 12% is better, and that's where we're heading. So...

Got it. Congrats again on the 3M deal.

Thanks, David.

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

Thank you. I mean one of the things we didn't cover that I wanted to cover was in March, we stopped all of our sales to Russia. That will have about a $0.5 million impact for the quarter. The other thing that Neogen has done is we've identified a number of agencies working in the Ukraine to help the people and animals there that we serve. So we've identified agencies that Neogen is working with, and we are doing a company match program for employees as we help drive donations to that country and the people there. So we're trying to do all we can to help support the Ukrainian people in this very, very challenging time, and I just wanted the group to know that. So thank you very much, and we really look forward to talking to you all again in July when we present fourth quarter and year-end results.

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