Operator Welcome to the Neogen Third Quarter Fiscal Year 2023 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note today's event is being recorded. I'd now like to turn the conference over to Bill Waelke, Head of Investor Relations. Please go ahead.

Thank you for joining us this morning for the discussion of the results of the third quarter of our 2023 fiscal year. I'll briefly cover the non-GAAP and forward-looking language before passing the call over to our CEO, John Adent, who will be followed by our CFO, Dave Naemura. Before the market open today, we published our third quarter results as well as the presentation with both documents available in the Investor Relations section of our website. On our call this morning, we will refer to certain non-GAAP financial measures that we believe are useful in evaluating our performance. Reconciliations of historical non-GAAP financial measures are included in our earnings release and the presentation, Slide 2 of which provides a reminder that our remarks will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These forward-looking statements are subject to risks that could cause actual results to be materially different from those expressed in or implied by such forward-looking statements. These risks include, among others, matters that we have described in our most recent annual report on Form 10-K and in other filings we make with the SEC. We disclaim any obligation to update these forward-looking statements. With that, I'll turn things over to John.

Good morning, everyone, and welcome to our earnings call covering the third quarter of our fiscal 2023 year. We're pleased to be with you today to provide an update on our performance and the ongoing integration of the Food Safety business we acquired from 3M last year. On our last earnings call I mentioned the trend we're seeing in some of our macro-related softenings in our end markets. This continued in the third quarter with many feed producers seeing lower unit volumes, with inflationary pressure on consumers being a key driver. On the Animal Safety side of our business the macro weakening was driven primarily by a difficult comparison against extremely strong market growth in Q3 of the last fiscal year, and some destocking by our channel partners. Despite the macro headwinds, we delivered core growth in both legacy segments, aided by diversification across product categories. In the recently added Food Safety business key product lines continue to be negatively impacted by the backlog situation at our transition manufacturing partner. After an unanticipated holiday shut down in December, we've seen intermittent improvement, but not the sustained progress we expected. To resolve this, we've elevated it to the highest levels of our contract manufacturer, where we've seen meaningful engagement to address the root causes and alleviate certain process constraints. We're working with them to provide additional input into key production decisions and believe we have a path to successful resolution over the coming quarters. As we've discussed before, the former 3M business is a high quality franchise with leading diagnostic technology for high replenishment environments, that in many cases is specced into their quality control processes. We understand the critical roles our products play, and are working closely with our customers to fulfil as much of their demand as possible, while…

Thank you, John, and welcome to everyone listening this morning. Jumping right into the results, our second quarter revenues were $218 million, an increase of 70% compared to the same quarter a year ago. Core growth, which excludes the impact of both foreign currency and acquisitions was 4% for the quarter. Acquisitions added 68% while foreign currency amounted to a 2% headwind compared to the prior year. At the segment level, revenues in our Food Safety segment were $152 million in the quarter, an increase of 141% compared to the prior year, including core growth of 6%. Sales in our Culture Media & Other category grew high teens on a core basis, benefiting from a large order from a vaccine manufacturer. Within Bacterial & General Sanitation, our microbial testing products had solid growth, partially offset by lower sales of general sanitation testing products, and in part to supply challenges. Rounding out, our larger Food Safety product categories, Natural Toxins, Allergens, & Drug Residues had a slight core revenue decline, due largely to the discontinuation of our product line of drug testing kits for international dairy markets. Quarterly revenues in the Animal Safety segment were $67 million, up 2% over last year's third quarter on both a core and reported basis, as the foreign currency impact was modest. Sales of our biosecurity products had the strongest core growth, led by insect control share gains in the animal protein market. This growth was partially offset by a decline in vet instruments and disposables, which faced a difficult compare against a new business win last year, and lower volumes of antibiotics and vitamin injectables in the animal care and other category. Worldwide genomics revenue was up high single digits on a core basis, with growth in the global beef markets offsetting weakness in…

Thanks, Dave. We're excited about the progress we've made to-date combining Neogen and the former 3M Food Safety business into a clear pure play leader in the food security market, with a product portfolio that's over 95% consumables. While our market is not immune to economic slowdowns, it has historically been resilient. And we believe there's a number of attractive long term secular tailwinds, such as heightened pathogen awareness, the growing prevalence of food allergies, and increasingly health conscious consumers who want to know what's in their food. It's also a market in which we believe the aggregation of structured data and use of analytics are of particular importance. The effective use of data can allow auditing bodies and food companies to identify risks, and improve safety and testing processes to ultimately minimize outbreaks. We are implementing our data strategy through Neogen Analytics, a software platform that capitalizes on our many touch points across the food supply chain and provides users with actionable data. Neogen Analytics can provide insights from industry best practices, predictive modelling, trend analysis with real time monitoring, and simplify compliance processes. The acquisition of Corvium last month will allow us to accelerate this strategy and further embed Neogen Analytics in the market, as customers are increasingly looking to leverage data. We've seen strong growth in the platform, and are planning to build on this leading presence by launching additional software modules and digital mapping capabilities in the near future. We've also begun working with one of the leading providers of generative AI search of potential opportunities to drive monetization for Neogen Analytics capabilities. I appreciate the efforts and commitment of our team members around the world. We have numerous integration work streams underway across the organization. And I couldn't be happier to have them working with us as we build the future of our Neogen. I'll now turn things over to the operator to begin the Q&A.

Thank you [Operator Instructions]. Today's first question comes from Brandon Vasquez with William Blair. Please go ahead.

Hi, good morning, everyone. Thanks for taking the question. First I'll ask maybe a couple of near term ones, and then maybe one or two kind of longer term ones. But kind of in the near term, curious, your thoughts around, it sounds like there was a holiday shutdown at one of the manufacturing facilities. But then you had issued guidance in January. So it sounds like maybe you would have been passed that already. So curious if that was -- can you talk about if it was that the reason that things came in a little weaker than expected? Was there something post that January guidance that had developed differently?

Brandon, it was a little bit of both. We didn't realize -- we looked in January, the full impact of that December shutdown, because our expectation was that we had a plan in place that the contract manufacturer is going to run. And that's why it was unanticipated to us that they shut it down. And so we didn't really realize that full impact. So we got a little bit later into that January period. It was a major disappointment. We were making progress and it really set us back and that's why you're seeing -- I was talking about, we're not meeting our customers demand right now on the 3M of the 3M business that we bought because the manufacturer just can't make enough for us at this point now. 3M [ph] and we've had three meetings with myself and their CEO over the last 30 days. We've got a new structure in place. We have, I think, the attention now of the group that this is no longer a business buried within 3M. This is a business they have to focus on. And I think we're starting to see that focus. But it's going to take us a while to get through it. I have seen now that, we're directionally better. But we've been in that position before. So I want to see this stay directionally better, and not go the other way. So we're optimistic that this is transitory and give us momentum going in the next year. But they need to prove to me also that they can follow what they say they're going to do and get that stuff done.

Okay, got it. And then as you think -- maybe this is a question a little bit more for Dave. But you have that mid-single digits core growth, maybe towards the lower end of that now. What is implied? My understanding is that Neogen is a core legacy business. What's implied there in the 3M business? I mean, it's a sizable revenue number, right? Should -- can that sequentially improve as we go into the fiscal fourth quarter?

Yeah, hey, Brandon. I think I'd say we're not anticipating too much improvement, maybe a little bit better. Obviously, there's some more selling days. But from a growth perspective, we would anticipate it probably doing a little bit better, but more kind of that mid-single digit on an underlying legacy business and the acquired business, not showing significant improvement sequentially, I think, is what's contemplated there.

Okay, and then, maybe going a little further out, just one on kind of long term guidance. It was encouraging, you guys still feel comfortable with the fiscal '25 guidance, despite kind of the maybe the backlog in this quarter being a little worse than expected? Can you -- David, now, we're all going to start looking at our fiscal '24 models. And I appreciate that you're not going to give a number now. But how do we think of the recovery through fiscal '24? Is this a linear event? Is this kind of like a hockey stick as we get to the back half of '24, and into '25? Any commentary you can give us to kind of level set?

Yeah, look, I think more to come, obviously when we get to year end, Brandon. But underlying the performance we saw -- look we participate in these food safety markets, and you saw the legacy business grow solid mid-single digits on a core basis in these markets. And that's where we also participate with the acquired businesses as well. So we think that as we get through these near term challenges that we've gotten underlying good market, even with some production volume headwinds, in some of our customer base. So it's really that underlying market that we think supports, kind of as you're implying the bridge from where we see '23 coming in to '25. The shape and pace of that, I think, is what John's referring to. He says, we need to see some momentum coming out of '23 into '24. And that'll give us a little better frame on that. So I'd say more to come on that when we get to a quarter or so from now.

Okay, great. Thank you very much.

Thanks, Brandon.

Thank you. And our next question today comes from David Westenberg with Piper Sandler. Please go ahead.

Hi, guys. Thank you for taking the question. So I want to talk about kind of the debt and free cash flow in the quarter? I think you kind of gave a little bit here when you said it was just kind of maybe timing of interest payments. And I think you said some additional CapEx, obviously for that. So I mean, I noticed it does look like net debt went higher in the quarter. So can you maybe explain some of the things that maybe in addition to that? And then how we should think about the EBITDA -- EV to EBITDA -- sorry, debt to EBITDA, the leverage ratio, the debt to leverage ratio, as we go further in the year, just given that, interest rates are on the rise. And man, I cannot ask a question today.

That's okay. We know what you mean. Hey, Dave. So a couple of thoughts. Yes, leverage is a little bit elevated on a net basis here, where we would have typically expected to see it flat, come down a little bit. I would say that, aside from funding our integration CapEx deleveraging remains a top priority for us. But we can't always predict the timing of everything. We are a serial bolt-on acquirer. We've changed that focus now to deleveraging. But the Corvium deal that we completed in the quarter, the timing was such that it needed to be transacted and that's a very strategic deal for us for I think the -- all the reasons that John outlined In his prepared remarks. So obviously, cash utilization of that of $24-ish million was a headwind to, to net debt in the quarter. In addition, you noted the timing of interest payments, which I think had about an extra $12 million kind of increase to what you would think of as a normal underlying quarterly cash outflows. And then our integration CapEx, which is elevated and will be elevated, not the same quarter-on-quarter, might be [ph] linear. But as we work through more of the factory side, but also the system side over the next couple of years, and that's always been a known item. So we knew that would be a headwind to free cash conversion over time. And it is. But underlying, all of that is a pretty strong, historically free cash flow conversion business that we think we can make even more robust in the future with some opportunities of the working capital side of the balance sheet. So that's what's going on. And our priorities remain the same. Having said that, like in many cases, you might see that bounce around a little bit quarter to quarter, but our objective remains the same.

Got you. I appreciate you being able to parse out my terrible phrasing. So secondly, just on the Petrifilm and the manufacturing that on -- maybe I should say the failure to fully get your -- all your orders in from your supplier here. Can you talk about how you're prioritizing the products for your competitors and -- I mean, sorry for your customers. And kind of what I'm getting at with this is keeping this product in the hands of your customers to make sure that maybe they're not dual sourcing or they're sticking with you through the process, can you maybe talk about some of the discussions you're having with the customers to make sure they feel that you're on -- as the middleman that they're taken care of, and I guess some of this is out of you control, because you're just -- you're in between the two?

Yeah, so what we're doing, David, is to point that out on the SKUs, we're having issues because we don't have it on every issue. We don't have it on every SKU, in Petrifilm or even in sample [indiscernible]. It's on the SKUs that are an issue. We end up allocating, and we end up working with customers to make sure that we're trying to do the best but that we're just not meeting their demand. We're not getting the manufacturing support we need. And because of that -- because it's a consumable, they have to go and do something else. So by definition, we're losing that sale, and that share of market at that moment, because they're having to go for that to continue to test. Now we know it's a very resilient business. And we know that our solution is better. So we're very confident that we're going to be able to get those customers back. But that is a sale, we lose that we don't get back. It's not like they can just say, well, we'll wait until you're ready, and you guys have enough. And then this excess build-up of demand comes back later in future sales. So that's why we're working so hard at it. That's why it's so frustrating to me and the team. And that's why we're so focused on communications with the customers to make sure that the products that we have -- even though it's not enough, we're trying to work with them in a way on an allocation basis to easily make this the least painful, but we recognize this is extremely painful for our customers. I've talked to our customers almost every week about this. I know they're frustrated. They know we're frustrated. We're seeing some incremental progress, but we've got a lot more work to do.

Got it. In terms of -- is there any other maybe technical issues or invoicing issues with Petrifilm? I mean, like, is the experience right now just kind of a stock out and everything else from the transition is going pretty fine right now and you feel comfortable that that frustration is isolated to really the product.

Yeah. The biggest issue is manufacture. It's not logistics, it's not -- there's nothing in the order to cash cycle. We don't see any issues with billing or receiving or anything like that. It's purely a manufacturing issue. And Brandon kind of brought this up about what '24 looks like. During fiscal year '24 some of those lines will be coming over to us, just petri for now, but sample handling, portions of that will be coming over and even the pathogen side. So we'll feel a lot more comfortable. And we're working very hard to continue to move some of those products into our manufacturing and into our hands even at an accelerated rate than we were anticipated, because we know we can get that fixed. So those are some of the things we're doing.

Got it. No, really helpful, and then maybe just along those lines, can you talk about some of the maybe integration and some of the cost savings? I don't know if you're ready to quantify some of the integration of distribution. And maybe faster than expected manufacturing on what this could look like in terms of timing and speed. I know, you did reiterate the long term guidance. So I mean, I'm guessing -- I don't know if this is -- maybe you can talk about linear versus exponential. I mean, what are we talking about in terms of some of that cost savings in the near term or integration savings?

David, in the near term, I think what you've heard us talk about is having to build up some costs. So we'll have some duplicate costs, where we're paying our partners and their various forms of transition services, where we're building up the cost to come off. And one of the things I think we will do here at a point in the future, I think, when we have a little better fidelity into the timing of that is to help characterize some of that a little bit, and what it means kind of over time. But I'm not prepared to do that now. But we do think that we'll be able to gain efficiencies once we're through building up the cost of transition services, to be able to bring these products into our existing processes. We think there's efficiency over time with that.

Got you. And then you may well just end with, one of the maybe fun long term, positive kind of stories. Can you talk about how the data from farm to table strategy? I mean, I think over the -- traditionally, it's been really hard to get these companies to understand the importance of really the food chain, so to speak, or going down the food chain. What does that strategy look like to finally get that dream that we've talked about for years for that full down the farm to table stream?

Sure, thanks, David. Yeah, I mean, look of course, is what we're doing now, right, starting with our analytics platform. And what that platform does is allows us to work with our key customers in the food manufacturing to help them modernize and digitize our environmental plant mapping policies and procedures, right. So it's a suite of products around environmental plant mapping, around benchmarking, around predictive analytics, and we continue to develop new suites for that offering to be able to show customers the things that we can do to help them connect. Now the more we add in the ecosystem, the easier we are to then connect the ecosystem. We already have our blockchain solution. We can take -- one of our customers, you buy their steak in a supermarket and you take a sample and send it to me, I can tell you, every place that animal went, everything it ate, every time it was sick, every medicine that was given, all the way from birth to your dinner plate. Again, Neogen tends to lead the industry. So while we have that capability, and we see that, we don't see a huge demand for that, because right now the question is who's going to pay for it? The rancher says, well that should be the processor. The processor says well that should be the grocer. The grocer says well that should be the consumer. So -- but at some point, we know that we have the ability to tie that all together that nobody else has. So we're continuing to drive the solutions forward. Because we know this will happen. This happened just like with our genomics business. We bought the genomics business over a decade ago, everybody said we don't need genomics. I can look at that animal and tell you how it's going to grow. And now you've seen the whole industry has changed in the decade. You're going to see that too on this side of the business. So we're really excited about our Corvium acquisition. It will allow us to not only stay in front, but 10x be in front of our competitors around this part of the marketplace that really is just a big white space. And we're excited. We've got so much -- we've got so much data within the organization, we're not even sure yet of the value streams to provide, which is why we're working with one of the largest generative AI companies to work with us to figure out what do we have and what can we make actionable. So those are things that are really exciting about what's coming.

Thank you guys. And thank you for putting up with my inability to ask a question this morning.

No problem. We know you got other things on your mind. So we hope that goes well.

Thank you.

Thank you. And our next question is a follow-up from Brandon Vasquez of William Blair. Please go ahead.

Hey, thanks for taking the follow-up. Just one last quick one on Petrifilm. Are you guys able to quantify the backlog of Petrifilm sales in the quarter? And then second one there is just you said things have improved in January and February in terms of output. Is that -- we're basically done with March now, is that true of March as well, just so we can get an understanding of the cadence going forward? Thanks.

Yeah. So I think the backlog number was…

About $7 million, I think. We're just about flat and Brandon, the challenge is a little bit less the absolute backlog number, but the fact that we're still in this allocation situation. So as John pointed out, we don't lose a customer, but we lose some sales. I think production, absolute production was lower in December than January in February. And we saw an uptick, which was good. I think we again have seen some improvement to the backlog number here in the March timeframe. But again, we've seen periods like that. We've seen periods like that before. I think John alluded to that. And it's about the sustainability here. So at the end of the day we've got to work through getting continuity of supply for this high replenishment product that's what's really going to do it. So the key is to get the backlog down to a sub-million dollar type number on a sustained basis, which is a better sign that we're fulfilling at the rate we need to for the requirements of this product category.

Got it. Super helpful. Thanks a lot.

Thank you.

Thank you.

And ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to the management team for any final remarks.

Thank you all. Really appreciate you joining us this morning. And again, as we work through this, we're really excited about the future of this business. So we look forward to speaking to you all again in our fourth quarter and end of the year this summer.

Thank you, sir. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.