Neogen Q3 2025 Earnings Call Transcript

Quartr
Provided by Quartr
April 9, 2025
Skip to Participants
Operator

Good morning, ladies and gentlemen, and welcome to the Neogen Corporation Third Quarter Fiscal Year twenty twenty five At this time, all lines are in a listen only mode. Following the presentation, we will conduct a question and answer session. This call is being recorded on Wednesday, 04/09/2025. I would now like to turn the conference over to Bill Walke, Head of Investor Relations.

Operator

Please go ahead.

Bill Waelke
Bill Waelke
Head Of Investor Relations at Neogen

Thank you for joining us this morning for the discussion of the third quarter of our 2025 fiscal year. I'll briefly cover the non GAAP and forward looking language before passing the call over to our CEO, John Audent, who will be followed by our CFO and COO, Dave Namura. Before the market opened today, we published our third quarter results as well as a 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

Bill Waelke
Bill Waelke
Head Of Investor Relations at Neogen

two of

Bill Waelke
Bill Waelke
Head Of Investor Relations at Neogen

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. I'll now turn things over to John.

John Adent
John Adent
President and CEO at Neogen

Thanks, Bill. Good morning, everyone, and welcome to the earnings call for the third quarter of our 2025 fiscal year. You may have seen the press release issued earlier today announcing that I will be stepping down as CEO. It's been an honor to lead Neogen, and I'm incredibly proud of the team we've built and everything we've accomplished, including making a significant amount of progress on the complex integration of a transformational acquisition. I would like to extend my sincere gratitude to the team for all their hard work and sacrifice over the last several years and firmly believe these efforts have put the company in a stronger position.

John Adent
John Adent
President and CEO at Neogen

I will remain in my role while the board conducts a search for my successor, and I'm fully committed to ensuring a smooth transition for our customers and employees. With that behind us, let's move into the some color on the quarter. Over the course of the third quarter, we saw the broad development of uncertainty, primarily related to the goals and policies of the US government, most notably deregulation, government spending cuts, tariffs, and global trade. As we've all seen, the administration is aiming to reduce federal spending and has made cuts across a number of government agencies, including those relevant to food safety like the FDA and the USDA. While these cuts could possibly affect the speed with which outbreaks of food borne illness can be addressed or possibly delay or eliminate certain research spending, we don't currently see them as having a significant effect on food safety testing.

John Adent
John Adent
President and CEO at Neogen

This is still a developing environment, but the leaning out of these agencies could result in more testing being pushed to the plants, which is where the ultimate responsibility lies for safe food production. Food quality, which by extension includes food safety, appears to be a priority for the administration, and we believe it has the potential to be a tailwind over time. The administration's position on tariffs and the actions announced last week have added to this uncertain environment. Despite almost half of our revenue being generated outside of The US, a significant portion of our manufacturing is based in The US. As it relates to our purchases, the situation is similar.

John Adent
John Adent
President and CEO at Neogen

Within our food safety business, approximately 75% of our direct purchase spend is in The US. In animal safety, the number is about two thirds, with our needle and syringe products having initially been subjected to tariffs back in September of last year. While acknowledging the tariff landscape has been and could continue to be fluid, we believe that our domestic manufacturing footprint provides some level of insulation in this environment, particularly in our largest markets, The US. We have been exploring alternative sources for supply for certain items procured from outside The US and will continue to do so. Given our large domestic manufacturing footprint, we are closely monitoring responses from other countries and will consider those impacts as they become more clear.

John Adent
John Adent
President and CEO at Neogen

With respect to the retaliatory tariffs announced by China last week, a small portion of our total revenue is generated there, roughly 2.5%. Of that revenue, approximately 40% is served by US manufacturing. We believe that uncertainty increased as the quarter progressed and read through to our end markets, which contributed to our third quarter results being below our expectations. In the face of faltering consumer confidence, a lack of clarity with respect to global trade, and concerns about the potential for recession, we saw both domestic and international distributors and customers being less willing to commit to inventory. This uncertainty was reflected in our proxy for global food production, which decelerated for the first time in six quarters.

John Adent
John Adent
President and CEO at Neogen

Food safety is typically a resilient end market and has historically been relatively insulated against periods of economic weakness. The unique combination of lingering inflation, which had been particularly acute in food, and the current elevated macro uncertainty has resulted in an end market that's still growing, but we believe at a rate below normal levels. Our performance in food safety is also impacted by the challenges we've discussed with our sample collection product line, which we located from a former three m facility to one of our own. It took longer than we had originally anticipated, but the relocated product lines are now producing at the prior levels. From this point forward, our immediate focus is on improving the production efficiency and catching up with our customers' demand.

John Adent
John Adent
President and CEO at Neogen

Outside of the specific challenges in sample collection, core revenue in our food safety business was up 7% in the quarter. In our animal safety segment, we believe we continue to work through the cyclical trough of the market. Inventory levels in the distribution channel remain broadly stable hence the deposit level sales out of our products. Although it's a relatively small part of the business, we saw notable softness in China amidst the uncertain macro environment there, with many of our distributors being in a wait and see mode or in some cases opting for local supply. Outside of the decline in genomics, our animal safety core business was down just over 1% on a year over year basis.

John Adent
John Adent
President and CEO at Neogen

For our genomics business in total, third quarter core revenue was down mid single digits year over year. We believe the actions we took last quarter to focus and restructure this business were the right moves to make. We are focusing the business on our leading differentiated bovine product offering maybe to stop or wind down most of the rest of the business over the coming quarters. Although genomics in total has been a headwind for the past seven quarters, our bovine business has performed better during this period, including many quarters of growth. On the integration front, we continued to make progress in the quarter.

John Adent
John Adent
President and CEO at Neogen

With sample collection recovering to prior production levels, Petrie film remains the last outstanding integration work stream. Construction of the new facility is complete as is the installation of the first two petri film production lines. The shipment of the second production line has landed in Lansing and is in the process of being staged and rigged for installation, And we remain on track for our goal of beginning initial test production in the fall of twenty twenty five. As we mentioned on our prior earnings call, we are undertaking actions to accelerate the building of a more profitable focus Neogen. We have made solid progress on this front with one potential portfolio action in the later stages and one that has started in marketing phase.

John Adent
John Adent
President and CEO at Neogen

These actions represent a step towards focusing our business on the highly attractive food safety end market and are expected to be accretive to margins with net proceeds being prioritized for debt repayment. Last week, we completed the refinancing of our term loan a, extending the maturity by close to three years and realizing 60 basis points of interest rate savings. Combined with the expected near term debt repayment, this provides us with balance sheet flexibility as we continue to work to bring down our net leverage. In addition to future EBITDA growth, improving cash flow is a priority to contribute to the reduction of net leverage. Some of the improvements in free cash flow is expected to come naturally as a result of integration CapEx reducing in fiscal year twenty twenty six and then mostly tapering off in fiscal twenty twenty seven.

John Adent
John Adent
President and CEO at Neogen

We expect to see additional improvement come from the significant opportunity we have to reduce working capital over time. We have seen some progress from our initial actions, but a larger opportunity remains mostly related to our inventory levels. The evolution of our leadership team has continued with a number of changes recently made. We have a new head of r and d. We have a new head of our North America commercial organization and a new commercial head for North American food safety in place, as well as a new chief human resources officer who started this week.

John Adent
John Adent
President and CEO at Neogen

We continue to make good progress on the search for a chief commercial officer, and we expect to fill the role in the first quarter of fiscal twenty twenty six. The standing up of our own Petrie Flom production is progressing well, but we nonetheless want to ensure that we are derisking as much as possible. To that end, we have made additions to the operating team to enhance key areas of expertise and also expanded the existing project governance. As it relates to our outlook for the full year, the current environment is very dynamic. With respect to the macro environment, it is not yet clear what the ultimate impact and duration might be from the rising level of uncertainty.

John Adent
John Adent
President and CEO at Neogen

We are updating our full year view based on the information we have today to reflect the third quarter being below our expectations and a fourth quarter that will likely not be as strong as we had previously anticipated given the softening market backdrop and the uncertain impact of tariffs. We also plan to take further actions to ensure the cost base is more aligned with the current level of revenue and the macro environment, the full impact of which will be reflected in fiscal twenty twenty six. The sample collection production delays have improved. We have targeted commercial plans that we expect will return that product line to more normal revenue levels over the coming quarters. In genomics, we restructured a portion of the business in the second quarter and will continue to focus on a differentiated offering for the more attractive bovine market.

John Adent
John Adent
President and CEO at Neogen

We are taking actions to control what we can control to navigate the current situation and to derisk the final piece of the three ms integration. Now I'll turn the call over to Dave for some more insights into our results for the quarter and our outlook.

David Naemura
David Naemura
CFO & COO at Neogen

Thank you, John, and welcome to everyone on the call today. Jumping into the results, our third quarter revenues were $221,000,000 Core revenue growth, which excludes the impact of foreign currency, acquisitions and discontinued product lines, came in at 20 basis points for the quarter, while foreign currency was a headwind of three ten basis points compared to the prior year. At the segment level, revenues in our Food Safety segment were $153,000,000 in the quarter, down 3.2% compared to the prior year, with core revenue growth of 1.5% offset by the negative impact of FX. The core growth was led by our biosecurity products in the bacterial and general sanitation product category, which benefited from strong growth in pathogen detection products. In the indicator testing, culture media, and other product category, solid growth in our food quality and petrifilm product lines was partially offset by a decline in sample collection as we continue the process of ramping up the relocated production in our facility.

David Naemura
David Naemura
CFO & COO at Neogen

Excluding the headwinds in sample collection, core revenue in the Food Safety segment grew 7%, which we believe reflects a solid underlying business. Quarterly revenues in the Animal Safety segment were $68,000,000 which includes a core revenue decline of 2.6% compared to the prior year quarter. Within our animal care and other product category, solid growth was driven primarily by small animal supplements with an increase in private label business. This growth was offset mainly by lower sales of vet instruments and disposables. Our global genomics revenue was down mid single digits on a core basis.

David Naemura
David Naemura
CFO & COO at Neogen

Core revenue growth at our differentiated bovine business was offset by declines in other areas and consistent with the focused restructuring we executed in Q2 of this year. From a regional perspective, core revenue growth in the third quarter was mixed. Growth was again led by Latin America, which saw double digit growth and a strong performance across most key product categories. Asia Pacific core revenue was up mid single digits on a year over year basis with solid growth in petri film and pathogen detection, partially offset by decline in sample collection. Our business in Europe was down mid single digits on a core basis with growth in cleaners and disinfectants and food quality and nutritional analysis offset by declines in genomics, general sanitation and sample collection, as well as petri film, which came down after strong growth in q two.

David Naemura
David Naemura
CFO & COO at Neogen

In our US and Canada region, which has experienced the largest carryover impact from last year's shipping delays, core revenue was also down mid single digits compared to the prior year period. Solid growth in food quality and nutritional analysis was offset by declines in most other food safety product categories, including a larger impact in sample collection. In the animal safety segment, solid growth in the biosecurity and animal care products categories was offset by declines in genomics and vet instruments. Gross margin in the third quarter was 49.9%, representing a decrease of 120 basis points from 51.1% in the same quarter a year ago. Excluding integration and restructuring costs as well as the reclassification of certain expenses in the prior year period gross margin, Q3 was down 30 basis points year over year primarily due to lower revenues.

David Naemura
David Naemura
CFO & COO at Neogen

Adjusted EBITDA was $49,000,000 in the third quarter representing a margin of 22 roughly flat from Q2 on lower revenue. On a year over year basis, the decline in adjusted EBITDA margin was driven primarily by the lower revenue level. Third quarter adjusted net income and adjusted earnings per share were 21,000,000 and $0.10 respectively, compared to $26,000,000 and $0.12 in the prior year quarter, due primarily to the lower adjusted EBITDA and a nominally higher effective tax rate. We ended the quarter with gross debt of $900,000,000 60 1 percent of which is at a fixed rate and a total cash position of $128,000,000 Free cash flow in Q3 was an outflow of approximately $14,000,000 representing an improvement of $49,000,000 compared to Q3 of fiscal year twenty twenty four. Net working capital was a $10,000,000 source of cash in the quarter, reflecting some progress on our multi year improvement journey.

David Naemura
David Naemura
CFO & COO at Neogen

Capital expenditures in the quarter were elevated, driven in part by some acceleration of spending related to our new petrol film plant and production equipment. As John mentioned earlier, last week, we completed refinancing of the $550,000,000 remaining on our Term Loan A. We issued a new $450,000,000 Term Loan A with an upsized $250,000,000 revolving facility on which we've drawn $100,000,000 and obviously utilize those funds as part of the payoff of the previous $550,000,000 term loan. Further, this draw on the facility, which allows us to currently maintain the same $150,000,000 of available liquidity should be taken as indicative of a portion of our near term expectations for the portfolio actions we've discussed. In addition to extending the maturity of our term loan by over two and a half years, we were able to realize 60 basis points of interest rate savings.

David Naemura
David Naemura
CFO & COO at Neogen

Moving to our outlook. The market environment softened as the third quarter progressed, and we believe the macroeconomic uncertainty has led to somewhat of a pause taken by many customers and channel partners. In addition to the uncertain trade environment, grocery inflation, in particular, has persisted and continues to affect the consumer, contributing to the move backwards that we saw in our proxy for global food production. In animal safety, we see healthy channel inventory levels and positive sales out of the channel, but saw a slowdown of sales into some of our larger distributors. We expect these impacts that we saw in Q3 will continue through Q4 when we will also begin to see the impact of tariffs.

David Naemura
David Naemura
CFO & COO at Neogen

We are therefore updating our revenue outlook for the year to approximately $895,000,000 We are accordingly also updating our outlook for adjusted EBITDA to approximately $195,000,000 With a lower adjusted EBITDA and some acceleration of CapEx, which we now expect to be approximately $100,000,000 our current view of free cash flow for the year is an outflow of approximately $20,000,000 We would emphasize that the end market conditions are about as dynamic as we have seen, but we will focus on what is within our control, which includes the near term actions John has highlighted. I'll now hand the call back to John for some final thoughts.

John Adent
John Adent
President and CEO at Neogen

Thanks, Dave. We view this as a critical period in the engine's transformation and are focused entirely on improved execution. During this environment of rising macro uncertainty, this means taking decisive action to influence those things that we are within our control. In addition to FX, there have been two primary things weighing on our results over the last few quarters, genomics and sample collection, and there are clear plans in place to address both. In the third quarter specifically, these areas were a headwind of over 400 basis points to our consolidated core revenue growth.

John Adent
John Adent
President and CEO at Neogen

Through strategic alignment and substantial cost reductions, we are addressing our genomics business, which has been a meaningful headwind for the better part of two years. For sample collection, we expect it will take a couple of quarters for the revenue to return to its prior run rate. The production has been restored to prior levels and is now undergoing intense operational scrutiny to ensure the efficiencies improve as quickly as possible. As we've discussed, this leaves feature film as the final integration work stream, which continues to progress well. Establishment of our own feature film production will be a more gradual transition than the other key integration work streams were, which have either been a lift and shift of production or a cut over from a three m systems to our own.

John Adent
John Adent
President and CEO at Neogen

Once test production and the performance of the equipment have been validated, a process we still expect will begin in the fall of this year, we will start to ramp up our own production on a SKU by SKU basis. The Petrifilm product line consists of a total of 17 SKUs. Once we have a SKU fully validated and running on our own equipment, we will turn off production of that SKU at our transition manufacturing partner. We plan to move through the entire product line that way very gradually one SKU at a time. This will result in some temporary duplicate manufacturing costs to begin to increase in fiscal twenty twenty six, which we will dimensionalize to provide for an orderly transition of petrol foam production.

John Adent
John Adent
President and CEO at Neogen

Key members of the petrol foam manufacturing engineering team who have done this before are part of the Neogen team, and we currently have employees undergoing advanced training and manufacturing testing in a current feature film facility. We feel good about where things stand today, and we will continue to take all actions available to us to make this as seamless a transition as possible. We also have taken and will continue to take actions to maintain balance sheet flexibility. The refinancing of our term loan extended the maturity by close to three years and net proceeds we may realize from the portfolio actions we discussed will be prioritized for debt pay down. Along with the reduced integration CapEx and the resulting improvement of free cash flow, we expect our balance sheet to continue to improve moving forward.

John Adent
John Adent
President and CEO at Neogen

Following the completion of the three m food safety transaction, we added substantial amount of cost to the business to both catch up legacy Neogen capabilities and accommodate the increased size of the business. For a number of reasons, including FX and market weakness and integration challenges, revenue is currently below the levels that were contemplated when these costs are being added. We took actions in the second quarter to address a portion of these costs, mainly in genomics business. As mentioned, we will be taking additional actions in this area in q four. We have continued to make enhancements to the team to address key areas of the business that we believe put us in the best position to generate demand and capitalize on the opportunities we have in front of us.

John Adent
John Adent
President and CEO at Neogen

Two of these enhancements are in the customer facing leadership roles in our largest region of North America, where we placed a particular emphasis on demand generation through targeted commercial initiatives. We expect these changes in combination with the chief commercial officer role that should be filled in q one to provide us with momentum in the market as we leverage our full portfolio solutions. It's too early to determine if customer conservatism for macro headwinds will be temporary or more sustained. We're staying attuned to the market and will provide additional perspective in the future on the expected duration as the trade landscape continues to change. However, we have a leading franchise in critical diagnostic solutions for food safety, which, while not immune to macro uncertainty, is an end market where we would expect to generally be resilient as it has been in the past during periods of turbulence.

John Adent
John Adent
President and CEO at Neogen

We remain optimistic about the future trajectory of the business and believe the changes we are making will allow us not only to manage through the current uncertainty, but also position us to deliver on the long term growth opportunity in front of us. I'll now turn things over to the operator to begin the q and a.

Operator

Thank you. Ladies and gentlemen, we will now begin the question and answer session.

Operator

You.

Operator

Your first question comes from Brandon Vasquez with William Blair. Your line is now open.

Brandon Vazquez
Research Analyst at William Blair & Company, L.L.C

Hey, good morning everyone. Thanks for taking the question. First, I just wanted to talk a little bit about the guide and talk a little bit about macro and moving pieces there. So can we just start by talking a little bit about how much of the lower guide is coming from macro specifically at this point? It sounds like, and correct me if I'm wrong, it's less of execution on maybe sample handling or or any of those other integration.

Brandon Vazquez
Research Analyst at William Blair & Company, L.L.C

This is primarily a a macro headwind. So talk to us, one, about how much of it is macro and, two, a little bit more of, like, what volumes are you seeing in food safety even as macro worsens? You know, I think in the past, we've always talked about this market as being kind of resilient but not immune. So are there any numbers you can put on that to help us understand, is this a market that even if things get bad can stay positive growth, or is it something that should start to decline with food safety? So sorry.

Brandon Vazquez
Research Analyst at William Blair & Company, L.L.C

A couple questions there just all around macro guidance and what you guys are seeing.

David Naemura
David Naemura
CFO & COO at Neogen

Thanks, Brandon. Let me go first. This is Dave, and then I'll pass it pass it to John. What we saw during the quarter, as we noted, was some broader softening as the quarter progressed. Hesitancy, I think, driven by some of the macro uncertainty, and we're assuming that that condition continues into the second through the second half into the fourth quarter.

David Naemura
David Naemura
CFO & COO at Neogen

So if we look at Q3, we probably come in about $6,000,000 below where we thought at the time. I'd say a good 4,000,000 of that was clearly just uncertainty. 2,000,000 of that alone was China. And a million of genomics, which is timing of ramp down from some of the business we're getting away from. And then maybe roughly a million lighter in sample handling.

David Naemura
David Naemura
CFO & COO at Neogen

Although we exited at the rates we had anticipated, I think the shape of the ramp through the quarter ended up being a little light, but predominantly macro. Look. Then as as as the global trade situation has developed, that'll have that, you know, dramatically hides the uncertainty in my opinion, particularly on the animal safety side for us, and that's where we have the most exposure to some of the existing tariff activity that we will obviously have some commercial efforts to offset. But the ability to do that, there'll be some level of uncertainty given the magnitude of the actions. As far as the environment, let me turn it over to John to talk a little bit about what we saw more specifically.

John Adent
John Adent
President and CEO at Neogen

Yeah. Thanks, Dave. So, Brandon, the like we had talked about in the past, we had we follow a basket of companies, and we had seen, you know, six quarters of kind of sequential improvement. And that really for the ones that that are closer to our reporting cycle, that reversed where, you know, instead of seeing sequential improvement, we saw 300 to 400 basis point decline on a on a quarterly basis from for their report. So we did see the softening in the market.

John Adent
John Adent
President and CEO at Neogen

But like we talked about, even with that, you know, excluding the sample handling, the food safety business in The US grew 7% for the quarter. I will tell you, that disappointed me. Like, my expectation was double digit growth. But when when the market started to soften at the end of the quarter, I think that that's what really pulled it down. So while you think about the underlying firmness of the business, I I think there is an underlying firmness.

John Adent
John Adent
President and CEO at Neogen

I still think the market is growing. Right? And I think there's it just isn't as growing as robustly as it did traditionally. David, you have anything else you wanna add with that?

David Naemura
David Naemura
CFO & COO at Neogen

Yeah. Yeah. Just specifically, Brandon, we've talked to you before about our our production proxy that we track. That had been coming it was it was frankly coming towards even after the after the six quarters of improvement, eight quarters of decline you know, of negative numbers, it was approaching kind of par, and it moved backwards 70 to 80 basis points in total across the 15 companies that we track. We have a couple folks that we watch that share a year end with us, and that's where we saw more recent reporting that would show that getting worse and kind of, you know, three ish hundred basis point type moves to the negative.

David Naemura
David Naemura
CFO & COO at Neogen

So we think it's consistent with what we saw in the marketplace. And again, I think it's worth emphasizing, sample collection aside, 7% as a core growth for our food safety business, felt pretty good, albeit on an easier compare. So still growing consistent with what you said, a rather durable end market, but not growing at the rates we've seen historically.

Brandon Vazquez
Research Analyst at William Blair & Company, L.L.C

Okay. And following up, switching a little bit to tariff headwinds, one kind of a clarification and two, just an operational question. But when you guys talk about tariff headwinds, just to be clear, are we talking mostly here that the tariff headwinds is gonna be from margins because, obviously, your your COGS will go up? Or is part of the tariff headwind here that you guys are expecting you're gonna lose some sales because your products are gonna become more expensive and you could potentially lose some share through that? And then the follow-up kind of the operational side of tariffs is what can you do?

Brandon Vazquez
Research Analyst at William Blair & Company, L.L.C

You know, I think in the past, it's been a while since we've discussed this, but in the past, we discussed that this is actually a very sticky business and that you probably have some ability to push price. You maybe also have some operational efficiencies you can do to offset to offset some tariff headwinds. So what can you do over the coming months if if these tariffs these tariffs actually stay a little sticky to kinda offset some of these headwinds?

John Adent
John Adent
President and CEO at Neogen

Yeah. Brandon, I'll start and then I'll turn it over to Dave. I mean, the analysis we're doing is a market by market analysis. Right? And it really depends.

John Adent
John Adent
President and CEO at Neogen

For for example, China is a is a different dynamic, right, than kind of the rest of the world and some of the other markets. And and so when we look at it yes. China, for example, we the products we sell to China, Forty Percent on the animal safety side come from The US. The rest, you know, is not. So we look at how do we mitigate those because we have manufacturing in Europe.

John Adent
John Adent
President and CEO at Neogen

So our European product is going in there and it's not affected. So it's really market by market, and it is extremely dynamic. I mean, since, you know, yesterday, it's gone up, what, a %, fifty %. I mean, it's it's it's things were moving very quickly on. So understanding that and then it's anything coming out of China on the buy sell nature is, you know, having an impact.

John Adent
John Adent
President and CEO at Neogen

We have to recognize China's about 2.5% of the total business. So while, yes, that is a very dynamic, it's a smaller piece. It is not the kind of this tariff market overall. I know Dave's got better specifics, but I just want I I think the key is that it is a market by market analysis.

David Naemura
David Naemura
CFO & COO at Neogen

Got it. I I think that's right. And, Brandon, just to frame it up for you a little bit, I think thinking about this in two buckets. So tariff impacts around US imports, based on what we know today as current as with what was enacted yesterday, just from the analysis without any mitigating actions, and you just took kind of a last twelve months run rate and straight up applying tariffs to that based on country of origin, you'd probably be around 30,000,000, close to it, 29. And of that, two thirds of it roughly would be China.

David Naemura
David Naemura
CFO & COO at Neogen

We import a lot from China, and this is predominantly animal safety. And so we have to look at that by resell business and how that'll be impacted. You asked a very specific question. Much of it'll be just impact to the bottom line versus impact to volume? And I think there'll be some of each.

David Naemura
David Naemura
CFO & COO at Neogen

And so, again, it's very dynamic, but, you know, we'll we'll we'll see what we'll see what happens in the coming weeks, but that's what we're preparing for. And to John's point, China's about two and a half points, roughly $2,425,000,000 of sales in. About 40% of that comes from The US, roughly roughly 10,000,000. And, again, we have to look at that dynamic and our ability to compete locally. And so, you know, we did see more headwind there in the third quarter.

David Naemura
David Naemura
CFO & COO at Neogen

So we think net net, it's it's a headwind, some impact to the top line. And it's it's the uncertainty that we called out. I mean, we've updated the guide. We've got seven weeks left. We've seen March.

David Naemura
David Naemura
CFO & COO at Neogen

March has March has been consistent with, I think, what we saw coming through the third, but, you know, uncertainty continues to creep up. So we're monitoring it closely. And just just to point out again, the tariff impact would be before we we were able to mitigate anything with price. And obviously, there will be some of that. And we've had some products that have this is the incremental amount.

David Naemura
David Naemura
CFO & COO at Neogen

We've had some products in the needles and syringes space, again, animal safety that has been a tariff since last September. And we were able to pass a decent amount of that through. And then we also have to look at the competition, and we're looking at that. And some people aren't that disadvantaged. We're we're in our in some of our larger markets where we're advantaged.

David Naemura
David Naemura
CFO & COO at Neogen

But some people, you know, it is a headwind for some others, so we'll look to play offense where it's applicable as well. I hope that I hope that helps.

John Adent
John Adent
President and CEO at Neogen

Yep. Okay. Thanks, guys. I'll let someone else hop in.

David Naemura
David Naemura
CFO & COO at Neogen

Thanks, Brandon.

Operator

Your next question comes from Subbu Nandi with Guggenheim. Your line is now open.

Subbu Nambi
Senior Analyst at Guggenheim Securities

Hey, guys. Thank you for taking my question. I kind of want to ask a similar question to Brandon, and I'm now more confused, by all the answers that you gave. Maybe I'm missing something. But it seems like you're largely insulated on tariffs, maybe a little bit on China, but otherwise, largely insulated.

Subbu Nambi
Senior Analyst at Guggenheim Securities

Even insulated on policy, sample production is done. Petrofilm is on track. So that leaves us with all the guide cuts related to either less than expected growth for soft food safety and softer animal business. Is that the right conclusion?

John Adent
John Adent
President and CEO at Neogen

Yeah. Simba, I think I think you're really close. Right? Like we talked about. So while we had 7% growth core growth in the quarter, you know, our expectation was to be better than that.

John Adent
John Adent
President and CEO at Neogen

And and what happened is we saw the food safety market soften a bit at the end of the quarter and we had just talked about. Right? The other than that we saw was, you know, we are in the trough for the animal safety. So the animal safety is in the trough. With that, you know, it has not been a growing market.

John Adent
John Adent
President and CEO at Neogen

So I think you're you're you're right on with that is that, you know, those are the two things that impacted. This was not, you know, we improved our we we hit the goal we wanted on sample handling with production reaching the three m rates. Now again, we have to exceed that. We're working hard to to drive those volumes up because we have to, you know being at those rates does not help us knock out the back orders, so we have to to execute in the fourth to continue to grow to to start chewing into some of the back order piece. But I think, you know, the the the big takeaway was kind of with this uncertainty too is this this softening that we see within the baskets of our customers that were coming in really later in in the quarter.

John Adent
John Adent
President and CEO at Neogen

And while while I'm happy with the 7% growth, I wanted better.

Subbu Nambi
Senior Analyst at Guggenheim Securities

Okay. I I just wanted to make sure that, I was understanding it right. Thank you for that. The distributors who are less willing to commit to inventory, were they largely concentrated in The US or was it all over global?

John Adent
John Adent
President and CEO at Neogen

Yeah. It so our our distribution is we use multichannel distribution around the world. So when we talk about, you know, distributors unwilling, it it really is thinking about it across, the worldwide basis. Right? And with with uncertainty, especially around tariffs and others, nobody wants to get hung with high tariff inventory or other things.

John Adent
John Adent
President and CEO at Neogen

So we just saw that it was it was an environment where inventories weren't reduced, but it wasn't an aggressive where anybody was gonna really step up and and and we saw we didn't see a lot of movement from the distributors. Normally, at this time of year heading into spring, you expect to see a little bit better uptake on distributor inventories.

Subbu Nambi
Senior Analyst at Guggenheim Securities

Okay. Because some of your colleagues have called out pull forward because of all the tariff dynamics, but maybe you didn't see that. My last question is halfway through the year, we are looking at it and for a couple of different catalysts which would fall in place for near June to turn the corner. With one quarter left, what is the mission critical objective here that will deem the year a success for you guys?

John Adent
John Adent
President and CEO at Neogen

Yeah. I think it's it's I don't know if it's one. I mean, we we talked about this. We have we have plans on the specific things we need to do around the business, and it's it's driving to those, you know, critical areas. Petri film manufacturing.

John Adent
John Adent
President and CEO at Neogen

Right? We we continue to talk about derisking the petri film manufacturing, the things we're doing around that. We continue to execute on that plan. We are on track to begin, you know, test production in the fall of this year, which puts us, and gives us two years to move away from our contract manufacturing business. We know we're gonna do it significantly faster than that two year period.

John Adent
John Adent
President and CEO at Neogen

So being on track with that. Sample handling. We have to you know, that was a $25,000,000 headwind for the year. We have to be able to continue to grow the manufacturing output to eat into the back order to allow us to continue to make that a growth driver for the company, and and that will tremendously improve the growth rates for the organization as we're going as we're going forward. The other thing is, you know, we contemplated being at a certain revenue level.

John Adent
John Adent
President and CEO at Neogen

And with us not being at that certain revenue level, then we are looking at how are we gonna make sure that the cost structure fits the new revenue level. And we're being very active and aggressive looking at what is the exit run rate for the quarters to make sure that we're aligning the business from a cost perspective that that fits that revenue drive. I know Dave's got a couple of thoughts on this too.

David Naemura
David Naemura
CFO & COO at Neogen

The one I would add, John, is around portfolio as well. I think we've talked to the year about some advanced efforts there. I would anticipate a certain environment aside, assuming things happen as we anticipate being able to come back, and I think that's an important demarcation for the year. Those are the things we're looking to make solid progress on, Subbu.

Subbu Nambi
Senior Analyst at Guggenheim Securities

Thank you for that, guys.

John Adent
John Adent
President and CEO at Neogen

Thank you.

Operator

Your next question comes from Thomas DeBoerci with Nephron Research. Your line is now open.

Thomas DeBourcy
Principal at Nephron Research LLC

Hi, guys. Hi, Tom. Just a couple hi, guys. Thank you. So just one question, I guess, maybe first on animal safety.

Thomas DeBourcy
Principal at Nephron Research LLC

So I know you don't break out U. S. Versus OUS Animal Safety, but I guess USDA estimates, I guess, have protein same as last year, I guess, expecting roughly 1% growth. And so I guess I'm a little confused your comments in terms of, I guess, the weakness and sort of being in line with the market, or it seems like you're growing below market in Animal Safety.

David Naemura
David Naemura
CFO & COO at Neogen

Well, Tom, one point is as we look at, particularly in The U. S, our large distributors, I think our sales out of those channels remains positive in the low single digits. So I think we continue to kind of bounce along the trough. The timing at which large distributors take inventory varies dramatically. You may or may not recall, a year and a half ago, we were talking about the rebalancing of the inventories into those distributors.

David Naemura
David Naemura
CFO & COO at Neogen

And today, now we've been operating in a situation where I think inventories have come into balance. So I think it jives okay.

Thomas DeBourcy
Principal at Nephron Research LLC

Okay. And then I guess just one other question on the, I guess, global genomics business. So we're kind of in the finishing the second year of a reset of the genomics business. Is there a kind of annual run rate that we should think about in maybe the $80,000,000 80 5 million dollars range that I guess sort of would represent, I guess, the go forward business given that, I guess, we've had kind of incremental decline?

David Naemura
David Naemura
CFO & COO at Neogen

Yes. Tom, I don't have the exact numbers in front of me, but let me try to dimensionalize that for you. I'd say we globally entered the year with, you know, roughly a 90 ish million dollar global genomics business that included serving a lot of end markets. Within that, our more differentiated bovine business that's, you know, called in the fifties. That's really the business that we're trying our restructuring is aimed at focusing around.

David Naemura
David Naemura
CFO & COO at Neogen

And I will say that even though genomics was down mid single digits this last quarter and for this year, you know, we've seen growth in bovine. Bovine grew low single digits here in this last quarter and is a pretty pretty strong global business for us. So as we work through, some of the back office companion work and some of the other kind of protein categories and specialty categories that that we're kind of moving away from over over time, we would get down to that that bovine business in that kind of fifties range, if that helps. Okay.

Thomas DeBourcy
Principal at Nephron Research LLC

Yep. Great. Thank you. That was it for me. Appreciate it.

John Adent
John Adent
President and CEO at Neogen

Thanks, Tal.

Operator

Your next question comes from David Westenberg with Piper Sandler. Your line is now open.

David Westenberg
David Westenberg
Managing Director & Senior Research Analyst at Piper Sandler Companies

Hi. Thank you for taking the question. So on the destocking commentary, can you just maybe talk about the size, timing and kind of quantification of that if you possibly can? I know you said it's global. And the reason why I'm getting trying to get a hold of that is essentially, that should see a bounce back.

David Westenberg
David Westenberg
Managing Director & Senior Research Analyst at Piper Sandler Companies

I mean, when people have, like, an understanding of the tariffs, maybe even wanting to, like, buy ahead of new tariffs, that kind of thing. So, the quantification of that would probably help us understand, if there is going to be, you know, potentially a snapback that

David Westenberg
David Westenberg
Managing Director & Senior Research Analyst at Piper Sandler Companies

we could see in the future.

David Naemura
David Naemura
CFO & COO at Neogen

David, I don't think we characterize it as destocking. I think what we saw was people hesitancy to take inventory, so a little bit of a pause, which I think is different than a longer term destocking cycle. I think in the quarter, you know, I said we we were probably came in about 6,000,000 below where we thought we would. A million of genomics, a million of the timing of the ramp of sample collection, and about 4,000,000 other. I think in total, the the 6,000,000 was included both food safety and animal safety, maybe a little biased towards animal safety.

David Naemura
David Naemura
CFO & COO at Neogen

But of the of the 4,000,000 that was kind of broader, you know, two of that was China. And I and I think that is just a unique a unique dynamic. When you spread the rest around the world, I think it felt more like, just not seeing the uptake and kind of the uncertainty uncertainty reading through. So I don't you know, and and we'll see how the fourth develops, but I think it feels to us uncertainty potentially increasing here with the additional tariff actions from when we ended the quarter to where we're at today. So I does that help?

David Westenberg
David Westenberg
Managing Director & Senior Research Analyst at Piper Sandler Companies

Yeah. No. No problem. You know, just in terms of like the tariff impacts, I mean, this is probably something going on in April and May. And when you contemplated the guidance for the year, I mean, how did you quantify the unquantifiable, which I know that's a it's it's a really it's a really challenging questions, but, you know, just, anyway, I'll I'll stop there.

David Naemura
David Naemura
CFO & COO at Neogen

Yeah. Yeah. Look look.

David Naemura
David Naemura
CFO & COO at Neogen

I think we weren't you know,

David Naemura
David Naemura
CFO & COO at Neogen

our timing here today is is rough because the events of the last twenty four and forty eight hours have been have been pretty pretty dramatic. But I think that's why you heard us emphasize uncertainty. We didn't give you a range. We kinda set about because I think we recognize that there's a level of uncertainty that we can't quantify. Having said that, you know, we've got March under our belts.

David Naemura
David Naemura
CFO & COO at Neogen

That felt a lot like how we how we kinda felt coming through February. So what we tried what we've assumed is an environment reasonably consistent with probably some incremental headwind to EBITDA at a minimum from tariffs. And, you know, maybe that's kind of roughly five in there, which if you take kind of that 30 exposure that I talked about and kind of broke it down by weeks, that that probably comes pretty close. But I I think you're making a very good point, which is the level of uncertainty heightened. Look.

David Naemura
David Naemura
CFO & COO at Neogen

Even with that, we felt it was important to up update our guide even even given that as opposed to not with seven weeks left. But, you know, I I I think your point is a good one, and we would like to we agree with it. It's very difficult at this stage.

David Westenberg
David Westenberg
Managing Director & Senior Research Analyst at Piper Sandler Companies

Yeah. I I guess and, again, I'm I'm sorry to hammer on to this point. But, like, right now, I mean, it's it's like and you're right. You have unfortunate timing. I mean, this is really happening in April and, you know, you have, what, eight days of of visibility since liberation day to to kinda understand what the impacts are in the business.

David Westenberg
David Westenberg
Managing Director & Senior Research Analyst at Piper Sandler Companies

I mean, I don't really know if if I I guess I'm belaboring the point here, but the the different buckets, the USDA, the FDA, the increase decreases in spend you're expected to see, but you have not necessarily seen yet. I don't know if you could quantify that. And then I don't know if you could quantify some of the like, what you're saying in terms of deregulation. And, you know, I I guess you've already kind of said the tariff impacts was 5,000,000 ish. But, again, I I I I know, like, you can't unquant I know the timing is hard, but for us, like, we wanna understand this guidance and kind of, like, what's happening in this you know, until that that April August close, like, what all went in it?

David Westenberg
David Westenberg
Managing Director & Senior Research Analyst at Piper Sandler Companies

And and I I know it's extremely hard for you. So I I I'm I'm I'm sorry to ask that question, but we're, you know, we're we're trying to get to it.

John Adent
John Adent
President and CEO at Neogen

Oh, David. So look. It totally makes sense. Look. What we were pointing out on the FDA and the USDA was while they are leaning out those agencies, it it if, you know, everyone remembers, they're not not all manufacturing facilities have MPA inspectors in.

John Adent
John Adent
President and CEO at Neogen

Actually, most do not. And so if we feel this will continue to push food safety testing to the plant where it should be done. Right? Because that's where food safety is. So while the inspection services may have less inspectors, what I was trying to portray was that it is not the inspectors that are doing the test.

John Adent
John Adent
President and CEO at Neogen

It is the companies that are doing the test. So I I was trying to portray that there is a overall firmness there even though there may be a leaning out of those

John Adent
John Adent
President and CEO at Neogen

sorts of agencies.

John Adent
John Adent
President and CEO at Neogen

Right? Yeah. The other the other thing regarding the some of things we're doing on cost is, as Dave talked about, we we we did already in the genomics business execute on a in the second and third quarter a pretty significant restructuring of that. I don't mean to restart, but realigning that business and doing it also on the cost side. Right?

John Adent
John Adent
President and CEO at Neogen

So we we have that under our belt. And then we continue to look at where we are overall as a company to say, are the costs aligned? And I think, look, I think that's where if you go you look at the quarter, the the EBITDA percentage hung in there at a at a much lower volume level, which if you look traditionally in Neogen, you know, would be very, very challenging for us pre, you know, kind of where we are at this stage of the company. Mhmm.

David Westenberg
David Westenberg
Managing Director & Senior Research Analyst at Piper Sandler Companies

Gotcha. I you know, I I I I'll I'll take

David Westenberg
David Westenberg
Managing Director & Senior Research Analyst at Piper Sandler Companies

the rest

David Westenberg
David Westenberg
Managing Director & Senior Research Analyst at Piper Sandler Companies

offline. I I mean, I feel like I'm hitting the same like guidance and like for the next like five months kind of comments. Anyway, good. Thank you. You've been great.

David Naemura
David Naemura
CFO & COO at Neogen

Thanks, David.

Operator

Your next question comes from Brandon Vasquez with William Blair. Your line is now open.

Brandon Vazquez
Research Analyst at William Blair & Company, L.L.C

Hey. Thanks for the follow-up question. Just one real quick to now that we're in a public setting. I think, Dave, as we start to look towards fiscal twenty six, I'll I'll be the guy to ask it. I appreciate we're not gonna get any numbers here.

Brandon Vazquez
Research Analyst at William Blair & Company, L.L.C

But just in a in a public setting here, anything that we should be keeping in mind, puts and takes for the model as we start to update our forward year numbers as well? Thanks, guys. Yeah.

David Naemura
David Naemura
CFO & COO at Neogen

Look. I think the the actions that we laid out that John highlighted will all have implications to that. I think we're looking at some cost actions here that we hope to impact the exit rate with. We've added costs over a period of time, and I think we're operating at a level that we recognize is below what was anticipated even a year ago. And a result, we need to readdress some of those costs.

David Naemura
David Naemura
CFO & COO at Neogen

Portfolio, obviously, will have an impact both to kind of incrementals moving forward as we begin to refine our end market exposures as a result of those actions. And then, you know, you know, we talked with we talked earlier about how hard it is to call the next seven weeks. So, you know, with that with that caveat, Brandon, you know, progress on key integration items and, you know, seeing the focus areas around sample handling and those things come back will be kind of the big levers. As you know, the financial model here and the the model your guys' model is significantly revenue driven, and that'll be a big that'll be a big part of our focus. So more to come, and we look forward to providing some guidance there.

David Naemura
David Naemura
CFO & COO at Neogen

The other thing that John noted in his comments was, you know, we'll we'll dimensionalize some costs that that'll be duplicative costs as we stand up the new feature film facility, and those will be driven by the timeline as we get into that. So more to come on that, but look forward to having a broader conversation around that this summer.

Operator

There are no further questions at this time. I will now turn the call over to John for closing remarks.

John Adent
John Adent
President and CEO at Neogen

All right. Thank you. Thank you, everybody, for being here with us today, we look forward to talking to you again in July.

Operator

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.

Remove Ads
Executives
Analysts
Powered by Quartr
Earnings Conference Call
International Seaways Q3 2025
00:00 / 00:00

Transcript Sections

Remove Ads