Good morning, and welcome to the Neogen Corporation Second Quarter Fiscal Year 2023 Earnings Call. All participants will be in a listen-only mode. Please note, this event is being recorded. I would 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 second 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 Steve Quinlan, our retiring CFO; and Dave Naemura, our current CFO. Before the market opened today, we published our second 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.

Thanks, Bill. Good morning, everyone, and welcome to our earnings call covering the second quarter of our 2023 fiscal year. We're pleased to be with you today to provide the first view of the company's performance since the completion of the Food Safety acquisition from 3M. We've delivered solid core growth in both of our segments and, notably, a level of profitability well ahead of where the company was prior to the acquisition. The former 3M Food Safety business is a great business and highly complementary, and we're excited about what we've seen in the first four months of our ownership. Clearly, we still have a number of things to do and we're in the early days of the integration, but we're off to a great start and we have numerous work streams fully underway across the organization to integrate our systems, products, processes, and people. Our integration philosophy has always been that the best idea wins, with the willingness to make any changes necessary to improve the business and ensure long-term success. We've made significant progress to date in the realignment and coordination of our commercial efforts. We combined CRM systems on day two, modified geographic coverage areas and worked together to identify and prioritize the highest potential revenue and synergy opportunities. We've had successes within the marketplace with customers responding positively to the new products and solutions available to them. Neogen's reputation for technical expertise and excellent customer service has been a considerable asset as we've begun to move forward as one company with one combined portfolio. Planning the relocation of manufacturing operations for our new Food Safety facility in Lansing and maximizing their efficiency are also key integration items receiving significant focus and attention. The manufacturing engineers from the former 3M business are assisting in the design and layout of the production process, while construction of the new facility continues on track. In the interim, the manufacturing and distribution of the acquired products will continue under transition service agreements, and we've been collaborating with 3M to address the production and backlog issues that materialized between signing and closing of the transaction. There's still work to be done, but things are moving in the right direction and we're implementing plans that we believe will lead to further improvements as we move through the second half of the fiscal year. While the integration activities are a broad organizational priority, we're not losing our focus on our customers. The Food Safety segment, which now comprises approximately 70% of our total revenues, grew nicely in the quarter on a core basis, including the indicator testing category, which is the most significant and profitable piece of the acquired Food Safety business from 3M. Our Animal Safety segment had a similar level of core revenue growth, led by genomics and our portfolio of biosecurity products. Tomorrow, we will be having the grand opening of our new expanded distribution center in Mount Sterling, Kentucky, which will shorten customer lead times and allow us to ship more efficiently to our customers. While the elevated level of macro uncertainties led to some softening in our markets, we believe the business is resilient and well equipped to drive future growth. We have an excellent team in place, with each member working hard to ensure that the new Neogen we are creating will continue its upward trajectory, gaining market share and helping our customers around the world keep the people and animals they care about safe. Now, I'll turn it over to Steve for some more insights into our results for the quarter.

Well, thanks, John, and welcome to everyone listening this morning. Jumping right into the results. Our second quarter revenues were $230 million, an increase of 76% compared to the same quarter a year ago. Core growth, which we're introducing to replace our measurement of organic growth, excludes the impact of both foreign currency and acquisitions and was a solid 7% for the quarter. Acquisitions added a further 73%, while foreign currency amounted to a 4% headwind compared to the prior year. At the segment level, revenues in our Food Safety segment were $161 million in the quarter, an increase of 140% compared to the prior year and included core growth of 6%. The sales of our Culture Media & Other category grew mid-single digits, driven by increases in our Neogen Analytics platform and other Culture Media products. Our recently acquired Petrifilm product line performed well in its first quarter under our ownership. Sales of Bacteria & General Sanitation products were mixed, up low single digits on a core basis with growth of Neogen Filters and Ampouled Media and AccuPoint general sanitation products, partially offset by lower sales of rapid microbial testing products. Rounding out our larger Food Safety product categories are natural toxins, allergens, and drug residues, sales of which were down slightly on a core basis. Natural toxin test kit sales were up mid-single digits on a core basis due to higher levels of aflatoxin in domestic and international grain harvests. Allergen test kits were roughly flat due to softening market conditions and supply disruptions for certain products, while drug residue test kits were down primarily due to lower sales to international dairy markets. Quarterly revenues in the Animal Safety segment were $69 million, up 8% over last year's second quarter. Core growth was 7%, while acquisitions contributed 2% and were partially offset by a 1% negative foreign currency impact. Sales in the rodent control, insect control, and disinfectants category had a strong performance, up low double digits on a core basis. The growth was driven by share gains in the animal protein market and sales of dairy hygiene products, as well as new insect control product introductions. Revenues in the vet instruments and disposables category were up mid-single digits on a core basis, led by strong market demand and additional sales to a large retail customer. Worldwide, core genomics revenues rose upper single digits on strong demand in U.S., Europe, and Australian beef markets. Gross margin in the second quarter was 48.9%, representing an increase of 250 basis points from the 46.4% in the same quarter a year ago, with the increase primarily driven by the addition of a higher-margin business from the 3M Food Safety transaction. Excluding the inventory revaluation charge associated with the transaction, gross margin was up over 400 basis points on a comparable basis year-over-year. Adjusted EBITDA was $64 million, representing growth of 116% from the prior year quarter, driven primarily by the merger with the former 3M Food Safety division. Adjusted EBITDA margin was 27.8%, a year-over-year increase of 510 basis points. The increase was driven by the gross margin expansion and also by lower operating expenses as a percentage of sales. As part of the Food Safety acquisition, certain costs were conveyed directly to us, while others did not and will need to be added over time to accommodate the larger scale of the combined business. The adjusted EBITDA margin in the second quarter is higher than what we would expect to see over the next several quarters as we ramp up these additional costs. With respect to earnings, we reported a net loss of $42 million or $0.19 a share compared to net income of $11 million or $0.10 a share in the same period last year. The decline in earnings was primarily the result of expenses related to the 3M Food Safety transaction, professional fees, interest expense, and the amortization of intangible assets. Adjusted net income, a non-GAAP measure we are introducing for comparability purposes, was $31 million for the quarter, and adjusted earnings per share were $0.15, compared to $21 million and $0.19 a share, respectively, a year ago. The increase in adjusted net income was driven by higher adjusted EBITDA, more than offsetting the increase in interest expense, while adjusted earnings per share were impacted by the increase in weighted average shares outstanding, resulting from the Food Safety transaction. I'll now turn things over to Dave.

Thanks, Steve. In connection with the acquisition of the Food Safety division, Neogen took on some debt, which we recognize as a new position for the Company. However, team members of the management team have experience operating with leverage, and we believe the current debt level is very reasonable, particularly when considering our targeted revenue and profitability, as well as the resilient nature of our end markets. We ended the second quarter with gross debt of $940 million and net debt of $664 million for a net leverage ratio of 3 times the last 12 months pro forma adjusted EBITDA. You'll note that the gross debt amount is lower than at the closing of the Food Safety transaction and reflects $60 million of term loan repayment in the quarter. Following the close of the quarter, we repaid an additional $40 million in December. During the second quarter, we also converted a portion of our floating-rate term loan to fixed via an interest rate swap, and therefore, we currently have a 65-35 fixed to floating ratio for at least the next 12 months, which we believe is a prudent course of action in the current interest rate environment. You'll recall that in November, we updated our outlook for achieving $1 billion in revenue and $300 million of adjusted EBITDA, shifting the timing to fiscal 2025 due to changes in the macro environment and exchange rates, as well as the performance of the acquired business during the first eight months of calendar 2022. The lower-than-expected business performance was related to some supply and productivity issues that we expect to be temporary in nature. In fact, we did see signs of improvement in the second quarter. We remain firmly committed to this outlook that we previously shared. As we look forward to the second half of fiscal year 2023, we anticipate continued core growth in the mid-single-digit range, which includes some level of macro softening. This would result in full-year core growth on a pro forma basis also in the mid-single-digit range. As Steve noted earlier, the Q2 adjusted EBITDA margin of approximately 28% was higher than we anticipate running in coming quarters as we continue to add cost in support of the larger combined organization. Our expectation is for a full-year adjusted EBITDA margin in the mid-20%s range. Additionally, as we think about adjusted net income, we anticipate a full-year effective tax rate of around 20% and interest expense for the full year of approximately $57 million. Under our new capital structure, deleveraging will continue to be a capital allocation priority moving forward. We will allocate capital to building our new manufacturing site in Lansing and other organic growth drivers, but deleveraging will be a priority for us. As appropriate, we will continue to execute bolt-on M&A that accelerates our growth strategy and provides for attractive returns. I'll now hand the call back to John for some closing thoughts.

Thanks, Dave. Like Steve and Dave said earlier, there's a lot of things to be excited about as we move forward. We completed the transformational acquisition of a high-quality asset, firmly positioning Neogen as a pure-play leader in food safety. This is an attractive growing end market with what we believe are long-term secular tailwinds, including heightened pathogen awareness, the increasing prevalence of food allergies, and increasingly health-conscious consumers who want to know what's in their food. Neogen is a resilient business, having grown now in 122 of the last 128 quarters, due largely to the consumable nature of our products, which play critical roles throughout the food supply chain. After the acquisition of the Food Safety division of 3M, approximately 95% of our total revenues come from consumable products, which we believe positions us to continue to grow despite the current level of macro uncertainty. The feedback we've consistently heard is that the former 3M Food Safety division has a great portfolio of products. It is the industry standard in indicator testing. We believe the focus we brought to the business compared to the previous situation is a very small piece in a very large organization has been energizing. Our new team members are eager to demonstrate their capabilities and the strength of their products, which we are able to combine with our leading product portfolio to offer even greater value to our customers. I appreciate their efforts and commitment, and I couldn't be happier to have them onboard and working with us to build One Neogen. Now, I'll turn things over to the operator to begin the Q&A.

Thank you. We will now begin the question-and-answer session. Our first question comes from Brandon Vazquez from William Blair. Please go ahead.

Hi, guys. Good morning, and thanks for taking the question. I wanted to start first on the second half guidance for fiscal '23. Can you talk a little bit more about what the investments you need to make are as you kind of scale more? And then, the follow-up question to that would basically be as you make these investments, which makes sense as you scale, when do you expect to see more ROI off of those?

Hey, Brandon?

Yes.

Brandon, you cut out right in the middle of your question. Can you ask again, please?

Yes. So, the question was around second half guidance. Just talking a little bit more about the investments that you guys said you were going to make, why the step down in EBITDA margins just a little bit in the back half of the year? And then, basically, the timing for when you'll see ROI on those investments and when you can start to see margins expand again?

Yes. What you're observing is our efforts to scale the business in order to transition from the service and distribution agreements. As you may recall, we did not acquire any back-office staff during the merger. Therefore, we need to build our IT, accounting, logistics, and HR teams gradually. This increase in staffing is necessary because those agreements had a duration of 12 months with options for six-month extensions. Consequently, we do not hire all the necessary personnel immediately after closing; it requires time to develop those teams.

Okay. And then, I guess the follow-up question to that is, are those investments that may take six to 12 months to start to see an ROI? Or are they upfront costs? And then right away, you can start to see some benefits?

You'll see an offset. Because what will happen is it's really an offset of cost, because as we roll off those agreements, we no longer have to pay 3M for doing those service functions. So, what you're seeing more is the roll-off of expense.

Okay. And then, one more on kind of the profitability side, just switching to gross margins, though. Even when backing out the inventory step up, it came in a little bit below our expectations just given the proxy filings of 3M's gross margin. So, kind of curious if you guys could walk through what kind of margins you're seeing or gross margins on both the Neogen side and the 3M side, just to give a little bit more color on the progression of gross margins from here.

Yes. I think I'm really pleased with what we saw on the gross margin side coming out of the legacy business. You saw early on some margin deterioration even between sign and close with the historical 3M business. And that was really around raw materials moving in that business, not pricing to match the raw materials. I think we've had this discussion before, right, about Neogen doing a 6% price increase while the 3M business did a 2% price increase during the same period in 2022. We implemented price increases January 1. So, we think we have an ability now that we run that business to really manage that closer to what we do than what historically was done.

Okay. And then last one for me, and I'll hop back in queue. Just around Petrifilm, it sounded like from a high level, the updates were positive. Hoping you could give a little more color. You guys in terms of supply, are you kind of unconstrained at this point? It sounds like maybe not. What's the timeline to kind of get to a point where you guys feel comfortable and you're not supply constrained there anymore? Thank you.

Yes, you're right. We're not unconstrained. We did see the business back orders go down in the quarter. We're continuing to work with 3M to drive performance to eliminate the backlog issue. And we're hopeful that in the second half of the year, we can get that fixed.

Our next question comes from David Westenberg from Piper Sandler. Please go ahead.

Hi. Thank you for taking my question, and congratulations on completing the first quarter of the full acquisition. I appreciate the guidance you provided, but I'm a bit concerned because there are many variables affecting core revenue versus solid revenue. You mentioned mid-single digit guidance for the second half of the year. Could you clarify what that means for actual revenue numbers? I'm uncertain whether to apply mid-single digits to core revenue, and I'm confused about how to approach 3M. Is there a framework you can provide to help me understand this better?

Yes.

Yes. Hey, David, it's Dave. So, a mid-single-digit core in the second half, if we look at today's currency rates, would suggest some currency offsetting that is still at a step-down level. Acquisitions other than 3M won't significantly impact us going forward. It will decline substantially. Therefore, we anticipate that on a reported basis, we would see growth in a low single-digit range, and that's on a pro forma basis. What you'll likely observe is a second half average around, if not slightly lower than what we experienced in the previous year, with underlying core growth in that mid-single-digit range.

Yes. As we mentioned, the markets are facing some challenges compared to last year, and we're observing a bit of softening. However, there are positive developments in these markets that I find encouraging. One significant change is that sesame has been added as a major food allergen in the U.S., the first addition since 2004. This has led to an increase in demand for our sesame allergen testing kits because testing has now become necessary. I believe this trend will continue to grow in the long term. Additionally, I highlighted in my release the issue of pathogens. Last year, over 1.3 million Americans were affected by Salmonella, and I was one of them. It’s not something anyone wants to experience. In August, the USDA announced that Salmonella will be classified as an adulterant in frozen breaded chicken products, which is just the beginning. We will expand this regulation to include other chicken products, and this will further drive the need for testing by Neogen. This is why we operate in such relevant markets. Despite a generally soft economy, these developments will support our growth throughout the year.

Got it. Okay. And going on a continuation of understanding the growth rate, I mean, I think you put core revenue as being 7%, and correct me if I'm wrong, on core. So that's without 3M. And then, Food Safety did do 8.4%. Does that imply the legacy Neogen Food Safety business was about 5% to 6%? Is my math here all right?

I think we can proceed, Steve.

Yes, Dave, I think maybe you had to add a little backwards. Animal was at 7% core. I believe it was 8.5% may be reported. The Food was closer to 6% core, so those are kind of the numbers for the quarter.

Thank you very much. To continue Brandon's question about the gross margin, our long-term guidance suggests it will be in the mid-50% range. This is slightly below expectations, and it seems to be related to mix. Animal Safety has a lower gross margin compared to Food Safety, so some of this may be attributed to that mix. Is there anything else you would like to highlight besides the mix?

Well, and I think not only mix between those units, but also as is now the Food Safety 70% of the business, you've got to be aware of the mix within the Food Safety business. And again, we're not through the headwinds on the Petrifilm, but we still have back orders to where that's one of our highest profitability lines, and we have more demand than what we can sell today. When we get that fixed, that's really going to help. And that's the one thing that I hope you guys have taken away, too, is like even just after the first quarter, we bought a great business. I mean, it has a great margin profile. It's a highly profitable business. The new Neogen, the One Neogen, is now much more profitable than we were pre-acquisition.

Got it. No, that's super helpful. So, as we'll get the benefits as the indicators can actually come to market.

Yup.

Can you discuss the H2 EBITDA assumption? It seems like you may have received some timing-related benefits. Did you experience any cost avoidance in this quarter that will contribute to H2?

Yes. Look, I think that's a fair way to think about it. We're on a ramp here, so we'll see that come up. That's why we wanted to say that we came in probably a little hot at the adjusted EBITDA margin line item here in the quarter just completed, and we'll see those costs come in and will normalize back down in kind of the mid-20s.

Got it. All really helpful. I’ll let Brandon have some follow-ups and I’ll ask the rest of those later. Thank you so much.

Thanks, David.

There are no more questions in the queue. This concludes our question-and-answer session. I would like to turn the conference back over to John Adent for any closing remarks.

Great. Thank you. I want to thank all of you for joining us this morning. I hope that you had a happy and safe holiday, and that your 2023 is off to a great start. We're really excited here at Neogen about what the New Year brings with our new One Neogen business and really helping our customers perform in 2023. So, thank you again for joining us, and we look forward to talking to you again on our third quarter call in the spring.

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