Prepared remarks
Good morning, ladies and gentlemen, and welcome to the Neogen Corporation Fourth Quarter 2024 Earnings Call. This call is being recorded on Tuesday, July 30, 2024. I would now like to turn the conference over to Bill Waelke. Please go ahead.
Thank you for joining us this morning for the discussion of the fourth quarter of our 2024 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 opened today, we published our fourth 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 the earnings call for the fourth quarter of our 2024 fiscal year. After crossing multiple significant integration milestones in the third quarter, progress continued on multiple fronts in the fourth quarter. We finished relocating the former 3M sample handling product lines in our facility in Lexington, Kentucky, and are now in the process of ramping up to full production levels, which we expect will be at the end of next month. We also saw improvement throughout the fourth quarter in our shipping performance, and this progress has allowed our commercial teams to return their focus to what they do best: demand generation. Food production volumes remained mostly down on a year-over-year basis as customers continue to be under pressure, but the end market environment was stable in the fourth quarter. With the belief that food inflation in particular will continue to ease, food production volumes are generally expected to slowly improve over the course of our 2025 fiscal year.
Along with the improving end market backdrop, our commercial teams are leveraging the broadest product portfolio in the industry and our reputation for consultative customer service to drive demand. Now for our results for the quarter. Total food safety core revenue grew in the mid-single-digit range, following solid growth in the fourth quarter of fiscal 2023. In Animal Safety, channel inventory levels and end-user demand for our product categories remain roughly stable compared to the prior quarter. Our lower quarterly sales in this segment are due primarily to our Genomics business in the U.S. and were otherwise flat on a core basis. In our Genomics business globally, core revenue was still down on a year-over-year basis. In the first quarter, we began to round-trip most of the impact of the strategic shift towards larger production animals, which has primarily impacted the U.S. business.
We are focusing our efforts on driving growth in the direct-to-producer beef and dairy business, as well as managing through a mostly flat companion animal market by expanding our direct-to-consumer genetic testing offerings. With respect to product technology, we've seen notable developments recently related to two of our priority growth areas, pathogen detection and Petrifilm. In early June, the USDA's Food Safety Inspection Service named the Neogen Molecular Detection System or MDS, as its primary screening method for Salmonella and Listeria in meat, eggs, and poultry. Salmonella and Listeria represent the majority of pathogen testing in these food categories. This selection by the USDA further validates the effectiveness, reliability, and ease of use of our MDS testing platform. We believe we have a significant opportunity for growth in pathogen detection and plan to leverage the core capabilities of the MDS platform as a key part of our product development and initiatives in this area.
The USDA announcement was followed in late June by the launch of our Petrifilm automated reader, which automates the loading of Petrifilm plates. The automated reader is specifically designed for high-volume labs and allows users to automatically feed and enumerate up to 300 Petrifilm plates, while integrating with existing lab workflows and systems. This level of automation removes the need for lab technicians to manually load individual plates into the reader, reducing labor and providing more capacity for data analysis. We expect the growth of this product to take some time to ramp up but allows us to more effectively target the market opportunity for high-volume testing environments. Those labs typically running over 100,000 such tests annually. We believe Petrifilm is a clear market leader in indicated testing and are planning continued investment to maintain its market leadership and unlock additional opportunities.
On our last earnings call, we committed to resolving the distribution inefficiencies stemming from our SAP and our new warehouse management system by the end of the first quarter. Although the fourth quarter was impacted by these issues, they have now effectively been resolved, and our commercial efforts are squarely focused on winning back the sales that were impacted. With respect to the integration, we still have work ahead of us, but the vast majority involves the completion and outfitting of our new Petrifilm production facility, which we do not expect will affect the rest of our operations. Now I'll turn the call over to Dave for some more insights into our results for the quarter.
Thank you, John, and welcome to everyone on the call today. Jumping into the results. Our fourth quarter revenues were $237 million. Core revenue, which excludes the impact of foreign currency, acquisitions, and discontinued product lines grew 2% for the quarter, while foreign currency was a headwind of 420 basis points compared to the prior year. Although we made significant progress during the quarter, our total revenue was impacted by our lower order fulfillment rates. Moving to the segment level, revenues in our Food Safety segment were $167 million in the quarter, a decrease of 1% compared to the prior year, including core growth of over 4%. The core growth was led by the indicator testing, culture media, and other product categories, which benefited from double-digit growth in our Petrifilm product line as well as solid growth in culture media and food quality nutritional analysis.
The bacterial and general sanitation product categories saw growth in pathogens and general sanitation, partially offset by a slight decline in microbiology due primarily to a higher level of equipment sales in the prior year period. Within the natural toxins and allergens category, modest growth in allergens was offset by a decline in natural toxins due mainly to reduced product availability. Quarterly revenues in the Animal Safety segment were $70 million, which includes a core revenue decline of 3% compared to the prior year quarter. Overall, inventory levels in the channel remained largely stable, with our decline in core revenue being driven by a couple of specific product category dynamics. The Vet Instruments and Disposables product line had another quarter of solid core growth. In the Animal care and other product categories, core growth was led by higher sales of our vitamin injectables and Biologics products.
Within our portfolio of biosecurity products, strong growth in insect control was offset by declines in cleaners and disinfectants and rodent control, due primarily to a compare challenge on strong growth in the prior year quarter and timing of current-year shipments. Worldwide genomics revenue was down mid-single digits on a core basis. Solid growth in beef markets in EMEA and Latin America was offset by the shift away from small production animals in the U.S., the impact of which we expect to decrease as we exit the first quarter. From a regional perspective, core revenue growth in the fourth quarter was mixed. Growth was led by Latin America, which saw growth well into the double digits with a strong performance across most key product categories. The growth was driven by progress on backorder fulfillment, some level of distributor restocking, and additional business at key food producers.
Our business in Europe grew low single digits on a core basis, with strength in culture media, Petrifilm, general sanitation, and sample handling, partially offset by a decline in Biosecurity products. Asia Pacific core revenue grew mid-single digits on a year-over-year basis, with strong growth in Petrifilm and general sanitation offset by declines in pathogen and sample handling. Our U.S. and Canada region saw the largest impact in the quarter from the shipment delays in our main distribution center, with core revenue down in the mid-single-digit range. Despite the impact, Petrifilm did see a modest level of growth, which was offset by declines in most other food safety product categories. In the Animal Safety segment, performance was mixed with Vet Instruments in Animal Care, offset by declines in biosecurity and genomics. Gross margin in the quarter was 47.9%, representing a decrease of 300 basis points from 50.9% in the same quarter a year ago.
Adjusting for transaction and integration-related costs, the gross margin decline in Q4 was about 210 basis points. The decline was driven primarily by costs related to the stabilization of our distribution and logistics operations and a higher-than-usual level of inventory adjustments. Adjusted EBITDA was $53 million in the fourth quarter, representing an adjusted EBITDA margin of 22.4%, a year-over-year decline of 370 basis points. The decline in adjusted EBITDA margin resulted primarily from the decline in gross margin with some additional negative impact from transaction FX. Overall, the adjusted EBITDA margin came in below what we believe is our underlying run rate, this level of revenue by approximately 100 basis points as a result of some higher charges in the quarter that should not recur. Fourth quarter adjusted net income and adjusted earnings per share were $22 million and $0.10, respectively, compared to $30 million and $0.14 in the prior year quarter.
The declines in the current year Q4 were driven primarily by the lower adjusted EBITDA. We ended the quarter with gross debt of $900 million, 67% of which remains at a fixed rate, and a total cash position of $171 million. Compared to the third quarter, cash was roughly flat with outflows for capital expenditures offset by operating cash inflows. Moving to our outlook for fiscal year '25, we are expecting core revenue growth in the mid-single-digit range on the back of an end market environment we expect to slowly improve as the year progresses, with total revenue anticipated between $925 million and $955 million. We expect the first half of fiscal '25 to be a little wider than its usual seasonality of around 48% as we continue our focus on winning back sales following the shipment constraints we experienced in the second half of fiscal '24. Adjusted EBITDA for the full year is expected to be between $215 million and $235 million, reflecting margin expansion of approximately 100 basis points and an incremental margin of over 70% at the midpoint.
We expect this margin expansion to be driven by improvements in gross margin and operating expense efficiency, aligned with revenue growth throughout the year. With respect to capital expenditures, we are anticipating a sizable decrease as we move past the peak integration spend of fiscal '24. For fiscal '25, we expect capital expenditures of approximately $85 million with approximately $55 million specifically related to integration items. We believe higher adjusted EBITDA combined with lower CapEx and the 3M working capital load not repeating will result in free cash flow being well into positive territory. I'll now hand the call back to John for some closing thoughts.
Thanks, Dave. The last couple of quarters have seen a tremendous amount of integration progress as we extricated ourselves from the services previously provided by our transition partner. This progress came with the inefficiencies in our distribution center that we discussed and have now resolved. Fiscal 2024 represented the peak of cash outflows for the integration in terms of both capital expenditures and working capital investment. Outside of the new facility we're building, the 3M food safety operations have now been combined with Neogen, and we're able to shift a significant portion of our operational focus towards driving improvements in these combined operations. Commercially, we're excited to see a continued trend of improvement in our end markets and look forward to operating in a much more normal environment in which we're able to bring the combined power of One Neogen to demand generation on an unconstrained basis.
As demonstrated by some of our recent product launches, innovation remains a top priority. We are continuing to invest behind our key technology platforms where we believe we have a meaningful opportunity to drive growth, particularly in regions where we are underrepresented today. Simultaneously, we're exploring a number of new technologies that can improve the quality and ease of food safety testing and strengthen our leadership position in the industry. While we have a significant amount of work that's behind us, we understand and are committed to executing on the opportunities ahead of us to continue to position the business for long-term growth. Speaking of work, all of the progress we've made would not have been possible without the dedication and sacrifices made by our team members around the world. I'm proud of what they've achieved to date, and I want to thank them all again for their continued efforts. Now I'll turn things over to the operator to begin the Q&A.
Questions and answers
Your first question comes from David Westenberg with Piper Sandler.
Congrats on a good end of the year, right, big beat numbers. All right. And guidance in line. So let's go with the Petrifilm. Let me ask just a bunch on Petrifilm, it's kind of one question because I think that is a pretty important business. So as we look at the retrospective on Petrifilm, can you give us some sort of rate of customers that you've won back? Customers that are still ready to come back? And then can you talk about how that new automated Petrifilm reader can maybe drive business to that Petrifilm? And of course, you talked about the high-volume customers. Can you give us a distribution of what percent of your customers are high-volume customers versus low-volume customers? Just would love to figure out how much of your customers would actually be able to convert to that system. So that was a lot. Apologies.
I appreciate your question, David. To start, we had a strong performance in the fourth quarter with Petrifilm seeing growth in the low teens, which we consider positive. In Japan, after some customer losses, we managed to recover and even grow over the year, and we anticipate that trend to continue, though the overall market remains a bit sluggish with low single-digit declines in the food production segment. We expect gradual improvements in our next fiscal year, particularly in the latter half. As for the new reader, we are very enthusiastic about its implementation. Previously, users had to manually feed samples, but now we can process over 300 stacked reads. Our focus is on high-throughput labs for food safety, which account for approximately 20% of our market share, while the remaining 80% includes those high-throughput facilities. This represents a significant growth opportunity for us. In the longer term, we plan to reach non-food producing labs as well, but that requires us to develop additional products and establish manufacturing capabilities internally since we can't expand our SKU offerings using 3M's resources. We're optimistic that the reader will enhance our addressable market, especially for labs conducting over 100,000 tests. In the coming years, we look forward to developing specific SKUs to support those new market opportunities.
Got it. No, that's helpful. Just maybe if I can dive in a little bit. So it does sound like those high-volume customers do represent a pretty high percentage of the revenue in Petrifilm. Did I catch that right? Anyway...
It's a smaller number of customers, but they conduct more volume. I wouldn't say that the remaining 80% represents the larger segment. It's less than half, but it's more focused because they generate a lot of volume, although it's a small group of customers.
Got it. Perfect. You have another analyst on, so I'll stick to two questions. Can you discuss the gross margins? You mentioned the distribution and inventory issues, indicating more than 200 basis points of headwind. That seems like it could be temporary. As we model for next year, should we expect that to roll off quickly, or should we consider it a drag for a couple of quarters? Additionally, as we think about our modeling, if you could reference any year-over-year comparisons for our 2025 fiscal year, that would be helpful. I'll stop there.
Yes, thank you, David. I believe the gross margin for the fourth quarter turned out to be lower than what we believe the business can achieve. This is mainly due to increased inventory write-downs, and we are actively working on stabilizing our distribution and logistics operations. Over a period of about two and a half quarters, this has resulted in higher inventory write-downs and ongoing inefficiencies. If we take a step back and look at the quarter as a whole, it seems there has been a couple of hundred basis points of inefficiency affecting the gross margin. Operating expenses are a bit lower than what I would consider typical for our run rate. Therefore, at the EBITDA margin level, we are likely about 100 basis points below target. I do anticipate some of those efficiencies in gross margin will return over time, hopefully in the second half of the year. It's important to note that gross margin is quite dependent on volume, especially given our higher incremental costs. So, as we move through 2025, I expect to see gradual improvements in both gross margin and EBITDA margins. Thank you for your question.
Your next question comes from Brandon Vazquez with William Blair.
Maybe on a high level first, can we just start. John, can you just talk about as you look at the organization now, most of the integration of the business is done here, what are the opportunities? And then even the risks as you look at, call it, the next 1 to 2 years from a commercial perspective? And then maybe, Dave, can you also frame from the P&L side, the same kind of discussion of what are the remaining risks and opportunities here in the next 1 to 2 years?
Yes. Thanks, Brandon. Look, the growth opportunities in the next 1 to 2 years are now that we have substantially everything except Petrifilm in-house is to take the One Neogen portfolio to our customers and drive share growth, right? And doing that across multiple regions. As we've talked about in the past, we feel that we're still underpenetrated. In Asia, we're underpenetrated. In Europe, we're underpenetrated. Latin America, heck, we're underpenetrated in the U.S. So we still have a 20% share opportunity to continue to grow in these core markets. So that's number one. Secondarily, you see what we're doing with MDS. You saw that in MDS. We had an opportunity where we saw that the USDA chose our molecular detection system as the choice for Salmonella testing and Listeria testing in poultry, eggs, and meat. I don't know if you saw yesterday, they also said that now they're going to start requiring Salmonella testing in all poultry products.
So when we were asked, what does that do? Well, just to get the USDA contract really isn't that big of a revenue deal. But now as they continue to move testing further and push it along that we are the testing of choice really helps us as they continue to drive this throughout the industry. So big opportunities to continue in new product development like we saw with our MDS and pathogen testing. As we talked about, David, the reader is going to open up the opportunity in the high-throughput labs. First, starting with the food, high-throughput labs, but that opportunity really past 2 years to look at commercial labs in general that are using Petrifilm. I was talking to the group. I don't ask for a lot. The only thing I'm asking for is everybody that uses Petri dishes in the world to be using Petrifilm, that's not a lot to ask for. So I think that's something that we're going to aspire to as a group.
I think if you think about the risk side, our biggest risk is still bringing in the new Petrifilm manufacturing. Now the team was in Taiwan. The equipment is up, it's running. We performance tested it in Taiwan. We were very pleased with the results. So we've approved, signed off. So we're breaking down the equipment, and it's going to be sent over to the U.S. So we're right on track to where we need to be kind of on that progress. But to me, that's the number one. And then secondarily, I'd just like to see our customers get back to some growth. The unprecedented inflation that we've had has really had an impact on the market that I haven't seen in 7 years here. And you still see it. I mean, I don't know if you saw McDonald's comments, but when you've got people revolting that fast food prices are too high, it's tough. It's tough out there. So I'd like to see some of that ease. We think that could help a little bit in the second half, which is and Dave will kind of take you through kind of the quarters, but we see the second half is going to be stronger for us as that eases a little bit.
But I'd like to see the markets improve a little bit. And as we talked about, we're kind of going to be in the trough for Animal Safety. The good news is it's a smaller part of our business, but that business is not going to be growing as fast as next fiscal year because of the economics right now in the production animal segment.
Brandon, just to follow up on the second part of your question, I'd say, maybe in the near term and then the longer term. I'd say in the near term, we need a year where we're not faced with a sizable integration challenge in '23. We have the supply-side constraint from 3M. And then, of course, in '24, we did the shipping, logistics, order to cash integration, which resulted in constrained on our capacity shift. And some of that impact now flows through, particularly into the first half of fiscal '25. So you know from being around here that we typically see the first half is a little lighter than the second half. I think historically, in the kind of 48-52-type range. I think what we'll see in '25, again, in the near term, is a little lighter first half and then a little better second half with better growth rates in the second half on what amounts to an easier compare. We've got some share to recapture as a result of some of the shipping constraints.
We'll see that mostly impact Q1, which historically is always our lowest quarter from both revenue and an EBITDA margin perspective. So it will put pressure earlier in the year. But as we work through that, like we did following the supply constraint of Petrifilm in '23, we should see that recover. I think in the intermediate to longer term, we've talked about the integration thesis remaining intact, and I think it really does. We've always talked about the P&L performance here. Yes, there's always this or that this put or that take. But at the end of the day, P&L performance will come down to volume. So getting back to unconstrained growth, being able to tackle the markets as John elaborated on is what really unlocks the opportunity for the P&L. I'll stop there.
Okay. And maybe to follow up on what you were talking about at the end there. If I look at guidance for the year at the midpoint, let's call it, a $75 million delta towards EBITDA to get to that $300 million pro forma goal you guys previously put out there, without going into timing of getting there, I think you guys want to take things a year at a time, which I understand. But talk about what the bridge is, how do you get that incremental $75 million in EBITDA? What are the drivers that get you from like a fiscal '25 EBITDA number up to eventually in an undisclosed time frame, a $300 million EBITDA number?
I appreciate that. The first key factor is growth. We have indicated that the $300 million EBITDA target is linked to over $1 billion in revenue, and we need to reach that level. Additionally, as we move through years of significant integration, we can achieve better efficiency and performance in our profit and loss management. Although this was a challenging year, we have made substantial operational improvements and introduced new insights to our teams, which should yield long-term benefits. Therefore, it’s really a combination of these two elements and the strong contributions the company can achieve from growth, particularly from the 3M products like Petrifilm that have demonstrated excellent results. Regardless of market timing and integration challenges, we believe this potential still exists. While we are guiding one year at a time, we think the financial outlook following integration remains solid, and it’s just a matter of time before that growth occurs.
Okay. And maybe one last one for me. Dave, again, can you talk a little bit about what is baked into the high and the low end of the revenue and EBITDA guidance ranges?
Sure. First of all, we mentioned that we constrained supply to our customers for the better part of two and a half quarters, which has implications. I believe we will see those effects in the first half of the year. The way we recover from this is significant for the overall shape of the year. I would estimate that we've accounted for at least a couple of points of impact from this in the midpoint of our guidance. However, it's a challenging number to estimate, even with the data available, so the actual outcome could vary. In terms of our customers and their production levels, we believe we are currently in a relatively soft spot in the food safety market during this economic cycle, which is not stable. Presently, we are facing a tougher phase in this cycle, and we expect a gradual recovery, but again, this could turn out better or worse. Additionally, we are assuming that we will stay in the lower segment of a somewhat cyclical animal safety market. There are market implications to consider, including share and share recapture factors that could influence the midpoint guidance.
There are no further questions at this time. I will now turn the call over to John Adent for closing remarks.
Great. Well, thanks, everyone. Appreciate you joining us today, and we look forward to updating you again on our first quarter call in October. So have a good summer. Thank you.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.