管理層發言
Good morning, ladies and gentlemen, and welcome to the Neogen Third Quarter 2026 Earnings Conference Call. This call is being recorded on Thursday, April 9, 2026. I would now like to turn the conference over to Scott Gleason, Head of Investor Relations at Neogen. Please go ahead.
Thank you for joining us this morning for the discussion of our fiscal third quarter 2026 earnings. I'll briefly cover the non-GAAP and forward-looking language before passing the call over to our CEO, Mike Nassif; and our CFO, Bryan Riggsbee. 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 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. I'm now pleased to turn the call over to our CEO, Mike Nassif.
Good morning, everyone, and thank you for joining us. I'm happy to report that we delivered solid core growth in our Food Safety segment again this quarter, including continued growth in the United States. Our growth in the quarter was consistent with current market dynamics. This is an important milestone to achieve our goal of above-market growth. We improved our adjusted EBITDA margins to some of the highest levels in recent company history at 22.8% through cost discipline. This bodes well for our future as we look to accelerate top line growth in fiscal year 2027 and beyond and helps demonstrate the inherent financial leverage in the business. At the same time, we encountered several supplier challenges stemming from third-party manufacturers that unfortunately had a meaningful impact on our Animal Safety business. While many of these issues were outside of our direct control, they don't meet the standards we've established as an organization.
In response, we've implemented a more rigorous supplier qualification and review process to strengthen reliability going forward. Meeting our customer needs remains our highest priority, and we're addressing these challenges head-on with urgency and discipline. As we look at our transformation journey, we continue to be focused on three major strategic initiatives to stabilize and strengthen our mission as the market leader in food safety. First, commercial prowess. We're strengthening our sales and marketing engine by deploying an enhanced go-to-market strategy. We're introducing a global solutions-based selling model that will fully leverage our market leadership position, implement rigorous metric-driven performance tracking, and continue to invest in talent and capabilities of our commercial team. Second, high-impact innovation. We're building the foundation for true organic innovation for the first time at Neogen.
This means identifying the products and technologies that can expand our addressable markets, advance our technology leadership and differentiation, and unlock new growth opportunities within our core channel. Finally, operational efficiency. We're simplifying and fortifying our enterprise processes to drive stronger efficiency and execution. Our key operational initiatives include advancing and scaling our S&OP process, completing the transition of our manufacturing operations, and refining our budgeting and forecasting processes. As we prepare for fiscal 2027, we are pursuing technology enhancements and consolidation opportunities that can further streamline operations. Together, these three initiatives paint the picture of how we're upgrading our capabilities and solutions across the organization to be best-in-class. I'll start with our first growth initiative, commercial prowess. First, I think it's important to highlight that Neogen has a strong commercial foundation for us to build upon.
It includes the most comprehensive portfolio of high-quality integrated solutions in food safety, unparalleled technical expertise, standard-setting guidance, and best-in-class global education, training, and implementation support. These foundational elements provide a strong launching platform for our next-generation commercial engine. Additionally, as we have previously announced, we've added two outstanding leaders to our commercial organization: Tammi Ranalli, our new General Manager of Global Food Safety; and Joe Freels, our new Chief Commercial Officer. Tammi and Joe have been conducting a comprehensive review of our global go-to-market strategy. These leaders know what good looks like and are leading our commercial transformation on a day-to-day basis. As we assess our presence across countries and customer segments, a clear theme has emerged: it's time to optimally realign our resources from either a geographic or revenue exposure standpoint.
To address this, we intend to reallocate investment towards the markets, product lines, and customer segments that deliver the most significant impact on our ability to grow while allowing us to provide better customer service. In certain regions, partnering through distribution can be a more effective playbook. This approach allows us to streamline our cost structure and improve the level of service we deliver to customers in those areas. I implemented a similar approach when I led the Siemens Point-of-care Diagnostics business, and it resulted in significantly improved operating performance, a more efficient organization overall, and a better ability to meet our customers' needs. From a sales and operations perspective, Neogen has historically operated in a siloed manner with limited process standardization or resource alignment across geographies. Tammi and Joe are developing global standards and a unified solutions-based selling framework for our teams.
We believe this approach is the most effective way to differentiate Neogen competitively and to fully leverage two of our core strengths: the breadth of our portfolio and our expanding commitment to innovation. We will support these solutions with rigorous metric-based analysis and disciplined performance management. Joe and Tammi continue their weekly meetings to evaluate our critical sales KPIs such as total funnel size, funnel additions, and funnel wins. This process rigor has been the biggest contributor to our improved execution in food safety to date and still has significant room for further improvement. Now for our second initiative, high-impact innovation. Our Chief Scientific Officer, Jeremy Yarwood, is leading a comprehensive assessment of our existing portfolio, opportunities for organic innovation, and areas where externally developed technologies could be licensed and applied within food safety.
The goal of this component of our transformation strategy is clear: to enhance our current offering, enable entry into attractive markets, and strengthen Neogen's competitive differentiation through unique technology solutions. At the heart of our innovation strategy, we always consider our customer needs and requirements first. One area where we see a meaningful early opportunity is Petrifilm. We believe the applications for Petrifilm extend well beyond traditional food and beverage testing into additional consumer product categories like pharmaceuticals, cosmetics, nutraceuticals, and other consumer product categories. In the future, with full control of our manufacturing process, we'll qualify and validate new custom SKUs within the established Petrifilm framework, something that wasn't possible historically. In prior years, several major customers approached us seeking custom SKUs tailored to their testing needs.
But because we didn't have control of production, we couldn't respond. That constraint will soon be removed. To accelerate this development, in the fourth quarter of fiscal year '26, we're investing in a research-scale R&D line at our Minnesota research facility. This will allow us to rapidly prototype, test, and validate new SKUs without disrupting commercial production. As our new facility in Lansing becomes operational, it will support our current and future volumes utilizing highly automated production lines with a capacity of multiples of our current commercial volume. As a result, in addition to the structural efficiencies gained from bringing manufacturing in-house, the contribution margin on incremental Petrifilm revenue is exceptionally high. Incremental volume growth can have a meaningful impact on our transformation and our ability to achieve our longer-term margin objectives.
We'll plan to share more details on our plans around innovation and customer technology solutions as we progress through the calendar year. But at a high level, beyond best-in-class sales and service, differentiated products and technologies remain the most critical drivers to position Neogen as the category leader in food safety. Now let's turn to our third initiative, operational efficiency. Here's an update on our Petrifilm manufacturing transition and our core enterprise capabilities. We're right on schedule for the planned November '26 transition. I'm highly encouraged by the disciplined oversight from our operations and R&D teams and the significant momentum we continue to build. First, we've now completed full validation of 100% of the production equipment utilized in the Petrifilm manufacturing process. Additionally, this quarter, we initiated the validation process for our current 17 SKUs, beginning with the highest volume and most technically challenging products.
We are actively conducting both operational performance validation on multiple SKUs to ensure a full manufacturing transition by this fall. It's important for us to complete all of the product validations before commercial production and scale up to ensure we have a robust process in place and prevent commercial production from interfering with the validation process. We continue to believe that the scale of investment required and the considerable technical complexity associated with reproducing this manufacturing process creates almost an insurmountable barrier to entry; replicating the level of precision and quality achieved through our Petrifilm platform would be exceptionally challenging for any competitor, let alone a subscale provider. In addition, we look forward to hosting two upcoming investor tours at our Lansing manufacturing facility in partnership with our covering analysts.
These tours will give investors a firsthand view into the sophistication of the operation and the progress we are making. From an inventory management and sales operations planning perspective, we continue to make meaningful progress even as reported inventory levels remain flat sequentially. Our objective is to build an enterprise-level end-to-end controlled supply chain. We believe these initiatives will drive lower cost of goods sold through increased automation and procurement optimization, enable faster and more reliable global fulfillment, and most importantly, enhance the overall customer experience. As part of this transformation, we are moving toward a centralized planning model supported by AI-enabled logistics and supply chain software tools to improve efficiency and decision-making. In parallel, we are strengthening supplier management with rigorous controls around cost, quality, and performance while also simplifying an overly complex warehousing and logistics footprint to reduce both cost and operational complexity.
We expect to complete the implementation of this new operating model by the end of the calendar year, and we believe it will have a lasting impact on both our cost structure and our ability to serve customers more effectively. Now I want to address the backorder challenges we experienced in our Animal Safety business. The issues stem primarily from disruptions at our third-party suppliers related to product documentation, raw material shortages, and delays tied to supplier manufacturing site transitions. These challenges are further compounded by supplier shifts driven by global tariff changes. Here's what we're doing about it: we're conducting a rigorous review of our supplier qualifications processes and strengthening the controls necessary to ensure we're consistently positioned to meet customer needs going forward. Finally, as part of our operational efficiency, our fiscal 2027 budgeting and forecasting cycle is well underway.
I've asked our leaders to do two things: first, to scrutinize spending with a focus on value-creating activities; and second, to take a strategic view of where technological innovation, enhanced enterprise capabilities, and strengthened processes can drive meaningful long-term efficiencies. This will ultimately allow us to allocate more resources towards growth and innovation. Today, about 56% of our operating expenses are tied to salaries and benefits. This level reflects underinvestment in process automation and modern technology solutions. Achieving sustainable efficiency gains will require a degree of near-term investment and transformation-related spending. The longer-term returns from these initiatives are likely to exceed what we could achieve through acquisitions or even through internal product innovation alone. We are currently evaluating a number of areas for AI and technology implementation.
These include customer service, finance process automation, sales operations and planning, research and development, and technical service applications. Consistent with our historical practice, we expect this transformation-related spend to be excluded from our adjusted financials, as we view it as a temporary requirement to build the foundation for a more scalable business. However, in any scenario, we believe the total magnitude of spend in these areas is positioned to decline going forward, and we continue to anticipate significant improvements in free cash flow next year. Given the large number of initiatives we have ongoing pertaining to sales and marketing, our innovation strategy, and enhancing our operational efficiency, we are excited to host an Investor Day this fall to give investors a better sense of the impact our transformation is having and our long-term financial outlook.
Since the day I arrived, I've been convinced that our challenges are solvable, our industry secular growth drivers are strong, and our ability to execute will ultimately drive our success. While there is still meaningful work ahead, we all know turnarounds are never linear. The progress underway is substantial. And while our early wins aren't always immediately visible in our financial results, what is clear is this: our unwavering commitment to build a stronger, more innovative, and efficient company for all stakeholders. The impact of the changes we're implementing today will become increasingly evident as we enter the next fiscal year and beyond. And now I'll turn the call over to Bryan.
Thank you, Mike, and thanks to all of you participating in the call today. I'm pleased to provide an overview of our financial results and outlook for fiscal year 2026. We delivered third quarter revenue of $211.2 million, representing a 0.1% increase on a core basis. As Mike noted, we saw continued strong core growth in our Food Safety segment, while supply chain disruptions within our Animal Safety segment had a significant impact on our results in the quarter. At the segment level, our Food Safety business delivered $156.7 million in revenue for the quarter, representing 4% core growth, consistent with the second quarter and relatively in line with current market growth rates. Performance was led by continued strength in our indicator testing and culture media products, which were up 11%, and strong growth in pathogen test kits, which are included in bacteria and general sanitation. From a macro standpoint, as the year started, market commentary from several major food producers was generally positive.
Many reported flat volumes, an improvement from the persistent declines observed over the past three years, and several guided to a return to volume growth in calendar year 2026. Recent public comments from companies like Conagra and General Mills show the operating environment has deteriorated, with supply chain and logistics cost pressures mounting as a result of the war with Iran. Fuel and fertilizer costs are rising, which is having a meaningful impact on margins for our customers. Other signs of market disruptions include factory consolidations, increased focus on cost management initiatives, and restructuring across the food production landscape. Given these factors, we continue to maintain a measured view on the macro backdrop for our food safety customers. Food safety continues to be a top priority for our customers and a clear area of competitive differentiation. As an example, Nestle recently highlighted that the latest infant formula recall is expected to result in approximately $350 million in lost sales across 2025 and 2026, which does not include the additional financial costs associated with managing the recall itself.
At an industry level, recall activity is also increasing. The total number of food recalls rose by roughly 15% from 2024 to 2025, and more significantly, the volume of food recalled by the FDA more than doubled year-over-year. These trends reinforce how essential reliable food safety solutions are for producers and the critical role we play in helping them maintain trust, compliance, and brand protection. Quarterly revenue in our Animal Safety segment totaled $54.5 million, with core revenue declining 8.7% compared to the prior year period. As mentioned earlier, supplier-related disruptions had a significant impact on the results in our Animal Safety business. If you exclude these impacts in the quarter, core growth in Animal Safety would have been more consistent with where we were in the second quarter of this fiscal year from a year-over-year growth perspective. We are beginning to see some encouraging signs in the Animal Safety end markets.
Although U.S. production animal herd sizes remain near record lows, sustained strength in meat demand and pricing has materially improved producer profitability. In addition, USDA projections indicate that herd sizes may be nearing a cyclical bottom with growth expected beyond 2026 as ranchers reinvest to meet elevated global protein demand. These trends support a more constructive outlook for the segment over the medium term. From a regional perspective, U.S. revenue was 48% of total sales in the quarter, and our international revenue was 52%. Importantly, U.S. Food Safety once again grew in the third quarter, consistent with the second quarter. We saw strong growth in both EMEA and Latin America in the quarter, and the supplier issues in Animal Safety disproportionately impacted the domestic business in the quarter, given sales are predominantly based in the U.S. Gross margin in the third quarter was 46.9%, and adjusted gross margin was 51.7%.
On a year-over-year basis, our gross margins, excluding one-time costs, were essentially flat. This quarter, we did not make as much progress as planned on sample collection margin improvement, and it still generated a negative gross margin. We faced higher scrap rates on certain sample collection products due to a quality issue at a third-party supplier, which has now been addressed. We continue to be optimistic about our ability to drive improvement for sample collection margins through a combination of growth and potential automation investments in the upcoming fiscal year. Adjusted EBITDA was $48.2 million in the quarter, representing a margin of 22.8%, an improvement of almost 110 basis points on a sequential basis from the second quarter despite lower revenue. This change is reflective of a decline in adjusted operating expenses, which were down 9% from second quarter levels, showing strong cost control.
Of note, $1 million of the sequential decline was due to nonrecurring credits, which will not repeat in future periods. Third quarter adjusted net income and adjusted earnings per share were $19.4 million and $0.09 per share, respectively. Turning to the balance sheet. We closed the quarter with $800 million of gross debt, 68% of which is fixed rate, and a total cash balance of $159.9 million. We remain fully compliant with all debt covenants and believe we are well positioned to further strengthen our balance sheet as free cash flow continues to improve. As previously announced, we entered into an agreement to divest our genomics business unit, which generated approximately $90 million in revenue in fiscal year 2025 and delivered adjusted EBITDA margins in the mid-teens. The announced sale price for the business is $160 million, with expected net proceeds of approximately $140 million after transaction costs and taxes.
We expect the transaction to close in the second quarter of fiscal 2027. We intend to use net proceeds from the sale to reduce debt, and we anticipate our net debt to adjusted EBITDA ratio will decline to below 3x by the end of calendar 2026. Free cash flow in the third quarter was $11.1 million and is now positive for the year. We continue to expect improvements in cash flow trends going forward due to reduced CapEx following the completion of our Petrifilm equipment and construction costs, as well as the elimination of duplicative manufacturing costs. Turning to our guidance, we're raising our full year fiscal 2026 revenue guidance to reflect our stronger-than-expected third quarter results. We now anticipate full year revenue to be in the range of $857 million to $860 million. With respect to this guidance, it's important to consider the evolving foreign exchange environment. Following the sharp decline in the U.S. dollar index last year and more recently, the strengthening we have seen in the dollar, we expect the currency tailwinds that have supported non-core growth to diminish meaningfully beginning next quarter.
This dynamic will impact both reported growth rates and our full year revenue outlook. As a reminder, approximately 40% of our revenue is generated in non-U.S. dollar currencies. On a sequential basis, the current level of the dollar index represents a modest headwind to non-core growth. In addition, we anticipate continued impact from certain supply-related challenges in our Animal Safety business that affected results this quarter. As Mike noted, we are also implementing several changes across the sales organization, including leadership transitions following our global talent review. Taken together, we believe it is prudent to take a more conservative view for the fourth quarter. We have also received questions regarding the conflict involving Iran and the potential implications for our business. Revenue exposure to countries within the conflict zone is immaterial, totaling less than $0.5 million annually.
As for the potential impact of higher energy and oil prices on plastic components, today, we source approximately $40 million annually in plastic OEM products, and we currently hold 6 to 9 months of inventory for these components. As a result, the duration of elevated oil prices would need to be prolonged to meaningfully impact our cost structure. It is important to note that raw material costs represent only one component of our suppliers' total cost base alongside labor and overhead. Even under a more adverse scenario, we believe any impact would be manageable, and we would have the ability to partially offset increased costs through pricing actions, if necessary. Where we are seeing more tangible pressure is in global logistics and freight, given disruptions around key global transit routes such as the Suez Canal and the impact of higher energy prices on transportation rates. Currently, we are experiencing freight and transportation cost increases in the high single-digit to low double-digit range.
At current rates, the aggregate impact equates to approximately $1.5 million per quarter in incremental freight and transportation costs. In light of these headwinds, we are maintaining our adjusted EBITDA guidance of $175 million for fiscal year 2026. I'll now hand the call back to Mike for some final thoughts.
Thanks, Bryan. I'm really proud of our team, and I'd like to take this opportunity to thank our dedicated employees. We're committed to creating outstanding stakeholder and customer value as the clear market leader in Food Safety. Our industry is driven by powerful secular trends, and we offer the broadest and highest quality products. Our primary barrier to unlocking our full potential has been operational execution. As you've just heard, we're making rapid and meaningful progress. We'll finish this year as a stronger, leaner, and more capable organization. This foundation will enable us to enter the next phase of our transformation, accelerating growth and leadership through technology and product innovation. And with that, I'll now turn things over to the operator to begin the Q&A.
分析師問答
Your first question comes from Subbu Nambi with Guggenheim.
A couple of cleanup questions. The Petrifilm and duplicative costs were expected to step up, and they did, but the tariff cost and the sample handling expenses did come as a surprise, which sample handling looks like it's solved for. But could you walk us through what's driving those? And what's your line of sight to further costs for 4Q?
Thank you, Subbu. We discussed some challenges we faced with sample collection during the quarter. Many of those issues have been resolved. I don't anticipate an increase from our current position, and I expect to see improvements as we move into the fourth quarter.
And then just any of these like unexpected third-party supply issues that was tied once you have taken stock of the whole animal safety supplier issue? What gives you the confidence that you'll be able to move through this quickly, just given the history of these costs mainly on margins and concerns for investors?
Yes, I'll take that, and thank you for the question. The challenges we faced in the quarter regarding Animal Safety were due to supply issues rather than a lack of demand. Our ordering trends remain encouraging. Our primary focus is on resolving three supplier problems. The first relates to a key instrument supplier that is moving its manufacturing locations to mitigate tariff impacts, which has led to some initial challenges. The second issue is the global vitamin A shortage, which has affected several of our products and created some constraints. The third issue involves a significant partner in sodium bicarbonate that is also transitioning production and experiencing difficulties. We have enhanced our supplier management to ensure better collaboration and understanding, which will help us improve our forecasting accuracy. We acknowledge that we fell short in this regard in Q3 and were caught off guard by some of these supplier issues, but we do not expect to encounter these challenges again in Q4. As we plan for Q4, we are accounting for this uncertainty, and we are approaching our outlook more conservatively. While I can't provide a specific recovery forecast at this moment, we are working towards improvement, although we anticipate these challenges to persist in Q4 as our suppliers continue to resolve their issues.
Super helpful. One cleanup question. On the slide deck, you say Petrifilm will be done in November 2027. I feel you meant November fiscal year 2027, right?
Yes, I hope it’s November 2026. We're on track. In addition, we are continuing our 3M agreement until August 2027 as a safeguard for any potential disruptions we might face.
Your next question comes from Bob Labick with CJS Securities.
Congratulations on another strong quarter.
Thanks, Bob.
Just to make sure you hear me. So obviously, with this solid core growth for the second quarter in a row of 4% in Food Service, after one quarter, you weren't there yet, but are you in a position to say you're able to sustain top line core growth in Food Service going forward? And how should we think about the core growth over the next 12 months in terms of potential headwinds and tailwinds and any unusual comps that we should keep in mind?
Thank you for your question, Bob. I'll share some insights and let Bryan add to it. To address your second question, we are not ready to provide guidance for next year at this time; that will come during our Investor Day. Regarding Food Safety, as I mentioned during the earnings call, our focus on commercial execution and effectively leveraging our portfolio has allowed us to align with market growth in Food Safety for another quarter. I anticipate this trend to continue. As Tammi and Joe manage the reorganization and assess resource allocation for faster growth, we are also optimizing our portfolio to emphasize higher-margin products. We expect to see additional growth as we move forward. The market for food safety appears stable, growing in the lower single digits currently. We are hearing from food producers that volumes are flat compared to previous declines. The sentiment from our customers seems to be improving.
However, the current macroeconomic landscape, including issues in Iran and oil prices, is causing some cost pressures and uncertainties for us. Nevertheless, we remain optimistic about food safety and our role as the leading market player with the broadest portfolio to meet customer demands. We will share more during Investor Day, but we feel positive about our position. We are pleased but not yet satisfied, and we will continue to strive for market leadership in food safety. Bryan, would you like to add anything?
Yes, we have experienced solid growth in the Food Safety segment for several quarters. As Mike mentioned earlier, I won’t go beyond Q4, but we do expect the challenges in Animal Safety to persist during the quarter. I believe this will not affect the core growth number we report, but I want to note that currency exchange rates are shifting from a benefit to a challenge, which will influence our reported figures.
Okay. Great. And then just, I guess, my follow-up, another question. You mentioned in the prepared remarks, certainly driving innovation. And then you also mentioned a research line for Petrifilm, which sounds like a wonderful idea to keep production going. Can you talk about the kind of the CapEx for that? And I think you said you expect free cash flow to grow in fiscal '27. So maybe kind of tie all of those things together for us, please.
Yes. I would say the CapEx will be in our FY '26 CapEx number. We do expect CapEx to step down next year as we get past the projects, the larger Petrifilm manufacturing facility ramp-up. Given that we're at a positive free cash flow level now for the year, year-to-date, we would expect that to step up next year as profitability continues to improve and as CapEx ramps down.
Okay. Great. So the research line is not a major investment. It's just an opportunity to continue.
Yes. It's just incremental. It's not a material change to what we had talked about before.
But it has a significant impact on accelerating Petrifilm innovation. We believe that that's extremely important for the future growth of our food safety portfolio.
Your next question comes from Brandon Vazquez, William Blair.
Mike, maybe can I start with you, and I wanted to start a little bit higher level. You've been in the seat about 6 or 7 months now. Just reflect a little bit on what things within the organization have changed that are kind of working? Like what things are allowing you to execute a little bit better than we've seen historically for Neogen? And then spend a minute on like what's left. You're talking a little bit about go-to-market strategy evaluation, things like that. What work is left to be done still? And just spend a little bit of time around that first.
Sure, Brandon. Thanks for the question. I would say that seven months in, I continue to believe based on everything that I've learned so far that purely our challenges are operational. They're internally related. From the start, I discussed the approach on driving the top line to create oxygen to allow us to run a more efficient organization and kick off more cash. We are implementing that strategy. I spoke a little bit today around commercial prowess, operational efficiency, and really focusing on innovation. As we strengthen our commercial acumen and become more focused on higher-growth markets, managing better in our operating expenses, we need to start now to think about innovation to accelerate growth in '28, '29, and '30 and beyond. We've been able to really push hard, and you're seeing the results of that. Solid growth in food safety is representative. But I would say we're just getting started.
Tammi and Joe are really digging in. They are optimizing the commercial organization. We're looking to flex the portfolio. Again, you guys know this, Neogen has got the broadest portfolio in food safety. We have the ability to provide end-to-end solutions. I'm not sure we always flex that portfolio the way that we should. So we are very much focused on doing that and changing how we go to market. All those things are remaining to be done. I would say what I would call 'quick wins' we kind of captured those, and now we're in a phase of taking those best practices and just back to basics and scaling them. Scaling takes some time, and I think we're in that phase now. No turnaround is linear, but we're going to continue to focus on those areas and scaling them across the organization in the various regions.
Okay. And Bryan, for you, as I look at the implied guidance on adjusted EBITDA, you had talked a lot about moving pieces in Q4, whether it's the OpEx line or maybe some margin headwinds, things like that. I want to ask it a little bit more direct. I know you're not going to give us '27 on this call, but I think a lot of us are going to start building our model off of the Q4 EBITDA line, right? So like just maybe like walk us through, help us think of like what things impacting the Q4 profitability implied in guidance are transient, which ones are going to linger into fiscal '27, so we can understand to what degree this Q4 EBITDA number is like a good jumping point we should use as we build our model going forward into fiscal '27?
Thanks for the question. I want to highlight a few things. First, we noted the one-time credit in the quarter was about $1 million. The increase in freight and transportation costs is around $1.5 million. Due to the quarter's timing, our merit increases will have some additional impact on our employee costs, as we have two months represented from the last quarter and will see an extra month affecting us. This is a bit of a challenge. We've also completed building out the leadership team, which adds some incremental costs. When you consider these factors, they explain the adjustments in relation to your previous expectations for Q4. That's a few million dollars to keep in mind. I hope this is helpful.
Okay. Yes. And maybe I'll sneak one last one in. Mike, as you talk about kind of go-to-market strategy evaluation, I'm kind of curious what might that entail? Is it possible in the next quarter or two that there's some bigger commercial changes that might be made to the organization that may take a little time to take root?
Yes. No. So I don't see the changes we're making as disruptive as much as they are more additive and sort of accelerating where we see opportunity. The overall strategy of our go-to-market is pretty simple: it's identifying the markets where we see significant market opportunity, evaluating our presence, adding resources to capture or exceed market growth, looking at markets where maybe the market opportunity is not as substantial, evaluating our cost structure in those markets and saying, is our cost structure aligned with the market opportunity? Third, looking at markets where the market opportunity is not great and maybe our revenue is not there, but our cost structure is too high. How do we transition that to a partner, reallocate those savings, and put them in the markets where we see accelerated growth? I don't see that disruption as really just realigning and reinforcing the markets where we see accelerated growth. Does that help, Brandon?
Your next question comes from Thomas DeBourcy with Nephron Research.
I'll just ask two upfront. So first, just on adjusted gross margin. It seems like clear sequential trajectory upwards. The question there is really even with, I guess, integration or some disruption, your ability to sustain, even, I guess, above 50% adjusted gross margins? And then the second question, just on the sale of the genomics business. It looks like it may be actually accretive on an earnings basis given the cost of debt. But just whether that's the case? And is there additional portfolio rationalization in Animal Safety products, whether through divestiture or through just, I guess, end-of-lifeing low-margin products?
Yes. Thanks, Thomas. I'll start. I guess to your first question around the adjusted gross margin, yes, we were very pleased with the performance. I think you're thinking about it the right way, too, in terms of sustaining above 50% because we're going to have fluctuations from quarter to quarter. I wouldn't focus so much on that as I would on the fact of sustaining it at that higher level; I think that's the right way to think about it. Considering the current quarter, we probably had some favorable mix in there given the food safety growth, that's a higher-margin business relative to the Animal Safety business, which was down in the quarter. That's the first question. The short answer on your second question around the genomics sale is, yes, accretive and positive impact from that divestiture.
Yes, Tom, just when you look at the margin structure for the genomics business, we've talked about both the gross margin and operating margins for that business on an operating margin basis, the adjusted operating margins being in the mid-teens. That's obviously below the corporate average. As we look from a total expense standpoint, there is some allocated corporate overhead that goes away with that as well. That's really what drives the accretion.
Your next question comes from David Westenberg with Piper Sandler.
Congratulations on a solid performance. You increased the guidance slightly more than the earnings beat, which suggests the Animal Safety issue may be resolved soon. Is that a fair interpretation? Additionally, regarding the earnings beat, you mentioned freight costs and some one-time items. Are there any other factors that might prevent you from gaining more operating leverage with the revenue increase in Q4?
I believe the guidance indicates a slight increase in top line revenue from Q3 to Q4. There will be some leverage, but it won't represent a significant growth in revenue. The guidance suggests ongoing growth in food safety at the current levels. We don’t anticipate fully benefiting from the Animal Safety resolution in this quarter. Additionally, transitioning from a favorable foreign exchange situation to a disadvantageous one will also impact our final results for the year.
Got you. Regarding Brandon's question, you mentioned some of the margin challenges in Q4. Can you discuss the margin expansion opportunities as we plan for 2027? I know Petrifilm is moving in-house. Are there additional considerations for margin expansion in '27?
Yes. I think a couple of things. First, from a gross margin perspective, we should be getting past the issues that we've had with sample collection. We should see Petrifilm. We've said that should be margin expansive once we've in-sourced that. That's helpful. On the OpEx side, we continue to evaluate the cost structure there. I think one of the things is we saw the impact of the restructuring that we did back in the fall. Part of that was we were looking at taking out around $25 million, but also with some add-backs for areas where we thought we had gaps. You started to see some of that flow through as well in terms of the investments that we've made. The go-to-market strategy we discussed, that's obviously a more efficient way of operating in a lot of places, given the fact that you may go through a distributor versus going direct, that sort of thing. I think we have opportunity remaining on the OpEx side.
Yes. I would add a couple of other things that are also extremely important and we're focused on. I'd say more in a purchase price variance. We're really digging into that and looking at our supplier base and trying to understand how we can improve that. That will be a huge focus as we think about '27. Another big one is inventory. We definitely talked about inventory and the challenges we've had. The write-offs are obviously very visible, and we're aware of those and are working through them. As we transition into '27, we should see a meaningful decline in our finished goods inventory, which will manifest itself in an improved margin. So those are two other areas I would add that we're thinking through for next year.
There are no further questions at this time. I will now turn the call over to Scott Gleason for closing remarks.
Thank you for joining us today, and we look forward to following up with a lot of you after the call here. Have a great day.
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