Neogen Corporation
Q3 2021 Earnings Call Transcript

Published: 23 Mar 2021

[Operator:]

Good morning, and welcome to the Neogen Third Quarter Earnings Results Conference call. . I would now like to turn the conference over to John Adent, Chief Executive Officer. Please go ahead.

[John Adent:]

Thank you, Chad. Good morning, and welcome to our regular quarterly conference call for investors and analysts. Today, we'll be reporting on the third quarter of our 2021 fiscal year, which ended on February 28. As usual, some of the statements made here today could be termed as forward-looking statements. These statements are subject to certain risks and uncertainties, and our actual results may differ from those that we discuss today. The risks associated with our business are covered in part in the company's Form 10-K as filed with the Securities and Exchange Commission.

[Steven Quinlan:]

All right. Thanks, John. Earlier today, Neogen issued a press release announcing the results of our third quarter, which ended on February 28, and I'm pleased to report that revenues for the third quarter increased 17% to $116.7 million from the previous year's third quarter of $99.9 million. On an organic basis, our sales increased 13%. Net income for the third quarter was $13.4 million or $0.25 a share compared to $12.2 million or $0.23 a share a year ago. The results in the third quarter of the year reflect $2.1 million in the expenditures on acquisition activities, which did not ultimately come to fruition and a $1.3 million shortfall in interest income compared to last year due to lower yields on our marketable securities. Combined, these 2 items had about a $0.05 per share impact to our net earnings for the quarter. For the year-to-date, revenues were $341 million, up 10% over the $309.1 million reported last year. And net income for the first 9 months of fiscal 2021 was $45.1 million or $0.85 a share compared to $43.1 million or $0.82 a share a year ago. Over the next few minutes, I'll take you through some of the highlights of the quarter. During the quarter, the impact of currency fluctuations on our revenues was minimal, reducing our comparative revenues only by approximately $150,000. Continued weakness in the Brazilian real and the Mexican peso relative to the U.S. dollar were almost entirely offset by recovery of the pound, euro and Australian dollar. For the year-to-date, in a neutral currency environment, revenues would have been approximately $3.4 million higher than we've reported. Revenues for the Food Safety segment were $58.4 million in the third quarter of fiscal '21, an increase of 16% compared to $50.5 million in last year's third quarter. Acquisitions of international distributors in the second half of fiscal '20 and the December 30 acquisition of Megazyme, a food quality diagnostics company contributed to our growth. On an organic basis, sales in the Food Safety segment increased 11%. Our line of microbial testing products grew 19%. And as John mentioned, as our innovative Soleris NG testing platform, which launched in July of 2020 and is used to detect spoilage organism like yeast and mold, continues to gain market acceptance and is helping us gain customers in new markets.

[John Adent:]

Thanks, Steve. I want to expand a little bit on Steve's mention that during the quarter, we incurred more than $2 million in expenses for acquisitions that we ultimately did not complete. Similar to our second quarter, we were excited about those businesses, and I thought we made very attractive offers to each of the sellers. And while I was disappointed in the outcome, I was pleased with our offers and our work done by our teams to try to consummate those deals.

[Operator:]

. And the first question will be from David Westenberg with Guggenheim Securities.

[David Westenberg:]

Congrats. It was a very great quarter here. So first, can you talk about the run rate and relative margin profile of Megazyme? And if you can't be specific, can you, at least, maybe give us some directional contribution as we put our models out for the coming year?

[John Adent:]

Yes. Thanks, David. Steve, you want to…?

[Steven Quinlan:]

Yes, David, I would say that when you talk about the gross and operating margin profiles of Megazyme, think of them as similar to the Food Safety margin profile for our diagnostic tests, they're very similar in profile.

[David Westenberg:]

So that's double-digit growth, 60% gross margin, operating margin profile similar to like that 20%. That's how I think of Food Safety is on.

[Steven Quinlan:]

Yes. You're in the ballpark.

[David Westenberg:]

Perfect. All right. And first of all, like this is the best growth rate you've had since 2015. So I feel bad about asking this question because it's harping on you guys a little bit.

[John Adent:]

Sorry, David.

[David Westenberg:]

It was a huge beat on the top line. But even when you consider the $2 million you had for acquisition evaluation, it looks like you didn't get the operating leverage, I would have expected with that kind of huge beat. And again, I'm sorry if we're harping on you after this really impressive quarter, but can you talk about how we should think about the operating leverage if the company was to have a beat like this in the next few quarters?

[John Adent:]

Yes. I think, David, we don't like saying we would have been this except for that, but I'm going to do it a little bit for you, right? So -- and Steve will give you the exact sense per share. But when you add in the change in the debt deal expense, the income tax change, and then what was the other big one, Steve, we had?

[Steven Quinlan:]

Well, the interest income.

[John Adent:]

Yes. And the interest income. So if you look at those, I mean, we're talking $0.04 to $0.05, and we think that would have been right in line with how profitability normally looks for our business to flow. Now Steve did mention, I am putting more money back in, in R&D, right? So R&D is up, and we're seeing -- we're going to -- we're reinvesting money. And I think you'll see some of the new products we're going to have coming here shortly, and we're pretty excited about it. Steve, do you want to expand any more on that?

[Steven Quinlan:]

Yes. I mean, your points are dead on, John, and maybe just a couple more. Some of the acquisition, the noncash amortization expenses that we're recognizing now, 4 businesses that we bought, both this year with Megazyme and StandGuard as well as the distributor purchases from last year are flowing through that G&A line. And we also cleaned up some legal. We had nondeal legal expenses that are kind of -- that were incremental to G&A expense in the quarter. But otherwise, I would tell you, David, that we were pretty happy with the numbers that we reported. I mean it was -- if you've, again, using John's, if we put those or take those expenses out, it's a significant improvement over last year's third quarter at the operating income line.

[David Westenberg:]

Got it. And then can we talk about the -- two of the things that were called out, rodenticides, the aflatoxins because of the dog food situation. Can you talk about the timing in terms of durability of strength of both of those? Is this 1 quarter, 2 quarters? Is this a little bit more enduring? Just how should we think about the contribution over the next few quarters? And I'll jump back in line after that question.

[John Adent:]

Yes. I think the reason I called those out is because I wanted to show, again, the strength of Neogen, right? When something -- when a crisis happens, like the aflatoxin outbreak in pet food, we can move and ramp up really, really quickly to fix customer solutions. so that one while that may be a quarter or 2 opportunity, the rodenticide has been a year-long because the rodent pressure has just been so widespread in the Pacific Northwest. Now again, those things are seasonal, right? But what you see with our business is, if we see insecticide pressure down in Europe, it may be offset by increased rodenticide pressure in North America. When you see rodenticide pressure in North America drop, you may see an increase in toxins and microtoxin outbreak in South America. So what I was trying to point out is, whenever these things happen, we are designed to move very, very rapidly to capture that opportunity for our customers.

[Operator:]

And the next question comes from John Kreger with William Blair.

[John Kreger:]

John, can you just talk about how the supply chain is holding up? We've certainly seen more press about there being pressure all around the world, both from the pandemic and some of the weather events.

[John Adent:]

Yes, it's tough, John. Long Beach is a mess. L.A. is a mess. We ended up sending stuff, rerouting stuff to Seattle to try to avoid that, and we were good. We were early, and we got some of our stuff through, but now Seattle's a mess too. So global supply chain, I think you know it, and you've seen it, is very, very challenging around the world. What we talk about as a team is how can we look forward to try to predict a little bit better than our competitors so that we can stay ahead of it. And I'm knocking on my head and on the table right now, we have been. I mean we haven't been out of anything because of supply issues. We've been close, but we've really done a nice job of staying ahead and that just comes with knowing your business and planning. I think the teams have done an outstanding job of forecasting. They've done an outstanding job of working with our buyers and replenishment team. We've developed alternative suppliers very quickly where we didn't have them in the past. We have -- we're really operating as a very strong global organization, where we've got our European buyers will find opportunities that we can use in the U.S., our U.S. buyers find opportunities where we can send raw materials to Europe. So it is extremely challenging, but I'm very, very pleased with the performance of the team.

[John Kreger:]

Great. And as you think about the next couple of quarters, do those pressures feel like they're starting to normalize at all? Or are they getting worse?

[John Adent:]

I think they're getting worse, John. I think you've got just shipping containers coming out of Asia, the ports and the challenge you have in a lot of these places is labor. I mean, we're not through COVID. I know everyone is excited about the vaccines, and I'm excited, and -- but we're seeing incidents rise. We're seeing employees out. We're seeing it all around the country. I think you're going to have the same -- you've got the same issues. You still have to have people to unload those shipping containers. Brexit, while we planned and planned and planned, our logistics partners let us down in Europe. I don't want to say it, but anyway. They were a mess, and they weren't prepared. And so we had to scramble to make sure that we routed -- rerouted shipments and we changed distribution centers to make sure our European customers were taken care of. So even though I was yelling at them because it wasn't a surprise Brexit was going to happen, they were grossly underprepared. So I think that just shows that it's -- the worldwide market is very, very challenging for transportation. And when you have other hiccups like this, it just exacerbates it.

[John Kreger:]

Great. And then one last one. A similar question about the Food Safety side of your demand environment. We're year-end of the crisis, how does it stand? Are you seeing recovery in any of these pockets? And how do you think this will play out over the next few quarters?

[John Adent:]

Yes, I'm optimistic about it. if you think about the -- like I mentioned, you think about the food service and the restaurant industry, I mean they're slowly opening back up. Still here in Michigan, we're at 25% restriction for occupancy. I know in other parts of the country, they've opened it up more, but we're still seeing -- we're seeing that kind of flow through the channel. So we're pretty optimistic about those customers moving forward. So we think we've got opportunities there. And I think that the team is performing at a high level, I was really pleased with their double-digit organic growth for the quarter.

[Operator:]

The next question will be from Mark Connelly with Stephens.

[Mark Connelly:]

John, you obviously got a big boost in China. I was wondering if you could talk about the rest of the portfolio, not sort of in the short term, but how are you thinking about the China opportunity when we think about the difficulties they're still having with food and animal safety more broadly?

[John Adent:]

Yes, Mark, I think there's a big opportunity there. We continue to grow. And the nice thing is, not only are we growing, but we're getting new customer penetration, and that's going to continue because you saw what happened with the African swine fever, there's a resurgence there. And the issue is China has to work to develop its biosafety protocols, and that's only going to benefit us. So the big boost in China was cleaners and disinfectants, and I think that's going to continue to go. And then secondarily was on the genomics side, where they're trying to rebuild their herds. And I think that's a process that is going to continue to take a little bit of time. And you saw -- I don't know if you saw recently, but the export -- beef exports out to China were up -- I forget what it was almost like $100 million. It was a big, big number for beef exports were up, where it hadn't been there before. The corn stock, I don't know if you guys are watching, but you see what's going on with corn and soybean pricing. Soybean is at the lowest supply in history. And China is holding 60-some percent of that supply. So there's a lot of different interesting things going on that I think are going to allow us to continue to grow there, and it's a key market for us.

[Mark Connelly:]

The jump at Soleris sales comes despite the challenges that you've been talking about in terms of getting face-to-face and getting customers with new equipment and labs. Do you think you've sort of figured out how to get this sales process going in a sort of COVID world or when we recover, is there a lot more opportunity there?

[John Adent:]

I think there's more opportunity. What we've done, Mark, is we've kind of taken that blended approach. So we have virtual lab training where when we put the equipment, we connect live with them, and we're showing them live from Lansing how to do setup and others, right? And while that's good, it's not as efficient, but some customers do really well with it and others don't. So we think when we're able to get back face-to-face with customers, we're going to continue to accelerate that. The reason why it's done so well as a technology is fantastic. People really like it. They love the new machine. We're really seeing growth. Like I talked about, we're entering other markets. You wouldn't call dietary supplements, technically Food Safety, but it's a great product for that marketplace, and they're really embracing it. So I think there's opportunities there to continue to grow.

[Mark Connelly:]

And last question. You talked about the ongoing challenges in the logistics and all that with COVID. But in the last couple of quarters, you had talked about your own staffing issues. Are those still getting worse? Or have they more or less plateaued?

[John Adent:]

We're doing a really good job regarding staffing. Our churn rate is at the lowest it's been in a couple of years. And I think that's really just because we've beefed up the HR team, and they've done an outstanding job of getting us really good candidates who are staying. Now our infection rates continue to go up. It's -- it has not dropped off at all. I mean, if anything, we're seeing raising rates among employees because schools are back, more schools are going full online, people are bringing stuff home, the weather is getting a little better. Some states have relaxed masks. And so that's just what I was telling you, I'm not confident we're through the COVID piece because I see it within the group. So actually, rates are going up, not going down.

[Operator:]

. The next question is a follow-up from David Westenberg with Guggenheim Securities.

[David Westenberg:]

I'm just going to ask a couple on the companion animal space. The ThyroKare, looking back at old transcripts when you're calling out some of the year-over-year headwind in that product, it looks like the product was in the neighborhood of $6 million to $10 million. I want to confirm if that's about right where it was the run rate before it pulled off the market? And then your expectations about how fast it can jump back to that run rate that you had prior to it being pulled from the market?

[John Adent:]

Yes. It was a $6 million market -- $6 million product for us, David. And we know that we need to go and earn that business back from the customers. We were out of the market for a while, and they had -- but they only had one choice. And we think providing a choice to customers is always a good thing. We've got great relationships with our veterinary distributors, and we have great relationships with veterinarians. So I think we're excited about our prospects for that product line.

[David Westenberg:]

Great. Yes. And actually, that's a great follow-up to the second question. I believe between that time that it got pulled, and today, you also have a companion animal safety -- I mean a cleaning product called Companion and that entire line of products. Now that you have multiple products in that line or in that segment, would you consider building up a Companion animal sales force and maybe even consider that in an adjacency for potential future M&A? And that's the last question.

[John Adent:]

Yes, David, I do. I like that space. And in addition to what you mentioned, we have our canine wellness program. So our genetic canine wellness test for the veterinarians, also in the companion space. So we are viewing that as a very, very nice market. That companion animal market is growing every year. Pet parents are getting more intimately involved with the health and nutrition and wellness of their pet children. So that's a market that we are very interested in, and you've seen that we're investing. So with the canine wellness test and now with ThyroKare, we are building up that portfolio, and I think it's something that we're going to continue to do.

[Operator:]

Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to John Adent for any closing remarks.

[John Adent:]

Thank you, Chad. I just want to thank all of you for being big supporters of Neogen. I want to thank our employees for turning in a tremendous quarter. And I hope all of you stay safe and healthy and get your COVID vaccination as soon as you can. Thank you, everyone.

[Operator:]

And thank you, sir. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.