Neogen Corporation Price & Performance (NEOG)

These forward looking statements are subject to risks that could cause actual results to be materially different from those expressed in or implied by such forward looking statements. These risks include, among others, matters that we have described in our most recent annual report on Form 10 k and in other filings we make with the SEC. We disclaim any obligation to update these forward looking statements. I'll now turn things over to John. Thanks, Bill. Morning, everyone, and welcome to the earnings call for the third quarter of our 2025 fiscal year. You may have seen the press release issued earlier today announcing that I will be down as CEO.

It's been an honor to lead Neogen, and I'm incredibly proud of the team we've built and everything we've accomplished. Including making a significant amount of progress on the complex integration of a transformational acquisition. I would like to extend my sincere gratitude to the team for all their hard work and sacrifice over the last several years and firmly believe these efforts have put the company in a stronger position. I will remain in my role while the board conducts a search for my successor, I'm fully committed to ensuring a smooth transition for our customers and employees. With that behind us, let's move into the some color on the quarter. Over the course of the third quarter, we saw the broad development of uncertainty primarily related to the goals and policies of the US government. Most notably, deregulation, government spending cuts, tariffs, and global trade. As we've all seen, the administration is aiming to reduce federal spending and has made cuts across a number of government agencies. Including those relevant to food safety like the FDA and the USDA. While these cuts could possibly affect the speed with which outbreaks of foodborne illness can be addressed, or possibly delay or eliminate certain research spending we don't currently see them as having a significant effect on food safety testing.

This is still a developing environment. But the leaning out of these agencies could result in more testing being pushed to the plants. Which is where the ultimate responsibility lies for safe food production. Food quality, which by extension includes food safety, appears to be a priority for the administration, and we believe it has the potential to be a tailwind over time. The administration's position on tariffs and the actions announced last week have added to this uncertain environment. Despite almost half of our revenue being generated outside of The US, a significant portion of our manufacturing is based in The US. As it relates to our purchases, the situation is similar. Within our food safety business, approximately 75% of our direct purchase spend is in The US. In animal safety, the number is about two thirds. With our needle and syringe products having initially been subjected to tariffs back in of last year. While acknowledging the tariff landscape, has been and could continue to be fluid, we believe that our domestic manufacturing footprint provides level of insulation in this environment. Particularly in our largest markets, The US. We have been exploring alternative sources for supply for certain items procured from outside The US and will continue to do so.

Given our large domestic manufacturing footprint, we are closely monitoring responses from other countries and will consider those impacts as they become more clear. With respect to the retaliatory tariffs announced by China last week, a small portion of our total revenue is generated there, roughly 2.5% Of that revenue, approximately 40% is served by US We believe that uncertainty increased as the quarter progressed and read through to our end markets, which contributed to our third quarter results being below our expectations. In the face of faltering consumer confidence, a lack of clarity with respect to global trade, and concerns about the potential for recession, we saw both domestic and international distributors and customers being less willing to commit to inventory. This uncertainty was reflected in our proxy for global food production. Which decelerated for the first time in six quarters. Food safety is typically a resilient end market, and has historically been relatively insulated against periods of economic weakness. The unique combination of lingering inflation had been particularly acute in food, and the current elevated macro uncertainty has resulted in an end market that's still growing but we believe at a rate below normal levels. Our performance in food safety is also impacted by the challenges we've discussed with our sample collection product line.

Which we located from a former three m facility to one of our own. It took longer than we had originally anticipated, but the relocated lines are now producing at the prior levels. From this point forward, our immediate focus is on improving the production and catching up with our customers' demand. Outside of the specific challenges in sample collection, core revenue in our food safety business was up 7% in the quarter. In our animal safety segment, we believe we continue to work through the cyclical trough of the market Inventory levels in the distribution channel remain broadly stable. Hence the deposit level sales out of our products. Although it's a relatively small part of the business, we saw notable softness in China amidst the uncertain macro environment there. But many of our distributors being in a wait and see mode or in some cases opting for local supply. Outside of the decline in genomics, our animal safety core business was down just over 1% on a year over year basis. For our genomics business in total, third quarter core revenue was down mid single digits year over year. We believe the actions we took last quarter to focus and restructure this business were the right moves to make.

We are focusing the business on our leading differentiated bovine product offering, Have either stopped or wind down most of the rest of the business over the coming quarters. Although genomics in total has been a headwind for the past seven quarters, our bovine business has performed better during this period, including many quarters of growth. On the integration front, we continued to make progress in the quarter. With sample collection recovering to prior production levels, future film remains the last outstanding integration work stream. Construction of the new facility is complete. As is the installation of the first two petri film production lines. The shipment of the second production line has landed in Lansing and is in the process of being staged and rigged for installation. And we remain on track for our goal of beginning initial test production in the fall twenty twenty five. As we mentioned on our prior earnings call, we're undertaking actions to accelerate the building of a more profitable focused Neogen. We have made solid progress on this front. With one potential portfolio action in the later stages and one that has started in marketing phase. These actions represent a step towards focusing our business on the highly food safety end market.

And are expected to be accretive to margins. With net proceeds being prioritized for debt repayment. Last week, we completed the refinancing of our term loan a.

Extending the maturity by close to three years and 60 basis points of interest rate savings. Combined with the expected near term debt repayment, this provides us with balance sheet flexibility as we continue to work to bring down our net leverage. In addition to future EBITDA growth, improving cash flow is a priority to contribute to the reduction of net leverage. Some of the improvements in free cash flow is expected to come naturally. As a result of integration CapEx reducing in fiscal year twenty twenty six and then mostly tapering off in fiscal twenty twenty seven. We expect to see additional improvement come from the significant opportunity we have to reduce working capital over time. We have seen some progress from our initial actions, but a larger opportunity remains mostly related to our inventory levels. The evolution of our leadership team has continued with a number of changes recently made. We have a new head of r and d, We have a new head of our North America commercial organization. A new commercial head for North American food safety in place. As well as a new chief human resources officer who started this week. We continue to make good progress on the search for a chief commercial officer and we expect to fill the role in the first quarter of fiscal twenty twenty six.

The standing up of our own Petrie Flom production is progressing well. But we nonetheless want to ensure that we are derisking as much as possible. To that end, we have made additions to the operating team to enhance key areas of and I also expanded the existing project governance. As it relates to our outlook for the full year, the current environment is very dynamic. With respect to the macro environment, it is not yet clear the ultimate impact and duration might be from the rising level of uncertainty. We are updating our full year view based on the information we have today. To reflect the third quarter being below our expectations and a fourth quarter that will likely not be as strong as we had previously anticipated. Given the softening market backdrop the uncertain impact of tariffs. We also plan to take further actions to ensure the cost base is more aligned with the current level of revenue and the macro environment. The full impact of which will be reflected in fiscal twenty twenty six. The sample collection production delays have improved. We have targeted commercial plans that we expect will return that product line to more normal revenue levels over the coming quarters.

In genomics, we restructured a portion of the business in the second quarter and we'll continue to focus on a differentiated offering for the more attractive bovine market. We are taking actions to control what we can control to navigate the current situation and to derisk the final piece of the three m integration. Now I'll turn the call over to Dave for some more insights into our results for the quarter and our outlook.

Thank you, John, and welcome to everyone on the call today. Jumping into the results, our third quarter revenues were $221,000,000 Core revenue growth, which excludes the impact of foreign currency acquisitions, and discontinued product lines, came in at 20 basis points for the quarter while foreign currency was a headwind of three ten basis points compared to the prior year.

At the segment level, revenues in our food safety segment were hundred and $53,000,000 in the quarter, down 3.2% compared to the prior year. With core revenue growth of 1.5% offset by the negative impact of FX. Core growth was led by our biosecurity products in the bacterial and general sanitation product category. Which benefited from strong growth in pathogen detection products. In the indicator testing, culture media, and other product category, solid growth in our food quality and petrifilm product lines was partially offset by a decline in sample collection we continue the process of ramping up the relocated production in our facility. Excluding the headwinds in sample collection, core revenue in the Food Safety segment grew 7% which we believe reflects a solid underlying business. Quarterly revenues in the Animal Safety segment were 68,000,000 which includes a core revenue decline of 2.6% compared to the prior year quarter. Within our animal care and other product category, solid growth was driven primarily by small animal supplements with an increase in private label business. This growth was offset mainly by lower sales of Vet Instruments and Disposables. Our global genomics revenue was down mid single digits on a core basis.

Core revenue growth at our differentiated bovine business was offset by declines in other areas and consistent with the focused restructuring we executed in Q2 of this year.

From a regional perspective, core revenue growth in the third quarter was mixed.

Growth was again led by Latin America, which saw double digit growth and a strong performance across most key product categories. Asia Pacific core revenue was up mid single digits on a year over year basis with solid growth in petri film and pathogen detection. Partially offset by decline in sample collection. Our business in Europe was down mid single digits on a core basis with growth in cleaners and disinfectants and food quality and nutritional analysis offset by declines in genomics, general sanitation, and sample collection, as well as petri film, came down after strong growth in q two. In our US and Canada region, which has experienced the largest carryover impact from last year's shipping delays, core revenue was also down mid single digits compared to the prior year period. Solid growth in food quality and nutritional analysis was offset by declines in most other food safety product categories, including a larger impact in sample collection. In the animal safety segment, solid growth in the biosecurity and animal care products [indiscernible] was offset by declines in genomics and vet instruments. Gross margin in the third quarter was 49.9% representing a decrease of 120 basis points from 51.1% in the same quarter a year ago.

Excluding integration and restructuring costs as well as the re class reclassification of certain expenses in the prior year period gross margin, Q3 was down 30 basis points year over year.

Primarily due to lower revenues. Adjusted EBITDA was $49,000,000 in the third quarter, representing a margin of 22% roughly flat from Q2 on lower revenue.

On a year over year basis, the decline in adjusted EBITDA margin was driven primarily by the lower revenue level. Third quarter adjusted net income and adjusted earnings per share were $21,000,000 and $0.10 respectively. Compared to $26,000,000 and $0.12 the prior year quarter due primarily to the lower adjusted EBITDA and a nominally higher effective tax rate. We ended the quarter with gross debt of 900000061% of which is at a fixed rate and a total cash position of 128,000,000 Free cash flow in Q3 was an outflow of approximately 14,000,000 representing an improvement of $49,000,000 compared to Q3 of fiscal year twenty twenty four. Net working capital was a $10,000,000 source of cash in the quarter reflecting some progress on our multiyear improvement journey. Capital expenditures in the quarter were elevated driven in part by some acceleration of spending related to our new petrol film plant and production equipment. As John mentioned earlier, last week we completed refinancing of the £550,000,000 remaining on our Term Loan A. We issued a new $450,000,000 term loan a with an upsize $250,000,000 revolving facility on which we've drawn $100,000,000 and obviously utilized those funds as part of the payoff of the previous $550,000,000 term loan.

Further, this draw on the facility, allows us to currently maintain the same hundred and $50,000,000 of available liquidity should be taken as indicative of a portion of our near term expectations for the portfolio actions we've discussed. In addition to extending the maturity of our term loan by over two and a half years, we were able to realize 60 basis points of interest rate savings. Moving to our outlook. Market environment softened as the third quarter progressed, and we believe the macroeconomic uncertainty has led to somewhat of a pause taken by many customers and channel partners. In addition to the uncertain trade environment, grocery inflation, in particular, has persisted continues to affect the consumer. Contributing to the move backwards that we saw in our proxy for global food production.

In animal safety, we see healthy, channel inventory levels and positive sales out of the channel, but saw a slowdown of sales into some of our larger distributors. We expect these impacts that we saw in q three will continue through q four, when we will also begin to see the impact of tariffs. We are therefore updating our revenue outlook for the year to approximately $895,000,000 We are accordingly also updating our outlook for adjusted EBITDA to approximately 195,000,000 dollars with a lower adjusted EBITDA and some acceleration of CapEx, which we now expect to be approximately $100,000,000 our current view of free cash flow for the year is an outflow of approximately $20,000,000 We would emphasize that the end market conditions are about as dynamic as we have seen, but we will focus on what is within our control, which includes the near term actions John has highlighted. I'll now hand the call back to John for some final thoughts.

Thanks, Dave.

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

Through strategic alignment and substantial cost reductions, we are addressing our genomics business. Which has been a meaningful headwind for the better part of two years. For sample collection, we expect it will take a couple of quarters for the revenue to return to prior run rate. The production has been restored to prior levels and is now undergoing intense operational scrutiny to ensure the efficient is improved as quickly as possible. As we've discussed, this leaves Peter from us the final integration work stream which continues to progress well. Establishment of our own feature film production will be a more gradual transition than the other key integration work streams were. Which have either been a lift and shift of production or a cutover from a three m systems to our own. Once test production and the of the equipment have been validated, a process we still expect will begin in the fall of this year We'll start to ramp up our own production on a SKU by SKU basis. The Petrifilm product line consists of total of 17 SKUs. Once we have a SKU fully validated and running on our own equipment, we will turn off production of that SKU at our transition manufacturing partner.

We plan to move through the entire product line that way very gradually one skew at a time. This will result in some temporary duplicate manufacturing costs that begin to increase in fiscal twenty twenty six. Which we will dimensionalize. To provide for an orderly transition of petrol foam production. Key members of the petrol foam manufacturing engineering team who have done this before are part of the team. And we currently have employees undergoing advanced training and manufacturing testing in a current feature film facility. We feel good about where things stand today, and we will continue to take all actions available to us to make this as seamless a transition as possible. We also have taken and will continue to take to maintain balance sheet flexibility. The refinancing of our term loan extended the maturity by close to three years and net proceeds we may realize from the portfolio actions we discussed will be prioritized for debt paid out. Along with the reduced integration CapEx, and the resulting improvement in free cash flow, we expect our balance sheet to continue to improve moving forward. Following the completion of the three m food safety we added substantial amount of cost to the business to both catch up legacy Neogen capabilities, and accommodate the increased size of the business.

For a number of reasons, FX and market weakness and integration challenges, revenue is currently below the levels that were contemplated when these costs are being added. We took actions in the second quarter to address a portion of these costs mainly in genomics business. As mentioned, we will be taking additional actions in this area in q four. We have continued to make enhancements to the team to address key areas of the business that we believe put us in the best position to generate demand and capitalize on the opportunities we have in front of us. Two of these enhancements are in the customer facing leadership roles in our largest region of North America. Where we placed a particular emphasis on demand generation through targeted commercial initiatives We expect these changes in combination with the chief commercial officer role that should be filled in q one to provide us with momentum in the market as we leverage our full portfolio solutions. It's too early to determine if customer conservatism for headwinds will be temporary or more sustained. We're staying attuned to the market and will provide additional perspective in the future on the expected duration as the trade lands continues to change.

However, we have a leading franchise in critical diagnostic solutions for food safety. Which will not immune to macro uncertainty as an end market where we would expect to generally be resilient as it has been in the past during periods of turbulence. We remain optimistic about the future trajectory of the business and believe the changes we are making will allow us not only to manage through the current uncertainty, but also position us to deliver on the long term growth opportunity in front of us. I'll now turn things over to the operator to begin the q and a.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. To decline from the polling process, please press star followed by the two. Your first question comes from Brandon Vasquez with William Blair. Your line is now open.

Hey, good morning, everyone. Thanks for taking the question.

First, I just wanted to talk a little bit about the guide and talk a bit about macro and moving pieces there. So can we just start by talking a little bit about how much of the lower guide is coming from macros specifically at this point. It sounds like, and correct me if I'm wrong, it's less of execution on maybe sample handling or or any of those other integration This is primarily a a macro headwind. So talk to us one about how much of it is macro and two, a little bit more of, like, what volumes are you seeing in food safety even as macro worsens? Know, I think in the past, we've all always talked about this market as being kind of resilient but not immune. Are there any numbers you can put on that to help us understand is this a market that even if things get bad, can stay positive growth, or is it something that should start to decline with food safety safety So sorry. A couple questions there just all around macro guidance and what you guys are seeing. Thanks, Brandon. Me go first. This is Dave, and then I'll pass it pass it to John.

What we saw during the quarter, as we noted, was some broader softening as the quarter progressed. Hesitancy, I think, driven by some of the macro and we're assuming that that condition continues into the second through the second half into the fourth quarter. So if we look at q three, we probably come in about 6,000,000 below where we thought. At the time. I'd say a good 4,000,000 of that was clearly just uncertainty dollars 2,000,000 of that alone was China. And a million of genomics, which is timing of ramp down from some of the business we're getting away from, and then maybe roughly a million lighter in sample handling. Although we exited at the rates we had anticipated. I think the the shape of the ramp through the quarter ended up being a little light, but predominantly macro. Look. Then as as as the global trade situation has developed, that'll have that it, you know, dramatically hides the uncertainty in my particularly on the animal safety side for us. And that's where we have the most exposure to some of the existing tariff activity. That, you know, we will obviously have some commercial efforts to offset but the ability to do that, there'll be some level of uncertainty given the magnitude of of the actions.

As far as the environment, let me turn it over to John to talk a little bit about what we saw more specifically.

Yeah. Thanks, Dave. So, Brandon, the the like we had talked about in the past, we had follow a basket of companies, and we had seen, you know, six quarters of kind of sequential improvement. And that really for the ones that that are closer to our reporting cycle, that reversed where, you know, instead of seeing sequential improvement, we saw 300 to 400 basis point decline on a on a quarterly basis from for their report. So we did see the softening in the market, but like we talked about, even with that, you know, excluding the sample handling, the food safety business in The US grew 7% for the quarter. I will tell you, that disappointed me.

Like, my expectation was double digit growth. But one when the market started to soften at the end of the quarter, I think that that's what really pulled it down. So while you think about the underlying firmness of the business, I I think there is an underlying firmness. I still think the market is growing.

Right?

And I think there's it just isn't as growing as robustly as it did traditionally. Dave, do have anything else you wanna add with that?

Yeah. Yeah. Just specifically, Brandon, you know, we've talked to you before about our peak production proxy that we track.

That had been coming it was it was frankly coming towards even after this after the six quarters of improvement, eight quarters of decline you know, of negative numbers, it was approaching kind of par, and it moved backwards 70 to 80 basis points. In total across the 15 companies that we track. We have a couple folks that we watch that share a year end with us, and that's where we saw more recent reporting. That would show that getting worse and kind of you know, three ish hundred basis point type moves. To the negative. So we think it's consistent with what we saw in the marketplace. And, I think it's worth emphasizing. You know, sample collection aside, 7% as a core growth our food safety business felt pretty good, albeit on an easier compare. So still growing consistent with what you said. A rather durable end market.

But not growing at the rates we've seen historically. Okay. And following up switching a little bit to tariff headwinds, one, kind of a clarification and two, just a operational question. But when you guys talk about tariff headwinds, just to be clear, are we talking mostly here that the tariff headwinds is gonna be from margins because, obviously, your your COGS will go up, or is part of tariff headwind here that you guys are expecting you're gonna lose some sales because your products are gonna become more expensive and you could potentially lose some share through that. Then the follow-up kind of the operational side of tariffs is what can you do I think in the past, it's been a while since we've discussed this, but in the past, we discussed that this is actually a very sticky business and that you probably have some ability to push [indiscernible] You maybe also have some operational efficiencies you can do to off states offset some tariff headwinds. So what can you do over the coming months if if this tariffs tariffs actually stay a little sticky? To kinda offset some of these headwinds.

Yeah. Brian, I'll start and I'll turn it over to Dave. I mean, the analysis we're doing is a market by market analysis. Right? And it really depends for for example, China is a is a different dynamic. Right, than kind of the rest of the world and some of the other markets. And and so when we look at it, yes, China, for example, we in the products we sell, to China, 40% the animal safety side come from The US. The rest you know, is not So we look at how do we mitigate those because we have manufacturing in Europe. So our European product is going in there and it's not affected. So it's really market by market.

And it is extremely dynamic. I mean, since you know, yesterday, it's gone up, what, a %, 50%? I mean, it's it it's we're moving very quickly on. So understanding that, and then it's anything coming out of China on the buy sell nature is you know, having an impact. We have to recognize China's about 2.5% of the total business. So while, yes, that is a very dynamic, it's a smaller piece. It is not the of this tariff market overall. And know Dave's got better specifics, but I just want I think the key is that it is a market by market analysis.

Got it. I I think that's right. And, Brandon, just to frame it up for you a little bit, I think thinking about this in two buckets. So tariff impacts around US imports. Based on what we know today, as current as with what was enacted yesterday, just from the analysis, without any mitigating actions, and you just took of a last twelve months run rate. And straight up applying tariffs to that based on country of origin. You'd probably be around 30,000,000, close to it. 29. And of that, two thirds of it roughly would be China. We import a lot from China, and this is predominantly animal safety. And so have to look at that by resell business and how that'll be impacted. You asked a very specific question. How much of it'll be just impact to the bottom line versus impact to volume, and I think there'll be some of each. And so again, it's very dynamic, but know, we'll we'll we'll see what we'll see what happens in the coming weeks, but that's what we're preparing for. And to John's point, China's about two and a half points, roughly $2,425,000,000 of sales in. About 40% of that comes from The US, roughly roughly 10,000,000 And, again, have to look at that dynamic and our ability to compete locally And so you know, we did see more headwind there in the third quarter.

So we think net net, it's it's a headwind, some impact to the top line. And it's it's the uncertainty that we called out. I mean, we've updated the guide. We've got seven weeks left. We've seen March. March has March has been consistent with, I think, what we saw coming through the third. But know, uncertainty continues to creep up. So we're monitoring it closely. Just just to point out again, the tariff impact would be before we we we're able to mitigate anything with price and obviously you know, there will be some of that. And we've we've had some products that have this is the incremental amount. We've had some products in the needles and syringes space, again, animal safety, that has been a tariff since last September. And and we were able to pass a decent amount of that. A decent amount of that through. And then we also have to look at the competition and and looking at that. And some people aren't that disadvantaged. We're we're in our in some of our larger markets where we're advantaged, But some people know, it is a headwind for some others. So we'll look to play offense where it's applicable as well.

I hope that I hope that helps.

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

Thanks, Brandon.

Your next question comes from Subbu Nandi with Guggenheim. Your line is now open. Hey, guys. Thank you for taking my question.

Kinda wanna ask a similar question to Brandon, and I'm now more confused by all the answers that you gave. Maybe I'm missing something. But it seems like you're largely insulated on tariffs, maybe a little bit on China. But otherwise, largely insulated. Even insulated on policy, sample production is done. Petrofilm is on track. So that leaves us with all the guide cuts related to either less than expected growth for so food safety and softer animal business. Is that the right conclusion?

Yeah. Simba, I think I think you're really close. Right? Like, we talked about. So while we had 7% growth, core growth in the quarter, you know, our expectation was to be better than that. And and what happened is we saw the food safety market soften a bit at the end of the quarter and like we had just talked about. Right? The other than that, we saw was know, we are in the trough for the animal safety. So the animal safety is in the trough. With that, you know, it has not been a growing market So I think you're you're you're right on with that is that you know, those are the two things that impacted. This was not know, we improved our we we hit the goal we wanted on sample handling. With production of reaching the three ms rates. Now again, we have to exceed that. We're working hard to to drive those volumes up because we have to you know being at those rates does not help us knock out the back orders, so we have to to execute in the fourth to continue to grow to to start chewing into some of the back order piece.

But I think you know, the the the big takeaway was kind of with this uncertainty too is this this softening that we see within the baskets of customers that were coming in really later in the quarter. And while while I'm happy with the 7% growth, I wanted better. Okay.

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

Yeah. It's so our our distribution is we use multichannel distribution around the world. So when we talk about you know, distributors unwilling, it it really is thinking about it across the worldwide basis. Right? And with with uncertainty especially around tariffs and others, nobody wants to get hung with high tariff inventory or other things. So we just saw that it was it was an environment where inventories weren't reduced, but it wasn't an aggressive where anybody was gonna really step up and and and we saw we didn't see a lot of movement from the distributors or normally at this time of year heading into spring, you expect to see a little bit better uptake on distributor inventories.

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

Yeah. I think it's it's don't know if it's one. I mean, we we talked about this. We have we have plans on the specific things we need to do around the business. And it's it's driving to those you know, critical areas. [indiscernible] Right? We we continue to talk about derisking the petri film manufacturing, the things we're doing around that. We continue to execute on that plan. We are on track to begin you know, test production in the fall of this year, which puts us you know, gives us two years to move away from our contract manufacturing business. We know we're gonna do it significantly faster that two year period. So being on track with that. Sample handling. We have to you know, that was a $25,000,000 headwind. For the year. We have to be able to continue to grow the manufacturing output to eat into the backward to allow us to continue to make that a growth driver for the company. And and that will tremendously improve the growth rates for the organization as we're going as we're going forward. The other thing is you know, we contemplated being at a certain revenue level. And with us not being at that certain revenue revenue level, then we are looking at how are we gonna make sure that the cost structure fits the new revenue level.

And we are being very active and aggressive looking at what is the exit run rate, for the quarters to make sure that we're aligning the business from a cost perspective that that fits that revenue drive. I know Dave's got a couple of thoughts on this too.

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

Thank you for that, guys.

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

Hi, guys. How's going? Just a couple Hi, guys. That hey, Dave. So just one question, I guess, maybe first on animal safety.

So I know you don't break out U. S. Versus OUS animal safety, but I guess USDA estimates, I guess, you know, protein, same as last year, I guess, expected roughly 1% growth. And so guess, a little confused your comments in terms of, I guess, the weakness and sort of being in line with the market, where it seems like you're growing below market in animal safety. Well, Tom, one point is is we look at, particularly in The US, our large distributors, think our sales out of the those channels remains positive in the low single digits. So I think, you know, we continue to kind of bounce along the trough. The timing at which large distributors take inventory varies dramatically You may or may not recall, know, year and a half ago, we were talking about the rebalancing of the inventories into those distributors And today, now we've been operating in a situation where I think inventories have come into balance. So I think it think it jives okay. Okay.

And then I guess just one other question on the I guess, global genomics business. So we're kind of in the finishing the second year of a reset of the Genovix business. So is there a kind of annual run rate we should think about, you know, in maybe the 80,000,000, 85,000,000 range that, I guess, sort of would represent, you know, I guess, the go forward business given that you know, I guess, we've had kind of incremental decline? Yeah.

Tom, I don't have the exact numbers in front of me, but let me try to dimensionalize that for you. I'd say we globally entered the year with roughly a $90 ish million global genomics business that included serving a lot of end markets. Within that are more differentiated bovine business that's, you know, called in the fifties.

That's really the business that we're trying our restructuring is aimed at focusing around. And I will say that even though genomics was down mid single digits, [indiscernible] this last quarter and for this year, We've seen growth in bovine. Bovine grew low single digits here in this last quarter. And is a pretty pretty strong global business for us. So as we work through some of the back office companion work and some of the other kind of protein categories and specialty categories. That that we're kind of moving away from over over time, we would get down to that. That bovine business. In that kind of fifties range. If that helps. Okay.

Yep. Great. Thank you. That was it for me. Appreciate it. Thanks, Tom.

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

Hi. Thank you for taking the question. So on the destocking commentary, can you just maybe talk about the size timing and kind of quantification of that if you possibly can. I know you said it's global. And and the reason why I'm getting you know, trying to get a hold of that is essentially, you know, that should see a bounce back. I mean, when people have, an understanding the tariffs, maybe even wanting to, like, buy ahead of new tariffs, that kind of thing. So the quantification of that would probably help us understand if there is going to be, you know, potentially a a snapback that we could see in the future.

David, I don't I don't think we characterize it as destocking. I think what we saw was people, you know, hesitancy to take inventory, so a little bit a pause, which I think is different than a longer term destocking cycle. I think in the quarter, you know, I said we we were probably came in about 6,000,000 below where we thought we would. A million of genomics, a million of the timing of the ramp of sample collection. And about 4,000,000 other, I think, in total. The the 6,000,000 was included both food safety and animal safety, maybe a little biased towards animal safety. But of the 4,000,000 that was kind of broader, you know, two of that was China. And and I think that is just a unique a unique dynamic. When you spread the rest around the world, I think it felt more like just not seeing the uptake and kind of the uncertainty uncertainty reading through. So I don't you know, and and see how the fourth develops, but I think it feels to us [indiscernible] potentially increasing here with the additional tariff actions from when we ended the quarter to where we're at today. So I does that help?

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

Yeah.

Look. Look. I think we weren't you know, our timing here today is is rough because the events of the last twenty four and forty eight hours have been have been pretty pretty dramatic. But I think that's why you heard us emphasize uncertainty. We didn't give you a range kinda set about because I think we recognize that there's a level of uncertainty that we can't quantify. Having said that, you know, we've got March under our belts. That felt a lot like how we how we kind of felt coming through February. So what we tried what we've assumed is an environment reasonably consistent with probably some incremental headwind to EBITDA at minimum from tariffs. And, you know, maybe that's kind of roughly five in there. Which if you take kind of that 30 exposure that I talked about and kind of broke it down by weeks, that that probably comes pretty close. But I I think you're making a very good point, which is the level of uncertainty heightened. Look. Even with that, we felt it was important to ups up up update our guide even even given that. As opposed to not with seven weeks left.

But you know, I I I I think your point is a good one, and we would like to we agree with it. It's very difficult at this stage.

Yeah. I I guess and again, I'm I'm sorry to hammer on to this point, but, like, right now, I mean, it's it's like and you're right. You have unfortunate timing. I mean, this is really happening in April and, you know, you have, what, eight days of of visibility since liberation day to to kinda understand what the impacts are in the business. I mean, I don't really know if if I I guess I'm belaboring the point here. But the the different buckets, the USDA, the FDA, the increase decreases in spend your expected to see, but you have not necessarily seen yet. I don't know if you could quantify that, and then I don't know if you could quantify of the like, what you're saying in terms of of deregulation. [indiscernible] I guess you've already kind of said that tariff impacts was 5,000,000 ish. But, again, I I I I know, like, you can't unquant I know the timing is hard, but for us, like, we wanna understand this guidance and kind of, like, what's happening in this you know, until that that April August close, like, what all went in it and and I I know it's extremely hard for you.

So I I I'm I'm I'm sorry to ask that question, but we're, you know, we're we're trying to get to it.

Oh, David.

Don't look good. Totally makes sense. Look. What we were pointing out on the FDA and the USDA was while they are leaning out those agencies, it it it if, you know, everyone remembers, they're not not all manufacturing facilities have MPA inspectors in. Actually, most do not. And so it we feel this will continue to push food safety testing to the plant, where it should be done. Right? Because that's where food safety is. So while the inspection services may have less inspectors, what I was trying to portray was that it is not the inspectors that are doing the tests. It is the companies that are doing the test. So I I was trying to portray that there is a overall firmness there even though there may be a leaning out of those sorts of agencies. Right? Yeah.

The other the other thing regarding the some of the things we're doing on cost is as Dave talked about, we we we did already in the genomics business execute a in the second and third quarter a pretty significant restructuring of that. I'm only restructuring, but realigning that business and doing it also on the cost side.

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

Pre know, kind of where we are at this stage of the company.

Mhmm. Gotcha.

I you know, I I I I'll I'll take the rest off offline. I I mean, I feel like I'm hitting the same, like, guidance and, like, for the next, like, five months kind comments and anyway. But thank you. You've been great.

Thanks, David.

Your next question comes from Brandon Vasquez with William Blair.

Your line is now open.

Hey, thanks for the follow-up question. Just one real quick to now that we're in a public setting, I Dave, as we start to look towards fiscal twenty six, I'll I'll be the guy to ask it.

I appreciate we're not gonna get any numbers here. But just in a in a public setting here, anything that we should be keeping in mind puts and takes for the model as we start to update our forward year numbers as well?

Thanks, guys.

Yeah. Look. Think the the actions that we laid out that John highlighted will all have implications to that. I think we're looking at some cost actions here that we hope to impact the exit rate with. We've added cost over a period of time, and I think we're operating at a level that we is below what was anticipated. Even a year ago. As a result, we need to readdress some of those costs. Portfolio, obviously, will have an impact both to kind of incrementals moving forward as we begin to refine our end market exposures as a result of those actions. And then, you know, you know, we talked with we talked earlier about how hard it is to call the next seven weeks. So, you know, with that, with that caveat, Brandon, you know, progress on key integration items, and, you know, [indiscernible] the focus areas around sample handling and those things come back will be kind of big levers. As you know, the financial model here and the model your guys' model is significantly revenue driven. That'll be a big be a big part of our focus. So more to come, we look forward to providing some guidance there.

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

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

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

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