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

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.

In addition to those of you who are joining us by live telephone conference, I also welcome those of you joining us via the internet. Following our prepared comments this morning, we will entertain questions from participants who have joined this live conference.

I'm joined this morning by our Chief Financial Officer, Steve Quinlan, who will provide detail on our results for the quarter. We're pleased to report double-digit organic growth across our businesses during the third quarter, while at the same time, boosting our revenues through our strategically important acquisition of Megazyme on December 30.

Our customers and businesses continue to operate in very challenging environments. As an example, 32% of our global employees work in Michigan and until recently, did not qualify under any vaccine protocols.

We've had no choice but to maintain the same restrictive safety protocols that we've had in place for about a year now in order to keep our staff safe. Many of our customers remain in the same situation.

There may be a loosening of restrictions, but it will be many months before our core restaurant supply and foodservice customers, for example, will return to their pre-COVID demand. While we're pleased with our performance for the quarter, we continue to fight global market disruptions caused by the COVID-19 pandemic.

All that said, we believe the third quarter delivered the type of performance Neogen was built to deliver. Sales of our test kits to detect aflatoxin, a product we first developed in 1985, surged 25% as we responded to a mycotoxin outbreak in pet food.

Sadly, the outbreak has claimed the lives of more than 100 dogs and sickened hundreds more across at least 35 countries. Sales of our equipment to detect spoilage organisms, such as yeast and mold grew 45% as we continue to expand placements of our new Soleris NG System we launched in July.

We received tremendously positive feedback on the system from our core customers and been able to sell in new markets, such as dietary supplement manufacturers. The Soleris NG System is a good example of Neogen expanding its core Food Safety mission to include food quality applications.

Some yeast and mold may not greatly affect the safety of a product but it may affect its quality, aesthetics and shelf life. We also had a strong quarterly performance on our Animal Safety side, with increases largely driven by sales of our rodenticide products and increased consumer expenditures in companion animals, especially dogs and cats.

Our diversification continues to be our strength. Our deep knowledge and broad product offerings allow us to grow even in the face of difficult markets. I'll now ask Steve to run down the numbers..

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. Natural toxin test kits rose 14% as the recent pet food recalls have driven demand for increased testing.

Sales of Neogen Culture Media grew 11% in the quarter, helped by new business from a COVID-19 vaccine manufacturer, while our AccuPoint product line designed to help monitor environmental sanitation rose 5% for the quarter.

Our pathogen test kits were up 8%, primarily from sales of our Listeria Right Now product, and our line of allergen test kits increased 3%. Revenues for our test to detect the presence of antibiotics in milk declined by 10% in the quarter, due primarily to lower demand in Eastern Europe from a large European distributor.

We've put a direct sales team in place to market these products and are working aggressively to recover this business. Our international business grew 16% in the quarter, and this growth was partly due to 2 months of sales from the Megazyme acquisition. Our U.K.

business grew 4% in pounds as lower economic activity caused by the pandemic resulted in sluggish sales performance across the organization. This increase was 9% when converted to U.S. dollars. Conversely, the 20% devaluation of the real caused our 12% revenue gain in Brazil to translate to an 11% decline in U.S. dollars.

In local currency, Brazil had a solid quarter with double-digit growth in Food Safety products, genomic services and insecticides due to a large tender order.

Sales at our Neogen Latino America operation based in Mexico City, grew 14% in the quarter in local currency, primarily in strength in sales of vet instruments, cleaners and disinfectants and Food Safety diagnostic kits. After adjusting for currency translation on a weaker peso, the revenue gain was reduced to 7%.

Revenue at Neogen China more than doubled in the quarter, driven by increased sales of cleaners and disinfectants to address the ongoing African swine fever outbreak and the COVID pandemic in China. And strong sales of genomic services to the swine and dairy cattle markets.

The Animal Safety segment had another strong quarter, recording revenues of $58.3 million, up 18% compared to the $49.4 million achieved in last year's third quarter. Excluding the prior year acquisitions of an Australian distributor and the StandGuard product line, organic sales increased 16%.

Animal Care products sold out of our Lexington, Kentucky based manufacturing and distribution center, such as small animal supplements, wound care and vitamin injectables, increased 45%. And vet instruments, including needles and syringes, rose 15% for the quarter. These increases were primarily the result of increased sales to our largest U.S.

distributors into animal protein markets. We also benefited from high sales of disposable gloves in the third quarter as several months of backorder PPE shipped to customers. Offsetting these increases somewhat were lower sales of distributed dairy supplies due to the termination of our distribution agreement last June.

Rodenticide sales increased 79% in the third quarter due to ongoing increased rodent pressure across the U.S., primarily in the Pacific Northwest.

Insecticide sales increased 14% aided in part by sales from the StandGuard product line we purchased in July of 2020, while cleaner and disinfectant sales decreased 9%, resulting from lower sales of water treatment products as COVID restrictions have limited our sales and service teams' ability to complete new customer installations.

Revenues in our genomics business through the Animal Safety segment increased 9% from gains in beef and companion animal testing in Australia and commercial beef and beef association markets in the U.S. and Canada.

Worldwide, genomics revenues increased 10%, with strong growth in China, Australia and North American beef markets, offset by a small decline in Europe. Gross margins were 46.1% for the quarter compared to 45.4% in last year's third quarter.

The improvement in gross margin is primarily the result of the increased rodenticide sales within the Animal Safety segment as these products have higher gross margins within that segment. Gross margins for the Food Safety segment were the same in both quarters. For the year-to-date, gross margins are 46.1% versus 46.8% last year.

Operating expenses increased 18% for the quarter and were up 7% for the year-to-date. As I mentioned earlier, this increase includes $2.1 million of spending in the quarter on strategic consulting, legal, and other professional fees related to acquisition activity for businesses, which we were ultimately not successful in acquiring.

Excluding these charges, operating expenses increased 11% for the quarter. Sales and marketing expenses rose 6% with increased compensation in shipping, somewhat offset by continued lower spending on travel, trade shows and other customer-facing activities due to the pandemic.

For the year-to-date, sales and marketing expense is flat compared to last year. Research and development expenses increased 11% for the quarter and 8% for the year-to-date as we've continued to have higher development spending on products that were recently launched or are scheduled to be launched in the very near future.

General and administrative expenses were up significantly in the quarter and year-to-date periods due primarily to the previously mentioned debt deal expenses. Noncash amortization expense resulting from acquisitions in fiscal '21 and the second half of fiscal '20 also contributed to the increase over the prior year.

Operating income for the quarter was $15.8 million. That compares to $13 million in last year's third quarter. When expressed as a percent of sales, operating income was 13.5% compared to 13.1% in the third quarter a year ago. Excluding the debt deal expenses, operating income in the third quarter would have been 15.3%.

Our other income for the third quarter declined by about $1 million, as interest income at $294,000 was down $1.3 million from last year due to the precipitous drop in yield on our marketable securities portfolio, as I mentioned earlier, as rates dropped last year in response to the pandemic.

For the year-to-date, interest income is down $2.8 million. The impact of the interest income decline on earnings per share was about $0.02 in the third quarter and is $0.04 for the year-to-date.

Our effective tax rate for the third quarter was 16.3% compared to 14.4% in last year's third quarter, with the increase in rate driven primarily by lower estimated deductions for foreign-derived income, increased taxes at international locations and higher provisions for state taxes.

On the balance sheet, accounts receivable balances have increased only about 3% this year as our collection teams across the world have been very effective in their efforts. Inventory balances have increased $4.2 million.

However, excluding the Megazyme acquisition, our inventory is actually down slightly as we work to lower inventory levels that were increased last year in anticipation of potential supply chain issues due to the pandemic and Brexit.

We've generated $59.1 million in cash from operations during the first 9 months of the year and have invested $52 million in our two acquisitions and $19.4 million in property, plant and equipment and other assets. Now I threw a lot of numbers out in the last few minutes, and I'll stop now so that John can add further comments.

Hopefully, what you heard behind the numbers was that our business has continued to execute and post solid results despite the incredibly challenging environment that we're operating in. These results are due to the efforts of our more than 1,800 employees worldwide who continue to deliver month after month.

We are grateful for their ongoing effort and are proud of them and the results that they've been able to achieve. At this point, I'll turn it back to John for further comments..

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. We believe the best use of our available cash is accelerating Neogen's growth through acquisitions of complementary businesses and technologies.

We're going to continue our aggressive corporate development process, and we have targets on all stages of the acquisition pipeline. I have nothing that I can report on you today, but I will say that we are currently working on multiple active targets. On February 1, we reported the relaunch of ThyroKare.

And for those of you new to Neogen, in 2015, we were the market-leading provider of tablets to treat hypothyroidism in dogs.

We exited the market in 2016 as a competitor earned an exclusive license, but now we've received our own license for the product from the FDA, and we're back to full production with the shipping of product to our customers beginning at the end of February. We recently received other critical government approvals.

The full approval of our Neogen Viroxide Super disinfectant by the U.S. EPA and Cedar in Mexico. The full approvals mean that we now have another industry-leading product and the more than $2.9 billion global animal disinfectant market.

Also on February 15, we announced our early-warning waste sludge solution to detect SARS-CoV-2, the virus known to cause COVID-19. You know this product is interesting because it provides a very cost-effective solution to systematically test and monitor large groups of people.

We're ready to help municipalities, colleges, food processors, the transportation industry and any other industries where a large number of people come together. I'm also very excited about the new products that we'll be launching soon as well as our robust R&D pipeline.

Again, while there's nothing I can report to you today, I highly encourage you to follow Neogen closely in the coming weeks and months. Our December acquisition of Megazyme based in Dublin, Ireland, has begun its initial integration phase and we're encouraged and excited by the results so far.

Megazyme is another big step in our expansion of diagnostic products in the adjacent markets of food quality and nutrition. Megazyme's assay kits and reagents are used to measure dietary fiber polysacharides and sugars in the acids such as lactose in commercial labs, animal feed producers and food and beverage companies.

The next quarter or two won't be easy, but I'm optimistic about Neogen's future as we move forward. Neogen is stronger than ever. Our markets are growing. Our teams are invested in our mission. Our organization as a whole is able to span the entire globe, providing the highest quality food and animal safety solutions possible.

I'm going to stop at this point and answer any questions you may have..

[Operator Instructions]. And the first question will be from David Westenberg with Guggenheim Securities..

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?.

Yes. Thanks, David.

Steve, you want to…?.

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..

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..

Yes. You're in the ballpark..

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..

Sorry, David..

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?.

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?.

Well, the interest income..

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?.

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..

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..

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..

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

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..

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..

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?.

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..

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?.

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..

The next question will be from Mark Connelly with Stephens..

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?.

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..

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?.

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..

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?.

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

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?.

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..

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..

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..

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..

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..

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