Neogen (NEOG) Q1 2026 Earnings Call Transcript

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DATE

Thursday, October 9, 2025 at 8 a.m. ET

CALL PARTICIPANTS

Chief Executive Officer — Mike Nassif

Chief Financial Officer — Dave Naemura

Vice President, Investor Relations — Bill Waelke

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RISKS

Adjusted net income and EPS declined to $9 million and $0.04, respectively, from $14 million and $0.07, due to lower adjusted EBITDA despite reduced interest expense in fiscal Q1 ended Aug. 31, 2025.

Ongoing sample collection inefficiencies and inventory write-offs continued to negatively impact gross margin in fiscal Q1 ended Aug. 31, 2025, which remained under pressure despite sequential improvement.

Food Safety segment revenue declined 4.6% in fiscal Q1 ended Aug. 31, 2025, including a 1.7% core decrease, with the PetriFilm line down mid-single digits and market share losses cited in sample collection, allergens, and natural toxins.

TAKEAWAYS

Total Revenue -- $209 million in fiscal Q1 ended Aug. 31, 2025, representing 0.3% core growth; results were in line with management's expectations.

Food Safety Segment Revenue -- $152 million, down 4.6% overall and 1.7% on a core basis in fiscal Q1 ended Aug. 31, 2025; declines offset mid-single-digit growth in pathogens, allergens, general sanitation, and sample collection.

PetriFilm Core Revenue -- Mid-single-digit decline in fiscal Q1 ended Aug. 31, 2025; leadership attributes this to distributor inventory adjustments in the U.S. and Asia rather than underlying demand shifts.

Animal Safety Segment Revenue -- $57 million, a 0.8% decline in reported revenue but 5.8% core revenue growth, helped by easy prior-year comparisons and growth in animal care, life sciences, and biosecurity products in fiscal Q1 ended Aug. 31, 2025.

Adjusted EBITDA -- $35.5 million, with a 17% margin in fiscal Q1 ended Aug. 31, 2025, pressured by lower volume, gross margin headwinds (notably tariffs and operating expenses), and inventory-related issues.

Gross Margin -- 45.4% in fiscal Q1 ended Aug. 31, 2025, improving sequentially from the prior quarter but still affected by elevated sample collection production inefficiencies and residual tariff impacts.

Operating Expense Reduction -- Actions taken at the end of September to lower annualized operating expenses by approximately $20 million through a 10% global headcount cut and non-labor cost reductions, with an expected fiscal 2026 benefit of $12 million.

Free Cash Flow -- Outflow of $13 million in fiscal Q1 ended Aug. 31, 2025, improving by $43 million year-over-year; this improvement was attributed to reduced CapEx and a $30 million improvement in trade working capital.

Divestitures -- Completed sale of the Cleaners and Disinfectants business for $115 million in net proceeds in fiscal Q1 ended Aug. 31, 2025; $100 million was used to pay down debt, providing $6 million in annualized interest savings.

Inventory Management -- Elevated inventory levels and write-offs were cited as a drag on cash in fiscal Q1 ended Aug. 31, 2025; SNOP process improvements are underway to release excess inventory and bolster cash generation.

Guidance -- Management reaffirmed full-year fiscal 2026 guidance, noting expectations for margin improvement and a sequential revenue step-up in Q2 due to seasonality.

PetriFilm Production Transfer -- Initial product testing underway; transfer completion targeted for the second quarter of next fiscal year, with transition processes and supply continuity measures in place.

Genomics Business -- Core revenue grew 4% in fiscal Q1 ended Aug. 31, 2025; management confirmed the divestiture process is progressing, and future guidance will be adjusted at the time of sale.

Regional Revenue Trends -- LATAM was up mid-single digits; the U.S. and Canada achieved low single-digit core growth; AMEA and APAC declined by mid- and high-single digits, respectively, due to regional mix and supply chain shifts in fiscal Q1 ended Aug. 31, 2025 core revenue.

Capital Investments -- CapEx was $24 million in fiscal Q1 ended Aug. 31, 2025, described as the annual high point and linked to ongoing plant integration expenditures.

SUMMARY

Management initiated a $20 million annualized cost-reduction program involving a 10% workforce reduction and other cost measures, with a focus on reallocating resources toward commercial and R&D priorities, at the end of September in fiscal 2026. Gross margin improved sequentially in fiscal Q1 ended Aug. 31, 2025 as inventory write-offs and sample collection inefficiencies began to moderate, though both remain significant internal challenges being addressed by ongoing process changes. The company completed a $115 million divestiture and used $100 million to pay down debt in fiscal Q1 ended Aug. 31, 2025, and reaffirmed full-year fiscal 2026 guidance for margin and revenue improvements for the remainder of the year. Efforts to enhance top-line growth include targeted market expansion, pricing initiatives, and organizational changes, including recruitment for a new Chief Commercial Officer. Management anticipates releasing excess inventory through process improvements and has cited early success in improving trade working capital metrics in fiscal Q1 ended Aug. 31, 2025.

CEO Nassif said, "we can unlock significant growth through disciplined focus, prioritization, and scaling of effective processes," while indicating that a major strategic overhaul is not required.

Plans to transfer PetriFilm production remain on schedule, with initial testing described as "promising" and the full production transition expected to conclude in Q2 fiscal 2027.

CFO Naemura said, "Free cash flow in Q1 was an outflow of $13 million, representing an improvement of $43 million" due to lower CapEx and improved working capital, but flagged ongoing inventory and sample collection as key improvement areas in fiscal Q1 ended Aug. 31, 2025.

Leadership acknowledged prior market share losses, especially in sample collection and allergen/natural toxin product lines, attributed to supply and execution distress post-3M integration.

CEO Nassif stated, "food safety core revenue has grown only modestly over the last few years and even declined in certain quarters," identifying execution issues rather than demand as central to this trend, referencing performance over multiple fiscal years.

INDUSTRY GLOSSARY

PetriFilm: A proprietary line of diagnostic test media for microbial detection and enumeration, central to Neogen’s food safety offerings.

SNOP (Sales and Operations Planning): A cross-functional process to align production, inventory, and sales strategies to optimize supply chain efficiency and reduce working capital requirements.

Full Conference Call Transcript

Bill Waelke: Thank you for joining us this morning for the discussion of the first quarter of our 2026 fiscal year. I'll briefly cover the non-GAAP and forward-looking language before passing the call over to our new CEO, Mike Nassif, who will be followed by our CFO, Dave Naemura. Before the market opened today, we published our first quarter results, as well as a presentation with both documents available in the investor relations section of our website. On our call this morning, we will refer to certain non-GAAP financial measures that we believe are useful in evaluating our performance.

Reconciliations of historical non-GAAP financial measures are included in our earnings release and the presentation, slide two of which provides a reminder that our remarks will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These forward-looking statements are subject to risks that could cause actual results to be materially different from those expressed in or implied by such forward-looking statements. These risks include, among others, matters that we have described in our most recent annual report on Form 10-K and in other filings we make with the SEC. We disclaim any obligation to update these forward-looking statements.

I'd like to extend a special welcome to Mike on his first earnings call at Neogen, and we'll now turn things over to him.

Mike Nassif: Thank you, Bill. Good morning, everyone, and thank you for joining the call today. When I was approached about the opportunity to lead Neogen a few months ago, I was drawn by its strong reputation as a leader in both food and animal safety. Few companies have the chance to shape a safer, healthier world through innovations like PetriFilm and comprehensive environmental monitoring. However, I also found a company not yet reaching its full operational and financial potential. I saw an opportunity to make a transformative impact and position Neogen for sustained success.

Having led the turnaround of the point-of-care diagnostics business at Siemens Healthineers over three years, I drove step changes in performance, and I'm confident that experience equips me to deliver similar results at Neogen. In my first nine weeks, I've prioritized engaging with our talented team, customers, partners, and shareholders. Neogen's employees are deeply passionate, and our loyal customer base is equally committed to our mission. We're a leader with unique scale, product depth, and global capabilities in a highly attractive market, but execution challenges are holding us back. Moreover, I do not believe a major strategic overhaul is needed. Rather, we can unlock significant growth through disciplined focus, prioritization, and scaling of effective processes.

Part of my comprehensive review of the business includes reexamining our strategic initiatives and aligning them with our targeted improvement plan to drive sustainable growth. In the short term, we are focusing on the critical priorities of driving top-line growth, right-sizing our cost base, reinvigorating innovation, and deleveraging. To right-size our cost base, we're acting urgently to streamline our organizational structure, boost agility, and scale key processes like sales and operations planning, or SNOP. At the end of September, we took actions to reduce operating expenses by approximately $20 million on an annualized basis through a global headcount reduction of approximately 10% of existing and planned positions, as well as non-labor cost reductions.

These savings include some level of targeted reinvestment we plan to direct towards enhancing our commercial and R&D capabilities, and we do not believe the cost actions will have a negative effect on demand generation. This was not a decision that was taken lightly, but the costs added by the company over the last few years to scale up capabilities and absorb the 3M transaction contemplated higher levels of revenue. This action better aligned our costs with the current revenue of the business. For top-line growth, we're empowering our commercial teams to execute with precision, targeting higher growth markets, particularly accelerating growth in the U.S.

We are optimizing our portfolio for market share gains and profitability, including targeted price increases where we are under-indexed. Additionally, we will evaluate adding commercial headcount in select markets to capture incremental growth opportunities. The addition of a Chief Commercial Officer, a role we're currently recruiting for, will provide dedicated global commercial leadership as we work to put the company on the trajectory of improving growth. To reinvigorate innovation, we will strengthen our R&D pipeline in core food safety and animal health categories, prioritizing fewer high-impact projects, investing in top talent, and enhancing our innovation processes.

We are also tackling critical projects with urgency, advancing PetriFilm production integration, addressing sample collection inefficiencies through productivity enhancements, and optimizing inventory management with a robust SNOP process to reduce write-offs and streamline our supply chain. With respect to PetriFilm specifically, we recently began initial product testing with the intent of demonstrating that the different steps of production are able to execute processes within the required parameters. The early results have been promising, and we expect a production testing process to be completed within the next couple of months before we begin transitioning individual SKUs to our line for full validation.

I've spent a significant amount of time meeting with the team driving this project and feel comfortable that a solid plan is in place and we are managing it very closely. In addition, we are anticipating potential challenges and working in tandem with a primary machine builder who has kept a team on site to assist. We have also had a number of our employees spend extended time in Poland over the last year, observing the PetriFilm production there and refining their understanding of the manufacturing through detailed process documentation.

We have multiple employees with legacy PetriFilm expertise, including the key manufacturing engineers who set up PetriFilm production in Poland, know the process inside out, and joined Neogen at the time of the 3M transaction. We believe we have a significant amount of knowledge in-house as it relates to both the art and science of PetriFilm manufacturing and are currently tracking to the timeline laid out in April, which has us completing the transfer of PetriFilm production during the second quarter of the next fiscal year. Furthermore, we intend to have production available at our manufacturing partner during the transfer process to ensure continuity of supply and a smooth transition.

The goal of the focused approach to these priorities and critical projects is to drive EBITDA growth and free cash flow generation, which ultimately results in deleveraging the business. With the right sizing of the cost base, we anticipate the enhanced commercial and innovation focus will drive future revenue growth that comes through in attractive incremental margins, particularly with respect to PetriFilm. One of the contributing factors to the recent elevated inventory write-offs is simply the fact that we're carrying too much inventory, tying up an unnecessarily large amount of cash. The aim of the work underway to optimize our SNOP process is to release a significant amount of excess inventory over time, further bolstering cash generation.

Finally, the integration of sample collection product line has been a meaningful drag on cash over the last several quarters. We are acting with urgency on this issue and expect to see improvement over the balance of the fiscal year. Turning to some brief comments on our Q1 results specifically, Neogen delivered revenue approximately $209 million, up 0.3% year over year on a core basis, which was in line with our expectations. In food safety, key product lines in which we've been investing, like food quality and pathogens, showed solid growth in the quarter. PetriFilm, which has had a core revenue crater in the mid-single-digit range over the last few years, had a mid-single-digit decline in the first quarter.

We do not believe this decline reflects an underlying change in the demand for PetriFilm, but rather a couple of changes within our distributor base that we believe are temporary in nature. We made a distributor change in Asia and saw what seems to be the normalization of buying patterns at a large distributor in the U.S. We have decent visibility into sales out of PetriFilm from the distribution channel in the U.S., and those numbers continue to indicate solid growth in the quarter. Adjusted EBITDA margin was in line with our expectations and primarily impacted by lower revenue, higher tariff costs, and higher operating expenses.

The last two items are being addressed with a combination of pricing and resourcing actions, as well as the previously mentioned headcount reduction. Free cash flow in the quarter represented a significant improvement compared to the prior year, with lower investment in CapEx and working capital being the biggest drivers. With Q1 behind us and the trend we saw in September, we are confident in reaffirming our full-year guidance. Now, to share with you more details on our Q1 results, I'd like to pass it to Dave.

Dave Naemura: Thank you, Mike, and welcome to everyone on the call today. Jumping into the results, our first quarter revenues were $209 million. Core revenue, which excludes the impact of foreign currency, divestitures, and discontinued product lines, was about flat at positive 30 basis points for the quarter, while foreign currency added 50 basis points and divestitures and discontinued products were a headwind of 440 basis points compared to the prior year. The impact from divestitures was attributable to the sale of the Cleaners and Disinfectants business midway through the quarter. At the segment level, revenues in our Food Safety segment were $152 million in the quarter, down 4.6% compared to the prior year, including a core decline of 1.7%.

We saw growth in most of our core Food Safety categories, other than our indicator testing and Culture Media product category. We had mid-single-digit growth in pathogens and also grew in allergens and bacterial and General Sanitation, as well as sample collection, which benefited from an easy prior year compare. As Mike mentioned, PetriFilm core revenue declined in the quarter, which we believe is primarily attributable to adjustment of distributor inventory levels in the U.S., as well as changing a large distributor in Asia Pacific. Sales out of the distribution channel in the U.S. showed solid growth in PetriFilm, giving us confidence in the underlying demand profile of the product line.

In APAC, we are winding down inventory at a large distributor and expect to see our new channel partner begin to load in inventory in the third quarter. Quarterly revenues in the Animal Safety segment were $57 million, a decline of 0.8%, with the core revenue growth of 5.8% benefiting in part from an easy compare to Q1 of fiscal 2025. We experienced solid growth in our animal care product category, led by higher sales of biologics and wound care products. Growth in the life sciences product category was driven by higher sales of substrates and reagents, and the biosecurity product category saw strong growth in insect control products.

We believe this end market has been in or around a trough for several quarters now. Our global genomics business had core growth of 4%, with solid growth in the bovine market, partially offset by weakness in companion animal testing. This marked the first quarter of growth for the total genomics business since fiscal year 2023, reflecting the move away from certain less attractive end market exposures. From a regional perspective, core revenue growth in the first quarter was mixed. Growth was led by our LATAM region, up mid-single digits, with strong sales of pathogen detection and general sanitation products.

The U.S. and Canada region had core growth in the low single-digit range, with food safety about flat and mid-single-digit growth in animal safety. Growth in pathogen detection, sample collection, food quality, and general sanitation products was offset by a decline in PetriFilm in the U.S., which, as I noted before, we mostly attribute to some inventory rebalancing in the distribution channel. We declined mid-single digits in AMEA and high single digits in our APAC region. AMEA saw growth in most major food safety product categories outside of sample collection, which was offset by declines in genomics and cleaners and disinfectants during the period when we still owned that business.

The APAC region was a mixed story by country, with better than anticipated performance in Japan and Korea, more than offset by headwinds in China and the ASEAN countries, where we have seen a greater impact from shifting supply chains in response to global trade policies, as well as the switch of a large distributor. Gross margin in the first quarter was 45.4%, a sequential improvement from the fourth quarter of fiscal 2025, which was significantly impacted by inventory write-offs. Although the inventory impact in Q1 improved sequentially, we continued to see an elevated level of sample collection production inefficiencies. Last quarter, we noted our focus on certain core process improvements and driving efficiency in the sample collection product line.

These are multi-quarter activities that we made progress on during Q1, which should continue to improve as we progress through the year. Finally, we also saw tariff impacts in the quarter as the higher tariff rates in Q4 flowed out of inventory, impacting gross margin in Q1. Adjusted EBITDA was $35.5 million in the quarter, representing a margin of 17%. In addition to lower volume, the adjusted EBITDA margin was negatively impacted by the previously noted gross margin headwinds, as well as higher operating expenses.

As Mike noted, we have executed on a reduction in force to better align spending with the current operating environment, which will provide run rate benefit beginning in October through the remainder of the fiscal year. First quarter adjusted net income and adjusted earnings per share were $9 million and $0.04, respectively, compared to $14 million and $0.07 in the prior year quarter, due primarily to the lower adjusted EBITDA, which more than offset the lower interest expense. Moving to the balance sheet, we ended the quarter with gross debt of $800 million, 68% of which is at a fixed rate, and a total cash position of $139 million.

During Q1, we completed the divestiture of our Cleaners and Disinfectants business, which resulted in approximately $115 million in net proceeds that was used to pay down $100 million in debt in Q1, representing annualized interest savings of roughly $6 million at current rates. Free cash flow in Q1 was an outflow of $13 million, representing an improvement of $43 million compared to the prior year Q1 and included $24 million of CapEx, a high point for the year as we continue to work through our plant-related integration expenditures.

In addition to lower CapEx compared to the prior year, free cash flow benefited from improved trade working capital efficiency, which contributed an inflow of about $30 million, a 300 basis point reduction in working capital as a percentage of last 12 months' sales compared to the prior year Q1. As Mike noted, we are reaffirming our full-year guide for fiscal 2026. The first quarter came in about as anticipated, with margin improvement expected in the balance of the year as we work to improve in certain areas, namely sample collection, productivity, and inventory write-down performance.

The first quarter is typically our seasonally lowest revenue quarter, and this year's first quarter included approximately $6 million of revenue from the divested Cleaners and Disinfectants business. Based on historical seasonality, we would expect the second quarter to see a modest sequential step up from the baseline revenue in the first quarter. The actions that we have taken on cost, a portion of which were contemplated in our original guidance, will help us protect EBITDA and cash flow as the remainder of the year continues to develop. Elaborating briefly on the actions that Mike referred to, we implemented a reduction of force that impacted about 10% of headcount planned for the year.

These actions, net of some level of reinvestment and a few targeted growth priorities, are anticipated to have an annualized impact of about $20 million, from which we expect to see a benefit of about $12 million this fiscal year, more than half of which was contemplated in our initial guide for the year. As we noted last quarter, the guide for fiscal 2026 includes our genomics business, which, as you know, we are involved in a process to sell. We are not providing details on that process, but we will share that it continues to progress well.

At the time there is a sale of that business, we will adjust our guidance accordingly for the remaining post-sale portion of the year. I'll now hand the call back to Mike for some final thoughts.

Mike Nassif: Thanks, Dave. I believe that Neogen is a great company, with a leading product portfolio of consumables in the attractive food safety end market that should benefit from long-term tailwinds and a broad portfolio of animal safety products that provide value to farm and ranch operators. With respect to food safety, there is still significant opportunity to improve the quality of food safety testing programs within the overall industry. Despite an increase in the level of testing over the past 20+ years, the CDC estimates there has not been a significant reduction in the number of infections from food-borne pathogens.

Last year, the FDA estimated that the U.S. and Canada had a record 300 food safety incidents with a cost of $2 billion in direct expense alone. Just last week, we had a reminder of why our mission matters, with another high-profile incident of Listeria contamination. These issues have contributed to a recent drop in consumer confidence in food safety in the U.S. to a 13-year low. The fact that our food safety core revenue has grown only modestly over the last few years and even declined in certain quarters means that we have not maintained our market share in certain product lines.

This appears to primarily be the result of execution challenges related to the 3M integration and some resulting inconsistencies in supply. When I have spoken directly with customers and also heard objective feedback from them indirectly, the majority still seem to have a favorable view of our company and our products. This has been encouraging to hear, not only because it speaks to the longstanding reputation of Neogen, but also because it means to me that we have the opportunity to gain back market share with improved execution.

I expect that a relentless focus on the priorities we've laid out, including successfully executing on our critical projects, will propel Neogen to a more predictable and consistent execution and higher levels of service and delivery. I'm confident we can deliver world-leading innovation for our customers, significantly improve financial performance, and a fulfilling experience to our engaged workforce. My team and I are looking forward to transparent and constructive engagement with the investment community, customers, and all stakeholders, with a more in-depth update planned to be shared in early 2026. I would like to thank the Neogen team for welcoming me to the company and for the thoughtful dialogue that has taken place since I joined.

The effort and commitment around the world are refreshing to see as we embark on the journey of realizing the potential we believe lies ahead of us. I'll now turn things over to the operator to begin the Q&A.

Operator: Thank you, ladies and gentlemen. We will now begin the question and answer session. To ask a question, you may press star followed by the number one on your telephone keypad. If you're using a speakerphone, please pick up your headset before pressing the keys. To withdraw your question, please press star followed by the number two. Your first question comes from the line of Brandon Vazquez with William Blair. Please go ahead.

Brandon Vazquez: Hey, good morning, everyone. Thanks for taking the question, Mike. Nice to meet you. Mike, maybe just start us off. Can you talk a little bit about the time period during the interview process and thinking about taking this job? Just reflect a little bit on what were you hearing out in the field that gave you comfort that Neogen is a differentiated asset? I think this is something that a lot of us in the investor community have done expert calls, and we've kind of heard pockets that there are good products here and there, but it's been hard to kind of grasp that given the execution that we've seen.

Frankly, now competitors have been a little aggressive in terms of what they're saying about share, taking from you all. Just spend a little bit of time on where are the pockets of strength. What were the things that were really encouraging that you were hearing that gave you confidence to take the role?

Mike Nassif: Yeah, thanks for the question, Brandon. Listen, when I was looking at this opportunity, certainly I had my questions as well when you look at the performance and the company itself. Now being here two months, what I can say is I've confirmed what attracted me in the first place, which is a growing market, strong portfolio, significant opportunity to unlock shareholder value. You know, Neogen's got a broad portfolio that I think is really well positioned in an attractive end market. What stood out to me being here two months is really the genuine and dedicated nature of our employees. They want to win.

They're frustrated with the challenges that we've had, but they want to win, which is a great foundation to start with. I think with that in place, we have a clear opportunity to build core processes and really become experts in the fundamentals of managing the business. You've heard us speak to SNOP as an example, but we have to scale that and we have to do a better job at how we collaborate and manage the business to be able to see around the corner and prevent surprises. Looking ahead, my focus is really around organizing in a way that supports our food safety and animal safety businesses. We want to align the functions appropriately.

We want to strip out complexity and really focus on driving those key processes that I think are going to help us unlock the value. With regards to your question on share loss, I think it's true. I think we've lost share in sample collection, and allergens, natural toxins. I think those are related to supply challenges that we've had. When we look at pathogens, I think that we're growing with market. We've got a strong portfolio there. I feel the same way about PetriFilm, putting aside performance in Q1, but PetriFilm, we're seeing sell-out data that's very strong. To summarize what I'm saying, Brandon, the opportunity is ours and we are focused on maximizing that opportunity.

Brandon Vazquez: Got it. Maybe as a follow-up to that, Mike, one question that I think a lot of us have tried to grasp with over time is, you know, products like PetriFilm are unique and there are some other product lines within Neogen that are pretty unique within the market. How do you take share with those products, right? Talk to us a little bit in your view, what the commercial organization needs to do to actually take share in this market. I mean, maybe step one is grow in line with the market, but then ideally, with those unique products, take a little share. As a side follow-up note, maybe for Dave, I'll ask my second other follow-up real quick.

Dave, can you walk us through a little bit what how we should expect kind of EBITDA margins and EBITDA to progress through the year? What's contemplated in that guidance? There's a lot of moving pieces here with OpEx reductions and improvements in sales, things like that. How do you think on our math, you need kind of like a north of 20% margin number exiting this year? Is that kind of fair as how you guys are thinking about it? Talk us through what gets you there. Thanks, guys.

Mike Nassif: Thanks, Brandon. Let me answer your first question and then I'll hand it over to Dave. How do we take share? I think it's more than product portfolio. There are three things that I think give us an opportunity to regain growth through share gain. First and foremost, Neogen is by far the most broad portfolio, specifically in food safety. Our customers look to us not only for our product, but also to partner with them on testing and how to go about doing what they need to do. We're seen as a trusted partner in addition to having a very broad portfolio.

Number two, when you look at our share position around the world, there are markets where we are underpenetrated. You think about PetriFilm, for example, in Europe. There are other areas that I think we need to explore. That's number two. Number three, having those two points that I stated earlier is really the opportunity in front of us, with three being all about execution. Really honing in the commercial excellence around what are those targeted accounts, how are we going and trying to gain share, how do we position our products and position a solution of product partnerships, but also with our analytics platforms. How do we become that partner to deliver on what the customer needs?

All of those things are tailwinds, and they're there for us to leverage to share gain. I just have to say and go back to it, it really comes down to focus and driving the discipline within the commercial organization. That's going to be the focus since I started and will continue to be in the coming quarters. I'll hand it over to Dave to answer the second question.

Dave Naemura: Yeah. Hey, Brandon. Yeah, look, I think your view is right around the year. We need to see a progression of EBITDA margin as the year progresses. You know, from a volume standpoint, Q1 usually starts a little low, but we've talked about two notable items: inventory, inventory write-off activity, as well as our sample collection performance. We think both of those improve as the year progresses. We talked about the restructuring. We'll start to see run rate benefit from that, some in the second quarter, but a full quarter's worth in the second half of the year. We think all of those are contributing factors. Obviously, volumes matter here given our kind of robust fall through.

I think you're thinking about it right, and we'll continue to provide a little more clarity as we work our way into the year. Thanks for the question, Brandon.

Operator: Thank you. Your next question comes from the line of Subbu Nambi with Guggenheim Securities. Please go ahead.

Subbu Nambi: Hey, guys. Thank you for taking my question. The transition to a new CEO can always be an exciting time for a company. However, in this instance, we have to acknowledge there are a lot of idiosyncratic challenges and a leadership transition that goes well beyond the CEO across the C-suite. Recognizing all of these variables, what is a reasonable and fair timeline for investors to expect you to outline your vision and a plausible timeline to where the company can be playing offense?

Mike Nassif: Thank you for that question, Subbu. I think two months in, I can say I've had a chance to sit with the team and look at our strategy and our focus areas. I think from a strategic perspective, where we need to play and what we need to do, that does not need to change. I think how we monopolize, how we leverage that to drive growth and how we organize ourselves around that is something that we're currently focused on, and we're looking to take specific actions, one being the headcount reduction we took last week to streamline some of our activities.

I think that as I get more time under my belt in the coming months, probably early 2026 calendar year, when we start to lay out more of the vision of what we're doing and have a bit more time under my belt to kind of share with you, here's the things that are going well, here's what we need to do. I'll have more to share with you then. Right now, it's really around how can we monopolize on quick wins to drive top line, to manage our costs, and deliver on the critical projects that you expect us to deliver on.

Subbu Nambi: Thank you for that, Mike. Two specific questions. Given your B2 revenue estimates consensus, but didn't raise revenue guidance, were there any one-timers or pull forward mainly in animal safety that we need to be aware of?

Dave Naemura: No, Subbu, I don't think there was any one-timers. You know, it's early in the year, and it came in a little better than expected. I think there's still some uncertainty in the year around sample collection volumes as we continue to ramp back there. We felt things came in close enough to what we expected, and we want to get further into the year. No one-timers, if you will, to call out.

Subbu Nambi: Thanks, Dave. Revenue improved, but it might be a repetitive question to what Brandon asked. Margins and cash flow continue to be pressured. Can you talk about the underlying business as it sits today on margins and cash generation potential outside of short-term headwinds? Why are you still comfortable with expansion opportunities from here? Also, a follow-up, what gives you the confidence that under $15 million PetriFilm duplicative cost guide? Thank you so much.

Dave Naemura: Yeah, Subbu, thanks for the questions. I'll jump in here and see if Mike wants to add any color. Look, there's some big variables that we've called out that, you know, kind of building on the earlier question as well, that we know we have some execution on. I mean, inventory is taking core process development, and sample collection is well documented as being a difficult area for us. Having said that, when we think margin expansion, you know, kind of from a financial model standpoint, we have very robust fall through on incremental margins. That incremental gets better as we continue to work on improving the end market exposures of the portfolio as well.

We think those things work in our favor. As far as the $15 million of duplicate cost, we accomplished a key milestone in the PetriFilm plant standup, and so we're working into that now. Based on our current estimates, we still feel good about the $15 million cash impact this year, but we'll continue to update folks as we get into the year. Finally, you know, cash flow was negative. Free cash flow is negative for the first quarter, but it also included the largest CapEx outflow as we continue to work through the plant standup, and we anticipate seeing that improve as the year progresses.

Our working capital performance was, at least on a year-over-year basis as compared to Q1 of last year, strong from a payables and from a receivables standpoint, but inventory remains a challenge, one that we would be the first to acknowledge, and it's really seeing improvement there that's going to add improvement going forward. I don't know if Mike, you want to add anything?

Mike Nassif: Maybe just a little bit more on that, thanks for that, Dave. I think certainly, you know, what's in our control within OpEx, capital expenditures, managing cash flow, managing our inventory better is all going to show an improvement. What is really going to drive cash flow is revenue conversion. When we think about maximizing the opportunity we have in front of us, we're prioritizing sort of high margin, high growth product lines, you know, across food safety and animal safety. We're looking to sharpen sort of the pencil, if I can say, from a commercial perspective on how we drive these globally in the various regions.

It's all about accelerating growth, especially in really profitable, important product lines like PetriFilm. As we continue to push that and at the same time identify opportunities to run leaner, smarter, manage our capital expenditures in a better way, all of that is going to result in higher cash flow. It's going to be revenue conversion, and that's where we're spending a significant amount of time trying to drive top-line growth.

Subbu Nambi: Thank you, guys.

Dave Naemura: Thank you.

Operator: Your next question comes from the line of Bob Lovick with CJS Securities. Please go ahead.

Bob Lovick: Good morning. Thanks for taking our questions.

Dave Naemura: Hi, Bob.

Mike Nassif: Hi, Bob.

Bob Lovick: Hi. Mike, in your introductory remarks, you mentioned why you joined Neogen and the market leading positions, the strong secular growth in the industry, but then you very candidly said also execution challenges are holding us back. You've discussed the market share losses portion of that, so I'll skip that out of my question. Oftentimes when companies are going through some execution challenges, they take their eyes off the future growth potential and can impact years beyond.

Can you discuss how Neogen's gone through this and the new product pipeline, if that's been impacted at all, new products that are coming out, have come out recently, and those opportunities and if they've been impacted and how you feel about the pipeline for new growth.

Mike Nassif: Yeah. That's a great question, Bob, and you're absolutely right. That does happen. I have experienced it in prior organizations. I think what's a little bit different here is, listen, the challenges within Neogen are, you all know them. They are very public and we're all well aware of them. We are tackling them head-on. I think these execution challenges haven't been here two months and just from prior turnarounds, really, it's just about an organization that's had misaligned priorities, that stretch trying to get an integration up and running that's had some of its challenges, and we are addressing these, but we really need to streamline how we operate. We need to clarify roles.

We need to enhance accountability across the teams to make sure that we're delivering on the things that we need to deliver. I think if we do that consistently, we're going to start to be more predictable and consistent in our performance. We are going to drive our portfolio because we've got a broad portfolio, a very healthy product line, and we've got a lot of great products within there we want to drive. You're absolutely right. We can't lose our vision towards innovation, which is extremely important. As we think about that, this is where in my remarks I talked about, we want to look at reinvigorating innovation. What does reinvigorating innovation mean?

I think that our R&D team has done solid work in integrating the 3M portfolio and driving incremental innovation. I think that lays a very strong foundation for us. However, I think that's limited our capacity to build a robust needs-based pipeline or pursue transformational breakthroughs. I really believe that now is the time for us to focus on this, build an innovation strategy that's externally informed to drive the substantial market-shaping innovations. Along with refining how we think about innovation, focusing on a few high-impact opportunities, I think will position us really well in the future. I'm looking forward to, in future calls, I'm going to give you a bit more around what I mean by that.

We are very willing to invest in innovation, and certainly the work we're doing right now, I think, is going to help us prepare to do that. We've got to drive top line and get the business healthy enough that we can invest in innovation. We're trying to do both at the same time. I don't know, Dave, if you want to add anything?

Dave Naemura: No, I think that's great. That's a great question, Bob. Thank you.

Mike Nassif: Yeah, thanks, Bob.

Bob Lovick: Okay, great. Yeah, and then just, you know, one quick follow-up. For Dave, I think midpoint EBITDA guidance is about 20.5% EBITDA margins or so. Obviously, we've talked about inventory write-offs and sample handling issues short term and things like that. If we were to kind of back it out and those impacts or short-term impacts, can you give us a ballpark of what the kind of core margin operating level might be this year? I know it's not exactly precise. Then the opportunities for margin kind of recovery over the next few years.

Dave Naemura: Yeah, look, I don't want to sharpen the pencil too, too sharp here, Bob, but I mean, clearly we had, you know, easily a few hundred basis points of headwinds from these items in the first quarter, which tends to be a little bit light, particularly from a volume perspective. As we're able to make improvements and see volumes improve in the second half, and frankly, the benefits of the cost structure flow through, that's going to help a lot. The $20 million annualized OpEx savings, that's obviously $5 million a quarter. Starting to see that impact partially in Q2 and seeing it read through in Q3 and Q4 is another helpful item relative to the current run rate.

I look, we've got to execute some of these core process improvement things that we're working on in both inventory and sample collection. I'd say they're both very much kind of a little bit of a back to basics and fundamentals approach, but those should see improvement as the year progresses from some of those headwinds we experienced in the first.

Bob Lovick: Okay, great. Thank you.

Operator: Thank you. Your next question comes from the line of David Westenberg with Piper Sandler. Please go ahead.

David Westenberg: All right. Thanks for taking the question. Welcome, Mike. Dave, been great. I'll start actually with Dave since you're transitioning. I'll give you one more little tougher one. Can you talk about that $6 million in sample collection cost? What exactly is that? You know, we did see it in non-GAAP. Does that imply that this won't be going on maybe into the next quarter? Do you just get to remind us what this is? I mean, I know we've had some spoilage. Is this kind of just purely spoilage or just, you know, help us out with what exactly is going on there? Because, you know, sample collection is an important part of quarterly business. Thanks.

Dave Naemura: Yeah, look, for the first year or so of standing up sample collection, we considered part of the startup costs that we have pretty good disclosure around. What it is, is scrap and kind of quality flags, which results in finished goods scrap, as well as excess production costs, which implies that in total, we're selling the product at a loss currently. As we talk sample collection improvement, what we're talking about, David, is first and foremost, getting our labor costs down and reducing scrap. There's a pricing component here as well where we've had to make some concessions, because the customers that buy sample collection buy other products as well that are very important.

It's a multifaceted approach to getting back to where we needed to be. The first thing that's going to help a lot is getting our back orders under control. When we look at what our back orders were six and even three months ago, we've made significant improvement to that. Basically, we've got it down to almost a normal level. As we do that, we're able to take out high-priced temp labor. We're reducing the overall labor and the cost of that labor. It's also high turnover, and high turnover is one of the contributing factors to scrap and machine uptime because operator consistency on machine matters a lot.

There's a reasonable number of aspects to this to get back in the positive here, which we hope to be, and we have a plan that says we can do as we come through the second and into the third. We've got some performance to demonstrate, but we need to see that here in the sequential quarters. Good question.

David Westenberg: Gotcha. Yeah, thank you very much. Actually, maybe Mike, sorry, I'm going to ask you a hard one against your CEO. You kind of deserve it, right?

Mike Nassif: Bring it on.

David Westenberg: Thanks. Just going with this headcount reduction, but then also kind of like working on this lack of turnover, how do you, how are you thinking about headcount and getting the right employees and stable employees here, in the face of stabilizing this headcount or right-sizing the business? I'll stop after this one. Thanks so much.

Mike Nassif: Yeah, certainly anytime we're having a conversation about colleagues and friends, it's a very tough one. It's not a decision you take lightly at all, but there are certain times in a business where you have to look at that. I am not a believer of a one-time correction. I think that as a business, you constantly need to relook at how you are operating and make sure that you're allocating your limited resources to maximize your overall growth all the time.

I know this may seem like a one-time event, but I think moving forward, you're going to see us starting to challenge every part of the business to make sure that we are as optimized as we need to be. Where we need to invest, we will invest to drive higher growth. That is something that we're going to continue to evaluate. Now, with regards to the turnover, you guys know this as well as I do, in any turnaround situation or businesses that have some challenges, you're going to have turnover. Those things happen at different levels. I see this as an opportunity to re-engage with the organization with a fresh vision.

I already shared earlier, we've got a workforce that wants to win. They come in every single day working very, very hard. I've been pleasantly surprised by that because that's a great foundation for us to move forward. As we realign the organization to make sure that everything we're doing is on the priorities that I set, which is driving top-line growth, improving operational excellence, making sure that we deliver on these critical projects with PetriFilm, sample collection, fixing our inventory challenges, and really reinvigorating innovation. That's going to be the focus. We will continue to improve our processes, bring in talent, upgrade roles to really build a best-in-class organization.

David Westenberg: Thank you.

Bob Lovick: Thank you, Dave.

Operator: Your next question comes from the line of Thomas DeBourcy with Nephron Research. Please go ahead.

Dave Naemura: Hi, Tom.

Thomas DeBourcy: Hi, thanks for taking the question. My main question is really around, I guess, the assessment of Neogen's portfolio overall, which has been ongoing and, you know, I think has resulted in the divestitures of Cleaners and Disinfectants and ongoing potential sale of genomics. You know, I think there's been a clear shift and focus towards food safety. Obviously, lower margin product lines, you know, reevaluating whether those make sense in the portfolio. I was curious whether that work still continues and whether we could still see additional divestitures beyond, obviously, the genomics process that's ongoing.

Mike Nassif: Yeah, thanks, Tom. Maybe I'll say a few words and then I'll pass it on to Dave. Coming in two months, I've had a chance to sit down with the team and really look at the broad portfolio of food safety and animal safety and our plans. I have to say that I'm very aligned with the approach that we're taking. I think I agree with the rationale. I want to thank the team that's worked really hard on Cleaners and Disinfectants and the other things that we are planning to do because there's been a lot of work on top of the day-to-day.

As for the remaining portfolio, our focus is how do we optimize the remaining product lines and position ourselves for return to predictable, profitable growth. I think we have a very strong, healthy animal safety portfolio. We have even a stronger food safety that we need to continue to drive and execute on. As we position ourselves for growth, improving our processes, improving our focus, and we anticipate improving in markets in the coming quarters and years, we'll start to see that accelerate. Dave, I don't know if you want to add a few comments.

Dave Naemura: I think that's great. Tom, if we went back a year and a half or so, when we started talking about portfolio, we talked about looking at end market exposures, the growth profile, and the financial profile of some of the product lines. That was kind of our filtering process that we've followed. I think we've been effective here. It'll always be an ongoing thing, right? We'll continue to look at the current market environments. I think we like where we're at. I think Mike said it right, right? I think we've got a really good portfolio, but of course, we're always in kind of portfolio review mode.

I think we did what we said we'd do a few years ago. We'll see what the coming years hold. I think we like where we're at.

Mike Nassif: Thank you.

Dave Naemura: Thanks for the question.

Operator: We have a follow-up question coming from the line of Subbu Nambi with Guggenheim Securities. Please go ahead.

Subbu Nambi: Hey, guys. Just a follow-up and clarification. Maybe these operate in different lanes, but you say you've reduced your back orders over the last few months, yet you have excess spoiling inventory. Could you give us more color? Maybe it is completely different product lines, but just what are these inefficiencies to call out and how can execution fix it?

Dave Naemura: Subbu, the backorder comment was specific to sample collection, where we had an elevated level of backorders because we had, you know, kind of a pause last year in our ability to get production ramped in a timely manner. I think when we talk about kind of excess spoilage in inventory, that really has more to do with getting the right products, frankly, that have shelf life to the right places in the right amounts. That goes to the core SNOP process improvement actions that Mike talked about, that there's a lot of energy on in the company right now. Just trying to reconcile those two statements.

Subbu Nambi: Thank you for that.

Dave Naemura: You're welcome.

Operator: I'm showing no further questions at this time. I would like to turn it back to Mike Nassif for some closing remarks.

Mike Nassif: Thank you very much. This has been a great first earnings call. Thank you so much for your questions. I look forward to future conversations with you. Have a great rest of your day.

Operator: Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for attending. You may now disconnect.

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