Neogen Corporation Aktie

Good morning, ladies and gentlemen, and welcome to the Neogen Third Quarter 2026 Earnings Conference Call. [Operator Instructions] This call is being recorded on Thursday, April 9, 2026. I would now like to turn the conference over to Scott Gleason, Head of Investor Relations at Neogen. Please go ahead.

Thank you for joining us this morning for the discussion of our fiscal third quarter 2026 earnings. I'll briefly cover the non-GAAP and forward-looking language before passing the call over to our CEO, Mike Nassif; and our CFO, Bryan Riggsbee. Before the market opened today, we published our third quarter results as well as a presentation with both documents available in the Investor Relations section of our website. On our call this morning, we will refer to certain non-GAAP financial measures that we believe are useful in evaluating our performance. Reconciliations of historical non-GAAP financial measures are included in our earnings release and the presentation, Slide 2 of which provides a reminder that our remarks will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act.

These forward-looking statements are subject to risks that could cause actual results to be materially different from those expressed in or implied by such forward-looking statements. These risks include, among others, matters that we have described in our most recent annual report on Form 10-K and in other filings we make with the SEC. We disclaim any obligation to update these forward-looking statements. I'm now pleased to turn the call over to our CEO, Mike Nassif.

Good morning, everyone, and thank you for joining us. I'm happy to report that we delivered solid core growth in our Food Safety segment again this quarter, including continued growth in the United States. And our growth in the quarter was consistent with current market dynamics. This is an important milestone to achieve our goal of above-market growth. We improved our adjusted EBITDA margins to some of the highest levels in recent company history at 22.8% through cost discipline. This bodes well for our future as we look to accelerate top line growth in fiscal year 2027 and beyond and helps demonstrate the inherent financial leverage in the business. At the same time, we encountered several supplier challenges stemming from third-party manufacturers that unfortunately had a meaningful impact on our Animal Safety business. While many of these issues were outside of our direct control, they don't meet the standards we've established as an organization. So in response, we've implemented a more rigorous supplier qualification and review process to strengthen reliability going forward.

Meeting our customer needs remains our highest priority, and we're addressing these challenges head on with urgency and discipline. As we look at our transformation journey, we continue to be focused on 3 major strategic initiatives to stabilize and strengthen our mission as the market leader in food safety. First, commercial prowess. We're strengthening our sales and marketing engine by deploying an enhanced go-to-market strategy. We're introducing a global solutions-based selling model that will fully leverage our market leadership position, implement rigorous metric-driven performance tracking and continue to invest in talent and capabilities of our commercial team.

Second, high-impact innovation. We're building the foundation for true organic innovation for the first time at Neogen. This means identifying the products and technologies that can expand our addressable markets, advance our technology leadership and differentiation and unlock new growth opportunities within our core channel. And finally, operational efficiency. We're simplifying and fortifying our enterprise processes to drive stronger efficiency and execution. Our key operational initiatives include advancing and scaling our S&OP process, completing the transition of our manufacturing operations and refining our budgeting and forecasting processes. We're already preparing for fiscal 2027 and pursuing technology enhancements and consolidation opportunities that can further streamline operations.

Together, these 3 initiatives paint the picture of how we're upgrading our capabilities and solutions across the organization to be best-in-class. I'll start with our first growth initiative, commercial prowess. First, I think it's important to highlight that Neogen has a strong commercial foundation for us to build upon with the most comprehensive portfolio of high-quality integrated solutions in food safety, unparalleled technical expertise and standard setting guidance and best-in-class global education, training and implementation support. These foundational elements provide a strong launching platform for our next-generation commercial engine.

Additionally, as we have previously announced, we've added 2 outstanding leaders to our commercial organization. Tammi Ranalli, our new General Manager of Global Food Safety; and Joe Freels, our new Chief Commercial Officer. Tammi and Joe have been conducting a comprehensive review of our global go-to-market strategy. These leaders know what good looks like and are leading our commercial transformation on a day-to-day basis. As we assess our presence across countries and customer segments, a clear theme has emerged. It's time to optimally realign our resources from either a geographic or revenue exposure standpoint. To address this, we intend to reallocate investment towards the markets, product lines and customer segments that deliver the most significant impact on our ability to grow while allowing us to provide better customer service.

In certain regions, partnering through distribution can be a more effective playbook. This allows us to streamline our cost structure and improve the level of service we deliver to customers in those areas. I implemented a similar approach when I led the Siemens Point-of-care Diagnostics business, and it resulted in significantly improved operating performance, a more efficient organization overall and a better ability to meet our customers' needs. From a sales and operations perspective, Neogen has historically operated in a siloed manner with limited process standardization or resource alignment across geographies.

Tammi and Joe are developing global standards and a unified solutions-based selling framework for our teams. We believe this approach is the most effective way to differentiate Neogen competitively and to fully leverage 2 of our core strengths, the breadth of our portfolio and our expanding commitment to innovation. We will support these solutions with rigorous metric-based analysis and disciplined performance management. Joe and Tammi continue their weekly meetings to evaluate our critical sales KPIs such as total funnel size, funnel additions and funnel wins. This process rigor has been the biggest contributor to our improved execution in food safety to date and still has significant room for further improvement.

Now for our second initiative, high-impact innovation. Our Chief Scientific Officer, Jeremy Yarwood, is leading a comprehensive assessment of our existing portfolio, opportunities for organic innovation and areas where externally developed technologies could be licensed and applied within food safety. The goal of this component of our transformation strategy is clear: to enhance our current offering, enable entry into attractive markets and strengthen Neogen's competitive differentiation through unique technology solutions. At the heart of our innovation strategy, we always consider our customer needs and requirements first. One area where we see a meaningful early opportunity is Petrifilm. We believe the applications for Petrifilm extend well beyond traditional food and beverage testing into additional consumer product categories like pharmaceuticals, cosmetics, nutraceuticals and other consumer product categories.

In the future, with full control of our manufacturing process, we'll qualify and validate new custom SKUs within the established Petrifilm framework, something that wasn't possible historically. In prior years, several major customers approached us seeking custom SKUs tailored to their testing needs. But because we didn't have control of production, we couldn't respond. That constraint will soon be removed. To accelerate this development, in the fourth quarter of fiscal year '26, we're investing in a research scale R&D line at our Minnesota research facility. This will allow us to rapidly prototype, test and validate new SKUs without disrupting commercial production. As our new facility in Lansing becomes operational, it will support our current and future volumes utilizing highly automated production lines with a capacity of multiples of our current commercial volume.

As a result, in addition to the structural efficiencies gained from bringing manufacturing in-house, the contribution margin on incremental Petrifilm revenue is exceptionally high. Incremental volume growth can be a meaningful impact on our transformation and our ability to achieve our longer-term margin objectives. We'll plan to share more details on our plans around innovation and customer technology solutions as we progress through the calendar year. But at a high level, beyond best-in-class sales and service, differentiated products and technologies remain the most critical drivers to position Neogen as the category leader in food safety. Now let's turn to our third initiative, operational efficiency. Here's an update on our Petrifilm manufacturing transition and our core enterprise capabilities.

We're right on schedule for the planned November '26 transition. I'm highly encouraged by the disciplined oversight from our operations and R&D teams and the significant momentum we continue to build. First, we've now completed full validation of 100% of the production equipment utilized in the Petrifilm manufacturing process. Additionally, this quarter, we initiated the validation process for our current 17 SKUs, beginning with the highest volume and most technically challenging products. We are actively conducting both operational performance validation on multiple SKUs to ensure full manufacturing transition by this fall. It's important for us to complete all of the product validations before commercial production and scale up to ensure we have a robust process in place and to prevent commercial production from interfering with the validation process.

We continue to believe that the scale of investment required and the considerable technical complexity associated with reproducing this manufacturing process creates an almost insurmountable barrier to entry, replicating the level of precision and quality achieved through our Petrifilm platform would be exceptionally challenging for any competitor, let alone a subscale provider. In addition, we look forward to hosting 2 upcoming investor tours at our Lansing manufacturing facility in partnership with our covering analysts. These tours will give investors a firsthand view into the sophistication of the operation and the progress we are making. From an inventory management and sales operations planning perspective, we continue to make meaningful progress even as reported inventory levels remain flat sequentially.

Our objective is to build an enterprise-level end-to-end controlled supply chain. We believe these initiatives will drive lower cost of goods sold through increased automation and procurement optimization, enable faster and more reliable global fulfillment and most importantly, enhance the overall customer experience. As part of this transformation, we are moving toward a centralized planning model supported by AI-enabled logistics and supply chain software tools to improve efficiency and decision-making. In parallel, we are strengthening supplier management with rigorous controls around cost, quality and performance while also simplifying an overly complex warehousing and logistics footprint to reduce both cost and operational complexity.

We expect to complete the implementation of this new operating model by the end of the calendar year, and we believe it will have a lasting impact on both our cost structure and our ability to serve customers more effectively. Now I want to address the backorder challenges we experienced in our Animal Safety business. The issues stem primarily from disruptions at our third-party suppliers that related to product documentation, raw material shortages and delays tied to supplier manufacturing site transitions. These are further compounded by supplier shifts driven by global tariff changes. Here's what we're doing about it. We're conducting a rigorous review of our supplier qualifications processes and strengthening the controls necessary to ensure we're consistently positioned to meet customer needs going forward.

And finally, as part of our operational efficiency, our fiscal 2027 budgeting and forecasting cycle is well underway. I've asked our leaders to do 2 things: first, to scrutinize spending with a focus on value-creating activities; and second, to take a strategic view of where technological innovation, enhanced enterprise capabilities and strengthened processes can drive meaningful long-term efficiencies. This will ultimately allow us to allocate more resources towards growth and innovation. Today, about 56% of our operating expenses are tied to salaries and benefits. This level reflects underinvestment in process automation and modern technology solutions. Achieving sustainable efficiency gains will require a degree of near-term investment and transformation-related spending. The longer-term returns from these initiatives are likely to exceed what we could achieve through acquisitions or even through internal product innovation alone.

We are currently evaluating a number of areas for AI and technology implementation. These include customer service, finance process automation, sales operations and planning, research and development and technical service applications. Consistent with our historical practice, we expect this transformation-related spend to be excluded from our adjusted financials as we view it as a temporary requirement to build the foundation for a more scalable business. However, in any scenario, we believe the total magnitude of spend in these areas is positioned to decline going forward, and we continue to anticipate significant improvements in free cash flow next year.

Given the large number of initiatives we have ongoing pertaining to sales and marketing, our innovation strategy and enhancing our operational efficiency, we are excited to host an Investor Day this fall to give investors a better sense of the impact our transformation is having and our long-term financial outlook. Since the day I arrived, I've been convinced that our challenges are solvable, our industry secular growth drivers are strong and our ability to execute will ultimately drive our success. While there is still meaningful work ahead, we all know turnarounds are never linear. The progress underway is substantial. And while our early wins aren't always immediately visible on our financial results, what is clear is this, our unwavering commitment to build a stronger, more innovative and efficient company for all stakeholders. The impact of the changes we're implementing today will become increasingly evident as we enter the next fiscal year and beyond. And now I'll turn the call over to Bryan.

Thank you, Mike, and thanks to all of you participating in the call today. I'm pleased to provide an overview of our financial results and outlook for fiscal year 2026. We delivered third quarter revenue of $211.2 million, representing a 0.1% increase on a core basis. As Mike noted, we saw continued strong core growth in our Food Safety segment, while supply chain disruptions within our Animal Safety segment had a significant impact on our results in the quarter. At the segment level, our Food Safety business delivered $156.7 million in revenue for the quarter, representing 4% core growth, consistent with the second quarter and relatively in line with current market growth rates. Performance was led by continued strength in our indicator testing and culture media products, which were up 11% and strong growth in pathogen test kits, which are included in bacteria and general sanitation.

From a macro standpoint, as the year started, market commentary from several major food producers was generally positive. Many reported flat volumes, an improvement from the persistent declines observed over the past 3 years and several guided to a return to volume growth in calendar year 2026. Recent public comments from companies like Conagra and General Mills show the operating environment has deteriorated with supply chain and logistics cost pressures mounting as a result of the war with Iran. Fuel and fertilizer costs are rising, which is having a meaningful impact on margins for our customers. Other signs of market disruptions include factory consolidations, increased focus on cost management initiatives and restructuring across the food production landscape.

Given these factors, we continue to maintain a measured view on the macro backdrop for our food safety customers. Food safety continues to be a top priority for our customers and a clear area of competitive differentiation. As an example, Nestle recently highlighted that the latest infant formula recall is expected to result in approximately $350 million in lost sales across 2025 and 2026, which does not include the additional financial costs associated with managing the recall itself. At an industry level, recall activity is also increasing. The total number of food recalls rose by roughly 15% from 2024 to 2025, and more significantly, the volume of food recalled by the FDA more than doubled year-over-year. These trends reinforce how essential reliable food safety solutions are for producers and the critical role we play in helping them maintain trust, compliance and brand protection.

Quarterly revenue in our Animal Safety segment totaled $54.5 million with core revenue declining 8.7% compared to the prior year period. As mentioned earlier, supplier-related disruptions had a significant impact on the results in our Animal Safety business. If you exclude these impacts in the quarter, core growth in Animal Safety would have been more consistent with where we were in the second quarter of this fiscal year from a year-over-year growth perspective. We are beginning to see some encouraging signs in the Animal Safety end markets. Although U.S. production animal herd sizes remain near record lows, sustained strength in meat demand and pricing has materially improved producer profitability. In addition, USDA projections indicate that herd sizes may be nearing a cyclical bottom with growth expected beyond 2026 as ranchers reinvest to meet elevated global protein demand.

These trends support a more constructive outlook for the segment over the medium term. From a regional perspective, U.S. revenue was 48% of total sales in the quarter, and our international revenue was 52%. Importantly, U.S. Food Safety once again grew in the third quarter, consistent with the second quarter. We saw strong growth in both EMEA and Latin America in the quarter, and the supplier issues in Animal Safety disproportionately impacted the domestic business in the quarter, given sales are predominantly based in the U.S. Gross margin in the third quarter was 46.9% and adjusted gross margin was 51.7%. On a year-over-year basis, our gross margins, excluding onetime costs, were essentially flat. This quarter, we did not make as much progress as planned on sample collection margin improvement, and it still generated a negative gross margin.

We faced higher scrap rates on certain sample collection products due to a quality issue at a third-party supplier, which has now been addressed. We continue to be optimistic about our ability to drive improvement for sample collection margins through a combination of growth and potential automation investments in the upcoming fiscal year. Adjusted EBITDA was $48.2 million in the quarter, representing a margin of 22.8%, an improvement of almost 110 basis points on a sequential basis from the second quarter despite lower revenue. This change is reflective of a decline in adjusted operating expenses, which were down 9% from second quarter levels, showing strong cost control. Of note, $1 million of the sequential decline was due to nonrecurring credits, which will not repeat in future periods.

Third quarter adjusted net income and adjusted earnings per share were $19.4 million and $0.09 per share, respectively. Turning to the balance sheet. We closed the quarter with $800 million of gross debt, 68% of which is fixed rate and a total cash balance of $159.9 million. We remain fully compliant with all debt covenants and believe we are well positioned to further strengthen our balance sheet as free cash flow continues to improve. As previously announced, we entered into an agreement to divest our genomics business unit, which generated approximately $90 million in revenue in fiscal year 2025 and delivered adjusted EBITDA margins in the mid-teens. The announced sale price for the business is $160 million with expected net proceeds of approximately $140 million after transaction costs and taxes.

We expect the transaction to close in the second quarter of fiscal 2027. We intend to use net proceeds from the sale to reduce debt, and we anticipate our net debt to adjusted EBITDA ratio will decline to below 3x by the end of calendar 2026. Free cash flow in the third quarter was $11.1 million and is now positive for the year. We continue to expect improvements in cash flow trends going forward due to reduced CapEx following the completion of our Petrifilm equipment and construction costs as well as the elimination of duplicative manufacturing costs.

Turning to our guidance. We're raising our full year fiscal 2026 revenue guidance to reflect our stronger-than-expected third quarter results. We now anticipate full year revenue to be in the range of $857 million to $860 million. With respect to this guidance, it's important to consider the evolving foreign exchange environment. Following the sharp decline in the U.S. dollar index last year and more recently, the strengthening we have seen in the dollar, we expect the currency tailwinds that have supported noncore growth to diminish meaningfully beginning next quarter. This dynamic will impact both reported growth rates and our full year revenue outlook. As a reminder, approximately 40% of our revenue is generated in non-U.S. dollar currencies. And on a sequential basis, the current level of the dollar index represents a modest headwind to noncore growth.

In addition, we anticipate continued impact from certain supply-related challenges in our Animal Safety business that affected results this quarter. As Mike noted, we are also implementing several changes across the sales organization, including leadership transitions following our global talent review. Taken together, we believe it is prudent to take a more conservative view for the fourth quarter. We have also received questions regarding the conflict involving Iran and the potential implications for our business. Revenue exposure to countries within the conflict zone is immaterial, totaling less than $0.5 million annually. As for the potential impact of higher energy and oil prices on plastic components, today, we source approximately $40 million annually in plastic OEM products, and we currently hold 6 to 9 months of inventory for these components.

As a result, the duration of elevated oil prices would need to be prolonged to meaningfully impact our cost structure. It is important to note that raw material costs represent only one component of our suppliers' total cost base alongside labor and overhead. And even under a more adverse scenario, we believe any impact would be manageable, and we would have the ability to partially offset increased cost through pricing actions, if necessary. Where we are seeing more tangible pressure is in global logistics and freight, given disruptions around key global transit routes such as the Suez Canal and the impact of higher energy prices on transportation rates.

Currently, we are experiencing freight and transportation cost increases in the high single-digit to low double-digit range. At current rates, the aggregate impact equates to approximately $1.5 million per quarter in incremental freight and transportation costs. In light of these headwinds, we are maintaining our adjusted EBITDA guidance of $175 million for fiscal year 2026. I'll now hand the call back to Mike for some final thoughts.

Thanks, Bryan. I'm really proud of our team, and I'd like to take this opportunity to thank our dedicated employees. We're committed to creating outstanding stakeholder and customer value as the clear market leader in Food Safety. Our industry is driven by powerful secular trends, and we offer the broadest and highest quality products. Our primary barrier to unlocking our full potential has been operational execution. And as you've just heard, we're making rapid and meaningful progress. We'll finish this year as a stronger, leaner and more capable organization. This foundation will enable us to enter the next phase of our transformation, accelerating growth and leadership through technology and product innovation. And with that, I'll now turn things over to the operator to begin the Q&A.

[Operator Instructions] Your first question comes from Subbu Nambi with Guggenheim.

A couple of cleanup questions. The Petrifilm and duplicative costs were expected to step up, and they did, but the tariff cost and the sample handling expenses did come as a surprise, which sample handling looks like it's solved for. But could you walk us through what's driving those? And what's your line of sight to further costs for 4Q?

Yes. Thanks, Subbu. Yes, I think we talked about a little bit on the call some of the issues that we had in sample collection during the quarter. We made -- some of those have resolved themselves. I would not expect it to step up from where we're at, and I would expect it to improve sequentially as we get to the fourth quarter.

And then just any of these like unexpected third-party supply issues that was tied once you have taken stock of the whole animal safety supplier issue? What gives you the confidence that you'll be able to move through this quickly, just given the history of these costs mainly on margins and concerns for investors?

Yes, Subbu, I'll take that, and thank you for the question. Yes, I mean, again, the challenges with the quarter on Animal Safety were supply side, not a demand issue. Our ordering patterns continue to be pretty encouraging. So our focus is really on addressing the 3 supplier issues. The first has to do with the key instrument supplier transitioning manufacturing locations to reduce tariffs impact. So there's been some start-up challenges that they've had. Second, we're all aware of the global vitamin A shortage. So that's affected several of our products and some constraints. And third, a fairly substantial partner of ours in sodium bicarb is transitioning production and they're running into some issues.

So we've strengthened our -- on our side, our supplier management and making sure we're partnering and understanding so that we can do a better job at predicting in our forecast. I think we missed that a little bit in Q3. We were surprised by some of these supplier challenges, which we won't repeat again in Q4. Now in Q4, given the uncertainty and these things being out of our control, we have built that into the guide, and we're really thinking along the lines of being meaningfully measured as we do that. I can't give you a specific number with regards to what we expect as recovery at this point in time. We're certainly working towards that, but we do expect the challenges to continue in Q4 as these suppliers are working through it.

Super helpful. One cleanup question. On the slide deck, you say Petrifilm will be done in November 2027. I feel you meant November fiscal year 2027, right?

Yes, surprised, no. That's I hope -- it's November 2026. We're on track. Maybe what we were trying to say is that in addition to that, we continue our 3M agreement until August of 2027 as an "insurance policy" for any disruption we may have.

Your next question comes from Bob Labick with CJS Securities.

Congratulations on another strong quarter.

Thanks Bob.

Okay. Great. Just to make sure you hear me. So obviously, with this solid core growth for the second quarter in a row of 4% in Food Service, after 1 quarter, you weren't there yet, but are you in a position to say you're able to sustain top line core growth in Food Service going forward? And how should we think about the core growth over the next 12 months in terms of potential headwinds and tailwinds and any unusual comps that we should keep in mind?

Well, thank you for that question, Bob. And I'll let -- I'll give you some thoughts and let Bryan jump in. First, let me address your second part. I mean, we're not going to -- we're not prepared to give guidance for next year at this point in time. We'll do that during our Investor Day. But to speak to Food Safety, I think that, as I said on the earnings call, our focus on commercial execution and really driving the discipline and leveraging the breadth of our portfolio has enabled us to deliver another quarter of in line with market growth on Food Safety. Now I expect that to continue. As Tammi and Joe are working through the reorganization and looking at where we can reallocate resources to drive quicker -- faster growth, we're looking at the optimization of our portfolio where we're looking to drive higher-margin products.

I think that we can expect there to be more upside as we go through to accelerate that growth. And so I think the overall market on the end market piece, we see the food safety continue to be fairly stable. I'd say it's in the lower single digits at this point in time. We do hear food producers are reporting that they see volumes being flat versus declining historically. I think the tone of our customers is improving. Of course, the current macroeconomic environment and Iran and oil and all those things are creating some cost pressures and unknowns for us. But we continue to be excited about food safety and our position as the only market leader with the broadest portfolio to meet customer needs. So more to come on the Investor Day, but we feel good. But certainly, we're happy but not satisfied, and we're going to continue to push on our market leadership in food safety. And Bryan, I don't know if there's anything else you want to add.

Yes. No, I think we've seen nice -- for a few quarters now, nice growth on the Food Safety side. As Mike mentioned earlier, I'm not going to get beyond Q4, but we expect the Animal Safety issues to not fully resolve during the quarter. I think it doesn't impact the core growth number that we report, but the only thing I would just highlight is that the commentary around FX becoming a headwind versus a tailwind that we've seen. So that will impact the reported numbers.

Okay. Great. And then just, I guess, my follow-up, another question. You mentioned in the prepared remarks, certainly driving innovation. And then you also mentioned a research line for Petrifilm, which sounds like a wonderful idea to keep production going. Can you talk about the kind of the CapEx for that? And I think you said you expect free cash flow to grow in fiscal '27. So maybe kind of tie all of those things together for us, please.

Yes. I would say the CapEx will be in our FY '26 CapEx number. We do expect CapEx to step down next year as we get past the projects, the larger Petrifilm manufacturing facility ramp up. And given that we're at a positive free cash flow level now for the year, year-to-date, we would expect that to step up next year as profitability continues to improve and as CapEx ramps down.

Okay. Great. So the research line is not a major investment. It's just an opportunity to continue.

Yes. It's just incremental. It's not a material change to what we had talked about before.

But it has a significant impact on accelerating Petrifilm innovation. And we believe that, that's extremely important for the future growth of our food safety portfolio.

Your next question comes from Brandon Vazquez, William Blair.

Mike, maybe can I start with you, and I wanted to start a little bit higher level. You've been in the seat about 6 or 7 months now. Just reflect a little bit on what things within the organization have changed that are kind of working? Like what things are allowing you to execute a little bit better than we've seen historically for Neogen? And then spend a minute on like what's left. You're talking a little bit about go-to-market strategy evaluation, things like that. What work is left to be done still? And just spend a little bit of time around that first.

Sure, Brandon. Thanks for the question. I would say that 7 months in, I continue to believe based on everything that I've learned so far that purely our challenges are operational. They're internally related. And from the start and having been in other turnarounds, I discussed sort of the approach on driving the top line to create oxygen to allow us to run a more efficient organization and kick off more cash. And we are implementing that strategy. I spoke a little bit today around commercial prowess, operational efficiency and really focusing on innovation. So as we are strengthening our commercial acumen and becoming more focused on higher-growth markets, managing better in our operating expenses, we need to start now to think about innovation to accelerate growth in ' 28, '29 and '30 and beyond.

So I think where we've been able to really push hard, you're seeing the results of that. So I think the second quarter of solid growth in food safety is representative. But I would say we're just getting started. Tammi and Joe are really digging in. They're optimizing the commercial organization. We're looking to flex the portfolio. Again, you guys know this, Neogen has got the broadest portfolio in food safety. We have the ability to provide end-to-end solutions. I'm not sure we always flex that portfolio the way that we should. And so we are very much focused on doing that and changing how we go to market. And all of those things are remaining to be done. And so I would say what I would "a quick wins" I think we've kind of captured those. And now we're in a part of taking those best practices and just back to basics and scaling them. And as you know, scaling takes some time. And I think we're in that phase now. And so no turnaround is linear, but we're going to continue to focus on those areas and scaling them across the organization in the various regions.

Okay. And Bryan, for you, as I look at the implied guidance on adjusted EBITDA, you had talked a lot of moving pieces in Q4, whether it's the OpEx line or maybe some margin headwinds, things like that. I want to ask it a little bit more direct. I know you're not going to give us '27 on this call, but I think a lot of us are going to start building our model off of the Q4 EBITDA line, right? So like just maybe like walk us through, help us think of like what things impacting the Q4 profitability implied in guidance are transient, which ones are going to linger into fiscal '27, so we can understand to what degree this Q4 EBITDA number is like a good jumping point we should use as we build our model going forward into fiscal '27?

Yes. Thanks for the question. I think a few things that I would highlight. I think, first of all, when you look at -- we talked about it on the call, the onetime credit that we had in the quarter, that was about $1 million. We talked about the freight and transportation step-up that we're seeing. We characterize that as about $1.5 million. We had a partial -- because of the way the quarter straddles, the months, we -- our merit impact will have some incremental impact from some of our employee costs in the quarter, given the fact that we had 2 months of it in the last quarter, we'll have an incremental month.

So that's a bit of a headwind. And then we finally have finished building out the lead team. And so we have a little bit of incremental cost related to that. But I think the sum of those things is probably what reconciles it for you relative to kind of where you were before in terms of Q4, that's at least a few million dollars there. And that's the way that I would probably think about it. Hope that's helpful.

Okay. Yes. And maybe I'll sneak one last one in. Mike, as you talk about kind of go-to-market strategy evaluation, I'm kind of curious what might that entail? Like I guess part of the question that I'm asking is, is it possible in the next quarter or 2 that there's some bigger commercial changes that might be made to the organization that may take a little time to take root?

Yes. No. So I don't see the changes we're making as disruptive as much as they are more additive and sort of accelerating where we see opportunity. So the overall strategy of our go-to-market is pretty simple. It's identifying the markets where we see significant market opportunity, evaluating our presence, adding resources to capture or exceed market growth, looking at markets where maybe the market opportunity is not as substantial, evaluating our cost structure in those markets and saying, is our cost structure aligned with the market opportunity?

And then third, looking at markets where the market opportunity is not great and maybe our revenue is not there, but our cost structure is too high. How do we transition that to a partner, reallocate those savings and put it in the markets where we see accelerated growth. So I don't see that disruption as really just realigning and reinforcing the markets where we see accelerated growth. Does that help, Brandon?

Yes.

Your next question comes from Thomas DeBourcy with Nephron Research.

I'll just ask 2 upfront. So first, just on adjusted gross margin. It seems like clear sequential trajectory upwards. And question there is really even with, I guess, integration or some disruption, your ability to sustain, even, I guess, above 50% adjusted gross margins? And then the second question, just on the sale of the genomics business. It looks like it may be actually accretive on an earnings basis given the cost of debt. But just whether that's the case? And is there additional portfolio rationalization in Animal Safety products, whether through divestiture or through just, I guess, end-of-lifeing low-margin products?

Yes. Thanks, Thomas. I'll start. I guess to your first question around the adjusted gross margin, yes, we were very pleased with the performance. I think you're thinking about it the right way, too, in terms of sustaining above 50% because we're going to have fluctuation from quarter-to-quarter. So I wouldn't focus so much on that as I would on the fact that sustaining it at that higher level, I think that's the right way to think about it. Because if you look at the current quarter, we probably had some favorable mix in there given the food safety growth, that's a higher-margin business relative to the Animal Safety business, which was down in the quarter. So I think that's the first question. And then I think the short answer on your second question around the genomics sale is, yes, accretive and positive impact from that divestiture.

Yes, Tom, just when you look at the margin structure for the genomics business, we've talked about both the gross margin and operating margins for that business on an operating margin basis, the adjusted operating margins being in the mid-teens. So that's obviously below the corporate average. And then as we look at from a total expense standpoint, there is some allocated corporate overhead that goes away with that as well. And so that's really what drives the accretion.

Your next question comes from David Westenberg with Piper Sandler.

Congrats on another nice beat here. So you raised the guide by a little bit more than the beat, implying maybe that Animal Safety issue might be resolved in the next quarter or so. Is that a great way to read it? And then also with kind of the beat, I know you mentioned kind of the freight costs and some of the other stuff, onetime items. Is there any other reason why you wouldn't get more operating leverage with the -- with revenue going up there in Q4?

Yes. I think the implied guide is a slight increase from Q3 to Q4 in terms of the top line revenue. So there will be some leverage that you should get -- you should see there, but it's not a meaningful step-up in terms of the revenue. I think that the guidance really implies continued food safety growth around the levels where we are currently. And we don't expect the full benefit of the Animal Safety resolution in the current quarter is the way we think about it. And then as I noted as well, the fact that we've started to turn from an FX tailwind to a headwind is also a thing that we thought about as we looked at where we're going to land the year.

Got you. Well, you guys -- I mean, on Brandon's question, you talked a lot about kind of some of the margin headwinds in Q4. Can you talk about as we're building 2027 to thinking about the margin expansion opportunities? I mean, I know Petrifilm is now getting in-house or transitioning to you. Is there any other ways of thinking about margin expansion opportunities in '27?

Yes. I mean I think that a couple of things. First of all, from a gross margin perspective, I think that we should be getting past the issues that we've had with sample collection. We should see Petrifilm. We've said that should be margin expansive once we've in-sourced that. So those are helpful. And then on the OpEx side, we continue to evaluate the cost structure there. I think one of the things is we saw the impact of the restructuring that we did back in the fall with -- part of that was we were looking at taking out, I think it was around $25 million, but also with some add-backs for areas where we thought we had gaps.

And so you started to see some of that sort of flow through as well in terms of the investments that we've made. But I think we -- in terms of the go-to-market strategy that Mike has talked about earlier, that's obviously a more efficient way of operating in a lot of places, given the fact that you may go through distributor versus going direct, that sort of thing. So I think we have opportunity remaining on the OpEx side.

Yes. I would add a couple of other things that are also extremely important and we're focused on, and we've talked a little bit about it. I would say more in a purchase price variance. So we're really digging into that and looking at our supplier base and trying to understand how can we improve that. That will be -- that's a huge focus now as we think about '27. I think another big one is inventory. So we definitely talked about inventory and the challenges we've had. I think the write-offs are obviously very visible, and we're aware of those, and we're working through them.

But I think the way that I would see that in '27 is there's certainly been a lot of legacy raw materials that have been a big part of our inventory. And as those make it the finished goods and we start to calibrate our production to reduce inventory in '27, we should start to see the benefits of those. It's hard to see them right now because they're currently in progress. But as we transition into '27, we should start to see a meaningful decline in our finished goods inventory, which will manifest itself in an improved margin. So those are 2 other areas I would add that we're thinking through for next year.

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

Thank you for joining us today, and we look forward to following up with a lot of you after the call here. Have a great day.

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

Good afternoon, everyone. Next up, we have Neogen, a global leader in food and animal safety providing diagnostic testing solutions used across the food supply chain and animal health markets worldwide. We're pleased to have with us Mike Nassif, President and CEO; and Bill Waelke from the IR team with us today. Over to you, team.

Thank you, [ Brad ], and thank you all for being here. Before we start, I wanted to pose a question to you. Just think about your day to day. You probably grabbed something to you this morning, maybe grab something from the market to go for lunch. And maybe when you're not in a conference, you're a home buying groceries to make dinner your family or even if you have to buy baby formula. How many times do you pause and ask yourself, is this safe for me to consume before you buy it?

If you're like me, you probably never do that, right? We live under this cloak of comfort that our food is safe. And it's not trust that I think is really the opportunity that's ahead of us. The CDC, according to the CDC, last year, there was 50 million food-borne illness cases, of those 100,000 were serious enough that they have to be hospitalized. And unfortunately, of those 100,000, 3,000 people lost their life to food-borne illnesses.

My name is Mike Nassif. I have the privilege of leading a company that is at the forefront of creating solutions to make sure that the food that we consume is safe. What we're going to talk about today in unlocking the Neogen's potential is I'm going to give you a little bit about the market and the portfolio, but really talk to you about our strategy to turn this business around. What are we doing in the short term and what are we doing in the long term?

Do the pause for disclaimer. It's long enough. So at the heart of Neogen is really ensuring that a world where food is safe, sufficient and suitable for everyone as a top priority for us. Producers, manufacturers, partners, processors, all of them are under relentless pressure. And we really view ourselves at Neogen as playing a role to make their job easier in this highly regulated market.

Neogen, we deliver essential testing, diagnostics and expertise to protect the food supply chain. When we look at the market, it's a very sizable market, and it's expanding, growing by food complexity, stricter regulations, rising customer and consumer expectations of quality and safety. And it's a really diverse, broad customer base from small to large, covering every major category and segment from processors, animal health, global protein producers.

Now at Neogen, we're structured in 2 global business units, 1 focused on food safety, 1 focused on animal safety. We participate in very attractive markets with long-term growth drivers across our portfolios. We've got market leadership in specific categories, spanning from pathogen detection indicators, positioning us really from a food safety perspective as really the scale provider.

Now as we think on our broad portfolio that serves customers, it's really a consumable-driven portfolio. So what that means from a financial perspective is that recurring revenue and a lot of resilience in the portfolio. I believe that we have an unmatched breadth across categories making Neogen truly the industry's only scale provider when it comes to food safety. Indicators for us is a segment of the market where we have a market leadership with our iconic brand, Petrifilm, and animal safety with the recent divestitures of C&D, also the announcement of our genomics divestiture has really allowed us to focus the animal safety portfolio on higher growth, more profitable markets.

Now I wanted to take an example from our portfolio to give you an idea of how our products work within a typical food manufacturer. And in this example, I'm using Petrifilm, our #1 product in the portfolio and #1 in the world. Microbiology testing is a high-frequency embedded control point within the food processing plant. So they're looking for pathogens, hydrogen indicators, spoilage, and it's driven by strict regulations and the need for confidence and quality in the results is paramount. Petrifilm solves this complexity with really driving simplicity. It's a ready-to-use plate that's faster, more standardized and ensures reproducible results versus the traditional Petrifilm dish that you would see in a lab.

A lot of these food processors either send out their testing to a third-party lab or some if they're large enough, will have their own lab on site. But that still takes time and the Petrifilm is definitely faster. I think what customers really appreciate about Petrifilm is just the simplicity. Just in 3 simple steps, they're able to get a result. And the good thing about it is that it reduces operator variability and make sure that we've got the right testing at the right time. And Petrifilm can be used at different stages within the food processing value chain. So intake, raw material intake, in process and finished goods.

And Petrifilm is really just part of the end-to-end solution that Neogen can provide when it comes to food safety. When you look at our overall portfolio, it really delivers on a holistic food safety solution from integrated detecting, monitoring and diagnostics that deliver continuous visibility across the value chain for our customers. I think what's just as important is it's reinforced with deep expertise and services. So our technical support, our application knowledge, the guidance that we provide our customers in building their food safety programs but also helping them with the challenges and the things that they need to manage on a day-to-day basis is highly valued.

I've been here for 5 months now, and I've had the opportunity to travel the world and meet with all of our customers. Some of these are customers who purchase 100% of the needs from Neogen. There's other customers who purchased some products from us but also from our competitors. But there's 1 common theme that I took from all of our customers. They see Neogen as a trusted authority beyond testing, okay? Our reference material, protocols, handbooks, they establish best practices that are widely adopted within the industry. And I think that really speaks to the power of the Neogen brand when it comes food safety, which also presents a huge opportunity.

Now I have to acknowledge that in face of a strong market fundamentals and a strong portfolio, Neogen has struggled in the last couple of years. And that was really largely due to strategically the right decision to acquire the 3M food safety business. However, it doubled the business overnight and integrating a global business like 3M into original Neogen proved to have some challenges. In the last couple of years, the business has been working through that. I truly believe that we're beyond those difficult times, and I think the best days are ahead for Neogen. And having been here for the first 5 months, I really believe that when I look at the challenges that are ahead of us, they're all within our control. And there are definitely things that we can do to stabilize the business.

And if you look at our recent Q2 results, that should give us an indication that what we're doing is working. And now we really need to make sure that we continue to build that foundation to return this business to growth. And it's not too aspirational to expect this business once we are fully operational with the management team and running well to achieve mid- to high single digits on the top line and profit margin, adjusted EBITDA north of 20%, up to 30% in the right time line.

Now to achieve all of this, we've rebuilt the entire management team at Neogen. In the past 5 months, I've hired 5 external leaders with deep experience coming from top-tier companies who know what good looks like, who have been in turnarounds, who understand how to operate in global businesses. I think that paired with strong internal talent that understands the challenges that we have and have been trying to solve for that really, I think, brings forward a renewed leadership team that has new skills, heightened accountability and really a commitment on turning this business around. I mean these are leaders who thought the same thing I did when I looked at Neogen as an opportunity. Wow, that looks like a company that is having a lot of challenges.

But I was able to figure out that I think there's a huge opportunity here end market fundamentals and a strong portfolio. And these leaders see the same thing, and they were happy to jump onboard. And I'm super excited to have a full management team in 5 months to really help us continue to accelerate turnaround.

Now our turnaround strategy is very simple. There's 3 simple stages: stabilize, accelerate, expand. Stabilization is really all about driving top line, managing our costs, and looking at cash flow conversion. And many of the turnarounds I've been in, those that have been successful and those that have not been successful, have really been about driving the top line. And when you have a portfolio like ours that's very broad, that's global, I think focusing there and creating oxygen for the organization so that we're able to focus on the operational and other elements gives us a lot of headway.

Now if we do that correctly and we build the foundation, that sets us up for accelerated growth in fiscal year '27. Now another component that is extremely important for the trajectory of this business is innovation. As the market leader as having market-leading products, it's incumbent on us to shape the industry and deliver against the needs of our customers. So Jeremy Yarnwood, who was my first hire, Chief Science Officer, he was in a previous slide, strong diagnostics background. He is almost 100% focused on driving innovation. So as we are trying to stabilize the business in the short term, he's thinking about our innovation processes. He's talking to customers trying to understand needs, and he's looking at how do we take our flagship products like Petrifilm and really continue to address customer needs by expanding the portfolio.

And if we do that correctly, fiscal year '28 and beyond, we'll start to see innovation kick in and really take Neogen's portfolio and growth profile to a higher level.

Now the Petrifilm site is extremely important. So I think many of you are aware we're building a stand-alone Petrifilm site in Lansing, Michigan. That's part of the agreement from 3M. I'm happy to report today that, that is on track. We're very happy with the progress that we're making work. The foundational work is complete, the key equipment is installed. Initial production testing looks really good. We started product validation and product production testing. That's underway, and that's meeting our expectations. So the goal continues to be that by November of 2026, we have transferred over and ready for production all 17 SKUs from 3M.

Now with that time line, that allows us an additional 9 months with the agreement with 3M. So if there was to be any challenges with any of our SKUs, we will continue to have the relationship with 3M for additional 9 months to make sure that our customers are not impacted by anything there.

And I spoke earlier about reinvigorating innovation. This is one of my top priorities. I see huge opportunity to drive innovation within Neogen with a deep diagnostics expertise, our large installed base and really as a trusted partner in food safety in a regulated environment, I think we have permission to really drive innovation and meet customer expectations. And so Jeremy and the team are very much looking at how do we need to enhance our capabilities when it comes to innovation, what are the problems that we really need to solve for our customers. And my mindset around innovation is less about technology led but more about solving the needs.

So this is where we want to make sure we're clear on what it is we're trying to do, and I have every intent on increasing investment in R&D, but we're only going to do that if we have very tangible projects that we believe are really going to solve a problem with our customers, but also differentiated and scalable and something that we really want to put our investment dollars behind. So I'm super excited about what the innovation portfolio is going to look like in a road map. We are looking to have an Investor Day later in calendar year, probably the later part of the calendar year '26. And hopefully, we can bring to life a little bit more about our innovation work with Jeremy and the team have had a chance to build that up.

Now we're still in the early stages of the turnaround. I think we have a clear path on how we're going to achieve that and what are we going to do. But I think it's important for me to share with you what I and Bryan Riggsbee, our new CFO, really believe this company can be. So what you see up here on the slide is what I think is what a market-leading company like Neogen can achieve.

Now in order for that to be true, there are some things that have to happen. One, I really think that we need to continue to focus on [indiscernible] and execution. We need to have extreme customer intimacy. We got to understand what -- how do we need to solve our customer issues and challenges that they have. And then lastly, we got to make sure that we become masters in the fundamentals the business. We've got to scale these processes and really mature how Neogen operates as a global leader in food safety.

Now with our overperformance in Q2, we felt comfortable raising the guide in this past Q2 earnings. I would say that our guide reflects just a careful measured plan to restore and sustain and for predictable performance. Brian and I are very well aware that Neogen has really had a difficult meeting expectations and meeting our commitments, and we're sensitive to that, and we want to make sure that as we are managing this business that we continue to recognize the importance of honoring the investment community and rebuilding that trust. So being cautiously optimistic, making sure we're managing it appropriately, I think, is important. But also, we need -- we need to give space for our new management team, which we had 2 new hires last week. I'm sure you saw the announcement. So we got to give them time to kind of get their hands on the business.

So net, we're very encouraged by the early progress, and I really believe we have a strong path forward. And we're on the path of recovery. We're in a very attractive market. I think that everything that we need to do to make sure that this company is successful and continues to deliver what's expected of us in the market with our customers is within our control. And I think that's the biggest opportunity. But it's also the exciting part about being part of Neogen and the management team that we built is now we get to focus on the blocking and tackling of improving how this company operates. So thank you, and we'll open it up for questions

Thanks for the great presentation. I'll get started with a few questions that I've received here, and then we can also open it up to the floor. But to kick off, based on your experience with the company so far, what do you believe are like the greatest opportunities and more importantly, challenges for the company as you look forward over the next few years?

I think the biggest opportunity is just what I was talking about, the end market and long-term secular trends. I think this is a very attractive market in food safety. It's not -- demand for food safety is not driven by reimbursement or government funding. It's regulations. It's a necessary step to ensure the safety of our food safety supply chain. And I think that despite some of the challenges and operational challenges that we have, Neogen having the broadest portfolio and really being a scale provider when it comes to food safety is a huge opportunity. And the hypothesis that I had when I -- before I joined, which is really a lot of the challenges are within our control are really more operational. 5 months in, I still believe the same thing. I have not uncovered anything new that tells me otherwise.

So I think it's a great market. We've got great customers who want us to succeed. We've got a great portfolio. The challenge will be how quickly can this management team get their hand around the business, how can we scale the processes to get this business maturing and operating as a global company; and lastly, how quickly do we change the culture in the organization to help really raise the bar on our performance.

Early indicators tell me that they are adapting really well to the changes, and I think our performance in Q2 reflects how the team is really leaning into the new ways of working.

Yes. That makes a lot of sense. Moving on to a little bit and to the extent you could share at this point, historically, many of the technologies used in this industry have been relatively low tech, such as lateral floor culture-based media solutions. Do you see that changing over time?

Yes. Listen, my background is in med device diagnostics. I've learned that you never lead with the technology. You need to first understand what is the problem we're trying to solve. We are in an industry where efficiency, quality and cost becomes extremely important. I've been part of many organizations where they're trying to build a Cadillac when you need a Honda, okay? We're not going to make that mistake. We're going to make sure that we really understand what is it our customers are challenged with and what is the minimally viable product that addresses their concern. That will dictate the level of technology that we need, and that will dictate how we go and innovate. And that's the work Jeremy is trying to identify right now.

Makes sense. And you alluded to this fact just earlier here, but you reported a much improved second quarter with results coming in well ahead of consensus for costs. However, you didn't raise full year guidance meaningfully. Was there anything onetime in nature or anything that gives you caution as you look forward to the next half of the [indiscernible]?

Yes. I mean the only caution is what I was sharing earlier in a sense that we're happy with the results, but 1 quarter is 1 data point is not a trend. I'm very proud of how the team has really adopted the new ways of working, driving more focus and discipline around commercial execution and breaking down silos and working on collaborating and really solving those issues that have been in the way of the commercial team and doing what they need to do for our customers. But we still have work to do. We have a new management team. Then you hands around the business. And Brian and I are very much focused on building a predictable, sustainable business, and we're just -- we have a new management team. So I think we need to give a little bit of room for the team to get their hands around what we're trying to accomplish. And we'll see how things transpire in the coming quarters.

This is a little bit in the past, but the company has discussed its plans of divesting its genomic division, but we haven't seen any official announcement yet. You mentioned on your call that you would expect a transaction to occur by the end of this fiscal year. A, what gives you the confidence in that timing? And could there be -- are there asset divestitures as part of this portfolio review?

Yes. Well, let me answer the second question. No. So genomics is the only one. Of course, I can't comment on ongoing negotiations. We're happy with the progress, and we are looking to make an announcement on the latter part of the year.

Okay. And then from your seats, just on the valuation side of things, is there anything that you think that investors just fundamentally under appreciate or miss about the news today?

I think that's a great question. I should ask investors about that, get their thoughts what they have to say. I think there's 3 things that I underestimated to be honest with you. I don't know if everybody thinks of it the same way. But coming from the human diagnostics and being in med device, it's a highly regulated business that's driven by reimbursement codes, government funding. In food safety, that's not the case. I mean these are mandated testing, regulated industries where that's a tailwind, right? So we're not constrained there.

I think the other one is the innovation cycle. So when I was in a point-of-care diagnostics with Siemens Healthineers, to get a new assay through the FDA, you cannot do that without a 2-year clinical with $20 million. And then you're crossing your fingers hoping that the design of the clinical was enough that the FDA was going to give you approval.

In food safety, we don't have to do that. We don't have to run clinicals. Now of course, we've got to do validations and to make sure it's safe and meets the quality standards. But the hurdle to get approval and the investment level is much less, which means that our innovation cycle should be much faster. So as the market leader in food safety, it's incumbent on us to really drive innovation. And this is where I'm very excited about what we're going to be able to do with the broad portfolio that we have and Jeremy and the new team and the competency that we're building.

And then lastly, the same concern that I had, the same concern when I started and had a chance to interact with all of our investors that they had. They all felt that the end market was great. Neogen has a portfolio. For all intents and purposes, this company should be successful, but it's not. And the conclusion that I believe they all came to was that this company is not well run. That is another, I think, opportunity for us that is now manifesting itself in the other way around, right?

So yes, the company was not well run. I agree to that. But we're starting to do some things right. And I think that continues to be the biggest opportunity. It's 100% in our control, and by us building what I think is a very strong leadership team that has experience with top tier organizations that knows what good and great looks like that are able to just run and establish the right processes in place, I think if we do everything correctly, we should continue to see improvements in how this company operates.

And I think I don't want anybody to underestimate the amount of effort that takes. It sounds easy when you say, well, we just focused on execution. Let me give some examples. But in reality, when you're trying to change the culture of execution for a 3,000-person company at a global scale, it's very different than doing a turnaround on an Excel spreadsheet.

So I think that that's something we have really in mind that it's an opportunity for us, and that's the one that we're going to be focused on.

Perfect. That makes sense. We'll also quickly go to the audience to see if there are any questions. If not, we'll just pass it back to you to -- for any closing comments that you would like to make.

No. Thank you very much for this opportunity. We are super excited about the progress we made. We're super excited about all of the engagement of the investors and trying to learn more about Neogen. Thank you for the support, and we're going to just continue to do what we're doing and focus on getting this business back to market-leading growth. Thank you for your time today.

Thank you so much.

Good morning, ladies and gentlemen, and welcome to the Neogen Corporation Second Quarter FY 2026 Earnings Conference Call. [Operator Instructions] This call is being recorded on Thursday, January 8, 2026. I would now like to turn the conference over to Bill Waelke, Head of Investor Relations. Please go ahead.

Thank you for joining us this morning for the discussion of the second quarter of our 2026 fiscal year. I'll briefly cover the non-GAAP and forward-looking language before passing the call over to our CEO, Mike Nassif, who will be followed by our new CFO, Bryan Riggsbee. Before the market opened today, we published our second quarter results as well as a presentation with both documents available in the Investor Relations section of our website.

On our call this morning, we will refer to certain non-GAAP financial measures that we believe are useful in evaluating our performance. Reconciliations of historical non-GAAP financial measures are included in our earnings release and the presentation, Slide 2 of which provides a reminder that our remarks will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These forward-looking statements are subject to risks that could cause actual results to be materially different from those expressed in or implied by such forward-looking statements. These risks include, among others, matters that we have described in our most recent annual report on Form 10-K and in other filings we make with the SEC. We disclaim any obligation to update these forward-looking statements. I will now turn things over to Mike.

Thank you, Bill. Good morning, everyone, and thank you for joining the call today. I continue to be energized by the significant opportunity ahead at Neogen, working alongside our highly engaged global team as we transform the company with a clear focus on improved top line growth and profitability. We are the scale provider in a highly attractive industry, supported by strong long-term secular trends, and I have high confidence in our ability to overcome recent macroeconomic and execution-related headwinds. Our second quarter performance represents encouraging early progress with a return to positive core growth across the enterprise and adjusted EBITDA margins improving nearly 500 basis points sequentially.

The initial phase of our transformation is centered on stabilizing and strengthening our core, providing a solid framework for future innovation. We began with cost structure improvements implemented in the second quarter, expected to deliver approximately $20 million in annualized savings. We will continue to rigorously evaluate resource allocation opportunities and instill a culture of disciplined operational execution across the organization. Turning to our commercial teams, we are implementing a rigorous process-oriented approach to commercial excellence, emphasizing strong operational planning and data-driven decisions. In Food Safety, where our scale and breadth of offerings provide a clear competitive advantage, we see significant opportunity to shift towards solutions-based selling. This approach should increase customer stickiness and drive greater cross portfolio penetration.

Globally, over 75% of our food safety customers already purchased multiple product categories from us, and we have targeted initiatives underway to increase that percentage further by delivering comprehensive solutions tailored to their needs. In Animal Safety, we are focused on elevating our portfolio of products through our long-standing partnerships and have made investments to enable our commercial teams to drive growth. To accelerate all these priorities, we have strengthened our leadership with highly experienced operators, including our new CFO, Bryan Riggsbee; and our new Chief Commercial Officer, Joe Freels. Joe is a seasoned diagnostics executive with extensive senior commercial experience at Abbott and Cepheid. He understands what world-class sales execution looks like, and I'm confident he will help transform our sales culture. We have also added Tammi Ranalli as Senior Vice President and General Manager of our Food Safety business unit; James Meadows as Head of North America Food Safety; and Jeremy Yarwood as Chief Scientific Officer.

These leaders bring proven track records from top-tier companies and will accelerate both innovation and execution excellence at Neogen. In parallel with our commercial focus, we are applying the same discipline and urgency to operational efficiency and key project execution. We saw early benefits in the second quarter from our cost actions, which attributed to the sequential adjusted EBITDA margin expansion. We have continued to make progress on our sample collection product line and expect it to become a positive contributor to gross profit in the second half of this fiscal year. While there remains room for further improvement, we're committed to fully optimizing sample collection over the long term, alongside broader enhancements in inventory management and operational efficiency.

Another key priority is the integration of Petrifilm, which remains on track for the second quarter of fiscal 2027 time line previously shared. We're currently in the latter stages of the production testing process, which has gone well. In parallel, we have moved into the initial stages of product validation, which is a comprehensive internal process to validate our ability to produce each of the 17 SKUs that we expect will be completed this summer. As part of the testing and initial validation work we have done so far, we've demonstrated the ability to manufacture Petrifilm plates. These plates will continue to be subjected to a wide range of internal quality and performance testing, but the early results have been encouraging.

As Bryan will discuss later in the call, we are making positive progress on the previously announced sale of our genomics business, the completion of which will provide an opportunity to accelerate the deleveraging of our balance sheet. As a reminder, this past summer, we divested our cleaners and disinfectants business, which allowed us to pay down $100 million of debt. To wrap up my opening remarks, I'm pleased with the initial progress we've made over the past few months, which has led us to raise our outlook for the year and represents a solid step in the right direction. We are still in the early innings of our transformation journey, and the end market backdrop is not without some challenges. However, we believe they are solvable or transitory in nature.

I have every confidence in our ability to exit this fiscal year as a stronger, leaner and more disciplined organization positioned to increasingly focus on innovation and the next leg of growth in fiscal 2027 and beyond. I look forward to meeting with many of you at the JPMorgan conference next week, where we will provide more details on our operational strategy. With that, I'll now turn the call over to Bryan to share some details on our results and our updated outlook.

Thank you, Mike, and welcome to all the investors and analysts joining us on the call today. Similar to Mike, I'm incredibly excited to be part of the team at Neogen and emboldened by the significant opportunity ahead of the company to drive shareholder value. To that end, we saw a return to positive core growth in both segments for the first time in 4 quarters with total second quarter revenues of $224.7 million, increasing 2.9% on a core basis. Looking at the components of growth, foreign currency added 0.9% and divestitures and discontinued products were a headwind of 6.6% compared to the prior year. The impact from divestitures was attributable to the sale of the Cleaners and Disinfectants business, which was completed in July 2025. At the segment level, revenues in our Food Safety segment were $165.6 million in the quarter, including core revenue growth of 4.1%.

We saw the strongest growth in our indicator testing and culture media product category, led by sample collection, which benefited from an easy prior year compare and Petrifilm, which saw a nice recovery from the first quarter and returned to high single-digit growth. Double-digit growth in pathogens led the bacterial and general sanitation product category, while the allergens and natural toxins categories saw growth in allergens, offset by a decline in natural toxins. From a macro perspective, we continue to see disruption at the customer level with food production volumes estimated to generally still be down across major producers on a year-over-year basis.

Additionally, there have been several major plant closures and food producer bankruptcies across the industry in the last 12 months. Given the short-term fundamental backdrop that we believe is primarily driven by inflationary cost pressures, we are even more encouraged by the strong results in the second quarter. While macro trends remain negative, there are signs some of the headwinds may begin to abate as we transition into fiscal year 2027 and beyond. Quarterly revenues in the Animal Safety segment were $59.1 million, including core revenue growth that was approximately flat compared to the prior year quarter.

We experienced solid growth in our biosecurity product category, led by higher sales of insect control products due in part to market share gains. In the veterinary instruments’ product category, lower sales were primarily driven by needles and syringes, while lower sales in the Life Sciences product category were largely driven by timing of orders and fulfillment. Our global genomics business had core revenue growth accelerate to 6% in the quarter, with solid growth in the bovine market, partially offset by weakness in companion animal testing.

From a macro perspective, we have also seen challenges in Animal Safety as a part of a multiyear trend with production animal herds declining in the U.S. to record lows. Most forecasts have this trend reversing next year as ranchers begin to invest again given record beef prices, but we will continue to take a more cautious approach as we approach guidance until evidence of positive improvement is more apparent. From a regional perspective, core revenue growth in the second quarter was led by our LatAm region, up high single digits with strong sales of pathogen detection products and Petrifilm. The U.S. and Canada region had core growth in the mid-single-digit range with food safety up mid-single digits and Animal Safety about flat.

Strong growth in sample collection as well as in Petrifilm, pathogen detection and allergens was partially offset by a decline in food quality and culture media. The APAC region saw low single-digit core growth that was led by pathogen detection products, sample collection and genomics offsetting declines in culture media and allergen test kits. Our EMEA region had core growth decline low single digits with growth in sample collection, food quality, genomics and Petrifilm offset by declines in natural toxins, culture media and general sanitation products. Gross margin in the second quarter was 47.5%, a sequential improvement of 210 basis points from the first quarter, with the increase due primarily to volume and lower tariff costs. Excluding the impact of integration-related and restructuring costs, the second quarter gross margin was 50.3%, addressing the production efficiency of our sample collection product line has been a priority, and we saw improvement in the quarter, which is a trend we expect to continue in the second half of the fiscal year.

With an increased focus on inventory across the organization, we did see an elevated level of inventory write-offs in the quarter. We have described this as a multi-quarter process to return to more normal levels of scrap and continue to expect to see improvement in the second half as this is an item of high emphasis for our operations teams. Adjusted EBITDA was $48.7 million in the quarter, representing a margin of 21.7%, an improvement of 470 basis points from the first quarter. The margin improvement was driven primarily by the higher gross margin and the headcount reduction implemented during the second quarter. Second quarter adjusted net income and adjusted earnings per share were $22.6 million and $0.10 respectively, compared to $9.4 million and $0.04 in the prior quarter due primarily to the higher level of adjusted EBITDA.

Moving to the balance sheet. We ended the quarter with gross debt of $800 million, 68% of which remains at a fixed rate and a total cash position of $145.3 million. We remain in compliance with all debt covenants and remain comfortable with our position as we look to the second half of the fiscal year. Free cash flow in Q2 was $7.8 million, representing an improvement of $20.9 million from Q1, the result of lower CapEx and improved trade working capital efficiency. Importantly, we expect that routine CapEx will trend towards more normal levels of 3% to 4% of revenue starting in late fiscal year 2026, which will further improve free cash flow trends.

As Mike noted earlier, we are raising our full year guidance for fiscal 2026 to reflect the second quarter performance being ahead of our expectations. We now expect revenue to be in the range of $845 million to $855 million and adjusted EBITDA to be approximately $175 million for the fiscal year. This updated guidance reflects a cautious approach to the second half of the year given the lingering weakness in our end markets and the fact that we have a new team on board that is still settling in and evaluating opportunities. As a management team, Mike and I take very seriously the commitments and guidance we provide to investors. Looking on a quarterly basis, our guidance contemplates revenue in the fourth quarter being modestly higher than the third quarter, which we are assuming will step down from the second quarter due primarily to seasonality and that adjusted EBITDA margins will follow a similar trend.

We continue to expect our capital expenditures for the year will be approximately $50 million and that free cash flow will be positive. We have also previously disclosed that we have a process underway to divest our global genomics business. The process continues to move along. And while the timing of such processes is inherently difficult to predict, we anticipate being able to make an announcement in the fourth quarter of the current fiscal year given the current stage of the process. In addition to the net proceeds being prioritized for debt reduction, this divestiture will further simplify and focus the business and also position the business for enhanced incremental margins. I'll now hand the call back to Mike for some final thoughts.

Thanks, Bryan. When I joined Neogen, I was thrilled to lead a company with strong leadership positions in highly attractive end markets. While we have faced both macroeconomic headwinds and execution challenges, we believe these are solvable and that Neogen's best days lie ahead. Now nearly 5 months into my role, I've had the privilege of meeting many of our customers and team members around the world. These interactions have only strengthened my optimism and deepened my appreciation for the power of the Neogen brand. Our customers don't see us simply as a supplier. They view us as a true partner and a trusted authority in Food Safety.

We are committed to further strengthening these vital partnerships, accelerating groundbreaking innovation and delivering greater value to our customers than ever before. In my interactions with team members across the globe, I've been deeply encouraged by the passion and commitment I've witnessed firsthand. The thoughtful dialogue and sharp insights shared in these conversations reaffirm what I already knew. We have an exceptional team that is fully invested in our mission. We now have a strengthened leadership team in place, seasoned executives with deep experience driving transformation in global life sciences and diagnostics businesses. They bring a disciplined fundamentals focused approach centered on process excellence, clear prioritization, cross-functional collaboration, transparency and accountability.

Importantly, we are already seeing strong buy-in across the organization as we implement these changes, a clear signal that we are aligning around the right strategy to unlock Neogen's potential. In closing, I want to extend my heartfelt gratitude to every employee around the world for your hard work, resilience and unwavering dedication. It is your talent and commitment that will drive our success, and I'm more confident than ever in our ability to deliver outstanding results for both our customers and shareholders. Thank you. And now I'd like to turn things over to the operator to begin the Q&A session.

[Operator Instructions] Your first question comes from Bob Labick with CJS Securities.

Congratulations on the strong results and outlook. So I wanted to start where you just finished, Mike. You talked about the new management team. Can you discuss kind of maybe a little more what you look for in each of the people as you built out this team and how long it will take to get -- I mean, the announcements kind of just happened, obviously, get people on board and for everyone to gel and make a difference and start operating as one.

Yes. Thank you for that question. The great news is we've attracted top-tier talent to this company, which speaks highly to the opportunity we have at Neogen in turning this business around. When I was recruiting for the talent, I was really looking for very experienced leaders in diagnostics or life sciences that have been part of large organizations that understand the discipline and complexity of managing global businesses. But more importantly, were operators that they were able to zoom in and zoom out and really help the organization accelerate the basics that I've talked about before. And I think that's extremely important because we've got a great workforce. And in some cases, we're trying to implement global processes that require a lot of hands-on initially to get everybody going in the same direction. So I'm very proud, and I think we're extremely lucky to have attracted the talent that we've attracted.

As far as how long is it going to take to get them up and running, I would say that given the talent caliber and experience of these professionals, they're already hitting the ground running. And our business is not so different than the diagnostic and the human diagnostics business. So from a technology and go-to-market, there's a lot of similarities there. So we've got a very robust onboarding plan for all of the leaders, and we are starting now to meet as a full management team and really focusing on the priorities, which have not changed, which are all about driving top line, optimizing our growth and really focusing and becoming masters in the fundamentals.

Okay. That sounds great. And then maybe just one more question, I'll jump back in queue. Obviously, a good quarter, strong sequential margin improvement. But I think you said you'll get better improvement in sample handling in the back half. I'm trying to get a sense of what was the headwind to margins maybe from sample handling? Or maybe said another way, once you get that to the margins you want, what would be the equivalent or close EBITDA margins at current levels? And then obviously, as top line grows, you can grow that from there.

Yes. I mean let me give you a little bit of my thoughts on sample collection, and then I'd like to ask Bryan to share his thoughts as well on more specifics. But listen, sample collection is a challenge for us. We've been pretty transparent about that. We're working it multiple fronts from making sure that pricing is reflective of the average price in the market. We are taking all of the improvements on improving the efficiency on the line. I think the great progress that we have made in getting out of back orders means that we can reduce the temporary labor, some of the scrap and other things that were impacting our margins to kind of get more to a steady state.

And we are 100% focused on improving profitability on this product. But this continues to be a gateway product that our customers need, but it leads to other purchases within our portfolio. And I personally don't think the product is ever going to be as profitable as other parts in our portfolio. But we're not giving up, and we're going to continue to be focused on that. But I would say, high level, we would expect this product to return to some profitability in the second half. And I'd like to ask Bryan to share any thoughts on that.

Yes. Thanks, Mike. Bob, my comment would just be, I think if you look at the -- at our non-GAAP reconciliation schedule where we've excluded the negative impact of that previously, you can see that it was -- in Q4, it was around $10 million. In Q1, it was $6 million. In Q2, it was around $3 million. So the trend is favorable. And again, to Mike's comments, we would expect to then turn positive as we move into the back half of the year.

Your next question comes from David Westenberg with Piper Sandler.

Congrats on a really good quarter here. So I'll just start off with why hasn't the implied H2 growth or margin a little bit higher following a really good quarter. Do you think -- is this conservatism or like just first quarter for both the CFO and I guess, second quarter for the CEO, you just want to make sure that everything is right here.

Yes. Let me start. I'll share some thoughts. Thank you for the question. I think that's a very fair question, and I'll ask Bryan to jump in. I mean I think, listen, what you see contemplated in the guide is our prudent approach to beginning to return the business to sustain and predictable performance. You've heard me talk about that last time. I'm very much focused on driving predictability in this business and consistency. Listen, I'm happy with how the org is reacting to the new ways of working in the very short period of time that we've been here. And Q2 is a great quarter, but it's one data point. We've also got a brand-new team that's going to be settling in and learning how to work together and really start to scale these things that we've put in place.

And I would say just as important, and Bryan and I have talked a lot about this, we understand the importance of our commitment to investors and building credibility. That's extremely important to us. And so with that said and the lingering macroeconomic weaknesses, tariffs, uncertainty and what have you, we feel confident with the trajectory, the early progress we've made. And taking all of that into account, we believe it's appropriate to take a conservative tact for the remainder of the fiscal year. And the last point I'd make is it's important to note that we are now forecasting a positive growth for the year, given this latest update on the guide. Bryan?

Yes, I would just echo Mike's comments in terms of -- it's one data point. We did raise the guide to reflect the over-delivery in Q2. But we've got a new team in here. I've been here for 2 months now, and we just want to make sure that we take the right approach as it relates to how we manage the guidance.

Perfect. And just asking one more kind of basic blocking and tackling question as we look at our models. Were there any onetime revenue tailwinds in the quarter? And we think about recurring adjustments, how do we think about those cycling through for the rest of the year? I think with the recurring adjustments, it's one of those have limited time. But I mean, I guess you always have new ones. So I guess, any way to think about that -- anyway.

Yes. Sure. I'll take the question and Mike can add anything you like. The only thing I would sort of call out, we did have about $2 million of insecticide tailwind in Q2 in the Animal Safety segment. But really, that would be the only thing of note that I would call out as a onetime.

Yes, David, what I would just add is that we saw it's crazy, the simplicity sometimes is you get what you measure. So driving the commercial excellence, focusing on key products. When you think about Petrifilm, pathogens, allergens, which have been a focus for us in that quarter, you see very healthy returns on those when you drive the right focus. And so we were very pleased with how the organization is responding to the additional focus, and we feel that a lot of this growth was due to driving the specificity and commercial excellence. So the organic growth is great, and now we're looking to scale that and accelerate it.

I'll just keep it 2, knowing that you still have a few more analysts to ask the questions.

Your next question comes from Brandon Vazquez with William Blair.

A nice quarter as well. Mike, maybe as you sit -- you're maybe about 6 months into the seat now, you guys have had a strong quarter here. Talk to us a little bit about specifically what in the commercial organization has changed that is working. This is probably the first time in several quarters, if not a couple of years, where you've been able to kind of accurately forecast the business and actually give improving expectations for the business on a go-forward basis. So what is working? And what's giving you the confidence to raise guidance already less than a year into the seat -- in the CEO seat?

Yes. Thanks, Brandon. And listen, I wish I can tell you something that makes me look really smart. Reality is it's just focusing on the basics and driving simplicity. I think that last quarter, when we were talking about in the quarter discussion, but also on the one-on-ones, Specifically, the organization was very comfortable doing monthly forecasts, for example. And very early on, that didn't seem like the right approach given our history of missing our forecasts. So we instituted a weekly latest best estimate process where we bring in all of the sales leaders and all of the supporting functions on a weekly basis, reviewing the forecast, reviewing the risks and opportunities, reviewing the targeted accounts, discussing what needs to be true, what do we need to do to enable the sales team to deliver on the commitments to the customers.

And I would say in the first couple of weeks, it was a little bit rough, but now you see the leaders running the calls and the whole organization is really focused on enabling the commercial team. And one of the things that I think I've shared and I've been trying to instill in the organization is our commercial team needs to be very customer-centric. The rest of the organization needs to be in service of the commercial team. and that is how we're driving this.

And so early signs is that this is really resonating with the organization. And I think we can kind of see that reflective in the Q2 performance. Now that said, we don't want to get ahead of our skis. We're going to continue to do the same thing this quarter that we did last quarter, get the new leaders on board, drive more specificity, making sure we're really looking at the opportunities, addressing the concerns that we have and the headwinds in the market. And I think really, that is the formula for success.

Got it. Great. That's helpful. And then one of the other big questions I get a lot with investors now, and I'm sure you're aware, is just the Petrifilm manufacturing process. You made a couple of comments in your prepared remarks on some confidence there. Can you maybe just spend another minute on like what is it that's giving you confidence that this is continuing on time? And what are you seeing in the early ramp of that facility?

Yes, absolutely. This is a super important project for us. In Q1, I shared that early on, I knew this was a priority, and I spent a lot of time with Jim Walter, our Head of Operations and the manufacturing team, really looking at this plan. Having been in biopharma businesses and med tech businesses, any tech transfer has a lot of challenges. In this case, we're doing 17 on 17 SKUs. And I was very proud and happy, pleasantly surprised, I guess, happy of how the team has thought about all of the potential factors and things that can come to play in making sure that this transition is extremely successful. And I think that since then, we have executed that plan and that plan remains the same.

We remain extremely focused and the process of doing that is starting to demonstrate some results. And so we're still on track for the November 2027 time line. We're in the late stages of production testing, which has gone very well so far. In parallel, we've begun initial phases of product validation, which we expect to continue into the summer. As I mentioned in the opening remarks, throughout the course of production testing and the initial product validation work, we've demonstrated that we can manufacture Petrifilm on the new equipment, which is a very important milestone. And so we're going to continue to execute the plan. We've got the right talent, the right resources. This is a top focus for us. We are not sparing any focus or resource required. And that's what gives me confidence.

Your next question comes from Subbu Nambi with Guggenheim Securities.

This is Thomas on for Subbu. For the growth in indicator testing and culture media, how much of that was volume driven? And then how much was on price? Just trying to gauge how we should think about growth for the rest of the year and if that's sustainable.

Yes, I can share some thoughts and maybe Bryan wants to add a few things. I would say that most of it is organic growth. These are product lines that we drove specific focus on. And so there are some -- last quarter, we did share that there was a part of the decline of Petrifilm was due to an inventory correction in our major distributor in the United States. We've seen that distributor go back to normal levels. And when you look at sellout data, it's around 9%.

So the Petrifilm market continues to be healthy. We continue to be the market leader and growing at that pace. I think pathogens is also another one where we're seeing significant growth -- organic growth just due to all of the illness, the rise in illnesses and other things that you see. And then with allergens, that was, as you guys might be aware, we've had some supply issues in the past. We're not through those. We're working -- we've worked through all of the back orders, and we're -- we've gained some lost customers, and we're really looking to get that platform back on sustained growth. I don't know, Bryan, if anything you want to share there?

Yes. I would just say, in total, up 6% and just more volume than price would be the only thing I would envisage.

Okay. Awesome. And then maybe just to stay there on Petrifilm. What are your updated assumptions around the 2026 growth rate? And then just how should we think about this longer term? If much of the growth was volume, is there pricing power still available in the market to take for Petrifilm?

Yes. I mean I think the -- there's always pricing opportunity. And in fact, that's a standard language in all of our contracts. One of the things that is not unique to this business is that we have different contract durations and different contract expiry. So as new contracts come on board, certainly, the inflationary pricing adjustments are introduced. And of course, when we launch new Petrifilm tests, we always price that accordingly. But I think there continues to be an opportunity to adjust for inflationary measures as new contracts come up for renewal.

Yes. I think the only thing I would add is just that you may recall that in Q1, we had one of our largest U.S. distributor adjusting their inventory levels, which provided for a headwind in Q1, even though the end market was still strong. And so that phenomenon wasn't there in the second quarter. So we would expect the remainder of the year for that product to look more like Q2.

[Operator Instructions] Your next question comes from Thomas DeBourcy with Nephron Research.

I was just wondering, just in terms of, I guess, how we get to the CEO role, your feedback from customers, the business overall. Obviously, they've had to deal with some stockouts of certain products like in sample collection and just their willingness to kind of work with you as you ramp up production and get back towards more normal inventory levels? And then just overall of the business, is there a rough breakout you could give in terms of volume versus price in terms of the organic growth?

Thanks, Tom, for your question. By now, I have visited all regions and have visited customers, distributors, direct customers from around the world. And I honestly have to say I've never been in a market where customers are rooting for you like they are for Neogen. We are the Food Safety company. I can't tell you how many customers, some more impacted than other with our supply issues, but they want us to succeed. They see us as a vital partner in their food safety quality program. If you look at Food Safety quality program at sites, these are cost centers.

These are -- they're doing the testing required and sometimes they have a lot of turnover. And when there are gaps in their competency or gaps in their training or knowledge, they rely on Neogen to help fill that gap. And I think that is one of the competitive advantages that we have in addition to having a full Food Safety portfolio is that we are seen as the experts in the Food Safety business. And so it has been consistent around the world. Yes, some customers are frustrated, but they very much want us and need us to succeed because that means that their Food Safety programs will also succeed. Bryan, I don't know if you have any comments to add.

I would just say similar to my earlier comments around another product category, it was positive, but more volume than price.

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

Great. Thank you, everybody, for joining and all of the conversations and the feedback. I very much look forward to seeing many of you next week at JPMorgan to continue the conversation, and have a great rest of your day.

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

Good morning, ladies and gentlemen, and welcome to Neogen Corporation First Quarter FY 2026 Earnings Conference Call. [Operator Instructions] This call is being recorded on Thursday, October 9, 2025. I would now like to turn the conference over to Bill Waelke. Please go ahead.

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 2 of which provides a reminder that our remarks will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These forward-looking statements are subject to risks that could cause actual results to be materially different from those expressed in or implied by such forward-looking statements.

These risks include, among others, matters that we have described in our most recent annual report on Form 10-K and in other filings we make with the SEC. We disclaim any obligation to update these forward-looking statements. I'd like to extend a special welcome to Mike on his first earnings call at Neogen. I will now turn things over to him.

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 a 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 3 years, I drove step changes in performance and I'm confident that experience equips me to deliver similar results at Neogen.

In my first 9 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, rightsizing our cost base, reinvigorating innovation and deleveraging. To rightsize our cost base, we're acting urgently to streamline our organizational structure, boost agility and scale key processes like sales and operations planning, or S&OP.

At the end of September, we took actions to reduce operating expenses by approximately USD 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 aligns 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 United States. 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 a 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 by advancing Petrifilm production integration, addressing sample collection inefficiencies through productivity enhancements and optimizing inventory management with a robust S&OP 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 the 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 on working in tandem with a primary machine builder who has kept the 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 a focused approach to these priorities in critical projects is to drive EBITDA growth and free cash flow generation, which ultimately result in deleveraging the business. With the rightsizing of the cost base, we anticipate the enhanced commercial and innovation focus will drive future revenue growth that comes through at 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 S&OP 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 of 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 CAGR 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 the 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.

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 to 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. As we've discussed, 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 EMEA and high single digits in our APAC region.

EMEA 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 continue 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've made progress on during Q1, which should continue to improve as we progress through the year. Finally, we also saw a 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-month 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 in 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 the 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.

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-plus 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. And 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've 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 long-standing 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 improved 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 a 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 Instructions] And your first question comes from the line of Brandon Vazquez with William Blair.

Can Mike, maybe to 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 kind of the execution that we've seen. And frankly, now competitors have been a little aggressive in terms of what they're saying about share taking from you all. So just spend a little bit of time on like where are the pockets of strength? What were the things that you were really encouraging that you were hearing that gave you confidence to take the role?

Yes. 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. But now being here 2 months, what I can say is I've confirmed what attracted me in the first place, which is growing market, strong portfolio, significant opportunity to unlock shareholder value. Neogen has got a broad portfolio that I think is really well positioned in an attractive end market. What stood out to me is being here 2 months is really the genuine and dedication nature of our employees. They want to win. They're so 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 S&OP 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. So 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, in 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 sellout data that's very strong. And so to summarize what I'm saying, Brandon, the opportunity is ours and we are focused on maximizing that opportunity.

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 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? Like 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 growing in line with the market, but then ideally with those unique products take a little share. And 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? And talk us through what gets you there?

Thanks, Brandon. Yes, 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. So there's three things that I think give us an opportunity to regain growth through share gain. I think, first and foremost, Neogen is by far the most broad portfolio, specifically in food safety. Our customers look to us not only for our products, but for also to partner with them on testing and how to go about doing what they need to do. So 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 not -- we are underpenetrated. If you think about Petrifilm, for example, in Europe. There are other areas that I think we need to explore. So that's number two. And then number three, having those two points that I stated earlier, is really that the opportunity in front of us with three being all about execution. So 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. So all of those things are tailwinds and they're there for us to leverage to share gain. But I just have to say and go back to it, it really comes down to focus and driving the discipline within the commercial organization. And that's going to be the focus since I started and will continue to be in the coming quarters. So I'll hand it over to Dave to answer the second question.

Yes. Brandon. Yes. Look, I think your view is right around the year. We need to see a progression of EBITDA margin as the year progresses. From a volume standpoint, Q1 usually starts a little low, but we 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. And obviously, volumes matter here given our kind of robust fall through. But 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.

And your next question comes from the line of Subbu Nambi with Guggenheim.

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 possible timeline to where the company can be playing offense.

Thank you for that question, Subbu. I think 2 months in, I can say -- 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 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. And so I think that as we -- as I get more time under my belt in the coming months, I think 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. But 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.

Then two specific questions. Given you beat 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?

No, Subbu, I don't think there was any one-timers. 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. So we felt things came in close enough to what we expected, and we want to get further into the year. But no one-timers, if you will, to call out.

And then revenue improved, but might be a repetitive question to what Brandon asked, but 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? And then why are you still comfortable with expansion opportunities from here? And also a follow-up, what gives you the confidence around the $15 million Petrifilm duplicative cost guide?

Yes, Subbu, thanks for the questions. I'll jump in here and see if Mike wants to add any color. But look, there are some big variables that we've called out that 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 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. So we think those things work in our favor. As far as the $15 million of duplicate costs, 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.

And then finally, 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 stand up, 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 has been 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 improvement going forward. I don't know if Mike, do you want to add anything?

Maybe just a little bit more. Thanks for that, Dave. I think certainly, what's in our control within OpEx, capital expenditures and managing cash flow, managing our inventory better is all going to show an improvement. But really what's going to drive cash flow is revenue conversion. So when we think about maximizing the opportunity we have in front of us, we're prioritizing sort of high-margin, high-growth product lines across Food Safety and Animal Safety. We're looking to sharpen sort of the pencil, I can say, from a commercial perspective on how we drive these globally in the various regions. And it's all about accelerating growth, especially in really profitable, important product lines like Petrifilm. So 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, but 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.

And your next question comes from the line of Bob Labick with CJS Securities.

So Mike, in your introductory remarks, you mentioned why you joined Neogen, 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 kind of losses portion of that, so I'll skip that to my question. But 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 has 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?

Yes. 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. But we are tackling them head on. I think the -- these execution challenges, having been here 2 months and just from prior turnarounds, Really, it's just about an organization that's had misaligned priorities. The stretch trying to get an integration up and running that's had some of its challenges. And so we're 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. And I think if we do that consistently, we're going to start to be more predictable and consistent in our performance.

Now 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 that we want to drive. But you're absolutely right, we can't lose our vision towards innovation, which innovation is extremely important. Now as we think about that, this is where, in my remarks, I talked about we want to look at reinvigorating innovation. So 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 robust needs-based pipeline or pursue transformational breakthroughs.

So I really believe that now is the time for us to focus on this, to build an innovation strategy that's externally informed to drive the substantial market-shaping innovation. So along with sort of refining how we think about innovation, focusing on a few high-impact opportunities I think will position us really well for in the future. And I'm looking forward to -- in the future calls, I'm going to give you a bit more around what do I mean by that. But we are very willing to invest in innovation. And certainly, the work we're doing right now and is going to help us prepare to do that. But we've got to drive top line and get the business healthy enough that we can invest in innovation. So we're trying to do both at the same time. I don't know, Dave, if you want to add anything?

No, I think that's great. That's a great question, Bob.

Okay. Great. Yes. And then just one quick follow-up for Dave. I think the midpoint of EBITDA guidance is about 20.5% EBITDA margins or so. But 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 are 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, and then the opportunities for margin kind of recovery over the next few years.

Look, I don't want to sharpen the pencil too sharp here. Bob. But I mean, clearly, we had 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. So 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. So starting to see that impact partially in Q2 and then seeing it read-through in Q3 and Q4 is another helpful item relative to the current run rate. So -- but 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.

Your next question comes from the line of David Westenberg with Piper Sandler.

All right. Welcome, Mike. Dave, been great. I'll start actually with Dave since you're transitioning, I'll give you a little tougher one. Can you talk about the $6 million in sample collection costs? What exactly is that? And I mean, we did see it in non-GAAP. Does that imply that this won't be going on maybe into the next quarter? And then you just kind of remind us what this is? I mean, I know we've had some spoilage, is this kind of just purely spoilage or just help us out with what exactly is going on there because sample collection is an important part of the business.

Yes. Look, we -- for the first year or so, standing out sample collection consider part of the start-up costs that we have pretty good disclosure around. But 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, yes, we're selling the product at a loss currently. So as we talk sample collection improvement, what we're talking about, David, is, first and foremost, getting our labor cost down, reducing scrap and 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. So it's a multifaceted approach to getting back to where we need it to be. The first thing that's going to help a lot is getting our back orders under control.

And when we look at what our back orders were 6 and even 3 months ago, we've made significant improvement to that. And basically, we've got it down to kind of almost a normal level. Well, as we do that, we're able to take out high-priced temp labor. So we're reducing the overall labor. We're reducing the cost of that labor but 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. So there's a reasonable kind of number of aspects to this to get back in kind of the positive here, which we hope to be and we have a plan that says we can do as we kind of come through the second and into the third. So we've got the performance to demonstrate, but we need to see that here in the sequential quarters. So a good question.

And actually, maybe, Mike, sorry, I'm going to ask you a hard one, I guess, you're CEO, so you kind of deserve it, right? So stabilizing...

Bring it on.

Just dealing 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 face of stabilizing this headcount or rightsizing the business. And I'll stop after this one.

Yes, certainly, any time we're having a conversation about colleagues and friends. It's a very tough one. So it's not a decision we take lightly at all. But there are certain times in a business where you have to look at that. And I am not a believer of a onetime 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, okay? So I know this may seem like a onetime 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 and where we need to invest, we will invest to drive higher growth. But 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 have some challenges, you're going to have turnover. Those things happen at different levels. And I see this as an opportunity to reengage 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. So it's a great -- I've been very -- I've been pleasantly surprised by that because that's a great foundation for us to move forward. And so as we realign the organization to make sure that everything we're doing is on the priorities that I said, which is driving top line growth, improving operational excellence, making sure that we deliver on these critical projects with Petrifilm and sample collection, fixing our inventory challenges and really reinvigorating innovation. And that's going to be the focus, and we will continue to improve our processes, bring in talent, upgrade roles to really build a best-in-class organization.

And your next question comes from the line of Thomas DeBourcy with Nephron Research.

So my main question is really around, I guess, the assessment of Neogen's portfolio overall, which has been ongoing, and I think, has resulted in the divestitures of disinfectants and cleaners and ongoing potential sale of genomics. I think there's been a clear shift -- focus towards food safety, and obviously, lower margin product lines, reevaluating whether those make sense in the portfolio. So I was curious whether that work still continues and whether we could still see additional divestitures beyond obviously, the genomics process that's ongoing?

Yes. Thanks, Tom. Maybe I'll say a few words and then I'll pass it on to Dave. Coming in 2 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. And 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 C&D and the other things that we are planning to do because there's been a lot of work on top of sort 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. And so as we position ourselves for growth, improving our processes, improving our focus, and we anticipate improving end markets in the coming quarters and years, we'll start to see that accelerate. But Dave, I don't know if you want to add a few comments.

Look, I think that's great. And Tom, if we went back 1.5 years 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, and that was kind of our filtering process that we've followed. I think we've been effective here. But it will always be an ongoing thing, right, that we'll continue to look at the current market environment. But I think we like where we're at. And I think Mike said it right, right? I mean I think we've got a really good portfolio, but of course, we're always in kind of portfolio review mode. But I think we did what we said we'd do a few years ago, and we'll see what the coming years hold, but I think we like where we're at.

And we have a follow-up question coming from the line of Subbu Nambi with Guggenheim.

Just a follow-up and clarification and 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?

So Subbu, the back order comment was specific to sample collection, where we had an elevated level of back orders because we had 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 and inventory, that really has more to do with getting the right products, frankly, that have shelf life to the right places and the right amounts. And that goes to the core S&OP process improvement actions that Mike talked about that there's a lot of energy on in the company right now. So just trying to reconcile those two statements.

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

Yes. 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.

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

Good morning, ladies and gentlemen. Welcome to Neogen Corporation Fourth Quarter FY 2025 Earnings Call. [Operator Instructions] This call is being recorded on Tuesday, July 29, 2025. I would now like to turn the conference over to Bill Waelke. Please go ahead.

Thank you for joining us this morning for the discussion of the fourth quarter of our 2025 fiscal year. I'll briefly cover the non-GAAP and forward-looking language before passing the call over to our CEO, John Adent, who will be followed by our CFO and COO, David Naemura. Before the market opened today, we published our fourth quarter results as well as a presentation with both documents available in the Investor Relations section of our website. On our call this morning, we will refer to certain non-GAAP financial measures that we believe are useful in evaluating our performance. Reconciliations of historical non-GAAP financial measures are included in our earnings release and the presentation, Slide 2 of which provides a reminder that our remarks will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act. .

These forward-looking statements are subject to risks that could cause actual results to be materially different from those expressed in or implied by such forward-looking statements. These risks include, among others, matters that we have described in our most recent annual report on Form 10-K and in other filings we make with the SEC. We disclaim any obligation to update these forward-looking statements. I'll now turn things over to John.

Thanks, Bill. Good morning, everyone, and welcome to the earnings call for the fourth quarter of our 2025 fiscal year. You may have seen the press release issued last week announcing that the Board has identified my successor as CEO, and I will be officially stepping down from the role in a couple of weeks. I remain committed to ensuring a smooth transition for our customers and employees and will work with [indiscernible] as he takes the helm of the company that I believe is well positioned to capitalize on the significant potential ahead of it. Now moving on to some color for the quarter. The end market conditions that we saw worsened over the course of the third quarter continued into the fourth quarter, particularly in food safety. With consumers continuing to be under pressure from the cumulative inflation over the last 4 years. We estimate that many food producers are still experiencing year-over-year declines in the production volumes, with many of them not expecting this trend to meaningfully reverse in the near future.

Our view is that the food safety end market is still able to grow in this environment, but certainly not at the mid- to high-single-digit levels we believe it has historically seen. As it relates to the regulatory environment in the U.S. specifically, there have been cuts made at both the USDA and the FDA. To date, these cuts have primarily been in areas outside of normal course food safety testing and impacted things like avian flu testing and milk. The emergency response network focused on bioterrorism and certain local food assistance programs. The USDA and FDA are interacting more with state and local agencies in an effort to improve efficiency and responsiveness and both agencies appear to be fully committed to continuing their mission of food safety.

In fact, in the last 2 weeks, the USDA, Food Safety & Inspection Service, or FSIS, announced our food safety policy plan and separately their fiscal 2025 research priorities. The key tenets of the Food Safety policy plan were announced at the grand opening of the new state-of-the-art USDA facility in St. Louis, Missouri. I won't run through all of them, but the first of these key tenants is enhanced microbiological testing and inspection oversight. USDA is placing particular emphasis on Listeria and detecting results quicker and for a broader set of species. In 2025 so far, the FSIS has increased the volume of samples that is tested for Listeria by over 200%. And uses the Neogen Molecular Detection System, or MDS, as its primary method. It is also performing more robust in-person food safety assessments at an increasing rate, with the intent of proactively identifying and addressing potential food safety concerns and a priority placed on the ready-to-eat meat and poultry facilities.

In 2025, the number of these assessments conducted is up by over 50% to date. Another key tenet of the USDA plan is charging ahead to reduce Salmonella illnesses. In April, the USDA withdrew the previously proposed Salmonella framework that would have extended beyond raw breaded stuff chicken to include all poultry products. This appears to have been done mainly as a result of the practical complications of implementing the framework as proposed and not due to any lack of commitment by the USDA to address Salmonella illnesses. The agency has said they are competing discussions with key stakeholders and the development of a new common sense strategy to address Salmonella. And we view it as a question of when, not if or revised Somonella framework is proposed.

A few days after the food safety policy plan was announced. FSIS released the research priorities for fiscal 2025, in which the prevention, detection and analysis of pathogens particularly Salmonella and Campylobacter are prominent studies, while responsibility for food safety ultimately lies with the producers. And we are not dependent on the regulatory action to drive growth, it is certainly a positive to see this prioritization of food safety and the administration. On the topic of the enhanced focus on microbiological testing, just yesterday, we announced the launch of our Asturia right now for use on our MBS platform for pathogens. MDS utilizes loop-mediated isothermal amplification providing customers the opportunity to use 1 robust platform for the fast detection of environmental pathogens in up to 96 samples per cycle.

The pathogen detection market is 1 of our top priorities and we are continuing to invest in the development of additional assays to ensure customers have access to fast, accurate results in order to minimize the risk of product recall or disposal costs and help keep contaminated products from reaching our customers. In our Animal Safety segment, we believe we continue to work through an environment that is in a cyclical trough. Net farm incomes are expected to improve in 2025. However, the size of the cattle herd on which most of our Animal Safety business is focused, has declined for several years and is currently at a 70-year low. Inventory levels in the channel remained largely stable, but the veterinary distributors and ag retailers through which we go to market seem to be taking a cautious approach given the broader market uncertainty.

For our genomics business in total, fourth quarter core revenue growth improved sequentially and was down low-single digits on a year-over-year basis. Strong core growth in the bovine business was offset by expected declines in companion animal and other markets. We've disclosed that we have a process underway to divest this business, and we have seen a strong level of interest. The process continues to progress, but we won't be commenting beyond that, given the active nature of the project. This portfolio action, in addition to the recently completed cleaners and disinfectants divestiture will help to simplify the business and focus our efforts on core areas while also accelerating our deleveraging.

Although we are currently in a pause as it relates to some of the steeper tariff rates that have been in effect, the uncertainty has persisted with numerous discussions with key U.S. trade partners still underway. Our most recent communication on tariffs was that we expected a $5 million annualized impact on a fully mitigated basis. We have now had an additional 2 months to assess the landscape and believe this impact is likely to be closer to $10 million on an annualized basis given the status of surcharges, competitor actions and the timing of certain resourcing opportunities.

We expect the trade environment to remain dynamic, but plan to continue to take actions to mitigate our exposure. Our new [indiscernible] facility continues to progress well, but our expectation remains that initial testing production will begin in a few months. Once future phone production is fully up and running, our intent is to move some additional product lines that we have in lancing into the new facility, which will affect overhead absorption rates. We've been able to complete this detailed overhead analysis and also refine our buildup of the bill of material and labor costs with the most current information available. This work has validated our previous estimates and suggest that future film gross margins in our facility once fully running, will be slightly better than what we see today on sales of these products made by our transition manufacturing partner.

Future from is clearly an important product line for the company. We made additions to the team and implemented an enhanced governance process to ensure the remainder of the integration is derisked as much as possible. during the eventual gradual transition of production from our transition manufacturing partner to our own facility. We saw improved output of sample collection production during the quarter, which enabled a sequential revenue improvement around 50% in the overall product category, although it remained lower than prior year levels. The challenge with achieving these higher rates is that we were very inefficient in doing so. The production equipment is of an advanced age, and we continue to struggle with sustaining consistent uptime of the automated processes, which is causing us to produce a significant amount of products manually.

Our experience so far in the first quarter has continued to be inconsistent. We are, however, seeing reductions in back orders and hopefully, a more normalized production rate, combined with our engineering efforts, will allow productivity to improve in the coming quarters. Given the softer market backdrop, we are squarely focused on controlling what we can in order to put the company in the best position to capitalize as conditions improve. To that end, you may have seen the targeted improvement plan we released last month. This is effectively the near-term blueprint in place for managing through the current transition period for Neogen. As we mentioned on our prior earnings call, we are undertaking actions to accelerate the building of a more profitable focused Neogen. We believe that rigorously managing these discrete items with a focus on improved execution will maximize the company's ability to take full advantage of its position in attractive end markets. I'll now turn the call over to Dave for some more insights into our results for the quarter and our outlook for the year.

Thank you, John, and welcome to everyone on the call today. Jumping into the results. Our fourth quarter revenues were $225 million. Core revenue, which excludes the impact of foreign currency, acquisitions and discontinued product lines, was down 290 basis points for the quarter, while foreign currency and discontinued products were a headwind of 190 basis points compared to the prior year. At the segment level, revenues in our Food Safety segment were $162 million in the quarter, down 3% compared to the prior year, including a core revenue decline of 1.3%. We saw growth in biosecurity products as well as in the bacterial and general sanitation product category, which benefited from strong growth in pathogen detection products. In the indicated testing, culture media and other product category, solid new product growth in our food quality product line was offset by the decline in sample collection as well as a decline in petri film that was mostly compare driven. Outside of the sample collection issues, Food Safety core revenue was up low-single digits in Q4 and mid-single digits for the full fiscal year. .

Accordingly, revenues in the Animal Safety segment were $64 million, which includes a core revenue decline of 6.7% compared to the prior year quarter. Solid growth in our small animal supplements and rodenticide product lines was offset by declines in the rest of our major products. As we discussed, we believe this end market has been in or around a trough for several quarters now. Excluding genomics, the Animal Safety segment has had core revenue growth at a compound annual rate of 3.5% over the last 4 fiscal years. This is below the typical through-the-cycle growth rate, but about what we would expect but 3 of those 4 years representing periods of weakening market conditions.

Genomics core revenue declined low-single digits in Q4, reflecting a sequential improvement and benefits from refocusing the business on more attractive end market opportunities. From a regional perspective, core revenue growth in the fourth quarter was mixed. Growth was led by our Europe region, up mid-single digits with strong sales of pathogen and food quality products as well as petri film, partially offset by a decline in sample collection. Asia Pacific core revenue was down mid-single digits on a year-over-year basis with solid growth in pathogen detection, offset by declines in most other major product categories with some impact from the global trade uncertainty we've experienced, particularly in China. After several quarters of strong growth, our Latin America region was down mid-single digits on a core basis. with growth in culture media and general microbiology products, offset by declines in general sanitation testing, sample collection and Petri film, which faced a very difficult compare against the prior year quarter.

In our U.S. and Canada region, food safety core revenue improved sequentially to low-single-digit growth. Solid growth in our food quality, allergen and pathogen product categories was partially offset by declines in most other major food safety product categories as well as a decline in the Animal Safety segment. Gross margin in the fourth quarter was 41.2% and which was primarily impacted by lower volume, elevated inventory write-offs, sample collection production inefficiencies and some tariff impact. Given the focus on improving our internal processes around inventory planning, we believe the fourth quarter should be the peak of these costs and that we will see a benefit from these improvements in fiscal 2026.

For sample collection, we've discussed that as part of the integration of the 3M business, we relocated this production to a Neogen facility and have been operating with a very high level of inefficiency. We noted that revenue in Q4, although still down year-over-year, represented a significant sequential improvement from Q3, but was achieved with significant inefficiencies. The elevated level of manual work is causing us to incur cost for expensive temporary labor and excessive scrap rates. We have multiple work streams underway in parallel to address this challenge, including reviewing potential opportunities to involve global manufacturing partners with certain areas of the product line.

We continue to have periods of improvement followed by setbacks and clear line of sight to consistent performance at higher output levels will likely be a gradual progression over the coming quarters. Adjusted EBITDA was $41 million in the quarter, representing a margin of 18%. In addition to lower volume, the adjusted EBITDA margin was negatively impacted by the previously covered inventory write-offs, tariffs and sample collection and efficiencies, a portion of which were not considered start-up costs, but rather run rate inefficiencies. The elevated inventory write-offs negatively impacted adjusted EBITDA margin by a few hundred basis points compared to what we had anticipated.

The tariff impact was driven by some purchases that were in route, particularly from China prior to the current pause going into effect and subject to the higher rates. And there was also some time lag in the implementation of our offsetting actions. Fourth quarter adjusted net income and adjusted earnings per share were $11 million and $0.05, respectively, compared to $22 million and $0.10 in the prior year quarter due primarily to the lower adjusted EBITDA, which more than offset the lower interest expense and effective tax rate. During the fourth quarter, in connection with our annual goodwill valuation assessment, we further impaired the carrying value of goodwill primarily associated with the 3M Food Safety division acquisition.

As we have seen end market conditions weaken, and some impacts from the global trade environment as well as inconsistent execution in our start-up of sample collection production, we determined that a further impairment under U.S. GAAP was warranted and recorded an additional $598 million noncash charge. Moving to the balance sheet. We ended the quarter with gross debt of $900 million, 61% of which is at a fixed rate and a total cash position of $129 million. Just under 2 weeks ago, we completed the divestiture of our cleaners and disinfectants business, which resulted in approximately $115 million in net proceeds that will be used to pay down $100 million of debt in Q1. On a pro forma basis, this would reduce our net leverage by approximately 0.4 turns. Free cash flow in Q4 was roughly breakeven, representing an improvement of $14 million compared to Q3 but lower than we had anticipated due to lower EBITDA, some pull forward of CapEx from fiscal 2026 and the timing of certain international cash taxes.

Total capital expenditures declined to $16 million in Q4, a trend we expect to continue with substantially lower CapEx in fiscal 2026 compared to fiscal 2025. Moving to our outlook. We are not assuming the current end market conditions will improve meaningfully over the course of the fiscal year. The cumulative effect on the consumer from the protracted period of elevated inflation and the related pressure on overall food production are conditions we currently expect to continue through fiscal year '26. Until we see signs that the animal safety market is beginning to meaningfully improve, our expectation is that we will continue to work through the trough of the cycle.

In addition to the underlying market weakness, we see indications that the uncertain global trade environment is having some effect on food producers, import, export planning as well as distributors purchase decisions. Taking these factors into account, our current expectation is for revenue to be between $820 million and $840 million, which excludes 10.5 months of annualized revenue from our cleaners and disinfectants business which was in the low $60 million in fiscal 2025. Our current view is that revenue in the second half of fiscal 2026 will be higher than in the first half due in part to the normal seasonality of the business.

Regarding adjusted EBITDA, our current expectation is a range of $165 million to $175 million, which similarly excludes 10.5 months of an annualized EBITDA impact of approximately $11 million from cleaners and disinfectants. Compared to fiscal 2025, we are planning for gross margin in fiscal 2026 to include a tailwind from lower inventory write-offs and headwinds from sample collection and tariffs, which will flow through to impact adjusted EBITDA. Our work to reduce these headwinds continues, but we believe it is prudent to reflect them in our outlook. Accordingly, we would anticipate higher adjusted EBITDA margins in the second half of the year as we make improvements in these areas and also benefit from the higher expected second half revenue from normal seasonality. Due in part to our expectation of capital expenditures coming down significantly to approximately $50 million, we expect free cash flow in fiscal 2026 will be positive. Finally, I am pleased to share that we have successfully remediated 2 of the Sarbanes-Oxley material weaknesses, which will be reflected in the upcoming filing of our 10-K. I'll now hand the call back to John for some final thoughts.

Thanks, Dave. Before we wrap up today's call, I want to thank you for your engagement and support as the company progresses into the later stages of the integration of the former 3M Food Safety business. While we have made significant progress, the integration has been complex, and we've had some execution shortfalls, which have been exacerbated by the soft end market conditions, foreign currency headwinds and more recently, the global trade environment. We are taking clear steps to address the sample collection production challenges and in parallel, implementing pricing actions to improve the profitability. As it relates to inventory, we are implementing more robust planning and coordination across the key organizational functions and expect to see a decreasing impact from this issue moving forward. At the same time, I want to emphasize that we believe the company is well positioned, particularly in the attractive food safety end market and that our long-term growth drivers remain fully intact.

Our core mission humping to protect the world's food supply has never been more relevant. The global food system is under increasing pressure to be safer, more transparent and more resilient. We believe the regulatory backdrop is favorable, particularly in the U.S. with the USDA having made key announcements this month focused on the priority of food safety. We have a long history as a trusted food safety partner and source of expertise for our customers resulting from our over 40-plus years in the industry. Our commercial teams in combination with our leading product portfolio and innovation opportunities, should be valuable partners for both customers and regulators to maximize the effectiveness of their food safety efforts.

I'd like to once again thank the Neogen team for their dedication and perseverence throughout my tenure at the company. We faced and overcome real challenges, and the team is entirely focused on the road ahead and executing our improvement plan with Precision. I'm excited about the positive future I believe is in store for the company. I'll now turn things over to the operator to begin the Q&A.

[Operator Instructions] And our first question comes from the line of Subu Nambi with Guggenheim.

At this time, with Mike as a new CEO appointment, why is this that are trying to put out guidance and why are these the right numbers? How much students is building.

Look, I think at the end of the day, we still have a position here that we want to give people color as to where the year is going. We tried to take into account that there would be a change. But I think we're operating going forward here like we usually would, and I don't think we've put Mike in a position here where where we've signed them up for something that's out of the ordinary for us. So it's -- I guess I would characterize a little more as business as usual.

And then David and on those lines, you articulated some of the assumptions here. recognizing that you limited the tariff impact of $10 million annualized after supply actions, how much of a headwind is built for next year? .

I'm sorry, can you repeat that part again about the $10 million I didn't quite catch the question, Subha.

The tariff impact that you have sized it to $10 million annualized after the issue, how much of a headwind is built in for next year?

Yes. $10 million is the headwind for fiscal '26 that we're trying to communicate. And we increased that from our previous. Okay. So does that make sense? Did I answer your question? .

Yes, David. Yes, yes. And then I have 2 questions, real quick. I'll -- recognizing there are others on the line. We've seen some of the major food brands continue to emphasize that consumer backdrop is pressure just as you mentioned today, how do you work around that headwind this year? And then what are some of the ways that you've been able to grow above market?

Yes. Look, I think what you see is coming into the year with is a view that kind of carries in the market environment that we experienced in the second half of the year. The sample collection here for us is an opportunity to drive additional volumes, but we're being cautious about that, given the inefficiencies that we've experienced. So I think also -- and I'm going to turn it over to John because we think there's a regulatory backdrop in our portfolio that that provides us a nice opportunity. John, can you speak to that? .

Yes. Thanks, Dave. Yes. So I think a way to help us continue -- help us outgrow the market is to use the tailwind of the regulatory. As we talked about, we saw that testing at FDA was up -- or USDA was up almost 200 -- or FSIS is up 20% increase in Listeria on a pace because the administration is really focusing on pathogen whether that's Listeria or Salmonella. And we think we're really well aligned for that. Regarding Salmonella, we're working kind of with National Chicken Council Meat Institute and FSIS to kind of develop a program and we think that our MDS quant Salmonella serotyping kits are really going to provide the data that is going to help them develop a robust program for this protein industry.

So working with those constituents is going to help us continue to grow.

And 1 last 1 real quick. What are you pointing investors to in terms of clear KPIs in regards to Petri firms, SKU numbers, transition, CapEx targets or just other beyond just timing of these projects? I know you said is going to be the largest impact in terms of duplication cost, but anything else that you would point out when it comes to Petri film transition?

Yes. Thanks, Subu. Clearly, we have a large reduction in capital expenditures year-over-year and we're going to -- we'll stay within that envelope. The -- as we move into the transition period here, we've talked about starting test production that is an important milestone. And then as we proceed through test production, the degree to which we're kind of certifying SKUs for saleable product, there are 17 SKUs of Petri film that will stand up over 4 or 5 quarters after we start test production and that will be an important milestone that we take people through. So I think more to come here in the quarter as we work towards standup. .

And your next question comes from the line of Brandon Vasquez with William Blair.

The first one, I just wanted to focus a little bit on the macro side first and clarify. It sounds like, correct me if I'm wrong, are things getting incrementally worse on a sequential basis on the macro front. Anywhere that you can point to what you think might be causing it getting worse, if I'm understanding that correctly. And then maybe just talk about, historically, we've said even though food volumes from the manufacturers are declining, the food testing segment is still growing somewhere in the mid-single digits. Where do you guys expect that to be over the next 4 quarters, what are you assuming within the guidance?

Yes, Brandon, it's a good question. So I think what we saw kind of rewinding a little bit is as we came through the third quarter, we saw softening of the macro environment as we work through the third. We saw that continue through the fourth. So sequentially, a lower environment. As you know, we developed some internal proxies that we use as an indicator of food production levels, and we saw that decrease sequentially Q3 to Q4. And then, of course, we pay close attention to what some of our larger, broader customers are saying. So we think the environment remains soft, and we're going to see some -- we're going to need to see some recovery in the macro for the consumer to get back to buying more volumes.

As it relates to food safety industry growth, yes, we believe food safety testing grows even when production is negative, but we think it grows at a lower rate. I think if we rewound the year, we felt that was mid-single. It might be lower than that now. It's difficult to tell. We think other than our sample collection issues, we grew low-single in the fourth on our food safety testing side. And we've really, for the year, assumed this kind of environment that we've exited the year is what we're kind of carrying through the year. And until we maybe see something different, given some of the uncertainties out there, including some of the impacts of the global trade environment and related uncertainty, we've kind of planned an environment not too dissimilar than what we experienced during the second half of the year.

Okay. And just to clarify, Dave, on what you just said there, it sounds like from what you can tell, you are growing in line with the food safety market, the food testing market ex sample handling at that low-single digit clip. And for the most part, that's kind of what you're assuming for the rest of the year. Is that the right way to categorize that?

Yes, Brandon, directionally, I think that's right. I mean, if we step back and look for the full year, it would be 5%. So we think we're in that zone.

Okay. And then Dave, maybe you can spend a minute just talking a little bit also about like is there any kind of sequential guidance you can give us, whether it's kind of high level, even on where margins go on a sequential basis through the year. There's just a lot of moving pieces, like when do the tariffs really roll through inventory and meaningfully start impacting you? When does some of the OpEx of the disinfectants business kind of roll off? Anything else in terms of -- when does the inventory management level -- or sorry, not the inventory management, but the inventory write-offs, when do those level off? Like help us think about how we should be modeling the sequentials of margins through the year? .

Okay. So we usually start the year with Q1 as our lowest quarter. And I think a combination of volumes, plus some of the headwinds that we intend to make improvement upon over the course of the year, particularly sample collection, will most impact margins in the first quarter and will improve as the year progresses and that's kind of compounded with a lower volume environment. On the margin side, I think we can point to some of the challenges we saw in the fourth and see some pretty clear path to doing better this year, but we will get a full year of sample handling, which is very inefficient. We have a path to doing better there, but it's going to take a few quarters at least here. So I think we'll see gradual improvement as well. I think all of these things are pointing to kind of directional improvement as the year progresses with some bias from a volume standpoint usually towards the second half, maybe not as large as we've seen in prior years because we've taken cleaners and disinfectants out of the business and that tended to drive a little bit of the seasonality and lumpiness. Does that help directionally Brandon?

Yes, it does. And I'll just ask 1 last 1 and let someone else hop in here. But as we think about -- obviously, you have the disinfectants that you've already announced as a divestiture, we'll have genomics updates later in the year. When these businesses are divested and as we play with our model, it seems like maybe the biggest lever in terms of understanding what the stand-alone company or pro forma margins will be is essentially how much OpEx goes away with those businesses. Is there anything you can share with us in terms of how quickly OpEx goes with those businesses? Will there be some stranded costs that need to come out? Will they take a couple of quarters, any color around that would be helpful, too, and I'll let someone else hop in.

Yes. So as we sell the businesses, the majority of the -- let's talk about cleaners and disinfectants because that's done, the majority of the related costs are direct costs that go directly with the business. There tends to be $1.5 million to $2 million of additional costs that remain behind. We will be delayed in getting those out because we will continue to service under a TSA arrangement for a period of time, probably at least a full year here in the case of this business, and then we'll see some reductions. But again, at maybe $1.5 million or so, not the biggest number, the majority of the costs go directly with the business. So thanks for the questions, Brandon. .

And your next question comes from the line of David Westenberg with Piper Sandler.

John on for Dave. So just first off, could you give any commentary, like any thoughts on the key differences in the management styles between Mike and John, any different priorities. And what we should be looking at for going forward?

Yes. Look, a fair question. But again, let's remember, Mike hasn't started yet. And so I think we'll see getting to know Mike, a little bit. I think very much a back to basics guy. But he'll start here in a few weeks, and we'll get into it. And I think as we do that, we'll be looking forward to kind of meeting you guys and sharing some of this philosophy in the coming quarters.

Got it. And you mentioned the genomics sequential improvement, particularly in bovine, do you see that, that business overall is stabilizing for fiscal '26? And can you give any thoughts on demand in the different species and use cases for it?

Yes. Look, if you recall back in midyear fiscal '25, we talked about a restructuring of that business, trying to refocus it on more attractive cattle end market where we think we're more highly differentiated. And with that, we brought down some of the second half revenue associated with genomics I'd say the top line for genomics will be a little less in fiscal '26 as compared to fiscal '25. And I can't break it down for you by species, but recall that it's predominantly or the majority of the business is focused on the cattle end markets. .

[Operator Instructions] Your next question comes from the line of Thomas DeBourcy with Nephron Research.

Can't hear you Tom, if you're talking.

Could you hear me now?

Yes.

Sorry about that. So just on the Food Safety segment, in terms of the strength that you've seen, I guess, in the food quality pathogen product lines, would you say that you've seen some market share gain or addressing additional kind of unmet need? What has really driven, I guess, maybe the strikes, I guess, in pathogen more specifically?

Sure, Tom. I can start with that. I think, look, we know that pathogens have been a priority for us. We've stated that pathogens have been a priority. And part of that is some of the new launches we've done, right? We've talked a little bit about our MDS quant Salmonella test that we just launched. And then we just did our Listeria right now on the MDS platform. So we're -- we are continuing to invest in the pathogen space. And with those investments, we're saying that we're able to meet some of the needs where we didn't have the product portfolio before that we do now. So we see that as a great opportunity for us to continue to drive growth in that pathogen space.

Got it. And just 1 other question on CapEx. For 2026, I think you mentioned $50 million actually don't -- a little bit lower than I was expecting. So just is part of the divestiture helping or was this kind of in line with maybe expected CapEx step down over the kind of years since the merger?

Tom, I think a combination of things, maybe minimally from the divestiture that we did, but we also did see some CapEx pull forward into '25 million from '26. So that brings it down a few million as well. And look, we're prioritizing the plant and getting that work done, as you know. So what I think you see us here doing is also just kind of focusing on our CapEx on the priority. So it's a pretty good step down for us, as you point out. .

And we have no further questions. At this time, I would like to turn it back to John Adent for closing remarks.

Thank you. Thank you all for joining us. We look forward to helping drive -- I look forward to helping drive a smooth transition to Mike. We talked about -- I will be here through the end of October and working with him. And really see great opportunities for Neogen in the future and excited to watch the growth of this company. So thank you very much. .

Thank you, presenters. And ladies and gentlemen, this concludes today's conference call. Thank you all for joining. You may now disconnect.