Neogen Corporation Stock

Hello, everyone. Thank you for joining us, and welcome to the Neogen 4Q '26 Earnings Call. [Operator Instructions] I will now hand the conference over to Scott Gleason. Scott, please go ahead.

Thank you for joining us this morning to discuss our fiscal fourth quarter and full year 2026 results. I will briefly cover our non-GAAP and forward-looking disclosures before turning the call over to our CEO, Mike Nassif; our CFO, Bryan Riggsbee; and our CCO, Joe Freels.

Earlier this morning, we issued our fourth quarter and full year results and accompanying presentation, both of which are available on the Investor Relations section of our website. During today's call, we will reference certain non-GAAP financial measures that we believe provide useful insight into our performance. Reconciliations of historical non-GAAP measures are included in our earnings release and presentation. Please also refer to Slide 2 of the presentation, which contains reminders regarding forward-looking statements under the Private Securities Litigation Reform Act. These statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied. These risks are described in our most recent annual report on Form 10-K and in other filings with the SEC. We undertake no obligation to update these forward-looking statements.

With that, I'm pleased to turn the call over to Mike.

Thank you, Scott. Good morning, and thank you for joining us. We operate in a highly attractive market, supported by strong growth drivers. Customers increasingly require a true industry leader who can innovate and solve complex challenges. Food safety and security are critical and growing global priorities, and we believe Neogen is uniquely positioned to lead this industry. We closed fiscal year '26 on a strong note. Core growth improved sequentially across both our Food Safety and Animal Safety business units in the fourth quarter. Our fiscal 2027 financial guidance reflects a measured outlook consistent with our historical approach. While my confidence in the trajectory of our business entering the year is high, we believe our macro fundamental backdrop is improving.

We have restored our product portfolio and significant progress is underway in enhancing our commercial operations. We exceeded our adjusted EBITDA guidance for the year. At the same time, we are intentionally investing in Neogen's future, and this will remain a key theme through fiscal year 2027. We're funding innovation, technology solutions, enterprise systems and marketing capabilities that are designed to meaningfully enhance the company's long-term growth trajectory. We're prioritizing these investments to position Neogen to win while also driving profitable growth.

I would also highlight that Food Safety core growth reached 5.8% in the quarter, the highest level since 2023, going back to the period immediately following the 3M acquisition. In addition, our Animal Safety team successfully resolved the majority of the global supply issues, returned to a year-over-year positive core growth and saw a 7% sequential growth from the third quarter. I'm proud of our teams and want to thank our employees for their dedication to our mission and the effort that made this progress possible. This is a real turnaround from the negative core growth in fiscal year 2025, and we're just getting started.

Our ambition is clear: build Neogen into the undisputed global food safety category leader. To accomplish this, we are focused on 3 major strategic initiatives. First, commercial prowess. You'll hear from our Chief Commercial Officer, Joe Freels, on how we're enhancing our capabilities and building a best-in-class global commercial organization in the food safety channel. Our teams are moving decisively from a defensive posture to offense with increased focus on share gain. This includes enhanced targeting and customer segmentation through our new go-to-market strategy, a shift towards selling solutions rather than products and deeper, more strategic engagement with our most important global customers to partner in ways we haven't in the past.

Second, high-impact innovation. Our largest area of investment for fiscal year '27 will be in our research and development team led by our Chief Scientific Officer, Jeremy Yarwood. Beyond our previously announced Petrifilm line expansion, we're evaluating technology licensing deals to further solidify our market-leading position and solve customer pain points. Additionally, we have teams working on next-generation platforms in our most critical markets. Our R&D efforts are fully anchored in customer needs, focus on developing solutions that directly address their most pressing challenges while clearly differentiating Neogen from our competition.

And finally, operational efficiency. We're simplifying and fortifying our processes. As we look ahead to fiscal '27, our investments in innovation, technology and commercial capabilities will be largely funded through disciplined cost management and enhanced operational efficiency across the organization. We have clear plans in place to aggressively address key areas of value leakage, including inventory write-offs, sample collection margins, purchase price variance, our global supplier network and pricing execution. Ultimately, these initiatives will drive profitable growth as we reinvest in the business. At the same time, our Petrifilm manufacturing transition remains on track to manufacture sellable product and begin a planned multi-quarter manufacturing transition beginning in November 2026.

We're close to completing full validation of our first Petrifilm SKU, which we expect to complete in August, a major milestone for the company. In parallel, we will be making a series of targeted transformation investments aimed at increasing productivity across the organization. These initiatives are expected to deliver strong returns on invested capital. They're critical to achieve our long-term objective of approximately 30% adjusted EBITDA margins.

I've been very impressed with how our commercial teams have risen to the challenge and how they are accelerating and scaling our execution. Our Chief Commercial Officer, Joe Freels, is here to share how we are building a world-class commercial engine.

Thanks, Mike. It's truly an honor to lead the commercial organization at Neogen at this pivotal time. We believe we have significant competitive advantages in quality of our products, the breadth of our portfolio and the strength of our technical expertise. We're confident in our right to win in the global food safety market and the actions we're taking will position us to strengthen and expand our leadership across key channels.

I'll begin by emphasizing that the 6% core growth we delivered during the fourth quarter in food safety doesn't happen in a vacuum, but is rather the early evidence of a meaningful cultural transformation across our commercial organization. This transformation is reshaping how we approach the market, how we compete, how we define and measure success, how we hold ourselves accountable and ultimately, how we win. Our ambition is clear, building a market-leading position in the food safety industry as the category leader. We believe the path to achieve that is to serve our customers better than anyone else, delivering best-in-class solutions that meet their needs and having a world-class team to communicate our value proposition.

Let me walk you through how we're executing against this at a tactical level. First, we are repositioning our commercial organization to align more closely with our new go-to-market strategy, optimizing how we deploy resources across geographies, customer segments and product lines. As part of this effort, we are reallocating investments toward the highest impact markets, product lines and customer segments that will best support our long-term growth objectives. Entering the year, we have identified a focused set of 14 priority countries where we believe we can drive the greatest returns. We're also bringing greater discipline to customer segmentation. Historically, our account base has been highly fragmented with a long tail of thousands of ordering customers globally and limited strategic prioritization.

Going forward, we will concentrate our direct commercial efforts on high-value accounts where we can drive meaningful share gains while simultaneously enhancing our ability to serve the broader customer base through technology-enabled solutions. In fiscal '27, we will invest in e-commerce and customer service automation capabilities, which we believe will significantly expand our reach across this long tail. Today, approximately 40% of food safety revenue flows through e-commerce. However, that volume is concentrated among larger accounts due to current platform limitations. We see a clear opportunity to broaden access and increase penetration over time, expanding the reach of our teams.

In parallel, we've made the deliberate decision to transition certain markets to distribution partners or exit where we lack sufficient scale. This allows us to deliver a high level of service and focus our resources in regions where we can achieve meaningful competitive advantage. From a customer engagement perspective, we're fundamentally shifting how we approach key accounts. In the past, we've operated at the site or plant level, which has limited our ability to sell enterprise-wide solutions and has created inefficiencies in our commercial model. To address this, we are establishing a dedicated strategic account function designed to engage with senior decision-makers. This will enable us to more effectively position the full breadth of our solutions, including our Neogen analytics platform and support broader enterprise-wide implementation programs. We're already seeing encouraging early results from this approach and look forward to discussing the impact in greater detail at our Investor Day this fall.

For the first time in years, we're entering fiscal '27 with a restored product portfolio. Through the efforts of our R&D, manufacturing and supply chain teams, we have resolved prior supply and quality challenges and significantly improved service levels. This progress is reflected in a meaningful improvement in our full and on-time delivery performance over the course of the year. With these operational improvements in place, we believe we are now well positioned to take more aggressive actions focused on share gains. We're also rolling out a global solutions-based sales operating model. This represents a shift away from a product-centric approach toward a more integrated offering of solutions, services and technology. We believe this will drive increased product utilization, deepen customer relationships and create higher barriers to entry from a competitive standpoint while also eliminating siloed selling behaviors.

Additionally, we have developed segment-specific strategic frameworks focused on the unique needs of key food production segments such as protein. Each of these segments has distinct operational and regulatory requirements, and this approach will enable our commercial teams to deliver more targeted and relevant solutions to our customers. To drive accountability and measure progress, we're building a culture of operational rigor and discipline. Key metrics we evaluate include funnel building, funnel wins and a focus on share gains. We believe this accountability-based approach is critical to drive long-term success.

Last week, I had the privilege of attending our first global sales meeting in years. We were able to unite our reps and leaders from across the globe as we work to roll out the major initiatives I've described. I can say without a doubt, our teams are fired up. We are more unified in our message and purpose than ever before, and we're ready to deliver.

So with that, I'll turn it back over to you, Mike.

Thanks, Joe. We'll now turn to our focus on innovation. We're stepping up our commitment to innovation as we enter fiscal year '27. We plan to increase R&D investment by about 50% next year and intend to continue scaling R&D at an accelerated pace with a long-term objective of approaching 5% of revenue. We believe these investments will deliver attractive returns on invested capital. They are focused on differentiated industry-leading technologies that support our ambition to increase market leadership across our food safety channel. We're also evaluating technology licensing opportunities. This is an important evolution in how we innovate. We're looking to bring differentiated technologies to solve real-world customer challenges.

Given the pace of innovation in adjacent markets such as human health care, we believe licensing offers a highly efficient and cost-effective way to accelerate technology adoption within food safety. We're making real progress to expand our product platforms. At our Oakdale, Minnesota facility, we're standing up our new Petrifilm innovation line. All capital equipment is ordered, and we expect the line to be fully operational later this fiscal year. At that point, we will begin validating a pipeline of new SKUs targeting meaningful market opportunities. In parallel, we're evaluating partnership and co-development opportunities to further accelerate investment and broaden the scope of innovation within this platform. We believe we will soon have the capability to deliver on 2 new Petrifilm SKUs per year.

Beyond product innovation, we're investing in our digital ecosystem. We're enhancing our Neogen analytics platform to improve connectivity, deliver more actionable insights to customers and build a scalable data architecture. Over time, we believe this data strategy can create meaningful network effects that strengthen our value proposition and deepen customer engagement. We now have teams assessing next-generation platforms for core markets like pathogen detection and general sanitation. Ultimately, our goal is to have differentiated market-leading solutions that match customer needs across all product lines.

Now our organic development cycles run 18 to 24 months from concept to commercialization. So we expect these investments to meaningfully contribute to revenue growth starting in fiscal year '29 and beyond. We believe as we ramp up our R&D spending, we will be able to support 2 new Petrifilm SKU launches and up to 5 innovation projects simultaneously. We look forward to providing additional details on our innovation strategy at our Investor Day this fall.

Now I want to highlight our ongoing efforts to drive operational efficiency, including the progress we are making on the Petrifilm manufacturing transition. We're on track to manufacture sellable product and begin our planned multi-quarter manufacturing transition beginning in November of 2026. We also anticipate having our first fully validated SKU in August, a major milestone demonstrating the capability our teams have built. To date, we haven't encountered any major problems in the validation process. This is a reflection of the rigor and quality of the planning and execution led by our operations and engineering teams.

We're making real progress in inventory management as we build our more integrated enterprise-wide supply chain. Since launching our first sales and operations planning process known as S&OP earlier this year, we're already seeing results. This includes a reduction in actual inventory of more than $36 million year-over-year. Despite our reduction in inventory levels, on-time and full rate, which measures the percentage of time we fulfill an order completely and on time has improved 40% since we initiated our S&OP process. This metric is critical as we rebuild customer trust and look to drive share gain. This progress is very encouraging, and we're still focused on further opportunities to enhance efficiency by strengthening vendor qualification processes, rationalizing our global logistics and supply footprint, executing on PPV savings initiatives and reducing inventory waste.

Looking ahead to fiscal '27, our teams are actively driving initiatives to improve profitability and reduce cost. Key areas of focus include reducing inventory write-downs, improving purchase price variance through more disciplined supply chain management, optimizing pricing and contracting strategies and enhancing margins with our sample collection business. Together, we expect these initiatives to generate meaningful savings that help fund our ongoing investments in innovation and commercial growth.

We're also advancing technology and enterprise capability upgrades to improve efficiency and scalability. Last quarter, we completed a comprehensive technology and systems assessment to identify key gaps. Examples of this work include our AI-enabled John Gul demand planning software and our automation initiatives for key finance processes. Based on this work, we plan to invest in transformation initiatives in fiscal year '27. We expect these investments to deliver highly attractive returns and significantly improve our long-term cost structure, exceeding the returns of our internal capital deployment opportunities. These upgrades strengthen core capabilities across our commercial organization, supply chain and logistics and corporate functions.

Over time, we believe they will enable us to scale the business efficiently with limited incremental headcount, driving improvements in revenue per FTE and overall margin profile. Finally, experience tells us that the key enabler to success of any transformation is the commitment of the team and the strength of the culture, and we are seeing meaningful progress. As part of our efforts, we're hosting regular company-wide listening sessions and tracking our progress through frequent engagement surveys. Encouragingly, the percentage of employees who believe our transformation is working increased meaningfully with double-digit improvements in metrics on communication, transparency and leadership responsiveness. We are committed to building on this momentum.

I am exceptionally proud of the progress our team has made and the foundation we're building. As we move into fiscal year '27, we're entering the next phase of our transformation, one where we expect to operate and execute at a meaningfully higher level. And now I'll turn the call over to Bryan.

Thank you, Mike, and thanks to all of you participating in this call today. I'm pleased to provide an overview of our financial results and outlook for fiscal year '27. We delivered fourth quarter revenue of $225.3 million, representing a 4.3% increase on a core basis by far our highest growth rate of the fiscal year. As Mike noted, we saw accelerated core growth in our Food Safety segment, reaching the highest level since 2023 and a sequential improvement in our Animal Safety segment following the resolution of the majority of our supply headwinds. At the segment level, our Food Safety business delivered $166.8 million in revenue for the quarter, representing 5.8% core growth.

Performance was led by continued strength in our indicator testing and culture media products, which were up 9% and strong growth in our bacteria and general sanitation products, which grew 10%. We're carrying a significant amount of operating momentum into fiscal year '27, and we believe the commercial changes being implemented will further strengthen our commercial execution. We've also been reassured by commentary from food producers on recent earnings calls who have noted improving industry volume trends. Based on our analysis of public companies, volume growth turned positive in the first calendar quarter of 2026 after being flat in the fourth quarter and down for most of calendar year 2025. Despite positive commentary, many of our customers are still facing inflationary cost pressures as a result of the Iran war.

Consequently, while we welcome the positive news, we maintain a tempered view on the impact it will have on our near-term trends. The other macro drivers of our industry remain robust. Calendar year 2025 was an 8-year peak in the number of food safety recalls and the volume of food recall. We also saw broad food safety reform regulations in China in 2025, similar to the end-to-end system control implemented as part of the Food Safety Modernization Act, which became law in the U.S. in 2011. Furthermore, food safety litigation and class action lawsuits have increased 50% over the last 5 years, increasing the cost of recalls and poor compliance.

Our Animal Safety business saw a significant recovery in the fourth quarter and grew 0.5% on a core basis year-over-year. Total revenue increased 7% sequentially as we resolved the majority of our supply-related challenges. From a macro perspective, we are seeing 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. Our competitors have seen strong production animal growth and USDA is anticipating modest improvements in U.S. herd sizes in coming years based upon meat prices supporting investment from ranchers.

I am also proud of the work that our Animal Safety team has been doing to help address the new World screwworm outbreak. We have 2 new topical aerosol products that have received authorization for sale in Texas, and we are also able to sell these products in Florida. We would note that the path of the outbreak is unclear and other recent outbreaks have had limited scope. Consequently, from a product perspective, we anticipate a modest contribution in the first quarter of '27 and are closely monitoring the situation. From a regional perspective, U.S. revenue was 49% of total sales in the quarter, and our international revenue was 51%. As anticipated, the positive impact of currency slowed in the quarter following the strengthening of the dollar index. We saw double-digit growth in our LatAm business unit and food safety growth in every global division in the quarter.

Gross margin in the fourth quarter was 47.8% and adjusted gross margin was 49.7%, which improved 330 basis points year-over-year. We did see some impact in the quarter due to higher freight and material costs due to cost pressures we noted on the last call. Additionally, sample collection margin losses narrowed to their lowest point of the year in the fourth quarter and showed strong sequential improvement. We continue to have plans in place to drive further efficiency and plan to roll out our new automation line in fiscal year 2028, which will lead to a step function improvement in sample collection margins. Adjusted operating expenses in the quarter increased by approximately $3 million on a year-over-year basis. The biggest factor driving the increase was a $6 million impact on a year-over-year basis for bonus accrual due to the lower level of cash bonuses in fiscal year '25, driven by poor company performance.

In the absence of these changes, operating expenses would have declined on a year-over-year basis. We also saw the impact of higher salaries and benefits on a sequential basis due to recent executive hires and as we began investment for fiscal year '27. Adjusted EBITDA was $45.4 million in the quarter, representing a margin of 20.2% and growth of 12% year-over-year. Fourth quarter adjusted net income and adjusted earnings per share were $18.7 million and $0.09, respectively. Importantly, cash flow from operations was over $30 million in the quarter, our highest level of the fiscal year and free cash flow was over $26 million. Cash flow benefited from improvements in working capital, but also due to the timing of interest payments on our debt.

Turning to the balance sheet. We closed the quarter with approximately $794 million of gross debt and a total cash balance of $185.5 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. We took advantage of our growing cash balances to pay down $20 million of our term loan in late June. We're also evaluating treasury opportunities to free up global cash to lower our required cash balances to operate the business and support further debt repayment.

As previously stated, the closing of the divestiture of the Genomics business unit is subject to certain regulatory approvals and customary closing conditions. The only outstanding regulatory approvals are those from the Australian Competition Authority and the New Zealand Competition Authority. Both agencies have moved their review of the transaction into the second phase, and we continue to work with Zoetis towards closing on the time line as previously announced, which is by the end of the first half of fiscal year '27. We intend to use the $140 million in net proceeds following transaction costs and taxes to also pay down debt and to invest in the business. As previously stated, we believe this would put us on track to end the calendar year below 3x net leverage and end fiscal year 2027 close to our target net leverage range of 2.5x.

Now I'd like to discuss our guidance for fiscal year '27. We are guiding toward total fiscal year '27 revenue of $880 million to $885 million and adjusted EBITDA of $180 million to $182 million. Let me discuss some of the assumptions underlying this guidance. First, the guidance includes an assumption of approximately $92 million of revenue and $13 million in adjusted EBITDA from our genomics business. This is in line with the financials for genomics from fiscal year 2026. We plan to update the full year guidance following the closing of the Genomics transaction. From a growth perspective, the guidance implies core growth of approximately 3%. As a reminder, Q1 of fiscal year '26 revenue included approximately $6 million of revenue from our cleaners and disinfectants business. Additionally, we are assuming a negative 1% impact from currency in fiscal year '27 based upon current rates.

On an adjusted EBITDA basis, our guidance implies an adjusted EBITDA margin of 20.5% at the midpoint of our guidance range, implying slight margin expansion relative to fiscal year '26. We intend to invest in our business in 2027 with R&D spending increasing 50% and targeted investments in our commercial infrastructure to support higher long-term growth. However, as implied by our guidance, despite these investments, we still believe we will be able to expand adjusted EBITDA margins by improvements in areas such as inventory write-downs, purchase price variance, our pricing strategy and other operational efficiency programs.

As Mike previously highlighted, we're also anticipating continued investment in transformation initiatives to improve our enterprise capabilities and deploy technology solutions and automation across the organization. The total amount anticipated for transformation initiatives is $25 million in fiscal year '27 compared to approximately $22 million in fiscal year '26 -- and consistent with fiscal year '26, we will exclude these costs from our adjusted financials in order to allow for better visibility to the underlying operating performance of the business. We believe these investments will have an exceptionally high ROIC and support improvements to our earnings and cash flow over time. Despite these investments, we anticipate that both our GAAP cash flow from operations and our free cash flow will increase meaningfully on a year-over-year basis.

In addition to our full year outlook, I'd like to provide additional guidance for our first quarter. We're guiding toward first quarter '27 revenue of $207 million to $209 million and adjusted EBITDA of approximately $37 million. In addition to typical business seasonality, Q1 '27 will reflect the impact of the incremental business investments we discussed earlier on the call, such as our global sales meeting. We expect that both revenue growth and EBITDA margins will improve throughout the year as we leverage our incremental investments and execute on key sales and operational efficiency initiatives. We ended the year with significant business momentum. Our guidance reflects our philosophy of setting targets as we focus on restoring investor credibility.

I'll now hand the call back to Mike for some final thoughts.

Thanks, Bryan. Our ambition is clear: to build a company that will lead the food safety industry grow consistently above market and deliver industry-leading profitability. Fiscal year '26 was all about stabilization and foundation building. In fiscal year '27, the focus will be on accelerating profitable growth as we become experts in the fundamentals at scale. We expect the operational progress and investments we make this year to position Neogen for even stronger future growth.

And with that, I'll now turn things over to the operator to begin the Q&A.

[Operator Instructions] Your first question comes from the line of Subbu Nambi from Guggenheim.

Congratulations on delivering a great quarter on food safety growth. I completely get your focus on growth, but I do want to touch on the EBITDA guide. The EBITDA guide ex genomics came in a bit below where the Street was. Can you walk through the assumption for the underlying business apples-to-apples and why there may not be as much EBITDA expansion this year despite a stellar growth?

Yes. Thanks, Subbu, for the question. You're looking at the year-over-year number, full year '27 versus full year '26. I think on a year-over-year basis, it's roughly flat, so slightly up on a year-over-year basis, and it's really driven by, as we highlighted earlier, some of the additional investments that we'll be making through the course of the year. We just will not see the type of expansion in fiscal year '27, really sort of driven by some of the investments that we're making in the business. I think that would be, Mike, anything to add?

No. I mean also with regards to our guide, I think that -- we just recall, we finished '26 at 1.9% growth. We have a fairly new management team. Joe outlined all the work we're doing to enhance commercial organization. It's important to note that our fiscal '27 guide is $30 million above Street consensus. And most importantly, Bryan and I, as we've discussed before, are very much focused on rebuilding the credibility of Neogen and meeting and/or exceeding its commitments to investors.

Yes. And Subbu, maybe just to clarify, I think you're the only analyst that didn't include genomics for the full year in your number for next year. All the other analysts did. And so when you look at the actual consensus, if you adjust it for that, it would increase it slightly, but we're still well above where consensus was for the year.

On an absolute dollar basis. And the other comment I would just make is that the numbers that we talked about, although we haven't really broken things out discretely in the past, that the top line and bottom line for genomics are roughly flat on a year-over-year basis just in terms of how you might model that.

Thank you for clarifying that. And Mike, it's not lost on us that the company is now a very different company from a year ago, and the future looks very bright. As we look into '27 guide, what is the split between core FS and -- Food Safety versus Animal Safety in the guide? And could you also walk us through the cadence of each relative to where you exited 4Q from a core growth perspective?

Yes. I mean we haven't broken out Food Safety and Animal Safety, but I think the color that I would provide is that if you look at the assumption for next year, we're guiding to core growth of about 3% -- that includes -- when you get to the absolute number, there's about a 50 basis point headwind from the divestitures that we had in Q1 of fiscal '26, we had the C&D business. We won't have that in the current year. And then there's about 100 basis points headwind from foreign exchange on a year-over-year basis. So those are the 2 things. That's the reconciliation between core growth of 3% and a top line guidance of about 1.5%. Is that what you were looking for?

Bryan, so would it be fair to assume Food Safety roughly 3% and Animal Safety roughly 50 bps? Would that be far off from what you're assuming? I know you're not providing a split, but just like a guidepost.

Yes. Subbu, we're not giving specific guidance for each of the segments. As we look to next year, as we talked about on the call, we are seeing an improving macro fundamental backdrop for the Animal Safety business. So I don't think it's necessarily safe to assume that the growth rates will be the same for next year. And so that -- but we're not providing segment-specific guidance.

I think the only thing I would add is just that Food Safety grows faster than Animal Safety. So as you think about the average of 3% core growth, you'd have Food Safety above that and Animal Safety below that.

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

So we got asked some of the tougher questions, so I don't want to take it away from the fact that you had a great quarter and doing a great job here. But let's just maybe get into the Q1 EBITDA guide. Are you already starting some of the investments already into Q1? I'm just -- I did notice that the EBITDA guide for Q1 is a little bit below Street. And saying that, do you think net of these investments, you really are seeing some of that good operating leverage? And again, we just kind of wanted to kind of see where we're at from this place from a very clear standpoint and then kind of assess how much the new investments are kind of making the return. So anyway.

Thanks, Dave. Yes. I think the challenge with the looking quarter-to-quarter, quite frankly, is just that the business moves around through the year. So when you look at Q1, it's a seasonally weaker quarter. If you look at it on a year-over-year basis, it's up 80 basis points as compared to the same fiscal quarter last year. We are starting some of the investments, but I don't know that I would characterize that as a real -- as what's impacting the sequential view of the EBITDA. It's more just the seasonality of the business. We are seeing real operating leverage and improvement in the process.

And a lot of this might come at Investor Day. So sorry for getting ahead of it here. But as we think about the reorg and e-commerce and all some of that kind of stuff that you're doing here, do you see this as an opportunity to get ahead of competitors? Or do you think this is kind of maybe a catch-up to where the kind of competitors are already at?

Yes, Joe, do you want to take that?

Yes. So thanks for that question, David. When we think about how we're structuring ourselves, I would think about it more of just realigning resources where we believe we can deliver the greatest return, while at the same time, investing in some back-office infrastructure that allows us to expand our reach. So when we talk about things like e-commerce, ensuring that we just become a little more easy to do business with for our customers from a self-serve perspective, particularly as you get toward the greater number of smaller customers. So we feel like we're well positioned to carry our growth and accelerate throughout the future.

I would just add, I think there are some areas, obviously, where we have capability that should have been there. And so we've got some catch-up -- a little bit of catch-up to do. But I would say that a lot of what we're talking about here is -- and the way we think about it is we're going to be the leader in this space. And so what are the investments and the capabilities that we need to have in place in order to really drive that and not concern ourselves so much with where the competition is, but we set the market.

Yes. Well said, Bryan. I think the other 2 things as category leaders, which we're very much focused on, and we've discussed a lot as a team, there's 2 other areas where Joe and team are definitely going to be focused on in '27. I believe we brought this up before, but really a much bigger focus on strategic accounts. And so we've talked about very much Neogen would look at strategic accounts at the plant level, at the local level. We're changing that completely -- we're going more top to top now with a very clear list of those strategic accounts and partnerships. I think the second change in how we're thinking about the market is Neogen historically very much looked at product by product.

And we believe that as the category leader with the greatest portfolio in food safety, we have the opportunity to deliver solutions to our customers, which means that we are switching our go-to-market from product to segment level. When you do that, you open up much bigger opportunities to solve your customer problems. So those are all things that we're also putting into place.

I'll stop there. I'm looking forward to asking more of these on the Investor Day in the fall.

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

Congratulations on the quarter and the outlook. So I want to start with Petrifilm. Obviously, some exciting progress there with first SKU to be fully validated, I guess, by the end of next month or almost in August. Could you talk a little bit more about the kind of P&L impact as we go through the product transfer, I mean, I guess, higher D&A, lower labor costs, maybe higher margins. I don't know, give us a sense of the product transfer over the next -- I guess, over the next year, right? And how that's going to roll out, impact the P&L and what you're looking at to continue to be on track for that.

Yes. Thanks, Bob. And I'll just kind of speak to the thinking around the transition and then Bryan can help discuss the financial impact. So I think as we said in our earnings statement, we're making very good progress against our plan. We're very excited about the new -- the first SKU to be fully validated. That's one of the most complicated ones to actually manufacture. And I think it speaks to the team and our capabilities, and we see it as a major derisking event for this entire program, which I think is really important to call out. Something like this, with this complexity and scale naturally is going to require a multi-quarter transition. So this is pretty much standard practice for large transfers like this. And so we're looking at a lot of things as we make certain decisions.

So you think about product readiness, you talk about managing inventory levels, minimizing write-offs, coordinating with suppliers, ensuring uninterrupted supply. So all of those things happening across 17 SKUs -- it's quite complex, but we feel like we have a very solid plan in place as we start up this transition. So maybe as we do that, maybe, Bryan, you can shed some light on that.

Yes. I think with respect to the margin profile, certainly, as we go through the year, we'll expect to have less duplicative costs over time as we complete the transition. We talked about 200 to 300 basis points of gross margin expansion as we fully ramp up the line. I would expect that we would start to see that benefit coming online in the following fiscal year. So probably because it will take us through the course of the year to complete the transition, and then we would start to see the benefit as we optimize through FY '28. And then beyond that, we would expect to see that significant margin contribution. That's kind of the way I would think about the -- how it plays out over time.

Really exciting, and it's great to be continued on track and getting close to the transfer itself. And then for my follow-up, Mike, did you say R&D -- I mean, obviously, increasing 50% or so this year, but like with a goal of 5% of sales because I think you're at like 2% and change right now. So obviously, that's a multiyear goal, but that's a significant increase. And maybe just kind of dig in on that a little bit more and the areas of focus.

Yes, absolutely. So last year, we were around 2%. We're increasing 50%. In the beginning, when I joined this organization, I've been very open about the huge innovation opportunity that we have with this business. And we haven't -- Neogen has not historically invested a lot in organic innovation and really driving some of these market-leading portfolios. And so we feel that we have significant opportunity when it comes to Petrifilm pathogens, general sanitation. And in fact, a lot of our investments that we are making this year are really focused on building that early innovation discovery engine, so making sure that we get the funnel in place, working with customers, identifying the needs.

We're also looking at digital and instrumentation. So digital connectivity data is becoming very, very important with traceability and what have you. And then the last one is to really accelerate things around Petrifilm, for example, we're investing in molecular microbiology resources. And just to go back to Petrifilm. I think I've shared before that one of the untapped opportunities we have with our new manufacturing site in Lansing is that it is able to produce multiples of our current demand. And the opportunity we have in front of us is that historically, Neogen has not been able to innovate on Petrifilm because it's been difficult to work with our suppliers to get line time and all those types of things. This is very normal. And so last quarter, we leaned in, and I shared that we went ahead and invested in a pilot line. It's a small coder line that we're putting in our Oakdale facility to accelerate innovation on Petrifilm. So that one is paid for. It's being installed. By the end of this year, we'll start to run product through it.

And as the manufacturing site and Lansing stands up, the transition time, we're talking about a few months to take a product that's been validated on the pilot line to full scalability. And this is where we really believe that this investment, the pilot line and the investment that we're making this year enables us to launch 2 new Petrifilm SKUs per year and have at a minimum 5 in the hopper that we are working on. So this is just within Petrifilm. But you think about pathogens and other parts of our portfolio, there is a lot of opportunity there through either organic or licensing technologies. So we'll share a lot more with a bit more granularity on our thinking at Investor Day. I don't want to give you all the things now because I want you to come and be excited to hear from us. So more to come on that. But that's sort of the direction and the opportunity we have in front of.

And maybe the only thing I would add, Mike, is just -- and maybe as a follow-up to Subbu's question earlier around the margins is just the fact that we can't wait to make these investments 2 years, 3 years from now if we want to see the benefit. So we're making the investment in R&D at the same time that we're working on initiatives to lower costs in other areas of the business. So there's a bit of a transition here where we're bringing forward some of these investments before we actually see the benefit from some of the operating efficiencies that we'll see in areas like finance and other areas where we can get more automated. So that's probably a way to think about the margin impact. We're trying to manage it all at the same time that over time, we think we have the opportunity to get to 30%. We just want to change the mix of where we spend dollars.

That's a very good add, Bryan. I think the other thing to note is as we're thinking about innovation, we can't wait until we feel ready to do innovation because the innovation cycle on some of these products is 18 to 24 months, maybe some 36 if it's not instrument. So in order for us to really realize any new product introduction in, let's say, late 2029, we have to start now. And given the balance of short term and long term, this is how we're thinking about and this is how we're allocating the investment.

I'm already excited, but I'll be even more excited for the Analyst Day.

We have reached the end of the Q&A session. I will now pass the call back to Scott Gleason for closing remarks.

Yes. We want to thank everybody for joining us today. Please feel free to reach out with any questions, and that's the end of our call.

This concludes today's call. Thank you for attending. You may now disconnect.

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.