Neogen Earnings Call Marks Early Turnaround Momentum

Neogen ((NEOG)) has held its Q2 earnings call. Read on for the main highlights of the call.

Neogen Earnings Call Signals Turn in Momentum Amid Ongoing Headwinds

Neogen’s latest earnings call struck a cautiously optimistic tone, highlighting a clear turn back to positive core revenue growth, improved margins, and tighter cost discipline after several challenging quarters. Management emphasized that operational execution is beginning to translate into better profitability and cash generation, even as the company continues to navigate weak food production volumes, pressure in animal safety markets, and a still-sizeable debt load. The overall sentiment was one of early but tangible progress, balanced by realistic acknowledgment of the work still ahead.

Return to Positive Core Revenue Growth

Neogen reported total second-quarter revenue of $224.7 million, with core revenue up 2.9%. Foreign exchange added 0.9 percentage points, while divestitures and discontinued products shaved 6.6 percentage points off reported growth, underscoring that the underlying business is performing better than the headline number suggests. This return to positive core growth marks a key turning point for the company, suggesting that demand is stabilizing despite ongoing macroeconomic pressure in key end markets.

Food Safety Segment Strength

The Food Safety segment was a standout, delivering $165.6 million in revenue and core growth of 4.1%. Growth was driven by indicator testing, culture media, and sample collection, with Petrifilm returning to high-single-digit growth. Given Food Safety’s strategic importance and higher-margin profile, the segment’s performance is particularly encouraging and indicates that Neogen is successfully capitalizing on demand for testing and monitoring solutions in the global food supply chain.

Genomics and Regional Performance

Global genomics delivered 6% core revenue growth, an acceleration that helped offset weakness in some traditional animal safety categories. Regionally, Latin America led with high-single-digit core growth, followed by mid-single-digit gains in the U.S. and Canada, low-single-digit improvements in Asia-Pacific, and a slight low-single-digit decline in EMEA. This mixed geographic picture reflects both uneven economic conditions and differing trends in food and animal production across markets, but overall points to broad-based resilience.

Margin and Profitability Improvement

Profitability improved sharply in the quarter. Adjusted EBITDA reached $48.7 million, representing a 21.7% margin and a sequential expansion of roughly 470 basis points. Adjusted net income jumped to $22.6 million and adjusted EPS rose to $0.10, up from $9.4 million and $0.04, respectively, in the prior quarter—an increase of about 140% in adjusted net income and 150% in EPS. These gains underline the impact of cost actions, better mix, and early benefits from operational initiatives.

Gross Margin Recovery

Neogen also showed meaningful progress in restoring profitability at the gross margin level. Reported gross margin improved to 47.5%, a sequential increase of about 210 basis points. Excluding integration and restructuring items, gross margin was 50.3%, highlighting the underlying economic improvement in the business. The recovery indicates that pricing, manufacturing efficiency, and mix are moving in the right direction after a period of pressure from integration work and operational inefficiencies.

Cost Actions and Operational Savings

Management highlighted a more disciplined cost structure as a core driver of the improved results. The company implemented cost actions in the quarter that are expected to yield approximately $20 million in annualized savings, including headcount reductions that contributed directly to margin expansion. These measures are part of a broader effort to streamline operations, reduce complexity, and align costs with current demand, suggesting further margin benefits as these savings fully flow through.

Petrifilm Integration Progress

The integration of the Petrifilm business remains a major strategic project and a key value driver in Neogen’s portfolio. Management reiterated that the integration is on track for the previously disclosed 2027 timeline. Late-stage production testing has been completed with good results, initial product validation is underway, and the company has demonstrated its ability to manufacture Petrifilm plates internally. While still multi-year in nature, this progress reduces execution risk around one of Neogen’s most important growth and margin assets.

Balance Sheet and Cash Flow Improvements

On the balance sheet, Neogen ended the quarter with $800 million of gross debt, 68% of which is fixed-rate, and $145.3 million of cash on hand. The earlier divestiture of the Cleaners & Disinfectants business funded a $100 million paydown, helping reduce leverage. Free cash flow improved to $7.8 million in the quarter, a $20.9 million improvement over Q1, signaling better cash conversion despite still modest levels. Management expects full-year capital expenditures of about $50 million and sees routine CapEx normalizing to 3–4% of revenue over time, which should support additional deleveraging.

Raised Guidance Reflects Q2 Outperformance

Neogen’s confidence in its trajectory was underscored by a guidance hike for fiscal 2026. The company now expects revenue between $845 million and $855 million and adjusted EBITDA of approximately $175 million, implying an adjusted margin of roughly 20.6% at the midpoint. The upgrade reflects Q2’s stronger performance on revenue, margins, and cash flow, as well as the anticipated benefits of the $20 million in annualized cost savings. Management reiterated its expectation for positive free cash flow and maintained CapEx guidance at around $50 million, while signaling that quarterly revenue and margins will likely step down from Q2 in the near term before improving again, with Q4 anticipated to be modestly above Q3.

Leadership and Commercial Execution

Management credited improved execution in part to a refreshed leadership team and sharper commercial processes. Recent additions include a new chief financial officer, chief commercial officer, and other senior leaders. The company has rolled out more rigorous weekly forecasting (LBE) and a solutions-based selling framework, which are aimed at improving visibility, reducing volatility in results, and sharpening sales performance. These changes appear to be contributing to better predictability and more disciplined decision-making.

Macroeconomic and Industry Headwinds

Despite the operational progress, Neogen remains constrained by difficult industry conditions. Food production volumes are generally down year over year, several processing plants have closed, and there have been producer bankruptcies across parts of the value chain. Multi-year declines in production animal herds are weighing on the animal safety business in particular. These macro and sector-specific pressures are a key reason management continues to frame its guidance conservatively and warns that end-market recovery may be gradual.

Drag from Divestitures and Discontinued Products

Reported revenue growth continues to be held back by portfolio pruning. Divestitures and discontinued products, most notably the Cleaners & Disinfectants sale, reduced reported revenue growth by approximately 6.6 percentage points year over year. While these actions pressure the top line in the short term, they are consistent with management’s focus on higher-return assets and should ultimately improve the company’s growth quality and margin profile.

Sample Collection Profitability Turnaround

Sample collection has been a notable profitability drag over recent quarters. Management quantified the negative impact at roughly $10 million in the fourth quarter, $6 million in the first quarter, and $3 million in the second quarter, indicating steady improvement. The company expects this business to turn positive in the second half, which would remove a lingering headwind to margins and reinforce the broader narrative of operational cleanup and process improvement.

Elevated Inventory Write-offs and Scrappage

Neogen is still working through higher-than-normal inventory write-offs and operational scrappage, a legacy of integration and manufacturing challenges. The company described this as a multi-quarter normalization process, with expectations for improvement in the second half. As scrap levels return to more typical ranges, gross margins should see additional tailwinds, adding to the benefits from cost savings and mix improvements.

Leverage and Modest Free Cash Flow Remain Watchpoints

Despite the recent debt reduction and better free cash flow, leverage remains a central investor concern. The company’s $800 million in gross debt and only $7.8 million of Q2 free cash flow leave limited near-term cushion. Management is pursuing further deleveraging, including a planned divestiture of the global genomics business, though timing is uncertain. Until cash generation strengthens meaningfully or asset sales are completed, the balance sheet is likely to remain a key risk factor.

One-off Tailwinds and Timing Factors

Some of the quarter’s outperformance was aided by non-recurring or timing-related benefits. Management cited a roughly $2 million tailwind in the Animal Safety segment related to insecticide demand and noted that distributor inventory normalization in Petrifilm also contributed. While these factors do not detract from the overall progress, they suggest that not all of the Q2 strength should be extrapolated into future quarters, reinforcing the company’s cautious guidance posture.

Uncertainty Around Genomics Divestiture

The planned divestiture of Neogen’s global genomics business is a major strategic and financial swing factor. The sale process is underway, and the company is targeting an announcement in the fourth quarter. However, management emphasized that such processes are inherently uncertain, and both timing and potential proceeds remain unclear. The outcome will influence the company’s growth profile, leverage trajectory, and portfolio focus, making this a key event for investors to monitor.

Forward-Looking Outlook and Guidance

Looking ahead, Neogen’s raised fiscal 2026 guidance encapsulates its cautiously improving outlook. The company is targeting $845–$855 million in revenue and around $175 million in adjusted EBITDA, with margins above 20% and positive free cash flow for the year. Capital spending is expected to remain around $50 million, with routine CapEx trending down toward 3–4% of revenue by late fiscal 2026. Management signaled that near-term quarterly performance will be choppy—Q3 stepping down from Q2 before a modest uptick in Q4—while key strategic initiatives such as the genomics divestiture and Petrifilm integration progress on their multi-year timelines.

Neogen’s earnings call painted the picture of a company in transition but making solid early strides. Positive core revenue growth, stronger margins, and improved cash flow suggest that cost-cutting and operational initiatives are gaining traction, even as persistent macro headwinds, elevated leverage, and one-off benefits temper the near-term outlook. For investors, the story now hinges on whether Neogen can sustain profitable growth, execute its portfolio moves, and steadily deleverage—if it does, the constructive momentum evident in this quarter could mark the start of a more durable recovery in value creation.