.svg){kind=logo}
Written by the Mackenzie Growth Team
One of the important aspects that we wanted to highlight to our holders this month is the increased due diligence that our team has engaged in on holdings that have had recent material drawdowns.
When companies face challenges, our process involves a rigorous re-evaluation of the original investment thesis. This includes expert calls, speaking to the management or visiting the company.
Neogen is an example of this. The company has had recent challenges with its acquisition of 3M’s food safety business and a change in its management.
We visited Neogen's Lansing headquarters last week after the board fired CEO, John Adent. Overall, we are pleased to see the integration progress that Neogen has been making around its 3M deal from September 2022. The board grew impatient with Neogen's performance given the dramatic decrease in share price valuation. Our most valuable take-away from the trip was the investment Neogen has made in their Petrifilm manufacturing facility, which is Neogen's largest revenue and gross profit dollar product family. The facility which will house the 2 primary Petrifilm production lines is complete, roughly 90% of the first manufacturing line has been installed. In order to accomplish this undertaking, the company engaged with engineers from 3M who moved equipment to Poland 10 plus years ago and hired Jim Walter from Mallinckrodt to become the Global Head of Operations. We believe this manufacturing facility will drive higher margins, ample capacity, increased visibility and a better reliability of supply for Neogen. Despite challenges across the Neogen business, Petrifilm has been growing around 10% for the past 7 quarters. As we look to the long term, management knows the importance of ROIC, profitable growth and balancing working capital efficiency with high service quality standards for their customers.
Based on our conversations, Neogen will continue to optimize working capital (inventory levels) to pay down debt. The company announced a divestiture of their Global Cleaners and Disinfectants business for $130 million dollars of gross proceeds. The company will use the net of tax proceeds to lower debt outstanding upon deal close. Once this transaction completes, Neogen will have repaid 20% of the debt outstanding from the 3M deal. As large shareholders, we have encouraged the leadership to continue to de-lever the remaining $ 800 million of gross debt through additional Animal Health divestitures and FCF generation.
We are optimistic that the worst of the supply disruptions are now behind Neogen. There has been a lot of change in the organization over the past 36 months. Although many investors have thrown in the towel, we believe the hardest work of the 3M deal is now complete and a simpler, more focused company can return to their mid-to-high single digit growth aspirations.
The decision to revisit a company or thesis is triggered by news that questions our original investment thesis, not necessarily just share price movement.
The contents of this document (including facts, views, opinions, recommendations, descriptions of or references to, products or securities) are not to be used or construed as investment advice, as an offer to sell or the solicitation of an offer to buy, or an endorsement, recommendation or sponsorship of any entity or security cited. Although we endeavour to ensure its accuracy and completeness, we assume no responsibility for any reliance upon it.
Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.
This document may contain forward-looking information which reflect our or third party current expectations or forecasts of future events. Forward-looking information is inherently subject to, among other things, risks, uncertainties and assumptions that could cause actual results to differ materially from those expressed herein. These risks, uncertainties and assumptions include, without limitation, general economic, political and market factors, interest and foreign exchange rates, the volatility of equity and capital markets, business competition, technological change, changes in government regulations, changes in tax laws, unexpected judicial or regulatory proceedings and catastrophic events. Please consider these and other factors carefully and not place undue reliance on forward-looking information. The forward-looking information contained herein is current only as of May 13, 2025. There should be no expectation that such information will in all circumstances be updated, supplemented or revised whether as a result of new information, changing circumstances, future events or otherwise.