David Naemura
Thank you, John, and welcome to everyone on the call today. Jumping into the results, our second quarter revenues were $231 million core revenue which excludes the impact of foreign currency acquisitions and discontinued product lines grew 3.5% for the quarter including a positive contribution for pricing. While foreign currency was a headwind of 250 basis points. Compared to the prior year at the segment level revenues in our food safety segment were $164 million in the quarter flat compared to the prior year due to the negative impact of FX which offset core growth of nearly 4%.
The core growth was led by our biosecurity products and the bacterial and general sanitation product category which benefited from strong growth in our ATP product line in the indicator testing, culture media and other product category, solid growth in our food quality culture media and Petri film product lines was offset by a decline in sample collection. As we continue the process of ramping up the relocated production in our own facility within the natural toxins and allergens category.
Modest growth in allergens was partially offset by a slight decline in natural toxins, excluding the headwinds and sample collection. Core revenue in the food safety segment grew 8% which we believe is more reflective of the underlying business albeit on an easier compare.
Quarterly revenues in the animal safety segment were $67 million, which includes core revenue growth of 3.2% compared to the prior year quarter. Within our biosecurity product category, we saw growth in all major product lines in the animal care and other product category, solid growth was driven primarily by biologics and wound care products as well as vitamin injectables, which saw the easing of a supplier backlog situation.
The vet instruments and disposable product category accelerated from the first quarter to modest growth in the second quarter, driven mainly by sales of needles and syringes outside of genomics. Core revenue in our animal safety segment was up over 7%.
Our global genomics revenue was down mid-single digits on a core basis. Growth in US and international beef markets was primarily offset by a decline on the companion animal side of the business.
From a regional perspective. Core revenue growth in the second quarter was mixed growth was again led by Latin America which saw double digit growth with a strong performance across most key product categories including new business wins. Our business in Europe grew high single digits on a core basis, led by growth in Petri film, general sanitation and natural toxins.
Asia Pacific core revenue was up slightly on a year over year basis. With solid growth in Petri film, partially offset by declines in pathogens and sample collection in our US and Canada region which has experienced the largest carryover impact from last year's shipping delays. Core revenue was roughly flat compared to the prior year period.
Solid growth in culture, media and food quality and nutritional analysis was offset by declines in most other food safety product categories including a larger impact in sample collection. As we continue the process of recapturing market share in the animal safety segment. Solid growth across most key product categories was partially offset by the decline in genomics.
Gross margin the second quarter was 49% representing a decrease of 190 basis points from 50.9% in the same quarter a year ago, excluding integration and restructuring costs, gross margin Q2 was roughly flat compared to the prior year adjusted EBITDA was $51 million in the second quarter, representing a margin of 22.2% for a sequential improvement of 210 basis points on a year over year basis. The decline in adjusted EBITDA margin was driven primarily by having the full cost to exit the various transition agreements which we did not fully have in the prior year period. This also includes some impact from higher shipping and distribution costs where we expect to see improvement in the second half of this year.
From cost reduction initiatives we have underway second quarter adjusted net income and adjusted earnings per share were $24 million and $0.11 respectively compared to $25 million and $0.11 in the prior year quarter. The lower adjusted EBITDA in the current year Q2 was mostly offset by a lower effective tax rate due largely to regional profitability mix.
Our GAAP net income in the quarter was significantly negative due to the non-cash goodwill impairment charge related to the acquisition of the former three Food Safety Division. We continue to have full confidence in the post integration prospects of the business. The impairment charge primarily reflects from an accounting perspective. The slower start we've had as a result of some of the end market and integration complexities.
We ended the quarter with gross debt of $900 million. Approximately 60% of which is at a fixed rate with our interest rate swap having reduced by $50 million at the end of the quarter and a total cash position of $140 million cash flow in Q2 improved by approximately $80 million compared to Q1 benefiting primarily from lower capital expenditures, improved working capital performance and the semi-annual bond interest payment not repeating with capital expenditures expected to step down in the second half. We believe that we are still on track for positive free cash flow for the year.
Moving to our outlook. As John mentioned, we are updating our guidance to account for several changes compared to the assumptions underpinning our guidance. Entering the fiscal year, first half revenue developed in line with the expectations we communicated. However, with the continued strength of the US dollar particularly post-election, we are now facing an elevated FX headwind which is the biggest change reflected in our updated guidance.
Additionally, the restructuring of our genomics business has resulted in additional intentional attrition of some less attractive revenue as we focus our end market exposure and streamline our operating footprint. Finally, the ramp up of sample collection production to full capacity has taken longer than originally anticipated, reducing our revenue in this product line as we have been unable to fully meet demand due to normal seasonality. The expected ramp of sample collection and continued share recovery, we expect second half revenue to be more weighted towards the fourth quarter.
With the restructuring actions taken and anticipated reductions in our freight and distribution costs combined with operating expense efficiency. We expect to build on the sequential margin improvement we saw in the second quarter and see further expansion in the second half of the year. Our updated adjusted guidance primarily reflects the decrease in revenue and the lower first half margin as well as some offsetting efficiencies from our restructuring actions. We expect our quarterly margins in the second half to generally be aligned with revenue and higher in the fourth quarter.
As I mentioned earlier, we expect capital expenditures to decline in the second half and are maintaining our original outlook specifically related to the goodwill impairment charge. We will be filing form 12 B 25 later today to provide additional time to complete the audit procedures related to our impairment analysis. We do not expect the impairment charge included in the financials in our earnings release to change. But until we file our form 10-Q, the results technically remain preliminary. We plan to file our 10-Q next week within the grace period provided by SEC rules.
When we do file our 10-Q, it will include the conclusion that we have had deficiencies in the control activities and information and communication components of the Coso internal control framework that constitutes material weaknesses at a high level. These deficiencies are primarily related to the timely execution and documentation of controls, and we have performed additional analysis and other procedures to ensure that our financial statements are free from material misstatement. We remain on the journey of improving our global controls environment and are working through remediation actions which will be ongoing as we continue to progress through the integration and strengthen our capabilities.
I'll now hand the call back to John for some final thoughts.
John Adent
Thanks, Dave. The second quarter represented additional progress for Neogen. We saw improved revenue margins and cash flow from the first quarter and our primary food safety and markets continue to show signs of gradual improvement.
We're also taking the actions I covered earlier to protect margins and further focus the business part of the process of building the engine for the future and repositioning our company to win the end markets along these lines. We also announced this week that Dave will be taking on the role of Chief Operating Officer in addition to his duties as Chief Financial Officer with the operations organization. Already reporting to Dave. This additional responsibility will allow Dave to further strengthen the coordination and strategic alignment between the finance organization and the rest of our business with the goals of optimizing margin improvement opportunities and capital allocation.
Dave's expanded role coincides with the update we provided that Doug Jones, our current Chief Operating Officer will be making his retirement official at the end of February after which he will remain available to us through 2025 to ensure a smooth transition to a new Chief Commercial Officer and provide other assistance as needed.
We're well into the process of hiring a Chief Commercial Officer with multiple rounds of interviews conducted with a number of highly qualified candidates. And we're excited about the opportunity we have to further strengthen our team with the addition of someone we'll be solely focused on driving growth globally.
The new Chief Commercial Officer will supplement the strong regional leaders we put in place, and we will be able to leverage our global scale comprehensive product portfolio and the largest technical support team in the industry.
While we're not relying on the regulatory environment to drive growth, the increasing level of regulatory interest in the US highlights not only the importance of food safety overall but also the significant room for improvement that exists. Our long history and experience. Going back to the early days of food safety testing puts us in a position to be a trusted partner of both food producers and regulators to help in the mission of reducing the frequency and severity of foodborne illness.
I'll now turn things over to the operator to begin the Q&A.
Operator
(Operator Instructions) Brandon Vasquez, William Blair.
Brandon Vasquez
Hey, good morning, everyone. Thanks for taking the question. I'll start off with one kind of high-level question. You know, I think part of the discussions that we've had about putting this business together and reaching kind of higher profitability targets has always been based on volume and I know a lot of the revenue coming down, example in genomics is something you're proactively taking, but it probably still has P&L impact.
So maybe talk to us a little bit about like, we're going to a lower and lower revenue base to some degree here. What are the implications on what the margins of this business can be? Is this still a business as we're going closer to 900 rather than closer to $1.1 billion in sales? Can we still think of this as a high 20% EBITDA margin the foreseeable future?
David Naemura
Yeah. Hey, Brandon, it's Dave. When we talk about portfolio, you hear us talking about components of the business that maybe don't have the growth profile or the margin profile that we aspire to for Neogen. And I think what we've seen in genomics over the last you call it as an example here. What we've seen in genomics over the last year and a half is a business that hasn't, hasn't grown. We've seen commoditization and we've seen decline from an EBITDA perspective.
So, it's a big component of bringing down the year was pulling out genomics. You've heard us talk about restructuring parts of that business, but we think by focusing it more, we can support the margin profile that we're that. We're really after here, we have a really good franchise focused on cattle and that's the focus of the restructuring, the restructuring actions we've done, I guess I would just further add that. When we think about animal safety, you've heard us say a lot, we don't view it as one large business.
We think it's a component or it's a made up of four or five different components, all of a little bit of different profiles. So we're really doing the analysis at that level but the objective to your to your point, the objective is to yes from a revenue standpoint, potentially be smaller but the higher quality from a margin and probably less cyclicality perspective as well.
John Adent
Yeah, and, and Brandon John, just to add what Dave said, the other piece we're doing is, we talked about the restructuring activities we're taking to make sure that we can continue to drive to our targets, and where we put the guide that, the mid 20 range in the, in the second half of the year for EBITDA.
Brandon Vasquez
Okay. That, that makes a lot of sense. Maybe a little bit more granular of a question near term trends on sample handling. You need to talk to us a little bit about, obviously in the past when you've had some issues and distribution, things like that, this is food safety customers need to test, they move to someone else. Are you guys getting in a position now as you're the manufacturers take a little longer and sample handling to ramp, are you kind of losing some share there? Is this going to be something that even if it's fixed? I think John, you said at the end of fiscal Q3, we're going to probably have several quarters of headwinds after it because you need to go out reengage with those customers and get that share back again.
John Adent
Yeah, I think that's, that's exactly right. Brandon, you see that that business is a, is a consumable business, right? So when you lose, when you don't have product available, you lose the sale and the customer has to go buy that, that product from somewhere else. So I think it's, it's been a bit of a challenge. We talked about some of the things that happened with it. You know, we weren't able to get the desired safety stock up. We brought four lines over it was one line that's kind of been the challenge.
Product line wasn't decommissioned, right. So we began production in our facility in the second quarter. We're at about half that output. Now of historic, we think we're going to be at 100% for Q3.
We think the Q1, the impact was about $45 million. We think Q2 is probably going a little bit to six, but we see that easing in the second or in the third quarter and then going into fourth because we're going to be able to bring those capacity rates back up by the end of the third quarter.
Brandon Vasquez
Okay, great John. One last one, another big picture one you talked a little about the evolving food regulation space. Seems like there's even some potential for a separate food administration which would be great. I think there's a lot of there tends to be a lot of questions just around. What could this mean for food safety regulation in general and then what it could mean for Neogen?
So I know you touched a little in the prepared remarks, but maybe you talk about what are some realistic scenarios you could see playing out here and where can you see benefits because some of your biggest customers are probably already extensively food testing, right? So where can you see benefits to the business in an increasingly food regulatory environment?
John Adent
Yeah, thanks Brandon. Yeah, look, I think the tailwinds from this could be very significant religion over the longer term. When you look at some of the challenges that companies have had recently and all of us are aware, those are very established companies that have had very significant food safety programs. I think the thing that people need to recognize is food safety monitoring and testing is very much like cybersecurity, it never ends. And there's always new threats and there's always new pathogens and ways these pathogens can kind of get into your system and therefore always updating and improving your risk analysis is extremely important.
And I think that's what's going to help continue to drive needs and success in the future because we have the broadest portfolio, we have the broadest team and we're going to be able to help those customers meet those challenges and you see it from a regulatory basis where they're going to say this is now the new minimum. But I also think customers are understanding that just because you haven't had an issue in 10 years does not mean you're not going to have an issue tomorrow. It is a, it is a day to day, constant monitoring fight in a way that we can help our customers win that fight, so they provide safe food to their, to their consumers.
Operator
Subbu Nambi, Guggenheim.
Subbu Nambi
Hey, guys, good morning. Thank you for taking my questions. You touched on this a little, could you give us more color on magnitude for each currency genomics and the delay in sample collection production that resulted in the $25 million reduction in guide at midpoint. And then could you break out some of the accelerators or headwinds getting to that guidance number as well? Thank you.
David Naemura
Yeah. Hi Subu. Thanks for the question. So when we think about the guide production at the midpoint, which I think is the heart of the question, the two biggest components is really FX and, and the genomics reduction, which makes up a significant portion called over two thirds of the reduction. You know, the FX has strengthened significantly post-election in November and December, the US dollar has strengthened so that headwind has grown. And then of course, as we've proactively taken these actions in genomics.
So that's the biggest piece of it within, some other items netting, but really sample collection being kind of the third piece to get to $25 million. And when we think of it, the EBITDA line, there's a fall through on that. Let's so from, let's so from the genomics because you know, we've also hand in hand restructured out a lot of a lot of the infrastructure associated with that.
But from, you get the fall through from FX, which actually given our profitability and not having as much kind of overhead and infrastructure internationally comes through it a little above the fleet average rate and then, and then also as well as sample collection and other products come through. And then I think it's worth pointing out, we've talked consistently through the year that from a shipping and distribution cost standpoint, we knew we had inefficiencies last year and had planned to on that this year and we've been running higher than we had thought, particularly in the first half year.
Now, we have actions in place to do better there, which is not restructuring, but those are operational actions and we're working on that for the second, but ultimately the second half, but ultimately, that impacts the year guide as well.
Subbu Nambi
Well, thank you for that, David. You, why did it take another quarter to realize this? You should have known of all this heading into the year, right? Sorry for being so blunt here.
David Naemura
Are you, are you talking specifically about shipping and distribution costs? I think, a lot of what we're Yeah. Well, we definitely saw the impact in Q1, and I think we talked with folks about that when we saw the margins lower than we thought in Q1 at the gross margin level and also impacts ex kind of shipping and distribution. It is, we did see some improvement sequentially in Q2, but it's really about responding to you, your question is really fair, Subu. But also, I think it requires a look back at what we went through last. Year in shipping and distribution where we were just focused on trying to get things out the door in our post-integration environment.
And then as we're settling that out, we, you know, we had to kind of bottom out. I think what it looked like in a normalized state. So, and I think we were really working through that coming into the year and a normal course business that isn't going through these integration activities. I agree with you, but I think it's more of a symptom of the changes we've gone through over the last four quarters. And to be H1st, it's been compounded by some shipping rate issues which are a little difficult to predict, particularly as it relates to ocean freight.
Subbu Nambi
Got it. And then I have a similar question as Brandon, but for Petro, you've strung a couple of quarters together here on offense after losing some customer share, but now you're trying to win it back. Where does the current customer sentiment stand today and our customers holding off before we commit in?
John Adent
Yeah, John, I'll take that. I mean, I think customer sentiment gets better every day because we continue to show them that we have supply, and we can meet their needs. And we saw that where we kind of regaining back those customers over the different over Q2, over Q1. And you know, while we know that it's going to be challenging to, to get everybody back, we do see that the customers are coming back, they're happy with us. And the ones that take a little bit longer, what we need to do is what we're doing.
Now, we need to offset that with new customers and growth and that's really what we're focused on. So we've seen the customers come back, but this is something where, we need to prove ourselves to them every day and we are, and each day we do it the more comfortable they get.
Subbu Nambi
Got it. This is a smaller part of your business, but still a significant one you mentioned in one queue that animal safety peaked in us in '22 and then decline last two years. Are you expecting that again for the remainder of this year? Or are there any early indicators to prove that that is happening? Any factors that would give you a different reaction?
John Adent
Yeah, I mean, I get into this a lot where I'm, I hate to, to pick the tops and the bottoms. But, last quarter, when we saw the, when we saw animal safety kind of drop, we made sure to say, look, it was, it really wasn't a, a have a fundamental destocking and we saw really good sequential improvement, related to that second quarter and, and really, like we said that first quarter was a couple of specific issues on a few large distributors that we didn't think it was a broader issue. And in fact, that was the case. So we had a bit of a backlog that we had on a third-party supplier, which we cleared in the quarter that really helped us.
But look, I think we're on pretty solid footing right now for animal safety, we continue to see our move out through distributors being positive. And so to me that gives me confidence going forward in animal safety.
Subbu Nambi
Okay. Fair enough. Thank you, guys.
John Adent
Thank you.
Operator
David Westenberg, Piper Sandler.
David Naemura
Great one. David, we're not able to hear you really.
David Westenberg
You can't hear me. You said another thing. What about now? Can you hear me now?
You can hear me now. Okay, perfect. All right. Thank you. So, you, you've mentioned about the freight and distribution cost. Can you help out piece out how much of it is related to just distribution center changes? Kind of kind of that organization versus external factors such as, oil prices or, you know, you mentioned kind of sea shipping where I'm just trying to get a handle of you know, just when that could end how that comp and what stuff. We need to probably continue to worry about in the future just because, you obviously can't control oil prices or shipping like, you know.
David Naemura
Yeah. Yeah. No, look, David. Good, good, good question. I think the majority of it relates to where we ended up kind of bottoming out the internal costs associated with our internal logistics and distribution operations. Once we kind of got through what we went through last year, we are seeing higher rates. I would also say, I think we have opportunity in rates and that is one of the threads that we're pursuing for second half is renegotiating some of those contracts.
But I think, look, we're also bringing in some additional talent internally on that side. We just had someone start that we're really enthusiastic about and we'll be taking a new strategic look at our whole global network. So these things are difficult to move in a short period of time because the priority is to keep them moving. But we'll have a number of a number of actions. I think you'll see the change in the future being driven more operationally than by external factors.
David Westenberg
Got it. No, thank you. And then I'm just going to ask on the, on the genomics and, and focusing on profitability here. You mentioned on the call just that you have a little bit more focus on large animal. Does that mean you're exiting companion? And I, and if you are, can you talk about some of the how that might impact some of the other areas in terms of companion animal, for example, parasiticides or you know, I know you have a clean view of the companion cleaners and disinfectants line, anything like that. I'm just trying to think about, it's kind of a continuation of Brandon's question about how, you have a, you grow by volume but at the same time you might be reducing something. So you know, can you just run us through how you came up with the decision there?
John Adent
Yeah, look, historically, genomics was a really good growth source for us both organically and inorganically. But in recent years, we've seen kind of the competition expand and while some of the markets are attractive, some of them commoditized. And that's why we're really focusing on where we can add value is when we sell a product with insights directly to customers, right?
So we're helping the customer take that data and make good decisions, which is the case in our differentiated cattle. When you think about small production animals and even companion today, the current big pieces of our business is we supply the raw genomic results and then the and that's A B two B market and then that customer takes those results and then they interpret or they then change it and give it to their customer base.
So while we're not exiting that, what we see is that, that companion genomics market is slowing down. We haven't seen, the puppy boom that we saw for COVID has been slowing down. So that market is slowing down and we're seeing a lot of those tests being more outsourced because it's raw genomic data right now. What, what's challenging to me and, and frustrates me is because that market is declining. If I like what gets me interested and excited about the visit, I think genomics out of second quarter for animal safety, the growth rate goes from 3.5 to 7.5 to 7.3% right?
So we have and I have a similar thing in food safety. If I take out sample handling, Q2 growth goes from 3.6 to 8.1 and year-to-date, it goes from 2.4 to 6, right? So I have a couple of really bespoke issues that, that we are working diligently on to fix, but that's what kind of gets me excited and, and see where the underlying business is growing versus these two things that are really headwinds for us.
David Naemura
Yeah, let me let me add two points to what John said. So I think, I think John mentioned this report is that we're seeing less outsourcing and that's what we do. We do the back-office testing for Companion versus having our product direct to the consumer. So we're seeing that decline and we anticipate seeing that continue to tread frankly.
But to your other point, the relationship to other companion products, we're not exiting companion, we're exiting specifically the back-office work that we do. We're not exiting it. We see it attiring frankly now and it is unrelated to our other products that would be focused on companion, that most of our products are focused on production animals, but we do have some focused on companion. But a lot of times when we talk that, we're talking production, of course, so there wouldn't be any additional spillover from that.
David Westenberg
Sure, if you guys can hear me, I'm having headset issues, but thank you so much.
David Naemura
Okay, thanks David. Thank you. You were ready for the next question, please.
Operator
Thomas DeBourcy, Nephron Research.
Thomas DeBourcy
Hey guys, my question, I guess relates to, hey, my question relates to kind of animal safety and I guess the pruning of the portfolio or potentially, I guess, selling parts. You know how it, it's a little difficult whether it is kind of, I guess played out over a longer period of time. So, is there a certain time period where you would expect this to occur and that if not, this is really the portfolio going forward or how do you think about kind of just, the time frame towards, I guess, making any strategic decisions or kind of, I guess, growing off the base that you have.
John Adent
Yeah, thanks. Thanks Tom. I mean, well, look, it's difficult to talk to specifically until we've got something completed. But let me kind of take you through our approach because I think that will help you kind of think how we're doing. So look, as, animal safety is made up of like four or five product categories. It is not a monolithic business. And we looked at those each category in our portfolio analysis. And then what we did is we focused on, those few categories that we have that are lower growth, lower profitability and more cyclical.
We did the internal work on those categories and we've moved into the next stage with active engagement, right? Collectively, we're targeting a significant amount of animal safety revenue probably around half. And that's kind of the process that, that we're in right now. And so we'll, we'll keep you guys updated as the developments happen.
Thomas DeBourcy
Great. Thank you very much. Appreciate it.
Operator
Thanks, Tom. And I'm showing no further questions at this time. I would like to turn this back to our CEO John Aden for closing remarks.
John Adent
Thank you. So, thanks everybody. Thanks for being on the call with us today. I want to thank our team members for all their hard work in 2024 and the work they continue to do. We've accomplished a tremendous amount in 2024 and are looking forward to a much better 2025. We hope all of you have a prosperous and happy 2025. So thanks for joining us.
Operator
Thank you, presenters and ladies and gentlemen, this concludes today's conference call. Thank you all for participating. You may now disconnect.
