Neogen Corp (NEOG) 2007 Q3 法說會逐字稿

Good day, everyone, and welcome to the Neogen Corporation third quarter fiscal year 2007 results conference call. Today's call is being recorded. For opening remarks and introductions I would like to turn the call over to Mr. James L. Herbert, Chief Executive Officer. Please go ahead, sir.

Thank you, Sheila, and again good morning, and welcome to our regular quarterly conference call for investors and analysts. Today we will be reporting on Neogen's third that ended on February 28. I will remind you that some of the statements that are made here today could be termed as forward-looking statements. These forward-looking statements, of course, are subject to certain risk and uncertainties, and the actual results may differ from those that we discuss today. These risk associated with our business are covered at least in part in the company's form 10-K as filed with the Securities and Exchange Commission.

In addition to those of you who are joining us today by live telephone conference, I also welcome those who may be joined by way of the simulcast on the World Wide Web. These comments, along with some exhibits, will be available on the Web for approximately 90 days. Following our comments this morning we will entertain questions from participants who are joined on this live telephone conference. And I am joined today by Lon Bohannon, Neogen's President and Rick Current, Neogen's Chief Financial Officer.

Earlier today Neogen issued a press release detailing the results of our third quarter for our 2007 fiscal year which ended on February 28. Once again, we set a new quarterly record for the company in both revenues and income. Neogen's revenue for the third quarter increased 20% over the same quarter last year to slightly over $21 million. This compares to the same quarter last year in which revenues were about $17.3 million. Though the 20% revenue increase is good, you might say that the earnings from these revenues are more than twice as good.

Net income for the third quarter increased by 44% from the previous year's third quarter to almost $2 million. This compared to about $1.4 million last year. This translates to earnings per share for the quarter of $0.21 as compared to $0.16 per share in the same quarter a year ago. On a year-to-date basis now for our first nine months revenues are up 21% compared to a year earlier as year-to-date revenues now stand at approximately $63.5 million. Year-to-date net income for the first nine months increased 29% as compared to a year earlier to approximately $6.8 million, and this translates to $0.73 per share in the current year compared to $0.63 in the first nine months of last year.

The third quarter marks our 56th consecutive profitable quarter from operations, and the 60th quarter in the past 65, that we have shown increased revenues as compared to the previous year. Or as stated another way as we are all into basketball now, for the last 16 years Neogen's winning record is a 92%, having failed to show a quarterly increase in revenues in only five quarters. I continue to be immensely proud of our worldwide employee team for their strong focus on our growth strategy and their continual work in building our operational strength throughout the company.

The growing synergy between our Food and Animal Safety divisions, the organic growth of our existing products and the continued successful integration of acquired businesses have all been keys in helping us meet our performance expectations. I think this operational strength is validated by the fact that gross margins as a percent of revenues increased to 52% in the third quarter from 48.5% in the comparable quarter last year. But the strength is more than just gross margin improvements.

In the first nine months of our '07 year Neogen's operating income increased 29% as compared to a year earlier. I am sure that most of you can appreciate the fact that it is not easy for a company our size to continue maintaining this kind of top line and bottom line growth while at the same time making significant investments to build a pipeline of new products, keep organic growth going at a robust level, always be looking for synergistic new acquisition opportunities and then successfully integrating those acquisitions to be accretive at both the top line and the bottom line.

The greatest negative impact to the third-quarter results were substantial expenses that were related to litigation. I advised you in the last conference call that the company was involved in litigation that was related to intellectual properties. We continue to believe that our position is solid and that Neogen will prevail. However, we recorded approximately $300,000 in legal expenses in this third quarter. Of course we normally budget for some legal expenses but had not anticipated them to be this large. Legal expense for the third quarter equates to about $0.02 a share. In a few minutes Lon will talk more about the performance specifics of our two operating divisions, but I would like to take a few minutes to talk about our consolidated activities and developments.

Though we still have tremendous opportunities for growth outside the U.S., we are continuing to build nicely on our existing international business. For this quarter international revenues jumped to 41% of third quarter sales. On a year-to-date basis for the first nine months of this year, revenues from outside the U.S. accounted for 39% of Neogen's total. By way of comparison if you look at the first nine months last year that number was 28%, so 28% for the first nine months last year, 39% for the first nine months this year. Though we are seeing growth in all of our international markets, I am particularly pleased with the business that we are building in Europe. Neogen Europe Ltd. our wholly-owned subsidiary located in Scotland is responsible for the direct sales to the major European food producing countries of the UK, Germany and France. They are also responsible for the activities of our independent European distributors in 30 countries over there.

Though we are building both our sales and marketing teams and our R&D groups to take advantage of the new opportunities we have still been able to hold the line on costs related to those two areas. Through the first nine months our sales and marketing expenses continued at about 21%, and we are still holding G&A expenses to 10% even though this administrative category catches all that non-cash expense related to the new ruling of expensing stock options. In fact, you would be interested that non-cash charges against the first nine months of this year were approximately $930,000 for option expenses and $480,000 for amortization of intangibles that were related to the Beta Star and Centrus acquisitions.

The market opportunities and the market growth for both Food Safety and Animal Safety divisions continue to look bright; while our Animal Safety group continues to strengthen their position in supplying products to the nation's farmers and ranchers through the nationwide retail stores, they are also strengthening their position in direct business with the nation's largest integrated poultry and red meat producers. We continue to be on schedule for the completion of our new vaccine production facility in Lansing and expect to get that facility approval by the U.S. Department of Agriculture before the end of April. We will run our vaccine production operations redundantly both in Tampa and Lansing until we are convinced that the Lansing plant is fully capable. At that time we will cease operations in Tampa and move some of that equipment to Lansing. I expect that we will complete this transition process sometime in August/September timeframe.

The new facility will be more efficient, and it will also provide us with some expansion capacity. One of the questions throughout both animal agriculture and crop agriculture today relates to the continued expansion of ethanol production in the U.S. Extra demand for corn to produce fuel rather than food is driven corn prices up from the mid $2 range to over $4 a bushel, and there is speculation that it might go even higher. This will undoubtedly have some impact on animal agriculture, and at the same time I am sure that ethanol producers are looking at their feasibility studies in light of these much higher corn prices. Really it is pretty phenomenal how this industry has grown in the total scope of it. Early this month I spent some time with a company that is involved in ethanol production. This company is now grinding approximately one million bushels of corn a day for ethanol production. This time last year I doubt that they were even grinding as much as 100,000 bushels.

Opportunities for our Food Safety side are also very bright. Its almost never a day that goes by that there is not an announcement of some kind of food product recall, either because of bacterial contamination, the presence of some toxin or the presence of some food borne allergen. Our Centrus acquisition from Eastman a year ago shows great promise by providing diagnostic tests to help the nation's food processors avoid food spoilage organisms that may contaminate food and shorten shelf life. We are continuing to make real progress in getting our Beta Star test approved by the Food and Drug Administration for use in the U.S. to detect the presence of antibiotics in milk.

You will remember at the time we made that acquisition the predecessor owners had not actively pursued U.S. license since the tests were too sensitive for U.S. regulations. Over the course of the next several months we developed a new U.S. version that is less sensitive or if you will, we dumbed down the tests. There are several hurdles to be cleared to get an FDA approval. We are well along in that process and have had no negative results. We do have a couple more important hurdles to clear, but at this point I am confident that we will be allowed to market this product in the U.S. We now believe that it is reasonable that we may expect to get that approval in the first quarter of next fiscal year, and that is about three months later than what we had projected when we started down this trail a little over a year ago.

Consolidation through mergers and acquisitions continues with our customers in both divisions. At the same time, Neogen is finding opportunities to be a consolidator in the Food and Animal Safety business. We are not at a signed letter of intent stage in any of these explorations at this point. However, we are certainly poised with enough dry powder to make significant acquisitions. At the end of the quarter we had approximately $8 million in cash and significant borrowing capacity but no bank borrowing and a current ration in of 5 to 1.

For the last couple of weeks and for most of the month of April our senior management is heavily engaged in budgeting and in the overall planning process for our new year that begins on June the first. At this point the first round of reviews from all of our operating divisions is very optimistic for this year that lies ahead.

Let's turn now to Lon Bohannon, Neogen's President, to give you more insight on the performance of our two divisions, as well as their expectations going forward.

Thank you, Jim, and welcome to our listeners on the conference call and those joining us via Internet access. As Jim has already indicated, Neogen's third quarter performance was outstanding and in many ways represented our best quarter so far this fiscal year. Not only did we attain 20% overall sales growth, actual revenues for the quarter came in at 99.8% of our budget. I know you probably all think we should hit our budgets every quarter but I can tell you that coming that close to budget this far into the fiscal year is an achievement worth recognizing, especially considering Neogen's aggressive approach to budgeting for revenues.

More importantly Neogen achieved overall organic sales growth in excess of 10% in the third quarter. Same-store sales growth has improved each quarter resulting in good momentum as we now move into our fourth quarter and look ahead to fiscal year 2008. Of course another measure of success is that area of international sales that accounted for 41% of total revenues in the third quarter, representing its highest level for any quarter in Neogen's history. This outstanding revenue growth enabled Neogen to actually exceed our budgeted operating profit for the third quarter despite having to overcome higher-than-expected legal expenses that Jim touched upon earlier.

Obtaining a 44% increase in net income on a 20% increase in sales, I think is clear evidence that we continue to find success in our efforts to control cost and improve margins. And as Jim indicated, this was particularly evident in Neogen's overall gross margins that increased to 52% of sales for the quarter compared to 48.5% same quarter last year. So again on an overall basis I think management was extremely pleased with the strong third quarter operating performance.

Let me take a few minutes now to provide our listeners with some additional detail pertaining to performance of the Food Safety and Animal Safety divisions. The Food Safety group led Neogen's overall gross performance again this quarter with sales of $11,517,000, representing a 30% increase in revenues compared to the third quarter of last year. On a year-to-date basis Food Safety sales are $34,599,000 or more than 40% ahead of the prior year.

Of course by now you all know that two acquisitions that were added in December and February of last year have contributed significantly to this year's substantial sales growth. However, organic sales growth in Food Safety has been very solid all year and in fact this division achieved its highest quarterly same-store sales increase in the third quarter with growth of over 13%. Nine of our ten broad industry segments in Food Safety reported sales growth compared to last year as we continue to find success in focusing on our largest customers within these industry segments and seeking more ways to capitalize on having the broadest line of diagnostic tests to serve the needs of these same customers.

As Jim already mentioned our Neogen Europe operation experienced another strong quarter, reporting sales growth of over 30%. Our Neogen Europe operations are also instrumental in supporting the sales and distribution of dairy antibiotic tests that are marketed throughout most of the world by the Denmark based Chris Hansen organization. Now as near as we can tell sales of this productline has grown approximately 15% since being acquired by Neogen in December of 2005. This growth has occurred despite some significant competitive price pressure, particularly in Europe and in some of the old Eastern Bloc countries. I should also point out that we have opened up distribution for the first time in Mexico and we are optimistic that this country represents a good growth opportunity for dairy antibiotic tests in fiscal year 2008.

Of course we also look forward to begin selling our Beta Star dairy antibiotic tests in the United States and Canada sometime in 2008 once we obtain the necessary regulatory approval referred to by Jim in his earlier comments. From a productline standpoint there were a number of successes in the third quarter for Food Safety. Leading the way was the performance of Neogen's productline for testing of general sanitation. AccuPoint sampler and reader sales were up 38% in the third quarter, bringing year-to-date sales growth for this product line up to 35%. Sales of products to detect harmful pathogens were up 10% in the quarter. This was led by strong growth in sales of the companies revealed listeria and salmonella test kits that were up 49% and 17%, respectively compared to the prior year. In addition, this productline was helped by a 31% growth in sales of dehydrated cultured media sold to the food industry and used as a growth media by companies testing for bacteria.

On the other side of the dehydrated culture media equation sales to what we call the traditional markets, consisting of companies making port plates for human clinical applications and companies making human and animal vaccines also experienced another strong quarter with growth of 16%.

Neogen's unique rapid optical system for detecting spoilage organisms and sold under the Soleris trade name experienced a truly exceptional third quarter. Sales in this product group have grown in each quarter this fiscal year to the point where they actually exceeded budget by a substantial margin in our third quarter. We continue to uncover very good opportunities with major companies that are testing everything from spices and salad dressings to fruit juices, syrup and nutraceuticals. And we expect to see ongoing sales growth in the fourth quarter and fiscal year 2008 for the Soleris productline.

Lastly for Food Safety I would mention the growth in our line of diagnostic kits for natural toxins. Those of you who have followed Neogen for a long time have probably heard our diagnostic test for the detection of natural toxins sometimes referred to as Food Safety's flagship productline. The diagnostic tests that make up this product line were among the very first Food Safety tests introduced by Neogen, and they remain important in terms of their overall contribution to sales and gross margins. I am happy to be able to report that this product group was up a very solid 14% in the third quarter with significant sales growth in tests for fumonisin, zearalenone and histamine.

Turning my attention to the Animal Safety side of our business, third quarter sales were $9,537,000 compared to $8,722,000 the same quarter last year. It was particularly gratifying to see organic sales growth of over 9% in this division for the quarter. Like Food Safety this same-store sales growth represented our best performance so far in fiscal 2007.

The Lexington operations led Animal Safety's performance in the third quarter with sales growth of 10% compared to last year. Sales of diagnostic test kits used in research applications achieved 40% growth in the quarter and tests for drugs of abuse sold to the forensic market were up a solid 8%. The biggest contributor to sales growth for Animal Safety was the growth in OEM sales of veterinary instruments and specialty needles marketed to large animal health companies. Sales in this growing market segment were up more than $360,000 in the quarter and are now up more than 100% on a year-to-date basis.

We also experienced broadbased growth in sales of other products sold to veterinarians and the OTC market, including a 23% growth in injectable vitamins, 40% growth in sales of small animal supplements and a 19% increase in sales of wound, leg and foot products. The Hacco rodenticide business experienced a nice turnaround in the third quarter reporting sales growth of 5%. You will recall that this operation has been facing a difficult comparisons of the prior year when weather conditions contributed to a significant outbreak of moles in the Pacific Northwest that led to unprecedented sales growth last year for our zinc phosphide based rodenticide sold under the trade name ProZap. As predicted in conference calls in our first and second quarters we felt that Hacco would start to show positive results as we moved into our third and fourth quarters, and it was good to see this operation return to positive sales growth compared to the same quarter last year.

The Animal Safety division also signed up a new in country distributor for the UAE during the third quarter that is expected to contribute significant international sales growth for the fourth quarter as we move into next year. As far as other important initiatives impacting both Food and Animal Safety we continue to look for ways to reduce costs, without sacrificing quality to ensure we maintain a leadership position in terms of being a low-cost producer wherever possible. We have recently signed contracts with a number of trucking firms to deliver what is called less than full truckload shipments at an estimated 20% savings compared to prior rates. In addition we expect to expand our in-house manufacturing capabilities during the fourth quarter and install some automated manufacturing equipment that will expand capacity and reduce costs for several product lines.

And as Jim stated earlier, we are moving forward with our plans to consolidate our biological manufacturing from Tama, Florida to existing facilities in Lansing, Michigan. This consolidation will result in some duplicate costs for the short-term, probably running through the first quarter of fiscal year 2008. However these duplicate costs are not expected to be significant, and I think as we have shown with previous consolidation and manufacturing operations savings will be realized once the consolidation is complete.

March Madness has a slightly different meaning at Neogen during this time of the year as we've now started our budgeting process for fiscal year 2008. As Jim said we have conducted only a few first review meetings, but I can say that there is a great deal of enthusiasm and excitement among our sales and marketing teams regarding the opportunities that exist for both Food Safety and Animal Safety. Based on the many opportunities identified our greatest challenge will be how to best allocate resources to take full advantage of these opportunities to yield the greatest returns for our employees and shareholders. That concludes our prepared comments for today. We will now open the call for your questions.

(OPERATOR INSTRUCTIONS) Steve O'Neil, Hilliard Lyons.

Good morning. Just a few quick questions. I will read all three of them and then we can come back if we need to. Lon, you had mentioned the performance of the food allergen testing. I thought I would ask about that. I want to see if you could give some elaboration on the gross margin improvement and maybe give us an update on the legal costs; have they about run their course? Should we expect to see similar impact in the fourth quarter?

Let me talk about food allergens. I think one of the food allergens were up again in the quarter. You got to pick certain product lines to talk about. Of course one of the advantages that we've always talked about with Neogen Corp. is the breadth of products, this one-stop shop that we are and the fact that we can serve our customers' needs for Food and Animal Safety solutions based on the number of products and formats we have. There are still many opportunities for food allergens, we're looking at expanding that line, not only with tests for other allergens but also adding additional formats so that we can maintain our leadership role in that area. So I think everything points ahead to a good year, fiscal year '08 for that product line.

In terms of the gross margin question I frankly was very happy with the number that came in for the third quarter. I haven't gone back to spend a lot of time in the detail to see how much of that was fixed. But I think it is reflective of our ongoing efforts to improve efficiencies and productivity. We continue to gain benefits in a number of areas, make better use of existing facilities, bring more products in for in-house manufacturing and we have taken some efforts to -- we've not just across the board lowered prices where we meet price competition. We take advantage of that one-stop shop; we sell our features and benefits and try to build the kinds of relationships with customers that allows us to maintain a premium price wherever possible out in the marketplace and I think that helps our margins.

I will take the last one. The 300,000 that we spent in third quarter is at the end of the road or not, unfortunately its not. These lawsuits as it relates to intellectual property seem to take a life of their own. There is the significant pieces of that have not come to trial, and of course you continue to spend money until you can get them to trial. So Steve I don't know that the expenses will be $300,000 for the fourth quarter, but I am confident that they are probably going to be more than what we budgeted for the fourth quarter.

One quick question, a follow-up on the gross margin. You had talked about the use of some high-cost inventory in the dairy antibiotic testing that you were working through some high-cost inventory from the previous owner. And I wondered is that complete or are you still and are you benefiting from running through that inventory?

That inventory now is all turned through the system, actually has been for more than just the last quarter. And if you look back one thing I'll remind you of and supplement Lon's comment, our gross margin year-to-date is 52 just like it was in the third quarter. So I think that improvement is just showing its way through the entire year.

One last kind of a big picture question I guess mainly for Jim. Reading about the FDA trying to keep up with food importing into the United States and all of the problems they are dealing with; it sounds like they are close to being overwhelmed with all the food imports. And I just wondered if there was any discussion you might have about that or maybe the opportunity that might arise for Neogen because of food imports.

Yes, I think it helps the entire diagnostic, rapid diagnostic testing market where food, safety of food quality has to be tested in some cases still using the older methods that take 72 hours to get results. Obviously they've got to figure out how to shorten that timeframe up. We don't think we've seen the import group at FDA do a lot of testing with rapid test at this point, but at the same time we are going to get more and more of our food from offshore. I don't know what -- we may be looking at some different situations as it relates to animal products because of this high corn price. It is a little bit difficult to feed cattle $4 corn. So we may be seeing some offshore imports, particularly of lower quality utility cuts of meat. And that is going to require more surveillance. So I think that all of that bodes well for Neogen and I believe, Steve, we are in pretty good position to take advantage of it.

(OPERATOR INSTRUCTIONS) Tony Brenner, Roth Capital Partners.

Lon went through a whole list of products that were showing strong double-digit gains. I wonder if there are any products in either the Food or Animal Safety divisions that were showing a decline of close to double-digits.

I knew when I was listening to Lon give his comments that that was likely to be a question; I was wondering myself maybe we ought to disclose what was down. Lon, what was down?

Well, we do have in any given quarter, we obviously have products and product lines that are doing better than others. Fortunately we didn't have any that showed large differences or variances that were down big-time. I can tell you that what we did have if you think about on the Food Safety side, you think about natural toxins, two of the larger diagnostic tests that we have there are for aflatoxin and for DON. It just so happens that last year's crop year was a relatively clean crop year, so it wasn't so much that they weren't really down. They are not down at all, but they are not showing the kind of growth that we sometimes have had in prior years where we have either made greater market penetration and/or had dirty crop years.

So in some cases you got some product lines that are -- they might be growing but they're growing only at 1 or 2% but they are large enough that they bring down the overall percentage. On the Animal Safety side of the business we have had some decline in our disinfectant productline. We think there are some good opportunities. We are taking a look at adding some products to that productline to have a more complete offering and taking a look how we can position those out there, take advantage of opportunities that we know exist particularly with the large integrators in the swine and poultry markets. But that is an area that we've struggled with.

It was good to see the pathogen line show an increase in this particular quarter. That has been an area where we've had some competitive pressures in the past and have struggled to show any growth. The only other area in the Animal Safety I guess is that we do have some products that we carry just to complete our line that are subject to new pedigree laws under FDA, and we are working through those. And we are not really basic in those products in terms of what we manufacture and so that would he another area that is down a little bit relative to sales last year.

One other question. It appears that despite the very strong revenue increase you got no benefit from sales leverage on your sales and marketing expense, which was up at an even greater rate. What is the reason for that, and will that continue?

Well, we take a look and Jim made comments in his remarks related to the fact that it is kind of a simultaneous equation. We are trying to get operating profit and net income up at the same time where we see opportunities. We will make investments, and in the two areas where you're going to see investment is going to be in the sales and marketing and the R&D areas. So we've got initiatives and are expanding our efforts. Jim alluded to the fact one of the things we did this year on the Animal Safety side is we expanded our direct sales efforts. So we added staff in that area. We've added some staff and built a sales organization around that new Soleris productline that I talked about.

And the reason that we did it is because frankly we just see some very good opportunities out there for large sales growth in the future. So we do have a couple of areas where we're leading sales a little bit, and we manage those in a way that we are still going to get through the right kind of operating profit. And I guess Rick just pointed out one of the other areas where we are looking to expand and we will make some investment is in the area of international. Those sales are continuing to go up, but the opportunity is there. Of course we think that total market is placed the domestic market and so that is another area for growth where we will be looking at making some investments.

Tony, I looked at it if you got gross margins that some of these products are running in excess of 60% gross margins that you ought to be willing to spend 20, 21% on sales and marketing. I know in real dollars our expenses were up as compared to, I think maybe $800,000, $900,000 as compared to last year. But on a percent of sales I tried to make that clear in my comments, we are still running at about 20 to 21%. And I think that is healthy. The other thing is that sometimes we get down to looking at individual quarters and whether there is any trends but on a year-to-date basis for the first nine months overall we are down about 30 basis points compared to last year in our sales and marketing area as a percent of sales.

Thank you very much.

Jeremy Steele, Lansing State Journal.

Good morning, guys. Jim, you had mentioned the Food Safety issues that tend to come up in the news, and I know we talked some months back on E. coli issue with spinach. And we've had the pet food issue in the last few weeks. I am wondering if first off if you got much business in that pet food area. And secondly if you've been able to make anymore inroads in the fresh cut vegetable area since we went through all that last season.

Lon maybe able to add some to this. The pet food business, we have long been a strong ally market player with the pet food industry going way back; we continue to be in that position. In fact that industry has a select group out of that industry for the last couple of weeks have had a daily conference call among themselves as they try to help make sense out of what happened. One of our managers sits in on that daily conference call. That one is still a puzzle. I am not sure we know what it was except that perhaps the corn gluten, or the wheat gluten meal that came in that was used came from China.

I don't know that we know that is what the culprit was. That's supposedly the only ingredient that was changed in that overall program. But we have always been strong and continue to be strong with pet food producers, not just in the U.S. but worldwide. The fresh cut business I think a little bit closer to that then I am, but I know there continues to be a lot of concern from the state organizations as well as FDA. But even perhaps bigger, the guys who put their name on the bag its probably more important to them to protect the brand franchise than anything else. We laugh about what has happened in the spinach patch. I don't know what the latest report is there.

I will say in term one of those market segments that I mentioned before its fruit and vegetable. And I mentioned that 9 of our 10 segments are up actually from a percentage growth standpoint. Sales in our fruit and vegetable segments have increased higher than any other segment this year. So we clearly have seen some benefit from the news reports and all of the commentary and media attention that has been placed on the fresh cut vegetable market. We've also seen some increase in testing at some of our laboratory customers where those organizations are sending out samples to independent labs for testing. We are going to continue to work with industry and the regulators there. I think that FDA is concerned about the fresh cut vegetable in terms of the kinds of programs they have in place, and I think we will continue to see some greater emphasis placed on testing and I think we are in a good position to take advantage of that with our products.

Thank you.

(OPERATOR INSTRUCTIONS) Steve O'Neil, Hilliard Lyons.

I am going to beat this to death; I just wanted to come back to the allergens again and you didn't really mention the third quarter performance very specifically other than to say it was up, and you really hope to improve on it. And I guess does that imply that it was a disappointment to you or just not on the radar screen right now as some of the others?

It is just not on the radar screen as high as the others in terms of that percentage growth for the quarter. If I recall I think it was up like -- I think if you look at our individual allergens I think it was up about 5% or 6% for the quarter. You have to remember we came out with some new products last year also and when that happens some companies go through the evaluation process. And when that happens there are some additional orders for kits that take place, so sometimes it takes a while for those to even out from a quarter to quarter comparison. But we've had some good growth this year and they continue to as I said -- we might be in a little bit of a lull here while we get some additional formats out there and some other products. But it continues to grow and we know that there are opportunities there.

It is grown very quickly the past few years, too. I realize that.

Oh, yes. We were running 15%, 20% a quarter every quarter, going back about six years now.

(OPERATOR INSTRUCTIONS) Peter Coyle, private investor.

Excellent quarter. Looks like a good, solid nine months, too. You mentioned that fruit and vegetable sales were higher if I understood correctly or heard you correctly than any other this year. I am wondering the impact of increased corn production in the United States, is that having an effect on you, or do you have any other single product line that you are experiencing a large increase in at this point in time? I did not get on the conference call until about four minutes after so I did not hear the purr.

Let me talk about the corn, of course nothing has happened yet for corn. The corn price has gone up based on extra demand that we've added to use corn for fuel as well as for food, Peter. We will and they are out, I have not seen the latest planning intentions from farmers as to what they are planning intentions are here a week ago. But we fully expected particularly across the major Midwestern states they will plant corn fence row to fence row this time. I don't remember when corn prices have been so high and people have been so optimistic. So there's going to be a lot of corn planted in this fiscal year, in this current crop year. That red crop is in the ground in South Texas and we are moving up now getting in the ground; we are still a ways from putting anything in in the major states.

All of the things that are important about corn production or corn quality still remain. The ethanol -- a lot of that corn is going to go into ethanol, but that ethanol production also yields a byproduct that is called distillers dried grains. A bushel of corn yields about one-third alcohol, about one-third of it goes to alcohol, one-third of it goes to carbon dioxide and the other one-third goes to distillers dried grain. And any toxin that you had in that grain at the time the raw grain gets concentrated twofold or threefold really, when it gets to the distillers dried grain. So the ethanol producers are very conscientious about testing incoming raw materials.

In this case corn, to make certain that it doesn't have high levels of any one of those micro toxins, particularly in the case of aflatoxin. Aflatoxin you could have 10 ppm of aflatoxin, which you can slip under the radar most of the time but once it gets into distillers dried grain we are looking at 30 parts, which would be outside of the range of what people could use. So there will still be plenty of testing going on for the natural toxins regardless of whether that grain goes to food or goes to alcohol, because a portion of that alcohol grain will end up going back into animal feeds. I don't know whether that answers your question.

Yes, that increased testing will come along in what, July, August, September timeframe?

A little bit later. When we start to get the big states -- we call the I states -- Illinois, Indiana, Iowa, that crop doesn't start to get out into the field until dependent on what weather conditions are, but that's September, October, November. Particularly with high fuel prices it takes more fuel to dry down wet corn and (indiscernible) dry down all they can in the field before they try to harvest it.

Thank you very much, and congratulations on a good quarter.

[Larry Southam], myBroker.

Good morning. Again excellent numbers. Just keep pumping them out. I love it. You are still a relatively small company. What is the competitive situation? What are you seeing out there?

We are still small.

A lot bigger than when I started watching.

Yes, well, that's right. I was listening to Lon give his report after I finished my comments, and I couldn't help but think I am sure am proud, 25 years ago I managed to get a job with this company. By the way, we celebrate in June, we do celebrate our 25th anniversary of the time we started the business. I think there is -- you have to look at competition. Nobody has the same strategy we do of being the one-stop shop in Food and Animal Safety so where we've got competitors, hardly anybody that really matches up with us across the board. In any individual segment we've got competitors that match up with us, that varies all the way from the large companies like DuPont and 3M down to small companies with less than $10 million a year in revenue. So it is a big potential market, and we think the Food Safety market is in total worldwide could be as big as $1 billion. We think we got access, should have access to maybe as much as $600 million of that. So there is room for a number of players.

Excellent. Any particular areas or new technologies coming along with I won't say I expect (inaudible) or need to be watched or adopted?

This is a game of watching what's happening every day to make sure that you are on top of the bubble. There is tremendous pressure, will be, has been since we started, to make certain that you got in the way of diagnostic tests, that you are quicker, easier and cheaper. That is what the market wants and as long as you can make sure that you are on top of that, we continue to play. That is one of the reasons that we said in the very beginning that we wanted to manufacture, try to manufacture everything we sold. We would like to invent it and manufacture it and sell it. And we are in that position with most all of our products, which does give us the opportunity as Lon has mentioned several times, to be a low-cost producer. We think that is pretty important.

Very good. Thank you.

At this time we have no further questions. Mr. Herbert I would like to turn the conference back over to you for any additional or closing remarks.

Thank you for joining us this morning. We look forward to finishing up this fourth quarter of the year and getting excited about starting the next year. So thanks for your questions and your interest and your continued support. Good day.

That does conclude today's presentation. Thank you for your participation, and you may disconnect at this time.