Neogen Corp (NEOG) 2007 Q4 法說會逐字稿

Please stand by. We are about to begin. Good day, everyone, and welcome to the Neogen Corporation fiscal year 2007 year-end earnings 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 Herbert, Chairman and Chief Executive Officer. Please go ahead, sir.

Good morning and welcome to our regularly quarterly conference call for investors and analysts. Today as reported we will be talking about Neogen's fourth quarter that ended on May 31 and, of course, our year-end for fiscal 2007.

Before starting out, I would remind each of you that some of the statements that we make here today could be termed as forward-looking statements. These forward-looking statements, of course, are subject to certain risks and uncertainties. Actual results may differ from those that we discussed today. These risks that are associated with our business are covered 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 would also welcome those who may be joined by way of simulcast on the World Wide Web. These comments, along with some exhibits, will be available on the Web for approximately 90 days. Following my comments this morning, we will entertain questions from participants who are joined in this live conference, and I am joined today by Lon Bohannon, Neogen's President, and Rick Current, our Chief Financial Officer.

Earlier today Neogen issued a press release detailing the results of the fourth quarter of the Company's 2007 fiscal year, which as I said ended on May 31 and, of course, with that was our final year-end results. Once again, the Company set a new quarterly record for both revenues and income.

For our 2007 fiscal year, the Company enjoyed a 30% increase in net income, finishing the year with approximately $9.1 million in income. This equates to $0.97 per share for the year as compared to $0.83 per share last year. Our total revenues for the year were approximately $86.1 million, which is up 19% from last year's $72.4 million.

Our fourth quarter was pretty much on trend with the performance that we have enjoyed throughout the year. Net income for the fourth quarter increased 34% to $0.24 per share compared to last year's net income of $0.20. Our fourth-quarter revenues increased 14% on a year-over-year comparison to approximately $22.7 million. Neogen's fourth quarter, by the way, was the 57th consecutive profitable quarter from operations for the Company and the 61st quarter in the past 66 in which the Company has shown revenue increases compared to the prior year.

As stated a bit simpler than that, there have only been five quarters in the last 16.5 years in which the Company has failed to show a revenue increase compared to the prior year.

Last month Neogen's celebrated its 25th birthday. I won't spend a lot of time this morning reminiscing because I think you are more interested in what the future holds for the Company than me sitting here trying to relive the past. However, 1982 just does not seem like it was that long ago when we had the challenge of trying to explain to outsiders what our mission was.

In those days few people could comprehend the importance of either food safety or animal safety. In the new discoveries of biotechnology, we are beginning to find the place in the popular press though where a few people really understood the terms that were being used.

When we began to use terms like monoclonal antibodies and immunoassay systems and new vaccine technologies, we were generally regarded as speaking in foreign tongues. At the same time, the general public had not fully comprehend the concern that natural toxins in grain crops could impact to cause cancer. Most people thought that there was really no problem if the milk we drank contained a little bit of antibiotic residue. Most of us still ate our hamburgers medium-rare because we never heard of an organism named E. coli 0157:H7 and the that organism could be lethal.

In those days mad cow was one that wanted to get on the other side of the fence where the grass was taller. Most of the food that we ate was produced close to home, and we never dreamed that a head of lettuce would be replaced by fresh-cut salad mixtures in a cello bag. We certainly never thought about getting a significant portion of our food from places like India, China and Thailand.

In those early days here at Neogen we worried about meeting the payroll for a half dozen employees and never dreamed how easily it might be today to meet the payroll for 450 employees. Few people could smell the name Neogen and even fewer could pronounce it.

Last week I got a call from one of the original shareholders that happened to be the day that the Neogen stock closed first at over $30, and he had purchased stock at $5.00 a share 18 years ago in our initial public offering. He calculated the compound annual growth of that investment over those 18 years to have been about 11% annually, and he was questioning me as to why he had not purchased more stock at that time.

Obviously there have been a lot of changes in the last 25 years, and I believe that it was change that allowed Neogen to prosper. We were able to attract a lot of good employees who embraced that change. These employees have doggedly looked for and incorporated changes in the technology that would provide our customers with quicker, easier and less-expensive solutions to both food and animal safety. This group of employees has and continues to learn more about our customers business and to work with those customers in helping them incorporate this new technology.

I believe that we understand our markets today, but I also believe that we realize that we will need to embrace this change continually as we move into the future.

I'm also convinced that this team will continue to maintain its focus and capitalize on the changes as they continue to occur. Abraham Lincoln said it well when he said fortunately the future comes only one day at a time. I think we're embracing those future changes at least one month at a time faster than Mr. Lincoln might have been envisioned.

One of the barometers of our growth has been the increase in our business in the international markets. As we have built more critical mass, we have been in a better position to capitalize on these opportunities. In the year that we have just finished, about 38% of our total revenue was derived from outside the US as compared to 29% last year. We estimate that our international markets have about twice the potential as our domestic markets, and we are encouraged that we have been able to grow these markets at an accelerated rate even compared to our domestic sales.

In fact, some of the regulations related to food safety have moved faster and become more stringent in the European Union than they have in the US. Our base of operations in Scotland is helping us stay better attuned to those geographic differences. Not only are we seeing a change in the European regulations, but we are also seeing the impact that has on all those countries that are designed to export to Europe.

Food safety from imported products to products imported here to the US has created a great deal of popular press in the last few weeks. In the US -- and by the way imports about 13% of its total food supply, and that number has been growing. Last week President Bush established a high-level government panel to recommend steps to better guarantee the safety of food shipped into the US and to improve US policing of these imports.

In turn, this has brought a backlash from several of our trading partners who are now placing higher safety standards on food products the US exports to them. The new US Farm Bill is now winding its way through the halls of Congress, and I expect that we will see the enactment and funding of more food safety activities than we have in the past. The concerns in regulations expand beyond just normal foodstuffs. New FDA regulations on the dietary supplement industry will begin to take effect next month. Now these regulations establish new standards for purity and quality similar to those that are required for food producers. Some of our food safety products for concerns such as bacterial contamination are already finding favor with that industry.

The '07 year was a good year for the Company, but it left us even better positioned to take advantage of future opportunities. Those of you who have seen this morning's press release undoubtedly noticed that the Company now has over $13 million in cash and marketable securities and is essentially debt free. The cash, along with our substantial unused bank lines of credit, allow us to fund internal growth, as well as keep us well positioned for those accretive acquisitions.

Let me stop at this point and call on Lon Bohannon, Neogen's President, to talk more about the actual operations of our business and give you a bit more detail.

Thank you, Jim. Welcome to our listeners on the conference call as well as those joining us via the Internet access. Jim has already provided the broad overview of what ended up as a very rewarding 2007 fiscal year. I don't intend to go into quite as much detail as past quarters on the two operating groups, but I do think I would like to cover a couple of key achievements in FY '07 that in my opinion are worth mentioning.

I begin by pointing out that the fourth-quarter sales increase of 14% was our best quarter in FY '07 for same-store sales growth. In addition to this being the case for total Neogen revenues, both food safety and animal safety experienced their best performance for organic sales in the fourth quarter with growth rates of 16% and 12% respectively. I think it is noteworthy that these growth percentages exceeded our same-store sales growth objective of between 9% and 11%, and it does provide Neogen with good momentum heading into our new fiscal year.

As far as specific operating results for the Food Safety division, 2007 was just an outstanding year. Growth for this division was broad-based and consistent throughout the year. Our two most recent acquisitions, dairy antibiotics and Soleris, contributed strong growth to Food Safety's overall 34% sales increase for the year. However, this group turned in double-digit organic growth each and every quarter, including double-digit same-store sales growth for dairy antibiotics and Soleris in the last half of FY '07 when we were comparing apples-to-apples for these two important product lines.

Another interesting fact I just learned is that this week the Lansing operations will produce our sixth millionth dairy antibiotic lateral flow device. Considering that one device normally would be used to test approximately 10,000 gallons of milk, Neogen tests have been used to test a lot of milk in the short time that we have owned the dairy antibiotic business. In fact, Jim has got a bigger calculator than I do, and he tells me that that is something like 60 billion gallons of milk that has been tested with our dairy antibiotic lateral flow devices.

One area of improved performance in the fourth quarter for Food Safety was our line of rapid tests for food born pathogens. This product line, which includes tests in a couple of different formats for E. coli, salmonella and Listeria achieved 17% growth in the fourth quarter. This performance represented a definite improvement over the prior quarters and last fiscal year. We have been spending significant effort and resources to improve our tests and marketing strategies for the protection of specific pathogens. We still have a ways to go to get where we want to be with this product line, but the fourth-quarter sales growth was certainly encouraging to see.

I also need to mention the particularly strong performance of our general sanitation test system that is sold under the AccuPoint trade name. We placed more AccuPoint instrument readers in 2007 than we had sold in the previous three years combined. The ATP testing business continues to grow throughout the world, and Neogen's line of readers and rapid disposable tests are recognized leaders in this growing market.

Included in the 40% AccuPoint sales increase for FY '07 were a couple of significant shipments of readers to China. I would point out, however, that this new Food Safety business in China was not the direct result of recent regulatory actions involving concerns over imports. We have been working on opportunities in China for several years that are just now beginning to realize some benefit of those efforts.

Of course, the recent media and regulatory activity involving imports in Food Safety in general will certainly help our ongoing efforts not just internationally but also domestically. In fact, now is probably a good time to announce that Neogen will be adding a full-time Director of Industry Affairs in August. This newly created position will be responsible for senior level relationships with key industry trade associations and play an important role in building and maintaining a strong presence at the appropriate levels within USDA, FDA and EPA on behalf of Neogen. As Neogen has grown, the need to have someone within the Company to devote full attention to these activities has become more important.

Looking at the Animal Safety division I was quoted in the press release about how gratifying it was to see the Animal Safety division complete its sales growth turnaround in FY '07 by delivering 12% organic growth in the fourth quarter. It is a lot more difficult to build momentum and show good annual sales growth when you first have to dig yourself out of a hole, but that is exactly what our Animal Safety team did in FY '07, and I think their strong quarter to quarter improvement in sales growth shows the commitment and positive can do attitude that exists within out Animal Safety group.

The Animal Safety division achieved strong performance in FY '07 in the area of forensic drug tests that were up 15%, and it was another strong year for growth in veterinary instruments with a sales increase of 10%.

International sales of rodenticides also had a particularly good year with sales exceeding budget coming in 29% ahead of the prior fiscal year. However, Animal Safety's best performance was in the area of specialty veterinary instruments and needles where sales more than doubled in FY '07. This product area experienced significant growth each quarter throughout the year.

Animal Safety's biggest challenge continues to be the need to expand our product line with additional proprietary products like our BotVax B and EqStim vaccines. I don't mean just vaccines, but with additional proprietary products that will provide greater opportunity for double-digit organic growth and improved gross margins. We have active programs underway to find these products through an internal development, strategic partnerships or where appropriate exclusive licensing agreements.

And speaking in terms of margins, we often get asked how much longer can Neogen continue to achieve substantially better percentage growth and operating profit than the percentage growth achieved in sales. Probably the true answer to this is, I don't really know for sure, but we do continue to devote substantial time and effort in improving both gross margins and operating profit. These efforts are taking place within both the Food Safety and Animal Safety groups.

During fiscal year 2007, we installed new automated equipment that enables us to produce as many active AccuPoint sampler tests in a normal one shift working five days per week than we could produce in three shifts working six days per week previously. Neogen's purchasing team also completed negotiations on new shipping contracts that initially appeared to have saved us as much as 20% on incoming and outgoing freight expense.

Now these cost-saving initiatives helped Neogen achieve a 25% improvement in operating profit on a 19% overall increase in sales for the 2007 fiscal year. Additional cost savings programs are underway for our current fiscal year. They include expanding internal manufacturing of products currently produced on the outside, consolidation of high margin vaccine production facilities and additional freight saving initiatives involving warehouse, strategic location and alternative freight distribution channels.

I guess I would bring my comments to a close by saying that as good as the 2007 year was in terms of financial performance, our 2008 fiscal year has all the signs of being an even better year. The markets for Neogen's products continued to expand as witnessed by the unprecedented media and regulatory focus on domestic and international Food Safety issues in addition to consumers willingness to spend more and more on the care and health of things like companion animals. And as our markets grow, we seem more and more synergy between the Food and Animal Safety groups.

For example, most of the dairy antibiotic testing now occurs at the milk processing facility serviced by our Food Safety division. However, testing back at the dairy farm is a growing opportunity as tests become faster and easier to use.

Another opportunity is to take our line of drug tests sold primarily to the racing market by our Animal Safety division and expand sales efforts to rapidly expanding markets for the testing of drug residues in food animals and milk. As a result, tests for drugs like chloramphenicol, clenbuterol, tetracycline and ractopamine will become increasingly important to our Food Safety marketing effort in the years ahead.

Also in FY '08 we will tweak important Food Safety products like Reveal, salmonella, the Soleris test system and our diagnostic test for food allergens to access emerging sales opportunities in key animal safety markets.

Clearly the Neogen management team is pleased with our fiscal year 2007 results, but we know that fame is fleeting, and we must continue to deliver superior results in fiscal year 2008 and the years ahead. I'm very happy to report that our management team and all of Neogen's employees to which I owe a great debt of gratitude for their outstanding performance in FY '07 is committed to maintaining Neogen's great history of success as we move forward.

That concludes our prepared comments for today, and at this time we will entertain questions from our listeners. Thank you.

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

You said you did not want to, but I'm still going to try and pin you down on a few product-specific areas. You did give us some information on some annual increases and things like foodborne pathogens in the AccuPoint business. I just wondered if you could give us maybe some fourth-quarter performances in those areas.

Yes, I do have some numbers. I mentioned that pathogens were up 17% for the quarter. Our test for what we call the general micro area, which includes that Soleris rapid optical test system for spoilage organisms and indicator organisms, was up over 30%. General sanitation just had a phenomenal fourth quarter. Sales up about 50%. Natural toxins were up 12% for the year. I think they were fairly flat in the fourth quarter, but as you know that business tends to be a little bit more seasonal with the testing of a lot of commodity crops. Allergens had a particularly -- we did not talk about it -- but they had a particularly good fourth quarter with sales up 20%, and that put them up 12% for the year. And that Food Safety was just very broad-based and very consistent for most of the year in all of our major product lines.

What about food pathogens for the year? I guess I'm sorry I got it backwards, you did give fourth quarter.

Yes, I think that is the one area where I said we've still got a ways to go to make improvements. I mentioned in the last quarter that the Acumedia dehydrated culture media portion of that does well. But the specific test for the pathogens like E. coli and salmonella, they were down slightly for the year. And slightly is like, you know, very small single digit kind of declines.

Okay. I guess a similar question in Animal Safety, you talked about forensics and instruments and international rodenticides. I am just curious about those for the quarter.

Yes, I don't have as much detail in terms of specifics for the quarter in some of those individual product categories. We have got so many different SKUs on the Animal Safety side that it takes a while to accumulate some of that detail.

I know that international rodenticides had a good quarter. I know that our ethical sales had a particularly good sales quarter, and that includes not just things like BotVax B and EqStim but also includes things like vitamin injectables and a lot of products that are sold through the veterinary channel or the veterinarian channel I should say.

It was a solid quarter and year for veterinary instruments, and of course, that OEM side of the business was -- I don't even throw out the percentages. I just say more double the percentages are so high, and it would have been that way for the quarter as well.

What about the domestic rodenticides?

The domestic rodenticides actually recovered nicely over the last half of the year. You will recall that they started out the year in the first two quarters struggling a little bit because of that comparison with the vole outbreak break in the Pacific Northwest last year, which caused a big comparison difficulty for the zinc phosphate based products. But overall the rodenticides had a good fourth quarter. I think they probably -- did they have double-digit growth in the fourth quarter in rodenticides?

8%.

8%. For the quarter, so they just missed out on double-digit growth.

Okay. Looking at the -- gross margin was maybe down just a little bit, although it did improve for the year. In the fourth quarter, was that a mix effect, Lon? Any other comments on that?

Yes, when you have that small of a change, it is just how the other product sales fall under which categories. I think I indicated to you that on the Animal Safety side we had a big quarter for ethical sales. Some of those products are -- some of those products are by and and sale items that have a little less margins in them. But it would not have been enough -- I mean, when it changes 10, 20 basis points, there is not anything going on other than mix generally.

So I can figure cash flow -- you have a depreciation and amortization figure for 2007 and capital expenditures?

Yes, I can. Actually just to get you started, cash flow from operations was $9.9 million the way that I compute it. And depreciation and amortization -- sorry, about the delay -- $2 million 840.

Did that did your question, Steve?

Actually you faded out for a second there, Rick. I did not hear CapEx.

$2 million 840 in depreciation and amortization, and the CapEx was $4 million 7.

Okay. And then the last thing -- of course, I just cannot end the question without asking about the BetaStar US approval and where that might stand.

We are thing pretty close on that. It goes through a bunch of hoops. We have got one group of tests to get completed. I would say we're probably -- I would guess somewhere in the 60 to 90 day range before we will have -- be able to put that product into the US market.

Other markets are growing nicely. The Mexico market is fairly new. That one is beginning to move on for us now. So every reason to believe that that product will continue to do as we had expected it at the time of the acquisition.

Well, thanks very much. I will let someone else ask a question, and a good quarter.

(OPERATOR INSTRUCTIONS). Tony Brenner, Roth Capital Partners.

Lon, I thought I heard you refer briefly to Neogen's projected revenue growth of 9% to 11%. My impression has been that the Animal Safety business was expected to grow in the top line at a high single digit rate, and the Food Safety business at a teens growth rate resulting in a double-digit growth rate. Is that wrong, or are you going to be, in fact, very satisfied with, let's say, 9%?

Let me answer that.

Jim, is that you?

No, we would not be satisfied with that. You know we still are shooting for a bogey of 20%. We think that with internal growth, development of new products, existing products that we have out there today, and the introduction of other products and markets through acquisitions that we can still grow this business at 20%.

We fell a bit short of the this year but not much. As we look at various pieces of the business, obviously as you get more mature, we look at various pieces of the business, that 9% to 11% organic growth with existing products is not a bad mix. But when you put together with that new products that are coming online that are developed internally, plus products that we can bring in by acquisition, we still have our goal of 20% compounded annual growth. Now we did not quite get that this year, but we got awful close to it.

Now let me just add to that. We have -- I probably did not make it clear enough, but the 9% to 11% that we kind of throw out there is related specifically to organic sales growth. And I am trying to come up with a number that quarter end and quarter out we think we can achieve.

Now we know that the markets for the Food Safety side of the business are growing a little bit faster, but your question is timely because we are having our monthly operational meetings and it is on Animal Safety, and we just had a fairly lengthy discussion earlier today about the need to have goals of growing double-digit organic sales growth on the Animal Safety side of the business. We think those opportunities are there, and that is what we want to achieve.

We had in place what is called a CleanSweep program for both Food Safety and Animal Safety where we're focusing on the largest opportunities with prospects and customers. And in that regard where we've got those accounts identified, we want to be able to try to grow those 15%. So we have got internal objectives that are higher than that. It is a challenge to generate consistent numbers every quarter. But on an annual basis, Jim is exactly right. We want to try and hit 20% compounded growth rate. We want to make sure we are in that double-digit overall growth rate for same-store sales growth.

Fair enough. Thank you. Just one other question. Has the vaccine business been consolidated in your Michigan facility now, or is that still pending?

It is still pending. We're ready to do it. Everything is set to go. Staff is present, and equipment is warmed up, and we are waiting on final approvals from FDA and from CDC to move the portion of the cultures up from Florida. We have already accrued the closedown of the Tampa operations. I think Lon earlier had figured that he might get that moved about now in the July timeframe. I think we are now saying it before we get it all effectively moved, we're probably looking at early fall.

There is not anything on our side that is slowing up that process. I mean what we find when we get into these things where we have to get third-party approvals or regulatory approvals, they don't operate with the same sense of urgency sometimes that Neogen Corporation does. I was very happy to see that when we have had both USDA and CDC out for a site visit and review or audit if you like, and there were no major issues of note or concern. We have already responded. We were able to respond to all of their questions within a matter of days. So it just takes a process to work through that bureaucracy in this case for those two organizations. We're doing everything we can to push it along, but they are just not moving as fast as we would like.

(OPERATOR INSTRUCTIONS). Robert Mitchell, Conestoga.

I just wanted to ask you, obviously you had a great year overall, and the cash flow was building up. If you could talk a little bit about perhaps the use of that cash in terms of either acquisitions, or do you think about rewarding shareholders with a dividend or both?

Or both. Well, I have long had a philosophy -- and people who have been on this call have heard it before -- that the time to give shareholders money back in cash is when you cannot figure out how to spend it to give them the kind of return that they expect. So I think we're still in that position. We have got the good opportunities out there right now. We do not have -- I think we have got I believe five companies that are -- opportunities that are on what we call our radar screen. That means we have identified and we probably have some conversation going.

There are no letters of intent that are binding at this point in any one of those. All of those if we were successful would be accretive at both the top and the bottom lines. But I would say to you in fair disclosure we may not get any of them done.

So there are -- but I say that to you tell you that there are some good opportunities out there, Robert. And nothing works quite as good as cash when you are in that kind of business, and you know the kind of businesses, the size of the business that we're looking at cash sometimes, immediate cash, where there might be some immediate need for a move is even more important.

Okay. Great. One housekeeping question in terms of, can you talk about CapEx, where you think CapEx will be for the year?

For the current '08 year?

Yes.

We've generally would expect it to be around the rate of appreciation. With -- if we have a special need, a large machine or a building or something, that would run it up on top of that. But the routine kinds of buys are around the depreciation level.

Okay. Great. And one final question, you talk if you can about any new products that you anticipate putting into the portfolio over the next six to nine months? Aside from the BetaStar antibiotic in the US.

Yes, we have got some that considering that I have got two or three competitors that are probably listening to this phone call sometimes or being on the World Wide Web I probably don't want to totally disclose, but then you can appreciate that. But in addition to some new products that are in the pipeline that are coming out and the pipelines are full both at Food and Animal Safety. We have also got a number of product improvements. As I spoke in the very beginning of my comments, I think change has been important. It has been important to this Company as the technologies have improved and we have improved our ability to transfer those technologies, to make products easier, faster, less expensive for our customers. So we have had two or three of those that have either come out within the last 60 to 90 days or will be out in the next 30 days. So we will see a continued move there.

And when you look at what is available on the Food Safety and a lot of that expands over to the Animal Safety side, we are looking at being able to detecting the output and control the presence of natural toxins and then bacterial growth, be they pathogens or be they spoilage bacteria, the control of foodborne allergens has been important. And the area that is probably progressing now is a bit of a new frontier though we have been there for awhile is the whole area of drug residues.

So those are the main concerns of Food Safety, and therefore, a lot of them are the main concerns of Animal Safety as you move that food system back inside the farm gate. So there's not a whole new frontier out there that we see at this point, but there will be some more products added and continual improvement of the current products.

[John Morehead], Catalyst Associates. I do apologize. Mr. Morehead has disconnected from the conference. [Peter Quayle].

I had a question concerning some new product. I think I will save it for a later time. But I do want to congratulate you for a great quarter and a great year. And certainly over the years that I have been invested with Neogen, I have followed you, as you know, in conference calls and other events, and I look forward to a very prosperous '08 and beyond. Keep up the good work.

Thank you, Peter.

(OPERATOR INSTRUCTIONS). Gentlemen, it appears we have no further questions at this time.

Wonderful. Let me not get off the line without making certain to give those of you who are able to be here or on the line, to give you an invitation to our Thursday open house for investors, analysts, friends, that is held here at the Company headquarters as we hold each year. I think a big part of you on this line should have received personal invitations. If somehow it did not get to you, well, consider it has now been given. But it starts at 4:00. If you need more information on that, call Terry Maynard. Terry can give you all the details, and Terry is available at the main Company number.

So, in closing, thank you again for your participation this morning, and thank you for your support in following the Company through the year. We look forward to talking with you coming up here in another couple of months about what is bearing out to be an exciting first quarter for our fiscal '08 year. Good day.

And this concludes today's presentation. We thank you for your participation.