Neogen Corp (NEOG) 2008 Q1 法說會逐字稿

Good day everyone, and welcome to the Neogen Corporation Q1 fiscal year 2008 earnings announcement 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, Chairman and Chief Executive Officer. Please go ahead.

Good morning and welcome to our regular quarterly conference call for investors and analysts. As stated, we will be reporting this morning on Neogen's first quarter that ended on the 31st of August. 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 risks and uncertainties, and the actual results may differ from those that we discuss today. The 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 also welcome those who may be joined by way of simulcast on the worldwide web. These comments along with some exhibits will be available on the web for about 90 days. Following my comments this morning, we will entertain questions from participants who are joined by this live 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 that detailed the results of our first quarter of 2008 fiscal year, which as I said ended on August 31st. Once again, we set a new quarterly record for the Company for both revenues and income. Neogen's net income for the first quarter increased 25% from the previous year's first quarter to over $3 million. Adjusted for that 3-for-2 stock split that was effective on September 4th, net income per share was $0.21 in the first quarter, compared to $0.17 for the same period last year.

The Company's first quarter revenues increased 13% from the prior year to $22.9 million. That is a revenue record for any quarter in our 25-year history. We continue to take pride in the Company's consistent revenue growth, and this quarter marks the 62nd in the past 67 quarters when Neogen reported revenue increases, as compared to the previous year, so that is now a record that spans almost 17 years.

Our achievements in both the Food Safety and Animal Safety areas in the first quarter were gratifying. Lon Bohannon will report more on the specifics of operations in a few moments, but I would like to cover a few of the highlights of this first quarter. We continued to expand our international sales during the quarter, with almost 40% of our total revenues coming from international sources. Those of you that follow the Company know that this has been one of our objectives over the past few years, since we believe that about two-thirds of our total market potential lies outside the U.S.

That international growth was generally broad-based during the quarter, with increases from Latin America, from our Asia-Pacific region, and from Europe. Our Neogen Europe Limited subsidiary, once again, turned in outstanding results, with increases in revenues of 32% compared to last year's first quarter. I could add that the performance of that group has not gone unnoticed.

During the quarter Neogen Europe Limited received the coveted Queen's Award that was presented personally by Queen Elizabeth for our outstanding record in the international trade. In fact, later today I will be attending a reception hosted by the British Consulate, in which Neogen and one other firm will receive an award from the British Consulate General in recognition of trade development between the U.S. and the U.K.

Perhaps the most significant activity of the first quarter was our 3-for-2 stock split, which provided a stock dividend to shareholders of one additional share of stocks for each two shares held. The Board of Directors made this decision in order to enhance the availability and liquidity of our shares, and to allow for greater participation by the market, while at the same time rewarding a large number of loyal, long-term investors with this dividend.

It appears that the decision was appropriate since the average daily trading volume in Neogen stock in the month that followed the split announcement was 60% greater than the average daily volume for the three months prior. At the time the dividend was effective, Neogen stock had been trading in the 30 to $33 range, since that time the stock has been trading at around the $22 mark, which is slightly in excess of that pre-split price.

The quarter also saw us making continued progress in the acquisition of synergistic businesses. On the 27th of August, a few days before the end of the quarter, we announced the acquisition of Kane Enterprises, a South Dakota-based manufacturer and marketer of animal-safety products. This acquisition was done for both financial and strategic reasons.

Kane Enterprise had been growing consistently in the 10 to 15% range for several years, and in it's most recently completed fiscal year, the company had revenues of about $6 million. The acquisition is synergistic to our basic businesses, and represents what we term to be a bolt-on acquisition. The operations are now being relocated to our Lexington Kentucky facilities, where they will be generally absorbed by our already existing manufacturing and marketing groups.

We like the Kane acquisition also from a strategic standpoint, due to it's position in the dairy industry, with a focus on the nation's largest producers of milk, these Kane products will add to our existing product lines that are already serving this important industry. Kevin Kane, the former President, has become a Neogen employee, and will be helping us further expand our dairy products business.

The quarter also brought about what we might term as some disadvantages. Our increase in profits has now pushed us into a new tax bracket, with the effective tax rate now of about 36%, as compared to an effective rate of about 35% last year. As I suppose is a disadvantage to most companies in the high-tech intellectual property areas, we continue to have legal expenses related to the protection of our intellectual properties.

In fact, expenses related to legal activities were somewhere over $90,000 greater in this quarter than they were a year ago. The decrease in the dollar value is having both positive and negative impacts on the Company. In most of the world, we sell product on a dollar basis, but in a few cases we do sell in euros and British Sterling. In those cases it has been an advantage.

However, we also manufacture products offshore, and in those cases the decrease in the dollar value has a negative impact. We, of course, ended the quarter with a strong balance sheet, with total assets nearly $109 million. That is up about $3.5 million from the beginning of the quarter, and this resulted in an increase in shareholder equity of about 5% over the three months. We still sit with approximately $6.8 million in cash after the purchase of the Kane business. We have reduced our current liabilities by about 7%, and we still have no bank debt.

This leaves us in a strong position with available capital for growth, and we continue to be in the hunt for additional good, synergistic acquisitions. I guess at this point I would be remiss if I didn't remind you of the upcoming Annual Meeting of shareholders to be held on October 11th. At that time we will be asking shareholders for the reelection of Jack Parnell and Bob Book, who are strong Directors that have played a role in the Company's growth.

We are also asking for the election of Dr. Clayton Yeutter, a very knowledgeable addition to our Board of Directors, having served in numerous important national and international capacities, including the United States Secretary of Agriculture, and a member of the Board of Directors of several important large ag firms. For those of you on this conference who may not yet have returned your proxies from that meeting, we would ask that you not forget to do so.

Looking back over the quarter, I would say that it's been one of continued growth in the importance of both Food and Animal Safety. Recalls pertaining to food and animal feeds range all the way from bacterial contamination of fresh vegetables, to the continued concern of food allergens, and also the contamination of our meat supply. During the past quarter, I know of 68 recalls that were related to Food Safety issues. And the concern of Food Safety related to animals back inside the farm gate also continues.

I am often asked if there are greater challenges in food safety today than there were a decade ago, or if we just hear more about them. Both are likely, I guess. However, as we continue to grow the food business on a worldwide basis, import more food from less developed countries, and produce animal products in larger and larger facilities, the concerns do become greater, and the need for the kind of products produced by Neogen become even more important.

Let me stop here before stealing more of Lon Bohannon's comments, and let him talk more specifically about the operations of our business during the past quarter.

Thank you, Jim. I too would like to welcome our listeners on the conference call, as well as those joining us on the internet. I think I will begin my comments by spending some time on our outstanding improvement in operating income for the first quarter.

Those of you that have been listening in on these conference calls for some years, have no doubt heard us say that we believe the best way to evaluate Neogen's performance from quarter-to-quarter and year-to-year is look at the operating income line. We say that because we do have some product lines that have very good gross margins, but may require higher selling expense and technical customer support, while other products may have proportionately lower gross margins, but require much less customer and technical support.

Accordingly, we think that the real measure of a product line's contribution to profit is that amount of sales dollars that we can drop through to the operating income line, which takes into consideration not only gross margin, but also all of the other operating expenses required to support sales to the end users. As you no doubt noticed from the numbers reported in the press release, operating profit in our first quarter was over $4.5 million, representing a 27% improvement compared to the first quarter last year. I think even more impressive, our operating income was 19.8% of total revenues, and I am not aware that Neogen has ever had a better quarter for operating income, in either total dollars or as a percent of total revenues.

This outstanding performance and improved operating profit can be attributed to several factors. First, Neogen has diligently pursued a number of cost-saving initiatives over the last 18 to 24 months, that are now paying dividends. Among these cost-saving programs include consolidation and integration of acquisitions, changes to our logistics and distribution efforts that have reduced freight cost, and installation of automated equipment that has improved productivity and production efficiency, reflected in lower labor and overhead cost. Secondly, we did experience a favorable mix of high-margin product sales in our first quarter, that contributed to stronger than normal gross margins for both the Food Safety and the Animal Safety groups.

Lastly, just in terms of commenting on this area of operating profit, I would say that we do continue to experience improvements in overall operating efficiencies, due to the consistent growth in total sales volume we have had for a number of years now. Now looking forward to the rest of this year, I am not ready to promise we can continue to deliver operating income equal to 19.8% of revenues each and every quarter, however we do have ongoing programs in place to further reduce cost and improve operating efficiencies, but the overall objective of pushing operating profit to levels consistently above last year's percentage of 16%.

As far as performance for our two operating groups, let me begin by discussing some highlights for the Food Safety division. This group followed up an outstanding fourth quarter in our last fiscal year, with an even better first quarter to start out this fiscal year. Food Safety achieved same-store sales growth of over 20%. This growth was particularly satisfying, because it was based on increases in sales across most all product lines and market segments.

A couple of areas are deserving of special note. The Soleris product line of diagnostics for detecting general microbial contamination and spoilage organisms doubled in sales compared to last year, and sales for our line of AccuPoint test systems for general sanitation increased almost 50%. However, as I mentioned earlier, Food Safety saw broad-based sales growth, with diagnostic tests for food-borne pathogens, drug residues, natural toxins including histamines, and tests for food allergens, all experienced sales growth of more than 10%, compared to the first quarter of last year.

I have been asked on many occasions over the last six months or so, how much impact the recent attention given to food contamination have helped our sales, and specifically whether we have seen an increase in sales of diagnostic tests for food safety going to China. I am sure all the media attention and regulatory focus on food safety issues have had a positive effect on Neogen's business.

We have seen some strong sales increases in certain markets, like fresh cut fruits and vegetables, but in my opinion, all the attention and media coverage surrounding food safety has not had what I would call, a significant overall impact on actual sales of diagnostic test kits. I think the actual growth we have been reporting in food safety sales is more likely the direct result of focused sales and marketing programs, and increased management intensity that began more than two years ago, further supported by a couple of very good strategic acquisitions in fiscal year 2006, and I would say a concentrated effort to become recognized industry experts, in key markets like pet food.

In terms of China, I would say that awareness pertaining to food safety has increased dramatically this calendar year. We are positioning Neogen to take advantage of testing opportunities that we believe will develop, as that country strives to improve its infrastructure for monitoring food quality for both exports and domestic food consumption. In fact, Jim and I just returned from a trip to China, and it appears our best opportunities for growth in the near-term will be sales of the AccuPoint test systems for general sanitation, most likely to be used mostly by governmental units, sales of dehydrated culture media for both food safety and pharmaceutical markets, and sales of diagnostic products to large, multinational corporations, who have operations in China and worldwide brand names to protect.

I would hasten to add that China is still in its infancy as a market for our food safety products, and it will take some time before China represents a significant portion of our total international sales revenue. I would also remind our listeners that China is important to Neogen as a supplier for a number of animal safety products, and a growing number of ingredients used in our dehydrated culture media.

Turning my focus to Animal Safety for a few minutes, this group achieved sales growth of just over 4% for the quarter. This growth was actually better than we had budgeted for the Animal Safety group in the first quarter, so we are very much on target to achieve double-digit growth for our current fiscal year.

As we reported in the press release, the growth in Animal Safety sales was led by superior performance in the diagnostic products, where sales were 19% better than last year. Growth was particularly strong in sales of tests to detect drugs of abuse in racing animals, and for diagnostic tests used in the forensic market.

Sales of veterinary instruments were up 15%, and that continues their strong run of double-digit quarterly sales growth that now spans several years. This product line will also get a boost as we move through the rest of this fiscal year, from the introduction of a new line of disposable syringes and needle combinations that were launched at the very end of the first quarter. Sales of other specialty veterinary products also experienced strong growth in the first quarter, with sales up 27% compared to last year.

Now, there are two product sales areas in the Animal Safety, where we experienced what I will term below average performance in the first quarter. First, sales of a number of buy and sell commodity products that are sold into the ethical market. Those are products that are ultimately used by veterinarians. They were down flat to 10% down in the quarter. Fortunately, these products, while they are needed to provide a complete offering to our customers, provide lower operating margins, and do not have a significant impact on the overall bottom line performance.

In addition, we do not spend a lot of sales and marketing effort on many of these products, as we much prefer to allocate marketing resources to products with higher margins, or that represent a better long-term strategic fit for Animal Safety, and that can be manufactured in our own Neogen facilities. For example, we recently conducted a continuing education seminar and open house for veterinarians at our Lexington facilities, and we may certainly have focused on products that were high margins like our XM and BotVax B vaccines.

Domestic rodenticide sales were another area that fell slightly short of expectations in the first quarter. I have spent some time analyzing these sales by market segment, by salesmen and sales territory, but product SKU, as well as by customer. It does not appear to me that we have lost market share with these products.

At this point I believe that rodent populations and the problems associated with rodent infestations are generally down, due primarily to mild weather conditions throughout large portions of the country. We are monitoring this area closely, and in fact we are actually being proactive. We will be adding staff and expanding our sales efforts into some key focus markets to help grow rodenticide sales as we move through the year.

Now on the positive side for rodenticide sales, we had a very strong first quarter in sales to international markets where sales increased 60%, led by large shipments to Mexico. So overall it was a fantastic quarter for sales, especially since the increase in organic sales exceeded our internal growth objective, and it was also a quarter where we experienced exceptional growth in operating income.

We believe the Kane acquisition is a great fit for Animal Safety, and that it will enable us to leverage existing customer relationships, to increase future sales for both the Kane products as well as the Neogen products. We have also identified and are working a good number of opportunities on both the Food and Animal Safety side, that involve several product categories and cover a number of different markets, and that gives me confidence that we will continue to report favorable results in the quarters ahead.

That concludes our prepared comments for today's conference call, and we will be happy to answer your questions at this time.

Thank you. (OPERATOR INSTRUCTIONS) Our first question comes from Amy Stevens. Your line is open.

Okay. Yes. I just wanted to follow up on the comment earlier about two-thirds of the growth opportunity available to the Company being ex-U.S., and I was wondering whether that was meant to apply to more Food Safety or Animal Safety, or whether it's really a broad statement applicable to both?

That is a good question. I think it's fairly broad, but one, I believe the U.S. probably is the leader in Food Safety, in the food safety area, particularly the diagnostics, whereas competition in certain other areas in animal safety groups, particularly in South America and somewhat Europe, we had a little bit more competition there. So more of our two-thirds growth opportunity would, Amy, likely be, well, it is most likely on the Food Safety side.

On the Food Safety side. Okay. Just because of the competition issue. Right, okay.

And then you mentioned that with regard to China, and I know you are getting more questions about this than you'd probably like, but obviously it is an area of focus or attention right now. Could you help us understand what you see as the opportunity there? If in fact it hasn't perhaps contributed as much to the growth that we have seen this quarter as might be estimated or assumed, than how are you taking advantage of the opportunity there in the coming years?

Let me make a brief comment and then let Lon finish it up. Because he is on the phone with China generally in a conference call once a week. You have got to remember that it hasn't been that long ago, and still true to a lot of degrees, is Chinese are concerned about just having enough food to eat, without as much emphasis on the safety of that food, however after joining the WGO, which requires that they have similar food safety precautions at home as they do on the export products, as they continue to export more and more product from China, and with the upcoming Olympics in Beijing, which has been a real key for the Chinese government to make certain that they are not embarrassed by something that happens, there is a lot more emphasis.

But I think as Lon says, most of the testing right now is likely at the government level or is at the government level, and it is for products that are going to be exported from China going somewhere else, and less concern about the safety of the domestic food supply. That will all come in time, but the Chinese still don't have a lot of cash to spend. There is a lot of cash that is, a lot of our cash is going over there, but cash available for these kind of things is not as available as one might think.

I am going to let Lon finish that up as it relates to the overall look.

Amy, I would say that in the short-term, there is no question that the Olympics and the Chinese government interest in making this an event that can make a statement, in terms of the overall world's perception of China is very important, and that is driving some very significant interest in the short-term, on what I will call food safety issues. They are interested in easy, simple, kinds of tests that they might be able to utilize, to better ensure quality of food and water supplies in conjunction with that event.

That is why we think that in the near-term the best opportunity in terms of our products for a fit over there is with our AccuPoint general sanitation systems, and in fact there has been some interest in that. We have been working on that for the better part of a year now, and we have placed 125 units over there, and are looking at some other opportunities where that product will go over there.

I think on a longer-term basis, because they do have a growing export business, as it relates to some food products to the U.S., Europe, and Japan particularly, they realize that they will need to put some programs in place, but they are still struggling with how they do that as their agricultural system moves more into larger farms, and figure out how they can not just put the regulations in place, but then have some sort of enforcement procedures so that there will be some accountability.

That is where I think the multinational corporations will help, because both those companies do have some brand names that they have to protect, and as they develop their operations in China, I think we can work through their offices here in the U.S. and Europe, and other places where they are headquartered, to help them put some kind of programs in place that will mirror the kinds of testing that they are doing in more developed countries.

So I think it's going to, I don't think anybody knows for sure how this will all play out. It is a developing area. We are not investing a lot of resources over there, but we are certainly spending some time there, because we do think it is an opportunity.

There is an example, Amy, Lon and I were there a couple of weeks ago and had meetings with the Ministry of Health. That seems to be where the focus is right now, particularly for the domestic supply. And they are concerned about things such as setting a standard for water quality at the tap of households. They are back to that stage.

They are concerned about can they somehow do a test to set up some sort of an equivalent that we use in our health departments, on the cleanliness of the surfaces upon which food is prepared in restaurants and eating establishments. So they have got a long ways to go yet.

Okay. Thank you very much.

Our next question comes from Steve O'Neil, Hilliard Lyons.

Good morning.

Good morning, Steve.

Just a couple of quick follow-ups. Lon, did you said the AccuPoint sales were up nearly 50% or 15%?

That was 50, 5-0.

Okay. The press release just referred to double digit, and I wanted to make sure I heard it correctly.

Yes. We have been giving out such big numbers for AccuPoint for so many quarters now, I was surprised that the number was that high in the first quarter. It shouldn't be because we have had a lot of focus on that area, and we have got some good momentum built up within our sales force and our marketing group, but they turned in another outstanding performance, and it was, when you combine the instruments with the disposable samplers, sales were up just over 48% compared to last year.

That is very good. When you combine the domestic rodenticide and the very strong international, how did rodenticide perform overall in the quarter?

They came in right flat compared to last year, and like I said, that was pretty much on where we had budgeted. On the Animal Safety side, they did actually exceed our budget. Because of the nature of some of the customers there with the distributors, some of the promotions we have in place that are tied to calendar quarters, and some international customers whose ordering patterns are sometimes as much as five, six months apart, we could see that sales for this particular quarter weren't going to be in double digits, but we did exceed our budgets, and our budgets do call for double digit growth for the year. So I actually feel pretty good about Animal Safety after we got through the first quarter like that.

Okay. Were external sales of the culture media up in the quarter?

External, our sales of Acumedia products were up, yes, both from what we call the traditional markets, as well as our Food Safety market. So we continue to see good growth there.

Then last product, can you comment on just the vaccine, I don't know if you mentioned the vaccine and the biological sales or not? Just how they performed?

We are in the process of answer my question, and then I will answer your question. We are in the process, Stephen, of moving that facility from Tampa, Florida, to Lansing, which I think we announced we were going to do back a couple quarters ago, which is sometimes the case dealing with the governmental agencies, it takes a while to get the approvals all done.

The facility here is manned and is approved by one agency, and we are waiting on the final approval by the other, which is typically a matter of how long it takes to get the paperwork through, and we will be moving that facility up here, and start to produce vaccine here instead of in Florida. That is going to help in a number of ways. One thing, we won't worry about hurricanes anymore, but that does continue to grow. I think, Lon, you have got the --

Yes, what we call biologic sales, which is the BotVax B and the XM products that I mentioned in my comments, sales of those products actually beat our budget by 10 to 15%. I know BotVax B was up 15% in the quarter compared to budget.

That is one of those areas where we have a very large international customer, that had a very large order last year, so when you compare it to last year, those sales were flat, but we had good performance compared to our budget. In fact, with some new effort that we put into EqStim, where we had a new article related to Endometritis and the use of EqStim for that, those sales were up good in the first quarter. So just very solid performance across the board in both groups.

Jim, you talked about the Kane acquisition being complementary to the dairy antibiotic testing. Could you elaborate a little bit on that?

If I said dairy antibiotic testing, I misled you some. I think it is our overall penetration into the dairy, into the large dairy production business, yes, our dairy antibiotics tests do fit there. Milk is tested both back inside the farm gate by farmers to make certain that they don't have violated milk before it goes on the truck to go to the processing plant, because most of the testing is done at the processing plant to make certain it is clean before it goes into the bulk holding facilities there, but Kane has a group of products that fit there, that fit particularly well for these large dairy operations that are milking anywhere north of 2,000 head of cows, up to 5,000 or 6,000 heads of cows a day on the same farm.

As that business begins to look many more like the integrated businesses that have developed in poultry and in swine, we think that that market bodes well for us going forward. We have got some products in the veterinary instrument area that fit very well there. We have got some products in the diagnostic area. We have got some other products that favor diagnostics that are in the pipeline in R&D now, and the addition of the Kane products that were strong in the dairy, that was probably his strongest single segment in the market, was the large dairy operations. Just gives us some more exposure there, some additional products to sell to that same customer base.

And should we model a 36% tax rate for the full year?

Steve, that is right. This is Rick. I think that we will get some variability as a result of the way that you have to account for options now, but as Jim indicated, we were up really a full percent to help our country's efforts.

I guess I can't let a call go by without asking about the BetaStar?

Well, last time I said we are almost there, and I guess this time I can say, we are almost there. I think all of the tests are now complete that are required to get the FDA certification. Those tests are, I think, were completed last week or the first day or two of this week, so it is a matter now of getting the paperwork back through the system.

I don't see any reason why that approval won't come, but I can't tell you how long it will take before the right groups meet and put the stamp on it. I think yesterday we finished up the last of 700 samples that had to be, or we didn't, an outside lab did, that had to be run. As far as we know, the test was passed with flying colors, and it is 100%. So I think it is in our budget now to begin to look at the first introduction of sales probably Thanksgiving time, probably.

Very good. Thank you very much and great quarter.

Thanks.

Thanks, Steve.

Our next question comes from Tony Brenner, Roth Capital Partners.

Thank you. I had a couple of questions. First one relates to food-borne and pathogen tests. As I recall, it wasn't too long ago that this had become an extremely competitive area. There were 60-plus companies competing, a good deal of price competition had set in, and Neogen's results were lagging. Now for the past three quarters at least, you have broken it out and cited it as a particularly fast-growing area, and I am curious what has changed in that marketplace?

I guess we just got a little tougher. I don't think we have lost many competitors. It is still the same guys that were out there. There are those that show up one month and make a splash in the marketplace, and six months later they are gone, but that is sort of always to be expected in this kind of business. Our sales of tests for food-borne pathogens has been spotty by market.

We will elaborate more on it. In some of the markets we have done, for instance, we are pretty well positioned in the leafy vegetable area, and the fresh cut areas. We had a little more competition in the meat area. But, I don't know Lon, I think we just got more serious.

It is fundamental sales and marketing efforts, we have put together some better support documentation, data, literature, compared to our competitors. We have a better automated instrument based system in the marketplace that can compete in certain areas, and I think we have done a better job of the one-stop shop, trading on some of our other products that we had in place that customers, and carrying that over to the media portion and test portion for the pathogens.

So there is not any single thing that has changed in the marketplace, or I think we have got better products out there and better marketing programs to take advantage of those opportunities. And we want to consider to do that. Because that particular segment of the Food Safety market is extremely large. It represents about a $600 million testing opportunity on the microorganism size, and a big chunk of that is testing for food-borne pathogens. So it is going to be an area of focus for us as we go forward.

What portion of your Food Safety revenues does this area account for?

For strict pathogens, that would be a little difficult to figure, because we have got media involved there, the new Soleris product, some of it fits there. I don't know that we can pinpoint an actual number there.

We don't keep track of our sales on the micro area, combining all of those categories. We look at each category individually to test for food-borne pathogens.

There is a media portion of that, some of which is sold in unitized units that go with the diagnostic test, and then the general micro area has been growing rapidly, and is part of that.

We have got a ways yet to go. I do know, though, that I saw last week, week before in the monthly meeting of that group, that we had a couple customers that we had lost, I am going to say probably a year ago, primarily to a cheaper price by a competitor, and they reported that we had them back now.

So you see some of that when you have got a lot of competition in the market. Somebody comes in and takes some business away from you, but you don't have to have but one recall, to realize it really doesn't make a lot of difference how much you paid for that diagnostic test, whether you paid $5 or $6 or $4, if there is half a million pounds of meat behind it that gets recalled, the price of a test is pretty insignificant.

When I combine the, Tony, just to follow-up because I don't want to avoid your question, or appear that we are, if I take the pathogens and general micro area, that is the best fit for testing for food-borne pathogens, those sales in the first quarter were over 20% of the total revenues for food safety. So it is a significant portion, but as Jim said, we have got more we can do there.

Okay. Lon, you also mentioned that there were additional cost-saving opportunities that could benefit gross profits going forward. What are some of those?

We have got more opportunities that we are working on in the logistics area. We have only really implemented a portion of those so far. We have two others that are going to be implemented here in the second quarter that will generate savings.

Jim alluded to the fact that we are bringing and consolidating the biologics production to our facilities here in Lansing. That should be completed in the second quarter, and will bring savings. We have two other pieces of automated equipment that we are bringing in between now and the end of the calendar year, that will help our costs, and we are looking at bringing in-house some tableting capabilities and manufacturing in our Animal Safety group that will improve our cost.

Those are the ones that come to mind right now that I know that we are actively pursuing. We are going to have a meeting with our purchasing group actually in a couple of weeks, to see what other opportunities are out there that we can focus on as well.

Okay. Lastly, how long will it take to integrate Kane in your facilities, and what are the initial costs that will be incurred to do that, and the margin impact from doing it?

I think we will get it moved pretty quickly. We are well along, I don't know, they have brought 30 or 40 trucks already, moved from South Dakota to Kentucky. We have got some new warehouse space that we have got to take care of in Kentucky, it is going to take a little while to get it all cleaned up, and the sales organization, the existing sales organization has already had accounts reassigned.

A lot of that business, I don't remember the exact number, maybe Lon does, of their Top 10 customers, I think maybe seven or eight of them were on our Top 10 customer list. So we already had a relationship with the customers. We already had salespeople that had relationships there that were well developed.

Our position always in an acquisition like this is to hold the revenues. We say if we can hold them through the first year, if we can end up holding the revenues that that company had in the year prior to the acquisitions that we think it is a winner. So we focus on doing that instead of getting out there and trying, and we have done that in the past and it has worked for us.

Instead of trying to get the cart ahead of the horse and figure out how much we can expand those sales, we want to make certain that we've got them solidified, and we are able to serve the product inventoried properly and delivered properly. That is kind of how we look at the Kane thing. I wouldn't look at a big impact as far as increased revenues is concerned.

I don't think we are going to see any unusual expenses as it relates to the integration. We have got, we will be inefficient in our transportation and shipping costs here for the first few months, but we had no employees with any severance. The former owners took care of the South Dakota employees, so we didn't have any severance costs related to that, nor did we have any real estate that we had to sell. We have got some duplicate real estate leasing costs probably here for a couple of months, but nothing, Rick, that I think is going to be very large.

Thank you very much.

(OPERATOR INSTRUCTIONS) We will take a follow-up question from Steve O'Neil.

I forgot to ask about the 29% increase in general and administrative expenses?

I would have been disappointed if you hadn't, because we told Chris somebody would ask that question, Steve, and he ought to be prepared to answer it.

Steve, we started down that with, Jim had mentioned the increase in legal costs and there was actually $100,000 of professional fees, if you include some of the others in there. There is $100,000 of additional IT expense, we have been continuing to upgrade those systems and work with getting systems for all of our operations that are commensurate with a $100 million company.

And then lastly there's $200,000 of compensation and related kind of things. These are new positions, increases in compensation, and the option expense, which is up from what it had been in the first quarter of last year.

Very good. Thank you.

We will take our next question from Vito Menza, Sandler Capital Management.

Hi, guys, great quarter. A couple questions on the growth. I guess firstly, just to clarify, organically in the Animal and in the Food testing, was that currency neutral? Was that 20% and 4% currency neutral organic?

For the foreign currency translation, is that what you are referring to?

Yes, just trying to get a sense of what it is on a like for like, without the currency impact?

The currency impacted us by about $300,000 [inaudible].

Okay, okay.

Most all on the Food Safety side.

So really true organic growth was 20% in Food, and 4% in Animal?

Yes. With rounding, you might have dropped it down a percent or so on the Food Safety side. It wouldn't have been more than a percent. It might have been 19.5 instead of 20.5 or something.

Got it.

But then you have got to continue to look at the offset of where our costs might be going up when we are bringing product from another currency in too.

Right. So the P&L impact, it nets out to almost nothing, I am assuming?

Yes, that would be fair.

And then I guess just on the Animal. If I heard you correctly, don't expect too much growth out of the Kane acquisition. So how the, you say you are budgeting double digit growth for Animal this year. How is that, where is that going to come from?

That is going to be, it is coming from a number of areas. I mentioned that we do have some new products that we are releasing, some on the veterinary instruments side, some on the Disinfectant side, we have got good growth opportunities in the diagnostic area going forward. I think we are going to have a better year following up on the first quarter in the diagnostic tests of drugs of abuse in racing animals, and I think we've also got some good opportunities on the forensic kit side.

So it was more in terms of the first quarter, we had some large, very large shipments. One international specifically, and to some of the distributors that we sell through on that side of the business in the April and May timeframe. So we know some of those things wouldn't come back in from a timing standpoint in the first quarter. But we have got good growth identified in a number of areas for both the rodenticides, as well as the diagnostics, and what we call the OTC, particularly market areas involving veterinary instruments, and other products that go through that market channel.

Got it.

And the rodenticide thing, we are beginning on, everywhere now we are beginning to play our weather market, or we are beginning to look at our weather market.

Just like the commodities, those of you have to keep up with the commodities, they are all over the board, people are betting on what the weather is going to be from now until we get the harvest out, it's about 28 to 29% as of Sunday, we have still got the harvest to get out of the field. We are probably going to put away the largest corn crops we have had in three or four decades. That corn has got to go somewhere.

We have got to keep the rats and mice out of it, particularly if we get a colder winter this year than we did last year. So there are a lot of 'ifs' as it relates to the weather, but most of those would tend to work in our favor on the Animal Safety, side if you compare it to the same quarter prior year.

Got it. Great. Nice job. Rick, nice job with the cost cutting too this quarter. Nice quarter, guys.

Thanks.

(OPERATOR INSTRUCTIONS) We will take another question from [Joseph Pottman], Wachovia Securities.

Congratulations, guys. Great quarter.

Thanks, Joe.

I don't know if this just already got answered, but what are you guys hearing about vomitoxin outbreaks, and does vomitoxin matter to ethanol producers?

Yes, I think anything matters to ethanol producers, because a part of their revenue comes from the sale of the distiller's dried grain that is left over after they get the ethanol out. That is not likely since that is still mostly corn-based everywhere, and we don't see much vomitoxin or DON in corn, it is not likely to be a big issue for the ethanol producers. If it is there, it is an issue, but they are more likely to be faced with aflatoxin problems.

We do hear there is some vomitoxin on some of the crop that was put away, and Lon may remember the exact geographies of that, but a pretty clean wheat and barley crop that has been harvested now. The upper Midwest, up at the Canadian border is already in the bins now, but there have been some spots where there were some DON problems. Lon, do you got something to add to that?

Let me just make a couple comments. In terms of the U.S., I think what Jim has characterized in terms of DON or vomitoxins, I think it is a pretty clean year. In terms of microtoxins in general, I would characterize it as maybe an average year. It is a fairly clean crop, it is going to be a large crop.

There are always some areas and pockets where you have some problems. I saw a report yesterday that there is potentially some problems with aflatoxin in some parts of the Iowa corn crop, but overall I would say average.

What we have seen in terms of DON or vomitoxin is we have seen some nice sales in Europe where they had some problems over there this year, and we are trying hard to keep up with the orders that are coming in from our Neogen Europe office, and that is one of the areas where they have experienced some growth this year that added to that 32%.

Would you be counting Russia in the European office?

Yes. Russia is served out of our European office, and Russia is a tough place to do business. We are doing some business there through a distributor, as well as some direct business with one of the major bottling companies over there. I doubt that we have had, I don't know for a fact, but I doubt that we have had big impact out of DON sales in Russia, though.

Okay. Good quarter.

Thanks.

Thank you.

(OPERATOR INSTRUCTIONS)

Good!

There are no further questions at this time.

Good. Well in closing, let me again remind you that that the upcoming Annual Meeting of shareholders will be held at the University Club of Michigan State in Lansing, Michigan, at 10:00 on Thursday the 11th of October. We would invite you to come if you are in the area and can be available. If not, we would certainly again request that you vote your proxies and get those in.

Thank you for your continued interest and your participation in this call this morning. Good day!

That does conclude today's conference. We do appreciate your participation. You may now disconnect your lines at this time.