Neogen Corp (NEOG) 2009 Q1 法說會逐字稿

Good day everyone. Welcome to the Neogen Corporation first quarter fiscal year 2009 earnings results conference call. Today's call is being recorded.

At this time for opening remarks and introductions, I would like to turn the conference over to Mr. Jim Herbert. Please go ahead sir.

Good morning, and welcome to our regular quarterly conference call for investors and analysts. As Dustin has reported, today we will be discussing with you Neogen's first quarter that ended on 31st of August in 2008.

First I would 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. The actual results may differ from those that we discuss today. Part of the risks that are 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 that are joining us today by live telephone conference, I would also welcome those that 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 comments this morning we will entertain questions from participants who are joined in this live call, 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 announcing the results of our first quarter that ended on August 31st. These results again demonstrate our ability to deliver solid consistent performance. Our first quarter revenues, our net income, and our earnings per share all represent quarterly records for our 26-year history. This fact, in-total this was I think the 66th of the past 71 quarters, when Neogen reported revenue increases over the previous year. That is a record now that spans almost 18 years.

Let me stop here now though, and turn the program over to Lon Bohannon, Neogen's President and Chief Operating Officer, and let Lon fill you in on more of the details of the quarter, and in turning this over to Lon, I would say he and his team can certainly take justifiable pride again in this very outstanding performance for the quarter.

Thank you Jim. Welcome to our listeners on the conference call, as well as those joining us by Internet access.

As Jim indicated, Neogen issued a press release earlier today, describing our operating results for the first quarter of our 2009 fiscal year. Neogen's results for those three months ended August 31, 2008, represented a terrific encore to our strong finish in the fourth quarter of last fiscal year, but I think more importantly it was a great start to our current fiscal year. Total revenues of $28.8 million were 26% higher than sales in the first quarter last year. Our net income increased to more than $3.7 million, or $0.25 per share, compared to $3 million or $0.21 per share in last year's first quarter.

As Jim stated but I think it is certainly worth repeating, total revenues, net income, and earnings per share, all represent new quarterly records for Neogen. While successful integration of acquisitions contributed to the overall top line and bottom line growth for the quarter, Neogen experienced yet another quarter of outstanding organic sales growth with the Food Safety and Animal Safety segments both reporting a 13% increase in same-store sales.

The first quarter also demonstrated continued strong demand and opportunities, in terms of sales to international markets. In-total sales to customers outside the US were approximately 42% of total revenues for the three months ended August 31. This percentage of business derived from sources outside the US, represents yet another new quarterly record for Neogen.

Now let me take a couple minutes to review performance for each of the two business segments. Sales for the Animal Safety group totaled more than $13.2 million in the first quarter, representing a jump of 45% over the prior year. Last year's acquisitions of Kane Enterprises and Rivard Instruments, along with our June 30th acquisition of a product line of cleaners and disinfectants from DuPont, helped drive this outstanding overall revenue growth for Animal Safety. However from my perspective, an even more encouraging aspect of Neogen's first quarter performance was the return to strong double digit organic sales growth within our Animal Safety group.

Same-store sales increased 13% over the prior year. This sales increase was broad based. It included growth in products sold to veterinarians through ethical market channels, growth in products sold to large food animal producers and processors distributed through the traditional over-the-counter market channels, including retail farm stores and a continued increase in sales of diagnostic products shipped to Life Science markets. It was especially gratifying I think to see a 14% organic growth in Rodenticide sold to domestic customers in the first quarter, compared to the same period last year.

In addition the Animal Safety group did experience exceptional same-store sales growth of some important product lines like vitamin injectables, companion animal supplements, and drug residue Test Kits that are sold to the forensic market, which were up 30%, 80%, and 40% respectively.

If I turn my attention to Food Safety for a few minutes, sales for this business segment also increased 13%, to more than $15.5 million in the first quarter. I think this was a significant accomplishment considering the Food Safety segment had such an outstanding first quarter last year. Our Neogen Europe Operations continued their trend of superlative performance, with organic growth of 20% lead by strong shipments of diagnostic products for Mycotoxins and histamine, along with solid growth in sales of Dehydrated Culture Media.

The breadth of Neogen's line of Food Safety solutions, which I think is a definite strength for the Company was evident in the first quarter, as a number of products exhibited strong sales growth. Diagnostic tests for natural toxins increased 12%, lead by increases in sales of Test Kits for aflatoxin, DON, and histamine.

Sales of products used to detect harmful pathogens like E. coli, Salmonella, and Listeria were up 14% compared to last year. And sales of Diagnostic Test Kits for food allergens achieved a remarkable 48% increase, with growth in sales of Diagnostic Test Kits for milk, peanut, and egg allergens particularly strong. The exceptional sales growth in these product lines helped support sales of dairy antibiotic Test Kits, which experienced a more modest single digit sales increase in the first quarter. That was partly because of the timing and size of warehouse shipments to our exclusive international distributor Chris Hansen, and partly due to delays in obtaining final approval for our new BetaStar US product.

Another area of strength within Neogen's product portfolio of Food Safety solutions is evidenced by the first quarter sales of disposable Test Kits that are used in conjunction with Instrument Based Test Systems. The timing and placement of high value instruments can vary from quarter to quarter, and impact quarter to quarter sales comparison for those instruments. This was in fact the case in our first quarter for Neogen's Soleris line of Test Systems, used for the detection of general microbial contamination and spoilage organisms, and also was the case for AccuPoint readers used in ATP general sanitation testing. Placement of instruments for both of these product lines was significant in the first quarter last year, making comparisons for instrument sales in the first quarter this year unfavorable.

However much of the shortfall in instrument sales for the quarter was offset by the ongoing growth of sales of disposable Test Kits, that are used in conjunction with the Soleris and AccuPoint reader instruments. For example, sales of disposable Test Kits consumed daily by customers who own the Soleris instruments continued to grow, and increased 15% in the first quarter this year compared to last year.

In the same way, the sales of samplers used by customers who own AccuPoint readers to test for ATP increased 25% in the first quarter, compared to the same period last year. This increase in ATP sampler usage is reflective of our past success in placing ATP readers. In fact an independent market survey reported that more AccuPoint ATP readers have been placed worldwide in the past three years, than all other Test Systems combined.

Furthermore we continue to find new opportunities to keep the pipeline full for placement of both the AccuPoint and Soleris reader instruments, so even though we may have some quarter to quarter timing differences in instrument sales, we fully expect year-over-year growth in placement of instruments for both of these important product lines. And of course, this helps ensure sustainable future growth of repeat disposable kit sales like we saw in the first quarter just completed.

Gross margins in the first quarter this year were a solid 51.4%. The primary reason that this percentage is lower than last year is product mix. Total revenues in the first quarter this year had a lower overall mix of diagnostic test kit products, which I think as most of you know generally have higher gross margins than many other products sold by Neogen.

In this year's first quarter, diagnostic product sales accounted for approximately 55% of total revenues, compared to approximately 61% of total revenues in the first quarter last year. Part of this percentage difference is due to the non-diagnostic product sales added through acquisitions, and part of the difference is due to exceptional organic sales growth of existing non-diagnostic product lines. In terms of protecting gross margins, we did put in place price increases for many Food Safety products midway through the first quarter.

We also implemented another round of price increases for Animal Safety products that took effect on September 1, and which should help gross margins going forward. As we have mentioned in other conference calls earlier this calendar year, we continue to monitor raw material and other operating costs, and when justified, we will increase prices as necessary to protect gross margins. In addition, we continue to aggressively pursue measures to improve productivity, and achieve other cost savings in virtually all of our operating units.

Management still believes that the best way to evaluate Neogen's overall performance is to look at the operating profit line. In our first quarter operating margin result was outstanding, with Neogen's profit from operations coming in at 19.6% of sales. This percentage is 200 basis points higher than we achieved for our 2008 fiscal year, when operating profit margin ended up at 17.6%.

In fact, the first quarter operating profit margin was almost the same as last year's first quarter, when as I mentioned earlier we really experienced an unusually high product sales mix of Diagnostic Test Kits. I think this is an example of our success in getting significant incremental operating profit from acquisitions, even in cases where products obtained in those acquisitions carry proportionately lower gross margins.

We are fortunate to be selling products into markets that are growing, and we are equally fortunate to have a team of employees dedicated to providing the best possible Food and Animal Safety solutions for our customers. Management is excited about the prospects for the remainder of our current fiscal year, and probably more excited about Neogen's longer term opportunities to build itself into a $200 million Company.

With that, I will turn the call back over to Jim Herbert.

Thanks Lon. Well it was a good quarter, and it is obviously fun to be able to give our shareholders this kind of a report. I think our stock price has continued to benefit from our ability to report this kind of quarter, however I have been known on occasions to say to employees when they get excited about a high volume day with rising stock prices, that we need to quit talking and go back to work, since we now have new owners that have an even higher expectation of us than we did at the beginning of the day.

Over 15 years ago, my friend Ted Doan, who was a member of Neogen's Board of Directors for a number of years, sent me a quote that said "The toughest thing about success is that you have got to keep on being a success." In fact, many of our managers have this quote in a framed plaque in their office, and I would like to visit with you for the next few minutes, on how we see the continued success of Neogen in the quarters that are ahead. I think this is particularly important today as we are facing economic times that are truly unparalleled for our management group.

Over the course of the past several days, we saw Neogen's stock trading at high volumes and reaching an all-time high price per share, while most public stocks encountered substantial declines in their share price. I believe that a part of this success is due to the fact that we are perceived as a safe place for investments, as well as an investment opportunity with good potential growth. Our consistency of growth has almost certainly had some impact in the recent market performance. We strive to make sure that this confidence is well placed.

I think the strength of our balance sheet is certainly important in this time of financial uncertainties. At the end of August if you have noticed the press release this morning, we had approximately $9.6 million in cash, no bank borrowing and an unused bank line of credit of about $10 million. Given our continued strong cash flow, I think our real potential for bank borrowing could be considerably higher, given the right investment opportunity. Our financial stability also gives us the opportunity to make wise investments, to ensure that continued success that I mentioned.

As an example over the past two months, we had the ability to step up our R&D activities through the construction of new laboratories, and making a notable increase in our scientific staff. As I announced a few months ago this is important, since we can now identify more opportunities for products in our Food and Animal Safety divisions than ever before. Not only will this group help us bring new products to the marketplace, but they will also allow us to continue to make improvements in many of our already existing important products.

The financial stability has also allowed us to increase the reach of our Sales and Marketing activities. Our investment in Mexico a few months ago will open opportunities for revenue growth in the quarters ahead for Mexico, and the neighboring Central American countries. We have also expanded our Sales and Marketing group at Neogen Europe, in order to continue to garner a greater market share in the important countries of France, the UK, and Germany.

I think it will also give us the opportunity to expand into certain of the Eastern European countries, particularly those that must now abide by the Food Safety regulations of the European Union. Of course, it also gives us the opportunity to continue to look at synergistic acquisitions, and to make investments to more completely integrate some of those more recent acquisitions.

The June 30th acquisition of the disinfectant and cleaner product line from DuPont is a good example of this. Though DuPont is clearly a worldwide leader in the development of chemistry based products, they found that they did not have a clear distribution channel to reach the producers of animal proteins, such as swine and poultry. At the same time, this extensive line of cleaners and disinfectants fits well into Neogen's biosecurity strategy, when we pair it up with our complete line of rodenticides.

We expect these disinfectants to provide in excess of $7 million of revenue for our 2009 fiscal year, however we will continue to have these products manufactured by a third party on a total manufacturing basis, until we can complete a number of registration changes. As these changes become effective, we will begin to move products to our Randolph, Wisconsin plant, and we estimate that as a result of that we can improve our gross margins in the area of about 10%. This integration will likely require $300,000 to $400,000 in additional holding tanks and equipment, over and above what we already have in place at Randolph.

Fortunately, we also have sufficient cash to produce above normal inventories, to ensure that we do not back order customers, as we move through the integration of acquisitions, and get positioned to operate on a more just-in-time basis. Not only does this DuPont acquisition put Neogen in a good position currently with outstanding chemistries, but DuPont will look to Neogen as its marketing channel, as they continue to develop new and improved products in the future. This acquisition also enhanced our international sales expansion, since the products from this acquisition are sold to customers in 36 countries outside the US.

The acquisition, the DuPont product line acquisition was really not unlike the one that we did a number of months ago, when we acquired the Food Safety Diagnostic Business from Eastman Chemical. At the time that Eastman became involved in the Food Safety diagnostic business, it seemed to them that it fit their core technology base, but they found they did not have market access to the food processing industry. That business of course became a bolt-on opportunity for Neogen, since we had the existing R&D, manufacturing, and Sales and Marketing capabilities that fit the exact same marketplace.

As the Food and Animal Safety businesses continue to consolidate, I think there are likely other opportunities similar to the ones that we found at DuPont and at Eastman. We move along from the economy and aside really from that national financial situation, we must also view here at Neogen the impact of the political ramifications, as we near the Presidential elections. Regardless of who wins in November, and Neogen is apt to experience increased market potential, is (inaudible) both parties accelerate their concerns about food safety, both in the US and from international imports.

We know that both USDA and FDA are considering new regulations to improve food safety at the processing plant level, as well as back inside the farm gate. However, since the senior positions in both of these agencies will change after the elections, most changes will be postponed until the new political appointees are in position, but regardless of which party wins the election, I think there is no doubt that there will be tighter controls, in an attempt to prevent the reoccurrence of the contaminated food issues that have occurred over the past several months.

I think that as I make these comments, I certainly would not want to indicate that I believe that Neogen has total immunity against the financial uncertainties that are taking place in the US, or the value of the dollar and the international monetary system or the whims of national politics, however I do believe that Neogen's mission of developing the best available solutions for Food and Animal Safety, carries somewhat of an immunity against the sort of economic ills that could strike other business sectors.

I do believe that Neogen's mission matters. Even at tough times, the food industry cannot back down from its goal of providing the safest, high quality products possible, and even as household budgets are squeezed, consumers will not back away from demanding safe and wholesome food.

If we compare the performance of Neogen stock at a price of $29 today, with the well known indexes of the Dow Jones Industrial and NASDAQ composite, and Standard & Poor's 500, two years ago with today, we find that those indexes are down anywhere from 3% to 9%, while Neogen's stock is up over 100%. We greatly appreciate the support many of you have provided us. We now have four firms with research analyst reports on the Company, as Craig-Hallum has now instituted research coverage on Neogen stock, to join Roth Capital, Hilliard Lyons, and Stonegate Securities.

In summary I would say we are pleased to report this additional new good quarter, but we fully recognize that the toughest thing about success is that you have to keep on being a success, and I believe we have got the Company positioned to do just that. In closing, I would remind you that the Company's Annual Meeting will be held on Thursday, October 9th at 10:00 at the University Club here in Lansing, Michigan. We usually have a nice crowd for that meeting, and certainly wish to reissue the invitation to any shareholders who might wish to attend.

Dustin, this concludes our prepared comments for the morning, and at this point, we would turnover the conference call to you, for any questions or comments from the audience.

Thank you, sir. (OPERATOR INSTRUCTIONS). We will go first to Steve Crowley with Craig-Hallum.

Good morning gentlemen.

Good morning Steve.

Congratulations on the great quarter. It is nice to be part of the routine here.

Thank you.

Thank you.

Question for you. Obviously it seems like your Animal Safety business is firing on some more cylinders versus last year, and you bolted on a few more. I am wondering what kind of opportunity there is for you to improve the gross margins, and maybe more importantly, the operating margins of that business. I am wondering what that picture of improvement might look like? Is it one of steady improvement? Are there some step functions in front of you? How can we look at that?

I think that Lon can pick up on part of this, but I think that we will see it is going to tend to look more like steps I think, rather than steady, as I mentioned in my comments, right now, the products that we are marketing are made in two different plants. One in the UK, and one in the US, on a total manufacturing basis. We do have the capability at our Randolph, Wisconsin plant to manufacture those.

The only thing that is holding us up is there are about 234 registrations around the world with EPA-like registrations, that we have to get in place, which will move the products or allow us to move the products to a different manufacturing site. Obviously one of the first ones we want to close down is the one in the UK. Or not close it down, but we want to get our products out of there, but then we have others. So if we look at the fact that we already have in place most of the infrastructure in Randolph, in the way of other than I mentioned $300,000 or $400,000 probably of additional equipment, but we have got the people, and we have got the facility to do that. So that would be kind of step-wise, as we begin to be able to manufacture more products ourself.

I think you asked the right question, what improvements will it make to the operating line. This from a marketing standpoint is pretty much a bolt-on with what we are already doing in Sales and Marketing. We already had a group that was part of the Animal Safety group, that was addressing what we call the integrated business or the large producers of swine and poultry.

We have added a few to that, added a few product management spots, but basically, it is that same sales organization, that has already proven with good relationships with a lot of customers, they are going to be carrying these products forward. So that is one of those. It is not unlike some of the others that we have done, as we wear along over the next year, I think we will see that particular product line give us an improvement, both at the gross margin line as well as at the operating line.

I think there are some other opportunities that Lon might want to address.

Thanks, Jim. That is a good question, Steve. Of course in the kind of economic times you are dealing with right now, you have to focus on both gross margins and operating margins, and we do that at every single monthly meeting. Jim is right in that any time we have had an acquisition, we have had some generally good success right away in leveraging our Sales and Marketing and general administrative costs, so that we can improve the operating margin line.

It sometimes takes a little longer on the gross margin line, until we can do some consolidation, and move the manufacturing to some of our own locations. Aside from the acquisitions, we continue to move and work on transferring product that is currently manufactured by outside third party tollers to existing facilities, and this has been an ongoing program for a couple of years. We have identified the products that we want to do that. We know that those will improve gross margins as we go forward.

At the same time, we are also taking a more I think aggressive look, in terms of where we focus our sales energies on products that will provide greater returns, in terms of those products that have higher margins, and that is where we want to make sure we incentivize our sales force, and want them spending their time so we get increased sales in those areas that will also help out gross margins.

And all of that is separate and apart from constantly looking at the raw materials every day to see if there are alternative suppliers out there that can provide us quality products at a better price, and other things that we can do from a system standpoint, in terms of automation to improve productivity and efficiency, so it is an ongoing program, and that is true for Food Safety as well as Animal Safety, but certainly for Animal Safety.

So if we look at the division as a whole, the Animal Safety division as a whole, it seems like you are doing a bunch of the appropriate things to drive the profitability of that business, and I guess the essence of my question is, at one time admittedly it was a business of different components, but this was a mid-teens operating margin business. You have continued to grow it successfully, but there have been some pressures and there's been some transition that's made it something less than that, and I am wondering, is the script that you are writing here one that ultimately generates mid-teens operating margins for your Animal Safety business if you are successful?

Mid-teens is a pretty good range, so I guess I could say "Yes" if we are talking about 14% to 18% in there. It is that kind of business. We have got some diagnostic portions of that which bring in higher margins.

There are probably in total, there may be better opportunities of higher operating margins on the Food Safety side, but a lot of that is divisible by what your dollar revenue volume is; the higher the revenue volume is, the better that looks as you spread it over your sales organization and your G&A, and we are doing some things certainly to grow that revenue side.

Now one follow-on question that jumps over to the Food Safety side. I was struck by that very strong increase in your line of diagnostic tests for food allergens. You talked about new customers, a number of high profile food recalls, I guess there have been discussions at and with the FDA by the industry on new labeling requirements.

Could you tell us a little bit about the nature of new customers who have adopted? Is there a lot of greenfield there for you, for folks who could adopt? Are you seeing a little bit of a knee in the curve, in terms of the rate of adoption? What can you tell us about that phenomenon?

I will address the international side of that, and then let Lon follow-up with what is happening in the US. Just back this last week from 10 days in Europe, and half a dozen countries over there. We are seeing more and more pressure coming out of EU-based countries for the testing of food allergens, and it is kind of unusual in that if it is a food allergen, it is under the regulation, and even though you might not consider that it would be in the product, you have to prove that it has been tested, which is a little different than what is happening in the US, so that has propelled our food allergen business over there, that will continue to propel our food allergen business in the EU as we add additional products.

For instance, we are now working on a diagnostic test to be able to detect lupine, which most of you probably don't even know what that is. I remember it as being the Texas Bluebonnet, but it is also a plant used as a seed production, and used sometimes in animal feed, but that is now one that's on the list. Sesame, we don't worry about sesame seed allergens in this country, though they are beginning to worry about those in Europe.

So I do think that there is some continued opportunity for new product development, and I think we have got three in-house right now that are under development, and there is also room for development for increases in the EU, or in products that are going to be shipped to the EU. That is a little different than what I would say is the more realistic concrete stuff that is happening in the US, that maybe Lon could talk about.

Yes, thanks, Jim. I think the one thing if you noticed in the press release, it is kind of interesting to see the big increases in our first quarter in terms of this product line, were in the very first three products that we developed, and the ones that are most important, peanut, egg, and milk, and particularly in milk, I think that what you talked about, in terms of FDA continuing to look at this area, they passed new labeling laws about two years ago.

They aren't apparently totally happy with the way some of the producers and processors are using that may contain, and they want to get more specifics on those labels, at least that is the kind of thing they are talking about in their press releases. All of that has served [to have] the industry or the people that need to be concerned about the kinds of labels that they have.

Looking at allergen tests as part of their regular protocols and QC programs, and we certainly expect that to continue. We were benefited in the first quarter. There were some food recalls, particularly related to milk and dairy products, and so that certainly helped drive the specific quarter and three-month period. However this particular product line has been a strong grower for Neogen Corporation, for I don't know, eight years now, the first two years it was kind of slow to take off, but the last eight it has just steadily grown, because of the increased scrutiny by FDA, and interest in US markets, as well as European.

And there is not a lot of testing that goes on for allergens right now in some of the other international markets. But I have no doubt that when you look at it from a little longer term standpoint, they will be faced with some of the issues, and there will be good opportunities in other international markets as well. So we feel good about that product line.

We continue to add and look at other products to add to the product line. We want to continue to maintain what we call our leadership position out there with that. We think we are in a good leadership position, and that we will get opportunities to grow that market going forward.

Sounds great. Thanks for taking my questions. I will hop back in the queue.

We will go next to Steve O'Neil with Hilliard Lyons.

Good morning.

Good morning Steve.

Just a few items here. If I use your 13% organic growth for Animal Safety, I come up with an incremental contribution from acquisitions of about $2.9 million, and that is a little higher than what I had originally estimated, and I wonder is it possible for you to break that down between Kane and DuPont, just to give me an idea where I may have been low?

I am sure we can. I am not sure we can do it right at the moment, because Kane was in for a part of the quarter. We bought them midway in the quarter a year ago, so part of the Kane business would have been organic, and part of it would have been new acquisitions. I don't have that in my head. I don't know whether Rick does or not?

Yes. The Kane one is a little foggier from being able to give it to you right here on the phone. DuPont was $1.6 million. That we can tell you. And there was a little bit of --

I think you add probably $1 million for Kane.

That sounds about right, because you had Kane for I think the full quarter versus I think only a month last time (multiple speakers).

Yes, that is correct.

That is probably about right then.

There is still a little of our business that is in there too.

Okay. Also in terms of the Mycotoxins, I am familiar with Aflatoxin and Vomitoxin, I am not real familiar with DON. Can you tell me a little bit about that?

Well, we have got all kinds of different references to that. You have probably heard it under the name Vomitoxin.

Oh, okay.

Yes, the same as Vomitoxin. Some of us want to get sophisticated, we call it Deoxynivalenol, so that we can see if our tongue still works, but that is the one that we see being an issue in small grains, in wheat, barley, oats to some degree. It was a situation in Europe this year, one of the things that is kind of nice about being more global, is that generally somewhere in the world, there is an opportunity that pops up, where it may not be anywhere else.

The US crop was pretty clean this year, the wheat and barley crop was. In most cases, however, we saw France with a big problem in their barley and wheat this year because of the weather as it related to DON, so our DON sales over there were up as a result of that.

Okay, also you didn't really mention culture media sales, and that has been a very strong area. How did that perform in the quarter?

Overall, that business was up. It was kind of a Tale of Two Cities almost. The traditional sales had an exceptional year last year, and so they had, they were a little bit above the prior year, but we did see some very nice increase particularly in international sales of the Dehydrated Culture Media business, so I know I go through such a long laundry list, most all of the product lines showed some kind of increase on the Food Safety side compared to last year, except for those instrument sales that I talked about, so we had growth across-the-board in Dehydrated Culture Media. It was stronger in international than it was than in the traditional markets.

Along the same lines then, you did have a long list, and I appreciate that Lon. But can you, kind of from an overview, give us an idea of how veterinary pharmaceuticals and products performed? You mentioned some highlights within that. How did the overall segment do?

Well, it was a number of those products. We had an increase in our BotVax B vaccine, which is a very high margin product for the Animal Safety group, which was nice to see. That business and the Animal Safety business in general, is still influenced by the timing of orders that go out to distributors. In the case of those biologics we have a significant distributor that is international, based in Scandinavia actually, that can impact sales. We did not have an order from them for BOT-B in the first quarter. In spite of that we had an increase in sales, so we expect a large order from them in the second quarter, so that looks good for that business.

A lot of those products are in what we call the ethical markets. These are sales of products that end up going to veterinarians through ethical distributors, and we have a couple of product lines there that we have been de emphasizing. In fact if you go back, and I know you have been on the calls, you will remember a little over a year ago, we started to deemphasize some of the buy and sell items that are used, have uses that are not label claims on the product, and those actually continue to decline as we go through the years.

The rest of the sales moving through those ethical distribution channels were up 37%, including some of those products that I mentioned, so we had a really good first quarter in the Animal Safety side, and it was broad based across a number of products.

It sounds like it. What about the specialty needles?

The specialty needle and OEM business in fact did increase in the first quarter. Rick just threw it over, we have got all of these percentages. It was up 36%. Again, we have got some very large, those are special relationships with very large what we call OEM producers, but very large companies typically in the animal health industry, and it was a good quarter for them in terms of growth.

We continue to work those and look for opportunities where we can sell more of our products in special promotions with those kinds of companies, and we have had good success over the years, and it was another good quarter for specialty needles in the first quarter as well.

Our detectable needle business continues to grow, and continues to show good opportunity. France has moved ahead very strongly, and we continue to keep our good business in Denmark. We are now beginning to supply that detectable needle to one of the large producers of pork in Poland, simply because their customers have demanded that they use that.

Our people have been working closely just within the past week or two with the National Pork Producers Council, as the whole US industry tries to put more emphasis on making certain that they are using a needle, that the producers are using a needle that is going to be detectable, or if it happens to break off, it will be detectable when it goes through the processing plant, so that is customer pressure on that, and we are in good position there.

It is a more expensive product but when one figures the cost per injection, it is a very salable program, so that side of the business, part of it we brought in back a few months ago, I think continues to grow, and has good prospects too.

And then finally, a couple of forward-looking things with the hurricanes occurring in the Southern US, and flooding, and that sort of thing, is that a favorable environment for rats and your Rodenticide sales?

(laughter) I don't know for sure how to predict those kinds of things. I will say this. I think the rodent populations are up this year compared to last year, and that is good to see for us, maybe not so for some of the people that have to buy those products.

I think more importantly to us that we keep talking about this DuPont acquisition, we are always looking for strategic kinds of opportunities, and being able to take those products the cleaners and disinfect products, and put it into a biosecurity program, and go to those large integrators in the poultry and swine markets, represents a very good opportunity for the Rodenticides, and then we won't have to worry about whether we have hurricanes or not, and what that is doing to sales of our Rodenticides.

Last question and I will get off, of course China has got an absolute scandal going on with this milk production that they have had for the infant formula. Are there opportunities there for you in food testing in China along those lines?

Well, it is hard to predict something like melamine. As Rick asked earlier, we talked about what is melamine really, what is it, and it is a component of plastics. Rick wanted to know if they could take some of that contaminated dry milk and make dishes out of it, and we decided it we probably had a little too much casein in it for that, but who would have ever predicted this kind of an occurrence? Now we are working on some things that impact China, that China impacts in the world market, there are some dyes and stuff that are used unlawfully, at least unlawfully for us in fish production.

That is one of the concerns that we have had importing aquaculture species into the US, is a concern about a couple of products called Malachite Green and Crystal Violet, that are old dyes that are used to dump into fish ponds to hold down the biologic growth, and they aren't good when they get into the flesh of the fish, but we are working on those kind of things.

But we saw the first one when melamine showed up the first time, in the gluten it went into dog food, we thought that once that once they beheaded a couple of guys, and invited two or three more to jump off the top of high buildings, that that would be the end of that, but I guess it is not. I guess we have experienced every day, greed is a powerful tool, so we don't have anything from melamine, and I don't know where the next odd thing may show up, but we are looking at the places where it is predictable, where there are food safety concerns are being predictable.

And I think what it does do is it does raise awareness about some food safety issues and problems that they have in China, and that certainly helps our overall efforts over there, to market some of our food safety products, and they are only going to be able to incur so many of these kinds of scandals as you put it, and not put into place more testing to protect their food supplies, and get the rest of the world comfortable with those, also products that they are exporting.

It is going to help. It is not anything specific to melamine that we have that is going to help us like next quarter, but it certainly helps our overall efforts to sell more food safety products into that country.

That is what I was wondering.

I wasn't really thinking about melamine specifically, but just some spillover benefit to you from, as you pointed out the growing awareness and that doesn't make sense. That is all of my questions. Thank you, and great quarter guys.

Thank you.

Our next question comes from [Ken Reeds], Paragon Financial.

Gentlemen how you been?

Good, Ken.

Hi, Ken.

Nice to hear from you. A couple of questions. One of the things I proposed to a neighbor of yours, Spartan Motors and George Sztykiel in '97, was to implement a small dividend, which would make your stock available to not only growth funds, but also income funds, and they followed that up with a $0.05 initiation. Have you thought about doing something like that, even at a nickel on your shares outstanding, that would only be about $72,000 a year, and that would make you available for income funds to buy you at the same time?

Well, Ken, we are great on dividends. We love them, and we gave a nice dividend a year ago in terms of stock dividend. We continue to believe that that is the right way to go.

I know there are people that talk about cash dividends, and I have got a famous speech that I will try not to repeat, but we think that when it appears appropriate in the market to be able to reward shareholders with a stock dividend, then it allows them to treat that, sell it and convert it to cash if they wanted cash, or on the other hand keep it where they have got it and treat it as a full growth stock, but I think we want to keep our money and grow our business, and make it sound, and not beat the market within our small size in our growth, not try to beat the market with trying to stick some cash dividends out there. That has been our opinion, and been the opinion of the Board of Directors. I don't see that changing any time soon.

A client of mine, [Richard Rapper], was just on the phone, is also a shareholder of Neogen, and he called me back. He could only stay on the call for a little while, and he was wondering why there is, as far as insider buying goes there has been 2,900 shares bought in the last year, and there's only been about 0.25 million shares exercised, of which 95% of those shares have been sold at $25 or better. He is wondering if that is an implicit statement of saying that your stock is fairly valued? I know it is a tough question.

I don't know where those figures come from so I can't -- I own more stock today than --

(multiple speakers)

The people in this room own more stock today than they did a year ago.

That is fine by me.

Yes.

We will move to our next question with [Lawrence Southam], My Broker LLC].

Good morning. Lovely quarter once again. I appreciate it very much. Two specific questions. There was a brief mention there of BetaStar. What is happening on that approval process or is that (inaudible) come through?

Gosh, I have been waiting on that question. Unfortunately, that question has been asked at too many of these meetings. I can report to you today that our US version of the BetaStar test kit has been approved by the AOAC. It has been through all of the hoops, and has been approved for all of our claims by the Food and Drug Administration.

It is now, before we actively can market it in the US, though we could market it, but with the other approvals but before it's of any consequence, it needs the approval all of the Interstate Milk Shippers, the Interstate Milk Shippers have a meeting scheduled for next week, in which this is the sole item on the agenda. Of course the game is not over until the fat lady sings, but I can't fathom any reason why it wouldn't win its final approval next week, and we will still get it marketed in September I hope.

Great. Okay. Then also we're discussing the Soleris and AccuPoint instruments, and the lumpiness there. Could you just give us some -- I look at this as a razor and blade business, but could you give us some feel for what the instrument cost is, and then how much product a typical instrument might use, in terms of disposables over the course of a year, or series of years, can we have the basic economic model on those?

Right. The AccuPoint instrument is in the range of, and it depends on a few things, but it is in the range of about $1,800, so it is a pretty inexpensive instrument, and it's pretty easy to run, I should remember what the average is per instrument out there, but I think it is somewhere in the range of $5,000 in reagents that go with that, and of course those instruments last for a long time if they don't happen to drop one in a vat of soup, or run over it with a forklift, but it is a pretty durable product, and it is really a pretty simple razor razor blade business.

The Soleris product line, the razor costs a little more, but it is finding a lot of favor with, we now have got I believe we have got five tests up in vials on that instrument. We are continually adding new ones. This allows somebody, we have got what we call a 32 model, which has 32 sample holes in it, and we have got one that is a 128, which ironically holds 128 samples, but that means that they can take a sample from the floor, for instance if it is a salad dressing person, they can pull a sample if they want to know if it's got one or two or three different particular specific spoilage organisms, it goes into one of those, they program it in to the machine, and it's a walk away system.

So they could be running in the big machine, they could be running as many as 128 samples at a time, so it is a little easier for them to depreciate the cost of that. Most people are depreciating those probably on a five year basis. We fully expect it probably will last a lot longer than that, but the costs there are not prohibitive, and the returns are quite good in the way of reagents. There are a few cases where we have got high volume users of reagents that are buying a lot, and where it is an issue of capital expense approval, that we do have a program that we call our reagent rental program, which we place the instrument, actually loan the instrument to them, and then charge them so much a vial for the rental on that is added on to the cost of the reagents.

We also have a rental program that has worked pretty good. Sometimes you get in a situation where somebody is not sure whether they want to spend the money to implement a program, and rather than saying we will take it and try it for three months, we said well we will rent it to you for three months, and that program has worked, and it has kept people's attention when they are renting the machine, versus maybe just letting them have it and sit on the bench and not do anything with it. So both of those programs are, you characterized them exactly right, they are both razor/razor blade businesses.

Okay. Of the basic Soleris instrument, the 32 or 128, what sort of price tag (inaudible) purchase?

A 32 would, we probably have got retail prices out there in $25,000 range, or something like that, when you get up to the 128, you are talking about an instrument that can cost $40,000.

So that can cause some lumpiness, right.

They are a lot more sophisticated. The other thing looked at in terms of the Soleris instrumentation quite often is, laboratories might be looking at a labor savings there, because they are true walk-away kind of instruments for the kinds of testing. There they are looking at ways to minimize the amount of inventory that they have to hold, so there is a real economic benefit associated with that instrument as well.

Those prices are not outrageous for automated laboratory equipment.

No.

And then what sort of magnitude of reagents, or range would you like to see? Obviously there is tremendous variation between users.

Yes, there is. I think Jim has correctly characterized the usage for an AccuPoint reader. We typically don't think that they should even be looking at that instrument, unless they can run 25 tests a week or so, and that gets into that $5,000, $6,000, $7,000 range and stuff.

That is kind of the minimum, we have got users that are doing a lot more than that in terms of what they are running in kits, and because of what I said, in terms of the way that the customers look at the Soleris equipment, it does range widely, and we have got customers that can easily buy $50,000 and up of vials in a year for use on that equipment.

Very, very good. Thank you, and obviously we are continuing to stay involved here.

Thank you, sir. Appreciate your confidence.

Thank you.

(OPERATOR INSTRUCTIONS). We will go next to [Joseph Pottman] with Wachovia Securities.

Well, guys, congratulations. Another great quarter.

Thanks, Joe.

You continue to reinforce my sentiment that I pass along to my clients, that the risk in Neogen is in not owning it, rather than owning it. The question I have is related to what you guys see happening down the road, over the next two, three, four years. What happens?

Well, we are going to continue to grow the business. We passed $100 million, and we put a milestone marker on that, and Bohannon is about three paces ahead of me heading toward the $200 million mile marker, but we think that there is great opportunity in the businesses that we are in, Joe, both as we see the markets grow, and as we see consolidation.

I don't think it is really unusual if you look at other industries back through time, as to what happens when you got a lot of people coming in early on, they get some of the smaller companies get flushed out, some others get to be bigger, and then you see consolidations. And I think it is interesting that the arrangement we have now with DuPont, and the arrangement that we had with Eastman, and before that, it was an arrangement with PerkinElmer, that they are very strong in certain technical areas, often technical areas, but don't have access to the marketplace.

So I think a big part of our success is that we started out very early building our own Sales and Marketing force, and we have continued to do that. We have got a jump on competition, and we have tried to keep ourself in that position. I would see us continuing to do that as we go forward, which means that not only products that we develop internally, but there may be some acquisition opportunities, but we may find ourself in a position of working more closely with some other people, as a strong distribution channel for those products.

We would only do that if it was synergistic to what we're doing, and doesn't distract our people, but I think we have got good strong growth opportunities going forward.

In your main presentation I thought that I heard you say a 10% gross margin improvement in some particular product line.

Yes, that was the disinfectant product line. That is somewhere north of $7 million in this fiscal year with revenue coming in, but it has been manufactured, a part of it is being manufactured in the UK, there is a lot of water between here and there you got to move product across for transportation, when we need it over here in this hemisphere, so we are working to get the registrations cleaned up there, so that we can begin to manufacture that product, and particularly those products particularly at Randolph, and then we have got some other toll manufacturing arrangements, that some of which certainly we would all look at consolidating into our own business at some point in time, and we don't have to pay the profit and the cost of the toll manufacturer.

I am not saying that they are not fair in their costs, but we already have a lot of those costs already in place, so that was the part that I was talking about being able to, that I thought I could see being able to gain 10% on the gross margin of that DuPont group of products.

What do you see happening to your gross margin over the next 12 to 24 months? Will you be able to maintain it?

We always continue to look at operating profit, Joe. I think that is, obviously gross margin is a part of operating profit. We are still pushing hard to try to get that 20%, and get it stabilized at 20% which I think is a pretty great accomplishment if we can get that done, so in some cases, if the gross margins are not quite as good in some products as others, if we don't have to spend the money on R&D, and G&A, and Sales and Marketing, if that side of the expenses are down, which then it comes through the bottom line, which is one of the great things about some of these bolt-ons.

Today, I would not have gone out and been interested in us buying the DuPont product line, if we didn't already have two very important aspects. We already had the Plant Property & Equipment, with filling lines that were not running at full capacity, to be able to absorb that from a manufacturing standpoint, and we already had a Sales and Marketing group, that were calling on the people or the buyers, or the would-be buyers of these products and selling them something else.

So that allowed us to go forward with that acquisition, where if we had to go out and build our own manufacturing plants from scratch, and had to start up our own sales organization to do nothing but sell these products, it wouldn't have been near so attractive, and now the gross margins are not as good as diagnostic tests for aflatoxin, but neither are the R&D and Sales and Marketing expenses.

Thank you.

We have a follow-up from Steve Crowley with Craig-Hallum.

Gentlemen, just a couple related follow-up questions. Related to your instrument business sales and placements, what I gathered from your prepared comments were that, timing issues had sales and placements of instruments down slightly on a year-over-year basis, but the pipeline and the outlook for that activity was good for the year as a whole. One, is that an accurate take-away for us to have?

Yes, I think that is a very accurate take-away, and particularly, really the area that saw some shortfall compared to the first quarter last year was that Soleris instrument. It is a high value instrument. We had some very good placements last year, but the pipeline for that is good. We have actually got an increased focus on adding to that, because there are so many opportunities out there, and in terms of overall product lines from a budget standpoint, it has got one of the highest growth forecasts for the year, so that is certainly the case for Soleris, and we believe the same thing is true.

We have had great success as I mentioned on the ATP instruments over the last three years, and we continue to find opportunities out there, so that we fully expect the increased placement of instruments going forward, so we can increase that razor business following on.

And then just to give me or give us a little bit of a feel, I would think instrument sales as a whole is a very modest percent of your overall revenues, if we looked for example, at last year? Is it a couple percent of revenue, or is it much more than that, under 5%?

Yes, it is under 5%.

Okay, now final question. It seems like acceptance of these products, AccuPoint or Soleris has really been driven by particular segments of an industry, or particular applications, I think of things like beverage companies, or salad dressing comes up whenever Soleris comes up. I am wondering, are there some new either vertical markets, or applications or product areas, that seem to be embracing these products? Areas like fast food or hospitality, or a particular food segment, or do you see some new applications bubbling up?

Yes, I think, I mean that is one of the things when you have got a product like this, and you are looking to expand and grow your sales, you are definitely always looking at other markets, and other potential or the same technology can be utilized. That is true for both of those.

We have had some very good strength in the dairy and beverage market for the ATP product line, but there are equally good opportunities we have talked about those poultry and swine integrators, from a standpoint of biosecurity for Animal Safety, but there are some good applications for the ATP instrument in those processing facilities as well.

The Soleris, it is really there. It is more a matter of us determining where to best apply the resources, because the opportunities there are really broad based, we want to continue to develop new vials for that product, because all of the food safety market segments in which we operate, virtually all of them have an opportunity for that instrument, so we will continue to apply our resources in those areas that represent the best opportunity for growth for both of those, and we think that we will continue to uncover those, and find new applications in a number of those markets, including some of those that you mentioned.

Great. Well sounds fantastic. Look forward to your progress.

Thanks, Steve.

There appear to be no further questions at this time. I would like to turn the conference back over to Mr. Herbert for any additional or closing comments.

Well, thank you for your participation this morning. Again, to remind you of the Annual Meeting, some of you may have proxies that haven't been returned. We would appreciate if you have got those laying around, if you could get those back for us.

There is nothing huge on the agenda for this year's Annual Meeting. We have the opportunity to elect three Directors, and name the auditors for the Company, and if you happen to be in the area and can attend, it is usually a pretty fun event. We get a large number of people there, and lots of questions. So please keep that in mind if you are available.

Thank you again, and we will look forward to if nothing real important comes up, we will look forward to talking to you this time next quarter. Good day.

Again that does conclude today's conference call. We would like to thank you for your participation, and you may disconnect at this time.