Neogen Corp (NEOG) 2009 Q2 法說會逐字稿

Good day, everyone, and welcome to the Neogen Corporation's second-quarter fiscal year 2009 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. Jim Herbert. Please go ahead, sir.

Good morning, and welcome to our regular quarterly conference call for investors and analysts. Today, we will be reporting on Neogen's second quarter that ended on November 30.

Before starting. 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, of course, could differ from those that we discuss today. These risks that are associated with our business are covered in part in the Company's Form 10-K as filed with the Securities and Exchange Commission.

In addition to those of you that are joining us today by live telephone conference, I would also welcome those who may be joined by way of simulcast on the World Wide Web. These comments, along with some exhibits, will be available on the Web for approximately 90 days.

Following comments this morning, we will entertain questions from participants who are joined by this live telephone conference. And I am joined today by Lon Bohannon, Neogen's President, and Rick Current, our Chief Financial Officer.

Earlier today, Neogen issued a press release announcing results of our second quarter that ended on November 30. We reported that net income of approximately $3.9 million was a 20% increase over the same quarter last year and a new record for Neogen.

On a per-share basis, the income for the quarter translated to $0.26 per share as compared to $0.22 a year ago.

In the first six months, our net income was approximately $7.6 million, or 22% greater than the first half of last year. This translates to $0.51 a share for our current year as compared to $0.42 per share a year ago.

The second-quarter revenues increased 15% to approximately $31.2 million compared to last year's $27.2 million. Year-to-date revenues are now running about 20% ahead of last year for that first half and reaching almost $60 million.

The quarter revenues for this second quarter mark the 67th quarter in the past 72 in which Neogen has shown increases. That is a record that now spans 18 years.

Given the difficult economic climate, frankly, this quarter wasn't an easy one. But I think it does show the operational strength throughout the Company, and my thanks to the managers and employees who are responsible for this accomplishment. As I said in this morning's press release, I believe that our management strategy has been a key to the quarterly performance.

As we start off a new calendar year, I thought it might be worthwhile this morning to talk a bit about that three-point growth strategy and how we view the future. Our strategy to be the one-stop supplier for both food and animal safety solutions is a sound one and continues to prove that way. Despite these tough times, a number of the markets that we serve have continued to grow. I believe that we have captured our share of that growth and also have made some competitive gains.

A second element of our growth strategy has been to grow through the development of new products. During the past year, we have approximately doubled the size of our R&D team, hiring 23 new personnel over the past six months. I don't believe that I have ever felt more comfortable about the strengths of our R&D group for future growth than I do today.

The third element for our growth is through acquisitions. We make acquisitions that fit our overall strategy. We don't purchase businesses that have a one-time impact on growth. Though we separate organic growth from growth through acquisitions, that comparison too can sometimes be blurred. As an example, two of our more recent acquisitions showed growth in the first year under our management, as compared to the same period under the former owners' management. So from a technical standpoint, a part of what we call growth from acquisitions does have an element of organic growth.

These are clearly uncertain times that are ahead of us over the next 12 months. To borrow an old farmer colloquialism, we are truly plowing new ground. We don't know when or where the plow may strike that next stump. However, I do believe that we have an experienced management team that is positioned to deal with those stumps when they appear.

Which I guess leads us into discussing what are we doing to face these economic times and how are we measuring up at the end of this quarter. I think the first thing it is appropriate to look at is cash. We started the quarter off with a little less than $10 million in cash and finished with over $13 million. Protecting that cash over the past quarter has been the key focus. Our cash is now invested in 89 instruments and US government-insured accounts. This means that our interest rate is a bit lower than a year ago, but we didn't lose any of our principle.

We have stepped up our surveillance on accounts receivable and we'll continue to watch those closely as we move through these troubled times. Aging of accounts receivable at the end of the quarter was 58 days, which corresponds to the same aging at the end of our last fiscal year on May 31.

Inventory is another area to watch for. Our inventories at the end of the quarter were approximately 11% greater than they were six months ago. Though the 11% compares favorably to a 20% increase in revenues, we still have some inventory positions that are higher than we would like to maintain, though frankly much of this increase was planned.

As an example, our inventories in disinfectants and cleaners is about $0.5 million higher than it was at the beginning of the quarter. We intentionally built these higher inventories and will likely need to maintain them for most of the rest of this fiscal year due to our strategy of running the business that we acquired from DuPont.

We've got 188 registrations in 41 countries that underpin that disinfectant market. And as we are orderly moving through those transfers of registration, moving them from DuPont's ownership to ours, there are a number of countries where we must maintain inventories until we can get the new registrations approved. These inventories also give us some breathing room, as we intend to transfer manufacturing from third-party sources for these cleaners and disinfectants to our own facility in Wisconsin.

There is a piece of the inventory that is in excess simply because of our inability to forecast demand. As we bring on new customers, it is difficult to know exactly what products they might be ordering and in what quantities, and we don't want to backorder a new customer. We have an MRP system that is in place at our Lansing operations and has recently been installed in both Wisconsin and Kentucky, and I feel sure that this system will allow us to further reduce certain inventories.

One of the unusual situations that has affected inventories during the last eight to 10 months has been in the commodities area. Where we found an opportunity to purchase commodity-type products such as casing that is used in our media manufacturing or grains that are used in our rodenticide operation, we have brought in some extra inventories to take advantage of price breaks or, in some cases, availability.

However, I'd say at the same time we've exercised discipline in commodity purchases. As an example, earlier in the year, wheat, which is a significant raw material in our rodenticides, was selling in the $12-a-bushel range, and that is about double what we had seen in earlier years. Feeling that the market couldn't sustain these prices, we worked hand-to-mouth for several months instead of booking high-priced commodities.

We are now buying that same wheat in the $6 range per bushel. This meant that we didn't get caught up with a lot of high-priced commodities like a lot of people did that are in the animal-feeding industry. Instead, we are now in a position to book needs for the remainder of this year as prices make that decision more prudent.

I'll speak a little bit about our international growth. It did have a strong influence on the quarter that we just finished. On a consolidated basis, revenue from sources outside of the US for the quarter were 41% as compared to 37% this time a year ago. However, this performance is really better than it might appear on the surface.

Remember that we sell product in euro, in pound, in real, in peso, as well as the US dollar. Currency conversions can have a high impact on consolidated statements. As an example, our Neogen Europe operations, when consolidated to US dollars, showed a 2% decrease in revenue for the quarter as compared to last year's second quarter. In actuality, those revenues on a Pound Sterling basis were up 21%. Of course, this time a year ago, we were converting the pound on the basis of approximately $2, whereas this past quarter, the conversion rate was at $1.68.

In some cases, we've been able to hedge currency to protect the conversion rate. However, that hedging activity shows up on our statements as other income, of course, down at the bottom of the statement, and not what I would consider appropriately reflected as part of the operating profits.

In looking at the year ahead, I think the Company is positioned to play whatever hand might be dealt us. We know that for some of our product offerings, customers will have the flexibility to delay purchases, which will have a negative impact on our revenues. However, we believe we have enough growth opportunities to offset that and to continue to keep the positive, sound growth at both the top and the bottom lines.

We also believe we have enough flexibility to continue the strong performance in operating income. Last quarter was an example, when we were able to actually grow operating income by 22% compared to a 15% growth in revenues.

We believe that our strong balance sheet, our cash position may also be advantageous to us as we look at the year ahead. With about $13 million in cash, positive cash flow each month, no bank borrowing, we could see some attractive investment opportunities in the months ahead.

Let me stop my comments at this point and turn the call over to Lon Bohannon to give you a bit more insight into how we achieved the results of this past quarter and his outlook for the quarters ahead.

Thank you, Jim, and let me wish all of our listeners on the conference call, as well as those joining us via Internet access, a happy and prosperous new year. As Jim indicated, Neogen did issue a press release earlier today describing our operating results for the second quarter of our 2009 fiscal year.

Neogen's results for the three months ended November 30, 2008 did set new records for Neogen in terms of sales, operating profits and earnings per share. And as Jim said, given the difficult economic conditions that exist throughout the world, our outstanding results are a tribute to the commitment and exceptional effort put forth by Neogen's group of approximately 500 employees. And like Jim, I would also like to acknowledge and recognize our employees' contributions to another great quarter.

Jim has already discussed a number of the key performance metrics for Neogen Corporation's second quarter. The only other item related to our consolidated results that I would point out is that operating income was 18.8% of revenues for the quarter. That compares to 17.6% last year and represents an improvement of 120 basis points. I do believe this improved operating profit performance is reflective of Neogen's ability to effectively integrate acquisitions, as well as our ongoing commitment to reduce costs and improve margins, which I will discuss in more detail in a couple minutes.

In terms of divisional performance, the second quarter was another strong quarter for most all of our operating groups. Sales for our Animal Safety Division were up 24% for the quarter and are now up 33% for our first six months compared to the same period last year. Acquisitions have contributed significantly to Animal Safety's overall growth, but we've also experienced some strong organic growth in a number of core product lines, especially during the second quarter.

Sales of diagnostic kits used in research applications and revenues from substrates sold to diagnostic kit manufacturers both increased more than 30% in this year's second quarter. Much of this growth was a result of selling more products to our existing customer base, including particularly strong growth in sales of our diagnostic test kit for histamine.

The increase in sales of Veterinary Biologics was the largest contributor to organic growth for Animal Safety in the second quarter. Sales of EqStim and, more importantly, our BotVax B vaccine that is used to prevent Type B botulism in horses, jumped 61% in the second quarter. Reports of equine botulism outbreaks in Florida, Texas, Hawaii and some of the New England states, along with expanded domestic distribution of this proprietary vaccine, helped drive the overall growth in sales for this high-margin product.

Sales of products aimed at small companion animals, primarily our care line of products, also saw growth in the second quarter, with sales up 26%. This product line is up 49% on a year-to-date basis, led by a significant expansion of private-label sales to a large distributor. Other contributors to organic growth for Animal Safety include sales of rodenticides to the domestic market that on a year-to-date basis are now running 8% above last year, and sales of Kane veterinary products that were up 19% in the second quarter compared to the prior year.

Food Safety revenue growth, which is all organic, came in at 6% for the second quarter, and on a year-to-date basis is up 10% compared to the prior year. However, this same-store sales growth is misleading and does not reflect actual unit volume growth achieved by our Food Safety group.

Jim already touched upon the currency exchange impact on the reported growth in revenues of our Neogen Europe subsidiary, and currency translation also artificially lowered reported revenues for our dairy antibiotic test kits. Adjusting for the impact of currency translation in these two areas, Food Safety revenues were up more than 12% for the quarter and are also 12% ahead of prior year for our first six months.

I also want to point out that we have increased the selling price of dairy antibiotic test kits effective December 1. The price increase was based on a predetermined formula that automatically adjusts prices quarterly based on the value relationship of the dollar and the euro.

Like Animal Safety, the Food Safety group also experienced some exceptional growth across a number of core product lines. Sales of diagnostic test kits for food allergens increased more than 50% in the second quarter and are also running 50% ahead of last year on a year-to-date basis. All seven of our allergen test kits are experiencing good growth, led by sales of our milk allergen test kits that are up 80% so far this year.

Neogen's test systems sold under the AccuPoint brand-name and widely used for general sanitation applications had another quarter of strong growth, with an overall revenue increase of 14%. A decline in the placement of readers in the quarter compared to the same period last year was more than offset by a 23% increase in sales of AccuPoint disposable samplers. As I discussed last quarter, we are not surprised to see quarter-to-quarter variations in the placement of readers, but we do fully expect quarter-to-quarter growth of the disposable samplers that are consumed daily by our customers to monitor general sanitation in their processing facilities.

Another area that has achieved exceptional growth in the second quarter was the Soleris product line, used primarily by food producers and processors to detect spoilage organisms in finished products destined for the consumer market. Soleris revenues increased more than 50% for the quarter, and that pushed our increase in Soleris sales for the first six months of this year to 26%.

I think most of you will recall the unique technology used in Soleris detects general microbial contamination like yeast and mold much faster than traditional methods. We continue to uncover numerous prospects for this technology and we are adding to our pipeline of opportunities monthly to help ensure solid revenue growth in the quarters ahead.

Now before we move on to questions from our callers, I do want to take just a couple moments to elaborate on our efforts to reduce costs and improve margins that I alluded to at the beginning of my comments. I believe Neogen has done a good job of increasing prices and managing costs to improve margins during the first six months of this fiscal year. While it is impossible to provide an exact number for the impact of price increases, I believe we have been successful in implementing price increases that have had a positive impact on sales of approximately 3% in the current fiscal year.

I think equally important, we continue to seek improvements in manufacturing systems to improve activity and are in constant negotiations with vendors to attain cost reductions or identify alternatives that will lower our overall costs. In addition, because the interest we earn on invested cash is so low in today's market, we have on occasion taken advantage of special offers from vendors to bring in as much as a year's supply of inventory. I know of one specific example that occurred more than six months ago when we purchased a year's supply of Kane nitrile gloves to avoid an expected price increase. In fact, the price of these gloves was increased twice within approximately 90 days of the issuance of our purchase order, and our vendor went on back order for these gloves shortly after we received our shipment.

We took advantage of this situation to gain market share, and as we approach the time to reorder gloves, we are now in a better position to negotiate price due to the dramatic reduction in oil prices in the last four months, which has also brought down the price of petroleum-based products.

Now we realize the downside to making some of these buying decisions is that we will periodically have more inventory on hand than we would carry in ordinary economic times. However, in addition to allowing us to lock in favorable pricing on a number of raw material and buy/sell products, maintaining above-normal inventories for certain items has been less expensive than ordering more often at higher prices and has also saved Neogen significant shipping costs on incoming product.

I would say that the likelihood of continuing to purchase excess quantities of inventory to gain a favorable price differential declined during our second quarter in the face of the deflationary price pressure we are starting to see in the current economic environment. And as a result, we are now focusing attention on other ways to reduce costs. For example, the dramatic decrease in oil prices will have a positive impact on our freight costs over the last half of this fiscal year. In addition, we are proactively negotiating cost reductions from vendors who supply us with those petroleum-based products. This is especially true of those vendors that put through significant price increases starting approximately a year ago as the price of oil began to skyrocket.

And as I have mentioned in a number of previous quarterly conference calls, Neogen will continue to take advantage of existing facilities and manufacturing expertise to bring in-house those products from acquisitions and products currently made by third parties whenever it will result in improved margins for the Company. Both Animal Safety and Food Safety have programs underway to expand the number of products manufactured within existing facilities that will ultimately result in improved margins for Neogen.

In closing, I would say that Neogen is indeed fortunate to be operating in growing markets and to have such a broad portfolio of products that are needed by the industries we serve. There are a lot of opportunities for both Food Safety and Animal Safety as we set our sights on reaching $200 million in sales within the next five years. I believe our management team is excited about the opportunities we see in spite of the current economic difficult conditions and we expect to continue to report solid top- and bottom-line growth in the future.

That concludes our prepared comments for today and we will now open up the call for questions.

(Operator Instructions) Steve O'Neil, Hilliard Lyons.

Good morning. A question on the international sales. First, Lon, could you indicate how much the dairy antibiotic sales were down in dollars?

I think they were -- I think in the quarter, I believe they were down a little over $0.5 million.

That's correct -- because of conversions.

Actually, we did this analysis at the end of the quarter, and so far in the quarter -- and I'm not sure if it was the quarter on a year-to-date basis, but our unit volume shipments are actually up. I know they are up about 9% for the year, and it is just not being reflected because of the currency translations. Because those are sold in euros and when they get converted to dollar denominations, that is where that adjustment comes in.

What's that $0.5 million in percentage terms, Lon?

It was down about 20%, I think, for the quarter.

Okay. Now, Jim mentioned -- if I heard this correctly --international sales were 41% of revenue versus 37% last year.

That is correct, Steve.

And so are there DuPont sales in there, or is there something --? I mean, that would imply about 27% growth in international sales, even with -- if I have done my math correctly -- even with the currency drag. Am I forgetting some DuPont sales in the there?

There is a significant amount of DuPont sales in the quarter.

Okay, so while [your need] in Europe was down a little there, antibiotic down 20%, the difference was more than made up by DuPont.

That would be correct, yes.

As well as the growth in --

We had other growth, yes.

Remember, a good deal of our international sales are sold in dollars, Steve.

Okay. Also, could you discuss the microtoxin and microorganism testing?

Yes, our natural toxins is still a big category for Neogen Corporation. It was up about 1% for the quarter. It is up about 6% on a year-to-date basis. I think most of the callers that have listened to these conference calls before realize and understand that particular category is the one that is most influenced by general overall crop conditions. We did have pockets of problems with DON, aflatoxin and fumonisin, but no major outbreaks this year. So actually, it is pretty good to kind of see that number up.

The only change from last year, I think last year in this quarter particularly, in the first six months of last year, we saw some strong shipments for microtoxin diagnostic test kits to companies that were in the ethanol production business, and I don't think those sales repeated at the same level this year. So it was a good, solid -- been a good, solid quarter and a good, solid first six months for natural toxins.

And microorganism testing?

I think up about 5% in the quarter, similar kinds of things. I think it is up even more than that on a year-to-date basis, maybe up 8%, 9%. Again, just we strive to do a better job there because there is big opportunities in that area. We are working on some things in our R&D area and working on some improvements in formats and stuff to give us a stronger portfolio of products there. And in the meantime, we continue to grow the business.

Then also, you didn't talk a lot -- I know there is a lot of products to talk about. I was curious about the veterinary pharmaceuticals and also the veterinary instruments and possibly specialty needles.

Veterinary instruments were up -- and again, I didn't mention -- I tend not to mention things that are just in that solid -- or in that 4%, 5% range. But they continue to grow. We continue to particularly expand our presence in the retail farm store market. I know that our sales to Tractor Supply in particular, which people have heard us refer to before, have grown significantly this year compared to last year. And it is not just veterinary instruments; we are now starting to see the benefit of having that relationship there and starting to get additional shelf space for other veterinary products and fly control products and even rodenticides, which we have not had before. So that is going pretty well.

OEM and specialty needles, I think they were about flat in the quarter and on a year-to-date basis. Of course, those are unique kinds of relationships with large organizations. Typically, we do get some timing differences. But we've also got some very nice opportunities there that we are working on that ought to provide some nice support for future growth as we go through this calendar year.

The last product I will ask you about is you mentioned rodenticides up 8% year to date. Did they not do as well in the quarter?

I don't know that I have that number specifically for the quarter.

Okay.

You might be able to call back and get that specifically. I think they've been pretty consistent this year.

They were down slightly.

Domestically, I think -- if I remember right, Steve, domestically, they are up; internationally, they may be off just a little bit because of some big shipments that went out in the first quarter.

And then lastly, in terms of gross margin, the operating margins are doing very well. The gross margins are running below a year ago. Is that a mix effect or is there some other explanation?

There are probably a number of things that are in there. It is a mix. And also remember that those margins are affected by the accounting for the translation adjustments, because it comes out of the sales, but not out of the costs. And it clearly will reduce those margins.

Okay, great. Really good quarter, and thank you very much.

Tony Brenner, Roth Capital Partners.

Thank you. You indicated what the revenue effect of currency exchange was. What was the bottom-line income effect?

That number is a little more difficult to compute than is the top one. My best estimate on operating margin is $375,000 --.

On operating income.

On operating income. Now, we get part of that back -- at least a couple hundred thousand of it back -- in Other income. So the total effect on the bottom line is probably closer to $200,000.

Tony, we've been hedging the euro all along, and it has been a smart move. We have been -- typically, I think, the first month or two we might have been behind a little bit. Of course, that's why you hedge. You hedge to tie in the price you want, not necessarily to try to be -- not to be a speculator. But our hedging has worked well for us as we've seen moves in the currency. But it began to play out at -- the hedging opportunities begin to play out at the end of this quarter.

And all we have been hedging is the euro. We are now hedging both euro and real, because we have enough real out there because of our Brazilian business that we've begun to hedge the real too. But there is just not a good way to hedge what is happening in the Pound Sterling as it relates to Pound Sterling conversion to the US dollar or as it relates to the Pound Sterling conversion to euro, remembering that our European operations report on Pound Sterling but they sell a lot of product in euro.

So that is -- we're almost beginning to see parity with Pound Sterling and euro being parity to -- when compared to the dollar. So it is kind of an unusual situation going on over there. But business is good and it's healthy, but it is just the comparison from this year to last year that sometimes distorts it a bit.

Just looking at the third quarter, Jim, the pound has, at least to date, remained quite low. But the euro has rebounded to above where it was a year ago.

That's correct.

So does that mean, given that you are hedged on the euro, not on the pound, that the negative effect on sales might be even a little greater this quarter, or not so?

Let me take a shot at that. On the Sterling, we will probably have an equivalent negative affect, assuming that all things remain equal going forward in the third quarter. It is going to be a tough -- that will be a tough comparison. I think we are okay on the euro, both compared to the prior year and with where we sit on our hedging strategy in the third quarter.

I think I remember -- of course, it moves from day to day -- but as I remember Rick and I looked at it on Friday, our euro was hedged just a little bit better than the spot market that day.

139.

Yes.

Okay. That's pretty close. One other point, your latest take on BetaStar.

Well, that's -- I think one of these days I might write a book on the efficiency of government or something based on this one. Those of you that have been following this and asking the questions, and I'm sure along the way wondering if they've got a problem they are not disclosing, I can again say that is not the issue. It is just the efficiency of government.

Back last March, after doing a good bit of work, we did get what was the final acid test on the use of our BetaStar milk antibiotic test, its performance in order to be able to use that in the US market. None of our current sales of that product are in the US market; they are outside. And the product continues to do well and continues to grow. So that would have normally been the -- once that approval by the Association of Analytical Chemists was done, that would have been the end of it, because they work with a Memorandum of Understanding with FDA.

Well, it went over then to FDA and the Center for Veterinary Medicine. And the FDA took a look at all of it, had a few questions, asked us to reword some of the product inserts and so on. At the end of August, they approved it. So we started telling you all that it is just right around the corner now.

So then it went over from the FDA to the National Conference on Interstate Milk Shippers, because they get an opportunity to look at whatever FDA has approved. And their lab committee looked at it and the 21st of October, they got around to having a meeting and approving it, and they sent it off to the executive committee to sign their approval. And the executive committee signed it on November 4, and we said this is it, the only thing it has to do now is FDA has got to write a little simple memorandum and issue it to the industry.

Well, November 4 kind of coincided with the change of -- expected change of the guard, I guess, in Washington. And FDA, as we finally got a word out of them on December 16, that that everybody was sick, on leave or whatever, and they didn't expect to get to it until the 1st of January. The word yesterday was that they were reviewing it, they thought that there was no problem, that they just were shorthanded, and somebody would get what I guess is a one-page memorandum out. And they had a big meeting going on this week, the week of January 5.

So it is just waiting the final memorandum from somebody at FDA, and I've quit predicting how long that takes. Sometimes you call them every day and then that just sets up a block -- they'll just show you that they don't have to do it. Or if you don't do it often enough, then they lose it in the pile. So I don't know what the right approach is.

But clearly, it is a good product, it is clearly approved. And there is some demand for it because some people in the US -- the US milk processors already know the product is out there. We do business with a lot of those milk processors today with products other than the milk antibiotic test. So once we get released, which surely to God will be this month, then we ought to be able to begin to see some revenues.

We do have product built. That product is in inventory. And it is not a dating problem, it is not perishable, it is not anything we are going to throw away, but we are ready to go.

Look forward to it. Thank you.

Scott Gleason, Stephens.

Thanks for taking my call and congratulations on the good quarter. First question, food production is clearly a very defensive industry, but probably not perfectly defensive, as any industry is. Can you maybe give us some granularity as to looking forward what to expect in terms of organic growth in 2009 and what your kind of assessment of what we could likely see is?

I think, Scott, as I said in my comments earlier, it really is a lot like plowing new ground. We don't know where the stumps are going to be. I think we know how to get around them. But we take for instance a company like -- that you are close to -- they're close to your office -- at Tyson Foods and what is happening there. Those customers like that -- or companies like that are big customers of ours. And Pilgrim, who is down the road a piece, they, too, are in pretty bad financial straits.

It's kind of unusual Tyson didn't notice it. Their President stepped down yesterday, and they brought in a guy who I know who is an extraordinarily good manager, Leland Tollett, who -- Leland has been away from the business for, gosh, a lot of years. Now, I'm sure he has probably got as much energy as I do, so I'm sure he would be plenty capable of coming back. But there is all those kind of things that are going on as they're closing down plants or trying to decide how to get more efficient during these times.

That will have some impact on our sales. If Pilgrim shuts down one or two of 10 plants, and those two plants were using our product, that will minimize the amount or reduce the amount of business we have. I think we are picking up enough other business, as I see us bringing on new customers, to more than offset the kind of things that we are going to find there. But my crystal ball is just not good enough to be able to predict exactly what is going on.

Okay. Is it safe to say maybe that kind of the low teens type organic growth rate you guys saw in 2007, maybe it would be safer to assume kind of high single digits for 2009?

Yes, we are talking about calendar 2009?

Yes.

Yes, I think that's right. And we've got -- we are bringing on -- we've got a couple acquisitions that are now over in the organic growth area, where they have been on board for more than a year. So they are not considered to be growth through acquisitions now because they are comparing year-to-year the same apples-to-apples comparison.

The DuPont thing continues to look good. You know, we've had that business on board now for seven months. We see all kinds of opportunities for expansion there. A big part of it is outside of the US, and it doesn't happen -- it takes a little longer to get it done in Costa Rica than it does in Georgia. But that is 41 countries where we've got some of them accessed for the first time, really good distribution access. We see that coming along.

Through the first seven months -- I was looking at it last night, saying how did we do in our pro forma and forecasting that business, because there were a lot of -- I guess in any acquisition there are a lot of unknowns as we brought it on board. Through the first seven months, the actual performance in terms of revenues were within about 1.5% of what we thought they were going to be. So there is no real surprises there, whether negative surprises or offsetting positive ones. So I think that will continue to help us as we look forward over the next 12 months.

Great. And then, Lon and Mr. Herbert, could you potentially give us maybe a little bit more color from an acquisition standpoint of kind of your assessment of what the current pipeline looks like? And then maybe talk about your appetite to take on maybe a little bit larger deals in terms of deal size.

Well, we would welcome doing bigger deals. We typically have been doing things that are in the $5 million to $8 million revenue, and we would like to step up to something bigger. I think it is just the availability of finding it. We've got one or two that we've spotted, but they are either not a real good fit or there is probably no interest on the other side in a courtship.

But with our line of credit that is available to us -- actually, we've got a lot more borrowing capacity than we do actually even in available line of credit today -- I think we have the capability of stepping up. I think we are in a position to get bank money. Haven't tried to get any lately, but they got somebody -- they got to loan it to somebody, and I don't know that anybody is more creditworthy than we are out there today. So I think we could get the money to step up to something bigger.

We just haven't seen anything that fits there. We do have a couple of areas that we are looking at, none of them real big and nothing near any point of a letter of intent yet. But I think especially in private companies as they are looking at what they might do to get liquidity, there is concern about what the current administration may do in the way of taxes. That is still fanning some flames out there. It's got some interest that might not otherwise be there because people might be looking at liquidity.

And then I just think there's also that concern of some people who are not as fortunate as we are to be carrying big bank balances and to have monthly cash -- positive cash flows, that are wondering what might happen when their note comes up at the bank. So we think that we are in the best position to do some acquisitions.

We are also in a better position to do some things in Europe. We backed out of Europe for most of the last couple years when the pound and euro became reversed on us. It didn't make any sense to use US dollars to buy pound-denominated opportunities. That, of course, is looking better than it was. It's from $1.58 down to $1.32 or wherever it is today. Those opportunities look better.

Plus Europe is facing its share of financial difficulties, too. So there could be some opportunities for us there in some areas that we would like to have done something in over the course of the past couple of years.

Great. I really appreciate you taking my questions. Thank you.

Steven Crowley, Craig-Hallum Capital Group.

Good morning, gentlemen, and congratulations. A couple follow-on -- well, actually one follow-on question and then kind of a new chapter we will open on something.

On DuPont, you mentioned that the business so far has performed pretty darn consistent with your expectations. I know you guys have an ambitious plan and a compelling plan to bring the manufacturing of that product into your own manufacturing and further drive the profit contribution from that business.

Can you give us a bit of an update on the timetable and how you are sizing up that challenge?

This is, again, an issue that is it not really based on anything that we can do directly. It is based on registrations. We, in order to be able to ship to a manufacturing site, in many countries you have to file a registration with that company for an alternate manufacturing site. And until that registration is approved in that country, you can't move it from its current manufacturing site.

We right now are manufacturing a fair amount of stuff in the UK that was being manufactured there at the time we acquired the business. Our toll manufacturer in the UK has told us that they would like to be out of manufacturing our products because they know that they are going to lose that business, and they would like to be out of that by the end of February; would extend it longer if we just absolutely needed to do it.

So that portion of our business is one of the things that I mentioned in my prepared comments is causing us to carry higher inventories than we might normally, because we've got to get all of the registrations done for a change of alternate manufacturing site and move it to Randolph. It will be going to -- that product will be begin to manufacture in Randolph. But where we may start manufacturing in Randolph in, say, April if we've got a country where we don't expect to get an approval on the alternate manufacturing sites until May or June, we've got to keep enough inventory from the UK operation to continue to sell in there and so our distributor doesn't run out of stock. So it is a maze.

We've got two good people that are spending full-time working on registrations and they know what they are doing. It is just a maze of getting through all of those. It is also a good barrier to entry. Not everybody has got the capability or the guts or the lack of sense or whatever to go through trying to do all those things.

In terms of the potential payoff from moving that into your own manufacturing, has much changed in terms of your expectation there?

No, no. I think -- I would say that I think there is probably 12% to 13% improvement in cost of goods. I think Lon and Rick would probably not be quite so optimistic as that, because I am still typically a crazy optimist at times. But there is clearly some opportunity for us to do that because we've already got a lot of -- a lot of the big stuff is already in place.

And in terms of the sale synergies you anticipated with bundling these newer disinfectants with the rest of your supply product line to the larger producers, how does that look from your current vantage point?

We are already beginning to see, particularly within the large animal, what we call integrated market, where before we might have had some rodenticide sales but not disinfectant sales, we are now able to bring disinfectants in. Whereas maybe DuPont had some disinfectant sales into that company but we didn't have rodenticide sales where now we've been able to hook rodenticides to it. So I think the story is beginning to materialize.

And then to pick up on a couple of the other bright spots that you mentioned in your press release. Soleris and the success you had in the quarter, is that driven by any new sizable applications or major customers that have come on stream?

Thanks for the question, Steven. This is Lon. Since we acquired that product line, I guess it goes back almost two years now, we have seen broad-based growth opportunities in a number of markets. If not unique to any particular market. We have had particularly good strength in the nutraceutical market for the placement of instruments, but there is a lot of other opportunities for that particular technology where there is an economic value to not having to hold inventory for as long as needed. Because you can detect these spoilage organisms much faster with this Soleris instrument and the disposable vials that we sell to it.

We had kind of a blip in our first quarter in terms of the placement of instruments, but we've worked very hard to rebuild the pipeline there, and it is hard not to be overly optimistic in that particular category going forward. That is one area where -- and Jim already alluded to -- it is just difficult for us to predict what the impact of the economy might have, not from the standpoint of the opportunities and the need for the technology, but from the standpoint that there is a capital expenditure associated with this and whether or not some of those might be deferred or moved out because of the economic conditions.

Now to counteract that, we are also taking a look at ways that we can utilize rental reagent agreements with that instrument to get some of those placed. A lot of those we find subsequently get converted to sales and, of course, when we can get them out there and get them in use, then the vial usage goes up and that supports month-to-month growth.

So we're excited about that product line and there is opportunities in a lot of different markets, beverage markets and things like spices, other condiments and even into other areas that we can expand into going forward.

And we are continuing to develop new products through R&D that fit onto that same platform. As Lon said, what really drives that business is the razor blade business, and that is the vials that are tailored to find certain organisms within certain matrices. And we've got, looking at the R&D schedule as a part of what they are doing in that section of our R&D group, I think they've got either three or four new products that will fit on that same platform that are somewhere in the development pipeline anywhere from a month to six months out. So some of that has also come into play here over the past six months.

Great. I'd have a similar question about the ongoing success you are having with AccuPoint. It seems like this quarter with the preponderance of your success being on the disposable sensors versus a lot of new reader placements, the conclusion I jump to is that you are having good success further penetrating existing customers and their applications rather than kind of breaking into some new greenfield territory.

Well, I would say that we are still very optimistic about other opportunities to place instruments as well. I just think when you are talking about some of those kinds of expenditures, it is hard to look at just one single quarter and draw a lot of conclusions. There are still a lot of good opportunities out there for placement of instruments with new customers.

We actually already in this month have seen other placement internationally that looks like a good sale. I think that that also gets back a little bit to this organic growth to follow up on some of the things that Jim said. One thing that I am encouraged about is at the monthly meetings we are still seeing a lot of very good prospects and opportunities across a number of product lines for both Food Safety and Animal Safety. And I think when you combine that with the efforts we've got going in on R&D to develop new products for some of these markets that, at least from a unit volume standpoint, we can continue to look at some solid organic growth in this calendar year.

My final question does dovetail that answer. You mentioned a significant increase in resources and research and development. Have we seen the majority of that cost increase on your income statement? Or kind of the way I have it modeled is it continues to, I guess, show up more in Q3 with a run rate of R&D of around $1.5 million a quarter. What is the right way for us to think about the cost ramp as you've done the people ramp?

Yes, the cost ramp -- of course, the people have been added on sequentially. They didn't get all get added on the 1st of June, so we've been continuing to hire. I indicated I thought we brought 23 people on since probably last May, I guess is when we started that. And some of them have come on board as late as last month. So you've got a big part of R&D for us is expense of personnel, salary expenses.

But at the same time, every time you put a scientist in the lab, well, there is a certain amount of supplies that goes with it. So those haven't ramped up yet. Even though some of the salaries are in, they have not been fully productive enough to be chewing up a lot of lab supplies yet. Q3, we ought to be leveled out probably to about where we are going to be running in Q3 as far as total costs.

And are you still looking to bring a leader to that organization versus the current interim leader of that organization?

Are you trying to get me out of a job or --?

I figured I would just play along.

The guy that Scott -- I guess based on visiting here, I guess somebody must've said Herbert is running R&D and we're going to try to find somebody capable of doing that. No, we are continuing to add senior people as the organization gets larger. Those of us that have been managing those kinds of things have less and less time to manage it. So no, that is part of the strengthening of the overall program that we are doing.

But they are very successful now. They are very productive now. But if we are going to continue to produce going forward and push -- we've got a goal as to how many new products we need to push out of the pipeline in both Food Safety and Animal Safety on an annual basis, and we've got to ride herd on that and make sure that these new resources that we are putting in place truly are productive. I've got a lot of confidence in the leaders that are running the various groups today, but we --.

And we need to move up, step up some on what we're doing on Animal Safety. We've not spent as much resources on new product development in Animal Safety as we might and as I would expect we would as we move forward even through the rest of this fiscal year.

Thanks for taking my questions, and congrats again.

(Operator Instructions) Steve O'Neil, Hilliard Lyons.

Just a quick follow-up. Can you tell me what the incremental impact of acquisitions amounted to in the quarter?

In dollars, Steve?

Yes, please.

$2,750,000.

Okay. Thank you very much.

Thank you so much. And at this time, we have no further questions. I'll turn the call back to our speakers for any additional or closing remarks.

Well, thank you. I guess I would make some concluding comments. During the past year, Neogen was named, as most of you know I think, to be a part of the Russell 2000 Index. I asked Rick Current yesterday if this was truly a market distinction as we look back over the past year. And he came back saying that as a youngster he had learned that making a C in school couldn't be explained away by reminding his folks that other people made D's and F's, but that maybe in the stock market, it was appropriate to look at price performance as it compared to the overall market. And I thought you would be interested in those findings.

When he compared Neogen to the Russell 2000 for the past year -- and that would be through yesterday's market -- Neogen's stock was down 2% versus the Russell 2000 suffering a collapse of 34%. Looked further back to see how we were doing compared to the Russell for the past two years and found that Neogen was actually up 76% while the Russell Index was still down 36%. And then looking even further back over the past five years, during that period of time compared to yesterday's close, Neogen's stock is up 97% while the Russell Index was still down 11%.

So I guess I'd say to each of you here and others, our thanks to all of you who have placed your confidence in Neogen and its management team over the past few years. And let me assure you that we will keep our heads down, we'll continue to work on those things that we can do something about, and we will continue to strive to give you this kind of above-average return on your investment going forward. That concludes our call and good day to you all.

Thank you. And ladies and gentlemen, that does conclude today's conference. We appreciate your participation and have a wonderful day.