Neogen Corp (NEOG) 2009 Q3 法說會逐字稿

Good day, everyone, and welcome to the Neogen Corporation third quarter fiscal quarter 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, Chairman and CEO of Neogen. Please go ahead.

Good morning, and welcome to our regular quarterly conference call for investors and analysts. Today, as you know, we'll be reporting on Neogen's third quarter that ended on February 28th, 2009.

I'll 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. 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 those of you who are joining us today by this live telephone conference, I would also welcome those who may be joined by way of the simulcast that is on the worldwide web. These comments, along with some exhibits, will be available on the web for approximately 90 days.

Following the comments this morning, we'll entertain questions from participants who are joined in this live call. And I'm joined today by Lon Bohannon, Neogen's President, and Rick Current, our Chief Financial Officer.

Earlier today Neogen issued a press release announcing the results of our third quarter that ended on February 28th. The third quarter revenues increased 11% to approximately $27.8 million, a record third quarter for the Company. These revenues compare with the prior year's approximately $25.2 million. On a year-to-date basis, for the first nine months revenue now stands at approximately $87.8 million or a 17% increase over the prior year. Net income for the third quarter was approximately $2.8 million or about $0.19 a share. This is approximately a 6% increase over last year's $0.18 per share. On a year-to-date basis, for that first nine months net income has increased 17% to approximately $10.5 million, as compared to $8.9 million last year. This was Neogen's 64th consecutive profitable quarter, and the 68th quarter in the last 73 to show increased revenues compared to the previous year. That record now spans more than 18 years.

This past quarter was one of our tougher ones; and though our increases in revenue and profits were not as great as they've been in some prior quarters, we did weather the storm, with a lot of economic adversity generally that was outside of our control. In a few minutes, Lon Bohannon will give you some more of the details, and then we'll come back and talk about our expectations in the months ahead.

One of the key factors outside of our control was currency translations for this quarter as compared to the same quarter last year. Neogen does business in pound sterling, in euro and in pesos. The wind was certainly in our face this year as we translated those currencies to our dollar-based consolidated statements. In the third quarter of last year, we were translating pound sterling on the basis of $1.98 to the pound as compared to this past quarter at $1.46. That's a decrease of 26%. As an example, our Neogen Europe operations actually had a nice increase in both revenues and profits compared to the prior year. But translations subtracted $800,000 from the comparative revenues and $140,000 from earnings. Similarly, the euro was translated for this quarter last year at $1.47, and this year it was at $1.32. Even the Canadian dollar and the peso were below prior-year in the conversions.

The quarter also saw many of our customers making significant inventory adjustments, or what some people are referring to as destocking. While this took place with some of our direct customers, it was even more obvious with our distributor customers in the US and around the world, where we have more than 100 distributors. Most of these customers rely on bank borrowing to cover a significant portion of their working capital. As bank borrowing became tighter or at least more uncertain, these distributor customers pulled back their inventory levels. As one might expect, many of those inventory adjustments occurred with our higher-priced and higher-margin products, which ultimately had an impact on our product mix and our gross margin and our operating income as compared to a year ago.

A portion of our revenues come from producers and processors of animal proteins. These customers also resorted to somewhat drastic reductions in cash use because of their dependence on borrowed capital. Oversupply of animal proteins, weak pricing and some wrong-way hedges from last fall on feed ingredients has certainly taken a temporary toll. As an example, the nation's largest poultry producer was forced to seek bankruptcy protection. We saw a similar impact on the world's largest hog processor and hog producer, as they faced a liquidity squeeze, causing them to close six of their processors for their 40 processing plants, and reduce about 1,800 employees.

The milk industry didn't escape these perils either, as that industry is now in the midst of a dairy herd reduction program to bring down the oversupply of milk products. And the extra meat that's going to market as a result of this dairy cow reduction has also put pressure on the traditional beef industry.

As we watched all of these activities take place over the past quarter and a rather widespread drop in consumer confidence worldwide, it sort so if brought home the fact there we're truly sailing in some uncharted waters. I couldn't help but remember the old quote that says, "Troubled times can only be understood backward, but we must live life going forward." As we look going forward, I do believe that some of the massive adjustments that we saw take place are not long-lived. I can't speculate as to what's going to happen to currency translations in the quarters ahead. However, I think we do have a decent view on some of the other areas. If the reduction in our sales to distributors is truly an effort in destocking, we will undoubtedly see resumption of purchasing as the inventories become completed. We've seen the animal protein industries go through adjustments before, though not normally all proteins have required an adjustment in supply so drastically all at the same time. Obviously, the world will continue to eat meat proteins and animal proteins, and we'll see improvements in our business.

Let me stop at this point and let Lon give you a bit of color on the operations of our two divisions during the past quarter; and really, we saw a lot of bright spots.

Thank you, Jim. And I too would like to welcome all of 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 third quarter of our 2009 fiscal year. Neogen results for the three months ended February 28th, 2009, did represent a new record for Neogen in terms of third quarter sales earnings per share. I think obtaining any level in growth in sales and net income in these tough economic times is a noteworthy achievement. But in addition, there were some unique circumstances in the third quarter that make it difficult to get an accurate comparison for the same three-month period of the prior year. Accordingly, I would like to discuss our third quarter results in some detail to give you a better insight regarding what is behind the numbers.

I want to start out by discussing three items that significantly impact the comparison of this year's results to the prior year for the third quarter, and on a year-to-date basis. The first item is the currency translation that Jim already mentioned in his opening remarks. I do think it's important to note that our Neogen Europe operations achieved unit volume sales growth of almost 30% for the third quarter, all of which was nullified by the negative effect of the currency translation. As Jim indicated, sales for the third quarter were $1.1 million below the prior year, solely on the basis of converting pound sterling, and to a lesser extent euros and some other foreign currencies to US dollars. For the year, currency translation has lowered sales by $1.5 million. We have used hedging strategies to minimize the impact of currency translation on net income wherever possible; but as you see, it has still had a significant negative impact on the revenues when compared to last year.

The second item impacting comparisons has to do with a change in regulatory interpretation. After exercising regulatory discretion for more than 10 years, allowing the use of [isoxoprene] for treating lameness in horses, the FDA decided to detain all imported shipments of [isoxoprene], effectively removing [isoxoprene] from the sale into the equine market. The impact of this change in application of FDA policy reduced Neogen's sales by $200,000 in the third quarter, and on a year-to-date basis has resulted in more than $530,000 less sales compared to the prior year.

The third unusual item affecting year-to-year comparisons is the back order of an important injectable vitamin. All injectable vitamins marketed by Neogen are supplied by third parties, and the manufacturer for Vitamin E-AD back-ordered Neogen for all of the third quarter. At the end of the quarter, Neogen had $425,000 in unfilled orders, which obviously put a big dent in sales. Now, we don't like to make excuses, but I believe it is important to take into consideration the unique situations that impact year-over-year comparisons, and we do want to make an effort to get as close to an apples-to-apples comparison as possible. The combination of the three unique items that I've just described negatively impacted sales by more than $1.7 million for the quarter, and by $2.4 million for the first nine months of our current fiscal year compared to the same periods last year. Adjusting for these three items, our sales growth would have been 17% above last year for the quarter, and we stand at 20% higher than the prior year for our first nine months. I do believe that this is a more accurate indication of the unit volume and current year's overall growth performance for Neogen.

In terms of recession impact, our Animal Safety Division has likely been most affected by the worldwide economic downturn. Animal health distributors made conscientious efforts to cut back on inventory levels during our third quarter, resulting in lower stocking orders than normal. Even sales to the pet industry, which historically has been a recession-proof market segment, suffered a slowdown as veterinarians reported reductions in transaction fees at vet clinics and vet hospitals. It's impossible to predict how much more customers can pull back inventory levels, but we would certainly expect to return to more normal ordering patterns as we move closer to our 2010 fiscal year that begins on May 1st.

Now, fortunately, a good number of Neogen's animal safety product lines continue to exhibit excellent growth performance. As a result, overall sales for the Animal Safety Division were up 20% in the third quarter. Cleaning and disinfectant products acquired from DuPont have exceeded budget expectations, and provide good growth potential going forward. Furthermore, we are finding opportunities to sell our complete biosecurity product line to customers who had previously only purchased the DuPont disinfectant products.

Our line of proprietary substrates sold to diagnostic kit manufacturers had an outstanding quarter, with same-store sales growth of 54%, driving year-to-date growth to almost 30%. Sales of small animal supplements, most notably products sold under the Care brand name were up 36% in the quarter and have grown 44% so far this year. Sales of veterinary instruments continued their trend of exceptional performance with another quarter of double-digit organic growth, led by further penetration into the retail farm store market.

You may have noticed the press release from Tractor Supply this week, indicating they have the potential to more than double the number of their stores from 855 to more than 1,800 domestic locations. Neogen is the exclusive supplier of veterinary instruments to Tractor Supply, and we have made good progress in gaining business for other products from this important farm retailer. Over the last five years, Tractor Supply has opened 396 stores, and their aggressive expansion plans will translate to good sales growth for Neogen in the years ahead.

The Food Safety Division also had more than its fair share of outstanding performers in the third quarter. Excluding the impact of currency translation, food safety sales achieved a 10% organic increase for the quarter compared to the prior year. You've already heard me say that our Neogen Europe operations continue to turn in outstanding year-over-year growth performance. Their 30% growth extended a three-year trend of 25% to 30% quarterly increases.

Another stellar performer for food safety is our line of rapid tests to detect food allergens. On a year-to-date basis, sales of food allergen test kits have increased 49%, with the third quarter reporting growth of 46% over the comparable period last year. Neogen will be introducing several new allergen test kits in the coming months that are expected to continue to drive fiscal year 2010 sales growth for this key product line.

Sales of our Soleris rapid microbial test system for spoilage organisms achieved growth of 16% in the third quarter. This product line continues to maintain an impressive pipeline of identified prospects, and is expected to generate strong double-digit organic growth through the rest of this calendar year and into 2010.

Neogen's AccuPoint test system, used to monitor general sanitation, also turned in an exceptional quarter with overall sales growth of 34%. We experienced strong growth in [sample] usage for the quarter, and placed substantially more readers in the quarter than we did in the third quarter last year.

Sales of dairy antibiotic tests did decline in the third quarter compared the prior year. While we did see some impact from the decline of the euro, most all of the shortfall in dairy antibiotic sales occurred in the month of December as a result of a reduction in orders from our largest distributor. Based on recent in-person meetings, and because sales to this distributor in January and February exceeded sales for the same months last year by more than 10%, I believe the December activity represented a one-time inventory reduction, and that we can expect a return to normal order volumes in future quarters.

Another highlight of the third quarter was receiving the long-awaited and final approval for our BetaStar US dairy antibiotic test from the FDA and the National Conference on Interstate Milk Shipments. The January approval of this test opens up the domestic market, providing Neogen access to customers who conduct approximately 3.5 million tests each year. Neogen is actively engaged in sales, product evaluation or sales quotes to 26 producers and processors in all of the key dairy states. The selling cycle can be long, because coordination with state authorities is required to obtain mandatory certification of test sites for implementation of a new test procedure. Nevertheless, we are very excited to have the BetaStar US test available for sale, and we believe our goal of capturing 6% to 8% of the domestic market in fiscal year 2010 is reasonable.

Now, before I turn the call back over to Jim, let me take just a few minutes to cover a couple of other income statement categories. I'm sure many of you noticed that operating income fell slightly below last year for the quarter. This is due entirely to a decline in gross margins from 50.3% last year to 46.8% in the current quarter. We paid very close attention to our gross margins, and I can assure you that this decline is solely the result of product mix. The third quarter included an unusually high percentage of disinfectant product sales, with proportionately lower gross margins. Now, when you remove these sales from the calculation, gross margins were almost exactly the same in this fiscal year third quarter as the prior year's third quarter.

I think this would also be a good time to let you know we have already embarked on plans to begin the transfer of disinfectant production from third-party [toll] manufacturers to Neogen facilities in Randolph, Wisconsin. We will proceed with an orderly transition, and would expect to be in full production by the end of fiscal year 2010. It is anticipated that the transfer of this manufacturing to our own facilities could improve gross margins for disinfectant products by as much as 10% to 15%.

Other operating costs are also under very good control. SG&A expense for the quarter declined as a percent of sales to 29.4% to 30.4% in the third quarter last year. Research expense did increase in the third quarter as planned, and I'm convinced that our investment in research and development activities will result in new products and improvements in existing products, to help us take full advantage of the significant opportunities we see in our food and animal safety markets.

I guess I'll close my comments by telling you that I remain confident we can overcome the current economic turmoil, continue to turn in positive results and, in fact, should be able to take advantage of these tough economic times to strengthen our position as the dominant company in the development of marketing and solutions for food and animal safety.

Now let me turn the call back over to Jim for some further comments.

Thanks, Lon.

Let me talk a minute about what we think we see ahead, and the actions that we're taking to make sure that we keep Neogen healthy, and I'm not concerned about the health of Neogen. Though our growth slowed a bit during the quarter, and for some understandable reasons we're still growing at both the top line and the bottom line, we've got about $14 million in cash, positive cash flow being generated each month, and we have no bank borrowing. Furthermore, we have inventories in a number of places in our business that are beyond the current demand, and a big part of that inventory is in raw materials that have long shelf lives, so we'll convert some of that into additional cash.

There will be issues concerning the health of some of our customers. We've doubled up on our surveillance of accounts receivable, and we'll continue that practice. Before this is all over, we'll undoubtedly have some customers that won't make it. However, I think that we have every opportunity to replace those with new customers and to expand our product line sales to a lot more of our existing customers. We'll continue our international expansion, as we still have a lot of opportunities to grow in many of those major countries, as we've proven by our European operations that Lon talked about.

Our acquisition of the disinfectant and cleaner line from DuPont, and that ongoing partnership to develop and market new chemistries, will provide further opportunities for growth. The real impact of these products to the bottom line has not been fully recognized yet, as Lon talked about. In fact, they were actually -- had a negative impact to operating income last quarter, as we were making a transition in both pricing and in production. We stopped manufacturing products in the UK plant on February the 28th; and when we start production in our own plant in Wisconsin, by that time we'll get rid of old pricing agreements and have those behind us; and with our own production, we'll restore overall margins.

Amidst all of what's happening in Washington today, food safety is certainly not being left out of the discussion. Public health experts are -- put out some new numbers a couple of weeks ago, estimating that approximately 76 million people in the US are sickened by contaminated food, hundreds of thousands are hospitalized, and there are recordable fatalities due to food poisoning that run into the thousands. These food safety concerns are high on the budget considerations globally today. The President spent a great deal of his weekly radio address last week talking about the food safety issue in the US, and promised to bolster and reorganize the nation's fractured food safety system. Bipartisan groups in the Congress now have introduced legislation aimed at improving food safety. The President made it clear that he not only supports that legislative effort, but may push to expand it. The Administration's 2010 budget will propose spending over $1 billion on food safety efforts. That's nearly double the amount that was spent in 2007.

It's likely that this spending will expand the programs at both the US Department of Agriculture and the Food and Drug Administration. One has to remember that there are about 150,000 domestic food facilities and over 200,000 foreign food plants that are registered with the FDA. It's difficult to know exactly how these new programs may be aimed, since the White House has yet to name most of the under secretaries and other key second-level cabinet appointments. However, I think expanded testing and the need for more testing, products such as those that we make should get some priorities in a lot of those programs.

I don't think at this point we've mentioned anything about the stock buy-back program, and I'd like to comment on that. Back in December, the entire stock market was falling, though Neogen was holding up at that point pretty well. But our Board had no idea whether we'd see another market freefall and see Neogen stock get caught in that avalanche. As a result, the Board passed a resolution allowing management to acquire up to a half a million shares in a stock repurchase plan. We saw a few days over the past few weeks that when the market was down, and we've purchased approximately $1 million worth of stock, we didn't do this in an effort to try to keep the price propped up, but instead saw it as a good investment opportunity for our shareholders. In fact, we were right the last time we did this a few years ago, when we repurchased shares at an average price of $7.11. We'll continue to watch for breaks in the coming month.

Some have asked why Neogen's stock price has held so well for 13 months, when other stocks weren't doing so well, and then began to suffer some significant drops in the past 30 days. You know, currently, institutional investors own about 70% of Neogen's stock float, and I counted it up the other day, there were 50 of these institutions that have in excess of $1 million each in ownership. I think it's reasonable speculation that as some of these institutions have been faced with continued redemptions that they likely sold Neogen stock to meet cash calls.

In closing our prepared comments, I'd have to say that I'm certainly not delighted about the current global financial dilemma, but I do believe that we'll take advantage of it and make Neogen a better company. We'll look harder at places to reduce our cost. We'll be more aggressive in our sales and marketing activities, and we'll continue to put larger resources behind our exciting research and development programs. In fact, the expanded resources that we put behind our R&D programs starting about six or eight months ago will soon be yielding results, as we have several new products and improved products that are now beginning to come out of the pipeline.

And lastly, I'd say that we'll be saving cash reserves for acquisitions, and we think that there may be some new opportunities in the months ahead, and perhaps there might be even more attractive pricing.

That concludes our prepared comments for the morning, and we'd welcome any questions from participants now on this conference call.

Thank you, Mr. Herbert.

(Operator Instructions)

Our first question comes from Steven Crowley with Craig-Hallum Capital Group.

Good morning, gentlemen. A couple questions for you. In terms of the contribution from your international business, you've typically given us, have been willing to give us a percentage of sales coming from international. What's that number for the quarter and for the year-to-date, if you have it?

The number for the quarter, Steve, is 43%, and year to date is year to date is 42%.

And do you have those comparative numbers from a year ago?

I don't have the quarter, but I do have the year-to-date a year ago, and it was 38%.

Okay. Great. Now, in terms of Neogen Europe, it seems like, in constant currency, it had another excellent quarter. The inference you've given us is that currency has washed away most all of that. In dollars -- when it eventually made it to dollars, was it -- you know, what was the percentage change, or can you give us a sense for the size of Neogen Europe? Because it's not just the total international percent, if I understand it correctly.

Well, I mean, I'll answer that or take a shot at it. In the quarter, there was just 800 -- just over $800,000 of shrinkage as compared to what it would have been had we converted at the same dollar amount as we did in the comparable quarter of the prior year. And it translates to the bottom line in that case -- in their case, I should say the operating margin line, is about $150,000 of our operating margin was lost as a result of that.

Now, the total currency impact was closer to 1.1 million on the top line, and what was the total currency impact on the operating income line?

About $450,000.

So $450,000 on the operating income line?

Correct.

And about $300,000 more on the top line, because we went from $800,000 to $1.1 million?

The euro effect drops whatever -- whatever effect you had on the sales line on the euro drops all the way to the bottom line.

Okay. All right, so that's why both of those are up about $300,000. In terms of DuPont, it sounds like you're quite happy with how that product line is doing at the early stages of being under your wing, and the bundle strategy is starting to play with customers. You telegraphed in the past that that business in its current state was around $2 million a quarter. It sounds like it might have been a bit more in the February quarter. Can you give us a little bit more color on its contribution?

Yes. It is, Steve, a bit more, and we've seen those sales pick up each quarter since we acquired it. It's -- you know, we'll know it -- come the end of this quarter, where everything stacks up. But I'd say that -- you know, our sales so far, I think, since we've bought it, are just under $3 million.

In the quarter.

Yes.

Okay. Great. And then final question, and I'll hop back into in the queue. You've had some -- somewhat surprisingly, given the environment, good things to say about a couple of your capital equipment -- or products that resemble capital equipment, Soleris in particular. Can you give us a little bit of color as to why you've been able to continue to do well with that product line? Is it new applications? Is it new customers? I think I ask this question every quarter, but it continues to be an intriguing equation to me.

In terms of that product line, the fact that it's just -- has great application across many of our markets is overwhelming the fact that some customers are deferring or delaying capital expenditure decisions. So we're continuing. But I will tell you that, actually -- and we may have some -- we may have some of our sales team that are listening in on the teleconference conference call. That number, the 16% growth, for us is a little bit disappointing, and I think it's only because of the fact that some of those customers are deferring and delaying capital expenditure decisions that it's not higher.

We had a comment yesterday that was made, for every one of those units that was placed or was placed probably in the quarter, we've got another 30 prospects out there. And they're not dropping off the list, they're not declining; they're just -- it's just taking longer to make decisions, and that process has taken longer. So we feel good about that product line going forward; and as the economy improves, there's some strong economic reasons for customers to take a look at that product, and we believe it will be a strong contributor to sales growth for years to come.

And that 16% growth, was it very biased toward the consumables stream? Or on a year-over-year basis, was the equipment -- were the equipment sales up year-over-year?

Pretty balanced. I mean, we are seeing -- we're seeing growth, because we continue to get instruments out there, so we're seeing growth in the disposables. But we're continuing to place units, and I don't think that was -- I don't think that was unfavorable for the quarter.

Okay. And AccuPoint, ATP, and then I really will get back in queue. Had a great quarter. Standard question there is are there some new industries or new applications driving the sales there, or just better penetration of where you've made inroads?

Well, we've -- we continue to believe that in particularly in our domestic and some of the international markets, we're gaining market share. We did have -- we did have a large placement in China in the quarter, some of which went to some governmental labs for demonstration and training, and some that went into -- actually into the hospital market over there. The thing that we haven't seen from placements in China is their usage of the disposables has not been as great as what it is when we place units in our traditional markets. So we did get some good unit placement over there. We're excited to see that. We think sooner or later that has an opportunity for growth over there, and we're looking forward to the time when they start picking up on the usage of the samplers. We had strong sampler usage, and continued to gain market share with that product in other market segments.

Great. Thank you for taking my questions.

Our next question will come from Scott Gleason with Stephens.

Guys, thanks for taking my questions, and congratulations on the strong quarter in light of some of the headwinds that you faced. I guess my first question, can you break down what the organic growth rate was for the Animal Safety Division in the quarter?

Let's see, Rick. I think -- maybe Rick's got that. I don't have it.

Animal safety, the same-store sales in the quarter were down 5%.

Okay. Great.

I think it would have been flat to just slightly positive, when you take into consideration those two product lines that we sold last year that we did not have available this year.

Okay. Great. Mr. Herbert, you talked a little bit about destocking activity by some of your distributors throughout the quarter. Is it your sense that that trend has kind of played itself out, or do you kind of expect that to, I guess, continue over the next couple of quarters here?

Well, based on what we've been able to learn at this point, they've had a couple of months to pull done inventories. I don't think we've gotten -- they don't have near as much inventory to pull down and deplete going forward as we look out into the spring. Furthermore, some of those guys, particularly I think you know -- because of how you thought of some of the animal agriculture, we're getting into the spring season, where distributors are carrying a lot of products particularly for small animals -- for large animals, in which we're working cattle on the beef side. You know, we expect to see some just general pickup in seasonal animal husbandry business, which will help some as we move into the fourth quarter. It's -- you know, it's hard to say exactly -- I'm sure there's probably still some more inventories that will be pulled down. I certainly don't believe think they'll be near so drastic as what we saw this quarter.

Okay. Great. So at least kind of slowing going into the end of the year here, the end of the fiscal year?

Right.

Mr. Herbert, I know you guys have talked a lot about the expanded R&D budget, but you really haven't talked much about kind of the outcomes for that. Are you guys ready at this point to start kind of talking about some of the new products that you could potentially be launching, you know, over the next 12 months as a part of that expanded R&D effort?

Well, it's a little bit premature. You know, I suspect that our competitors, like us, listen to conference calls; and, you know, I don't know that we want to give them any more advance notice than we need to. We do have some things that -- and we can talk about several areas. We've got some things in the pathogen area, we've got some things in the allergy area. We're a leader there, in that market. We want to continue to hold that leadership. Part of that comes from introducing some new products.

And we've got some other applications in the microbiology area, over on the animal safety side, that I think is going to be very interesting, product areas that have been in the pipeline for awhile. Some of them are actually making minor changes in food safety products to make them a better fit on the animal safety side, and we see those that are coming out. We'll begin to get a little trickle coming out of the pipeline before the end of this currently quarter, and then more as we move into the first quarters of next year.

Great. And then, Lon, I think you mentioned briefly in your comments that the number of Tractor Supply stores in the U.S. could be going from 855 to 1,800. Could you maybe give us a little more granularity on how big a revenue contribution that sales channel represents, just so we can get a little bit better idea of what the potential impact there could be?

I don't have the specific numbers for sales to that customer. I know that earlier this year we looked at that, and our sales of Tractor Supply were up something like 60, 70%, and it wasn't just from the growth that we had seen in the veterinary instruments as a result of them opening and continuing to open additional locations; it was also because we have had some good success in placing some other products with that farm retailer, and getting access to more shelf space. I mean -- they're a significant customer, well in excess of $1 million, and I suspect this year they'll push $1.8 million or something like that. But again, I prefer not to give too much competitive information out or get in those kind of specifics. But we fully expect to continue to do well. They were a big driver for growth for us in the third quarter in some of the animal safety product lines I mentioned.

And they're becoming a more important conduit to reach the traditional farmer/rancher market out there, as that whole distribution center is changing up a bit. You know, they're gaining strength, they're in more markets. They're visible, and they're providing a good outlook for the traditional farmer and rancher to be able to pick up livestock supplies there. So that's helping us, too.

Okay. Thanks, guys.

Moving along, we'll hear from Stephen O'Neil with Hilliard, Lyons.

Good morning, Stephen.

Good morning. Just a few questions on some of the various products that were mentioned, and they may not have done as well -- but actually, let me go back to the dairy antibiotics for a second. The dairy antibiotic volume, I think you mentioned, was down, and would that not have been aggravated by currency as well in euros?

Yes. Steve, it was aggravated by about $350,000 dollars. So it was part euros and part -- as Lon mentioned, destocking in that -- a contributor in Europe.

What would that be on a percentage basis, Rick?

Percentage of which --

Yes. How much did the sales and dollars decline for the dairy antibiotic, I guss is the best way to ask it?

Sales were down 7 -- just under $700,000, and $300,000 were from the currency and the rest was from destocking.

Right. Just overall, how much -- what percent did dairy antibiotic sales decline in the quarter?

For the quarter, I think they were down about 18%.

Okay. That's fine.

I didn't understand the question.

Sorry. And then just looking at a few other product lines, especially in light of some of the food recalls, can you discuss the third quarter performance of the microorganism testing for things like E. coli and salmonella?

I don't have that right before me. Maybe Rick does here.

Actually, that product line in total was -- we have a number of things that we include in that category, and so not just specifically salmonella and E. coli, but actually that product line was off about $150,000. Not very much, but less than 10% for the quarter. It's still up on a year-to-date basis. So I think that's one of those things where you have that impact of the potential of customers cutting back on inventories, and watching very close, because it is still up year-to-date.

I guess the same thing might apply, but what about the microtoxin testing business?

Actually, the microtoxin business was strong in the quarter, it was up 9%, which is a couple percent higher than the year-to-date business. When I looked across these product lines, it was amazing from a unit volume standpoint how many increases we had in just about every area. You had the dairy antibiotic thing that was down and the currency translation impact, and just about everything else on the food safety side was up, and some of them up very strong.

And I guess, in the microtoxin business, in spite of I think a fairly clean crop this year?

Yes. That's right. Of course, we've got worldwide impact now, Steve, so that helps. I think natural toxins were up in the range of 9% to 10%, and this is, you know, not a particularly strong quarter. The crop's put away, and we -- you know, we're -- obviously it's a crop being tested every day, but the big harvest flush is behind us. So I feel good about the way those are going.

You mentioned higher year-to-date sales of rodenticides. How did they do in the third quarter?

That was another good performer. I didn't mention the non-Du Pont products for that [HACO] operation in Randolph, Wisconsin, but we were very happy to see same store sales growth of 7% there. If you take out the DuPont disinfectants that run through that operation, that's at least where we recorded the sales. The other products, which are mostly rodenticides, were up 7%, had strong growth internationally, with -- sales to Puerto Rico and Mexico helped support that.

And I think you mentioned -- I just want to have this straight. You said Soleris sales were up 16%, but AccuPoint was up 34%, benefiting from the large placement in China?

That's true for the quarter, yes.

Okay. And based on your comments, it sounds like you're not really looking for any meaningful BetaStar sales in fiscal 2009?

There's a lead time in there. You know, it was like Lon said, and in the event that there are some of our salespeople listening to the call, yes, we're expecting something out of it in the fourth quarter.

(Laughter)

And then, lastly, I just wanted to talk a little bit about margins; and of course, Lon mentioned the [NX] effect. But I'm also wondering about -- your production is heavily concentrated in the U.S., which is really good for efficiency; but when you have sales to Europe and China and the international markets, that your supply chain gets really stretched, or at least it seems like you would get stretched. And I'm wondering if, first of all, you have lower revenues when translated into dollars for foreign operations, but with those product being manufactured here, those costs aren't impacted by currency, and does that put a bit of an additional squeeze on margins as well?

Yes, there are a couple things that we are doing that, you know, are not perhaps very visible. We are moving some of our finished goods products for some of the antibiotic tests. We put those in [WIP] form, and they go to Europe, to our Neogen Europe operations, and we put them together over there, which shortens that supply chain up some, reduces the amount of freight that's involved in doing that.

As we're looking at disinfectants going forward, we spent some time -- a couple of our guys were out last week in Asia, we're looking at what we can do over there in some liquid stuff that we might very well with a major partner do some [toll] manufacturing for those products in Korea to take care of the Taiwan, Korea, Philippines market area. It's a long ways to haul stuff across the pond to get to those markets. We're looking at those, and it does require that we carry a little bit more inventories in some products, as you pointed out.

However, our efficiencies, as we've been able to mechanize things here in the U.S. and do a whole lot better job -- you know, our direct labor costs are still pretty low. So as we've been able to further improve our manufacturing processes here, we still think that it offsets trying to set up another more significant manufacturing operation somewhere else, particularly with a company of our size.

And that makes sense, Jim. I just -- my question, basically, I guess is just specific to the third quarter, because Lon mentioned the mix impact of the disinfectants. I guess I'm also wondering if there might have been some negative effects just in this quarter, as you some got foreign sales translated into fewer dollars, yet your production costs in dollars still remains the same.

No. You're exactly right. I'm sorry, I didn't --

I guess I was looking for some additional impact beyond just the mix effect.

No. You're exactly right. We took -- we inherited some old price deals that we felt like we needed to honor with some distributors that -- you know, the margins are not as good as they needed to be, and we moved up on that.

And furthermore, one of the things that's helped us going forward there is that about forty percent of the total ingredients that go into the cleaner and disinfectant products are from petroleum-derived -- based stock. And of course, we know what's happened over the course of the past year as far as petroleum prices, oil prices are concerned. All of that hasn't yet bled through. It takes a while from the time you quote Texas sweet crude until it gets down to the person that's making the chemical out of it and putting it in a drum and selling it to us. So that -- we think that will continue to help us, too. So everything there looks positive there at this point. I don't see anything from a margin standpoint that goes the other way.

I've just got a couple quick things, and I'll get back in the queue. Did lower legal costs contribute to slower growth in general in administrative?

No. Steve, I don't think there was lower -- or there was much legal costs in either one of those quarters. It just simply was a lower amount of spending that took place.

And then the last thing is the large jump in other income versus a year ago, and also I guess for the whole -- the quarter in particular, but for the whole year so far?

You have two pieces of other income. About $150,000 of it was the hedge gains on the euro during the quarter, and the remainder was [royalties] that were recognized in this quarter.

Thanks very much.

Thank you.

(Operator Instructions)

We will go to Lawrence Southam with My Broker LLC.

Good morning. Considering the conditions, I was delighted with the report.

Thank you.

Thank you.

I recognize the headwinds. Most of my questions are on the -- are more some product things. You had a very nice jump in the disposable syringe needle business. Any particular things on that?

That, too, is market share gain.

Okay.

We've got good products there, and we continue to work with customers. Some of them have put us in as secondary suppliers, and some others have taken on the full line, and we -- we continue to see growth there, and it's just a general overall increase in market share out there in the traditional animal health industries and the companion animal markets.

Great. Some more questions. Substrate reagents, up 54%. That's a tremendous performance. Is this new products, new customers, a combination?

Yes, net new products is just -- I think increased orders from existing -- and we picked up some new customers. That's -- you know, that's a nice little business. It's product that we use ourselves in our own product line, and have continued to develop superior products there, and we also get the opportunity then to sell that, frankly, to some not real competitors, but a lot of other people that are in the diagnostic test business are using our substrates as a part of their product line.

Okay. Very good. By the way, I was delighted -- I was interested in the FDA comment, I think it was the FDA, on their need for an instant E. coli test that would take it right down to the stream, and I'm sure they want those for $5 a piece, too?

Yes.

I'm waiting to see what your R&D boys come up with.

I think we're about to do something about the genetics of E. coli to grow that fast.

I suspect so, too. Okay, let's see. The food allergen business -- detection business was up significantly, too. Was this a reflection of requirements for more continuous testing, monitoring of production by users?

I think, as we pointed out before, the number-one cause of food recalls from the FDA last year was actually for allergenic food products that weren't on the label. So it continues to be a bigger issue. You continue to hear more press about it. I think the latest is that allergens are up among children 20% compared to a year ago -- I mean, compared to a decade ago. That makes it about 5% of the kids in the U.S. have some food allergy or another.

It's getting more attention, and I think we're seeing more people, particularly among the majors that are doing environmental testing at -- at the allergy line to make sure when they switch from one product to another, that they didn't inadvertently get a wrong ingredient in or didn't get the product -- didn't get the processing line cleaned well enough and they're going to end up with a little bit of allergenic product on their side. I think it --

So it is a combination then of more frequent testing as opposed to just certifying the product once --

Yes.

It's really a batch by batch --

Yes. If a guy is running milk in the morning through a processing line and running orange juice in the afternoon, you know, it's -- that's a daily process. When he gets ready to start running orange juice, he wants to make sure that the clean in-place equipment has all the milk residue out, so those first hundred quarts of orange juice don't have a milk residue in them.

Right.

I'm going to pass a couple accolades along to our R&D group in this area, too. This is a trend. This growth in food allergens is a trend that we've seen now for probably six quarters any way, and it's not -- there is an increase in testing because of exactly the things Jim said, but we've also come out with some new products over the course of the last couple years, and some new formats for those products, that has helped drive that growth.

So it's one of those -- that's the kind of thing that you like to have when you've got an identified market that's growing and more attention that's being paid to it, and we can provide the right kinds of solutions. I think we've done that, and that's why we're experiencing that kind of growth in food allergen testing.

Okay. I have a question that I've sort of seen throughout the line, what's the competitive situation there? I presume there are other people who also feel that they've got great allergen tests and are pushing hard there? How do you stack up?

Well, we -- I think -- I'm a little bit prejudiced, but I think that we're probably overall in the number-one spot there. We've got some competitors out there. We're not as dominant as I'd like to be, and as I expect that we're going to be. But as we introduce more products and more formats, as Lon talked about. But I think we're pretty much universally accepted, I think, as probably being the primary supplier of those tests.

Very, very good. Okay. I think we covered my questions on BetaStar. And then a general question on inventory. Unfortunately, I didn't pull out the previous quarter inventory figure. I know that inventories had been moved up some, especially in -- you had some new products -- some acquired products that were being moved over, and you hadn't -- didn't have the new facility certified yet, so it was a precautionary measure. But a can you comment on what's happening with inventory levels and trends?

Well, in comparison to the 11/30 quarter --

Okay.

-- the food safety inventories were almost dead-on, down just slightly. Animal safety experienced two things. Number one is that, as both Jim and Lon had mentioned, with the DuPont products coming through and closing of operations, that's not our operation, but the [expired] operation in London, we did stock up on some of those disinfectants as we get through this quarter.

And then when you have destocking among your big customers, tou end up with a little more inventory than you planned, and those were in the -- that was in the case of Lexington. And those are all pretty much hard goods, with really no expiry dates at all on them, and it's brand-new product. So we don't expect to have any problem with that.

Very good. Okay. And I presume with destocking, you also have a need to carry a little bit more to provide just-in-time inventory to those distributors carrying less?

Yes, and it unfortunately kind of fits both directions, where we have some product that's being made on the outside, and [toll] manufacturers are -- their lead time is -- they're trying to pull back, everybody's trying to cut back on the amount of cash that they've got in play, and so some of their raw materials, where once upon a time we had to immediate add raw materials that were available to move on a toll manufacturing order, they've got a lead time that's probably gotten [spilt] in their one or two weeks. So it's all -- it will all get adjusted out, but -- and I think we've got the right people and the right tools for inventory control to do that, but we didn't move so fast this quarter. We didn't -- it got ahead of us.

Okay, that's fine. Am I correct also in believing that in some -- especially some of the tests and lower-volume items, that these are sort of -- is a [back] process for several months at a time or -- so you're carrying -- they're not in continuous production but --

No, our diagnostic products are pretty much continuous production, which makes that -- that means that we don't end up with -- as Rick said, short shelf-life stuff. We don't have expired stuff that's going to go bad on us.

And we have weekly production meetings to take a look at what our inventory levels are for any of those products that have -- particularly any of those products that have shelf-life issues, to make sure that we're adjusting our batch size as necessary, and where appropriate also safety stock levels. So we do try to monitor that so that we don't get too far ahead of ourselves.

Okay. Very good. Delighted, once again, and continue to watch.

Thank you, sir.

Thank you.

(Operator Instructions)

At this time, it appears we have no questions in the queue. I'll turn things back over to Mr. Herbert for any additional or closing remarks.

Well, we appreciate your participation in the conference call this morning. We've started the fourth quarter of the year now. I'm optimistic about -- I think we're all optimistic about where we are and where we're going. I'm sure there are some surprises out there that we haven't yet seen. As everybody that's in business today, we're trying to figure out what's going to happen next, but I've got a lot of confidence that we'll weather whatever comes, and we're going to end up being a stronger company as we move through this current cycle than when we went in.

We appreciate your continued confidence and your interest in the call this morning. Good day.

Once again, ladies and gentlemen, this does conclude today's conference call. Thank you for joining us, and have a great day.