Neogen Corp (NEOG) 2009 Q4 法說會逐字稿

Good day, everyone, and welcome to the Neogen Corporation fourth-quarter and year-end fiscal year 2009 earnings announcement conference call. Today's call is being recorded. For opening remarks and introductions, I would look to turn the call over to Mr. Jim Herbert. Please ahead, sir.

Good morning and welcome to our regular orderly conference call for investors and analysts. Today, we will be reporting on Neogen's fourth quarter that ended on May 31, 2009 and the results of our full fiscal year.

I will remind you that some of the statements that we make here today could be termed as forward-looking statements. These forward-looking statements of course are subject to certain risks and uncertainties. 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-K that is filed with the Securities and Exchange Commission, and we will be filing another new 10-K for the new fiscal year coming up here in about another month.

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 conference. 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 fourth quarter and the combined results of the Company's 2009 fiscal year. Given the challenging year for a large number of our customers, I was pleased with both of those results.

Revenues for our fourth quarter were approximately $30.9 million, or a 14% increase, as compared to the same quarter a year ago. Income per share equated to $0.23 as compared to $0.21 in the prior year.

This fourth quarter also marked a continuation of our consistency of performance, as it was the 69th quarter in the past 74 to show revenue increases compared to the previous year. I look back to see that the last time we missed this consistency mark was four years ago, and that was in the third quarter of 2005.

This quarter also marked an extension of our profitability record as the Company has now recorded a profit every quarter now for the past -- for over 16 years.

With the quarter completed, we can now discuss the fiscal year. Revenues for Neogen's 2009 fiscal year were approximately $118.7 million or 16% greater than a year earlier. Net income for the year came in at almost $13.9 million. That's 15% higher than last year. This income was in the face of an overall provision for income taxes that went to 36% as compared to 35% last year.

Net income per share was $0.92 for FY '09, as compared to $0.81, another all-time record high for our 27-year-old company. I believe that the results of the quarter and the year met or exceeded the expectations from the six analysts who publish research on the Company.

Credit certainly goes to our 500 dedicated employees. As we started to move into our third quarter back in calendar 2008, it became apparent to us that it wasn't going to be business as usual. We knew that a number of our customers are going to be facing challenges that would impact our business. We called upon employees to improve our sales efficiency and at the same time to start looking even harder for places where we could save expenses. We challenge them with the old saying that when the going gets tough, the tough get going. Certainly to this point, that toughness has shone through.

Neogen does business in pound Sterling, in euro and pesos and the Canadian dollar. As the dollar showed strength throughout most of this past fiscal year, it meant that Neogen products cost our international customers more than they had previously paid.

Furthermore, when we translated these currencies into our dollar-based consolidated statement, the translations all had a negative impact. In fact, the unfavorable impact of currency translations equated to $2.7 million in revenue for the year.

Our good performance during the year didn't go unheeded by the investment community, as the price of the Company's shares has maintained a respectable level. In addition to being selected to the Russell 2000 list, Neogen is now part of the Standard & Poor's 600 Index. In July, Fortune magazine once again named Neogen to its list of the 100 Fastest Growing Small Public Companies in America, this time at spot number 21. The previous month, Fortune had named Neogen as one of the 40 stocks to retire on. We were on a list with many of the world's largest blue-chip corporations, and I think we perhaps had the smallest market capitalization of anybody that was on that list. Again this year, Forbes magazine named Neogen to its list of the 200 Best Small Companies in America, and this was the seventh time in the last nine years.

Though I'm proud of the year that's behind us, it is just that. Now, how do we view the year that is ahead of us?

We started the year on June 1 and despite continued challenges being faced by many of our customers, we are off to a decent start. Despite the economy, I believe that we will continue to see the market for food safety and animal safety products grow in the year ahead. Customers will continue to make tougher buying decisions, and we will have to continue to closely watch our accounts receivable. Despite pressures from bankruptcies and reduced borrowing capacity for many of our customers, we have managed to keep those receivables in good shape with 60 days outstanding at the end of the year as compared to 58 days a year earlier.

There will undoubtedly be more pricing pressure in the marketplace as competitors strive to replace lost business. However, as we continue our quest to be a lower-cost producer, we should be able to weather those storms.

At the same time, we have to be sympathetic to industry price problems. Compared to a year ago, milk price is 40% lower, hog price is 23% lower, beef prices are 17% behind last July, and the egg and poultry producers are facing similar challenges.

In addition to pricing however, we think that food producers will more than ever before look to their suppliers to provide them with the service that they need to stay out of trouble. Our technical service groups, along with our sales organizations, are pretty much veterans, and I believe we should be able to fill that role for them.

We will continue our emphasis to gain market share, both inside and outside the barn gate. Leasing activities in Washington again prove that our strategy of combining food and animal safety is appropriate. At a meeting in Washington earlier this month, the administration unveiled a broad food safety agenda that focuses on preventing rather than just reacting to foodborne illness outbreaks.

I thought that you might be interested that since January 1, we have had 80 recorded recalls that are under the auspices of either the US Department of Agriculture or the Food and Drug Administration. Many of those 80 spawned multiple other recalls. As an example, we count the Peanut Corporation of America and the Seaton pistachio recall as only two on our list. However, both of these probably resulted in another 10 or 20 recalls from companies that use those recalled products in the manufacturing of their food products.

Regulatory changes for the commercial egg industry are an example of this push back inside the farm gate. For some time, I think we've recognize that Salmonella contamination posed by shell eggs was significant. I think they estimate that there's about 80,000 illnesses and perhaps as many as 50 deaths that occur each year because of shell-egg contamination.

A new regulation finalized by the FDA this month will require additional on-farm controls for the nation's egg industry, and the testing of hands at the farm level that is not now part of the current farm practices. This regulation not only calls for more testing, but also places emphasis on an increased use of both rodenticides and disinfectant at the farm level.

We will see continued pressure, I believe, to reduce antibiotic feeding to food animals because of such issues as antibody-resistant bacteria. Many believe that this was brought about by feeding the same antibiotic products to animals that are used for humans, and the resulting residues in food has now made them ineffective.

We will continue our efforts to provide new products for our customers. We announced about a year ago that we were almost doubling the size of our research staff. That effort is already paying off. Our research teams in Lansing, Lexington, Scotland and Wisconsin have 66 research projects in this year's plans. Many of these are expected to bring new or improved products to market during this current fiscal year. Our research budgets are over 50% greater than they were a year ago, but they are still only about 5% of sales.

The third piece of our ongoing growth strategy has been to increase revenues from international expansion. As a percent of total revenues attributable to international sales, we have grown from 25% five years ago to 41% in the year that we just completed.

Though the worldwide financial situation is similar to ours here in the US, we expect that there will be some continued food safety pressure in many countries. Our revenues have already grown rapidly in Europe, but we think we still have some good gains ahead of us. A similar situation is true for Latin America.

The fourth growth strategy has been to continue to add synergistic acquisitions. Though we don't currently have any letters of intent that are in place, we think that there will be acquisition opportunities over the next year and likely at reasonable valuations. With a strong balance sheet and experience in this area, we will continue to look for those opportunities. We now have cash in the range of $17 million and a significant unused bank line of credit that can certainly support this plan.

I don't believe that Neogen management is blind to the challenges that are both known and unknown as we look out over the next ten months. As an example, the first-quarter currency translation will still be wind in our face. We were translating the pound Sterling to dollars at about $1.90 in the first quarter of last year, and that number is likely to be more in the range of $1.60 for the current first quarter.

However, having said all of this, we believe that the time to invest in expansion is when competition either can't afford the investment or chooses not to make those investments. We believe that our fiscal 2010 affords us the opportunity to consistently build on the growth record that we have to this point.

Let me stop at this point and turn the call over to Lon Bohannon, Neogen's President and Chief Operating Officer, to give you a bit more color on the year that we just finished and some of his views on the year ahead. Lon?

Thank you, Jim, and I too want to welcome everyone listening on the conference call as well as those joining us by way of the Internet.

As Jim has already stated, Neogen issued a press release earlier today describing our fiscal year 2009 fourth-quarter and fiscal year-end operating results. I want to echo Jim's comments that management was pleased with our 2009 fiscal year, and particularly pleased with our fourth-quarter financial results.

Total fourth-quarter revenues of almost $31 million represented a respectable 14% growth over the same period of last year. I think it is noteworthy to again point out that this growth was achieved in the face of some very turbulent and difficult economic conditions for many of our customers.

In addition, our fourth-quarter growth was an even more remarkable 19% over the prior year when you remove the impact of currency fluctuation. Neogen's animal safety division led the fourth-quarter revenue increase with an overall sales growth of 30%. In addition to the strong contributions of acquisitions, it was especially gratifying to see same-store sales for this division grow by a solid 6% from the fourth quarter after suffering a decline in the third quarter. Sales of diagnostic parts, domestic rodenticides, and products sold to veterinarians through ethical distribution channels all achieved strong double-digit growth ranging from 11% to 45% compared to the fourth quarter of last year.

On a unit volume basis, food safety also experienced solid same-store sales growth in the fourth quarter with a 10% increase compared to the prior year. A 24% increase in sales of food allergen kits, and double-digit growth in sales to Latin America and the Asia-Pacific Rim territories helped fuel food safety's overall fourth-quarter growth.

Perhaps even more satisfying in terms of the fourth-quarter performance was Neogen's strong growth in operating profit. A profit from operations of $5.4 million for the quarter represented a 15% improvement and enabled Neogen to report net income of $3.4 million or $0.23 per share, compared to $0.21 per share for the fourth quarter of last year. This outstanding profit performance is a tribute to the efforts of virtually all Neogen employees who dedicated themselves to achieving operating efficiencies that resulted in more operating profit growth and sales growth for the quarter. Expenses for direct labor, overhead, sales and marketing and administration all declined as a percent of sales compared to the fourth quarter of last year.

So considering the overall poor economic climate that existed for the three-month period ended May 31, combined with the realization that for comparison purposes last year's fourth quarter was exceptionally strong, Neogen's 2009 fiscal fourth quarter was, in my opinion, one of our best performances ever.

As you would expect, the strong fourth quarter helped us finish off another record year for Neogen. Total 2009 fiscal year revenues were just under $119 million, representing a 16% increase over our 2008 record-setting sales of $102 million. In terms of unit volume, I estimate Neogen's growth for the year to be approximately 19% with same-store unit growth showing an overall increase of approximately 8%.

Neogen Europe experienced another exceptional year with overall organic revenue growth of 26% on the basis of British pound Sterling. This outstanding sales growth in 2009 was led by strong increases in sales of dehydrated culture media, diagnostic tests for histamine and plant diseases, along with continued growth in sales of the AccuPoint general sanitation test systems, all of which achieved percentage increases of between 11% and 40% in 2009 compared to 2008.

Other food safety product lines that have experienced exceptional organic growth in fiscal year 2009 included food allergen test kits, which were up 42% for the year; sales of Soleris disposable vials that increased 33% and which are used to detect spoilage organisms like yeast and molds; and sales of dehydrated culture media used for the detection of specific pathogens like salmonella, listeria and E. coli, which experienced growth of 26% in 2009. Sales of disposable samplers used for general sanitation monitoring also experienced another year of exceptional growth with an increase of 15% compared to the prior year.

Now, one food safety product line that experienced a decrease in sales in 2009 compared to 2008 was the sale of tests to detect dairy antibiotic residues, which declined about 10% for the year. This decrease was partially due to the impact of currency translation and partially due to a reduction in inventory levels by our major international distributor in the second and third quarters.

Sales of dairy antibiotic tests actually showed a significant improvement in our fourth quarter compared to our third-quarter sales performance, and for that quarter ended up virtually equal to last year's strong fourth-quarter numbers. We remain optimistic regarding future growth for this product line in fiscal year 2010.

Animal safety also had its share of strong contributors to Neogen's record-breaking 2009 fiscal year performance. Our Kare line of small animal supplements exceeded budget and increased 44% compared to 2008. Sales of our proprietary D3 detectible needles were up more than 30%, helping veterinary instruments to another year of strong organic growth.

Led by strong marketshare gains in the agronomics market, domestic rodenticide sales grew by 11% in fiscal year 2009 and our proprietary K-Blue substrate sold to manufacturers of diagnostic test systems, achieved an increase of 12% for the year.

Now, helped along by our strong fourth-quarter, profit from operations for 2009 exceeded $20 million for the first time in our history and ended the year at 17.3% of revenues. There were only two expense categories that increased as a percent of sales in 2009. First is material cost, which increased primarily as a result of the change in product mix for 2009 compared to 2008. The other category that increased as a percent of sales is in the area of research and development, which went up due to our announced plan to increase staffing and which represents an important investment in the future of Neogen.

All other expense categories declined as a percent of sales, including direct labor, overhead, sales, marketing, administrative and accounting. The strong cost control in these areas reflects our ongoing commitment to improve productivity, and also reflects the success of a number of operations task team projects that were initiated during the year. We now have in excess of 25 employee teams working on productivity, customer service and cost improvement projects.

One of these teams took on the task of reducing inventory levels for our dehydrated culture media product line. Over the last six months of fiscal 2009, this team was successful in reducing media inventories by $1.4 million, representing a 22% reduction in inventory investment for Acumedia products. We will continue to encourage and support the use of these cross-functional teams to reduce costs and improve productivity and operating efficiencies at Neogen.

Now, as Jim mentioned earlier, Neogen's solid revenue growth and the strong operating margins resulted in net income of almost $13.9 million or $0.92 per share in fiscal year '09 compared to $12.1 million or $0.081 per share in fiscal year '08. Obviously, management is pleased to be able to report this kind of growth, given the tough economic environment that existed for much of our 2009 fiscal year.

We have now taken a significant and successful first step toward our goal of reaching $200 million in sales by the end of our 2013 fiscal year and look forward to fiscal year 2010 with a high level of excitement and enthusiasm while taking into account that many of our customers are still facing significant challenges as a result of what is still a poor overall economy. We realize that fiscal year 2010 will require better planning and an even greater effort to achieve the satisfactory growth we have come to expect at Neogen.

In spite of these challenges, we believe that Neogen has a world opportunity to continue our track record of consistent and sustained top and bottom-line growth. Our sales personnel have already identified their top targets for growth and are implementing plans to gain market share with these prospects. Our expanded team of R&D scientists is fully engaged in numerous new product-development programs as well as product-enhancement projects. Our operations groups are committed to making further productivity and efficiency improvements, in addition to qualifying alternative route material vendors and service suppliers that will provide cost savings without sacrificing the exceptional quality of our products and customer service.

In closing, I would say that FY '09, though challenging because of the unique economic environment that existed, was another very successful year for Neogen. Since we have already begun a new fiscal year, I would reinforce Jim's comments that management believes the growth drivers for Neogen remain in place. We continue to believe that our markets are growing, both domestically and internationally, as attention given to issues involving food and animal safety continues to escalate.

We believe we can gain market share with our existing product lines and with new products currently under development. We will continue to grow our international business and expand our direct sales efforts in countries where it makes sense to do so. We also believe our strong balance sheet and positive cash flow places us in an enviable position to continue to supplement our organic growth with strategic acquisitions.

I know the management team and all employees at Neogen are excited about the future, and we look forward to taking another big step forward, during fiscal year 2010, toward our new goal of $200 million in annual revenues.

That concludes our prepared comments for today's conference call. At this time, Michelle, Jim, Rick and I will be happy to answer questions from our listeners.

Great. (Operator Instructions). Steven Crowley, Craig-Hallum Capital Management.

Congratulations on another very good performance.

Thank you.

Some questions for you -- in terms of the recently acquired products that made a nice contribution this last fiscal year, can you give us a feel for what DuPont and IDS contributed in the quarter? I mean, we can back into the total but maybe those pieces specifically?

I think, I believe -- Rick, do you have that number? I believe (multiple speakers).

Steve, for DuPont, it was $2.600 million but for IDS $175,000.

So for the year, DuPont came in at what number?

$9 million, just under $9.6 million.

So the balance of that category is more than just the domestic rodenticide business? I was trying to back into that 11%. So there are other components to that category versus just domestic rodenticides, the one that the disinfectants are in?

Steve, the growth related to domestic rodenticides, that category of domestic rodenticide sales was up 11% for the year.

Okay, but it wasn't the entire balance of that category, from what I can gather, otherwise the numbers don't add up.

No, we separate -- we keep the rodenticides and disinfectants separate. Lon was just reporting on rodenticides.

Okay, well, I can deal with this off-line to make sure my numbers are adding up.

Now, in terms of the bacterial and general sanitation products, it seems like you are getting nice utilization, given your comments on disposable/consumable utilization. But there have been some challenges, given the economy, on selling or placing additional hardware. Is that the right inference for us to have? How tricky is that equation moving forward? Do you see things getting better there?

It's a very good question Steve, and you are exactly right. As we moved through the 2009 fiscal year, we did see a slowdown in terms of purchases of the capital equipment. We saw very steady growth and we continue to have more systems out there, and so we are seeing increases in sales of the disposables, but the number of instruments that were placed, though slowed down, was approximately equal to what it was last year. So it's not like it stopped, and we still have a lot of opportunities in the queue, a lot of opportunities identified. Our challenge is to find the right reasons to get those customers to make the move and pull the trigger as we move into fiscal year 2010.

I don't think it would be surprising to anyone that a lot of companies and a lot of our customers have gotten very tight controls on capital expenditures, but we can usually work through most of that. It's just taking longer. The sales cycle for those kinds of things is taking a little bit longer. We might have to sell higher up the ladder at some of those organizations.

So if we look at that category as a whole, you have more maturity in terms of utilization of the equipment. You are still placing or selling additional equipment. If we total those things up, should we think about that category that's coming off an almost 10% growth year as being a high single digits to 10% grower until things on the capital equipment side get measurably better?

One of the things I think you have to look at here is that we've got some instruments that get up there a little bit high to justify for in bad times. But the reader for the AccuPoint product, which is the sanitation reader, is really not that difficult for most people to handle. I think our average selling price for that product is about $1500 a reader. So we are not talking about -- whereas on the Soleris side, you know, those readers are running, depending on what size that they are buying, but they are running in the range of $40,000. That gets to be a little bit more difficult for some people to handle. But the readers for the AccuPoint in the sanitation program are really not that difficult.

As consumables get to be a bigger portion of the mix, they can carry more of the day. I'm thinking that kind of high single digits, 10% kind of growth rate for that business is a reasonable number. I guess that's my question.

No, I think it is. You know, we are continuing to look at new markets and new market opportunities for the product out there.

Excellent. My final question and I will jump back in the queue -- the significant expansion of research and development resources seems to be a pretty meaningful story at the company and a source of some good things coming down the pike.

When are we going to see the first wave of products come out of this expanded effort, or have we already started to see it, or is that a 2010 story? Thanks for taking my questions.

The answer is yes to all of the above! [laughter] No, you are already beginning to see some of those come out. Of the projects that I mentioned, some of these are product improvements of existing products. We either expanded them to make them work in -- where we may have something that now works in the detection of drugs in milk, we are expanding programs to expand that to be able to detect the presence of those drug residues in meat tissues, which is one of the projects, it's one or two of the project that's in there.

There are some brand-new products in there. They will be coming to market. Most of that flow starts in the second quarter. There's one or two that will still hit in the first quarter, nothing that is a big, brand-new product, however, until we start to look at the third and fourth quarter.

You know, as R&D goes, there's a few of those products or those projects that are really building background to what will come in 2011. But a big piece of what we're working on now should have some impact sometime during FY 2010.

Excellent. Thanks again.

Tony Brenner, Roth Capital Partners.

I think you provided a growth rate for the year for Europe. What would that be for the fourth quarter, both organically and in reported revenues?

27% in Sterling, Tony.

Okay. And then the organic rate would be roughly -- (multiple speakers)?

That is the organic growth rate in British pounds (multiple speakers) about 27% for the fourth quarter. It gets reduced way down in the low single digits again when you do the conversion to dollars.

Has the DuPont product that you acquired, has that production been brought in house yet?

No, we are in the process of starting to bring it in. We are still working our way through a lot of international registrations. We are on target as to where we expected to be. We didn't expect to start production of those products at our [Heiko] operations in Wisconsin actually until October, so we are still a little bit ahead. The facility is pretty much ready to go. Raw materials are pretty much in place.

In order to make sure that we didn't leave customers in backorder situations, we did the same program that we did when we brought dairy antibiotics in, when we brought a number of other products in. We built up some inventory, sometime at not the most attractive prices, but to make certain that we didn't have any backorders and that we didn't have a slip between what we were doing in the former manufacturing and what we did when we got it moved.

If you remember, Tony, when we moved the dairy antibiotic business, we had to move it from Barcelona, Spain to Lansing, Michigan.

Right.

Our guys did a wonderful job there. A big portion of what we're moving, or a portion of what we are moving of the DuPont product line is coming from Antech operations in the UK. So in this case, we had to move operations from England to Wisconsin. As a consequence, we built up some inventory, inventory that we needed to make sure that we had on hand so as not to leave customers back-ordered in places like China, as part of that, some of Central America as a part of that.

So we are on schedule as to where we expected to be. Like we did with other products, you'll see a significant change in gross margins once we get that integrated and get it moved in.

Right, that was my next question, actually. You referred to an adverse product mix, and this was one of the contributors in fiscal '09 to that adverse product mix. So with that being sorted out during the year, is it reasonable to think that your gross margins might improve for the full year in 2010?

Tony, that would be right, although it is going to be a ramp as we bring that in house in the second half of the year, so go easy on us in the first half.

We always do! Thank you.

Marco Rodriguez, Stonegate Securities.

Real quick, I was wondering if you might be able to provide a little bit more color in regard to your prepared remarks, and also your press release comments in regard to the systems and procedures that you implemented during Q4 to help I guess stimulate your cash flows.

I think that one is mine, Marco. What I am referring to there are MRV systems that in Lansing were installed earlier in the year and refined to get them so that they are working to a maximum in the fourth quarter. And then we have been installing MRP systems to turn them on in Lexington, and they will be going through that same process as we move through the year. So we expect to see good results from that specific -- those specific moves in the upcoming year.

The inventory was up $3.5 million for the year but it was up $5 million for the first nine months and we brought it down $1.5 million in the fourth quarter. So that was a positive move.

Do you expect more or rather improvements in your working capital areas, or are you expecting more just, I don't know, overall expense reductions to these MRP systems?

No, I think what it should do is allow us to, at worst, hold our inventories at current levels. As our sales rise, we will grow into them. At very best, we will actually get reductions in inventories that will both help our cash flows.

Our cash flow generation, I'm not sure we talked about it, but our cash flow generation continues to be good and they are considerably ahead of where we were last year.

Yes. We are about $3 million ahead on cash flow from operations, $11 million in total.

You know, I'd like to find a good place to use part of that $17 million that the bank has given us at 1% return on out there. So it is not burning a hole in our pocket, but we've certainly got enough cash to do whatever we want to do so long as it fits our plan of course.

Right, of course. Then lastly just a quick follow-up -- you did mention an expectation for pricing pressure going forward. I'm assuming that's mostly coming from your commentary on the food producers seeing their prices come down year-over-year. Do you expect that pressure to kind of equal out when you look at these overall expense reductions that you are also taking, or do you see it impacting more?

Well, if I knew the answer to that question, I would probably be trying to advise somebody in Washington today, and that might be appropriate. But nevertheless, I don't think we know what's ahead. I think the point I tried to make is that we are prepared to make adjustments.

As we look at -- we think we can predict some of the things that we are facing. We know where we've got some customers that you have to start singling out now, customers that are slow-pay and they are having a little difficulty, and they've got line problems with the bank but they're going to make it. You stay with those guys; they don't ever forget it.

Then you've got those on the other side that you have to make that hard decision about, that we don't think they're going to make it so we can't continue to extend them credit.

So we don't know how those go. We know that we have some competitors out there that apparently are down in total revenues and are willing to do some price-cutting, and some of that price in order to try to either gain back or keep business that they have, and we will meet some of those and in some cases we won't meet it.

But if we continue -- to my point I think and the comments is if we continue to keep the pressure on being the low-cost producer, then we are better able to stand off any of the competitive price pressures that are out there.

[Brian Geep], Sidoti & Co.

Congratulations on the quarter. First, I was hoping you could talk a little bit about the recently announced partnership with China, just about what you are expecting there.

Well, let me answer that one. I will start off by answering it like I have for the last several years. You know, when we first began to move into China and there was news of our activities, I said at that time nobody should buy Neogen stock based on an avalanche of earnings or revenues coming from China. I continue to make that statement.

You know, our situation in China continues to be good, both from a supply and a -- both from sourcing of product as well as selling product. I like to look at it as we are importing low-tech and exporting high-tech as we go to China.

The latest announcement I think that perhaps you are talking about is one that was done; actually the initial press release came out from the Scottish government announcing the First Minister of Scotland along with another dignitary to accompany our people on one of the trips to China, and that was our Scotland-based group. We do have a laboratory setup now over there in cooperation with the Chinese government and which we are doing additional work and validation on our diagnostic test kits that are used to detect plant diseases. That looks like it is getting some traction, looks like we may have some diagnostic tests there that will be used throughout China in that regard.

The First Minister Salmond was perhaps a bit aggressive. When he said he thought this would bring $10 million of additional income, he wasn't talking about $10 million coming to Neogen Europe out of that; he was talking about overall Scottish influence I think.

It's interesting to note that Scotland is the major supplier of seed potatoes to China, and making sure that there is a good diagnostic test to be able to detect diseases in potatoes, for potatoes production in China, as they should begin to shift away from 100% rice to a lot of potatoes in their diet, that fit well in the overall China program. So it has been a good program, but I will go back to my first statement. Don't by buying Neogen stock based upon any huge avalanche of earnings that are going to come from China.

On the Tractor Supply store expansion, have you guys seen any moves there from them, or any increased volume through their stores?

That relationship that we have with Tractor Supply has been wonderful for a number of years now. Not only do we see increases in our business as they continue to open new stores, but over the years, we have also been able to expand our presence in terms of shelf space that we have for our products in those stores.

We started out initially as just being the primary supplier of veterinary instruments. We have been able to leverage that relationship to expand it into other products and product lines. We will continue to do so, so we benefit in a couple of ways there. They are a very good business partner, and we continue to benefit from their success in expanding in the retail marketplace, the farm store area, and continue to open up new stores in their system.

Right. One last one on growth -- the International Diagnostic Systems acquisition, I know they did a little over $2 million in annual sales before the acquisition. Can you talk about your growth expectations now that that's in your hands?

Well, it fit our strategy in a number of places. It's very synergistic, almost a complete bolt-on. A big part of what was -- of the activities in St. Joseph, Michigan, which is about an hour down the road from Lansing -- a big part of that is shifted -- or almost shifted, or will be in another month, to our production operations in Lexington.

Their products and their customer base, in many ways, looked a lot like our Lexington customer base. They are, along with Lexington, I believe two of the world's authorities in development of diagnostic tests for the detection of drugs, whether those drugs be in human forensics or whether they be in veal chops. So that is a good fit. It is a good fit from a research standpoint, and we will continue to keep a small group in St. Joe to do ongoing research. It makes there pretty easy contact to run back and forth for the Lansing group to keep that coordinated. They are doing some very interesting things with a couple of the major animal health companies in developing diagnostic tests to be able to detect some of those drugs that major animal health companies are marketing today, to make sure that the animal health companies are concerned to make sure that they can keep their customers and their producers out of trouble.

So it's a good fit overall. You know, will be keeping track of the $2 million and be able to tell you a year from now that $2 million has grown to $2.5 million? I doubt it, because we are going to integrate it so we won't be keeping track of what the overall growth is. We will be able to tell you on the customers that are specifically theirs, but there is such a hybrid mix of customers that it will be difficult to keep that one totally separate.

Okay. Just one last one -- this is on the inventory levels. I know you took some discounted raw material products throughout 2009 and took on some extra inventory with the disinfectants move. But your decrease in inventory came from the internal project. I wondered if you could talk a little bit about where you think the inventory levels go for 2010. Do we expect to see some more decreases on burning through some of those raw materials?

Well, I don't know. I will take a shot at it.

Where we have opportunities to buy inventory at discounted prices and we have the cash to do it, I think we would be foolish not to take those opportunities, as long as we have inventory that we could use over a reasonable period of time and take advantages of the cheaper prices. Even if that was to set us back on projects, that would reduce overall inventory. I don't know if that is responsive to your question, but --

Let me provide you a little more clarification in terms of that, where that reduction in inventory came from. The dehydrated culture media reduction in inventory that I referred to in my comments occurred over a period that started in November and went through the end of the year.

In the fourth quarter alone, we had a $1.5 million reduction in inventory. Part of that was a reduction in some of those inventory levels for some of that inventory that you were talking about, including inventories related to disinfectants that we had acquired and built ahead.

We do have -- some of those improvement teams that I talked about are focused on continuing reduction of inventory using some of the tools that Rick referred to earlier, and we will continue to focus on finding areas where we can increase our turns in inventory. I think that in fiscal year '10 our operations understand that that's an important priority, and we will look at continuing to find ways to do exactly that.

All right, terrific. I think that gives me what I need. Thanks, gentlemen.

Joseph [Bachmann], Wells Fargo Advisors.

Good quarter, guys. One quick question -- the increase in gross margin on the quarter, what is that attributed to?

In comparison to the sequential quarter or a year ago, Joe?

The sequential quarter. I think it is more a dip in the prior quarter than it is a real dramatic increase in this quarter.

No, I think that would be a good (multiple speakers).

(multiple speakers). That is a good way to look at it. I mean, with $3 million more in volume, and really I think you had a negative mix in the prior quarter and a positive mix in this quarter, really accounts for all of it, in my mind.

Okay, now the inevitable question because my clients ask me. Thoughts on a dividend?

I thought about that last night. I was watching education TV, and Warren Buffett was on. You know, they were telling the Warren Buffett story and I all of a sudden remembered that I guess that he and I have got a couple of things in common. Neither one of us still agree that you ought to be paying cash dividends if you've got use for the money somewhere else. That's a trite answer I know, Joe.

You know, you look at the amount of cash we are sitting on and you wonder why we are not paying dividends, I guess I still think that there is some opportunities to invest that. As long as we can invest money and make more out of it than we can if we pass it back to your shareholders, I think we still look at that.

I am probably less dogmatic in my statements that I have been in prior years, but at this point the Board has not entertained any discussion of a cash dividend.

(Operator Instructions). Steven Crowley, Craig-Hallum Capital Group.

Just a couple of follow-ups -- you mentioned that dairy, because of FX and some inventory adjustments, had a relatively challenging fiscal year. Can you give us a feel for what the dairy business came in last fiscal year relative to the prior year, and I guess paint us a little bit of a picture of what is a reasonable expectation or range of expectations for that business, but at least the historical stuff would be great.

We've got the numbers at-and, but I guess the one thing that skewed that a little bit is that our largest distributor of those products for Europe did do some what we would call destocking back in the end of the second quarter and part of the third quarter, and brought their total inventories down. They figured it a more efficient way to handle their business, so that was kind of I believe -- Lon is a little bit closer to that than I am. But I believe that was kind of a one-time occurrence based on what we saw than a rebound back in the fourth quarter, but Rick has got the total numbers I think.

Well, the revenues on the dairy antibiotics business decreased from just over $13 million to $11 million (technical difficulty) but that's got currency translation.

Yes, you've got two things there. (multiple speakers)

Big currency translation.

About half of that adjustment was currency translation; that changed. Approximately half of it was this reduction in inventory. We stay very close to our major distributor there in terms of regular periodic meetings, talk to them virtually every week if not more often.

As near as we can tell, they've reported some slight decline in business as we went through the year. I would say probably in the 4% or slightly less range. Actually, given the overall market in the industries that they are selling product to, we didn't think was too bad.

I already reported that we did see a significant improvement in our fourth quarter relative to our third quarter, which is why I think Jim's comments are appropriate and why we do believe that those changes in the second and third quarter, part of that inventory adjustment and destocking was a one-time thing.

I guess I would say that you never know exactly how these things are going to work out, but we are off to a good start this quarter and we feel pretty good out the overall first quarter, which is about as far out as we can see.

We continue to work on development of our own products for some other markets. We think there's a couple of opportunities in countries where we are going to work with that distributor, see if we can't expand business, and we're going to continue to work on that product. We've got the US to expand market, so we do feel good about overall dairy antibiotic testing as we go forward.

Great. I guess I can't let you escape without talking a little bit about the domestic marketplace for your dairy antibiotic tests. Have you gotten out of the starting gate there, or are we still looking forward to that happening?

We've gotten out of the starting gate.

Just barely! [laughter]

But we are not running very fast yet. You know, the customers have no problem evaluating the product. They like the test; they like the simplicity of it; they like the robustness of it -- all the things that make the BetaStar line the success that it has been.

We have one antibiotic (inaudible) that we do detect but we do not detect it at the level that we need to to be as successful in the marketplace as we want to be. So we've got an ongoing research project to improve that. Once we do that, I think we will really see that take traction and start to move off.

The one thing that did surprise me is that evaluation process is a lot longer than I anticipated, and I guess that is not surprising, during these economic times, that people take a little longer to go through the validation process and stuff. But we've got the targets identified. We know what we need to do, and it's another one of those reasons why I think, as we move through fiscal year '10, we still have -- feel very good about the potential and the opportunities for that BetaStar US product.

Do you have to go through that regulatory process again when you change your cutoff levels for that antibiotics?

We will have to back through that process, although we have actually already initiated the steps to do so. There were some unique situations associated with that process, including serious health problems with the principle individual that was responsible for I guess I am going to call it championing that effort. We don't think that we will incur those kinds of things this time and fully expect to get through that process in a much faster timeframe.

Great. In terms of just a couple of financial questions, Jim, you mentioned cash being north of $17 million that, given your press release that shows cash and securities at $13.8 million, that must mean that some is in the long-term category. Could you share the total cash and investment number with us?

Jim was giving you a recent number.

I see the bank statements every day, or I see the cash position every day, so I'm a little bit ahead of where the year end was.

Oh, we will strike that from the record then! [laughter]

Then in terms of capital expenditures last year and your thoughts about the current year?

Well, we generally budget for capital expenditures to be equal to depreciation. This year, we will be buying a facility in Scotland, so the budget will be a little bit higher, probably by another $1.5 million or so. But it's not a horribly capital-intensive business, so that doesn't soak up a lot of our cash.

Last year CapEx, Rick, was roughly the $3.9 million. That was depreciation and amortization, or was it a little bit lower than that?

A little lower than that, it was really around $3 million, because it would be just the depreciation, not the amortization portion.

Then international, you gave us the number for the year -- a new high water mark for the year. For the quarter, what was international as a percentage of sales? You may not have that at your fingertips. I can back into it or come back at you.

No, actually I do. Actually, I do. International, for the quarter, was 39.1%.

Last year in the fourth quarter, do you have that number?

I do not have that one but I will get it for you.

All right. Well now that I've stumped you, I will thank you again from taking my questions and move along.

Joseph [Bachmann], Wells Fargo Advisors.

Yes, guys, just real quick, can you address what goodwill and other assets is composed of and how you amortize it off the balance sheet?

Well, the goodwill portion of it is not amortized at all. That's a -- you know, they changed those rules several years ago, and it is done. You support your goodwill on a yearly basis, and if you can't support it, you have to write it off. Being at our profit levels, we don't have much trouble supporting our goodwill numbers.

The other thesis of that -- there are some amortizable kinds of things like customer-based intangibles, which is a portion of acquisition costs that are assigned to customer-based intangibles and those are amortized over 12 to 15 years. There will be -- their patents have the amortization of the rest of the patent life, and then there are some other non-amortizable things such as trademarks.

The jump this year is from an acquisition?

Yes, it was from the -- well, the two acquisitions, actually put some goodwill onto the books, both the one in IDS and also DuPont.

At this point, there are no further questions. I would like to turn the call back over to Mr. Herbert.

Well, thank you. Thanks to all of you for your participation in the conference call this morning and your continued support of Neogen.

I would also like to remind you about the Company's annual open house and barbecue that will be held here in Lansing on Thursday of this week. If for some reason we missed getting you an invitation, or if you received one and didn't get a chance to send us an RSVP, we would certainly like to invite you to join us for an opportunity to see many of the products that we manufacture and that we market and hear more about our plans for the future.

Again, thank you. We will look forward to talking to you officially I guess again at the end of our first quarter. Have a good day.

That does conclude our presentation. Thank you for your participation.