Neogen Corp (NEOG) 2010 Q1 法說會逐字稿

Good morning, ladies and gentlemen. And welcome to the first quarter fiscal year 2010 earnings announcement conference call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Mr. James Herbert. Mr. Herbert, you may begin.

Good morning, and welcome to our regular quarterly conference call for investors and analysts. As indicated today, we'll be reporting on Neogen's fiscal year 2010 first quarter that ended on August 31. To start with, I'd 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 risk and uncertainties. And the actual results may differ from those that we'll be discussing here today. These risks that are associated with our business are covered in part in the Company's Form 10-K as filed with the Securities and Exchange Commission.

In addition to those of you who are joining us today by live telephone conference, I'd also welcome those who may be joined by way of simulcast on the worldwide web. These comments, along with some exhibits, will be available on the web for approximately 90 days. Following the comments this morning, we'll entertain questions from participants who are joined in this live telephone conference, 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 this first quarter of the Company's 2010 year. Given the worldwide economic situation, and the financial position of a number of our customers, I'm very pleased with the results. Revenues for our first quarter were approximately $32.3 million, or a 12% increase from the previous year's first quarter. First quarter net income increased 18% over the same quarter a year ago, to approximately $4.4 million or $0.29 a share in the current year, compared to the previous year's $0.25 per share. The results of this quarter extends the consistency record that we've built over time and one that I think many of you know we take great pride in.

This is the 66th consecutive profitable quarter from operations for the Company, and was the 70th in the past 75 quarters when Neogen reported revenue increases as compared to the previous year. That's a record that now spans almost 19 years. The Company achieved these results even though the currency translations had an unfavorable impact this quarter of approximately $1 million when we compare it to a year ago, and income taxes were almost 1% higher this quarter than the same quarter last year.

The credit goes to Lon Bohannon's operating group. In fact, the credit goes to all of Neogen's over 500 employees scattered around the world. Months ago we realized that the year that we were facing was not going to be business as usual. We asked employees to look for ways once again to reduce costs without jeopardizing the Company's future growth. We asked our sales organization to identify ways in which they could be more effective in their sales and marketing activities. And we asked all these employees to convert these strategies into some written plans and we reminded them that hope was not a strategy.

Over the quarter since then we've been able to continue that top line growth while at the same time improving income. In fact, operating income for the quarter that we just finished equaled 21.5% of revenues.

Now, I'd be remiss if I didn't acknowledge that a favorable product mix this past quarter helped push up both our gross margins and our operating profit. Though our product diversification has helped take out a lot of the seasonality in our business, there's still certain of our product lines that yield higher margins than others. Our worldwide diversification of revenues continues to help propel both the top line and the bottom line.

For the quarter just completed, over 41% of total revenues were derived from sources outside the US. Because of some timing issues, it was a particularly good quarter from a cash flow standpoint as we generated $9 million in cash from operations for this first quarter. Of course, all these factors continued to strengthen Neogen's balance sheet and resulted in a 4.8% increase in shareholder equity compared to just three months ago.

At this point, I'll stop talking about the quarter, and in a few minutes Lon Bohannon can give you some of the real color of the various areas of our operation. Instead, let me talk a bit about what I see in the upcoming quarters. First of all, let me talk about specific Neogen activities. Our combined expenses for sales, marketing and administrative expenses for this first quarter were up only 8% compared to the prior year, but gave us a 12% increase in revenue. However, our Research and Development expenses were up over 50% as we compared them to the prior year. This was very much in line with the strategy that we announced last year when we advised that we expected to almost double the size of our research staff because of new development opportunities.

The return on this investment won't really begin to fully show up for a few more quarters. However, our R&D groups at five locations have 66 projects either underway right now or that will be instituted before the end of the fiscal year. Some of these are aimed at new products, some at improvement of current products, and still others aimed at technologies designed to spur us ahead of the competition. As an example, our Food Safety R&D group has now completed seven new or improved product releases. This group alone has about 19 such projects that should yield new or improved products before the end of the fiscal year.

Looking at another opportunity for the quarters ahead of us, commodity grain prices should also be on our side as we look out over these next few quarters. Remember that our rodenticide operation buys several million pounds of corn, wheat and soy beans for the manufacturing of our rodent baits. Our forecasts are for all of these to be less expensive than they were a year ago. As an example, last fall we were paying almost $12 a bushel for wheat, and this year's bookings look like we could be at about half that price. It's difficult to forecast what's going to happen with currency valuations, but in the near term it appears that we won't be beset with the unfavorable translations on a year-to-year comparison as we've seen in the last few quarters. Currently, I think we'd expect the currency translations for this second quarter to be approximately neutral to what they were in the second quarter of last year.

Looking at the international situation, we again expect to see the same kind of growth in these markets that we've experienced in the last few quarters. These revenues are strengthened now by the fact that we have approximately 40 more international distributors than we did a year ago. Our Neogen Europe operations continues to turn in good, strong growth. Our Mexico operations, though still establishing traction, are turning in above year earlier results.

We've been asked several times recently about the food safety announcements from China and what these are apt to mean to Neogen. I think we're doing the right things there, but I'm still not hearing the cash register ring that often. Dr. Richard Crowder, who is by the way a nominee for our Board of Directors coming up, had a personal meeting earlier in the month with a long-time acquaintance of his who is currently the deputy director of China's food safety programs. China, I think, clearly understands that they must establish more active programs if they're going to continue to be a world exporter of food products. We're working on new diagnostic tests now to more rapidly monitor food adulteration. And some of these will be introduced in the next few months. They'll find a place either in China or in the ports where China products are being exported.

Looking at other opportunities in the quarters ahead, there will be more acquisition opportunities. Our corporate development group has several possibilities right now that are on our radar screen and, quite honestly, we would like to get some of that surplus cash to work, but we're not letting the money burn a hole in our pocket. I guess I'd say to you on this call this morning, be patient with us in the way of acquisitions. Remember that we've done 15 successful acquisitions now over the past eight years. Increased regulations are likely to have a positive impact on our business in the quarters ahead.

We heard a great deal about the US Food Safety Enhancement Act when it passed -- was passed by the House and it's now up for eventual consideration by the Senate. Of course, the healthcare issue has pushed both a discussion and action on these new regulations temporarily to a back seat. However, different from the controversy that surrounds the healthcare issue, there is more bipartisan support here, not only in the Congress but also in the public. Just during Neogen's last quarter, there were 47 food recalls covering a laundry list of products like cheese, ham, salmon, raisins, milk, ground beef, peanuts, lettuce and even cookie dough. The causes of these recalls ranged all the way from bacterial contamination of food to food that's containing undeclared food allergens.

The US Center for Disease Control is now on record with an estimate that some 76 million Americans, and that's about a quarter of our population, are stricken with some form of foodborne illness each year. Their statistics show that more than 300,000 of this group ends up in the hospital and some 5,000 die. This widespread news coverage of these recent outbreaks makes it seem that hardly anything in our food supply today is safe. Food companies, particularly those larger companies protecting valuable brands, understand that they have to do something to renew consumer confidence.

While the details of the new federal plan are yet to be established, I think it does appear certain that the legal framework and the requirements for regulating food safety in the United States is going to change. I think it's also being recognized that much of the food safety crisis is going to have to be dealt with back at the food production level or back inside the farm gate, if you will. This, of course, further verifies Neogen's strategy of providing solutions for both food and animal safety.

As an example here, on July 7 the Food and Drug Administration announced new regulations aimed at reducing the occurrence of salmonella in eggs. The FDA estimates that these new regulations will reduce food poisoning cases from eggs by 60% or 79,000 people a year. Prior to this there's been no mandatory food testing at the farm production level. Though regulations prohibit the sale of adulterated food products, there has not been a regulation requiring mandatory testing. When this latest regulation goes into effect which won't be until next July, every flock of egg-laying chickens in the United States above a certain size, which represents approximately 95% of the total laying hen population, will have to be tested twice during their productive lives.

Other biosecurity measures are also mandated by this FDA announcement. Neogen's continuing strategy of producing and supplying rodenticides, disinfectants and fly control products will clearly help the nation's egg producers comply with this regulation. Furthermore, Neogen currently has the only rapid test available to quickly and economically detect the presence of salmonella enteriditis. This is the specie of salmonella that's a target of these regulations. Though I could continue with other examples that bode well for Neogen's future, let me stop now before I totally dominate this entire call.

But before turning the call over to Lon Bohannon, let me remind you that Neogen's annual meeting of shareholders is coming up on October 8, to be held at the University Club of Michigan State University here in Lansing. We continue to extend the invitation to all to attend, and shareholders should have recently received a proxy statement covering the measures that are up for vote at this meeting. I would encourage everyone to please complete their proxy and get them submitted as soon as possible. In fact, I think I'll go a little bit further and solicit your votes based on management's recommendation on those three measures.

Now, let me turn the call over to Lon Bohannon to give you a bit of color on the quarter that we just completed and, perhaps even more important, the things that we continue to learn about our business and the market that I believe help ensure our continued profitable growth. Lon?

Thank you, Jim and I, too, would like to welcome everyone listening on the conference call as well as those joining us via the Internet. As Jim has already stated, Neogen issued a press release earlier today reporting yet another quarter of record breaking operating results. And like Jim, I think it is important to recognize the outstanding contributions of Neogen's team of more than 500 employees who are primarily responsible for our consistent track record of growth in quarterly revenues and earnings.

Jim has already commented on the first quarter total revenues of $32.3 million, net income of $4.4 million, which represented growth rates of 12%, 18% respectively, compared to the first quarter of last year. So I would like to provide a few more details on some of the outstanding performance behind those overall results.

I will begin by discussing performance at our Animal Safety Division. The Animal Safety group experienced a very solid first quarter with overall sales growth of 12%. The majority of this increase in revenues did come from the contributions of acquisitions, but also included a very respectable organic sales growth of more than 4%. And I think that same store sales growth is particularly noteworthy, considering the overall depressed economic environment that continues to exist for some of the important customers serviced by our Animal Safety Division. For example, customers involved in any aspect of animal protein production continue to struggle, and they do remain focused on cost containment in virtually every facet of their operation. We have seen the impact of these cost control measures in a couple of our product lines including OB gloves and hoof care products that are sold to dairy farmers, as well as veterinary instruments, cleaners and disinfectants used by poultry and swine integrators.

Fortunately, our Animal Safety sales team has been successful in uncovering new opportunities and in gaining market share, which has helped offset much of the lower demand brought about by the poor economic conditions in the overall animal protein markets.

Now in addition, product lines sold to distributors servicing companion and food animal veterinarians experienced a very strong first quarter. Sales of our high margin BotVax B vaccine used to prevent Type B botulism in horses, combined with sales of our EqStim biological, used primarily to aid in the treatment of equine respiratory infections, achieved 60% growth in the first quarter. Sales of injectable vitamins sold under the Neogen Vet brand and used primarily to prevent and treat vitamin deficiencies in food animals also achieved first quarter sales growth of more than 60%.

Sales of veterinary products sold through over-the-counter, or what we call the OTC distributor channels, represented another area of strong first quarter revenue growth for Animal Safety. The Company's Ideal Instruments brand of products, including disposable needles and syringes continued its tradition of solid growth with a revenue increase of 11% in the first quarter.

Other OTC lines that experienced exceptional first quarter sales growth included products positioned as biosecurity solutions, including sales of domestic rodenticides which increased 8%, and sales of fly control products which more than doubled in the first quarter compared to the same period last year.

Turning to Food Safety, Neogen's Food Safety Division also had a stellar first quarter with overall same store sales growth of 12%. The negative impact of currency translation kept this organic growth from being an even higher growth percentage. Once again, as Jim indicated, our Neogen Europe subsidiary experienced outstanding quarterly unit volume growth that exceeded 20%. That's an impressive record that now spans several years for that group. However, for the first quarter all of this growth disappeared upon the conversion of pound Sterling to dollars that is required for financial consolidation purposes.

Fortunately, in addition to Neogen Europe, the Food Safety Division had a number of strong performing business segments in the first quarter. Sales of diagnostic tests for drug residues, including antibiotics used to treat dairy cows, increased more than 35% for the quarter. International sales were particularly strong, including a significant increase in sales of our new BetaStar Combo test. This test detects the presence of violative levels of beta -lactams and tetracycline drug residues on a single device. Growth has been especially strong in the Eastern Europe country of Belarus, which exports virtually all of its milk production to Russia.

Sales of test kits to detect food allergens continued their recent trend of exceptional growth with an overall increase of 25% in the first quarter. Sales of diagnostics for milk allergens led the way, but we also saw solid growth in the sales of allergen test kits for eggs, almonds, processed soy, and wheat gluten.

There are probably two other Food Safety product lines worth mentioning in terms of first quarter growth. Neogen's line of test kits to detect naturally occurring toxins achieved solid growth of 10% for the quarter; that was led by an increase in sales of our diagnostic test for DON and histamine. I suspect that some of you have probably heard, we did see a number of regions throughout the US where mold was a problem in wheat harvest, leading to strong sales for our DON test kits. I guess lastly for Food Safety, I'd say that our Soleris product line of tests for general microbial contamination, such as yeast and mold, also had a strong quarter with sales growth of 16%.

In fact, as the economy improves and prospective customers move to relax current restrictions on capital expenditures, we're optimistic that the Soleris instrument-based optical microbial test system will continue to generate strong organic sales growth in future quarters.

I'm sure that everyone who saw the press release noticed the exceptional gross margin and operating profit performance in our first quarter. Obviously, we were very pleased to see such strong gross margins and to report a 23% increase in operating profit and a 12% increase in sales. There are a couple of reasons why we experienced such a significant improvement in gross margin and operating profit compared to the quarter last year.

First, as Jim already mentioned, product mix was definitely in our favor in the first quarter. There have been quarters when we've experienced a less than favorable product mix that resulted in lower margins than probably otherwise would have been expected. I know that many of you have heard me use that explanation to address less than expected margins on those occasions when that occurs. However, in the three month period reported today, we had one of those quarters when the product mix was extraordinarily favorable and which resulted in higher gross margins than normal.

Our Animal Safety Division had a big quarter of sales for our high margin vaccines. And Food Safety's gross margins were certainly boosted by extremely strong sales of tests to detect drug residues. I wish I could say this will be the case in every quarterly report. But history tells us that would be overly optimistic and we have to look at margins over a longer time period based on a more normal mix of product sales.

The second reason for the improved margins, and probably more importantly from my perspective, is that we do continue to focus attention on maintaining effective cost control from the use of employee based improvement teams in our manufacturing, customer service and administrative areas. These improvement teams have succeeded in finding a number of ways to reduce costs or improve productivity. Because of the success of these improvement teams, the favorable product mix, and our overall sales growth in the first quarter, expense categories for raw material, direct labor, overhead, sales and marketing and G&A were all less than the prior year, when expressed as a percent of sales.

We continue to believe that it is critically important to maintain a mindset of supplying the highest quality product at the lowest possible unit cost when compared to competition. And we believe we still do have a number of operational areas where we can further improve our cost structure or improve productivity as we push forward to $200 million in sales.

Let me close by saying that we are particularly pleased with our solid organic revenue growth for the first quarter. Although many economists and investment strategists are predicting an end to the recession, I think it's important to point out that most companies are preserving or achieving their profitability almost entirely by cutting costs. I read last week that one of the biggest things missing from the recovery so far has been growth in revenue. During the second calendar quarter, the combined revenue of companies in the S&P 500 was 20% lower than for the same quarter in 2008. This was the third consecutive quarter of lower revenue on a combined basis for companies in the S&P 500, and analysts expect revenue of companies in this important index to fall below 2008 levels again in the calendar third quarter.

Of course, Neogen has been somewhat unique in this area as we have consistently reported sales growth, in addition to our earnings growth, for each of our quarters throughout the current economic downturn. For our first quarter reported earlier today, we believe our organic growth exceeded 10% on a unit shipped basis, and we believe overall revenue growth was more than 15% after adjustment for currency translation.

Even if we are in the early stages of a recovery, it remains difficult to predict how strong that recovery might be as well as how it might impact future results, but our shareholders can be assured that we will do everything possible to continue to expand revenues and to aggressively pursue growth opportunities that we see throughout our domestic and international markets. Our first quarter results represent another successful and significant step forward as we begin the second year of our five year plan to reach $200 million in annual revenue. That concludes our prepared comments for today. And at this time, Jim, Rick and I will be happy to answer your questions.

Thank you. We will now begin the question-and-answer session. (Operator Instructions). And our first question comes from Steven Crowley from Craig-Hallum Capital. Please go ahead.

Good morning, gentlemen.

Hi, Steve.

Congratulations. Fantastic performance in the quarter.

Thank you.

In terms of -- a couple questions, but maybe first a clarification. You referenced some numbers. Obviously your reported growth, both for the Company overall and internationally and you referenced a unit growth number, I think you said internationally it was over 20%, domestically for the whole Company it was -- it exceeded 10%.

Does that number differ from just a pure currency adjustment for FX translation? Because if I do that for international, just add that $1 million back to your international total, I actually get a constant currency growth rate of international of high teens. And I think for the Company overall, you referenced a similar constant currency growth rate statistic of about 9%. I just want to make sure there are three different numbers, not two, if you follow me.

Steve, let me -- I don't know that we can answer that here. Why don't you let us -- maybe we can huddle back on that this afternoon and see if I can answer that question.

Okay.

I think you'll find, Steve, there are three different numbers as they were put together. There's some change because of currency translations, but it also takes into account what the price variance might be on Average Selling Prices, some of those products. So I think all of that probably gets calculated into that total. But I think if your question is is it three different numbers, I think the answer is yes, you can't go back and make two numbers out of it.

That makes sense to me. I just wanted to run it up the flag pole.

Right.

The more important stuff, you have reference to 66 projects kind of in process or soon to be in process related to new products. Sounds like an impressive number. Do you have any reference point for us as to where that number was, ballpark, a year ago?

No, I can speculate about where it was. It was probably less than half that. It was probably more in the range of 20.

All right. So that's good reference point for us. And then in terms of the performance of the DuPont business, there's obviously some pressure on some of the end customers you referenced for the DuPont disinfectant line, and from your own disinfectants. Can you give us a little bit of a status update as to how the product line is doing and where you are in converting manufacturing to your own plant?

Let me start there and then Lon can add to it, because he just came back from our Wisconsin operations last night. We're pleased with the way it's moving. It is probably one of the areas that's faced the greatest pressure out there today, because a large share of that business goes to the large producers worldwide of both poultry and hogs. And anybody that's watched the numbers know how bad that those two industries have been beset with the economic situation, so they sometimes take away prudent activities, just in favor of cash flow.

So our sales there have been -- they've been good, but there's been a lot of price pressure on it, too. And we've got some competition there, there's some price pressure there. We are about a month behind, I guess, on where we meant to be as far as integration of the manufacturing activities. We do not manufacture any product right now in the UK. That manufacturing operation was a total manufacturing for us, but we're now out of that and we're moving toward getting more products up to speed in what we're doing at Hacco.

We'll also be -- we're also in the final throes of putting together an agreement for toll manufacturing for those products for the Pacific Rim area. We've got good a toll manufacturer lined up for over there. It doesn't make any sense to make that product here. It's heavy, it's got a lot of liquids in it, to ship that product around the world when we can make it in some other places.

So we'll be spending most of the rest of this year getting DuPont and the cleaner and disinfectant activities integrated. We are working with DuPont chemists as we look at some new technologies, as we look at some new products that one, will be more effective, and number two, will more nearly answer the green concerns of environmentally friendly. But those are not going to be -- they won't ring the cash register in this fiscal year. Lon may want to add some more to that.

Let me add a couple of other points to Jim's comments. We do an analysis at the end of the first year of any acquisition to see how we did do against our pro formas. And in terms of the DuPont cleaners and disinfectants we actually well exceeded the pro forma and our own internal budgets for the first year. Some of that is because we were able to work with DuPont, and we thought we would be able to do this from a collaborative effort in terms of finding other areas to act as their distributor for products.

In addition, in reviewing our first quarter results, some of the synergies that we thought would be there are actually taking place, for example, the disinfectants that we owned ourselves prior to getting access to the DuPont cleaners and disinfectants, were not doing very well. But now that we have a complete product line, sales of those products are up or were up almost 20% in the first quarter. And also, because we're approaching this from this total biosecurity solution standpoint, we have seen an increase in rodenticide sales. So we're very pleased with the performance so far.

Some of our customers are facing some tough times out there, and that's why I commented that, fortunately, our sales team down there has been successful in finding some new opportunities and taking some market share in a couple places to continue to grow that business. So it's very much on track.

We will be producing our first batch of product in our Randolph operations in the October and more to be produced in November. And then, of course, we'll begin to see some of those other improvements from cost structure standpoint as we bring those products in-house. So I think it certainly was a very good acquisition for Neogen Corporation. And all of the concerns out there right now over H1N1 and the swine flu, we can use a little bit to our advantage to make sure that the kinds of security issues are in place, or programs are in place that should include some kind of cleaner and disinfectant usage. So it's going along well.

Thanks for taking my questions, I'll hop back in the queue.

Our next question comes from Tony Brenner from Roth Capital Partners. Please go ahead.

Thank you. Regarding gross margins, you had a 200 basis point improvement in the quarter year-over-year and you cited three broad reasons for that improvement, lower commodity costs, various cost efficiency measures and favorable product mix. I'm wondering if you could sort of quantify each of those, or at least rank them in importance? And I wonder what the predictability of favorable product mix might be going forward?

Well, I would rank product mix first. From quarter-to-quarter, in terms of changes at the gross margin line, the product mix in terms of diagnostics or other high margin products can move that percentage more than any other single factor.

I think the overall revenue growth continues to be positive, and is why over the long term we think we can continue to bring up the overall gross margin percentage. And of course, we want to continue to focus our attention on continuous improvement in terms of productivity and cost reduction measures. And they're going to add intermittently in terms of the quarter, but they would probably be the least. If I had to rank those in importance, it would be product mix in this particular quarter first, then volume growth, and then our cost improvements. So it is virtually impossible, however, to predict that going forward.

Yes, I've had a hard time. And my second question is what accounted for the smaller gain relative to sales in your sales and marketing expense?

Well, I think that once again, as we increased -- we expect those -- some of those percentages in some of those areas to come down over time as volume increases, as sales volume increases. I mean, we don't need to add the senior manager levels. And then we're always -- we've always got some open positions as we expand and grow, and I think we're probably a little aggressive in terms of timing of when those will come on board. So we've probably got some saddles that we still need to fill or did need to fill in the first quarter, and that helped not have as much of an increase there. But over time, we expect that to come down, but it was certainly a lower percentage in the first quarter than we would expect going forward.

Okay. Last question. I wonder if you could comment on the progress of the IDS integration.

It's coming well. We wanted to move -- first step there was to move all of the manufacturing or move 80% of the manufacturing operation from the St. Joe operation to Lexington. That's now been affected. All of that large group of products is being now manufactured in Lexington and as a consequence, we've further reduced the overall staff a bit at St. Joe. It's down to our core group now of the product managers and the R&D team that's there.

That R&D team is a very strong, core team that is working well with R&D staffs at both Lexington and Lansing. Have already been productive on some things. They've got -- they're one of those six operations, Tony, that I spoke of on R&D and where our R&D expenses are. They've got a couple of new products there that look very promising that were, in fact, in place when we acquired the business that will be ringing the cash register here probably toward the end of this second quarter. So we're very pleased with what's happened there.

Thank you.

Our next question comes from Marco Rodriguez from Stonegate Securities. Please go ahead.

Good morning, guys. Thanks for taking my questions here. I was wondering, kind of a follow-up to one of the previous questions here on gross margins, would it be fair to say that the product mix impact on the increasing 200 basis points year-over-year, say maybe 50% of that was from product mix?

Well, I don't know that we -- we haven't done that calculation.

I would have estimated it would be probably three-quarters from mix, if that helps you.

Okay. No, that's great. And then can you kind of help us think about what might be more of -- I guess we can back that out, that would probably be more of a normalized gross margin trend going forward if we just assume that that product mix wouldn't stay there?

Well, if the product mix stayed there, you're going to get the same gross margin. But it just was -- it was an extraordinary quarter from a mix standpoint. That's all I can tell you, and it's pretty -- beyond that, if we have another extraordinary product mix quarter, we'll have similar kinds of margins. But they should be better sequentially through the year would be the best thing that I could tell you.

And it depends on what products you're selling in the quarter. I can look out right now and say we'll probably pick up some volume in the second quarter as we move into times of possible infections and cleanout overall in the Animal Safety side, that we'll have maybe a higher percentage of cleaners and disinfectants that may be folded into that second quarter which carries a lower gross margin.

At the same time we've got a corn crop to harvest here yet. We've got a milo crop to harvest yet. It's too early to tell what's that going to look like. It's always our second quarter when we get the mycotoxin issues. If we get weather conditions so that we've got a problem in the crop, we'll see an increase in our group of products used to detect natural toxins, and those carry a good margin with them. So they're just pieces, I said in my earlier comments, we've done a lot to stabilize our quarter-to-quarter variation in revenues, but even at that, some of those carry higher gross margins than others.

Okay. Perfect. And then in your prepared remarks you talked about the R&D projects. I think you said about 19 of those 65 or 66 were going to close, if you will, by year end. Can you give any other sort of color in regard to how the rest of those fall through in the remainder of the couple years?

Well, fortunately our research, our R&D programs provide marketable results pretty quickly. We're out sometimes in eight months from the time we start a product, depending on what it is, until we get one out. Sometimes -- it's seldom ever more than about a year. So those will all fold out pretty quick.

Some of those 66 projects are, as I indicated, improvements on our current products to make them either more sensitive or easier to use or other areas that will make us more competitive.

Some of those are to increase the product offering. For instance, we have a test that might be used to detect an organism in certain meat products but it doesn't work in a high sugar product. We need a product out there that we need to make some variations and do some validation in order to get it to work there.

We're doing some things, as an example, our Soleris business that Lon talked about is doing very well. But there's a lot of opportunities that are out there that we're not quite able to take advantage of yet. There's a lot of opportunities in the brewery business where they would like to have more rapid tests to be able to detect certain yeast contamination in the overall brewing process. We're working on some areas there which if we get those completed successfully, will increase the size of that market.

So it's not like we've got 66 products that are fixing to come out of the pipeline. A lot of those are improvements or expansion of our current products. Now, there are some new products that are in there. Can't tell you right off the top of my head how many brand-new ones they've got. Three or four of those that we released I think in this first quarter were brand-new products, hadn't seen the light of day before. So it's overall just sort of a combination of those three.

We're working on some new technology that probably won't get out this year but -- because we don't have enough of this year left, but will probably get out within the year, that if we're successful in that will be a big boost in the overall platform and the technology that's in use that could in fact spur us ahead of some competition.

That's helpful. And then lastly, you mentioned you had some timing issues on the cash flow from operations. I was wondering if you could talk a little bit about that and expectations going forward?

The cash flow was positively affected by the timing of when some of the payables were made and the payments for taxes, which were -- there was a heavier amount accrued at the end of this August than there was a year ago. We still would have been -- the total of that, if I factored it out, would have possibly reduced the cash flow from operations by maybe a little more than $2 million. But nonetheless, it was still a very, very nice quarter from that standpoint. And I expect to see that continue on as we move into the second or the -- the second quarter.

Great. Thanks a lot, guys.

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

You talked about Soleris, I didn't hear any mention of AccuPoint. I wondered if you could discuss that, please.

I didn't mention AccuPoint. I try to focus on the largest items that are having a significant impact. That product line continues to do well for us. There was -- it was minimal growth in the first quarter. I think that was primarily more of a comparison purposes to how things went in the first quarter last year. We continue to experience a significant number of opportunities in the general sanitation area. We're looking at -- we're even looking at a couple different markets.

I'd like to not spend a lot of time talking about that on a conference call, but we continue to see opportunities for that product line and think that there's a very broad-based market for that product that will show solid growth very much in line with our budgets and which has been double-digit growth for that product line for the last several years. And we anticipate similar kinds of growth this year, just hadn't budget for it and didn't happen in the first quarter.

I read it's a good product which is why I asked about it. Anyway one question -- with the larger or the growing installed base, how are you seeing your sales of the disposables and the items that go with it progressing?

Well, I know last year they -- I know last year they increased significantly. I think this year they're -- in the first quarter they continued to grow, about up 8% or some number like that, so we continue to see a growth in the sampler area relative to the prior year.

Switching subjects, you reported strong 30% plus percent growth in the dairy, antibiotic testing. Were there any meaningful US sales in that number?

Not enough from my perspective. We had the BetaStar US product launch. The sales there have been minimal, as we commented last quarter. I think we found this is one of those areas that you get a product out there. We had one of the drug residues that was fairly important that we detected, but not at the level that it needed to be detected at. So that's one of those where we need to go back to the product from an improvement standpoint. We think we can do that, and that's one of those projects that's currently in R&D. And we still think that the opportunity is very good there in the US.

We've got good relationships with the customers where that product can be sold, and in a number of cases are already providing them some of our other products. And so we continue to be very excited about the prospects there and are anxious to get that tweaking done for that product so that we can realize the kinds of sales growth there that we know exists and we can't get with our current product.

And I can comment on where that is in R&D now, Steve. I think within three months, it will be out of R&D, but we've still got to go back then and jump through some hoops before we can make label claims with it at FDA. Fortunately, I think we're a little bit better wired at FDA than we were. We really need to get that done in the US to be able to gain the kind of market we need there.

The competition has effectively used that and I would, too, if I had been in their case. And we just need to have that antibiotic -- it wasn't required for FDA approval and we didn't do it in time -- at the time of the FDA approval. But it's since to be done now. And now on the positive side of that is that we quickly were able to put tetracycline on that same test, and that's a big concern outside of the US. We don't use a lot of tetracycline in the US to control mammary infections like they do in certain parts of -- particularly in Europe. We were able to put a second line on our product which now lets it detect all of the beta-lactams, but also the same milk sample then can detect tetracycline. That product was launched, I guess, really only somewhere in the early part of this quarter and we're already hustling, trying to keep up with it, to try to keep that production going on. Lon mentioned a bit about what was happening in Belarus. That was a part of our success over there.

I guess the 30%-plus growth was primarily Europe. Do you have a feel for what it was in local currencies?

Do you mean before translation?

Yes.

Again, if I try to get back and work for a specific product line, the unit volume growth was in excess of 30% for drug residues used in the area of testing dairy antibiotics.

That number would be about $400,000, Steve, greater.

There we kind of got a very interesting thing. We've got the Euro versus the dollar, and then we've got the Euro versus the pound and then the pound versus the dollar, as they get translated back and forth through the statements between our operations in the UK and those here.

All other questions were answered and great quarter, guys. I'll jump back in the queue. Thank you.

Thanks, Steve.

(Operator Instructions). And our next question comes from Brian Jeep from Sidoti Company. Please go ahead.

Good morning, gentlemen.

Good morning, Brian.

My first question, you mentioned that we should be patient on the acquisition front. And I'm only asking because it's been -- you've been -- you've made so many acquisitions in the past few years. Could you tell us anything about how patient or -- I mean, is it just --

Patience has a fuse, is that right, Brian? We do not -- we are not at a point of letter of intent, signed a letter of intent on anything that we're looking at. We are looking at -- when I say looking at them, I don't mean that we're just under the cover (inaudible) looking at what they've got on their web sites. I mean, there's active conversations going on, I think four different -- yes, four different opportunities now, and they'll mature one way or another. I think they'll either be sold or they won't be sold. Or somebody else will buy them or we'll buy them. You just never know when you get into those situations. I think we'll start to see some of that. We'll get some answers to some of that certainly within this quarter. Now, every one of them may tell us that we're too cheap and they don't want to sell to us or whatever, but we'll begin to sort those out in what's left of the next couple months.

So you're not taking a breather there. There's nothing (multiple speakers)

No, no, no, no, we're not taking a breather.

All right. Great. Thank you. And then shifting gears on the Soleris front, I think in past conference calls you've given us kind of an idea of the backlog or the people waiting in the wings that maybe don't have the resources now but are looking at it. Has that grown? Are you seeing some growth in at least people you're talking to?

Well, we make that an emphasis in our monthly operational meetings with our Food Safety group that sells that product. It's very important that we keep the pipeline full and that we have an adequate number of prospects, because the sales cycle is a little bit longer in terms of the placement of the instruments there because it is a capital expenditure.

Everything I have seen would indicate that that pipeline continues to be as full as ever in terms of prospects and opportunities and nobody is telling us no. They're just saying not now or they have to go farther up the approval process line in terms of executive approvals within their organizations before they can pull the trigger and buy an instrument.

So in terms of the big markets that we've got there, that we've seen so far, which has included nutriceutical, which has included dairy, those we've still got a very, very full pipeline of prospects. And we expect to see some of those close in the second quarter and in the third quarter and in the fourth quarter, and I think some of it actually in the first quarter probably moved to the second quarter or third quarter, just because of the economic situation that exists out there.

I made in my comments that I think as the economy improves and some of these restrictions on capital expenditures are eased a little bit at some of these organizations, that's one of the areas where we would certainly expect to see some benefit from an improved economy.

It's not unusual when you're searching for cash conservation, sometimes profit maximization gets pushed aside from the standpoint of our customers.

All right. And then shifting gears one more time, on the new technology front, I think it was Jim that mentioned platform moves there. Are you looking at molecular and do you think there is a need our there for molecular?

I don't think I want to answer any of those questions because I know my competition is probably going to listen to this call sometime or another.

I understand. Thanks for taking my questions.

(Operator Instructions). And our next question comes from Travis Williams from Stephens, please go ahead.

Hi, guys, thanks for taking the call and congrats on another great quarter. I just had a quick question for you. Most of my questions have been answered. Regarding your inventory levels, I think if we look back kind of last year, we saw some destocking at some of your customers and I don't even know if you have the visibility to be able to answer this question, but what does the inventory levels look like today at your customers, and is it your sense that maybe some of the growth we're seeing today is restocking activity?

I don't know if I would say that it's restocking activity. I think that it is true that in our third quarter of last year, particularly, we saw a number of our customers reduce their inventory levels. And that certainly affected their ordering patterns, particularly with distributors that we work with for a number of different product lines.

We did start to see an improvement in ordering in our fourth quarter and I wouldn't characterize that as restocking. I would just characterize it as they did as much destocking as they could do and they had to buy product just to be able to service their customers. And I think that's what we continue to see. I think a number of our customers have gotten their levels down to the point where they have to reorder product just in order to keep their operations going and/or service their customers in the case of where we're selling to distributors. So we're -- I think some of those inventory levels at customers got as low as they can be. I'd be surprised if anybody tried to do anything to lower them any farther. I'm not ready to say that we'll see an improvement, that they'll bring those levels back to where they were a year ago. But they're certainly down to the point where they have to order from us on a regular basis.

So you are seeing the orders?

Oh, yes.

And Jim, I think you commented in your opening remarks, lots of news coming out of China in terms of headlines, still not hearing the register ring. I think in the past you had given sort of a number for the year expected from China, somewhere below $500,000 in sales total. But I guess just bigger picture, what's the key, what's the linchpin to get that market moving? What's the holdup to get things moving there, basically?

Well, I'll start it but let Lon answer it because he still is more of our expert on China than anybody here in-house. They're in the process of getting the system up and they know they've got to do something. It's not deliberate on the part of the Chinese, nor certainly on the part of the Chinese government. They do look for cheaper, easier ways to run tests. As an example, we talked some about detection of antibiotics in milk. I know for a fact having visited some of the Chinese plants where most everybody in the world today is using something like our test to be able to detect that, they've sought for an easier way to use it because their focus is on making sure that they don't have any antibiotics in the milk that they're about to make yogurt or cheese out of. Because if they do, the cultures won't grow and they'll end up with a tank of rotten milk. But they're doing that by using some, what I would say, more antiquated but fairly effective methods of being able to run antibiotic tests to see if there's enough antibiotics in there to prevent them from making yogurt rather than using a test like ours. I think we're beginning to see those tests are not fast enough. I think we'll begin to see more and more of that begin to disappear. But let Lon give you some of the -- I think, frankly, he can probably even give you some numbers on what we're looking at.

Yes, thanks, Travis. In terms of China, they're not an insignificant country any longer to us in terms of overall product sales there when you include everything that we've got in the Food Safety side and the Animal Safety side. They're pushing $1 million. I know they were over $1 million last year in terms of total sales to Neogen Corporation.

I think as we look at it, what we've been interested in is what would happen on that diagnostic front related to things like drug residues and other Food Safety issues. And I think they are doing more testing, particularly for products that are exported or particularly at companies, Western companies, that have brands over there to protect or have QC protocols here that they're able to enforce in their operations over there.

What I have not seen yet so far is the same kind of testing taking place on their own production for domestic consumption, and I think that's where the opportunity lies going forward. There are a couple markets that we're working on over there. We think there are some opportunities for the Soleris product line. We think there's better opportunities for drug residue testing over there than what we have been able to achieve so far. And we think there are some good opportunities for the general sanitation AccuPoint ATP testing. So those are some areas where we're focusing on.

It's just very difficult to predict in that country how fast they will move forward with their testing programs and how much enforcement will take place to make sure that actually -- that testing actually takes place.

We're beginning to pick up more significant sales over there in our diagnostic tests for plant diseases. That's work that's coming out of our Scotland group where that whole technology is based. And that's a very big concern to them as they do things like shifting to more potatoes which has not been normally a staple, they're concerned about potato diseases and being able to quarantine potato feedstock that's coming into the country and being able to diagnose it. And that's fitting right in with our overall program. So we're beginning get more and more traction within the same places. We haven't given up patience. I'm just listening intently to hear that cash register more often.

We are too. Thanks.

Thank you, guys.

Our next question comes from Peter [Coil], a private investor. Please go ahead.

Good morning, gentlemen.

Hi, Peter.

To your -- congratulations on a terrific quarter. I don't know how you guys can keep it up. I mean, what is it, the seventieth out of the seventy-fifth?

That's right.

And I'm going to have to get a new calculator and I'll have to get you one.

Lon's got a nice one, but mine's running out of digits, Peter.

To your knowledge, is Neogen being actively looked over for purchase by another corporation?

No. To our knowledge, we have no barbarians at the gate.

Well, thanks, and keep up the good work.

Thanks, Peter.

Thanks, Peter.

And at this time we have no further questions.

Well, thank you. We appreciate your attendance this morning. Let me once again remind you of the annual meeting of shareholders. It's coming up here at -- right away on October 8 here in Lansing. Also request again to check around, make sure your proxies are in so we can make sure we get all our proxy votes in. Thanks, we appreciate your continued support and confidence in the Company, and we'll look forward to talking with you in about another three months.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may all disconnect.