Neogen Corp (NEOG) 2010 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Neogen quarter two fiscal year 2010 earnings results conference call. At this time all participants are in listen-only mode. Later we will conduct a question-and-answer session. Please note 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. Today we will be reporting on Neogen's fiscal year 2010 second quarter that ended on November 30, of course of 2009.

I'll remind you that some of the statements that are made here today could be termed as forward-looking statements. These forward-looking statements, of course, are subject to certain risks and uncertainties and the actual results may differ from those that we discuss here today. These risks 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 with this live telephone conference, I also welcome those who may be joining 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 our comments this morning we'll entertain questions from those of you that are joined on the live 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 results of our second quarter and the first six months of the Company's 2010 fiscal year. I'm very pleased that with these results considering the economic situation that's been encountered by many of our customers.

Revenues of our second quarter were approximately $35.3 million or a 13% increase from the previous year's second quarter. The second-quarter net income increased 18% over the same quarter a year ago to approximately $4.6 million and that's another quarterly record for our 27-year-old company. This translates to $0.20 per share compared to the prior year's $0.17 when this is restated for the 3-for-2 stock dividend.

You'll remember that the Company declared a stock dividend and one additional share for each two shares held; that dividend became effective on Tuesday of this week and the shares outstanding increased from approximately 15 million shares to approximately 22.5 million shares.

The results of the second quarter extend our consistency record to the 71st quarter in the past 76 when Neogen has reported revenue increases as compared to the previous year. That's a record that now spans 19 years.

Year-to-date revenues for the first six months now stand at approximately $67.6 million, that's a 13% increase compared to last year's first half. The year-to-date net income for the first six months now stands at approximately $9 million or an 18% increase over last year's $7.6 million.

A lot of the credit for this accomplishment goes to Lon Bohannon's operating group and, in fact, the credit goes to all of Neogen's over 500 employees throughout the world. Because of some timing issues it was again a particularly good quarter for cash flow as we generated over $7 million in cash from operations for the quarter. Of course all these factors continue to strengthen Neogen's balance sheet and this has resulted in a 10% increase in shareholder equity compared to our position just six months ago on May 31.

At this point I'll stop talking about the quarter and in a few minutes Lon can give you some of the real color of the various areas of our operations. Instead let me talk about what I see for the Company in the upcoming quarters and some of the factors that affect the marketplace for our products.

We were successful in putting a part of that cash that I just mentioned to work affective December 1 with the acquisition of the BioKits Food Safety division of Gen-Probe. This company located in Deeside, Wales is only a few hours drive from our headquarters of Neogen Europe Ltd. located in Ayr, Scotland.

The business had sales of approximately $3 million in the prior 12 months. The business is concentrated in diagnostic test kits for the detection of foodborne allergens and an interesting group of tests to determine meat speciation. We believe that this latter piece of business is apt to grow as there's more concern about economic adulteration and the desire to better authenticate meat products for ethnic reasons.

The majority of the business is within the European Union where we are already building a good market share. Furthermore, the acquisition brought approximately 50 new diagnostic test kits to Neogen's offering. A number of these test kits for the detection of foodborne allergens had not yet been developed by Neogen.

Neogen has enjoyed strong double-digit growth in the foodborne allergens business for the past number of quarters; we've talked about that in several quarterly conference calls. In fact, based on a new study just released by the Centers of Disease Control, food allergies among US children jumped 18% from 1997 to 2007, that's a 10-year period.

Some of this increase may be due to a greater awareness of the disease by parents and healthcare providers, but for whatever reason there's a greater concern and a continuing need by food processors to guard against the inclusion of allergenic products that are not included on the label of the food.

Weekly reports of food recalls due to Food Safety issues and, of course, some widespread coverage by the popular press has continued to draw the attention from lawmakers. These Food Safety concerns are also impacting our US international trade. As an example, last week Russia added four more US pork processing plants that are banned from selling product into Russia. Russia, by the way, is one of the five largest export markets for US pork.

This brought about a total of banned plants to 11 that Russia now has that are not eligible to ship product into Russia. And Russia now states that US pork producers and processors could face a complete halt based on antibiotic residues that they have found in finished pork products. The US Congress would likely have adopted legislation calling for much more stringent Food Safety provisions already if they had not been embroiled in a debate over the healthcare issue.

Earlier in the year the US House of Representatives passed the Food Safety Enhancement Act and referred the matter to the Senate. A couple of weeks ago the Senate subcommittee unanimously approved its version of a Food Safety Act which has cleared the way now for a full -- to go to the floor for a full Senate vote. It may likely get to the floor I suspect in the early part of the year.

There's a lot of momentum behind these new measures. The President has exhibited a high degree of interest in Food Safety and the Congress is clearly not happy with the Food Safety situation. Since the Senate bill as it now stands is bipartisan it's likely to win the necessary votes as soon as it goes to the floor and then the two bills will be referred to committee. There will likely be a number of differences between those two bills and they'll likely be ironed out behind closed doors when the Senate and the House versions are reconciled.

But I guess I'd say regardless of how the final law gets on the books, it's expected that it will be the most sweeping changes in FDA regulations in at least 50 years. It appears that the bill is going to have an impact on inspection and testing not only for foodborne pathogens but also for drug residues, food allergens and likely some other food contaminants.

The final law will not only impact US food producers and processors, but it's also going to bring more attention to inspection of the huge amounts of food that we import into the US each year. I just returned from our operations in Mexico City last evening where FDA announced that they were establishing inspection offices in Mexico City to help improve the safety of the food that we import from Mexico. There's already one new law in place even before the enactment of this new legislation that will increase the scrutiny of Food Safety.

A number of months ago a regulation was activated in an attempt to reduce the amount of Salmonella enteritidis in eggs. This will have an impact on the producers and processors of about 98% of the US egg supply and it becomes effective in July of 2010. This regulation not only deals with testing but also with intervention.

Egg producers and processors will be confronted with compliance on intervention methods such as rodent and fly control as well as the proper cleaning and disinfecting of bird facilities. And Neogen has the proper test kit for the detection and the products for each of the needed interventions.

The FDA has recently put in place what's referred to as the Reportable Food Registry. This requires that any food processor that learns that food may be adulterated report it to the FDA within 24 hours of the findings. In turn this becomes a part of an electronic food registry report that is now available to the general public.

This is a departure from the past practice since such information was not available to the general public in the past. More importantly, in the past if a food processor had test results that indicated some adulteration they had the opportunity to validate that with secondary testing before reporting.

It's now possible that a food processor could get a false positive report and would be required to immediately report it even though upon validation they might find that no adulteration had actually occurred. This, in my opinion, is going to put even more attention on testing and likely it's going to put some pressure on the producers of diagnostic test kits.

Beginning a number of months ago, Neogen substantially stepped up its activities and its budget for the development of diagnostic tests. We now have 55 scientists in our R&D groups at three primary locations. They have 66 projects that will lead to new diagnostic tests or improvements in our existing products. We spent approximately $500,000 more in research and development in the second quarter that we just completed than we did in the same quarter last year.

To sum things up and looking forward, our growth strategy that has served us so well in the past will continue to be deployed as we look forward. We'll grow revenues through increased market share; I believe that we've gained some market share in several places during the past several quarters.

Secondly, we'll achieve growth through internal development of new products coming from our R&D programs that I just mentioned.

A third leg of our growth strategy is to increase our international business. We've made great strides in each quarter in accomplishing this and our BioKits acquisition will now help give us an additional boost in the market share growth in the imported European Union geography.

And the fourth strategy is to grow through acquisitions of synergistic businesses and we believe there will be continued opportunities in this area as our industry consolidates.

Before turning the conference over to Lon, let me say that we believe that Neogen's future continues to be as bright as ever, even though the financial health of many of our customers does present some restrictions. We believe that we're continuing to build good value for our shareholders.

Frankly, I felt great pride last month in representing our employees and our stockholders when NASDAQ invited us to New York to ring the bell to close the market that day. That admit -- the event marked the 20th year that Neogen has been a publicly held company. Five years earlier NASDAQ invited us to ring the bell to open the market and in those five years our revenues have more than doubled and net income is up about 120%.

I also felt good about our ability to issue the stock dividend earlier this week. Those shareholders who had some desire for cash dividends can now convert that stock dividend into cash whereas others may wish to just let it ride based upon the rewards for future growth.

Let me stop at this point and turn the conference over to Lon to talk about more of the color of what happened in the quarter we just finished. And then following Lon's comments we'll open the conference for questions from participants. Lon?

Thank you, Jim, and welcome to our listeners on the conference call as well as those joining us by Internet access. Considering how close we are to the holidays I would like to begin by wishing all of our listeners a Merry Christmas and a prosperous New Year.

As Jim mentioned, Neogen issued a press release earlier today reporting our operating results for the second quarter and first six months of our 2010 fiscal year. Neogen's percentage growth in sales and net income for the three months ended November 30, 2009 mirrored our exceptional first-quarter results and provides Neogen excellent momentum as we move into the last two quarters of our 2010 fiscal year.

Jim touched upon a number of the second-quarter's outstanding achievements including new quarterly records for Neogen in terms of sales, net income and earnings per share, along with the continuation of our remarkable track record for consistent growth in sales and profitability. Given the difficult economic conditions that stubbornly persist for a number of our important customers and market segments, management was pleased with the second-quarter performance.

The sluggish economy is having some impact on certain product lines within Neogen. For example, customers that are involved in virtually any facet of animal protein production are suffering. Smithfield, the largest US pork producer, recently announced the pork industry needed to cut production by another 3% to 5% to help support prices and avoid another year of losses.

Dairy farmers continue to experience milk prices far below operating costs and are moving to cull herds to stem the tide of ongoing losses. As a consequence, sales of some of our over-the-counter or what we call OTC products have slowed somewhat. This is probably the most evident in our line of OB gloves and hoof care products sold primarily for use in the dairy industry. Nevertheless we still feel very good about the overall opportunities for our OTC product line which has consistently delivered double-digit organic growth the last four to five years.

In addition, in that same announcement referenced above, Smithfield indicated that the challenge period was coming to an end and they went on to forecast [profits] for the last half of their fiscal year. So clearly there's some improvement in overall market conditions for customers in those market segments.

The other area of Neogen most impacted by the poor economy has been placement of high-value Soleris instruments used in conjunction with disposable vials to detect spoilage organisms like yeast and molds. As we moved through calendar year 2009 more and more customers implemented restrictions on capital expenditures which pushed back and delayed sales of Soleris instruments.

Neogen has added a new lease purchase financing alternative for the Soleris instruments and we do expect some relaxing of customer CapEx restrictions at the start of the new calendar year. With a very, very strong and full pipeline of prospects for the unique Soleris technology, we are optimistic about the growth potential for this product line as we look ahead to calendar year 2010.

And in spite of the pressure on a couple of our product lines caused by the poor economy, Neogen was still able to achieve impressive organic growth that exceeded 11% for the second quarter. I believe this is a tribute to the breadth of our product lines, our successful efforts to gain market share and the fact that our markets continue to expand even in the face of a troubled economy.

Let me discuss just a few of our many successes in the second quarter. Diagnostic products experienced an exceptional second quarter with overall same-store sales growth of approximately 20%. Sales of drug residue tests increased significantly for the second consecutive quarter led by strong sales of kits to detect dairy antibiotic residues which were up more than 40% compared to last year. This growth was due to increased sales of higher value test kits, unit volume increases and, compared to the same period last year, better currency exchange rates for test kits sold in euros.

Bolstered by the May 2009 acquisition of International Diagnostic Systems sales of test kits for drugs of abuse used in the forensic market experienced a strong 33% increase in the second quarter. Sales of food allergen tests continued their recent trend of outstanding organic growth in the second quarter with an overall increase of 23%. All allergen test kits including peanut, milk, egg, gliadin, almond and soy achieved solid sales growth ranging from 8% to 80% in the quarter.

One of the biggest growth drivers in the second quarter came in the area of diagnostic tests to detect naturally occurring toxins. Throughout much of the US corn belt cool and often wet weather conditions persisted during the summer growing months and again during the fall harvest season. As a result much of the nation's corn harvest was struck with a Fusarium mold that leaves behind a harmful toxic residue known as vomitoxin or DON.

Elevated levels of DON were found in corn as the harvest progressed resulting in a significant increase in demand for Neogen's industry-leading DON diagnostic test kits. Some of you may recall that Neogen announced in mid-September it had received AOAC approval for its Veratox DON 2/3 test. The AOAC approval made our DON 2/3 test the fastest quantitative DON test available with third-party approvals from both AOAC and USDA.

Neogen has been a leader in the supply of diagnostic tests for mycotoxins which includes DON for 20 years. Total sales for mycotoxin tests increased 27% in the second quarter led by the aforementioned growth in sales to detect DON.

I think it's also important to point out that this year's corn harvest is very late compared to historical averages. As of November 30 the USDA reported that this year's corn harvest was only 79% complete for the key 18 states that represent 94% of the country's total corn acreage. This compares to an average harvest completion rate of 98% as of November 30 for the five previous years.

Obviously a significant amount of this year's corn crop will be harvested in December and even into the first quarter of calendar year 2010. As a result Neogen expects to continue to see strong demand for its DON test kits for the next several months.

Neogen also realized significant second-quarter growth for several of our intervention products, small animal supplements including the Company's care line of products used to treat pancreatic, renal and urinary tract disorders in companion animals achieved organic growth of 39% for the quarter. It was also gratifying to see strong growth performance in Neogen's portfolio of products focused on biosecurity solutions.

Sales of cleaners and disinfectants used in food animal production and processing facilities were up 22% in the second quarter. The growth in cleaner and disinfectant sales I think is particularly noteworthy since last year's second quarter included a significant one-time stocking order of disinfectants shipped to the Asia-Pacific Rim region.

Rodenticide sales were another bright spot for intervention products in the second quarter. A strong marketing promotion and helped push domestic rodenticide sales to a 27% increase over the prior year. Rodenticide sales growth included one month of new business to a large food animal integrator representing an important gain in market share that will also benefit sales in future quarters. The addition of new packaging formats and new technical ingredients for our rat baits has helped Neogen expand its one-stop shop and overall value proposition for biosecurity solutions.

Operating profit for the quarter was 20.5% of sales compared to 18.8% in the same quarter last year. This also represents the first time in Neogen's history we have achieved back-to-back quarters where operating profit exceeded 20% of sales. On a year-to-date basis operating profit stands at 21% of sales compared to 19% in the prior year and I think gives us a reasonable chance to achieve operating profit equal to 20% of sales for the 2010 fiscal year.

We continue to maintain that the best way to evaluate Neogen's overall performance is to focus on our growth in the operating profit line. Our 13% increase in revenue for the second quarter combined with our ongoing cost control efforts contributed to an excellent 23% growth in operating profits.

Many months ago when we embarked on our budget planning process we realized that our 2010 fiscal year was not going to be business as usual. We encouraged our sales organizations to be more effective in implementing strategies to gain market share. We also asked employees to look for ways to reduce costs, lower inventories and improve productivity without jeopardizing the Company's future growth.

I think Neogen's strong 11% organic sales growth and even more impressive 23% growth in operating profits for the first two quarters of this fiscal year is proof of the accomplishments of our employees. And I do think it's important to recognize Neogen's team of more than 500 employees for their significant contributions to our overall success in the first two quarters of this fiscal year.

As Jim has already discussed, attention focused on Food Safety by consumers and regulators remains at a very high-level. I think part of this ongoing attention is due to what seems to be a never-ending parade of food recalls. There were 53 food recalls during Neogen's second quarter, an even higher number than the 47 recalls announced during our first fiscal quarter. And as you know, these announced recalls often result in many more follow-on recalls as contaminated product moves through the food chain. Foodborne pathogens such as salmonella and listeria and undeclared food allergens remain the primary causes of food recalls.

As we look ahead to the remainder of our 2010 fiscal year we do so with a great amount of optimism. We have established some very good momentum with a number of product lines. In addition I do think that the overall economic conditions are improving and will continue to do so as we move through calendar year 2010.

Our business model is working and the necessary drivers for future growth appear to be solidly in place. And finally, we are optimistic because we have a dedicated team of management employees who are focused on maintaining our consistent track record of top and bottom line growth. That concludes our formal comments for today's conference call. And at this time we'd be happy to answer questions from our listeners.

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

Good morning, gentlemen. Congratulations on a great performance. There are a couple things that I'd like to ask about and then I'll hop back in the queue. You mentioned international as a focus going forward, that you supplemented the business with the most recent acquisition. But do you have the data for the quarter and the year to date as to what international was as a percent of sales in maybe the year ago periods?

Steve, it's Rick. Current year for the current quarter was 39%; year to date was 40% and the prior year 41% in the quarter and 42% year-to-date.

Okay. And the products that you acquired that should supplement your international product offering you mentioned a number of new products in the food allergen area, in the meat area. Those of food allergen products that you had not yet developed here in the US, how quickly can you bring them to the US? Is there any kind of regulatory pathway that you need to go through?

No, that's a good point, Steve. In fact, we are already bringing them in. They were some of what we would consider to be the more minor food allergens, things such as walnuts and lupine and a few others -- I think there are like 23 food allergens that have been identified as having some allergenic reaction. We were immediately able to bring those products into the US.

Another thing that that acquisition brought about is that they had perfected their format of what we call lateral flow devices; we have two formats that are used in food allergens. One is a more quantitative test that determines how much food allergen is there. Another one is used by -- typically by the clean-up crews that's just used to detect -- with a simple lateral flow device just to take a simple sample on the line and make sure there is nothing left on the line.

That was the group of products that we had not developed a number of those, of our more analytical products into those quick environmental tests. But the BioKits guys had done that. So we're already beginning to incorporate those sales -- started I think probably the next day after the closing, second or third of December we were already taking orders and selling those products in the US.

Excellent. Now switching gears over to the disinfectant side of your business. It sounds like you had a pretty good quarter with your disinfectant line, which includes the acquired products from DuPont. Maybe you could give us a little more information as to how that product line did? And also, importantly, update us on your move of the manufacture of that product into your Randolph, Wisconsin facility. Thanks for taking my questions; I'll hop back in the queue.

Let me answer the second part of that and then Lon or Rick can pick up on the first part. We're about on schedule with what we planned to do at Randolph. We had some remodeling to do in one facility to accommodate some of our product but we are making cleaners and disinfectant products in Randolph now. Some of those products had originally been made at the Antech facility of DuPont actually in the UK. We discontinued a number of months ago having product made there and we're moving along I think in pretty good shape.

We've got some more construction to do at Randolph for our warehouse space more than anything else. And I think we've got our footings poured for that ahead of the frost line creeping up on us. So we should be able to proceed with that new construction in the coming months to more fully integrate that operation, Steve.

And in terms of the disinfectant line, we have seen nice increases in a number of areas. In total that business was up in excess of 20% in the quarter. I know we had strong growth internationally in terms of sales going into the Andean region countries in South America. I know we had strong sales growth in Mexico, strong sales growth in Canada. I mentioned the fact that we needed all (technical difficulty) because we had a very large one-time stocking order that went to the Asia-Pacific rim last region, but we were able to offset all of that with the growth we had in those areas I just mentioned.

And then in addition to that, on the distributed products that we acquired from DuPont, we had very nice strong growth domestically in the US. So it was particularly good to see, I think that whole idea of being that one-stop shop with those biosecurity solutions and having the disinfectants in addition to the rodenticides has really helped grow that business overall. And we are seeing it in some strong sales growth on the disinfectant side.

Is the plan still to generate the profitability increase that you've previously talked to us about as you move manufacturing into Wisconsin? Has anything changed there?

No. No, in the meantime we're picking up more business. So it's helping from both sides.

Great, thanks for taking my questions.

Scott Gleason, Stevens.

Mr. Herbert, Lon, Rick, thanks for taking my questions and congratulations on a strong quarter. Just starting off, obviously if you look at the Food Safety organic growth it was very impressive in the quarter at 20%. Can you guys talk a little bit about in terms of inventory restocking cycles, the weather, how much impact that had? And maybe give us a little bit of directionality on a go-forward basis with how we should think about organic growth in that segment of the business?

Well, just a quick observation and Lon can fill you in on more of the details. There's no doubt that weather conditions certainly helped and it helped in the corn crop across the central corn belt, a lot of that corn as it was planted this year for one reason or another was late maturing corn, they counted on getting another couple of weeks of growing season in the field, they didn't get it. So that crop got frostbitten before it got -- matured enough to dry down. And then we got all the problems that resulted from wet cold weather that brought on the Fusarium.

So it's not a normal occurrence to see late weather problems in the corn crop. But if you remember back, we never quite know where to predict what's going to happen as we move from the northern hemisphere to the southern hemisphere. And we have certain natural toxins in grain that are the result of hot dry weather, and we have others that are a result of cold wet weather and we have different issues relating to toxins that form in wheat and oats, the cereal grains as compared to corn and grain sorghum. So it's kind of difficult obviously, Scott, to predict where weather is going to deal a bad hand. Having said all those things, Lon can give you some more color on what he saw.

Yes, I'll also address your question related to inventory restocking levels. I think when we talk about diagnostics, particularly on the Food Safety side of the business; I don't think we experienced any growth in the second quarter on the basis of our customers restocking inventories. I think a number of those products have shelf lives, I think they turn over very rapidly and I think anything that happened there would have occurred earlier in the year.

As it relates -- I can't say I'll add a whole lot to what Jim indicated, there was a time 15 years ago when I was much more concerned about weather conditions, which mostly the biggest impact is in the area of mycotoxin testing around the harvest time. And I used to be a lot more concerned about it because, as Jim indicated; now that we're selling into 100 different countries usually every year we're seeing some kind of outbreak in different regions around the world for some kind of problem that results in an increase in growth and testing for mycotoxins.

Last year, for example, right at this time we were seeing particularly strong growth in our Neogen Europe operations because they had a major problem in Europe last year in their wheat crop. So it is difficult to predict. We think we're in good shape because we've got a lot of different products now and a lot of product lines and we're selling internationally.

And we just think there are enough opportunities out there to grow organically and gain market share that we can overcome a year like we're having this year when it rolls around to next year. If not mycotoxins then some other products and we might very well see some kind of problem with mycotoxins in some other part of the world.

Maybe just kind of a quick update; I think Lon talked about where the harvest was at the end of our quarter. Scott, as of Monday morning of this week USDA estimated that 8% of the US corn crop is still in the field. That's 8% of the planted acreage is still in the field. That would equate to about 1 billion bushels of corn.

There are two or three states that are pretty far behind, Illinois being a major state. In fact, Illinois I think plants 14%-15% of the nation's corn crop is planted in the state of Illinois. And as of Monday morning they still had 10% of their crop that was still in the field. Ed Bradley reported earlier today that it's kind of damned if you do, damned if you don't.

They'd like to get that corn out of the field before the weather gets so bad that, as he terms it, it becomes deer food. But at the same time the moisture level is there, and it's difficult to get it dried down. So their problem is they harvest it, they bring it in. They don't have room to get it through the dryers. It lays on a concrete slab somewhere until they can get it through the dryers. And unfortunately, it continues to deteriorate until they can get the moisture out of it.

So this crop is going to have a long tail on it. I think we will be testing for DON in the corn crop straight on through. As Lon indicated, probably some of this harvest won't get -- unless we get some weather breaks in a few places, some of that corn won't get out until early January. And then it's going to move from one elevator to another and it will get tested as they move it.

There is a lot of blending that is going on. I understand from our operations in Wisconsin, they were talking about the fact that they're having problems finding enough good corn to blend with the bad corn to try to come out with the kind of averages that are saleable.

So it's going to be an interesting corn year, even though it should be a record harvest. The quality of that harvest, though, because of product weight is going to be a little bit lightweight in some cases, plus the mycotoxins I think we're still looking at 13.7 billion to probably 14 billion bushels of corn this year.

So I guess when we think about organic growth on the Food Safety side of it, at least in the near term here should we be thinking about more of a high teens number?

And then, Lon, I guess just when we think about inventory positions, have we made a full recovery at this point where basically, from a customer standpoint, we're at more kind of normalized historical levels?

Well, in terms of organic growth on the Food Safety side, we certainly had a very good year. I think we're sitting at 16% year to date or something like that. We're not -- we like not to raise expectations, we don't like to over promise and then under deliver and stuff. We feel very good about achieving double-digit organic growth in our product lines. And I think we're in good shape there.

Restocking, I think people are -- I think they've about got their stocking levels up. It's not a problem, as Lon mentioned on the Food Safety side, the Animal Safety side is where there's more inventory carried in stocking. Based on what I've picked up, Lon, I believe they're kind back to their normal levels now.

I don't think there are many people that have -- probably we're approaching year end as some people pull inventories down, particularly outside of the US for tax reasons, they may pull inventories down a bit in December. But I don't think that there are any big gaping holes out there in inventory now.

Yes, I think what we're seeing is exactly what Jim said. There are still some customers that, depending on where they're at in terms of financing for inventories and the ends of their quarters, we see some adjustment to ordering patterns to meet whatever their needs are for their own particular situations.

But I don't think we're seeing further pull downs of inventory levels anywhere across the market segments that we're serving. Most of those people did that at the very beginning of calendar year 2009 and late in calendar year 2008. And that's all behind us and people are buying whatever it is they have to buy to service their customers. I mean they've tried to increase their turnovers, but we're not seeing any further reduction like we saw nine to 12 months ago.

And you've got different issues depending on which countries as it relates to holidays this time of year. Our operations in Mexico City are closed -- today is their last day until January 7. We'll have people in that will take care of some customer shipments, but that's a typical situation there. And then many of the Spanish-American, Latin American countries we see that they take long holidays over Christmas, but they always do that.

So it's -- December is a tough month for us, always has been a tough month for us just simply because of holidays that are taken, particularly in Latin America, but some of the same is true in Europe. I think based on the economic situations today we will see a lot of people that are closed down between Christmas and New Year's.

Great. And then just one more last real quick question for Rick. Rick, can you give us what the currency impact was in the quarter? And it looks like as we transition into next quarter, based on the weak dollar, currency is going to start giving as a tailwind -- becoming a tailwind. Can you maybe give us a little bit of guidance just kind of on what to anticipate as far as maybe the topline impact?

I can answer your first question, which is what was the impact as far as what the future holds? That one is a little tougher. But revenue was -- we were affected positively $200,000 on the top line. On the income line we were affected by a little less than $0.01 plus.

Great. All right, thanks for taking my questions, guys.

Brian Jeep, Sidoti & Company.

Good morning, gentlemen. I think several of my questions have already been answered, but one I was definitely curious about. On the Soleris financing option, since implementing that have you seen pretty good uptick?

You know, Brian, we really just rolled that out. In fact, there was even -- we're in the midst of conducting two days of monthly operational meetings for our Food Safety group as we speak. And there was more discussion about that. So I think there's a lot of interest related to it; our salespeople -- we're training them in terms of what the program is. And I think all of this is intended to have a positive effect as we turn the new calendar year over on January 1 and that's where we're going to see most of the impact.

I would echo that since all those things tend to, at some point in time, flow through my office. We certainly are seeing a pickup in interest on that. And I think early reading would say to me it's going to be a successful program.

All right. Can you give us an update on how things are moving with BetaStar US?

BetaStar US is in fact a reality. We got that product ready; we got it through FDA, through the interstate milk shippers. When we got to the marketplace with it we'll -- of all the beta-lactams there was one beta-lactam that we did not detect, it wasn't required to be able to detect that.

I guess I'd have to say the competition used that pretty effectively against us. And had a number of customers lined up that since we weren't able to detect that one additional beta-lactam it deterred our widespread interest in getting sales out there.

Since that time, of course, we immediately began working, had already immediately begun working on inclusion of that other beta-lactam. From an R&D standpoint that went back through our research and development group. It looks imminent as far as being included in the actual diagnostic test.

Now there will be some time that we will be required then to get that approval back through the Food and Drug Administration and back through the Interstate Milk Shippers. I guess that's the negative news. The positive news is we're growing the business without it.

So we've had good growth in our dairy antibiotics testing business. And I wish we'd have had all of our US clearances done and our ducks in a row a year ago. But in the meantime we're able to make some additional -- continuing to make some success in sales growth in other areas. And this will just be another boost to help us kick things off when we do get it all completed.

That dairy antibiotics testing growth does include a new product for us though that we didn't really talk a whole lot about. But the BetaStar combo test, which tests for the beta-lactams in addition to that test for tetracycline, has been a great success and has helped drive that growth. So we're fortunate that we were working on a number of new products at the same time and improvements to products in that line. And the BetaStar combo has been a great success in helping to drive that growth.

All right. Thanks for taking my question, gentlemen.

Marco Rodriguez, Stonegate Securities.

Thanks for taking my question here. I was curious in regard to the 20% operating margin you mentioned in your prepared remarks, a pretty good chance of getting there for fiscal '10. I was wondering if you could discuss the assumption that are driving that there. And then how you expect those assumptions to trend into your fiscal year '11?

Well, we are having some very good success at the operating profit line when expressed as a percent of sales. It's not due to any one thing. Part of it is the ongoing growth. We have had a good mix of diagnostic products thus far, which have better margins an we have had some success in improving productivity and in implementing some of those cost controls in a number of different operations that have helped us to keep costs in line while sales are going up and that has increased the margins as you go down the income statement.

We're a little bit ahead of our pace. We had said I think a year or so ago that our overall objective was to get to the point of achieving an operating profit that was equal to 20% of sales for a year. At the time I don't think we had ever done a quarter that was that high. We've now done two consecutive quarters like that and we feel good about that.

Our budgets do not call for that kind of increase in operating profit to continue like that. But when you get this kind of momentum going there's a good opportunity that we can continue to achieve some favorable results there and hit that 20% for the year.

Obviously when you do that we'd like to think that we'd budget a similar kind of number going forward. But that kind of depends on the mix; it kind of depends on what kind of acquisitions we do. And it depends on if we continue to see favorable results and where we've got to make expenditures to grow the business.

And we're also at the mercy of the some commodity purchases. I think we've talked before about our -- we're a major buyer of wheat and corn at our Wisconsin operations as we make rat rations. And we started off the beginning of the year with corn prices about $1 a bushel cheaper than where they are right now.

So on one side of the corn problem has been aid to us in revenue, on the other side corn is going to cost more to make rat feed. And as a consequence our margins won't be quite as good there and that's not by itself a huge issue. On our Acumedia side the diagnostic kits and an Acumedia issue, we've got a good break this year on the purchase of certain milk products such as casein.

We talked about the fact that last year we were paying a high price for casein. The dairy farmer in places most around the world, especially in this country, has been beset with low prices for fluid milk, but that creates a problem for them, but at the same time we're able to buy casein a little cheaper. So there's some influence of the commodities markets out there that are making it a little bit difficult to predict.

Okay, great. Thanks, guys.

Stephen O'Neill, Hilliard Lyons.

Good morning. One quick question on the international business. If I did the percentages right, it looked like the absolute dollars in international increased about 8%. And then you noted a positive currency impact. So I guess my question is, has there been some slowing in the growth of international or am I confusing some of the Latin American -- I mean, the Asian operations with Europe and how they mix together? I guess if you could just kind of go over the international side a bit.

Well, Rick can give you the exact numbers. I'd say there's not been a slowing in international. It's just that we've had good growth domestically. And international growth is not necessarily kept exactly up to pace with our domestic growth is probably more clearly the answer.

We hedge, you remember that in certain currencies where we can we hedge the euro versus the dollar. So we hedge at the point that when we have receivables at risk that sort of blurs some of what's happening, that gain or loss ends up showing in the other line down below operating. So a little bit of that gets blurred there.

I think we're -- nothing has really slowed in the international growth. Our Neogen -- Lon, you remember the Neogen Europe growth this quarter was slowed a bit from what it has been.

Yes, let me respond further to that question. One thing to keep in mind when you're looking at comparisons, particularly for the second quarter this year compared to the second quarter last year, we had that one time large stocking order actually went to China last year for disinfectants. So we experienced really good growth internationally with our disinfectants this year in those three different areas that I mentioned earlier. But we needed all those just to offset the impact of not having that same one-time stocking order this year.

So we are seeing growth in all of the areas, but we had to overcome that particular shipment last year which has an impact when you're talking about growth from year to year. And I think that when you look at it on a year-to-date basis we still -- we have to translate those dollars or translate those British pounds for our Neogen Europe operations into dollars, the impact of that is less and less and it wasn't very strong in the second quarter overall. But still on a year-to-date basis I think they've had 17%-18% growth. But what I think when you get it converted to US dollars it's like 7%.

I also know, if I remember right, that the Neogen LA operation in the second quarter on the basis of pesos was up about 40%. But again, when you translate that into US dollars it was 25% or 26% for the quarter. So I still think we're seeing good growth internationally, we just had very strong growth in our domestic product lines in the second quarter and we did have a big one-time shipment last year in China that affected those comparisons.

Yes, I think the peso, as I remember, we budgeted it about 11 to one and the translation rate as I exchanged money this week down there was 12.75. The peso has gotten weaker against the dollar.

That's a good point about the China shipment and I guess I maybe should have been more specific. How did Neogen Europe perform? And then as a part of that, are the dairy antibiotic test sales that you were talking about included in Neogen Europe or are they considered separately?

They're considered as part of -- they're not a part of -- we do some work over there but it's just an inter company transfer on the labor work that we do. They're a part of -- all of the dairy antibiotic revenues and profits get reported here. Rick, do you have the exact numbers on what Europe was up for the quarter?

Europe was up for the quarter 13% in their own currency.

In pounds?

Yes.

In sterling to pound sterling.

And 18% year-to-date.

Okay.

When they transferred over they were 10% for the quarter and about 8% year-to-date.

The wind was still in our face through the first and second quarters as far as the translation of the pound to the -- pound sterling to the dollar, which is a little different than the euro to the dollar. Now going forward it appears that the wind is going to be neutral to maybe a little to our back as we stand right now looking at December now compared to December a year ago. We could have a little tailwind coming off of this.

You've had continued good results in the dairy antibiotic testing. And I think you may have mentioned this earlier, but that is principally European business, is that correct?

Well, it's non-US business. It's around the world. We've got Asian business, we've got Latin American business and we've got European business. So we're well represented in all of the continents, we're just not doing anything to speak of in the US.

Okay. Also last quarter you got a really good quarter with some of your -- in your Animal Safety area with some of your pharmaceutical products like BotVax and EqStim. Was that just kind of a one-time thing or how have those continued to perform?

That's another area where it's -- really it's just a comparison issue. We had a second consecutive very good quarter. The level of sales for our Biologics business in Lexington was pretty close to the total sales number that we achieved in the first quarter. It was just that we had very, very strong sales last year in the second quarter as well. So they're holding up fine. It was just the comparison thing that caused me not to mention it specifically in terms of percentage growth.

And then lastly -- and actually, Lon, I think you probably did answer this earlier -- what's the status of moving the disinfectant production in-house?

Yes, we are manufacturing disinfectant products at our Randolph, Wisconsin location. Remember we said that's what our intent was to begin with. That is an EPA location there. So disinfectants, just like rodenticides, are under the authority of the Environmental Protection Agency and are licensed. We are manufacturing disinfectants and cleaners at Randolph. We're probably not quite as far advanced as I'd like to be there, but a part of that is coming back to the fact that we've had continued growth in sales.

We've got some building to do, we remodeled some existing facilities, that's all finished, it's in good shape now. We need to add some extra space out there for warehousing. We did get footings poured, got concrete poured before the frost line began to creep up on us, so we'll be proceeding going forward to add some more warehouse space which will slow us up a little bit on that. But we're doing I think okay there.

Thanks very much.

Tony Brenner, Roth Capital Partners.

This is Quinn Ruddick with Tony Brenner. I had just a couple of questions. First, can you give us a little more information as far as the integration plans of the BioKits business? Is that going to be production brought into existing Neogen facilities?

Well, as I think I said in my opening comments, it's fortuitous, it's in Wales just south of our Ayr, Scotland operations. They will operate under -- as a part of Ayr, Scotland. It was not -- that was an asset purchase, not a stock purchase. And they'll operate as a part of that business. So there will be some integration between what's happening out of Deeside and what's happening in other parts of the Company.

It's a little early to have a very complete plan about what we might move to where. One thing that is very clear is the sales and marketing activities. We did not bring on more any of the sales and marketing staff, though it was not very large, frankly, at the BioKits group because we have that well covered ourselves. So our sales and marketing group worldwide began selling and taking orders for that product on December 2.

So that's up and moving and we've got somebody in every country where -- in Europe where they were strong we have a sales team there which is stronger than what their sales team would have been. So we, as far as integration, have some great opportunity to expand it from a sales and marketing standpoint.

Okay. And my second question just relates to the salmonella regulation. It seems like a great opportunity for a number of your product lines. And I don't know if you could quantify that opportunity or at least talk to how you're anticipating those -- that business ramping. Is it something that will build over time after July? Is it something that some of them are complying with -- or you expect them to comply with prior to that date or how should we look at that?

Well, there's probably a little bit -- there are two sides of it, there's the diagnostic or the testing side and then there's the intervention side. It's a little bit unknown as to who's going to do the testing now, it is required and part of the regulation that every laying hen flock in the United States will have to be tested twice during their lifecycle. And that's never before been a regulation.

Is that going to be testing that's going to be done by the company who owns the birds or is it going to a third party lab and probably some of it will go in both directions. At this point we have the only test out there that is specific for Salmonella enteritidis. Now, we've got a number of competitors out there that have salmonella tests, but what the -- in this particular case they're not interested in general salmonella, they want to know if there is an infection of this one specie of salmonella.

So this is clearly -- we've got some business going on there now, there's clearly going to be some more business. But I would say that the real testing is going to be done the day they have to start doing it. Some people are beginning to build some baseline information now. But the ramifications are pretty serious, if you have a positive flock you've got to do something with them.

And that means to do something with them is those eggs have to be diverted from chilled eggs in the carton that bring the highest premium to breaker stock where they go to an egg breaker and they end up being pasteurized and as a part of the pasteurization or the drying process they of course can kill the salmonella. But those eggs are worth less money.

From the standpoint of the intervention side which is clearly a part of the things that we've been talking about that our Animal Safety division is up on, we've got disinfectants and cleaners that are going to be needed to take care of cleaning those houses. One of the things that spreads Salmonella is rodents and flies. There's also the contamination within the facility. We think we've got the best group of products to help clean those facilities.

When they get a positive facility and they depopulate that facility there will be more requirements than they've done in the past as far as cleanup. There's going to be more concern about taking care of rodents and there's going to be more concern about flies. Now we don't have a full line of fly products, but we've got some fly products that are doing pretty good.

So we think that we're set with all of the intervention products as well as the diagnostics that go there. But I suspect it's going to be late warm weather, it's going to be June or July before we begin to see a whole lot of activity there.

Thank you.

Joseph [Bachmann], Wells Fargo Advisors.

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Sorry, sir, if you're on the speaker phone can you please pick up your handset?

(technical difficulty) hello?

You're on.

Yes, congratulations, guys, another great quarter. It kind of gets boring after a while, one great quarter after --. Rick, I have a question. I know you were overworked, but there's no cash flow statement in here. I assume the cash flow in the quarter was about $19 million.

Well, the cash flow for the six months was $16.5 million; for the quarter then it would have been about $7.5 million, that's cash flow from operations.

Okay, okay. And so we are now sitting $32 million in cash and investments? Wow.

Well, we spent some of that 1st of December.

Well, I wanted to ask you a question on that. What was the cost of BioKits? I haven't seen that in any of the --.

Well, you haven't seen it because we hadn't said what it was. No, --.

That's why I'm asking.

Yes. With the assumption of some debt it was a little over $6.5 million.

Okay. Did they take any stock in the deal or did they just want cash?

No, they wanted cash and we didn't want -- cash is cheap compared to equity today. So we wouldn't have given any equity in the deal anyway.

Okay, that answers my questions. Keep up the good work, I mean this is fabulous.

Well, thank you. We're sorry we got you bored. The alternative is to have a bad quarter so you could get excited. And I don't like that alternative. So I think we'll just keep you bored.

Steven Crowley.

This has gone long so I'll just hit you with one quick one. You were nice enough to give us some statistics on the number of food recalls in Q2 and Q1 of this year. Might you have any comparative data for the year ago periods or maybe just a number for all of 2008?

I don't say that definitively, but I believe it's true. We should be able to have that, Steve.

Can't tell you right off the top of our heads, but we have all of those -- we catalog those everyday. Terry Maynard of our group puts out that report at the end of every day and puts them in a database. So I'm sure we've got it, we just hadn't probably counted them up. But it's something we can sure give you.

I suffice it's fair to say that the number has grown noticeably year over year?

Oh, yes, no question.

I'll look forward to the follow-up there. Now that we've sort of stumped you I think you can put a bow on this and let everybody go home.

Okay.

Stephen O'Neill.

Yes, thank you, I forgot to ask earlier, you mentioned some slowdown in sales of products requiring capital expenditures like Solaris and I would guess AccuPoint. But given all the food recalls you mentioned, how's the microorganism testing business doing overall?

It's good, it's still not where it needs to be. But maybe as early as next quarter I'm going to be able to give you some good positive information. Our problem there is that we've got -- in a couple of those pathogens we've got tests that are as good as our competitors, but they're not distinctly better. One of the things that we've really never learned how to do very good around here is sell by cutting price.

In order to get market share out there it's been a pricing issue. And we just have not had a product that was distinctly better than our competitors. I think we're pretty close to that. When we get that all lined up and in a row, it could be within the next quarter, I think we'll begin to start to take back some of the business that we've lost or business that we hadn't been able to gain because we didn't have any distinct competitive advantage, Steve.

All right, I'll be looking forward to that then. Thanks a lot.

Yes, let me just also say as it relates to what we call the general micro area. We're still seeing growth in terms of the disposable vial sales. Where we've got instruments placed we're doing very well and it continues to grow and there are more opportunities and we can develop more products. It's been solely on the instrument side where the comparisons have hurt us compared to the instruments we were placing last year versus this year.

And I already said we really are optimistic as we head into 2010 about being able to get that moving back in the positive direction. Because the pipeline is very significant there with identified names of prospects and actions that we think we can accomplish that will allow us to get those placements and then, of course, that will also further increase the sales of disposables.

That's a good point, Lon; thanks for making that distinction.

All right, I think maybe we can put a bow on it. And thank you to all of you who participated this morning. Thank you for the continued support that you've provided us from a shareholder standpoint. And as I said when I left Mexico City last night, Feliz Navidad.

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.