Neogen Corp (NEOG) 2011 Q4 法說會逐字稿

Welcome to the Fourth Quarter and Fiscal Year 2011 Earnings Results Conference Call. My name is Monica and I will be your operator for today's 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. Jim Herbert. Mr. Herbert, you may begin.

Good morning and welcome to our regular quarterly conference call for investors and analysts. As Monica reported, today we will be reporting to you the results of our fourth quarter that ended on May 31 as well as the results of this complete 2011 fiscal year. And I would remind you that some of the statements that are made here today could be termed as forward-looking statements. These forward-looking statements, of course, are subject to certain risks and uncertainties. The actual results may differ from those that we discuss today. These risks that are associated with our business are covered in part in the company's Form 10-K as filed with the Securities and Exchange Commission. And in fact that filing for our fiscal year 2011 is currently scheduled to be made later this week.

In addition to those of you that are joining us today by live telephone conference, I would also welcome those who are maybe joined by way of simulcast on the World Wide Web. Those comments along with some exhibits will be available on the web for approximately 90 days. And following our comments this morning we will entertain questions from participants who were joined by this live telephone conference. And I am joined today by Lon Bohannon, Neogen's President, and Steve Quinlan, our Chief Financial Officer.

Earlier today Neogen issued a press release announcing the results of our fourth quarter for the 2011 fiscal year. Once again it was another record-breaking quarter to cap off another record-breaking year. As I look back over the last twelve months, there were a number of rough spots in the road that we had to get over in order to get us to this point today. The credit for this year's accomplishment in making it across those rough spots goes to our team of over 600 employees that are now located in several places around the world. They just continue to remember that the toughest thing about success is that you have to keep on being a success.

As the press release reported this morning, our net income for the 2011 fiscal year increased 30% from the previous year to approximately $22.8 million. This is equal to $0.96 per share as compared to last year's $0.76 per share. Revenues for the 2011 fiscal year increased 23% to approximately $172.7 million, up from the $140.5 million in the last fiscal year. Of course, both revenues and net income established new all-time highs for our 29 year old company.

Fourth quarter results were also strong with net income increasing by 29% to almost $6 million or to $0.25 per share as compared to $0.20 per share in the 2010 fiscal year. Overall revenues for the fourth quarter showed a 12% increase. This fourth quarter marked the 77th quarter in the past 82 in which we have shown increased revenues as compared to a year earlier. I even marvel at times when I realize we have only had five down quarters in the past 20.5 years.

The great performance of the year was broad based by each of our operating groups in both food safety and animal safety and they both made very significant contributions. Two acquisitions that we made in fiscal 2010 also played a role in setting these new records. However, organic growth or what we sometimes refer to as Same Source Sales was also up for all of the groups.

The accomplishments during the year have allowed us to increase our tangible assets by about $39 million while increasing liabilities by only $3 million. We grew revenues by 23% but we only added 3% to inventories and accounts receivable. We continue to have good cash balances and no bank borrowing.

Adding to this string of good numbers has resulted in an increase of 24% in shareholder equity as compared to the beginning of the year. I'm pleased that our performance has not gone unnoticed by the financial markets. Early in the year Neogen stock was selling for as little as $25 a share as compared to the current levels in the $40 range. I believe that this is in part based on our performance during the year and the consistency of performance over the last 20 years.

But I think even more it is based upon the reception of the future of Neogen's markets -- the markets in which we operate -- and Neogen's participation in those markets. I will talk a bit more about that in my concluding comments. But however let me stop at this point and let Lon Bohannon give you some color on both operating divisions for the quarter that we just finished as well as a summation of the operations for the year. Lon?

Thank you, Jim, and welcome to everyone listening on the conference call as well as those joining us via the internet. I do think that today's press release describing Neogen's record breaking 2011 fiscal year is a fair indication of the overall condition of Neogen as a company. And like Jim I think it is appropriate for me to begin my comments by expressing my appreciation to Neogen's 600 plus employees who delivered the outstanding results we are able to report today.

Jim has already described many of the overall highlights for our 2011 fiscal year, so I will focus my comments on more specific details pertaining to the quarter and fiscal year results.

Our food safety group finished off a very strong year with overall sales growth of 12%. I think even more gratifying was the fact that this growth was broad based across multiple market segments and product lines. All six operating divisions in food safety achieved sales increases ranging from 2% to 38% compared to the prior year.

In terms of product lines, food allergens led the way in FY '11 with overall growth of 45%. Our tests sold under the trade names Reveal and Gene-Trak to detect specific pathogens like E. coli, Salmonella and Listeria as well as our Soleris test systems to detect spoilage organisms such as yeast and mold were both up 15% for the year. AccuPoint test systems used for general sanitation purposes also had another strong year with double digit growth. Drug Residue test kits sold under the BetaStar trade name also experienced a solid year of sales growth. And more importantly after several months of review by FDA and the National Conference on Interstate Milk Shipments, Neogen received final approval on June 3, 2011 for its new BetaStar Plus test for dairy antibiotics.

Now this approval significantly expands Neogen's market for testing of drug residues in milk. Prior to the approval we had already been working with customers and prospects regarding BetaStar Plus and upon approval launched an extensive marketing campaign targeting milk processing facilities around the country. The marketing effort involves both our food safety and animal safety groups to ensure we achieve maximum synergistic impact on the dairy industry.

As you know, Neogen has a complete product offering -- (technical difficulty).

Monica, do we assume that we now have reestablished connections?

You have reestablished connection. You may begin your conference.

Thank you.

All right. Well we must have had some kind of line break there. I guess the numbers were so good we just blew up the phones or something. Not sure exactly where it was cut off at but I think I was talking about our BetaStar Plus product and the fact that we had received approval on June 3 from FDA and the National Conference on Interstate Milk Shipments. And this approval does significantly expand Neogen's market for testing of drug residues in milk.

Prior to the approval we had been working with customers and prospects regarding BetaStar Plus and upon approval we launched an extensive marketing campaign targeting milk processing facilities around the country. This marketing effort involves both our food safety and animal safety groups to ensure that we achieve maximum synergistic impact in the dairy industry.

I think as you know Neogen has a complete product offering for dairy production inside the farm gate. This includes our Ag-Tek line of gloves and healthcare products in addition to our Ideal line of veterinary instruments and our complete line of cleaners and disinfectant bio security solutions. Combining these products with BetaStar Plus to perform on farm milk antibiotic testing provides our animal safety group a compelling product offering for the 55,000 dairy producers in the United States.

All right, this discussion on the synergy between food safety and animal safety as it pertains to BetaStar Plus provides a convenient segue for me to discuss 2011 fiscal year results for the animal safety group. Animal Safety sales were up 22% in the fourth quarter with 16% of that increase representing organic growth. The strong finish helped animal safety complete its strongest year ever with overall sales growth of 36% an organic growth of 12%. Similar to food safety, the increase in sales was broad based with all three operating divisions achieving solid growth compared to their prior year ranging from 8% to 50%.

As we have mentioned, in each quarter for FY '11 our GeneSeek Agricultural Genetics Laboratory in Lincoln, Nebraska exceeded expectations in its first year as part of Neogen. Sales for GeneSeek were approximately 50% higher than in the year prior to Neogen's ownership. Product lines that exhibited superior performance in FY '11 for animal safety included our life science diagnostics that achieved 11% growth and the Ideal line of veterinary instruments that increased 28%.

In addition, Neogen's efforts in margining bio security solutions to animal protein producers continue to pay dividends as evidenced by the 19% sales increase in rodenticides and double digit organic growth in FY '11 sales of cleaners and disinfectants.

International sales growth contributed significantly to Neogen's record-breaking year and is another area worth mentioning. Sales to customers outside the borders of the United States were up 30% for the year, accounting for 42% of Neogen's total revenues. The 42% represents an all-time high for international sales as a percentage of total revenues.

Neogen Europe continues to lead the charge in growing international sales, achieving another year of outstanding growth with overall sales increase of 27%. Sales were up across a number of product lines in the UK, France and Scandinavia. Distributors serving other EU countries and managed by our Neogen Europe operation also experienced an exceptional year with sales growth of 34%.

Our Neogen Latino American subsidiary in Mexico City completed another successful year of revenue growth. Their sales were up 38% led my increases in sales of food diagnostic tests for mycotoxins, allergens and pathogens; higher revenue for dehydrated culture media; as well as increased sales for cleaners and disinfectants.

Neogen do Brasil completed its first year of operation coming in at budget and now has full access to sell Neogen's complete line of food and animal safety products including our BetaStar dairy antibiotic test. We continue to feel optimistic regarding the potential sales growth in both Mexico and Brazil and we also believe we are making good progress in building our sales and marketing teams to take advantage of opportunities in those countries.

Another country that experienced significant growth in FY '11 was China. A number of our operating divisions benefited from sales to China last fiscal year. Our animal safety group shipped a large stocking order of disinfectants to China during our second quarter. Neogen Europe achieved strong sales of plant disease tests and AccuPoint ATP Systems to China. And other food safety divisions also experienced strong revenue growth to China especially during the third and fourth quarters as a result of sales of Soleris test systems for foliage organisms and BetaStar dairy antibiotic tests.

In total, sales to China increased more than 250% during FY '11. Now I know China remains a wild card in terms of opportunity for Neogen. It makes it virtually impossible to forecast future sales. However, we did make very good progress during FY '11 penetrating the dairy processing market in China and we expect to expand our share of the China dairy market even further in FY '12.

There are a couple of other noteworthy accomplishments for FY '11 fiscal year that deserve mentioning before I turn the call back over to Jim. We were particularly proud of our operating profit for the year which increased 33% and ended the year at 20.8% of sales. As you know we have had a goal of getting operating profits to 20% for a number of years and it was gratifying to see us achieve that goal in FY '11.

Much of the improvement in operating profit is of course directly related to increased volume and better utilization of fixed cost including facilities and other overhead items. However, it is also a result of our ongoing cost reduction and productivity improvement efforts that have become an important part of Neogen's operating culture. I am very proud of our operations and administrative employees who have taken it upon themselves to put together teams focused on specific cost saving measures.

During the year these teams were successful in improving systems to minimize our investment in inventories and receivables and achieve reductions in various cost categories like raw materials and shipping through alternative sourcing and more effective purchasing.

And since I mentioned efforts in the areas of receivables and inventories, I know you heard Jim make this comment but I think it is worth repeating that our investments in receivables and inventories went up a scant 3% in spite of our 23% increase in sales volume for the year. This excellent management of working capital contributed to another outstanding year of cash flow from operations for Neogen giving us a very strong balance sheet at year end with no outstanding debt.

As we look ahead to our 2012 fiscal year, we are fortunate to be serving markets that are growing significantly, both domestically and internationally. Recent third party market reports suggest that that food safety related markets are growing in excess of 10% annually and food micro-related markets are growing even faster. Neogen is well positioned in these rapidly expanding markets and we are in the process of making additional investments in sales and marketing to take full advantage of the significant opportunities that we believe exist for our company.

Management expects our 2012 fiscal year to continue our trend of consistent growth in sales and profitability. At this point I will turn it back to Jim for his closing remarks.

Well thank you, Lon. Throughout the year I have generally felt good about our progress and our accomplishment but it really came into focus the other night as I prepared my comments for our board of directors that meets later this week. And I never lose sight of the fact that the main responsibility of a board of directors is to hire and fire the chief executive. And since I would like to continue working here I always want to make sure I discuss with them the general metrics of the business and do that on a regular basis.

As I wrote down those important metrics the other night, my pride in what this team has accomplished during the past year swelled a bit and I will just run down that list once more. Our revenue is up 23%. Operating profits up 33%. Earnings up 30%. Shareholder equity up 24%. Market cap went over $1 billion for the first time. Forbes named Neogen to the list of the 200 best small companies in America for the ninth time. Fortune named us once again as one of the 100 fastest growing small public companies.

All of that is great, but I guess what makes me feel even better are the great opportunities that I see that still lie ahead of us. The title of our annual report for the year that we just finished which you will be receiving in about another month is titled "Satisfying Growing Global Demand." I'm just getting used to using that phrase.

I believe that our opportunity is bigger than just the desire to have safer food through improved production and processing. Bear with me just a minute and I will try to explain what I believe is that bigger picture.

I believe that the global market for food and animal safety will highly correlate to increases in global population, increases in urbanization worldwide, the more occurrences and widespread news about food borne illnesses and death, more legislation and regulations on food safety, and the resulting demand for significantly more high quality food.

Take a minute and look at the global population that now stands at about 6.9 billion. Even with the slower growth rates that are expected to occur, we should hit perhaps 9 billion people by the year 2050. Not only will we need to feed 30% more people but they will be demanding higher quality food than we even provide today.

A look at the trend toward urbanization. Sometime around 2007 we crossed the line at which the majority of the people worldwide lived in towns and cities for the first time in history. A United Nations study shows that by 2050, that same year I referred to above, that 70% of the world's population will be living in cities and towns. They won't be producing their own food and therefore processing and transportation from the rural food source to the urban table will create even bigger food safety problems.

This urban population even a decade from now will be demanding higher quality food and/or rapidly moving away, particularly in third world countries, moving away from a subsistence diet.

I remember about a decade ago sitting with an important Chinese government official in Beijing in an effort to discuss food safety issues. They politely advised to we must first produce enough food so that our people are not hungry, then we will worry about its safety.

Well they are already reaching that point in China and a number of other developing countries. In the cast of China, they no longer are producing huge quantities of shrimp just to ship to the developed countries. They are producing more but exporting less as they are seeking higher quality diets themselves.

They are no longer satisfied to have their babies drink rice milk, but instead are owning more cows, importing more grain and worrying about how to make sure that that milk supply is safe for those children. To produce the quantity and quality of food that will be increasing the demand each year, we will need to produce more food in the same space and process it at higher speeds. Then we will have to transport it further and push it through tighter distribution systems.

Food safety and animal safety stands in the way of nearly every one of these requirements. Companies like Neogen will play an ever increasing role in helping to identify and solve the food safety problems to allow for this expanded production to be possible.

For our 2012 year that is now almost 60 days old, we will be making some strategic decisions to make certain that we get our share and maybe a little bit more of this growing global market. Though we have had good revenue increases in the year that we just finished, I think that there are a lot of opportunities to grow our market share from our current position. We spent about $4 million more in 2011 for sales and marketing but we are in the process of ratcheting up those numbers significantly as we look at the new year.

We will be looking for opportunities in markets that we don't presently have a position and we will be allocating more expenses to those markets that have the fastest growing growth rate.

We need to spend more money on our research and development efforts in our quest to help the market find quicker, easier, and more affordable food and animal safety solutions. I'm proud of our R&D group that we currently have in place and the new products that are in the pipeline. However, we need to apply more resources to push those through the pipeline faster.

An example would be our announcement this past week of combining our scientists from the genomics group at GeneSeek in Nebraska with our microbiology research group in Lansing to move rapidly in developing diagnostic tools to be able to detect those important E. coli strains that are now being recognized worldwide as more critical problems, not just in ground beef but in a multitude of other products including fresh fruits and vegetables.

We will continue to search for acquisition opportunities that can provide products faster than we might develop them ourselves or allow us to enter into markets that we don't currently serve in a more accelerated fashion. An example would be our VeroMara acquisition that we made last month. That opened up a whole new market in the aqua sciences as we began to put more attention to food production through aqua culture.

We already had a significant program going in the development of diagnostic tests for the detection of important shell fish toxins. This will become, by the way, an even bigger issue as these marine animals are grown under in higher numbers in more confined spaces than we have been accustomed to in the past.

The VeroMara acquisition gave us the leading laboratory and an outstanding group of scientists who were already using older methods to test for shell fish toxins every day. Now combined with our own research scientists, rapid new commercial diagnostic tests should be developed even faster. Furthermore this acquisition gave us a stronger footing in those rapidly growing European Union markets and an opportunity to care more of our existing products to these new customers.

Our strategy for 2012 fiscal year will likely push some of our employees into some unchartered waters as we expect a little more risk or accept a little more risk to capitalize on some of these growth areas. When I talked to our international sales meeting group at our international sales meeting last month, I asked our sales force when they looked ahead into the year to not be saying, "I wish I had," but instead at the end of the year to be saying, "I'm glad I did."

It was exciting today to report the great year we just completed. However it is far more exciting to look at the opportunities that lie ahead of us. I think that the results that we reported today clearly indicate that Neogen is capturing a piece of the growing global demand for food and animal safety products.

This concludes our prepared comments for the morning and we can now open the conference call for any questions. Monica?

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

Good day gentlemen and congrats again on the success last year.

Thanks Steve.

Well I have a theory about the conference call problems. Since the operators, they probably don't get all of your press releases, they might have been so surprised with the BetaStar domestic approval that they dropped the call. That is completely in jest. That was long in the wait but seems to be worth the wait. I'm wondering what kind of reaction you have had besides the operator on the BetaStar product approval and what kind of momentum you see building in the marketplace.

Well we deserved all of the jest that was attached to that, Steve.

It's been a long time coming for us and our sales force is very excited about having a product that captures all of the beta-lactams and antibiotics that are used. It opens up for us significantly the US market. We have estimated and maintained that that is probably $15 million that we have not had access to with the products that we had currently.

I'm always a little bit sensitive in terms of the competitors that might be listening in on the call. I can tell you that the test has been received favorably. We think it has some competitive advantages in the marketplace. And we are going to aggressively pursue opportunities at both the milk processing side as well as back inside the farm gate.

And we think we've got a nice approach going with both our food safety and animal safety sales teams working together and we expect that we will achieve sales growth of that product right away as we move into the first and second quarters in this coming fiscal year.

Those people that hadn't followed that drama might be worth just a little bit more to add to that, Lon. Our tests for diagnosing antibiotic residues in milk have done very well for us on a worldwide basis and continue to show increases. The problem we had in the US was the test was too good, just to be frank. It recognized levels lower than the US requirements so therefore couldn't be used in the US. We had to dumb the test down to fit the US market and in doing that it has taken a little bit of work to get it done. We've got it in that position now and as Lon said we think it is going to be great.

The worldwide product, though, remains the same as it was going throughout the world and we expect it to continue to see the same basic increases we have had there. There are probably three major producers I guess on a worldwide basis producing dairy antibiotic tests. So we are clearly, depending on what country you are in, we are clearly one of the leaders.

And did you guys say that the dairy antibiotic test business was up double digit or up nicely? How should we think about the performance of that business in fiscal '11.

Yes. It was up double digit for the year.

Another area that you pointed out in your prepared comments that performed well was GeneSeek, the laboratory business you have acquired and grown. Trying to mesh your comments with its performance in the fourth quarter, it seems like it might have had a strong performance but maybe a little below recent quarters. You have advertised some lumpiness in that business and is that a fair inference on my part that you might have seen a little bit of that?

And then the related question is what kind of normalized organic growth rate do you think you can generate with GeneSeek?

I wish I knew the answer to that question. It does have lumpiness and I think you saw a little bit of that in the fourth quarter. And you are right, the first quarter last year was huge compared to what that business usually does.

It has grown, it is going to continue to grow. We are doing a lot of things there to change that business just a bit as we are moving from pure laboratory work over into more of the bio/informatics area. We are working on a worldwide basis there. Two of our lead guys just came back from two weeks in Australia and New Zealand. Brought a lot of business back with them. The European business is growing; we will probably be adding some people in Europe this year instead of trying to cover it all out of the US as far as our activities.

Most of that is with the animal breeding business, so we are talking about cattle being dairy cattle, beef cattle, swine, sheep, mostly in that area. But we are also doing a lot of stuff in the canine area. So the canine business is growing. We spent some time last month with the equine area with the horse business and it is an opportunity that we are pretty close to the horse business in the US. I'm in Ireland, I guess, next month and expect to spend a little time with the Irish equine breeders.

So, it's still a young business. And it is hard to say form quarter-to-quarter and hard to predict what we are going to do. But at the same time I think we told you when we began this that we saw some opportunities for these genomic tools to be used in things other than determine which was the best Holstein sire for our dairy efforts. And that came true as we announced last week that the work between our microbiologists here in Michigan and our genomics people in Nebraska, we have come up with a program to be able to identify not just E. coli 157 which is a product we have had obviously for a long time, but to be able to pick up its six ugly sisters and get it done in a hurry.

And we have been able to do that, we indentified, and those of you who are following that side of the business, when I say "snips" you will understand what I mean, but we use 71 snips to be able to identify that which is far more reaching than you could do with the typical kind of test that we have been accustomed to in the past.

This is not the be all to end all. There is a lot of work yet to be done. But none of our competition is there yet, either. A long political answer to what was a short question.

Well it is always interesting to get the color. I've got one more and then I will hop back in the queue. You are coming off a couple of years where you have really demonstrated some great improvement in operating margins. I think 170 basis points and 180 basis points the year before that. I'm trying to rationalize kind of that trajectory with the commentary you made about the desire, the opportunity to invest in 2012. And I'm wondering whether or not you can show meaningful operating margin improvement -- let's say 100 basis point plus -- in the context of those investments or we should interpret your comments differently?

Well I will try to answer your question. I think you have interpreted our remarks accurately as it relates to looking at fiscal year '12. We are going to make an investment in sales and marketing and because the markets themselves are growing so rapidly that we, to get not just our share but gain market share we need to make a strong effort in that area in fiscal year '12 we believe.

I kind of looked at fiscal year '11, we have had this goal of getting to 20% operating and we certainly achieved it, but actually if I had to sit here today I would say maybe we overshot the mark a little bit. We could have used some extra dollars to make some investment in infrastructure to take advantage of these markets that are developing. We certainly want to do that as we move into FY '12 and I think we will be very happy if we can maintain an operating profit of 20%.

And I think with that kind of growth that is out there, that will still yield significant results to the bottom line that will be very acceptable. But I think going forward, at least in FY '12, I think our increases on the top line and in the operating profit line will come more in line because we are going to make an investment to grow sales.

So I trust the rationale for the investment is to get that top line moving faster. How much lag time is there likely to be between the investment mode and the top line moving up which is kind of the first tranche of payoff on those investments?

Well I would like to think that some of them are a quarter out. They won't pay for themselves the first quarter, but they will begin to show in the second quarter. I think a lot of what we are looking at and we have a number of pieces of strategy on the table now. We typically looked at what will they do within twelve months of implantation. So some of our R&D resources will take a bit longer because they do, but our R&D returns we pushed up through the pipeline because of the nature of our products, generally within a year so it is a lot different than when you are digging with pharmaceutical products or whatever -- you've got long, long lead times.

But I think we will begin -- the sales and marketing areas that Lon talked about will see the results of those in the FY '12 year. We may not see them in the exact quarter in which we began expenses.

Thanks for taking my questions and offering the thoughtful answers. I will get back in the queue.

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

Thank you. Does your increased investment also relate to general and administrative expense in 2012? Those numbers have been coming up pretty quickly in the last several years as you have made a number of acquisitions and invested internationally. It didn't sound like that would continue at the same pace, at least in terms of international new areas being entered.

I will cop out and let Quinlan and Bohannon handle that because I get a little bit emotional when I think about what the FASB rules have done and how we have to account for acquisitions anymore. But part of what you saw this year was simply the way in which acquisitions have to be accounted for. They were non cash expenses.

I'm pretty proud of Tony where we have continued to pull our percentage down on G&A expenses. I wouldn't expect to see with that lead in -- I will let you or Lon pick up on it, but I wouldn't expect to see anything. I don't think we've got anything major that we are looking at there.

Yes, I think that is right. We look at for that particular category more as a percent of total revenues. I think for the year we made some good progress, maybe even down about 80 basis points or something for the year going from 9.6 in G&A down to 8.8. So we think we can continue to manage that and keep it under control. It is going to increase somewhat as volume goes up but not at the same pace. So we probably will have some increases in G&A area but as a percent of total revenues it should not increase.

Okay. And secondly food safety in the fourth quarter, revenues were up a little over 2% I believe. Was that small increase only reflective of the mycotoxin detection sales or were there other factors holding back that number?

Mycotoxins and particularly DON was the primary difference between last year and this year. Just short, our Milling & Grain Group which is selling predominantly those mycotoxin diagnostic test kits to the grain processors and flour millers and customers like that was down just short of $1 million in the quarter. But when you break it down and look at it in terms of where they were at compared to two years ago, they were up about 80%, so almost double. So it was just such an unusual year last year that that comparison was very tough for that particular group.

There is only one other category that I would say that kind of bumped us in the quarter for food safety and that was in the area of our instrumentation, both our AccuPoint readers and our Soleris test systems were down in the quarter. That is not an unusual situation. We see that from quarter-to-quarter. We have actually talked about it on the conference calls. I think the important thing there is for the year we placed just as many instruments this year as we did last year and of course our interest in doing that is to get those disposable sales up. And it was very good to see that our samplers for the ATP test systems were up 13% for the year and our vials in the Soleris system were up 20% for the year.

We monitor that very closely. The pipeline in both of those areas looks very good and is very strong. So that was an anomaly that also dinged us in the quarter but still looks very favorable going forward.

Will the mycotoxin comparison problem now go away following the fourth quarter?

That was a long tail on that harvest from the year before last. We will have some challenge in the first quarter.

Okay, thank you.

Our next question comes from Paul Knight of CLSA.

Good morning. Congratulations.

Thanks Paul.

Being from Nebraska, but from a broker based in Asia, I'll start in Nebraska. Do you have a backlog on the GeneSeek business? What is the visibility relative -- I think the number one question is what is visibility versus a product business that you are used to?

Well, we don't have, in most of our business we don't have any backlog. Certainly if you looked at the business overall we do have some backlog at GeneSeek but again not very much. Our guys came out of Australia last week with new business that we hadn't anticipated that is pretty sizable. It kicks in starting, I think, next month. So that business is just still too early for us to be able to predict the preciseness of it. I don't think there is any question that we predict it's good and it is going to continue to be good because of where it sits.

But, it is just pretty difficult to be able to predict on a month-to-month basis what it is going to look like.

On the Asian side, specifically to China, how will you handle the distribution of product?

We have two primary distributors that we work with in China to help carry our products to the end users. They work with some distributors as you might expect in such a large country to get the products sold throughout. But we are also, I think, doing a good job of focusing on particular markets. We have had some success. I mentioned the plant disease test market over there. WE have done some nice collaborations with some universities. That product is manufactured and comes out of our Eastern Europe operations. And most of those sales are going through a distributor in Beijing that has done a nice job.

We have also focused on the general sanitation area with our ATP test systems. We had a very nice tender that we won last year in that marketplace. And that looks like an opportunity. And then I mentioned the dairy industry over there which is rapidly growing. Jim even commented on that in his remarks. That represents a very good opportunity for us with both a Soleris product as well as the dairy antibiotic test. And we are handling that through a distributor over there.

We are probably going to be looking at, that's one of the areas from a sales and marketing standpoint where we will be making a little investment to support perhaps a representative office there or some other form of having our own people on the ground to build brand awareness for those products. And we think there are opportunities there that are starting to take place and take hold there and that represent a good future for the company.

How big are those markets as a percent of total Asia, rest of world, versus South America? And what is the growth rate?

Well that is a much more difficult question to answer. A lot of that information is not readily available. I mean the dairy testing market over there is sizable and growing and I think it is more an issue of enforcement over there. They have been getting a lot of attention to their food safety issues and concerns over there and they continue to draft regulations to place more emphasis on testing in those areas.

It just takes time for that to get done in the individual processes. Or in the individual states and provinces over there. So, it is a significant opportunity. I mean you can't have 1.3 billion people and as they improve their diets in terms of the quality of the food that they have from their own internal consumption, they are going to need more of the products like we have. So we are going to continue to not get too far ahead of ourselves but take advantage in specific markets as we see those opportunities develop.

That's one of those counties, too, when you really have to look at urbanization is what is happening over there. Urbanization in much of Beijing, and particularly China is happening so rapidly is that it is taking people off of those small subsistence patches in the countryside and bringing them into the cities. And it is different to producing the food and how they get it there. It is a real challenge that they face but challenges that they seem to be willing to accept.

Okay. Thank you.

Next question comes from Jason Rogers of the Great Lakes Review.

Hello. I wonder if you could, just a few number of questions here for Steve. Steve, do you have the cash flow from operations either for the quarter or the year?

Yes. For the quarter, about $7 million. For the year-to-date, it is somewhere around $29 million.

And then looking at CapEx, do you have that figure for fiscal '11 and any expectations for fiscal 2012 you have currently?

'11 is around $8 million and it will approximate that level next year.

Okay. And then looking at the tax rate, I wonder if you can detail why that was off year-over-year for the quarter as well as the expectations for fiscal 2012?

Sure. The first three quarters of the year were kind of booking at an estimated rate based on our expectation of how income earned in states and credits that we were going to receive are going to come out. And at the end of the year, when we have filed some of our state returns and calculate deductions we get for R&D credits or credits for R&D and deductions for domestic production activity, things like that, that kind of results in a refinement of our total year rate so that when we did the fourth quarter it distorts because the ones we adjust, the fourth quarter is almost a plug or a fall out number.

So that resulted in the rate being significantly lower in the fourth quarter. Next year we are looking at 35.5% effective rate.

Okay. And finally, what was the impact for the quarter that FX had on sales and operating income?

Hang on one second here. That result -- it was an increase in sales of about $880,000. And operating income of about $280,000.

Jason Rogers. Thank you.

That was a quarter, right?

I'm sorry, were you asking for the quarter or the year-to-date?

Quarter.

Okay, I misspoke. That number is $580,000 for the quarter and $280,000 -- revenue of $580,000 and operating income $280,000 for the quarter.

Got it. Thanks.

Yes, that currency translation is -- the volatility of it is just going crazy and we have quarters when it is in our face and other quarters when it is in our back. You got the fourth quarter numbers. For the year I think our revenues were down $750,000 and our operating profit was down $800,000 as a result of currency translation. So, it really goes back and forth, quarter-to-quarter sometimes.

Our next question comes from Brad Hoover of Sidoti. Please go ahead.

Hi, good morning. Thanks for taking my questions. I wanted to ask first on the veterinary instruments, they were strong in the quarter. I think you made similar comments earlier this year as well. And I was just curious from fiscal 2011 was that pushed a lot by the over-the-counter market or is there something else working or another geography that is helping you have a success there with that instrument and kind of what is your expectation as you move into fiscal '12?

Yes. It has been over-the-counter primarily. We have had a couple of things that were in our favor in 2011. We continue to do very well with the farm and field retail stores. A lot of that market is moving through that to form a distribution. You have heard us talk before about our relationship with Tractor Supply. When we started with them they had something just over 300 stores in the US. They now have over 1,000 stores and continue to be aggressive in terms of their expansion. We work with a number of other retail store chains as well, they are just not as large as Tractor Supply and that has been a good success for us.

And then we continue to just look. Our sales people do a good job of looking for opportunities out there in that OTC market including some opportunities that helped us in fiscal year '12 with some of the larger animal health companies in terms of some private label opportunities. So all of that contributed to nice growth, again, for veterinary instruments in 2012. We feel pretty good about that piece of the market going in, or I mean in fiscal year '11 that contributed to the growth overall. And in fiscal year '12 we feel good, particularly in the retail farm to food market opportunities.

And remember, too, that a lot of that product goes into what I call food safety back inside the farm gate. Some of you remember our story of the D3 needle, the detectable needle. And it is a story that we haven't told recently, but it continues to grow with a product that is going in on a worldwide basis that is detectable going through metal detectors and meat processing plants where regular needles are not.

So, though we are doing a lot of stuff through the farm and fleet type stores, through Tractor Supply, we've got more people in the field and we will also get more traction if you look at the work we are doing with the major dairy producers in the United States and major swine producers is a big part of what we are doing. So it is coming from all around. It's great to see that old product line, that Ideal instruments product line that has been a name brand for, gosh, I guess 80 years plus now, continues to grow and take on a new face.

Okay, great. Thanks for the additional comments, too. There seemed to be a lot of rain I guess down south during the quarter and I was wondering if potentially a later planting season would benefit you maybe in terms of toxins or if there are other potential ramifications and if you have any kind of thoughts on that, that would be great.

I wish to hell I knew where the rain was down south.

Well not recently.

Don't extend over to what we got in Texas in the Southwest for sure today. The crop -- the crop is kind of unusual. If you kept up with the crop report we saw back four, five weeks ago I guess that surprised everybody. I'm not sure how accurate it is. It says, for instance, we are going to produce more corn than anybody thought. We planted more acres of corn and the USDA thinks the yields are going to be higher.

It's a weather market out there playing that. We are in that market some where we are buying grains for our rat and mouse feed business. But I think typically the crop was late. It was cold and wet across a big part of the corn belt. The crop got in a little bit late. And there are a few spots where we had some heat areas over the course of last week or two where corn ought to be pollinating and anybody that keeps up with that knows that corn doesn't pollinate real well when you got hot weather and it stays hot all night. It doesn't fill out every grain, every kernel of corn on the ear like you would like to see.

I think it is too early to be calling anything yet. I think we are going to have a pretty good year. There are going to be parts of the country where the quality of the grain is not going to be as good and there will be an opportunity for us to help in analyzing that with our tests. There will be parts of the country where we are not going to have a crop, but Texas I think you can just mark us off. We don't produce very much down there but what we did produce we are not going to have this year

But the crop, I think, the people that I have talked to that have been riding across, particularly the northern part of the Corn Belt think the crop looks good.

Okay, great. Thanks Jim and Lon for both your comments. That's all I have for now.

Our next question comes from Larry Southam of My Broker LLC.

Good morning. Lovely year, lovely quarter. Thank you. Wanted to get some further insight into the GeneSeek and especially the NeoSEEK. Do I understand correctly that this was done as a service in your labs or is there a product that also ships?

At this point is a service, a confirmation of service in our lab. There are all kinds of stories particularly over the past week that have been running around about where are the six ugly sisters and who is testing and who isn't and who claims to be testing and who claims to have tests and who doesn't have.

We are not there yet. There are a couple of really good labs that are doing a lot of work with the meat industry and now the fruit and vegetable industry that are able to get differentiation in 72, 96 hours kind of thing. We can all find H7, E. coli 157 H7. Hell, we can all find that in eight hours. And that is where the lightning rods are of course always attached. But as we look at the six ugly sisters, we are still not there yet. I think what we succeeded in doing was the combination between GeneSeek and our microbiologists in Michigan -- we were able to do the genomics of the E. coli and be able to determine by genomics how to differentiate one from the other.

So that's an overnight issue. So if we got a sample into our lab, we can tell you overnight which one of the six ugly sisters it happened to be other than just H7. Probably the best guys in the field out there today are getting there with products that they have available, probably getting there in, I don't' know, 96 hours or so.

But, us meaning the testing industry and the lab industry are going to have to pick up speed a little bit. The FDA is being criticized because they haven't declared all of these adulterants. The problem in declaring them adulterants is, hell, we don't know how to find them. That organism is doing some genetic shift and drift on us I'm sure. Plus the fact that when we looked at it back in the very beginning years ago I was involved in some of those conversations. Everybody knew that there was a few other serovars of E. coli that were [hemorrhagic] but we said as long as we can find H7 that whatever it takes to control H7 will control the rest of them. Well, I guess we are finding out that that wasn't true now.

So, it is an industry problem and it is based on what you saw in the outbreak in Germany it is no longer confined to the US. And there are going to be opportunities for those of us in the diagnostic business to help solve that problem. There are going to be opportunities for people in the lab testing business. It's interesting but it is also heartening to see how fast this industry is responding.

Okay. I will continue to follow that with interest. Thank you.

(Operator Instructions). Our next question comes from Joe Potvin of Wells Fargo. Please go ahead.

Well good day, gentlemen.

Thanks Joe.

Hi Joe.

Excellent quarter. Excellent quarter. Cash flow question, got to ask. So I've got it down to about $1.21 a share. I assume that's correct?

$1.21 of cash? Keep in mind we also have about $34 million of marketable securities so we are at $55 million in total cash and securities.

What are we earning on our cash?

Almost nothing. Between 20 and 60 basis points really.

Jim, that kind of leads into the acquisition question. When cash has become such a large part of the balance sheet, what do we do to earn something on it? Acquisitions sound like the way to go.

You are being very polite, Joe. We are seriously looking (multiple speakers). We've got I guess at this point no letters of intent anywhere and nothing that we can announce at that point. We have got self circle around about three opportunities out there. It's a challenge not to let money burn a hole in your pocket. But we continue to look back and say what we have done in the past since year 2000 we brought in 19 acquisitions and every one of them has been accretive and we haven't had a mistake that cost us a lot of money or cost us a lot of effort.

Where are there acquisitions out there?

Pardon?

Where are there accretive acquisitions out there? I guess there aren't any, huh?

No, no, no. There are some. There are some out there. It's just you can't snap your finger and find them tomorrow. There are some places where the sellers don't want to be sellers and there are some other places where we are just not sure how we can integrate it within our own operations. But we are not through and we are not through looking. I was out last Friday looking at one. So, there is still stuff there.

What kind of gross margins are you seeing out of these folks?

You mean the acquisitions, Joe?

Yes. Potential acquisitions. What's out there?

Well I think, again, I go back to conversations we have had in the past. I think it is more what do we see in the operating margin side more so than the gross margin side. Particularly where we can find things that are bolt-on. You can remember the GeneSeek story, the gross margins that are not that great on GeneSeek but the operating margins are -- I don't know where we ended up exactly this year, Steve, but probably 21% plus in the operating margin side.

So I think when we look at acquisition opportunities obviously we don't ignore gross margins but the true test for us is to see when it is integrated how it fits into our structure on the operating margin line.

And my only last comment is that if you haven't gotten the call already, I would like to thank you on behalf of the Obama Administration for maintaining a very high tax rate.

I will reserve any comment on that.

Do you have the corporate jet order in?

No. We decided not to buy the jet because we couldn't afford the taxes we would have to pay on it.

Congratulations.

Thanks, Joe.

Our question comes from Peter Coyle.

Good morning, gentlemen, or afternoon I guess at this point. Congratulations on your terrific quarter and I marvel as well as Jim is on the performance you have done over the last 82 quarters or so. I guess did I understand correctly that you are considering opening a representative office in China or is one already established there?

We do not have one established as yet. There are a couple of different options that you can do and we are exploring whether or not there is value to doing that or introducing our own wholly owned foreign enterprise operation over there so that we can have some of our own sales and marketing presence in that country. So we are just in the early stages of exploring that and considering what we might be able to do there to expand our sales and marketing efforts in China because we do see some opportunities there that look like they are starting to gain some traction.

And we are over there a lot, Peter. And by the way, it is good to hear from you. We are over there a lot. Lon is over there. Chuck Bird and our guys on the food safety side spend a good bit of time there. And our animal safety guys are over there. So it is not like we are trying to run it from a distance. But it's just what is the correct organizational structure.

Right. Could you comment on the approximate revenues that are coming out of China for you or would you prefer not to do that at this time?

I think we would prefer not to do that. It's significant.

Okay. And it's growing?

Yes.

About 250% increase in sales, I should hope. Again, congratulations for a terrific quarter and a great year.

Great. Thank you, Peter.

Our last question is a follow up question from Steve Crowley of Craig-Hallum Capital.

Hey guys, thanks for taking a follow up. We have covered a lot of ground and we have talked though kind of the potential impacts of weather on the crop side of your business or the crop related side of your business. In terms of the impact on the cattle herd and the dairy herd and what that means in terms of challenge to you guys if it even means that, can you help us understand that just a bit? And thanks for the time today.

Yes. It's still kind of early. I can give you all kinds of horror stories of what is happening in the Southwest. Some of you know, I still run a little ranching operation down there and we are out of everything. We've got water, but we actually began to liquidate part of the herds a week ago. And we are in better shape than some of my neighbors.

That is going to impact the beef side. The dairy guys, they are finding enough to be able to keep those animals going. And it is not a huge piece of the country. It's all of Texas and it is part of New Mexico and it is part of Oklahoma. But it happens to be a big place or a place where there is whole lot of our nation's total beef cattle. So that is going to disrupt the market, I think, a little bit here as we move into the next few months as some of these cattle are going to market early. We are killing cows that we wouldn't normally be killing just because we can't feed them. And there is enough out there that is going to impact it.

I don't know. I think it is still too early to tell what the weather is going to do for grains. It's just too early to tell. There is nothing that has happened yet that is I think going to impact mycotoxins. We tend to see that in August. We began to look for hot dry weather that might impact the corn crop in August. It's worth watching and I feel good that we've got a group of people that got their feed on the ground and they are following what is happening every day.

So, I think we will be in a position to come to help the industry as we untangle what's going to happen. It's not a normal year.

Well thanks for the color and good luck down on the ranch.

You bet. Thank you.

There are no further questions in queue. I will now turn the call back over to Jim Herbert for any closing remarks.

Good. Well thank you for your participation this morning and let me make sure to remind you of our annual open house for investors and analysts that will be held here in Lansing on Thursday of this week. And if for some reason we overlooked you with an invitation, there is still plenty of room under the big tent and I'm sure more than enough food to go around. So you are certainly welcome and we look forward to seeing you.

Also, since I won't have the opportunity to talk to you again in the next month or so, let me ask that you watch out for the proxy along with the annual report that you will be receiving in September. The proxy requirements have increased significantly as a result of new SEC provisions and so when you get the proxy don't rely on the broker to vote for you. Please vote it and get it back to us.

Thanks again for your support throughout the year that we just finished. And we look forward to talking to you in the next conference call when we can report the first quarter of this new year. That's all I have, Monica.

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