Neogen Corp (NEOG) 2012 Q2 法說會逐字稿

Welcome to the Neogen second quarter fiscal year 2012 earnings results conference call. My name is Hilda, 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.

Well, good morning and welcome to our regular quarterly conference call for investors and analysts, and today, as you know, we will be reporting to you the results of our second quarter that ended on November 30 and the first six months of Neogen's 2012 fiscal year. And I need to remind you, of course, 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 discussed to date. These risks that are associated with our business are covered in part in the Company's Form 10-K as filed with the Securities and Exchange Commission.

In addition, to those of you who are joining us today by live telephone conference, I'd also welcome those who may be joined by way of simulcast on the World Wide Web. These comments, along with some exhibits, will be available on the web for approximately 90 days. Following our prepared comments this morning, we will entertain questions from participants who are joined by this live telephone conference, and I'm 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 second quarter of the 2012 year, and I guess we learned quickly what happens when you miss analysts' expectations. From a revenue standpoint, we are once again reporting record numbers, but just barely. Revenues for the Company's second quarter were approximately $44.9 million, and that's about 2% ahead of the same quarter last year. This brings the first half of the year to total revenues of about $90.6 million, or a little better than 4% ahead of a year earlier. Net income for the quarter was approximately $5.2 million, or $0.22 a share as compared to the prior year's second quarter of $0.26. On a year-to-date basis, net income now stands at approximately $11.2 million as compared to $11.9 million in 2011. And if you want to calculate that down to per share, that calculates to $0.47 a share in the current year compared to last year's $0.51.

While I'm pleased to report that we remain solidly profitable, I'm of course not pleased to report that we did not meet the high expectations that we've grown to expect from ourselves. In fact, this is quite a bit different from the report that we had for you last year at Christmastime when we reported second quarter revenues that climbed 25% and net income was actually up 33%, and that's probably one of the reasons this made this quarter a little more difficult by comparison. Though the quarter was not monumental, it was the 79th quarter in the past 84 in which we reported revenue increases that compared to the prior year. I think that record now spans 21 years.

Let me start by making the remainder of my comments here by giving you assurance that we do know exactly what happened during the past three months, and we know how we're going to go about correcting the business and getting it back on its normal course. You may remember that we began talking with you at the end of last fiscal year about how we planned to expand our overall capabilities to take advantage of market growth that we expected in both our food and animal safety areas. A big part of that planned expansion was in people, and frankly, we intended to hire on a phase-in basis and trickle those new employees in over the course of six to eight months and therefore, let the early group bring in increased revenue to cover the cost of the later hires. We've now pretty much increased our manpower numbers to where we expected, but unfortunately, we didn't trickle them in on the plan that we had in mind. At the end of November 2011, just a month ago, we had approximately 730 employees, as compared to 640 employees a year earlier. I think that will give you a pretty good idea of what happened to this bottom line shrinkage.

I think that the sluggish worldwide economy has also begun to catch up with us, particularly outside the US. When the world economies began to go topsy-turvy about 12 quarters ago, we managed to show nice increases in both the top and bottom lines, and I guess I'd like to think that we drove through that sluggish economic situation. But in the last two quarters, the sluggishness has just been more difficult. This has particularly impacted our European operations where we've been able to grow about 20%-plus each quarter for the past several years. Neogen Europe, however, this year was only able to achieve a 4% increase in revenues for the second quarter. There we've done better where we had our own sales organization on the ground in the UK and in France, but in the rest of the EU that's mostly served by our independent distributors, its been much tougher. In fact, 12 of our 17 strongest European distributors are showing reductions in year-to-date revenue, but in no case do they believe that they've actually lost market share. I think this simply reflects the economic slowdown in places like Ireland and Greece and Spain and Italy and Portugal. Being able to collect on what we've sold has also been an impediment in a few cases there.

So, we know what has happened and also, we know what we're going to do to get back on track. I'd like to quickly highlight those, and Lon will talk more about them. In the past several months, we've been doing a number of things that we think will help our progress during the last half of the year. On the Food Safety side, we'll be adding a whole new family of diagnostic products in the pathogen detection area. I'm sure Lon will talk about those in his comments in a few minutes, but the first ones of those new tests should be introduced into early January. We have a whole new family of products for the detection of natural toxins in grains and nuts and spices. We established the leading position in this market a number of years ago and have continued to be a market leader; however, we do have some competition that took away a part of that lead. We introduced the first of these new natural toxin tests to the market some weeks ago, and we have approximately one new test per month for the next five months that we should be introducing. Again, I hope Lon will tell you more about that.

We've also done some exciting things with our AccuPoint product line that's used for the measurement of sanitation practices. Part of my enthusiasm here is related to the continued improvement in the product itself, but also the new markets that we've been able to address, such as healthcare and the food service industry. Our press release this morning mentioned that a launch of new products this month is a part of our Soleris testing system that's used in many industries to detect spoilage organisms. A new test for the detection of yeast and mold contaminates in food will be one of those that offers us a good opportunity since this market comprises about 15% of all microbiological testing that's performed worldwide.

I talked about our increase in total manpower by 15%. That's those additional 90 employees. But I also need to tell you there's a part of that program we've been successful in bringing on some new experienced managers that are now beginning to step in alongside our tenured group. At this point, we've hired three new experienced managers. One has been on the job now for a couple months and two more will be joining us at the end of the month. These managers will help us expand our markets and give our current managers more room and more time for concentration.

In fact, this is probably a good time for me to stop and turn it over to Lon to give you a bit more color about the quarter and also before I steal all of his thunder about the new things that are happening. Lon?

Thank you, Jim, and welcome to everyone listening on the conference call and as well as those joining us via the internet.

Jim has already provided some details on Neogen's 2012 fiscal year second quarter and year-to-date performance. There really is no way to sugarcoat the second quarter numbers. Management was certainly disappointed in our top line and bottom line performance for the three months ended November 30; however, in spite of that second quarter performance, we do remain optimistic regarding our short-term and long-term opportunities to return to double digit growth in both sales and operating profit, and I will provide you some reasons for that optimism as part of my comments today.

Let me first begin by providing a few more details on the second quarter results. Our Food Safety division ended the quarter with more than $22 million in sales. That was an increase of $700,000 compared to the same quarter last year. Really, the only significant decline in Food Safety sales for the quarter occurred in the area of dehydrated culture media revenue which was down about $330,000 compared to the same period last year. This shortfall was primarily the result of loss of one customer due to pricing and credit issues and the closing of a production facility by another large customer.

On the positive side, I think it is noteworthy that sales of natural toxins, including test kits for DON or what we often refer to as vomitoxin, were essentially flat in the second quarter coming within $50,000 of last year's second quarter sales. This does represent a significant turnaround from the previous two quarters, when natural toxin sales fell $500,000 to $600,000 below quarterly sales for the prior year. It certainly appears that our top natural toxin comparisons following the 2010 fiscal year outbreak are behind us, and we look forward to solid growth in this product line moving forward.

Sales for all other Food Safety product lines actually increased in the second quarter compared to last year. Of particular note was an exceptional 15% increase in sales of our AccuPoint general sanitation test systems and solid 7% growth in revenues from products used to detect indicator organisms, including the [agent] proprietary Soleris optical microbial test systems that detect spoilage organisms in many different food commodities.

Second quarter sales for Neogen's Animal Safety segment grew to just under $23 million. It was a quarter of mixed results for divisions within our Animal Safety group. Lexington division experienced an exceptional quarter with overall organic sales growth of 16% lead by double digit sales increases and our proprietary BotVax B vaccine and diagnostic test kits sold to the forensic market. In addition, the Lexington division achieved a 33% growth in sales of our Kare line of small animal supplements and saw double digit growth in its Ag-Tek line of disposable OB gloves, supplies and apparel products.

Offsetting some of these outstanding Lexington division growth was a decline in sales of our Hacco division, rodenticide cleaners and disinfectants. Rodenticide sales have been down all year, primarily due to significant inventory stocking that occurred during our fiscal year 2011 fourth quarter in anticipation of EPA's risk mitigation rule that went into effect on June 4, 2011. Now as our customers work off these stocking inventories, rodenticide sales growth should return to normal growth levels. In fact, second quarter rodenticide sales were 57% higher than our first quarter, and we experienced record second quarter sales of diphacinone-based rodenticides which were not impacted by the EPA rule change. The decline in cleaner and disinfectant sales compared to last year is really primarily due to timing of large orders going to international customers that hit us in this area and we've talked about on previous calls.

The last comment I'll make regarding sales in the second quarter has to do with our GeneSeek operation. This operation was budgeted to fall below prior year sales in the second quarter, as timing of contracts and processing of samples for genetic testing services was anticipated to be down in the first half of fiscal year 2012 compared to the same period as last year. However, we do have three large projects that are expected to positively impact the second half of the fiscal year, and we remain optimistic that the next six months will yield better results for our GeneSeek operation.

Now, let me make just a couple comments regarding operating margins before moving on to the opportunities we see for the second half of the fiscal year. Gross margins actually held up quite well in the second quarter considering the relatively small sales growth. The decline in gross margin percentage compared to last year is primarily the result of sales mix as well as adding some manufacturing expenses in anticipation of future sales growth. Now, the decline in operating margin percentage reflects our previously announced commitment to invest in sales and marketing to take advantage of future growth opportunities that we believe exist within our still expanding global markets. Sales and marketing expressed as a percent of sales for the quarter was up over 200 basis points compared to the second quarter of last year, and yes, that investment is out of balance in terms of revenue growth generated in the second quarter; however, we continue to believe we need to make this investment to fully realize the significant future sales growth in the rapidly expanding worldwide food safety and food security markets.

Now at this point, I'd like to follow-up on a couple of the comments Jim made pertaining to new initiatives at Neogen that we believe will contribute significant positive growth in the quarters ahead. First of all, our investment in sales and marketing personnel is expected to start yielding positive results in the current quarter. Not only have we added headcount and sales personnel to focus on specific new market segments in addition to expanding our sales efforts in existing markets, we have also added, as Jim said, some experienced sales, marketing and technical service managers who are already implementing a number of changes to enhance future growth. These changes include realigning individual sales skills to better match market opportunities, implementing more intensive training for an expanding sales team, and developing plans to allocate resources where they will likely yield the greatest returns in terms of immediate sales growth and also creating new innovative marketing initiatives to take better advantage of Neogen's existing product portfolio, as well as anticipated new product introductions.

Now in terms of new products, we are excited about several new products recently launched or that are expected to be launched in our third and fourth quarters. Some of these new product introductions are intended to enhance our market-leading position with existing product lines, and Jim talked about a couple of those. For example, we did recently launch a new direct yeast and mold test within our proprietary Soleris product line that's used to detect spoilage organisms. This test is faster and easier than conventional methods, providing Neogen a more effective entry into the yeast and mold test market that, as Jim said, is estimated to represent as much as 15% of all microbiology tests performed worldwide. Other new Soleris tests are in final development stages and are expected to be introduced over the next two quarters.

Another example of strengthening our position in existing markets is our recently released quantitative lateral flow technology for testing mycotoxins. We did release Reveal Q-Plus for aflatoxin in late September, and we expect to release Reveal Q-Plus for DON within the next couple weeks. We anticipate releasing additional Q-Plus tests for a number of other mycotoxins including zearalenone and fumonisin at the rate of approximately one per month for the next several months. Now, these tests are fully quantitative, but they require minimal investment and equipment, and they've also been designed to be more environmentally friendly. We fully expect that we can capture market share with these new Reveal Q-Plus products.

Perhaps most exciting for Neogen will be our launch this quarter of what we believe is the next generation of molecular-based diagnostic tests for foodborne pathogens like salmonella, listeria and E. coli. This unique isothermal reaction test system will be marketed under the trade name ANSR, that's A-N-S-R. This test platform offers many advantages over existing test methodologies including faster test results, a more simple, straightforward test procedure with fewer steps and again, minimal investment in laboratory equipment. Neogen will first introduce ANSR for salmonella followed by ANSR for listeria and ANSR for E. coli which will detect E. coli 0157.H7 and the soon to be regulated [FTAX]. The ANSR test platform provides a viable solution for users of all sizes who needs an easy, accurate and inexpensive method to test for specific food-borne pathogens.

Neogen has a number of other projects in the research pipeline that are expected to be released in the second half of our 2012 fiscal year, including new software and improved sample design for our highly successful AccuPoint general sanitation test system and a new genotyping product for dairy and beef cattle. I'm not going to take the time to elaborate on these and many other ongoing research activities in this call, but I think it is important for you to know that we do have a robust pipeline of new products to help us achieve our objective to return to double digit organic growth rates in the quarters ahead.

I will conclude my remarks by making sure our listeners understand that management at Neogen is not only disappointed with our second quarter results, but that we are committed to making the changes necessary to deliver the kind of performance in future quarters that our shareholders have come to expect from Neogen. Our markets do continue to grow. We've identified substantial opportunities, both domestically and internationally, for Neogen's expanding portfolio of food and animal safety solutions. Equally important, we have a committed group of managers and a talented team of employees who have proven, through years of consistent performance, they are capable of delivering outstanding growth in sales and profits. Now, before I turn the call back to Jim, I do just want to take a brief moment to wish each of you a Merry Christmas, a joyous holiday season. And with that, I'll turn the call back to Jim for his concluding remarks.

Thank you, Lon. In my earlier comments this morning, I talked some about what was happening with our international markets. Revenues for the quarter did hold constant at about 42% of total sales coming from international markets, and contrary to what's happening in Europe, our Latin American operations are growing more rapidly. Our subsidiary in Mexico had a 52% increase in revenue for the quarter as compared to the prior year, and it's been showing good progress for the past several quarters. Mexico is, in fact, profitable for the year. The newest of our subsidiaries, in Brazil, is now beginning to get solid traction in that important economy, as revenues for the second quarter are more than double what they were in the same quarter last year. Despite the slowdown in our European business, our Neogen Europe personnel, as well as those independent distributors, are enthusiastic about what's ahead. Some of the things that Lon talked about. In fact, I'm going to spend some time with that group in January at a distributor conference in Scotland in the early part of January.

On the US side, our markets in both Food Safety and Animal Safety continue to be very promising. The Food Safety market is still trying to sort out -- or the Animal Safety market, excuse me, is still trying to sort out a few things that are related to the economics of animal protein production that related to grain prices and last summer's weather patterns, but it looks like that's about stabilized now. On the food side, there continues to be more regulations being introduced as we work to try to keep the US food supply safer despite the increase in imports.

We haven't completed any acquisitions in the first two quarters, though we've looked at several opportunities. We either did not like the price or the fit or our ability to get them integrated in a positive fashion. We've done, as many as you know, 19 of these acquisitions in the past decade, and all have worked well and all are still providing top and bottom line contributions, and I think we'll recognize the good ones as we turn them up going forward. At present, we do have four acquisitions on the radar screen, but there's of course no assurance that we'll get any of those completed.

In closing my prepared comments here, let me once again reemphasize that I believe that Neogen has the products the market wants, but more important, a number of new products that will make us even more competitive. I'm proud of our seasoned organization and the management group but I'm also sure that the new horsepower of experienced management that's now joining the Company will also be an aid in returning to that double-digit growth.

There's no question that there's a continued need for new and better Food Safety and Animal Safety solutions, and I believe that we are the most significant supplier of those solutions to the marketplace. I believe we'll make up some of the growth momentum in the quarters ahead that we failed to achieve in these past two quarters. At this point, that concludes our prepared comments for the morning, and we'll open the conference call for any questions for Lon or Steve Quinlan or myself.

Thank you. (Operator Instructions) Our first question come from Steven Crowley from Craig-Hallum. Please go ahead.

Good morning, gentlemen, and happy holidays to you guys also.

Thanks, Steve.

In terms of a couple questions. In terms of Europe and some of the headwinds you've faced there, have they been --those headwinds been significant inhibitors of customer decision-making or you being able to garner new customers or the absolute level of business? I'm trying to figure out how disruptive it's really been.

Steve, we spent some time with our management at Neogen Europe and at several of our important distributors, Italy as an example. We've had conversations going back and forth with our independent Italian distributor weekly over the past several weeks. They don't believe they've lost any market share. It's just a total slowdown. So, does it mean that people are not testing as much? That there's perhaps more bad food going into the marketplace? I think that's hard to say, but I'll know better after another few weeks when I'm over there. But at this point, it doesn't look like we've lost any business. It doesn't look like we've gained any business out of there.

And in terms of some of the opportunities that you've seen with larger potential customers or partners in that theatre of business, has it elongated sales cycles on major programs or anything along those lines?

Well, where we've got some capital goods, it certainly has pushed those back. In fact, Lon may remember what some of those might have looked like, the numbers might have looked like in the second quarter of last year. But our Soleris product line, that's a capital expenditure, anywhere from $30,000 to pushing $40,000, $50,000 for the instrument. That's not huge, but in places like Ireland and Greece, I don't think they're spending any money they don't have to. We're also looking at where there's some places where we would like to put out more product but fear of whether we're going to get paid for it in an orderly fashion has been sort of an impediment. If not an impediment to us directly, an impediment to our distributors as they look at -- they'd like to go with a particular line of products or some capital expenditures with one of their customers, but they're not sure about the ability to repay right now. So, I think that from the standpoint of our capital goods, it's certainly been an impediment. Lon, do you remember what second quarter sales looked like in Soleris instruments and other instruments last year?

Well, again, we're kind of talking in relative terms here because the Centrus operations were up in sales for the quarter. It's just, I think what we're seeing is it's in the opportunities in that pipeline that we have where we're introducing new products and have capital equipment that that sales cycle has been extended where it's taking more time to get people to make a decision. They have to get more approvals, the evaluation process seems to take longer. So, it's not a matter of losing business. It's a matter of not gaining that new business as fast as what we were before. And we think that we can do some things from a marketing standpoint to give these people a reason to change, to get them to make a decision, and that's what we're going to be working on. Combined with some of these new product opportunities that we've got coming out, will give us a good chance, a strong chance of getting that growth back.

Now, it seems like AccuPoint is doing really well. I'm going to ask the standard question about, is it new applications, new customers, deeper penetration with AccuPoint> What's driving your success and what kind of prospects do you have going forward? I think you even mentioned some new market applications like healthcare.

We have moved into a couple of different areas, but that's been mostly in the area of increased sample usage as well as some placement of some additional instruments. We do continue to find new customers in that area. It has not been to any large extent as a result of new product or specific new applications. I think anybody -- as the whole area of regulations surrounding food safety gets more attention, people understand and realize that they have an effective food quality program. Certainly, general sanitation is a strong part of that basic foundation, and so we look to products like our AccuPoint ATP system to help with that. And I think we believe that we have the best system that exists out there from both an instrument standpoint as well as a sampler standpoint, which is proprietary design to us. Now, going forward, we hope to capitalize even more on that area because we do have the strength. I think that's one of the opportunities where we have to generate some significant growth, and we are introducing some new software for that product that is going to be particularly important. We were just talking to a large customer yesterday, and the opportunity to benchmark and gather information and compare operating units and see who's doing a good job and not doing a good job is taking advantage of that instrument to its fullest,and we've got the kind of software to allow customers to do that. So, we are going to capitalize on that and we think growing that particular area over the next two quarters.

And in terms of your launch of an isothermal-based molecular diagnostic platform, are you one of the first movers with relatively low cost molecular diagnostics technology in this marketplace? I know there's been other players on bigger, kind of more expensive hardware platforms, but are there other folks who have similar functionality out in the marketplace?

Probably -- there's one customer who got a jump on us by a few weeks with its similar technology, happens to be located in the state of Minnesota which is where they pull the name of their Company from. But -- and they're good guys and they're good competitors. What we see at this point, however, is that their isothermal method is similar to ours, but the instrumentation required to get the results from that is more expensive. So, we do believe that we'll be the fastest, most economical in the marketplace when we get that product out there.

Did you do that in partnership or did you do most of the development yourself?

We did all of the development essentially ourself, but we did license in an isothermal technology from a group located in California that are penetrating the human health market. So, it was -- we do pay a royalty, will pay a royalty on that product, but well worth it for what we've done.

Okay, and then one final question for me, I'll hop back in the queue. As we look at the federal food safety working group progress report that came out I think yesterday or the day before, there seemed to be some lofty objectives in terms of compliance with programs in the poultry market. And then some objectives in terms of preventive control requirements. What can we take away from this that has more teeth and maybe represents more of a catalyst for your business, if anything? And thanks for taking my questions.

Well, I think there's a lot of catalysts there, both from USDA and the FDA side. Just to speak briefly to the USDA side because I was working on that and had some conversations that lasted as late as 11.00 last night. They're trying to figure out what to do with the testing for E-coli, what we used to look at is O17H7 which is at one type identified as the great problem with E-coli. And we've of course, since you've heard us talk about the fact that they've now clearly identified, or admitted to identifying six other ugly sisters, and each of those have the same hemorrhagic problems that cause the problems of -- particularly in younger people and what can happen to kidney shut down and so on. And now trying to figure out how to go about putting in the end regulations to be able to test for all of those. It's not a simple people issue. The testing is fairly complicated, especially in the time that's allowed from the time you start with fresh trim and end up with ground beef that has a finite shelf life before it goes to the meat case, but we think we're on top of that.

We think it's going to be interesting. It's not going to be anything probably that's going to -- the regulation probably, it's announced to be -- go into effect in March. I suspect it may be delayed a bit because they're still trying to figure out what to do. So, that one is important to us. And then the other one I think that may have been --I'm not sure whether you talk about the President's working group on food safety or exactly what report, but the one that's out within the last few days puts more pressure on salmonella. We know that salmonella is pretty -- probably the biggest tested micro that's out there and it's ubiquitous, it's in everything. It's harmless if you cook the food, obviously. But there is a quote from somebody high up on the regulatory side that says that if you cook your food it's safe, but the American people are not very smart, and it's my job before I retire to try to protect them from themselves. And so with that, out of 100 or more varieties of salmonella, there are four that have been identified as being critically important, and we are really on top of that, I believe, with our salmonella test.

We further expanded what we're doing with our Gene Seek operations and what we call Neo Seek. That operation now runs an independent laboratory to actually run microbial samples to identify the E-coli problems, and we're fast getting geared up to be able to identify the big four salmonella problems. That will be helpful in our further development of rapid tests, plus it's also helpful as a reference laboratory from any of our customers who want to get more information than they could get from anybody's rapid test and results they could get in a day instead of 10 days like they would have to do today. So, I think all of those -- that's a long answer to a short question, but I do think that all of those will continue to drive what's happening in the marketplace, particularly on meat and particularly in poultry, so that's -- we've got that to look forward to for the latter half of the year. We'll just have to see how fast it matures.

Great. Thanks again.

Our next question comes from Scott Gleason from Stephens. Please go ahead.

Jim, Lon, Steve, thanks for taking my questions. I guess just to start off with, more start thinking about next quarter. I guess in light of some of the volatility we've seen in kind of your guys' results here lately, typically, you guys kind of see a $1 million to $2 million kind of seasonal drop in revenue and then a 100 to 200 basis point drop in margins sequentially. When we think about next quarter, I guess just given some of the new product initiatives and other things that you guys have talked about, is that still a good expectation, or should we maybe see that be more flat quarter to quarter?

I'm not sure how to answer your question. We fully anticipate that we can, with these new products coming out, with the new staffing that we have, particularly in the sales and marketing area, that we have opportunities to get the growth back to where it should be. Other than mix changes, I would not anticipate that we should have swings in gross margins levels. I already indicated earlier in my comments that to the extent micro toxins impact that, those comparison are over with. But we think that those opportunities are good. And I don't -- if you're looking at quarter to quarter comparisons, I think our, in terms of sequentially, our third quarter has been lower than our second quarter, but I think we had an abnormally low second quarter this year. So, I'm not looking forward to a decline as we move into the third and fourth quarters.

Okay, well Lon, are you guys guiding then towards kind of double digit organic growth again next quarter?

Well, that's our objective. Its always been our objective, but we're certainly focused on that, and any sales and marketing person here at Neogen Corporation would tell you that is certainly what we think is reasonable.

Great, and then I guess if we look at the Gene Seek segment specifically, you guys talked about three new projects that are coming up. Does that imply that we should kind of see that return to kind of a $5 million or so quarterly run rate going forward?

We've got a lot of testing out there that's just hanging in the wings. We've got a big contract in New Zealand, as an example, on a major portion of the dairy industry, for a major portion of the dairy industry in that country. We thought we would get those samples start to flow in in November. We thought that we would start to get them in December, and now we think we're going to get them in January. I don't think there's any question we're going to get them. It's just when they get the samples pulled from the cows and get them to us.

So, those things, things like that are a little bit more difficult in the service business that we haven't really been -- hadn't had significant portions of our business involved in the service business before, so it's a little bit difficult to tell you exactly where those are. But there's several more just like that. But we've added to our sales manpower there. We brought a guy in who's a PhD animal geneticist who came out of -- actually came from the Pfizer organization in the UK that's taking care of Gene Seek's operations and our testing work from over there. Bright guy, knows the market well, already started to hit pay dirt. We brought in, just starting I guess this week, a new employee that will be covering the US and part of South America, comes Brazilian by birth, understands that market very well. We think that all those things will help us garner more of that Gene Seek program. Those two alongside an already existing good two man sales force that we already had. We're very encouraged about where Gene Seek is going and how it fits in our overall strategy.

Okay, great. And then, I guess Mr. Herbert, if you could talk a little bit more about, maybe in more detail about the acquisition pipeline? Are any of the deals that you guys mentioned in your comments, are they potentially near term in nature? And I guess from a size standpoint, can you maybe give a little bit of color on what type of size you guys are looking at right now?

We do not have any signed letter of intent. It usually takes us at least a month after we get a signed letter of intent before we get something closed. We do have active conversations going on two fronts. There are a total of four that we're looking at that are on the screen too that we have active conversations going with. One of those would hit the double digit mark. Unfortunately, others are not double digit, but still, if we can put them together, are very synergistic to what we are doing and would tend to be kind of bolt-on opportunities as we've done in the past. But as I've said before, don't go out and buy Neogen stock, though as cheap as it is today, you should be buying it, but don't go out and buy Neogen stock just because you think we're going to close a big acquisition because we're pretty serious about what we buy and we've got to feel pretty good about what we're going to do with it. It takes time to buy one and integrate it, but it takes a lot more time to straighten up a bad one, and we don't want to be in that position.

Okay, and then just one last question on the molecular side. You guys announced these new products that seem pretty interesting. Can you talk a little bit about the system that you'll be utilizing, what the turnaround times look like? Is it fully sampled results, a little bit more detail I guess on the system architecture?

Probably not something that we want to talk about today. We haven't made our big splash yet. We've got one that we think will be, one of the tests that's coming along, one of the pathogen tests that will be distinctly faster than anybody else's because of what we're doing. And we'll be competitive speed wise and time wise with anybody that's out there, but it's probably a little bit premature to me to want to send out all that signal out.

Okay, thanks for taking my questions, guys.

Our next question comes from Paul Knight from CLSA. Please go ahead.

Hi, Jim. Can you give me the headcount on employees again? But when you added the 90 people, where were they? Were they international? Could you give a geographic spread on the hiring pattern?

Well I out to be able to. I should have anticipated that question, but I didn't. I think a significant number, we've added probably 10 people in Europe in that 12 month period. The -- probably two or three of them fairly close, two or three probably in Brazil, maybe two or three in Mexico. The rest have been in the US. Significant number of those I think have been in the food -- well, have been in the food safety sales and marketing group, where we're still adding people. I think probably if we look at the separate categories, we probably put more people in sales and marketing of that 90 line I think than we have any other break down.

Yes, I think that's right. Certainly, virtually all of the people we've added in Mexico and Brazil have been sales and marketing related. Brazil has been more current in this fiscal year and Mexico got a little earlier start, and I think that's a good sign because it's reflective. Where we got those people hired and on board earlier, we are seeing positive results. And the Neogen LA operations located in Mexico City, I realize it's still a small base of sales, but they're experiencing a terrific year, exceeding their budgets and growing in excess of 50%. And we know that it's a result of having some quality sales and marketing people on board there that we added before the end of last year.

So, we have added more people. We've added people in the technical services area and sales area in Lexington. And you can see some of the -- they've got some nice momentum going down there. That particular group has experienced some nice sales increases, and we are a little farther behind in doing some of the things here in Lansing on the food safety side. So, that's why we're optimistic going forward and we think that we're going to start to see some results. Obviously, as you do get some sales growth and we are up this year overall. You have some people that you have to add in the operations area, but I think that a majority of those have been in sales and marketing. The number was 730 employees approximately compared to 640 last year.

And Lon, the rodenticide comparisons that you're talking about, there was restocking in 2010. When do those -- what quarter do we go past those restocking issues?

Okay, here's -- let me clarify. The restocking -- not restocking, the stocking that took place that we saw a lot of came in our 2011 fiscal fourth quarter, so that quarter that ended May 31, 2011. The EPS risk mitigation rule went into effect on June 4. That rule had most of its impact was in what we call retail type product skews. We've done a very extensive analysis of that. We've gone through every customer, and we are finding out that -- we have news. We just had a meeting, just in fact earlier this week where we discussed this, and we are finding a number of those customers have worked off those inventories and we think the last ones to go are here in this December/January time frame and we'll get back to ordering patterns on that. And if you listen to my comments, the diphacinone technical agent that we use in some of those baits that was not affected by that rule had a record quarter in our second quarter. We also are having great success right now in putting together programs that are focused on the animal protein segment. Those large integrators that are in poultry and swine operations, and we're having success in growing business and gaining the business there with rodenticide. So, I think that area is another one that we'll see positive growth and impact as we head into the second half of the year.

That side that Lon talked about is pretty exciting. We've got boots on the ground that are out there, they were talking last night about looking at -- we've got a night vision video system, as an example, that it's set up at night to see where the rats are. And I guess they were pretty -- I didn't see it, but those that saw it were pretty scared. I guess they're using -- competitors must have been using competitors' rat bait instead of ours. But the opportunities of looking at the different products that are out there, Lon spoke of diphacinone, I think we've got five technicals that are in part of that group in our rodenticide area. And we've got several good veterinarians that are on the technical staff, one that comes straight out of the poultry business, another one that comes straight out of the swine business. So, not only have we got the sales group on the ground, we've got good solid technical service to support them, as Lon talked about frankly in his conversations on tech service.

Okay, thank you.

Our next question comes from Tony Brenner from Roth Capital Partners.

Thank you. Jim, it seems to me that historically, Neogen has had several pretty significant sales drivers that have enabled you to pretty consistently report double digit organic sales growth, increased regulations, consumer demand for safer food companies seeking to protect themselves, just being defensive and conducting tests, a stream of new product introductions and so on. So, even in 2008, 2009 and 2010, you reported high teens sales growth. The idea of economic cyclicality impacting results seems to be pretty new, and I'm wondering what's changed to cause that and why, referring back to Lon's outlook for the third quarter, why you'd think this won't impact Q3 results as well.

Well, we have a hard time being negative around here I guess, that's the starter. If you think you can you can, and that's driven us through some bad times before. But I don't know what's going to happen in Europe. I don't guess anybody does. We're going to have increased sales in Ireland, I suspect we won't. Will we have increased sales in France and Germany and the UK? I'm sure we will, as we pick up new customers, as we convert. I don't know that those markets are going to grow, Tony, as fast as they were growing because there's a lot of people that have already fulfilled what they needed to do. But I do think that our opportunity to tear away some market share continues to be there and there will be some growth.

As an example, we just picked up one of the major worldwide bottling companies business that we haven't had before, and that will take some time to -- we have another of the worldwide bottling companies' business already, and it will take a little while to convert that business. We do have the opportunities to pick up some significant business. And it may sound a little bit trite, but I think we'll get some of this stuff done because we've got 700 plus employees that have done it and want to do it.

Okay. Thank you. That was my only question.

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

Yes, good morning.

Good morning, Steve.

Just a couple of quick follow-ups on some particular product areas. You gave a really good overview, Lon, I just have to fill in a few gaps. You mentioned the vomitoxins test were about flat. Can you comment on overall natural toxin sales?

Yes, they were -- actually, I was talking about -- yes, overall, natural toxin sales were flat.

Oh, okay.

We only had one significant area that was down and all the rest of them were up and --

And then I guess--

It was -- back to this growth thing, they were up anywhere from 2% to a high of 15% for general sanitation. So, it was it was really only the Accumedia dehydrated culture media that experienced any kind of significant decline compared to last year.

I maybe missed this, what you said. Can you differentiate between the vomitoxin and the aflatoxin sales in the quarter? Were they both about flat, or were there some difference in movement between those two?

Well, I know we had some increases in aflatoxin. I know we do on a year-to-date basis. I don't know how much that impact was in the quarter, but we did have some aflatoxin outbreaks, particularly in the Southwest. But unfortunately, the crop was so poor down there, they didn't test as much as they ordinarily would because it just wasn't there to test. But overall, I think those tough comparison are behind us. We're looking forward to growth going forward.

And then looking -- what about food allergens?

That was another area that was up about 2%. So again, it's not that we've not having growth, it's not that we're losing customers, it's we're having some impact from not getting as many of the prospects that are in the pipeline to make those decisions change going forward as fast as what we had in the past.

Okay, what about microorganism testing?

Another area that was up like 2% or 3%.

Okay, and --

When I talk about that, you have to differentiate. You got specific pathogen testing, assessing for salmonella, E-coli, listeria, campylobacter, and that was another area that was up. Of course, there is where we think having a new molecular test platform will really help spur future growth in that area. The general microorganism area was up a little bit stronger. That was up 7%, and that's the one that includes the Soleris technology testing for indicator organisms.

How about dairy antibiotics? I don't think you mentioned that one.

Dairy antibiotics was up 7% and is up a good 9% to 10%, I think, on a year-to-date basis. That one continues to be strong for us --

And with a lot of growth opportunities.

-- on a worldwide basis and still includes a lot of growth opportunities going forward.

How is the BetaStar Plus doing?

BetaStar Plus is -- the evaluations are going very well. Everybody likes the product. Now, what we have to do is focus on our total dairy solutions and give those prospects a reason to change. And that's one of those areas, since we know we have a great dairy product solution for that marketplace, that's one of the areas that we'll be looking at from a sales and marketing standpoint to focus on to get increased growth as we move through the next two quarters.

And then I guess, lastly moving to animal safety if you have any comment on specialty needles and the veterinarian instruments sold at retail?

Well, the -- we feel good about the veterinary instruments, and I'm not sure what you mean by specialty needles and stuff, but we have a D3 awareness program. Of course, that's our proprietary product that's more durable and detectable needle. We've had great sales growth in that area this year, and that's actually, when you play to your strengths and we look at putting around marketing campaigns going forward, we're going to do that. And we think in the detectable needle area we have some opportunities to expand not just domestically, but internationally. And then the other thing in terms of veterinary instruments, why we feel good about that is we did win a contract last spring with Tractor Supply. And so we're still their primary veterinary instrument supplier.

We've also got some nice conversations going with a couple of other retail farm stores that have the opportunities to stock those kinds of veterinary instruments, and I think we're also excited -- again, this all fits together. One of the increases in staff we had, we brought in an individual on the marketing side who is specifically understanding of the retail market. That's his background, and so he's already came up with a couple nice ideas that will help our signage and marketing in those retail store environments for veterinary instruments, so -- from both a packaging as well as marketing standpoint. The veterinary instruments continues to chug along for us in terms of being a product line that exhibits growth year in and year out.

And then last question is, Jim mentioned Europe being up 4%. How much of a drag was currency on Europe?

Steve, you've got that number? It wasn't -- it was about neutral.

Okay. That's all I had, thank you.

Thanks, Steve.

Our next question comes from Brad Hoover from Sidoti & Company.

Hi, good morning. Just going back to the headcount, I know you hired a lot of folks before that six to eight month timeline when you said you wanted them to trickle in, so should we expect very few kind of more rep adds or manager adds to the rest of fiscal '12, or are you still looking to increase headcount in those areas?

Lon, Steve maybe able to give you the exact number, but I think we have still got 30 plus on the hiring list for that would be all locations that are not hired yet. Do you remember that number, Steve?

I thought -- we're in the mid 20s.

Mid 20s, so I'm a week behind, I guess.

That's open saddles at Neogen Corporation.

Yes, some of those would be replacements.

Okay, and then as far at the new molecular platform, I guess ASR, did you say what the timing was for salmonella and listeria and E-coli tests as far as launching those?

We would expect at this point to be able to put the first one in the marketplace in January. It's a little early to say. I'd -- there are a few more hurdles that I haven't seen us go across yet, so I can't tell you whether the next one is February or March.

Okay, and then just lastly on Gene Seek. Had the margins -- the operating margin there changed at all from fiscal '11 or because you budgeted for lower revenue than your margin profile, at least on Gene Seek, is still holding to what it was last year?

There's been some reduction in selling price, which we expected -- I guess we implemented. Our margins are still the same, but we've reduced because we've been able to drive down costs, because of our size and scale, in order to pick up extra business and in order to grow that market overall. We think that -- we've always thought that that price needed to come down. Now, the margins are not going to come down. But for instance, one of the big things that needs to be done out there now is, there needs, on the beef cattle side, there needs to be more testing of females. Everybody would like to test females. Today they are mostly testing males for genetics, and that's the place to go because you look at one male and natural service in the beef business, that's $20,000, $25,000. However, that -- the other half of that genetics is in that replacement effort that's being saved, and those prices need to get down to $20, $25. And we're getting them down, approaching that now, which should considerably increase the size of that marketplace. And as we've continued to apply new technology, as we've continued to be able to drive our costs down, we could do that with -- it will change the top line numbers, but it won't be changed in the gross margin numbers.

Okay, great. Thanks for the color, Jim. Thanks for taking my questions.

You bet.

Our next question comes from Greg Halter from Great Lakes Review.

Yes, good morning.

Good morning.

Relative to the international business, the sales I think were 42% of the total in the quarter. How much of that is Europe, broadly speaking?

Overall?

Did you get the question?

Can you repeat the question?

Sure. The international business you mentioned was about 42% of sales. I'm just wondering what portion of that or of the entire Company is in Europe in terms of sales.

Well I can tell you that the Neogen Europe operations are about 10% of sales that run through that group. Now obviously, we have our animal safety group as to that. I don't know how much specifically of the Gene Seek testing service comes from Europe. I know we had some growth there last year, and so it's somewhere between, my guess would be somewhere between maybe around 15%, somewhere between 10% and 20%.

Yes, we've got some D3 needle business there. There's -- Denmark, it's mandatory to have detectable needles for the Denmark pork industry, so we've got some of that is in -- and then we've got --I guess never stopped to -- I guess we ought to stop and do that. We'll have the numbers, but I don't have them right before me because we're picking up some Gene Seek business in several places in Europe too.

Okay.

We've -- while we were talking here, Steve was able to get the details and stuff, and it looks like it's in -- 20% of that total international sales business comes out of Europe.

About 50% of the international is related to Europe or coming out of Europe approximately?

Yes.

Okay, and your receivables were up about 14% year over year basis. You did make some comments about some ability to collect on receivables becoming, I don't want to call it an issue, but maybe stretched out a little. Just wondered if you could comment on the year over year increase as well as where you are situated currently on your receivable reserves?

Steve can talk about that, but I think you're probably borrowing my comment when I said it was an impediment to some of the sales in those troubled economies in the half dozen European countries. Its not been, oh, we got a little bit of slowdown, but -- out of Neogen Europe, but I wouldn't guess more than three or four days. It's just -- you start looking a little bit closer at who you're selling to and make sure that they are going to pay in. And I'm sure that -- well, I know that's slowed up sales in a few places.

Okay. And --

And just to give you a little more specificity, our collection period is up about three days from May. Actually reduced from our August balance, so we're at about 60 days overall. And looking back over the last three years, we're somewhere in the 57 to 63 day collection period, so we're right where we've been. Our AR reserve you asked about, we're at $800,000, which is exactly where we were at year-end.

Okay, and --

And we're trying to pay close attention to that. When you get into these kinds of situations, you don't want to start to extend your credit beyond limits that are reasonable just to get sales. For example, I know for a fact, we're not -- we don't like to give excuses. When you have a quarter like this, it is what it is, but we had $500,000 in open orders that we could have shipped to Venezuela in this quarter, but we're just not going to do it. We've got credit limits there. We go through the government approval process and if we can't get paid, we're not going to ship the product, so.

Okay, that's helpful. And on a similar tact again, on the balance sheet inventory is up about 16% year over year, just wondering if you could provide any commentary there on that increase relative to the sales increase of, I think 2%?

Yes, the biggest piece of the inventory build was really, we got some significantly discounted pricing on chips at Gene Seek, and that's about $2 million of the overall increase. That inventory will be fully utilized in the next two or three months. And then there was some inventory build in Lansing in the food safety side for the aflatoxin outbreak that we thought was going to impact us a little bit more than it did. And then we had to buy some of the bulk materials that we purchased. We have to buy in large quantities to get better pricing as well.

Okay. And --

We do have programs, I'm sorry to interrupt. But we do have programs underway in both the animal safety and the food safety side of the business to bring those inventories down. Specific goals and specific product skews or raw material skews that we know we can have an effect on over the last half of the year.

Okay, great. And I don't know if you mentioned it but what was your cash flow from operations for the quarter?

For the quarter it's about $4.8 million.

All right, and then what was capital spending for the quarter or year-to-date, whatever you have, and then what are your expectations for the full year?

For the quarter, we were at about $2.1 million. And I think in the last call, we talked about, we're about $6 million of CapEx, exclusive. If you remember, we bought the facility in Lexington in the first quarter that was about a $5 million purchase, so I guess we'll be somewhere around $11 million.

Okay, great, thank you.

Our next question comes from Larry [Southen] from My Broker LLC.

Good morning. Actually, good afternoon, gentlemen, on the East Coast.

Good afternoon.

I think you've gotten through every question I had jotted down and -- no, actually, one other area. With your tests and especially environmental tests, are you getting into a hospital market at all or other medically related? I know you're not in product tests for humans.

We do have a little bit of business in the hospital market that we're testing out, in the healthcare is probably better way to put it, for our AccuPoint sanitation monitoring system. We won't put a full sales force in there. We're testing that market, we'll see what it looks like. And assuming we continue to have success, we look toward distribution of people who are in that market every day to help carry that product out. But it definitely fits in that marketplace.

Well, it certainly would seem to. And I know from talking to other people there's a lot more emphasis on the surfaces in hospitals.

You bet.

Okay, so just keep up the good work. Not dismayed by the quarter by any means, and best to all of you out there.

Well thank you. We appreciate that. We're not proud of it, but we're not dismayed either.

No, but those things do happen.

Our next question comes from Brandon Couillard from Jefferies. Please go ahead.

Hi, good morning. Thanks for taking the question. Jim, the molecular food pathogen test launch looks interesting and actually seems to be a departure from what I've historically viewed as a difficult market to convert to molecular, given the higher ASPs. Any chance you could give us a sense of how you expect to price those tests or the ASPs per test you expect upon launch?

No, I probably could, but I'm not going to. That's still a pretty competitive market out there, and our marketing people would probably not be very happy with me if I started disclosing what their plans are. I think we will be very competitive, and I think the marketplace, if you're trying to find E-coli in ground beef trim, I don't think they care whether you use and what molecular system or what antibody system you're using. It's cost per test that counts, and cost per test ease-of-use and speed are still the three drivers. You're not going to be able to get the prices up very much. You'll get them up a little bit to compensate for speed and ease-of-use, but not a lot.

Thanks, and then Steve, what was the impact of FX on revenue in the quarter?

In the quarter on revenue, it was a decline of $40,000.

Great, thank you.

Our next question comes from Joseph [Potman] from Wells Fargo.

Yes, congratulations guys. With all of the turmoil in euro land, it's hard to believe that things are just flat with the euro comparisons. Has something happened in the last 1.5 monthsthat gives you pause? Hello?

What was the question again, Joe?

Well, there's been a lot of turmoil in euro and it's hard to believe that, over the last 1.5 months anyway, there hasn't been a lot of concern generated over what's going on over there. Any comment?

We're concerned. One of the thins that makes the calculations a little bit difficult for us is Neogen Europe operates on the pound sterling. They sell product, however, in euro, pound sterling and US dollars. So, we consolidate what's happening back into Neogen Europe depending on into pound sterling, it transfers over here, and then we transfer it into consolidated back. It's a multi-faceted, when you start looking at currency changes, it's a multi-faceted formula. I think -- we talked about where our concerns were, why that's impacted our sales in those countries over there. But I think they're going to keep buying product in Ireland, they are going to keep buying product in Spain and Italy. It's just probably not going to be a lot of expansion right now.

But we're not getting burned by holding euros vis-a-vis the dollar. It's kind of a new experience to actually have a strong dollar against the euro.

Right. In fact, we still have our own internal hedging system going where we hedge receivables, so we -- I think we're pretty neutral this quarter on that. But we sometimes hedge it. It may make a difference at the top line, but we recover it at the bottom line and the other income side. So no, I don't think you should have any concern about our jeopardy in holding foreign currencies.

Any comments on progress in the seafood market?

No, wish I could tell you. We're doing some -- we're getting some interesting things going, we hadn't converted any of it to sales dollars yet. We're putting out our second shell fish toxin test, it should be coming out this month. Good uptake we think at FDA, something they were looking for. We've got several other seafood products going, but we're not ringing the cash register to speak of.

There seems to be a migration of salmonella and E-coli away from meat products into other products. Any comment there?

Yes, I'm not sure I'd define it as migration. Its just been picked up more, diagnosed better. That's clearly the case with everything from salad greens to cantaloupe, and I talked a little bit about that earlier, about there have been a lot of pressure put on salmonella for those very reasons that I think we'll continue to see that. It's going to be gaining a little bit every month, every quarter. It won't be one fell swoop, but we're going to be looking more and more at salmonella in the same way we were probably looking at E-coli three or four years ago.

Can we extend this phone call further? Your golden tongue has moved the stock up about $3.

(Laughter) No, that's just sanity returning to the market is all that is, Joe.

(Laughter) Okay, congratulations.

Thanks, Joe.

I believe that concludes what we had for the day, and we thank you very much. We appreciate your continued support, we hope you'll continue to support us as we move into the last half of the year. And to each and every one of you, a Merry Christmas and a happy holiday season.

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