Neogen Corp (NEOG) 2012 Q3 法說會逐字稿

Welcome to the Neogen third quarter fiscal-year 2012 earnings results conference call. My name is Christine, and I'll be your operator for today's conference. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note, today's conference is being recorded.

I will now turn the call over to Neogen's Chief Executive Officer, Jim Herbert. Sir, you may begin.

Good morning, and welcome to our regular quarterly conference call. Today we'll be reporting to you, as announced, the results of our third quarter that ended on February 29, and also the first nine months of Neogen's 2012 fiscal year.

I'll remind you that some of the statements that are made here today could be termed as forward-looking statements. These forward-looking statements, of course, are subject to certain risks and uncertainties, and actual results may differ than 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.

In addition to those of you that are joining us today by live telephone conference, I also welcome those who may be joined by way of simulcast on the worldwide web. These comments, along with some exhibits, will be available on the web for approximately 90 days. Following our 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 third quarter for the 2012 fiscal year. We once again reported record numbers. Revenues for the Company's third quarter were approximately $44.9 million. That's a little over 6% above the prior year. This brings the first three quarters of the year to total revenues of approximately $135.5 million. That's about $6.4 million ahead of last year.

Net income for the third quarter was $5.2 million, or an improvement of about 6.1% as compared to a year earlier. This equates to $0.22 a share as compared to the prior year's third quarter of $0.21 a share. On a year-to-date basis, net income stands at approximately $16.5 million as compared to $16.9 million in 2011.

I think a quick look at these numbers today show that these year-to-date numbers are beginning to dig out from that troublesome second quarter that we reported. While I'm certainly not pleased with the gains of the quarter, I am pleased that we continue to remain solidly profitable. Though the quarter was not monumental, it was the 80th quarter in the past 85 quarters when Neogen reported revenue increases compared to the prior year. That record now spans over 21 years.

We told you in -- just before Christmas in our last call that when our revenues were up only about 2% for that second quarter, that we knew where the problems were, and that we were going about making the necessary adjustments to get back to double-digit growth. We didn't know at that time that the worst was really yet to come, and that was to happen in December. I'm a good bit more optimistic today. December was significantly below December of last year, so we started off the quarter in a hole. However, January finished up about 10% ahead of the prior year, and February finished up about 20% better than February of last year.

Now, I realize that two months don't make a trend, but this performance has actually, as I said, increased my confidence level. So, given the performance of January and February, and the realization that we're comparing against a third quarter last year that had an increase of 25% over the prior year, I think the Company may be ready to enjoy spring.

While we still have some uncertainties that are certainly still out there, and I realize that we are not totally out of the woods, what happens in Europe continues to be problematic. Those who listened to our last quarterly conference call may remember me talking about how we had pushed through the financial difficulties in most of those EU countries in good shape during the first two years of their crisis, but that we're finding it more difficult to hold our own in the last several months. Well, that trend continued into the third quarter with a revenue drop in France compared to the prior year, along with the Netherlands and other major countries such as Spain, Portugal, Italy, Ireland, Greece, and Egypt. In fact, revenues outside the UK and Germany were down about 10% compared to last year. At the same time, we had nice increases in the UK, along with some notable increases in food safety sales in Germany.

When I talked to you in December, I said I was going to Europe in early January to explore the situation, and I came away feeling that we had not lost market share, but the overall markets were just in the doldrums. We began to put in place some new programs at that time, and I believe that we're beginning to see some results. However, due in large part to the 40 countries that we service through our Scotland operations, we did see a drop in the percent of international revenues as compared to our total revenues in the third quarter. Third-quarter revenues from international sources were approximately 40.7% as compared to 44.7% in the third quarter of last year.

For the quarter, we saw nice increases in gross margins compared to the prior year as they pushed up to 51%; however, our operating expense numbers weren't really anything to write home about. Sales and marketing expenses were up about 3% as compared to the same quarter last year, and I think Lon will probably talk more about that in his comments. G&A expenses were up to 10.3% of revenues as compared to 8.7% last year. Those of you that have followed the Company for a while remember that it's always been my personal objective to keep those G&A numbers under the 10% mark. The principal reasons for the increase this quarter were -- a couple of them were two non-cash items, amortization and some stock-option charges of about $0.25 million, and there was also a sizeable legal expense on a couple of legal cases we have related to the protection of our intellectual properties.

Before turning the call over to Lon this morning, let me first mention our genomics business. This is centered around our GeneSeek operation that we acquired about two years ago. In the first year of operations, revenues from that business grew approximately 50%. Up against those strong comparables, the business didn't look quite as good in the first two quarters; however, revenues at GeneSeek have begun to climb again, with quarter revenues for this quarter about 5% ahead of last year. And these numbers are solid, coming from several genetic products and from several countries.

Let me, I think, stop at this point and turn the comments over to Lon to talk to you and add a bit more color for the quarter that we just finished, his outlook for the quarters ahead, due to a number of factors, including the introduction of several new products. Lon?

Thank you, Jim. Welcome to everyone listening on the conference call, as well as those joining us via the Internet. Jim has already provided some details on Neogen's 2012 fiscal third quarter and year-to-date performance. While the third quarter numbers did not totally meet management's expectations, we are encouraged by positive trends that were established in the quarter. During this call, I'll elaborate on a number of the positive trends that developed in our third quarter, and provide additional information pertaining to various operating divisions within Neogen.

Let me first begin by providing a few more details on the third quarter results. As Jim indicated, third quarter sales for Neogen were $44.9 million, representing overall growth of 6.3% compared to the third quarter of last year. But, as Jim also pointed out, sales in December actually fell well below the prior year, which certainly masks the excellent organic growth performance in January and February. There were a number of highlights in the quarter for both diagnostic products and intervention products across many market segments. I think many of you are aware that Neogen's sales and marketing efforts are organized according to industry market segments, and we returned to double-digit organic growth in many of these industry segments in our third quarter.

Our second-largest operating division, Lansing Diagnostics, achieved outstanding organic growth of over 15% in the third quarter. The sales increase was broad based, with organic growth of 13% to 55% achieved in numerous market segments, including grocery products, pet food, milling and grain, labs, seafood, nutraceuticals and beverage, as well as within our international group. Product line growth within these industry segments was especially strong in the areas of diagnostic tests for mycotoxins, including strong sales of our new quantitative lateral flow test for aflatoxin, vomitoxin, and zearalenone. And we also experienced solid double-digit organic growth for sales of allergen test kits. And an area that we've been focusing on, the area of technical support service revenue, also experienced double-digit growth in the quarter.

Now, in spite of ongoing challenges referred to by Jim in his opening remarks, our Neogen Europe operations actually experienced a good third quarter, with double-digit organic sales growth. A portion of this growth was a direct result of expanding our sales staff in the EU in the current fiscal year, which started to pay dividends in the form of increased sales for the third quarter.

Another division that experienced strong organic growth in the third quarter was our Neogen do Brasil operation. This division's sales were up 89% in the quarter, as we continued to see growth across a number of product lines, including increased test kit sales for drug residue sold to the dairy industry, higher mycotoxin test kit revenue in several market segments, and strong growth in sales of allergen test kits. This division is another operation that benefited from our 2012 fiscal-year plan to add sales and marketing staff to take advantage of identified growth opportunities within Brazil.

Neogen's largest operating division, our Lexington group, that markets both diagnostic products and intervention products to a number of industry segments, including producers of animal protein, also experienced an exceptional third quarter, with organic growth exceeding 25%. Strong sales increases were achieved in a number of product lines, including a doubling of sales of diagnostic reagents sold to China, and used for the detection of Ractopamine, and a more than 20% growth in sales of our patented detectable needles as a result of strong marketing programs.

Other product lines experiencing strong organic growth in excess of 20% within the Lexington division include disposable gloves, sold primarily to dairy producers; small-animal supplements, including the Company's care line of products used to treat pancreatic, thyroid, and urinary tract conditions in dogs and cats; and vitamin injectables sold to veterinarians and used in treating various conditions in both food and companion animals.

Obviously, with all of this outstanding growth that I just outlined, there had to be a couple of divisions that did not fare as well in the third quarter. Our Hacco division that manufactures and sells rodenticides, cleaners and disinfectants, fell 10% below the same quarter last year. Due to the EPA risk mitigation rule that went into effect at the very beginning of this fiscal year, customers serving the retail consumer market are required to change to different packaging and bait formulations, which has negatively affected rodenticide sales this fiscal year during the transition. In addition, Hacco did have a significant disinfectant stocking order that shipped in last year's third quarter that was not repeated this year.

The third quarter also saw a December reduction in stocking orders from the Company's largest distributor of dairy antibiotic tests, as that customer sought to reduce inventory levels. Orders for this distributor returned to normal levels in January and February.

Sales by our Acumedia division to customers in the pharmaceutical industry were more than 20% below third quarter last year. As stated in previous quarters, this shortfall in non-core business is primarily the result of the lost sales volume with two major customers, one of which who closed a plant facility, and another who had been on credit hold for most of this year. I am pleased to report that Neogen was able to work out satisfactory payment terms with the large customer that had been on credit hold for all of fiscal-year 2012. This arrangement cleared the way for a shipment of media in February, and is expected to result in a return to normal sales volume as we move into fiscal-year 2013.

So, while challenges remain in certain operating areas, our two largest operating groups experienced exceptionally strong organic growth in the third quarter. This performance is encouraging, and leads me to believe that we are on track to return the kind of organic growth management expects on a quarter-to-quarter basis.

I do want to take a few minutes for a couple comments pertaining to operating margins. I'm sure that our listeners noticed that our third quarter was particularly strong for gross margins. The 230-basis point improvement in gross margin is certainly reflective of a stronger mix of diagnostic products in the quarter; however, I also need to recognize the ongoing cost reduction efforts of our operations groups throughout the Company. We continue to have multiple teams focused on reducing costs and improving productivity that are yielding positive contributions to the gross margin line. Cost reduction will remain an important part of Neogen's operating culture going forward.

Now, I'm sure you also -- that our listeners noticed the 320-basis point increase in sales and marketing expense in the third quarter. This increase is part of Neogen's planned investment to build a stronger team of sales and marketing professionals to take advantage of what we believe are rapidly growing worldwide food safety and food security markets for our diagnostic and intervention products. As of the end of February, Neogen had added 43 positions focused on sales and marketing this fiscal year, with many of these positions added in the last two quarters. This represents more than 60% of our headcount increase in FY '12.

Obviously, this kind of increase in staffing levels has resulted in a significant increase in salaries, along with associated fringe and travel-related expense. This overall increase in cost, while still leading sales at this point, is already contributing to sales growth. Earlier in my comments, I mentioned the growth in Neogen Europe sales, and the continued strength in sales growth at Neogen do Brasil, both of which are a direct result of increases in sales personnel.

Our Neogen Latino American division has achieved sales growth of 27% this fiscal year, again, largely due to expanding and strengthening our sales team in that operation. Adding sales staff and implementing new marketing campaigns this fiscal year has certainly contributed to sales growth of 25% and 20%, respectively, for our third quarter and on a year-to-date basis in our Lexington division. And an example of the positive effect of investing in sales and marketing within our Lansing diagnostic division is reflected in more than $700,000 of incremental new revenue in the third quarter from new customers, and existing customers purchasing new products. Management believes additional organic growth will be realized in future quarters, as our recent hires receive more training on Neogen products, build stronger relationships with our customer base, and as we continue to introduce new innovative products and solutions for the food safety and food security markets.

And the mention of new products provides a convenient segue for me to cover one last area before I turn the call back to Jim for his closing remarks. Management continues to be encouraged by the pipeline of new products being developed by our research and development team. New products that have been released in the last two quarters have been thoroughly tested for efficacy and robustness, and as a result, these new products have been well received by customers.

As mentioned earlier, our Q Plus quantitative lateral flows for aflatoxin, vomitoxin, and zearalenone have achieved strong introductory sales. Two other examples of successful new product launches include our new E-Jac 6 veterinary instrument sold out within two weeks of introduction, and our new Data Manager 3.0 software that customers are finding a perfect match for Neogen's highly successful AccuPoint ATP test system used to monitor general sanitation.

We are equally excited about additional new product introductions planned for the next 90 days. We are eagerly anticipating the launch of what we continue to believe is the next generation of molecular-based diagnostic tests for food-borne pathogens like salmonella, listeria, and e-coli. Marketed under the trade name, Answer, this new test system will provide users with a faster, easier-to-use test platform to detect specific pathogens, with the added benefit of a minimal investment in start-up equipment.

Neogen has a number of other projects in the research pipeline that are also expected to be released in the near future, including a unique genotyping product for dairy and beef cattle, additional quantitative lateral flow devices for other important mycotoxins, new tests to detect additional drug residues of concern, and new and improved diagnostics for Neogen's industry leading product line of allergen test kits. These new products, along with our investments in sales and marketing, are expected to help drive our return to the double-digit organic growth rates our shareholders and management have come to expect.

That concludes my formal comments for today, and at this point, I will turn the call back to Jim for his concluding remarks.

Thanks, Lon, for that update. I think at this point, it might be helpful to give you an update on how we see the markets for our products that are developing here in the near term, as well as looking out a bit further. About 14 months ago, President Obama used 15 pens to sign into law the Food Safety Modernization Act. When completed, this will bring about the most dramatic changes in regulations regarding our food industry in more than 70 years. In total, the Act calls for 50 new regulations or industry advisories.

At this point, FDA is significantly behind, and none of these have yet been put into place. It does appear that four of these could be in place before the end of spring. At the last report I had from Washington, two of these were now awaiting Office of Management and Budget review. These two would establish how the food industry and the animal feed industries in two separate regulations would go about hazard identification and establishing preventative controls. These could call for more widespread testing, which would obviously benefit us.

FDA and USDA are both clearly under pressure to improve the food safety situation, with reported food poisoning still exceeding 48 million annually, and at least 3,000 deaths. A portion of these are coming from food imported to the US. Tighter controls over food imports is a major emphasis of the FDA Food Safety Act. According to FDA's own records, the amount of food that's imported to the US has nearly doubled in the past decade from approximately 5.6 million shipments in 2000, to 10.7 million shipments. According to USDA records, nearly 16% of the food that's consumed by Americans now comes from abroad.

USDA, as the other major food regulator other than FDA, has regulation now that's pending that will significantly increase the pressure to keep certain e-coli organisms away from meat products. You'll likely remember that e-coli 015787 was the first microorganism to ever be declared an adulterant in food. Neogen, in fact, had the first rapid diagnostic test for the detection of this organism.

In recent years, it became more evident that it was not just e-coli 0157 that was dangerous, but that this organism had six ugly sisters that were scattered around the world. As these additional organisms begin to be more and more incriminated in food illness outbreaks, USDA announced that it would include the other six in the mandatory regulation. This regulation was originally scheduled to take place earlier this year, but the deadline has now been extended until June.

One of the big issues in the extension has been the fact that there's not a good rapid diagnostic test to properly identify the other six e-colis. Neogen is in the hunt for the new rapid test that will be required, but in the meanwhile, through our genomics expertise at GeneSeek, we've been able to identify on a molecular basis how to distinguish among the seven organisms, and provide bona fide results back to the industry. We expect that this service will be important to the industry, particularly here in the near term.

The concern for food-borne allergens continues to increase. Official numbers now show that 1 in every 13 children has a serious food allergy. The Center for Disease Control estimates that there's been about an 18% increase in the past 10 years in the incidence of food allergies. Neogen now has rapid diagnostic tests for the detection of peanuts, milk, eggs, gluten, and nine other important food-borne allergens. Our R&D teams in the US and in Scotland have three additional tests that are under development that should be released here in the next couple of months.

All of these are important as we look over the short-term horizon; however, we believe that even more important is the concern about food safety as it stands in the way of food security. I attended a White House conference earlier this month with approximately 50 food companies and government officials to focus on how we can produce 70% more food in the next 35 years, by when the world population is expected to double. And it's not only a concern about producing enough food, but it's also the quality that will be demanded. As the world's middle-class population increases from about 1.8 billion to 4.9 billion, these consumers are not going to be content to eat the staples of rice and corn cakes as they might have in the past. Some of them will have had the opportunity to eat meat for the first time. Failure to meet these demands, we believe, carries with it serious socioeconomic impacts.

Well, let me wrap up my comments by saying that the market growth for our products, both on the intervention side as well as on the diagnostic side, are very bright in the coming quarters, and certainly throughout the remainder of this decade. The things that we did to build up our resource base during the past quarters should put us in a good position to take advantage of this market growth that we've discussed, and the new products that are being developed will both fill market voids, as well as make us more competitive. We do appreciate your continued interest and support of Neogen as we continue to grow.

At this point, I'll conclude our formal comments, and we'll open the conference call to any questions for Lon, Steve Quinlan, or myself.

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

Good morning, folks, and thanks in advance for taking my questions.

Good morning, Steve.

Couple questions here. You gave us some really nice granularity on the trending within the quarter, and I'm wondering if you could give us a little bit of a flavor for how things have continued in March. I know we should never place too much emphasis on the first month of a quarter, but we probably should place some emphasis on it, and I'm wondering what you can tell us about it.

I don't give advice, so I'll have to refer that to Lon.

Steve, as you know, Neogen does not maintain a backlog of orders. It's not like we sell on contracts or anything like that, so our sales are really -- our orders are shipped generally within 24 hours of when they're received, a lot of times same day. Management has high expectations, and always have had, and I wouldn't want to change our expectations from anything we've had historically. And that means we're focused and the sales and marketing teams are focused on getting double-digit growth. And we made -- we had a tough start to the last quarter because December fell so far below, and then we were able to achieve that in January and February. And so we're looking forward to the same kind of effort in the fourth quarter so we can hopefully when we meet on July be able to report positive results to you.

The recent business environment kind of more supportive of at least encouraging trends? I'm not asking for a number, but I'm hoping for some indication that you're not dealing with another crater like you dealt with in December.

Yes, let me speak to the international side. Though we were down 10% in those important EU countries, and I think both Lon and I said that even though those big countries were down, we did see some positive impact from where we have more traction of our own in Germany and in the UK, Germany and the UK were up. They were up stronger than they've been in the past, so we think that that's beginning to see some recovery there.

We talked about doing some things when I was over in January with a dozen of our key distributors that are in some of those EU countries that have been hardest hit by the financial situation, and we put in place some programs there. There's lack of available capital borrowing, bank borrowing in some of those countries. So though we don't have a lot of big capital intensive products that we sell, we do have products that you need in order to be able to buy the disposable or the useable diagnostic tests, you need a reader to read them with, and those are -- some of those are anywhere from $8,000 to $15,000, $25,000. And where there wasn't any money available, we worked out some programs so that we can provide some extended credit to some of those to be able to take advantage of that.

I think I'm beginning to see some positive movement from that, particularly in Spain and Italy and probably Belgium, so they can't sit on their fists and lean back on their thumb forever. Things have got to be done, and they're tightening up on the imports that are coming in. It's not just testing the food at home, but those countries all have a high reliance on food coming from other places. It's kind of helpful to us that some of that food, significant pieces of it now are coming from Brazil, so that gives us an opportunity to test the food on both ends of the ship. So I think that we're about to shed some of the doldrum situation in the EU, and as we know, it hasn't made the financial headlines recently, so maybe that's going to be helpful.

Yes, that's helpful. Now one of the businesses that jumped nicely off prior run rate was GeneSeek, and I know you've been telegraphing to us that there were better days ahead after a little bit of an air pocket. What kind of visibility do you have for the strength in that business continuing, and what's driving it?

Yes, I like your air pocket term. I think that's kind of what it was. That business was up 50% in FY '11 compared to FY '10, so we were up against quite a comparable there. So, but we were up -- if you look at where we are right now, we were up about 5% for the quarter if you look at revenues in GeneSeek from all sources. That didn't include any of the work that we think will come in on laboratory test work on the e-coli product line. We think that will make some contribution, probably not huge, but it's going to make some contribution initially.

We think that parts of the world that have not been severely affected by the financial crisis are principally Australia and New Zealand. We do a good bit of business down there as it relates to the dairy industry. Those dairy industries are doing well, and we think that we'll see more in the quarter. It looks like in the quarter coming up we're going to have an increase in testing on genomics for the dairy animals for the dairy industry and particularly in New Zealand. There's a continued move in a lot of places on animal genomics.

Though we don't put a lot of emphasis on goats in this country, there are parts of the world that depend on goats as a principal source of meat. There's work being done there. We're doing work -- expanding some work in Brazil on the Nelore cattle down there that's a different kind of cattle than what we see in most of the rest of the world. That's going to have an impact, because if you remember, Brazil is a major exporter of beef. So, I think our GeneSeek business is -- has not been a disappointment. It's every bit of what we thought it was going to be when we made that acquisition almost two years ago, Steve.

Great. You have just given me a nice little segue there. You've also had an uncharacteristic dry spell on that acquisition front. It seems like there was some hopeful verbiage in the press release that you were moving some things along. Can you tell us a little bit about your pipeline? And thanks again for taking my questions.

You bet. I'll have to look back. I didn't know we telegraphed anything in the press release, but it was unintentional. We are active. We are not at a position to be able to report any acquisition at this point. But things have opened up here over the course of the past few months with some opportunities that best fit our overall strategy of they've got to be synergistic to our current business, and we've got to be comfortable in how we can integrate them. And we're seeing some of those opportunities. It's probably inappropriate for me to say much more.

Great. Thanks again.

Thanks.

The next question comes from Reggie Miller from CLSA. Please go ahead.

Hi, good morning.

Good morning.

I was just wondering if you could maybe shed some more light on the marketing programs that you had in place, what we can expect for them going forward and some color around where you'd like to see those trending as maybe a percentage of revenues, because it seems like they are pretty successful, and it's going to be a very important part of your business to continue increasing investment in that section.

Well, let me make just a quick comment and then turn it over to Lon for the real color. I think one of the things is we've put a lot more emphasis behind marketing. As we've gotten bigger, we've been able to be a little bit more sophisticated, so we're looking at marketing more in a lot of the traditional methods, and I think just the internal emphasis has been helpful. Lon can perhaps bore down and be a little more specific on some of those.

Yes, I think what one of the things that we wanted to do as part of this investment in our sales and marketing area was to separate out more formally our -- a marketing team that would be focused on more traditional marketing kinds of programs. On the food safety side, we're really just starting to get underway with that, with the new Marketing Director that came on board January 1. So we are going to be putting some specific programs in place. We're going to be establishing -- I think I saw a list that was identified for the next six months or so that identified six or seven different marketing campaigns that we're in the process of building tactics around. They're predicated and aligned around areas of strength for the Company, including a number of the product lines that this -- listeners on this call know very well.

Probably in terms of this fiscal year, when you're talking about specifically marketing and you're talking about the third quarter particularly, I think some of the campaigns that we had on the intervention product side that came out of our Lexington operations that had that strong growth were probably more successful and farther ahead than where we're at on some of the diagnostic products at this point, strictly on the basis of who we had in place and what we had from a resource standpoint in terms of manpower to do them. And so I mentioned the veterinary instruments and particularly the detectable needles. That was a specific targeted marketing program that we have done. We've got some programs that are aligned around the intervention products going back inside the farm gate from rodenticides to cleaners and disinfectants, focusing on the large integrators that are serving in the animal protein production markets. And we're having some success there. So we're pretty excited about some of the things we've got going on, and I'll be perfectly honest with you, in the area of the diagnostic products that are associated mostly with what our food safety kinds of things, we're really just getting started on those.

Thanks for the color, guys.

The next question comes from Steve O'Neil from Hilliard Lyons. Please go ahead.

Good morning.

Good morning, Steve.

One quick follow-up. In G&A, you mentioned some higher legal expenses. Looks like overall, G&A is up about $1 million. Do you know -- was the legal expense a significant factor in that increase, or could I get some detail on that, please?

Yes, Steve something over $200,000 in the quarter in legal expenses that were at least that much above where we were last year. We've got -- we've always got a case or two around that deal with intellectual properties. That's about the only legal expenses we usually ever have, and these are both dealing with intellectual properties. One's been around a while. It's getting heated up, I think, toward perhaps some final results. There's another one that probably I shouldn't comment too much about, but it's -- we've got a situation with somebody on the other side that's a pretty frivolous kind of a deal. But intellectual properties are pretty important to us, and so we've always been very aggressive in defending where we are. And we've spent money through the years, but we've gotten some very significant results as a result of being aggressive.

Moving on to some of the product areas, Lon referred to double-digit growth in mycotoxins and food allergens, but that area was only up in the single digits. And I'm just wondering, were there some areas that were lagging in that segment?

You're thinking of the food side, Steve?

Yes.

Diagnostic side?

Yes.

Well, I mentioned the -- in the area of drug residues, which is the category I mentioned, the large distributor that we have that sells the drug residue tests for dairy antibiotics, especially in Eastern Europe, has done a good job for us over the years and on a year-to-date basis is up a good number this year. But they did have an inventory adjustment month there in December where they didn't order much at all but came back in January and February. But that group was down not much, just overall drug residue was just 2% below the previous year. But that was a result of that, those orders being not there in the month of December for that distributor.

Who is your distributor in Europe? I can't remember the name.

It's Chris Hansen.

That's right.

Only for that product line, Steve.

Just as it relates to dairy antibiotics.

And Charm Sciences is your competitor in that area.

That would be correct. That's right.

And then, how about dairy antibiotic business in the US?

The business in the US has been slow to develop. I will say we've had a lot of evaluations that have been done out there. The good news that comes back from that is every single potential prospect and customer that tests the product says, yes, it works great. I think there's a couple things that are going on there. I think that we've discovered that work flow is particularly important to these customers, and so we're working on some sample handling and reader improvements that will have minimum disruption and actually work with them in terms of work flow so they won't have to change there.

And then the other thing that's happening that's really going to be to our benefit, I think, going forward is they're expanding their interest beyond the beta-lactams and starting to take a look at additional drugs of concern, including tetracyclines and sulfas and in addition to that, things like flunixin and even an issue that starts out as a mycotoxin that turns into M1. And I mentioned M1 because we actually are seeing and had a major order that came through for shipment of M1 diagnostic kits going to China that was for the dairy industry, and you've heard us talk about China in terms of dairy industry before. We've had great success over there this year, particularly with our testing of general microorganisms using the Soleris technology in that country.

So we're going to be expanding our offering to give us a better opportunity to penetrate the US market. And they are also doing some things from a sample handling standpoint so we can have the kind of work flow that those prospects want to see, because we know from their own tests that the product itself, the BetaStar Plus test that we came out with works very well and gives extremely accurate results and is rock solid. So I continue to believe -- I'm not going to say we're happy with the results so far, but it's a market opportunity that we're going to continue to go after because we think we can penetrate and achieve some sales growth there as we move forward.

And I want to make sure I heard this correctly. I think you said -- did you say that culture media declined 20% in the quarter because of your problems with two customers?

Yes, the dehydrated culture media sold to what we call the traditional market primarily, which are pharmaceutical companies. It's part of the business that we acquired and we've supported it. It's not a core portion of growth. It was down 20%. Most of that, again, was in two customers, one of whom had closed a facility. They were manufacturing poured plates and did not transfer that to another location. In fact, they sold the customer list to other media manufacturers who were basic in selling to the pharmaceutical industry, which we were not and wouldn't even have been a candidate for acquiring those lists. So that was -- that has been hurting us all year, and then the other one was a credit issue with a customer that we refused to sell until we worked out a satisfactory program that we got done in the third quarter.

Now, I want to separate out, there's another part of that business. A big chunk of that Acumedia business or dehydrated culture media is used in food safety applications. That's the primary reason that we acquired the business originally, and it supports our pathogen testing business. And that has been growing in double digits for a number of years and was actually up 14% in the third quarter. Those sales are reflected in the Lansing Diagnostic operating division and recorded as an inter-Company sale by Acumedia. So Acumedia doesn't get the benefit of that, but that portion of the business is doing very well.

That was my question, because it looked like an overall increase, so okay. And actually, you just mentioned it, but I didn't really hear much discussion of Acumedia and Soleris in your remarks, Lon.

Well, Soleris technology continues to do well. The disposables vials that are part of that business were up like 16% for the quarter. So I just expect double-digit growth when it comes to the Soleris technology and particularly in the area of the disposables, and we're in the process of introducing and working on some additional vials. I didn't talk about that in terms of new products, but we've got some other opportunities there we're continuing to work on. The thing about Soleris that will vary from quarter to quarter is the instrument-based sales. We've had individual quarters when the comparisons there have been -- have affected the overall growth, but as long as we continue on a yearly basis to place instruments, the disposable vials, which is really what we're interested in, continues to grow very nicely.

Now, you in the -- Acumedia and Soleris are contained in your bacteria and general sanitation segment, are they not?

The Soleris is part of the general micro area. I'm not sure about Acumedia is also part of general micro. I guess if you're looking at in terms of the SEC --

In terms of what you report in your 10-Q.

Yes, they would be in that general micro area.

Okay, because that -- was there an area that was down in the quarter then? Was microorganism testing down in the quarter? That area didn't seem like it did as well as past quarters.

I think that it would be more on the Acumedia side.

Okay.

It would be affecting that. The general micro area I know was up for the quarter.

And that's mostly, as Lon said, in that non-traditional side, which is good business, and we continue to maintain it, and it helps our overall program. That was -- of course, Acumedia was one of those 19 acquisitions that we've made since 2000, and it continues just to do great for us. It continues to be synergistic top and bottom line for the reasons that we bought it.

Actually, I think I confused myself. When you're referring to the two customers, those were Acumedia customers, not --

Correct.

Okay, that explains it now. I'm fine with that now. But is this a seasonally slower period for both mycotoxin testing and bacterial testing in terms of looking sequentially across your year?

You've followed us for a while, Steve, and we've taken a lot of seasonality out because of various products and various markets that we cover. But there's still more testing for mycotoxins during the harvest months. And, of course, we've got harvest in Northern and Southern Hemisphere, and that's tended to knock a lot of that out too. But still, because of our dominance in parts of North American grain market, this quarter is a little less -- or the coming quarter, especially, is a little less testing, because that grain has been moved around and maybe tested once or twice. But at the same time, we've got the Southern Hemisphere that starts to come in. So our presence in Brazil is going to be more and more important down there.

From the standpoint of microorganisms, just do better when they got heat. And one of the big problems of particularly on anything on the food side where it is subjected to -- when we got e-coli 0157 coming out of animals that come out of the feed lot in the middle of the summertime, they are carrying to the processing plant more organisms hanging on the hair and the coat of the animals than they would any other time during the year. So there is, based on what we do in the food side, there is more testing probably in the hot weather than otherwise. But again, we're in 113 countries, so we're beginning to more and more normalize, I suppose, some of those revenues.

Last product question. You addressed the rodenticide question but I had a note. Did your customers build inventory ahead of the CPA change, now they're working it off? Or has the change to packaging been a disruption of their sales just in the current quarter?

No, there was some stockpiling of the old product prior to the implementation of the risk mitigation rule. Most of those inventories are starting to work off. We have had a couple customers in that retail, we call them retail box stores, but are in that retail segment that have to address packaging. They are trying to determine how they are going to move forward and the kind of shelf space that they will allocate to this. So it's been a combination of the packaging and working off inventories that have affected rodenticide sales this year.

Great. Thank you. That's all I have for right now. I'll get back in the queue.

The next question comes from Brad Hoover from Sidoti & Company. Please go ahead.

Hi, good morning. Wanted to ask about the new quantitative mycotoxin tests that you guys recently launched, and sounds like they are going well. I was curious as to what the mix kind of looks like between existing customers switching out their Neogen qualitative tests versus you winning new customers. And secondly, kind of what the potential is. Are customers asking for quantitative tests? Are you having to sell them on them? And just kind of what the outlook is for these tests.

It's a good question. I think it is too early to tell exactly what that breakdown is, and I don't know that we have that information. I mentioned in my comments -- I'll give you some flavor just in terms of overall for the quarter. I mentioned that $700,000 of new business. Actually, I think there was as many as 700 new customers that -- well, let me restate that.

There were approximately -- and I don't remember the exact breakdown -- but about 350 new customers that purchased product from Neogen for the first time in that quarter and another 350 that purchased that were already customers of Neogen but purchased a new product from us. So one of the things that we are trying to do is, we call it mine the database of customers that we have here and prospects and stuff and take advantage of the fact that we have this one-stop shop of products and where customers are not buying as many products from us as they should, make sure our sales and marketing staff are working on promoting the entire line to them. But obviously, in terms of new customers, that's part of the benefit of having an increase in sales and marketing staff and partially the benefit of having new products out there.

We'll be monitoring that as we go forward. It's just too early to tell on these mycotoxins, because it is past the harvest season. I know aflatoxin was strong. I know DOM was strong, and I know that we've already had valuations with new customers that have gone well and have purchased product. I just don't know the specific numbers of new customers for those two -- for that specific product line.

That's really helpful, Lon. I appreciate the color. I know it's still early and look forward to continuing to monitoring that. Thank you.

(Operator Instructions). The next question comes from Jason Rogers from Great Lakes Review. Please go ahead.

Hi. It's actually Greg Halter on the line as well here with Jason. First question, do you have your cash flow from operations figure for the quarter?

We do.

Steve can give you that.

Cash from operations was $7 million even.

And that's for the quarter, correct?

Correct. $13.2 million for the year to date.

Great. And your capital spending for the third quarter, and what your plans are for the full year, fiscal '12?

It was $1.9 million, and it's probably going to come in somewhere around $12 million for the full year. And if you remember, included in that $12 million is the $5 million purchase of the Lexington warehouse that we did in August.

And I notice that both your -- on a year over year basis, both your receivables and inventory are up about 16%. Both those numbers outpace the year over year sales growth, and I just wondered if you could provide some comments on each of those.

Sure. Receivables are still in very good shape. We're 91% current. 96% are current to 30 days, which is right in our traditional aging pattern. Really what you have here is a little bit of an anomaly. The last two months of our fiscal '11, April and May of 2011, sales were $30.4 million. And then the last two months of this quarter, January was $13 million and February was $21 million, so our sales were $34.7 million.

So we really had -- if our DSO is about a 60-day collection period we're -- we had $4 million in those two comparative periods. So that explains the bulk of that $5.5 million increase. And then DSO, we generally operate in a 57- to 63-day collection period, and we're right at 61. At the start of the year we were at 57, so that four days really explains the rest of the difference.

Okay. And then on inventory?

Yes, inventory we're up about $4.4 million, and we have three kind of distinct pieces there. GeneSeek, we buy in large -- buy basically in bulk our chips that we use in our lab, and that gets us best pricing. And that is up about $1.7 million year to date, and that's down actually $0.5 million from the November balance. Animal Safety, we're in the middle right now of moving production from a rented facility to the new warehouse that we recently bought. And that's about $800,000 of the about $1.5 million of incremental inventory there. And then they've also bought some inventory ahead of some of these seasonal programs that they are offering here in the spring. And then the food safety is up due to inventory build for some of these new products that we're introducing, and that's about $1 million.

Okay, great. That's very helpful. I know you made a foray into the seafood business about a year ago, I guess it's been now. I was just wondering if you could provide some comments on what you're seeing in that area so far.

We haven't been able to progress that quite as much as we -- still is our ambition. We had a good acquisition in our sights and thought we would get something done on that that would provide us with access to an important piece of the market. We couldn't come to terms with the seller as related to value and price. But in the meantime, we did make an acquisition of a seafood testing lab in Oban, Scotland, which we moved down to our operations in Ayr. It's been a good addition, and we have continued to work on expansion of our diagnostic tests for the detection of shellfish concerns.

We have two of those important diagnostic tests now that are coming into the market and a third one that's -- it's probably still, I'm going to say four to six months away from introduction, paralytic shellfish poisoning. And some of you may have heard recently there's been some comments about red tide and the problems of red tide. Well, red tide really ties back to the shellfish issue. It's the algae that grows in the water is ingested into the shellfish, which would be scallops -- principally scallops, clams, and oysters. And we are moving there, and we're doing more and more -- that Oban operation that we moved to Scotland is doing some very nice work both in helping us develop these rapid tests as well as doing laboratory work. But it's still in our sights.

We still think that there's good opportunities in aquaculture, mariculture area. A big part of -- I talked earlier about what percent of our food comes from abroad here in the US. We import over 70% of the seafood that we eat. And they come from -- some of those come from countries that have some questionable sanitation practices. So we think that the aquaculture, mariculture thing still offers us opportunity. We are still diligently looking but haven't been able to play out our hand there yet.

And two more for you. The first one is, what's the swing in your other income versus expense? I think it's about $800,000 on a year over year basis.

You're talking specifically for the quarter, right?

Correct. (multiple speakers) says 222.

In this year's third quarter, we reversed -- we have an earn out with the GeneSeek business. And every year or at any point during the year, we have to evaluate how much do we think we are going to be paying out on that earn out. In the third quarter this year, we reversed out about $220,000, basically took to income $220,000, because we aren't going to be paying out to the former owners of GeneSeek as much as we had set up at the beginning of the year. Last year's third quarter, we actually took a charge for $218,000, and it's just the exact opposite. They were doing -- they were so far outperforming the budgets that we had set for them last year that we had to recognize some incremental expense last year. The other biggest pieces within there are we recognized some royalty income this year of about $165,000, and last year, that was a much smaller number. It was about $30,000. The remainder is currency swings on comparative -- this third quarter was about $150,000 of currency pick up. Last year's third quarter was somewhere around a $60,000 charge.

Okay, great. That's very helpful. And then last question relates to Tractor Supply and your relationship there. I think they have got around 1,085 stores. And first I'd like to ask how many of those stores you're in and what your plans are as they plan to go to 2,100 stores over the next number of years.

Well, thanks for that question. We haven't mentioned Tractor Supply in quite a long time. We continue to have a very good relationship there, and we are in every one of those stores and not just veterinary instruments. We have some other product SKUs that we've been able to add over the years there, and whenever they do a line review, we are always requested to participate if it's in a product segment or category that we can supply. And it's because we do have a good relationship and have had a good relationship with them over the years. In fact, it was just about -- it was just over a year ago where they had a line review, and we were able to obtain some additional business and expand our presence in those stores. So they are a very large customer for us. We continue to participate. As they open new stores and we continue to work very hard at getting additional product SKUs in there, and we'll continue to do that as we go forward.

That's excellent. And sounds like a very good opportunity for Neogen.

The next question comes from Steve O'Neil from Hilliard Lyons. Please go ahead.

One quick follow-up. Just wondering about the reason for the lower tax rate and possibly what tax rate we should model for the full year?

The primary reasons for the lower tax rate is we were able to take some larger deductions and some income tax credits this year, more so than last year. And last year through the third quarter, we were actually accruing at a higher rate. We were at 37% last year in the third quarter. And because -- in the fourth quarter, if you remember last year, we actually adjusted that effective rate down to -- the fourth quarter was a very low rate. But I think we ended up for the year somewhere in the 35.2% range. So we're accruing at a lower rate this year, obviously, which reflects what we actually did last year and the fact that we are going to be entitled to some higher deductions and credits this year. So in terms of modeling, the 35.6% for the quarter is our best estimate at this time. If you wanted to somewhere in the 35% to 35.5% is probably a good range.

Okay, great. Thank you so much, and have a good day.

Thanks, Steve.

That concludes the question and answer portion of today's call. Please go ahead with any final remarks.

Well, thank you all so much for your continued support and your participation this morning. We'll look forward to talking with you in the next of these calls, and unfortunately, that's going to be a while. It will be after the conclusion of our current fiscal year. So again, once again, thanks for your continued support, and good day.

Thank you for participating in Neogen's third quarter fiscal year 2012 earnings results conference call. This concludes the conference for today. You may all disconnect at this time.