Neogen Corp (NEOG) 2012 Q4 法說會逐字稿

Welcome to Neogen's fourth-quarter fiscal year 2012 year end earnings results conference call. My name is Christine and I will 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 that today's conference is being recorded.

I will now turn the call over to Jim Herbert, Chief Executive Officer. You may begin.

Thank you, Christine, and good morning and welcome to our regular quarterly conference call for investors and analysts. As Christine said, today we will be reporting to you the results of our fourth quarter which ended on May 31 and also the full 2012 fiscal year.

To start out, I would remind you that some of the statements that are made here today could be termed as forward-looking statements and these forward-looking statements of course are subject to certain risks and uncertainties the actual results that may differ from those that we discuss here today. The risks that are associated with our business are covered in part in the Company's Form 10-K as filed with the Securities and Exchange Commission and our new Form 10-K for the 2012 fiscal year will be filed with the SEC and available approximately on July 30.

In addition to those of you joining us today by live telephone conference, I would also welcome those who may be joined by simulcast on the World Wide Web. These comments along with some exhibits will be available on the Web for approximately 90 days.

Following our pre-pared comments this morning, we will entertain questions from participants who are joined by this live telephone conference. And I am joined today by Lon Bohannon, Neogen's President, and Steve Quinlan, our Chief Financial Officer.

Earlier today, Neogen issued a press release announcing results of the fourth quarter of our 2012 fiscal year. And once again, we reported record numbers. Revenues for the Company's fourth quarter were approximately $48.5 million. That is an increase of 11.4% from the previous year's fourth quarter.

This brings the total revenues for the Company's 2012 fiscal year to approximately $184 million, up from last year's $172.7 million. Net income for the fourth quarter was slightly over $6 million which is about 1% ahead of last year, but the rounding still equals $0.25 a share as compared to the $0.25 last year for the fourth quarter.

For the full year, net income was $22.5 million compared to last year's $22.8 million. This equates out to $0.94 per share this year, compared to $0.96 last year when the extra 228,000 outstanding shares are taken into consideration in this year's report.

Though the fourth quarter doesn't reflect a full recovery to our normal high-performance model, I think it does show the progress that we told you -- what happened that we told you we expected. We started off the 2012 fiscal year with a 6% increase in that first quarter that compared to a tremendous first quarter in 2011 that had been up 33%.

Revenue generation got a bit tougher when we were only able to show a 2% increase in the second quarter. And at that time we told you that we understood the problems and were on a program to get the situation righted.

At the end of the third quarter, we were back to a 6% increase. And at that time we advised you that we believed we would be back to double-digit growth in the quarter ahead, and that is the one that we just finished at over 11%.

A bit over a year ago, it became obvious to our management group that all of the indicators were positive for strong growth in food safety and animal safety markets. Even though our compound growth rate for the previous five years had been 19%, we realized that our existing infrastructure would not likely sustained those levels of growth that we had been reporting.

The results that we are reporting to you today for the full 2012 fiscal year reflects, I think, the emphasis that we have been placing on creating an operational infrastructure that would allow for the sustainable growth levels that we believe lie ahead.

Back in 2008 when our revenues crossed over the $100 million mark, we immediately set our plans to reach the $200 million mark in five years. That would be our 2013 fiscal year. We are now in a position to reach that $200 million mark in this year that we have now begun and continue those growth levels on beyond.

Though we didn't show the kind of growth this year that we did last year, nevertheless, the growth was solid and the quarter that we just finished parts the eighty-first quarter out of the past 86 that Neogen has shown revenue increases as compared to the previous year. That growth record now stands 21.5 years.

We got a lot accomplished this year that should be putting us in a good position for this year ahead of us. From a fixed asset standpoint, we completed a new warehouse in Wisconsin for our Hayco operations that will allow us to get out of two warehouse leases that we had in Wisconsin that were pretty ineffective for our rodenticide and disinfectant business.

We acquired a new 128,000-square-foot building in Lexington, Kentucky, that has replaced the leased facility for our manufacturing operations there that had gotten a bit ineffective. We bought a beautiful old 36,000-square-foot manor house in Ayr, Scotland to give us room for expansion of our Neogen Europe Ltd. business that handles all of our Food Safety distributions to 40 European countries.

We already have significant manufacturing warehousing in sales and marketing activities there. So this is just a natural extension. By the way, that business only had about a dozen people when we occurred it nine years ago and they will go over 100 employees this quarter. We bought several pieces of manufacturing equipment last year that are just now beginning to have an impact on cost savings and increasing our manufacturing capacity.

One of our biggest investments in this past year was in personnel. During the year we hired approximately 100 new employees, pushing our total over 750 now. Our intention is -- I think I have told you in a previous call, was to phase that hiring in over a 12- to 15-month period and, hopefully, get the early hires to cover the cost of the latter hires. Well, we didn't quite get that job done that way and that wasn't the way it ended up, but we had a lot of employees all coming on at one time prior to the time that they really became productive.

We also brought on what I believe are some really top managers that will allow our existing managerial group to be more effective and capture additional market shares.

A part of our increased manpower was for our research and development labs and our five R&D locations. I think Lon plans to talk more about the R&D activities here in a few minutes. But as a broad overview, I am pleased to report to you that not only did we develop some new products during the past year, but we actually established four new product platforms that I think are real cutting-edge science.

In the technology business that we operate, we always try to be cognizant of the risk factors, both those where we can exert some control and those where we have no real control. One of these examples is currency conversion. You often hear us talk about wind at our back or wind in our face and most of this year that wind was in our face. In fact, in the fourth quarter it was almost at gale force when currency conversions cost us $680,000 in revenue.

However, even with these adverse currency conversions we were still able to maintain our international revenues at almost $77 million or about 42% of total revenues.

Legal expenses for the year that we just finished were about double the prior year. It was -- legal expenses were spent in protecting our intellectual properties such as our patents, our trademarks and our copyrights that have become more important as we expand worldwide.

Before I turn the program over to Lon, I frankly didn't really mean to stop on a negative note by talking about currency conversions and losses, but it is a good time for Lon Bohannon to give you some color behind our operations for the fiscal year 2012 and, probably more important, some of his thoughts about the year ahead.

But before I turn it over to Lon I want to make certain to thank our over 750 employees that are scattered around the world for their contributions this year and their role in helping implement the changes that will carry us forward.

Lon, let me turn the program over to you.

Thank you, Jim, and I too would like to welcome everyone listening on the conference call as well as those joining us via the Internet.

Jim has already reported on the overall sales and profit performance for our fourth quarter and 2012 fiscal year. Our press release issued earlier today provided additional details related to Neogen's FY 2012 results. I intend to cover a few additional highlights for the year but, more importantly, discuss our fourth quarter in more detail since I believe Q4 is more reflective of the future opportunities for the year ahead.

Neogen's overall 6.6% sales growth in FY 2012 was below management's expectations, and it is not reflective of the growth opportunities that exist for our Company. There were a number of challenges in FY 12 that impacted sales growth including negative currency translation, depressed market conditions in the EU, as well as some tough comparisons on a couple of quarters due to unique events that benefited sales in the prior year.

With an exception of currency translation, these challenges were most evident during the first six months of the fiscal year and particularly in our second quarter when, as Jim indicated, overall revenue growth slowed 2%.

However, Neogen experienced a strong recovery in the last two quarters of the year, closing out Q4 with organic sales growth of more than 11%. Were it not for the negative currency adjustment Jim described in his comments, our fourth-quarter organic revenue growth would have been over 12%. I also think the sales growth improvement over the last three quarters of the fiscal year going from 2% to 6% to more than 11% is a good indication that the investment we are making in sales and marketing, which Jim also touched upon in his comments, is starting to pay dividends.

I believe this is further supported in the fact that our Food Safety group obtained over $1 million of incremental new revenue in the fourth quarter. Approximately half of this segmental revenue was the result of existing customers purchasing a new product for the first time and half of that increment revenue was a result of the painting business from 450 new customers.

The solid fourth-quarter increase was broad-based as many market segments within our Food Safety and Animal Safety Divisions achieved double-digit organic growth. For Food Safety, the growth was also broad-based among many different product lines. For example, sales of our AccuPoint general sanitation test systems were up 22% in the quarter while sales of Neogen's proprietary Soleris technology for detection of indicator and spoilage organisms such as yeast and mold led to a 20% increase in sales of diagnostics for general micro applications. Sales of tests to detect drug residues, including antibiotics in fluid milk, increased 13% in Q4 and sales of diagnostics for food allergens were up a solid 10%. I think of particular note for Food Safety was that Q4 represented a second consecutive quarter of double-digit growth for our tests to detect harmful micro toxins led by growth in sales of our recently introduced Q Plus quantitative lateral flow test for aflatoxin [in DON].

There were a couple of Food Safety product lines that lagged in the fourth quarter. Sales of diagnostic kits to detect specific pathogens like salmonella and listeria were slightly below last year. Sales for this product line are expected to improve due to the recent launch of Neogen's unique ANSR test system that has already received AOAC approval for the detection of salmonella. A launch of the listeria test on the ANSR platform is expected within the next 30 days.

Another problem area for Food Safety in Q4 related to sales of dehydrated culture media primarily to customers in the pharma industry. Dehydrated media sales have been below prior year each quarter this fiscal year, due to lost customers and business that I have discussed in previous conference calls. However, the Q4 sales performance for this product line represented improvement over the previous quarters and we expect further improvement as we move through the 2013 fiscal year.

The report for our Animal Safety Division is equally impressive for the fourth quarter. Our [genes save] genetics testing business continued its revenue resurgence that began in our third quarter with a substantial increase in sales in Q4. Significant sales for the quarter were realized from processing dairy cow samples coming from New Zealand as well as sheep samples from Australia.

Neogen also added to its capabilities and proprietary position in the genomics area through the fourth-quarter acquisition of Merial's Igenity business. We continue to believe that genomics will play an important role in helping address issues of food security that become more critical as a result of a growing world population.

Animal Safeties Lexington division closed out a year of exceptional performance ending FY 2012 with organic growth of 17% and Q4 for organic growth of 11%. Diagnostic tests to detect drug residues used in forensic applications were up 18% for the quarter while test to detect drug residues such as ractopamine were also up substantially, due in large part to significantly higher sales of kits and reagents going to China.

Another product line achieving strong double-digit sales growth for the year was veterinary instruments led by an 18% year-over-year increase in sales of Neogen's proprietary D3 detectable needle. Animal care products such as Neogen's care line of small animal supplements and vitamin injectables achieved solid growth in Q4 and were up 24% and 31%, respectively, for the year.

Also noteworthy were sales of high-margin biologics including our unique BotVax B vaccine used to prevent type B (technical difficulty) botulism in horses which increased 26% in the quarter and was up 16% for the year.

Partially offsetting the outstanding Q4 results in our GeneSeek and Lexington groups was a 15% decline of the revenues at our Hayco operations. Last year's fourth-quarter experienced significant inventory stocking orders from rodenticide customers in advance of the EPA's new risk mitigation rule that went into effect just a couple of days after the end of last year's fourth quarter. The new rule primarily impacts packaging in the type of rodenticides that can be marketed to retail consumers. Neogen has rodenticides that comply with the new EPA rule and is focusing on new packaging configurations for the retail farm store market.

In addition, since rodents represent a significant food safety problem inside the farm gate, we continue to develop new bait formulations to capture a greater share of market with animal protein producers who must use rodenticides to control rodent infestations and outbreaks within their facilities.

Now before I leave revenue growth, let me briefly comment on our international sales.

We ended the year with international sales representing 42.6% of our Q4 total revenues which brought us up to 41.7% of FY 2012 total revenues. Our Neogen Europe operations had an exceptional fourth quarter with overall revenue growth of 24% led by sales increases in many of the product categories described earlier. Neogen Europe actually ended the year with double-digit organic growth, which is pretty remarkable considering the economic turmoil that persisted throughout the year in EU.

Our Neogen LA and Neogen (technical difficulty) operations also achieved excellent growth in FY 2012 with significant increases in sales although, frankly in fairness, these two operations are still very much in their infancy in terms of total revenues.

One other comment I would make regarding international sales is related to China. We now have our own employee in China working for a Neogen-owned subsidiary that was established shortly after the end of our 2012 fiscal year. Initially, this person will work closely with existing distributors to build Neogen's brand and presence in China's growing food and animal safety markets.

In FY 2012, total sales to China exceeded $2.6 million with much of the growth occurring in sales of drug residue tests and Soleris systems used to detect spoilage organisms. Inroads are also being made in the areas of plant disease diagnostics and general sanitation testing.

Well, switching gears, I do want to say I am particularly proud of our employees working in operations who in FY 2012 did an excellent job of managing cost at the gross margin level. For the year, gross margins were just 60 points -- 60 basis points less than last year and this decline is primarily due to a change in product mix between rodenticides and disinfectant sales. Employee teams focused on cost reductions were able to achieve a 24% reduction in Food Safety scrap expense for the year and helped the Company realize almost $500,000 in net raw materials cost savings during FY 2012.

Other initiatives resulted in labor savings, lower shipping expense, and increases in manufacturing productivity. Of course, all these cost savings programs were needed because, as Jim discussed earlier, management had determined prior to the start of FY 2012 we needed to expand our staffing levels particularly in sales and marketing to put in place an organization that will carry us beyond $200 million in annual sales.

As we look ahead to our 2013 fiscal year, we know we are serving markets that continue to grow both domestically and internationally. We are also now benefiting from a growing portfolio of new products that are being introduced to the market. Since March 1, Neogen has launched eight new products to the market. Included in the new product releases are two new mycotoxin products, three new food allergen tests, two new Soleris assays for sterility testing and aseptic processing and, of course, our new ANSR salmonella test.

More new products are scheduled for release as we move through the 2013 fiscal year for both the Food Safety and Animal Safety Divisions. We also have a much larger, more experienced and better trained sales and marketing team to sell these new products and take full advantage of the significant opportunities we believe exist for our Company.

Management expects to see the completion of our stated five-year goal to achieve $200 million in annual sales in our 2013 fiscal year and intends to build on that important milestone to achieve success for greater growth in sales and profitability in the years to come. At this point I would like to turn the call back to Jim for his closing remarks.

Well, thanks, Lon, and I think you can see that there is certainly no lack of optimism in our future when you hear Lon lay out the plans.

In my opening comments, I did not make any mention of acquisitions during the prior year since they had very little impact. However, during the year, we have made a nice small acquisition in Scotland to edge our laboratory services group there in Aye. Our big -- the big contribution of that acquisition will really come in the years ahead.

One concern worldwide today in the food industry is being able to provide ample seafood from both wild harvest as well as aquaculture. The laboratory business that we purchased in Scotland was solely devoted to testing seafood. This is providing us a good space as we develop rapid diagnostic tests to detect the most important shellfish toxins. I expect us to have at least three good rapid diagnostic tests coming from the Scotland research unit sometime during this coming year.

I also didn't talk much about -- or talk at all in fact about the acquisition of Igenity. Lon mentioned that. This is a acquired animal genomics business that we acquired from Merial in May right at the end of the year. This business is a great bolt-on to our GeneSeek genomics business located in Lincoln, Nebraska.

I believe that Igenity is likely the world's leader in supplying genetic information for breeding improvement of beef cattle. This now puts Neogen with what we are already had in the place of being the undisputed world leader in beef cattle genetics.

In addition to providing important selection traits to commercial cattle producers and feed lot operators, we also are doing work with more than a dozen of the different beef cattle breed organizations including the largest five. For those of you that are familiar somewhat with cattle breeds, you will recognize the names of Angus, Hereford, Simmental, Limousin, and Charolais.

As I think I reported to you in an earlier conference call this year, we have been able to take the genomic capabilities in Lincoln and utilize those not only in animal breeding such as beef, dairy, sheep and pigs, but also to utilize those in diagnostics in the determination of harmful food pathogens. Within the next few weeks, we will be launching our NeoSeek program to more precisely identify harmful microorganisms in food. This will be one of those 20 new product launches that we expected during the year. Lon gave you a little bit better color on several of those already.

Of course, we can't always manage around the risks that we can't control. However our awareness of those areas is important, I think, to the growth of our Company. Weather is an example. Record-high temperatures across major grain-producing states coupled with drought still leave the US corn and soybean crop in question.

Will this give rise to some of the important microtoxins where we provide tests? This of course is still unknown.

All of this is also driving up the cost of animal production. Cold wet weather in parts of Europe and the United Kingdom have introduced yet indeterminate other risks in the food industry.

Part of Neogen's distinct advantage is we offer many food and animal safety solutions. As an example, Mexico is now fighting a problem with avian influenza that has killed millions of chickens and may, in fact, require extermination in many more in order to prevent the spread of this disease. While this is bad for the meat and egg side of our business, we do supply the strongest available disinfectant in the market to clean up contaminated farms.

The winds of currency conversion are not predictable to us at this point, and what they may look like out over the next 12 months. However in certain high-risk situations where we sell products in currencies other than the US dollar, we do hedge some of those receivables.

Furthermore, as Lon pointed out in his comments, as we continue to be the lowest cost producer of the products that provide most of our revenues, we can and are protecting the bottom line with our continued investment in our efficiencies.

We will continue to look for those synergistic acquisitions and I have got a feeling that things might be a little looser here in the next six months, particularly for some of those businesses where taxes may be a major driving force. Our current view of taxes based on capital gains and what is going to happen apparently to Medicare is that Washington will get 10% more of a seller's profits after January 1.

Our balance sheet is of course strong and we continue to generate positive cash flow. The 16% increase in shareholders' equity during the past year and that strong balance sheet should allow for any borrowings that we might need to do to to even bigger deals.

In closing I want to make sure to make you aware of our annual open house and picnic for shareholders that takes place on Thursday afternoon of this week at the Company's headquarters here in Lansing. If it is convenient talk to Terry Maynard about the details and we would like to have you join us.

In closing let me once again say thanks to all of our shareholders and analysts who have been such strong supporters of the Company during the past year and also particularly to our employees who along with me realize that the toughest thing about success is that you have to keep on being a success.

This concludes our prepared comments for the day and we are now turning over the telephone call for any questions from participants.

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

Good morning, gentlemen, and congratulations on stoking some of those encouraging trends over the course of the year.

Thank you.

One of the things you mentioned, maybe I'll start with a numbers question and ask a couple on new products and then hop in the queue. But the FX numbers that you just shared with us in the prepared commentary, the $680,000, just to be clear was the revenue impact in Q4, and the $413,000 that you referenced as a currency loss in the press release was the operating income impacts? So my question is, is that the case and what were those respective numbers for the year?

For the year, the operating income number was $531,000 loss. Excuse me, the revenue number was $58,000 reduction in revenue for the full year. So you see we really got hit in the fourth quarter.

And was the $680,000 hit in the fourth quarter to the revenue line?

Correct.

Okay. That is helpful. I just wanted to get a clearer picture of what was happening under the hood.

And then on the new product front. In your prepared commentary you mentioned both Q Plus and ANSR in a constructive light. Can you give us a sense for the customer acceptance of those products and the prospects as we move forward here?

Yes. Thanks for the question. Q Plus, we actually released the first quantitative lateral flow for aflatoxin going back to last fall and followed that up with DON, deoxynivalenol, and I think we have got [humosin] out now and the acceptance of those tests have been very, very good. I don't even know how any customers we have totally sold since releasing that first product. But I know we've got significant amounts of dollars in the FY 2013 budget and we had good growth in sales of those products actually in fiscal year 2012.

I mentioned if you recall that we now in both the third quarter and the fourth quarter, we got double-digit organic growth in the area of micro toxins and I certainly attribute a good deal of that to the fact that we had these new quantitative Q Plus products out there and they are gaining market share for us in both the EU as well as domestically.

In terms of ANSR, that's really we are very excited about that product line. That's -- it is a platform we are looking forward to the listeria test. The ANSR platform and the salmonella tests that already has AOAC approval has been well received. We have already got six placements of that instrument. We have got 50 active accounts in the pipeline right now that are looking at it and so it is going every bit as well as we expected in terms of the initial launch. It is still very new and when you are talking about running the kinds of companies that are looking at this, they are all going to do in-house validations over a period of months to determine the quality of that product.

So but it is meeting all of our expectations at this point.

And would Q Plus the peak usage period for those naturally occurring toxins in grain would be what's starting maybe a month from now or six weeks or what is kind of the peak customary timeframe for utilization?

Those would generally be in the second quarter when we start to see crop come from the field. That's the OND time period is when we see most of the grain began to come out. The extreme South and Texas we will start to see a little bit of stuff coming out next month, but that is not going to be probably all that's --. It has never in the past been all that big. So it's -- but the Q -- that is sort of the beginning of the season. But remember when grain comes out of the field it changes and moves several times before it is finally consumed.

So its first point of receipt if it leaves the field and goes to an elevator somewhere in the country and then, the next time when it comes out of that elevator and goes to either another elevator or goes on a barge to go down river to go to be exported or it goes into actual consumption could be tested -- the same grain could be tested three or four times in its life. Most of that, however, does occur in our second and third quarters.

Scott Gleason, Stephens Inc.

I guess, Jim, if we could just deal a bit more on your comments on the drought and look at the upcoming harbor season for the [mycotoxin] test kits. Certainly those have been pretty important products for you guys. When we think about the second half of this calendar year, how do we balance that aspect with some of the new quantifiable test kits sales? Can you give us a little bit more sense for how you are thinking about that trajectory?

Yes. It's -- I think it -- I really don't know what the situation is going to be in Europe. I was over there two weeks ago and it rained every day and was 10 degrees cooler than normal. It is going to impact and is impacting, I think, their small grains over there -- their barley and their wheat crop -- which is likely going to continue to be problems with DON and some others. The yields probably look okay over there.

I think the problem that we are facing here is what we are going to do as far as yield are concerned. July is -- having been around this business for more years than I care to remember, July is always a rumor month. The first rumor is it is going to be a great crop because it rained yesterday and then the next rumor is it is going to be a terrible crop because it didn't rain on Friday and those rumors abound.

I do think that it is probably a little more concerned than we might normally think of. We have had four times in the last 20 years, when I look back, that we had sharply declining crop conditions at this time of year. The last one is we look back would have been back in 2005.

I think they suggest that, first of all in order to be able to test for mycotoxin we have got to have a ear of corn. And some of those places it looks so bad that there may not be any ears formed. But it is a little early to tell yet. I think it is going to get to be a disaster if we don't get some rain here in the next couple of weeks. But I don't think that -- the commodities market is talking about a disaster right now. I'm not sure we are ready to call it a disaster.

I do think there's going to be some spotty issues because and that works well for us. If the whole world has got the same or the whole state of Iowa as an example has bad mycotoxin corn then the whole state of Iowa has a tendency not to test. Because they all know it is going to be bad. However if it is from one county to the next, then there is a lot more reason to test. So I think we are probably looking at some spotty weather conditions out there which may mean that we will have some bad crop in some places and other places will have good crop.

So I think if our predicting right now and try to tell our people what kind of diagnostic test to get prepared to start to push out in September, October, I think there's going to be some opportunity for us, particularly in aflatoxin and corn.

You know, this is going to impact and is impacting what is happening in animal production costs. There's already been a cry to go out to get the government to rescind the ethanol needs. That is not apt to happen, try to keep corn flowing into the food supply rather than into fuel. That is a political hotspot. I don't see anything changing there.

We are seeing our -- beef herd is not because of the weather that we are seeing now but because of the weather last year and a few other places. The cow herd is the smallest that it has been if you look back in the last 25 years. So we don't have as many mama cows out there that are going to be giving putting feeder calves into the market this fall. That is going to be healthy I think for the cattle business, but by the same token, it is going to put a pinch on probably what he is going to bring in the meat counter.

The poultry business, we know, was hit pretty hard. I know several of you are acting as analysts on some of the publicly held poultry companies. Pilgrims, Tyson, Sanderson, I think they have all been downgraded as far as earnings this year because of what has happened or this week were downgraded because of the drought. We know that there were millions of chickens lost across even the central part of the country -- Ohio, Kentucky, Tennessee, both in the laying flock as well as in the broiler flock and part of that broiler flock is a hatchery supply flock that is producing hatching eggs to produce the-day-old baby chicks that are going to make chicken meat going forward.

So there's some uncertainties there not only because of feed price but because of the effect.

When you look at all of that, we are cognizant of it. We try to make sure that we are there to help our customers where we can, but when we have products on both sides, it is kind of comforting. I talked about the problem that our friends have in Mexico today with avian influenza. So they are not testing as much feed going into those flocks of chickens that are now dead. But by the same token as they clean up down there and they are decontaminating, we have the single best disinfectant in that marketplace and it is considered as such to use for cleanup.

So there's just a lot of moving parts right now. But that is kind of not -- you have been around this market for a while. That is not atypical for July.

Okay. Great. And I guess when we look at that Igenity deal in the quarter -- since it closed in May is the right way to think about that that that was about a $300,000 contribution and we are looking about the $6 million or so you did through the DNA testing segment?

And when we think about FY 2013 there is the right way to think about that $4 million to $5 million in total revenue contribution?

Yes. I think. I don't remember what our exact budget number is. We have got it in the budget now. Remember that a part of that business is add-on. We were doing all of the genomic testing for Merial. The samples were coming to us. We were doing the lab testing providing the raw data back to Merial and then they were running it through their bioinformatics models and then selling that -- those results back to their customer.

We have got both ends of the rope now. So we will continue to have the testing revenue that we had before, but we will also be able to capture the additional gross margins by being able to have our own -- have the bioinformatics that we can carry through to the customer.

So I think you would have to look at it in two ways. What is the total expected revenue from Igenity and then what is the expected revenue and earnings over and above what we had in the prior year? I ought to have those numbers in my head because I looked at them but we could give it to you at a later point. But I'm afraid to quote them now.

Great. And then this last question for Jim and Lon. When we look at the growth for FY 2013, obviously, seems like this year you guys are expecting a larger contribution from new products. Could you maybe give us a sense of what the magnitude of the total growth for next year could be from new product contribution?

And then also, I guess, obviously people are always wondering about acquisitions. Could you give us a sense for what the current pipeline looks like in terms of potential candidates that are out there and maybe how to think about that a little bit in terms of our models for FY 2013?

I think -- Lon, you correct me if your memory is better than mine. We've looked at those new products that were going to be introduced this year and sort of did a Ouija board on them, predicting which ones. I think we talk about 20 in my conservatism I have said I think 17 of them will make it but may not get there with all 20 by the end of the year.

But and the Ouija board we have tried to pick out how many of those would be $1 million plus in contribution and on down to less than $1 million, put them into about four different buckets. As I remember that number was somewhere in the range of $7 million coming out of those. But again, I am working from memory and if that is important to you, Steve can give you better information on these. He's got as the old boy he says with the aid of paper and pencil and he can tell you more. But that is about what I remember.

Yes, Scott, Jim is correct in terms of -- as he usually is in terms of his memory and as far as what we are looking at. We have been saying that we think starting really in that May period that we thought we could get 20 products out in the next 12 months. The opportunity is to even get more than that in the year when you include everything and animal safety and food safety combined.

But I think the opportunity to get another 15 out this year or so, based -- compared to what we have already got now is reasonable. And we do have a number of those products that we certainly expect to be $1 million plus kinds of opportunities. We kind of depend on when they get released. Obviously. things like ANSR salmonella and listeria, they are going to be released earlier in the year. We are going to have an opportunity to generate those kinds of numbers. Whereas some of the products that may be $1 million opportunities but don't get released until March of -- in the fourth quarter of fiscal year 2013 won't generate as much in this fiscal year. But certainly on a go forward basis we will be above that $1 million opportunity on a full year kind of basis.

So we can look. We don't really budget just specifically that way for new products because we sell them, we are market oriented and so we are looking at customers and markets. But we can certainly add that up for you and get that if you want to see that.

Great and then do you have any commentary on the acquisition pipeline? Thanks for taking my questions.

Yes. There is -- we have got three in the pipeline at this point. No letters of intent on any of the three. None of them really big. None of them that would unfortunately strap Mr. Quinlan's cash account this morning.

But we are looking at some things that do look interesting and I think particularly where you have tight ownership. Very controlled ownership, the comments I made in my prepared remarks it, I think we don't -- I don't think any of us know what the tax situation is going to be next year, but I think we probably all agree it is going to be higher than what is this year. And if we see a change in what capital gains is going to be and whatever add-on we are going to get for Medicare, it is going to mean that if you plan to sell your business, you ought to do it before December 31 and I think there are some people who are beginning to look around.

We have got one that is on our target right now that would fit into that category. But nothing that we have got a letter of intent on.

We are active there. We have got new member of our corporate development group 2 is a bright young guy who is much like [Jason Lily], he is the PhD. In his case chemist who is also an MBA from maize and blue, kind of a school down the road from us, who is pretty bright. And we have got him at work on looking at some things. Not just domestically, but also internationally.

Tony Brenner, ROTH Capital Partners.

Good morning. I have three questions. Jim, you mentioned that management has four new product platforms developed this year. Could you identify those and maybe comment on whether those are a significant piece of that projected $7 million or so in revenue contribution?

Well, one of those is the isothermal platform that Lon talked about with ANSR. We will put several products on that platform. The first one out is our product for salmonella. It's no secret that the next one coming is our product for listeria that looks equally good. It is -- those of you familiar with that side of the science it is even faster because it detects RNA rather than DNA so you can get there with a lot -- you get a lot more copies so you get there a lot faster. That one is in beta sites this week. I would expect with any luck we will have that one out by the end of the month. I had hoped I would get it on my birthday which was 3 of July, but they didn't quite make that.

Right behind that is what we are doing with [STEX]. That is the whole issue on hemorrhagic E. coli. That is a big development that everybody including the major meatpackers that are our close friends are all trying to wait for the next shoe to fall there. This is if you remember [FSIS USDA] came out and said that it is not just E. coli 015787 that is the problem, but we are also going to declare her six ugly sisters as adulterants if they are in food and nobody knew exactly how many of those there were going to be. There are some results back now that are showing that maybe as much as 5% is going to be contaminated in one of those. So that will be also on that isothermal program both to detect the hemorrhagic portion as well as to be able to detect the six serobars that are of the biggest importance.

Campylobacter is another one that will get added to that because of the problems that we see in poultry. So I think you can say that platform will put -- we will put several products on. One of the other platforms was our quantitative test in our lateral flow device that, frankly, is pretty well developed now. It was one of the four that we developed during the past year. That is the Q Plus line that Lon talked about with aflatoxin and being the first one out. We have still got a couple of those products that are not yet been introduced to the market, but will be here. Hopefully both of them in this fall timeframe.

And then the third one is what we have done with our Soleris product line. We have made some changes in one of the vials there which has made it possible for us to have a one step. Remember the Soleris product line is the one that we acquired from Eastman Chemical Company back in 2006. We have continued to grow that business. Lon Bohannon would tell you that it is probably the best growth opportunity of any product line in the Company and he may be right.

We have continued to grow that business. One of the -- and make these things faster. These are just little individual vials that go into a reader, it comes on and reads the vial on regular intervals throughout a 24-hour period. Tells you when growth occurs. When growth occurs it tells you that there was an organism that was present in that sample.

We were able to get the -- move away from what we had. We had a double vial system that was the only way we could handle some yeast and molds and products like that. We have developed or during the year developed a silicon method to get away from the double vial. Added on probably $0.25 million to our manufacturing equipment to be able to accommodate that and we -- that has been an important platform for us. And we are putting some new products on that platform. We have still got a few more to put on there.

So, those -- that kind of defines the overall platform.

Second question regarding Europe which earlier in the year had been a real problem for you. I know you addressed many of the credit issues earlier but certainly the economy remains depressed in most European markets. Yet in the fourth quarter you reported -- I think you said a 24% revenue increase. So I am wondering if that is just a [debt cap balance] in that market or against TC comparisons we can see 20% plus gains in fiscal 2013 in Europe?

If you can tell me what the bond rate is going to be in Greece and whether Italy is going to be able to honor its debts and what is going to happen in Portugal, I can give you the answer to your 2013 question. Seriously, we -- I think we have obviously gained some strength in the United Kingdom. Our UK business where it has been not hit by the [vagaries] of the financial situation so bad as we have grown that market and then that has helped cover up some of the problems in some of those other 40 countries that we talked about.

Our French business is where we have got our own people on the ground, is strong and growing. Our German business is strong and growing. So I just picked off the three top economies over there.

We still are having a bit of difficulty in Greece, just because we are concerned about being paid. We know that there are still problems in Spain and Portugal, Italy. They seem to be improving a little bit. Maybe the economy is not improving so much as the apprehension within the marketplace within the customer base, they have decided that life is not going to come to an end. They have got to keep going forward. I think that has helped us a little bit. You know, I don't -- I can't, as I said, I don't know what to tell you about -- I don't know what to tell myself about what this type situation may look like three months, six months now.

Of course the dollar has gotten stronger which is not particularly in our favor and a stronger dollar going into a weaker economy is not particularly helpful. But I think we are doing some things to help our distributors and some of those (technical difficulty) countries we started doing that back in January. And it has paid dividends as we moved into that fourth quarter that Lon talked about.

(technical difficulty) accounted for, for the big increase?

I missed the question.

Is that the major factor in that big fourth-quarter sales increase in Europe?

Yes, it probably -- there were several things that went in to add up to it, but yes I think some of the things that we had established for our distributors back in January in those countries I talked about the countries being strong where we have our own salespeople and the rest of those countries we worked through independent distributors to establish some programs to help them regain some business. And I think that probably showed up. Was a strong cause for the fourth quarter increases.

To add to that (technical difficulty) was one of the areas where we did make an investment in sales and marketing this year. And I think what we saw is similar. And to a greater extent, we saw even domestically in that operation we saw them pick up strength as we went through the year and particularly in those countries where we had direct presence and had our own people and added to the staff and got better trained personnel on the ground.

I think that what did contribute and drive up the revenues percentagewise in the fourth quarter was an improvement in that portion of the business that runs through distributors. And I think for all the reasons that Jim commented on, and that is still the area that we have to work with very closely going forward to continue to see overall growth double-digit growth in Neogen Europe in the next year.

Okay well certainly that business was especially weak in the first half of last year's -- you have still got some easy comparisons (inaudible).

Yes. You're right.

Last question. What is going on with FDA regulations on imported products?

Very little. It's -- they are beginning to clean up on certain products as I guess I got the word last week that I've forgotten which of the seafood species they are now testing 100% of what is coming in through the FSMA Act.

Well, I guess I could say there's just still very little happening. It's -- the regulations are there. The money is budgeted and yet the procedures are not all still -- waiting for the procedures to be written out. It is a political year and I guess that is the best explanation I have.

[Brian Kepf], from CLSA.

It is [Paul Knight]. Congratulations on the quarter. My question was regarding the DNA business. Can you talk about, I know you've made an acquisition there or change your partnership. Can you talk about what is happening in the sequencing service business?

Yes. I guess I can address that from three avenues. One is probably the youngest and easiest is that I made mention in prepared comments that we have now done the sequencing or now done the genomics work based on the sequencing of the harmful pathogens. That is an area that was not involved at all in genomics at the time, in our genomics base it's a the time we acquired that business. It has helped us help some of our most important customers, the major beef packers as an example, try to figure out how to deal with some of the pathogens that they have got. That is providing us some service business.

But probably more importantly it is providing us an avenue for the better development of our own rapid tests and we see that as important going forward. We had all of that group together last Friday and it was really encouraging to see the new things that went you look at the microbiologists and the genetics guys sitting together as to how much stuff that they could dream up they could get started right away.

The second piece of that is our traditional GeneSeek business in which, when we acquired that business it was the strongest laboratory in doing actual laboratory genomics work for the animal industry. They, in almost all cases, were just simply running the genomics and providing the raw data back to a customer who was in turn making interpretations of that.

We will continue to do that. It is a strong part of our business and we will continue to do that. And it is covering all species. We just got a contract this past week for catfish, to do work on catfish genomics through a group as you would expect, in the southern US. We also got a nice contract from a Chinese publicly owned state-owned industry to do genomics on Asian carp.

So a little bit outside of the pig and cattle business, but we continue to do those kind of genomic businesses in which we will do the hard the heavy lifting and supply that data back over to somebody else who will do the final interpretation.

However the third piece and the one that gets me most excited is where we are with the genomics. Where we can -- and the bioinformatics to match up to that. We said when we bought the business that that was one of the things that we wanted to do and we are off to a good start in doing that. We said we wanted to get a lot of that accomplished by the end of the third year and we are in the third year.

So what we're doing there with our Igenity program in beef cattle we will be doing in other commercial programs. I had just as soon not talk about it today since I suspect that the one strongest competitor we have probably will listen to this call.

Steve O'Neil, Hilliard Lyons.

Good morning. I think you have covered just about everything. About the only thing and it gets kind of lost in all of the other new products is the -- I guess I should ask about the dairy antibiotics, if anything was happening there or if there was anything of note in that business.

It continues to be a very important product line for Neogen in total and stuff. We had nice growth in the quarter as it relates to dairy antibiotic business which was overall a growth of 10%, I think. Frankly, our penetration of the US market with the BetaStar test has been disappointing up to this point. We are taking a look. One of the reasons we put in and developed started a marketing group this year was to help us understand a better way to position that product for this important market.

Now having said that, we are having good success with that product in Brazil. So it is not like we are not having success with the new BetaStar Plus product and in fact we just got an e-mail last night or night before last from one of our principals in Brazil who was had pictures of a tradeshow they are at right now, where we have had success in converting customers over and capturing market share with that product.

So we have got to take some of the stuff we are learning down there actually and apply it to what we've got here in the US and maybe reposition that product in a way to capture more business here. But, overall, the product line is doing well and some of those new products that we are talking about releasing are going to be to help supplement that line in terms of testing for that important dairy market.

Great. Thank you.

Greg Halter, Great Lakes Review.

Thank you. Good morning. Couple of numbers questions. Wondered if you could provide the capital spending for the year fiscal 2012 and what your expectations are for 2013?

CapEx for the year is about $12.4 million. And remember that that included the purchase of our Lexington facility, which was about a $5 million spend. So fiscal 2013 will go down probably in the $7 million range -- to the $7 million range, I'm sorry.

And also regarding depreciation and amortization, what that figure was for 2012 and what you expect for 2013?

It was $6.2 million for the full year 2012 and it will probably ratchet up to about $6.4 million in 2013.

And I don't know if I -- if this was provided or not, I may have missed it, but the annual figure for cash flow from operations?

It was $22.3 million, which included a strong $9.1 million in the fourth quarter.

Great. And finally I know you provide this in the Q or I guess it will be in the K, but do you have the operating and income figures by segment by the two segments?

Okay. For Animal Safety, $12 million -- basically $12,039,000 -- and for Food Safety it is about $23.4 million. I'm sorry, $23.9 million.

Great. Thanks a lot.

[Joseph Hutton], Wells Fargo.

Just a quick one, cash flow per share.

Well, I think cash flow is the number one measure of how healthy a business is.

I don't disagree with that.

Cash flows from operations per share was about $0.93.

$0.93. Okay. I came up with $1.19.

I like yours better, Joe.

I was giving you from pure -- purely from operations. So if you want the cash increase year-over-year, your $1.19 is going to be much closer.

Okay. Yes. Okay.

[You pay bills with cash], right, Jim?

That's right.

Good job.

Thanks, Joe.

Michael Castor, Sio Capital.

Couple of small ones. First, I didn't catch earlier. There was a question about how much you expect the Igenity acquisition to add in 2013. Could you repeat that?

I think, again, I would have to go back because it is kind of a convoluted question because of business that was already there. But somewhere in the range of $4 million.

Second one is actually looking at this question that was just asked on cash flow per share. I'm looking at the balance sheet. You have got $69 million in cash roughly at the end of the year now versus $56 million at the end of fiscal year from last year. So the increase about $30 million is roughly $0.50 a share. Am I missing something?

Well, what I was trying to give was the cash flow from operations and then from that we are spending -- we spent about $12 million in property, plant, and equipment. So it kind of depends on exactly how you want to measure that number.

Okay. Look, I can understand the [logic]; I wanted to clarify just cause it came up in the last question. Then the other one I had was what is your expectation, Jim, for the operating margins for next year?

Well, we don't normally give advice. But our goal is always to run that 20% and I'm not sure how close to that 20% we will get. We should get in there pretty close to it based on what I am looking at right now. It's just sort of been a guide for us. We violated that a little bit a couple of years ago and we let that run up to 22.5% (technical difficulty) and we should have been taking some of that money and putting it back into expansion opportunities. So we watch it pretty close. 20% is our bogey.

So, this year coming in at 18.4, 18.5 roughly with gross margins being a little bit under pressure. You think that will reverse next year?

Yes. Yes. I don't know how much a reversal but I think we'll put a greater percent to the operating line than we did.

And finally on that topic, R&D as a percentage of sales, it was running last three years 4.4%, 4.0%, then 3.6%. Although in absolute terms it is about stable. Is the current level of 3.6% or so enough to keep growing the business?

You know, and we will spend more next year. It's not always -- it is where you spend the dollars and the quality of the dollars. I think the quality that we were able to produce from the dollars this year speaks very well for the scientist and the professional group. They got a lot more done with less money than they have in some years in the past. And you know, there's a lot there that is unpredictable. How fast will we make breakthroughs and what areas where we are building on platforms that are already in existence, new product development becomes cheaper than if you are trying to invent a new platform.

And occasionally we will get one that will just work on forever and finally abandon it and that money just gets lost. So -- but we will spend more dollars in actual dollars this year.

Okay. Also, what is your expectation for tax rate for next year? This year came in around 33.6% which was about 150, 200 basis points less than in prior years.

Yes, I think it is probably fair to look at about a 35% to 35.5% effective rate. The 33.7% for this year is actually lower than what we would normally expect because we were under audit this year with the IRS for the 2010 and 2009 fiscal year. That came back with clean, no adjustment and we took -- we reversed some reserves that we had set up in prior years because we are now clean. So we reversed some of those reserves in the fourth quarter resulting an effective rate for the fourth quarter of about 28% and for the year 33.7%.

Great. Very helpful. Thanks.

So that explains it.

Steven Crowley, Craig-Hallum Capital.

Thanks for taking my follow-up. The reward is I'll keep it short and sweet and just ask one since we have gone a while here. You mentioned roughly 20 new products over this 12-month period we are in. Could you just give us some perspective, historical perspective on what you have typically done in a fiscal year or in prior 12-month period just so we have a reference point? Thanks.

Lon, I would say this is probably threefold what we are doing the normal in the last three or four years.

Yes, I would say, and that's a key point, I think, in the last couple of years I think we have been in that 6 to 8 range a year and so this does represent that pipeline getting filled up and now starting to result in new products being launched that can help drive that organic growth going forward. So it is a definite improvement particularly over the last two or three years in terms of new product releases we have had.

And some of the new products that we put out tend to cannibalize older products as we are coming out with newer, better, faster ways of doing things too.

Great. Thanks again for taking the follow-up question.

You bet.

That concludes the question-and-answer session for today. Please go ahead with any final remarks.

Well, thanks again for your interest and following the Company over the past fiscal year. And we are excited we are starting a new year now and almost two months into it. Those of you who are in a position to be to join us on Thursday for the open house and picnic we would love to have you and otherwise we look forward to talking to you again on this call at the end of the first quarter. Have a good day.

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