Neogen Corp (NEOG) 2013 Q4 法說會逐字稿

Welcome to the Neogen fourth-quarter fiscal year 2013 year-end results conference call. My name is Adrian and I will be your operator for today's call. At this time, all participants are in listen-only mode. Later we will conduct a question-and-answer session. Please note that this conference is being recorded.

I will now turn the call over to Herbert. Jim Herbert, you may begin.

Thanks, Adrian. Good morning and welcome to our regular quarterly conference call for investors and analysts. Today, as Adrian said, we will be reporting to you the results of our fourth quarter that ended on May 31 and of course also the full fiscal year for the Company.

I will remind you to start with that some of the statements that are made here today could be termed as forward-looking statements. These forward-looking statements of course are subject to certain risks and uncertainties and the actual results may in fact differ from what we discuss 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 Form 10-K will soon be on file for this year at the SEC.

In addition to those of you who are joined today by this live telephone conference, I would also welcome those who will be joined by way of the simulcast on the World Wide Web. These comments along with some exhibits will be available on the Web for approximately 90 days. Following comments this morning, we will entertain questions from participants who are joined by this live conference.

And I am joined today by Steve Quinlan, our Chief Financial Officer; Lon Bohannon, Neogen's current President; Steve Snyder, Neogen's President-elect who will also be assuming the role of President and Chief Operating Officer at Lon's retirement at the end of August.

I suspect that most of you saw our press release a few weeks back when we announced Lon's pending retirement and the selection of Steve Snyder.

Lon's decision to retire was not a surprise. As many of you know, Lon and I worked together for over 27 years in building the Company and Lon told me sometime back that he would like to retire at some point in order to pursue some family activities.

Beginning last fall, Lon and I along with the Board of Directors began to search for his replacement. Even though Neogen has a lot of great talent inside the Company, we felt that bringing someone in from the outside coupled with this inside talent would enhance our growth, as Steve Snyder comes to this position with a broad background in managing technical businesses at both Monsanto and at Cargill.

This scheduling of being able to select Steve earlier has given us the opportunity to -- for Lon to personally sort of lead Steve's orientation. So we feel good about the direction we're going now. Obviously Lon has made a lot of great contributions to the Company and I will miss him personally but I think he's leaving the position in good hands.

Earlier today, Neogen issued a press release announcing the results of our fourth quarter that ended on May 31. Net income increased 21% from the previous year to approximately $27.2 million or $0.29 a share as compared to $0.25 for the fourth quarter last year. Net income for the fiscal year increased to $1.12 a share compared to $0.94 last year and on a yearly basis, that a 19% increase.

Five years ago in July of 2008, we celebrated a milepost in the Company's history when our total revenues went over $100 million for the first time. Someone in that celebration said let's not let this be a hitching post for Neogen, but merely a milepost as we continue to grow. So at that time we said why not just set our goals to hit $200 million in five years. And we mapped out a plan to get there. Employees throughout the Company adopted this as a corporate goal.

So therefore it's with a great deal of pleasure that I can now officially announce today that Neogen has doubled its revenues in the last five years and that our revenues for 2013 reached $207.5 million. That's a 13% increase over last year.

On a quarterly basis, the fourth-quarter revenues pushed us over the top as we increased 15% to approximately $56 million.

This quarter was the 85th quarter in the past 90 quarters that Neogen reported revenue increases as compared with the previous year. This is a record of over 22 years of consistent growth. Those of you who have sat in on calls before know that we take a great deal of pleasure in announcing that. I think throughout the company it has become the byword as all employees have set this to be a record that we don't want to see broken.

The good performance of fiscal year 2013 was attributable to an increase in market share, increase in new products, and we had two synergistic acquisitions. The Food Safety Group led the revenues for the year with approximately $106 million in sales or 16.5% increase from the prior year. Sales of diagnostic test kits for the detection of natural toxins in grain were key contributors to the Food Safety side increase.

Weather patterns across the central grain belt in the US last summer gave rise to contamination from the natural toxin aflatoxin and this is perhaps the leading producer of diagnostic tests to detect this toxin, Neogen did well. A different weather pattern of cold and rain across parts of Europe caused the occurrence of a natural toxin called DON or vomitoxin. Again, Neogen has a strong product line to detect this toxin and thereby kept it out of our food system.

Revenues in our Animal Safety group showed good, solid growth with an increase of over 9% compared to a year earlier. Key contributors were our rodenticide product line and our small animal supplements. Our animal genomics business was also strong and Steve Quinlan will talk a little bit more about both of these areas to give you a little color here in a few minutes.

During the past year, we continued to look at acquisitions to aid in the growth in addition to the new products and the market share increases I just talked about. Back in October, we acquired the stock of Macleod Pharmaceuticals, an animal health company that's headquartered in Fort Collins, Colorado. This pharmaceutical product, the one and the only real key product they had, one called Uniprim, has excellent antibacterial activity against a wide range of infection in animals. And, as it turned out, a large part of their customer base were already Neogen customers and therefore our sales and marketing -- their sales and activity marketing activity was quickly picked up by our larger sales organization.

This acquisition has been accretive at both the topline and the bottom-line, just as we had expected.

In the beginning of January, we acquired the assets of Scidera. This is a company that's headquartered in Davis, California. They once operated under the name of MMI Genomics and were in fact a pioneer in the development of cattle, poultry, swine, and canine genetic testing. We are now in the final process of relocating that business to Lincoln, Nebraska where the base of our animal genetics overall business.

With this kind of a general summary, let me stop at this point and ask Steve Quinlan to give you some color behind these results and then I will come back and talk a bit about what I see in the future and I'm going to call on Lon Bohannon to give us his thoughts about our future direction.

Steve, why don't you give some update and let me see if I get my voice repaired here.

All right. Thanks, Jim. Welcome to 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 the 2013 fiscal year and I would like to echo his comments that we were very pleased overall with the results.

The Company's operating units generated increased momentum each quarter during the year, culminating in double-digit growth for each unit in the fourth quarter and double-digit organic growth for the Company overall. In the next few minutes, I will address some of the significant highlights for the record quarter and year.

While the Food Safety Group delivered an outstanding fourth quarter with revenues up 20%, almost all of that growth was organic. The sales growth similar to previous quarters in the year was broad-based across almost all of our market segments. Overall the Lansing-based Diagnostic Group grew revenues by 16% for the year with the Milling and Grain Group, the strongest performer, up 43% as a result of the aflatoxin outbreak in the fall 2012 harvest.

Our International operations, which are primarily focused in the Food Safety area, were also strong in the fourth quarter led by our Neogen Europe business unit, with sales up almost 40%. Part of that increase was due to the horse meat scandal, which began in late winter, when it was discovered that significant amounts of ground beef going into the European market had been mixed with horse meat in an example of economic adulteration of food.

Neogen has an easy to use field test for the detection of horse meat and also has an approved laboratory facility in Scotland and was able to capitalize on this opportunity. This incident has also resulted in speciation testing for other adulterants including pork and chicken. We believe that increased levels of speciation testing will continue into the future and will also include testing of fish.

Neogen Europe also benefited both in the quarter and for the full year from increased genomic revenues and increased mycotoxin testing in Germany and Eastern Europe. For the full year, revenues increased by over 20%, an outstanding performance in an area of the world which is experiencing significant economic turmoil.

Neogen do Brasil continued to make inroads in penetrating the growing Brazilian market with sales up 42% in the fourth quarter and 44% for the full year with strong growth in sales of test kits to detect drug residues in milk, an area of particular focus for the group this year and nice increases in mycotoxin and allergen text kits.

Revenues at Neogen Latinoamerica, our Mexican subsidiary, increased by 68% in the fourth quarter, driven by strong sales of our mycotoxin test kits, and we are up 12% overall for the year.

Many of our product lines contributed to Food Safety's strong fourth-quarter results. Revenues for the natural toxin product line increased 27% in the quarter and were up 33% for the year as the Company realized strong sales of test kits, readers, and accessories used to test for aflatoxin and DON.

Our 2+ quantitative lateral flow devices introduced into the market in FY 2012 the FY 2013 have been well received and have allowed us to capture market share throughout the year.

Revenues for our industry-leading product line to detect inadvertent allergen contamination such as soy, milk, and gliadin, were up 14% in the quarter and 16% for the year. This market segment continues to grow rapidly due to increasing regulations regarding product labeling and heightened awareness of the adverse effects of allergenic contaminants in food.

Neogen is constantly investing in R&D to improve our existing allergen test kid lineup including the popular 3-D lateral flow format while also developing new allergen diagnostic tests to strengthen our position in this important market segment.

Our Acumedia line of dehydrated culture media recorded a 23% increase in revenue for the quarter, up 17% for the full year in what was a nice recovery year from a relatively weak 2012. Revenues from products such as ampoules media and filters used to test and monitor water quality at beverage manufacturers rose 36% for the quarter and 42% for the full year, reflecting market share growth for these products.

As we have discussed on previous conference calls, our new ANSR pathogen test platform continues to gain traction after almost a year devoted to validation and approvals. We placed a number of instruments and have other product evaluations under way with potential customers interested in the ANSR technology to test for both salmonella and Listeria. We expect further growth for ANSR in fiscal 2014.

Some weakness in the Soleris line of optical microbial test systems used in the detection of spoilage organisms like yeast and molds was seen in the fourth quarter. Soleris disposable vial sales increased by 39% in the quarter but placements of the Soleris instruments declined in the quarter compared to the same period last year.

As we've talked about in previous quarterly calls, we do see fluctuation in the timing of placements of Soleris instruments that can affect our quarter-to-quarter comparisons. New marketing programs in this product line are planned for the first quarter of 2014 to stimulate sales of the equipment and vials.

Animal Safety recorded overall revenue increases of 11% in the quarter and 9% for the year. Demand for the veterinary antibiotic acquired in the McCloud acquisition continued to be strong and as we discussed in our last call, the Lexington Group has also capitalized on a supply disruption earlier in the year for a thyroid replacement product for dogs, resulting in significant revenue gains this year.

We also recorded increases in our retail farm store business where we have grown through the years with our relationship with a number of retailers including Tractor Supply.

GeneSeek recorded revenue increases of 9% for the year, in part reflecting the incremental impact of business acquired in the Igenity and Scidera acquisitions. The acquisition of Igenity has greatly expanded GeneSeek's capabilities in using information derived from sample testing to help animal protein producers speed genetic improvement efforts and better manage economically important positive and negative genetic traits in food animals.

With Scidera, we have been able to strengthen our relationships with a number of breeding associations including the American Kennel Club.

The overall revenue increases at our Lexington and GeneSeek operations were partially offset by lower sales in the fourth quarter at Hacco, which manufactures our rodenticides and cleaners and disinfectants, which are important components of our effective biosecurity programs maintained by animal protein producers.

Rodenticide slowed to a 4.5% growth in the fourth quarter but ended the year with a solid organic growth rate of 20%. Sales of disinfectants were weak all year mostly from lower international orders and caused Hacco's revenues to decline 13% in the fourth quarter. For the full year, Hacco revenues increased a little more than 2%.

At this point I would like to recognize our manufacturing and operation groups at all of our locations this year, which did exceptional jobs of ramping up production to capitalize on market opportunities particularly in Lansing, for the significant aflatoxin and DON outbreaks; in Lexington for the thyroid tablet for dogs I mentioned earlier; in Neogen Europe, for the dramatic increase in speciation testing in the last half of the year; in GeneSeek, which absorbed all the incremental sample volume and integrated two acquisitions during the year. That they were able to accomplish all of this while still supporting the normal growth of the business is a testament to the can-do, will-do attitude that permeates this Company.

For the full year, gross margins of 52.8% represent a 260 basis point increase over last year and that's due to higher gross margins from new product from acquisitions, the incremental sales of the small animal supplements, the shift towards Food Safety and Diagnostic products, and the 20% increase in rodenticide revenues discussed earlier.

Operating expenses increased 19% in the fourth quarter and were up 17% for the full year. About a third of those -- the increase in those expenses is a result of personnel and related expenses absorbed in our acquisitions.

Sales and marketing expenses increased by 13% in the quarter and this reflects the investments primarily in headcount we have made in these groups in the last couple of years as we have built our infrastructure to accommodate our anticipated future growth.

The strong organic growth during the year and our internal tracking of new business, which shows us generating over $4.0 million in new business for the year supports our belief that our investments in this area are having a positive impact.

Our general and administrative expenses increased 37% for the quarter. This reflects increased salary costs and fringes and increased depreciation for investments made in personnel and systems in the past couple of years, higher amortization expenses relating to the businesses acquired and increases in stock option and legal expenses from year ago levels. For the year, these expenses grew by 19%.

Our R&D expenses increased 13% over the prior year in the fourth quarter, reflecting the continued high level of new product activity for the group. For the year, the increase was about 17%.

So for the quarter, revenue growth was 15.4%. Operating income was 17.7% over last year. For the full year, revenue growth was 12.8%, operating income increased by 20.6%, and net operating income represented 19.6% of our revenues compared to 18.3% last year. A nice improvement year-over-year made possible by the increased gross margin percentage and higher revenues for the year.

A couple of comments on the balance sheet. The overall receivable and inventory balances each grew on a percentage basis by less than the increase in revenues, indicative of improvements in both our collection period and our inventory turns.

Cash generated by operating activities allowed us to finance nearly $9 million of investments in property and equipment and $13.3 million in business acquisitions while still increasing our cash and marketable securities position by almost $17 million. So it was a very strong financial year as well.

In closing, I had the pleasure of announcing these results to you today, but I think it's important at this point to recognize and thank the more than 800 Neogen employees worldwide whose efforts make these results possible.

At this point, I will turn it back to Jim.

Thanks, Steve, for those updates and again, our thanks always to the group that makes it happen. As Steve pointed out, some of the great things that happened during the year that seemed like there was always some excitement somewhere, some that came along that we hadn't quite expected and always turned out to be the positive and that can-do, will-do attitude certainly permeated throughout the year.

As we have expanded our product line and our geographic coverage, I think we have become more effective suppliers of solutions for both Food and Animal Safety, as our mission states. I think we will be able to continue steadily developing those programs.

Speaking of programs, I am sure that some of you may be curious to know what has happened to the Food Safety Modernization Act that was passed and signed into law by the President some 30 months ago. And the answer is not much.

There were seven major rules that comprised that Act. Two of these have been published in draft form and were put out for comment. Now the comment period has been extended. I don't know -- our contacts in Washington say that surely we will see these two rules make the rounds within the next 12 months and become law and begin to be enforced.

There are five major rules that are still remaining. I think it's interesting that a consumer group filed a lawsuit against the FDA for failure to act and the Federal Court in the Northern District of California ruled a couple of weeks ago that FDA be required to publish those proposed rules on those five between now and the end of November. And that the comment period on those five be held open until March of 2014 and that all five would be under enforcement by July -- by June of 2015.

So as you can see, it's there and it continues to drag along. Now we've got some knowledge of what I think is going to be in all five of these and we believe that all of them will require some additional amount of increased testing.

However as indicated by those dates, we don't have any extra revenue built into our budgets for the FY 2014 year on the basis of this.

Neogen's business I think -- I know is perfectly situated as we look at the growing need for awareness of what's happening in food security. Neogen products will continue to play a strong role in helping to produce not only the quantity of food that's going to be required over the next two decades, but also the quality of food that's going to be needed to satisfy the developing middle classes.

The hurdles of Food Safety, Animal Safety, and Animal Genomics are going to continue to be critical if we meet those requirements. It is estimated that by 2030 the world's middle class will have grown from 1.8 billion people to 4.9 billion and that the spending power of this group will increase from $20 trillion to $56 trillion.

So I think you can -- with those numbers perhaps better understand how our mission is aimed at the food security for that middle class.

That it's in countries in a number of areas but certainly India and China will have explosive demands for higher quality foods and they are going to welcome food providers. The Chinese meat companies' interest in acquiring Smithfield Foods is one example. In addition to increasing pork production within China, Chinese leaders recognize that they need this to be supplemented by food produced elsewhere.

In general, I believe that the US meat producers look upon this as an opportunity to produce more pork for a known buyer. This means for the US that we can produce more corn and more soybeans and more pigs, and create more US jobs. So I think the US continues to be in a strong position.

As the US-based food service companies move into these growing middle-class countries, food safety within those countries becomes an even bigger issue. I think one only has to look at what happened to Yum Brands and Kentucky Fried Chicken earlier this year. The Chinese press reported that KFC was using chicken that has drug residues. Revenues in the KFC stores in China fell between 20% and 50% in the last two quarters. These China earnings are so important that this ended Yum Brands' 11-year streak of double-digit growth in earnings per share.

I think it is proof that this new middle class is looking for higher quality food but not at the risk of food safety.

You know that's ahead of us, we will continue to use the same growth strategy that has been rewarding to us in the past. We are off to a good start with first month of the new year. Several new products from our R&D groups are now finding their way into the market. Other products are gaining approval from government or third party approval agencies.

At the beginning of July, we acquired the assets of SyrVet, a veterinary instrument business that has been a Neogen competitor for the past 26 years. The delivery of medicines and veterinary practices is important in keeping animals healthy back inside the farm gate.

This acquisition brings new revenues of about $8 million to the Company. It brings with it a number of new products and provides us with access to some additional products. It also brings with it the expertise of Daniel Klein, who will be working with the company, who was the guy who started all this and built it up. This acquisition for Neogen will be treated as a bolt-on and we expect to move those operations either to our current operations for Animal Safety in Lexington, Kentucky or to our manufacturing sites here in Lansing, Michigan.

Let me leave some time for Lon Bohannon. As I said in the beginning of my comments today, Lon has long had plans for retirement. After 27 years he is now going to exercise on those plans. I know that many of you on this call have known Lon for a long time and I thought that you would be interested in his thoughts on where Neogen was headed in the future. Following Lon's comments, then we will open the phone lines for any additional questions. Lon?

Thank you, Jim. I appreciate that Jim has allowed me the opportunity to take a few minutes to make some general comments. And as he said, more importantly, give listeners my perspective on the bright future I see for Neogen.

However, I do want to begin by commenting on our excellent 2013 fiscal year-end results. As Jim indicated, five years ago we established a goal to double our annual sales from $100 million to $200 million. I know I am going to sound like a broken record but I am very proud of the efforts of Neogen's outstanding team of over 800 employees who made it possible to achieve this important milestone and I do want to congratulate them for their efforts to make our five-year plan to double sales a reality.

I think Jim has also accurately described some of the thought process surrounding my pending requirement from Neogen. While I am definitely going to miss the employee relationships, the excitement, and the success that I have been lucky to be a part of at Neogen, it is true that I am looking forward to working more closely with family on some new business adventures.

Also want to take a brief moment to thank the analysts and listeners or investors -- excuse me, the analysts and investors listening in on this call who I have had the good fortune to work with for quite a long time now and who have supported our efforts to build Neogen into a world leader in the development and marketing of solutions for food and animal safety.

That brings me to the most important part of my comments, which is to describe a few of the reasons why I continue to believe that Neogen has a very bright future for many years to come. A lot of things have changed during my tenure with Neogen, but one thing remains constant. Our mission matters as much today as it did when I joined the Company. Actually in my opinion, that mission along with the product and service solutions we offer to food producers and processors are more relevant today than they were when I started with Neogen over 27 years ago.

A company can have great products. They can have great operating systems, a hard-working staff of employees but if the markets for its products are static or declining, it is very tough to achieve the kind of growth investors are looking for. And since I expect to maintain a significant investment in Neogen stock going forward, it gives me great confidence to know that the markets for Neogen's products and services are both large and growing.

I just saw an announcement for a new report from a third-party market research firm indicating that the cost of tracking pathogens like Salmonella and Listeria in North America will increase by 47% in the next five years. That same report estimated that food safety testing costs will hit $5.5 billion by the year 2018. Currently the largest share of that testing is centered in the US, which of course bodes well for Neogen's long-term future since we have seen that emerging international markets often follow the lead of North America and Europe when it comes to food and animal safety testing.

And Neogen's market growth should be sustainable well into the future. For example, we introduced our first diagnostic tests for mycotoxins in the mid to late 1980s and you heard earlier that sales of mycotoxin diagnostic tests were still contributing to Neogen's growth 25 years later.

Another example I think is reflected in our sales of test kits to detect foodborne allergens. This product line has delivered annual growth of approximately 15% to 20% each and every year since 2006.

Aside from growing markets for our existing product lines, new markets are emerging to add growth opportunities in the years ahead.

I also recently saw that global animal protein production from aquaculture in 2012 surpassed the output from cattle and the gap is expected to widen going forward, providing another significant market growth opportunity for Neogen.

We also continue to believe that testing for drug residues will expand in the years and decades ahead. As Jim alluded to in his comments earlier, major multinational firms want to avoid and prevent the kind of negative impact that Yum Brands just experienced in China as a result of drug residues found in chicken. Accordingly, these large multinational firms are expressing a growing interest in implementing food safety solutions that will help them protect their brand equity from any form of food adulteration including things like drug residue contamination.

As Steve touched upon in his comments, this year's meat speciation scandal in Europe has both increased awareness and expanded our markets for meat and fish speciation testing.

We also expect food security issues to remain in the headlines. I really don't need to say much about this except we expect it to help drive the need for Neogen's animal and plant genomic products and testing services going forward. We know that consumers along with domestic and foreign governments continue to push for new regulations like the Food Safety Modernization Act. While the gears of government often grind away pretty slowly, implementation of new regulations should ultimately increase the demand for Neogen's product and testing solutions.

I could elaborate on many other growth markets if I had the time but I trust you get a feel for the excitement that I have when it comes to future opportunities in the markets served by Neogen.

I will close my comments by saying that not only does Neogen operate in rapidly growing and sustainable markets but I believe we also have the vision, leadership, and management experience supported by a great team of talented employees to continue our consistent track record of growth in sales and profits far into the future.

As I mentioned earlier, I do fully expect to maintain a significant investment in Neogen stock long after I retire because when it comes to Neogen's future, I remain convinced that the best is yet to come.

Again I want to thank Jim for allowing me the opportunity to make some comments during this conference call and I think this concludes our formal remarks. So at this time, we will open the call for questions from our listeners.

(Operator Instructions). Steve Crowley, Craig-Hallum.

Good morning, gentlemen, and congratulations on the continuing success.

Thanks, Steve.

And special well wishes for Lon. Obviously big contributor over the years and we will miss you, Lon. Thanks for leaving the shop in good shape.

Thank you for those kind words. I can tell you it is in good shape.

Now in terms of some of the drivers to your business looking forward, Jim, you mentioned some new products that were coming to market as we speak and we are on the near-term horizon, but there's also the product seeds like the ANSR that you planted in the last year or so.

Could we maybe talk about some of the new stuff that you are hoping to get rolling over the next year and then some of the stuff that should be sparks and real contributors to the financial performance this year that may be launched over the last year or two?

Yes, of course, as you know, Steve, research and development doesn't know corporate calendars as far as success is concerned. A lot of what we are doing now and have done is a bit invisible in the marketplace. Some of it is improvements of existing product to make them faster, to make them better, to make them less expensive for the end user. And so those continue to find their way out.

In the pathogen area, which is where we have now got three platforms that are aimed -- we talk about ANSR and it's coming along just about where we expected it to be based on our overall plans but we have also got our Reveal product line that is really a great product that's out there that is a lot of room out there that's a lateral flow device. It is based on antibodies that detects the presence or absence of a number of pathogenic organisms.

And then we have got our earlier product line that came over from the acquisition of GeneSeek products back sometime back. But I think we are going to see pathogen detection continue to grow.

We are all waiting to see what's going to happen with the FSMA rules. I think there's going to be some need or basis for validating FSMA rules. We think some of those are going to be based on go back to maybe look at just generic E. coli, whether E. coli, whether E. coli is present in the food system or not. So that -- I think we are pretty well positioned for that.

Our Soleris vials, I think Steve said that our Soleris product line off the [centrist] format was down a little bit in instrument sales in the fourth quarter. There's really nothing to be concerned about there. It is just how those things happened to fall but those were all detecting spoilage organisms.

I think we are going to see increases in concerns about detecting spoilage organisms and that's already being exhibited by increase in sales of the consumable vials that go with the Soleris system.

I think in his comments, Steve talked about international approvals for a certain of these products. Within this country, we have a few products that have to be approved by governmental agencies. The USDA approves products for detection of natural toxins, as an example. That's out of the US Government.

But then we've also got the AOAC, which is an independent approval agency. I think we still have the largest number of AOAC-approved test of anybody in this business. And then we also are going for the more expensive tests that are for the detection of some of these that are going through the French AFNOR approval process that is in some places that are necessary in order to get the validations for Europe.

So all of those I think combine as to what some of the things that we are doing and in R&D on the pathogen side. The speciation area now that that has been unlocked and people become more aware of what we knew for some time was out there, the economic adulteration of calling it something when it's not in order to get an economic advantage either by adding horse meat to ground beef or by selling pollock and calling it cod, we think that those areas all continue to grow.

There are a couple of new areas where we are not today. In fact, where really nobody is today. We probably don't want to talk about those yet but I mention them just so you know that we've still got a lot of opportunities to continue to grow those areas.

In terms of your progress with the Company in doubling sales over the last five years, is there another one of those goals to double again in the next five years or putting a dollar number on the long-term objective of the Company? Or is that really just implied by a continuation of the kind of growth we have seen in the last five or 10 years continuing in the next five or 10 years?

Well, I think you just won the lottery. We had a question going around here earlier how long before somebody has asked what we're going to do in the next five years because what we did in the last five is now history and we understand that.

We think we probably can do that. We've got a little work to do to decide exactly how we are going to get there. I think we got there the last time by having a good plan, thinking it out and knowing where we were going. There were a few curves in the road that we didn't anticipate, but I think we've got another doubling left in us, Steve, and we are going to be looking at how we put that together here over the next few months.

Thanks for answering the questions, as always. Take care.

Tony Brenner, ROTH Capital Partners.

Thank you, and Lon, congratulations and good luck to you.

A couple of things. Gross margins were up year-over-year in the quarter, but sequentially they were almost 300 basis points lower than in the first nine months of the year. What is that attributable to?

Tony, this is Steve. In the fourth quarter, GeneSeek had a couple of very large projects which were lower gross margin products or projects and that really drove -- that was the biggest driver of the lower gross margin in the quarter. The other part was -- we talked about rodenticides being up 20% in the first three quarters and with that growth slowing, it was up about 5% in the fourth quarter. It was really the mix there. The weakening of that growth caused the margins to decline a little bit.

And are those structures?

On the GeneSeek side, remember that we play with the gross margins that are less than what we look at in other areas but our operating costs are also considerably less than some of the other product lines.

I understand. Are those factors carrying over into the new year as well?

No, I think the GeneSeek project is basically completed. It might be running over a little bit into June's numbers, but for all intents and purposes, that one is done.

In the mix between cleaners and disinfectants and rodenticides in the Hacco business, it's always changing. So I can't really answer that until we get further along in the quarter, but there should be no significant long-term degradation of that margin.

Lon, you mentioned that Mexico was up 68% in the fourth quarter. It was up as I recall 30% in the third quarter and it's up 12% for the year. I don't recall during the first half any discussion about how weak Mexico was. I'm wondering why those disparate results for the full year?

Well, we did have some one-time sales in the prior year in the first six months particularly in the area of some of the Animal Safety products that did not repeat. We knew they were one-time sales, large orders for stocking inventory and also then a transfer [Neil] order that was very large that went to at the time Pfizer and stuff. So those were just things we had to overcome.

The Food Safety was a big driver of the revenue growth. That continued to grow in the first two quarters and then once we got past those ugly comparisons in the first six months, the second half of the year was very strong for Mexico.

We anticipate ongoing solid growth there. Occasionally when you are a smaller operation like that, you are more impacted sometimes from quarter to quarter comparisons for those one-time kinds of sales.

Okay, could you discuss what sales in China were for the year? Or what kind of increase there was?

Virtually flat, Tony, slightly down. About $2.3 million in fiscal 2013 and part of that is they will be -- some of the Soleris order timing. You might get -- we had a significant number of units in fiscal 2012 that weren't repeated in 2013.

Right, that's another area where because of government tenders and things that occurred; we have some sales that sometimes can occur in one year and not the next year. We have had that occur I know for acupoint test systems. But overall, we continue to make progress in terms of growing our business there. But again, when you've got a relatively small level of sales you can't be impacted from quarter to quarter on those kinds of comparisons.

Okay, last question, your cash position has built up pretty significantly to a point where it seems unlikely that you are going to require that amount of cash or anything close to it for acquisitions. And you are generating enough cash for your CapEx program. So I wonder what other uses for cash are being considered?

We've got some pretty spectacular plans on what might be available for us, Tony. But I probably shouldn't say much more than that.

That's a good non-answer answer.

I know what the other -- I know what the rest of the question is. No, we fully understand that we've got a lot of cash built up that we need to put to use. It's the worst time in my career to have idle cash laying around as far as the value of the cash is concerned. And you know, we've got an extremely good line of credit at very low rates and we need to be using those assets that are available to us.

We have done 24 good acquisitions in -- since the year 2000. There's some good opportunities out there but I think our model works and we don't want to be tempted away from that model. So we are still actively looking in the acquisition area.

We have got -- I can tell you that we have several on the radar screen now. We do not have any active fully developed letters of intent in place. But we've got some opportunities that would fit well and be synergistic to our current businesses.

So again as I said in the very beginning, we might do three or four. Who knows, we might not be able to get any of them done. But we have high hopes of continuing to add some significant growth through acquisitions.

Thank you very much.

Jason Rodgers, Great Lakes Review.

Good morning. Could you provide the FX impact on sales and operating profit for the quarter and the year?

Sure, if we look at last year's rates and this year's volumes, the effect on revenue would have been lower by $1.7 million and operating income would have been lower by $900,000.

That's the quarter?

No, I'm sorry, that was for the year. Did you want the quarter as well?

If you have it.

Sure, the revenue is a $325,000 decline and operating income $73,000 lower.

Okay, then do have the cash flow from operations either the quarter or the year?

We do. For the quarter, it's $6.9 million and so that would make the year's $26.6 million.

Okay, then would you be able to provide your CapEx plans for fiscal 2014?

We don't really talk much about that. This year we spent about $8.9 million. And remember, that included the purchase of a building in Scotland for about $1.5 million. So we don't really talk about it, but the level is probably going to be similar.

Thank you.

Michael Castor, Sio Capital.

Great, a couple of questions for Steve. First, can you provide some color on do you expect a tax rate for next year?

That's always -- that's interesting. I think we are probably going to be somewhere in the 35.5%, maybe 36%. The more states that we do businesses that are claiming Nexus and dragging us in increases that rate. But if you noticed, this year our rate was a little bit lower but actually when we compare it to last year's rate, remember we took a -- we had a pickup of about $0.5 million in last year's fourth quarter for a tax reversal. We were under audit in 2012 and had set aside some money and actually the results of the audit were favorable, so we took that -- we reversed that, took it to income.

This year the rates are a little bit lower than the 35.5%. Some of our R&D credits were larger than they had been in prior years. And then manufacturing (multiple speakers)

The 35.5% rate, is that sort of a stable rate that you anticipate going forward?

That's probably a good approximation.

Second question was -- minority interest actually contributed about $150,000 this year, $125,000 last year. Do you have an outlook for minority interest over time?

That minority interest is actually -- that's an operating loss by the minority. We actually have our Brazil and Mexican subsidiaries have small positions in the Company. Their operating losses are added back to our net income to basically give the income that's attributable to Neogen, so those are small losses. I would expect that probably somewhere in the same range going forward.

The last question was on other income. I think it was roughly $300,000 or so this year and again, can you speak to some of the components and your expectations for coming years?

Well, other income is usually a mishmash of numbers. The pieces -- we had some currency loss in there and about $170,000. We paid some royalties, I'm sorry -- we received royalty income, and that was about $360,000 of income. And then we recognized some change in some of the secondary obligations that we -- in some of the acquisitions that we do. So that's pretty nominal amounts there.

You know, we don't plan for currency amounts each year. I can't really give you a number. I think going forward, royalties will probably still be there, maybe a couple hundred thousand of royalties, but anything else is really just a mishmash of numbers.

Very good, thank you for the help.

[Joseph Pottman].

Congratulations, guys. It was a great quarter. Lon, you really can't leave. I mean, your wife is going to be so upset when she figures out what is going to happen around her house because you are going to be there all the time. It's not going to be pretty. So when you are --

She has already made that clear to me, Joe.

Yes, when you are finished with your world tour, I'm sure Jim would consider rehiring you soon.

Yes, he's got an open invitation.

We are going to be far away, so --.

That raises another consideration and that is if Lon feels that taking a world tour is a worthwhile endeavor, are you satisfied that you've pretty much seen all that you need to see or are you thinking about gracefully exiting?

No, I am going to stay around. I told them that when I start -- somebody will have to catch me and I start slobbering out of both corners of my mouth, roll me off somewhere and get me out of the way. But I am having fun and I think I am being useful and there's three or four people who have got keys to tell me whether I'm useful or not. I think they will usually apply them justly. So no, I'm having fun, Joe, and my health is good and I expect to stay around.

I've got to get Steve Snyder off on the right foot. Lon is going to get him oriented, but I have got to train him to sort of start finishing my sentences up. Lon could always -- when I slow up, he could finish the last half of my sentences when I got into a southern drawl and Steve is going to have to learn how to do the same thing. I'm going to be around a while.

Well, I will see you guys tomorrow afternoon.

Good, good, thanks.

Thursday.

Or Thursday.

We have no further questions. Mr. Jim Herbert, do you have any closing remarks?

I sure do and as Joe Pottman indicated, please don't forget that tomorrow -- that Thursday afternoon is our annual barbecue for our investors, analysts, and friends, and if you didn't get an invitation, that was -- something happened to the mail or whatever, please consider yourself invited. To get the details and the particulars, call this number and talk to Terry Maynard. He can give you all the details. Starts tomorrow afternoon.

Thank you for -- excuse me, not tomorrow. Joe, you've got me messed up. It starts Thursday afternoon.

To all of you, thank you for your continued support. It has been a great year and we are off to start another new one. So we will look forward to talking to you as we end the next quarter. Good day and thank you, Andrea.

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