Neogen Corp (NEOG) 2015 Q1 法說會逐字稿

Hello, and welcome to the first quarter fiscal year 2015 earnings results conference call. My name is Joe, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Please note this conference is also being recorded. I will now turn the conference over to Mr. Jim Herbert. Mr. Herbert, you may begin.

Thank you, Joe, and good morning. Welcome to our regular quarterly conference call for investors and analysts. Today we'll be reporting to you the results of our first quarter for our 2015 year that ended on August 31. As in normal I would remind you that some of the statements that are made here today could be termed as forward-looking statements. These forward-looking statements of course are subject to certain risks and uncertainties, and actual results might differ from those we discuss today. These risks that are associated with our business are covered in part in the Company's Form 10-K as filed with the Securities and Exchange Commission.

In addition, to those of you who are joined by this live telephone conference, I'd also welcome those who may be joined by way of simulcast on the World Wide Web. Following comments this morning, we'll entertain questions from participants who are joined by the live conference. I'm joined today by Steve Quinlan, our Chief Financial Officer. I apologize for my raspy throat. I think it may have come from too much football scoring. I think I was over-served Saturday with a 70-something point team. It must have gotten to my throat some.

Anyway, earlier today Neogen issued a press release announcing the results of our first quarter that ended on August 31. Net income for the first quarter of this 2015 fiscal year was approximately $8.9 million. That's a 13% increase compared to our net income last year of approximately $7.8 million. That's over $1 million more than last year, and the largest net income that the Company has ever reported. Adjusted for the three-for-two stock split that was effective last October, earnings per share came in at $0.24, as compared to $0.21 a year ago.

Revenues increased 15% to approximately $67.6 million. That's up from last year's first quarter of approximately $58.5 million. Again, these first-quarter revenues have set a new record for our 32-year-old Company. I know for the previous couple of quarters it's been of concern that our top-line revenues weren't growing at great rates, but this was not being translated into commensurate increases at the bottom line. We knew where we were positioned in those past few quarters. We had brought in three new acquisitions in about a six-month period, and we're also up against some tough comparable numbers in the previous year, in which there have been almost worldwide outbreaks of microtoxins of one sort or another. There were big issues over ground beef being adulterated with horse meat. I think it's now been eight months since the last acquisition, and I think as you can see in the numbers, we're settling in into this new fiscal year comfortably.

I'm sure most of you know that a major metric that we use in operations is operating income as a percent of sales. 20% has been the optimum level that we believe is healthy for the business. The first quarter we almost got there, with operating income of 19.9% for the quarter. The first quarter was the 90th quarter in the past 95 quarters that Neogen has reported revenue increases as compared with the previous year. That's a record that now spans almost 24 years.

There were a number of positive organic developments during the first quarter that should lead us well into the new year. On the animal safety side, take a quick look at that first. Rodenticide sales in the first quarter were strong. This is especially promising since we don't normally see those sales pick up until cool weather beginning in the second and third quarters, as another part of our biosecurity system on the animal side that we talk about as being part of our food safety back inside the farm gate. Our insecticide program there is growing nicely. This includes the product line that we have been a part of our group for the past several years. To that has been added to Chem-Tech line of insecticide products that were added in January.

The needle and syringe business is a part of that biosecurity system, continued strong into the first quarter. This was led by our continued strong growth of our detectable needle business. Some of you may remember back a few years ago when our engineers developed a patented stainless steel metallurgy for use in hypodermic needles that could be detected with metal detectors in a processing plant, in the event that a needle was broken off some time during the animal's regular injection cycles. The normal stainless steel needle is not detectable with those metal detectors.

Our animal safety group has just launched its NeoFilm product line for commercial dairymen to diagnose the onset of mastitis, a mammary infection that's prevalent in many dairy cattle. This simple two-step test allows dairymen to determine overnight what kind of infection that particular cow might be facing, and therefore prescribe the treatment. In some cases, inter-mammary infusion of antibodies is used. In other cases no treatment is necessary, and the infection just runs itself in normal course. This of course helps keep antibodic residues out of the milk that we consume.

Also on that dairy side, our animal safety group just released a new dairy heifer replacement program that's part of our GeneSeek operations. This simple program allows a producer to pull a quick sample from young heifers, run it through our genomic process, and find out what kind of cow she'll make two years later. This is one that our own marketing program is being strongly supplemented by a recent agreement that we did with Merck Animal Health. Their sales organization will be making this selection available throughout the US to the dairy customers of Merck. This joins our own marketing program.

Our GeneSeek business is growing, but it was already growing even before the addition of these new samples. You may remember that we moved into our new laboratory earlier this quarter. In the quarter, we just completed -- we were running approximately 85,000 samples a month, which is about a 15% increase over last year's run rate. As further information on the animal safety side just in general, I can say that I'm pleased with all three of the acquisitions that we made last year, and that we are at or ahead of our budgeted plans for those three.

Probably this is a good time for me to stop and get a cup of coffee or something to get the throat back working, and turn this call over to Steve Quinlan to previewing on the growth and the outlook for our food safety group, and give you some color behind the numbers that I just talked about. Then I'll come back and talk about, after Steve gets through, talk about some of the future opportunities that we're seeing. Steve?

Thanks, Jim. Welcome to everyone listening on the conference call, as well as those joining us via the Internet. Jim's already reported on the overall sales and profit performance for the first quarter of our fiscal year. The next few minutes I'm going to give you some color behind those results, and I'll start by discussing the performance of the food safety group. Revenues for the food safety segment were up 3% in the first quarter. These results stack up against difficult comparisons from last year's first quarter, when as Jim said we had the tail of the aflatoxin outbreak from the 2012 calendar year, and were in the middle stages of the horse meat speciation scandal in the UK. Without those head winds, revenue growth would have been more in the 7% range.

Markets which were strong for our Lansing-based diagnostic group were grocery products, which were up 16%; dairy, which is up 33%; and the commercial lab group, up 9%. Our Neogen Europe operations led the way for the quarter, with sales up 9%. This growth was on top of growth of 54% in last year's first quarter, which resulted from the speciation outbreak in the UK. The biggest growth driver for the quarter this year was the 52% increase in genomic testing services in Europe, the result of our investment in direct sales personnel based in Europe to capture business, coupled with the strong product offering in this important market.

Neogen Latino America, our business based in Mexico City, had a 77% revenue increase, as they took over a number of customers in Mexico and Central America, formerly served by our Lexington operations, based on their increased capabilities to serve those customers directly. Neogen do Brazil had a 12% increase in its food safety product sales, but a large one-time genomic research project in the prior year resulted in a 9% overall revenue decline in the current quarter. We've made significant investments in personnel and infrastructure in both Brazil and Mexico in the past year, and have high growth expectations for these businesses and markets going forward.

A number of our product lines contributed to food safety's first-quarter results. Revenues for our industry-leading product line to detect inadvertent allergen contamination, which includes diagnostic tests to determine the presence of milk, peanuts, and processed soy amongst others, continues to be robust, and were up 12% in the quarter. Milk test kit sales were particularly strong, up 28%. We continue to strengthen our allergen test kit product portfolio, and recently adding new tests for contaminates such as mustards, and believe we'll continue to capture share in this growing market segment.

Our AccuPoint line, which is used to detect general sanitation and cleanliness in food processing environments, had a 6% increase in revenues during the quarter for the disposable samplers. We've invested over $1 million in new automation equipment to produce our next-generation sampler, which will be introduced in the very near future. Revenues from products such as [ampule] media and filters used to test and monitor water quality at beverage manufactures rose 18% in the quarter, continuing their strong recent growth, as we penetrate this growing and important market.

Although our natural toxin product sales decreased 4% compared to last year due to that tail of that Aflatoxin outbreak from calendar 2012, DON sales increased 11% in the quarter, based on sporadic outbreaks of DON across the US in the current crops. This should be the last difficult comparative quarter related to that Aflatoxin outbreak. Revenues for our tests to detect the presence of antibiotics in milk declined by 12% in the quarter, due primarily to order timing at a large European distributor, and changing testing regulations in the eastern European markets for these products.

We had 16% growth in sales of the consumable vials used in the Solaris line of optical microbial test systems, which are used to detect spoilage organisms like yeast and molds. Our placement of equipment in this product line declined 44% in the quarter, after a strong finish to the 2014 fiscal year. As we've discussed in previous calls, this product line can give lumpy results due to the timing of equipment placements. The prospect pipeline for equipment remains very strong, and we believe that we'll see increased equipment revenues as the year progresses. Like the razor, razor blade model, this will give rise to even more consumables, which carry good margins.

The animal safety segment achieved revenue growth of 28% in the first quarter, aided by the recent acquisitions offer Servat, Primatech and Chem-Tech. Animal safety's Lexington division recorded revenue increases of almost 16% in the quarter. In addition to the increases provided from the acquisitions, our line of patented D3 detectable needles were up 27%. Our diagnostics line grew 22%, aided in part by forensic kit sales to commercial labs. Now these increases offset a 16% decline in our disposable business, which we believe is due to order timing, and which is a lower margin product line for us.

Within our animal care line, sales of the wound care product declined by almost $1 million, due to a competitor which had been shut down coming back into the market, and a distributed antibiotic product declined $210,000 due to our withdrawal of that product from the market.

Animal safety's Hacco division, which is located in Randolph, Wisconsin, and produces rodenticides and cleaners and disinfectants, which are important pieces of the effective biosecurity programs maintained by animal protein producers, recorded flat sales for the quarter. A $1.2-million increase in rodenticide sales resulting from a vole outbreak in the northwest US was offset by a similar decline in cleaners and disinfectants, due to the transfer of some business to Neogen LA and lower international shipments.

Chem-Tech, the insecticide business based in Pleasantville, Iowa, which we acquired in January, provided $5.1 million in sales this quarter, which was higher than budgeted, and we're excited about its future. GeneSeek, our genomics-based testing and bioinformatics business located in Lincoln, Nebraska, had a strong quarter, with a revenue increase of 12%, with particular gains in the swine market, a significant poultry genotyping project, and continued strength in the dairy and beef cattle markets.

Gross margins were 50.4% for the quarter, compared to 51.9% in last year's first quarter. The change there reflects a shift in product mix towards animal safety products. We were pleased that gross margins rebounded from last year's final three quarters to give back to the 50% level. Improvements over those quarters reflects improved product mix within the animal safety segment, and better efficiencies realized at GeneSeek, in part due to its move to its new operations in Lincoln.

Overall operating expenses were up 15% compared to last year's first quarter. Sales and marketing expenses increased 18%, primarily reflecting the impact of hires made in fiscal 2014, and increases in shipping due to the increased revenue for the quarter. G&A expenses rose 9% for the quarter, due primarily to higher amortization expenses resulting from our recent acquisitions, and increased stock-option expense. Each of those expenses are non-cash charges.

R&D expenses increased 15% over the prior year, due to outside services and costs incurred in scaling up several products for larger manufacturing batch sizes. With the 15.5% increase in revenue and solid gross margins of 50.4%, we were able to generate operating income of $13.4 million, an increase of 8.2%, or $1 million over last year. Expressed as a percentage of revenues as Jim indicated, operating income was 19.9%, compared to 21.2% last year.

The quarter was favorably impacted by a $240,000 pick-up we recorded in other income, below the operating income line. This related to the earn-out paid to the former owner of Cervat. Last year in the first quarter we recognized approximately $630,000 in foreign currency translation losses in other income and expense, as a number of currencies in countries we operate in devalued against the US dollar.

On the balance sheet, our receivable balance declined slightly compared to year end, and our collection period improved by two days. Inventory increased by $3.9 million, or 8%. Approximately $1 million of that increase was due to lack of trucks to ship product over the Labor Day weekend, which was the close of our quarter. We're working hard as a Company to improve our inventory turnover, and have programs in place at each operation to make that happen. We finished the quarter with $88 million in cash and marketable securities, compared to $76 million we had at the end of May, reflecting the strong cash generation from the Company's operations.

While we're pleased with the overall operating -- improved operating results for our first quarter, we realize that we need to accelerate the organic growth performance of our businesses. Each group had some good tail winds behind it, and we're excited about the remainder of the year ahead. Thanks for your attention. At this point, I'll turn it back to Jim for his comments.

Thanks, Steve, for that update. Let's take the next few minutes and talk about future opportunities that we see on the horizon. Here we are in the last week of September here in the northern hemisphere. It's beginning to be grain harvest time, so take our first look at the world grain crop and how this may impact several of our businesses. I think the crops look good. USDA continues to upgrade its forecast on the size of the crop for all commodities, and in particular corn and soybeans. They are just now seeing the last -- we are just now seeing the last of the wheat and barley crops come out of the northwest. There was some problem that we gained here in the last month on the diagnostic test to detect DON in wheat and barley -- there was some in the Dakotas, Minnesota, and up into Central Canada; however most of that crop is now in the bins, and those sales have been good. There really wasn't anything that's been all that significant.

As far as the rest of the US is concerned and then on into Mexico and Central America, as I said earlier the crops continue to look good. We will probably see not just clean crops but clean bumper crops from both corn and soybeans. Those prices are dropping dramatically. This will help on the meat processing side or meat production side. Both beef and pork are at high price levels at retail, because of a shortage of animals. In the US, baby pig virus played its toll on available animals. The drought continued to hold down the rebuilding of the beef herd.

However from a positive standpoint, these feeder calves that are now worth about twice as much as they were a year ago with a 500-pound calf going for about $2 a pound. As we go forward into the Fall, I expect that we'll see some increases in our beef heifer replacement programs at GeneSeek, as a result of the industry rebuilding its beef cattle herds. We're building back already the swine breeding herds after that disaster during the summer with the baby pig virus. In general, we're not going to see microtoxins, but we're going to see I think some good positive impact from the animal side, the animal protein side of our business.

One of the hot topics of conversation in food safety as we move into the winter will be the labeling of food that may contain GMO ingredients. Well, this is not going to be a simple test. It will accomplish what the consumer might desire. However, we are working with all facets of the industry to see if we can develop a testing program that will allay the concerns of a part of the consuming public, and yet at the same time not create undue problems for grain producers, processors, and merchandisers.

Organic foods will undoubtedly play some role in this area, and are increasing in volume annually -- not just here in the US, but in most of the European countries. We are currently working with the organic industries to help them better provide safe foods for their portion of the market. Our growth strategies will continue to follow the same successful path that we've used in the past. Internally, developed products from our R&D will help increase revenues and bottom-line results, as our customers continue to tell us how we can be helpful in providing them with the solutions they need. We will continue, I believe, to gain market share in a number of the markets in which we already operate.

Acquisitions will be the leg of the stool that will continue to play a big role. We don't currently have any letters of intent in place; however, we have several good acquisition opportunities that could be nearby. As our balance sheet shows and as Steve mentioned, we have the necessary capital to make sizeable acquisitions. If needed, we certainly have access to the debt market to step up even stronger, since we're sitting in a cash position with no real debt.

The fourth leg of that stool is our international business, and we'll continue to grow it. It's growing now, and we are especially putting additional resources behind those countries in which we already have boots on the ground. I spent some time earlier this month with the Management teams of both our Mexico and Brazilian businesses, and believe that growth in both of those will accelerate as we move through the year. Our Scotland operations were up about 8% for the quarter, but that's huge compared to the tremendous quarter that they had this time a year ago. I can tell you that the status of Scotland's independence of course had left us with some questions until last Thursday. We serve distributors in over 40 countries outside from the warehouse system in Eyre, Scotland, and we were beginning to wonder if we needed to put a contingency plan in place, but that's behind us.

We did have the opportunity to ring the bell to close the NASDAQ market a few weeks back. This marked the 25th year that Neogen has been a public Company. The NASDAQ official that welcomed us remembered the time when we first went on the NASDAQ board having done our initial public offering that raised a huge sum of $6 million, and that $6 million put our market cap on the Company of about $16 million. He fast forwarded to the audience then to say that if he had bought a $5 share of stock 25 years ago, that share would be worth about 40 times what he paid for it, or about $200 a share. Of course the overall market cap of the Company has grown from that $16 million to approximately $1.6 billion.

I rang the bell and accepted the honor on behalf of 950 Neogen employees around the world who have been the ones that really built the Company to where it is today; however, I can assure you that it was a bit humbling to make my comments from the podium inside the studio, while looking out the glass windows on to the street and seeing that what we were doing inside was being televised on the face of a 70-foot NASDAQ tower stuck right out in the middle of Times Square. This, I think, concludes our formal comments for the morning. Joe, I'll turn it back over to you for questions and answers from the audience.

Thank you.

(Operator Instructions)

Our first question here comes from Tony Brenner from Roth Capital Partners.

Did you mention what the organic sales growth for the animal safety products was in the quarter?

Well, that's a good question. It's a little bit hard to figure, in that some of these acquisitions are beginning to be kind of aged, particularly the one that we did last July. Once we brought that business in, it stepped up, and its revenues are based on what we've built there, considerably stronger than what they would have been at the time that we brought them in. The same thing is true with Prima Tech fire client.

So how do you call that? Is it organic sales, or is it sales from acquisitions. The amount that we added to it, it's a little bit difficult. I don't have the numbers right off the top of my head. But the fact that we moved a good bit of business that was on the animal safety side, where they've been going direct with it in Mexico, as an example. It had been on -- its animal safety products have been accounted for there. But the Mexican operations are fully reported under the food safety group now. There was some numbers that moved from animal safety that was purely organic over to food safety as a result of what we're doing in Mexico.

Okay. Then the food safety --

I will say if you take into account all of that, Tony -- it's not a true representation, but if you take it all into account -- we probably would be about flat, probably. That's not true, but if you kept the accounting in the fashion that it was done a year ago after transferring that stuff, it would have been about flat. This is politics season, so I'm beginning to learn how to answer questions without giving answers.

Right, okay. Given that, Jim, and given the fact that on the food safety side, even eliminating the impact of microtoxin and meat depreciation declines, you were up about 7%, which is 500 or 700 basis points below a presumed trend line growth rate there. The microtoxins and allergens are high-margin products. As that comparison gets better during the course of the year, given the fact that even in the first quarter you're just about at a 20% operating margin, is it then reasonable to think that for the balance of the year, you should edge beyond the 20% margin? If so, does that mean you're going to invent some need to spend money on marketing and R&D to bring it back down?

Tony, I know you didn't mean invent. You really meant that we would reach back and get some of the things out of our five-year plan that we wanted to do.

There you go.

No, it is kind of hard to see what's going to happen next quarter because product mix is so important there. We've got some great things coming organically. We've got a brand new product coming out for our Accupoint product line; on a new platform we put about $1 million in. We'll start to put the product out there beginning probably next week. That was a system, though it was automated, it was running 24/7 and it was beginning to get aged, and we were having slow-down problems. This is going to help both the cost and put us in position there. I think it is possible. We'll watch real close as to where we put money. You've heard me talk about India. I'd like to put some money in the expansion of the India program, which will be food safety, some time here before Christmas. That's not going to be immediately --

Are you talking about building infrastructure, or just making an acquisition?

Making an acquisition and building infrastructure at the same time.

Okay.

I'm encouraged. When Steve and I were looking over the last numbers when they came out, I was a little surprised that we had done that 19.9%. Under normal conditions we would just say 20%, but it was I thought a dramatic effect for folks like you to be able to say 19.9% and still hadn't got there yet.

Okay, so you're telling me that you do have projects that are going to offset some of what otherwise would be a sequential increase in margins? Is that the message?

Well, probably not immediately, no. Steve, can you add anything?

Well, I think --

Where have we got--

We had really good product mix this quarter, Tony. I think maybe Jim's hedging a little bit because the gross margins at 50.4% were a little bit higher than we thought we were going to come in at. It was good strong mix within the animal safety segment. Is that going to repeat itself in the next quarter? We just don't know. The mix is critical to that operating income.

Sure.

The growth is there and it's going to be strong. It will look a little different, because we will be outside of where we had that real increase this quarter we just finished. It was sort of the tail end, as Steve said, of the big microtoxin surge that we had that lasted for about five quarters. We were still, first quarter of last year, we were still running strong with helping the industry try to find all the horse meat there was in ground beef. I think Steve we had a 30% increase maybe in the same quarter last year in Europe with all that surge that was going on. That's the reason I said in my comments that considering where they were last year, I felt real good about the 9% growth that they had in revenue this year. When all that will get leveled out, I think we'll be back on a pretty level playing field.

Thank you.

Our next question here comes from Mr. Paul Knight from Janney Capital Markets.

Hi this is actually Bryan Kipp on behalf of Paul. Thanks for taking the questions. Wanted to drill in here a little bit on the OpEx side, too. I know in light of your recent acquisitions some of the products have natural synergies, especially in the retail side. I just wanted to see if some of that flow-through was from natural synergies that you guys got on the cost side? If so, some color on that would be helpful. How is that retail business performing relative to your expectations?

That's a good question. Yes, we are -- over on our animal safety side, we've got a lot of products that go through the large retail stores to get to farmers and ranchers. That's true for veterinary medicine -- I mean veterinary instruments. It's true for our rodenticides, some cleaners and disinfectants and insecticides. We've got an advantage because of where we are. As an example, we're the exclusive supplier in a number of products at Tractor Supply that's -- Steve, I forget the numbers where they are now, but we started with them they were about 400, and they are up to what now?

1,300.

We did pick up with the Cervent acquisition. We picked up several other big chain suppliers, retail suppliers, that's helping us there. The synergy is certainly working. It's working back inside and outside the farm gate. As an example, Mars is one of our good customers in a number of places. They're the largest animal food producer in the world, and we work with them there. They are a major service as it relates to canine parentage. We work with them solely as their supplier to that product line. I was at the beginning of last week at the organic food show in Baltimore, and surprised -- among a lot of other surprises there -- but to see Mars there with an organic rice. Those synergies are certainly working. I skip Snickers bars, but we are a good player there, too. I think -- maybe we're just now beginning to fully realize what we can do with these synergies.

Yes, I guess in context to that, with the consumables shift that we saw on the animal safety side, a little bit higher margin products lesser instruments in conjunction with this, you think you're at the start of those synergies, or you think there was some baked in here that can continue to evolve going forward?

I think it's just a start.

Okay.

For instance, we think we've got -- we have to earn our way on to the shelf, but we've got some good opportunities for the insecticide product. The former owners of that business said all they wanted without worrying about trying to get positioned with the retail outlets. We've got already the contacts, we've got the people there. That's just one example of what we can see going forward. There's more and more concern over on the food safety side -- not that there hadn't been -- when all of a sudden, if you're on that side and you wake up last Thursday morning and you read where the two principals at Peanut Processors of America, with their salmonella outbreak a year ago that killed several people and made several hundred sick, are found guilty and they're headed for the grey bar hotel for a while.

You can remember back in the summer when we had the cantaloupe problem -- those guys, they've got criminal charges have been levied against them. Got us in Iowa, folks that we know there unfortunately have got problems because of salmonella and (inaudible) eggs. They sickened a bunch of people, and there's a father-son there that may do some time, also, before it's over with. As society begins to enforce food safety rules, its kind of gotten to be personal. I think that's beginning to -- people are unfortunately beginning to see how that might -- nobody wants to kill their customers, but at the same time, you didn't think about getting a bad load of peanuts might send you to jail for five years, either. I think some of those things are all working.

Appreciate it. A quick follow-up on a different line of track. Your comments on potentially expanding out to India. Would you view a need for like a fighter brand there -- maybe something existing there that's lower end that you might not sell ex-US; or do you think the existing products Neogen has, you can kind of just push right down the channel there and it will work through? In light of that, what are your views -- more in the food safety side, is my assumption? Just want to get some color there, general stuff.

Yes, clearly on the food safety side. Animals are a different issue in India, of course. Not that there's not opportunities there. But no, we have distribution with independent distributors there; but it's not like having your own people on the ground. India and China, if you can remember, our commonplace conversations are important to us as we're building for what we're going to do the next five years, next 10 years. That's where the middle-income population growth is just burgeoning. India is not growing as fast as China, but it's beginning to grow.

As that happens, these people are looking for animal proteins for the first time. They want milk and meat and butter and cheese. They will have the money to pay for it. The countries have got to be able to produce that to satisfy that demand; because otherwise, like in China and that's a socioeconomic problem there. But in India, most of our success has always been as we moved into a different country or sometimes even a different market, is to buy a starter culture, if you will. We think there's a couple of potential opportunities to make an acquisition, and then to bolt a lot of stuff on to it that we already have. We will have somebody that knows the local rules and the local culture. I would think that at least at this point, that's kind of the way we're viewing India. It's worked for us everywhere else.

Appreciate it. Thanks again.

Thank you. Our next question here comes from Mr. Drew Jones from Stephens, Incorporated.

Sticking with the operating margins, if we look back to what's been a little bit of a drag over the past year or so, how many of those infrastructure investments that you've made over the past 18 months would you say are running full speed at this point?

Can you ask that question a little differently?

Yes, sure. I guess it seems like a lot of the investments you've made over the past 18 months have been in infrastructure, especially internationally on the food safety side. Are those all starting to contribute now?

I think on the international part, we're probably in early stages. A lot of those hires have been more probably in the last six months in the sales and marketing and customer service and technical service support. Those are going to take some time to percolate. But domestically, I think a lot of the hires that we've done in the last year, those people are -- those contributions are being felt.

They're paying for themselves. I think that's the question. And they're paying for themselves in Mexico and Brazil, though we don't have any real multiples off those people yet; but we're having good quarters down there. We're having good months down in both places.

Great. Trying to size up the GMO labeling opportunity, you guys have talked about that a pretty good bit. Just putting some numbers around it, what are you guys doing now in terms of that sort of testing?

Well, we've got -- let's think about the corn plant, for example. I know you're sitting in the middle of production country in Arkansas, but there's probably about six or seven what we call genetic events that are in corn that have been spliced in from some outside source. One of those is herbicide resistance so that you can plant the corn, spray it with a herbicide that'll kill the weeds and not bother the corn. We've got two -- a couple of them now for root worm in corn, so that when a worm shows up to eat the corn's roots, it's carrying BTs in the system, and acts as the poison kills the worm. We've got the same thing for the European corn bore that bores into the corn. Just to give you an example that all of these are a little different.

If you wanted to check something that had corn in it for the presence of genetic modification, you'd have to run half a dozen different tests, which is not really practical, and they're continuing to introduce them. We're looking at ways to be able to run a screening test for the guys like Whole Foods or others, so that they can say yes, if it's corn we're going to use this test. We're not there yet. I probably already talked more than I want to for my competitors that are listening; but you know, we are already there, for instance, on the soybean side. Our tests for herbicide resistance in soybeans is still the official test in Brazil. If they are shipping soybeans for instance that are going to Europe, they don't leave the port unless they've been checked with our tests for the presence of the Round Up resistance.

It's not a simple issue. If you look at the US in particular, probably over 90% of the corn, the soybeans, and the sugar beets that are a big sugar producer for us, have some genetic modification in those product lines. We think that it needs to be done. Do I think genetic modifications are safe? Yes. But I also respect those people that say maybe, but I don't want to eat it. I think you see the same thing out of the Monsantos and the DuPonts of the world. It protects their right to be in the market place with genetic modifications, if there's some way that those GMOs can be segregated, and makes the guys at places like Whole Foods happier. We're still working on it. We're not quite there, but it's going to be significant.

Okay, and then last one for me. You talked about the vole outbreak in northwest United States helping drive rodenticide sales in the quarter. Have there been any changes in rodenticide distribution, and do you envision any changes this fiscal year?

No, I think we'll strengthen our distribution and we're gaining a little more in what we call the Agronomic area. Most of our rodenticides go into protein production, so they are going into those people that are running dairies or laying flocks or chickens or broiler or turkeys. But there's also good markets out there for those people that are growing spinach and broccoli. We're beginning to see that agronomic business begin to pick up. Of course they got their own food safety problems, too. We're beginning to see how do you keep rats out of a lettuce field, and what about cleaning the machinery that's going through the field to harvest your fresh-cut salads that go in the celo bags. Those all present opportunities for us. They were there, but as we expand the synergy between our marketing groups, I think we're beginning to see more opportunities.

Thanks, guys.

Thank you, Drew.

Our next question comes from Mr. Brian Weinstein from William Blair.

Before I ask my question, Jim, I'll let you know my wife went to Eastern Michigan, so she was on the other side of your beating over the weekend; but I'm a Hoosier -- we had a good win. All in all, not too bad.

My condolences to your wife.

Yes, that's fine -- and congratulations to the Hoosiers, right? My question is, you guys always seem to have a lot of prior-year one-time events because you guys are so diverse. I just want to make sure that we have an understanding of what some of those one-time events were that benefited or hurt you guys in the last quarter. We talked about pig buyers, the horse meat speciation. Is there anything else that's maybe smaller that we should think about and make sure we're taking into consideration as we're looking at the year here?

That's a good question, and hard to answer. We couldn't have predicted all of a sudden the Irish guys got caught putting horse meat in ground beef. We try to be in a position to take advantage of those opportunities. Somebody told me recently, said Herbert, you've got to be one of the luckiest companies in the world. Every time something breaks you're right there on top of it. I said well, I'll accept that if you'll accept my definition of luck. Luck is when preparation and opportunity collide. I think we're trying to always be out there in preparation of what might happen where we, as we talk to the industry, what we think they might need.

I talked a little bit about the grain business, because that's a forward -- we kind of begin to know several months before harvest general what things are going to look like. We didn't call the DNO problem in the Dakotas this time for malt and barley, and for wheat. But again, it's not real big. It helped us. Probably most of that's going to come in our September business, probably.

I'm not sure how to predict what's ahead. We go through -- every two or three quarters we go through a risk issue. We ask each of our groups to talk about what risk they might see both internally and externally that could affect our business, either positive or negatively. Believe me, our Board is always saying Herbert, where is lightning going to strike next? I don't know where it's going to strike next. We try to keep our eyes out. But I think that's what we tried to build from the start. I think we're beginning to get it built, the synergy between foods and animals, and what's happening as we begin to focus more and more on food security going forward. I don't guess I answered you, but the best I know how to answer it, I think.

Okay, and I appreciate it. A question on -- obviously, you've had some Management changes at the top. Just curious on how the process is to find a replacement for the COO, where that process is, if you have an estimated time frame for when somebody would be coming on board there?

Yes, thank you for that. It's no secret we are short a Chief Operating Officer today, and everybody else has doubled up. I'm working an hour or two longer every week, but we've got some good candidates. I can say we've got it down I think pretty close to a final panel -- probably wouldn't want to say much more than that, but can we get it done within next 90 days? I think the answer is probably yes.

Okay, great. I'll jump out and let somebody else ask some questions. Thanks a lot.

Our next question here comes from Mr. Stephen O'Neill from Hilliard Lions.

Yes, good morning. One quick question, and this came up earlier. Are you able to provide the incremental addition to revenue year over year from acquisitions?

That's probably -- I think we can, but we don't have it available now. Maybe Steve can get back to you later on that one.

Okay, that was my only question.

Okay.

I'll give you a call, Steve.

Okay, thanks.

Our next question here comes from Mr. Shawn Rodriguez from Cowen and Company. Please go ahead, sir.

Hi, this is Ryan Blicker on for Shawn. Thanks for taking my questions. Rodenticide revenue was a strong driver in the quarter, specifically through the Prozap product line. You mentioned obviously the vole outbreak. How sustainable are these sales, and can you speak at all to the margin profile of the Prozap product line?

Well, I'll let Mr. Quinlan take part of that. We've got several product lines within our rodenticides. This is one of five, I believe, different technical agents that's in it. It's a fast-acting product that can be used in outdoors in fields, in orchards. Steve, I don't know what the margin on Prozap -- it's pretty good.

50%-plus.

50%-plus, yes.

Okay, thanks. That's helpful. Depreciation continued to be a head wind in the quarter with a tough comp. You said in the press release that sales of meat speciation testing -- that they're back to pre-scandal levels. Do you expect the sales of those tests to decline back to pre-scandal levels, or do you think the current level of sales are sustainable moving forward?

Oh, I think it's sustainable and probably we're seeing growth. I think we'll continue to see growth. We've got a lot of opportunities there. Horse meat was one thing, but as people begin to test, they're finding more and more economic adulteration. They're seeing where turkey -- ground turkey is being supplemented into ground beef and up to 10%, or whatever, at a whole lot different kind of prices. Especially now, as you see high beef prices, people are doing economic adulteration there.

Plus there's a lot of good opportunities going forward. We do a fair amount of work in our labs for service labs in Scotland for fish species. Its been estimated 30% of the fish we buy is really not the fish that it's claimed to be -- it's not cod, it's haddock or hake, or one of those specialty [NOI] fishes. We see the realization is developing. We see that happening, and probably more so right now in Europe, because of what's happened over there in speciation scandals. But it's here in the US.

That's one of those the first time that -- probably some of you on the phone can remember the first time that McDonald's got accused of having kangaroo in their hamburger meat, and it was a huge problem for months and months. I think that's one of those things that could -- not McDonald's and kangaroo -- but it's one of those things that -- one of the earlier questions would ask how do you take it into account. Hopefully we may have the product that they need, and we've worked far enough ahead to know what the contingency plans are. I think speciation, to wrap it up in a few words, continues to have good, strong double-digit growth for us, as we make new products, and as awareness in the market place continues.

Okay, thanks. One quick one on gross margin. You mentioned the negative dynamics for microtoxin, and then the positive dynamics from product mix in the animal health segment. Should we still look at Q1 margins as a trough? It doesn't seem like you mentioned that earlier. Do you think gross margins should continue to increase over the course of the year, or do you think we're going to be flat from here?

That's a great question. I don't know that I can give you anything more than a wishy-washy answer. We thought that the end of the FY14 year was kind of the trough of the gross margins. They recovered a little bit quicker than we thought here in the first quarter; but it does have a tremendous amount to do with the product mix. We had a very strong mix in the first quarter. Some of the diagnostic sales in the animal safety side -- the rodenticide sales on the animal safety side really popped the margin there. We just have to see what the rest of the year holds. We think that the margins are going to be higher than last year margins. We just don't know what the levels are going to be going forward here.

Yes, and remember, though gross margins also certainly important, look down at the operating profit. We've got some -- somebody earlier asked about synergies. We've got some synergies where we may have a product that's 36% gross margin, but it's got essentially no cost below the line. A big part of that gets to pass through, so that's the reason that if you build a program like we have with bolt-ons, you can afford to take on lower gross margin products, because your operating expenses of R&D and sales and marketing are minimal. I think you have to always look at that operating profit.

Okay, that's helpful. Thank you very much.

Thank you.

Thank you. Our next question here comes from Mr. Charles Haff from Craig-Hallum.

Hi, thanks for taking my questions. I had a question as a follow-up to a previous question on the natural tox line item. You mentioned that animal safety constant currency revenues were about 7%, but you had those difficult comps in the first quarter in that natural tox line item from the previous year, and these are easier comps. Could we extrapolate that maybe the natural tox line item would be around the 7% organic that you gave for all of food safety, or are we off there? Thank you.

I think it could be better than the 7%. As we open new markets, we've got a couple of new products coming to the market there. Got plenty of competition there. You all do a good enough job of publicizing the profitability in this business, so you drag in all or competitors. I think we can be 10% to 12% growth there, still. Remember, that's the very first product line that we introduced. We started introducing diagnostic products 29 years ago for the detection of natural toxins. It's a market area that people are aware of, but it just continues to grow every year.

Okay, great, thank you. Then a question for you on vet instruments. I know you had some acquisitions there, but did the organic revenues in vet instruments grow year over year, or were those flat? Any color there would be helpful.

That's one of those that's difficult to tell, as I talked about earlier when Roth was on the phone. We bought a share of that in July, so it was in for two of the three months. But Serevent products in July of 2014 look a hell of a lot different than they did in July of 2013 when Daniel Klein was kind of running it by himself with two sales people, and selling all day and hauling all night. When we put it into our organization that we had new distribution, we had a lot bigger sales and marketing force behind it. It's kind of hard to say what was really organic, and what was going to be accounting to probably taking over some market shares in places.

Okay. My last question is regarding the days inventory. Steve, I think you gave some explanations about that. It looks like it ticked up a little bit. I'm wondering if you can go over that one more time, as it wasn't quite clear to me the inventory days going up, and what you think those might do in the future quarters of this fiscal year, if you have any views there?

Sure, Charles. We had about $1 million of product that we couldn't get out the door on the animal safety side, just because we couldn't get trucks in over the Labor Day weekend. Not saying that as an excuse, just to say that's why some of the inventories grew a little bit. But we have that as a focus area for the Company this year, is to not necessarily minimize inventory, but to improve our turns. Each location is working on those and we report on those monthly. I think you're going to see the inventory turn number or days on hand start to decline. The turns improve during the rest of the year here.

I want to replay that for each one of our Managers. We've got opportunities in every part of our business to reduce some inventories. Some of that came about as a result of acquisitions that we still hadn't cleaned up, some rag-tail stuff. I guess GeneSeek is our only group that's -- they're running at 5-point-something on going toward six turns a year. That's probably the best performer we've got, and maybe the only one that doesn't have opportunities to do some things.

So Steve, you think kind of getting back to the low 130s, where it was last quarter, by the end of the year -- is that pretty reasonable?

That is reasonable. I mean I'd like to do better.

We've got to do better than that.

Okay, sounds good. Thanks, guys.

Thank you. This concludes the question-and-answer session. I will now turn the call back over to Mr. Herbert for closing remarks.

Well, thank you all, and thank you for the insightful questions. Let me remind you that the Company's Annual Meeting of Shareholders will be here in Lansing on October 2. To any of the shareholders that have the opportunity to attend, we would certainly welcome you here. For those of you that can't make the trip, remember to vote your proxy. I'm up for re-election as a Director this year, so thanks again. We'll stop and look forward to talking with you later. We're through, Joe.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for your participation, and you may now disconnect.