Neogen Corp (NEOG) 2015 Q2 法說會逐字稿

Welcome to the second-quarter FY15 earnings results conference call. My name is Jeanette, and I will be your operator for today's call.

(Operator Instructions)

Please note that this conference is being recorded.

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

Thank you. Good morning, and welcome to our regular quarterly conference call for investors and analysts. Today, we'll be reporting to you the results of our second quarter that ended on November 30.

And I'll remind you that some of the statements that are made here today could be termed as forward-looking statements. These forward-looking statements, of course, are subject to certain risk and uncertainties. The actual results might differ from those that we discuss today. These risks that are associated with our Business are covered, at least in part, in the Company's Form 10-K, as filed with the Securities and Exchange Commission.

In addition to those of you who are joining us today by live telephone conference, I'd also welcome those who may be joined by way of the simulcast on the world wide web. Following comments this morning, we'll entertain questions from participants who are joined on this live conference.

And I'm joined today by Steve Quinlan, our Chief Financial Officer, and Rick Calk, Neogen's new President and Chief Operating Officer. Rick has been with us now for a little less than two weeks, but I can tell you he's already starting to assimilate our products and markets, as he focuses on future growth. Rick has a good background in a number of food ingredient markets.

Earlier today, we issued a press release announcing the results of our second quarter; and as I said, that ended on November 30. Net income for that second quarter increased 26% to $7.8 million compared to the prior year's $6.2 million. Earnings per share in the current quarter were $0.21, as compared to $0.17 a year ago. Year-to-date net income for the first two quarters was approximately $16.7 million or $0.45 a share, compared to $0.38 a share for the same period last year.

Revenues for the second quarter of this FY15 increased by 15% to approximately $68.5 million. On a year-to-date comparison, revenues for the first two quarters were $136 million; again, up 15% compared to the year earlier. This second quarter marked the 91st quarter in the past 96 that Neogen has reported revenue increases, as compared with the same quarter in the previous year. This record now spans 24 years.

Though we successfully increased revenue by 15%, we were able to increase net earnings by 26%. And somebody would remember a few quarters ago, top-line revenues had actually grown faster than the bottom-line net income, as we were rebalancing some expenses that went there.

I guess in many ways the second quarter for Neogen were just kind of a steady-as-she-goes quarter. All of our divisions were holding their profitable position as the markets grew. We continued to build our staff with additional talent to take advantage of this market growth; and in fact, total employee count increased to 1,000 people as we closed the second quarter.

In early October, we made a nice synergistic acquisition, as we acquired the stock of BioLumix, an Ann Arbor, Michigan-based manufacturer and marketer of automated systems for the detection of microbial contaminates. Over the next several months, we expect to consolidate that business with Neogen's closely related Soleris technology. Both of these are widely used for the detection of spoilage organisms in a number of food industries, as well as in the expanding nutraceutical market.

So, combining of the BioLumix and the Soleris technologies, the market basis and the outstanding technical staffs, I think will greatly enhance this Business. And it's also important to note that this combination settles seven years of litigation between the two Companies.

Our food safety segment was up 16% in revenue, as compared to the prior year. This was aided by the BioLumix acquisition that we brought on board in mid-quarter that I just mentioned. And at the same time, our Scotland-based Neogen Europe operations once again had strong performance, both at the revenue line, as well as earnings. Even with some currency conversion adjustments, their revenues were up 20%.

On the animal safety side, we had revenue increases of 14%. These revenues were aided, in part, by the Prima Tech veterinary instrument business that we acquired back in November of 2013, and the Chem-Tech business that we acquired in January of this year, almost 12 months ago.

In fact, the growth of the Prima Tech business was greater than we had expected at the time we made the purchase. The earn-out payment to the former owners at the end of that first year was greater than what we had accrued. And I think Steve Quinlan will give you a little bit more of the color behind that in just a few minutes; but, again, another great acquisition.

The GeneSeek portion of our animal safety group once again made a strong contribution. This increase was due, in part, to the increased operational capacity of that business that was gained when we completed our new laboratory facilities in Lincoln, Nebraska.

The third quarter, that's now almost a month old, is starting off strong, and is presenting us with some new opportunities. But let me stop at this point and turn the call over to Steve Quinlan to give you a bit more of the color behind these general comments, and then I'll come back at the end and talk about how the third quarter is shaping up and what we see in the Business going forward.

Steve?

Thanks, Jim.

Jim has already reported on the overall sales and profit performance for the second quarter of our fiscal year. And I'd like to echo his comments that we were pleased with the results, and feel like momentum is beginning to build toward our goal of double-digit organic growth. In the next few minutes, I'll address some of the significant highlights for the quarter, and will begin by discussing our food safety group.

Food safety, as Jim mentioned, achieved revenues of $33 million for the quarter, an increase of 16% over last year. Sales of mycotoxin test kits were up 10% in the quarter; the result of DON outbreaks in Canada and Eastern Europe, and there were isolated outbreaks in the US as well.

We're just coming out of a year-long period of difficult comparisons caused by the significant aflatoxin outbreak from the 2013 corn crop. And this is the first quarter of growth in this product line since then. So, we're pleased to be able to report this.

Revenues for our industry-leading product line to detect inadvertent allergen contamination, which includes diagnostic tests for milk, peanuts, gluten, and processed soy, among others, continue to be very strong, and were up 11% in the quarter, as we continue our leading position in this rapidly growing market. Now, this increase was achieved in spite of a 40% fall off in speciation testing, as the significant uptick in sales from the 2013 horse meat scandal did not continue into the second half of calendar 2014.

Gluten test kit sales were particularly strong, up 23% in the quarter, as gluten-free food production continues to expand significantly. Our line of general micro products rose by 36% for the quarter, helped by the BioLumix acquisition, which closed at the beginning of October and provided $850,000 in revenues. This acquisition brings similar and complementary technology to our Soleris line of optical microbial test systems, which are used to detect spoilage organisms like yeast and mold in foods. We will spend the next few months integrating the platforms, incorporating the best features of each into a new next-generation product line.

Disposable vial sales rose 12% in the existing Soleris product line, while instrument sales, which we know to be lumpy, were down compared to last year's strong comparative quarter. Revenues from other micro products such as ampouled media and filters, which are used to test and monitor water quality at beverage manufacturers, rose 17% in the quarter, as we continue our penetration in this important market.

Revenues for our tests to detect the presence of antibiotics in raw fluid milk declined by 2% in the quarter, primarily due to delays in the launch of a new product offering for the European market, and currency issues caused by the strengthening of the dollar.

On the international front, Neogen Europe, as Jim mentioned, continued its run of impressive growth; up 20% for the quarter on the strength of a DON outbreak in eastern Europe, and strong sales in our genomic testing to our European customer base. Neogen Latino America, our subsidiary based in Mexico, has taken over account responsibility for a number of customers in Mexico and Central America, formerly served by the Lexington Group, in order to more directly and effectively serve those customers. After adjusting for the revenues transferred into Neogen LA, overall food safety organic growth was 7% for the quarter.

The animal safety segment recorded revenues of $35.5 million for the quarter; 14% over last year's second quarter, aided, in part, by revenues from last year's acquisitions. Apples to apples, organic growth for the segment was 8%.

Animal safety's Lexington division recorded revenue increases of 16% for the quarter, with revenues from the Prima Tech line of veterinary instruments and marketing products particularly strong. Our diagnostics line, which includes our horseracing and forensic kits, rose a strong 20% on strength of sales to international testing labs. We also had a number of other product lines which performed very well in the quarter, including our market-leading line of detectable needles, with revenue increases of 11%, and disposable supplies also up 11%.

GeneSeek, our genomics-based testing and bioinformatics business located in Lincoln, Nebraska, had a nice quarter, with sample volume up 25%, and a worldwide revenue increase of 20%, as a number of custom chip and service offerings, primarily developed to aid beef and dairy cattle producers, continue to perform well in the market. The move to the larger labs, which we completed in May, came at a perfect time, allowing us to absorb the increased volume, while at the same time improving our efficiencies.

Our biosecurity product offerings of cleaners, disinfectants and insecticides, which are produced by the companies, Hacco and Chem-Tech operations, recorded an overall sales increase of 13% for the quarter, helped by revenue from Chem-Tech, the insecticide manufacturer acquired in January.

Gross margins were 50% for the quarter, compared to 49.5% in last year's second quarter. The increase was largely the result of product mix shifts within animal safety's product lines, and improved efficiencies at GeneSeek. Overall, our gross margins rose by $4.7 million for the quarter.

Our operating expenses were up 8% compared to last year's second quarter. Sales and marketing expenses increased 14%, due to increases in personnel, marketing and advertising activity, and shipping expense directly related to our volume increases.

Our general and administrative expenses declined 3% for the quarter, due, in part, to settlement of litigation and the elimination of one-time costs related to last year's acquisitions. Increases in amortization of certain intangible assets from the recent acquisitions and higher stock-based compensation expense partially offset these lower expenses. Our R&D expenses increased 7% over the prior year, reflecting the continued elevated level of new product development and product improvement activity for this group.

Our operating earnings improved to $12.9 million for the quarter, a 33% improvement from last year's $9.7 million second quarter; and improved as a percentage of sales from 16.3% to 18.8%. Now, this improvement comes as we were able to leverage the increase in sales and higher gross margin percentage with moderate growth in operating expenses. We did recognize a charge of $450,000 in other income and expense during the quarter, as higher-than-budgeted sales of Prima Tech products resulted in an increase in the earn-out due to the sellers of this business. Now, this reduced our earnings per share by about $0.01 for the quarter. Obviously, we were happy to pay it, as it confirms our initial assessment of the potential of this business.

We continue to generate cash nicely, with cash provided by operations of $23 million for the year to date compared to our net income of $16.7 million. Our receivable balance is flat compared to the beginning of the year, in spite of our increased revenues. And our credit and collection group is doing a nice job of setting and monitoring credit levels, and collecting balances. Inventory levels have declined by more than $1.6 million from our August 31 balances, indicating that programs put in place to right size inventories and improve our turns are beginning to have a positive impact.

During the quarter, we did face some currency headwinds, as the dollar strengthened against the currencies we operate in. Revenues were about $360,000 less than they would have been using last year's currency rates, primarily due to the euro devaluing compared to last year. These headwinds have accelerated into the beginning of December, as currencies in oil-dependent economies, such as Brazil and Mexico, have devalued as the price of oil has continued its decline; and there's been a flight to quality in the form of the US dollar.

In the first half of this month, the real and peso have each declined by about 5%. This obviously makes our products less competitive internationally, and hurts us when we convert our foreign operations into our consolidated statements. We're obviously aware of these issues, and will be managing through them.

That wraps up my prepared comments for the quarter, and thanks for your attention. And at this point, I'll give the call back to Jim.

Thanks, Steve, for that update. Let me take the next few minutes to talk about what kind of future opportunities that we see on the horizon with our products, and what we see is happening in the market areas in which we work.

Taking a look first at, I think, the world grain crop: The size of the corn and soybean crop in the United States continued to surprise everyone, as estimates grew all the way up until last month. We now estimate that US corn crop to be about 14.4 billion. That's a number that probably doesn't mean a lot to you, but it's about 4% increase over last year in an all-time record harvest for this country. This crop size pushed down the on-farm prices to about $3.50 a bushel -- still profitable for the corn farmer, but that compares with last year's $4.50. So, we're seeing cheaper corn, which we'll talk about where that leads to.

So, there are plenty -- there were a few small pockets of mycotoxins, as Steve mentioned. The crop was really pretty clean.

The next concern came when we started trying to put that crop away, and there was inadequate on-farm or elevator storage to put it all in bins. So, some of that corn crop has ended up under [tarpoulins] or on concrete pads. This portion of the crop is problematic, since there's no real way to get any air through it to prevent [over] growth. So, some quality issues will certainly likely come up, and we'll have a little bit of opportunity with some of our mycotoxin tests as they try to dispose of it -- move that crop into commerce.

At this point, it's kind of premature to try to look at what's happening in the southern hemisphere, as far as grains production is concerned. Ed Bradley was just back from Brazil, but not sure that they're making any estimates down there yet.

From the animal side, the immediate future looks good for animal producers. Both beef and pork are at all-time high price levels at the retail, because of a shortage of breeding stock that occurred. And in the US, baby pig virus was a far-reaching problem to this nation's hog producers. But it now seems that we generally have it under control. And cold weather will be on our side -- will be on the side of these producers, because it won't multiply -- the virus won't multiply as fast, as the weather gets colder.

Feeder calves that are bound for the feed lot are short, and beef is selling at historically high levels, if you've bought much steak in a grocery store lately. [Breeder] calves are likely probably 300% of what the 10-year average would be; so, huge prices going to the guys that are raising feeder calves to go to the feed lots. As a result, this calving season, which begins in the southern US starting probably next month, our Ideal instrument obstetrical products are likely to see some boost, or see some nice boost I think, as those baby calves are more valuable than they've ever been before.

Pork producers are already beginning to recover from their disease problems, and spending in that area could see a boost with higher hog prices and cheaper corn. So, the forecast [covering the whole around] the forecast for the dairy business over the next year is also going to be profitable.

All this positive meat production forecasts are also positive for our GeneSeek animal genomics business. We are likely the largest animal genomic laboratory in the world, and we do business with the major suppliers of breeding stock of almost all species. And we also have a genomic program in place to help beef producers pick the best replacement heifers to go back into their herd.

Even though these rules are -- let's see, I have lost a page. I never do that. All right, some gremlin slipped in on my comments here.

So, the pipeline is full in our R&D labs, with much of the activity aimed at, as Steve talked about, additional allergy test kits and meat speciation identification. The regulatory concerns are also aimed in that same direction. Since the first of June, the beginning of our fiscal year, there's been 102 food recalls in the US. Of those, 58 were because of allergenic food products. And this would have meant that there was allergenic food in the products that were not properly labeled.

Someone asked me earlier this morning if I'd make some comments about the adoption of the Food Safety Modernization Act; and, frankly, there's very little to report to you. It's hard to believe that the President signed this Act almost four years ago. Once the Act was passed, then regulations had to be written. And now these regulations have been and the proposed rules have been written and rewritten. And it finally got to the point that the Federal courts got involved as the result of consumer concerns, and issued a rule that the FDA must comply with the Act within certain periods of time.

There are seven initiatives in the Act. The first two are now expected to be published around the end of August of 2015. After that, there will be a grace period before compliance that will actually be mandatory.

So, the next three will probably be final published sometime about October of next year. And the sixth and seventh regulations are not scheduled to be published for implementation until the spring of 2016. Now, although these rules are not currently enforceable, I think the smarter companies are already implementing what they believe may become the final regulations.

We are seeing retailers and restaurant companies require that their suppliers provide pathogen-free certificates more than we've ever seen before. And I'm sure we're probably already gaining some business among our various markets as a result of these anticipated FDA final regulations. And I expect that we'll continue to see this sort of slow, unofficial adoption by the food industry, as the mandatory regulations come into play.

As we see our markets developing outside the US, we continue to put resources in place to take advantage of these opportunities. For the quarter just finished, approximately 40% of our revenues came from customers outside the US. And we're continuing to invest more heavily in this international business.

Earlier this month, we acquired the Food Safety and Veterinary Genomic assets of our Chinese distributer, Beijing Anapure BioScientific Co. Anapure has been a distributor of Neogen food safety products for now more than 10 years. We'll be combining these assets with Neogen's already fully owned Company in China, and this will give us some additional strength.

A large number of the western and multi-national food companies have expanded their food production operations into China. Many of these are already Neogen customers elsewhere in the world. So, this acquisition will allow us to build on our existing Neogen China infrastructure. And China, of course, now with its growing middle class and rapidly growing demand for higher-quality meat and dairy products makes it be a substantial growth opportunity for Neogen going forward.

So, I think in conclusion, I'd say that our growth strategy is well positioned as we look out over the next quarters. We'll grow our Business as a one-stop-shop in food and animal safety. This is allowing us to gain more market share in those markets where we already are positioned.

We'll continue to grow the Company through the development of new products for both food and animal safety. And we've got a research team now, I counted them up, of 61 scientists and engineers that are working in this area on some promising new products, as well as enhanced current products that are pretty exciting. As with China, we'll continue to make greater investments in the worldwide international markets, both in working through our independent distributors, as well as expanding our own Company-owned distribution groups.

The fourth leg: We'll continue to look for those synergistic acquisitions. We have several good potential acquisitions on the radar at present, and we'll continue to [produce] some of them. And we'll be able to integrate the good ones, as we've done so successfully in the past. The last acquisition of Anapure in China marked the 28th acquisition that the Company has done since the year 2000. All of these were and continue to be accretive at both the top line and the bottom line.

So, I think I've about talked as much as my voice is going to hold out for now, so let me stop for now and say thanks for spending time with us this morning. This does conclude our prepared comments, and we're now open for questions from those who are on the line.

Thank you.

(Operator Instructions)

Our first question comes from Paul Knight of Janney Capital Markets.

Hello, guys, this is actually Brian Kipp on behalf of Paul. Thanks for taking the questions. I guess I'll just start off on the organic numbers.

Steve, you guys said I think [7%] and [8%] food safety and animal safety. Just teasing it out, that would suggest that I think acquisition contributions around $4 million.

I know you're basically lapping Chem-Tech, but just wanted to see if you can give additional color? Sorry Prima Tech, you're lapping. It just seems like Chem-Tech might have slowed down significantly Q-o-Q. Is that attributed to seasonality, or am I wrong?

Well, we haven't slowed down. I think it is a very seasonal business. And it's been kind of nice in our seasonal businesses that they're contra is -- rodenticides, there's a big market for rodenticides is when the weather gets cold, and rodents start hunting a place inside the chicken house or wherever.

And when the same thing happens -- the reverse then happens on the insecticides. Cold weather kills them flies, and warm weather brings them on. So this is sort of a period for the insecticide business.

We will -- obviously we've got to make enough product to fill up the pipeline. So we're starting pretty quick now to increase production there and to fill our pipelines as people are ready to take on product for housing for the Spring coming on.

Okay. So bookings are strong with nothing out of the ordinary with this Chem-Tech and Hacco consolidation you guys are seeing on the rodenticides, correct?

No, this is the first time you've seen them both in tandem.

And then I guess on China, still early. The distribution acquisition is intriguing. Just want to get your color on I guess, one, your view on consumption at dairy versus rice and soy milk. The potential convergence there.

Do you guys have any exposure to soy and rice? And two, what tier cities do they penetrate? Is it primarily tier 1 and customers that are located around tier 1, or does it go tier 2, tier 3? Thanks again.

Yes, I'm not sure how far that penetrates. I think it's beyond tier 1. As the middle class grows, they've got more income and they want our quality food.

That's the group that's been -- they've been able to get enough rice, not starve. But they want higher quality food. And (inaudible) of US companies have been particularly moving into China to produce food for the Chinese people. Tyson Foods is an example is there with I think they're probably killing now about 2.1 million chickens a week.

Cargill is there in the broader business killing something over 1 million birds a week. And that list goes on with both meal production and for animal proteins. Whether it's milk and eggs, or whether it's beef and pork, and these are the places that have to have good quality programs.

They've got to be doing live testing. Because though the Chinese government wants them to be there, the Chinese government is the first to attack them if they start presenting a food safety product issue, more so than their own domestic companies.

And yes, we're seeing a lot of those tier 1 consumers that are buying -- they will pay twice as much to buy a US product or from a US Company today. So those are all things in play in China as the leaders in that country try to continue to be able to hold things together.

Thanks again. Happy holidays.

Our next question comes from Tony Brenner of ROTH Capital Partners.

Thank you, and good morning.

Morning, Tony.

Hello, Jim. I think Steve mentioned that organic sales for Latin America were ahead by 7%. And I presume that to the currencies revenues were up at a lesser rate than that.

But in either case, that appears to be a much slower growth rate than you've been reporting for Latin America. So I'm curious what is going on in that market, and what you expect to drive revenues there going forward?

I think it's -- I don't think there's anything permanent about that. I think it's probably a lot of little things, Tony, that have gone into it. Mexico is really -- I think we're okay there.

There's some really good things that are on the drawing board. You're right, Brazil in particular has not grown like I'd like to have seen it grow. And Ed Bradley is sitting at the table with me here today. He just came back last night from being down there and working with our guys, so I don't have a full update.

We continue to be optimistic. Part of the problems in Brazil is that Brazil, though they are going to be a huge grower, and right now as far as supply and food to the world they're doing everything they can to protect their own homegrown industries.

So we've been trying to carry in the big stuff like the disinfectants or rodenticides made somewhere else. It became obvious to us that we're going to have to make those in country, and we're I think probably near the completion of some [pro] manufacturing down there to be able to participate more in the growth of what's happening there. Just kind of -- I'm not concerned about it, but I think it's just a slow down right now as we try to move up on that next plateau.

Okay. Jim, I know you took a vacation in India a short time ago, and you've been looking to make an acquisition there that you've talked about for at least six months. I wonder what kind of progress you've made on that score.

Well for one thing, I got a new lesson in patience. But nothing ever happens very fast, and I went in saying while this can't be that hard. They're a democracy and they speak the same language, so we should be able to work all right there.

But I failed to realize that it was a democracy as built by the English, and so they don't always move at American speeds. We do not have a letter of intent on the table today. I think we're very close to a letter of intent to go forward with the philosophy that we wanted to.

India is beginning to offer markets for products for some of the same things to be -- so they can do food safety testing at the point of production. There's a lot that's going to outside labs, food safety labs now. We're going to be a player there, and there's still a lot of exports coming out of there.

There's some places where there's a lot of spices, a lot of tea is coming out of India going elsewhere. And we think that there's going to be good markets for us there.

So I'd said, I think maybe earlier to you even, that I thought we'd have a flag planted by Christmas. That's not going to happen. But I think we ought to be there, and I'm fearful for giving you a date because your memory is good. But I think we ought to be there within the next two to three months.

Okay. And last question. Between India and China, as you plant flags, as you put it, how much infrastructure spending is there going to have to be in those markets? And will that be large enough for a period of time just obscure any income that might be forthcoming from those markets?

Well I think it certainly will in India. I'm hoping that we can -- and within a quarter of planting the flag there that we can be earnings neutral. China, we're already making a little money in China.

So obviously, we're adding to infrastructure, we're adding people. We don't need to add any facilities, but we are adding people. So it's going to be a contributor to the bottom line, not third quarter, fourth quarter, while that's a better guess. But India, I'd hope that we could breakeven there for this fiscal year.

Okay, thank you.

Our next question comes from Brian Weinstein of William Blair.

Yes, hello, guys. Thanks for taking the questions. This is Matt in for Brian today. Jim, I was just hoping if maybe you could give us a little more color on your thoughts on the acquisition landscape in 2015. If there are any particular geographies or product groups that are interesting. Thanks.

Yes, unfortunately, we don't find any big ones. We've got adequate resources to do a big one, but not any big ones that fit our synergy. That are synergistic to what we're doing.

I apologize for that, but then I look back at what we've done. We've been able to bring in these $10 million, $12 million, $15 million acquisitions and bring them in properly and integrate them. So as long as they're still around and we continue to do what we've already developed, I think they're okay.

I guess geographically, we've got a management team in Neogen Europe sitting there in Scotland that is plenty adequate to take on some new responsibilities. We are and will be looking for some things that we could add to that management team going forward that will open up more of the European Union for us in some places where we don't have good access to markets today.

And that's one of the ones that's clearly on our drawing boards. And we're spending some time -- be spending more conscience time looking there over the next three to six months as to what's available that we can bring in.

We got some stuff on the radar, but it's kind of too early to make any real predictions. So we'll be looking for what we can do to bulk up both Mexico and Brazil. Unless they had brought something back with him last night, nothing in Brazil that's readily at hand. But that's going to be a good place to put some additional resources.

Okay. Thanks for that, Jim.

And then, Steve, just one on the gross margin improvement. I was hoping if you could help us with the components of that improvement between product mix and underlying efficiencies that you guys have been working on. And then how that would trend moving forward, what things are sustainable for perhaps some impacts of this mix shift in the quarter? Thanks.

The product mix on the Animal Safety side, there was some nice growth on our forensic kits which are higher margin products for us there. And efficiencies at GeneSeek, we budgeted for those with the new facility.

In terms of splitting the margin gain by efficiencies or mix, it was probably about half and half. And Food Safety was pretty consistent. So I think going forward, 50%, we hit 50.4% in Q1 which was a big step up from the prior three quarters of last year. Kind of surprised us a little bit that we got to 50.4%, but 50% is our kind of our target for the next couple quarters I would say.

Yes, and of course, we're still working hard for that 20% operating profit which we slipped a little bit this quarter compared to last quarter there. But we know where it is, and it's just pretty difficult to manipulate all those things every three months.

Okay. Thanks for the detail, guys.

Our next question comes from Charles Haff of Craig-Hallum.

Hello, thanks, guys, for taking my questions. So, Steve, you had impressive sales and marketing leverage this quarter. I'm wondering if you could kind of spike out anything going on there, how you're thinking about sales and marketing expenses for the remaining quarters of the fiscal year?

I think that the growth there, Charles, of what was that, about 14% a quarter? I think that's probably going to be a run rate in that 14% to 16% depending upon volume.

We continue to add people, and not all just bag carriers, but we're adding to our marketing, our tech service group, some of that infrastructure that is so important for this Company. But I think that growth will be in that range going forward.

Okay. And the additional 1,000 FTE that Jim referenced earlier, was that up year-over-year? And I don't know, how many employees do you have right now?

No, that was -- I'm sorry. I miscommunicated that our 1,000th employee.

Got you.

About 1,000, 1,010 or 1,020 now somewhere in there.

Okay, my mistake. Sorry about that.

It's about 40 year-to-date.

Okay, great, thank you. And then any updates on ContraPest?

I know that you guys were thinking or hoping for EPA approval by the end of the year when you did the original press release. Any updates you can give us there, and have your timing estimates changed at all?

Unfortunately, it's not our product. It's our product to manufacture and market once we get an approval, but the current owners and inventors are the ones who have to do the EPA license request. And there, I was with them last week I guess, and nothing I think maybe they just were a little more optimistic perhaps than they should have been.

There's nothing wrong going on there. I would say that it's going to be another probably two months before they finish their application with the EPA. And it's hard to say how long EPA will hold on to this, so it's not likely we're going to see any impact of that this fiscal year. But our regular rodenticide sales are good.

Okay. And I think you've mentioned previously, Jim, that you think they have the fast track status. Is that still the case, or has that changed at all?

No, it would appear to be the case. Yes.

Okay. And then, Steve, last one for me on foreign exchange. You mentioned that you expect some continued pressure there for the remaining in the fiscal year. Do you guys do any hedging or are you expecting to do any hedging for that, or is that just going to flow through?

No, we do do some hedging, Charles, and are looking to possibly expand our hedging program. But some of it will certainly flow through, yes.

Okay. Would you say that you're going to be 50% hedged or 80%, or do you have any kind of estimate on that or is it too early to say?

It's probably too early. I'd say it's somewhere around 50%. Since we're not big enough to be buying futures contracts, we have to play it a little differently.

And if you're big enough to buy futures contracts, the hedge would be more profitable. We have to go through banks to get that done, and they take a little bit off the top. So we have to look at how we're doing that.

And this whole currency thing is I think the dollar will continue to get stronger, and we're going to look at that and the way we hedge our average receivables out there. But it really affects us probably more in terms of being competitive on a worldwide basis, other than just an adjustment for currency.

We've got to adjust the currency. But at the same time, if in those places where we're selling on the dollar and maybe we still sell along the basis of the dollar being places in the world today, then our price gets to be -- if we don't make some adjustments, our price pushes us out to be non-competitive against the local industry. So it's got sort of a double edge.

Okay. So in that case, Jim, do you usually have to make some adjustments to your prices on a short-term basis, or do you not usually get involved with that?

No, we end -- we've got -- with our distributors, we've got sort of a I think I'd started to say unwritten, but I guess it's written now. As to at what point, when the currency moves to certain level, at what point we can make -- we will make some price adjustments going to them? And that's primarily with distributors.

It's kind of difficult to get them to reciprocate when it goes the other way. But we've been here before, so this is not a new -- it's not our first rodeo. We've been up and down with the peso and Mexico for 20 years plus, and seen some of the same things in Venezuela still a problem because of being able to just get product in. So I don't know that we've got all the answers, but it's not our first trip.

Okay. And just one more on this, because it seems like an important point. Are you in that environment now with your distributors where you've had to work out arrangements with them to make them whole, or are you just anticipating that you might be in that environment in the next remaining quarters of the fiscal year? Or you're already there now?

No, we're not already there. And if it doesn't get any worse, we won't need to go there probably. But we know they how to do it, and that would be mostly the South American countries where we'd have a bigger concern I think today.

We go into Russia through a distributer, and God knows what's going to happen over there. The way that currency is devaluing, but I think we're going to be okay there. We don't have enough going in there to make a big difference anyway.

Okay, great. Well I really appreciate the color, Jim and Steve.

Thank you.

(Operator Instructions)

Our next question comes from Shaun Rodriguez of Cowen and Company.

Hello, this is Ryan Blicker filling in for Shaun. Thanks for taking my questions. So I was wondering if you could provide any update on the progress regarding the Merck Animal Health partnership [from] last quarter.

Obviously, a large opportunity, but currently dominated by a pretty major player. How are you thinking guys about that, and has it impacted sales so far in FY15?

What you're talking about is our program for our genomics program at GeneSeek for the dairy side. And this is a genomics program that's been somewhere between $20 and $40 per animal, depending on what kind of results they want.

We were able to take a sample into our labs, and go back with a prediction of what that animal, in this case the dairy animal, what kind of milk production she might provide a year from now when she's mature. And what kind of feed conversion, even down in some cases to butter fat levels. How long we expect her to stay in the herd beyond two years.

And a lot of those predictions are pretty realistic. So we started that program. We're working -- Merck came to us and said we like the program, we'd like to be able to sell it to some of our big dairy producers, and because it kind of enhances our reputation as a supplier to the dairy farmers.

And so we struck a deal with them, and they are providing -- they're working with our field people but they also work on their own. And essentially, we pay them a commission for what they bring in.

So and it's just really getting legs. It's I think we announced it probably 60 days ago or thereabouts, but this is really getting legs at this point. So we're pretty optimistic.

We're already doing a good bit of business. And this would just be a good addition to it.

Okay, thanks for the color there. One more follow-up on margins.

Obviously, pretty impressive bottom line growth so far this year. But obviously, on track 30% gross margin, maybe close to 19% operating margin for the year. Just given the acquisition so far and it sounds like you're going to continue to be acquiring companies, should we expect any headwinds to margins in the back half of the year from either M&A or FX like you mentioned earlier?

No I don't think so. We just underestimated what Prima Tech was going to do. At the time, if we had assumed another $450,000 and put it in our numbers back then, we wouldn't be taking it in like we doing it now that Steve talked about.

And the accounting rules are accounting rules, but they get to be for sometimes a little bit difficult to determine when you make an acquisition. How much of it is going to go to goodwill, how much of it is going to be a customer base intangible, what they're going to do with existing inventories. Whether you're going to have to discount existing inventories for whatever rule.

It all works out in the end, but it can have an impact on what we're doing from time to time. But I don't think, Steve, I don't think there's anything I see that's that $450,000 Prima Tech was the biggest trip block we had I think in putting these things away.

Yes. And I think BioLumix and anything in China, we have so many products that the impact of those on our gross margins aren't going to be significant in and of themselves. So I don't see any huge headwinds to our gross margins for any acquisitions, or ones that I think we're thinking, I shouldn't say that, for any of the acquisitions that we've done so far.

Okay, thanks a lot.

We have no further questions at this time. I will now turn the call back to Mr. Herbert for closing remarks.

Well, thank you very much for your attention this morning, your interest and your continued interest in our Company. We're kind of proud of what we're getting done, and we're certainly proud to be associated with folks like have been on the line this morning.

So at the conclusion, I'd just wish everyone happy holidays for the weeks ahead, and we'll be talking to you in the new calendar year. We're off.

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