Neogen Corp (NEOG) 2015 Q3 法說會逐字稿

Welcome to the Third Quarter Fiscal Year 2015 Earnings Results Conference Call. My name is Eric 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 that this conference is being recorded.

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

Good morning and welcome to our regular quarterly conference call for investors and analysts. Today, as Eric has said, we'll be reporting to you the results of our third quarter which ended on February 28.

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

So, in addition, to those of you who are joining us by live telephone conference this morning, I'd also welcome those who may be joined by simulcast on the World Wide Web. Following comments this morning, we'll entertain questions from participants who are joined with me, which would include Steve Quinlan, our Chief Financial Officer; and Rick Calk, Neogen's new President and Chief Operating Officer. Rick has been with us now for about 90 days and even in this short period of time is recording some nice successes. When Rick came in, I asked him to take over six important projects. And they're all progressing well and one or two of them even nearing completion. So it's good to have Rick's leadership on the team.

Earlier today, Neogen announced in its press release that results of our third quarter that ended on February 28 and the net income for that third quarter increased 13% to approximately $7.5 million compared to prior year's approximately $6.6 million. And on an earnings per share basis, the quarter was $0.20 as compared to $0.18 a year ago. Year-to-date net income for the first three quarters was 17% ahead of prior year, to approximately $24 million or $0.65 a share compared to $0.56 a share in the same period last year.

Revenues for the third quarter increased 10% to $68.4 million, from the previous year's third quarter of $62 million. And we achieved this revenue growth and we'll be talking more about it this morning, despite topline currency adjustments for the quarter, the revenue currency adjustments were about $1.5 million as a result of currency weaknesses in essentially all of our international markets.

On a year-to-date basis, FY15 revenues increased 14% to approximately $204 million from the prior year's $180 million. And I'd have to say that we're pleased with this third quarter and it's really stronger than these final results might indicate. This is a result of those negative currency headwinds. Revenue increases would have been closer to 13% instead of 10%, if we'd been working on the same currency valuations as the prior year.

As I followed along each of our operating units during the quarter, the growth all seemed to be pretty healthy and I guess I was thinking that international sales as a percentage of total revenues were going to be about 39% of total revenues, which has been kind on track of where we've been. When currency translations -- international sales came in -- with those currency translations, international sales came in at 36% after taking into account the strength of the U.S. dollar against almost every other currency in the world.

I think as a real world example, if I look at our Neogen Europe operations, that management was from our Scotland offices who were here with us last week and they left with their heads still shaking that this is the first quarter probably in more than a decade that they'd not shown double-digit revenue increases. On a pound sterling basis, when the books left Scotland, they'd reported an increase of 12%, which when we got them converted to U.S. dollars that came in at 4%. So that's a good example of what the currency translation has been.

And having that said, I have to bear responsibility for part of that currency problem. We'd been hedging at some places but obviously not enough. Neogen does business and consolidates its various statements in pound sterling and euro, peso and Brazilian real and Chinese yuan. All of these transitions then eventually get back to the U.S. dollars when we consolidate them into our statements. And going forward, I can tell you that we now have a much more proactive program to hedge and/or protect against further -- or help protect against further conversion losses.

Having said all that above, it's still a great story. The third quarter marked our 92nd quarter in the past 97 that Neogen has reported revenue increases as compared to the same quarter in the previous year. This record now spans over 24 years. And by the way, all consecutive quarters in the last nine years have held this nice record.

All of our operating groups, they did pretty well for the quarter. We faced a number of challenges with weather and freight issues, but fortunately none of those were permanent. Revenues for our food safety segment were up 14% for the quarter compared to the prior year and a number of our product lines are doing very well. I'll talk a little bit more later on about some of the food [priority] issues that are going on and some other issues that we might expect to see going forward.

Third quarter revenues for the animal safety group were up about 7% and this is despite several external issues that business faced. Some of you may know that we make several of our products in China and we're generally able to keep those inventories matched up to our revenues. However, the dock workers strike on the West Coast really jammed us up like they did a lot of other companies, and for our products that were coming from Asia, I think at one time we had containers on over 40 ships that were laying offshore waiting there to come into ports to be unloaded. And of course it's -- that's now opened up and at least we're beginning to get some relief coming in.

Weather was probably a bigger issue, sort of a bigger issue than normal. It's always winter time, but this was the worst winter time. This related to both transportation and the product usage. Many animal protein production units were -- is locked down, because of the weather and there again transportation just didn't flow to move products out. The GeneSeek portion of the animal safety group, this continues to turn in good results. This group reported increases in revenues of almost 29% as compared to the third quarter of last year and a portion of that undoubtedly due to our larger and upgraded facilities in our plant in Lincoln, Nebraska.

The last quarter of the year is now almost a month old and is starting off with several new opportunities. But before I go further, let me stop at this point and ask Steve Quinlan to give you more of the color behind my general comments and then I'll come back and talk a bit more about what's beginning to shape up as we look towards the end of the year. Steve?

Thanks Jim. As Jim indicated, the quarter overall was solid, even after considering the currency issues which affected both top and bottom line results. In the next few minutes, I'll take you through some of the highlights for the quarter and address some of our significant balance sheet changes.

Our food safety segment achieved revenues of $32 million for the quarter, an increase of 14% over last year. Revenues for our industry-leading product line to detect inadvertent allergen contamination, which include diagnostic test for milk, peanuts, gluten and processed soy amongst others, continue to be very strong and were up 15% in the quarter. Tests to detect the presence of peanuts, were especially strong, rising 39%, the result of peanut shell residue being discovered in spices such as cumin during the quarter.

We believe that testing for contaminants in spices will increase significantly in the near term as more companies become aware of the potential adulteration in these products. Milk test kit sales were also robust, up 18% in the quarter. Sales of our mycotoxin test kits rose 6% in the quarter, a result of DON outbreaks in Eastern Europe and to a lesser extent in Canada. Our tests to detect the presence of histamine, a toxin found in fish, also rose 13% during the quarter. These increases offset slightly lower sales of aflatoxin kits. With the clean corn crop in the U.S. last year there has been less downstream testing for this toxin this year.

Our line of general micro products rose by 47% for the quarter, significantly aided by the BioLumix acquisition, which closed in October of 2014 and which generated $1.4 million in revenue this quarter, significantly exceeding our internal budgets. As we mentioned on last quarter's call, this acquisition brings complementary technology to our Soleris line of optical microbial test systems, which are used to detect spoilage organisms like yeast and molds in foods. We spent these first five months of ownership ensuring the manufacturability of the BioLumix products in our operations.

Disposable vial sales rose 11% in the quarter in the existing Soleris product line, while the instrument sales were down compared to last year's strong quarter. Revenues from other micro products, such as our ampouled media and filters used to test and monitor water quality at beverage manufacturers continued their steady growth, up 10% in the quarter. Revenues for our test to detect the presence of antibiotics in raw fluid milk declined by 8% in the quarter, primarily due to currency issues related to the strengthening of the dollar, as we sell this product in euros and to a lesser extent, lower volumes due to the delays in the launch of a new product in Eastern Europe.

Each of our international operations were adversely impacted by the strong U.S. dollar. Jim already mentioned the impact at Neogen Europe in his earlier comments. Neogen do Brasil located near Sao Paulo, Brazil, recorded a 16% increase in revenues in the real. However, this increase was reduced to 2% when converted into U.S. dollars. And Neogen Latinoamerica, our subsidiary based in Mexico has taken over [account] responsibility for a number of customers in Mexico and Central America, which were formally served by the Lexington Group in order to more directly serve those customers and had significant growth even after the peso devalued 7% in the quarter. After adjusting for the revenues transferred into Neogen LA and the BioLumix revenues, our overall food safety organic growth was 4% for the quarter. Well, I think it's important to note that the growth was actually 9% before adjusting for currency effects.

Our animal safety segment recorded revenues of $36.4 million for the quarter; that's 7% over last year's third quarter, led by the 29% increase in revenues from GeneSeek, our genomics testing and bioinformatics business located in Lincoln, Nebraska. This group continues to offer new iterations of its custom chip and service offerings, primarily developed to aid beef and dairy cattle producers and they continue to perform well in their markets. The larger lab facility we moved to in May of 2014 has enabled this business to absorb the significant increase in volume and improve our operating efficiencies.

Our bio-security product offerings of cleansers, disinfectants, rodenticides and insecticides, which are produced by the Company's Hacco and Chem-Tech operations, recorded an overall sales increase of 30% for the quarter, helped by revenue from Chem-Tech, the insecticide manufacturer we acquired a year ago. Chem-Tech's revenues have exceeded our internal budgets in its first year under our ownership, which has resulted in additional contingent consideration related to the acquisition. A wool infestation in the Western portion of the U.S. and incremental business from a large customer were factors in our rodenticide sales increasing 40%.

Our diagnostics line, which includes our horse racing and forensics kits rose 11% and strengthened sales to international testing labs. Sales of veterinary instruments and disposables declined 7% in the quarter, due in part to back-order product, resulting from the ports slowdowns on the West Coast. Our patented line of detectible needles was up 17%, continuing its strong recent trends. Animal care products declined 13% in the quarter, as a distributed antibiotic discontinued by the manufacturer in late fiscal 2014 resulted in no sales for that product in the current year and a wound care product with strong sales in the prior year due to a supply disruption declined as the supplier came back into the market in 2015. Adjusted organic growth for the segment was 9%, after accounting for the Chem-Tech revenues and the transfer of some product sales to Neogen LA.

Gross margins on our $68.4 million in revenues for the quarter were 49.3%, compared to 49.5% on the $62 million in revenues in the February 2014 quarter. On a year-to-date basis, gross margins were 49.9%, compared to 50.3% in the prior fiscal year. The slight decline in gross margin on a year-to-date basis is due to mix shifts within each segment and the currency impact.

On the operating expense side, our sales and marketing expenses were $12.7 million for the quarter, an increase of 6% over last year's third quarter and as a percent of sales were 18.5% compared to 19.3% last year. Increased headcount and expenses related to the increased sales drove this growth. General and administrative costs for the first nine months were $6.5 million, up about 3% due to increased amortization of certain intangible assets from our recent acquisitions and higher compensation and stock option expenses, somewhat offset by reduced legal expenses. Our R&D expenses were about $2.4 million, an increase of 12% over last year's third quarter, primarily due to numerous product development and improvement projects.

So our operating profit for the quarter was $12.2 million, an increase of 18% compared to the same period a year ago. Our operating margin increased from 16.6% in the February 2014 quarter to 17.8% in this year's third quarter. On a year-to-date basis, operating margin was 18.8%, compared to 18% in the same period of the prior year. For both the quarter and year-to-date, the improvement in operating margin percentage was due to the increase in revenues and controlled expense growth.

Now the dollar strengthening during the quarter resulted in currency translation losses of about $470,000 recorded in other income and expense. Also included in other expense during the quarter was an $84,000 charge for increased contingent consideration related to our Chem-Tech acquisition. Last year's third quarter had minimal currency losses. As Jim mentioned, we've taken steps to hedge more of our exposure in the currencies we operate.

As Jim mentioned at the beginning of the call, we achieved net income of $7.5 million for the quarter or $0.20 per share compared to $6.6 million or $0.18 a share in last year's third quarter. The topline currency impact of $1.5 million, combined with the currency conversion losses running through other expense wound up cost in the Company about $0.02 a share for the quarter.

For the year-to-date, we've earned a total profit of $24.1 million or $0.65 a share, compared to $20.6 million or $0.56 per share last year. This is a 16% increase on a per share basis. The Company generated about $10 million in cash from operations during the quarter and has generated about $33.5 million for the first nine months of the year, almost double the $17.1 million achieved in the first nine months of last fiscal year, with improved profitability and better utilization of working capital the primary drivers.

Our receivable balance is up about 2% since year-end, primarily due to the revenue increase. We're paying very close attention to our receivables, as the dollar strength and sluggish economies puts pressure on our international customers. We are also helping customers in countries and markets which have been negatively affected by the local currency devaluation. Our inventory levels are up 8% over year-end levels and have increased about $1.6 million over second quarter levels, as we made some calendar year-end purchases to fulfill our commitments and secure favorable costs. We're continuing our focus on improvement of inventory turns and are seeing some improvements in this area.

That concludes my prepared comments and at this point I'll turn it back to Jim for his further comments.

Thanks Steve. Before I move on to the closing comments, let me call on Rick Calk -- there's a [Rick Kirk] in our past, some of you may remember, a different Rick, Rick Calk for some comments. Though he is up to his elbows and getting some great operational experience, I can tell you that Rick is developing a good understanding of our strategic direction at the same time. Rick?

Well thanks Jim, and again, thank you very much for the opportunity here at Neogen. From the outside looking in, I really believe Neogen was a real once in a lifetime opportunity for both myself and my family and would give me an exceptional capstone on my business career. And now that I've had a chance to come in and experience Neogen from the inside and really take time to meet the key Company personnel, my belief has only been strengthened.

I'd like to think that at this point I'm beginning to lose a little bit of that new car smell. I believe I've been able to start making a real contribution on some very important projects in my first 90 days, while really increasing my knowledge of the synergies between both our food and our animal safety business segments, as well as our domestic and international operations.

I've been very fortunate in that I've been able to utilize a hands on approach in many of these cases to better understand Neogen's operations at all levels of the organization, as well as to better understand who purchases Neogen's products and services and probably most importantly, who should be purchasing what Neogen has to offer.

So Jim, I really look forward to continuing this process and I really look forward to meeting many of the people that are on the phone and hope that we'll have a great year together as we finish 2015.

Thanks Rick and I promise I'll do a better job of getting your name right next time. Let me see if I can give you a better color here and share with you some of the enthusiasm for the months ahead.

I think it was Charles Dickens that wrote, it was the best of times and it was the worst of times. So I think I'll go back and look it up, did he say it was the worst of times and the best of times, but whatever, this is probably a pretty good way to lead into my next comments.

I think -- let me start up by giving you a quick view of what's happening in the animal protein side. Avian influenza, a contagious disease of chickens and turkeys, affecting in wildlife, hit the Pacific Northwest in late fall. Because of the potential communicable disease concerns, this gave the Japanese the opportunity to ban the import of any poultry from anywhere in the U.S. beginning in January. And this disease found its way into the Southern Missouri and Northwest Arkansas in early March and it still has all of us holding our breath, since this area is probably one of the two most densely populated poultry regions, probably anywhere in the world.

According to my information, we've not had a new farm break since March 12, which means that we've been able to control -- the industry has been able to control the spread for the last three weeks, which certainly bodes well. This has brought about tight security on almost all poultry farms, regardless of the geography. Farms with disease will be depopulated and undergo strong cleaning and disinfecting program and fortunately Neogen has the cleaner and disinfected products that are probably best in the market to be used for the most efficient control of highly contagious poultry diseases.

Though there's been some market undertone for the past, certainly at least the past several months, the concept of antibiotic-free meat really began to gain momentum really this month. Many restaurants and food service providers, including McDonald's, Chick-fil-A, Chipotle and I think the list now is maybe in menus of a dozen more, have announced that they will not be purchasing chicken after certain dates unless it's raised antibiotic free. Many companies have made similar announcements concerning the purchase of antibiotic-free beef and pork.

For some time, there's been a concern that the use of antibiotics in animal production -- or actually in animal feed has led to residues in meat products and then the development of bacteria that cannot be controlled with normal human antibiotic medications. I was a part of a group of industry leaders in January that estimated perhaps 4% to 6% of the U.S. chicken meat today is produced in a truly antibiotic-free manner. Based on consumer demands and some of those buyers that I just mentioned, there are some people who believe that that could grow to as high as 30% in the next 12 months. Well, frankly this is a lot more doable in chickens than would be any other meat, since we only need to keep a chicken healthy for a bit over six weeks from the date it's hatched until it's processed.

Again, good news for Neogen, our bio-security programs and our products, along with our sanitation monitoring and our pathogen detection diagnostics are likely to play, I think, an increasing role in helping the industry achieve this raise without antibiotics program.

Whether it's the best of times or the worst of times, there is also some interesting developments that are happening over on the food safety side. The latest interesting problem occurred when people started to find peanut protein in the spice cumin. People with peanut allergens began to actually get sick from eating things like Chilli & Hummus chips. It was quickly learnt that this of course was an economic adulteration, more food problem then. It's interesting how much ground peanut [husk] look like cumin once they're all mixed together. It's hard to say how big this program really is going to be before it's all over with. We don't know how much of this adulterated cumin spices that may be tucked away in warehouses somewhere around the world. USDA, I think last week announced that it's already been estimated at least 350,000 pounds of seasoned beef, pork, and chicken have been pulled off the market. Companies like Whole Foods have recalled hundreds of products from its shelves, because of actual findings or suspicions, and fortunately Neogen has a test kit that detects peanut contamination and the largest offering of diagnostic test in the industry. We can detect, I think, 13 of the potentially allergenic foods today.

In the late fall, people began to get sick from caramel apples. Five people died and a number or many more were hospitalized in 10 states after eating these apples. The problem was traced to the bacteria Listeria. Eventually it was discovered that the bacteria was harbored in the stamen end of apples that were stored in controlled atmospheric storage in California last fall. Even though they were stored under refrigeration, Listeria will still grow. We immediately contacted all of the large apple storage companies in the country and I think our quick diagnostic test for the detection of Listeria will help these food storage companies by making sure these apples don't get into the fresh market in the food chain.

Even though we don't have any final enforcement action from the Food Safety Modernization Act at FDA, and remember it was signed into law four years ago now, I can give you an update and say, it appears closer at hand. There were several distinct pieces of the act. In fact there was seven of them in total. After writes and rewrites, the first rule, or the first two of these is set to be published on August 30. And really what this means is this tells the industry what rules they'll have to comply with 12 to 24 months later, but at least there is some movement. These two pertain to the prevention and control of human foods and other prevention and control of problems in the foods fed to the animals or what we call the animal feed industry.

In either case, companies that will be required to write a plan on how they expect to keep hazardous contents out of their products. For instance, anyone who is making animal feed or human food that's using grains must have a plan to make sure that they can detect and prevent mycotoxins from getting into that final product. Even though testing itself won't be required, it will be impossible to monitor without testing. The same is true for drug residues or for pathogens. Allergens are included in human food side, but not for the animal feed of course.

The next implementation of the act is scheduled to occur on Halloween. At that point, rules for three more of the seven regulations are to be published. One of these is to establish new rules governing fresh fruits and vegetables that's aimed at trying to solve the problems that have been associated with numerous outbreaks of fresh spinach that have killed and sickened hundreds of people over the last couple of years. Perhaps one of the most noteworthy problems was the cantaloupe episode that resulted from dirty rinse water in a cantaloupe packing plant in Colorado. It's kind of ironic, as I move from one side of our campus to another this morning with the radio on, it was -- the first item on the news was to announce that the day was National Spinach Day and then along later in the broadcast it said if you have frozen spinach of either one of these two brands, destroy it, because it is expected to be contaminated with Listeria. So it wasn't such a good National Spinach Day I'm afraid. The fourth set of rules is also scheduled to be published on Halloween, and this would establish import responsibilities for food coming into the U.S., imported food, and the last two are now scheduled to be published in March and May of 2016.

So looking at what's going on, there's a lot of activities on both the food and animal safety side that match up pretty well to Neogen's product catalogs. Fortunately, not only do we have the products and the opportunities, but I think the structure to continue our strong growth, we'll use the same strategies to continue that -- that worked for us in the past. As we go forward, we'll strengthen our position as a one stop shop in both food and animal safety. We'll continue to grow the Company through the development of new products for both food safety and animal safety.

Despite the current difficulties with currency conversions, we'll continue to make greater investments in worldwide international markets, both through independent distributors, as well as expanding our own Company owned distribution group. And of course, the fourth leg we'll continue to work with will be for synergistic acquisitions.

Let me stop at this point and thank you for being here with us. And Eric, open the lines for anyone that has questions.

(Operator Instructions) Drew Jones, Stephens Inc.

This is Garrett Phelps on for Drew Jones. First, just wanted to ask about the FX impact on demand. You spoke a little bit on the top line, but on demand and kind of your ability to compete on price in those markets due to the strong dollar?

Fortunately or unfortunately, I would say it's not our first rodeo. We've been through these evaluation situations before. We have to keep our customers in business. So there are places where we need to reduce prices in order to make sure that we're competitive in the local market, especially those places where we rely upon third party distribution for our products, we've got to make sure that we can help these guys stay in business until things do get corrected. I think one of the great things that helps us is, is that we've got the flexibility and the strength of our own manufacturing. Almost -- the big portion of the stuff that we sell we make ourselves. So it's not like we're locked into a price from a third party supplier.

Now, obviously we're locked into some raw material prices. But being your own manufacturer in times like this is certainly helpful. I don't know that -- there has been, and Steve can probably speak more to it. I think there has been some impact in this third quarter where we've reduced or made some kind of special arrangements to help on pricing, but there's probably still some of that left ahead of us. If you can tell me how long the dollar is going to be strong comparing to other currencies, well I guess we could do most anything we wanted to do this morning. But (inaudible).

And then also could you give us an update on how the ContraPest application has gone with the EPA and the timeline that you're looking for on that?

Well, first of all, I don't have a timeline. Secondly, I can tell you that they have not filed their final application with EPA. I think maybe that the ContraPest product is probably more intriguing to some than to others, but I can't say at the same time we've got some very interesting ongoing research on rodenticides in our own research laboratories. We've got a special laboratory in Wisconsin in which -- in our plant there where we're continually working on new rodenticides, new baits and so on. So there is some equally exciting things.

We don't own it. If those of you that don't know the background of this question, it's a license that we own and it's a license for part of the world. We don't own the technology and nor can we do anything really to help in the filing of the EPA application. So we'd love to have the product, but until there is some application filed, I think it's pretty difficult to determine what kind of time line we're looking at.

Shaun Rodriguez, Cowen and Company.

This is Ryan Blicker in for Shaun, thanks for taking my questions. So you mentioned a few outbreaks, including the peanut shell contamination in spices, the poultry market troubles, wool, et cetera. How should we be thinking about tailwinds for this in Q4 for Neogen?

I am not sure I understood your question.

You had mentioned a couple of outbreaks and also that you expect some increased test sales from the peanut shell contamination in spices. How should we be thinking about how these things may impact Q4 revenue?

I don't know. I wished I knew too. The outbreaks, yes, we would -- it's the best of times, worst of times. If there's an outbreak we're going to sell a lot more cleaners. If the outbreak in diseases gets worse, we're going to sell a lot more cleaners and disinfectants. And particularly the disinfectants that go into that market are nice margins. From the best of times I hope, certainly hope, we don't get that to continue, because we make a whole lot of money out of healthy chickens than we do out of sick chickens. So, we get them to the processing plant and what's happening there. So it's hard to say. I don't mean to be like a smart Alec, it's just hard to say what's going to happen. 60 days ago, we would have never predicted that that disease having an influence, will find its way from Washington State to Northwest Arkansas. So it's kind of hard to say.

As it relates to economic fraud, we're going to continue to see that. It's just the opportunities. We've seen it and heard a lot of it out of China. There's still a lot's of it going on. And who would have ever thought that you need to worry about cumin spices. Now, there is some concern about paprika somewhere. Somebody told me the other day that your next one will be cilantro. I don't know what you put. I think cilantro is green when it gets processed. So I don't know how you contaminate that, but nevertheless, I think it's a big important area, the whole food fraud area, not just spice contaminations. But they say that probably 30% of the fish we sell in this country today are not what's on the label. What we sell (inaudible). So we're going to continue to see those opportunities and I think we're in a good position. It's kind of nice when a problem occurred, we had some [opportunity], we could send it out. So, I don't know. I think you just look at us as, either way, good times or bad times, we ought to be properly positioned.

And then Brazil returned to some better growth in the quarter following a little bit of slower growth last quarter and you had potentially mentioned some increased infrastructure investments. Can you talk a little bit about what drove the better performance in Brazil this quarter?

Yes, they had some strength in their dairy antibiotic testing. That's the primary driver. That's one of their biggest pieces of business on the food safety side.

Brazil is kind of -- is not kind of, it's very interesting, to have Brazilians in town. So between broken English and broken Portuguese last night, I got a good catch up on where we are. Let's just hope that the economic and political stability stays there. It's kind of scary. Last night, they were telling me about what approvals had to be on -- when you got 39 ministers in the federal government. So I don't know how you can develop 39 ministries, but we're there, we're a player. It's been important to be in the country. We are now manufacturing cleaners that are going into that market. That market is -- you kept up with what's happening with the two major animal protein producers. They're doing nothing but getting bigger. I don't know where they are finding their money. But they certainly are and there is an announcement I guess out. So, well, how far it goes and what happens -- they have some interest in what's going to happen if (inaudible). So there's all kinds of Brazilian opportunities develop as Brazil -- we've been saying for some time, lines itself up as being one of, if not the major exporter of animal -- higher quality animal protein foods as we move into the next decade.

So we've got -- we'll be spending the next several days through Sunday talking about what to do to grow faster. That's our number one item on the management team's agenda, is what do I need to grow faster and Mr. Quinlan has promised to me he has got a little extra cash laying around to help get that done. So Brazil, I think is going to be a lot more important going forward, maybe than it has been even in the past.

And just quickly on GeneSeek, you mentioned 29% revenue growth. Can you quantify what volume growth was in the quarter?

I don't know. We average 100,000, 200,000 samples a month maybe.

The volume growth was somewhat north of [29]. It's probably in the 35-ish percent growth I would think.

We did a million samples there last year and I don't know, we must be on track to do at least -- maybe as much as 30% increase above that this year. So this year is nice to have that new facility.

Brian Weinstein, William Blair.

This is [Matt Lerew] in. I just want to follow up first with the previous gentlemen's GeneSeek question. Obviously, some really nice growth there. Just wondering if there are any large orders or single customer product driving that or is that really just a result of having the new facility up and going now and continued product development? Just how should we think about growth there going forward?

I think both. We've got some big customers that highly depend on us, they'd bring in big numbers. Some months they may shift. We do work for a major portion of the genomic work for those people, as a primary breeders for broiler type chickens on a worldwide market and those are quick turnaround tests. They are into us and back out to the poultry breeders within seven days. You stop and think about it, you have to turn it at that pace, whereas the generation interval in a cow is over 12 months, generation interval in a chicken is 21 days. So that side of our business works awfully well. We're a major supplier of some things that are happening down under in Australia and New Zealand as it relates to the sheep business. Overall, in this side of the country, we are a major supplier to 11 of the -- I think it's 11 of the 12 probably registered beef cattle registries. We have exclusive business of 10 of those 11 I think. So all of that's coming in. Those are coming in, in large numbers, and large numbers coming in together is a large customer and I guess it's what you're asking. Well at the same time, our dairy heifer replacement program that's in the market and our beef heifer replacement program are both doing well. These are where ranchers or farmers are sending in samples for [20, 50] head of young female calves to decide which ones to save, to go back into their breeding herds a year and half later. So that side of the business is doing well. The economics that are affecting the beef industry certainly are on our side. We still see good 500 pound breeder cows that are going at $2 a pound prices. So that means that those ranchers can't afford and want to make sure that they're saving the right heifers, because this market won't last forever. So they want to make sure that they can now afford to save the right heifers for the best calves going forward. It's just hard to find any problem out there.

And then, Steve, thinking about this sort of this roadmap to this 20% flagpole that's always been kind of sitting out as a operating margin target and given the mix shift that's occurring, if I look back kind of 2012 and 2013, about a 50-50 split animal and food safety, and now it's certainly shifted more towards animal safety with some of the recent acquisitions. What are the things that need to happen in a more animal safety weighted environment to get back to that 20% range?

Well I think this quarter we probably would have been fairly close, but for the currency impact. And then we have so many different product lines that affect that gross margin number, both within the food and the animal safety group.

I think you -- I'm sounding defensive and I guess maybe I am, but I think you're painting the animal -- white washing the animal safety with a pretty broad brush. We've got 70% gross margins on those products there. So just because it's animal safety, doesn't mean its low operating profit. One of our best units is running at over 20% in the animal safety side. Go ahead Steve.

No, no, I was just going to say that the product mix is such a big driver of our overall gross margin. So I guess to piggyback on Jim's comment, the proportion of food to animal does drive that a little bit. We see the growth going forward it's more weighted toward the food safety side. So you should start to see some expansion of gross margins, but the currency impact really kind of shrouded that this quarter. So depending on what happens there, if you believe that the food side is growing a little bit faster than the animal, over time you should see the gross margins grow a little bit, but I don't know what's going to happen in the next few quarters.

And you're going to see more and more -- that line is -- that farm gate is a pretty broad and stays open a lot. It's not like maybe you might envision it. One of the things that is going on, the animal safety guys are on the phone with our research people here this week, two or three different occasions looking at -- asking for help on how to interpret certain products that we in the past have always sold into the food safety side that monitors what's going on in the hatchery business. We talk about sanitation and the fact that the processors want to check their lines to make sure they're clean. Same thing is going on using the same sanitation products to make sure that the eggs that go into hatchers that are going to hatch baby chicks 21 days from now are clean and not going to have infections. So there is a lot of this going on there that we cross over. One of our products is being used. We think we've got some pretty big opportunities that we normally might be used in -- overall is being used on the food side is being used at the dairy barn to determine whether a cow has got mastitis or not, and if so, what's the best way to treat for that. So it's going to be more and more difficult for you to be able to put a brand on it. I mean that's what we want. We want to make that synergy work.

Yes, I understand. I appreciate you explaining the nuance there.

And I don't mean to be so defensive. So --

No, of course. Then final one here for Jim, you mentioned last quarter several potential acquisitions on the radar and just wondering how you're feeling about the acquisition landscape right now. Just wanted an update there. And that's my final one. And again I appreciate the detail.

Well, we're not ready to announce anything. I'd like to do something when we figure out which way currencies are going to go and how they're going to get stable or unstable. We'd like to do some things internationally. We've got ourselves circled around several opportunities that would expand our footprint with our own people. I don't know that we're getting anything done between now and end of the year. The end of the year is drawing pretty close. But those are probably the closest things, unfortunately nothing big.

I keep looking for something -- we've got [5s] to $25 million deals and more 5s than 25s, but it would be nice to use the final one three or four times that big. But at same time we've done pretty well at figuring out how to take these smaller ones and integrate them and bolt them on and make them work. So maybe I ought not to be [worrying] about that, but there is some opportunity and we obviously got cash and I'd hope that we might get at least one done between now and year end, but I can't give you any assurance to that.

Tony Brenner, ROTH Capital Partners.

Jim, I wonder if -- regarding your last comment, whether it's an acquisition in India is actually you're closest too or is that going to take how much longer time?

We've spent a lot of time in India. I think today if you were sitting in India, you might be sitting at the fount of where this adulterated cumin might be coming from. I'd say that not to dissuade the Indian government, I guess, but simply because that a big part of the spices for world supply come out of that part of the world. We'd like to be there. We think we've got the right strategy to be there for a lot of reasons. It's certainly, Tony as you know, you and I have talked about the two parts of the world where we're going to see middle-class development grow strongly in the next decade and that's both of those two Asian countries, India and China. And we're in China, we're growing in China, I'm feeling good about where we are there. I'm going back over -- I've hadn't been there in a while, I am going back over with (inaudible) I think next month and again looking forward to watching our China stuff grow. And it would be kind of nice to -- at the end of the day, we get India tacked on to China. They actually touch those two Continents, or we don't touch, we just bounce back and forth and they assured me that those Continents were pretty big. They're bouncing back and forth was probably more than I thought, as you try to move from Mumbai on one side to Shanghai on the other. But we're sounding like a politician talking, but we are strongly looking in and think that India is important to us too.

So I missed the answer to how imminent that acquisition was?

We haven't announced -- we don't anything that we can publically announce on at this point.

And as long as you brought China up, Jim, having acquired a couple of distributors in China, and with multinational companies increasingly playing important in production there, can you give any indication as to how that's affected your growth in that market?

I think it may be a little bit premature to -- the strategy is there, the growth is there. It's not been jet propulsion yet. So I think we've got the largest meat producer in the world is producing over 2 million broilers a week in China and the largest family owned corporation in the world is producing a million chickens per week in China. There's just lots of meat, animal protein going on large dairies. We've got the largest two dairies representatives, senior guys from the largest two Chinese dairies in China here, in our offices within the last six to eight months. I'm excited about it. I still say, don't buy Neogen stock right now in China, but I know one of these days maybe somebody is going to say maybe we ought to buy Neogen based on China. So, I feel good about where we are, but we're not there yet and we've still got some work to do, but I think we're positioned in the right place.

Charles Huff, Craig Hallum.

Most of my questions have been answered. But you guys put in the press release that a large part of your growth potential for Neogen exists outside the United States and obviously you have a lot of domestic revenues today and you've given a lot of detail here on India and China. But I'm wondering if there is anything else that you have in Brazil as well. But I'm wondering if there is anything else that you haven't touched on that caused you to put in that very [point in your] statement in the press release? Thanks.

Well Charles, that's not new for us. In fact, we publicly said that for some time and we thought probably two thirds of our market potential lies outside the U.S. And we at one point where 42% of total revenues came -- I think that may have been the highest peak we got to -- but 42% came from outside the U.S. One of the reasons why we're looking at international acquisitions, to be able to carry our product into certain areas. Mexico, we haven't talked much about Mexico. Mexico, I think Steve said in his comments, our Mexican operations, when we built -- the one we actually formed there we called it Neogen Latinoamerica, not Neogen [Americo], of course we said we're going to use that as our organization for the Central American countries along with Mexico. We are now moving there. That operation, we'll be working with either direct or through distributors, whatever the case might be in all of those Central American countries as we finish out this year and move into next year, all the way down to the Canal.

So that we think -- Mexico has the opportunity to not to probably be as large, obviously be large as Brazil, but an opportunity to help feed that middle class that we've been talking about. There's already a product going off the West Coast to Mexico heading for the Asian market now and that's an easy touch to get there. I think we'll probably see more of that going forward. And it's in our standard countries -- our Neogen Europe operations, of course, they're going to keep growing. I don't know. We haven't got their budgets finalized for the new year, but I'll be surprised, like currency that we won't be seeing another 12% to 15% growth opportunity there, and that's not just -- that's why we have our own people on the ground in the UK, France and Germany and Holland, but it's also distributors in that whole EU countries over there report through our office.

What's happening in the Eurozone is just problematic. There the euro dollar is, I think, the weakest it's been since somebody told me nine or 10 years I guess now. So that right now gives us some temporary heart burn as to our people can afford to buy our product if it's been sold in U.S. dollars. But those countries are going to grow. We've got to figure out what to do. They can think how to figure out what to do about Greece, but the food demand in places like Italy and Spain are going to continue to be strong as well as the more developed countries where we've got our people on the ground.

Asia, there is, in addition to the two big guys, our guys are doing pretty well in Thailand and in some of those countries there. I think we're going to see -- continue to see that growth going forward and it kind of all feeds on itself. I think we may never get two-thirds of our revenue from outside the U.S., but that potential I think exists, Charles, and I appreciate your question.

And then, Steve, I may have missed this, but I didn't catch the specific numbers for Neogen LA. I heard Neogen Brasil, but did you provide those constant currency revenue growth rates for Neogen LA or reported revenue?

I didn't report it Charles, because we transferred some revenues there from our Lexington Group, and so the revenue growth was pretty significant. On an organic basis, it was -- I think it was somewhere in the 10% range.

And then regarding Neogen in Europe, you mentioned some price compression to maintain your distributors and your customers' profit. If and when the dollar weakens in the future, do you have mechanisms in place where you'd be able to raise prices more than you normally would -- normal market prices or would those price concessions be kind of permanent?

Well, they're not price concessions -- yes, they are, but it's not -- we're not changing price list. So it's not that we've gone in and dropped the price list down, everything by 10% particularly. It's been down country-by-country, individual basis. We sell a lot of product in Europe in US dollars. We sell a lot of product in Europe in pound sterling and of course the pound sterling hadn't been crippled up like the euro. And we sell a lot of products in euro. So it's a special circumstance situation where we're able to work with people. Sometimes it's working with them in and bundling some other products.

I thought your question is very good, but we haven't gone in and said, okay, we just take the machete and slice everything by bringing the prices down 15% to take into effect what's happening. We're looking at it on a month-by-month basis, as we look at our hedges and the movement of dollars to protect the value of the dollar with the current feeling that there's -- at least as we look at April and May that it's not going to go the opposite direction. The dollar is going to be where it is now or maybe even stronger against some currency. So it's kind of [in a way] in the past that I have been able to do it.

We're not big enough to go to the Board and take out a contract. So we have to work through bankers to get these kind of things done. And you're going look at the -- we can hedge the pound without almost any fees, but just start trying to hedge the -- when you hedge the Brazilian real, the fees become a little more dear. So it's a country-by-country, currency-by-country, month-by-month situation and we're not new to that. I just let it get away from me. I didn't expect everything to go that fast. So [we're] just back in and Steve and I got it in our attention now.

My last question is on the Indian distributor or Indian acquisition that you talked about in the last quarter. I think you mentioned previously that you're getting close to a letter of intent, maybe the next two to three months or so. But it sounds like you're a little less definitive on this call. Has anything changed there or anything that we should be thinking about?

No less optimistic. It's -- that country was built -- it required the patience (inaudible) and everything is going great. Just before I left office to come over here, well my admin handed me a new card, which would appear to be my Indian driver's license, [with a] picture. We do have our own Company in India and we're operating there and we have bank account. So we have the right mechanism now to bolt things on. So it's particularly interesting for somebody like me, as I'm noted for patience.

Jason Rodgers, Great Lakes Review.

Looking at the gross margin, would you be able to flesh out the impact foreign currency had on the gross margin for the quarter?

That's a really difficult question. It affected our -- on the food safety side of our business, it affected us by about 2%. So that's about maybe $600,000 impact.

And that's on the gross margin correct?

Correct.

And where are you now on the process of hiring sales people? Is that still ongoing or is it coming more to an end? Or are you looking at just focusing on making those additions more productive?

No, we're continuing to -- we're always hiring sales people. And generally, where they are, it takes a year for them to be productive, depending on which site they are working on, what products they were working on. We've got good operating margin. So it's a -- we're not done [dealing with 3-percents and 5-percents] those kind of thing. So, we have the money to be able to do that. I think our sales and marketing expenses as a percent of revenue were down a little bit. They were up, but they were down a little bit as a percent of revenues. I wouldn't be afraid to, I think we're at -- where we're at Steve? 18% thereabouts?

18.5%, yes.

We probably ought to be looking at spending a little more than that as we're going forward, because the opportunities for growing that top line are there. It's that same old case of trying to balance top line and bottom line and we work at getting that down, but it's easier to add people. I don't know how many -- Ed Bradley happens to be in the room and he's got the biggest sales organization. I think between sales and marketing combined you got about 75 people on the food side, is it roughly correct? I mean you got to remember. I'm going to hope you know exactly how many openings you got.

We have about [10] openings in SoHo. Some of those are backfills.

Backfills and some of them are new.

And then finally, what percent as a corporate revenue is genomics?

Give us a second. That's got to be a big [enough room] we're hitting out. While they're doing that, part of the genomics thing is kind of interesting too is the genomics work that we do for the food safety side of our business. [Steve kind of] made the point earlier that that farm gate is pretty wide and stays open. We've got, for instance, Uruguay is a major importer -- major exporter of beef, but they're concerned about E. coli O157 and what I call our six ugly sisters. They're all hemorrhagic organisms. And as a consequence, before they start shipping beef in some cases -- in many cases, there's a U.S person and actual beef samples come in and go to our operations in Lincoln where we're able to run the genomics on the E. coli group of bacteria to give them some idea of what's there, which is even better than what they might be able to do with the standard test.

We're doing work now on Salmonella, expect there's some concern about which Salmonella are going to be considered to be the more pathogenic and we're doing work there with Salmonella, both outside lab services, where people are bringing product in, as well as helping us get directed, to improve, have better, faster, more specific diagnostic test kits to be able to detect those Salmonella. So, I've talked long enough for you to have it Steve?

Our overall genomics is about 13.5% of total Company revenue for the quarter.

Paul Knight, Janney Capital Markets.

This is actually Bryan Kipp on behalf of Paul. We've beaten this up pretty good, but I think there's a few more, hopefully I can tease out of you guys. One is in context to the cumin comments you've made throughout the call. Just thinking in context to the -- I think meat speciation in your -- of course a $1 million to $2 million opportunity. I know you said you haven't sized it. But one, is there a competitive landscape on the allergens for cumin testing right now? Are you guys kind of leading the market? And two, is that a good proxy to think about it more like the meat speciation market size and seasonality or do you think there's a little bit longer tail to that?

Well, I mean -- let me see if I can -- I think you asked five questions, let me see if I can get them all in. First of all, do we have competition? Unfortunately yes. Are we the leader? Yes. We were the first out for peanut. The first test we developed got, I don't remember how many years ago, was to detect the presence of peanuts, because it is the biggest problem that's out there today, or it was at least, certainly they're recognized as the biggest problem, because of anaphylactic shock that just occurs so rapidly. So we are the leader. We do have one -- I guess I might say two competitors. We don't take any competitor lightly, but we have two with probably some significance. But this is a test that was developed to protect for food allergies, to make sure that some -- in this case peanuts, where it would normally be used to make certain that peanuts didn't somehow get into the food supply and then not appear on the label. And it's amazing, some of that, we've got a couple of guys that are users that are putting rating on chicken and seafood products and say why would they want to use a peanut allergy test. Peanut meal has been commonly one of the carriers for spices. It goes into things like that. So that's where that product line was developed and that's where it all fits and that's where the big opportunity is going forward. But then when you get into something like economic fraud, who on earth would have thought, if somebody would have thought about how to increase the profit of cumin by branding them peanut, it's taken them in. So it's best of times worst of times. Again, we think that's going to grow.

Speciation -- meat speciation. I'm not sure we've mentioned it, but it's certainly growing. Of course, this time a year ago, we were all talking about what we now refer to as horse gate, where horse meat was getting blended in with beef and created problem. I talked about, I think, speciation is [70-some percent] of our seafood that we import or that we sell in this country, is not the same as what's on the label. That's a speciation issue, which I think we don't have the answer there today, but I'd like to have one and I think those are the kind of things are going forward. So this whole issue of food fraud, whether it's because we can find something it's an allergenic product to do it or because we have developed the speciation products that we have today, I think, they'll just continue to be there and unpredictable. Fortunately, we've got (inaudible) find it real quick.

I guess I was looking and thinking in context of the 350,000 pounds of meat recalled in connection, just looking at that as a proxy to meat speciation, is that like kind of the same size of meat recall that we saw in Europe and just thinking -- I know it's a different type of test (multiple speakers).

That wasn't speciation, that was pre-seasoned, probably a lot of it frozen product that had cumin in it as a flavor and is a spice and they were able to check back and find out that somebody unsuspecting who bought that and made a beef product out of it, had no reason to guess that there would be peanuts in it.

Yes, I'll shift. I guess I was thinking in volumes of pounds, is it about the same size. I know it's on the cumin side and peanut allergy. So I appreciate all the color. I guess one other thing I wanted us was the ripple effect. The Chinese government or FDA was consolidated about two years ago and there hasn't been a lot of convention around new guideline structures et cetera. The Food Safety Modernization Act has been the one driver on reform in the U.S., but have you heard any ripples out of China as to direction, now that they've been two years fully consolidated and potential opportunities for additional regulations there or is it still work in process?

I think it may always be work in process, but they clearly are adding a lot of regulatory strength there. It'll just be a [log] and cleaned up. That's the reason that non-Asian countries are more concerned than they would if they were located somewhere else, because they don't want to get caught and branded with the same iron that the Chinese guys are and they got to protect themselves because they don't what they're getting either. But that middle class population is going to demand better. They're not driving a car and they'd like to have their babies drink milk that doesn't have a leather extract in it.

And lastly for me, Steve, the Chem-Tech milestone, and I know you highlighted BioLumix is outperforming. Are there additional potential contingent milestones outstanding? I'm sure we can kind some in the 10-Q. Just any color around that potential conversions et cetera.

We don't have any contingencies on any acquisitions that have not yet -- that had not [yet have been played].

There's nothing in the backlog. All right, appreciate it.

Now the reason this one was kind of unusual was when we got a contingency, we kind of estimate what we think that might be in and we allow for it at the time we capitalize it, to purchase, but if you don't -- when you don't capitalize it, so that hurts. All of

a sudden you just took $83,000 right out of my pocket, but (technical difficulty)

Larry Southam, My Broker LLC.

One question that's occurred to me over the years. Could you talk about the competitive situation, especially in the food safety and other segments? There are certainly other companies who claim to have great products for testing for allergens et cetera. Just give us some idea of what's there and what's -- and market shares in some areas?

Well, that's a mouthful, Larry.

Yes.

I think it's very difficult to quantify how we shape up, because of how our business is built and from protecting food and animal safety or carrying food and safety all way back to the -- in our case back to hatching egg this morning, 21 days before the chick got there. They're carrying you all the way through to McDonald's that says we're not going to buy any chicken that has got drugs in it or actually it was raised on drugs. They did not say drug free, they say we want to make sure you did not really expose it to a drug. So if you cover that, we don't have anybody that's got products that fit in those 20-odd stops between hatching the egg to MacDonald's chicken sandwich. So we've got some competitors in certain areas where we compete in pathogen detection. We've got very formidable competitors there. We've got some competitors in the allergen side, but not near so formidable. And they're not the same people. They're all different. So it's a good question, but kind of an impossible answer, I'm afraid.

And we have no further questions at this time. Mr. Herbert do you have any final remarks?

Well, I do. I now look at in window here and I cannot see a pile of snow anywhere. So, we got a great quarter ahead of us and it's got to feel good to be not only working with good opportunities, but spring time, it's come in. So thank you very much for the continued support and understanding that you provided and I guess it will be a little while longer before we'll be able to formally talk to you again. We get to the end of the fourth quarter, or we have to wait until we get to the end of the year, but hopefully we'll be able to send out a few press releases along the way, so you don't forget us. So thanks so much for your continued support and your participation this morning. And we're off.

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