Neogen Corp (NEOG) 2015 Q4 法說會逐字稿

Welcome to the fourth-quarter and year-end FY15 earnings results conference call. My name is Chris 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 Mr. Jim Herbert, CEO. Mr. Herbert, you may begin.

Thanks, Chris, and good morning and welcome to our regular quarterly conference call for investors and analysts. As Chris said, today we will be reporting to you on the results of our fourth quarter and then, of course, also the fiscal year that ended on -- both on May 31.

I will remind you that some of the statements made here today could be termed as forward-looking statements and these forward-looking statements, of course, are subject to risk and uncertainties and the actual results may differ from those that we discussed today. These 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.

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 the simulcast on the World Wide Web. Following comments this morning, we'll entertain questions from participants who are joined by the live call. I'm joined by Rick Calk, Neogen's Chief Operating Officer and Steve Quinlan, Neogen's Chief Financial Officer.

Earlier today, Neogen issued a press release announcing the results of this fourth quarter and year end. Looking first at that fourth quarter, revenues were $78.6 million. That's a 17% increase over revenues for the same period last year. Income for the fourth quarter was approximately $9.4 million and that's up a nice 25% over the same quarter in FY14. This equates on a per-share basis to $0.25 a share, comparing to $7.5 million last year, or $0.20 a share, so up a nickel a share for the fourth quarter.

Revenues for the full FY15 increased 14% to $283 million. That's up over the $247 million last year's -- for last year's FY14. Net income for the year was up 19% from the previous year to $0.90 a share. This compares with $0.76 a share last year.

As you would expect, revenues and income for this 2015 year established a new all-time high for our 33-year-old company. On the same note, this fourth quarter was the 93rd of the past 98 quarters that Neogen reported revenue increases as compared with the previous year. This record now spans 24.5 years. Sometimes I feel like our now over 1,000 employees are saying, the record won't get spoiled on my watch, and of course our gratitude goes to them continually.

Neogen has analysts from eight different firms that write research on the Company and frankly, have gotten to be pretty good through the years, especially since Neogen doesn't give advice. When we pulled the final numbers together, I was curious to see how we came out compared to the analyst estimates for the year and frankly, it was a surprise to see how well they had really become -- how good they'd really become.

No analysts estimated that either our earnings or our revenues would be higher than those that we reported. Interestingly, the consensus of earnings was 2% below where we actually finished and the revenues were 2% higher than the revenue forecast of the eight firms.

I am saddened to report to you today that Stephen O'Neill of the Hilliard Lyons firm who wrote research on Neogen for almost 25 years passed away this quarter. We'll miss Stephen as an analyst, trusted advisor and a friend.

As I thought about describing this morning our 2015 year, I started to think back of something really spectacularly good or spectacularly bad that I might point out. There haven't been any real changes in the way we ran the business and I concluded that it was just another one of those good years. Our compound growth rate, if you look in the past, the compounded growth rate in revenue over the past five years, previous five years, was 16%, and as I reported earlier, the revenue growth for the quarter was 14%. So pretty much in keeping. The compounded growth rate of net income over the past five years had been 15%, and this year's net income growth was 19%.

Over the past number of years, many of you know that we work to keep operating income as a percentage of sales at about the 20% range. We think that's a healthy place to be. This year we got close again at 18.8% and that's not much difference than the average of 19.1% in the past five years. So another just really good solid year.

It was a little bit more difficult to keep that steady pace this year because of the winds of currency translations that were right in our face, but that's especially in the last half of the year. Steve will talk more about that here shortly.

Our strategy for growth has been the same for the past number of years and continues to serve us well. Fortunately, we are in markets that have grown and in many cases, we increased our share in those growing markets. We've done that by increasing our sales and marketing groups worldwide and we did the same thing this past year. The second leg of our growth has been in the development of new products and again this year, we increased revenues and bottom-line results with new products that were developed internally. Our worldwide research team of over 75 people will -- they will continue to be doing research and making investments as opportunities do present themselves.

A third leg of the stool has been acquisitions. We've now done 29 acquisitions since the year 2000 and all have been accretive at both the top and the bottom line. 15 years later, the products on that first acquisition are still a part of our portfolio. This year we acquired the BioLumix company that was a competitor using much of the same technology as our Soleris product line. We're still the process of integrating those two businesses and the revenues continue to grow nicely.

We furthered our Asian strategy this year in both China and India. We had a nice but small food safety distribution business in China, but still lack the traction to really propel that business. In December we acquired our largest food safety distributor in China and joined that base to our own. We've now sharpened up our strategy, our customer base and our product offering. We're, I think, off to an even better start in China as we look at FY16.

You've heard us talk in the past about food security and the need to work in those markets where the middle class will have the most rapid growth. Obviously, the two countries with the most rapid growth include both China and India.

In June, we acquired Sterling Laboratories and bolted it onto an Indian shell company that we already own. This one is going to be fun, but it's likely to take a little bit of time until we can get good traction there. We are situated, I think, in the right place on the southwest coast, where spices, fruits and vegetables and some seafood items are shipped into export markets. Sterling Labs had them a good service lab business and we'll use that as a launching pad for our diagnostic test kits also.

We didn't do quite so well on that fourth leg of expansion growth stool, that being the expansion of international sales. Though our international businesses were good, we weren't able to grow them as fast as the US businesses. We finished the year with international revenues accounting for about 36.7% of total revenues and that's about 2% less than where we were last year. Of course, monetary translations in six different countries handicapped a part of that growth, I'm sure.

Expansion investments in our existing business units brought good returns this year also. Revenues from our GeneSeek worldwide animal genomic products and services increased this year by almost 27% as compared to 2014. You may remember from some of the quarterly conference calls that we talked about having built out the new state-of-the-art 26,000 square foot genomic laboratory in Lincoln, Nebraska, that we took occupancy on there at the beginning of the fiscal year. This increased capacity, along with the Company's reputation, has allowed us to continue that growth and it's also spilled over and expanded our genomics business in Europe quite nicely also.

Neogen was the first company to begin developing in marketing diagnostic tests for the detection of food allergens. Though we now have hot competition, of course, we've managed to maintain a nice market share in this area. Our growth of revenues in food allergens this year was approximately 18%. There was a food fraud case or two that likely also helped with that growth. Someone found that ground-up peanut hulls look very much like the spice cumin and of course, ground peanut hulls are free, wherein they enhance the profits in the cumin sales.

Fortunately -- or unfortunately, the fraud was detected because people with peanut allergies began to have allergenic reaction to food where cumin was used as a spice. Fortunately, Neogen has a test to detect the presence of peanuts and our test became popular as people were trying to screen the fraudulent spices out of the marketplace.

All in all, I was right proud of the year. I'm sure you could guess that it wasn't quite as smooth a ride as I just made it sound, but we got across those few rough spots without any permanent damage.

One of the real highlights of the year was the addition of Rick Calk to the Neogen team as President and Chief Operating Officer. Rick joined us in December and in that last half of the year not only got up to speed on a lot of the things that we do, but also undertook some important projects. Rick is good at isolating opportunities and applying the right repairing maintenance program.

Let me turn the program over to Rick and let him tell you a little bit about his highlights here in the last half of the year. Rick?

Thank you, Jim, and welcome to everyone listening on the conference call, as well as those joining us via the internet. Jim has already reported on the overall sales and profit performance for our FY15, and our press release issued earlier today provided additional details related to Neogen's 2015 results. This morning, I'll provide a bit more detail on the year's performance from an operational and a product perspective.

In many cases, our FY15 was a continuation of the success of certain products and services from previous years, as Jim has mentioned. For example, last year at this time we reported a 21% increase in the sales of our food allergen test kits over the prior year and building on that growth this year, we are reporting an 18% increase in sales of food allergen test kits.

We were very excited to launch a new test kit for Multi-Treenuts in March, but this significant increase of 18% came in large part from the greater use of our complete line of allergen testing products. The growing demand of our products is the result of a more educated global consumer purchasing food and beverage products verified to be free of allergens such as gluten, peanuts and soy. This consumer demand has led to government and regulatory agencies in the US, Europe and elsewhere to increasingly create and revise regulations labeling laws that might be present for the food and beverage industry that dictate maximum allowable allergen residues in food products. This, in turn, continues to help drive increased usage of our testing products.

It's unfortunate that each year one in six people in the United States is sickened by a foodborne illness. Foodborne pathogens impose over a $15.5 billion economic burden on the US public each year according to a recent report from the US Department of Agriculture. Just five pathogens cause 90% of this burden of foodborne illness, hospitalization and death where a specific pathogen can be identified. The single largest of these pathogens is salmonella.

Next week, Neogen will introduce the NeoSeek salmonella serotyping service to seamlessly identify salmonella serotypes from DNA sequencing data, which is generated by Neogen's GeneSeek genomics laboratory in Lincoln, Nebraska. In as little as 72 hours, NeoSeek will allow identification of all top 30 salmonella serotypes from salmonella-positive isolates, as well as an additional 1,500 serotypes that may grow in importance over time. This will all add to our existing NeoSeek's STEC confirmation service, which detects and identifies seven Shiga toxin-producing E. coli strains, including H7. As the nation's largest animal genomic lab, GeneSeek also continues to play a major role in traditional food safety.

Another continuing success in the FY15 was our D3 line of detectable veterinary needles. Neogen first introduced D3 needles in 2002, and yet we were able to increase sales nearly 30% in the year, continuing our leadership position after 30 years in this business. Most consumers don't even know that broken veterinary needles are a problem, but they would if they ever discovered a broken needle in Grandma's pork on Sunday afternoon. The D3 needles greatly reduce the chance of that ever happening by being uniquely detectable in the standard metal detectors that are currently being used in the meat industry.

The team is very excited by a new approval of our ANSR line of molecular microbiology testing for Listeria monocytogenes, which adds to our previous approvals for ANSR salmonella and Listeria species test kits. This, combined with the recent GIPSA approval for the Reveal Q+ aflatoxin kit on all three of our AccuScan readers, has Neogen ready to respond to the key issues facing today's food and beverage processor.

Our ability to rapidly respond to changing market conditions has been demonstrated by this year's DON mycotoxin outbreak, where we were able to rapidly build inventory based on solid forecasting and strong market knowledge. The market's come to rely on Neogen not just for high-quality tests supplied in full and on time, but for the market information we supply to our customers on a regular basis. From these relationships we expect a strong impact on quarter-one FY16 results.

Other examples of being in front of the market and striking while the iron is hot include Neogen's effective response to the widespread contamination of the spice cumin and the spice blends containing cumin, such as chili powder mixes, with peanut and peanut byproduct, as Jim has discussed earlier, and we discovered this in early 2015. I feel as I'm kind of skimming rapidly through our performance highlights, but as anyone who follows Neogen knows well, we are a diverse company with many moving parts.

Two topics that I want to make sure I touch on before I go are the BioLumix acquisition integration and our new AccuPoint Advanced Hygiene, or Sanitation Monitoring System. As many of you on the call are already aware, Neogen offers the widest available variety of rapid and traditional methods for general microbiology testing. We offer rapid and traditional testing products for coliforms, generic E. coli, lactics, total plate count, yeast, mold and many other microorganisms all in a variety of sample types.

When we acquired BioLumix last October, we bought a competitor with an automated testing system for spoilage microorganisms to complement our already successful Soleris system. The system consists of ready-to-use vials containing growth media and a detection system looking for subtle changes that indicate contamination of a sample by up to 60% faster than the traditional methods. The integration of these once-fierce competitors has gone very well and sales of our BioLumix products have far exceeded what we thought at the time were optimistic budget projections. We look forward to what we'll be able to accomplish with combined technologies and the R&D efforts going forward.

Operationally, the June launch of our AccuPoint Advanced system, which is used to detect the amount of food residue another organic matter such as bacteria, yeast and mold which remain after cleaning, was much more than what it may have appeared to be in the press release we issued at the time. My visit to last week's major food convention, the IFT in Chicago, showed me, through the long lines outside our booth and the interest generated by participants, the immediate need for this state-of-the-art technology to be incorporated into an organization's cleaning program to monitor its effectiveness.

With the worldwide customer base made up of the world's largest food and beverage manufacturers, the introduction of this technology demonstrates how Neogen has incorporated the voice of the customer to bring improvements such as sensitivity, ambient storage, faster results, in this case less than 20 seconds, and advanced data manager software to create test plans and easy-to-read dashboards while keeping a permanent record of hygiene results.

The addition of RFID technology has helped us enter the fast food, especially the deli markets, as well as the healthcare market by pinpointing test locations, simplifying test procedures and increasing plan accuracy. The demand for the disposable samplers use in our previous AccuPoint system tested our manufacturing capabilities to meet the growing demand of the AccuPoint sampler. That's the kind of problem you want in business, but it was a significant problem nonetheless. With the launch of our improved system, we also christened our new automated sampler manufacturing equipment, which has greatly increased our production capacity and eased the pressure on our manufacturing team.

With that I would like to thank you all for allowing me to share just some of the highlights for the year that was. Jim?

Thanks, Rick.

As you can tell, Rick had more accomplishments than he had time to present this morning, but we'll share a little bit of that with Steve Quinlan and his staff. It's interesting, our staff for our accounting finance administrative side of the business had a few more challenges this year than normal, particularly from the outside as we look at what was happening to the markets around the world as we become bigger in that area. Steve, talk a bit about -- we keep hinting around about currency, so talk about that and some of the financial highlights of the year we just finished.

All right. Thanks, Jim.

I think you can all clearly tell in listening to Rick's comments that we're excited to talk about some of the operational gains we've made in 2015, which helped to make the year a solid one and which bode well for the future. As Jim indicated, the Company gained momentum all year, finishing with a 17% increase in revenues in the fourth quarter and we're up overall 14% for the year overall.

We were able to achieve these results despite the considerable currency headwinds we encountered during the year, which accelerated into the fourth quarter. All the currencies the Company operates in declined against the dollar. The euro was down 21% compared to last year's fourth-quarter and 9% on average for the year. The real was down 27% for the comparative quarter and 11% on average for the full year. The peso was 14% lower in the fourth quarter than the same period last year and down 8% for the full year. The pound sterling was relatively flat for the year, but was 10% lower in the fourth quarter of 2015 than it was for the fourth quarter of 2014.

The negative impact of the stronger dollar on our comparative revenues for the full year was $3.6 million, and currency translation losses included in our other income and expense from balance sheet translations was $1.1 million in 2015, making our 2015 results that much more impressive. On the last quarterly call, we talked about increasing our hedging program to help mitigate some of the currency risks and we have taken steps to do just that, although it is important to understand that we're lessening the currency impact, not eliminating it.

The food safety segment had a solid year, with overall revenues of $131.5 million, representing growth of $15.2 million, or 13% for the year. Jim and Rick both mentioned the continued strength of our allergen product line. Another highlight within the diagnostics product line was the 28% increase in sales in our DON test kits, aided by outbreaks of that naturally occurring toxin in Canada and Eastern Europe.

Partially offsetting that increase was a decline in revenues for our aflatoxin test due to a relatively clean corn crop in the US in last fall's harvest. Our line of optical microbial test systems, which are used in the detection of spoilage organisms like yeast and mold, had gains of 52% for the year, aided by our purchase of BioLumix in October 2014, which provided $4 million of incremental revenue.

Sales of the existing Soleris files rose 10%, while equipment sales were off 43% due to prior-year international placements which did not repeat this year. Sales of our distributed test kits to detect the presence of antibiotics in milk declined 10% on volume and 21% overall in dollars and were impacted negatively by currency translation. We'll be introducing a number of new and improved products in this line in 2016, which should restore our growth.

Revenues from our isothermal amplified pathogen detection system, which are designed to detect dangerous pathogen such as salmonella and Listeria, rose 60% for the year. As Rick mentioned, we received a number of AOAC approvals for the product this year and are looking for continuing growth in FY16.

Our international operations, which are primarily focused on food safety and report under the food safety segment, were negatively impacted by the strong US dollar during the year. Neogen Europe revenues rose by 11% in local currency, but only increased 9% when converted to the US dollar.

Increases in Europe were driven by strong sales of genomics, up 43% as we continue to grow our share internationally, and allergens, which rose 14%. Our subsidiary in Brazil, Neogen do Brasil, recorded revenue increases of 12% in the real for the year, with strong momentum in the second half of the year, but revenues were down overall 3% when converted to US dollars. And revenues at Neogen Latinoamerica, our Mexican subsidiary, were up strongly for the year in spite of the peso weakness.

Our animal safety group recorded overall revenue increases of 15% for the quarter and 16% for the full year, partly aided by three acquisitions the Company completed during FY14, which provided the segment with $13 million in incremental revenue in FY15. Organic growth for the animal safety segment for the year was 6%. Strength in our existing Lexington-based business came from our line of patented detectible needles, up 29%, forensics kits, which are sold into commercial laboratories, up 41% and a nice 23% increase in small animal supplements, led by higher sales of our canine thyroid replacement products.

Our lines for rodenticides and cleaners and disinfectants had mixed results. Rodenticides were strong the entire year and revenues ended 21% higher than 2014. Sales of cleaners and disinfectants struggled with comparisons against the prior year, a strong prior year, and declined 12% for the current year. Jim has already commented about the ongoing strength of the agrigenomics testing business, which was up 27% for the year.

For 2015, our gross margins were 49.4%, compared to 49.6% last year. Within the animal safety segment, gross margins rose to 40.4%, compared to 38.1% in FY14, primarily the result of a favorable product mix shift towards higher gross margin products such as rodenticides and the small animal supplements and efficiencies gained across a number of our operations. In the food safety segment, gross margins declined from 62.5% in FY14 to 59.7% this year, primarily the result of currency weakness, as we discussed earlier, in our international markets, which produced our comparative of revenues and negatively impacted margins.

Our operating expenses were up 10% in the fourth quarter and 9% for the full year, less than the 14% annual rate of growth in revenues. Sales and marketing expenses increased by 10% for the quarter and were up 11% overall for the year. The largest components of this increase are-personnel related expenditures reflecting the increased headcount for the year as well as the full-year impact of hires made in the prior year.

Our general and administrative expenses rose 5% for the quarter and were up 3% for the year, again reflecting increased salary and stock-based compensation and fringe costs, higher amortization expense from our recent business acquisitions and depreciation on investments made in the Company's infrastructure in the past couple of years. Offsetting these increases was about a $1 million reduction in legal expense following the successful resolution of a legal dispute earlier in the year. Research and development expenses were 15% higher than FY14 as the Company continues to make investments in new product development and improvements in our existing products.

Moving over to the balance sheet, our inventory of $51.6 million was virtually flat compared to last year end. We worked hard throughout the year on programs which resulted in improvements in our inventory turns, and we're going to continue those programs in FY16, along with the rationalization of our product lines of both sides of the business.

Our receivable balance grew in line with the growth in revenues for the year and we improved our days sales outstanding slightly. We actively monitor our receivables and are paying particular attention to those in our international markets, given the uncertainty in some geographies.

We generated almost $44 million in cash from operations during the year. Now, that's double that of a year ago, and used a portion of the cash generated to make investments of $9.6 million in property and equipment and another $6.5 million in acquisitions. We're now up to 1,062 employees worldwide and we would like to thank them publicly for their effort in making these results possible.

We continue to feel good about where the Company is headed as we move into 2016. The year ended with strong momentum and 2016 has also started off well. Each side of the business has double-digit organic growth goals in FY16, and we continue to believe that we are well-positioned in our growing markets with the right products and strong people and the future is bright for Neogen.

I thank you for your continued support and at this point, I'll turn it back to Jim.

Thanks, Steve. Let me wrap up here in just the next few minutes and talk briefly about some of the things that -- other things that make FY16 look pretty exciting. They'll be a lot of continued strong activity on the animal safety side. It will be primarily aimed at food safety back inside the farm gate and raised without antibiotics is a term that you will continue to hear more and more.

There's a significant portion of our population that believes that antibiotic-resistant bacteria on the human medicine side are the result of heavy antibiotic feeding to food animals and that residue is entered in the food chain, the human food chain. True or not, it's going to get more attention.

First will come chicken. I think all of the major broiler producers except perhaps one or two have already committed to their customers that they'll be moving toward production of a substantial portion of their chicken meat without the use of antibiotics. This means we'll have to do a better job of management on the poultry side throughout the hatcheries, the feed mills, the grow-out houses and the processing plants, if they're going to be able to protect these animals from disease.

Neogen's strong program of biosecurity is a clear answer. Our cleaners, disinfectants, rodenticides and insecticides are the strong support tools to prevent the spread of disease and replace that once crutch of antibiotics. Our diagnostic test to detect the presence of antibiotics will also help to make sure that the wrong truck didn't go to the wrong farm and deliver a medicated feed that had antibiotics in it or that a flock of chickens can actually be tested before processing to make certain that antibiotics didn't inadvertently get introduced or maybe even to prove to the Chipotles of the world that the product that they are receiving didn't contain any antibiotic residues.

I'm sure you've all heard the dreadful story of Avian Influenza on how it wiped out over 10% of the nations laying flock and played havoc with turkey production. Almost miraculously, the broiler people kept it out of the major chicken meat production area somehow.

Most poultry veterinarians believe that this bias was introduced by migratory birds as they move from South to North for summer nesting. It's further believed that perhaps geese may have been the only real conduit for the spread of the disease. Well, guess what? Those same geese that went north in the spring will be heading back south again this fall.

The same biosecurity measures that will be so critical in raised without antibiotics will also be the ones that will help protect the poultry industry from re-infection, we hope. Neogen will be there with more cleaners, disinfectants, insecticides and rodenticides. Problems like baby pig diarrhea that swept through many of the pork production areas a year ago still haven't been completely brought under control. They been brought under better control because of biosecurity measures, but products to continue that program of security are going to continue to be necessary.

We believe that the same thing that drove our animal genomic business up 27% this year will still be around next year. More and more beef cattle and dairy producers are realizing the importance of genomic selection of females that are going back into those herds as replacements. As dairymen are able to select just the top 60% or 70% of their annual calf crop for replacements, it's become more important to make sure they are picking the best animals.

The same is true for the inflow our primary poultry breeders in the world, who virtually controlled the breeding stock that will produce the meat that you and I will be eating next year. Ability to withstand stress and disease will, of course, be more important to those poultry breeding companies as their eventual customers are the ones that we're talking about that will be trying to grow chickens without the use of antibiotics.

The food safety market demands will continue to grow in several areas. At long last, the Food Safety Modernization act will, in fact, see regulations come to market. The first will actually go into effect in August and then a couple more around Halloween time. All of these will increase the need for more food safety diagnostic tests like those that Neogen produces.

The opportunity for the synergistic acquisitions are continuing to be present. At the moment, we have four good acquisition candidates on the radar screen. It appears that all could be synergistic to both our top and our bottom line. Obviously, we may not get any of these completed but it's sure nice to be looking at these kind of opportunities with a strong balance sheet.

Let me stop at this point and open up for any questions that you might have for Steve or Rick or myself. Chris?

(Operator Instructions)

Brian Weinstein, William Blair.

Hi. Good morning. Thanks for taking the questions. Starting quickly on gross margin, what do you see as kind of the primary puts and takes in FY16? Is a reasonable to think that gross margins can be 50% next year? What would have to push them one way or the other significantly?

I'll let Steve give you a financial answer, but let me give you the (technical difficulty) answer. Don't -- as you know, Brian, we have to continue to say, don't judge us based on what gross margins do. Gross margin is just one of the contributors to operating profit. We'll still be pushing towards that 20% of sales in operating profit. Some of the gross margin stuff, for instance, that I've talked about in my comments may not be -- may be a detractor from that 50%, but there's nothing below them that's going to -- in the way of operating expenses that's going to be very important.

That's awfully important when we get to the bottom line. I look at gross margins, and they vary from month to month. We depend on which products are in there as how they might be skewed one way or another, but I just look at gross margins as one of the indicators of what we're doing with operating profits. Steve, do you have anything to add to that?

No, I would agree with everything you said. I think it's important to note our animal safety gross margins expanded nicely in 2015. 2015 food safety margins were hit by currency and to the extent that the currency comparatives ease, we should see some expansion possibly there. It's all about product mix. The Lansing diagnostics products in 2015 ended the year with strong momentum. If that continues into 2016, you should see a growth there on that side of the business. I think gross margins of 50% are reasonable to expect.

Brian, I can't remember how your guys were looking at currency futures for the year -- for our year, the next 10 to 12 months, but frankly, we think that the dollar is still going to be strong compared to the currencies that we work in. As Steve said, it costs us the same amount of dollars to produce a product and if we end up selling it because of discounted currencies, that has an impact that is kind of difficult to control.

All right. I appreciate that. Second question on the GeneSeek business had very strong growth, obviously. Is there anything that you are seeing, either from a competitive standpoint or anything else, that would slow down what we have seen as a 25% to 30% growth profile for the business going forward? Anything on the horizon there?

I wouldn't encourage you to use 27% to 30% as part of your growth model for next year. Those are pretty difficult to maintain, obviously. We do have a couple of competitors out there, not across the board. We are working in all areas of animal genomics. Some of the major poultry breeders on a worldwide basis are customers, partners of ours. We do a lot of business in New Zealand and Australia. Some of that goes to the sheep market, where we do a lot of business on canine parentage, a big piece of our business. All of those are strong and don't suffer a lot of competition at this point.

You don't want -- you're not ever going to get to stay in the business very long, it's any good unless you attract some competitors. We do have one or two competitors that are in the main line dairy and beef business that -- they're to be reckoned with. They make us think every morning when we get up. I think we are still -- I've been taught not to say dominant, but we're still in a leading position as it relates to that side of our business. But please don't build a model on 30%, would you?

Understood. Okay. Thanks so much.

Thank you, Brian.

Tony Brenner, ROTH Capital Partners.

Thank you. I have two questions. First is regarding Neogen Europe, which in the past typically has grown faster than your domestic business and last year its growth slowed somewhat. I wonder if you could elaborate on that and discuss maybe what the outlook is ex-currency?

That's a good question. Europe is -- Neogen Europe is confounded by two sets of currency conversions. Neogen Europe covers our domestic sales force in the countries of the UK, France, Germany and Holland. They take care of distributors that are in the rest of the EU countries over there, our independent distributors. They sell product in US dollars, some in euro and some in pounds sterling. They bring it all back in, Tony, as you may remember and consolidate it all into pounds sterling and they bring it over here and then Quinlan takes it and converts it to US dollars. Somewhere along the way, sometimes I get kind of lost in that transaction. Some portion of that percentage is gobbled up with some currency transactions.

We've continue to grow well there. We've got good opportunities in all of those countries. I think we've got acquisition opportunities that will bring in some new products, acquisition opportunities for Europe. We've got just a great management team. They are one of the management teams within the Company that we probably don't have them fully stretched out every day, so they've got an opportunity probably to pick up some more management responsibilities with some additional growth there.

I think it looks good for the year ahead. It was confused somewhat by the currency confoundment, but it's slowed up from a few years ago when we were up 25% over there, I think. Sometimes we get -- that's what they call the horse gate year. That's when we had a lot of product that was contaminated with horse meat. We got some extra revenue as a result of that. But I continue to be very proud of that group and I think they'll make a good strong solid contribution going forward.

Okay. My second question regards the FSMA, where you said the first three regulations will be published in the second half of the calendar year. Wonder if you could discuss what those regulations pertain to and what product lines of yours they would most affect?

Good question. The first one's -- I call it one; I think they may call it two. The final deadline, the final rule, will be printed August 30. One of those concerns what we would call over on the USDA side a [HASA] program for food -- human food and for animal food and this is the first time the FDA stepped quite so far back inside the farm gate on animal food. It's going to require better record keeping. It's going to require that a lot of these food processors recognize in advance where they might have a risk problem and then document what they are going to do in case they have a risk problem. Those in turn, then, will be subject to investigation -- or verification, I should say, by the FDA.

Having said that, this will be the final rule that will be out, but they will still have a year to get into compliance. Nothing moves fast, seemingly, in this part. And the small companies will even have more than a year. It's going to impact our business but it won't be a landslide, which I guess maybe is good. Will be able to absorb it as fast as it grows.

The ones that I think probably are going to be more important are the ones that come in at the end of October. One of those has to do with ports. A lot of import stuff coming into the US, it's owned and the people responsible are the shippers. After this rule goes into effect, it will be the receivers, which will get rid of what we call port shopping. You could bring a product in on a ship in New Jersey and then can get turned down and put it back on the ship and carry it down to Charleston and bring it in. That will stop that kind of a problem.

It's also going to step up the amount of testing that is required and it will be one look back. So if I'm an importer of a seafood product, let's say, I'm bringing in lobster tails as an importer, I'm going to be the one, as the importer, I'm going to be the one responsible if the FDA doesn't make certain that product is in compliance. So I'm going to make sure there is some testing done at the home port where it left. It's the reason we think things like our India system is going to be helpful. We think that people are going to require, as a part of a certificate, US importers are going to require more certification than they have in the past.

And then the other piece, or the one I call the Halloween gift, is going to deal with fruits and vegetables. That's probably one of the biggest places we've got now is where we've got potential for human safety. Rick talked about what a large amount of problems we have in this country, how many people get sick and what it costs us and a lot of that is coming out of things like spinach, fresh-cut spinach and fresh vegetables that are -- a lot of it produced California, Florida, Mexico, wherever and it's not under as tight a scrutiny as it might be. We think that this regulations that are coming in will tighten that up.

On top of that, what's happening from the criminal side is making a believer out of some of us as some people do. The guys that had the problem with cantaloupe because the wash water they were using to wash the cantaloupe are going spend some time in a the grey bar hotel. We have got several of those people who really didn't mean to do bad, but they're going to learn the lesson. We think that will get more attention. I certainly don't want to say we got people that are trying to get by and take shortcuts, but I think we do need to tighten up on the security measures we use and, of course, the first of which is the diagnostic test. You have got to know it's there before you know what to fix.

Those are the two that are coming up. There's another one that has to do with transportation. I think it comes out in March of next year and then even another one maybe as late as this time next year that is aimed at food defense. We're concerned -- always have been concerned. Fortunately, we haven't been hit by somebody who puts a bioterrorism agent in a milk tank, but we're going to see tightened up rules there from FDA. It's taken a long time in coming. It will take even longer to get it fully implemented. We think by and large (technical difficulty) and it is going help us.

Got you, Jim.

Thank you.

Paul Knight, Janney.

Hi. Maybe this is a question for Steve and that is regarding the organic growth rate. I guess we understand DNA testing. The rodenticides seemed to have that rodent outbreak. What were the other big parts of the organic growth in the quarter? Was it bacterial? Was it dry culture? What were the other couple of areas you should -- we should know?

We talked about allergens. We're up a very strongly. That's a nice product line for us, that was up 18%. We talked about genomics being strong. The rodenticides, as you mentioned. Pathogens were up very nicely in the quarter and the year. It's almost across the board on the food safety side. On the animal safety side, there were pockets of real strength and then underlying basic solid business. The pockets of strength there were the -- what we kind of tried to highlight were the rodenticides, the needles, the forensic test kits and the genomics on that side of the business.

The dry culture medium portions was up 32%. What's within that?

That, in the fourth quarter in particular, there was a very large sale of media internationally that drove the fourth-quarter numbers. But then contained within there are the genomics revenues that we are serving, the Brazilian and Chinese markets internationally, and those report under food safety. I'm sorry, I forgot to mention Europe as well. So genomics in Europe, Brazil and China report in other under food safety because of how we have to report. That's the other driver for the big increase there.

Okay. Lastly, could you talk maybe about the China strategy? I know Anapure has been acquired, but what are next step in -- next steps in that large market?

A part of that is a focus -- well, first of all, let's look at China. China is working hard to get the quality of food for that population that they know they need as that middle class is growing. A big part of that is animal proteins. A big part of the animal protein production is outstripping what China herself can do without some help. They bought the largest pork producer in the world when they bought but Smithfield Foods. So we've got companies like that, that are operating in China. We've got other major companies that are -- that have -- Tyson Foods is a major producer of poultry in China. Cargill is a major producer over there. You got a number of companies that are producing animal proteins in China, at the behest of the Chinese government, but they've got their own brand to protect, of course, whereas a Chinese company that's operating out of a backyard and throwing dead hogs in the river is a different story.

Our focus is on those big, major operations. They'll always be somebody over there who can produce a diagnostic test that's a little cheaper than ours, may not be as good. But we see that the major producers, be they non-Asian companies, or even Asian companies, in China are demanding higher quality. They want real help. We are doing business with three of the top five -- I started to say maybe the top three, three of the top five dairy production companies in China. They are getting very, very big. We've got operations in inner Mongolia now where they are running over 10,000 cows per farm to produce milk.

That's the way to get away from the melamine problem, where you had guys that were milking five cows and hauling it to town in a wheelbarrow. You've got, now, these major companies that are going in -- these are Chinese companies with major installations to provide the quantity and quality of food. That's where our focus is. We probably pulled back a little bit of trying to be competitors with everybody but we're looking more and more at what we can do, both food safety and animal safety. We are introducing some new -- will be introducing some new animal safety products. Some of that will be a, frankly, be a tie-in with what were doing in India. That's -- when I mentioned that we sharpened our strategy, that's a part of that whole statement.

Okay. Lastly, Rick, can you talk to the BioLumix contribution to revenue?

Yes, I'd be happy to. I think Steve highlighted, and what he said was that we had the addition of about $4 million in sales overall from the BioLumix acquisition over the nine months that we had that business. Thank you very much, Jim. I think as important is the fact we been able to take that and by putting it into our supply chain and utilizing our very talented sales force, been able to grow that business over the period as well.

Thank you.

(Operator Instructions)

Charlie Haff, Craig-Hallum.

Hi. Thanks for taking my questions and congratulations on a great fiscal year. I had a question for you about the Illumina distribution arrangement that you discussed in a press release for the GeneSeek genomic profiler for SNPs. Wondering if you can help us understand that arrangement a little bit more. Is it international, domestic? Any details you can provide would be very helpful. Thank you.

Sure. It's basically international. Over time, we've got -- the bioinformatics, there's the testing and the test results that one gets from using an instrument platforms like Illumina to give you raw data, but then that raw data then needs to be converted through some bioinformatics that says that it's good or bad or what degree of good or bad. We know what all the SNPs are, for instance, that are pretty much going to dictate how much beef [kafe] we will gain per day.

Once we get all of those factors, then we have to put that in some kind of a model. Over time our guys have developed what they call the GGGP, in which is our own bioinformatics program that's being used to help producers save -- use the bulls, save the right replacement efforts, whether it's on beef or it's on the dairy side. And obviously, we would like to do as much as that business through our own lab as we could, but it's a big old world out there and we can't quite cover everybody and everybody doesn't want to send a product to Ayr, Scotland, or to Lincoln, Nebraska.

In conversations with Illumina, they said if you'd allow us -- in fact, license us to use your bioinformatics on our hard chip, we could sell that as a part of a program. It will help us increase our revenues -- that is, Illumina. Plus, it gives people more reason to use the big aluminum machines and platform and at the same time, then, it reaches a part of the market that Neogen GeneSeek people can't reach for whatever reason. We get, obviously, we get some profit every time they sell -- Illumina sells a chip that has got our bioinformatics on it, we get a little piece of that. But probably more important, as I look at it, it's a way to take this tool as we continue to develop it, make it stronger and stronger to the benefit of, particularly, of beef and dairy production around the world. We can't be everywhere all the time, but it's nice that -- will be nice to see more and more people are using genomics and to the extent that, as Rick Current used to say, a rising tide raises all ships and I think that fits in this program and what we're talking about here.

Okay. That's very helpful. Thanks Jim. I'm wondering about the penetration rate that you think about these bioinformatics products and SNP arrays internationally in the market were Illumina is in versus domestically. Do you think the penetration rates are dramatically much lower internationally versus domestically, or how should we kind of think about that in terms of the opportunity that Illumina, and I guess you guys, have internationally relative to what you think you have domestically?

I think for Neogen's GeneSeek program, the international markets will be more lucrative than the domestic markets. We're getting a big piece of that now. We've got -- for instance, of the breed associations on the beef side, you've got Hereford and Shorthorn and Brahma and Angus and all those. I think all but perhaps two we do exclusively their work. So all of the, for instance, the Hereford work for parentage and determining on the purebred side for Hereford, we do that -- the genomics for them and then it goes back to them and to their association. We don't have 100% of the Angus business, but I think that's probably the -- maybe that and American Brahma, we don't have all of that one, but we're already there domestically. That's just as an indication. We've already got a big piece of the domestic market.

International market is going make a difference. It will help us develop better models. We've got models that are developed for -- mostly today for Bos taurus, that's the English breed of cattle versus Bos indicus, which is the indicus influence, that'd be the Brahma, Zebu-type cattle. We've got some good models, particularly for Brazil, but we don't have a model that's really developed for some of those other areas. The feedback of some of that will eventually help us develop more models in those countries where maybe our bioinformatics is not as precise as we would like for it to be.

That's great. Another question I had was on Brazil. You mentioned in the prepared remarks in the second half of this fiscal year, Brazil started to get some traction and I know the first half was a little bit challenged and you guys were building some infrastructure down there. Just wondering if you could kind of characterize Brazil now. Are you out of the woods, excluding the currency, of course? Are you out of the woods and you think you expect progress going forward or are there are still some roadblocks you see?

We expect progress going forward. I think there are still some roadblocks out there. Brazil has done a great job of protecting and continuing to protect their own industries. Depending of what we're shipping into Brazil, the tariffs, I guess, Steve, up to, what, 17% on some stuff. As a local -- we produce it here, ship it down there, we pay 17% more on our cost than a local guy would that's producing it domestically. We understand that, so part of our challenge is to produce more product in country. That's particularly true of cleaners and disinfectants and those bigger products that we're working on now. We're making some progress. We're not there yet. We think we know how to get there.

At the same time, Brazil gets to be a bigger factor in the entire food supply to the world. They're already the largest soybean producer. They're fighting for the number-one spot producing the most chicken meat. Not only are they doing it in Brazil, but JBS comes to the US and buys up companies here. They're the -- I don't know where they rank now. Third- or fourth-largest broiler producer in United States is owned by the Brazilians. So making sure we have good solid footing in Brazil is important to us. I don't know that anybody is ahead of us, but we're still working on a daily basis to make sure we are structured right, which could -- it's not going mean were not going to continue to grow, I just -- it's harder to predict the rate of growth.

Okay, great. I know this has been a long call so I just have one more. On SenesTech and ContraPest, wondering if you could give us an update there? I know there's been a leadership change at SenesTech. Just wondering what the status is maybe with the EPA as far as you understand it and where your expectations are in terms of being able to commercialize ContraPest?

Yes. Thank you. To refresh the audience that might not be as familiar, we have a license to a technology that was developed by some scientists out of the University of Arizona that will sterilize rats and mice, in particular rats, so they can't continue to reproduce. We don't own the technology. We've got a license to the technology should it -- when it gets approved by the EPA. I think they were to have filed an EPA application, I think, the end of last week. Whether that got filed I don't have any confirmation.

But that's just an application which could be a long ways from application to approval. It is a different kind of a product that EPA hasn't had all that much experience with. Most of what they have experience with the something that kills something, not something that alters its ability to reproduce. That's whether it's cleaners and disinfectants or rodenticides or insecticides. Those are all aimed at killing something, that most of what they look at. I really can't tell you. We hope that they are successful. We don't really have anything other than being a cheering section for them to get further to where they are.

In the meantime, we've got a great program going of our own. You maybe remember we've got a rodenticide laboratory special research facility that's located in our Madison -- in our Randolph, Wisconsin, facility and we're continually working on new rodenticides there. We've got, I think, two or three before EPA now for approval. I suspect that we'll get an approval on a new liquid bait hopefully here within the next month or so that will have a, we think, a great application, be competitive over other things that are available in controlling rodents particularly in feed mills. Most of the places, remember, where we're trying to kill rodents is already a clinical supply of food, so they've got all kinds of choices to what they're going to eat, so we got to convince them to eat our poison instead of eating that corn. It's -- a lot of work is done in that regard. So SenesTech, nothing new to really report on that.

And in terms of the bait forms? I know you guys of been working on those for the past year or so. Do you feel like your ND group has figured out the bait forms for ContraPest now?

The bait forms are really -- that's ContraPest is -- they are working, to my knowledge, it's all on a liquid basis. We haven't done any work on our side as far as testing any bait forms or anything. No active input at all there.

Okay. Thanks for taking my questions.

You bet.

We have no further questions. At this time, I would like to turn the call over to Mr. Herbert for closing remarks.

Thank you so much. Thank you so much, not just for the day, but you could tell I think most people, the caliber of questions, there's some -- a lot of people who have been awful close to what we've done for the last year we appreciate your support. We appreciate the advice you've given us along the way. I would make sure to invite you -- if you got the invitation remember to come; if you didn't, you can come anyway, to our summer picnic. It starts on Thursday afternoon here at Company headquarters beginning about 4 o'clock. The weather is promised to be sunny, the beer cold and the barbecue good and we'll get an opportunity to talk with you firsthand throughout the evening with some exhibits. Be like County fair time. We will have exhibits up of a lot of the different products and the people out there with them everyday. We always enjoy doing that, so if you can get here please do. If you need instructions, call Terry Maynard. Consider yourself invited. Thank you again, and a good day.

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