Neogen Corp (NEOG) 2016 Q1 法說會逐字稿

Welcome to the Neogen first-quarter FYP16 earnings results conference call. My name is Eric and I will be your operator for today's call.

(Operator Instructions)

Please note that this conference is being recorded. I will now turn the call over to Jim Herbert. Mr. Herbert, you may begin.

Thank you, Eric. And good morning to all of you and welcome to our regular quarterly conference call. Today we'll be reporting to you today the results of the first quarter of our FY16, that quarter ended on August 31.

I'll 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 risks and uncertainties, and actual results may differ from those that we discuss today. And the risks that are associated with our business are covered, in part, in the Company's Form 10-K, as just recently filed with the Securities and Exchange Commission.

In addition to those of you who are joining us by this live conference, I'd welcome those who may be joining later by way of the simulcast on the World Wide Web. And following comments this morning, we'll entertain questions from participants who are joined by this live conference. And I'm joined today 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 first quarter that ended on the 31st of August. Revenues were approximately $74.9 million. That's an increase of 11% compared to last year's first-quarter revenues that were approximately $67.6 million.

The net income for the first quarter increased to approximately $9.3 million. That's a 5% increase compared to the year earlier. This equates to $0.25 a share as compared to $0.24 last year. Both the revenue and the net income figure represent first-quarter records for our now 33-year-old company.

This quarter we continue to take pride in pointing out that this quarter, which is the 94th quarter in the past 99 quarters that Neogen has reported revenue increases compared to the previous year. And dividing that by 4 this is a record that now spans almost 25 years.

Our operating income for the quarter came in at 19.9% and that's as a percentage of sales. Those of you that have followed the Company know that our goal is to run that number to about a 20% operating profit, leaving us some flexibility to increase investments to take advantage of top-line growth with any excess funds. With one notable exception, this first quarter got us off to a good solid start for the new year.

Our product groups all showed good revenue increases. We captured nice growth in individual markets that we serve in both the food and animal safety sides. And most of our non-US companies showed good growth when measured in their native currency. This is all, I think, a real testament to our now 1,200 employees scattered around the world that just don't quit. Of course our gratitude continues to go to this strong employee group.

The not so good news was the even stronger headwinds that we encountered in currency translation. As the dollar continued to be strong against all currencies, and in particular the Mexican peso and the Brazilian real, adverse translations robbed from both our top line and our bottom line. Steve will talk more about that and where we are with currency translations in a moment. I think this cost us at least $0.02 a share compared to the currency values of the first quarter of last year.

And this first quarter saw us build again on our strong balance sheet. We increased shareholder equity and that allowed us to make some nice bolt-on acquisitions that will begin to make contributions in the quarters ahead. I'd like to come back later in this call and talk a little bit more about the acquisitions, about what's happening in regulatory activity and the international markets, as well as talk about what's happening in Washington. However, at this point let me stop and get Rick Calk an opportunity to talk about improvements in growth that he's been diligently working on over this past quarter. 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 the first quarter of our FY16, and our press release issued earlier today provided additional details related to our quarterly results. But I'd like to try to provide a bit more detail on the quarter's performance.

As mentioned in our press release we continue to see double-digit growth in two of our most important product lines, our rapid diagnostic tests for mycotoxins and our test for food allergens. In both cases we were innovators in developing the first rapid test for these contaminants many years ago and we continue to earn new business with each of these product lines.

Sales of our rapid test for mycotoxins, which we first launched 30 years ago, increased 12% in the quarter, with increases in sales of test kits for each of the six major mycotoxins. This increase came despite the fact there were no major mycotoxin outbreaks anywhere in the world.

Sales of our rapid test for food allergens, which we first launched 17 years ago, increased 17% in the quarter, with increases in sales of test kits for 11 of the 12 food allergens for which we market tests. These increases were led by our tests for gluten, peanuts, and soy, and then bolstered with our new Reveal test for multiple tree nuts. In both cases we've made numerous product improvements over the years to keep a step ahead of competition, and now offer the worldwide food and feed industries the best test kits available.

I'm highlighting these product lines because their increases were not the result of major new product developments as you see with our AccuPoint advanced hygiene monitoring system or newly acquired products such as the BioLumix automated microbial test system. The increases in mycotoxin and food allergen tests came as a result of other factors, including new sales and marketing initiatives to prepare for the phase-in of provisions of the Food Safety Modernization Act of 2011, commonly known as FSMA.

The FDA recently took one of the most significant steps in decades to prevent foodborne illnesses by finalizing the first two of seven major rules under FSMA. The two finalized preventive control rules, known as the preventative controls for human food and the preventative controls for animal food, focus on implementing modern food manufacturing processes for both human and animal foods to ensure that the food and feed companies are taking action and working with the FDA to prevent contamination outbreaks rather than waiting to act until an outbreak has occurred. The preventative control rules require food and feed facilities to develop and implement written food safety plans that indicate the possible problems that could affect safety of their products and then outline the steps the facility will take to prevent or significantly minimize the likelihood of those problems occurring.

Neogen is also well positioned to assist companies with two additional FSMA rules scheduled to come online at around Halloween time this year. These new rules, the foreign supplier verification program and third-party certification, specifically affect food imported into the United States by enhancing the oversight of these imported foods. Overall, 15% of the nation's food supply is imported from other countries, and that includes 80% of our seafood, nearly 50% of our fresh fruit and 20% of our fresh vegetables. Neogen's comprehensive suite of rapid food safety diagnostics is just what is needed for companies to demonstrate compliance with these new rules.

At the same time, we're enhancing our relationships with our customers by providing additional web-based resources to provide additional 24/7 support. Our Monday mycotoxin video reports, for example, pinpoint potential mycotoxin trouble spots throughout the United States as reported by our customer partners. And our partner, Brock Associates, provides timely, customer valued grain market analysis. Our eCommerce website continues to gain in popularity as we continue to see easier and quicker methods of assisting our customers through the routine ordering processes.

On our animal safety side we are taking a similar partnership approach with our customers who are now being asked to produce poultry and pork products that have been raised without antibiotics. This increasing consumer demand for antibiotic-free products has led to many poultry and pork producers to make major changes in their production programs, and led to an increasing demand for the exact type of products and services that are offered by Neogen.

Our cleaners, disinfectants, rodenticides and our insecticides help strengthen a facility's biosecurity efforts and helps stop the spread of disease in livestock facilities. Our simple diagnostic tests for contaminants, such as mycotoxins, bacterial pathogens, and drug residues, help ensure feed intended for these antibiotic-free animals is safe and free of antibiotics, and that their environment is also safe for potential sources of disease. In addition to our rapid diagnostics, we've seen significant increases in sales of rodenticides and disinfectants intended to stop the spread of these diseases.

In preparing for today's conference call I sent a very simple message to each of our group management teams. I asked -- how many new customers did your group have in this first quarter? Their answers were more than encouraging. During the quarter we had hundreds of new customers of our animal genomic products, including several large genomic researchers. We posted hundreds of new food safety customers and hundreds of first-time customers of our animal safety products.

As you can probably tell, I'm very excited by what's happening in the markets that Neogen serves and by what we have to offer companies in their markets as they continue to face new challenges. Jim, can I turn it back to you?

Thanks, Rick. I'm going to call on Steve Quinlan to talk a little bit about the financial side of what's happening, in particular our food and animal safety splits, more on the currency problems that we faced, and in particular some of the particular financial highlights of the quarter. Steve?

Thanks, Jim. The first quarter of FY16 was indeed a mixed bag with some solid underlying growth offset by the considerable currency headwinds we encountered during the quarter, which continue a trend that began in the second half of last year. All the currencies we operate in have declined against the dollar compared to the same period in the prior year. The euro was down 18% on average compared to last year's first quarter, the real was down 32% for the comparative quarters, peso was 18% lower, and the pound sterling was down 8% on average.

The negative impact of the stronger dollar on our comparative revenues for the quarter was $2.2 million, and, as Jim mentioned, about $0.02 on the bottom line. In constant currency our growth would have been 14% versus the 11% reported. And reported organic growth of 9% would have been 12%.

Food safety had a solid start to the year with overall revenues of $34.5 million, growth of 11%. Rick has already mentioned the growth in natural toxin and allergen product lines in this segment for the quarter. Our line of optical microbial test systems, which are used to detect spoilage organisms such as yeast and mold, recorded strong gains, aided by $1.3 million in revenue from the BioLumix product line which we purchased in October of 2014.

Consumable vial sales from our existing Soleris product line rose a strong 24%. Sales of AccuPoint samplers and readers used to monitor environmental sanitation rose 12% in the quarter, as we launched our next-generation system. Revenues for our line of test kits to detect the presence of antibiotics in milk declined by 12%. These products are primarily sold in Europe, and although volume rose slightly, the decrease in the value of the euro resulted in the comparative revenue decline.

Top-line results for our international operations, which are primarily focused on food safety, were mixed and were negatively impacted by the strong US dollar during the first quarter of 2016. Neogen Europe revenues declined by 4% in local currency in the quarter, primarily the result of a significant one-time genomic order in last year's first quarter. Revenues declined by 12% when the pound sterling was converted to US dollars.

Neogen do Brasil continued its strong momentum from the second half of FY15 and recorded revenue increases of 70% in the local currency, the real, for the first quarter. And we're still up 16% after accounting for the devaluation of the real for the comparative quarters. Revenues at Neogen Latinoamerica, our Mexican subsidiary, rose 53% in local currency, and were still up 26% for the quarter in spite of the peso weakness, with broad-based increases across our product lines.

The animal safety segment recorded overall revenue increases of 10% in the quarter, almost entirely organic. Increases in our Lexington-based business came from strong growth in our line of small animal and equine supplements which were up $1.6 million, our complete line of veterinary instruments which were up 8%, and increases in sales of dairy supplies as a result of a new distribution agreement. These offset a 35% decline in forensic kits sold into commercial laboratories as a large $600,000 sale in last year's first quarter was not repeated this year.

Our biosecurity product offering of cleaners, disinfectants and insecticides were mixed, as rodenticides, which were strong all of last year, continued their momentum, with revenues up 39% over last year's strong first quarter. This offset a 22% decline in insecticide revenues, the result of a strong spring booking program which resulted in sales pulled ahead from this year's first quarter and into the third and fourth quarters of FY15.

Our agrigenomics testing business was up 12% in Nebraska for the comparative quarter due to sample volume increases resulting from incremental poultry business and market share gains, primarily in testing services for beef and dairy cattle. Gross margins of 50.5% compare to 50.4% in last year's first quarter.

Overall operating expenses were up 11% in the first quarter. Sales and marketing expenses rose by 11% with the largest components of this increase personnel-related expenditures reflecting the increased headcount from additional staffing over the past year as well as revenue growth. Additionally, shipping costs were up 13% and advertising and trade show expenses also rose.

General and administrative expenses rose 12% for the quarter reflective of increased compensation and fringe costs and depreciation on infrastructure investments made in the past couple of years. Our R&D expenses were 7% over the prior-year first quarter. The Company will be launching a number of new or improved products in the next six months and continues to invest in new product development. As Jim mentioned, our pretax operating income was 19.9% of sales, equal to that of the prior year's first quarter, and a nice improvement over the 18.6% recorded in last year's fourth quarter.

Currency conversions resulting from the weaker euro, pound, real and peso resulted in charges recorded in other income and expense of about $600,000 compared to just $55,000 in last year's first quarter. We also recorded income of $240,000 in last year's first quarter which was related to the settlement of the earnout on our SyrVet acquisition. These items are the drivers of the $726,000 variance in this line between last year and this. The Company generated $6.6 million in cash from operations during the quarter and invested about $13 million in the Sterling House and Lab M acquisitions, and another $2.8 million in investments in property and equipment.

So, overall we started off FY16 strong and we continue to be in a great position to execute our plans for the remainder of the year. I'll now turn it back to Jim for his closing comments.

Thanks, Steve. As Steve pointed out, in cash, we did close two acquisitions in the quarter. I mentioned that in my opening comments. And these acquisitions -- actually we had three -- they were strategic in nature and have been part of our ongoing planning process.

One of the highlights was the acquisition of the Sterling House operation, which gave us the opportunity to officially plant the Neogen flag in India. This operation is on the southwest coast of India in Cochin in the state of Kerala. The Company's 25-year history of providing exceptional food safety testing services were perfectly aligned with our goal of establishing a strong presence in India.

This is India's leading region for export of spices and tea along with some fresh fruits and vegetables and some seafood. However, we have now 40 employees in this Indian operation that are expanding the testing business to act also as the distribution point for Neogen's many food safety diagnostic tests, along with our biosecurity cleaners and disinfectants that we didn't have a market presence in before. Though some patience will continue to be required in dealing with that economy we think that we'll see some solid steady growth on a month-to-month basis going forward.

So, not at the same scope, we did officially form Neogen Canada during the quarter to give ourselves a Canadian-based corporation to deal with several issues including quarantines related to the movement of animal test material back and forth across the border. Of course Canada has always been our single largest export country and continues to grow nicely. In many ways we treat it like were another state.

The other international acquisition took place right at the end of the quarter as our Neogen Europe subsidiary acquired the stock of the United Kingdom-based Lab M Holdings. Lab M is a developer and manufacturer of microbiological culture media and some diagnostic products that go along with that. In many ways, it looks a lot like our US-based Acumedia product line.

We looked at that business back a few years ago and the timing just wasn't right for an acquisition at the time. However, the Company, that was founded in 1971, has continued to grow as a leading provider of diagnostic products for the global food, water and industrial testing markets that the Company sells into more than 100 countries on a worldwide basis, and has a good large customer base in the European Union, the Middle East and India. It only has just a few small customers in North and South America where our Michigan-based Acumedia business is the strongest.

This business, with 30 employees located in Heywood in England, which is in the middle near Manchester, will continue to operate from that well-designed accredited production facility. It's located about three hours down the road from our Neogen Europe operations in Ayr, Scotland. This business will report through our strong management team based there in Scotland.

The Indian and Lab M acquisitions mark the 30th and 31st acquisitions by Neogen since the year 2000. Like all the others, we expect these to be accretive both at the top line and the bottom line. Even those first acquisitions back in the year 2000 when we started this record still have products that we manufacture and sell every month.

I think that we've been successful because we've stuck with three firm acquisition beliefs. First, we need to understand the technology. Second, we need to have the ability to manufacture the product. And, third, we need access to the marketplace.

And, of course, that marketplace has changed over these past 15 years, not the least of which has been the change in the food and animal safety regulations around the world. The European Union is now clamping down more on antibiotic residues in chicken and pork products. China has considerably strengthened its food safety laws and is desperately increasing scrutiny on enforcement. The Indian government just handed down an ultimatum to its regulatory agencies to get the food safety code rewritten and implemented within the next six months.

And, of course, not the least of which of all of this is the US Food and Drug Administration's Food Safety Modernization Act. This finally got its last two regulations placed in the final rules just this month. Rick's already provided you with some of the details on FSMA.

In the US, to refresh your memory, food regulations are administered mostly by the Food and Drug Administration or the US Department of Agriculture. The US Department of Agriculture put in place a HACCP program -- Hazard Analysis Critical Control Point Program -- aimed at the safety of animal derived food products back several years ago. However, the FDA Food Safety Authority has generally not been updated for 70 years.

Five years ago Congress passed a law and the President signed it to overhaul the nation's food safety system. More and more attention has been focused on the fact that 48 million Americans are estimated to become sick with foodborne diseases each year and over 3,000 die. This likely has given some extra push for better FDA measures.

These last two FDA regs, though they won't take effect for more than a year, in particular include a requirement that food processing companies must take active steps to reduce risk, not just acting only after someone gets sick. Under these new laws, the FDA will have far greater enforcement power than ever before. Food processors will be required to establish preventative programs, to keep written records of their success, and to do sufficient testing to prove that their intervention methods are in fact being successful. Rick pointed out this latter piece is, of course, right in Neogen's wheelhouse as we are the leading producer of diagnostic tests for the food industry.

I can say in conclusion that we again seem to be at the right place at the right time, with the right people and the right products. Obviously, it's a fast-moving business and technology doesn't stand still. We'll continue to work toward improving both the intervention technologies as well as our diagnostic abilities.

These recent acquisitions will allow us to push harder on international revenue growth. Though this international revenue has grown nicely it's not grown at the same speed as our domestic growth. We're also seeing some good acquisition opportunities that fit our criteria as being bolt-on to our current mission of the Company and the Company's strengths.

So, let me stop at this point and open for questions. And please feel free to direct your questions to Rick, Steve or myself. Eric, if you'd open the questions.

(Operator Instructions)

Paul Knight, Janney Montgomery Scott.

This is actually Bill March on for Paul Knight. First question, could you speak to the GeneSeek partnership with Illumina? How is that progressing? And then, specifically, have you guys seen an uptick in penetration or interest in international markets?

It's really just beginning to get some traction. For those that might not be totally aware of the question, we've developed, within the animal genomics business, there's the pure testing business in which you run samples and you are able to pick out snips and you get lots of A's and B's and X's. And somebody takes those and puts them through a bioinformatic program and says -- this means that this animal is going to give more milk or raise healthier calves, or whatever the story might be.

Of course, we are Illumina's -- probably their biggest agricultural customer as far as their equipment and testing chips are concerned. We've developed our own bioinformatics that fit particularly into the cattle business, and had a number of people that were using or like to use the bioinformatics that we develop, which was okay with us because it was outside our reach. A lot of that was in the international market. So, we made an agreement with Illumina that they could sell our bioinformatics, if you will, as a part of their chip, and they paid us a fee for all that they sell there. It's not strictly a royalty program but it's similar to a royalty program.

That's been helpful to us because people around the world, we currently do business with 11 of the beef breed associations, which, I think, all but one in the US. Their programs are all based on our bioinformatics products. So, that helps establish us in the future and at the same time has helped Illumina with their sales of, what they really like to sell is chips and instruments, has helped them going forward.

So, it's a little early to tell. I checked to see if we had any real numbers. We did last year sell whole chips. We sold a chip for $100. We recorded $100 at the top line and whatever profit at the bottom line.

And some of these programs this year, however, we don't record the wholesale. We just record the margin between what the chip would have cost and what Illumina sells it for. And that's not all completely tidied up yet. I don't know whether Steve has a better answer to that or not, but it appears like it's going to be successful. We get a lot of good uptake on it but I don't think it's had any impact on our revenue at this point. Steve, is that roughly --?

I think that's a fair statement.

That was a long answer to a short question.

No worries. And then, secondly, could you maybe just speak to your strategy in China and what you guys are seeing over there?

We're feeling good about China. We've readjusted our strategy two or three different times. We've got a good operation headquartered with offices both in Shanghai and Beijing. We are doing business in China with a number of products on our animal safety and food safety side.

A big part of our focus now is not to try to compete with the Chinese companies that may be making diagnostic products. As you would expect, there are a number of those that have the Chinese version of a mycotoxin text test kit. We think that ours are obviously better. We have focused on the major companies that have a real franchise to protect in the marketplace.

There are a number of Western companies who, actually by invitation of China, are producing animal proteins. Tyson Foods, the largest meat producer here, is also a major producer of chickens in China. Cargill is a major chicken producer in China. We have several dairy companies there. The three largest dairy businesses in China are Chinese companies and we have a close working relationship with them as they look at various diagnostic tests as well as other products.

Our focus has not been to play down in the lower level and try to compete with the Chinese companies that are apt to be able to offer something cheaper, but to make sure that we continue to maintain our quality program in working with those people who can afford to pay a little bit higher price for what we're doing. Your first question about genomics certainly comes into play there. We'll do more than $1 million this year in samples coming from the China dairy business. Three or four companies are building large dairy operations in inner Mongolia with milk in the 10,000 cows or better farming operation. And one of their big challenges is to save the right replacement efforts to grow that business.

So, we're seeing hair pulled from the tail of a week-old heifer calf, find its way to Lincoln, Nebraska and a week to 10 days later we send the result back and tell them which ones of those calves are going to make the best replacements to go into that milking herd a year and two years out. China and India both with strong growth in the middle class and strong disposable income in the middle class makes it just perfect places for us to be in. And we're excited to be there with our own feet on the ground.

Great. One quick one, lastly, if you could just speak about the long-term strategy around the eCommerce platform and whether that's already contributing a meaningful percentage to the sales. And I'll jump in the queue. Thanks for your time.

It is meaningful. I ought to have the numbers off the top of my head. I'm looking across the table at Mr. Quinlan. His memory is short as mine this morning. But our food safety guys, where we're dealing direct with end-users, they're really seeing nice growth. Ed Bradley is in the room with me. What are we seeing there, Ed?

About 10% of our business on the food safety side comes through eCommerce.

So, Ed reports that 10% of the revenues on the food safety side -- this would be primarily our diagnostic business -- comes through eCommerce, which is up from nothing two years ago. So, that's nice growth. And it fits that tier of customers who know exactly what they want, they're going to order 10 kits of this and five kits of that and they're going to do it on a monthly basis. They can do that through eCommerce. They don't have to worry about chasing invoices and all the other things that go with it. So we've seen nice growth there.

We're seeing some growth over on the animal safety side but that's a different business there. There we're dealing with, whereas on the food safety side, something three times the size of a cigar box is a normal shipment, we're talking about pallets or part truckloads when we get to the animal safety side. They are doing some things there that fit and we'll continue to grow that business, but it will not be as big probably ever on -- we won't be as big on the animal safety side because a lot of those products require warehouses and trucks and UPS doesn't deliver it to the end user's door.

Brian Weinstein, William Blair.

I was hoping we could talk a little bit more about FSMA. I'm just trying to understand, with everything that you guys have going on, obviously you sided rather with the EU, China, India and the FDA and everything going on in the respective areas. How should we think about longer-term growth rates here? Do you expect growth overall will accelerate for the Company over the next 12, 24 months? And, if so, can you give us any idea about quantifying any of that and any idea of when we'd really see any inflection from any of this? Thanks.

Thanks, Brian, that's a great question. Thank you. We talk about all the great things that's happening but really nothing's happened other than we finally got regulations and we finally got them in print. And we've warned the industry that they're fixing to have to start complying. But the two regulations that went into effect at the end of August, August 31, they don't become compulsory for large producers for, I think, Rick, it's a year from then, so it's next August. And for the smaller guys it's two years away. So they won't have to be fully compliant.

Now, people are already aware of those regulations. And the industry's very responsible and they're working already toward making sure that they're compliant. But that's the very first two of the seven that won't really take effect, some of them for a period of two years away. So, in some ways that's good because it's not like the floodgates got opened. We'll be able to adjust that business as it goes.

These last two that went into, that are actually announced, I don't think those regulations actually even get on the books until like next spring. It's going to be important. And then after that it's a year or better before you have to be fully compliant and subject to penalties if you don't comply. So, they are taking place, the seven, slowly over time. And that will be good for us.

Okay. And then on GeneSeek, we're very bullish on what you guys are doing there, but it looks like it was down sequentially for the second straight quarter. Is there anything going on, emerging competitive dynamics there, or is there something with the changing business model with Illumina where you used to sell the chip but now you're getting a royalty? Anything you could talk about the sequential situation there? Thank you.

I'm trying to think back two quarters. I'm trying to remember. Some of this business comes in chunks. Our guys say it's kind of a chunky kind of a business. We'll get a big order in, we'll get several hundred thousand or several thousand samples coming out of New Zealand or Australia that gets all booked together and that come in on one particular month this year and then maybe we don't see them again, same time next year, or maybe not quite as many.

I don't think, Steve, I think we showed a little bit of a decrease this year and part of that was chips. We sold a fair number of chips last year in that first quarter. And this year we didn't have any chip sales to speak of. And a big part of that was in Europe at Neogen Europe.

We are redoing, or strengthening I should say, our program for genomics in Europe. We are in the process of establishing a Little Lincoln, if you will, in Ayr, Scotland. We've already been working with that industry. We extract the DNA there -- it's an extracted DNA instead of actual samples -- to Lincoln now for the most part.

But we're putting in our own Illumina system which will be operational somewhere in the December timeframe so that we can take care of stuff coming out of the UK right there in the UK. That fits in that good business over there. And the canine business, as it relates to canine breeding registry. Got good business over there as it relates to the cattle business. And some strong business in swine genomics.

So, that will help us grow what we're doing. It will also take a little pressure off of Lincoln. We're in the process, so we just moved into that facility a year ago, and we're now in the process of expanding it already to give ourself more lab space. So that will help us as to what we're doing there. I'm not sure, maybe Steve can help off-line, Brian, to tell you where those numbers come from but I certainly don't see any weakness in what's happening.

Great. I appreciate that. Lastly, on rodenticides, can you talk how big that specifically is? I know it's classified within an area with rodenticides, insecticides and disinfectants but specifically how big is rodenticides? You called it out with big growth this quarter. And any thoughts on the update with your partner [Genestech]? That's it for me. Thanks.

I think Steve can tell you the rodenticide number. That business is growing. It's pushed our Randolph, Wisconsin plant to, I think we're still taking off Sundays out there but I think we're working 16/6 now to keep up with what's happening. Of course, as we move into fall that's a heavy rodenticide time. That's the time that little mice and rats start trying to find a warmer place to live and they move inside of barns and chicken houses and so on. So, our pressure, we've been building -- some opportunity to build some inventory during the summer, but we'll continue to be strong as we move through Neogen's second quarter. Have you got --?

Our revenues for rodenticides are annualized out at about $20 million, $21 million.

Kurt Kemper, Hilliard Lyons.

I just have a quick one for Steve. Could you give an estimate for the incremental revenue added this quarter from Sterling Test House and Lab M?

Lab M, we purchased right at the last day of August so there's nothing from Lab M. That will be a going forward type thing. Sterling Test House, that's about $0.5 million, $550,000 a piece of business. So, quarterly revenues somewhere in the $165,000 for this quarter. It's going to be a minor contributor initially. It's going to pick up strength as we move forward.

Okay. And then at the last end of last quarter, you announced that there were about four targets, and with Lab M does that leave three still out there?

That would be right. I think one of those we announced is no longer there. But I think we replaced it so, no, we've still got some interesting acquisitions. They tend to be strategic in nature, like these two were that we just did. They're bolt-ons to what we're already doing but they clearly fit in our program of making sure we understand the business, we know how to make the product and we have access to the market.

I feel good about it. And Steve's kept enough cash put aside for us so we've got enough money to make those acquisitions. So, I feel good about where we are. I don't know what to tell you about currency translations. I don't know that any of us know how to model that.

Okay. Thanks for taking my questions. That's all I have.

(Operator Instructions)

Charles Haff, Craig Hallum.

I had a question for you on GeneSeek. The market growth has been very strong. I think you sometimes break out the volume growth number. Did you give that? If you did I missed it. I'm sorry.

Charles, we didn't. We did not break out the volume number there. I'll get back to you off-line.

Okay, sure. And then I wanted to ask you about the volume and the pricing. Some of the end-users, some of the smaller heifer farmers and stuff have told us that the panel pricing has come down quite a bit and they just had to adopt this technology. It was about $200 five years ago and now it's come down to around $45 for some of the panels that they're using.

I'm wondering, do you think that pricing is stabilizing here or do you think it may still fall further? I know with all technologies, as you improve, you tend to lose it on price. Do you think there's some offsets on mix and maybe some additional panels that may start to be used that you're not seeing today that are used in a widespread way? Any color there would be helpful. Thank you.

It's really all a matter of economics. The numbers probably are a little less than even those that you quoted. The heifer replacement programs now are in the $20 to $30 range. That's certainly a reasonable number to look at.

They've got to be influenced by technologies of how much the market's worth. It's easy in the dairy business. And so far it's been easy in the beef cattle business. Beef prices are at the highest they've been in almost forever. But when one stops to think about picking the right beef heifer replacement programs, an example, if I can pick the cow that's going to bring me 8 or 10 calves versus 3 or 4 calves, and those calves are going to weigh 50 pounds more at the time they go to market than one that I might pick that's the wrong kind, it doesn't take very long for those numbers to pick up and get at it. There are some temporary influences when we see milk prices fall or when we see cattle prices fall but those shouldn't have any long-term effect.

Talking all around it, we've brought costs down. We've brought costs down to try to maintain the same kind of gross margins. I think we're about through bringing costs down now. One of the big parts of genomics is not the running of the samples but extraction of the DNA. And that's a matter of trying to automate how do you take the tail hair of a little calf that got shipped halfway around the world and extract the DNA out of that with any kind of labor saving device, is pretty tough.

But I think we're going to see, based on today's dollars, those numbers for that side of the market in the $20 to $30 place. But at the same token, there's big bucks over on the poultry side. We do a little stuff with the poultry industry. That's much more proprietary.

We do a lot of stuff for the pork industry. We do a lot of stuff for the artificial insemination companies, the AI companies. They can pay $200 to decide which is the best bull to keep. There's a lot more genomic opportunities on the upper end of that model, too.

It's going to be good. And I think we're going to be able to maintain the same kind of profit from operations that we've set going forward and that's, I think, the best guide for us.

Okay. And then just to understand that a little bit more, because I don't know how your GeneSeek business is divvied up between heifers and bulls and poultry, is poultry a pretty small piece of the business today?

It's probably 15%, Steve? Would that be about right? Somewhere in the 10% to 15% range in terms of revenues.

Okay. Great. Thank you. And then last question, for Rick Calk, Tyson made an announcement, Rick, that they were eliminating all antibiotics in poultry by 2017. That's a pretty aggressive target by industry standards. I'm just trying to understand the materiality of a change like that. As others continue to adopt this antibiotic program, how material could this be for your business?

I think it's going to be a strong opportunity for us because we are a company who, as you've heard us say many times, works from behind the farm gate all the way to the dinner plates. So, a company like Tyson who's interested in protecting their brand while trying to implement something like raised without antibiotics is the perfect partner for us as we look at what we do on a regular basis. As I spoke, the ability to bring the biosecurity piece all the way back to the hatcheries, and looking at, whether it's cleansers, disinfectants, and then that ability to continue on and look at the actual animal feed with our mycotoxin test, et cetera, I think positions us well going forward with these large branded multinational companies because we have set our businesses up to be able to support them worldwide.

I think, to add my two cents, somehow you've got Donnie Smith's quote a little bit misquoted. They're, of course, friends of ours. What the President of Tyson said was that by 2017, they were going to cease use of any antibiotics that might also be used in human medicine to treat humans. So, that doesn't mean that they're going to be able to get rid of all antibiotics.

There's going to be a market for raised without antibiotics. It's going to be a premium market. But there's no way you can raise an animal -- chickens even although we've only got to keep them alive 42 to 48 days, pigs you've got to keep them alive a lot longer -- you've got to be able to treat sick animals. So, there will never be a time come that there won't be some meat, milk, and eggs out there that will be from animals that have been treated by antibiotics

The big concern at Tyson, and probably the right one, is to make sure that we're not using penicillin and tetramycin and the kind of products that we use on the human side, that we're not using those products as a part of our antibiotic program in animals.

Okay. Great. Thanks, guys. And I appreciate the clarification, Jim.

We have no further questions at this time so I'd like to turn the call back over to Mr. Herbert for closing remarks.

I came into this room this morning saying I'm going to abide by the old quote of Henry Ford who said way back somewhere, when he announced things that the market didn't like, he said -- I won't explain, I won't complain. But I can't quite do that. I noticed and I sort of prophesied to our group that somebody would pick up the headline this morning after we announced our results that Neogen disappoints analyst expectations. I don't think it was quite that strong.

I would point out that we announced $0.25 a share a year ago and $0.26. However, we announced $0.25 and the market analysts were expecting $0.26. There was $0.02 that got lost -- as I said, got robbed -- in currency conversions, would have put us at $0.27, which would have exceeded analyst expectations. On the top line, we recorded $74.9 million which is almost $75 million. And as was pointed out, analysts expected $76 million, but we lost $2.2 million there in currency conversions which would, again, put us at $77 million which would have been ahead of analyst expectations.

And that takes nothing away from the analysts. There's no way an analyst could have figured out how to put in their model that the Brazilian real was going to decline by 32% or the Mexican peso was going to be down by 18% or the euro was going to be down by 18%. We have to play the hand that's dealt us. We're working diligently to do what we can to hedge currency. We think that the dollar's going to continue to be strong as compared to foreign currency as we look at the rest of the year. And we're doing what hedging we can when the timing appears appropriate.

That's one of the things. We can tell you what we expect the revenue is going to be and what we expect the bottom line's going to be so long as we can work in native currencies. We're not very good at predicting what the dollar's going to be compared to some of these others. Your company is just as strong as it ever was and I feel good of the quarter that we just finished.

Thank you all. I'd be remiss if I didn't remind you that the annual meeting of the Company will be held here in Lansing on October 1. We'd love to, of course, see you in person, but if you can't be here and you are holding proxies related to voting at that annual meeting, please get them in so we can make sure we get them recorded. Thank you again for joining us today and thank you for your continued support of the Company. Good day.

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