Neogen Corp (NEOG) 2017 Q1 法說會逐字稿

Good morning and welcome to the Neogen first-quarter FY17 earnings results. My name is Brandon and I'll be your operator for today.

(Operator Instructions)

Please note: This conference is being recorded. I will now turn it over to Mr. Jim Herbert. You may begin, sir.

Good morning and welcome to our regular quarterly conference call for investors and analysts. Today we'll be reporting to you the results of our first quarter of our FY17, which 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. The actual results may differ from those that we discuss today. But again, call your attention to the fact that the risks that are associated with our Business are covered in part in the Company's Form 10-K, as filed with the Securities and Exchange Commission.

In addition, to those of you who are joining us today by live telephone conference, I'd also welcome those who may be joined by way of simulcast on the world wide web. Following the comments this morning, we will entertain from here questions from participants who are joined in 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 our first quarter that ended on August 31. Revenues of that first quarter were $83.6 million, a 12% increase as compared to revenues of $74.9 million in the first quarter of last year. First-quarter net income increased by 6% to $9.9 million, and that was $0.26 a share; this compares with the previous year's first quarter of $9.3 million or $0.25 a share. As you would expect, both the revenues and the net income represent first-quarter records for our 34-year-old Company.

The quarter also adds to a long string of consecutive growth quarters. This is the 98th quarter in the past 103 quarters that Neogen has reported revenue increases compared to the previous year. That's a record that now spans almost 26 years. By the way, all consecutive quarters have been up for the past 11 years.

As we did our budgets back earlier this year, I said to our folks, surely we've seen an end to being penalized by adverse currency translations. Well, unfortunately, that's not yet happened. Steve will talk more about that later in the call this morning.

The Brexit vote in June caused the British pound to decline by 10% as compared to the US dollar, and this is of course the currency of our sizable Neogen Europe operations. The Mexican peso also continued its decline into the quarter. So the results that I just reported to you would have been markedly better if we would have had a neutral currency translation, as we had budgeted.

Of course, these adverse translations affect all the other numbers in the statements. Our gross margin for the quarter was 48.4% and this compares to 50.5% in last year's first quarter. In addition to the impact of these currency translations, there were several other factors that contributed to the change in gross margins. This related, some of it to incremental revenue from acquisitions that are onboard and fine but they're still being integrated, and the loss of significant sales of a small animal supplement with a high gross margin was also significant.

You may remember back a couple quarters ago I advised you that our thyroid substitute product for dogs would be required by the FDA to be temporarily withdrawn from the market. As a quick reminder, we've made that thyroid supplement product for dogs for a number of years with the full understanding and discretion of the Food and Drug Administration. However, FDA regulations require that if a company gets a registration on any one of these kind of discretionary products, other companies are suspended from marketing until they can also have a registration.

Well, we had our registration in progress prior to the required withdrawal, but it hadn't been completed, but we are continuing to aggressively pursue that approval. However, effective July 28, we ceased shipping the product to veterinarians and we asked them to return anything that they had in their warehouses. Of course, the canine thyroid care product is not a part of Neogen's core business, nevertheless it's been a nice revenue generator and it will be again in the future.

Operating income for the quarter was 17.6% of sales; much of this of course tracks back to the gross margins and the currency translations and all the other things that we just talked about. This compares to an almost perfect 19.9% that we had a year ago in the first quarter. Looking at the components of that, sales and marketing expense increases were actually less than revenue growth, but we did have some inordinate expenses that hit the administrative bucket for the quarter and I'm sure Steve will talk more about that later here in the call.

There were a few disappointments in the quarter, in addition to those currency translation headwinds, but I think the first quarter got the new year off to a pretty good start. Again, my hat goes off to over 1,300 Neogen employees that I watched during the past three months as they worked hard to take on new responsibilities and the many new customers coming from our own internal Food Safety business, as well as newly acquired customers that came from acquisitions on the Animal Safety side.

I'll plan to come back toward the end of the call and talk more about several things that look promising going forward. But let me stop at this point and ask Rick Calk, our Chief Operating Officer, to talk about the growth and some of the exciting opportunities that he sees are happening in our Food Safety business. Rick?

Thank you, Jim. Welcome to everyone listening. Jim's already reported on the overall sales and profit performance for the first quarter of our FY17. I'll try to provide some more detail on the performance of our Food Safety segment, as well as offer some perspective.

As stated in the press release, revenues for our Food Safety segment increased 13% during the first quarter compared to the prior year's first three months, aided in part by the acquisitions of Lab M and Deoxi in the past year. Organic growth for the Food Safety segment was 9% for the quarter.

Sales of Neogen's rapid test for food allergens such as gluten and peanuts increased 17% in the quarter compared to the prior year. Neogen developed the first rapid test for food allergens in 1988 and we have remained the leading provider of food allergen test kits ever since. With increasing industry and regulatory efforts to reduce food allergen contamination, our food allergen product line, which now detects 15 allergenic foods, should remain one of our Food Safety growth drivers going forward.

In the quarter, sales of general sanitation products, which includes our AccuPoint Advanced ATP Sanitation Monitoring System increased 9% compared to the prior year. Like many of our Food Safety diagnostic products or test kits, AccuPoint is a key product to help food manufacturers comply with new regulations that require companies to test their equipment and facilities for contamination to reduce the risk of any food contamination. With AccuPoint, you can almost instantly know if a surface is clean or if it requires further attention.

Last week we announced that the AccuPoint Advanced system is the only product to receive approval from the AOAC Research Institute. The AOAC is an influential, independent organization that verifies the tests perform as expected. This approval of an ATP sanitation system was unprecedented in the food industry. We wanted the industry to know just how much we believe in the performance of our product, and proved it by seeking this very important approval.

One other high point in our first quarter on our Food Safety side was a 55% increase in sales of the Company's BioLumix and Soleris test systems. These systems rapidly detect general microorganisms such as yeast and mold in food, nutraceuticals, and other consumer items.

While the testing for specific bacterial pathogens such as listeria, E.coli, salmonella, gained the most attention, the vast majority of microbial testing in the food industry is for general microorganisms. These microbes are less likely to pose a risk for consumers, but can adversely affect a product's taste and the product's shelf life, and this is a key trend in reducing food waste. As an example, in the first quarter, Neogen's R&D team developed a new testing solution using our Soleris system that allows yogurt manufacturers to test the full range of yogurt products for yeast and mold using this single testing platform. This solution represents a major breakthrough in Food Safety testing.

It's notoriously difficult to test for yeast and mold in yogurt. Yeast and mold are very slow-growing organisms compared to bacteria, and the number of live beneficial organisms in yogurt can confound conventional testing methods. Our new testing protocol can produce accurate results in only 48 to 72 hours, where conventional yeast and mold methods can take up to five days.

Sales of our mycotoxin test in the first quarter were up 2% compared to 2016 as we overcame a difficult comparison to an exceptional previous-year quarter for mycotoxin sales. Going forward, we are seeing reports of limited mycotoxin outbreaks in the 2016 harvest season, including reports of DON in wheat in western Europe and Canada, as well as aflatoxin in corn in pockets in the United States.

One major natural toxin testing product that we rarely discuss in these calls is our test for histamine, which is a toxin that's produced when certain species of fish, including tuna, decompose if they're not stored properly following harvest. Sales of our test for histamine increased 11% in the first quarter as we have increased our commercial presence in this growing market. Sales of our products for pathogens increased by 5%, while our test kit to detect dairy antibiotics were up 7% in the first quarter compared to last year.

Now, as you might have seen after much anticipation, the first major compliant state for regulations under the Food Safety Modernization Act, FSMA, passed on September 19. And now, larger businesses must comply with the new standards for preventative controls for human and animal food, and this is the first of seven rules developed to drive down the incidence of food-borne illness here in the United States. Large facilities are now required to have a Food Safety system in place that includes an analysis of hazards and risk-based preventative controls to minimize or prevent those hazards.

The standards that animal food facilities must meet marks the very first time that good manufacturing practices have been broadly required for the safe production of animal food. As we've said repeatedly, we believe FSMA and similar regulations in other countries will help drive Neogen's growth going forward. The timing and magnitude of that added growth is yet to be determined.

On a personal note, I look forward to seeing all of you who can make it to our annual meeting taking place here in Lansing in a couple weeks. I hope to see you there. Jim?

Thanks, Rick. Steve Quinlan, talk some about the highlights of the Animal Safety division for the quarter, and go back and fill in the blanks on the financial results that I opened up, including my favorite subject of currency issues, if you would?

All right, thanks, Jim. As Jim indicated, we got off to a solid start for FY17, with the 12% increases in revenues in that first quarter. We were able to achieve these results despite the withdrawal of the ThyroKare product, and the ongoing impact of currency primarily affecting our Neogen Europe operation this quarter, as the pound devalued against the dollar following the Brexit vote in June.

As Jim indicated, the pound was down 10% immediately following the vote and hasn't yet recovered. Additionally, although the peso stabilized against the dollar late in last fiscal year, for the comparative quarters it was down an average of 14%. The negative impact of the stronger dollar on our comparative revenues, primarily from those two currencies, for the quarter was $1.9 million, and the cost at the bottom line was approximately $0.02 a share.

Rick has already discussed some of the key highlights of our growth in the Food Safety business, so I'm going to focus on the Animal Safety segment. Animal Safety recorded an overall revenue increase of 10% for the quarter, and that was aided by the Preserve and Virbac acquisitions in the latter half of our prior fiscal year. Organic growth was actually negative 1%, primarily due to our market withdrawal of ThyroKare, that thyroid replacement supplement for dogs.

During the first quarter we removed ThyroKare from our distribution channels and issued credits for returned product totaling $1.1 million to our customers. In last year's first quarter, our sales of this product were $1.8 million. This resulted in a $2.9 million negative impact on revenues for the quarter.

So if you exclude the impact of ThyroKare, Animal Safety would have recorded organic growth of 6% for the quarter. As Jim mentioned, even though this product is not core to our strategy, we are aggressively pursuing our own regulatory approval, allowing us to once again sell it, but that will not happen in the current fiscal year.

Increases in our Lexington-based business came from sales of consumable products to the commercial dairy market. This is the result of a new distribution agreement entered into in July of 2015, and strong sales of our vitamin injectables product line, which rose 60% for the quarter.

We had a 33% increase in sales of our life science products, primarily forensic test kits for the quarter, the result of increased sales to commercial labs due to new regulations requiring drug testing of commercial drivers in Brazil. You may recall that I mentioned on our last call that we expected to see a nice increase of these drug testing products as that law went into effect.

Our rodenticide business increased by 17% for the quarter, as our contract manufacturing business expanded further and we continued to penetrate the retail agricultural market. This growth came despite a lessening of the rodent outbreak in the northwestern US which had resulted in strong sales to that market in the prior-year quarter.

Offsetting these gains, our veterinary instrument product line was down 7%. This product line had very strong sales in our last fiscal fourth quarter, and sales for Q1 were a little soft.

Sales of our existing line of cleaners and disinfectants declined 25% for the quarter, primarily due to continued difficult economic conditions in a number of our key international markets and the strength of the US dollar, which made our products less competitive in those markets. However, I'm really excited about our acquisition this May of Preserve and its sister company, Tetradyne, which give us a leading position in cleaners and disinfectants in the US.

The genomics testing business that's reported through the Animal Safety segment was up 9% for the quarter. This is the revenue from our Lincoln, Nebraska, location. However, worldwide revenues from genomic testing increased 21%, as we opened a lab at Neogen Europe in the third quarter last year to better serve our European customers and provide us with additional capacity, and also purchased Deoxi, a leading genomic laboratory in Brazil, in April.

Corporate-wide, as Jim said, our gross margins were 48.4% for the quarter compared to 50.5% last year. Margins were adversely impacted by mix changes from the two larger acquisitions from FY16, which were Lab M and Preserve, which at present each have lower gross margin than the Company's overall historical average. The loss of ThyroKare and the adverse currency translations, which reduced our comparative revenues and compressed margins, also had an impact. Partially offsetting these shortfalls were favorable mix shifts toward more profitable product lines in the rest of the Business.

Our operating expenses overall were up 12% for the quarter, and that's consistent with the 12% increase in revenues. This increase included about $1.2 million in expenses related to our recent acquisitions. Sales and marketing expenses rose 9%, but actually decreased as a percent of revenues from 18.1% in the prior year to 17.7% this year's first quarter.

General and administrative expenses rose 22% for the quarter, with $700,000 of that increase coming from additional expenses incurred as a result of our recent acquisitions, things such as legal expenses and amortization of purchased intangible assets. Additional increases were for stock options and other compensation-related expenses. The stock-based compensation and amortization expenses are non-cash charges, and totaled about [$3 million] for the quarter. R&D expenses increased 4% in the first quarter versus last year.

Operating income for the quarter was $14.7 million, which was down about $150,000 compared to last year's first quarter, primarily due to the 210-basis-point decrease in gross margins and the increased operating expenses. Expressed as a percent of sales, operating income was 17.6% compared to 19.9% in the first quarter last year. However, this represents improvement from Q3 and Q4 of last year, which were 14.7% and 17.3%, respectively.

Other income was $492,000 for the quarter compared to expense of $456,000 in the prior year's first quarter. This shift is due in large part to realized currency gains at our international operations, and we had favorable results from the Company's hedging program. Overall currency gains in the first quarter were $246,000 compared to a loss of $605,000 in the prior-year quarter. We also had $123,000 of interest income and $45,000 of royalty income in the quarter.

The Company generated a strong $20.3 million in cash from operations in the first quarter, aided by a 12% decrease in accounts receivable and an increase in accounts payable. We invested $3.4 million in property and equipment this quarter, primarily building improvements and equipment at our Lansing campus. Inventory balances increased $5.4 million from year-end levels, as we continue to work on minimizing back orders while also improving our inventory turnover.

In summary, we feel really good about the start of our fiscal year here despite some of the challenges we face, and continue to be optimistic that we are well positioned for the growth opportunities which are ahead of us. I'll now turn it back to Jim for some additional comments.

Thanks, Steve. Let me talk a little bit about more about what's happening on the international front. We talk about currency swings, but there's a lot of positive things going on out there.

In the past number of quarters, our international business has been growing but hasn't been keeping up with the rate of our domestic business. In the quarter we just finished, we managed to make some gains in this first quarter with our international sales were up almost 19% over the prior year as compared to total revenues being up 12%. That pushed our international sales up to about 35% of total revenue for the quarter. And this was of course despite those adverse currency translations that we've continued to mention.

But even despite that, our Scotland-based Neogen Europe operation showed revenue increases of 24%. Our Mexico-based Neogen Latino America sales increased by 28%. Our Neogen do Brazil revenues grew about 43%. And China sales were up 21%, even though from a little bit smaller base.

The drivers that impact Neogen's growth are all continuing to be strong, as both Rick and Steve had talked about. The Food Modernization Act that Rick mentioned, fortunately the compliance has a number of industries now scurrying in order to get into compliance. Fortunately for the industries and for the agency itself and for consumers, the various facets that surround this Food Modernization Act don't all come due at one time and that leaves the food industry some time to continue their compliance activities. We think that we'll continue to see increases in our diagnostic business as a result of this.

At the same time we're seeing regulatory pressure increase, we're also seeing some similar pressure coming from what I would call consumerism activities. Some consumers, even though perhaps small in numbers, want to feel good about the food that they eat. A good example of this is raised-without-antibiotics activity that is going on. This is first sweeping the chicken meat industry. This will be the one that will be the easiest to meet these demands.

We had a meeting just this past week with a major broil producer who speculated that in excess of 30% of all chicken meat going into the market during the month of December will be raised without antibiotics. Neogen's tailor-made program to help the industry be compliant yet keep chickens healthy continues to bring attention and I think gives us some competitive edge.

There are some other outer reaches of this consumerism movement that's going to be more difficult to satisfy. As an example, there's some significant-size dairy product producers are now saying to farmers that they only want to buy milk from cows that have been fed with non-GMO corn. Well, obviously all the regulatory agencies believe that these corn varieties are perfectly safe and have been for a number of years. However, realizing that something like 83% of the nation's corn crop is planted to these new superior varieties, only a small portion of the crop, the non-GMO crop, would be available with the kind of seed that your grandfather used to raise corn.

A major food service company has told the industry that they'll no longer buy eggs from hens that are housed in cages. This is kind of interesting. We moved hens to cages 75 years ago to keep them from eating their own feces and pecking each other to death, but I guess as this develops we'll sell more diagnostic test kits in order to manage salmonella and another 10 or more food pathogens that are apt to come into play.

As you know, we're the largest animal genomic testing lab in the world today. And as that fact is more recognized, we get a lot of different requests dealing with genomics in this line of consumerism. The latest one is, I thought was a pretty big stretch, was a request to know how to get all dairy cows to be polled. This means that a polled animal is born without horns.

This group wanted to make certain that the animals didn't have horns because the process of removing those horns to prevent them from injuring each other was an inhumane practice. Well, interestingly we have a $5 genomic test that predicts if a cow's calves will be polled. Obviously none of these things have anything to do with the safety of food, but nevertheless, they can't be ignored as long as consumers are pushing their suppliers.

On the more generally positive approach to genomics comes our activities on using genomic capabilities to increase to help in the identification of pathogenic or spoilage organisms that we've been talking about. This kind of activity is much simpler than looking at the complex genetic system of animals.

Bacteria has a pretty small genome. It can be sequenced rather rapidly in our labs. Right now it's a lab process where we do lab service for hire. But at some point, I believe that we'll be able to develop that technology so that it can be used as a field kit, and I believe that Neogen is going to be one of the first to be a game changer in that area.

It looks like it's becoming consolidation time within the food and animal businesses. Veterinary clinics are being acquired and consolidated by probably a dozen different firms today. Some of this is equity capital struggling to find new homes since interest on money is nonexistent. All this has a bearing on what we're doing in the Animal Safety side with veterinary instruments, cleaners and disinfectants in a number of products.

We're also seeing consolidation on the Food Safety side. A couple companies in some segments of our Business have sold recently at prices that could be as high as 80 times earnings. The buyers were equity capital folks, not people with an industry background; so without sounding cavalier, it may be interesting to welcome some of these new players to the Food Safety club.

There appears to be some good, sensible acquisitions out there, too. Again, we'll be looking at places to do bolt-on acquisitions and we'll continue to build on our international markets.

So I think it's safe to say in closing that the same strategy that's grown our top line and bottom lines continuously for almost 26 years is still in place and the drivers are getting stronger. The overall market for Food and Animal Safety products continues to grow, and I think we have an opportunity to gain an additional share of that growing market.

Our R&D group has been working on making current products more robust and easier to use. These new or improved products coming into the marketplace should also continue to help our growth strategy. I just talked about acquisitions, and of course the fourth leg of the stool is growth in the international markets, which should continue also to be strong for us.

I think this is probably a pretty good time to wind up our prepared comments for the morning. Let me stop and open the phone lines for any questions that you might have for Steve or Rick or for myself.

(Operator Instructions)

From William Blair, we have Brian Weinstein on the line.

Thanks for taking the question. First kind of a revenue side. On ThyroKare, you talked about $1.8 million in the quarter then you had the $1.1 million Steve, I think you mentioned, for credits. So as we try and think about that business going forward, is removing about $1.8 million in the quarter the right way to think about it? And are there going to be any of these additional credits going forward?

Brian, there won't be any additional credits. We took all the product out of the market. Sales for that product last year were about $6.6 million. So I would just kind of annualize that for the remaining three quarters.

Okay. And on gross margin, it was up sequentially, still down year over year, but you've talked a lot about, you're trying to get these acquisitions up to the corporate average. Can you talk about how far below the corporate average they are and what the process is to get them up to corporate average? How long does it take and what were the specific steps that you guys are taking on that?

Thank you, Brian. That gets us from a couple aspects. First to talk about the gross margin side, we just brought the Preserve operations onboard and that's a sizable piece in cleaners and disinfectants. We've got operations in Turlock, California and Memphis where neither of those two markets that we operated before. We had some changes as we increased, moved around where the products came from. We ended up with some extra shipping cost coming out of California that in the future will probably get shipped out of Memphis.

We had changes in personnel. We ended up with some people, I guess it's safe to say we're not compliant with the international owned citizenship in one of the locations. So we had to -- came on with the part of the baggage with the business; that took us a little while to get some of that reorganized.

It's, as Steve said, it's exciting and that piece of the business is exciting. At the same time, the Deoxi operations in Brazil are small but we're getting that one churned to get a lot of stuff done. Some of our business, not an acquisition, but some of our business in Neogen Europe related to the genomics. We're beginning to hit our stride out there with the number of some expenses that are now being well covered by an increase in revenue.

So it's a number of places. I think probably the most telling is what happened at the G&A expenses. I mentioned months before that the new, I say not new but the current FASB rules, require that you expense acquisition expenses the quarter in which you spend them. We used to be able to put those in as part of a purchase price and amortize them over some period of time.

But now if you spend $0.5 million to buy a $10 million operation you expense that $0.5 million in the quarter in which you spent it. That was accounted for a part of what Steve talked about. I think he made it pretty clear. That 20%, 22% increase, I think, in G&A expenses against a 12% increase in revenue. All of those, we're pretty happy with all of it. It's just a matter of kind of wringing the water out.

Last question for me on the DNA testing services, came in about $7.9 million for the quarter. That's up year over year, but down from where the recent trend line is. Can you talk about -- you were talking about the worldwide growth of 21% but only up 9% in Lincoln. Can you just describe the difference between those two numbers? Was this down a little bit relative to your expectations given that trend line looked like it was closer to $9.5 million to $10 million in the last couple quarters?

Actually, Brian, we were very happy with genomic revenues for the quarter. What I was trying to say is that, what is recognized out of Lincoln was the $9 million; but when we talk about our worldwide revenues, those genomic revenues are reported inside Neogen Europe which reports inside of food safety. So there's a little bit of noise in the numbers, but if you look at our overall genomics revenues for the Company worldwide, it's up about, what did I say, 21%? So that was really in line with where I think we've been in the low to mid 20%s the last few quarters. So I think we are actually very pleased with that.

All right, Jim. Tell your buddy Dantonio not to take out his frustrations out on my Hoosiers this weekend. Okay? (Laughter) Thanks, guys.

From Roth Capital Partners, we have Tony Brenner.

Thank you. Good morning. I have two questions. First, Jim, you've indicated previously, I think, that 40% of your European business is denominated in pounds; and given that devaluation, I'm wondering what the effect has been on your European volume, your customer demand and your pricing strategy as a result?

That's a mouthful, Tony. Let me see if I can go back. The growth I think is real. We had good growth. Sometimes I have to get out the Ouija ball to figure out what's happening. Neogen Europe sells product in euro. Actually they still sell some product in dollars. They sell a lot of product in pound sterling. They bring all of that in to Neogen Europe and then restate it at pound sterling, which is how they report it, the pound sterling numbers come over here and we then translate those back to US dollars.

So it's typically clean.

Yes, that's right. Sometimes I wonder which shell to pea is under, but when we start moving things around. They struggled a bit last year because we were strongly competing with some international customers, our international competitors over there. This quarter started off really strong and really good. I'm awfully pleased with it.

We did some more consolidating over there with our Lab M business, that's the dehydrated culture media business that we bought. We did some more consolidation with that this quarter. They report through the Neogen Europe operations headquartered in Scotland. So I'm feeling good about where we are with the Neogen Europe operations.

And Brexit, I think everybody has decided that whatever is going to happen is not going to happen tomorrow anyway. That's 2 to 3 years in the process. We're looking at an acquisition or two over there now and Dr. Lily came the morning after and said, do we want to change our thoughts? I said no, we've still got strong movements over there and this too shall pass. I don't know whether I answered your question or not, but we're pretty comfortable with what's happening there.

Second question is would you discuss the economics of your involvement with Contrapest?

I really can't discuss much. I can say to you that our people -- in fact I was on the phone with our people yesterday. Our people continue to -- they were there last week. We continue to have an ongoing dialogue as it relates to the manufacturing of the business and where they are.

And the reason I can't say much is that it's a NASDAQ company with whom we have a license as an S1 on the Street filing for an initial public offering, so it would be inappropriate. And I'm so cautioned by our attorneys that I shouldn't be saying anything one way or another other than our relationship continues there; and I don't know when they might expect that to go final. But anyway, there's an SEC offering document under consideration and on the Street. You'd know better about the status if this one than I would, Tony, but that's probably all I should say.

Okay. Thank you.

From Janney Montgomery Scott we have Paul Knight.

Hi Jim, on the veterinary equipment and supply line that was a little soft, could you talk to that? Then also, I know your cattle prices are down 30% year over year on feeder prices along with corn prices down. Is that agricultural market affecting your product demand?

Yes, it's affecting some and, as some of you know, I can speak firsthand on the cattle side. I was talking to one of my ranching friends the night before last and he was lamenting the fact that he sold feeder calves last week for $1.21 a pound and he got $2.20 for them last year. I reminded him that I'd advised him last year to take a picture of that check and put it on the wall because he'd never see another one like it. I think we're seeing that.

The opposite side of it -- it's all kind of funny out there right now. We look back in 2013, corn was $8.50 a bushel and now it's $3.50 a bushel, so what a big change there. We saw cattle and feeder calves and the whole beef increase go up. Now that's come back down toward reality.

It's probably impacting anybody who's buying -- well it is impacting anybody that's got capital assets to sell. John Deere is not real happy. We're probably selling a few less syringes in cattle obstetrical equipment than we would; they're making the old stuff work a little longer. I don't think it's going to have any material impact on what we're doing on the vet instrument side. We got enough new stuff coming on the vet instrument side. I think we were down a little, Steve, for the quarter.

But we supply a lot of OEM stuff from big pharmaceutical companies that are out with a new vaccine or out with a new pour-on product and they need a device to be able to administer it. Sometimes they buy those devices from us and give it to the end-rancher user as a premium to sell their product. I think we probably had a little bit of that a year ago. We didn't have it now.

But I'm really excited about some of the things we've got coming on vet instruments. They're working on some new electronic instrumentation now as all this gets tied more and more together with RIFD tags in animals' ears and the scales that you can run them up in the head gate and it tells you how much they weigh. You can record all this to permanent records.

I think we're seeing a new era of that happening and we've just got to get used to $3.50 corn and $1.20 feeder calves. We'll still make it. I can remember feeder calves when they were $0.50. That's maybe longer ago than most people want to remember, but we can still make it out there.

Lastly, I know international expansion is a priority for your company now, Jim. How was demand in the quarter specifically China, South America, and then any traction on getting more foot holds in those markets from your (inaudible) acquisitions. And again, does it continue to be a top priority for you?

Yes, it does continue to be top. And our expansion in Brazil, we're continuing to look at Brazil. I don't know anything I can announce today, but we've got our own people on the ground down there. We are calling on major food processors and producers directly. We're working through a group of distributors for our animal safety cleaners and disinfectants. We're manufacturing actually cleaners and disinfectants in country now to avoid shipping water all across the world and paying high tariff costs to come in. That's beginning to work for us.

There's obviously the real to the dollar compared to where it was a year and a half ago is not favorable, but if you're buying, the real to the dollar maybe say there's some bargain opportunities there. Maybe not bargains, that's probably the wrong word, but more adjustly priced. We're looking at some opportunities there again. Nothing that we can report, but Brazil is important to us.

China is important to us. We continue to build that business. I was with a US company that's a major producer in China a week ago and we talked about what's happening in the China market. They've got to have higher more animal protein to satisfy that demand of that population. It's happening. We sometimes are a little impatient about how.

But we're clearly in the right place there in China and with Brazil as the supply. India is there and not a lot I can say about India. I've said at the end of last fiscal year if we could break even in India in the first year, I'd consider it to be an accomplishment. That's about where we are now but some great opportunities are beginning to occur in India now so.

Mexico is strong and getting stronger. Mexico, our Mexican operations have now taken on a direct responsibility for a lot of our food industry distribution in Central America; so we've got our own boots on the ground that are working there in addition to some distributors that we had. So I feel good about what we're doing there. Nobody knows. For us Brazil had some trouble on the political front but Brazil is still solid as a producer and I think that too will pass when we get that behind us. It certainly doesn't look like Venezuela, but Venezuela's got some marks of [it]. We got hurt a little bit in Venezuela because there's demand down there but you can't get your money back out. Venezuela is, I'd think, as the year wears along, it will look a little better.

Thank you.

From Great Lakes Review we have David Stratton.

Thanks for taking the question. Can you talk a little bit about the timeline of the thyroid dog supplement as you say you're trying to get it registered or re-registered?

Any time you deal with the FDA, I can tell you what we're going to do, I can't tell you what they're going to do. They have to be concerned. I think they do. They have to be concerned and it's a pretty good size, a big market that was served by half a dozen suppliers at one time; they're now down to one supplier in that marketplace. From time to time that supplier as anybody can hit an FDA problem in which they have to shut down manufacturing.

A matter of fact, if that would happen you've got millions of dogs in this country that are going to be needing the product on a daily basis. I can't see FDA trying to keep that. I'm sure they're not going to try to keep it as a monopoly, but I think they'd be encouraged to have it certainly not a monopoly.

We're in dog studies now. It's kind of interesting. We've been selling this product for years. It's been used to treat millions of dogs. We know that it works. We know that it's safe. That's been proven over and over and over.

In order to get the registration, we've got to get back and put more data down on paper to show that it's safe and to show it is efficacious. It will probably take us six months to get through that as it's now what we're looking at now. If it takes us six months and we got the right number of dogs and you've got to have some dogs that are on a control that you don't treat compared to those that you do treat; that's almost inhumane in some places. Nevertheless we're working on that. I'm guessing six months before we get those trials that are complete and ready to submit.

As Steve said, we probably won't get it done in this fiscal year. So we've only got -- I guess we've got eight months left in this fiscal year, so I think that's probably pretty safe to say. We won't get it done in between now and May 31. But a good product and a lot of veterinarians that are on, they've been using the product, the strong distribution into the marketplace, all of this will come back as soon as we get a product.

Fortunately it's not one that's growing. We had a growing interest in it because we took a big market share. We were the only supplier a year-and-a-half ago. Everybody else was out of the market because of noncompliance or whatever. But we took a big market share, but there's probably no increase in thyroid deficient dogs; so the market is not really growing, but it's a nice little market. We'll get our piece of it back. Fortunately, it's not one of those core products; it's not core to our food or animal safety business as such.

Okay. And then the third quarter you talked about the competition from a German competitor due to the currency at that time. I was wondering, is that still a headwind given the changes that have transpired since? If you could talk about that for a second, please.

I've been ridiculed by our own staff so much, I hate that you brought that up again. (Laughter) They said Herbert, you really misled the market. You had the Germans whipping us out there. And the answer was no. We had more competition from a German competitor than we've been accustomed to. I guess they probably came out one of those weeks in which we had to reduce prices in order to stay competitive somewhere out there.

We've got several good competitors scattered around the world. This happens to be one, they've got some diagnostic tests that they're using to detect food allergens. We were first out there and it's kind of nice to be first. So they compete with us, the market is better as a result of competition; but I still think that by and large we're taking market share.

I haven't seen anything this quarter that would indicate that we're losing market share. Our market share is either stable to gaining where we are today. The break on the devaluation for the European union really wasn't the euro; it was the pound sterling was where the break was. We're in kind of the same monetary situation we were with the euro even after the Brexit break.

All right, well, sorry for opening it up.

No, no. (Laughter) That was okay. I deserved it.

Thank you.

From Craig-Hallum we have Charles Haff on the line.

Thanks for taking my questions and appreciate all the detail on the call. Jim, you talked about acquisitions a little bit. You had a couple targets in the UK. Anything else that you see in the pipeline over the next year or so that you can talk about how robust is your acquisition pipeline right now?

It's pretty robust. I mentioned that we missed a couple that went at pretty exorbitant numbers I thought. They were pieces, they were double digit kind of revenues. I don't remember exactly where, $16 million, $18 million, $20 million, it would've been nice to pick them up.

But we've done well in the past by sticking with what we think we know in acquisitions. Number one, we need to understand the technology. Number two, we need to have the ability to manufacture it. Number three, we have to have access to the marketplace. Neither one of those quite fit there, though we were bidders. We weren't successful bidders in either one of those.

I mentioned there's a lot to cash out there and I'm sure all of you are seeing it not just in our little area, but in other places where you've got equity capital that's earning two-tenths of 1% if you leave it in a bank somewhere and the people are looking for better opportunities. So they're looking for those places.

Where we probably have, I don't know if you'd call it a disadvantage, but we're playing on a different playing field because we go out and buy a company and we pay a real high premium for it. Then we've got to do something with that goodwill. If I'm an equity capital guy and I've only got to report the use of the cash, it's not such an issue. But Steve reported this time about the amount of expenses we had that were actually non-cash expenses and part of that is a amortization of what we used to call goodwill; now we restate it and we call it customer-based intangibles. So it's a non-cash expense, but nevertheless it affects our earnings per share.

We're pretty sensitive to not overpaying something, though we've got cash. It's going to affect our earnings per share and you're going to judge us based on that, regardless of whether it's cash or non-cash. I think there will be some more. There is some consolidation going on.

I suspect as we look on the horizon, there's probably one or two competitors. They're competitors in one piece of the market that may decide to not stay in business or may decide that they want to sell it, especially when they see the high multiples of the business are being sold for. I think we'll have some fun.

And fortunately we're in a position where we've pretty much got things integrated. We got a little work that we need to scurry around and get finished up. We're pretty stable with our management force and we've got cash in the bank.

Okay. Great. And then Steve, you rattled off a couple numbers there, I just want to make sure that I got them right. On the CapEx, did you say $3.4 million in the quarter?

Yes, I did, Charles.

And the stock comp was $3 million? Did I hear that right?

Stock comp, give me a second here, it was $1.5 million. The $3 million number I gave you was the combination of stock comp and amortization.

I see. Okay. Thank you. And then operating cash flow in the quarter, what was that?

$20.3 million.

Great. Thank you. On the genomics test, Steve, on the DNA business, opening up the Scotland facility there and you were serving some customers in Lincoln, European customers that is. And now I guess they're being served out of the Scotland facility. Roughly how much would you approximate the delta is from customers that were previously served through the Lincoln facility but now are being served through the Scotland facility on the DNA business?

For the first quarter, Charles, that number was pretty close to $800,000.

Okay. Great. Perfect. Thanks for taking my questions.

You're welcome.

(Operator Instructions)

From Hilliard Lyons we have Kurt Kemper.

Thanks for taking my questions. Most of them have been answered. I wanted to go back to vet instruments quickly. I know last year had some tough comps but a couple products were mentioned as being weak in the retail market and then one of your retail partners recently issued weak guidance. So I was just curious for this quarter, how much of that weakness was from retail versus if you are seeing any buying power increase in the vet clinics market?

That's a good question. He's referring to Tractor Supply which, gosh, we took a lick this morning based on our results but, boy, they really took a lick based on theirs. I own a little bit of that stock and it fell out the map in one day. I was in Tractor Supply stores interestingly this past week and they're still solid. They're strong. I guessed it was a disappointment to some analysts that caused that one to drop. There's still a good strong company.

I don't think they're -- that didn't have any impact on movement of our vet instruments going through retail, realizing that our veterinary instrument business, some of it goes through retail like the Tractor Supply businesses. They are exclusive. Tractor supply is exclusive and with our vet instruments around the United States.

We've got similar situations in other places in the world. I think our sales of detectable needles may have been down a little bit for the quarter. That's a product that's used particularly in this line business. It's a patented product to make sure that if a needle were to happen to be broken in an animal while it was being vaccinated that it would be detected when it went through the metal detectors in the processing plant and not end up in somebody's pork loin on Sunday morning.

That has to do with probably the swine numbers being down a little bit that might have impacted that or quarter-to-quarter changes on where the inventories were. I think it's still strong. I think going forward I can get kind of excited about what I see is going to happen, that spread out in the vet instrument area over the next 12 to 18 months, but I see it as kind of life as normal in the next couple quarters as we go forward than what it was. Steve?

Kurt, this is Steve. Tractor was actually up quite nicely in the first quarter for us.

Our sales for tractor were up.

Yes. Yes.

Okay. That's helpful. That's all I had. Thanks.

And those are all at decent margins too.

Okay.

No further questions at this time. We'll now turn it back to Mr. Herbert for closing remarks.

Don't let me forget to remind you that we have our annual meeting coming up on October 6, at 10 o'clock here in Lansing, Michigan, at the University Club of Michigan State. If anybody is in the vicinity or could be, we'd love to have you. Probably every bit as important or more important, if you haven't voted your proxies, please find them and vote them. We've got Steve who shared this morning, we have enough proxies in to have a formal holder meeting but we'd still like to get all those proxies in if you've got some proxies that you hadn't voted well, please get those in for us so we can get a full count.

Thank you for staying with us this first quarter. I'm excited and I think we're going to have an interesting year to report. Once again, as Rick said, we look forward to seeing you here in a couple weeks if you can be here. Have a good autumn. Bye now.

Ladies and gentlemen, this concludes today's conference. Thank you for joining. You may now disconnect.