Neogen Corp (NEOG) 2017 Q2 法說會逐字稿

Hello and welcome to the Neogen second-quarter FY17 earnings results conference call. My name is Jason and I will be your operator.

(Operator Instructions)

Later, we will conduct a question-and-answer session and please note this conference is being recorded. I will now turn the call over to Jim Herbert. Mr. Herbert, you may begin.

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

I'll remind you that some of the statements made here today could be termed as forward-looking statements. And these forward-looking statements, of course, are subject to certain risks and uncertainties. The actual results may differ from those that we discuss today. These risks that 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 by live telephone conference, I'd also welcome those who may be joined by way of simulcast on the worldwide web. Following comments this morning, we'll entertain questions from participants who are joined by this live conference.

And I'm joined today by Rick Current, Neogen's -- excuse me, Rick Calk, Neogen's Chief Operating Officer; and Steve Quinlan, Neogen's Chief Financial Officer. Some of you may remember Rick Current was with us for a lot of years, and sometimes I mispronounce the names.

Earlier this morning, Neogen issued a press release announcing the results of our second quarter that ended on November the 30. Net income for that second quarter of this FY17 increased 23% to $11.2 million, or $0.29, per fully diluted share. This is an increase from last year's approximate $9 million that equated to $0.24 per share.

Current year-to-date income for the first six months is approximately $21 million, or $0.55 per share, this compares to last year's $18.4 million, or $0.49 a share. Revenues for the second quarter increased by 14% to $90.7 million, this compares with the previous year's second-quarter revenues of $79.6 million. This increase this quarter was aided in part by some acquisitions.

The quarterly revenue and net income both represent second-quarter records for our 34-year-old Company. On a year-to-date basis, the revenues for the first half of the year increased by 13% to $174.4 million, that compares to last year's $154 million.

Once again, I can say that a dedicated group of employees around the world kept our success record going yet another quarter. This second quarter was the 99th quarter in the past 104 quarters that Neogen reported revenue increases as compared with the previous year. This is a record that now spans 26 years and includes all consecutive quarters for the last 11 years. As I've said in the past, there just seems to be an implied determination that this growth record won't get broken on their watch.

Operating income for the quarter came in at 18.6% compared to 18.4% the same quarter last year. Gross margins, which are of course, a major increment of operating income, settled in at 48.1% as a percent of sales, almost exactly matching last year's second quarter.

Adverse currency translations continued to detract from the revenues, the gross profits, and the operating income. When we last talked about three months ago, I thought that the currency trade winds could be behind us and at least be neutral as we moved through the rest of the year. However, devaluation of the British pound, its relationship to the dollar and the euro, along with the decline in the Mexican peso, have all stirred up headwinds again for the quarter. I'll let Steve give you more of the details on that later in the call.

I could, I guess, stop at this point by pointing out that our strong balance sheet continues to be solid, with growing assets, no long-term debt, and liabilities in a very comfortable position. Shareholder equity has improved by 8% when you compare it to the beginning of the year on June 1.

I'll plan to come back a little bit later in the call and talk about our growth strategy, and give you a view of both the international and domestic environments that we're working in, and talk a bit about programs that we're continuing to grow. But let me stop at this point and give Rick Calk an opportunity to talk about some of the growth over the past quarter in both the Food Safety and the Animal Safety divisions. And it's noteworthy that Rick celebrates his second anniversary this month with the Company. Rick.

Well, thank you, Jim, and welcome to everyone who is listening. Jim's already reported on the overall sales and the profit performance for the second quarter of our FY17. What I'd like to do is provide a little more detail on the performance of our Food and Animal Safety segments, as well as offer some perspective behind the numbers.

As stated in the press release, revenues of our Food Safety segment increased 9% during the second quarter compared to the prior year, aided in part by the acquisition of Deoxi, which reports through our Neogen do Brasil subsidiary. Organic growth for the Food Safety segment was 8% for the quarter.

Food Safety highlights for the quarter include a 27% increase in sales of our rapid test to detect natural toxins. This increase was largely due to the increased sales of tests to detect the mycotoxin's DON and zearalenone in grain, and that includes both wheat and corn grown in the US, Canada, and Europe.

Now, zearalenone is one of the lesser known toxins, but still one of the six mycotoxins of most concern to grain producers and processors. It's important to note that Neogen offers test kits for each of those six mycotoxins.

In a twist, the size of this year's record North American corn harvest is thought to have contributed to the growth of molds that produce these mycotoxins. The exceptionally large harvest has forced producers to temporarily store grain on the ground outside of their normal storages facilities, and do their best to protect the corn with tarps and other means. Unfortunately, molds can thrive in these conditions.

Sales of Neogen's rapid test for food allergens, such as milk, such as gluten, increased 20% in the quarter compared to the prior year. Consumers and regulators around the world continue to increasingly demand that processed food be guaranteed not to contain an unlabeled food allergen.

Now, from outside the food industry, it might seem like a fairly easy demand to meet. But the reality inside the food industry is that production efficiencies require shared production facilities for allergenic and non-allergenic foods.

It's not easy to ensure that non-allergenic foods are not contaminated with an allergen, especially at the low parts per million shown to trigger an allergic reaction. Food allergen testing is critical to help ensure the safety of the food supply for our customers.

Major pathogen outbreaks in 2016 included four outbreaks involving salmonella, three involving listeria, two involving hepatitis A, and one for e coli. Interestingly, salmonella resistant to antibiotics came into play in one of these major outbreaks, and a single e coli outbreak did not involve beef, but flour. Sales of our products to detect pathogens and verify cleanliness were also up in the second quarter compared to last year, as our customer base continues its pathogen detection and its reduction focus.

On the Animal Safety side of our business, we reported a revenue increase for the quarter of 18%. This was largely due to the acquisitions of Preserve International, which happened in May 2016, and Virbac's rodenticides, which we acquired in December of 2015. On an organic basis, our Animal Safety revenues grew by 5% for the quarter.

As we detailed in our previous quarter, we knew we would face a difficult comparison with the prior year due to the temporary removal of our thyroid replacement product for dogs from the marketplace last July. The impact of the loss of this multi-million dollar product will continue to be felt in the third and fourth quarters of our current fiscal year.

Animal Safety highlights for the quarter include our expanding suite of biosecurity products. Our Chem-Tech subsidiary recorded a 22% sales increase in the quarter. This was driven by increasing sales of a new livestock insecticide application system. We acquired Chem-Tech now over two years ago with the belief that its line of insecticides served as a perfect complement to our biosecurity line of rodenticides, cleaners, and disinfectants, and that belief has been borne out.

While sales of Preserve International products, which we acquired seven months ago, may not technically qualify as contributing to our organic sales growth in our financial reporting, we are very pleased to report that thus far, sales of Preserve products have significantly exceeded our internal budget projections.

When we acquired Preserve, we stated that adding Preserve's products, complementary expertise, and customer base strengthened our cleaner and disinfectant presence. Its sales channels were almost identical to our existing Animal Safety distribution and represented an easy fit with our sales and marketing operations. Again, the early returns are showing that this is bearing out.

Now, it's far too early to assess the acquisition of Quat-Chem, which we acquired now only 20 days ago. We acquired the UK-based Quat-Chem, a basic manufacturer of agricultural, industrial, and food processing cleaners and disinfectants to give us a biosecurity, manufacturing, and distribution presence in Europe. It's our belief that we should achieve similar results to those that we have seen and are currently seeing from the Preserve acquisition.

Sales of Neogen's rodenticides into this segment increased approximately 16% in the current quarter compared to the prior year, and our sales of rapid test to detect drug residues in forensic samples rose 98% compared to the prior-year quarter. It's happened globally, due mainly to the new commercial lab business that we're seeing in the US and Brazil.

Now, as I was reviewing the quarter's financial results for our Animal Safety segment, one other number caught my eye. Sales of our patented detectable livestock needles increased 19% over the prior year's second quarter.

Neogen first launched detectable livestock needles in 2002 to address a Food Safety issue that most people don't even think exists, and that's the possibility that a broken piece of veterinary needle could end up in a cut of meat on your dinner table. Now, almost 15 years later, our needles are used in even greater numbers to protect consumers from this threat.

In his comments, Steve will provide some more detail on the second-quarter performance of our GeneSeek Agronomics group, but I'd like to finish up with just a personal note and join Jim, Steve, and everyone here at Neogen in wishing you all the best for the holidays and a prosperous 2017. Jim?

Thanks, Rick. I'll turn the program over to Steve Quinlan and get Steve to give us some color behind the financials. Steve, talk a bit about the currency conversion issues and discuss our international growth and maybe something on the genomic side of the business.

Sure, Jim. Thanks. As Jim and Rick have both indicated, the second quarter of FY17 was solid in most respects, with strong earnings growth achieved despite the continued currency headwinds we've had to overcome, particularly as they relate to the pound sterling and the Mexican peso relative to the US dollar. The pound has declined 17% on average compared to last year's second quarter, with most of that movement following the Brexit vote in the UK in June of this year. The peso was 14% lower, with almost all of the downward movement immediately following the US elections in early November.

The negative impact of the stronger dollar on our comparative results for the second quarter was $2.1 million, and on the bottom line it was about a $0.02 hit. In constant currency, our growth was 17% versus the 14% we reported, and reported overall organic growth of 7% would have been 9%.

On the Food Safety segment, where most of our international operations report, and where the effects of currency movements are primarily recorded and felt, the impact was even more pronounced. Their reported 8% organic growth was 14% in constant currency.

Now, Rick's already discussed the highlights of our growth in the domestic Food Safety business and a good portion of our Animal Safety business. I'm going to focus on the international operations and the genomics business.

Now Neogen Europe, which is based in Ayr, Scotland, had a 33% revenue growth in its local currency, the pound sterling, in the second quarter. Primarily the result of the DON outbreak in grain crops in Western Europe, and the addition of an in-house genomic lab constructed to better serve our European customers and provide us with additional genomic testing capacity. Year to date, revenues have risen 38% in pounds and 17% when those pounds are translated to dollars.

Neogen do Brazil had a very strong quarter with revenues up 64% in the real for the quarter, and the real actually strengthened against the dollar in the quarter, resulting in a 93% increase in revenues after translation to dollars. The increase was primarily the result of forensic test kits sold to testing labs in Brazil and increases in sales of the Company's line of dehydrated culture media. Year to date, revenues are up 54% in local currency and 66% in dollars.

Revenues at Neogen Latinoamerica, our Mexican subsidiary, rose 3% in the local currency, the peso, but declined by 11% when translated into dollars. The prior-year quarter was exceptionally strong with revenue increases of 59% in pesos. Year to date, revenues are up 20% in pesos and 4% in dollars.

The genomics testing business that's reported through the Animal Safety segment was up 24% for the quarter on the strength of incremental poultry business, gains made in testing services to the commercial dairy market, and research projects on goats and sheep. This is the revenue directly generated from the Lincoln, Nebraska location, where, helped by continued investments in automation, we were able to process over 200,000 samples last month for the first time ever. The lab has now processed almost 2 million samples in the past 12 months, a doubling of volume in just over two years.

Worldwide, revenues from genomics increased 31% in the quarter, due to the additional capacity provided by the new lab at Neogen Europe and the purchase of Deoxi in Brazil in April of this year.

Looking now at the corporate financials, our gross margins of 48.1% compared to 48% in last year's second quarter. Favorable product mix, particularly the result of the DON outbreaks in North America and Europe, which Rick discussed earlier, and strong allergen and forensic kit sales was able to overcome the loss of the higher margin ThyroKare business and the negative impact of currency movements. For the year to date, margins were 48.2% versus 49.2% last year.

Operating expenses overall were up 13% for both the second quarter and the year to date. Sales and marketing expenses rose by 10% for both the quarter and year to date, with the largest components of this increase, commissions, shipping, and royalty expense, all of which are based on the revenue increase, and higher salary expense, the result of increased staffing and compensation increases.

General and administrative expenses rose 22% for both the quarter and the year to date. Recent acquisitions account for almost half of that increase, with the largest components, non-cash amortization of intangible assets acquired and related legal expenses.

R&D expenses were 6% over the prior year and rose 5% for the year to date as the Company continues its active investment in new product development, primarily in the Food Safety segment.

As Jim mentioned, our operating income rose 15% to $16.9 million, and that's 18.6% of sales, compared to $14.6 million, or 18.4% of sales recorded in last year's second quarter. The 18.6% as a percent of sales that we recorded this quarter compares favorably to the 17.6% achieved in the first quarter of this fiscal year. Other expense for the second quarter was $81,000 compared to $420,000 in the prior year's second quarter.

Currency losses of $424,000 in the quarter were somewhat offset by interest income of almost $300,000. Currency losses recorded in last year's second quarter were about $560,000, which was partially offset by $51,000 of interest income. The interest income in this current quarter is significantly higher compare to the prior year due to interest received on funds on deposit in Brazil, rising rates in the US, and higher cash balances.

Our effective income tax rate in the quarter was 33.4% compared to 35.6% in the prior-year second quarter. This year's provision includes a tax credit for research and development activities. In the prior year, the credit had not yet been approved by Congress, so it was not recorded until the third quarter. For the year to date, the effective rate was 34.1%, compared to 35.6% in the prior year.

We generated about $9.3 million in cash from operations during the quarter and invested about $2.8 million of that in property and equipment. For the year to date, we generated $29.5 million from operations and have spent $6.2 million in property and equipment.

Our inventory balances have increased by 11% since the beginning of the fiscal year, largely due to continued efforts to build up key inventory levels, both domestic and international, to minimize back orders and improve our service levels. Accounts receivable balances declined in spite of the increase in revenues, and our DSO remained constant at 63 days.

So overall, it was a very solid quarter and we continue to be enthused about the prospects for the remainder of the fiscal year. Jim?

Thanks, Steve. I don't want to belabor the currency translation situation that Steve's already covered, but I think we certainly can't ignore it in our planning efforts. Just as a reminder, for the first half of the year, our international sales were approximately 34.6% of total revenues and that's flat relative to last year's 34%.

So however, every country in which we have our own Company base, as Steve was referring to, is enjoying nice increases in their local currencies. We pick those locations or those countries because we think they represent the best international growth opportunities as we look out over at least the next decade. We do business today in about 100 countries around the world. Obviously, some of these are bigger than others.

Last week I did, as a cowboy would say, a gate cut on the sources of that international revenue and looked at all of the countries where we are doing $1 million in revenue or greater on an annual basis. And there were 24 of those countries in that count, and all but five of them are showing nice increases in revenue as compared to the same period last year. So I think we're in the right [tranche].

The continued rise in the value of the dollar against international currencies is, of course, problematic. The dollar hit a 14-year high against all the major trading currencies this last week, and as Steve pointed out, it was after the move by the Fed to raise the tax rates and piled on top of the reaction that we had, that came out of the US elections. However, these are the cards that are dealt to us, and as usual, we'll play them.

A significant portion of our product is produced in the US and shipped throughout the world. We'll have to continue to be cognizant of competitors who are producing products in countries where we market. On the other hand, the dollar will now buy more imported products, and the stronger dollar will also make acquisition opportunities outside the US more favorable.

As an example, Rick or Steve talked about the recent acquisition of Chem-Quat, the cleaner disinfectant business serving the animal protein market. This acquisition was priced in pound sterling but it took fewer US dollars to close than it would have just a few months earlier.

We're continuing to look at other strategic acquisitions outside the US because we think it's smart and is a part of our growth strategy. However, if it costs less US dollars to do that, all the better.

The US farm economy will also keep our attention as we move forward through the next 12 months. Bumper corn and soybeans crops have depressed prices, and that's apt to put a buying damper on some farm and ranch purchases. However, we think they'll likely be felt mostly in the small retail market where there's a lack of discretionary funds that may cause some farmers and ranchers to postpone purchases.

On the other hand, that big corn crop is still trying to get in out of the weather, as Rick talked about, and has piled up, a lot of it piled up outside with tarp [oline] covers. I think that's likely to open up more room for the ethanol l producers to expand. However, this will still need -- require some testing. Just to quickly cover that, the corn that goes into ethanol production yields about 30% of its original weight in residue that's used in animal feeds. That means that any toxin that was in that original grain is now multiplied by a factor of 3. So testing for that toxin becomes even more critical.

One of the trends that we've seeing in the last couple quarters has been increase in the synergy between our various products. From the very inception, it's been our intent to provide solutions for Food and Animal Safety all the way back inside the farm gate to the dinner plate. Food producers are also becoming more and more integrated.

As an example, we've been supplying a major dairy processor for the past number of years with diagnostic tests used at the processing plant to help maintain safety and quality. However, we're now back inside the farm gate and are supplying them with biosecurity products for, like, cleaners and disinfectants and insecticides.

This month, we began to work with that dairy processor to do genomic sampling of 40,000 milk cows that are a part of their supply herd. It's their desire to make sure that the genetics used by the farmer suppliers that are providing them milk is of the highest possible quality.

Another similar synergy example is with the worldwide multinational company where we began years ago providing them with tests to detect the presence of aflatoxin in peanuts that were going into a confectionery product. That spread to their pet food business, where we support them with tests to ensure the safety of their animal feed.

This group also sells testing information to customers regarding the breed of their pet dog. We do that testing, because they are also in the veterinary clinic business. We supply veterinary instruments such as needles and syringes. And now, we've just launched a cooperative program using animal genomics to help the veterinarian provide wellness advice to the pet owner. What a long ways from that original start when we were providing diagnostic tests to detect aflatoxin in peanuts.

In conclusion, I can safely advise you that the strategy that got us here will continue to support our future growth. We'll continue to develop new products based on advice from our customers. Most of our market areas are growing, and we'll keep up with that market growth and we'll try to take a bit of that market share away from a competitor or two.

We'll continue making strategic acquisitions at affordable prices, and we'll pay particular attention to making certain that those acquisitions can be effectively integrated. I think we've done 35 acquisitions since the year 2000 and all of these are still a part of revenue production.

The last two growth strategies might be tied together a bit, as we look at expanding our international reach along with the acquisition side. The current value of the dollar against foreign currencies could help give us a boost with these acquisitions.

Let me stop at this point and open up for questions. Feel free to direct questions to Rick or Steve or to myself.

Thank you.

(Operator Instructions)

Our first question comes from Tony Brenner from ROTH Capital Partners.

Thank you. Good morning.

Good morning, Tony.

A couple of questions. First of all, you mentioned that the forensic drug residue tests were up 59%. What's driving that big increase?

It's coming -- most of that's coming out of Brazil, so it's sales into our Brazilian or through our Brazilian subsidiary. And then, some of it is coming direct to labs from our Life Sciences group in Lexington. It has to do mostly with commercial transportation. Drivers of anything that moves in Brazil now are required to go through drug tests on some sort of a regular basis. That's been a piece of our business all along.

We began, Tony, you may remember, developing those diagnostic tests way back early to detect drugs of abuse in racing animals. We still market those products in that way. Some of those also find their way over to the human side, and that's what this is an example of.

Okay. Regarding allergen tests, are a large portion of those US based or is the global profile similar to your total Food Safety profile?

I don't know, Steve may have some hard facts. But it's widespread, because 32% of our revenue is outside the US. So that explains why most -- probably the same revenue relation. I don't know, Ed Bradley could probably tell me closer, but it's widespread.

The more developed countries, of course, are more concerned about allergens. We get more allergen business in Europe, a lot of allergen in the EU countries and a lot here. And a lot of it is coming through the multinationals where we've got multinational companies that are operating in a lot of places.

Less concerned today in Asia. Less concern today in some of the poorer countries in South America. But as you'd expect, where people have a full stomach, they worry more about the safety of what they're eating.

Okay, and lastly, is there any notable progress in China or India that you might share?

Patience is still the buy word in India. We're convinced we're in the right place. We got a lot of activity. Revenues, Steve, are -- I don't know whether you got the exact revenues, they escape me at the moment. But they're I think maybe up a tad, but they're small enough it really probably doesn't matter.

China continues to get stronger. Our China market and what's happening in China, what's happening in Food Safety there. What's happening in food supply there is beginning to show. That is the country that's going to have the fastest growth of that middle-class economy as we look out over the next 10 years. India's going to be behind them in total numbers, but probably not with a disposable income. We continue to be in the right place.

Steve, you got a number to add to that?

For China, we're up about 11% for the year, and really running right to our budget. We're somewhere north of $2 million in revenue there.

Thank you. Our next question comes from Brian Weinstein from William Blair.

Hi. Good morning. This is Matt Larew on for Brian. Thanks for taking my question. First, on the genomics business, obviously it looked like a record quarter here for revenue. Could you give us a sense of what the gross and operating margin profiles look like at this point in genomics? And then what you anticipate that to be at scale in whatever way you define scale?

I don't know how you define scale. It was -- when we turned in 218,000 samples the month of November, I wanted to make sure that they didn't transpose the number. That's an incredible amount of samples to be run.

We've done a lot to improve our costs out there. It's, a lot of it is people related. We've got robots in that are amazing that can take those samples and manipulate them, do the extractions, put them in the right places. Of all of our businesses, the equipment costs and demands there are the greatest. But that's fine.

The -- I don't know, Steve, you got a number where we think we're -- we are working there to get to the 20% net operating profit, and it has a little bit of different increment in, we look at -- we take gross margins and then we look at operating cost. And where we've got less or more sales and marketing expense or G&A or R&D to try to end up with the 20%, we're not there yet, but we're getting closer.

Our supply cost is coming down. Our raw material cost is coming down. We'll have a better feel on that as the year wears along. I think we expect, Steve, that number to get [smaller]. The raw material cost as a percent of sales should go down in the last half of the year as compared to the first half of the year.

And it's a little bit of integration translation. We put in -- we have operator service lab in our Ayr, Scotland place, and we're pretty proud of what they've been doing but they weren't doing any direct genomics over there. They were taking genomic samples, shipping them to Lincoln, Nebraska. We did the work and sent the results back.

We're now in a position there, or now are processing our own samples in Europe. It shortens the turnaround time, and it also relieves a little pressure on what was happening in Lincoln.

It will take a few quarters. It will take a few quarters to get that shaken down. It's profitable; I like what's happening there, but it's a little too early to pronounce victory.

We acquired the leading animal genomics lab in Brazil with Deoxi back a few months ago. It's still small. So the economies of scale have not picked up there yet. They will pick up, and we'll put more automation into that operation too.

So did that -- that sounded like a politician's answer to a simple question. Did I get close to what you wanted to know?

Yes. Thanks for that, Jim. Second one here. Just thinking about your biosecurity portfolio, just curious, following the recent acquisition and obviously the Preserve one before that, do you have a sense of what type of market share you have in at least what you define as your biosecurity business? And then also what you think the size of that business is at this point.

Ask me that question three months from now, I'll be able to give you a better answer. Depending on where you are, there's a lot of little players in, particularly in the cleaner and disinfectant business. I think the major players, a couple of the major players in the C&D side in the US that are competitors of ours, I think we're probably bigger than both of them now. But they still have some substantial interest in the marketplace.

There's little guys that I refer to as guys with 50-gallon barrels and boat paddles and they're making it up in their garage; they're beginning to disappear as regulations have gotten tighter.

In Europe, there's still consolidation happening over there. We know of several companies that are in part of the European theater that probably would be -- could be sold or could be bought today.

We're going about trying to build it on a uniform basis. So anywhere in the world that you go if you wanted to buy a disinfectant that would control a certain disease or a certain organism, you'd find it under that name and registered in that country. So that's a part of what we're doing as we look at acquisitions, both domestically and international.

I think we probably will find some opportunities, more opportunities internationally for some more biosecurity acquisitions. As I said in my prepared comments, that's particularly good because we can buy more with the dollar today than we could a year ago in most markets.

Okay. Thanks, Jim. My last question is for Steve. Steve, just given the growth in this quarter in the mycotoxin business and the allergens business, could you just remind us what the size of the businesses are? And then, I believe they have slightly higher gross margins than other products in Food Safety. Could you give us a sense of what those look like?

Sure. The mycotoxin market is -- we're probably, given the growth this year, we're probably going to be somewhere in $35 million or so, mid-$30 millions. The allergen market is not quite as big, but be north of $20 million. And margins for them are -- these are some of our best margins, they're strong.

Some of those are 60 plus.

Okay. Thanks for taking the questions, guys.

You almost made us give more information than I want for competition, but.

Our next question comes from David Stratton from Great Lakes Review.

Hi, thanks for taking the question. Regarding the DON outbreak and the other toxin that I can't pronounce, what does the time line look for something like that? Is that going to go into the third or fourth quarter or have all the test samples been applied currently?

This crop's got a long tail on it. Rick talked about the part of the crop, particularly domestically, mostly in the US. We've got a lot of corn on the ground. It's on concrete slab somewhere and it's got a tarp over it, but that tarp may have a foot of snow on it now.

And some of those molds that grow in the hot, dry weather cause one toxin. There are those that grow in cold, wet weather that would also leave a toxin behind. There's some of that. That's a little of what I was referring to when I talked about the ethanol producers.

They're not going to -- you say they're going to make alcohol out of it so does it matter? But one-third of that grain is going back in the animal feed, so it does matter.

I think the crop has been tested, but there's going to be ongoing testing, particularly with this out-of-position grain that can't get to the river to export. And is going to -- it may stay there on the ground for a while.

I think the wheat, the wheat's in. It's safe. Some of that goes back early. But anybody that's making flour today is going to continue to be testing, particularly in those areas where there's troublesome areas.

We provide, every Monday morning during the growing season, reports to millers and grain handlers, buyers, so they know where the trouble spots are in parts of the country. For instance, Southern Indiana and Southern Illinois have had a big mycotoxin problems and they'll be there. They'll be testing that grain until it's used up. Whereas Nebraska and the Northern plains, was much cleaner.

It's not a normal year. I think we'll benefit, we'll continue to benefit, not to the extent we have this quarter, but we'll continue to benefit as we move into third and fourth quarters.

All right. Thank you. And then when we look at the ThyroKare, did you break out what that was in the prior year?

We did. That was about a [$6.5 million] product for us in FY16 and pretty evenly spread, $6.5 million for the year.

And then in 2Q 2016, was it even across the year, a steady run rate?

Yes, it's about $1.5 million a quarter for every quarter.

All right. And then were there any new products this quarter that have been really catching your eye, something that's garnering attention?

No, I would say there's a number of introductions coming out of the pipeline. We've done some -- we're continually working to improve products that we already have. Some of our products now are in their fourth or fifth generation where we figured out, particularly on the diagnostic side, where we figured the buy word there is faster, easier, cheaper. That's the buy word.

So we're continuing to develop products that -- for the industry that they can get results faster and easier. And we've got some of those introduced into the market. We'll be cleaning up another section with some good, nice improved products. I don't know, I think probably between now and the end of January that will continue to have an impact. Some new products that are coming out with yet in this year, but I don't think I want to talk much more about those now.

Alright, thank you very much.

Thank you. And our next question comes from Charles Haff from Craig-Hallum.

Hi. Thanks for taking my questions. I had a question first on Quat-Chem. So when you've outlined your forecast for Quat-Chem, how do you think the growth is going to unfold there? Is it now that you've owned it, is it going to be right off the bat or is there going to be a lag for a couple quarters? Or can you just help us understand the ramp that you're expecting for the next year or two there?

Well, thank you, Charles, good question, and you know, having followed us for a while what our strategy is in acquisitions. It's easy to acquire them, more difficult to integrate them. We have a standing rule around here: we don't change -- when we buy a company, we don't go in and start making changes. We try to leave it alone for the first year and figure out what we know about it and not screw up what we just bought. That will certainly be true of Quat-Chem as we look at over the next three to six months there.

This is a new market area for us. We don't have -- this is product going into Europe. We don't have a lot of cleaner and disinfectant products that we're selling there now. We've got to add new distribution. We've got some good distribution. We need to add other distribution to grow that business for Quat-Chem, and we're getting lined up to do that.

The original owners will be leaving the business before too long, so we have to be in a position to handle them. There are some products there that have a worldwide -- they're attractive worldwide, but it would be an EPA-type registration. So we'd have to register those products in countries where they're not registered today.

They had -- Quat-Chem had essentially no real business at all in North America. So nothing in US, Canada, and Mexico, which was great for us. We've got a pretty good toe hold there. But we need a stronger toe hold for Europe.

That one will be -- it will be the flag bearer for our European biosecurity business that's based in Europe. We'll add to that. It should be the platform that will carry further production of cleaners, in addition to cleaners and disinfectants of rodenticides and insecticides. So we'll either make those somewhere else in the world and ship them in there, attach them to that platform, or we'll find a local production over there. At this point, we're wide open to all the possibilities.

Okay. And the one aspect I'm very interested about for Quat-Chem is in China. So they have about $0.5 million of revenue over there, and that seems like a nice size shot in the arm to your pretty less significant revenue base that you have in China right now. I'm just wondering how Quat-Chem fits in with your China strategy or is it just came along as part of the acquisition? Or is there's something maybe larger that you're signaling on the China side.

No, I'd say it just kind of came along. It's too expensive to ship water from Manchester, England to Shanghai, China. We're in business there. We do share some production operations between China, South Korea, and India. We're producing product in India now that's going to China under toll manufacturing of our own. They've got some business that was going in there, but it was more of a technical basis. It's probably not anything that has much growth opportunity, Charles.

Okay, and then a question for Rick on Food Safety modernization (inaudible). I think previous comments you've made are saying a gradual uptake, if you will, from the final regulations now being all done. Is that still your current view? Are you seeing any need to revise your comments over the last couple quarters that you've made to us?

No. Thank you for the question. I don't think we need to revise those at all. I think there's still some more question with the change in organization at the top that we'll have to see how that plays out over the next year. But if you believe what he's been saying, what he's been saying publicly, he may try to put the brakes on FSMA a little bit. We believe that it's fully rolled out, and it's going do be a matter of enforcement in how they're going to do that going into the next couple of quarters.

Thank you. And then on animal genomics for the vet market, you mentioned that you are starting to sell there. That seems to be very interesting to me. Are you using distributors for that or is that going to be a direct sale to vets? And is that something that you could see being material to your business, say a couple years from now?

Well, no, it won't -- we will not use distributors. At this point, it's testing service, it's not a testing product that we can sell. So it's samples that come back to a lab somewhere.

Just like today, we run what we jokingly call the test to make sure your poodle's really a poodle. I think we can detect with a cheek sample from a little dog, we can tell you whether it's any one of a 133 different varieties of dogs. And this will be the animal wellness.

As you look at what's happening with the growth of veterinary clinics, PetSmart, every PetSmart of any size has got one in it. There's a couple of other major pet clinics out there that make it easy, tying together sometimes pet stores and pet supplies.

Those vets are looking for an opportunity to provide wellness treatment for the animal, not bring them in once a year to get their rabies shot. And it also makes a lot of sense too. We try to look at how to make animals healthier and live longer and they become a part of the family.

Those genomic work tests that we're doing there, at least for now, would be samples that a vet might send in, just like we're getting samples for determining parentage. We might at the same time, if we know it's a Labrador retriever, we know if it's carrying the genes for hip dysplasia, for example. But at this point, vet side, for veterinary use, would be for companion animals.

Okay. Well, thanks for taking my questions.

Thank you for your continued interest.

Our next question comes from Kurt Kemper from Hilliard Lyons.

Thanks for taking my question. I won't make you divulge any more information on that gross margin, but I just got a couple quick ones for Steve. Earlier this year, I think you guided to around a 36% effective tax rate. Has that changed at all?

It's appearing that may be a little bit on the high side. We were probably conservative when we were talking about that. I think we're probably going to come in somewhere 35%. I think 35% might be a more accurate, more refined number for you, Kurt.

Okay. And then what were the revenues for the GeneSeek International that reports through Food Safety for this quarter?

Give me a second.

It's hard to remember those because they ebb and flow. We're almost through December and now we're trying to remember what happened last month. I can tell you what happened last week, but I can't remember for sure what happened last month.

We'll come back to you on that one, okay? Maybe we'll find it before the end of the call.

That's all I had. Thank you.

Thank you.

Thank you.

(Operator Instructions)

Our next question comes from William March from Janney Montgomery Scott.

This is Bill on for Paul. How you doing?

Good.

I just have one question. Looking at the balance sheet and free cash flow and acquisitions, how do you think about returning cash to shareholders just as the cash balance on the balance sheet continues to rise? Thanks.

My answer's the same as it's been now for, what is it, 15 years? When we get to the point that we think we can't make money for you by keeping your cash and growing the business, we'll start sending you some back. We still think there's some great opportunities. We are building cash.

But I guess we'll get that question more often as interest rates improve. But there's still pretty -- if I sent you the money back, if you put it in time deposit, you still wouldn't be real proud of it. I think we can do more.

The problem is with cash dividends is once you start, you can't quit. Some people say oh, yes you can, but that has been my experience with that. We think we've got use for that cash.

Thank you. We have no further questions. I will now turn the call back to Mr. Herbert for closing remarks.

Okay. Well, thank you all for your continued interest in Neogen and the support that so many of you have provided us during this past year that's led to our successful growth. I wish you all a happy holiday season and certainly a prosperous new year and plan to give you the same kind of results going forward. Question, Steve?

I wanted to say the question from Kurt earlier, it's about $2.6 million, Kurt, if you're still on the call, in genomics for that question.

Good. Thanks, folks. Have a good holiday season.

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