Neogen Corp (NEOG) 2017 Q4 法說會逐字稿

Hello, and welcome to the Neogen Fourth Quarter and Year-end 2017 Earnings Results Conference Call. My name is Eric, and I'll be your operator for today's call. (Operator Instructions) Please note that this conference is being recorded.

I will now turn the call over to Jim Herbert. Please go ahead, sir.

Thanks, Eric, and good morning and welcome to our regular quarterly conference call for our investors and analysts. And as Eric said, today, we'll be reporting the results of our fourth quarter that ended on May 31 and of course, the company's 2017 fiscal year-end.

And I'll remind you that (inaudible) that some of the statements that are made here today could be termed as forward-looking statements. These forward-looking statements, of course, are subject to certain risks and uncertainties and the actual results may differ from those that we discussed today. These risks 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 also welcome those who may be joining by way of the simulcast on the World Wide Web. Following comments this morning, we'll entertain questions from participants who are joined on this live conference. And I'm joined today by Rick Calk, Neogen's Chief Operating Officer; Steve Quinlan, Neogen's Chief Financial Officer; and John Adent, Neogen's newly announced Chief Executive Officer. John has been with us now for only about 24 hours, so we've not asked him for any prepared comments, but I would like to take the opportunity to welcome John and to introduce him to this group. John will replace me as CEO, but I'll remain as Executive Chairman and I'll work closely with John in transition of our responsibilities. I'm excited that John joined our leadership team, to bring his strong background to many of our activities, both domestically and internationally.

Until recently, John served as CEO of Animal Health International, a $3.3 billion animal health distributor, a subsidiary to the Patterson Companies and a significant Neogen customer. At the time, John joined Animal Health International, it was a small private company that was started by veterinarian about the same time Neogen began. Under John's leadership, revenues more than quadrupled over the following decade. John began his career with management responsibilities by the former Ralston Purina company, developing animal feed, manufacturing and sales operations in China and the Philippines. When Purina spun off that business to 4 mega brands, John continued in his management role. And this time, in the European division, managing 22 different manufacturing facilities and the sales organization and operated throughout Spain, Portugal, France, Italy, Turkey and even into South Africa.

John and I will share responsibilities initially, and I'll be closely involved in the transition. And I'll be paying particular attention to research and development and our corporate development activities.

Now for the great news of the fourth quarter and the year-end. Earlier today, Neogen issued a press release announcing the results of our fourth quarter, which of course, ended on May 31, which is also the end of our 2017 year.

Net income for the fourth quarter increased 27% to $12.5 million or $0.32 per fully diluted share. This compares to $0.26 per share for the fourth quarter of last year. Net income for the full 2017 fiscal year increased 20% to $43.8 million or $1.14 a share compared to the prior year's $36.6 million or $0.97.

Moving to the revenue side, the revenues for our fourth quarter increased by 10% to $98.8 million compared to about $90 million in the prior year. Revenues for our entire fiscal 2017 year increased 13% to $361.6 million, from last year's $321 million. So to kind of boil it down in a nutshell, we increased the top line revenues for the year by 13%, and the bottom line net income by 20%.

As you'd expect, both revenues and net income for the fourth quarter and for the fiscal year established new all-time highs for our company that celebrated its 35th birthday in June. Once again, I'm delighted to thank our dedicated group of about 1,500 employees around the world who kept our success record going for yet another quarter. This fourth quarter was the 101st of the past 106 quarters that Neogen reported revenue increases as compared to the previous year. And by the way, this record covers all consecutive quarters for the last 12 years.

Our gross margins for the fiscal year as was reported in the press release were about 47.6%, which is about same as it were last year. Operating income was almost $65 million in 2017 for the year, that was about 18% of sales compared to about 17.6% last year. And a quick look at the year. Our adverse currency translations continued to detract from revenue and gross margins and, obviously, operating profit for the quarter but also for the year. Once again, we played the hand that was dealt to us and still turned in good results. These results look even better and when you measure them according to local currency. I'll let Steve give you more of those details later in the call.

I think I'll stop at this point by simply pointing out that our balance sheet continues to be solid with nice asset growth, shareholder equity, improved by 17%, when compared to where we were at the beginning of the June 1 year. I plan to come back a little bit later in the call and talk about our growth strategy and give you a view of our international growth and some of our corporate development activities.

Let me stop at this point and give Rick Calk an opportunity to talk about some of the growth of our Food and Animal Safety groups, and then Steve Quinlan to provide you some color behind the financials and I guess the currency conversion story, and to report a rather spectacular progress of our worldwide genomics business. So Rick?

Well, thank you, Jim, and welcome to everyone who's listening. Jim's already reported on the overall sales and profit performance for our fourth quarter as well as our entire 2017 fiscal year. I'll try to provide some more detail on the performance of our Food and Animal Safety segments as well as offering you a little perspective.

As stated in the press release, revenues for our Food Safety segment increased 22% during the fourth fiscal quarter when compared to the same quarter of the prior fiscal year. For the entire fiscal year, revenues increased 17% when compared to the prior fiscal year. These results reflect the adverse impact of strength of the U.S. dollar as compared to other currencies. Neogen's international operations report through the Food Safety segment, and Steve will provide more detail on the effects of the adverse currency translations in his presentation.

On the flip side, the 2017 increase in revenues for our Food Safety segment were aided by the company's acquisitions of Quat-Chem and Rogama during the fiscal year. The recently acquired companies report through Neogen's Food Safety operations in Scotland and Brazil, respectively. Organic growth for that segment was 9% for the year. And if you exclude the adverse currency effect on the revenues, the increase in our organic growth was 14%.

Food Safety highlights for the year included 19% increase in the sales of our rapid test to detect natural toxins. As I've mentioned on prior calls, this increase was largely due to the increased sale of tests to detect the mycotoxins DON and zearalenone in corn and wheat grown in the U.S., Canada and Europe. Now increased testing of the existing grain stores will continue until the current grain crops are harvested, mostly in the second quarter of Neogen's 2018 fiscal year. And early reports for the new grain crop indicate mycotoxin concerns in some global market areas, but it's really too early to accurately assess the amount of extra mycotoxin testing that might be required for this year's crop.

For the year, sales of Neogen's test kits to detect food allergens such as gluten, milk and peanuts increased 16%. This increase was aided by increasing global food allergen regulatory efforts and strong sales of Neogen's product to detect 6 tree nuts with 1 test. Our test for tree nuts has been on the market for 2 years now, but the 2017 fiscal year saw a significant jump in its market acceptance and its use. In just minutes, our test can simultaneously detect almond, hazelnut, pecan, walnut, cashew and pistachio residues. That's a huge timesaver for companies that test for more than one tree nut at a time.

Now those of you who have closely followed Neogen know that our Animal Safety segment has faced difficult comparisons to the prior year due to lost sales of significant products. In July of last year, we removed our thyroid replacement product for dogs from the marketplace. The impact of the loss, which had sales of $6.2 million in fiscal 2016, was felt throughout our 2017 fiscal year.

During the fiscal year, we also had an early termination of a distribution agreement of a significant cleaner and disinfectant product line, which resulted in lost sales of $1.4 million in 2017. These products have now been replaced with Neogen's own branded product, and we expect to see great improvement.

That said, we knew our Animal Safety segment would be challenged in fiscal 2017 to try to match our fiscal 2016 sales performance. For the year, our Animal Safety segment recorded a revenue increase of 9% when compared to 2016, aided in part by the May 2016 acquisition of Preserve International's cleaner and disinfectant business. The segment's organic growth was flat compared to the prior year.

Highlights from our Animal Safety segment for the year includes the company's sales of rapid test to detect drug residues and forensic samples. Sales of these kits rose 34% compared to the prior year due to a significant increase in sales of our drug detection kits to U.S. commercial labs and to meet the requirements for drug testing of commercial drivers in Brazil. The Animal Safety segment also recorded an 11% increase in sales of our patented D3 Detectable Needles, which are engineered to be more resistant to breakage and detectable in standard metal detectors should they ever break off.

Our Animal Safety group continues to benefit from the Raised Without Antibiotics movement throughout the U.S. It's estimated that approximately 70% of all antibiotics used in the United States that are important to human health are used in livestock. An increased focus on improvement of housing conditions has led producers of chicken and pork to increase the use of our rodenticides, our drinking water treatments as well as our cleaners and disinfectants. The importance of biosecurity is now understood by our customer base as critical to both safeguarding the health of livestock on the farm and the safety of food throughout the global food chain.

Going forward, our fiscal 2017 will be remembered as solidifying our foundation as an important global developer and supplier of biosecurity expertise and products, including cleaners, disinfectants, insecticides and rodenticides.

We believe biosecurity fits extremely well within our mission of providing food and animal safety solutions and is within our operational capabilities. We're very excited about where our newly expanded biosecurity business can take us.

In his comments, Steve will provide more detail on the fiscal 2017 performance of our GeneSeek agronomics group, which also falls within our Animal Safety segment. Steve?

Thanks, Rick. As Rick and Jim have both indicated, we were very pleased with our results for the year, which were solid. Before I talk about GeneSeek, I want to talk a little bit about the impact of currency translations on the company for the year. We've talked about the impact each quarter for the past 2 years, and we'll talk about it again today. Hopefully, we won't be talking about this issue in 2018.

The most significant negative currency impact to our revenues came from the pound Sterling, in which we conduct a good portion of our European business, which was worth 14% less this year versus the dollar on average than last year, with the biggest part of that decline occurring as a result of the Brexit vote in the U.K. last June.

The euro was up and down during the year, declining at one point to near parity with the dollar, before recovering somewhat and was down 2% on the average for the year. The Mexican peso declined 12% on average and continues to be somewhat volatile. At one point during the year, the peso fell to almost 22 to the dollar, before closing the year at 18.5 to the dollar. The Brazilian real, on the other hand, strengthened significantly during the year, and was 13% higher on average than this time last year, helping boost the comparative revenues and earnings of our Brazilian operations.

Overall, the negative impact of the stronger dollar on our comparative revenues for the fourth quarter was $1.5 million. And for the full year, was about $7.2 million. The negative impact of translations was about $0.01 per share for the quarter and $0.06 per share for the full year.

In constant currency, our overall growth for the year was 15% versus the 13% we reported. The good news here is that the dollar is declining somewhat recently, and we've had -- we've now anniversaried the decline in the pound, absent some unforeseen market shock, currency should not impact us to this degree in fiscal 2018.

Now Rick has 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 give you some highlights on the genomics business, and then give you some financial color on a consolidated basis. The genomics testing business continued to develop nicely this year, with worldwide growth of 19%. This business headquartered in Lincoln, Nebraska, has expanded significantly in the past year as we've added capacity in Scotland to serve the growing European market, and then purchased Deoxi Labs, a leading genomic laboratory in Brazil, in April of 2016. Volume gains have been made on the strength of incremental poultry business, significant continued growth in the commercial dairy market, resulting from market success with our heifer replacement testing service, university research projects and growth with the registered beef cattle associations.

We recently purchased a building adjacent to our existing operation in Lincoln, to accommodate a need for additional space, and we'll also be making significant investments in information technology this year to support the growing data requirements as the genomics business continues to expand.

Looking now at the corporate financials. Jim mentioned that our gross margins were 47.6% for the year, this is the same as last year. We had strong organic growth in the Food Safety segment and favorable product mix, primarily the result of the deal and outbreaks in North America and Europe, and strong allergen and forensic kit sales. These gains, along with improved gross margins at GeneSeek, resulting from improved chip cost, helped us overcome the loss of the higher-margin thyroid care business and the negative impact of currency movements.

Our operating expenses overall rose 7% for the fourth quarter and 11% for the year. Sales and marketing expenses rose by 5% for the quarter, 8% for the full year. With the largest components of these increases, commissions, shipping and royalty expense, all of which are based on revenue increases and higher travel and salary expense, the result of increased staffing.

Our general and administrative expenses rose 12% for the quarter, and were up 17% overall for the year. Recent acquisitions account for almost half of the quarterly and year-to-date increases, with the largest components, salaries, noncash amortization of the intangible assets acquired and related legal and professional expenses. Depreciation, primarily related to information technology software and equipment expenditures was also a component of the increase for each comparative period.

Research and development expenses were up 5% for the year as the company continues to invest in its product development programs in both new products and enhancements to existing products, primarily in the Food Safety segment. Our operating income for the fourth quarter was $19 million or 19.2% of sales, an increase of 22% compared to the $15.6 million or 17.3% of sales recorded in the last year's fourth quarter. And for the full year, as Jim noted, our operating income rose 15% to $64.9 million or 18% of sales compared to $56.4 million or 17% -- 17.6% of sales in the prior year.

Other income for the year was $1.7 million, and this compares to expense of $874,000 in the prior year. Included in the $1.7 million income was $840,000 in net interest income, significantly higher than the prior year due to interest received on funds on deposit in Brazil, higher cash balances and rising interest rates on those balances.

The company also recorded a gain of $660,000 related to the settlement of a licensing agreement during the year. In fiscal 2016, currency losses primarily in Brazil and Mexico, were $1.3 million and this was offset by interest in royalty income. Our effective income tax rate for the year was 34% compared to 34.2% last year. We generated $15.5 million in cash from operations during the quarter and $60.7 million for the full year. While investing $35 million in our 2 acquisitions and another $14.6 million in property and equipment.

On the balance sheet, our inventory balances increased 14% in fiscal '17, largely due to continuing efforts to build up our key inventories, both domestically and internationally, to minimize back orders and improve our service levels. In addition, the company acquired $2.2 million of inventory from its 2 acquisitions. But we're going to be working on programs to improve our inventory turns in fiscal 2018.

Account receivable balances rose only $900,000, in spite of the 13% increase in revenues. And our DSO improved from 61 last year and to 60 days this year-end.

Overall, the solid ending to a strong year, and we're excited about the company's prospects for 2018. Jim?

Thanks, Steve. And without being repetitive, 2017 growth continued to be good despite those few short-term setbacks that we talked about. We lost some revenue from sale of the small animal pharmaceutical product but we expect to recover this late in the fiscal year. We dropped distribution on some new products that had some impact on revenue, but we did that in favor of our own products that will contribute several times more income in the year ahead. But our international growth in sales and our acquisition progress this year were great and had to be in the same bundle. In December of 2016, we acquired Quat-Chem, a well-established agriculture cleaner and disinfectant company located in Central England. We also acquired Rogama, an insecticide and a rodenticide company that's located in Brazil. Of course, both of those added to our worldwide strategy and biosecurity that supply the animal protein market with cleaners, disinfectants insecticides, rodenticides to help produce higher-quality safer animal products.

This also added to strong international growth in both -- we're both still down to strong management teams that we have in both Neogen Europe and at Neogen do Brasil. In total, our international sales for this past year accounted for about $129 million in revenue or a 35.8% of total revenue, and this is up from last year's 33.5%.

The geographic synergy of our genomics business, that Steve talked a bit about, is also helped on that international growth. We earlier acquired Deoxi, the leading animal health testing company in Brazil. During the past year, we greatly expanded our own genomic testing laboratory at the Neogen Europe operations in Ayr, Scotland. Both of these have communications back to our central genomics lab in Lincoln, Nebraska, which by the way, is the largest animal genomics testing lab in the world. We think that we still have got another opportunity to tie together another country in our worldwide strategy (inaudible) to help enhance geographic -- genomic, excuse me, Neogen's genomic progress on a worldwide basis.

One of the areas of genomic progress is a new product that was developed at Neogen during the past year for food safety. This works in food safety diagnostics. Our sequencing services for the food industry enables the food companies to accurately identify all the bacterias there might be in a sample with one simple genomic test. Earlier in the year, Neogen also introduced its genomics serotyping testing for food pathogens such as Salmonella or E. coli, to help food producers and processors better detect problems and probably more important to isolate the sources of where they might have come from.

During the year, our R&D scientists around the world help improve and bring on a new product, a new generation of several of our products. We just recently introduced a new test for Listeria. It's faster than anything in the industry and it allows almost instant results, which lets producers stop contaminating -- or processors stop contaminated product before it leaves the plant. More importantly, they can clean up an environment or processing equipment before beginning a processing day. Several of these products that are coming from R&D are just beginning to add revenues, and those revenues and profits will start to come in, in this fiscal year.

As we celebrate our 35th birthday at Neogen, it's still a great and exciting place to be. The markets for our products continue to grow. We continue to find ways to capture greater market share. We're able to develop new and improved products that the industry needs. We're finding synergistic and affordable acquisitions that in some way bolt on to what we're already doing, and our international growth continues.

We're just wrapping up our annual budgeting process for the fiscal year 2018, and it looks like to me that we ought to be able to continue to provide shareholders with that strong top line and bottom line growth. I'm still having fun and we certainly have the best and strongest organization, I think, any time in our history.

So let me stop at this point and open it up for questions, and please feel free to direct questions to any of us.

(Operator Instructions) And our first question comes from Kurt Kemper from Hilliard Lyons.

A couple of quick ones before I get to kind of more of an overview. On expense control, that was pretty strong, sales and marketing, cost control. I was just wondering if that was kind of more of a onetime item or if that's the integration of acquisitions and other activities you're doing to control spending there.

Yes, Kurt. I think you're going to see, it was the good control in the fourth quarter. I -- Jim was talking a little bit about the 2018 budgeting, and we are continuing to invest in our sales and marketing group. So I don't think that it will be at the 5% rate in 2018, but we, obviously, will continue to exercise strong control of our expenses and match them to our revenue growth.

And one of the things, Kurt, that makes it work so easy for us is a lot of these are bolt-ons so -- and from a sales and marketing standpoint where you already got access to the market, you've already got a group that's out there. You can add another product line or add another product to what you're doing, and it beats starting over again. So we'll continue to see some of that, too.

Okay. And then one for Steve. Do you expect the tax rates to change much for this coming fiscal year?

I think we -- last year, we had some R&D credits that we took and amended some returns. This year, when we close the year, we -- that effective rate was about the same as last year's. I think we're going to be in that 34% to 35% rate.

We're not making any strategic decisions based on what might happen in Washington now. We're just going to keep playing the hand that's been dealt to us.

Okay, fair enough. And then last question I just kind of wanted to get the -- what you all hope to accomplish on the M&A front and how the landscape looks in terms of opportunities?

There's, obviously, I can't talk a lot about what's not public, but there's some continued opportunities. It's an industry that's seeking to consolidate. There's a lot of cash floating around. We looked at and missed a couple of opportunities, I don't -- I shouldn't say missed -- we walked away from a couple of acquisition opportunities when valuation we thought just gotten out of any control. So when you got big money and equity capital trying to find a home, it's pretty hard to compete -- we don't try to compete with them. But we've got soft circle around several things, and it probably be nothing big that we're looking at now that's been available to us. But we think we'll be able to continue to bring in some new stuff that will either add to product line or give us access to some technology or in a lot of places, give us access to some international market. So nothing concrete to report, but we think we still got a good year.

And our next question comes from David Westenberg from CL King.

So just on the ThyroKare, and I'm sorry if I missed this in the opening comments, is there any change in expectations around the FDA approval of -- or getting that FDA approval on ThyroKare?

No, probably no changes that -- there's a long process in Washington or FDA, in particular, moves in its own speed. That's about $6 million, most of which was a comparison year-to-year is behind us. It's a good product, it's -- we controlled that market at one point in time. We just didn't go forward. If you remember, David, and we were operated under the authority of FDA, but without any requirement for registration and we had a competitor that decided to go register their product. And when they did, well, that suspended sales for many of us who didn't have registration. So we're still working on it, and we'll get it done. I think I mentioned in my comments, I expected we're ought to have that registration back in place by the end of the fiscal year. So -- and all that will open up again. It's got a demand for -- from several of our distributors is a strong product and we're a strong player there with other people.

Okay. And then, do you have any expectations in changes of strategy with John as the CEO, in terms of maybe with M&A or with just overall strategic focus?

No, that's one thing that John and I worked out several months ago that it's not broken, it doesn't need fixing. And I think John is very comfortable with our strategy going forward, and mine and his program is -- we've strengthened the bench now, and it's an opportunity to get bigger and get there faster. So we think we're zeroed in the right places and John certainly has the -- have a similar mind.

Got it. And then I'm pretty pleased with the operating margin in this quarter. On a go-forward basis, getting back to 20%, is there something that can be happening in the next, let's call it, couple of quarters? And then just an add-on to that, is there any potential benefit in terms of margin expansion with better integration or maybe some sort of ERP system integration or anything like that, that could maybe a unexpected margin expansion potential here?

Well, I don't think unexpected. To the contrary, I think it's expected if we continue to improve that operating margin with 20% is being bogey. There's some things, obviously, that come in that are difficult to predict. You've got the noncash items that impact that, that have an impact on where we're going. Though if we continue to do bolt-ons, that helps improve the margin, and that's the reason as you just recently picked up coverage, is we like to talk about net operating profits and not gross margins because we can bring in a product that's got a gross margin below what our average is but if it's got no operating cost below the line, which is a bit -- it's a major contributor. So it is -- sometimes (inaudible) known acquisition that we bring in, how long it takes us to bring them in, what we have to do with the accounting for the expenses, used to -- it was in the good old days when you made an acquisition, you folded in all of the legal cost and everything else it took to acquire the product and you divided it by 17 years, and you knew where you're going, well, we're accountants, so we made life more interesting since then. And so sometimes it's a little bit more difficult to predict but if you look at the -- I see you've talked about cash flow contribution for the year, it's -- from that standpoint, we're awfully proud of where we are.

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

Jim, I guess, just focusing on the transition from you over to John, a lot of investors have associated you with kind of the culture of the organization. You built this company, it's quite uncommon to see a company of your size still run by a founder. I know you have a really active work schedule. I guess I was just wondering why now to pass over the reins to John? Is it because he was available, because of the AHI Patterson acquisition? Or was there something else here?

No, thank you, Charles, and good to have you on the call. Now the transition idea, it goes all the way back. I mean, this is not -- some probably would say it was unexpected, well, it wasn't unexpected from the board. We began to look at where we were last July and where we needed to be and where the company was going. Honestly, I feel good, I've been out to see all my doctors within the last month, and everybody gave me a clean bill of health, and I've got a 10-year warranty. But one of these days, somebody's going to say, what if the -- you don't cross the road fast enough and the beer truck gets you? In the event that happened, we didn't want to leave everybody in lurch. And really, we've got so much to do now that I'm going to -- I told John, I want to cut back to a 50-hour week, and he's going to have to help me get that done and I'm going to take off an extra 2 weeks in the year and go to the ranch. But we still got plenty of work for all of us to do. John's going to add a tremendous amount of experience to the company and what we're doing. He's going to help us do some things that we won't have to learn for the first time, comes out of running a $3.3 billion company. So he understands big data and IT better than I do and he understands what you do with HR issues, and we won't have to deal with for the first time. So I think he's going to make a major contribution. Obviously, I get more credit than I'm due. I've been the chief cheerleader for a lot of years, but there's a pretty damn strong team standing behind me everywhere we go and that team is still there and very much intact. But thank you for your kind words, Charles, and your continued support of what we're doing.

Yes. Yes, well, I guess it goes without saying that a lot of people, including your 1,500 employees, owe you a big debt of gratitude, and you've really created a great company here and I'm looking forward to seeing it move forward. And then, Steve, question for you on the organic growth in the fourth quarter for Food Safety and Animal Safety, fourth quarter. What were those numbers?

Food is about 8%, and animal was -- we actually contracted 4%.

Okay. And then on the gross margin side, usually, when we have -- when we see this mixed benefit to Food Safety and the deceleration in Animal Safety, we tend to get a strong gross margin improvement, but we didn't really see the full bang, I guess, for the buck on the mix side. Was there anything going on with the -- I know you to match some prices of some of your European competitors, were there any change in the pricing dynamic this quarter? Or did you think that gross margin was kind of where you thought it would be?

Actually, Charles, it came in really very close to where we thought it was going to be. What you probably didn't see or couldn't see until we tell you is that we absorbed the Quat-Chem and Rogama acquisitions, and that damped really a little bit of the gross margins on the overall company on the Food Safety side. But we were very pleased with how the gross margins came in, in the fourth quarter.

That's another, Charles, as I'm sure you know, another accounting ruling, without just getting low, you bring in new inventories and you can't bring them in at cost when you buy a company, you've got to bring them in based on what some other thinks the value is. So when you turn around and sell those, you don't get the same gross margins out of them. So those sale or purchase and sale of inventories had some impact on us during the year. And it's a part of the operating story versus gross margins. Those are some bolt-ons, and we didn't need to have some extra people that's -- as part of the operating cost, so we had less operating costs associated with those.

Okay, great. And maybe I'll just ask one more and then I'll jump back in the queue. I want to be respectful to other people's time here. In terms of the Food Safety segment analysis that you provided, was there anything, Steve, that moved from Animal Safety into Food Safety with the 2 new line items that you have in Food Safety, the rodenticide and the genomics piece? Or was everything between Food Safety and Animal Safety still the same as you've reported it in the past?

It was the same, Charles. If you'll notice in that table, we did break out of the other kind of that rodenticide, insecticide and disinfectant line because that other was getting to be a very large, large number that made sense to break it out, but the numbers as they are, are the exact same from a comparative perspective.

And our next question comes from Brian Weinstein from William Blair.

Question on genomics. It looked like, obviously, for the full year growth was very good. Steve, I think you gave a number of 19% for the full year, but looking to fourth quarter was a little bit slower, only kind of about 9%, can you just talk about, was it just a comp issue? Was there anything going on in the fourth quarter that stood out to you as to why growth appeared to slow a little bit there?

Yes, it actually is a comp thing, Brian. We added to the Scotland lab last year and late third quarter, and they really started ramping up in the fourth quarter. So when you do that comp, it looks to be softening as really just a difficult comp. Their business is still going gangbusters.

So longer term, we just still kind of expect a mid-teens plus type of growth rate for this -- for, I guess, the combined genomics business between the 2, obviously, Food Safety and Animal Safety but combined, we should still be thinking about longer-term mid-teens-plus type of growth?

Yes, and we look at it back here, we've got the genomic work that's going on in Lincoln in support of the GeneSeek operations. But then we spun out what we're doing in Scotland and so that a year ago probably came back a big part of that, that have been done in Nebraska where we're now able to do it in-country. We're doing more work at Deoxi in Brazil now, Rick (sic) [Brian]. And we'll be looking at some other opportunities going forward. So what we do back here is -- our guys pulled together for me a consolidated genomics number at the end of every month. And when you compare, regardless of what location it is and where it's reported. If you reported, there's a part of that business segment, it's really looking awfully nice. And I mentioned in my comments that it's now going beyond just what we might be doing on animals on our own -- a few of them are [raw] inputs. But it's -- we're going strongly over on the genomics side for Food Safety. And we've got, for instance, we've got a major company that had a spoilage problem in fresh meat and couldn't figure out what it was. And they sent it in to us and said, where the shelf life is not lasting as long as we need to. Can you find it and make a long story more bearable? We did, and we told them where it was, and they never expected to find it, it was in an ingredient. So we went back and fixed it. So those are the kind of services that genomics can do for us that even help on the Food Safety side.

And mentioned that margins were improving a little bit there. Can you just update us on where the margins are because historically, this has been well below corporate average on the margin side? Where are they now? And can you give us an update on where you think these can be?

You're talking about the genomics side now? Or...

Yes, sir. Sorry about that.

Yes, when we bought the business, Brian, the margins were gross, I would say, were mid-30%. And then the last couple of years, they had -- they moved a little bit lower. But the -- as Jim said, the operating expenses are still pretty strong there, but we recently have done some improvements, gotten some improvements on the cost side, and those gross margins have expended back up to that 30 -- mid-30% level, and I think it will be able to hold them, if not prove them with some efficiency going forward.

Yes, and a couple of things there. Our reagent cost is improving. And there's several reasons for that. Plus, the fact that we're finding more and more ways to automate. We've got almost wholly automated sensor systems that analyze some animal samples that instead of a hand pulling them out and doing the segregation in getting them in, we can actually load up a machine that does that. And we're working on a new machine now that will help in being able to do hair samples, because still hair samples are a bit of a tedious problem because you pull the animal in, and I tell the story pull in the hair out of the tail of a day-old Holstein calf in Inner Mongolia or China and send it in. And 10 days later, we can go back and tell you whether to still save her as a replacement heifer or not. But in the meantime, somebody's got to arrange that hair and find those little follicles on the end and punch them out and get them in as a sample. And so those are the kind of things that we see when we have an opportunity to automate today, is we're getting along. And just economies of scale are helping there, too.

Great. And last one for me, thinking about margins for next year, as we've got kind of operating margins expanding about 100 basis points over 2017. So just want to understand some of the headwinds and tailwinds and things that we should be thinking about that are specific to next year, to the fiscal year, in terms of how we should be thinking about how much to expand those margins?

I think you kind come in the backdoor and asked us the forecast.

Never, never. I'm just really trying to kind of...

But we don't respond very well to stuff.

Just thinking about the headwinds and tailwinds, is there anything that's sort of unique or special that we should be thinking about to make sure that we're accounting for that, would be taking place into '18, without getting specific on the numbers then?

We've got some new products coming out this year, Brian, that we're pretty excited about it on the Food Safety side. And as we've talked about before, anytime we have that expansion on the Food Safety side of the business, you may see some margin expansion. So I think your model is probably correct when you say 100 basis points, obviously, we're not going to talk about that. But if the Food Safety side is expanding quicker than the animal side, there could be some margin expansion there.

(Operator Instructions) And our next question comes from David Stratton from Great Lakes Review.

Just to piggyback on some of the other questions regarding John, I know that you said the strategy isn't going to change. And you mentioned IT, data, and then also HR as areas of strength that you might bring. But also, when we look at his international experience, can we expect to see a more aggressive expansion internationally, given his background?

Well, I don't know what more aggressive means. We're pretty aggressive now. But John does bring a lot to that in areas that he and I discussed to begin with. John operated in the international market, goes back a few years since he was there. But he has a good understanding of that market, where we are and particularly, as we look at our Animal Safety business, it doesn't stop at Atlantic or the Pacific. So John's had actual working knowledge on what's going on in some of the places, for instance, that we'll be expanding in the EU and the other areas. And among other things, he understands the culture and the people, and that's pretty important. He -- I can't vouch for it, but they tell me is that he speaks perfectly good Mandarin Chinese. So we've got somebody that understands the marketplace and communicating the language, I think we're going to see some -- he and I are planning to see some growth going on there.

All right. And then the CapEx outlook for '18, did you mention that? Or would you be willing to? I know that you mentioned some projects on the horizon there, and just any more detail around that would be helpful.

We did not mention it. I think we spent somewhere around $14.5 million this year, and that's probably a good place-holding number, somewhere in there, say, $15 million for next year. Some of the expenditures that we're making are, there will be CapEx, but as much will be investing -- they'll be running through the income statement in terms of some of those IT investments that we're talking about.

And we've got some automation stuff that will come in there, but it's -- they're in chunks of a half million so I think, Steve, would be the kind of chunks we're looking at. So...

Got you. Then one last thing with all the numbers going around. Did you give a full year organic in constant currency number?

In constant currency?

Yes.

Let me give it to you.

All right.

It was, in constant currency, it was 6%. And that we did speak to the Food Safety side, it was about 14%, animal is about flat, and that averages out about 6%.

(Operator Instructions) And our next question comes from Paul Knight from Janney.

This is actually Bill, on for Paul. First, maybe, just on the Food Safety and Animal Safety genomic services, could you just talk about what's driving the different growth rates you're seeing from both of those end markets?

Well, the better quality food is of course driving a lot on the food side if that's what you're asking. And one of problems, the Food Safety Modernization Act is there. If it is fully enforced, it's going make a lot of changes. It won't get fully enforced for a while because it is not (inaudible) to do it. But if -- in fact, in our Listeria right now program is the newest one out there, is an example of what were happening in that side, on the genomics side, but that's on the testing side. It's because of what we've been able to do. There's been a tendency for people to not know whether they do I test for Listeria and find out that I've got a big problem and I got to go back and food out of the marketplace? And what happens when I do that? We all know what the right answer is, but that might not always be the answer. Now if I got to test it, I can go in before I start that line up in the morning and I know about where I might have problems with Listeria. And I can pull samples, and I'll find it, I can clean it up before I ever start that conveyor belt running. And that's where we see a lot of opportunities developing there is another kind of edge. When you move over to the genomics side, as an example, we've got a customer who knows that they have to be concerned about the presence of E. coli 157 pathogen that we've all talked about for a long time. And so we've got a library and a genomics lab of some samples from different, we where they came from but they're under different code names. And if this customer gets -- finds a problem with an E. coli, they could send it to us, we can run that through the system, and we can say, it looks like S39. And they know where S39 is, so they can go there and say, "We got -- we know where it is. Now we got to go and stop it, fix it, whatever." So those are the kind of new things that are coming along trying to make it much easier and for -- to put some -- to really fix the food safety issue without always being concerned about the legal issues that surround it. So those are the fast breakthrough areas that we think are going to be so important. And it's always been our mission, is to provide those solutions.

Got you. And then just one last one in terms of M&A. You acquired Deoxi in April of last year. As you think about the growth of the genomic services business, is that something that you can build organically and move into other countries? Or is that something that's going to continue to be a focus on M&A?

Well, it will either go -- Deoxi will be a big -- will be a big contributor this year. That if you remember the story of Brazil has more beef cattle than anybody in the world, and that's a major place for beef cattle. It's also a different breed. It's called an (inaudible) breed, which is a different breed than what we're accustomed to seeing with the (inaudible). It's kind of like we've got in this country. They're not Angus. They're not even Brahman because they're different. And we developed (inaudible) model that will help those guys predict the right heifers, say. And there are a lot of talking to (inaudible) talking somebody yesterday and he said, "You mean, for $25 a heifer, I can decide, which ones to keep and which ones not to. And he said, well that's an easy decision to make. There's no problem there. So those are the kind of things we're seeing that will come out of the -- what we're doing, And on top of that, certainly in Brazil, we're actually doing some work on animals that might be going into some other countries around, we got some Europe going in samples that come through in that part of the world, everybody is a little easier maybe to get to. And you're dealing with animals that are a little bit different. So that's going to help organic growth considerably. I do think that there's a place or 2 and we don't talk a lot about it yet but there is place or 2 where we can expand through M&A to give us another set of laboratories to deal with a different kind of animal population. At to put the laboratory closer to the farm or the animals, so I think we could really likely to see another country expansion going into that look this year.

And our final question comes from Charles Haff.

Steve, on veterinary instruments that came in a little bit lighter in the quarter than I was expecting, is there anything to call out there? Do you think that this is kind of where the market growth rate is? Any help you can give us on understanding the veterinary performance in the fourth quarter would be great.

Charles, there wasn't anything that really jumped out. I think the quarter was a little bit soft in that space primarily because a couple of the larger distributors that we do business with recently been purchased in the last couple of years and we've just seen them that there's less uptake of inventory, there being a little more fiscally responsible and we just had soft orders in the fourth quarter, but nothing -- there's really no change in the market growth there.

From time to time, it gets a little (inaudible) that we do what I call OEM sales, so we may make a specific product for a major pharmaceutical company but that giveaway in order to support the sale of our vaccine or sales of a pharmaceutical product. And when they take on one of those big orders for something like that, it -- they don't come in every month. So it could be that it was a month different 1 year to our next, but the fact it continues to be strong for us but it's a bit unpredictable.

Okay. And then my last one is on the international side. Jim, on Brazil, there's been a lot of political upheaval down there, it kind of continues. And just when we think it's over, it starts again. Now we have the problem with JBS and some of the issues down there. I mean, what's your perspective right now on Brazil? Are you full steam ahead? You talked about little bit on the genomics side? Or are you taking a little bit of pause in terms of investment? Or how should we kind of think about Brazil for your company right now? And then I have one follow-up, Steve, on -- I wanted to get the constant currency breakouts by major regions that you usually give us.

Yes, I'll be happy to talk about Brazil. JBS, obviously, is -- I mean we're a major player in that market and they're a major customer. And I don't express any opinion about what they did was rather wrong. This we see that, that's not feeling at this point as that one, the Brazilian economy is too strong to let it be strangled by the corruption that's going on. It's -- they got some problems. They got to get cleaned up. It would get cleaned up but I think their economy is just too strong to be -- it won't be another Argentina in my opinion. It will make a difference maybe with JBS. JBS is strong in the United States, and then Mexico is stronger outside of Brazil. It may mean that they taking already, taking a look at how they might (inaudible) their cattle feeding operations there in the U.S. It supply us and support some of that U.S. beef business. And that's -- somebody else will take that up. Somebody else will feed those cattle. We'll still be there. But long term, we just have a real strong feeling about Brazil and what's going on, not just the cattle business we talked about but that was -- Brazil still is going to be a major feeder to the world, and we think that's not going to change. I mean, we look at all, we look at breed, we look at a lot of things that's coming out of there. They're major soybean producers now. I guess, they're be the largest in the world. Those things are not going to change as a result of the corruption in -- I just think they'll overpower it.

And Steve, on the constant currency growth rates per EU, Mexico, Brazil and China?

Constant currency in Europe was 32% versus their 13% reported. Brazil was 45% constant -- or yes, constant currency and then converted it with 65%. Mexico was about 6%, and in constant currency, and then adjusted was about a decline of 7%. And China was 32%. And that converted to 24%. And India was about 60 -- upper 60% growth in both.

We have no additional questions at this time. And I would now like to turn the call over back to Mr. Herbert for closing remarks.

Yes, sir. Well, thank you, all, and thank you for your continued support. Tomorrow is Thursday, I guess it is. Just (inaudible) to tell you we're please, if you haven't received an invitation and you're within reaching distance, our annual shareholder open house and picnic is here in Lansing tomorrow afternoon starting by 4:30 or 4:00, 4:30, and (inaudible) Thursday, I'm sorry, let me get it straight. Thursday. And don't come on the wrong day, you won't get any food. So on Thursday, it starts about 4:00 and that's always a great time, a lot of people there, and we'd love to see you. We'll have -- it'll be kind of like [fair] day, we'll have exhibits under the big tent with what we're doing in a lot of places and you get to see products and doctors, the real-world people. So we hope you can make it. And in the meantime, we'll thank you for your support for the full year. It's been a great year and an even more exciting year as we look ahead. So good day.

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